-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AWKq/il33mTRc2HbsBAT/wcSsCU2XeXAopx701z3K3R+3PT9sGj28rfJvEMQA5Hl EUAb2Ug2BHr5HxhwQwFHig== 0000950129-96-001832.txt : 19960814 0000950129-96-001832.hdr.sgml : 19960814 ACCESSION NUMBER: 0000950129-96-001832 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960813 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEX INC CENTRAL INDEX KEY: 0001020710 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DURABLE GOODS, NEC [5099] IRS NUMBER: 760509661 STATE OF INCORPORATION: TX FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-10021 FILM NUMBER: 96611178 BUSINESS ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 713-531-4214 MAIL ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 S-4/A 1 INDEX, INC. - FORM S-4 - AMEND. #1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1996. REGISTRATION NO. 333-10021 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 1 to FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 INDEX, INC. (Exact Name of Registrant as Specified in Its Charter) TEXAS 5084 76-0509661 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
580 WESTLAKE PARK BOULEVARD, SUITE 1100 HOUSTON, TEXAS 77079 (713) 531-4214 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) DAVID R. LITTLE CHAIRMAN AND CHIEF EXECUTIVE OFFICER INDEX, INC. 580 WESTLAKE PARK BOULEVARD, SUITE 1100 HOUSTON, TEXAS 77079 (713) 531-4214 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) --------------------- Copies to: GARY A. MESSERSMITH, ESQ. CURTIS W. HUFF, ESQ. FOUTS & MOORE, L.L.P. FULBRIGHT & JAWORSKI L.L.P. 5555 SAN FELIPE, 17TH FLOOR 1301 MCKINNEY HOUSTON, TEXAS 77056-2726 HOUSTON, TEXAS 77010
--------------------- Approximate date of commencement of proposed sale of the securities to the public: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AND ONCE ALL OTHER CONDITIONS OF THE MERGER AGREEMENTS DESCRIBED IN THE ENCLOSED PROXY STATEMENT/PROSPECTUS HAVE BEEN SATISFIED OR WAIVED. If the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INDEX, INC. --------------------- CROSS-REFERENCE SHEET PURSUANT TO ITEM 1 OF FORM S-4 AND ITEM 501(B) OF REGULATION S-K
CAPTION OR LOCATION ITEM OF FORM S-4 IN PROXY STATEMENT/PROSPECTUS ------------------------------------------- ------------------------------------------- A. Information about Transaction 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Forepart of the Registration Statement; Cross Reference Sheet; Outside Front Cover Page of Proxy Statement/Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Table of Contents; Inside Front Cover Page of Proxy Statement/Prospectus 3. Risk Factors and Ratio of Earnings (Loss) to Fixed Charges and Other Information... Summary; Risk Factors 4. Terms of the Transaction................... Summary; The Reorganization; Certain Terms of the Merger Agreements 5. Pro Forma Financial Information............ Summary; Selected Consolidated Financial Data 6. Material Contracts with Company Being Acquired................................. Certain Terms of the Merger Agreements 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters....................... Not Applicable 8. Interests of Named Experts and Counsel..... Experts; Legal Matters 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Part II B. Information about the Registrant 10. Information with Respect to S-3 Registrant............................... Not Applicable 11. Incorporation of Certain Information by Reference................................ Not Applicable 12. Information with Respect to S-2 or S-3 Registrants.............................. Not Applicable 13. Incorporation of Certain Information by Reference................................ Not Applicable 14. Information with Respect to Registrants other than S-3 or S-2 Registrants........ Summary; Risk Factors; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business Information Concerning the Company; Market for Common Stock, Sepco Common Stock and Newman Common Stock and Related Shareholder Matters; Management; Beneficial Ownership of Securities; Certain Transactions; Description of Company Capital Stock
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CAPTION OR LOCATION ITEM OF FORM S-4 IN PROXY STATEMENT/PROSPECTUS ------------------------------------------- ------------------------------------------- C. Information about the Company being Acquired 15. Information with Respect to S-3 Companies................................ Not Applicable 16. Information with Respect to S-2 or S-3 Companies................................ Not Applicable 17. Information with Respect to Companies other than S-3 or S-2 Companies................ Summary; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business Information Concerning Newman; Market for Common Stock, Sepco Common Stock and Newman Common Stock and Related Shareholder Matters; Description of Newman Capital Stock D. Voting and Management Information 18. Information if Proxies, Consents or Authorizations are to be Solicited....... Outside Front Cover Page of Proxy Statement/Prospectus; Summary; The Meetings; The Reorganization 19. Information if Proxies, Consents or Authorizations are not to be Solicited in an Exchange Offer........................ Not Applicable
4 SEPCO INDUSTRIES, INC. 6500 BRITTMOORE ROAD HOUSTON, TEXAS 77041 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS , 1996 Notice is hereby given that a special meeting of shareholders of Sepco Industries, Inc., a Texas corporation ("Sepco"), will be held at : a.m., Central Daylight Time, on , October , 1996, at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010, for the following purposes: (a) To consider and vote upon a proposal to approve and adopt an Agreement and Plan of Merger dated August 12, 1996 by and among Index, Inc., a Texas corporation (the "Company"), Sepco Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of the Company ("Sepco Acquisition"), and Sepco (the "Sepco Merger Agreement"), providing for the merger of Sepco Acquisition with and into Sepco (the "Sepco Merger") and pursuant to which (a) each outstanding share of Sepco's Class A Common Stock will be converted automatically into the right to receive 16 shares of common stock of the Company, (b) each outstanding share of Sepco's Class B Common Stock will be converted automatically into the right to receive 18.1232 shares of common stock of the Company, (c) each outstanding share of Sepco's Class A Convertible Preferred Stock will be converted automatically into the right to receive one share of Series B Convertible Preferred Stock of the Company and (d) each outstanding share of Sepco's Preferred Stock will be converted automatically into the right to receive one share of Series A Preferred Stock of the Company, all as more fully described in this Proxy Statement/Prospectus. (b) To consider and take action upon any other matter that may properly come before the special meeting, or any adjournment or postponement thereof. The Sepco Merger is being effected in connection with a related merger (the "Newman Merger") of Newman Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of the Company ("Newman Acquisition") with and into Newman Communications Corporation, a New Mexico corporation ("Newman"), as part of an overall reorganization. The Sepco Merger and Newman Merger shall be effected contemporaneously and each are conditioned upon the consummation of the other. The Sepco Merger, Newman Merger and the resulting reorganization of Sepco and its affiliated companies are collectively referred to as the "Reorganization". The Company was formed recently for the sole purpose of effecting the Reorganization and succeeding to the business and operations of Sepco. The Sepco Merger will be consummated only if certain conditions are satisfied, including (a) the contemporaneous consummation of the Newman Merger and (b) approval of the Sepco Merger Agreement by the holders of at least two-thirds of the outstanding shares of Sepco's Class A Common Stock and Class B Common Stock and the approval of the Sepco Merger Agreement by the holders of at least two-thirds of the outstanding shares of Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock, each voting separately as a series. The shareholders of Sepco have the right to dissent from the Sepco Merger under the Texas Business Corporation Act and, subject to certain conditions set forth therein, receive payment for their shares. These rights are more fully described in the accompanying Proxy Statement/Prospectus. Shareholders of record of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock at the close of business on September , 1996 will be entitled to notice of and to vote at the special meeting or any adjournment or postponement thereof. A list of the shareholders of record of Sepco's Class A Common Stock, Class B Common Stock, Class A Convertible Preferred Stock and Preferred Stock as of September , 1996 will be open to the examination of any such shareholder for any purpose germane to the special meeting at Sepco's offices at 580 Westlake Park Boulevard, Suite 1100, Houston, Texas, after , 1996 during ordinary business hours. YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON, BUT IN ANY EVENT YOU ARE URGED TO MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON OR BY YOUR PROXY. By order of the Board of Directors, Secretary Houston, Texas , 1996 5 NEWMAN COMMUNICATIONS CORPORATION 211 WEST WALL STREET MIDLAND, TEXAS 79701 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS , 1996 Notice is hereby given that a special meeting of shareholders of Newman Communications Corporation, a New Mexico corporation ("Newman"), will be held at a.m., Central Daylight Time, on , October , 1996, at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010, for the following purposes: (a) To consider and vote upon a proposal to approve and adopt an Agreement and Plan of Merger dated August 1, 1996 by and among Index, Inc., a Texas corporation (the "Company"), Newman Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of the Company, Newman and Little & Company Investment Securities, a Texas corporation (the "Newman Merger Agreement"), pursuant to which Newman Acquisition Corporation will be merged with and into Newman (the "Newman Merger"). Upon consummation of the Newman Merger, each outstanding share of common stock of Newman will be converted automatically into the right to receive one-fourth of one share of common stock of the Company. (b) To consider and take action upon any other matter that may properly come before the special meeting, or any adjournment or postponement thereof. The Newman Merger is being effected in connection with a related merger (the "Sepco Merger") of Sepco Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of the Company ("Sepco Acquisition"), with and into Sepco Industries, Inc., a Texas corporation ("Sepco"), as part of an overall reorganization. The Sepco Merger and Newman Merger shall be effected contemporaneously and each are conditioned upon the consummation of the other. The Sepco Merger, Newman Merger and the resulting reorganization of Sepco and its affiliated companies are collectively referred to as the "Reorganization". The Company was formed recently for the sole purpose of effecting the Reorganization and succeeding to the business and operations of Sepco. The Newman Merger will be consummated only if certain conditions are satisfied, including (a) the contemporaneous consummation of the Sepco Merger and (b) the approval of the Newman Merger Agreement by the holders of at least a majority of the outstanding shares of common stock of Newman. The shareholders of Newman have the right to dissent from the Newman Merger under the New Mexico Business Corporation Act and, subject to certain conditions contained therein, receive payment for their shares. These rights are more fully described in the accompanying Proxy Statement/Prospectus. Only shareholders of record at the close of business on , 1996 are entitled to notice of and to vote at the special meeting or any adjournment thereof. WE HOPE THAT YOU ATTEND THE SPECIAL MEETING IN PERSON, BUT IN ANY EVENT YOU ARE URGED TO MARK, DATE, SIGN AND RETURN YOUR PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE AS SOON AS POSSIBLE SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES. ANY PROXY GIVEN BY A SHAREHOLDER MAY BE REVOKED BY THAT SHAREHOLDER AT ANY TIME PRIOR TO THE VOTING OF THE PROXY. By Order of the Board of Directors Patricia de Little Secretary Midland, Texas , 1996 6 SUBJECT TO COMPLETION, DATED AUGUST 13, 1996 INDEX, INC. --------------------- PROXY STATEMENT/PROSPECTUS This Proxy Statement/Prospectus is being furnished to shareholders of Sepco Industries, Inc., a Texas corporation ("Sepco"), in connection with the solicitation of proxies by its board of directors for use at a special meeting of Sepco shareholders (the "Sepco Meeting") scheduled to be held on , October , 1996, at : .m., Central Daylight Time, at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010, and any adjournment or postponement thereof. This Proxy Statement/Prospectus also is being furnished to the shareholders of Newman Communications Corporation, a New Mexico corporation ("Newman"), in connection with the solicitation of proxies by its board of directors for use at a special meeting of shareholders of Newman (the "Newman Meeting") scheduled to be held on , October , 1996, at : .m., Central Daylight Time, at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010, and any adjournment or postponement thereof. At the Sepco Meeting, the holders of Class A Common Stock, $.01 par value per share, of Sepco (the "Sepco Class A Common Stock"), Class B Common Stock, $.01 par value, of Sepco (the "Sepco Class B Common Stock" and, together with the Sepco Class A Common Stock, the "Sepco Common Stock"), Class A Convertible Preferred Stock, $100.00 par value per share, of Sepco (the "Sepco Class A Convertible Preferred Stock") and preferred stock, $1.00 par value per share, of Sepco (the "Sepco Preferred Stock") will be asked to consider and vote upon a proposal to approve the merger of Sepco Acquisition, Inc., a Nevada corporation ("Sepco Acquisition"), with and into Sepco (the "Sepco Merger"), and the Plan and Agreement of Merger dated August 12, 1996, by and among Index, Inc., a Texas corporation and sole shareholder of Sepco Acquisition (the "Company"), Sepco Acquisition and Sepco (the "Sepco Merger Agreement"), providing for the Sepco Merger. Such approval is a condition to Sepco consummating the Sepco Merger. In the Sepco Merger (i) each outstanding share of Sepco Class A Common Stock will be converted automatically into the right to receive 16 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), (ii) each outstanding share of Sepco Class B Common Stock will be converted automatically into the right to receive 18.1232 shares of Common Stock, (iii) each outstanding share of Sepco Class A Convertible Preferred Stock will be converted automatically into the right to receive one share of series B convertible preferred stock of the Company, par value $1.00 per share (the "Series B Convertible Preferred Stock"), and (iv) each outstanding share of Sepco Preferred Stock will be converted automatically into the right to receive one share of series A preferred stock of the Company, par value $1.00 per share (the "Series A Preferred Stock"), all as more fully described in this Proxy Statement/Prospectus. At the Newman Meeting, the holders of common stock of Newman, no par value (the "Newman Common Stock") will be asked to consider and vote upon a proposal to approve the merger of Newman Acquisition Corporation, a Nevada corporation ("Newman Acquisition"), with and into Newman (the "Newman Merger"), and the Plan and Agreement of Merger dated August 12, 1996, by and among the Company, the sole shareholder of Newman Acquisition, Newman Acquisition, Little & Company Investment Securities, a Texas corporation ("LITCO"), and Newman (the "Newman Merger Agreement"), providing for the Newman Merger. Such approval is a condition to Newman consummating the Newman Merger. In the Newman Merger each outstanding share of Newman Common Stock will be converted automatically into the right to receive one-fourth of one share of Common Stock. Index, Inc. was formed recently for the sole purpose of effecting a reorganization of Sepco and its affiliated companies, succeeding to the business and operations of Sepco and acquiring by merger Newman. The Reorganization will be effected through the contemporaneous consummation of the Sepco Merger and Newman Merger (the "Mergers"). The Mergers and the resulting reorganization of Sepco and its affiliated companies are collectively referred to herein as the "Reorganization". Upon consummation of the Reorganization, the prior holders of Sepco Class A Common Stock and Sepco Class B Common Stock will hold approximately 96% of the outstanding shares of Common Stock and the prior holders of Newman Common Stock will hold approximately 4% of the outstanding shares of Common Stock. THE COMMON STOCK, SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES A PREFERRED STOCK INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 11. THE SHARES OF COMMON STOCK, SERIES B CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK TO BE ISSUED IN CONNECTION WITH THE MERGERS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Proxy Statement/Prospectus is , 1996. 7 This Proxy Statement/Prospectus also constitutes the prospectus of the Company pursuant to the Securities Act of 1933, as amended (the "Securities Act"), with respect to the issuance of up to 15,987,900 shares of Common Stock, 19,500 shares of Series B Convertible Preferred Stock and 3,366 shares of Series A Preferred Stock in connection with the Reorganization, up to 2,184,000 shares of Common Stock issuable upon conversion of the Series B Convertible Preferred Stock and up to 412,500 shares of Common Stock issuable upon the exercise of certain Class C Warrants of Newman to be assumed by the Company pursuant to the Newman Merger. There is no current market for the Common Stock, the Series B Convertible Preferred Stock or the Series A Preferred Stock and there can be no assurance that such a market will develop. The Company intends to apply for quotation of the Common Stock on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. upon effectiveness of the Registration Statement. This Proxy Statement/Prospectus is being mailed to shareholders of Sepco and Newman on or about , 1996. No person has been authorized to give any information or to make any representation other than those contained in this Proxy Statement/Prospectus in connection with the solicitation of proxies or the offering of securities made hereby and, if given or made, such information or representation must not be relied upon as having been authorized by the Company, Sepco, Newman or any other person. This Proxy Statement/Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy in any jurisdiction to or from any person to whom it is not lawful to make any such offer or solicitation in such jurisdiction. Neither the delivery of this Proxy Statement/Prospectus nor any distribution of securities made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company, Sepco or Newman since the date hereof or that the information herein is correct as of any time subsequent to its date. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-4 (the "Registration Statement") under the Securities Act with respect to the Common Stock to be issued in the Reorganization. This Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered by this Proxy Statement/Prospectus, reference is made to the Registration Statement, including the exhibits thereto. Statements contained in this Proxy Statement/Prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Prior to the Reorganization, neither the Company nor Sepco has been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Newman is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the Commission. Upon consummation of the Reorganization, Newman will cease to be a reporting company under the Exchange Act. The reports, proxy statements and other information to be filed by the Company, and as filed by Newman, with the Commission may be inspected without charge, and copies may be obtained at prescribed rates, at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission at Northwest Atrium Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048. The Commission also maintains a Worldwide Web site on the Internet at http://www.sec.gov which contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 8 TABLE OF CONTENTS
PAGE --- SUMMARY............................................................................... 1 RISK FACTORS.......................................................................... 12 No Fairness Opinion Obtained by the Company, Sepco or Newman........................ 12 Control by Existing Shareholders, Directors and Executive Officers of Sepco......... 12 Substantial Competition............................................................. 12 Risks Associated with Implementation of Corporate Strategy.......................... 12 Dependence on Key Personnel......................................................... 13 Risks Associated with Hazardous Materials........................................... 13 Limitation on Ability to Pay Dividends.............................................. 13 Dilution............................................................................ 14 Potential Anti-Takeover Effects of Articles of Incorporation and Bylaws............. 14 No Public Market; Possible Volatility of Stock Price................................ 14 THE MEETINGS.......................................................................... 15 General............................................................................. 15 Record Dates; Shares Entitled to Vote; Quorum; Vote Required........................ 15 Solicitation of Proxies............................................................. 16 Appointment and Revocation of Proxies............................................... 16 Voting of Shares and Exercise of Discretion of Proxies.............................. 17 Other Matters....................................................................... 17 THE REORGANIZATION.................................................................... 17 General Description of the Mergers.................................................. 17 Sepco's Reasons for the Reorganization; Recommendation of Sepco's Board of Directors........................................................................ 18 Newman's Reasons for the Newman Merger; Recommendation of Newman's Board of Directors..................................................................... 18 Certain Federal Income Tax Consequences............................................. 19 Anticipated Accounting Treatment.................................................... 20 Dissenters' Rights.................................................................. 20 Arrangement with Halter............................................................. 25 Restrictions on Resales by Affiliates............................................... 25 CERTAIN TERMS OF THE MERGER AGREEMENTS................................................ 26 Sepco Merger Agreement.............................................................. 26 Newman Merger Agreement............................................................. 28 SEPCO SELECTED CONSOLIDATED FINANCIAL DATA............................................ 31 NEWMAN SELECTED FINANCIAL DATA........................................................ 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................................... 36 The Company/Sepco................................................................... 37 General............................................................................. 35 Results of Operations............................................................... 36 Liquidity and Capital Resources..................................................... 38 Accounting Pronouncements........................................................... 39 Inflation........................................................................... 39 Newman.............................................................................. 39 BUSINESS INFORMATION CONCERNING THE COMPANY........................................... 41 General............................................................................. 41 Industry Overview and Business Objectives........................................... 42 Products and Services............................................................... 43 The iPower Consortium............................................................... 44
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PAGE --- Manufacturers....................................................................... 44 Competition......................................................................... 44 Customers........................................................................... 44 Properties.......................................................................... 45 Backlog............................................................................. 45 Employees........................................................................... 45 Insurance........................................................................... 45 Intellectual Property............................................................... 46 Government Regulation and Environmental Matters..................................... 46 Legal Proceedings................................................................... 46 BUSINESS INFORMATION CONCERNING NEWMAN................................................ 47 Background.......................................................................... 47 Bankruptcy Proceedings.............................................................. 47 Current Business of Newman.......................................................... 48 MARKET FOR THE COMPANY'S STOCK, SEPCO COMMON STOCK AND NEWMAN COMMON STOCK AND RELATED SHAREHOLDER MATTERS................................................................. 48 The Company......................................................................... 48 Sepco............................................................................... 49 Newman.............................................................................. 49 DIVIDEND POLICY....................................................................... 49 MANAGEMENT............................................................................ 50 Board of Directors' Compensation.................................................... 51 Committees of the Board of Directors................................................ 51 Employment Agreements............................................................... 51 Executive Compensation.............................................................. 53 Benefit Plans....................................................................... 54 The Sepco Industries, Inc. Employee Stock Ownership Plan............................ 54 Nonqualified Stock Option Agreements................................................ 55 Long Term Incentive Plan............................................................ 56 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 61 CERTAIN TRANSACTIONS.................................................................. 64 Sepco............................................................................... 64 COMPARISON OF RIGHTS OF SHAREHOLDERS OF SEPCO AND THE COMPANY......................... 64 Common Stock........................................................................ 64 Preferred Stock..................................................................... 64 Vote Required on Certain Matters.................................................... 64 COMPARISON OF RIGHTS OF HOLDERS OF NEWMAN COMMON STOCK AND COMMON STOCK............... 65 Mergers............................................................................. 65 Appraisal Rights.................................................................... 65 Special Meetings.................................................................... 66 Shareholder Action Without a Meeting................................................ 66 Election of Directors............................................................... 66 Voting on Other Matters............................................................. 67 Distributions to Shareholders....................................................... 67 Liquidation Rights.................................................................. 67 Limitation of Liability and Indemnification......................................... 68 Removal of Directors................................................................ 68 Inspection of Books and Records..................................................... 68
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PAGE --- DESCRIPTION OF COMPANY CAPITAL STOCK.................................................. 69 General............................................................................. 69 Common Stock........................................................................ 69 Preferred Stock..................................................................... 69 Transfer Agent...................................................................... 70 DESCRIPTION OF SEPCO CAPITAL STOCK.................................................... 70 General............................................................................. 70 Sepco Common Stock.................................................................. 71 Sepco Preferred Stock............................................................... 71 DESCRIPTION OF NEWMAN CAPITAL STOCK................................................... 73 General............................................................................. 73 Newman Common Stock................................................................. 73 Newman Preferred Stock.............................................................. 73 Class C Warrants.................................................................... 73 LEGAL MATTERS......................................................................... 74 EXPERTS............................................................................... 74 APPENDIX A: Sepco Merger Agreement.................................................... APPENDIX B: Newman Merger Agreement................................................... APPENDIX C: Articles 5.12 and 5.13 of the Texas Business Corporation Act.............. APPENDIX D: Sections 53-15-3 and 53-15-4 of the New Mexico Business Corpor a tion Act................................................................................. APPENDIX E: Articles of Incorporation of the Company.................................. APPENDIX F: Bylaws of the Company.....................................................
iii 11 SUMMARY The following is a brief summary of certain information contained elsewhere in this Proxy Statement/Prospectus. This summary does not contain a complete statement of all material information relating to the Sepco Merger, the Newman Merger, the Sepco Merger Agreement, the Newman Merger Agreement, the Reorganization or the other transactions contemplated thereby and is subject to and qualified in its entirety by reference to the more detailed information and financial statements contained elsewhere in this Proxy Statement/Prospectus, the Sepco Merger Agreement and the Newman Merger Agreement, which are attached hereto and incorporated herein by reference, and the other Appendices attached hereto. Shareholders are urged to read this Proxy Statement/Prospectus and the Appendices hereto in their entirety. Unless the context otherwise requires, references in this Proxy Statement/Prospectus to the "Company" shall mean Index, Inc., as the successor to Sepco following the completion of the Reorganization. THE COMPANIES The Company was incorporated in the State of Texas in July 1996 for the sole purpose of effecting the Reorganization and succeeding to the business and operations of Sepco. Sepco is a distributor of maintenance, repair and operating supplies and equipment for industrial customers engaged in various businesses, principally the oil and gas, petrochemical and wood products industries. The Company currently distributes over 125,000 items, consisting primarily of pumps and pump accessories, valves and valve automation products and bearings and power transmission equipment. The Company also provides system design, fabrication, installation, repair and maintenance services for its customers. The Company's products currently are distributed from over 30 distribution centers strategically located throughout the Southwest. The Company's sales force includes approximately 100 sales representatives. See "Business Information Concerning the Company". Newman was incorporated in the State of New Mexico in June 1981. Newman was in the business of publishing and distributing non-musical audio cassette recordings of fiction and non-fiction books, recorded interviews and seminars and other original spoken word recordings containing ideas, information or entertainment similar to that presented in books. In 1987, Newman began experiencing financial difficulties and, by late 1987, Newman no longer had sufficient cash flow to meet its obligations as they became due and ceased substantially all of its business operations. At this time, the business purpose of Newman is to seek an acquisition or merger transaction with a business that Newman believes has significant growth potential, thereby allowing its shareholders to benefit by owning an interest in a viable business enterprise. While Newman has no significant assets or operations, it possesses a shareholder base which Newman believes makes it an attractive merger candidate to a privately-held corporation seeking to become a public company. See "Business Information Concerning Newman". THE MEETINGS GENERAL Sepco. The Sepco Meeting will be held at : .m., Central Daylight Time, on , October , 1996 at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010 to consider and vote upon (i) a proposal to approve and adopt the Sepco Merger Agreement and (ii) such other business as may properly be brought before the Sepco Meeting or any adjournment or postponement thereof. The Sepco Board of Directors has unanimously approved the Sepco Merger Agreement and the Sepco Merger and has determined that the Sepco Merger is in the best interests of Sepco and its shareholders. The Sepco Board of Directors recommends that the Sepco shareholders vote for the approval and adoption of the Sepco Merger Agreement. See "The Meetings -- General -- Sepco". Newman. The Newman Meeting will be held at : .m., Central Daylight Time, on , October , 1996 at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010 to consider and vote upon (i) a proposal to approve and adopt the Newman Merger Agreement and (ii) such other business as may properly be brought before the Newman Meeting or any adjournment or 1 12 postponement thereof. The Newman Board of Directors has unanimously approved the Newman Merger Agreement and the Newman Merger and has determined that the Newman Merger is in the best interests of Newman and its shareholders. The Newman Board of Directors unanimously recommends that the Newman shareholders vote for approval and adoption of the Newman Merger Agreement. See "The Meetings -- General -- Newman". RECORD DATES; SHARES ENTITLED TO VOTE; QUORUM; VOTE REQUIRED Sepco. Only holders of record of the Sepco Class A Common Stock, the Sepco Class B Common Stock, the Sepco Class A Convertible Preferred Stock and the Sepco Preferred Stock at the close of business on September , 1996 (the "Sepco Record Date") are entitled to notice of, and to vote at, the Sepco Meeting. A majority of the shares entitled to vote, present in person or represented by proxy, will constitute a quorum at the Sepco Meeting. At the close of business on the Sepco Record Date, there were 758,899 shares of Sepco Class A Common Stock, 176,900 shares of Sepco Class B Common Stock, 19,500 shares of Sepco Class A Convertible Preferred Stock and 3,366 shares of Sepco Preferred Stock outstanding and entitled to vote at the Sepco Meeting. Directors and executive officers of Sepco held 587,399 shares of Sepco Class A Common Stock, representing approximately 62.8% of the outstanding shares, 12,035 shares of Sepco Class B Common Stock, representing approximately 6.8% of the outstanding shares, 15,000 shares of Sepco Class A Convertible Preferred Stock, representing approximately 76.9% of such series, and no shares of Sepco Preferred Stock. Such persons have indicated to Sepco that they intend to vote their shares in favor of the approval and adoption of the Sepco Merger and the Sepco Merger Agreement. Each share of Sepco Common Stock entitles the holder thereof to one vote on each matter submitted for shareholder approval. Under Texas law and Sepco's Articles of Incorporation, approval and adoption of the Sepco Merger and the Sepco Merger Agreement require the affirmative vote of the holders of at least two-thirds of the shares of Sepco Common Stock outstanding and entitled to vote thereon. Approval and adoption of the Sepco Merger and the Sepco Merger Agreement also requires the approval of the holders of at least two-thirds of the shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class B Convertible Preferred Stock and Sepco Preferred Stock, each voting as a separate class or series, as the case may be. Under Texas law, abstentions contained on a returned proxy card will be considered present for purposes of determining the existence of a quorum at the Sepco Meeting and will have the effect of a vote against the Sepco Merger and Sepco Merger Agreement. See "The Meetings -- Record Dates; Shares Entitled to Vote; Quorum; Vote Required -- Sepco". Newman. Only holders of record of Newman Common Stock at the close of business on September , 1996 (the "Newman Record Date") are entitled to notice of, and to vote at, the Newman Meeting. A majority of the shares entitled to vote, present in person or represented by proxy, will constitute a quorum at the Newman Meeting. Under New Mexico law and Newman's Articles of Incorporation, approval and adoption of the Newman Merger and the Newman Merger Agreement require the affirmative vote of a majority of the issued and outstanding shares of Newman Common Stock entitled to vote therein. At the close of business on the Newman Record Date, there were 2,552,064 shares of Newman Common Stock outstanding and entitled to vote at the Newman Meeting. The officers, directors and principal shareholders of Newman who collectively held, as of the Newman Record Date, 2,213,564 shares of Newman Common Stock, or approximately 86.74% of the shares of Newman Common Stock outstanding, have indicated that they intend to vote such shares in favor of approval and adoption of the Newman Merger Agreement. On the Newman Record Date, there were approximately 193 holders of record of the 2,552,064 shares of Newman Common Stock then issued and outstanding. Each share of Newman Common Stock entitles the holder thereof to one vote on each matter submitted for shareholder approval. See "The Meetings -- Record Dates; Shares Entitled to Vote; Quorum; Vote Required -- Newman". Under applicable rules of the National Association of Securities Dealers, Inc., brokers will not be permitted to submit proxies to authorize the Newman Merger and the Newman Merger Agreement in the 2 13 absence of specific instructions from beneficial owners. Any unvoted position in a brokerage account (i.e., broker non-votes) with respect to any matter will be considered as not voted. Under New Mexico law, abstentions contained on a returned proxy card will be considered present for purposes of determining the existence of a quorum at the Newman Meeting. Accordingly, broker non-votes and abstentions will have the effect of votes against the Newman Merger and the Newman Merger Agreement. THE REORGANIZATION GENERAL DESCRIPTION OF THE MERGERS Sepco Merger. Upon consummation of the Sepco Merger, Sepco Acquisition will merge with and into Sepco, with Sepco being the surviving corporation, and (i) each outstanding share of Sepco Class A Common Stock will be converted automatically into the right to receive 16 shares of Common Stock, (ii) each outstanding share of Sepco Class B Common Stock will be converted automatically into the right to receive 18.1232 shares of Common Stock, (iii) each outstanding share of Sepco Class A Convertible Preferred Stock will be converted automatically into the right to receive one share of Series B Convertible Preferred Stock and (iv) each outstanding share of Sepco Preferred Stock will be converted automatically into the right to receive one share of Series A Preferred Stock. As a consequence of the Sepco Merger, Sepco will become a wholly-owned subsidiary of the Company. Based on the number of shares of Sepco capital stock and Newman Common Stock outstanding as of the Sepco Record Date and Newman Record Date, respectively, Sepco shareholders collectively will hold 15,384,384 shares, or approximately 96%, of the issued and outstanding Common Stock, upon consummation of the Reorganization. See "The Reorganization -- General Description of the Mergers -- Sepco". Newman Merger. Upon consummation of the Newman Merger, Newman Acquisition will merge with and into Newman, with Newman being the surviving corporation, and each outstanding share of Newman Common Stock will be converted into one-fourth of one share of Common Stock. As a consequence of the Newman Merger, Newman will become a wholly-owned non-operating subsidiary of the Company. Newman shareholders collectively will own 639,516 shares of the outstanding Common Stock, or approximately 4.0% of the issued and outstanding Common Stock, upon consummation of the Reorganization. See "The Reorganization -- General Description of the Mergers -- Newman". REASONS FOR THE MERGERS; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS Sepco Merger. During 1995, Sepco began an investigation with respect to the possibility of becoming a public company in order to obtain better access to equity capital for purposes of supporting its acquisition program and proposed growth plans and to provide greater liquidity for the Sepco Common Stock. After analyzing the costs and benefits of different possibilities and the probabilities of success, the board of directors of Sepco ultimately concluded that the most desirable means for Sepco to achieve its objectives would be to merge with an existing public company. In connection with this decision, Sepco retained Halter Financial Group, Inc. ("Halter") to assist it in identifying a desirable public company with which to merge. As part of this arrangement, Sepco agreed that Halter would be entitled to receive up to 2.7% of the outstanding shares of common stock of the surviving corporation upon the consummation of a merger between Sepco and a public company secured by Halter for the transaction. See "The Reorganization -- Sepco's Reasons for the Reorganization; Recommendation of Sepco's Board of Directors". In February 1996, after reviewing several potential public companies as acquisition candidates, including Newman, management of Sepco determined that Newman would be a desirable candidate for Sepco to merge. From February to April 1996, Sepco conducted due diligence with respect to the prior business and operations of Newman. Sepco also concluded that the most desirable means for effecting a merger or business combination with Newman would be through the creation of the Company and the concurrent acquisition by the Company of all of the outstanding shares of Newman through the Newman Merger and of all the outstanding shares of Sepco through the Sepco Merger. In connection with this structure, Halter entered into an agreement with Newman pursuant to which Halter acquired a 67.2% interest in Newman which was 3 14 intended to provide Halter with an approximate 2.7% ownership interest in the Company upon the consummation of the Reorganization. See "The Reorganization -- Sepco's Reasons for the Reorganization; Recommendation of Sepco's Board of Directors" and "The Reorganization -- Arrangements With Halter". On August 12, 1996, the Company entered into the Sepco Merger Agreement and the Newman Merger Agreement. The Board of Directors of each of Sepco and Newman have determined that the Sepco Merger and the Newman Merger, respectively, are in the best interest of their respective shareholders and have recommended to their shareholders that such mergers be approved. Newman Merger. The Newman Merger is the result of Newman's efforts to obtain value for the Newman Common Stock. Newman has no significant assets or operations; however, it possesses a shareholder base which Newman believes makes it an attractive merger candidate to a privately-held corporation seeking to become a public company. The board of directors of Newman has concluded that the Newman Merger is in the best interests of the shareholders of Newman, has approved the Newman Merger Agreement and has recommended that the shareholders of Newman approve and adopt the Newman Merger Agreement. The board of directors of Newman believes that the terms of the Newman Merger Agreement are fair to, and in the best interests of, Newman and its shareholders. In reaching its conclusion, Newman's Board of Directors considered (i) the matters set forth above, (ii) the judgment and advice of Newman's management, (iii) the historical financial performance and future operating prospects of Newman, (iv) detailed business and financial information regarding Sepco and (iv) the terms of the Newman Merger Agreement. See "The Reorganization -- Newman's Reasons for the Newman Merger; Recommendation of Newman's Board of Directors". APPRAISAL RIGHTS Sepco Shareholders. Any shareholder of record of Sepco who objects to the Sepco Merger and who follows the procedures prescribed by Articles 5.12 and 5.13 of the Texas Business Corporation Act (the "TBCA") may be entitled, in lieu of receiving the shares of Common Stock, Series B Convertible Preferred Stock or Series A Preferred Stock, as the case may be, in the Sepco Merger, to receive cash equal to the fair value of such shares, which value will be determined by agreement or appraisal. See "The Reorganization -- Dissenters' Rights -- Sepco Shareholders" and Appendix C to this Proxy Statement/Prospectus, which contains the applicable provisions of the TBCA in their entirety. Newman Shareholders. Any shareholder of record of Newman who objects to the Newman Merger and who follows the procedures prescribed by Section 53-15-4 of the New Mexico Business Corporation Act (the "NMBCA") may be entitled, in lieu of receiving the shares of Common Stock in the Newman Merger, to receive cash equal to the fair value of such shares, which value will be determined by agreement or appraisal. See "The Reorganization -- Dissenters' Rights -- Newman Shareholders" and Appendix D to this Proxy Statement/Prospectus, which contains the applicable provisions of the NMBCA in their entirety. EFFECTIVE TIMES OF THE MERGERS The Sepco Merger will become effective at the effective time set forth in the certified Articles of Merger issued by the Secretary of State of Texas and the Secretary of State of Nevada with respect to the Sepco Merger. The Newman Merger will become effective at the effective time set forth in the certified Articles of Merger issued by the Secretary of State of New Mexico and the Secretary of State of Nevada with respect to the Newman Merger. Assuming all conditions to the Mergers contained in each of the Sepco Merger Agreement and the Newman Merger Agreement are satisfied or waived prior thereto, it is anticipated that the effective time of the Sepco Merger and the Newman Merger will occur on the business day immediately following the Sepco Meeting (the "Sepco Effective Time") and the Newman Meeting (the "Newman Effective Time"), respectively. See "Certain Terms of the Merger Agreements -- Sepco Merger Agreement -- Closing Date and Effective Time of the Merger" and "Certain Terms of the Merger Agreements -- Newman Merger Agreement -- Closing Date and Effective Time of the Merger". 4 15 EXCHANGE OF STOCK CERTIFICATES As soon as practicable following the Sepco Effective Time, the Company or its transfer agent will mail to each record holder of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock a letter of transmittal and other information advising such holder of the consummation of the Sepco Merger and for use in exchanging certificates representing Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock for certificates representing Common Stock, Series B Convertible Preferred Stock and Series A Preferred Stock, respectively. As soon as practicable following the Newman Effective Time, the Company or its transfer agent will mail to each record holder of Newman Common Stock immediately prior to the Newman Effective Time, a letter of transmittal and other information advising such holder of the consummation of the Newman Merger and for use in exchanging certificates representing Newman Common Stock for certificates representing Common Stock. SHAREHOLDERS MUST SURRENDER SHARE CERTIFICATES REPRESENTING SEPCO CAPITAL STOCK OR NEWMAN COMMON STOCK, TOGETHER WITH THE LETTER OF TRANSMITTAL, TO RECEIVE THE SHARES OF STOCK OF THE COMPANY ISSUED PURSUANT TO THE SEPCO MERGER OR THE NEWMAN MERGER. SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY SHAREHOLDERS OF SEPCO OR NEWMAN PRIOR TO THE APPROVAL OF THE SEPCO MERGER AND THE NEWMAN MERGER AND THE RECEIPT OF A LETTER OF TRANSMITTAL. See "Certain Terms of the Merger Agreements -- Sepco Merger Agreement -- Manner and Basis of Converting Shares" and "Certain Terms of the Merger Agreements -- Newman Merger Agreement -- Manner and Basis of Converting Shares". CONDITIONS TO THE MERGERS The consummation of each of the Mergers is conditioned on (i) the effectiveness of the Registration Statement, of which this Proxy Statement/Prospectus forms a part, (ii) shareholder approval of each of the Mergers, the Sepco Merger Agreement and the Newman Merger Agreement and (iii) other conditions customary to transactions similar to the Mergers. See "Certain Terms of the Merger Agreements -- Sepco Merger Agreement -- Conditions to the Merger" and "Certain Terms of the Merger Agreements -- Newman Merger Agreement -- Conditions to the Merger". TERMINATION OR AMENDMENT OF THE MERGER AGREEMENTS The Sepco Merger Agreement may be terminated, among other circumstances, by the Company if the Sepco Merger has not closed by December 31, 1996 or by either party if a court of competent jurisdiction shall have issued an order, decree or ruling or taken any other action to enjoin or otherwise prohibit the Sepco Merger. The Sepco Merger Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties to the Sepco Merger Agreement. See "Certain Terms of the Merger Agreements -- Sepco Merger Agreement -- Termination or Amendment of the Sepco Merger Agreement". The Newman Merger Agreement may be terminated, among other circumstances, by the Company if the Newman Merger has not closed by December 31, 1996 or by either party if a court of competent jurisdiction shall have issued an order, decree or ruling or taken any other action to enjoin or otherwise prohibit the Newman Merger. The Newman Merger Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties to the Newman Merger Agreement. See "Certain Terms of the Merger Agreement -- Newman Merger Agreement -- Termination or Amendment of the Newman Merger Agreement". CERTAIN FEDERAL INCOME TAX CONSEQUENCES The Sepco Merger and the Newman Merger are intended to be treated as an exchange of shares of Sepco and Newman capital stock for shares of Common Stock, Series B Convertible Preferred Stock and Series A Preferred Stock, as the case may be, and therefore, should constitute a non-taxable transaction for the holders of Sepco Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock (collectively referred to herein as "Sepco Stock") or Newman Common Stock, except to the extent of cash received, if any, in lieu of fractional shares of Common Stock. For a discussion of these and other federal income tax 5 16 considerations in connection with the Sepco Merger and the Newman Merger, see "The Reorganization -- Certain Federal Income Tax Consequences" and "Certain Federal Income Tax Consequences". ANTICIPATED ACCOUNTING TREATMENT The Reorganization will be treated as a recapitalization of Sepco into the Company, a newly formed holding company, and the issuance of shares of the Company's capital stock for the underlying tangible net assets of Newman. As a result, the historical pre-Reorganization financial statements of the Company upon completion of the Reorganization will be those of Sepco. See "The Reorganization -- Anticipated Accounting Treatment". COMPARATIVE RIGHTS OF SHAREHOLDERS OF THE COMPANY AND SHAREHOLDERS OF SEPCO AND NEWMAN The rights of the shareholders of Sepco currently are governed by Sepco's articles of incorporation, as amended, Sepco's bylaws and the laws of the State of Texas. The rights of the shareholders of Newman currently are governed by Newman's articles of incorporation, Newman's bylaws and the laws of the State of New Mexico. The rights of the shareholders of the Company will be governed by the Company's Restated Articles of Incorporation (the "Company's Articles"), the Company's Bylaws (the "Company's Bylaws") and the laws of the State of Texas. The significant differences, as they impact the rights of the shareholders of Sepco and the shareholders of Newman, are summarized elsewhere in this Proxy Statement/Prospectus. See "Comparison of Rights of Shareholders of Sepco and the Company" and "Comparison of Rights of Holders of Newman Common Stock and Common Stock". 6 17 MARKET PRICE DATA THE COMPANY There currently is no market for the Common Stock, the Series B Convertible Preferred Stock or the Series A Preferred Stock, and there can be no assurance that such a market will develop. The Company intends to apply for quotation of the Common Stock on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. upon effectiveness of the Registration Statement. See "Risk Factors -- No Public Market; Possible Volatility of Stock Price" and "Market for the Company's Stock, Sepco Common Stock and Newman Common Stock and Related Shareholder Matters -- The Company". SEPCO There is no public market for the Sepco Common Stock. See "Market for the Company's Stock, Sepco Common Stock and Newman Common Stock and Related Shareholder Matters -- Sepco". NEWMAN The Newman Common Stock has been quoted on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. under the trading symbol "NWMC" since October 1994. The Company believes, however, that such quotations have been limited and sporadic and therefore do not constitute an "established public trading market" under Item 201 of Regulation S-K of the Securities Act. The following table sets forth the range of high and low closing bid prices for the Newman Common Stock for the periods indicated. Quotations represent inter-dealer prices, do not include retail markups, markdowns or commissions and may not represent actual transactions. See "Market for the Company's Stock, Sepco Common Stock and Newman Common Stock and Related Shareholder Matters -- Newman".
HIGH LOW ---- ---- FISCAL 1994 First Quarter............................................... $.25 $.25 Second Quarter.............................................. .25 .25 Third Quarter............................................... .25 .25 Fourth Quarter.............................................. .25 .25 FISCAL 1995 First Quarter............................................... .25 .25 Second Quarter.............................................. .25 .25 Third Quarter............................................... .25 .25 Fourth Quarter.............................................. .25 .25 FISCAL 1996 First Quarter............................................... .25 .25 Second Quarter.............................................. .25 .25 Third Quarter (to August 9, 1996)........................... .25 .25
7 18 SEPCO SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA The summary historical consolidated financial data of Sepco set forth below for each of the years ended December 31, 1995, 1994 and 1993 and at December 31, 1995 and 1994 have been derived from the audited consolidated financial statements of Sepco included elsewhere in this Proxy Statement/Prospectus. Such financial statements have been audited by Ernst & Young LLP, independent auditors. The selected financial data for the years ended December 31, 1992 and 1991 and at December 31, 1993, 1992 and 1991 are derived from the audited financial statements of Sepco which are not included in this Proxy Statement/Prospectus and which have been audited by Ernst & Young LLP, independent auditors. The summary financial data set forth below for each of the six-month periods ended June 30, 1996 and 1995 and at June 30, 1996 have been derived from unaudited financial statements of Sepco included elsewhere in this Proxy Statement/Prospectus. This information should be read in conjunction with "Selected Consolidated Financial Data -- Sepco", "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Sepco" and Sepco's consolidated financial statements and notes included elsewhere in this Proxy Statement/Prospectus.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------ ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- -------- -------- ------- ------- ------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA) CONSOLIDATED STATEMENTS OF EARNINGS DATA: Revenues....................................... $63,021 $56,395 $111,328 $102,592 $99,353 $96,017 $93,239 Gross profit................................... 16,231 14,390 29,157 27,217 26,792 23,622 24,416 Operating income(1)............................ 1,425 2,010 4,598 4,150 3,288 1,827 4,171 Income before provision for income taxes, minority interest and change in accounting principle.................................... 931 1,470 3,512 3,038 2,346 620 2,511 Minority interest in earnings (loss) of Subsidiaries(2).............................. -- -- -- -- (403) 136 (392) Cumulative effect of change in accounting principle(3)................................. -- -- -- -- 882 Net income(4).................................. 554 874 2,088 1,862 1,843 152 1,043 PER SHARE DATA: Primary Net income................................... $ 0.55 $ 0.66 $ 1.68 $ 1.41 $ 1.58 $ 0.14 $ 0.95 Fully diluted Net income................................... $ 0.48 $ 0.66 $ 1.61 $ 1.40 $ 1.55 $ 0.14 $ 0.95 Number of shares used to calculate Primary net income per share................. 1,016 1,331 1,244 1,319 1,163 1,102 1,102 Fully diluted net income per share........... 1,152 1,334 1,293 1,328 1,187 1,102 1,102
JUNE DECEMBER 31, 30, --------------------------------------------------- 1996 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital........................................... $23,418 $23,967 $20,011 $18,402 $17,084 $15,069 Total assets.............................................. 43,071 43,254 38,163 38,686 37,243 34,327 Long-term debt obligations................................ 19,660 21,275 18,461 20,766 19,200 16,565 Stockholders' Equity...................................... 11,887 10,288 8,708 6,942 4,542 3,975
- --------------- (1) Six months ended June 30, 1996 includes a one-time charge to compensation expense of $710,000 for the amendment of book value options to fair market value options. (2) In December 1992 and September 1993, Sepco acquired the remaining capital stock of two subsidiaries, T.L. Walker Bearing Company and Southern Engine and Pump Company. The acquisitions eliminated any need to account for minority interest in earnings of the subsidiaries. (3) Effective January 1, 1993, Sepco changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109, "Accounting for Income Taxes". As permitted under the new rules, prior years' financial statements were not restated. The cumulative effect of adopting Statement 109 as of January 1, 1993 was to increase net earnings by $882,000. (4) In August 1990, June 1991 and July 1992, Sepco acquired three separate bearing and power transmission companies having revenues of approximately $25,000,000, $10,000,000 and $7,000,000, respectively, at the time of their purchase. In 1991, 1992 and 1993, operating income (loss) from these bearing and power transmission companies was $188,000, ($1,091,000) and $379,000, respectively. 8 19 NEWMAN SUMMARY HISTORICAL FINANCIAL DATA The summary financial data of Newman for the fiscal years 1991 through 1995 were derived from the audited financial statements of Newman. Included elsewhere in this Proxy Statement/Prospectus are the Balance Sheets for December 31, 1995 and March 31, 1995 and the Statements of Operations, Changes in Shareholders' Equity and Cash Flows for the nine months and twelve months then ended. Such financial statements have been audited by Cheshier & Fuller, Inc., P.C., independent public accountants. This information included elsewhere in the Proxy Statement/Prospectus should be read in conjunction with the following summary financial data. The summary financial data for the six months ended June 30, 1996 and 1995 are unaudited, but in the opinion of management of Newman, such financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of Newman's financial position and results of operations. The results of operations for the six months ended June 30, 1996 may not be indicative of the results to be expected for the full fiscal year. See "Selected Consolidated Financial Data -- Newman", "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Newman" and Newman's financial statements and notes thereto included elsewhere in this Proxy Statement/Prospectus.
SIX MONTHS ENDED NINE MONTHS JUNE 30,(3) YEAR ENDED MARCH(1)(2)(3) ENDED -------------------- -------------------------------------------------- DECEMBER 31, 1996 1995 1995 1994 1993 1992 1995(1)(3) -------- -------- -------- ---------- ---------- ---------- ------------ STATEMENTS OF OPERATIONS DATA: Revenues......................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- Income (loss) before extraordinary items............ (13,212) (5,644) (4,392) (5,600) -- -- (5,978) Extraordinary items(2)........... -- -- -- 4,026,333 -- -- -- Net income (loss)................ (13,212) (5,644) (4,392) 4,020,733 -- -- (5,978) PER SHARE DATA: Primary Income (loss) before extraordinary items.......... $ (.02) $ (.01) $ (.01) $ -- $ -- $ -- $ (.01) Net income..................... $ (.02) $ (.01) $ (.01) $ 1.14 $ -- $ -- $ (.01) Fully diluted Net income (loss).............. $ (.02) $ (.01) $ (.01) $ -- $ -- $ -- $ (.01) Average number of Shares of Common Stock outstanding(2).... 858,500 834,500 763,792 3,540,407 5,310,610 5,310,610 839,833
JUNE 30, ---------------- MARCH 26, MARCH 27, MARCH 28, DECEMBER 31, 1996 1995 1994 1993 1992 1995 ------ ------ --------- ----------- ----------- ------------ Total assets.................................. $5,676 $2,640 $ 9,249 $ -0- $ -0- $ 12,854 Total liabilities............................. 6,034 2,250 25 4,031,509 4,031,509 -0- Shareholders equity (deficit)................. (358) 390 9,224 (4,031,509) (4,031,509) 12,854
- --------------- (1) During 1995, Newman changed its fiscal 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. (2) Newman filed for Chapter 11 bankruptcy on August 12, 1992, and emerged as a reorganized entity on November 22, 1993. See "Business Information Concerning Newman -- Bankruptcy Proceedings". (3) Newman has been a development stage company since its November 22, 1993 reorganization. (4) Does not include 1,693,564 shares of Newman Common Stock issued to Halter in August 1996 for approximately $1,694 in cash. See "The Reorganization -- Sepco's Reasons for the Reorganization -- Recommendation of Sepco's Board of Directors". 9 20 SUMMARY UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL DATA The following unaudited pro forma condensed combined balance sheet and statements of earnings reflect the completion of the Sepco Merger and Newman Merger. The Sepco Merger and the Newman Merger are described more fully herein and in the Sepco Merger Agreement and Newman Merger Agreement. The pro forma condensed combined statements of earnings assume that the Sepco Merger and the Newman Merger were consummated as of the beginning of the periods presented and the pro forma condensed combined balance sheets assume that the Sepco Merger and the Newman Merger were consummated as of the end of the periods presented. The pro forma adjustments are explained in "Notes to Unaudited Pro Forma Combined Financial Statements". The pro forma combined statements of operations are not necessarily indicative of the results of operations had the proposed transactions occurred at the beginning of each period presented, nor are they necessarily indicative of the results of future operations. PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1996 DECEMBER 31, 1995 ---------------- ----------------- (IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENTS OF EARNINGS DATA: Revenues.................................................... $ 63,021 $ 111,328 Costs and expenses: Costs of sales............................................ 46,790 82,171 Selling, general and administrative....................... 14,818 24,565 ------- -------- Operating income............................................ 1,413 4,592 Other income (expense): Other Income.............................................. 514 867 Interest expense.......................................... (1,008) (1,953) ------- -------- Total other expense............................... (494) (1,086) ------- -------- Earnings before income taxes................................ 919 3,506 Provision for income taxes.................................. (377) (1,424) ------- -------- Net income.................................................. $ 542 $ 2,082 ======= ======== Earnings per share.......................................... $ .03 $ .12 ======= ======== Number of shares used to compute pro forma earnings per share..................................................... 17,263 17,263 ======= ========
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
JUNE 30, 1996 DECEMBER 31, 1995 ------------- ----------------- (IN THOUSANDS) ASSETS: Total Current Assets......................................... $36,744 $35,088 Property, plant and equipment net............................ 6,749 6,744 Total assets......................................... 45,078 43,269 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Total current liabilities.................................... 13,325 11,106 Long-term debt, less current portion......................... 19,660 20,130 Deferred compensation........................................ 380 Subordinated debt, less current portion...................... 1,145 Deferred income taxes........................................ 205 205 Total shareholders' equity................................... 11,887 10,303 Total liabilities and shareholders' equity........... 45,078 43,269
10 21 HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA The following table presents historical and pro forma per share data for Sepco (whose financial statements will become the historical financial statements of the Company) and historical and equivalent pro forma per share information for Newman after giving effect to the Reorganization, assuming the Reorganization had been effective during all periods presented. See "The Reorganization -- Anticipated Accounting Treatment". The pro forma data are not necessarily indicative of future operations or the results that would have occurred had the Reorganization been consummated at the beginning of the periods presented. The information set forth below should be read in conjunction with "Selected Consolidated Financial Information", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto of Sepco and Newman included elsewhere in this Proxy Statement/Prospectus.
HISTORICAL PRO FORMA --------------- --------------- SEPCO NEWMAN SEPCO NEWMAN ----- ------ ----- ------ Income (loss) per common and common equivalent share: Six months ended June 30, 1996............................ $0.55 $(0.01) $0.03 $ -- Year ended December 31, 1995.............................. 1.68 (0.01 ) 0.12 0.01 Book value per share: June 30, 1996............................................. $9.12 $0.38 $0.57 $0.02 December 31, 1995......................................... 7.85 0.33 0.49 0.02
- --------------- (1) The historical information for Newman is for the twelve month period ended December 31, 1995. (2) The equivalent pro forma per share data for Newman is computed by dividing Sepco's pro forma per share information by 24, the exchange ratio. 11 22 RISK FACTORS The following risk factors should be considered carefully in addition to the other information contained in this Proxy Statement/Prospectus. This Proxy Statement/Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. 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 and elsewhere in this Proxy Statement/Prospectus. NO FAIRNESS OPINION OBTAINED BY THE COMPANY, SEPCO OR NEWMAN None of the Company, Sepco or Newman engaged an independent third party to review the terms of the Reorganization or to prepare a fairness opinion related to the applicable exchange ratios set forth in the Sepco Merger Agreement and Newman Merger Agreement. Each exchange ratio was determined by negotiations between management of the Company, on the one hand, and Sepco and Newman, respectively, on the other hand, related to the relative value of each entity. The factors considered in establishing the exchange ratio with respect to the Newman Merger included (i) the publicly held nature and existing shareholder base of Newman, (ii) the operating and financial history of Newman and (iii) the potential value of the shares of Common Stock to be issued to Newman shareholders in light of Newman's present financial condition, which includes no significant assets or operations. The factors considered in establishing the exchange ratios with respect to the Sepco Merger included (i) the operating and financial history of Sepco, (ii) the fair value of the Sepco Common Stock at December 31, 1995, as determined by an independent appraiser for purposes of the Sepco Employee Stock Ownership Plan ("Sepco ESOP"), and (iii) a desire that the Reorganization result in an aggregate of 16,000,000 outstanding shares of Common Stock, based upon the advice of Halter. See "The Reorganization -- Newman's Reasons for the Mergers; Recommendation of Newman's Board of Directors; -- Sepco's Reasons for the Reorganization; Recommendation of Sepco's Board of Directors". CONTROL BY EXISTING SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS OF SEPCO Sepco's existing shareholders, executive officers, directors and their affiliates will beneficially own approximately 96% of the outstanding shares of Common Stock following the Reorganization. As a result, such persons, acting together, will be able to elect all of the Company's directors, will retain the voting power to approve most matters requiring shareholder approval and will have significant influence on the affairs of the Company. Such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company. See "Beneficial Ownership of Securities". 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 Sepco. 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. See "Business Information Concerning the Company". 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 12 23 ability of the Company to implement this strategy will be dependent 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 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 be dependent on its 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. 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 operations. See "Management". CHANGES IN VOTING RIGHTS OF HOLDERS OF SEPCO COMMON STOCK Pursuant to the Sepco Merger, the holders of Sepco Class A Common Stock and Class B Common Stock will receive shares of Common Stock in accordance with the exchange ratios set forth in the Sepco Merger Agreement. As a result, the former holders of Sepco Class A Common Stock and Class B Common Stock will no longer have the right to a class vote with respect to certain matters that under Texas law require the approval of each class or series of stock. In addition, the holders of Sepco Common Stock currently have the right to approve any changes in the terms of the Sepco Class A Preferred Stock and Sepco Preferred Stock. As holders of Common Stock, the former holders of Sepco Common Stock will not have the right to approve any changes in the terms of the Series B Convertible Preferred Stock or the Series A Preferred Stock. Furthermore, a holder of Sepco Class B Common Stock is entitled to receive $7.5075 upon the liquidation of Sepco. Such liquidation right is in preference to the liquidation rights of holders of Sepco Class A Convertible Preferred Stock. As a holder of Common Stock, the former holders of Class B Common Stock will have no such liquidation rights or preference. The holders of Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock, except as otherwise provided by law, have no right to vote on the election of directors or any matters presented to the Sepco shareholders. Each share of Series A Preferred Stock and Series B Preferred Stock entitles the holder thereof to one-tenth of a vote on all matters to come before a meeting of the shareholders of the Company. In addition, matters that previously required the vote of two-thirds of the outstanding shares of Sepco stock will only require the approval of a majority of the outstanding shares of the Company. See "Comparison of Rights of Holders of Sepco Stock and Common Stock". 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. See "Business Information Concerning the Company -- Government Regulation and Environmental Matters". 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 13 24 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 which do not exceed $117,000 in the aggregate in any fiscal year. Accordingly, the Company does not anticipate paying cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy". DILUTION Shareholders of Newman will receive shares of Common Stock as a result of the Newman Merger. The percentage of ownership of the former Newman shareholders in the Company will be significantly less than their percentage of ownership in Newman prior to the Newman Merger as a result of the terms of the Newman Merger Agreement and issuance of Common Stock to the shareholders of Sepco in the Sepco Merger, although this dilution is somewhat offset by the fact that the former Newman shareholders' smaller ownership percentage interest will be in a larger operating enterprise. POTENTIAL ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION AND BYLAWS The Texas Articles (as defined herein) allow the Board of Directors of the Company to issue shares of preferred stock without shareholder approval on such terms as the Board of Directors may determine. The rights of all the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. In addition, the Texas Articles do not allow cumulative voting in the election of directors. All of the foregoing could have the effect of delaying, deferring or preventing a change in control of the Company and could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock. See "Description of Company Capital Stock". NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE The Common Stock, Series B Convertible Preferred Stock and the Series A Preferred Stock are new issues of securities that will have no established trading market. The Company intends to apply for quotation of the Common Stock on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. upon effectiveness of the Registration Statement, of which this Proxy Statement/Prospectus forms a part. There can be no assurance, however, that a market in the Common Stock will develop or, if developed, will be sustained. Upon the consummation of the Mergers, over 90% of the outstanding shares of Common Stock will be held by less than 20 holders. Concentration of ownership and the lack of a public market for the Common Stock could adversely affect the liquidity of such shares and the amount that could be realized on a sale thereof. See "Market for the Company's Stock, Sepco Common Stock and Newman Common Stock and Related Shareholder Matters -- The Company". The limited number of unaffiliated shareholders and factors such as market expansion, the development of additional services, its competitors and other third parties, as well as quarterly variations in the Company's anticipated or actual results of operations or market conditions generally, may cause the market price of the Common Stock to fluctuate significantly if a trading market does in fact develop for the Common Stock. In addition, the stock market has on occasion experienced extreme price and volume fluctuations, which have particularly affected the market prices of many companies. These broad market fluctuations may adversely affect the market price of the Common Stock, if a public trading market is established. 14 25 THE MEETINGS GENERAL Sepco. The Sepco Meeting will be held at : .m., Central Daylight Time, on , October , 1996 at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010. Newman. The Newman Meeting will be held at : .m., Central Daylight Time, on , October , 1996 at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Suite 5100, Houston, Texas 77010. RECORD DATES; SHARES ENTITLED TO VOTE; QUORUM; VOTE REQUIRED Sepco. Only holders of record of the Sepco Class A Common Stock, the Sepco Class B Common Stock, the Sepco Class A Convertible Preferred Stock and the Sepco Preferred Stock at the close of business on September , 1996 (the "Sepco Record Date") are entitled to notice of, and to vote at, the Sepco Meeting. A majority of the shares entitled to vote, present in person or represented by proxy, will constitute a quorum at the Sepco Meeting. At the close of business on the Sepco Record Date, there were 758,899 shares of Sepco Class A Common Stock, 176,900 shares of Sepco Class B Common Stock, 19,500 shares of Sepco Class A Convertible Preferred Stock and 3,366 shares of Sepco Preferred Stock outstanding and entitled to vote at the Sepco Meeting. Directors and executive officers of Sepco held 587,399 shares of Sepco Class A Common Stock, representing approximately 62.8% of the outstanding shares, 12,035 shares of Sepco Class B Common Stock, representing approximately 6.8% of the outstanding shares of such class, 15,000 shares of Sepco Class A Convertible Preferred Stock, representing approximately 76.9% of the outstanding shares of such series, and no shares of Sepco Preferred Stock. Such persons have indicated to Sepco that they intend to vote their shares in favor of the approval and adoption of the Sepco Merger and the Sepco Merger Agreement. Each share of Sepco Common Stock entitles the holder thereof to one vote on each matter submitted for shareholder approval. Under Texas law and Sepco's Articles of Incorporation, approval and adoption of the Sepco Merger and the Sepco Merger Agreement require the affirmative vote of the holders of at least two-thirds of the shares of Sepco Common Stock outstanding and entitled to vote thereon and approval by the holders of at least two-thirds of the shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock, each voting as a separate class or series, as the case may be. Under Texas law, abstentions contained on a returned proxy card will be considered present for purposes of determining the existence of a quorum at the Sepco Meeting and will have the effect of a vote against the Sepco Merger and Sepco Merger Agreement. Newman. Only holders of record of Newman Common Stock at the close of business on September , 1996 (the "Newman Record Date") are entitled to notice of, and to vote at, the Newman Meeting. A majority of the shares entitled to vote, present in person or represented by proxy, will constitute a quorum at the Newman Meeting. Under New Mexico law and Newman's Articles of Incorporation, approval and adoption of the Newman Merger and the Newman Merger Agreement require the affirmative vote of a majority of the issued and outstanding shares of Newman Common Stock entitled to vote thereon. At the close of business on the Newman Record Date, there were 2,552,064 shares of Newman Common Stock outstanding and entitled to vote at the Newman Meeting. The officers, directors and principal shareholders of Newman who collectively held, as of the Newman Record Date, 2,213,564 shares of Newman Common Stock, or approximately 86.74% of the shares of Newman Common Stock outstanding, have indicated that they intend to vote such shares in favor of approval and adoption of the Newman Merger Agreement. On the Newman Record Date, there were approximately 193 holders of record of the 2,552,064 shares of Newman Common Stock then issued and outstanding. Each share of Newman Common Stock entitles the holder thereof to one vote on each matter submitted for shareholder approval. 15 26 Under applicable rules of the National Association of Securities Dealers, Inc., brokers will not be permitted to submit proxies to authorize the Newman Merger and the Newman Merger Agreement in the absence of specific instructions from beneficial owners. Under New Mexico law, abstentions contained on a returned proxy card will be considered present for purposes of determining the existence of a quorum at the Newman Meeting. Accordingly, abstentions and broker non-votes will have the effect of votes against the Newman Merger and the Newman Merger Agreement. SOLICITATION OF PROXIES Sepco. In addition to solicitation by mail, the directors, officers and employees of Sepco may solicit proxies from its shareholders by personal interview, telephone, facsimile or otherwise. Halter will bear the costs of the solicitation of proxies. Arrangements also will be made with custodians, nominees and fiduciaries who hold the voting securities of record for the forwarding of solicitation materials to the beneficial owners thereof. Halter will reimburse such custodians, nominees and fiduciaries for the out-of-pocket expenses incurred by them in connection therewith. Newman. The cost of soliciting proxies on behalf of Newman, including the cost of preparing and mailing the Notice of the Newman Meeting and this Proxy Statement/Prospectus to the Newman shareholders, will be paid by Halter. Solicitation will be primarily by mailing this Proxy Statement/Prospectus to all shareholders of Newman entitled to vote at the Newman Meeting. Proxies may be solicited by officers of Newman personally, but at no compensation in addition to their regular compensation as officers. Halter may reimburse brokers, banks and others holding shares in their names for others for the cost of forwarding proxy materials and obtaining proxies from their principals. APPOINTMENT AND REVOCATION OF PROXIES A shareholder has the right to appoint a person to attend and act for him on his behalf at either the Sepco Meeting or the Newman Meeting other than the person(s) named in the enclosed instruments of proxy. To exercise this right, a shareholder shall strike out the names of the person(s) named in the appropriate instrument of proxy and insert the name of his nominee in the space provided or complete another instrument of proxy. The proxies for the Sepco Meeting and the Newman Meeting, respectively, must be signed by an individual shareholder or by his attorney authorized in writing and executed by the shareholder. If the shareholder is a corporation, it must either be under its common seal or signed by a duly authorized officer, or if the shareholder is a partnership, it must be signed by either a general partner, managing partner or duly authorized officer of the partnership. A shareholder of either Sepco or Newman who has given a proxy may revoke it at any time before it is exercised. In addition to revocation in any other manner permitted by law, a proxy may be revoked by an instrument in writing executed by a shareholder of Sepco or a shareholder of Newman or by their respective attorneys authorized in writing and executed by the shareholder. If the shareholder is a corporation, it must either be under its common seal, or signed by a duly authorized officer, or if the shareholder is a partnership it must be signed by either a general partner, managing partner or duly authorized officer of the partnership. A revocation of a proxy by a shareholder of Sepco should be deposited with the Secretary of Sepco, 580 Westlake Park Boulevard, Suite 1100, Houston, Texas 77079. A revocation of a proxy by a shareholder of Newman should be deposited with General Securities Transfer Agency, Inc., P. O. Box 3805, Albuquerque, New Mexico 87190. Revocation of a proxy by either a shareholder of Sepco or Newman may be delivered at any time up to and including the day of the Sepco Meeting and the Newman Meeting, respectively, or any adjournment or postponement thereof, at which the proxy is to be used. A proxy is also revoked if a shareholder is present at either the Sepco Meeting or the Newman Meeting, respectively, and elects to vote in person. 16 27 VOTING OF SHARES AND EXERCISE OF DISCRETION OF PROXIES All properly executed proxies that are not revoked will be voted at the Sepco Meeting and the Newman Meeting in accordance with the instructions contained therein. If a shareholder of Sepco executes and returns a proxy and does not specify otherwise, the shares represented by such proxy will be voted FOR approval and adoption of the Sepco Merger and Sepco Merger Agreement in accordance with the recommendation of the Sepco board of directors. If a shareholder of Newman executes and returns a proxy and does not specify otherwise, the shares represented by such proxy will be voted FOR approval and adoption of the Newman Merger and Newman Merger Agreement in accordance with the recommendation of the Newman board of directors. The accompanying instruments of proxy confer discretionary authority on the persons named therein with respect to amendments or variations to matters identified in the respective Notices of Meetings and with respect to other matters which may properly come before the Meetings. At the date hereof, management of Sepco and Newman, respectively, know of no such amendments, variations or other matters to come before the Meetings other than the matters referred to in the respective Notices of Meeting. OTHER MATTERS As of the date of this Proxy Statement/Prospectus, the boards of directors of Sepco and Newman do not know of any business to be presented at their respective Meetings other than as set forth in the Notices of Meeting accompanying this Proxy Statement/Prospectus. If any other matters should properly come before the respective Meetings, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting such proxies. THE REORGANIZATION GENERAL DESCRIPTION OF THE MERGERS Sepco Merger. Upon consummation of the Sepco Merger, Sepco Acquisition will merge with and into Sepco, with Sepco being the surviving corporation. In the Sepco Merger, (i) each outstanding share of Sepco Class A Common Stock will be converted automatically into the right to receive 16 shares of Common Stock, (ii) each outstanding share of Sepco Class B Common Stock will be converted automatically into the right to receive 18.1232 shares of Common Stock, (iii) each outstanding share of Sepco Class A Convertible Preferred Stock will be converted automatically into the right to receive one share of Company Series B Convertible Preferred Stock and (iv) each outstanding share of Sepco Preferred Stock will be converted automatically into the right to receive one share of Series A Preferred Stock. As a consequence of the Sepco Merger, Sepco will become a wholly-owned subsidiary of the Company. Based on the number of shares of Sepco capital stock and Newman Common Stock outstanding as of the Sepco Record Date and Newman Record Date, respectively, Sepco shareholders collectively will hold 15,384,384 shares, or approximately 96%, of the issued and outstanding Common Stock, upon consummation of the Reorganization. Newman Merger. Upon consummation of the Newman Merger, Newman Acquisition will merge with and into Newman, with Newman being the surviving corporation. In the Newman Merger, each outstanding share of Newman Common Stock will be converted into one-fourth of one share of Common Stock. As a consequence of the Newman Merger, Newman will become a wholly-owned non-operating subsidiary of the Company. Based on the number of shares of Newman Common Stock and Sepco capital stock outstanding as of the Newman Record Date and the Sepco Record Date, respectively, Newman shareholders collectively will hold 639,516 shares, or approximately 4.0%, of the issued and outstanding Common Stock, upon consummation of the Reorganization. In addition, warrants to purchase an aggregate of 1,650,000 shares of Newman Common Stock at $2.00 per share will become exercisable to purchase an aggregate of 412,500 shares of Common Stock at an exercise price per share of $8.00. These warrants expire in November 1996. See "Description of Newman Capital Stock -- Class C Warrants". The Sepco Merger and the Newman Merger will be consummated simultaneously. 17 28 SEPCO'S REASONS FOR THE REORGANIZATION; RECOMMENDATION OF SEPCO'S BOARD OF DIRECTORS During 1995, Sepco began an investigation with respect to the possibility of becoming a public company in order to obtain better access to equity capital for purposes of supporting its acquisition program and proposed growth plans and to provide greater liquidity for the Sepco Common Stock. In connection with this review, Sepco considered the possibility of an initial public offering in which it would issue additional shares as well as the possibility of a merger with an existing public company that would provide Sepco with a broader shareholder base. After analyzing the costs and benefits of each and probabilities of success, the board of directors of Sepco ultimately concluded that the most desirable means for Sepco to achieve its objectives would be to merge with an existing public company. In connection with this decision, Sepco retained Halter to assist it in identifying a desirable public company with which to merge. As part of this arrangement, Sepco agreed that Halter would be entitled to receive up to 2.7% of the outstanding shares of common stock of the surviving corporation upon the consummation of a merger between Sepco and a public company secured by Halter for the transaction. In February 1996, after reviewing several potential public companies as acquisition candidates, including Newman, management of Sepco determined that Newman would be a desirable candidate for Sepco to merge. From February to April 1996, Sepco conducted due diligence with respect to the prior business and operations of Newman. Sepco also concluded that the most desirable means for effecting a merger or business combination with Newman would be through the creation of the Company and the concurrent acquisition by the Company of all of the outstanding shares of Newman through the Newman Merger and of all the outstanding shares of Sepco through the Sepco Merger. In connection with this structure, Halter entered into an agreement with Newman in which Halter acquired a 67.2% interest in Newman in consideration for approximately $1,694. The ownership interest acquired by Halter in Newman was intended to provide Halter with an approximate 2.7% ownership interest in the Company upon the consummation of the Reorganization. In light of the agreement between Halter and Newman, Sepco and Halter agreed to an amendment to the terms of Halter's engagement with Sepco that eliminated Halter's right to receive shares from Sepco in connection with the Reorganization. Halter, however, continued to be responsible for various costs and expenses relating to the Reorganization, including filing fees with the Commission, printing costs and various legal costs associated with the document preparation for the Newman Merger. Halter further agreed as an inducement to Sepco to enter into the Reorganization to assist the Company in making application for the listing or quotation of its stock on the Nasdaq Stock Market, assisting in the preparation of a shareholder communications and relations program, identifying a market maker for the stock of the Company and assisting in a program of communication with brokerage professionals, investment bankers and market makers. On August 12, 1996, the Company entered into the Sepco Merger Agreement and the Newman Merger Agreement. The Board of Directors of each of Sepco and Newman have determined that the Sepco Merger and the Newman Merger, respectively, are in the best interest of their respective shareholders and have recommended to their shareholders that such mergers be approved. The exchange ratios for the shares of stock of the Company to be issued to the shareholders of Sepco were determined by negotiations of the parties. The factors considered in establishing the exchange ratios with respect to the Sepco Merger included (i) the operating and financial history of Sepco, (ii) the fair value of the Sepco Common Stock at December 31, 1995, as determined by an independent appraiser for purposes of the Sepco ESOP and (iii) a desire that the Reorganization result in an aggregate of 16,000,000 outstanding shares of Common Stock, based upon the advice of a financial advisor. NEWMAN'S REASONS FOR THE NEWMAN MERGER; RECOMMENDATION OF NEWMAN'S BOARD OF DIRECTORS The Newman Merger is the result of Newman's efforts to obtain value for the Newman Common Stock. Newman has no significant assets or operations; however, it possesses a shareholder base which makes it an attractive merger candidate to a privately-held corporation seeking to become a public company. The board of directors of Newman has concluded that the Newman Merger is in the best interests of the shareholders of Newman, has approved the Newman Merger Agreement and unanimously has recommended that the shareholders of Newman approve and adopt the Newman Merger Agreement. 18 29 The board of directors of Newman believes that the terms of the Newman Merger Agreement are fair to, and in the best interests of, Newman and its shareholders. In reaching its conclusion, Newman's board of directors considered (i) the matters set forth above, (ii) the judgment and advice of Newman's management, (iii) the historical financial performance and future operating prospects of Newman, (iv) detailed business and financial information regarding Sepco and (iv) the terms of the Newman Merger Agreement. The exchange ratio for the shares of Common Stock to be issued to shareholders of Newman in the Newman Merger was determined by negotiations between the parties. The factors considered in establishing the exchange ratio with respect to the Newman Merger included (i) the publicly held nature and existing shareholder base of Newman, (ii) the operating and financial history of Newman and (iii) the potential value of the shares of Common Stock to be issued to Newman shareholders in light of Newman's present financial condition, which includes no significant assets or operations. CERTAIN FEDERAL INCOME TAX CONSEQUENCES Introduction. This section summarizes the material federal income tax considerations of general application that should be considered by shareholders in evaluating the Sepco Merger and the Newman Merger. It does not, however, address all tax matters that may affect the Company or the shareholders and does not consider various factual limitations applicable to any particular shareholder that may modify or alter the results described herein. In particular, it does not address federal income tax considerations to investors who are nonresident aliens, foreign entities or tax-exempt entities such as an employee stock option plan ("ESOP") and does not address particular situations where shares are received in exchange for services rendered or for reasons other than in exchange for shares of the Company. Except as otherwise indicated, statements of legal conclusion regarding tax treatments, tax effects or tax consequences discussed in this section reflect the opinions of Fulbright & Jaworski L.L.P., special securities and tax counsel to the Company. The Company has not obtained a ruling from the Internal Revenue Service (the "IRS") on the matters discussed herein. The IRS may disagree with some of the conclusions set forth below. In addition, tax counsel's opinions are conditioned upon the accuracy of certain factual information and representations provided to tax counsel by the Company and attached to the opinion of special tax counsel filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus forms a part. Any inaccuracy in those factual matters could adversely affect the conclusions identified herein and, in particular, could result in a shareholder recognizing gain in the Sepco Merger and the Newman Merger. Each shareholder, and particularly a shareholder that is an ESOP, is urged to consult his own tax advisor with respect to the consequences to him of the consolidation and the advisability of obtaining and reviewing the factual information and representations that counsel has relied upon in rendering its opinion. The Sepco Merger and the Newman Merger. For federal income tax purposes, the Sepco Merger and the Newman Merger will be treated as an exchange of shares of Sepco Stock and Newman Common Stock for shares of Common Stock, Series B Convertible Preferred Stock and Series A Preferred Stock (collectively referred to herein as "Company Stock"), as the case may be. The tax consequences to a shareholder of Sepco or Newman who receives shares of Company Stock in either the Sepco Merger or the Newman Merger will be as follows: - Receipt of Company Stock. A shareholder of Sepco or Newman who receives solely shares of Company Stock in either the Sepco Merger or the Newman Merger in exchange for their Sepco Stock or Newman Common Stock will not recognize gain or loss on the exchange. - Tax Basis. A shareholder's aggregate basis in all shares of Company Stock received (including any fractional share deemed received) in either the Sepco Merger or the Newman Merger will equal his aggregate basis in his shares of Sepco Stock or Newman Common Stock, respectively, surrendered in exchange therefor. - Holding Period. A shareholder's holding period for the shares of Company Stock received (including any fractional share deemed received) in either the Sepco Merger or the Newman Merger will include the holding period of his shares of Sepco Stock or Newman Common Stock respectively, surrendered 19 30 in exchange therefor; provided, however, that such shares of Sepco Stock or Newman Common Stock, as the case may be, are held as capital assets at the time of the Sepco Merger and the Newman Merger, respectively. - Cash in Lieu of Fractional Shares. A holder of shares of Sepco Stock or Newman Common Stock who receives cash in lieu of a fractional share of Company Stock will recognize gain or loss equal to the difference, if any, between such holder's basis in such fractional share (as described above) and the amount of cash received. Such gain or loss should be long-term capital gain or loss if such shares of Sepco Stock or Newman Common Stock are held as a capital asset at the time of the Sepco Merger or the Newman Merger, respectively, and the holding period for the fractional share (as described above) is more than one year. - Reporting Requirements. Each shareholder will be required to file with his federal income tax return a statement that provides details relating to such shareholder's shares of Company Stock received in the Sepco Merger or the Newman Merger and such shareholder's shares of Sepco Stock or Newman Common Stock surrendered in exchange therefor. Any holder of Sepco Stock who dissents from the Sepco Merger, perfects his dissenter's rights under the TBCA, and, accordingly, receives cash for the value of his Sepco Stock, and any holder of Newman Common Stock who dissents from the Newman Merger, perfects his dissenter's rights under the NMBCA, and, accordingly, receives cash for the value of his Newman Common Stock, should be treated as having received such cash as a distribution from Sepco or Newman, as the case may be, in full payment in exchange for such Sepco Stock or Newman Common Stock. The dissenting shareholder would recognize gain or loss measured by the difference between the cash received and the basis for such Sepco Stock or Newman Common Stock exchanged, if the redemption does not have the effect of the distribution of a dividend under Section 302 of the United States Internal Revenue Code of 1986, as amended (the "Code") (after applying the constructive ownership rules of Section 318 of the Code). For additional information regarding the material federal income tax considerations that should be considered by shareholders in evaluating the Sepco Merger and the Newman Merger, see "Certain Federal Income Tax Consequences". ANTICIPATED ACCOUNTING TREATMENT The Reorganization will be treated as a recapitalization of Sepco into the Company (with respect to the Sepco Merger) and the issuance of the Company's capital stock for the underlying tangible net assets of Newman (with respect to the Newman Merger) for accounting and financial statement purposes because, among other factors, the Company is a recently formed holding company with nominal net assets, Newman is a non-operating public shell company with cash as its primary asset, and the Sepco stockholders will control the Company after the Reorganization. Accordingly, the historical pre-Reorganization financial statements of the combined Company after the Closing will be those of Sepco. The retained earnings of Sepco will be carried forward after the Reorganization and the historical stockholders' equity of Sepco prior to the Reorganization will be retroactively restated for the equivalent number of shares received in the Reorganization. DISSENTERS' RIGHTS Sepco Shareholders. Articles 5.11 through 5.133 of the TBCA entitle any shareholder of Sepco as of the Sepco Record Date who objects to the Sepco Merger and who follows the procedures prescribed by such Articles, in lieu of receiving the Common Stock, Series B Convertible Preferred Stock or Series A Preferred Stock, as the case may be, to receive cash equal to the "fair value" of such shareholder's shares as determined by agreement or appraisal. Set forth below is a summary of the procedures relating to the exercise of the right to dissent as provided in the TBCA. The summary does not purport to be complete and is qualified in its entirety by reference to Articles 5.12 and 5.13 of the TBCA, which have been reproduced and attached hereto 20 31 as Appendix C. FAILURE TO COMPLY WITH ANY OF THE REQUIRED STEPS MAY RESULT IN TERMINATION OF ANY SUCH RIGHT TO DISSENT THE SHAREHOLDER MAY HAVE UNDER THE TBCA. Shareholders of Sepco who follow the procedures set forth in Articles 5.12 and 5.13 of the TBCA may receive a cash payment equal to the fair value of their shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, determined as of the day preceding the Sepco Meeting, exclusive of any element of value arising from or in anticipation of the Reorganization. Unless all of the procedures set forth in Articles 5.12 and 5.13 of the TBCA are followed by a shareholder of Sepco who wishes to exercise dissenters' rights, such shareholder will be bound by the terms of the Sepco Merger. To be entitled to a cash payment upon exercise of dissenters' rights, a shareholder must (i) file with Sepco, prior to the Sepco Meeting, a written objection to the Sepco Merger, setting out that the shareholder's right to dissent will be exercised if the Sepco Merger is effected and giving the shareholder's address to which notice thereof shall be delivered or mailed in the event the Sepco Merger is consummated, (ii) not vote his shares in favor of the adoption and approval of the Sepco Merger and Sepco Merger Agreement and (iii) demand such cash payment in writing within ten days after the delivery or mailing by Sepco of a notice that the Sepco Merger has become effective. The demand must state the number of shares of the Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock owned by the shareholder and the fair value of such shares as estimated by the shareholder. ANY SHAREHOLDER FAILING TO MAKE DEMAND WITHIN THE TEN-DAY PERIOD SHALL BE BOUND BY THE SEPCO MERGER AGREEMENT AND THE SEPCO MERGER. Within 20 days after demanding payment for his shares, each holder of certificates formerly representing shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock so demanding payment shall submit such certificates to Sepco for notation thereon that such demand has been made. The failure of holders of such certificates to do so shall, at the option of Sepco, terminate such shareholders' rights to dissent unless a court of competent jurisdiction for good and sufficient cause shall otherwise direct. Within 20 days after receipt by Sepco of a demand for payment made by a dissenting shareholder, Sepco shall deliver or mail to the dissenting shareholder a written notice that either shall set out that Sepco accepts the amount claimed in the demand and agrees to pay that amount within 90 days after the Sepco Effective Time, upon the surrender of the share certificates duly endorsed, or shall contain an estimate by Sepco of the fair value of the shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, together with an offer to pay the amount of that estimate within 90 days after the Sepco Effective Time, upon receipt of notice within 60 days after the effective time of the Sepco Merger, from the shareholder that the shareholder agrees to accept that amount upon the surrender of the certificates duly endorsed. If, within the period of 60 days after the Sepco Effective Time, shareholder and Sepco do not so agree, the shareholder or Sepco may, within 60 days after the expiration of such 60-day period, file a petition in any court of competent jurisdiction in Harris County, Texas, asking for a finding and determination of the fair value of the shareholder's shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock or Sepco Preferred Stock, as the case may be. The clerk of the court shall give notice of the time and place fixed for the hearing of the petition by registered mail to Sepco and to the shareholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by Sepco. Sepco and all of its shareholders so notified shall be bound by the final judgment of such court. After hearing of the petition, the court shall determine the shareholders who have complied with the provisions of Articles 5.12 of the TBCA and have become entitled to the valuation of and payment of their shares, and shall appoint one or more qualified appraisers to determine that value. In addition to having the power to examine the books and records of Sepco, the appraisers shall afford a reasonable opportunity to the parties interested to submit to them pertinent evidence as to the value of the shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock or Sepco Preferred Stock, as the case may be. 21 32 The appraisers shall determine the fair value of the shares of the shareholders adjudged by the court to be entitled to payment for their shares and shall file their report of that value in the office of the clerk of the court. Notice of the filing of the report shall be given by the clerk to the parties in interest. The report shall be subject to exceptions to be heard before the court both upon the law and the facts. The court shall by its judgment determine the fair value of the shares of the shareholders entitled to payment for their shares and shall direct the payment of that value by Sepco, together with interest thereon, to the date of such judgment, to the shareholder entitled to payment. The judgment shall be payable to the holders of shares only upon, and simultaneously with, the surrender to Sepco of duly endorsed certificates for those shares. Upon payment of the judgment, the dissenting shareholders shall cease to have any interest in those shares or in Sepco. The court shall allow the appraisers a reasonable fee as court costs, and all costs shall be allocated between the parties in the manner that the court determines to be fair and equitable. Any shareholder who has demanded payment for his shares in accordance with the TBCA shall not thereafter be entitled to vote or exercise any other rights of a shareholder except the right to receive payment for his shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, in accordance with the TBCA and the right to maintain an appropriate action to obtain relief on the ground that the Sepco Merger would be or was fraudulent, and the respective shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, for which payment has been demanded shall not thereafter be considered outstanding for the purposes of any subsequent vote of shareholders. Any shareholder who has demanded payment for his shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, in accordance with the TBCA may withdraw such demand at any time before payment for his shares or before any petition has been filed pursuant to the TBCA asking for a finding and determination of the fair value of such shares, but no such demand may be withdrawn after such payment has been made, or, unless the Company shall consent thereto, after any such petition has been filed. If, however, (i) such demand shall be withdrawn as hereinbefore provided, (ii) pursuant to the TBCA the Company shall terminate the shareholder's rights under the TBCA, (iii) no petition asking for a finding and determination of fair value of such shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, by a court shall have been filed within the time provided in the TBCA, or (iv) after the hearing of a petition filed pursuant to the TBCA, the court shall determine that such shareholder is not entitled to the relief provided by the TBCA, then, in any such case, such shareholder and all persons claiming under him shall be conclusively presumed to have approved and ratified the merger and shall be bound thereby, the right of such shareholder to be paid the fair value of his shares shall cease, and his status as a shareholder shall be restored without prejudice to any corporate proceedings that may have been taken during the interim, and such shareholder shall be entitled to receive any dividends or other distributions made to shareholders in the interim. A vote against approval and adoption of the Sepco Merger and the Sepco Merger Agreement will not satisfy the requirement for a written objection to approval and adoption of the Sepco Merger and the Sepco Merger Agreement or a written demand for payment of the "fair value" of the shares owned by a dissenting shareholder. Failure to vote against approval and adoption of the Sepco Merger and the Sepco Merger Agreement (i.e., abstention from voting) will not constitute a waiver of a shareholder's dissenters' rights. Exercise of the right to dissent under the TBCA will result in a judicial determination that the "fair value" of a dissenting shareholder's shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock or Sepco Preferred Stock, as the case may be, is higher or lower than the shares of Common Stock, Convertible Preferred Stock, or Preferred Stock, as the case may be, to be issued pursuant to the Sepco Merger. The TBCA provides that, in the absence of fraud in the transaction, the right to an appraisal as set forth above to a shareholder objecting to the Sepco Merger is the exclusive remedy for the recovery of the value of his shares or for money damages to such shareholder with respect to the Sepco Merger. If Sepco complies 22 33 with the requirements of the TBCA, any shareholder who fails to comply with the requirements of the TBCA shall not be entitled to bring suit for the recovery of the value of his shares or for money damages to the shareholder with respect to the Sepco Merger. The Sepco ESOP shall act as a single shareholder with respect to appraisal rights. SEPCO SHAREHOLDERS WHO ARE CONSIDERING EXERCISING DISSENTERS' RIGHTS WITH RESPECT TO THE SEPCO MERGER ARE URGED TO CONSULT THEIR OWN LEGAL COUNSEL. Newman Shareholders. Any shareholder of record of Newman may exercise dissenters' rights in connection with the Newman Merger by properly complying with the requirements of Section 53-15-4 of the NMBCA. By exercising dissenters' rights, any such shareholder would have the "fair value" of his Newman Common Stock paid to him in cash. The following is a summary of the statutory procedures that a shareholder of a New Mexico corporation must follow in order to exercise his dissenters' rights under New Mexico law. This summary is not complete and is qualified in its entirety by reference to Section 53-15-4 of the NMBCA, the text of which is set forth in full in Appendix IV to this Proxy Statement/Prospectus. The NMBCA provides that each shareholder of a New Mexico corporation has the right to dissent from certain transactions, including a merger requiring shareholder approval. The NMBCA also provides that shareholders electing to exercise their right to dissent must file with the corporation a written objection to the merger at or prior to the meeting of shareholders called to consider and vote upon the merger. If the merger is approved at the meeting, those shareholders who do not vote in favor of the merger may make written demand on the corporation for payment of the fair value of their shares as determined in accordance with the applicable provisions of the NMBCA. This demand must be made either within ten days following the meeting at which the merger was approved or within 25 days after the plan of the merger has been mailed to the shareholder. Any shareholder who fails to properly make demand within the prescribed time periods shall not acquire a right to receive payment for his shares. Newman shareholders should send their written demand for payment to 211 West Wall Street, Midland, Texas 79701, Attention: Secretary. Thereafter, assuming compliance with the provisions of the NMBCA, dissenting Newman shareholders who properly exercise their rights will receive cash equal to the fair value of their shares in lieu of shares of Common Stock. The NMBCA provides that, upon receiving a demand for payment from any dissenting shareholder, the corporation shall make an appropriate notation thereof in its shareholder records. Within 20 days after demanding payment for his shares, each holder of shares represented by certificates demanding payment shall submit the certificates to the corporation for notation thereon that such demand has been made. Failure of the shareholder to do so shall, at the option of the corporation, terminate his rights under the NMBCA unless a court of competent jurisdiction, for good and sufficient cause shown, otherwise directs. If uncertified shares for which payment has been demanded or shares represented by a certificate on which notation has been so made is transferred, any new certificate issued therefor shall bear similar notation, together with the name of the original dissenting holder of the shares, and a transferee of the shares acquires by such transfer no rights in the corporation other than those which the original dissenting shareholder had after making demand for payment of the fair value thereof. The corporation, or in the case of a merger or consolidation, the surviving or new corporation shall give written notice thereof to each dissenting shareholder who has made written demand within ten days after such corporate action is effected. The surviving corporation shall make a written offer to each shareholder for shares at a specified price determined by the corporation to be the fair value thereof. The notice and offer shall be accompanied by (i) a balance sheet of the corporation as of the latest available date and not more than 12 months prior to the making of the offer and (ii) a profit and loss statement of the corporation for the 12 month period ended on the date of the balance sheet. If the value of the shares is agreed upon by the corporation and the shareholder within 30 days after the date on which the corporate action was effected, payment for the shares shall be made within 90 days after the date on which the action was effected. Upon 23 34 payment of the agreed value, the shareholder shall cease to have any interest in the shares or in the corporation. If, within the period of 30 days after the date on which the corporate action was effected, a dissenting shareholder and the New Mexico corporation do not agree to the fair value of the shares, the corporation shall file a petition in any court of competent jurisdiction in the county and the state where the registered office of the corporation is located praying that the fair value of such shares be found and determined. The corporation should take such action within 30 days after receipt of written demand from any dissenting shareholder, given within 60 days after the date on which such corporate action was effected, or at the election of the corporation at any time within the period of 60 days. If, in the case of a merger or consolidation, the surviving or new corporation is a foreign corporation without a registered office in this state, the petition shall be filed in the county where the domestic corporation was last located. If the corporation fails to institute the proceedings as provided above, any dissenting shareholder may do so in the name of the corporation. All dissenting shareholders, wherever residing, shall be made parties to the proceeding as an action against their shares quasi in rem. A copy of the petition shall be served upon each dissenting shareholder who is a resident of New Mexico and shall be served by registered or certified mail on each dissenting shareholder who is a non-resident. Service on non-residents shall also be made by publication as provided by law. The jurisdiction of the court shall be plenary and exclusive. All shareholders who are parties to the proceeding shall be entitled to judgment against the corporation for the amount of the fair value of their shares. A court may, if it so elects, appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The NMBCA leaves the final determination of fair value to the courts. The costs and expenses of any such proceeding shall be determined by the court and shall be assessed against the corporation, but all or any part of the costs and expenses may be apportioned and assessed as the court deems equitable against any or all of the dissenting shareholders who are parties to the proceeding, and who received from the corporation an offer to pay for the shares if the court finds that the shareholders' actions in failing to accept the corporation's offer was arbitrary, vexatious or not in good faith. Such expenses shall include reasonable expenses and compensation for the appraisers, excluding the fees and expenses of counsel for experts employed by any party. If the fair value of the shares as determined materially exceeds the amount which the corporation offered to pay therefor, or if no offer was made, the court in its discretion may award to any shareholder who is a party to the proceeding such sum as the court determines to be reasonable compensation to any expert employed by the shareholder in the proceeding, together with reasonable fees of legal counsel. Payment of the fair value or judgment extinguishes a dissenting shareholder's interest in such shares. The judgment shall include an allowance for interest at such rate as the court may find to be fair and equitable, in all the circumstances, from the date on which the vote was taken on the proposed corporate action to the date of payment. Under New Mexico law, no demand may be withdrawn unless the corporation consents thereto. If (i) the demand is withdrawn upon consent, (ii) the proposed corporate action is abandoned or rescinded or the shareholders revoke the authority to effect the action, (iii) in the case of a merger, on the date of the filing of the articles of merger the surviving corporation is the owner of all of the outstanding shares of the other corporations that are parties to the merger, (iv) no demand or petition for the determination of fair value by a court has been properly made, or (v) if a court of competent jurisdiction determines that the shareholder is not entitled to the relief provided by the NMBCA, then the right of the shareholder to be paid the fair value of such shares ceases and the dissenter's status as a shareholder shall be restored, without prejudice, to any corporate proceedings which may have been taken during the interim. Shareholders of Newman considering appraisal rights should consider that the payment which they eventually receive in exchange for their shares in a dissenters' rights proceeding under Texas law could be less than, equal to, or greater than the eventual market value of the consideration they would receive as a result of the consummation of the Newman Merger. 24 35 A Newman shareholder who exercises his appraisal rights and receives cash in exchange for his shares of Newman Common Stock will recognize taxable gain or loss in an amount equal to the difference between (i) the sum of cash received and (ii) the basis of the common stock so exchanged. Any such gain or loss recognized would be long-term capital gain or loss if the shares of Newman Common Stock constitute capital assets in the hands of the dissenting Newman shareholder and have been held by such shareholder for more than one year at the Newman Closing Date. NEWMAN SHAREHOLDERS WHO ARE CONSIDERING EXERCISING DISSENTERS' RIGHTS WITH RESPECT TO THE NEWMAN MERGER ARE URGED TO CONSULT THEIR OWN LEGAL COUNSEL. ARRANGEMENT WITH HALTER As described in "The Reorganization -- Sepco's Reasons for the Reorganization; Recommendation of Sepco's Board of Directors", Sepco and Halter entered into an agreement in early 1996, pursuant to which Halter was to identify possible merger candidates for Sepco and assist Sepco in consummating such a merger. In connection with the final negotiations of the terms of the Newman Merger and Newman's agreement to issue to Halter shares of Newman Common Stock prior to the Newman Merger, the agreements between Sepco and Halter were amended. As an inducement to Sepco to participate in the Reorganization, Halter agreed to assist the Company in the preparation of the documents relating to the Newman Merger, assist in the preparation of the Company's filings with the Commission to effect the Reorganization, pay all printing costs relating to the Reorganization, pay all listing and similar fees with respect to the authorization for quotation of the stock of the Company on the Nasdaq Stock Market, assist in obtaining a market maker for the Common Stock following the Reorganization, assist in the preparation of a shareholder relations program for the Company and assist in a communication program for the Company with brokerage professionals, investment bankers and market makers. Under the agreement between Sepco and Halter, Halter is not entitled to any compensation for the foregoing services and the only consideration being received by Halter in connection with the Reorganization is through its ownership interest in Newman through its purchase of shares of Newman Common Stock from Newman. Sepco and the Company have agreed to indemnify Halter for various liabilities that may be incurred by it relating to Sepco and the Company, including liabilities under the securities laws. RESTRICTIONS ON RESALES BY AFFILIATES All shares of Common Stock received by Newman in the Newman Merger and all shares of Common Stock, Series B Convertible Preferred Stock and Series A Preferred Stock received by Sepco shareholders in the Sepco Merger will be freely transferable, except that shares of Common Stock, Series B Convertible Preferred Stock and Series A Preferred Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of the Company prior to the Sepco Merger and the Newman Merger may be resold by them only in transactions permitted by the resale provisions of Rule 145 promulgated under the Securities Act or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of the Company generally include individuals or entities that control, are controlled by, or are under common control with, such party and may include certain officers and directors of such party as well as principal shareholders of such party or persons who hold restricted shares. 25 36 CERTAIN TERMS OF THE MERGER AGREEMENTS The following description does not purport to be complete and is qualified in its entirety by reference to the Sepco Merger Agreement and Newman Merger Agreement, respectively, copies of which are attached to this Proxy Statement/Prospectus as Appendices A and B, respectively, and are incorporated herein by reference. SEPCO MERGER AGREEMENT Closing Date and Effective Time of the Merger. The Sepco Merger will become effective at the effective time set forth in the certified Articles of Merger issued by the Secretary of State of Texas and the Secretary of State of Nevada with respect to the Sepco Merger. Assuming all conditions to the Merger contained in the Sepco Merger Agreement are satisfied or waived prior thereto, it is anticipated that the Sepco Effective Time will occur on the business day immediately following the Sepco Meeting (the "Sepco Closing Date"). The Sepco Merger and the Newman Merger will be consummated simultaneously. Manner and Basis of Converting Shares. At the Sepco Effective Time (i) each outstanding share of Sepco Class A Common Stock will be converted into the right to receive 16 shares of Common Stock, (ii) each outstanding share of Sepco Class B Common Stock will be converted into the right to receive 18.1232 shares of Common Stock, (iii) each outstanding share of Sepco Class A Convertible Preferred Stock will be converted into the right to receive one share of Series B Convertible Preferred Stock and (iv) each outstanding share of Sepco Preferred Stock will be converted into the right to receive one share of Series A Preferred Stock. As soon as practicable following the Sepco Effective Time, the Company or its transfer agent will mail to each record holder of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock a letter of transmittal and other information advising such holder of the consummation of the Sepco Merger and for use in exchanging certificates representing Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock for certificates representing Common Stock, Series B Convertible Preferred Stock and Series A Preferred Stock, respectively. After the Sepco Effective Time, there will be no further registration of transfers on the stock transfer books of Sepco of shares of Sepco Class A Common Stock, Sepco Class B Common Stock, Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock. SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY SHAREHOLDERS OF SEPCO PRIOR TO THE SEPCO EFFECTIVE TIME AND THE RECEIPT OF A LETTER OF TRANSMITTAL. No fractional shares of Common Stock shall be issued in the Sepco Merger. In lieu thereof, all fractional shares of Common Stock that a holder of Sepco Class A Common Stock otherwise would be entitled to receive as a result of the Sepco Merger shall be converted automatically into the right to receive an amount of cash to be determined by multiplying $.58 by the fraction of a share of Common Stock to which such holder would otherwise have been entitled. Further, all fractional shares of Common Stock that a holder of Sepco Class B Common Stock would otherwise be entitled to receive as a result of the Sepco Merger shall be automatically converted into the right to receive an amount of cash to be determined by multiplying $.58 by the fraction of a share of Common Stock to which such holder would otherwise be entitled. Fractional shares of Series B Convertible Preferred Stock and Series A Preferred Stock will be issued in the Sepco Merger to the holders of Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock, respectively. Until surrendered and exchanged, each certificate previously evidencing Sepco Class A Common Stock and Sepco Class B Common Stock shall represent solely the right to receive Common Stock. Each certificate previously evidencing Sepco Class A Convertible Preferred Stock shall represent solely the right to receive Company Series B Convertible Preferred Stock and each certificate previously evidencing Sepco Preferred Stock shall represent solely the right to receive Series A Preferred Stock. Conditions to the Sepco Merger. The respective obligations of the Company, Sepco and Sepco Acquisition to consummate the Sepco Merger are subject to the satisfaction or waiver of the following conditions: (i) the Registration Statement, of which this Proxy Statement/Prospectus is a part, shall have 26 37 been declared effective by the Commission under the Securities Act, and no stop order with respect thereto shall be in effect; (ii) the Sepco Merger Agreement and the Sepco Merger shall have been approved and adopted by the requisite vote of the shareholders of each of the Company, Sepco and Sepco Acquisition; (iii) the Newman Merger shall have been approved by the shareholders of each of the Company, Newman Acquisition and Newman; and (iv) no order, injunction or decree shall have been entered and remains in effect in any action or proceeding before any foreign, federal, state court or governmental agency that would prevent or make illegal the consummation of the transactions contemplated by the Sepco Merger. The obligations of Sepco Acquisition and the Company to effect the Sepco Merger are also subject to the satisfaction or waiver at or prior to the Sepco Closing Date of the following conditions: (i) the representations and warranties of Sepco contained in the Sepco Merger Agreement will be true and correct in all material respects as of the Sepco Closing Date; (ii) Sepco shall have performed, in all material respects, each obligation and agreement and complied with each covenant to be performed and complied with by them contained in the Sepco Merger Agreement prior to the Sepco Closing Date; (iii) all consents by governmental or regulatory agencies or otherwise that are required for the consummation of the transactions contemplated by the Sepco Merger Agreement or that are required for the Company to own, operate or control Sepco or any portion of the assets of Sepco to prevent a breach of or a default under or a termination of any agreement material to Sepco to which Sepco is a party or to which any material portion of the assets of Sepco is subject, will have been obtained; (iv) no action or proceeding before any court or governmental body will be pending or threatened wherein a judgment, decree or order would prevent or restrain any of the transactions contemplated thereby or cause such transactions to be declared unlawful, nullified or rescinded or which might adversely affect the right of the Company to own, operate or control Sepco; (v) the Company and its financial and legal advisors shall have completed a due diligence review of the business, operations and financial statements of Sepco, the results of which shall be satisfactory to the Company in its sole discretion; and (vi) no event shall have occurred which in the reasonable judgment of the Company or Sepco Acquisition would materially affect the purpose of the Sepco Merger. The obligations of Sepco to effect the Sepco Merger are subject to the satisfaction or waiver at or prior to the Sepco Closing Date of the following conditions: (i) the representations and warranties of Sepco Acquisition and the Company set forth in the Sepco Merger Agreement will be true and correct in all material respects as of the Sepco Closing Date; (ii) the Company shall have performed, in all material respects, each obligation and agreement and complied with each covenant required to be performed and complied with by it contained in the Sepco Merger Agreement prior to the Sepco Closing Date; and (iii) no action or proceeding before any court or governmental body will be pending or threatened wherein a judgment, decree or other would prevent any of the transactions contemplated hereby or cause the transactions contemplated by the Sepco Merger Agreement to be declared unlawful or rescinded. There can be no assurance that all of the conditions to the Sepco Merger will be satisfied. Representations and Warranties. The Sepco Merger Agreement contains various representations and warranties of the Company, Sepco and Sepco Acquisition relating to, among other things, (i) the organization and similar corporate matters of the Company and Sepco, (ii) the capitalization of the Company and Sepco, (iii) the authorization, execution, delivery, performance and enforceability of the Sepco Merger Agreement and related matters, and the absence of conflicts, violations and defaults under the respective charters and bylaws of the Company and Sepco and certain other agreements and documents, (iv) Sepco's compliance with applicable laws, (v) the financial statements of Sepco, (vi) the absence of certain changes and events with regard to Sepco, (vii) litigation of Sepco, (viii) Sepco's employee benefit and labor matters, (ix) certain business practices of Sepco and (x) environmental matters with regard to Sepco. Certain Covenants; Conduct of Business Prior to the Sepco Merger. Sepco has agreed that, prior to the Sepco Closing Date, unless expressly contemplated by the Sepco Merger Agreement or otherwise consented to by the Company, Sepco will (i) operate its business in the usual and ordinary course consistent with past practices; (ii) preserve substantially intact its business organization and capital structure; (iii) use its best efforts not to take any action which would render, or which reasonably may be expected to render, any representation or warranty made by it in the Sepco Merger Agreement untrue at any time prior to the Sepco 27 38 Closing Date as if then made; (iv) notify the Company of any change in the normal course of Sepco's business or in the operation of its properties or of any governmental or third party complaints, investigations or hearings; (v) notify the Company of any material adverse event or circumstance affecting Sepco; and (vi) comply with all legal requirements and contractual obligations applicable to its operations and business and pay all applicable taxes. Termination or Amendment of the Sepco Merger Agreement. The Sepco Merger Agreement may be terminated, among other circumstances, by the Company if the Sepco Merger has not closed by December 31, 1996 or by either party if a court of competent jurisdiction shall have issued an order, decree or ruling or taken any other action to enjoin or otherwise prohibit the Sepco Merger. The Sepco Merger Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties to the Sepco Merger Agreement. NEWMAN MERGER AGREEMENT Closing Date and Effective Time of the Newman Merger. The Newman Merger will become effective at the effective time set forth in the certified Articles of Merger issued by the Secretary of State of New Mexico and the Secretary of State of Nevada with respect to the Newman Merger. Assuming all conditions to the Newman Merger contained in the Newman Merger Agreement are satisfied or waived prior thereto, it is anticipated that the Newman Effective Time will occur on the business day immediately following the Sepco Meeting (the "Newman Closing Date"). The Sepco Merger and the Newman Merger will be consummated simultaneously. Manner and Basis of Converting Shares. At the Newman Effective Time, each outstanding share of Newman Common Stock will be converted automatically into the right to receive one-fourth of one share of Common Stock. Newman's Class C Warrants (as defined herein) will be adjusted in accordance with that certain Warrant Agreement by and between Newman and its warrant agent, General Securities Agency, Inc. As soon as practicable following the Newman Effective Time, the Company or its transfer agent will mail to each record holder of Newman Common Stock immediately prior to the Newman Effective Time, a letter of transmittal and other information advising such holder of the consummation of the Newman Merger and for use in exchanging certificates representing Newman Common Stock for certificates representing Common Stock. After the Newman Effective Time, there will be no further registration of transfers on the stock transfer books of Newman of shares of Newman Common Stock. SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY SHAREHOLDERS OF NEWMAN PRIOR TO THE NEWMAN EFFECTIVE TIME AND THE RECEIPT OF A LETTER OF TRANSMITTAL. Until surrendered and exchanged, each certificate previously evidencing Newman Common Stock shall represent solely the right to receive Common Stock. No fractional shares of Common Stock shall be issued in the Newman Merger. In lieu thereof, all fractional shares of Common Stock that a holder of Newman Common Stock would otherwise be entitled to receive as a result of the Newman Merger shall be automatically converted into the right to receive an amount of cash to be determined by multiplying $1.00 by the fraction of a share of Common Stock to which such holder would otherwise have been entitled. Conditions to the Newman Merger. The respective obligations of the Company, Newman Acquisition, Newman and LITCO to consummate the Newman Merger are subject to the satisfaction or waiver of the following conditions; (i) the Registration Statement, of which this Proxy Statement/Prospectus forms a part, shall have been declared effective by the Commission, and no stop order with respect thereto shall be in effect (ii) the Newman Merger Agreement and the Newman Merger shall have been approved and adopted by the requisite vote of the shareholders of each of Newman and Newman Acquisition, respectively; (iii) the Sepco Merger shall have been approved by the shareholders of each of the Company and Sepco, respectively; and (iv) no order, injunction or decree shall have been entered and remain in effect in any action or proceeding before any foreign, federal, state court or governmental agency that would prevent or make illegal the consummation of the transactions contemplated by the Newman Merger. 28 39 The obligations of Newman Acquisition and the Company to effect the Newman Merger are also subject to the satisfaction or waiver at or prior to the Newman Closing Date of the following conditions; (i) the representations and warranties of Newman and LITCO contained in the Newman Merger Agreement will be true and correct in all material respects as of the Newman Closing Date; (ii) Newman and LITCO shall have performed, in all material respects, each obligation and agreement and complied with each covenant to be performed and complied with by them contained in the Newman Merger Agreement prior to the Newman Closing Date; (iii) all consents by governmental or regulatory agencies or otherwise that are required for the consummation of the transactions contemplated by the Newman Merger Agreement or that are required for the Company to own, operate or control Newman or any portion of the assets of Newman to prevent a breach of or a default under or a termination of any agreement material to Newman to which Newman is a party or to which any material portion of the assets of Newman is subject, will have been obtained; (iv) no action or proceeding before any court or governmental body will be pending or threatened wherein a judgment, decree or order would prevent or restrain any of the transactions contemplated hereby or cause such transactions to be declared unlawful, nullified or rescinded or which might adversely affect the right of the Company to own, operate or control Newman; (v) the Company and its financial and legal advisors shall have completed a due diligence review of the business, operations and financial statements of Newman, the results of which shall be satisfactory to the Company in its sole discretion; and (vi) no event shall have occurred which in the reasonable judgment of the Company or Newman Acquisition would materially affect the purpose of the Newman Merger. The obligations of Newman and LITCO to effect the Newman Merger are subject to the satisfaction or waiver at or prior to the Newman Closing Date of the following conditions: (i) the representations and warranties of Newman Acquisition and the Company set forth in the Newman Merger Agreement will be true and correct in all material respects as of the Newman Closing Date; (ii) the Company shall have performed, in all material respects, each obligation and agreement and complied with each covenant required to be performed and complied with by it contained in the Newman Merger Agreement prior to the Newman Closing Date; and (iii) no action or proceeding before any court or governmental body will be pending or threatened wherein a judgment, decree or other would prevent any of the transactions contemplated hereby or cause the transactions contemplated by the Newman Merger Agreement to be declared unlawful or rescinded. There can be no assurance that all of the conditions to the Newman Merger will be satisfied. Representations and Warranties. The Newman Merger Agreement contains various representations and warranties of the Company, Newman Acquisition, Newman and LITCO relating to, among other things, (i) the organization and similar corporate matters of the Company and Newman, (ii) the capitalization of the Company and Newman, (iii) the authorization, execution, delivery, performance and enforceability of the Newman Merger Agreement and related matters, and the absence of conflicts, violations and defaults under the respective charters and bylaws of the Company and Newman and certain other agreements and documents, (iv) Newman's compliance with applicable laws, (v) the financial statements of Newman, (vi) the documents and reports filed by Newman with the Commission and the accuracy of the information contained therein, (vii) the absence of certain changes and events with regard to Newman, (viii) litigation of Newman, (ix) employee benefit and labor matters of Newman, (x) certain business practices of Newman, (xi) environmental matters with regard to Newman and (xii) the accuracy of information provided by the Company, Sepco and Newman. Certain Covenants; Conduct of Business Prior to the Newman Merger. Newman and LITCO have jointly and severally agreed that, prior to the Newman Closing Date, unless expressly contemplated by the Newman Merger Agreement or otherwise consented to in writing by the Company, Newman will (i) operate its business in the usual and ordinary course consistent with past practices; (ii) preserve substantially intact its business organization and capital structure, except for the repayment of indebtedness owed to LITCO in the amount of $6,040; (iii) use its best efforts not to take any action which would render, or which reasonably may be expected to render, any representation or warranty made by them in the Newman Merger Agreement untrue at any time prior to the Newman Closing Date as if then made; (iv) notify the Company of any change in the normal course of Newman's business or in the operation of its properties or of any governmental or third party complaints, investigations or hearings; (v) notify the Company of any material adverse event or 29 40 circumstance affecting Newman; and (vi) comply with all legal requirements and contractual obligations applicable to its operations and business and pay all applicable taxes. Indemnification by LITCO. Subject to certain conditions of the Newman Merger Agreement, LITCO has agreed to indemnify, defend and hold the Company and its directors, officers, agents, attorneys and affiliates harmless from and against all losses, claims, actions, causes of action, fines, obligations, demands, assessments, penalties, liabilities, costs, damages, attorneys' fees and expenses (collectively, the "Damages"), asserted against or incurred by any such person or entity by reason of or resulting from (i) a breach of any representation, warranty, non-fulfillment of any agreement or covenant of Newman or LITCO contained in the Newman Merger Agreement or in any written statement, certificate or other document to be delivered in connection therewith or (ii) any untrue, inaccurate or incomplete statements of a material fact contained in the Registration Statement of which this Proxy Statement/Prospectus is a part, except such statements that are based on information provided by the Company. Indemnification by the Company. Subject to certain conditions of the Newman Merger Agreement, the Company has agreed to indemnify, defend and hold Newman and its directors, officers, agents, attorneys and affiliates harmless from and against all Damages asserted against or incurred by any such person or entity by reason of or resulting from (i) a breach of any representation, warranty or covenant of the Company contained in the Newman Merger Agreement or (ii) any untrue, inaccurate or incomplete statements of a material fact contained in the Registration Statement of which this Proxy Statement/Prospectus is a part, except such statements that are based on information provided by Newman or LITCO. Termination or Amendment of the Newman Merger Agreement. The Newman Merger Agreement may be terminated, among other circumstances, by the Company if the Newman Merger has not closed by December 31, 1996 or by either party if a court of competent jurisdiction shall have issued an order, decree or ruling or taken any other action to enjoin or otherwise prohibit the Newman Merger. The Newman Merger Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties to the Newman Merger Agreement. 30 41 SEPCO SELECTED CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data of Sepco set forth below for each of the years ended December 31, 1995, 1994 and 1993 and at December 31, 1995 and 1994 have been derived from the audited consolidated financial statements of Sepco included elsewhere in this Proxy Statement/Prospectus. Such financial statements have been audited by Ernst & Young LLP, independent auditors. The selected financial data for the years ended December 31, 1992 and 1991 and at December 31, 1993, 1992 and 1991 are derived from the audited financial statements of Sepco which are not included in this Proxy Statement/Prospectus and which have been audited by Ernst & Young LLP, independent auditors. The selected financial data set forth below for each of the six-month periods ended June 30, 1996 and 1995 and at June 30, 1996 have been derived from unaudited financial statements of Sepco included elsewhere in this Proxy Statement/Prospectus. This information should be read in conjunction with "Selected Consolidated Financial Data -- Sepco", "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Sepco" and Sepco's consolidated financial statements and notes included elsewhere in this Proxy Statement/Prospectus.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ----------------- ------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- -------- -------- ------- ------- ------- (IN THOUSANDS EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF EARNINGS DATA: Revenues.............................................. $63,021 $56,395 $111,328 $102,592 $99,353 $96,017 $93,239 Gross profit.......................................... 16,231 14,390 29,157 27,217 26,792 23,622 24,416 Operating income(1)................................... 1,425 2,010 4,598 4,150 3,288 1,827 4,171 Income before provision for income taxes, minority interest and change in accounting principle......... 931 1,470 3,512 3,038 2,346 620 2,511 Minority interest in earnings (loss) of Subsidiaries(2)..................................... -- -- -- -- (403) 136 (392) Cumulative effect of change in accounting principle(3)........................................ -- -- -- -- 882 Net income(4)......................................... 554 874 2,088 1,862 1,843 152 1,043 PER SHARE DATA: Primary Net income.......................................... $ 0.55 $ 0.66 $ 1.68 $ 1.41 $ 1.58 $ 0.14 $ 0.95 Fully diluted Net income.......................................... $ 0.48 $ 0.66 $ 1.61 $ 1.40 $ 1.55 $ 0.14 $ 0.95 Number of shares used to calculate Primary net income per share........................ 1,016 1,331 1,244 1,319 1,163 1,102 1,102 Fully diluted net income per share.................. 1,152 1,334 1,293 1,328 1,187 1,102 1,102
SIX MONTHS ENDED JUNE DECEMBER 31, 30, --------------------------------------------------- 1996 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- ------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA) Working capital........................................... $23,418 $23,967 $20,011 $18,402 $17,084 $15,069 Total assets.............................................. 45,071 43,254 38,163 38,686 37,243 34,327 Long-term debt obligations................................ 19,660 21,275 18,461 20,766 19,200 16,565 Stockholders' Equity...................................... 11,887 10,288 8,708 6,942 4,542 3,975
- --------------- (1) Six months ended June 30, 1996 includes a one-time charge to compensation expense of $710,000 for the amendment of book value options to fair market value options. (2) In December 1992 and September 1993, Sepco acquired the remaining capital stock of two subsidiaries, T.L. Walker Bearing Company and Southern Engine and Pump Company. The acquisitions eliminated any need to account for minority interest in earnings of the subsidiaries. (3) Effective January 1, 1993, Sepco changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109, "Accounting for Income Taxes". As permitted under the new rules, prior years' financial statements were not restated. The cumulative effect of adopting Statement 109 as of January 1, 1993 was to increase net earnings by $882,000. (4) In August 1990, June 1991 and July 1992, Sepco acquired three separate bearing and power transmission companies having revenues of approximately $25,000,000, $10,000,000 and $7,000,000, respectively, at the time of their purchase. In 1991, 1992 and 1993, operating income (loss) from these bearing and power transmission companies was $188,000, ($1,091,000) and $379,000, respectively. 31 42 NEWMAN SELECTED FINANCIAL DATA The selected financial data of Newman for the fiscal years 1991 through 1995 were derived from the audited financial statements of Newman. Included elsewhere in this Proxy Statement/Prospectus are the Balance Sheets for December 31, 1995 and March 31, 1995 and the Statements of Operations, Changes in Shareholders' Equity and Cash Flows for the nine months and twelve months then ended. Such financial statements have been audited by Cheshier & Fuller, P.C., independent public accountants. This information included elsewhere in the Proxy Statement/Prospectus should be read in conjunction with the following selected financial data. The selected financial data for the six months ended June 30, 1996 and 1995 are unaudited, but in the opinion of management of Newman, such financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of Newman's financial position and results of operations. The results of operations for the six months ended June 30, 1996 may not be indicative of the results to be expected for the full fiscal year. See "Selected Consolidated Financial Data -- Newman", "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Newman" and Newman's financial statements and notes thereto included elsewhere in this Proxy Statement/Prospectus.
SIX MONTHS ENDED NINE MONTHS JUNE 30,(3) YEAR ENDED MARCH(1)(2)(3) ENDED ------------------- ----------------------------------------------- DECEMBER 31, 1996 1995 1995 1994 1993 1992 1995(1)(3) -------- -------- -------- ---------- ---------- ---------- ------------ STATEMENTS OF OPERATIONS DATA: Revenues............................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- Income (loss) before extraordinary items................................ (13,212) (5,644) (4,392) (5,600) -- -- (5,978) Extraordinary items(2)................. -- -- -- 4,026,333 -- -- -- Net income (loss)...................... (13,212) (5,644) (4,392) 4,020,733 -- -- (5,978) PER SHARE DATA: Primary Income (loss) before extraordinary items.............................. $ (.02) $ (.01) $ (.01) $ -- $ -- $ -- $ (.01) Net income........................... $ (.02) $ (.01) $ (.01) $ 1.14 $ -- $ -- $ (.01) Fully diluted Net income (loss).................... $ (.02) $ (.01) $ (.01) $ -- $ -- $ -- $ (.01) Average number of Shares of Common Stock outstanding(2)................. 838,500 834,500 763,792 3,540,407 5,310,610 5,310,610 839,833
JUNE 30, --------------- MARCH 26, MARCH 27, MARCH 28, DECEMBER 31, 1996 1995 1994 1993 1992 1995 ------ ------ --------- ----------- ----------- ------------ Total assets....................................... $5,676 $2,640 $ 9,249 $ -- $ -- $ 12,854 Total liabilities.................................. 6,034 2,250 25 4,031,509 4,031,509 -- Shareholders equity (deficit)...................... (358) 390 9,224 (4,031,509) (4,031,509) 12,854
- --------------- (1) During 1995, Newman changed its fiscal 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. (2) Newman filed for Chapter 11 bankruptcy on August 12, 1992, and emerged as a reorganized entity on November 22, 1993. See "Business Information Concerning Newman -- Bankruptcy Proceedings". (3) Newman has been a development stage company since its November 22, 1993 reorganization. (4) Does not include 1,693,564 shares of Newman Common Stock issued to Halter in August 1996 for approximately $1,694 in cash. See "The Reorganization -- Sepco's Reasons for the Reorganization -- Recommendation of Sepco's Board of Directors". 32 43 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The unaudited pro forma combined balance sheets as of June 30, 1996 and December 31, 1995 and the unaudited pro forma combined statements of earnings for the six months ended June 30, 1996 and the year ended December 31, 1995 give effect to the Sepco Merger and 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 Merger 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 Proxy Statement/Prospectus. PRO FORMA COMBINED BALANCE SHEETS
JUNE 30, 1996 DECEMBER 31, 1995 ------------------------------------------------- ------------------------------------------------- SEPCO NEWMAN PRO FORMA PRO FORMA SEPCO NEWMAN PRO FORMA PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS COMBINED HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ---------- ---------- ----------- --------- ---------- ---------- ----------- --------- (IN THOUSANDS) ASSETS Current Assets: Cash.................. $ -- $ 5 $ 2(1) $ 7 $ 1,492 $ 13 $ 2(1) $ 1,507 Accounts receivable, net................. 18,016 18,106 15,892 15,892 Inventories........... 17,247 17,247 16,706 16,706 Prepaid expense and other............... 971 971 813 813 Deferred income taxes............... 503 503 170 170 ------- ------- ------- ------- ------- ------- ------- ------- Total current assets.......... 36,737 5 2 36,744 35,073 13 2 35,088 Property, plant and equipment, net........ 6,749 6,749 6,744 6,744 Notes receivable from officers and shareholders.......... 640 640 Intangible assets, net................... 1,585 1,585 797 797 ------- ------- ------- ------- ------- ------- ------- ------- Total Assets...... $ 45,071 $ 5 $ 2 $45,078 $ 43,254 $ 13 $ 2 $43,269 ======= ======= ======= ======= ======= ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Trade account payables............ $ 7,370 $ $ $ 7,370 $ 6,435 $ $ $ 6,435 Current portion of long-term debt...... 1,347 1,347 1,888 1,888 Current portion of subordinated debt... 1,308 1,308 235 235 Employee compensation........ 1,005 1,005 1,129 1,129 Other current liabilities......... 2,289 6 2,295 1,419 1,419 ------- ------- ------- ------- ------- ------- ------- ------- Total current liabilities..... 13,319 6 13,325 11,106 11,106 Long-term debt, less current portion....... 19,660 19,660 20,130 20,130 Subordinated debt, less current portion....... 1,145 1,145 Deferred compensation... 380 380 Deferred income taxes... 205 205 205 205 Total Liabilities..... 33,184 6 33,190 32,966 32,966 Shareholders' Equity: Preferred Stock....... 10 (7)(3) 3 10 (7)(3) 3 Convertible Preferred Stock............... 1,950 1,950 1,950 1,950 Common Stock.......... 12 1,421 2(1) 160 12 1,421 2(1) 160 (1,417)(2) (1,417)(2) 142(3) 142(3) Paid in capital....... 1,880 (790)(3) 1,085 790 (790)(3) 9 (5)(2) 9(2) Retained earnings (deficit)........... 9,732 (1,422) 1,422(2) 8,690 9,223 (1,408) 1,408(2) 8,181 (1,042)(3) (1,042)(3) Treasury Stock........ (1,697) 1,697(3) (1,697) 1,697(3) ------- ------- ------- ------- ------- ------- ------- ------- Total shareholders' equity............ 11,887 (1) 2 11,888 10,288 13 2 10,303 ------- ------- ------- ------- ------- ------- ------- ------- Total Liabilities and Shareholders' Equity.......... $ 45,071 $ 5 $ 2 $45,078 $ 43,254 $ 13 $ 2 $43,269 ======= ======= ======= ======= ======= ======= ======= =======
33 44 PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 YEAR ENDED DECEMBER 31, 1995 ---------------------------------- ---------------------------------- PRO PRO SEPCO NEWMAN FORMA SEPCO NEWMAN FORMA HISTORICAL HISTORICAL COMBINED HISTORICAL HISTORICAL COMBINED ---------- ---------- -------- ---------- ---------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues.............................. $ 63,021 $ $63,021 $ 111,328 $ $111,328 Costs and expenses: Cost of sales....................... 46,790 46,790 82,171 82,171 Selling, general and administrative................... 14,806 12 14,818 24,559 6 24,565 ------- ------ ------- -------- ------ -------- Operating income (loss)............... 1,425 (12) 1,413 4,598 (6) 4,592 Other income (expense) Other income........................ 514 514 867 867 Interest expense.................... (1,008) (1,008 ) (1,953) (1,953) ------- ------ ------- -------- ------ -------- Earnings (loss) before income taxes... 931 (12) 919 3,512 (6) 3,506 Provision for income taxes............ (377) (377 ) (1,424) (1,424) ------- ------ ------- -------- ------ -------- Net income (loss)..................... $ 554 $ (12) $ 542 $ 2,088 $ (6) $ 2,082 ======= ====== ======= ======== ====== ======== Net income (loss) per share........... $ 0.55 $(0.01) $ 0.03 $ 1.68 $(0.01) $ 0.12 ======= ====== ======= ======== ====== ======== Weighted average shares outstanding... 1,016 839 17,263 1,244 764 17,263 ======= ====== ======= ======== ====== ========
34 45 PRO FORMA ADJUSTMENTS (IN THOUSANDS EXCEPT SHARE AMOUNTS) 1. To record the issuance of 1,693,564 shares of Newman Communications to Halter Financial. 2. To record the issuance of shares of Index, Inc. to the Newman shareholders as a result of the Reorganization. 3. To record issuance of shares of Index, Inc. to SEPCO shareholders as a result of the Reorganization and to eliminate Sepco treasury stock. 35 46 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE COMPANY/SEPCO The following analysis of the financial condition and results of operations of the Company reflects the Company and Sepco on a combined basis after giving effect to the Reorganization and should be read in conjunction with the Consolidated Financial Statements of Sepco, including the notes thereto, included elsewhere in this Proxy Statement/Prospectus. GENERAL The Company is a distributor of maintenance, repair and operating supplies and equipment for industrial customers engaged in various businesses, principally the oil and gas (transportation and production segments), petrochemical and wood products industries. The Company also sells its products to municipalities, food and beverage companies and companies in the construction industry. The Company's principal products currently consist of pumps and pump accessories, valves and valve automation products and bearings and power transmission equipment. The Company also provides system design, fabrication, installation, repair and maintenance services for its customers. Demand for the Company's products is subject to changes in the United States economy in general and economic trends affecting the Company's customers and the industries in which they compete in particular. Many of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry, are cyclical and materially affected by changes in the economy. As a result, the Company may experience changes in demand for its products as changes occur in the markets of its customers. Such was the case in late 1994 when prices for natural gas declined substantially and resulted in a drop in demand for the Company's valve automation products used for natural gas transmission. 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 be dependent 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 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 be dependent on its obtaining financing for its planned expansions, which there can be no assurance will be available. 36 47 RESULTS OF OPERATIONS The following table sets forth selected items of the results of operations.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------ ------------------------------- 1996 1995 1995 1994 1993 ------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) Total Revenues............................. $63,021 $56,395 $111,328 $102,592 $99,353 Pumps and Pump Products.................. 33,870 31,773 61,630 58,774 56,004 Valve and Valve Automation............... 5,205 4,656 10,198 7,678 8,915 Bearings and Power Transmission.......... 23,946 19,966 39,500 36,140 34,434 ------- ------- -------- -------- ------- Cost of Sales.............................. 74.2% 74.5% 73.8% 73.5% 73.0% Gross Profit............................... 25.8 25.2 26.2 26.5 27.0 Selling, General and Administrative Expense.................................. 23.5 22.0 22.1 22.5 23.7 Operating Income........................... 2.3 3.5 4.1 4.0 3.3 Other Income............................... .8 .8 .8 .8 .9 Interest Expense, net...................... 1.6 1.7 1.8 1.9 1.8 Income Before Taxes, Minority Interest and Cumulative Effect of Change in Accounting Principles............................... 1.5 2.6 3.2 3.0 2.4 Income Tax Expense (benefit)............... .6 1.1 1.3 1.1 1.0 Minority Interest in Earnings of Subsidiaries............................. .4 Income Before Cumulative Effect of Change in Accounting Principles................. 1.0 Effect of Change in Accounting Principle... .9 ------- ------- -------- -------- ------- Net Income................................. .9% 1.5% 1.9% 1.8% 1.9% ======= ======= ======== ======== =======
Six Months Ended June 30, 1996 compared to Six Months Ended June 30, 1995. Revenues for the six months ended June 30, 1996 increased 11.7% to $63.0 million from the six months ended June 30, 1995. The increase in revenues for the 1996 period was primarily attributable to sales of bearings and transmission products at locations where pump and pump products were previously the only products sold and increased market penetration and higher prices. During the six months ended June 30, 1996, sales of pumps and pump products increased 6.6% over the comparable period in 1995, while sales of valves and valve automation products increased 11.8% in the first six months in 1996 over the comparable 1995 period. Sales of bearings and power transmission equipment increased 19.9% in the first six months of 1996 over the comparable period in 1995. Revenues for the six months ended June 30, 1996, also included approximately $2,061,000 in revenues attributable to two companies acquired in December 1995 and February 1996. Gross margins increased slightly by .3% in the first six months of 1996 compared to the first six months of 1995 due to the ability of the Company to pass on manufacturer price increases, in particular in the pump market. Selling, general and administrative expenses increased as a percentage of revenues by 1.5% for the six months ended June 30, 1996 as compared to the six months ended June 30, 1995, due primarily to the incurrence of 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 and costs associated with the Company's expansion of operations. Excluding the effect of the amendments to the stock options, selling, general and administrative expenses as a percentage of revenues remained relatively flat from period to period. Operating income for the first six months of 1996 as a percentage of revenues declined 1.2% compared to the first six months of 1995, due primarily to the compensation recorded in connection with the stock option amendments. 37 48 Interest expense during the first six months of 1996 increased slightly compared to the first six 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 lower during the same period of 1995. The Company's provision for income taxes for the first six months of 1996 decreased by $219,000 compared to the first six months of 1995 notwithstanding increased operating income due to higher compensation expense during the quarter associated with the amendments to the Company's stock options. Net income for the six months ended June 30, 1996, declined $320,000 from the first six months of 1995 due to the effects of the additional compensation expense associated with the amendments to the Company's stock options. Excluding the effect of this expense, net income would have increased by approximately $106,000 due to increased product sales. Year Ended December 31, 1995 compared to Year Ended December 31, 1994. Revenues for the year ended December 31, 1995 increased 8.5% to $111.3 million from $102.6 million for the year ended December 31, 1994. The increase in revenues for the 1995 period was primarily attributable to sales of bearings and transmission products at locations where pump and pump accessories were previously the only products sold, increased sales of valve automation products for use in the gas transmission market, increased market penetration for the Company's bearings and valves, increased market penetration and higher prices. During the year ended December 31, 1995, sales of pumps and pump products increased 4.9% over 1994, while sales of valves and valve automation products increased 32.8% in 1995 over 1994. Sales of bearings and power transmission equipment increased 9.3% in 1995 over 1994. Gross profit decreased .3% during the year ended December 31, 1995, due to higher costs of sales relating to increases in manufacturer pricing compared to 1994. This relatively small percentage decrease was due to the inability to pass on manufacturer price increases. Selling, general and administrative expense for the year ended December 31, 1995, decreased as a percentage of revenues by .4% as compared to 1994 due primarily to increased revenues. Operating income for the year ended December 31, 1995, as a percentage of revenues remained constant with 1994 notwithstanding higher manufacturer costs due to the Company being able to reduce average selling, general and administrative expense. Interest expense for 1995 increased compared to 1994 due to higher average debt incurred to finance increased sales. The increased levels of debt, however, were partially offset by lower average borrowing costs during the year. The provision for income taxes for 1995 increased by $248,000 as compared to 1994 due primarily to increased pre-tax profits for the year as compared to the prior year. Year Ended December 31, 1994 compared to Year Ended December 31, 1993. Revenues for the year ended December 31, 1994, increased 3.2% to $102.6 million from $99.4 million. During the year ended December 31, 1994, sales of pumps and pump products increased 5.0% over 1993, while sales of bearings and power transmission equipment increased 5.0% in 1994 over 1993. Sales of valves and valve automation products decreased 13.9% in 1995 over 1994. The increased revenues from pumps and pump products and bearings and power transmission equipment resulted from better penetration of existing markets and increases in manufacturer pricing. The decrease in the sales of valves and valve automation products was primarily due to a depressed gas transmission market that prompted some customers to push 1994 projects into 1995. Gross profit decreased .5% during the year ended December 31, 1994, due to higher costs of sales relating to increases in manufacturer pricing compared to 1993. This relatively small percentage increase was due to the inability to fully pass on manufacturer price increases. 38 49 Selling, general and administrative expenses decreased as a percentage of revenues by 1.2% for 1994 as compared to 1993. This decrease was attributable to increased revenues and average per unit selling, general and administrative expense declining greater than per unit increases in costs of sales. The Company also benefitted from reductions in insurance expense, which were partially offset by increased compensation expense. Operating income as a percentage of revenues increased by .7% between 1994 and 1993 due to the small increase in Cost of Sales as a percentage of revenues being more than offset by the decrease in the selling, general and administrative expenses as a percentage of revenues. Interest expense in 1994 increased by $129,000 to $1.9 million in 1994 due to higher interest rates. Average borrowings, however, decreased during the year. Interest expense as a percentage of sales remained virtually constant at 1.9%. The provision for income taxes increased by $194,000 from 1994 as compared to 1993 due primarily to increased pre-tax profits for the year as compared to the prior year. The Company had no minority interest in earnings of subsidiaries for 1994 compared to $403,000 in 1993. The elimination of minority interests was due to the Company's acquisition of the minority interest in Southern Engine & Pump Company in September 1993. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The cumulative effect of this change in accounting principle resulted in a one time increase in earnings of $882,000 in 1993. LIQUIDITY AND CAPITAL RESOURCES 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 June 30, 1996, the Company had no cash and cash equivalents compared to $1.5 million and $.9 million at December 31, 1995, and 1994, respectively. 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 also had $3.0 million available for borrowings under its working capital line of credit at June 30, 1996. Working capital at June 30, 1996 was $23 million compared to $24 million and $20 million at December 31, 1995 and 1994, respectively. During 1994 and 1995, Sepco 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 .75% (9.25% and 9.50% at December 31, 1995 and 1994, respectively). The line of credit is secured by receivables, inventory, and machinery and equipment and matures January 1997. At June 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, current assets to current liabilities greater than two to one and capital expenditures equal to or less than $350,000. The Company currently expects to renew the line of credit at its maturity. The Company generated cash from operating activities of $.7 million in the first six months of 1996. The Company had a working capital deficit from operations of $59,000 in 1995 compared to a positive $2.6 million in 1994, primarily due to the financing of inventory and increases in receivables of approximately $3.2 million incurred in connection with the expansion of the distribution of the Company's bearing and power transmission equipment in markets previously selling only pump and pump products. The Company had capital expenditures of approximately $572,000 and $1.5 million during the first six months of 1996 and the year ended December 31, 1995, respectively. Capital expenditures in the first six months of 1996 were for the purchase of a facility in Lufkin, Texas ($190,000), leasehold improvements and furniture and fixtures at the corporate office and for office equipment and computer automation. Capital expenditures for 1995 were primarily for office and shop equipment and computer automation. For the 39 50 remainder of 1996 the Company has budgeted approximately $400,000 for additional capital expenditures primarily associated with the installation of the Company's computer system. During the first quarter of 1996, the Company expended approximately $550,000 for the acquisition of the assets of Austin Bearings. During 1995, the Company exchanged 4,500 shares of Sepco Class A Convertible Preferred Stock and $50,000 for the acquisition of all of the outstanding stock of Bayou Pumps. The Company is currently undergoing an examination of its tax returns by the Internal Revenue Service ("IRS") who is asserting claims against Sepco 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 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. ACCOUNTING PRONOUNCEMENTS 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. The Company adopted Statement 121 in the first quarter of 1996. The adoption of Statement 121 did not have any material effect on the Company. The Company currently 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. INFLATION The Company does not believe the effects of inflation have any material adverse effect on its results of operations or financial condition and attempts to minimize inflationary trends by passing manufacturer price increases on to the customer whenever practicable. NEWMAN Newman, a development stage company, has had no business operations and no material assets since it filed the Petition in 1992. Since 1993, Newman's expenses were principally its audit fees and certain other filing and administrative fees necessary to keep Newman in compliance with regulatory requirements. Newman filed with the Court the Plan (as defined herein) on April 14, 1993, which was confirmed on September 13, 1993. Under the Plan, Newman's unsecured creditors received either cash or a combination of Newman Common Stock and Class A, B and C Warrants. In addition, holders of Pre-petition Common Stock (as defined herein) received, at their option and upon payment of a $20 administrative fee to Newman's transfer agent, a combination of common stock and Class A, B and C Warrants (each as defined herein). A total of 332,500 shares of Newman Common Stock and 650,000 each of Class A, B and C Warrants were 40 51 issued to unsecured creditors and Newman shareholders under the Plan. In addition, LITCO, Newman's principal shareholder, contributed $20,000 to Newman and was designated as a separate class under the Plan. LITCO received 1,000,000 each of Class A, B and C Warrants. The exercise period for the Class A and B Warrants has expired, with the exercise period for the Class C Warrants expiring on November 22, 1996. During the six months ended June 30, 1996, there was no revenue or exercise of warrants. Certain regulatory and operational expenses were paid in this period resulting in a loss for the period of $998. Newman had $5,200 in cash as of June 30, 1996 and accrued liabilities of $6,034 is related to administrative expenses incurred by LITCO for the benefit of Newman. Management of Newman unable to estimate the number, if any, of warrants that will be exercised in the future. On February 1, 1996, the Board of Directors of Newman changed Newman's fiscal year end to December 31. 41 52 BUSINESS INFORMATION CONCERNING THE COMPANY The Company is a newly incorporated entity formed for the sole purpose of effecting the Reorganization and succeeding to the business and operations of Sepco. Unless the context otherwise requires, the term "Company" refers to the Company, as the successor to Sepco, following the completion of the Reorganization. GENERAL The Company is a distributor of maintenance, repair and operating supplies and equipment for industrial customers engaged in various businesses, principally the oil and gas, petrochemical and wood products industries. The Company currently distributes over 125,000 items, consisting primarily of pumps and pump accessories, valves and valve automation products and bearings and power transmission equipment. The Company also provides system design, fabrication, installation, repair and maintenance services for its customers. The Company's products currently are distributed from over 30 distribution centers strategically located throughout the Southwest. The Company's sales force includes approximately 100 sales representatives. The Company has been a distributor of industrial supplies in the Southwest since 1908 when it was founded as a distributor of pumps and pump products for companies in the agriculture industry. The Company has grown substantially since that time through the addition of new product lines and distribution locations. Since 1987, the Company has made various acquisitions with the objective of expanding its product lines and distribution network. These acquisitions have resulted in the Company becoming one of the largest regional distributors of industrial supplies in the Southwest and the 36th largest distributor of industrial supplies in the United States, based on the most recent survey conducted by Industrial Distribution. The Company's strategy is to continue to expand through acquisitions and internal development. Through future acquisitions, the Company will seek to take advantage of what it believes to be a trend toward consolidation in the highly fragmented $200 billion industrial product distribution industry. The Company believes that this consolidation is being driven by the customer's desire to reduce costs through integrated sources of supply which can provide products at lower costs through volume purchases. The integration of supply also reduces the customer's need to maintain excess inventories and to coordinate purchasing needs through numerous small suppliers. The Company intends to meet this customer demand by engaging in selective acquisitions of small- to medium-sized independent distributors with complementary or desirable new product lines, strategic distribution locations and attractive customer bases and manufacturer relations. The Company also will seek acquisitions that will provide it with the ability to penetrate new geographical markets through the establishment of distribution bases outside of the Company's current geographical markets. These acquisitions are expected to be both within the Southwest and elsewhere in the United States. Although the Company is actively seeking acquisitions that would meet its strategic objectives, there can be no assurance that the Company will be successful in its efforts. The Company's strategy for internal development also is related to the consolidation trend in the industry and focused on providing the Company's customers with an integrated source of supply for a large portion of their maintenance, repair and operating supply needs. The Company believes that as the market for industrial supplies consolidates to compete successfully, it will be necessary for distributors to provide the customer with a single source of supply for a majority of their industrial supply needs either directly through their own product lines or through alliances, consortiums or joint ventures. The Company intends to seek to meet this competitive need by expanding its existing product lines and adding new product lines through acquisitions, new manufacturing arrangements and alliances and joint ventures with other suppliers. The Company also intends to begin to actively market to its customers through AMRO a comprehensive outsourcing program that is designed to provide all aspects of the maintenance, repair and operating, supply procurement, inventory management and distribution functions for its customers at the customer's location. The Company is a Texas corporation formed solely for the purpose of effecting the Reorganization and succeeding to the business of Sepco. Sepco has been a distributor of pumps and pump products since 1908 and was incorporated in Texas in 1913. The Company's principal office is located at 580 Westlake Park Boulevard, Suite 1100, Houston, Texas 77079 and its telephone number is (713) 531-4214. 42 53 INDUSTRY OVERVIEW AND BUSINESS OBJECTIVES The Company estimates that the United States market for industrial supplies is currently approximately $200 billion annually. The principal products provided to this market consist of (i) pumps and pump accessories, (ii) valves and valve automation products, (iii) bearings and power transmission equipment, (iv) electrical products and (v) general mill supplies and safety products. The Company currently provides three of these five classes of products (pumps, valves and bearings and power transmission) and, as part of its operating strategy, intends to seek acquisitions of distributors who provide the other two classes of products (electrical and general mills and safety). The industrial distribution industry currently is highly fragmented. Although there exist various national distribution companies, the 50 largest industrial supply distributors currently account for less than 10% of the total market. As a result, most industrial customers currently purchase their industrial supplies through numerous local distribution and supply companies. These distributors, like the Company, also generally provide the customer with repair and maintenance services, technical support and application expertise with respect to their own product lines. Products typically are purchased by the distributor for resale directly from the manufacturer and warehoused at branch distribution facilities of the distributor until sold to the customer. The customer also typically will purchase an amount of product inventory for its near term anticipated needs and warehouse those products at its industrial site until the products are used. The Company believes that the current distribution system for industrial products in the United States creates inefficiencies at both the customer and the distributor level through excess inventory requirements and duplicative cost structures. The Company believes that with increased global competition and pricing pressures, the current system will need to change and industrial distributors will need to consolidate to meet their clients' objectives for faster deliveries and lower costs. Consolidation will provide those distributors that are able to consolidate the opportunity to better manage their inventory levels, reduce per unit overhead and selling costs and improve purchasing power from the manufacturer. The Company believes that an additional factor underlying the consolidation trend in the industry is a growing demand for new alternative distribution programs in which an integrated source of supply is offered to the customer as a means of simplifying the procurement of industrial supplies and reducing the customer's own purchasing costs. This integrated source of supply currently is being provided on a limited basis by the Company and other distributors through a variety of differing forms of alliances, joint ventures and consortiums among distributors that are designed to offer the customer a broader range of products though a centralized source of supply. The Company expects that while such alliances will continue to grow and be a factor in the market in the future, the ability of a distributor to provide all or a substantial portion of the supply needs of the customer will become a central aspect of competition in the industry in the future. The Company's objective for future growth is to take advantage of the current consolidation and integrated supply trends in the market. In this regard, the Company intends to seek acquisitions that will both expand its existing product lines and add new product lines. The Company also intends to continue to pursue on a selective basis alliances and other similar arrangements with other distributors, such as the Company's participation in the iPower Consortium described below, that will allow it to provide a more integrated source of supply to its customers. The Company also has recently created a new subsidiary, AMRO, to market a comprehensive vendor outsourcing service through which the Company will perform all aspects of supply procurement, inventory management and distribution functions for large volume customers at the customer's industrial site. Although AMRO has just recently begun the marketing of its services and has not yet generated any revenues, the Company believes that the services proposed to be provided by AMRO ultimately will become an important component of the Company's distribution network. The ability of the Company to implement its strategy for growth will be dependent 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 those being pursued by 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 43 54 successful in these efforts. Further, the ability of the Company to effect its strategic plans will be dependent on its obtaining financing for its planned expansions, which there can be no assurance will be available. PRODUCTS AND SERVICES The Company currently stocks in inventory for distribution more than 125,000 different items for use primarily by customers engaged in the oil and gas, petrochemical and wood products industries. Other industries served by the Company include municipalities, food and beverage and construction. The principal products currently distributed by the Company consist of (i) pumps and pump accessories, (ii) valves and valve automation products and (iii) bearings and power transmission equipment. The Company also provides system design, fabrication, installation and repair and maintenance services for its customers. The Company's products are distributed from over 30 distribution centers strategically located throughout the Southwest and sold through a sales force of approximately 100 sales representatives who operate on a commission basis. Pumps and Pump Accessories The Company's pump products include a full line of (i) centrifugal pumps for transfer and process service applications, such as petrochemicals, refining and crude oil production, (ii) rotary gear pumps for low-to medium-pressure service applications, such as pumping lubricating oils and other viscous liquids, (iii) plunger and piston pumps for high-pressure service applications such as salt water injection and crude oil pipeline service and (iv) air-operated diaphragm pumps. The Company also provides various pump accessories. Sales of pumps and pump accessories accounted for 56%, 58% and 56% of the Company's revenues for years ended December 31, 1995, 1994 and 1993, respectively. Valves and Valve Automation The Company's valve and valve automation products include a full line of pneumatic, hydraulic and electric actuators for critical or high-pressure service applications or remote valve operation applications, such as refinery, offshore and pipeline applications, as well as for applications involving large-diameter pipe. The Company also provides a full line of manual worm gear and bevel gear actuators for low-pressure applications not requiring remote operation, including tank farms, water lines and municipal water systems. These actuators may be fitted to either multi- or quarter-turn valves. The Company also supplies various accessories and control equipment, such as positive displacement gas meters, rupture disc replacement devices, control valves, limit switches and valve positioners. Sales of valves and valve automation products accounted for 9%, 7% and 9% of the Company's revenues for years ended December 31, 1995, 1994 and 1993, respectively. Bearings and Power Transmission Equipment The Company provides a full line of bearings, hoses, seals and power transmission products. The Company's bearing products include several types of mounted and unmounted bearings for a variety of applications, ranging from basic applications such as pumps, motors and conveyors to complex applications. Hose products distributed by the Company include a large selection of industrial fittings and stainless steel hoses, hydraulic hoses, Teflon(R) hoses and expansion joints, as well as hoses for chemical, petroleum, air and water applications. The Company also distributes seal products, such as O-rings, Vee packings, retaining rings and other related equipment. Power transmission products distributed by the Company include speed reducers, flexible coupling drives, chain drives, sprockets, gears, conveyors, clutches, brakes and hoses. Sales of bearings, hoses, seals and power transmission equipment accounted for 35%, 35% and 35% of the Company's revenues for years ended December 31, 1995, 1994 and 1993, respectively. System Design, Fabrication, Installation and Repair and Maintenance Services In addition to distributing products, the Company provides complete, customized pumping, valve automation and power transmission system design and fabrication services through its engineering personnel and fabrication facilities. The Company also provides training services with respect to the installation and 44 55 basic applications of its products as well as around-the-clock field repair services supported by a fleet of fully-equipped service vehicles. THE IPOWER CONSORTIUM As part of the Company's efforts to provide its customers with a source of integrated supply, the Company currently is a member of the Texas Gulf, North Texas and Louisiana Gulf South divisions of the iPower Consortium ("iPower"). iPower is an integrated supply consortium currently serving over 30 large industrial customers nationwide and brings together a wide variety of suppliers to provide all necessary products to an end-user customer using one efficient software package which eliminates the need for multiple invoices. The Company believes that iPower's streamlined distribution process enables the customer to reduce its purchasing costs. iPower also provides multiple product application expertise and technical support to those customers that require them. The Company has participated in iPower for less than one year. To date, revenues from the Company's participation in iPower have not been material and there can be no assurance as to the future profitability of the Company's participation in iPower in the future. MANUFACTURERS The Company acquires its products through numerous original equipment manufacturers. The Company has distribution agreements with these manufacturers, some of which give the Company exclusive rights to distribute the manufacturer's products in a specific geographic area. All of the Company's distribution agreements are subject to cancellation by the manufacturer upon one year notice or less. No one manufacturer provides products that account for 10% or more of the Company's revenues. The Company believes that alternative sources of supply could be obtained in a timely manner if any distribution agreement were canceled. Accordingly, the Company does not believe that the loss of any one distribution agreement would have a material adverse effect on its business, financial condition or results of operations. Representative manufacturers of Sepco's products include (i) G.H. Bettis (valve and valve automation products), (ii) Gould's, G&L, Viking, Wilden and Gaso (pumps and pump products), (iii) SKF, Torrington/Fafnir, Timkin and NTN (bearings) and (iv) Dodge/Reliance, Falk, Gates, Martin Sprocket, T. B. Woods, Emerson, Rexnord and Baldor Electric (power transmission products). COMPETITION The Company's business is highly competitive. The Company competes with a variety of industrial supply distributors, many of which may have greater financial and other resources than the Company. Many of the Company's 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 iPower and outsourcing services similar to those proposed to be offered by AMRO, some of which may be able to supply their products in a more efficient and cost-effective manner than the Company. The Company also competes with direct mail suppliers, large warehouse stores and, to a lesser extent, manufacturers. CUSTOMERS The Company provides its products and services to over 10,000 customers in various industries, principally oil and gas, petrochemicals and wood products. Other industries include chemicals, pulp and paper, food and beverage, municipal, construction and general manufacturing. 45 56 PROPERTIES Set forth below is certain information with respect to certain of the Company's properties. The Company believes that all of these properties are adequately insured, in good condition and suitable for the uses described below for the foreseeable future.
APPROXIMATE LEASE SIZE OWNED/ EXPIRATION LOCATION PRIMARY USE (SQUARE FEET) LEASED DATE --------------------------- ---------------------- ------------- ----- ------------- 580 Westlake Park Office 7,276 Leased February 2001 Houston, Texas 6500 Brittmoore Office 88,000 Owned(1) Houston, Texas Distribution facility 2603 LaBranch Distribution facility 33,000 Owned(1) Houston, Texas 4302 Creekmont Distribution facility 26,000 Owned(1) Houston, Texas Harahan, Louisiana Distribution facility 30,000 Owned(1) Odessa, Texas Distribution facility 25,000 Owned(1) Oklahoma City, Oklahoma Distribution facility 18,000 Leased November 1996 Irving, Texas Distribution facility 15,000 Owned Hobbs, New Mexico Distribution facility 10,000 Owned Lufkin, Texas Distribution facility 10,000 Owned Broussard, Louisiana Distribution facility 10,000 Owned Longview, Texas Distribution facility 7,000 Owned Baytown, Texas Distribution facility 7,000 Owned
- --------------- (1) Property pledged to secure certain indebtedness of the Company. The Company also leases 25 additional branch distribution facilities located in Texas, Louisiana, Oklahoma and New Mexico. These facilities, which average 5,000 square feet or less in size, are generally leased for a term of three to five years. The leases provide for periodic specified rental payments and certain leases are renewable at the option of the Company. The Company believes that if the leases for any of its facilities were not renewed, other suitable facilities could be leased with no material adverse effect on its business, financial condition or results of operations. BACKLOG The Company typically fills and ships customer orders within 30 to 90 days of receipt of the order and, therefore, maintains no significant backlog. EMPLOYEES As of June 30, 1996, the Company had 441 full-time employees. None of the Company's employees are represented by a labor union. The Company believes that it has good relations with its employees. INSURANCE The Company maintains liability and other insurance that it believes to be customary and generally consistent with industry practice. There can be no assurance that such insurance will be adequate for the risks involved, that coverage limits will not be exceeded or that such insurance will apply to all liabilities. The occurrence of an adverse claim in excess of the coverage limits maintained by the Company could have a material adverse effect on the Company's financial condition and results of operations. 46 57 INTELLECTUAL PROPERTY Many of the Company's products are subject to patents by the manufacturers thereof. The Company's business, however, is not materially dependent on any single patent or group of patents or generally upon patent protection. GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS The Company is subject to various laws and regulations relating to its business and operations, and various health and safety regulations as established by the Occupational Safety and Health Administration. The Company's operations are also subject to federal, state and local laws and regulations controlling the discharge of materials into or otherwise relating to the protection of the environment. In recent years, laws and regulations protecting the environment have generally become more stringent and have sought to impose greater liability on a larger number of potentially responsible parties. However, the Company is not currently aware of any situation or condition that it believes is likely to have a material adverse effect on its results of operations or financial condition. The Company's expenditures in 1995 in order to comply with applicable environmental laws and regulations were not material, and the Company expects that the costs of compliance with such laws and regulations for 1996 will be minimal. LEGAL PROCEEDINGS The Company is currently undergoing an examination of its tax returns by the Internal Revenue Service ("IRS") who is asserting claims against Sepco 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 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. From time to time the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, except as described above, the Company does not believe that these matters will have a material adverse effect on its business or financial position. 47 58 BUSINESS INFORMATION CONCERNING NEWMAN BACKGROUND Newman was incorporated in the State of New Mexico on June 25, 1981. Newman was in the business of publishing and distributing non-musical audio cassette recordings of fiction and non-fiction books, recorded interviews and seminars and other original spoken word recordings containing ideas, information or entertainment similar to that presented in books. Such audio cassette recordings are commonly known in the publishing industry as "books on cassette". From its inception through 1984, Newman's principal business was the distribution to bookstores and other retailers throughout the United States of books on cassette produced by third parties. Subsequent to the completion of an initial public offering of its common stock in December 1984, Newman expanded its business and began producing its own books on cassette and developing a consumer-direct marketing catalog. Newman also expanded its distribution business to include books on cassette produced by itself as well as those produced by third parties. During 1986, Newman began selling books on cassette to other distributors who resold them to specialty retailers, schools and libraries. By early 1987, however, Newman began experiencing financial difficulties. By late 1987, Newman no longer had sufficient cash flow to meet its obligations as they became due and ceased substantially all of its business operations. By November 1987, Newman had liquidated substantially all of its assets. In May 1991, LITCO purchased an aggregate of 1,792,000 shares of Newman's common stock, or approximately 34% of Newman's outstanding capital stock from certain officers of Newman for $5,000. In connection with this transaction, the two existing members of Newman's Board of Directors appointed Mr. Glenn A. Little (an officer, director and principal shareholder of LITCO) and Mr. Matthew Blair to the Board of Directors and subsequently resigned as directors and officers of Newman. BANKRUPTCY PROCEEDINGS Filing of Petition; Summary of the Plan of Reorganization. On August 12, 1992, Newman filed a petition (the "Petition") for reorganization under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Western District of Texas (the "Court"). On April 14, 1993, Newman filed with the Court a Plan of Reorganization (the "Plan"). The Court entered an order confirming the Plan on September 13, 1993. The Plan generally provided as follows: - Newman's unsecured creditors were given the option of receiving cash or a combination of common stock of the reorganized Newman (the "Newman Common Stock") and warrants to purchase Newman Common Stock. Creditors that elected to receive cash were paid $5,010 as a group. Creditors that elected to receive Newman Common Stock and warrants each received four shares of Newman Common Stock and four each of Class A, B and C Warrants (each as hereinafter defined) for each dollar of their respective claims filed. The maximum number of securities that would be issued for any one claim was 7,500 shares of Newman Common Stock and 7,500 each of Class A, B and C Warrants. All creditors electing to receive common stock and warrants were issued a minimum of 100 shares of Newman Common Stock and 100 each of Class A, B and C Warrants. - Holders of Newman's common stock outstanding prior to the filing of the Petition (the "Pre-petition Common Stock") were designated as a separate class under the Plan and allowed to voluntarily participate in the Plan by paying a $20 administrative fee directly to Newman's transfer agent. Shareholders that elected to participate in the Plan each received 500 shares of Newman Common Stock and 1,000 each of Class A, B and C Warrants, regardless of the number of shares of Pre-petition Common Stock held. All shares of Pre-petition Common Stock held by shareholders that did not elect to participate in the Plan were canceled. - Newman's creditors and holders of Pre-petition Common Stock were given until March 22, 1994 to subscribe to common stock and warrants. A total of 332,500 shares of Newman Common Stock and 650,000 each of Class A, B and C warrants were issued under the Plan to such creditors and holders of Pre-petition Common Stock. 48 59 - Under the Plan, LITCO contributed $20,000 to Newman and was designated as a separate class. LITCO returned to Newman's treasury the 1,792,000 shares of Pre-petition Common Stock that it had purchased in March 1992 and received 500,000 shares of Newman Common Stock and 1,000,000 each of Class A, B and C Warrants. Description of the Warrants Issued Pursuant to the Plan of Reorganization. The Plan provided for the issuance of the three following classes of warrants to purchase shares of Newman Common Stock: - Class A Warrant. Each class A warrant (the "Class A Warrant"), which are now expired, allowed the holder to purchase one share of Newman Common Stock at $.50 per share for a period of 12 months from November 22, 1993. - Class B Warrant. Each class B warrant (the "Class B Warrant"), which are now expired, allowed the holder to purchase one share of Newman Common Stock at $1.00 per share for a period of 24 months from November 22, 1993. - Class C Warrant. Each class C warrant (the "Class C Warrant") allows the holder to purchase one share of Newman Common Stock at $2.00 per share for a period of 36 months from November 22, 1993. On October 1, 1994, the Newman Board of Directors extended the exercise period of the Company's Class A Warrants. Accordingly, this extension allowed LITCO, a company controlled by Glenn A. Little, an additional 12 months in which to exercise 1,000,000 Class A Warrants. LITCO exercised 6,000 and 14,000 Class A Warrants on July 14, 1995 and November 20, 1995, respectively. CURRENT BUSINESS OF NEWMAN At this time, the business purpose of Newman is to obtain an acquisition or merger transaction with a business which Newman believes has significant growth potential, thereby allowing its shareholders to benefit by owning an interest in a viable business enterprise. Since Newman has no significant assets or operations, its principal potential for profits comes solely from operations it may receive in an acquisition or merger transaction. Newman is not currently involved in any pending litigation. Newman is a New Mexico corporation and its principal office is located at 211 West Wall Street, Midland, Texas 79701, and its telephone number is (915) 682-1761. MARKET FOR THE COMPANY'S STOCK, SEPCO COMMON STOCK AND NEWMAN COMMON STOCK AND RELATED SHAREHOLDER MATTERS THE COMPANY There is no current public market for the Common Stock, Series A Preferred Stock or Series B Convertible Preferred Stock, and there is no assurance that such a market will develop. The Company intends to apply for quotation of the Common Stock on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. upon effectiveness of the Registration Statement. See "Risk Factors -- No Public Market; Possible Volatility of Stock Price". Upon consummation of the Reorganization, the Company will have 15,987,900 shares of Common Stock outstanding, approximately 9,398,400 shares of which will be held by affiliates of the Company and will be subject to the resale limitations of Rule 144 promulgated under the Securities Act. In general, under Rule 144, as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years, including an "affiliate," is entitled to sell, within any three-month period, a number of his restricted shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Common Stock or (ii) an amount equal to the average weekly reported volume of trading in such shares during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner of sale limitations, notice requirements and the availability of current public 49 60 information about the Company. A person (or persons whose shares are aggregated) who is not deemed an "affiliate" of the Company and who has beneficially owned restricted shares for at least three years generally is entitled to sell such shares under Rule 144 are thereafter freely tradable without restrictions or registration under the Securities Act, unless thereafter held by an "affiliate" of the Company. SEPCO There is no public market for the Sepco Common Stock. NEWMAN The Newman Common Stock has been quoted on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. under the trading symbol "NWMC" since October 14, 1994. However, the Company believes that such quotations have been limited and sporadic and therefore do not constitute an "established public trading market" under Item 201 of Regulation S-K of the Securities Act. The following table sets forth the range of high and low closing bid prices for the Newman Common Stock for the periods indicated. Quotations represent inter-dealer prices, do not include retail markups, markdowns or commissions and may not represent actual transactions.
HIGH LOW ---- ---- FISCAL 1994 First Quarter.............................................. $.25 $.25 Second Quarter............................................. .25 .25 Third Quarter.............................................. .25 .25 Fourth Quarter............................................. .25 .25 FISCAL 1995 First Quarter.............................................. .25 .25 Second Quarter............................................. .25 .25 Third Quarter.............................................. .25 .25 Fourth Quarter............................................. .25 .25 FISCAL 1996 First Quarter.............................................. .25 .25 Second Quarter............................................. .25 .25 Third Quarter (to August 9, 1996).......................... .25 .25
On August 1, 1996, there were approximately 193 record shareholders of the Newman Common Stock. Upon consummation of the Merger, Newman shareholders will own shares of the Common Stock and Newman, as the surviving entity of the Newman Merger, will be a wholly-owned non-operating subsidiary of the Company. DIVIDEND POLICY Neither the Company nor Newman has paid or declared any dividends on their respective securities as of a recent date. Sepco has paid a monthly dividend of $.05 per share on 15,000 shares of Sepco Class A Convertible Preferred Stock from October 1995 through December 1995 and $.50 per share on 19,500 shares of Sepco Class A Preferred Stock since January 1996. The terms of the Convertible Preferred Stock provide that the Company shall pay monthly dividends on the Convertible Preferred Stock equal to an annual rate of 6% of the stated value thereof, $100 per share. 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 which do not exceed $117,000 in the aggregate in any fiscal year. Accordingly, 50 61 the Company does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the success of the Company's business activities, regulatory and capital requirements, the general financial condition of the Company and general business conditions. MANAGEMENT The following table sets forth certain information about the executive officers and directors of the Company. All directors of the Company hold office until the next annual meeting of shareholders or until their respective successors have been elected and qualified. Executive officers are elected by the Company's Board of Directors to hold office until their respective successors are elected and qualified.
NAME AGE POSITION(S) ----------------------------------------- ---------------------------------------- David R. Little....................... 44 Chairman of the Board, Chief Executive Officer and Director Gary A. Allcorn....................... 43 Senior Vice President/Finance Jerry J. Jones........................ 57 Senior Vice President/Corporate Development and Director Bryan H. Wimberly..................... 57 Senior Vice President/Pump, Bearing, Power Transmission and Valve Automation Group and Director Cletus Davis.......................... 66 Director Kenneth H. Miller..................... 57 Director Thomas V. Orr......................... 46 Director
Set forth below is a description of the backgrounds of the executive officers and directors of the Company. David R. Little has served as a Director, Chairman of the Board and Chief Executive Officer of the Company since its incorporation in July 1996 and has also held these positions with Sepco since 1986 and with Sepco's wholly-owned subsidiary, Bayou Pumps, Inc., since December 1995. Mr. Little has been employed by Sepco since 1975 in various capacities, including Staff Accountant, Controller, Vice President/Finance and President. Gary A. Allcorn has served as Senior Vice President/Finance of the Company since its incorporation in July 1996 and has also held this position with Sepco since June 1995 and with Bayou Pumps, Inc. since December 1995. Mr. Allcorn has been employed by Sepco since 1985 in various capacities, including Vice President/Finance and Chief Financial Officer. Jerry J. Jones has served as a Director and Senior Vice President/Corporate Development of the Company since its incorporation in July 1996. Mr. Jones has also served as a Director of Sepco since 1986 and as Senior Vice President/Corporate Marketing of Sepco since June 1995. From February 1993 to June 1995, Mr. Jones served as President of T.L. Walker Bearing Group, a subsidiary of Sepco. Prior to his employment with Sepco, Mr. Jones served as President and Chief Executive Officer of the Energy Partners, Inc./Perry Oceanographics, a renewable energy development company and offshore underwater equipment manufacturer, from November 1989 to December 1992. Bryan H. Wimberly has served as a Director and Senior Vice President/Pump, Bearing, Power Transmission and Valve Automation Group of the Company since its incorporation in July 1996. Mr. Wimberly has also served as a Director of Sepco since 1987 and the President and Chief Operating Officer of Sepco since October 1995. Mr. Wimberly has been employed by Sepco since 1987 in various capacities, including Senior Vice President/Operations. 51 62 Cletus Davis has served as a Director of the Company since its incorporation in July 1996. Mr. Davis has also served as a Director of Sepco since May 7, 1996. Mr. Davis is an attorney practicing in the areas of commercial real estate, banking, corporate, estate planning and general litigation and is also a trained mediator. From May 1988 to February 1992, Mr. Davis was a member of the law firm of Wood, Lucksinger & Epstein. Since March 1992, Mr. Davis has practiced law with the law firm of Cletus Davis, P.C. Kenneth H. Miller has served as a Director of the Company since its incorporation in July 1996. Mr. Miller has also served as a Director of Sepco since April 1989. Mr. Miller is a Certified Public Accountant and has been a solo practitioner since 1983. Thomas V. Orr has served as a Director of the Company since its incorporation in July 1996. Mr. Orr has also served as a Director of Sepco since May 1996. Mr. Orr has served as Senior Vice President and Divisional Manager of Morgan Keegan, Inc., a full service brokerage firm, since February 1995. From June 1990 to January 1995, Mr. Orr served as Divisional Sales Manager for two years and Branch Office Manager for three years for PaineWebber, Inc., an investment banking firm. BOARD OF DIRECTORS' COMPENSATION The Company's Bylaws provide that directors may be paid their expenses, if any, and may be paid a fixed sum for attendance of each Board of Directors meeting. The Company pays each non-employee director $1,000 per meeting attended, plus expenses. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has two committees, an Audit Committee and a Compensation Committee, each composed of at least three independent directors. The Audit Committee, composed of Messrs. Davis, Miller and Orr, makes recommendations to the Board of Directors on matters regarding the independent public accountants of the Company and the annual audit of the Company's financial statements and accounts. The Compensation Committee, composed of Messrs. Davis, Miller and Orr, will make recommendations to the Board of Directors regarding compensation for the Company's executive officers, directors, employees, consultants and agents, and will act as the administrative committee for any stock plan of the Company, including the Long-Term Incentive Plan. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement (the "Little Employment Agreement"), effective July 1, 1996, with Mr. Little. The Little Employment Agreement is for a term of three years, renewable annually for a term to extend three years from such renewal date. The Little Employment Agreement provides for compensation in a minimum amount of $260,000 per annum, to be reviewed at least annually for possible increases, monthly bonuses equal to 3% of the profit before tax of Sepco as shown on the books and records of Sepco at the end of each month, and other perquisites in accordance with Sepco policy. In the event Mr. Little terminates his employment for "Good Reason" (as defined herein), or is terminated by the Company for other than "Good Cause" (as defined herein), Mr. Little would receive a cash lump sum payment equal to the sum of (i) the base salary for the remainder of the employment period under the Little Employment Agreement, (ii) an amount equal to the sum of the most recent 12 months of bonuses paid to him, (iii) two times the sum of his current annual base salary plus the total of the most recent 12 months of bonuses, (iv) all compensation previously deferred and any accrued interest thereon, and any accrued vacation pay not yet paid by the Company and (v) continuation of benefits under the Company's benefit plans for the current employment period. In the event Mr. Little dies, retires or is terminated by the Company for Good Cause, Mr. Little or Mr. Little's estate, as applicable, would receive all payments then due him under the Little Employment Agreement through the date of termination, including a pro rated monthly bonus and any compensation previously deferred. Also, in the event of death, Mr. Little's family shall receive Mr. Little's base salary for 24 months and benefits provided by the Company to surviving family members of the Company's key employees. Mr. Little is also entitled under the Little Employment Agreement to certain gross-up payments if an excise tax is imposed pursuant to Section 49999 of the Internal Revenue Code of 52 63 1986, as amended, which imposes an excise tax on certain severance payments in excess of three times an annualized compensation amount following certain changes in control or any payment or distribution made to either of them. The Little Employment Agreement also contains non-competition and non-disclosure provisions. In the event Mr. Little were to be terminated without cause, he currently would be entitled to receive approximately $1.1 million under this agreement. The term "Good Reason" is defined in the Little Employment Agreement to mean (i) a change in the nature or scope of the functions, powers, authority, duties or responsibilities of Mr. Little, unless remedied by the Company; (ii) any failure by the Company to pay any form of compensation for which the Little Employment Agreement provides, unless remedied by the Company; (iii) requiring Mr. Little to be based at any office or location more than 30 miles from the current location of the Company, other than travel reasonably required in the performance of Mr. Little's responsibilities; (iv) any purported termination by the Company of Mr. Little's employment other than due to Mr. Little's death or for Good Cause; or (v) any failure of the Company to require a successor of the Company to assume the terms of the Little Employment Agreement. The term "Good Cause" is defined in the Little Employment Agreement and generally means (i) Mr. Little's conviction of a felony that is no longer subject to direct appeal; (ii) Mr. Little's adjudication to be mentally, physically and/or emotionally incapacitated so as to render him incapable of performing his required duties and services that is no longer subject to direct appeal; or (iii) Mr. Little has been found to have committed fraud, theft or willful misfeasance that has materially damaged the Company and such determination is no longer subject to direct appeal. The Company also has entered into employment agreements (each Employment Agreement hereinafter referred to as "Employment Agreement" and the four Employment Agreements hereinafter collectively referred to as "Employment Agreements"), effective as of July 1, 1996, with Messrs. Jerry J. Jones, Bryan H. Wimberly, Bob Evans and Gary A. Allcorn (each hereinafter referred to as "Employee"). Each Employment Agreement is for a term of one year, renewable automatically for a one-year term. The Employment Agreements provide for (i) annual salary ("Salary") in the amounts of $113,000 for Mr. Jones, $130,000 for Mr. Wimberly, $108,000 for Mr. Evans and $110,000 for Mr. Allcorn, and (ii) other perquisites in accordance with Company policy. The Employment Agreements provide for bonuses as follows: (i) Mr. Jones is entitled to a monthly bonus of two percent of the monthly profit before tax of the Company, excluding sales of fixed assets and extraordinary items; (ii) Mr. Wimberly is entitled to a monthly bonus of two percent of the monthly profit before tax of Sepco, excluding sales of fixed assets and extraordinary items; and (iii) Mr. Allcorn is entitled to a quarterly bonus pursuant to the terms and conditions of Sepco's bonus pool. Mr. Evans is not entitled to receive a bonus. In the event Employee terminates his employment for "Good Reason" (as defined below), or is terminated by the Company for other than "Cause" (as defined below), each Employee would receive (i) 12 monthly payments each equal to one month of the Salary, in the case of Messrs. Jones, Wimberly and Allcorn, and six monthly payments each equal to one month of Salary, in the case of Mr. Evans, (ii) except for Mr. Evans, a termination bonus equal to (A) the previous 12 monthly bonuses, in the case of Messrs. Jones and Wimberly, and (B) the previous four quarterly bonuses, in the case of Mr. Allcorn, and (iii) any other payments due through the date of termination. In the event Employee dies, becomes disabled, terminates the Employment Agreement with notice or the Employment Agreement is terminated by the Company for Cause, Employee or Employee's estate, as applicable, would receive all payments then due him under the Employment Agreement through the date of termination. The Employment Agreements contain non-competition and non-disclosure provisions. The term "Good Reason" is defined in each Employment Agreement to mean (i) any failure of the Company to comply with any material provisions of the applicable Employment Agreement unless remedied by the Company; (ii) failure by the Company to pay any form of compensation for which the Employment Agreement provides, unless remedied by the Company; or (iii) any failure of the Company to obtain an agreement from a successor of the Company to assume the terms of the Employment Agreement. The term "Cause" is defined in each Employment Agreement and generally means (i) Employee's conviction of a felony or crime involving moral turpitude; (ii) Employee has been found to have committed fraud, dishonesty, gross negligence, willful misconduct or conduct that is unprofessional, unethical or detrimental to the 53 64 reputation, character or standing of the Company; (iii) Employee's failure or refusal to comply with Company's policies, standards and regulations; or (iv) Employee's failure to faithfully and diligently perform the duties or comply with the provisions of the applicable Employment Agreement. EXECUTIVE COMPENSATION The following table sets forth the cash and non-cash compensation paid by Sepco to its Chief Executive Officer and its three other most highly compensated executive officers for the year ended December 31, 1995. Each of the individuals set forth below will serve in the same or similar capacities for the Company. None of Sepco's other officers and directors received cash or non-cash compensation in excess of $100,000 for the fiscal year ended December 31, 1995. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM ------------------------------------ COMPENSATION NAME AND OTHER ANNUAL AWARDS PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS(1) - ------------------------------------- ---- -------- -------- ------------ --------------- David R. Little...................... 1995 $222,567 $131,888 $ -- 200,000 Chief Executive Officer Jerry J. Jones....................... 1995 113,330 67,503 357,216 89,800 Senior Vice President/Corporate Development Bryan H. Wimberly.................... 1995 121,967 92,589 -- 12,200 Senior Vice President/Operations Gary A. Allcorn...................... 1995 103,707 9,059 -- -- Senior Vice President/Finance
- --------------- (1) Under the terms of the Sepco Merger, each share of Sepco Class A Common Stock will be converted into 16 shares of Common Stock. Assuming such conversion, the number of shares of Common Stock underlying such options held by Messrs. Little, Jones and Wimberly will be 3,200,000, 1,436,800 and 195,200 shares, respectively. The following table sets forth certain information regarding each exercise of stock options by certain of Sepco's executive officers during the fiscal year ended December 31, 1995. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT SHARES ACQUIRED VALUE FISCAL YEAR-END FISCAL YEAR-END NAME ON EXERCISE REALIZED (EXERCISABLE)(1) (EXERCISABLE)(2) - ------------------------------ --------------- -------- ---------------------- -------------------- David R. Little............... -- $ -- 200,000 $320,000 Jerry J. Jones................ 89,800 357,216 89,800 195,764 Bryan H. Wimberly............. -- -- 12,200 34,038
- --------------- (1) Under the terms of the Sepco Merger, each share of Sepco Class A Common Stock will be converted into 16 shares of Common Stock. Assuming such conversion, the number of shares of Common Stock underlying such options held by Messrs. Little, Jones and Wimberly will be 3,200,000, 1,436,800 and 195,200 shares, respectively. The options are fully vested. (2) The value of unexercised options at fiscal year end reported above was calculated using the value of the Sepco Class A Common Stock, as determined by an independent appraiser for purposes of valuing shares of Sepco Common Stock held by the Sepco ESOP. 54 65 The following table sets forth certain information regarding stock options granted by Sepco to certain of its executive officers during the fiscal year ended December 31, 1995. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE - ----------------------------------------------------------------------------- VALUE AT ASSUMED ANNUAL NUMBER OF PERCENT OF TOTAL RATES OF SECURITIES OPTIONS STOCK PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4) OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------ NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10% - ---------------------- ---------- ---------------- --------- ---------- -------- ---------- David R. Little....... 200,000(1) 66% $7.14 10/24/2005 $898,062 $2,275,864 Jerry J. Jones........ 89,800(2) 30 6.56 08/23/2000 162,754 359,644 Brian H. Wimberly..... 12,200(3) 4 5.90 03/31/2000 20,055 44,317
- --------------- (1) The options is a non-qualified stock option granted on October 24, 1995 for a term of ten years, subject to earlier termination upon termination of employment. At the date of grant, the market value per share of the Sepco Class A Common Stock was equal to the exercise price. The option is fully vested. Pursuant to the terms of the Sepco Merger, the option will become exercisable for 3,200,000 shares of Common Stock at an exercise price of $.44625 per share. (2) The option is a non-qualified stock option granted on August 23, 1995, for a term of five years, subject to earlier termination upon termination of employment. At the date of grant, the market value per share of the Sepco Class A Common Stock was equal to the exercise price. The option is fully vested. Pursuant to the terms of the Sepco Merger, the option will become exercisable for 1,436,800 shares of Common Stock at an exercise price of $.41 per share. (3) The option is a non-qualified stock option granted on March 31, 1995, for a term of five years, subject to earlier termination upon termination of employment. At the date of grant, the market value per share of the Sepco Class A Common Stock was equal to the exercise price. The option is fully vested. Pursuant to the terms of the Sepco Merger, the option will become exercisable for 195,200 shares of Common Stock at an exercise price of $.36875 per share. (4) The grant date present value reported above was calculated using the value of the stock based upon an appraisal thereof for ESOP purposes at December 31, 1995. BENEFIT PLANS THE SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN General. The Sepco Industries, Inc. Employee Stock Ownership Plan (the "Sepco ESOP") was established by Sepco in January 1985, as subsequently effective on January 1, 1993. Under the Sepco ESOP, Sepco may make annual contributions to a trust (the "Trust") for the benefit of eligible employees. Contributions to the Trust historically have been invested primarily in the Sepco Class B Common Stock. As a result of the Sepco Merger, the 176,900 shares of Sepco Class B Common Stock currently held in the Trust will be converted into an aggregate of 3,206,000 shares of Common Stock and the 38,900 shares of Sepco Class A Common Stock currently held in the Trust will be converted into an aggregate of 619,200 shares of Common Stock. Subsequent to the completion of the Reorganization, the Company anticipates that contributions to the Sepco ESOP will be invested primarily in the Common Stock. In addition, the Company anticipates that following the Reorganization, certain modifications will be made to the Sepco ESOP to allow the employees of the Company and any other subsidiaries to participate in the Plan. The Plan is qualified under the Code. The Sepco ESOP has obtained a favorable determination letter from the IRS and Sepco believes that the Plan continues to so qualify. Administration. The Sepco ESOP is administered by a plan administrator, currently David R. Little. In addition, certain administrative functions are performed by employees of Sepco. No such employee receives compensation from the Sepco ESOP for performing such functions. All other administrative expenses are paid for by the Sepco ESOP. Following the Reorganization, the Company's Compensation Committee will serve as administrator of the Sepco ESOP. 55 66 The Sepco ESOP trustee invests, manages and holds the Sepco ESOP's assets. The Trust provides for pass-through voting rights to the Sepco ESOP participants with respect to all shares held by the Trust when required by the Employee Retirement Income Security Act of 1974, as amended. Contributions. The amount and form of the annual contribution is within the discretion of Sepco's board of directors. Such contributions are limited to a maximum of 15% of the total compensation paid to all participants eligible to receive an allocation during the fiscal year. Sepco contributed $150,000 for each of the years ended December 31, 1995, 1994 and 1993. Eligibility, Vesting and Payment of Benefits. An employee becomes eligible to participate in the Plan after 12 consecutive months of employment, provided the employee worked at least 1,000 hours during such 12-month period. Benefits vested in a participant will be distributed upon the participant's separation from service, retirement, disability or death. Participants' benefits vest based on the number of years of service in annual 20% increments beginning on the date on which the participant completes three years of service. A participant may borrow up to 50% of the vested balance of his or her account, up to a maximum of $50,000. Promissory notes to evidence such borrowings bear interest at reasonable rates and are secured by the participant's vested account balance. Termination. Upon termination of the Sepco ESOP (if not replaced by a comparable employee benefit plan), participants are entitled to receive all amounts then credited to their accounts after payment of all expenses and adjustments for profits and losses to the date of distribution. NONQUALIFIED STOCK OPTION AGREEMENTS Sepco is currently a party to certain agreements ("Nonqualified Stock Option Agreements"), pursuant to which options to purchase shares of Sepco Common Stock have been granted to certain executive officers and directors of the Company. Each of the Nonqualified Stock Option Agreements between Sepco and each of Messrs. Little, Jones and Wimberly became effective as of March 1996 and amended and replaced existing stock option agreements to eliminate a provision that would permit the option holder to require Sepco to purchase, at book value, the shares of stock issued upon exercise of the option. Each of the options in the Nonqualified Stock Option Agreements described below were granted by Sepco and were exercisable for shares of Sepco Class A Common Stock. Pursuant to the Sepco Merger, the options are exercisable for shares of Common Stock. Nonqualified Stock Option Agreements Pursuant to a Non-Qualified Stock Option Agreement, Mr. Little received a nonqualified option to purchase the equivalent of 3,200,000 shares of Common Stock at an exercise price of $0.44625 per share exercisable until October 24, 2005. Such option became exercisable as of the date of grant. Pursuant to a Non-Qualified Stock Option Agreement, Mr. Jones received a nonqualified option to purchase the equivalent of 1,436,800 shares of Common Stock at an exercise price of $0.41 per share exercisable until August 23, 2000. Such option became exercisable as of the date of grant. Pursuant to a Non-Qualified Stock Option Agreement, Mr. Wimberly received a nonqualified option to purchase the equivalent of 195,200 shares of Common Stock at an exercise price of $0.36875 per share exercisable until March 31, 2000. Such option became exercisable as of the date of grant. Pursuant to Non-Qualified Stock Option Agreements, each of Messrs. Davis, Miller and Orr received nonqualified options to purchase the equivalent of 16,000 shares of Common Stock at an exercise price of $0.578125 per share exercisable until March 30, 1999. Such options became exercisable as of the date of grant. LONG-TERM INCENTIVE PLAN In August 1996, the Company established the Index, Inc. Long-Term Incentive Plan (the "LTIP"). The LTIP is intended to advance the best interests of the Company, its subsidiaries and its shareholders by 56 67 attracting, retaining and motivating key employees. The LTIP provides for the grant of stock options (which may be non-qualified stock options or incentive stock options for tax purposes), stock appreciation rights issued independent of or in tandem with such options ("SARs"), restricted stock awards and performance awards to certain key employees of the Company and its subsidiaries, thereby increasing the personal stake of such key employees in the continued success and growth of the Company. It is anticipated that approximately 30 key employees of the Company and its subsidiaries will initially be eligible to participate in the LTIP. Administration The LTIP will be administered by the Board of Directors of the Company or the Compensation Committee or other designated committee of the Board of Directors, which consists solely of two or more nonemployee directors of the Company who are intended to be "Non-Employee Directors" within the meaning of Rule 16b-3 under the Exchange Act (the Board of Directors of such committee being referred to as the "Committee"). The Committee will have broad authority to interpret and administer the LTIP, including the power to grant and modify awards and the power to limit or eliminate its discretion as it may deem advisable to comply with or obtain preferential treatment under any applicable tax or other law, rule or regulation. The Committee will also have broad authority to accelerate the vesting of an award or the time at which any award is exercisable or to waive any condition or restriction on the vesting, exercise or receipt of any award. The Board of Directors may at any time amend, suspend, discontinue or terminate the LTIP without shareholder approval or approval of participants, subject to certain limitations. Shares Subject to LTIP Initially, 800,000 shares of Common Stock (approximately 5% of the current outstanding shares of Common Stock) will be available for issuance under the LTIP. In addition, as of January 1 of each year the LTIP is in effect, if the total number of shares of Common Stock issued and outstanding, not including any shares issued under the LTIP, exceeds the total number of shares of Common Stock issued and outstanding as of January 1 of the preceding year (or, for 1996, as of the Effective Date assuming all shares issued pursuant to the Sepco Merger and Newman Merger are issued), the number of shares available will be increased by an amount such that the total number of shares available for issuance under the LTIP equals 5% of the total number of shares of Common Stock outstanding, not including any shares issued under the LTIP. Lapsed, forfeited or cancelled awards will not count against these limits. Cash exercises of SARs and cash settlement of other awards will also not be counted against these limits but the total number of SARs and other awards settled in cash shall not exceed the total number of shares authorized for issuance under the LTIP (without reduction for issuances). The aggregate number of shares of Common Stock subject to stock options or SARs that may be granted to any one participant in any one year under the LTIP shall be 400,000 (subject to certain adjustment provisions relating to changes in capitalization). The aggregate number of shares of Common Stock that may be granted to any one participant in any one year in respect of restricted stock shall be 400,000 (subject to certain adjustment provisions relating to changes in capitalization). The aggregate number of shares of Common Stock that may be received by any one participant in any one year in respect of a performance award shall be 400,000 (subject to certain adjustment provisions relating to changes in capitalization) and the aggregate amount of cash that may be received by any one participant in any one year in respect to a performance award shall be $500,000. Stock Options The Committee is authorized to determine the terms and conditions of all option grants, which may be of incentive stock options subject to the limits of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or non-qualified stock options. The aggregate number of shares of Common Stock that are available for incentive stock options granted under the LTIP is 800,000 (subject to certain adjustment provisions relating to changes in capitalization). Stock options may be awarded subject to time, performance or other vesting limitations imposed by the Committee. The term of an incentive stock option shall not exceed ten years from date of grant. The exercise price of an option shall be determined by the Committee upon the 57 68 option grant, provided that the exercise price of incentive stock options shall be no less than the fair market value of the Common Stock on the date of grant. Payment of the exercise price may be made in a manner specified by the Committee (which may include payment in cash, Common Stock, a combination thereof, or by "cashless exercise"). Stock Appreciation Rights The Committee is authorized to grant SARs independent of or in tandem with options under the LTIP. The terms, conditions and exercise price of SARs granted independent of options under the LTIP will be determined by the Committee on the date of grant. A tandem SAR can be exercised only to the extent the option with respect to which it is granted is then exercisable and is subject to the same terms and conditions as the option to which it is related. An option related to a tandem SAR will terminate automatically upon exercise of the tandem SAR. Similarly, when an option is exercised, the tandem SARs relating to the shares covered by such option exercise shall terminate. Any tandem SAR which is outstanding on the last day of the term of the related option will be automatically exercised on such date for cash. Upon exercise of an SAR, the holder will be entitled to receive, for the number of shares referenced by the SAR, an amount per share (the "appreciation") equal to the difference between the base price per share (which shall be the exercise price per share of the related option in the case of a tandem SAR) and the fair market value (as determined by the Committee) of a share of Common Stock on the date of exercise of the SAR. The appreciation will be payable in cash, Common Stock or a combination of both, at the discretion of the Committee. Restricted Stock The Committee is authorized to award restricted stock under the LTIP subject to such terms and conditions as the Committee may determine consistent with the LTIP. The Committee has the authority to determine the number of shares of restricted stock to be awarded, the price, if any, to be paid by the recipient of the restricted stock and the date or dates on which the restricted stock will vest. The number of shares and vesting of restricted stock may be conditioned upon the completion of a specified period of service with the Company or its subsidiaries or upon the attainment of specified performance objectives based on increases in share prices, operating income, margin, sales increases on a Company wide, division, product line or other basis, net income before or after taxes or before or after extraordinary charges, completions of successful acquisitions, implementation of strategic expansions, net income or cash flow thresholds, return on common equity or any combination of the foregoing. Stock certificates representing the restricted stock granted to an eligible employee may be registered in the employee's name or held by the Company prior to the achievement of certain criteria. The Committee will determine whether an employee will have the right to vote and/or receive dividends on the restricted stock before it vests. No share of restricted stock may be sold, transferred, assigned or pledged by the employee until such share has vested in accordance with the terms of the restricted stock award. Except as otherwise specified in the grant of a restricted stock award, in the event of an employee's termination of employment before all his or her restricted stock has vested, or in the event other conditions to the vesting of restricted stock have not been satisfied prior to any deadline for the satisfaction of such conditions set forth in the award, the shares of restricted stock that have not vested will be forfeited and any purchase price paid by the employee will be returned to the employee. At the time the restricted stock vests, a certificate for such vested shares will be delivered to the employee (or the beneficiary designated by the employee, in the event of death), free of all restrictions. Performance Awards The Committee is authorized to grant performance awards, which are payable in stock, cash or a combination thereof, at the discretion of the Committee. An employee to whom a performance award is granted will be given achievement objectives to be reached over a specified period of time, the "performance period." A minimum level of acceptable achievement will also be established. Achievement objectives may be 58 69 described either in terms of Company-wide performance or in terms that are related to the performance of the employee or of the division, subsidiary, department or function within the Company in which the employee is employed. The Committee has the authority to determine the size of the award, frequency of awards, the date or dates when awards vest, the performance periods and the specific performance objectives to be achieved in order to receive the award. Performance objectives, however, will be based on increases in share prices, operating income, margin, sales increases on a Company wide, division, product line or other basis, net income before or after taxes or before or after extraordinary charges, completions of successful acquisitions, implementation of strategic expansions, net income or cash flow thresholds, return on common equity or any combination of the foregoing. If at the end of the performance period the specified objectives have been fully attained, the employee will be deemed to have fully earned the performance award. If such objectives have been partially attained, the employee will be deemed to have partly earned the performance award and will become entitled to receive a portion of the total award. If the required minimum level of achievement has not been met, the employee will not be entitled to any part of the performance award. If a performance award is granted after the start of a performance period, the award will be reduced to reflect the portion of the performance period during which the award was in effect. An employee who, by reason of death, disability or retirement, terminates employment before the end of the performance period will be entitled to receive, to the extent earned, a portion of the award which is proportional to the portion of the performance period during which the employee was employed. An employee who terminates employment for any other reason will not be entitled to any part of the award unless the Committee determines otherwise; however, the Committee may in no event pay the employee more than that portion of the award which is proportional to his or her period of actual service. Change of Control Upon the occurrence of a "Change of Control" (as defined below) of the Company, all outstanding shares of restricted stock and performance awards will immediately vest. All stock options and all SARs granted under the LTIP and held by then-current employees will become immediately exercisable and will remain exercisable for three years (but not beyond their expiration date) following the employee's termination of employment for any reason other than for dishonesty, conviction of a felony, wilful unauthorized disclosure of confidential information or wilful refusal to perform the duties of such employee's position. In addition, each participant in the LTIP will receive the maximum performance award he or she could have earned for the proportionate part of the performance period prior to the Change of Control and will retain the right to earn any additional portion of his or her award if he or she remains in the Company's employ. A "Change of Control" shall be deemed to have occurred if: (1) any Person (as defined below), other than a Designated Person, is or becomes the Beneficial Owner (as defined below) of securities of the Company representing 35% or more of the Voting Power (as defined below); (2) there shall occur a change in the composition of a majority of the Board of Directors within any period of four consecutive years which change shall not have been approved by a majority of the Board of Directors as constituted immediately prior to the commencement of such period; (3) at any meeting of the shareholders of the Company called for the purpose of electing directors, more than one of the persons nominated by the Board of Directors for election as directors shall fail to be elected; or (4) the shareholders of the Company approve a merger, consolidation, sale of substantially all assets or other reorganization of the Company, other than a reincorporation, in which the Company does not survive. For purposes of the LTIP, (i) "Person" shall have the meaning set forth in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on August 15, 1996, (ii) "Beneficial Owner" 59 70 shall have the meaning set forth in Rules 13d-3 and 13d-5 promulgated under the Exchange Act on August 15, 1996; (iii) "Voting Power" shall mean the voting power of the outstanding securities of the Company having the right under ordinary circumstances to vote at an election of the Board of Directors; and (iv) "Designated Person" shall mean any Person who at the Effective Date is a Beneficial Owner of 10% or more of the Common Stock or whose Beneficial Ownership of securities is solely the result of such Person acquiring securities as an underwriter in an underwritten public offering of such securities. Grants In anticipation of the Reorganization, the Company has granted to 24 employees of the Company options to purchase an aggregate of 456,000 shares of Common Stock at an exercise price of $.578125 per share. The exercise price is based on the fair market value of the stock using information from an independent appraisal that established the value of the Sepco Common Stock at December 31, 1995 and was used by Sepco in establishing the conversion ratio for the Class A Common Stock and Class B Common Stock of Sepco. Such grants are subject to the consummation of the Sepco Merger, are for a term of five years from the effective date of the Sepco Merger and are fully vested on the date of the grant. The options are also subject to immediate vesting in the event of a Change of Control of the Company. Of the grants made, Gary Allcorn, Chief Financial Officer of Sepco and the Company, was granted options to purchase an aggregate of 80,000 shares of Common Stock at $.578125 per share. Amendments The Board of Directors may at any time and from time to time and in any respect amend or modify the LTIP. The Administrative Committee shall have the authority to amend any Award to include any provision which, at the time of such amendment, is authorized under the terms of the Plan; however, no outstanding Award may be revoked or altered in a manner unfavorable to the holder without the written consent of the holder. Federal Income Tax Consequences Incentive Stock Options. The grant of incentive stock options under the LTIP to an employee does not result in any income tax consequences. The exercise of an incentive stock option does not result in any income tax consequences to the employee if the incentive stock option is exercised by the employee during his employment with the Company or a subsidiary, or within a specified period after termination of employment. However, the excess of the fair market value of the shares of stock as of the date of exercise over the option price is a tax preference item for purposes of determining an employee's alternative minimum tax. An employee who sells shares acquired pursuant to the exercise of an incentive stock option after the expiration of (i) two years from the date of grant of the incentive stock option and (ii) one year after the transfer of the shares to him (the "Waiting Period") will generally recognize long term capital gain or loss on the sale. An employee who disposes of his incentive stock option shares prior to the expiration of the Waiting Period (an "Early Disposition") generally will recognize ordinary income in the year of sale in an amount equal to the excess, if any, of (a) the lesser of (i) the fair market value of the shares as of the date of exercise or (ii) the amount realized on the sale, over (b) the option price. Any additional amount realized on an Early Disposition should be treated as capital gain to the employee, short or long term, depending on the employee's holding period for the shares. If the shares are sold for less than the option price, the employee will not recognize any ordinary income but will recognize a capital loss, short or long term, depending on the holding period. The Company will not be entitled to a deduction as a result of the grant of an incentive stock option, the exercise of an incentive stock option or the sale of incentive stock option shares after the Waiting Period. If an employee disposes of his incentive stock option shares in an Early Disposition, the Company will be entitled to deduct the amount of ordinary income recognized by the employee. Non-Qualified Stock Options. The grant of non-qualified stock options under the LTIP will not result in the recognition of any taxable income by the employee. An employee will recognize ordinary income on the 60 71 date of exercise of the non-qualified stock option equal to the difference between (i) the fair market value on that date of the shares acquired and (ii) the exercise price. The tax basis of these shares for the purpose of a subsequent sale includes the option price paid and the ordinary income reported on exercise of the option. The income reportable on exercise of the non-qualified stock option is subject to federal and state income and employment tax withholding. Generally, the Company will be entitled to a deduction in the amount reportable as income by the employee on the exercise of a non-qualified stock option. Stock Appreciation Rights. Stock Appreciation Rights granted under the LTIP do not result in taxable income to the employee at that time. The issuance of shares of Common Stock or the payment of cash, without other payment by the recipient, will be treated as additional compensation for services to the Company. The employee will recognize taxable income equal to cash received or the fair market value of the shares on the date of receipt, which becomes the tax basis in a subsequent sale. Generally, the Company will be entitled to a corresponding deduction in an amount equal to the income recognized by the employee. Restricted Stock Grants. Restricted stock granted under the LTIP generally will not be taxed to the recipient, nor deductible by the Company, at the time of grant. Restricted Stock Grants involve the issuance of stock to an employee subject to specified restrictions as to sale or transferability of the stock and/or subject to a substantial risk of forfeiture. On the date the restrictions lapse, or the performance goals are met, and the stock becomes transferable or not subject to a substantial risk of forfeiture, whichever is applicable, the recipient recognizes ordinary income equal to the excess of the fair market value of the stock on that date over the purchase price paid for the stock, if any. The employee's tax basis for the stock includes the amount paid for the stock, if any, and the income recognized. Generally, the Company will be entitled to a corresponding tax deduction in an amount equal to the income recognized by the employee. Performance Awards. Performance awards involve the issuance of shares of stock, cash, or a combination of both, without any payment, as compensation for services to the Company only after satisfaction of specified performance goals established by the Committee and certification by the Committee, prior to payment, that the goals have been satisfied. Generally, the Company will be entitled to a corresponding tax deduction in an amount equal to and in the year income is recognized by the employee. See following discussion of "performance based" compensation. Compensation Deduction Limitation. Under Section 162(m) of the Code the Company's tax deduction for certain compensation paid to designated executives is limited to $1 million per year. These executives include the Chief Executive Officer and the next four highest compensated officers of the Company. Section 162(m) provides an exception from this deduction limitation for certain "performance based" compensation approved by a committee consisting solely of at least two "outside directors". The LTIP is generally designed to be able to satisfy these statutory requirements for stock options and SAR's, when the exercise price is not less than fair market value on the date of grant, and for performance awards (including restricted stock). 61 72 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to the beneficial ownership of each equity security of Sepco and Newman prior to the completion of the Reorganization and with respect to beneficial ownership of the Common Stock and Series B Convertible Preferred Stock after giving effect to the Reorganization by: (i) all persons known to the Company to be the beneficial owner of 5% or more of each of the foregoing equity securities, (ii) each director of the Company, (iii) each executive officer of the Company and (iv) all executive officers and directors of the Company as a group.
PRIOR TO FOLLOWING REORGANIZATION REORGANIZATION --------------------- ---------------------- NAME AND ADDRESS OF NUMBER OF PERCENT NUMBER OF PERCENT BENEFICIAL OWNER(1) SHARES(2) OF CLASS SHARES(2) OF CLASS - ---------------------------------------------------- --------- -------- ---------- -------- Gary A. Allcorn(3) 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Sepco Class A Common Stock........................ 559,999 69.5 Sepco Class B Common Stock........................ 1,474 .8 Sepco Convertible Preferred Stock................. 15,000 76.9 Common Stock...................................... 8,986,698 50.6 Series B Convertible Preferred Stock.............. 15,000 76.9 Kacey Joyce, Andrea Rae, Nicholas David Little 1988 Trusts, Gary A. Allcorn, Trustee(3) 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Sepco Class A Common Stock........................ 533,199 61.7 Sepco Convertible Preferred Stock................. 15,000 76.9 Common Stock...................................... 8,531,184 43.3 Series B Convertible Preferred Stock.............. 15,000 76.9 David R. Little(4) 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Sepco Class A Common Stock........................ 259,800 27.1 Sepco Class B Common Stock........................ 8,800 5.0 Common Stock...................................... 4,316,284 22.5 Bryan H. Wimberly(5) 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Sepco Class A Common Stock........................ 102,400 13.3 Sepco Class B Common Stock........................ 1,753 * Common Stock...................................... 1,670,170 10.3 Jerry J. Jones(6) 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Sepco Class A Common Stock........................ 89,800 10.6 Sepco Class B Common Stock........................ 8* Common Stock...................................... 1,436,945 8.25 SEPCO ESOP 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Sepco Class A Common Stock........................ 38,700 5.1 Sepco Class B Common Stock........................ 176,900 100.0 Common Stock...................................... 3,825,194 23.9
62 73
PRIOR TO FOLLOWING REORGANIZATION REORGANIZATION --------------------- ---------------------- NAME AND ADDRESS OF NUMBER OF PERCENT NUMBER OF PERCENT BENEFICIAL OWNER(1) SHARES(2) OF CLASS SHARES(2) OF CLASS - ---------------------------------------------------- --------- -------- ---------- -------- Thomas V. Orr(7) 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Sepco Class A Common Stock........................ 1,000 * Common Stock...................................... 16,000 * Kenneth H. Miller(8) 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Sepco Class A Common Stock........................ 1,000 * Common Stock...................................... 16,000 * Cletus Davis(9) 580 Westlake Park Blvd., Suite 1100 Houston, Texas 77079 Sepco Class A Common Stock........................ 1,000 * Common Stock...................................... 16,000 * Little & Company(10) 211 West Wall Street Midland, Texas 79701 Newman Common Stock............................... 1,520,000 42.7 Common Stock...................................... 380,000 2.4 Glenn A. Little(10)(11) 211 West Wall Street Midland, Texas 79701 Newman Common Stock............................... 1,520,000 42.7 Common Stock...................................... 380,000 2.4 Patricia de Little(10)(12) 211 West Wall Street Midland, Texas 79701 Newman Common Stock............................... 1,520,000 42.7 Common Stock...................................... 380,000 2.4 Tim Halter(13) Halter Financial Group 4851 LBJ Freeway, Suite 201 Dallas, Texas 75244 Newman Common Stock............................... 1,693,564 66.2 Common Stock...................................... 423,391 2.7 All executive officers and directors as a group (7 persons)(3)(4)(5)(6)(7)(8)(9) Sepco Class A Common Stock........................ 1,014,999 86.5 Sepco Class B Common Stock........................ 12,035 6.8 Sepco Convertible Preferred....................... 15,000 76.9 Common Stock...................................... 16,458,097 72.7 Series B Convertible Preferred.................... 15,000 76.9
- --------------- * Less than 1% (1) Unless otherwise noted, the Company believes that each person named in the table above has sole voting and investment power with respect to all shares beneficially owned by such person. 63 74 (2) Each beneficial owner's percentage ownership is determined by assuming that options, warrants and other convertible securities that are held by such person (but not those held by any other person) and are exercisable or convertible within 60 days have been exercised or converted. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days upon the exercise of options or warrants or conversion or convertible securities. (3) Includes 428,199 shares of Sepco Class A Common Stock and 15,000 shares of Sepco Convertible Preferred Stock owned by the Kacey Joyce, Andrea Rae and Nicholas David Little 1988 Trusts (the "Trusts") for which Mr. Allcorn serves as trustee. Because of this relationship, Mr. Allcorn may be deemed to be the beneficial owner of such shares and the 105,000 shares of Sepco Class A Common Stock issuable upon conversion of the shares of Sepco Convertible Preferred Stock held by the Trusts. Also includes 5,000 shares of Sepco Class A Common Stock issuable upon exercise of an option and 1,474 shares of Sepco Class B Common Stock held of record by the Sepco ESOP for Mr. Allcorn's account. (4) Includes 200,000 shares of Sepco Class A Common Stock issuable to Mr. Little upon exercise of an option and 8,800 shares of Sepco Class B Common Stock held of record by the Sepco ESOP for Mr. Little's account. (5) Includes 12,600 shares of Sepco Class A Common Stock owned by John H. Wimberly [TRUST?] for which Mr. Wimberly is one-third beneficiary and 12,200 shares of Sepco Class A Common Stock issuable upon exercise of an option granted to Mr. Wimberly. Also includes 1,753 shares of Sepco Class B Common Stock held by the Sepco ESOP for Mr. Wimberly's account. (6) Includes 89,800 shares of Sepco Class A Common Stock issuable upon exercise of an option granted to Mr. Jones and 8 shares of Sepco Class B Common Stock held by the Sepco ESOP for Mr. Jones' account. (7) Includes 1,000 shares of Sepco Class A Common Stock issuable upon exercise of an option. (8) Includes 1,000 shares of Sepco Class A Common Stock issuable upon exercise of an option. (9) Includes 1,000 shares of Sepco Class A Common Stock issuable upon exercise of an option. (10) Includes 1,000,000 shares of Newman Common Stock issuable upon exercise of a warrant. (11) Mr. Glenn Little is an officer, director and principal shareholder of LITCO and, therefore, may be deemed to be the beneficial owner of the shares of Newman Common Stock and warrants owned by LITCO. (12) Mrs. Little is the wife of Glenn A. Little and is an officer and director of LITCO and, therefore, may be deemed to be the beneficial owner of the shares of Newman Common Stock and warrants owned by LITCO. (13) Includes 1,693,564 shares of Newman Common Stock held of record by Halter. Mr. Halter is the sole director, officer and shareholder of Halter and, because of such relationships, may be deemed to be the beneficial owner of such shares. 64 75 CERTAIN TRANSACTIONS SEPCO In December 1989, Sepco restructured certain loans previously made by Sepco to David R. Little, Chairman of the Board and Chief Executive Officer of the Company, pursuant to which Mr. Little executed two promissory notes in the amounts of $149,910 and $58,737, respectively, each bearing interest at 9% per annum. The notes require monthly payments of $1,349 and $528, respectively. The outstanding balances of such loans at August 5, 1996, were $127,813 and $50,080, respectively. In December 1993, Sepco loaned Mr. Little approximately $210,940 to purchase 59,080 shares of Sepco Class A Common Stock. The loan bore interest at 6% per annum and provided for annual interest payments and one principal payment upon sale of the stock which secures such loan. The loan was repaid on August 5, 1996. Additionally, Sepco from time to time has made non-interest bearing advances to Mr. Little that as of August 5, 1996 totaled approximately $330,100. The largest aggregate amount of Mr. Little's indebtedness outstanding to Sepco during the year ended December 31, 1995 was approximately $762,500. Mr. Allcorn, Senior Vice President/Finance of the Company, is the trustee of three trusts for the benefit of Mr. Little's children, each of which holds 142,733 shares of Sepco Class A Common Stock and 15,000 shares of Sepco Class A Convertible Preferred Stock. Mr. Allcorn exercises sole voting and investment power over the shares held by such trusts. COMPARISON OF RIGHTS OF SHAREHOLDERS OF SEPCO AND THE COMPANY The rights of the shareholders of Sepco currently are governed by Sepco's articles of incorporation, as amended, Sepco's bylaws and the laws of the State of Texas. The rights of the shareholders of the Company will be governed by the Company's Restated Articles of Incorporation, its Bylaws and the laws of the State of Texas. Pursuant to the Sepco Merger, the shareholders of Sepco will receive securities of the Company, which differ in certain respects from the securities of Sepco. COMMON STOCK The former holders of Sepco Class A Common Stock and Class B Common Stock, as holders of Common Stock, will no longer have the right to a class vote with respect to certain matters that under Texas law require the approval of each class or series of stock. In addition, the holders of Sepco Common Stock currently have the right to approve any changes in the terms of Sepco's preferred stock. The holders of Common Stock do not have the right to approve any changes in the terms of the Series B Convertible Preferred Stock or the Series A Preferred Stock. The holders of Sepco Class B Common Stock currently are entitled to receive $7.5075 per share of Sepco Class B Common Stock held upon the liquidation of Sepco. This liquidation right is in preference to the liquidation rights of the holders of Sepco Class A Convertible Preferred Stock. The holders of Common Stock have no such liquidation rights. See "Description of Company Capital Stock". PREFERRED STOCK The holders of Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock, except as otherwise provided by law, have no right to vote on the election of directors or on any matters presented to the Sepco shareholders. Each share of Series A Preferred Stock and Series B Preferred Stock entitles the holder thereof to one-tenth of a vote on all matters to come before a meeting of the shareholders of the Company. VOTE REQUIRED ON CERTAIN MATTERS The Restated Articles of Incorporation of the Company (the "Company's Articles") provide, as permitted under the TBCA, that with respect to certain matters for which the affirmative vote of the holders of more than a majority of the shares entitled to vote is required by law, the affirmative vote of the holders of only a majority of the shares of the Company shall be required. The Sepco articles of incorporation had no such 65 76 provision and, under the TBCA, for such matters as amendments to the articles of incorporation, mergers and voluntary dissolution of the corporation, the affirmative vote of the holders of two-thirds of the outstanding shares entitled to vote on such matters is required. Under the Company's Articles, the vote of only the holders of a majority of the outstanding shares entitled to vote on such matters is required. If a class or series of outstanding shares of stock of the Company is entitled to vote on such a matter, approval by the affirmative vote of the holders of a majority of the shares within such class or series would be required. COMPARISON OF RIGHTS OF HOLDERS OF NEWMAN COMMON STOCK AND COMMON STOCK After the consummation of the Newman Merger, Newman shareholders will become shareholders of the Company. The rights of the shareholders of the Company will be governed by the Company's Articles, the Company's Bylaws (the "Company's Bylaws") and the laws of the State of Texas. The Company's Articles and the Company's Bylaws are set forth in full as Appendices E and F, respectively to this Proxy Statement/Prospectus. Although it is impractical to note all of the differences between the corporation statutes of Texas and New Mexico, the Company believes that the most significant differences, as they impact the rights of shareholders, are summarized below. The summary does not purport to be complete and is qualified in its entirety by reference to the TBCA and the NMBCA. MERGERS Under the TBCA, shareholders have the right, subject to certain exceptions, to vote on all mergers to which the corporation is a party. In certain circumstances, different classes of securities may be entitled to vote separately as classes with respect to such mergers. Under the Company's Articles, approval of the holders of at least a majority of all outstanding shares entitled to vote is required to approve a merger. Under the NMBCA, approval by the holders of a majority of all outstanding shares is required, unless the articles of incorporation provide otherwise. Newman's current articles of incorporation do not provide otherwise. The approval of the shareholders of the surviving corporation in a merger is not required under Texas law if (i) the corporation is the sole surviving corporation in the merger, (ii) there is no amendment to the surviving corporation's articles of incorporation, (iii) each shareholder holds the same number of shares in the surviving corporation immediately after the merger as prior thereto, and such shares have identical designations, preferences, limitations and relative rights, (iv) the voting power of the shares in the surviving corporation immediately after the merger, plus the voting power of the shares issued in the merger, does not exceed the voting power of the shares outstanding prior to the merger by more than 20%, (v) the number of shares in the surviving corporation outstanding immediately after the merger, plus the shares issued in the merger, does not exceed the number of shares outstanding prior to the merger by more than 20% and (vi) the board of directors of the surviving corporation adopts a resolution approving the plan of merger. Under the NMBCA, a vote of the shareholders is not required if (i) the articles of incorporation of the surviving corporation do not differ except in name from those of the corporation before the merger, (ii) each holder of shares of the surviving corporation which were outstanding immediately before the effective date of the merger is to hold the same number of shares with identical rights immediately thereafter, (iii) the number of voting shares outstanding immediately after the merger, plus the number of voting shares issuable on conversion of other securities issued by virtue of the terms of the merger and on exercise of rights and warrants so issued, will not exceed by more than 20% the number of voting shares outstanding immediately before the merger and (iv) the number of participating shares outstanding immediately after the merger, plus the number of participating shares issuable on conversion of other securities issued by virtue of the terms of the merger and on exercise of rights and warrants so issued, will not exceed by more than 20% the number of participating shares outstanding immediately before the merger. 66 77 APPRAISAL RIGHTS Shareholders of Texas corporations are entitled to exercise certain dissenters' rights in the event of a sale, lease, exchange or other disposition of all, or substantially all, of the property and assets of the corporation, and, with the exceptions discussed below, a merger or consolidation. Shareholders of New Mexico corporations are entitled to exercise certain dissenter's rights in the event of a merger, consolidation, sale, exchange or certain other dispositions of all, or substantially all, of the property and assets of the corporation, and certain amendments to articles of incorporation which materially and adversely affect their rights appurtenant to the dissenting shareholders' shares. See "The Reorganization -- Rights of Dissenting Shareholders". In general, no shareholder vote is required for a sale of all or substantially all of the assets of a Texas corporation under Texas law as long as the corporation continues in business or applies a portion of the proceeds received in the sale to a new business. New Mexico does not have a similar provision. No appraisal rights are available under Texas or New Mexico law for the holders of any shares of a class or series of stock of a Texas or New Mexico corporation which is a party to a merger if that corporation survives the merger and if the merger did not require the vote of the holders of that class or series of such corporation's stock. Texas law also contains a provision which states that shareholders do not have appraisal rights in connection with a merger where, on the record date fixed to determine the shareholders entitled to vote on the merger or consolidation, the stock of the corporation is listed on a national securities exchange or is held of record by more than 2,000 shareholders, unless any of the exceptions discussed below concerning consideration paid to the shareholder for his shares is met. Under Texas law, a shareholder will be entitled to dissent and be paid for his shares if, notwithstanding the above, the shareholder is required to accept for his shares any consideration other than (i) shares of stock of a corporation which, immediately after the effective date of the merger, are listed on a national securities exchange or are held of record by not less than 2,000 shareholders and (ii) cash in lieu of fractional shares otherwise entitled to be received. New Mexico law does not contain any similar provisions. SPECIAL MEETINGS Under the TBCA, a special meeting of shareholders of a Texas corporation may be called by the president, the board of directors, such other persons authorized in the articles of incorporation or shareholders. The Texas Articles provide that the holders of at least 30% of all the votes entitled to be cast are eligible to call a special meeting. Under the NMBCA, a special meeting may be called by a majority of the board of directors, or by shareholders entitled to vote at least 10% of the votes to be cast, or such other persons as authorized by the articles of incorporation or by the bylaws. Newman's current Bylaws do not authorize any other such persons. SHAREHOLDER ACTION WITHOUT A MEETING Under both the TBCA and the NMBCA, shareholders may act without a meeting if a consent in writing to such action is signed by all shareholders entitled to vote. In addition, Texas law permits the articles of incorporation of a Texas corporation to provide that the shareholders may take action without a meeting if a consent in writing to such action is signed by the shareholders having the minimum number of votes that would be necessary to take such action at a meeting. The Texas Articles contain such a provision. The NMBCA does not contain any similar provision. ELECTION OF DIRECTORS Under the TBCA, the number of directors shall be fixed by the articles of incorporation or the bylaws, except with regard to the number of initial directors, which shall be fixed by the articles of incorporation. Under the Company's Articles, no shareholders are entitled to cumulative voting in the election of directors. The TBCA further provides that the number of directors may be increased or decreased from time to time by amendment to, or in the manner provided in, the articles of incorporation or the bylaws, but no 67 78 decrease shall have the effect of shortening the term of an incumbent director. At the first annual meeting of the shareholders and at each annual meeting thereafter, the holders of shares entitled to vote in the election of directors shall elect directors to hold office until the next succeeding annual meeting. Under the NMBCA, the number of directors shall be fixed by the articles of incorporation or the bylaws, except with regard to the number of initial directors, which shall be fixed by the articles of incorporation. The number of directors may be increased or decreased from time to time by amendment to, or in the manner provided in, the articles of incorporation or the bylaws, but no decrease shall have the effect of shortening the term of an incumbent director. At the first annual meeting of the shareholders and at each annual meeting thereafter, the holders of shares entitled to vote in the election of directors shall elect directors to hold office until the next succeeding annual meeting. New Mexico law provides that the articles of incorporation may confer cumulative voting upon its shareholders by an affirmative statement. Newman's articles of incorporation do not confer any such right. VOTING ON OTHER MATTERS Amendments to the Articles of Incorporation. Under the Company's Articles, an amendment to the articles of incorporation requires the approval of the holders of a majority of the outstanding shares of the corporation entitled to vote thereon. If a class or series of outstanding shares is entitled to vote on an amendment, approval by the affirmative vote of the holders of a majority of the shares within such class or series also is required. Under New Mexico law, an amendment to the articles of incorporation requires the approval of the holders of a majority of the outstanding shares of the corporation entitled to vote thereon. If a class or series of outstanding shares is entitled to vote on an amendment, approval by the affirmative vote of the holders of a majority of the shares within such class or series is required. Dissolution of the Corporation. Under the TBCA, the voluntary dissolution of a corporation by an act of the corporation requires the approval of the holders of at least two-thirds of the total outstanding shares of the corporation, unless any class or series is entitled to vote as a class thereon, in which event the resolution shall require the affirmative vote of two-thirds of the shareholders of each class or series. The Company's articles have reduced this vote requirement to a majority of the outstanding shares entitled to vote on the matter. See "Comparison of Rights of Shareholders of Sepco and the Company -- Vote Required on Certain Matters". Under the NMBCA, the voluntary dissolution of a corporation by an act of the corporation requires the approval of the holders of a majority of the total outstanding shares of the corporation, unless any class or series is entitled to vote as a class thereon, in which event the resolution shall require the affirmative vote of a majority of the shareholders of each class or series. DISTRIBUTIONS TO SHAREHOLDERS A Texas corporation may make distributions only out of surplus, which is defined as the excess of net assets of a corporation over its stated capital. Further, a Texas corporation may not make a distribution if after giving effect to the distribution, the corporation would be insolvent. A New Mexico corporation may make distributions as long as after giving effect to the distribution the corporation is able to pay its debts as they come due in the usual course of business or the corporation's total assets are greater than the sum of its total liabilities and (unless the articles of incorporation otherwise permit) the corporation would be able to pay the maximum amount, in any liquidation, on shares of stock having preferential rights in liquidation. Newman's current Articles of Incorporation do not contain such a provision. LIQUIDATION RIGHTS Generally, under Texas and New Mexico law, shareholders are entitled to share ratably in the distribution of assets upon the dissolution of their corporation. Preferred shareholders, if any, typically do not participate in the distribution of assets of a dissolved corporation beyond their established contractual preferences. Once the 68 79 rights of any preferred shareholders have been fully satisfied, common shareholders are entitled to the distribution of any remaining assets. LIMITATION OF LIABILITY AND INDEMNIFICATION Texas and New Mexico law both permit a corporation to set limits on the extent of a director's liability. The TBCA and the NMBCA permit a corporation to indemnify an officer, director, employee and agent who is the defendant or respondent to a proceeding if such person (i) acted in good faith, (ii) reasonably believed that his conduct was in the corporation's best interest if he was acting in his official capacity, and if he was not acting in his official capacity, that his conduct was not opposed to the best interests of the corporation and (iii) had no reason to believe his conduct was unlawful in the case of a criminal proceeding. New Mexico law prohibits indemnification in any respect of a proceeding charging the receipt of improper benefit, or if the director is found liable to the corporation. Texas law allows a corporation to indemnify a director for the reasonable expenses actually incurred by the person in connection with a proceeding finding the director in receipt of improper benefit or liable to the corporation if the director (i) acted in good faith, (ii) reasonably believed that his conduct was in the corporation's best interest and (iii) had no reason to believe his conduct was unlawful in the case of a criminal proceeding. However, Texas law prohibits indemnification in any proceeding where the director is found liable for willful or intentional misconduct in the performance of his duty to the corporation. The Company's Articles authorize indemnification of officers, directors and others to the fullest extent permitted by Texas law. Under Texas law, a corporation may also provide for indemnification of its directors and officers for liabilities not otherwise permitted to be indemnified as long as such indemnity in excess of the indemnification otherwise permitted is approved by shareholders. REMOVAL OF DIRECTORS The TBCA requires that the directors be removed in accordance with the provisions of the bylaws or the articles of incorporation. Otherwise, each director shall hold office for the elected term and until the successor shall have been elected and qualified. The bylaws or the articles of incorporation may provide that at any meeting of shareholders called expressly for the purpose of director removal, any director or the entire board may be removed, with or without cause, by a vote of the holders of a specified portion, not less than a majority, of the shares entitled to vote at an election of directors, subject to any further restrictions on removal that may be contained in the bylaws. The Company's Bylaws contain such a provision. The NMBCA provides that any director can be removed, with or without cause, by a vote of the holders of not less than a majority of shares entitled to vote at an election of directors. In the case of a corporation having cumulative voting, if less than the entire board is to be removed, no one of the directors may be removed if the votes cast against removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors, or, if there are classes of directors, at an election of the class of directors of which he is part. INSPECTION OF BOOKS AND RECORDS The TBCA and the NMBCA both provide that a corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders and board of directors. The corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shareholders and the number and the class of the shares held by each. Further, both the TBCA and the NMBCA provide that any person who has been a shareholder for at least six months preceding his demand, or shall be the holder of at least six months preceding his demand, or who is the holder of at least 5% of all of the outstanding shares of a corporation, is entitled to personally, or by agent or attorney, examine a corporation's relevant books and records for any proper purpose. The shareholder must issue a written demand stating the purpose of the inspection, and may examine the books and records at a reasonable time and make extracts therefrom. 69 80 DESCRIPTION OF COMPANY CAPITAL STOCK GENERAL The Company has an authorized capitalization of 110,000,000 shares of capital stock, consisting of 100,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, of which 1,000,000 shares have been designated Series A Preferred Stock, and 1,000,000 shares of which have been designated Series B Convertible Preferred Stock. As of August 1, 1996, there were 100 shares of Common Stock, no shares of Series A Preferred Stock and no shares of Series B Convertible Preferred Stock outstanding. As of such date, there was one holder of Common Stock of record. COMMON STOCK Dividends. The holders of shares of Series B Convertible Preferred Stock are entitled to dividends before the payment of any dividends to holders of shares of Common Stock. The holders of shares of Common Stock have no right or preference to the holders of shares of any other class of capital stock of the Company in respect of the declaration or payment of any dividends or distributions by the Company. The holders of shares of Common Stock shall be entitled to equally receive any dividends or distributions, if and when declared by the Board of Directors out of any funds legally available for that purpose. Liquidation, Dissolution or Winding Up. Subject to the required cash payments to the Series A Preferred Stock and the Series B Convertible Preferred Stock, the remainder of the assets of the Company, if any, shall be divided and distributed ratably among the holders of the Series B Convertible Preferred Stock and the Common Stock. Redemption. No shares of Common Stock are callable or redeemable by the Company. Conversion. No holder of Common Stock has the right to convert or exchange any such shares with or into any other shares of capital stock of the Company. Voting. Each share of Common Stock entitles the holder thereof to one vote, in person or by proxy, at any and all meetings of the shareholders of the Company on all propositions presented to the shareholders generally. PREFERRED STOCK Dividends. The holders of shares of Series A Preferred Stock shall not as a matter of right be entitled to be paid or receive or have declared or set apart for such Series A Preferred Stock, any dividends or distributions of the Company. The holders of shares of Series B Convertible Preferred Stock receive dividends out of any funds legally available for that purpose at the annual rate of 6% per annum of the par value and no more. These dividends are payable in cash monthly on the last day of each month. The dividends accrue from the date the Series B Convertible Preferred Stock are issued and is considered to accrue from day to day, whether or not earned or declared. The dividends are payable before any dividends are paid, declared, or set apart for any other capital stock of the Company. The dividends are cumulative so that if for any dividend period the dividends on the outstanding Series B Convertible Preferred Stock are not paid or declared and set apart, the deficiency shall be fully paid or declared and set apart for payment, without interest, before any distribution (by dividend or otherwise) is paid on, declared, or set apart for any other capital stock of the Company. The holders of shares of Series B Convertible Preferred Stock shall not be entitled to receive any other dividends or distributions. Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of outstanding shares of Series A Preferred Stock shall be entitled to receive $100.00 in cash for each share of Series A Preferred Stock, before any distribution of the assets of the Company shall be made to the holders of the outstanding shares of Series B Convertible Preferred Stock, unless funds necessary for such payment shall have been set aside in trust for the account of the holders of outstanding shares of Series A Preferred Stock so as to be and continue to be available therefor. After the $100.00 distribution per share of the Series A Preferred Stock, the holders of outstanding shares of Series B 70 81 Convertible Preferred Stock shall be entitled to receive $100.00 in cash for each share, before any distribution of the assets of the Company shall be made to the holders of the outstanding shares of any other capital stock of the Company, unless funds necessary for such payment shall have been set aside in trust for the account of the holders of outstanding shares of Series B Convertible Preferred Stock so as to be and continue to be available therefor. Redemption. No shares of Series A Preferred Stock shall be callable or redeemable by the Company. The Company, at the option of its Board of Directors, may at any time five years from the date of issuance redeem the whole or any part of the outstanding Series B Convertible Preferred Stock shares by paying in cash $110.00 per share plus all dividends accrued, unpaid, and accumulated through and including the redemption date. If only a part of the outstanding Series B Convertible Preferred Stock shares is redeemed, redemption will be pro rata. No Series B Convertible Preferred Stock shares may be redeemed unless all accrued dividends on all Series B Convertible Preferred Stock shares have been paid for all past dividend periods and full dividends for the current period, except those to be redeemed, have been paid or declared and set apart for payment. The holders of any Series B Convertible Preferred Stock shares called for redemption are entitled to receive 112 shares of Common Stock for each share of Series B Convertible Preferred Stock. The holders are entitled to exercise said conversion right at any time after redemption notice is given and before the close of business on the fifth day before the redemption date stated in the notice. The right to receive the converted shares is at the shareholder's option and requires delivery to the Company of the shareholder's written notice stating the number of shares the shareholder is electing to convert. The exercise of the right also requires the shareholder, on or before the redemption date, to surrender the certificate or certificates, duly endorsed to the Company, for the Series B Convertible Preferred Stock shares at the office of the Company or its transfer agent. Conversion. No holder of Series A Preferred Stock shall have the right to convert or exchange shares with or into any other shares of capital stock of the Company. The holders of shares of Series B Convertible Preferred Stock shall have the right to convert each share of Series B Convertible Preferred Stock into 112 shares of Common Stock at any time. The right to receive the converted shares requires delivery to the Company's office or its transfer agent of the shareholder's written notice stating the number of shares the shareholder is electing to convert. Such notice shall be accompanied by the surrender of the Series B Convertible Preferred Stock certificate or certificates, duly endorsed to the Company. The date of conversion shall be the date of receipt by the Company or its transfer agent of the notice and the duly endorsed certificate(s). Voting. Each share of Series A Preferred Stock and each share of Series B Convertible Preferred Stock shall entitle the holder thereof to 1/10th of a vote, in person or by proxy, at any and all meetings of shareholders of the Company on all propositions presented to shareholders generally. TRANSFER AGENT The transfer agent and registrar for the Common Stock, Series B Convertible Preferred Stock and Series A Preferred Stock is . 71 82 DESCRIPTION OF SEPCO CAPITAL STOCK GENERAL Sepco's authorized capital stock consists of 10,000,000 shares of Sepco Class A Common Stock, 10,000,000 shares of Sepco Class B Common Stock, 1,000,000 shares of Sepco Preferred Stock, 1,000,000 shares of Sepco Class A Convertible Preferred Stock and 1,000,000 shares of Sepco Class B Convertible Preferred Stock. As of July 23, 1996, there were 758,899 shares of Sepco Class A Common Stock, 176,900 shares of Sepco Class B Common Stock, 3,366 shares of Sepco Preferred Stock, 19,500 shares of Sepco Class A Convertible Preferred Stock and no shares of Sepco Class B Convertible Preferred Stock outstanding. As of such date, there were approximately 17 holders of Sepco Class A Common Stock, one holder of Sepco Class B Common Stock, six holders of Sepco Preferred Stock, 3 holders of Sepco Class A Convertible Preferred Stock and no holders of Sepco Class B Convertible Preferred Stock of record. SEPCO COMMON STOCK Dividends. The shareholders of Sepco Class A Convertible Preferred Stock and Sepco Class B Convertible Preferred Stock are entitled to dividends before the payment of any dividends to the holder of Sepco Class A Common Stock or Sepco Class B Common Stock. The holders of shares of Sepco Class A Common Stock and Sepco Class B Common Stock have no right or preference to the holders of shares of any other class of capital stock of Sepco in respect of the declaration or payment of any dividends or distributions by Sepco. The holders of shares of Sepco Class A Common Stock and Sepco Class B Common Stock shall be entitled to equally receive any dividends or distributions, if and when declared by the Board of Directors out of any funds legally available for that purpose. Liquidation, Dissolution or Winding Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of Sepco, the holders of outstanding shares of Sepco Class B Common Stock shall be entitled to receive $7.5075 in cash for each share of Sepco Class B Common Stock, before any distribution of the assets of Sepco shall be made to the holders of the outstanding shares of Sepco Class A Convertible Preferred Stock or Sepco Class B Convertible Preferred Stock, unless funds necessary for such payment shall have been set aside in trust for the account of the holders of outstanding shares of Sepco Class B Common Stock so as to be and continue to be available therefor. At the same time as the payment to the holders of the Sepco Class B Common Stock, the holders of shares of Sepco Preferred Stock shall be entitled to $100.00 in cash for each share, but no further participation in any distribution of the assets of Sepco. If upon such liquidation, dissolution or winding up, the assets of Sepco, distributable as aforesaid, are insufficient to permit the payment to holders of Sepco Preferred Stock of $100.00 per share and to holders of Sepco Class B Common Stock of $7.5075 per share, then the assets of Sepco shall be distributed to the holders of shares of Sepco Preferred Stock and Sepco Class B Common Stock ratably according to their respective shares. After the required cash payments to the Sepco Preferred Stock, the Sepco Class A Convertible Stock and the Sepco Class B Convertible Preferred Stock, the remainder of the assets, if any, shall be divided and distributed ratably among the holders of the Sepco Class A Convertible Preferred Stock, the Sepco Class B Convertible Stock, the Sepco Class A Common Stock and the Sepco Class B Common Stock. Redemption. No shares of Sepco Class A Common Stock or Sepco Class B Common Stock, are callable or redeemable by Sepco. Conversion. No holder of Sepco Class A Common Stock or Sepco Class B Common Stock has the right to convert or exchange any such shares with or into any other shares of capital stock of Sepco. Voting. Each share of Sepco Class A Common Stock and Sepco Class B Common Stock entitles the holder thereof to one vote, in person or by proxy, at any and all meetings of the shareholders of Sepco on all propositions before such meetings. Except as otherwise provided by law, the holders of shares of Sepco Class A Common Stock and Sepco Class B Common Stock vote together, share for share, as a single class upon the election of directors and upon each and every other matter at any meeting of shareholders. 72 83 SEPCO PREFERRED STOCK Dividends. The holders of shares of Sepco Preferred Stock shall not as a matter of right be entitled to be paid or receive or have declared or set apart for such Sepco Preferred Stock, any dividends or distributions of Sepco. The holders of shares of Sepco Class A Convertible Preferred Stock and Sepco Class B Convertible Preferred Stock receive dividends out of any funds legally available for that purpose at the annual rate of six percent (6%) per annum of the par value and no more. These dividends are payable in cash monthly on the last day of each month. The dividends accrue from the date the Sepco Class A Convertible Preferred Stock and/or the Sepco Class B Convertible Preferred Stock are issued and are considered to accrue from day to day, whether or not earned or declared. The dividends are payable before any dividends are paid, declared, or set apart for any other capital stock of Sepco. The dividends are cumulative so that if for any dividend period the dividends on the outstanding Sepco Class A Convertible Preferred Stock and/or the Sepco Class B Convertible Preferred Stock are not paid or declared and set apart, the deficiency shall be fully paid or declared and set apart for payment, without interest, before any distribution (by dividend or otherwise) is paid on, declared, or set apart for any other capital stock of Sepco. The holders of shares of Sepco Class A Convertible Preferred Stock and Sepco Class B Convertible Preferred Stock shall not be entitled to receive any other dividends or distributions. Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of Sepco, the holders of outstanding shares of Sepco Preferred Stock shall be entitled to receive $100.00 in cash for each share of Sepco Preferred Stock. After the $100.00 distribution per share of the Sepco Preferred Stock and the $7.5075 distribution per share of the Sepco Class B Common Stock, the holders of outstanding shares of Sepco Class A Convertible Preferred Stock and Sepco Class B Convertible Preferred Stock shall be entitled to receive $100.00 in cash for each share, before any distribution of the assets of Sepco shall be made to the holders of the outstanding shares of any other capital stock of Sepco, unless funds necessary for such payment shall have been set aside in trust for the account of the holders of outstanding shares of Sepco Class A Convertible Preferred Stock and Sepco Class B Convertible Preferred Stock so as to be and continue to be available therefor. If upon such liquidation, dissolution or winding up, the assets of Sepco, distributable as aforesaid, are insufficient to permit said full payment, then the assets of Sepco shall be distributed to the holders of outstanding shares of Sepco Class A Convertible Preferred Stock and Sepco Class B Convertible Preferred Stock ratably according to their respective shares. Redemption. No shares of Sepco Preferred Stock shall be callable or redeemable by Sepco. Sepco, at the option of its Board of Directors, may at any time five years from the date of issuance redeem the whole, or any part of the outstanding Sepco Class A Convertible Preferred Stock or Sepco Class B Convertible Preferred Stock shares by paying in cash $110.00 per share plus all dividends accrued, unpaid, and accumulated through and including the redemption date. If only a part of the outstanding Sepco Class A Convertible Preferred Stock or Sepco Class B Convertible Preferred Stock shares is redeemed, redemption will be pro rata. No Sepco Class A Convertible Preferred Stock or Sepco Class B Convertible Preferred Stock shares may be redeemed unless all accrued dividends on all outstanding Sepco Class A Convertible Preferred Stock or Sepco Class B Convertible Preferred Stock shares have been paid for all past dividend periods and full dividends for the current period, except those to be redeemed, have been paid or declared and set apart for payment. The holders of any Sepco Class A Convertible Preferred Stock shares called for redemption, are entitled, to receive seven Sepco Class A Common Stock shares for each share of Sepco Class A Convertible Preferred Stock. The holders of any Sepco Class B Convertible Preferred Stock shares called for redemption, are entitled to receive three and one-half shares of Sepco Class B Common Stock for each share of Sepco Class B Convertible Preferred Stock. The holders are entitled to exercise said conversion right at any time after redemption notice is given and before the close of business on the fifth day before the redemption date stated in the notice. The right to receive the converted shares is at the shareholder's option and requires delivery to Sepco of the shareholder's written notice stating the number of shares the shareholder is electing to convert. The exercise of the right also requires the shareholder, on or before the redemption date, to surrender the certificate or certificates, duly endorsed to Sepco, for the Sepco Class A Convertible Preferred Stock or shares of Sepco Class B Convertible Preferred Stock, as applicable, at the office of Sepco or its transfer agent. 73 84 Conversion. No holder of Sepco Preferred Stock shall have the right to convert or exchange shares with or into any other shares of capital stock of Sepco. The holders of shares of Sepco Class A Convertible Preferred Stock shall have the right to convert each share of Sepco Class A Convertible Preferred Stock into seven shares of Sepco Class A Common Stock, at any time. The holders of shares of Sepco Class B Convertible Preferred Stock shall have the right to convert each share of Sepco Class B Convertible Preferred Stock into three and one-half shares of Sepco Class B Common Stock, at any time. The right to receive the converted shares requires delivery to Sepco's office or its transfer agent of the shareholder's written notice stating the number of shares the shareholder is electing to convert. Said notice shall be accompanied by the surrender of the Sepco Class A Convertible Preferred Stock or Sepco Class B Convertible Preferred Stock certificate or certificates, duly endorsed to Sepco. The date of conversion shall be the date of receipt by Sepco or its transfer agent of the notice and the duly endorsed certificate(s). Voting. Except as otherwise provided by law, the holders of shares of Sepco Preferred Stock, Sepco Class A Convertible Preferred Stock and Sepco Class B Convertible Preferred Stock shall have no right or power to vote on the election of directors or on any questions or in any proceedings or to be represented at or to receive notice of any meeting of shareholders of Sepco. DESCRIPTION OF NEWMAN CAPITAL STOCK GENERAL Newman's authorized capital stock consists of 8,000,000 shares of Newman Common Stock and 2,000,000 shares of preferred stock, no par value (the "Newman Preferred Stock"). As of August 1, 1996, there were 2,552,064 shares of Newman Common Stock outstanding and no shares of Newman Preferred Stock outstanding. As of such date, there were approximately 193 holders of record of Newman Common Stock. NEWMAN COMMON STOCK The holders of Newman Common Stock are entitled to one vote for each share in all matters submitted to a vote of shareholders. The holders of Newman Common Stock do not have cumulative voting rights for the election of directors. The holders of Newman Common Stock are entitled to receive ratably such dividends, if any, as may be declared by Newman's Board of Directors out of legally available funds. In the event of liquidation, dissolution or winding up of Newman, the holders of Newman Common Stock are entitled to share ratably in all assets of Newman remaining after provision for payment of liabilities in satisfaction of the liquidation preference of any shares of Newman Preferred Stock that may be outstanding. The holders of Newman Common Stock have no preemptive, subscription, redemptive or conversion rights. The outstanding shares of Newman Common Stock are fully paid and non-assessable. The rights, preferences and privileges of the holders of Newman Common Stock may be subject to those of holders of Newman Preferred Stock, if such securities should ever be issued. NEWMAN PREFERRED STOCK The Board of Directors of Newman is authorized, without further shareholder action, to issue any of the undesignated shares of Newman Preferred Stock in one or more series and to fix the voting rights, liquidation preferences, dividend rights, repurchase rights, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences of such shares of Newman Preferred Stock. CLASS C WARRANTS Newman has issued and outstanding 1,650,000 Class C Warrants as a result of its reorganization under Chapter II of the United States Bankruptcy Code. The Class C Warrants were issued to unsecured creditors of Newman under the Plan. Each Class C Warrant entitles the holder thereof to purchase one share of Newman Common Stock at an exercise price of $2.00 per share, subject to certain adjustments, until November 22, 1996. 74 85 The Class C Warrants provide for the adjustment of the exercise price and number of shares of Newman Common Stock issuable upon exercise of such Class C Warrants upon the occurrence of certain events, such as stock dividends and distributions, stock splits, recapitalizations, mergers and consolidations. The Class C Warrants will be adjusted as a result of the Newman Merger. Following the Newman Merger, the Company will execute and deliver to the warrant agent for the Class C Warrants a supplemental warrant agreement which will provide that the holder of each outstanding Class C Warrant on the closing date of the Newman Merger shall have the right, until the expiration date of such Class C Warrant, to receive, upon exercise thereof, the number of shares of Common Stock the holder would have received in the Newman Merger if the holder had exercised such Class C Warrant prior to the closing date of the Newman Merger. See "Certain Terms of the Merger Agreements -- Newman Merger Agreement -- Manner and Basis of Converting Shares". The Class C Warrants also contain provisions that protect the holders thereof against dilution, by adjustment of the exercise price and number of shares of Newman Common Stock issuable on exercise of such Class C Warrants, upon the occurrence of certain events, such as stock dividends and distributions, stock splits, recapitalizations, mergers, consolidations and the issuance of Newman Common Stock, or options or rights to subscribe for, or securities convertible into or exchangable for Newman Common Stock, at a price below the exercise price of any of the Class C Warrants. Holders of Class C Warrants have no rights as shareholders of Newman unless the Class C Warrants are exercised. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a general discussion summarizing all of the material federal income tax consequences generally applicable to initial holders of Company Stock. Shareholders of Sepco and Newman should be aware that this discussion does not address all aspects of taxation that may be relevant to particular shareholders in light of their personal circumstances, or to certain types of shareholder (including dealers in securities, insurance companies, foreign persons, financial institutions and tax-exempt entities) subject to special treatment under the federal income tax laws. THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE FOR GENERAL INFORMATION ONLY AND ARE BASED UPON PRESENT LAW. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH PROSPECTIVE HOLDER OF COMPANY STOCK IS STRONGLY URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO HIS OR HER PARTICULAR TAX SITUATION AND THE PARTICULAR TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX LAWS (INCLUDING POSSIBLE CHANGES IN THE TAX LAW). The Company, Sepco, and Newman have not requested (nor will they request) a ruling from the Internal Revenue Service ("IRS") concerning any of the matters discussed herein. Accordingly, Sepco and Newman shareholders should be aware that the IRS is not precluded from adopting a contrary position. In addition, legislative or regulatory amendments or administrative or court decisions could change the anticipated federal income tax consequences. The discussion below assumes that the Company Stock will be held as a capital asset within the meaning of Section 1221 of the Code. In addition, the discussion below refers to the Company's current or accumulated earnings and profits for federal income tax purposes following the consummation of the Mergers. The calculation of current and accumulated earnings and profits is complicated and does not coincide with the determination of the Company's income or loss and retained earnings for financial accounting purposes. The Company's accumulated earnings and profits or its current earnings and profits, if any, in future years will depend primarily on future profits or losses, which cannot be accurately predicted. DIVIDENDS ON COMPANY STOCK. Distributions by the Company with respect to Company Stock will be characterized as dividends taxable as ordinary income to the extent of the Company's current or accumulated earnings and profits, if any, as determined for federal income tax purposes. To the extent that a distribution on Company Stock exceeds the Company's current and accumulated earnings and profits, such distribution first will be treated as a return of capital that will reduce the holder's adjusted tax basis in such Company Stock, and the excess will be taxed as 75 86 a capital gain and will be long-term capital gain if the holder's holding period for such Company Stock is more than one year. The availability of accumulated earnings and profits or current earnings and profits, if any, in future years will depend primarily on future profits and losses which cannot be accurately predicted. Thus, there can be no assurance that all or any portion of a distribution on the Company Stock will be characterized as a dividend for federal income tax purposes. For the remainder of this discussion, the term "dividends" refers to a distribution paid entirely out of the Company's current or accumulated earnings and profits, unless the context otherwise requires. Dividends received by corporate holders of Company Stock out of such earnings and profits generally will qualify, subject to the limitations under Sections 246(c) and 246A of the Code, for the 70% dividends received deduction allowable to corporations under Section 243 of the Code (although the benefits of such deduction may be reduced or eliminated by the corporate alternative minimum tax). Under Section 246(c) of the Code, to be eligible for the dividends received deduction, a corporate holder must hold its shares of Company Stock for at least 46 days (91 days in the case of a preferred dividend attributable to a period or periods aggregating more than 366 days). A taxpayer's holding period for these purposes is suspended during any period in which the taxpayer has an option to sell, is under a contractual obligation to sell, has made (and not closed) a short sale of, or has granted an option to buy, substantially identical stock or securities or holds one or more other positions with respect to substantially similar or related property that diminish the risk of loss from holding such stock. Under Section 246A of the Code, the dividends received deduction may be reduced or eliminated if a holder's shares of Company Stock are debt financed. Section 1059 of the Code will require a corporate holder to reduce (but not below zero) its basis in Company Stock by the "nontaxed portion" of any "extraordinary dividend" if the holder has not held Company Stock for more than two years before the date the Company declares, announces, or agrees to, the amount or payment of such dividend, whichever is earliest. If the nontaxed portion of all extraordinary dividends exceeds the holder's basis in Company Stock, the excess will be treated as taxable gain at the time of disposition of the stock. Generally, the nontaxed portion of an extraordinary dividend is the amount excluded from income under Section 243 of the Code (relating to the dividends received deduction). An extraordinary dividend generally is a dividend that (i) equals or exceeds 5% in the case of preferred stock, or 10% in the case of common stock, of the holder's adjusted tax basis in the stock (reduced for this purpose by the nontaxed portion of any prior extraordinary dividend), treating all dividends having ex-dividend dates within an 85-day period as one dividend, or (ii) exceeds 20% of the holder's adjusted tax basis in the stock, treating all dividends having ex-dividend dates within a 365-day period as one dividend, provided that in either case fair market value on the day before the ex-dividend date, if it can be established by the holder, may be substituted for stock basis. An extraordinary dividend would also include any amount treated as a dividend in the case of a redemption of any preferred stock that is either non-pro rata as to all stockholders or in partial liquidation of the Company, regardless of the relative size of the dividend and regardless of the corporate holder's holding period for the preferred stock. Under Section 1059(e)(3) of the Code, the extraordinary dividend rules may not apply with respect to "qualified preferred dividends." A qualified preferred dividend is any fixed dividend payable with respect to preferred stock which (i) provides for fixed preferred dividends payable no less often than annually and (ii) is not in arrears as to dividends when acquired, provided the actual rate of return, as determined under Section 1059(e)(3) of the Code, on such stock does not exceed 15%. Where a qualified preferred dividend exceeds the 5% (or 20%) threshold for extraordinary dividend status described above, (i) the extraordinary dividend rules will not apply if the taxpayer holds the stock for more than five years, and (ii) if the taxpayer disposes of the stock before it has been held for more than five years, the aggregate reduction in basis cannot exceed the excess of the qualified preferred dividends paid on such stock during the period held by the taxpayer over the qualified preferred dividends which would have been paid during such period on the basis of the stated rate of return, as determined under Section 1059(e)(3) of the Code. The length of time that a taxpayer is deemed to have held stock for purposes of Section 1059 of the Code is determined under principles similar to those contained in Section 246(c) of the Code discussed above. 76 87 CONVERSION OF SERIES B CONVERTIBLE PREFERRED STOCK INTO COMMON STOCK. Except in certain circumstances where there are dividends in arrears on the Series B Convertible Preferred Stock, no gain or loss will be recognized upon conversion of Series B Convertible Preferred Stock solely into shares of Common Stock. If dividends on the Series B Convertible Preferred Stock are in arrears at the time of conversion, however, a portion of the Common Stock received in exchange for the Series B Convertible Preferred Stock could be viewed under Section 305(c) of the Code as a distribution with respect to the Series B Convertible Preferred Stock, taxable as a dividend. Except to the extent of shares of Common Stock, if any, which are deemed to be in payment of dividends in arrears, the adjusted tax basis for the shares of Common Stock received upon the conversion will be equal to the adjusted tax basis of the Series B Convertible Preferred Stock converted, and, provided the Series B Convertible Preferred Stock is held as a capital asset, the holding period of the shares of Common Stock will include the holding period of the Series B Convertible Preferred Stock converted. REDEMPTION PREMIUM. Under Section 305 of the Code and Treasury Regulations currently in force, if the redemption price of redeemable preferred stock exceeds its issue price, all of such excess will be includible in ordinary gross income as a dividend (to the extent of the issuer's current or accumulated earnings and profits) in accordance with the economic accrual principles of Section 1272 of the Code over the period during which the preferred stock cannot be redeemed, if a redemption is more likely than not to occur. A redemption that satisfies the safe harbor provision of Treasury Regulation Section 1.305-5(b)(3)(ii) is not treated as more likely than not to occur. The safe harbor is available to a holder of Series B Convertible Preferred Stock that is not related to the Company, within the meaning of Section 267(b) or 707(b) applied by substituting the phrase "20 %" for the phrase "50%." If a holder is not so related to the Company, the Company believes that any redemption should satisfy the remaining requirements of the safe harbor. ADJUSTMENT OF CONVERSION PRICE. Pursuant to Section 305(c) of the Code and the Treasury regulations thereunder, certain adjustments to the conversion price of the Series B Convertible Preferred Stock, such as adjustments to reflect taxable distributions of cash or property on any of the outstanding Common Stock, will be treated as a constructive distribution of stock and will be treated as a dividend to the holders of the Series B Convertible Preferred Stock to the extent of the current or accumulated earnings and profits of the Company. Adjustments to reflect nontaxable stock splits or distributions of stock, stock warrants or stock rights will, however, generally not be so treated. The failure to adjust fully the conversion price for the Series B Convertible Preferred Stock to reflect distributions of stock, stock warrants or stock rights with respect to the Common Stock may result in a taxable dividend to holders of the Common Stock. REDEMPTION OF THE SERIES B CONVERTIBLE PREFERRED STOCK FOR CASH. A redemption of Series B Convertible Preferred Stock for cash will be a taxable event. Under Section 302 of the Code, a redemption of Series B Convertible Preferred Stock for cash will be treated as a distribution that is treated as a taxable dividend, nontaxable recovery of basis, or an amount received in exchange for the Series B Convertible Preferred Stock pursuant to the rules described under "Dividends on Company Stock", unless the redemption (i) results in a "complete termination" of the stockholder's interest in the Company under Section 302(b)(3) of the Code, (ii) is "substantially disproportionate" with respect to the stockholder under Section 302(b)(2) of the Code or (iii) is "not essentially equivalent to a dividend" under Section 302(b)(1) of the Code. In determining whether any of these tests have been met, shares considered to be owned by the stockholder by reason of certain constructive ownership rules in Sections 302(c) and 318 of the Code, as well as shares actually owned, must be taken into account. If any of these tests are met, the redemption of the Series B Convertible Preferred Stock for cash would be treated as a sale or exchange for tax purposes. 77 88 A redemption will be "not essentially equivalent to a dividend" as to a particular stockholder if it results in a "meaningful reduction" in that stockholder's interest in the Company. If, as a result of the redemption of the Series B Convertible Preferred Stock, a stockholder of the Company, whose relative interest in the Company is minimal and who exercises no control over corporate affairs, suffers a reduction in his proportionate interest in the Company (taking into account shares owned by the stockholder under the constructive ownership rules and, in certain events, dispositions of the stock which occur contemporaneously with the redemption), that stockholder should be regarded as having suffered a meaningful reduction in his interest in the Company. In determining whether a holder's interest in the Company is actually reduced or completely terminated, the holder is deemed, under the constructive ownership rules of Sections 302(c) and 318 of the Code, to own any shares in the Company owned by certain related persons and entities and any shares which the holder or certain related persons and entities have an option to acquire. Because the provisions of Section 302 of the Code are applied separately to each stockholder based upon the particular facts and circumstances at the time of the redemption (and the applicable law at such time which may be different from that currently in effect), no assurance can be given that a redemption of the Series B Convertible Preferred Stock for cash will be treated as a sale or exchange rather than as a distribution. In addition, legislation has been introduced in Congress which, if enacted in its present form, would appear to treat a redemption of Series B Convertible Preferred Stock held by a corporation as a sale or exchange of Series B Convertible Preferred Stock under Section 302(a), and not as a dividend. If a redemption of Series B Convertible Preferred Stock is treated as a distribution taxable as a dividend, then the holder's tax basis in the redeemed Series B Convertible Preferred Stock will be transferred to any remaining stock in the Company held by such holder. A redemption of Series B Convertible Preferred Stock that is treated as a dividend may also be considered an extraordinary dividend under Section 1059 of the Code. See "Dividends on Company Stock" above. Treatment of a redemption as a dividend that is not pro rata as to all stockholders will be treated as an extraordinary dividend without regard to the period during which the stockholder held the Series B Convertible Preferred Stock. If a redemption of the Series B Convertible Preferred Stock is treated as a sale or exchange, the redeemed holder will recognize capital gain or loss equal to the difference between the amount of cash received by such holder from the Company (other than cash which represents the payment of a previously declared dividend and which will be taxed as a dividend) and the holder's tax basis in the Series B Convertible Preferred Stock. If the holder holds such stock as a capital asset, and if the holder's holding period exceeds one year, such capital gain or loss will be long-term. BACKUP WITHHOLDING AND INFORMATION REPORTING. Under Section 3406 of the Code and applicable Treasury regulations, a noncorporate holder of Company Stock who is not otherwise exempt from backup withholding may be subject to backup withholding at a rate of 31 percent with respect to dividends paid on, or the proceeds of a sale or an exchange of, Company Stock. Generally, backup withholding applies only when the IRS notifies the payor that the taxpayer identification number furnished by the payee is incorrect or a payee (i) fails to furnish or certify his correct taxpayer identification number to the payor or establish an exemption from backup withholding, (ii) is notified by the IRS that he has failed to report payments of interest or dividends properly or (iii) under certain circumstances, fails to certify under penalties of perjury that he is not subject to backup withholding. Holders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for establishing any applicable exemption. Any amounts withheld under the backup withholding rules from a payment to a holder will be allowed as a refund or a credit against the holder's United States federal income tax liability, provided that the required information is furnished to the IRS. LEGAL MATTERS The validity of the shares of Common Stock, Series B Convertible Preferred Stock and Series A Preferred Stock to be issued in connection with the Mergers will be passed on by Fulbright & Jaworski L.L.P., Houston, Texas. 78 89 EXPERTS The balance sheet of the Company and the consolidated financial statements of Sepco included in this Proxy Statement/Prospectus, which is referred to and made a part of this Registration Statement, have been audited by Ernst & Young LLP, independent auditors, to the extent indicated in their reports thereon appearing elsewhere herein and in the Registration Statement. Such balance sheet and consolidated financial statements have been included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The financial statements of Newman at December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, included in this Proxy Statement/Prospectus, which is referred to and made a part of this Registration Statement, have been audited by Cheshier & Fuller, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 79 90 APPENDIX A: SEPCO MERGER AGREEMENT 91 * * * * * AGREEMENT AND PLAN OF MERGER BY AND AMONG INDEX, INC., SEPCO ACQUISITION CORPORATION AND SEPCO INDUSTRIES, INC. * * * * * AUGUST 12, 1996 92
ARTICLE/SECTION PAGE - ----------- ---- RECITALS ........................................................................ ARTICLE 1 THE MERGER.............................................................. 1.1 The Merger.............................................................. 1.2 Closing................................................................. 1.3 Effective Time of the Merger............................................ 1.4 Articles of Incorporation and Bylaws.................................... 1.5 Directors and Officers.................................................. ARTICLE 2 CONVERSION OF SHARES.................................................... 2.1 Conversion of Company Stock............................................. 2.2 Stock Certificates...................................................... 2.3 Fractional Shares....................................................... 2.4 Dissenting Shares....................................................... ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF INDEX AND THE MERGER SUB.............. 3.1 Organization............................................................ 3.2 Capitalization.......................................................... 3.3 Certain Corporate Matters............................................... 3.4 Authority Relative to this Agreement.................................... 3.5 Consents and Approvals; No Violations................................... 3.6 Information Supplied.................................................... ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................... 4.1 Organization............................................................ 4.2 Capitalization and Ownership of the Company............................. 4.3 Certain Corporate Matters............................................... 4.4 Subsidiaries............................................................ 4.5 Authority Relative to this Agreement.................................... 4.6 Consents and Approvals; No Violations................................... 4.7 Intentionally Deleted................................................... 4.8 Financial Statements.................................................... 4.9 Events Subsequent to Financial Statements............................... 4.10 Undisclosed Liabilities................................................. 4.11 Tax Returns and Audits.................................................. 4.12 Books and Records....................................................... 4.13 Questionable Payments................................................... 4.14 Environmental Matters................................................... 4.15 Intellectual Property................................................... 4.16 Insurance............................................................... 4.17 Contracts............................................................... 4.18 Litigation.............................................................. 4.19 Employees............................................................... 4.20 Employee Benefit Plans.................................................. 4.21 Legal Compliance........................................................ 4.22 Broker's Fees........................................................... 4.23 Disclosure.............................................................. 4.24 Information Supplied.................................................... ARTICLE 5 CONDUCT OF BUSINESS PENDING THE CLOSING................................. 5.1 Conduct of Business by the Company Pending the Closing.................. 5.2 Other Actions...........................................................
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ARTICLE/SECTION PAGE - ----------- ---- ARTICLE 6 ADDITIONAL AGREEMENTS................................................... 6.1 Access and Information.................................................. 6.2 Registration Statement.................................................. 6.3 Meetings of Shareholders................................................ 6.4 Stock Market Approval................................................... 6.5 Press Releases.......................................................... ARTICLE 7 CONDITIONS TO CLOSING................................................... 7.1 Conditions to Obligations of Each Party to Effect the Closing........... 7.2 Additional Conditions to Index's and the Merger Sub's Obligations....... 7.3 Additional Conditions to the Company's Obligations...................... ARTICLE 8 REMEDIES................................................................ 8.1 General................................................................. 8.2 Waiver.................................................................. ARTICLE 9 TERMINATION............................................................. 9.1 Termination by Mutual Consent........................................... 9.2 Termination by Any Party................................................ 9.3 Termination by Index.................................................... 9.4 Effect of Termination and Abandonment................................... 9.5 Material Breach......................................................... ARTICLE 10 GENERAL PROVISIONS...................................................... 10.1 Notices................................................................. 10.2 Interpretation.......................................................... 10.3 Severability............................................................ 10.4 Miscellaneous........................................................... 10.5 Separate Counsel........................................................ 10.6 Governing Law........................................................... 10.7 Counterparts............................................................ 10.8 Amendment............................................................... 10.9 Parties In Interest; No Third Party Beneficiaries....................... 10.10 Captions................................................................ 10.11 Expenses................................................................ 10.12 Survival................................................................
ii 94 AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER, dated as of August 12, 1996 (this "Agreement"), is made and entered into by and among Index, Inc., a Texas corporation ("Index"), Sepco Acquisition Corporation, a Nevada corporation and a wholly-owned subsidiary of Index (the "Merger Sub") and Sepco Industries, Inc., a Texas corporation (the "Company"). RECITALS WHEREAS, the respective Boards of Directors of Index, the Merger Sub and the Company have adopted resolutions approving and adopting the proposed merger (the "Merger") of the Company with the Merger Sub upon the terms and conditions hereinafter set forth in this Agreement; WHEREAS, Index is entering into that Agreement and Plan of Merger with Newman Communications, Inc., a New Mexico corporation ("Newman") and Newman Acquisition, Inc., a Nevada corporation ("Newman Acquisition") simultaneously with this Agreement (the "Newman Merger Agreement"); WHEREAS, the Merger and the merger contemplated by the Newman Merger Agreement (the "Newman Merger") will be effected simultaneously; and WHEREAS, the Merger and the Newman Merger are both intended to qualify as a tax-free transaction under Section 351 and Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the foregoing premises, the representations, warranties and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to the conditions set forth herein, the parties hereto agree as follows: ARTICLE 1 THE MERGER 1.1 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3 hereof), the Merger Sub shall be merged with and into the Company and the separate corporate existence of the Merger Sub shall thereupon cease. The Company shall be the surviving corporation in the Merger. The Merger shall have the effects set forth in the applicable provisions of the Nevada General Corporation Law (the "NGCL") and the Texas Business Corporation Act (the "TBCA"). 1.2 Closing. The closing of the Merger (the "Closing") shall take place at 10:00 a.m., local time, at the offices of Fulbright & Jaworski, L.L.P. located at 1301 McKinney, Houston, Texas 77010, on the next business day after all the shareholder approvals set out in Section 6.3 hereof have been completed, or as soon as the conditions set forth in Article 7 have been satisfied or waived or as soon as practicable thereafter; provided, however, that the date of the Closing shall not be later than December 31, 1996, unless the parties hereto otherwise mutually agree. Such date is herein referred to as the "Closing Date." At the Closing, the parties hereto shall deliver or cause to be delivered the certificates and other documents set forth in Article 7. 1.3 Effective Time of the Merger. If all the conditions to the Merger set forth in Article 7 shall have been fulfilled or waived in accordance herewith and this Agreement shall not have been terminated as provided in Article 9, the parties hereto shall cause Articles of Merger (the "Articles of Merger") that meet the requirements of the applicable provisions of the NGCL and the TBCA, respectively, to be properly executed and filed with the Secretary of State of the States of Nevada and Texas, respectively, on the Closing Date. The Merger shall be effective at the time of acceptance of the filing of the Articles of Merger with the Secretary of State of the States of Nevada and Texas in accordance with the NGCL and the TBCA, respectively, or at such later time which the parties hereto shall have agreed upon and designated in such filing as the effective time of the Merger (the "Effective Time"). 1.4 Articles of Incorporation and By-Laws. The Articles of Incorporation and By-Laws of the Company in effect immediately prior to the Effective Time shall continue to be the Articles of Incorporation and By- 1 95 Laws of the Company subsequent to the Effective Time, subject always to the right of the Company to amend its Articles of Incorporation and By-Laws in accordance with the laws of the State of Texas and the provisions of its Articles of Incorporation and By-Laws. 1.5 Directors and Officers. The directors and officers of the Company immediately prior to the Effective Time shall continue to be the directors and officers of the Company and shall hold such positions from the Effective Time until their respective successors are duly elected or appointed and qualify in the manner provided in the Articles of Incorporation and By-Laws of the Company or as otherwise provided by law. ARTICLE 2 CONVERSION OF SHARES 2.1 Conversion of Company Stock. At the Effective Time, by virtue of the Merger and without any action required on the part of Index, the Company, the Merger Sub or any holder of capital stock of any of them: (a) Subject to the limitations contained herein, each outstanding share of Sepco Class A Common Stock will be converted into the right to receive 16 shares of Index Common Stock. Each outstanding share of Sepco Class B Common Stock will be converted into the right to receive 18.1232 shares of Index Common Stock. Further, each outstanding share of Sepco Class A Convertible Preferred Stock will be converted into the right to receive one share of Index Series B Convertible Preferred Stock. Finally, each outstanding share of Sepco Preferred Stock will be converted into the right to receive one share of Index Series A Preferred Stock. The Sepco Preferred Stock, Sepco Class A Convertible Preferred Stock, Sepco Class A Common Stock and Sepco Class B Common Stock shall be collectively referred to as "Company Stock"). The Index Common Stock, Index Series A Preferred Stock and Index Series B Convertible Preferred Stock shall be collectively referred to as "Index Stock". (b) All shares of common stock of the Merger Sub issued and outstanding immediately prior to the Effective Time shall be cancelled and cease to be outstanding. 2.2 Stock Certificates. At or following the Effective Time, each holder of an outstanding certificate or certificates representing the Company Stock shall surrender the same to Index and Index shall, in exchange therefor, cause to be issued to the holder of such certificate(s) a new certificate representing shares of Index Stock in accordance with Section 2.1, less any amount required to be withheld under applicable federal, state or local tax requirements, and the surrendered certificate(s) shall be cancelled. Until so surrendered and exchanged, each such certificate shall represent solely the right to receive shares of Index Stock in accordance with Section 2.1, without interest and less any tax withholding. 2.3 Fractional Shares. No fractional shares of Company Common Stock shall be issued in the Merger. In lieu thereof, all fractional shares of Company Common Stock that a holder of a Sepco Class A Common Stock would otherwise be entitled to receive as a result of the Merger shall be automatically converted into the right to receive an amount of cash to be determined by multiplying $0.58 by the fraction of a share of Company Common Stock to which such holder would otherwise have been entitled. Further, all fractional shares of Company Common Stock that a holder of Sepco Class B Common Stock would otherwise be entitled to receive as a result of the Merger shall be automatically converted into the right to receive an amount of cash to be determined by multiplying $0.58 by the fraction of a share of Company Common Stock to which such holder would otherwise be entitled. Fractional shares of Company Convertible Preferred Stock and Company Preferred Stock, if any, will be issued in the Merger to the holders of Sepco Class A Convertible Preferred Stock and Sepco Preferred Stock, respectively. 2.4 Dissenting Shares. Each share of Company Stock issued and outstanding immediately prior to the Effective Time not voted in favor of the Merger, the holder of which has given written notice of the exercise of dissenter's rights and has perfected such rights as required by the TBCA is herein called a "Dissenting Share." Dissenting Shares shall not be converted into or represent the right to receive shares of Index Stock pursuant to this Section 2 and shall be entitled only to such rights as are available to such holder pursuant to the TBCA, 2 96 unless the holder thereof shall have withdrawn or forfeited his dissenter's rights. Each holder of Dissenting Shares shall be entitled to receive the value of such Dissenting Shares held by him in accordance with the applicable provisions of the TBCA. Index will promptly pay to any holder of Dissenting Shares such amount as such holder shall be entitled to receive in accordance with the applicable provisions of the TBCA. If any holder of Dissenting Shares shall effectively withdraw or forfeit his dissenter's rights under the TBCA, such Dissenting Shares shall be converted into the right to receive shares of Index Stock in accordance with this Section 2. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF INDEX AND THE MERGER SUB Index and the Merger Sub hereby jointly and severally represent and warrant to the Company as follows: 3.1 Organization. Each of Index and the Merger Sub has been duly incorporated, is validly existing as a corporation and is in good standing under the laws of its state of incorporation, and has the requisite corporate power to carry on its business as now conducted. 3.2 Capitalization. The total number of shares of stock of all classes which Index shall have the authority to issue is 110,000,000 shares, of which the following designations have been made: 100,000,000 shares of common stock par value $0.01 per share ("Index Common Stock"), 1,000,000 shares of preferred stock, par value $1.00 per share ("Index Series A Preferred Stock") and 1,000,000 shares of convertible preferred stock, par value $100 per share ("Index Series B Convertible Preferred Stock"). As of the date of this Agreement, 100 shares of Index Common Stock are issued and outstanding, no shares of Index Series A Preferred Stock are issued and outstanding and no shares of Index Series B Convertible Preferred Stock are issued and outstanding. All of the issued and outstanding shares of Index Common Stock are validly issued, fully paid, nonassessable and free of preemptive rights. All shares of Index Stock issuable in accordance with this Agreement will be, when so issued, duly authorized, validly issued, fully paid and nonassessable. The authorized capital stock of the Merger Sub consists of 100 shares of common stock, par value $0.10 per share, all of which are validly issued, fully paid and nonassessable and are owned by Index. 3.3 Certain Corporate Matters. Index is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership of its properties, the employment of its personnel or the conduct of its business requires it to be so qualified, except where the failure to so qualify would not have a material adverse effect on Index's financial condition, results of operations or business. Index has the requisite corporate power and authority and all authorization, licenses and permits necessary to carry on the business in which it is engaged and to own and use the properties owned and used by it, except such authorizations, licenses and permits, the failure of which to possess would not have a material adverse effect on the financial condition, results of operations of business of Index. 3.4 Authority Relative to this Agreement. Each of Index and the Merger Sub has the requisite corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by Index and the Merger Sub and the consummation by Index and the Merger Sub of the transactions contemplated hereby have been duly authorized by the Boards of Directors of each of Index and the Merger Sub and, subject to stockholder approval as set forth in this Agreement, no other actions on the part of Index or the Merger Sub are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of Index and the Merger Sub and constitutes, subject to stockholder approval as set forth in this Agreement, a valid and binding agreement of each of Index and the Merger Sub, enforceable against Index and the Merger Sub in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 3.5 Consents and Approvals; No Violations. Except as may be required under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"), the 3 97 Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), state securities or blue sky laws, and the filing and recordation of the Articles of Merger as required by the NGCL and the TBCA, no filing with, and no permit, authorization, consent or approval of, any public body or authority is necessary for the consummation by Index and the Merger Sub of the transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement by Index or the Merger Sub nor the consummation by Index or the Merger Sub of the transactions contemplated hereby, nor compliance by Index or the Merger Sub with any of the provisions hereof, will (a) conflict with or result in any breach of any provisions of the Articles of Incorporation or By-Laws of Index or the Articles of Incorporation or By-Laws of the Merger Sub, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default of a material nature (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation, of a material nature, to which Index or any of its subsidiaries is a party or by which any of them or their properties or assets may be bound or (c) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Index, any of its subsidiaries or any of their properties or assets, except in the case of clauses (b) and (c) for violations, breaches or defaults which in the aggregate would not have a material adverse effect on the financial condition or results of operations of Index and its subsidiaries taken as a whole. The parties hereto agree and acknowledge that Index was required to obtain and has obtained the written consent of Fleet Capital Corporation. 3.6 Information Supplied. None of the information provided by Index for use in the Registration Statement (as defined in Section 6.2 hereof) and contained therein will, as of the date that the Registration Statement is filed with the Securities and Exchange Commission (the "Commission"), on the date it is declared effective or at the time of the meeting of the shareholders of the Company to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The registration statement and prospectus contained in the Registration Statement will comply, in all material respects, as to form with the provisions of the Exchange Act and the Securities Act. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Index and the Merger Sub as follows: 4.1 Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and has the requisite corporate power and authority to carry on its business as now conducted in all applicable jurisdictions. 4.2 Capitalization and Ownership of the Company. The Company's entire authorized capital stock consists of Sepco's authorized capital consists of 10,000,000 shares of Sepco Class A Common Stock, $0.01 par value per share, 10,000,000 shares of Sepco Class B Common Stock, $0.01 par value per share, 1,000,000 shares of Sepco Preferred Stock, $1.00 par value per share, 1,000,000 shares of Sepco Class A Convertible Preferred Stock, $100.00 par value per share and 1,000,000 shares of Sepco Class B Convertible Preferred Stock, $100.00 par value per share. As of July 23, 1996, there were 758,899 shares of Sepco Class A Common Stock, 176,900 shares of Sepco Class B Common Stock, 3,366 shares of Sepco Preferred Stock, 19,500 shares of Sepco Class A Convertible Preferred Stock and no shares of Sepco Class B Convertible Preferred Stock outstanding. As of such date, there were approximately 16 holders of Sepco Class A Common Stock, 1 holder of Sepco Class B Common Stock, 6 holders of Sepco Preferred Stock, 3 holders of Sepco Class A Convertible Preferred Stock and no holders of Sepco Class B Convertible Preferred Stock of record. All of the shares of Company Stock have been duly authorized and are validly issued, fully paid and nonassessable and have not been issued in violation of any pre-emptive rights. Except as disclosed in the Registration Statement, there are no outstanding or authorized options, rights, warrants, calls, convertible securities, rights to subscribe, 4 98 conversion rights or other agreements or commitments to which the Company is a party or which are binding upon the Company providing for the issuance by the Company or transfer by the Company of additional shares of Company Stock and the Company has not reserved any shares of the Company Stock for issuance, nor are there any outstanding stock option rights, phantom equity or similar rights, contracts, arrangements or commitments. There are no voting trusts or any other agreements or understandings, written or oral, with respect to the voting of the Company Stock. 4.3 Certain Corporate Matters. The Company is duly licensed or qualified to do business and is in good standing as a foreign corporation in every jurisdiction in which the character of the Company's properties or nature of the Company's business requires it to be so licensed or qualified other than such jurisdictions in which the failure to be so licensed or qualified does not, or insofar as can reasonably be foreseen, in the future will not, have a material adverse effect on its financial condition, results of operations or business. The Company has full corporate power and authority and all authorizations, licenses, variances, exemptions, orders, contracts, approvals and permits necessary to carry on the business in which it is engaged or in which it proposes presently to engage and to own and use the properties owned and used by it. The Company has delivered to Index true, accurate and complete copies of its Articles of Incorporation and By-Laws, which reflect all amendments made thereto at any time prior to the date of this Agreement. The records of meetings of the shareholders and Board of Directors of the Company are complete and correct in all material respects. The stock records of the Company and the shareholder lists of the Company that the Company has previously furnished to Index are complete and correct in all material respects and accurately reflect the record ownership and the beneficial ownership of all the outstanding shares of the Company's capital stock and all other outstanding securities issued by the Company. The Company is not in default under or in violation of any provision of its Articles of Incorporation or By-Laws in any material respect. The Company is not in default or in violation of any restriction, lien, encumbrance, indenture, contract, lease, sublease, loan agreement, note or other obligation or liability by which it is bound or to which any of its assets is subject. 4.4 Subsidiaries. American MRO, Inc., a Nevada corporation, is a wholly owned subsidiary of the Company. The Company does not own, directly or indirectly, any of the capital stock of any other corporation or any equity, profit sharing, participation or other interest in any corporation, partnership, joint venture or other entity of a material nature, except as set out in the Registration Statement. 4.5 Authority Relative to this Agreement. The Company has the requisite corporate power and authority to enter into this Agreement and carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby have been duly authorized by the Boards of Directors of the Company and, subject to shareholder approval as set forth in this Agreement, no other actions on the part of the Company are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Company and constitutes, subject to shareholder approval as set forth in this Agreement, a valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. The parties hereto agree and acknowledge that the Company was required to obtain and has obtained the written consent of Fleet Capital Corporation required under that Amended and Restated Loan and Security Agreement by and between the Company and Fleet Capital Corporation. 4.6 Consents and Approvals; No Violations. Except as may be required under the Securities Act, the Exchange Act, state securities or blue sky laws, and the filing and recordation of the Articles of Merger as required by the NGCL and the TBCA, no filing with, and no permit, authorization, consent or approval of, any public body or authority is necessary for the consummation by the Company of the transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby, nor compliance by the Company with any of the provisions hereof, will (a) conflict with or result in any breach of any provisions of the Articles of Incorporation or By-Laws of Company, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which the Company is a party or by which it or any of 5 99 its properties or assets may be bound except as setout herein or (c) violate any order, law, resolution, writ, injunction, decree, statute, rule or regulation applicable to the Company, or any of its properties or assets, except in the case of clauses (b) and (c) for violations, breaches or defaults which in the aggregate would not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole. 4.7 Intentionally Deleted. 4.8 Financial Statements. The Company has delivered to Index the following audited financial statements: (a) its balance sheets as of December 31, 1995; (b) its statements of operations for the twelve months ended December 31, 1995; (c) its statements of cash flows for the twelve months ended December 31, 1995; (d) its statements of changes in shareholders' equity for the twelve months ended December 31, 1995. In addition, the Company has delivered to Index the following unaudited financial statements:(a) its balance sheet as of June 30, 1996; (b) its statement of operations for the six months ended June 30, 1996; and (c) its statement of cash flows for the six months ended June 30, 1996. Such financial statements are herein collectively referred to as the "Financial Statements." The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby and present fairly the financial condition of the Company as of such dates and the results of its operations and changes in cash flows for such periods. 4.9 Events Subsequent to Financial Statements. Since June 30, 1996, except in the ordinary course of business there has not been: (a) Any material adverse change in the financial condition, results of operations or business of the Company; (b) Any sale, lease, transfer, license or assignment of any material assets, tangible or intangible, of the Company; (c) Any material damage, destruction or property loss, whether or not covered by insurance, affecting adversely the properties or business of the Company; (d) Any declaration or setting aside or payment of any dividend or distribution with respect to the Company Stock (except as required by the terms of the Class A Convertible Preferred Stock) or any redemption, purchase or other acquisition of any such shares; (e) Any subjection to any lien on any of the assets, tangible or intangible, of the Company; (f) Any material incurrence of indebtedness or liability or assumption of obligations by the Company; (g) Any waiver or release by the Company of any right of any material value; (h) Any material increase in compensation or benefits to officers or directors of the Company; (i) Any change made or authorized in the Articles of Incorporation or By-laws of the Company; (j) Except as disclosed to Index, any issuance, transfer, sale or other disposition by the Company of any shares of Company Stock or other equity securities, or any grant of any options, warrants or other rights to purchase or obtain (including upon conversion or exercise) shares of Company Stock or other equity securities; or (k) Any material loan to or other material transaction with any officer, director or shareholder of the Company giving rise to any claim or right of the Company against any such person or of such person against the Company. 4.10 Undisclosed Liabilities. The Company has no material liability or obligation of any nature whatsoever, either direct or indirect, matured or unmatured, accrued, absolute, contingent or otherwise. 4.11 Tax Returns and Audits. The Company has duly and timely filed or caused to be filed all returns, reports or similar statements (including any attached schedules) required to be filed with respect to any tax including, without limitation, all information returns, claims for refunds, amended returns and declarations of estimated tax (collectively, the "Tax Returns"). For the purpose of this Agreement, "tax" shall include any 6 100 federal, state, local or foreign income, gross receipts, windfall profits, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, transfer, stamp or environmental tax, or any other tax or similar assessment or charge, together with any interest or penalty, addition to tax or additional amount imposed by any governmental authority. The Company has paid in full or fully reserved against in the Financial Statements all taxes, interest, penalties, assessments and deficiencies due or claimed to be due by it to foreign, federal, state or local taxing authorities. All Tax Returns are complete and accurate and disclose all taxes required to be paid. The income Tax Returns filed by the Company are not being, to the knowledge of the Company, examined by the Internal Revenue Service (the "IRS") or other applicable taxing authorities for any period, except as set out in the Registration Statement. All taxes or estimates thereof that are due as of December 31, 1995, or are claimed or asserted by any taxing authority to be due as of such date, have been (a) timely and appropriately paid so as to avoid penalties for underpayment or (b) accrued for on the balance sheet as of December 31, 1995, as contained in the Financial Statements. Except for amounts not yet due and payable, all tax liabilities to which the properties of the Company may be subject have been paid and discharged. The provisions for income and other taxes payable reflected in the Financial Statements make adequate provision for all then accrued and unpaid taxes of the Company. There are no tax liens on any property of the Company, nor are there any pending or threatened examinations, actions, suits, investigations, audits, assessments or tax claims asserted. The Company has not been granted any extensions of limitation periods applicable to tax claims. Except jurisdictions in which the Company filed Tax Returns, no claim has been made by a taxing authority that the Company is or may be subject to taxation by that jurisdiction. All copies of Tax Returns delivered to Index by the Company are true and correct, and any and all notices from foreign, federal, state and local taxing authorities, tax examination reports and statements of deficiencies assessed against or agreed to by the Company have been made available to Index. The Company is not a party to, or bound by, any tax indemnity, tax sharing or tax allocation agreement. The Company is not a member of an "affiliated group," as defined in Section 1504(a) of the Code and is not the owner of an interest in a partnership, joint venture, trust, limited liability company or other entity or organization. All positions taken on federal Tax Returns that could give rise to a penalty for substantial understatement pursuant to Section 6662(d) of the Code have been disclosed on such Tax Returns. The Company has not agreed to and is not required to make any adjustment pursuant to Section 481(a) of the Code (or any predecessor provision) by reason of any change in any accounting method. The Company has no application pending with any taxing authority requesting permission for any changes in any accounting method, and the IRS has not proposed any such adjustment or change in accounting method. The Company is not subject to any limitation under Section 382 or Section 383 of the Code. Index shall have sole control over any contest relating to federal, state, local, or foreign tax assessments or proposed assessments against the Company. Index shall promptly notify the Company of any audit or examination of the books and records of the Company undertaken by the tax authorities, any tax assessments or proposed assessments or any extension of the statute of limitations applicable to any Tax Returns of the Company relating to any taxable year or periods ending on or prior to the Closing Date and shall provide the Company with periodic reports regarding the status of such audit or examination. The Company shall be entitled to participate in (but not control) any such contest at its sole cost. Index shall not settle or otherwise compromise any such contest in a manner which results in liability to the Company under this Agreement without the written consent of the Company, which consent shall not be unreasonably withheld. 4.12 Books and Records. The books and records of the Company fairly reflect the transactions to which the Company is a party or by which its properties are bound. 4.13 Questionable Payments. The Company nor any employee, agent or representative of either of them has, directly or indirectly, made any bribes, kickbacks, illegal payments or illegal political contributions using Company funds or made any payments from the Company's funds to governmental officials for improper purposes or made any illegal payments from the Company's funds to obtain or retain business. 7 101 4.14. Environmental Matters. (a) Definitions. For the purpose of this Agreement, the following terms shall have the meaning herein specified: (i) "Governmental Authority" shall mean the United States, each state, each county, each city and each other political subdivision in which the Company's business is located, and any court, political subdivision, agency or instrumentality with jurisdiction over the Company's business. (ii) "Environmental Laws" shall mean (A) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. 9601 et seq. ("CERCLA"), (B) the Resource Conservation and Recovery Act, as amended by the Hazardous and Solid Waste Amendment of 1984, 42 U.S.C.A. 6901 et seq. ("RCRA"), (C) the Clean Air Act, 42 U.S.C.A. 7401 et seq., (D) the Federal Water Pollution Control Act, as amended, 33 U.S.C.A. 1251 et seq., (E) the Toxic Substances Control Act, 15 U.S.C.A. 2601 et seq., (F) all applicable state laws, and (G) all other laws and ordinances relating to municipal waste, solid waste, air pollution, water pollution and/or the handling, discharge, disposal or recovery of on-site or off-site hazardous substances or materials, as each of the foregoing has been or may hereafter be amended from time to time. (iii) "Hazardous Materials" shall mean, among others, (A) any "hazardous waste" as defined by the RCRA, and regulations promulgated thereunder; (B) any "hazardous substance" as defined by CERCLA, and regulations promulgated thereunder; (C) any "toxic pollutant" as defined in the Federal Water Pollution Prevention and Control Act, as amended, 33 U.S.C. 1251 et seq., (commonly known as "CWA" for "Clear Water Act"), and any regulations thereunder; (D) any "hazardous air pollutant" as defined in the Air Pollution Prevention and Control Act, as amended, 42 U.S.C. 7401 et seq. (commonly known as "CAA" for "Clear Air Act") and any regulations thereunder; (E) asbestos; (F) polychlorinated biphenyls; (G) underground storage tanks, whether empty, filled or partially filled with any substance; (H) any substance the presence of which on the Business Location (as hereinafter defined) is prohibited by any Environmental Laws; and (I) any other substance which is regulated by any Environmental Laws. (iv) "Hazardous Materials Contamination" shall mean the contamination (whether presently existing or hereafter occurring) of the improvements, facilities, soil, groundwater, air or other elements on or at the location of the Company at 6500 Brittmoore Road, Houston, Texas 77041, or at any other location where the Company conducts or has conducted business (collectively, the "Business Location") by Hazardous Materials, or the contamination of the buildings, facilities, soil, groundwater, air or other elements on or any other specific property or general area, as a result of Hazardous Materials emanating from the operations of the Company's business. Notwithstanding the foregoing, if any Environmental Law is amended so as to broaden the meaning of any term defined in it, such broader meaning shall apply subsequent to the effective date of such amendment. Where a defined term in this Agreement derives its meaning from a statutory reference, for the purposes of this Agreement any regulatory definition promulgated pursuant to the applicable statute shall be deemed to be applicable to the extent its definition is broader than the statutory reference and any reference or citation to a statute or regulation shall be deemed to include any amendments to that statute or regulation and judicial and administrative interpretations of it. To the extent that any state laws or regulations establish a meaning for a term defined in this Agreement through reference to a federal Environmental Law that is broader than the meaning specified in such federal Environmental Law, such broader meaning set forth in the state Environmental Law shall apply. Any specific references to a law shall include any amendments to it promulgated from time to time. (b) Representations and Warranties. Based on the foregoing, the Company represents and warrants that, to its best knowledge and belief: (i) There has been no failure by the Company to comply with all applicable requirements of Environmental Laws relating to the Company, the Company's operations, and the Company's 8 102 manufacture, processing, distribution, use, treatment, generation, recycling, reuses, sale, storage, handling, transportation or disposal of any Hazardous Material and the Company is not aware of any facts or circumstances which could materially impair such compliance with all applicable Environmental Laws. (ii) The Company has not, through the Closing Date, received notice from any Governmental Authority or any other person of any actual or alleged violation of any Environmental Laws, nor is any such notice anticipated. (iii) The Company will not do or permit anything that will cause the Company to be in violation of any requirements of Environmental Laws, or do or permit anything to be done that would materially and adversely affect the financial condition of the Company or subject the Company to any enforcement actions under any Environmental Laws. (iv) The Company has not obtained and is not required to obtain any permits, licenses or similar authorizations to construct, occupy, operate or use any buildings, improvements, fixtures and equipment owned or leased by the Company by reason of any Environmental Laws. (v) No Hazardous Materials are now located at the Business Location, and the Company has not ever caused or permitted any Hazardous Materials to be generated, placed, stored, held, handled, located or used at the Business Location, any part thereof or at any other site controlled or utilized by the Company in its operation of its business, except in compliance with applicable Environmental Laws. (vi) Hazardous Materials Contamination does not now and has never existed on, in, under or at the location of the Company or at any other site controlled or utilized by the Company in the operation of its business. No part of the Business Location or any other site controlled or utilized by the Company in the operation of its business is being used has ever been used by others for the release, disposal or long-term storage of Hazardous Materials, nor is any part of the Business Location or any other site controlled or utilized by the Company in the operation of its business otherwise affected by Hazardous Materials Contamination. (vii) No investigation, administrative order, consent order or agreement, litigation or settlement with respect to Hazardous Materials or Hazardous Materials Contamination is proposed, threatened, anticipated, pending or otherwise in existence with respect to the Business Location or with respect to any other site controlled or utilized by the Company in the operation of its business. The Business Location is not currently on, and has never been on, any federal or state "Superfund" or "Superlien" list. 4.15 Intellectual Property. There are no material patents, patent applications, trade names, trademark or service mark registrations or applications, registered trade dress rights, common law trademarks or copyright registrations or applications owned by the Company or which the Company is licensed to use. To the best knowledge and belief of the Company, there are no claims that any product, activity or operation of the Company infringes upon or involves, or has resulted in the infringement of, any patents, patent applications, trade names, trademark or service mark registrations or applications, registered trade dress rights, common law trademarks or copyright registrations or applications or any other proprietary right of any other person, corporation or other entity; and no proceedings have been instituted, are pending or are threatened with respect thereto. 4.16 Insurance. The Company has provided Index a list of all material insurance policies and binders in effect, insuring the Company, including, without limitation, fire and extended coverage, public liability, property damage, vehicle, product liability insurance, environmental impairment insurance, worker's compensation coverage, medical and dental insurance held by or on behalf of the Company. All such insurance is in full force and effect and no notice of cancellation has been received. 4.17 Contracts. Except as set forth in the Registration Statement, the Company has no material contracts, leases, arrangements and commitments (whether oral or written). Except in the ordinary course and 9 103 as set forth in the Registration Statement, the Company is not a party to or bound by or affected by any material contract, lease, arrangement or commitment (whether oral or written) relating to: (a) the employment of any person; (b) collective bargaining with, or any representation of any employees by, any labor union or association; (c) the acquisition of services, supplies, equipment or other personal property; (d) the purchase or sale of real property; (e) distribution, agency or construction; (f) lease of real or personal property as lessor or lessee or sublessor or sublessee; (g) lending or advancing of funds; (h) borrowing of funds or receipt of credit; (i) incurring of any obligation or liability; or (j) the sale of personal property. 4.18 Litigation. The Company is not subject to any judgment or order of any court or quasi-judicial or administrative agency of any jurisdiction, domestic or foreign, nor is there any charge, complaint, lawsuit or governmental investigation pending or, to the best knowledge of the Company, threatened against the Company. The Company is not a plaintiff in any action, domestic or foreign, judicial or administrative. There are no existing actions, suits, proceedings or investigations of the Company, and the Company does not know of any basis for such actions, suits, proceedings or investigations. There are no unsatisfied judgments, orders, writs, injunctions, decrees or stipulations affecting the Company or to which the Company is a party. 4.19 Employees. Except in the ordinary course, the Company does not owe any material compensation, bonuses, profit sharing, pension, retirement, stock options or related appreciation rights, deferred or otherwise, to any current or previous employees. The Company is not a party to or bound by any collective bargaining agreement. There are no material loans or other material obligations payable or owing by the Company to any shareholder, officer, director or employee of the Company, except as set out in the Registration Statement. 4.20 Employee Benefit Plans. Except as set out in the Registration Statement, the Company has no material (a) nonqualified deferred or incentive compensation or retirement plans or arrangements, (b) qualified retirement plans or arrangements, (c) other employee compensation, severance or termination pay or welfare benefit plans, programs or arrangements or (d) any related trusts, insurance contracts or other funding arrangements maintained, established or contributed to by the Company within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Company does not have any liability under Title IV of ERISA as a result of actions or events occurring prior to the Closing. 4.21 Legal Compliance. No claim has been filed against the Company alleging a violation of any applicable laws and regulations of foreign, federal, state and local governments and all agencies thereof. The Company holds all of the material permits, licenses, certificates or other authorizations of foreign, federal, state or local governmental agencies required for the conduct of its business as presently conducted. 4.22 Broker's Fees. The Company or anyone on its behalf does not have any liability to any broker, finder, investment banker or agent, or has agreed to pay any brokerage fees, finder's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with the Merger or any similar transaction. 4.23 Disclosure. The representations and warranties and statements of fact made by the Company in this Agreement and in any Schedule hereto are, as applicable, accurate, correct and complete and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained herein or therein not misleading. 4.24 Information Supplied. None of the information supplied by the Company for use in the Registration Statement and contained therein will, as of the date that the Registration Statement is filed with the Commission, on the date it is declared effective or at the time of the meeting of the shareholders of the Company to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The proxy statement contained in the Registration Statement will comply, in all material respects, as to form with the provisions of the Exchange Act. 10 104 ARTICLE 5 CONDUCT OF BUSINESS PENDING THE CLOSING 5.1 Conduct of Business by the Company Pending the Closing. The Company covenants and agrees that prior to the Closing Date, except in the ordinary course of business or with the approval of Index: (a) The Company shall conduct its business and operations only in the usual and ordinary course of business and consistent with past custom and practice; (b) The Company shall not directly or indirectly do any of the following, except in the ordinary course of business: (i) sell, pledge, dispose of or encumber any of its material assets, (ii) amend or propose to amend its Articles of Incorporation or By-Laws; (iii) split, combine or reclassify any outstanding shares of its capital stock, or declare, set aside or pay any dividend or other distribution payable in cash, stock, property or otherwise with respect to shares of its capital stock except as required for the Class A Convertible Preferred Stock; (iv) redeem, purchase or acquire or offer to acquire any shares of Company Stock; or (v) enter into or modify any material contract, agreement, commitment or arrangement with respect to any of the foregoing; (c) The Company shall not, (i) issue, sell, pledge or dispose of, or agree to issue, sell, pledge or dispose of, any additional shares of, or any options, warrants, conversion privileges or rights of any kind to acquire any shares of, its capital stock; (ii) acquire (by merger, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership or other business organization or division or the material assets thereof; (iii) incur any indebtedness for borrowed money, issue any debt securities or guarantee any indebtedness to others; or (iv) enter into or modify any contract, agreement, commitment or arrangement with respect to any of the foregoing; (d) The Company shall not enter into any employment, severance or similar agreements or arrangements with, or grant any bonus, salary increase, severance or termination pay to, any officers or directors; (e) The Company shall not adopt any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, fund or arrangement for the benefit or welfare of any employee; (f) Except as otherwise required by its Articles of Incorporation or By-Laws, by this Agreement or by applicable law, the Company shall not call any meeting of shareholders; (g) The Company shall (i) use its best efforts not to take any action which would render, or which reasonably may be expected to render, any representation or warranty made by it in this Agreement untrue at any time prior to the Closing Date as if then made; and (ii) notify Index of any emergency or other change in the normal course of its business or in the operation of its properties and of any tax audits, tax claims, governmental or third party complaints, investigations or hearings (or communications indicating that the same may be contemplated) if such emergency, change, audit, claim, complaint, investigation or hearing would be material, individually or in the aggregate, to the financial condition, results of operations or business of the Company, or to the ability of any of the parties hereto to consummate the transactions contemplated by this Agreement; (h) The Company shall notify Index promptly of any material adverse event or circumstance affecting the Company (including the filing of any material litigation against the Company or the existence of any dispute with any person or entity which involves a reasonable likelihood of such litigation being commenced); and (i) The Company shall comply with all legal requirements and contractual obligations applicable to its operations and business and pay all applicable taxes. 5.2 Other Actions. Unless approved by Index, the Company shall not take any action or permit any action to occur that might reasonably be expected to result in any of the representations and warranties of the 11 105 Company contained in this Agreement becoming untrue after the date hereof or any of the conditions to the Closing set forth in Article 7 of this Agreement not being satisfied. ARTICLE 6 ADDITIONAL AGREEMENTS 6.1 Access and Information. Except for information relating to any claims any party may have against the other, the Company and Index shall each afford to the other and to the other's financial advisors, legal counsel, accountants, consultants and other representatives full access during normal business hours throughout the period prior to the Effective Time to all of its books, records, properties and personnel and, during such period, each shall furnish promptly to the other (a) a copy of each report, schedule and other document filed or received by it pursuant to the requirements of federal or state securities laws, and (b) all other information as such other party may reasonably request. Each party shall hold in confidence all non-public information until such time as such information is otherwise publicly available and, if this Agreement is terminated, each party will upon written request deliver to the other all documents, work papers and other material obtained by such party or on its behalf from the other party as a result of this Agreement or in connection herewith, whether so obtained before or after the execution hereof. As soon as practicable following the Closing, the Company shall deliver to Index all of the books and records of the Company. 6.2 Registration Statement. Index and the Company shall cooperate in preparing a registration statement on Form S-4 and combined prospectus and proxy statement, any amendments or supplements thereto and any notices, reports, letters, proxies or other materials required to be filed with the Commission in connection with the Merger and the Newman Merger (collectively, the registration statement and combined prospectus and proxy statement, any amendments or supplements thereto and any notices, reports, letters, proxies or other materials required to be filed with the Commission in connection with the Merger and the Newman Merger are herein referred to as the "Registration Statement"). The parties shall cooperate with each other in providing any information that the other party may reasonably request to aid in the preparation of the Registration Statement. The parties will use their commercially reasonable efforts to respond to the comments of the Commission with respect to the Registration Statement and will make any further filing (including amendments and supplements) in connection therewith that may be necessary, proper and advisable. Index will provide the Company, and the Company will provide Index, with whatever information and assistance in connection with the foregoing filings that the filing party reasonably may request. Index will take all actions that may be necessary, proper or advisable under state securities laws in connection with the offering and issuance of Index Common Stock as contemplated herein. 6.3 Meetings of Shareholders. (a) The Company shall call a special meeting of its shareholders prior to the Effective Time (at a date agreed upon with Index) to be held in accordance with the laws of the State of Texas to consider and vote upon the Merger. (b) The Merger Sub shall call a special meeting of its sole stockholder prior to the Effective Time to be held in accordance with the laws of the State of Nevada to consider and vote upon the Merger. The parties hereto acknowledge and agree that the Merger Sub's sole stockholder may approve the Merger by written consent in lieu of holding such a meeting. (c) Index shall call a special meeting of its shareholder prior to the Effective Time to be held in accordance with the laws of the State of Texas to consider and vote upon the Newman Merger. 6.4 Intentionally Left Blank. 6.5 Press Releases. The Company and Index shall consult with each other as to the form and substance of any press release or other public disclosure of matters related to this Agreement or any of the transactions contemplated hereby; provided, however, that nothing in this Section 6.5 shall be deemed to prohibit any party 12 106 hereto from making any disclosure that is required to fulfill such party's disclosure obligations imposed by law, including, without limitation, federal securities laws. ARTICLE 7 CONDITIONS TO CLOSING 7.1 Conditions to Obligations of Each Party to Effect the Closing. The respective obligations of each party to effect the Closing shall be subject to the fulfillment on or prior to the Closing Date of the following conditions: (a) The Registration Statement shall have been declared effective by the Commission and no stop order with respect thereto shall be in effect; (b) The Merger shall have been approved by the shareholders of Index, the Company and the Merger Sub, in accordance with the laws of the States of Texas and Nevada; (c) The Newman Merger shall have been approved by the shareholders of Index, Newman Acquisition and Newman, in accordance with the laws of the States of Nevada and New Mexico, respectively; (d) Intentionally left blank; (e) No order, injunction or decree shall have been entered and remain in effect in any action or proceeding before any foreign, federal or state court or governmental agency or other foreign, federal or state regulatory or administrative agency or commission that would prevent or make illegal the consummation of the transactions contemplated hereby. 7.2 Additional Conditions to Index's and the Merger Sub's Obligations. The obligations of each of Index and the Merger Sub to effect the Closing are subject to the satisfaction of the following additional conditions on or before the Closing Date: (a) The representations and warranties set forth in Article 4 of this Agreement will be true and correct in all material respects as of the date hereof and at and as of the Closing Date as though then made; (b) The Company shall have performed, in all material respects, each obligation and agreement and complied with each covenant to be performed and complied with by it under Articles 5 and 6 of this Agreement prior to the Closing Date; (c) All consents by governmental or regulatory agencies or otherwise that are required for the consummation of the transactions contemplated hereby or that are required for Index to own, operate or control the Company or any portion of the assets of the Company to prevent a breach of or a default under or a termination of any agreement material to the Company to which the Company is a party or to which any material portion of the assets of the Company is subject, will have been obtained; (d) No action or proceeding before any court or governmental body will be pending or threatened wherein a judgment, decree or order would prevent or restrain any of the transactions contemplated hereby or cause such transactions to be declared unlawful, nullified or rescinded or which might adversely affect the right of Index to own, operate or control the Company; (e) Index and its financial and legal advisors shall have completed a due diligence review of the business, operations and financial statements of the Company, the results of which shall be satisfactory to Index in its sole discretion; (f) Index will have received from Fulbright & Jaworski, L.L.P., counsel to the Company, an opinion addressed to Index, dated the Closing Date; 13 107 (g) No event shall have occurred prior to the Closing which in the reasonable judgment of Index or the Merger Sub, would materially affect the purpose of the Merger; and (h) At the Closing, the Company shall have delivered or caused to be delivered to Index the following: (i) a certificate executed by the President and Secretary of the Company stating that the conditions set forth in Sections 7.2(a) through (d) of this Agreement have been satisfied; (ii) certified copies of the resolutions duly adopted by the Company's Board of Directors authorizing and approving the Merger and the execution, delivery and performance of this Agreement; (iii) certified copies of resolutions duly adopted by the Company's shareholders authorizing and approving the Merger and the execution, delivery and performance of this Agreement; (iv) certificates of good standing or comparable certificates for the Company from the jurisdiction of its incorporation and from every jurisdiction where a failure to be qualified or licensed would have a material adverse effect on its financial condition, results of operations or business, dated not earlier than five days prior to the Closing Date; (v) a copy of the Company's Articles of Incorporation certified as of a recent date by the Secretary of State of the State of Texas; (vi) an incumbency certificate of the officers of the Company; and (vii) such other documents as Index may reasonably request in connection with the transactions contemplated hereby. 7.3 Additional Conditions to the Company's Obligations. The obligations of the Company to effect the Closing are subject to the satisfaction of the following conditions on or before the Closing Date: (a) The representations and warranties set forth in Article 3 of this Agreement will be true and correct in all material respects as of the date hereof and at and as of the Closing Date as though then made; (b) Index shall have performed, in all material respects, each obligation and agreement and complied with each covenant required to be performed and complied with by it under Article 6 of this Agreement prior to the Closing Date; (c) No action or proceeding before any court or governmental body will be pending or threatened wherein a judgment, decree or order would prevent any of the transactions contemplated hereby or cause such transactions to be declared unlawful or rescinded; (d) The Company shall have received from Fouts & Moore, L.L.P., counsel to Index, an opinion addressed to the Company, dated the Closing Date; and (e) On the Closing Date, Index shall have delivered to the Company the following: (i) a certificate executed on behalf of Index and the Merger Sub stating that the conditions set forth in Sections 7.3(a) through (c) of this Agreement have been satisfied; (ii) certified copies of resolutions duly adopted by Index's and the Merger Sub's Boards of Directors authorizing and approving the Merger and the execution, delivery and performance of this Agreement; (iii) certified copies of the resolutions duly adopted by the shareholder of the Merger Sub authorizing and approving the Merger and the execution, delivery and performance this Agreement; (iv) certified copies of resolutions duly adopted by Index's Board of Directors authorizing and approving the Newman Merger and the execution, delivery and performance of the Newman Merger Agreement; 14 108 (v) certified copies of resolutions duly adopted by the shareholders of Index authorizing and approving the Newman Merger and the execution, delivery and performance of the Newman Merger Agreement; (vi) a certificate of existence for Index from the Secretary of State of the State of Texas and for Merger Sub from the Secretary of State of the State of Nevada, dated not earlier than five days prior to the Closing Date; (vii) a copy of Index's Articles of Incorporation certified by the Secretary of State of the State of Texas; (viii) a certificate of good standing for Index from the Secretary of State of the State of Texas and for the Merger Sub from the Secretary of State of the State of Nevada, dated not earlier than five days prior to the Closing Date; (ix) a copy of the Merger Sub's Articles of Incorporation certified by the Secretary of State of the State of Nevada; (x) an incumbency certificate of the officers of Index and the Merger Sub; and (xi) such other material documents as the Company may reasonably request in connection with the transactions contemplated hereby. ARTICLE 8 REMEDIES 8.1 General. In the event of any breach of this Agreement, the parties shall have all remedies at law or in equity. 8.2 Waiver. No waiver by any party of any default or breach by another party of any representation, warranty, covenant or condition contained in this Agreement shall be deemed to be a waiver of any subsequent default or breach by such party of the same or any other representation, warranty, covenant or condition. No act, delay, omission or course of dealing on the part of any party in exercising any right, power or remedy under this Agreement or at law or in equity shall operate as a waiver thereof or otherwise prejudice any of such party's rights, powers and remedies. All remedies, whether at law or in equity, shall be cumulative and the election of any one or more shall not constitute a waiver of the right to pursue other available remedies. ARTICLE 9 TERMINATION 9.1 Termination by Mutual Consent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time by the mutual consent of the parties hereto. 9.2 Termination by Any Party. This Agreement may be terminated and the Merger may be abandoned by action of the Board of Directors of any party hereto if a United States federal or state court of competent jurisdiction or United States federal or state governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable; provided, that the party seeking to terminate this Agreement pursuant to this clause shall have used all reasonable efforts to remove such injunction, order or decree. 9.3 Termination by Index. This Agreement may be terminated by Index upon written notice if the Closing has not occurred by December 31, 1996. 15 109 9.4 Effect of Termination and Abandonment. In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article 9, all obligations of the parties hereto shall terminate, except the obligations of the parties pursuant to Section 6.1. 9.5 Material Breach. This Agreement may be terminated if a material breach of this Agreement has occurred and such breach has not been cured by the breaching party within ten (10) business days of receipt of written notice from a non-breaching party detailing such breach. ARTICLE 10 GENERAL PROVISIONS 10.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by overnight courier or mailed by registered or certified mail (postage prepaid and return receipt requested) to the party to whom the same is so delivered, sent or mailed at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Index or the Merger Sub: David R. Little, President 580 Westlake Park Boulevard Suite 1100 Houston, Texas 77079 Phone: (713) 558-4448 Fax: (713) 558-4448 with a copy to: Gary A. Messersmith, Esq. Fouts & Moore, L.L.P. 5555 San Felipe, 17th Floor Houston, Texas 77066-2726 Phone: (713) 622-9966 Fax: (713) 622-1045 (b) if to the Company: Mr. Bryan Wimberly, President 6500 Brittmoore Houston, Texas 77041 Phone: (713) 937-0330 Fax: (713) 937-0574 with a copy to: Mr. Curtis Huff Fulbright & Jaworski, L.L.P. 1301 McKinney Houston, Texas 77010 Phone: (713) 651-5657 Fax: (713) 651-5246 10.2 Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. References to Sections and Articles refer to sections and articles of this Agreement unless otherwise stated. 10.3 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, 16 110 impaired or invalidated and the parties shall negotiate in good faith to modify this Agreement to preserve each party's anticipated benefits under this Agreement. 10.4 Miscellaneous. This Agreement (together with all other documents and instruments referred to herein): (a) constitutes the entire agreement and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof; (b) except as expressly set forth herein, is not intended to confer upon any other person any rights or remedies hereunder and (c) shall not be assigned by operation of law or otherwise, except that Index may assign all or any portion of its rights under this Agreement to any wholly-owned subsidiary but no such assignment shall relieve Index of its obligations hereunder, and except that this Agreement may be assigned by operation of law to any corporation with or into which Index may be merged. 10.5 Separate Counsel. Each party hereby expressly acknowledges that it has been advised and urged to seek its own separate legal counsel for advice with respect to this Agreement. 10.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 10.7 Counterparts. This Agreement may be executed in two or more counterparts which together shall constitute a single agreement. 10.8 Amendment. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties hereto. 10.9 Parties In Interest: No Third Party Beneficiaries. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives, successors and assigns of the parties hereto. This Agreement shall not be deemed to confer upon any person not a party hereto any rights or remedies hereunder. 10.10 Captions. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. 10.11 Expenses. The parties hereto shall pay all of their own expenses relating to the transactions contemplated by this Agreement, including, without limitation, the fees and expenses of their respective counsel and financial advisers. 10.12 Survival. The representations, warranties and covenants contained herein shall not survive the Closing. 17 111 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. INDEX, INC. By: /s/ DAVID R. LITTLE - ------------------------------------ DAVID R. LITTLE, President SEPCO ACQUISITION CORPORATION By: /s/ DAVID R. LITTLE - ------------------------------------ DAVID R. LITTLE, President SEPCO INDUSTRIES, INC. By: /s/ BRYAN WIMBERLY - ------------------------------------ BRYAN WIMBERLY, President 18 112 APPENDIX B: NEWMAN MERGER AGREEMENT 113 * * * * * AGREEMENT AND PLAN OF MERGER BY AND AMONG INDEX, INC., NEWMAN ACQUISITION CORPORATION, NEWMAN COMMUNICATIONS CORPORATION AND LITTLE & COMPANY INVESTMENT SECURITIES * * * * * AUGUST 12, 1996 114
ARTICLE/SECTION PAGE - ------- ---- RECITALS................................................................................ 1 ARTICLE 1 THE MERGER................................................................... 1 1.1 The Merger..................................................................... 1 1.2 Closing........................................................................ 2 1.3 Effective Time of the Merger................................................... 2 1.4 Articles of Incorporation and Bylaws........................................... 2 1.5 Directors and Officers......................................................... 2 ARTICLE 2 CONVERSION OF SHARES......................................................... 2 2.1 Conversion of Company Common Stock............................................. 2 2.2 Class C Warrants............................................................... 3 2.3 Stock Certificates............................................................. 3 2.4 Fractional Shares.............................................................. 3 2.5 Dissenting Shares.............................................................. 3 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF INDEX AND THE MERGER SUB................... 4 3.1 Organization................................................................... 4 3.2 Capitalization................................................................. 4 3.3 Certain Corporate Matters...................................................... 4 3.4 Authority Relative to this Agreement........................................... 4 3.5 Consents and Approvals; No Violations.......................................... 5 3.6 Information Supplied........................................................... 5 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND LITCO...................... 6 4.1 Organization................................................................... 6 4.2 Capitalization and Ownership of the Company.................................... 6 4.3 Certain Corporate Matters...................................................... 6 4.4 Subsidiaries................................................................... 7 4.5 Authority Relative to this Agreement........................................... 7 4.6 Consents and Approvals; No Violations.......................................... 7 4.7 Reports........................................................................ 7 4.8 Financial Statements........................................................... 8 4.9 Events Subsequent to Financial Statements...................................... 8 4.10 Undisclosed Liabilities........................................................ 9 4.11 Tax Returns and Audits......................................................... 9 4.12 Property....................................................................... 10 4.13 Books and Records.............................................................. 10 4.14 Questionable Payments.......................................................... 10 4.15 Environmental Matters.......................................................... 10 4.16 Intellectual Property.......................................................... 13 4.17 Insurance...................................................................... 13 4.18 Contracts...................................................................... 13 4.19 Litigation..................................................................... 14 4.20 Employees...................................................................... 14 4.21 Employee Benefit Plans......................................................... 14 4.22 Legal Compliance............................................................... 14 4.23 Broker's Fees.................................................................. 14 4.24 Disclosure..................................................................... 14 4.25 Bank Accounts.................................................................. 15 4.26 Information Supplied........................................................... 15
i 115
ARTICLE/SECTION PAGE - ------- ---- ARTICLE 5 CONDUCT OF BUSINESS PENDING THE CLOSING...................................... 15 5.1 Conduct of Business by the Company Pending the Closing......................... 15 5.2 Other Actions.................................................................. 16 ARTICLE 6 ADDITIONAL AGREEMENTS........................................................ 17 6.1 Access and Information......................................................... 17 6.2 Registration Statement......................................................... 17 6.3 Meetings of Shareholders....................................................... 17 6.4 Press Releases................................................................. 18 6.5 Reimbursement of LITCO......................................................... 18 ARTICLE 7 CONDITIONS TO CLOSING........................................................ 18 7.1 Conditions to Obligations of Each Party to Effect the Closing.................. 19 7.2 Additional Conditions to Index's and the Merger Sub's Obligations.............. 19 7.3 Additional Conditions to the Company's and LITCO's Obligations................. 21 ARTICLE 8 REMEDIES..................................................................... 22 8.1 Indemnification by LITCO....................................................... 22 8.2 Indemnification by Index....................................................... 23 8.3 Conditions of Indemnification.................................................. 23 8.4 Waiver......................................................................... 24 8.5 Remedies Not Exclusive......................................................... 24 ARTICLE 9 TERMINATION.................................................................. 24 9.1 Termination by Mutual Consent.................................................. 24 9.2 Termination by Any Party....................................................... 24 9.3 Termination by Index........................................................... 25 9.4 Effect of Termination and Abandonment.......................................... 25 9.5 Material Breach................................................................ 25 ARTICLE 10 GENERAL PROVISIONS.......................................................... 25 10.1 Notices........................................................................ 25 10.2 Interpretation................................................................. 26 10.3 Severability................................................................... 26 10.4 Miscellaneous.................................................................. 26 10.5 Separate Counsel............................................................... 26 10.6 Governing Law.................................................................. 26 10.7 Counterparts................................................................... 26 10.8 Amendment...................................................................... 26 10.9 Parties In Interest; No Third Party Beneficiaries.............................. 26 10.10 Captions....................................................................... 27 10.11 Expenses....................................................................... 27 10.12 Survival....................................................................... 27 SCHEDULES Schedule 4.2 Schedule 4.9 Schedule 4.20 Schedule 4.25 EXHIBITS Exhibit A Exhibit B
ii 116 AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER, dated as of August 12, 1996 (this "Agreement"), is made and entered into by and among Index, Inc., a Texas corporation ("Index"), Newman Acquisition Corporation, a Nevada corporation and a wholly-owned subsidiary of Index (the "Merger Sub"), Newman Communications Corporation, a New Mexico corporation (the "Company") and Little & Company Investment Securities, a Texas corporation ("LITCO"). RECITALS WHEREAS, the respective Boards of Directors of Index, the Merger Sub, the Company and LITCO have adopted resolutions approving and adopting the proposed merger (the "Merger") of the Company with the Merger Sub upon the terms and conditions hereinafter set forth in this Agreement; WHEREAS, LITCO, which holds approximately 61% of the issued and outstanding common stock of the Company, will enter into this Agreement for the purpose of making certain representations, warranties, covenants and agreements; WHEREAS, Index is entering into that Agreement and Plan of Merger with Sepco Industries, Inc., a Texas corporation and Sepco Acquisition Corporation, a Nevada corporation (the "Sepco Merger Agreement") simultaneously with this Agreement; WHEREAS, the Merger and the merger contemplated by the Sepco Merger Agreement (the "Sepco Merger") will be effected simultaneously; and WHEREAS, the Merger and the Sepco Merger are both intended to qualify as a tax-free transaction under Sections 351 and 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the foregoing premises, the representations, warranties and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to the conditions set forth herein, the parties hereto agree as follows: ARTICLE 1 THE MERGER 1.1 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3 hereof), the Merger Sub shall be merged with and into the Company and the separate corporate existence of the Merger Sub shall thereupon cease. The Company shall be the surviving corporation in the Merger. The Merger shall have the effects set forth in the applicable provisions of the Nevada General Corporation Law (the "NGCL") and the New Mexico Business Corporation Act (the "NMBCA"). 1.2 Closing. The closing of the Merger (the "Closing") shall take place at 10:00 a.m., local time, at the offices of Fulbright & Jaworski L.L.P., located at 1301 McKinney, Houston, Texas 77010 on the next business day after the shareholder approvals set forth in Section 6.3 hereof have been completed, or as soon as the conditions set forth in Article 7 have been satisfied or waived or as soon as practicable thereafter; provided, however, that the date of the Closing shall not be later than December 31, 1996, unless the parties hereto otherwise mutually agree in writing. Such date is herein referred to as the "Closing Date." At the Closing, the parties hereto shall deliver or cause to be delivered the certificates and other documents set forth in Article 7. 1.3 Effective Time of the Merger. If all the conditions to the Merger set forth in Article 7 shall have been fulfilled or waived in accordance herewith and this Agreement shall not have been terminated as provided in Article 9, the parties hereto shall cause Articles of Merger (the "Articles of Merger") that meet the requirements of the applicable provisions of the NGCL and the NMBCA, respectively, to be properly executed and filed with the Secretary of State of the States of Nevada and New Mexico, respectively, on the Closing Date. The Merger shall be effective at the time of acceptance of the filing of the Articles of Merger with the Secretary of State of the States of Nevada and New Mexico in accordance with the NGCL and the 1 117 NMBCA, respectively, or at such later time which the parties hereto shall have agreed upon and designated in such filing as the effective time of the Merger (the "Effective Time"). 1.4 Articles of Incorporation and By-Laws. The Articles of Incorporation and By-Laws of the Company in effect immediately prior to the Effective Time shall continue to be the Articles of Incorporation and By-Laws of the Company subsequent to the Effective Time, subject always to the right of the Company to amend its Articles of Incorporation and By-Laws in accordance with the laws of the State of New Mexico and the provisions of its Articles of Incorporation and By-Laws. 1.5 Directors and Officers. The directors and officers of the Merger Sub immediately prior to the Effective Time shall be the directors and officers of the Company and shall hold such positions from the Effective Time until their respective successors are duly elected or appointed and qualify in the manner provided in the Articles of Incorporation and By-Laws of the Company or as otherwise provided by law. ARTICLE 2 CONVERSION OF SHARES 2.1 Conversion of Company Common Stock. At the Effective Time, by virtue of the Merger and without any action required on the part of Index, the Company, the Merger Sub or any holder of capital stock of any of them: (a) Subject to the limitations contained herein, each share of common stock of the Company, no par value (the "Company Common Stock"), issued and outstanding immediately prior to the Effective Time shall be automatically converted into the right to receive one-fourth of one share of common stock of Index, par value $.01 per share (the "Index Common Stock"). (b) All shares of common stock of the Merger Sub issued and outstanding immediately prior to the Effective Time shall be cancelled and cease to be outstanding. 2.2 Class C Warrants. The Company's Class C Warrants shall be adjusted as provided in Section 7 of that Warrant Agreement by and between the Company and General Securities Transfer Agency, Inc. dated September 13, 1993. 2.3 Stock Certificates. At or following the Effective Time, each holder of an outstanding certificate or certificates representing the Company Common Stock shall surrender the same to Index and Index shall, in exchange therefor, cause to be issued to the holder of such certificate(s) a new certificate representing shares of Index Common Stock in accordance with Section 2.1, less any amount required to be withheld under applicable federal, state or local tax requirements, and the surrendered certificate(s) shall be cancelled. Until so surrendered and exchanged, each such certificate shall represent solely the right to receive shares of Index Common Stock in accordance with Section 2.1, without interest and less any tax withholding. 2.4 Fractional Shares. No fractional shares of Index Common Stock shall be issued in the Merger. In the event that a holder of the Company Common Stock would otherwise be entitled to receive any fractional shares of Index Common Stock as a result of the Merger, such holder shall be entitled to receive, in lieu thereof, an amount of cash to be determined by multiplying $1.00 by the fraction of a share of Index Common Stock to which such holder would otherwise have been entitled. 2.5 Dissenting Shares. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time not voted in favor of the Merger, the holder of which has given written notice of the exercise of dissenter's rights and has perfected such rights as required by the NMBCA is herein called a "Dissenting Share." Dissenting Shares shall not be converted into or represent the right to receive shares of Index Common Stock pursuant to this Section 2 and shall be entitled only to such rights as are available to such holder pursuant to the NMBCA, unless the holder thereof shall have withdrawn or forfeited his dissenter's rights. Each holder of Dissenting Shares shall be entitled to receive the value of such Dissenting Shares held by him in accordance with the applicable provisions of the NMBCA. Index will promptly pay to any holder of Dissenting Shares such amount as such holder shall be entitled to receive in accordance with the 2 118 applicable provisions of the NMBCA. If any holder of Dissenting Shares shall effectively withdraw or forfeit his dissenter's rights under the NMBCA, such Dissenting Shares shall be converted into the right to receive shares of Index Common Stock in accordance with this Section 2. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF INDEX AND THE MERGER SUB Index and the Merger Sub hereby jointly and severally represent and warrant to the Company and LITCO as follows: 3.1 Organization. Each of Index and the Merger Sub has been duly incorporated, is validly existing as a corporation and is in good standing under the laws of its state of incorporation, and has the requisite corporate power to carry on its business in such state as now conducted. 3.2 Capitalization. The total number of shares of stock of all classes which Index shall have the authority to issue is 110,000,000 shares, of which the following designations have been made: 100,000,000 shares of common stock, 1,000,000 shares of preferred stock, par value $1.00 per share and 1,000,000 shares of convertible preferred stock, par value $100 per share. As of the date of this Agreement, (a) 100 shares of common stock of Index are issued and outstanding, (b) no shares of preferred stock are issued and outstanding, and (c) no shares of convertible preferred stock are issued and outstanding. All of the issued and outstanding shares of common stock of Index are validly issued, fully paid, nonassessable and free of preemptive rights. All shares of Index Common Stock issuable in accordance with this Agreement will be, when so issued, duly authorized, validly issued, fully paid and nonassessable. The authorized capital stock of the Merger Sub consists of 100,000 shares of common stock, par value $.10 per share, of which 100 shares are outstanding and are validly issued, fully paid and nonassessable and are owned by Index. 3.3 Certain Corporate Matters. Index is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership of its properties, the employment of its personnel or the conduct of its business requires it to be so qualified, except where the failure to so qualify would not have a material adverse effect on Index's financial condition, results of operations or business. Index has the requisite corporate power and authority and all authorizations, licenses and permits necessary to carry on the business in which it is engaged and to own and use the properties owned and used by it except such authorization, licenses and permits the failure of which to possess would not have a material adverse effect on the financial condition, results of operations or business of Index. 3.4 Authority Relative to this Agreement. Each of Index and the Merger Sub has the requisite corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by Index and the Merger Sub and the consummation by Index and the Merger Sub of the transactions contemplated hereby have been duly authorized by the Boards of Directors of each of Index and the Merger Sub and, subject to stockholder approval as set forth in this Agreement, no other actions on the part of Index or the Merger Sub are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of Index and the Merger Sub and constitutes, subject to stockholder approval as set forth in this Agreement, a valid and binding agreement of each of Index and the Merger Sub, enforceable against Index and the Merger Sub in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 3.5 Consents and Approvals; No Violations. Except as may be required under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"), the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), state securities or blue sky laws, and the filing and recordation of the Articles of Merger as required by the NGCL and the NMBCA, no filing with, and no permit, authorization, consent or approval of, any public body or authority is necessary for the consummation by Index and the Merger Sub of the 3 119 transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement by Index or the Merger Sub nor the consummation by Index or the Merger Sub of the transactions contemplated hereby, nor compliance by Index or the Merger Sub with any of the provisions hereof, will (a) conflict with or result in any breach of any provisions of the Articles of Incorporation or By-Laws of Index or the Articles of Incorporation or By-Laws of the Merger Sub, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default of a material nature (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation, of a material nature, to which Index or any of its subsidiaries is a party or by which any of them or their properties or assets may be bound or (c) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Index, any of its subsidiaries or any of their properties or assets, except in the case of clauses (b) and (c) for violations, breaches or defaults which in the aggregate would not have a material adverse effect on the financial condition or results of operations of Index and its subsidiaries taken as a whole. The parties hereto agree and acknowledge that Sepco Industries, Inc. was required to obtain and has obtained the written consent of Fleet Capital Corporation as required under that Second Amended and Restated Loan and Security Agreement by and between Sepco Industries, Inc. and Fleet Capital Corporation dated April 1, 1994, as amended. 3.6 Information Supplied. None of the information provided by Index for use in the Registration Statement (as defined in Section 6.2 hereof) and contained therein will, as of the date that the Registration Statement is filed with the Securities and Exchange Commission (the "Commission"), on the date it is declared effective or at the time of the meeting of the shareholders of the Company to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The registration statement and prospectus contained in the Registration Statement will comply, in all material respects, as to form with the provisions of the Exchange Act and the Securities Act. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND LITCO The Company and LITCO hereby jointly and severally represent and warrant to Index and the Merger Sub as follows: 4.1 Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and has the requisite corporate power and authority to carry on its business as now conducted in all applicable jurisdictions. 4.2 Capitalization and Ownership of the Company. The Company's entire authorized capital stock consists of 10,000,000 shares of common stock, of which 2,552,064 shares are outstanding and 2,000,000 shares of preferred stock, no par value, of which none are outstanding. All of the shares of Company Common Stock have been duly authorized and are validly issued, fully paid and nonassessable and have not been issued in violation of any pre-emptive rights. Except as set forth on Schedule 4.2 hereto, there are no outstanding or authorized options, rights, warrants, calls, convertible securities, rights to subscribe, conversion rights or other agreements or commitments to which the Company or LITCO are parties or which are binding upon the Company or LITCO providing for the issuance by the Company or transfer by the Company or LITCO of additional shares of the Company's capital stock and the Company has not reserved any shares of its capital stock for issuance, nor are there any outstanding stock option rights, phantom equity or similar rights, contracts, arrangements or commitments. There are no voting trusts or any other agreements or understandings, written or oral, with respect to the voting of the Company's capital stock. 4.3 Certain Corporate Matters. The Company is duly licensed or qualified to do business and is in good standing as a foreign corporation in every jurisdiction in which the character of the Company's properties or nature of the Company's business requires it to be so licensed or qualified other than such jurisdictions in 4 120 which the failure to be so licensed or qualified does not, or insofar as can reasonably be foreseen, in the future will not, have a material adverse effect on its financial condition, results of operations or business. The Company has full corporate power and authority and all authorizations, licenses, variances, exemptions, orders, contracts, approvals and permits necessary to carry on the business in which it is engaged or in which it proposes presently to engage and to own and use the properties owned and used by it. The Company has delivered to Index true, accurate and complete copies of its Articles of Incorporation and By-Laws, which reflect all amendments made thereto at any time prior to the date of this Agreement. The records of meetings of the shareholders and Board of Directors of the Company are complete and correct in all material respects. The stock records of the Company and the shareholder lists of the Company that the Company has previously furnished to Index are complete and correct in all material respects and accurately reflect the record ownership and the beneficial ownership of all the outstanding shares of the Company's capital stock and all other outstanding securities issued by the Company. The Company is not in default under or in violation of any provision of its Articles of Incorporation or By-Laws in any material respect. The Company is not in default or in violation of any restriction, lien, encumbrance, indenture, contract, lease, sublease, loan agreement, note or other obligation or liability by which it is bound or to which any of its assets is subject. 4.4 Subsidiaries. The Company does not own, directly or indirectly, any of the capital stock of any other corporation or any equity, profit sharing, participation or other interest in any corporation, partnership, joint venture or other entity. 4.5 Authority Relative to this Agreement. Each of the Company and LITCO has the requisite corporate power and authority to enter into this Agreement and carry out its obligations hereunder. The execution, delivery and performance of this Agreement by both the Company and LITCO and the consummation of the transactions contemplated hereby have been duly authorized by the Boards of Directors of each of the Company and LITCO and, subject to shareholder approval as set forth in this Agreement, no other actions on the part of the Company or LITCO are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of the Company and LITCO and constitutes, subject to shareholder approval as set forth in this Agreement, a valid and binding obligation of the Company and LITCO, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 4.6 Consents and Approvals; No Violations. Except as may be required under the Securities Act, the Exchange Act, state securities or blue sky laws, and the filing and recordation of the Articles of Merger as required by the NGCL and the NMBCA, no filing with, and no permit, authorization, consent or approval of, any public body or authority is necessary for the consummation by the Company of the transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby, nor compliance by the Company with any of the provisions hereof, will (a) conflict with or result in any breach of any provisions of the Articles of Incorporation or By-Laws of Company, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which the Company is a party or by which it or any of its properties or assets may be bound or (c) violate any order, law, resolution, writ, injunction, decree, statute, rule or regulation applicable to the Company, or any of its properties or assets, except in the case of clauses (b) and (c) for violations, breaches or defaults which in the aggregate would not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole. 4.7 Reports. The Company has filed all reports required to be filed with the Securities and Exchange Commission (the "Commission") pursuant to the Exchange Act (collectively, the "Reports"). The Company has delivered to Index copies of all Reports filed with Commission since March 26, 1994. None of the Reports, as of their respective dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5 121 4.8 Financial Statements. The Company has delivered to Index the following audited financial statements: (a) its balance sheets as of December 31, 1995 and March 25, 1995; (b) its statements of operations for the nine months ended December 31, 1995 and 1994 and for the years ended March 25, 1995 and March 26, 1994; (c) its statements of cash flows for the nine months ended December 31, 1995 and 1994 and for the years ended March 25, 1995 and March 26, 1994; (d) its statements of changes in shareholders' equity for the nine months ended December 31, 1995 and 1994; and (e) its statements of changes in shareholders' equity for the years ended March 25, 1995 and March 26, 1994. In addition, the Company has delivered to Index the following unaudited financial statements: (a) its balance sheet as of March 31, 1996; (b) its statement of operations for the three months ended March 31, 1996; and (c) its statement of cash flows for the three months ended March 31, 1996. Such financial statements are herein collectively referred to as the "Financial Statements." The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby and present fairly the financial condition of the Company as of such dates and the results of its operations and changes in cash flows for such periods. 4.9 Events Subsequent to Financial Statements. Since March 31, 1996, there has not been: (a) Any adverse change in the financial condition, results of operations or business of the Company; (b) Any sale, lease, transfer, license or assignment of any assets, tangible or intangible, of the Company; (c) Any damage, destruction or property loss, whether or not covered by insurance, affecting adversely the properties or business of the Company; (d) Any declaration or setting aside or payment of any dividend or distribution with respect to the shares of capital stock of the Company or any redemption, purchase or other acquisition of any such shares; (e) Any subjection to any lien on any of the assets, tangible or intangible, of the Company; (f) Any incurrence of indebtedness or liability or assumption of obligations by the Company; (g) Any waiver or release by the Company of any right of any material value; (h) Any increase in compensation or benefits to officers or directors of the Company; (i) Any change made or authorized in the Articles of Incorporation or By-laws of the Company; (j) Except as set forth on Schedule 4.9 hereto, any issuance, transfer, sale or other disposition by the Company of any shares of its capital stock or other equity securities, or any grant of any options, warrants or other rights to purchase or obtain (including upon conversion or exercise) shares of its capital stock or other equity securities; or (k) Any loan to or other transaction with any officer, director or shareholder of the Company giving rise to any claim or right of the Company against any such person or of such person against the Company. 4.10 Undisclosed Liabilities. The Company has no material liability or obligation of any nature whatsoever, either direct or indirect, matured or unmatured, accrued, absolute, contingent or otherwise. 4.11 Tax Returns and Audits. The Company has duly and timely filed or caused to be filed all returns, reports or similar statements (including any attached schedules) required to be filed with respect to any tax including, without limitation, all information returns, claims for refunds, amended returns and declarations of estimated tax (collectively, the "Tax Returns"). For the purpose of this Agreement, "tax" shall include any federal, state, local or foreign income, gross receipts, windfall profits, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, transfer, stamp or environmental tax, or any other tax or similar assessment or charge, together with any interest or penalty, addition to tax or additional amount imposed by any governmental authority. The Company has paid in full or fully reserved against in the Financial Statements all taxes, interest, penalties, assessments and deficiencies due or claimed to be due by it to foreign, federal, state or local taxing authorities. 6 122 All Tax Returns are complete and accurate and disclose all taxes required to be paid. The income Tax Returns filed by the Company are not being, to the knowledge of the Company, examined by the Internal Revenue Service (the "IRS") or other applicable taxing authorities for any period. All taxes or estimates thereof that are due as of December 31, 1995, or are claimed or asserted by any taxing authority to be due as of such date, have been (a) timely and appropriately paid so as to avoid penalties for underpayment or (b) accrued for on the balance sheet as of December 31, 1995, as contained in the Financial Statements. Except for amounts not yet due and payable, all tax liabilities to which the properties of the Company may be subject have been paid and discharged. The provisions for income and other taxes payable reflected in the Financial Statements make adequate provision for all then accrued and unpaid taxes of the Company. There are no tax liens on any property of the Company, nor are there any pending or threatened examinations, actions, suits, investigations, audits, assessments or tax claims asserted. The Company has not been granted any extensions of limitation periods applicable to tax claims. Since May 1991, except jurisdictions in which the Company filed Tax Returns, no claim has been made by a taxing authority that the Company is or may be subject to taxation by that jurisdiction. All copies of Tax Returns delivered to Index by the Company are true and correct, and any and all notices from foreign, federal, state and local taxing authorities, tax examination reports and statements of deficiencies assessed against or agreed to by the Company since May 1991 have been made available to Index. The Company is not a party to, or bound by, any tax indemnity, tax sharing or tax allocation agreement. The Company is not a member of an "affiliated group," as defined in Section 1504(a) of the Code and is not the owner of an interest in a partnership, joint venture, trust, limited liability company or other entity or organization. All positions taken on federal Tax Returns that could give rise to a penalty for substantial understatement pursuant to Section 6662(d) of the Code have been disclosed on such Tax Returns. The Company has not agreed to and is not required to make any adjustment pursuant to Section 481(a) of the Code (or any predecessor provision) by reason of any change in any accounting method. The Company has no application pending with any taxing authority requesting permission for any changes in any accounting method, and the IRS has not proposed any such adjustment or change in accounting method. The Company is not subject to any limitation under Section 382 or Section 383 of the Code. Index shall have sole control over any contest relating to federal, state, local, or foreign tax assessments or proposed assessments against the Company. Index shall promptly notify LITCO of any audit or examination of the books and records of the Company undertaken by the tax authorities, any tax assessments or proposed assessments or any extension of the statute of limitations applicable to any Tax Returns of the Company relating to any taxable year or periods ending on or prior to the Closing Date and shall provide LITCO with periodic reports regarding the status of such audit or examination. LITCO shall be entitled to participate in (but not control) any such contest at its sole cost. Index shall not settle or otherwise compromise any such contest in a manner which results in liability to LITCO under this Agreement without the written consent of LITCO, which consent shall not be unreasonably withheld. 4.12 Property. The Company does not own or lease any real or personal property. 4.13 Books and Records. The books and records of the Company fairly reflect the transactions to which the Company is a party or by which its properties are bound. 4.14 Questionable Payments. Neither the Company nor LITCO nor any employee, agent or representative of either of them has, directly or indirectly, made any bribes, kickbacks, illegal payments or illegal political contributions using Company funds or made any payments from the Company's funds to governmental officials for improper purposes or made any illegal payments from the Company's funds to obtain or retain business. 4.15 Environmental Matters. (a) Definitions. For the purpose of this Agreement, the following terms shall have the meaning herein specified: (i) "Governmental Authority" shall mean the United States, each state, each county, each city and each other political subdivision in which the Company's business is located, and any court, political subdivision, agency or instrumentality with jurisdiction over the Company's business. 7 123 (ii) "Environmental Laws" shall mean (A) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. 9601 et seq. ("CERCLA"), (B) the Resource Conservation and Recovery Act, as amended by the Hazardous and Solid Waste Amendment of 1984, 42 U.S.C.A. 6901 et seq. ("RCRA"), (C) the Clean Air Act, 42 U.S.C.A. 7401 et seq., (D) the Federal Water Pollution Control Act, as amended, 33 U.S.C.A. 1251 et seq., (E) the Toxic Substances Control Act, 15 U.S.C.A. 2601 et seq., (F) all applicable state laws, and (G) all other laws and ordinances relating to municipal waste, solid waste, air pollution, water pollution and/or the handling, discharge, disposal or recovery of on-site or off-site hazardous substances or materials, as each of the foregoing has been or may hereafter be amended from time to time. (iii) "Hazardous Materials" shall mean, among others, (A) any "hazardous waste" as defined by the RCRA, and regulations promulgated thereunder; (B) any "hazardous substance" as defined by CERCLA, and regulations promulgated thereunder; (C) any "toxic pollutant" as defined in the Federal Water Pollution Prevention and Control Act, as amended, 33 U.S.C. 1251 et seq., (commonly known as "CWA" for "Clear Water Act"), and any regulations thereunder; (D) any "hazardous air pollutant" as defined in the Air Pollution Prevention and Control Act, as amended, 42 U.S.C. 7401 et seq. (commonly known as "CAA" for "Clear Air Act") and any regulations thereunder; (E) asbestos; (F) polychlorinated biphenyls; (G) underground storage tanks, whether empty, filled or partially filled with any substance; (H) any substance the presence of which on the Business Location (as hereinafter defined) is prohibited by any Environmental Laws; and (I) any other substance which is regulated by any Environmental Laws. (iv) "Hazardous Materials Contamination" shall mean the contamination (whether presently existing or hereafter occurring) of the improvements, facilities, soil, groundwater, air or other elements on or at the location of the Company at 211 West Wall Street, Midland, Texas 79701, or at any other location where the Company conducts or has conducted business (collectively, the "Business Location") by Hazardous Materials, or the contamination of the buildings, facilities, soil, groundwater, air or other elements on or any other specific property or general area, as a result of Hazardous Materials emanating from the operations of the Company's business. Notwithstanding the foregoing, if any Environmental Law is amended so as to broaden the meaning of any term defined in it, such broader meaning shall apply subsequent to the effective date of such amendment. Where a defined term in this Agreement derives its meaning from a statutory reference, for the purposes of this Agreement any regulatory definition promulgated pursuant to the applicable statute shall be deemed to be applicable to the extent its definition is broader than the statutory reference and any reference or citation to a statute or regulation shall be deemed to include any amendments to that statute or regulation and judicial and administrative interpretations of it. To the extent that any state laws or regulations establish a meaning for a term defined in this Agreement through reference to a federal Environmental Law that is broader than the meaning specified in such federal Environmental Law, such broader meaning set forth in the state Environmental Law shall apply. Any specific references to a law shall include any amendments to it promulgated from time to time. (b) Representations and Warranties. Based on the foregoing, the Company and LITCO jointly and severally represent and warrant that, to their best knowledge and belief: (i) There has been no failure by the Company to comply with all applicable requirements of Environmental Laws relating to the Company, the Company's operations, and the Company's manufacture, processing, distribution, use, treatment, generation, recycling, reuses, sale, storage, handling, transportation or disposal of any Hazardous Material and neither the Company nor LITCO is aware of any facts or circumstances which could materially impair such compliance with all applicable Environmental Laws. (ii) Neither LITCO nor the Company has, through the Closing Date, received notice from any Governmental Authority or any other person of any actual or alleged violation of any Environmental Laws, nor is any such notice anticipated. 8 124 (iii) Neither the Company nor LITCO will do or permit anything that will cause the Company to be in violation of any requirements of Environmental Laws, or do or permit anything to be done that would materially and adversely affect the financial condition of the Company or subject the Company to any enforcement actions under any Environmental Laws. (iv) The Company has not obtained and is not required to obtain any permits, licenses or similar authorizations to construct, occupy, operate or use any buildings, improvements, fixtures and equipment owned or leased by the Company by reason of any Environmental Laws. (v) No Hazardous Materials are now located at the Business Location, and neither LITCO nor the Company has ever caused or permitted any Hazardous Materials to be generated, placed, stored, held, handled, located or used at the Business Location, any part thereof or at any other site controlled or utilized by the Company in its operation of its business. (vi) Hazardous Materials Contamination does not now and has never existed on, in, under or at the location of the Company or at any other site controlled or utilized by the Company in the operation of its business. No part of the Business Location or any other site controlled or utilized by the Company in the operation of its business is being used has ever been used by others for the release, disposal or long-term storage of Hazardous Materials, nor is any part of the Business Location or any other site controlled or utilized by the Company in the operation of its business otherwise affected by Hazardous Materials Contamination. (vii) No investigation, administrative order, consent order or agreement, litigation or settlement with respect to Hazardous Materials or Hazardous Materials Contamination is proposed, threatened, anticipated, pending or otherwise in existence with respect to the Business Location or with respect to any other site controlled or utilized by the Company in the operation of its business. The Business Location is not currently on, and has never been on, any federal or state "Superfund" or "Superlien" list. 4.16 Intellectual Property. There are no patents, patent applications, trade names, trademark or service mark registrations or applications, registered trade dress rights, common law trademarks or copyright registrations or applications owned by the Company or which the Company is licensed to use. To the best knowledge and belief of the Company and LITCO, there are no claims that any product, activity or operation of the Company infringes upon or involves, or has resulted in the infringement of, any patents, patent applications, trade names, trademark or service mark registrations or applications, registered trade dress rights, common law trademarks or copyright registrations or applications or any other proprietary right of any other person, corporation or other entity; and no proceedings have been instituted, are pending or are threatened with respect thereto. 4.17 Insurance. The Company has no insurance policies in effect. 4.18 Contracts. Except as set forth herein, the Company has no material contracts, leases, arrangements and commitments (whether oral or written). The Company is not a party to or bound by or affected by any contract, lease, arrangement or commitment (whether oral or written) relating to: (a) the employment of any person; (b) collective bargaining with, or any representation of any employees by, any labor union or association; (c) the acquisition of services, supplies, equipment or other personal property; (d) the purchase or sale of real property; (e) distribution, agency or construction; (f) lease of real or personal property as lessor or lessee or sublessor or sublessee; (g) lending or advancing of funds; (h) borrowing of funds or receipt of credit; (i) incurring of any obligation or liability; or (j) the sale of personal property. 4.19 Litigation. The Company is not subject to any judgment or order of any court or quasijudicial or administrative agency of any jurisdiction, domestic or foreign, nor is there any charge, complaint, lawsuit or governmental investigation pending or, to the best knowledge of the Company and LITCO, threatened against the Company. The Company is not a plaintiff in any action, domestic or foreign, judicial or administrative. There are no existing actions, suits, proceedings or investigations of the Company, and neither the Company nor LITCO know of any basis for such actions, suits, proceedings or investigations. There are no unsatisfied 9 125 judgments, orders, writs, injunctions, decrees or stipulations affecting the Company or to which the Company is a party. 4.20 Employees. Except as set forth on Schedule 4.20 hereto, the Company does not have any employees. The Company does not owe any compensation, bonuses, profit sharing, pension, retirement, stock options or related appreciation rights, deferred or otherwise, to any current or previous employees. The Company has no written or oral employment agreements with any officer or director of the Company. The Company is not a party to or bound by any collective bargaining agreement. There are no loans or other obligations payable or owing by the Company to any shareholder, officer, director or employee of the Company, nor are there any loans or debts payable or owing by any of such persons to the Company or any guarantees by the Company of any loan or obligation of any nature to which any such person is a party. 4.21 Employee Benefit Plans. The Company has no (a) non-qualified deferred or incentive compensation or retirement plans or arrangements, (b) qualified retirement plans or arrangements, (c) other employee compensation, severance or termination pay or welfare benefit plans, programs or arrangements or (d) any related trusts, insurance contracts or other funding arrangements maintained, established or contributed to by the Company within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Company does not have any liability under Title IV of ERISA as a result of actions or events occurring prior to the Closing. 4.22 Legal Compliance. No claim has been filed against the Company alleging a violation of any applicable laws and regulations of foreign, federal, state and local governments and all agencies thereof. The Company holds all of the material permits, licenses, certificates or other authorizations of foreign, federal, state or local governmental agencies required for the conduct of its business as presently conducted. 4.23 Broker's Fees. Neither the Company, LITCO nor anyone on their behalf has any liability to any broker, finder, investment banker or agent, or has agreed to pay any brokerage fees, finder's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with the Merger or any similar transaction. 4.24 Disclosure. The representations and warranties and statements of fact made by the Company and LITCO in this Agreement and in any Schedule hereto are, as applicable, accurate, correct and complete and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained herein or therein not misleading. 4.25 Bank Accounts. Except as set forth on Schedule 4.25 hereto, the Company does not have any account, instrument of deposit or safe deposit box. 4.26 Information Supplied. None of the information supplied by the Company or LITCO for use in the Registration Statement and contained therein will, as of the date that the Registration Statement is filed with the Commission, on the date it is declared effective or at the time of the meeting of the shareholders of the Company to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The proxy statement contained in the Registration Statement will comply, in all material respects, as to form with the provisions of the Exchange Act. ARTICLE 5 CONDUCT OF BUSINESS PENDING THE CLOSING 5.1 Conduct of Business by the Company Pending the Closing. The Company and LITCO jointly and severally covenant and agree that prior to the Closing Date: (a) The Company shall conduct its business and operations only in the usual and ordinary course of business and consistent with past custom and practice; 10 126 (b) The Company shall not directly or indirectly do any of the following: (i) sell, pledge, dispose of or encumber any of its assets, except for the repayment of indebtedness owed to LITCO in the amount of $6,040.00; (ii) amend or propose to amend its Articles of Incorporation or By-Laws; (iii) split, combine or reclassify any outstanding shares of its capital stock, or declare, set aside or pay any dividend or other distribution payable in cash, stock, property or otherwise with respect to shares of its capital stock; (iv) redeem, purchase or acquire or offer to acquire any shares of its capital stock or other securities; (v) create any subsidiaries; or (vi) enter into or modify any contract, agreement, commitment or arrangement with respect to any of the foregoing; (c) The Company shall not, and with respect to the applicable matters set forth in this Section 5.1(c)(i) and (iv), LITCO shall not, (i) issue, sell, pledge or dispose of, or agree to issue, sell, pledge or dispose of, any additional shares of, or any options, warrants, conversion privileges or rights of any kind to acquire any shares of, its capital stock; (ii) acquire (by merger, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership or other business organization or division or the material assets thereof; (iii) incur any indebtedness for borrowed money, issue any debt securities or guarantee any indebtedness to others; or (iv) enter into or modify any contract, agreement, commitment or arrangement with respect to any of the foregoing; (d) The Company shall not enter into any employment, severance or similar agreements or arrangements with, or grant any bonus, salary increase, severance or termination pay to, any officers or directors; (e) The Company shall not adopt any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, fund or arrangement for the benefit or welfare of any employee; (f) Except as otherwise required by its Articles of Incorporation or By-Laws, by this Agreement or by applicable law, neither the Company nor LITCO shall call any meeting of shareholders; (g) The Company and LITCO shall (i) use their best efforts not to take any action which would render, or which reasonably may be expected to render, any representation or warranty made by them in this Agreement untrue at any time prior to the Closing Date as if then made; and (ii) notify Index of any emergency or other change in the normal course of its business or in the operation of its properties and of any tax audits, tax claims, governmental or third party complaints, investigations or hearings (or communications indicating that the same may be contemplated) if such emergency, change, audit, claim, complaint, investigation or hearing would be material, individually or in the aggregate, to the financial condition, results of operations or business of the Company, or to the ability of any of the parties hereto to consummate the transactions contemplated by this Agreement; (h) The Company and LITCO shall notify Index promptly of any material adverse event or circumstance affecting the Company (including the filing of any material litigation against the Company or the existence of any dispute with any person or entity which involves a reasonable likelihood of such litigation being commenced); and (i) The Company shall comply with all legal requirements and contractual obligations applicable to its operations and business and pay all applicable taxes. 5.2 Other Actions. Unless approved in writing by Index, the Company and LITCO shall not take any action or permit any action to occur that might reasonably be expected to result in any of the representations and warranties of the Company and LITCO contained in this Agreement becoming untrue after the date hereof or any of the conditions to the Closing set forth in Article 7 of this Agreement not being satisfied. 11 127 ARTICLE 6 ADDITIONAL AGREEMENTS 6.1 Access and Information. Except for information relating to any claims any party may have against the other, the Company and Index shall each afford to the other and to the other's financial advisors, legal counsel, accountants, consultants and other representatives full access during normal business hours throughout the period prior to the Effective Time to all of its books, records, properties and personnel and, during such period, each shall furnish promptly to the other (a) a copy of each report, schedule and other document filed or received by it pursuant to the requirements of federal or state securities laws, and (b) all other information as such other party may reasonably request. Each party shall hold in confidence all non-public information until such time as such information is otherwise publicly available and, if this Agreement is terminated, each party will upon written request deliver to the other all documents, work papers and other material obtained by such party or on its behalf from the other party as a result of this Agreement or in connection herewith, whether so obtained before or after the execution hereof. As soon as practicable following the Closing, the Company shall deliver to Index all of the books and records of the Company. 6.2 Registration Statement. Index and the Company shall cooperate in preparing a registration statement on Form S-4 and combined prospectus and proxy statement, any amendments or supplements thereto and any notices, reports, letters, proxies or other materials required to be filed with the Commission in connection with the Merger and the Sepco Merger (collectively, the registration statement and combined prospectus and proxy statement, any amendments or supplements thereto and any notices, reports, letters, proxies or other materials required to be filed with the Commission in connection with the Merger and the Sepco Merger are herein referred to as the "Registration Statement"). The parties shall cooperate with each other in providing any information that the other party may reasonably request to aid in the preparation of the Registration Statement. The parties will use their commercially reasonable efforts to respond to the comments of the Commission with respect to the Registration Statement and will make any further filing (including amendments and supplements) in connection therewith that may be necessary, proper or advisable. Index will provide the Company, and the Company will provide Index, with whatever information and assistance in connection with the foregoing filings that the filing party reasonably may request. Index will take all actions that may be necessary, proper or advisable under state securities laws in connection with the offering and issuance of Index Common Stock as contemplated herein. 6.3 Meetings of Shareholders. (a) The Company shall promptly take all action reasonably necessary in accordance with the NMBCA and its Articles of Incorporation and By-Laws to convene a meeting of its shareholders to consider and vote upon the adoption and approval of the Merger and this Agreement. The Company (i) shall recommend at such meeting, through its Board of Directors, that the shareholders of the Company vote to adopt and approve the Merger and this Agreement, (ii) shall use its reasonable efforts to solicit from shareholders of the Company proxies in favor of such adoption and approval and (iii) shall take all other action reasonably necessary to secure a vote of its shareholders in favor of the adoption and approval of the Merger and this Agreement. (b) The Merger Sub shall call a special meeting of its sole stockholder prior to the Effective Time to be held in accordance with the laws of the State of Nevada to consider and vote upon the Merger. The parties hereto acknowledge and agree that the Merger Sub's sole stockholder may approve the Merger by written consent in lieu of holding such a meeting. (c) Index shall call a special meeting of its shareholders prior to the Effective Time to be held in accordance with the laws of the State of Texas to consider and vote upon the Sepco Merger. 6.4 Press Releases. The Company and Index shall consult with each other as to the form and substance of any press release or other public disclosure of matters related to this Agreement or any of the transactions contemplated hereby; provided, however, that nothing in this Section 6.4 shall be deemed to prohibit any party 12 128 hereto from making any disclosure that is required to fulfill such party's disclosure obligations imposed by law, including, without limitation, federal securities laws. 6.5 Reimbursement of LITCO. On or before the Closing Date, the Company shall pay to LITCO the amount of $6,040.00 in order to reimburse LITCO for expenses incurred for the benefit of the Company, which payment is not objected to by Index. ARTICLE 7 CONDITIONS TO CLOSING 7.1 Conditions to Obligations of Each Party to Effect the Closing. The respective obligations of each party to effect the Closing shall be subject to the fulfillment on or prior to the Closing Date of the following conditions: (a) The Registration Statement shall have been declared effective by the Commission and no stop order with respect thereto shall be in effect; (b) The Merger shall have been approved by the shareholders of Index and the Company and the stockholder of the Merger Sub, respectively, in accordance with the laws of the States of Texas, New Mexico and Nevada, respectively; (c) The Sepco Merger shall have been approved by the shareholders and stockholders of Index and Sepco and the stockholder of Sepco Acquisition Corporation, respectively in accordance with the laws of the States of Texas and Nevada, respectively; and (d) No order, injunction or decree shall have been entered and remain in effect in any action or proceeding before any foreign, federal or state court or governmental agency or other foreign, federal or state regulatory or administrative agency or commission that would prevent or make illegal the consummation of the transactions contemplated hereby. 7.2 Additional Conditions to Index's and the Merger Sub's Obligations. The obligations of each of Index and the Merger Sub to effect the Closing are subject to the satisfaction of the following additional conditions on or before the Closing Date: (a) The representations and warranties set forth in Article 4 of this Agreement will be true and correct in all material respects as of the date hereof and at and as of the Closing Date as though then made; (b) The Company and LITCO shall have performed, in all material respects, each obligation and agreement and complied with each covenant to be performed and complied with by them under Articles 5 and 6 of this Agreement prior to the Closing Date; (c) All consents by governmental or regulatory agencies or otherwise that are required for the consummation of the transactions contemplated hereby or that are required for Index to own, operate or control the Company or any portion of the assets of the Company to prevent a breach of or a default under or a termination of any agreement material to the Company to which the Company is a party or to which any material portion of the assets of the Company is subject, will have been obtained; (d) No action or proceeding before any court or governmental body will be pending or threatened wherein a judgment, decree or order would prevent or restrain any of the transactions contemplated hereby or cause such transactions to be declared unlawful, nullified or rescinded or which might adversely affect the right of Index to own, operate or control the Company; (e) Index and its financial and legal advisors shall have completed a due diligence review of the business, operations and financial statements of the Company, the results of which shall be satisfactory to Index in its sole discretion; 13 129 (f) Index will have received from Matthew Blair, Esq., counsel to the Company, an opinion addressed to Index, dated the Closing Date and substantially in the form attached hereto as Exhibit A; (g) No event shall have occurred prior to the Closing which in the reasonable judgment of Index or the Merger Sub, would materially affect the purpose of the Merger; and (h) At the Closing, the Company shall have delivered or caused to be delivered to Index the following: (i) a certificate executed by the President and Secretary of both the Company and LITCO stating that the conditions set forth in Sections 7.2(a) through (d) of this Agreement have been satisfied; (ii) certified copies of the resolutions duly adopted by the Company's and LITCO's Boards of Directors authorizing and approving the Merger and the execution, delivery and performance of this Agreement; (iii) certified copies of resolutions duly adopted by the Company's and LITCO's shareholders authorizing and approving the Merger and the execution, delivery and performance of this Agreement; (iv) certificates of good standing or comparable certificates for the Company from the Secretary of State of the State of New Mexico and for LITCO from the Secretary of State of the State of Texas and from every jurisdiction where a failure to be qualified or licensed would have a material adverse effect on its financial condition, results of operations or business, dated not earlier than five days prior to the Closing Date; (v) a certificate of existence or comparable certificates for LITCO from the Secretary of State of the State of Texas and for the Company from the Secretary of State of the State New Mexico, dated not earlier than five days prior to the Closing Date; (vi) a copy of each of the Company's and LITCO's Articles of Incorporation certified as of a recent date by the Secretary of State of the States of New Mexico and Texas, respectively; (vii) an incumbency certificate of the officers of the Company and LITCO; (viii) resignations from the officers and directors of the Company, dated as of the Effective Time; and (ix) such other documents as Index may reasonably request in connection with the transactions contemplated hereby. 7.3 Additional Conditions to the Company's and LITCO's Obligations. The obligations of each of the Company and LITCO to effect the Closing are subject to the satisfaction of the following conditions on or before the Closing Date: (a) The representations and warranties set forth in Article 3 of this Agreement will be true and correct in all material respects as of the date hereof and at and as of the Closing Date as though then made; (b) Index shall have performed, in all material respects, each obligation and agreement and complied with each covenant required to be performed and complied with by it under Article 6 of this Agreement prior to the Closing Date; (c) No action or proceeding before any court or governmental body will be pending or threatened wherein a judgment, decree or order would prevent any of the transactions contemplated hereby or cause such transactions to be declared unlawful or rescinded; 14 130 (d) The Company shall have received from Fouts & Moore, L.L.P., counsel to Index, an opinion addressed to the Company and LITCO, dated the Closing Date and substantially in the form attached hereto as Exhibit B; and (e) On the Closing Date, Index shall have delivered to the Company the following: (i) a certificate executed on behalf of Index and the Merger Sub stating that the conditions set forth in Sections 7.3(a) through (c) of this Agreement have been satisfied; (ii) certified copies of resolutions duly adopted by Index's and the Merger Sub's Boards of Directors authorizing and approving the Merger and the execution, delivery and performance of this Agreement; (iii) certified copies of the resolutions duly adopted by the shareholder of the Merger Sub authorizing and approving the Merger and the execution, delivery and performance this Agreement; (iv) certified copies of resolutions duly adopted by Index's Board of Directors authorizing and approving the Sepco Merger and the execution, delivery and performance of the Sepco Merger Agreement; (v) certified copies of resolutions duly adopted by the shareholders of Index authorizing and approving the Sepco Merger and the execution, delivery and performance of the Sepco Merger Agreement; (vi) certificate of existence for Index from the Secretary of State of the State of Texas and certificate of existence for the Merger Sub from the Secretary of State of Nevada, dated not earlier than five days prior to the Closing Date; (vii) a copy of Index's Articles of Incorporation certified by the Secretary of State of the State of Texas; (viii) a certificate of good standing for the Merger Sub from the Secretary of State of the State of Nevada and a certificate of good standing for Index from the Secretary of State of Texas, dated not earlier than five days prior to the Closing Date; (ix) a copy of the Merger Sub's Articles of Incorporation certified by the Secretary of State of the State of Nevada; (x) an incumbency certificate of the officers of Index and the Merger Sub; and (xi) such other material documents as the Company may reasonably request in connection with the transactions contemplated hereby. ARTICLE 8 REMEDIES 8.1 Indemnification by LITCO. Subject to the terms and conditions of this Article 8, LITCO agrees to indemnify, defend and hold Index and its directors, officers, agents, attorneys and affiliates harmless from and against all losses, claims, actions, causes of action, fines, obligations, demands, assessments, penalties, liabilities, costs, damages, attorneys' fees and expenses (collectively, "Damages"), asserted against or incurred by any such person or entity (i) by reason of or resulting from a breach of any representation, warranty, non-fulfillment of any agreement or covenant of the Company or LITCO contained in this Agreement or in any written statement, certificate or other document to be delivered in connection herewith or (ii) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any part of the Registration Statement when such part became effective, or in the Registration Statement or the prospectus contained therein, as of its date, or any amendment or supplement thereto relating to information furnished by the Company or LITCO to Index, or arise out of or are based upon any omission or alleged omission to state 15 131 therein a material fact required to be stated therein or necessary to make the statements therein not misleading relating to information furnished by the Company or LITCO to Index. 8.2 Indemnification by Index. Subject to the terms and conditions of this Article 8, Index hereby agrees to indemnify, defend and hold the Company and its directors, officers, agents, attorneys and affiliates harmless from and against all Damages asserted against or incurred by any such person or entity (i) by reason of or resulting from a breach of any representation, warranty or covenant of Index contained in this Agreement or (ii) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any part of the Registration Statement when such part became effective, or in the Registration Statement or the prospectus contained therein, as of its date, or any amendment or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein not misleading; provided, however, that Index shall not be liable to the Company or any of its directors, officers, agents, attorneys or affiliates in any such case to the extent that any Damages arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission relating to information furnished by the Company or LITCO to Index for inclusion in the Registration Statement. 8.3 Conditions of Indemnification. The respective obligations and liabilities of LITCO and Index (the "indemnifying party") to the other (the "party to be indemnified") under Sections 8.1 and 8.2 with respect to claims resulting from the assertion of liability by third parties shall be subject to the following terms and conditions: (a) Within 20 days (or such earlier time as might be required to avoid prejudicing the indemnifying party's position) after receipt of notice of commencement of any action evidenced by service of process or other legal pleading, the party to be indemnified shall give the indemnifying party written notice thereof together with a copy of such claim, process or other legal pleading, and the indemnifying party shall have the right to undertake the defense thereof by representatives of its own choosing and at its own expense; provided that the party to be indemnified may participate in the defense with counsel of its own choice, the fees and expenses of which counsel shall be paid by the party to be indemnified unless (i) the indemnifying party has agreed to pay such fees and expenses, (ii) the indemnifying party has failed to assume the defense of such action or (iii) the named parties to any such action (including any impleaded parties) include both the indemnifying party and the party to be indemnified and the party to be indemnified has been advised by counsel that there may be one or more legal defenses available to it that are different from or additional to those available to the indemnifying party (in which case, if the party to be indemnified informs the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of the party to be indemnified, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for the party to be indemnified, which firm shall be designated in writing by the party to be indemnified). (b) In the event that the indemnifying party, by the 30th day after receipt of notice of any such claim (or, if earlier, by the 10th day preceding the day on which an answer or other pleading must be served in order to prevent judgment by default in favor of the person asserting such claim), does not elect to defend against such claim, the party to be indemnified will (upon further notice to the indemnifying party) have the right to undertake the defense, compromise or settlement of such claim on behalf of and for the account and risk of the indemnifying party and at the indemnifying party's expense, subject to the right of the indemnifying party to assume the defense of such claims at any time prior to settlement, compromise or final determination thereof. (c) Notwithstanding the foregoing, the indemnifying party shall not settle any claim without the consent of the party to be indemnified unless such settlement involves only the payment of money and the claimant provides to the party to be indemnified a release from all liability in respect of such claim. If the settlement of the claim involves more than the payment of money, the indemnifying party shall not settle the claim without the prior consent of the party to be indemnified. 16 132 (d) The party to be indemnified and the indemnifying party will each cooperate with all reasonable requests of the other. 8.4 Waiver. No waiver by any party of any default or breach by another party of any representation, warranty, covenant or condition contained in this Agreement shall be deemed to be a waiver of any subsequent default or breach by such party of the same or any other representation, warranty, covenant or condition. No act, delay, omission or course of dealing on the part of any party in exercising any right, power or remedy under this Agreement or at law or in equity shall operate as a waiver thereof or otherwise prejudice any of such party's rights, powers and remedies. All remedies, whether at law or in equity, shall be cumulative and the election of any one or more shall not constitute a waiver of the right to pursue other available remedies. 8.5 Remedies Not Exclusive. The remedies provided in this Article 8 shall not be exclusive of any other rights or remedies available to one party against the other, either at law or in equity. ARTICLE 9 TERMINATION 9.1 Termination by Mutual Consent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time by the mutual consent of the parties hereto. 9.2 Termination by Any Party. This Agreement may be terminated and the Merger may be abandoned by action of the Board of Directors of any party hereto if a United States federal or state court of competent jurisdiction or United States federal or state governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable; provided, that the party seeking to terminate this Agreement pursuant to this clause shall have used all reasonable efforts to remove such injunction, order or decree. 9.3 Termination by Index. This Agreement may be terminated by Index upon written notice if the Closing has not occurred by December 31, 1996. 9.4 Effect of Termination and Abandonment. In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article 9, all obligations of the parties hereto shall terminate, except the obligations of the parties pursuant to Section 6.1. 9.5 Material Breach. This Agreement may be terminated if a material breach of this Agreement has occurred and such breach has not been cured by the breaching party within ten business days of receipt of written notice from a non-breaching party detailing such breach. 17 133 ARTICLE 10 GENERAL PROVISIONS 10.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by overnight courier or mailed by registered or certified mail (postage prepaid and return receipt requested) to the party to whom the same is so delivered, sent or mailed at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Index or the Merger Sub: David R. Little, President 580 Westlake Park Boulevard Suite 1100 Houston, Texas 77079 Phone: (713) 558-4448 Fax: (713) 558-4448 with a copy to: Gary A. Messersmith, Esq. Fouts & Moore, L.L.P. 5555 San Felipe, 17th Floor Houston, Texas 77066-2726 (b) if to the Company or LITCO: Glenn A. Little, President 211 West Wall Street Midland, Texas 79701-4506 Phone: (800) 351-4515 Fax: (915) 682-2560 with a copy to: Matthew Blair, Esq. 4419 Tanforan Midland, Texas 79701 10.2 Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. References to Sections and Articles refer to sections and articles of this Agreement unless otherwise stated. 10.3 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated and the parties shall negotiate in good faith to modify this Agreement to preserve each party's anticipated benefits under this Agreement. 10.4 Miscellaneous. This Agreement (together with all other documents and instruments referred to herein): (a) constitutes the entire agreement and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof; (b) except as expressly set forth herein, is not intended to confer upon any other person any rights or remedies hereunder and (c) shall not be assigned by operation of law or otherwise, except that Index may assign all or any portion of its rights under this Agreement to any wholly-owned subsidiary but no such assignment shall relieve Index of its obligations hereunder, and except that this Agreement may be assigned by operation of law to any corporation with or into which Index may be merged. 10.5 Separate Counsel. Each party hereby expressly acknowledges that it has been advised and urged to seek its own separate legal counsel for advice with respect to this Agreement. 18 134 10.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 10.7 Counterparts. This Agreement may be executed in two or more counterparts which together shall constitute a single agreement. 10.8 Amendment. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties hereto. 10.9 Parties In Interest: No Third Party Beneficiaries. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives, successors and assigns of the parties hereto. This Agreement shall not be deemed to confer upon any person not a party hereto any rights or remedies hereunder. 10.10 Captions. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. 10.11 Expenses. The parties hereto shall pay all of their own expenses relating to the transactions contemplated by this Agreement, including, without limitation, the fees and expenses of their respective counsel and financial advisers. 10.12 Survival. The representations, warranties and covenants contained herein shall survive the Closing. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. INDEX, INC. By: /s/ DAVID R. LITTLE - ------------------------------------ David R. Little, President NEWMAN ACQUISITION CORPORATION By: /s/ DAVID R. LITTLE - ------------------------------------ David R. Little, President NEWMAN COMMUNICATIONS CORPORATION By: /s/ GLENN A. LITTLE - ------------------------------------ Glenn A. Little, President LITTLE & COMPANY INVESTMENT SECURITIES By: /s/ GLENN A. LITTLE - ------------------------------------ Glenn A. Little, President 19 135 SCHEDULE 4.2 The Company currently has 1,650,000 Class C Warrants outstanding. Each Class C Warrant allows the holder to purchase one share of Company Common Stock at $2.00 per share until November 22, 1996. The form of the Class C Warrant certificate is attached as Exhibit A hereto. 136 SCHEDULE 4.9 The Company will issue 1,693,564 shares of Company Common Stock to Halter Financial Group, Inc., a Texas corporation subsequent to the date of this Agreement. 137 SCHEDULE 4.20
NAME OF EMPLOYEE: POSITIONS: - ------------------------------------------------ -------------------------------------------------- Glenn A. Little................................. Chairman of the Board and President Patricia de Little.............................. Director, Vice President, Secretary and Treasurer
138 SCHEDULE 4.25 BANK ACCOUNTS NationsBank of Texas, N.A. Sunwest Bank of Albuquerque, N.A. Post Office Box 831547 Post Office Box 25500 Dallas, Texas 75283-1547 Albuquerque, New Mexico 87125-0500 (800) 462-6289 (505) 765-2600 Business Economy Checking Funds Checking Account Number 423-003953-7 Account Number 00-0109-652297
139 APPENDIX C: ARTICLES 5.12 AND 5.13 OF THE TEXAS BUSINESS CORPORATION ACT 140 ARTICLES 5.12 AND 5.13 OF THE TEXAS BUSINESS CORPORATION ACT ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS A. Any shareholder of any domestic corporation who has the right to dissent from any of the corporate actions referred to in Article 5.11 of this Act may exercise that right to dissent only by complying with the following procedures: (1) (a) With respect to proposed corporate action that is submitted to a vote of shareholders at a meeting, the shareholder shall file with the corporation, prior to the meeting, a written objection to the action, setting out that the shareholder's right to dissent will be exercised if the action is effective and giving the shareholder's address, to which notice thereof shall be delivered or mailed in that event. If the action is effected and the shareholder shall not have voted in favor of the action, the corporation, in the case of action other than a merger, or the surviving or new corporation (foreign or domestic) or other entity that is liable to discharge the shareholder's right of dissent, in the case of a merger, shall, within ten (10) days after the action is effected, deliver or mail to the shareholder written notice that the action has been effected, and the shareholder may, within ten (10) days from the delivery or mailing of the notice, make written demand on the existing, surviving or new corporation (foreign or domestic) or other entity, as the case may be, for payment of the fair value of the shareholder's shares. The fair value of the shares shall be the value thereof as of the day immediately preceding the meeting, excluding any appreciation or depreciation in anticipation of the proposed action. The demand shall state the number and class of the shares owned by the shareholder and the fair value of the shares as estimated by the shareholder. Any shareholder failing to make demand within the ten (10) day period shall be bound by the action. (b) With respect to proposed corporate action that is approved pursuant to Section A of Article 9.10 of this Act, the corporation, in the case of action other than a merger, and the surviving or new corporation (foreign or domestic) or other entity that is liable to discharge the shareholder's right of dissent, in the case of a merger, shall, within ten (10) days after the date the action is effected, mail to each shareholder of record as of the effective date of the action notice of the fact and date of the action and that the shareholder may exercise the shareholder's right to dissent from the action. The notice shall be accompanied by a copy of this Article and any articles or documents filed by the corporation with the Secretary of State to effect the action. If the shareholder shall not have consented to the taking of the action, the shareholder may, within twenty (20) days after the mailing of the notice, make written demand on the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, for payment of the fair value of the shareholder's shares. The fair value of the shares shall be the value thereof as of the date the written consent authorizing the action was delivered to the corporation pursuant to Section A of Article 9.10 of this Act, excluding any appreciation or depreciation in anticipation of the action. The demand shall state the number and class of shares owned by the dissenting shareholder and the fair value of the shares as estimated by the shareholder. Any shareholder failing to make demand within the twenty (20) day period shall be bound by the action. (2) Within twenty (20) days after receipt by the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, of a demand for payment made by a dissenting shareholder in accordance with Subsection (1) of this Section, the corporation (foreign or domestic) or other entity shall deliver or mail to the shareholder a written notice that shall either set out that the corporation (foreign or domestic) or other entity accepts the amount claimed in the demand and agrees to pay that amount within ninety (90) days after the date on which the action was effected, and, in the case of shares represented by certificates, upon the surrender of the certificates duly endorsed, or shall contain an estimate by the corporation (foreign or domestic) or other entity of the fair value of the shares, together with an offer to pay the amount of that estimate within ninety (90) days after the date on which the action was effected, upon receipt of notice within sixty (60) days after that date from the shareholder that the shareholder agrees to accept that amount and, in the case of shares represented by certificates, upon the surrender of the certificates duly endorsed. C-1 141 (3) If, within sixty (60) days after the date on which the corporate action was effected, the value of the shares is agreed upon between the shareholder and the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, payment for the shares shall be made within ninety (90) days after the date on which the action was effected and, in the case of shares represented by certificates, upon surrender of the certificates duly endorsed. Upon payment of the agreed value, the shareholder shall cease to have any interest in the shares or in the corporation. B. If, within the period of sixty (60) days after the date on which the corporate action was effected, the shareholder and the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, do not so agree, then the shareholder or the corporation (foreign or domestic) or other entity may, within sixty (60) days after the expiration of the sixty (60) day period, file a petition in any court of competent jurisdiction in the county in which the principal office of the domestic corporation is located, asking for a finding and determination of the fair value of the shareholder's shares. Upon the filing of any such petition by the shareholder, service of a copy thereof shall be made upon the corporation (foreign or domestic) or other entity, which shall, within ten (10) days after service, file in the office of the clerk of the court in which the petition was filed a list containing the names and addresses of all shareholders of the domestic corporation who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the corporation (foreign or domestic) or other entity. If the petition shall be filed by the corporation (foreign or domestic) or other entity, the petition shall be accompanied by such a list. The clerk of the court shall give notice of the time and place fixed for the hearing of the petition by registered mail to the corporation (foreign or domestic) or other entity and to the shareholders named on the list at the addresses therein stated. The forms of the notices by mail shall be approved by the court. All shareholders thus notified and the corporation (foreign or domestic) or other entity shall thereafter be bound by the final judgment of the court. C. After the hearing of the petition, the court shall determine the shareholders who have complied with the provisions of this Article and have become entitled to the valuation of and payment for their shares, and shall appoint one or more qualified appraisers to determine that value. The appraisers shall have power to examine any of the books and records of the corporation the shares of which they are charged with the duty of valuing, and they shall make a determination of the fair value of the shares upon such investigation as to them may seem proper. The appraisers shall also afford a reasonable opportunity to the parties interested to submit to them pertinent evidence as to the value of the shares. The appraisers shall also have such power and authority as may be conferred on Masters in Chancery by the Rules of Civil Procedure or by the order of their appointment. D. The appraisers shall determine the fair value of the shares of the shareholders adjudged by the court to be entitled to payment for their shares and shall file their report of that value in the office of the clerk of the court. Notice of the filing of the report shall be given by the clerk to the parties in interest. The report shall be subject to exceptions to be heard before the court both upon the law and the facts. The court shall by its judgment determine the fair value of the shares of the shareholders entitled to payment for their shares and shall direct the payment of that value by the existing, surviving, or new corporation (foreign or domestic) or other entity, together with interest thereon, beginning 91 days after the date on which the applicable corporate action from which the shareholder elected to dissent was effected to the date of such judgment, to the shareholders entitled to payment. The judgment shall be payable to the holders of uncertificated shares immediately but to the holders of shares represented by certificates only upon, and simultaneously with, the surrender to the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, of duly endorsed certificates for those shares. Upon payment of the judgment, the dissenting shareholders shall cease to have any interest in those shares or in the corporation. The court shall allow the appraisers a reasonable fee as court costs, and all court costs shall be allotted between the parties in the manner that the court determines to be fair and equitable. E. Shares acquired by the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, pursuant to the payment of the agreed value of the shares or pursuant to payment of the judgment entered for the value of the shares, as in this Article provided, shall, in the case of a merger, be C-2 142 treated as provided in the plan of merger and, in all other cases, may be held and disposed of by the corporation as in the case of other treasury shares. F. The provisions of this Article shall not apply to a merger if, on the date of the filing of the articles of merger, the surviving corporation is the owner of all the outstanding shares of the other corporations, domestic or foreign, that are parties to the merger. G. In the absence of fraud in the transaction, the remedy provided by this Article to a shareholder objecting to any corporate action referred to in Article 5.11 of this Act is the exclusive remedy for the recovery of the value of his shares or money damages to the shareholder with respect to the action. If the existing, surviving, or new corporation (foreign or domestic) or other entity, as the case may be, complies with the requirements of this Article, any shareholder who fails to comply with the requirements of this Article shall not be entitled to bring suit for the recovery of the value of his shares or money damages to the shareholder with respect to the action. ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS A. Any shareholder who has demanded payment for his shares in accordance with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to vote or exercise any other rights of a shareholder except the right to receive payment for his shares pursuant to the provisions of those articles and the right to maintain an appropriate action to obtain relief on the ground that the corporate action would be or was fraudulent, and the respective shares for which payment has been demanded shall not thereafter be considered outstanding for the purposes of any subsequent vote of shareholders. B. Upon receiving a demand for payment from any dissenting shareholder, the corporation shall make an appropriate notation thereof in its shareholder records. Within twenty (20) days after demanding payment for his shares in accordance with either Article 5.12 or 5.16 of this Act, each holder of certificates representing shares so demanding payment shall submit such certificates to the corporation for notation thereon that such demand has been made. The failure of holders of certificated shares to do so shall, at the option of the corporation, terminate such shareholder's rights under Articles 5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and sufficient cause shown shall otherwise direct. If uncertificated shares for which payment has been demanded or shares represented by a certificate on which notation has been so made shall be transferred, any new certificate issued therefor shall bear similar notation together with the name of the original dissenting holder of such shares and a transferee of such shares shall acquire by such transfer no rights in the corporation other than those which the original dissenting shareholder had after making demand for payment of the fair value thereof. C. Any shareholder who has demanded payment for his shares in accordance with either Article 5.12 or 5.16 of this Act may withdraw such demand at any time before payment for his shares or before any petition has been filed pursuant to Article 5.12 or 5.16 of this Act asking for a finding and determination of the fair value of such shares, but no such demand may be withdrawn after such payment has been made or, unless the corporation shall consent thereto, after any such petition has been filed. If, however, such demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B of this Article the corporation shall terminate the shareholder's rights under Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking for a finding and determination of fair value of such shares by a court shall have been filed within the time provided in Article 5.12 or 5.16 of this Act, as the case may be, or if after the hearing of a petition filed pursuant to Article 5.12 or 5.16, the court shall determine that such shareholder is not entitled to the relief provided by those articles, then, in any such case, such shareholder and all persons claiming under him shall be conclusively presumed to have approved and ratified the corporate action from which he dissented and shall be bound thereby, the right of such shareholder to be paid the fair value of his shares shall cease, and his status as a shareholder shall be restored without prejudice to any corporate proceedings which may have been taken during the interim, and such shareholder shall be entitled to receive any dividends or other distributions made to shareholders in the interim. C-3 143 APPENDIX D: SECTIONS 53-15-3 AND 53-15-4 OF THE NEW MEXICO BUSINESS CORPORATION ACT 144 SECTIONS 53-15-3 AND 53-15-4 OF THE NEW MEXICO BUSINESS CORPORATION ACT 53-15-3 RIGHT OF SHAREHOLDERS TO DISSENT AND OBTAIN PAYMENT FOR SHARES. A. Any shareholder of a corporation may dissent from, and obtain payment for the shareholder's shares in the event of, any of the following corporate actions: (1) any plan of merger or consolidation to which the corporation is a party, except as provided in Subsection C of this section; (2) any sale or exchange of all or substantially all of the property and assets of the corporation not made in the usual and regular course of its business, including a sale in dissolution, but not including a sale pursuant to an order of a court having jurisdiction in the premises or a sale for cash on terms requiring that all or substantially all of the net proceeds of sale be distributed to the shareholders in accordance with their respective interests within one year after the date of sale; (3) any plan of exchange to which the corporation is a party as the corporation the shares of which are to be acquired; (4) any amendment of the articles of incorporation which materially and adversely affects the rights appurtenant to the shares of the dissenting shareholder in that it: (a) alters or abolishes a preferential right of such shares; (b) creates, alters or abolishes a right in respect of the redemption of such shares, including a provision respecting a sinking fund for the redemption or repurchase of such shares; (c) alters or abolishes an existing preemptive right of the holder of such shares to acquire shares or other securities; or (d) excludes or limits the right of the holder of such shares to vote on any matter, or to cumulate his votes, except as such right may be limited by dilution through the issuance of shares or other securities with similar voting rights; or (5) any other corporate action taken pursuant to a shareholder vote with respect to which the articles of incorporation, the bylaws or a resolution of the board of directors directs that dissenting shareholders shall have a right to obtain payment for their shares. (1) A record holder of shares may assert dissenters' rights as to less than all of the shares registered in his name only if the holder dissents with respect to all the shares beneficially owned by any one person and discloses the name and address of the person or persons on whose behalf the holder dissents. In that event, his rights shall be determined as if the shares as to which he has dissented and his other shares were registered in the names of different shareholders. (2) A beneficial owner of shares who is not the record holder may assert dissenters' rights with respect to shares held on his behalf, and shall be treated as a dissenting shareholder under the terms of this section and Section 53-15-4 NMSA 1978 if he submits to the corporation at the time of or before the assertion of these rights a written consent of the record holder. C. The right to obtain payment under this section shall not apply to the shareholders of the surviving corporation in a merger if a vote of the shareholders of such corporation is not necessary to authorize such merger. D. A shareholder of a corporation who has a right under this section to obtain payment for his shares shall have no right at law or in equity to attack the validity of the corporate action that gives rise to his right to obtain payment, nor to have the action set aside or rescinded, except when the corporate action is unlawful or fraudulent with regard to the complaining shareholder or to the corporation. D-1 145 53-15-4 RIGHTS OF DISSENTING SHAREHOLDERS. A. Any shareholder electing to exercise his right of dissent shall file with the corporation, prior to or at the meeting of shareholders at which the proposed corporate action is submitted to a vote, a written objection to the proposed corporate action. If the proposed corporate action is approved by the required vote and the shareholder has not voted in favor thereof, the shareholder may, within ten days after the date on which the vote was taken or if a corporation is to be merged without a vote of its shareholders into another corporation any of its shareholders may, within twenty-five days after the plan of the merger has been mailed to the shareholders, make written demand on the corporation, or, in the case of a merger or consolidation, on the surviving or new corporation, domestic or foreign, for payment of the fair value of the share holder's shares, and, if the proposed corporate action is effected, the corporation shall pay to the shareholder, upon the determination of the fair value, by agreement or judgment as provided herein, and, in the case of shares represented by certificates, the surrender of such certificates the fair value thereof as of the day prior to the date on which the vote was taken approving the proposed corporate action, excluding any appreciation or depreciation in anticipation of the corporate action. Any shareholder failing to make demand within the prescribed ten-day or twenty-five-day period shall be bound by the terms of the proposed corporate action. Any shareholder making such demand shall thereafter be entitled only to payment as in this section provided and shall not be entitled to vote or to exercise any other rights of a shareholder. B. No such demand may be withdrawn unless the corporation consents thereto. If, however, the demand is withdrawn upon consent, or if the proposed corporate action is abandoned or rescinded or the shareholders revoke the authority to effect the action, or if, in the case of a merger, on the date of the filing of the articles of merger the surviving corporation is the owner of all the outstanding shares of the other corporation, domestic and foreign, that are parties to the merger, or if no demand or petition for the determination of their value by a court has been made or filed within the time provided in this section, or if a court of competent jurisdiction determines that the shareholder is not entitled to the relief provided by this section, then the right of the shareholder to be paid the fair value of his shares ceases and his status as a shareholder shall be restored, without prejudice, to any corporate proceedings which may have been taken during the interim. C. Within ten days after such corporate action is effected, the corporation, or, in the case of a merger or consolidation, the surviving or new corporation, domestic or foreign, shall give written notice thereof to each dissenting shareholder who has made demand as provided in this section and shall make a written offer to each such shareholder to pay for such shares at a specified price deemed by the corporation to be the fair value thereof. The notice and offer shall be accompanied by a balance sheet of the corporation, the shares of which the dissenting shareholder holds, as of the latest available date and not more than twelve months prior to the making of the offer, and a profit and loss statement of the corporation for the twelve-months' period ended on the date of the balance sheet. D. If within thirty days after the date on which the corporate action was effected the fair value of the shares is agreed upon between any dissenting shareholder and the corporation, payment therefor shall be made within ninety days after the date on which the corporate action was effected, and, in the case of shares represented by certificates, upon surrender of the certificates. Upon payment of the agreed value, the dissenting shareholder shall cease to have any interest in the share. E. If, within the period of thirty days, a dissenting shareholder and the corporation do not so agree, then the corporation, within thirty days after receipt of written demand from any dissenting shareholder, given within sixty days after the date on which corporate action was effected, shall, or at its election at any time within the period of sixty days may, file a petition in any court of competent jurisdiction in the county in this state where the registered office of the corporation is located praying that the fair value of the shares be found and determined. If, in the case of a merger or consolidation, the surviving or new corporation is a foreign corporation without a registered office in this state, the petition shall be filed in the county where the registered office of the domestic corporation was last located. If the corporation fails to institute the proceeding as provided in this section, any dissenting shareholder may do so in the name of the corporation. All dissenting shareholders, wherever residing, shall be made parties to the proceeding as an action against their shares quasi in rem. A copy of the petition shall be served on each dissenting shareholder who is a resident of this state and D-2 146 shall be served by registered or certified mail on each dissenting shareholder who is a nonresident. Service on nonresidents shall also be made by publication as provided by law. The jurisdiction of the court shall be plenary and exclusive. All shareholders who are parties to the proceeding shall be entitled to judgment against the corporation for the amount of the fair value of their shares. The court may, if it so elects, appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers shall have such power and authority as specified in the order of their appointment or on an amendment thereof. The judgment shall be payable to the holders of uncertificated shares immediately, but to the holders of shares represented by certificates only upon and concurrently with the surrender to the corporation of certificates. Upon payment of the judgment, the dissenting shareholder ceases to have any interest in the shares. F. The judgment shall include an allowance for interest at such rate as the court may find to be fair and equitable, in all the circumstances, from the date on which the vote was taken on the proposed corporate action to the date of payment. G. The costs and expenses of any such proceeding shall be determined by the court and shall be assessed against the corporation, but all or any part of the costs and expenses may be apportioned and assessed as the court deems equitable against any or all of the dissenting shareholders who are parties to the proceeding to whom the corporation made an offer to pay for the shares if the court finds that the action of the shareholders in failing to accept the offer was arbitrary or vexatious or not in good faith. Such expenses include reasonable compensation for and reasonable expenses of the appraisers, but exclude the fees and expenses of counsel for and experts employed by any party; but if the fair value of the shares as determined materially exceeds the amount which the corporation offered to pay therefor, or if no offer was made, the court in its discretion may award to any shareholder who is a party to the proceeding such sum as the court determines to be reasonable compensation to any expert employed by the shareholder in the proceeding, together with reasonable fees of legal counsel. H. Upon receiving a demand for payment from any dissenting shareholder, the corporation shall make an appropriate notation thereof in its shareholder records. Within twenty days after demanding payment for his shares, each holder of shares represented by certificates demanding payment shall submit the certificates to the corporation for notation thereon that such demand has been made. His failure to do so shall, at the option of the corporation, terminate his rights under this section unless a court of competent jurisdiction, for good and sufficient cause shown, otherwise directs. If uncertificated shares for which payment has been demanded or shares represented by a certificate on which notation has been so made is [are] transferred, any new certificate issued therefor shall bear similar notation, together with the name of the original dissenting holder of the shares, and a transferee of the shares acquires by such transfer no rights in the corporation other than those which the original dissenting shareholder had after making demand for payment of the fair value thereof. I. Shares acquired by a corporation pursuant to payment of the agreed value therefor or to payment of the judgment entered therefor, as in this section provided, may be held and disposed of by the corporation as in the case of other treasury shares, except that, in the case of a merger or consolidation, they may be held and disposed of as the plan of merger or consolidation may otherwise provide. D-3 147 APPENDIX E: ARTICLES OF INCORPORATION OF THE COMPANY 148 RESTATED ARTICLES OF INCORPORATION OF INDEX, INC. ARTICLE ONE Index, Inc., pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts restated articles of incorporation which accurately copy the articles of incorporation and all amendments thereto that are in effect to date and as further amended by such restated articles of incorporation as hereinafter set forth and which contain no other change in any provision thereof. ARTICLE TWO The articles of incorporation of the corporation are amended by the restated articles of incorporation as follows: The total number of shares of stock of all classes which the Corporation shall have authority to issue has been increased from 102,000,000 shares to 110,000,000 shares. Further, the designated Common Stock, Preferred Stock and Convertible Preferred Stock have each been designated as a series. ARTICLE THREE Each such amendment made by the restated articles of incorporation has been effected in conformity with the provisions of the Texas Business Corporation Act and such restated articles of incorporation and each such amendment made by the restated articles of incorporation were duly adopted by the shareholders of the corporation on the 2nd day of August, 1996. ARTICLE FOUR The number of shares outstanding was 100, and the number of shares entitled to vote on the restated articles of incorporation as so amended was 100. All of the shareholders have signed a written consent to the adoption of such restated articles of incorporation as so amended pursuant to Article 9.10 and any written notice required by Article 9.10 has been given. ARTICLE FIVE The articles of incorporation and all amendments and supplements thereto are hereby superseded by the following restated articles of incorporation which accurately copy the entire text thereof and as amended as above set forth: ARTICLE I NAME The name of the Corporation is Index, Inc. (the "Corporation"). ARTICLE II DURATION The period of its duration is perpetual. E-1 149 ARTICLE III PURPOSE The purpose or purposes for which the Corporation is organized is the transaction of any or all lawful business for which corporations may be incorporated under the Act. ARTICLE IV CAPITAL STOCK The total number of shares of stock of all classes which the Corporation shall have the authority to issue is 110,000,000, of which 100,000,000 shares of the par value of $.01 each shall be designated common stock ("Common Stock") and 10,000,000 shares of the par value of $1.00 each shall be designated serial preferred stock ("Preferred Stock"). A statement of all of the powers, preferences and rights, and the qualifications, limitations or restrictions thereof in respect of the Common Stock and the Preferred Stock is as follows: A. Common Stock. 1. Dividends. Subject to any rights of the Preferred Stock or any series thereof and the conditions set forth in paragraph B of this Article IV or in any resolution of the Board of Directors of the Corporation providing for the issuance of any series of Preferred Stock, the holders of the Common Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable in cash, stock or otherwise. 2. Voting Rights. Each holder of Common Stock shall be entitled to one vote for each share held on each matter presented to shareholders generally. Notwithstanding the foregoing, the Corporation may, without the approval or consent of any holder of the Common Stock, amend these Articles of Incorporation in any manner that would solely effect changes in the preferences, limitations and relative rights of one or more series of stock of the corporation which has been established pursuant to the authority granted the Board of Directors of the corporation pursuant to paragraph B of this Section 2 if (x) such amendment is approved by the holders of a majority of the outstanding shares of the series of stock so affected and (y) the preferences, limitations and relative rights of such series after giving effect to such amendment and of any new series that may be established as a result of a reclassification of such series are, in each case, no greater than those preferences, limitations and rights permitted to be fixed and determined by the Board of Directors of the corporation with respect to the establishment of any new series of shares pursuant to the authority granted the Board of Directors of the corporation in these Articles of Incorporation. B. Preferred Stock. 1. Authorized Shares. The Preferred Stock may be divided into and issued in one or more series. Of the 10,000,000 authorized shares of Preferred Stock, (i) 1,000,000 shares have been designated as Series A Preferred Stock (the "Series A Preferred Stock"), (ii) 1,000,000 shares have been designated as Series B Convertible Preferred Stock (the "Series B Preferred Stock") and (iii) 8,000,000 shares are available for future designation as provided herein. 2. Series A Preferred Stock The holders of the Series A Preferred Stock shall have the following rights and preferences: (a) Dividends. The holders of Series A Preferred Stock shall not as a matter of right be entitled to be paid or receive or have declared or set apart for such Series A Preferred Stock, any dividends or distributions of the Corporation in respect thereof. (b) Liquidation, Dissolution and Winding Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of the Series A Preferred Stock shall be entitled to receive $100.00 in cash and no more for each share of Series A Preferred Stock held by them, before any distribution of the assets of the Corporation shall be made to the holders of any other outstanding shares of the Corporation, unless funds necessary for such payment E-2 150 shall have been set aside in trust for the account of the holders of outstanding shares of Series A Preferred Stock so as to be and continue to be available therefor. The holders of shares of Series A Preferred Stock shall be entitled to no further participation in any distribution of the assets of the Corporation. If upon such liquidation, dissolution or winding up, the assets of the Corporation distributable as aforesaid among the holders of shares of Series A Preferred Stock are insufficient to permit the payment to holders of Series A Preferred Stock of $100.00 per share then the assets of the Corporation shall be distributed to the holders of shares of Preferred Stock ratably according to their respective shares until they shall have received the full amount to which they would otherwise be so entitled. (c) Redemption. No shares of Series A Preferred Stock shall be callable or redeemable by the Corporation. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation shall have the status of treasury shares of Preferred Stock until such time as such shares are cancelled pursuant to the provisions of the Act. (d) Voting. Each share of Series A Preferred Stock shall entitle the holder thereof to one-tenth ( 1/10) of one vote on each matter presented to shareholders generally voting as a single class with the Common Stock and any other class or series of stock having similar voting rights. The holders of the Series A Preferred Stock shall not be entitled to vote as a class on any matter except as required by law. (e) Exclusion of Other Rights. Unless otherwise required by law, the shares of Series A Preferred Stock shall not have any powers, preferences, or relative, participating, option or other special rights other than those specifically set forth herein. 3. Series B Preferred Stock The holders of the Series B Preferred Stock shall have the following rights and preferences: (a) Dividends. The holders of the Series B Preferred Stock shall be entitled to receive dividends out of any funds legally available for that purpose at the annual rate of six percent (6%) per annum of the stated value and no more. These dividends are payable in cash monthly on the last day of each month. The first dividend, after the issuance of such shares, shall be payable on the last day of the month of issuance. Dividends will accrue from the date the shares of Series B Preferred Stock are issued and are considered to accrue from day to day, whether or not earned or declared. The dividends will be payable before any dividends are paid, declared, or set apart for any other capital stock of the Corporation. Dividends are cumulative so that if for any dividend period the dividends on the outstanding Series B Preferred Stock are not paid or declared and set apart, the deficiency shall be fully paid or declared and set apart for payment, without interest, before any distribution (by dividend or otherwise) is paid on, declared, or set apart for any other capital stock of the Corporation. The holders of shares of Series B Preferred Stock shall not be entitled to receive any other dividends or distributions. (b) Liquidation, Dissolution and Winding Up. Subject to the rights of the holders of the Series A Preferred Stock, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of outstanding shares of Series B Preferred Stock shall be entitled to receive $100.00 in cash for each share, before any distribution of the assets of the Corporation shall be made to the holders of any other class or series of shares of the Corporation unless funds necessary for such payment shall have been set aside in trust for the account of the holders of outstanding shares of Series B Preferred Stock so as to be and continue to be available therefor. If upon such liquidation, dissolution or winding up, the assets of the Corporation distributable as aforesaid among the holders of shares of Series B Preferred Stock are insufficient to permit the payment to the holders of outstanding shares of Series B Preferred Stock of $100.00 per share, then the assets of the Corporation shall be distributed to the holders of outstanding shares of Series B Preferred Stock ratably according to their respective shares until they shall have received the full amount to which they would otherwise be so entitled. The holders of the Series B Preferred Stock shall also be entitled to participate on a pro rata basis (based on the outstanding number of shares) in any distributions made to the holders of the Common Stock or other class or series of stock that is entitled to distributions upon satisfaction of all shares entitled to preferred distribution. E-3 151 (c) Redemption. (i) The Corporation, at the option of the Board of Directors, may at any time five (5) years from the date of initial issuance redeem the whole, or any part, of the outstanding shares of Series B Preferred Stock by paying $100.00 per share plus all dividends accrued, unpaid, and accumulated as provided in this Article through and including the redemption date and by giving to each record holder of Series B Preferred Stock, at his or her last known address as shown in the Corporation's records, at least twenty but not more than sixty days' notice. This redemption notice may be delivered either in person or in writing, by mail, postage prepaid and must state the shares to be redeemed, along with the date and plan of redemption, the redemption price, and the place where the shareholders may obtain payment of the redemption price on surrendering their share certificates. If only a part of the outstanding shares of Series B Preferred Stock shares are redeemed, redemption will be pro rata. No shares of Series B Preferred Stock may be redeemed unless all accrued dividends on all outstanding shares of Series B Preferred Stock shares have been paid for all past dividend periods and full dividends for the current period, except those to be redeemed, have been paid or declared and set apart for payment. On or after the date fixed for redemption, each holder of shares called for redemption must, unless the shareholder has previously exercised the option to convert the holder's shares of Series B Preferred Stock as provided herein, surrender to the Corporation the certificate for the shares at the place designated in the redemption notice and will then be entitled to receive payment of the redemption price. If fewer than all the shares represented by any surrendered certificate are redeemed, a new certificate for the unredeemed shares will be issued. If the redemption notice is duly given and sufficient funds are available to pay all monies herein required on the date fixed for redemption, then, whether or not the certificates representing the shares to be redeemed are surrendered, all rights with respect to the shares shall terminate on the date fixed for redemption, except for the holders' right to receive the redemption price, without interest, on surrendering their certificates. (ii) Shares are considered redeemed, and dividends on them cease to accrue after the date fixed for redemption, if, on or before any date fixed for redemption of the shares of Series B Preferred Stock as provided herein, the Corporation deposits as a trust fund with any bank or trust company a sum sufficient to redeem, on the date fixed for redemption, with irrevocable instructions and authority to the bank or trust company (a) to publish the redemption notice (or to complete publication already begun), and (b) to pay, on and after the date fixed for redemption or before that date, the redemption price of the shares to their holders when they surrender their certificates. The deposit is considered to constitute full payment of the shares to their holders, and from the date of the deposit the shares will no longer be considered outstanding. Moreover, the holders of the shares will cease to be shareholders with respect to the shares and will have no rights with respect to the shares, except to receive from the bank or trust company payment of the redemption price of the shares (without interest) on surrendering of the certificates unless the shares are converted to Common Stock, as provided herein. Any money so deposited on account of the redemption price of Series B Preferred Stock share which are converted after the deposit is made must be repaid immediately to the Corporation on conversion of the Series B Preferred Stock. (iii) Share of Series B Preferred Stock redeemed by the Corporation shall be restored to the status of authorized but unissued shares. (d) Conversion. (i) At any time prior to the redemption of any share of Series B Preferred Stock, the holder of such shares of Series B Preferred Stock shall have the right to convert such share into 112 shares of Common Stock. The right to receive the converted shares requires delivery to the office of the Corporation or its transfer agent of the shareholder's written notice stating the number of shares the shareholder is electing to convert. Said notice shall be accompanied by the surrender of the Series B Preferred Stock certificate or certificates, duly endorsed to the Corporation. The date of conversion E-4 152 shall be the date of receipt by the Company or its transfer agent of the notice and the duly endorsed certificate(s). (ii) Neither fractional shares nor scrip or other certificates representing the shares may be issued by the Corporation on conversion of shares of Series B Preferred Stock, but the Corporation must pay in lieu thereof the full value in cash to the holders who would be entitled to receive the fractional shares but for this provision. (iii) The Corporation must at all time reserve out of its authorized but unissued shares of Common Stock the full number of shares deliverable on conversion of all shares hereunder from time to time outstanding. Said shares are reserved solely for the purpose of satisfying the conversion requirements. (iv) The number of shares and securities or other property issuable upon the conversion of the Series Preferred Stock shall be subject to adjustment from time to time in the event of any reclassification of the Common Stock, the issuance of any stock dividend or stock split in respect of the Common Stock, share exchange involving the Common Stock or other similar transaction so that the holders of the Series B Preferred Stock shall be entitle to receive on conversion of the shares of Series B Preferred Stock that number of shares and other securities or property that a holder of a share of Common Stock received in such reclassification, stock dividend, stock split, share exchange or similar transaction. Such adjustments shall be determined by the Board of Directors of the Corporation, whose determination shall be final and conclusive. Such adjustments shall be made for successive transactions. (d) Voting. Each share of Series A Preferred Stock shall entitle the holder thereof to one-tenth (1/10) of one vote on each matter presented to shareholders generally voting as a single class with the Common Stock and any other class or series of stock having similar voting rights. The holders of the Series A Preferred Stock shall not be entitled to vote as a class on any matter except as required by law. (e) Exclusion of Other Rights. Unless otherwise required by law, the shares of Series A Preferred Stock shall not have any powers, preferences, or relative, participating, option or other special rights other than those specifically set forth herein. (f) Stated Value. The stated value of the Series B Preferred Stock is $100 per share, all of which shall be allocated to the stated capital of the Corporation. 4. Future Designations Subject to the provisions of paragraph A of this Article IV, the Board of Directors of the Corporation is hereby vested with authority from time to time to establish and designate such series of Preferred Stock from the authorized but unissued shares of Preferred Stock as it may deem desirable, and within the limitations prescribed by law or set forth herein, to fix and determine the relative rights and preferences of the shares of any series so established. The Board of Directors shall exercise such authority by the adoption of a resolution or resolutions as prescribed by law, setting forth the designation of the series and fixing and determining the relative rights and preferences thereof or so much thereof as shall not be fixed and determined herein. The Board of Directors may increase or decrease the number of shares of a series by adopting a resolution fixing and determining the new number of shares of each series in which the number of shares is increased or decreased; provided, however, no decrease may reduce the number of shares within a series to less than the number of shares within such series that are then issued. C. Provisions Applicable to All Stock. 1. Voting Rights. The holders of a majority of the shares of the Corporation's stock of any class entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. Subject to the provisions of paragraph A of this Article IV, the vote of the holders of a majority of the shares entitled to vote and represented at a meeting at which a quorum is present shall be the act of the shareholders' meeting, except with respect to certain actions, which require the affirmative vote of the holders of a majority of the outstanding shares of the Corporation unless any class of stock of the Corporation is entitled to vote as a class E-5 153 thereon, in which event the action shall be approved upon the affirmative vote of the holders of a majority of the outstanding shares within each class entitled to vote as a class thereon as well as a majority of the outstanding shares. No shareholder of the Corporation shall have the right of cumulative voting at any election of directors or upon any other matter. 2. Preemptive Rights. No holder of securities of the Corporation shall be entitled as a matter of right, preemptive or otherwise, to subscribe for or purchase any securities of the Corporation now or hereafter authorized to be issued, or securities held in the treasury of the Corporation, whether issued or sold for cash or other consideration or as a share dividend or otherwise. Any such securities may be issued or disposed of by the Board of Directors to such persons and on such terms as in its discretion it shall deem advisable. ARTICLE V MAJORITY VOTE FOR APPROVAL OF CERTAIN ACTIONS If, with respect to any matter for which the affirmative vote or concurrence of the shareholders of the Corporation is required, any provision of the Texas Business Corporation Act, as the same may be amended from time to time, would, but for this Article V, require the affirmative vote or concurrence of the holders of shares having more than a majority of the votes entitled to vote on such matter, or of any class or series thereof, the affirmative vote or concurrence of the holders of shares having only a majority of the votes entitled to vote on such matter, or of any class or series thereof, shall be required with respect to any such matter. ARTICLE VI WRITTEN CONSENTS Except for the election of directors of the Corporation, who when elected by shareholders shall be elected at either an annual or special meeting of shareholders called for such purpose, any action required to, or which may, be taken at any annual or special meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. ARTICLE VII COMMENCEMENT OF BUSINESS The Corporation will not commence business until it has received for the issuance of its shares consideration of the value of One Thousand ($1,000.00) Dollars consisting of money, labor done, or property actually received. ARTICLE VIII REGISTERED OFFICE AND AGENT The street address of its initial registered office is 5555 San Felipe, 17th Floor, Houston, Texas 77056 and the name of its initial registered agent at such address is Gary A. Messersmith. ARTICLE IX DIRECTORS (A) Number of Directors. The business and affairs of the Corporation shall be managed by or be under the direction of the Board of Directors of the Corporation. The number of Directors constituting the initial E-6 154 Board of Directors is one (1). The number of Directors of the Corporation may from time to time be changed in accordance with the Bylaws of the Corporation and the Act. (B) Name and Address of Director. The name of the person who is to serve as Director until the first annual meeting of the shareholders, or until his successor is elected and qualified is DAVID R. LITTLE and his address is 580 Westlake Park Blvd., Suite 1100, Houston, Texas 77079 (C) Directors Liability. No director of the Corporation shall be liable to the Corporation or any of its shareholders for monetary damages for an act or omission in the director's capacity as a director, except that this Article IX shall not authorize the elimination or limitation of liability of a director of the Corporation to the extent the director is found liable for: (i) a breach of such director's duty of loyalty to the Corporation or its shareholders; (ii) an act or omission not in good faith that constitutes a breach of duty of such director to the Corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which such director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (iv) an act or omission for which the liability of a director is expressly provided by an applicable statute. ARTICLE X LIMITATION OF LIABILITY OF DIRECTORS A. No director of the Corporation shall be liable to the Corporation or any of its shareholders for monetary damages for an act or omission in the director's capacity as a director, except that this Article VIII shall not authorize the elimination or limitation of liability of a director of the Corporation to the extent the director is found liable for: (i) a breach of such director's duty of loyalty to the Corporation or its shareholders; (ii) an act or omission not in good faith that constitutes a breach of duty of such director to the Corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which such director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (iv) an act or omission for which the liability of a director is expressly provided by an applicable statute. B. If the Texas Business Corporation Act, the Texas Miscellaneous Corporation Laws Act or any other applicable Texas statute hereafter is amended to authorize the further elimination or limitation of the liability of directors of the Corporation, then the liability of a director of the Corporation shall be limited to the fullest extent permitted by the Texas Business Corporation Act, the Texas Miscellaneous Corporation Laws Act and such other applicable Texas statute, as so amended, and such limitation of liability shall be in addition to, and not in lieu of, the limitation on the liability of a director of the Corporation provided by the foregoing provisions of this Article VIII. C. Any repeal of or amendment to this Article VIII shall be prospective only and shall not adversely affect any limitation on the liability of a director of the Corporation existing at the time of such repeal or amendment. ARTICLE XI INDEMNIFICATION OF OFFICERS AND DIRECTORS (A) Indemnification of Directors. To the fullest extent permitted by Section B and Section E of Article 2.02-1 of the Act, the Corporation shall indemnify each person who was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director of the Corporation, and this provision for indemnification shall be deemed to constitute authorization of such indemnification in the manner required by Section G of said Article 2.02-1 of the Act. (B) Expenses of a Defendant. To the fullest extent permitted by Section K of Article 2.02-1 of the Act, reasonable expenses incurred by a director of the Corporation who was, is, or is threatened to be made a named defendant or respondent in a proceeding shall be paid or reimbursed by the Corporation, in advance of E-7 155 the final disposition of such proceeding, after the Corporation receives a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification by the Corporation and the Corporation receives a written undertaking by or behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is otherwise prohibited by said Article 2.02-1 of the Act. This provision for payment or reimbursement shall be deemed to constitute authorization of such payment or reimbursement as provided by said Section K of Article 2.02-1 of the Act. (C) Officers. Pursuant to Section O of Article 2.02-1 of the Act, the Corporation shall indemnify and advance expenses to an officer of the Corporation to the same extent that the Corporation shall indemnify and pay or reimburse expenses to directors of the Corporation as set forth in subsections (A) and (B) hereinabove. (D) Expenses of a Witness. To the fullest extent permitted by Section N of Article 2.02-1 of the Act, the Corporation shall pay or reimburse expenses incurred by a director or officer in connection with his appearance as a witness or other participation, only in his capacity as a director or officer of the Corporation, in a proceeding at a time when he is not a named defendant or respondent in the proceeding as set out therein. (E) Other. In addition to the foregoing, the Corporation hereby adopts all other terms, provisions and authorizations of Article 2.02-1 of the Act, not in conflict with subsections (A), (B), (C) and (d) hereinabove, including but not limited to Sections H, I, J and O of said Article 2.02-1 of the Act. It is the intention of the Corporation to provide the maximum indemnification allowed by law to its directors and officers and to make mandatory in all instances any permissive provisions of Article 2.02-1 of the Act for the benefit of the Corporation's directors and officers. (F) Insurance. The Corporation shall have power to purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article or the Act. (G) Amendment of this Article. No amendment or repeal of this Article shall apply to or have any affect on the indemnification or reimbursement of any director or officer of the Corporation for or with respect to any such indemnification or reimbursement on the part of such director or officer for events covered by such indemnification or reimbursement occurring prior to such amendment or repeal. (H) Amendment of the Act. In the event any provision of the Act set out in this Article is amended, altered or repealed in any way, then any such amendment, alteration or repeal shall be incorporated herein without the necessity of any further action by the corporation upon the effective date of such action. ARTICLE XII AMENDMENT OF BYLAWS The shareholders of the Corporation hereby delegate to the Board of Directors the power to adopt, alter, amend or repeal the Bylaws of the Corporation. Such power shall be vested exclusively in the Board of Directors and shall not be exercised by the shareholders. ARTICLE XIII POWER TO CALL SPECIAL SHAREHOLDERS' MEETINGS Special meetings of the shareholders of the Corporation may be called by the President of the Corporation, the Board of Directors or holders of not less than thirty (30%) percent of all the shares entitled to vote at the proposed special meeting of the shareholders. E-8 156 ARTICLE XIV AMENDMENTS The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation or in its Bylaws in the manner now or hereafter prescribed by the Act or these Articles of Incorporation, and all rights conferred on shareholders herein are granted subject to this reservation. Executed this the day of August, 1996. INDEX, INC. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ E-9 157 APPENDIX F: BYLAWS OF THE COMPANY 158 CORPORATE BYLAWS OF INDEX, INC. (A TEXAS CORPORATION) 159 TABLE OF CONTENTS
SECTION SUBJECT MATTER PAGE - ------- -------------------------------------------------------------------------- ---- ARTICLE I. NAME AND OFFICES 1.1 Name............................................................................ 1.2 Registered Office and Agent..................................................... (a) Registered Office......................................................... (b) Registered Agent.......................................................... (c) Change of Registered Office or Agent...................................... 1.3 Other Offices................................................................... ARTICLE II. SHAREHOLDERS 2.1 Place of Meetings............................................................... 2.2 Annual Meetings................................................................. 2.3 Special Meetings................................................................ 2.4 Notice.......................................................................... 2.5 Voting List..................................................................... 2.6 Quorum.......................................................................... 2.7 Requisite Vote.................................................................. 2.8 Withdrawal of Quorum............................................................ 2.9 Voting at Meeting............................................................... (a) Voting Power.............................................................. (b) Exercise of Voting Power; Proxies......................................... (c) Election of Directors..................................................... 2.10 Record Date for Meetings; Closing Transfer Records.............................. 2.11 Action Without Meetings......................................................... 2.12 Record Date for Action Without Meetings......................................... 2.13 Preemptive Rights............................................................... ARTICLE III. DIRECTORS 3.1 Management Powers............................................................... 3.2 Number and Qualification........................................................ 3.3 Election and Term............................................................... 3.4 Voting on Directors............................................................. 3.5 Vacancies....................................................................... 3.6 New Directorships............................................................... 3.7 Removal......................................................................... 3.8 Meetings........................................................................ (a) Place..................................................................... (b) Annual Meeting............................................................ (c) Regular Meetings.......................................................... (d) Special Meetings.......................................................... (e) Notice and Waiver of Notice............................................... (f) Quorum.................................................................... (g) Requisite Vote............................................................ 3.9 Action Without Meetings......................................................... 3.10 Committees...................................................................... (a) Designation and Appointment...............................................
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SECTION SUBJECT MATTER PAGE - ------- -------------------------------------------------------------------------- ---- (b) Members; Alternate Members; Terms......................................... (c) Authority................................................................. (d) Records................................................................... (e) Change in Number.......................................................... (f) Vacancies................................................................. (g) Removal................................................................... (h) Meeting................................................................... (i) Quorum; Requisite Vote.................................................... (j) Compensation.............................................................. (k) Action Without Meetings................................................... (l) Responsibility............................................................ 3.11 Compensation.................................................................... 3.12 Maintenance of Records.......................................................... ARTICLE IV. NOTICES 4.1 Method of Notice................................................................ 4.2 Waiver.......................................................................... ARTICLE V. OFFICERS AND AGENTS 5.1 Designation..................................................................... 5.2 Election of Officers............................................................ 5.3 Qualifications.................................................................. 5.4 Term of Office.................................................................. 5.5 Authority....................................................................... 5.6 Removal......................................................................... 5.7 Vacancies....................................................................... 5.8 Compensation.................................................................... 5.9 Chairman of the Board........................................................... 5.10 President....................................................................... 5.11 Vice Presidents................................................................. 5.12 Secretary....................................................................... 5.13 Assistant Secretaries........................................................... 5.14 Treasurer....................................................................... 5.15 Assistant Treasurers............................................................ ARTICLE VI. INDEMNIFICATION 6.1 Indemnification of Directors.................................................... 6.2 Expenses of a Defendant......................................................... 6.3 Officers........................................................................ 6.4 Expenses of a Witness........................................................... 6.5 Other........................................................................... 6.6 Insurance....................................................................... 6.7 Amendment of this Article....................................................... 6.8 Amendment of the Act............................................................
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SECTION SUBJECT MATTER PAGE - ------- -------------------------------------------------------------------------- ---- ARTICLE VII. STOCK CERTIFICATES AND TRANSFER REGULATIONS 7.1 Description of Certificates..................................................... 7.2 Delivery........................................................................ 7.3 Signatures...................................................................... 7.4 Issuance of Certificates........................................................ 7.5 Payment for Shares.............................................................. (a) Consideration............................................................. (b) Valuation................................................................. (c) Effect.................................................................... (d) Allocation of Consideration............................................... 7.6 Subscriptions................................................................... 7.7 Closing of Transfer Records; Record Date for Action With Meeting................ 7.8 Registered Owners............................................................... 7.9 Lost, Stolen or Destroyed Certificates.......................................... (a) Proof of Loss............................................................. (b) Timely Request............................................................ (c) Bond...................................................................... (d) Other Requirements........................................................ 7.10 Registration of Transfers....................................................... (a) Endorsement............................................................... (b) Guaranty and Effectiveness of Signature................................... (c) Adverse Claims............................................................ (d) Collection of Taxes....................................................... (e) Additional Requirements Satisfied......................................... 7.11 Restrictions on Transfer and Legends on Certificates............................ (a) Shares in Classes or Series............................................... (b) Restriction on Transfer................................................... (c) Preemptive Rights......................................................... (d) Unregistered Securities................................................... ARTICLE VIII. GENERAL PROVISIONS 8.1 Distributions................................................................... (a) Declaration and Payment................................................... (b) Record Date............................................................... 8.2 Reserves........................................................................ 8.3 Books and Records............................................................... 8.4 Annual Statement................................................................ 8.5 Contracts and Negotiable Instruments............................................ 8.6 Fiscal Year..................................................................... 8.7 Corporate Seal.................................................................. 8.8 Resignations.................................................................... 8.9 Amendment of Bylaws............................................................. 8.10 Construction.................................................................... 8.11 Telephone Meetings.............................................................. 8.12 Table of Contents; Captions..................................................... 18
iii 162 BYLAWS OF INDEX, INC. (A TEXAS CORPORATION) ARTICLE I. NAME AND OFFICES 1.1 Name. The name of the Corporation is INDEX, INC. hereinafter referred to as the "Corporation." 1.2 Registered Office and Agent. The Corporation shall establish, designate and continuously maintain a registered office and agent in the State of Texas, subject to the following provisions: (a) Registered Office. The Corporation shall establish and continuously maintain in the State of Texas a registered office which may be, but need not be, the same as its place of business. (b) Registered Agent. The Corporation shall designate and continuously maintain in the State of Texas a registered agent, which agent may be either an individual resident of the State of Texas whose business office is identical with such registered office, or a domestic corporation or a foreign corporation authorized to transact business in the State of Texas, having a business office identical with such registered office. (c) Change of Registered Office or Agent. The Corporation may change its registered office or change its registered agent, or both, upon the filing in the Office of the Secretary of State of Texas of a statement setting forth the facts required by law, and executed for the Corporation by its President or a Vice President. 1.3 Other Offices. The Corporation may also have offices at such other places within and without the State of Texas as the Board of Directors may, from time to time, determine the business of the Corporation may require. ARTICLE II. SHAREHOLDERS 2.1 Place of Meetings. Each meeting of the shareholders of the Corporation is to be held at the principal offices of the Corporation or at such other place, either within or without the State of Texas, as may be specified in the notice of the meeting or in a duly executed waiver of notice thereof. 2.2 Annual Meetings. The annual meeting of the shareholders for the election of Directors and for the transaction of such other business as may properly come before the meeting shall be held after the close of the fiscal year of the Corporation on a day to be selected by the Board of Directors; provided, however, that the failure to hold the annual meeting within the designated period of time or on the designated date shall not work a forfeiture or dissolution of the Corporation. 2.3 Special Meetings. Special meetings of the shareholders, for any purpose or purposes, may be called by the Chairman of the Board or the President. Special meetings of the shareholders shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of shareholders owning thirty percent (30%) of the capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting and the business to be transacted at any such special meeting of shareholders, and shall be limited to the purposes stated in the notice therefor. 2.4 Notice. Written or printed notice of the meeting stating the place, day and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board or the President, the Secretary or a majority of the members of the Board of Directors calling the meeting, to each shareholder entitled to vote at such meeting as 1 163 determined in accordance with the provisions of Section 2.10 hereof. If mailed, such notice shall be deemed to be delivered when deposited in the United States Mail, with postage thereon prepaid, addressed to the shareholder entitled thereto at his address as it appears on the share transfer records of the Corporation. 2.5 Voting List. The officer or agent having charge and custody of the share transfer records of the Corporation, shall prepare, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order and containing the address and number of voting shares held by each, which list shall be kept on file at the registered office or principal place of business of the Corporation for a period of not less than ten (10) days prior to such meeting and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the entire time of the meeting. The original share ledger or transfer book, or a duplicate thereof, shall be prima facie evidence as to identity of the shareholders entitled to examine such list or share ledger or transfer book and to vote at any such meeting of the shareholders. 2.6 Quorum. The holders of a majority of the shares of the capital stock issued and outstanding and entitled to vote thereat, represented in person or by proxy, shall be requisite and shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by statute or by the Articles of Incorporation or by these Bylaws. The shareholders represented in person or by proxy at a meeting of the shareholders at which a quorum is not present may adjourn the meeting until such time and to such place as may be determined by a vote of the holders of a majority of the shares represented in person or by proxy at that meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. 2.7 Requisite Vote. If a quorum is present at any meeting, the vote of the holders of a majority of the shares of capital stock having voting power and casting a vote thereon, present in person or represented by proxy, shall determine any question brought before such meeting, unless the question is one upon which, by express provision of the Articles of Incorporation or of these Bylaws, a different vote shall be required or permitted, in which case such express provision shall govern and control the determination of such question. 2.8 Withdrawal of Quorum. If a quorum is present at the time of commencement of any meeting, the shareholders present at such duly convened meeting may continue to transact any business which may properly come before said meeting until adjournment thereof, notwithstanding the withdrawal from such meeting of sufficient holders of the shares of capital stock entitled to vote thereat to leave less than a quorum remaining. 2.9 Voting at Meeting. Voting at meetings of shareholders shall be conducted and exercised subject to the following procedures and regulations: (a) Voting Power. In the exercise of voting power with respect to each matter properly submitted to a vote at any meeting of shareholders, each shareholder of the capital stock of the Corporation having voting power shall be entitled to one (1) vote for each such share held in his name on the records of the Corporation, except to the extent otherwise specified by the Articles of Incorporation. (b) Exercise of Voting Power; Proxies. At any meeting of the shareholders, every holder of the shares of capital stock of the Corporation entitled to vote at such meeting may vote either in person, or by proxy executed in writing by such shareholder. A telegram, telex, cablegram, or similar transmission by a shareholder, or a photographic, photostatic, facsimile, or similar reproduction of a writing executed by a shareholder, shall be treated as an execution in writing. No proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless otherwise stated therein. A proxy shall be revocable unless expressly designated therein as irrevocable and coupled with an interest. Proxies coupled with an interest include the appointment as proxy of: (a) a pledgee; (b) a person who purchased or agreed to purchase or owns or holds an option to purchase the shares voted; (c) a creditor of the Corporation who extended its credit under terms requiring the appointment; (d) an employee of the Corporation whose employment contract requires the appointment; or (e) a party to a voting agreement created under Section B of Article 2.30 of the Texas Business Corporation Act, as amended (the "Act"). 2 164 Each proxy shall be filed with the Secretary of the Corporation prior to or at the time of the meeting. Voting for directors shall be in accordance with the provisions of paragraph (c) below of this Section 2.9. Any vote may be taken by voice vote or by show of hands unless someone entitled to vote at the meeting objects, in which case written ballots shall be used. (c) Election of Directors. Directors shall be elected in accordance with Section 3.4 of these Bylaws. 2.10 Record Date for Meetings; Closing Transfer Records. As more specifically provided in Article 7, Section 7.7 hereof, the Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such record date to be not less than ten (10) nor more than sixty (60) days prior to such meeting, or the Board of Directors may close the share transfer records for such purpose for a period of not less than ten (10) nor more than sixty (60) days prior to such meeting. In the absence of any action by the Board of Directors, the date upon which the notice of the meeting is mailed shall be deemed the record date. 2.11 Action Without Meetings. Any action required by the Act, the Articles of Incorporation or these Bylaws to be taken at any annual or special meeting of the shareholders, or any action which may be taken at any annual or special meeting of the shareholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all of the shares entitled to vote on the action were present and voted, provided that such action is done in compliance with Section 9.10 of the Act. Any such executed written consent, or an executed counterpart thereof, shall be placed in the minute book of the Corporation. Every written consent shall bear the date of signature of each shareholder who signs the consent. No written consent shall be effective to take the action that is the subject of the consent unless, within sixty (60) days after the date of the earliest dated consent delivered to the Corporation in the manner required under Section 2.12 hereof, a consent or consents signed by the holders of a majority of the shares of the capital stock issued and outstanding and entitled to vote on the action that is the subject of the consent are delivered to the Corporation. 2.12 Record Date for Action Without Meetings. Unless a record date shall have previously been fixed or determined by the Board of Directors as provided in Section 2.10 hereof, whenever action by shareholders is proposed to be taken by consent in writing without a meeting of shareholders, the Board of Directors may fix a record date for the purpose of determining shareholders entitled to consent to that action, which record date shall not precede, and shall not be more than ten (10) days after, the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors and the prior action of the Board of Directors is not required by statute or the Articles of Incorporation, the record date for determining shareholders entitled to consent to action in writing without a meeting shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office, its principal place of business, or an officer or agent of the Corporation having custody of the books in which proceedings of meetings of shareholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. Delivery to the Corporation's principal place of business shall be addressed to the President or principal executive officer of the Corporation. If no record date shall have been fixed by the Board of Directors and prior action of the Board of Directors is required by statute, the record date for determining shareholders entitled to consent to action in writing without a meeting shall be at the close of business on the date in which the Board of Directors adopts a resolution taking such prior action. 2.13 Preemptive Rights. Unless otherwise determined by the Board of Directors in the manner provided under the Act, no holder of shares of capital stock of the Corporation shall, as such holder, have any right to purchase or subscribe for any capital stock of any class which the Corporation may issue or sell, whether or not exchangeable for any capital stock of the Corporation of any class or classes, whether issued out of unissued shares authorized by the Articles of Incorporation, as amended, or out of shares of capital stock of the Corporation acquired by it after the issue thereof; nor, unless otherwise determined by the Board of Directors in the manner provided under the Act shall any holder of shares of capital stock of the Corporation, as such 3 165 holder, have any right to purchase, acquire or subscribe for any securities which the Corporation may issue or sell whether or not convertible into or exchangeable for shares of capital stock of the Corporation of any class or classes, and whether or not any such securities have attached or appurtenant thereto warrants, options or other instruments which entitle the holders thereof to purchase, acquire or subscribe for shares of capital stock of any class or classes. ARTICLE III. DIRECTORS 3.1 Management Powers. The powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. 3.2 Number and Qualification. The Board of Directors shall consist of not less than one (1) member nor more than ten (10) members; provided, however, the initial Board of Directors shall consist of one (1) member. Directors need not be residents of the State of Texas nor shareholders of the Corporation. Each Director shall qualify as a Director following election as such by agreeing to act or acting in such capacity. The number of Directors may be increased or decreased from time to time by resolution of the Board of Directors or shareholders without the necessity of a written amendment to the Bylaws of the Corporation; provided, however, no decrease shall have the effect of shortening the term of any incumbent Director. 3.3 Election and Term. Members of the Board of Directors shall hold office until the annual meeting of shareholders and until their successors shall have been elected and qualified. At the annual meeting of the shareholders, the shareholders entitled to vote in an election of Directors shall elect Directors to hold office until the next succeeding annual meeting. Each Director shall hold office for the term for which he is elected, and until his successor shall be elected and qualified or until his death, resignation or removal, if earlier. 3.4 Voting on Directors. Directors shall be elected by the vote of the holders of a plurality of the shares entitled to vote in the election of Directors and represented in person or by proxy at a meeting of shareholders at which a quorum is present. Cumulative voting in the election of Directors is expressly prohibited. 3.5 Vacancies. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining Directors then in office, though less than a quorum of the Board of Directors. For purposes of these Bylaws, a "vacancy" shall be defined as an unfilled directorship arising by virtue of the death, resignation or removal of a Director theretofore duly elected to serve in such capacity in accordance with the relevant provisions of these Bylaws. A Director elected to fill a vacancy shall be elected for the unexpired portion of the term of his predecessor in office. 3.6 New Directorships. Any directorship to be filled by reason of an increase in the number of Directors actually serving as such shall be filled by election at an annual meeting of the shareholders or at a special meeting of shareholders called for that purpose, or by the Board of Directors for a term of office continuing only until the next election of one or more Directors by the shareholders, provided that the Board of Directors may not fill more than two (2) such directorships during the period between any two (2) successive annual meetings of shareholders. 3.7 Removal. Any Director may be removed either for or without cause at any duly convened special or annual meeting of shareholders, by the affirmative vote of a majority in number of shares of the shareholders present in person or by proxy at any meeting and entitled to vote for the election of such Director, provided notice of intention to act upon such matter shall have been given in the notice calling such meeting. 4 166 3.8 Meetings. The meetings of the Board of Directors shall be held and conducted subject to the following regulations: (a) Place. Meetings of the Board of Directors of the Corporation, annual, regular or special, are to be held at the principal office or place of business of the Corporation, or such other place, either within or without the State of Texas, as may be specified in the respective notices, or waivers of notice, thereof. (b) Annual Meeting. The Board of Directors shall meet each year immediately after the annual meeting of the shareholders, at the place where such meeting of the shareholders has been held (either within or without the State of Texas), for the purpose of organization, election of officers, and consideration of any other business that may properly be brought before the meeting. No notice of any kind to either old or new members of the Board of Directors for such annual meeting shall be required. (c) Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and at such place or places as shall from time to time be determined and designated by the Board. (d) Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President of the Corporation on notice of two (2) days to each Director either personally or by mail or by telegram; special meetings shall be called by the Chairman of the Board or the President or Secretary in like manner and on like notice on the written request of two (2) Directors. (e) Notice and Waiver of Notice. Attendance of a Director at any meeting shall constitute a waiver of notice of such meeting, except where a Director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. (f) Quorum. At all meetings of the Board of Directors, a majority of the number of Directors fixed by these Bylaws shall constitute a quorum for the transaction of business, until a greater number is required by law or by the Articles of Incorporation. If a quorum shall not be present at any meeting of Directors, the Directors present thereat may adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. (g) Requisite Vote. In the exercise of voting power with respect to each matter properly submitted to a vote at any meeting of the Board of Directors, each Director present at such meeting shall have one (1) vote. The act of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. 3.9 Action Without Meetings. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action required or permitted by law to be taken at any meetings of the Board of Directors, or any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed in the minutes or proceedings of the Board of Directors or committee. 3.10 Committees. Committees designated and appointed by the Board of Directors shall function subject to and in accordance with the following regulations and procedures: (a) Designation and Appointment. The Board of Directors may, by resolution adopted by a majority of the entire Board, designate and appoint one or more committees under such name or names and for such purpose or function as may be deemed appropriate. (b) Members; Alternate Members; Terms. Each Committee thus designated and appointed shall consist of two or more of the Directors of the Corporation. The Board of Directors may designate one or more of its members as alternate members of any committee, who may, subject to any limitations imposed by the entire Board, replace absent or disqualified members at any meeting of that committee. The members or alternate members of any such committee shall serve at the pleasure of and subject to the discretion of the Board of Directors. 5 167 (c) Authority. Each Committee, to the extent provided in the resolution of the Board creating same, shall have and may exercise such of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation as the Board of Directors may direct and delegate, except, however, those matters which are required by statute to be reserved unto or acted upon by the entire Board of Directors. (d) Records. Each such Committee shall keep and maintain regular records or minutes of its meetings and report the same to the Board of Directors when required. (e) Change in Number. The number of members or alternate members of any Committee appointed by the Board of Directors, as herein provided, may be increased or decreased (but not below two) from time to time by appropriate resolution adopted by a majority of the entire Board of Directors. (f) Vacancies. Vacancies in the membership of any committee designated and appointed hereunder shall be filled by the Board of Directors, at a regular or special meeting of the Board of Directors, in a manner consistent with the provisions of this Section 3.10. (g) Removal. Any member or alternate member of any committee appointed hereunder may be removed by the Board of Directors by the affirmative vote of a majority of the entire Board, whenever in its judgment the best interests of the Corporation will be served thereby. (h) Meetings. The time, place and notice (if any) of committee meetings shall be determined by the members of such committee. (i) Quorum; Requisite Vote. At meetings of any committee appointed hereunder, a majority of the number of members designated by the Board of Directors shall constitute a quorum for the transaction of business. The act of a majority of the members and alternate members of the committee present at any meeting at which a quorum is present shall be the act of such committee, except as otherwise specifically provided by statute or by the Articles of Incorporation or by these Bylaws. If a quorum is not present at a meeting of such committee, the members of such committee present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. (j) Compensation. Appropriate compensation for members and alternate members of any committee appointed pursuant to the authority hereof may be authorized by the action of a majority of the entire Board of Directors pursuant to the provisions of Section 3.11 hereof. (k) Action Without Meetings. Any action required or permitted to be taken at a meeting of any committee may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all members of such committee. Such consent shall have the same force and effect as a unanimous vote at a meeting. The signed consent, or a signed copy, shall become a part of the record of such committee. (l) Responsibility. Notwithstanding any provision to the contrary herein, the designation and appointment of a committee and the delegation of authority to it shall not operate to relieve the Board of Directors, or any member or alternate member thereof, of any responsibility imposed upon it or him by law. 3.11 Compensation. By appropriate resolution of the Board of Directors, the Directors may be reimbursed their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum (as determined from time to time by the vote of a majority of the Directors then in office) for attendance at each meeting of the Board of Directors or a stated salary as Director. No such payment shall preclude any Director from serving the Corporation in another capacity and receiving compensation therefor. Members of special or standing committees may, by appropriate resolution of the Board of Directors, be allowed similar reimbursement of expenses and compensation for attending committee meetings. 3.12 Maintenance of Records. The Directors may keep the books and records of the Corporation, except such as are required by law to be kept within the State, outside the State of Texas or at such place or places as they may, from time to time, determine. 6 168 ARTICLE IV NOTICES 4.1 Method of Notice. Whenever under the provisions of the Act or of the Articles of Incorporation or of these Bylaws, notice is required to be given to any Director or shareholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or shareholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States Mail. Notice to Directors or shareholders may also be given by telegram. 4.2 Waiver. Whenever any notice whatever is required to be given under the provisions of the Act or under the provisions of the Articles of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance by such person or persons, whether in person or by proxy, at any meeting requiring notice shall constitute a waiver of notice of such meeting, except as provided in Section 3.8(e) hereof. ARTICLE V OFFICERS AND AGENTS 5.1 Designation. The officers of the Corporation shall be chosen by the Board of Directors and shall consist of the offices of: (a) President and Secretary; and (b) Such other offices and officers (including a Chairman of the Board, one or more Vice Presidents and a Treasurer) and assistant officers and agents as the Board of Directors shall deem necessary. 5.2 Election of Officers. Each officer designated in Section 5.1(a) hereof shall be elected by the Board of Directors on the expiration of the term of office of such officer, as herein provided, or whenever a vacancy exists in such office. Each officer or agent designated in Section 5.1(b) above may be elected by the Board at any meeting. 5.3 Qualifications. No officer or agent need be a shareholder of the Corporation or a resident of Texas. No officer or agent is required to be a Director, except the Chairman of the Board. Any two or more offices may be held by the same person. 5.4 Term of Office. Unless otherwise specified by the Board of Directors at the time of election or appointment, or by the express provisions of an employment contract approved by the Board, the term of office of each officer and each agent shall expire on the date of the first meeting of Directors next following the annual meeting of shareholders each year. Each such officer or agent shall serve until the expiration of the term of his office or, if earlier, his death, resignation or removal. 5.5 Authority. Officers and agents shall have such authority and perform such duties in the management of the Corporation as are provided in these Bylaws or as may be determined by resolution of the Board of Directors not inconsistent with these Bylaws. 5.6 Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 5.7 Vacancies. Any vacancy occurring in any office of the Corporation (by death, resignation, removal or otherwise) shall be filled by the Board of Directors. 7 169 5.8 Compensation. The compensation of all officers and agents of the Corporation shall be fixed from time to time by the Board of Directors. 5.9 Chairman of the Board. If a Chairman of the Board is elected, he shall be chosen from among the Directors and shall be the chief executive and principal officer of the Corporation. He shall have the power to call special meetings of the shareholders and of the Directors for any purpose or purposes, and he shall preside at all meetings of the shareholders and of the Board of Directors, unless he shall be absent or unless he shall, at his election, designate the President to preside in his stead. The Chairman of the Board shall be responsible for the operations and business affairs of the Corporation and shall possess all of the powers granted by the Bylaws to the President, including the power to make and sign contracts and agreements in the name and on behalf of the Corporation. He shall, in general, have supervisory power over the President and all other officers and the business activities of the Corporation, subject to the discretion of the Board of Directors. 5.10 President. Subject to the supervision of the Chairman of the Board, or in the absence of the election of a Chairman of the Board, the President shall be the chief executive officer of the Corporation; shall preside at all meetings of the shareholders and the Board of Directors; shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise executed and except where the execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The President shall perform such other duties and possess such other authority and powers as the Board of Directors may from time to time prescribe. 5.11 Vice Presidents. The Vice President, or if there shall be more than one, the Vice Presidents in the order determined by a majority vote of the Board of Directors, shall, in the prolonged absence or disability of the President (and Chairman of the Board, if one is elected), perform the duties and exercise the powers of the President and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe or the chief executive officer may from time to time delegate. 5.12 Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders of the Corporation and record all proceedings of the meetings of the Corporation and of the Board of Directors in a book to be maintained for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, or President. He shall have custody of the corporate seal of the Corporation, and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. 5.13 Assistant Secretaries. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, shall in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe or the chief executive officer may from time to time delegate. 5.14 Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President (and Chairman of the Board, if one is elected) and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in 8 170 case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money, and other property of whatever kind in his possession or under his control owned by the Corporation. The Treasurer shall perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe or as the chief executive officer may from time to time delegate. 5.15 Assistant Treasurers. The Assistant Treasurer, or, if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe or as the chief executive officer may from time to time delegate. ARTICLE VI. INDEMNIFICATION 6.1 Indemnification of Directors. To the fullest extent permitted by Section B and Section E of Article 2.02-1 of the Act, the corporation shall indemnify each person who was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director of the corporation, and this provision for indemnification shall be deemed to constitute authorization of such indemnification in the manner required by Section G of said Article 2.02-1 of the Act. 6.2 Expenses of a Defendant. To the fullest extent permitted by Section K of Article 2.02-1 of the Act, reasonable expenses incurred by a director of the corporation who was, is, or is threatened to be made a named defendant or respondent in a proceeding shall be paid or reimbursed by the corporation, in advance of the final disposition of such proceeding, after the corporation receives a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation and the corporation receives a written undertaking by or behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is otherwise prohibited by said Article 2.02-1 of the Act. This provision for payment or reimbursement shall be deemed to constitute authorization of such payment or reimbursement as provided by said Section K of Article 2.02-1 of the Act. 6.3 Officers. Pursuant to Section O of Article 2.02-1 of the Act, the corporation shall indemnify and advance expenses to an officer of the corporation to the same extent that the corporation shall indemnify and pay or reimburse expenses to directors of the corporation as set forth in subsections (a) and (b) hereinabove. 6.4 Expenses of a Witness. To the fullest extent permitted by Section N of Article 2.02-1 of the Act, the corporation shall pay or reimburse expenses incurred by a director or officer in connection with his appearance as a witness or other participation, only in his capacity as a director or officer of the corporation, in a proceeding at a time when he is not a named defendant or respondent in the proceeding as set out therein. 6.5 Other. In addition to the foregoing, the corporation hereby adopts all other terms, provisions and authorizations of Article 2.02-1 of the Act, not in conflict with subsections (a), (b), (c) and (d) hereinabove, including but not limited to Sections H, I, J and O of said Article 2.02-1 of the Act. It is the intention of the corporation to provide the maximum indemnification allowed by law to its directors and officers and to make mandatory in all instances any permissive provisions of Article 2.02-1 of the Act for the benefit of the corporation's directors and officers. 6.6 Insurance. The Corporation shall have power to purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article or the Act. 9 171 6.7 Amendment of this Article. No amendment or repeal of this Article VI shall apply to or have any affect on the indemnification or reimbursement of any director or officer of the corporation for or with respect to any such indemnification or reimbursement on the part of such director or officer for events covered by such indemnification or reimbursement occurring prior to such amendment or repeal. 6.8 Amendment of the Act. In the event any provision of the Act set out in this Article VI is amended, altered or repealed in any way, then any such amendment, alteration or repeal shall be incorporated herein without the necessity of any further action by the corporation upon the effective date of such action. The corporation shall indemnify any director or officer or former director or officer of the corporation, or any person who may have served at its request as a director or officer of another corporation in which it owns shares of capital stock or of which it is a creditor, against expenses actually and necessarily incurred by him in connection with the defense of any action, suit, or proceeding in which he is made a party by reason of being or having been such director or officer, except in relation to matters as to which he shall be adjudged in some action, suit or proceeding to be liable for negligence or misconduct in performance of duty, but such indemnification shall not be deemed exclusive of any other rights to which such director or officer may be entitled, under any bylaw, agreement, vote of shareholders, or otherwise. ARTICLE VII. STOCK CERTIFICATES AND TRANSFER REGULATIONS 7.1 Description of Certificates. The shares of the capital stock of the Corporation shall be represented by certificates in the form approved by the Board of Directors and signed in the name of the Corporation by the President or a Vice President and the Secretary or an Assistant Secretary of the Corporation, and sealed with the seal of the Corporation or a facsimile thereof. Each certificate shall state on the face thereof the name of the holder, the number and class of shares and the designation of the series, if any, which such certificate represents, the par value of shares covered thereby or a statement that such shares are without par value, and such other matters as are required by law. At such time as the Corporation may be authorized to issue shares of more than one class or any class in series, every certificate shall set forth upon the face or back of such certificate a statement of the designations, preferences, limitations and relative rights of the shares of each class or series authorized to be issued, as required by the laws of the State of Texas. 7.2 Delivery. Every holder of the capital stock in the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the President or a Vice President and the Secretary or an Assistant Secretary of the Corporation, certifying the class of capital stock and the number of shares represented thereby as owned or held by such shareholder in the Corporation. 7.3 Signatures. The signatures of the President, Vice President, Secretary or Assistant Secretary upon a certificate may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been placed upon any such certificate or certificates, shall cease to serve as such officer or officers of the Corporation, whether because of death, resignation, removal or otherwise, before such certificate or certificates are issued and delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered with the same effect as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to serve as such officer or officers of the Corporation. 7.4 Issuance of Certificates. Certificates evidencing shares of its capital stock (both treasury and authorized but unissued) may be issued for such consideration (not less than par value, except for treasury shares which may be issued for such consideration) and to such persons as the Board of Directors may determine from time to time. Shares shall not be issued until the full amount of the consideration, fixed as provided by law, has been paid. 10 172 7.5 Payment for Shares. Consideration for the issuance of shares shall be paid, valued and allocated as follows: (a) Consideration. The consideration for the issuance of shares shall consist of money paid, labor done (including services actually performed for the Corporation), or property (tangible or intangible) actually received. (b) Valuation. In the absence of fraud in the transaction, the determination of the Board of Directors as to the value of consideration received shall be conclusive. (c) Effect. When consideration, fixed as provided by law, has been paid, the shares shall be deemed to have been issued and shall be considered fully paid and nonassessable. (d) Allocation of Consideration. The consideration received for shares shall be allocated by the Board of Directors, in accordance with law, between the stated capital and capital surplus accounts. 7.6 Subscriptions. Unless otherwise provided in the subscription agreement, subscriptions of shares, whether made before or after organization of the Corporation, shall be paid in full in such installments and at such times as shall be determined by the Board of Directors. Any call made by the Board of Directors for payment on subscriptions shall be uniform as to all shares of the same class and series. In case of default in the payment of any installment or call when payment is due, the Corporation may proceed to collect the amount due in the same manner as any debt due to the Corporation. 7.7 Closing of Transfer Records; Record Date for Action With Meetings. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive a distribution by the Corporation (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, or in order to make a determination of shareholders for any other proper purpose (other than determining shareholders entitled to consent to action by shareholders proposed to be taken without a meeting of shareholders), the Board of Directors may provide that share transfer records shall be closed for a stated period of time not to exceed, in any case, sixty (60) days. If the share transfer records shall be closed for the purpose of determining shareholders, such records shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the share transfer records, as aforesaid, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days, and in the case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the share transfer records are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive a distribution (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall be applied to any adjournment thereof except where the determination has been made through the closing of the stock transfer books and the stated period of closing has expired. 7.8 Registered Owners. Prior to due presentment for registration of transfer of a certificate evidencing shares of the capital stock of the Corporation in the manner set forth in Section 7.10 hereof, the Corporation shall be entitled to recognize the person registered as the owner of such shares on its records (or the records of its duly appointed transfer agent, as the case may be) as the person exclusively entitled to vote, to receive notices and dividends with respect to, and otherwise exercise all rights and powers relative to such shares; and the Corporation shall not be bound or otherwise obligated to recognize any claim, direct or indirect, legal or equitable, to such shares by any other person, whether or not it shall have actual, express or other notice thereof, except as otherwise provided by the laws of Texas. 11 173 7.9 Lost, Stolen or Destroyed Certificates. The Corporation shall issue a new certificate in place of any certificate for shares previously issued if the registered owner of the certificate satisfies the following conditions: (a) Proof of Loss. Submits proof in affidavit form satisfactory to the Corporation that such certificate has been lost, destroyed or wrongfully taken; and (b) Timely Request. Requests the issuance of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; and (c) Bond. Gives a bond in such form, and with such surety or sureties, with fixed or open penalty, as the Corporation may direct, to indemnify the Corporation (and its transfer agent and registrar, if any) against any claim that may be made or otherwise asserted by virtue of the alleged loss, destruction, or theft of such certificate or certificates; and (d) Other Requirements. Satisfies any other reasonable requirements imposed by the Corporation. In the event a certificate has been lost, apparently destroyed or wrongfully taken, and the registered owner of record fails to notify the Corporation within a reasonable time after he has notice of such loss, destruction, or wrongful taking, and the Corporation registers a transfer (in the manner hereinbelow set forth) of the shares represented by the certificate before receiving such notification, such prior registered owner of record shall be precluded from making any claim against the Corporation for the transfer required hereunder or for a new certificate. 7.10 Registration of Transfers. Subject to the provisions hereof, the Corporation shall register the transfer of a certificate evidencing shares of its capital stock presented to it for transfer if: (a) Endorsement. Upon surrender of the certificate to the Corporation (or its transfer agent, as the case may be) for transfer, the certificate (or an appended stock power) is properly endorsed by the registered owner, or by his duly authorized legal representative or attorney-in-fact, with proper written evidence of the authority and appointment of such representative, if any, accompanying the certificate; and (b) Guaranty and Effectiveness of Signature. The signature of such registered owner or his legal representative or attorney-in-fact, as the case may be, has been guaranteed by a national banking association or member of the New York Stock Exchange, and reasonable assurance in a form satisfactory to the Corporation is given that such endorsements are genuine and effective; and (c) Adverse Claims. The Corporation has no notice of an adverse claim or has otherwise discharged any duty to inquire into such a claim; and (d) Collection of Taxes. Any applicable law (local, state or federal) relating to the collection of taxes relative to the transaction has been complied with; and (e) Additional Requirements Satisfied. Such additional conditions and documentation as the Corporation (or its transfer agent, as the case may be) shall reasonably require, including without limitation thereto, the delivery with the surrender of such stock certificate or certificates of proper evidence of succession, assignment or other authority to obtain transfer thereof, as the circumstances may require, and such legal opinions with reference to the requested transfer as shall be required by the Corporation (or its transfer agent) pursuant to the provisions of these Bylaws and applicable law, shall have been satisfied. 7.11 Restrictions on Transfer and Legends on Certificates. (a) Shares in Classes or Series. If the Corporation is authorized to issue shares of more than one class, the certificate shall set forth, either on the face or back of the certificate, a full or summary statement of all of the designations, preferences, limitations, and relative rights of the shares of each such 12 174 class and, if the Corporation is authorized to issue any preferred or special class in series, the variations in the relative rights and preferences of the shares of each such series so far as the same have been fixed and determined, and the authority of the Board of Directors to fix and determine the relative rights and preferences of subsequent series. In lieu of providing such a statement in full on the certificate, a statement on the face or back of the certificate may provide that the Corporation will furnish such information to any shareholder without charge upon written request to the Corporation at its principal place of business or registered office and that copies of the information are on file in the office of the Secretary of State. (b) Restriction on Transfer. Any restrictions imposed or agreed to by the Corporation on the sale or other disposition of its shares and on the transfer thereof must be copied at length or in summary form on the face, or so copied on the back and referred to on the face, of each certificate representing shares to which the restriction applies. The certificate may however state on the face or back that such a restriction exists pursuant to a specified document and that the Corporation will furnish a copy of the document to the holder of the certificate without charge upon written request to the Corporation at its principal place of business. (c) Preemptive Rights. The preemptive rights of a shareholder to acquire unissued or treasury shares of the Corporation which are denied by the Articles of Incorporation must be set forth at length on the face or back of the certificate representing shares subject thereto. In lieu of providing such a statement in full on the certificate, a statement on the face or back of the certificate may provide that the Corporation will furnish such information to any shareholder without charge upon written request to the Corporation at its principal place of business and that a copy of such information is on file in the office of the Secretary of State. (d) Unregistered Securities. Any security of the Corporation, including, among others, any certificate evidencing shares of the Common Stock or warrants to purchase Common Stock of the Corporation, which is issued to any person without registration under the Securities Act of 1933, as amended, or the Blue Sky laws of any state, shall not be transferable until the Corporation has been furnished with a legal opinion of counsel with reference thereto, satisfactory in form and content to the Corporation and its counsel, to the effect that such sale, transfer or pledge does not involve a violation of the Securities Act of 1933, as amended, or the Blue Sky laws of any state having jurisdiction. The certificate representing the security shall bear substantially the following legend: THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL EITHER (i) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) THE CORPORATION SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION AND ITS COUNSEL THAT REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR TRANSFER. 13 175 ARTICLE VIII. GENERAL PROVISIONS 8.1 Distributions. Subject to the provisions of the Act, as amended, and the Articles of Incorporation, distributions of the Corporation shall be declared and paid pursuant to the following regulations: (a) Declaration and Payment. Distributions on the issued and outstanding shares of capital stock of the Corporation required or allowed by the Articles of Incorporation to receive such distribution may be declared by the Board of Directors at any regular or special meeting and may be paid in cash, in property, or in shares of capital stock. Such declaration and payment shall be at the discretion of the Board of Directors. (b) Record Date. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to receive payment of any distribution, such record date to be not more than sixty (60) days prior to the payment date of such distribution, or the Board of Directors may close the stock transfer books for such purpose for a period of not more than sixty (60) days prior to the payment date of such distribution. In the absence of action by the Board of Directors, the date upon which the Board of Directors adopts the resolution declaring such distribution shall be the record date. 8.2 Reserves. There may be created by resolution of the Board of Directors out of the surplus of the Corporation such reserve or reserves as the Directors from time to time, in their discretion, think proper to provide for contingencies, or to equalize distributions, or to repair or maintain any property of the Corporation, or for such other purposes as the Directors shall think beneficial to the Corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. 8.3 Books and Records. The Corporation shall maintain books and records of account and shall prepare and maintain minutes of the proceedings of its shareholders, its Board of Directors and each committee of its Board of Directors. The Corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of the original issuance of shares issued by the Corporation and a record of each transfer of those shares that have been presented to the Corporation for registration of transfer. Such records shall contain the names and addresses of all past and present shareholders of the Corporation and the number and class of shares issued by the Corporation held by each of them. 8.4 Annual Statement. The Board of Directors shall present at or before each annual meeting of shareholders a full and clear statement of the business and financial condition of the Corporation, including a reasonably detailed balance sheet and income statement under current date. 8.5 Contracts and Negotiable Instruments. Except as otherwise provided by law or these Bylaws, any contract or other instrument relative to the business of the Corporation may be executed and delivered in the name of the Corporation and on its behalf by the Chairman of the Board, the Chief Executive Officer, or the Chief Operating Officer, if any, or the President of the Corporation. The Board of Directors may authorize any other officer or agent of the Corporation to enter into any contract or execute and deliver any contract in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances as the Board of Directors may determine by resolution. All bills, notes, checks or other instruments for the payment of money shall be signed or countersigned by such officer, officers, agent or agents and in such manner as are permitted by these Bylaws and/or as, from time to time, may be prescribed by resolution of the Board of Directors. Unless authorized to do so by these Bylaws or by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement, or to pledge its credit, or to render it liable pecuniarily for any purpose or to any amount. 8.6 Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 8.7 Corporate Seal. The Corporation seal shall be in such form as may be determined by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. 14 176 8.8 Resignations. Any director, officer or agent may resign his office or position with the Corporation by delivering written notice thereof to the President or the Secretary. Such resignation shall be effective at the time specified therein, or immediately upon delivery if no time is specified. Unless otherwise specified therein, an acceptance of such resignation shall not be a necessary prerequisite of its effectiveness. 8.9 Amendment of Bylaws. These Bylaws may be altered, amended, or repealed and new Bylaws adopted at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the Directors present at such meeting, provided notice of the proposed alteration, amendment, or repeal be contained in the notice of such meeting. 8.10 Construction. Whenever the context so requires herein, the masculine shall include the feminine and neuter, and the singular shall include the plural, and conversely. If any portion or provision of these Bylaws shall be held invalid or inoperative, then, so far as is reasonable and possible: (1) the remainder of these Bylaws shall be considered valid and operative, and (2) effect shall be given to the intent manifested by the portion or provision held invalid or inoperative. 8.11 Telephone Meetings. Shareholders, Directors, or members of any committee may hold any meeting of such shareholders, Directors or committee by means of conference telephone or similar communications equipment which permits all persons participating in the meeting to hear each other and actions taken at such meetings shall have the same force and effect as if taken at a meeting at which persons were present and voting in person. The Secretary of the Corporation shall prepare a memorandum of the action taken. 8.12 Table of Contents; Captions. The table of contents and captions used in these Bylaws have been inserted for administrative convenience only and do not constitute matter to be construed in interpretation. IN DUE CERTIFICATION WHEREOF, the undersigned, being the Secretary of INDEX, INC. confirms the adoption and approval of the foregoing Bylaws, effective as of the day of , 1996. ------------------------------------ Name: ------------------------------------ Title: Secretary 15 177 INDEX TO FINANCIAL STATEMENTS INDEX, INC. Report of Independent Auditors................................................... F-2 Balance Sheet.................................................................... F-3 Notes to Balance Sheet........................................................... F-4 SEPCO INDUSTRIES, INC. Year Ended December 31, 1995 Report of Independent Auditors................................................... F-5 Consolidated Balance Sheets...................................................... F-6 Consolidated Statements of Earnings.............................................. F-7 Consolidated Statements of Shareholders' Equity.................................. F-8 Consolidated Statements of Cash Flows............................................ F-9 Notes to Consolidated Financial Statements....................................... F-10 Six Months Ended June 30, 1996 (unaudited) Condensed Consolidated Balance Sheets............................................ F-19 Condensed Consolidated Statements of Earnings.................................... F-20 Condensed Consolidated Statements of Cash Flows.................................. F-21 Notes to Condensed Consolidated Financial Statements............................. F-22 NEWMAN COMMUNICATIONS CORPORATION Nine Months Ended December 31, 1995 Independent Auditor's Report..................................................... F-24 Balance Sheets................................................................... F-25 Statements of Operations......................................................... F-26 Statements of Cash Flows......................................................... F-27 Statements of Changes in Shareholders' Equity.................................... F-28 Notes to Financial Statements.................................................... F-29
F-1 178 REPORT OF INDEPENDENT AUDITORS Board of Directors Index, Inc. We have audited the accompanying balance sheet of Index, Inc., as of July 31, 1996. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Index, Inc., at July 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas August 6, 1996 F-2 179 INDEX, INC. BALANCE SHEET JULY 31, 1996 ASSETS Cash................................................................................ $1,000 ------ Total Assets........................................................................ $1,000 ====== SHAREHOLDERS' EQUITY Series A Preferred Stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share; authorized shares -- 1,000,000; issued and outstanding -- none Series B Convertible Preferred Stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share; authorized shares -- 1,000,000; issued and outstanding -- none Common Stock, $.01 par value; authorized shares 100,000,000; issued and outstanding -- 100 shares......................................................... $ 1 Paid-in capital..................................................................... 999 ------ Total Shareholders' Equity.......................................................... $1,000 ======
See notes to balance sheet. F-3 180 INDEX, INC. NOTES TO BALANCE SHEET JULY 31, 1996 1. THE COMPANY Index, Inc. (the "Company") was incorporated on July 26, 1996 in the State of Texas. The Company was formed to facilitate a proposed reorganization transaction whereby subsequent to July 31, 1996 the Company will become a public holding company and acquire 100% of the outstanding capital stock of Sepco Industries, Inc. ("Sepco"), a private distribution company with revenues approximating $120 million, and Newman Communications Corporation ("Newman"), an inactive public entity with nominal net tangible assets. The Company's only transaction to date has been the issuance of 100 shares of Common Stock for $1,000. Contemporaneously with the proposed reorganization transaction, the Company will file a registration statement on Form S4 with the Securities and Exchange Commission ("Commission") to register 18,584,400 shares of its Common Stock, 19,500 shares of its Series B Convertible Preferred Stock and 3,366 shares of its Series A Preferred Stock. Because the Company and Newman are non-operating entities with nominal tangible net assets, the proposed transaction will be accounted for as a recapitalization of Sepco into the Company and an issuance of shares for the net tangible assets of Newman. Accordingly, the historical financial statements for the Company will be those of Sepco. The proposed reorganization transaction is subject to the approval by vote of the shareholders of record of both Sepco and Newman. 2. SHAREHOLDERS' EQUITY The holders of Series B Convertible Preferred Stock would have the right to convert each share into 112 shares of Common Stock at any time. The Series B Convertible Preferred Stock provides for a cumulative 6% dividend. The Company's Board of Directors may at any time five years from the date of issuance redeem the Series B Convertible Preferred Stock for $110 per share. The Company must at all times reserve out of its authorized but unissued shares of Common Stock the full number of shares deliverable upon conversion of any outstanding shares of Series B Convertible Preferred Stock. In the event of liquidation, the holders of Series A Preferred Stock would be entitled to receive $100 for each share and are first in priority. The holders of Series A Preferred Stock would not be entitled to participate in the distribution of assets exceeding the $100 per share liquidation preference. The holders of Series B Convertible Preferred Stock would be entitled to receive $100 for each share upon liquidation and would be entitled to participate in the distribution of assets exceeding the liquidation preferences on a ratable basis with the holders of Common Stock. An additional 8,000,000 shares of preferred stock have been authorized and are available for future designation as provided in the Company's articles of incorporation. F-4 181 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders 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 accounting principles used and significant estimates made by management, as well as evaluating the overall 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 its 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. March 22, 1996, except for Notes 8 and 10, as to which the date is August 7, 1996 F-5 182 SEPCO INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------- 1995 1994 ------- ------- (IN THOUSANDS EXCEPT SHARE DATA) 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 ======= ======= 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 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.................................................... 10 10 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............................................ 1,950 -- 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.................... 10 11 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.............................................................................. 790 2,057 Retained earnings............................................................................ 9,223 7,158 ------- ------- 11,985 9,238 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..................................................................... 10,288 8,708 ------- ------- Total liabilities and shareholders' equity..................................................... $43,254 $38,163 ======= =======
See accompanying notes. F-6 183 SEPCO INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 -------- -------- ------- (IN THOUSANDS EXCEPT PER SHARE DATA) 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 per common and common equivalent share................................. 1,244 1,319 1,163 ======== ======== ======= 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 ======== ======== =======
See accompanying notes. F-7 184 SEPCO INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS CLASS CLASS A A B PREFERRED PREFERRED COMMON COMMON PAID-IN RETAINED TREASURY STOCK STOCK STOCK STOCK CAPITAL EARNINGS STOCK TOTAL --------- --------- ------ ------ ------- -------- -------- ------- (IN THOUSANDS EXCEPT SHARE DATA) Balance at December 31, 1992............ $10 $ -- $10 $ 2 $ 1,551 $3,453 $ (484) $ 4,542 Issuance of 140,500 shares of Class A common stock....................... -- -- 1 -- 481 -- -- 482 Acquisition of 10,000 shares of Class A common stock..................... -- -- -- -- -- -- (22) (22) Net income............................ -- -- -- -- -- 1,843 -- 1,843 --- ------ --- --- ------- ------ ------- ------- Balance at December 31, 1993............ 10 -- 11 2 2,032 5,296 (506) 6,845 Issuance of 5,300 shares of Class A common stock....................... -- -- -- -- 25 -- -- 25 Acquisition of 5,300 shares of Class A common stock....................... -- -- -- -- -- -- (24) (24) Net income............................ -- -- -- -- -- 1,862 -- 1,862 --- ------ --- --- ------- ------ ------- ------- Balance at December 31, 1994............ 10 -- 11 2 2,057 7,158 (530) 8,708 Issuance of 89,800 shares of Class A common stock....................... -- -- 1 -- 231 -- -- 232 Issuance of 4,500 shares of Class A convertible preferred stock........ -- 450 -- -- -- -- -- 450 Conversion of 210,000 shares of Class A common stock to 15,000 shares of Class A preferred stock............ -- 1,500 (2) -- (1,498) -- -- -- Acquisition of 140,201 shares of Class A common stock and 2,431 shares of preferred stock.................... -- -- -- -- -- -- (1,167) (1,167) Preferred dividends paid.............. -- -- -- -- -- (23) -- (23) Net income............................ -- -- -- -- -- 2,088 -- 2,088 --- ------ --- --- ------- ------ ------- ------- Balance at December 31, 1995............ $10 $1,950 $10 $ 2 $ 790 $9,223 $(1,697) $10,288 === ====== === === ======= ====== ======= =======
See accompanying notes. F-8 185 SEPCO INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ----------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) 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 ========= ========= =========
See accompanying notes. F-9 186 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 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. Under Statement 109, the liability method is used in accounting for income 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. F-10 187 SEPCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. F-11 188 SEPCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
DECEMBER 31 ------------------- 1995 1994 ------- ------- (IN THOUSANDS) 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 ======= =======
4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are comprised of the following:
DECEMBER 31 ------------------- 1995 1994 ------- ------- (IN THOUSANDS) 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 amortization............... (7,360) (6,745) ------- ------- $ 6,744 $ 6,065 ======= =======
F-12 189 SEPCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM AND SUBORDINATED DEBT Long-term and subordinated notes consist of the following:
DECEMBER 31 ------------------- 1995 1994 ------- ------- (IN THOUSANDS) 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 ======= =======
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): 1996............................................... $ 2,123 1997............................................... 18,449 1998............................................... 445 1999............................................... 480 2000............................................... 518 Thereafter......................................... 1,383 ------- $23,398 =======
F-13 190 SEPCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The provision for income taxes consisted of the following:
YEAR ENDED DECEMBER 31 -------------------------- 1995 1994 1993 ------ ------ ------ (IN THOUSANDS) 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 ====== ====== ======
The differences between income taxes computed at the federal statutory income tax rate and the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31 ------------------------ 1995 1994 1993 ------ ------ ---- (IN THOUSANDS) 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 ====== ====== ====
The net current and noncurrent components of deferred income taxes are as follows:
DECEMBER 31 ------------- 1995 1994 ---- ---- (IN THOUSANDS) Net current assets.................................................... $170 $191 Net noncurrent liabilities............................................ 205 119 ---- ---- Net liability (asset)................................................. $ 35 $(72) ==== ====
F-14 191 SEPCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax liabilities and assets were comprised of the following:
DECEMBER 31 ------------- 1995 1994 ---- ---- (IN THOUSANDS) 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) ==== ====
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. F-15 192 SEPCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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):
OPTION SHARES PRICE PER SHARE -------- --------------- 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 =======
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): 1996................................................ $1,142 1997................................................ 794 1998................................................ 546 1999................................................ 315 2000................................................ 208 Thereafter.......................................... 206 ------ $3,211 ======
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. F-16 193 SEPCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company is currently undergoing an examination of its tax returns by the Internal Revenue Service ("IRS") who 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. 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. 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 shell corporation, 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:
OUTSTANDING SHARES ------------------ 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
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. Contemporaneously with the reorganization, Index will file a registration statement on Form S-4 with the SEC to register 18,584,400 shares of its common stock. Index and Newman are corporate shells and not operating entities; therefore, the proposed merger will be accounted for as if the Company recapitalized. F-17 194 SEPCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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-18 195 SEPCO INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, 1996 (IN THOUSANDS EXCEPT SHARE DATA) ASSETS Current assets: Cash............................................................................. $ -- Trade accounts receivable, net of allowance for doubtful accounts of $245,000.... 18,016 Inventory........................................................................ 17,247 Prepaid expenses and other current assets........................................ 971 Deferred income taxes............................................................ 503 ------- Total current assets............................................................... 36,737 Property and equipment, net........................................................ 6,749 Other Assets....................................................................... 1,585 ------- Total assets....................................................................... $45,071 ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Trade accounts payable........................................................... $ 7,370 Employee compensation............................................................ 1,005 Other accrued liabilities........................................................ 2,289 Current portion of long-term debt................................................ 1,347 Current portion of subordinated debt............................................. 1,308 ------- 13,319 Long-term debt, less current portion............................................... 19,660 Deferred income taxes.............................................................. 205 Shareholders' equity: Preferred stock, nonvoting, noncumulative $1 par value; liquidation preference of $100 per share: Authorized shares -- 1,000,000 Issued shares -- 10,098....................................................... 10 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....................................... 1,950 Class B convertible preferred stock, nonvoting, cumulative $100 par value; liquidation preference $100 per share: Authorized shares -- 1,000,000 Issued and outstanding shares -- none......................................... -- Class A common stock, $.01 par value; liquidation preference of $7.5075 per share: Authorized shares -- 10,000,000 Issued and outstanding shares -- 980,300...................................... 10 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 Paid-in capital.................................................................. 1,880 Retained earnings................................................................ 9,732 ------- 13,584 Less treasury stock, 6,732 shares preferred and 221,401 shares Class A common.... (1,697) ------- Total shareholders' equity......................................................... 11,887 ------- Total liabilities and shareholders' equity......................................... $45,071 =======
See accompanying notes. F-19 196 SEPCO INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
SIX MONTHS ENDED JUNE 30 ------------------ 1996 1995 ------- ------- (IN THOUSANDS EXCEPT PER SHARE DATA) Sales...................................................................... $63,021 $56,395 Cost of sales.............................................................. 46,790 42,005 ------- ------- Gross profit............................................................... 16,231 14,390 Selling, general, and administrative expenses.............................. 14,806 12,380 ------- ------- Operating income........................................................... 1,425 2,010 Other income............................................................... 514 428 Interest expense........................................................... (1,008) (968) ------- ------- (494) (540) ------- ------- Income before income taxes................................................. 931 1,470 Provision for income taxes................................................. 377 596 ------- ------- Net income................................................................. $ 554 $ 874 ======= ======= Primary net income per common and common equivalent share.................. $ 0.55 $ 0.66 ======= ======= Number of shares used to compute primary net income per common and common equivalent share......................................................... 1,016 1,331 ======= ======= Fully diluted net income per common and common equivalent share............ $ 0.48 $ 0.66 ======= ======= Number of shares used to compute fully diluted net income per common and common equivalent shares................................................. 1,152 1,334 ======= =======
See accompanying notes. F-20 197 SEPCO INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30 ----------------------- 1996 1995 -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Net cash provided by operating activities............................ $ 704 $ 1,881 INVESTING ACTIVITIES Purchase of Austin Bearing net assets................................ (550) -- Purchase of property and equipment................................... (481) (260) --------- --------- Net cash used in investing activities................................ (1,031) (260) FINANCING ACTIVITIES Proceeds from debt................................................... 60,704 56,773 Principal payments on revolving line of credit, long-term and subordinated debt, and notes payable to bank................... (61,824) (59,283) Dividends paid....................................................... (45) -- --------- --------- Net cash used in financing activities................................ (1,165) (2,510) --------- --------- Decrease in cash..................................................... (1,492) (889) Cash at beginning of period.......................................... 1,492 889 --------- --------- Cash at end of period................................................ $ -- $ -- ========= =========
See accompanying notes. F-21 198 SEPCO INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1996 1. GENERAL The unaudited interim condensed consolidated financial statements of Sepco Industries, Inc. (the "Company") included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). 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. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes included elsewhere in this registration statement. 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 this 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 Class A convertible preferred stock was converted as of the beginning of the period. 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 forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. 4. 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. Goodwill of $400,000 was recorded on 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) issuance of 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 on the acquisition. 5. COMMITMENTS AND CONTINGENCIES The Company is currently undergoing an examination of its tax returns by the Internal Revenue Service ("IRS") who 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 F-22 199 SEPCO INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 6. 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 of the date of grant. The option agreement allowed the employee to put the stock acquired back to the Company at the book value at that time. 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, market value plan stock options. Under the amended agreement, the employees can no longer put the acquired stock back to the Company. In connection with these changes, the Company has recognized approximately $426,000 of compensation expense, net of a tax benefit of $284,000, in the six months ended June 30, 1996. F-23 200 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-24 201 NEWMAN COMMUNICATIONS CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS DECEMBER 31, 1995 AND MARCH 25, 1995 ASSETS
DECEMBER 31, MARCH 25, 1995 1995 ------------ ----------- 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 =========== ===========
F-25 202 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
FOR THE PERIOD NOVEMBER 23, 1993 UNAUDITED (DATE OF NINE MONTHS NINE MONTHS FOR THE YEAR FOR THE YEAR REORGANIZATION) ENDED ENDED ENDED ENDED THROUGH DECEMBER 31, DECEMBER 31, MARCH 25, MARCH 26, DECEMBER 31, 1995 1994 1995 1994 1995 ------------ ------------ ------------ ------------ ----------------- 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) ======== ======== ======== =========== ========= PRIMARY 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 ======== ======== ======== =========== ========= 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 ======== ======== ======== =========== =========
See notes to financial statements. F-26 203 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
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 1995 1994 1995 1994 DECEMBER 31, 1995 ------------ ------------ ------------ ------------ ----------------- 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 ======== ======== ======== ============ =========
- --------------- (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 Cash paid during the period for: Income taxes........................ $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ============ ========= Interest............................ $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ============ =========
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-27 204 NEWMAN COMMUNICATIONS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY NINE MONTHS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
A, B, & C WARRANTS COMMON STOCK TO BUY COMMON STOCK RETAINED ------------------------- PAID-IN ---------------------- EARNINGS SHARES AMOUNT CAPITAL NUMBER AMOUNT (DEFICIT) TOTAL ---------- ---------- ---------- ---------- ------- ----------- ----------- 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 ======= =========== ========== ========== ======= =========== =========== 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 ======= =========== ========== ========== ======= =========== ===========
See notes to financial statements. F-28 205 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 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 of Reorganization 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 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. F-29 206 NEWMAN COMMUNICATIONS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 of Reorganization, 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. 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-30 207 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article 2.01-1 of the Texas Business Corporation Act ("TCBA") provides that a corporation may indemnify any director or officer who was, is or is threatened to be made a named defendant or respondent in a proceeding because he is or was a director or officer, provided that the director or officer (i) conducted himself in good faith, (ii) reasonably believed (a) in the case of conduct in his official capacity, that his conduct was in the corporation's best interests or (b) in all other cases, that his conduct was at least not opposed to the corporation's best interests and (iii) in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Subject to certain exceptions, a director or officer may not be indemnified if the person is found liable to the corporation or if the person is found liable on the basis that he improperly received a personal benefit. Under Texas law, reasonable expenses incurred by a director or officer may be paid or reimbursed by the corporation in advance of a final disposition of the proceeding after the corporation receives a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification and a written undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined that the director or officer is not entitled to indemnification by the corporation. Texas law requires a corporation to indemnify an officer or director against reasonable expenses incurred in connection with a proceeding in which he is named a defendant or respondent because he is or was a director or officer if he is wholly successful in defense of the proceeding. Texas law also permits a corporation to purchase and maintain insurance or another arrangement on behalf of any person who is or was a director or officer against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the corporation would have the power to indemnify him against that liability under Article 2.02-1 of the TCBA. The Company's Restated Articles of Incorporation and Bylaws provide for indemnification of its officers and directors, and the advancement to them of expenses in connection with proceedings and claims, to the fullest extent permitted under the TBCA. Such indemnification may be made even though directors and officers would not otherwise be entitled to indemnification under other provisions of the Company's Bylaws. The above discussion of the TBCA and the Company's Restated Articles of Incorporation and Bylaws is not intended to be exhaustive and is qualified in its entirety by such statute, the Restated Articles of Incorporation and Bylaws, respectively. Reference is made to the Newman Merger Agreement filed as Exhibit 2.1 to this Registration Statement for certain provisions regarding the indemnification of the Company, its officers, directors and any controlling persons by Newman and LITCO against certain liabilities for information furnished by Newman or LITCO. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable. II-1 208 ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES A. 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. +2.2 -- Agreement and Plan of Merger dated August 12, 1996, by and among Index, Inc., Sepco Acquisition Corporation and Sepco Industries, Inc. +3.1 -- Restated Articles of Incorporation. +3.2 -- Bylaws. *4.1 -- Form of Common Stock Certificate. *4.2 -- Form of Series A Preferred Stock Certificate. *4.3 -- Form of Series B Convertible Preferred Stock Certificate. *5.1 -- Opinion of Fulbright & Jaworski L.L.P. *8.1 -- Opinion of Fulbright & Jaworski L.L.P. +10.1 -- Index, Inc. Long Term Incentive Plan. +10.2 -- Stock Option Agreement dated effective as of May 7, 1996, between Sepco Industries, Inc. and Kenneth H. Miller. +10.3 -- Stock Option Agreement dated effective as of May 7, 1996, between Sepco Industries, Inc. and Tommy Orr. +10.4 -- Stock Option Agreement dated effective as of May 7, 1996, between Sepco Industries, Inc. and Cletus Davis. +10.5 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between Sepco Industries, Inc. and Jerry J. Jones. +10.6 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between Sepco Industries, Inc. and Bryan H. Wimberly. +10.7 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between Sepco Industries, Inc. and David R. Little. +10.8 -- Employment Agreement dated effective as of July 15, 1996, between Sepco Industries, Inc. and David R. Little. +10.9 -- Employment Agreement dated as of July 1, 1996, between Sepco Industries, Inc. and Jerry J. Jones. +10.10 -- Employment Agreement dated as of July 1, 1996, between Sepco Industries, Inc. and Bryan H. Wimberly. *10.11 -- Employment Agreement dated as of July 1, 1996, between Sepco Industries, Inc. and Bob Evans. +10.12 -- Employment Agreement dated as of July 1, 1996, between Sepco Industries, Inc. and Gary A. Allcorn. 10.13 -- Second Amended and Restated Loan and Security Agreement dated effective as of April 1, 1994, by and between Barclays Business Credit, Inc. and Sepco Industries, Inc., as amended by First Amendment to Second Amended and Restated Loan and Security Agreement and Secured Promissory Note dated May , 1995, by and between Sepco Industries, Inc. and Shawmut Capital Corporation, successor-in- interest by assignment to Barclays Business Credit, Inc., and as amended by Second Amendment to Second Amended and Restated Loan and Security Agreement dated April 3, 1996, by and between Sepco Industries, Inc. and Fleet Capital Corporation, formerly known as Shawmut Capital Corporation. +10.14 -- Promissory Note dated December 31, 1989, in the aggregate principal amount of $149,910.00, made by David R. Little and payable to Sepco Industries, Inc. +10.15 -- Promissory Note dated December 31, 1989, in the aggregate principal amount of $58,737.00, made by David R. Little and payable to Sepco Industries, Inc.
II-2 209 +10.16 -- Vehicle Lease Agreement dated July 28, 1993, by and between World Omni Financial Corp. and Sepco Industries, Inc. +10.17 -- Real Estate Note dated November 8, 1979, by Southern Engine & Pump Company, payable to the order of Southwestern Life Insurance Company. 10.18 -- Sepco Industries, Inc. Employee Stock Ownership Plan. +11.1 -- Statement re Computation of Per Share Earnings. *21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Ernst & Young LLP. 23.2 -- Consent of Cheshier & Fuller. *23.3 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1). +24.1 -- Powers of Attorney from Certain Members of the Board of Directors of the Company. 27.1 -- Financial Data Schedule.
- --------------- * To be filed by amendment. + Previously filed. B. Financial Statement Schedules: None ITEM 22. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (a) To include any prospectus required in Section 10(a)(3) of the Act; (b) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (c) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; PROVIDED HOWEVER, that paragraphs (1)(a) and (1)(b) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; (4) That, prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form; II-3 210 (5) That every prospectus (a) that is filed pursuant to paragraph (4) immediately preceding, or (b) that purports to meet the requirements of section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (6) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-4 211 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on the 13th day of August, 1996. INDEX, INC. (Registrant) By: /s/ DAVID R. LITTLE ------------------------------------ David R. Little Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------- ---------------- /s/ DAVID R. LITTLE Chairman of the Board, Chief August 13, 1996 - --------------------------------------------- David R. Little Executive Officer and Director (Principal Executive Officer) * Senior Vice President/Corporate August 13, 1996 - --------------------------------------------- Development and Director Jerry J. Jones /s/ GARY A. ALLCORN Senior Vice President/Finance August 13, 1996 - --------------------------------------------- (Principal Financial and Gary A. Allcorn Accounting Officer) * Director August 13, 1996 - --------------------------------------------- Cletus Davis * Director August 13, 1996 - --------------------------------------------- Thomas V. Orr *By: /s/ GARY A. ALLCORN - --------------------------------------------- Attorney-in-fact (for each of the persons indicated)
II-5 212 INDEX TO EXHIBITS
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. +2.2 -- Agreement and Plan of Merger dated August 12, 1996, by and among Index, Inc., Sepco Acquisition Corporation and Sepco Industries, Inc. +3.1 -- Restated Articles of Incorporation. +3.2 -- Bylaws. *4.1 -- Form of Common Stock Certificate. *4.2 -- Form of Series A Preferred Stock Certificate. *4.3 -- Form of Series B Convertible Preferred Stock Certificate. *5.1 -- Opinion of Fulbright & Jaworski L.L.P. *8.1 -- Opinion of Fulbright & Jaworski L.L.P. +10.1 -- Index, Inc. Long Term Incentive Plan. +10.2 -- Stock Option Agreement dated effective as of May 7, 1996, between Sepco Industries, Inc. and Kenneth H. Miller. +10.3 -- Stock Option Agreement dated effective as of May 7, 1996, between Sepco Industries, Inc. and Tommy Orr. +10.4 -- Stock Option Agreement dated effective as of May 7, 1996, between Sepco Industries, Inc. and Cletus Davis. +10.5 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between Sepco Industries, Inc. and Jerry J. Jones. +10.6 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between Sepco Industries, Inc. and Bryan H. Wimberly. +10.7 -- Amended and Restated Stock Option Agreement dated effective as of March 31, 1996, between Sepco Industries, Inc. and David R. Little. +10.8 -- Employment Agreement dated effective as of July 15, 1996, between Sepco Industries, Inc. and David R. Little. +10.9 -- Employment Agreement dated as of July 1, 1996, between Sepco Industries, Inc. and Jerry J. Jones. +10.10 -- Employment Agreement dated as of July 1, 1996, between Sepco Industries, Inc. and Bryan H. Wimberly. *10.11 -- Employment Agreement dated as of July 1, 1996, between Sepco Industries, Inc. and Bob Evans. +10.12 -- Employment Agreement dated as of July 1, 1996, between Sepco Industries, Inc. and Gary A. Allcorn. 10.13 -- Second Amended and Restated Loan and Security Agreement dated effective as of April 1, 1994, by and between Barclays Business Credit, Inc. and Sepco Industries, Inc., as amended by First Amendment to Second Amended and Restated Loan and Security Agreement and Secured Promissory Note dated May , 1995, by and between Sepco Industries, Inc. and Shawmut Capital Corporation, successor-in- interest by assignment to Barclays Business Credit, Inc., and as amended by Second Amendment to Second Amended and Restated Loan and Security Agreement dated April 3, 1996, by and between Sepco Industries, Inc. and Fleet Capital Corporation, formerly known as Shawmut Capital Corporation. +10.14 -- Promissory Note dated December 31, 1989, in the aggregate principal amount of $149,910.00, made by David R. Little and payable to Sepco Industries, Inc. +10.15 -- Promissory Note dated December 31, 1989, in the aggregate principal amount of $58,737.00, made by David R. Little and payable to Sepco Industries, Inc.
213
EXHIBITS - -------------------- +10.16 -- Vehicle Lease Agreement dated July 28, 1993, by and between World Omni Financial Corp. and Sepco Industries, Inc. +10.17 -- Real Estate Note dated November 8, 1979, by Southern Engine & Pump Company, payable to the order of Southwestern Life Insurance Company. 10.18 -- Sepco Industries, Inc. Employee Stock Ownership Plan. +11.1 -- Statement re Computation of Per Share Earnings. *21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Ernst & Young LLP. 23.2 -- Consent of Cheshier & Fuller. *23.3 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1). +24.1 -- Powers of Attorney from Certain Members of the Board of Directors of the Company. 27.1 -- Financial Data Schedule.
- --------------- * To be filed by amendment. + Previously filed. EX-2.1 2 AGREEMENT & PLAN OF MERGER - NEWMAN 1 EXHIBIT 2.1 * * * * * AGREEMENT AND PLAN OF MERGER BY AND AMONG INDEX, INC., NEWMAN ACQUISITION CORPORATION, NEWMAN COMMUNICATIONS CORPORATION AND LITTLE & COMPANY INVESTMENT SECURITIES * * * * * AUGUST 12, 1996 2
ARTICLE/SECTION PAGE - --------------- ---- RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 1 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Articles of Incorporation and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . 2 1.5 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 2 CONVERSION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 Conversion of Company Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Class C Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.3 Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.4 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.5 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF INDEX AND THE MERGER SUB . . . . . . . . . . . . . 4 3.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.3 Certain Corporate Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.4 Authority Relative to this Agreement . . . . . . . . . . . . . . . . . . . . . . . . 4 3.5 Consents and Approvals; No Violations . . . . . . . . . . . . . . . . . . . . . . . 5 3.6 Information Supplied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND LITCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.2 Capitalization and Ownership of the Company . . . . . . . . . . . . . . . . . . . . 6 4.3 Certain Corporate Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.4 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.5 Authority Relative to this Agreement . . . . . . . . . . . . . . . . . . . . . . . . 7 4.6 Consents and Approvals; No Violations . . . . . . . . . . . . . . . . . . . . . . . 7 4.7 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.8 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.9 Events Subsequent to Financial Statements . . . . . . . . . . . . . . . . . . . . . 8 4.10 Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.11 Tax Returns and Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.12 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.13 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.14 Questionable Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.15 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.16 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.18 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
i 3 4.19 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.20 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.21 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.22 Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.23 Broker's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.24 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.25 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.26 Information Supplied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 5 CONDUCT OF BUSINESS PENDING THE CLOSING . . . . . . . . . . . . . . . . . . . . . . 15 5.1 Conduct of Business by the Company Pending the Closing . . . . . . . . . . . . . . . 15 5.2 Other Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 6 ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.1 Access and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.2 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.3 Meetings of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.4 Press Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.5 Reimbursement of LITCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE 7 CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.1 Conditions to Obligations of Each Party to Effect the Closing . . . . . . . . . . . 19 7.2 Additional Conditions to Index's and the Merger Sub's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.3 Additional Conditions to the Company's and LITCO's Obligations . . . . . . . . . . . 21 ARTICLE 8 REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.1 Indemnification by LITCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.2 Indemnification by Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.3 Conditions of Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.4 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 8.5 Remedies Not Exclusive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE 9 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 9.1 Termination by Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 9.2 Termination by Any Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 9.3 Termination by Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 9.4 Effect of Termination and Abandonment . . . . . . . . . . . . . . . . . . . . . . . 25 9.5 Material Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE 10 GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 10.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 10.2 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 10.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 10.4 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 10.5 Separate Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 10.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ii 4 10.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 10.8 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 10.9 Parties In Interest; No Third Party Beneficiaries . . . . . . . . . . . . . . . . . 26 10.10 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.11 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.12 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SCHEDULES Schedule 4.2 Schedule 4.9 Schedule 4.20 Schedule 4.25 EXHIBITS Exhibit A Exhibit B
iii 5 AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER, dated as of August 12, 1996 (this "Agreement"), is made and entered into by and among Index, Inc., a Texas corporation ("Index"), Newman Acquisition Corporation, a Nevada corporation and a wholly-owned subsidiary of Index (the "Merger Sub"), Newman Communications Corporation, a New Mexico corporation (the "Company") and Little & Company Investment Securities, a Texas corporation ("LITCO"). RECITALS WHEREAS, the respective Boards of Directors of Index, the Merger Sub, the Company and LITCO have adopted resolutions approving and adopting the proposed merger (the "Merger") of the Company with the Merger Sub upon the terms and conditions hereinafter set forth in this Agreement; WHEREAS, LITCO, which holds approximately 61% of the issued and outstanding common stock of the Company, will enter into this Agreement for the purpose of making certain representations, warranties, covenants and agreements; WHEREAS, Index is entering into that Agreement and Plan of Merger with Sepco Industries, Inc., a Texas corporation and Sepco Acquisition Corporation, a Nevada corporation (the "Sepco Merger Agreement") simultaneously with this Agreement; WHEREAS, the Merger and the merger contemplated by the Sepco Merger Agreement (the "Sepco Merger") will be effected simultaneously; and WHEREAS, the Merger and the Sepco Merger are both intended to qualify as a tax-free transaction under Sections 351 and 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the foregoing premises, the representations, warranties and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to the conditions set forth herein, the parties hereto agree as follows: ARTICLE 1 THE MERGER 1.1 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3 hereof), the Merger Sub shall be merged with and into the Company and the separate corporate existence of the Merger Sub shall thereupon cease. The Company shall be the surviving corporation in the Merger. The Merger shall have the effects set forth in the applicable provisions of the Nevada General Corporation Law (the "NGCL") and the New Mexico Business Corporation Act (the "NMBCA"). 6 1.2 Closing. The closing of the Merger (the "Closing") shall take place at 10:00 a.m., local time, at the offices of Fulbright & Jaworski L.L.P., located at 1301 McKinney, Houston, Texas 77010 on the next business day after the shareholder approvals set forth in Section 6.3 hereof have been completed, or as soon as the conditions set forth in Article 7 have been satisfied or waived or as soon as practicable thereafter; provided, however, that the date of the Closing shall not be later than December 31, 1996, unless the parties hereto otherwise mutually agree in writing. Such date is herein referred to as the "Closing Date." At the Closing, the parties hereto shall deliver or cause to be delivered the certificates and other documents set forth in Article 7. 1.3 Effective Time of the Merger. If all the conditions to the Merger set forth in Article 7 shall have been fulfilled or waived in accordance herewith and this Agreement shall not have been terminated as provided in Article 9, the parties hereto shall cause Articles of Merger (the "Articles of Merger") that meet the requirements of the applicable provisions of the NGCL and the NMBCA, respectively, to be properly executed and filed with the Secretary of State of the States of Nevada and New Mexico, respectively, on the Closing Date. The Merger shall be effective at the time of acceptance of the filing of the Articles of Merger with the Secretary of State of the States of Nevada and New Mexico in accordance with the NGCL and the NMBCA, respectively, or at such later time which the parties hereto shall have agreed upon and designated in such filing as the effective time of the Merger (the "Effective Time"). 1.4 Articles of Incorporation and By-Laws. The Articles of Incorporation and By-Laws of the Company in effect immediately prior to the Effective Time shall continue to be the Articles of Incorporation and By-Laws of the Company subsequent to the Effective Time, subject always to the right of the Company to amend its Articles of Incorporation and By-Laws in accordance with the laws of the State of New Mexico and the provisions of its Articles of Incorporation and By-Laws. 1.5 Directors and Officers. The directors and officers of the Merger Sub immediately prior to the Effective Time shall be the directors and officers of the Company and shall hold such positions from the Effective Time until their respective successors are duly elected or appointed and qualify in the manner provided in the Articles of Incorporation and By-Laws of the Company or as otherwise provided by law. ARTICLE 2 CONVERSION OF SHARES 2.1 Conversion of Company Common Stock. At the Effective Time, by virtue of the Merger and without any action required on the part of Index, the Company, the Merger Sub or any holder of capital stock of any of them: (a) Subject to the limitations contained herein, each share of common stock of the Company, no par value (the "Company Common Stock"), issued and outstanding immediately prior to the Effective Time shall be automatically converted into the right to receive one-fourth of one share of common stock of Index, par value $.01 per share 2 7 (the "Index Common Stock"). (b) All shares of common stock of the Merger Sub issued and outstanding immediately prior to the Effective Time shall be cancelled and cease to be outstanding. 2.2 Class C Warrants. The Company's Class C Warrants shall be adjusted as provided in Section 7 of that Warrant Agreement by and between the Company and General Securities Transfer Agency, Inc. dated September 13, 1993. 2.3 Stock Certificates. At or following the Effective Time, each holder of an outstanding certificate or certificates representing the Company Common Stock shall surrender the same to Index and Index shall, in exchange therefor, cause to be issued to the holder of such certificate(s) a new certificate representing shares of Index Common Stock in accordance with Section 2.1, less any amount required to be withheld under applicable federal, state or local tax requirements, and the surrendered certificate(s) shall be cancelled. Until so surrendered and exchanged, each such certificate shall represent solely the right to receive shares of Index Common Stock in accordance with Section 2.1, without interest and less any tax withholding. 2.4 Fractional Shares. No fractional shares of Index Common Stock shall be issued in the Merger. In the event that a holder of the Company Common Stock would otherwise be entitled to receive any fractional shares of Index Common Stock as a result of the Merger, such holder shall be entitled to receive, in lieu thereof, an amount of cash to be determined by multiplying $1.00 by the fraction of a share of Index Common Stock to which such holder would otherwise have been entitled. 2.5 Dissenting Shares. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time not voted in favor of the Merger, the holder of which has given written notice of the exercise of dissenter's rights and has perfected such rights as required by the NMBCA is herein called a "Dissenting Share." Dissenting Shares shall not be converted into or represent the right to receive shares of Index Common Stock pursuant to this Section 2 and shall be entitled only to such rights as are available to such holder pursuant to the NMBCA, unless the holder thereof shall have withdrawn or forfeited his dissenter's rights. Each holder of Dissenting Shares shall be entitled to receive the value of such Dissenting Shares held by him in accordance with the applicable provisions of the NMBCA. Index will promptly pay to any holder of Dissenting Shares such amount as such holder shall be entitled to receive in accordance with the applicable provisions of the NMBCA. If any holder of Dissenting Shares shall effectively withdraw or forfeit his dissenter's rights under the NMBCA, such Dissenting Shares shall be converted into the right to receive shares of Index Common Stock in accordance with this Section 2. 3 8 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF INDEX AND THE MERGER SUB Index and the Merger Sub hereby jointly and severally represent and warrant to the Company and LITCO as follows: 3.1 Organization. Each of Index and the Merger Sub has been duly incorporated, is validly existing as a corporation and is in good standing under the laws of its state of incorporation, and has the requisite corporate power to carry on its business in such state as now conducted. 3.2 Capitalization. The total number of shares of stock of all classes which Index shall have the authority to issue is 110,000,000 shares, of which the following designations have been made: 100,000,000 shares of common stock, 1,000,000 shares of preferred stock, par value $1.00 per share and 1,000,000 shares of convertible preferred stock, par value $100 per share. As of the date of this Agreement, (a) 100 shares of common stock of Index are issued and outstanding, (b) no shares of preferred stock are issued and outstanding, and (c) no shares of convertible preferred stock are issued and outstanding. All of the issued and outstanding shares of common stock of Index are validly issued, fully paid, nonassessable and free of preemptive rights. All shares of Index Common Stock issuable in accordance with this Agreement will be, when so issued, duly authorized, validly issued, fully paid and nonassessable. The authorized capital stock of the Merger Sub consists of 100,000 shares of common stock, par value $.10 per share, of which 100 shares are outstanding and are validly issued, fully paid and nonassessable and are owned by Index. 3.3 Certain Corporate Matters. Index is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership of its properties, the employment of its personnel or the conduct of its business requires it to be so qualified, except where the failure to so qualify would not have a material adverse effect on Index's financial condition, results of operations or business. Index has the requisite corporate power and authority and all authorizations, licenses and permits necessary to carry on the business in which it is engaged and to own and use the properties owned and used by it except such authorization, licenses and permits the failure of which to possess would not have a material adverse effect on the financial condition, results of operations or business of Index. 3.4 Authority Relative to this Agreement. Each of Index and the Merger Sub has the requisite corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by Index and the Merger Sub and the consummation by Index and the Merger Sub of the transactions contemplated hereby have been duly authorized by the Boards of Directors of each of Index and the Merger Sub and, subject to stockholder approval as set forth in this Agreement, no other 4 9 actions on the part of Index or the Merger Sub are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of Index and the Merger Sub and constitutes, subject to stockholder approval as set forth in this Agreement, a valid and binding agreement of each of Index and the Merger Sub, enforceable against Index and the Merger Sub in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 3.5 Consents and Approvals; No Violations. Except as may be required under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"), the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), state securities or blue sky laws, and the filing and recordation of the Articles of Merger as required by the NGCL and the NMBCA, no filing with, and no permit, authorization, consent or approval of, any public body or authority is necessary for the consummation by Index and the Merger Sub of the transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement by Index or the Merger Sub nor the consummation by Index or the Merger Sub of the transactions contemplated hereby, nor compliance by Index or the Merger Sub with any of the provisions hereof, will (a) conflict with or result in any breach of any provisions of the Articles of Incorporation or By-Laws of Index or the Articles of Incorporation or By-Laws of the Merger Sub, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default of a material nature (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation, of a material nature, to which Index or any of its subsidiaries is a party or by which any of them or their properties or assets may be bound or (c) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Index, any of its subsidiaries or any of their properties or assets, except in the case of clauses (b) and (c) for violations, breaches or defaults which in the aggregate would not have a material adverse effect on the financial condition or results of operations of Index and its subsidiaries taken as a whole. The parties hereto agree and acknowledge that Sepco Industries, Inc. was required to obtain and has obtained the written consent of Fleet Capital Corporation as required under that Second Amended and Restated Loan and Security Agreement by and between Sepco Industries, Inc. and Fleet Capital Corporation dated April 1, 1994, as amended. 3.6 Information Supplied. None of the information provided by Index for use in the Registration Statement (as defined in Section 6.2 hereof) and contained therein will, as of the date that the Registration Statement is filed with the Securities and Exchange Commission (the "Commission"), on the date it is declared effective or at the time of the meeting of the shareholders of the Company to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The registration statement and prospectus contained in the Registration Statement will comply, in all material respects, as to form with the provisions of the Exchange Act and the Securities Act. 5 10 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND LITCO The Company and LITCO hereby jointly and severally represent and warrant to Index and the Merger Sub as follows: 4.1 Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and has the requisite corporate power and authority to carry on its business as now conducted in all applicable jurisdictions. 4.2 Capitalization and Ownership of the Company. The Company's entire authorized capital stock consists of 10,000,000 shares of common stock, of which 2,552,064 shares are outstanding and 2,000,000 shares of preferred stock, no par value, of which none are outstanding. All of the shares of Company Common Stock have been duly authorized and are validly issued, fully paid and nonassessable and have not been issued in violation of any pre-emptive rights. Except as set forth on Schedule 4.2 hereto, there are no outstanding or authorized options, rights, warrants, calls, convertible securities, rights to subscribe, conversion rights or other agreements or commitments to which the Company or LITCO are parties or which are binding upon the Company or LITCO providing for the issuance by the Company or transfer by the Company or LITCO of additional shares of the Company's capital stock and the Company has not reserved any shares of its capital stock for issuance, nor are there any outstanding stock option rights, phantom equity or similar rights, contracts, arrangements or commitments. There are no voting trusts or any other agreements or understandings, written or oral, with respect to the voting of the Company's capital stock. 4.3 Certain Corporate Matters. The Company is duly licensed or qualified to do business and is in good standing as a foreign corporation in every jurisdiction in which the character of the Company's properties or nature of the Company's business requires it to be so licensed or qualified other than such jurisdictions in which the failure to be so licensed or qualified does not, or insofar as can reasonably be foreseen, in the future will not, have a material adverse effect on its financial condition, results of operations or business. The Company has full corporate power and authority and all authorizations, licenses, variances, exemptions, orders, contracts, approvals and permits necessary to carry on the business in which it is engaged or in which it proposes presently to engage and to own and use the properties owned and used by it. The Company has delivered to Index true, accurate and complete copies of its Articles of Incorporation and By-Laws, which reflect all amendments made thereto at any time prior to the date of this Agreement. The records of meetings of the shareholders and Board of Directors of the Company are complete and correct in all material respects. The stock records of the Company and the shareholder lists of the Company that the Company has previously furnished to Index are complete and correct in all material respects and accurately reflect the record ownership and the beneficial ownership of all the outstanding shares of the Company's capital 6 11 stock and all other outstanding securities issued by the Company. The Company is not in default under or in violation of any provision of its Articles of Incorporation or By-Laws in any material respect. The Company is not in default or in violation of any restriction, lien, encumbrance, indenture, contract, lease, sublease, loan agreement, note or other obligation or liability by which it is bound or to which any of its assets is subject. 4.4 Subsidiaries. The Company does not own, directly or indirectly, any of the capital stock of any other corporation or any equity, profit sharing, participation or other interest in any corporation, partnership, joint venture or other entity. 4.5 Authority Relative to this Agreement. Each of the Company and LITCO has the requisite corporate power and authority to enter into this Agreement and carry out its obligations hereunder. The execution, delivery and performance of this Agreement by both the Company and LITCO and the consummation of the transactions contemplated hereby have been duly authorized by the Boards of Directors of each of the Company and LITCO and, subject to shareholder approval as set forth in this Agreement, no other actions on the part of the Company or LITCO are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of the Company and LITCO and constitutes, subject to shareholder approval as set forth in this Agreement, a valid and binding obligation of the Company and LITCO, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 4.6 Consents and Approvals; No Violations. Except as may be required under the Securities Act, the Exchange Act, state securities or blue sky laws, and the filing and recordation of the Articles of Merger as required by the NGCL and the NMBCA, no filing with, and no permit, authorization, consent or approval of, any public body or authority is necessary for the consummation by the Company of the transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby, nor compliance by the Company with any of the provisions hereof, will (a) conflict with or result in any breach of any provisions of the Articles of Incorporation or By-Laws of Company, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which the Company is a party or by which it or any of its properties or assets may be bound or (c) violate any order, law, resolution, writ, injunction, decree, statute, rule or regulation applicable to the Company, or any of its properties or assets, except in the case of clauses (b) and (c) for violations, breaches or defaults which in the aggregate would not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole. 4.7 Reports. The Company has filed all reports required to be filed with the Securities and Exchange Commission (the "Commission") pursuant to the Exchange Act (collectively, the 7 12 "Reports"). The Company has delivered to Index copies of all Reports filed with Commission since March 26, 1994. None of the Reports, as of their respective dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.8 Financial Statements. The Company has delivered to Index the following audited financial statements: (a) its balance sheets as of December 31, 1995 and March 25, 1995; (b) its statements of operations for the nine months ended December 31, 1995 and 1994 and for the years ended March 25, 1995 and March 26,1994; (c) its statements of cash flows for the nine months ended December 31, 1995 and 1994 and for the years ended March 25, 1995 and March 26,1994; (d) its statements of changes in shareholders' equity for the nine months ended December 31, 1995 and 1994; and (e) its statements of changes in shareholders' equity for the years ended March 25, 1995 and March 26, 1994. In addition, the Company has delivered to Index the following unaudited financial statements:(a) its balance sheet as of March 31, 1996; (b) its statement of operations for the three months ended March 31, 1996; and (c) its statement of cash flows for the three months ended March 31,1996. Such financial statements are herein collectively referred to as the "Financial Statements." The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby and present fairly the financial condition of the Company as of such dates and the results of its operations and changes in cash flows for such periods. 4.9 Events Subsequent to Financial Statements. Since March 31, 1996, there has not been: (a) Any adverse change in the financial condition, results of operations or business of the Company; (b) Any sale, lease, transfer, license or assignment of any assets, tangible or intangible, of the Company; (c) Any damage, destruction or property loss, whether or not covered by insurance, affecting adversely the properties or business of the Company; (d) Any declaration or setting aside or payment of any dividend or distribution with respect to the shares of capital stock of the Company or any redemption, purchase or other acquisition of any such shares; (e) Any subjection to any lien on any of the assets, tangible or intangible, of the Company; (f) Any incurrence of indebtedness or liability or assumption of obligations by the Company; 8 13 (g) Any waiver or release by the Company of any right of any material value; (h) Any increase in compensation or benefits to officers or directors of the Company; (i) Any change made or authorized in the Articles of Incorporation or By-laws of the Company; (j) Except as set forth on Schedule 4.9 hereto, any issuance, transfer, sale or other disposition by the Company of any shares of its capital stock or other equity securities, or any grant of any options, warrants or other rights to purchase or obtain (including upon conversion or exercise) shares of its capital stock or other equity securities; or (k) Any loan to or other transaction with any officer, director or shareholder of the Company giving rise to any claim or right of the Company against any such person or of such person against the Company. 4.10 Undisclosed Liabilities. The Company has no material liability or obligation of any nature whatsoever, either direct or indirect, matured or unmatured, accrued, absolute, contingent or otherwise. 4.11 Tax Returns and Audits. The Company has duly and timely filed or caused to be filed all returns, reports or similar statements (including any attached schedules) required to be filed with respect to any tax including, without limitation, all information returns, claims for refunds, amended returns and declarations of estimated tax (collectively, the "Tax Returns"). For the purpose of this Agreement, "tax" shall include any federal, state, local or foreign income, gross receipts, windfall profits, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, transfer, stamp or environmental tax, or any other tax or similar assessment or charge, together with any interest or penalty, addition to tax or additional amount imposed by any governmental authority. The Company has paid in full or fully reserved against in the Financial Statements all taxes, interest, penalties, assessments and deficiencies due or claimed to be due by it to foreign, federal, state or local taxing authorities. All Tax Returns are complete and accurate and disclose all taxes required to be paid. The income Tax Returns filed by the Company are not being, to the knowledge of the Company, examined by the Internal Revenue Service (the "IRS") or other applicable taxing authorities for any period. All taxes or estimates thereof that are due as of December 31, 1995, or are claimed or asserted by any taxing authority to be due as of such date, have been (a) timely and appropriately paid so as to avoid penalties for underpayment or (b) accrued for on the balance sheet as of December 31, 1995, as contained in the Financial Statements. Except for amounts not yet due and payable, all tax liabilities to which the properties of the Company may be subject have been paid and discharged. The provisions for income and other taxes payable reflected in the Financial Statements make adequate provision for all then accrued and unpaid taxes of the Company. There are no tax liens on any property of the Company, nor are there any pending or threatened examinations, actions, suits, investigations, audits, assessments or tax claims asserted. The Company has not been granted 9 14 any extensions of limitation periods applicable to tax claims. Since May 1991, except jurisdictions in which the Company filed Tax Returns, no claim has been made by a taxing authority that the Company is or may be subject to taxation by that jurisdiction. All copies of Tax Returns delivered to Index by the Company are true and correct, and any and all notices from foreign, federal, state and local taxing authorities, tax examination reports and statements of deficiencies assessed against or agreed to by the Company since May 1991 have been made available to Index. The Company is not a party to, or bound by, any tax indemnity, tax sharing or tax allocation agreement. The Company is not a member of an "affiliated group," as defined in Section 1504(a) of the Code and is not the owner of an interest in a partnership, joint venture, trust, limited liability company or other entity or organization. All positions taken on federal Tax Returns that could give rise to a penalty for substantial understatement pursuant to Section 6662(d) of the Code have been disclosed on such Tax Returns. The Company has not agreed to and is not required to make any adjustment pursuant to Section 481(a) of the Code (or any predecessor provision) by reason of any change in any accounting method. The Company has no application pending with any taxing authority requesting permission for any changes in any accounting method, and the IRS has not proposed any such adjustment or change in accounting method. The Company is not subject to any limitation under Section 382 or Section 383 of the Code. Index shall have sole control over any contest relating to federal, state, local, or foreign tax assessments or proposed assessments against the Company. Index shall promptly notify LITCO of any audit or examination of the books and records of the Company undertaken by the tax authorities, any tax assessments or proposed assessments or any extension of the statute of limitations applicable to any Tax Returns of the Company relating to any taxable year or periods ending on or prior to the Closing Date and shall provide LITCO with periodic reports regarding the status of such audit or examination. LITCO shall be entitled to participate in (but not control) any such contest at its sole cost. Index shall not settle or otherwise compromise any such contest in a manner which results in liability to LITCO under this Agreement without the written consent of LITCO, which consent shall not be unreasonably withheld. 4.12 Property. The Company does not own or lease any real or personal property. 4.13 Books and Records. The books and records of the Company fairly reflect the transactions to which the Company is a party or by which its properties are bound. 4.14 Questionable Payments. Neither the Company nor LITCO nor any employee, agent or representative of either of them has, directly or indirectly, made any bribes, kickbacks, illegal payments or illegal political contributions using Company funds or made any payments from the Company's funds to governmental officials for improper purposes or made any illegal payments from the Company's funds to obtain or retain business. 4.15 Environmental Matters. (a) Definitions. For the purpose of this Agreement, the following terms shall have 10 15 the meaning herein specified: (i) "Governmental Authority" shall mean the United States, each state, each county, each city and each other political subdivision in which the Company's business is located, and any court, political subdivision, agency or instrumentality with jurisdiction over the Company's business. (ii) "Environmental Laws" shall mean (A) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. 9601 et seq. ("CERCLA"), (B) the Resource Conservation and Recovery Act, as amended by the Hazardous and Solid Waste Amendment of 1984, 42 U.S.C.A. 6901 et seq. ("RCRA"), (C) the Clean Air Act, 42 U.S.C.A. 7401 et seq., (D) the Federal Water Pollution Control Act, as amended, 33 U.S.C.A. 1251 et seq., (E) the Toxic Substances Control Act, 15 U.S.C.A. 2601 et seq., (F) all applicable state laws, and (G) all other laws and ordinances relating to municipal waste, solid waste, air pollution, water pollution and/or the handling, discharge, disposal or recovery of on-site or off-site hazardous substances or materials, as each of the foregoing has been or may hereafter be amended from time to time. (iii) "Hazardous Materials" shall mean, among others, (A) any "hazardous waste" as defined by the RCRA, and regulations promulgated thereunder; (B) any "hazardous substance" as defined by CERCLA, and regulations promulgated thereunder; (C) any "toxic pollutant" as defined in the Federal Water Pollution Prevention and Control Act, as amended, 33 U.S.C. 1251 et seq., (commonly known as "CWA" for "Clear Water Act"), and any regulations thereunder; (D) any "hazardous air pollutant" as defined in the Air Pollution Prevention and Control Act, as amended, 42 U.S.C. 7401 et seq. (commonly known as "CAA" for "Clear Air Act") and any regulations thereunder; (E) asbestos; (F) polychlorinated biphenyls; (G) underground storage tanks, whether empty, filled or partially filled with any substance; (H) any substance the presence of which on the Business Location (as hereinafter defined) is prohibited by any Environmental Laws; and (I) any other substance which is regulated by any Environmental Laws. (iv) "Hazardous Materials Contamination" shall mean the contamination (whether presently existing or hereafter occurring) of the improvements, facilities, soil, groundwater, air or other elements on or at the location of the Company at 211 West Wall Street, Midland, Texas 79701, or at any other location where the Company conducts or has conducted business (collectively, the "Business Location") by Hazardous Materials, or the contamination of the buildings, facilities, soil, groundwater, air or other elements on or any other specific property or general area, as a result of Hazardous Materials emanating from the operations of the Company's business. 11 16 Notwithstanding the foregoing, if any Environmental Law is amended so as to broaden the meaning of any term defined in it, such broader meaning shall apply subsequent to the effective date of such amendment. Where a defined term in this Agreement derives its meaning from a statutory reference, for the purposes of this Agreement any regulatory definition promulgated pursuant to the applicable statute shall be deemed to be applicable to the extent its definition is broader than the statutory reference and any reference or citation to a statute or regulation shall be deemed to include any amendments to that statute or regulation and judicial and administrative interpretations of it. To the extent that any state laws or regulations establish a meaning for a term defined in this Agreement through reference to a federal Environmental Law that is broader than the meaning specified in such federal Environmental Law, such broader meaning set forth in the state Environmental Law shall apply. Any specific references to a law shall include any amendments to it promulgated from time to time. (b) Representations and Warranties. Based on the foregoing, the Company and LITCO jointly and severally represent and warrant that, to their best knowledge and belief: (i) There has been no failure by the Company to comply with all applicable requirements of Environmental Laws relating to the Company, the Company's operations, and the Company's manufacture, processing, distribution, use, treatment, generation, recycling, reuses, sale, storage, handling, transportation or disposal of any Hazardous Material and neither the Company nor LITCO is aware of any facts or circumstances which could materially impair such compliance with all applicable Environmental Laws. (ii) Neither LITCO nor the Company has, through the Closing Date, received notice from any Governmental Authority or any other person of any actual or alleged violation of any Environmental Laws, nor is any such notice anticipated. (iii) Neither the Company nor LITCO will do or permit anything that will cause the Company to be in violation of any requirements of Environmental Laws, or do or permit anything to be done that would materially and adversely affect the financial condition of the Company or subject the Company to any enforcement actions under any Environmental Laws. (iv) The Company has not obtained and is not required to obtain any permits, licenses or similar authorizations to construct, occupy, operate or use any buildings, improvements, fixtures and equipment owned or leased by the Company by reason of any Environmental Laws. (v) No Hazardous Materials are now located at the Business Location, and neither LITCO nor the Company has ever caused or permitted any Hazardous Materials to be generated, placed, stored, held, handled, located or used at the 12 17 Business Location, any part thereof or at any other site controlled or utilized by the Company in its operation of its business. (vi) Hazardous Materials Contamination does not now and has never existed on, in, under or at the location of the Company or at any other site controlled or utilized by the Company in the operation of its business. No part of the Business Location or any other site controlled or utilized by the Company in the operation of its business is being used has ever been used by others for the release, disposal or long-term storage of Hazardous Materials, nor is any part of the Business Location or any other site controlled or utilized by the Company in the operation of its business otherwise affected by Hazardous Materials Contamination. (vii) No investigation, administrative order, consent order or agreement, litigation or settlement with respect to Hazardous Materials or Hazardous Materials Contamination is proposed, threatened, anticipated, pending or otherwise in existence with respect to the Business Location or with respect to any other site controlled or utilized by the Company in the operation of its business. The Business Location is not currently on, and has never been on, any federal or state "Superfund" or "Superlien" list. 4.16 Intellectual Property. There are no patents, patent applications, trade names, trademark or service mark registrations or applications, registered trade dress rights, common law trademarks or copyright registrations or applications owned by the Company or which the Company is licensed to use. To the best knowledge and belief of the Company and LITCO, there are no claims that any product, activity or operation of the Company infringes upon or involves, or has resulted in the infringement of, any patents, patent applications, trade names, trademark or service mark registrations or applications, registered trade dress rights, common law trademarks or copyright registrations or applications or any other proprietary right of any other person, corporation or other entity; and no proceedings have been instituted, are pending or are threatened with respect thereto. 4.17 Insurance. The Company has no insurance policies in effect. 4.18 Contracts. Except as set forth herein, the Company has no material contracts, leases, arrangements and commitments (whether oral or written). The Company is not a party to or bound by or affected by any contract, lease, arrangement or commitment (whether oral or written) relating to: (a) the employment of any person; (b) collective bargaining with, or any representation of any employees by, any labor union or association; (c) the acquisition of services, supplies, equipment or other personal property; (d) the purchase or sale of real property; (e) distribution, agency or construction; (f) lease of real or personal property as lessor or lessee or sublessor or sublessee; (g) lending or advancing of funds; (h) borrowing of funds or receipt of credit; (i) incurring of any obligation or liability; or (j) the sale of personal property. 13 18 4.19 Litigation. The Company is not subject to any judgment or order of any court or quasijudicial or administrative agency of any jurisdiction, domestic or foreign, nor is there any charge, complaint, lawsuit or governmental investigation pending or, to the best knowledge of the Company and LITCO, threatened against the Company. The Company is not a plaintiff in any action, domestic or foreign, judicial or administrative. There are no existing actions, suits, proceedings or investigations of the Company, and neither the Company nor LITCO know of any basis for such actions, suits, proceedings or investigations. There are no unsatisfied judgments, orders, writs, injunctions, decrees or stipulations affecting the Company or to which the Company is a party. 4.20 Employees. Except as set forth on Schedule 4.20 hereto, the Company does not have any employees. The Company does not owe any compensation, bonuses, profit sharing, pension, retirement, stock options or related appreciation rights, deferred or otherwise, to any current or previous employees. The Company has no written or oral employment agreements with any officer or director of the Company. The Company is not a party to or bound by any collective bargaining agreement. There are no loans or other obligations payable or owing by the Company to any shareholder, officer, director or employee of the Company, nor are there any loans or debts payable or owing by any of such persons to the Company or any guarantees by the Company of any loan or obligation of any nature to which any such person is a party. 4.21 Employee Benefit Plans. The Company has no (a) non-qualified deferred or incentive compensation or retirement plans or arrangements, (b) qualified retirement plans or arrangements, (c) other employee compensation, severance or termination pay or welfare benefit plans, programs or arrangements or (d) any related trusts, insurance contracts or other funding arrangements maintained, established or contributed to by the Company within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Company does not have any liability under Title IV of ERISA as a result of actions or events occurring prior to the Closing. 4.22 Legal Compliance. No claim has been filed against the Company alleging a violation of any applicable laws and regulations of foreign, federal, state and local governments and all agencies thereof. The Company holds all of the material permits, licenses, certificates or other authorizations of foreign, federal, state or local governmental agencies required for the conduct of its business as presently conducted. 4.23 Broker's Fees. Neither the Company, LITCO nor anyone on their behalf has any liability to any broker, finder, investment banker or agent, or has agreed to pay any brokerage fees, finder's fees or commissions, or to reimburse any expenses of any broker, finder, investment banker or agent in connection with the Merger or any similar transaction. 4.24 Disclosure. The representations and warranties and statements of fact made by the Company and LITCO in this Agreement and in any Schedule hereto are, as applicable, accurate, correct and complete and do not contain any untrue statement of a material fact or omit to state 14 19 any material fact necessary in order to make the statements and information contained herein or therein not misleading. 4.25 Bank Accounts. Except as set forth on Schedule 4.25 hereto, the Company does not have any account, instrument of deposit or safe deposit box. 4.26 Information Supplied. None of the information supplied by the Company or LITCO for use in the Registration Statement and contained therein will, as of the date that the Registration Statement is filed with the Commission, on the date it is declared effective or at the time of the meeting of the shareholders of the Company to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The proxy statement contained in the Registration Statement will comply, in all material respects, as to form with the provisions of the Exchange Act. ARTICLE 5 CONDUCT OF BUSINESS PENDING THE CLOSING 5.1 Conduct of Business by the Company Pending the Closing. The Company and LITCO jointly and severally covenant and agree that prior to the Closing Date: (a) The Company shall conduct its business and operations only in the usual and ordinary course of business and consistent with past custom and practice; (b) The Company shall not directly or indirectly do any of the following: (i) sell, pledge, dispose of or encumber any of its assets, except for the repayment of indebtedness owed to LITCO in the amount of $6,040.00; (ii) amend or propose to amend its Articles of Incorporation or By-Laws; (iii) split, combine or reclassify any outstanding shares of its capital stock, or declare, set aside or pay any dividend or other distribution payable in cash, stock, property or otherwise with respect to shares of its capital stock; (iv) redeem, purchase or acquire or offer to acquire any shares of its capital stock or other securities; (v) create any subsidiaries; or (vi) enter into or modify any contract, agreement, commitment or arrangement with respect to any of the foregoing; (c) The Company shall not, and with respect to the applicable matters set forth in this Section 5.1(c) (i) and (iv), LITCO shall not, (i) issue, sell, pledge or dispose of, or agree to issue, sell, pledge or dispose of, any additional shares of, or any options, warrants, conversion privileges or rights of any kind to acquire any shares of, its capital stock; (ii) acquire (by merger, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership or other business organization or division or the material assets thereof; (iii) incur any indebtedness for borrowed money, issue any debt securities or guarantee any indebtedness to others; or (iv) enter into or modify any contract, agreement, commitment or arrangement with respect to any of the foregoing; 15 20 (d) The Company shall not enter into any employment, severance or similar agreements or arrangements with, or grant any bonus, salary increase, severance or termination pay to, any officers or directors; (e) The Company shall not adopt any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, fund or arrangement for the benefit or welfare of any employee; (f) Except as otherwise required by its Articles of Incorporation or By-Laws, by this Agreement or by applicable law, neither the Company nor LITCO shall call any meeting of shareholders; (g) The Company and LITCO shall (i) use their best efforts not to take any action which would render, or which reasonably may be expected to render, any representation or warranty made by them in this Agreement untrue at any time prior to the Closing Date as if then made; and (ii) notify Index of any emergency or other change in the normal course of its business or in the operation of its properties and of any tax audits, tax claims, governmental or third party complaints, investigations or hearings (or communications indicating that the same may be contemplated) if such emergency, change, audit, claim, complaint, investigation or hearing would be material, individually or in the aggregate, to the financial condition, results of operations or business of the Company, or to the ability of any of the parties hereto to consummate the transactions contemplated by this Agreement; (h) The Company and LITCO shall notify Index promptly of any material adverse event or circumstance affecting the Company (including the filing of any material litigation against the Company or the existence of any dispute with any person or entity which involves a reasonable likelihood of such litigation being commenced); and (i) The Company shall comply with all legal requirements and contractual obligations applicable to its operations and business and pay all applicable taxes. 5.2 Other Actions. Unless approved in writing by Index, the Company and LITCO shall not take any action or permit any action to occur that might reasonably be expected to result in any of the representations and warranties of the Company and LITCO contained in this Agreement becoming untrue after the date hereof or any of the conditions to the Closing set forth in Article 7 of this Agreement not being satisfied. ARTICLE 6 ADDITIONAL AGREEMENTS 6.1 Access and Information. Except for information relating to any claims any party may have against the other, the Company and Index shall each afford to the other and to the other's 16 21 financial advisors, legal counsel, accountants, consultants and other representatives full access during normal business hours throughout the period prior to the Effective Time to all of its books, records, properties and personnel and, during such period, each shall furnish promptly to the other (a) a copy of each report, schedule and other document filed or received by it pursuant to the requirements of federal or state securities laws, and (b) all other information as such other party may reasonably request. Each party shall hold in confidence all non-public information until such time as such information is otherwise publicly available and, if this Agreement is terminated, each party will upon written request deliver to the other all documents, work papers and other material obtained by such party or on its behalf from the other party as a result of this Agreement or in connection herewith, whether so obtained before or after the execution hereof. As soon as practicable following the Closing, the Company shall deliver to Index all of the books and records of the Company. 6.2 Registration Statement. Index and the Company shall cooperate in preparing a registration statement on Form S- 4 and combined prospectus and proxy statement, any amendments or supplements thereto and any notices, reports, letters, proxies or other materials required to be filed with the Commission in connection with the Merger and the Sepco Merger (collectively, the registration statement and combined prospectus and proxy statement, any amendments or supplements thereto and any notices, reports, letters, proxies or other materials required to be filed with the Commission in connection with the Merger and the Sepco Merger are herein referred to as the "Registration Statement"). The parties shall cooperate with each other in providing any information that the other party may reasonably request to aid in the preparation of the Registration Statement. The parties will use their commercially reasonable efforts to respond to the comments of the Commission with respect to the Registration Statement and will make any further filing (including amendments and supplements) in connection therewith that may be necessary, proper or advisable. Index will provide the Company, and the Company will provide Index, with whatever information and assistance in connection with the foregoing filings that the filing party reasonably may request. Index will take all actions that may be necessary, proper or advisable under state securities laws in connection with the offering and issuance of Index Common Stock as contemplated herein. 6.3 Meetings of Shareholders. (a) The Company shall promptly take all action reasonably necessary in accordance with the NMBCA and its Articles of Incorporation and By-Laws to convene a meeting of its shareholders to consider and vote upon the adoption and approval of the Merger and this Agreement. The Company (i) shall recommend at such meeting, through its Board of Directors, that the shareholders of the Company vote to adopt and approve the Merger and this Agreement, (ii) shall use its reasonable efforts to solicit from shareholders of the Company proxies in favor of such adoption and approval and (iii) shall take all other action reasonably necessary to secure a vote of its shareholders in favor of the adoption and approval of the Merger and this Agreement. (b) The Merger Sub shall call a special meeting of its sole stockholder prior to the 17 22 Effective Time to be held in accordance with the laws of the State of Nevada to consider and vote upon the Merger. The parties hereto acknowledge and agree that the Merger Sub's sole stockholder may approve the Merger by written consent in lieu of holding such a meeting. (c) Index shall call a special meeting of its shareholders prior to the Effective Time to be held in accordance with the laws of the State of Texas to consider and vote upon the Sepco Merger. 6.4 Press Releases. The Company and Index shall consult with each other as to the form and substance of any press release or other public disclosure of matters related to this Agreement or any of the transactions contemplated hereby; provided, however, that nothing in this Section 6.4 shall be deemed to prohibit any party hereto from making any disclosure that is required to fulfill such party's disclosure obligations imposed by law, including, without limitation, federal securities laws. 6.5 Reimbursement of LITCO. On or before the Closing Date, the Company shall pay to LITCO the amount of $6,040.00 in order to reimburse LITCO for expenses incurred for the benefit of the Company, which payment is not objected to by Index. ARTICLE 7 CONDITIONS TO CLOSING 7.1 Conditions to Obligations of Each Party to Effect the Closing. The respective obligations of each party to effect the Closing shall be subject to the fulfillment on or prior to the Closing Date of the following conditions: (a) The Registration Statement shall have been declared effective by the Commission and no stop order with respect thereto shall be in effect; (b) The Merger shall have been approved by the shareholders of Index and the Company and the stockholder of the Merger Sub, respectively, in accordance with the laws of the States of Texas, New Mexico and Nevada, respectively; (c) The Sepco Merger shall have been approved by the shareholders and stockholders of Index and Sepco and the stockholder of Sepco Acquisition Corporation, respectively in accordance with the laws of the States of Texas and Nevada, respectively; and (d) No order, injunction or decree shall have been entered and remain in effect in any action or proceeding before any foreign, federal or state court or governmental agency or other foreign, federal or state regulatory or administrative agency or commission that would prevent or make illegal the consummation of the transactions contemplated hereby. 18 23 7.2 Additional Conditions to Index's and the Merger Sub's Obligations. The obligations of each of Index and the Merger Sub to effect the Closing are subject to the satisfaction of the following additional conditions on or before the Closing Date: (a) The representations and warranties set forth in Article 4 of this Agreement will be true and correct in all material respects as of the date hereof and at and as of the Closing Date as though then made; (b) The Company and LITCO shall have performed, in all material respects, each obligation and agreement and complied with each covenant to be performed and complied with by them under Articles 5 and 6 of this Agreement prior to the Closing Date; (c) All consents by governmental or regulatory agencies or otherwise that are required for the consummation of the transactions contemplated hereby or that are required for Index to own, operate or control the Company or any portion of the assets of the Company to prevent a breach of or a default under or a termination of any agreement material to the Company to which the Company is a party or to which any material portion of the assets of the Company is subject, will have been obtained; (d) No action or proceeding before any court or governmental body will be pending or threatened wherein a judgment, decree or order would prevent or restrain any of the transactions contemplated hereby or cause such transactions to be declared unlawful, nullified or rescinded or which might adversely affect the right of Index to own, operate or control the Company; (e) Index and its financial and legal advisors shall have completed a due diligence review of the business, operations and financial statements of the Company, the results of which shall be satisfactory to Index in its sole discretion; (f) Index will have received from Matthew Blair, Esq., counsel to the Company, an opinion addressed to Index, dated the Closing Date and substantially in the form attached hereto as Exhibit A; (g) No event shall have occurred prior to the Closing which in the reasonable judgment of Index or the Merger Sub, would materially affect the purpose of the Merger; and (h) At the Closing, the Company shall have delivered or caused to be delivered to Index the following: (i) a certificate executed by the President and Secretary of both the Company and LITCO stating that the conditions set forth in Sections 7.2(a) through (d) of this Agreement have been satisfied; (ii) certified copies of the resolutions duly adopted by the Company's and 19 24 LITCO's Boards of Directors authorizing and approving the Merger and the execution, delivery and performance of this Agreement; (iii) certified copies of resolutions duly adopted by the Company's and LITCO's shareholders authorizing and approving the Merger and the execution, delivery and performance of this Agreement; (iv) certificates of good standing or comparable certificates for the Company from the Secretary of State of the State of New Mexico and for LITCO from the Secretary of State of the State of Texas and from every jurisdiction where a failure to be qualified or licensed would have a material adverse effect on its financial condition, results of operations or business, dated not earlier than five days prior to the Closing Date; (v) a certificate of existence or comparable certificates for LITCO from the Secretary of State of the State of Texas and for the Company from the Secretary of State of the State New Mexico, dated not earlier than five days prior to the Closing Date; (vi) a copy of each of the Company's and LITCO's Articles of Incorporation certified as of a recent date by the Secretary of State of the States of New Mexico and Texas, respectively; (vii) an incumbency certificate of the officers of the Company and LITCO; (viii) resignations from the officers and directors of the Company, dated as of the Effective Time; and (ix) such other documents as Index may reasonably request in connection with the transactions contemplated hereby. 7.3 Additional Conditions to the Company's and LITCO's Obligations. The obligations of each of the Company and LITCO to effect the Closing are subject to the satisfaction of the following conditions on or before the Closing Date: (a) The representations and warranties set forth in Article 3 of this Agreement will be true and correct in all material respects as of the date hereof and at and as of the Closing Date as though then made; (b) Index shall have performed, in all material respects, each obligation and agreement and complied with each covenant required to be performed and complied with by it under Article 6 of this Agreement prior to the Closing Date; (c) No action or proceeding before any court or governmental body will be pending or 20 25 threatened wherein a judgment, decree or order would prevent any of the transactions contemplated hereby or cause such transactions to be declared unlawful or rescinded; (d) The Company shall have received from Fouts & Moore, L.L.P., counsel to Index, an opinion addressed to the Company and LITCO, dated the Closing Date and substantially in the form attached hereto as Exhibit B; and (e) On the Closing Date, Index shall have delivered to the Company the following: (i) a certificate executed on behalf of Index and the Merger Sub stating that the conditions set forth in Sections 7.3(a) through (c) of this Agreement have been satisfied; (ii) certified copies of resolutions duly adopted by Index's and the Merger Sub's Boards of Directors authorizing and approving the Merger and the execution, delivery and performance of this Agreement; (iii) certified copies of the resolutions duly adopted by the shareholder of the Merger Sub authorizing and approving the Merger and the execution, delivery and performance this Agreement; (iv) certified copies of resolutions duly adopted by Index's Board of Directors authorizing and approving the Sepco Merger and the execution, delivery and performance of the Sepco Merger Agreement; (v) certified copies of resolutions duly adopted by the shareholders of Index authorizing and approving the Sepco Merger and the execution, delivery and performance of the Sepco Merger Agreement; (vi) certificate of existence for Index from the Secretary of State of the State of Texas and certificate of existence for the Merger Sub from the Secretary of State of Nevada, dated not earlier than five days prior to the Closing Date; (vii) a copy of Index's Articles of Incorporation certified by the Secretary of State of the State of Texas; (viii) a certificate of good standing for the Merger Sub from the Secretary of State of the State of Nevada and a certificate of good standing for Index from the Secretary of State of Texas, dated not earlier than five days prior to the Closing Date; (ix) a copy of the Merger Sub's Articles of Incorporation certified by the Secretary of State of the State of Nevada; 21 26 (x) an incumbency certificate of the officers of Index and the Merger Sub; and (xi) such other material documents as the Company may reasonably request in connection with the transactions contemplated hereby. ARTICLE 8 REMEDIES 8.1 Indemnification by LITCO. Subject to the terms and conditions of this Article 8, LITCO agrees to indemnify, defend and hold Index and its directors, officers, agents, attorneys and affiliates harmless from and against all losses, claims, actions, causes of action, fines, obligations, demands, assessments, penalties, liabilities, costs, damages, attorneys' fees and expenses (collectively, "Damages"), asserted against or incurred by any such person or entity (i) by reason of or resulting from a breach of any representation, warranty, non-fulfillment of any agreement or covenant of the Company or LITCO contained in this Agreement or in any written statement, certificate or other document to be delivered in connection herewith or (ii) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any part of the Registration Statement when such part became effective, or in the Registration Statement or the prospectus contained therein, as of its date, or any amendment or supplement thereto relating to information furnished by the Company or LITCO to Index, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading relating to information furnished by the Company or LITCO to Index. 8.2 Indemnification by Index. Subject to the terms and conditions of this Article 8, Index hereby agrees to indemnify, defend and hold the Company and its directors, officers, agents, attorneys and affiliates harmless from and against all Damages asserted against or incurred by any such person or entity (i) by reason of or resulting from a breach of any representation, warranty or covenant of Index contained in this Agreement or (ii) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any part of the Registration Statement when such part became effective, or in the Registration Statement or the prospectus contained therein, as of its date, or any amendment or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein not misleading; provided, however, that Index shall not be liable to the Company or any of its directors, officers, agents, attorneys or affiliates in any such case to the extent that any Damages arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission relating to information furnished by the Company or LITCO to Index for inclusion in the Registration Statement. 8.3 Conditions of Indemnification. The respective obligations and liabilities of LITCO and Index (the "indemnifying party") to the other (the "party to be indemnified") under Sections 8.1 and 8.2 with respect to claims resulting from the assertion of liability by third parties shall be subject to the following terms and conditions: 22 27 (a) Within 20 days (or such earlier time as might be required to avoid prejudicing the indemnifying party's position) after receipt of notice of commencement of any action evidenced by service of process or other legal pleading, the party to be indemnified shall give the indemnifying party written notice thereof together with a copy of such claim, process or other legal pleading, and the indemnifying party shall have the right to undertake the defense thereof by representatives of its own choosing and at its own expense; provided that the party to be indemnified may participate in the defense with counsel of its own choice, the fees and expenses of which counsel shall be paid by the party to be indemnified unless (i) the indemnifying party has agreed to pay such fees and expenses, (ii) the indemnifying party has failed to assume the defense of such action or (iii) the named parties to any such action (including any impleaded parties) include both the indemnifying party and the party to be indemnified and the party to be indemnified has been advised by counsel that there may be one or more legal defenses available to it that are different from or additional to those available to the indemnifying party (in which case, if the party to be indemnified informs the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of the party to be indemnified, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for the party to be indemnified, which firm shall be designated in writing by the party to be indemnified). (b) In the event that the indemnifying party, by the 30th day after receipt of notice of any such claim (or, if earlier, by the 10th day preceding the day on which an answer or other pleading must be served in order to prevent judgment by default in favor of the person asserting such claim), does not elect to defend against such claim, the party to be indemnified will (upon further notice to the indemnifying party) have the right to undertake the defense, compromise or settlement of such claim on behalf of and for the account and risk of the indemnifying party and at the indemnifying party's expense, subject to the right of the indemnifying party to assume the defense of such claims at any time prior to settlement, compromise or final determination thereof. (c) Notwithstanding the foregoing, the indemnifying party shall not settle any claim without the consent of the party to be indemnified unless such settlement involves only the payment of money and the claimant provides to the party to be indemnified a release from all liability in respect of such claim. If the settlement of the claim involves more than the payment of money, the indemnifying party shall not settle the claim without the prior consent of the party to be indemnified. (d) The party to be indemnified and the indemnifying party will each cooperate with all reasonable requests of the other. 23 28 8.4 Waiver. No waiver by any party of any default or breach by another party of any representation, warranty, covenant or condition contained in this Agreement shall be deemed to be a waiver of any subsequent default or breach by such party of the same or any other representation, warranty, covenant or condition. No act, delay, omission or course of dealing on the part of any party in exercising any right, power or remedy under this Agreement or at law or in equity shall operate as a waiver thereof or otherwise prejudice any of such party's rights, powers and remedies. All remedies, whether at law or in equity, shall be cumulative and the election of any one or more shall not constitute a waiver of the right to pursue other available remedies. 8.5 Remedies Not Exclusive. The remedies provided in this Article 8 shall not be exclusive of any other rights or remedies available to one party against the other, either at law or in equity. ARTICLE 9 TERMINATION 9.1 Termination by Mutual Consent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time by the mutual consent of the parties hereto. 9.2 Termination by Any Party. This Agreement may be terminated and the Merger may be abandoned by action of the Board of Directors of any party hereto if a United States federal or state court of competent jurisdiction or United States federal or state governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable; provided, that the party seeking to terminate this Agreement pursuant to this clause shall have used all reasonable efforts to remove such injunction, order or decree. 9.3 Termination by Index. This Agreement may be terminated by Index upon written notice if the Closing has not occurred by December 31, 1996. 9.4 Effect of Termination and Abandonment. In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article 9, all obligations of the parties hereto shall terminate, except the obligations of the parties pursuant to Section 6.1. 9.5 Material Breach. This Agreement may be terminated if a material breach of this Agreement has occurred and such breach has not been cured by the breaching party within ten business days of receipt of written notice from a non-breaching party detailing such breach. 24 29 ARTICLE 10 GENERAL PROVISIONS 10.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by overnight courier or mailed by registered or certified mail (postage prepaid and return receipt requested) to the party to whom the same is so delivered, sent or mailed at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Index or the Merger Sub: David R. Little, President 580 Westlake Park Boulevard Suite 1100 Houston, Texas 77079 Phone: (713) 558-4448 Fax: (713) 558-4448 with a copy to: Gary A. Messersmith, Esq. Fouts & Moore, L.L.P. 5555 San Felipe, 17th Floor Houston, Texas 77066-2726 (b) if to the Company or LITCO: Glenn A. Little, President 211 West Wall Street Midland, Texas 79701-4506 Phone: (800) 351-4515 Fax: (915) 682-2560 with a copy to: Matthew Blair, Esq. 4419 Tanforan Midland, Texas 79701 10.2 Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. References to Sections and Articles refer to sections and articles of this Agreement unless otherwise stated. 10.3 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated and the parties shall negotiate in good faith to modify this Agreement to preserve each party's anticipated benefits under this Agreement. 10.4 Miscellaneous. This Agreement (together with all other documents and instruments 25 30 referred to herein): (a) constitutes the entire agreement and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof; (b) except as expressly set forth herein, is not intended to confer upon any other person any rights or remedies hereunder and (c) shall not be assigned by operation of law or otherwise, except that Index may assign all or any portion of its rights under this Agreement to any wholly-owned subsidiary but no such assignment shall relieve Index of its obligations hereunder, and except that this Agreement may be assigned by operation of law to any corporation with or into which Index may be merged. 10.5 Separate Counsel. Each party hereby expressly acknowledges that it has been advised and urged to seek its own separate legal counsel for advice with respect to this Agreement. 10.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 10.7 Counterparts. This Agreement may be executed in two or more counterparts which together shall constitute a single agreement. 10.8 Amendment. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties hereto. 10.9 Parties In Interest: No Third Party Beneficiaries. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives, successors and assigns of the parties hereto. This Agreement shall not be deemed to confer upon any person not a party hereto any rights or remedies hereunder. 10.10 Captions. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. 10.11 Expenses. The parties hereto shall pay all of their own expenses relating to the transactions contemplated by this Agreement, including, without limitation, the fees and expenses of their respective counsel and financial advisers. 10.12 Survival. The representations, warranties and covenants contained herein shall survive the Closing. 26 31 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. INDEX, INC. By: /s/ David R. Little ---------------------------------- David R. Little, President NEWMAN ACQUISITION CORPORATION By: /s/ David R. Little ---------------------------------- David R. Little, President NEWMAN COMMUNICATIONS CORPORATION By: /s/ Glenn A. Little ---------------------------------- Glenn A. Little, President LITTLE & COMPANY INVESTMENT SECURITIES By: /s/ Glenn A. Little ---------------------------------- Glenn A. Little, President 27 32 SCHEDULE 4.2 The Company currently has 1,650,000 Class C Warrants outstanding. Each Class C Warrant allows the holder to purchase one share of Company Common Stock at $2.00 per share until November 22, 1996. The form of the Class C Warrant certificate is attached as Exhibit A hereto. 33 SCHEDULE 4.9 The Company will issue 1,693,564 shares of Company Common Stock to Halter Financial Group, Inc., a Texas corporation subsequent to the date of this Agreement. 34 SCHEDULE 4.20
Name of Employee: Positions: ----------------- ---------- Glenn A. Little Chairman of the Board and President Patricia de Little Director, Vice President, Secretary and Treasurer
35 SCHEDULE 4.25 BANK ACCOUNTS NationsBank of Texas, N.A. Sunwest Bank of Albuquerque, N.A. Post Office Box 831547 Post Office Box 25500 Dallas, Texas 75283-1547 Albuquerque, New Mexico 87125-0500 (800) 462-6289 (505) 765-2600 Business Economy Checking Funds Checking Account Number 423-003953-7 Account Number 00-0109-652297 36 The following exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K, promulgated under the Securities Act of 1933, as amended: Exhibit A -- Opinion of Matthew Blair, Esq. Exhibit B -- Opinion of Fouts & Moore, L.L.P. The Company will furnish supplementally a copy of the omitted exhibits to the Commission upon request. EX-10.13 3 AMEND. #2 & RESTATED LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.13 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AMONG SEPCO INDUSTRIES, INC. AS BORROWER AND BARCLAYS BUSINESS CREDIT, INC. AS LENDER APRIL 1, 1994 2 TABLE OF CONTENTS Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Preamble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1 GENERAL DEFINITIONS 1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2. Accounting and Other Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3. Certain Matters of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 2 CREDIT FACILITY 2.1. Revolving Credit Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2. Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3. All Loans to Constitute One Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4. Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 3 INTEREST, FEES, TERM AND REPAYMENT 3.1. Interest and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2. Unused Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3. Term of Agreement; Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5. Application of Payments and Collections . . . . . . . . . . . . . . . . . . . . . . . . . 3.6. Statements of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 4 COLLATERAL: GENERAL TERMS 4.1. Security Interest in Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2. Lien on Realty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3. Pledge of Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4. Lien Perfection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5. Location of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6. Insurance of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7. Protection of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
i 3 SECTION 5 PROVISIONS RELATING TO ACCOUNTS 5.1. Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . . . 5.2. Assignments, Records and Schedules of Accounts . . . . . . . . . . . . . . . . . . . . . . 5.3. Administration of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4. Collection of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 6 PROVISIONS RELATING TO INVENTORY 6.1. Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . . . 6.2. Inventory Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3. Returns of Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 7 PROVISIONS RELATING TO EQUIPMENT 7.1. Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . . . 7.2. Dispositions of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 8 REPRESENTATIONS AND WARRANTIES 8.1. General Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2. Reaffirmation and Survival of Representations and Warranties . . . . . . . . . . . . . . . SECTION 9 COVENANTS AND CONTINUING AGREEMENTS 9.1. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3. Specific Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 10 CONDITIONS PRECEDENT 10.1. Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2. Other Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 11 EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 11.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2. Acceleration of the Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ii 4 11.3. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4. Remedies Cumulative; No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECTION 12 MISCELLANEOUS 12.1. Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3. Modification of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4. Reimbursement of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5. Indulgences Not Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.6. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.7. Successors and Assigns; Participations by Lender . . . . . . . . . . . . . . . . . . . . . 12.8. Cumulative Effect; Conflict of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.9. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.10. Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.11. Lender's Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.12. Demand Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.13. Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.14. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.15. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.16. Nonapplicability of Article 5069-15.01 et. seq. . . . . . . . . . . . . . . . . . . . . . 12.17. No Preservation or Marshalling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.18. Governing Law; Consent To Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.19. Waivers By Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.20. Special Louisiana Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.21. Oral Agreements Ineffective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXHIBITS: - -------- EXHIBIT A Form of Secured Promissory Note (Term Loan) EXHIBIT B Borrower's Business Locations EXHIBIT C Corporate Names EXHIBIT D Litigation EXHIBIT E Form of Compliance Certificate EXHIBIT F Existing Indebtedness EXHIBIT G Real Property EXHIBIT H Form of Legal Opinion iii 5 SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is made effective as of the 1st day of April, 1994, by and between BARCLAYS BUSINESS CREDIT, INC. ("Lender"), a Connecticut corporation with an office at 2711 North Haskell, Suite 2100, LB 21, Dallas, Texas 75204, and SEPCO INDUSTRIES, INC., a Texas corporation ("Borrower"), with offices at 6500 Brittmoore Road, Houston, Texas 77041. WHEREAS, Southern Engine & Pump Company, a Delaware corporation ("SE&P"), Wesco Equipment, Inc., a Delaware corporation ("Wesco"), and Lender have entered into that certain General Loan and Security Agreement dated February 10, 1986 as heretofore amended by amendments dated as of December 19, 1988, and December 31, 1990 (as amended, the "Prior Loan Agreement"); and WHEREAS, SE&P, Wesco, and Lender have entered into that certain Amended and Restated Loan and Security Agreement dated January 22, 1992 (the "Prior Restated SE&P Loan Agreement"); and WHEREAS, T.L. Walker Bearing Co. ("TLW") and Lender have entered into that certain Loan and Security Agreement dated January 22, 1992 (the "Prior TLW Loan Agreement"); and WHEREAS, pursuant to that certain Plan and Agreement of Merger - Wesco Equipment, Inc. Into Southern Engine & Pump Company, dated as of March 1, 1994, Wesco and SE&P agreed that Wesco and SE&P would be merged into a single corporation, by Wesco merging into and with SE&P, with SE&P being the surviving corporation, to exist by virtue of and be governed by the laws of the State of Delaware; and WHEREAS, pursuant to that certain Plan and Agreement of Merger - Southern Engine & Pump Company Into Sepco Industries, Inc., dated as of March 1, 1994, SE&P and Borrower agreed that SE&P and Borrower would be merged into a single corporation, by SE&P merging into and with Borrower, with Borrower being the surviving corporation, to exist by virtue of and be governed by the laws of the State of Texas; and WHEREAS, pursuant to that certain Plan and Agreement of Merger - T.L. Walker Bearing Co. Into DMS Corporation, dated as of March 1, 1994, TLW and DMS Corporation, a Texas corporation ("DMS"), agreed that TLW and DMS would be merged into a single corporation, by TLW merging into and with DMS, with DMS being the surviving corporation, to exist by virtue of and be governed by the laws of the State of Texas; and WHEREAS, pursuant to that certain Plan and Agreement of Merger - DMS Corporation Into Sepco Industries, Inc., dated as of March 1, 1994, DMS and Borrower agreed that DMS and Borrower would be merged into a single corporation, by DMS merging into and with Borrower, LOAN AND SECURITY AGREEMENT - Page 1 6 with Borrower being the surviving corporation, to exist by virtue of and be governed by the laws of the State of Texas; and WHEREAS, Borrower and Lender now desire to consolidate, amend and restate in their entirety the Prior Restated SE&P Loan Agreement and the TLW Loan Agreement. NOW, THEREFORE, in consideration of the premises and other value, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender agree as follows: SECTION 1. GENERAL DEFINITIONS 1.1. Defined Terms. When used herein, the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): Accounts - all accounts, contract rights, chattel paper, instruments and documents, whether now owned or hereafter created or acquired by Borrower or in which Borrower now has or hereafter acquires any interest. Account Debtor - any Person who is or may become obligated under or on account of an Account. Adjusted Net Earnings From Operations- with respect to any fiscal period, means the net earnings (or loss) after provision for income taxes for such fiscal period of Borrower, all as reflected on the financial statement of Borrower supplied to Lender pursuant to Section 9.1(J) hereof, but excluding: (a) any gain or loss arising from the sale of capital assets; (b) any gain arising from any write-up of assets; (c) earnings of any Subsidiary accrued prior to the date it became a Subsidiary; (d) earnings of any corporation, substantially all the assets of which have been acquired in any manner by Borrower, realized by such corporation prior to the date of such acquisition; (e) net earnings of any business entity (other than a Subsidiary) in which Borrower has an ownership interest unless such net earnings shall have actually been received by Borrower in the form of cash distributions; (f) any portion of the net earnings of any Subsidiary which for any reason is unavailable for payment of dividends to Borrower; (g) the earnings of any Person to which any assets of Borrower shall have been sold, transferred or disposed of, or into which Borrower shall have merged, or been a party to any consolidation or other form of reorganization, prior to the date of such transaction; (h) any gain arising from the acquisition of any Securities of Borrower; and (i) any gain arising from extraordinary or non-recurring items. Adjusted Tangible Assets - all assets except: (a) deferred assets, other than prepaid insurance and prepaid taxes; (b) patents, copyrights, trademarks, trade names, non-compete agreements, franchises and other similar intangibles; (c) good will; (d) Restricted Investments; (e) unamortized debt discount and expense; (f) assets located and notes and receivables due from obligors outside of the United States of America; and (g) Accounts, notes and other receivables due from Affiliates or employees. LOAN AND SECURITY AGREEMENT - Page 2 7 Adjusted Tangible Net Worth - at any date means a sum equal to: (a) the net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves) at which the Adjusted Tangible Assets of a Person would be shown on a balance sheet at such date in accordance with GAAP, less (b) the amount at which such Person's liabilities (other than capital stock and surplus) would be shown on such balance sheet in accordance with GAAP, plus (c) Subordinated Debt. Affiliate - a Person (other than a Subsidiary): (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, Borrower; (b) which beneficially owns or holds 5% or more of any class of the voting Securities of Borrower; or (c) 5% or more of the voting Securities (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by Borrower or a Subsidiary of Borrower. For purposes hereof, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting Securities, by contract or otherwise. Agreement - this Second Amended and Restated Loan and Security Agreement, as amended, modified, supplemented or restated from time to time. Annual Rate - as defined in Section 3.1(A) of this Agreement. Applicable Margin - as defined in Section 3.1(F) of this Agreement. Average Daily Availability - the amount obtained by adding the difference between the Borrowing Base and the unpaid balance of Loans owing by Borrower to Lender at the end of each day during the period in question and by dividing such sum by the number of days in such period. Average Monthly Loan Balance - the amount obtained by adding the unpaid balance of Revolving Credit Loans owing by Borrower to Lender at the end of each day for each day during the month in question and by dividing such sum by the number of days in such month. Bank - Barclays Bank PLC. Base Rate - the rate of interest announced or quoted by Bank from time to time as its "base rate" for commercial loans, whether or not such rate is the lowest rate charged by said bank to its most preferred borrowers; and, if the base rate for commercial loans is discontinued by said bank as a standard, a comparable reference rate designated by said bank as a substitute therefor shall be the Base Rate. Borrower - Sepco Industries, Inc., a Texas corporation, and the surviving corporation of the mergers of SE&P into Borrower and DMS into Borrower; SE&P being the surviving corporation of the merger of Wesco into SE&P; and DMS being the surviving corporation of the merger of TLW into DMS. LOAN AND SECURITY AGREEMENT - Page 3 8 Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (a) Twenty Million Dollars ($20,000,000), minus the unpaid principal balance of the Term Loan at such date; or (b) an amount equal to: (i) 85% of the net amount of Eligible Accounts outstanding at such date (as determined by Lender in its sole discretion); PLUS (ii) the lesser of (A) Nine Million Dollars ($9,000,000) or (B) 50% of the value of Eligible Inventory (as determined by Lender in its sole discretion) at such date consisting of finished goods, calculated on the basis of the lower of cost or fair market value (as determined by Lender in its sole discretion) with the cost of finished goods calculated on a first-in, first-out basis; MINUS (subtract from the sum of clauses (i) and (ii) above) (iii) an amount equal to the sum of (A) the face amount of all LC Guaranties and Letters of Credit issued by Lender or Affiliates of Lender and outstanding at such date and (B) any amounts which Lender may be obligated to pay in the future for the account of Borrower pursuant to this Agreement, the Other Agreements or otherwise. For purposes hereof, the net amount of Eligible Accounts at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts, (which may, at Lender's option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time. Business Day - a day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of Texas or is a day on which banking institutions in such state are closed. Capital Expenditures - expenditures made and liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the direct or indirect acquisition of such assets by way of increased product or service charges, offset items or otherwise and the principal portion of payments with respect to capitalized lease obligations. LOAN AND SECURITY AGREEMENT - Page 4 9 Cash Flow - with respect to any fiscal period, means the Adjusted Net Earnings From Operations of Borrower for such period, plus non-cash charges in respect to depreciation and amortization for such period minus Capital Expenditures made during such period, minus scheduled principal payments on Indebtedness for such period. Closing Date - the date on which all of the conditions precedent in Section 10 are satisfied and the initial Loan is made hereunder. Code - the Uniform Commercial Code as adopted and in force in the State of Texas, as from time to time in effect. Collateral - all of the Property and interests in Property described in Section 4 hereof, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations. Commitment - Twenty Million Dollars ($20,000,000.00). Current Assets - at any date means the amount at which all of the current assets of a Person would be properly classified as current assets on a balance sheet at such date in accordance with GAAP except that amounts due from Affiliates and investments in Affiliates shall be excluded there from. Current Liabilities - at any date means the amount at which all of the current liabilities of a Person would be properly classified as current liabilities on a balance sheet at such date in accordance with GAAP excluding the Loans and current maturities of any long-term indebtedness. Default - an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. Default Rate - as defined in Section 3.1(A) of this Agreement. Distribution - in respect of any corporation means and_includes: (a) the payment of any dividends or other distributions on capital stock of the corporation (except distributions in such stock) and (b) the redemption or acquisition of Securities unless made contemporaneously from the net proceeds of the sale of Securities. Dominion Account - a special account of Borrower established by Borrower pursuant to this Agreement at a bank selected by Borrower, but acceptable to Lender, in its sole discretion, and over which Lender shall have sole and exclusive access and control for withdrawal purposes. Eligible Account - an Account arising in the ordinary course of Borrower's business from the sale of goods or rendition or services which Lender, in its credit judgment, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if: LOAN AND SECURITY AGREEMENT - Page 5 10 (a) it arises out of a sale made by Borrower to a Subsidiary or an Affiliate of Borrower or to a Person controlled by an Affiliate of Borrower; or (b) it is unpaid for more than 60 days after the original due date shown on the invoice; or (c) it is due or unpaid more than 90 days after the original invoice date; or (d) 20% or more of the Accounts from the Account Debtor are not deemed Eligible Accounts hereunder; or (e) the total unpaid Accounts of the Account Debtor exceed 25% of the net amount of all Accounts, to the extent of such excess; or (f) any covenant, representation or warranty contained in this Agreement with respect to such Account has been breached; or (g) the Account Debtor is also Borrower's creditor or supplier, or the Account Debtor has disputed liability with respect to such Account, or the Account Debtor has made any claim with respect to any other Account due from such Account Debtor to Borrower, or the Account otherwise is or may become subject to any right of setoff by the Account Debtor; or (h) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the premises in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or if the Account Debtor has ceased to be Solvent or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; or (i) it arises from a sale to an Account Debtor outside the United States; or (j) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; or (k) Lender in good faith believes that collection of such Account is insecure or that payment thereof is doubtful or will be delayed by reason of the Account Debtor's financial condition; or (l) the Account Debtor is the United States of America or any department, agency or instrumentality thereof; or LOAN AND SECURITY AGREEMENT - Page 6 11 (m) the Account Debtor is located in the State of New Jersey or Minnesota, unless Borrower has filed a Notice of Business Activities Report with the appropriate officials in those states for the then current year; or (n) the Account is subject to a Lien other than a Permitted Lien; or (o) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by Borrower and accepted by the Account Debtor or the Account otherwise does not represent a final sale; or (p) the total unpaid Accounts of the Account Debtor exceed a credit limit determined by Lender, to the extent such Account exceeds such limit; or (q) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; or (r) Borrower has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or (s) Borrower has made an agreement with the Account Debtor to extend the time of payment thereof; or (t) the Account arises from a retail sale of goods to a Person who is purchasing same primarily for personal, family or household purposes. Eligible Inventory - such Inventory of Borrower which Lender, in its credit judgment, deems to be Eligible Inventory. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory unless, in Lender's good faith opinion, it (a) is raw materials or finished goods, (b) is in good, new and saleable condition, (c) is not obsolete or unmerchantable, (d) has been owned by Borrower for not more than twelve months, (e) meets all standards imposed by any governmental agency or authority, (f) conforms in all respects to the warranties and representations set forth in Section 6.1 hereof, LOAN AND SECURITY AGREEMENT - Page 7 12 (g) is at all times subject to Lender's duly perfected, first priority security interest and no other Lien except a Permitted Lien, and (h) is situated at a location in compliance with Section 4.5 hereof and is not in transit. Environmental Laws - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to health, safety and environmental matters. Equipment - all machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles and other tangible personal Property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower or in which Borrower has an interest, whether now owned or hereafter acquired and wherever located, and all parts, accessories and special tools and all increases and accessions thereto and substitutions and replacements therefor. ERISA - the Employee Retirement Income Security Act of 1974, and all rules and regulations from time to time promulgated thereunder. Excess - as defined in Section 3.1(C) of this Agreement. Event of Default - as defined in Section 11.1 of this Agreement. GAAP - generally accepted accounting principles in the United States of America in effect from time to time. General Intangibles - all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, deposit accounts, inventions, designs, patents, patent applications, trademarks, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, tax refund claims, computer programs, all claims under guaranties, security interests or other security held by or granted to Borrower to secure payment of any of the Accounts by an Account Debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Accounts). Guarantors - David Little, Southern Engine & Pump Company (formerly known as Sepco Compression Services, Inc.), T.L. Walker Bearing Co. (formerly known as Sepco Power Products, Inc.) and any other Person who may hereafter guarantee payment or performance of the whole or any part of the Obligations. Guaranty Agreements - the Continuing Guaranty Agreements which are to be executed by Guarantors in form and substance satisfactory to Lender. LOAN AND SECURITY AGREEMENT - Page 8 13 Indebtedness - as applied to a Person means, without duplication (i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, capitalized lease obligations, (ii) all obligations of other Persons which such Person has guaranteed and (iii) in the case of Borrower (without duplication), the Obligations. Inventory - all of Borrower's inventory, whether now owned or hereafter acquired, and wherever located, including, but not limited to, all goods intended for sale or lease by Borrower, or for display or demonstration; all work in process; all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, printing, packing, shipping, advertising, selling, leasing or furnishing of such goods or otherwise used or consumed in Borrower's business; and all documents evidencing and General Intangibles relating to any of the foregoing. LC Guaranty - a guaranty executed by Lender at Borrower's request in favor of a Person who has issued a Letter of Credit. Letter of Credit - a letter of credit at any time issued for the account of Borrower. Leverage Ratio - at any date means the ratio of the Indebtedness of Borrower to Adjusted Tangible Net Worth of Borrower. Lien - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest, security title or lien arising from a security agreement, mortgage, deed of trust, deed to secure debt, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. Loan Account - the loan account established on the books of Lender pursuant to Section 2.4 of this Agreement. Loan Documents - this Agreement and the Other Agreements. Loans - all loans and advances made by Lender pursuant to this Agreement, including, without limitation, all Revolving Credit Loans and the Term Loan. Maximum Legal Rate - as defined in Section 3.1(B) of this Agreement. Mortgages - the mortgages and deeds of trust, and extension and modification agreements as required by Lender with respect to presently recorded mortgages and deeds of trust, to be executed by Borrower and/or Guarantor on or about the Closing Date in favor of Lender and by which Borrower and/or Guarantor shall grant and convey to Lender, as security for the Obligations, a first priority Lien upon all real Property of Borrower wherever located and that real Property described in Exhibit G hereto. LOAN AND SECURITY AGREEMENT - Page 9 14 Obligations - all Loans and all other advances, debts, liabilities, obligations, covenants and duties owing, arising, due or payable from Borrower to Lender of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under this Agreement or any of the Other Agreements or otherwise, whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorney's fees and any other sums chargeable to Borrower under this Agreement or any of the Other Agreements. Original Term - as defined in Section 3.3(A) of this Agreement. Other Agreements - any and all agreements, instruments and documents heretofore, now or hereafter executed by Borrower or Guarantors, as the case may be, and delivered to Lender in respect to the transactions contemplated by this Agreement, including, without limitation, the Term Note, the Shareholder Pledge Agreement, the Guaranty Agreements and the Mortgages. Overadvance - as defined in Section 2.1 of this Agreement. Participating Lender - each Person who shall be granted the right by Lender to participate in any of the Loans described in this Agreement and who shall have entered into a participation agreement in form and substance satisfactory to Lender. Permitted Liens - any Lien of a kind specified in subparagraphs (i) through (viii) of Section 9.2(E) of this Agreement. Person - an individual, partnership, corporation, joint stock company, trust or unincorporated organization, or a government or agency or political subdivision thereof. Plan - an employee benefit plan now or hereafter maintained for employees of Borrower that is covered by Title IV of ERISA. Prohibited Transaction - any transaction set forth in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986. Projections - Borrower's forecasted (a) balance sheets, (b) profit and loss statements, (c) cash flow statements, and (d) capitalization statements, all prepared on a consistent basis with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. Property - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Purchase Money Lien - a Lien upon fixed assets granted by Borrower to secure Indebtedness incurred by Borrower to purchase such fixed assets. LOAN AND SECURITY AGREEMENT - Page 10 15 Renewal Terms - as defined in Section 3.3(A) of this Agreement. Reportable Event - any of the events set forth in Section 4043(b) of ERISA. Restricted Investment - any investment in cash or by delivery of Property to any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following: (a) investments in one or more Subsidiaries of Borrower; (b) Property to be used in the ordinary course of business; (c) Current Assets arising from the sale of goods and services in the ordinary course of business of Borrower; (d) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; (e) investments in certificates of deposit maturing within one year from the date of acquisition issued by a bank or trust company organized under the laws of the United States or any state thereof having capital surplus and undivided profits aggregating at least $100,000,000; and (f) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof. Revolving Credit Loan - a Loan made by Lender as provided in Section 2.1 of this Agreement. Schedule of Accounts - as defined in Section 5.2 of this Agreement. Security - shall have the same meaning as in Section 2(l) of the Securities Act of 1933, as amended. Shareholder Pledge Agreement - the Pledge Agreement to be executed by Gary Allcorn, Trustee, in form and substance acceptable to Lender, by which Gary Allcorn, Trustee, grant to Lender a first priority security interest in and to approximately 53% of all of the common stock of Borrower. Solvent - as to any Person, such Person (a) owns Property whose fair saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (b) is able to pay all of its Indebtedness as such Indebtedness matures, and (c) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Subordinated Debt - Indebtedness of Borrower to whose existence Lender has consented in writing and that is subordinated to the Obligations pursuant to a written agreement acceptable to Lender in all respects as to both form and substance. Subsidiary - any corporation of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the voting Securities at the time of determination. LOAN AND SECURITY AGREEMENT - Page 11 16 Term Loan - the Loan described in Section 2.2 of this Agreement. Term Note - the Secured Promissory Note to be executed by Borrower on or about the Closing Date in favor of Lender to evidence the Term Loan, which shall be in the form of Exhibit A attached hereto. Working Capital - at any date means Current Assets minus Current Liabilities. 1.2. Accounting and Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP consistent with that applied in preparation of the financial statements referred to in Section 9.1(J), and all financial data pursuant to the Agreement shall be prepared in accordance with such principles. All other terms contained in this Agreement shall have, when the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein. 1.3. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of this Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any instruments or agreements, including, without limitation, references to this Agreement or any of the Other Agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. SECTION 2. CREDIT FACILITY 2.1. Revolving Credit Loans. Subject to the terms and conditions of this Agreement, Lender agrees to make Revolving Credit Loans to Borrower from time to time, in amounts determined by Lender in its sole discretion, up to a maximum principal amount at any time outstanding equal to the Borrowing Base at such time. If the unpaid balance of the Revolving Credit Loans should exceed the Borrowing Base or any other limitation set forth in this Agreement, such Revolving Credit Loans shall nevertheless constitute Obligations that are secured by the Collateral and entitled to all benefits thereof. Insofar as Borrower may request and Lender may be willing in its sole and absolute discretion to make Revolving Credit Loans to Borrower at a time when the unpaid balance of Revolving Credit Loans exceeds, or would exceed with the making of any such Revolving Credit Loan, the Borrowing Base (any such Loan or Loans being herein referred to individually as an "Overadvance" and collectively as "Overadvances"), Lender shall enter such Overadvances as debits in the Loan Account. All Overadvances shall be payable ON DEMAND, shall be secured by the Collateral and shall bear interest as provided herein for Revolving Credit Loans generally. The Revolving Credit Loans shall be used solely for the satisfaction of existing Indebtedness of Borrower to and for Borrower's general operating capital needs to the extent not inconsistent with the provisions of this Agreement. LOAN AND SECURITY AGREEMENT - Page 12 17 2.2. Term Loan. Subject to the terms and conditions of this Agreement, Lender agrees to make a term loan to Borrower in the principal amount of $1,329,277.37. The Term Loan shall be repayable in accordance with the terms of the Term Note and shall be secured by the Collateral. The proceeds of the Term Loan shall be used by Borrower for the purpose of consolidating and refinancing, in Borrower's name, (a) that certain promissory note in the original principal sum of $2,000,000, executed by SE&P, payable to the order of Lender, the proceeds of which were used by SE&P for paying for costs associated with SE&P's building expansion project in New Orleans, Louisiana and for working capital purposes, and (b) that certain promissory note in the original principal sum of $500,000, executed by TLW, payable to the order of Lender, the proceeds of which were used by TLW for the purpose of refinancing existing term indebtedness owing to Marine Midland Business Credit, Inc., First National Bank of Livingston, Texas and certain other lenders or to provide working capital for TLW in the ordinary course of business. If Borrower sells any of the Equipment or real Property, or if any of the Collateral is taken by condemnation, Borrower shall pay to Lender, unless otherwise agreed by Lender, as and when received by Borrower and as a mandatory prepayment of the Term Loan (or, at Lender's option, such of the other Obligations as Lender may elect), a sum equal to the proceeds received by Borrower from such sale or condemnation less any state or federal income tax directly attributable thereto. 2.3. All Loans to Constitute One Obligation. All Loans shall constitute one general obligation of Borrower, and shall be secured by Lender's security interest in and Lien upon all of the Collateral, and by all other security interests and Liens heretofore, now or at any time or times hereafter granted by Borrower to Lender. 2.4. Loan Account. Lender shall enter all Loans as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrower on any Obligations and all proceeds of Collateral which are finally paid to Lender, and may record therein, in accordance with customary accounting practice, all charges and expenses properly chargeable to Borrower and any other Obligation. SECTION 3. INTEREST, FEES, TERM AND REPAYMENT 3.1. Interest and Charges. (A) Interest shall accrue on the Term Loan in accordance with the terms of the Term Note and, subject to Section 3.1(F), shall accrue on the principal amount of the Revolving Credit Loans outstanding at the end of each day at the lesser of (i) a fluctuating rate per annum equal to the Applicable Margin (determined in accordance with Section 3.1(F) hereof) above the Base Rate (the "Annual Rate") or (ii) the Maximum Legal Rate. After the date hereof, the Annual Rate shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Base Rate becomes effective. The Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the date hereof, but if this Agreement is executed on a day that is not a Business Day, the Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the last LOAN AND SECURITY AGREEMENT - Page 13 18 Business Day immediately preceding the date hereof. Interest shall be calculated on a daily basis (computed on the actual number of days elapsed over a year of 360 days), commencing on the date hereof, and shall be payable monthly, in arrears, on the first day of each month; provided, however, that interest at the Maximum Legal Rate shall be computed on the actual number of days elapsed over a year of 365 or 366 days, as the case may be. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of the Obligations shall bear interest at the lesser of (i) the Maximum Legal Rate or (ii) a fluctuating rate per annum, calculated daily (computed on the actual days elapsed over a year of 360 days), equal to 4.0% above the Base Rate (the "Default Rate"). (B) Notwithstanding the foregoing or any other provision in this Agreement, (i) if at any time the amount of interest computed on the basis of the Annual Rate or the Default Rate would exceed the amount of such interest computed upon the basis of the maximum rate of interest permitted by applicable state or federal law in effect from time to time hereafter (the "Maximum Legal Rate"), the interest payable under this Agreement shall be computed upon the basis of the Maximum Legal Rate, but any subsequent reduction in the Annual Rate or Default Rate, as applicable, shall not reduce such interest thereafter payable hereunder below the amount computed on the basis of the Maximum Legal Rate until the aggregate amount of such interest accrued and payable under this Agreement equals the total amount of interest which would have accrued if such interest had been at all times computed solely on the basis of the Annual Rate or Default Rate, as applicable; and (ii) unless preempted by federal law, the Annual Rate or Default Rate, as applicable, from time to time in effect hereunder may not exceed the "indicated ceiling rate" from time to time in effect under Tex. Rev. Civ. Stat. Ann. art 5069-1.04(c) (Vernon 1987). (C) No agreements, conditions, provisions or stipulations contained in this Agreement or any other instrument, document or agreement between Borrower and Lender or default of Borrower, or the exercise by Lender of the right to accelerate the payment of the maturity of principal and interest, or to exercise any option whatsoever contained in this Agreement or any other agreement between Borrower and Lender, or the arising of any contingency whatsoever, shall entitle Lender to contract for, charge, or receive, in any event, interest exceeding the Maximum Legal Rate. In no event shall Borrower be obligated to pay interest exceeding such Maximum Legal Rate and all agreements, conditions or stipulations, if any, which may in any event or contingency whatsoever operate to bind, obligate or compel Borrower to pay a rate of interest exceeding the Maximum Legal Rate, shall be without binding force or effect, at law or in equity, to the extent only of the excess of interest over such Maximum Legal Rate. In the event any interest is contracted for, charged or received in excess of the Maximum Legal Rate ("Excess"), Borrower acknowledges and stipulates that any such contract, charge, or receipt shall be the result of an accident and bona fide error, and that any Excess received by Lender shall be applied, first, to reduce the principal then unpaid hereunder; second, to reduce the other Obligations; and third, returned to Borrower, it being the intention of the parties hereto not to enter at any time into a usurious or otherwise illegal relationship. Borrower recognizes that, with fluctuations in the Base Rate and the Maximum Legal Rate, such a result could inadvertently occur. By the execution of this Agreement, Borrower covenants that (i) the credit or return of any Excess shall constitute the acceptance by Borrower of such Excess, and (ii) Borrower shall not seek or pursue any other remedy, legal or equitable, against Lender, LOAN AND SECURITY AGREEMENT - Page 14 19 based in whole or in part upon contracting for, charging or receiving of any interest in excess of the maximum authorized by applicable law. For the purpose of determining whether or not any Excess has been contracted for, charged or received by Lender, all interest at any time contracted for, charged or received by Lender in connection with this Agreement shall be amortized, prorated, allocated and spread in equal parts during the entire term of this Agreement. (D) The provisions of Section 3.1(C) shall be deemed to be incorporated into every document or communication relating to the Obligations which sets forth or prescribes any account, right or claim or alleged account, right or claim of Lender with respect to Borrower (or any other obligor in respect of Obligations), whether or not any provision of Section 3.1 is referred to therein. All such documents and communications and all figures set forth therein shall, for the sole purpose of computing the extent of the Obligations and obligations of the Borrower (or other obligor) asserted by Lender thereunder, be automatically recomputed by Borrower or obligor, and by any court considering the same, to give effect to the adjustments or credits required by Section 3.1(C). (E) If the applicable state or federal law is amended in the future to allow a greater rate of interest to be charged under this Agreement or the Other Agreements than is presently allowed by applicable state or federal law, then the limitation of interest hereunder shall be increased to the maximum rate of interest allowed by applicable state or federal law as amended, which increase shall be effective hereunder on the effective date of such amendment, and all interest charges owing to Lender by reason thereof shall be payable upon demand. (F) "Applicable Margin" initially shall mean 1.00%. Thereafter, the Applicable Margin shall be adjusted upward on a monthly basis as follows: (i) Commencing with June, 1994, if the Average Daily Availability is $1,500,000 or less for any month (the "Test Month"), the Applicable Margin for the month immediately succeeding the Test Month will equal 1.75%; and (ii) Commencing with June, 1994, if the Average Daily Availability is less than $2,000,000 but greater than $1,500,000 for any Test Month, the Applicable Margin for the month immediately succeeding the Test Month will equal 1.50%. 3.2. Unused Facility Fee. From the date hereof, Borrower agrees to pay to Lender a quarterly unused facility fee, equal to one-quarter percent (0.25%) per annum of the average daily unused portion of the Commitment, payable quarterly in arrears, the first payment being due on July l, 1994 and continuing on the first day of each July, October, January and April thereafter during the term of this Agreement and upon the termination hereof. The first payment due on July 1, 1994 shall include also payment to Lender of the unused facility fees, if any, that accrued pursuant to the terms of the Prior Restated SE&P Loan Agreement and the Prior TLW Loan Agreement during the period beginning April 1, 1994 and ending May 31, 1994. LOAN AND SECURITY AGREEMENT - Page 15 20 3.3. Term of Agreement; Termination. (A) Subject to Lender's right to cease making Loans to Borrower at any time upon or after the occurrence of a default or an Event of Default, the provisions of this Agreement shall be in effect for a period from the date hereof, through and including January 2, 1997 (the "Original Term"). Upon written request by Borrower, Lender may, in its sole and absolute discretion, renew this Agreement for any number of successive one year periods thereafter (a "Renewal Term"), but Lender shall have no obligation to do so. (B) Upon at least 90 days prior written notice to Lender, Borrower may, at its option, terminate this Agreement; provided, however, no such termination shall be effective until Borrower has paid all of the Obligations in immediately available funds. It is understood that Borrower may elect to terminate this Agreement in its entirety only; no section or lending facility may be terminated singly. (C) At the effective date of any such termination by Borrower, Borrower shall pay to Lender (in addition to the then outstanding principal, accrued interest and other charges owing under this Agreement and any of the Other Agreements), as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to 0.5% of the highest of the Average Monthly Loan Balances outstanding pursuant to Section 2.1 during the twelve month period ending on the date of termination if termination occurs at any time prior to January 2, 1997 or during any Renewal Term thereafter. If termination occurs on the last day of the Original Term or the last day of any Renewal Term, no termination charge shall be payable. (D) All of the Obligations shall be forthwith due and payable upon any termination of this Agreement. Except as otherwise expressly provided in this Agreement or any of the Other Agreements, no termination or cancellation (regardless of cause or procedure) of this Agreement or any of the Other Agreements shall in any way affect or impair the rights, powers or privileges of Lender or the obligations or liabilities of Borrower in any way relating to (i) any transaction or event occurring prior to such termination or cancellation or (ii) any of the undertakings, agreements, covenants, warranties or representations of Borrower contained in this Agreement or any of the Other Agreements. All such undertakings, agreements, covenants, warranties and representations of Borrower shall survive such termination or cancellation, and, notwithstanding such termination or cancellation, Lender shall retain its Liens in the Collateral and all of its rights and remedies under this Agreement and the Other Agreements until Borrower has paid the Obligations to Lender, in full, in immediately available funds. 3.4. Payments. Principal and interest on the Term Loan shall be payable as provided in the Term Note. Except where evidenced by notes or other instruments issued or made by Borrower to Lender specifically containing payment provisions which are in conflict with this Section 3.4 (in which event the conflicting provisions of said notes or other instruments shall govern and control), the Obligations shall be payable as follows: (A) Principal payable on account of Revolving Credit Loans made by Lender to Borrower, shall be payable by Borrower to Lender immediately upon the earliest of (i) the LOAN AND SECURITY AGREEMENT - Page 16 21 receipt by Lender or Borrower of any proceeds of any of the Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement; provided, however, that if the principal balance of Revolving Credit Loans outstanding at any time shall exceed the Borrowing Base at such time, Borrower shall, on demand, repay the Revolving Credit Loans in an amount sufficient to reduce the aggregate unpaid principal amount of such Revolving Credit Loans by an amount equal to such excess. (B) Interest accrued on the Obligations shall be due on the earliest of (i) the first day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement; provided, however, that Borrower hereby irrevocably authorizes Lender, in Lender's sole discretion, to advance to Borrower, and to charge to the Loan Account hereunder as a Revolving Credit Loan, a sum sufficient each month to pay all interest accrued on the Obligations during the immediately preceding month. (C) The balance of the Obligations requiring the payment of money, if any, shall be payable by Borrower to Lender as and when provided in this Agreement or the Other Agreements, or on demand, whichever is earlier. (D) All proceeds (less income taxes directly attributable to such sale), up to a maximum amount of $300,000, received by Borrower from the sale of its Metairie, Louisiana facility located at 1119 Central Avenue, Metairie, Louisiana shall be applied as a pre-payment of installments of principal on the Term Note in inverse order of maturity; such prepayments will not be subject to any prepayment penalty. 3.5. Application of Payments and Collections. Borrower irrevocably waives the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of Borrower, and Borrower does hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lender or its agent against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. If as the result of collections of Accounts as authorized by Section 5.4 hereof a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrower, but shall be available to Borrower at any time or times for so long as no Default or Event of Default exists. In no event shall such credit balance be applied or be deemed to have been applied as a prepayment of the Term Loan unless so requested by Borrower, but Lender may offset such credit against the Obligations upon or after the occurrence of any Event of Default. 3.6. Statements of Account. Lender will account to Borrower monthly with a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Lender shall be deemed final, binding and conclusive upon Borrower unless Lender is notified by Borrower in writing to the contrary within 30 days of the date each account is LOAN AND SECURITY AGREEMENT - Page 17 22 mailed to Borrower. Such notice shall only be deemed an objection to those items specifically objected to therein. SECTION 4. COLLATERAL: GENERAL TERMS 4.1. Security Interest in Collateral. To secure the prompt payment and performance to Lender of the Obligations, Borrower hereby grants to Lender a continuing security interest in and Lien upon all of the Property and interests in Property of Borrower, whether now owned or existing or hereafter created, acquired or arising and wheresoever located including, without limitation, the following: (A) Accounts; (B) Inventory; (C) Equipment; (D) General Intangibles; (E) all monies and other Property of any kind, now or at any time or times hereafter, in the possession or under the control of Lender or a bailee of Lender; (F) all accessions to, substitutions for and all replacements, products and cash and non-cash proceeds of (A), (B), (C), (D) and (E) above, including, without limitation, Proceeds of and unearned premiums with respect to insurance Policies insuring any of the Collateral; and (G) all books and records (including, without limitation, customer lists, credit files, computer programs, print-outs, and other computer materials and records) of Borrower pertaining to any of (A), (B), (C), (D), (E) or (F) above. 4.2. Lien on Realty. The due and punctual payment and performance of the Obligations shall also be secured by the Lien created by the Mortgages upon all real Property of Borrower described therein. Borrower shall deliver to Lender, at Borrower's expense, mortgagee title insurance policies issued by a title insurance company satisfactory to Lender insuring Lender as mortgagee; such policies shall be in form and substance satisfactory to Lender and shall insure a valid first Lien in favor of Lender on the Property covered thereby, subject only to those exceptions acceptable to Lender and its counsel. Borrower shall deliver to Lender such other documents, including, without limitation, as-built survey prints of the real Property, as Lender and its counsel may reasonably request relating to the real Property subject to the Mortgage. 4.3. Pledge of Note. The due and punctual payment and performance of the Obligations shall also be secured by the pledge and security interest created by the Pledge of Note, dated as of December 2, 1992, covering that certain promissory note in the principal LOAN AND SECURITY AGREEMENT - Page 18 23 amount of $290,000.00, executed by Independent Supply, Inc., payable to the order of Bearer. Borrower shall deliver to Lender the original of the note, together with such other documents as Lender and its counsel may reasonably request relating to the note. 4.4. Lien Perfection. Borrower agrees to execute the UCC-l financing statements provided for by the Code or otherwise together with any and all other instruments, assignments or documents and shall take such other action as may be reasonably required to perfect or to continue the perfection of Lender's security interest in the Collateral as a first priority Lien subject to Permitted Liens only. Unless prohibited by applicable law, Borrower hereby authorizes Lender to execute and file any such financing statement on Borrower's behalf. The parties agree that a carbon, Photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. 4.5. Location of Collateral. All Collateral, other than Inventory in transit, will at all times be kept by Borrower at one or more of the business locations set forth in Exhibit B and shall not, without the prior written approval of Lender, be moved therefrom except, prior to an Event of Default, for sales of Inventory in the ordinary course of business and dispositions of Equipment that are authorized by Section 7.2 hereof. 4.6. Insurance of Collateral. Borrower agrees to maintain and pay for insurance upon all Collateral wherever located, in storage or in transit in vehicles, including goods evidenced by documents, covering casualty, hazard, public liability and such other risks and in such amounts and with such insurance companies as shall be reasonably satisfactory to Lender to insure Lender's interest in the Collateral. Borrower shall deliver the originals of such policies to Lender with satisfactory endorsements naming Lender as loss payee and as mortgagee pursuant to a standard mortgagee clause. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever and a clause that the interest of Lender shall not be impaired or invalidated by any act or neglect of Borrower or owner of the Property nor by the occupation of the premises for purposes more hazardous than are permitted by said policy. If Borrower fails to provide and pay for such insurance, Lender may, at Borrower's expense, procure the same, but shall not be required to do so. Borrower agrees to deliver to Lender, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. 4.7. Protection of Collateral. All insurance expenses and all expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, any and all taxes imposed by any governmental authority on any Collateral or in respect of the sale thereof shall be borne and paid by Borrower. If Borrower fails to promptly pay any portion thereof when due, Lender may, at its option, but shall not be required to, pay the same and charge the Loan Account therefor. Borrower agrees to reimburse Lender promptly therefor with interest accruing thereon daily at the Default Rate. All sums so paid or incurred by Lender for any of the foregoing and all reasonable costs and expenses (including reasonable attorneys' fees, legal expenses, and court costs) which Lender may incur in enforcing or protecting its Lien on or rights and interest in the Collateral or any of its rights or remedies, together with interest at the LOAN AND SECURITY AGREEMENT - Page 19 24 Default Rate, shall be considered Obligations hereunder secured by all Collateral. Lender shall not be liable or responsible in any way for the safekeeping of any Collateral or for any loss or damage thereto (except for reasonable care in the custody thereof while any Collateral is in Lender's actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other person whomsoever, but the same shall be at Borrower's sole risk. SECTION 5. PROVISIONS RELATING TO ACCOUNTS 5.1. Representations, Warranties and Covenants. With respect to all Accounts, Borrower represents and warrants to Lender that Lender may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrower with respect to any Account or Accounts, and, unless otherwise indicated in writing to Lender, that with respect to each Account: it is genuine and in all respects what it purports to be, and it is not evidenced by a judgment; it arises out of a completed, bona fide sale and delivery of goods or rendition of services by Borrower in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts or other documents relating thereto and forming a part of the contract between Borrower and the Account Debtor; it is for a liquidated amount maturing as stated in the duplicate invoice covering such sale or rendition of services; such Account, and Lender's security interest therein, is not, and will not be in the future, subject to any offset, Lien, deduction, defense, dispute, counterclaim or any other adverse condition except for disputes resulting in returned goods where the amount in controversy is deemed by Lender to be immaterial, and each such Account is absolutely owing to Borrower and is not contingent in any respect or for any reason; Borrower has made no agreement with any Account Debtor thereunder for any deduction therefrom, except discounts or allowances which are granted by Borrower in the ordinary course of its business for prompt payment and which are reflected in the calculation of the net amount of each respective invoice related thereto; there are no facts, events or occurrences which in any way impair the validity or enforceability thereof or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered to Lender with respect thereto; to the best of Borrower's knowledge, the Account Debtor thereunder is Solvent and, at the time any contract or other document giving rise to the Account was executed, such Account Debtor had the capacity to contract; and Borrower has no knowledge of any fact or circumstance which would impair the validity or collectibility of such Account. 5.2. Assignments, Records and Schedules of Accounts. If requested to do so by Lender, Borrower shall execute and deliver to Lender formal written assignments of all of its Accounts weekly (or, if requested by Lender, daily), together with copies of invoices or invoice registers related thereto. Borrower shall keep accurate and complete records of its Accounts and all payments and collections thereon and shall submit to Lender on a daily basis a sales and collections report for the preceding day, in form satisfactory to Lender. On or before the fifteenth day of each month from and after the date hereof, Borrower shall deliver to Lender, in form satisfactory to Lender, a detailed aged trial balance of all Accounts existing as of the last day of the preceding month, specifying the names, addresses, face value, dates of invoices and due dates for each Account Debtor obligated on an Account so listed ("Schedule of Accounts"), LOAN AND SECURITY AGREEMENT - Page 20 25 and, upon Lender's request therefor, copies of proof of delivery and the original copy of all documents, including, without limitation, repayment histories and present status reports relating to the Accounts so scheduled and such other matters and information relating to the status of then existing Accounts as Lender shall reasonably request. If any amounts due and owing in excess of $50,000 are in dispute between Borrower and any Account Debtor, Borrower shall provide Lender with written notice thereof at the time of submission of the next Schedule of Accounts, explaining in detail the reason for the dispute, all claims related thereto and the amount in controversy. 5.3. Administration of Accounts. Upon the granting of any discounts, allowances or credits by Borrower that are not shown on the face of the invoice for the Account involved, Borrower shall promptly report such discounts, allowances or credits, as the case may be, to Lender and in no event later than the time of its submission to Lender of the next Schedule of Accounts as provided in Section 5.2. If an Account includes a charge for any tax payable to any governmental taxing authority, Lender is authorized, in its sole discretion, to pay the amount thereof to the proper taxing authority for the account of Borrower and to charge the Loan Account therefor. Whether or not a Default or an Event of Default has occurred, Lender shall have the right, at any time or times hereafter, in the name of Lender, any designee of Lender or Borrower, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, telegraph or otherwise. Borrower shall cooperate fully with Lender in an effort to facilitate and promptly conclude any such verification process. 5.4. Collection of Accounts. To expedite collection, Borrower shall endeavor in the first instance to make collection of its Accounts for Lender. All remittances received by Borrower on account of Accounts shall be held as Lender's property by Borrower as trustee of an express trust for Lender's benefit and Borrower shall immediately deposit same in the Dominion Account. After the occurrence of an Event of Default, Lender shall have the right to notify Account Debtors that Accounts have been assigned to Lender and to collect Accounts directly in its own name and to charge the collection costs and expenses, including reasonable attorneys' fees, to Borrower. Lender has no duty to protect, insure, collect or realize upon the Accounts or preserve rights in them. For the purpose of computing interest hereunder, all items of payment received by Lender shall be deemed applied by Lender on account of the Obligations on the first Business Day after Lender's receipt of payment in Chicago, Illinois, in immediately available funds. SECTION 6. PROVISIONS RELATING TO INVENTORY 6.1. Representations, Warranties and Covenants. With respect to Inventory, Borrower represents and warrants to Lender that Lender may rely, in determining which items of Inventory constitute Eligible Inventory, on all statements and representations made by Borrower with respect to any Inventory and that: All Inventory is presently and will continue to be located at Borrower's places of business listed on Exhibit B and will not be removed therefrom except as authorized by Section 4.4 of this Agreement; no Inventory is now, nor shall any Inventory at any time or times hereafter be, stored with a bailee, warehouseman or similar party without Lender's prior written consent; no Inventory is or will be consigned to any Person without Lender's prior LOAN AND SECURITY AGREEMENT - Page 21 26 written consent; and no Inventory is or will be produced in violation of the Fair Labor Standards Act. 6.2. Inventory Reports. Borrower agrees to furnish Lender with Inventory reports at such times as Lender may request, but at least once each month. Such reports shall be in form and detail satisfactory to Lender. Borrower shall conduct a physical inventory no less frequently than annually and shall provide to Lender a report based on each such physical inventory promptly thereafter, together with such supporting information as Lender shall in its discretion request. 6.3. Returns of Inventory. If at any time or times hereafter any Account Debtor returns any Inventory to Borrower the shipment of which generated an Account on which such Account Debtor is obligated in excess of $20,000, Borrower shall notify Lender of the same immediately, specifying the reason for such return and the location and condition of the returned Inventory. SECTION 7. PROVISIONS RELATING TO EQUIPMENT 7.1. Representations, Warranties and Covenants. With respect to the Equipment, Borrower represents, warrants and covenants to and with Lender that the Equipment is in good operating condition and repair, and all necessary replacements of and repairs thereto shall be made so that the value and operating efficiency of the Equipment shall be maintained and preserved, reasonable wear and tear excepted. Borrower will not permit any of the Equipment to become affixed to any real Property leased to Borrower so that an interest arises therein under the real estate laws of the applicable jurisdiction unless the landlord of such real Property has executed a landlord waiver or leasehold mortgage in favor of Lender, and Borrower will not permit any of the Equipment to become an accession to any personal Property other than Equipment subject to first priority Liens in favor of Lender or subject to Permitted Liens. Immediately on request therefor by Lender, Borrower shall deliver to Lender any and all evidence of ownership, if any, of any of the Equipment (including, without limitation, certificates of title and applications for title). Borrower shall maintain accurate records itemizing and describing the kind, type, quality, quantity and value of its Equipment and all dispositions made in accordance with Section 7.2 hereof, and shall furnish Lender with a current schedule containing the foregoing information on at least an annual basis and more often if requested by Lender. 7.2. Dispositions of Equipment. Borrower will not sell, lease or otherwise dispose of or transfer any of the Equipment or any part thereof without the prior written consent of Lender; provided, however, that the foregoing restriction shall not apply, for so long as no Default or Event of Default exists, to (A) dispositions of Equipment which, in the aggregate during any consecutive twelve-month period, has a fair market value or book value, whichever is less, of $150,000 or less, provided that all proceeds thereof are turned over to Lender, or (B) replacements of Equipment that is substantially worn, damaged or obsolete with Equipment of like kind, function and value, provided that the replacement Equipment shall be acquired prior to or concurrently with any disposition of the Equipment that is to be replaced, the replacement LOAN AND SECURITY AGREEMENT - Page 22 27 Equipment shall be free and clear of Liens other than Permitted Liens, Borrower shall give Lender at least five days prior written notice of such disposition and Borrower shall turn over to Lender all proceeds realized from any such disposition. SECTION 8. REPRESENTATIONS AND WARRANTIES 8.1. General Representations and Warranties. To induce Lender to enter into this Agreement and to make advances hereunder, Borrower warrants, represents and covenants to Lender as follows: (A) Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas; has duly qualified and is authorized to do business and is in good standing as a foreign corporation in all states and jurisdictions where the character of its Properties or the nature of its activities make such qualification necessary; and has not been known as or used any corporate, fictitious or trade names in the past seven years except as disclosed on Exhibit C attached hereto and made a part hereof. (B) Borrower has the right and power and is duly authorized to enter into, deliver and perform this Agreement and each of the Other Agreements to which it is a party, and this Agreement is, and each of the Other Agreements when delivered under this Agreement will be, a legal, valid and binding obligation of Borrower enforceable against it in accordance with their respective terms. (C) Borrower is not engaged principally, or as one of its important activities, in the business of purchasing or carrying "margin stock" (within the meaning of Regulation G or U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loans to Borrower will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock, or be used for any purpose which violates or is inconsistent with the provisions of Regulations G, T, U or X of said Board of Governors. (D) Borrower has, and is in good standing with respect to, all governmental consents, approvals, authorizations, permits, certificates, inspections, and franchises which materially affect its ability to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Properties as now owned or leased by it. (E) Borrower owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of its business without any known conflict with the rights of others. (F) Except as set forth on Exhibit D attached hereto and made a part hereof, there are no actions, suits, proceedings or investigations pending, or to the knowledge of Borrower, threatened, against or affecting Borrower or any of its Properties in any court or before any governmental authority or arbitration board or tribunal, and no action, suit, proceeding or investigation shown on Exhibit D involves the possibility of materially and adversely affecting LOAN AND SECURITY AGREEMENT - Page 23 28 the Properties or condition (financial or otherwise) of Borrower or the ability of Borrower to perform this Agreement. (G) Borrower has good, indefeasible and marketable title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its real Property, and good title to all of its other Property, in each case, free and clear of all Liens except Permitted Liens. (H) The balance sheet of Borrower and such other Persons described therein as of March 31, 1994, and the related statements of income, for the periods ended on such dates, have been prepared, to the best of Borrower's knowledge, in accordance with GAAP (except for changes in application in which Borrower's independent certified public accountants concur), and present fairly the financial positions of Borrower at such dates and the results of Borrower's operations for such periods. Since March 31, 1994, there has been no material change in the condition, financial or otherwise, of Borrower and such other Persons as shown on the balance sheet as of such date and no change in the aggregate value of Equipment and real Property owned by Borrower or such other Persons, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. The fiscal year of Borrower for accounting purposes ends on December 31 of each year. (I) There is no fact which Borrower has failed to disclose to Lender in writing which materially affects adversely or, so far as Borrower can now foresee, will materially affect adversely the Properties, business, prospects, profits, or condition (financial or otherwise) of Borrower or the ability of Borrower to perform this Agreement. (J) Borrower has not received any notice to the effect that it is not in full compliance with any of the requirements of ERISA and the regulations promulgated thereunder. No fact or situation that could result in a material adverse change in the financial condition of Borrower (including, but not limited to, any Reportable Event or Prohibited Transaction) exists in connection with any Plan. Borrower has no withdrawal liability in connection with a Multi-Employer Plan. (K) Borrower has filed all federal, state and local tax returns and other reports it is required by law to file and has paid, or made provision for the payment of, all taxes, assessments, fees and other governmental charges that are due and payable. (L) Borrower has duly complied with, and its Properties, business operations and leaseholds are in compliance in all material respects with, the provisions of all federal, state and local laws, rules and regulations applicable to Borrower, its Properties or the conduct of its business. (M) No Default or Event of Default will exist or result from the execution and delivery of this Agreement or Borrower's performance hereunder. (N) There are no claims for brokerage commissions, finder's fees or investment banking fees in connection with the transactions contemplated by this Agreement. LOAN AND SECURITY AGREEMENT - Page 24 29 8.2. Reaffirmation and Survival of Representations. Each request for a Loan made by Borrower pursuant to this Agreement or any of the Other Agreements shall constitute (A) an automatic representation and warranty by Borrower to Lender that there does not then exist any Default or Event of Default, and (B) a reaffirmation as of the date of said request of all of the representations and warranties of Borrower contained in this Agreement and the Other Agreements are true in all material respects, except for any changes in the nature of Borrower's business or operations that would render the information contained in any exhibit hereto either materially inaccurate or materially incomplete, so long as Lender has consented to such changes or such changes are expressly permitted by this Agreement. Borrower covenants, warrants and represents to Lender that all representations and warranties of Borrower contained in this Agreement or any of the Other Agreements shall be true at the time of Borrower's execution of this Agreement and the Other Agreements, and shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 9. COVENANTS AND CONTINUING AGREEMENTS 9.1. Affirmative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: (A) Pay and discharge all taxes, assessments and governmental charges upon it, its income and Properties as and when such taxes, assessments and charges are due and payable, except and to the extent only that such taxes, assessments and charges are being actively contested in good faith and by appropriate proceedings, Borrower maintains adequate reserves on its books there for and the nonpayment of such taxes does not result in a Lien upon any Properties or Borrower other than a Permitted Lien. Borrower shall also pay and discharge any lawful claims which, if unpaid, might become a Lien against any of Borrower's Properties except for Permitted Liens. (B) File all federal, state and local tax returns and other reports Borrower is required by law to file and maintain adequate reserves for the payment of all taxes, assessments, governmental charges, and levies imposed upon it, its income, or its profits, or upon any Property belonging to it. (C) Pay to Lender, on demand, any and all fees, costs or expenses which Lender pays to a bank or other similar institution (including, without limitation, any reasonable fees paid by Lender to any Participating Lender) arising out of or in connection with (i) the forwarding to Borrower or any other Person on behalf of Borrower, by Lender of proceeds of loans made by Lender to Borrower pursuant to this Agreement and (ii) the depositing for collection, by Lender, of any check or item of payment received or delivered to Lender on account of the Obligations. LOAN AND SECURITY AGREEMENT - Page 25 30 (D) Preserve and maintain its separate corporate existence and all rights, privileges, and franchises in connection therewith, and maintain its qualification and good standing in all states in which such qualification is necessary. (E) Maintain its Properties in good condition and make all necessary renewals, repairs, replacements, additions and improvements thereto. (F) Comply with all laws, ordinances, governmental rules and regulations to which it is subject, and obtain and keep in force any and all licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, which violation or failure to obtain might materially and adversely affect the Properties or condition (financial or otherwise) of Borrower. (G) (i) At all times make prompt payment of contributions required to meet the minimum funding standards set forth in ERISA with respect to each Plan; (ii) promptly after the filing thereof, furnish to Lender copies of any annual report required to be filed pursuant to ERISA in connection with each Plan and any other employee benefit plan of it and its Affiliates subject to said Section; (iii) notify Lender as soon as practicable of any Reportable Event and of any additional act or condition arising in connection with any Plan which Borrower believes might constitute grounds for the termination thereof by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States district court of a trustee to administer the Plan; and (iv) furnish to Lender, promptly upon Lender's request therefor, such additional information concerning any Plan or any other such employee benefit plan as may be reasonably requested. (H) Keep adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP (to the best of Borrower's knowledge) reflecting all its financial transactions. (I) Permit representatives of Lender, from time to time, as often as may be reasonably requested, but only during normal business hours, to visit and inspect the Properties of Borrower, inspect and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, Borrower's business, assets, liabilities, financial condition, business prospects and results of operations. (J) Cause to be prepared and furnished to Lender the following (all to be kept and prepared in accordance with GAAP applied on a consistent basis, unless Borrower's certified public accountants concur in any change therein and such change is disclosed to Lender and are consistent with GAAP): (i) as soon as possible, but not later than 90 days after the close of each fiscal year of Borrower, unqualified audited financial statements of Borrower as of the end of such year, certified as to the statements by a firm of independent certified public accountants of recognized standing selected by Borrower but acceptable to Lender (except for a qualification for a change in accounting principles with which such accounting firm concurs) and an unaudited financial statement of Borrower, certified by the principal financial officer of Borrower as prepared in accordance with GAAP to the best of his knowledge and fairly presenting the LOAN AND SECURITY AGREEMENT - Page 26 31 financial position and results of operations of Borrower for such year; and (ii) as soon as possible, but not later than 30 days after the end of each month hereafter, unaudited interim financial statements of Borrower as of the end of such month and of the portion of Borrower's fiscal year then elapsed, certified by the principal financial officer of Borrower as prepared in accordance with GAAP to the best of his knowledge, and fairly presenting the financial position and results of operations of Borrower for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes. Concurrently with the delivery of the financial statements described in clause (i) of this Section 9.1(J), Borrower shall forward to Lender a copy of the accountants' letter to Borrower's management that is prepared in connection with such financial statements and also shall cause to be prepared and furnish to Lender a certificate of the aforesaid certified public accountants certifying to Lender that, based upon their examination of the financial statements of Borrower performed in connection with their examination of said financial statements, they are not aware of any Default or Event of Default, or, if they are aware of such Default or Event of Default, specifying the nature thereof. Concurrently with the delivery of the financial statements described in clauses (i) and (ii) of this Section 9.1(J), Borrower shall cause to be prepared and furnished to Lender a certificate from the chief financial officer of Borrower certifying to Lender that to the best of his knowledge, Borrower has kept, observed, performed and fulfilled each and every covenant, obligation and agreement binding upon Borrower in this Agreement and the Other Agreements and that no Default or Event of Default has occurred, or, if such Default or Event of Default has occurred, specifying the nature thereof. (K) At Lender's request, promptly execute or cause to be executed and deliver to Lender any and all documents, instruments and agreements reasonably deemed necessary by Lender to perfect or to continue the perfection of Lender's Liens as first priority Liens subject only to Permitted Liens, to facilitate collection of the Collateral or otherwise to give effect to or carry out the terms or intent of this Agreement or any of the Other Agreements. (L) Within 30 days after the end of each month, or more frequently if requested by Lender, cause the chief financial officer of Borrower to prepare and deliver to Lender a Compliance Certificate in the form of Exhibit E attached hereto, with appropriate insertions. (M) As soon as available, and in any event no later than 60 days after the end of each fiscal year of Borrower, deliver to Lender Projections of Borrower for the forthcoming three fiscal years, year by year, and the forthcoming fiscal year, month by month. 9.2. Negative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless Lender has first consented thereto in writing, it will not: (A) Merge or consolidate, or permit any Subsidiary to merge or consolidate, with any Person; nor acquire all or any substantial part of the Properties of any Person. LOAN AND SECURITY AGREEMENT - Page 27 32 (B) Make any loans or other advances of money (other than for salary, travel advances, advances against commissions and other similar advances in the ordinary course of business) to any Person in excess of an aggregate $100,000 outstanding at any time for all such loans, except those advances or loans made to various employees as identified in Exhibits I and J. (C) Enter into any transaction with any Affiliate or stockholder, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms which are fully disclosed to Lender and are no less favorable to Borrower than would obtain in a comparable arm's length transaction with a Person not an Affiliate or stockholder of Borrower. (D) Guarantee, assume, endorse or otherwise, in any way, become directly or contingently liable with respect to the Indebtedness of any Person except by endorsement of instruments or items of payment for deposit or collection. (E) Create or suffer to exist any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Lender; (ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due or being contested as permitted by Section 9.1(A) hereof, but only if in Lender's judgment such Lien does not affect adversely Lender's rights or the priority of Lender's Lien in the Collateral; (iii) Liens securing the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons for labor, materials, supplies or rentals incurred in the ordinary course of Borrower's business, but only if the payment thereof is not at the time required and only if such Liens are junior to the Liens in favor of Lender; (iv) Liens resulting from deposits made in the ordinary course of business in connection with workmen's compensation, unemployment insurance, social security and other like laws; (v) attachment, judgment and other similar non-tax Liens arising in connection with court proceedings, but only if and for so long as the execution or other enforcement of such Liens is and continues to be effectively stayed and bonded on appeal in a manner satisfactory to Lender for the full amount thereof, the validity and amount of the claims secured thereby are being actively contested in good faith and by appropriate lawful proceedings and such Liens do not, in the aggregate, materially detract from the value of the Property of Borrower or materially impair the use thereof in the operation of Borrower's business; (vi) reservations, exceptions, easements, rights of way, and other similar encumbrances affecting real Property, provided that, in Lender's judgment, they do not in the aggregate materially detract from the value of said Properties or materially interfere with their use in the ordinary conduct of Borrower's business and, if said real Property constitutes Collateral, Lender has consented thereto; and (vii) such other Liens as Lender may hereafter approve in writing. (F) Make any payment of any part or all of any Subordinated Debt in violation of the subordination agreement relating to such Subordinated Debt or voluntarily prepay any Subordinated Debt; or enter into any agreement (oral or written) which could in any way be construed to amend, modify, alter or terminate any one or more instruments or agreements evidencing or relating to any Subordinated Debt. LOAN AND SECURITY AGREEMENT - Page 28 33 (G) Declare or make any Distributions. (H) Hereafter create any Subsidiary or divest itself of any material assets by transferring them to any Subsidiary to whose existence Lender has consented. (I) Make Capital Expenditures (including, without limitation, by way of capitalized leases) which, in the aggregate, exceed $350,000 during any fiscal year of Borrower. (J) Transfer its principal place of business or chief executive office, or open new manufacturing plants, or transfer existing manufacturing plants, or maintain warehouses or records with respect to Accounts or Inventory, to or at any locations other than those at which the same are presently kept or maintained, as set forth on Exhibit B hereto, except upon at least 60 days prior written notice to Lender and after the delivery to Lender of financing statements, if required by Lender, in form satisfactory to Lender to perfect or continue the perfection of Lender's Lien and security interest hereunder. (K) Enter into any new business or make any material change in any of Borrower's business objectives, purposes and operations. (L) Sell, lease or otherwise dispose of any of its Properties, including any disposition of Property as part of a sale and leaseback transaction, to or in favor of any Person, except (i) sales of Inventory in the ordinary course of Borrower's business for so long as no Event of Default exists hereunder, (ii) a transfer of Property to Borrower by a Subsidiary or (iii) dispositions expressly authorized by this Agreement. (M) Use any corporate name (other than its own) or any fictitious name, tradestyle or "d/b/a" except for names disclosed in writing to Lender on or before the Closing Date. (N) Permit the total annual compensation (including, without limitation, salaries, fees, bonuses, commissions and other payments, whether direct or indirect, in money, or otherwise but specifically excluding compensation from existing employee incentive agreements) of its officers, shareholders and directors to exceed during any fiscal year of Borrower 110% of the amount paid during the preceding fiscal year. (O) Own, purchase or acquire (or enter into any contract to purchase or acquire) any "margin security" as defined by any regulation of the Federal Reserve Board as now in effect or as the same may hereafter be in effect unless, prior to any such purchase or acquisition or entering into any such contract, Lender shall have received an opinion of counsel satisfactory to Lender to the effect that such purchase or acquisition will not cause this Agreement to violate Regulations G, T, U, or X or any other regulation of the Federal Reserve Board then in effect. (P) Make or have any Restricted Investment. LOAN AND SECURITY AGREEMENT - Page 29 34 (Q) Change its fiscal year or permit any Subsidiary to have a fiscal year different from that of Borrower. (R) Create, assume or suffer to exist any indebtedness for borrowed money or issue or sell any obligation of Borrower (whether absolutely, concurrently or otherwise), excluding only (i) the Obligations; (ii) accounts payable and accrued liabilities arising in the ordinary course of Borrower's business; (iii) indebtedness incurred for the payment of Capital Expenditures permitted by this Agreement; (iv) existing indebtedness of Borrower which shall have been approved in writing by Lender, and which shall be set forth on Exhibit F attached hereto and made a part hereof (and to the extent set forth on Exhibit F, such indebtedness is approved by Lender); and (v) such other indebtedness as Lender may hereafter approve in writing. 9.3. Specific Financial Covenants. During the term of this Agreement, and thereafter for so long as there - are any Obligations to Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: (A) Maintain positive Cash Flow, measured on a rolling three-month basis at the end of each calendar month, for the three-month period that ends as of the end of each calendar month, from and including the calendar month ending March 31, 1994. Cash Flow during any portion of a three-month period that includes any month prior to March l, 1994 will be determined on a consolidated basis. (B) Maintain positive Cash Flow, measured on an annual basis at the end of each fiscal year of Borrower, for the twelve-month period that ends as of the end of such fiscal year of Borrower, from and including the fiscal year of Borrower ending December 31, 1994. Cash Flow during the period from January l, 1994 to March l, 1994 will be determined on a consolidated basis. (C) Maintain at all times a ratio of (i) the aggregate Indebtedness of Borrower to (ii) Adjusted Tangible Net Worth of Borrower of not more than 5.0 to one. (D) Maintain at all times a ratio of Current Assets to Current Liabilities of not less than 2.0 to one. SECTION 10. CONDITIONS PRECEDENT Notwithstanding any other provision of this Agreement or any of the Other Agreements, and without affecting in any manner the rights of Lender under the other sections of this Agreement, it is understood and agreed that Lender will not make any Loan under Section 2 of this Agreement unless and until each of the following conditions has been and continues to be satisfied, all in form and substance satisfactory to Lender and its counsel: 10.1. Documentation. Lender shall have received the following documents, each in form and substance satisfactory to Lender and its counsel: LOAN AND SECURITY AGREEMENT - Page 30 35 (A) certified copies of Borrower's casualty insurance policies, together with endorsements naming Lender as loss payee and as mortgagee pursuant to a standard mortgagee clause, and certified copies of Borrower's liability insurance policies, together with endorsements naming Lender as a co-insured; (B) copies of all filing receipts or acknowledgments issued by any governmental authority to evidence any filing or recordation necessary to perfect the Liens of Lender in the Collateral and evidence that such Liens constitute valid and perfected security interests and Liens, having the Lien priority specified in Section 4.3 hereof; (C) landlord or warehouseman agreements with respect to all premises leased by Borrower; except that, in the instances where Lender has received landlord or warehouseman agreements with respect to all premises originally leased by SE&P or TLW, confirmation letters with respect to occupation of the premises by Borrower, as the successor-in-interest, shall be satisfactory; (D) a copy of the Articles or Certificate of Incorporation of Borrower, and all amendments thereto, certified within 15 days before the closing by the Secretary of State or other appropriate official of its jurisdiction of incorporation; (E) a copy of the bylaws of Borrower, and all amendments thereto, certified as of the closing date by the Secretary of the Borrower; (F) good standing certificates for Borrower, issued within 15 days before the closing by the Secretary of State or other appropriate official of Borrower's jurisdiction of incorporation and each jurisdiction where the conduct of Borrower's business activities or the ownership of its Properties necessitates qualification; (G) a closing certificate signed by the chief executive officer and chief financial officer of Borrower dated as of the date hereof, stating that (i) the representations and warranties set forth in Section 8 hereof are true and correct on and as of such date, (ii) Borrower is on such date in compliance with all the terms and provisions set forth in this Agreement and (iii) on such date no Default or Event of Default has occurred or is continuing; (H) Guaranty Agreements and security agreements from each Guarantor for the benefit of Lender; (I) the Other Agreements duly executed and delivered by Borrower and/or the Guarantors, as appropriate; (J) the written opinion of Fouts & Moore, L.L.P., counsel to Borrower and Guarantors, regarding Borrower, Guarantors, the Loan Documents and the transactions contemplated by this Agreement and the Other Agreements, the form of which is attached hereto as Exhibit H; LOAN AND SECURITY AGREEMENT - Page 31 36 (K) certificates evidencing 53% of the issued and outstanding common stock of Borrower, with the duly executed blank stock powers attached; (L) fully paid endorsements to presently issued policies, issued by a title insurance company satisfactory to Lender, each in an amount equal to not less than the fair market value of the real Property or leasehold interest, as the case may be, described in Exhibit G, insuring the Mortgage to create a valid Lien on all real Property described in Exhibit G, with the priority set forth in Exhibit G, with no exceptions (other than prior Liens as noted in Exhibit G) which Lender shall not have approved in writing and no survey exceptions; and (M) such other documents, instruments and agreements as Lender shall reasonably request in connection with the transaction contemplated hereby. 10.2. Other Conditions. The following conditions have been and shall continue to be satisfied: (A) no Default or Event of Default shall exist; (B) each of the conditions precedent set forth in the Other Agreements shall have been satisfied; (C) since July 31, 1994, there shall not have occurred any material adverse change in the business, financial condition or results of operations of Borrower, or the existence or value of any Collateral, or any event, condition or state of facts which would reasonably be expected materially and adversely to affect the business, financial condition or results of operations of Borrower; (D) no action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby or which, in Lender's judgment, would make it inadvisable to consummate the transactions contemplated by this Agreement or any of the Other Agreements; and (E) Lender shall have received such certificates and documents reflecting the Solvency of Borrower, after giving effect to the transactions contemplated by this Agreement, as Lender shall find acceptable. SECTION 11. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 11.1. Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default": LOAN AND SECURITY AGREEMENT - Page 32 37 (A) Borrower shall fail to pay any installment of principal, interest or premium, if any, owing on the Term Note within ten days after the due date of such installment; (B) Borrower shall fail to pay any of the Obligations that are not evidenced by the Term Note on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise); (C) any warranty, representation, or other statement made or furnished to Lender by or on behalf of Borrower or Guarantor or in any instrument, certificate or financial statement furnished in compliance with or in reference to this Agreement or any of the Other Agreements proves to have been false or misleading in any material respect when made or furnished; (D) Borrower shall fail or neglect to perform, keep or observe (i) any covenant contained in this Agreement (other than a covenant a default in the performance or observance of which is dealt with specifically in clause (ii) hereof or elsewhere in this Section 11.1) and the breach of such covenant is not cured to Lender's satisfaction within 15 days after the sooner to occur of Borrower's receipt of notice of such breach from Lender or the date on which such failure or neglect becomes known to any officer of Borrower or (ii) shall fail or neglect to perform, keep or observe any covenant contained in Sections 4.3, 4.4, 4.5, 4.6, 5.2, 5.4, 7.2, 9.1(A), 9.1(E), 9.1(F), 9.1(J), 9.1(K), 9.1(N), 9.2 or 9.3; (E) any event of default shall occur under, or Borrower shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Other Agreements and such default shall continue beyond any applicable period of grace; (F) there shall occur any default or event of default on the part of Borrower under any agreement, document or instrument to which Borrower is a party or by which Borrower or any of its Property is bound, creating or relating to any Indebtedness (other than the Obligations) if the payment or maturity of such Indebtedness is accelerated in consequence of such event of default or demand for payment of such Indebtedness is made; (G) any material loss, theft, damage or destruction not materially covered by insurance (as required by this Agreement and subject to such deductibles as Lender shall have agreed to in writing), or sale, lease or encumbrance of any of the Collateral or the making of any levy, seizure, or attachment thereof or thereon except in all cases as may be specifically permitted by other provisions of this Agreement; (H) there shall occur any material adverse change in the financial condition or business prospects of Borrower or any Guarantor; (I) Borrower or any Guarantor shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against Borrower or any Guarantor under the Bankruptcy Code (if against Borrower or any Guarantor, the LOAN AND SECURITY AGREEMENT - Page 33 38 continuation of such proceeding for more than 30 days), or Borrower or any Guarantor shall make any offer of settlement, extension or composition to their respective unsecured creditors generally; (J) a Reportable Event shall occur which Lender shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed; (K) any Guarantor shall revoke or attempt to revoke the Guaranty Agreement signed by such Guarantor, or shall repudiate such Guarantor's liability thereunder or shall be in default under the terms thereof; (L) any money judgment, writ or attachment or similar process is entered or filed against Borrower or any of its Property and results in the creation or imposition of any Lien that is not a Permitted Lien; (M) Borrower shall incur, assume or suffer to exist any Indebtedness, whether direct or contingent, other than Indebtedness listed on Exhibit F hereto and other Indebtedness (exclusive of trade payables) up to an aggregate of $500,000 at any time outstanding; (N) any of the Indebtedness owed by Borrower to Edith Leavens Hughs ("Hughs") or George N. Allen, Jr. ("Allen") shall be paid in violation of the terms of that certain Subordination Agreement dated February 10, 1986 among Hughs, Borrower and certain Affiliates of Borrower (the "Hughs Agreement") or that certain Subordination Agreement dated February 10, 1986 among Allen, Borrower and certain Affiliates of Borrower (the "Allen Agreement"), respectively, or the Hughs Agreement or the Allen Agreement shall be amended without the prior written consent of Lender; or (O) Lender shall in good faith deem itself insecure. 11.2. Acceleration of the Obligations. Without in any way limiting the right of Lender to demand payment of any portion of the Obligations payable on demand in accordance with Section 3.4 hereof, upon and at any time after the occurrence of an Event of Default, all or any portion of the Obligations due or to become due from Borrower to Lender (whether under this Agreement, any Other Agreement or otherwise) shall, at Lender's option, become at once due and payable without presentment, demand, protest, notice of dishonor, notice of default, notice of intent to accelerate, notice of acceleration, or any other notice whatsoever, and Borrower shall forthwith pay to Lender, in addition to any and all sums and charges due, the entire principal of and interest accrued on the Obligations. 11.3. Remedies. Upon and after the occurrence of an Event of Default, Lender shall have and may exercise from time to time the following rights and remedies: LOAN AND SECURITY AGREEMENT - Page 34 39 (A) All of the rights and remedies of a secured party under the Code or under other applicable law, and all other legal and equitable rights to which Lender may be entitled, all of which rights and remedies shall be cumulative, and none of which shall be exclusive, and shall be in addition to any other rights or remedies contained in this Agreement or any of the Other Agreements. (B) The right to take immediate possession of the Collateral, and (i) to require Borrower to assemble the Collateral, at Borrower's expense, and make it available to Lender at a place designated by Lender which is reasonably convenient to both parties, and (ii) to enter any of the premises of Borrower or wherever any of the Collateral shall be located, and to keep and store the same on said premises until sold (and if said premises be the Property of Borrower, Borrower agrees not to charge Lender for storage thereof). (C) The right to sell or otherwise dispose of all or any Inventory or Equipment in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law,. in lots or in bulk, for cash or on credit, all as Lender, in its discretion, may deem advisable. Borrower agrees that fifteen days written notice to Borrower of any public or private sale or other disposition of such Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Lender may designate in said notice. Lender shall have the right to conduct such sales on Borrower's premises, without charge therefor, and such sales may be adjourned from time to time in accordance with applicable law. Lender shall have the right to sell, lease or otherwise dispose of such Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or any part of such Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set-off the amount of such price against the Obligations. (D) Lender is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, tradenames, trademarks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit. (E) The proceeds realized from the sale of any Collateral may be applied, after allowing two Business Days for collection, first to the costs, expenses and reasonable attorneys' fees incurred by Lender in collecting the Obligations, in enforcing Lender's rights under the Loan Documents and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any of the Collateral; secondly, to interest due upon any of the Obligations; and thirdly, to the principal of the Obligations. If any deficiency shall arise, Borrower shall remain liable to Lender therefor. 11.4. Remedies Cumulative; No Waiver. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Borrower contained in this Agreement and the Other Agreements, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule given to Lender or contained in any other agreement between Lender and Borrower, heretofore, concurrently, or hereafter entered into, LOAN AND SECURITY AGREEMENT - Page 35 40 shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Borrower herein contained. The failure or delay of Lender to exercise or enforce any rights, Liens, powers or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such Liens, rights, powers and remedies, but all such Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all other Obligations owing or to become owing from Borrower to Lender shall have been fully satisfied, and all Liens, rights, powers, and remedies herein provided for are cumulative and none are exclusive. SECTION 12. MISCELLANEOUS 12.1. Power of Attorney. Borrower hereby irrevocably designates, makes, constitutes and appoints Lender (and all Persons designated by Lender) as Borrower's true and lawful attorney (and agent-in-fact) and Lender, or Lender's agent, may, without notice to Borrower and in either Borrower's or Lender's name, but at the reasonable cost and expense of Borrower: (A) At such time or times hereafter as Lender or said agent may determine, endorse Borrower's name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Lender or under Lender's control; and (B) At such time or times upon or after the occurrence of an Event of Default as Lender or its agent may determine: (i) demand and enforce payment of the Accounts by legal proceedings or otherwise and exercise generally all of Borrower's rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) prepare, file and sign Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (iv) receive and open all mail addressed to Borrower and to notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (v) endorse the name of Borrower upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Lender on account of the Obligations; (vi) endorse the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (vii) use Borrower's stationery and sign the name of Borrower to verifications of the Accounts and notices thereof to Account Debtors; (viii) make and adjust claims under policies of insurance; and (ix) do all other acts and things necessary, in Lender's reasonable determination, to fulfill Borrower's obligations under this Agreement. 12.2. Indemnity. Borrower hereby agrees to indemnify Lender and hold Lender harmless from and against any liability, loss, damage, suit, action or proceeding ever suffered or incurred by Lender as the result of Borrower's failure to observe, perform or discharge Borrower's duties hereunder. Without limiting the generality of the foregoing, this indemnity shall extend to any claims asserted against Lender by any Person under any Environmental Laws LOAN AND SECURITY AGREEMENT - Page 36 41 or similar laws by reason of Borrower's or any other Person's failure to comply with laws applicable to solid or hazardous waste materials or other toxic substances, but this indemnity shall specifically exclude liability for breach of any Environmental Laws caused solely and directly by Lender. Notwithstanding any contrary provision in this Agreement, the obligation of Borrower under this Section 12.2 shall survive the payment in full of the Obligations and the termination of Lender's obligation to make Revolving Credit Loans for a period of four (4) years beyond the date of such payment in full and termination. 12.3. Modification of Agreement. This Agreement and the Other Agreements may not be modified, altered or amended, except by an agreement in writing signed by Borrower and Lender. 12.4 Reimbursement of Expenses. If, at any time or times prior or subsequent to the date hereof, regardless of whether or not an Event of Default then exists or any of the transactions contemplated hereunder are concluded, Lender employs counsel for advice or other representation, or incurs legal expenses or other costs or out-of-pocket expenses in connection with: (A) the negotiation and preparation of this Agreement or any of the Other Agreements, any amendment of or modification of this Agreement or any of the Other Agreements; (B) the reasonable administration of this Agreement or any of the Other Agreements and the transactions contemplated hereby and thereby; (C) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, Borrower or any other Person) in any way relating to the Collateral, this Agreement or any of the Other Agreements or Borrower's affairs (other than litigation in which Borrower is the prevailing party and in which Lender is adverse to Borrower); (D) any attempt to enforce any rights of Lender against Borrower or any other Person which may be obligated to Lender by virtue of this Agreement or any of the Other Agreements, including, without limitation, the Account Debtors (other than litigation in which Borrower is the prevailing party and in which Lender is adverse to Borrower); or (E) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then, in any such event, the reasonable attorneys' fees arising from such services and all expenses, costs, charges and other fees of such counsel or of Lender or relating to any of the events or actions described in this Section shall be payable, on demand, by Borrower to Lender and shall be additional Obligations hereunder secured by the Collateral. Additionally, if any taxes (excluding taxes imposed upon or measured by the net income of Lender) shall be payable on account of the execution or delivery of this Agreement, or the execution, delivery, issuance or recording of any of the Other Agreements, or the creation of any of the Obligations hereunder, by reason of any existing or hereafter enacted federal or state statute, Borrower will pay all such taxes, including, but not limited to, any interest and penalties thereon, and will indemnify and hold Lender harmless from and against liability in connection therewith. Borrower shall have no obligation to pay the legal expenses or other costs incurred by a Participating Lender or by Lender in connection with any sale or attempted sale of any interest herein to a Participating Lender. 12.5. Indulgences Not Waivers. Lender's failure, at any time or times hereafter, to require strict performance by Borrower of any provision of this Agreement shall not waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance LOAN AND SECURITY AGREEMENT - Page 37 42 therewith. Any suspension or waiver by Lender of an Event of Default by Borrower under this Agreement or any of the Other Agreements shall not suspend, waive or affect any other Event of Default by Borrower under this Agreement or any of the Other Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or any of the Other Agreements and no Event of Default by Borrower under this Agreement or any of the Other Agreements shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Lender and directed to Borrower. 12.6. Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 12.7. Successors and Assigns; Participations by Lender. This Agreement and the Other Agreements shall be binding upon and inure to the benefit of the successors and assigns of Borrower and Lender; provided, however, that Borrower may not sell, assign or transfer any interest in this Agreement or any of the Other Agreements, or any portion thereof, including, without limitation, Borrower's rights, title, interests, remedies, powers and duties hereunder or thereunder. Any purported assignment by Borrower in violation of this Section 12.7 shall be void, without Lender's prior written consent. Borrower hereby consents to Lender's participation, sale, assignment, transfer or of the disposition, at any time or times hereafter, of this Agreement, any of the Other Agreements, or any other Obligations, or of any portion hereof or thereof, including, without limitation, Lender's rights, title, interests, remedies, powers, and duties hereunder or thereunder. In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would have if it were the original "Lender" hereunder and Lender shall be relieved of all obligations hereunder upon any such assignment. In the case of a participation, each Participating Lender shall be entitled to receive all information received by Lender regarding the credit-worthiness of Borrower, including, without limitation, information required to be disclosed to a participant pursuant to Banking Circular 181 (Rev., August 2, 1984), issued by the Comptroller of the Currency (whether such Participating Lender is subject to the circular or not). 12.8. Cumulative Effect; Conflict of Terms. The provisions of the Other Agreements are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in Section 3.4 of this Agreement and except as otherwise provided in any of the Other Agreements by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the Other Agreements, the provision contained in this Agreement shall govern and control. 12.9. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so LOAN AND SECURITY AGREEMENT - Page 38 43 executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 12.10. Notice. Except as otherwise provided herein, all notices, requests and demands to or upon a party hereto shall be in writing and shall be sent by certified or registered mail, return receipt requested, personal delivery against receipt, or by telegraph or telex and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given or delivered when delivered against receipt or three Business Days after deposit in the mail, postage prepaid, or, in the case of telegraphic notice, when delivered to the telegraph company, or, in the case of telex notice, when sent, answer-back received, addressed as follows: (A) If to Lender: Barclays Business Credit, Inc. 2711 North Haskell Suite 2100, LB 21 Dallas, Texas 75204 Attention: Senior Vice President w/ a copy to: Hughes & Luce, L.L.P. 1717 Main Street, Suite 2800 Dallas, Texas 75201 Attention: Larry A. Makel, Esq. (B) If to Borrower: Sepco Industries, Inc. 6500 Brittmoore Road Houston, Texas 77041 Attention: David R. Little w/ a copy to: Fouts & Moore, L.L.P. 5555 San Felipe, 17th Floor Houston, Texas 77057 Attention: Gary A. Messersmith or to such other address as each party may designate for itself by like notice given in accordance with this Section 12.10; provided, however, that any notice, request or demand to or upon Lender pursuant to Section 3.3 shall not be effective until received by Lender. Any written notice that is not sent in conformity with the provisions hereof shall nevertheless be effective on the date such notice is actually received by the noticed party. 12.11. Lender's Consent. Whenever Lender's consent is required to be obtained under this Agreement or any of the Other Agreements as a condition to any action, inaction, condition or event, Lender shall be authorized to give or withhold such consent in its sole and absolute discretion (unless otherwise expressly provided herein) and to condition its consent upon the giving of additional collateral security for the Obligations, the payment of money or any other matter. LOAN AND SECURITY AGREEMENT - Page 39 44 12.12. Demand Obligations. Nothing in this Agreement shall affect or abrogate the demand nature of any portion of the Obligations expressly made payable on demand by this Agreement or by any instrument evidencing or securing same, and the occurrence of an Event of Default shall not be a prerequisite for Lender's requiring payment of such Obligations. 12.13. Time of Essence. Time is of the essence of this Agreement and the Other Agreements. 12.14. Entire Agreement. This Agreement and the Other Agreements, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. 12.15. Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured, drafted or dictated such provision. 12.16. Nonapplicability of Article 5069-15.01 et seq. Borrower and Lender hereby agree that, except for Section 15.10(b) thereof, the provisions of Tex. Rev. Civ. Stat. Ann. art. 5069-15.01 et seq. (Vernon 1987) (regulating certain revolving credit loans and revolving tri-party accounts) shall not apply to this Agreement or any of the Other Agreements. 12.17. No Preservation or Marshaling. Borrower agrees that Lender has no obligation to preserve rights to the Collateral against prior parties or to marshal any Collateral for the benefit of any Person. 12.18. GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN DALLAS, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN TEXAS, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF TEXAS. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWER OR LENDER, BORROWER HEREBY CONSENTS AND AGREES THAT THE DISTRICT COURT OF DALLAS COUNTY, TEXAS, OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN LOAN AND SECURITY AGREEMENT - Page 40 45 BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE, AT THE ELECTION OF LENDER, BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR FIVE DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID; PROVIDED THAT LENDER SHALL ALSO SEND, BY TELECOPY, TO BORROWER A COPY OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS (AN AFFIDAVIT OF AN OFFICER, EMPLOYEE OR AGENT OF LENDER STATING THAT SUCH TELECOPY WAS SENT TO BORROWER SHALL BE PRESUMPTIVELY CORRECT IN ALL RESPECTS). NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. 12.19. WAIVERS BY BORROWER. BORROWER WAIVES (A) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL; (B) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON-PAYMENT, INTENT TO ACCELERATE, ACCELERATION, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (C) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (D) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; (E) ANY RIGHT BORROWER MAY HAVE UPON PAYMENT IN FULL OF THE OBLIGATIONS TO REQUIRE LENDER TO TERMINATE ITS SECURITY INTEREST IN THE COLLATERAL OR IN ANY OTHER PROPERTY OF BORROWER UNTIL TERMINATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS AND THE EXECUTION BY LOAN AND SECURITY AGREEMENT - Page 41 46 BORROWER, AND BY ANY PERSON WHOSE LOANS TO BORROWER IS USED IN WHOLE OR IN PART TO SATISFY THE OBLIGATIONS, OF AN AGREEMENT INDEMNIFYING LENDER FROM ANY LOSS OR DAMAGE LENDER MAY INCUR AS THE RESULT OF DISHONORED CHECKS OR OTHER ITEMS OF PAYMENT RECEIVED BY LENDER FROM BORROWER OR ANY ACCOUNT DEBTOR AND APPLIED TO THE OBLIGATIONS; AND (F) NOTICE OF ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 12.20. SPECIAL LOUISIANA PROVISIONS. Insofar as the validity or perfection of the security interest hereunder or the remedies hereunder are governed by the laws of the State of Louisiana, Borrower agrees as follows: (i) For purposes of Louisiana executory process, Borrower acknowledges the Obligations secured hereby, whether now existing or to arise hereafter, and confesses judgment thereon if not paid when due. Upon the occurrence of an Event of Default and at any time thereafter so long as the same shall be continuing, and in addition to all of the rights and remedies granted the Lender hereunder, it shall be lawful for and Borrower hereby authorizes Lender without making a demand or putting Borrower in default, a putting in default being expressly waived, to cause all and singular the Collateral to be seized and sold after due process of law, Borrower waiving the benefit of any and all laws or parts of laws relative to appraisement of property seized and sold under executory process or other legal process, and consenting that the Collateral be sold without appraisement, either in its entirety or in lots or parcels, as Lender may determine, to the highest bidder for cash or on such other terms as the plaintiff in such proceedings may direct. In addition, Lender shall have all of the-rights and remedies available to it under this Agreement or under the Louisiana Commercial Laws (Louisiana Revised Statutes, Title 10), then in effect (La. R.S. 10:9-101 et seq.). (ii) Borrower hereby waives: (a) the benefit of appraisement provided for in Articles 2332, 2336, 2723 and 2724 of the Louisiana Code of Civil Procedure and all other laws conferring the same; (b) the demand and three (3) days notice of demand as provided in Articles 2639 and 2721 of the Louisiana Code of Civil Procedure; LOAN AND SECURITY AGREEMENT - Page 42 47 (c) the notice of seizure provided by Articles 2293 and 2721 of the Louisiana Code of Civil Procedure; and (d) the three (3) day delay provided for in Articles 2331 and 2722 of the Louisiana Code of Civil Procedure. (iii) Borrower expressly authorizes and agrees that Lender shall have the right to appoint a keeper of the Collateral pursuant to the terms and provision of La. R.S. 9:5136. (iv) All liens and security interests created and perfected by Borrower prior to the effective date of Chapter 9 of the Louisiana Commercial Laws (La. R.S. 10:9-101 et seq.) (the "Existing Liens") shall remain effective according to their terms and the applicable provisions of law, and nothing contained herein shall constitute a novation of, or otherwise extinguish such Existing Liens. 12.21 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER AGREEMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND THE SAME MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. LOAN AND SECURITY AGREEMENT - Page 43 48 IN WITNESS WHEREOF, this Agreement has been duly executed in Dallas, Texas, on the day and year specified at the beginning hereof. "BORROWER" SEPCO INDUSTRIES, INC. By: /s/ DAVID R. LITTLE ------------------------------------- Name: David R. Little Title: Chief Executive Officer "LENDER" BARCLAYS BUSINESS CREDIT, INC. By: /s/ H. MICHAEL WILLS ------------------------------------- Name: H. Michael Wills Title: Group Vice President LOAN AND SECURITY AGREEMENT - Page 44 49 EXHIBIT 10.13 EXHIBIT A SECURED PROMISSORY NOTE (REAL ESTATE LOAN) $1,329,277.37 Dallas, Texas April 1, 1994 FOR VALUE RECEIVED, the undersigned ("Borrower"), hereby promises to pay to the order of Barclays Business Credit, Inc., a Connecticut corporation ("Lender"), at 2711 North Haskell, Suite 2100, LB 21, Dallas, Texas 75204, or at such other address as the holder hereof shall so notify Borrower, in such coin or currency of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, the principal sum of ONE MILLION, THREE HUNDRED TWENTY-NINE THOUSAND, TWO HUNDRED SEVENTY-SEVEN AND 37/100 DOLLARS ($1,329,277.37), together with interest from and after the date hereof on the unpaid principal balance outstanding at a variable rate per annum equal to the lesser of (i) 1.50% above the Base Rate (the "Annual Term Rate"), or (ii) the Maximum Legal Rate. This Secured Promissory Note (this "Note") is the Term Note referred to in, and is issued pursuant to, that certain Second Amended and Restated Loan and Security Agreement between Borrower and Lender dated effective as of the date hereof (as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and all other instruments evidencing or securing the indebtedness hereunder (including, without limitation, the "Other Agreements" as defined in the Loan Agreement) are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used in this Note, unless otherwise specifically defined herein, shall have the meanings ascribed to them in the Loan Agreement. Borrower acknowledges and understands that the Base Rate merely serves as a basis upon which effective rates of interest are calculated for loans making reference to the per annum rate of interest publicly announced by Bank from time to time as its base rate and that such rate may not be the lowest or best rate at which Bank calculates interest or extends credit. After the date hereof, the rate of interest in effect hereunder shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate, with such adjustments to be effective as of the opening of business on the date that any such change in the Base Rate becomes effective. The Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the Exhibit A--Page 1 (Secured Promissory Note) 50 date hereof, but if this Note is executed on a day that is not a Business Day, the Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the last Business Day immediately preceding the date hereof. The rate of interest in effect hereunder may be increased in accordance with the provisions of the Loan Agreement. Interest due at the Maximum Legal Rate shall be calculated on the basis of actual days elapsed over a year of 365 or 366 days, as the case may be. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of this Note shall bear interest, at a fluctuating rate per annum equal to the lesser of (i) 4% above the Base Rate (the "Default Rate"), calculated daily (computed on the actual days elapsed over a year of 360 days), or (ii) the Maximum Legal Rate. If at any time the amount of such interest computed on the basis of the Annual Term Rate or the Default Rate, whichever is applicable (the "Applicable Rate"), would exceed the amount of such interest computed upon the basis of the maximum rate of interest permitted by applicable state or federal law in effect from time to time hereafter (the "Maximum Legal Rate"), the interest payable under this Note shall be computed upon the basis of the Maximum Legal Rate, but any subsequent reduction in the Applicable Rate shall not reduce such interest thereafter payable hereunder below the amount computed on the basis of the Maximum Legal Rate until the aggregate amount of such interest accrued and payable under this Note equals the total amount of interest which would have accrued if such interest had been at all times computed solely on the basis of the Applicable Rate. The principal amount and accrued interest of this Note shall be due and payable on the dates and in the manner hereinafter set forth: (a) interest shall be due and payable monthly, in arrears, on the first day of each month, commencing on May 1, 1994, and continuing until such time as the full principal balance, together with all other amounts owing hereunder, shall have been paid in full; (b) principal shall be due and payable in thirty-one (31) equal monthly installments of THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-THREE AND No/100 DOLLARS ($33,333) each, commencing on May 1, 1994, and continuing on the first day of each month thereafter to and including the first day of December, 1996; and (c) the entire unpaid principal balance hereof, together with any and all other amounts due hereunder, Exhibit A--Page 2 (Secured Promissory Note) 51 shall be due and payable on January 2, 1997. Notwithstanding the foregoing, the entire unpaid principal balance and accrued interest on this Note shall be due and payable immediately upon any termination of the Loan Agreement pursuant to Section 3.3 thereof or otherwise. The occurrence of an Event of Default under the Loan Agreement, including, without limitation, the failure to pay any installment of principal or interest on this Note in full on or within ten days after the due date thereof in accordance with the terms of this Note, shall constitute an event of default under this Note and shall entitle Lender, at its option, upon, or at any time after the occurrence of any such Event of Default, to declare the then outstanding principal balance and accrued interest hereof to be, and the same shall thereupon become, immediately due and payable without notice to or demand upon Borrower, all of which Borrower hereby expressly waives. If this Note is collected by or through an attorney at law, then Borrower shall be obligated to pay, in addition to the principal balance and accrued interest hereof, reasonable attorneys' fees and court costs. This Note shall be subject to mandatory prepayment, without premium or penalty, in accordance with the provisions of Section 3.4(D) of the Loan Agreement. Subject to the next sentence, Borrower may voluntarily prepay, without premium or penalty, this Note in whole at any time or in part from time to time upon ten days' prior written notice to Lender, provided that each such prepayment shall be made together with accrued interest on the principal amount so prepaid on the prepayment date, and any partial prepayment shall be in an amount equal to $100,000 or in $100,000 multiples thereof. If Borrower terminates the Loan Agreement pursuant to Section 3.3(A) thereof in connection with a refinancing of the Revolving Credit Loans and/or any Term Loan, then, upon the effective date of any such termination, Borrower shall pay to Lender (in addition to any other charges due under the terms of the Loan Agreement) a prepayment premium in an amount equal to the applicable percentage set forth below of the principal amount prepaid: If Prepayment is Made Between ----------------------------- The Following Dates, Inclusive: The Premium Shall Be: ------------------------------- --------------------- April 1, 1994 and 0.5% of principal January 1, 1997 amount prepaid All partial prepayments, whether mandatory or voluntary, shall be applied to installments of principal in the inverse order of their maturities. Exhibit A--Page 3 (Secured Promissory Note) 52 No agreements, conditions, provisions or stipulations contained in the Loan Agreement, this Note or any other instrument, document or agreement between Borrower and Lender or default of Borrower, or the exercise by Lender of the right to accelerate the payment of the maturity of principal and interest, or to exercise any option whatsoever contained in the Loan Agreement, this Note or any other agreement between Borrower and Lender, or the arising from any contingency whatsoever, shall entitle Lender to charge or collect, in any event, interest exceeding the Maximum Legal Rate and in no event shall Borrower be obligated to pay interest exceeding such Maximum Legal Rate and all agreements, conditions or stipulations, if any, which may in any event or contingency whatsoever operate to bind, obligate or compel Borrower to pay a rate of interest exceeding the Maximum Legal Rate, shall be without binding force or effect, at law or in equity, to the extent only of the excess of interest over such Maximum Legal Rate. In the event any interest is charged or collected in excess of the Maximum Legal Rate ("Excess"), Borrower acknowledges and stipulates that any such charge or collection shall be the result of an accident and bona fide error, and such Excess shall be, first, applied to reduce the principal then unpaid hereunder; second, applied to reduce the Obligations; and third, returned to Borrower, it being the intention of the parties hereto not to enter at any time into a usurious or otherwise illegal relationship. Borrower recognizes that, with fluctuations in the Annual Term Rate, the Default Rate and the Maximum Legal Rate, such an unintentional result could inadvertently occur. By the execution of this Note, Borrower covenants that (i) the credit or return of any Excess shall constitute the acceptance by Borrower of such Excess, and (ii) Borrower shall not seek or pursue any other remedy, legal or equitable, against Lender, based in whole or in part upon the charging or receiving of any interest in excess of the maximum authorized by applicable law. For the purpose of determining whether or not any Excess has been contracted for, charged or received by Lender, all interest at any time contracted for, charged or received by Lender in connection with this Note, shall be amortized, prorated, allocated and spread in equal parts during the entire term of this Agreement. Time is of the essence of this Note. To the fullest extent permitted by applicable law, Borrower, for itself and its legal representatives, successors and assigns, expressly waives presentment, demand, protest, notice of dishonor, notice of nonpayment, notice of acceleration, notice of intent to accelerate, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption or insolvency laws. Exhibit A--Page 4 (Secured Promissory Note) 53 Wherever possible each provision of this Note shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas, as more fully provided in Section 12.18 of the Loan Agreement. This Note is a renewal, modification and consolidation, and not a novation or extinguishment, of the following promissory notes (the "Prior Notes"): (a) that certain promissory note in the original principal sum of $2,000,000, dated January 22, 1994, executed by Southern Engine & Pump Company, a Delaware corporation, and Wesco Equipment, Inc., a Delaware corporation, payable to the order of Lender, and (b) that certain promissory note in the original principal sum of $500,000, dated January 22, 1992, executed by T.L. Walker Bearing Co., payable to the order of Lender. All rights, liens, titles and security interests securing the Prior Notes are and shall be preserved, maintained and carried forward to secure this Note. Exhibit A--Page 5 (Secured Promissory Note) 54 IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed, sealed and delivered on the date first above written. SEPCO INDUSTRIES, INC. By: -------------------------- David R. Little Chief Executive Officer Exhibit A--Page 6 (Secured Promissory Note) 55 EXHIBIT B BUSINESS LOCATIONS (1) Borrower currently has the following business locations, and no others: I. With respect to business formerly conducted under the name of Southern Engine & Pump Company: 1. 928 South Treadaway Abilene, Texas 79602 2. 11646 Industriplex Blvd. Baton Rouge, Louisiana 70809 3. 4718 Baldwin Blvd. (78408) P.O. Box 4206 (78469) Corpus Christi, Texas 4. 12786 O'Connor Road (78233) P.O. Box 34386 (78265-4386) San Antonio, Texas 5. 2020 North Loop 12 (75061) P.O. Box 565105 Irving, Texas 6. 1100 West Marland (88240) P.O. Box 2406 (88241) Hobbs, New Mexico 7. 6500 Brittmoore Road (77041) P.O. Box 1697 (77251) Houston, Texas 8. 110 KOL Drive (70518) Broussard, Louisiana P.O. Box 51409 (70505) Lafayette, Louisiana 9. 1712 Avenue H (Odessa-Sub- Branch) P.O. Box 1119 (79336) Levelland, Texas 10. 1803 West Cotton (75607) P.O. Box 7908 (75602) Longview, Texas Exhibit B--Page 1 (Business Locations) 56 11. 320 Time Saver Ave. Harahan, LA 70123 P.O. Box 10497 New Orleans, LA 70181-0497 12. 3900 West Loop 338 (79764) P.O. Box 69838 (79769) Odessa, Texas 13. 1401 S.E. 29th Oklahoma City, Oklahoma 73129 14. 1206 Grimmett Drive (71107) P.O. Box 7312 (71137) Shreveport, Louisiana 15. 5141 South 24th West Avenue Tulsa, Oklahoma 74107 16. 8497 Jacksboro Highway Wichita Falls, Texas 76301 17. 4695 College Street Beaumont, Texas 77707 18. 21 Mulberry Sulphur, Louisiana 70664 19. 4308 Murray Ave. Halthom City, Texas 76117 II. With respect to business formerly conducted under the name of Wesco Equipment: 1. 4302 Creekmont (77018) P.O. Box 924068 (77292) Houston, Texas 2. 6860 So. Yosemite Ct. #200 Englewood, Colorado 80112 3. 137 W. Oxmoor Road, Suite 401 Birmingham, Alabama 35226 4. 11646 Industriplex Blvd. Baton Rouge, Louisiana 70809 Exhibit B--Page 2 (Business Locations) 57 III. With respect to business formerly conducted under the name of T. L. Walker Bearing Co.: 1. 2603 LaBranch (77004) P.O. Box 8235 (77288) Houston, Texas 2. 112 North 12th Street La Porte, Texas 77571 3. 5550 Highland Avenue Beaumont, Texas 77705 4. 113 Rhodes Conroe, Texas 77301 5. 839 Hwy. 146 Texas City, Texas 77590 6. 13618-13620 Hempstead Hwy Houston, Texas 77040 7. 9153 Wallisville Road Houston, Texas 77029 8. 315 South Loop 201 Baytown, Texas 77520 9. 6618 East Highway 332 Freeport, Texas 77541 10. 3165 Summitt Port Neches, Texas 77651 IV. With respect to business formerly conducted under the name of Jackson's Industrial Supplies, Inc. 1. 9153 Wallisville Road Houston, Texas 77029 2. P.O. Box 1079 207 W. Mill Livingston, Texas 77351 3. P.O. Box 1504 2902 E. Denman Lufkin, Texas 75901 4. 1108 E. Gibson Jasper, Texas 75951 Exhibit B--Page 3 (Business Locations) 58 (2) Borrower maintains its books and records relating to Accounts and General Intangibles at: 6500 Brittmoore Road, Houston, Texas 77041. (3) During the preceding three-year period, Borrower has had no office, place of business or agent for process located in any county other than as set forth above, except: 1. 2305 Winterstone Plano, Texas 75023 2. Dallas and Potter Counties Texas 3. 12047 Old Hammond, Suite B Baton Rouge, Louisiana 70809 4. 5 miles west of 385 on FM 300 Levelland, Texas 79336 5. 1119 Central Ave. Metairie, Louisiana 6. 505 N. Big Spring Midland, Texas 79701 7. 1545 Gulf Shores Parkway Gulf Shores, Alabama 36542 8. 400 N. 11th Street La Porte, Texas 77571 9. 2702 North Chenevert Houston, Texas 77004 10. 4 North Chenevert Houston, Texas 77002 11. 328 E. Lamar Jasper, Texas 75951 12. 6868 N. Loop East, Suite 320 Houston, Texas 77028 Exhibit B--Page 4 (Business Locations) 59 EXHIBIT C CORPORATE NAMES (1) Borrower's correct corporate name, as registered with the Secretary of State of the State of Texas, is: SEPCO Industries, Inc. (2) During the preceding seven-year period, Borrower has used the following names: Southern Engine & Pump Company Wesco Equipment, Inc. Perkins Southwest, Inc. Shoreline Company, Inc. Shoreline Supply, Inc. Shoreline Equipment Company, Inc. T.L. Walker T.L. Walker Bearing Jackson's Industrial Supplies, Inc. PURC, Inc. DMS Corporation Exhibit C--Page 1 (Corporate Names) 60 EXHIBIT D LITIGATION (1) There are no proceedings pending against Borrower in any court, except as follows:
DESCRIPTION PLAINTIFF COURT CASE NO. 1. The Plaintiff has alleged a former Joe A. Manjarris 189th Judicial 92-4777 officer of T. L. Walker (Lindley King) vs. T. L. Walker Court, Harris, negligently and grossly accused Plaintiff Bearing County of four disparaging and slanderous acts. Plaintiff has claimed damages of $8,000,000 as a result of corporate officer's remarks. Plaintiff's accusations are without merit. Case is being handled by SEPCO's insurance carrier. We expect no damage in this case. 2. Personal injury lawsuit. Defense and James Stanley 16th Judicial 900781 claims, if any, are covered by insurance. vs. Texaco, et al. District Court, (includes SEPCO) St. Mary Parish, State of LA 3. Plaintiff, a former employee of T. L. Riley McDaniel Harris County 632,718 Walker, alleges money is owed to him for vs. T. L. Walker Civil Court commissions on product sales and salary and SEPCO of Law #3 under an employment contract. Plaintiff Industries, Inc. originally sought $35,000 in damages but proposed a settlement offer of $12,500. T. L. Walker rejected the offer. We believe the suit is without merit.
(2) The only threatened litigation of which Borrower is aware is as follows: None. SARGENT:324 - 1 - 61 EXHIBIT E FORM OF COMPLIANCE CERTIFICATE _________________, 19__ TO: Barclays Business Credit, Inc. 2711 North Haskell Suite 2100, LB 21 Dallas, Texas 75204 Attention: Michael Wills The undersigned, the chief financial officer of Sepco Industries, Inc., a Texas corporation ("Borrower"), gives this certificate to Barclays Business Credit, Inc. ("Lender") in accordance with the requirements of Section 9.1(L) of that certain Second Amended and Restated Loan and Security Agreement dated April 1, 1994, between Borrower and Lender (the "Loan Agreement"). Capitalized terms used in this Certificate, unless otherwise defined herein, shall have the meanings ascribed to them in the Loan Agreement: (1) Based upon my review of the balance sheets and statements of income of Borrower for the fiscal [month] [year] ending _____________, 19__, copies of which are attached hereto, and supported by the calculations shown below, I hereby certify that as of the end of such [month] [year]: (a) Capital Expenditures and payments on account of capital leases for the fiscal year to the date of the financial statements to which this certificate is attached total $_____________. The requirement of the Loan Agreement (Section 9.2(I)) is no more than $350,000 during any fiscal year. (b) If this certificate is furnished as of the end of a fiscal year, total annual compensation (other than compensation from existing incentive agreements) for officers, shareholders and directors is ____ % of the amount paid during the preceding fiscal year. The requirement of the Loan Agreement (Section 9.2(N)) is no more than 110%. (c) The Cash Flow, measured on a rolling three-month basis at the end of each calendar month, for the calendar month ending on the date of the financial statements to which this certificate is attached is $________, calculated as set forth below. Exhibit E--Page 1 (Compliance Certificate) 62 The requirement of the Loan Agreement is positive Cash Flow, measured on a rolling three-month basis at the end of each calendar month, for the three-month period that ended as of the end of each calendar month: (i) Adjusted Net Earnings From Operations for the three-month period ended to date: (1) net earnings or loss after provision for income taxes $___________ (2) extraordinary items $___________ (3) Adjusted Net Earnings From Operations ((1) less (2)) $___________ (ii) Non-cash charges in respect to depreciation and amortization: $___________ (iii) Capital Expenditures: $___________ (iv) Scheduled principal payments on Indebtedness: $___________ (v) Cash Flow ((i) plus (ii) less (iii) less (iv)): $___________ (d) If this certificate is furnished as of the end of a fiscal year, the Cash Flow for the fiscal year ending as of the date of the financial statements to which this certificate is attached is $______________, calculated as set forth below. The requirement of the Loan Agreement is positive Cash Flow, measured on an annual basis at the end of each fiscal year of Borrower, for the twelve-month period that ended as of the end of such fiscal year of Borrower, from and including the fiscal year of Borrower ending December 31, 1994: (i) Adjusted Net Earnings From Operations for the fiscal year to date: (1) net earnings or loss after provision for income taxes $________________ (2) extraordinary items $________________ (3) Adjusted Net Earnings From Operations ((1) less (2)) $________________ Exhibit E--Page 2 (Compliance Certificate) 63 (ii) Non-cash charges in respect to depreciation and amortization: $________________ (iii) Capital Expenditures: $________________ (iv) Scheduled principal payments on Indebtedness: $________________ (v) Cash Flow ((i) plus (ii) less (iii) less (iv)): $________________ (e) The ratio of Indebtedness to Adjusted Tangible Net Worth as of the date of the financial statements to which this certificate is attached is ___ to 1.0, calculated as set forth below. The requirement of the Loan Agreement is not less than 5.0 to 1.0: (i) Aggregate Indebtedness: $_________________ (ii) Adjusted Tangible Assets: $_________________ (iii) Liabilities: $_________________ (iv) Subordinated Debt $_________________ (v) Adjusted Tangible Net Worth ((ii) less (iii) plus (iv)): $_________________ (vi) Ratio of (i) to (v): __________ to 1.0 (f) The ratio of Current Assets to Current Liabilities as of the date of the financial statements to which this certificate is attached is _______________ to 1.0, calculated as set forth below. The requirement of the Loan Agreement is not less than 2.0 to 1.0: (i) Current Assets: $__________________ (ii) Current Liabilities: $__________________ (2) The financial statements to which this certificate is attached have been prepared in accordance with GAAP to the best of my knowledge and fairly present the consolidated financial positions and results of operations of Borrower and its Subsidiaries (if any) for the period covered thereby. Exhibit E--Page 3 (Compliance Certificate) 64 (3) No Default exists on the date hereof, other than: _____________________________________(if none, so state). (4) No Event of Default exists on the date hereof, other than: ____________________________________________ (if none, so state). Very truly yours, ------------------------ Chief Financial Officer Exhibit E--Page 4 (Compliance Certificate) 65 EXHIBIT F EXISTING INDEBTEDNESS [Attached.] Exhibit F--Page 1 (Existing Indebtedness) 66 SEPCO INDUSTRIES, INC. Notes Payble Rollforward 12/31/93 File: Noterol1
G/L Account Balance Balance Current Long Number Lender Collateral 12/31/92 Additions Payments 12/31/93 Portion Term - ----------------------------------------------------------------------------------------------------------------------------------- 000-2580 Edith Hughes 97,723 97,723 97,723 ------------------------------------------------------------------ Total-SEPCO 4,454,490 1,973,856 387,225 6,041,121 1,134,766 4,906,355 ================================================================== 000-2030 Barclay's Revolver Inventory and Receivables 6,138,820 61,114,304 59,910,495 7,342,629 7,342,629 000-2410 Barclay's - Real Estate, Certain Real Estate & 1,633,337 438,700 1,194,637 442,224 752,413 PP&E Equipment ------------------------------------------------------------------ Total Barclay's 7,772,157 61,114,304 60,349,195 8,537,266 442,224 8,095,042 000-2430 Parker Square Bank Fort Worth Real Estate 96,754 12,109 86,645 13,320 71,325 000-2430 William B. Ferguson Fort Worth Real Estate 42,795 5,356 37,439 5,891 31,548 (Pledged to Parker Square) ------------------------------------------------------------------ Total - S E & P 7,911,707 61,114,304 60,366,660 8,659,351 461,435 8,197,916 ================================================================== 000-2030 Barclay's Revolver Inventory and Receivables 1,458,107 8,551,811 8,114,019 1,895,899 1,895,899 000-2430 William E. Snyder WESCO Real Property 266,855 18,151 248,705 19,853 228,851 ------------------------------------------------------------------ Total - WESCO 1,724,962 8,551,881 8,132,170 2,144,603 19,853 2,124,750 ==================================================================
EXHIBIT F 67 SEPCO INDUSTRIES, INC. Notes Payable Rollforward 12/31/93
G/L Secured Account Note Interest Note Maturity or Number Lender Number Rate Date Date Payment Terms Unsecured - -------------------------------------------------------------------------------------------------------------------------------- 3 Installments 000-2580 Edith Hughes 18% Int paid monthly. Principal due in 3 installments to lender's estate upon Unsecured Total - SEPCO 000-2030 Barclay's Revolver Prime 1 1/4% 1/22/92 1/02/97 Secured 000-2410 Barclay's - Real Estate, PP&E Prime 1 3/4% 1/22/92 1/02/97 $33,333/mo. Principal Secured +$3,518.51 Payment from Sale of New Orleans Property Total Barclay's 000-2430 Parker Square Bank 42000 Base Rate + 1 1/2%, 4/24/92 4/24/99 $1,699.77/mo. Principal Floating & Interest Secured 000-2430 William B. Ferguson Base Rate + 1 1/2%, 4/24/92 4/24/99 $751.82/mo. Principal (Pledged to Parker Square) Floating & Interest Secured Total - S E & P 000-2030 Barclay's Revolver Prime 1 1/4% 1/22/92 1/02/97 Secured 000-2430 William E. Snyder 9.0% 8/20/92 8/01/92 452.58/mo. Principal & Interest Secured Total - WESCO
EXHIBIT F 68 SEPCO INDUSTRIES, INC. Notes Payable Rollforward 12/31/93 File: Noterol1
G/L Account Balance Balance Current Long Number Lender Collateral 12/31/92 Additions Payments 12/31/93 Portion Term - ----------------------------------------------------------------------------------------------------------------------------------- > 000-2460 Robert Davenport 0.00 16,000.00 16,000.00 6,000.00 10,000.00 000-2460 Bill Diddle 0.00 10,364.00 10,364.00 3,887.00 6,477.00 000-2460 Fred Jackson, Jr. 0.00 4,000.00 4,000.00 1,500.00 2,500.00 000-2460 Joe Lewallen 0.00 8,000.00 8,000.00 3,000.00 5,000.00 000-2460 Donald Wile 0.00 5,612.00 5,612.00 2,105.00 3,507.00 000-2460 Edward Kelly Trust 0.00 1,200,000.00 1,200,000.00 450,000.00 750,000.00 000-2460 W. H. Blaney, Jr. 0.00 280,000.00 280,000.00 105,000.00 175,000.00 000-2460 Ellen Kelley Trust 0.00 73,620.00 73,620.00 27,608.00 46,012.00 000-2460 Edward W. Kelley, Jr. Trust 0.00 147,236.00 147,236.00 55,214.00 92,022.00 000-2460 Kinsloe Kelley Queen Trust 0.00 80,000.00 80,000.00 30,000.00 50,000.00 000-2460 Michael Kelley Trust 0.00 80,000.00 80,000.00 30,000.00 50,000.00
EXHIBIT F 69 SEPCO INDUSTRIES, INC. Notes Payable Rollforward 12/31/93
G/L Secured Account Note Interest Note Maturity or Number Lender Number Rate Date Date Payment Terms Unsecured - --------------------------------------------------------------------------------------------------------------- 000-2460 Robert Davenport 7.0% 10/27/93 10/27/96 Principal Due Annually Unsecured 3 Installments 000-2460 Bill Diddle 7.0% 10/21/93 10/21/96 Principal Due Annually Unsecured 3 Installments 000-2460 Fred Jackson, Jr. 7.0% 10/12/93 10/12/96 Principal Due Annually Unsecured 3 Installments 000-2460 Joe Lewallen 7.0% 10/12/93 10/12/96 Principal Due Annually Unsecured 3 Installments 000-2460 Donald Wile 7.0% 9/30/93 9/30/96 Principal Due Annually Unsecured 3 Installments 000-2460 Edward Kelly Trust 7.0% 9/30/93 9/30/96 Principal Due Annually Unsecured 3 Installments 000-2460 W.H. Blaney, Jr. 7.0% 9/30/93 9/30/96 Principal Due Annually Unsecured 3 Installments 000-2460 Ellen Kelley Trust 7.0% 9/30/93 9/30/96 Principal Due Annually Unsecured 3 Installments 000-2460 Edward W. Kelley, Jr. 7.0% 9/30/93 9/30/96 Principal Due Annually Unsecured Trust 3 Installments 000-2460 Kinsloe Kelley Queen 7.0% 9/30/93 9/30/96 Principal Due Annually Unsecured Trust 3 Installments 000-2460 Michael Kelley Trust 7.0% 9/30/93 9/30/96 Principal Due Annually Unsecured 3 Installments
EXHIBIT F 70 SEPCO INDUSTRIES, INC. Notes Payable Rollforward 12/31/93 File Noterol1
G/L Account Balance Balance Current Long Number Lender Collateral 12/31/92 Additions Payments 12/31/93 Portion Term - ----------------------------------------------------------------------------------------------------------------------------------- > 000-2450 Southwestern Life Brittmore Real 2,023,479 69,212 1,954,267 76,555 1,877,712 Property 000-2440 George Allen 316,667 100,000 216,667 100,000 116,667 000-2440 George Allen 138,750 15,000 123,750 15,000 108,750 000-2440 Edith Hughes 1,813,121 196,013 1,617,108 196,013 1,421,095 000-2440 Edith Hughes 64,750 7,000 57,750 7,000 50,750 000-2460 Peter Pianta 0.00 8,000,00 0.00 8,000 3,000,00 5,000.00 000-2460 Charles Pogue 0.00 20,000.00 0.00 20,000 7,500.00 12,500.00 000-2460 John Walls 0.00 7,200.00 0.00 7,200.00 2,700.00 4,500.00 000-2460 Garland Norman 0.00 1,824.00 0.00 1,824.00 684.00 1,140.00 000-2460 Arthur Bleimeyer, Jr. 0.00 24,000.00 0.00 24,000.00 9,000.00 15,000.00 000-2460 Joe Brunson 0.00 8,000.00 8,000 3,000.00 5,000.00
EXHIBIT F 71 SEPCO INDUSTRIES, INC. Notes Payable Rollforward 12/31/93
G/L Secured Account Note Interest Note Maturity or Number Lender Number Rate Date Date Payment Terms Unsecured - --------------------------------------------------------------------------------------------------------------------------- 000-2450 Southwestern Life 30515 10.125% 11/08/79 12/01/06 $22,578/mo. Principal and Interest Secured 000-2440 George Allen 11.5% 2/28/91 2/28/96 8,333.33/mo. Principal plus Unsecured Accrued Interest 000-2440 George Allen 12.0% 1/14/82 1/14/97 Qtrly Principal Pymt of $3,750 Unsecured beginning April 1992 000-2440 Edith Hughes 12.3333% 1/14/82 1/14/97 Qtrly Principal Pymt of $49,003.28 Unsecured beginning April 1992 000-2440 Edith Hughes 12.0% 1/14/82 1/14/97 Qtrly Principal Pymt of $1,750 Unsecured beginning April 1992 000-2460 Peter Pianta 7.0% 10/18/93 10/18/96 Principal Due Annually Unsecured 3 Installments 000-2460 Charles Pogue 7.0% 10/19/93 10/19/96 Principal Due Annually Unsecured 3 Installments 000-2460 John Walls 7.0% 10/29/93 10/29/96 Principal Due Annually Unsecured 3 Installments 000-2460 Garland Norman 7.0% 10/07/93 10/07/96 Principal Due Annually Unsecured 3 Installments 000-2460 Arthur Bleimeyer, Jr. 7.0% 10/08/93 10/08/96 Principal Due Annually Unsecured 3 Installments 000-2460 Joe Brunson 7.0% 10/25/93 10/25/96 Principal Due Annually Unsecured 3 Installments
EXHIBIT F 72
SECURED BALANCE BALANCE OR AT AT PAYMENT TERMS UNSECURED COLLATERAL 12/31/92 ADDITIONS PAYMENTS 12/31/93 - ------------------------------------------------------------------------------------------------------------------------------------ 2/97 Secured Inv. & Rec. 4,776,288.47 34,456,776.63 34,465,527.11 4,767,537.89 2/97 8,333/mo P Secured Certain real estate 408,337.00 99,996.00 308,341.00 and equip. 1/94 725.83/mo P&I Secured Bay City real estate 47,075.52 1,766.84 45,308.68 2/94 1,517.49/mo P&I Secured JIS Stock 53,589.87 13,456.78 40,133.09 2/94 4,349.08/mo P&I Secured JIS Stock 153,587.29 38,566.64 115,020.65 2/96 6,557/mo P&I Secured Computer equip. 213,768.68 48,764.51 165,004.17 1/96 311.24/mo P&I Secured Bay City real estate 11,423.82 2,714.68 8,709.14 5/94 Settlement Secured HP Computer equip. 86,976.81 86,976.81 0.00 1/02 4,246.47/mo P&I Unsecured 342,270.60 65,607.04 276,663.56 5/93 2,486/mo P&I Secured Baytown real estate 18,733.33 18,733.33 0.00 9/93 4,185/mo P&I Secured 2nd lien on A/R 8,282.43 8,282.43 0.00 & Inv. ee. Unsecured 31,904.08 0.00 31,904.08 --------------------------------------------------------------- 6,152,237.90 0.00 384,865.06 5,758,622.26 1/95 6,940/mo P&I Secured DMS Stock 201,926.30 67,860.57 134,065.73 --------------------------------------------------------------- 201,926.30 0.00 67,860.57 134,065.73 --------------------------------------------------------------- 6,354,164.20 0.00 452,725.63 5,892,687.99 ===============================================================
73 EXHIBIT G REAL PROPERTY FORMERLY OWNED IN THE NAME OF SOUTHERN ENGINE & PUMP COMPANY 1. 1100 West Maryland, Hobbs, Lea County, New Mexico Title Policy Required: No Survey Required: No Permitted Liens: See Attachment 1 2. 3900 West Loop 338, Odessa, Ector County, Texas Fair Market Value: $335,000 Title Policy Required: Yes Survey Required: Yes Permitted Liens: See Attachment 2 3. 1803 W. Cotton, Longview, Gregg County, Texas Title Policy Required: No Survey Required: No Permitted Liens: See Attachment 3 4. 320 Time Saver Avenue, Harahan, Jefferson Parish, Louisiana Fair Market Value: $1,050,000 Title Policy Required: Yes Survey Required: Yes Permitted Liens: See Attachment 4 REAL PROPERTY OWNED BY SEPCO INDUSTRIES, INC. 1. 2020 N. Loop 12, Irving, Dallas County, Texas Fair Market Value: $380,000 Title Policy Required: Yes Survey Required: Yes Permitted Liens: See Attachment 5 2. 110 KOL Drive, Broussard, Lafayette Parish, Louisiana Title Policy Required: No Survey Required: No Permitted Liens: See Attachment 6 3. 1119 Central Avenue, Metairie, Jefferson Parish, Louisiana Fair Market Value: $285,000 Title Policy Required: Yes Survey Required: Yes Permitted Liens: See Attachment 7 Exhibit G--Page 1 (Property Owned) 74 4. 4718 Baldwin, Corpus Christi, Nueces County, Texas Title Policy Required: No Survey Required: No Permitted Liens: See Attachment 8 REAL PROPERTY FORMERLY OWNED IN THE NAME OF T.L. WALKER BEARING CO. 1. 2603 LaBranch, Houston, Harris County, Texas Fair Market Value: $675,000 Title Policy Required: Yes Survey Required: Yes Permitted Liens: See Attachment 9 2. 112 North 12th Street, La Porte, Harris County, Texas Title Policy Required: No Survey Required: No Permitted Liens: See Attachment 10 3. Hammond Road, RR2, Bay City, Matagorda County, Texas Title Policy Required: No Survey Required: No Permitted Liens: See Attachment 11 4. 5550 Highland Avenue, Beaumont, Jefferson County, Texas Title Policy Required: No Survey Required: No Permitted Liens: See Attachment 12 Exhibit G--Page 2 (Property Owned) 75 ATTACHMENTS to Exhibit G ATTACHMENT 1 1. RESERVATIONS, CONDITIONS, AND STIPULATIONS AS CONTAINED IN PATENT FROM THE UNITED STATES IN BOOK 2, PAGE 309, MISCELLANEOUS RECORDS, LEA COUNTY, NEW MEXICO. 2. TITLE TO ALL OF THE OIL, GAS, MINERALS AND MINERAL SUBSTANCES WITHIN AND UNDERLYING THE PREMISES, TOGETHER WITH THE TITLE TO ALL OF THE OIL, GAS, MINERALS, AND MINERAL SUBSTANCES WITHIN AND UNDERLYING THE PREMISES, TOGETHER WITH THE DRILLING RIGHTS AND PRIVILEGES THERETO BELONGING IN BOOK 2, PAGE 309, MISCELLANEOUS RECORDS, LEA COUNTY, NEW MEXICO. 3. FINANCING STATEMENT DATED ---, FILED 12-22-88, BOOK 31, PAGE 130, FINANCING STATEMENT RECORDS, LEA COUNTY, NEW MEXICO. EXECUTED SEPCO POWER PRODUCTS, INC. TO BARCLAYSAMERICAN/BUSINESS CREDIT, INC. 4. FINANCING STATEMENT DATED ---, FILED 12-22-88, BOOK 31, PAGE 133, FINANCING STATEMENT RECORDS, LEA COUNTY, NEW MEXICO. EXECUTED BY SEPCO COMPRESSION SERVICES, INC. TO BARCLAYSAMERICAN/BUSINESS CREDIT, INC. 5. FINANCING STATEMENT DATED ---, FILED 12-22-88, BOOK 31, PAGE 136, FINANCING STATEMENT RECORDS, LEA COUNTY, NEW MEXICO. EXECUTED BY SHORELINE EQUIPMENT COMPANY TO BARCLAYSAMERICAN/BUSINESS CREDIT, INC. 6. FINANCING STATEMENT DATED ---, FILED 12-22-88, BOOK 31, PAGE 139, FINANCING STATEMENT RECORDS, LEA COUNTY, NEW MEXICO. EXECUTED BY SOUTHERN ENGINE & PUMP COMPANY TO BARCLAYSAMERICAN/BUSINESS CREDIT, INC. 7. FINANCING STATEMENT DATED ---, FILED 12-22-88, BOOK 31, PAGE 142, FINANCING STATEMENT RECORDS, LEA COUNTY, NEW MEXICO. EXECUTED BY WESCO EQUIPMENT, INC. TO BARCLAYSAMERICAN/BUSINESS CREDIT, INC. 8. FINANCING STATEMENT DATED, 12-22-88, BOOK 31, PAGE 145, FINANCING STATEMENT RECORDS, LEA COUNTY, NEW MEXICO. EXECUTED BY SEPCO INTERNATIONAL, INC. TO BARCLAYSAMERICAN/BUSINESS CREDIT, INC. Attachments to Exhibit G--Page 1 76 9. FINANCING STATEMENT DATED ---, FILED 12-22-88, BOOK 31, PAGE 127, FINANCING STATEMENT RECORDS, LEA COUNTY, NEW MEXICO. EXECUTED BY SEPCO INDUSTRIES, INC. TO BARCLAYSAMERICAN/BUSINESS CREDIT, INC. Attachments to Exhibit G--Page 2 77 ATTACHMENT 2 1. All minerals and/or royalty interest as described in Deed recorded in Volume 187, Page 200, Deed Records, Ector County, Texas, and amended by instrument recorded in Volume 342, Page 104, Deed Records, Ector County, Texas. 2. Oil and Gas Leases recorded in Volume 43, Page 505, and Volume 43, Page 453, Deed Records, Ector County, Texas. 3. Well Site Designation recorded in Volume 371, Page 328, Deed Records, Ector County, Texas. 4. Easements and/or rights-of-way: a) To Barnsdall Oil Co., recorded at Volume 51, Page 55, Deed Records, Ector County, Texas. b) To Phillips Petro. Co., recorded at Volume 83, Page 427, and Volume 119, Page 245, Deed Records, Ector County, Texas. c) To Pan American Petro. Corp., recorded at Volume 278, Page 522, Deed Records, Ector County, Texas. d) To Pioneer National Gas Co., recorded at Volume 234, Page 406, Deed Records, Ector County, Texas. e) To TESCO recorded at Volume 87, Page 4, Deed Records, Ector County, Texas. f) To TESCO recorded at Volume 788, Page 584, Deed Records, Ector County, Texas, and as shown on a survey dated January 6, 1992, prepared by S. W. O. Howell, R.P.L.S. #280. g) To ECUD at Volume 733, Page 568, and Volume 786, Page 733, Deed Records, Ector County, Texas, and as shown on survey dated January 16, 1992, prepared by S. W. Howell, R.P.L.S. #280. h) Sunray DX pipelines and Westar Transmission power lines on West side of property as shown on a survey dated December 9, 1983, by Gary N. Haner, Registered Surveyor. i) Overhead Electric Line along Westerly side of property as shown on survey dated January 16, 1992, prepared by S. W. Howell, R.P.L.S. #280. Attachments to Exhibit G--Page 3 78 5. UCC Financing Statement, recorded in Volume 860, Page 233, of the Deed of Trust Records, Ector County, Texas, from Shoreline Equipment Company, Debtor, to Barclays American/Business Credit, Inc., Secured Party. 6. UCC Financing Statement, recorded in Volume 860, Page 236, of the Deed of Trust Records, Ector County, Texas, from Southern Engine and Pump Company, Debtor, to Barclays American/Business Credit, Inc., Secured Party. 7. UCC Financing Statement, recorded in Volume 860, Page 239, of the Deed of Trust Records, Ector County, Texas, from Sepco Industries, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. 8. UCC Financing Statement, recorded in Volume 860, Page 242, of the Deed of Trust Records, Ector County, Texas, from Sepco International, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. 9. UCC Financing Statement, recorded in Volume 860, Page 245, of the Deed of Trust Records, Ector County, Texas, from Sepco Power Products, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. 10. UCC Financing Statement, recorded in Volume 860, Page 248, of the Deed of Trust Records, Ector County, Texas, from Sepco Compression Services, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. 11. UCC Financing Statement, recorded in Volume 860, Page 251, of the Deed of Trust Records, Ector County, Texas, from Wesco Equipment, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. Attachments to Exhibit G--Page 4 79 ATTACHMENT 3 1. Financing Statement executed by Sepco Industries, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party, filed for record on December 22, 1988, in Volume 1988, Page 216, Public Official Records, Gregg County, Texas. 2. Financing Statement executed by Sepco International, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party, filed for record on December 22, 1988, in Volume 1988, Page 221, Public Official Records, Gregg County, Texas. 3. Financing Statement executed by Sepco Power Products, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party, filed for record on December 22, 1988, in Volume 1988, Page 226, Public Official Records, Gregg County, Texas. 4. Financing Statement executed by Sepco Compression Services, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party, filed for record on December 22, 1988, in Volume 1988, Page 231, Public Official Records, Gregg County, Texas. 5. Financing Statement executed by Shoreline Equipment Company, Debtor, to Barclays American/Business Credit, Inc., Secured Party, filed for record on December 22, 1988, in Volume 1988, Page 236, Public Official Records, Gregg County, Texas. 6. Financing Statement executed by Southern Engine and Pump Company, Debtor, to Barclays American/Business Credit, Inc., Secured Party, filed for record on December 22, 1988, in Volume 1988, Page 241, Public Official Records, Gregg County, Texas. 7. Financing Statement executed by Wesco Equipment, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party, filed for record on December 22, 1988, in Volume 1988, Page 246, Public Official Records, Gregg County, Texas. 8. Visible, apparent and/or record easements in Gregg County, Texas, on or across the herein described property. Attachments to Exhibit G--Page 5 80 9. Mineral reservations set forth in instrument filed for record in Volume 643, Page 241, Deed Records, Gregg County, Texas. Attachments to Exhibit G--Page 6 81 ATTACHMENT 4 1. COB 995, folio 694 - Servitude for sidewalk and utilities measuring 5 feet in width along the front of the land, granted by LaSalle Properties, Inc. to the Parish of Jefferson by act dated December 23, 1980. 2. COB 1033, folio 745 - Servitude for sidewalk and utilities measuring 5 feet in width along Time Saver Avenue granted by LaSalle Properties, Inc. to the Parish of Jefferson by act dated October 6, 1982. 3. COB 2546, folio 121 - Right of Way Permit granted by Southern Engine & Pump Company to Louisiana Power & Light Company dated August 16, 1991. 4. Five foot servitude for sidewalk and utilities as shown on a plan of resubdivision of J. J. Krebs & Sons, Inc., dated November 16, 1990, approved under Jefferson Parish Ordinance No. 18186 on January 9, 1991 and recorded in COB 2420, folio 144. Attachments to Exhibit G--Page 7 82 ATTACHMENT 5 1. Easement granted by W. A. Courreges, et al to Texas Power & Light Company, as evidenced by the instrument dated November 5, 1970 recorded in Volume 74080, Page 2211, of the Deed Records, Dallas County, Texas, and as shown on survey dated January 9, 1992, prepared by L. Lynn Kadleck, R.P.L.S. #3952. 2. Airport Zoning Ordinance No. 71-100 for Dallas-Fort Worth International Airport, recorded in Volume 82173, Page 0178, of the Deed Records, Dallas County, Texas. 3. Encroachment of building over 30 foot set-back line as shown on survey dated January 9, 1992, prepared by L. Lynn Kadleck, R.P.L.S. #3952. 4. Deed of Trust dated February 10, 1986, recorded in Volume 86036, Page 4406, of the Deed of Trust Records, Dallas County, Texas, from Sepco Industries, Inc. to Sue P. Murphy, Trustee, securing the payment of multiple notes therewith, described as follows: 1) principal sum of $14,500,000.00, payable to the order of Barclays American/Business Credit, Inc.; 2) principal sum of $2,538,000.00, payable to the order of Barclays American/Business Credit, Inc.; 3) principal sum of $910,000.00, payable to the order of Barclays American/Business Credit, Inc.; and subject to all terms, conditions, and provisions contained in said Deed of Trust. 5. UCC Financing Statement filed February 21, 1986, recorded in Volume 86036, Page 4389, of the Deed of Trust Records, Dallas County, Texas, from Sepco Industries, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. Amendment recorded in Volume 91019, Page 2707, Deed Records, Dallas County, Texas, and continuation recorded in Volume 91019, Page 2209, Deed Records, Dallas County, Texas. 6. UCC Financing Statement filed January 6, 1989, recorded in Volume 89004, Page 4035, of the Deed of Trust Records, Dallas County, Texas, from Southern Engine and Pump Company, Debtor, to Barclays American/Business Credit, Inc., Secured Party. 7. UCC Financing Statement filed January 6, 1989, recorded in Volume 89004, Page 4040, of the Deed of Trust Records, Dallas County, Texas, from Shoreline Equipment Company, Attachments to Exhibit G--Page 8 83 Debtor, to Barclays American/Business Credit, Inc., Secured Party. 8. UCC Financing Statement filed January 6, 1989, recorded in Volume 89004, Page 4045, of the Deed of Trust Records, Dallas County, Texas, from Wesco Equipment, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. 9. UCC Financing Statement filed January 6, 1989, recorded in Volume 89004, Page 4050, of the Deed of Trust Records, Dallas County, Texas, from Sepco Industries, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. 10. UCC Financing Statement filed January 6, 1989, recorded in Volume 89004, Page 4055, of the Deed of Trust Records, Dallas County, Texas, from Sepco International, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. 11. UCC Financing Statement filed January 6, 1989, recorded in Volume 89004, Page 4060, of the Deed of Trust Records, Dallas County, Texas, from Sepco Power Products, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. 12. UCC Financing Statement filed January 6, 1989, recorded in Volume 89004, Page 4065, of the Deed of Trust Records, Dallas County, Texas, from Sepco Compression Services, Inc., Debtor, to Barclays American/Business Credit, Inc., Secured Party. Attachments to Exhibit G--Page 9 84 ATTACHMENT 6 1. File No. 86-05814 - Collateral Mortgage granted by SEPCO Industries, Inc. to secure a promissory note in the principal sum of $30,000,000.00 dated February 10, 1986 before Garvin Gunner, N.P., filed February 20, 1986. Said mortgage is payable at BarclaysAmerican/Business Credit, Inc., Dallas, Texas. 2. Entry No. 343727 - Notice of UCC-1 Filing of the above-referenced collateral mortgage, filed January 31, 1991. 3. File No. 80-027051 - Servitude Agreement granted by Kol Investment Corporation to Gulf States Utilities Company. Said servitude is ten feet in width across the front of the land. 4. File No. 81-010933 - Restrictive Covenants established by Kol Investments Corporation affecting the area known as Kol Industrial Park, together with the servitudes for drainage measuring 20 feet in width across the rear of the land and the ten foot utility servitude across the front of the land as shown on the plan of resubdivision. 5. File No. 81-013456 - Act of Dedication of Servitudes by Kol Investment Corporation in favor of the Town of Broussard. Attachments to Exhibit G--Page 10 85 ATTACHMENT 7 1. MOB 1431, folio 150 - Collateral Mortgage granted by SEPCO Industries, Inc. in favor of Barclays American/Business Credit, Inc. by act before G. Gunner, N.P., to secure a promissory note in the principal sum of $30,000,000.00 dated February 10, 1986, filed February 21, 1986. 2. COB 354, folio 362 - Right of way granted by Southern Engine & Pump Co., to Louisiana Power & Light Company dated October 26, 1953, filed March 30, 1954 in the office of the Clerk of Court of Jefferson Parish. 3. The discrepancies between actual and title measurements as shown on a plat of survey by H.E. Sutch dated May 19, 1953 and annexed to an act of sale by Regina Holloway Mahl, et al, to Southern Engine & Pump Company. Attachments to Exhibit G--Page 11 86 ATTACHMENT 8 1. Deed of Trust dated February 10, 1986, executed by SEPCO INDUSTRIES, INC., a Texas corporation, to SUE P. MURPHY, Trustee, filed for record in the Office of the County Clerk of Nueces County, Texas on February 19, 1986, under Clerk's File No. 478090, Volume 2065, Page 524, Deed of Trust Records of Nueces County, Texas, payable to the order of BARCLAYS AMERICAN/BUSINESS CREDIT, INC. 2. Financing Statement filed by BARCLAYS AMERICAN/BUSINESS CREDIT, INC., as Secured Party, against SEPCO INDUSTRIES, INC., as Debtor, filed on March 25, 1986, under Clerk's File No. 483135, Volume 2073, Page 50, Deed of Trust Records of Nueces County, Texas. Continuation filed on January 30, 1991, under Clerk's File No. 743524, Volume 2433, Page 593, Deed of Trust Records of Nueces County, Texas. Amendment filed on January 30, 1991, under Clerk's File No. 743625, Volume 2433, Page 594, Deed of Trust Records of Nueces County, Texas. 3. Financing Statement filed by BARCLAYS AMERICAN/BUSINESS CREDIT, INC., as Secured Party, against SEPCO COMPRESSION SERVICES, INC., a Debtor, filed on January 9, 1989; UCC File No. 213156; Clerk's File No. 646836, Volume 2310, Page 752, Deed of Trust Records of Nueces County, Texas. 4. Financing Statement filed by BARCLAYS AMERICAN/BUSINESS CREDIT, INC., as Secured Party, against SEPCO POWER PRODUCTS, INC., as Debtor, filed on January 9, 1989; UCC File No. 213157; Clerk's File No. 646837, Volume 2310, Page 755, Deed of Trust Records of Nueces County, Texas. 5. Financing Statement filed by BARCLAYS AMERICAN/BUSINESS CREDIT, INC., as Secured Party, against SEPCO INTERNATIONAL, INC., as Debtor, filed on January 9, 1989; UCC File No. 213158, Clerk's File No. 646838, Volume 2310, Page 756, Deed of Trust Records of Nueces County, Texas. 6. Financing Statement filed by BARCLAYS AMERICAN/BUSINESS CREDIT, INC., as Secured Party, against SEPCO INDUSTRIES, INC., as Debtor, filed on January 9, 1989; UCC File No. 213159; Clerk's File No. 646839, Volume 2310, Page 761, Deed of Trust Records of Nueces County, Texas. 7. Financing Statement filed by BARCLAYS AMERICAN/BUSINESS CREDIT, INC., as Secured Party, against WESCO EQUIPMENT, INC., as Debtor, filed on January 9, 1989; UCC File No. Attachments to Exhibit G--Page 12 87 213160; Clerk's File No. 646840, Volume 2310, Page 764, Deed of Trust Records of Nueces County, Texas. 8. Financing Statement filed by BARCLAYS AMERICAN/BUSINESS CREDIT, INC., as Secured Party, against SOUTHERN ENGINE AND PUMP COMPANY, as Debtor, filed on January 9, 1989; UCC File No. 213161; Clerk's File No. 646841, Volume 2310, Page 767, Deed of Trust Records of Nueces County, Texas. 9. Financing Statement filed by BARCLAYS AMERICAN/BUSINESS CREDIT, INC., as Secured Party, against SHORELINE EQUIPMENT COMPANY, as Debtor, filed on January 9, 1989; UCC File No. 213162; Clerk's File No. 646842, Volume 2310, Page 770, Deed of Trust Records of Nueces County, Texas. Attachments to Exhibit G--Page 13 88 ATTACHMENT 9 1. The subject property is located within the City of Houston or within its extra territorial jurisdiction (within 5 miles of the city limits but outside another municipality) it is subject to the terms, conditions and provisions of City of Houston Ordinance No. 85-1878, pertaining to, among other things, the platting and re-platting of real property and to the establishment of building lines (25 feet along major thoroughfares and 10 feet along other streets). A certified copy of said ordinance was filed for record on August 1, 1991, under Harris County Clerk's File No. N253886. Attachments to Exhibit G--Page 14 89 ATTACHMENT 10 1. None. Attachments to Exhibit G--Page 15 90 ATTACHMENT 11 1. State Tax Lien dated August 23, 1991, filed September 3, 1991 of record in Volume 295, Page 209, Official Records, Matagorda County, Texas. 2. Assumption Deed dated September 22, 1981, filed September 24, 1981, recorded in Volume 686, Page 713, Deed Records of Matagorda County, Texas from H P Heathman & wf Peggy Heathman to T L Walker Bearing Company. 3. Deed of Trust dated September 22, 1981, filed September 24, 1981 recorded in Volume 188, Page 143, Deed of Trust Records of Matagorda County, Texas from T L Walker Bearing Company by Lindley A King, President to Anthony B Hamilton, Trustee for H P Heathman & wf Peggy Heathman in the amount of $28,962.74. 4. Deed of Trust to Secure Assumption dated September 22, 1981, filed September 24, 1981 recorded in Volume 188, Page 138, Deed of Trust Records of Matagorda County, Texas from T L Walker Bearing Company, A Corporation to Anthony B Hamilton, Trustee for H P Heatherman & wf Peggy Heathman covering all principal & interest remaining unpaid upon that note for $65,000.00 dated March 20, 1979 executed by E D Wells et ux Bertha M Wells payable to Bay City Federal Savings & Loan Association of record in Volume 168, Page 302, Deed of Trust Records. Attachments to Exhibit G--Page 16 91 ATTACHMENT 12 1. All minerals reserved in Deed dated 5-17-66 filed 5-19-66 recorded in Vol. 1467 page 140 Deed Records of Jefferson County, Texas. 2. All minerals reserved in Deed dated 5-17-66 filed 5-19-66 recorded in Vol. 1467 page 121 Deed Records of Jefferson County, Texas. 3. Oil and gas lease in favor of J. D. Boone, dated August 24, 1950, filed March 22, 1951, in Volume 804, Page 432, Deed Records of Jefferson County, Texas. 4. Oil and gas lease in favor of H. E. Dishman and Harvey Lucas, dated February 12, 1951, filed March 28, 1951, in Volume 805, Page 304, Deed Records of Jefferson County, Texas. 5. Fence encroachment as shown on survey prepared by Matt Racki, Registered Professional Surveyor, dated September 25, 1984. Attachments to Exhibit G--Page 17 92 EXHIBIT H FORM OF OPINION OF BORROWER'S COUNSEL (To Be Placed on Borrower's Counsel's Stationery) April 1, 1994 Barclays Business Credit, Inc. 2711 North Haskell Suite 2100, LB 21 Dallas, Texas 75204 Re: Barclays Business Credit, Inc. Loan to Sepco Industries, Inc. ("Borrower") Gentlemen: We have represented Borrower, Sepco Power Products, Inc. ("Sepco Power"), Sepco Compression Services, Inc. ("Compression"), David Little and Gary Allcorn, Trustee (Borrower, Sepco Power, Compression, David Little and Gary A. Allcorn, Trustee, are collectively called the "Sepco Parties" and individually, a "Sepco Party") in connection with extensions of credit by Barclays Business Credit, Inc. ("Lender") to Borrower. In connection with such transaction, our firm has been requested by Lender to render an opinion to Lender relative to certain matters. Terms used but not defined in this opinion letter shall have the meanings assigned to them in the Loan Agreement (as such term is defined below). In rendering the following opinion, we have examined copies of the following documents: 1. Second Amended and Restated Loan and Security Agreement between Borrower and Lender dated as of the date hereof (the "Loan Agreement"). 2. Secured Promissory Note (Real Estate Loan) in the original principal amount of $1,329,277.37 dated as of the date hereof from Borrower to Lender (the "Term Note"). 3. Pledge Agreement dated as of the date hereof between Gary A. Allcorn, Trustee for the benefit of Kacey Joyce Little, Nicholas David Little and Andrea Rae Little 1988 Trusts and Lender. Exhibit H--Page 1 (Opinion) 93 Barclays Business Credit, Inc. April 1, 1994 Page 2 4. Unconditional Guaranty dated as of the date hereof from David R. Little for the benefit of Lender relating to Borrower. 5. Unconditional Guaranty dated as of the date hereof from Sepco Power for the benefit of Lender. 6. Unconditional Guaranty dated as of the date hereof from Compression for the benefit of Lender. 7. Deceptive Trade Practices Act Waiver dated as of the date hereof executed by the Sepco Parties. The above-described documents are at times hereinafter collectively referred to as the "Operative Documents". Borrower, Sepco Power and Compression are referred to herein as the "Corporate Parties"). As counsel for each of the Corporate Parties, we have also examined copies of the Articles/Certificate of Incorporation of each of the Corporate Parties and all amendments thereto which have been duly filed, and the Bylaws of each of the Corporate Parties, as amended to date. We are familiar with the proceedings of each of the Corporate Parties with respect to the authorization, execution, and delivery of the Operative Documents executed by them and the transactions contemplated thereby. In addition to the foregoing, we have examined and relied upon such other matters of law, documents, certificates, and statements of public officials and certificates and representations of the Corporate Parties as we have deemed relevant to rendering our opinion. In all of our examinations, we have assumed the accuracy of all information furnished to us (and nothing has come to our attention that would lead us to question the accuracy of such information), the genuineness of all documents submitted to us as original or certified documents, the conformity to original or certified documents of all copies submitted to us as conformed or photostatic copies and the genuineness of all signatures on all documents not signed in our presence. On the basis of the foregoing, we are of the opinion that: (a) Each of the Corporate Parties is a corporation duly organized and existing in good standing under the laws of the state of its incorporation. Exhibit H--Page 2 (Opinion) 94 Barclays Business Credit, Inc. April 1, 1994 Page 3 (b) Borrower is duly qualified and licensed as a foreign corporation in each state where the nature of its business or properties requires such qualification. (c) Each of the Corporate Parties has full power and authority to execute, deliver and perform its obligations under the Operative Documents to which it is a party. The transactions between each of the Corporate Parties and Lender contemplated by the Operative Documents have been duly authorized by all necessary corporate proceedings of each of the Corporate Parties. Each of the Corporate Parties and its officers executing such Operative Documents to which it is a party have been duly authorized to execute and deliver to Lender such Operative Documents and any other documents required to obtain and secure the credit being extended. (d) The Operative Documents have been duly executed and delivered on behalf of each Sepco Party that is a party thereto and the Operative Documents constitute legal, valid and binding obligations of each Sepco Party that is a party thereto and may be enforced in accordance with their terms except as may be limited by bankruptcy, reorganization, moratorium, insolvency or similar laws affecting the enforcement of creditors' rights generally. (e) To the best of our knowledge, there is no action, suit, investigation or proceeding pending or threatened against any Sepco Party or any of its properties before any court or administrative agency which, if adversely determined, would result in a materially adverse change in the business or condition of any Sepco Party. (f) To the best of our knowledge, no Corporate Party is in default under the provisions of any instruments evidencing any obligation for borrowed money or of any agreement relating thereto, or in default under or in violation of any order, writ, injunction or decree of any court, or any order, regulation or demand of any administrative or governmental instrumentality which default or violation might have consequences which would materially and adversely affect its business or properties. (g) The execution and delivery of the Operative Documents and the consummation of the transactions therein contemplated and the fulfillment of and compliance with the respective terms, conditions, and provisions thereof or of any Exhibit H--Page 3 (Opinion) 95 Barclays Business Credit, Inc. April 1, 1994 Page 4 instruments required thereby will not conflict with or result in a breach of any of the terms, conditions or provisions of, the Articles/Certificate of Incorporation, any bylaw or any law, rule or regulation of any administrative or governmental instrumentality applicable to any Corporate Party or, to the best of our knowledge, of any writ, injunction or decree of any court, or, to the best of our knowledge, the terms, conditions or provisions of any agreement or instrument to which any Corporate Party is a party or by which any Corporate Party is bound or to which it is subject. (h) Other than the filing of financing statements, deeds of trust and mortgages to perfect Liens, no registration with or authorization, consent, order or approval of any federal, state or other governmental authority or regulatory body is required with respect to any Sepco Party in connection with the execution and delivery of the Operative Documents, the consummation of the transactions therein contemplated, and/or the fulfillment of and compliance with the respective terms, conditions and provisions thereof or any of the instruments required thereby. (i) We understand that Lender has filed or soon will file financing statements, copies of which have been examined by us, covering Borrower's accounts receivable, equipment, fixtures, chattel paper, documents, instruments, general intangibles, contracts, contract rights, inventory and the proceeds and products of such items. Assuming that Lender gives value to Borrower and duly files the financing statements in the form reviewed by us with the Secretary of the State of Texas, Lender will thereupon have a duly perfected security interest in all of the above-described property and the proceeds and products thereof to the extent that the property is owned by Borrower and a security interest may be taken and perfected by filing in Texas under the Uniform Commercial Code of Texas. (j) Borrower has no direct Subsidiaries other than __________________. (k) No taxes, including, without limitation, intangible or documentary stamp taxes, mortgage taxes, transfer taxes or similar charges, are payable to the State of Texas, or any political subdivision thereof, or to any other jurisdiction in which Borrower conducts its business, on account of the execution or delivery of the Operative Documents, or the Exhibit H--Page 4 (Opinion) 96 Barclays Business Credit, Inc. April 1, 1994 Page 5 creation of the indebtedness evidenced or secured by any of the foregoing or the recording or filing of any of the foregoing, except for nominal filing or recording fees. (1) The compensation contracted for in the Operative Documents constitutes lawful interest, and the Operative Documents do not violate any laws of the State of Texas relating to interest or usury, and will not violate any such law by virtue of any fluctuations in any base, prime, index or equivalent rate or rates on which interest charged may be based under such agreements. Yours very truly, By: ---------------------------- Exhibit H--Page 5 (Opinion) 97 Sepco Industries, Inc. Exhibit I Schedule of Existing Loans and advance to David R. Little 1. Interest Bearing Note $137,635.00 2. Interest Bearing Note 53,927.00 3. Non Interest Bearing Note 227,000.00 4. Interest Bearing Note (Stk) 210,939.00 5. Miscellaneous Advances 35,734.00 ----------- $665,235.00 ===========
Explanation: 1. Original note was $149,910 of which $138,000 existed at time David R. Little purchased Sepco and was secured by stock of Sepco. Subsequent to stock transfer to Little's children's trust Sepco accepted equity interest in Little's home as collateral. Monthly principal and interest payments of $1348.78 due the 1st of each month. 2. Original note of $58,737 originated in July 1990. Proceeds used by David R. Little for settlement of amount due at Texas American Bank for activities related to Tryit Enterprises. Principal and interest payment of $528.47 due the 1st of each month. 3. Advance made to David R. Little in April of 1992 for payment of personal income tax. Tax liability resulted from income generated by dissolution of Tryit related entities. Income to partners was created with no cash proceeds for payment of taxes. 4. Interest bearing note created in December, 1993 for purpose of selling five percent of Sepco to David R. Little. Interest only payments due in December of each year. 5. Miscellaneous advances made to David R. Little. 98 Sepco Industries, Inc. Exhibit J Schedule of Amount Due Stock Acquisition Debt Marvin Steffek $ 4770.00 Nelvin Luke 1060.00 Norman Schenk 1360.00 Charles E. Jacob 5730.00 Gary A. Allcorn 10,906.54 Bryan H. Wimberly 27,216.32 J. Michael Wappler 17,210.32 ---------- Total $68,253.18 ==========
Note: Notes originated with employee listed above for purpose of allowing various employees to acquire Sepco stock through a non qualified stock plan. Notes require yearly interest payment. 99 FIRST AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AND SECURED PROMISSORY NOTE THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AND SECURED PROMISSORY NOTE ("this Amendment") is made and entered into this ____ day of May, 1995, by and between SEPCO INDUSTRIES, INC., a Texas corporation ("Borrower"), and SHAWMUT CAPITAL CORPORATION, a Connecticut corporation and successor-in-interest by assignment to Barclays Business Credit, Inc. ("Lender"). RECITALS A. Borrower and Lender have entered into that certain Second Amended and Restated Loan and Security Agreement, dated as of April 1, 1994 (the "Loan Agreement"). B. In connection with the Loan Agreement, Borrower executed that certain Secured Promissory Note (Real Estate Loan) dated April 1, 1994 (the "Term Note"), in the original principal amount of $1,329,277.37, payable to the order of Lender. C. Borrower and Lender desire to amend the Loan Agreement, the Term Note and the Other Agreements as hereinafter set forth. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: AGREEMENT ARTICLE I DEFINITIONS 1.01 Capitalized terms used in this Amendment are defined in the Loan Agreement, as amended hereby, unless otherwise stated. ARTICLE II AMENDMENTS TO LOAN AGREEMENT Effective as of the date hereof, the Loan Agreement is hereby amended as follows: 2.01 AMENDMENT TO SECTION 1.1; ADDITION OF CERTAIN DEFINITIONS. Section 1.1 of the Loan Agreement is hereby amended by adding the following new definitions thereto, in the proper alphabetical order: -1- 100 "First Amendment - the First Amendment to Second Amended and Restated Loan and Security Agreement and Secured Promissory Note dated as of May ___, 1995 by and between Borrower and Lender. Eurodollar Base Rate - with respect to a Eurodollar Loan for the relevant Eurodollar Interest Period, a rate per annum equal to the quotient of the following: (a) the rate at which deposits in U.S. dollars in immediately available funds are offered by Lender or Bank to first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of the Eurodollar Loan and having a maturity approximately equal to the Eurodollar Interest Period divided by (b) the difference of 1.00 minus the Eurodollar Reserve Requirement. Eurodollar Borrowing Notice - as defined in Section 3.7(A) of this Agreement. Eurodollar Interest Period- with respect to a Eurodollar Loan, a period of one (1), two (2), three (3) or six (6) months commencing on a Business Day selected by Borrower pursuant to this Agreement. Such Eurodollar Interest Period shall end on (but exclude) the day which corresponds numerically to such date one (1), two (2), three (3) or six (6) months thereafter, provided, however, that if there is no such numerically corresponding day in such first (1st), second (2nd), third (3rd) or sixth (6th) succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such first (1st), second (2nd), third (3rd) or sixth (6th) succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. Eurodollar Loan - a Revolving Credit Loan which bears interest at a Eurodollar Base Rate. Eurodollar Reserve Requirement- on any day, means that percentage (expressed as a decimal fraction) which is in effect on such day, as provided by the Board of Governors of the Federal Reserve System (or any successor governmental body) applied for determining the maximum reserve requirements (including without limitation, basic, supplemental, marginal and emergency reserves) under Regulation D with respect to "eurocurrency liabilities" as currently defined in Regulation D, or under any similar or successor regulation with respect to eurocurrency liabilities or eurocurrency funding. Each determination by Lender of the Eurodollar Reserve Requirement shall, in the absence of manifest error, be conclusive and binding." 2.02 AMENDMENT TO DEFINITION OF "BANK" IN SECTION 1.1. The definition of "Bank" in Section 1.1 of the Loan Agreement is hereby amended by deleting the reference to "Barclays Bank PLC" therefrom and substituting "Shawmut Bank Connecticut, N.A." in lieu thereof. - 2 - 101 2.03 AMENDMENT TO SECTION 1.1; DELETION OF DEFINITION. Section 1.1 of the Loan Agreement is hereby amended by deleting the definition of "Applicable Margin" therefrom. 2.04 AMENDMENT TO SECTION 3.1(A); INTEREST AND CHARGES. Subsection 3.1(A) of the Loan Agreement is hereby deleted in its entirety and the following is hereby substituted therefor: "(A) Interest shall accrue on the outstanding principal on the Term Loan in accordance with the terms of the Term Note, and the outstanding principal on the Revolving Credit Loans shall bear interest, calculated daily, at the following rates per annum (individually called, as applicable, an "Applicable Annual Rate"): (i) Eurodollar Loans shall bear interest at a rate per annum equal to 3.25% above the Eurodollar Base Rate for the Eurodollar Interest Period applicable thereto and (ii) all other Revolving Credit Loans shall bear interest at a rate per annum equal to .75% above the Base Rate. Revolving Credit Loans shall bear interest at a rate per annum equal to .75% above the Base Rate unless the Borrower provides a Eurodollar Borrowing Notice to the Lender in accordance with Section 3.7(A) irrevocably electing that all or a portion of the Revolving Credit Loans are to bear interest at a Eurodollar Base Rate. Each Revolving Credit Loan that is not a Eurodollar Loan shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Base Rate becomes effective. The Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the date hereof, but if this Agreement is executed on a day that is not a Business Day, the Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the last Business day immediately preceding the date hereof. Interest shall be calculated on a daily basis (computed on the actual number of days elapsed over a year of 360 days), commencing on the date hereof, and shall be payable monthly, in arrears, on the first day of each month; provided, however, that interest at the Maximum Legal Rate shall be computed on the actual number of days elapsed over a year of 365 or 366 days, as the case may be. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of the Obligations shall bear interest at the lesser of (i) the Maximum Legal Rate or (ii) a fluctuating rate per annum, calculated daily (computed on the actual days elapsed over a year of 360 days), equal to 4.0% above the Applicable Annual Rate or other applicable rate of interest (the "Default Rate"). 2.05 AMENDMENT TO SECTION 3.1; DELETION OF SUBSECTION. Section 3.1 of the Loan Agreement is hereby amended by deleting Subsection 3.1(F) in its entirety therefrom. 2.06 AMENDMENT TO SUBSECTION 3.1(C). The fourth sentence of Subsection 3.1(C) of the Loan Agreement is hereby deleted in its entirety and the following is hereby substituted therefor: "Borrower recognizes that, with fluctuations in the Base Rate, the Eurodollar Base Rate and the Maximum Legal Rate, such a result could inadvertently occur." - 3 - 102 2.07 AMENDMENT TO ARTICLE III; ADDITION OF SECTIONS. Article III of the Loan Agreement is hereby amended by adding new Sections 3.7 and 3.8 thereto which shall read as follows: "3.7. Additional Provisions Regarding Eurodollar Loans. (A) Manner of Borrowing a Eurodollar Loan. Borrower shall give Lender notice of its intention to borrow a Eurodollar Loan in the form of Annex B to the First Amendment (a "Eurodollar Borrowing Notice"), in which notice Borrower shall specify (x) the aggregate amount of such Eurodollar Loan, (y) the requested date of such Eurodollar Loan, and (z) the Eurodollar Interest Period applicable thereto. Borrower shall give Lender the Eurodollar Borrowing Notice at least two (2) Business Days prior to the requested date of the Eurodollar Loan. With respect to such Eurodollar Loans, (i) each Eurodollar Loan shall be in an integral multiple of $1,000,000, (ii) no more than four (4) Eurodollar Interest Periods may be in existence at any one time, and (iii) Borrower may not request a Eurodollar Loan if there exists a Default or Event of Default. The Borrower shall select Eurodollar Interest Periods with respect to Eurodollar Loans so that no Eurodollar Interest Period expires after the end of the Original Term, or if extended pursuant to Section 3.3(A), any Renewal Term. An outstanding Revolving Credit Loan may be converted to a Eurodollar Loan at any time subject to the provisions of this Section 3.7. (B) Interest on Eurodollar Loans. Each Eurodollar Loan shall bear interest from and including the first day of the Eurodollar Interest Period applicable thereto (but not including the last day of such Eurodollar Interest Period) at the interest rate determined as applicable to such Eurodollar Loan, but interest on such Eurodollar Loan shall be payable as provided in Section 3.4. If at the end of a Eurodollar Interest Period for an outstanding Eurodollar Loan, Borrower has failed to deliver to Lender a new Eurodollar Borrowing Notice with respect to such Eurodollar Loan or to pay such Eurodollar Loan, then such Eurodollar Loan shall be converted to a Revolving Credit Loan bearing interest at a rate, and subject to all other terms and conditions of this Agreement, applicable to Revolving Credit Loans not constituting Eurodollar Loans on and after the last day of such Eurodollar Interest Period until paid or until the effective date of a new Eurodollar Borrowing Notice with respect thereto. (C) Availability of Eurodollar Loans. If Lender determines that maintenance of any of its Eurodollar Loans would violate any applicable law, rule, regulation or directive, whether or not having the force of law, Lender shall suspend the availability of Eurodollar Loans and require any Eurodollar Loans outstanding to be repaid (provided, that, without in any - 4 - 103 way impairing Borrower's obligations under Section 3.7(D) and Section 3.7(E), to the extent that Borrower is entitled to request a Revolving Credit Loan bearing interest at the Base Rate, Borrower may request such a Revolving Credit Loan in order to repay the Eurodollar Loans); or if Lender determines that (x) deposits of a type or maturity appropriate to match fund Eurodollar Loans are not available or (y) the Eurodollar Base Rate does not accurately reflect the cost of making a Eurodollar Loan, then Lender shall suspend the availability of Eurodollar Loans after the date of any such determination. (D) Funding Indemnification. If any payment of a Eurodollar Loan occurs on a date which is not the last day of the applicable Eurodollar Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Loan is not made on the date specified by Borrower because Borrower has not satisfied the conditions precedent to such Eurodollar Loan contained in this Agreement or has otherwise breached the terms of this Agreement, Borrower will indemnify Lender for any loss or cost incurred by it resulting therefrom, including without limitation any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Loan. (E) Lender Statements: Survival of Indemnity. Within sixty (60) days of the date upon which Lender suspends the availability of Eurodollar Loans under Section 3.7(C) hereof or learns of any loss or cost for which Borrower has indemnified Lender under Section 3.7(D) hereof, Lender shall deliver a written statement as to the amount due under Section 3.7(C) or (D). Such written statement shall set forth in reasonable detail the calculations and basis therefor upon which Lender determined such amount and shall be final, conclusive and binding on Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though the Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Base Rate applicable to such Eurodollar Loan whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement shall be payable on demand after receipt by Borrower of the written statement. 3.8. Yield Protection. If either (i) the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall subject Lender to any tax (including without limitation any United States interest equalization or similar - 5 - 104 tax, however named), duty or other charge with respect to any Eurodollar Loan or Lender's obligation to compute interest on the principal balance of any Eurodollar Loan at a rate based upon the Eurodollar Base Rate, or shall change the basis of taxation of payments to Lender of the principal of or interest on any Eurodollar Loan or any other amounts due under this Agreement in respect of any Eurodollar Loan or Lender's obligation to compute the interest on the principal balance of any Eurodollar Loan at a rate based upon the Eurodollar Base Rate, or (ii) any governmental authority, central bank or other comparable authority shall at any time impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, Lender, or shall impose on Lender (or its eurodollar lending office) or any relevant interbank eurodollar market any other condition affecting any Eurodollar Loan or Lender's obligation to compute the interest on the principal balance of any Eurodollar Loan at a rate based upon the Eurodollar Base Rate; and the result of any of the foregoing is to increase the cost to Lender of maintaining any Eurodollar Loans, or to reduce the amount of any sum received or receivable by Lender under this Agreement by an amount deemed by Lender to be material, then upon demand by Lender, Borrower shall pay to Lender such additional amount or amounts as will compensate Lender for such increased cost or reduction. Lender will promptly notify Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle Lender to compensation pursuant to this Section 3.8. A certificate of Lender claiming compensation under this Section 3.8 and setting forth the additional amount or amounts to be paid to Lender hereunder shall be conclusive in the absence of manifest error." 2.08 AMENDMENT TO REFERENCES TO "ANNUAL RATE". The Loan Agreement is hereby amended by deleting any and all references to "Annual Rate" therefrom and substituting "Applicable Annual Rate" in lieu thereof. 2.09 REFERENCES TO "BARCLAYS BUSINESS CREDIT, INC.". The Loan Agreement and the Other Agreements are hereby amended by deleting any and all references to "Barclays Business Credit, Inc." therefrom and substituting "Shawmut Capital Corporation" in lieu thereof. ARTICLE III AMENDMENTS TO TERM NOTE Effective as of the date hereof, the Term Note is hereby amended as follows: 3.01 AMENDMENT TO INTEREST RATE. The first full paragraph on page 1 of the Term Note is hereby amended by deleting the reference to "1.50%" contained therein and substituting "1.00%" in lieu thereof. ARTICLE IV - 6 - 105 CONDITIONS PRECEDENT 4.01 CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent, unless specifically waived in writing by Lender: (a) Lender shall have received this Amendment, duly executed by Borrower together with such additional documents, instruments and information as Lender or its legal counsel may request; (b) The representations and warranties contained herein and in the Loan Agreement and the Other Agreements, as each is amended hereby, shall be true and correct as of the date hereof, as if made on the date hereof; (c) No Default or Event of Default shall have occurred and be continuing, unless such Default or Event of Default has been specifically waived in writing by Lender; and (d) All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Lender and its legal counsel. ARTICLE V RATIFICATIONS, REPRESENTATIONS AND WARRANTIES 5.01 RATIFICATIONS. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Loan Agreement and the Other Agreements, and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Loan Agreement and the Other Agreements are ratified and confirmed and shall continue in full force and effect. Borrower and Lender agree that the Loan Agreement and the Other Agreements, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. 5.02 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Lender that (a) the execution, delivery and performance of this Amendment and any and all Other Agreements executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of Borrower and will not violate the Articles of Incorporation or Bylaws of Borrower; (b) attached hereto as Annex A is a true, correct and complete copy of presently effective resolutions of Borrower's Board of Directors authorizing the execution, delivery and performance of this Amendment and any and all Other Agreements executed and/or delivered in connection herewith, certified by the Assistant Secretary of Borrower; (c) the representations and warranties contained in the Loan Agreement, as amended hereby, and any Other Agreement are true and correct on and as of the date hereof and on and as of the date of execution hereof as though made on and as of each such date; (d) no Default or Event of Default under the Loan Agreement, as amended hereby, has occurred and is continuing, unless such Default or Event of Default has been specifically waived in writing by Lender; (e) - 7 - 106 Borrower is in full compliance with all covenants and agreements contained in the Loan Agreement and the Other Agreements, as amended hereby; and (f) Borrower has not amended its Articles of Incorporation or its Bylaws since the date of the Loan Agreement. ARTICLE VI MISCELLANEOUS PROVISIONS 6.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in the Loan Agreement or any Other Agreement, including, without limitation, any document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the Other Agreements, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. 6.02 REFERENCE TO LOAN AGREEMENT. Each of the Loan Agreement and the Other Agreements, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Loan Agreement, as amended hereby, are hereby amended so that any reference in the Loan Agreement and such Other Agreements to the Loan Agreement shall mean a reference to the Loan Agreement as amended hereby. 6.03 EXPENSES OF LENDER. As provided in the Loan Agreement, Borrower agrees to pay on demand all costs and expenses incurred by Lender in connection with the preparation, negotiation, and execution of this Amendment and the Other Agreements executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including, without limitation, the costs and fees of Lender's legal counsel, and all costs and expenses incurred by Lender in connection with the enforcement or preservation of any rights under the Loan Agreement, as amended hereby, or any Other Agreements, including, without, limitation, the costs and fees of Lender's legal counsel. 6.04 SEVERABILITY. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. 6.05 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall inure to the benefit of Lender and Borrower and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Lender. 6.06 COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. - 8 - 107 6.07 EFFECT OF WAIVER. No consent or waiver, express or implied, by Lender to or for any breach of or deviation from any covenant or condition by Borrower shall be deemed a consent to or waiver of any other breach of the same or any other covenant, condition or duty. 6.08 HEADINGS. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. 6.09 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 6.10 FINAL AGREEMENT. THE LOAN AGREEMENT AND THE OTHER AGREEMENTS, EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE LOAN AGREEMENT AND THE OTHER AGREEMENTS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY BORROWER AND LENDER. 6.11 RELEASE. BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY THE "OBLIGATIONS" OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER. BORROWER HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE BORROWER MAY NOW OR HEREAFTER HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY "LOANS", INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT OR OTHER AGREEMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT. - 9 - 108 IN WITNESS WHEREOF, this Amendment has been executed and is effective as of the date first above-written. "BORROWER" SEPCO INDUSTRIES, INC. By: /s/ GARY A. ALLCORN ------------------------------------- Name: Gary A. Allcorn Title: Vice President Finance "LENDER" SHAWMUT CAPITAL CORPORATION, SUCCESSOR-IN-INTEREST BY ASSIGNMENT TO BARCLAYS BUSINESS CREDIT, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- ANNEXES: A - Certified Resolutions of Borrower's Board of Directors B - Eurodollar Borrowing Notice - 10 - 109 ANNEX A CERTIFIED RESOLUTIONS OF BORROWER'S BOARD OF DIRECTORS RESOLVED: That any officer of Sepco Industries, Inc., a Texas corporation (the "Corporation"), acting alone, by his signature be, and the same hereby is, authorized and directed, in the name of and on behalf of the Corporation (a) to amend the Corporation's existing Second Amended and Restated Loan and Security Agreement by and between the Corporation and Barclays Business Credit, Inc., predecessor-in-interest to Shawmut Capital Corporation ("Lender"), (b) to execute and deliver to Lender with such changes in the terms and provisions thereof as the officer executing same shall, in his sole discretion, deem advisable, (i) a certain proposed First Amendment to Second Amended and Restated Loan and Security Agreement and Term Note, a draft of each of which has been reviewed and discussed by the Board of Directors of the Corporation, and (ii) such other agreements, instruments, statements and writings as the officer or officers executing the same may deem desirable or necessary in connection therewith, and (c) to perform such other acts as the officer or officers performing such acts on behalf of the Corporation may deem desirable or necessary in connection therewith; and be it FURTHER RESOLVED: That said agreements will benefit the Corporation, both directly and indirectly, and are in the best interests of the Corporation; and be it FURTHER RESOLVED: That said agreements and other statements in writing executed in the name and on behalf of the Corporation by any officer of the Corporation shall be presumed conclusively to be the instruments, the execution of which is authorized by these resolutions; and be it FURTHER RESOLVED: That the officers of the Corporation be, and the same hereby are, authorized and directed to execute, in the name of and on behalf of the Corporation, security agreements, financing statements, assignments, collateral reports, loan statements, confirmations of delivery, lien statements, pledge certificates, release certificates, removal reports, guaranties, cross- collateralization agreements and such other writings and to take such other actions as are necessary in their dealings with Lender, and any such papers executed and any such actions taken by any of them prior to this time are approved, ratified and confirmed; and be it FURTHER RESOLVED: That the Secretary or any Assistant Secretary of the Corporation, by the signature of any one or more of them, be, and the same hereby are, authorized and directed to attest the execution by the Corporation of the papers signed pursuant to these resolutions, to affix the seal of the Corporation thereto, if required by Lender, and to certify to Lender the adoption of these resolutions. ANNEX A - Page 1 of 2 110 CERTIFICATION The undersigned hereby certifies that the within and foregoing resolutions are in effect as of the date hereof, without modification, and that the person signing the within and foregoing Amendment on behalf of the Corporation is the duly elected officer stated below his name, that he is authorized to sign such Amendment, and that his signature thereon is genuine. DATED: May ___, 1995. /s/ GARY A. ALLCORN ---------------------------------------- [Assistant] Secretary of the Corporation ANNEX A - Page 2 of 2 111 ANNEX B FORM OF EURODOLLAR BORROWING NOTICE This Eurodollar Borrowing Notice is executed and delivered to Shawmut Capital Corporation, successor-in-interest by assignment to Barclays Business Credit, Inc. ("Lender"), by the undersigned officer of Sepco Industries, Inc., a Texas corporation ("Borrower"), this ____ day of __________________, 19______, pursuant to Section 3.7(A) of that certain Second Amended and Restated Loan and Security Agreement, dated April 1, 1994 (together with any and all renewals, modifications, extensions and amendments thereof, the "Loan Agreement"), between Borrower and Lender. All capitalized terms not otherwise defined herein shall have the definitions assigned to such terms in the Loan Agreement. 1. Outstanding principal amount of Revolving Credit Loans $______________ 2. Borrowing Base as of , 19 (within ------------- -- Business Days of the ---- date hereof) $______________ 3. Amount of Eurodollar Loan requested $______________ 4. Date Eurodollar Loan is requested _________, 19___ 5. The Eurodollar Interest Period _______________
In connection with the foregoing Eurodollar Loan and pursuant to the terms and provisions of the Loan Agreement, the undersigned hereby certifies that: (i) The undersigned is the duly elected, qualified and acting officer of Borrower specified below and as such officer is authorized to make and deliver this certificate. (ii) The representations and warranties contained in Section 8 of the Loan Agreement and in each of the Other Agreements are true and correct in all material respects on and as of the date hereof with the same force and effect as though made on and as of the date hereof. (iii) No Default or Event of Default has occurred and is continuing or will exist after giving effect to the Eurodollar Loan requested hereby. ANNEX B - Page 1 of 2 112 (iv) The Loans will not, after giving effect to the Eurodollar Loan requested hereby, exceed the amount permitted by Section 2.1 of the Loan Agreement. (v) Enclosed herewith is a Borrowing Base Certificate prepared as of a date not more than _____ Business Days prior to the date hereof. EXECUTED and delivered this _____ day of _____________________, 19______. By: ------------------------------------ Its: ------------------------------------ ANNEX B - Page 2 of 2 113 CONSENT AND RATIFICATION The undersigned, DAVID R. LITTLE, has executed that certain Amended and Restated Unconditional Guaranty dated September 16, 1994 (the "Guaranty"), in favor of BARCLAYS BUSINESS CREDIT, INC., predecessor-in-interest to SHAWMUT CAPITAL CORPORATION ("Lender"). The undersigned hereby (i) consents and agrees to the terms of the First Amendment to Second Amended and Restated Loan and Security Agreement and Term Note dated as of May ___, 1995 (the "Loan Amendment"), between Sepco Industries and Lender, a copy of which has been reviewed by the undersigned, and (ii) agrees that the Guaranty shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of the undersigned enforceable against it in accordance with its terms. Furthermore, the undersigned hereby agrees and acknowledges that (a) the obligations, indebtedness and liabilities arising in connection with the Loan Amendment comprise some, but not all, of the "Obligations" as such term is used in the Guaranty, (b) the Guaranty is an "Other Agreement" as such term is defined in the Loan Agreement, (c) the Guaranty, is not as of this date subject to any claims, defenses or offsets, (d) nothing contained in the Loan Agreement or any Other Agreement entered into prior to or as of the date hereof shall adversely affect any right or remedy of Lender under the Guaranty, and (e) the execution and delivery of the Loan Amendment shall in no way reduce, impair or discharge any obligations of the undersigned as guarantor pursuant to the Guaranty and shall not constitute a waiver by Lender of any of Lender's rights against the undersigned. Dated: May ___, 1995. ------------------------------------- David R. Little, individually 114 CONSENT AND RATIFICATION The undersigned, T. L. WALKER BEARING CO., has executed that certain Amended and Restated Unconditional Guaranty dated September 16, 1994 (the "Guaranty"), in favor of BARCLAYS BUSINESS CREDIT, INC., predecessor-in-interest to SHAWMUT CAPITAL CORPORATION ("Lender"). The undersigned hereby (i) consents and agrees to the terms of the First Amendment to Second Amended and Restated Loan and Security Agreement and Term Note dated as of May ___, 1995 (the "Loan Amendment"), between Sepco Industries and Lender, a copy of which has been reviewed by the undersigned, and (ii) agrees that the Guaranty shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of the undersigned enforceable against it in accordance with its terms. Furthermore, the undersigned hereby agrees and acknowledges that (a) the obligations, indebtedness and liabilities arising in connection with the Loan Amendment comprise some, but not all, of the "Obligations" as such term is used in the Guaranty, (b) the Guaranty is an "Other Agreement" as such term is defined in the Loan Agreement, (c) the Guaranty, is not as of the date hereof subject to any claims, defenses or offsets, (d) nothing contained in the Loan Agreement or any Other Agreement entered into prior to or as of the date hereof shall adversely affect any right or remedy of Lender under the Guaranty, and (e) the execution and delivery of the Loan Amendment shall in no way reduce, impair or discharge any obligations of the undersigned as guarantor pursuant to the Guaranty and shall not constitute a waiver by Lender of any of Lender's rights against the undersigned. Dated: May ___, 1995. T. L. WALKER BEARING CO. By: ------------------------------------- Name: ----------------------------------- 115 CONSENT AND RATIFICATION The undersigned, SOUTHERN ENGINE & PUMP COMPANY, has executed that certain Amended and Restated Unconditional Guaranty dated September 16, 1994 (the "Guaranty"), in favor of BARCLAYS BUSINESS CREDIT, INC., predecessor-in-interest to SHAWMUT CAPITAL CORPORATION ("Lender"). The undersigned hereby (i) consents and agrees to the terms of the First Amendment to Second Amended and Restated Loan and Security Agreement and Term Note dated as of May ___, 1995 (the "Loan Amendment"), between Sepco Industries and Lender, a copy of which has been reviewed by the undersigned, and (ii) agrees that the Guaranty shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of the undersigned enforceable against it in accordance with its terms. Furthermore, the undersigned hereby agrees and acknowledges that (a) the obligations, indebtedness and liabilities arising in connection with the Loan Amendment comprise some, but not all, of the "Obligations" as such term is used in the Guaranty, (b) the Guaranty is an "Other Agreement" as such term is defined in the Loan Agreement, (c) the Guaranty, is not as of the date hereof subject to any claims, defenses or offsets, (d) nothing contained in the Loan Agreement or any Other Agreement entered into prior to or as of the date hereof shall adversely affect any right or remedy of Lender under the Guaranty, and (e) the execution and delivery of the Loan Amendment shall in no way reduce, impair or discharge any obligations of the undersigned as guarantor pursuant to the Guaranty and shall not constitute a waiver by Lender of any of Lender's rights against the undersigned. Dated: May ____, 1995. SOUTHERN ENGINE & PUMP COMPANY By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- 116 CONSENT AND RATIFICATION The undersigned, GARY A. ALLCORN, TRUSTEE FOR KACEY JOYCE LITTLE, NICHOLAS DAVID LITTLE AND ANDREA RAE LITTLE 1988 TRUSTS, has executed that certain Amended and Restated Pledge Agreement dated September 16, 1994 (the "Pledge Agreement"), in favor of BARCLAYS BUSINESS CREDIT, INC., predecessor-in-interest to SHAWMUT CAPITAL CORPORATION ("Lender"). The undersigned hereby (i) consents and agrees to the terms of the First Amendment to Second Amended and Restated Loan and Security Agreement and Term Note dated as of May ___, 1995 (the "Loan Amendment"), executed by Sepco Industries, Inc. and Lender, a copy of which has been reviewed by the undersigned, and (ii) agrees that the Pledge Agreement shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of the undersigned enforceable against it in accordance with its terms. Furthermore, the undersigned hereby agrees and acknowledges that (a) the obligations, indebtedness and liabilities arising in connection with the Loan Amendment comprise some, but not all, of the "Secured Indebtedness" as such term is used in the Pledge Agreement, (b) the Pledge Agreement is an "Other Agreement" as such term is defined in the Loan Agreement, (c) the Pledge Agreement, is not as of the date hereof subject to any claims, defenses or offsets, (d) nothing contained in this Agreement or any Other Agreement entered into prior to or as of the date hereof shall adversely affect any right or remedy of Lender under the Pledge Agreement, and (e) the execution and delivery of the Loan Amendment shall in no way reduce, impair or discharge any obligations of the undersigned pursuant to the Pledge Agreement and shall not constitute a waiver by Lender of any of Lender's rights against the undersigned. Dated: May ___, 1995. ---------------------------------------- GARY A. ALLCORN, TRUSTEE FOR KACEY JOYCE LITTLE, NICHOLAS DAVID LITTLE AND ANDREA RAE LITTLE 1988 TRUSTS 117 SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("this Amendment") is made and entered into this 3rd day of April, 1996, to be effective as of the respective date herein indicated, by and between SEPCO INDUSTRIES, INC., a Texas corporation ("Borrower"), and FLEET CAPITAL CORPORATION, a Connecticut corporation, formerly known as Shawmut Capital Corporation, and successor-in-interest by assignment to Barclays Business Credit, Inc. ("Lender"). RECITALS A. Borrower and Lender have entered into that certain Second Amended and Restated Loan and Security Agreement, dated as of April 1, 1994, as amended by that certain First Amendment to Second Amended and Restated Loan and Security Agreement and Secured Promissory Note, dated May, 1995, executed by Borrower and Lender (as amended, the "Loan Agreement"). B. Borrower and Lender desire to further amend the Loan Agreement and the Other Agreements as hereinafter set forth. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: AGREEMENT ARTICLE I DEFINITIONS 1.01 Capitalized terms used in this Amendment are defined in the Loan Agreement, as amended hereby, unless otherwise stated. ARTICLE II AMENDMENTS TO LOAN AGREEMENT Effective as of the respective date herein indicated, the Loan Agreement is hereby amended as follows: 2.01 AMENDMENT TO DEFINITION OF "BANK" IN SECTION 1.1. Effective as of December 8, 1995, the definition of "Bank" in Section 1.1 of the Loan Agreement is hereby amended by deleting the reference to "Shawmut Bank Connecticut, N.A." therefrom and substituting "Fleet National Bank of Connecticut" in lieu thereof. SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - Page 1 118 2.02 REFERENCES TO "SHAWMUT CAPITAL CORPORATION". The Loan Agreement and the Other Agreements are hereby amended by deleting any and all references to "Shawmut Capital Corporation" therefrom and substituting "Fleet Capital Corporation" in lieu thereof. 2.03 AMENDMENT TO SECTION 9.2(G). Effective as of December 31, 1995, Section 9.2(G) of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "(G) Declare or make any Distributions; provided, however, that notwithstanding the foregoing, Borrower may pay cash dividends on Borrower's preferred stock provided that (i) the aggregate amount of such paid dividends does not exceed $117,000 in any fiscal year of Borrower, and (ii) at the time of such payment, no Default or Event of Default shall be in existence." 2.04 AMENDMENT TO EXHIBIT I. Effective as of December 31, 1995, Exhibit I to the Loan Agreement, which is the Schedule of Existing Loans and advances to David R. Little, is amended as follows: (a) The reference in Exhibit I to the dollar amount "$137,635.00" is hereby deleted and substituted therefor is the dollar amount "$136,028.00". (b) The reference in Exhibit I to the dollar amount "$53,927.00" is hereby deleted and substituted therefor is the dollar amount "$53,298.00". (c) The reference in Exhibit I to the dollar amount "$35,734.00" is hereby deleted and substituted therefor is the dollar amount "$122,735.00". (d) The reference in Exhibit I to the dollar amount "$665,235.00" is hereby deleted and substituted therefor is the dollar amount "$750,000.00". ARTICLE III LIMITED WAIVERS 3.01 LIMITED WAIVERS. Upon satisfaction of the conditions precedent specified in Article IV hereof, Lender hereby waives any Default or Event of Default which occurred solely from the following: (a) Failure by Borrower to furnish to Lender not later than 90 days after the close of Borrower's 1995 fiscal year, the audited financial statements described in Section 9.1(J) of the Loan Agreement, which failure is a violation of Section 9.1(J) of the Loan Agreement; provided, however, this waiver is conditioned on Borrower's supplying such audited financial statements to Lender by April 30, 1996; SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - Page 2 119 (b) The payment by Borrower to the Littles' children's trusts of Distributions in the aggregate amount of $22,500 during Borrower's 1995 fiscal year, which is a violation of Section 9.2(G) of the Loan Agreement; (c) Making aggregate Capital Expenditures of $1,515,000 during Borrower's 1995 fiscal year, which is a violation of Section 9.2(I) of the Loan Agreement; and (d) (i) Creation by Borrower of a new wholly-owned Subsidiary, Bayou Pumps, Inc., a Texas corporation ("Bayou Pumps-Texas"), (ii) acquisition of the shares of Bayou Pumps, Inc., a Louisiana corporation ("Bayou Pumps-Louisiana"), by Bayou Pumps-Texas, pursuant to the provisions of that certain Agreement and Plan of Reorganization, entered into effective as of December 27, 1995, by and among Denny Lawrence, Gary Pappas, Bayou Pumps-Texas, Bayou Pumps-Louisiana, and Borrower, and (iii) the merger of Bayou Pumps-Louisiana into Bayou Pumps-Texas, which events constitute violations of Sections 9.2(A) and 9.2(H) of the Loan Agreement. Except as otherwise specifically provided for in this Amendment, nothing contained herein shall be construed as a waiver by Lender of any covenant or provision of the Loan Agreement, the Other Agreements, this Amendment, or of any other contract or instrument between Borrower and Lender, and the failure of Lender at any time or times hereafter to require strict performance by Borrower of any provision thereof shall not waive, affect or diminish any right of Lender to thereafter demand strict compliance therewith. Lender hereby reserves all rights granted under the Loan Agreement, the Other Agreements, this Amendment and any other contract or instrument between Borrower and Lender. ARTICLE IV CONDITIONS PRECEDENT 4.01 CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent, unless specifically waived in writing by Lender: (a) Lender shall have received this Amendment, duly executed by Borrower together with such additional documents, instruments and information as Lender or its legal counsel may request; (b) The representations and warranties contained herein and in the Loan Agreement and the Other Agreements, as each is amended hereby, shall be true and correct as of the date hereof, as if made on the date hereof; (c) No Default or Event of Default shall have occurred and be continuing, unless such Default or Event of Default has been specifically waived by the provisions of Article III hereof or otherwise specifically waived in writing by Lender; and SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - Page 3 120 (d) All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Lender and its legal counsel. ARTICLE V RATIFICATIONS, REPRESENTATIONS AND WARRANTIES 5.01 RATIFICATIONS. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Loan Agreement and the Other Agreements, and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Loan Agreement and the Other Agreements are ratified and confirmed and shall continue in full force and effect. Borrower and Lender agree that the Loan Agreement and the Other Agreements, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. 5.02 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Lender that (a) the execution, delivery and performance of this Amendment and any and all Other Agreements executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of Borrower and will not violate the Articles of Incorporation or Bylaws of Borrower; (b) attached hereto as Annex A is a true, correct and complete copy of presently effective resolutions of Borrower's Board of Directors authorizing the execution, delivery and performance of this Amendment and any and all Other Agreements executed and/or delivered in connection herewith, certified by the Assistant Secretary of Borrower; (c) the representations and warranties contained in the Loan Agreement, as amended hereby, and any Other Agreement are true and correct on and as of the date hereof and on and as of the date of execution hereof as though made on and as of each such date; (d) no Default or Event of Default under the Loan Agreement, as amended hereby, has occurred and is continuing, unless such Default or Event of Default has been specifically waived in writing by Lender; (e) Borrower is in full compliance with all covenants and agreements contained in the Loan Agreement and the Other Agreements, as amended hereby; and (f) Borrower has not amended its Articles of Incorporation or its Bylaws since the date of the Loan Agreement. ARTICLE VI MISCELLANEOUS PROVISIONS 6.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in the Loan Agreement or any Other Agreement, including, without limitation, any document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the Other Agreements, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. 6.02 REFERENCE TO LOAN AGREEMENT. Each of the Loan Agreement and the Other Agreements, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Loan SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - Page 4 121 Agreement, as amended hereby, are hereby amended so that any reference in the Loan Agreement and such Other Agreements to the Loan Agreement shall mean a reference to the Loan Agreement as amended hereby. 6.03 EXPENSES OF LENDER. As provided in the Loan Agreement, Borrower agrees to pay on demand all costs and expenses incurred by Lender in connection with the preparation, negotiation, and execution of this Amendment and the Other Agreements executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including, without limitation, the costs and fees of Lender's legal counsel, and all costs and expenses incurred by Lender in connection with the enforcement or preservation of any rights under the Loan Agreement, as amended hereby, or any Other Agreements, including, without, limitation, the costs and fees of Lender's legal counsel. 6.04 SEVERABILITY. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. 6.05 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall inure to the benefit of Lender and Borrower and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Lender. 6.06 COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. 6.07 EFFECT OF WAIVER. No consent or waiver, express or implied, by Lender to or for any breach of or deviation from any covenant or condition by Borrower shall be deemed a consent to or waiver of any other breach of the same or any other covenant, condition or duty. 6.08 HEADINGS. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. 6.09 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 6.10 FINAL AGREEMENT. THE LOAN AGREEMENT AND THE OTHER AGREEMENTS, EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE LOAN AGREEMENT AND THE OTHER AGREEMENTS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - Page 5 122 AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY BORROWER AND LENDER. 6.11 RELEASE. BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY THE "OBLIGATIONS" OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER. BORROWER HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE BORROWER MAY NOW OR HEREAFTER HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY "LOANS", INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT OR OTHER AGREEMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT. SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - Page 6 123 IN WITNESS WHEREOF, this Amendment has been executed and is effective as of the date first above-written. "BORROWER" SEPCO INDUSTRIES, INC. By: /s/ GARY A. ALLCORN -------------------- Name: Gary A. Allcorn Title: Sr. VP Finance "LENDER" FLEET CAPITAL CORPORATION, FORMERLY KNOWN AS SHAWMUT CAPITAL CORPORATION, SUCCESSOR-IN-INTEREST BY ASSIGNMENT TO BARCLAYS BUSINESS CREDIT, INC. By: /s/ H. MICHAEL WILLS ----------------------- Name: H. Michael Wills Title: Vice President ANNEX: A - Certified Resolutions of Borrower's Board of Directors SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - Page 7 124 ANNEX A CERTIFIED RESOLUTIONS OF BORROWER'S BOARD OF DIRECTORS RESOLVED: That any officer of Sepco Industries, Inc., a Texas corporation (the "Corporation"), acting alone, by his signature be, and the same hereby is, authorized and directed, in the name of and on behalf of the Corporation (a) to amend the Corporation's existing Second Amended and Restated Loan and Security Agreement by and between the Corporation and Barclays Business Credit, Inc., predecessor-in-interest to Fleet Capital Corporation, formerly known as Shawmut Capital Corporation ("Lender"), (b) to execute and deliver to Lender with such changes in the terms and provisions thereof as the officer executing same shall, in his sole discretion, deem advisable, (i) a certain proposed Second Amendment to Second Amended and Restated Loan and Security Agreement, a draft of which has been reviewed and discussed by the Board of Directors of the Corporation, and (ii) such other agreements, instruments, statements and writings as the officer or officers executing the same may deem desirable or necessary in connection therewith, and (c) to perform such other acts as the officer or officers performing such acts on behalf of the Corporation may deem desirable or necessary in connection therewith; and be it FURTHER RESOLVED: That said agreements will benefit the Corporation, both directly and indirectly, and are in the best interests of the Corporation; and be it FURTHER RESOLVED: That said agreements and other statements in writing executed in the name and on behalf of the Corporation by any officer of the Corporation shall be presumed conclusively to be the instruments, the execution of which is authorized by these resolutions; and be it FURTHER RESOLVED: That the officers of the Corporation be, and the same hereby are, authorized and directed to execute, in the name of and on behalf of the Corporation, security agreements, financing statements, assignments, collateral reports, loan statements, confirmations of delivery, lien statements, pledge certificates, release certificates, removal reports, guaranties, cross- collateralization agreements and such other writings and to take such other actions as are necessary in their dealings with Lender, and any such papers executed and any such actions taken by any of them prior to this time are approved, ratified and confirmed; and be it FURTHER RESOLVED: That the Secretary or any Assistant Secretary of the Corporation, by the signature of any one or more of them, be, and the same hereby are, authorized and directed to attest the execution by the Corporation of the papers signed pursuant to these resolutions, to affix the seal of the Corporation thereto, if required by Lender, and to certify to Lender the adoption of these resolutions. ANNEX A TO SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - Page 1 125 CERTIFICATION The undersigned hereby certifies that the within and foregoing resolutions are in effect as of the date hereof, without modification, and that the person signing the within and foregoing Amendment on behalf of the Corporation is the duly elected officer stated below his name, that he is authorized to sign such Amendment, and that his signature thereon is genuine. DATED: April 4, 1996. /s/ GARY A. ALLCORN ---------------------------------------- [Assistant] Secretary of the Corporation ANNEX A TO SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - Page 2 126 CONSENT AND RATIFICATION The undersigned, DAVID R. LITTLE, has executed that certain Amended and Restated Unconditional Guaranty dated September 16, 1994 (the "Guaranty"), in favor of BARCLAYS BUSINESS CREDIT, INC., predecessor-in-interest to FLEET CAPITAL CORPORATION, formerly known as Shawmut Capital Corporation ("Lender"). The undersigned hereby (i) consents and agrees to the terms of the Second Amendment to Second Amended and Restated Loan and Security Agreement, dated as of April 3, 1996 (the "Loan Amendment"), between Sepco Industries, Inc. and Lender, a copy of which has been reviewed by the undersigned, and (ii) agrees that the Guaranty shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of the undersigned enforceable against it in accordance with its terms. Furthermore, the undersigned hereby agrees and acknowledges that (a) the obligations, indebtedness and liabilities arising in connection with the Loan Amendment comprise some, but not all, of the "Obligations" as such term is used in the Guaranty, (b) the Guaranty is an "Other Agreement" as such term is defined in the Loan Agreement, (c) the Guaranty is not as of this date subject to any claims, defenses or offsets, (d) nothing contained in the Loan Agreement or any Other Agreement entered into prior to or as of the date hereof shall adversely affect any right or remedy of Lender under the Guaranty, and (e) the execution and delivery of the Loan Amendment shall in no way reduce, impair or discharge any obligations of the undersigned as guarantor pursuant to the Guaranty and shall not constitute a waiver by Lender of any of Lender's rights against the undersigned. Dated: April __, 1996. /s/ DAVID R. LITTLE --------------------------------- David R. Little, individually CONSENT AND RATIFICATION TO SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY - Page 1 127 CONSENT AND RATIFICATION The undersigned, T. L. WALKER BEARING CO., has executed that certain Amended and Restated Unconditional Guaranty dated September 16, 1994 (the "Guaranty"), in favor of BARCLAYS BUSINESS CREDIT, INC., predecessor-in-interest to FLEET CAPITAL CORPORATION, formerly known as Shawmut Capital Corporation ("Lender"). The undersigned hereby (i) consents and agrees to the terms of the Second Amendment to Second Amended and Restated Loan and Security Agreement, dated as of April 3, 1996 (the "Loan Amendment"), between Sepco Industries, Inc. and Lender, a copy of which has been reviewed by the undersigned, and (ii) agrees that the Guaranty shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of the undersigned enforceable against it in accordance with its terms. Furthermore, the undersigned hereby agrees and acknowledges that (a) the obligations, indebtedness and liabilities arising in connection with the Loan Amendment comprise some, but not all, of the "Obligations" as such term is used in the Guaranty, (b) the Guaranty is an "Other Agreement" as such term is defined in the Loan Agreement, (c) the Guaranty, is not as of the date hereof subject to any claims, defenses or offsets, (d) nothing contained in the Loan Agreement or any Other Agreement entered into prior to or as of the date hereof shall adversely affect any right or remedy of Lender under the Guaranty, and (e) the execution and delivery of the Loan Amendment shall in no way reduce, impair or discharge any obligations of the undersigned as guarantor pursuant to the Guaranty and shall not constitute a waiver by Lender of any of Lender's rights against the undersigned. Dated: April ___, 1996. T. L. WALKER BEARING CO. By: /s/ GARY A. ALLCORN ------------------------------------- Name: Gary A. Allcorn Title: Senior VP Finance CONSENT AND RATIFICATION TO SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY - Page 2 128 CONSENT AND RATIFICATION The undersigned, SOUTHERN ENGINE & PUMP COMPANY, has executed that certain Amended and Restated Unconditional Guaranty dated September 16, 1994 (the "Guaranty"), in favor of BARCLAYS BUSINESS CREDIT, INC., predecessor-in-interest to FLEET CAPITAL CORPORATION, formerly known as Shawmut Capital Corporation ("Lender"). The undersigned hereby (i) consents and agrees to the terms of the Second Amendment to Second Amended and Restated Loan and Security Agreement, dated as of April 3, 1996 (the "Loan Amendment"), between Sepco Industries, Inc. and Lender, a copy of which has been reviewed by the undersigned, and (ii) agrees that the Guaranty shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of the undersigned enforceable against it in accordance with its terms. Furthermore, the undersigned hereby agrees and acknowledges that (a) the obligations, indebtedness and liabilities arising in connection with the Loan Amendment comprise some, but not all, of the "Obligations" as such term is used in the Guaranty, (b) the Guaranty is an "Other Agreement" as such term is defined in the Loan Agreement, (c) the Guaranty, is not as of the date hereof subject to any claims, defenses or offsets, (d) nothing contained in the Loan Agreement or any Other Agreement entered into prior to or as of the date hereof shall adversely affect any right or remedy of Lender under the Guaranty, and (e) the execution and delivery of the Loan Amendment shall in no way reduce, impair or discharge any obligations of the undersigned as guarantor pursuant to the Guaranty and shall not constitute a waiver by Lender of any of Lender's rights against the undersigned. Dated: April 4, 1996. SOUTHERN ENGINE & PUMP COMPANY By: /s/ GARY A. ALLCORN ------------------------------------- Name: Gary A. Allcorn Title: Senior VP Finance CONSENT AND RATIFICATION TO SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY - Page 3 129 CONSENT AND RATIFICATION The undersigned, GARY A. ALLCORN, TRUSTEE FOR KACEY JOYCE LITTLE, NICHOLAS DAVID LITTLE AND ANDREA RAE LITTLE 1988 TRUSTS, has executed that certain Amended and Restated Pledge Agreement dated September 16, 1994 (the "Pledge Agreement"), in favor of BARCLAYS BUSINESS CREDIT, INC., predecessor-in-interest to FLEET CAPITAL CORPORATION, formerly known as Shawmut Capital Corporation ("Lender"). The undersigned hereby (i) consents and agrees to the terms of the Second Amendment to Second Amended and Restated Loan and Security Agreement, dated as of April 3, 1996 (the "Loan Amendment"), executed by Sepco Industries, Inc. and Lender, a copy of which has been reviewed by the undersigned, and (ii) agrees that the Pledge Agreement shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of the undersigned enforceable against it in accordance with its terms. Furthermore, the undersigned hereby agrees and acknowledges that (a) the obligations, indebtedness and liabilities arising in connection with the Loan Amendment comprise some, but not all, of the "Secured Indebtedness" as such term is used in the Pledge Agreement, (b) the Pledge Agreement is an "Other Agreement" as such term is defined in the Loan Agreement, (c) the Pledge Agreement, is not as of the date hereof subject to any claims, defenses or offsets, (d) nothing contained in this Agreement or any Other Agreement entered into prior to or as of the date hereof shall adversely affect any right or remedy of Lender under the Pledge Agreement, and (e) the execution and delivery of the Loan Amendment shall in no way reduce, impair or discharge any obligations of the undersigned pursuant to the Pledge Agreement and shall not constitute a waiver by Lender of any of Lender's rights against the undersigned. Dated: April 4, 1996. /s/ GARY A. ALLCORN -------------------------------------- GARY A. ALLCORN, TRUSTEE FOR KACEY JOYCE LITTLE, NICHOLAS DAVID LITTLE AND ANDREA RAE LITTLE 1988 TRUSTS CONSENT AND RATIFICATION TO SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY - Page 4 EX-10.18 4 SEPCO INDUSTRIES EMPLOYEE STOCK OWNERSHIP PLAN 1 EXHIBIT 10.18 Sepco Industries, Inc. Employee Stock Ownership Plan TABLE OF CONTENTS 1. Submission Forms 2. Plan document 3. Summary Plan Description 4. Loan Program 5. Administrative Forms 2 [ROBERT A. FRAHM & ASSOCIATES LETTERHEAD] November 30, 1994 District Director Internal Revenue Service EP/EO Division, MC 4950 DAL 1100 Commerce Street Dallas, Texas 75242 Re: Sepco Industries, Inc. Employee Stock Ownership Plan Dear Sir: Request is hereby made for a favorable determination concerning the continued qualification of the above referenced Plan and Trust under Section 401(a) of the Internal Revenue Code. The following items are enclosed: - Form 8717, User Fee, and a check for $700.00; - Form 2848, Power of Attorney; - Form 5300, Application for Determination; - Form 5309, Application for Determination of an ESOP; - Prior Determination Letter; - Consent to Action Without a Meeting; - Attachment to applications filed under Rev. Proc. 93-39; - Plan Document; - First Amendment to the Plan Document. It is requested that copies of a favorable determination letter be mailed to: Gary Allcorn Robert A. Frahm Sepco Industries, Inc. Robert A. Frahm & Associates P.O. Box 1697 1853 Lexington Houston, Texas 77251 Houston, Texas 77098-4399 3 If you have reason to call us to discuss this file, please ask for the undersigned. Respectfully submitted, ROBERT A. FRAHM & ASSOCIATES By: /s/ RICK HARWELL ------------------------------- for Robert A. Frahm Enclosures cc: Gary Allcorn 4 Form 8717 USER FEE FOR EMPLOYEE PLAN For IRS Use Only (Rev. January 1994) DETERMINATION LETTER REQUEST Control number ____________________ Department of the Treasury Amount paid________________________ Internal Revenue Service - Attach to determination letter applications. User fee screener - ----------------------------------------------------------------------------------------------------------------------------------- 1 Sponsor's name 2 Sponsor's employer identification number Sepco Industries, Inc. 74-0909900 - ----------------------------------------------------------------------------------------------------------------------------------- 3 Plan name 4 Plan number Sepco Industries, Inc. Employee Stock Ownership Plan 001 - ----------------------------------------------------------------------------------------------------------------------------------- Request for Letter Covering Average Benefit Test and/or Any General Test Fee - ----------------------------------------------------------------------------------------------------------------------------------- 5a [ ] Form 5300 ........................................................................................................ $1,250 b [ ] Form 5303 ........................................................................................................ 1,250 c [ ] Form 5307 ........................................................................................................ 1,000 d [ ] Form 5310 ........................................................................................................ 375 e [ ] Multiple employer plans (Form 5300) (1) [ ] 2 to 10 employers ........................................................................................... 1,250 (2) [ ] 11 to 99 employers .......................................................................................... 2,000 (3) [ ] 100 to 499 employers ........................................................................................ 3,500 (4) [ ] Over 499 employers .......................................................................................... 6,500 - ----------------------------------------------------------------------------------------------------------------------------------- Request for Letter Not Covering Average Benefit Test or Any General Test Fee - ----------------------------------------------------------------------------------------------------------------------------------- 6a [X] Form 5300 ........................................................................................................ $ 700 b [ ] Form 5303 ........................................................................................................ 700 c [ ] Form 5307 ........................................................................................................ 125 d [ ] Form 5310 ........................................................................................................ 225 e [ ] Form 6406 ........................................................................................................ 125 f [ ] Multiple employer plans (Form 5300): (1) [ ] 2 to 10 employers ........................................................................................... 700 (2) [ ] 11 to 99 employers .......................................................................................... 1,400 (3) [ ] 100 to 499 employers ........................................................................................ 2,800 (4) [ ] Over 499 employers .......................................................................................... 5,600 g [ ] Volume submitter specimen plan ................................................................................... 1,500 (1) [ ] Non-model amendments ........................................................................................ 400 h [ ] Form 4461 or Form 4461-A (regional prototype plan) ............................................................... 1,500 (1) [ ] Non-model amendments ........................................................................................ 400 i [ ] Form 4461-B (adopter of mass submitter regional prototype plan) .................................................. 100 j [ ] Group trust ...................................................................................................... 750 - ----------------------------------------------------------------------------------------------------------------------------------- ATTACH CHECK OR MONEY ORDER HERE - ----------------------------------------------------------------------------------------------------------------------------------- H763 Form 8717 (Rev. 1-94)
5 Form 2848 Power of Attorney OMB No. 1545-0150 (Rev. February 1993) and Declaration of Representative Department of the Treasury -- For Paperwork Reduction and Privacy Expires 2-29-96 Internal Revenue Service Act Notice, see the instructions. - ---------------------------------------------------------------------------------------------------------------------- PART I Power of Attorney (Please type or print.) - ---------------------------------------------------------------------------------------------------------------------- 1 Taxpayer Information (Taxpayer(s) must sign and date this form on page 2, line 9.) - ---------------------------------------------------------------------------------------------------------------------- Taxpayer name(s) and address Social security number(s) Employer identification Plan name: Sepco Industries, Inc. ____-____-_____ number Employee Stock Ownership Plan 74-0909900 Sponsor name: Sepco Industries, Inc. ____-____-_____ _______________________ 6500 Brittmore Daytime telephone number Plan number (if applicable) Houston, Texas 77041 (713) 937-0330 001 - ---------------------------------------------------------------------------------------------------------------------- hereby appoint(s) the following representative(s) as attorney(s)-in-fact: 2 Representative(s) (Representative(s) must sign and date this form on page 2, Part II.) - ---------------------------------------------------------------------------------------------------------------------- Name and address Robert A. Frahm, Attorney CAF No. 7800-0282R 1853 Lexington Telephone No. (713) 526-8862 Houston, Texas 77098-4399 Fax No. (713) 526-9524 Check if new: Address [ ] Telephone No. [ ] - ---------------------------------------------------------------------------------------------------------------------- Name and address Joel K. French, Attorney CAF No. 7805-4960R 1853 Lexington Telephone No. (713) 526-8862 Houston, Texas 77098-4399 Fax No. (713) 526-9524 Check if new: Address [ ] Telephone No. [ ] - ---------------------------------------------------------------------------------------------------------------------- Name and address Frederick A. Harwell, Attorney CAF No. 7805-75602R 1853 Lexington Telephone No. (713) 526-8862 Houston, Texas 77098-4399 Fax No. (713) 526-9524 Check if new: Address [ ] Telephone No. [ ] - ---------------------------------------------------------------------------------------------------------------------- to represent the taxpayer(s) before the Internal Revenue Service for the following tax matters: 3 Tax Matters - ---------------------------------------------------------------------------------------------------------------------- Type of Tax (Income, Employment, Excise, etc.) Tax Form Number (1040, 941, 720, etc.) Year(s) or Period(s) - ---------------------------------------------------------------------------------------------------------------------- Application for determination letter or 5300 1994-1998 opinion letter all inclusive - ---------------------------------------------------------------------------------------------------------------------- Application for Determination of an ESOP 5309 - ---------------------------------------------------------------------------------------------------------------------- 4 Specific Use Not Recorded on Centralized Authorization File (CAF).--If the power of attorney is for a specific use not recorded on CAF, please check this box. (See Line 4--Specific Uses Not Recorded on CAF on page 3.). . . -- [ ] - ---------------------------------------------------------------------------------------------------------------------- 5 Acts Authorized.--The representatives are authorized to receive and inspect confidential tax information and to perform any and all acts that I (we) can perform with respect to the tax matters described in line 3, for example, the authority to sign any agreements, consents, or other documents. The authority does not include the power to receive refund checks (see line 6 below) or the power to sign certain returns (see Line 5--Acts Authorized on page 4). List any specific additions or deletions to the acts otherwise authorized in this power of attorney: -------------- -------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- NOTE: In general, an unenrolled preparer of tax returns cannot sign any document for a taxpayer. See Revenue Procedure 81-38, printed as Pub. 470, for more information. NOTE: The tax matters partner/person of a partnership or S corporation is not permitted to authorize representatives to perform certain acts. See the instructions for more information. - ---------------------------------------------------------------------------------------------------------------------- 6 Receipt of Refund Checks.--If you want to authorize a representative named in line 2 to receive, BUT NOT TO ENDORSE OR CASH, refund checks, initial here _______________ and list the name of that representative below. Name of representative to receive refund check(s) -- - ---------------------------------------------------------------------------------------------------------------------- Cat. No. 11980J Form 2848 (Rev. 2-93)
6 Form 2848 (Rev. 2-93) Page 2 - --------------------------------------------------------------------------------------------------------------------------------- 7 Notices and Communications. -- Notices and other written communications will be sent to the first representative listed in line 2. a If you also want the second representative listed to receive such notices and communications, check this box ..... [ ] b If you do not want any notices or communications sent to your representative, check this box ..................... [ ] - --------------------------------------------------------------------------------------------------------------------------------- 8 Retention/Revocation of Prior Power(s) of Attorney. -- The filing of this power of attorney automatically revokes all earlier power(s) of attorney on file with the Internal Revenue Service for the same tax matters and years or periods covered by this document. If you do not want to revoke a prior power of attorney, check here ..................... [ ] YOU MUST ATTACH A COPY OF ANY POWER OF ATTORNEY YOU WANT TO REMAIN IN EFFECT. - --------------------------------------------------------------------------------------------------------------------------------- 9 Signature of Taxpayer(s). -- If a tax matter concerns a joint return, both husband and wife must sign if joint representation is requested, otherwise, see the instructions. If signed by a corporate officer, partner, guardian, tax matters partner/person, executor, receiver, administrator, or trustee on behalf of the taxpayer, I certify that I have the authority to execute this form on behalf of the taxpayer. - IF THIS POWER OF ATTORNEY IS NOT SIGNED AND DATED, IT WILL BE RETURNED. /s/ DAVID R. LITTLE 9-6-94 Chairman of the Board - --------------------------------------- --------------------------------------- --------------------------------------- Signature Date Title (if applicable) /s/ David R. Little - --------------------------------------- Print Name - --------------------------------------- --------------------------------------- --------------------------------------- Signature Date Title (if applicable) - --------------------------------------- Print Name - --------------------------------------------------------------------------------------------------------------------------------- PART II Declaration of Representative - --------------------------------------------------------------------------------------------------------------------------------- Under penalties of perjury, I declare that: - I am not currently under suspension or disbarment from practice before the Internal Revenue Service; - I am aware of regulations contained in Treasury Department Circular No. 230 (31 CFR, Part 10), as amended, concerning the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries, and others; - I am authorized to represent the taxpayer(s) identified in Part I for the tax matter(s) specified there; and - I am one of the following: a Attorney -- a member in good standing of the bar of the highest court of the jurisdiction shown below. b Certified Public Accountant -- duly qualified to practice as a certified public accountant in the jurisdiction shown below. c Enrolled Agent -- enrolled as an agent under the requirements of Treasury Department Circular No. 230. d Officer -- a bona fide officer of the taxpayer organization. e Full-Time Employee -- a full-time employee of the taxpayer. f Family Member -- a member of the taxpayer's immediate family (i.e., spouse, parent, child, brother, or sister). g Enrolled Actuary -- enrolled as an actuary by the Joint Board for the Enrollment of Actuaries under 29 U.S.C. 1242 (the authority to practice before the Service is limited by section 10.3(d)(1) of Treasury Department Circular No. 230). h Unenrolled Return Preparer -- an unenrolled return preparer under section 10.7(a)(7) of Treasury Department Circular No. 230. - - If this declaration of representative is not signed and dated, the power of attorney will be returned. - --------------------------------------------------------------------------------------------------------------------------------- Designation -- Insert Jurisdiction (state) or above letter (a-h) Enrollment Card No. Signature Date - --------------------------------------------------------------------------------------------------------------------------------- a TX /s/ ROBERT A. FRAHM 7/21/94 Robert A. Frahm - --------------------------------------------------------------------------------------------------------------------------------- a TX /s/ JOEL K. FRENCH 7/21/94 Joel K. French - --------------------------------------------------------------------------------------------------------------------------------- a TX /s/ FREDERICK A. HARWELL 7/21/94 Frederick A. Harwell - ---------------------------------------------------------------------------------------------------------------------------------
7 (5300) APPLICATION FOR OMB No. 1545-0197 (Rev 11/92) DETERMINATION FOR EMPLOYEE BENEFIT PLAN Expires 11-30-95 ------------------------------------- For IRS Use Only Department of the Treasury (UNDER SECTIONS 401(a) AND 501(a) OF THE INTERNAL REVENUE CODE) File folder number - Internal Revenue Service Case number - - ------------------------------------------------------------------------------------------------------------------------------------ File page 1 of Form 5300 in duplicate. Note: User fee must be attached to this application. (See What To File.) Enter amount of user fee submitted . ---------------------- The information provided on this form will be read by computer. Therefore page 1 must be typed (except the signature). Please enter information exactly as requested and only in the space provided. Do not type in areas that are shaded. Review the Procedural Requirements Checklist on page 4 before submitting this application. - ------------------------------------------------------------------------------------------------------------------------------------ 1a Name of plan sponsor (employer if single-employer plan) 1b Employer identification number ( Sepco Industries, Inc. ) (74-0909900 ) - ------------------------------------------------------------------------------------------- ------------------------------------- Number, street and room or suite no. (If a P.O. box, see instructions.) 1c Employer's tax year ends-Enter N/A or (MM) ( 6500 Brittmore ) 12-31 - -------------------------------------------------------------------------------------------- ------------------------------------- City State ZIP code 1d Telephone number ( Houston ) (TX) (77041 ) (713) 937-0330 - ---------------------------------------------------------------- ---- ------------ ------------------------------------- 2 Person to be contacted if more information is needed. (See instructions.) (If the same as line 1a, leave blank.) (Complete even if a Power of Attorney is attached): Name ( Robert A. Frahm & Associates ) - ------------------------------------------------------------------------------------------------------------------------------------ Number, street, and room or suite no. (If a P.O. box, see instructions.) ( 1853 Lexington ) - ------------------------------------------------------------------------------------------------------------------------------------ City State ZIP code Telephone number ( Houston ) (TX) (77098-4399) (713) 526-8862 - ---------------------------------------------------------------- ---- ------------ ------------------------------------- 3a Determination requested for (enter applicable number(s) at left and fill in required information). (See instructions.) ( ) Enter 1 for Initial Qualification -- Date plan signed . . . . . . . . . . . . . . ---------------------------------- ( 2 ) Enter 2 for Amendment after initial qualification -- is plan restated? . . . . . Yes ( X ) No ( ) Date amendment signed October 15, 1991 Date amendment effective January 1, 1989 ---------------------------------- ---------------------------------- ( ) Enter 3 for Affiliated Service Group status (section 414(m)) -- Date effective ---------------------------------- ( ) Enter 4 for Leased Employee Status ( ) Enter 5 for Partial termination -- Date effective ---------------------------- b Has the plan received a determination letter? If "Yes," submit a copy of the latest letter . . Yes ( X ) No ( ) c Have interested parties (as defined in Treasury Regulations section 1.7476-1) been given the required notification of this application? . . . . . . . . . . . . . . . . . . . . . . . . . . Yes ( X ) No ( ) d Does the plan have a cash or deferred arrangement, or employee or matching contributions (section 401(k) or (m))? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes ( ) No ( X ) Name of Plan: 4a (Sepco Industries, Inc. Employer Stock Ownership Plan ) -------------------------------------------------------------------------------------------------------------------------------- ( 001 ) b Enter plan number (3 digits) 1-1-85 d Enter date plan effective (MMDDYY) ----------- ( 12-31 ) c Enter date plan year ends (MMDD) ( 397 ) e Enter number of participants in plan 5a If this is a defined benefit plan, enter the appropriate number in box at left. ( ) Enter 1 for unit benefit Enter 3 for flat benefit Enter 2 for fixed benefit Enter 4 for other (Specify) ------------------------------------ b If this is a defined contribution plan, enter the appropriate number in box at left. ( 5 ) Enter 1 for profit sharing Enter 4 for target benefit Enter 2 for stock bonus Enter 5 for ESOP Enter 3 for money purchase Enter 6 for other (Specify) ------------------------------------ 6a Is the employer a member of an affiliated service group? ( 2 ) Enter 1 if "Yes" Enter 2 if "No" Enter 3 if "Not Certain" b Is the employer a member of a controlled group of corporations or a group of trades or businesses under common control? ( 2 ) Enter 1 if "Yes" Enter 2 if "No" 7 Enter type of plan: ( 5 ) Enter 1 if governmental plan Enter 2 if church plan not subject to ERISA (see instructions) Enter 3 if multiple employer plan (described in section 413(c)). Enter number of participating employers ----------- Enter 4 if section 412(i) plan Enter 5 if other - ------------------------------------------------------------------------------------------------------------------------------------ Under penalties of perjury, I declare that I have examined this application, including accompanying statements, and to the best of my knowledge and belief, it is true, correct, and complete. Both copies of this page must be signed. Signature > DAVID R. LITTLE Title > President Date > 9-6-94 - ------------------------------------------------------------------------------------------------------------------------------------ Instructions are separate. See page 1 for Paperwork Reduction Act Notice. Cat. No. 11740X Form 5300 (Rev. 11-92)
8 IRS FORM 5309, APPLICATION FOR DETERMINATION OF EMPLOYEE STOCK OWNERSHIP PLANS FORM 5309 APPLICATION FOR DETERMINATION OF QMS NO. 1545-0284 (REV. JANUARY 1994) EMPLOYEE STOCK OWNERSHIP PLAN EXPIRES 1-31-97 ----------------- (UNDER SECTION 409 OR 4975(e)(7) OF THE INTERNAL REVENUE CODE) FOR IRS USE ONLY DEPARTMENT OF THE TREASURY FILE FOLDER INTERNAL REVENUE SERVICE FILE WITH FORM 5300 OR 5303, WHICHEVER APPLIES NUMBER - - ------------------------------------------------------------------------------------------------------------------------------------ 1 Employer's name, address, and ZIP Code 2 Employer identification number Sepco Industries, Inc. 74: 0909900 6500 Brittmore ----------------------------------- Houston, Texas 77041 Telephone number - (713) 937-0330 3 Date plan was adopted Mo. 10 Day 15 Yr. 91 - ------------------------------------------------------------------------------------------------ ----------------------------------- 4 This application is for (complete one): a [ ] A tax credit employee stock ownership plan under section 409 b [X] An employee stock ownership plan under section 4975(e)(7) - ------------------------------------------------------------------------------------------------------------------------------------ 5 Type of plan: a [X] Profit-sharing b [ ] Stock bonus c [ ] Money purchase and stock bonus - ------------------------------------------------------------------------------------------------------------------------------------ Show the section and page number in the plan document where the following provisions will appear. Section and page number - ------------------------------------------------------------------------------------------------------------------------------------ 6 Complete the following for all plans: a The plan is designed to invest primarily in employer securities . . . . . . . . . . . . . . . . . . . . . 5.1(a), p.35 -------------------- b Each participant must be entitled to direct the plan to vote the allocated securities as required in section 409(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5, p.67 --------------------- c A participant entitled to a distribution from the plan may demand the entire distribution in employer securities, and if the securities are not readily tradable, the employer will repurchase the securities under a fair valuation formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6, p. 50 -------------------- d A participant may elect to diversify a portion of his or her account's investment in employer securities as required under section 401(a)(28) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1, p.35 -------------------- e A participant may begin distribution of his or her account balance after reaching normal retirement age, or after death, disability, or separation from service, not later than required by section 409(o) . . . . 7.5, p.46 -------------------- 7 Only plans applying under section 409 complete the following: a All employer securities transferred to or purchased by the plan for the employee plan credit or employee stock ownership credit will be allocated for the plan year to the accounts of all participants who are entitled to share in these allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3(c), p.25 -------------------- b The allocation to each participant of the employer securities transferred or purchased for the employee plan credit or employee stock ownership credit is in substantially the same proportion as each employee's compensation is to the total compensation of all participants. For this allocation, compensation of any participant in excess of the first $100,000 per year is disregarded . . . . . . . . . . . . . . . . . . 4.3(b), p.25 -------------------- c No allocated securities described in section 409(d) may be distributed to any participant before the end of the 84th month after the month the securities are allocated except for separation from service, death, disability, termination of the plan, or as otherwise stated in section 409(d) . . . . . . . . . . . . . 7.5, p.46 -------------------- 7.4(b), p.43/ d The participants have a nonforfeitable right to the securities allocated to them . . . . . . . . . . . 1.54, p.13 -------------------- e If any part of the employee plan credit or employee stock ownership credit is recaptured or redetermined, amounts transferred to the plan for such credit shall remain in the plan and if allocated shall remain allocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3, p.25 -------------------- 8 Only plans applying under section 4975(e)(7) complete the following: a The plan is designated as an employee stock ownership plan within the meaning of section 4975(e)(7) . . 1.16, p.4 -------------------- b The plan provides for the establishment and maintenance of a suspense account as required under Regulations section 54.4975-11(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.53, p.13 -------------------- c Participants' rights to plan assets acquired by use of the exempt loan are protected as specified in Regulations section 54.4975-11(a)(3)(i) and (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3(c), p.25 -------------------- 9 If the plan is applying under section 409(n) with respect to transactions under section 1042, the plan provides that the assets of the plan attributable to employer securities acquired by the plan in a sale to which section 1042 applies cannot accrue for the benefit of the persons specified in section 409(n) during the nonallocation period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3, p.36 -------------------------------------------------------------------------------------------------------------------------------- Under penalties of perjury, I declare that I have examined this application, including accompanying statements, and to the best of my knowledge and belief it is true, correct, and complete. Signature - DAVID LITTLE Title - CHAIRMAN OF BOARD Date - 9-6-94 - ----------------------------------------------------------------------------------------------------------------------------------- For Paperwork Reduction Act Notice, see back of form. Cat. No. 11835F Form 5309 (Rev. 1-94)
9 Form 5300 (Rev. 11-92) Page 4 - ---------------------------------------------------------------------------------------------------------------------------- PROCEDURAL REQUIREMENTS CHECKLIST - ---------------------------------------------------------------------------------------------------------------------------- This checklist identifies certain basic data required to process this application. The checklist identifies items that MUST be included with the application. Completion of this checklist is optional and is for the benefit of the plan sponsor. - ---------------------------------------------------------------------------------------------------------------------------- Yes No --- --- a Is Form 5302, Employee Census, attached? ................................................................. --- --- b Is Form 8717, User Fee for Employee Plan Determination Letter Request, and the appropriate user fee attached? ............................................................................................ X --- --- c Is a copy of the plan attached? (Initial applications and Restated plans only) ........................... X --- --- d Is a copy of the plan's latest determination letter attached? (Previously approved plans only) ........... X --- --- e Are the appropriate certifications, designations, and demonstrations attached? ........................... X --- --- f Has page one been submitted in duplicate (at least one must be an original)? ............................. X --- --- g Are both copies of page one of the application signed? ................................................... X --- --- h Is the plan sponsor's 9-digit employer identification number entered on line 1b? ......................... X --- --- i If appropriate, is Form 2848, Power of Attorney and Declaration of Representative, attached? See Disclosure Requested by Taxpayer ..................................................................... X --- --- j Is the effective date of the plan entered on line 4d? .................................................... X --- --- k Affiliated Service Groups, Controlled Groups or Entities Under Common Control -- Is the information requested under What To File and the line 6 instructions attached? ....................................... X --- --- l Multiple-Employer Plans -- Is the information required under What To File, Specific Plans, item 7, attached? ........................................................................................ --- --- m ESOPs -- Is Form 5309, Application for Determination of Employee Stock Ownership Plan, attached? ......... X - ---------------------------------------------------------------------------------------------------------------------------- ALL APPLICATIONS ARE SCREENED BY COMPUTER. FAILURE TO INCLUDE A REQUIRED ITEM WILL RESULT IN THE RETURN OF THIS APPLICATION TO YOU.
*U.S. Government Printing Office: 1993 -- 338-858 10 (5300) APPLICATION FOR OMB No. 1545-0197 (Rev 11/92) DETERMINATION FOR EMPLOYEE BENEFIT PLAN Expires 11-30-95 ------------------------------------- For IRS Use Only Department of the Treasury (UNDER SECTIONS 401(a) AND 501(a) OF THE INTERNAL REVENUE CODE) File folder number - Internal Revenue Service Case number - - ------------------------------------------------------------------------------------------------------------------------------------ File page 1 of Form 5300 in duplicate. Note: User fee must be attached to this application. (See What To File.) Enter amount of user fee submitted . ---------------------- The information provided on this form will be read by computer. Therefore page 1 must be typed (except the signature). Please enter information exactly as requested and only in the space provided. Do not type in areas that are shaded. Review the Procedural Requirements Checklist on page 4 before submitting this application. - ------------------------------------------------------------------------------------------------------------------------------------ 1a Name of plan sponsor (employer if single-employer plan) 1b Employer identification number ( Sepco Industries, Inc. ) (74-0909900 ) - ------------------------------------------------------------------------------------------- ------------------------------------- Number, street and room or suite no. (If a P.O. box, see instructions.) 1c Employer's tax year ends-Enter N/A or (MM) ( 6500 Brittmore ) 12-31 - -------------------------------------------------------------------------------------------- ------------------------------------- City State ZIP code 1d Telephone number ( Houston ) (TX) (77041 ) (713) 937-0330 - ---------------------------------------------------------------- ---- ------------ ------------------------------------- 2 Person to be contacted if more information is needed. (See instructions.) (If the same as line 1a, leave blank.) (Complete even if a Power of Attorney is attached): Name ( Robert A. Frahm & Associates ) - ------------------------------------------------------------------------------------------------------------------------------------ Number, street, and room or suite no. (If a P.O. box, see instructions.) ( 1853 Lexington ) - ------------------------------------------------------------------------------------------------------------------------------------ City State ZIP code Telephone number ( Houston ) (TX) (77098-4399) (713) 526-8862 - ---------------------------------------------------------------- ---- ------------ ------------------------------------- 3a Determination requested for (enter applicable number(s) at left and fill in required information). (See instructions.) ( ) Enter 1 for Initial Qualification -- Date plan signed . . . . . . . . . . . . . . ---------------------------------- ( 2 ) Enter 2 for Amendment after initial qualification -- is plan restated? . . . . . Yes ( X ) No ( ) Date amendment signed October 15, 1991 Date amendment effective January 1, 1989 ---------------------------------- ---------------------------------- ( ) Enter 3 for Affiliated Service Group status (section 414(m)) -- Date effective ---------------------------------- ( ) Enter 4 for Leased Employee Status ( ) Enter 5 for Partial termination -- Date effective ---------------------------- b Has the plan received a determination letter? If "Yes," submit a copy of the latest letter . . Yes ( X ) No ( ) c Have interested parties (as defined in Treasury Regulations section 1.7476-1) been given the required notification of this application? . . . . . . . . . . . . . . . . . . . . . . . . . . Yes ( X ) No ( ) d Does the plan have a cash or deferred arrangement, or employee or matching contributions (section 401(k) or (m))? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes ( ) No ( X ) Name of Plan: 4a (Sepco Industries, Inc. Employer Stock Ownership Plan ) -------------------------------------------------------------------------------------------------------------------------------- ( 001 ) b Enter plan number (3 digits) 1-1-85 d Enter date plan effective (MMDDYY) ----------- ( 12-31 ) c Enter date plan year ends (MMDD) ( 397 ) e Enter number of participants in plan 5a If this is a defined benefit plan, enter the appropriate number in box at left. ( ) Enter 1 for unit benefit Enter 3 for flat benefit Enter 2 for fixed benefit Enter 4 for other (Specify) ------------------------------------ b If this is a defined contribution plan, enter the appropriate number in box at left. ( 5 ) Enter 1 for profit sharing Enter 4 for target benefit Enter 2 for stock bonus Enter 5 for ESOP Enter 3 for money purchase Enter 6 for other (Specify) ------------------------------------ 6a Is the employer a member of an affiliated service group? ( 2 ) Enter 1 if "Yes" Enter 2 if "No" Enter 3 if "Not Certain" b Is the employer a member of a controlled group of corporations or a group of trades or businesses under common control? ( 2 ) Enter 1 if "Yes" Enter 2 if "No" 7 Enter type of plan: ( 5 ) Enter 1 if governmental plan Enter 2 if church plan not subject to ERISA (see instructions) Enter 3 if multiple employer plan (described in section 413(c)). Enter number of participating employers ----------- Enter 4 if section 412(i) plan Enter 5 if other - ------------------------------------------------------------------------------------------------------------------------------------ Under penalties of perjury, I declare that I have examined this application, including accompanying statements, and to the best of my knowledge and belief, it is true, correct, and complete. Both copies of this page must be signed. Signature - DAVID R. LITTLE Title - President Date - 9-6-94 - ------------------------------------------------------------------------------------------------------------------------------------ Instructions are separate. See page 1 for Paperwork Reduction Act Notice. Form 5300 (Rev. 11-92)
11 Form 5300 (Rev. 11-92) Page 2 - ------------------------------------------------------------------------------------------------------------------------------- 8a Do you maintain any other qualified plan(s)? (See instructions.) . . . . . . . . . . . . . . . [X] Yes [ ] No If "No," skip to line 8c. b If this is a defined contribution plan and you also maintain a defined benefit plan, or if this is a defined benefit plan and you also maintain a defined contribution plan, when the plan is top-heavy, do non-key employees covered under both plans receive: (1) the top-heavy minimum benefit under the defined benefit plan?. . . . . . . . . . . . . [ ] Yes [ ] No (2) at least a 5% minimum contribution under the defined contribution plan?. . . . . . . . [ ] Yes [ ] No (3) the minimum benefit offset by benefits provided by the defined contribution plan?. . . [ ] Yes [ ] No (4) benefits under both plans that, using a comparability analysis, are at least equal to the minimum benefit? (See instructions.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [ ] Yes [ ] No c Do the provisions of the plan preclude the possibility that the section 415 limitations will be exceeded for any employee who is (or has been) a participant in this plan and any other plan of the employer?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [X] Yes [ ] No - ------------------------------------------------------------------------------------------------------------------------------- 9 COVERAGE (See instructions.): a Is the employer applying the separate line of business rules of section 414(r)?. . . . . . . . [ ] Yes [X] No (If "Yes," see instructions.) b Does the employer receive services from any leased employees within the meaning of section 414(n)?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [ ] Yes [X] No c Coverage of plan at (give date). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-31-93 ----------------------- d Enter the percentage of nonhighly compensated employees who benefit under the plan, excluding employees who benefit only under a part of the plan containing a CODA or employee or matching contributions. (If 70% or more, skip line 9e and go to line 9f.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [ ] N/A 100 % ----------------------- e Divide the percentage of nonhighly compensated employees who benefit under the plan (line 9d) by the percentage of highly compensated employees who benefit under the plan, exluding employees who only benefit under a part of the plan containing a CODA or employee or matching contributions. . . . . . . . . . . . . . [ ] N/A 100 ------------------------ f If the plan contains a CODA, compute the ratio in line 9e above on the basis of employees eligible to make elective deferrals under the CODA portion of the plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [X] N/A ------------------------ g If the plan provides for employees or matching contributions, compute the ratio in line 9e above on the basis of employees eligible to make employee contributions or to receive matching contributions under the plan . . . . . . . . . [X] N/A ------------------------ h Are the results in line 9e, 9f, or 9g based on the aggregated coverage of more than one plan? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [ ] Yes [X] No (If "Yes," see instructions.) i If line 9e, 9f, or 9g is less than 70%, does the plan pass the average benefit test? [X] N/A [ } Yes [ ] No (1) Enter the safe harbor percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------------------- (2) Enter the average benefit percentage. (See instructions.) . . . . . . . . . . . . . . . . . ----------------------- j Enter total number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402 - --------------------------------------------------------------------------------------------------------------------------------
12 FORM 5300 (REV. 11-92) PAGE 3 - ----------------------------------------------------------------------------------------------------------------------------------- 10 PERMITTED DISPARITY: N/A Yes No a If the plan provides for disparity in contributions or benefits, is the plan intended to meet the requirements of section 401(l)? ........................................................................ x --------------------- If N/A, do not complete lines 10b through 10f. If "Yes" or "No," complete lines 10b through 10f. (See instructions.) b In the case of a defined contribution plan, does the excess contribution percentage exceed the base contribution percentage by a uniform amount that does not exceed the maximum excess allowance? ......... --------------------- Base Contribution Percentage Excess Contribution Percentage ------------------ ------------------------- c In the case of a defined benefit excess plan, does the excess benefit percentage exceed the base benefit percentage by a uniform amount no greater than the maximum excess allowance? ........................... --------------------- Base Benefit Percentage Excess Benefit Percentage --------------------- -------------------------- d In the case of a defined benefit offset plan, are the gross benefit percentage and the offset uniform and is the offset less than the maximum offset allowance? .............................................. --------------------- Gross Benefit Percentage Offset ----------------------------- ------------------------------------------ e What is the plan's integration/offset level? ----------------------------------------------------------- f In the case of a defined benefit plan, does the plan adjust the 75% factor for benefits commencing at ages other than social security retirement age in accordance with Treasury Regulations section 1.401(l)-3(e)? ................................................................................. --------------------- - ----------------------------------------------------------------------------------------------------------------------------------- 11 General eligibility requirements -- Complete lines 11a, 11b, and 11c below. a Check one box: (1) [x] All employees (2) [ ] Hourly rate employees only (3) [ ] Salaried employees only (4) [ ] Other (Specify) ------------------------------------------------------ b Length of service (number of years) 1 [ ] N/A -------------------- c Minimum age (Specify) [ ] N/A ---------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- 12 Vesting: Check one box to indicate the vesting provisions of the plan: a [ ] Full and immediate. b [ ] Full vesting after 2 years of service. c [ ] Full vesting after 3 years of service. d [ ] Full vesting after 5 years of service. e [ ] 6 year graded vesting. f [x] 3 to 7 year graded vesting. g [ ] Other (Specify) (See instructions and attach schedule.) - ----------------------------------------------------------------------------------------------------------------------------------- 13 Benefits and requirements for benefits: a For defined benefit plans -- Method for determining accrued benefit: ---------------------------------------------------------- (1) Benefit formula at normal retirement age is ------------------------------------------------------------------------------- (2) Benefit formula at early retirement age is -------------------------------------------------------------------------------- (3) Normal form of retirement benefit is -------------------------------------------------------------------------------------- b For defined contribution plans -- Employer contributions: (1) Profit-sharing or stock bonus plan contributions are determined under: [ ] A definite formula [x] An indefinite formula [ ] Both (2) Money purchase -- enter rate of contribution ------------------------- (3) State target benefit formula - ----------------------------------------------------------------------------------------------------------------------------------- 14 Miscellaneous Provisions: N/A Yes No a Does any amendment to the plan reduce or eliminate any section 411(d)(6) protected benefit? (See instructions.) .................................................................................... x --------------------- b Are contributions or benefits allocated on the basis of total compensation within the meaning of section 414(s)? If "No," explain. (See instructions.) .................................................. x --------------------- c Are forfeitures allocated, in the case of a defined contribution plan, on the basis of total compensation within the meaning of section 414(s)? If "No," explain .................................... x --------------------- d Are trust earnings and losses allocated on the basis of account balances in a defined contribution plan? ..................................................................................... x --------------------- e Is this plan or trust currently under examination or is any issue related to this plan or trust currently pending before the Internal Revenue Service, the Department of Labor, the Pension Benefit Guaranty Corporation, or any court? If "Yes," attach an explanation .................................... x --------------------- f Does the plan comply with the annual compensation limit of section 401(a)(17)? (See instructions.) ..... x --------------------- g If this is a defined benefit plan, does the plan contain the pre-termination restrictions of Treasury Regulations section 1.401(a)(4)-(5)(b)? ................................................................ x --------------------- - -----------------------------------------------------------------------------------------------------------------------------------
13 TEXT (Vol. 21) 627 Form 5309 (Rev. 1-94) Page 2 - ------------------------------------------------------------------------------- PAPERWORK REDUCTION ACT NOTICE.-- We ask for the information on this form to determine whether you meet the legal requirements for the plan approval you request. Your filing of this information is only required if you wish the IRS to determine if your plan qualifies under section 409 or 4975(e)(7). The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is: Recordkeeping....................................5 hr., 30 min. Learning about the law or the form...............1 hr., 23 min. Preparing and sending the form to the IRS........1 hr., 32 min.
If you have comments concerning the accuracy of these time estimates or suggestions for making this form more simple, we would be happy to hear from you. You can write to both the IRS and the Office of Management and Budget at the addresses in the Instructions for Form 5300 or Form 5303. GENERAL INFORMATION Section references are to the Internal Revenue Code unless otherwise noted. Use this form to apply for a determination letter for either a Tax Credit Employee Stock Ownership Plan that meets the requirements of section 409, or an Employee Stock Ownership Plan (ESOP) that meets the requirements of section 4975(e)(7). Attach Form 5309 to Form 5300 or 5303, whichever applies. The plan you establish must be designed to invest primarily in employer securities. For a definition of employer securities and how it applies to your plan, see section 409(l) or section 4975(e)(8). Also see Regulations section 54.49 for the formal plan requirements of an ESOP, and Regulations section 1.46-8(d) for the formal requirements of a Tax Credit Employee Stock Ownership Plan. _______________________________________________________________________________ GENERAL INSTRUCTIONS Who May File 1. Any corporate employer who: - Elects to have an employee plan credit apply that was earned under section 48(n) as in effect prior to the enactment of the Tax Reform Act of 1984 and that has been properly carried from such prior year, and - Establishes a plan intended to meet the requirements under section 409. 2. Any corporate employer who has established an ESOP intended to meet the requirements under section 4975(e)(7). 3. Any corporate employer who amends an ESOP under section 409 or 4975. What to file To receive a determination on whether a plan, initially or as a result of a plan amendment, meets the requirements of section 409 or 4975(e)(7), submit Form 5309, Form 5300 or 5303, and a copy of all documents and statements required by those forms. Where to File Attach the completed Form 5309 to Form 5300 or 5303 and file at the IRS address listed in the Instructions for Form 5300 or Form 5303. Signature Form 5309 must be signed by the principal officer authorized to sign. 14 Department of the Treasury In reply refer to: 75220017 Internal Revenue Service Apr. 09, 1986 LTR 835AU 1100 Commerce St. Code 431 74-0909900P Y Dallas, TX 75242 00896 SEPCO INDUSTRIES INC c/o ROBERT A FRAHM STARK & FRAHM 1853 LEXINGTON HOUSTON TX 77098-4399 District Office Code and Case Serial Number: 765219021 EP Name of Plan: Sepco Industries Inc Profit Sharing Plan Application Form: 5301 Date Amended: June 14 1984 & July 02 1985 Employer Identification Number: 74-0909900 Plan Number: 001 File Number: 760000496 Dear Applicant: Based on the information supplied, we have made a favorable determination on your application identified above. Please keep this letter in your permanent records. Continued qualification of the plan will depend on its effect in operation under its present form. (See section 1.401-1(b)(3) of the Income Tax Regulations.) The status of the plan in operation will be reviewed periodically. The enclosed document describes some events that could occur after you receive this letter that would automatically nullify it without specific notice from us. The document also explains how operation of the plan may affect a favorable determination letter, and contains information about filing requirements. This letter relates only to the status of your plan under the Internal Revenue Code. It is not a determination regarding the effect of other Federal or local statutes. This determination is subject to your adoption of the proposed amendments submitted in your or your representative's letter dated March 21 1986. The proposed amendments should be adopted on or before the date prescribed by the regulations under Code Section 401(b). 15 Department of the Treasury Internal Revenue Service 75220017 APR. 09, 1986 LTR 835AU 74-0909900P Y 00897 SEPCO INDUSTRIES INC c/o ROBERT A FRAHM STARK & FRAHM 1853 LEXINGTON HOUSTON TX 77098-4399 This determination letter also applies to Sepco Compression Services Inc. If you have any questions, please contact E P Tech Assistor at 214-767-1204. Sincerely yours, /s/ GLENN CAGLE Glenn Cagle District Director Enclosures: Publication 794 LMSA 645 16 [Department of the Treasury Internal Revenue Service Logo] Publication 794 (Rev. March 1985) FAVORABLE DETERMINATION LETTER This publication points out some operational features that may affect the qualified status of your employee benefit plan, and provides information on the reporting requirements for your plan. HOW TO USE A FAVORABLE DETERMINATION LETTER A favorable determination letter gives the employer a basis for deducting contributions to an employee benefit plan. Whether a plan qualifies is determined from the information in the written plan document and the supporting information submitted by the employer. A favorable determination letter indicates that the terms of the plan conform to the requirements of section 401(a) of the Internal Revenue Code. The actual operation of the plan determines whether it will continue to qualify. Generally, a plan qualifies in operation if it is maintained according to the terms on which the favorable determination letter was issued. However, conditions may develop in operation that do not follow the written plan document, and they may jeopardize the plan's qualification. CONDITIONS ADVERSELY AFFECTING A FAVORABLE DETERMINATION LETTER Examples of common operational features that adversely affect a favorable determination are: 1) NOT MEETING COVERAGE REQUIREMENTS. If a plan satisfies the coverage requirements of section 410, when the favorable determination letter is received, by meeting either the percentage test under section 410(b)(1)(A) or the classification test under section 410(b)(1)(B), but the plan fails to meet the coverage requirements in operation, the letter will no longer apply to the plan. The letter will cease to apply when the defect in coverage arises. A plan is considered as meeting these requirements for the whole plan year if it meets the requirements on at least one day of each quarter of that year. 2) ALLOCATION OF FORFEITURES. If employee turnover results in the allocation of forfeitures principally to officers, shareholders, and highly compensated employees, a favorable determination letter will cease to apply. 3) AMENDMENTS TO THE PLAN. A favorable determination letter may no longer apply if there is a change in a statute, a regulation, or a revenue ruling applicable to the qualification of the plan. If the determination letter no longer applies to the plan, the plan must be amended to comply with the new requirements to maintain its qualified status. However, the determination letter will continue to apply for years before the effective date of the statute, regulation, or revenue ruling. Generally, if a regulation changes, an amendment must be adopted by the end of the first plan year beginning after the adoption date of the regulation. Generally, if a revenue ruling changes, the amendment must be adopted by the end of the first plan year beginning after the publication date of the revenue ruling. The amendment must be effective not later than the first day of the first plan year beginning after the revenue ruling is published. However, if certain requirements are satisfied, the amendment may be adopted retroactively after the close of that year. For further information on retroactive amendments, see Rev. Rul. 82-66, 1982-1 C.B. 61. REPORTING REQUIREMENTS Most plan administrators or employers who maintain an employee benefit plan must file an annual return/report with the Internal Revenue Service. The following forms should be used for this purpose: FORM 5500 -- for a pension benefit plan with 100 or more participants at the beginning of the plan year. FORM 5500-C AND FORM 5500-R -- for a pension benefit plan with fewer than 100 participants at the beginning of the plan year. FORM 5500-K, will be eliminated after the 1983 plan year filing is completed. Keogh (H.R. 10) plans are required to file an annual return even if the only participants are owner-employees. This new requirement applies to both defined contribution and defined benefit plans. WHEN TO FILE. Form 5500 must be filed annually. Form 5500-C must be filed for (i) the initial plan year, (ii) the year a final return/report would be filed, and (iii) at three-year intervals. Form 5500-R must be filed in the years when 5500-C is not filed. However, 5500-C will be accepted in place of 5500-R. For more information, see Publication 1048, Filing Requirements for Employee Benefit Plans. DISCLOSURE. The Internal Revenue Service will process the returns and provide the Department of Labor and the Pension Benefit Guaranty Corporation with the necessary information and copies of the returns on microfilm for disclosure purposes. [MAP] 17 U.S. DEPARTMENT OF LABOR Labor-Management Services Administration Washington, D.C. 20216 Reply to the attention of: LBI [SEAL] To: Administrators of Employee Pension and Welfare Benefit Plans The Employee Retirement Income Security Act of 1974 (ERISA) requires administrators of employee pension benefit plans (pension, profit sharing and other plans that provide retirement income to employees or result in a deferral of income by employees for periods extending to the termination of covered employment or beyond), and employee welfare benefit plans (medical, surgical, hospital, sickness, accident, disability, death, unemployment, vacation, training, scholarship funds, prepaid legal services, etc.) to meet certain reporting and disclosure requirements. Within 120 days after a new plan comes into existence, plan administrators are to file a summary plan description (SPD) with the Secretary of Labor. A summary plan description also must be provided to each plan participant and beneficiary within 120 days after the establishment of a plan. However, certain fully insured welfare plans with fewer than 100 participants are exempt from the requirement to file a summary plan description with the Secretary. For further information about the summary plan description and other reporting and disclosure requirements of ERISA, contact the nearest Area Office of the Labor Department's Labor-Management Services Administration (see list on reverse side). /s/ JEFFREY N. CLAYTON Jeffrey N. Clayton Administrator Pension and Welfare Benefit Programs LMSA 645 (12/15/82) 18 CONSENT TO ACTION WITHOUT A MEETING OF THE BOARD OF DIRECTORS OF WESCO EQUIPMENT, INC. The undersigned, being all of the Directors of Wesco Equipment, Inc. (Company), acting pursuant to Article 9.10 of the Texas Business Corporation Act, consent to the following action being taken without a meeting, to-wit: RESOLVED, that the Company approves the amendment and restatement of the Sepco Industries, Inc. Employee Stock Ownership Plan and Trust effective January 1, 1989, in order to bring the Plan into compliance with the Tax Reform Act of 1986; RESOLVED FURTHER, that the President of the Company is authorized and directed to execute the restated Plan and Trust Agreement, a copy of which is on file with the Secretary of the Company, and to take such other and further action and execute such other documents as may be necessary or desirable to amend said Plan and Trust; RESOLVED FURTHER, that the appointments of the Trustee and Plan Administrator by the Controlling Board of Directors are approved; and RESOLVED FURTHER, that the officers of the Company are authorized and directed to execute Form 2848 authorizing the law firm of Robert A. Frahm, P.C. to represent the Company before the Internal Revenue Service with respect to the Plan and Trust and to execute such amendment or amendments to the Trust Agreement as may be necessary to secure a determination letter, to execute certification statements and other documents with respect to the Plan and Trust in order to maintain the qualified status of the Plan under the Internal Revenue Code. Dated May 31, 1991. /s/ DAVID R. LITTLE /s/ GARY ALLCORN - ------------------------------ ------------------------------ David R. Little Gary Allcorn /s/ BRYAN H. WIMBERLY - ------------------------------ ------------------------------- Bryan H. Wimberly 19 CONSENT TO ACTION WITHOUT A MEETING OF THE BOARD OF DIRECTORS OF SOUTHERN ENGINE & PUMP COMPANY The undersigned, being all of the Directors of Southern Engine & Pump Company (Company) consent to the following action being taken without a meeting, to-wit: RESOLVED, that the Company approves the amendment and restatement of the Sepco Industries, Inc. Employee Stock Ownership Plan and Trust effective January 1, 1989, in order to bring the Plan into compliance with the Tax Reform Act of 1986; RESOLVED FURTHER, that the President of the Company is authorized and directed to execute the restated Plan and Trust Agreement, a copy of which is on file with the Secretary of the Company, and to take such other and further action and execute such other documents as may be necessary or desirable to amend said Plan and Trust; RESOLVED FURTHER, that the appointments of the Trustee and Plan Administrator by the Controlling Board of Directors are approved; and RESOLVED FURTHER, that the officers of the Company are authorized and directed to execute Form 2848 authorizing the law firm of Robert A. Frahm, P.C. to represent the Company before the Internal Revenue Service with respect to the Plan and Trust and to execute such amendment or amendments to the Trust Agreement as may be necessary to secure a determination letter, to execute certification statements and other documents with respect to the Plan and Trust in order to maintain the qualified status of the Plan under the Internal Revenue Code. Dated May 31, 1991. /s/ DAVID R. LITTLE /s/ BRYAN H. WIMBERLY - ------------------------------ ------------------------------ David R. Little Bryan H. Wimberly /s/ MARVIN C. STEFFEK /s/ J. MICHAEL WAPPLER - ------------------------------ ------------------------------ Marvin C. Steffek J. Michael Wappler 20 CONSENT TO ACTION WITHOUT A MEETING OF THE BOARD OF DIRECTORS OF SEPCO INDUSTRIES, INC. The undersigned, being all of the Directors of Sepco Industries, Inc. (Company), acting pursuant to Article 9.10 of the Texas Business Corporation Act, consent to the following action being taken without a meeting, to-wit: WHEREAS, the Company adopted the Sepco Industries, Inc. Employee Stock Ownership Plan, effective January 1, 1985, and amended and restated the Plan in its entirety, effective January 1, 1989, to bring the Plan into compliance with the Tax Reform Act of 1986; WHEREAS, the Company is the survivor by statutory merger of Southern Engine & Pump Company, Wesco Equipment, Inc., and DMS Corporation into Sepco Industries, Inc. DMS Corporation being the survivor by statutory merger of the T. L. Walker Bearing Company into DMS Corporation; WHEREAS, the Company desires to amend the Sepco Industries, Inc. Employee Stock Ownership Plan to bring the Plan into compliance with the Final Treasury Regulations under Internal Revenue Code Sections 401(k), 401(m), 414(s), 401(a)(31), and 401(a)(17). NOW THEREFORE, it is: RESOLVED, that said Plan and Trust is amended by adoption of the First Amendment to the Plan and Trust, a copy of which is on file with the Secretary of the Company; RESOLVED FURTHER, that the President of the Company is authorized and directed to execute the First Amendment and to do such other things and execute and deliver such other documents and instruments as may be necessary to maintain the qualified status of the Plan under the Internal Revenue Code and Treasury Department Regulations; RESOLVED FURTHER, that, by reason of the statutory merger described above, Southern Engine & Pump Company, Wesco Equipment, Inc., DMS Corporation, and T. L. Walker Bearing Company shall cease as participating employers under the Plan; 21 Trust, to execute such amendment or amendments to the Plan and Trust as may be necessary, and to execute certification statements and other documents with respect to the Plan and Trust in order to maintain the qualified status of the Plan under the Internal Revenue Code. Signed 6th day of September, 1994. /s/ DAVID R. LITTLE /s/ JERRY J. JONES - ------------------------------ ------------------------------ David R. Little Jerry J. Jones /s/ KENNETH H. MILLER /s/ GEORGE N. ALLEN, JR. - ------------------------------ ------------------------------ Kenneth H. Miller George N. Allen, Jr. /s/ BRYAN H. WIMBERLY - ------------------------------ Bryan H. Wimberly 22 CONSENT TO ACTION WITHOUT A MEETING OF THE BOARD OF DIRECTORS OF SEPCO INDUSTRIES, INC. The undersigned, being all of the Directors of Sepco Industries, Inc. (Company), acting pursuant to Article 9.10 of the Texas Business Corporation Act, consent to the following action being taken without a meeting, to-wit: WHEREAS, the Company adopted the Sepco Industries, Inc. Employee Stock Ownership Plan effective January 1, 1985; WHEREAS, the Company, having acquired a majority of stock in DMS Corporation, desires to have DMS Corporation and T.L. Walker Bearing Company (a subsidiary of DMS) become participating employers by their adoption of the Sepco Industries, Inc. Employee Stock Ownership Plan; WHEREAS, DMS Corporation and T. L. Walker Bearing Company desire to transfer the DMS Corporation stock held in the DMS Corporation Profit Sharing Plan and Trust into the Sepco Industries, Inc. Employee Stock Ownership Plan effective July 1, 1991. NOW THEREFORE, it is: RESOLVED, that the adoption of the plan by DMS Corporation and T.L Walker Bearing Company is approved; RESOLVED FURTHER, that the DMS Corporation stock in the DMS Corporation Profit Sharing Plan and Trust shall be transferred into the Sepco Industries, Inc. Employee Stock Ownership Plan effective July 1, 1991, and IRS Form 5310, Notice of Merger, Consolidation or Transfer of Plan Assets, shall be filed with the Internal Revenue Service. Before the transfer, the value of the stock allocated to the accounts of the Participants in each Plan shall equal the fair market value (determined as of the effective date of the transfer) of the entire assets attributable to the stock held in each Plan; the stock in each Plan shall be combined to form the assets of the Plan as transferred; immediately after the transfer, the value of each participant's stock as transferred shall equal to the sum of value of the stock the participant had in the Plans immediately prior to the transfer. RESOLVED FURTHER, that the President of the Company is authorized and directed to execute Form 2848 authorizing the law firm of Robert A. Frahm, P.C. to represent the Company before the Internal Revenue Service with respect to the Plan and 23 Trust, to execute such amendment or amendments to the Plan and Trust as may be necessary, and to execute certification statements and other documents with respect to the Plan and Trust in order to maintain the qualified status of the Plan under the Internal Revenue Code. May 31, 1991. /s/ DAVID R. LITTLE /s/ JERRY J. JONES - ------------------------------ ------------------------------ David R. Little Jerry J. Jones /s/ KENNETH H. MILLER /s/ GEORGE N. ALLEN, JR. - ------------------------------ ------------------------------ Kenneth H. Miller George N. Allen, Jr. /s/ BRYAN H. WIMBERLY - ------------------------------ Bryan H. Wimberly 24 CONSENT TO ACTION WITHOUT A MEETING OF THE BOARD OF DIRECTORS OF SEPCO INDUSTRIES, INC. The undersigned, being all of the Directors of Sepco Industries, Inc. (Company), acting pursuant to Article 9.10 of the Texas Business Corporation Act, consent to the following action being taken without a meeting, to-wit: WHEREAS, the Company adopted the Sepco Industries, Inc. Employee Stock Ownership Plan effective January 1, 1985; WHEREAS, the Company desires to amend and restate the Plan and Trust in its entirety effective January 1, 1989, in order to bring the Plan into compliance with the Tax Reform Act of 1986; WHEREAS, the Company desires to have Southern Engine & Pump Company and Wesco Equipment, Inc. continue as participating employers. NOW THEREFORE, it is: RESOLVED, that the Plan and Trust is amended and restated in its entirety, effective January 1, 1989, a copy of which document is on file with the Secretary of the Company; RESOLVED FURTHER, that the President of the Company is authorized and directed to execute the Plan and Trust Agreement and to do such other things and execute and deliver such other documents and instruments as may be necessary to maintain the qualified status of the Plan under the Internal Revenue Code and Treasury Department Regulations; RESOLVED FURTHER, that David R. Little shall continue to serve as the Plan Administrator of said Plan and Trust; RESOLVED FURTHER, that Northern Trust Bank of Texas N.A. is appointed as Trustee of the Trust created by said Plan; RESOLVED FURTHER, that Southern Engine & Pump Company and Wesco Equipment, Inc. shall continue to be participating employers in said Plan; and 25 RESOLVED FURTHER, that the Chairman of the Board is authorized and directed to execute Form 2848 authorizing the law firm of Robert A. Frahm, P.C. to represent the Company before the Internal Revenue Service with respect to the Plan and Trust, to execute such amendment or amendments to the Plan and Trust as may be necessary, and to execute certification statements and other documents with respect to the Plan and Trust in order to maintain the qualified status of the Plan under the Internal Revenue Code. Dated May 31, 1991. /s/ DAVID R. LITTLE /s/ JERRY J. JONES - ------------------------------ ------------------------------ David R. Little Jerry J. Jones /s/ KENNETH H. MILLER /s/ GEORGE N. ALLEN, JR. - ------------------------------ ------------------------------ Kenneth H. Miller George N. Allen, Jr. /s/ BRYAN H. WIMBERLY - ------------------------------ Bryan H. Wimberly 26 CONSENT TO ACTION WITHOUT A MEETING OF THE BOARD OF DIRECTORS OF SEPCO INDUSTRIES, INC. The undersigned, being all of the Directors of Sepco Industries, Inc. (Company), acting pursuant to Article 9.10 of the Texas Business Corporation Act, consent to the following action being taken without a meeting, to-wit: WHEREAS, the Company adopted the Sepco Industries, Inc. Employee Stock Ownership Plan effective January 1, 1985; WHEREAS, the Company desires to amend and restate the Plan and Trust in its entirety effective January 1, 1989, in order to bring the Plan into compliance with the Tax Reform Act of 1986; WHEREAS, the Company desires to have Southern Engine & Pump Company and Wesco Equipment, Inc. continue as participating employers. NOW THEREFORE, it is: RESOLVED, that the Plan and Trust is amended and restated in its entirety, effective January 1, 1989, a copy of which document is on file with the Secretary of the Company; RESOLVED FURTHER, that the President of the Company is authorized and directed to execute the Plan and Trust Agreement and to do such other things and execute and deliver such other documents and instruments as may be necessary to maintain the qualified status of the Plan under the Internal Revenue Code and Treasury Department Regulations; RESOLVED FURTHER, that David R. Little shall continue to serve as the Plan Administrator of said Plan and Trust; RESOLVED FURTHER, that Northern Trust Bank of Texas N.A. is appointed as Trustee of the Trust created by said Plan; RESOLVED FURTHER, that Southern Engine & Pump Company and Wesco Equipment, Inc. shall continue to be participating employers in said Plan; and 27 RESOLVED FURTHER, that the Chairman of the Board is authorized and directed to execute Form 2848 authorizing the law firm of Robert A. Frahm, P.C. to represent the Company before the Internal Revenue Service with respect to the Plan and Trust, to execute such amendment or amendments to the Plan and Trust as may be necessary, and to execute certification statements and other documents with respect to the Plan and Trust in order to maintain the qualified status of the Plan under the Internal Revenue Code. Dated May 31, 1991. /s/ DAVID R. LITTLE /s/ JERRY J. JONES - ------------------------------ ------------------------------ David R. Little Jerry J. Jones /s/ KENNETH H. MILLER /s/ GEORGE N. ALLEN, JR. - ------------------------------ ------------------------------ Kenneth H. Miller George N. Allen, Jr. /s/ BRYAN H. WIMBERLY - ------------------------------ Bryan H. Wimberly 28 CERTIFIED COPY OF RESOLUTION I, the undersigned, Gary A. Allcorn, Secretary of DMS Corporation (Company), certify that the following resolutions were adopted by the Directors on May 31, 1991, and are now in full force and effect: RESOLVED, that the Company adopts the Sepco Industries, Inc. Employee Stock Ownership Plan and Trust, effective, January 1, 1991, for the benefit of its employees; RESOLVED FURTHER, that the President and Secretary of the Company are authorized and directed to execute an Adoption Agreement, a copy of which is on file with the Secretary of the Company, and to take such other and further action and execute such other documents as may be necessary or desirable to adopt said Plan and Trust; RESOLVED FURTHER, that the appointments of the Trustee and Plan Administrator by the Controlling Board of Directors are approved; RESOLVED FURTHER, that the DMS Corporation stock in the DMS Corporation Profit Sharing Plan shall be transferred into the Sepco Industries, Inc. Employee Stock Ownership Plan effective July 1, 1991 and IRS Form 5310, Notice of Merger, Consolidation or Transfer of Plan Assets, shall be filed with the Internal Revenue Service. Before the transfer the value of the stock allocated to the accounts of the Participants in each Plan shall equal the fair market value (determined as of the effective date of the transfer) of the entire assets attributable to the stock held in each Plan; the stock in each Plan shall be combined to form the assets of the Plan as transferred; immediately after the transfer, the value of each participant's stock as transferred shall equal to the sum of value of the stock the participant had in the Plans immediately prior to the transfer. RESOLVED FURTHER, the officers of the Company are authorized and directed to execute Form 2848 authorizing the law firm of Robert A. Frahm, P.C. to represent the Company before the Internal Revenue Service with respect to the Plan and Trust and to execute such amendment or amendments to the Trust Agreement as may be necessary to secure a determination letter, to execute certification statements and other documents with respect to the Plan and Trust in order to maintain the qualified status of the Plan under the Internal Revenue Code. Dated May 31, 1991. /s/ GARY A. ALLCORN ------------------------------ Gary A. Allcorn, Secretary 29 ADOPTION AGREEMENT FROM: DMS Corporation TO: The Plan Administrator The undersigned, DMS Corporation, a Texas corporation, with principal offices in Houston, Texas, by this Adoption Agreement adopts the Sepco Industries, Inc. Employee Stock Ownership Plan and Trust for the exclusive benefit of its employees in accordance with Article Section 11.1 of the Agreement creating said Plan and Trust, effective January 1, 1991. The undersigned as a participating employer agrees to be bound by the terms and provisions of said Plan and Trust with respect to its eligible employees, agrees to perform its obligations thereunder, and contemporaneously herewith make its initial contribution of $100 to the Trust. Dated May 31, 1991. DMS CORPORATION /s/ GARY A. ALLCORN ------------------------------ Gary A. Alcorn, Secretary PLAN ADMINISTRATOR'S ACCEPTANCE The undersigned, Plan Administrator of the Sepco Industries, Inc. Employee Stock Ownership Plan and Trust accepts the foregoing Adoption Agreement and approves the adoption of said Plan and Trust by DMS Corporation, a Texas corporation, effective as of the January 1, 1991. Dated May 31, 1991. /s/ DAVID R. LITTLE ------------------------------------ David R. Little, Plan Administrator 30 CERTIFIED COPY OF RESOLUTION I, the undersigned, Gary A. Allcorn, Secretary of T. L. Walker Bearing Company (Company), certify that the following resolutions were adopted by the Directors on May 31, 1991, and are now in full force and effect: RESOLVED, that the Company adopts the Sepco Industries, Inc. Employee Stock Ownership Plan and Trust, effective January 1, 1991, for the benefit of its employees; RESOLVED FURTHER, that the President and Secretary of the Company are authorized and directed to execute a copy of the Plan and Trust Agreement, a copy of which is on file with the Secretary of the Company, and to take such other and further action and execute such other documents as may be necessary or desirable to adopt the Plan and Trust; RESOLVED FURTHER, that the appointments of the Trustee and Plan Administrator by the Controlling Board of Directors are approved; RESOLVED FURTHER, that the DMS Corporation stock allocated to the employees of T.L. Walker Bearing Company in the DMS Corporation Profit Sharing Plan and Trust shall be transferred into the Sepco Industries, Inc. Employee Stock Ownership Plan, effective July 1, 1991, and IRS Form 5310, Notice of Merger, Consolidation or Transfer of Plan Assets, shall be filed with the Internal Revenue Service. Before the transfer, the value of the stock allocated to the accounts of the Participants in each Plan shall equal the fair market value (determined as of the effective date of the transfer) of the entire assets attributable to the stock held in each Plan; the stock in each Plan shall be combined to form the assets of the Plan as transferred; immediately after the transfer, the value of each participant's stock as transferred shall equal to the sum of value of the stock the participant had in the Plans prior to the transfer. RESOLVED FURTHER, that the officers of the Company are authorized and directed to execute Form 2848 authorizing the law firm of Robert A. Frahm, P.C. to represent the Company before the Internal Revenue Service with respect to the Plan and Trust and to execute such amendment or amendments to the Trust Agreement as may be necessary to secure a determination letter, to execute certification statements and other documents with respect to the Plan and Trust in order to maintain the qualified status of the Plan under the Internal Revenue Code. Dated May 31, 1991. /s/ GARY A. ALLCORN ------------------------------ Gary A. Allcorn, Secretary 31 APPENDIX A ATTACHMENT TO APPLICATIONS FILED UNDER REV. PROC. 93-39 PLAN NAME: SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN ---------------------------------------------------------------------- (Refer to the notes following Part IV of this attachment in responding to the following questions) PART I H = Enter the letter (A-I) that describes the plan from ----- the notes following Part IV. Enter one letter only. If you have entered A, B, or I, do not complete the rest of this attachment. PART II Enter Y or N (unless otherwise indicated) 1. N Are you using the separate lines of business rules of ----- section 414(r) in testing whether a plan satisfies section 401(a)(26) or section 410(b)? If yes, attach the required schedule and label it Demo 1. 2. Y Have you attached a demonstration that the plan ----- satisfies section 401(a)(26)? Label this Demo 2. If you entered C, D, E or F in Part I, skip to Part IV. If you entered G in Part I, skip to Part III, question 12. If you entered H, continue with question 3. 3. N Determination letters generally provide reliance that ----- certain benefits, rights, and features under a plan satisfy the nondiscriminatory current availability requirement of section 1.401(a)(4)4(b) of the regulations. Refer to section 4.04 of Rev. Proc. 93-39 to identify those benefits, rights and features for which the determination letter will automatically provide reliance. Answer this question "yes" only if you are requesting a determination that any other specified benefit, right, or feature meets the nondiscriminatory current availability requirement of section 1.401(a)(4)-4(b) of the regulations. Otherwise, answer "no". If you answer "yes", a separate demonstration must generally be provided for each other benefit, right, and feature you wish considered. See appendix B, Demo 3, for guidelines relating to this demonstration. 4. N Is the plan mandatorily disaggregated, permissively ----- aggregated, or restructured? If yes, attach the required schedule and label it Demo 4. 5. a Identify the coverage test being met by entering "a" ----- for Ratio percentage, "b" for average benefit, or "c" for pre-ERISA rules for certain governmental and nonelecting church plans. 6. NA If 5 is "b," are you requesting a determination that ----- the plan satisfies the average benefit test? If yes, attach the required demonstration and label it Demo 5. (Leave blank if you entered "a" or "c" on line 5.) 32 7. Y Is the plan intended to satisfy a design-based safe ----- harbor? (Leave blank if the plan is a section 401(k) or section 401(m) plan only.) 8. a If 7 is "Y", enter one of "A: through "g: from the ----- notes following Part IV to identify the safe harbor intended to be satisfied. (Leave blank of line 7 is "N" or blank.) List the plan provisions that satisfy the safe harbor here: 4.3 9. NA If 7 is "N", are you requesting a determination that ----- the plan satisfies a nondesign-based safe harbor or a general test? If the answer to this question 9 is yes, attach the required demonstration and label it Demo 6. Leave blank if line 7 is "Y" or blank.) Also, check the type of determination requested: a. General test, involving "safety valve" rule. b. General test, not involving "safety valve". c. Nondesign-based safe harbor. 10. N Answer this question"yes" if any plan provision ----- provides for pre-participation or imputed service as defined in section 1.401(a)(4)-11(d)(3)(ii) of the regulations. Also answer "yes" if a plan amendment or, in the case of an initial determination, a plan provision provides for a period of past service that exceeds the period set forth in the safe harbor in section 1.401(a)(4)-5(a)(3). If you answer "yes," you must attach a schedule that includes the following: (1) a description of the nature of the grant of past service or pre-participation or imputed service, (2) the location of the various plan provisions that provide for the granting of the service, and, (3) in the case of pre-participation or imputed service, whether the service is being taken into account in determining whether the plan satisfies section 1.401(a)(4)-1(b)(2). Do not answer "yes" if past service, pre-participation service, or imputed service is, or imputed service is provided under the plan solely to the extent necessary to satisfy one or more of the following: (1) the service crediting rules under section 410(a) (eligibility), 411(a) (vesting), 413 (collectively bargained plans), or 414(a) (service for predecessor employer), (2) the hour of service or elapsed time service-crediting methods under sections 29 CFR section 2530.200b-2 and 1.410(a)-7, respectively, and (3) the limit on double proration of service and compensation in 29 CFR section 2.530.204-2(d). 11. N Is the plan part of a floor offset arrangement ----- intended to satisfy the safe harbor in section 1.401(a)(4)-8(d) of the regulations? If yes, attach the required schedule and label it Demo 8. PART III SKIP TO PART IV IF YOU ENTERED "N" ON LINE 7. 12. N Are you required to submit a demonstration that a ----- definition of compensation is nondiscriminatory? If yes, Label this Demo 9. IF YOU ENTERED G IN PART I, SKIP TO PART IV. 13. N Is the plan a defined benefit plan that provides for ----- employee contributions not allocated to separate accounts? 33 IF NO, SKIP TO PART IV. 14. Enter one of "a" through "e" from the notes following Part IV to ----- identify the method used to determine the employer-provided benefit. If "a," attach the required demonstration and label it Demo 10. If applicable, list the plan provisions and indicate the plan factor here: 15. Enter one of "a" through "c" from the notes following Par IV to ----- identify the method used to show that the employee-provided benefit is nondiscriminatory in amount. If "c," attach the required demonstration, if applicable, and label it Demo 11. PART IV Enter "X": opposite the demonstrations that are attached: 1 [ ] s [ ] 9 [ ] 2 [x] 6 [ ] 10 [ ] 3 [ ] 7 [ ] n [ ] 4 [ ] s [ ] 34 DEMONSTRATION 2 SECTION 401(A) (26) REQUIREMENTS SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN Note: You may be required to file separate section 401(a) (26) demonstrations for different portions of the plan in accordance with the directions on Demo 2(Schedule A - Disaggregation). If this worksheet relates only to a portion of the plan, identify the portion here (e.g. collectively bargained portion, name of collective bargaining unit, or name of employer):____________________________ ________________________________________________________________________________ PART I 1. Does the plan meet all of the following requirements for the Plan year: a. the plan is not a frozen plan, Yes X No --- --- b. the plan is not top-heavy under section 416, Yes X No --- --- c. the plan benefits no highly compensated employee or former employees, and Yes No X --- --- d. the plan is not aggregated with any other plan to enable the other plan to satisfy sections 401(a)(4) or 410(b) (other than the average benefit percentage test of section 410(b)(2)(A)(ii)? Yes X No --- --- 2. Is the plan a defined benefit plan that satisfies all of the following conditions for the plan year: a. a timely filed actuarial report evidences that the plan does not have sufficient assets to satisfy all liabilities, Yes No --- --- b. no employees accrue additional benefits under the plan for the plan year, other than minimum benefits for non-key employees required by section 416; and, if applicable, Yes No --- --- c: if the determination letter is filed in the 1992 or later plan year, the plan is either subject to Title IV of ERISA or is not top-heavy for such year? Yes No N/A --- --- --- 35 3. Is this a multiemployer plan that meets any of the following conditions: a. the plan benefits only employees included in a unit covered by a collective bargaining agreement within the meaning of section 1.401(a)(26)-8 of the regulations, or Yes No --- --- b. the plan benefits 50 or more employees? Yes No --- --- (Note that an employee is not to be considered included in a unit of employees covered by a collective bargaining agreement for a year if for that year more than 2% of the employees covered pursuant to the agreement are professionals.) 4. Deserve how the plan meets the requirements of the exception selected above: N/A --------------------------------------------------------------- PART II Complete this Part if the plan does not meet one of the exceptions in Part I. 1. Is this a frozen plan within the meaning of section 1.401(a)(26)-2(b) of the regulations? Yes No X --- --- If "yes", do not complete the remainder of this Part. 2. Enter the date for which data responding to the following questions is given (note: This data must be reasonably representative of the employer's workforce and plan coverage): December 31, 1993 ----------------- 3. Enter the total number Of employees of the employer who were employed on the date shown on line 2, including self-employed individuals, common-law employees, and leased employees who are treated as employees (See section 1.401(b)-9 of the regulations? 397 --- 3a. Does line 3 include any leased employees treated as employees? Yes No X --- --- 4. Enter the number of employees identified on line 3 (other than those employees in a category excludable with respect to the plan or portion of the plan being tested) who, on the date shown on line 2 were participants and who were benefiting for the plan year, within the meaning of section 1.401(a)(26)-5 of the regulations, under the plan or separate portion of the plan being tested, if applicable. (See line 6 below regarding categories of employees who may be excludable.): 402 --- 36 5. Is line 4 greater than or equal to the lessor 50 or 40% of line 3? Yes X No --- --- If yes do not complete the remainder of this Part. 6. Enter the number of employees identified on line 3 who, on the basis of the plan provisions and relevant facts as of the last day of the plan year, are excludable employees in each of the following categories: a. Noncovered employees excludable on account of minimum age and service under section 1.401(a)(26)-6(b)(1)(i) ------ b. Covered employees otherwise excludable under section 1.401(a)(26)-6(b)(1)(ii). (This exclusion applies in testing the part of the plan benefiting those employees not otherwise excludable.): ------ c. Covered employees who are not otherwise excludable under section 1.401(a)(26)-6(b)(1)(ii). (This exclusion applies in testing the part of the plan benefiting those employees who are otherwise excludable.): ------ d. Employees covered pursuant to a collective bargaining agreement (CBA) and excludable under section 1.401(a)926)-6(b) (4): ------ e. Employees NOT covered pursuant to a CBA and excludable under section 1.401(a)(26)-6(b)(5): ------ f. Terminating employees excludable under section 1.401(a)(26)-6(b)(7): ------ g. Other (identify): ------ h. Total of a. through g. (do not count any employee more than once: ------ 7. Subtract line 6.h from line 3: ------ 37 8. Multiply line 7 by 40%: ------ 9. Enter the lesser of 50 or the number shown on line 8: ------ 10. Is line 4 equal to or greater than line 9? Yes No --- --- if "no" the plan does not satisfy section 401(a)(26) 38 SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN Robert A. Frahm, P.C. 1853 Lexington Houston, Texas 7098-4399 (713) 526-8862 39 TABLE OF CONTENTS ARTICLE I DEFINITIONS ARTICLE II TOP HEAVY ADMINISTRATION 2.1 TOP HEAVY PLAN REQUIREMENTS 13 2.2 DETERMINATION OF TOP HEAVY STATUS 14 2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER 17 2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY 18 2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES 18 2.6 POWERS AND DUTIES OF THE ADMINISTRATOR 18 2.7 RECORDS AND REPORTS 20 2.8 APPOINTMENT OF ADVISERS 20 2.9 INFORMATION FROM EMPLOYER 20 2.10 PAYMENT OF EXPENSES 20 2.11 MAJORITY ACTIONS 21 2.12 CLAIMS PROCEDURE 21 2.13 CLAIMS REVIEW PROCEDURE 21 ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY 22 3.2 APPLICATION FOR PARTICIPATION 22 3.3 EFFECTIVE DATE OF PARTICIPATION 22 3.4 DETERMINATION OF ELIGIBILITY 23 3.5 TERMINATION OF ELIGIBILITY 23 3.6 OMISSION OF ELIGIBLE EMPLOYEE 23
40 3.7 INCLUSION OF INELIGIBLE EMPLOYEE 23 3.8 ELECTION NOT TO PARTICIPATE 24 ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION 24 4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION 24 4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS 24 4.4 MAXIMUM ANNUAL ADDITIONS 29 4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS 33 4.6 DIRECTED INVESTMENT ACCOUNT 34 ARTICLE V FUNDING AND INVESTMENT POLICY 5.1 INVESTMENT POLICY 35 5.2 APPLICATION OF CASH 36 5.3 TRANSACTIONS INVOLVING COMPANY STOCK 36 5.4 LOANS TO THE TRUST 37 ARTICLE VI VALUATIONS 6.1 VALUATION OF THE TRUST FUND 39 6.2 METHOD OF VALUATION 39 ARTICLE VII DETERMINATION AND DISTRIBUTION OF BENEFITS 7.1 DETERMINATION OF BENEFITS UPON RETIREMENT 40 7.2 DETERMINATION OF BENEFITS UPON DEATH 40 7.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY 41 7.4 DETERMINATION OF BENEFITS UPON TERMINATION 41 7.5 DISTRIBUTION OF BENEFITS 46
41 7.6 HOW PLAN BENEFIT WILL BE DISTRIBUTED 50 7.7 DISTRIBUTION FOR MINOR BENEFICIARY 51 7.8 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN 51 7.9 RIGHT OF FIRST REFUSALS 52 7.10 STOCK CERTIFICATE LEGEND 53 7.11 PUT OPTION 53 7.12 NONTERMINABLE PROTECTIONS AND RIGHTS 55 7.13 LIMITATIONS OF BENEFITS AND DISTRIBUTIONS 55 7.14 AUTOMATIC SURVIVOR BENEFITS 56 ARTICLE VIII TRUSTEE 8.1 BASIC RESPONSIBILITIES OF THE TRUSTEE 59 8.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE 60 8.3 OTHER POWERS OF THE TRUSTEE 61 8.4 LOANS TO PARTICIPANTS 64 8.5 VOTING AND TENDER OF COMPANY STOCK 67 8.6 DUTIES OF THE TRUSTEE REGARDING PAYMENTS, 68 INVESTMENTS, EXEMPT LOANS 8.7 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES 69 8.8 ANNUAL REPORT OF THE TRUSTEE 70 8.9 AUDIT 70 8.10 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE 71 8.11 TRANSFER OF INTEREST 72 8.12 REAL ESTATE INVESTMENTS 73 8.13 INDEMNIFICATION OF THE TRUSTEE 73
42 ARTICLE IX AMENDMENT, TERMINATION AND MERGERS 9.1 AMENDMENT 74 9.2 TERMINATION 75 9.3 MERGER OR CONSOLIDATION 75 ARTICLE X MISCELLANEOUS 10.1 PARTICIPANT'S RIGHTS 75 10.2 ALIENATION 76 10.3 CONSTRUCTION OF PLAN 76 10.4 GENDER AND NUMBER 76 10.5 LEGAL ACTION 77 10.6 PROHIBITION AGAINST DIVERSION OF FUNDS 77 10.7 BONDING 78 10.8 EMPLOYER'S AND TRUSTEE'S PROTECTION CLAUSE 78 10.9 INSURER'S PROTECTIVE CLAUSE 78 10.10 RECEIPT AND RELEASE FOR PAYMENTS 78 10.11 ACTION BY THE EMPLOYER 78 10.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY 78 10.13 HEADINGS 79 10.14 APPROVAL BY INTERNAL REVENUE SERVICE 79 10.15 UNIFORMITY 80 10.16 SECURITIES AND EXCHANGE COMMISSION APPROVAL 80 10.17 VOTING COMPANY STOCK 80
43 ARTICLE XI PARTICIPATING EMPLOYERS 11.1 ADOPTION BY OTHER EMPLOYERS 81 11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS 81 11.3 DESIGNATION OF AGENT 81 11.4 EMPLOYEE TRANSFERS 82 11.5 PARTICIPATING EMPLOYER'S CONTRIBUTION 82 11.6 AMENDMENT 82 11.7 DISCONTINUANCE OF PARTICIPATION 82 11.8 ADMINISTRATOR'S AUTHORITY 83 11.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE 83
44 SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN THIS AGREEMENT, hereby made.and entered into this 15th day of October, 1991, by and between Sepco Industries, Inc., Southern Engine & Pump Company, Wesco Equipment, Inc., and T.L. Walker Bearing Co. (herein referred to as the "Employer") and The Northern Trust Company of Texas (herein referred to as the "Trustee"). W I T N E S S E T H: WHEREAS, the Employer heretofore established an Employee Stock Ownership Plan and Trust effective January 1, 1985, (hereinafter called the "Effective Date") known as the Sepco Industries, Inc. Employee Stock Ownership Plan (herein referred to as the "Plan") in recognition of the contribution made to its successful operation by its employees and for the exclusive benefit of its eligible employees; and WHEREAS, under the terms of the Plan, the Employer has the ability to amend the Plan, provided the Trustee joins in such amendment if the provisions of the Plan affecting the Trustee are amended; and WHEREAS, contributions to the Plan will be made by the Employer and such contributions to the trust will be invested primarily in the capital stock of the Employer; NOW THEREFORE, effective January 1, 1989, except as otherwise provided, the Employer and the Trustee in accordance with the provisions of the Plan pertaining to amendments thereof, hereby amend the Plan in its entirety and restate the Plan to provide as follows: ARTICLE I DEFINITIONS 1.1 "Act" means the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.2 "Administrator" means the person designated by the Employer pursuant to Section 2.4 to administer the Plan on behalf 1 45 of the Employer. 1.3 "Affiliated Employer" means the Employer and any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(0). 1.4 "Aggregate Account" means, with respect to each Participant, the value of all accounts maintained on behalf of a Participant, whether attributable to Employer or Employee contributions, subject to the provisions of Section 2.2. 1.5 "Anniversary Date" means December 31. 1.6 "Beneficiary" means the person to whom the share of a deceased Participant's total account is payable, subject to the restrictions of Sections 7.2 and 7.5. 1.7 "Code" means the Internal Revenue Code of 1986, as amended or replaced from time to time. 1.8 "Company Stock" means common stock issued by the Employer (or by a corporation which is a member of the controlled group of corporations of which the Employer is a member) which is readily tradeable on an established securities market. If there is no common stock which meets the foregoing requirement, the term "Company Stock" means common stock issued by the Employer (or by a corporation which is a member of the same controlled group) having a combination of voting power and dividend rights equal to or in excess of: (A) that class of common stock of the Employer (or of any other such corporation) having the greatest voting power, and (B) that class of stock of the Employer (or of any other such corporation) having the greatest dividend rights. Noncallable preferred stock shall be deemed to be "Company Stock" if such stock is convertible at any time into stock which constitutes "Company Stock" hereunder and if such conversion is at a conversion price which (as of the date of the acquisition by the Trust) is reasonable. 1.9 "Company Stock Account" means the account of a Participant which is credited with the shares of Company Stock purchased and paid for by the Trust Fund or contributed to the Trust Fund. 1.10 "Compensation" with respect to any Participant means total compensation paid by the Employer for a Plan Year. Amounts 2 46 contributed by the Employer under the Plan and any non-taxable fringe benefits provided by the Employer shall not be considered as Compensation. For purposes of the Section, the determination of Compensation shall include salary reduction contributions made on behalf of an Employee to a plan maintained under Code Sections 125 and 401(k). Compensation shall be recognized as of an Employee's effective date of participation pursuant to Section 3.3. Compensation in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d). In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest (415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) the close of the year. If, as a result of the application of such rules the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among the affected Family Members in proportion to each such Family Member's Compensation prior to the application of this limitation. For Plan Years beginning prior to January 1, 1989, the $200,000 limit (without regard to Family Member aggregation) shall apply only for Top Heavy Plan Years and shall not be adjusted. 1.11 "Contract" or "policy" means a life insurance policy or annuity contract (group or individual) issued by the insurer as elected. 1.12 "Current Obligations" means Trust obligations arising from extension of credit to the Trust and payable in cash within (1) year from the date an Employer contribution is due. Trust obligations shall include the liability for payment of taxes imposed by Code Section 2001 which liability is incurred pursuant to Code Section 2210(b). 1.13 "Eligible Employee" means any Employee. Employees of Affiliated Employers shall not be eligible to participate in this Plan unless such Affiliated Employers have specifically adopted this Plan in writing. 1.14 "Employee" means any person who is employed by the Employer, but excludes any person who is employed as an independent contractor. Employee shall include leased employees within the 3 47 meaning of Code Sections 414(n)(2) and 414(o)(2) unless such leased employees are covered by a plan described in Code Section 414(n)(5) and such leased employees do not constitute more than 20% of the recipient's non-highly compensated work force. 1.15 "Employer" means Sepco Industries, Inc. and any Participating Employer (as defined in Section 11.1) which shall adopt this Plan; any successor which shall maintain this Plan; and any predecessor which has maintained this Plan. The Employer is a corporation with principal offices in the state of Texas. 1.16 "ESOP" means an employee stock ownership plan that meets the requirements of Code Section 4975(e)(7) and Regulation 54.4975-11. 1.17 "Exempt Loan" means a loan made to the Plan by a disqualified person or a loan to the Plan which is guaranteed by a disqualified person and which satisfies the requirements of Section 2550.408b-3 of the Department of Labor Regulations, Section 54.4975-7(b) of the Treasury Regulations and Section 5.4 hereof. 1.18 "Family Member" means, with respect to an affected Participant, such Participant's spouse, such Participant's lineal descendants and ascendants and their spouses, all as described in Code Section 414(q)(6)(B). 1.19 "Fiduciary" means any person who (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Trustee, the Employer and its representative body, and the Administrator. 1.20 "Fiscal Year" means the Employer's accounting year of 12 months commencing on January 1 of each year and ending the following December 31. 1.21 "Forfeiture" means that portion of a Participant's Account that is not Vested, and occurs on the earlier of: (a) the distribution of the entire Vested portion of a Participant's Account, or (b) the last day of the Plan Year in which the Participant incurs five (5) consecutive 1-Year Breaks in Service. Furthermore, for purposes of paragraph (a) above, in the case 4 48 of a Terminated Participant whose Vested benefit is zero, such Terminated Participant shall be deemed to have received a distribution of his Vested benefit upon his termination of employment. Restoration of such amounts shall occur pursuant to Section 7.4. In addition, the term Forfeiture shall also include amounts deemed to be Forfeitures pursuant to any other provision of this Plan. 1.22 "Former Participant" means a person who has been a Participant, but who has ceased to be a Participant for any reason. 1.23 "415 Compensation" means compensation as defined in Section 4.4(d). 1.24 "414(s) Compensation" with respect to any Employee means his "415 Compensation" paid during a Plan Year. The amount of "414(s) Compensation" with respect to any Employee shall include "414(s) Compensation" during the entire twelve (12) month period ending on the 1st day of such Plan Year, except that for Plan Years beginning prior to January 1, 1990, "414(s) Compensation shall only be recognized as of an Employee's effective date of participation. For purposes of this Section, the determination of "414(s) Compensation" shall include salary reduction contributions made on behalf of an Employee to a plan maintained under Code Sections 125 and 401(k). "414(s) Compensation" in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d). However, for Plan Years beginning prior to January 1, 1989, the $200,000 limit shall apply only for Top Heavy Plan Years and shall not be adjusted. 1.25 "Highly Compensated Employee" means an Employee described in Code Section 414(q) and the Regulations thereunder and generally means an Employee who performed services for the Employer during the "determination year" and is one or more of the following groups: (a) Employees who at any time during the "determination year" or "look-back year" were "five percent owners" as defined in Section 1.30(c). (b) Employees who received "415 Compensation" during the "look-back year" from the Employer in excess of $75,000. (c) Employees who received "415 Compensation" during the "look-back year" from the Employer in excess of $50,000 and were in the Top Paid Group of Employees for the Plan Year. (d) Employees who during the "look-back year" were officers 5 49 of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) and received "415 Compensation" during the "look-back year" from the Employer greater than 50 percent of the limit in effect under Code Section 415(b)(1)(A) for any such Plan Year. The number of officers shall be limited to the lesser of (i) 50 employees; or (ii) the greater of 3 employees or 10 percent of all employees. For purposes of determining the number of officers, Employees described in Section 1.49 (a), (b), (c), and (d) shall be excluded, but such Employees shall still be considered for the purpose of identifying the particular Employees who are officers. If the Employer does not have at least one officer whose annual "415 Compensation" is in excess of 50 percent of the Code Section 415(b)(1)(A) limit, then the highest paid officer of the Employer will be treated as a Highly Compensated Employee. (e) Employees who are in the group consisting of the 100 Employees paid the greatest "415 Compensation" during the "determination year" and are also described in (b), (c) or (d) above when these paragraphs are modified to substitute "determination year" for "look-back year". The "look-back year" shall be the calendar year ending with or within the Plan Year for which testing is being performed, and the "determination year" (if applicable) shall be the period of time, if any, which extends beyond the "look-back year" and ends on the last day of the Plan Year for which testing is being performed (the "lag period"). If the "lag period" is less than twelve months long, the dollar threshold amounts specified in (b), (c) and (d) above shall be prorated based upon the number of months in the "lag period". For purposes of this Section, the determination of "415 Compensation" shall be based only on "415 Compensation" which is actually paid and shall be made by including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Sections 125, 402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions made pursuant to a salary reduction agreement, by including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Section 403(b). Additionally, the dollar threshold amounts specified in (b) and (c) above shall be adjusted at such time and in such manner as is provided in Regulations. In the case of such an adjustment, the dollar limits which shall be applied are those for the calendar year in which the "determination year" or "look-back year" begins. In determining who is a Highly Compensated Employee, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)(2) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, 6 50 all Affiliated Employers shall be taken into account as a single employer and leased employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such leased employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. The exclusion of Leased Employees for this purpose shall be applied on a uniform and consistent basis for all of the Employer's retirement plans. Highly Compensated Former Employees shall be treated as Highly Compensated Employees without regard to whether they performed without regard to whether they performed services during the "determination year". 1.26 "Highly Compensated Former Employees" means a former Employee who had a separation year prior to the "determination year" and was a Highly Compensated Employee in the year of separation from service or in any "determination year" after attaining age 55. Notwithstanding the foregoing, an Employee who separated from service prior to 1987 will be treated as a Highly Compensated Former Employee only if during the separation year (or year preceding the separation year) or any year after the Employee attains age 55 (or the last year ending before the Employee's 55th birthday), the Employee either received "415 Compensation" in excess of $50,000 or was a "five percent owner". For purposes of this Section, "determination year", "415 Compensation" and "five percent owner" shall be determined in accordance with Section 1.25. Highly Compensated Former Employees shall be treated as Highly Compensated Employees. The method set forth in this Section for determining who is a "Highly Compensated Former Employee" shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) is applicable. 1.27 "Highly Compensated Participant" means any Highly Compensated Employee who is eligible to participate in the Plan. 1.28 "Hour of Service" means (1) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer for the performance of duties during the applicable computation period; (2) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, jury duty, disability, lay-off, military duty or leave of absence) during the applicable computation period; (3) each hour for which back pay is awarded or agreed to by the Employer without regard to mitigation of damages. These hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. The same Hours of Service shall not be credited both under (1) or (2), as the case may be, and under (3). 7 51 Notwithstanding the above, (i) no more than 501 Hours of Service are required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (ii) an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable worker's compensation, or unemployment compensation or disability insurance laws; and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. For purposes of this Section, a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund, or insurer, to which the Employer contributes or pays premiums and regardless of whether contributions made or due to the trust fund, insurer, or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. An Hour of Service must be counted for the purpose of determining a Year of Service, a year of participation for purposes of accrued benefits, a 1-Year Break in Service, and employment commencement date (or reemployment commencement date). In addition, Hours of Service will be credited for employment with other Affiliated Employers. The provisions of Department of Labor regulations 2530.200b-2(b) and (c) are incorporated herein by reference. Notwithstanding the above, for Plan Years which began in 1987, Income during the "gap period" shall not be taken into account. 1.29 "Investment Manager" means an entity that (a) has the power to manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility to the Plan in writing. Such entity must be a person, firm, or corporation registered as an investment adviser under the Investment Advisers Act of 1940, a bank, or an insurance company. 1.30 "Key Employee" means an Employee as defined in Code Section 416(i) and the Regulations hereunder. Generally, any Employee (as well as each of his Beneficiaries) is considered a Key Employee if he, at any time during the Plan Year that contains the "Determination Date" or any of the preceding four (4) Plan Years, has been included in one of the following categories: (a) an officer of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) having annual "415 Compensation" greater than 50 percent of the 8 52 amount in effect under Code Section 415(b)(1)(A) for any such Plan Year. (b) one of the ten employees having annual "415 Compensation" from the Employer for a Plan Year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Code Section 318) both more than one-half percent interest and the largest interests in the Employer. (c) a "five percent owner" of the Employer. "Five percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than five percent (5%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. (d) a "one percent owner" of the Employer having an annual "415 Compensation" from the Employer of more than $150,000. "One percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than one percent (1%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. However, in determining whether an individual has "415 Compensation" of more than $150,000, "415 Compensation" from each employer required to be aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken into account. For purposes of this Section, the determination of "415 Compensation" shall be based only on "415 Compensation" which is actually paid and shall be made without regard to Code Sections 125, 402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions made pursuant to a salary reduction agreement, without regard to Code Section 403(b). 1.31 "Late Retirement Date" means the first day of the month coinciding with or next following a Participant's actual Retirement Date after having reached his Normal Retirement Date. 1.32 "Leased Employee" means any person (other than an 9 53 Employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n)(6) on a substantially full time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A Leased Employee shall not be considered an Employee of the recipient if: (a) such employee is covered by a money purchase pension plan providing: (1) a non-integrated employer contribution rate of at least 10% of compensation, as defined in Code Section 415(c)(3), but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Code Sections 125, 402(a)(8), 402(h) or 403(b); (2) immediate participation; and (3) full and immediate vesting. (b) Leased Employees do not constitute more than 20% of the recipient's non-highly compensated work force. 1.33 "Non-Highly Compensated Participant" means any Participant who is neither a Highly Compensated Employee nor a Family Member. 1.34 "Non-Key Employee" means any Employee or former Employee (and his Beneficiaries) who is not a Key Employee. 1.35 "Normal Retirement Date" means the first day of the month coinciding with or next following the Participant's Normal Retirement Age (65th birthday). A Participant shall become fully Vested in his Account upon attaining his Normal Retirement Age. 1.36 "1-Year Break in Service" means the applicable computation period during which an Employee has not completed more than 500 Hours of Service with the Employer. Further, solely for the purpose of determining whether a Participant has incurred a 1-Year Break in Service, Hours of Service shall be recognized for "authorized leaves of absence" and "maternity and paternity leaves of absence." Years of Service and 1-Year Breaks in Service shall be measured on the same computation period. "Authorized leave of absence" means an unpaid, temporary cessation from active employment with the Employer pursuant to an 10 54 established nondiscriminatory policy, whether occasioned by illness, military service, or any other reason. A "maternity or paternity leave of absence" means, for Plan Years beginning after December 31, 1984, an absence for any period by reason of the Employee's pregnancy, birth of the Employee's child, placement of a child with the Employee in connection with the adoption of such child, or any absence for the purpose of caring for such child for a period immediately following such birth or placement. For this purpose, Hours of Service shall be credited for the computation period in which the absence from work begins, only if credit therefore is necessary to prevent the Employee from incurring a 1-Year Break in Service, or, in any other case, in the immediately following computation period. The Hours of Service credited for a "maternity or paternity leave of absence" shall be those which would normally have been credited but for such absence, or, in any case in which the Administrator is unable to determine such hours normally credited, eight (8) Hours of Service per day. The total Hours of Service required to be credited for a "maternity or paternity leave of absence" shall not exceed 501. 1.37 "Other Investments Account" means the account of a Participant which is credited with his share of the net gain (or loss) of the Plan, Forfeitures and Employer contributions in other than Company Stock and which is debited with payments made to pay for Company Stock. 1.38 "Participant" means any Eligible Employee who participates in the Plan as provided in Sections 3.2 and 3.3, and has not for any reason become ineligible to participate further in the Plan. 1.39 "Participant' Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan and Trust resulting from the Employer's contributions. 1.40 "Plan" means this instrument, including all amendments thereto. 1.41 "Plan Year" means the Plan's accounting year of twelve (12) months commending on January 1 of each year and ending the following December 31. 1.42 "Regulation" means the Income Tax Regulations as promulgated by the Secretary of the Treasury or his delegate, and as amended from time to time. 1.43 "Retired Participant" means a person who has been a Participant, but who has become entitled to retirement benefits under the Plan. 11 55 1.44 "Retirement Date" means the date as of which a Participant retires for reasons other than Total and Permanent Disability, whether such retirement occurs on a Participant's Normal Retirement Date or Late Retirement Date (see Section 7.1). 1.45 "Super Top Heavy Plan" means a plan described in Section 2.2(b). 1.46 "Terminated Participant" means a person who has been a Participant, but whose employment has been terminated other than by death, Total and Permanent Disability or retirement. 1.47 "Top Heavy Plan" means a plan described in Section 2.2(a). 1.48 "Top Heavy Plan Year" means a Plan Year commencing after December 31, 1983, during which the Plan is a Top Heavy Plan. 1.49 "Top Paid Group" means the top 20 percent of Employees who performed services for the Employer during the applicable year, ranked according to the amount of "415 Compensation" (determined for this purpose in accordance with Section 1.25) received from the Employer during such year. All Affiliated Employers shall be taken into account as a single employer, and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. Additionally, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, for the purpose of determining the number of active Employees in any year, the following additional Employees shall also be excluded; however, such Employees shall still be considered for the purpose of identifying the particular Employees in the Top Paid Group: (a) Employees with less than six (6) months of service; (b) Employees who normally work less than 17 1/2 hours per week; (c) Employees who normally work less than six (6) months during a year: (d) Employees who have not yet attained age 21. In addition, if 90 percent or more of the Employees of the Employer are covered under agreements the Secretary of Labor finds to be collective bargaining agreements between Employee representatives and the Employer, and the Plan covers only 12 56 Employees who are not covered under such agreements, then Employees covered by such agreements shall be excluded from both the total number of active Employees as well as from the identification of particular Employees in the Top Paid Group. The foregoing exclusions set forth in this Section shall be applied on a uniform and consistent basis for all purposes for which Code Section 414(g) definition is applicable. 1.50 "Total and Permanent Disability" means a physical or mental condition of a Participant resulting from bodily injury, disease, or mental disorder which renders him incapable of continuing any gainful occupation and which condition constitutes total disability under the federal Social Security Acts. 1.51 "Trustee" means the person or entity named as trustee herein or in any separate trust forming a part of this Plan, and any successors. 1.52 "Trust Fund" means the assets of the Plan and Trust as the same shall exist from time to time. 1.53 "Unallocated Company Stock Suspense Account" means an account containing Company Stock acquired with the proceeds of an Exempt Loan and which has not been released from such account and allocated to the Participants' Company Stock Accounts. 1.54 "Vested" means the nonforfeitable portion of any account maintained on behalf of a Participant. 1.55 "Year of Service" means the computation period of twelve (12) consecutive months, herein set forth, during which an Employee has at least 1000 Hours of Service. For vesting purposes, the computation period shall be the Plan Year. For all other purposes, the computation period shall be the Plan Year. Years of Service with any Affiliated Employer shall be recognized. ARTICLE II TOP HEAVY AND ADMINISTRATION 2.1 TOP HEAVY PLAN REQUIREMENTS For any Top Heavy Plan Year, the Plan shall provide the special vesting requirements of Code Section 416(b) pursuant to 13 57 Section 7.4 of the Plan and the special minimum allocation requirements of Code Section 416(c) pursuant to Section 4.4 of the Plan. However, for Plan Years beginning prior to January 1, 1989, the Plan shall provide the special Compensation and "415 Compensation" limitations of Code Section 416 (d). 2.2 DETERMINATION OF TOP HEAVY STATUS (a) This Plan shall be a Top Heavy Plan for any Plan Year commencing after December 31, 1983, in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds sixty percent (60%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. If any Participant is a Non-Key Employee for any Plan Year, but such Participant was a Key Employee for any prior Plan Year, such Participant's Present Value of Accrued Benefit and/or Aggregate Account balance shall not be taken into account for purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan (or whether any Aggregation Group which includes this Plan is a Top Heavy Group). In addition, for Plan Years beginning after December 31, 1984, if a Participant or Former Participant has not performed any services for any Employer maintaining the Plan at any time during the five year period ending on the Determination Date, any accrued benefit for such Participant or Former Participant shall not be taken into account for the purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan. (b) This Plan shall be a Super Top Heavy Plan for any Plan Year commencing after December 31, 1983, in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds ninety percent (90%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. (c) Aggregate Account: A Participant's Aggregate Account as of the Determination Date is the sum of: (1) his Participant's Account balance as of the most recent valuation occurring within a twelve (12) month period ending on the Determination Date; (2) an adjustment for any contributions due as of the Determination Date. Such adjustment shall be the amount of 14 58 any contributions actually made after the valuation date but due on or before the Determination Date, except for the first Plan Year when such adjustment shall also reflect the amount of any contributions made after the Determination Date that are allocated as of a date in that first Plan Year; (3) any Plan distributions made within the Plan Year that includes the Determination Date or within the four (4) preceding Plan Years. However, in the case of distributions made after the valuation date and prior to the Determination Date, such distributions are not included as distributions for top heavy purposes to the extent that such distributions are already included in the Participant's Aggregate Account balance as of the valuation date. Notwithstanding anything herein to the contrary, all distributions, including distributions made prior to January 1, 1984, and distributions under a terminated plan which if it had not been terminated would have been required to be included in an Aggregation Group, will be counted. Further, distributions from the Plan (including the cash value of life insurance policies) of a Participant's account balance because of death shall be treated as a distribution for the purposes of this paragraph; and (4) any Employee contributions, whether voluntary or mandatory. However, amounts attributable to tax deductible qualified deductible employee contributions shall not be considered to be a part of the Participant's Aggregate Account balance. (5) With respect to unrelated rollovers and plan-to-plan transfers (ones which are both initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another employer), if this Plan provides the rollovers or plan-to-plan transfers, it shall always consider such rollovers or plan-to-plan transfers as a distribution for the purpose of this Section. If this Plan is the plan accepting such rollovers or plan-to-plan transfers, it shall not consider such rollovers or plan-to-plan transfers accepted after December 31, 1983, as part of the Participant's Aggregate Account balance. However, rollovers or plan-to-plan transfers accepted prior to January 1, 1984 shall be considered as part of the Participant's Aggregate Account balance. (6) With respect to related rollovers and plan-to-plan transfers (ones either not initiated by the Employee or made to a plan maintained by the same employer), if this Plan provides the rollover or plan-to-plan transfer, it shall not be counted as a distribution for purposes of this Section. If this Plan is the plan accepting such rollover or plan-to-plan transfer, it shall consider such rollover or plan-to- 15 59 plan transfer as part of the Participant's Aggregate Account balance, irrespective of the date on which such rollover or plan-to-plan transfer is accepted. (7) For the purposes of determining whether two employers are to be treated as the same employer in (5) and (6) above, all employers aggregated under Code Section 414(b), (c), (m) and (o) are treated as the same employer. (d) "Aggregation Group" means either a Required Aggregation Group or a Permissive Aggregation Group as hereinafter determined. (1) Required Aggregation Group: In determining a Required Aggregation Group hereunder, each plan of the Employer in which a Key Employee is a participant in the Plan Year containing the Determination Date or any of the four preceding Plan Years, and each other plan of the Employer which enables any plan in which a Key Employee participates to meet the requirements of Code Sections 401(a)(4) or 410, will be required to be aggregated. Such group shall be known as a Required Aggregation Group. In the case of a Required Aggregation Group, each plan in the group will be considered a Top Heavy Plan if the Required Aggregation Group is a Top Heavy Group. No plan in the Required Aggregation Group will be considered a Top Heavy Plan if the Required Aggregation Group is not a Top Heavy Group. (2) Permissive Aggregation Group: The Employer may also include any other plan not required to be included in the Required Aggregation Group, provided the resulting group, taken as a whole, would continue to satisfy the provisions of Code Section 401(a)(4) and 410. Such group shall be known as a Permissive Aggregation Group. In the case of a Permissive Aggregation Group, only a plan that is part of the Required Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is a Top Heavy Group. No plan in the Permissive Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is not a Top Heavy Group. (3) Only those plans of the Employer in which the Determination Dates fall within the same calendar year shall be aggregated in order to determine whether such plans are Top Heavy Plans. (4) An Aggregation Group shall include any terminated plan of the Employer if it was maintained within the last five (5) years ending on the Determination Date. 16 60 (e) "Determination Date" means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year. (f) Present Value of accrued Benefit: In the case of a defined benefit plan, the Present Value of Accrued Benefit for a Participant other than a Key Employee, shall be as determined using the single accrual method used for all plans of the Employer and Affiliated Employers, or if no such single method exists, using a method which results in benefits accruing not more rapidly than the slowest accrual rate permitted under Code Section 411(b)(1)(C). The determination of the Present Value of Accrued Benefit shall be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the Determination Date except as provided in Code Section 416 and the Regulations thereunder for the first and second plan years of a defined benefit plan. (g) "Top Heavy Group" means an Aggregation Group in which, as of the Determination Date, the sum of: (1) the Present Value of Accrued Benefits of Key Employees under all defined benefit plans included in the group, and (2) the Aggregate Accounts of Key Employees under all defined contribution plans included in the group, exceeds sixty percent (60%) of a similar sum determined for all Participants. 2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER (a) The Employer shall be empowered to appoint and remove the Trustee and the Administrator from time to time as it deems necessary for the proper administration of the Plan to assure that the Plan is being operated for the exclusive benefit of the Participants and their Beneficiaries in accordance with the terms of the Plan, the Code, and the Act. (b) The Employer shall establish a "funding policy and method", i.e., it shall determine whether the Plan has a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a long run goal and investment growth (and stability of same) is a more current need, or shall appoint a qualified person to do so. The Employer or its delegate shall communicate such needs and goals to the Administrator who shall coordinate such Plan needs with its investment policy. The communication of such a "funding policy and method" shall not, however, constitute a directive to the Administrator as to investment of the Trust Funds. Such "funding policy and method" shall be consistent with the objectives of this Plan and with the requirements of Title I of the Act. 17 61 (c) The Employer shall periodically review the performance of any Fiduciary or other person to whom duties have been delegated or allocated by it under the provisions of this Plan or pursuant to procedures established hereunder. This requirement may be satisfied by formal periodic review by the Employer or by a qualified person specifically designated by the Employer, through day-to-day conduct and evaluation, or through other appropriate ways. (d) The Employer will furnish Plan Fiduciaries and Participants with notices and information statements when voting rights must be exercised pursuant to Section 8.5. 2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY The Employer shall appoint one or more Administrators. Any person, including, but not limited to, the Employees of the Employer, shall be eligible to serve as an Administrator. Any person so appointed shall signify his acceptance by filing written acceptance with the Employer. An Administrator may resign by delivering his written resignation of the Employer or be removed by the Employer by delivery of written notice of removal, to take effect at a date specified therein, or upon delivery to the Administrator if no date is specified. The Employer, upon the resignation or removal of an Administrator, shall promptly designate in writing a successor to this position. If the Employer does not appoint an Administrator, the Employer will function as the Administrator. 2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES If more than one person is appointed as Administrator, the responsibilities of each Administrator may be specified by the Employer and accepted in writing by each Administrator. In the event that no such delegation is made by the Employer, the Administrators may allocate the responsibilities among themselves, in which event the Administrators shall notify the Employer and the Trustee in writing of such action and specify the responsibilities of each Administrator. The Trustee thereafter shall accept and rely upon any documents executed by the appropriate Administrator until such time as the Employer or the Administrator file with the Trustee a written revocation of such designation. 2.6 POWERS AND DUTIES OF THE ADMINISTRATOR The primary responsibility of the Administrator is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan. The Administrator shall administer the Plan in accordance with its terms and shall have the power and discretion to construe the terms of the Plan and to determine all questions arising in connection 18 62 with the administration, interpretation, and application of the Plan. Any such determination by the Administrator shall be conclusive and binding upon all persons. The Administrator may establish procedures, correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedure, discretionary act, interpretation or construction shall be done in a nondiscriminatory manner based upon uniform principles consistently applied and shall be consistent with the intent that the Plan shall continue to be deemed a qualified plan under the terms of Code Section 401(a), and shall comply with the terms of the Act and all regulations issued pursuant thereto. The Administrator shall have all powers necessary or appropriate to accomplish his duties under this Plan. The Administrator shall be charged with the duties of the general administration of the Plan, including, but not limited to, the following: (a) to determine all questions relating to the eligibility of Employees to participate or remain a Participant hereunder and to receive benefits under the Plan; (b) to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled hereunder; (c) to authorize and direct the Trustee with respect to all nondiscretionary or otherwise directed disbursements from the Trust; (d) to maintain all necessary records for the administration of the Plan; (e) to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan as are consistent with the terms hereof; (f) to determine the size and type of any Contract to be purchased from any insurer, and to designate the insurer from which such Contract shall be purchased; (g) to compute and certify to the Employer and to the Trustee from time to time the sums of money necessary or desirable to be contributed to the Plan; (h) to consult with the Employer and the Trustee regarding the short and long-term liquidity needs of the Plan in order that the Trustee can exercise any investment discretion in a manner designed to accomplish specific objectives; 19 63 (i) to establish and communicate to Participants a procedure, which includes at least three (3) investment options pursuant to Regulations, for allowing each Participant to direct the Trustee as to the investment distribution of his Company Stock Account pursuant to Section 4.6; (j) to establish and communicate to Participants a procedure and method to insure that each Participant will vote Company Stock allocated to such Participant's Company Stock Account pursuant to Section 8.5; (k) to assist any Participant regarding his rights, benefits, or elections available under the Plan. 2.7 RECORDS AND REPORTS The Administrator shall keep a record of all actions taken and shall keep all other books of account, records, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law. 2.8 APPOINTMENT OF ADVISERS The Administrator, or the Trustee with the consent of the Administrator, may appoint counsel, specialists, advisers, an Investment Manager, and other persons as the Administrator or the Trustee deems necessary or desirable in connection with the administration of this Plan. 2.9 INFORMATION FROM EMPLOYER To enable the Administrator to perform his functions, the Employer shall supply full and timely information to the Administrator on all matters relating to the Compensation of all Participants, their Hours of Service, their Years of Service, their retirement, death, disability, or termination of employment, and such other pertinent facts as the Administrator may require; and the Administrator shall advise the Trustee of such of the foregoing facts as may be pertinent to the Trustee's duties under the Plan. The Administrator may rely upon such information as is supplied by the Employer and shall have no duty or responsibility to verify such information. 2.10 PAYMENT OF EXPENSES All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Except as provided in Section 8.7, such payment shall be directed by the Administrator. Such expenses shall include any expenses incident to the functioning of the Administrator, including, but not limited to, fees of 20 64 accountants, counsel, and other specialists and their agents, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. However, the Employer may reimburse the Trust Fund for any administration expense incurred. Any administration expense paid to the Trust Fund as a reimbursement shall not be considered an Employer contribution. 2.11 MAJORITY ACTIONS Except where there has been an allocation and delegation of administrative authority pursuant to Section 2.5, if there shall be more than one Administrator, they shall act by a majority of their number, but may authorize one or more of them of sign all papers on their behalf. 2.12 CLAIMS PROCEDURE Claims for benefits under the Plan may be filed with the Administrator on forms supplied by the Employer. Written notice of the disposition of a claim shall be furnished to the claimant within 90 days after the application is filed. In the event the claim is denied, the reasons for the denial shall be specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. In addition, the claimant shall be furnished with an explanation of the Plan's claims review procedure. 2.13 CLAIMS REVIEW PROCEDURE Any Employee, former Employee, or Beneficiary of either, who has been denied a benefit by a decision of the Administrator pursuant to Section 2.12 shall be entitled to request the Administrator to give further consideration to his claim by filing with the Administrator (on a form which may be obtained from the Administrator) a request for a hearing. Such request, together with a written statement of the reasons why the claimant believes his claim should be allowed, shall be filed with the Administrator no later than 60 days after receipt of the written notification provided for in Section 2.12. The Administrator shall then conduct a hearing within the next 60 days, at which the claimant may be represented by an attorney or any other representative of his choosing and at which the claimant shall have an opportunity to submit written and oral evidence and arguments in support of his claim. At the hearing (or prior thereto upon 5 business days written notice to the Administrator) the claimant or his representative shall have an opportunity to review all documents in the possession of the Administrator which are pertinent to the claim at issue and its disallowance. Either the claimant or the Administrator may cause a court reporter to attend the hearing and 21 65 record the proceedings. In such event, a complete written transcript of the proceedings shall be furnished to both parties by the court reporter. The full expense of any such court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. A final decision as to the allowance of the claim shall be made by the Administrator within 60 days of receipt of the appeal (unless there has been an extension of 60 days due to special circumstances, provided the delay and the special circumstances occasioning it are communicated to the claimant within the 60 day period). Such communication shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY Any Eligible Employee who has completed one (1) Year of Service shall be eligible to participate hereunder as of the date he has satisfied such requirements. However, any Employee who was a Participant in the Plan prior to the effective date of this amendment and restatement shall continue to participate in the Plan. The Employer shall give each prospective Eligible Employee written notice of his eligibility to participate in the Plan prior to the close of the Plan Year in which he first becomes an Eligible Employee. 3.2 APPLICATION FOR PARTICIPATION In order to become a Participant hereunder, each Eligible Employee shall make application to the Employer for participation in the Plan and agree to the terms hereof. Upon the acceptance of any benefits under this Plan, such Employee shall automatically be deemed to have made application and shall be bound by the terms and conditions of the Plan and all amendments hereto. 3.3 EFFECTIVE DATE OF PARTICIPATION An Eligible Employee shall become a Participant effective as of the earlier of the first day of the Plan Year or the first day of the seventh month of such Plan Year coinciding with or next following the date such Employee met the eligibility requirements of Section 3.1, provided said Employee was still employed as of such date (or if not employed on such date, as of the date of rehire if a 1-Year Break in Service has not occurred). 22 66 3.4 DETERMINATION OF ELIGIBILITY The Administrator shall determine the eligibility of each Employee for participation in the Plan based upon information furnished by the Employer. Such determination shall be conclusive and binding upon all persons, as long as the same is made pursuant to the Plan and the Act. Such determination shall be subject to review per Section 2.13. 3.5 TERMINATION OF ELIGIBILITY (a) In the event a Participant shall go from a classification of an Eligible Employee to an ineligible Employee, such Former Participant shall continue to vest in his interest in the Plan for each Year of Service completed while an ineligible Employee, until such time as his Participant's Account shall be forfeited or distributed pursuant to the terms of the Plan. Additionally, his interest in the Plan shall continue to share in the earnings of the Trust Fund. (b) In the event a Participant is no longer a member of an eligible class of Employees and becomes ineligible to participate but has not incurred a 1-Year Break in Service, such Employee will participate immediately upon returning to an eligible class of Employees. If such Participant incurs a 1-Year Break in Service, eligibility will be determined under the break in service rules of the Plan. (c) In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee will participate immediately if such Employee has satisfied the minimum age and service requirements and would have otherwise previously become a Participant. 3.6 OMISSION OF ELIGIBLE EMPLOYEE If, in any Plan Year, any Employee who should in included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his Employer for the year has been made, the Employer shall make a subsequent contribution with respect to the omitted Employee in the amount which the said Employer would have contributed with respect to him had be not been omitted. Such contribution shall be made regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code. 3.7 INCLUSION OF INELIGIBLE EMPLOYEE If, in any Plan Year, any person who should not have been included as a Participant in the Plan is erroneously included and discovery of such incorrect inclusion is not made until after a contribution for the year has been made, the Employer shall not be 23 67 entitled to recover the contribution made with respect to the ineligible person regardless of whether or not a deduction is allowable with respect to such contribution. In such event, the amount contributed with respect to the ineligible person shall constitute a Forfeiture for the Plan Year in which the discovery is made. 3.8 ELECTION NOT TO PARTICIPATE An Employee may, subject to the approval of the Employer, elect voluntarily not to participate in the Plan. The election not to participate must be communicated to the Employer, in writing, at least thirty (30) days before the beginning of a Plan Year. ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION (a) For each Plan Year, the Employer shall contribute to the Plan such amount as shall be determined by the Employer. (b) Notwithstanding the foregoing, however, the Employer's contributions for any Plan Year shall not exceed the maximum amount allowable as a deduction to the Employer under the provisions of Code Section 404. All contributions by the Employer shall be made in cash, Company Stock or in such property as is acceptable to the Trustee. (c) Except, however, to the extent necessary to provide the top heavy minimum allocations, the Employer shall make a contribution even if it exceeds the amount which is deductible under Code Section 404. 4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION Employer contributions will be paid in cash, Company Stock or other property as the Employer may from time to time determine. Company Stock and other property will be valued at their then fair market value. The Employer shall pay to the Trustee its contribution to the Plan for each Plan Year within the time prescribed by law, including extensions of time, for the filing of the Employer's federal income tax return for the Fiscal Year. 4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS (a) The Administrator shall establish and maintain an account in the name of each Participant to which the Administrator shall credit as of each Anniversary Date all amounts allocated to each such Participant as set forth herein. 24 68 (b) The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Employer's contributions for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate such contribution to each Participant's Account in the same proportion that each such Participant's Compensation for the year bears to the total compensation of all Participants for such year. Except, however, a Participant who performs less than a Year of Service during any Plan Year shall not share in the Employer's contribution for that year. (c) The Company Stock Account for each Participant shall be credited as of each Anniversary Date with Forfeitures of Company Stock and his allocable share of Company Stock (including fractional shares) purchased and paid for by the Plan or contributed in kind by the Employer. Stock dividends on Company Stock held in his Company Stock Account shall be credited to his Company Stock Account when paid. Cash dividends on Company Stock held in his Company Stock Account shall, in the sole discretion of the Administrator, be credited to his Other Investments Account when paid or be used to repay an Exempt Loan provided that Company Stock released from the Unallocated Company Stock Suspense Account and allocated to his Company Stock Account pursuant to Section 4.3(f) has a fair market value not less than the amount of cash dividends which would have been allocated to such Participant's Other Investments Account for the year. Company Stock acquired by the Plan with the proceeds of an Exempt Loan shall only be allocated to each Participant's Company Stock Account upon release from the Unallocated Company Stock Suspense Account as provided in Section 4.3(f) herein. Company Stock acquired with the proceeds of an Exempt Loan shall be an asset of the Trust Fund and maintained in the Unallocated Company Stock Suspense Account. (d) As of each Anniversary Date or other valuation date, before allocation of Employer contributions and Forfeitures, any earnings or losses (net appreciation or net depreciation) of the Trust Fund shall be allocated in the same proportion that each Participant's and Former Participant's nonsegregated accounts (other than each Participant's Company Stock Account) bear to the total of all Participants' and Former Participants' nonsegregated accounts (other than Participants' Company Stock Accounts) as of such date. Cash dividends on Company Stock allocated to each Participant's or Former Participant's nonsegregated accounts after the first month of the Plan Year shall not share in any earnings or losses of the Trust Fund for such year. However, the Administrator may direct that cash dividends on Company Stock allocated to each Participant's or Former Participant's Company Stock Account made after a valuation date be segregated into a 25 69 separate account for each Participant in a federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate, or other short term debt security acceptable to the Trustee until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated or be invested as part of the general Trust Fund, or such cash dividends be distributed pursuant to Section 7.5(e). Earnings or losses include the increase (or decrease) in the fair market value of assets of the Trust Fund (other than Company Stock in the Participants' Company Stock Accounts) since the preceding Anniversary Date. Earnings or losses do not include the interest paid under any installment contract for the purchase of Company Stock by the Trust Fund or on any loan used by the Trust Fund to purchase Company Stock, nor does it include income received by the Trust Fund with respect to Company Stock acquired with the proceeds of an Exempt Loan to the extent such income is used to repay the loan; all income received by the Trust Fund from Company Stock acquired with the proceeds of an Exempt Loan may, at the discretion of the Administrator, be used to repay such loan. Participants' transfers from other qualified plans and voluntary contributions deposited in the general Trust Fund after a valuation date shall not share in any earnings and losses (net appreciation or net depreciation) of the Trust Fund for such period. Each segregated account maintained on behalf of a Participant shall be credited or charged with its separate earnings and losses. (e) Participants' accounts shall be debited for any insurance or annuity premiums paid, if any, and credited with any dividends received on insurance contracts. (f) All Company Stock acquired by the Plan with the proceeds of an Exempt Loan must be added to and maintained in the Unallocated Company Stock Suspense Account. Such Company Stock shall be released and withdrawn from that account as if all Company Stock in that account were encumbered. For each Plan Year during the duration of the loan, the number of shares of Company Stock released shall equal the number of encumbered shares held immediately before release for the current Plan Year multiplied by a fraction, the numerator of which is the amount of principal paid for the Plan Year and the denominator of which is the sum of the numerator plus the principal to be paid for all future Plan Years. As of each Anniversary Date, the Plan must consistently allocate to each Participant's Account, in the same manner as Employer discretionary contributions pursuant to Section 4.1(a) are allocated, non-monetary units (shares and fractional shares of Company Stock) representing each Participant's interest in Company Stock withdrawn from the Unallocated Company Stock Suspense Account. However, Company Stock released from the Unallocated 26 70 Company Stock Suspense Account with cash dividends pursuant to Section 4.3(c) shall be allocated to each Participant's account in the same proportion that each such Participant's number of shares of Company Stock sharing in such cash dividends bears to the total number of shares of all Participants' Company Stock sharing in such cash dividends. Income earned with respect to Company Stock in the Unallocated Company Stock Suspense Account shall be used, at the discretion of the Administrator, to repay the Exempt Loan used to purchase such Company Stock. Any income which is not so used must be allocated as income of the Plan. (g) As of each Anniversary Date any amounts which became Forfeitures since the last Anniversary Date shall first be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with Section 7.4(g). The remaining Forfeitures, if any, shall be allocated among the Participants' Accounts in the same proportion that each such Participant's Compensation for the year bears to the total Compensation of all Participants for the year. Provided, however, that in the event the allocation of Forfeitures provided herein shall cause the "annual addition" (as defined in Section 4.4) to any Participant's Account to exceed the amount allowable by the Code, the excess shall be reallocated in accordance with Section 4.5. Except, however, Participants who perform less than a Year of Service during any Plan Year shall not share in Plan Forfeitures for that year, unless required pursuant to Section 4.3(j) below. (h) Minimum Allocations Required for Top Heavy Plan Years: Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of the Employer's contributions and Forfeitures allocated to the Participant's Account of each Non-Key Employee shall be equal to at least three percent (3%) of such Non-Key Employee's "415 Compensation" (reduced by contributions and forfeitures, if any, allocated to each Non-Key Employee in any defined contribution plan included with this plan in a Required Aggregation Group). However, if (i) the sum of the Employer's contributions and Forfeitures allocated to the Participant's Account of each Key Employee for such Top Heavy Plan Year is less than three percent (3%) of each Key Employee's "415 Compensation" and (ii) this Plan is not required to be included in an Aggregation Group to enable a defined benefit plan to meet the requirements of Code Section 401(a)(4) or 410, the sum of the Employer's contributions and Forfeitures allocated to the Participant's Account of each Non-Key Employee shall be equal to the largest percentage allocated to the Participant's Account of any Key Employee. However, no such minimum allocation shall be required in this Plan for any Non-Key Employee who participates in another 27 71 defined contribution plan subject to Code Section 412 providing such benefits included with this Plan in a Required Aggregation Group. (i) For purposes of the minimum allocations set forth above, the percentage allocated to the Participant's Account of any Key Employee shall be equal to the ratio of the sum of the Employer's contributions and Forfeitures allocated on behalf of such Key Employee divided by the "415 Compensation" for such Key Employee. (j) For any Top Heavy Plan Year, the minimum allocations set forth above shall be allocated to the Participant's Account of all Non-Key Employees who are Participants and who are employed by the Employer on the last day of the Plan Year, including Non-Key Employees who have (1) failed to complete a Year of Service; (2) declined to make mandatory contributions (if required) to the Plan; and (3) been excluded from participation because of their level of Compensation. (k) For the purposes of this Section, "415 Compensation" shall be limited to $200,000 (unless adjusted in such manner as permitted under Code Section 415(d)). However, for Plan Years beginning prior to January 1, 1989, the $200,000 limit shall apply only for Top Heavy Plan Years and shall not be adjusted. (l) Notwithstanding anything herein to the contrary, Participants terminating for reasons of death shall share in the allocations of contributions and Forfeitures provided for in this Section if they completed a Year of Service during the Plan Year. (m) Notwithstanding anything herein to the contrary, Participants terminating for reasons of Total and Permanent Disability shall share in the allocations of contributions and Forfeitures provided for in this Section if they completed a Year of Service during the Plan Year. (n) Notwithstanding anything herein to the contrary, Participants terminating for reasons of retirement shall share in the allocations of contributions and Forfeitures provided for in this Section if they completed a Year of Service during the Plan Year. (o) If a Former Participant is reemployed after five (5) consecutive 1-Year Breaks in Service, then separate accounts shall be maintained as follows: (1) one account for nonforfeitable benefits attributable to pre-break service; and (2) one account representing his status in the Plan attributable to post-break service. 28 72 4.4 MAXIMUM ANNUAL ADDITIONS (a) Notwithstanding the foregoing, the maximum "annual additions" credited to a Participant's accounts for any "limitation year" shall equal the lessor of: (1) $30,000 (or, if greater, one-fourth of the dollar limitation in effect under Code Section 415(b)(1)(A)) or (2) twenty-five percent (25%) of the Participant's "415 Compensation" for such "limitation year." (b) For purposes of applying the limitations of Code Section 415, "annual additions" means the sum credited to a Participant's accounts for any "limitation year" of (1) Employer contributions, (2) Employee Contributions for "limitation years" beginning after December 31, 1986, (3) Forfeitures, (4) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Code Section 415(1)(2) which is part of a pension or annuity plan maintained by the Employer and (5) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3) under a welfare benefit plan (as defined in Code Section 419(e)) maintained by the Employer. Except, however, the "415 Compensation" percentage limitation referred to in paragraph (a)(2) above shall not apply to: (1) any contribution for medical benefits (within the meaning of Code Section 419A(f)(2)) after separation from service which is otherwise treated as an "annual addition," or (2) any amount otherwise treated as an "annual addition" under Code Section 415(1)(1). (c) For purposes of applying the limitations of Code Section 415, the following are not "annual additions:' (1) the transfer of funds from one qualified plan to another and (2) provided no more than one-third of the Employer contributions for the year are allocated to Highly Compensated Participants, Forfeitures of Company Stock purchased with the proceeds of an Exempt Loan and Employer contributions applied to the payment of interest on an Exempt Loan. In addition, the following are not Employee contributions for the purposes of Section 4.4(b)(2): (1) rollover contributions (as defined in Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans made to a Participant from the Plan; (3) repayments of distributions received by an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (4) repayments of distributions received by an Employee pursuant to Code Section 411(a)(3)(D) (mandatory contributions); and (5) Employee contributions to a simplified employee pension excludable from gross income under Code Section 408(k)(6). (d) For purposes of applying the limitations of Code Section 415, "415 Compensation" shall include the Participant's wages, salaries, fees for professional service and other amounts received (without regard to whether or not an amount is paid in cash) for 29 73 personal services actually rendered in the course of employment with an Employer maintaining the Plan to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements, and expense allowances, and in the case of a Participant who is an Employee within the meaning of Code Section 401(c)(1) and the regulations thereunder, the Participant's earned income (as described in Code Section 401(c)(2) and the regulations thereunder) paid during the "limitation year." However, for "limitation years" beginning after December 31, 1991, accrued "415 Compensation" (subject to de minimis accrued "415 Compensation" pursuant to Regulation 1.415-2(d)(4)(ii)) shall not be used. "415 Compensation" shall exclude (1)(A) contributions made by the Employer to a plan of deferred compensation to the extent that, before the application of the Code Section 415 limitations to the Plan, the contributions are not includable in the gross income of the Employee for the taxable year in which contributed, (B) contributions made by the Employer to a plan of deferred compensation to the extent that all or a portion of such contributions are recharacterized as a voluntary Employee contribution, (C) Employer contributions made on behalf of an Employee to a simplified employee pension plan described in Code Section 408(k) to the extent such contributions are excludable from the Employee's gross income, (D) any distributions from a plan of deferred compensation regardless of whether such amounts are includable in the gross income of the Employee when distributed except any amounts received by an Employee pursuant to an unfunded non-qualified plan to the extent such amounts are includable in the gross income of the Employee; (2) amounts realized from the exercise of a non-qualified stock option or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (3) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (4) other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includable in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of any annuity contract described in Code Section 403(b) (whether or not the contributions are excludable from the gross income of the Employee). For the purposes of this Section, the determination of "415 Compensation" shall be made by not including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Sections 125, 402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions made pursuant to a salary reduction agreement, Code Section 403(b). (e) For purposes of applying the limitations of Code Section 30 74 415, the "limitation year" shall be the Plan Year. (f) The dollar limitation under Code Section 415(b)(1)(A) stated in paragraph (a)(1) above shall be adjusted annually as provided in Code Section 415(d) pursuant to the Regulations. The adjusted limitation is effective as of January 1st of each calendar year and is applicable to "limitation years" ending with or within that calendar year. (g) For the purpose of this Section, all qualified defined benefit plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined benefit plan, and all qualified defined contribution plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined contribution plan. (h) For the purpose of this Section, if the Employer is a member of a controlled group of corporations, trades or businesses under common control (as defined by Code Section 1563(a) or Code Section 414(b) and (c) as modified by Code Section 415(h)), is a member of an affiliated service group (as defined by Code Section 414(m)), or is a member of a group of entities required to be aggregated pursuant to Regulations under Code Section 414(0), all Employees of such Employers shall be considered to be employed by a single Employer. (i) For the purpose of this Section, if this Plan is a Code Section 413(c) plan, all Employers of a Participant who maintain this Plan will be considered to be a single Employer. (j)(1) If a Participant participates in more than one defined contribution plan maintained by the Employer which have different Anniversary Dates, the maximum "annual additions" under this Plan shall equal the maximum "annual additions" for the "limitation year" minus any "annual additions" previously credited to such Participant's accounts during the "limitation year." (2) If a Participant participates in both a defined contribution plan subject to Code Section 412 and a defined contribution plan not subject to Code Section 412 maintained by the Employer which have the same Anniversary Date, "annual additions" will be credited to the Participant's accounts under the defined contribution plan subject to Code Section 412 prior to crediting "annual additions" to the Participant's accounts under the defined contribution plan not subject to Code Section 412. (3) If a Participant participates in more than one defined contribution plan not subject to Code Section 412 maintained by the Employer which have the same Anniversary Date, the maximum "annual additions" under this Plan shall equal the 31 75 product of (A) the maximum "annual additions" for the "limitation year" minus any "annual additions" previously credited under subparagraphs (1) or (2) above, multiplied by (B) a fraction (i) the numerator of which is the "annual additions" which would be credited to such Participant's accounts under this Plan without regard to the limitations of Code Section 415 and (ii) the denominator of which is such "annual additions" for all plans described in this subparagraph. (k) If an Employee is (or has been) a Participant in one or more defined benefit plans and one or more defined contribution plans maintained by the Employer, the sum of the defined benefit plan fraction and the defined contribution plan fraction for any "limitation year" may not exceed 1.0. (l) The defined benefit plan fraction for any "limitation year" is a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the "limitation year" under Code Sections 415(b) and (d) or 140 percent of the highest average compensation, including any adjustments under Code Section 415(b). Notwithstanding the above, if the Participant was a Participant as of the first day of the first "limitation year" beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last "limitation year" beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 for all "limitation years" beginning before January, 1987. (m) The defined contribution plan fraction for any "limitation year" is a fraction, the numerator of which is the sum of the annual additions to the Participant's Account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior "limitation years" (including the annual additions attributable to the Participant's nondeductible Employee contributions to all defined benefit plans, whether or not terminated, maintained by the Employer, and the annual additions attributable to all welfare benefit funds, as defined in Code Section 419(e), and individual medical accounts, as defined in Code Section 415(1)(2), maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior "limitation years" of service 32 76 with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any "limitation year" is the lesser of 125 percent of the dollar limitation determined under Code Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent of the Participant's Compensation for such year. If the Employee was a Participant as of the end of the first day of the first "limitation year" beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last "limitation year" beginning before January 2, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 6, 1986, but using the Code Section 415 limitation applicable to the first "limitation year" beginning on or after January 1, 1987. The annual addition for any "limitation year" beginning before January 1, 1987 shall not be recompute to treat all Employee contributions as annual additions. (n) Notwithstanding the foregoing, for any "limitation year" in which the Plan is a Top Heavy Plan, 100% shall be substituted for 125% in Sections 4.9(l) and 4.9(m) unless the extra minimum allocation is being provided pursuant to Section 4.4. However, for any "limitation year" in which the Plan is a Super Top Heavy Plan, 100% shall be substituted for 125% in any event. (o) Notwithstanding anything contained in this Section to the contrary, the limitations, adjustments and other requirements prescribed in this Section shall at all times comply with the provisions of Code Section 415 and the Regulations thereunder, the terms of which are specifically incorporated herein by reference. 4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS (a) If, as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's Compensation or other facts and circumstances to which Regulation 1.415-6(b)(6) shall be applicable, the "annual additions" under this Plan would cause the maximum "annual additions" to be exceeded for any Participant, the Administrator shall (1) return any voluntary Employee contributions credited for the "limitation year" to the extent that the return would reduce the "excess amount" in the Participant's accounts (2) hold any "excess amount" remaining after the return of any voluntary Employee contributions in a "Section 415 suspense account" (3) allocate and reallocate the "Section 415 33 77 suspense account" in the next "limitation year" (and succeeding "limitation years" if necessary) to all Participants in the Plan before any Employer or Employee contributions which would constitute "annual additions" are made to the Plan for such "limitation year" (4) reduce Employer contributions to the Plan for such "limitation year" by the amount of the "Section 415 suspense account" allocated and reallocated during such "limitation year." (b) For purposes of this Article, "excess amount" for any Participant for a "limitation year" shall mean the excess, if any, of (1) the "annual additions" which would be credited to his account under the terms of the Plan without regard to the limitations of Code Section 415 over (2) the maximum "annual additions" determined pursuant to Section 4.4. (c) For purposes of this Section, "Section 415 suspense account" shall mean an unallocated account equal to the sum of "excess amounts" for all Participants in the Plan during the "limitation year". The "Section 415 suspense account" shall not share in any earnings or losses of the Trust Fund. (d) The Plan may not distribute "excess amounts," other than voluntary Employee contributions, to Participants or Former Participants. 4.6 DIRECTED INVESTMENT ACCOUNT (a) Each "Qualified Participant" for Plan Years beginning after December 31, 1986, may elect within ninety (90) days after the close of each Plan Year during the "Qualified Election Period" to direct the Administrator in writing as to the investment of 25 percent of the total number of shares of Company Stock acquired by or contributed to the Plan after December 31, 1986, that have ever been allocated to such "Qualified Participant's" Company Stock Account (reduced by the number of shares of Company Stock previously invested pursuant to a prior election). In the case of the election year in which the Participant can make his last election, the preceding sentence shall be applied by substituting "50 percent" for "25 percent." In order to direct such investment, each Qualified Participant shall have the right to elect, in writing on a form provided for by the Administrator, to have such 25 percent of his account invested among the same investment options provided in the directed investment accounts in the Sepco Industries, Inc. 401(k) Profit Sharing Plan. If the "Qualified Participant" elects to direct the Administrator as provided herein, such direction shall be effective no later than 180 days after the close of the Plan Year to which such direction applies. Notwithstanding the above, if the fair market value (determined pursuant to Section 6.1 at the Plan valuation date immediately preceding the first day on which a "Qualified Participant" is eligible to make an election) of Company Stock 34 78 acquired by or contributed to the Plan after December 31, 1986 and allocated to a "Qualified Participant's" Company Stock Account is $500 or less, then such Company Stock shall not be subject to this paragraph. For purposes of determining whether the fair market value exceeds $500, Company Stock held in accounts of all employee stock ownership plans (as defined in Code Section 4975(e)(7)) and tax credit employee stock ownership plans (as defined in Code Section 409(a)) maintained by the Employer or any Affiliated Employer shall be considered as held by the Plan. (b) For the purposes of this Section the following definitions shall apply: (1) "Qualified Participant" means any Participant or Former Participant who has completed ten (10) Plan Years of Service as a Participant and has attained age 55. (2) "Qualified Election Period" means the five (5) Plan Year period beginning with the Plan Year after the Plan Year in which the Participant attains age 55 (or, if later, beginning with the Plan Year after the later of the first Plan Year in which the Participant first became a "Qualified Participant", or December 31, 1986). (c) A separate Directed Investment Account shall be established for each Participant who has directed an investment. Transfers between the Participant's regular account and his Directed Investment Account shall be charged and credited as the case may be to each account. The Directed Investment Account shall not share in Trust Fund earnings, but it shall be charged or credited as appropriate with the net earnings, gains, losses and expenses as well as any appreciation or depreciation in market value during each Plan Year attributable to such account. ARTICLE V FUNDING AND INVESTMENT POLICY 5.1 INVESTMENT POLICY (a) The Plan is designed to invest primarily in Company Stock. (b) With due regard to subparagraph (a) above, the Administrator may also direct the Trustee to invest funds under the Plan in other property described in the Trust or in life insurance policies to the extent permitted by subparagraph (c) below, in a common, pooled or collective trust fund for qualified employee benefit plans which the Trustee may now have or in the future may adopt, or the Trustee may be directed to hold such funds in cash or cash equivalents. 35 79 (c) With due regard to subparagraph (a) above, the Administrator may also direct the Trustee to invest funds under the Plan in insurance policies on the life of any "keyman" Employee. The proceeds of a "keyman" insurance policy may not be used for the repayment of any indebtedness owed by the Plan which is secured by Company Stock. In the event any "keyman" insurance is purchased by the Trustee, the premiums paid thereon during any Plan Year, net of any policy dividends and increases in cash surrender values, shall be treated as the cost of Plan investment and any death benefit or cash surrender value received shall be treated as proceeds from an investment of the Plan. (d) The Plan may not obligate itself to acquire Company Stock from a particular holder thereof at an indefinite time determined upon the happening of an event such as the death of the holder. (e) The Plan may not obligate itself to acquire Company Stock under a put option binding upon the Plan. However, at the time a put option is exercised, the Plan may be given an option to assume the rights and obligations of the Employer under a put option binding upon the Employer. (f) All purchases of Company Stock shall be made at a price which, in the judgment of the Administrator, does not exceed the fair market value thereof. All sales of Company Stock shall be made at a price which, in the judgment of the Administrator, is not less than the fair market value thereof. The valuation rules set forth in Article VI shall be applicable. 5.2 APPLICATION OF CASH Employer contributions in cash and other cash received by the Trust Fund shall first be applied to pay any Current Obligations of the Trust Fund. 5.3 TRANSACTIONS INVOLVING COMPANY STOCK (a) No portion of the Trust Fund attributable to (or allocable in lieu of) Company Stock acquired by the Plan after October 22, 1986, in a sale to which Code Section 1042 applies may accrue or be allocated directly or indirectly under any plan maintained by the Employer meeting the requirements of Code Section 401(a): (1) during the "Nonallocation Period," for the benefit of (i) any taxpayer who makes an election under Code Section 1042(a) with respect to Company Stock, (ii) any individual who is related to the taxpayer (within the meaning of Code Section 267(b)), or 36 80 (2) for the benefit of any other person who owns (after application of Code Section 318(a) applied without regard to the employee trust exception in Code Section 318(a}(2)(B)(i)) more than 25 percent of (i) any class of outstanding stock of the Employer or Affiliated Employer which issued such Company Stock, or (ii) the total value of any class of outstanding stock of the Employer or Affiliated Employer. (b) Except, however, subparagraph (a)(1)(ii) above shall not apply to lineal descendants of the taxpayer, provided that the aggregate amount allocated to the benefit of all such lineal descendants during the "Nonallocation Period" does not exceed more than five (5) percent of the Company Stock (or amounts allocated in lieu thereof) held by the Plan which are attributable to a sale to the Plan by any person related to such descendants (within the meaning of Code Section 267(c)(4)) in a transaction to which Code Section 1042 is applied. (c) A person shall be treated as failing to meet the stock ownership limitation under paragraph (a)(2) above if such person fails such limitation: (1) at any time during the one (1) year period ending on the date of sale of Company Stock to the Plan, or (2) on the date as of which Company Stock is allocated to Participants in the Plan. (d) For purposes of this Section, "Nonallocation Period" for Plan Years beginning after December 31, 1986, means the period beginning on the date of the sale of the Company Stock and ending on the later of: (1) the date which is ten (10) years after the date of sale, or (2) the date of the Plan allocation attributable to the final payment of the Exempt Loan incurred in connection with such sale. 5.4 LOANS TO THE TRUST (a) The Plan may borrow money for any lawful purpose, provided the proceeds of an Exempt Loan are used within a reasonable time after receipt only for any or all of the following purposes: (1) To acquire Company Stock. 37 81 (2) To repay such loan. (3) To repay a prior Exempt Loan. (b) All loans to the Trust which are made or guaranteed by a disqualified person must satisfy all requirements applicable to Exempt Loans including but not limited to the following: (1) The loan must be at a reasonable rate of interest; (2) The amount of interest paid shall not exceed the amount of each payment which would be treated as interest under standard loan amortization tables; (3) Any collateral pledged to the creditor by the Plan shall consist only of the Company Stock purchased with the borrowed funds; (4) Under the terms of the loan, any pledge of Company Stock shall provide for the release of shares so pledged on a pro-rata basis pursuant to Section 4.3(f); (5) Under the terms of the loan, the creditor shall have no recourse against the Plan except with respect to such collateral, earnings attributable to such collateral, Employer contributions (other than contributions of Company Stock) that are made to meet Current Obligations and earnings attributable to such contributions; (6) The loan must be for a specific term and may not be payable at the demand of any person, except in the case of default; (7) The term of the loan (including the sum of the expired duration of the loan, any renewal period, any extension period, and the duration of any new loan) shall not exceed ten (10) years. (8) The loan must provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for ten (10) years; (9) In the event of default upon an Exempt Loan, the value of the Trust Fund transferred in satisfaction of the Exempt Loan shall not exceed the amount of default. If the lender is a disqualified person, an Exempt Loan shall provide for a transfer of Trust Funds upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of the Exempt Loan; (10) Exempt Loan payments during a Plan Year must not exceed 38 82 an amount equal to: (A) the sum, over all Plan Years, of all contributions and cash dividends paid by the Employer to the Plan with respect to such Exempt Loan and earnings on such Employer contributions and cash dividends, less (B) the sum of the Exempt Loan payments in all preceding Plan Years. A separate accounting shall be maintained for such Employer contributions, cash dividends and earnings until the Exempt Loan is repaid. (c) For purposes of this Section, the term "disqualified person" means a person who is a Fiduciary, a person providing services to the Plan, an Employer any of whose Employees are covered by the Plan, an employee organization any of whose members are covered by the Plan, an owner, direct or indirect, of 50% or more of the total combined voting power of all classes of voting stock or of the total value of all classes of the stock, or an officer, director, 10% or more shareholder, or a highly compensated Employee. ARTICLE VI VALUATIONS 6.1 VALUATION OF THE TRUST FUND The Administrator shall direct the Trustee, as of each Anniversary Date, and as of such other date or dates agreed to by the Administrator and Trustee, herein called "valuation date", to determine the net worth of the assets comprising the Trust Fund as it exists on the "valuation date" prior to taking into consideration any contribution to be allocated for that Plan Year. In determining such net worth, the Trustee shall value the assets comprising the Trust Fund at their fair market value as of the "valuation date" and shall deduct all expenses for which the Trustee has not yet obtained reimbursement from the Employer or the Trust Fund. 6.2 METHOD OF VALUATION Valuations must be made in good faith and based on all relevant factors for determining the fair market value of securities. In the case of a transaction between a Plan and a disqualified person, value must be determined as of the date of the transaction. For all other Plan purposes, value must be determined as of the most recent "valuation date" under the Plan. An independent appraisal will not in itself be a good faith determination of value in the case of a transaction between the Plan and a disqualified person. However, in other cases, a determination of fair market value based on at least an annual appraisal independently arrived at by a person who customarily makes such appraisals and who is independent of any party to the transaction will be deemed to be a good faith determination of 39 83 value. Company Stock not readily tradeable on an established securities market shall be valued by an independent appraiser meeting requirements similar to the requirements of the Regulations prescribed under Code Section 170(a)(1). ARTICLE VII DETERMINATION AND DISTRIBUTION OF BENEFITS 7.1 DETERMINATION OF BENEFITS UPON RETIREMENT Every Participant may terminate his employment with the Employer and retire for the purposes hereof on his Normal Retirement Date. Upon such Normal Retirement Date, all amounts credited to such Participant's Account shall become distributable. However, a Participant may postpone the termination of his employment with the Employer to a later date, in which event the participation of such Participant in the Plan, including the right to receive allocations pursuant to Section 4.3, shall continue until his Late Retirement Date. Upon a Participant's Retirement Date, or as soon thereafter as is practicable, the Trustee shall distribute all amounts credited to such Participant's Account in accordance with Sections 7.5 and 7.6. 7.2 DETERMINATION OF BENEFITS UPON DEATH (a) Upon the death of a Participant before his Retirement Date or other termination of his employment, all amounts credited to such Participant's Account shall become fully Vested. The Administrator shall direct the Trustee, in accordance with the provisions of Sections 7.5 and 7.6, to distribute the value of the deceased Participant's accounts to the Participant's Beneficiary. (b) Upon the death of a Former Participant, the Administrator shall direct the Trustee, in accordance with the provisions of Sections 7.5 and 7.6, to distribute any remaining amounts credited to the accounts of a deceased Former Participant to such Former Participant's Beneficiary. (c) The Administrator may require such proper proof of death, and such evidence of the right of any person to receive payment of the value of the account of a deceased Participant or Former Participant as the Administrator may deem desirable. The Administrator's determination of death and of the right of any person to receive payment shall be conclusive. (d) The Beneficiary of the death benefit payable pursuant to this Section shall be the Participant's spouse. Except, however, the Participant may designate a Beneficiary other than his spouse if: 40 84 (1) the spouse has waived the right to be the Participant's Beneficiary, or (2) the Participant is legally separated or has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (and there is no "qualified domestic relations order" as defined in Code Section 414(p) which provides otherwise), or (3) the Participant has no spouse, or (4) the spouse cannot be located. In such event, the designation of a Beneficiary shall be made on a form satisfactory to the Administrator. A Participant may at any time revoke his designation of a Beneficiary or change his Beneficiary by filing written notice of such revocation or change with the Administrator. However, the Participant's spouse must again consent in writing to any change in Beneficiary unless the original consent acknowledged that the spouse had the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elected to relinquish such right. In the event no valid designation of Beneficiary exists at the time of the Participant's death, the death benefit shall be payable to his estate. (e) Any consent by the Participant's spouse to waive any rights to the death benefit must be in writing, must acknowledge the effect of such waiver, and be witnessed by a Plan representative or a notary public. Further, the spouse's consent must be irrevocable and must acknowledge the specific nonspouse Beneficiary. 7.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY In the event of a Participant's Total and Permanent Disability prior to his Retirement Date or other termination of his employment, all amounts credited to such Participant's Account shall become fully Vested. In the event of a Participant's Total and Permanent Disability, the Trustee, in accordance with the provisions of Sections 7.5 and 7.6, shall distribute to such Participant all amounts credited to such Participant's Account as though he had retired. 7.4 DETERMINATION OF BENEFITS UPON TERMINATION (a) On or before the Anniversary Date coinciding with or subsequent to the termination of a Participant's employment for any reason other than death, Total and Permanent Disability or retirement, the Administrator may direct the Trustee to segregate the amount of the Vested portion of such Terminated Participant's Account and invest the aggregate amount thereof in a separate, 41 85 federally insured savings account, certificate of deposit, common or collective trust fund or a bank or a deferred annuity. In the event the Vested portion of a Participant's Account is not segregated, the amount shall remain in a separate account for the Terminated Participant and share in allocations pursuant to Section 4.3 until such time as a distribution is made to the Terminated Participant. The amount of the terminated Participant's Account which is not Vested may be credited to a separate account (which will always share in gains and losses of the Trust) and at such time as the amount becomes a Forfeiture shall be applied pursuant to Section 4.3. If a portion of a Participant's Account is forfeited, Company Stock allocated to the Participant's Company Stock Account must be forfeited only after the Participant's Other Investments Account has been depleted. If the interest in more than one class of Company Stock has been allocated to a Participant's Account, the Participant must be treated as forfeiting the same proportion of each such class. In the event that the amount of the Vested portion of the Terminated Participant's Account equals or exceeds the fair market value of any insurance Contracts, the Trustee, when so directed by the Administrator and agreed to by the Terminated Participant, shall assign, transfer, and set over to such Terminated Participant all Contracts on his life in such form or with such endorsements so that the settlement options and forms of payment are consistent with the provisions of Section 7.5. In the event that the Terminated Participant's Vested portion does not at least equal the fair market value of the Contracts, if any, the Terminated Participant may pay over to the Trustee the sum needed to make the distribution equal to the value of the Contracts being assigned or transferred, or the Trustee, pursuant to the Participant's election, may borrow the cash surrender value of the Contracts from the insurer so that the value of the Contracts is equal to the vested portion of the Terminated Participant's Account and then assign the Contracts to the Terminated Participant. Distribution of the funds due to a Terminated Participant shall be made on the occurrence of an event which would result in the distribution had the Terminated Participant remained in the employ of the Employer (upon the Participant's death, Total and Permanent Disability, or Normal Retirement). However, at the election of the Participant, the Administrator shall direct the Trustee to distribute the entire Vested portion of the Terminated Participant's Account to such Terminated Participant as soon as administratively feasible following termination of employment. Any distribution under this paragraph shall be made in a manner which is consistent with and satisfies the provisions of Sections 7.5 and 7.6, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. 42 86 If the value of a Terminated Participant's Vested benefit derived from Employer and Employee contributions does not exceed and has never exceeded $3,500 at the time of any prior distribution, the Administrator shall direct the Trustee to cause the entire Vested benefit to be paid to such Participant in a single lump sum. Notwithstanding the above, unless the Terminated Participant otherwise elects in writing a later distribution date, distribution of Company Stock shall commence not later than one (1) year after the close of the Plan Year which is the fifth Plan Year following the Plan Year in which the Participant otherwise separates from service. However, if such Terminated Participant is reemployed by the Employer before distribution is required to be made under this paragraph, such distribution shall be postponed. Distribution to a Participant shall not include any Company Stock acquired with the proceeds of an Exempt Loan until the close of the Plan Year in which such loan is repaid in full. For purposes of this Section 7.4, if the value of a Terminated Participant's Vested benefit is zero, the Terminated Participant shall be deemed to have received a distribution of such Vested benefit. (b) The Vested portion of any Participant's Account shall be a percentage of the total amount credited to his Participant's Account determined on the basis of the Participant's number of Years of Service according to the following schedule:
Vesting Schedule Years of Service Percentage 3 20% 4 40% 5 60% 6 80% 7 100%
(c) Notwithstanding the vesting schedule provided for in paragraph (b) above, for any Top Heavy Plan Year, the Vested portion of the Participant's Account of any Participant who has an Hour of Service after the Plan becomes top heavy shall be a percentage of the total amount credited to his Participant's Account determined on the basis of the Participant's number of Years of Service according to the following schedule: 43 87
Vesting Schedule Years of Service Percentage 2 20% 3 40% 4 60% 5 80% 6 100%
If in any subsequent Plan Year, the Plan ceases to be a Top Heavy Plan, the Administrator shall revert to the vesting schedule in effect before this Plan became a Top Heavy Plan. Any such reversion shall be treated as a Plan amendment pursuant to the terms of the Plan. (d) Notwithstanding the vesting schedule above, the Vested percentage of a Participant's Account shall not be less than the Vested percentage attained as of the later of the effective date or adoption date of this amendment and restatement. (e) Notwithstanding the vesting schedule above, upon the complete discontinuance of the Employer's contributions to the Plan or upon any full or partial termination of the Plan, all amounts credited to the account of any affected Participant shall become 100% Vested and shall not thereafter be subject to Forfeiture. (f) The computation of a Participant's nonforfeitable percentage of his interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Article. In the event that the Plan is amended to change or modify any vesting schedule, a Participant with at least three (3) Years of Service as of the expiration date of the election period may elect to have his nonforfeitable percentage computed under the Plan without regard to such amendment. Notwithstanding the foregoing, for Plan Years beginning before January 1, 1989, or with respect to Employees who fail to complete at least one (1) Hour of Service in a Plan Year beginning after December 31, 1988, five (5) shall be substituted for three (3) in the preceding sentence. If a Participant fails to make such election, then such Participant shall be subject to the new vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end 60 days after the latest of: (1) the adoption date of the amendment, (2) the effective date of the amendment, or (3) the date the Participant receives written notice of the amendment from the Employer or Administrator. (g)(1) If any Former Participant shall be reemployed by the Employer before a 1-Year Break in Service occurs, he shall 44 88 continue to participate in the Plan in the same manner as if such termination had not occurred. (2) If any Former Participant shall be reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, and such Former Participant had received a distribution of his entire Vested interest prior to his reemployment, his forfeited account shall be reinstated only if he repays the full amount distributed to him before the earlier of five (5) years after the first date on which the Participant is subsequently reemployed by the Employer or the close of the first period of 5 consecutive 1-Year Break in Service commencing after the distribution. If a distribution occurs for any reason other than a separation from service, the time for repayment may not end earlier than five (5) years after the date of separation. In the event the Former Participant does repay the full amount distributed to him, the undistributed portion of the Participant's Account must be restored in full, unadjusted by any gains or losses occurring subsequent to the Anniversary Date or other valuation date preceding his termination. (3) If any Former Participant is reemployed after a 1-Year Break in Service has occurred, Years of Service shall include Years of Service prior to his 1-Year Break in Service subject to the following rules: (i) If a Former Participant has a 1-Year Break in Service, his pre-break and post-break service shall be used for computing Years of Service for eligibility and for vesting purposes only after he has been employed for one (1) Year of Service following the date of his reemployment with the Employer; (ii) Any Former Participant who under the Plan does not have a nonforfeitable right to any interest in the Plan resulting from Employer contributions shall lose credits otherwise allowable under (i) above if his consecutive 1-Year Breaks in Service equal or exceed the greater of (A) five (5) or (B) the aggregate number of his pre-break Years of Service. (iii) After five (5) consecutive 1-Year Breaks in Service, a Former Participant's Vested Account balance attributable to pre-break service shall not be increased as a result of post-break service; (iv) If a Former Participant who has not had his Years of Service before a 1-Year Break in Service disregarded pursuant to (ii) above completes one (1) Year of Service for eligibility purposes following his reemployment with the Employer, he shall participate in the Plan 45 89 retroactively from his date of reemployment; (v) If a Former Participant who has not had his Years of Service before a 1-Year Break in Service disregarded pursuant to (ii) above completes a Year of Service (a 1-Year Break in Service previously occurred, but employment had not terminated), he shall participate in the Plan retroactively from the first day of the Plan Year during which he completes one (1) Year of Service. 7.5 DISTRIBUTION OF BENEFITS (a) The Administrator, in his sole discretion if the amount to be distributed has been held by the ESOP for the five year period prior to the Administrator's discretion (or if the amount to be distributed has been held in an ESOP throughout the entire period of its existence), otherwise, pursuant to the election of the Participant (or if no election has been made prior to the Participant's death, by his Beneficiary), shall direct the Trustee to distribute to a Participant or his Beneficiary any amount to which he is entitled under the Plan in one or more of the following methods: (1) One lump sum payment; (2) Payments over a period certain in monthly, quarterly, semiannual, or annual installments. The period over which such payment is to be made shall not extend beyond the earlier of the Participant's life expectancy (or the life expectancy of the Participant and his designated Beneficiary) or the limited distribution period provided for in section 7.5(c). (c) Unless the Participant elects in writing a longer distribution period, distribution to a Participant or his Beneficiary of Company Stock shall be in substantially equal monthly, quarterly, semiannual, or annual installments over a period not longer than five (5) years. In the case of a Participant with an account balance in the Plan in excess of $500,000, the five (5) year period shall be extended one (1) additional year (but not more than five (5) additional years) for each $100,000 or fraction thereof by which such balance exceeds $500,000. The dollar limits shall be adjusted at the same time and in the same manner as provided in Code Section 415(d). (d) Any distribution to a Participant who has a benefit which exceeds, or has ever exceeded, $3,500 shall require such Participant's consent if such distribution commences prior to the later of his Normal Retirement Age or age 62. With regard to this required consent: (1) The Participant must be informed of his right to defer receipt of the distribution. If a Participant fails to 46 90 consent, it shall be deemed an election to defer the commencement of payment of any benefit. However, any election to defer the receipt of benefits shall not apply with respect to distributions which are required under Section 7.5(g). (2) Notice of the rights specified under this paragraph shall be provided no less than 30 days and no more than 90 days before the first day on which all events have occurred which entitled the Participant to such benefit. (3) Written consent of the Participant to the distribution must not be made before the Participant receives the notice and must not be made more than 90 days before the first day on which all events have occurred which entitle the Participant to such benefit. (4) No consent shall be valid if a significant detriment is imposed under the Plan on any Participant who does not consent to the distribution. (e) Notwithstanding anything herein to the contrary, cash dividends on shares of Company Stock allocable to Participants' Company Stock Accounts may be paid pursuant to Section 4.3(d) to Participants or their Beneficiaries within 90 days after the close of the Plan Year in which the dividend is paid. (f) Any part of a Participant's benefit which is retained in the Plan after the Anniversary Date on which his participation ends will continue to be treated as a Company Stock Account or as an Other Investments Account (subject to Section 7.4(a) as provided in Article IV. However, neither account will be credited with any further Employer contributions or Forfeitures. (g) Notwithstanding any provision in the Plan to the contrary, the distribution of a Participant's benefits made on or after January 1, 1985, shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder (including Regulation 1.401(a)(9)(2), the provisions of which are incorporated herein by reference): (1) A Participant's benefits shall be distributed to him not later than April 1st of the calendar year following the later of (i) the calendar year in which the Participant attains age 70 1/2 or (ii) the calendar year in which the Participant retires, provided, however, that this clause (ii) shall not apply in the case of a Participant who is a "five (5) percent owner" at any time during the five (5) Plan Year period ending in the calendar year in which he attains age 70 1/2 or, in the case of a Participant who becomes a "five (5) percent owner" during any subsequent Plan Year, clause (ii) shall no longer apply and the required beginning date shall be the April 1st 47 91 of the calendar year following the calendar year in which such subsequent Plan Year ends. Alternatively, distributions to a participant must begin no later than the applicable April 1st as determined under the preceding sentence and must be made over a period certain measured by the life expectancy of the Participant (or the life expectancies of the Participant and his designated Beneficiary) in accordance with Regulations. Notwithstanding the foregoing, clause (ii) above shall not apply to any Participant unless the Participant had attained age 70 1/2 before January 1, 1988 and was not a "five (5) percent owner" at any time during the Plan Year ending with or within the calendar year in which the Participant attained age 66 1/2 or any subsequent Plan Year. (2) Distributions to a Participant and his Beneficiaries shall only be made in accordance with the incidental death benefit requirements of Code Section 401(a)(9)(G) and the Regulations thereunder. Additionally, for calendar years beginning before 1989, distributions may also be made under an alternative method which provides that the then present value of the payments to be made over the period of the Participant's life expectancy exceeds fifty percent (50%) of the then present value of the total payments to be made to the Participant and his Beneficiaries. (h) Notwithstanding any provision in the Plan to the contrary, distributions upon the death of a Participant made on or after January 1, 1985 shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder. If it is determined pursuant to Regulations that the distribution of a Participant's interest has begun and the Participant dies before his entire interest has been distributed to him, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution selected pursuant to Section 7.5 as of his date of death. If a Participant dies before he has begun to receive any distributions of his interest under the Plan or before distributions are deemed to have begun pursuant to Regulations, then his death benefit shall be distributed to his Beneficiaries by December 31st of the calendar year in which the fifth anniversary of his date of death occurs. However, the 5-year distribution requirement of the preceding paragraph shall not apply to any portion of the deceased Participant's interest which is payable to or for the benefit of a designated Beneficiary. In such event, such portion may, at the election of the Participant (or the Participant's designated Beneficiary), be distributed over a period not extending beyond the life of such designated Beneficiary provided such distribution begins not later than December 31st of the calendar year 48 92 immediately following the calendar year in which the Participant died. However, in the event the Participant's spouse (determined as of the date of the Participant's death) is his Beneficiary, the requirement that distributions commence within one year of a Participant's death shall not apply. In lieu thereof, distributions must commence on or before the later of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died; or {2) December 31st of the calendar year in which the Participant would have attained age 70 1/2. If the surviving spouse dies before distributions to such spouse begin, then the 5-year distribution requirement of this Section shall apply as if the spouse was the Participant. (i) For purposes of Section 7.5(h), the election by a designated Beneficiary to be excepted from the 5-year distribution requirement must be made no later than December 31st of the calendar year following the calendar year of the Participant's death. Except, however, with respect to a designated Beneficiary who is the Participant's surviving spouse, the election must be made by the earlier of (1) December 31st of the calendar year immediately following the calendar year in which the Participant died or, if later, the calendar year in which the Participant would have attained age 70 1/2; or (2) December 31st of the calendar year which contains the fifth anniversary of the date of the Participant's death. An election by a designated Beneficiary must be in writing and shall be irrevocable as of the last day of the election period stated herein. In the absence of an election by the Participant or a designated Beneficiary, the 5-year distribution requirement shall apply. (j) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse may, at the election of the Participant or the Participant's spouse, be redetermined in accordance with Regulations. The election, once made, shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. Life expectancy and joint and last survivor expectancy shall be computed using the return multiples in Tables V and VI of Regulation 1.72-9. (k) Except as limited by sections 7.5 and 7.6, whenever the Trustee is to make a distribution or to commence a series of payments on or as of an Anniversary Date, the distribution or series of payments may be made or begun on such date or as soon thereafter as is practicable after the Anniversary Date. However, unless a Former Participant elects in writing to defer the receipt of benefits (such election may not result in a death benefit that is more than incidental), the payment of benefits shall begin not later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: 49 93 (1) the date on which the Participant attains the earlier of age 65 or the Normal Retirement Age specified herein; (2) the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (3) the date the Participant terminates his service with the Employer. (l) The restrictions imposed by this Section shall not apply if a Participant has, prior to January 1, 1984, made a written designation to have his retirement benefit paid in an alternative method acceptable under Code section 401(a) as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982. Any such written designation made by a Participant shall be binding upon the Plan Administrator notwithstanding any contrary provision of Section 7.5. (m) Subject to the spouse's right of consent afforded under the Plan, the restrictions imposed by this Section shall not apply if a Participant has, prior to January 1, 1984, made a written designation to have his death benefits pain in an alternative method acceptable under Code Section 401(a) as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982. 7.6 HOW PLAN BENEFIT WILL BE DISTRIBUTED (a) Distribution of a Participant's benefit may be made in cash or Company Stock or both, provided, however, that if a Participant or Beneficiary so demands, such benefit (other than Company Stock reinvested pursuant to Section 4.6(a)) shall be distributed only in the form of Company Stock. Prior to making a distribution of benefits, the Administrator shall advise the Participant or his Beneficiary, in writing, of the right to demand that benefits be distributed solely in Company Stock. (b) If a Participant or Beneficiary demands that benefits be distributed solely in Company Stock, distribution of a Participant's benefit will be made entirely in whole shares or other units of Company Stock. Any balance in a Participant's Other Investments Account will be applied to acquire for distribution the maximum number of whole shares or other units of Company Stock at the then fair market value. Any fractional unit value unexpended will be distributed in cash. If Company Stock is not available for purchase by the Trustee, then the Trustee shall hold such balance until Company Stock is acquired and then make such distribution, subject to Sections 7.5(k) and 7.5(g). (c) The Trustee will make distribution from the Trust only on instructions from the Administrator. 50 94 (d) Notwithstanding anything contained herein to the contrary, if the Employer's charter or by-laws restrict ownership of substantially all shares of Company Stock to Employees and the Trust Fund, as described in Code section 409(h)(2), the Administrator shall distribute a Participant's Account entirely in cash without granting the Participant the right to demand distribution in shares of Company Stock. (e) Except as otherwise provided herein, Company Stock distributed by the Trustee may be restricted as to sale or transfer by the by-laws or articles of incorporation of the Employer, provided restrictions are applicable to all Company Stock of the same class. If a Participant is required to offer the sale of his Company Stock to the Employer before offering to sell his Company Stock to a third party, in no event may the Employer pay a price less than that offered to the distributee by another potential buyer making a bona fide offer and in no event shall the Trustee pay a price less than the fair market value of the Company Stock. (f) If Company Stock acquired with the proceeds of an Exempt Loan (described in Section 5.4 hereof) is available for distribution and consists or more than one class, a Participant or his Beneficiary must receive substantially the same proportion of each such class. 7.7 DISTRIBUTION FOR MINOR BENEFICIARY In the event a distribution is to be made to a minor, then the Administrator may direct that such distribution be paid to the legal guardian, or if none, to a parent of such Beneficiary or a responsible adult with whom the Beneficiary maintains his residence, or to the custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted by the laws of the state in which said Beneficiary resides. Such a payment to the legal guardian, custodian or parent of a minor Beneficiary shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof. 7.8 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN In the event that all, or any portion, of the distribution payable to a Participant or his Beneficiary hereunder shall, at the later of the Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid solely by reason of the inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or his Beneficiary, the amount so distributable shall be treated as a Forfeiture pursuant to the Plan. In the event a Participant or Beneficiary is located subsequent to his benefit being reallocated, such benefit shall be restored. 51 95 7.9 RIGHT OF FIRST REFUSALS (a) If any Participant, his Beneficiary or any other person to whom shares of Company Stock are distributed from the Plan (the "Selling Participant") shall, at any time, desire to sell some or all of such shares (the "Offered Shares") to a third party (the "Third Party"), the Selling Participant shall give written notice of such desire to the Employer and the Administrator, which notice shall contain the number of shares offered for sale, the proposed terms of the sale and the names and addresses of both the Selling Participant-and Third Party. Both the Trust Fund and the Employer shall each have the right of first refusal for a period of fourteen (14) days from the date the Selling Participant gives such written notice to the Employer and the Administrator (such fourteen (14) day period to run concurrently against the Trust Fund and the Employer) to acquire the Offered Shares. As between the Trust Fund and the Employer, the Trust Fund shall have priority to acquire the shares pursuant to the right of first refusal. The selling price and terms shall be the same as offered by the Third Party. (b) If the Trust Fund and the Employer do not exercise their right of first refusal within the required fourteen (14) day period provided above, the Selling Participant shall have the right, at any time following the expiration of such fourteen (14) day period, to dispose of the Offered Shares to the Third Party; provided, however, that (i) no disposition shall be made to the Third Party on terms more favorable to the Third Party than those set forth in the written notice delivered by the Selling Participant above, and (ii) if such disposition shall not be made to a third party on the terms offered to the Employer and the Trust Fund, the offered Shares shall again be subject to the right of first refusal set forth above. (c) The closing pursuant to the exercise of the right of first refusal under Section 7.9(a) above shall take place at such place agreed upon between the Administrator and the Selling Participant, but not later than ten (10) days after the Employer or the Trust Fund shall have notified the Selling Participant of the exercise of the right of first refusal. At such closing, the Selling Participant shall deliver certificates representing the Offered Shares duly endorsed in blank for transfer, or with stock powers attached duly executed in blank with all required transfer tax stamps attached or provided for, and the Employer or the Trust Fund shall deliver the purchase price, or an appropriate portion thereof, to the Selling Participant. (d) Except as provided in this paragraph (d), no Company Stock acquired with the proceeds of an Exempt Loan complying with the requirements of Section 5.4 hereof shall be subject to a right of first refusal. Company Stock acquired with the proceeds of an Exempt Loan, which is distributed to a Participant or Beneficiary, shall be subject to the right of first refusal provided for in 52 96 paragraph (a) of this Section only so long as the Company Stock is not publicly traded. The term "publicly traded" refers to a securities exchange registered under Section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) or that is quoted on a system sponsored by a national securities association registered under Section 15A(b) of the Securities Exchange Act (15 U.S.C. 780). In addition, in the case of Company Stock which was acquired with the proceeds of a loan described in Section 5.4, the selling price and other terms under the right must not be less favorable to the seller than the greater of the value of the security determined under Regulation 54.4975-11(d)(5), or the purchase price and other terms offered by a buyer (other than the Employer or the Trust Fund), making a good faith offer to purchase the security. The right of first refusal must lapse no later than fourteen (14) days after the security holder gives notice to the holder of the right that an offer by a third party to purchase the security has been made. The right of first refusal shall comply with the provisions of paragraphs (a), (b) and (c) of this Section, except to the extent those provisions may conflict with the provisions of this paragraph. 7.10 STOCK CERTIFICATE LEGEND Certificates for shares distributed pursuant to the Plan shall contain the following legend: "The shares represented by this certificate are transferable only upon compliance with the terms of the Sepco Industries, Inc. Employee Stock Ownership Plan effective as of January 1, 1989 which grants to the Company a right of first refusal, a copy of said Plan being on file in the office of the Company." 7.11 PUT OPTION (a) If Company Stock which was not acquired with the proceeds of an Exempt Loan is distributed to a Participant and such Company Stock is not readily tradeable on an established securities market, a Participant has a right to require the Employer to repurchase the Company Stock distributed to such Participant under a fair valuation formula. Such Stock shall be subject to the provisions of Section 7.11(c). (b) Company Stock which is acquired with the proceeds of an Exempt Loan and which is not publicly traded when distributed, or if it is subject to a trading limitation when distributed, must be subject to a put option. For purposes of this paragraph, a "trading limitation" on a Company Stock is a restriction under any Federal or State securities law or any regulation thereunder, or an agreement (not prohibited by Section 7.12) affecting the Company Stock which would make the Company Stock not as freely tradeable as stock not subject to such restriction. 53 97 (c) The put option must be exercisable only by a Participant, by the Participant's donees, or by a person (including an estate or its distributee) to whom the Company Stock passes by reason of a Participant's death. (Under this paragraph Participant or Former Participant means a Participant or Former Participant and the beneficiaries of the Participant or Former Participant under the Plan.) The put option must permit a Participant to put the Company Stock to the Employer. Under no circumstances may the put option bind the Plan. However, it shall grant the Plan an option to assume the rights and obligations of the Employer at the time that the put option is exercised. If it is known at the time a loan is made that Federal or State law will be violated by the Employer's honoring such put option, the put option must permit the Company Stock to be put, in a manner consistent with such law, to a third party (e.g., an affiliate of the Employer or a shareholder other than the Plan) that has substantial net worth at the time the loan is made and whose net worth is reasonably expected to remain substantial. The put option shall commence as of the day following the date the Company Stock is distributed to the Former Participant and end 60 days thereafter and if not exercised within such 60-day period, an additional 60-day option shall commence on the first day of the fifth month of the Plan Year next following the date the stock was distributed to the Former Participant (or such other 60-day period as provided in regulations promulgated by the Secretary of the Treasury). However, in the case of Company Stock that is publicly traded without restrictions when distributed but ceases to be so traded within either of the 60-day periods described herein after distribution, the Employer must notify each holder of such Company Stock in writing on or before the tenth day after the date of the Company Stock ceases to be so traded that for the remainder of the applicable 60-day period the Company Stock is subject to the put option. The number of days between the tenth day and the date on which notice is actually given, if later than the tenth day, must be added to the duration of the put option. The notice must inform distributees of the term of the put options that they are to hold. The terms must satisfy the requirements of this paragraph. The put option is exercised by the holder notifying the Employer in writing that the put option is being exercised; the notice shall state the name and address of the holder and the number of shares to be sold. The period during which a put option is exercisable does not include any time when a distributee is unable to exercise it because the party bound by the put option is prohibited from honoring it by applicable Federal or State law. The price at which a put option must be exercisable is the value of the Company Stock determined in accordance with Section 6.2. Payment under the put option involving a "Total Distribution" shall be paid in substantially equal monthly, quarterly, semiannual or annual installments over a period certain beginning not later than thirty (30) days after the exercise of the put option and not 54 98 extending beyond (5) years. The deferral of payment is reasonable if adequate security and a reasonable interest rate on the unpaid amounts are provided. The amount to be paid under the put option involving installment distributions must be paid not later than thirty (30) days after the exercise of the put option. Payment under a put option must not be restricted by the provisions of a loan or any other arrangement, including the terms of the Employer's articles of incorporation, unless so required by applicable state law. For purposes of this Section, "Total Distribution" means a distribution to a Participant or his Beneficiary within one taxable year of the entire Vested Participant's Account. (d) An arrangement involving the Plan that creates a put option must not provide for the issuance of put options other than as provided under this Section. The Plan (and the Trust Fund) must not otherwise obligate itself to acquire Company Stock from a particular holder thereof at an indefinite time determined upon the happening of an event such as the death of the holder. 7.12 NONTERMINABLE PROTECTIONS AND RIGHTS No Company Stock, except as provided in section 7.11(b), Section 7.9(d) and Section 7.11(b), acquired with the proceeds of a loan described in Section 5.4 hereof may be subject to a put, call, or other option, or buy-sell or similar arrangement when held by and when distributed from the Trust Fund, whether or not the Plan is then an ESOP. The protections and rights granted in this Section are nonterminable, and such protections and rights shall continue to exist under the terms of this Plan so long as any Company Stock acquired with the proceeds of a loan described in Section 5.4 hereof is held by the Trust Fund or by any Participant or other person for whose benefit such protections and rights have been created, and neither the repayment of such loan nor the failure of the Plan to be an ESOP, nor an amendment of the Plan shall cause a termination of said protections and rights. 7.13 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS All rights and benefits, including elections, provided to a Participant in this Plan shall be subject to the rights afforded to any "alternate payee" under a "qualified domestic relations order." Furthermore, a distribution to an "alternate payee" shall be permitted if such distribution is authorized by a "qualified domestic relations order," even if the affected Participant has not reached the "earliest retirement age" under the Plan. For the purposes of this Section, "alternate payee," "qualified domestic relations order" and "earliest retirement age" shall have the meaning set forth under Code Section 414(p). 55 99 7.14 AUTOMATIC SURVIVOR BENEFITS (a) The special rule of this Section 7.14 shall only apply to those vested Participants who have transferred to this Plan, or have caused to be transferred to this Plan, either directly or indirectly, accrued benefits from any defined benefit plan, any defined contribution plan which is subject to the funding standards of Code Section 412, or any other defined contribution plan to which Code Section 401(a)(11) applied as of or prior to the date of such transfer. (b) Except as otherwise provided herein, the following rules shall apply: (1) The Aggregate Account of any vested Participant who is married on the Annuity Starting Date and who does not die before the Annuity Starting Date shall be payable to such Participant in the form of a Qualified Joint and Survivor Annuity; and (2) The Aggregate Account of any vested Participant who dies before the Annuity Starting Date and who has a surviving spouse shall be payable in the form of a Qualified Preretirement Survivor Annuity. (c) For purposes of this Section 7.14, the following definitions shall apply: (1) Vested Participant - Any Participant whether or not still employed by the Employer who has a nonforfeitable right to any portion of the Aggregate Account derived from Employer contributions. (2) Qualified Joint and Survivor Annuity (A) An annuity for the life of the Participant with a survivor annuity for the life of the spouse which is not less than 50% (and not greater than 100%) of the amount which is payable during the joint lives of the Participant and spouse, and which is the actuarial equivalent of a single life annuity for the life of the Participant. (B) Any other annuity in a form having the effect of an annuity described in Subparagraph (A) above. (3) Qualified Preretirement Survivor Annuity - An annuity for the life of the surviving spouse, the actuarial equivalent of which is not less than 50% of the Aggregate Account of the Participant as of the date of death. 56 100 (4) Earliest Retirement Age - The first day of the first period for which an amount is received as an annuity (whether by reason of retirement or disability). (5) Annuity Starting Date - The first day of the first period for which an amount is received as an annuity (whether by reason of retirement or disability). (d) For purposes of this Section 7.14, the following limitations shall apply: (1) (A) A Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity need not be provided under this Plan unless the Participant and the spouse have been married throughout the one-year period ending on the earlier of: (i) The Participant's Annuity Starting Date, or (ii) The date of the Participant's death. (B) For purposes of Subparagraph (A) above, if a Participant marries within one year before the Annuity Starting Date and the Participant has been married to that spouse for at least one year ending on the date of the Participant's death, the Participant and his spouse will be treated as having been married throughout the one year period ending on the Participant's Annuity Starting Date. (2) (A) If the present value of a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity does not exceed $3,500, it may be immediately distributed. Provided, no distribution shall be made under the preceding sentence after the Annuity Starting Date unless the Participant and his or her spouse (or if the Participant has died, the surviving spouse) consents in writing to such distribution. (B) If the present value of a qualified Joint and Survivor Annuity or the qualified Preretirement Survivor Annuity exceeds $3,500, the Participant and his or her spouse (or if the Participant has died, the surviving spouse) must consent in writing before the Plan can immediately distribute the present value of the annuity. (e) A Participant may elect not to receive either or both the Qualified Joint and Survivor Annuity and the Qualified Preretirement Survivor Annuity as follows: (1) The Participant's election shall be made during the Applicable Election Period. For purposes of this Subsection 57 101 (d), the Applicable Election Period shall be: (A) In the case of a Qualified Joint and Survivor Annuity, the 90-day period ending on the Annuity Starting Date, or (B) In the case of a Qualified Preretirement Survivor Annuity, a period beginning on the first day of the Plan Year in which the Participant attains age 35 and ending on the date of the Participant's death. Provided that if a Participant separates from Service, the Applicable Election Period begins on that date with respect to benefits accrued before the separation from Service. (2) The Participant's election under this Subsection (e) may be revoked in writing during the Applicable Election Period. If any such election is revoked, the person making such revocation shall retain the right to make another election during the Applicable Election Period. (3) An election by a Participant to waive automatic survivor benefits hereunder shall be effective only if the Participant's spouse consents to such election in writing, the spouse's consent acknowledges the effect of such election and such consent is witnessed by the Administration or a notary public. Any consent by a spouse is effective only with respect to such spouse. Spousal consent hereunder is not required if the Participant establishes to the satisfaction of the Administrator that there is no spouse or that the spouse cannot be located. (f) For purposes of this Section 7.14, the following notice procedures shall apply: (1) Written explanation of Qualified Joint and Survivor Annuity form of benefit. (A) The Administrator shall provide to each Participant a written explanation of: (i) The terms and conditions of the Qualified Joint and Survivor Annuity; (ii) The Participant's right to make, and the effect of, an election to waive the Qualified Joint and Survivor Annuity form of benefit; (iii) The rights of the Participant's spouse; and (iv) The right to make, and the effect of, a revocation of an election. 58 102 (B) The written explanation shall be provided by the Committee within a reasonable period of time before the Annuity Starting Date. (2) Notice of Right to Decline a Qualified Preretirement Survivor Annuity: (A) The Administrator shall provide a notice to Participants which is comparable to the notice required with respect to the Qualified Joint and Survivor Annuity. (B) The notice shall be provided within the period beginning on the first day of the Plan Year during which "the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35. (3) Notice Exemption (A) The Administrator is not required to provide notice of the right to waive the Qualified Joint and Survivor Annuity or the Qualified Preretirement Survivor Annuity if the Employer fully subsidizes the cost of the benefit. (B) The Employer fully subsidizes the cost of a benefit only if the Participant's failure to waive the benefit does not result in either: (i) A decrease in any Plan benefits to the Participant; or (ii) Increased Plan contributions by the Participant. (g) The Employer may take into account, in any equitable manner (as determined by the Administrator) any increased costs resulting from providing a Qualified Joint or Survivor Annuity or a Qualified Preretirement Survivor Annuity. ARTICLE VIII TRUSTEE 8.1 BASIC RESPONSIBILITIES OF THE TRUSTEE The Trustee shall have the following categories of responsibilities: (a) Subject to Sections 8.5 and 8.6, to invest, manage, and control the Plan assets; 59 103 (b) At the direction of the Administrator regarding timing, amount, form and payee, to pay benefits required under the Plan to be paid to Participants, or, in the event of their death, to their Beneficiaries; (c) To maintain records of receipts and disbursements and furnish to the Employer and/or Administrator for each Plan Year a written annual report per Section 8.8 notwithstanding any provision contained herein to the contrary, the Trustee in no event shall be required to maintain separate accounts for Participants; and (d) If there shall be more than one Trustee, they shall act by a majority of their number, but may authorize one or more of them to sign papers on their behalf. 8.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE The Trustee shall have the following investment powers and duties, subject to Sections 8.5 and 8.6: (a) The Trustee shall invest and reinvest the Trust Fund to keep the Trust Fund invested without distinction between principal and income and in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable, including, but not limited to, stocks, common or preferred, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. In making such investments, the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments. The Trustee may assume, until advised to the contrary, that the Plan is a Stock Bonus Plan qualified under Section 401(a) of the Code and an Employee Stock Ownership Plan qualified under Section 4975(e)(7) of the Code. (b) The Trustee may employ a bank or trust company pursuant to the terms of its usual and customary bank agency agreement, under which the duties of such bank or trust company shall be of a custodial, clerical and record-keeping nature. (c) The Trustee may from time to time transfer to a common, collective, or pooled trust fund maintained by any corporate Trustee hereunder, all or such part of the Trust Fund as the Trustee may deem advisable, and such part or all of the Trust Fund so transferred shall be subject to all the terms and provisions of the common, collective, or pooled trust fund which contemplate the commingling for investment purposes of such trust assets with trust assets of other trusts. The Trustee may, from time to time withdraw from such common, collective, or pooled trust fund all or such part of the Trust Fund as the Trustee may deem advisable. (d) In the event the Trustee invests any part of the Trust 60 104 Fund, pursuant to the directions of the Administrator, in any shares of stock issued by the Employer, and the Administrator thereafter directs the Trustee to dispose of such investment, or any part thereof, under circumstances which, in the opinion of counsel for the Trustee, require registration of the securities under the Securities Act of 1933 and/or qualification of the securities under the Blue Sky laws of any state or states, then the Employer at its own expense, will take or cause to be taken any and all such action as may be necessary or appropriate to effect such registration and/or qualification. (e) The Trustee, at the direction of the Administrator, shall ratably apply for, own, and pay premiums on Contracts on the lives of the Participants. The Trustee shall act with respect to such Contracts only as directed by the Administrator and shall have no investment responsibility for any such Contracts. If a life insurance policy is to be purchased for a Participant, the aggregate premium for ordinary life insurance for each Participant must be less than 50% of the aggregate of the contributions and Forfeitures to the credit of the Participant at any particular time. If term insurance is purchased with such contributions, the aggregate premium must be less than 25% of the aggregate contributions and Forfeitures allocated to a Participant's Account. If both term insurance and ordinary life insurance are purchased with such contributions, the amount expended for term insurance plus one-half of the premium for ordinary life insurance may not in the aggregate exceed 25% of the aggregate contributions and Forfeitures allocated to a Participant's Account. The Administrator shall direct the Trustee to convert the entire value of the life insurance contracts at or before retirement into cash or provide for a periodic income so that no portion of such value may be used to continue life insurance protection beyond retirement, or to distribute the Contracts to the Participant. 8.3 OTHER POWERS OF THE TRUSTEE The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of the Plan, shall have the following powers and authorities, to be exercised in the Trustee's sole discretion subject to Sections 8.5 and 8.6: (a) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained; (b) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, 61 105 with or without advertisement; (c) To vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate discretionary powers, and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property; (d) To cause any securities or other property to be registered in the Trustee's own name or in the name of one or more of the Trustee's nominees, and to hold any investments in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; (e) To borrow or raise money for carrying out the responsibilities hereunder in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any part, of the Trust Fund; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing; (f) To keep any portion of the Trust Fund in cash or cash balances pending investment thereof or payment of expenses or making distributions therewith, without liability for interest, depreciation, or loss occasioned by such retention, and to make permanent or temporary investments in time deposits and other forms of accounts and certificates of deposit which bear a reasonable rate of interest issued by the Trustee; (g) To accept and retain for such time as the Trustee may deem advisable any securities or other property received or acquired as Trustee hereunder, whether or not such securities or other property would normally be purchased as investments hereunder; (h) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (i) To settle, compromise, or submit to arbitration any claims, debts, or damages due or owing to or from the Plan, to commence or defend suits or legal or administrative proceedings, and to represent the Plan in all suits and legal and administrative 62 106 proceedings; (j) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agent or counsel may or may not be agent or counsel for the Employer; (k) To apply for and procure from responsible insurance companies, to be selected by the Administrator, as an investment of the Trust Fund such annuity, or other Contracts (on the life of any Participant) as the Administrator shall deem proper; to exercise, at any time or from time to time, whatever rights and privileges may be granted under such annuity, or other Contracts; to collect, receive, and settle for the proceeds of all such annuity or other Contracts as and when entitled to do so under the provisions thereof, all at the direction of the Administrator; (l) To transfer, at any time and from time to time, all or any portion of the assets forming a part of the Trust Fund to any trust which is maintained as a medium for the pooling of the funds of qualified pension and profit sharing trusts and to execute such documents and other instruments as may be necessary in connection therewith. The terms and provisions of any such group trust or pooled fund agreement shall, upon such transfer, be incorporated by reference into this Plan and Trust Agreement and shall apply to the Trust Fund to the extent of the assets so transferred; (m) To invest in Treasury Bills and other forms of United States government obligations; (n) To deposit monies in federally insured savings accounts or certificates of deposit in banks or savings and loan associations; (o) To vote Company Stock as provided in Section 8.5; (p) To consent to or otherwise participate in reorganizations, recapitalizations, consolidations, mergers and similar transactions with respect to Company Stock or any other securities and to pay any assessments or charges in connection therewith. (q) To deposit such Company Stock (but only if such deposit does not violate the provisions of Section 8.5 hereof) or other securities in any voting trust, or with any protective or like committee, or with a trustee or with depositories designated thereby; (r) To sell or exercise any options, subscription rights and conversion privileges and to make any payments incidental thereto; (s) To exercise any of the powers of an owner, with respect to such Company Stock and other securities or other property 63 107 comprising the Trust Fund. The Administrator, may authorize the Trustee to act on any administrative matter or class of matters with respect to which direction or instruction to the Trustee by the Administrator is called for hereunder without specific direction or other instruction from the Administrator; (t) To sell, purchase and acquire put or call options if the options are traded on and purchased through a national securities exchange registered under the Securities Exchange Act of 1934, as amended, or, if the options are not traded on a national securities exchange, are guaranteed by a member firm of the New York Stock Exchange; (u) To retain any funds or property subject to any dispute without liability for the payment of interest, or to decline to make payment or delivery thereof until final adjudication is made by a court of competent jurisdiction; (v) To do all such acts and exercise all such rights and privileges, although not specifically mentioned herein, as the Trustee may deem necessary to carry out the purposes of the Plan. 8.4 LOANS TO PARTICIPANTS (a) The Trustee may, subject to the direction of the Plan Administrator, make loans to Participants and Beneficiaries. The Plan Administrator is responsible for administering the loan program. He may delegate or assign responsibility for administering the loan program to another person in accordance with the provisions of the Plan authorizing the delegation or assignment of fiduciary duties. The Trustee shall distribute cash to such Participants who are granted loans in such amount and at such times as the Administrator shall from time to time direct in writing. Loan payments collected by the Administrator shall be forwarded to the Trustee. The amount of such loans shall be carried by the Trustee as an asset of the trust equal to the combined unpaid principal balance of all Participants. The Trustee shall rely conclusively upon the determination of the Administrator with respect to the amount of the combined unpaid principal balance of all Participants. The Trustee shall have no responsibility to ascertain whether a loan complies with the provisions of the Plan, for the decision to grant a loan or for the collection and repayment of a loan. The loan program shall be carried out and administered in accordance with Section 408 of the Act, regulations of the Department of Labor published thereunder, and other relevant provisions of the Act and of the Code and the Plan. The person administering the loan program is a fiduciary and shall be known as the "Loan Administrator." 64 108 (b) Loans from the Plan shall be available to eligible participants. An "eligible participant" is a Participant or Beneficiary who is a party-in-interest as defined in the Act (Section 3(14)). A party-in-interest includes, among others, a current Employee of the Employer (whose Employees are covered by the Plan), and each former Employee and Plan Beneficiary who is an officer, owner, or director, fiduciary, counsel, or service provider, and their relatives as defined in the Act (spouse, ancestor, lineal descendant and his/her spouse, (Section 3(15)). Loans shall be available to eligible Participants without regard to any individual's race, color, religion, sex, age or national origin. All loans shall be arranged and approved by the Loan Administrator in the interest of the eligible Participants and for the exclusive purpose of providing benefits to such Participants. Loans shall not be made available to Highly Compensated Employees in an amount that is greater than the amount (percentage of accrued benefit) available to other Employees. A more than 5% shareholder-employee of an S-corporation is not an eligible employee nor is a self-employed individual or a more than 10% partner in a partnership, or their family members (ascendants, descendants and collaterals). (c) An eligible Participant may apply for a loan to the Loan Administrator on a form provided for such purpose or in any other written form. The application shall specify the amount of the loan requested, the proposed terms for repayment and collateral offered. The application may specify the purpose of the loan, and may include a financial statement of the applicant and any other information the applicant cares to provide. If the Loan Administrator finds that the applicant is an eligible Participant and that the terms of this loan program are complied with, he shall approve and authorize the loan. Otherwise, he shall deny the loan and advise the applicant in writing of the reason for the denial. The Loan Administrator may deny a loan if such loan is not in the best interest of all Plan Participants or is not a prudent investment in view of the liquidity needs of the Plan or other relevant investment criteria, provided, however, that the availability of a loan to an eligible Participant shall not be unreasonably withheld. If the loan is approved the loan proceeds shall be disbursed to the borrower upon satisfactory execution of the loan documents. (d) If an eligible Participant has or applies for more than one loan, all loans shall be aggregated for the purpose of applying the loan limitation. All Plans in which an eligible Participant has an accrued benefit shall be aggregated for the purpose of applying the loan limitation. No loan shall be allowed if such loan, when aggregated with all other loans to an eligible Participant, exceeds the loan limitation. The loan limitation as to an eligible Participant is the lesser of (1) or (2) where 65 109 (1) is $50,000 reduced by the excess (if any) of the highest loan balance from the Plan during the one year period ending on the day before the date on which the loan is made, over the outstanding balance of loans to the eligible participant from the Plan on the date on which the loan is made, and (2) is one-half of the eligible participants vested accrued benefit as of the valuation date next preceding the date of the loan application. Loans of less than $1000 shall not be permitted. (e) The term of a loan may not exceed five years except in the case of a loan that is used to acquire a dwelling unit which will be used within nine months as the principal residence of the borrower, in which event the term of the loan may not exceed ten years. Each loan shall be amortized in substantially equal payments, made not less often than quarterly, over the term of the loan. Loans may be repaid by payroll deductions. (f) All loans shall be secured by 50% of the borrower's vested accrued benefit in the Plan. No other collateral shall be required. (g) Each loan shall bear a reasonable rate of interest commensurate with the rates charged by persons in the business of lending money. The Loan Administrator shall ascertain the rate the Plan sponsor's principal bank would charge a creditworthy customer for a loan secured by a certificate of deposit in the full amount of the loan as of the date of the loan, and such rate shall be the rate charged the borrower for the term of the loan. In no event shall the interest rate exceed the maximum rate that may be charged at the time under the state usury laws. (h) Each loan shall be evidenced by a negotiable promissory note signed by the borrower and, if married, the borrower's spouse shall be required to consent to the loan and to the use of the borrower's vested accrued benefit as security for the loan. Such consent must be in writing and obtained within the 90 day period prior to the date the loan proceeds are disbursed. The loan documents shall provide for a security interest in 50% of the borrower's accrued benefit and shall contain customary provisions for acceleration of maturity and attorney fees in the event of default. (i) A default shall occur if the borrower shall fail to make a note payment when due. In such event the Administrator shall make demand for payment and initiate collection procedures which may include filing suit against the borrower. Any expenses incurred by the Administrator in collecting the note shall be 66 110 charged as an administrative cost to the borrower's vested accrued benefit. No distributions from the Plan to the borrower shall be permitted unless the note is paid in full or payment is adequately provided for. The Administrator shall be authorized to charge all amounts due on the note, including costs of collection, to the borrower's vested accrued benefit and report the same as a distribution to the borrower at such time as the benefit becomes immediately distributable under the terms of the Plan. (j) Loans shall be general investments of the Trust Fund. The Loan Administrator shall keep records of all loans and administer the loan program in a uniform and nondiscriminatory manner for the benefit of all Participants and Beneficiaries in order to assure that the Plan will suffer no loss in the event of a default. To that end he is authorized to construe all provisions of the loan program so as to maintain compliance with applicable government regulations. (k) A borrower should consult his own tax advisor to ascertain whether interest paid to the Plan upon a loan from the Plan will be tax deductible to him. Interest deductions are not allowed (IRC Section 72(p)(3)) for interest paid upon a loan to a Key Employee. 8.5 VOTING AND TENDER OF COMPANY STOCK (a) Prior to each annual or special meeting of shareholders of the Company, the Trustee shall send to each Participant in the Plan (including beneficiaries of deceased Participants) a copy of the proxy' soliciting material for the meeting, together with a form for providing instructions to the Trustee on how to vote the number of whole shares and any fractional share of Company Stock allocated to the Participant's Account. The voting instructions received by the Trustee will be held by it in confidence. Upon receipt of such instruction, the Trustee shall vote such shares as instructed, provided that, in the case of fractional shares, the Trustee shall vote the combined fractional shares to the extent possible to reflect the instruction of the Participants to whose Accounts fractional shares are credited. The Trustee shall vote shares of Company Stock for which it does not receive voting instructions under this Trust, including those shares which are not allocated to Participants Accounts, in the same proportion as shares which it holds under this Trust and any other trust forming a part of the Plan and with respect to which it does receive instructions. (b) The Trustee shall provide each Participant in the Plan (including beneficiaries of deceased Participants) with such notices and information statements as are provided to Company shareholders generally with respect to any tender or exchange offer, and each Participant shall be entitled to direct the Trustee with respect to the tender or exchange of whole shares and fractional shares of Company Stock allocated to his Account. A 67 111 Participant's instructions shall remain in force until superseded in writing by the Participant. Upon receipt of such direction, the Trustee shall tender or exchange such shares as directed, provided that, in the case of fractional shares, the Trustee shall tender or exchange the combined fractional shares to the extent possible to reflect the direction of the Participants to whose Accounts fractional shares are credited. The Trustee shall not tender or exchange shares in a Participant's Account for which directions are not received. The Trustee shall tender or exchange, shares of Company Stock which are not allocated to Participants' Accounts such that the ratio of tendered or exchanged unallocated shares under this Trust is the same as the ratio of tendered or exchanged shares in Participants' Accounts under this Trust to all shares in Participants' Accounts which the Trustee holds under this Trust. Unless and until shares of Company Stock are tendered or exchanged, the individual instructions received by the Trustee from Participants shall be held in strict confidence and shall not be divulged or released to any person, including officers and employees of the Employers. The Administrator shall provide the Trustee with timely information regarding proxy voting and tender offers and in carrying out its responsibilities under Section 8.5, the Trustee may conclusively rely on information furnished to it by the Administrator, including names and current addresses of Participants, the number of shares of Company Stock credited to Participant Accounts and the number of shares of Company Stock held by the Trustee that have not yet been allocated. (c) No provision of Section 8.5 shall prevent the Trustee from taking any action relating to its duties under Section 8.5 if the Trustee determines in its sole discretion that such action is necessary in order for the Trustee to fulfill its fiduciary responsibilities to ERISA. 8.6 DUTIES OF THE TRUSTEE REGARDING PAYMENTS, INVESTMENTS, EXEMPT LOANS (a) The Trustee shall make distributions from the Trust Fund at such times and in such numbers of shares or other units of Company Stock and amounts of cash to or for the benefit of the person entitled thereto under the Plan as the Administrator directs in writing. Any undistributed part of a Participant's interest in his accounts shall be retained in the Trust Fund until the Administrator directs its distribution. Where distribution is directed in Company Stock, The Trustee shall cause an appropriate certificate to be issued to the person entitled thereto and mailed to the address furnished it by the Administrator. Any portion of a Participant's Account to be distributed in cash shall be paid by the Trustee mailing its check to the same person at the same address. If a dispute arises as to who is entitled to or should receive any benefit or payment, the Trustee may withhold or cause to be withheld such payment until the dispute has been resolved. 68 112 (b) As directed by the Administrator pursuant to Sections 2.10, 5.4, 8.1(b) and 8.6, the Trustee shall make payments out of the Trust Fund. Such directions or instructions need not specify the purpose of the payments so directed and the Trustee shall not be responsible in any way respecting the purpose or propriety of such payments. (c) In the event that any distribution or payment directed by the Administrator shall be mailed by the Trustee to the person specified in such direction at the latest address of such person filed with the Administrator, and shall be returned to the Trustee because such person cannot be located at such address, the Trustee shall promptly notify the Administrator of such return. Upon the expiration of sixty (60) days after such notification, such direction shall become void and unless and until a further direction by the Administrator is received by the Trustee with respect to such distribution or payment, the Trustee shall thereafter continue to administer the Trust as if such direction had not been made by the Administrator. The Trustee shall not be obligated to search for or ascertain the whereabouts of any such person. (d) The Trustee shall invest all Plan assets, including earnings thereon, exclusively in Company Stock, except as otherwise directed by the Administrator. Such other directed investments may include but are not limited to real estate and insurance contracts. The Administrator shall have investment responsibility for such other directed investments and except to the extent that the Trustee is directed to invest cash for short term purposes, the Trustee shall not make any investment review of, consider the propriety of holding or selling or vote other than as directed by the Administrator any such assets. (e) The Trustee shall take such actions with respect to Exempt Loans as may be directed from time to time by the Administrator. 8.7 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES The Trustee shall be paid such reasonable compensation as shall from time to time be agreed upon in writing by the Employer and the Trustee. An individual serving as Trustee who already receives full-time pay from the Employer shall not receive compensation from the Plan. In addition, the Trustee shall be reimbursed for any reasonable expenses, including reasonable counsel fees incurred by it as Trustee. Such compensation and expenses shall be paid from the Trust Fund unless paid or advanced by the Employer. All taxes of any kind and all kinds whatsoever that may be levied or assessed under existing or future laws upon, or in respect of, the Trust Fund or the income thereof, shall be paid from the Trust Fund. 69 113 8.8 ANNUAL REPORT OF THE TRUSTEE Within a reasonable period of time after the later of the Anniversary Date or receipt of the Employer's contribution for each Plan Year, the Trustee shall furnish to the Employer and Administrator a written statement of account with respect to the Plan Year for which such contribution was made setting forth: (a) the net income, or less, of the Trust Fund; (b) the gains, or losses, realized by the Trust Fund upon sales or other disposition of the assets; (c) the increase, or decrease, in the value of the Trust Fund; (d) all payments and distributions made from the Trust Fund; and (e) such further information as the Trustee and/or Administrator deems appropriate. The Employer, forthwith upon its receipt of each such statement of account, shall acknowledge receipt thereof in writing and advise the Trustee and/or Administrator of its approval or disapproval thereof. Failure by the Employer to disapprove any such statement of account within thirty (30) days after its receipt thereof shall be deemed an approval thereof. The approval by the Employer of any statement of account shall be binding as to all matters embraced therein as between the Employer and the Trustee to the same extent as if the account of the Trustee had been settled by judgment or decree in an action for a judicial settlement of its account in a court of competent jurisdiction in which the Trustee, the Employer and all persons having or claiming an interest in the Plan were parties; provided, however, that nothing herein contained shall deprive the Trustee of its right to have its accounts judicially settled if the Trustee so desires. 8.9 AUDIT (a) If an audit of the Plan's records shall be required by the Act and the regulations thereunder for any Plan Year, the Administrator shall direct the Trustee to engage on behalf of all Participants an independent qualified public accountant for that purpose. Such accountant shall, after an audit of the books and records of the Plan in accordance with generally accepted auditing standards, within a reasonable period after the close of the Plan Year, furnish to the Administrator and the Trustee a report of his audit setting forth his opinion as to whether each of the following statements, schedules or lists, or any others that are required by Section 103 of the Act or the Secretary of Labor to be filed with the Plan's annual report, are presented fairly in conformity with generally accepted accounting principles applied consistently: 70 114 (1) statement of the assets and liabilities of the Plan; (2) statement of changes in net assets available to the Plan; (3) statement of receipts and disbursements, a schedule of all assets held for investment purposes, a schedule of all loans or fixed income obligations in default at the close of the Plan Year; (4) a list of all leases in default or uncollectible during the Plan Year; (5) the most recent annual statement of assets and liabilities of any bank common or collective trust fund in which Plan assets are invested or such information regarding separate accounts or trusts with a bank or insurance company as the Trustee and Administrator deem necessary; and (6) a schedule of each transaction or series of transactions involving an amount in excess of three percent (3%) of Plan assets. All auditing and accounting fees shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund. (b) If some or all of the information necessary to enable the Administrator to comply with Section 103 of the Act is maintained by a bank, insurance company, or similar institution, regulated and supervised and subject to periodic examination by a state or federal agency, it shall transmit and certify the accuracy of that information to the Administrator as provided in Section 103(b) of the Act within one hundred twenty (120) days after the end of the Plan Year or by such other date as may be prescribed under regulations of the Secretary of Labor. 8.10 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE (a) The Trustee may resign at any time by delivering to the Employer, at least thirty (30) days before its effective date, a written notice of his resignation. (b) The Employer may remove the Trustee by mailing by registered or certified mail, addressed to such Trustee at his last known address, at least thirty (30) days before its effective date, a written notice of his removal. (c) Upon the death, resignation, incapacity, or removal of any Trustee, a successor may be appointed by the Employer; and such successor, upon accepting such appointment in writing and delivering same to the Employer, shall, without further act, become 71 115 vested with all the estate, rights, powers, discretions, and duties of his predecessor with like respect as if he were originally named as a Trustee herein. Until such a successor is appointed, the remaining Trustee or Trustees shall have full authority to act under the terms of the Plan. (d) The Employer may designate one or more successors prior to the death, resignation, incapacity, or removal of a Trustee. In the event a successor is so designated by the Employer and accepts such designation, the successor shall, without further act, become vested with all the estate, rights, powers, discretions, and duties of his predecessor with the like effect as if he were originally named as Trustee herein immediately upon the death, resignation, incapacity, or removal of his predecessor. (e) Whenever any Trustee hereunder ceases to serve as such, he shall furnish to the Employer and Administrator a written statement of account with respect to the portion of the Plan Year during which he served as Trustee. This statement shall be either (i) included as part of the annual statement of account for the Plan Year required under Section 8.8 or (ii) set forth in a special statement. Any such special statement of account should be rendered to the Employer no later than the due date of the annual statement of account for the Plan Year. The procedures set forth in Section 8.8 for the approval by the Employer of annual statements of account shall apply to any special statement of account rendered hereunder and approval by the Employer of any such special statement in the manner provided in Section 8.8 shall have the same effect upon the statement as the Employer's approval of and annual statement of account. No successor to the Trustee shall have any duty or responsibility to investigate the acts or transactions of any predecessor who has rendered all statements of account required by Section 8.8 and this subparagraph. 8.11 TRANSFER OF INTEREST The Trustee, on behalf of any Participant, any accept funds transferred from another trust forming part of a pension, profit sharing, or stock bonus plan meeting the requirements of Code Section 401(a) or a "conduit" Individual Retirement Account for the account of a Participant under this Plan, provided the conditions precedent to such transfer set forth in Section 4.11 are satisfied. In the event of such a transfer under this Plan, the Trustee shall maintain a separate, nonforfeitable "Participant's Rollover Account" for the amount transferred. In addition, any such transfer may only be made if it does not result in the elimination of any "Section 411(d)(6) protected benefits" as described in Section 9.1. The Trustee may act upon the direction of the Administrator without determining the facts concerning a transfer. 72 116 8.12 REAL ESTATE INVESTMENTS The Trustee shall have no investment responsibility for any Trust assets which are invested in real estate and the Trustee shall have no responsibility for: (a) any condition which now exists or may hereafter be found to exist in, under, or about any real estate investment of the Trust Fund or of a corporation organized under Section 501(c)(2) or 501(c)(25) of the Code, the stock of which is held as an asset of the Trust Fund; or (b) any violation of any applicable environmental or health or safety law, ordinance, regulation or ruling; or (c) the presence, use, generation, storage, release, threatened release, or containment, treatment or disposal of any hazardous or toxic substances or materials including such situations at or activities on any investment of the Trust Fund or of a Section 501(c)(2) or 501(c)(25) corporation, the stock of which is held as an asset of the Trust Fund. The Trustee is hereby authorized to pay from the Trust Fund all costs and expenses (including attorneys' fees) relating to or connected with any condition, violation, presence or other situation referred to in (a), (b), and (c) above and notwithstanding anything to the contrary in this agreement, to the extent permitted by law, the Trustee shall be indemnified from the Trust Fund from all claims, suits, losses and expenses (including attorneys' fees) arising therefrom. The authority to pay from the Trust Fund and the right of indemnification set forth in the preceding sentence include and relate to, without limitation, any claims, suits, liabilities, losses and expenses (including attorneys' fees) arising from any matters relating to the existence of petroleum including crude oil and any fraction thereof, hazardous substances, pollutants, or contaminants as defined in the Compensation and Liability Act, as amended, 42 U.S.C. Section 9601 et seg., or hazardous wastes as defined in the Resource Conservation and Liability Act, 42 USC Section 6906 et seg., or as any of the foregoing terms or similar terms may be defined in similar state environmental laws or subsequent federal or state legislation of a similar nature which may be enacted from time to time. This Section shall survive the sale or other disposition of any real estate investment of the Trust Fund and the termination of this agreement. Nothing in this Section shall be construed to in any way limit the indemnification rights of the Trustee provided for below. 8.13 INDEMNIFICATION OF THE TRUSTEE To the extent not prohibited under ERISA, or other law, the Employer agrees to indemnify the Trustee for any and all liability, 73 117 loss and expense, including legal fees and expenses, which the Trustee may sustain by reason of the purchase, retention, tender or sale of any assets of the Trust, including Company Stock, or by reason of any act or failure to act of any fiduciary to whom the fiduciary responsibility for such action or inaction has been allocated. This Section shall survive the termination of this agreement. ARTICLE IX AMENDMENT, TERMINATION AND MERGERS 9.1 AMENDMENT (a) The Employer shall have the right at any time to amend the Plan, subject to the limitations of the Section. However, any amendment which affects the rights, duties or responsibilities of the Trustee and Administrator may only be made with the Trustee's and Administrator's written consent. Any such amendment shall become effective as provided therein upon its execution. The Trustee shall not be required to execute any such amendment unless the Trust provisions contained herein are a part of the Plan and the amendment affects the duties of the Trustee hereunder. (b) No amendment to the Plan shall be effective if it authorizes or permits any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to any purpose other than for the exclusive benefit of the Participants or their Beneficiaries or estates; or cause any reduction in the amount credited to the account of any Participant; or cause or permit any portion of the Trust Fund to revert to or become property of the Employer. (c) Except as permitted by Regulations (including Regulation 1.411(d)-4), no Plan amendment or transaction having the effect of a Plan amendment (such as a merger, plan transfer or similar transaction) shall be effective if it eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or modifies conditions relating to "Section 411(d)(6) protected benefits" the result of which is a further restriction on such benefit unless such protected benefits are preserved with respect to benefits accrued as of the later of the adoption date or effective date of the amendment. "Section 411(d)(6) protected benefits" are benefits described in Code Section 411(d)(6)(A), early retirement benefits and retirement-type subsidies, and optional forms of benefit. In addition, no such amendment shall have the effect of terminating the protections and rights set forth in Section 7.12, unless such termination shall then be permitted under the applicable provisions of the Code and Regulations; such a termination is currently expressly prohibited by Regulation 54.4975-11(a)(3)(ii). 74 118 9.2 TERMINATION (a) The Employer shall have the right at any time to terminate the Plan by delivering to the Trustee and Administrator written notice of such termination. Upon any full termination, all amounts credited to the affected Participants' Accounts shall become 100% Vested as provided in Section 7.4 and shall not thereafter be subject to forfeiture, and all unallocated amounts shall be allocated to the accounts of all Participants in accordance with the provisions hereof. (b) Upon the full termination of the Plan, the Employer shall direct the distribution of the assets of the Trust Fund to Participants in a manner which is consistent with and satisfies the provisions of Sections 7.5 and 7.6. Except as permitted by Regulations, the termination of the Plan shall not result in the reductions of "Section 411(d)(6) protected benefits" in accordance with Section 9.1(c). 9.3 MERGER OR CONSOLIDATION This Plan and Trust may be merged or consolidated with, receive assets and/or assume liabilities from, or transfer assets and/or liabilities to, any other plan and trust only if the benefits which would be received by a Participant of this Plan or of the other Plan, in the event of a termination of either Plan immediately after such transfer, merger or consolidation, are at least equal to the benefits the Participant would have received if such Plan had terminated immediately before the transfer, merger or consolidation, and such transfer, merger or consolidation does not otherwise result in the elimination or reduction of any "Section 411(d)(6) protected benefits" in accordance with Section 9.1(c). ARTICLE X MISCELLANEOUS 10.1 PARTICIPANT'S RIGHTS This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon him as a Participant of this Plan. 75 119 10.2 ALIENATION (a) Subject to the exceptions provided below, no benefit which shall be payable out of the Trust Fund to any person (including a Participant or his Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized by the Trustee, except to such extent as may be required by law. (b) This provision shall not apply to the extent a Participant or Beneficiary is indebted to the Plan, for any reason, under any provision of the Plan. At the time a distribution is to be made to or for a Participant's or Beneficiary's benefit, such proportion of the amount distributed as shall equal such indebtedness shall be paid by the Trustee to the Trustee or the Administrator, at the direction of the Administrator, to apply against or discharge such indebtedness. Prior to making a payment, however, the Participant or Beneficiary must be given written notice by the Administrator that such indebtedness is to be so paid in whole or part from his Participant's Account. If the Participant or Beneficiary does not agree that the indebtedness is a valid claim against his Vested Participant's Account, he shall be entitled to a review of the validity of the claim in accordance with procedures provided in Sections 2.12 and 2.13. (c) This provision shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), and those other domestic relations orders permitted to be so treated by the Administrator under the provisions of the Retirement Equity Act of 1984. The Administrator shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Further, to the extent provided under a "qualified domestic relations order", a former spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan. 10.3 CONSTRUCTION OF PLAN This Plan and Trust shall be construed and enforced according to the Act and the laws of the State of Texas, other than its laws respecting choice of law, to the extent not preempted by the Act. 10.4 GENDER AND NUMBER Wherever any words are used herein in the masculine, feminine or neuter gender, they shall be construed as though they were also 76 120 used in another gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply. 10.5 LEGAL ACTION In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee or the Administrator may be a party, and such claim, suit, or proceeding is resolved in favor of the Trustee or Administrator, they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable. 10.6 PROHIBITION AGAINST DIVERSION OF FUNDS (a) Except as provided below and otherwise specifically permitted by law, it shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any trust fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of Participants, Retired Participants, or their Beneficiaries. (b) In the event the Employer shall make an excessive contribution under a mistake of fact pursuant to Section 403(c)(2)(A) of the Act, the Employer may demand repayment of such excessive contribution at any time within one (1) year following the time of payment and the Trustees shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the excess contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned. 10.7 BONDING Every Fiduciary, except a bank or an insurance company, unless exempted by the Act and regulations thereunder, shall be bonded in an amount not less than 10% of the amount of the funds such Fiduciary handles; provided, however, that the minimum bond shall be $1,000 and the maximum bond, $500,000. The amount of funds handled shall be determined at the beginning of each Plan Year by the amount of funds handled by such person, group, or class to be covered and their predecessors, if any, during the preceding Plan Year, or if there is no preceding Plan Year, then by the amount of the funds to be handled during the then current year. The bond shall provide protection to the Plan against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in connivance with others. The surety shall be a corporate surety 77 121 company (as such term is used in Section 412(a)(2) of the Act), and the bond shall be in a form approved by the Secretary of Labor. Notwithstanding anything in the Plan to the contrary, the cost of such bonds shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund or by the Employer. 10.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE Neither the Employer nor the Trustee, nor their successors, shall be responsible for the validity of any Contract issued hereunder or for the failure on the part of the insurer to make payments provided by any such Contract, or for the action of any person which may delay payment or render a Contract null and void or unenforceable in whole or in part. 10.9 INSURER'S PROTECTIVE CLAUSE Any insurer who shall issue Contracts hereunder shall not have any responsibility for the validity of the Plan or for the tax or legal aspects of this Plan. The insurer shall be protected and held harmless in acting in accordance with any written direction of the trustee, and shall have no duty to see to the application of any funds paid to the Trustee, nor be required to question any actions directed by the Trustee. Regardless of any provision of this Plan, the insurer shall not be required to take or permit any action or allow any benefit or privilege contrary to the terms of any Contract which it issues hereunder, or the rules of the insurer. 10.10 RECEIPT AND RELEASE FOR PAYMENTS Any payment to any Participant, his legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of the Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer, either of whom may require such Participant, legal representative, Beneficiary, guardian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee or Employer. 10.11 ACTION BY THE EMPLOYER Whenever the Employer under the terms of the Plan is permitted or required to do or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority. 10.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY The "named Fiduciaries" of this Plan are (1) the Employer, (2) the Administrator and (3) the Trustee. The named Fiduciaries 78 122 shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under the Plan. In general, the Employer shall have the sole responsibility for making the contributions provided for under Section 4.1; and shall have the sole authority to appoint and remove the Trustee and the Administrator; to formulate the Plan's "funding policy and method"; and to amend or terminate, in whole or in part, the Plan. The Administrator shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described in the Plan. The Trustee shall have the responsibility of management of the assets held under the Trust, subject however, to Sections 8.5 and 8.6. Each named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan, authorizing or providing for such direction, information or action. Furthermore, each named Fiduciary may rely upon any such direction, information or action of another named Fiduciary as being proper under the Plan, and is not required under the Plan to inquire into the propriety of any such direction, information or action. It is intended under the Plan that each named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan. No named Fiduciary shall guarantee the Trust Fund in any manner against investment loss or depreciation in asset value. Any person or group may serve in more than one Fiduciary capacity. 10.13 HEADINGS The headings and subheadings of this Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 10.14 APPROVAL BY INTERNAL REVENUE SERVICE (a) Notwithstanding anything herein to the contrary, contributions to this Plan are conditioned upon the initial qualification of the Plan under Code Section 401. If the Plan receives an adverse determination with respect to its initial qualification, then the Plan may return such contributions to the Employer within one year after such determination, provided the application for the determination is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan was adopted, or such later date as the Secretary of the Treasury may prescribe. (b) Notwithstanding any provisions to the contrary, except Sections 3.6, 3.7, and 4.1(c), any contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may, within one (1) year following the disallowance of the deduction, demand repayment of such disallowed contribution and the Trustee shall return such 79 123 contribution within one (1) year following the disallowance. Earnings of the Plan attributable to the excess contribution may not be returned by the Employer, but any losses attributable thereto must reduce the amount so returned. 10.15 UNIFORMITY All provisions of this Plan shall be interpreted and applied in a uniform, nondiscriminatory manner. 10.16 SECURITIES AND EXCHANGE COMMISSION APPROVAL The Employer may request an interpretative letter from the Securities and Exchange Commission stating that the transfers of Company Stock contemplated hereunder do not involve transactions requiring a registration of such Company Stock under the Securities Act of 1933. In the event that a favorable interpretative letter is not obtained, the Employer reserves the right to amend the Plan and Trust retroactively to their Effective Dates in order to obtain a favorable interpretative letter or to terminate the Plan. 10.17 VOTING COMPANY STOCK The Trustee shall vote all Company Stock held by it as part of the Plan assets at such time and in such manner as the Administrator shall direct. Provided, however, that if any agreement entered into by the Trust provides for voting of any shares of Company Stock pledged as security for any obligation of the Plan, then such shares of Company Stock shall be voted in accordance with such agreement. If the Administrator fails or refuses to give the Trustee timely instructions as to how to vote any Company Stock as to which the Trustee otherwise has the right to vote, the Trustee shall not exercise its power to vote such Company Stock and shall consider the Administrator's failure or refusal to give timely instructions as an exercise of the Administrator's rights and a directive to the Trustee not to vote said Company Stock. The Trustee shall not vote Company Stock which a Participant or Beneficiary, pursuant to this Section, fails to exercise. If the Employer does not have a registration-type class of securities and the by-laws of the Employer require the Plan to vote an issue in a manner that reflects a one-man, one-vote philosophy, each Participant or Beneficiary shall be entitled to cast one vote on an issue and the Trustee shall vote the shares held by the Plan in proportion to the results of the votes cast on the issue by the Participants and Beneficiaries. 80 124 ARTICLE XI PARTICIPATING EMPLOYERS 11.1 ADOPTION BY OTHER EMPLOYERS Notwithstanding anything herein to the contrary, with the consent of the Employer and Trustee, any other corporation or entity, whether an affiliate or subsidiary or not, may adopt this Plan and all of the provisions hereof, and participate herein and be known as a Participating Employer, by a properly executed document evidencing said intent and will of such Participating Employer. 11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS (a) Each such Participating Employer shall be required to use the same Trustee as provided in this Plan. (b) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. However, the assets of the Plan shall, on an ongoing basis, be available to pay benefits to all Participants and Beneficiaries under the Plan without regard to the Employer or Participating Employer or who contributed such assets. (c) The transfer of any Participant from or to an Employer participating in this Plan, whether he be an Employee of the Employer or a Participating Employer, shall not affect such Participant's rights under the Plan, and all amounts credited to such Participant's Account as well as his accumulated service time with the transferor or predecessor, and his length of participation in the Plan shall continue to his credit. (d) All rights and values forfeited by termination of employment shall inure only to the benefit of the Participants of the Employer or Participating Employer by which the forfeiting Participant was employed. (e) Any expenses of the Trust which are to be paid by the Employer or borne by the Trust Fund shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants. 11.3 DESIGNATION OF AGENT Each Participating Employer shall be deemed to be a part of this Plan; provided, however, that with respect to all of its relations with the Trustee and Administrator for the purpose of this Plan, each Participating Employer shall be deemed to have 81 125 designated irrevocably the Employer as its agent. Unless the context of the Plan clearly indicates the contrary, the word "Employer" shall be deemed to include each Participating Employer as related to its adoption of the Plan. 11.4 EMPLOYEE TRANSFERS It is anticipated that an Employee may be transferred between Participating Employers, and in the event of any such transfer, the Employee involved shall carry with him his accumulated service and eligibility. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred. A Participant's Account in the Plan shall not be transferred between Participating Employers if the Account is not fully vested. 11.5 PARTICIPATING EMPLOYER'S CONTRIBUTION All contributions made by a Participating Employer, as provided for in this Plan shall be determined separately by each Participating Employer, and shall be paid to and held by the Trustee for the exclusive benefit of the Employees of such Participating Employer and the Beneficiaries of such Employees, subject to all the terms and conditions of this Plan. On the basis of the information furnished by the Administrator, the Trustee shall keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the accounts and credits of the Employees of each Participating Employer. The Trustee may, but need not, register Contracts so as to evidence that a particular Participating Employer is the interested Employer hereunder, but in the event of any Employee transfer from one Participating Employer to another, the employing Employer shall immediately notify the Trustee thereof. 11.6 AMENDMENT Amendment of this Plan by the Employer at any time when there shall be a Participating Employer hereunder shall only be by the written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary in accordance with the terms of this Plan. 11.7 DISCONTINUANCE OF PARTICIPATION Any Participating Employer shall be permitted to discontinue or revoke its participation in the Plan. At the time of any such discontinuance or revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts and other Trust Fund assets allocable to the Participants 82 126 of such Participating Employer to such new Trustee as shall have been designated by such Participating Employer, in the event that it has established a separate pension plan for its Employees provided, however, that no such transfer shall be made if the result is the elimination or reduction of any "Section 411(d)(6) protected benefits" in accordance with Section 9.1(c). If no successor is designated, the Trustee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of Article VII hereof. In no such event shall any part of the corpus or income of the Trust as it relates to such Participating Employer be used for or diverted for purposes other than for the exclusive benefit of the Employees of such Participating Employer. 11.8 ADMINISTRATOR'S AUTHORITY The Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Participating Employers and all Participants, to effectuate the purpose of this Article. 11.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE If any Participating Employer is prevented in whole or in part from making a contribution to the Trust Fund which it would otherwise have made under the Plan by reason of having no current or accumulated earnings or profits, or because such earnings or profits are less than the contribution which it would otherwise have made, then, pursuant to Code Section 404(a)(3)(B), so much of the contribution which such Participating Employer was so prevented from making may be made, for the benefit of the participating employees of such Participating Employer, by the other Participating Employers who are members of the same affiliated group within the meaning of Code Section 1504 to the extent of their current or accumulated earnings or profits, except that such contribution by each such other Participating Employer shall be limited to the proportion of its total current and accumulated earnings or profits remaining after adjustment for its contribution to the Plan made without regard to this paragraph which the total prevented contribution bears to the total current and accumulated earnings or profits of all the Participating Employers remaining after adjustment for all contributions made to the Plan without regard to this paragraph. A Participating Employer on behalf of whose employees a contribution is made under this paragraph shall not reimburse the contributing Participating Employers. 83 127 IN WITNESS WHEREOF, this Plan has been executed the day and year first above written. SEPCO INDUSTRIES, INC.: SOUTHERN ENGINE & PUMP COMPANY By /s/ [ILLEGIBLE] By /s/ [ILLEGIBLE] ----------------------------------- ----------------------------------- President President WESCO EQUIPMENT, INC. T.L. WALKER BEARING CO. By /s/ [ILLEGIBLE] By /s/ [ILLEGIBLE] ----------------------------------- ----------------------------------- President President THE NORTHERN TRUST COMPANY OF TEXAS By ----------------------------------- for the Trustee 84 128 AMENDMENT NUMBER ONE TO SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN By This Agreement, SEPCO INDUSTRIES, INC. Employee Stock Ownership Plan (herein referred to as the "Plan") is hereby amended as follows, effective as of January 1, 1993: 1. Section 1.10 is amended to read as follows: 1.10 "Compensation" with respect to any Participant means such Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the Employer (in the course of the Employer's trade or business) for a Plan Year for which the Employer is required to furnish the Participant a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). For purposes of this Section, the determination of Compensation shall be made by: (a) including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(a)(8), 402(h), 403(b) or 457, and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. For a Participant's initial year of participation, Compensation shall be recognized as of such Employee's effective date of participation. Compensation in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Plan Year the Compensation limit shall be an amount equal to the Compensation limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among the affected Family Members in proportion to each such Family Member's Compensation prior to the application of this limitation, or the limitation shall be adjusted in accordance with any other method permitted by Regulations. For purposes of determining the portion of the Compensation of a Family Member which is below the integration level for purposes of Code Section 401(1), the preceding sentence shall not apply. If, as a result of such rules, the maximum "annual addition" limit would be exceeded for one or more of the affected Family Members, the prorated Compensation of all affected Family Members shall be adjusted to avoid or reduce any excess. The prorated Compensation of any affected Family Member whose allocation would exceed the limit shall be adjusted downward to the level needed to provide an allocation equal to such limit. The prorated Compensation of affected Family Members not affected by such limit shall then be adjusted upward on a pro rata basis not to exceed each such affected Family Member's Compensation as determined prior to application of the Family Member rule. The resulting allocation shall not exceed such individual's maximum "annual addition" limit. If, after these adjustments, an "excess amount" still results, such "excess amount" shall be disposed of pro rata among all affected Family Members. 129 In addition to other applicable limitations set forth above, and notwithstanding any other provision of the plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual compensation of each employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applied to any period, not exceeding 12 months, over which compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision. If compensation for any prior determination period is taken into account in determining an employee's benefits accruing in the current Plan Year, the compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. 2. Section 1.23 is amended to read as follows: 1.23 "415 Compensation" with respect to any Participant means such Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the Employer (in the course of the Employer's trade or business) for a Plan year for which the Employer is required to furnish the participant a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. "415 Compensation" must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). 3. Section 1.24 is amended to read as follows: 1.24 "414(s) Compensation" with respect to any Participant means such Participant's "415 Compensation" paid during a Plan Year. The amount of "414(s) Compensation" with respect to any Participant shall include "414(s) Compensation" for the entire twelve (12) month period ending on the last day of such Plan Year, except that "414(s) Compensation" shall only be recognized for that portion of the Plan Year during which an Employee was a Participant in the Plan. For purposes of this Section, the determination of "414(s) Compensation" shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(a)(8), 402(h), 403(b) or 457, and the Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. "414(s) Compensation" in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Plan Year the "414(s) Compensation" limit shall be an amount equal to the "414(s) Compensation" limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In applying this limitation, the family group of a Highly 2 130 Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. 4. Article VII is amended by the addition of the following section after Section 7.15: DIRECT ROLLOVER (a) This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) For the purposes of this Section the following definitions shall apply: (1) An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (2) An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, and eligible retirement plan is an individual retirement account or individual retirement annuity. (3) A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. 3 131 (4) A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. IN WITNESS WHEREOF, this Amendment has been executed this 6th day of September, 1994. SEPCO INDUSTRIES, INC. By: /s/ DAVID R. LITTLE ----------------------------------- David R. Little Title: Chairman of the Board -------------------------------- Date: 9-6-94 --------------------------------- 4 132 SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP SUMMARY PLAN DESCRIPTION SEPCO INDUSTRIES, INC. 6500 Brittmore Houston, Texas 77041 (713) 937-0330 133 SUMMARY OF MATERIAL MODIFICATIONS SUPPLEMENT TO SUMMARY PLAN DESCRIPTION SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN The following is a non-technical explanation of certain provisions of the Sepco Industries, Inc. Employee Stock Ownership Plan which were changed effective January 1, 1996. This Summary of Material Modifications should be read as a supplement to the Summary Plan Description which was given to you previously. The Plan and Trust, a copy of which is on file in the Office of the Plan Administrator, is controlling as to all matters relating to the Plan. 1. Section III, PARTICIPATION IN THE PLAN, is amended by deleting item number 1 in its entirety and replacing it with the following: You will be eligible to participate in the Plan on the date of your employment. 2. Section IV, TRANSFERS FROM QUALIFIED PLANS (ROLLOVERS), is deleted in its entirety. The Plan will not permit you to deposit into the Plan distributions received from other plans. 134 TABLE OF CONTENTS I. INTRODUCTION TO THE PLAN II. GENERAL INFORMATION ABOUT THE PLAN 1. General Plan Information 1 2. Employer Information 1 3. Plan Administrator Information 2 4. Plan Trustee Information 2 5. Service of Legal Process 2 III. PARTICIPATION IN THE PLAN 1. Eligibility Requirements 3 2. Participation Requirements 3 IV. CONTRIBUTIONS TO THE PLAN 1. Employer Contributions to the Plan 3 2. Your Share of Employer Contributions 3 3. Compensation 4 4. Forfeitures 4 5. Transfers from Qualified Plans (Rollovers) 4 6. Directed Investments 5 V. BENEFITS UNDER THE PLAN 1. Distribution of Benefits Upon Normal Retirement 5 2. Distribution of Benefits Upon Death 5 3. Distribution of Benefits Upon Disability 6 4. Distribution of Benefits Upon Termination of Employment 6 5. Vesting in the Plan 6 6. Benefit Payment Options 7 7. Automatic Survivor Benefits 8 8. Treatment of Distributions from the Plan 8 9. Domestic Relations Order 8 10. Pension Benefit Guaranty Corporation 9
135 VI. INFORMATION REGARDING COMPANY STOCK 1. Voting Company Stock 9 2. Right of First Refusal 9 3. Put Option 9 VII. YEAR OF SERVICE RULES 1. Year of Service and Hour of Service 10 2. 1-Year Break in Service 10 VIII. THE PLAN'S "TOP HEAVY RULES" 1. Explanation of "Top Heavy Rules" 11 IX. LOANS 1. Loan Requirements 12 X. CLAIMS BY PARTICIPANTS AND BENEFICIARIES 1. The Claims Review Procedure 13 XI. STATEMENT OF ERISA RIGHTS 1. Explanation of Your ERISA Rights 14 XII. AMENDMENT AND TERMINATION OF THE PLAN 1. Amendment 16 2. Termination 16
136 SUMMARY PLAN DESCRIPTION I. INTRODUCTION TO THE PLAN This Summary Plan Description is a brief description of the Plan and your rights, obligations, and benefits under the Plan. It is not meant to interpret, extend, or change the provisions of the Plan in any way. A copy of the Plan and the Adoption Agreement are on file at your Employer's office and may be read by you, your beneficiaries, or your legal representatives at any reasonable time. If you have any questions regarding either the Plan, the Adoption Agreement or this Summary Plan Description, you should ask the Plan Administrator. In the event of any discrepancy between this Summary Plan Description and the actual provisions of the Plan, the Plan will govern. II. GENERAL INFORMATION ABOUT THE PLAN 1. GENERAL PLAN INFORMATION Sepco Industries, Inc. Employee Stock Ownership Plan is the name of your Plan. The Plan Number is 001. The amended and restated provisions of the Plan became effective on January 1, 1989. The Plan Year begins on January 1 ends on December 31. The Anniversary Date of the Plan is December 31. Contributions made to the Plan are held and invested by the Trustee. The Plan and Trust will be governed by the laws of the state of Texas. 2. EMPLOYER INFORMATION The sponsoring Employer's name, address and identification number are: Sepco Industries, Inc. P.O. Box 1697 Houston, Texas 77251-1697 74-0909900 137 The Plan allows other employers to adopt its provisions. You or your beneficiaries may examine or obtain a complete list of employers, if any, who have adopted the Plan by making a written request to the Administrator. 3. PLAN ADMINISTRATOR INFORMATION The name, address, and business telephone number of the Plan's Administrator are: David R. Little P.O. Box 1697 Houston, Texas 77251-1697 (713) 937-0330 The Plan Administrator keeps the records for the Plan and is responsible for the administration of the Plan. The Administrator has discretionary authority to construe the terms of the Plan and make determinations on questions which may affect your eligibility for benefits. 4. PLAN TRUSTEE INFORMATION The name and address of the Plan's Trustee(s) are: River Oaks Trust Company 2001 Kirby at San Felipe Houston, Texas 77019 The Trustee has been designated to hold and invest Plan assets for the benefit of Plan participants. The trust fund established by the Plan's Trustee will be the funding medium used for the accumulation of assets from which benefits will be distributed. 5. SERVICE OF LEGAL PROCESS The name and address of the Plan's agent for service of legal process are: David R. Little P.O. Box 1697 Houston, Texas 77251-1697 Service of legal process may also be made upon the Trustee or Administrator. 2 138 III. PARTICIPATION IN THE PLAN 1. ELIGIBILITY REQUIREMENTS You will be eligible to participate in the Plan if you have completed one (1) Year of Service. You should review the Article in this Summary entitled YEAR OF SERVICE RULES for a further explanation of these eligibility requirements. 2. PARTICIPATION REQUIREMENTS Once you have satisfied your Plan's eligibility requirements, you will become a participant on the earlier of the first day of the Plan Year or the first day of the seventh month of the Plan year coinciding with or next following the date you meet the Plan's eligibility requirements. IV. CONTRIBUTIONS TO THE PLAN 1. EMPLOYER CONTRIBUTIONS TO THE PLAN Each year, your Employer will determine the amount, if any, to contribute to the Plan. This contribution is discretionary and is subject to the following requirement: o You must complete a Year of Service in order to share in this contribution. This rule may have been different for Plan Years beginning prior to 1990. You should refer to any prior Summary Plan Description or your Administrator if you have any questions. 2. YOUR SHARE OF EMPLOYER CONTRIBUTIONS The contribution will be "allocated" to the accounts of participants eligible to share in the contribution for the Plan Year. A participant's share of the contribution will depend upon how much compensation he or she received during the year and the compensation received by other eligible participants. 3 139 Your share of the Employer's discretionary contribution is determined as follows: Your Compensation Employer's X ------------------------- Discretionary Contribution Total Compensation of All Participants Eligible to Share In addition to the Employer's contribution made to your account, your account will be credited annually with a pro rata share of the investment earnings or losses of the trust fund. 3. COMPENSATION For Plan purposes, compensation has a special meaning. Compensation is defined as your W-2 compensation actually paid during a Plan Year. Salary reduction contributions to any cafeteria plan, tax sheltered annuity, SEP or 401(k) Plan will be included as compensation for Plan purposes. Your compensation will be recognized for benefit purposes from your date of entry into the Plan. Effective January 1, 1994, the Plan, by law, cannot recognize compensation in excess of $150,000. This amount will be adjusted for cost of living increases. It will also be applied to certain highly compensated employees and their family members as if they were a single participant. 4. FORFEITURES Forfeitures are created when participants terminate employment before becoming entitled to their full benefits under the Plan. Your account may grow from the forfeitures of other participants. Forfeitures will be "allocated" or divided among participants eligible to share in Employer Contributions for a Plan Year. 5. TRANSFERS FROM QUALIFIED PLANS (ROLLOVERS) At the discretion of the Administrator, you may be permitted to deposit into the Plan distributions received from other plans. Such a deposit is called a "rollover" and may result in tax savings to you. Your rollover will be placed in a separate account, will always be 100% vested, and will receive allocations of investment gains or losses. 4 140 6. DIRECTED INVESTMENTS The Administrator may establish rules for investment of your account balance. If the Administrator approves, you may direct the Trustee as to the investment of your account balance. V. BENEFITS UNDER YOUR PLAN 1. DISTRIBUTION OF BENEFITS UPON NORMAL RETIREMENT Your Normal Retirement Date is the first day of the month coinciding with or next following your 65th birthday (Normal Retirement Age). At your Normal Retirement Age, you will be entitled to 100% of your account balance. Payment of your benefits will begin as soon as practicable following your Normal Retirement Date. 2. DISTRIBUTION OF BENEFITS UPON DEATH Your beneficiary will be entitled to 100% of your account balance upon your death. If you are married at the time of your death, your spouse will be the beneficiary of the death benefit, unless you otherwise elect in writing on a form to be furnished to you by the Administrator. IF YOU WISH TO DESIGNATE A BENEFICIARY OTHER THAN YOUR SPOUSE, HOWEVER, YOUR SPOUSE MUST IRREVOCABLY CONSENT TO WAIVE ANY RIGHT TO THE DEATH BENEFIT. YOUR SPOUSE'S CONSENT MUST BE IN WRITING, BE WITNESSED BY A NOTARY PUBLIC OR A PLAN REPRESENTATIVE AND ACKNOWLEDGE THE SPECIFIC NONSPOUSE BENEFICIARY. If, however, (a) your spouse has validly waived any right to the death benefit in the manner outlined above, (b) your spouse cannot be located; or (c) you are not married at the time of your death, then your death benefit will be paid to the beneficiary of your own choosing in installments or as a single lump sum, as you or your beneficiary may elect. You may designate the beneficiary on a form to be supplied to you by the Administrator. If you change your designation, your spouse must again consent to the change. 5 141 Your entire death benefit must generally be paid to your beneficiaries within five years after your death. However, your beneficiary may elect to have minimum distributions begin within one year of your death paid over the designated beneficiary's life expectancy. If your spouse is the beneficiary, the start of payments may be delayed until the year in which you would have attained age 70 1/2. The election to have death benefits distributed must be made no later than the time at which minimum distributions must commence. Since your spouse participates in these elections and has certain rights in the death benefit, you should immediately report any change in your marital status to the Administrator. 3. DISTRIBUTION OF BENEFITS UPON DISABILITY Disability is defined as a physical or mental condition resulting from bodily injury, disease, or mental disorder which renders you incapable of continuing any gainful occupation with your Employer. Your Disability will be determined by a licensed physician chosen by the Administrator. However, if a condition constitutes total disability under the Federal Social Security Act, then the Administrator may deem that you are disabled for purposes of the Plan. If you become disabled while a participant, you will be entitled to 100% of your account balance. Payment of your disability benefits will be made to you as if you had retired. 4. DISTRIBUTION OF BENEFITS UPON TERMINATION OF EMPLOYMENT The Plan is designed to encourage you to stay with your Employer until retirement. Payment of your account balance under the Plan is only available upon your death, disability or retirement. If your employment terminates for other reasons, however, you will be entitled to receive only the "vested percentage" of your account balance and the remainder of your account will be forfeited. If you elect to have your vested benefit paid to you before the date of your death, disability or retirement, the Administrator will direct the Trustee to distribute it as soon as practicable following your termination of employment. Under the Plan's administrative procedures, if the value of your vested account is zero, any non-vested account balance will be forfeited immediately. 5. VESTING IN THE PLAN Your "vested percentage" in your account is determined under the following schedule and is based on vesting Years of Service. You will always, however, be 100% vested upon your Normal Retirement Age. 6 142
YEARS OF SERVICE PERCENTAGE 0-2 years 0% 3 years 20% 4 years 40% 5 years 60% 6 years 80% 7 years 100%
Your vested percentage will not be less than your vested percentage under the Plan before this amendment and restatement. Any nonvested amounts will be retained in a segregated account until forfeiture of these amounts occur, in which case, your nonvested amounts will be allocated to the remaining Plan participants. 6. BENEFIT PAYMENT OPTIONS The Administrator, in accordance with your election, will direct the Trustee to pay your benefits to you under one or more of the following options: (a) a single lump-sum payment in cash; or (b) installments over a period of not more than your assumed life expectancy (or you and your beneficiary's assumed life expectancies) determined at the time of distribution. You may also elect to have your life expectancy and the life expectancy of a designated beneficiary who is your spouse recalculated each year. You must make this election before the time that distributions are to begin. Failure to make this election will result in life expectancies not being recalculated. UNLESS YOU ELECT IN WRITING TO DEFER THE RECEIPT OF BENEFITS, NO DISTRIBUTION MAY BEGIN LATER THAN THE 60TH DAY AFTER THE CLOSE OF THE PLAN YEAR IN WHICH THE LATEST OF THE FOLLOWING EVENTS OCCURS: (a) the date on which you reach the age of 65 or your Normal Retirement Age; (b) the 10th anniversary of the year in which you became a participant in the Plan; (c) the date you terminated employment with your Employer. 7 143 Regardless of whether you elect to delay the receipt of benefits, there are other rules which generally require minimum payments to begin no later than the April 1st following the year in which you reach age 70 1/2. You should see the Administrator if you feel you may be affected by this rule. 7. AUTOMATIC SURVIVOR BENEFITS If you are a Participant in this Plan and have transferred benefits that are subject to Internal Revenue Code requirements regarding joint and survivor annuities, special distribution rules apply. Please contact the Plan Administrator to obtain more information regarding these rules. 8. TREATMENT OF DISTRIBUTIONS FROM THE PLAN Whenever you receive a distribution from your Plan, it will normally be subject to income taxes. You may, however, reduce, or defer entirely, the tax due on your distribution through use of one of the following methods: (a) The direct rollover of all or a portion of the distribution to an Individual Retirement Account (IRA) or another qualified employer plan. (b) The election of favorable income tax treatment under "10-year forward averaging", "5-year forward averaging" or, if you qualify, "capital gains" method of taxation. WHENEVER YOU ARE ELIGIBLE TO RECEIVE A DISTRIBUTION, THE ADMINISTRATOR WILL DELIVER TO YOU A MORE DETAILED EXPLANATION OF THESE OPTIONS. HOWEVER, THE RULES WHICH DETERMINE WHETHER YOU QUALIFY FOR FAVORABLE TAX TREATMENT ARE VERY COMPLEX AND HAVE BEEN GREATLY AFFECTED BY THE TAX REFORM ACT OF 1986 AND SUBSEQUENT LEGISLATION. YOU SHOULD CONSULT WITH A TAX ADVISOR BEFORE MAKING A CHOICE. 9. DOMESTIC RELATIONS ORDER As a general rule, your account may not be alienated. This means that your interest may not be sold, used as collateral for a loan, given away or otherwise transferred. In addition, your creditors may not attach, garnish or otherwise interfere with your account. There is an exception, however, to this general rule. The Administrator must honor a "qualified domestic relations order." A "qualified domestic relations order" is defined as a decree or order issued by a court that obligates you to pay child support or alimony, or otherwise allocates a portion of your assets in the Plan to your spouse, former spouse, child or other dependent. If a qualified domestic relations order is received by the Administrator, all or a portion of your benefits may be used to satisfy the obligation. The Administrator will determine the validity of any domestic relations order received. 8 144 10. PENSION BENEFIT GUARANTY CORPORATION Benefits provided by your Plan are not insured by the Pension Benefit Guaranty Corporation (PBGC) under Title IV of the Employee Retirement Income Security Act of 1974 because the insurance provisions under ERISA are not applicable to the Plan. VI. INFORMATION REGARDING COMPANY STOCK 1. VOTING COMPANY STOCK The Trustee of the Plan will vote all Company stock held by it as a part of the Plan assets, provided that you or your beneficiary will be entitled to direct the Trustee as to the manner in which voting rights on shares of Company Stock which are allocated to your account are expected to be exercised (i) with respect to any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction, and (ii) with respect to all corporate matters pertaining to Company Stock acquired by, or transferred to the Plan in connection with a securities acquisition loan after July 10, 1989 or, if, at the time of the vote, the Company Stock is a "registration-type" class of securities. 2. RIGHT OF FIRST REFUSAL Company Stock distributed by the Plan to you or to your beneficiary may be subject to a right of first refusal in favor of the Employer. In other words, the Employer must be given an opportunity to purchase at the same price and under the same terms as you or your beneficiary may offer to sell to a third party. 3. PUT OPTION If the Company Stock distributed to you or your beneficiary cannot be readily sold, then you or your beneficiary will have two put options to the Employer. In other words, you may require the Employer to purchase the stock under a fair valuation formula. The first 60 day put option period will begin on the day following the date your Company Stock is distributed, and if not exercised, the second 60 day option period will begin as of the first day of the fifth month of the Plan Year next following the date your Company Stock was distributed. 9 145 VII. YEAR OF SERVICE RULES 1. YEAR OF SERVICE AND HOUR OF SERVICE The term "Year of Service" is used throughout this Summary Plan Description and throughout the Plan. You will have completed a Year of Service for eligibility purposes if, at the end of your first twelve consecutive months of employment with your Employer, you have been credited with 1000 Hours of Service. If you have not been credited with 1000 Hours of Service by the end of your first twelve consecutive months of employment, you will have completed a Year of Service at the end of any following Plan year during which you were credited with 1000 Hours of Service. You will have completed a Year of Service for vesting purposes if you are credited with 1000 Hours of Service during a Plan Year, even if you were not employed on the first or last day of the Plan Year. You will have completed a Year of Service for purposes of sharing in Employer contributions if you are credited with 1000 Hours of Service during a Plan Year. An "Hour of Service" means: (a) each hour for which you are directly or indirectly compensated by your Employer for the performance of duties during the Plan Year; (b) each hour for which you are directly or indirectly compensated by your Employer for reasons other than performance of duties (such as vacation, holidays, sickness, disability, lay-off, military duty, jury duty or leave of absence during the Plan Year); and (c) each hour for which back pay is awarded or agreed to by your Employer. You will not be credited for the same Hours of Service both under (a) or (b), as the case may be, and under (c). 2. 1-YEAR BREAK IN SERVICE A 1-Year Break in Service is a computation period during which you have not completed more than 500 Hours of Service. You will be credited with Hours of Service for absences taken on account of pregnancy, birth, or adoption of a child. No more than 501 Hours of Service will be 10 146 credited for this purpose and they will be credited solely to avoid your incurring a 1-Year Break in Service. VIII. THE PLAN'S "TOP HEAVY RULES" Key employees are certain owners or officers of your Employer. A Plan is a "top heavy plan" when more than 60% of the contributions or benefits have been allocated to key employees. If the Plan becomes top heavy in any Plan Year, then non-key employees will be entitled to certain "top heavy minimum benefits," and other special rules will apply. Among these top heavy rules are the following: (a) Your Employer may be required to make a contribution equal to 3% of your compensation to your account. (b) Instead of the vesting schedule outlined in the Article and Section in this Summary entitled BENEFITS UNDER YOUR PLAN: Vesting in Your Plan, your nonforfeitable right to benefits or contributions derived from Employer contributions will be determined according to the following schedule:
YEARS OF SERVICE PERCENTAGE 0-1 year 0% 2 years 20% 3 years 40% 4 years 60% 5 years 80% 6 years 100%
(c) If you are a participant in more than one Plan, you may not be entitled to minimum benefits under both Plans. IX. LOANS You may apply to the Administrator for a loan from the Plan. Your application must be in writing on forms which the Administrator will provide to you. The Administrator may also request that you provide additional information, such as financial statements, tax returns and credit reports. After considering your application, the Administrator may, in his or her discretion, determine that you qualify for the loan. The Administrator will inform the Trustee that you qualify. The Trustee may then review the Administrator's determination and make a loan to you if it is a prudent investment for the Plan. 11 147 1. LOAN REQUIREMENTS There are various rules and requirements that apply for any loan. These rules are outlined in this section. In addition, your Employer has established a written loan program which explains these requirements in more detail. You can request a copy of the loan program from the Administrator. Generally, the rules for loans include the following: (a) Loans must be made available to all participants and their beneficiaries on a uniform and non-discriminatory basis. (b) All loans must be adequately secured. The Plan may also require that repayments on the loan obligation be by payroll deduction. (c) All loans must bear a reasonable rate of interest. The interest rate must be one a bank or other professional lender would charge for making a loan in a similar circumstance. (d) All loans must have a definite repayment period which provides for payments to be made not less frequently than quarterly, and for the loan to be amortized on a level basis over a reasonable period of time, not to exceed 5 years. However, if you use the loan to acquire your principal residence, you may repay the loan over a reasonable period of time that may be longer than 5 years. (e) The amount the Plan may loan to you is limited by rules under the Internal Revenue Code. All loans, when added to the outstanding balance of all other loans from the Plan, will be limited to the lesser of: (1) $50,000 reduced by the excess, if any, of your highest outstanding balance of loans from the Plan during the one-year period prior to the date of the loan over your current outstanding balance of loans; or (2) 1/2 of your vested account balance. Also, no loan in an amount less than $1,000 will be made. (f) If you fail to make payments when they are due under the loan, you will be considered to be "in default". The Trustee would then have authority to take all reasonable actions to collect the balance owing on the loan. This could include filing a lawsuit or foreclosing on the security for the loan. Under certain circumstances, a loan that is in default may be considered a distribution from the Plan, and could result in taxable income to you. In any event, your failure to repay a loan will reduce the benefit you would otherwise be entitled to from the Plan. 12 148 X. CLAIMS BY PARTICIPANTS AND BENEFICIARIES Benefits will be paid to participants and their beneficiaries without the necessity of formal claims. You or your beneficiaries, however, may make a request for any Plan benefits to which you may be entitled. Any such request must be made in writing, and it should be made to the Administrator. Your request for Plan benefits will be considered a claim for Plan benefits, and it will be subject to a full and fair review. If your claim is wholly or partially denied, the Administrator will furnish you with a written notice of this denial. This written notice must be provided to you within a reasonable period of time (generally 90 days) after the receipt of your claim by the Administrator. The written notice must contain the following information: (a) the specific reason or reasons for the denial; (b) specific reference to those Plan provisions on which the denial is based; (c) a description of any additional information or material necessary to correct your claim and an explanation of why such material or information is necessary; and (d) appropriate information as to the steps to be taken if you or your beneficiary wishes to submit your claim for review. If notice of the denial of a claim is not furnished to you in accordance with the above within a reasonable period of time, your claim will be deemed denied. You will then be permitted to proceed to the review stage described in the following paragraphs. If your claim has been denied, and you wish to submit your claim for review, you must follow the Claims Review Procedure. (a) Upon the denial of your claim for benefits, you may file your claim for review, in writing, with the Administrator. The form for this claim for review is available from the Employer or Administrator. (b) YOU MUST FILE THE CLAIM FOR REVIEW NO LATER THAN 60 DAYS AFTER YOU HAVE RECEIVED WRITTEN NOTIFICATION OF THE DENIAL OF YOUR CLAIM FOR BENEFITS. (c) You may review all pertinent documents relating to the denial of your claim and submit any issues and comments, in writing, to the Administrator. 13 149 (d) Your claim for review must be given a full and fair review. If your claim is denied, the Administrator must provide you with written notice of this denial within 60 days after the Administrator's receipt of your written claim for review. There may be times when this 60 day period may be extended. This extension may only be made, however, where there are special circumstances which are communicated to you in writing within the 60 day period. If there is an extension, a decision will be made as soon as possible, but not later than 120 days after receipt by the Administrator of your claim for review. (e) The Administrator's decision on your claim for review will be communicated to you in writing and will include specific references to the pertinent Plan provisions on which the decision was based. (f) If the Administrator's decision on review is not furnished to you within the time limitations described above, your claim will be deemed denied on review. (g) If benefits are provided or administered by an insurance company, insurance service, or other similar organization which is subject to regulation under the insurance laws, the claims procedure relating to these benefits may provide for review. If so, that company, service, or organization will be the entity to which claims are addressed. If you have any questions regarding the proper person or entity to address claims, you should ask the Administrator. XI. STATEMENT OF ERISA RIGHTS As a participant in this Plan you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974, also called ERISA. ERISA provides that all Plan participants shall be entitled to: (a) examine, without charge, all Plan documents, including: (1) insurance contracts; (2) collective bargaining agreements; and (3) copies of all documents filed by the Plan with the U.S. Department of Labor, such as detailed annual reports and Plan descriptions. This examination may take place at the Administrator's office and at other specified employment locations of the Employer. (See the Article in this Summary entitled GENERAL INFORMATION ABOUT YOUR PLAN); 14 150 (b) obtain copies of all Plan documents and other Plan information upon written request to the Plan Administrator. The Administrator may make a reasonable charge for the copies; (c) receive a summary of the Plan's annual financial report. The Administrator is required by law to furnish each participant with a copy of this summary annual report; and (d) obtain a statement telling you whether you have a right to receive a retirement benefit at Normal Retirement Age and, if so, what your benefits would be at Normal Retirement Age if you stop working under the Plan now. If you do not have a right to a retirement benefit, the statement will tell you how many years you have to work to get a right to a retirement benefit. THIS STATEMENT MUST BE REQUESTED IN WRITING AND IS NOT REQUIRED TO BE GIVEN MORE THAN ONCE A YEAR. The Plan must provide the statement free of charge. In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of the Plan. The people who operate your Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including your employer or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a pension benefit or exercising your rights under ERISA. If your claim for a retirement benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Administrator review and reconsider your claim. (See the Article in this Summary entitled CLAIMS BY PARTICIPANTS AND BENEFICIARIES.) Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Administrator to provide the materials and pay you up to $100.00 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Administrator. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or Federal court. If the Plan's fiduciaries misuse the Plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a Federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees if, for example, it finds your claim is frivolous. 15 151 If you have any questions about this statement, or about your rights under ERISA, you should contact the nearest Area Office of the U.S. Labor-Management Services Administration, Department of Labor. XII. AMENDMENT AND TERMINATION OF THE PLAN 1. AMENDMENT Your Employer has the right to amend the Plan at any time. In no event, however, will any amendment: (a) authorize or permit any part of the Plan assets to be used for purposes other than the exclusive benefit of participants or their beneficiaries; or (b) cause any reduction in the amount credited to your account. 2. TERMINATION Your Employer has the right to terminate the Plan at any time. Upon termination, all amounts credited to your accounts will become 100% vested. A complete discontinuance of contributions by your Employer will constitute a termination. 16 152 SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN LOAN PROGRAM ROBERT A. FRAHM, P.C. Attorney at Law 1853 Lexington Houston, Texas 77098-4399 FAX: (713) 526-9524 (713) 526-8862 153 PLAN ADMINISTRATOR'S DIRECTIVE PARTICIPANT LOAN PROGRAM SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN Plan Administrator: David R. Little Trustee: River Oaks Trust Company Plan Number: 001 The Plan Administrator and the Trustee, pursuant to provisions of the Plan and Department of Labor Regulation Section 2550.408b-1, adopt the Participant Loan Program, a copy of which is attached hereto this ___ day of __________, 1994. - ----------------------------------- ----------------------------------- River Oaks Trust Company, David R. Little, Trustee Plan Administrator 154 PARTICIPANT LOANS INFORMATION ABOUT THE LOAN PROGRAM FOR THE LOAN ADMINISTRATOR The accompanying loan program is intended to comply with Department of Labor Regulations. It is more restrictive than Internal Revenue Service requirements in some of its provisions. For example, IRS rules allow a loan that is not greater than $10,000 to exceed 50% of the borrower's vested benefit. The loan program does not allow any loan to exceed 50% of the borrower's vested benefit because under DOL regulations any loan that exceeds 50% of the benefit must be secured by collateral other than (or in addition to) the borrower's vested benefit. The loan limitations of the loan program are coordinated with IRS rules that require a loan that exceeds such limitations to be treated as a taxable distribution to the borrower. However, the $1,000 minimum loan limitation is not required. Such limitation is for administrative convenience and may be less, but not more. The loan interest rate may be calculated in any commercially reasonable manner. The DOL requires a return commensurate with the interest rates charged by persons in the business of lending money for loans that would be made under similar circumstances. The IRS generally will approve a percentage tied to the prime rate. If commercially reasonable at a given time, 2% over prime, for example, is acceptable to both the DOL and IRS. Plan loans under the program are treated as general investments of the trust fund. However, it is permissible to earmark a loan to a participant's accrued benefit in a defined contribution plan. Generally, that would not be the case in a defined benefit plan. The DOL apparently will not question the adequacy of security if a loan is earmarked to the borrower's account but may do so in other cases. The safe harbor would be to earmark the loans. It is also permissible to establish a plan loan investment fund in which each loan becomes a part of a separate (pooled) fund and each borrower is treated as having his account invested in such fund to the extent of the money borrowed. This allows each borrower to realize an average rate of return on his loan instead of the rate he pays. Generally, loan funds or earmarked loans increase administrative costs which, if reasonable, may be charged to the borrower's account. The Loan Program should specifically provide for special treatment of loans if earmarked loans, or loan funds, are to be structured. 155 Loans may not be made to a person whose relationship to the Plan Sponsor (or related entity) is that of a self-employed individual, a partner owning more than a 10% partnership interest, a shareholder owning more than 5% of the stock of an S Corporation or members of the family (ascendants, descendants and collaterals) of such persons, without adverse tax consequences. Loans may also be restricted so as to be available only for specific uses. The accompanying loan program is intended to apply to corporate sponsored plans. The Participant Loan Program, consisting of four pages, the Loan Application, and the Payroll Deduction Authorization, may be copied and given to, and used by, Plan participants. The other worksheets and this information are for the Plan Administrator's use. Please contact the undersigned if you require additional information or loan documents. ROBERT A. FRAHM & ASSOCIATES By /s/ RICK HARWELL ----------------------------------- for Robert A. Frahm 156 SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN PARTICIPANT LOAN PROGRAM The Loan Program. This loan program applies to loans from the Plan named above to Plan participants and beneficiaries herein specified. The Plan Administrator is responsible for administering the loan program. He may delegate or assign responsibility for administering the loan program to another person in accordance with the provisions of the Plan authorizing the delegation or assignment of fiduciary duties. The loan program will be carried out and administered in accordance with Section 408 of the Employee Retirement Income Security Act of 1974, as amended (the Act), regulations of the Department of Labor published thereunder, and other relevant provisions of the Act and of the Internal Revenue Code, the Plan and this Loan Program. The person administering the loan program is a fiduciary and will be known as the "Loan Administrator." Availability of Loans. Loans from the Plan will be available to eligible participants. An "eligible participant" is a participant or beneficiary who is a party-in-interest as defined in the Act (Section 3(14)). A party-in-interest includes, among others, a current employee of the employer (whose employees are covered by the Plan), and each former employee and Plan beneficiary who is an officer, owner, or director, fiduciary, counsel, or service provider, and their relatives as defined in the Act (spouse, ancestor, lineal descendant and his/her spouse, (Section 3(15)). Loans must be available to eligible participants without regard to any individual's race, color, religion, sex, age or national origin. All loans will be arranged and approved by the Loan Administrator in the interest of the eligible participants and for the exclusive purpose of providing benefits to such participants. Loans will not be made available to highly compensated employees in an amount that is greater than the amount (percentage of accrued benefit) available to other employees. A more than 5% shareholder-employee of an S Corporation is not an eligible employee nor is a self-employed individual or a more than 10% partner in a partnership, or their family members (ascendants, decendants and collaterals). Loan Application. An eligible participant may apply for a loan to the Loan Administrator on a form provided for such purpose or in any other written form. The application will specify the amount of the loan requested, the proposed terms for repayment and the interest rate. The application will specify the purpose of the loan and may include any other information the applicant cares to provide. If the Loan Administrator finds that the applicant is an eligible participant and that the terms of this loan program are complied with he will approve and authorize the loan. Otherwise, he will deny the loan and advise the applicant in writing of the reason for the denial. The Loan Administrator may deny a loan if such loan is not in the best interest of all Plan participants or is not a prudent investment in view of the liquidity needs of the Plan or other relevant investment criteria, 157 provided, however, that the availability of a loan to an eligible participant will not be unreasonably withheld. If the loan is approved, the loan proceeds will be disbursed to the borrower upon satisfactory execution of the loan documents. Loan Amount. If an eligible participant has or applies for more than one loan, all loans will be aggregated for the purpose of applying the loan limitation. All plans in which an eligible participant has an accrued benefit will be aggregated for the purpose of applying the loan limitation. No loan will be allowed if such loan, when aggregated with all other loans to an eligible participant, exceeds the loan limitation. The loan limitation as to an eligible participant is the lesser of (a) or (b) where (a) is $50,000 (1) reduced by the excess (if any) of the highest loan balance from the Plan during the one-year period ending on the day before the date on which the loan is made (2), over the outstanding balance of loans to the eligible participant from the Plan on the date on which the loan is made (3) and (b) is one-half of the eligible participant's vested accrued benefit as of the valuation date next preceding the date of the loan application (4). Example: First step (1) $50,000 Second step Highest loan balance in prior 12 months (2) 30,000 Current loan balance (3) (25,000) Difference (5,000) Loan limitation (a) 45,000 Third step 1/2 of vested accrued benefit (4); loan limitation (b) 40,000 Fourth step lesser of (a) or (b) 40,000 Fifth step Current loan balance (3) (25,000) -------- Loan Limitation $ 15,000 ========
Loans of less than $1000 are not permitted. 2 158 Loan Term. The term of a loan may not exceed five years except in the case of a loan that is used to acquire a dwelling unit which will be used within nine months as the principal residence of the borrower, in which event the term of the loan may not exceed ten years. Each loan will be amortized in substantially equal payments, made not less often than quarterly, over the term of the loan. Loans may be repaid by payroll deductions. Loan Collateral. All loans will be secured by the borrower's vested accrued benefit in the Plan. No other collateral will be required. Loan Interest. Each loan will bear a reasonable rate of interest commensurate with the rates charged by persons in the business of lending money. The Loan Administrator will ascertain the rate the Plan Sponsor's principal bank would charge a creditworthy customer for a loan secured by direct obligations of the United States having five year or longer maturity as of the date of the loan. The rate charged the borrower for the term of the loan will be the greater of the "bank rate" or 2% over prime as of the date of the loan. In no event will the interest rate exceed the maximum rate that may be charged at the time under the state usury laws. Loan Documents. Each loan will be evidenced by a negotiable promissory note signed by the borrower and, if married, the borrower's spouse will be required to consent to the loan and to the use of the borrower's vested accrued benefit as security for the loan. Such consent must be in writing and obtained within the 90 day period prior to the date the loan proceeds are disbursed. The loan documents will provide for a security interest in the borrower's accrued benefit and will contain customary provisions for acceleration of maturity and attorney fees in the event of default. Loan Default. A default will occur if the borrower fails to make a note payment when due. In such event, the Trustee will make demand for payment and initiate collection procedures which may include filing suit against the borrower. Any expenses incurred by the Trustee in collecting the note will be charged as an administrative cost to the borrower's vested accrued benefit. No distributions from the Plan to the borrower will be permitted unless the note is paid in full or payment is adequately provided for. The Trustee will be authorized to charge all amounts due on the note, including costs of collection, to the borrower's vested accrued benefit and report the same as a distribution to the borrower at such time as the benefit becomes immediately distributable under the terms of the Plan. Loan Administration. Loans will be general investments of the Trust Fund. The Loan Administrator will keep records of all loans and administer the loan program in a uniform and nondiscriminatory manner for the benefit of all participants and beneficiaries in order to assure that the Plan will suffer no loss in the event of a default. To that end he is authorized to construe all provisions of the loan program so as to maintain compliance with applicable government regulations. 3 159 LOAN APPLICATION SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN PLAN LOANS TO PARTICIPANTS AND BENEFICIARIES Date ____________________ Name of Borrower: ____________________________________________ SS No.___________ Address: ______________________________________________________________ ______________________________________________________________ Telephone Number: ______________________ If Borrower is married and the loan is allowed, Borrower's Spouse will be required to sign the loan papers. Name of Spouse: ____________________________________________ SS No.___________ If not married initial here: _____ Eligibility: ___ Current Employee ___ Beneficiary or Former Employee If the latter; write in party-in-interest status (see Loan Program) ______________________________________________________________ Amount/Terms: Amount $________ Vested Accrued Benefit $________ Payment Schedule: ________ Months (1 to 60) (If over 60, see Loan Program) Payment Interval (Circle One): each payday Monthly Quarterly Interest Rate ___% (see Loan Program) Payment Amount $________ Purpose for loan (optional, if loan term within 5 years) (required, if loan term over 5 years): ________________________________________________________________________________ You may attach other comments. ________________________________________ Signature 160 WORKSHEET MAXIMUM PERMISSIBLE LOAN SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN Borrower Name:__________________________________________________________________ Date:____________________ 1. Upper loan limitation: $50,000.00 2. Highest loan balance in prior 12 months: $_________ 3. Loan balance this date: (_________) 4. Difference, (2) minus (3): _________ 5. Loan limitation (a), (1) minus (4): (a)__________ 6. Vested accrued benefit this date: $_________ 7. 50% of (6): (_________) 8. Difference, loan limitation (b), (6) minus (7): (b)$_________ 9. Lesser of (a) or (b): $_________ 10. Loan balance this date: (_________) 11. Tentative loan limitation: $_________ 12. Minimum loan, less 1 cent: $ 999.99 _________ 13. Greater of (11) or (12): $_________ 14. Loan limitation: If (13) is $999.99, the maximum permissible loan is zero. If (13) is more than $999.99, the maximum permissible loan is the amount on line 13. 161 LOAN APPROVAL/DENIAL WORKSHEET FOR LOAN ADMINISTRATOR'S USE SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN Name of Borrower:_______________________________________________________________ Eligibility checked ___ Loan limitation checked ___ Interest Rate checked ___ Loan approved ___ If the number of payments extends beyond five years (60 monthly, 20 quarterly) is the purpose for the loan within the requirements of the loan program and adequately documented? _____Yes _____No. If no, the loan should be denied. Loan denied _____ because: _____________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ IF THE LOAN IS APPROVED, COMPLETE THE FOLLOWING: TERMS OF THE LOAN Date loan to commence ______ Amount of loan $______ Interest rate per annum ___% Payment interval, each payday _____ being _____, monthly _____, quarterly _____ Number of payments _____ Payment amount $_________ (see amortization schedule) Payroll deduction required? __Yes __No. Payroll deduction authorized by borrower? __Yes ___N/A. Loan documents ordered __Yes. __N/A. Loan documents require spousal consent and a security interest in the borrower's vested accrued benefit under the Plan. - ------------------------- ----------------------------------- Date Loan Administrator Please attach Loan Application For further information and/or loan documents please contact: Robert A. Frahm, Attorney Robert A. Frahm & Associates 1853 Lexington Houston, Texas 77098-4399 (713) 526-8862 FAX: (713) 526-9524 162 SEPCO INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN PAYROLL DEDUCTION AUTHORIZATION The undersigned having this day borrowed $__________ from the Sepco Industries, Inc. Employee Stock Ownership Plan and Trust authorizes Sepco Industries, Inc. to deduct $__________ each payday from amounts due him as wages beginning on the first payday after the loan proceeds are disbursed and to pay said amount to the Trustee of said Plan and Trust until the loan is fully paid according to its terms. Witnessed By: Date: ------------------------------ - ----------------------------------- ----------------------------------- Witness signature Borrower signature - ----------------------------------- ----------------------------------- Please Print Name Please Print Name 163 SEPCO INDUSTRIES, INC:. EMPLOYEE STOCK OWNERSHIP PLAN BENEFICIARY DESIGNATION (Without the Pre-Retirement Survivor Annuity) As a Participant in the above named qualified Plan, I acknowledge that I have received notice of my rights: 1) to designate a beneficiary of the death benefit, 2) to revoke such designation, and 3) that such designation may be subject to the consent of my spouse. I designate each of the following persons to be a beneficiary of the death benefit in the percentages specified: PRIMARY BENEFICIARY NAME AND RELATIONSHIP PERCENTAGE ==================================================== ==================== - ---------------------------------------------------- -------------------- - ---------------------------------------------------- -------------------- - ---------------------------------------------------- -------------------- ==================================================== ==================== CONTINGENT BENEFICIARY NAME AND RELATIONSHIP PERCENTAGE ==================================================== ==================== - ---------------------------------------------------- -------------------- - ---------------------------------------------------- -------------------- - ---------------------------------------------------- -------------------- ==================================================== ==================== INSTRUCTIONS: 1) Please sign your name, write the date, and indicate your marital status below. 2) If you are married at the time you make this beneficiary designation and do not name your spouse as primary beneficiary of 100% of your death benefit, YOUR SPOUSE MUST SIGN the following consent form. 164 NOTE: Change in marital status may nullify this form. In such event you should sign a new beneficiary designation form. This beneficiary designation revokes all prior beneficiary designations with respect to the Plan. ----------------------------------- Date Participant's Signature --------------- M S - ------------------- ----------------------------------- Marital Status Please Print Name SPOUSE'S CONSENT I am the spouse of the Participant whose signature appears above and consent to the designation by my spouse of the persons named above to receive all or part of the death benefit. I understand that the effect of my consent will be to cause benefits to be paid to the persons named in the event of the death of my spouse. I understand that my spouse's designation will not be effective without my written consent and that this consent is irrevocable unless my spouse revokes the beneficiary designation to which I am consenting. Witnessed by: Date: ---------- - ----------------------------------- ----------------------------------- ( ) Plan Representative Spouse's Signature ( ) Notary Public - ----------------------------------- ----------------------------------- Please Print Name Please Print Name EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and in the headnotes to "Sepco Summary Consolidated Historical Financial Data" and "Sepco Selected Consolidated Financial Data" and to the use of our reports dated August 6, 1996, with respect to the balance sheet of Index, Inc., and March 22, 1996 (except for Notes 8 and 10 as to which the date is August 7, 1996), with respect to the consolidated financial statements of Sepco Industries, Inc., which are included in the Proxy Statement/Prospectus of Index, Inc., that is made a part of Amendment No. 1 to the Registration Statement (Form S-4 No. 333-10021) of Index, Inc., for the registration of 18,584,400 shares of its common stock, 3,366 shares of its Series A preferred stock and 19,500 shares of its Series B convertible preferred stock. ERNST & YOUNG LLP Houston, Texas August 9, 1996 EX-23.2 6 CONSENT OF CHESHIER & FULLER 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement of Index, Inc. on Form S-4 of our report dated January 27, 1996, appearing in the Proxy Statement/Prospectus, which is part of this Registration Statement, and to the references to us under the headings "Newman Summary Historical Financial Data", "Newman Selected Historical Financial Data" and "Experts" in such Proxy Statement/Prospectus. CHESHIER & FULLER, INC. A Professional Corporation Dallas, Texas August 13, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED BALANCE SHEET OF INDEX, INC. AS OF JULY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OTHER DEC-31-1996 JUL-26-1996 JUL-31-1996 1,000 0 0 0 0 1,000 0 0 1,000 0 0 1 0 0 999 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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