<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year 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: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16885 DALLAS PARKWAY, SUITE 400
DALLAS, TEXAS 75248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 732-0010
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
COMMON STOCK, $.01 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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 _______ No X
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based on the closing price of such stock on December 31, 1996, was
approximately $45.1 million. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and 10% beneficial owners are affiliates. As of
December 31, 1996, the registrant had issued and outstanding 13,664,109 shares
of the Company's common stock, $ .01 par value.
================================================================================
<PAGE>
POLYPHASE CORPORATION
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1 Description of Business 1
Item 2 Description of Property 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation 14
Item 8 Financial Statements 19
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 19
PART III
Item 10 Directors and Executive Officers of the Registrant 20
Item 11 Executive Compensation 23
Item 12 Security Ownership of Certain Beneficial Owners and Management 25
Item 13 Certain Relationships and Related Transactions 27
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30
</TABLE>
i
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The Company is a diversified holding company that, through its subsidiaries,
currently operates primarily in three industry segments: the forestry segment,
which distributes, leases and provides financing for industrial and logging
equipment (the "Forestry Group"); the food processing segment, which produces
high quality entrees, plated meals, soups, sauces and poultry, meat and fish
specialties (the "Food Group"); and the transformer segment, which manufactures
and markets electronic transformers, inductors and filters (the "Transformer
Group"). The Company was incorporated in New Jersey in 1963 under the name
Kappa Networks, Inc. In June 1991, through a merger with a wholly owned
subsidiary, the Company reincorporated in Pennsylvania and formally changed its
name to Polyphase Corporation. In June 1994, the Company, through a merger with
a wholly owned subsidiary, reincorporated in Nevada.
During 1993, under the direction of a new management team, the Company
embarked on an aggressive long-term program to diversify its activities and
expand its operations. At that time, the Company's sole operating entity was
Polyphase Instrument Co. ("PIC"), which conducts the Company's transformer-
related activities. PIC, active since 1956, manufactures and sells customized
transformers and communications filters, primarily to defense contractors and
their suppliers.
In connection with the Company's program of diversification and expansion, a
number of acquisitions were consummated during fiscal 1993, 1994 and 1995:
. Computer-Related Activities ("Computer Group") Through various
transactions in fiscal 1993 and 1994, the Company acquired the operations of
several computer-related companies which were engaged in the computer marketing,
service and networking business and in software development. These operations
were all purchased from individuals and were generally accomplished through the
issuance of shares of various series of the Company's convertible preferred
stock. All such preferred stock issued was subsequently converted into shares
of the Company's common stock. The Company, during fiscal 1996, relinquished
control of the Computer Group, first by contributing the stock of Network
America, Inc. ("NAI"), Letronix, Inc., dba Computer Systems Concepts ("CSC"), PC
Repair of Florida, Inc. ("PCR") and Register-Mate, Inc. ("RMI") to a wholly-
owned subsidiary, PC Networx America, Inc. ("PCNA") and selling 51% of PCNA to
an unrelated corporation; and by selling 100% of the stock of Micro
Configurations, Inc. to the same unrelated entity. No significant gain or loss
was recorded on the transactions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
. Taylor-Built Industries, Inc. ("TBI") In October 1993, the Company
acquired all of the outstanding capital stock of TBI from James T. Taylor in
exchange for 5,000 shares of Series B Preferred Stock, which were subsequently
converted into 50,000 shares of Common Stock. TBI, located in Dallas, Texas,
was a manufacturer and distributor of automotive aftermarket products. In
February 1995, the Company exchanged 100% of the common stock of TBI for
200,000 restricted shares of a publicly-held Company; such shares were sold in a
private transaction in fiscal 1996. No significant gain or loss was recorded on
these transactions.
. Dallas Parkway Properties Inc. ("DPPI") The Company, during October 1993,
acquired from Weldon Hays all the outstanding stock of DPPI in exchange for
100,000 shares of Series D Preferred Stock, which were subsequently converted
into 250,000 shares of Common Stock. At the time of the acquisition, DPPI was a
single-asset Texas corporation that owned (subject to related indebtedness) a
40,000 square foot office building in Dallas, Texas, which is used as the
Company's corporate headquarters. Ownership of the property was subsequently
conveyed to the Company.
1
<PAGE>
. Texas Timberjack, Inc. ("TTI") In June 1994, the Company acquired all of
the outstanding capital stock of TTI from Harold Estes. TTI, with locations in
Lufkin, Jasper, Cleveland and Atlanta, Texas, is a distributor of industrial and
logging equipment in East Texas and Western Louisiana. The capital stock of TTI
was acquired from Mr. Estes in consideration of approximately $4,000,000 in
cash, a $10,000,000 promissory note payable to the order of Mr. Estes, due
December 31, 1997 (as modified, renewed and extended), and 100,000 shares of
Series A Preferred Stock, which were subsequently converted into 2,000,000
shares of Common Stock.
. Overhill Farms, Inc. ("Overhill") In May 1995, the Company acquired all
the operating assets of IBM Foods, Inc. The purchase, which was accomplished
through Overhill, a newly-formed subsidiary of the Company, provided for cash
payment to the seller of $31.3 million plus the assumption of certain
liabilities of the acquired business. Overhill, located in Culver City,
California, is a food processor that produces high quality entrees, meals, soup,
sauces and poultry, meat and fish specialities primarily for customers in the
weight loss, airline and restaurant chain industries.
PRODUCTS AND SERVICES
Food Group
The Food Group, through Overhill, is a value-added manufacturer of quality
frozen food products including entrees, plated meals, soups, sauces, poultry,
meat and fish specialities. Overhill's strategy has been to position itself as a
short run provider to a number of prominent customers such as American Airlines,
Jenny Craig International, United Airlines, Albertsons, Price Costco and King's
Hawaiian. Historically, Overhill has served four industry segments: airlines,
weight loss, food service and retail.
Forestry Group
The Forestry Group is a distributor of industrial and logging equipment with
locations in Lufkin, Jasper, Cleveland and Atlanta, Texas. TTI carries the
Timberjack, Blount and Hyundai lines of industrial and logging equipment and the
New Holland line of farm equipment. TTI is involved in the sale, leasing, and
financing of the equipment it distributes as well as the servicing of all major
brands of related equipment. TTI's operations are primarily concentrated in the
forested areas of East Texas although its market extends to surrounding states.
TTI operates in a fragmented industry where its major competition is from
distributors and dealers of Caterpillar and John Deere equipment. TTI estimates
that it currently holds 60% of the shear (a machine that cuts the timber)
market, 50% of the skidder (machine which transports the logs out of the forest
to a loader) market and approximately 70% of the loader (machine that stacks
trees on trucks) market in Texas.
Transformer Group
The Company's Transformer Group currently consists of PIC. Transformers are
electromagnetic mechanisms used in a wide variety of electronic and electro-
mechanical applications to convert electrical currents from one voltage level to
another. The Transformer Group's products include power transformers used in
direct current power supplies; audio transformers used in voice and audio signal
circuits for transferral of low level, precise signals; pulse transformers used
in radar, digital signaling and computer applications; telephone modem
transformers used in telephone circuits; and ferro-resonant transformers used in
computers and stabilized power systems. PIC manufactures a large line of
transformers ranging from miniaturized versions to oil-filled units, with power
levels ranging from microwatts to over 20 kilowatts, voltage levels of up to 20
kilovolts and currents ranging from micro-amperes to 700 amperes. PIC's
communications filters are electronic, frequency-selective devices that isolate
and permit the passage through electronic equipment of selected information
carried by electrical energy. Such filters include filter chokes and low pass,
bank pass and high pass filter-to-signal circuits that separate frequencies from
one another. Filter sales currently account for only a small portion of the
transformer group's total sales. PIC supplies products to meet its customers'
exact specification requirements. Specifications include frequency response and
temperature range; energy loss; and voltage, current, and energy levels.
2
<PAGE>
SALES AND MARKETING
Food Group
Overhill markets its products through an internal sales force and outside food
brokers. While Overhill will continue to service the airline and weight loss
segments, current management has identified the retail and food service markets,
particularly the emerging home meal replacement market, as areas of potential
significant future growth. Overhill management has restructured its sales force
and redirected its marketing efforts to concentrate on these markets. During
fiscal 1996, Overhill began to see the effects of these efforts with products
under both the Overhill brand and under private label now being sold in major
retail and food service chains.
Approximately 83% of Overhill's sales in fiscal 1996 were derived from six
customers, two of which accounted for approximately 51% of its total sales,
Jenny Craig, Inc. (39%) and American Airlines (12%). On a consolidated basis
Jenny Craig, Inc. and American Airlines represented approximately 26% and 8% of
Company total sales, respectively. Although the Company considers its
relationships with these customers to be good, there can be no assurance that
these relationships will continue as presently in effect. A decline in the
sales of the Food Group's products to these six customers or the loss of, or a
significant change in the relationship between the Company and any of these key
customers could have a material adverse effect on the Company's business and
operating results. It is management's objective to reduce the reliance on this
concentration of accounts by further expansion into the retail service markets
described above.
Forestry Group
TTI currently maintains sales and distribution offices in Lufkin, Jasper,
Cleveland and Atlanta, Texas primarily to serve Eastern Texas and Western
Louisiana. Sales are generated through repeat customers, advertisements in
various trade publications and direct marketing calls on companies located in
the area. A general sales manager and branch managers supply technical and
operational support at the Lufkin headquarters while nine sales have direct
responsibility for customer relationships. TTI meets customers' orders for new
equipment and replacement parts out of existing inventory or through purchase
orders placed with the manufacturers TTI currently represents.
Approximately 45% of TTI sales during fiscal 1996 are from new equipment sold
to companies involved in the forestry industries. Additional revenues are
derived from sales of used equipment (11%), servicing of equipment (5%), sales
of parts (17%) and financing equipment sales (22%). No single customer accounts
for more than 10% of TTI's sales. Equipment sales are typically financed by TTI
for periods ranging from 12 to 24 months at interest rates ranging from 12% to
18% per annum.
Transformer Group
The Company sells transformers and filters directly to customers and through
commissioned sales representatives principally in the Mid-Atlantic and Northeast
regions of the United States. As of September 30, 1996, PIC had an in-house
sales and marketing staff of two full-time employees. To obtain new business,
PIC relies on referrals from the existing customer base, advertisements in
various trade journals and leads generated from its reputation .
Approximately 83% of the transformers and filters sold by PIC are components
of systems used by the United States Armed Forces. Most of the remaining 17% is
utilized in various industrial processing systems and commercial avionics.
Major projects in which PIC's products are currently used include the United
States Navy's Aegis Destroyer, Airborne Self Protection Jammer and new nuclear
attack submarine as well as the United States Army's Bradley Infantry Fighting
Vehicle and PLGR Global Positioning System Receiver. Approximately 5% of PIC's
sales from these operations in fiscal 1996 were direct spares procurement from
various government activities.
PIC's products are sold to approximately 200 active accounts, principally
defense contractors and their suppliers. Nine customers accounted for
approximately 76%, 78% and 84% of PIC's sales for fiscal 1996, 1995 and 1994,
respectively, which percentages represented approximately 1%, 2% and 12% of the
Company's
3
<PAGE>
consolidated sales, respectively. Four accounts now have 12% to 14% of PIC's
overall sales each. These four accounts are Lockheed Martin, Rockwell
International, Eaton Corporation and ITT Avionics.
MANUFACTURING AND SOURCING
Food Group
Overhill's manufacturing operations are located in three separate facilities
in Los Angeles, California. The operations are labor intensive requiring semi-
skilled employees. All manufacturing employees are unionized with contracts
covering each plant and due to expire at various times over the next three to
six years. Management believes relations with the unions are excellent and does
not anticipate any problems which would affect future production. Each plant
specializes in different processing operations allowing efficiencies in
production of the product. In fiscal 1996, the plants each operated at
approximately 70% of capacity.
The Company's ability to produce economically a large quantity of product,
while at the same time maintaining a high degree of quality, depends in a large
part on its ability to procure raw materials on a reasonable basis. The Company
relies on a few large suppliers for its poultry products with the remaining raw
materials purchased from suppliers in the open market. The Company does not
anticipate any difficulty in acquiring these materials in the future. The
Company maintains three dry warehouses and one frozen warehouse to supply
ingredients, raw materials and packaging for production. Finished goods are
stored on site or in a public frozen food storage facility until shipment is
required.
Transformer Group
PIC operates a manufacturing facility in Fort Washington, Pennsylvania that
produces approximately 92% of the Transformer Group's transformers and all
filters. Transformers are also manufactured at a leased facility in Haiti. See
"Properties--Transformer Group."
The manufacturing process for PIC's transformers and filters is labor
intensive, involving mostly low-technology, manually operated machinery. The
process is not highly automated since PIC's products are custom designed to
customer specifications. Wherever economically feasible, operations are
automated. Given the nature of PIC's products and their end uses, PIC maintains
extensive test equipment for its quality control operation.
Raw materials used by PIC include ferrites, laminates, copper wire and
electronic components purchased in predesigned configurations. Substantially
all raw materials and components are purchased from domestic sources and are
widely available. PIC carries adequate inventories of raw materials and other
product components as required to meet open customer orders. To avoid the
impact of commodity price fluctuations on items such as copper wire, the Company
endeavors to quote prices to customers based upon the known costs of such
materials at the time of such quotation.
BACKLOG
Food Group
At September 30, 1996, Overhill had unfilled purchase orders aggregating
approximately $2,350,000, as compared to $2,222,000 at September 30, 1995.
Substantially all of the backlog is expected to be delivered to customers within
the following 12 month period. Overhill may experience variations in the
total amount of the backlog at any given date and, accordingly, Overhill's
backlog is not necessarily indicative of trends in the Company's business.
Orders are subject to changes in quantities or to cancellation with thirty days
notice without penalties to customers.
4
<PAGE>
Forestry Group
As a dealer, servicer and financier of forestry equipment, TTI does not
maintain a backlog of orders. Equipment ordered by a customer that is not in
inventory takes approximately one to six weeks to be shipped from the
manufacturer or another representative.
Transformer Group
At September 30, 1996, PIC had unfilled purchase orders aggregating
approximately $1,200,000 as compared to $700,000 at September 30, 1995. Orders
may be subject to cancellation at the customer's discretion subject to
substantial cancellation charges. Based on current delivery schedules and
shipments, management believes that the Transformer Group will ship
substantially all of its current backlog within the following 12 months. The
Transformer Group's backlog may not provide meaningful period-to-period
comparisons and such comparisons and the backlog may not be indicative of future
results.
PRODUCT DEVELOPMENT
Food Group
Overhill maintains a separate research, development and quality control
departments who formulate recipes and upgrade specific products for current
customers and establish production and quality standards. Products are
developed based upon either customers' specifications or recipes from the
marketing and research and development departments. Overhill is continuously
modifying recipes as customers' tastes change. During fiscal 1996, the Company
continued its expansion into the retail and food service areas with branded and
private label entrees.
Forestry Group
TTI does not develop products for sale to the public. TTI relies primarily
upon two suppliers, Timberjack, Inc. and Blount, for a majority of its new units
and parts.
Transformer Group
PIC does not maintain a formal research and development program, nor are
material amounts expended for research and development. However, PIC's
engineering, marketing and operations staff are regularly engaged in engineering
design and product development since most products are designed to customers'
specifications. Customers either supply PIC with design specifications or
submit proposed designs and require PIC to determine whether such designs will
meet the customers' performance specifications. PIC continuously modifies and
enhances its transformers and communication filters to accommodate its
customers' systems and equipment and, in this manner, attempts to increase its
market penetration.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company does not have patents or patent applications pending on any of its
products, although it may file such patent applications in the future. The
Company attempts to protect its proprietary interest in its products by entering
into non-disclosure agreements with customers.
The Company has registered the trademark "Polyphase" in the United States
Patent and Trademark Office.
5
<PAGE>
REGULATION
The Food Group is subject to strict government regulation particularly in the
health and environmental areas by the United States Department of Agriculture
("USDA"), the Food and Drug Administration ("FDA"), Occupational Safety and
Health Organization ("OSHA") and the Environmental Protection Agency ("EPA").
The Food Group anticipates increased regulation by the USDA and FDA concerning
food processing and storage. The Company's food processing facilities are
subject to on-site examination, inspection and regulation by the USDA.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position. During 1996, the Company
implemented a Hazard Analysis Critical Point Plan to ensure proper handling of
all food items.
The Transformer and Forestry Groups are required to comply with various
governmental regulations and requirements concerning the discharge of materials
into the environment or otherwise relating to the protection of the environment.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position.
The Company takes all reasonable precautions to ensure that its operations,
processing plants and facilities operate in a safe, sanitary and
environmentally-sound manner. However, events beyond the control of the
Company, such as the adoption by the government of more stringent environmental
regulations could adversely affect its operations. Management believes that the
Company is in substantial compliance with all applicable laws and regulations
relating to the operations of facilities.
COMPETITION
General
Competition in the industries in which the Company operates generally is
intense. Many of the Company's competitors have greater market recognition and
greater, financial, technical, marketing and human resources than the Company.
There can be no assurance that the Company will compete successfully against
existing companies or new entrants to the marketplace. Furthermore, the
development by competitors of new or improved products, services and/or
technologies may render the Company's products or services (or proposed products
or services) obsolete or less competitive.
Food Group
Overhill's food products, consisting primarily of poultry, pasta and to a
lesser extent beef and assorted related products, compete with those produced by
numerous regional and national firms. Many of these companies are divisions of
larger fully integrated companies including Tyson Foods, Hudson Foods and
ConAgra which have greater financial and marketing resources. Competition is
intense with most firms producing similar products for the fast food and retail
industries. Competitive factors include price, product quality, product
development, customer service and, on a retail basis, brand name recognition.
Overhill competes in this market by its ability to produce small/custom product
runs within a short time frame and on a cost effective basis.
Forestry Group
Competition in the Forestry Segment is highly fragmented in the Eastern Texas
and Western Louisiana area where TTI principally operates. In business for many
years, TTI believes it has established a strong local identity in its field with
a proven record of delivering equipment on a timely basis, providing
satisfactory financing and strong customer support and service. TTI is one of
only a few distributors of Timberjack and Blount forestry equipment in its
operating area. TTI has the added advantage of being a leading seller and
financier of various makes and models of used logging equipment. Principal
competitors include local John Deere and Caterpillar distributors.
6
<PAGE>
Transformer Group
The business in which PIC is engaged is highly competitive, characterized by
ease of entry and intense regionally-based competition. Competition is based on
such factors as price, performance, reliability and product quality. The
Company believes that the reputation of PIC's engineering department and the
relationships it has established with its customers (having been in business
over 30 years) are important to its ability to compete successfully.
PIC competes directly with a number of manufacturers, primarily in the United
States, certain of which have financial and other resources substantially
greater than PIC. In addition, such manufacturers generally have more extensive
facilities than those that are, or in the foreseeable future may become,
available to PIC. In this market, changing governmental policies can rapidly
create or eliminate areas of competition and market share. There is no
assurance that PIC will be able to maintain or further increase its market
share.
EMPLOYEES
As of September 30, 1996, the Company had approximately 989 employees as
follows: 59 full-time employees at PIC in Pennsylvania, 74 full-time employees
in the Forestry Group, approximately 846 full-time employees in its Food Group
and 10 full-time employees in the corporate office. All subsidiaries presently
provide group health plans for their domestic employees and pay a portion of the
costs associated with such plans. TTI also maintains profit sharing plans for
its employees.
7
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
CORPORATE HEADQUARTERS
The Company's corporate headquarters are located at 16885 Dallas Parkway,
Dallas, Texas 75248 and contain approximately 40,000 square feet of office
space. This building is subject to a first priority lien mortgage held by
Comerica Bank-Texas. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
FOOD GROUP
Overhill leases three manufacturing facilities in the Los Angeles, California
area. Plant No.1 is located in Inglewood, California and has 39,000 square feet
of manufacturing area. Plants No. 2 and No. 3 are located in Vernon, California
and have 49,000 and 27,000 square feet of manufacturing area, respectively. In
addition to the manufacturing facilities, Overhill also leases two dry goods
warehouses of 13,500 and 11,500 square feet, a 7,700 square foot frozen storage
facility in Inglewood, California and 7,927 square feet of office space in
Culver City, California. While Overhill believes the existing facilities are
adequate to meet its requirements in the foreseeable future, the Company is
currently reviewing the cost effectiveness of consolidating all manufacturing
and administrative functions into one location.
FORESTRY GROUP
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas and
leases buildings in Cleveland and Atlanta, Texas. One building in Lufkin, Texas
has 38,500 square feet, of which 18,900 square feet comprise the shop area. The
other two buildings in Lufkin have 3,600 and 4,200 square feet and comprise the
wash rack and storage room, respectively. One building in Jasper, Texas has
10,000 square feet of which 6,600 square feet comprises the shop area. The
other building in Jasper has 900 square feet and is used as a wash and paint
room. The Cleveland building has approximately 1,800 square feet and is used as
a shop and for parts. The Atlanta building has approximately 7,500 square feet
and is used for parts sales.
During the year, Texas Timberjack completed the real estate transaction in
which Lowe's Home Centers, Inc. acquired the five acres on Loop 287 that was the
site of the Company's Lufkin operations. TTI relocated to its newly constructed
facilities on thirty-one acres located five miles south of Lufkin on Highway 59.
TRANSFORMER GROUP
PIC's domestic transformer and filter manufacturing operations are housed in a
44,000 square foot, leased, single-story facility in Fort Washington,
Pennsylvania, about 30 miles from Philadelphia. The lease for this facility is
due to expire in May 1998. PIC's foreign manufacturing operations are based in
an 8,400 square foot building in Port-au-Prince, Haiti, which is rented by PIC
on a month-to-month basis. Management believes that these facilities are in
suitable condition and are adequate for PIC's needs in the foreseeable future.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
In January 1997, a suit was filed in District Court of Dallas County against
the Company by Rice Partners II, L.P., subordinated debt holders of Overhill.
The suit claims, among other things, that the Company breached covenants of the
subordinated debt agreement and refused to cure the defaults within a reasonable
period of time. The Company has filed a counter suit claiming Rice Partners II,
L.P. (i) refused to comply with verbal agreements to the indenture (ii)
conspired with the former general manager of Overhill to force the Company to
sell Overhill Farms at a distressed price in order to benefit Rice Partners II,
L.P. and (iii) caused the halting of trading of the Company's stock.
The Company is not a party to any other material pending litigation.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is listed on the American Stock Exchange under the symbol
"PLY." The following table sets forth the range of high and low sales prices
for the Common Stock on the American Stock Exchange for the periods indicated:
<TABLE>
<CAPTION>
Fiscal 1997 High Low
----------- ----- ---
<S> <C> <C>
Quarter from October 1, 1996
to December 31, 1996 $ 7.4375 $ 3.8750
Quarter from January 1, 1997
to February 3, 1997 (1) $ 5.5000 $ 3.8125
Fiscal 1996 High Low
----------- ----- ---
Quarter from October 1, 1995
to December 31, 1995 $ 4.7500 $ 3.1250
Quarter from January 1, 1996
to March 31, 1996 $ 4.3750 $ 2.7500
Quarter from April 1, 1996
to June 30, 1996 $ 4.2500 $ 3.0625
Quarter from July 1, 1996
to September 30, 1996 $ 7.2500 $ 1.8750
Fiscal 1995 High Low
----------- ----- ---
Quarter from October 1, 1994
to December 31, 1994 $ 5.7500 $ 3.1250
Quarter from January 1, 1995
to March 31, 1995 $ 3.7500 $ 2.1250
Quarter from April 1, 1995
to June 30, 1995 $ 3.6250 $ 2.6875
Quarter from July 1, 1995
to September 30, 1995 $ 3.8750 $ 3.0625
</TABLE>
- --------------------------------------------------------------------------------
(1) On February 3, 1997 the Company agreed with the American Stock Exchange,
Inc. to temporarily halt trading of its Common Stock pending the filing of this
annual report on Form 10-K for the fiscal year ended September 30, 1996.
The Company has never paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such
policy is, within the limitations and restrictions described below, subject to
change based on current industry and market conditions, as well as other factors
beyond the control of the Company.
11
<PAGE>
The Company is restricted from paying dividends on its Common Stock pursuant
to the indenture (the "1999 Indenture") executed in connection with the issuance
of $4,000,000 in principal amount of 12% Senior Convertible Debentures due July
1, 1999 (the "1999 Bonds"), and is further restricted pursuant to the indenture
(the "1997 Indenture") executed in connection with the issuance of $1,500,000 in
principal amount of 12% Senior Convertible Debentures due December 1, 1997 (the
"1997 Bonds"). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." In general, the
1999 Indenture and the 1997 Indenture prohibit the Company from paying or making
within any 12-month period dividends or distributions on its Common Stock having
a value in excess of 50% of the consolidated net income of the Company, unless
each holder of the 1999 Bonds and 1997 Bonds receives an amount equal to its pro
rata portion of the dividend or distribution (on an as-converted into Common
Stock basis). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources."
On February 3, 1997, the closing sales price for the Company's Common Stock on
the American Stock Exchange was $3.8125 per share.
As of December 31, 1996, the Company estimates that there were approximately
2,200 beneficial owners of the Company's Common Stock, represented by 215
holders of record.
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
In November 1995, the Company sold in a private transaction to Infinity
Investors, Ltd. for $2,500,000, 250,000 shares of Series A-3 Preferred Stock
having an aggregate redemption value of $2,500,000 and convertible into 500,000
shares of common stock.
The shares of Preferred Stock described above were not registered under the
1933 Act and were issued by the Company in reliance on the exemptions provided
under Section 4(2) of the 1933 Act.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The table set forth below is selected financial data for the Company for each
of the last five fiscal years. This information should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Consolidated Financial Statements and Notes included
elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30
---------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
Income Statement Data: 1996 1995 1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 149,541 $ 102,035 $ 24,970 $ 7,326 $ 5,563
Operating Income 6,665 6,752 355 390 (833)
Earnings (Loss) Before
Extraordinary Item and
Cumulative Effect of Change
in Accounting Principle (242) 3,286 (1,384) 852 (883)
Net Income (Loss) (242) 3,286 (1,017) 1,036 (883)
Income (Loss) per Common Share:
Before Cumulative Effect of
Extraordinary Item and Change
in Accounting Principle $ (.03) $ .26 $ (.28) $ .24 $ (.35)
Extraordinary Items .01 .05
Cumulative Effect of
Accounting Change .06
----------
Net Income (Loss) $ (.03) $ .26 $ (.21) $ .29 $ (.35)
=========== =========== ========== ========== ==========
Weighted Average Common
and Common Equivalent
Shares Outstanding 13,184,466 12,745,701 4,881,454 3,616,795 2,505,785
As of September 30
---------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 1996 1995 1994 1993 1992
---------------------------------------------------------------
Total Assets $ 94,179 $ 88,159 $ 37,975 $ 9,034 $ 3,904
Long-Term Debt - 27,230 5,259 169 620
Total Liabilities 68,991 66,335 23,618 1,740 1,926
Accumulated Income (Deficit) (1,488) (1,095) (4,381) (3,365) (4,400)
Stockholders' Equity 23,998 21,137 14,357 7,293 1,977
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Statements contained in this Form 10-K that are not historical facts,
including, but not limited to, the projections contained herein, are forward-
looking statements and involve a number of risks and uncertainties. The actual
results of the future events described in such forward-looking statements in
this Form 10-K could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Results of Operations
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995
For the year ended September 30, 1996 the Company's revenues increased
$47,506,000 (47%), to $149,541,000 from $102,035,000 in fiscal 1995. Operating
income for the year ended September 30, 1996 decreased $87,000 (1%) to
$6,665,000 from $6,752,000 in fiscal 1995. Net income to common shareholders
for the year ended September 30, 1996 was a loss of $392,000, a decrease of
$3,678,000 (112%) from net income of $3,285,599 in fiscal 1995. The increase in
revenues was attributable to the inclusion of Overhill for a full twelve months
in fiscal 1996 as compared to twenty one weeks in fiscal 1995, offset somewhat
by reduced sales at TTI and the Computer Group, control of the latter of which
was divested in July 1996. The decrease in net income to common stockholders
was attributable to increased interest expense from the Overhill acquisition,
the reduction of tax benefits available during the year, reduction of profits at
TTI, losses incurred by the Computer Group and dividends on the outstanding
preferred stock.
After evaluating the industry and growth potential of the Computer Group,
management determined current and future operating margins within the Computer
Group no longer met long term expectations. Consequently, in July 1996 the
Company sold a controlling interest in the Computer Group to an unrelated third
party. The sale of 51% of a newly-formed subsidiary whose sole assets
consisted of the capital stock of Network America, Inc., PC Repair of Florida,
Computer Systems Concepts, and Register Mate, Inc. occurred in July 1996. For
the year ended September 30, 1996 the Computer Group contributed revenues of
$10,398,000 and operating losses of $1,531,000. The Company in fiscal 1996
without the Computer Group would have realized revenues of approximately
$139,142,000 and operating income of $8,196,000.
Also during the fiscal year the Company reached an agreement to manage the
development and construction of a domed stadium in Las Vegas, Nevada. The
project is being developed by PLY Stadium Partners, Inc. ("Stadium Partners"), a
private investment firm headed by Mr. Paul A. Tanner, Chairman and Chief
Executive Officer of the Company. Preliminary design specifications for the
facility include accommodations for 85,000 and the ability to reduce capacity
for arena-style events. The Company's involvement will also include the
marketing of luxury suites, premium seating and sales of concessions,
sponsorships and other ancillary rights. The Company has funded $4,000,000 of
debt that (1) is convertible into a 14% economic interest in Stadium Partners
and (2) is guaranteed by Mr. Tanner and the Pyrenees Group, a private investment
firm controlled by Mr. Tanner. Beginning in January 1996, the Company began
recording a monthly fee for managing the project. For the twelve months ended
September 30, 1996, the Company accrued management and service revenues of
$2,550,000 and interest income of $790,000 related to the Company's activities
with Stadium Partners. At September 30, 1996, the total amount receivable from
Stadium Partners amounted to approximately $13.3 million, which includes the
convertible debt and managment fees discussed above as well as additional
advances made by the Company. The collectibility of this receivable, which is
currently approximatly $18 million, is dependent upon the success of the project
and/or performance under the guarantees referred to above. However, all such
amounts are guaranteed by Mr. Tanner and the Pyrenees Group.
On November 15, 1996, PLY Stadium Partners, Inc., through a newly-formed
partnership (the "Partnership"), purchased 62 acres in Las Vegas for the
development of the stadium and adjacent convention facility. Financing was
provided by a Lehman Brothers affiliate ("Lehman"), with the lender also
receiving 50% equity interest in the partnership. As a result of the new
partnership arrangement, Stadium Partners is precluded
14
<PAGE>
from making any revenue distributions until permanent financing is arranged or
until revenues from the sale of luxury suites, premium seats and/or concession
rights are sufficient to repay the financing provided by Lehman. Stadium
Partners launched its marketing campaign in Las Vegas on January 15, 1997, but
by March 15, 1997, sales were insufficient to satisfy the Lehman repayment. As a
result of Stadium Partners' failure to make timely payment of its obligation to
Polyphase, the Company was required to establish a reserve of $3.34 million
against the income accrued, which after applicable taxes reduced net income by
$2.2 million. The reserve will be reduced as collections and distributions are
made pursuant to the Stadium Partners loan agreements. There can be no assurance
that payments will be made and the Company has discontinued accruing for
interest and management fees.
Sales in the Food Group increased $58,376,000 (145%) to $98,771,000 in fiscal
1996 from $40,395,000 for the twenty one week period during fiscal 1995 in which
the Company owned the Overhill operations. Overall sales have remained stable
during the year despite the turndown in the weight loss sectors and airline
sectors. Overhill's expansion into brand name entrees and restaurant specialty
products offset the sales decline in other sectors. Brand name frozen entrees
have begun to gain name recognition and sales momentum at the regional level
while specialty products for the restaurant industry are developing market
share in a competitive environment. Operating income for fiscal 1996 was
$6,260,000 as compared to $2,708,000 for the twenty one weeks of fiscal 1995.
Gross margins on sales increased while operating income as a percentage of
revenues decreased. The changes resulted from a change in the product mix as
more emphasis is placed on the higher margined specialty products which require
higher marketing and administrative expenses.
The Forestry Group sales decreased $8,531,000 (20%) from $42,778,000 in
fiscal 1995 to $34,247,000 in fiscal 1996. Operating income decreased
$1,651,000 (35%) from $4,691,000 in fiscal 1995 to $3,040,000 in fiscal 1996.
The decreases in revenues and operating income are attributable to unseasonable
weather in fiscal 1996, contributing to weaker timber prices and decreased sales
of logging equipment. The Company also incurred additional expenses while
moving its Lufkin location to a larger facility and opening a third sales office
in Atlanta, Texas. See "Business-Properties" and "Liquidity and Capital
Resources."
The Transformer Group sales decreased $54,000 (1%) from $3,603,000 in fiscal
1995 to $3,549,000 in fiscal 1996. Operating income also decreased $226,000
(75%) primarily due to higher general and administrative costs during the year
and the effects of a fire which closed the business for three weeks. The
Company anticipates revenues and operating income will continue to decrease over
the next few periods as the industry begins a slow decline due to innovations in
alternative sources of electro-mechanical devices.
The Computer Group as mentioned above was consolidated into PC Networx
America, Inc. and a 51% interest was sold July 1, 1996. Revenues for the nine
months of fiscal 1996 were $10,398,000 as compared to revenues of $15,259,000
for twelve months of fiscal 1995. The group incurred operating losses of
$1,530,000 in fiscal 1996 as compared to operating income of $549,000 in fiscal
1995. The decreases in revenue and losses in Computer Group were attributable
to inventory adjustments in the third quarter of fiscal 1996 and significant
declines in prices of memory and other components. These factors contributing
with the lower gross margins on "clone" computers resulted in management's
decision to sell a controlling interest in the group.
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended September 30,
1994
During fiscal 1995, the Company made its largest acquisition to date
purchasing substantially all of the assets of IBM Foods, Inc. of Los Angeles,
California through its Overhill subsidiary. Overhill is a leading provider of
portion entrees to the airline and weight loss industry and a processor of food
for the retail and wholesale industries.
Net sales for the Company increased $77,065,000 (308 %) from $24,970,000 in
1994 to $102,035,00 in fiscal 1995. The increase in sales was primarily
attributable to the Overhill acquisition during the 1995 fiscal year.
Operating income increased $6,396,000 (1800%) from $355,000 in fiscal 1994 to
$6,752,000 in fiscal
15
<PAGE>
1995. Increased operating income was primarily the result of economies of scale
achieved through higher revenues and additional companies.
Sales in the Computer Group increased $4,960,000 (48%) from $10,300,000 in
fiscal 1994 to $15,260,000 in fiscal 1995, while operating income increased
$82,000 (18%) from $466,000 in fiscal 1994 to $549,000 in fiscal 1995. The
increase in revenue was largely attributable to a full year contribution by
Micro, PCR and RMI. The Computer Group also benefited from increased demand by
customers for hardware with increased processing power, networking upgrades, CD-
ROM kits, and Internet expertise. The significant interest initially shown by
the public over the Internet has compelled the Company to investigate potential
sales opportunities related to the Internet, which in the future may include the
sale and installation of hardware, and the development of, and programming
for, Internet sites.
Sales in the Transformer Group remained relatively flat due to the decreased
spending in military contracts. In fiscal 1995 sales increased $86,000 (2%)
from $3,517,000 in 1994 to $3,603,000 in fiscal 1995. Operating income improved
$86,000 (38%) as management continued to reduce staff and other selling general
and administrative expenses. The Company expects that, during the foreseeable
future, revenues in the Transformer Group will remain at approximately the same
level as fiscal 1995 with a slight decrease in operating profits.
The Forestry Group's sales increased $31,624,000 (283%) from $11,154,000 in
fiscal 1994 to $40,395,000 in fiscal 1995, while operating income increased
$3,815,000 (435%) from $ 876,000 in fiscal 1994 to $4,691,000 in fiscal 1995.
Most of the increase in sales was attributable to a full year's contribution of
TTI's results of operations in fiscal 1995 versus only three months in fiscal
1994. The remaining increase was due to a robust timber and logging market in
the East Texas region as wood prices remained firm through fiscal 1995. The
Forestry Group has attempted to increase its market share by aggressive sales
and marketing throughout the region and attractive financing packages.
The Food Group contributed sales of $40,395,000 and operating income of
$2,708,000 for the approximately five-month period during fiscal 1995 in which
the Company owned the Overhill operations.
LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity for the Company are cash flow from operations,
cash balances and additional financing capacity. The Company's cash and cash
equivalents decreased $2,994,000 to $281,000 at September 30, 1996 compared to
$3,275,000 at September 30, 1995.
The Company generated $2,775,000 cash from operations in fiscal 1996 as
compared to a use of $2,307,000 in fiscal 1995. The increase in cash flow from
operations results from larger increases in depreciation and amortization
expenses associated with the acquisition of Overhill, larger provision for
doubtful accounts in the current year over the prior year coupled with changes
in working capital items.
The Company's investing activities for the year ended September 30, 1996 used
cash of approximately $9,812,000 as compared to a use of cash (primarily due to
the Overhill acquisition) of $32,067,000 in the year ended September 30,1995.
During fiscal 1996 the Company's use of cash consisted primarily of advances to
Stadium Partners. In January 1996 the Company agreed to provide Stadium Partners
$4,000,000 of debt (bearing interest at 12%), convertible to a 14% economic
interest in Stadium Partners and guaranteed by Mr. Tanner and Pyrenees.
Additional advances were made during the year totalling approximately $9,271,000
consisting of cash advances of $5,931,000 and accrued revenue and interest of
$3,340,000; such accrued revenue and interest has been reserved at September 30,
1996. Effective October 1, 1996 the Company no longer accrues management fees or
interest income on the existing advances. The additional advances are subject to
the above guarantees and are currently due and payable by Stadium Partners.
Subsequent to September 30, 1996 the Company further advanced Stadium Partners
$4.9 million. The funds advanced consisted of $2.4 million, drawn from an
existing line of credit, and $2.5 million from a six month term note. The term
note bears interest at 16%, is payable monthly and is secured by a second lien
on the Company's headquarters. As additional collateral, the Company
16
<PAGE>
agreed to issue an option on 500,000 shares of Series A-2 preferred stock
(convertible into 1,000,000 shares of common stock) which is exercisable upon
default of certain covenants of the agreement.
The Company's financing activities provided cash of $4,043,000 for the year
ended September 30, 1996 as compared to $36,612,000 cash provided in the year
ended September 30, 1995. During fiscal 1996, the Company placed $2,500,000 of
Series A-3 Preferred Stock. The Series A-3 Preferred Stock is entitled to a 12%
cumulative dividend payable quarterly and each share of Series A-3 Preferred
Stock is convertible by the holder from time to time into two shares of common
stock subject to certain adjustments. Also during the year the Company entered
into an agreement with Merrill Lynch whereby the Company sold the 1997 Bonds on
generally the same terms and conditions of the offering of the 1999 Bonds. The
1997 Bonds bear interest at 12% are payable semiannually in June and December,
are convertible into common stock at the rate of $5.00 per share and become due
and payable on December 1, 1997. The funds from these transactions were used,
in part, in the repayment of advances of $1,153,000 from related parties in
connection with the acquisition of Overhill and prepaying $750,000 on existing
Overhill term loans. On April 1, 1996 the Company utilized a line of credit for
approximately $6 million for an advance made to Stadium Partners.
During the year, TTI completed the real estate transaction in which Lowe's
Home Centers, Inc. acquired the five acres on Loop 287 that was the site of the
Company's Lufkin operations. TTI relocated to its newly constructed facilities
on thirty-one acres located five miles south of Lufkin on Highway 59. TTI
realized a gain of $875,000 on the transaction.
During 1995 the Company entered into a financing arrangement which provided a
senior credit facility of $18,000,000 and a subordinated debt placement of
$13,000,000. These funds were used to provide financing for the acquisition of
the net assets of IBM Foods, Inc.
The senior credit facility was provided by Finova Capital Corporation and
included a line of credit, of which approximately $9,700,000 was initially
drawn, and two term loans. Borrowings under the line of credit are limited to
the lesser of $12,000,000 or an amount determined by a defined borrowing base
which is based upon eligible receivables and inventory. At September 30, 1996
approximately $9,714,000 was outstanding under the revolving line of credit.
Term Loan A in the original amount of $2,000,000 is payable in monthly
installments of $33,333 plus interest at prime plus 2.5%. Term Loan B in the
original amount of $4,000,000 is payable in monthly installments of $83,333 plus
interest at prime plus 2.5%. The senior credit facility contains various
covenants which include, without limitation, a restriction on the permissible
capital expenditures of Overhill, specified current debt to net worth ratios,
specified levels of net worth and a limitation on the ability of the Company to
realize monies, including dividends, and management and consulting fees, from
Overhill to $250,000 per annum. Furthermore, the capital stock and substantially
all assets of Overhill are pledged as collateral for the credit facility.
The subordinated debt placement in the amount of $13,000,000 bears interest at
13% per annum, payable semiannually. Principal payments in the amount of
$6,500,000 each are due in April 2002 and 2003. The subordinated debt includes
warrants to purchase shares of Overhill (representing up to 22.5% of its common
stock) at any time over a ten-year period which ends May 5, 2005 for a nominal
exercise price of $100. The warrant holders also have the option to "put" the
warrants to the Company at a "put" price based upon the higher of fair market,
book or appraised value of the subsidiary. The "put option" becomes exercisable
anytime after May 5, 2000 or at any time Overhill experiences a change in
control or merges with another unaffiliated company. Additionally the Company
has the option of calling the outstanding warrants for cash at anytime after May
5, 2001. The call price is determined using the same formula as provided for
determining the "put" price of the warrants. The subordinated debt facility
contains covenants similar to those described in the senior credit facility. At
September 30, 1996 the Company's subordinated debt balance, net of discount, was
$12,596,000. The lender and the subordinated debt are subject to litigation as
described in Item 3.
In May 1994, the Company obtained a $1,000,000 term loan from Comerica Bank --
Texas, N.A. ("Comerica"), payable in equal monthly installments through maturity
in May 1999, at which time the unpaid balance of approximately $600,000 becomes
due and payable. The term loan with Comerica bears interest at an annual rate
of 8.5% and is collateralized by the building in which the Company maintains
its headquarters.
17
<PAGE>
See "Properties--Corporate Headquarters." At September 30, 1996, the term loan
with Comerica had approximately $846,000 outstanding.
In connection with the acquisition of TTI, the Company sold $4,000,000 in
principal amount of the 1999 Bonds to Merrill Lynch World Income Fund, Inc. and
Convertible 1999 Holdings, Inc. (collectively, the "Purchasers" or "Merrill
Lynch"). The 1999 Bonds are convertible by a Bond holder at any time prior to
June 30, 1999 into such number of shares of Common Stock as is equal to the
principal amount of such Bond (or in $1,000 increments thereof) divided by $5.65
(such conversion price being subject to adjustment in certain instances). See
"Market for Common Equity and Related Stockholder Matters." The 1999 Indenture
requires the Company to maintain key-man life insurance policies on Paul A.
Tanner and James Rudis. The policies on each of Mr. Tanner and Mr. Rudis must
name as loss payee the trustee under the Indenture for the benefit of the 1999
Bond holders and must be in an amount at least equal to the principal amount of
the 1999 Bonds outstanding from time to time multiplied by the redemption price
in effect at such time.
In December 1995, the Company sold the 1997 Bonds to Merrill Lynch on
generally the same terms and conditions. The bonds are convertible by the Bond
Holder anytime prior to December 1997 into shares of Common Stock at a rate of
$1,000 increments divided by $5.00 per share.
In connection with the TTI acquisition, the Company also issued a non-interest
bearing note to Harold Estes for $10,000,000 due October 31, 1994, on which the
Company imputed interest at 8.0% per annum. The Company has since modified,
extended and renewed the note whereby the note currently having a balance
including accrued interest of $12,546,600 has been extended to December 1, 1997
bearing interest at 10% through June 30, 1997 and 16% thereafter. The Company
anticipates that it will be required to refinance this note payable on a long-
term basis and is presently in negotiations with potential lenders to accomplish
their goal. There is no certainty that Company will be able to refinance this
note on acceptable terms or at all, by December 1, 1997. The note holder has no
recourse to any of the assets or capital stock of Polyphase Corporation or any
of its other subsidiaries and no cross-default provisions exist between this
note and any other Polyphase debt.
TTI currently has an $11,000,000 line of credit at prime + 1/2% at Comerica
maturing on February 1, 1997 and extended on a month to month basis. The
agreement with Comerica relating to this line of credit contains various
restrictive covenants, including requiring TTI to maintain a tangible net worth
of $4,500,000, total debt divided by the tangible net worth of no greater than
4.0 to 1.0, fixed charged coverage of 1.5 to 1.0 and a minimum working capital
of $2,200,000. The balance at September 30, 1996 on the Comerica line of credit
was $8,900,000. The line has been extended for renewal pending receipt of
audited financial statements.
The Company has not complied with certain covenants involving the Rice,
Finova, Merrill Lynch, and Comerica loan agreements, including covenants that
restrict transactions with affiliates and requiring the filing of audited
financial statements for the Company and its subsidiaries on a timely basis. As
a result, the Company's debt has been classified as current as of September 30,
1996.
The Company is in the process of negotiating a transaction involving Overhill
that the Company expects will resolve the Rice lawsuit and improve the
Company's overall debt structure, but there can be no assurance that such
transaction will be consummated.
Accordingly, the Company's management believes that cash generated from the
proposed Overhill transaction and from operations, together with existing lines
of credit, will be sufficient to enable the Company to meet its liquidity
requirements for the next 12 months.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS.
See Index to Consolidated Financial Statements included in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company's independent accountants for fiscal 1994 were Price Waterhouse
LLP ("Price Waterhouse"). Price Waterhouse resigned as the principal
accountants for the Company on May 8, 1995. None of the reports of Price
Waterhouse on the financial statements of the Company for either of fiscal 1993
or 1994 contained an adverse opinion or a disclaimer of opinion, or were
qualified as to uncertainty, audit scope, or accounting principles. During the
Company's two most recent fiscal years and the subsequent interim period
preceding such resignation, there were no disagreements with Price Waterhouse on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures.
On May 31, 1995, Ernst & Young LLP ("Ernst & Young") was engaged as principal
accountants for the Company to, among other things, audit the financial
statements of the Company for fiscal 1995. The selection of Ernst & Young was
made by the Board of Directors upon recommendation of the Audit Review
Committee. Prior to its engagement, the Company did not consult with Ernst &
Young on either the application of accounting principles to a completed or
proposed specific transaction, or the type of audit opinion that might be
rendered on the Company's financial statements.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Paul A. Tanner 66 Chairman of the Board, President
and Chief Executive Officer
James Rudis 47 Executive Vice President and
Director
William E. Shatley 50 Senior Vice President, Chief
Financial Officer and Treasurer
Paul A. Tanner, Jr. 43 Director
Harold Estes 56 President of Texas Timberjack,
Inc.
and Director (1)
Michael F. Buck 57
Director
George R. Schrader 65 Director
</TABLE>
- --------------------------------------------------------------------------------
(1) Mr. Estes resigned as director of Polyphase Corporation on April 5, 1997
PAUL A. TANNER was elected to the Board of Directors on December 21, 1992 and
has served as Chairman of the Board, President and Chief Executive Officer since
December 29, 1992. He served as Chief Financial Officer and Chief Accounting
Officer from December 29, 1992 until March 2, 1994. He has been a licensed
Texas Real Estate Broker for over 30 years and is President of Southland
Resources, Inc., a private investment firm. Since 1956, Mr. Tanner has been the
owner and Chief Executive Officer of several companies engaged in oil and gas
development, real estate development, computer manufacturing and the national
distribution of office and telecommunications products.
JAMES RUDIS was elected to the Board of Directors in December 1992 and has
served as Executive Vice President of the Company since March 2, 1994. He is
President of Quorum Corporation, a private consulting firm involved in
acquisitions and market development and has held that position since September
1984. From 1970 until 1984, he held various executive positions in CIT
Financial Corporation, including Vice President and Regional Manager of that
company's Commercial Finance Division.
WILLIAM E. SHATLEY was named as Senior Vice President and Treasurer of the
Company in March 1994. He joined the Company in an executive capacity in
October 1993, having previously served the Company on an advisory basis since
the relocation of its corporate offices to Texas in 1992. Mr. Shatley, a
Certified Public Accountant since 1970, previously conducted his own consulting
and accounting practice (1982-1993), after having served as Vice President and
Chief Financial Officer of Datotek, Inc., a manufacturer of electronic
communications security equipment (1977-1982) and in an executive capacity with
Arthur Andersen & Co. (1968-1977).
MICHAEL F. BUCK is President of Mimatian Co., an operations and materials
consulting firm. From August 1990 to August 1994, Mr. Buck served as Vice
President of Bath Iron Works, Inc., a company engaged in building Aegis Class
cruisers and destroyers for the United States Navy. From August 1989 to
August 1990, Mr. Buck was a Vice President of Sabreliner Corporation, a company
engaged in building, maintaining and
20
<PAGE>
overhauling executive jet aircraft. From March 1986 to August 1989, Mr. Buck was
Vice President and Director of Procurement for International Telephone and
Telegraph. He became a director of the Company in December 1989.
GEORGE R. SCHRADER was appointed as a director in March 1994 to fill a vacancy
on the Board. He is currently a named member of Schrader & Cline, LLC, a
financial and governmental management consulting firm. From 1983 to 1993, he
was a principal of Schrader Investment Company, whose activities paralleled
those of Schrader & Cline, LLC. Mr. Schrader's additional experience includes
10 years as City Manager for the city of Dallas, Texas and a total of nine years
experience as City Manager for the Texas cities of Mesquite and Ennis.
PAUL A. TANNER, JR. was elected as a director in February 1996. He served as
a Vice President of the Company's wholly owned subsidiary Letronix, Inc. from
October 1993 until its sale in July 1996. From February 1990 to October 1993,
he served as Vice President of Southland Resources, Inc. a private investment
firm controlled by Paul A. Tanner. He is the son of Paul A. Tanner.
HAROLD ESTES was elected as a director in February 1996. He is the President
of Texas Timberjack, Inc. a wholly owned subsidiary of the Company. TTI is a
distributor of industrial and commercial timber and logging equipment with
locations in Lufkin, Cleveland, Atlanta and Jasper, Texas. Mr. Estes has been
President of TTI since 1984, when he acquired TTI from Eaton Corporation. On
April 5, 1997 Mr. Estes resigned from the Board of Directors.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board has standing Executive, Compensation and Audit Review Committees.
The Compensation Committee is comprised of Messrs. Buck and Schrader. During
fiscal 1996, the Compensation Committee met two times. The Compensation
Committee (i) administers the Company's employee stock option plans and approves
the granting of stock options and (ii) approves compensation for officers.
The Executive Committee is composed of Messrs. Tanner and Rudis. During
fiscal 1996, the Executive Committee met 10 times. Except as restricted under
Nevada law, the Executive Committee possesses all of the power and authority of
the Board of Directors between meetings of the Board of Directors.
The Audit Review Committee is composed of Messrs. Buck and Schrader. During
fiscal 1996, the Audit Review Committee did not meet. Its functions are to (i)
recommend the appointment of independent accountants; (ii) review the
arrangements for and scope of the audit by independent accountants; (iii)
consider the adequacy of the system of internal controls and review any proposed
corrective actions; and (iv)review and monitor the Company's policies regarding
business ethics and conflicts of interest.
The full Board of Directors met four times during fiscal 1996. No director
attended fewer than 75% of the total number of meetings of the Committee on
which such director served.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's directors, officers and persons who own more than 10
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the American Stock Exchange. Directors, officers and greater
than 10 percent beneficial owners are required by applicable regulations to
furnish the Company with copies of all forms they file with the Commission
pursuant to Section 16(a).
Based solely upon a review of the copies of forms furnished to the Company,
the Company believes that during fiscal 1996, all filing requirements
applicable to its directors, executive officers and greater than 10% beneficial
owners were satisfied, with the exception that (i) the Pyrenees Group failed to
report eleven transactions
21
<PAGE>
on Form 4, which were reported on a Form 5 that was filed late, (ii) Paul A.
Tanner failed to report thirteen transactions that occurred during fiscal 1996
and prior fiscal years, which were reported on a Form 5 that was filed late and
on an amended Form 5 from a previous reporting year, (iii) Michael F. Buck
failed to report four transactions on Form 4, which were reported on a Form 5
that was filed late, (iv) Harold Estes failed to report one transaction on Form
4, which was reported on a Form 5 that was filed late, (v) Paul A. Tanner, Jr.
filed his Form 3 late and failed to report one transaction on Form 4, which was
reported on a Form 5 that was filed late, (vi) James Rudis failed to report
three transactions on Form 4, which were reported on a Form 5 that was filed
late (vii) William E. Shatley failed to report five transactions on Form 4,
which were reported on a Form 5 that was filed late and (viii) George R.
Schrader failed to report one transaction on Form 4, which was reported on a
Form 5 that was filed late.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth for fiscal 1996, 1995 and 1994 compensation
awarded or paid to Mr. Paul A. Tanner, the Company's Chairman of the Board,
President and Chief Executive Officer and Mr. James Rudis, the Company's
Executive Vice President (collectively, the "Named Executive Officers"). Other
than as indicated in the table below, no executive officer of the Company
received salary plus bonus in excess of $100,000 for the year ended September
30, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------- ---------------
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation Options/SARs Compensation
- ------------------ -------- --------- --------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paul A. Tanner............... 1996 $196,560 $ 0 $ --(1) 130,000 $ -
President, Chief 1995 $187,200 $ 0 $ --(1) - $ -
Executive Officer and 1994 $166,200 $ 0 $ --(1) - $ -
Director
James Rudis.................. 1996 $120,960 $ 0 $ --(1) 130,000 $ -
Executive Vice 1995 $115,200 $ 0 $ --(1) - $ -
President and 1994 $ 96,300 $ 0 $ --(1) - $ -
Director
</TABLE>
_______________
(1) Mr. Tanner and Mr. Rudis each received certain perquisites and other
personal benefits from the Company during fiscal 1996, 1995 and 1994.
These perquisites and other personal benefits, however, did not equal or
exceed 10% of Mr. Tanner's or Mr. Rudis', as the case may be, salary and
bonus during fiscal 1996,1995 or 1994.
The following table sets forth, for the Named Executive Officers,
information concerning individual grants of stock options made during the last
completed fiscal year ended September 30, 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
NUMBER OF SECURITIES % OF TOTAL OPTIONS/SAR'S FOR OPTION TERM
UNDERLYING OPTIONS/SAR'S GRANTED TO EMPLOYEE EXERCISE PRICE EXPIRATION -------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ----------------- ------------------------- ------------------------ --------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Paul A. Tanner 130,000 25.5% $2.00 7-22-06 423,800 674,375
James Rudis 130,000 25.5% $2.00 7-22-06 423,800 674,375
</TABLE>
_______________
(1) The exercise price for each option is the fair market value of the Common
Stock on the date of grant, and such options are immediately exerciseable.
23
<PAGE>
The following table describes for the Named Executive Officers options and
the potential realizable value for his options at September 30, 1996.
FISCAL YEAR END SEPTEMBER 30, 1996 OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs at Options/SARs at
September 30, 1996 September 30, 1996(1)
--------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul A. Tanner.. 130,000 - $ 609,375 $ -
James Rudis..... 276,500 - $1,479,219 $ -
</TABLE>
- ---------
(1) Based on $6.875 per share of Common Stock, which was the closing price per
share of Common Stock on September 30, 1996 on the AMEX as reported by The
Wall Street Journal.
DIRECTOR COMPENSATION
Directors who are also employees of the Company receive no additional
compensation for services as directors. Nonemployee directors receive an annual
fee of $1,000 and are also reimbursed for all expenses incident to their service
on the Board of Directors.
During July 1996, the following directors were granted options to
purchase Common Stock, exercisable at $2.00 per share (the fair market value at
the date of grant) in whole or in part, expiring in July 2006, as follows:
Name Option Shares
------------------ -------------
Michael Buck 30,000
George R. Schrader 30,000
Paul A. Tanner, Jr. 30,000
In March 1994, Mr. Schrader was granted options to purchase 50,000
shares of Common Stock. Mr. Schrader's options are exercisable at $5.25 per
share (the fair market value at the date of grant), in whole or in part, and
will expire in March 1999.
During July 1993, Mr. Buck was granted options to purchase 75,000
shares of Common Stock. Mr. Buck's options, are exercisable at $0.75 per share
(the fair market value at the date of grant), in whole or in part, and will
expire in July 1998.
24
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of Common Stock as of December 31, 1996 by each person or group who
owned, to the Company's knowledge, more than five percent of the Common Stock,
each of the Company's directors, the Company's Chief Executive Officer, and all
of the Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
OF OF
NAME BENEFICIAL OWNERSHIP CLASS (1)
- ------------------------------------------- --------------------- ------------
<S> <C> <C> <C>
Paul A. Tanner............................. 490,882 (2) 3.6
James Rudis................................ 557,900 (3) 4.0
Michael F. Buck............................ 31,000 (4) *
Harold Estes............................... 2,700,000 (5) 19.8
George R. Schrader......................... 80,000 (6) *
Paul A. Tanner, Jr......................... 1,148,964 (7) 8.4
The Pyrenees Group......................... 1,903,000 (8) 13.9
Tanner Family Trust........................ 447,205 (9) 3.3
Elizabeth Carter Children's
Foundation................................ 671,759 (10) 4.9
Wayne H. Creasy............................ 447,205 (11) 3.3
Merrill Lynch.............................. 1,007,965 (12) 6.9
All directors and executive officers as a
group (7 persons)......................... 5,254,346 (13) 36.3
</TABLE>
- ----------------
* Less than 1%.
(1) Except as noted, the listed persons have sole investment power and sole
voting power as to all shares of Common Stock for which they are
identified as being the beneficial owners. Information as to beneficial
ownership has been furnished to the Company by such individuals. Such
presentation is based on 13,664,109 shares of Common Stock outstanding
as of December 31, 1996.
(2) Includes 130,000 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof. Includes 178,882 shares that Mr. Paul A. Tanner may be deemed
to beneficially own as a 9.4% owner of the Pyrenees Group (see footnote
8 below). Does not include 671,759 shares that Mr. Paul A. Tanner may
be deemed to beneficially own as a member of the board of trustees of
the Elizabeth Carter Children's Foundation, (the "Foundation") (see
footnote 10 below), and also does not include the remaining 1,724,118
shares of the Pyrenees Group (that Mr. Paul A. Tanner does not own as
owner), which Mr. Paul A. Tanner may be deemed to beneficially own
because he is the president and sole director of the Pyrenees Group.
(3) Includes 276,500 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof.
(4) Includes 30,000 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof.
25
<PAGE>
(5) Mr. Estes' address is Highway 59 South, Route 15 - Box 9475, Lufkin,
Texas 75901.
(6) Includes 80,000 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof.
(7) Includes 30,000 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof. Includes 671,759 shares that Mr. Paul A. Tanner, Jr. may be
deemed to beneficially own as a member of the board of trustees of the
Foundation. See Footnote 10. Also includes 447,205 shares that Mr.
Paul A. Tanner, Jr. may be deemed to beneficially own as trustee of the
Tanner Family Trust. See Footnote 9.
(8) The address of the Pyrenees Group is 2 Kelvingate Court, Dallas, Texas
75225. The Pyrenees Group, a Nevada corporation, is owned by Paul A.
Tanner (9.4%), Wayne H. Creasy (23.5%), the Tanner Family Trust (23.5%),
the Foundation (35.3%), and four other investors.
(9) Includes 447,205 shares that the Tanner Family Trust may be deemed to
beneficially own as a stockholder in the Pyrenees Group. See footnote
8. The address of the Tanner Family Trust is 16885 Dallas Parkway,
Dallas, Texas 75248. Mr. Paul A. Tanner, Jr., the trustee of the Tanner
Family Trust, is the adult son of Mr. Paul A. Tanner, the Chairman of
the Board, President, and Chief Executive Officer of the Company.
Unless otherwise indicated herein, all references to "Mr. Tanner" shall
mean Mr. Paul A. Tanner.
(10) Includes 671,759 shares that may be deemed to be beneficially owned by
the Foundation as a 35.3% stockholder in the Pyrenees Group. The
address of the Foundation is 9909 Inwood Road, Dallas, Texas 75220. The
Foundation was formed to construct and operate a non-profit home for
children. The shares of the Pyrenees Group owned by the Foundation are
voted by the board of trustees of the Foundation, of which Mr. Paul A.
Tanner is a member.
(11) Includes shares that Mr. Creasy may be deemed to beneficially own as a
23.5% stockholder in the Pyrenees Group. The address of Mr. Creasy is
3225 South Norwood, Tulsa, Oklahoma 74135.
(12) For purposes of the table above, Merrill Lynch consists of Merrill Lynch
World Income Fund, Inc. ("MLW") and Convertible Holdings, Inc. ("CH").
The address of MLW and CH is c/o Merrill Lynch Asset Management, 800
Scudders Mill Road, Plainsboro, New Jersey 08536. This figure consists
of 1,007,965 shares of Common Stock into which certain of the Company's
bonds held by Merrill Lynch are convertible within 60 days subsequent to
the date hereof. Such figure is subject to adjustment as specified in
the indenture governing the terms of such bonds.
(13) Includes 178,882 shares that may be deemed to be beneficially owned by
Mr. Paul A. Tanner due to his 9.4% ownership of the Pyrenees Group, but
does not include 671,759 shares that Mr. Paul A. Tanner may be deemed to
beneficially own as a trustee of the Foundation or the remaining
1,724,118 shares of the Pyrenees Group (that Mr. Paul A. Tanner does not
own as an 9.4% owner), which Mr. Paul A. Tanner may be deemed to
beneficially own because he is the president and a director of the
Pyrenees Group (see footnote 2 hereto). Includes 671,759 shares that
Mr. Paul A. Tanner, Jr. may be deemed to beneficially own as a member of
the board of trustees of the Foundation; also includes 447,205 shares
that Mr. Paul A. Tanner, Jr. may be deemed to beneficially own as
trustee of the Tanner Family Trust. Includes 823,000 shares that could
be purchased pursuant to the exercise of stock options exercisable
within 60 days subsequent to the date hereof.
26
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE PYRENEES OPTION
In October 1992, the Company's Board of Directors authorized the
issuance to the Pyrenees Group, or its assignees, options to purchase up to
1,000,000 shares of convertible preferred stock for $10 per share. The options
were issued subject to approval by the Company's shareholders and were approved
and ratified at the Company's Annual Meeting held May 31, 1994. Pyrenees, a
private investment firm controlled by Paul A. Tanner, Chairman and Chief
Executive Officer and Paul A. Tanner, Jr., Director of the Company was granted
these options as consideration for the sale to the Company of its collected due
diligence materials for acquisitions Pyrenees was contemplating, which were to
be used by the Company in its own previously announced acquisition program. The
options, covering Series A, B, C, D and E Preferred Stock, are summarized as
follows:
Preferred Conversion Common
Shares Series Price Shares
------ --------- ---------- ---------
A 125,000 $ .50 2,500,000
B 100,000 1.00 1,000,000
C 100,000 2.00 500,000
D 200,000 4.00 500,000
E 475,000 10.00 475,000
--------- ---------
1,000,000 4,975,000
========= =========
In fiscal 1994, the Pyrenees Group exercised options with respect to
the Series A and Series B Preferred Stock through the issuance of two 7% demand
notes in an aggregate amount of $2,250,000, collateralized by the shares issued;
such notes were reflected as a reduction in the stockholders' equity accounts in
the accompanying consolidated balance sheet as of September 30, 1994. In fiscal
1995, the Pyrenees Group exercised the Series C option through an additional
demand note bearing interest at 7% and collateralized by the shares issued. On
May 5, 1995 in conjunction with the acquisition of Overhill Farms, Pyrenees paid
$4,000,000 to IBM on the Company's behalf. Of this amount, $2,992,000
represented repayment of the 7% notes with the excess, $1,008,000, representing
a temporary advance by Pyrenees to the Company. This amount plus other payments
made by Pyrenees resulted in a temporary advance of $1,153,000 at September 30,
1995. During fiscal 1995, Pyrenees converted Series A, B and C Preferred Stock
into common stock.
During the year ended September 30, 1996, Pyrenees exercised the
Series D option through an additional 7% note in the amount of $2,000,000,
collateralized by the shares issued. These shares were subsequently converted
to 500,000 shares of common stock and principal payments of approximately
$721,000 were made on the note. The Series E option expired unexercised.
The Company recognized a non-recurring, non-cash charge for the fair
value of the Pyrenees options as of the date of approval by the shareholders.
The fair value of the options, as determined by an independent valuation firm,
amounted to $1,400,000; such amount was recorded as a non-cash charge against
income with a corresponding credit to paid-in capital.
ADVANCES TO RELATED PARTIES
During fiscal 1994, the Company made aggregate non-interest bearing
cash advances to Mr. Tanner in the amount of approximately $282,000. At
September 30, 1994, Mr. Tanner had repaid $150,000 of such advances. During
fiscal 1995, following the repayment of the unpaid 1994 advances, additional
advances amounting to approximately $63,000 were made to Mr. Tanner which were
unpaid at September 30, 1995.
During fiscal 1996, additional amounts were advanced to or on behalf
of Mr. Tanner which aggregated approximately $1.5 million. On December 8,
1995, the aforementioned advances and an unpaid promissory note receivable from
Mr. Tanner were refinanced through the issuance to the Company of a 12%
unsecured demand note from Mr. Tanner in the principal amount of $2,000,872.
27
<PAGE>
Also during the period, the Company made disbursements to the Pyrenees
Group, a corporation controlled by Mr. Tanner, of approximately $2.67 million,
of which $1,153,000 represented repayment of existing advances from Pyrenees,
with the balance representing an advance to Pyrenees of approximately $1.5
million.
During January 1996, the Company reached an agreement in principle to
manage a project to develop and build a multi-purpose sports facility in Las
Vegas, Nevada. The project is being developed by Stadium Partners, a private
investment firm headed by Mr. Tanner. As part of the transaction, the Company
is also to participate in the facility's management, sales of suites and seat
options, concessions and events and is to be compensated for such services. The
Company agreed to provide to Stadium Partners up to $4 million of debt that (1)
is convertible into a 14% economic interest in Stadium Partners and (2) is to be
guaranteed by certain members of the investment group. As part of this
agreement, the aforementioned accounts receivable from Mr. Tanner and Pyrenees
(approximately $3.5 million), together with any subsequent amounts advanced,
charged or accrued to or on behalf of Stadium Partners were considered as
components of the $4 million of convertible debt, to bear interest at 12% and
are guaranteed by Mr. Tanner and Pyrenees. During the year ended September 30,
1996, the Company advanced an additional $9,271,054 which are subject to the
above guarantees, and are due and payable currently by Stadium Partners. As of
September 30, 1996 the Company has reserved $3,340,000 against the existing
receivable.
During the year ended September 30, 1996, the Company accrued
management and service revenues of $2,550,000 and interest income of $790,000
related to the Company's activities with Stadium Partners, the collectibility of
which is dependent upon the success of the project and/or the guarantees
referred to above. As a result of the financing described above, Stadium
Partners is precluded from making any distributions until permanent project
financing is secured. As a consequence of Stadium Partners' inability to make
its payment to the Company due March 15,1997, the Company has subsequently
established a reserve of $3.34 million as of September 30, 1996, which
represents the income accrued. The reserve will be reduced as collections and
distributions are made pursuant to the Stadium Partner loan agreements.
Subsequent to year end, the Company no longer accrues management fees or
interest income on the existing advances. On November 15, 1996, Stadium
Partners through a newly-formed partnership purchased 62 acres for the
development of the stadium and adjacent convention facility. Financing was
provided by a national financial institution with the lender receiving an equity
interest in the project.
In January 1997, the Company further advanced Stadium Partners $4.9
million. The funds advanced consisted of $2.4 million, received from an
existing line of credit, and $2.5 million from a six month term note. The term
note bears interest at 16%, payable monthly and is secured by a second lien on
the Company's headquarters. As additional collateral, the Company agreed to
issue an option on 500,000 shares of Series A-2 preferred stock convertible into
1,000,000 shares of common stock which is exercisable upon default of certain
covenants of the agreement.
In connection with the aforementioned transaction, the Company entered
into a two year consulting agreement with a principal of the lender. In
consideration of the agreement, the Company issued an option to purchase 200,000
shares of common stock at $.01 per share.
Polyphase Corporation, upon the occurrence of certain events, has
guaranteed repayment of the $48,000,000 loan from Lehman to the Partnership.
Such guarantee is effective upon the occurrence of certain "bad acts", including
without limitation if the Partnership or any general partner of the Partnership
makes an assignment for the benefit of creditors, the Partnership or any general
partner of the Partnership files a petition seeking relief under Federal or any
state bankruptcy or insolvency law, if any representation or warranty of the
Partnership or the Company made in any document furnished in connection with the
loan from Lehman proves to be fraudulent in any material respect regarding the
financial condition of the Borrower or the Company, the Partnership or the
Company fails, after any applicable cure period, to deliver certain financial
certificates and documents required to be delivered under the terms of the loan
from Lehman, the land securing the loan from Lehman (the "Land") is further
encumbered or ownership transferred without the consent of Lehman or the
Partnership incurs any additional debt for borrowed money (other than trade debt
and similar unsecured obligations in the ordinary course of business) without
the consent of Lehman, or, upon the Partnership's failure or refusal to pay when
due any mandatory prepayment under the security documents governing the loan
from Lehman, the Partnership or any of its general partners or the Company takes
or fails to take any action that materially interferes, impedes or otherwise
impairs Lehman's ability to convey the Land or any interest in the Partnership
to Lender or the sale of the Land through foreclosure or by the power of sale
provided for in the security documents governing the loan.
28
<PAGE>
OTHER TRANSACTIONS
Other assets include an insurance premium receivable representing
insurance premiums paid by TTI on behalf of Harold Estes, President and former
owner of TTI and currently a principal shareholder of the Company. As of
September 30, 1996, insurance premium receivable was $492,000.
In connection with the TTI acquisition, the Company issued a
non-interest bearing note to Harold Estes, a principal shareholder of the
Company, for $10,000,000 due October 31, 1994, on which the Company imputed
interest at 8.0% per annum. The Company has since modified, extended and renewed
the note whereby the note currently having a balance including accrued interest
of $12,546,600 has been extended to December 1, 1997, bearing interest at 10%
per annum through June 30, 1997 and 16% thereafter.
In February 1994, a company owned by Harold Estes, loaned DPPI
$350,000 to pay a previous mortgage on the Company's principal executive
offices. The outstanding principal and interest on this loan was $363,347 as of
May 25, 1994, when such loan was paid in full by the Company.
In connection with the purchase of TTI, the Company acquired a note
receivable from an officer. The note is secured by marketable securities,
payable within one year and bears interest at 3.96%. As of September 30, 1996,
the balance outstanding was $367,634.
Upon the resignation of Paul Stevens from the Board of Directors and
as President of PIC in October 1993, the Company and Mr. Stevens entered into an
agreement whereby Mr. Stevens was to provide consulting services to PIC in
consideration for (1) the issuance of 7,500 shares of Series A Preferred Stock,
valued at $75,000 and convertible into 150,000 shares of restricted common
stock, and (2) a monthly retainer of $12,500 cash for a 5-year period. This
agreement was terminated in September 1994, whereby Mr. Stevens agreed to waive
all remaining cash payment requirements and the Company agreed to register the
common stock underlying Mr. Stevens Series A Preferred Stock and to cancel stock
subscriptions receivable from Mr. Stevens in the amount of $30,000. The
Company's expense for the year ended September 30, 1994 amounted to
approximately $200,000 as a result of this consulting contract and its
subsequent termination.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. and 2. Financial Statements and Financial Statement Schedules.
1. The following consolidated financial statements of Polyphase Corporation
and subsidiaries, included in the annual report of the registrant to
its shareholders for the year ended September 30, 1995, are included in
Item 8:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors - Ernst & Young LLP F-2
Report of Independent Accountants - Price Waterhouse LLP F-3
Consolidated Balance Sheets-September 30, 1996 and 1995 F-4
Consolidated Statements of Operations-Years ended September 30, 1996, 1995 and 1994 F-6
Consolidated Statements of Stockholders' Equity-Years ended September 30, 1996, 1995 and 1994 F-8
Consolidated Statements of Cash Flows-Years ended September 30, 1996, 1995, and 1994 F-11
Notes to Consolidated Financial Statements-September 30, 1996 F-14
2. The following consolidated financial statement schedules of Polyphase Corporation and subsidiaries
are included in item 14(d):
Schedule I Condensed Financial Information of Registrant F-43
Schedule II Valuation and Qualifying Accounts F-47
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been
omitted.
3. Exhibits
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3 through
4.8 to the Company's registration statement on Form S-8 (No. 33-82008),
filed with the Commission on July 27, 1994 (the "1994 Form S-8"))
3.2 Bylaws of Polyphase Corporation (incorporated by reference from Exhibit
4.2 to the 1994 Form S-8)
4.1 Certificate of Designation relating to the Series A-2 Preferred Stock
(incorporated by reference from Exhibit 4.9 to the Company's
Registration Statement on Form SB-2 [No. 33-85334] filed with the
Commission on October 19, 1994 [the "Form SB-2"])
4.2 Certificate of Designation relating to the Series A-3 Preferred Stock
(incorporated by reference from Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1995 [the "1995
Form 10-K"])
10.1+ Stock Option Agreement for Paul A. Tanner (incorporated by reference
from Exhibit 4.12 to the 1994 Form S-8)
30
<PAGE>
10.2+ Stock Option Agreement for Michael F. Buck (incorporated by reference
from Exhibit 4.13 to the 1994 Form S-8)
10.3+ Stock Option Agreement for Don E. McMillen (incorporated by reference
from Exhibit 4.14 to the 1994 Form S-8)
10.4+ Stock Option Agreement for George R. Schrader (incorporated by
reference from Exhibit 4.15 to the 1994 Form S-8)
10.5+ Stock Option Agreement for James Rudis (incorporated by reference from
Exhibit 10.5 to the Company's Form 8-B, filed with the Commission on
August 27, 1994 (the "Form 8-B"))
10.6+ Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
10.7+ Employment Agreement, dated as of November 1, 1993, between Harold
Estes and Texas Timberjack, Inc. (incorporated by reference from
Exhibit 2 to the 1994 Form 8-K)
10.8 Pledge Agreement, dated as of June 24, 1994, between Polyphase
Corporation and Harold Estes (incorporated by reference from Exhibit
10.10 to the Form 8-B)
10.9 Security Agreement, dated as of June 24, 1994, between Texas
Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.11 to the Form 8-B)
10.10 Stock Option Agreement, dated as of October 21, 1992, between
Polyphase Corporation and the Pyrenees Group (incorporated by
reference from Exhibit 10.12 to the Form 8-B)
10.11 Deed of Trust Note in the amount of $1,000,000, dated May 25, 1994, by
Polyphase Corporation in favor of Comerica Bank-Texas (incorporated by
reference from Exhibit 10.4 to the Company's Form 10-Q for the quarter
ended June 30, 1994 (the "1994 Form 10-Q"))
10.12 Deed of Trust (With Security Agreement and Assignment of Rents), dated
May 25, 1994, covering real property in Dallas County, Texas between
Polyphase Corporation and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.3 to the 1994 Form 10-Q)
10.13 Letter Agreement, dated May 25, 1994, between Polyphase Corporation
and Comerica Bank -Texas (incorporated by reference from Exhibit 10.4
to the 1994 Form 10-Q)
10.14 Securities Purchase Agreement, dated as of July 5, 1994, by and among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.16 to the Form 8-B)
10.15 Registration Rights Agreement, dated as of July 5, 1994, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.17 to the Form 8-B)
10.16 Indenture, dated as of July 5, 1994, from Polyphase Corporation to IBJ
Schroder Bank & Trust Company (incorporated by reference from Exhibit
10.18 to the Form 8-B)
10.17 Form of 12% Senior Convertible Debenture No. 1, payable to Bridge Rope
& Co. or registered assigns (incorporated by reference from Exhibit
10.19 to the Form 8-B)
10.18 Form of 12% Senior Convertible Debenture No. 2, payable to Vault & Co.
or registered assigns (incorporated by reference from Exhibit 10.20 to
the Form 8-B)
31
<PAGE>
10.19 Asset Purchase Agreement among Champ Computer Systems, Inc., Liberty
United Trust and Polyphase Corporation, dated March 23, 1994
(incorporated by reference from Exhibit 10.25 to the Form SB-2)
10.20 Stock Purchase Agreement among PC Repair of Florida, Inc., Gene H.
Thurston, Jr. and Polyphase Corporation, dated February 15, 1994
(incorporated by reference from Exhibit 10.26 to the Form SB-2)
10.21 Agreement and Plan of Reorganization between the Shareholders of Micro
Configurations, Inc. and Polyphase Corporation, dated July 1, 1994
(incorporated by reference from Exhibit 10.27 to the Form SB-2)
10.22 Credit Agreement, dated August 29, 1994, between Texas Timberjack,
Inc. and Comerica Bank-Texas (incorporated by reference from Exhibit
10.28 to the Form SB-2)
10.23 Guaranty, dated August 29, 1994, from Polyphase Corporation to
Comerica Bank-Texas (incorporated by reference from Exhibit 10.29 to
the Form SB-2)
10.24 Deed of Trust, dated as of August 30, 1994, from Texas Timberjack,
Inc. to J. Patrick Faubion, Trustee (incorporated by reference from
Exhibit 10.30 to the Form SB-2)
10.25 Security Agreement, dated as of August 29, 1994, between Texas
Timberjack, Inc. and Comerica Bank-Texas (incorporated by reference
from Exhibit 10.31 to the Form SB-2)
10.26 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated August 29, 1994 (incorporated by
reference from Exhibit 10.32 to the Form SB-2)
10.27 First Amendment to Credit Agreement dated September 1, 1995, between
Texas Timberjack, Inc. and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.27 to the 1995 Form 10-K)
10.28 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated September 1, 1995 (incorporated
by reference from Exhibit 10.28 to the 1995 Form 10-K)
10.29 Promissory Note in the amount of $2,000,000, from Pyrenees Group, as
maker, to Polyphase Corporation, dated November 1, 1995, related to
the exercise of options on Series D Preferred Stock (incorporated by
reference from Exhibit 10.29 to the 1995 Form 10-K)
10.30 Security Agreement, dated as of November 1, 1995, between Pyrenees
Group and Polyphase Corporation (incorporated by reference from
Exhibit 10.30 to the 1995 Form 10-K)
10.31 Promissory Note in the amount of $2,000,872, from Paul A. Tanner, as
maker, to Polyphase Corporation, dated December 8, 1995 (incorporated
by reference from Exhibit 10.31 to the 1995 Form 10-K)
10.32 Convertible Preferred Stock Purchase Agreement, dated as of November
10, 1995, by and between Polyphase Corporation and Infinity Investors,
Ltd. (incorporated by reference from Exhibit 10.32 to the 1995
Form 10-K)
10.33 Securities Purchase Agreement, dated as of December 1, 1995, by and
among Polyphase Corporation, Merrill Lynch World Income Fund, Inc.,
and Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.33 to the 1995 Form 10-K)
10.34 Registration Rights Agreement, dated as of December 1, 1995, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.34 to the 1995 Form 10-K)
10.35 Indenture, dated as of December 1, 1995, from Polyphase Corporation to
IBJ Schroder Bank & Trust Company (incorporated by reference from
Exhibit 10.35 to the 1995 Form 10-K)
32
<PAGE>
10.36 Form of 12% Senior Convertible Debenture No. 1, dated December 1,
1995 payable to Bridge Rope & Co. or registered assigns (incorporated
by reference from Exhibit 10.36 to the 1995 Form 10-K)
10.37 Form of 12% Senior Convertible Debenture No. 2, dated December 1,
1995 payable to Kane & Co. or registered assigns (incorporated by
reference from Exhibit 10.37 to the 1995 Form 10-K)
10.38 Renewal Promissory Note in the amount of $11,200,000, dated October
31, 1995, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.38 to the 1995 Form 10-K)
10.39 Amended Pledge Agreement, dated as of October 31, 1995, between
Polyphase Corporation and Harold Estes (incorporated by reference
from Exhibit 10.39 to the 1995 Form 10-K)
10.40 Amended Security Agreement, dated as of October 31, 1995, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference
from Exhibit 10.40 to the 1995 Form 10-K)
10.41** Renewal Promissory Note in the amount of $12,842,916, dated December
31, 1996, payable by Polyphase Corporation to Harold Estes
10.42** Amended Pledge Agreement, dated as of December 31, 1996, between
Polyphase Corporation and Harold Estes
10.43** Amended Security Agreement, dated as of December 31, 1996, between
Texas Timberjack, Inc. and Harold Estes
10.44** Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated June 28, 1996
10.45** Security and Pledge Agreement, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation
10.46** Secured Promissory Note, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation
10.47** Security Agreement, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation
10.48** Promissory Note, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation
10.49** Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1996
+10.50** Stock Option Agreement for Paul A. Tanner dated July 23, 1996
+10.51** Stock Option Agreement for James Rudis dated July 23, 1996
+10.52** Stock Option Agreement for William E. Shatley dated July 23, 1996
+10.53** Stock Option Agreement for Michael F. Buck dated July 23, 1996
+10.54** Stock Option Agreement for George R. Schrader dated July 23, 1996
+10.55** Stock Option Agreement for Paul A. Tanner, Jr. dated July 23, 1996
21.1** Subsidiaries of the Registrant
33
<PAGE>
23.1** Consent of Ernst & Young LLP
23.2** Consent of Price Waterhouse LLP
27.1** Financial Data Schedule
--------------------------------
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
(b). Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the Fiscal Year Ended September 30, 1996.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner June 9, 1997
-------------------------
Paul A. Tanner, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ Paul A. Tanner June 9, 1997
- -----------------------------
Paul A. Tanner
President and Chief Executive
Officer, Chairman of the
Board and Director
(Principal Executive Officer)
/s/ James Rudis June 9, 1997
- -----------------------------
James Rudis
Executive Vice President
and Director
/s/ William E. Shatley June 9, 1997
- -----------------------------
William E. Shatley
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ George R. Schrader June 9, 1997
- -----------------------------
George R. Schrader
Director
/s/ Paul A. Tanner, Jr. June 9, 1997
- -----------------------------
Paul A. Tanner, Jr.
Director
June 9, 1997
- -----------------------------
Michael F. Buck
Director
35
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Report of Independent Accountants F-3
Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-8
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-14
Financial Statement Schedules:
Condensed Financial Information of Registrant F-44
Valuation and Qualifying Accounts F-48
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Polyphase Corporation
We have audited the accompanying consolidated balance sheets of Polyphase
Corporation and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. Our audits also include the financial statement schedules
listed in the Index at Item 14 (a). These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules 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 Polyphase
Corporation and subsidiaries at September 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that Polyphase
Corporation will continue as a going concern. As more fully described in Notes
3 and 10, the Company has not complied with certain covenants of loan
agreements. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Dallas, Texas
December 15, 1996
except for Note 3, Note 9, Note 10, Note 13
and Note 14, as to which the date is June 9, 1997
F-2
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Polyphase Corporation
In our opinion, the consolidated statements of operations, of cash flows and of
stockholders' equity for the year ended September 30, 1994 as listed in the
accompanying index present fairly, in all material respects, the results of
operations and cash flows of Polyphase Corporation and its subsidiaries for the
year ended September 30, 1994, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Polyphase
Corporation and its subsidiaries for any period subsequent to September 30,
1994.
As discussed in Note 12 to the consolidated financial statements, effective
October 1, 1993, the Company changed its method of accounting for income taxes.
The above-referenced financial statements were prepared assuming that Polyphase
Corporation will continue as going concern. Subsequent to January 4, 1995 and
as more fully described in Notes 3 and 10, the Company has not complied with
certain covenants of loan agreements. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 3. The above-referenced
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Dallas, Texas
January 4, 1995, except for the last paragraph above as to which the date is
June 10, 1997.
F-3
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 280,969 $ 3,275,068
Receivables, net of allowance for doubtful accounts
of $519,104 and $506,805:
Trade accounts 12,098,852 11,602,628
Current portion of sales contracts 6,625,727 6,973,101
Notes receivable 972,422 1,215,389
Receivables from related parties 367,634 737,992
Inventories 28,027,779 26,007,672
Prepaid expenses and other 2,676,336 1,836,150
------------ ------------
Total current assets 51,049,719 51,648,000
------------ ------------
Property and equipment:
Land 765,000 505,000
Buildings and improvements 4,279,917 3,641,470
Machinery, equipment and other 8,575,687 7,932,882
------------ ------------
13,620,604 12,079,352
Less-Accumulated depreciation 4,212,872 2,761,966
------------ ------------
9,407,732 9,317,386
------------ ------------
Other assets:
Noncurrent receivables:
Sales contracts 1,333,150 3,281,459
Notes receivable 1,037,890 368,106
Related party, net of allowance of $3,340,000 9,931,054 -
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $1,557,165
and $1,037,734 15,041,574 19,374,134
Other intangible assets 1,402,239 2,021,652
Restricted cash 882,383 916,275
Other 4,092,780 1,231,851
------------ ------------
33,721,070 27,193,477
------------ ------------
$ 94,178,521 $ 88,158,863
============ ============
</TABLE>
F-4
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
--------------------------
1996 1995
------------ ------------
Current liabilities:
Notes payable $ 9,516,219 $ 11,130,056
Accounts payable 8,581,071 8,007,727
Accrued expenses and other 4,415,011 3,691,302
Advances from related party - 1,153,000
Current maturities of long-term debt 31,573,716 2,589,077
------------ ------------
Total current liabilities 54,086,017 26,571,162
Note payable and accrued
interest to related party 12,546,600 11,100,000
Long-term debt, less current maturities - 27,229,665
Reserve for credit guarantees 882,383 916,275
Deferred income taxes 1,475,897 437,729
Other - 80,413
------------ ------------
Total liabilities 68,990,897 66,335,244
------------ ------------
Commitments and contingencies
Warrants to purchase common stock
of subsidiary 1,189,224 686,276
Stockholders' equity:
Preferred stock, $.01 par value, authorized
50,000,000 shares, issued and outstanding
250,000 in 1996 and none in 1995 2,500 -
Common stock, $.01 par value, authorized
100,000,000 shares, issued and outstanding
13,196,966 in 1996 and 12,621,966 in 1995 131,970 126,220
Paid-in capital 26,630,714 22,106,606
Accumulated deficit (1,487,695) (1,095,483)
Notes receivable (1,279,089) -
------------ ------------
Total stockholders' equity 23,998,400 21,137,343
------------ ------------
$ 94,178,521 $ 88,158,863
============ ============
The accompanying notes are an integral part
of theses consolidated financial statements.
F-5
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues $ 149,540,785 $ 102,035,472 $ 24,970,404
Cost of sales 120,865,827 82,055,637 19,970,235
------------- ------------- -------------
Gross profit 28,674,958 19,979,835 5,000,169
Selling, general and administrative expenses 22,009,991 13,228,134 4,644,787
------------- ------------- -------------
Operating income 6,664,967 6,751,701 355,382
Other income (expenses):
Non-recurring charge related to
grant of stock options - - (1,400,000)
Gain on sale of assets 827,852 - -
Interest expense (6,389,926) (3,791,059) (447,987)
Interest income and other 751,385 592,055 125,730
------------- ------------- -------------
Total other income (expenses) (4,810,689) (3,199,004) (1,722,257)
Income (loss) before income taxes, warrant
accretion, extraordinary item and
cumulative effect of accounting change 1,854,278 3,552,697 (1,366,875)
Income taxes 1,593,542 76,227 17,000
------------- ------------- -------------
260,736 3,476,470 (1,383,875)
Accretion of warrants to purchase
common stock of subsidiary 502,948 190,871 -
------------- ------------- -------------
Income (loss) before extraordinary item
and cumulative effect of accounting change (242,212) 3,285,599 (1,383,875)
Extraordinary item:
Early extinguishment of debt - - 62,120
Cumulative effect of change in method of
accounting for income taxes - - 305,000
------------- ------------- -------------
Net income (loss) (242,212) 3,285,599 (1,016,755)
Dividends on preferred stock 150,000 - -
------------- ------------- -------------
Net income (loss) attributable to
common stockholders $ (392,212) $ 3,285,599 $ (1,016,755)
============= ============= =============
</TABLE>
F-6
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Per share data:
Weighted average common and common
equivalent shares 13,722,552 12,745,701 4,881,454
============= ============= =============
Income (loss) per common share:
Before extraordinary item and cumulative
effect of accounting change $ (.03) $ .26 $ (.28)
Extraordinary item - - .01
Cumulative effect of accounting change - - .06
------------- ------------- -------------
Net income (loss) per common share $ (.03) $ .26 $ (.21)
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Retained Notes/Stock
Earnings Subscription
Preferred Stock Common Stock Paid-in (Accumulated (Receivable)
Shares Amount Shares Amount Capital Deficit) Payable Total
------ ------ ------ ------ ------- ------------ -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
September 30, 1993 347,700 $ 3,477 3,191,020 $ 31,910 $10,276,831 $ (3,364,327) $ 345,000 $ 7,292,891
Issuance of common
stock subscribed 500,000 5,000 370,000 (375,000)
Issuance of shares for
interest on convertible
subordinated debentures 1,596 16 9,104 9,120
Private placements of
Series B and C preferred shares 34,000 340 339,660 340,000
Exercise of common
stock options 689,000 6,890 533,110 540,000
Issuance of preferred shares
in connection with
acquisitions -
DPPI - Series D 100,000 1,000 999,000 1,000,000
TBI - Series A-5 and B 20,000 200 210,823 211,023
PCR - Series B 7,500 75 159,925 160,000
TTI - Series A 100,000 1,000 3,499,000 3,500,000
Micro - Series A-2 60,000 600 615,000 615,600
Issuance of Series A-5,
A and B preferred shares
for services 11,000 110 110,640 110,750
Dividends on Series
A-5 preferred shares (62,500) (62,500)
Conversions of preferred shares
to common shares (428,200) (4,282) 1,499,000 14,990 (10,708)
Grant of Pyrenees
options 1,400,000 1,400,000
Options granted in purchase
of Register-Mate assets 285,000 285,000
Cancellation of stock
subscription receivable 30,000 30,000
</TABLE>
F-8
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Retained Notes/Stock
Earnings Subscription
Preferred Stock Common Stock Paid-in (Accumulated (Receivable)
Shares Amount Shares Amount Capital Deficit) Payable Total
------ ------ ------ ------ ------- ------------ -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of Series A and B
preferred stock options
by Pyrenees 225,000 2,250 2,247,750 (2,250,000)
Stock issuance costs (58,304) (58,304)
Net loss for 1994 (1,016,755) (1,016,755)
-------- ------ ---------- -------- ---------- ---------- ----------- -----------
Balance,
September 30, 1994 477,000 4,770 5,880,616 58,806 20,924,331 (4,381,082) (2,250,000) 14,356,825
-------- ------ ---------- -------- ---------- ---------- ----------- -----------
Exercise of Series C
preferred stock options
by Pyrenees 100,000 1,000 999,000 (1,000,000)
Conversions of preferred
shares to common shares (577,000)(5,770) 6,618,500 66,185 (60,415)
Issuance of Micro
escrow shares 120,000 1,200 366,600 367,800
Issuance of shares for
interest on convertible
subordinated debentures 2,850 29 9,091 9,120
Payments on Pyrenees notes 3,250,000 3,250,000
Stock issuance costs (132,001) (132,001)
Net income for 1995 3,285,599 3,285,599
-------- ------ ---------- -------- ---------- ---------- ----------- -----------
Balance,
September 30, 1995 - - 12,621,966 126,220 22,106,606 (1,095,483) - 21,137,343
-------- ------ ---------- -------- ---------- ---------- ----------- -----------
</TABLE>
F-9
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Retained Notes/Stock
Earnings Subscription
Preferred Stock Common Stock Paid-in (Accumulated (Receivable)
Shares Amount Shares Amount Capital Deficit) Payable Total
------ ------ ------ ------ ------- ------------ -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of Series D
preferred stock options
by Pyrenees 200,000 2,000 1,998,000 (2,000,000)
Conversion of preferred shares
to common shares (200,000) (2,000) 500,000 5,000 (3,000)
Private placement of
Series A-3 preferred stock 250,000 2,500 2,497,500 2,500,000
Exercise of common
stock options 75,000 750 49,250 50,000
Payments on Pyrenees note 720,911 720,911
Stock issuance costs (17,642) (17,642)
Dividends on
preferred shares (150,000) (150,000)
Net loss for 1996 (242,212) (242,212)
--------- ------- ---------- -------- ----------- ----------- ----------- -----------
Balance,
September 30, 1996 250,000 $ 2,500 13,196,966 $131,970 $26,630,714 $(1,487,695) $(1,279,089) $23,998,400
========= ======= ========== ======== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-10
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flow provided by (used in)
operating activities:
Net income (loss) $ (242,212) $ 3,285,599 $ (1,016,755)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 3,417,137 1,935,559 497,514
Equity in the loss of
non-consolidated subsidiaries 22,437 - -
Provision for doubtful accounts 3,398,094 (73,446) (110,822)
Deferred income tax 134,268 (449,651) -
Extraordinary item -
early extinguishment of debt - - (62,120)
Non-recurring charge related to
grant of stock options - - 1,400,000
Cumulative effect of change in
method of accounting for income taxes - - (305,000)
Issuance of common stock for
accrued interest payable on convertible
subordinated debentures - 9,120 9,120
Imputed interest on TTI
acquisition note - 66,225 196,056
Consulting contract and cancellation
of stock subscriptions of former
officer and director - - 105,000
Accretion of warrants to
purchase common stock of subsidiary 502,948 190,871 -
Issuance of preferred stock for
services - - 35,750
Recognition of deferred rent reductions (80,413) (82,944) (94,944)
(Increase) decrease in, net of
effects of acquisitions and dispositions
Accounts and sales contracts receivable (3,461,283) (4,857,876) (2,876,615)
Inventories (3,618,788) (5,677,039) 1,640,037
Prepaid expenses and other 575,814 (1,099,427) 139,746
Increase (decrease) in, net of
effects of acquisitions:
Accounts payable 1,414,236 1,959,902 1,251,207
Accrued expenses and other 712,401 2,486,034 (194,388)
------------- ------------- -------------
Net cash provided by (used in)
operating activities 2,774,639 (2,307,073) 613,786
------------- ------------- -------------
</TABLE>
F-11
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows provided by (used in)
investing activities:
Acquisition of Texas
Timberjack, Inc. $ - $ - $ (4,146,360)
Acquisition of net assets of
Overhill Farms - (31,292,910) -
Capital expenditures, net (2,656,209) (975,883) (347,521)
Notes and other receivables 242,967 202,247 (318,649)
Receivables from related parties (9,560,696) - -
Cash of acquired businesses - - 36,407
Cash from the sale of
subsidiaries 475,000 - -
Change in operating assets and liabilities
due to sale of subsidiaries 1,687,124 - -
------------- ------------- -------------
Net cash used in
investing activities (9,811,814) (32,066,546) (4,776,123)
------------- ------------- -------------
Cash flows provided by (used in)
financing activities:
Net borrowings (repayments) on
notes payable (1,293,837) 9,177,364 5,162,000
Net borrowings (repayments) on
other notes payable and
long-term debt 1,886,644 (763,191) (1,741,948)
Borrowings on notes payable
and long term debt - 24,470,360 -
Proceeds from the issuance of
12% subordinated debentures 1,500,000 - -
Proceeds from private
placements of preferred stock 2,500,000 - 340,000
Advances from (payments to)
related parties (1,153,000) 1,153,000 -
Exercise of common stock options 50,000 - 540,000
Principal collections on
Pyrenees notes receivable 720,911 3,250,000 -
Issuance of warrants to purchase
common stock of subsidiary - 495,405 -
Dividends on preferred stock (150,000) - (62,500)
Common stock issuance costs (17,642) (132,001) (58,304)
Loan acquisition costs and other - (1,039,089) (214,907)
------------- ------------- -------------
Net cash provided by financing
activities 4,043,076 36,611,848 3,964,341
------------- ------------- -------------
Net increase (decrease) in cash (2,994,099) 2,238,229 (197,996)
Cash at beginning of year 3,275,068 1,036,839 1,234,835
------------- ------------- -------------
Cash at end of year $ 280,969 $ 3,275,068 $ 1,036,839
============= ============= =============
</TABLE>
F-12
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental schedules of noncash investing
and financing activities:
Issuances of preferred stock in
connection with acquisitions:
Dallas Parkway Properties Incorporated $ - $ - $ 1,000,000
PC Repair of Florida, Inc. - - 160,000
Taylor-Built Industries, Inc. - - 211,023
Texas Timberjack, Inc. - - 3,500,000
Micro Configurations, Inc. - 367,800 615,600
Granting of stock options in connection
with purchase of Register-Mate - - 285,000
Supplemental schedule of cash flow
information:
Cash paid during the year for:
Interest $ 4,354,072 $ 2,249,778 $ 126,558
Income taxes $ 75,000 $ 377,442 $ 40,706
</TABLE>
See Note 4 for disclosures of additional noncash financing and investing
activities.
The accompanying notes are an integral part
of these consolidated financial statements.
F-13
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY AND ORGANIZATIONAL MATTERS
NATURE OF BUSINESS
The Company is a diversified holding company that, through its subsidiaries,
operates primarily in three industry segments: the forestry segment, which
distributes, leases and provides financing for industrial and commercial
timber and logging equipment (the "Forestry Group"); the transformer
segment, which manufactures and markets electronic transformers, inductors
and filters (the "Transformer Group"); and the food processing segment,
which produces high quality entrees, plated meals, soups, sauces and
poultry, meat and fish specialties (the "Food Group").
CORPORATE HISTORY AND ORGANIZATION
The Company was incorporated in New Jersey in 1963 under the name Kappa
Networks, Inc. Through a merger with a wholly-owned subsidiary in June 1991,
the Company reincorporated in Pennsylvania and formally changed its name to
Polyphase Corporation. A subsequent merger with a wholly-owned subsidiary in
June 1994 effected a change in the state of incorporation from Pennsylvania
to Nevada, together with certain changes to the Company's charter and
bylaws. These changes resulted in the authorization of 100,000,000 shares of
$.01 par value common stock and 50,000,000 shares of $.01 par value
preferred stock with rights and preferences as designated by the Board of
Directors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions are eliminated. Certain prior year amounts have been
reclassified to conform to the 1996 presentation.
FISCAL YEAR
The Company and its subsidiaries' fiscal year, except for the Food Group,
ends on September 30. The Food Group utilizes a 52 - 53 week accounting
period which ends on the Sunday closest to September 30.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of receivables and demand
deposits. Demand deposits sometimes exceed the amount of insurance provided
by the Federal Deposit Insurance Corporation. The Company performs ongoing
credit evaluations of its customers' financial condition and generally
requires no collateral from its customers except as discussed below.
F-14
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's Forestry Group subsidiary, Texas Timberjack, Inc, ("TTI"), is
a retailer of timber and logging equipment. TTI grants credit to customers,
substantially all of whom are located in East Texas or the western portion
of Louisiana, and rely on the logging industry for their ability to repay
debt to TTI. Collateral is generally the equipment sold for amounts due
under installment sales contracts.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to market
data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their
recorded values.
INVENTORIES
Inventories of raw materials, work-in-process and finished goods for
manufacturing and assembly operations and food processing are stated at the
lower of cost or market as determined by the first-in, first-out (FIFO)
method. Inventories of major units purchased in the forestry segment are
valued at the lower of cost or market or, in the case of repossessed and
used units, net realizable value, based upon the specific identification
method.
REPOSSESSION AND WARRANTY WORK
The Company's Forestry Group records repossessed equipment at the lower of
the balance of the receivable, net of any deferred profit, or net realizable
value. In most cases repossessions are recorded at the balance of the note,
net of deferred profit. Repossessed equipment is generally resold at book
value, including refurbishment costs.
Warranty work performed by the Forestry Group to be reimbursed by the
manufacturer is recorded as a receivable and sale. The Company periodically
performs services on equipment sold not warranted by the manufacturer, with
the cost of such service charged to expense as incurred.
The Transformer Group warrants all items shipped for a period of 12 months.
Because the segment's products are made to order, returns are a small
percentage of sales and are typically due to cosmetic marking problems.
Returns, when they do occur, are recorded as a reduction to revenues,
repaired by manufacturing and rebilled upon shipment within 30 days.
CONCENTRATION OF SOURCES OF LABOR
The Food Group's total hourly and salaried work force consists of 846
employees. Approximately 77% of the Company's work force is covered by
collective bargaining agreements expiring in fiscal years 1998 and 1999. The
Company considers its union relations to be good.
F-15
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
primarily using the straight-line method for financial reporting purposes
over the estimated useful lives of the assets. Useful lives generally range
from five to thirty years. Leasehold improvements are amortized over the
lesser of the term of the lease or the estimated useful life of the assets.
Repairs and maintenance costs are expensed, while additions and betterments
are capitalized. The cost and related accumulated depreciation of assets
sold or retired are eliminated from the accounts and any gains or losses are
reflected in earnings.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over the fair value of net assets acquired (goodwill) at
the date of acquisition is amortized on a straight line basis over periods
generally ranging from 15-25 years. The Company determines the period to be
benefited by using qualitative measuring factors such as competition, demand
and obsolescence, as well as legal, regulatory and contractual provisions.
In addition, the Company evaluates the existence of goodwill impairment on
the basis of whether the goodwill is fully recoverable from projected,
undiscounted cash flows of the related business unit.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options. The Company expects to continue
to follow the expense recognition criteria in APB 25. Therefore, Statement
of Financial Accounting Standards No. 123 , "Accounting for Stock Based
Compensation", will have no effect on the Company's financial statements
except for the proforma disclosures that will be required for the fiscal
year ending September 30, 1997.
REVENUE RECOGNITION
The Company generally recognizes revenue when products are shipped or
services are performed and provides for estimated returns and allowances at
the time of sale.
A significant amount of business in the Company's forestry segment relates
to the sale of equipment through sales/finance contracts. Revenue is
recognized on these accounts using the installment method (See Note 5).
Under the installment method, the Company records at the point of sale both
a sale and a cost of sale for the total cost of the unit. Gross profit is
initially recorded in a deferred profit account to be recognized as proceeds
are received. These deferred profits are recorded as sales revenue as funds
are received, based on the relative percentage of transaction profit to the
sales price. Interest on the contract is recognized on a cash basis due to
frequent late payments and periodic repossessions.
F-16
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Key sales and income information for the forestry segment for fiscal 1996 and
1995 and the period from acquisition (June 24, 1994) to September 30, 1994 are:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Equipment sales total $ 28,210,292 $ 35,837,259 $ 9,815,444
Equipment sales financed 3,005,776 10,121,004 3,445,670
Income earned on installment basis 2,046,730 2,777,209 132,971
Interest income earned on installment notes 1,634,621 1,562,486 351,614
</TABLE>
INCOME TAXES
Effective October 1, 1993 the Company prospectively adopted Statement of
Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes."
SFAS 109 requires the recognition of deferred tax liabilities and assets for the
anticipated future tax effects of temporary differences that arise as a result
of differences in the financial reporting and tax bases of assets and
liabilities. The standard also requires a valuation allowance for deferred tax
assets in certain circumstances. See Note 12 for the cumulative effect of the
adoption of SFAS 109. Prior to October 1, 1993, the Company calculated income
taxes using the deferred method in accordance with the provisions of Accounting
Principles Board Opinion No. 11, "Accounting for Income Taxes."
INCOME (LOSS) PER SHARE
Primary income (loss) per share is computed on the basis of the weighted average
number of common and common equivalent shares outstanding during each year. It
is assumed that all preferred stock is converted and that all dilutive stock
options and warrants are exercised at the beginning of each year or at the time
of issuance if later, and that the proceeds are used to purchase shares of the
Company's common stock at the average market price during the period. It is
assumed that the proceeds from all dilutive stock options and warrants are used
to purchase shares of the Company's common stock at the average market price for
the period.
Primary income (loss) per share does not give effect to any common equivalent
shares if their inclusion would have the effect of increasing earnings per share
or decreasing the loss per share.
See Note 11 for descriptions of common stock equivalents.
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 these estimates.
F-17
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LIQUIDITY
As described in Note 10, the Company has not complied with certain covenants
involving most of its loan agreements, including covenants that restrict
transactions with affiliates and require the filing of audited financial
statements for the Company and its subsidiaries on a timely basis. In
addition, in January 1997, a suit was filed in District Court of Dallas
County against the Company by Rice Partners II, L.P. ("Rice"), subordinated
debt holders of the Overhill Farms subsidiary. The suit claims, among other
things, that the Company breached covenants of the subordinated debt
agreement and refused to cure the defaults within a reasonable period of
time. The Company has filed a counter suit claiming Rice Partners II, L.P.
(i) refused to comply with verbal agreements to the indenture (ii) conspired
with the former general manager of Overhill to force the Company to sell
Overhill Farms at a distressed price in order to benefit Rice and (iii)
caused the halting of trading of the Company's stock. As a result, the
Company's debt has been classified as current as of September 30, 1996.
The Company is in the process of negotiating a transaction involving
Overhill that the Company expects will resolve the Rice lawsuit and improve
the Company's overall debt structure, but there can be no assurances that
such transaction will be consummated. Upon completion of the transaction,
the Company believes it will be able to negotiate with the remaining debt
holders and obtain waivers to the covenant violations that exist. As such,
the Company expects that it will be able to meet its liquidity requirements.
4. BUSINESS COMBINATIONS
FISCAL 1995 ACQUISITION
Effective May 5, 1995, the Company acquired the assets and operations of IBM
Foods, Inc., a food processing company located in Culver City, California,
which operated using the name Overhill Farms. The purchase, which was
accomplished through Overhill Farms, Inc. a newly-formed subsidiary of the
Company ("Overhill"), provided for cash payment to the seller of $31.3
million, subject to certain adjustments, plus the assumption of certain
liabilities of the acquired business. The transaction was financed by
Overhill in part using (1) a $12 million revolving line of credit, of which
$9.7 million was initially drawn, (2) term loans totalling $6 million,
payable monthly over 4 and 5-year periods and (3) the sale of $13 million of
senior subordinated notes and warrants, due in 2002 and 2003. The
acquisition has been accounted for by the purchase method of accounting. The
operating results of Overhill are included in the Company's results of
operations from the date of acquisition. Goodwill attributable to the
acquisition totaled $10.3 million and is being amortized on a straight-line
basis over a 20-year period.
FISCAL YEAR 1994 ACQUISITIONS
In October 1993, the Company acquired all of the outstanding capital stock
of Taylor-Built Industries, Inc. (TBI), a privately held Texas Corporation,
in exchange for 5,000 shares of Series B Preferred Stock, which were
subsequently converted into 50,000 shares of common stock. The
F-18
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company valued the acquisition at $50,000. TBI, located in Dallas, Texas, is
a manufacturer and distributor of automotive aftermarket products. During
August 1994, the Company purchased a note payable by TBI to its former owner
in the amount of approximately $161,000 (including accrued interest) in
consideration for the issuance of 15,000 shares of Series A-5 Preferred
stock which were subsequently converted into 30,000 shares of common stock.
TBI was sold during fiscal 1995. See Note 16.
The Company, during October 1993, acquired all the outstanding stock of
Dallas Parkway Properties Incorporated (DPPI) in exchange for 100,000 shares
of Series D Preferred Stock, which were subsequently converted into 250,000
shares of common stock. The Company valued the acquisition at $1,000,000. At
the time of acquisition, DPPI was a single-asset Texas corporation which
owned (subject to related indebtedness) a 40,000 square foot office building
in Dallas, Texas, which is now used as the Company's corporate headquarters.
Ownership of the property was subsequently conveyed to the Company.
The Company, in March 1994, acquired the rights to the point-of-sale
software system marketed under the name "Register-Mate" together with
certain other assets from the system's developer. The consideration for this
purchase amounted to approximately $500,000, consisting of note forgiveness
of approximately $215,000 and stock options valued at $285,000. In addition,
the Company assumed certain liabilities. Such stock options, covering 57,000
shares of common stock at an exercise price of $0.50 per share, were
exercised in September 1994. The assets acquired were transferred to a
newly-formed subsidiary of the Company operating as Register-Mate, Inc.
(RMI), a Texas corporation. RMI was sold during fiscal 1996. See Note 16.
In May 1994, the Company acquired all of the outstanding capital stock of PC
Repair of Florida, Inc. (PCR) for 7,500 shares of Series B Preferred Stock,
which were subsequently converted into 75,000 shares of common stock. PCR is
a provider and servicer of computer systems located in Sarasota, Florida.
The transaction was accounted for as a purchase and valued at $210,000. The
excess of cost over fair value of the assets acquired approximated $195,000
and is being amortized over 15 years. PCR was sold during fiscal 1996. See
Note 16.
In June 1994, the Company acquired all of the outstanding capital stock of
Texas Timberjack, Inc. (TTI), a distributor of commercial and industrial
timber and logging equipment, in Lufkin, Texas. The consideration for the
purchase consisted of (1) $4,026,000 cash; (2) 100,000 shares of the
Company's Series A Preferred Stock, which were converted into 2,000,000
shares of common stock and valued by an independent valuation firm at
approximately $3.5 million; and (3) a non-interest bearing promissory note
payable to the seller in the amount of $10,000,000. The transaction was
recorded as a purchase and valued at approximately $17.5 million. The excess
of cost over fair value of the assets acquired approximated $5.7 million and
is being amortized over 20 years. See Notes 8 and 9.
In August 1994, the Company acquired all of the outstanding capital stock of
Micro Configurations, Inc. (Micro) in exchange for 60,000 shares of Series
A-2 Preferred Stock, which were subsequently converted into 120,000 shares
of common stock. Under the terms of the Micro acquisition the sellers were
entitled to an additional 60,000 shares of such preferred stock
F-19
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subject to certain operational performance. The transaction was initially
recorded as a purchase and valued at approximately $616,000 with the excess
of cost over fair value of the net assets acquired approximating $746,000.
In July 1995, the escrowed shares were issued and converted into 120,000
shares of common stock which resulted in an increase in goodwill of
$367,800. Goodwill related to the Micro acquisition is being amortized over
15 years. Micro is engaged in the assembly, sale and service of computers
and related electronic products. Micro was sold during fiscal 1996.
See Note 16.
The consolidated statement of operations for the year ended September 30,
1994 includes the results of operations of the businesses acquired in 1994
from the respective acquisition dates.
PROFORMA FINANCIAL INFORMATION
The following unaudited proforma summary for fiscal year 1994 represents the
results of operations as if the acquisitions of Overhill and TTI had
occurred at October 1, 1993. The proforma effect of the other 1994
acquisitions would not be material and are not presented herein. For fiscal
year 1995, the unaudited proforma summary represents the results of
operations as if the acquisition of Overhill had occurred at October 1,
1994. This summary does not purport to be indicative of what would have
occurred had the acquisitions been made as of those dates or of results that
may occur in the future. This method of combining the companies is for the
presentation of unaudited proforma summary results of operations.
<TABLE>
<CAPTION>
For the Year Ended
September 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Net sales $164,138,000 $150,270,000
Income before extraordinary item
and cumulative effect of accounting change $ 4,176,000 $ 340,000
Net income $ 4,176,000 $ 645,000
Income per share:
Before extraordinary items and
and cumulative effect of accounting change $ .33 $ .04
Extraordinary item - -
Cumulative effect of accounting change .04
------------ ------------
Net income $ .33 $ .08
============ ============
</TABLE>
F-20
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SALES CONTRACTS RECEIVABLE
The Company's forestry segment provides financing to customers on certain
equipment sales using installment sales contracts. The following is a summary
of the components of the Company's net investment in these contracts as of
September 30, 1996 and 1995 and the related deferred income based on the
installment method of income recognition.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Contracts outstanding $ 12,401,689 $ 15,252,646
Less deferred income (4,324,627) (4,820,047)
------------- -------------
8,077,422 10,432,599
Less allowance for doubtful accounts (118,545) (178,039)
------------- -------------
Net investment in sales contracts receivable $ 7,958,877 $ 10,254,560
============= =============
</TABLE>
The following is a summary of the maturities of the contracts receivable and
related deferred income:
<TABLE>
Contracts Deferred
Due September 30, Outstanding Income Net
- ------------------ ------------- ------------- -------------
<S> <C> <C> <C>
1997 $ 10,279,299 $ 3,589,142 $ 6,690,157
1998 1,853,528 648,640 1,204,888
1999 268,862 86,485 182,377
------------- ------------- -------------
$ 12,401,689 $ 4,324,267 $ 8,077,422
============= ============= =============
</TABLE>
6. NOTES RECEIVABLE
The forestry segment periodically makes advances to certain unrelated
individuals and corporations. These notes have interest rates that range from
12% to 18%, are due within one year and are secured by a variety of marketable
collateral. Allowances are established periodically if, at the date of
valuation, management feels it is probable that a loss exists in the portfolio.
The allowance is established based upon interest payment history, evaluation of
the portfolio and the related expected credit risk.
The Company had $972,422 and $1,215,389 of notes receivable as of September 30,
1996 and 1995, respectively from unrelated corporations and individuals net of
allowances of $248,259 and $187,103. The loans are secured primarily by land,
timber and equipment. At September 30, 1996, approximately $378,000 of such
notes receivable were no longer accruing interest. All notes receivable are due
in less than one year.
In connection with the sale of the computer segment in July 1996 (See Note 16),
the Company
F-21
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
received as consideration notes receivable totalling $1,037,890. The term notes
bear interest of 7% payable semi-annually in June and December and are due
January 1, 1998.
7. INVENTORIES
Inventories are summarized as follows: September 30
------------------------
1996 1995
----------- -----------
Finished goods:
Forestry Group $12,172,607 $ 9,640,664
Computer Group - 1,598,681
Transformer Group 548,624 885,492
Food Group 9,768,795 9,418,418
Work-in-process:
Transformer Group 694,683 603,929
Raw material:
Transformer Group 1,320,086 1,003,399
Food Group 3,522,984 2,857,089
----------- -----------
Total $28,027,779 $26,007,672
=========== ===========
F-22
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
Register-Mate software $ - $ 512,500
Non-compete agreements 700,000 700,000
Deferred financing costs 1,039,089 1,039,089
Other 258,560 164,565
---------- -----------
1,997,649 2,416,154
Less accumulated amortization (595,410) (394,502)
---------- -----------
$1,402,239 $ 2,021,652
========== ===========
</TABLE>
The Company entered into noncompete agreements with the seller of TTI (See
Note 4) and an officer of TTI with such amount being amortized over the 7
year life of each agreement.
The Company incurred certain legal, brokerage and other costs associated
with the financing of the acquisition of Overhill Farms. These costs are
being amortized over a period of 5 years.
9. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
Note payable to Ford Motor Credit Corporation (a) $ 99,036 $ 252,692
Note payable to Finova Capital Corporation (b) 9,417,183 10,482,364
Other notes payable - 395,000
---------- -----------
$9,516,219 $11,130,056
========== ===========
</TABLE>
(a) TTI has a floor plan note with Ford Motor Credit Corporation. The floor
plan note accrues no interest provided the equipment financed under the
note is sold within a predetermined period, typically nine to twelve months
from the time TTI takes delivery of the equipment.
(b) In connection with the acquisition of Overhill Farms, Inc. (See Note
4), the Company's Overhill subsidiary obtained an $18,000,000 credit
facility with Finova Capital Corporation which consists of Term Loan A (See
Note 10) in the original amount of $2,000,000, Term Loan B (See Note 10) in
the original amount of $4,000,000 and a $12,000,000 revolving line of
credit. Borrowings under the revolving line of credit are limited to the
lesser of $12,000,000 or an amount determined by a defined borrowing base
which is based on eligible receivables
F-23
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and inventory. Borrowings under the line of credit facility bear interest
at the Citibank base rate plus 1.5% (10.25% at September 30,1996). This
amount is classified as a current liability in the consolidated balance
sheets due to a requirement for Overhill to maintain a blocked account in
favor of the lender for collections on all accounts receivable, which are
immediately applied to reduce borrowings under the line of credit.
Overhill's revolving line of credit requires the payment of an unused line
fee of .25% per annum and an annual facility fee of .50% per annum. The
agreement with Finova relating to this facility contains various covenants
including without limitation, Overhill's pledge to restrict capital
expenditures to certain agreed upon levels, maintain specified current and
debt to net worth ratios and specified levels of net worth. Additionally,
the terms of the credit facility prohibit loans, advances or dividends from
Overhill to the Company and limit management fees the Company can charge
Overhill to $250,000 per annum. Furthermore, the capital stock and
substantially all the assets of Overhill are pledged as collateral and the
Company has guaranteed all obligations under the credit facility. The
credit facility expires on May 5, 1998. As of June 9, 1997, the Company is
in violation of certain covenants in the credit facility including those
restricting affiliated transactions and requiring the filing of audited
financial statements for the Company and its subsidiaries on a timely
basis. The debt is in default and has been classified current as of
September 30, 1996. See Note 3.
NOTE PAYABLE AND ACCRUED INTEREST TO RELATED PARTY
In connection with the acquisition of TTI on June 24, 1994 (see Note 4),
the Company recorded a note to the seller (Mr. Harold Estes) in the amount
of $9,737,719 with interest at 8% due October 31, 1994 and collateralized
by all the capital stock of TTI. As of various maturity dates, the seller
has entered into subsequent agreements with the Company to modify and
extend the term of the note. As of September 30, 1996, the note had a
principal balance of $11,855,000 (plus accrued interest of $691,600) due
December 1, 1997. The note bears interest at 10% through June 30, 1997 and
interest at 16% thereafter through the term of the note. As part of the
most recent modification and extension agreement, upon certain conditions
including the sale of any of the Company's subsidiaries, $9,000,000 of the
note would become immediately due and payable. The note holder has no
recourse to any of the assets or capital stock of Polyphase or any of its
other subsidiaries other than its ownership interest in TTI and no cross-
default provisions exist between this note agreement and any other
Polyphase debt.
The weighted average interest rate on short term borrowings for the year
ended September 30, 1996 was 9.75%.
RESTRICTED NET ASSETS OF SUBSIDIARIES
At September 30, 1996, restricted net assets of subsidiaries totaled
$7,235,702. Such net assets consist of the net assets of Overhill and TTI
which were restricted by the terms of debt agreements as discussed above
and in Note 10.
F-24
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following: September 30,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Term loan payable to bank bearing interest
at 8.5%, due in monthly installments of
$12,465 through May 1999, collateralized by
real estate. A final payment of approximately
$600,000 is due in May 1999. $ 845,544 $ 930,825
Senior convertible debentures due July 1, 1999,
bearing interest at 12%, with interest payable
semi-annually in January and July. 4,000,000 4,000,000
Senior convertible debentures due December 1, 1997,
bearing interest at 12%, with interest payable
semi-annually in June and December. 1,500,000 -
Revolving credit agreement of TTI with Comerica Bank-
Texas, bearing interest at prime plus 1/2%,
collateralized by notes, trade accounts receivable
and inventory, originally due in February 1997 and
extended pending lenders receipt of financial statements. 8,900,000 6,199,999
Term Loan A payable to financial institution, with
interest at prime rate plus 2.5%, due in monthly
installments of $33,333 plus accrued interest
through May 1, 2000 (See Note 9). 1,466,672 1,866,668
Term Loan B payable to financial institution, with
interest at prime rate plus 2.5%, due in monthly
installments of $83,333 plus accrued interest
through May 1, 1999 (See Note 9). 1,915,600 3,666,668
Senior subordinated notes payable of Overhill
to a financial institution bearing interest 13%
payable quarterly, net of discount of $404,100
and $470,134. Principal payments of $6,500,000
are due on April 29, 2002 and 2003. 12,595,900 12,529,866
Other 350,000 624,716
------------ -----------
31,573,716 29,818,742
Less current maturities (31,573,716) (2,589,077)
------------ -----------
Total long-term debt $ - $27,229,665
============ ===========
</TABLE>
F-25
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of long-term debt are as follows, assuming the debt is
not called prior to maturity:
For the Years Ending
September 30,
--------------------------
1997 $11,428,127
1998 2,206,226
1999 5,076,779
2000 266,684
2001 -
Thereafter 12,595,900
-----------
$31,573,716
===========
As of June 9, 1997, the Company is in violation of certain covenants in existing
credit agreements including those restricting affiliated transactions and
requiring the filing of audited financial statements for the Company and its
subsidiaries on a timely basis. The debt continues to be in default and has
been classified current as of September 30, 1996.
The senior convertible debentures issued July 1994 are convertible at the
option of the holder into shares of common stock equal to the principal amount
of each bond (or in $1,000 increments) divided by a $5.65 conversion price
subject to adjustment in certain circumstances. The indenture requires the
Company to maintain key man life insurance policies on two executives in an
amount equal to the redemption value of the bonds naming the trustee as
beneficiary on behalf of the bond holders. The senior convertible debentures
prohibit the Company from paying or making within any 12-month period dividends
or distributions on its Common Stock having a value in excess of 50% of the
consolidated net income of the Company, unless each holder of the senior
convertible debentures receives an amount equal to its pro rata portion of the
dividend or distribution (on an as-converted into Common Stock basis).
Effective December 1, 1995, the Company entered into additional agreements with
the holders of the 12% senior convertible debentures, whereby the Company sold
an additional $1,500,000 of debentures on generally the same terms and
conditions as those previously issued. The new debentures bear interest at 12%,
payable semiannually in June and December, are convertible into common stock at
the rate of $5.00 per share and become due and payable on December 1, 1997.
TTI's revolving line of credit with Comerica Bank-Texas which was originally due
February 1997 has been extended pending lenders renewal upon receipt of audited
financial statements. The terms of the revolving line of credit require TTI to
restrict capital expenditures to certain agreed upon levels, maintain specified
debt to net worth and fixed charge coverage ratios, limit the amount of its
contingent liabilities and maintain agreed upon levels of working capital and
tangible net worth. Furthermore, the terms of the revolving line of credit
prohibit loans or advances from TTI to the Company and limit dividends from TTI
to the Company to $580,000 per year. The Company has guaranteed all obligations
under TTI's revolving line of credit. Availability under the line of credit at
September 30, 1996 amounted to approximately $2,000,000.
F-26
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has 50,000,000 authorized shares of $.01 par value preferred stock
with the rights and preferences as designated by the Board of Directors. Series
A, B, C, D, E, A-2 and A-5 of Preferred Stock are authorized for issuance of
375,000, 300,000, 300,000, 600,000, 1,425,000, 750,000 and 750,000 shares of
preferred stock, respectively. All shares of preferred stock designated above
have a redemption value of $10 per share, are noncumulative at the annual rate
of 5% of the redemption value, are convertible at the option of the holder into
20, 10, 5, 2-1/2, 1, 2 and 2 shares of restricted common stock, respectively,
have a liquidation preference of $10 per share and are callable by the Company
at 105% of the redemption value.
Series A-2 preferred shares are entitled to two votes per share on all matters
on which the holders of common stock have one vote per share. No other series
of preferred shares has voting rights.
During November 1995, the Company, in a transaction with an unrelated
corporation, sold 250,000 shares of newly-designated Series A-3 Preferred Stock
for $2,500,000 cash. The designations of the Series A-3 stock are similar to
those of other series of preferred stock, except that Series A-3 preferred stock
has voting rights, is entitled to cumulative annual dividends of 12% and is
convertible into 2 shares of common stock (subject to adjustment in certain
circumstances.) The Company also entered into an agreement with an associate of
the corporation to provide consulting services to the Company over a 36-month
period. The consideration for such services was the grant of options to
purchase 357,143 shares of common stock at $3.50 per share (the fair market
value at the date of grant) plus hourly fees and expenses.
In October 1996, the associate of the aforementioned corporation exercised the
stock option to purchase 357,143 shares of common stock. Consideration for the
transaction was the retirement of 125,000 shares of Series A-3 preferred stock
having a book value of $1,250,000. The Series A-3 preferred stock had been
assigned by the corporation to the associate.
STOCK OPTIONS TO OFFICERS, DIRECTORS AND EMPLOYEES
In April 1991, the Board of Directors granted to certain officers and directors
options covering 175,000 shares of the Company's common stock at an exercise
price of $.50 per share. Such options are exercisable in cumulative annual
increments of 33% following the first anniversary from the date of grant and
expire five years after the date of grant.
During July 1993 and March 1994, the Board of Directors granted to certain
officers and directors options to purchase 650,000 shares at option prices of
$.75 (600,000 shares) and $5.25 (50,000 shares) per share, respectively, which
were equal to the fair value at the date of grant. The options are exercisable
in whole or in part and expire five years from the date of grant.
Under the terms of the 1994 Employee Stock Option Plan adopted by the Board of
Directors in
F-27
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1994, the Company has reserved a total of 1,000,000 shares of its common
stock for issuance to eligible employees of, and consultants to, the Company.
The Plan provides for the grant of both incentive stock options (at exercise
prices no less than fair value at the date of grant) and nonqualified stock
options (at exercise prices as determined by the Compensation Committee of the
Board of Directors), that such options may be exercisable as determined by such
Committee and that the Plan will expire ten years following its adoption.
During July 1996, the Board of Directors granted to certain officers, directors
and employees options to purchase 510,000 shares at $2.00 per share which was
equal to the fair value at the date of the grant. The options are exercisable
in whole or in part and expire ten years from the date of grant.
Option transactions pursuant to the above plans during the three years ended
September 30, 1996 are summarized as follows:
Number of Exercise Shares
Shares Price Exercisable
--------- ---------- -----------
Outstanding, September 30, 1993 368,000 $ .50-2.50 359,667
Granted 357,000 .75-5.25 -
Exercised (232,000) .75 -
--------
Cancelled - - -
Outstanding, September 30, 1994 493,000 $ .50-5.25 493,000
Granted - - -
Exercised - - -
Cancelled - - -
--------
Outstanding, September 30, 1995 493,000 $ .50-5.25 493,000
Granted 510,000 2.00 510,000
Exercised (75,000) .50-.75 -
Cancelled - - -
--------
Outstanding, September 30, 1996 928,000 $50 - 5.25 1,003,000
========
STOCK OPTIONS-OTHERS
In July 1993, the Company entered into an agreement with an unrelated individual
to obtain, over a five-year period, services related to the finding and
evaluation of potential acquisition targets. In consideration thereof the
Company granted the individual an option to purchase 400,000 shares of the
Company's common stock at an exercise price of $.875 per share, the fair value
at the date of grant. The option was exercised during the year ended September
30, 1994.
F-28
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PYRENEES OPTION
In October 1992, the Company's Board of Directors authorized the issuance to the
Pyrenees Group, or its assignees, options to purchase up to 1,000,000 shares of
convertible preferred stock for $10 per share. The options were issued subject
to approval by the Company's shareholders and were approved and ratified at the
Company's Annual Meeting held May 31, 1994. Pyrenees, a private investment
firm controlled by Paul A. Tanner, Chairman and Chief Executive Officer and Paul
A. Tanner, Jr., Director of the Company were granted these options as
consideration for the sale to the Company of its collected due diligence
materials for acquisitions Pyrenees was contemplating, which were to be used by
the Company in its own previously announced acquisition program. The options,
covering Series A, B, C, D and E Preferred Stock, are summarized as follows:
Preferred Conversion Common
Series Shares Price Shares
------ --------- ------- ---------
A 125,000 $ .50 2,500,000
B 100,000 1.00 1,000,000
C 100,000 2.00 500,000
D 200,000 4.00 500,000
E 475,000 10.00 475,000
--------- ---------
1,000,000 4,975,000
========= =========
In fiscal 1994, the Pyrenees Group exercised options with respect to the Series
A and Series B Preferred Stock through the issuance of two 7% demand notes in an
aggregate amount of $2,250,000, collateralized by the shares issued; such notes
were reflected as a reduction in the stockholders' equity accounts in the
accompanying consolidated balance sheet as of September 30, 1994. In fiscal
1995, the Pyrenees Group exercised the Series C option through an additional
demand note bearing interest at 7% and collateralized by the shares issued. On
May 5, 1995 in conjunction with the acquisition of Overhill Farms, Pyrenees paid
$4,000,000 to IBM on the Company's behalf. Of this amount, $2,992,000
represented repayment of the 7% notes with the excess, $1,008,000, representing
a temporary advance by Pyrenees to the Company. This amount plus other payments
made by Pyrenees resulted in a temporary advance of $1,153,000 at September 30,
1995. During fiscal 1995, Pyrenees converted Series A, B and C Preferred Stock
into common stock. During November, 1995, Pyrenees exercised the Series D
option through an additional 7% note in the amount of $2,000,000, collateralized
by the shares issued. The Series E option expired unexercised.
The Company recognized a non-recurring, non-cash charge for the fair value of
the Pyrenees options as of the date of approval by the shareholders. The fair
value of the options, as determined by an independent valuation firm, amounted
to $1,400,000; such amount was recorded as a non-cash charge against income with
a corresponding credit to paid-in capital.
During the year ended September 30, 1996, the shares were converted to 500,000
shares of common stock and principal payments of approximately $721,000 were
made on the note.
F-29
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANT TO PURCHASE COMMON STOCK OF SUBSIDIARY
The warrant to purchase common stock of subsidiary issued in connection with the
$13 million subordinated debt described in Note 10 provides that the warrant
holders may purchase shares of the Company's Overhill subsidiary (representing
22.5 % of its common stock) at any time over a ten year period which ends May 5,
2005 for a nominal exercise price of $100. The warrant holders also have the
option to "put" the warrants to the Company any time after the warrant's fifth
anniversary at a "put" price based upon the higher of fair market, book or
appraised value of the subsidiary. The "put option" is exercisable anytime
after May 5, 2000 or immediately, if the subsidiary experiences a change in
control or merges with another unaffiliated company. Additionally the Company
has the option of "calling" the outstanding warrants for cash anytime after May
5, 2001. The "call" price is determined using the same formula as provided for
determining the warrant's "put" price.
In order to account for the obligation associated with the warrant's "put"
feature, the Company estimated the fair value of the warrants to be $900,000 at
the date of issuance. This amount was discounted at 12% for a five-year period
which resulted in a $495,405 liability and related debt discount on the senior
subordinated note being recorded for the warrant's "put" feature at the date of
issuance. In order to account for changes in the estimated warrant liability,
the Company periodically estimates the fair value of the Overhill common stock
and accretes the warrant liability accordingly through a charge to earnings.
(See Notes 3 and 4.)
12. INCOME TAXES
Income tax expense (benefit) consists of the following:
For the Years Ended
September 30,
1996 1995 1994
---------- --------- ----------
Current:
Federal $1,193,807 $ 111,589 $ -
State 265,467 414,289 127,000
Deferred:
Federal 115,233 (396,409) (94,000)
State 19,035 (53,242) (16,000)
---------- --------- ---------
Total income taxes $1,593,542 $ 76,227 $ 17,000
========== ========= =========
F-30
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective tax rate on earnings (loss) before income tax charges (benefits)
was different than the federal statutory tax rate. The following summary
reconciles the federal statutory tax rate with the actual effective rate:
<TABLE>
<CAPTION>
For the Years Ended
September 30,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Effective statutory tax expense (benefit) rate 34.0% 34.0% (34.0%)
Increase (decrease) in effective tax rate
resulting from:
State taxes, net of federal tax benefit 9.2 7.7 9.0
Officer life insurance premiums,
amortization of goodwill, accretion
of stock warrants 12.5 6.7 6.5
Exercise of stock options - - (10.2)
Limitation on utilization of net
operating losses - - 30.0
Utilization of net operating losses (4.3) (31.9) (14.2)
Change in losses losses
Sale of subsidiaries 27.9 - -
Other 6.6 (0.2) -
------ ------ ------
Effective tax expense rate 85.9% 2.1% 1.3%
====== ====== ======
</TABLE>
F-31
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As stated in Note 2, in 1993 the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
among other things a liability approach to calculating deferred income taxes.
The components of deferred tax balances as of September 30, 1996 and 1995 are
summarized as follows:
1996 1995
----------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 1,348,559 $ 209,628
Inventory 132,732 459,231
Accrued expenses 167,036 192,812
Deferred sales - 62,080
Net operating loss carryforwards - 69,232
AMT credit carryforwards - 69,945
Investment in subsidiary (unconsolidated) 45,206 -
Other 14,748 -
----------- ----------
Deferred tax assets 1,708,281 1,062,928
----------- ----------
Deferred tax liabilities:
Stock option exercises (17,572) (27,572)
Prepaid expenses (235,624) (216,501)
Intangibles (788,775) (296,357)
Depreciation (422,591) (112,668)
Other (11,335) (43,178)
----------- ----------
Deferred tax liabilities (1,475,897) (696,276)
----------- ----------
Net deferred tax assets $ 232,384 $ 366,652
=========== ==========
The Company has utilized all net operating losses available for carryforward.
Additionally, the Company has utilized all alternative minimum tax credit
carryforwards. Deferred tax assets are included in prepaid expenses and other
assets in the accompanying consolidated Balance Sheets.
F-32
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Future minimum lease payments for all operating leases at September 30, 1996 are
as follows:
For the Years Ending
September 30,
--------------------
1997 $1,323,131
1998 1,113,113
1999 473,206
2000 43,224
2001 24,375
----------
$2,977,049
==========
Certain of the leases provide for renewal options for periods from 1998 to 2005
at substantially the same terms as the current leases.
Rent expense, including monthly equipment rentals, was approximately $1,510,000,
$893,000 and $190,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.
The Company's subsidiary, TTI relies on two suppliers for the majority of their
new units and parts. As of September 30, 1996, TTI had commitments to purchase
inventory amounting to $3,944,000.
TTI guarantees on behalf of various customers certain lines of credit with banks
and financial institutions. The portion of the credit lines guaranteed ranges
from zero to 100% on a customer-by-customer basis. At September 30, 1996, the
Company's guarantees totaled $7,493,671. The Company receives a fee, in the
form of interest participation on certain of the notes upon which it is
contingently liable. This fee is recognized as interest income by the Company
and is usually held by the institution to meet reserve requirements. Company
funds held in escrow by the lenders of $882,383 at September 30, 1996 are
included in the Consolidated Balance Sheet as restricted cash and are fully
offset by a reserve for credit guarantees.
TTI has an interest in two partnerships. The total investment in these
partnerships at September 30, 1996 of $307,985 is included in other assets. TTI
guarantees the debt of these partnerships. The amount guaranteed at September
30, 1996 of $494,890 is collateralized by accounts receivable, inventory,
equipment, buildings and real estate.
F-33
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINGENCIES
On May 10, 1996, the United States District Court for the Northern District of
Texas dismissed a class action suit that initially had been filed in the Eastern
District of New York. The suit claimed that the Company and its officers were
responsible for artificially inflating the market price of the Company's common
stock during the period of October 26, 1993 through January 15, 1995.
In January 1997, a suit was filed in District Court of Dallas County against the
Company by Rice Partners II, L.P., subordinated debt holders of the Overhill
Farms subsidiary. The suit claims, among other things, that the Company
breached covenants of the subordinated debt agreement and refused to cure the
defaults within a reasonable period of time. The Company has filed a counter
suit claiming Rice Partners II, L.P. (i) refused to comply with verbal
agreements to the indenture (ii) conspired with the former general manager of
Overhill to force the Company to sell Overhill Farms at a distressed price in
order to benefit and (iii) caused the halting of trading of the Company's stock.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based
on advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial position or results of
operations.
See Note 14 for a guarantee of related party indebtedness.
14. RELATED PARTY TRANSACTIONS
During fiscal 1994, the Company made aggregate non-interest bearing cash
advances to Mr. Tanner in the amount of approximately $282,000. At September
30, 1994, Mr. Tanner had repaid $150,000 of such advances. During fiscal 1995,
following the repayment of the unpaid 1994 advances, additional advances
amounting to approximately $63,000 were made to Mr. Tanner which were unpaid at
September 30, 1995. During fiscal 1996, additional amounts were advanced to or
on behalf of Mr. Tanner which aggregated approximately $1.5 million. On
December 8, 1995, the aforementioned advances and an unpaid promissory note
receivable from Mr. Tanner were refinanced through the issuance to the Company
of a 12% unsecured demand note from Mr. Tanner in the principal amount of
$2,000,872.
Also during the period, the Company made disbursements to the Pyrenees Group, a
corporation controlled by Mr. Tanner, of approximately $2.67 million, of which
$1,153,000 represented repayment of existing advances from Pyrenees, with the
balance representing an advance to Pyrenees of approximately $1.5 million.
During January 1996, the Company reached an agreement in principle to manage a
project to develop and build a multi-purpose sports facility in Las Vegas,
Nevada. The project is being developed by PLY Stadium Partners, Inc. ("Stadium
Partners"), a private investment firm headed by Mr. Tanner. As part of the
transaction, the Company is also to participate in the facility's
F-34
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
management, sales of suites and seat options, concessions and events and is to
be compensated for such services. The Company agreed to provide to Stadium
Partners up to $4 million of debt that (1) is convertible into a 14% economic
interest in the project and (2) is to be guaranteed by certain members of the
investment group. As part of this agreement, the aforementioned accounts
receivable from Mr. Tanner and Pyrenees (approximately $3.5 million), together
with any subsequent amounts advanced, charged or accrued to or on behalf of
Stadium Partners were considered as components of the $4 million of convertible
debt, to bear interest at 12% and are guaranteed by Mr. Tanner and Pyrenees. As
of September 30, 1996, the Company advanced an additional $9,271,054 which are
subject to the above guarantees, and are due and payable currently by Stadium
Partners.
On November 15, 1996, Stadium Partners, through a newly-formed partnership,
purchased 62 acres in Las Vegas for the development of the stadium and adjacent
convention facility. Financing was provided by Lehman Brothers Holdings, Inc.
("Lehman") through a partnership, Nevada Stadium Partners Limited Partnership
("Nevada Partnership") with Lehman receiving an equity interest in the project.
The Company has guaranteed the repayment of the loan from Lehman to the Nevada
partnership in the above mentioned transaction, in certain circumstances or upon
the occurrence of certain events. Such guarantee is effective upon the
occurrence of certain conditions, including without limitation if Nevada
Partnership files for bankruptcy or insolvency, if representations by the
Partnership prove to be fraudulent regarding the financial condition of the
Partnership or, the land securing the loan is further encumbered or ownership is
transferred without the consent of Lehman.
During the twelve months ended September 30, 1996, the Company accrued
management and service revenues of $2,550,000 and interest income of $790,000
related to the Company's activities with Stadium Partners, the collectibility of
which is dependent upon the success of the project and/or the guarantees
referred to above. As a result of the terms of the financing described above
Stadium Partners is precluded from making any distributions until permanent
project financing is secured or stadium suite sales are made that are sufficient
to repay the financing from Lehman. As a consequence of Stadium Partners
inability to effect such sales or obtain such financing by March 15, 1997 in
order to make its payment to the Company on such date, the Company has
established a reserve of $3.34 million as of September 30, 1996, which
represents the income accrued. The reserve will be reduced as collections and
distributions are made pursuant to the Stadium Partners loan agreements.
Subsequent to year end, the Company no longer accrues management fees or
interest income on the existing advances.
In January 1997, the Company further advanced Stadium Partners $4.9 million.
The funds advanced consisted of $2.4 million, drawn from an existing line of
credit, and $2.5 million from a six month term note. The term note bears
interest at 16%, is payable monthly and is secured by a second lien on the
Company's headquarters. As additional collateral, the Company agreed to issue
an option on 500,000 shares of Series A-2 preferred stock (convertible into
1,000,000 shares of common stock) which is exercisable upon default of certain
covenants of the agreement.
F-35
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the aforementioned transaction, the Company entered into a
two year consulting agreement with a principal of the lender. In consideration
of the agreement, the Company issued an option to purchase 200,000 shares of
common stock at $.01 per share.
OTHER TRANSACTIONS
Other assets include an insurance premium receivable representing insurance
premiums paid by TTI on behalf of Harold Estes, President and former owner of
TTI. As of September 30, 1996, insurance premium receivable was $492,000.
In February 1994, a company owned by Harold Estes, loaned DPPI $350,000 to pay a
previous mortgage on the Company's principal executive offices. The outstanding
principal and interest on this loan was $363,347 as of May 25, 1994, when such
loan was paid in full by the Company.
In connection with the purchase of TTI, the Company acquired a note receivable
from an officer. The note is secured by marketable securities, payable within
one year and bears interest at 3.96%. As of September 30, 1996 the balance
outstanding was $367,634
Upon the resignation of Paul Stevens from the Board of Directors and as
President of PIC in October 1993, the Company and Mr. Stevens entered into an
agreement whereby Mr. Stevens was to provide consulting services to PIC in
consideration for (1) the issuance of 7,500 shares of Series A Preferred Stock,
valued at $75,000 and convertible into 150,000 shares of restricted common
stock, and (2) a monthly retainer of $12,500 cash for a 5-year period. This
agreement was terminated in September 1994, whereby Mr. Stevens agreed to waive
all remaining cash payment requirements and the Company agreed to register the
common stock underlying Mr. Stevens Series A Preferred Stock and to cancel stock
subscriptions receivable from Mr. Stevens in the amount of $30,000. The
Company's expense for the year ended September 30, 1994 amounted to
approximately $200,000 as a result of this consulting contract and its
subsequent termination.
See Note 11 for discussion of options granted to the Pyrenees Group, a related
party.
See Notes 4 and 9 for discussion of note payable to Harold Estes.
15. PROFIT SHARING PLAN
In 1986, prior to acquisition by the Company, TTI adopted a profit sharing plan.
In order to participate in the plan, an employee must be at least 21 years of
age, have been employed by TTI at least one year and be a full time employee.
Vesting begins in the third year of employment and increases each year until
full vesting is achieved in the seventh year. The plan is administered by an
independent third party. Trustees for the plan are the president and controller
of TTI. The maximum contribution is the lesser of 15% of eligible salaries or
net income plus retained earnings. Profit sharing expense for the years ended
September 30, 1996 and 1995 were $264,000 and $211,000 and for the period from
acquisition through September 30, 1994 was approximately $45,000.
F-36
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SALE OF SUBSIDIARIES
The Company, during February 1995, entered into a transaction whereby it
exchanged 100% of the common stock of Taylor-Built Industries, Inc., a wholly
owned subsidiary, for 200,000 shares of restricted common stock of Optimax,
Inc., a publicly held company - such shares were sold in a private transaction
in February 1996. No significant gain or loss was recognized on these
transactions.
In July 1996, the Company completed a transaction with an unrelated third
party to sell a controlling interest in the Company's computer subsidiaries.
The transaction was accomplished through the sale of 51% of a newly formed
subsidiary, PC Networx America, Inc. (PCNA), whose sole assets consist of the
capital stock of Network America, Inc., PC Repair of Florida, Inc., Computer
Systems Concepts and Register Mate, Inc. The consideration for this sale
amounted to approximately $1,600,000 (subject to adjustments) consisting of
$475,000 of cash, $86,457 of notes receivable and $1,175,000 of preferred stock.
The Company intends to publicly distribute to its shareholders a dividend of 30%
of the outstanding stock of PCNA with the Company retaining 19%. This
distribution is expected to occur as soon as practicable. In a related
transaction with the same party, the Company sold 100% of the stock of Micro
Configurations, Inc. (MCC) for a note receivable in the amount of $951,433
secured by the stock and assets of MCC. Total notes receivable outstanding at
September 30, 1996 related to these two transactions amounted to $1,037,890.
See Note 6. No gain or loss was realized on either of these transactions.
Subsequent to this transaction, PCNA's name was changed to DataTell Solutions,
Inc.
17. SALE OF ASSETS
During the period ended June 30, 1996, the Company's Texas Timberjack subsidiary
completed the sale of a parcel of land in Lufkin, Texas. The Company realized a
gain of $875,000 on the property having a book value of approximately $625,000.
18. INFORMATION BY INDUSTRY SEGMENT
The Company's industry segments are outlined below.
TRANSFORMER MANUFACTURING
The transformer manufacturing segment manufactures and sells custom designed
transformer and communication filters. Customers are primarily defense
contractors or defense contractor suppliers in the Mid-Atlantic and Northeastern
regions of the United States.
F-37
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORESTRY
The forestry segment sells, finances, and repairs timber and logging equipment
in East Texas and Western Louisiana. Customers range from small logging
operations to large integrated paper mills.
COMPUTER SALES AND SERVICE
The computer sales and service segment assembles and sells personal computers
and provides systems setup and hardware maintenance services. Customers
serviced range from individuals to large corporations. Subsidiaries included in
the segment are Network America, Inc., in Tulsa, Oklahoma; Letronix and Computer
System Concepts in Queens, New York; PC Repair in Sarasota, Florida and Micro
Configurations Inc., in Brooklyn, New York. Effective July 1, 1996, the Company
sold 51% of its interests in the computer operations. (See Note 16)
FOOD
The food segment produces high quality entrees, plated meals, soups, sauces and
poultry, meat and fish specialties primarily for customers in the airline,
restaurant and weight loss industries.
CORPORATE AND OTHER
The Corporate segment provides management and advisory services to Stadium
Partners, a privately owned development corporation engaged in the development
of a multi purpose sports facility in Las Vegas, Nevada.
F-38
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------------------------------------
Transformer Computer
Manufacturing Sales and Corporate
Food Forestry Corp. Service and Other Totals
------------ ------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
Sales to unaffiliated customers $ 98,771,224 $ 34,247,283 $ 3,549,126 $ 10,398,177 $ 2,574,975 $ 149,540,785
============ ============ =========== ============ =========== =============
Operating profit (loss) and income
before income taxes:
Operating profit (loss) $ 6,260,382 $ 3,039,922 $ 76,726 $ (1,530,277) (1,181,786) $ 6,664,967
Interest and other income 751,385
Interest expense (6,389,926)
Gain on sale of assets 827,852
-------------
Income before income taxes $ 1,854,278
=============
Identifiable assets:
Segment assets $ 38,746,696 $ 41,073,186 $ 3,305,280 $ - $11,053,359 $ 94,178,521
============ ============ =========== ============ =========== =============
Capital expenditures:
Segment $ 392,668 $ 2,159,674 $ 87,875 $ - $ 15,992 $ 2,656,209
============ ============ =========== ============ =========== =============
Depreciation and amortization:
Segment $ 2,024,902 $ 611,070 $ 82,402 $ 229,659 $ 469,104 $ 3,417,137
============ ============ =========== ============ =========== =============
</TABLE>
The Company's food group had sales to a single customer in fiscal 1996 which
comprised approximately 26% percent of consolidated sales. No other customer
accounted for more than 10% of the Company's sales in fiscal 1996.
F-39
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, 1995
------------------------------------------------------------------
Computer
Transformer Sales and
Food Forestry Manufacturing Service Totals
----------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales:
Sales to unaffiliated customers $40,395,326 $42,778,102 $3,602,678 $15,259,366 $102,035,472
=========== =========== ========== =========== ============
Operating profit and earnings
before income taxes
extraordinary items and cumulative
effect of accounting changes:
Operating profit $ 2,707,773 $ 4,691,322 $ 302,512 $ 548,601 $ 8,250,208
General corporate expenses (1,498,507)
Interest and other income 592,055
Interest expense (3,791,059)
------------
Income before income taxes $ 3,552,697
============
Identifiable assets:
Segment assets $38,991,764 $34,423,387 $2,988,017 $ 7,149,085 $ 83,552,253
=========== =========== ========== =========== ============
Corporate assets 4,606,610
------------
Total assets $ 88,158,863
============
Capital expenditures:
Segment $ 133,118 $ 590,052 $ 68,729 $ 157,408 $ 949,307
=========== =========== ========== =========== ============
Corporate 26,576
------------
Total capital expenditures $ 975,883
============
Depreciation and amortization:
Segment $ 857,813 $ 559,872 $ 69,321 $ 322,767 $ 1,809,773
=========== =========== ========== =========== ============
Corporate 125,786
------------
Total depreciation and amortization $ 1,935,559
============
</TABLE>
The Company's food group had sales to a single customer in fiscal 1995 which
comprised approximately 15% percent of consolidated sales. No other customer
accounted for more than 10% of the Company's sales in fiscal 1995.
F-40
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, 1994
----------------------------------------------------
Computer
Transformer Sales and
Forestry Manufacturing Service Total
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales:
Sales to unaffiliated customers $11,154,096 $3,516,730 $10,299,578 $24,970,404
=========== ========== ========== ===========
Operating profit and earnings
before income taxes
extraordinary items and cumulative
effect of accounting changes:
Operating profit $ 876,257 $ 216,401 $ 466,322 $ 1,558,980
=========== ========== ==========
General corporate expenses (1,203,598)
Non-recurring charge related
to the grant of stock options (1,400,000)
Interest and other income 125,730
Interest expense (447,987)
-----------
Loss before income taxes, extraordinary
item and cumulative effect of accounting change $(1,366,875)
===========
Identifiable assets:
Segment assets $24,868,598 $3,910,465 $6,311,229 $35,090,292
=========== ========== ==========
Corporate assets 2,884,657
-----------
Total assets $37,974,949
===========
Capital expenditures:
Segment $ 61,670 $ 20,749 $ 151,812 $ 234,231
=========== ========== ==========
Corporate 113,290
-----------
Total capital expenditures $ 347,521
===========
Depreciation and amortization:
Segment $ 128,470 $ 109,072 $ 182,979 $ 420,521
=========== ========== ==========
Corporate 76,993
-----------
Total depreciation and amortization $ 497,514
===========
</TABLE>
No customer accounted for more than 10% of the Company's consolidated sales in
fiscal 1994
F-41
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Year Ended September 30, 1996
-----------------------------------------------------
December 31 March 31 June 30 September 30
----------- ----------- ------------ -------------
Net revenues $37,497,289 $37,749,771 $36,477,962 $37,815,763
Gross profit 7,578,229 8,705,251 6,415,347 5,976,131
Operating income 2,955,640 2,945,518 926,614 (162,805)
Net income $ 797,296 $ 1,018,001 $ (41,243) $(2,166,266)
=========== =========== =========== ===========
Income per common
share:
Net income $ .06 $ .07 $ (.01) $ (.15)
=========== =========== =========== ===========
The Company's results for the quarter ending June 30, 1996 have been adjusted to
reflect changes in inventory valuation. The inventory adjustments were
identified in the Computer Group and revised in the third quarter, the last
quarter the Company controlled the Computer Group. The Company recorded a
reserve of $3.34 million in the quarter ending September 30, 1996 related to the
Company's activities with Stadium Partners. (See Note 14)
For the Year Ended September 30, 1996
-----------------------------------------------------
December 31 March 31 June 30 September 30
----------- ----------- ------------ -------------
Net revenues $12,611,165 $13,831,411 $33,633,241 $41,959,655
Gross profit 3,064,609 3,034,572 6,285,021 7,595,633
Operating income 877,489 1,005,637 2,151,530 2,717,045
Net income $ 574,354 $ 604,974 $ 917,461 $ 1,188,810
=========== =========== =========== ===========
Income per common
share:
Net income $ .05 $ .05 $ .07 $ .09
=========== =========== =========== ===========
F-42
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
For the Year Ended September 30, 1994
----------------------------------------------------
December 31 March 31 June 30 September 30
----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $3,722,093 $3,482,599 $ 4,837,293 $12,928,419
Gross profit 1,070,197 971,372 1,015,160 1,943,440
Operating income (loss) 310,046 184,250 94,812 (233,726)
Income (loss) before
extraordinary item and
cumulative effect of
accounting change 282,643 158,832 (1,325,688) (499,662)
Extraordinary item-early
extinguishment of debt 62,120
Cumulative effect of
change in method of
accounting for taxes 305,000 - - -
========== ========== =========== ===========
Net income (loss) $ 587,643 $ 158,832 $(1,325,688) $ (437,542)
========== ========== =========== ===========
Income (loss) per common
share:
Before extraordinary item
and cumulative effect of
accounting change $ .05 $ .03 $ (.24) $ (.09)
Extraordinary item .01
Cumulative effect of
change in method of
accounting for taxes .05 - - -
---------- ---------- ----------- -----------
Net income (loss) $ .10 $ .03 $ (.24) $ (.08)
========== ========== =========== ===========
</TABLE>
Quarterly per share data does not total to annual amounts reported due to the
weighting of common stock equivalents and the changes in the Company's capital
structure during the year. Amounts reported for the quarter ended June 30, 1994
have been restated from those included in Form 10-QSB for such quarter to
eliminate antidilutive common stock equivalents from the computation of loss per
share and to adjust the consideration in connection with the purchase of the
Register-Mate assets.
F-43
<PAGE>
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash $ 38,391 $ 2,193
Receivables from related parties 369,350
Receivables from subsidiaries - 2,259,115
Prepaid expenses and other 2,755,841 531,642
----------- -----------
Total current assets 2,794,232 3,162,300
Property and equipment 1,758,267 1,742,275
Less-Accumulated depreciation (162,763) (102,817)
----------- -----------
1,595,504 1,639,458
Non current receivables:
Related party for doubtful accounts of $3,340,000 9,931,054 -
Other 1,037,890 -
Other assets (primarily investments
in subsidiaries) 28,179,575 34,876,272
----------- -----------
Total assets $43,538,255 $39,678,030
=========== ===========
Accounts payable 346,105 858,476
Accrued expense - 343,878
Due to affiliated party - 1,153,000
Current maturities of long term debt 6,345,544 80,398
----------- -----------
Total current liabilities 6,691,649 2,435,752
Note payable- related party 12,546,000 11,100,000
Long term debt, net - 4,850,427
Deferred income taxes 302,206 154,508
----------- -----------
Total liabilities 19,539,855 18,540,687
----------- -----------
Stockholders' equity:
Preferred stock 2,500 -
Common stock 131,970 126,220
Additional paid in capital 26,630,714 22,106,606
Retained earnings (deficit) (1,487,695) (1,095,483)
Note receivable (1,279,089) -
----------- -----------
Total stockholders' equity 23,998,400 21,137,343
----------- -----------
$43,538,255 $39,678,030
=========== ===========
</TABLE>
See note to condensed financial
information of registrant.
F-44
<PAGE>
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended
September 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net revenues $ - $ -
Cost of sales - -
----------- -----------
Gross Profit - -
Selling general and administrative expenses 4,369,130 1,498,508
----------- -----------
Operating income (loss) (4,369,130) (1,498,508)
Other income (expense)
Loss on unconsolidated subsidiaries (855,565) -
Other expense (837,235) -
Interest income 908,364 127,145
Interest expense (2,276,195) (1,877,883)
----------- -----------
Total other income (3,060,631) (1,750,738)
Loss before income taxes (7,429,761) (3,249,247)
Income taxes (benefit) (985,908) (2,133,986)
----------- -----------
(6,443,853) (1,115,261)
Equity in net income of subsidiaries 6,201,641 4,400,860
----------- -----------
Net income (loss) (242,212) 3,285,599
Dividends on preferred stock 150,000 -
----------- -----------
Net income (loss) attributable
to common shareholder $ (392,212) $ 3,285,599
=========== ===========
</TABLE>
See note to condensed financial
information of registrant.
F-45
<PAGE>
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flow provided by operating activities:
Net income (loss) $ (242,212) $ 3,285,599
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 59,946 125,786
Provision for doubtful accounts 3,340,000 -
Issuance of common stock for accrued interest
payable on convertible subordinated debentures - 9,120
Imputed interest on TTI acquisition note - 66,225
Deferred income tax 147,698 293,616
Increase (decrease) in, net of effects of acquisitions:
Receivables from subsidiaries 2,259,115 (1,941,392)
Prepaid expenses and other (2,224,199) (423,523)
Accounts payable and other (512,371) 710,920
Accrued expenses and other (343,878) 1,279,321
------------- -------------
Net cash used in operating activities 2,484,099 3,405,672
------------- -------------
Cash flows used in investing activities:
Notes receivable (1,037,890) 132,000
Notes receivable from related parties (12,901,704) -
Capital expenditures (15,992) (26,576)
Investment in Overhill Farms, Inc. - (4,000,000)
Other assets 6,696,697 (3,770,824)
------------- -------------
Net cash used in investing activities (7,258,889) (7,665,400)
------------- -------------
Cash flows provided by financing activities:
Net borrowings (payments) on notes payable 1,360,719 (160,104)
Advances from (payments to ) related party (1,153,000) 1,153,000
Proceeds from private placement
of preferred stock 2,500,000 -
Proceeds from the issuance of
12% subordinated debentures 1,500,000 -
Exercise of common stock options 50,000 -
Principal collections on Pyrenees
Dividends on preferred stock (150,000) -
notes receivable 720,911 3,250,000
Common stock issuance costs (17,642) (132,001)
------------- -------------
Net cash provided by financing activities 4,810,988 4,110,895
------------- -------------
Net increase (decrease) in cash 36,198 (148,833)
Cash - beginning of year 2,193 151,026
------------- -------------
Cash - end of year $ 38,391 $ 2,193
============= =============
</TABLE>
See note to condensed financial
information of registrant.
F-46
<PAGE>
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Note A - Basis of Presentation
In the parent company only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The company's share of net income
of its unconsolidated subsidiaries is included in consolidated income using the
equity method. The parent company only financial statements should be read in
conjunction with the Company's consolidated financial statements.
The Company filed under the SB regulations for fiscal 1994 and was not required
to complete Schedule I. Accordingly, the condensed financial statements for
that year have been omitted.
F-47
<PAGE>
POLYPHASE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Three Years in the Period Ended September 30, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E Column F
- -----------------------------------------------------------------------------------------------
Balance at Charged to Balance at
beginning costs and end of
Classification of period expenses Deductions Other period
- -----------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended September 30, 1996 $506,805 $146,666 $(134,367) $ $519,104
===========================================================
Year ended September 30, 1995 $580,251 $ 73,446 $(146,892) $ -- $506,805
===========================================================
</TABLE>
Note: The Company filed under the SB regulations for fiscal 1994 and was not
required to complete Schedule II. Accordingly, the Valuation and Qualifying
Accounts for that year have been omitted.
F-48
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner June 9, 1997
-------------------------
Paul A. Tanner, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ Paul A. Tanner June 9, 1997
- -----------------------------
Paul A. Tanner
President and Chief Executive
Officer, Chairman of the
Board and Director
(Principal Executive Officer)
/s/ James Rudis June 9, 1997
- -----------------------------
James Rudis
Executive Vice President
and Director
/s/ William E. Shatley June 9, 1997
- -----------------------------
William E. Shatley
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ George R. Schrader June 9, 1997
- -----------------------------
George R. Schrader
Director
/s/ Paul A. Tanner, Jr. June 9, 1997
- -----------------------------
Paul A. Tanner, Jr.
Director
June 9, 1997
- -----------------------------
Michael F. Buck
Director
S-1
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3 through
4.8 to the Company's registration statement on Form S-8 (No. 33-82008),
filed with the Commission on July 27, 1994 (the "1994 Form S-8"))
3.2 Bylaws of Polyphase Corporation (incorporated by reference from Exhibit
4.2 to the 1994 Form S-8)
4.1 Certificate of Designation relating to the Series A-2 Preferred Stock
(incorporated by reference from Exhibit 4.9 to the Company's
Registration Statement on Form SB-2 [No. 33-85334] filed with the
Commission on October 19, 1994 [the "Form SB-2"])
4.2 Certificate of Designation relating to the Series A-3 Preferred Stock
(incorporated by reference from Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1995 [the "1995
Form 10-K"])
10.1+ Stock Option Agreement for Paul A. Tanner (incorporated by reference
from Exhibit 4.12 to the 1994 Form S-8)
-1-
<PAGE>
10.2+ Stock Option Agreement for Michael F. Buck (incorporated by reference
from Exhibit 4.13 to the 1994 Form S-8)
10.3+ Stock Option Agreement for Don E. McMillen (incorporated by reference
from Exhibit 4.14 to the 1994 Form S-8)
10.4+ Stock Option Agreement for George R. Schrader (incorporated by
reference from Exhibit 4.15 to the 1994 Form S-8)
10.5+ Stock Option Agreement for James Rudis (incorporated by reference from
Exhibit 10.5 to the Company's Form 8-B, filed with the Commission on
August 27, 1994 (the "Form 8-B"))
10.6+ Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
10.7+ Employment Agreement, dated as of November 1, 1993, between Harold
Estes and Texas Timberjack, Inc. (incorporated by reference from
Exhibit 2 to the 1994 Form 8-K)
10.8 Pledge Agreement, dated as of June 24, 1994, between Polyphase
Corporation and Harold Estes (incorporated by reference from Exhibit
10.10 to the Form 8-B)
10.9 Security Agreement, dated as of June 24, 1994, between Texas
Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.11 to the Form 8-B)
10.10 Stock Option Agreement, dated as of October 21, 1992, between
Polyphase Corporation and the Pyrenees Group (incorporated by
reference from Exhibit 10.12 to the Form 8-B)
10.11 Deed of Trust Note in the amount of $1,000,000, dated May 25, 1994, by
Polyphase Corporation in favor of Comerica Bank-Texas (incorporated by
reference from Exhibit 10.4 to the Company's Form 10-Q for the quarter
ended June 30, 1994 (the "1994 Form 10-Q"))
10.12 Deed of Trust (With Security Agreement and Assignment of Rents), dated
May 25, 1994, covering real property in Dallas County, Texas between
Polyphase Corporation and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.3 to the 1994 Form 10-Q)
10.13 Letter Agreement, dated May 25, 1994, between Polyphase Corporation
and Comerica Bank -Texas (incorporated by reference from Exhibit 10.4
to the 1994 Form 10-Q)
10.14 Securities Purchase Agreement, dated as of July 5, 1994, by and among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.16 to the Form 8-B)
10.15 Registration Rights Agreement, dated as of July 5, 1994, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.17 to the Form 8-B)
10.16 Indenture, dated as of July 5, 1994, from Polyphase Corporation to IBJ
Schroder Bank & Trust Company (incorporated by reference from Exhibit
10.18 to the Form 8-B)
10.17 Form of 12% Senior Convertible Debenture No. 1, payable to Bridge Rope
& Co. or registered assigns (incorporated by reference from Exhibit
10.19 to the Form 8-B)
10.18 Form of 12% Senior Convertible Debenture No. 2, payable to Vault & Co.
or registered assigns (incorporated by reference from Exhibit 10.20 to
the Form 8-B)
-2-
<PAGE>
10.19 Asset Purchase Agreement among Champ Computer Systems, Inc., Liberty
United Trust and Polyphase Corporation, dated March 23, 1994
(incorporated by reference from Exhibit 10.25 to the Form SB-2)
10.20 Stock Purchase Agreement among PC Repair of Florida, Inc., Gene H.
Thurston, Jr. and Polyphase Corporation, dated February 15, 1994
(incorporated by reference from Exhibit 10.26 to the Form SB-2)
10.21 Agreement and Plan of Reorganization between the Shareholders of Micro
Configurations, Inc. and Polyphase Corporation, dated July 1, 1994
(incorporated by reference from Exhibit 10.27 to the Form SB-2)
10.22 Credit Agreement, dated August 29, 1994, between Texas Timberjack,
Inc. and Comerica Bank-Texas (incorporated by reference from Exhibit
10.28 to the Form SB-2)
10.23 Guaranty, dated August 29, 1994, from Polyphase Corporation to
Comerica Bank-Texas (incorporated by reference from Exhibit 10.29 to
the Form SB-2)
10.24 Deed of Trust, dated as of August 30, 1994, from Texas Timberjack,
Inc. to J. Patrick Faubion, Trustee (incorporated by reference from
Exhibit 10.30 to the Form SB-2)
10.25 Security Agreement, dated as of August 29, 1994, between Texas
Timberjack, Inc. and Comerica Bank-Texas (incorporated by reference
from Exhibit 10.31 to the Form SB-2)
10.26 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated August 29, 1994 (incorporated by
reference from Exhibit 10.32 to the Form SB-2)
10.27 First Amendment to Credit Agreement dated September 1, 1995, between
Texas Timberjack, Inc. and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.27 to the 1995 Form 10-K)
10.28 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated September 1, 1995 (incorporated
by reference from Exhibit 10.28 to the 1995 Form 10-K)
10.29 Promissory Note in the amount of $2,000,000, from Pyrenees Group, as
maker, to Polyphase Corporation, dated November 1, 1995, related to
the exercise of options on Series D Preferred Stock (incorporated by
reference from Exhibit 10.29 to the 1995 Form 10-K)
10.30 Security Agreement, dated as of November 1, 1995, between Pyrenees
Group and Polyphase Corporation (incorporated by reference from
Exhibit 10.30 to the 1995 Form 10-K)
10.31 Promissory Note in the amount of $2,000,872, from Paul A. Tanner, as
maker, to Polyphase Corporation, dated December 8, 1995 (incorporated
by reference from Exhibit 10.31 to the 1995 Form 10-K)
10.32 Convertible Preferred Stock Purchase Agreement, dated as of November
10, 1995, by and between Polyphase Corporation and Infinity Investors,
Ltd. (incorporated by reference from Exhibit 10.32 to the 1995
Form 10-K)
10.33 Securities Purchase Agreement, dated as of December 1, 1995, by and
among Polyphase Corporation, Merrill Lynch World Income Fund, Inc.,
and Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.33 to the 1995 Form 10-K)
10.34 Registration Rights Agreement, dated as of December 1, 1995, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.34 to the 1995 Form 10-K)
10.35 Indenture, dated as of December 1, 1995, from Polyphase Corporation to
IBJ Schroder Bank & Trust Company (incorporated by reference from
Exhibit 10.35 to the 1995 Form 10-K)
-3-
<PAGE>
10.36 Form of 12% Senior Convertible Debenture No. 1, dated December 1,
1995 payable to Bridge Rope & Co. or registered assigns (incorporated
by reference from Exhibit 10.36 to the 1995 Form 10-K)
10.37 Form of 12% Senior Convertible Debenture No. 2, dated December 1,
1995 payable to Kane & Co. or registered assigns (incorporated by
reference from Exhibit 10.37 to the 1995 Form 10-K)
10.38 Renewal Promissory Note in the amount of $11,200,000, dated October
31, 1995, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.38 to the 1995 Form 10-K)
10.39 Amended Pledge Agreement, dated as of October 31, 1995, between
Polyphase Corporation and Harold Estes (incorporated by reference
from Exhibit 10.39 to the 1995 Form 10-K)
10.40 Amended Security Agreement, dated as of October 31, 1995, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference
from Exhibit 10.40 to the 1995 Form 10-K)
10.41** Renewal Promissory Note in the amount of $12,842,916, dated December
31, 1996, payable by Polyphase Corporation to Harold Estes
10.42** Amended Pledge Agreement, dated as of December 31, 1996, between
Polyphase Corporation and Harold Estes
10.43** Amended Security Agreement, dated as of December 31, 1996, between
Texas Timberjack, Inc. and Harold Estes
10.44** Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated June 28, 1996
10.45** Security and Pledge Agreement, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation
10.46** Secured Promissory Note, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation
10.47** Security Agreement, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation
10.48** Promissory Note, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation
10.49** Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1996
+10.50** Stock Option Agreement for Paul A. Tanner dated July 23, 1996
+10.51** Stock Option Agreement for James Rudis dated July 23, 1996
+10.52** Stock Option Agreement for William E. Shatley dated July 23, 1996
+10.53** Stock Option Agreement for Michael F. Buck dated July 23, 1996
+10.54** Stock Option Agreement for George R. Schrader dated July 23, 1996
+10.55** Stock Option Agreement for Paul A. Tanner, Jr. dated July 23, 1996
21.1** Subsidiaries of the Registrant
-4-
<PAGE>
23.1** Consent of Ernst & Young LLP
23.2** Consent of Price Waterhouse LLP
27.1** Financial Data Schedule
--------------------------------
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
-5-
<PAGE>
EXHIBIT 10.41
RENEWAL PROMISSORY NOTE
(this "Note")
$12,842,916.00 Date: December 31, 1996
FOR VALUE RECEIVED, the undersigned, POLYPHASE CORPORATION (the
"Borrower"), promises to pay to the order of HAROLD ESTES ("Lender"), at Lufkin,
Texas, the principal sum of Twelve Million Eight Hundred Forty-Two Thousand Nine
Hundred Sixteen and 00/100 Dollars ($12,842,916.00), upon the following terms:
1. INTEREST. The unpaid principal balance hereof shall be due and payable
on the Maturity Date (as hereafter defined), with interest thereon until June
30, 1997 at the rate of ten percent (10%) per annum, and after June 30, 1997 at
the rate of sixteen percent (16%) per annum. Notwithstanding anything to the
contrary contained herein, past due principal and interest shall bear interest
at the rate of interest equal to the lesser of (a) eighteen percent (18 %) per
annum or (b) the Maximum Lawful Rate. Interest shall be calculated at a daily
rate equal to 1/365th of the applicable annual percentage rate. The "Maximum
Lawful Rate" shall mean the maximum rate of interest from time to time permitted
under federal or state laws now or hereafter applicable to this Note, after
taking into account, to the extent required by applicable law, any and all
relevant changes and calculations.
2. PAYMENT OF PRINCIPAL AND INTEREST. The entire unpaid principal amount
of this Note shall be due and payable on (the "Maturity Date") December 1, 1997.
If any installment of principal on this Note shall become due on a
Saturday, Sunday or other day on which national banks are not open for business,
such payment shall be due on the next succeeding business day. Each payment
hereunder (including any prepayment) received by Lender shall be applied first
to the payment of accrued interest due hereunder, if any, and then to the
reduction of the unpaid principal balance hereof. After the occurrence and
during the continuation of any event of default (as hereinafter defined), any
payment hereunder received by Lender may ayment. The Borrower may, at its option
upon five business days notice, prepay the outstanding amount of this Note, in
whole or in part, with accrued interest but without any premium or other
prepayment fee.
3. PREPAYMENT. The Borrower may, at its option upon five business days
notice, prepay the outstanding amount of this Note, in whole or in part, with
accrued interest but without any premium or other prepayment fee.
4. SECURITY. The indebtedness evidenced hereby is secured by: (i) that
certain Pledge Agreement dated June 24, 1994, as amended, between Borrower, as
pledgor, and Lender, as secured party (the "Pledge Agreement"), whereby Borrower
grants to Lender a first and prior lien and security interest in and upon the
Pledge Stock (as defined in the Pledge Agreement) and (ii) that certain Security
Agreement dated June 24, 1994, as amended, between Texas Timberjack, Inc., a
Texas corporation, as debtor (the "Company"), and Lender, as secured party (the
"Security Agreement"), whereby the Company grants to Lender a lien and security
interest in and upon all of the Assets (as defined in the Security Agreement) of
the Company.
5. EVENTS OF DEFAULT; REMEDIES. Each of the following shall constitute an
event of default hereunder:
<PAGE>
a. Borrower's failure to make any payment hereunder when due;
b. Borrower's default under the terms and conditions of the Pledge
Agreement;
c. The Company's default under the terms and conditions of the Security
Agreement;
d. A decree or order by a court of competent jurisdiction shall have been
entered either: (i) adjudging Borrower or the Company a bankrupt or
insolvent, or (ii) approving a petition seeking reorganization or
arrangement of the Borrower under state or federal law, or (iii) appointing
for the Borrower or the Company a receiver, liquidator or trustee or
assignee in bankruptcy or insolvency or any receiver of all or any
substantial portion of its property, and such decree or order shall
continue in force for a period of more than thirty days; or
e. The Borrower or the Company shall institute any proceeding to be
adjudicated a voluntary bankrupt, or shall consent to the filing of a
bankruptcy or reorganization petition against it, or shall consent to the
appointment of a receiver, liquidator, or trustee or assignee in bankruptcy
or insolvency or any receiver of all or any substantial portion of its
property, or Borrower makes a general assignment for the benefit of
creditors or admits in writing its inability to pay its debts as they
become due.
Upon the occurrence of any event of default, this Note, without notice or
demand by Lender, shall become immediately due and payable. Upon the occurrence
of an event of default Lender will be entitled to any and all remedies described
in the Pledge Agreement and/or the Security Agreement, which remedies are
incorporated herein for all purposes, and all other remedies available at law or
in equity.
6. CUMULATIVE RIGHTS. No delay on the part of the holder of this Note in
the exercise of any power or right under this Note or any other agreement,
instrument or document executed pursuant hereto or in connection herewith shall
operate as a waiver thereof, nor shall a single or partial exercise of any other
power or right. Enforcement by the holder of this Note of any security for the
payment hereof shall not constitute any election by it of remedies so as to
preclude the exercise of any other remedy available to it.
7. WAIVER. Borrower and each surety, endorser, guarantor and other party
ever liable for payment of any part hereof jointly and severally waive
presentment and demand for payment, protest, notice of intention to accelerate,
notice of acceleration and notice of protest and nonpayment, and agree that
their liability on this Note shall not be affected by, and hereby consent to any
renewal or extension in the time of payment hereof, any indulgences or any
release or change on any security for the payment of this Note.
8. USURY. Regardless of any provisions contained in this Note or in any
other documents and instruments referred to herein, Lender shall never be deemed
to have contracted for or be entitled to receive, collect, or apply as interest
on this Note any amount in excess of the Maximum Lawful Rate, and in the event
Lender ever receives, collects or applies as interest any
2
<PAGE>
such excess, such amount which would be excessive interest shall be applied to
the reduction of the unpaid, principal balance of this Note, and, if the
principal balance of this note is paid in full, any remaining excess shall
forthwith be paid to Borrower. In determining whether or not the interest paid
or payable under any specific contingency exceeds the Maximum Lawful Rate,
Borrower and Lender shall, to the maximum extent permitted under applicable law,
(i) characterize any non-principal payment as an expense, fee or premium, rather
than as interest; and (ii) exclude voluntary prepayments and the effect thereof;
and (iii) amortize, prorate, allocate, and spread, in equal parts, the total
amount of interest throughout the entire contemplated term of this Note so that
the interest rate is uniform throughout the term of this Note; provided that if
this Note is paid and performed in full prior to the end of the full
contemplated term thereof, and if the interest received during the actual period
of existence thereof exceeds the Maximum Lawful Rate, the holder of this Note
shall refund to Borrower the amount of such excess or credit the amount of such
excess against the principal amount due thereunder, and in such event, no holder
of this Note shall be subject to any penalties provided by any laws for
contracting for, charging for, or receiving interest in excess of the Maximum
Lawful Rate.
If at any time and from time to time Lender is prevented from collecting
the rate of interest and the fees specified in this Note, by applicable law or
governmental regulation, it shall be entitled to re to collect when such
recoupment will not violate such applicable law or governmental regulation. Such
recoupment shall be accomplished by the Borrower paying interest at the Maximum
Lawful Rate until such time as Lender shall have fully recouped the interest it
would have otherwise been able to collect from Borrower in the absence of such
applicable law or governmental regulation. During any such period of recoupment,
interest collected by Lender shall first be credited to payment of current
interest due at the rate specified in this Note, then any remaining interest
collected shall be applied to recoupment. When Lender shall have recouped all
such interest, the interest rate payable by Borrower shall revert to the rate
specified in this Note. In no event, however, shall the interest rate charged
hereunder ever exceed the maximum rate of interest permitted by applicable law.
9. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATH OF TEXAS AND THE APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN ANGELINA COUNTY, TEXAS,
AND BORROWER WAIVES THE RIGHT TO BE SUED HEREON ELSEWHERE. COURTS WITHIN THE
STATE OF TEXAS SHALL HAVE JURISDICTION OVER ANY AND ALL DISPUTES BETWEEN LENDER
AND BORROWER, WHETHER AT LAW OR IN EQUITY, INCLUDING, BUT NOT LIMITED TO, ANY
AND ALL DISPUTES ARISING OUT OF OR RELATING TO THIS NOTE OR ANY OTHER AGREEMENT,
INSTRUMENT OR DOCUMENT EXECUTED IN CONNECTION HEREWITH; AND VENUE IN ANY SUCH
DISPUTE SHALL BE IN LUFKIN, TEXAS.
10. ATTORNEY'S FEES. If this Note is not paid at maturity whether by
acceleration or otherwise or is placed in the hands of an attorney for
collection, or suit is filed hereon, or proceedings are had in probate,
bankruptcy, receivership, reorganization, arrangement or other
3
<PAGE>
legal proceedings for collection thereof, Borrower agrees to pay Lender its
collection costs, including a reasonable amount as attorney's fees, but in no
event to exceed the maximum amount permitted by law.
11. SEVERABILITY. If any portion of this Note is declared invalid, for any
reason, such declaration shall not affect the validity of any remaining portion,
which remaining portion shall remain in force and effect as if this Note had
been executed with the invalid portion thereof eliminated.
12. HEADINGS. The headings used herein are for convenience only, have no
substantive content, may not thoroughly describe the contents of the paragraphs
which they head and shall not be used in construing this Note.
13. BUSINESS PURPOSE. The indebtedness represented by this Note (and any
predecessor indebtedness extended and renewed hereby) was and is for business
purposes only and not for any personal, family or household purposes.
14. MODIFICATION, EXTENSION AND RENEWAL. This Note is an amendment,
restatement, modification, extension and renewal of that one certain renewal
promissory note dated March 1, 1996, in the original amount of Eleven Million
Eight Hundred Fifty-Five Thousand and 00/100 Dollars (the "$11,855,000 Note").
Borrower acknowledges that the $11,855,000 Note has matured. The $11,855,000
Note was a modification, renewal and extension of that one certain renewed and
extended promissory note dated October 31, 1995 in the original amount of Eleven
Million Two Hundred Thousand and 00/100 Dollars ($11,200,000.00) given by
Borrower to Lender (the "Amended Note"). The Amended Note was a modification,
extension and renewal for that one certain renewed and extended promissory note
dated October 31, 1994 in the original amount of Ten Million and 00/100 Dollars
($10,000,000.00) (the "Prior Amended Note"). The Prior Amended Note was a
modification, extension and renewal of that one certain promissory note dated
June 24, 1994 in the original amount of Ten Million and 00/100 Dollars
($10,000,000.00) given by Borrower to Lender (the "Original Note"). Following
the execution and delivery of the Amended Note, the Prior Amended Note was
marked "modified were attached to the Amended Note and following the execution
and delivery of the Prior Amended Note, the Original Note was marked "modified,
extended and renewed" and attached to the Prior Amended Note. Following the
execution and delivery of this Note, the Amended Note will be marked "modified,
extended and renewed" and the Amended Note, the Prior Amended Note and the
Original Note will be attached hereto. The collateral given under the Pledge
Agreement and the Security Agreement is not being released or modified.
15. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by facsimile
transmission, telexed or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
BORROWER:
4
<PAGE>
Polyphase Corporation
16885 Dallas Parkway, Suite 400
Dallas, Texas 75248
Fax No. (214) 732-6430
Attn: Paul A. Tanner
LENDER:
Harold Estes
Rt. 15, Box 9475
Hwy 59 South
Lufkin, Texas 75901
Fax No. (409) 639-3673
IN WITNESS WHEREOF, Borrower has duly executed this note as of the day and
year above first written.
BORROWER:
POLYPHASE CORPORATION
By: __________________________
Paul A. Tanner, President
5
<PAGE>
EXHIBIT 10.42
AMENDED PLEDGE AGREEMENT
This Amended Pledge Agreement (the "Agreement") is made and entered into
effective as of December 31, 1996 (the "Effective Date"), between Polyphase
Corporation ("Pledgor"), and Harold Estes ("Secured Party").
WITNESSETH:
WHEREAS, pursuant to the terms of that one certain Stock Purchase Agreement
dated November 22, 1993, as amended by amendments one through four thereto (the
Stock Purchase Agreement, as amended is referred to herein as the "Stock
Purchase Agreement") Pledgor has become the owner of 100,000 shares (the
"Stock") of the issued and outstanding common stock, no par value of Texas
Timberjack, Inc., a Texas corporation (the "Company"), which represents one
hundred percent (100%) of the outstanding shares of the Company; and
WHEREAS, pursuant to the terms of the Stock Purchase Agreement the Pledgor
executed that certain Ten Million and 00/100 Dollar ($10,000,000.00) promissory
note (the "Original Note") made payable to the order of the Secured Party; and
WHEREAS, the Original Note has been modified, renewed and extended pursuant
to the terms of a Renewal Promissory Note dated October 31, 1995 in the
principal amount of Eleven Million Two Hundred Thousand and 00/100 Dollars
($11,200,000.00) (the "$11.2 Million Renewal Note"); and
WHEREAS, the $11,200,000.00 Renewal Note has been modified, renewed and
extended pursuant to the terms of a renewal promissory note dated March 1, 1996
in the principal amount of Eleven Million Eight Hundred Fifty-Five Thousand and
00/100 dollars ($11,855,000.00) (the $11.8 Million Renewal Note); and
WHEREAS, the $11.8 Million Renewal Note has matured and is now being
modified, renewed and extended pursuant to the terms of a renewal promissory
note dated December 31, 1996 in the principal amount of Twelve Million Eight
Hundred Forty-Two Thousand Nine Hundred Sixteen and 00/100 dollars
($12,842,916.00); and
WHEREAS, the Pledgor's obligations to the Secured Party have been secured
pursuant to the terms of a Pledge Agreement dated as June 24, 1994 between
Pledgor and Secured Party (the "Pledge Agreement"); and
WHEREAS, it is the parties intention that the Pledge Agreement shall
continue to secure the obligations of Pledgor to the Secured Party, including
payment of the Renewal Note;
NOW, THEREFORE, in consideration of the foregoing, the covenants and
agreement contained herein, and for Ten Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Section 1.2 of the Pledge Agreement is hereby amended to read in its
entirely as follows:
Section 1.2 Secured Obligations. This Agreement and the security
interest herein created secures (i) the full and punctual payment and
performance of all indebtedness, liabilities and obligations now owed
or hereafter owing by Pledger to
1
<PAGE>
Secured Party (the "Secured Obligations") including those under that
certain promissory note executed by Pledgor in favor of Secured Party
in the original principal amount of Twelve Million Eight Hundred Forty-
Two Thousand Nine Hundred Sixteen and 00/100 Dollars ($12,842,916.00)
(the "Note"), as the same may be renewed, extended, modified or amended
from time to time, and (ii) full and punctual performance of all the
obligations of Pledgor to the Secured Party under the terms of the
Stock Purchase Agreement.
2. Section 2.1 of the Pledge Agreement is hereby amended by adding the
following:
(e) Since January 1, 1997 Pledgor has not directly or indirectly sold,
transferred, assigned or conveyed, including by way of merger, any
interest in Overhill Foods, Inc. and since that date, Overhill Foods
has not issued or sold any securities or merged with or into any other
entity.
3. Article 3 of the Pledge Agreement is hereby amended by adding the
following:
Section 3.10 Overhill Farms, Inc. Pledgor agrees that in the event it
directly or indirectly sells, transfers, assigns, or conveys, including
by way of merger, any interest in Overhill Foods, Inc., or if Overhill
Foods, Inc. sells or issues securities of any type or merges with or
into another entity, Pledgor shall at the closing of such sale,
transfer, assignment, conveyance, merger or other transaction, make a
payment of $9,000,000.00 on the Note.
4. Except as otherwise provided herein, all terms, covenants and
conditions contained in the Pledge Agreement continue in full force and effect
without modification or alteration.
Executed as of the 31st day of December, 1996.
___________________________
Harold Estes
POLYPHASE CORPORATION
By_________________________
Paul A. Tanner, President
2
<PAGE>
EXHIBIT 10.43
AMENDED SECURITY AGREEMENT
This Amended Security Agreement is dated as of December 31, 1996
between Texas Timberjack, Inc., a Texas corporation ("Pledgor"), and Harold
Estes ("Secured Party") and amends that certain Security Agreement between the
parties dated as of June 24, 1994.
WHEREAS, Secured Party has sold to Polyphase Corporation ("Polyphase")
all of the issued and outstanding capital stock of Pledgor and Polyphase gave
its Ten Million and 00/100 Dollar ($10,000,000.00) promissory note (the "Note")
as partial consideration for the purchase of such stock; and
WHEREAS, the Note has been modified, renewed and extended by
Polyphase's Eleven Million Two Hundred Thousand and 00/100 Dollar
($11,200,000.00) promissory note (the "Renewal Note"); and
WHEREAS, the Renewal Note has been modified, renewed and extended by
Polyphase's Eleven Million Eight Hundred Fifty-Five Thousand and 00/100 Dollars
($11,855,000.00) promissory note (the "$11.8 Million Renewal Note); and
WHEREAS, the $11.8 Million Renewal Note has been modified, renewed and
extended and is now evidenced by Polyphase's Twelve Million Eight Hundred Forty-
Two Thousand Nine Hundred Sixteen and 00/100 Dollars ($12,842,916.00) (the $12.8
Million Renewal Note); and
WHEREAS, as a subsidiary of Polyphase, which is a public company,
Pledgor has been able and expects in the future to be able to obtain larger
lines of credit at more attractive interest rates than previously available to
it and to receive other direct benefits as a result of being a subsidiary of
Polyphase; and
WHEREAS, as an inducement to Secured Party to extend such credit to
Polyphase, Pledgor has granted Secured Party a security interest in the property
described in the Security Agreement and Pledgor acknowledges it will receive a
direct benefit therefrom;
NOW, THEREFORE, for and in consideration of the premises and mutual
undertaking of the parties, and Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
1. Section 1 of the Security Agreement is hereby amended to read in
its entirety as follows:
Secured Indebtedness - All indebtedness, obligations and
--------------------
liabilities of Polyphase to Secured Party including, but not limited
to, those under the Note, the Renewal Note, the $11.8 Million Renewal
Note and the $12.8 Million Renewal Note, whether now existing or
hereafter arising or arising under this Security Agreement or
otherwise and all renewals and extensions thereof, and all interest
accruing thereon, fees charged in connection therewith, expenses
reimbursable as provided therein, and attorney's fees incurred in the
enforcement or collection thereof, regardless of whether such
indebtedness, obligations and liabilities are direct, indirect, fixed,
contingent, joint, several or joint and several, and whether now
existing or hereafter arising and however acquired.
2. Section 4 of the Security Agreement, as amended, is amended by
adding the following:
(W) Polyphase agrees, directly or indirectly, that in the event
it sells, transfers, assigns or conveys, including by way of merger,
any interest in Overhill Foods, Inc., or if Overhill Foods, Inc. sells
or issues any securities of any type, Polyphase shall, at the closing
of such sale, transfer, assignment, conveyance, merger or other
transaction, make a payment of $9,000,000.00 on the $12.8 Million
Renewal Note.
<PAGE>
3. Section 5 of the Security Agreement is amended by adding the
following:
(H) Polyphase shall fail to pay, when due, the $12.8 Million
Renewal Note or defaults under any agreement given as security
therefor.
4. Except as expressly provided herein, all other terms, covenants and
conditions of the Security Agreement remain in full force and effect without
modification or alteration.
Executed as of the 31st day of December, 1996.
SECURED PARTY:
---------------------------
Harold Estes
PLEDGOR:
TEXAS TIMBERJACK, INC.
By
-------------------------
Title
----------------------
2
<PAGE>
EXHIBIT 10.44
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is entered into as of June 28,
1996, by Letronix Acquisition Corp., a Nevada corporation ("Buyer"), and
Polyphase Corporation, a Nevada corporation ("Seller").
RECITALS
Seller desires to sell, and Buyer desires to purchase, 1,020,000 shares
(the "Shares") of capital stock of PC Networx America, Inc., a Nevada
corporation (the "Company"), being fifty-one percent (51%) of the outstanding
shares of the Common Stock, par value $.001 per share, of the Company (the
"Common Stock"), for the consideration and on the terms set forth in this
Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. SALE AND TRANSFER OF SHARES; CLOSING.
------------------------------------
1.1 SHARES. Subject to the terms and conditions of this Agreement, at
------
the Closing, Seller will sell and transfer the Shares to Buyer, and Buyer will
purchase the Shares from Seller.
1.2 PURCHASE PRICE. The purchase price (the "Purchase Price") for the
--------------
Shares will be equal to 51% of the book value of the outstanding shares of
Common Stock of the Company as of March 31, 1996, which is hereby deemed to be
equal to $2,500,000. The Purchase Price shall be subject to a post-Closing
adjustment as set forth in SECTION 1.5 hereof.
1.3 CLOSING. The purchase and sale (the "Closing") provided for in this
------
Agreement will take place at the offices of Seller at 16885 Dallas Parkway, 4th
Floor, Dallas, Texas, at 10:00 a.m. (local time) on June 28, 1996 or at such
other time and place as the parties may agree (the "Closing Date"). Subject to
the provisions of SECTION 9, failure to consummate the purchase and sale
provided for in this Agreement on the date and time and at the place determined
pursuant to this SECTION 1.3 will not result in the termination of this
Agreement and will not relieve any party of any obligation under this Agreement.
1.4 CLOSING OBLIGATIONS. At the Closing:
-------------------
(a) Seller will deliver to Buyer:
(i) certificates representing the Shares, duly endorsed (or
accompanied by duly executed stock powers) (which Buyer will return to Seller as
collateral as hereinafter described);
(ii) a certificate executed by Seller to the effect that, except as
otherwise stated in such certificate, each of Seller's representations and
warranties in this Agreement was accurate
<PAGE>
in all material respects as of the date of this Agreement and is accurate in all
material respects as of the Closing Date as if made on the Closing Date (giving
full effect to any supplements to the Disclosure Schedule (as hereinafter
defined) that were delivered by Seller to Buyer at or prior to the Closing
Date);
(b) Buyer will deliver to Seller the Purchase Price at Closing, as follows:
(i) cash in the amount of Four Hundred Seventy Five Thousand
Dollars ($475,000) by bank cashier's or certified check payable to the order of
Seller, or, at Seller's election, by wire transfer to accounts specified by
Seller;
(ii) One Million One Hundred Seventy Five Thousand (1,175,000)
shares of the Buyer's Class A Preferred Stock, par value $1.00 per share (the
"Preferred Stock"), having the designations, preferences and relative,
participating, optional and other rights as set forth on the Designation of
Class A Preferred Stock attached hereto as ANNEX A;
(iii) A secured promissory note in the amount of $850,000 (the
"Note") having the terms and provisions set forth in the form thereof attached
hereto as ANNEX B; and
(iv) a certificate executed by Buyer to the effect that, except as
otherwise stated in such certificate, each of Buyer's representations and
warranties in this Agreement was accurate in all material respects as of the
date of this Agreement and is accurate in all material respects as of the
Closing Date as if made on the Closing Date.
1.5 POST-CLOSING ADJUSTMENT. The Note issued to Seller at Closing shall
-----------------------
be subject to increase or decrease after the Closing, based upon the book value
of the Common Stock of the Company as of June 30, 1996, as set forth in this
SECTION 1.5. Promptly following the Closing, an auditor of nationally
recognized standing reasonably acceptable to both Seller and Buyer shall audit
the consolidated balance sheet of the Company and its subsidiaries as of June
30, 1996 and shall determine therefrom the book value of the outstanding shares
of Common Stock as of June 30, 1996 (the "Book Value") and shall report its
finding to both Seller and Buyer. The report of such auditor shall be final and
binding on both Seller and Buyer. In the event that the Book Value multiplied
by 51%, as such figure is rounded to the nearest whole number (the "Pro Rata
Book Value"), is less than $2,500,000, then the Seller shall promptly surrender
to Buyer the Note referred to in SECTION 1.4(b)(iii) above in exchange for a new
promissory note (the "New Note") with terms identical to the Note except that
the principal amount of such New Note shall be reduced to equal (i) $850,000
less (ii) the difference between the Pro Rata Book Value and $2,500,000;
provided, however, that in no event shall Seller be required to pay money to
Buyer as a result of the adjustment, if any, hereunder. In the event that the
Pro Rata Book Value is more than $2,500,000, then Seller shall promptly
surrender the Note referred to in SECTION 1.4(b)(iii) above in exchange for a
new promissory note (the "Alternate New Note") with terms identical to the Note
except that the principal amount of such Alternate New Note shall be increased
to equal (i) $850,000 plus (ii) the difference between $2,500,000 and the Pro
Rata Book Value. For purposes of this Agreement, if the New Note or the
Alternate New Note are issued, the capitalized
2
<PAGE>
term "Note" as used herein shall be interpreted to mean the "New Note" or the
"Alternate New Note" where the context requires.
2. SPECIAL POST-CLOSING ITEMS.
--------------------------
(a) In connection with the acquisition contemplated hereby, Seller agrees
that following the Closing, it will use its best efforts to effect the
distribution to its public shareholders of shares of Common Stock representing
thirty percent (30%) of the outstanding shares of Common Stock (the "Spinoff"),
and that it will register such distribution with the Securities and Exchange
Commission and use its best efforts to cause the registration statement for such
distribution to be declared effective. If the registration statement relating
to the Spinoff is not declared effective by the Securities and Exchange
Commission on or prior to the date that is six (6) months following the Closing
Date (the "Termination Date"), Seller hereby grants Buyer an option (the
"Spinoff Option") to purchase such shares representing thirty percent (30%) of
the outstanding shares of Common Stock (the "Option Shares"). Such Spinoff
Option shall be exercisable by Buyer by written notice to Seller on or prior to
the date that is ten (10) days after the Termination Date. Assuming Buyer gives
written notice as described above, the closing of the purchase and sale of the
Option Shares shall be held no later than sixty days following the Termination
Date. The purchase price for the Option Shares shall be 30% of the Book Value
as of June 30, 1996 (as defined in Section 1.5), and such purchase price shall
consist of 20% of the purchase price in cash, a promissory note from Buyer to
Seller in original principal amount of 30% of the such purchase price (but
otherwise on substantially the same terms as the Note), and the remaining 50% of
such purchase price shall be payable by issuance of shares of Buyer's Preferred
Stock with a deemed value of $1.00 per share (but the number of such shares
issued shall be appropriately adjusted to account for any stock splits,
dividends and recapitalizations). Buyer covenants and agrees with Seller that
Seller shall not be obligated to sell Buyer the Option Shares unless Buyer (i)
enters into a purchase agreement containing representations and warranties
substantially similar to those made by the Buyer contained herein, (ii) enters
into a purchase agreement containing such other terms and provisions as are
necessary, in the opinion of counsel for the Seller, to comply with applicable
law, and (iii) agrees that the Option Shares shall become subject to the same
restrictions and other provisions provided for the Shares in Section 11.16
hereof. In such purchase agreement, (i) Seller shall not be obligated to make
representations and warranties to Seller , other than such representations and
warranties as are substantially similar to those contained in Sections 3.1, 3.2,
3.3 and 3.4 hereof and (ii) such representations and warranties of Seller shall
survive for a period not to exceed two (2) years after the closing of the
purchase and sale of the Option Shares.
(b) Seller agrees that it will cause its Affiliates that own shares of
Common Stock, to grant to Buyer the option to acquire the shares of Common Stock
owned by Seller and such Affiliates upon the terms and conditions set forth in
the form of the Option Agreement attached hereto as ANNEX C.
3. REPRESENTATIONS AND WARRANTIES OF SELLER.
----------------------------------------
Seller represents and warrants to Buyer as follows:
3
<PAGE>
3.1 ORGANIZATION AND GOOD STANDING. PART 3.1 of the Disclosure Schedule
------------------------------
delivered by Seller to Buyer at or prior to the Closing Date (the "Disclosure
Schedule") contains a complete and accurate list for each of the Company and
each of its subsidiaries (collectively, the "Acquired Companies") of its name,
its federal employer identification number, its jurisdiction of incorporation
and the other jurisdictions in which it is authorized to do business. Each
Acquired Company is a corporation duly organized, validly existing, and in good
standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to conduct its business as it is now being
conducted, to own or use the properties and assets that it purports to own or
use. Each Acquired Company is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each state or other
jurisdiction in which either the ownership or use of the properties owned or
used by it, or the nature of the activities conducted by it, requires such
qualification.
3.2 AUTHORITY; NO CONFLICT.
----------------------
(a) This Agreement constitutes the legal, valid, and binding obligation of
Seller, enforceable against Seller in accordance with its terms. Seller has the
absolute and unrestricted right, power, authority, and capacity to execute,
deliver and perform this Agreement.
(b) Neither the execution and delivery of this Agreement nor the
consummation or performance of any of the transactions contemplated by this
Agreement will, directly or indirectly (with or without notice or lapse of
time):
(i) contravene, conflict with, or result in a violation of any
provision of the certificate of incorporation or bylaws of the Acquired
Companies;
(ii) contravene, conflict with, or result in a violation of, or
give any governmental body or other person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or obtain
any relief under, any federal, state or local order, law, ordinance or
regulation or any injunction, judgment, order or decree of any court,
administrative agency or other governmental body to which any Acquired Company,
or any of the assets owned or used by any Acquired Company, may be subject;
(iii) contravene, conflict with, or result in a violation or
breach of any provision of, or give any person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any contracts applicable to the Acquired
Companies that would have a material adverse effect on the Acquired Companies;
or
(iv) result in the imposition or creation of any charge, claim,
lien, option, pledge, security interest or restriction of any kind upon or with
respect to any of the assets owned or used by any Acquired Company.
3.3 OWNERSHIP; CAPITALIZATION.
-------------------------
4
<PAGE>
(a) Seller is or will be on the Closing Date the record and beneficial
owner and holder of all the Shares, free and clear of any charge, claim, lien,
option, pledge, security interest or restriction of any kind.
(b) The authorized equity securities of the Company consist of (i)
100,000,000 shares of common stock, par value $.001 per share, of which
2,000,000 shares are issued and outstanding and (ii) 50,000,000 shares of
preferred stock, par value $.001 per share, of which no shares are issued and
outstanding. The Shares represent all of the issued and outstanding capital
stock of the Company on the Closing Date. Upon transfer of the Shares to Buyer
at the Closing, Buyer will own the entire legal and beneficial interest in the
Shares, free and clear of all liens, claims and encumbrances and subject to no
legal or equitable restriction of any kind. With the exception of the Company,
all of the outstanding equity securities and other securities of each Acquired
Company are owned of record and beneficially by one or more of the Acquired
Companies, free and clear of any charge, claim, lien, option, pledge, security
interest or restriction of any kind. All of the outstanding equity securities of
each Acquired Company have been duly authorized and validly issued and are fully
paid and nonassessable. Except as set forth in PART 3.3 of the Disclosure
Schedule, there are no agreements, contracts, obligations, promises or
undertakings relating to the issuance, sale, or transfer of any equity
securities or other securities of any Acquired Company.
3.4 FINANCIAL MATTERS. Seller has delivered to Buyer: (i) the pro forma
-----------------
consolidated balance sheets of the Acquired Companies as at the years September
30, 1995, and the related pro forma consolidated statements of income, changes
in stockholders' equity, and cash flow for each of the fiscal years then ended
(the "Financial Statements"), and (ii) an unaudited pro forma consolidated
balance sheet of the Acquired Companies as at March 31, 1996, and the related
unaudited consolidated statements of income, changes in stockholders' equity,
and cash flow for the six months then ended, including in each case the notes
thereto (the "Interim Financial Statements"). Such Financial Statements fairly
present in all material respects the financial condition and the results of
operations, changes in stockholders' equity, and cash flow of the Acquired
Companies as at the respective dates of and for the periods referred to in such
financial statements, all in accordance with generally accepted accounting
principles, subject, in the case of the Interim Financial Statements, to normal
recurring year-end adjustments (the effect of which will not, individually or in
the aggregate, be materially adverse) and the absence of notes (which, if
presented, would not differ materially from those included in the Financial
Statements); the financial statements referred to in this SECTION 3.4 reflect
the consistent application of such accounting principles throughout the periods
involved, except as disclosed in the notes to such Financial Statements.
3.5 BOOKS AND RECORDS. The books of account, minute books, stock record
-----------------
books, and other records of the Acquired Companies, all of which have been made
available to Buyer, are complete and correct in all material respects. The
minute books of the Acquired Companies contain accurate and complete records of
all meetings held of, and corporate action taken by, the stockholders and the
Boards of Directors. At the Closing, all of those books and records will be in
the possession of the Acquired Companies.
5
<PAGE>
3.6 TITLE TO PROPERTIES. The Acquired Companies own (with good and
-------------------
marketable title in the case of real property, subject only to the matters
permitted by the following sentence) all the properties and assets (whether
real, personal, or mixed and whether tangible or intangible) that they purport
to own, including all of the properties and assets reflected in the Financial
Statements and the Interim Financial Statements (except for assets held under
capitalized leases and personal property sold since the date of the Financial
Statements and the Interim Financial Statements, as the case may be, in the
ordinary course of business), and all of the properties and assets purchased or
otherwise acquired by the Acquired Companies since the date of the Financial
Statements (except for personal property acquired and sold since the date of the
Financial Statements in the ordinary course of business and consistent with past
practice).
3.7 CONDITION AND SUFFICIENCY OF ASSETS. The buildings, structures, and
-----------------------------------
equipment of the Acquired Companies are structurally sound, are in good
operating condition and repair, and are adequate for the uses to which they are
being put, and none of such buildings, structures, or equipment is in need of
maintenance or repairs except for ordinary, routine maintenance and repairs that
are not material in nature or cost. The building, structures, and equipment of
the Acquired Companies are sufficient for the continued conduct of the Acquired
Companies' businesses after the Closing in substantially the same manner as
conducted prior to the Closing.
3.8 NO UNDISCLOSED LIABILITIES. The Acquired Companies have no material
--------------------------
liabilities or obligations of any nature (whether known or unknown and whether
absolute, accrued, contingent, or otherwise) except for liabilities or
obligations reflected or reserved against in the Financial Statements or the
Interim Financial Statements and current liabilities incurred in the ordinary
course of business since the respective dates thereof.
3.9 TAXES. (a) Except as set forth on PART 3.9 of the Disclosure
-----
Schedule, all federal, state and local tax returns, reports, declarations,
information returns and estimates that the Acquired Companies were required to
file ("Tax Returns") have been filed for the Acquired Companies for all periods
for which such were due. All Taxes (as defined below) of the Acquired
Companies, whether or not disclosed in the Tax Returns, have been paid in full
and all such Tax Returns are true, correct and complete in all material
respects. The federal income tax returns of the Acquired Companies have not
been audited by the Internal Revenue Service. There is not in force any
extension of the date on which any Tax Return was or is due to be filed by or
with respect to the Acquired Companies, or any waiver or agreement by them for
the extension of time for the payment of any Tax. The reserve for Tax liability
(rather than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) shown on the Financial Statements is
adequate to cover the liability of the Acquired Companies for all Taxes
(including employee income tax withholding, social security and unemployment
taxes) to the date thereof.
(b) There is no claim against any of the Acquired Companies with respect to
any Taxes and no assessment, deficiency or adjustment has been asserted or
proposed with respect to any Tax Return which would, if determined adversely to
the Acquired Companies, have a material adverse effect on the Acquired
Companies. All prior audits and examinations of the Acquired Companies have
been disclosed to Buyer.
6
<PAGE>
(c) Each Acquired Company has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party.
(d) For purposes of this Agreement, "Tax" (and, with correlative meaning,
"Taxes") shall mean any federal, state, local or foreign income, gross receipts,
windfall profit, severance, property, alternative minimum or add-on minimum
production, sales, use, license, excise, franchise, employment, payroll,
withholding, ad valorem, or other taxes, assessments, duties, fees, levies or
other governmental charges, together with any interest, penalty or addition to
tax, or additional amount imposed by any governmental authority.
3.10 EMPLOYEE BENEFITS. PART 3.10 of the Disclosure Schedule contains a
-----------------
complete and accurate list of all plans or other obligations, arrangements, or
customary practices, whether or not legally enforceable, to provide benefits,
other than salary, as compensation for services rendered, to present or former
officers, directors, employees, or agents ("Benefits"). The Acquired Companies,
with respect to all Benefits are, and each Benefit is, in material compliance
with the Employee Retirement Income Security Act of 1974 ("ERISA"), the IRC, and
other applicable laws.
3.11 PROCEEDINGS. There are currently no pending lawsuits,
-----------
administrative proceedings or investigations ("Proceedings") against any of the
Acquired Companies or to which any of their assets is subject and Seller is not
aware of any threatened Proceedings. None of the Acquired Companies is subject
to any currently existing order, writ, injunction or decree relating to its
operations.
3.12 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in PART
-------------------------------------
3.12 of the Disclosure Schedule, since the date of the Financial Statements,
there has not been any material adverse change in the financial condition,
results of operation, business, prospects, assets or liabilities, of any of the
Acquired Companies, except for changes in the ordinary course of business
consistent with historical experience.
3.13 CONTRACTS. PART 3.13 of the Disclosure Schedule contains a complete
---------
and accurate list of (i) all current or pending contracts, commitments and
leases (of real or personal property), written or otherwise, between any of the
Acquired Companies and any party which are material to the operations of the
Acquired Companies and that cannot be canceled without penalty upon thirty (30)
days' notice (collectively, the "Material Contracts"); (ii) all patents,
copyrights, trade names, trademarks and service marks used or owned by any of
the Acquired Companies, and all licenses or agreements relating thereto; (iii) a
list of all leases, contracts or agreements for which consents of any private
persons or governmental bodies is required for the consummation of the
transactions contemplated by this Agreement, or for the preventing of any
termination of any material right, privilege, license or agreement of, or any
loss or disadvantage to, any of the Acquired Companies or Buyer upon
consummation of the transactions contemplated by this Agreement; and (iv) all
real property owned or leased by the Acquired Companies.
3.14 ENVIRONMENTAL MATTERS. To Seller's knowledge, each Acquired Company
---------------------
is, and at all times has been, in material compliance with, and has not been and
is not in material
7
<PAGE>
violation of or liable under, any environmental law. To Seller's knowledge, no
toxic chemicals or hazardous wastes have been deposited or disposed of on any
property owned by the Acquired Companies and none of such property has suffered
any material environmental damage due to the Acquired Companies operations.
3.15 EMPLOYEES. PART 3.15 of the Disclosure Schedule contains a complete
---------
and accurate list of the following information for each employee of the Acquired
Companies, including each employee on leave of absence or layoff status:
employer; name; job title; current compensation paid or payable and any change
in compensation since September 30, 1995.
3.16 CERTAIN PAYMENTS. To Seller's knowledge, no Acquired Company or
----------------
director, officer, agent, or employee of any Acquired Company, or any other
person associated with or acting for or on behalf of any Acquired Company, has
directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff,
influence payment, kickback, or other payment to any person, private or public,
regardless of form, whether in money, property, or services (i) to obtain
favorable treatment in securing business, (ii) to pay for favorable treatment
for business secured, (iii) to obtain special concessions or for special
concessions already obtained, for or in respect of any Acquired Company or any
Affiliate (as defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of an Acquired Company, or (iv) in violation of any federal,
state or local order, law, ordinance or regulation, (b) established or
maintained any fund or asset that has not been recorded in the books and records
of the Acquired Companies.
3.17 DISCLOSURE.
----------
(a) The Company has filed with the Securities and Exchange Commission all
reports required to be filed by the Exchange Act since at least October 1, 1995
and none of such filings contains any misstatement of a material fact or omits
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, as regards the
Acquired Companies, as the case may be.
(b) The Company has delivered to Buyer true and correct copies of all
reports filed with the Securities and Exchange Commission by the Company
pursuant to the Exchange Act since October 1, 1995.
3.18 NO MISSTATEMENTS OR OMISSIONS. No representation or warranty of
-----------------------------
Seller in this Agreement and no statement in the Disclosure Schedule omits to
state a material fact necessary to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
3.19 RELATIONSHIPS WITH AFFILIATES. Except as set forth in PART 3.19 of
-----------------------------
the Disclosure Schedule:
(a) No Seller or any Affiliate of Seller or of any Acquired Company has, or
since January 1, 1995, has had, any interest in any property (whether real,
personal, or mixed and whether tangible or intangible), used in or pertaining to
the Acquired Companies' businesses.
8
<PAGE>
(b) No Seller or any Affiliate of Seller or of any Acquired Company is, or
since January 1, 1995, has owned (of record or as a beneficial owner) an equity
interest or any other financial or profit interest in, a person that has had
business dealings or a material financial interest in any transaction with any
Acquired Company other than business dealings or transactions conducted in the
ordinary course of business with the Acquired Companies at substantially
prevailing market prices and on substantially prevailing market terms. Except
as set forth in PART 3.19 of the Disclosure Schedule, no Seller or any Affiliate
of Seller or of any Acquired Company is a party to any agreement, contract,
obligation, promise or undertaking with, or has any claim or right against, any
Acquired Company.
3.20 BROKERS OR FINDERS. Seller and its agents have incurred no
------------------
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement.
4. REPRESENTATIONS AND WARRANTIES OF BUYER.
---------------------------------------
Buyer represents and warrants to Seller as follows:
4.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly
------------------------------
organized, validly existing, and in good standing under the laws of the State of
Nevada.
4.2 AUTHORITY; NO CONFLICT.
----------------------
(a) This Agreement constitutes the legal, valid, and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms. Buyer has the
absolute and unrestricted right, power, and authority to execute, deliver and
perform its obligations under this Agreement.
(b) Neither the execution and delivery of this Agreement by Buyer nor the
consummation or performance of any of the transactions contemplated by this
Agreement by Buyer will give any person the right to prevent, delay, or
otherwise interfere with any of the transactions contemplated by this Agreement
pursuant to:
(i) any provision of Buyer's certificate of incorporation or
bylaws;
(ii) any resolution adopted by the board of directors or the
stockholders of Buyer;
(iii) any federal, state or local order, law, ordinance or
regulation or injunction, judgment, order or decree of any court, administrative
agency or other governmental body to which Buyer may be subject; or
(iv) any agreement, contract, obligation, promise or undertaking to
which Buyer is a party or by which Buyer may be bound.
9
<PAGE>
(c) Buyer is not and will not be required to obtain any consent from any
person in connection with the execution and delivery of this Agreement or the
consummation or performance of any of the transactions contemplated by this
Agreement.
4.3 INVESTMENT IN SHARES.
--------------------
(a) Buyer is acquiring the Shares for its own account and not with a
view to their distribution within the meaning of Section 2(11) of the Securities
Act.
(b) Buyer has received all information it believes necessary to make
an informed decision about its acquisition of the Shares.
(c) Each of the equity owners of Buyer is an "accredited investor" as
such term is defined in Rule 501(a) under the Securities Act.
(d) Buyer understands that the Shares are not registered under federal
or state securities laws and may not be offered, sold, transferred or otherwise
disposed of except pursuant to a registration statement or an exemption from
registration under those laws.
(e) Buyer acknowledges that the certificates representing the Shares
may bear a legend substantially as follows:
THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE LAW, OR (2) AN OPINION OF COUNSEL
(SATISFACTORY TO THE COMPANY) THAT REGISTRATION IS NOT REQUIRED.
4.4 CERTAIN PROCEEDINGS. There is no pending proceeding against Buyer
-------------------
that challenges, or may have the effect of preventing, delaying, making illegal,
or otherwise interfering with, any of the transactions contemplated by this
Agreement. To Buyer's knowledge, no such proceeding has been threatened.
4.5 BROKERS OR FINDERS. Buyer and its officers and agents have incurred
------------------
no obligation or liability, contingent or otherwise, for brokerage or finders'
fees or agents' commissions or other similar payment in connection with this
Agreement and will indemnify and hold Seller harmless from any such payment
alleged to be due by or through Buyer as a result of the action of Buyer or its
officers or agents.
5. COVENANTS OF SELLER PRIOR TO CLOSING DATE.
-----------------------------------------
5.1 ACCESS AND INVESTIGATION. Between the date of this Agreement and the
------------------------
Closing Date, Seller will, and will cause each Acquired Company and its
directors, officers and agents to,
10
<PAGE>
(a) afford Buyer and its directors, officers and agents and prospective lenders
and their representatives (collectively, "Buyer's Advisors") full and free
access to each Acquired Company's personnel, properties, contracts, books and
records, and other documents and data, (b) furnish Buyer and Buyer's Advisors
with copies of all such contracts, books and records, and other existing
documents and data as Buyer may reasonably request, and (c) furnish Buyer and
Buyer's Advisors with such additional financial, operating, and other data and
information as Buyer may reasonably request.
5.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES. Between the
-----------------------------------------------------
date of this Agreement and the Closing Date, Seller will, and will cause each
Acquired Company to conduct the business of such Acquired Company only in the
ordinary course of business and in material compliance with all applicable laws,
rules and regulations.
5.3 NEGATIVE COVENANTS. Between the date of this Agreement and the
------------------
Closing Date, Seller will not, and will cause each Acquired Company not to,
without prior notice to Buyer: (i) make any changes in its capital structure,
(ii) incur any liability or obligation other than current liabilities incurred
in the ordinary and usual course of business, (iii) incur any indebtedness for
borrowed money, (iv) make any loans or advances other than advances to employees
and owner-operators, in the ordinary and usual course of business, (v) mortgage,
pledge or subject to any encumbrance any of its assets or properties, (vi) sell
or transfer any of its assets or properties except in the ordinary and usual
course of business, (vii) make any investment of a capital nature, except in the
ordinary and usual course of business, (viii) adopt or amend in any material
respect any collective bargaining agreement or employee benefit plan, or (ix)
enter into any contract, agreement, or other commitment which is material to the
business, assets, properties, or financial position of the Acquired Companies.
5.4 BEST EFFORTS. Between the date of this Agreement and the Closing
------------
Date, Seller will use its best efforts to cause the conditions in SECTIONS 7 and
8 to be satisfied.
6. COVENANTS OF BUYER.
------------------
6.1 APPROVALS OF GOVERNMENTAL BODIES. As promptly as practicable after
--------------------------------
the date of this Agreement, Buyer will, and will cause each of its Affiliates
to, make all filings required by federal, state or local laws, orders,
ordinances or regulations to be made by them to consummate the transactions
contemplated by this Agreement. Between the date of this Agreement and the
Closing Date, Buyer will, and will cause each Affiliate to, (i) cooperate with
Seller with respect to all filings that Seller is required by federal, state or
local laws, orders, ordinances or regulations to make in connection with the
transactions contemplated by this Agreement, and (ii) cooperate with Seller in
obtaining all consents identified in PART 3.13 of the Disclosure Schedule.
6.2 BEST EFFORTS. Between the date of this Agreement and the Closing
------------
Date, Buyer will use its best efforts to cause the conditions in SECTIONS 7 and
8 to be satisfied.
11
<PAGE>
6.3 ACTIONS WITH RESPECT TO THE ACQUIRED COMPANIES AND BUYER. Buyer
--------------------------------------------------------
covenants and agrees that, after the Closing and for so long as any shares of
Preferred Stock issued to Polyphase or any amounts under the Note remain
outstanding:
(a) it will comply, and cause the persons it elects or causes to be elected
as directors and officers of the Company and the Acquired Companies to comply,
with its and their obligations under federal and state securities laws and its
and their fiduciary duties to the Company's shareholders;
(b) it will acquire shares, receive payments and otherwise engage in
transactions with the Acquired Companies only on terms that are fair to the
Company and its shareholders;
(c) it will, and it will cause each of the Acquired Companies, to:
(i) preserve and maintain in full force and effect its corporate
existence and good standing under the laws of its state of incorporation or
organization and all other states where it is legally required to be qualified
to do business as a foreign corporation;
(ii) preserve and maintain in full force and effect all material
rights, privileges, qualifications, licenses and franchises necessary in the
normal conduct of its business;
(iii) use its reasonable efforts, in the ordinary course, to
preserve its business organization and preserve the goodwill and business of the
customers, suppliers and others having business relations with it;
(iv) maintain and preserve all its property and the property of the
Acquired Companies in good working order and condition, ordinary wear and tear
excepted, except where failure to do so would not have a material adverse
effect.
(v) maintain, and shall cause each Acquired Company to maintain,
with financially sound insurance companies, insurance with respect to its
properties and business, against such casualties and contingencies, of the
kinds, covering the risks, and in the relative proportionate amounts, usually
carried by companies engaged in businesses similar to that of the Company;
(vi) except to the extent that the failure to do so would have a
material adverse effect, it will and it will cause the Acquired Companies to,
pay and discharge as the same shall become due and payable, all their respective
obligations and liabilities, including without limitation:
(A) all tax liabilities, assessments and governmental charges
or levies upon it or its properties or assets, unless the same are being
contested in good faith by appropriate proceedings and adequate reserves in
accordance with GAAP are being maintained by the Company or such Subsidiary; and
12
<PAGE>
(B) all lawful claims which any of Buyer or the Acquired
Companies is obligated to pay, which are due and which, if unpaid, would likely
by law become a Lien upon its property;
(vii) comply, and will cause each Acquired Company to, comply, in
all material respects with all requirements of law and with the directions of
any governmental authority having jurisdiction over it or its business, except
such
(A) as may be contested in good faith or as to which a bona
fide dispute may exist, and
(B) as to which such failure to comply would not have a
material adverse effect on Buyer or the Acquired Companies.
(d) neither it nor any Acquired Company will, merge, consolidate with or
into, or convey, transfer, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
assets (whether now owned or hereafter acquired)
(e) neither it nor the Company will declare, pay or make a dividend or
other distribution on its capital stock;
(f) neither it nor any Acquired Company will create any stock option,
bonus, profit sharing, stock purchase, deferred compensation, retainer, pension,
retirement or other compensation, benefit, welfare or incentive plans or
contracts without the prior approval of Seller, which approval shall not be
unreasonably withheld;
(g) no Acquired Company will, without the prior written consent of Seller
(which consent will not be unreasonably withheld), organize any subsidiary or
acquire any interest in or control of another person, whether by merger,
consolidation or purchase of the stock, assets or inventories of another person;
(h) neither it nor any Acquired Company will, without the prior written
consent of Seller (i) amend its Articles of Incorporation (including by a
Certificate of Designation), (ii) amend its Bylaws in a manner which would
result in such Bylaws conflicting with any provisions of this Agreement or of
the Shareholders' Agreement, or (iii) effect a reclassification or
recapitalization of its outstanding capital stock;
(i) neither it nor any Acquired Company will lend money to any person;
(j) neither it nor any Acquired Company will take any action to place it in
dissolution, liquidation or receivership.
13
<PAGE>
7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE.
---------------------------------------------------
Buyer's obligation to purchase the Shares and to take the other actions
required to be taken by Buyer at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Buyer, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS. All of Seller's representations and
---------------------------
warranties in this Agreement must have been accurate in all material respects as
of the date of this Agreement, and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
7.2 SELLER'S PERFORMANCE.
--------------------
(a) All of the covenants and obligations that Seller is required to perform
or to comply with pursuant to this Agreement at or prior to the Closing, must
have been duly performed and complied with in all material respects.
(b) Each document required to be delivered pursuant to SECTION 1.4 must
have been delivered.
7.3 CONSENTS. Each of the consents identified in PART 3.13 of the
--------
Disclosure Schedule must have been obtained and must be in full force and
effect.
7.4 ADDITIONAL DOCUMENTS. Each of the following documents must have been
--------------------
delivered to Buyer:
(a) the documents necessary to effect the resignation of each of the
noncontinuing directors and officers of each of the Acquired Companies, to be
effective not later than the Closing Date;
(b) the documents necessary to effect the election of one (1) director
designated by Buyer to the Board of Directors of the Company; and
(c) such other documents as Buyer may reasonably request for the purpose of
(i) evidencing the accuracy of any of Seller's representations and warranties,
(ii) evidencing the performance by Seller of, or the compliance by Seller with,
any covenant or obligation required to be performed or complied with by Seller,
or (iii) evidencing the satisfaction of any condition referred to in this
SECTION 7.
7.5 NO PROCEEDINGS. Since the date of this Agreement, there must not have
--------------
been with respect to Buyer (i) any effective injunction, writ, or temporary
restraining order of any nature issued by a court or governmental agency of
competent jurisdiction directing that the proposed acquisition not be
consummated or (ii) any action, suit, or proceeding pending or threatened by or
before any court or governmental body in which it is or may be sought to
prohibit, substantially
14
<PAGE>
delay, or rescind the proposed acquisition, or to limit in any way Buyer's right
to acquire the Acquired Companies.
8. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE.
-----------------------------------------------------
Seller's obligation to sell the Shares and to take the other actions
required to be taken by Seller at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Seller, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS. All of Buyer's representations and
---------------------------
warranties in this Agreement must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
8.2 BUYER'S PERFORMANCE.
-------------------
(a) All of the covenants and obligations that Buyer is required to perform
or to comply with pursuant to this Agreement at or prior to the Closing must
have been performed and complied with in all material respects.
(b) Buyer must have delivered each of the documents required to be
delivered by Buyer pursuant to SECTION 1.4 and must have paid the Purchase Price
required to be made by Buyer pursuant to SECTION 1.4(b).
8.3 CONSENTS. Each of the consents identified in PART 3.13 of the
--------
Disclosure Schedule must have been obtained and must be in full force and
effect.
8.4 ADDITIONAL DOCUMENTS. Buyer must have caused the following documents
--------------------
to be delivered to Seller:
(a) such documents as Seller may reasonably request for the purpose of (i)
evidencing the accuracy of any representation or warranty of Buyer, (ii)
evidencing the performance by Buyer of, or the compliance by Buyer with, any
covenant or obligation required to be performed or complied with by Buyer, or
(iii) evidencing the satisfaction of any condition referred to in this SECTION
8.
8.5 NO PROCEEDINGS. Since the date of this Agreement, there must not have
--------------
been with respect to Seller (i) any effective injunction, writ, or temporary
restraining order of any nature issued by a court or governmental agency of
competent jurisdiction directing that the proposed acquisition not be
consummated or (ii) any action, suit, or proceeding pending or threatened by or
before any court or governmental body in which it is or may be sought to
prohibit, substantially delay, or rescind the proposed acquisition, or to limit
in any way Seller's right to sell the Acquired Companies.
15
<PAGE>
9. TERMINATION.
-----------
9.1 TERMINATION EVENTS. This Agreement may, by notice given prior to or
------------------
at the Closing, be terminated:
(a) by either Buyer or Seller if a material breach of any provision of this
Agreement has been committed by the other party and such breach has not been
waived;
(b) (i) by Buyer if any of the conditions in SECTION 7 has not been
satisfied as of the Closing Date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Buyer to comply with its
obligations under this Agreement) and Buyer has not waived such condition on or
before the Closing Date; or (ii) by Seller, if any of the conditions in SECTION
8 has not been satisfied of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of Seller to
comply with its obligations under this Agreement) and Seller has not waived such
condition on or before the Closing Date;
(c) by mutual consent of Buyer and Seller; or
(d) by either Buyer or Seller if the Closing has not occurred (other than
through the failure of any party seeking to terminate this Agreement to comply
fully with its obligations under this Agreement) on or before July 15, 1996, or
such later date as the parties may agree upon.
9.2 EFFECT OF TERMINATION. Each party's right of termination under
---------------------
SECTION 9.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to SECTION 9.1, all
further obligations of the parties under this Agreement will terminate, except
that the obligations in SECTIONS 11.1 and 11.3 will survive; provided, however,
that if this Agreement is terminated by a party because of the breach of the
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
10. INDEMNIFICATION; REMEDIES.
-------------------------
10.1 SURVIVAL. The representations of Seller contained in SECTION 3
--------
hereof will survive the Closing for a period of two (2) years.
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLER. Seller will
------------------------------------------------
indemnify and hold harmless Buyer, the Acquired Companies, and their respective
directors, officers, stockholders, controlling persons, and affiliates
(collectively, the "Indemnified Persons") for, and will pay to the Indemnified
Persons the amount of, any loss, liability, claim, damage, expense (including
costs of investigation and defense and reasonable attorneys' fees) or diminution
of value, whether or not involving a third-party claim (collectively,
"Damages"), arising, directly or indirectly, from or in connection with any
breach of the representations made in SECTIONS 3.17 and 3.19.
16
<PAGE>
The remedies provided in this SECTION 10.2 will be the exclusive remedies
available to Buyer or the other Indemnified Persons for any breach of this
Agreement or the conduct of the business of the Acquired Companies prior to the
Closing Date.
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER. Buyer will
-----------------------------------------------
indemnify and hold harmless Seller from and will pay to Seller the amount of any
Damages arising, directly or indirectly, from or in connection with any breach
of the representations made in SECTIONS 4.2(a), 4.3 or 4.5.
The remedies provided in this SECTION 10.3 will be the exclusive remedies
available to Seller for any breach of this Agreement.
10.4 TIME LIMITATIONS. If the Closing occurs, neither party will have
----------------
liability (for indemnification or otherwise) with respect to any representation,
unless on or before the first anniversary of the Closing Date the other party
notifies the party of a claim specifying the factual basis of that claim in
reasonable detail to the extent then known by the other party.
10.5 FLOOR ON AMOUNT--SELLER. Seller will have no liability (for
-----------------------
indemnification or otherwise) to Buyer unless the amount of Damages sought is in
the aggregate at least $50,000.
10.6 [INTENTIONALLY LEFT BLANK].
--------------------------
10.7 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS.
-------------------------------------------------
(a) Promptly after receipt by an indemnified party of notice of the
commencement of any proceeding against it, such indemnified party will, if a
claim is to be made against an indemnifying party, give notice to the
indemnifying party of the commencement of such claim, but the failure to notify
the indemnifying party will not relieve the indemnifying party of any liability
that it may have to any indemnified party, except to the extent that the
indemnifying party demonstrates that the defense of such action is prejudiced by
the indemnifying party's failure to give such notice.
(b) If any proceeding referred to in SECTION 10.9(a) is brought against an
indemnified party and it gives notice to the indemnifying party of the
commencement of such proceeding, the indemnifying party will be entitled to
participate in such proceeding and, to the extent that it wishes (unless (i) the
indemnifying party is also a party to such proceeding and the indemnified party
determines in good faith that joint representation would be inappropriate, or
(ii) the indemnifying party fails to provide reasonable assurance to the
indemnified party of its financial capacity to defend such proceeding and
provide indemnification with respect to such proceeding), to assume the defense
of such proceeding with counsel satisfactory to the indemnified party and, after
notice from the indemnifying party to the indemnified party of its election to
assume the defense of such proceeding, the indemnifying party will not, as long
as it diligently conducts such defense, be liable to the indemnified party under
this SECTION 10 for any fees of other counsel or any other expenses with respect
to the defense of such proceeding, in each case subsequently incurred by the
indemnified party in connection with the defense of such proceeding, other than
17
<PAGE>
reasonable costs of investigation. If the indemnifying party assumes the defense
of a proceeding, (i) no compromise or settlement of such claims may be effected
by the indemnifying party without the indemnified party's consent unless (A)
there is no finding or admission of any violation of federal, state or local
laws, orders, ordinances or regulations or any violation of the rights of any
person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (ii) the indemnified party will have
no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any proceeding and the indemnifying party does not, within ten
days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such proceeding, the
indemnifying party will be bound by any determination made in such proceeding or
any compromise or settlement effected by the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party determines in
good faith that there is a reasonable probability that a proceeding may
adversely affect it or its affiliates other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
indemnified party may, at its own expense, participate in the defense,
compromise, or settlement of such proceeding, but the indemnifying party will
not be bound by any determination of a proceeding so defended or any compromise
or settlement effected without its consent (which may not be unreasonably
withheld).
10.8 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS. A claim for
-------------------------------------------
indemnification for any matter not involving a third-party claim may be asserted
by notice to the party from whom indemnification is sought.
11. GENERAL PROVISIONS.
------------------
11.1 EXPENSES. Except as otherwise expressly provided in this Agreement,
--------
each party to this Agreement will bear its respective expenses incurred in
connection with the preparation, execution, and performance of this Agreement
and the transactions contemplated by this Agreement, including all fees and
expenses of agents, representatives, counsel, and accountants.
11.2 PUBLIC ANNOUNCEMENTS. Buyer will keep this Agreement strictly
--------------------
confidential and may not make any disclosure of this Agreement or the
transactions contemplated by this Agreement to any person. The Company will
issue any press release or other publicity, if at all, at such time and in such
manner as it shall determine in its sole discretion. Buyer will not contact or
have any dealings with the Acquired Companies' employees, customers, and
suppliers without the consent of Seller.
11.3 CONFIDENTIALITY. Between the date of this Agreement and the
---------------
Closing Date, Buyer and Seller will maintain in confidence, and will cause the
directors, officers, employees, agents, and advisors of Buyer and the Acquired
Companies to maintain in confidence, and not use to the detriment of another
party or an Acquired Company any written, oral, or other information obtained in
confidence from another party or an Acquired Company in connection with this
18
<PAGE>
Agreement or the transactions contemplated by this Agreement, unless (a) such
information is already known to such party or to others not bound by a duty of
confidentiality or such information becomes publicly available through no fault
of such party, (b) the use of such information is necessary or appropriate in
making any filing or obtaining any consent or approval required for the
consummation of the transactions contemplated by this Agreement, or (c) the
furnishing or use of such information is required by legal proceedings.
If the transactions contemplated by this Agreement are not consummated,
each party will return all of such written information as the other party has
provided.
11.4 NOTICES. All notices, consents, waivers, and other communications
-------
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by telecopier (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
Seller:
Polyphase Corporation
16885 Dallas Parkway
4th Floor
Dallas, Texas 75248
Attention: Paul A. Tanner
Facsimile No.: (214) 732-6430
with a copy to:
Jenkens & Gilchrist,
A Professional Corporation
1445 Ross Ave.
Suite 3200
Dallas, Texas 75202
Attention: Ronald J. Frappier
Facsimile No.: (214) 855-4300
19
<PAGE>
Buyer:
Letronix Acquisition Corp.
2620 South Maryland Parkway, Suite 202
Las Vegas, Nevada 89109
Attention: President
Facsimile No.: (214) 980-0790
with a copy to:
Al Greco, Esq.
2 Galleria Tower
13455 Noel Road
Box 15, Suite 1420
Dallas, Texas 75240
Facsimile No.:
11.5 JURISDICTION; SERVICE OF PROCESS. Any action or proceeding seeking to
--------------------------------
enforce any provision of, or based on any right arising out of, this Agreement
may be brought against any of the parties in the courts of the State of Texas,
County of Dallas, and each of the parties consents to the jurisdiction of such
courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any action
or proceeding referred to in the preceding sentence may be served on any party
anywhere in the world.
11.6 FURTHER ASSURANCES. The parties agree (a) to furnish upon request
------------------
to each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to in this Agreement.
11.7 WAIVER. The rights and remedies of the parties to this Agreement
------
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
20
<PAGE>
11.8 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
---------------------------------
prior agreements between the parties with respect to its subject matter and
constitutes (along with the documents referred to in this Agreement) a complete
and exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended except by a
written agreement executed by the party to be charged with the amendment.
11.9 DISCLOSURE SCHEDULE. The Disclosure Schedule is incorporated into
-------------------
and shall be part of this Agreement.
11.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. No party may
--------------------------------------------------
assign any of its rights under this Agreement without the prior consent of the
other parties, except that Buyer may assign any of its rights under this
Agreement to any subsidiary of Buyer. Subject to the preceding sentence, this
Agreement will apply to, be binding in all respects upon, and inure to the
benefit of the successors and permitted assigns of the parties. Nothing
expressed or referred to in this Agreement will be construed to give any person
other than the parties to this Agreement any legal or equitable right, remedy,
or claim under or with respect to this Agreement or any provision of this
Agreement. This Agreement and all of its provisions and conditions are for the
sole and exclusive benefit of the parties to this Agreement and their successors
and assigns.
11.11 SEVERABILITY. If any provision of this Agreement is held invalid
------------
or unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
11.12 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this
------------------------------
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
11.13 TIME OF ESSENCE. With regard to all dates and time periods set
---------------
forth or referred to in this Agreement, time is of the essence.
11.14 GOVERNING LAW. This Agreement will be governed by the laws of
-------------
the State of Texas without regard to conflicts of laws principles.
11.15 COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
11.16 FURTHER COVENANTS OF BUYER AND THE COMPANY.
------------------------------------------
(a) Until the Termination Date, the Company shall not, and Buyer
shall not allow the Company to, issue common stock or other
21
<PAGE>
securities convertible into or exchangeable for common stock
which represent more than 5% of its common stock on a fully
diluted basis.
(b) The Buyer covenants and agrees that, it in any election of
directors of the Company, it shall vote all shares of common
stock of the Company then held by Buyer ("Buyer Shares") to
elect a board of directors comprised of not less than three (3)
directors and not more than seven (7) directors, one (1) of
which shall be designated by Seller. In the event of any vacancy
in the board of directors of the Company, Buyer covenants and
agrees to vote all Buyer Shares and to otherwise use its best
efforts to fill such vacancy so that the board of directors will
include directors designated as provided above.
(c) Buyer agrees that the face of each certificate evidencing
shares of common stock held or to be held by Buyer shall bear an
endorsement (which shall be made conspicuous using capital
letters, bold face or contrasting type, underlining or similar
means) in substantially the following form:
"AS SET FORTH ON THE REVERSE HEREOF, THE SHARES
EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS AS CONTAINED IN A STOCK PURCHASE AGREEMENT,
DATED AS OF JUNE 28, 1996."
The reverse of each such certificate shall bear an endorsement
substantially as follows:
"THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS, INCLUDING A VOTING AGREEMENT, AS SET FORTH
IN A STOCK PURCHASE AGREEMENT, DATED AS OF JUNE 28,
1996, A COPY OF WHICH HAS BEEN DEPOSITED AT THE
PRINCIPAL OFFICE OF THE COMPANY."
(d) Buyer shall not, and the Company shall not recognize any
attempted, transfer, voluntarily or involuntarily, of Buyer
Shares unless such proposed transferee agrees to be bound by the
terms of this Agreement as a holder of Buyer Shares, and
specifically this Section 11.16 . Any attempted transfer in
violation of this Section 11.16 shall be void ab initio.
22
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
Seller:
POLYPHASE CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Buyer:
LETRONIX ACQUISITION CORP.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
23
<PAGE>
EXHIBIT 10.45
SECURITY AND PLEDGE AGREEMENT
-----------------------------
THIS SECURITY AND PLEDGE AGREEMENT (the "Agreement") is made as of
this 28th day of June, 1996, by Letronix Acquisition Corporation ("Pledgor"), in
favor of Polyphase Corporation ("Secured Party").
R E C I T A L S:
----------------
A. Pledgor owns beneficially and of record 1,020,000 shares (the
"Stock") of the common stock of Letronix, Inc., a Nevada corporation (the
"Company");
B. The Secured Party has agreed to loan to the Company the aggregate
principal sum of $850,000 (the "Loan") pursuant to a Secured Promissory Note
(the "Loan Agreement"). The principal sum of the Loan is subject to adjustment
as provided for in the Stock Purchase Agreement (as defined herein). All
capitalized terms used but not defined herein shall have the meanings set forth
in the Loan Agreement.
C. It is a condition precedent to the extension of the Loan by the
Secured Party that the Pledgor shall have executed and delivered to the Secured
Party, inter alia, a pledge agreement providing for the pledge to the Secured
Party of all of the Stock of the Company now or hereafter owned by Pledgor.
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, and other good and valuable consideration, receipt and
sufficiency of which are hereby acknowledged, and in order to induce the Secured
Party to extend the Loan to the Company, and with the intent to be legally bound
hereby, the Pledgor hereby agrees with the Secured Party as follows:
SECTION 1. DEFINITIONS. All terms used in this Agreement that are defined
-----------
in Article 9 of the Uniform Commercial Code currently in effect in the State of
Texas (the "Code") and are not otherwise defined herein shall have the same
meanings as set forth in the Code.
SECTION 2. PLEDGE AND GRANT OF SECURITY INTEREST. As collateral security
-------------------------------------
for all of the obligations of the Company under the Loan Agreement
(collectively, the "Obligations"), the Pledgor hereby pledges and assigns to the
Secured Party, and grants to the Secured Party a continuing security interest
in, the following (the "Pledged Collateral"):
(a) All right, title and interest of Pledgor in and to all stock and
other securities of the Company, whether now owned or hereafter acquired,
including, without limitation, the Stock, all options and other rights,
contractual or otherwise, of Pledgor now existing or hereafter arising with
respect to the Stock or other securities of the Company and all
distributions, cash, instruments and other property from time to time
received, receivable
<PAGE>
or otherwise distributed in respect of or in exchange for any or all of
Pledgor's interest in such stock or other securities of the Company; and
(b) All proceeds of any and all of the foregoing; in each case,
whether now owned or hereafter acquired by the Pledgor and howsoever its
interest therein may arise or appear (whether by ownership, security
interest, claim or otherwise ).
SECTION 3. SECURITY FOR OBLIGATIONS. The security interest created hereby
------------------------
in the Pledged Collateral constitutes continuing collateral security for all of
the Obligations, whether now existing or hereafter incurred.
SECTION 4. DELIVERY OF THE PLEDGED COLLATERAL.
----------------------------------
(a) All certificates and instruments, if any, representing the Pledged
Collateral shall be delivered to the Secured Party or to its designated
agent upon the execution and delivery of this Agreement. All other
certificates and instruments constituting Pledged Collateral from time to
time shall be delivered to the Secured Party or to its designated agent
promptly upon the receipt thereof by or on behalf of the Pledgor. All such
certificates and instruments shall be held by the Secured Party or its
designated agent pursuant hereto and shall be delivered in suitable form
for transfer by delivery or shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory in the Secured Party.
(b) If the Pledgor shall receive, by virtue of its being or having
been an owner of any Pledged Collateral, any (i) stock certificate
(including, without limitation, any certificate representing a stock
dividend or distribution in connection with any increase or reduction of
capital, reclassification, merger, consolidation, sale of assets,
combination of shares, stock split, spinoff or split-off), promissory note
or other instrument; (ii) option or right, whether as an addition to,
substitution for, or in exchange for, any Pledged Collateral, or otherwise;
(iii) distributions payable in cash (except such distributions permitted to
be retained by the Pledgor pursuant to Section 7 hereof) or in securities
or other property; or (iv) distributions in connection with a partial or
total liquidation or dissolution, Pledgor shall receive such stock
certificate, promissory note, instrument, option, right, payment or
distribution in trust, for the benefit of the Secured Party, shall
segregate it from the Pledgor's other property and shall deliver it
forthwith to the Secured Party or to its designated agent in the exact form
received, with any necessary indorsement and/or appropriate stock powers
duly executed in blank, to be held by the Secured Party or its designated
agent as Pledged Collateral and as further collateral security for the
Obligations.
SECTION 5. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and
------------------------------
warrants as follows:
(a) The Pledgor is and will be at all times the legal and beneficial
owner of the Pledged Collateral free and clear of any lien, security
interest or other charge or
2
<PAGE>
encumbrance except for (i) the security interest created by this Agreement
and (ii) any restrictive legends contained on any certificates representing
the Pledged Collateral.
(b) Pledgor is a corporation duly organized, validly existing and in
good standing in Nevada and has taken all necessary corporate actions in
order to duly authorize the execution, delivery and performance of this
Agreement and the Loan Agreement. This Agreement and the Loan Agreement
constitute the legal, valid and binding obligations of Pledgor, enforceable
against Pledgor in accordance with their terms. The execution, delivery and
performance of this Agreement will not contravene any law or governmental
regulation or any contractual restriction binding on or affecting the
Pledgor or any of its properties and will not result in or require the
creation of any lien, security interest or other, charge or encumbrance
upon or with respect to any of Pledgor's properties.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required
in connection with the pledge hereunder by the Pledgor of, or the grant by
the Pledgor of the security interest created hereby in, the Pledged
Collateral, except as may be required in respect of any such exercise by
laws affecting the offering and sale of securities generally.
(d) This Agreement creates a valid security interest in favor of the
Secured Party in the Pledged Collateral. The filing by Secured Party of a
UCC-1 financing statement in the office of the Secretary of State of Texas
and the taking of possession by Secured Party or its designated agent of
all certificates, instruments and cash constituting Pledged Collateral from
time to time will perfect, and establish the first priority of, the Secured
Party's security interest hereunder in the Pledged Collateral, securing the
Obligations. Except as set forth in this Section 5(d) and except for the
delivery of certain of the Pledged Collateral to Secured Party, no action
is necessary or desirable to perfect or otherwise protect such security
interest.
(e) The Pledgor's principal place of business is located at 2620 South
Maryland Parkway, Suite 202, Las Vegas, Nevada 89109.
SECTION 6. COVENANTS AS TO THE PLEDGED COLLATERAL. So long as any of the
--------------------------------------
Obligations shall remain outstanding, the Pledgor will, unless the Secured Party
shall otherwise consent in writing:
(a) Provide the Secured Party with thirty (30) days' advance notice of
any change in the location of its primary residence from the address
specified for the Pledgor in Section 5(e) above; and
(b) Keep adequate records concerning the Pledged Collateral and permit
the Secured Party or any agents or representatives thereof at any
reasonable time and from time to time to examine and make copies of and
abstracts from such records; and
3
<PAGE>
(c) At its expense, promptly deliver to the Secured Party a copy of
each notice or other communication received by it in respect of the Pledged
Collateral; and
(d) At its expense, defend the Secured Party's right, title and
special property and security interest in and to the Pledged Collateral
against the claims of any person; and
(e) At its expense, at any time and from time to time, promptly
execute and deliver all further instruments and documents and take all
further action that may be necessary or desirable or that the Secured Party
may reasonably request in order (i) to perfect and protect the security
interest created or purported to be created hereby; (ii) to exercise and
enforce its rights and remedies hereunder in respect of the Pledged
Collateral; or (iii) to otherwise effect the purposes of this Agreement,
including, without limitation, delivering to the Secured Party irrevocable
proxies in respect of the Pledged Collateral; and
(f) Not sell, assign, exchange or otherwise dispose of any Pledged
Collateral or any interest therein; and
(g) Not create or suffer to exist any lien, security interest or other
charge or encumbrance upon or with respect to any Pledged Collateral except
for the pledge hereunder and the security interest created hereby; and
(h) Not make or consent to any amendment or other modification or
waiver with respect to any Pledged Collateral or enter into any agreement
or permit to exist any restriction with respect to any Pledged Collateral;
and
(i) Not (i) take any action that would, in any manner, impair the
enforceability of the Secured Party's security interest in any Pledged
Collateral or (ii) fail to take any action where such failure would result
in such impairment.
SECTION 7. VOTING RIGHTS, DISTRIBUTIONS, ETC. IN RESPECT OF THE PLEDGED
------------------------------------------------------------
COLLATERAL.
- ----------
(a) So long as no default shall have occurred hereunder, and so long
as neither the Company nor any other party thereto (other than Secured
Party) has failed to make any payment or perform any other covenant,
agreement or obligation under the Loan Agreement or the Note, subject to
any applicable cure periods contained therein (each, an "Event of Default")
then:
(i) The Pledgor may exercise any and all voting, managerial and
other rights pertaining to the Pledged Collateral or any part thereof
for any purpose not inconsistent with the terms of this Agreement, the
Loan Agreement or any shareholders' agreement to which Pledgor may be
bound; provided, however, that the Pledgor will not exercise or
refrain from exercising any such right, as the case may be, if such
action would have a material adverse effect on the value of any
Pledged Collateral;
4
<PAGE>
(ii) The Pledgor may receive and retain any and all distributions
or interest paid in respect of the Pledged Collateral; provided,
however, that any and all
(A) Distributions and interest paid or payable other than in
cash in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of or in exchange
for, any Pledged Collateral,
(B) Distributions paid or payable in cash in respect of any
Pledged Collateral in connection with a partial or total
liquidation or dissolution, and
(C) Cash paid, payable or otherwise distributed in
redemption of, or in exchange for, any Pledged Collateral,
shall be, and shall forthwith be delivered to the Secured Party or its
designated agent to hold as Pledged Collateral and shall, if received by the
Pledgor, be received in trust for the benefit of the Secured Party, shall be
segregated from the other property or funds of the Pledgor, and shall be
forthwith delivered to the Secured Party or its designated agent in the exact
form received with any necessary endorsement and/or appropriate stock powers or
other instruments of assignment duly executed in blank, to be held by the
Secured Party or its designated agent as Pledged Collateral and as further
collateral security for the Obligations.
(b) Upon the occurrence and during the continuance of any Event of Default:
(i) All rights of the Pledgor to exercise the voting, managerial and
other rights that it would otherwise be entitled to exercise pursuant to
paragraph (i) of subsection (a) of this Section 7, and to receive the
distributions and interest payments that it would otherwise be authorized
to receive and retain pursuant to paragraph (ii) of subsection (a) of this
Section 7, shall cease, and all such rights shall thereupon become vested
in the Secured Party who shall thereupon have the sole right to exercise
such voting, managerial and other rights and to receive and hold as Pledged
Collateral such distributions and interest payments; and
(ii) Without limiting the generality of the foregoing, the Secured
Party may at its option exercise any and all rights of conversion,
exchange, subscription or any other rights, privileges or options
pertaining to any of the Pledged Collateral as if Secured Party were the
absolute owner thereof, including, without limitation the right to
exchange, in its discretion, any and all of the Pledged Collateral upon the
merger, consolidation, reorganization, recapitalization or other adjustment
of the Company, or upon the exercise by the Secured Party of any right,
privilege or option pertaining to any Pledged Collateral, and in connection
therewith, to deposit and deliver any and all of the Pledged Collateral
5
<PAGE>
with any committee, depository, transfer agent, registrar or other
designated agent upon such terms and conditions as such committee,
depository, transfer agent, registrar or other designated agent may
determine; and
(iii) All distributions and interest payments that are received by the
Pledgor contrary to the provisions of paragraph (i) of this Section 7(b)
shall be received in trust for the benefit of the Secured Party, shall be
segregated from other funds of the Pledgor, and shall be forthwith paid
over to the Secured Party or its designated agent as Pledged Collateral in
the exact form received, to be held by the Secured Party as Pledged
Collateral and as further collateral security for the Obligations.
SECTION 8. ADDITIONAL PROVISIONS CONCERNING THE PLEDGED COLLATERAL.
-------------------------------------------------------
(a) The Pledgor hereby authorizes the Secured Party to file, without
the signature of the Pledgor where permitted by law, one or more financing
or continuation statements, and amendments thereto, relating to the Pledged
Collateral.
(b) The Pledgor hereby irrevocably appoints the Secured Party as the
Pledgor's attorney-in-fact and proxy, with full authority in the place and
stead of the Pledgor and in the name, of the Pledgor or otherwise, from
time to time prior to the payment in full of the Obligations, at the
Secured Party's reasonable discretion, to take any action and to execute
any instrument that the Secured Party may deem necessary or advisable to
accomplish the purposes of this Agreement (subject to the rights of the
Pledgor under Section 7(a) hereof), including, without limitation, to
receive, indorse and collect all instruments made payable to the Pledgor
representing any distribution in respect of the Pledged Collateral or any
part thereof and to give full discharge for the same.
(c) If the Pledgor fails to perform any agreement or obligation
contained herein and such failure shall remain unremedied for a period of
twenty (20) days, the Secured Party may itself perform, or cause
performance of, such agreement or obligation, and the expenses of the
Secured Party incurred in connection therewith shall be payable by the
Pledgor pursuant to Section 10 hereof. The Secured Party agrees to notify
the Pledgor of any such action taken, but failure to so notify the Pledgor
shall not affect the rights of the Secured Party hereunder.
(d) Other than the exercise of reasonable care to assure the safe
custody of the Pledged Collateral while held hereunder, the Secured Party
shall have no duty or liability to preserve rights pertaining thereto and
shall be relieved of all responsibility for the Pledged Collateral upon
surrendering it or tendering surrender of it to the Pledgor. The Secured
Party shall be deemed to have exercised reasonable care in the custody and
preservation of the Pledged Collateral in its possession if the Pledged
Collateral is accorded treatment substantially equal to that which the
Secured Party accords its own property of a similar nature, it being
understood that the Secured Party shall not have responsibility for (i)
ascertaining or taking action with respect to calls, conversions,
6
<PAGE>
exchanges, maturities, tenders or other matters relating to any Pledged
Collateral, whether or not the Secured Party has or is deemed to have
knowledge of such matters, or (ii) taking any necessary steps to preserve
rights against any parties with respect to any Pledged Collateral.
(e) The Secured Party may at any time in its discretion (i) transfer
or register in the name of the Secured Party or any nominees of the Secured
Party any or all of the Pledged Collateral, subject only to the revocable
rights of the Pledgor under Section 7(a) hereof, and (ii) exchange
certificates or instruments constituting Pledged Collateral for
certificates or instruments of smaller or larger denominations. The Secured
Party will inform the Pledgor of any transfer or registration effected
pursuant to clause (i) of the preceding sentence.
SECTION 9. REMEDIES UPON DEFAULT. If any Event of Default shall have
---------------------
occurred and be continuing:
(a) The Secured Party may, by notice to the Pledgor, (i) exercise in
respect of the Pledged Collateral, in addition to other rights and remedies
provided for herein or otherwise available to it, all of the rights and
remedies of a secured party on default under the Code (whether or not the
Code applies to the affected Pledged Collateral) then in effect in the
State of Georgia or other applicable law; and (ii) without limiting the
generality of the foregoing and without notice except as specified below,
sell the Pledged Collateral or any part thereof in one or more, parcels at
public or private sale, at any exchange or broker's board or elsewhere, as
such price or prices and on such other terms as Secured Party may deem
commercially reasonable, for cash or on credit or for future delivery.
Pledgor agrees that, to the extent notice of sale shall be required by law,
notice to Pledgor at least ten (10) days prior to the time and place of any
public sale or the time after which any private sale is to be made shall
constitute reasonable notification. The Secured Party shall not be
obligated to make any sale of Pledged Collateral regardless of notice of
sale having been given. The Secured Party may adjourn any public or private
sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.
(b) The Pledgor recognizes that the Secured Party may deem it
impracticable to effect a public sale of all or any part of the any
securities constituting Pledged Collateral and that the Secured Party may,
therefore, determine to make one or more private sales of any such
securities to a restricted group of purchasers who will be obligated to
agree, among other things, to acquire such securities for their own
account, for investment and not with a view to the distribution or resale
thereof. The Pledgor acknowledges that any such private sale may be at
prices and on terms less favorable to the seller than the prices and other
terms which might have been obtained at a public sale and, notwithstanding
the foregoing, agrees that such private sales shall be deemed to have been
made in a commercially reasonable manner and that the Secured Party shall
have no obligation to delay sale of any such securities for the period of
time necessary to permit the issuer of such securities to register such
securities for public sale under the Securities Act of 1933
7
<PAGE>
(the "Securities Act") or any applicable state securities laws. Pledgor
further acknowledges and agrees that any offer to sell such securities
which has been (i) publicly advertised on a bona fide basis in a newspaper
or other publication of general circulation in the financial community of
Atlanta, Georgia (to the extent that such an offer may be so advertised
without prior registration under the Securities Act or applicable state
securities laws), or (ii) made privately in the manner described above to
not less than five bona fide offerees shall be deemed to involve a "public
sale" for the purposes of Section 9-504(3) of the Code (or any successor or
similar applicable statutory provision) as then in effect in the State of
Georgia, notwithstanding that such sale may not constitute a "public
offering" under the Securities Act or applicable state securities laws and
that the Agent on behalf of Secured Party may, in such event, bid for and
purchase of such securities.
(c) Any cash held by the Secured Party as Pledged Collateral and all
cash proceeds received by the Secured Party in respect of any sale of,
collection from, or other realization upon, all or any part of the Pledged
Collateral shall be applied as follows:
(i) First, to the extent not otherwise paid or reimbursed by
Pledgor, to the repayment of the reasonable costs and expenses,
including reasonable attorneys fees and legal expenses, incurred by
the Secured Party in connection with (A) the administration of this
Agreement, (B) the custody, preservation, use or operation of, or the
sale of, collection from, or other realization upon, any Pledged
Collateral, (C) the exercise or enforcement of any of the rights of
the Secured Party hereunder, and/or (D) the failure of the Pledgor to
perform or observe any of the provisions hereof;
(ii) Second, at the option of the Secured Party, to the payment or
other satisfaction of any liens and other encumbrances upon any of the
Pledged Collateral;
(iii) Third, to the reimbursement of the Secured Party for the
amount of any obligations of the Pledgor and/or the Company paid or
discharged by the Secured Party pursuant to the provisions of this
Agreement, the Loan Agreement or any Other Agreement and of any
reasonable expense of the Secured Party payable by the Pledgor
hereunder or under the Loan Agreement or any Other Agreement;
(iv) Fourth, to the satisfaction of any other indebtedness of the
Pledgor and/or the Company to the Secured Party;
(v) Fifth, to the payment of any other amounts required by
applicable law (including, without limitation, Section 9-504(1)(c) of
the Code or any successor or similar, applicable statutory provision);
and
8
<PAGE>
(vi) Sixth, the surplus proceeds, if any, to the Pledgor or to
whomsoever shall be lawfully entitled to receive the same or as a
court of competent jurisdiction shall direct.
(d) In the event that the proceeds of any such sale, collection or
realization are insufficient to pay all amounts to which the Secured Party
is legally entitled, the Pledgor shall be liable for the deficiency,
together with interest thereon at the default rate provided in Section 1.1
of the Loan Agreement, together with the costs of collection and the
reasonable fees of any attorneys employed by the Secured Party to collect
such deficiency.
(e) The Secured Party agrees that it will not sell or transfer any
securities constituting all or part of the Pledged Collateral except in
compliance with all applicable securities laws.
SECTION 10. INDEMNITY AND EXPENSES.
----------------------
(a) [intentionally left blank]
(b) The Pledgor will upon demand pay to the Secured Party, the amount
of any and all costs and expenses, including, without limitation, court
costs and the reasonable fees and disbursements of the Secured Party's
counsel and of any experts and agents, that the Secured Party or such
Purchaser may incur in connection with (i) the administration of this
Agreement; (ii) the custody, preservation, use or operation of, or the sale
of, collection from, or other realization upon, any Pledged Collateral;
(iii) the exercise or enforcement of any of the rights of the Secured Party
hereunder; or (iv) the failure by the Pledgor to perform or observe any of
the provisions hereof; except for expenses resulting solely and directly
from the Secured Party's or a Purchaser's gross negligence, willful
misconduct or breach of this Agreement.
SECTION 11. NOTICES. Unless otherwise required herein, all notices and
-------
other communications provided for hereunder shall be given as set forth in the
Loan Agreement.
SECTION 12. MISCELLANEOUS.
-------------
(a) No amendment of any provision of this Agreement shall be effective
unless it is in writing and signed by the Pledgor and the Secured Party,
and no waiver of any provision of this Agreement, and no consent to any
departure by the Pledgor therefrom, shall be effective unless it is in
writing and signed by the Secured Party and then such waiver or consent
shall be effective only in the specific instance and for the specific
purpose for which given.
(b) No failure on the part of the Secured Party to exercise, and no
delay in exercising, any right hereunder or under the Loan Agreement, any
Other Agreement or any related agreement, instrument or documents shall
operate as a waiver thereof; nor shall any single or partial exercise of
any such right preclude any other or further exercise
9
<PAGE>
thereof or the exercise of any other right. The rights and remedies of the
Secured Party provided herein and in the Loan Agreement, the Other
Agreements and all related agreements, instruments and documents are
cumulative and are in addition to, and not exclusive of, any rights or
remedies provided by law. The rights of the Secured Party under each of
this Agreement, the Loan Agreement, the Other Agreements and any related
agreements, instruments and documents against any party thereto are not
conditional or contingent on any attempt by the Secured Party to exercise
any of its rights hereunder or under the Loan Agreement, the Other
Agreements or any related agreement, instrument or document against such
party or against any other person or entity.
(c) Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall be ineffective, as to such
jurisdiction, to the extent of such prohibition or invalidity without
invalidating the remaining portions hereof or thereof or affecting the
validity or enforceability of such provision in any other jurisdiction.
(d) This Agreement shall create a present continuing security interest
in the Pledged Collateral and shall (i) remain in full force and effect
until the earlier of the payment and satisfaction in full or release of the
Obligations, (ii) be binding on the Pledgor and its successors and assigns
and shall inure, together with all rights and remedies of the Secured Party
hereunder, to the benefit of the Secured Party and its successors,
transferees and assigns. Without limiting the generality of the foregoing,
the Secured Party may assign or otherwise transfer the Note held by it as
provided in the Loan Agreement, and the Secured Party may assign or
otherwise transfer its rights under the Loan Agreement to any other person
or entity, and such other person or entity shall thereupon become vested
with all of the benefits in respect thereof granted to the Secured Party,
herein or otherwise. None of the rights or obligations of the Pledgor
hereunder may be assigned or otherwise transferred without the prior
written consent of the Secured Party.
(e) Upon the earlier of the final and irrevocable payment and
satisfaction in full or release of the Obligations, this Agreement and the
security interest created hereby shall terminate and all rights to the
Pledged Collateral shall revert to the Pledgor. The Secured Party shall
thereafter, upon the Pledgor's request and at the Pledgor's expense, (i)
return to the Pledgor such of the Pledged Collateral as shall not have been
sold or otherwise disposed of or applied pursuant to the terms hereof; and
(ii) execute and deliver to the Pledgor such documents as the Pledgor shall
reasonably request to evidence such termination.
(f) THIS AGREEMENT CONSTITUTES A SECURED COMMERCIAL LENDING
TRANSACTION GOVERNED BY THE UNIFORM COMMERCIAL CODE (TO THE EXTENT
APPLICABLE). THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE AT DALLAS,
TEXAS AND SHALL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE
PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES
APPLICABLE THERETO AND THE INTERNAL LAWS OF THE STATE
10
<PAGE>
OF TEXAS, APPLICABLE TO AGREEMENTS EXECUTED, DELIVERED AND PERFORMED WITHIN
SUCH STATE, EXCEPT AS REQUIRED BY MANDATORY PROVISIONS OF LAW AND EXCEPT TO
THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST CREATED
HEREBY, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED
COLLATERAL ARE GOVERNED BY THE LAW OF A JURISDICTION OTHER THAN THE STATE
OF TEXAS. PLEDGOR HEREBY CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY
REGISTERED MAIL DIRECTED TO SUCH PARTY AT ITS ADDRESS SET FORTH IN SECTION
5(E) HEREOF. PLEDGOR WAIVES TRIAL BY JURY (TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW), ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY
OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER AND CONSENTS TO THE
GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE
COURT. NOTHING IN THIS SECTION 12(F) SHALL AFFECT THE RIGHT OF SECURED
PARTY TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT
THE RIGHT OF SECURED PARTY TO BRING ANY ACTION OR PROCEEDING AGAINST
PLEDGOR AND/OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHERE
SUCH PARTY MAINTAINS OFFICES OR HAS PROPERTY.
(g) This Agreement may be executed in multiple counterparts, each of
which shall be deemed an original, and all counterparts hereof so executed
by the parties hereto, whether or not such counterpart shall bear the
execution of each of the parties hereto, shall be deemed to be, and shall
be construed as, one and the same Agreement. A photocopy, telecopy or
facsimile transmission of a signed counterpart of this Agreement shall be
sufficient to bind the party or parties whose signature(s) appear thereon.
(h) Secured Party hereby agrees to release a pro rata portion of the
--------
Stock securing the Obligations within ten (10) days following proper and
timely payment of all or a part of the principal amount paid in accordance
with the terms of the Loan Agreement. The number of shares of Stock to be
released shall be in the same proportion as the Stock bears to the original
principal amount of the Loan (as adjusted pursuant to the Stock Purchase
Agreement pursuant to which the stock was sold to Pledgor (the "Stock
Purchase Agreement"))on the date hereof. For example, if the Stock is equal
to 825 shares on the date hereof, then (assuming the $850,000 Loan remains
unadjusted under the Stock Purchase Agreement) .000970 shares of the Stock
shall be released for each dollar of principal paid off under the Loan
Agreement. Notwithstanding, no release shall be made of fractional shares.
11
<PAGE>
IN WITNESS WHEREOF, the Pledgor has executed this Agreement as of the
date first above written.
PLEDGOR:
LETRONIX ACQUISITION CORPORATION
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
SECURED PARTY:
POLYPHASE CORPORATION
By:
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
12
<PAGE>
EXHIBIT 10.46
SECURED PROMISSORY NOTE
$850,000 June 28, 1996
Dallas, Texas
FOR VALUE RECEIVED, this Promissory Note (this "Note") is made by
----
Letronix Acquisition Corp., a Texas corporation ("Maker"), to Polyphase
-----
Corporation, a Nevada corporation ("Payee").
-----
1. Payments. Maker hereby promises to pay to the order of Payee the
--------
principal sum of Eight Hundred Fifty Thousand Dollars ($850,000) at its
office at 16885 Dallas Parkway, Suite 400, Dallas, Texas 75248, or such
other place as the holder hereof may designate from time to time in writing,
in lawful money of the United States of America and in immediately available
funds, together with interest on the unpaid principal balance hereof at the
rate provided herein from the date of this Note until payment in full of the
indebtedness evidenced by this Note. Principal and interest on the Note
shall be due and payable as follows:
(a) Interest only on this Note shall be due and payable in arrears
once every six months, commencing on the last business day of December, 1996,
and continuing up to and including the last business day of December, 1997.
(b) On January 1, 1998 (the "Maturity Date") all principal and accrued
but unpaid interest on the Note shall be due and payable.
2. Final Payment. On the Maturity Date, all amounts hereunder shall
-------------
immediately become due and payable without demand or notice. All payments
received by Payee after the Maturity Date (whether of principal, interest or
other amounts) which are applied at any time by Payee to indebtedness
evidenced by this Note may be allocated, applied and reapplied by Payee to
principal, interest or other amounts then due and payable as Payee may
determine in Payee's sole discretion.
3. Interest Rate. The principal amount outstanding from time to time
-------------
hereunder shall bear interest calculated daily on the basis of a 360-day
year, at a rate equal to seven percent (7%) per annum. Any statements or
invoices sent by Payee to Maker and setting forth the amount of interest
payable hereunder, unless contested in writing to Payee by Maker within
thirty (30) days from the date of such statement or invoice, shall be deemed
conclusive as to the interest actually payable hereunder.
4. Maximum Rate. It is the intention of the parties hereto to conform
------------
strictly to any usury laws in force that apply to this transaction.
Accordingly, all agreements among the parties hereto (including, without
limitation, the Transaction Documents, as defined herein), whether
previously existing, now existing or hereafter arising and whether written
or oral, are hereby limited so that in no contingency, whether by reason of
acceleration of the maturity of the amounts owing under this Note or
otherwise, shall the interest (and
<PAGE>
all other sums that are deemed to be interest) contracted for, charged or
received by Payee with respect to this Note, exceed the Highest Lawful Rate.
The "Highest Lawful Rate" means the maximum nonusurious interest rate, if
any, that at any time or from time to time may be contracted for, taken,
reserved, charged or received under the laws of the United States and the
laws of such states as may be applicable thereto which are presently in
effect or, to the extent allowed under such applicable laws of the United
States and the laws of such states, which may hereafter be in effect and
which allow a higher maximum nonusurious interest rate than applicable laws
now allow. If, from any circumstance whatsoever, interest under any
agreement to which Maker and Payee are parties (including, without
limitation, under the Transaction Documents) would otherwise be payable in
excess of the Highest Lawful Rate, and if from any circumstance Payee shall
ever receive anything of value deemed interest by applicable law in excess
of the Highest Lawful Rate, then Payee's receipt of such excess interest
shall be deemed a mistake and the same shall, so long as no Event of Default
under this Note or the Security Agreement shall be continuing, at the option
of Maker, either be repaid to Maker or credited to the unpaid principal;
provided, however, that if an Event of Default shall have occurred and be
-------- -------
continuing, and Payee shall receive excess interest during such period, then
Payee shall have the option of either crediting such excess amount to
principal or refunding such excess amount to Maker. All interest paid or
agreed to be paid to Payee shall, to the extent allowed by applicable law,
be amortized, prorated, allocated, and spread throughout the full period of
Maker's credit relationship with Payee until payment in full of the
principal (including the period of any renewal or extension) so that the
interest for such full period shall not exceed the Highest Lawful Rate.
5. Prepayment.
----------
(a) This Note may be prepaid, in whole or in part, without premium
or penalty.
(b) In the event of any public or private offering by Maker of any
of the Maker's common stock, or other debt or equity securities which are
convertible or exchangeable into shares of common stock, Maker shall prepay the
Note in an amount equal to the lesser of the (i)(A) 10% of the gross proceeds
from such offering if such offering raises less than $2,000,000 in gross
proceeds or (B) 30% of the gross proceeds from such offering if such offering
raises $2,000,000 or more in gross proceeds or (ii) the aggregate amount of all
amounts due and owing under the terms of this Note at such time, such prepayment
to be made within five (5) business days of receipt of such net cash proceeds.
(c) All prepayments shall be applied first to accrued interest
and then to principal.
6. Default Rate. Upon the failure of Maker to make any payment of
------------
principal or interest on, or any amount owing in respect of, the
indebtedness evidenced by this Note, or any other amounts payable by Maker
to Payee pursuant to the terms hereof or any other agreement, when due and
payable or declared due and payable, the interest rate applicable
2
<PAGE>
to this Note shall be increased by three percent (3%) per annum above the
rate otherwise applicable.
7. Transaction Documents. This Note, including the principal, interest and
---------------------
fees and costs payable pursuant hereto, is secured by, among other things,
that certain Security and Pledge Agreement between Maker and Payee, dated as
of even date herewith (the "Security Agreement"), and all covenants,
------------------
agreements and undertakings of Maker and each Obligated Party (as
hereinafter defined) set forth therein are incorporated in and made part of
this Note with the same force as if fully set forth herein. This Note is
issued in connection with, among other things, that certain Stock Purchase
Agreement dated as of even date herewith (the "Stock Purchase Agreement") by
------------------------
and between Maker and Payee. This Note, the Security Agreement, the Stock
Purchase Agreement, and all documents, instruments and certificates executed
and delivered in connection therewith, are sometimes hereinafter
collectively referred to as the "Transaction Documents". Maker and any
guarantor or other natural or legal person who is or becomes party to any
agreement that guarantees or secures payment and performance of the
indebtedness and obligations evidenced by this Note, are all referred to
individually as an "Obligated Party" and collectively as the "Obligated
Parties".
8. Event of Default. The occurrence of any one or more of the following
----------------
shall constitute an "Event of Default" hereunder.
(a) Maker shall fail to pay any principal, interest or other
amounts when due and payable or declared due and payable
(whether at maturity, by acceleration or otherwise) under
this Note, and such failure shall remain uncured or
unremedied for a period of five (5) days after notice of
the failure to Maker by payee of such failure;
(b) Maker or any other Obligated Party shall fail or neglect
to perform, keep or observe any provision, condition,
covenant or warranty contained in this Note or any of the
other Transaction Documents to which it is a party (other
than as set forth in paragraph 8(a) of this Note);
--------------
(c) Any statement, report, financial statement or
certificate made or delivered by Maker, any other Obligated
Party or any of their officers, employees or agents, to
Payee is untrue, incomplete or incorrect in any material
respect;
(d) There shall occur any material uninsured damage to, or
loss, theft, or destruction of, any of the Pledged
Collateral (as defined in the Security Agreement);
3
<PAGE>
(e) A judgment or judgments for the payment of money in
excess of $5,000 in the aggregate shall be rendered against
either Maker or any other Obligated Party and any such
judgment or judgments shall, if unsatisfied, remain
unstayed for a period in excess of thirty (30) days;
(f) The Pledged Collateral or any other of any Obligated
Party's assets are attached, seized, levied upon or
subjected to a writ or distress warrant, or come within the
possession of any receiver, trustee, custodian or assignee
for the benefit of creditors and the same is not cured
within sixty (60) days thereafter; an application is made
by any person, other than such Obligated Party, for the
appointment of a receiver, trustee, or custodian for such
Obligated Party's assets, respectively and the same is not
dismissed within sixty (60) days after the application
therefor;
(g) An application is made by Maker or any other Obligated
Party for the appointment of a receiver, trustee or
custodian for any of Maker's or any such Obligated Party's
assets; a petition under any section or chapter of the
Bankruptcy Code or any similar law or regulation shall be
filed by Maker or any other Obligated Party; Maker or any
other Obligated Party makes an assignment for the benefit
of its creditors or any case or proceeding is filed by
Maker or any other Obligated Party for its dissolution,
liquidation, or termination;
(h) Maker or any other Obligated Party ceases to conduct its
business as now conducted or is enjoined, restrained or in
any way prevented by court order from conducting all or any
material part of its business affairs; a petition under any
section or chapter of the Bankruptcy Code or any similar
law or regulation is filed against Maker or any other
Obligated Party or any case or proceeding is filed against
Maker or any other Obligated Party for its dissolution or
liquidation, and such injunction, restraint or petition is
not dismissed within sixty (60) days after the entry or
filing thereof;
(i) A notice of lien, levy or assessment is filed of record
with respect to all or any of Maker's or any other
Obligated Party's assets by the United States, or any
department, agency or instrumentality thereof, or by any
state, county, municipal or other governmental agency,
including, without
4
<PAGE>
limitation, the Pension Benefit Guaranty Corporation, or if
any taxes or debts owing at any time or times hereafter to
any one of these becomes a lien or encumbrance upon any of
Maker's or any other Obligated Party's assets and the same
is not released within sixty (60) days after the same
becomes a lien or encumbrance; provided that Maker or such
Obligated Party shall have the right to contest in good
faith and by appropriate proceedings any such lien, levy or
assessment if Maker or such Obligated Party provides Payee
with a bond or indemnity satisfactory to Payee assuring the
payment of such lien, levy or assessment; or
(j) Maker or any other Obligated Party becomes insolvent or
admits in writing its inability to pay its debts as they
mature or communicates its intention to petition for
protection under the Bankruptcy Code or apply for the
appointment of a receiver, trustee or custodian.
9. Remedies; No Offset. Upon and after the occurrence and continuance of
-------------------
an Event of Default, Payee shall have the option, without demand or notice
or legal process of any kind, to declare the unpaid principal of this Note,
together with interest thereon and any other sums owing hereunder, at once
due and payable, and to exercise any and all other rights and remedies
available hereunder or under the Security Agreement, or the other
Transaction Documents, or otherwise available at law or in equity. Maker
shall not be entitled to offset against this Note any amounts due and owing
from Payee to Maker, if any.
10. Remedies Cumulative. The remedies of Payee, as provided herein, shall
-------------------
be cumulative and concurrent, and may be pursued singularly, successively or
together, at the sole discretion of Payee, and may be exercised as often as
occasion therefor shall arise. No act of omission or commission of Payee,
including specifically any failure to exercise any right, remedy or
recourse, shall be deemed to be a waiver or release of the same, such waiver
or release to be effected only through a written document executed by Payee
and then only to the extent specifically recited therein. A waiver or
release with reference to any one event shall not be construed as
continuing, as a bar to, or as a waiver or release of, any subsequent right,
remedy or recourse as to a subsequent event.
11. Costs of Collection. Maker promises to pay all of Payee's costs of
-------------------
collection of every kind, including but not limited to all reasonable
attorneys' fees, court costs, and expenses of every kind, incurred by Payee
in connection with the collection (including, but not limited to collection
through a bankruptcy or other Court) or enforcement of this Note. If Payee
or its affiliates advances any additional amounts to or on behalf of Maker,
then the principal amount of this Note may, at the option of Payee, be
increased by the
5
<PAGE>
amounts so advanced, and Maker agrees to repay such additional amounts
pursuant to the terms hereof.
12. Waivers. Maker and each surety, endorser, guarantor and other party now
-------
or hereafter liable for the payment of any sums of money payable on this
Note, hereby severally (a) waive demand, presentment for payment, notice of
dishonor, notice of nonpayment, protest, notice of protest, notice of intent
to accelerate, notice of acceleration and all other notices, filing of suit
and diligence in collecting this Note or enforcing any other security with
respect to same, (b) agree to any substitution, subordination, exchange or
release of any such security or the release of any parties primarily or
secondarily liable hereon, (c) agree that Payee shall not be required first
to institute suit or exhaust its remedies hereunder against Maker, or others
liable or to become liable hereon or to enforce its rights against them or
any security with respect to same, (d) consent to any and all renewals,
extensions, indulgences, releases or changes regardless of the number of
such renewals, extensions, indulgences, releases or changes, without notice
thereof, and (e) agree to the application of any deposit balance with Payee
as payment or part payment hereon or as an offset hereto. No such conduct
shall affect, impair, release or change the liability of Maker, surety,
endorser, guarantor and any other party. No waiver by Payee of any of its
rights or remedies hereunder or under any other document evidencing or
securing this Note or otherwise shall be considered a waiver of any other
subsequent right or remedy of Payee; no delay or omission in the exercise or
endorsement by Payee of any rights or remedies shall ever be construed as a
waiver of the same or any other right or remedy of Payee; and no exercise or
enforcement of any such right or remedy shall ever be held to exhaust any
right or remedy of Payee.
13. Notices. Except as otherwise provided herein, any notice or demand
-------
which, by the provisions hereof, is required or which may be given to or
served upon the Maker or Payee shall be in writing and, if by telecopy,
shall be deemed to have been validly served, given or delivered when
transmitted with a copy immediately mailed by registered or certified mail,
if by personal delivery, shall be deemed to have been validly served, given
or delivered upon actual delivery and, if mailed, shall be deemed to have
been validly served, given or delivered three (3) business days after
deposit in the United States mails, as registered or certified mail, with
proper postage prepaid and addressed to the party to be notified, at the
following addresses (or such other address(es) as a party may designate for
itself by like notice):
If to Maker: Letronix Acquisition Corp.
- ----------- 2620 South Maryland Parkway, Suite 202
Las Vegas, Nevada 89109
Attention: President
Telecopier No.: (214) 980-0790
6
<PAGE>
If to Payee: Polyphase Corporation
- ----------- 16885 Dallas Parkway, Suite 400
Dallas, Texas 75248
Attention: President
Telecopier No.: 214-732-6430
14. Successors and Assigns. This Note shall be binding upon Maker and its
----------------------
successors and assigns (including, without limitation, a receiver, trustee
or debtor-in-possession of or for Maker) and shall inure to the benefit of
Payee and its successors and assigns. Maker may not assign its rights
hereunder without the prior written consent of Payee, in its sole
discretion. Payee may assign all or a part of its interest in this Note and
its rights hereunder to any party.
15. GOVERNING LAW. THIS NOTE SHALL BE DEEMED A CONTRACT AND INSTRUMENT MADE
-------------
UNDER THE LAWS OF THE STATE OF TEXAS AND ACCEPTED BY PAYEE IN SAID STATE,
THE LOCATION OF PAYEE'S PRINCIPAL PLACE OF BUSINESS, AND ANY AND ALL CLAIMS,
DEMANDS OR ACTIONS IN ANY WAY RELATING THERETO OR INVOLVING ANY DISPUTE
BETWEEN ANY OF THE PARTIES TO THIS NOTE, WHETHER ARISING IN CONTRACT OR
TORT, AT LAW, IN EQUITY OR STATUTORILY, SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH AND/OR GOVERNED BY THE LAWS OF THE STATE OF TEXAS (EXCEPTING
ITS CHOICE OF LAW RULES) AND THE LAWS OF THE UNITED STATES OF AMERICA. MAKER
HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION OF THE
STATE AND FEDERAL COURTS OF THE STATE OF TEXAS AND AGREES AND CONSENTS THAT
SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO
THE TRANSACTION DOCUMENTS, THE RELATIONSHIPS CREATED THEREBY OR THE DEBT BY
ANY MEANS ALLOWED UNDER TEXAS OR FEDERAL LAW. VENUE FOR ANY LEGAL PROCEEDING
MAY BE DALLAS COUNTY, TEXAS; PROVIDED, THAT PAYEE MAY CHOOSE ANY VENUE IN
ANY STATE WHICH IT DEEMS APPROPRIATE IN THE EXERCISE OF ITS SOLE DISCRETION.
16. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
--------------------
LAW, MAKER AND PAYEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS NOTE AND THE OTHER
TRANSACTION DOCUMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF PAYEE OR MAKER IN
CONNECTION HEREWITH, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
SOUNDING IN CONTRACT, TORT OR OTHERWISE, MAKER AND PAYEE HEREBY CONSENT AND
AGREE THAT ANY SUCH CLAIM, DEMAND, ACTION, CAUSE OF ACTION, SUIT OR
7
<PAGE>
PROCEEDING SHALL BE DECIDED BY A COURT TRIAL, WITHOUT A JURY, AND THAT ANY
PARTY MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS NOTE WITH ANY COURT
AS WRITTEN EVIDENCE OF THE OTHER PARTIES' CONSENT TO SUCH.
17. Severability. If any provisions of this Note or any payments pursuant
------------
to the terms hereof shall be invalid or unenforceable to any extent, the
remainder of this Note and any other payments hereunder shall not be
affected thereby and shall be enforceable to the greatest extent permitted
by law.
18. Time of the Essence. Time is of the essence with respect to all of
-------------------
Maker's obligations and agreements under this Note and the other Transaction
Documents.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Note at Dallas, Texas as of the date and year first above written.
LETRONIX ACQUISITION CORPORATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
8
<PAGE>
EXHIBIT 10.47
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT is entered into effective as of the 1/st/ day of
July 1996, by and between LETRONIX ACQUISITION CORP., a Florida corporation,
(hereinafter referred to as "Debtor") and Polyphase Corporation, a Texas
corporation with its principal place of business at 16885 Dallas Parkway,
Dallas, Dallas County, Texas 75248, (hereinafter collectively "Secured Party").
The undersigned Debtor hereby grants to the above named Secured Party a
Security Interest, under the Uniform Commercial Code, in the following described
property (hereinafter referred to as "Collateral") subject to all applicable
conditions contained herein and including all proceeds, products and accessions
thereto:
1. All of the assets owned by its subsidiary Micro Configurations, Inc., a
New York corporation, including without limitation: accounts, equipment and
general intangibles, both as of the date hereof and hereafter acquired.
2. Two Hundred (200) shares of common stock of Micro Configurations, Inc.,
being one hundred percent (100%) of the issued and outstanding shares of
the common stock of said Company.
DEBTOR WARRANTS, REPRESENTS AND AGREES:
1. The Debtor is a corporation duly organized and existing pursuant to the
laws of the State of Florida and is in good standing with the state of
Florida.
2. The Debtor will not allow the Collateral to be the subject of any other
security interest from and after the date of the execution hereof, except
as set forth hereinbelow, without the express written consent of the
Secured Party.
SECURED OBLIGATION:
This Security Interest will secure the payment of those certain Promissory
Notes of even date herewith, executed by the Debtor as maker thereof and payable
to the order of the Secured Parties, for the payment of the aggregate principal
amount of NINE HUNDRED FIFTY-ONE THOUSAND FOUR HUNDRED THIRTY-TWO DOLLARS AND
NINETY-NINE CENTS ($951,432.99), plus interest, subject to the terms and
conditions as outlined therein.
<PAGE>
THE OCCURRENCE OF ANY OF THE FOLLOWING EVENTS SHALL CONSTITUTE A DEFAULT:
1. Failure of Debtor to pay when due, by acceleration or otherwise, any
amount payable under the Secured Obligation;
2. Failure to perform any agreement of Debtor contained herein;
3. The Company shall (a) execute an assignment for the benefit of
creditors, (b) admit in writing its inability to pay its debts generally as
they become due, (c) voluntarily seek the benefits of any Debtor Relief Law
which could suspend or otherwise effect Payee's rights hereunder, or (d)
take any corporate action to authorize any of the forgoing.
Whenever a Default shall exist, the Secured Party may, at their option and
without demand or notice, declare all or any part of the unpaid balance of the
Promissory Notes plus accrued interest of the Secured Obligations immediately
due and payable, and the Secured Party may exercise, in addition to the rights
and remedies granted hereby, all rights and remedies of a Secured Party under
the Uniform Commercial Code or any other applicable law, including the right to
take possession of the Collateral. In addition, for the purpose of taking
possession of the Collateral, the Secured Party may, as far as the Debtor can
give authority therefor, enter upon any premises on which the Collateral or any
part thereof may be situated, and remove the same therefrom.
Debtor agrees, in the event of Default, to make the Collateral available to
the Secured Party at a place or places acceptable to Secured Party and, when
legally permissible, to pay all costs of the Secured Party, including reasonable
attorney's fees, in the collection of the Secured Obligation and the enforcement
of any of the Secured Party's rights. If any notification of intended
disposition of any of the Collateral is required by law, such notification shall
be deemed reasonably and properly given if mailed at least ten (10) days before
such disposition, postage prepaid, addressed to the Debtor at the address shown
on the first page of this Security Agreement.
THE SECURED PARTY SHALL HAVE THE AUTHORITY, BUT SHALL NOT BE OBLIGATED TO:
1. To place upon Debtor's books and records relating to the Accounts and
Contract Rights covered by the Security Interest granted hereby a notation
or legend stating that such Account or Contract Rights are subject to a
Security Interest held by the Secured Party.
2. After any default, to take possession of all Collateral or such part or
parts of the Collateral as may be necessary or appropriate in the judgment
of the Secured Party.
<PAGE>
3. After any default, in the name of the Debtor or otherwise, to demand,
collect, receive and receipt for, compound, compromise, settle and give
acquittance for, and prosecute and discontinue any suits or proceedings in
respect of any or all of the Collateral.
4. After any default, take any action which the Secured Party may deem
necessary or desirable in order to realize on the Collateral, including,
without limitation, the power to perform any contract, to endorse in the
name of Debtor any checks, drafts, notes or other instruments or documents
received in payment of or on account of the Collateral.
GENERAL TERMS AND CONDITIONS:
1. Debtor will keep accurate books, records and accounts with respect to
the Collateral and will make the same available to the Secured Party at
their request for examination and inspection; and will make and render to
the Secured Party such reports, accountings and statements as the Secured
Party from time to time may request with respect to the Collateral.
2. Debtor has or will acquire title to and will at all times keep the
Collateral free of all liens and encumbrances, except the Security Interest
created hereby, unless any such lien is expressly subordinate hereto and
has been pre-approved in writing by the Secured Party.
3. Debtor will at any time or times hereafter execute such financing
statements and other instruments and perform such acts as the Secured Party
may request to establish and maintain a valid Security Interest in the
Collateral, and will pay all costs of filing and recording, or, when
legally permissible, Debtor authorizes the Secured Party at the expense of
the Debtor to execute and file on Debtor's behalf a financing statement or
statements in those public offices deemed necessary by the Secured Party to
protect their Security Interest in the Collateral. Debtor will deliver or
cause to be delivered to the Secured Party any certificate or certificates
of title to the Collateral with the Security Interest of the Secured Party
noted thereon.
No delay or failure by the Secured Party in the exercise of any right or
remedy shall constitute a waiver thereof, and no single or partial exercise by
the Secured Party of any right or remedy shall preclude other or further
exercise thereof or the exercise of any other right or remedy. In case any one
or more of the provisions of this Agreement shall for any reason be held to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality
and unenforceability shall not affect any other provision of this Agreement.
<PAGE>
This Security Agreement and the provisions hereof are to be binding upon
the Debtor and any successors of Debtor and benefit the heirs, executors,
administrators and successors of Secured Party. The singular when used herein
shall include the plural and the meaning of words shall apply to masculine and
feminine as is appropriate. The validity, construction and enforcement of this
Agreement are governed by the internal laws of the state of Texas as pre-empted
by federal law. All terms not otherwise defined have the meanings assigned to
them by the Uniform Commercial Code. Invalidity or unenforceability of any
provision of this agreement shall not affect the validity or enforceability of
any other provisions.
A carbon, photographic or other reproduction of this Security Agreement is
sufficient as a financing statement, except where prohibited by law.
This Security Agreement or any other similar document may be filed by any
Secured Party with any state or county agencies where the filing of security
instruments is allowed.
Upon actual receipt of the final payment of the Secured Indebtedness, the
Secured Party hereunder agrees to execute any written memorandum as required by
the Debtor hereunder to release and extinguish the Security Interest created
hereby.
EXECUTED effective as of the day first above written.
DEBTOR
LETRONIX ACQUISITION CORP.
- -------------------------------------
BY: Albert B. Greco, Jr.
ITS: President
SECURED PARTY
POLYPHASE CORPORATION
- -------------------------------------
BY:
ITS:
<PAGE>
EXHIBIT 10.48
PROMISSORY NOTE
$951,432.99 LAS VEGAS, NEVADA July 1, 1996
FOR VALUE RECEIVED, the undersigned, LETRONIX ACQUISITION CORP., a
Florida corporation (the "Company"), hereby promises to pay to the order of
POLYPHASE CORPORATION or permitted assigns (the "Payee"), at 16885 Dallas
Parkway, Dallas, Texas 75248, or at any such other place as any Holder of this
Note may designate in writing, the principal amount of NINE HUNDRED FIFTY-ONE
THOUSAND FOUR HUNDRED THIRTY-TWO DOLLARS AND NINETY-NINE CENTS ($951,432.99)
(the "Principal Amount") with interest from the date hereof on the Principal
Amount from time to time remaining unpaid at the rate of eight percent (8%) per
annum. Interest on this Note shall be calculated based upon a year of 365 or
366 days, as applicable. All payments of principal and interest shall be made
in lawful money of the United States of America.
THIS NOTE IS DUE AND PAYABLE AS FOLLOWS: On June 30, 1999, all
Principal and all accrued but unpaid interest shall be due and payable in full.
All payments hereunder shall be applied first to the payment of interest and
then to the outstanding Principal Amount.
NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS NOTE, IN NO EVENT SHALL
THE AMOUNT OF INTEREST PAYABLE HEREON EXCEED THE MAXIMUM AMOUNT OF INTEREST
PERMITTED TO BE CHARGED OR PAYABLE HEREON BY APPLICABLE LAW.
PAYMENTS. All payments hereunder shall be made on or before the due
date and shall be delivered to Payee at the address indicated hereinabove, or at
any such other address as payee may designate in writing.
WAIVERS. The Company, to the extent allowed by law, may waive
presentment, demand for payment, protest, notice of dishonor, notice of intent
to accelerate the maturity of this Note, notice of acceleration of the maturity
of this Note, diligence in collecting, grace, notice and protest and agree to
one or more extensions for any period or periods of time and partial payments
before or after maturity without prejudice to the holder.
SEVERABILITY. If any part of this Note cannot be enforced, this fact
will not affect the rest of the Note.
<PAGE>
USURY. All agreements between the undersigned and the holder hereof,
whether now existing or hereafter arising and whether written or oral are hereby
limited so that in no contingency, whether by reason of demand for payment or
acceleration of the maturity hereof or otherwise, shall the interest contracted
for, charged or received by the holder hereof exceed the maximum amount
permissible under applicable law. In particular, this section means (among
other things) that the Company does not agree or intend to pay, and Payee does
not agree or intend to contract for, charge, collect, take, reserve or receive
(collectively referred to herein as "Charge or Collect"), any amount in the
nature of interest or in the nature of a fee for this loan, which would in any
way or event (including demand, prepayment, or acceleration) cause Payee to
charge or collect more for this loan that the maximum Payee would be permitted
to charge or collect by Federal law or the laws of the State of Nevada (as
applicable). Any such excess interest or unauthorized fee shall, instead of
anything stated to the contrary, be applied first to reduce the principal
balance of this loan, and when the principal has been paid in full, be refunded
to the Company. The right to accelerate maturity of sums due under this Note
does not include the right to accelerate any interest that has not otherwise
accrued on the date of such acceleration, and Payee does not intend to charge or
collect any unearned interest in the event of acceleration. All sums paid or
agreed to be paid to Payee for the use, forbearance or detention of sums due
hereunder shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of the loan evidenced by
this Note until payment in full so that the rate or amount of interest charged
to the account of the loan evidenced hereby does not exceed the applicable usury
ceiling. Payee may delay or forgo enforcing any of its rights or remedies under
this Note without losing them If for any circumstances whatsoever, interest
would otherwise be payable to the holder hereof in excess of the maximum lawful
amount the interest payable to the holder hereof shall be reduced to the amount
permitted under applicable law; and if for any circumstances, the holder hereof
shall ever receive anything of value deemed interest by applicable law in excess
of the maximum lawful amount, an amount equal to any excessive interest shall be
applied to the reduction of the principal hereof and such excess shall be
refunded to the Company. This Section shall control all agreements between the
Company and the holder hereof.
EVENT OF DEFAULT. In case an Event of Default (as defined below)
shall occur and shall be continuing, the Principal Amount due and payable as of
or prior to the date of the occurrence of such Event of Default but not yet paid
shall become (along with all accrued but unpaid interest) immediately due and
payable. For purposes of this Note any Event of Default shall have occurred if:
(i) The Company shall fail to make any payment pursuant hereto and
such failure shall continue for a period of fifteen (15) calendar days
after notice;
<PAGE>
(ii) The Company fails to perform promptly at the time and strictly in
the manner provided in this Note, and such failure shall continue for a
period of fifteen (15) calendar days after notice.
ACCELERATION. If default is made in the payment due under this Note, the
entire principal balance owing hereon shall at once become due and payable, at
the option of the Payee(s) with written notice of acceleration to the Company.
Failure to exercise this option shall not constitute a waiver of the right to
exercise the same in the event of any subsequent default. Payee may declare
immediately due the entire indebtedness, including the unpaid principal balance
on this Note, all accrued unpaid interest and all other amounts, costs and
expenses for which the Company is responsible under this Note or pertaining to
this loan.
SPECIAL PROVISIONS. This Note is issued by Maker without recourse to its
for any deficiency in the value of the collateral securing this indebtedness.
This Note is a limited obligation of Maker and shall be payable by Maker as to
principal and interest solely from the collateral pledged herefor as hereinafter
set forth, and shall be a valid claim of any holder thereof only against such
collateral. In the event that Maker defaults on its repayment obligation under
this Promissory Note, as the term default is defined herein, the Payee or any
holder, shall have recourse against and only to the extent of the value of the
Collateral specified herein. Payee or any holder's recourse against Maker is
limited to the value of the Collateral. In the event that the value of the
Collateral is less than the amount outstanding hereunder, Payee or any holder
shall have no cause of action against Maker for any deficiency between the value
of the Collateral and the amount owed under this Promissory Note.
COLLATERAL. The indebtedness evidenced by this Promissory Note shall be
secured pursuant to that certain security agreement of even date herewith.
CAPTIONS. The headings are included herein for ease of reference only and
shall not be considered in the construction or interpretation of the terms and
provisions of this date.
<PAGE>
OPTIONAL PREPAYMENTS. This Note may be prepaid in whole or in part,
without premium or penalty, at any time. Any such prepayment shall be applied
first to accrued but unpaid interest as of the date of such prepayment and then
to the outstanding Principal Amount of this Note in the inverse order of
scheduled principal payments.
GOVERNING LAW. THIS NOTE HAS BEEN DELIVERED TO AND ACCEPTED BY LENDER IN
DALLAS COUNTY, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS. ANY LEGAL PROCEEDINGS INSTITUTED UNDER THIS NOTE
SHALL BE BROUGHT IN DALLAS COUNTY, TEXAS.
IN WITNESS WHEREOF, LETRONIX ACQUISITION CORP. has caused this Note to be
dated 1st day of July 1996, and to be executed on its behalf by its officer
--
thereunto duly authorized.
LETRONIX ACQUISITION CORP.
__________________________________
By: Albert B. Greco, Jr.
Its: President
<PAGE>
EXHIBIT 10.49
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is entered into as of July 1,
1996, by Letronix Acquisition Corp., a Florida corporation ("Buyer"), and
Polyphase Corporation, a Nevada corporation, ("Seller").
RECITALS
Seller desires to sell, and Buyer desires to purchase, 200 shares (the
"Shares") of capital stock of Micro Configurations, Inc., a New York corporation
(the "Company"), being one hundred percent (100%) of the outstanding shares of
the Common Stock, no par value per share, of the Company (the "Common Stock"),
for the consideration and on the terms set forth in this Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. SALE AND TRANSFER OF SHARES; CLOSING.
------------------------------------
1.1 SHARES. Subject to the terms and conditions of this Agreement, at the
------
Closing, Seller will sell and transfer the Shares to Buyer, and Buyer will
purchase the Shares from Seller.
1.2 PURCHASE PRICE. The purchase price (the "Purchase Price") for the
--------------
Shares will be Nine Hundred Fifty One Thousand Four Hundred Thirty-two Dollars
and Ninety-nine Cents ($951,432.99), payable in the form of a non-recourse
promissory note in the form of attached hereto as ANNEX A.
1.3 CLOSING The purchase and sale (the "Closing") provided for in this
------
Agreement will take place at the offices of Seller at 16885 Dallas Parkway, 4th
Floor, Dallas, Texas, at 10:00 a.m. (local time) on July 12, 1996 or at such
other time and place as the parties may agree (the "Closing Date"). Subject to
the provisions of SECTION 9, failure to consummate the purchase and sale
provided for in this Agreement on the date and time and at the place determined
pursuant to this SECTION 1.3 will not result in the termination of this
Agreement and will not relieve any party of any obligation under this Agreement.
1.4 CLOSING OBLIGATIONS. At the Closing:
-------------------
(a) Seller will deliver to Buyer:
(i) certificates representing the Shares, duly endorsed (or
accompanied by duly executed stock powers) (which Buyer will return to Seller as
collateral as hereinafter described);
(ii) a certificate executed by Seller to the effect that, except as
otherwise stated in such certificate, each of Seller's representations and
warranties in this Agreement was accurate in all material respects as of the
date of this Agreement and is accurate in all material respects as
1
<PAGE>
of the Closing Date as if made on the Closing Date (giving full effect to any
supplements to the Disclosure Schedule (as hereinafter defined) that were
delivered by Seller to Buyer at or prior to the Closing Date);
(b) Buyer will deliver to Seller the Purchase Price, as follows:
(i) A secured non-recourse promissory note in the amount of Nine
Hundred Fifty One Thousand Four Hundred Thirty-two Dollars and Ninety-nine Cents
($951,432.99) (the "Note") having the terms and provisions set forth in the form
thereof attached hereto as ANNEX A; and
(ii) a certificate executed by Buyer to the effect that, except as
otherwise stated in such certificate, each of Buyer's representations and
warranties in this Agreement was accurate in all material respects as of the
date of this Agreement and is accurate in all material respects as of the
Closing Date as if made on the Closing Date.
2. REPRESENTATIONS AND WARRANTIES OF SELLER.
----------------------------------------
Seller represents and warrants to Buyer as follows:
2.1 ORGANIZATION AND GOOD STANDING. The Company is a corporation duly
------------------------------
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and authority to
conduct its business as it is now being conducted, to own or use the properties
and assets that it purports to own or use. The Company is duly qualified to do
business as a foreign corporation and is in good standing under the laws of each
state or other jurisdiction in which either the ownership or use of the
properties owned or used by it, or the nature of the activities conducted by it,
requires such qualification.
2.2 AUTHORITY; NO CONFLICT.
----------------------
(a) This Agreement constitutes the legal, valid, and binding obligation of
Seller, enforceable against Seller in accordance with its terms. Seller has the
absolute and unrestricted right, power, authority, and capacity to execute,
deliver and perform this Agreement.
(b) Neither the execution and delivery of this Agreement nor the
consummation or performance of any of the transactions contemplated by this
Agreement will, directly or indirectly (with or without notice or lapse of
time):
(i) contravene, conflict with, or result in a violation of any
provision of the certificate of incorporation or bylaws of the Company;
(ii) contravene, conflict with, or result in a violation of, or give
any governmental body or other person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or obtain
any relief under, any federal, state or local order, law, ordinance or
regulation or any injunction, judgment, order or decree of any court,
2
<PAGE>
administrative agency or other governmental body to which the Company, or any of
the assets owned or used by the Company, may be subject;
(iii) contravene, conflict with, or result in a violation or breach
of any provision of, or give any person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any contracts applicable to the Company that
would have a material adverse effect on the Company; or
(iv) result in the imposition or creation of any charge, claim, lien,
option, pledge, security interest or restriction of any kind upon or with
respect to any of the assets owned or used by any the Company.
2.3 OWNERSHIP; CAPITALIZATION.
-------------------------
(a) Seller is or will be on the Closing Date the record and beneficial
owner and holder of the Shares, free and clear of any charge, claim, lien,
option, pledge, security interest or restriction of any kind.
(b) The authorized equity securities of the Company consist of 200 shares
of common stock, no par value per share, of which 200 shares are issued and
outstanding. Upon transfer of the Shares to Buyer at the Closing, Buyer will own
the entire legal and beneficial interest in the Shares, free and clear of all
liens, claims and encumbrances and subject to no legal or equitable restriction
of any kind. All of the outstanding equity securities and other securities of
the Company are owned of record and beneficially by the Seller, free and clear
of any charge, claim, lien, option, pledge, security interest or restriction of
any kind. All of the outstanding equity securities of the Company have been duly
authorized and validly issued and are fully paid and nonassessable. There are no
agreements, contracts, obligations, promises or undertakings relating to the
issuance, sale, or transfer of any equity securities or other securities of the
Company.
2.4 FINANCIAL MATTERS. Seller has delivered to Buyer: (i) the balance
-----------------
sheets of the Company as at Sptember 30 in each of the years 1995 and 1994, and
the related consolidated statements of income for each of the fiscal years then
ended (the "Financial Statements"), and (ii) an unaudited balance sheet of the
Company as at March 31, 1996, and the related unaudited statement of income for
the six months then ended (the "Interim Financial Statements"). Such Financial
Statements fairly present in all material respects the financial condition and
the results of operations of the Company as at the respective dates of and for
the periods referred to in such financial statements, all in accordance with
generally accepted accounting principles, subject, in the case of the Interim
Financial Statements, to normal recurring year-end adjustments (the effect of
which will not, individually or in the aggregate, be materially adverse); the
financial statements referred to in this SECTION 2.4 reflect the consistent
application of such accounting principles throughout the periods.
2.5 BOOKS AND RECORDS. The books of account, minute books, stock record
-----------------
books, and other records of the Company, all of which have been made available
to Buyer, are complete and correct in all material respects. The minute book of
the Company contain accurate and complete records of all meetings held of, and
corporate action taken by, the stockholders and the
3
<PAGE>
Boards of Directors. At the Closing, all of those books and records will be in
the possession of the Company.
2.6 TITLE TO PROPERTIES. The Company owns (with good and marketable
-------------------
title in the case of real property, subject only to the matters permitted by the
following sentence) all the properties and assets (whether real, personal, or
mixed and whether tangible or intangible) that it purports to own, including all
of the properties and assets reflected in the Financial Statements and the
Interim Financial Statements (except for assets held under capitalized leases
and personal property sold since the date of the Financial Statements and the
Interim Financial Statements, as the case may be, in the ordinary course of
business), and all of the properties and assets purchased or otherwise acquired
by the Company since the date of the Financial Statements (except for personal
property acquired and sold since the date of the Financial Statements in the
ordinary course of business and consistent with past practice).
2.7 CONDITION AND SUFFICIENCY OF ASSETS. The buildings, structures, and
-----------------------------------
equipment of the Companies are structurally sound, are in good operating
condition and repair, and are adequate for the uses to which they are being put,
and none of such buildings, structures, or equipment is in need of maintenance
or repairs except for ordinary, routine maintenance and repairs that are not
material in nature or cost. The building, structures, and equipment of the
Company are sufficient for the continued conduct of the Company's business after
the Closing in substantially the same manner as conducted prior to the Closing.
2.8 NO UNDISCLOSED LIABILITIES. The Company has no material liabilities
--------------------------
or obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent, or otherwise) except for liabilities or obligations
reflected or reserved against in the Financial Statements or the Interim
Financial Statements and current liabilities incurred in the ordinary course of
business since the respective dates thereof.
2.9 TAXES. (a) All federal, state and local tax returns, reports,
-----
declarations, information returns and estimates that the Acquired Companies were
required to file ("Tax Returns") have been filed for the Company for all periods
for which such were due. All Taxes (as defined below) of the Company, whether
or not disclosed in the Tax Returns, have been paid in full and all such Tax
Returns are true, correct and complete in all material respects. The federal
income tax returns of the Company have not been examined by the Internal
Revenue Service. There is not in force any extension of the date on which any
Tax Return was or is due to be filed by or with respect to the Company, or any
waiver or agreement by them for the extension of time for the payment of any
Tax. The reserve for Tax liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) shown on
the Financial Statements is adequate to cover the liability of the Company for
all Taxes (including employee income tax withholding, social security and
unemployment taxes) to the date thereof.
(b) There is no claim against the Company with respect to any Taxes and no
assessment, deficiency or adjustment has been asserted or proposed with respect
to any Tax Return which would, if determined adversely to the Company, have a
material adverse effect on the Company. All prior audits and examinations of
the Company have been disclosed to Buyer.
4
<PAGE>
(c) The Company has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party.
(d) For purposes of this Agreement, "Tax" (and, with correlative meaning,
"Taxes") shall mean any federal, state, local or foreign income, gross receipts,
windfall profit, severance, property, alternative minimum or add-on minimum
production, sales, use, license, excise, franchise, employment, payroll,
withholding, ad valorem, or other taxes, assessments, duties, fees, levies or
other governmental charges, together with any interest, penalty or addition to
tax, or additional amount imposed by any governmental authority.
2.10 EMPLOYEE BENEFITS. PART 2.10 of the Disclosure Schedule contains a
-----------------
complete and accurate list of all plans or other obligations, arrangements, or
customary practices, whether or not legally enforceable, to provide benefits,
other than salary, as compensation for services rendered, to present or former
directors, employees, or agents ("Benefits"). The Company, with respect to all
Benefits are, and each Benefit is, in material compliance with the Employee
Retirement Income Security Act of 1974 ("ERISA"), the IRC, and other applicable
laws.
2.11 PROCEEDINGS. There are currently no pending lawsuits, administrative
-----------
proceedings or investigations ("Proceedings") against the Company or to which
any of its assets is subject and Seller is not aware of any threatened
Proceedings. The Company is not subject to any currently existing order, writ,
injunction or decree relating to its operations.
2.12 ABSENCE OF CERTAIN CHANGES AND EVENTS Since the date of the
-------------------------------------
Financial Statements, there has not been any material adverse change in the
financial condition, results of operation, business, prospects, assets or
liabilities, of the Company, except for changes in the ordinary course of
business consistent with historical experience.
2.13 CONTRACTS. PART 2.13 of the Disclosure Schedule contains a complete
---------
and accurate list of (i) all current or pending contracts, commitments and
leases (of real or personal property), written or otherwise, between the Company
and any party of more than $50,000 or which are otherwise material to the
operations of the Company, that cannot be canceled without penalty upon thirty
(30) days' notice or which otherwise are material to the Company; (ii) all
patents, copyrights, tradenames, trademarks and service marks used or owned by
the Company, and all licenses or agreements relating thereto; (iii) a list of
all leases, contracts or agreements for which consents of any private persons or
governmental bodies is required for the consummation of the transactions
contemplated by this Agreement, or for the preventing of any termination of any
material right, privilege, license or agreement of, or any loss or disadvantage
to, the Company or Buyer upon consummation of the transactions contemplated by
this Agreement; and (iv) all real property owned or leased by the Company.
2.14 ENVIRONMENTAL MATTERS. To Seller's knowledge, the Company is, and at
---------------------
all times has been, in material compliance with, and has not been and is not in
material violation of or liable under, any environmental law. To Seller's
knowledge, no toxic chemicals or hazardous wastes have been deposited or
disposed of on any property owned by the Company and none of such property has
suffered any material environmental damage due to the Company's operations.
5
<PAGE>
2.15 EMPLOYEES. PART 2.15 of the Disclosure Schedule contains a complete
---------
and accurate list of the following information for each employee of the Company,
including each employee on leave of absence or layoff status: employer; name;
job title; current compensation paid or payable and any change in compensation
since December 31, 1995.
2.16 CERTAIN PAYMENTS. To Seller's knowledge, neither the Company nor
----------------
director, officer, agent, or employee of the Company, or any other person
associated with or acting for or on behalf of the Company, has directly or
indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback, or other payment to any person, private or public, regardless
of form, whether in money, property, or services (i) to obtain favorable
treatment in securing business, (ii) to pay for favorable treatment for business
secured, (iii) to obtain special concessions or for special concessions already
obtained, for or in respect of the Company or any Affiliate (as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the
Company, or (iv) in violation of any federal, state or local order, law,
ordinance or regulation, (b) established or maintained any fund or asset that
has not been recorded in the books and records of the Company.
2.17 NO MISSTATEMENTS OR OMISSIONS. No representation or warranty of
-----------------------------
Seller in this Agreement and no statement in the Disclosure Schedule omits to
state a material fact necessary to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
2.18 RELATIONSHIPS WITH AFFILIATES No Seller or any Affiliate of Seller
-----------------------------
or of the Company has, or since January 1, 1995, has had, any:
(a) interest in any property (whether real, personal, or mixed and whether
tangible or intangible), used in or pertaining to the Company's business.
(b) equity interest or any other financial or profit interest in, a person
that has had business dealings or a material financial interest in any
transaction with any the Company other than business dealings or transactions
conducted in the ordinary course of business with the Company at substantially
prevailing market prices and on substantially prevailing market terms. No Seller
or any Affiliate of Seller or of the Company is a party to any agreement,
contract, obligation, promise or undertaking with, or has any claim or right
against, the Company.
2.19 BROKERS OR FINDERS. Seller and its agents have incurred no
------------------
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement.
6
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF BUYER.
---------------------------------------
Buyer represents and warrants to Seller as follows:
3.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly
------------------------------
organized, validly existing, and in good standing under the laws of the State of
Nevada.
3.2 AUTHORITY; NO CONFLICT.
----------------------
(a) This Agreement constitutes the legal, valid, and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms. Buyer has the
absolute and unrestricted right, power, and authority to execute, deliver and
perform its obligations under this Agreement.
(b) Neither the execution and delivery of this Agreement by Buyer nor the
consummation or performance of any of the transactions contemplated by this
Agreement by Buyer will give any person the right to prevent, delay, or
otherwise interfere with any of the transactions contemplated by this Agreement
pursuant to:
(i) any provision of Buyer's certificate of incorporation or bylaws;
(ii) any resolution adopted by the board of directors or the
stockholders of Buyer;
(iii) any federal, state or local order, law, ordinance or regulation
or injunction, judgment, order or decree of any court, administrative agency or
other governmental body to which Buyer may be subject; or
(iv) any agreement, contract, obligation, promise or undertaking to
which Buyer is a party or by which Buyer may be bound.
(c) Buyer is not and will not be required to obtain any consent from any
person in connection with the execution and delivery of this Agreement or the
consummation or performance of any of the transactions contemplated by this
Agreement.
3.3 CERTAIN PROCEEDINGS. There is no pending proceeding against Buyer
-------------------
that challenges, or may have the effect of preventing, delaying, making illegal,
or otherwise interfering with, any of the transactions contemplated by this
Agreement. To Buyer's knowledge, no such proceeding has been threatened.
3.4 BROKERS OR FINDERS. Buyer and its officers and agents have incurred
------------------
no obligation or liability, contingent or otherwise, for brokerage or finders'
fees or agents' commissions or other similar payment in connection with this
Agreement and will indemnify and hold Seller harmless from any such payment
alleged to be due by or through Buyer as a result of the action of Buyer or its
officers or agents.
7
<PAGE>
4. COVENANTS OF SELLER PRIOR TO CLOSING DATE.
-----------------------------------------
4.1 ACCESS AND INVESTIGATION. Between the date of this Agreement and the
------------------------
Closing Date, Seller will, and will cause the Company and its directors,
officers and agents to, (a) afford Buyer and its directors, officers and agents
and prospective lenders and their representatives (collectively, "Buyer's
Advisors") full and free access to the Company's personnel, properties,
contracts, books and records, and other documents and data, (b) furnish Buyer
and Buyer's Advisors with copies of all such contracts, books and records, and
other existing documents and data as Buyer may reasonably request, and (c)
furnish Buyer and Buyer's Advisors with such additional financial, operating,
and other data and information as Buyer may reasonably request.
4.2 OPERATION OF THE BUSINESS OF THE COMPANY. Between the date of this
----------------------------------------
Agreement and the Closing Date, Seller will, and will cause the Company to
conduct its business only in the ordinary course of business and in material
compliance with all applicable laws, rules and regulations.
4.3 NEGATIVE COVENANTS. Between the date of this Agreement and the
------------------
Closing Date, Seller will not, and will cause the Company not to, without prior
notice to Buyer: (i) make any changes in its capital structure, (ii) incur any
liability or obligation other than current liabilities incurred in the ordinary
and usual course of business, (iii) incur any indebtedness for borrowed money,
(iv) make any loans or advances other than advances to employees and owner-
operators, in the ordinary and usual course of business, (v) mortgage, pledge or
subject to any encumbrance any of its assets or properties, (vi) sell or
transfer any of its assets or properties except in the ordinary and usual course
of business, (vii) make any investment of a capital nature, except in the
ordinary and usual course of business, (viii) adopt or amend in any material
respect any collective bargaining agreement or employee benefit plan, or (ix)
enter into any contract, agreement, or other commitment which is material to the
business, assets, properties, or financial position of the Company.
4.4 BEST EFFORTS. Between the date of this Agreement and the Closing
------------
Date, Seller will use its best efforts to cause the conditions in SECTIONS 6 and
7 to be satisfied.
5. COVENANTS OF BUYER.
------------------
5.1 APPROVALS OF GOVERNMENTAL BODIES. As promptly as practicable after
--------------------------------
the date of this Agreement, Buyer will, and will cause each of its Affiliates
to, make all filings required by federal, state or local laws, orders,
ordinances or regulations to be made by them to consummate the transactions
contemplated by this Agreement. Between the date of this Agreement and the
Closing Date, Buyer will, and will cause each Affiliate to, (i) cooperate with
Seller with respect to all filings that Seller is required by federal, state or
local laws, orders, ordinances or regulations to make in connection with the
transactions contemplated by this Agreement, and (ii) cooperate with Seller in
obtaining all consents identified in PART 2.13 of the Disclosure Schedule.
5.2 BEST EFFORTS. Between the date of this Agreement and the Closing
------------
Date, Buyer will use its best efforts to cause the conditions in SECTIONS 6 and
7 to be satisfied.
5.3 ACTIONS WITH RESPECT TO THE COMPANY AND BUYER. Buyer covenants and
---------------------------------------------
agrees
8
<PAGE>
that, after the Closing and for so long as any amounts under the Note remain
outstanding:
(a) it will comply, and cause the persons it elects or causes to be elected
as directors and officers of the Company to comply, with its and their
obligations under federal and state securities laws and its and their fiduciary
duties to the Company's shareholders;
(b) it will acquire shares, receive payments and otherwise engage in
transactions with the Company only on terms that are fair to the Company and its
shareholders;
(c) it will, and it will cause the Company, to:
(i) preserve and maintain in full force and effect its corporate
existence and good standing under the laws of its state of incorporation or
organization and all other states where it is legally required to be qualified
to do business as a foreign corporation;
(ii) use its reasonable efforts, in the ordinary course, to preserve
its business organization and preserve the goodwill and business of the
customers, suppliers and others having business relations with it;
(iii) maintain and preserve all its property in good working order
and condition, ordinary wear and tear excepted, except where failure to do so
would not have a material adverse effect.
(iv) except to the extent that the failure to do so would have a
material adverse effect, it will and it will cause the Company to, pay and
discharge as the same shall become due and payable, all their respective
obligations and liabilities
(v) comply, and will cause the Company to, comply, in all material
respects with all requirements of law and with the directions of any
governmental authority having jurisdiction over it or its business, except such
(A) as may be contested in good faith or as to which a bona fide
dispute may exist, and
(B) as to which such failure to comply would not have a material
adverse effect on Buyer or the Company.
6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE.
---------------------------------------------------
Buyer's obligation to purchase the Shares and to take the other actions
required to be taken by Buyer at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Buyer, in whole or in part):
6.1 ACCURACY OF REPRESENTATIONS. All of Seller's representations and
---------------------------
warranties in this Agreement must have been accurate in all material respects as
of the date of this Agreement, and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
9
<PAGE>
6.2 SELLER'S PERFORMANCE.
--------------------
(a) All of the covenants and obligations that Seller is required to perform
or to comply with pursuant to this Agreement at or prior to the Closing, must
have been duly performed and complied with in all material respects.
(b) Each document required to be delivered pursuant to SECTION 1.4 must
have been delivered.
6.3 CONSENTS. Each of the consents identified in PART 2.13 of the
--------
Disclosure Schedule must have been obtained and must be in full force and
effect.
6.4 ADDITIONAL DOCUMENTS. Each of the following documents must have been
--------------------
delivered to Buyer:
(a) the documents necessary to effect the resignation of each of the
noncontinuing directors and officers of the Company, to be effective not later
than the Closing Date;
(b) such other documents as Buyer may reasonably request for the purpose of
(i) evidencing the accuracy of any of Seller's representations and warranties,
(ii) evidencing the performance by Seller of, or the compliance by Seller with,
any covenant or obligation required to be performed or complied with by Seller,
or (iii) evidencing the satisfaction of any condition referred to in this
SECTION 6; and
6.5 NO PROCEEDINGS. Since the date of this Agreement, there must not
--------------
have been with respect to Buyer (i) any effective injunction, writ, or temporary
restraining order of any nature issued by a court or governmental agency of
competent jurisdiction directing that the proposed acquisition not be
consummated or (ii) any action, suit, or proceeding pending or threatened by or
before any court or governmental body in which it is or may be sought to
prohibit, substantially delay, or rescind the proposed acquisition, or to limit
in any way Buyer's right to acquire the Company.
7. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE.
-----------------------------------------------------
Seller's obligation to sell the Shares and to take the other actions
required to be taken by Seller at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Seller, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS. All of Buyer's representations and
---------------------------
warranties in this Agreement must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
7.2 BUYER'S PERFORMANCE.
-------------------
10
<PAGE>
(a) All of the covenants and obligations that Buyer is required to perform
or to comply with pursuant to this Agreement at or prior to the Closing must
have been performed and complied with in all material respects.
(b) Buyer must have delivered each of the documents required to be
delivered by Buyer pursuant to SECTION 1.4 and must have paid the Purchase Price
required to be made by Buyer pursuant to SECTION 1.4(b).
7.3 CONSENTS. Each of the consents identified in PART 2.13 of the
--------
Disclosure Schedule must have been obtained and must be in full force and
effect.
7.4 ADDITIONAL DOCUMENTS. Buyer must have caused the following documents
--------------------
to be delivered to Seller:
(a) such documents as Seller may reasonably request for the purpose of (i)
evidencing the accuracy of any representation or warranty of Buyer, (ii)
evidencing the performance by Buyer of, or the compliance by Buyer with, any
covenant or obligation required to be performed or complied with by Buyer, or
(iii) evidencing the satisfaction of any condition referred to in this
SECTION 7; and
7.5 NO PROCEEDINGS. Since the date of this Agreement, there must not have
--------------
been with respect to Seller (i) any effective injunction, writ, or temporary
restraining order of any nature issued by a court or governmental agency of
competent jurisdiction directing that the proposed acquisition not be
consummated or (ii) any action, suit, or proceeding pending or threatened by or
before any court or governmental body in which it is or may be sought to
prohibit, substantially delay, or rescind the proposed acquisition, or to limit
in any way Seller's right to sell the Acquired Companies.
8. TERMINATION.
-----------
8.1 TERMINATION EVENTS. This Agreement may, by notice given prior to or
------------------
at the Closing, be terminated:
(a) by either Buyer or Seller if a material breach of any provision of this
Agreement has been committed by the other party and such breach has not been
waived;
(b) (i) by Buyer if any of the conditions in SECTION 6 has not been
satisfied as of the Closing Date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Buyer to comply with its
obligations under this Agreement) and Buyer has not waived such condition on or
before the Closing Date; or (ii) by Seller, if any of the conditions in SECTION
7 has not been satisfied of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of Seller to
comply with its obligations under this Agreement) and Seller has not waived such
condition on or before the Closing Date;
(c) by mutual consent of Buyer and Seller; or
(d) by either Buyer or Seller if the Closing has not occurred (other than
through the failure of any party seeking to terminate this Agreement to comply
fully with its obligations under
11
<PAGE>
this Agreement) on or before August 31, 1996, or such later date as the parties
may agree upon.
8.2 EFFECT OF TERMINATION. Each party's right of termination under
---------------------
SECTION 8.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to SECTION 8.1, all
further obligations of the parties under this Agreement will terminate, except
that the obligations in SECTIONS 10.1 and 10.3 will survive; provided, however,
that if this Agreement is terminated by a party because of the breach of the
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
9. INDEMNIFICATION; REMEDIES.
-------------------------
9.1 SURVIVAL. Only the representations of Seller contained in SECTIONS
--------
2.17 and 2.19 will survive the Closing.
9.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLER. Seller will
------------------------------------------------
indemnify and hold harmless Buyer, the Company, and their respective directors,
officers, stockholders, controlling persons, and affiliates (collectively, the
"Indemnified Persons") for, and will pay to the Indemnified Persons the amount
of, any loss, liability, claim, damage, expense (including costs of
investigation and defense and reasonable attorneys' fees) or diminution of
value, whether or not involving a third-party claim (collectively, "Damages"),
arising, directly or indirectly, from or in connection with any breach of the
representations made in SECTION 2.19.
The remedies provided in this SECTION 9.2 will be the exclusive remedies
available to Buyer or the other Indemnified Persons for any breach of this
Agreement or the conduct of the business of the Company prior to the Closing
Date.
9.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER. Buyer will indemnify
-----------------------------------------------
and hold harmless Seller from and will pay to Seller the amount of any Damages
arising, directly or indirectly, from or in connection with any breach of the
representations made in SECTIONS 3.2(a), 3.3 or 3.4.
The remedies provided in this SECTION 9.3 will be the exclusive remedies
available to Seller for any breach of this Agreement.
9.4 TIME LIMITATIONS. If the Closing occurs, neither party will have
----------------
liability (for indemnification or otherwise) with respect to any representation,
unless on or before the first anniversary of the Closing Date the other party
notifies the party of a claim specifying the factual basis of that claim in
reasonable detail to the extent then known by the other party.
12
<PAGE>
9.5 LIMITATIONS ON AMOUNT--SELLER. Seller will have no liability (for
-----------------------------
indemnification or otherwise) to Buyer unless the amount of Damages sought is in
the aggregate at least $50,000, and will have no liability (for indemnification
or otherwise) to Buyer in excess of the Purchase Price.
9.6 LIMITATIONS ON AMOUNT--BUYER. Buyer will have no liability (for
----------------------------
indemnification or otherwise) to Seller in other than the non-recourse
promissory note that comprises the Purchase Price.
9.7 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS.
-------------------------------------------------
(a) Promptly after receipt by an indemnified party of notice of the
commencement of any proceeding against it, such indemnified party will, if a
claim is to be made against an indemnifying party, give notice to the
indemnifying party of the commencement of such claim, but the failure to notify
the indemnifying party will not relieve the indemnifying party of any liability
that it may have to any indemnified party, except to the extent that the
indemnifying party demonstrates that the defense of such action is prejudiced by
the indemnifying party's failure to give such notice.
(b) If any proceeding referred to in SECTION 9.7(a) is brought against an
indemnified party and it gives notice to the indemnifying party of the
commencement of such proceeding, the indemnifying party will be entitled to
participate in such proceeding and, to the extent that it wishes (unless (i) the
indemnifying party is also a party to such proceeding and the indemnified party
determines in good faith that joint representation would be inappropriate, or
(ii) the indemnifying party fails to provide reasonable assurance to the
indemnified party of its financial capacity to defend such proceeding and
provide indemnification with respect to such proceeding), to assume the defense
of such proceeding with counsel satisfactory to the indemnified party and, after
notice from the indemnifying party to the indemnified party of its election to
assume the defense of such proceeding, the indemnifying party will not, as long
as it diligently conducts such defense, be liable to the indemnified party under
this SECTION 9 for any fees of other counsel or any other expenses with respect
to the defense of such proceeding, in each case subsequently incurred by the
indemnified party in connection with the defense of such proceeding, other than
reasonable costs of investigation. If the indemnifying party assumes the defense
of a proceeding, (i) no compromise or settlement of such claims may be effected
by the indemnifying party without the indemnified party's consent unless (A)
there is no finding or admission of any violation of federal, state or local
laws, orders, ordinances or regulations or any violation of the rights of any
person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (ii) the indemnified party will have
no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any proceeding and the indemnifying party does not, within ten
days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such proceeding, the
indemnifying party will be bound by any determination made in such proceeding or
any compromise or settlement effected by the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party determines in
good faith
13
<PAGE>
that there is a reasonable probability that a proceeding may adversely affect it
or its affiliates other than as a result of monetary damages for which it would
be entitled to indemnification under this Agreement, the indemnified party may,
at its own expense, participate in the defense, compromise, or settlement of
such proceeding, but the indemnifying party will not be bound by any
determination of a proceeding so defended or any compromise or settlement
effected without its consent (which may not be unreasonably withheld).
9.8 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS. A claim for
-------------------------------------------
indemnification for any matter not involving a third-party claim may be asserted
by notice to the party from whom indemnification is sought.
10. GENERAL PROVISIONS.
------------------
10.1 EXPENSES. Except as otherwise expressly provided in this Agreement,
--------
each party to this Agreement will bear its respective expenses incurred in
connection with the preparation, execution, and performance of this Agreement
and the transactions contemplated by this Agreement, including all fees and
expenses of agents, representatives, counsel, and accountants.
10.2 PUBLIC ANNOUNCEMENTS. Buyer will keep this Agreement strictly
--------------------
confidential and may not make any disclosure of this Agreement or the
transactions contemplated by this Agreement to any person. The Company will
issue any press release or other publicity, if at all, at such time and in such
manner as it shall determine in its sole discretion. Buyer will not contact or
have any dealings with the Company's employees, customers, and suppliers without
the consent of Seller.
10.3 CONFIDENTIALITY. Between the date of this Agreement and the Closing
---------------
Date, Buyer and Seller will maintain in confidence, and will cause the
directors, officers, employees, agents, and advisors of Buyer and the Company to
maintain in confidence, and not use to the detriment of another party or the
Company any written, oral, or other information obtained in confidence from
another party or the Company in connection with this Agreement or the
transactions contemplated by this Agreement, unless (a) such information is
already known to such party or to others not bound by a duty of confidentiality
or such information becomes publicly available through no fault of such party,
(b) the use of such information is necessary or appropriate in making any filing
or obtaining any consent or approval required for the consummation of the
transactions contemplated by this Agreement, or (c) the furnishing or use of
such information is required by legal proceedings.
If the transactions contemplated by this Agreement are not consummated,
each party will return all of such written information as the other party has
provided.
10.4 NOTICES. All notices, consents, waivers, and other communications
-------
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by telecopier (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or
14
<PAGE>
to such other addresses and telecopier numbers as a party may designate by
notice to the other parties):
Seller:
Polyphase Corporation
16885 Dallas Parkway
4th Floor
Dallas, Texas 75248
Attention: Paul A. Tanner
Facsimile No.: (214) 732-6430
with a copy to:
Jenkens & Gilchrist,
A Professional Corporation
1445 Ross Ave.
Suite 3200
Dallas, Texas 75202
Attention: Ronald J. Frappier
Facsimile No.: (214) 855-4300
Buyer:
Letronix Acquisition Corp.
P. O. Box 25653
Dallas, Texas 75225
Attention: President
Facsimile No.: (214) 980-0790
with a copy to:
Law Offices of Albert B. Greco, Jr.
13455 Noel Road
Suite 1420
Dallas, Texas 75240
Attention: Albert B. Greco, Jr.
Facsimile No.: (214) 702-7343
15
<PAGE>
10.5 JURISDICTION; SERVICE OF PROCESS. Any action or proceeding seeking
--------------------------------
to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of Texas, County of Dallas, and each of the parties consents to the jurisdiction
of such courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any action
or proceeding referred to in the preceding sentence may be served on any party
anywhere in the world.
10.6 FURTHER ASSURANCES. The parties agree (a) to furnish upon request to
------------------
each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to in this Agreement.
10.7 WAIVER. The rights and remedies of the parties to this Agreement are
------
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
10.8 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
---------------------------------
prior agreements between the parties with respect to its subject matter and
constitutes (along with the documents referred to in this Agreement) a complete
and exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended except by a
written agreement executed by the party to be charged with the amendment.
10.9 DISCLOSURE SCHEDULE. The Disclosure Schedule is incorporated into
-------------------
and shall be part of this Agreement.
10.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. No party may
--------------------------------------------------
assign any of its rights under this Agreement without the prior consent of the
other parties, except that Buyer may assign any of its rights under this
Agreement to any subsidiary of Buyer. Subject to the preceding sentence, this
Agreement will apply to, be binding in all respects upon, and inure to the
benefit of the successors and permitted assigns of the parties. Nothing
expressed or referred to in this Agreement will be construed to give any person
other than the parties to this Agreement any legal or equitable right, remedy,
or claim under or with respect to this Agreement or any provision of this
Agreement. This Agreement and all of its provisions and conditions are for the
sole and exclusive benefit of the parties to this Agreement and their successors
and assigns.
10.11 SEVERABILITY. If any provision of this Agreement is held invalid or
------------
unenforceable
16
<PAGE>
by any court of competent jurisdiction, the other provisions of this Agreement
will remain in full force and effect. Any provision of this Agreement held
invalid or unenforceable only in part or degree will remain in full force and
effect to the extent not held invalid or unenforceable.
10.12 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this
------------------------------
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
10.13 TIME OF ESSENCE. With regard to all dates and time periods set
---------------
forth or referred to in this Agreement, time is of the essence.
10.14 GOVERNING LAW. This Agreement will be governed by the laws of the
-------------
State of Texas without regard to conflicts of laws principles.
10.15 COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
Buyer:
POLYPHASE CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Seller:
LETRONIX ACQUISITION CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
17
<PAGE>
EXHIBIT 10.50
NONINCENTIVE STOCK OPTION AGREEMENT FOR THE
1994 EMPLOYEE STOCK OPTION PLAN FOR
POLYPHASE CORPORATION
A Nonincentive Stock Option (the "Option") for a total of 130,000 shares of
Common Stock, par value $0.01 per share, of Polyphase Corporation (the
"Company") is hereby granted to
PAUL A. TANNER
(the "Optionee") at the price determined as provided in, and in all respects
subject to the terms, definitions and provisions of, the 1994 Employee Option
Plan for Polyphase Corporation (the "Plan"), which is incorporated herein by
reference.
1. Option Price. The option price is $2.00 for each share.
------------
2. Exercise of Option. This Option shall be exercisable in accordance with the
------------------
provisions of the Plan as follows:
(i) Schedule of Rights to Exercise. This option shall be exercisable, in
------------------------------
whole or in part, immediately on the date of grant.
(ii) Method of Exercise. This Option shall be exercisable by a written
------------------
notice which shall:
a. state the election to exercise the Option and the number of shares in
respect of which it is being exercised;
b. be signed by the person or persons entitled to exercise the Option,
and if the Option is being exercised by any person or persons other
than the Optionee, be accompanied by proof, satisfactory to the
Company, of the right of such person or persons to exercise the
Option; and
(iii) Payment. Payment of the purchase price of any shares with respect
-------
to which this Option is being exercised shall be by cash, certified or
bank cashier's check, money order, personal check, with shares of
Common Stock of the Company or by a combination of the above delivered
to the Company and their exercise shall not be effective until such
payment is made. If the exercise price is paid in whole or in part
with shares of Common Stock of the Company, the value of the shares
surrendered shall be the Fair Market Value on the date received by the
Company. The certificate or certificates for shares of Common Stock as
to which the Option shall be exercised shall be registered in the name
of the person or persons exercising the Option.
<PAGE>
(iv) Withholding. The Optionee shall make satisfactory arrangements for
-----------
the withholding of any amounts necessary for withholding in accordance
with applicable federal or state income tax laws.
(v) Restrictions on Exercise.
------------------------
(a) This Option may not be exercised if the issuance of the shares
upon such exercise would constitute a violation of any applicable
federal or state securities or other law or valid regulation. As a
condition to the exercise of this Option, the Company may require
the person exercising this Option to make any arrangements and
undertakings that may be required by any applicable law or
regulation.
(b) Shares issued upon exercise of this Option without registration of
such shares under the Securities Act of 1933, as amended (the
"Act"), shall be restricted securities subject to the terms of
Rule 144 under the Act. The certificates representing any such
shares shall bear an appropriate legend restricting transfer and
the transfer agent of the Company shall be given stop transfer
instructions with respect to such shares.
(vi) Surrender of Option. Upon exercise of this Option in part, if
-------------------
requested by the Company, the Optionee shall deliver this Option and
any other written agreements executed by the Company and the Optionee
with respect to this Option to the Company who shall endorse or cause
to be endorsed thereon a notation of such exercise and return all
agreements to the Optionee.
3. Non-transferability of Option. This Option may not be transferred by the
-----------------------------
Optionee otherwise than by will or the laws of descent and distribution and
so long as an Optionee lives, only such Optionee or his guardian or legal
representative shall have the right to exercise this Option. The terms of
this option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
4. Term of Option. This Option may not be exercised after the expiration of
--------------
ten (10) years from the Date of Grant of this Option and is subject to
earlier termination as provided in the Plan. This Option may be exercised
during such term only in accordance with the Plan and the terms of this
Option.
5. Law Governing. THIS OPTION IS INTENDED TO BE PERFORMED IN THE STATE OF
-------------
TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF SUCH STATE.
2
<PAGE>
Date of Grant: July 23, 1996
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner
--------------------------
President
ATTEST:
/s/ Don E. McMillen
- --------------------
Secretary
Optionee acknowledges receipt of a copy of the Plan and represents that he is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all the terms and provisions of the Plan. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Committee (as defined in the Plan) upon any questions arising under the Plan.
/s/ Paul A. Tanner
-------------------------------
Optionee
3
<PAGE>
EXHIBIT 10.51
NONINCENTIVE STOCK OPTION AGREEMENT FOR THE
1994 EMPLOYEE STOCK OPTION PLAN FOR
POLYPHASE CORPORATION
A Nonincentive Stock Option (the "Option") for a total of 130,000 shares of
Common Stock, par value $0.01 per share, of Polyphase Corporation (the
"Company") is hereby granted to
JAMES RUDIS
(the "Optionee") at the price determined as provided in, and in all respects
subject to the terms, definitions and provisions of, the 1994 Employee Option
Plan for Polyphase Corporation (the "Plan"), which is incorporated herein by
reference.
1. Option Price. The option price is $2.00 for each share.
------------
2. Exercise of Option. This Option shall be exercisable in accordance with the
------------------
provisions of the Plan as follows:
(i) Schedule of Rights to Exercise. This option shall be exercisable, in
------------------------------
whole or in part, immediately on the date of grant.
(ii) Method of Exercise. This Option shall be exercisable by a written
------------------
notice which shall:
a. state the election to exercise the Option and the number of shares in
respect of which it is being exercised;
b. be signed by the person or persons entitled to exercise the Option,
and if the Option is being exercised by any person or persons other
than the Optionee, be accompanied by proof, satisfactory to the
Company, of the right of such person or persons to exercise the
Option; and
(iii) Payment. Payment of the purchase price of any shares with respect
-------
to which this Option is being exercised shall be by cash, certified
or bank cashier's check, money order, personal check, with shares of
Common Stock of the Company or by a combination of the above
delivered to the Company and their exercise shall not be effective
until such payment is made. If the exercise price is paid in whole or
in part with shares of Common Stock of the Company, the value of the
shares surrendered shall be the Fair Market Value on the date
received by the Company. The certificate or certificates for shares
of Common Stock as to which the Option shall be exercised shall be
registered in the name of the person or persons exercising the
Option.
<PAGE>
(iv) Withholding. The Optionee shall make satisfactory arrangements for
-----------
the withholding of any amounts necessary for withholding in
accordance with applicable federal or state income tax laws.
(v) Restrictions on Exercise.
------------------------
(a) This Option may not be exercised if the issuance of the shares
upon such exercise would constitute a violation of any applicable
federal or state securities or other law or valid regulation. As
a condition to the exercise of this Option, the Company may
require the person exercising this Option to make any
arrangements and undertakings that may be required by any
applicable law or regulation.
(b) Shares issued upon exercise of this Option without registration
of such shares under the Securities Act of 1933, as amended (the
"Act"), shall be restricted securities subject to the terms of
Rule 144 under the Act. The certificates representing any such
shares shall bear an appropriate legend restricting transfer and
the transfer agent of the Company shall be given stop transfer
instructions with respect to such shares.
(vi) Surrender of Option. Upon exercise of this Option in part, if
-------------------
requested by the Company, the Optionee shall deliver this Option and
any other written agreements executed by the Company and the Optionee
with respect to this Option to the Company who shall endorse or cause
to be endorsed thereon a notation of such exercise and return all
agreements to the Optionee.
3. Non-transferability of Option. This Option may not be transferred by the
-----------------------------
Optionee otherwise than by will or the laws of descent and distribution and
so long as an Optionee lives, only such Optionee or his guardian or legal
representative shall have the right to exercise this Option. The terms of
this option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
4. Term of Option. This Option may not be exercised after the expiration of
--------------
ten (10) years from the Date of Grant of this Option and is subject to
earlier termination as provided in the Plan. This Option may be exercised
during such term only in accordance with the Plan and the terms of this
Option.
5. Law Governing. THIS OPTION IS INTENDED TO BE PERFORMED IN THE STATE OF
-------------
TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF SUCH STATE.
2
<PAGE>
Date of Grant: July 23, 1996
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner
---------------------------
President
ATTEST:
/s/ Don E. McMillen
- -------------------------
Secretary
Optionee acknowledges receipt of a copy of the Plan and represents that he is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all the terms and provisions of the Plan. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Committee (as defined in the Plan) upon any questions arising under the Plan.
/s/ J. Rudis
-------------------------------
Optionee
3
<PAGE>
EXHIBIT 10.52
NONINCENTIVE STOCK OPTION AGREEMENT FOR THE
1994 EMPLOYEE STOCK OPTION PLAN FOR
POLYPHASE CORPORATION
A Nonincentive Stock Option (the "Option") for a total of 100,000 shares of
Common Stock, par value $0.01 per share, of Polyphase Corporation (the
"Company") is hereby granted to
WILLIAM E. SHATLEY
(the "Optionee") at the price determined as provided in, and in all respects
subject to the terms, definitions and provisions of, the 1994 Employee Option
Plan for Polyphase Corporation (the "Plan"), which is incorporated herein by
reference.
1. Option Price. The option price is $2.00 for each share.
------------
2. Exercise of Option. This Option shall be exercisable in accordance with the
------------------
provisions of the Plan as follows:
(i) Schedule of Rights to Exercise. This option shall be exercisable,
------------------------------
in whole or in part, immediately on the date of grant.
(ii) Method of Exercise. This Option shall be exercisable by a written
------------------
notice which shall:
a. state the election to exercise the Option and the number of shares
in respect of which it is being exercised;
b. be signed by the person or persons entitled to exercise the Option,
and if the Option is being exercised by any person or persons other
than the Optionee, be accompanied by proof, satisfactory to the
Company, of the right of such person or persons to exercise the
Option; and
(iii) Payment. Payment of the purchase price of any shares with respect
-------
to which this Option is being exercised shall be by cash, certified
or bank cashier's check, money order, personal check, with shares
of Common Stock of the Company or by a combination of the above
delivered to the Company and their exercise shall not be effective
until such payment is made. If the exercise price is paid in whole
or in part with shares of Common Stock of the Company, the value of
the shares surrendered shall be the Fair Market Value on the date
received by the Company. The certificate or certificates for shares
of Common Stock as to which the Option shall be exercised shall be
registered in the name of the person or persons exercising the
Option.
<PAGE>
(iv) Withholding. The Optionee shall make satisfactory arrangements for
-----------
the withholding of any amounts necessary for withholding in
accordance with applicable federal or state income tax laws.
(v) Restrictions on Exercise.
------------------------
(a) This Option may not be exercised if the issuance of the shares
upon such exercise would constitute a violation of any
applicable federal or state securities or other law or valid
regulation. As a condition to the exercise of this Option, the
Company may require the person exercising this Option to make
any arrangements and undertakings that may be required by any
applicable law or regulation.
(b) Shares issued upon exercise of this Option without registration
of such shares under the Securities Act of 1933, as amended
(the "Act"), shall be restricted securities subject to the
terms of Rule 144 under the Act. The certificates representing
any such shares shall bear an appropriate legend restricting
transfer and the transfer agent of the Company shall be given
stop transfer instructions with respect to such shares.
(vi) Surrender of Option. Upon exercise of this Option in part, if
-------------------
requested by the Company, the Optionee shall deliver this
Option and any other written agreements executed by the Company
and the Optionee with respect to this Option to the Company who
shall endorse or cause to be endorsed thereon a notation of
such exercise and return all agreements to the Optionee.
3. Non-transferability of Option. This Option may not be transferred by the
-----------------------------
Optionee otherwise than by will or the laws of descent and distribution and
so long as an Optionee lives, only such Optionee or his guardian or legal
representative shall have the right to exercise this Option. The terms of
this option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
4. Term of Option. This Option may not be exercised after the expiration of
--------------
ten (10) years from the Date of Grant of this Option and is subject to
earlier termination as provided in the Plan. This Option may be exercised
during such term only in accordance with the Plan and the terms of this
Option.
5. Law Governing. THIS OPTION IS INTENDED TO BE PERFORMED IN THE STATE OF
-------------
TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF SUCH STATE.
2
<PAGE>
Date of Grant: July 23, 1996
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner
-------------------
President
ATTEST:
/s/ Don E. McMillen
- --------------------
Secretary
Optionee acknowledges receipt of a copy of the Plan and represents that he is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all the terms and provisions of the Plan. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Committee (as defined in the Plan) upon any questions arising under the Plan.
/s/ W.E. Shatley
------------------
Optionee
3
<PAGE>
EXHIBIT 10.53
NONINCENTIVE STOCK OPTION AGREEMENT FOR THE
1994 EMPLOYEE STOCK OPTION PLAN FOR
POLYPHASE CORPORATION
A Nonincentive Stock Option (the "Option") for a total of 30,000 shares of
Common Stock, par value $0.01 per share, of Polyphase Corporation (the
"Company") is hereby granted to
MICHAEL F. BUCK
(the "Optionee") at the price determined as provided in, and in all respects
subject to the terms, definitions and provisions of, the 1994 Employee Option
Plan for Polyphase Corporation (the "Plan"), which is incorporated herein by
reference.
1. Option Price. The option price is $2.00 for each share.
------------
2. Exercise of Option. This Option shall be exercisable in accordance with the
------------------
provisions of the Plan as follows:
(i) Schedule of Rights to Exercise. This option shall be exercisable, in
------------------------------
whole or in part, immediately on the date of grant.
(ii) Method of Exercise. This Option shall be exercisable by a written
------------------
notice which shall:
a. state the election to exercise the Option and the number of shares in
respect of which it is being exercised;
b. be signed by the person or persons entitled to exercise the Option,
and if the Option is being exercised by any person or persons other
than the Optionee, be accompanied by proof, satisfactory to the
Company, of the right of such person or persons to exercise the
Option; and
(iii) Payment. Payment of the purchase price of any shares with respect
-------
to which this Option is being exercised shall be by cash, certified
or bank cashier's check, money order, personal check, with shares of
Common Stock of the Company or by a combination of the above
delivered to the Company and their exercise shall not be effective
until such payment is made. If the exercise price is paid in whole or
in part with shares of Common Stock of the Company, the value of the
shares surrendered shall be the Fair Market Value on the date
received by the Company. The certificate or certificates for shares
of Common Stock as to which the Option shall be exercised shall be
registered in the name of the person or persons exercising the
Option.
<PAGE>
(iv) Withholding. The Optionee shall make satisfactory arrangements for
-----------
the withholding of any amounts necessary for withholding in
accordance with applicable federal or state income tax laws.
(v) Restrictions on Exercise.
------------------------
(a) This Option may not be exercised if the issuance of the shares
upon such exercise would constitute a violation of any applicable
federal or state securities or other law or valid regulation. As
a condition to the exercise of this Option, the Company may
require the person exercising this Option to make any
arrangements and undertakings that may be required by any
applicable law or regulation.
(b) Shares issued upon exercise of this Option without registration
of such shares under the Securities Act of 1933, as amended (the
"Act"), shall be restricted securities subject to the terms of
Rule 144 under the Act. The certificates representing any such
shares shall bear an appropriate legend restricting transfer and
the transfer agent of the Company shall be given stop transfer
instructions with respect to such shares.
(vi) Surrender of Option. Upon exercise of this Option in part, if
-------------------
requested by the Company, the Optionee shall deliver this Option and
any other written agreements executed by the Company and the Optionee
with respect to this Option to the Company who shall endorse or cause
to be endorsed thereon a notation of such exercise and return all
agreements to the Optionee.
3. Non-transferability of Option. This Option may not be transferred by the
-----------------------------
Optionee otherwise than by will or the laws of descent and distribution and
so long as an Optionee lives, only such Optionee or his guardian or legal
representative shall have the right to exercise this Option. The terms of
this option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
4. Term of Option. This Option may not be exercised after the expiration of
--------------
ten (10) years from the Date of Grant of this Option and is subject to
earlier termination as provided in the Plan. This Option may be exercised
during such term only in accordance with the Plan and the terms of this
Option.
5. Law Governing. THIS OPTION IS INTENDED TO BE PERFORMED IN THE STATE OF
-------------
TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF SUCH STATE.
2
<PAGE>
Date of Grant: July 23, 1996
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner
--------------------------
President
ATTEST:
/s/ Don E. McMillen
- -------------------------------
Secretary
Optionee acknowledges receipt of a copy of the Plan and represents that he is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all the terms and provisions of the Plan. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Committee (as defined in the Plan) upon any questions arising under the Plan.
/s/ Michael F. Buck
------------------------------
Optionee
3
<PAGE>
EXHIBIT 10.54
NONINCENTIVE STOCK OPTION AGREEMENT FOR THE
1994 EMPLOYEE STOCK OPTION PLAN FOR
POLYPHASE CORPORATION
A Nonincentive Stock Option (the "Option") for a total of 30,000 shares of
Common Stock, par value $0.01 per share, of Polyphase Corporation (the
"Company") is hereby granted to
GEORGE R. SCHRADER
(the "Optionee") at the price determined as provided in, and in all respects
subject to the terms, definitions and provisions of, the 1994 Employee Option
Plan for Polyphase Corporation (the "Plan"), which is incorporated herein by
reference.
1. Option Price. The option price is $2.00 for each share.
------------
2. Exercise of Option. This Option shall be exercisable in accordance with the
------------------
provisions of the Plan as follows:
(i) Schedule of Rights to Exercise. This option shall be exercisable, in
------------------------------
whole or in part, immediately on the date of grant.
(ii) Method of Exercise. This Option shall be exercisable by a written
------------------
notice which shall:
a. state the election to exercise the Option and the number of shares in
respect of which it is being exercised;
b. be signed by the person or persons entitled to exercise the Option,
and if the Option is being exercised by any person or persons other
than the Optionee, be accompanied by proof, satisfactory to the
Company, of the right of such person or persons to exercise the
Option; and
(iii) Payment. Payment of the purchase price of any shares with respect
-------
to which this Option is being exercised shall be by cash, certified or
bank cashier's check, money order, personal check, with shares of
Common Stock of the Company or by a combination of the above delivered
to the Company and their exercise shall not be effective until such
payment is made. If the exercise price is paid in whole or in part
with shares of Common Stock of the Company, the value of the shares
surrendered shall be the Fair Market Value on the date received by the
Company. The certificate or certificates for shares of Common Stock as
to which the Option shall be exercised shall be registered in the name
of the person or persons exercising the Option.
<PAGE>
(iv) Withholding. The Optionee shall make satisfactory arrangements for
-----------
the withholding of any amounts necessary for withholding in accordance
with applicable federal or state income tax laws.
(v) Restrictions on Exercise.
------------------------
(a) This Option may not be exercised if the issuance of the shares
upon such exercise would constitute a violation of any applicable
federal or state securities or other law or valid regulation. As a
condition to the exercise of this Option, the Company may require
the person exercising this Option to make any arrangements and
undertakings that may be required by any applicable law or
regulation.
(b) Shares issued upon exercise of this Option without registration of
such shares under the Securities Act of 1933, as amended (the
"Act"), shall be restricted securities subject to the terms of
Rule 144 under the Act. The certificates representing any such
shares shall bear an appropriate legend restricting transfer and
the transfer agent of the Company shall be given stop transfer
instructions with respect to such shares.
(vi) Surrender of Option. Upon exercise of this Option in part, if
-------------------
requested by the Company, the Optionee shall deliver this Option and
any other written agreements executed by the Company and the Optionee
with respect to this Option to the Company who shall endorse or cause
to be endorsed thereon a notation of such exercise and return all
agreements to the Optionee.
3. Non-transferability of Option. This Option may not be transferred by the
-----------------------------
Optionee otherwise than by will or the laws of descent and distribution and
so long as an Optionee lives, only such Optionee or his guardian or legal
representative shall have the right to exercise this Option. The terms of
this option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
4. Term of Option. This Option may not be exercised after the expiration of
--------------
ten (10) years from the Date of Grant of this Option and is subject to
earlier termination as provided in the Plan. This Option may be exercised
during such term only in accordance with the Plan and the terms of this
Option.
5. Law Governing. THIS OPTION IS INTENDED TO BE PERFORMED IN THE STATE OF
-------------
TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF SUCH STATE.
2
<PAGE>
Date of Grant: July 23, 1996
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner
--------------------------
President
ATTEST:
/s/ Don E. McMillen
- ------------------------------
Secretary
Optionee acknowledges receipt of a copy of the Plan and represents that he is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all the terms and provisions of the Plan. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Committee (as defined in the Plan) upon any questions arising under the Plan.
/s/ George R. Schrader
-------------------------------
Optionee
3
<PAGE>
EXHIBIT 10.55
NONINCENTIVE STOCK OPTION AGREEMENT FOR THE
1994 EMPLOYEE STOCK OPTION PLAN FOR
POLYPHASE CORPORATION
A Nonincentive Stock Option (the "Option") for a total of 30,000 shares of
Common Stock, par value $0.01 per share, of Polyphase Corporation (the
"Company") is hereby granted to
PAUL A. TANNER, JR.
(the "Optionee") at the price determined as provided in, and in all respects
subject to the terms, definitions and provisions of, the 1994 Employee Option
Plan for Polyphase Corporation (the "Plan"), which is incorporated herein by
reference.
1. Option Price. The option price is $2.00 for each share.
------------
2. Exercise of Option. This Option shall be exercisable in accordance with the
------------------
provisions of the Plan as follows:
(i) Schedule of Rights to Exercise. This option shall be exercisable,
------------------------------
in whole or in part, immediately on the date of grant.
(ii) Method of Exercise. This Option shall be exercisable by a written
------------------
notice which shall:
a. state the election to exercise the Option and the number of shares
in respect of which it is being exercised;
b. be signed by the person or persons entitled to exercise the Option,
and if the Option is being exercised by any person or persons other
than the Optionee, be accompanied by proof, satisfactory to the
Company, of the right of such person or persons to exercise the
Option; and
(iii) Payment. Payment of the purchase price of any shares with respect
-------
to which this Option is being exercised shall be by cash, certified
or bank cashier's check, money order, personal check, with shares
of Common Stock of the Company or by a combination of the above
delivered to the Company and their exercise shall not be effective
until such payment is made. If the exercise price is paid in whole
or in part with shares of Common Stock of the Company, the value of
the shares surrendered shall be the Fair Market Value on the date
received by the Company. The certificate or certificates for shares
of Common Stock as to which the Option shall be exercised shall be
registered in the name of the person or persons exercising the
Option.
<PAGE>
(iv) Withholding. The Optionee shall make satisfactory arrangements for
-----------
the withholding of any amounts necessary for withholding in accordance
with applicable federal or state income tax laws.
(v) Restrictions on Exercise.
------------------------
(a) This Option may not be exercised if the issuance of the shares
upon such exercise would constitute a violation of any applicable
federal or state securities or other law or valid regulation. As a
condition to the exercise of this Option, the Company may require
the person exercising this Option to make any arrangements and
undertakings that may be required by any applicable law or
regulation.
(b) Shares issued upon exercise of this Option without registration of
such shares under the Securities Act of 1933, as amended (the
"Act"), shall be restricted securities subject to the terms of
Rule 144 under the Act. The certificates representing any such
shares shall bear an appropriate legend restricting transfer and
the transfer agent of the Company shall be given stop transfer
instructions with respect to such shares.
(vi) Surrender of Option. Upon exercise of this Option in part, if
-------------------
requested by the Company, the Optionee shall deliver this Option
and any other written agreements executed by the Company and the
Optionee with respect to this Option to the Company who shall
endorse or cause to be endorsed thereon a notation of such
exercise and return all agreements to the Optionee.
3. Non-transferability of Option. This Option may not be transferred by the
-----------------------------
Optionee otherwise than by will or the laws of descent and distribution and
so long as an Optionee lives, only such Optionee or his guardian or legal
representative shall have the right to exercise this Option. The terms of
this option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
4. Term of Option. This Option may not be exercised after the expiration of
--------------
ten (10) years from the Date of Grant of this Option and is subject to
earlier termination as provided in the Plan. This Option may be exercised
during such term only in accordance with the Plan and the terms of this
Option.
5. Law Governing. THIS OPTION IS INTENDED TO BE PERFORMED IN THE STATE OF
-------------
TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF SUCH STATE.
2
<PAGE>
Date of Grant: July 23, 1996
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner
-------------------
President
ATTEST:
/s/ Don E. McMillen
- --------------------
Secretary
Optionee acknowledges receipt of a copy of the Plan and represents that he is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all the terms and provisions of the Plan. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Committee (as defined in the Plan) upon any questions arising under the Plan.
/s/ Paul A. Tanner, Jr.
------------------------
Optionee
3
<PAGE>
POLYPHASE CORPORATION Exhibit 21.1
LIST OF SUBSIDIARIES
Name State of Incorporation
- ---- ----------------------
Polyphase Instrument Company Pennsylvania
Overhill Farms, Inc. Nevada
Phasenet, Inc. Nevada
Dallas Parkway Properties, Inc. Texas
Texas Timberjack, Inc. Texas
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-85334) of Polyphase Corporation and in the related Prospectus
and in the Registration Statements (Form S-8 No. 333-03333, No. 33-82008, No.
33-75860 and No. 33-72458) pertaining to the 1994 Stock Option Plan and various
stock option agreements of our report dated December 15, 1996 except for Notes
3, 9, 10, 13 and 14 as to which the date is June 9, 1997, with respect to
the consolidated financial statements and schedules of Polyphase Corporation
included in this Annual Report (Form 10-K) for the year ended
September 30, 1996.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Dallas, Texas
June 9, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-03333, 33-82008,33-75860 and 33-72458) of
Polyphase Corporation of our report, which includes an explanatory paragraph
about the Company's ability to continue as a going concern, dated
January 4, 1995, except for the last paragraph of such report as to which the
date is June 10, 1997, appearing on page F-3 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Dallas, Texas
June 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 280,969
<SECURITIES> 0
<RECEIVABLES> 20,064,635
<ALLOWANCES> 519,104
<INVENTORY> 28,027,779
<CURRENT-ASSETS> 51,049,719
<PP&E> 13,620,604
<DEPRECIATION> 4,212,872
<TOTAL-ASSETS> 94,178,521
<CURRENT-LIABILITIES> 54,086,017
<BONDS> 0
131,970
0
<COMMON> 2,500
<OTHER-SE> 23,863,930
<TOTAL-LIABILITY-AND-EQUITY> 94,178,521
<SALES> 149,540,785
<TOTAL-REVENUES> 149,540,785
<CGS> 120,865,827
<TOTAL-COSTS> 22,009,991
<OTHER-EXPENSES> 22,009,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,389,926
<INCOME-PRETAX> 1,854,278
<INCOME-TAX> 1,593,542
<INCOME-CONTINUING> (242,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (392,212)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
