<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): DECEMBER 4, 1996
INDEX, INC.
(Exact name of registrant as specified in charter)
TEXAS 0-21513 76-0509661
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
580 WESTLAKE PARK BOULEVARD, 77079
SUITE 1100 (Zip Code)
HOUSTON, TEXAS
(Address of Principal Executive
Offices)
281/531-4214
(Registrant's Telephone Number, Including Area Code)
================================================================================
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Index, Inc., a Texas corporation (the "Company"), was incorporated on
July 26, 1996, to facilitate a reorganization of SEPCO Industries, Inc., a
Texas corporation ("SEPCO"), in anticipation of an acquisition by Index as the
successor to SEPCO of Newman Communications Corporation, a New Mexico
corporation ("Newman"). On December 4, 1996, the reorganization of SEPCO (the
"SEPCO Reorganization") was effected through a merger of a wholly-owned
subsidiary of the Company with and into SEPCO pursuant to which the Company
acquired all of the outstanding shares of SEPCO in exchange for shares of the
Company. Immediately following the SEPCO Reorganization, the Company acquired
Newman through a merger of a wholly-owned subsidiary of the Company with and
into Newman (the "Newman Merger").
Prior to the SEPCO Reorganization, the Company had no operations and
its only assets consisted of $1,000 cash. The SEPCO Reorganization has been
accounted for as a recapitalization of SEPCO.
Prior to the Company's acquisition of Newman, Newman was a
non-operating entity with nominal assets. The Newman Merger was effected as a
means to increase the Company's shareholder base. The Newman Merger has been
accounted for as an issuance on December 4, 1996, of shares for the net
tangible assets of Newman.
The equity capitalization of the Company after giving effect to the
SEPCO Reorganization and Newman Merger consists of 15,987,900 shares of Common
Stock, 3,399 shares of Series A Preferred Stock and 19,500 shares of Series B
Convertible Preferred Stock. The holders of Series A Preferred Stock are
entitled to 1/10th a vote per share on all matters presented to a vote of
shareholders generally, voting as a class with the holders of Common Stock, and
are not entitled to any dividends or distributions other than in the event of a
liquidation of the Company, in which case, the holders of the Series A
Preferred Stock are entitled to a $100 liquidation preference per share. Each
share of the Series B Convertible Preferred Stock is convertible into 112
shares of Common Stock and a monthly dividend per share of $.50. The holders
of the Series B Convertible Preferred Stock are also entitled to a $100
liquidation preference per share after payment of distributions to the holders
of the Series A Preferred Stock and to 1/10th of a vote per share on all
matters presented to a vote of shareholders generally, voting as a class with
the holders of the Common Stock.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
<TABLE>
<S> <C>
SEPCO Industries, Inc.
Year Ended December 31, 1995
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash FlowsF-7
Notes to Consolidated Financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Nine Months Ended September 30, 1996
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17
Condensed Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . F-19
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . F-20
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . F-21
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
Newman Communications Corporation
Nine Months Ended December 31, 1995
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . F-29
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-31
Nine Months Ended September 30, 1996
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-34
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-35
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36
(b) Pro Forma Financial Information.
Index, Inc.
Unaudited Pro Forma Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F-37
Unaudited Pro Forma Combined Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . F-38
Unaudited Pro Forma Combined Statement of Operations . . . . . . . . . . . . . . . . . . . . . . F-39
Pro Forma Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-40
(c) Exhibits:
2.1 Agreement and Plan of Merger dated August 12, 1996, by and among Index, Inc., Newman Acquisition
Corporation, Newman Communications Corporation and Little & Company Investment Securities (incorporated
by reference to Exhibit 2.1 of Amendment No. 1 to Index, Inc.'s Registration Statement on Form S-4
(Registration Statement No. 333-10021)).
2.2 Agreement and Plan of Merger dated August 12, 1996, by and among Index, Inc., Sepco Acquisition
Corporation and SEPCO Industries, Inc. (incorporated by reference to Exhibit 2.2 of Amendment No. 1 to
Index, Inc.'s Registration Statement on Form S-4 (Registration Statement No. 333-10021)).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 1 to Index,
Inc.'s Registration Statement on Form S-4 (Registration Statement No. 333-10021)).
4.2 Form of Series A Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 of Amendment
No. 1 to Index, Inc.'s Registration Statement on Form S-4 (Registration Statement
No. 333-10021)).
4.3 Form of Series B Convertible Preferred Stock Certificate (incorporated by reference to Exhibit 4.3 of
Amendment No. 1 to Index, Inc.'s Registration Statement on Form S-4 (Registration Statement No. 333-
10021)).
4.4 Restated Articles of Incorporation of Index, Inc. defining the rights of holders of Common Stock,
Series A Preferred Stock and Series B Convertible Preferred Stock (incorporated by reference to
Exhibit 3.1 of Amendment No. 1 to Index, Inc.'s Registration Statement on Form S-4 (Registration
Statement No. 333-10021)).
</TABLE>
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Date: December 18, 1996
INDEX, INC.
By: /s/ DAVID R. LITTLE
--------------------------------------------
David R. Little, President
4
<PAGE> 5
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SEPCO Industries, Inc.
We have audited the accompanying consolidated balance sheets of SEPCO
Industries, Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SEPCO
Industries, Inc. at December 31, 1995 and 1994, and the results of operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 6 to the financial statements, in 1993 SEPCO
Industries, Inc. changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Houston, Texas
March 22, 1996
except for Notes 8 and 10, as to which the date is
August 7, 1996
F-1
<PAGE> 6
SEPCO Industries, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
--------------------------
(in thousands)
Assets
<S> <C> <C>
Current assets:
Cash $ 1,492 $ 889
Trade accounts receivable, net of allowance for doubtful accounts
of $200,000 in 1995 and $250,000 in 1994 15,892 13,648
Inventory 16,706 15,068
Prepaid expenses and other current assets 813 797
Deferred income taxes 170 191
--------------------------
Total current assets 35,073 30,593
Property and equipment, net 6,744 6,065
Other assets:
Notes receivable from officers and shareholders 640 771
Intangible assets, net of accumulated amortization of
$1,394,000 in 1995 and $1,105,000 in 1994 797 734
--------------------------
1,437 1,505
Total assets $43,254 $38,163
==========================
</TABLE>
F-2
<PAGE> 7
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
--------------------------------
(in thousands except share data)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable $ 6,435 $ 5,711
Employee compensation 1,129 895
Other accrued liabilities 1,419 2,092
Current portion of long-term debt 1,888 1,566
Current portion of subordinated debt 235 318
---------------------------
Total current liabilities 11,106 10,582
Long-term debt, less current portion 20,130 17,082
Subordinated debt, less current portion 1,145 1,379
Deferred compensation 380 293
Deferred income taxes 205 119
Equity subject to redemption -- Notes 7 and 10:
Preferred Stock, 1,496 shares and 3,927 shares in 1995 and 1994,
respectively 150
Class A convertible preferred stock, 4,500 shares 450
Class A common stock, 272,000 shares and 322,400 shares in 1995
and 1994, respectively 1,888
Shareholders' equity:
Preferred stock, nonvoting, noncumulative $1 par value;
liquidation preference of $100 per share:
Authorized shares - 1,000,000
Issued and outstanding shares - 10,098, including 1,496 shares
and 3,927 shares subject to redemption in 1995 and 1994,
respectively--Notes 7 and 10 9 6
Class A convertible preferred stock, nonvoting, cumulative
$100 par value; liquidation preference of $100 per share:
Authorized shares - 1,000,000
Issued and outstanding shares - 19,500 in 1995, including 4,500
shares subject to redemption--Notes 7 and 10 1,500 -
Class B convertible preferred stock, nonvoting, cumulative
$100 par value; liquidation preference of $100 per share:
Authorized shares - 1,000,000
Issued and outstanding shares - none - -
Class A common stock, $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 980,300 and 1,100,500
in 1995 and 1994, including 272,000 shares and 322,400
shares subject to redemption in 1995 and 1994, respectively--
Notes 7 and 10 7 8
Class B common stock, $.01 par value; liquidation preference
of $7.5075 per share:
Authorized shares - 10,000,000
Issued and outstanding shares - 176,900 2 2
Paid-in capital 580 1,847
Retained earnings 7,399 5,151
---------------------------
9,497 7,014
Less: treasury stock, 6,732 and 4,301 shares preferred and
221,401 and 81,200 shares Class A common in 1995 and 1994 (1,697) (530)
---------------------------
Total shareholders' equity 7,800 6,484
---------------------------
Total liabilities and shareholders' equity $ 43,254 $ 38,163
===========================
</TABLE>
See accompanying notes.
F-3
<PAGE> 8
SEPCO Industries, Inc.
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C>
Sales $ 111,328 $ 102,592 $ 99,353
Cost of sales 82,171 75,375 72,561
------------------------------------------------
Gross profit 29,157 27,217 26,792
Selling, general, and administrative expenses 24,559 23,067 23,504
------------------------------------------------
Operating income 4,598 4,150 3,288
Other income 867 817 858
Interest expense (1,953) (1,929) (1,800)
------------------------------------------------
(1,086) (1,112) (942)
------------------------------------------------
Income before income taxes, minority interest, and
cumulative effect of change in accounting principle 3,512 3,038 2,346
Provision for income taxes 1,424 1,176 982
------------------------------------------------
Income before minority interest and cumulative effect of
change in accounting principle 2,088 1,862 1,364
Minority interest in earnings of subsidiaries - - (403)
------------------------------------------------
Income before cumulative effect of change in accounting
principle 2,088 1,862 961
Cumulative effect of change in accounting principle - - 882
------------------------------------------------
Net income $ 2,088 $ 1,862 $ 1,843
================================================
Income before cumulative effect of change
in accounting principle per common and
common equivalent share $ 1.68 $ 1.41 $ 0.83
================================================
Primary net income per common and common
equivalent share $ 1.68 $ 1.41 $ 1.58
================================================
Number of shares used to compute primary net income 1,244 1,319 1,163
per common and common equivalent share
================================================
Fully diluted net income per common and
common equivalent share $ 1.61 $ 1.40 $ 1.55
================================================
Number of shares used to compute fully diluted net
income per common and common equivalent share 1,293 1,328 1,187
================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 9
SEPCO Industries, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Class A Class A Class B
Preferred Preferred Common Common Paid-In Retained Treasury
Stock Stock Stock Stock Capital Earnings Stock Total
------------------------------------------------------------------------------------
(in thousands except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 6 $ - $8 $ 2 $ 1,551 $2,582 $ (484) $ 3,665
Issuance of 10,000 shares of Class A
common stock - - 1 - 22 - - 22
Acquisition of 10,000 shares of Class A
common stock - - - - - - (22) (22)
Increase in redemption value of Class A
common stock subject to redemption - - - - - (375) - (375)
Net income - - - - - 1,843 - 1,843
---------------------------------------------------------------------------------
Balance at December 31, 1993 6 - 8 2 1,573 4,050 (506) 5,133
Issuance of 5,300 shares of Class A
common stock - - - - 25 - - 25
Acquisition of 5,300 shares of Class A
common stock - - - - - - (24) (24)
Increase in redemption value of Class A
common stock subject to redemption - - - - - (512) - (512)
---------------------------------------------------------------------------------
Net income - - - - - 1,862 - 1,862
---------------------------------------------------------------------------------
Balance at December 31, 1994 6 - 8 2 1,598 5,400 (530) 6,484
Issuance of 89,800 shares of Class A
common stock - - 1 - 231 - - 232
Conversion of 210,000 shares of Class A
common stock to 15,000 shares of Class A
preferred stock - 1500 (2) - (1,498) - - -
Acquisition of 140,201 shares of Class A
common stock and 2,431 shares of
preferred stock 3 - - - - 526 (1,167) (638)
Increase in redemption value of Class A
common stock subject to redemption - - - - - (343) - (343)
Preferred dividends paid - - - - - (23) - (23)
Net income - - - - - 2,088 - 2,088
---------------------------------------------------------------------------------
Balance at December 31, 1995 $ 9 $1500 $ 7 $2 $ 331 $7,648 $(1,697) $7,800
=================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 10
SEPCO Industries, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------------------
(in thousands)
<S> <C>
Operating activities
Net income $ 2,088 $ 1,862 $ 1,843
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Cumulative effect of change in accounting principle - - (882)
Depreciation and amortization 965 1,113 1,196
Deferred compensation on stock option plans 87 146 147
Provision (benefit) for deferred income taxes 109 791 (100)
Minority interest in earnings of subsidiaries - - 403
Gain on sale of property and equipment (11) (16) (7)
Changes in operating assets and liabilities:
Trade accounts receivable (1,915) (523) (609)
Inventories (1,288) (467) (220)
Prepaid expenses and other assets (88) 41 (51)
Accounts payable and other accrued liabilities (6) (302) (988)
---------------------------------------
Net cash provided by (used in) operating activities (59) 2,645 732
Investing activities
Purchase of minority interest shares - - (621)
Purchase of Cunningham Bearing net assets - - (40)
Purchase of Bayou Pumps common stock, net of cash received 38 - -
Purchase of property and equipment (739) (319) (308)
Proceeds from sale of property and equipment 177 60 14
Payments received on notes receivable from officers 172 80 86
---------------------------------------
Net cash used in investing activities (352) (179) (869)
Financing activities
Proceeds from debt 123,261 109,295 104,123
Principal payments on revolving line of credit, long-term and
subordinated debt, and notes payable to bank (121,867) (111,689) (103,804)
Issuance of Class A common stock 232 25 22
Acquisition of common stock (589) (24) (22)
Preferred dividends paid (23) - -
Payment of loan costs - - (11)
---------------------------------------
Net cash provided by (used in) financing activities 1,014 (2,393) 308
---------------------------------------
Increase in cash 603 73 171
Cash at beginning of year 889 816 645
---------------------------------------
Cash at end of year $ 1,492 $ 889 $ 816
=======================================
Supplemental disclosures of noncash investing and financing activities:
The Company purchased a computer system in exchange for cash of
$23,000 and a note payable to the leasing company totaling $776,000
Cash paid for:
Interest $ 1,901 $ 1,855 $ 1,752
=======================================
Income taxes $ 1,500 $ 165 $ 795
=======================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 11
SEPCO Industries, Inc.
Notes to Consolidated Financial Statements
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Sepco Industries, Inc. (the "Company") and its wholly owned subsidiary, Bayou
Pumps, purchased December 31, 1995 (see Note 2). All significant intercompany
accounts and transactions have been eliminated in consolidation.
CONCENTRATION OF CREDIT RISK
The Company sells rotating equipment to a diversified customer base in the
southwestern region of the United States. The Company believes no significant
concentration of credit risk exists. The Company continually evaluates the
creditworthiness of its customers' financial positions and monitors accounts on
a periodic basis, but does not require collateral.
INVENTORY
Inventory consists principally of finished goods and is priced at lower of cost
or market, cost being determined using the LIFO (last-in, first-out) method.
PROPERTY, PLANT, AND EQUIPMENT
Assets are carried on the basis of cost. Provisions for depreciation are
computed at rates considered to be sufficient to amortize the costs of assets
over their expected useful lives. Depreciation and amortization of property,
plant, and equipment is computed using principally the straight-line method for
financial reporting purposes. Useful lives assigned to property, plant, and
equipment range from 3 to 20 years. Maintenance and repairs of depreciable
assets are charged against earnings as incurred. Additions and improvements are
capitalized. When properties are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and gains or losses are
credited or charged to earnings.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the effect of adoption will be
material.
INTANGIBLES
Intangibles consist of non-compete and licensing agreements and goodwill. The
non-compete and licensing agreements are amortized over three to five years and
goodwill is amortized over five to ten years. All amortization of intangibles
is computed using the straight-line method.
FEDERAL INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109").
Under Statement 109, the liability method is used in accounting for income
F-7
<PAGE> 12
taxes. Under this method, deferred taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted marginal tax rates and laws that will be in effect
when the differences reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------
Carrying Value Fair Value
-------------------------------------
(In thousands)
<S> <C> <C>
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,492 $ 1,492
Notes receivable from officers . . . . . . . . . . . . . . 355 355
Long-term debt, including current portion . . . . . . . . . 22,028 22,028
Subordinated debt, including current portion . . . . . . . 1,380 1,380
</TABLE>
The carrying value of the long-term debt and subordinated debt approximates
fair value based upon the current rates and terms available to the Company for
instruments with similar remaining maturities. The carrying value of the notes
receivable from officers approximates fair value because the interest rate of
the notes (9%) is consistent with the interest rate of the Company's revolving
debt and with rates currently available in the market for similar instruments.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") in accounting for its employee stock
options. In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, was issued, which established a
fair-value based method of accounting for stock-based compensation plans. In
accordance with the provisions of this new accounting standard, the Company has
elected to continue following the provisions of APB 25 and will include in
future financial statements pro forma disclosures for the new standard.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
PER SHARE AMOUNTS
Net income per common and common equivalent share has been computed by dividing
net income applicable to common stock by the weighted average number of shares
of common stock and common stock equivalents outstanding during the period.
Options to purchase common stock issued by the Company within the 12 months
preceding the filing of the registration statement on Form S-4 of Index, Inc.
(see Note 10) have been included in the calculation of common equivalent shares
outstanding (using the treasury stock method) as if they were outstanding for
all periods presented. The computation of fully diluted net income per common
and common equivalent share assumes the Class A convertible preferred stock was
converted as of the beginning of the period.
RECLASSIFICATIONS
Certain 1994 and 1993 amounts have been reclassified to conform with the 1995
presentation.
F-8
<PAGE> 13
2. ACQUISITION
Effective December 31, 1995, the Company acquired 100% of the outstanding
common stock of Bayou Pumps. The purchase price totaled $500,000 and consisted
of (i) issuance of $450,000 of the Company's Class A convertible preferred
stock and (ii) cash of $50,000. The acquisition has been accounted for using
the purchase method of accounting. Accordingly, no results of operations of the
acquired company are included in the Company's consolidated results of
operations as the acquisition date was December 31, 1995. Goodwill of $400,000
was recorded on the acquisition. Pro forma disclosures of operating results
are omitted because the acquired company's operations were not significant.
3. INVENTORY
The Company uses the LIFO method of inventory valuation for approximately 88%
of its inventories as the LIFO method results in a better matching of current
costs and revenues. Remaining inventories are accounted for using the FIFO
(first-in, first-out) method. The reconciliation of FIFO inventory to LIFO
basis is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
------------------------
(In Thousands)
<S> <C> <C>
Finished goods $18,155 $16,190
Work in process 1,798 1,635
------------------------
Inventory at FIFO 19,953 17,825
LIFO allowance (3,247) (2,757)
------------------------
Inventory at LIFO $16,706 $15,068
========================
</TABLE>
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-----------------------
(In Thousands)
<S> <C> <C>
Land $ 1,368 $ 1,441
Buildings and leasehold improvements 5,946 5,969
Furniture, fixtures, and equipment 6,790 5,400
14,104 12,810
Less: allowances for depreciation and amortizatio (7,360) (6,745)
$6,744 $6,065
</TABLE>
5. LONG-TERM AND SUBORDINATED DEBT
Long-term and subordinated notes consist of the following:
F-9
<PAGE> 14
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
------------------------
(In Thousands)
<S> <C> <C>
Long-term debt:
Revolving credit agreement $16,891 $13,597
Note payable to insurance company, 10.125%, collateralized
by real property, payable in monthly installments through
December 2006 1,793 1,878
Notes payable to former shareholders, 7% - 10%, unsecured,
payable in varying annual installments through August 2002 1,410 1,482
Note payable to credit corporation, 2.25% above prime (10.75%
at December 31, 1995), collateralized by computer equipment,
payable in monthly installments beginning May 1996 776 -
Other 1,148 1,691
------------------------
22,018 18,648
Less current portion 1,888 1,566
------------------------
$20,130 $17,082
========================
Subordinated debt:
Notes payable to former shareholders, 12%, unsecured, payable
in varying installments through January 1997 $1,380 $1,697
Less current portion 235 318
------------------------
$1,145 $1,379
========================
</TABLE>
The Company has a $20 million line of credit available to them. The rate of
interest is prime plus 0.75% (9.25% at December 31, 1995). The line of credit
is secured by receivables, inventory, and machinery and equipment and matures
January 1997. As of December 31, 1995, the unused line is approximately $3
million. The bank agreements include loan covenants which, among other things,
require the Company to maintain a positive cash flow and other financial
ratios, which are measured monthly. The maturities of long-term and
subordinated debt for the next five years and thereafter are as follows (in
thousands):
<TABLE>
<S> <C>
1996 $ 2,123
1997 18,449
1998 445
1999 480
2000 518
Thereafter 1,383
-------
$23,398
=======
</TABLE>
6. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. The cumulative effect of adopting this accounting standard as of January
1, 1993 was to increase net earnings by $882,000 in 1993.
F-10
<PAGE> 15
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $1,172 $190 $946
State 143 195 136
----------------------------------------
1,315 385 1,082
Deferred:
Federal 107 797 (94)
State 2 (6) (6)
----------------------------------------
109 791 (100)
----------------------------------------
$1,424 $1,176 $982
========================================
</TABLE>
The differences between income taxes computed at the federal statutory income
tax rate and the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Income taxes computed at federal statutory income
tax rate $1,194 $1,033 $798
State income taxes, net of federal benefit 96 125 86
Nondeductible goodwill amortization 51 22 22
Other 83 (4) 76
----------------------------------------
$1,424 $1,176 $982
========================================
</TABLE>
The net current and noncurrent components of deferred income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
---------------------
(In Thousands)
<S> <C> <C>
Net current assets $170 $191
Net noncurrent liabilities 205 119
---------------------
Net liability (asset) $ 35 $(72)
=====================
</TABLE>
Deferred tax liabilities and assets were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
---------------------
(In Thousands)
<S> <C> <C>
Deferred tax liability:
Difference between financial and tax depreciation of
assets acquired $214 $220
Deferred tax assets:
Allowance for doubtful accounts 68 85
Section 263A inventory costs 102 106
Deferred compensation on stock options 9 101
---------------------
Total deferred tax assets 179 292
---------------------
Net deferred tax liability (asset) $ 35 $(72)
=====================
</TABLE>
F-11
<PAGE> 16
During 1994, the Company utilized its net operating loss carryforwards of
approximately $3 million for income tax purposes. Those carryforwards were used
to offset the taxable income of the Company in 1994, eliminating the majority
of the 1993 deferred tax asset.
7. SHAREHOLDERS' EQUITY
During 1995, the Company created two new classes of convertible preferred stock
designated Class A and Class B. Class A convertible preferred stock may be
converted into 7 shares of Class A common stock, and Class B convertible
preferred stock may be converted into 3.5 shares of Class B common stock. Upon
liquidation, the Class A and Class B convertible preferred stock is second in
priority to the preferred stock and the Class B common stock. During 1995,
holders of 210,000 shares of Class A common stock exchanged their shares for
15,000 shares of Class A convertible preferred stock.
Both Class A and Class B convertible preferred stock have a 6% cumulative
monthly dividend. As of December 31, 1995, $23,000 in dividends has been paid.
During 1994, Board of Directors of the Company approved a 100 to 1 stock split
resulting in the modification of the shares authorized, issued, and outstanding
and the par value per share of its Class A and B common stock. The 1993 share
disclosures have been adjusted for the effect of the stock split.
During 1993, the Company increased its ownership in Southern Engine & Pump
Company from 68% to 100%. The transaction, accounted for using the purchase
method of accounting, involved acquiring approximately 26% of the stock by
direct purchase. The purchase price was $2,843,845, of which $1,973,856 was
financed by the selling shareholders and $620,602 was paid in cash. The
remaining 6% of Southern Engine & Pump Company was acquired by exchanging
70,700 shares of the Company's Class A common stock valued at $249,387 for
112,068 shares of Southern Engine & Pump Company common stock. The Company
recorded $291,610 of goodwill on the transactions.
The Company has agreements with certain holders of Class A common and preferred
stock that, upon termination of employment, the shareholders have an obligation
to sell and the Company has the first opportunity to buy the stock. The Company
also has the opportunity to match a higher offer obtained by the shareholder
from another party. The selling price of the stock will be at a price per share
equal to the equity per share for the Class A common stock and $100 per share
for the preferred stock. Payment may be in the form of cash or a promissory
note bearing interest at 10% and payable in five equal installments beginning
on the first anniversary date of the note. During 1995, the Company purchased
140,201 shares of Class A common stock and 2,431 shares of preferred stock in
exchange for a note payable of $578,000 from a shareholder upon his retirement.
STOCK OPTIONS
Prior to and during 1995, the Company issued nonqualified, book value plan
stock options to certain officers of the Company to purchase shares of its
Class A common stock, which had exercise prices equal to the book value of the
common stock at the date of grant. The option agreement allows the employee to
put the stock acquired back to the Company at the book value at that time. The
Company recognizes compensation expense for increases in the book value of the
stock while the options are outstanding. In 1993, the Company purchased 100,058
shares acquired by an officer upon exercise of his options at $5.25 per share.
The officer also purchased 59,800 shares of the Company's Class A common stock
for which the Company obtained a note receivable of $211,000. During 1995, the
Company purchased 89,800 shares acquired by an officer upon exercise of his
options at $6.56 per share. Compensation expense related to these option
agreements of $87,000, $155,000, and $372,000 was recorded in 1995, 1994, and
1993, respectively. Activity during 1995 with respect to the stock options
follows (see also Note 10):
F-12
<PAGE> 17
<TABLE>
<CAPTION>
OPTION
SHARES PRICE PER SHARE
-----------------------------
<S> <C> <C>
Outstanding at January 1, 1993 100,058 $3.00
Granted 100,400 $2.58 - $3.01
Exercised (100,058) $3.00
---------
Outstanding at December 31, 1993 100,400 $2.58 - $3.01
Exercised (5,300) $3.01
---------
Outstanding at December 31, 1994 95,100 $2.58 - $3.01
Granted 302,000 $5.90 - $7.14
Exercised (89,800) $2.58
Canceled or expired - -
---------
Outstanding at December 31, 1995 307,300
=========
Options exercisable at end of year 307,300
=========
</TABLE>
The outstanding options at December 31, 1995 expire between March 31, 2000 and
October 24, 2005 or 90 days after termination of full-time employment.
8. COMMITMENTS AND CONTINGENCIES
The Company leases equipment, automobiles, and office facilities under various
operating leases. The future minimum rental commitments as of December 31, 1995
for noncancelable leases are as follows (in thousands):
<TABLE>
<S> <C>
1996 $1,142
1997 794
1998 546
1999 315
2000 208
Thereafter 206
------
$3,211
======
</TABLE>
Rental expense for operating leases was $1,338,000, $1,084,000, and $1,274,000
for the years ended December 31, 1995, 1994, and 1993, respectively.
The Company is currently undergoing an examination of its tax returns by the
Internal Revenue Service ("IRS") which is asserting claims against the Company
for additional taxes and penalties of approximately $1 million plus interest of
approximately $240,000. This claim relates primarily to a challenge by the IRS
of the Company's use of the LIFO method of accounting for inventory. The
Company believes that its LIFO elections were valid and currently is pursuing
its rights to administrative appeal. Although an unfavorable outcome on this
matter would result in the payment of additional taxes and impact the Company's
liquidity position, the Company believes that any liability that may ultimately
result from the resolution of this matter will not have a material adverse
effect on the financial position of the Company.
9. RETIREMENT PLANS
The Company provides an Employee Stock Ownership Plan (ESOP) which is eligible
to employees having 1,000 hours of service in 12 consecutive months of
employment. Employer contributions are at the discretion of the board of
directors. The ESOP held 176,900 shares of the Company's Class B common stock
at December 31, 1995 (see also Note 10). The Company contributed and expensed
$150,000 in 1995, 1994, and 1993.
F-13
<PAGE> 18
The Company also offers a 401(k) profit sharing plan for employees having 1,000
hours of service in 12 consecutive months of employment. The Company matches
contributions at a rate of 10%. The Company contributed $62,000, $56,000, and
$49,000 in the years ended December 31, 1995, 1994, and 1993, respectively.
10. SUBSEQUENT EVENTS
REORGANIZATION
On May 7, 1996, the Company's Board of Directors approved a reorganization
plan. Under the reorganization plan, the Company will merge with a newly formed
shell subsidiary of Index, Inc. ("Index"), a newly organized Texas holding
company. The Class A common shareholders of the Company will exchange each of
their shares for 16 shares of Index common stock and the Class B common
shareholders of the Company will exchange each of their shares for 18.1232
shares of Index common stock. The exchange ratios for the Class A common and
Class B common stock are based upon the relative value of each security as
determined by the independent appraisal of the Company's stock for purposes of
valuing the stock owned by the ESOP. As a result, the Class A common and Class
B common shareholders retain the same relative value in relation to each other
after the reorganization. As a result, no compensation expense was recognized.
In aggregate, former Company common shareholders will hold 96% of the
outstanding common stock of Index upon completion of the transaction. In
addition, the holders of each class of the Company's preferred stock will
exchange their shares for shares of Index preferred stock with identical rights
and terms except that the Class A convertible preferred stock will be
convertible into 112 shares of Index common stock. Simultaneously, Newman
Communications Corporation ("Newman"), a public corporation with nominal
assets, will merge with another newly formed shell subsidiary of Index. The
common shareholders of Newman will exchange their shares for approximately 4%
of the outstanding common shares of Index. Index's capital structure after the
proposed reorganization will be as follows:
<TABLE>
<CAPTION>
OUTSTANDING SHARES
------------------
<S> <C>
Preferred stock, nonvoting, noncumulative $1 par value; liquidation
preference of $100 per share: Authorized shares - 1,000,000 10,000
Convertible preferred stock, nonvoting, cumulative $100 par value;
liquidation preference of $100 per share: Authorized shares -
1,000,000 19,500
Common stock, $0.01 par value: Authorized shares - 100,000,000 15,987,900
</TABLE>
Each outstanding option to purchase the Company's Class A common
stock will be exchanged for an option to purchase 16 shares of Index common
stock at a split-adjusted exercise price resulting in aggregate options to
purchase 4,916,800 shares of Index common stock.
Index and Newman have nominal assets and no operations; therefore, the proposed
merger will be accounted for as a recapitalization. Accordingly, the
historical financial statements for Index prior to the reorganization will be
those of the Company. The reorganization plan is subject to the approval by
vote of the shareholders of record of both the Company and Newman. In
conjunction with the reorganization, all repurchase arrangements on the
Company's stock as discussed in Note 7 will be eliminated upon the issuance of
Index stock to the Company's shareholders.
REPAYMENT OF NOTES RECEIVABLE FROM SHAREHOLDERS
At December 31, 1995 and 1994, the Company held notes receivable from employees
arising from stock purchases which had outstanding balances totaling $285,000.
Such notes were full recourse and were collateralized by shares of common
stock. In June and July 1996, these notes were collected. Prior to January 1,
1995, the outstanding balances on these notes were classified in the
consolidated balance sheets as a reduction of shareholders' equity. As a result
of the subsequent collection of these notes, the outstanding balances have been
reclassified on the 1995 and 1994 consolidated balance sheets as a noncurrent
asset included in notes receivable from officers and shareholders.
F-14
<PAGE> 19
SEPCO INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-----------------------------------
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash $ 0 $ 1,492
Trade accounts receivable, net of allowance for doubtful
accounts of $199,000 and $200,000, respectively 16,358 15,892
Inventory 16,719 16,706
Prepaid expenses and other current assets 992 813
Deferred income taxes 533 170
-----------------------------------
Total current assets 34,602 35,073
Property and equipment, net 7,081 6,744
Other Assets 1,172 1,437
-----------------------------------
Total assets $42,855 $43,254
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable $ 6,014 $ 6,435
Employee compensation 851 1,129
Other accrued liabilities 2,178 1,419
Current portion of long-term debt 444 1,888
Current portion of subordinated debt 1,199 235
-----------------------------------
10,686 11,106
Long-term debt, less current portion 19,764 20,130
Subordinated debt, less current portion 1,145
Deferred compensation 380
Deferred income taxes 205 205
Equity subject to redemption--Note 8:
Preferred stock--1,496 shares 150 150
Class A convertible preferred stock -- 4,500 shares 450 450
Class A common stock -- 272,000 shares 2600 1,888
Shareholders' Equity:
Preferred stock, nonvoting, noncumulative $1 par
value; liquidation preference of $100 per share:
Authorized shares -- 1,000,000
Issued shares -- 10,098 including 1,496 shares subject to
redemption -- Note 8 9 9
Class A convertible preferred stock, nonvoting, cumulative
$100 per share
Authorized shares -- 1,000,000
Issued and outstanding -- 19,500, including 4,500
subject to redemption -- Note 8 1,500 1,500
Class B convertible preferred stock, nonvoting, cumulative
$100 par value; liquidation preference $100 per share:
Authorized shares -- 1,000,000 shares
Issued and outstanding shares -- none
Class A common stock, $.01 par value;
Authorized shares -- 10,000,00
Issued and outstanding-- 980,300 , including 272,000
shares subject to redemption --Note 8 7 7
Class B common stock, $.01 par value; liquidation
preference
of $7.5075 per share:
Authorized shares-- 10,000,000
Issued and outstanding -- 176,900 2 2
Paid-in capital 1,421 580
Retained earnings 7,758 7,399
-----------------------------------
10,697 9,497
Less treasury stock, 6,732 shares preferred and 221,401
shares Class A common (1,697) (1,697)
-----------------------------------
Total shareholders' equity 9,000 7,800
Total liabilities and shareholders' equity $42,855 $43,254
===================================
</TABLE>
See notes to condensed consolidated financial statements.
F-15
<PAGE> 20
SEPCO INDUSTRIES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Sales $ 32,193 $ 27,988 $ 95,214 $ 84,383
Cost of sales 23,784 20,677 70,574 62,682
---------------------------------------------------------
Gross Profit 8,409 7,311 24,640 21,701
Selling, general and administrative expenses 7,424 6,244 22,230 18,624
---------------------------------------------------------
Operating income 985 1,067 2,410 3,077
Other income 129 218 643 646
Interest expense (548) (474) (1,556) (1,442)
---------------------------------------------------------
(419) (256) (913) (796)
---------------------------------------------------------
Income before income taxes 566 811 1,497 2,281
Provision for income taxes 230 329 607 925
---------------------------------------------------------
Net income $336 $482 $890 $ 1,356
=========================================================
Primary net income per common and
common equivalent shares $ 0.33 $ 0.36 $ 0.87 $ 1.02
=========================================================
Number of shares used to compute primary
net income per common and common
equivalent shares 1,016 1,331 1,016 1,331
=========================================================
Fully diluted net income per common and
common equivalent share $ 0.29 $ 0.36 $ 0.77 $1.02
=========================================================
Number of shares used to compute fully
diluted net income per common and
common equivalent shares 1,152 1,334 1,152 1,334
=========================================================
</TABLE>
See notes to condensed consolidated financial statements.
F-16
<PAGE> 21
SEPCO INDUSTRIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1996 1995
---------------------------
(In thousands)
<S> <C> <C>
Operating Activities
Net cash provided by operating activities $ 2,118 $ 1,881
Investing activities
Proceeds from sale of property and equipment 7 100
Purchase of Austin Bearing net assets (550)
Purchase of property and equipment (971) (369)
---------------------------
Net cash used in investing activities $ (1,514) $ (269)
Financing activities
Proceeds from debt 93,856 89,386
Principal payments on revolving line of credit, long-term
and subordinated debt, and notes payable to bank (95,884) (90,114)
Acquisition of common stock (589)
Dividends paid (68)
Net cash used in financing activities (2,096) (1,085)
---------------------------
Decrease in cash (1,492) (889)
Cash at beginning of period 1,492 889
---------------------------
Cash at end of period 0 0
===========================
</TABLE>
See notes to condensed consolidated financial statements.
F-17
<PAGE> 22
SEPCO INDUSTRIES, INC.
September 30, 1996
Notes to Condensed Consolidated Financial Statements
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The Company
believes that the presentations and disclosures herein are adequate to make the
information not misleading. The condensed consolidated financial statements
reflect all elimination entries and adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year.
Note 2. Per Share Amounts
Net income per common and common equivalent share has been determined by
dividing net income applicable to common stock by the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period. Options to purchase common stock issued by the Company within the 12
months preceding the filing of the Registration Statement have been included in
the calculation of common equivalent shares outstanding (using the treasury
stock method) as if they were outstanding for all periods presented. The
computation of fully diluted net income per common and common equivalent share
assumes Series B Preferred Stock was converted as of the beginning of the
period.
Note 3: Inventory
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs.
Because these are subject to many factors beyond management's control, interim
results are subject to the final year-end LIFO inventory valuation.
Note 4: Acquisition
Effective December 31, 1995, the Company acquired 100% of the outstanding
common stock of Bayou Pumps, Inc. The purchase price totaled $500,000 and
consisted of (i) $450,000 of Class A convertible preferred stock and (ii) cash
of $50,000. The acquisition was accounted for using the purchase method of
accounting. Goodwill of $400,000 was recorded in connection with the
acquisition.
Effective February 2, 1996, the Company acquired the net assets of Austin
Bearing Corporation. The purchase price totaled approximately $578,000 and
consisted of (i) a $249,000 note, bearing interest at 9%, payable monthly over
five years and (ii) cash of $329,000. The acquisition has been accounted for
using the purchase method of accounting. Goodwill of $84,000 was recorded in
connection with the acquisition.
F-18
<PAGE> 23
Note 5: Commitments and Contingencies
The Company is currently undergoing an examination of tax returns for 1992
through 1994 by the Internal Revenue Service ("IRS"). The IRS has asserted
claims against the Company for additional taxes and penalties of approximately
$1 million plus interest of approximately $260,000. This claim relates
primarily to a challenge by the IRS of the Company's use of the LIFO method of
accounting for inventory. The Company believes that SEPCO's LIFO elections
were valid and is pursuing its rights to administrative appeal. Although an
unfavorable outcome on this matter would result in the payment of additional
taxes and impact the Company's liquidity position, the Company believes that
any liability that may ultimately result from the resolution of this matter
will not have a material adverse effect on the financial position of the
Company.
Note 6: Stock Options
Prior to and during 1995, SEPCO issued nonqualified, book value plan stock
options to certain officers of the Company to purchase 307,300 shares of Class
A common stock, which had exercise prices equal to the book value of the common
stock on the date of the grant. The option agreement allowed the employee to
require the Company to purchase, at book value, the shares of stock issued upon
exercise of the option. The Company recognized compensation expense for
increases in the book value of the stock while the options were outstanding.
Effective March, 31, 1996, the stock option agreements were amended to become
nonqualified stock options and to eliminate the provision that would require
the Company to purchase, at book value, the shares of stock issued upon
exercise of the options. In connection with these changes, the Company has
recognized approximately $426,000 of compensation expense, net of a tax benefit
of $284,000.
Note 7: Long-Term Debt
The Company currently has a $20 million secured line of credit with an
institutional lender. The rate of interest is prime plus .5% (9.00% at
September 30, 1996). The line of credit is secured by receivables, inventory,
machinery, equipment and real estate and matures January, 1999. At September
30, 1996, the available line of credit was approximately $3.0 million. The
facility contains customary affirmative and negative covenants as well as
financial covenants that require the Company to maintain a positive cash flow
and other financial ratios, such as tangible net worth less than five to one
and current assets to current liabilities greater than two to one. The credit
facility also restricts the Company's ability to declare and pay dividends and
distributions other than dividends on preferred stock. The Company currently
is discussing with its lender a modification to the facility in light of the
Company's operational cash requirements following the SEPCO Reorganization and
Newman Merger.
Note 8: Stockholders' Equity
The Company has agreements with certain holders of Class A common, preferred
and Class A convertible preferred stock, that, upon termination of employment,
the shareholders have an obligation to sell and the Company has the first
opportunity to buy the stock. The Company also has the opportunity to match a
higher offer obtained by the shareholder from another party. The selling price
of the stock will be at a price per share equal to the equity per share for the
Class A common stock and $100 per share for the preferred and Class A
convertible preferred stock.
F-19
<PAGE> 24
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Newman Communications Corporation
(A Development Stage Company)
We have audited the accompanying balance sheet of Newman Communications
Corporation (A Development Stage Company) as of December 31, 1995 and March 25,
1995 and the related statements of operations, changes in shareholders' equity
and cash flows for the nine months ended December 31, 1995 and for the years
ended March 25, 1995 and March 26, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Newman Communications
Corporation (A Development Stage Company) at December 31, 1995 and March 25,
1995 and the results of their operations and their cash flows for each of the
nine months ended December 31, 1995 and for the years ended March 25, 1995 and
March 26, 1994 in conformity with generally accepted accounting principles.
As discussed in note 4 to the financial statements, an error in the
presentation of the reorganization under bankruptcy was discovered during the
current year. Accordingly, the March 26, 1994 financial statements have been
restated.
CHESHIER & FULLER, INC.
A Professional Corporation
Dallas, Texas
January 27, 1996
F-20
<PAGE> 25
Newman Communications Corporation
(A Development Stage Company)
Balance Sheets
December 31, 1995 and March 25, 1995
ASSETS
<TABLE>
<CAPTION>
December 31, March 25,
1995 1995
----------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 12,854 $ 5,832
---------- ----------
TOTAL ASSETS $ 12,854 $ 5,832
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Priority claims $ -0- $ -0-
---------- ----------
Total Liabilities
-0- -0-
========== ==========
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
2,000,000 shares, 0 issued and outstanding -0- -0-
Common stock, no par value, authorized
8,000,000 shares, 858,500 issued and
outstanding at December 31, 1995, 834,500
issued and outstanding at March 31, 1995 1,409,193 1,387,599
Common stock warrants 11,406 20,000
Retained earnings (deficit) (1,392,275) (1,392,275)
Deficit accumulated during the
developmental stage (since November 23,
1993, reorganization) (15,470) (9,492)
---------- ----------
Total Shareholders' Equity 12,854 5,832
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 12,854 $ 5,832
========== ==========
</TABLE>
F-21
<PAGE> 26
Newman Communications Corporation
(A Development Stage Company)
Statements of Operations
Nine Months Ended December 31, 1995 and December 31, 1994
and for the Years Ended March 25, 1995 and March 26, 1994
<TABLE>
<CAPTION>
For the Period
Unaudited November 23, 1993
Nine Months Nine Months For the Year For the Year (Date of
Ended Ended Ended Ended Reorganization)
December 31, December 31, March 25, March 26, through December
1995 1994 1995 1994 31, 1995
----------- ----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
REVENUE $ -- $ -- $ -- $ -- $ --
---------- ---------- ---------- ----------- ----------
Total Revenue -- -- -- -- --
---------- ---------- ---------- ----------- ----------
EXPENSES
Professional fees 4,726 2,581 2,682 5,600 12,508
Regulatory expense 550 375 375 -- 925
Advertising and marketing 607 333 333 -- 940
Miscellaneous expense 95 717 817 -- 912
Office supplies -- 185 185 -- 185
---------- ---------- ---------- ----------- ----------
Total Expenses 5,978 4,191 4,392 5,600 15,470
---------- ---------- ---------- ----------- ----------
Net income (loss) before taxes (5,978) (4,191) (4,392) (5,600) (15,470)
Provision for income taxes -- -- -- -- --
---------- ---------- ---------- ----------- ----------
Net income (loss) before
extraordinary item (5,978) (4,191) (4,392) (5,600) (15,470)
Extraordinary item -
Relief of debt in bankruptcy -- -- -- 4,026,333 --
---------- ---------- ---------- ----------- ----------
NET INCOME (LOSS) $ (5,978) $ (4,191) $ (4,392) $ 4,020,733 $ (15,470)
========== ========== ========== =========== ==========
</TABLE>
See notes to financial statements.
F-22
<PAGE> 27
Newman Communications Corporation
(A Development Stage Company)
Statements of Operations
Nine Months Ended December 31, 1995 and December 31, 1994
and for the Years Ended March 25, 1995 and March 26, 1994
<TABLE>
<CAPTION>
For the Period
Unaudited November 23, 1993
Nine Months Nine Months For the Year For the Year (Date of
Ended Ended Ended Ended Reorganization)
December 31, December 31, March 25, March 26, through December
1995 1994 1995 1994 31, 1995
----------- ----------- ----------- ------------ ----------------
PRIMARY EARNINGS PER COMMON SHARE
<S> <C> <C> <C> <C> <C>
Earnings (loss) before
extraordinary item (.01) (.01) (.01) NIL (.03)
Extraordinary item - relief
of debt in bankruptcy -0- -0- -0- 1.14 -0-
---------- ---------- ---------- ----------- ---------
Net earnings (loss) (.01) (.01) (.01) 1.14 $ (.03)
========== ========== ========== =========== ==========
Weighted average common
shares outstanding 839,833 740,222 763,792 3,540,407 535,760
========== ========== ========== =========== ==========
FULLY DILUTED EARNINGS PER COMMON SHARE
Earnings (loss) before
extraordinary item (.01) (.01) (.01) NIL (.03)
Extraordinary item - relief
of debt in bankruptcy -0- -0- -0- 1.14 -0-
---------- ---------- ---------- ---------- ---------
Net earnings (loss) (.01) (.01) (.01) 1.14 $ (.03)
========== ========== ========== =========== ==========
Weighted average common
shares outstanding 839,833 740,222 763,792 3,540,407 535,760
========== ========== ========== =========== ==========
</TABLE>
See notes to financial statements.
F-23
<PAGE> 28
Newman Communications Corporation
(A Development Stage Company)
Statements of Cash Flows
Nine Months Ended December 31, 1995 and December 31, 1994
and for the Years Ended March 25, 1995 and March 26, 1994
<TABLE>
<CAPTION>
For the Period
Unaudited November 23, 1993
Nine Months Nine Months For the Year For the Year (Date of
Ended Ended Ended Ended Reorganization)
December 31, December 31, March 25, March 26, through December
1995 1994 1995 1994 31, 1995
----------- ----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,978) $ (4,191) $ (4,392) $ 4,020,733 $ (15,470)
Relief of debt in bankruptcy -- -- -- (4,026,333) --
---------- ---------- ---------- ----------- ----------
Net cash used from
operating activities (5,978) (4,191) (4,392) (5,600) (15,470)
---------- ---------- ---------- ----------- ----------
Cash flows from investing activities -- -- -- -- --
---------- ---------- ---------- ----------- ----------
Cash flows from financing activities:
Warrants exercised 13,000 1,000 1,000 -- 14,000
Subscription of 3,000,000 warrants -- -- -- 20,000 --
Priority claims payments -- (25) (25) (141) (25)
Unsecured debt payments -- -- -- (5,010) --
---------- ---------- ---------- ----------- ----------
Total financing activities 13,000 975 975 14,849 13,975
Net increase (decrease) in cash 7,022 (3,216) (3,417) 9,249 (1,495)
Cash at beginning of period(1) 5,832 9,249 9,249 -0- 14,349
---------- ---------- ---------- ----------- ----------
Cash at end of period $ 12,854 $ 6,033 $ 5,832 $ 9,249 $ 12,854
========== ========== ========== =========== ==========
</TABLE>
(1) Beginning cash for December 31, 1995 is as of March 25, 1995 as this cash
period is for nine months.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:
Income taxes $ -- $ -- $ -- $ -- $ --
========== ========== ========== =========== ==========
Interest $ -- $ -- $ -- $ -- $ --
========== ========== ========== =========== ==========
</TABLE>
See notes to financial statements.
F-24
<PAGE> 29
Newman Communications Corporation
(A Development Stage Company)
Statements of Cash Flows
Nine Months Ended December 31, 1995 and December 31, 1994
and for the Years Ended March 25, 1995 and March 26, 1994
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
- $4,026,333 unsecured debt was forgiven during the fiscal year
ended March 26, 1994.
- 832,500 of common stock, no par, and 1,650,000 each of warrant
A, B and C have been issued to pre-petition stockholders,
creditors and Little.
- On November 23, 1995 the remaining 1,628,000 A warrants,
and 1,648,000 B warrants expired.
See notes to financial statements.
F-25
<PAGE> 30
Newman Communications Corporation
(A Development Stage Company)
Statements of Changes in Shareholders' Equity
Nine Months Ended December 31, 1995 and December 31, 1994
<TABLE>
<CAPTION>
A, B, & C Warrants Retained
Common Stock Paid-In To Buy Common Stock Earnings
Shares Amount Capital Number Amount (Deficit) Total
---------- ---------- ------------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 26, 1994 832,500 $1,386,599 $ -0- 4,953,000 $ 20,000 $(1,397,375) $ 9,224
Warrants erroneously shown
as outstanding at
March 26, 1994 (3,000)
Warrants exercised 2,000 1,000 (2,000) 1,000
Net (loss) for the nine
months ended December 31,
1994 (Unaudited) (4,191) (4,191)
---------- ---------- -------- ---------- ---------- ---------- ----------
Balances at December 31,
1994 (Unaudited) 834,500 1,387,599 -0- 4,948,000 20,000 (1,401,566) 6,033
Net (loss) for the
quarter ended March 25,
1995 (Unaudited) (201) (201)
Warrants exercised 24,000 13,000 (24,000) 13,000
Expiration of Warrants 8,594 (3,274,000) (8,594)
Net (loss) for the
nine months ended
December 31, 1995 (5,978) (5,978)
---------- ---------- -------- ---------- ---------- ----------- ----------
Balances at December 31,
1995 858,500 $1,409,193 $ -0- 1,650,000 $ 11,406 $(1,407,745) $ 12,854
========== ========== ======== ========== ========== =========== ==========
</TABLE>
See notes to financial statements.
F-26
<PAGE> 31
Newman Communications Corporation
(A Development Stage Company)
Statements of Changes in Shareholders' Equity
Years Ended March 25, 1995 and March 26, 1994
<TABLE>
<CAPTION>
A, B, & C Warrants Retained
Common Stock Paid-In To Buy Common Stock Earnings
Shares Amount Capital Number Amount (Deficit) Total
---------- ---------- ------------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 27, 1993 5,310,160 $ 53,102 $ 1,333,497 $(5,418,108) $(4,031,509)
Net income (loss) for the
period March 27, 1993 to
November 23, 1993 (date of
reorganization) 4,025,833 4,025,833
Reorganization
November 23, 1993 (5,310,160) 1,333,497 (1,333,497) -0-
Subscription of warrants 3,000,000 $ 20,000 20,000
Subscription of
stock and warrants 832,500 1,953,000
Net (loss) for the period
November 23, 1993 (date
of reorganization) to
March 26, 1994 (5,100) (5,100)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at March 26, 1994 832,500 1,386,599 -0- 4,953,000 20,000 (1,397,375) 9,224
Warrants erroneously shown as
outstanding at March 26, 1994 (3,000)
Warrants exercised 2,000 1,000 (2,000) 1,000
Net (loss) for the year
ended March 25, 1995 (4,392) (4,392)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at March 25, 1995 834,500 $1,387,599 $ -0- 4,948,000 $ 20,000 $(1,401,767) $ 5,832
========== ========== ========== ========== ========== =========== ==========
</TABLE>
See notes to financial statements.
F-27
<PAGE> 32
Newman Communications Corporation
(A Development Stage Company)
Notes to Financial Statements
December 31, 1995 and March 25, 1995
Note 1 - Summary of Significant Accounting Policies
HISTORY
Newman Communications Corporation ("Company"), was incorporated
June 25, 1981 in Albuquerque, New Mexico as a company directed
toward the manufacture and distribution of books on audio
cassettes. The company began having financial difficulties in
early 1987, and subsequently ceased operations and liquidated its
assets in November of that year. The Company filed for chapter XI
bankruptcy on August 12, 1992. On November 22, 1993 the Company
emerged from bankruptcy as a reorganized entity.
Little and Company/Southwest ("Little") had no relationship
with the Company before it became illiquid and ceased
operations. Little acquired 1,792,000 shares of common stock
from previous stockholders for $5,000 and purchased an
outstanding judgment. When the Company filed a Chapter XI
petition under the United States Bankruptcy Code, a Plan of
Reorganization (the "Plan") was proposed by Little that was
confirmed by the Court.
DEVELOPMENT STAGE OPERATIONS
The Company currently has no operational activities.
REORGANIZATION
The terms of the recent Chapter XI reorganization are, in
general, as follows:
(A) The articles of incorporation of the Company were amended
to authorize no par common stock. All of the
pre-petition common stock held by stockholders was
voided.
(B) The unsecured creditors were given the option of
receiving cash or common stock. Those electing to
receive cash were paid $5,010 as a group. Those
creditors that elected to receive common stock of the
Company received four shares of common stock of the
Company and four warrants each of A, B & C for each
dollar of claims filed with no claim exceeding the
issuance of more than 7,500 shares of common stock and
7,500 each of warrants A, B & C. All creditors were
issued a minimum of 100 shares of common and 100 warrants
A, B & C.
(C) Holders of the common stock of the Company were
designated as a separate class in the Plan and allowed to
voluntarily participate in the reorganization.
Stockholders that elected to participate were required to
provide proof of ownership and pay a $20.00
administrative fee directly to the transfer agent. Those
pre-petition stockholders that participated received 500
shares of the new common stock of the reorganized entity
and 1,000 each of Warrants A, B and C. All stockholders
F-28
<PAGE> 33
Newman Communications Corporation
(A Development Stage Company)
Notes to Financial Statements
December 31, 1995 and March 25, 1995
Note 1 - Summary of Significant Accounting Policies
REORGANIZATION, continued
(C) and their respective shares that did not participate in
the Plan were removed from the stockholders list and
their respective shares canceled.
(D) The following is a description of the warrants:
Warrant A will allow the holder to purchase 1 share
of the common stock of the reorganized Company at
$.50 per share for a period of 12 months from
November 22, 1993. During the year ended March 25,
1995, the period in which the warrants may be
exercised was extended twelve months.
Warrant B will allow the holder to purchase 1 share
of the common stock of the reorganized Company at
$1.00 per share for a period of 24 months from
November 22, 1993.
Warrant C will allow the holder to purchase 1 share
of the common stock of the reorganized Company at
$2.00 per share for a period of 36 months from
November 22, 1993.
(E) Under the Plan, Little contributed $20,000 and received
1,000,000 each of Warrants A, B and C. Little returned
to the Company's treasury 1,792,000 shares of the
Company's pre-petition common stock and received 500,000
shares of new common stock under the Plan.
(F) Pre-petition creditors and shareholders had until March
22, 1994 according to the Plan to subscribe to stock and
warrants. A total of 332,500 shares of common stock and
650,000 each of warrants A, B & C were subscribed to by
this group.
FISCAL YEAR
During 1995 the Company changed its year end from a fiscal
year, which is based on a 52 week year ending on the last
Saturday in March, to a calendar year end.
F-29
<PAGE> 34
Newman Communications Corporation
(A Development Stage Company)
Notes to Financial Statements
December 31, 1995 and March 25, 1995
Note 1 - Summary of Significant Accounting Policies, continued
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Note 2 - Extraordinary Item
The net result of settling the pre-petition unsecured
creditors' claims and other liabilities of $4,031,343 for
$5,010 was accounted for as an extraordinary item. The
discharge of debts in bankruptcy has no tax effect.
Note 3 - Income Taxes
There are no temporary timing differences between recognition
of revenue and expenses for financial reporting purposes and
income tax purposes.
There are no net operating loss carryforwards available from
periods prior to November 22, 1993. Subsequent to November
22, 1993 there are loss carry forwards of $15,769 which can be
carried forward to reduce taxable income. These carryforwards
expire between 2008 and 2010, respectively. These
carryforwards may be limited under IRS Code Section 382 should
significant changes in stock ownership in the Company occur in
the future.
Because there is at least a 50% chance that the carryforward
will expire unused, the benefit associated with the loss
carryforward has not been reflected.
Note 4 - Correction of Error - Prior Year
During 1995, it was determined that the forgiveness of debt
under bankruptcy should have been reported as an extraordinary
item and shown as a component of net income for the year ended
March 26, 1994. The change had no effect on net loss before
extraordinary items, or the related net loss per share data.
Net income was increased by $4,026,333 and earnings per share
was increased by $1.14. Total equity was not affected. All
changes pertain to the year ended March 26, 1994 only.
F-30
<PAGE> 35
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STATE COMPANY)
BALANCE SHEET
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $2,794 $12,854
------------- -----------
TOTAL ASSETS $2,794 $12,854
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued liabilities
$6,034 $ -
------------- -----------
TOTAL LIABILITIES $6,034 $ -
============= ===========
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
2,000,000 shares, 0 issued and
outstanding -- --
Common stock, no par value, authorized
8,000,000, 2,552,064 issued and outstanding
at September 30, 1996 and 858,500 issued
and outstanding at December 31, 1995,
respectively 1,410,887 1,409,193
Common stock warrants 11,406 11,406
Retained earnings (deficit) (1,392,275) (1,392,275)
Deficit accumulated during the
developmental stage (since November
23, 1993, reorganization) (33,258) (15,470)
------------- -----------
Total Shareholders' Equity (loss) (3,240) 12,854
------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $(2,794) $12,854
============= ===========
</TABLE>
F-31
<PAGE> 36
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STATE COMPANY)
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Period November 23, 1993
------------------------- (Date of Reorganization)
1996 1995 through September 30, 1996
--------- ---------- --------------------------------
<S> <C> <C> <C>
REVENUE -- -- --
Total Revenue -- -- --
EXPENSES
Professional fees 16,778 4,451 29,286
Regulatory expense 125 550 1,050
Advertising and marketing -- 608 940
Miscellaneous expense 12 64 924
Office supplies 873 -- 1,058
--------- ---------- ----------
Total Expenses 17,788 5,673 33,258
--------- ---------- ----------
Net income (loss) before taxes (17,788) (5,673) 33,258
Provision for income taxes -- -- --
--------- ---------- ----------
NET INCOME (LOSS) $(17,788) $(5,673) $(33,258)
========= ========== ==========
PRIMARY EARNINGS
PER COMMON ========= ==========
SHARES
Net earnings (loss) (.01) (.01) (.04)
Weighted average common 1,234,848 838,500 818,754
shares outstanding ========= ========== ==========
FULLY DILUTED EARNINGS PER
COMMON SHARE
Net earnings (loss) (.01) (.01) (.04)
========= ========== ==========
Weighted average 1,234,848 838,500 818,754
common shares ========= ========== ==========
outstanding
</TABLE>
F-32
<PAGE> 37
NEWMAN COMMUNICATIONS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
For the Period
November 23,
1993 (Date of
Reorganization
Through
September 30, September 30, September 30,
1996 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(17,788) $(5,673) $(33,258)
Increase in accrued liabilities 6,034 -- 6,034
------------- ------------- --------------
Net cash used from operating
activities (11,754) (5,673) (27,224)
------------- ------------- --------------
Cash flows from investing activities -- -- --
------------- ------------- --------------
Cash flows from financing activities:
Sales of common stock 1,694 -- 1,694
Warrants exercised -- 3,000 14,000
Priority claims payments -- -- (25)
------------- ------------- --------------
Total financing activities 1,694 3,000 15,669
Net increase (decrease) in cash (10,060) (2,673) (11,555)
Cash at beginning of period 12,854 (6,033) 14,349
------------- ------------- --------------
Cash at end of period $2,794 $3,360 $2,794
============= ============= ==============
</TABLE>
F-33
<PAGE> 38
INDEX, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined balance sheets as of September 30, 1996 and
December 31, 1995 and the unaudited pro forma combined statements of earnings
for the nine months ended September 30, 1996 and the year ended December 31,
1995 give effect to the reorganization of SEPCO Industries, Inc., a Texas
corporation ("SEPCO"), which was effected through a merger of a wholly-owned
subsidiary of Index, Inc., a Texas corporation ("Index") with and into SEPCO
(the "SEPCO Reorganization"), and the related acquisition by Index of Newman
Communications Corporation, a New Mexico corporation ("Newman") through a
merger of a wholly-owned subsidiary of Index with and into Newman (the "Newman
Merger"). The unaudited pro forma combined statements of earnings assume all
such transactions occurred at the beginning of the periods presented. The
unaudited pro forma combined balance sheets assume all such transactions
occurred at the end of the periods presented. The pro forma information is
based on the historical financial statements of SEPCO and Newman, giving effect
to the SEPCO Reorganization and the Newman Merger under the purchase method of
accounting and the adjustments accompanying the unaudited pro forma combined
financial statements.
The unaudited pro forma combined financial statements may not be
indicative of the results that would have occurred if the combination had been
in effect on the dates indicated or which may occur in the future. The
unaudited pro forma condensed combined financial statements should be read in
conjunction with the financial statements of SEPCO and Newman, which are
included elsewhere in this Current Report.
F-34
<PAGE> 39
PRO FORMA COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------------------
SEPCO Newman Pro Forma PRO FORMA
HISTORICAL Historical Adjustments COMBINED
--------- --------- ------------ ------------
(in thousands except share data)
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash . . . . . . . . . . . $ 0 $ 3 $ 1 (4) $ 4
Accounts receivable, net . 16,358 16,358
Inventories . . . . . . . . 16,719 16,719
Prepaid expense and other . 992 992
Deferred income taxes . . . 533 533
--------- ------ --------- ---------
Total current assets . . 34,603 3 34,606
Property, plant and equipment,
net . . . . . . . . . . . . . 7,081 7,081
Notes receivable from officers
and shareholders . . . . . .
Intangible assets, net . . . 1,172 1,172
--------- ------ --------- ---------
Total Assets . . . . . . $ 42,855 $ 3 $ 1 $ 42,859
========= ====== ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Trade account payables . . $ 6,014 $ $ $ 6,014
Current portion of long-term
debt . . . . . . . . . . . 444 444
Current portion of
subordinated debt . . . . . 1,199 1,199
Employee compensation . . . 851 851
Other current liabilities . 2,178 6 2,184
--------- ------ --------- ---------
Total current
liabilities . . . . . . . . . . 10,686 6 10,692
Long-term debt, less current
portion . . . . . . . . . . . 19,764 19,764
Subordinated debt, less
current portion . . . . . .
Deferred compensation . . . .
Deferred income taxes . . . . 205 205
Total Liabilities 30,655 6 30,661
Equity Subject to Redemption:
Preferred Stock . . . . . . . 150 (150)(3)
Class A Convertible Preferred 450 (450)(3)
Class B Convertible Preferred 2,600 (2,600)(3)
Shareholders' Equity:
Preferred Stock . . . . . . . 9 1 (3) 3
(7)(2)
Convertible Preferred Stock . 1,500 450 (3) 1,950
Common Stock . . . . . . . . 9 1,422
(1,421)(1) 160
147 (2)
3 (3)
Paid in capital . . . . . . . 1,421 (792)(2)
(4)(1) 1,085
459 (3)
1 (4)
Retained earnings (deficit) . 7,758 (1,425) 1,425 (1)
2,287 (3) 9,000
(1,045)(2)
Treasury Stock . . . . . . . (1,697) 1,697 (2)
--------- ------ --------- ---------
Total shareholders' equity 9,000 (3) 12,198
--------- ------ --------- ---------
Total Liabilities and
Shareholders' Equity . . $ 42,855 $ 3 $ 1 $ 42,859
========= ====== ========= =========
</TABLE>
F-35
<PAGE> 40
PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996 Year Ended December 31, 1995
------------------------------------ -----------------------------------
Sepco Newman Pro Forma Sepco Newman Pro Forma
Historical Historical Combined Historical Historical Combined
---------- ---------- --------- ---------- ---------- ---------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 95,214 $ $ 95,214 $ 111,328 $ $ 111,328
Costs and expenses:
Cost of sales . . . . 70,574 70,574 82,171 82,171
Selling, general and
administrative . . 22,230 18 22,248 24,559 6 24,565
---------- ---------- ------------- ---------- ---------- ------------
Operating income (loss) 2,410 (18) 2,392 4,598 (6) 4,592
Other income (expense)
Other income . . . . 643 643 867 867
Interest expense . . (1,556) (1,556) (1,953) (1,953)
---------- ---------- ------------- ---------- ---------- ------------
Earnings (loss) before 1,497 (18) 1,479 3,512 (6) 3,506
income taxes . . . .
Provision for income (607) (607) (1,424) (1,424)
---------- ---------- ------------- ---------- ---------- ------------
taxes . . . . . . . . .
Net income . . . . . . $ 890 $ (18) $ 872 $ 2,088 $ (6) $ 2,082
========== ========== ============= ========== ========== ============
Net income per share . $ 0.87 $ (0.01) $ 0.05 $ 1.68 $ (0.01) $ 0.10
========== ========== ============= ========== ========== ============
Weighted average shares
outstanding . . . . . 1,016 1,235 17,264 1,244 764 20,925
========== ========== ============= ========== ========== ============
</TABLE>
F-36
<PAGE> 41
Pro Forma Adjustments
(in thousands except per share amounts)
1. To record the issuance of shares of Index, Inc. to the Newman shareholders
as a result of the Reorganization.
2. To record issuance of shares of Index, Inc. to SEPCO shareholders as a
result of the Reorganization and to eliminate Sepco treasury stock.
3. To record the reclassification of equity subject to redemption to
permanent equity as the redemption features are eliminated upon
consummation of the Reorganization.
4. To record capitalization of Index, Inc. in July 1996 for the purpose of
completing the Sepco Merger and the Newman Merger.
F-37
