-----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, CxlQ77Gbn+HIyKgHeWi8tk75VouMYPsL8kvmqvSJb5zzOdv+ky94wxRnJ/uGBnhE /L1J88PJF3pSPmFI1aEQ9A== 0000950129-96-003526.txt : 19961224 0000950129-96-003526.hdr.sgml : 19961224 ACCESSION NUMBER: 0000950129-96-003526 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEX INC CENTRAL INDEX KEY: 0001020710 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 760509661 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21513 FILM NUMBER: 96684492 BUSINESS ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 713-531-42 MAIL ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 10-Q 1 INDEX, INC. - 09/30/96 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 0-21513 INDEX, INC. (Exact name of registrant as specified in its charter) Texas 76-0509661 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 580 Westlake Park Boulevard, Suite 1100 77079 Houston, Texas (Zip Code) (Address of principal executive offices) 281/531-4214 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X (as to paragraph (1)) No X (as to paragraph (2)) ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares outstanding of each of the issuer's classes of common stock, as of December 20, 1996: Common Stock: 15,987,900 2 Part I: Financial Information INDEX, INC. (CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS) (In thousands, except per share data)
September 30, December 31, 1996 1995 ------------ ------------ (Unaudited) Assets Current assets: Cash $ 1 $ 1,492 Trade accounts receivable, net of allowance for doubtful accounts of $199,000 and $200,000, respectively 16,358 15,892 Inventory 16,719 16,706 Prepaid expenses and other current assets 992 813 Deferred income taxes 533 170 ------------ ------------ Total current assets 34,602 35,073 Property and equipment, net 7,081 6,744 Other Assets 1,172 1,437 ------------ ------------ Total assets $ 42,856 $ 43,254 ============ ============ Liabilities and Shareholders' Equity Current liabilities: Trade accounts payable $ 6,014 $ 6,435 Employee compensation 851 1,129 Other accrued liabilities 2,178 1,419 Current portion of long-term debt 444 1,888 Current portion of subordinated debt 1,199 235 ------------ ------------ 10,686 11,106 Long-term debt, less current portion 19,764 20,130 Subordinated debt, less current portion 1,145 Deferred compensation 380 Deferred income taxes 205 205 Equity subject to redemption--Note 8: Preferred stock--1,496 shares 150 150 Class A convertible preferred stock -- 4,500 shares 450 450 Class A common stock -- 272,000 shares 2,600 1,888 Shareholders' Equity: Preferred stock, nonvoting, noncumulative $1 par value; liquidation preference of $100 per share: Authorized shares -- 1,000,000 Issued shares -- 10,098 including 1,496 shares subject to redemption -- Note 8 9 9 Class A convertible preferred stock, nonvoting, cumulative $100 per share Authorized shares -- 1,000,000 Issued and outstanding -- 19,500, including 4,500 subject to redemption -- Note 8 1,500 1,500 Class B convertible preferred stock, nonvoting, cumulative $100 par value; liquidation preference $100 per share: Authorized shares -- 1,000,000 shares Issued and outstanding shares - none Class A common stock, $.01 par value; Authorized shares -- 10,000,00 Issued and outstanding-- 980,300 , including 272,000 shares subject to redemption --Note 8 7 7 Class B common stock, $.01 par value; liquidation preference of $7.5075 per share: Authorized shares-- 10,000,000 Issued and outstanding -- 176,900 2 2 Paid-in capital 1,422 580 Retained earnings 7,758 7,399 ------------ ------------ 10,698 9,497 Less treasury stock, 6,732 shares preferred and 221,401 shares Class A common (1,697) (1,697) ------------ ------------ Total shareholders' equity 9,001 7,800 Total liabilities and shareholders' equity $ 42,856 $ 43,254 ============ ============
See notes to condensed combined consolidated financial statements. 2 3 INDEX, INC. Condensed Combined Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 -------------------- -------------------- 1996 1995 1996 1995 -------- -------- -------- -------- (In thousands, except per share data) Sales $ 32,193 $ 27,988 $ 95,214 $ 84,383 Cost of sales 23,784 20,677 70,574 62,682 -------- -------- -------- -------- Gross Profit 8,409 7,311 24,640 21,701 Selling, general and administrative expenses 7,424 6,244 22,230 18,624 -------- -------- -------- -------- Operating income 985 1,067 2,410 3,077 Other income 129 218 643 646 Interest expense (548) (474) (1,556) (1,442) -------- -------- -------- -------- (419) (256) (913) (796) -------- -------- -------- -------- Income before income taxes 566 811 1,497 2,281 Provision for income taxes 230 329 607 925 -------- -------- -------- -------- Net income $ 336 $ 482 $ 890 $ 1,356 ======== ======== ======== ======== Primary net income per common and common equivalent shares $ 0.33 $.0.36 $ 0.87 $ 1.02 ======== ======== ======== ======== Number of shares used to compute primary net income per common and common equivalent shares 1,016 1,331 1,016 1,331 ======== ======== ======== ======== Fully diluted net income per common and common equivalent share $ 0.29 $ 0.36 $ 0.77 $ 1.02 ======== ======== ======== ======== Number of shares used to compute fully diluted net income per common and common equivalent shares 1,152 1,334 1,152 1,334 ======== ======== ======== ========
See notes to condensed combined consolidated financial statements. 3 4 INDEX, INC. Condensed Combined Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, -------------------- 1996 1995 -------- -------- (In thousands) Operating Activities Net cash provided by operating activities $ 2,118 $ 1,881 Investing activities Proceeds from sale of property and equipment 7 100 Purchase of Austin Bearing net assets (550) Purchase of property and equipment (971) (369) -------- -------- Net cash used in investing activities $ (1,514) $ (269) Financing activities Proceeds from debt 93,856 89,386 Principal payments on revolving line of credit, long-term and subordinated debt, and notes payable to bank (95,884) (90,114) Issuance of Class A common stock 1 232 Acquisition of common stock (589) Dividends paid (68) Net cash used in financing activities (2,096) (1,085) -------- -------- Decrease in cash (1,491) (889) Cash at beginning of period 1,492 889 -------- -------- Cash at end of period 1 0 ======== ========
See notes to condensed combined consolidated financial statements. 4 5 INDEX, INC. September 30, 1996 Notes to Condensed Combined Consolidated Financial Statements Note 1: Basis of Presentation Index, Inc., a Texas corporation (the "Company"), was incorporated on July 26, 1996, to facilitate a reorganization of SEPCO Industries, Inc., a Texas corporation (SEPCO"), in anticipation of an acquisition by Index as the successor to SEPCO of Newman Communications Corporations, a New Mexico corporation ("Newman"). On December 4, 1996, the reorganization of SEPCO (the "SEPCO Reorganization") was effected through a merger of a wholly-owned subsidiary of the Company with and into SEPCO pursuant to which the Company acquired all of the outstanding shares of SEPCO in exchange for shares of the Company. Immediately following the SEPCO Reorganization, the Company acquired Newman through a merger of a wholly-owned subsidiary of the Company with and into Newman (the "Newman Merger"). Prior to the SEPCO Reorganization, the Company had no operations and its only assets consisted of $1,000 cash. The SEPCO Reorganization has been accounted for as a recapitalization of SEPCO. Accordingly, the accompanying unaudited financials statements are presented on a combined basis assuming the SEPCO Reorganization had been effected as of first day of the periods presented. Prior to the Company's acquisition of Newman, Newman was a non-operating entity with nominal assets. The Newman Merger was effected as a means to increase the Company's shareholder base. The Newman Merger will be accounted for as an issuance on December 4, 1996, of shares for the net tangible assets of Newman. The equity capitalization of the Company after giving effect to the SEPCO Reorganization and Newman Merger consists of 15,987,900 shares of Common Stock, 3,399 shares of Series A Preferred Stock and 19,500 shares of Series B Convertible Preferred Stock. The holders of Series A Preferred Stock are entitled to 1/10th a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of Common Stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case, the holders of the Series A Preferred Stock are entitled to a $100 liquidation preference per share. Each share of the Series B Convertible Preferred Stock is convertible into shares of Common Stock and a monthly dividend per share of $0.50. The holders of the Series B Convertible Stock are also entitled to a $100 liquidation preference per share after payment of the distributions to the holders of the Series A Preferred Stock and to 1/10th of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the Common Stock. Unless the context otherwise requires, references to the Company with respect to historical operations shall mean the Company and SEPCO. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The Company believes that the presentations and disclosures herein are adequate to make the information not misleading. The condensed consolidated financial statements reflect all elimination entries and adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. 5 6 The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These condensed combined consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and SEPCO included in the Company's Registration Statement on Form S-4 (Registration No. 333-10021), as amended, which was filed with the Securities and Exchange Commission and declared effective November 12, 1996 (the "Registration Statement"). Note 2. Per Share Amounts Net income per common and common equivalent share has been computed by dividing net income applicable to common stock by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Options to purchase common stock issued by the Company within the 12 months preceding the filing of the Registration Statement have been included in the calculation of common equivalent shares outstanding (using the treasury stock method) as if they were outstanding for all periods presented. The computation of fully diluted net income per common and common equivalent share assumes the SEPCO Class A convertible preferred stock (converted to Series B Preferred Stock pursuant to the reorganization) was converted as of the beginning of the period. Note 3: Inventory An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. Note 4: Acquisition Effective December 31, 1995, the Company acquired 100% of the outstanding common stock of Bayou Pumps, Inc. The purchase price totaled $500,000 and consisted of (i) $450,000 of SEPCO's Class A convertible preferred stock (converted into shares of Series B Preferred Stock in the SEPCO Reorganization) and (ii) cash of $50,000. The acquisition was accounted for using the purchase method of accounting. Goodwill of $400,000 was recorded in connection with the acquisition. Effective February 2, 1996, SEPCO acquired the net assets of Austin Bearing Corporation. The purchase price totaled approximately $578,000 and consisted of (i) a $249,000 note, bearing interest at 9%, payable monthly over five years and (ii) cash of $329,000. The acquisition has been accounted for using the purchase method of accounting. Goodwill of $84,000 was recorded in connection with the acquisition. Note 5: Commitments and Contingencies The Company is currently undergoing an examination of tax returns for 1992 through 1994 by the Internal Revenue Service ("IRS"). The IRS has asserted claims against SEPCO for additional taxes and penalties of approximately $1 million plus interest of approximately $260,000. This claim relates primarily to a challenge by the IRS of SEPCO's use of the LIFO method of accounting for inventory. The Company believes that SEPCO's LIFO elections were valid and is pursuing its rights to administrative appeal. Although an unfavorable outcome on this matter would result in the payment of additional taxes and impact the Company's liquidity position, the Company believes that any liability that may ultimately result from the resolution of this matter will not have a material adverse effect on the financial position of the Company. 6 7 Note 6: Stock Options Prior to and during 1995, SEPCO issued nonqualified, book value plan stock options to certain officers of the Company to purchase 307,300 shares of SEPCO's Class A common stock (4,916,800 shares of Common Stock after the SEPCO Reorganization), which had exercise prices equal to the book value of the common stock on the date of the grant. The option agreement allowed the employee to require the Company to purchase, at book value, the shares of stock issued upon exercise of the option. The Company recognized compensation expense for increases in the book value of the stock while the options were outstanding. Effective March, 31, 1996, the stock option agreements were amended to become nonqualified stock options and to eliminate the provision that would require the Company to purchase, at book value, the shares of stock issued upon exercise of the options. In connection with these changes, the Company has recognized approximately $426,000 of compensation expense, net of a tax benefit of $284,000. Note 7: Long-Term Debt The Company currently has a $20 million secured line of credit with an institutional lender. The rate of interest is prime plus .5% (9.00% at September 30, 1996). The line of credit is secured by receivables, inventory, machinery, equipment and real estate and matures January 1999. At September 30, 1996, the available line of credit was approximately $3.0 million. The facility contains customary affirmative and negative covenants as well as financial covenants that require the Company to maintain a positive cash flow and other financial ratios, such as tangible net worth less than five to one and current assets to current liabilities greater than two to one. The credit facility also restricts dividends and distributions from SEPCO to the Company other than to pay dividends on the Series B Convertible Preferred Stock. The Company currently is discussing with its lender a modification to the facility in light of the Company's operational cash requirements following the SEPCO Reorganization and Newman Merger. Note 8. Stockholder's Equity SEPCO has agreements with certain holders of Class A common, preferred and Class A convertible preferred stock that, upon termination of employment, the shareholders have an obligation to sell and SEPCO has the first opportunity to buy the stock. SEPCO also has the opportunity to match a higher offer obtained by the shareholder from another party. The selling price of the stock will be at a price per share equal to the equity per share for the Class A common stock and $100 per share for the preferred and Class A convertible preferred stock. In conjunction with the reorganization discussed in Note 1 above, all put arrangements on SEPCO's stock will be eliminated upon the issuance of stock of Index, Inc. to SEPCO's shareholders. 7 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following analysis of the financial condition and results of operations of Index, Inc. (the "Company") reflects the Company and SEPCO Industries, Inc. ("SEPCO") on a combined basis after giving effect to the SEPCO Reorganization (defined below) and should be read in conjunction with the consolidated combined financial statements of the Company, including the notes thereto, included elsewhere in this Quarterly Report on Form 10-Q. The Company's expectations with respect to future results of operations that may be embodied in oral or written forward-looking statements, including any forward-looking statements that may be contained in this Quarterly Report on Form 10-Q, are subject to risks and uncertainties that must be considered when evaluating the likelihood of the Company's realization of such expectations. The Company's actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 5 of Part II of this Report. SEPCO Reorganization The Company was incorporated on July 26, 1996, to facilitate a reorganization of SEPCO in anticipation of an acquisition by the Company as the successor to SEPCO of Newman Communications Corporations, a New Mexico corporation ("Newman"). On December 4, 1996, the reorganization of SEPCO (the "SEPCO Reorganization") was effected through a merger of a wholly-owned subsidiary of the Company with and into SEPCO pursuant to which the Company acquired all of the outstanding shares of SEPCO in exchange for shares of the Company. Immediately following the SEPCO Reorganization, the Company acquired Newman through a merger of a wholly-owned subsidiary of the Company with and into Newman (the "Newman Merger"). Prior to the SEPCO Reorganization, the Company had no operations and its only assets consisted of $1,000 cash. The SEPCO Reorganization has been accounted for as a recapitalization of SEPCO. Accordingly, the accompanying unaudited financials statements are presented on a combined basis assuming the SEPCO Reorganization had been effected as of first day of the periods presented. Prior to the Company's acquisition of Newman, Newman was a non-operating entity with nominal assets. The Newman Merger was effected as a means to increase the Company's shareholder base. The Newman Merger will be accounted for as an issuance on December 4, 1996, of shares for the net tangible assets of Newman. The equity capitalization of the Company after giving effect to the SEPCO Reorganization and Newman Merger consists of 15,987,900 shares of Common Stock, 3,399 shares of Series A Preferred Stock and 19,500 shares of Series B Convertible Preferred Stock. The holders of Series A Preferred Stock are entitled to 1/10th a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of Common Stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case, the holders of the Series A Preferred Stock are entitled to a $100 liquidation preference per share. Each share of the Series B Convertible Preferred Stock is convertible into shares of Common Stock and a monthly dividend per share of $0.50. The holders of the Series B Convertible Stock are also entitled to a $100 liquidation preference per share after payment of the distributions to the holders of 8 9 the Series A Preferred Stock and to 1/10th of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the Common Stock. Unless the context otherwise requires, references to the Company with respect to historical operations shall mean the Company and SEPCO. Market Trends During the three- and nine-month periods ended September 30, 1996, the Company's revenues increased 15% and 11.4%, respectively, over the comparable periods in 1995. The revenue increases were reflective of the Company's efforts to expand operations through acquisitions and internal expansion. Gross margins remained relatively constant during 1996 compared to 1995 in spite of increased costs due in part to the Company's ability to pass on price increases. Offsetting the improvements in the Company's revenues and gross profits were various one-time costs incurred during 1996 related to the SEPCO Reorganization and Newman Merger. In March 1996, the Company converted its outstanding book value options into market-based options and recognized a $710,000 change for additional compensation expense. The Company also incurred $164,000 and $179,000 in expenses relating to the SEPCO Reorganization and Newman Merger for the three and nine months ended September 30, 1996. Combined, these items reduced operating income for the three and nine months ended September 30, 1996, and reduced net income for such periods by $108,000 and $118,000, respectively. Results for 1997 are expected to continue to benefit from the Company's recent acquisitions and internal development efforts. Although the Company expects to incur additional selling, general and administrative expenses associated with its becoming a public company, such expenses are expected to be less than the expenses and compensation charges incurred during 1996 relating to the SEPCO Reorganization and Newman Merger. The Company also intends to pursue an active acquisition program. The impact of this program will be dependent on the timing and nature of any acquisitions actually effected. RESULTS OF OPERATIONS Three Months Ended September, 1996 Compared to Three Months Ended September 30, 1995 Revenues for the three months ended September 30, 1996 increased 15.0% to $32.2 million from $28.0 million for the three months ended September 30, 1995, primarily due to sales of bearings and transmission products at locations where pump and pump products were sold previously. During the three months ended September 30, 1996, sales of pumps and pump products increased 7.1% over the comparable period in 1995, while sales of valves and valve automation products decreased 9.8% in the three months ended September 30, 1996 over the comparable 1995 period . The decrease in valve and automation sales during the three-month period ended September 30, 1996, however, represents less than one percent of total sales. Sales of bearings and power transmission equipment increased 34.7% in the three months ended September 30, 1996 over the comparable period in 1995. Included in the increased pump and pump products and bearing and power transmission revenues for the three months ended September 30, 1996 is approximately $1.2 million in revenues attributable to two companies acquired in December 1995 and February 1996. Gross margins remained constant for the third quarter of 1996 as compared to the third quarter of 1995 due to the Company's ability to pass on manufacturer price increases. The Company currently expects some increase in manufacturers' prices to continue due to increased raw material costs and strong market conditions. Although the Company intends to attempt to pass on these price increases to its customers to maintain current gross margins, there can be no assurance that the Company will be successful in this regard. 9 10 Selling, general and administrative expense increased as a percentage of revenues by .8% for third quarter of 1996 as compared to the third quarter of 1995, due primarily to costs associated with the Company's expansion of operations, software conversion, and professional fees associated with the SEPCO Reorganization and Newman Merger. Excluding the effect of the non-recurring expenses identified above, selling, general and administrative expenses as a percentage of revenues remained relatively consistent from period to period. Operating income for the three-month period ended September 30, 1996 as a percentage of revenues declined to 3.0% compared to 3.8% for the same period of 1995, due primarily to the software conversion and costs associated with the SEPCO Reorganization and Newman Merger. The Company expects that the installation of its new software system should be completed by the end of 1996, and the expenses associated with such installation should decrease in 1997. Interest expense during the third quarter of 1996 increased 15.6% to $548,000 from $474,000 for the third quarter of 1995, due to average debt increasing during the period as a result of increased inventory levels to support sales. Average interest rates were slightly lower during the three months ended September 30, 1996 as compared to the same period in 1995. Further increases in inventories may be required to the extent sales and activity levels increase. Any such increases would be subject to the nature of the increases and the perceived profitability of any such increases. The Company's provision for income taxes for the three months ended September 30, 1996 decreased to $230,000 from $329,000 for the same period of 1995 notwithstanding increased operating income due to costs associated with the expansion of the Company's business, software conversion and professional fees related to the SEPCO Reorganization and Newman Merger. Net income for the three-month period September 30, 1996, declined $146,000 from the three-month period ended September 30, 1995 due to expense associated with the software conversion and professional fees associated with the SEPCO Reorganization and Newman Merger. Excluding the cost associated with the SEPCO Reorganization and Newman Merger, operating income would have increased $109,000 and net income would have remained the same for the three months ended September 30, 1996 as compared to the three months ended September 30, 1995. Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995 Revenues for the nine months ended September 30, 1996 increased 11.4% to $95.2 million from $84.4 million for the same period in 1995, primarily due to sales of bearings and transmission products at locations where pump and pump products were sold previously, revenue attributable to the two companies acquired in December 1995 and February 1996 and from increased sales volume. During the nine months ended September 30, 1996, sales of pumps and pump products increased 6.8% over the comparable period in 1995, while sales of valves and valve automation products increased 4.1% in the first nine months in 1996 over the comparable 1995 period. Sales of bearings and power transmission equipment increased 24.7% in the first nine months of 1996 over the comparable period in 1995. Included in the increased pump and pump products and bearing and power transmission revenues for the nine months ended September 30, 1996 is approximately $3.2 million in revenues attributable to two companies acquired in December 1995 and February 1996. Gross margins increased slightly by .1% in the first nine months of 1996 compared to the first nine months of 1995 due to the ability of the Company to pass on manufacturer price increases. Selling, general and administrative expense increased as a percentage of revenues by 1.0% for the nine months ended September 30, 1996 as compared to the nine months ended September 30, 1995, due primarily to a one-time charge of $710,000 for additional compensation expense associated with the amendment of certain book value stock options into market-based stock options, costs associated 10 11 with the Company's expansion of operations, software conversion and professional fees associated with the SEPCO Reorganization and Newman Merger. Excluding the effect of the amendments to the stock options and the other non recurring expenses identified above, selling, general and administrative expenses as a percentage of revenues remained relatively consistent from period to period. Operating income for the first nine months of 1996 as a percentage of revenues declined to $2.4 million from $3.1 million the first nine months of 1996, due primarily to the compensation expense recorded in connection with the stock option amendments, interest and other costs associated with SEPCO's expansion of operations and software conversion, and increased professional fees related to the Reorganization.. Interest expense during the first nine months of 1996 increased slightly compared to the first nine months of 1995, due to average debt increasing during the period as a result of increased inventory levels to support sales. Average interest rates were slightly lower during the nine months of 1996 as compared to 1995. Further increases in inventories may be required to the extent sales and activity levels increase. Any such increases would be subject to the nature of the increases and the perceived profitability of any such increases. The Company's provision for income taxes for the first nine months of 1996 decreased by $318,000 compared to the first nine months of 1995 notwithstanding increased operating income due to higher compensation expense during the period associated with the amendments to the Company's stock options, costs associated with the expansion of the Company's operations and software conversion and increased professional fees related to the SEPCO Reorganization and Newman Merger. Net income for the nine months ended September 30, 1996, declined $466,000 from the first nine months of 1995 due primarily to the effects of the additional compensation expense associated with the amendments to the Company's stock options, costs associated with the software conversion and increased professional fees associated with the Reorganization. Excluding the costs associated with the Reorganization, operating income and net income would have increased $427,000 and $256,000, respectively, for the nine months ended September 30, 1996 as compared to the nine months ended September 30, 1995. Liquidity and Capital Resources The Company generated cash from operating activities of $2.1 million in the first nine months of 1996 as compared to 1.9 million during the first nine months of 1995. Under the Company's credit facility, all available cash is generally applied to reduce outstanding borrowings, with operations funded through borrowings under the credit facility. As a result, at September 30, 1996, the Company had no cash and cash equivalents compared to $1.5 million at December 31, 1995. The Company's policy is to maintain low levels of cash and cash equivalents and to use borrowings under its line of credit for working capital. The Company had $3.0 million available for borrowings under its working capital line of credit at September 30, 1996. Working capital at September 30, 1996 and December 31, 1995 was $24 million. During the first nine months of 1996, the Company collected its trade receivables in approximately 48 days and turned its inventory approximately five times. The Company currently has a $20 million secured line of credit with an institutional lender. The rate of interest is prime plus .5% (9.00% at September 30, 1996). The line of credit is secured by receivables, inventory, machinery, equipment and real estate and matures January 1999. At September 30, 1996, the available line of credit was approximately $3.0 million. The facility contains customary affirmative and negative covenants as well as financial covenants that require the Company to maintain a positive cash flow and other financial ratios, such as tangible net worth less 11 12 than five to one and current assets to current liabilities greater than two to one. The credit facility also restricts dividends and distributions from SEPCO to the Company other than to pay dividends on the Series B Convertible Preferred Stock. The Company currently is discussing with its lender a modification to the facility in light of the Company's operational cash requirements following the SEPCO Reorganization and Newman Merger. The Company had capital expenditures of approximately $971,000 for the first nine months of 1996 as compared to $369,000 during the same period of 1995. Capital expenditures for the first nine months of 1996 included $190,000 for the purchase of a facility in Lufkin, Texas, and leasehold improvements, furniture and fixtures at the corporate office and office equipment and computer automation. The Company expended approximately $550,000 for the acquisition of the assets of Austin Bearings during the first quarter of 1996. For the remainder of 1996, the Company has budgeted approximately $438,000 for additional capital expenditures primarily associated with the conversion of the Company's computer system. The Company is currently undergoing an examination of its tax returns by the IRS. The IRS has asserted claims against SEPCO for additional taxes and penalties of approximately $1 million plus interest of approximately $260,000. This claim relates primarily to a challenge by the IRS of SEPCO's use of the LIFO method of accounting for inventory. SEPCO believes that its LIFO elections were valid and currently is pursuing its rights to administrative appeal. Although an unfavorable outcome on this matter would result in the payment of additional taxes and impact the Company's liquidity position, the Company believes that any liability that may ultimately result from the resolution of this matter will not have a material adverse effect on the financial position of the Company. The Company believes that cash generated from operations and available under its credit facility will meet its future ongoing operational and liquidity needs and capital requirements. Funding of the Company's acquisition program and integrated supply strategy will require capital in the form of the issuance of additional equity or debt financing. There can be no assurance that such financing will be available to the Company or as to the terms thereof. 12 13 Part II: Other Information Item 1. Legal Proceedings - None Item 2. Changes in Securities On July 31, 1996, the Company issued 100 shares of its Common Stock, $.01 par value per share, in exchange for $10.00 cash per share, to David R. Little, the company's President and Chief Executive Officer, in connection with the formation of the Company. Item 3. Defaults upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders On August 12, 1996, by unanimous written consent, the sole shareholder of the company elected Jerry Jones, Cletus Davis, Kenneth H. Miller, Thomas V. Orr and Bryan Wimberly directors of the Company, approved the SEPCO Reorganization and Newman Merger and approved the Index, Inc. Long-Term Incentive Plan. Item 5. Other Information CAUTIONARY STATEMENTS The Company's expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be contained in this Quarterly Report on Form 10-Q, are subject to risks and uncertainties that must be considered when evaluating the likelihood of the Company's realization of such expectations. The company's actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. Substantial Competition The company's business is highly competitive. The Company competes with a variety of industrial supply distributors, some of which may have greater financial and other resources than the Company. Although many of the Company's traditional distribution competitors are small enterprises selling to customers in a limited geographic area, the Company also competes with larger distributors that provide integrated supply programs such as those offered through the iPower Consortium and outsourcing services similar to those that are planned to be offered by American MRO, Inc. ("AMRO"), a wholly-owned subsidiary of the Company. Some of these large distributors may be able to supply their products in a more timely and cost-efficient manner than the Company. The Company's competitors include direct mail suppliers, large warehouse stores and, to a lesser extent, certain manufacturers. Risks Associated with Implementation of Corporate Strategy Future results for the Company also will be dependent on the success of the Company in implementing its acquisition and growth strategy. This strategy includes taking advantage of a consolidation in the industry and effecting acquisitions of distributors with complementary or desirable new product lines, strategic distribution locations and attractive customer bases and manufacturer relations. The Company's strategy also includes expanding its product lines, adding new product lines and establishing alliances and joint ventures with other suppliers in order to provide the Company's customers with a source of integrated supply. The ability of the Company to implement this strategy will depend on its ability to identify, consummate and assimilate acquisitions on economic terms, to acquire and successfully integrate new product lines and to establish and successfully market new integrated forms of supply arrangements such as that being pursued by 13 14 AMRO. Although the Company is actively seeking acquisitions and integrated supply arrangements that would meet its strategic objectives, there can be no assurance that the company will be successful in these efforts. Further, the ability of the Company to effect its strategic plans will depend on obtaining financing for its planned expansions and acquisitions. There can be no assurance that such financing will be available on a timely basis or on terms satisfactory to the Company. The Company plans to examine appropriate methods of financing any such acquisition, including issuance of additional capital stock, debt or other securities or a combination of both. If the Company were to issue shares of its capital stock in any acquisition, such issuance could be dilutive to existing shareholders. Dependence on Key Personnel The company will continue to be dependent to a significant extent upon the efforts and ability of David R. Little, its Chairman of the Board and Chief Executive Officer. The loss of the services of Mr. Little or any other executive officer of the Company could have a material adverse effect on the Company's financial condition and results of operations. The Company does not maintain key-man life insurance on Mr. Little or on the lives of its other executive officers. In addition, the Company's ability to grow successfully will be dependent upon its ability to attract and retain qualified management and technical and operational personnel. The failure to attract and retain such persons could materially adversely effect the Company's financial condition and results of operation. Risks Associated with Hazardous Materials Certain of the Company's activities involve the controlled use of hazardous materials and chemicals. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated completely. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. IRS Examination The Company currently is undergoing an examination of its tax returns by the IRS. The IRS has asserted claims against SEPCO for additional taxes and penalties of approximately $1 million plus interest of approximately $260,000. This claim relates primarily to a challenge by the IRS of SEPCO's use of the LIFO method of accounting for inventory. Although the Company believes that its LIFO elections were valid and is pursuing its rights to administrative appeal, an unfavorable outcome on this matter would result in the payment of additional taxes and impact the company's liquidity position. Limitation on Ability to Pay Dividends The Company anticipates that future earnings, except for dividends payable on the Series B Convertible Preferred Stock, will be retained to finance the continuing development of its business. In addition, the Company's loan agreement with its principal lender prohibits the Company from declaring or paying any dividends or other distributions on its capital stock except for dividends on its preferred stock. Accordingly, the Company does not anticipate paying cash dividends on the Common Stock in the foreseeable future. Item 6. Exhibits and Reports on Form 8-K 2.1: Agreement and Plan of Merger dated August 12, 1996, by and among Index, Inc., Newman Acquisition Corporation, Newman Communications Corporation and Little & Company 14 15 Investment Securities, (incorporated by reference to Exhibit 2.1 of Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-10021)). 2.2: Agreement and Plan of Merger dated August 12, 1996, by and among Index, Inc., SEPCO Acquisition corporation and SEPCO Industries, Inc., (incorporated by reference to Exhibit 2.2 of Amendment No. 1 to the Registrant's Registration Statement on Form S-4, (Registration No. 333-10021)). 3.1: Restated Articles of Incorporation, (incorporated by reference to Exhibit 3.1 of Registration Statement on Form S-4, (Registration No. 333-10021)). 3.2: Bylaws, (incorporated by reference to Amendment No. 1 to the Registrant's Exhibit 3.2 of Registration Statement on Form S-4, (Registration No. 333-10021)). 4.1: Form of Common Stock Certificate, (incorporated by reference to Exhibit 4.1 of Registration Statement on Form S-4, (Registration No. 333-10021)). 4.2: Form of Series A Preferred Stock Certificate, (incorporated by reference to Exhibit 4.2 of Amendment No. 1 to the Registrant's Registration Statement on Form S-4, (Registration No. 333-10021)). 4.3: Form of Series B Convertible Preferred Stock Certificate, (incorporated by reference to Exhibit 4.3 of Amendment No. 1 to the Registrant's Registration Statement on Form S-4, (Registration No. 333-10021)). 4.4: See Exhibit 3.1 for provisions of the Restated Articles of Incorporation of the Registrant defining the rights of the holders of Common Stock, Series A Preferred Stock and Series B Convertible Preferred Stock. 4.5: See Exhibit 3.2 for provisions of the Bylaws of the Registrant defining the rights of the holders of Common Stock, Series A Preferred Stock and Series B Convertible Preferred Stock. 11.1: Statement re: Computation of Per Share Earnings. 27.1 Financial Data Schedule 15 16 Pursuant to the Requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. INDEX, INC. Date: December 20, 1996 By: ------------------------------ Gary A. Allcorn Senior Vice President/Finance (Duly authorized officer and principal financial officer) 16 17 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1: Agreement and Plan of Merger dated August 12, 1996, by and among Index, Inc., Newman Acquisition Corporation, Newman Communications Corporation and Little & Company Investment Securities, (incorporated by reference to Exhibit 2.1 of Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-10021)). 2.2: Agreement and Plan of Merger dated August 12, 1996, by and among Index, Inc., SEPCO Acquisition corporation and SEPCO Industries, Inc., (incorporated by reference to Exhibit 2.2 of Amendment No. 1 to the Registrant's Registration Statement on Form S-4, (Registration No. 333-10021)). 3.1: Restated Articles of Incorporation, (incorporated by reference to Exhibit 3.1 of Registration Statement on Form S-4, (Registration No. 333-10021)). 3.2: Bylaws, (incorporated by reference to Amendment No. 1 to the Registrant's Exhibit 3.2 of Registration Statement on Form S-4, (Registration No. 333-10021)). 4.1: Form of Common Stock Certificate, (incorporated by reference to Exhibit 4.1 of Registration Statement on Form S-4, (Registration No. 333-10021)). 4.2: Form of Series A Preferred Stock Certificate, (incorporated by reference to Exhibit 4.2 of Amendment No. 1 to the Registrant's Registration Statement on Form S-4, (Registration No. 333-10021)). 4.3: Form of Series B Convertible Preferred Stock Certificate, (incorporated by reference to Exhibit 4.3 of Amendment No. 1 to the Registrant's Registration Statement on Form S-4, (Registration No. 333-10021)). 4.4: See Exhibit 3.1 for provisions of the Restated Articles of Incorporation of the Registrant defining the rights of the holders of Common Stock, Series A Preferred Stock and Series B Convertible Preferred Stock. 4.5: See Exhibit 3.2 for provisions of the Bylaws of the Registrant defining the rights of the holders of Common Stock, Series A Preferred Stock and Series B Convertible Preferred Stock. 11.1: Statement re: Computation of Per Share Earnings. 27.1 Financial Data Schedule
EX-11.1 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Primary: Average shares outstanding 935,799 1,196,200 935,799 1,196,200 Net effect of dilutive stock options -- based on the treasury stock method using average market price 73,279 58,782 73,279 58,782 Adjustment to give effect to shares optioned to key employees within 12 months of the beginning of each period presented based on treasury stock method using estimated market price upon offering 6,451 76,137 6,451 76,137 Total common and common stock equivalents 1,015,529 1,331,119 1,015,529 1,331,119 Net income $ 336,000 $ 482,000 $ 890,000 $1,356,000 Per share amount $ 0.33 $ 0.36 $ 0.87 $ 1.02 Fully diluted Average shares outstanding 935,799 1,196,200 935,799 1,196,200 Net effect of dilutive stock options -- based on the treasure stock method using period-end market price, if higher than average market price 79,730 63,021 79,730 63,021 Adjustment to give effect to shares optioned to key employees within 12 months of the beginning of each period presented based on treasury stock method using estimated market price upon offering 76,137 76,137 Assumed conversion of Class A convertible Preferred Stock 136,500 136,500 Total 1,152,029 1,335,338 1,152,029 1,335,338 Net Income $ 336,000 $ 482,000 $ 890,000 $1,356,000 Per share amount $ 0.29 $ 0.36 $ 0.77 $ 1.02
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE UNAUDITED CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS OF INDEX, INC. AS OF SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. 1,000 OTHER DEC-31-1996 JAN-01-1996 SEP-30-1996 1 0 16,558 200 16,719 34,602 15,068 7,987 42,856 9,043 21,407 9 600 1,509 7,483 42,856 95,214 95,214 70,574 70,574 21,587 0 1,556 1,497 607 890 0 0 0 890 0.87 0.67
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