<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-21513
INDEX, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0509661
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
580 Westlake Park Boulevard, Suite 1100 77079
Houston, Texas (Zip Code)
(Address of principal executive offices)
281/531-4214
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X (as to paragraph (1)) No X (as to paragraph (2))
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of each of the issuer's classes of common stock,
as of December 20, 1996:
Common Stock: 15,987,900
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Part I: Financial Information
INDEX, INC.
(CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS)
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 1 $ 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 $ 42,856 $ 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 2,600 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 1,422 580
Retained earnings 7,758 7,399
------------ ------------
10,698 9,497
Less treasury stock, 6,732 shares preferred and 221,401
shares Class A common (1,697) (1,697)
------------ ------------
Total shareholders' equity 9,001 7,800
Total liabilities and shareholders' equity $ 42,856 $ 43,254
============ ============
</TABLE>
See notes to condensed combined consolidated financial statements.
2
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INDEX, INC.
Condensed Combined 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 combined consolidated financial statements.
3
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INDEX, INC.
Condensed Combined Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 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)
Issuance of Class A common stock 1 232
Acquisition of common stock (589)
Dividends paid (68)
Net cash used in financing activities (2,096) (1,085)
-------- --------
Decrease in cash (1,491) (889)
Cash at beginning of period 1,492 889
-------- --------
Cash at end of period 1 0
======== ========
</TABLE>
See notes to condensed combined consolidated financial statements.
4
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INDEX, INC.
September 30, 1996
Notes to Condensed Combined Consolidated Financial Statements
Note 1: Basis of Presentation
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 Corporations, 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. Accordingly, the accompanying unaudited
financials statements are presented on a combined basis assuming the SEPCO
Reorganization had been effected as of first day of the periods presented.
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 will be 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 shares of
Common Stock and a monthly dividend per share of $0.50. The holders of the
Series B Convertible Stock are also entitled to a $100 liquidation preference
per share after payment of the 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.
Unless the context otherwise requires, references to the Company with respect
to historical operations shall mean the Company and SEPCO.
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.
5
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The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
condensed combined consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
and SEPCO included in the Company's Registration Statement on Form S-4
(Registration No. 333-10021), as amended, which was filed with the Securities
and Exchange Commission and declared effective November 12, 1996 (the
"Registration Statement").
Note 2. 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 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
SEPCO Class A convertible preferred stock (converted to Series B Preferred Stock
pursuant to the reorganization) 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 SEPCO's Class A convertible preferred stock
(converted into shares of Series B Preferred Stock in the SEPCO Reorganization)
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, SEPCO 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.
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 SEPCO 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 SEPCO'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.
6
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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
SEPCO's Class A common stock (4,916,800 shares of Common Stock after the SEPCO
Reorganization), 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 dividends and distributions from SEPCO to the Company other than to
pay dividends on the Series B Convertible 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. Stockholder's Equity
SEPCO 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 SEPCO has the first opportunity to
buy the stock. SEPCO 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.
In conjunction with the reorganization discussed in Note 1 above, all put
arrangements on SEPCO's stock will be eliminated upon the issuance of stock of
Index, Inc. to SEPCO's shareholders.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following analysis of the financial condition and results of
operations of Index, Inc. (the "Company") reflects the Company and SEPCO
Industries, Inc. ("SEPCO") on a combined basis after giving effect to the SEPCO
Reorganization (defined below) and should be read in conjunction with the
consolidated combined financial statements of the Company, including the notes
thereto, included elsewhere in this Quarterly Report on Form 10-Q.
The Company's expectations with respect to future results of operations
that may be embodied in oral or written forward-looking statements, including
any forward-looking statements that may be contained in this Quarterly Report
on Form 10-Q, are subject to risks and uncertainties that must be considered
when evaluating the likelihood of the Company's realization of such
expectations. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in Item 5 of Part II of this Report.
SEPCO Reorganization
The Company was incorporated on July 26, 1996, to facilitate a
reorganization of SEPCO in anticipation of an acquisition by the Company as the
successor to SEPCO of Newman Communications Corporations, 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. Accordingly, the accompanying
unaudited financials statements are presented on a combined basis assuming the
SEPCO Reorganization had been effected as of first day of the periods
presented.
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 will be 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 shares of
Common Stock and a monthly dividend per share of $0.50. The holders of the
Series B Convertible Stock are also entitled to a $100 liquidation preference
per share after payment of the distributions to the holders of
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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.
Unless the context otherwise requires, references to the Company with respect
to historical operations shall mean the Company and SEPCO.
Market Trends
During the three- and nine-month periods ended September 30, 1996, the
Company's revenues increased 15% and 11.4%, respectively, over the comparable
periods in 1995. The revenue increases were reflective of the Company's efforts
to expand operations through acquisitions and internal expansion. Gross margins
remained relatively constant during 1996 compared to 1995 in spite of increased
costs due in part to the Company's ability to pass on price increases.
Offsetting the improvements in the Company's revenues and gross profits were
various one-time costs incurred during 1996 related to the SEPCO Reorganization
and Newman Merger. In March 1996, the Company converted its outstanding book
value options into market-based options and recognized a $710,000 change for
additional compensation expense. The Company also incurred $164,000 and
$179,000 in expenses relating to the SEPCO Reorganization and Newman Merger for
the three and nine months ended September 30, 1996. Combined, these items
reduced operating income for the three and nine months ended September 30,
1996, and reduced net income for such periods by $108,000 and $118,000,
respectively.
Results for 1997 are expected to continue to benefit from the Company's
recent acquisitions and internal development efforts. Although the Company
expects to incur additional selling, general and administrative expenses
associated with its becoming a public company, such expenses are expected to be
less than the expenses and compensation charges incurred during 1996 relating
to the SEPCO Reorganization and Newman Merger. The Company also intends to
pursue an active acquisition program. The impact of this program will be
dependent on the timing and nature of any acquisitions actually effected.
RESULTS OF OPERATIONS
Three Months Ended September, 1996 Compared to Three Months Ended September 30,
1995
Revenues for the three months ended September 30, 1996 increased 15.0% to $32.2
million from $28.0 million for the three months ended September 30, 1995,
primarily due to sales of bearings and transmission products at locations where
pump and pump products were sold previously. During the three months ended
September 30, 1996, sales of pumps and pump products increased 7.1% over the
comparable period in 1995, while sales of valves and valve automation products
decreased 9.8% in the three months ended September 30, 1996 over the comparable
1995 period . The decrease in valve and automation sales during the three-month
period ended September 30, 1996, however, represents less than one percent of
total sales. Sales of bearings and power transmission equipment increased 34.7%
in the three months ended September 30, 1996 over the comparable period in
1995. Included in the increased pump and pump products and bearing and power
transmission revenues for the three months ended September 30, 1996 is
approximately $1.2 million in revenues attributable to two companies acquired
in December 1995 and February 1996.
Gross margins remained constant for the third quarter of 1996 as compared to
the third quarter of 1995 due to the Company's ability to pass on manufacturer
price increases. The Company currently expects some increase in manufacturers'
prices to continue due to increased raw material costs and strong market
conditions. Although the Company intends to attempt to pass on these price
increases to its customers to maintain current gross margins, there can be no
assurance that the Company will be successful in this regard.
9
<PAGE> 10
Selling, general and administrative expense increased as a percentage of
revenues by .8% for third quarter of 1996 as compared to the third quarter of
1995, due primarily to costs associated with the Company's expansion of
operations, software conversion, and professional fees associated with the
SEPCO Reorganization and Newman Merger. Excluding the effect of the
non-recurring expenses identified above, selling, general and administrative
expenses as a percentage of revenues remained relatively consistent from period
to period.
Operating income for the three-month period ended September 30, 1996 as a
percentage of revenues declined to 3.0% compared to 3.8% for the same period of
1995, due primarily to the software conversion and costs associated with the
SEPCO Reorganization and Newman Merger. The Company expects that the
installation of its new software system should be completed by the end of 1996,
and the expenses associated with such installation should decrease in 1997.
Interest expense during the third quarter of 1996 increased 15.6% to $548,000
from $474,000 for the third quarter of 1995, due to average debt increasing
during the period as a result of increased inventory levels to support sales.
Average interest rates were slightly lower during the three months ended
September 30, 1996 as compared to the same period in 1995. Further increases in
inventories may be required to the extent sales and activity levels increase.
Any such increases would be subject to the nature of the increases and the
perceived profitability of any such increases.
The Company's provision for income taxes for the three months ended September
30, 1996 decreased to $230,000 from $329,000 for the same period of 1995
notwithstanding increased operating income due to costs associated with the
expansion of the Company's business, software conversion and professional fees
related to the SEPCO Reorganization and Newman Merger.
Net income for the three-month period September 30, 1996, declined $146,000
from the three-month period ended September 30, 1995 due to expense associated
with the software conversion and professional fees associated with the SEPCO
Reorganization and Newman Merger. Excluding the cost associated with the SEPCO
Reorganization and Newman Merger, operating income would have increased
$109,000 and net income would have remained the same for the three months ended
September 30, 1996 as compared to the three months ended September 30, 1995.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Revenues for the nine months ended September 30, 1996 increased 11.4% to $95.2
million from $84.4 million for the same period in 1995, primarily due to sales
of bearings and transmission products at locations where pump and pump products
were sold previously, revenue attributable to the two companies acquired in
December 1995 and February 1996 and from increased sales volume. During the
nine months ended September 30, 1996, sales of pumps and pump products
increased 6.8% over the comparable period in 1995, while sales of valves and
valve automation products increased 4.1% in the first nine months in 1996 over
the comparable 1995 period. Sales of bearings and power transmission equipment
increased 24.7% in the first nine months of 1996 over the comparable period in
1995. Included in the increased pump and pump products and bearing and power
transmission revenues for the nine months ended September 30, 1996 is
approximately $3.2 million in revenues attributable to two companies acquired
in December 1995 and February 1996.
Gross margins increased slightly by .1% in the first nine months of 1996
compared to the first nine months of 1995 due to the ability of the Company to
pass on manufacturer price increases.
Selling, general and administrative expense increased as a percentage of
revenues by 1.0% for the nine months ended September 30, 1996 as compared to
the nine months ended September 30, 1995, due primarily to a one-time charge of
$710,000 for additional compensation expense associated with the amendment of
certain book value stock options into market-based stock options, costs
associated
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<PAGE> 11
with the Company's expansion of operations, software conversion and
professional fees associated with the SEPCO Reorganization and Newman Merger.
Excluding the effect of the amendments to the stock options and the other non
recurring expenses identified above, selling, general and administrative
expenses as a percentage of revenues remained relatively consistent from period
to period.
Operating income for the first nine months of 1996 as a percentage of revenues
declined to $2.4 million from $3.1 million the first nine months of 1996, due
primarily to the compensation expense recorded in connection with the stock
option amendments, interest and other costs associated with SEPCO's expansion
of operations and software conversion, and increased professional fees related
to the Reorganization..
Interest expense during the first nine months of 1996 increased slightly
compared to the first nine months of 1995, due to average debt increasing
during the period as a result of increased inventory levels to support sales.
Average interest rates were slightly lower during the nine months of 1996 as
compared to 1995. Further increases in inventories may be required to the
extent sales and activity levels increase. Any such increases would be subject
to the nature of the increases and the perceived profitability of any such
increases.
The Company's provision for income taxes for the first nine months of 1996
decreased by $318,000 compared to the first nine months of 1995 notwithstanding
increased operating income due to higher compensation expense during the period
associated with the amendments to the Company's stock options, costs associated
with the expansion of the Company's operations and software conversion and
increased professional fees related to the SEPCO Reorganization and Newman
Merger.
Net income for the nine months ended September 30, 1996, declined $466,000 from
the first nine months of 1995 due primarily to the effects of the additional
compensation expense associated with the amendments to the Company's stock
options, costs associated with the software conversion and increased
professional fees associated with the Reorganization. Excluding the costs
associated with the Reorganization, operating income and net income would have
increased $427,000 and $256,000, respectively, for the nine months ended
September 30, 1996 as compared to the nine months ended September 30, 1995.
Liquidity and Capital Resources
The Company generated cash from operating activities of $2.1 million in the
first nine months of 1996 as compared to 1.9 million during the first nine
months of 1995.
Under the Company's credit facility, all available cash is generally applied to
reduce outstanding borrowings, with operations funded through borrowings under
the credit facility. As a result, at September 30, 1996, the Company had no
cash and cash equivalents compared to $1.5 million at December 31, 1995. The
Company's policy is to maintain low levels of cash and cash equivalents and to
use borrowings under its line of credit for working capital. The Company had
$3.0 million available for borrowings under its working capital line of credit
at September 30, 1996. Working capital at September 30, 1996 and December 31,
1995 was $24 million. During the first nine months of 1996, the Company
collected its trade receivables in approximately 48 days and turned its
inventory approximately five times.
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
11
<PAGE> 12
than five to one and current assets to current liabilities greater than two to
one. The credit facility also restricts dividends and distributions from SEPCO
to the Company other than to pay dividends on the Series B Convertible
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.
The Company had capital expenditures of approximately $971,000 for the first
nine months of 1996 as compared to $369,000 during the same period of 1995.
Capital expenditures for the first nine months of 1996 included $190,000 for
the purchase of a facility in Lufkin, Texas, and leasehold improvements,
furniture and fixtures at the corporate office and office equipment and
computer automation. The Company expended approximately $550,000 for the
acquisition of the assets of Austin Bearings during the first quarter of 1996.
For the remainder of 1996, the Company has budgeted approximately $438,000 for
additional capital expenditures primarily associated with the conversion of the
Company's computer system.
The Company is currently undergoing an examination of its tax returns by the
IRS. The IRS has asserted claims against SEPCO 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 SEPCO's use of the
LIFO method of accounting for inventory. SEPCO 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.
The Company believes that cash generated from operations and available under
its credit facility will meet its future ongoing operational and liquidity
needs and capital requirements. Funding of the Company's acquisition program
and integrated supply strategy will require capital in the form of the issuance
of additional equity or debt financing. There can be no assurance that such
financing will be available to the Company or as to the terms thereof.
12
<PAGE> 13
Part II: Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities
On July 31, 1996, the Company issued 100 shares of its Common Stock, $.01 par
value per share, in exchange for $10.00 cash per share, to David R. Little, the
company's President and Chief Executive Officer, in connection with the
formation of the Company.
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
On August 12, 1996, by unanimous written consent, the sole shareholder of the
company elected Jerry Jones, Cletus Davis, Kenneth H. Miller, Thomas V. Orr and
Bryan Wimberly directors of the Company, approved the SEPCO Reorganization and
Newman Merger and approved the Index, Inc. Long-Term Incentive Plan.
Item 5. Other Information
CAUTIONARY STATEMENTS
The Company's expectations with respect to future results of operations that
may be embodied in oral and written forward-looking statements, including any
forward-looking statements that may be contained in this Quarterly Report on
Form 10-Q, are subject to risks and uncertainties that must be considered when
evaluating the likelihood of the Company's realization of such expectations.
The company's actual results could differ materially. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed below.
Substantial Competition
The company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, some of which may have greater
financial and other resources than the Company. Although many of the Company's
traditional distribution competitors are small enterprises selling to customers
in a limited geographic area, the Company also competes with larger distributors
that provide integrated supply programs such as those offered through the iPower
Consortium and outsourcing services similar to those that are planned to be
offered by American MRO, Inc. ("AMRO"), a wholly-owned subsidiary of the
Company. Some of these large distributors may be able to supply their products
in a more timely and cost-efficient manner than the Company. The Company's
competitors include direct mail suppliers, large warehouse stores and, to a
lesser extent, certain manufacturers.
Risks Associated with Implementation of Corporate Strategy
Future results for the Company also will be dependent on the success of the
Company in implementing its acquisition and growth strategy. This strategy
includes taking advantage of a consolidation in the industry and effecting
acquisitions of distributors with complementary or desirable new product lines,
strategic distribution locations and attractive customer bases and manufacturer
relations. The Company's strategy also includes expanding its product lines,
adding new product lines and establishing alliances and joint ventures with
other suppliers in order to provide the Company's customers with a source of
integrated supply. The ability of the Company to implement this strategy will
depend on its ability to identify, consummate and assimilate acquisitions on
economic terms, to acquire and successfully integrate new product lines and to
establish and successfully market new integrated forms of supply arrangements
such as that being pursued by
13
<PAGE> 14
AMRO. Although the Company is actively seeking acquisitions and integrated
supply arrangements that would meet its strategic objectives, there can be no
assurance that the company will be successful in these efforts. Further, the
ability of the Company to effect its strategic plans will depend on obtaining
financing for its planned expansions and acquisitions. There can be no
assurance that such financing will be available on a timely basis or on terms
satisfactory to the Company. The Company plans to examine appropriate methods
of financing any such acquisition, including issuance of additional capital
stock, debt or other securities or a combination of both. If the Company were
to issue shares of its capital stock in any acquisition, such issuance could be
dilutive to existing shareholders.
Dependence on Key Personnel
The company will continue to be dependent to a significant extent upon the
efforts and ability of David R. Little, its Chairman of the Board and Chief
Executive Officer. The loss of the services of Mr. Little or any other
executive officer of the Company could have a material adverse effect on the
Company's financial condition and results of operations. The Company does not
maintain key-man life insurance on Mr. Little or on the lives of its other
executive officers. In addition, the Company's ability to grow successfully
will be dependent upon its ability to attract and retain qualified management
and technical and operational personnel. The failure to attract and retain such
persons could materially adversely effect the Company's financial condition and
results of operation.
Risks Associated with Hazardous Materials
Certain of the Company's activities involve the controlled use of hazardous
materials and chemicals. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated completely.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company.
IRS Examination
The Company currently is undergoing an examination of its tax returns by the
IRS. The IRS has asserted claims against SEPCO 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 SEPCO's use of the
LIFO method of accounting for inventory. Although the Company believes that its
LIFO elections were valid and is pursuing its rights to administrative appeal,
an unfavorable outcome on this matter would result in the payment of additional
taxes and impact the company's liquidity position.
Limitation on Ability to Pay Dividends
The Company anticipates that future earnings, except for dividends payable on
the Series B Convertible Preferred Stock, will be retained to finance the
continuing development of its business. In addition, the Company's loan
agreement with its principal lender prohibits the Company from declaring or
paying any dividends or other distributions on its capital stock except for
dividends on its preferred stock. Accordingly, the Company does not anticipate
paying cash dividends on the Common Stock in the foreseeable future.
Item 6. Exhibits and Reports on Form 8-K
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
14
<PAGE> 15
Investment Securities, (incorporated by reference to Exhibit 2.1 of
Amendment No. 1 to the Registrant's Registration Statement on Form
S-4 (Registration 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
the Registrant's Registration Statement on Form S-4, (Registration
No. 333-10021)).
3.1: Restated Articles of Incorporation, (incorporated by reference to
Exhibit 3.1 of Registration Statement on Form S-4, (Registration No.
333-10021)).
3.2: Bylaws, (incorporated by reference to Amendment No. 1 to the
Registrant's Exhibit 3.2 of Registration Statement on Form S-4,
(Registration No. 333-10021)).
4.1: Form of Common Stock Certificate, (incorporated by reference to
Exhibit 4.1 of Registration Statement on Form S-4, (Registration No.
333-10021)).
4.2: Form of Series A Preferred Stock Certificate, (incorporated by
reference to Exhibit 4.2 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4, (Registration 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 the
Registrant's Registration Statement on Form S-4, (Registration No.
333-10021)).
4.4: See Exhibit 3.1 for provisions of the Restated Articles of
Incorporation of the Registrant defining the rights of the holders of
Common Stock, Series A Preferred Stock and Series B Convertible
Preferred Stock.
4.5: See Exhibit 3.2 for provisions of the Bylaws of the Registrant
defining the rights of the holders of Common Stock, Series A
Preferred Stock and Series B Convertible Preferred Stock.
11.1: Statement re: Computation of Per Share Earnings.
27.1 Financial Data Schedule
15
<PAGE> 16
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INDEX, INC.
Date: December 20, 1996 By:
------------------------------
Gary A. Allcorn
Senior Vice President/Finance
(Duly authorized officer and
principal financial officer)
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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 the Registrant's
Registration Statement on Form S-4 (Registration 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
the Registrant's Registration Statement on Form S-4, (Registration
No. 333-10021)).
3.1: Restated Articles of Incorporation, (incorporated by reference to
Exhibit 3.1 of Registration Statement on Form S-4, (Registration No.
333-10021)).
3.2: Bylaws, (incorporated by reference to Amendment No. 1 to the
Registrant's Exhibit 3.2 of Registration Statement on Form S-4,
(Registration No. 333-10021)).
4.1: Form of Common Stock Certificate, (incorporated by reference to
Exhibit 4.1 of Registration Statement on Form S-4, (Registration No.
333-10021)).
4.2: Form of Series A Preferred Stock Certificate, (incorporated by
reference to Exhibit 4.2 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4, (Registration 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 the
Registrant's Registration Statement on Form S-4, (Registration No.
333-10021)).
4.4: See Exhibit 3.1 for provisions of the Restated Articles of
Incorporation of the Registrant defining the rights of the holders of
Common Stock, Series A Preferred Stock and Series B Convertible
Preferred Stock.
4.5: See Exhibit 3.2 for provisions of the Bylaws of the Registrant
defining the rights of the holders of Common Stock, Series A
Preferred Stock and Series B Convertible Preferred Stock.
11.1: Statement re: Computation of Per Share Earnings.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 935,799 1,196,200 935,799 1,196,200
Net effect of dilutive stock options -- based
on the treasury stock method using
average market price 73,279 58,782 73,279 58,782
Adjustment to give effect to shares
optioned to key employees within
12 months of the beginning of each
period presented based on treasury
stock method using estimated market
price upon offering 6,451 76,137 6,451 76,137
Total common and common stock
equivalents 1,015,529 1,331,119 1,015,529 1,331,119
Net income $ 336,000 $ 482,000 $ 890,000 $1,356,000
Per share amount $ 0.33 $ 0.36 $ 0.87 $ 1.02
Fully diluted
Average shares outstanding 935,799 1,196,200 935,799 1,196,200
Net effect of dilutive stock options --
based on the treasure stock method using
period-end market price, if higher than
average market price 79,730 63,021 79,730 63,021
Adjustment to give effect to shares
optioned to key employees within
12 months of the beginning of each
period presented based on treasury
stock method using estimated market
price upon offering 76,137 76,137
Assumed conversion of Class A convertible
Preferred Stock 136,500 136,500
Total 1,152,029 1,335,338 1,152,029 1,335,338
Net Income $ 336,000 $ 482,000 $ 890,000 $1,356,000
Per share amount $ 0.29 $ 0.36 $ 0.77 $ 1.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
UNAUDITED CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS OF INDEX, INC. AS
OF SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 16,558
<ALLOWANCES> 200
<INVENTORY> 16,719
<CURRENT-ASSETS> 34,602
<PP&E> 15,068
<DEPRECIATION> 7,987
<TOTAL-ASSETS> 42,856
<CURRENT-LIABILITIES> 9,043
<BONDS> 21,407
<COMMON> 9
600
1,509
<OTHER-SE> 7,483
<TOTAL-LIABILITY-AND-EQUITY> 42,856
<SALES> 95,214
<TOTAL-REVENUES> 95,214
<CGS> 70,574
<TOTAL-COSTS> 70,574
<OTHER-EXPENSES> 21,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,556
<INCOME-PRETAX> 1,497
<INCOME-TAX> 607
<INCOME-CONTINUING> 890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 890
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.67
</TABLE>
