<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, 1999
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.)
4800 Broadway, Suite A
Addison, Texas 75001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 386-0101
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 X No____
---
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 3, 1999, was
approximately $6.7 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 3, 1999, the registrant had issued and outstanding 17,812,464 shares of
common stock, $.01 par value.
==============================================================================
<PAGE>
POLYPHASE CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C>
Part I
Item 1 Description of Business 3
Item 2 Description of Property 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation 13
Item 7A Quantitative and Qualitative Disclosures about Market Risk 18
Item 8 Financial Statements 18
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 18
Part III
Item 10 Directors and Executive Officers of the Registrant 19
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners and Management 24
Item 13 Certain Relationships and Related Transactions 25
Part IV
Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K 28
</TABLE>
2
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PART I
ITEM 1. Description of Business.
-----------------------
General
The Company is a diversified holding company that, through its subsidiaries,
currently operates in two industry segments: the food segment, which produces
high quality entrees, plated meals, soups, sauces and poultry, meat and fish
specialties (the "Food Group"); and the forestry segment, which distributes,
leases and provides financing for industrial and logging equipment and also
participates in related timber and sawmill operations (the "Forestry Group").
The Company's transformer manufacturing operation, which manufactures and
markets electronic transformers, inductors and filters (the "Transformer Group")
was discontinued in fiscal 1999, as a result of the sale of a wholly-owned
subsidiary, Polyphase Instrument Co. ("PIC"). 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.
Acquisitions
In connection with the Company's program of diversification and expansion, the
more significant acquisitions consummated by the Company over the past five
years were:
Texas Timberjack, Inc. ("Timberjack" or "TTI") In June 1994, the Company
- --------------------------------------------
acquired all of the outstanding capital stock of TTI from Harold Estes, current
President of TTI. Timberjack, 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 for consideration of approximately $4,000,000 in cash, a $10,000,000
promissory note payable to the order of Mr. Estes, and 100,000 shares of the
Company's Series A Preferred Stock, which were subsequently converted into
2,000,000 shares of common stock. Subsequent to June 1994, the Company and Mr.
Estes have modified, renewed and extended the promissory note payable to Mr.
Estes. As of September 30, 1999 the promissory note had a balance of $17,914,842
(including accrued and unpaid interest) and was due December 15, 1999. The note
was modified, renewed and extended through October 10, 2002. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation-
Liquidity and Capital Resources."
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 a cash payment
to the seller of $31.3 million plus the assumption by the Company of certain
liabilities of the acquired business. Overhill's operations are located in
Culver City, California.
Disposition
Polyphase Instrument Co. ("PIC") Effective September 30, 1999, the Company sold
- -------------------------------
its wholly-owned subsidiary, PIC, to an investment group headed by management of
that company. The transaction was completed as a sale of 100% of the outstanding
capital stock of PIC for total consideration of approximately $2.8 million,
consisting of $1.8 million cash and a subordinated note receivable for $1.0
million. As discussed in Note 15 to the Company's consolidated financial
statements, the Company recorded a loss from discontinued operations of
approximately $1.2 million in 1999 as a result of this transaction.
3
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Business Strategy
Management believes the Company's future growth opportunities will be
concentrated in the two core operations described above, the Food Group and
Forestry Group. The business environment of the food industry is mandating
consolidation of smaller regional food processing companies to enhance operating
efficiencies and provide service to mid-size and large national accounts. The
Food Group is evaluating selected acquisition candidates which can complement
the operations of Overhill by providing one or more of the following selected
criteria such as: regional brand labels, additional production capacity,
geographical diversification, new markets and/or new customers. The Forestry
Group continues to develop its internal growth through product line extensions
and geographic expansions. It is the intention of TTI to offer a wider range of
products to both its existing customer base and to "non-logging" companies in
TTI's marketing area using the Company's existing infrastructure. TTI's long
term objective is to continue to diversify with synergistic activities and to
move forward on reducing costs to defray the cyclical effects of the timber
market.
To achieve future growth within the Company, Management has identified the
following basic initiatives:
1) Continue to provide high quality products and superior services to our
customers.
2) Seek internal growth by developing new products, adding customers,
leveraging its geographic presence and securing distribution rights to
additional products.
3) Seek additional growth through strategic acquisitions of complementary
businesses with strong management, solid product lines and growth
potential.
Operating Segments
The following table sets forth business segment information with respect to the
percentage of net sales and operating income contributed by each segment for the
years ended September 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
Food Group 71% 64% 63%
Forestry Group 29% 33% 34%
Transformer Group - 3% 3%
---- ---- -----
Total 100% 100% 100%
Operating Income
Food Group 83% 55% 53%
Forestry Group 17% 45% 48%
Transformer Group - - (1%)
---- ---- -----
Total 100% 100% 100%
</TABLE>
- --------------------------------------------------------------------------------
Reference is made to Note 17 to the Company's consolidated statements for
revenues, operating profits or losses and identifiable assets attributable to
each industry segment for each of the last three fiscal years.
4
<PAGE>
Food Group
Products and Services - 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 specialties. Overhill is positioned as a
provider of custom prepared foods to a number of prominent customers such as
American Airlines, Jenny Craig, Albertsons, Carl's Jr., Jack in the Box, Panda
Express and King's Hawaiian. Historically, Overhill has served four industry
segments: airlines, health care, food service and retail.
Sales and Marketing - Overhill markets its products through an internal sales
force and outside food brokers. Overhill believes that the airline industry,
while mature, represents an area for moderate growth potential in the future.
The Company has re-focused its attention on domestic carriers not currently
being served to any great extent by Overhill and on foreign carriers who are
increasingly choosing frozen entrees as part of their in-flight feeding
programs. The Company projects that its health care business will diminish
somewhat in the near term. The Company is predominantly focusing on the retail,
club stores and food service markets as areas of significant future growth. As a
result, Overhill management has realigned its sales force and redirected its
marketing efforts to concentrate on these markets. During fiscal 1999, Overhill
continued to concentrate on building on and increasing the profitability of
existing accounts while establishing new relationships with companies such as
Panda Express, Albertson's and Denny's.
Approximately 54% of Overhill's sales in fiscal 1999 were derived from three
customers, Jenny Craig (20%), American Airlines (18%) and King's Hawaiian (18%).
On a consolidated basis each of these three customers represented approximately
12-14% of the Company's total sales. Although the Company's relationships with
these customers remains strong, there can be no assurance that these
relationships will continue. During fiscal 1999, the Company has made a
concerted effort to sign multi-year supply agreements with its major customers.
Major contracts that were signed or extended in fiscal 1999 include Panda
Express, Jenny Craig and Carl's Jr. The Company is currently negotiating a three
year agreement with King's Hawaiian. A decline in the sales of Overhill's
products to these 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 and food service markets as described
above.
Manufacturing and Sourcing - Overhill's manufacturing operations are located in
three separate facilities near Los Angeles, California. The operations are labor
intensive, generally requiring semi-skilled employees. All manufacturing
employees are unionized with contracts covering each plant. Such contracts are
due to expire at various times over the next three 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. In fiscal 1999, the
plants operated collectively at approximately 80-85% of capacity.
The Company's ability to economically produce large quantities of its products,
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. Raw
materials, packaging for production and finished goods are stored on site or in
a public frozen food storage facility until shipment is required.
Backlog - Overhill typically delivers products directly from finished goods
inventory, and as such does not maintain a large backlog of unfilled purchase
orders. While at any given time there may be a small backlog of orders, such
backlog is not material in relation to total sales, nor is it necessarily
indicative of
5
<PAGE>
trends in its business. Orders are subject to changes in quantities or to
cancellation with thirty days notice without penalties to customers.
Product Development - Overhill maintains a comprehensive, fully staffed test
kitchen, which formulates recipes and upgrades specific products for current
customers and establishes production and quality standards. Products are
developed based upon either customers' specifications, conventional recipes or
new product developments. Overhill is continuously developing recipes as
customers' tastes and client requirements change. Overhill also maintains a
quality control department for testing and quality control. The Company
manufactures products in the retail and food service areas with branded and
private label entrees.
Competition - Overhill's food products, consisting primarily of poultry, pasta,
beef and assorted related products, compete with products produced by numerous
regional and national firms. Many of these companies are divisions of larger
fully integrated companies such as Tyson Foods and ConAgra, which have greater
financial, technical, human and marketing resources than the Company.
Competition is intense with most firms producing similar products for the food
service and retail industries. Competitive factors include price, product
quality, product development, customer service and, on a retail basis, name
recognition. There can be no assurance that the Company will compete
successfully against existing companies or new entrants to the marketplace.
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
Products and Services - The Forestry Group, through Timberjack and its
majority-owned subsidiaries, is a distributor of industrial and logging
equipment with investments in related timber and sawmill operations. TTI has
four locations in eastern Texas; TTI's headquarters are located in Lufkin, with
smaller satellite showrooms and repair facilities located in 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.
Subsequent to September 30, 1999, TTI signed an agreement to distribute New
Holland construction 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 into Western Louisiana.
TTI operates in a fragmented industry where its major competition is from
distributors and dealers of Caterpillar and John Deere equipment. TTI estimates
that in Eastern Texas it currently holds approximately 60% of the shear (a
machine that cuts timber) market, 35% of the skidder (a machine that transports
logs out of the forest onto a loader) market and 70% of the loader (a machine
that stacks trees onto trucks) market.
Sales and Marketing - Timberjack 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 several
branch managers supply technical and operational support at the Lufkin
headquarters, while nine salesman 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 44% of TTI's equipment sales during fiscal 1999 are from new
equipment sold to companies involved in the forestry industries. Additional
revenues are derived from sales of used equipment (13%), servicing of equipment
(7%), sales of parts (22%) and financing equipment sales (14%). No single
customer accounts for more than 10% of TTI's sales. Equipment sales financed by
6
<PAGE>
TTI are typically for periods ranging from 12 to 24 months at interest rates
ranging from 12.5% to 18% per annum.
Backlog - As a dealer, servicer and financier of forestry equipment, TTI does
not maintain a backlog of orders. Equipment ordered that is not in inventory
takes approximately one to six weeks to be shipped to a customer from the
manufacturer or another distributor.
Product Development - TTI does not develop products for sale to the public. TTI
relies primarily upon its suppliers (Timberjack, Blount, New Holland, Hyundai)
for a majority of its new units and parts.
Competition - Competition in the forestry segment is highly fragmented in the
Eastern Texas and Western Louisiana areas where TTI principally operates.
Because of its lengthy historical presence in these regions, 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 areas. 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.
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 interests in its products by
entering into non-disclosure agreements with customers.
The Company has registered the trademarks "Polyphase" and "Overhill Farms" in
the United States Patent and Trademark Office.
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 1997, the Company
implemented a Hazard Analysis Critical Point Plan to ensure proper handling of
all food items.
The Forestry Group is 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
7
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substantial compliance with all applicable laws and regulations relating to the
operations of facilities.
Employees
As of September 30, 1999, the Company had approximately 912 employees as
follows: approximately 750 full-time employees in the Food Group; 159 full-time
employees in the Forestry Group; and 3 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 a profit sharing plan for its employees.
Safe Harbor Statement
The nature of the Company's operations, and the environment in which it
operates, subjects the Company to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company notes the following factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Forward looking statements
contained in this document include, but are not limited to Year 2000 issues
(particularly with regard to the Company's business partners and suppliers), the
amount of future capital expenditures, and the possible uses of proceeds from
any future borrowings under the Company's currently effective credit facilities.
Factors which could cause results to differ include, but are not limited to:
changes in the Company's business environment, including actions of competitors
and changes in customer preferences; changes in governmental laws and
regulations, including income taxes; market demand for new and existing
products; and raw material pricing.
ITEM 2. Description of Property.
-----------------------
Corporate Headquarters
The Company leases an approximately 4,000 square foot facility which serves as
the corporate headquarters. The office space is located at 4800 Broadway, Suite
A, Addison, Texas 75001 and is leased at a basic rent of $4,100 per month. The
lease which began in February 1998 has a five year term with an option to buy
out the last two years for a nominal amount.
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 a 7,900 square foot office in Culver City,
California. While Overhill believes that the existing facilities are adequate to
meet its requirements in the foreseeable future, the Company is currently
reviewing the cost effectiveness of consolidating some manufacturing and
administrative functions and is actively seeking a facility on the east coast to
more cost effectively meet current and future customer requirements.
Forestry Group
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas, a
building in Cleveland,
8
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Texas and leases a building in Atlanta, Texas. The largest building in Lufkin
has 38,500 square feet, which is used for administrative offices, showroom,
parts sales and shop area. The remaining buildings have 3,600 and 4,200 square
feet, respectively. The Jasper, Cleveland and Atlanta buildings have
approximately 10,000, 6,700 and 7,500 square feet, respectively, which are used
for sales offices, parts sales and shop areas. TTI also leases six buildings on
68 acres in Bon Weir, Texas for a sawmill operation. The sawmill is leased at a
basic rent of $19,000 per month, which includes certain equipment, with an
option to purchase the land, buildings and equipment for $1,525,000 in March
2000.
ITEM 3. Legal Proceedings.
-----------------
During fiscal 1997, five substantially identical complaints were filed in the
United States District Court for the District of Nevada against the Company and
certain of its officers and directors. The complaints each sought certification
as a class action and asserted liability based on alleged misrepresentations
that the plaintiffs claimed resulted in the market price of the Company's stock
being artificially inflated. The defendants filed motions to dismiss in each of
the lawsuits. Without certifying the cases as class actions, the District Court
consolidated the cases into a single action. In June 1998, the District Court
ordered the plaintiffs to file an amended complaint within thirty days, finding
that their original allegations failed to state a claim under the federal
securities laws. The plaintiffs then filed a motion for re-consideration of the
Court's ruling. The defendants opposed that motion, and the Court denied the
plaintiff's motion for reconsideration. The plaintiffs did not file an amended
complaint within the specified thirty day time period, but subsequently filed an
amended complaint, claiming that they were entitled to additional time within
which to file an amended pleading by reason of a scheduling order issued by the
Court. The defendants moved to dismiss the case on the grounds that the amended
complaint was filed too late and failed to state a claim for securities fraud
under applicable legal authorities. The plaintiffs have sought a stay of the
Court's consideration of defendants' motion to dismiss, asserting that there is
uncertainty as to the legal standards to be applied in securities fraud cases.
The Court has not ruled on plaintiff's motion to stay or defendants' motion to
dismiss. However, management believes (based upon advice of legal counsel) that
this litigation will be resolved without material effect on the Company's
financial condition, results of operations or cash flows.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based on
the advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial condition, results of
operations or cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the Company's
fiscal year.
9
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
---------------------------------------------------------------------
The Common stock is listed on the American Stock Exchange, Inc. 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>
Fiscal 1999 High Low
----------- ------------ ------------
<S> <C> <C>
Quarter from October 1, 1998
to December 31, 1998 $ 0.5625 $ 0.2500
Quarter from January 1, 1999
to March 31, 1999 $ 0.5625 $ 0.3125
Quarter from April 1, 1999
to June 30, 1999 $ 0.5625 $ 0.3125
Quarter from July 1, 1999
to September 30, 1999 $ 0.8750 $ 0.3125
<CAPTION>
Fiscal 1998 High Low
----------- ------------ ------------
<S> <C> <C>
Quarter from October 1, 1997
to December 31, 1997 $ 1.8750 $ 0.7500
Quarter from January 1, 1998
to March 31, 1998 (2) $ 1.0625 $ 0.5000
Quarter from April 1, 1998
to June 30, 1998 $ 1.1875 $ 0.6250
Quarter from July 1, 1998
to September 30, 1998 $ 0.7500 $ 0.3125
<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 March 31, 1997 (1) $ 5.5000 $ 3.8125
Quarter from April 1, 1997
to June 30, 1997 (1) $ 2.6250 $ 1.2500
Quarter from July 1, 1997
to September 30, 1997 $ 2.5000 $ 0.8750
</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 its
Annual Report on Form 10-K for the fiscal year ended September 30, 1996. On June
16, 1997 the Form 10-K and the Forms 10-Q for the quarters ended December 31,
1996 and March 31, 1997, were filed and trading resumed on June 17, 1997.
(2) On January 14, 1998, trading in the Company's stock was temporarily halted
pending the Company's filing of its Annual Report on Form 10-K for the fiscal
year ended September 30, 1998. The stock resumed trading on February 23, 1998.
10
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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.
As of September 30, 1999, the Company estimates that there were approximately
3,200 beneficial owners of the Company's common stock, represented by 213
holders of record.
Recent Sales of Unregistered Equity Securities
In November 1995, the Company sold in a private transaction with Infinity
Investors, Ltd. ("Infinity") for $2,500,000 cash, 250,000 shares of Series A-3
Preferred Stock having an aggregate redemption value of $2,500,000 and
convertible into Common stock as provided in the Certificate of Designations for
the Series A-3 Preferred Stock. During the years ended September 30, 1998 and
1999, the Company issued 197,586 and 2,302,414 shares of common stock,
respectively, in partial satisfaction of Infinity's conversion rights.
Subsequent to September 30, 1999, the Company agreed to repurchase Infinity's
remaining Series A-3 Preferred Stock.
In August 1997, the Company sold in a private transaction with Black Sea
Investments, Ltd. ("Black Sea") for net proceeds of approximately $734,000 cash,
7,500 shares of Series F 6% Convertible Preferred Stock having an aggregate
redemption value of $750,000 and convertible into Common stock at a variable
rate equal to 75% of the average closing market price for the Company's common
stock for the previous five trading days prior to conversion. During the year
ended September 30, 1998, the Company issued a total of 1,008,355 shares of
common stock in satisfaction of Black Sea's conversion rights.
The shares of Preferred Stock described above were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), and were issued by
the Company in reliance on exemptions to the Securities Act. With respect to the
shares of Series A-3 Preferred Stock issued to Infinity, such shares were issued
pursuant to the exemption provided by Section 4(2) of the Securities Act.
Infinity was in compliance with the necessary requirements of Section 4(2) to
receive such exemption. Of the shares of Series A-3 Preferred Stock that were
issued, no such shares were issued to any party other than Infinity.
With respect to the shares of Series F 6% Convertible Preferred Stock issued to
Black Sea, such shares were issued pursuant to the exemption provided by
Regulation S of the Securities Act. Black Sea is a non United States person as
that term is defined in the Securities Act. Of the shares of the Series F 6%
Convertible Preferred Stock that were issued, no such shares were issued to any
party other than Black Sea.
In December 1997, in connection with the refinancing of certain indebtedness to
Merrill Lynch World Income Fund, Inc. and Convertible Holdings, Inc.
(collectively "Merrill Lynch"), the Company issued warrants covering a total of
420,000 shares of the Company's Common Stock. The warrants issued to Merrill
Lynch covered 210,000 shares exercisable at $.01 per share (the "Penny
Warrants") and an additional 210,000 shares exercisable at $1.125 per share. The
Penny Warrants were exercised and 210,000 shares of Common Stock were issued in
May 1998. The shares of Common Stock issued to Merrill Lynch were not registered
under the Securities Act, and were issued pursuant to the exemption provided by
Section 4(2) of the Securities Act. Merrill Lynch was in compliance with the
necessary requirements of Section 4(2) to receive such exemption.
11
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ITEM 6. Selected Financial Data
-----------------------
The following table sets forth 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: 1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ 158,308 $ 141,398 $ 148,378 $ 145,992 $ 98,433
Operating Income 8,494 7,633 6,651 6,588 6,449
Net Income (Loss) Before
Discontinued Operations and
Extraordinary Item (415) 277 (18,349) (280) 2,999
Net Income (Loss) $ (1,598) $ (329) $ (18,825) $ (242) $ 3,286
Per Share Data - Basic and Diluted:
Net Income (Loss) Before
Discontinued Operations and
Extraordinary Item $ (.03) $ .01 $ (1.38) $ (.03) $ .24
Discontinued Operations (.07) - (.03) - .02
Extraordinary Item - (.04) - - -
------------ ------------ ----------- ------------ -----------
Net Income (Loss) $ (.10) $ (.03) $ (1.41) $ (.03) $ .26
============ ============ =========== ============ ===========
Weighted Average Shares
Outstanding - Basic 16,947,195 14,552,462 13,632,357 13,722,552 12,745,701
============ ============ =========== ============ ===========
Weighed Average Shares
Outstanding - Diluted 16,947,195 16,452,433 13,632,357 13,722,552 12,745,701
============ ============ =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
As of September 30
- -----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Total Assets $ 83,522 $ 80,843 $ 71,321 $ 93,330 $ 87,360
Long-Term debt 33,593 29,221 23,272 - 27,080
Total Liabilities 76,647 73,042 61,920 68,142 65,536
Accumulated Deficit (22,889) (21,200) (20,717) (1,488) (1,095)
Stockholders' Equity 5,450 6,601 7,402 23,998 21,137
</TABLE>
12
<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, any 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.
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998
For the year ended September 30, 1999 the Company's revenues from continuing
operations increased $16,910,000 (12%) to $158,308,000 as compared to
$141,398,000 for the year ended September 30, 1998. The increase was due to
revenue gains in the Company's Overhill Farms subsidiary. Gross margins, on a
consolidated basis, remained constant at 18% with a decrease in margins at TTI
offset by improvements at Overhill Farms. During the period, operating income
increased 11% to $8,494,000 for fiscal 1999 from $7,633,000 last year.
Other income and expenses amounted to a net expense of $8,329,000 in 1999 as
compared to $7,299,000 in 1998. The prior year amounts were reported net of a
one time gain of $988,000 from the sale of the Company's office building in
December 1997.
The net loss for the year of $1,598,000, increased by $1,269,000 from a loss of
$329,000 reported in the prior year. The net loss for 1999 included charges for
$300,000 related to a tax assessment against TTI, $225,000 of accretion related
to Overhill's warrants and $1,183,000 related to the discontinued operations of
PIC. The 1998 amount was reported net of an extraordinary charge of $616,000,
related to the early extinguishment of Overhill debt.
The Food Group's revenues increased $19,147,000 (21%) to $112,496,000 for the
period ending September 30, 1999 as compared to $93,349,000 the same period last
year. Revenue gains were made in three of the four market segments the Company
serves with the largest gains coming from the food service segment. Increases in
this area were driven by the acquisition of two new national accounts (Panda
Express and Denny's) as well as increases from existing accounts. Gross margins
for the current period for the Food Group rose to 18% as compared to 15.8% for
the previous year. Operating income for fiscal 1999 increased by $2,408,000
(48%) to $7,384,000 as compared to $4,976,000 for fiscal 1998. Improvements in
gross margins and operating income are attributed to a cost reduction program
initiated in 1999 involving outsourcing some of the Company's production,
improved purchasing practices and the addition of new profitable accounts.
Income before income taxes for the Food Group increased to $1,647,000 for fiscal
1999 as compared to a loss before income taxes of $180,000 in the prior fiscal
year.
For the year ended September 30, 1999, revenues for the Forestry Group decreased
$2,237,000 (5%) to $45,812,000 as compared to $48,049,000 for the fiscal year
ended September 30, 1998. Gross margins decreased from almost 22% in fiscal 1998
to 18% in fiscal 1999. Operating income for the Forestry Group in fiscal 1999
was $1,490,000 as compared to $4,077,000 for the prior year. The decrease in
gross margins and operating income for the current period are primarily the
result of a change in product mix sold by the group in fiscal 1999. During the
period, sales of logging equipment, particularly used equipment, which
historically yields relatively higher percentage gross profits, decreased
markedly. Total equipment sales were down approximately 24% as compared to
fiscal 1998. These decreased sales were partially offset by gains in sales of
raw wood and timber products which brought lower gross margins than historical
equipment sales.
13
<PAGE>
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30,
1997
For the year ended September 30, 1998, the Company's revenues decreased
$6,980,000 (5%) to $141,398,000 from $148,378,000 for the year ended September
30, 1997. On a consolidated basis, gross margins increased from 17% to 18%
during the period, resulting in an increase in operating income. Operating
income for the year ended September 30, 1998 increased $982,000 (15%) to
$7,633,000 from $6,651,000 during the comparable prior period. The Company
attributes the higher gross margins to the elimination of lower margin business
and improved purchasing of raw materials and inventory. Operating income
improved primarily from improved gross margins and the reduction of salaries and
other general and administrative expenses at the corporate level.
For the year ended September 30, 1998, the Company's interest expense increased
$1,701,000 (24%) to $8,830,000 from $7,129,000 in fiscal 1997. The increase in
interest is primarily due to additional borrowings and increased charges on the
Company's indebtedness to Mr. Harold Estes.
For the year ended September 30, 1998, the Company recorded a tax expense of
$57,000 primarily related to state tax liabilities. The benefit in 1997 resulted
primarily from the statutory tax benefit of the $18.7 million loss by the
Company, reduced by the valuation allowance relating to the portion of the tax
benefits that the Company was not able to utilize through carryback of such
losses to prior years.
Net income before discontinued operations and extraordinary item for the year
ended September 30, 1998 increased to $277,000 from a net loss before
discontinued operations and extraordinary item of $18,349,000 in fiscal 1997.
Net income for the fiscal 1998 period included a one time gain of $988,000 from
the sale of the Company's corporate headquarters in December 1997. Net income
for the fiscal 1998 was adversely affected by an extraordinary expense of
$616,000 relating to the early extinguishment of debt associated with the
refinancing of certain indebtedness by Overhill Farms.
The Food Group's revenues decreased $2,828,000 (3%) to $93,349,000 in fiscal
1998 from $96,177,000 in fiscal 1997. The decrease in revenue is primarily due
to the intentional paring of lower margin business and the aggressive bidding by
competitors, which if met, would have reduced profitability below minimum
requirements. During the year, the Company worked closely with American Airlines
and Jenny Craig to improve product selection and quality resulting in increased
sales to those customers of $900,000 and $1.1 million respectively. The food
service segment revenues decreased primarily because of decisions to forego
sales due to profitability considerations. Carl's Jr., Jack in the Box and Koo
Koo Roo continue to be key food service customers while Panda Express and
Denny's, new in fiscal 1998, are expected to be significant accounts in the near
future. Gross margins improved during the year due primarily to selectivity of
sales, reduction in manufacturing expenses from capital investments and
improvements in purchases of raw materials. Operating expenses increased
primarily from higher general and administrative costs, professional fees and
amortization associated with the refinancing of debt.
The Forestry Group's revenues decreased $4,153,000 (8%) to $48,049,000 from
$52,202,000 in fiscal 1997. The decrease in revenue is primarily attributable to
drier weather conditions in East Texas, reducing demand for new equipment. Gross
margins increased due to a change in the sales mix from new equipment to used
equipment sales and parts and service. Operating expenses increased $843,000
during the fiscal year resulting in a $420,000 (9%) decrease in operating income
for the year ended September 30, 1998. The operating expense increase resulted
from TTI's investment in a controlling interest of two forestry products
businesses. In the third quarter of fiscal 1998, Timberjack arranged the
purchase of the rights to harvest 94,500 tons of raw timber from the U.S.
Forestry Service. The timber was cut in late spring and early summer and will be
processed at a sawmill the Company leased in Bon Weir, Texas. The sawmill is
located in six main buildings on 68 acres which serves as storage for raw
14
<PAGE>
materials and finished goods. For the year ended September 30, 1998 these
forestry products businesses contributed revenues of approximately $3.0 million
and a net loss of approximately $170,000.
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 $26,000 to $375,000 at September 30, 1999, compared to
$401,000 at September 30, 1998.
The Company's operating activities in 1999 resulted in cash provided of
$2,552,000, as compared to a use of cash of $8,435,000 in 1998. The cash
generated during the current year is generally related to improved operating
profits at Overhill, along with increases in accounts payables offset by
increases in accounts receivable, both related to the volume increases at
Overhill, together with the reductions in inventories by TTI and its
subsidiaries.
The Company's investing activities for the year ended September 30, 1999
resulted in a use of cash of $1,994,000, as compared to a use of cash of
$2,433,000 in 1998. The use of cash resulted primarily from increases in notes
and related party receivables and capital expenditures by Texas Timberjack and
its subsidiaries, offset by $1,780,000 in cash proceeds from the sale of PIC.
The Company's financing activities for the year ended September 30, 1999
resulted in a use of cash of $584,000, as compared to cash provided of
$10,165,000 in 1998. The use of cash resulted from the repayment of $1,200,000
of convertible bonds held by Merrill Lynch reduced by slight increases in net
borrowings by Overhill and TTI.
In December 1997, Overhill refinanced a certain portion of its existing debt.
The new financing amounted to a total facility of $24.2 million which is
structured as a three-year term loan maturing in December 2000. The agreement
also requires Overhill to pay on a quarterly basis, service fees totaling
$180,000, $300,000 and $440,000 for the first, second and third years of the
loan respectively. Under the terms of the agreement, the Company granted stock
warrants that entitle the holder to immediately acquire at $.01 per share, 30%
of the common stock of Overhill, of which 25% (5/6 of the total shares under
warrant) could be repurchased by the Company for $2,000,000 during the two-year
period following the date of the agreement. In June 1998, in connection with
amending certain covenants and restrictions, the percentage of Overhill that the
Company can repurchase for $2,000,000 was reduced to 20% from 25%. Additionally,
the lender received fees totaling approximately $1.7 million in connection with
this financing, of which $500,000 is refundable if the loan is paid in full
during the second year of the loan. The Company used a portion of the proceeds
to repay Term Loans A and B, and $2,800,000 of principal of the $4,000,000
senior convertible debentures described below. The early extinguishment of this
indebtedness resulted in an extraordinary charge of approximately $616,000 in
fiscal 1998.
In November 1999, Overhill refinanced substantially all of its existing debt.
The total facility amounted to $44 million, consisting of a $16 million line of
credit provided by Union Bank of California, N.A. ("Union Bank") together with
$28 million in the form of a five-year term loan provided by Levine Leichtman
Capital Partners II, L.P. ("LLCP").
The line of credit with Union Bank expires in November 2002 and provides for
borrowings limited to the lesser of $16 million or an amount determined by a
defined borrowing base consisting of eligible receivables and inventories.
Borrowings under the line of credit will bear interest at a rate, as selected by
Overhill at the time of borrowing, of prime plus .25% or LIBOR plus 2.75%.
Availability under the line through December 15, 1999 ranged from approximately
$2 million to $5 million. The Union Bank agreement provides, among other things,
that Overhill will be subject to an unused line of credit fee of
15
<PAGE>
.25% per annum. The agreement contains various covenants including restrictions
on capital expenditures, and specified net worth levels and debt service ratios.
In addition, the terms of the agreement generally prohibit loans, dividends or
advances from Overhill to the Company and limit payments of taxes and other
expenses to Polyphase to specified levels. The line of credit is guaranteed by
the Company and collateralized by certain assets of Overhill and all of the
Overhill common stock owned by the Company.
The term loan with LLCP is a secured senior subordinated note bearing interest
at 12% per annum, with interest payable monthly until maturity in October 2004.
Principal payments in an amount equal to 50% of the excess cash flow, as
defined, for Overhill's previous fiscal year are also payable annually
commencing in January 2001. Voluntary principal payments are permitted after
October 31, 2001, subject to certain prepayment penalties. The agreement
contains various covenants including restrictions on capital expenditures,
minimum EBITDA and net worth levels, and specified debt service and debt to
equity ratios. In addition, the terms of the agreement restrict changes in
control, generally prohibit loans, dividends, or advances by Overhill to the
Company and limit payments of taxes and other expenses to Polyphase to specified
levels. The term loan with LLCP is guaranteed by the Company and collateralized
by certain assets of Overhill. The agreement also requires Overhill to pay to
LLCP, during each January, annual consulting fees of $180,000.
In connection with the agreement, LLCP was granted stock warrants to purchase
17.5% of the common stock of Overhill, exercisable immediately at a nominal
exercise price. During the first two years following the date of the agreement,
Overhill has the right to repurchase 5% of Overhill's shares from LLCP for $3
million and/or to repurchase all 17.5% of the Overhill shares subject to the
LLCP warrant within five days of the term loan being repaid at their then
determined fair market value. If such shares are not repurchased, LLCP will be
entitled under the agreement to receive a cash payment of $500,000 from
Overhill. At the date of issuance, the warrants granted to LLCP were estimated
to have a fair value of $2.37 million.
As a result of these transactions, Overhill repaid in full the $22.7 million
senior subordinated notes payable and the $9.6 million revolving line of credit.
Additionally, Overhill repurchased for $3.7 million the warrants held by the
lender to purchase 30% of Overhill's common stock. In addition, in connection
with the refinancing, Overhill was permitted to make a one-time advance of $1.25
million to Polyphase for working capital and other specified purposes. Overhill
incurred costs and expenses in connection with the refinancing totaling
approximately $2.5 million, substantially all of which has been, or will be,
paid to the lenders. The early extinguishment of the previous indebtedness will
result in an extraordinary loss of approximately $1.2 million (net of a $500,000
refund for early payment of the senior subordinated notes) to be recognized
during the Company's quarter ending December 31, 1999.
In connection with its acquisition in 1995, Overhill obtained a credit facility
with Finova Capital Corporation in the original amount of $18,000,000,
consisting of a $12,000,000 revolving line of credit and two term loans, A and B
for $2,000,000 and $4,000,000, respectively. Term Loans A and B were repaid in
December 1997 as described above. 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 and inventory. Borrowings
under the line of credit facility bear interest at the Citibank base rate plus
1.5% (approximately 9.75% at September 30, 1999). 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 credit facility is collateralized by
Overhill's receivables and inventories and has been guaranteed by the Company.
The borrowings are classified as long-term debt due to their subsequent
refinancing under a long-term arrangement with Union Bank as discussed above.
The 1999 Bonds were repaid in July 1999. Such Bonds, in the original principal
amount of $4,000,000,
16
<PAGE>
were 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
$3.00 per share conversion price, subject to adjustment in certain
circumstances. As part of the 1997 refinancing, the holders were granted
warrants to purchase 420,000 shares of the Company's common stock, exercisable
over a five-year period, with certain registration rights. The warrants are
exercisable for 210,000 shares at $.01 per share (which were exercised during
fiscal 1998) and 210,000 shares at $1.125 per share, the market price of the
Company's common stock on the date of grant.
In connection with the acquisition of TTI in June 1994, 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, Mr. Estes has entered into subsequent agreements
with the Company to modify and extend the term of the note. As of September 30,
1999, the note had a total unpaid balance of $17,914,842 (principal of
$16,347,191 and accrued interest of $1,567,651), bearing interest at 9.75% per
annum with a maturity date of December 15, 1999. During November 1999, the note
was further modified and extended to mature October 10, 2002 at an interest rate
of 9% per annum, and to allow for principal and interest payments to be made
with amounts upstreamed to Polyphase by TTI for the payment of taxes (subject to
the approval of Timberjack's Board of Directors and its lenders). In connection
with a previous modification in 1998, the Company agreed to assign any interest
it may have or subsequently obtain with respect to 2,000,000 shares of the
Company's common stock owned by the Pyrenees Group ("Pyrenees"), a private
investment firm controlled by Paul A. Tanner, the Company's former Chairman and
Chief Executive Officer, and held by Mr. Estes as secondary collateral. These
shares, which were recovered in 1999 on behalf of Mr. Estes, had a value of
$875,000, which was charged to interest expense in 1999.
TTI has an $8.0 million revolving line of credit with Bank of America, N.A.
(formerly NationsBank of Texas, N.A.). Amounts advanced under the line of credit
bear interest at prime less .25% (approximately 8.0% at September 30, 1999), and
are collateralized by substantially all of TTI's assets. The line of credit
agreement contains various covenants related to receivables, capital
expenditures, inventories, debt ratios, contingent liabilities and payment of
dividends. Furthermore, the terms of the revolving line of credit generally
prohibit dividends, loans or advances from TTI to the Company, but permit the
payment of taxes. The Company has guaranteed all obligations under the TTI
revolving line of credit. Availability under the line as of September 30, 1999
amounted to approximately $4.1 million. TTI intends to renew the revolving
credit facility upon maturity in March 2000.
TTI's majority-owned subsidiary, Southern Forest Products, LLC, has an $8.0
million revolving line of credit with Bank of America, N.A. (formerly
NationsBank of Texas, N.A.) The line of credit expires in April 2000 and amounts
advanced under the line bear interest at prime (approximately 8.25% at September
30, 1999), and are collateralized by substantially all of the assets of Southern
Forest Products. Availability under the line as of September 30, 1999 amounted
to approximately $2.5 million.
The Company believes that the funds available to it from operations and existing
capital resources will be adequate for its capital requirements for the next
twelve months.
Year 2000
The Company has initiated a Year 2000 program to identify and address issues
associated with the ability of its business systems and equipment to properly
recognize the Year 2000. The purpose of this effort is to avoid interruption of
the operations of the Company as a result of the century change that will occur
on January 1, 2000. The Company's program includes review of its software
systems, review of its operating systems, upgrade or retirement of non-compliant
hardware and contacting key suppliers to assess their Year 2000 readiness.
17
<PAGE>
The Food Group has completed the installation of a new integrated accounting,
inventory, sales and purchasing system to replace the previous manual and
computer systems supporting operations. The system software and hardware has
been certified by the vendor to be Year 2000 compliant and has been implemented
as a parallel system. The Forestry Group has reviewed its existing software and
has completed an upgrade modification.
The Company began the second phase of its Year 2000 compliance project in late
January. The Company's subsidiaries are contacting key vendors to assess their
Year 2000 readiness and evaluate the effect of non-compliance on the Company's
future business.
Despite efforts to address the Year 2000 problem, there can be no guarantee that
critical suppliers or entities on which the Company relies will be converted on
a timely basis. The Company believes, based upon preliminary findings, that most
vendors are performing internal Year 2000 projects similar to the Company's and
that non-compliant vendors will offer alternative measures for time sensitive
products. Contingency plans for obtaining goods and services from non-compliant
vendors will be addressed on a case by case basis.
To date, the Company has had no material expenditures for direct Year 2000
compliance procedures.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
----------------------------------------------------------
The Company's interest expense is affected by changes in prime and LIBOR rates
as a result of its various line of credit arrangements (see Item 7). If these
market rates increase by an average of 1% in fiscal 2000, the Company's interest
expense would increase by approximately $200,000 based on the outstanding line
of credit balances at September 30, 1999.
The Company does not own, nor does it have an interest in any other market risk
sensitive instruments. See Item 1 "Description of Business".
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.
- --------------------
None
18
<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>
Name Age Position
- --------------------------------------------------------------------------------
<S> <C> <C>
James Rudis 50 Chairman of the Board,
Chief Executive Officer and President
William E. Shatley 53 Senior Vice President,
Chief Financial Officer, Treasurer and
Director
Michael F. Buck 62 Secretary and Director
George R. Schrader 68 Director
</TABLE>
James Rudis was elected to the Board of Directors (the "Board") in December 1992
and has served as Chairman and Chief Executive Officer since February 1998 and
President since July 1997. He also served as Executive Vice President of the
Company from March 1994 until July 1997. Prior to his employment with the
Company, Mr. Rudis was President of Quorum Corporation, a private consulting
firm involved in acquisitions and market development. 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 and was elected to the Board in February 1998. 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. (1977-1982) and in an executive capacity with Arthur Andersen (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 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. 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 ten 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.
19
<PAGE>
Significant Employee
Mr. Harold Estes is the President of Texas Timberjack, Inc., a wholly owned
subsidiary of the Company. He was elected as a director in February 1996 and
resigned from the board in April 1997. 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 it from the Eaton Corporation.
Meetings of the Board of Directors and its Committees
The Board has standing Compensation and Audit Review Committees. The
Compensation Committee is comprised of Messrs. Buck and Schrader. During fiscal
1999, the Compensation Committee met one time. 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 Audit Review Committee is composed of Messrs. Buck and Schrader. During
fiscal 1999, the Audit Review Committee met two times. 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 1999. Each director
attended all meetings of the Board of Directors and each 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
(the "Commission") and the American Stock Exchange. Directors, officers and
greater than 10 percent beneficial owners of the Company's equity securities 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 upon (i) a review of the copies of forms furnished to the Company pursuant
to the requirements of Section 16(a); (ii) information received by the Company
in connection with various purchases and sales of the Company's equity
securities; and (iii) the knowledge of the Company that Infinity Investors
Limited ("Infinity") may have owned greater than ten percent of the Company's
equity securities and did not file the required forms with the Commission
pursuant to Section 16(a), the Company believes that during fiscal 1999, all
filing requirements applicable to its directors and executive officers were
satisfied. However, with respect to the Company's greater than 10% beneficial
owners of equity securities, Infinity is delinquent in its Section 16(a) filing
obligations.
Based solely upon a review of the copies of forms furnished to the Company,
pursuant to the requirements of Section 16(a) and excluding Infinity, all
holders of greater than 10% of the Company's equity securities have satisfied
their Section 16(a) filing requirements.
20
<PAGE>
ITEM 11. Executive Compensation.
----------------------
The following table sets forth for fiscal 1999, 1998 and 1997 compensation
awarded or paid to Mr. James Rudis, the Company's Chairman, Chief Executive
Officer and President and Mr. William E. Shatley, the Company's Senior Vice
President, Treasurer and Chief Financial Officer (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, 1999.
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>
James Rudis 1999 $180,000 $ 0 $ -(1) - $ -
Chairman, Chief 1998 $168,077 $ 0 $ -(1) - $ -
Executive Officer, 1997 $138,240 $ 0 $ -(1) - $ -
President and
Director (2)
William E. Shatley 1999 $132,000 $ 0 $ -(1) - $ -
Senior Vice President, 1998 $126,000 $ 0 $ -(1) - $ -
Treasurer, Chief 1997 $108,000 $ 0 $ -(1) - $ -
Financial Officer and
Director
</TABLE>
_______________
(1) The Named Executive Officers each received certain perquisites and other
personal benefits from the Company during fiscal 1999, 1998 and 1997. These
perquisites and other personal benefits, however, did not equal or exceed
10% of the Named Executive Officers' salary and bonus during fiscal 1999,
1998 or 1997.
(2) Mr. Rudis was named Chairman and Chief Executive Officer in February 1998.
Mr. Rudis formerly the Company's Executive Vice President, became President
in July 1997.
No individual grants or exercises of stock options were made to the Named
Executive Officers during the fiscal year ended September 30, 1999.
The following table describes for the Named Executive Officers options and the
potential realizable value for his options as of September 30, 1999, which were
granted in prior fiscal years.
21
<PAGE>
Fiscal Year End September 30, 1999 Option/SAR Values
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-Money
Options/SARs at Options/SARs at
September 30, 1999 September 30, 1999 (1)
--------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James Rudis 276,500 - $ - $ -
William E. Shatley 246,500 - $ - $ -
</TABLE>
_________
(1) Based on $.6875 per share of Common Stock, which was the closing price per
share of Common Stock on September 30, 1999 on the AMEX as reported by The
Wall Street Journal.
Compensation Committee Report on Executive Compensation
The Board of Directors has established a Compensation Committee to review and
approve the compensation levels of executive officers of the Company, evaluate
the performance of the executive officers, consider senior management succession
issues and any related matters for the Company. The Compensation Committee is
charged with reviewing with the Board of Directors in detail all aspects of cash
compensation for the executive officers of the Company. Stock option
compensation for the executive officers is also considered by the Compensation
Committee.
The philosophy of the Company's compensation program is to employ, retain and
reward executives capable of leading the Company in achieving its business
objectives. These objectives include preserving a strong financial posture,
increasing the assets of the Company, positioning the Company's assets and
business operations in geographic markets and industry segments offering long
term growth opportunities, enhancing shareholder value and ensuring the survival
of the Company. The accomplishment of these objectives is measured against
conditions prevalent in the industries within which the Company operates. In
recent years these conditions reflect a highly competitive market environment
and rapidly changing regional, geographic and overall industry market
conditions.
The available forms of executive compensation include base salary, cash bonus
awards and incentive stock options. Performance of the Company is a key
consideration (to the extent that such performance can fairly by attributed or
related to such executive's performance), as well as the nature of each
executive's responsibilities and capabilities. The Company's compensation policy
recognizes, however, that stock price performance is only one measure of
performance and, given industry business conditions and the long term strategic
direction and goals of the Company, it may not necessarily be the best current
measure of executive performance. Therefore, the Company's compensation policy
also gives consideration to the Company's achievement of specified business
objectives when determining executive officer compensation. Compensation paid to
executive officers is based upon a Company-wide salary structure consistent for
each position relative to its authority and responsibility compared to industry
peers.
Based on comparative industry data, and after due consideration to the factors
mentioned above, the Compensation Committee set Mr. Rudis' salary at $180,000
for fiscal 1999. The Company did not pay any cash bonuses to Mr. Rudis for
fiscal 1999.
22
<PAGE>
The Compensation Committee believes that the compensation of the Company's other
executive officers was reasonably related to the performance of the Company and
those individuals during fiscal 1999.
COMPENSATION COMMITTEE
Michael F. Buck
George R. Schrader
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was an officer or employee of the
Company or any of its subsidiaries or had any relationship requiring disclosure
pursuant to Item 404 of Commission Regulation S-K. No executive officer of the
Company served as a member of a compensation committee of another corporation
(or other board committee of such company performing similar functions or, in
the absence of any such committee, the entire board of directors of such
corporation), one of whose executive officers served on the Compensation
Committee. No executive officer of the Company served as a director of another
corporation, one of whose executive officers served on the Compensation
Committee. No executive officer of the Company served as a member of a
compensation committee of another corporation (or other board committee of such
corporation performing similar functions or, in the absence of any such
committee, the entire board of directors), one of whose executive officers
served as a director of the Company.
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 $8,500, with additional fees of $2,500 and $1,500 for service on the
Audit Committee and Compensation Committee, respectively, plus additional fees
of $500 to $750 per Board and Committee meeting attended. Directors are also
reimbursed for all expenses incident to their service on the Board of Directors.
During March 1998, Mr. Michael F. Buck and Mr. George R. Schrader were granted
options to purchase 30,000 and 50,000 shares, respectively, of Common Stock,
exercisable at $0.75 per share (the fair market value at the date of grant) in
whole or in part, expiring in March 2008.
During July 1996, Mr. Buck and Mr. Schrader were each granted options to
purchase 30,000 shares of 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.
Common Stock Performance Table
The following performance table compares the five-year cumulative return of the
Common Stock with that of a Broad Market Index (American Stock Exchange) and a
Published Industry Index (MG Industry Group 342 - Food and Beverage - Processed
and Packaged Goods). Each index assumes $100 invested at September 30, 1994, and
is calculated assuming quarterly reinvestment of dividends and quarterly
weighting by market capitalization.
23
<PAGE>
Comparative Five-Year Total Returns
<TABLE>
Company 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Polyphase Corporation 100.00 59.78 119.57 31.52 7.61 11.96
Industry Index 100.00 97.88 113.31 155.90 147.89 145.05
AMEX Market Index 100.00 120.49 125.40 152.50 133.20 155.13
</TABLE>
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 September 30, 1999, 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 of
Name Beneficial Ownership (1) Percent of Class (1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
James Rudis 557,900 (2) 3.1%
William E. Shatley 404,700 (3) 2.2
Michael F. Buck 60,100 (4) *
George R. Schrader 80,000 (5) *
Harold Estes 3,921,200 (6) 22.0
Infinity Investors Limited 1,165,756 (7) 6.1
John E. McConnaughy, Jr. 1,511,900 (8) 8.5
All directors and executive officers
as a group (4 persons) 1,102,700 (9) 6.0
</TABLE>
- ----------------
* Less than 1%.
(1) Except as noted, to the knowledge of the Company, the listed persons and
entities 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 persons. Such presentation is based on 17,812,464 shares of
Common Stock outstanding as of September 30, 1999.
(2) Includes 276,500 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(3) Includes 246,500 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
Includes 158,200 shares that Mr. Shatley may be deemed to beneficially own
as a general partner in a family limited partnership.
(4) Includes 60,000 shares that could be purchased pursuant to the exercise of
stock options
24
<PAGE>
exercisable within 60 days subsequent to the date hereof.
(5) Includes 80,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(6) Mr. Estes' address is Highway 59 South, Route 15, Box 9475, Lufkin, Texas
75901.
(7) The address of Infinity is 38 Hertford Street, London W1Y7TG, England. As
discussed in the subsection to Item 10 entitled "Section 16(a) Beneficial
Ownership Reporting Compliance," the number of shares reportedly held by
Infinity consists solely of 1,165,756 shares, 6.1% of the class on an "as
converted" basis, of Common Stock into which certain of the Company's
preferred stock (and accrued dividends thereon) held by Infinity is
convertible within 60 days subsequent to the date hereof.
(8) Mr. McConnaughy's address is 1011 High Ridge Road, Stamford, Connecticut
06905.
(9) Includes 663,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
ITEM 13. Certain Relationships and Related Transactions.
----------------------------------------------
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance of
options to purchase five series of convertible preferred stock to the Pyrenees
Group, a private investment firm controlled by Paul A. Tanner, the Company's
former Chairman and Chief Executive Officer, or its assignees. The options 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
During fiscal 1994 and 1995, Pyrenees exercised and converted Series A, B and C
Preferred Stock into common stock. In November 1995, Pyrenees exercised the
Series D option through the issuance of a 7% recourse note in the amount of
$2,000,000, collateralized by the shares issued, which was treated as an
in-substance stock option at the date of grant. During fiscal 1996, these shares
were converted to 500,000 shares of common stock. During the years ended
September 30, 1996 and 1997, principal payments of approximately $721,000 and
$304,000, respectively, were made on the note. The remaining balance of $975,000
became uncollectible, and the 500,000 shares of common stock that secure this
note have been recovered pursuant to certain litigation against Pyrenees and Mr.
Tanner. This recovery has been accounted for as an unexercised stock option in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". As such, $756,000, representing the difference
between the note balance and the fair market value of the 500,000 shares as of
the recovery date was recorded as a reduction in paid-in capital.
25
<PAGE>
Advances to Related Parties
On February 23, 1998, Mr. Paul A. Tanner resigned as Chief Executive Officer and
Chairman of the Company's Board of Directors. Mr. James Rudis, the Company's
President, was elected by the Board to assume the vacated positions. Following
the resignation, a reserve of approximately $165,000 was established against all
outstanding advances due from Mr. Tanner.
During fiscal years 1994 and 1995 a number of advances were made to Mr. Tanner
which aggregated approximately $2.0 million. In December 1995, the advances were
refinanced though the issuance to the Company of a 12% unsecured demand note
from Mr. Tanner. Also during the aforementioned periods, the Company made
non-interest bearing cash advances of approximately $1.5 million to the Pyrenees
Group, a company controlled by Mr. Tanner.
Effective in January 1996, the Company reached an agreement to manage a project
to develop and build a multi-purpose sports facility in Las Vegas, Nevada. The
project was being developed by PLY Stadium Partners, Inc. ("Stadium Partners"),
a private investment firm headed by Mr. Tanner. The Company agreed to provide to
Stadium Partners up to $4 million of debt (1) convertible into a 14% economic
interest in the project and (2) guaranteed personally by Mr. Tanner and
Pyrenees. As part of this agreement, amounts which had been advanced during
fiscal 1994 and 1995 to Mr. Tanner and Pyrenees (approximately $3.5 million),
together with subsequent amounts advanced, charged or accrued to or on behalf of
Stadium Partners were considered as components of the $4 million of convertible
debt, bearing interest at 12.0% and guaranteed personally by Mr. Tanner and by
Pyrenees. Through September 30, 1996, the Company advanced an additional $9.27
million, for an approximate total of $13.3 million.
In addition to the cash advances referred to above, the Company, during fiscal
1996 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 was dependent upon the success of the project and/or the
guarantees referred to above. As a result of the terms of the financing
arrangements with Lehman described below, Stadium Partners was precluded from
making any distributions until permanent project financing was secured or
stadium suite sales were made that were 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 established a reserve of $3.34 million as of
September 30, 1996, which represented all income accrued in 1996.
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 guaranteed the repayment of the Lehman loan on behalf of Stadium
Partners. The guarantee is only effective in certain circumstances or upon the
occurrence of certain events. A foreclosure sale was conducted during July 1998.
Notwithstanding such foreclosure action, the Company, based on the advice of
legal counsel, does not believe that it will incur any significant liability as
a result of this guarantee. As a result, the Company believes the existence of
such guarantee will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
The loan agreement with Lehman required certain prepayments by Nevada
Partnership, the first of which in the amount of $5.0 million became due in
January 1997. This was paid primarily with funds advanced by the Company. The
second prepayment requirement of $20.0 million became due in May 1997; this
payment was not made. As a result of the failure to make this payment, another
agreement was entered into among the borrower, Lehman and the Company as of July
1, 1997. This agreement generally
26
<PAGE>
provided forbearance by Lehman until September 30, 1997, to allow additional
time to raise the funds to make the principal payment. The terms of the
forbearance agreement were not met by the September deadline, and the note
matured unpaid in November 1997.
As a result of the above, the Company recorded a charge to earnings for the year
ended September 30, 1997, in the amount of $14.8 million, representing all
amounts remaining uncollected from Stadium Partners, net of the reserve
established in 1996. Amounts which may subsequently be recovered, if any, will
be recognized as income when collection is assured.
During April 1998, the Company filed suit against PLY Stadium Partners, Inc.,
and against Mr. Tanner and Pyrenees, the guarantors of the debt. In May 1999,
the Company was awarded a judgment against such defendants, jointly and
severally, in the amount of approximately $19.5 million, plus interest. In
connection therewith, the defendants were ordered to turn over all ownership of
the stock of Polyphase, as well as the stock and assets of PLY Stadium Partners,
Inc. and Pyrenees, which includes the rights to 2,000,000 shares of Polyphase
common stock owned by Pyrenees and held by Mr. Harold Estes as secondary
collateral. In connection with this recovery of the 2,000,000 Polyphase shares,
the Company recorded interest expense of $875,000, the fair value assigned to
the shares, resulting from its assignment to Mr. Estes. Additionally, the
Company recorded income of $656,000 related to the recovery of 1,500,000 shares
and accounted for the remaining 500,000 shares as an unexercised stock option in
accordance with APB No. 25. After evaluating the possibility of any potential
post judgment collections and the additional legal expenses to be incurred in
pursuing such collections, and further considering the likelihood of one or all
of the defendants seeking protection under bankruptcy laws, the Company is
presently in negotiations to settle the judgment. The objective is to secure
recoveries, in addition to the Polyphase shares discussed above, through the
collections of proceeds using either first or second liens on properties held by
other than the judgment debtors. Any further amounts ultimately recoverable as a
result of this judgment and turnover order or the settlement negotiations is not
presently determinable.
Other Transactions
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September 30,
1999, the insurance premium receivable was $592,006.
In connection with the purchase of TTI, the Company acquired a note receivable
from an officer of TTI. The note which has been renewed and extended each year
since issuance is secured by marketable securities, is payable within one year
and bears interest at 3.96%. As of September 30, 1999 the balance outstanding
was $341,305 and the note has been classified as a non-current related party
receivable. Also included in related party receivables at September 30, 1999 are
approximately $683,000 in receivables from employees the Company and its
subsidiaries and $499,000 in receivables from partnerships in which TTI has
minority interests. As of September 30, 1999, approximately $570,000 of such
receivables are notes which are no longer accruing interest. During 1999, the
Company established a $100,000 reserve against receivables from employees of the
Company. The Company expects the remaining amounts due under related party
receivables to be realizable.
27
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
--------------------------------------------------------------
(a) 1. and 2. Financial Statements and Financial Statement Schedule.
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, 1999,
are included in Item 8:
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets-September 30, 1999 and 1998 F-3
Consolidated Statements of Operations-Years ended September 30, 1999, 1998,
and 1997 F-5
Consolidated Statements of Stockholders' Equity-Years ended September 30, 1999,
1998, and 1997 F-7
Consolidated Statements of Cash Flows-Years ended September 30, 1999, 1998,
and 1997 F-9
Notes to Consolidated Financial Statements F-12
2. The following consolidated financial statement schedule of Polyphase
Corporation and subsidiaries is included in item 14(a):
Schedule I - Condensed Financial Information of Registrant F-44
</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 (as amended April 26, 1999)
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"])
28
<PAGE>
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)
+10.2 Stock Option Agreement for George R. Schrader (incorporated by
reference from Exhibit 4.15 to the 1994 Form S-8)
+10.3 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"])
+10.4 Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
+10.5 Employment Agreement, dated as of November 1, 1993, between Harold
Estes and Texas Timberjack, Inc. (incorporated by reference from
Exhibit 2 to the Company's Form 8-K dated June 24, 1994 [the "1994
Form 8-K"])
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 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)
10.14 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)
29
<PAGE>
10.15 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)
10.16 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)
10.17 Convertible Preferred Stock Purchase Agreement, dated as of November
10, 1995, by and between Polyphase Corporation and Infinity
Investors, Limited (incorporated by reference from Exhibit 10.32 to
the 1995 Form 10-K)
10.18 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)
10.19 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)
10.20 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)
10.21 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)
10.22 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)
10.23 Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated June 28, 1996 (incorporated by reference
from Exhibit 10.44 to the 1996 Form 10-K)
10.24 Security and Pledge Agreement, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.45 to the 1996 Form 10-K)
10.25 Secured Promissory Note, dated June 28, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.46 to the 1996 Form 10-K)
10.26 Security Agreement, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.47 to the 1996 Form 10-K)
10.27 Promissory Note, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.48 to the 1996 Form
30
<PAGE>
10-K)
10.28 Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1996 (incorporated by reference
from Exhibit 10.49 to the 1996 Form 10-K)
+10.29 Stock Option Agreement for Paul A. Tanner dated July 23, 1996
(incorporated by reference from Exhibit 10.50 to the 1996 Form 10-K)
+10.30 Stock Option Agreement for James Rudis dated July 23, 1996
(incorporated by reference from Exhibit 10.51 to the 1996 Form 10-K)
+10.31 Stock Option Agreement for William E. Shatley dated July 23, 1996
(incorporated by reference from Exhibit 10.52 to the 1996 Form 10-K)
+10.32 Stock Option Agreement for Michael F. Buck dated July 23, 1996
(incorporated by reference from Exhibit 10.53 to the 1996 Form 10-K)
+10.33 Stock Option Agreement for George R. Schrader dated July 23, 1996
(incorporated by reference from Exhibit 10.54 to the 1996 Form 10-K)
10.34 Convertible Promissory Note, dated January 1, 1996 by and between
PLY Stadium Partners, Inc. and Polyphase Corporation (incorporated
by reference from Exhibit 10.53 to the Company's Annual Report on
Form 10-K for the year ended September 30, 1997 [the "1997 Form
10-K"])
10.35 Master Loan Agreement, dated January 1, 1996 by and between
Polyphase Corporation and PLY Stadium Partners, Inc. (incorporated
by reference from Exhibit 10.54 to the 1997 Form 10-K)
10.36 Guaranty, dated January 1, 1996 by Paul A. Tanner to Polyphase
Corporation (incorporated by reference from Exhibit 10.55 to the
1997 Form 10-K)
10.37 Guaranty, dated January 1, 1996 by Pyrenees Group, Inc. to Polyphase
Corporation (incorporated by reference from Exhibit 10.56 to the
1997 Form 10-K)
10.38 Management Agreement, dated January 1, 1996 by and between PLY
Stadium Partners, Inc. and Polyphase Corporation (incorporated by
reference from Exhibit 10.57 to the 1997 Form 10-K)
10.39 Security Agreement, dated January 1, 1996, between Paul A. Tanner
and Polyphase Corporation (incorporated by reference from Exhibit
10.58 to the 1997 Form 10-K)
10.40 Security Agreement, dated January 1, 1996, between Pyrenees Group,
Inc. and Polyphase Corporation (incorporated by reference from
Exhibit 10.59 to the 1997 Form 10-K)
+10.41 Stock Option Agreement for David Weinreb dated January 17, 1997
(incorporated by reference from Exhibit 10.60 to the 1997 Form 10-K)
10.42 Amended Renewal Promissory Note in the amount of $14,341,256 dated
December 2, 1997, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.61 to the 1997 Form 10-K)
31
<PAGE>
10.43 Amended Pledge Agreement, dated as of December 2, 1997, between
Polyphase Corporation and Harold Estes (incorporated by reference
from Exhibit 10.62 to the 1997 Form 10-K)
10.44 Amended Security Agreement, dated as of December 2, 1997, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference
from Exhibit 10.63 to the 1997 Form 10-K)
10.45 Term Loan Agreement in the amount of $22,500,000, dated December 4,
1997, among Overhill Farms, Inc. as borrower, Polyphase Corporation
as guarantor and The Long Horizons, Fund, L.P. as lender
(incorporated by reference from Exhibit 10.64 to the 1997 Form 10-K)
10.46 Security Agreement, dated December 4, 1997, between Overhill Farms,
Inc. as grantor and The Long Horizons Fund, L.P. as lender
(incorporated by reference from Exhibit 10.65 to the 1997 Form 10-K)
10.47 Assignment for Security (Trademarks) dated December 4, 1997, between
Overhill Farms, Inc. as assignor and The Long Horizons Fund, L.P. as
assignee (incorporated by reference from Exhibit 10.66 to the 1997
Form 10-K)
10.48 Pledge and Security Agreement, dated December 4, 1997, among
Polyphase Corporation as the pledgor, in favor of The Long Horizons
Fund, L.P. as the lender and Overhill Farms, Inc. as the borrower
(incorporated by reference from Exhibit 10.67 to the 1997 Form 10-K)
10.49 Registration Rights Agreement, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P. (incorporated
by reference from Exhibit 10.68 to the 1997 Form 10-K)
10.50 Common Stock Purchase Warrant, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P. (incorporated
by reference from Exhibit 10.69 to the 1997 Form 10-K)
10.51 Voting Rights Agreement, dated December 4, 1997, among Polyphase
Corporation, The Long Horizons Fund, L.P. and Overhill Farms, Inc.
(incorporated by reference from Exhibit 10.70 to the 1997 Form 10-K)
10.52 Supplemental Indenture, dated as of December 5, 1997, from Polyphase
Corporation to IBJ Schroder Bank & Trust Company (incorporated by
reference from Exhibit 10.71 to the 1997 Form 10-K)
10.53 Compromise Settlement Agreement with Mutual Release between Polyphase
Corporation and Rice Partners II, L.P. (incorporated by reference
from Exhibit 10.72 to the 1997 Form 10-K)
10.54 Stock Purchase Agreement between Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1997 (incorporated by reference
from Exhibit 10.73 to the 1997 Form 10-K)
32
<PAGE>
10.55 Certificate of Designation of Preferences of Series B Preferred
Stock of Letronix Acquisition Corporation dated July 2, 1997
(incorporated by reference from Exhibit 10.74 to the 1997 Form
10-K)
10.56 Term Loan Agreement in the amount of $2,800,000, dated August 29,
1997, between Dallas Parkway Properties, Incorporated and
National Operating, L.P. (incorporated by reference from Exhibit
10.75 to the 1997 Form 10-K)
10.57 Warrant to Purchase 500,000 Shares of Common Shares of Polyphase
Corporation by Black Sea Investments, Ltd., dated August 29, 1997
(incorporated by reference from Exhibit 10.76 to the 1997 Form
10-K)
10.58 Offshore Securities Subscription Agreement to purchase 7,500
Shares of Series F 6% Convertible Preferred between Polyphase
Corporation and Black Sea Investments, Ltd., dated August 29,1997
(incorporated by reference from Exhibit 10.77 to the 1997 Form
10-K)
10.59 Stock Exchange Agreement by and between Tollway Properties, Inc.
and Polyphase Corporation date as of December 1, 1997
(incorporated by reference from Exhibit 10.78 to the 1997 Form
10-K)
10.60 Release and Settlement Agreement between Dallas Parkway
Properties, Incorporated and Polyphase Corporation dated as of
December 1, 1997 (incorporated by reference from Exhibit 10.79 to
the 1997 Form 10-K)
10.61 General Release between Dallas Parkway Properties, Incorporated
and National Operating, L.P. dated as of December 1, 1997
(incorporated by reference from Exhibit 10.80 to the 1997 Form
10-K)
10.62 Common Stock Purchase Warrant, dated April 24, 1998, covering
105,000 shares issued to Merrill Lynch World Income Fund,
Inc.(incorporated by reference from Exhibit 10.81 to the
Company's Annual Report on Form 10-K for the year ended September
30, 1998 [the "1998 Form 10-K])
10.63 Common Stock Purchase Warrant, dated April 24, 1998, covering
105,000 shares issued to Merrill Lynch Convertible Fund, Inc.
(incorporated by reference from Exhibit 10.82 to the 1998 Form
10-K)
10.64 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch Convertible Fund, Inc. (w-
1) (incorporated by reference from Exhibit 10.83 to the 1998 Form
10-K)
10.65 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch Convertible Fund, Inc. (w-
1a) (incorporated by reference from Exhibit 10.84 to the 1998
Form 10-K)
10.66 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch World Income Fund, Inc. (w-
2) (incorporated by reference from Exhibit 10.85 to the 1998 Form
10-K)
10.67 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to
33
<PAGE>
Merrill Lynch World Income Fund, Inc. (w-2a) (incorporated by
reference from Exhibit 10.86 to the 1998 Form 10-K)
10.68 Registration Rights Agreement, dated as of April 24, 1998, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Merrill Lynch Convertible Fund, Inc. (incorporated by reference
from Exhibit 10.87 to the 1998 Form 10-K)
10.69 Guaranty, dated August 7, 1998 by Polyphase Corporation to
NationsBank (incorporated by reference from Exhibit 10.88 to the
1998 Form 10-K)
10.70 Loan Agreement in the amount of $12,000,000 dated August 7, 1998
between NationsBank, as lender and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.89 to the 1998 Form
10-K)
10.71 Promissory Note in the amount of $4,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.90 to the 1998 Form
10-K)
10.72 Promissory Note in the amount of $8,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.91 to the 1998 Form
10-K)
10.73 Security Agreement dated August 7, 1198 by Texas Timberjack to
NationsBank (incorporated by reference from Exhibit 10.92 to the
1998 Form 10-K)
+10.74 Stock Option Agreement for Michael F. Buck, dated March 17, 1998
(incorporated by reference from Exhibit 10.93 to the 1998 Form
10-K)
+10.75 Stock Option Agreement for George R. Schrader, dated March 17,
1998 (incorporated by reference from Exhibit 10.94 to the 1998
Form 10-K)
10.76** Stock Purchase Agreement, effective of September 30, 1999, by and
among Polyphase Corporation, Polyphase Instrument Acquisition
Corporation and Polyphase Instrument Co.
10.77** Promissory Note, dated September 30, 1999 in the principal amount
of $1,000,000, payable to the order of Polyphase Corporation, as
payee by Polyphase Instrument Acquisition Corporation, as maker.
10.78** Pledge Agreement, entered into on September 30, 1999, by and
between Polyphase Instrument Acquisition Corporation, as pledgor,
and Polyphase Corporation, as secured party.
10.79** Guaranty, executed as of September 30, 1999, by Polyphase
Instrument Co., as guarantor, in favor of Polyphase Corporation,
as payee, on promissory note executed by Polyphase Instrument
Acquisition Corporation, as maker.
10.80** Security Agreement entered into effective September 30, 1999, by
and between Polyphase Instrument Co., as pledgor, and Polyphase
Corporation, as secured party.
+10.81** Employment Agreement, entered into as of November 30, 1999
between Polyphase
34
<PAGE>
Corporation and Overhill Farms, Inc., jointly and severally, and
James Rudis.
+10.82** Employment Agreement, entered into as of November 30, 1999
between Polyphase Corporation and Overhill Farms, Inc., jointly
and severally, and William E. Shatley.
10.83** Settlement Agreement and Mutual Release of Claims, effective
November 30, 1999, by and among Infinity Investors Limited,
Polyphase Corporation, James Rudis, William E. Shatley, Michael
F. Buck, and George R. Schrader.
21.1** Subsidiaries of the Registrant.
23.1** Consent of Ernst & Young 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, 1999.
35
<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/ James Rudis December 21, 1999
-------------------------
James Rudis
Chief Executive Officer
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/ James Rudis December 21, 1999
- -----------------------------
James Rudis
Chief Executive Officer,
Chairman of the Board,
President and Director
(Principal Executive Officer)
/s/ William E. Shatley December 21, 1999
- -------------------------------------
William E. Shatley
Senior Vice President, Treasurer,
Chief Financial Officer and Director
(Principal Financial and
Accounting Officer)
/s/ George R. Schrader December 21, 1999
- ------------------------------
George R. Schrader
Director
/s/ Michael F. Buck December 21, 1999
- ------------------------------
Michael F. Buck
Director
36
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors...................................... F-2
Financial Statements:
- --------------------
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-5
Consolidated Statements of Stockholders' Equity.................. F-7
Consolidated Statements of Cash Flows............................ F-9
Notes to Consolidated Financial Statements....................... F-12
Financial Statement Schedule:
- ----------------------------
Schedule - Condensed Financial Information of Registrant......... F-44
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1999. Our audits also
include the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1999 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG LLP
December 16, 1999
Dallas, Texas
F-2
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash $ 375,408 $ 401,393
Receivables, net of allowance for doubtful
accounts of $502,667 and $509,646
in 1999 and 1998, respectively:
Trade accounts 17,373,364 13,209,834
Current portion of sales contracts 4,765,072 3,879,420
Notes receivable 3,359,777 1,813,232
Inventories 30,924,744 32,358,389
Prepaid expenses and other 1,663,269 498,788
------------- -------------
Total current assets 58,461,634 52,161,056
------------- -------------
Property and equipment:
Land 432,000 432,000
Buildings and improvements 3,481,009 3,726,296
Machinery, equipment and other 8,929,988 7,535,255
------------- -------------
12,842,997 11,693,551
Accumulated depreciation 7,114,989 5,558,155
------------- -------------
5,728,008 6,135,396
------------- -------------
Other assets:
Noncurrent receivables, net of allowance for doubtful accounts
of $1,305,220 and $209,717 in 1999 and 1998, respectively:
Sales contracts 2,114,591 1,363,039
Notes receivable - -
Related parties 1,523,096 670,655
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $3,754,614
and $2,957,972 in 1999 and 1998, respectively 12,178,209 12,974,851
Other intangible assets 1,216,393 2,494,754
Restricted cash 625,623 672,898
Net assets of discontinued operations - 2,962,508
Other 1,674,388 1,407,379
------------- -------------
19,332,300 22,546,084
------------- -------------
Total Assets $ 83,521,942 $ 80,842,536
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-3
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
September 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Current liabilities:
Notes payable $ 4,403,264 $ 4,209,256
Accounts payable 9,937,347 5,939,098
Accrued expenses and other 3,374,493 3,199,451
Current maturities of long-term debt 6,798,467 13,492,758
------------- -------------
Total current liabilities 24,513,571 26,840,563
Long-term debt, less current maturities 33,592,522 29,220,972
Note payable and accrued interest to related party 17,914,842 16,307,405
Reserve for credit guarantees 625,623 672,898
------------- -------------
Total liabilities 76,646,558 73,041,838
Commitments and contingencies
Warrants to purchase common stock of subsidiary 1,425,378 1,200,000
Stockholders' equity:
Preferred stock, $.01 par value, authorized 50,000,000 shares,
issued and outstanding, 56,440 and 115,000 shares in 1999 and
1998, respectively 564 1,150
Common stock, $.01 par value, authorized 100,000,000 shares,
issued and outstanding, 17,812,464 and 15,080,050 shares
in 1999 and 1998, respectively 178,125 150,800
Paid-in capital 28,159,887 28,623,811
Accumulated deficit (22,888,570) (21,199,744)
Note receivable from related party - (975,319)
------------- -------------
Total stockholders' equity 5,450,006 6,600,698
------------- -------------
Total Liabilities and Stockholders' Equity $ 83,521,942 $ 80,842,536
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-4
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
--------------------------------------------------------------
1999 1998 1997
-------------- ---------------- ---------------
<S> <C> <C> <C>
Net revenues $ 158,308,110 $141,398,339 $ 148,378,127
Cost of sales 129,840,884 116,076,348 123,374,610
------------- ------------ --------------
Gross profit 28,467,226 25,321,991 25,003,517
Selling, general and administrative expenses 19,973,627 17,688,569 18,352,769
------------- ------------ --------------
Operating income 8,493,599 7,633,422 6,650,748
------------- ------------ --------------
Other income (expenses):
(Loss) recoveries on related party receivable
656,250 - (14,838,456)
Loss on investment in computer operations - - (3,613,815)
Gain on sale of assets - 987,857 -
Interest expense (9,485,892) (8,830,391) (7,129,406)
Interest income and other 500,183 543,080 738,943
------------- ------------ --------------
Total other expenses (8,329,459) (7,299,454) (24,842,734)
------------- ------------ --------------
Income (loss) before income taxes,
warrant accretion, discontinued operations and
extraordinary item 164,140 333,968 (18,191,986)
Income tax (benefit) expense 353,881 56,575 (653,683)
------------- ------------ --------------
(189,741) 277,393 (17,538,303)
Accretion of warrants to purchase
common stock of subsidiary 225,378 - 810,776
------------- ------------ --------------
Net income (loss) before discontinued operations and
extraordinary item (415,119) 277,393 (18,349,079)
Discontinued operations (1,182,508) 9,955 (476,079)
Extraordinary item - (616,239) -
------------- ------------ --------------
Net loss (1,597,627) (328,891) (18,825,158)
Dividends on preferred stock 91,199 154,250 403,750
------------- ------------ --------------
Net loss attributable to
common stockholders $ (1,688,826) $ (483,141) $ (19,228,90)
============= ============ ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-5
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
----------------------------------------------------------
1999 1998 1997
-------------- -------------- ------------
<S> <C> <C> <C>
Per share data - basic and diluted:
Net income (loss) per common share:
Net income (loss) before discontinued
operations and extraordinary item $ (.03) $ .01 $ (1.38)
Discontinued operations (.07) - (.03)
Extraordinary item - (.04) -
------------ ------------ ------------
Net loss per common share $ (.10) $ (.03) $ (1.41)
============ ============ ============
Weighted average shares outstanding - basic 16,947,195 14,552,462 13,632,357
============ ============ ============
Weighted average shares outstanding - diluted 16,947,195 16,452,433 13,632,357
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-6
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Paid-in Accumulated Notes
Shares Amount Shares Amount Capital Deficit Receivable Total
-------- -------- ---------- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of common stock options 110,000 1,100 55,500 56,600
Preferred shares tendered for
exercise of options (125,000) (1,250) 357,143 3,571 197,679 200,000
Stock issuance costs (35,000) (35,000)
Payments on Pyrenees note 303,770 303,770
Stock option granted for services 973,000 973,000
Private placement of Series F
preferred stock 7,500 75 983,802 983,877
Issuance of warrant 150,000 150,000
Dividends on preferred stock (403,750) (403,750)
Net loss for 1997 (18,825,158) (18,825,158)
--------- ------- ---------- --------- ------------ ------------ ------------ ------------
Balance, September 30, 1997 132,500 1,325 13,664,109 136,641 28,955,695 (20,716,603) (975,319) 7,401,739
--------- ------- ---------- --------- ------------ ------------ ------------ ------------
Conversion of preferred shares and
accrued dividends to common
stock (17,500) (175) 1,205,941 12,059 10,616 22,500
Issuance of warrants 175,000 175,000
Exercise of stock purchase warrants 210,000 2,100 2,100
Stock issuance costs (17,500) (17,500)
Settlement of stock option
cancellation (500,000) (500,000)
Dividends on preferred stock (154,250) (154,250)
Net loss for 1998 (328,891) (328,891)
--------- ------- ---------- --------- ------------ ------------ ------------ ------------
Balance, September 30, 1998 115,000 $ 1,150 15,080,050 $ 150,800 $ 28,623,811 $(21,199,744) $ (975,319) $ 6,600,698
--------- ------- ---------- --------- ------------- ------------ ------------ ------------
</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, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Paid-in Accumulated Notes
Shares Amount Shares Amount Capital Deficit Receivable Total
-------- -------- --------- --------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Conversion of preferred shares
and accrued dividends to
common stock (58,560) $ (586) 2,302,414 $ 23,025 $ 183,208 205,647
Exercise of stock options 430,000 4,300 109,437 113,737
Reduction of Pyrenees note upon
recovery of common stock (756,569) 975,319 218,750
Dividends on preferred stock (91,199) (91,199)
Net loss for 1999 (1,597,627) (1,597,627)
-------- -------- ---------- --------- ------------ ------------- ------------ ----------
Balance, September 30, 1999 56,440 $ 564 17,812,464 $178,125 $28,159,887 $(22,888,570) $ - $5,450,006
======== ======== ========== ========== ============ ============= ============ ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-8
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- --------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss $ (1,597,627) $ (328,891) $ (18,825,158)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 4,559,507 4,192,271 3,900,963
Provision for doubtful accounts 176,793 535,489 317,145
Gain on sale of assets - (987,857) -
Loss (recoveries) on related party
receivable (656,250) - 14,838,456
Loss on disposition of computer segment - - 3,613,815
Deferred income tax - - 233,339
Accretion of warrants to purchase
common stock of subsidiary 225,378 - 810,776
Loss (income) from discontinued
operations 1,182,508 (9,955) 476,079
Extraordinary item - 616,239 -
Changes in:
Accounts and sales contracts receivable (5,901,611) (143,202) 466,381
Inventories 1,433,645 (11,737,432) 4,843,429
Prepaid expenses and other (1,197,500) 223,504 487,648
Accounts payable 3,998,249 (1,388,710) (813,864)
Accrued expenses and other 329,190 593,440 (3,883,876)
------------ ------------- ---------------
Net cash provided by (used in)
operating activities 2,552,282 (8,435,104) 6,465,133
------------ ------------- ---------------
Cash flows provided by (used in) investing activities:
Capital expenditures, net (1,299,306) (1,315,403) (730,387)
Notes and other receivables (1,622,461) (1,131,537) 1,070,691
Receivables from related parties (852,441) 13,654 (5,062,365)
Cash from sale of subsidiary 1,780,000 - -
------------ ------------- ----------------
Net cash used in investing
activities $ (1,994,208) $ (2,433,286) $ (4,722,061)
------------ ------------- ---------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-9
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
-------------------------------------------
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows provided by (used in) financing activities:
Net borrowings (principal payments) on line of credit
arrangements $ 1,404,600 $ 3,041,139 $ (2,685,537)
Net borrowings on other notes payable
and long-term debt 1,607,437 31,293,906 839,196
Principal payments on term notes (2,333,333) (1,982,280) -
Principal payments on convertible bonds (1,200,000) (4,300,000) -
Principal payments on subordinated debentures - (13,000,000) -
Redemption of Overhill warrants - (2,000,000) -
Deferred financing costs - (2,718,015) -
Proceeds from private placements of preferred stock - - 733,877
Exercise of common stock options
and warrants 28,436 2,100 56,600
Principal collection on Pyrenees note receivable - - 303,770
Dividends on preferred stock (91,199) (154,250) (153,750)
Common stock issuance costs - (17,500) (35,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities (584,059) 10,165,100 (940,844)
------------ ------------ ------------
Net increase (decrease) in cash (25,985) (703,290) 802,228
Cash at beginning of year 401,393 1,104,683 302,455
------------ ------------ ------------
Cash at end of year $ 375,408 $ 401,393 $ 1,104,683
============ ============ ============
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest $ 4,895,427 $ 5,391,913 $ 5,459,662
============ ============ ============
Income taxes $ - $ - $ 1,001,461
============ ============ ============
</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
Supplemental schedule of non-cash investing and financing activities:
In October 1996, an unrelated third party exercised an option to purchase
357,143 shares of common stock. As consideration, the Company received 125,000
shares of Series A-3 Preferred Stock having a redemption value of $1,250,000.
In November 1996, a former executive of the Company exercised an option on
35,000 shares of common stock at $.01 per share. Such options were granted in
consideration for a consulting contract and were valued at $200,000.
In January 1997, an unrelated third party was granted an option on 200,000
shares of common stock, exercisable at $.01 per share, in exchange for a two
year consulting agreement valued at $973,000.
In August 1997, in connection with the sale of Series F 6% Preferred Stock to an
unrelated third party, the Company issued warrants to purchase 500,000 shares of
the Company's common stock, exercisable at $1.50 per share. The Company valued
the warrants at $150,000. Also in connection with the transaction, the Company
recorded a dividend of $250,000 representing the value assigned to the preferred
stock's discount feature (see Note 10).
In December 1997, in connection with the Overhill Farms credit agreement,
warrants to purchase 30% of the common stock of Overhill at a nominal exercise
price were issued having an estimated fair value of $1,200,000 (see Notes 8 and
10).
In connection with the refinancing of certain indebtedness with Merrill Lynch in
December 1997, the Company issued warrants to purchase 210,000 shares of the
Company's common stock exercisable at $.01 per share and 210,000 shares
exercisable at $1.125 per share. Such warrants were valued at $175,000.
In September 1998, the Company recorded a liability, together with a
corresponding charge to paid in capital, for $500,000 in connection with the
settlement of a lawsuit. In December 1998 and January 1999, the Company made
partial payments on the obligation, together with certain associated expenses,
by granting options on 300,000 shares of common stock, exercisable at $.01 per
share. The options were assigned a value of $85,000.
The Company issued common shares valued at $205,647 in 1999 and $22,500 in 1998
in payment of accrued dividends on preferred stock (see Note 10).
In December 1998, the Company settled certain obligations by granting options on
145,000 shares of common stock, exercisable 130,000 shares at $.01 per share and
15,000 shares at $.50 per share. The options were assigned a value of $28,000.
During 1999, the Company recovered 2,000,000 shares of its common stock from a
former related party, of which 500,000 shares were used to satisfy a note
receivable and 1,500,000 shares were recorded as other income. As the Company
has previously assigned all of its rights to the 2,000,000 shares to a related
party in connection with a previous debt extension, interest expense of $875,000
was recorded in connection with the recovery (see Notes 9, 10 and 13).
The accompanying notes are an integral part
of these consolidated financial statements
F-11
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. COMPANY AND ORGANIZATIONAL MATTERS
Nature of Business
Polyphase Corporation (the "Company" or "Polyphase") is a diversified
holding company that, through its subsidiaries, currently operates in two
industry segments: the food segment and the forestry segment. The food
segment (the "Food Group"), which consists of the Company's Overhill Farms,
Inc. ("Overhill") subsidiary, produces high quality entrees, plated meals,
soups, sauces and poultry, meat and fish specialties. Overhill is a wholly-
owned subsidiary of the Company, subject to warrants outstanding to
purchase Overhill's common stock (see Note 10). The forestry segment (the
"Forestry Group"), which consists of the Company's wholly-owned subsidiary
Texas Timberjack, Inc. ("Timberjack" or "TTI") and TTI's majority-owned
subsidiaries Southern Forest Products LLC ("SFP") and Wood Forest Products
LLC ("WFP"), distributes, leases and provides financing for industrial and
commercial timber equipment and is also engaged in certain related timber
and sawmill operations. The Company's transformer segment, which
manufactures and markets electronic transformers, inductors and filters
(the "Transformer Group") was discontinued in fiscal 1999, as a result of
the sale of its wholly-owned subsidiary Polyphase Instrument Co. ("PIC").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and its majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Certain
prior year amounts have been reclassified to conform to the 1999
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-12
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's wholly-owned 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, which 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.
For the years ended September 30, 1999, 1998 and 1997, the Company has
write-offs, net of recoveries, to the allowance for doubtful accounts of
$188,269, $556,881 and $260,057, respectively.
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 food
processing operations are stated at the lower of cost or market as
determined by the first-in, first-out (FIFO) method and using the average
cost method for raw timber and finished wood products. Inventories of
timber equipment are valued at the lower of cost or market or, in the case
of repossessed and used equipment, net realizable value, based upon the
specific identification method.
Concentration of Sources of Labor
The Food Group's total hourly and salaried work force consists of
approximately 750 employees. Approximately 76% of the Food Group's work
force is covered by collective bargaining agreements expiring in fiscal
years 2000 and 2001. The Company has begun preliminary negotiations with
representatives of employees under collective bargaining agreements
expiring in fiscal 2000 and considers its union relations to be good.
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.
F-13
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired (goodwill) at the
date of acquisition is amortized on a straight line basis over 20 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 has elected to continue to follow 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
Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation", which provides for either recognition or disclosure of a
hypothetical charge for the fair value of stock options granted. The
Company has provided the required SFAS 123 disclosures in Note 10.
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 Group relates to
the sale of equipment through sales/finance contracts. Revenue is
recognized on these accounts using the installment method (see Note 3).
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.
Key sales and income information for the Forestry Group for fiscal 1999,
1998 and 1997 are:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Equipment sales total $28,455,430 $35,459,912 $43,460,398
Equipment sales financed 3,155,817 3,255,692 3,608,210
Income earned on installment basis 776,789 2,343,423 1,613,172
Interest income earned on installment notes 883,542 1,317,215 1,457,125
</TABLE>
F-14
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes
Deferred income taxes recorded using the liability method reflect the net
tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Income (Loss) Per Share
Options to purchase approximately 1.2 million shares of common stock at a
weighted average exercise price of $0.99 per share, warrants to purchase
710,000 shares of common stock at a weighted average exercise price of
$1.39 per share and 115,000 shares of preferred stock convertible into
shares of common stock at market prices were outstanding during the year
ended September 30, 1999 and excluded from the calculation of diluted
earnings per share as the effect would be antidilutive. In 1998, 1,899,000
common stock equivalents included in the calculation of diluted earnings
per share were comprised of options to purchase 32,000 shares of common
stock, warrants to purchase 90,000 shares of common stock and preferred
stock convertible into 1,777,000 shares of common stock. Options to
purchase approximately 1.5 million shares of common stock at a weighted
average exercise price of $1.70 per share, warrants to purchase 500,000
shares of common stock at a weighted average exercise price of $1.50 per
share and 257,500 shares of preferred stock convertible into shares of
common stock at various prices were outstanding during the year ended
September 30, 1997 and excluded from the calculation of diluted earnings
per share as the effect would be antidilutive.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), as amended, which is required to be adopted by the Company on October
1, 2000. SFAS No. 133 requires that all derivatives be recorded on the
balance sheet at fair value. Changes in derivatives that are not hedges are
adjusted to fair value through income. Changes in derivatives that meet the
Statement's hedge criteria will either be offset through income, or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company is currently evaluating the impact of
SFAS 133 on its future financial condition, results of operations and cash
flows.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
F-15
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. SALES CONTRACTS RECEIVABLE
The Company's Forestry Group 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, 1999 and 1998 and the related deferred income
based on the installment method of income recognition.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Contracts outstanding $ 10,194,090 $ 8,738,682
Less deferred income (3,174,987) (3,322,066)
------------ ------------
7,019,103 5,416,616
Less allowance for doubtful accounts (139,440) (174,157)
------------ ------------
Net investment in sales contracts receivable $ 6,879,663 $ 5,242,459
============ ============
</TABLE>
The following is a summary of the maturities of the sales contracts
receivable and related deferred income:
Contracts Deferred
Due September 30, Outstanding Income Net
----------------- ------------- ------------- ------------
2000 $ 7,257,118 $ 2,393,264 $ 4,863,854
2001 2,418,652 699,916 1,718,736
2002 477,455 77,570 399,885
2003 40,865 4,237 36,628
------------- ------------- ------------
$ 10,194,090 $ 3,174,987 $ 7,019,103
============= ============= ============
4. NOTES RECEIVABLE
The Forestry Group periodically makes advances under promissory notes to
certain unrelated individuals and corporations. These notes have interest
rates that range from 12% to 18%, are generally due within one year and are
secured by a variety of marketable collateral. Interest is accrued on notes
receivable as long as the Company believes the notes are collectible. The
accrued interest is added to the note and is shown as part of that balance
in the accompanying statements. Allowances are established periodically if,
at the date of valuation, management feels it is probable that a loss
exists on a note. The allowance is established based upon payment history,
evaluation of the portfolio and the related expected credit risk.
The Company had $3,359,777 and $1,813,232 of short-term notes receivable as
of September 30, 1999 and 1998, respectively, from unrelated corporations
and individuals, net of allowances of $173,184 and $208,743, respectively.
The loans are secured primarily by land, timber and equipment. At September
30, 1999, approximately $848,000 of such notes receivable were no longer
accruing interest. All notes receivable are due in less than one year.
F-16
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. INVENTORIES
Inventories are summarized as follows:
September 30,
-----------------------------
1999 1998
------------- -------------
Finished goods $ 22,409,448 $ 23,520,114
Raw materials 8,565,296 8,890,275
Inventory reserve (50,000) (52,000)
------------- -------------
Total $ 30,924,744 $ 32,358,389
============= =============
As of September 30, 1999 and 1998, finished goods inventories are comprised
of approximately $7,804,000 and $5,576,000 in inventories at the Food
Group, $13,603,000 and $16,745,000 in timber and logging related equipment,
and $1,003,000 and $1,198,000 in finished wood products, respectively. As
of September 30, 1999 and 1998, raw materials inventories are comprised of
approximately $5,872,000 and $4,684,000 in inventories at the Food Group,
and $2,693,000 and $4,207,000 in harvested but unprocessed timber,
respectively.
6. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
September 30,
-----------------------------
1999 1998
------------- -------------
Non-compete agreements (a) $ 700,000 $ 700,000
Deferred financing costs (b) 2,608,733 2,608,733
Consulting contract (c) 200,000 200,000
Other 22,800 322,132
------------- -------------
3,531,533 3,830,865
Less accumulated amortization (2,315,140) (1,336,111)
------------- -------------
$ 1,216,393 $ 2,494,754
============= =============
(a) The Company has noncompete agreements with two officers of Texas
Timberjack, Inc. Such amounts are being amortized over the seven-year
life of each agreement.
(b) The Company incurred certain legal, brokerage and other costs
associated with the financing of the initial acquisition of Overhill
Farms and the subsequent refinancing of debt in December 1997 and
November 1999. These costs are being amortized over periods of three
to five years (see Note 8 regarding the write-off of certain costs
associated with the initial acquisition financing and the December
1997 and November 1999 refinancings).
(c) The Company granted a former executive options to purchase 35,000
shares of common stock at $.01 per share. The options were granted in
consideration of a five year consulting contract and were valued at
$200,000 based on the fair market value at the date of grant. The
contract is being amortized over the five-year period.
F-17
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Note payable to Ford Motor Credit Corporation (a) $ 228,616 $ 979,451
Note payable to Associates First Capital Corporation (b) - 905,948
Note payable to Bank of America (c) 3,900,000 2,200,000
Other notes payable 274,648 123,857
------------ ------------
$ 4,403,264 $ 4,209,256
============ ============
</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) TTI has a floor plan agreement with Associates First Capital
Corporation to finance equipment. The agreement accrues interest on an
individual unit basis with an average interest rate of prime
(approximately 8.25% at September 30, 1999), and the equipment may be
financed for up to one year. There were no amounts outstanding under
the agreement as of September 30, 1999.
(c) TTI has an $8.0 million revolving line of credit with Bank of America,
N.A. (formerly NationsBank of Texas, N.A.). Amounts advanced under the
line of credit bear interest at prime less .25% (approximately 8.0% at
September 30, 1999), and are collateralized by substantially all of
TTI's assets. The line of credit agreement contains various covenants
related to receivables, capital expenditures, inventories, debt
ratios, contingent liabilities and payment of dividends. Furthermore,
the terms of the revolving line of credit generally prohibit
dividends, loans or advances from TTI to the Company, but permit the
payment of taxes. The Company has guaranteed all obligations under the
TTI revolving line of credit. Availability under the line as of
September 30, 1999 amounted to approximately $4.1 million. TTI intends
to renew the revolving credit facility upon maturity in March 2000.
The weighted average interest rate on short-term borrowings for the year
ended September 30, 1999 was 6.9%.
F-18
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Senior subordinated notes payable of Overhill due to a financial
institution, bearing interest at prime plus 4.0%, (12.25% at September
30, 1999) or 12.5%, whichever is greater, maturing December 5, 2000,
interest payable monthly, with $250,000 per month principal payments
beginning in May 1999 through maturity, net of discount of $466,667 and
$866,667, for 1999 and 1998, respectively. $ 22,708,333 $ 23,308,333
Revolving credit agreement of Overhill with a financial institution,
bearing interest at the Citibank base rate plus 1.5% (approximately 9.75%
at September 30, 1999) and collateralized by accounts receivable and
inventories. The agreement expires in November 2002. 9,647,005 9,959,425
Revolving credit agreements of TTI subsidiaries with a financial
institution, bearing interest at prime (8.25% at September 30, 1999) and
collateralized by accounts receivable, inventory and fixed assets of
subsidiaries. The agreements are guaranteed by TTI and expire in
April 2000. 5,458,498 4,357,083
Term loan of TTI in the amount of $4,000,000 payable to a financial
institution, bearing interest at 8.3%, due in monthly installments of
$111,111 plus accrued interest, with maturity in August 2001. 2,555,556 3,888,889
Senior convertible debentures, bearing interest at 12%, due July 1,
1999 (the "1999 Bonds"). - 1,200,000
Other 21,597 -
------------ ------------
40,390,989 42,713,730
Less current maturities (6,798,467) (13,492,758)
------------ ------------
Total long-term debt $ 33,592,522 $ 29,220,972
============ ============
</TABLE>
F-19
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Scheduled maturities of long-term debt, after giving effect to the November
1999 refinancing discussed below, are as follows:
2000 $ 6,798,467
2001 1,228,858
2002 9,653,641
2003 1,690
2004 23,175,000
------------
Total 40,857,656
Less: unamortized debt discount 466,667
------------
$ 40,390,989
============
In December 1997, Overhill refinanced a certain portion of its existing
debt. The new financing amounted to a total facility of $24.2 million which
is structured as a three-year term loan maturing in December 2000. The
agreement also requires Overhill to pay on a quarterly basis, service fees
totaling $180,000, $300,000 and $440,000 for the first, second and third
years of the loan respectively. Under the terms of the agreement, the
Company granted stock warrants that entitle the holder to immediately
acquire at $.01 per share, 30% of the common stock of Overhill, of which
25% (5/6 of the total shares under warrant) could be repurchased by the
Company for $2,000,000 during the two-year period following the date of the
agreement. In June 1998, in connection with amending certain covenants and
restrictions, the percentage of Overhill that the Company can repurchase
for $2,000,000 was reduced to 20% from 25%. Additionally, the lender
received fees totaling approximately $1.7 million in connection with this
financing, of which $500,000 is refundable if the loan is paid in full
during the second year of the loan. The Company used a portion of the
proceeds to repay Term Loans A and B, and $2,800,000 of principal of the
$4,000,000 senior convertible debentures described below. The early
extinguishment of this indebtedness resulted in an extraordinary charge of
approximately $616,000 in fiscal 1998.
In November 1999, Overhill refinanced substantially all of its existing
debt. The total facility amounted to $44 million, consisting of a $16
million line of credit provided by Union Bank of California, N.A. ("Union
Bank") together with $28 million in the form of a five-year term loan
provided by Levine Leichtman Capital Partners II, L.P. ("LLCP").
The line of credit with Union Bank expires in November 2002 and provides
for borrowings limited to the lesser of $16 million or an amount determined
by a defined borrowing base consisting of eligible Overhill receivables and
inventories. Borrowings under the line of credit will bear interest at a
rate, as selected by Overhill at the time of borrowing, of prime plus .25%
or LIBOR plus 2.75%. The Union Bank agreement provides, among other things,
that Overhill will be subject to an unused line of credit fee of .25% per
annum. The agreement contains various covenants including restrictions on
capital expenditures, and specified net worth levels and debt service
ratios. In addition, the terms of the agreement generally prohibit loans,
dividends or advances from Overhill to the Company and limit payments of
taxes and other
F-20
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
expenses to Polyphase to specified levels. The line of credit is guaranteed
by the Company and collateralized by certain assets of Overhill and all of
the Overhill common stock owned by the Company.
The term loan with LLCP is a secured senior subordinated note bearing
interest at 12% per annum, with interest payable monthly until maturity in
October 2004. Principal payments in an amount equal to 50% of the excess
cash flow, as defined, for Overhill's previous fiscal year are also payable
annually commencing in January 2001. Voluntary principal payments are
permitted after October 31, 2001, subject to certain prepayment penalties.
The agreement contains various covenants including restrictions on capital
expenditures, minimum EBITDA and net worth levels, and specified debt
service and debt to equity ratios. In addition, the terms of the agreement
restrict changes in control, generally prohibit loans, dividends, or
advances by Overhill to the Company and limit payments of taxes and other
expenses to Polyphase to specified levels. The term loan with LLCP is
guaranteed by the Company and collateralized by certain assets of Overhill.
The agreement also requires Overhill to pay to LLCP, during each January,
annual consulting fees of $180,000.
In connection with the agreement, LLCP was granted stock warrants to
purchase 17.5% of the common stock of Overhill, exercisable immediately at
a nominal exercise price. During the first two years following the date of
the agreement, Overhill has the right to repurchase 5% of Overhill's shares
from LLCP for $3 million and/or to repurchase all 17.5% of the Overhill
shares subject to the LLCP warrant within five days of the term loan being
repaid at their then determined fair market value. If such shares are not
repurchased, LLCP will be entitled under the agreement to receive a cash
payment of $500,000 from Overhill. At the date of issuance, the warrants
granted to LLCP were estimated to have a fair value of $2.37 million.
As a result of these transactions, Overhill repaid in full the $22.7
million senior subordinated notes payable and the $9.6 million revolving
line of credit. Additionally, Overhill repurchased for $3.7 million the
warrants held by the lender to purchase 30% of Overhill's common stock. In
addition, in connection with the refinancing, Overhill was permitted to
make a one-time advance of $1.25 million to Polyphase for working capital
and other specified purposes. Overhill incurred costs and expenses in
connection with the refinancing totaling approximately $2.5 million,
substantially all of which has been, or will be paid, to the lenders. The
early extinguishment of the previous indebtedness will result in an
extraordinary loss of approximately $1.2 million (net of a $500,000 refund
for early payment of the senior subordinated notes) to be recognized during
the Company's quarter ending December 31, 1999.
In connection with its acquisition in 1995, Overhill obtained a credit
facility with Finova Capital Corporation in the original amount of
$18,000,000, consisting of a $12,000,000 revolving line of credit and two
term loans, A and B for $2,000,000 and $4,000,000, respectively. Term Loans
A and B were repaid in December 1997 as described above. 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 and inventory. Borrowings under the line of credit facility
bear interest at the Citibank base rate
F-21
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
plus 1.5% (approximately 9.75% at September 30, 1999). 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 credit facility is
collateralized by Overhill's receivables and inventories and has been
guaranteed by the Company. The borrowings are classified as long-term debt
due to their subsequent refinancing under a long-term arrangement with
Union Bank as discussed above.
The 1999 Bonds were repaid in July 1999. Such Bonds, in the original
principal amount of $4,000,000, were 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 $3.00 per share conversion
price, subject to adjustment in certain circumstances. As part of the 1997
refinancing, the holders were granted warrants to purchase 420,000 shares
of the Company's common stock, exercisable over a five-year period, with
certain registration rights. The warrants are exercisable for 210,000
shares at $.01 per share (which were exercised during fiscal 1998) and
210,000 shares at $1.125 per share, the market price of the Company's
common stock on the date of grant (see Note 10).
9. NOTE PAYABLE AND ACCRUED INTEREST TO RELATED PARTY
In connection with the acquisition of TTI in June 1994, 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, Mr. Estes has
entered into subsequent agreements with the Company to modify and extend
the term of the note. As of September 30, 1999, the note had a total unpaid
balance of $17,914,842 (principal of $16,347,191 and accrued interest of
$1,567,651), bearing interest at 9.75% per annum with a maturity date of
December 15, 1999. During November 1999, the note was further modified and
extended to mature October 10, 2002 at an interest rate of 9% per annum,
and to allow for principal and interest payments to be made with amounts
upstreamed to Polyphase by Timberjack for the payment of taxes (subject to
the approval of Timberjack's Board of Directors and its lenders). In
connection with a previous modification in 1998, the Company agreed to
assign Mr. Estes any interest it may have or subsequently obtain with
respect to 2,000,000 shares of the Company's common stock owned by the
Pyrenees Group ("Pyrenees"), a private investment firm controlled by Paul
A. Tanner, the Company's former Chairman and Chief Executive Officer, and
previously held by Mr. Estes as secondary collateral. These shares, which
were recovered in 1999 on behalf of Mr. Estes, had a value of $875,000,
which was charged to interest expense in 1999 (see Notes 10 and 13).
F-22
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. 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, as follows:
Authorized Conversion
Series Shares Price
---------- ---------- ----------
A 375,000 $ .50
B 300,000 1.00
C 300,000 2.00
D 600,000 4.00
E 1,425,000 10.00
F 10,000 Variable
G 5,000 Variable
A-2 750,000 $ 5.00
A-3 750,000 Variable
A-5 750,000 $ 5.00
All shares of preferred stock referred to above generally have a redemption
value of $10 per share, have a liquidation preference of $10 per share and
are callable by the Company at 105% of the redemption value.
Holders of the 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. Only Series A-2 and Series A-3 (described below) entitle holders of
preferred stock to voting rights.
The designations of the Series A-3 stock are similar to those of other
series of preferred stock, except that holders of the Series A-3 preferred
stock have voting rights (two votes for each preferred share held) and are
entitled to cumulative annual dividends of 12%. The conversion rate of the
Series A-3 preferred stock, originally $5.00 per share, was adjusted in
November 1997 (pursuant to the preferred stock designations) to the market
price of the Company's common stock immediately preceding the date of
conversion. Additionally, the designations were amended to permit payment
of dividends, at the option of the Company, in either cash or common stock.
Also during November 1995, the Company entered into an agreement with an
associate of the corporate purchaser of the Series A-3 preferred stock to
provide consulting services to the Company over a 36-month period.
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. The associate of the
aforementioned corporation subsequently exercised this stock option. The
consideration for the exercise of the option on 357,143 shares was the
tender of 125,000 shares of Series A-3 preferred stock, having a
F-23
<PAGE>
redemption value of $1,250,000, which had been assigned by the corporation to
its associate.
Since issuance, the holder of the Series A-3 preferred stock, Infinity
Investors Limited ("Infinity"), has converted a total of 68,560 shares of
such stock having a redemption value of $685,600, together with accrued
dividends of $228,147, into a total of 2,500,000 shares of the Company's
common stock. Based upon the market price of the Company's common stock as of
September 30, 1999, Infinity would have been entitled to approximately 1.2
million common shares upon conversion of its remaining preferred stock and
accrued dividends. Any additional conversions of Infinity's Series A-3
preferred stock for common shares in excess of the 2,500,000 shares obtained
in previous conversions would require that the Company file an application
with the American Stock Exchange ("AMEX") for the listing of such additional
common shares prior to issuance. The AMEX Company Guide requires stockholder
approval as a prerequisite to the filing of such additional listing
application. At the Company's Annual Meeting held May 27, 1999, a majority of
the Company's stockholders voted against a proposal to file an additional
listing application with respect to the conversion of additional preferred
shares to common shares by Infinity. The Company's inability to honor
conversion requests resulted in litigation by Infinity against the Company.
During November 1999, the Company and Infinity entered into a settlement
agreement wherein, among other things, the Company agreed to repurchase all
remaining Series A-3 preferred stock owned by Infinity, including all accrued
but unpaid dividends, for $450,000 cash, and Infinity agreed to the dismissal
of all litigation against the Company with respect these matters. As a result
of the settlement, the Company will record an increase in stockholders'
equity of approximately $351,000, related to the difference between the
carrying value of the preferred shares plus accrued dividends and the
settlement amount, in the first quarter of fiscal 2000.
During August 1997, the Company sold 7,500 shares of newly designated Series
F 6% preferred stock for $750,000, less expenses. The designations for Series
F preferred stock provide for a redemption value of $100 per share,
cumulative annual dividends of 6%, payable quarterly, and for a conversion
price equal to 75% of the average closing price of the Company's common stock
for the five trading days immediately preceding conversion. In connection
with this transaction, the Company recorded a non-cash dividend of $250,000,
representing the value assigned to the discount feature related to the
conversion of the preferred stock. During the year ended September 30, 1998,
the holder converted all 7,500 shares of the Series F 6% preferred stock into
a total of 1,008,355 shares of the Company's common stock.
Stock Options
During July 1993, the Board of Directors granted to certain officers, both of
whom are directors of the Company, options to purchase 293,000 shares of the
Company's common stock at an exercise price of $.75 per share, which was
equal to the fair value at the date of grant. The expiration date of these
options was extended to July 2003 by the Board of Directors in March 1998.
Under the terms of the 1994 Employee Stock Option Plan (as amended) adopted
by the Board
F-24
<PAGE>
of Directors in March 1994, the Company has reserved a total of 1,750,000
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 non-qualified 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. As of September 30, 1999,
options for 900,000 shares were available for future grant under the Plan.
At September 30, 1999, options outstanding that were granted pursuant to the
Plan consist of a total of 385,000 shares, of which 290,000 were granted in
July 1996 at $2.00 per share to certain officers and directors; 80,000 of
which were granted to certain directors in March 1998 at an exercise price of
$.75 per share; and 15,000 of which were granted to a consultant in April
1999 at an exercise price of $.50 per share; all such exercise prices were
equal to the fair market value as of the date of grant.
In January 1997, an unrelated third party was granted an option to purchase
200,000 shares of the Company's common stock, exercisable at $.01 per share,
in exchange for a two-year consulting agreement. The contract was valued at
$973,000 based upon the trading value of the Company's common stock at the
date of grant. The option holder ceased performing services for the Company
during the year ended September 30, 1997; accordingly, the Company recognized
the entire amount associated with the consulting contract as an expense
during fiscal 1997. During fiscal 1998, the Company canceled these options
and refused to allow the holder to exercise them. This matter became the
subject of litigation which resulted in a judgment of $500,000 against the
Company which was recorded as a liability as of September 30, 1998, with a
corresponding charge to paid-in capital. Subsequently, the Company entered
into a settlement agreement with the aforementioned unrelated third party
whereby the Company agreed to pay the judgment amount at a rate of $8,000
(including interest at 10% per annum) per month for eighteen months beginning
in October 1998 with a balloon payment of the remaining principal and
interest balances at the end of that period. In addition, as consideration
for this forbearance and for partial payment against the judgment, together
with certain costs associated therewith, the Company issued the unrelated
third party a total of 300,000 shares of its common stock valued at $85,000.
During January 1999, a former employee of the Company was granted and
exercised options covering 130,000 shares of common stock at $.01 per share.
Such options were granted in consideration for past and future consulting
services, and were valued at $28,000 which was charged to expense in 1999.
In November 1996, a former executive of the Company was granted and exercised
options covering 35,000 shares of common stock at $.01 per share. Such
options were granted in consideration for a consulting contract and were
valued at $200,000, with this amount being amortized over a five-year period.
F-25
<PAGE>
A summary of changes in common stock options during the years ended
September 30, 1999, is as follows:
<TABLE>
<CAPTION>
Number of Exercise Weighted Avg.
Shares Price Exercise Price
---------------- ---------------- -----------------
<S> <C> <C> <C>
Outstanding September 30, 1996 1,285,143 $ .75 - 5.25 $ 2.01
Granted 235,000 $ .01 $ .01
Exercised (467,143) $ .01 - 3.50 $ 2.80
Canceled (30,000) $ 2.00 $ 2.00
---------
Outstanding, September 30, 1997 1,023,000 $ .01 - 5.25 $ 1.41
Granted 80,000 $ .75 $ .75
Canceled (375,000) $ .01 - 2.00 $ .94
-------- ------------ ---------
Outstanding, September 30, 1998 728,000 $ .75 - 5.25 $ 1.58
Granted 445,000 $ .01 - .50 $ .03
Exercised (430,000) $ .01 $ .01
Canceled (65,000) $2.00 - 5.25 $ 4.50
------- ------------ ---------
Outstanding, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
======= ============ =========
Exercisable, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
Exercisable, September 30, 1998 728,000 $ .75 - 5.25 $ 1.58
Exercisable, September 30, 1997 1,023,000 $ .01 - 5.25 $ 1.41
</TABLE>
Summarized information about stock options outstanding at September 30, 1999,
all of which are exercisable, is as follows:
<TABLE>
<CAPTION>
Options Outstanding/ Weighted Average
Exercise Exercisable at Remaining
Price September 30, 1999 Contractual Life
------------------------ ---------------------------- --------------------------
<S> <C> <C>
$ .50 15,000 Shares 1.08 Years
$ .75 373,000 Shares 4.82 Years
$ 2.00 290,000 Shares 6.75 Years
</TABLE>
Proforma information regarding net income (loss) is required by SFAS 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method specified by SFAS 123. The fair value of
options granted during the years ended September 30, 1999 was estimated at
the date of grant using the Black-Scholes option pricing
F-26
<PAGE>
model with the following weighted-average assumptions for grants for the
years ending September 30, 1999, 1998 and 1997, respectively: risk free
interest rate of 4.86%, 5.52% and 5.21%; no dividends expected to be
declared; volatility factor of .916, 1.150 and .994; and a weighted average
expected life of less than one month, five years and six months. The effect
of applying the fair value method under SFAS 123 to the Company's stock-based
awards would result in a net loss during the years ended September 30, 1999,
1998 and 1997 that is not materially different from amounts reported and
would have no effect on reported per share amounts.
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance of
options to purchase five series of convertible preferred stock to the
Pyrenees Group, a private investment firm controlled by Paul A. Tanner, the
Company's former Chairman and Chief Executive Officer, or its assignees. The
options are summarized as follows:
<TABLE>
<CAPTION>
Preferred Conversion Common
Series Shares Price Shares
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
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
</TABLE>
During fiscal 1994 and 1995, Pyrenees exercised and converted Series A, B and
C Preferred Stock into common stock. In November 1995, Pyrenees exercised the
Series D option through the issuance of a 7% recourse note in the amount of
$2,000,000, collateralized by the shares issued, which was treated as an
in-substance stock option at the date of grant. During fiscal 1996, these
shares were converted to 500,000 shares of common stock. During the years
ended September 30, 1996 and 1997, principal payments of approximately
$721,000 and $304,000, respectively, were made on the note. The remaining
balance of $975,000 became uncollectible, and the 500,000 shares of common
stock that secure this note have been recovered pursuant to certain
litigation against Pyrenees and Mr. Tanner (see Note 13). This recovery has
been accounted for as an unexercised stock option in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". As such, $756,000, representing the difference between the note
balance and the fair market value of the 500,000 shares as of the recovery
date was recorded as a reduction in paid-in capital.
F-27
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Warrants
Polyphase Warrants
------------------
In connection with the issuance of the Series F 6% Preferred Stock referred
to above, the Company issued warrants to purchase 500,000 shares of it
common stock at $1.50 per share, exercisable through September 2002. The
warrants were valued at $150,000 which was charged to operations in fiscal
1998.
In connection with the restructuring of the 1999 Bonds in December 1997
(see Note 8), the Company issued to the holders warrants totaling 420,000
shares of the Company's common stock. The warrants cover 210,000 shares
exercisable at $.01 per share, which were exercised in May 1998, and an
additional 210,000 shares exercisable at $1.125 per share, exercisable
through April 24, 2003. These warrants were valued at $175,000, which was
amortized over the remaining term of the 1999 Bonds.
Subsidiary Warrants
-------------------
As of September 30, 1997, the Company had recorded a liability for a
warrant to purchase 22.5% of the common stock of the Company's Overhill
subsidiary for $2,000,000, which represents the price at which the warrants
were repurchased by the Company from the holder in December 1997. During
1997 and prior fiscal years, the Company systematically provided for
accretion in the estimated value of the warrant by periodic charges to
operations in amounts representing the change in the estimated fair value
of the warrant.
In connection with Overhill's December 1997 refinancing (see Note 8), the
Company granted stock purchase warrants that entitled the holder to
immediately acquire at $.01 per share, 30% of the common stock of Overhill.
Such warrants were valued at $1,200,000, which was recorded as debt
discount and is being amortized over the term of the loan. The agreement
provided that warrants for the purchase of 25% of Overhill could be
repurchased by the Company for $2,000,000 during the two-year period
following the date of the agreement. In June 1998, in connection with
amending certain covenants and restrictions, the percentage of Overhill
that the Company could repurchase for $2,000,000 was reduced to 20% from
25%. As these warrants to purchase common stock of a subsidiary have a
nominal exercise price, the Company has accounted for the warrants as a
minority interest. Accordingly, for the fiscal year ended September 30,
1999, the Company has recorded warrant accretion of approximately $225,000.
In connection with the November 1999 refinancing discussed below, Overhill
repurchased all warrants held by Long Horizons for total consideration of
$3.7 million. This transaction was treated as a reacquisition of minority
interest resulting in $2.2 million of goodwill being recorded in connection
with this repurchase transaction.
F-28
<PAGE>
Also in connection with the Long Horizons refinancing in December 1997, an
unrelated consultant was issued a warrant to purchase 1% of Overhill's
common stock, exercisable through December 3, 2000, at a purchase price of
$50,000. Such warrant remains outstanding following the November 1999
refinancing described below.
In connection with the financing provided by LLCP in November 1999 (see
Note 8), the Company granted stock purchase warrants that entitle LLCP to
immediately acquire 17.5% of the common stock of Overhill, at a nominal
exercise price. Such warrants were valued at $2.37 million and will be
recorded as a debt discount to be amortized over the term of the LLCP loan.
During the first two years following the date of the agreement, Overhill
has the right to repurchase 5% of Overhill's shares from LLCP for $3
million and/or to repurchase all 17.5% of the Overhill shares subject to
the LLCP warrant within five days of the loan being repaid at their then
determined fair market value. If such shares are not repurchased, LLCP will
be entitled under the agreement to receive a cash payment of $500,000 from
Overhill.
11. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
For the Years Ended
September 30,
-----------------------------------------------------------
1999 1998 1997
---------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal $300,000 $ - $(1,126,891)
State 53,881 56,575 239,869
Deferred:
Federal - - 168,278
State - - 65,061
---------------- ----------------- -----------------
Total income taxes $353,881 $ 56,575 $ (653,683)
================ ================= =================
</TABLE>
F-29
<PAGE>
The effective tax rate on income (loss) before income taxes 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,
-----------------------------------------------------
1999 1998 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
Effective statutory tax expense (benefit) rate 34.0% 34.0% (34.0%)
Increase (decrease) in effective tax rate resulting
from:
Federal tax assessment 182.8 - -
State taxes, net of federal tax benefit 32.8 16.9 (4.1)
Officer life insurance premiums, amortization of
goodwill, accretion of stock warrants
(9.1) 81.0 2.9
Change in valuation allowance (26.1) (87.8) 26.6
Sale of subsidiaries - (9.7) 5.7
Other (4.9) 5.7 (0.7)
Tax credits 6.1 (23.2) -
--------------- -------------- ----------------
Effective tax expense (benefit) rate 215.6% 16.9% (3.6%)
=============== ============== ================
</TABLE>
F-30
<PAGE>
The components of deferred tax balances are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 683,249 $ 290,945
Inventory 158,628 215,747
Accrued expenses 399,360 395,545
Capital loss carryforwards 394,388 240,318
Net operating loss carryforwards 4,434,471 4,865,745
AMT and other credit carryforwards 416,777 336,944
Fixed assets 341,190 54,098
--------------- ---------------
Total deferred tax assets 6,828,063 6,399,342
Valuation allowance (5,694,986) (5,354,856)
--------------- ---------------
Deferred tax assets 1,133,077 1,044,486
--------------- ---------------
Deferred tax liabilities:
Prepaid expenses (124,528) (120,938)
Intangibles (682,934) (681,916)
Investments in partnerships (88,338) -
Other (237,277) (241,632)
--------------- ---------------
Deferred tax liabilities (1,133,077) (1,044,486)
--------------- ---------------
Net deferred tax assets $ - $ -
=============== ===============
</TABLE>
The Company has net operating losses available for carryforward of
approximately $11,000,000, which begin to expire in 2012 and capital losses
available for carryforward of approximately $986,000. Additionally, the
Company has alternative minimum tax credit carryforwards of $177,277 which
have no expiration and general business credits of $239,500 which begin to
expire in 2012. The Company has recorded a valuation allowance for its net
deferred tax asset position at September 30, 1999 and 1998 due to
uncertainty with respect to the future recoverability of such amounts.
During 1999, the federal income tax returns of TTI for the year ended March
31, 1994 and for the stub period ended June 24, 1994 were audited by the
Internal Revenue Service ("IRS"). Both of these tax periods were prior to
the acquisition of TTI by Polyphase. In connection with these audits, the
IRS assessed TTI with additional taxes of approximately $752,000 for the
year ended March 31, 1994. The Company and TTI appealed the IRS decision,
and in anticipation of further contesting the matter in District Court, TTI
made a cash payment to the IRS of $1,185,000, representing the above tax
assessment plus penalties and interest of $433,000. Such appeal was denied
by the IRS, and TTI is currently planning to seek recovery through
F-31
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
District Court proceedings pending the results of settlement negotiations.
Based upon the amounts expected to be recovered through protective refund
claims filed with the IRS for the tax periods ending March 31, 1992 and
June 24, 1994, as well as TTI's evaluation (based on the advice of counsel)
of its remedies through litigation, TTI has expensed $300,000 for the
fiscal year ended September 30, 1999, representing amounts considered not
recoverable.
12. COMMITMENTS AND CONTINGENCIES
Commitments
Future minimum lease payments for all operating leases at September 30,
1999 are as follows:
<TABLE>
<S> <C>
2000 $1,777,627
2001 1,425,253
2002 709,708
2003 32,536
2004 4,110
-------------------
$3,949,234
===================
</TABLE>
Certain of the leases provide for renewal options for periods from 1999 to
2005 at substantially the same terms as the current leases.
Rent expense, including monthly equipment rentals, was approximately
$2,226,559, $1,946,000 and $1,847,000 for the years ended September 30,
1999, 1998 and 1997, respectively.
TTI relies on two suppliers for the majority of its new units and parts. As
of September 30, 1999, TTI had commitments to purchase inventory from these
suppliers amounting to $4,115,000.
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, 1999, TTI's guarantees totaled $22,340,875. TTI 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
and is usually held by the institution to meet reserve requirements. Funds
held in escrow by the lenders amounting to $625,623 at September 30, 1999,
are included in the consolidated balance sheet as restricted cash and are
fully offset by the Company's reserve for credit guarantees.
F-32
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TTI has an interest in two unconsolidated partnerships. The total
investment in these partnerships at September 30, 1999 of $420,295 is
included in other assets. TTI guarantees the debt of these partnerships.
The amount guaranteed at September 30, 1999 of $232,935 is collateralized
by the accounts receivable, inventory, equipment, buildings and real estate
of the partnerships.
Contingencies
During fiscal 1997, five substantially identical complaints were filed in
the United States District Court for the District of Nevada against the
Company and certain of its officers and directors. The complaints each
sought certification as a class action and asserted liability based on
alleged misrepresentations that the plaintiffs claimed resulted in the
market price of the Company's stock being artificially inflated. The
defendants filed motions to dismiss in each of the lawsuits. Without
certifying the cases as class actions, the District Court consolidated the
cases into a single action. In June 1998, the District Court ordered the
plaintiffs to file an amended complaint within thirty days, finding that
their original allegations failed to state a claim under the federal
securities laws. The plaintiffs then filed a motion for re-consideration of
the Court's ruling. The defendants opposed that motion, and the Court
denied the plaintiff's motion for reconsideration. The plaintiffs did not
file an amended complaint within the specified thirty day time period, but
subsequently filed an amended complaint, claiming that they were entitled
to additional time within which to file an amended pleading by reason of a
scheduling order issued by the Court. The defendants moved to dismiss the
case on the grounds that the amended complaint was filed too late and
failed to state a claim for securities fraud under applicable legal
authorities. The plaintiffs have sought a stay of the Court's consideration
of defendants' motion to dismiss, asserting that there is uncertainty as to
the legal standards to be applied in securities fraud cases. The Court has
not ruled on plaintiff's motion to stay or defendants' motion to dismiss.
However, management believes (based upon advice of legal counsel) that this
litigation will be resolved without material effect on the Company's
financial condition, results of operations or cash flows.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. However, management
believes (based on advice of legal counsel) that such litigation and claims
will be resolved without material effect on the Company's financial
condition, results of operations or cash flows.
See Note 13 for a description of a guarantee of related party indebtedness.
13. RELATED PARTY TRANSACTIONS
On February 23, 1998, Mr. Paul A. Tanner resigned as Chief Executive
Officer and Chairman of the Company's Board of Directors. Mr. James Rudis,
the Company's President, was elected by the Board to assume the vacated
positions. Following the resignation, a reserve of approximately $165,000
was established against all outstanding advances due from Mr. Tanner.
F-33
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During fiscal years 1994 and 1995 a number of advances were made to Mr.
Tanner which aggregated approximately $2.0 million. In December 1995, the
advances were refinanced though the issuance to the Company of a 12%
unsecured demand note from Mr. Tanner. Also during the aforementioned
periods, the Company made non-interest bearing cash advances of
approximately $1.5 million to the Pyrenees Group, a company controlled by
Mr. Tanner.
Effective in January 1996, the Company reached an agreement to manage a
project to develop and build a multi-purpose sports facility in Las Vegas,
Nevada. The project was being developed by PLY Stadium Partners, Inc.
("Stadium Partners"), a private investment firm headed by Mr. Tanner. The
Company agreed to provide to Stadium Partners up to $4 million of debt (1)
convertible into a 14% economic interest in the project and (2) guaranteed
personally by Mr. Tanner and Pyrenees. As part of this agreement, amounts
which had been advanced during fiscal 1994 and 1995 to Mr. Tanner and
Pyrenees (approximately $3.5 million), together with subsequent amounts
advanced, charged or accrued to or on behalf of Stadium Partners were
considered as components of the $4 million of convertible debt, bearing
interest at 12.0% and guaranteed personally by Mr. Tanner and by Pyrenees.
Through September 30, 1996, the Company advanced an additional $9.27
million, for an approximate total of $13.3 million.
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 guaranteed the repayment of the Lehman loan on behalf of
Stadium Partners. The guarantee is only effective in certain circumstances
or upon the occurrence of certain events. A foreclosure sale was conducted
during July 1998. Notwithstanding such foreclosure action, the Company,
based on the advice of legal counsel, does not believe that it will incur
any significant liability as a result of this guarantee. As a result, the
Company believes the existence of such guarantee will not have a material
adverse effect on the Company's financial condition, results of operations
or cash flows.
The loan agreement with Lehman required certain prepayments by Nevada
Partnership, the first of which in the amount of $5.0 million became due in
January 1997. This was paid primarily with funds advanced by the Company.
The second prepayment requirement of $20.0 million became due in May 1997;
this payment was not made. As a result of the failure to make this payment,
another agreement was entered into among the borrower, Lehman and the
Company as of July 1, 1997. This agreement generally provided forbearance
by Lehman until September 30, 1997, to allow additional time to raise the
funds to make the principal payment. The terms of the forbearance agreement
were not met by the September deadline, and the note matured unpaid in
November 1997.
F-34
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As a result of the above, the Company recorded a charge to earnings for the
year ended September 30, 1997, in the amount of $14.8 million, representing
all amounts remaining uncollected from Stadium Partners, net of a reserve
established in 1996. Amounts which may subsequently be recovered, if any,
will be recognized as income when collection is assured.
During April 1998, the Company filed suit against PLY Stadium Partners,
Inc., and against Mr. Tanner and Pyrenees, the guarantors of the debt. In
May 1999, the Company was awarded a judgment against such defendants,
jointly and severally, in the amount of approximately $19.5 million, plus
interest. In connection therewith, the defendants were ordered to turn over
all ownership of the stock of Polyphase, as well as the stock and assets of
PLY Stadium Partners, Inc. and Pyrenees, which includes the rights to
2,000,000 shares of Polyphase common stock owned by Pyrenees and held by
Mr. Harold Estes as secondary collateral (see Notes 9 and 10). In
connection with this recovery of the 2,000,000 Polyphase shares, the
Company recorded interest expense of $875,000, the fair value assigned to
the shares, resulting from its assignment to Mr. Estes. Additionally, the
Company recorded income of $656,000 related to the recovery of 1,500,000
shares and accounted for the remaining 500,000 shares as an unexercised
stock option in accordance with APB No. 25 (see Note 10). After evaluating
the possibility of any potential post judgment collections and the
additional legal expenses to be incurred in pursuing such collections, and
further considering the likelihood of one or all of the defendants seeking
protection under bankruptcy laws, the Company is presently in negotiations
to settle the judgment. The objective is to secure recoveries, in addition
to the Polyphase shares discussed above, through the collections of
proceeds using either first or second liens on properties held by other
than the judgment debtors. Any further amounts ultimately recoverable as a
result of this judgment and turnover order or the settlement negotiations
is not presently determinable.
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September
30, 1999, the insurance premium receivable was $592,006.
In connection with the purchase of TTI, the Company acquired a note
receivable from an officer of TTI. The note which has been renewed and
extended each year since issuance is secured by marketable securities, is
payable within one year and bears interest at 3.96%. As of September 30,
1999 the balance outstanding was $341,305 and the note has been classified
as a non-current related party receivable. Also included in related party
receivables at September 30, 1999 are approximately $683,000 in receivables
from employees of the Company and its subsidiaries and $499,000 in
receivables from partnerships in which TTI has minority interests. As of
September 30, 1999, approximately $570,000 of such receivables are notes
which are no longer accruing interest. During 1999, the Company established
a $100,000 reserve against receivables from employees of the Company. The
Company expects the remaining amounts due under related party receivables
to be realizable.
See Note 10 for discussion of options granted to the Pyrenees Group, a
related party.
F-35
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
See Note 9 for discussion of the note payable to Mr. Estes.
14. PROFIT SHARING PLAN
In 1986, prior to its 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, 1999, 1998 and
1997 was $329,000, $353,000 and $298,000 respectively.
15. SALE OF SUBSIDIARIES
Effective September 30, 1999, the Company sold its wholly-owned subsidiary,
Polyphase Instrument Co. ("PIC"), to an investment group headed by
management of that company. The transaction was completed as a sale of 100%
of the outstanding capital stock of PIC for total consideration of
approximately $2.8 million, consisting of $1.8 million in cash and a
subordinated note receivable for $1.0 million. The note, which is
subordinated to bank indebtedness of up to $1.375 million, bears interest
at 8%, payable interest-only on a quarterly basis through July 2001 and
payable thereafter in quarterly amounts of $50,000 principal plus accrued
interest through October 2006. The note is collateralized by all of the
capital stock and assets of PIC, subject to the subordination referred to
above. Because of the highly leveraged nature of the purchaser, the
implicit reliance on the future operations of PIC to provide cash flows for
debt service and the subordination of the note to other creditors of PIC,
the Company was required to fully reserve for the subordinated note
receivable. As of September 30, 1999, the Company has recorded a loss from
discontinued operations of approximately $1.2 million as a result of this
transaction.
F-36
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended September 30, 1999, 1998 and 1997, PIC's operations
(unaudited) are summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended
September 30,
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net revenues $6,373,500 $4,832,600 $3,570,400
Gross profit 700,400 530,100 379,900
Operating income (loss) 59,300 51,100 (67,200)
Net income (loss) before tax $ 39,000 $ 10,000 $ (476,100)
</TABLE>
The net assets of PIC at the end of the prior fiscal year have been
reclassified from prior presentations as other assets in the accompanying
consolidated balance sheet as of September 30, 1998. The net assets of PIC
as of that date (unaudited) amounted to approximately $2,962,500 and are
summarized as follows:
<TABLE>
<CAPTION>
September 30,
1998
------------------
<S> <C>
Assets:
Cash, receivables and inventories $2,891,400
Property and equipment, net of
accumulated depreciation 316,000
Other assets 457,900
------------------
Total assets 3,665,300
------------------
Liabilities (current):
Notes payable 241,000
Accounts payable and accrued expenses 461,800
------------------
Total liabilities 702,800
------------------
Net assets $2,962,500
==================
</TABLE>
In December 1997, the Company sold Dallas Parkway Properties, Incorporated,
a subsidiary whose principal asset was the corporate office building, in
exchange for nominal consideration plus the assumption of a note payable
for $2.8 million. The Company realized a gain of approximately $988,000 on
this transaction.
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
F-37
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
through the sale of 51% of a newly formed subsidiary, PC Networx America,
Inc. (PCNA), whose sole assets consisted 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 $1,736,457
(subject to adjustments) consisting of $475,000 of cash, $86,457 of notes
receivable and $1,175,000 of preferred stock. At that time it was the
intention of the Company to publicly distribute to its shareholders a
dividend of 30% of the PCNA stock. 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. Subsequent to this transaction, PCNA's name was changed
to DataTell Solutions, Inc. ("DataTell").
During fiscal 1997, the purchaser and controlling shareholder of DataTell
elected to discontinue that company's efforts to effect a public
registration of DataTell's stock, thus precluding the Company from making a
distribution of the stock to its shareholders. Additionally, certain
purchase price adjustments resulted in the elimination of the note for
$86,457. The purchaser also elected not to further pursue the operation of
MCC, and since the Company was unsuccessful in its attempts to recover
MCC's assets, the amount due under the $951,433 note was determined not to
be realizable. The balance of these notes, totaling $1,037,890, was charged
to operations during fiscal 1997.
The Company, during the latter part of fiscal 1997, having made the
decision to further reduce its involvement in computer-related businesses,
entered into a new agreement with the controlling shareholder of DataTell
to dispose of its remaining direct ownership of DataTell. In connection
therewith, the Company agreed to exchange its 49% interest in DataTell,
together with the $1,175,000 of preferred stock referred to above, for cash
of $200,000 and a new series of the purchaser's preferred stock which
carries certain rights to be exchanged for DataTell stock. This transaction
resulted in a loss of $2,575,925 and was charged to operations during
fiscal 1997.
16. ASSETS ACQUIRED
In March 1998, TTI obtained a majority ownership interest in Wood Forest
Products LLC ("Wood"), which subsequently acquired the rights to harvest
timber from a tract of land owned by the U.S. Forestry Service.
Concurrently, the Company obtained a majority ownership interest in
Southern Forest Products LLC ("Southern"), whose primary purpose is to
lease and operate a sawmill in East Texas. For the years ended September
30, 1999 and 1998, these forestry products businesses contributed revenues
of approximately $7.4 million and $3.0 million, respectively, and a net
loss of approximately $329,000 and $170,000, respectively.
F-38
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
17. INFORMATION BY INDUSTRY SEGMENT
The Company's industry segments are described below.
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.
Forestry
The forestry segment sells, finances and repairs timber and logging
equipment in East Texas and Western Louisiana and participates in other
forestry-related activities. Customers range from small logging operations
to large integrated paper mills.
Corporate and Other
The corporate and other segment, prior to fiscal 1998, provided 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 (see Note 13).
Transformer
The transformer segment manufactured and marketed electronic transformers,
inductors and filters. The Company's wholly-owned subsidiary, Polyphase
Instrument Co. (PIC), was included in the transformer segment. Effective
September 30, 1999, all of the capital stock of PIC was sold (see Note 15).
Computer Sales and Service
The computer sales and service segment assembled and sold personal
computers and provided systems setup and hardware maintenance services.
Customers serviced ranged from individuals to large corporations.
Subsidiaries included in the segment were 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 1996 and July 1997, the Company sold 51% and 49% of
its interests in the computer operations, respectively (see Note 15).
F-39
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------------------
Food Forestry Total
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net Sales:
Sales to unaffiliated customers $ 112,495,726 $ 45,812,384 $ 158,308,110
================== ================== ==================
Operating income $ 7,384,385 $ 1,490,012 $ 8,874,397
================== ==================
General corporate expenses (380,798)
Recovery of related party receivables 656,250
Interest expense (9,485,892)
Interest income and other 500,183
------------------
Income (loss) before income taxes, warrant accretion, discontinued
operations and extraordinary item $ 164,140
==================
Identifiable assets:
Segment assets $ 50,024,950 $ 50,181,108 $ 100,206,058
================== ==================
Corporate assets 24,851,716
Eliminations (41,535,832)
==================
Total assets $ 83,521,942
==================
Capital expenditures, net:
Segment $ 295,405 $ 1,002,611 $ 1,298,016
================== ==================
Corporate 1,290
------------------
Total capital expenditures, net $ 1,299,306
==================
Depreciation and amortization:
Segment $ 2,715,121 $ 834,467 $ 3,549,588
================== ==================
Corporate 1,009,919
------------------
Total depreciation and amortization $ 4,559,507
==================
</TABLE>
The Company's Food segment had sales to Jenny Craig, American Airlines and
King's Hawaiian in fiscal 1999 which comprised approximately 14%, 13% and 12%,
respectively, of consolidated sales. No other customer accounted for more than
10% of the Company's sales in fiscal 1999.
F-40
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------------------------------------
Food Forestry Total
------------------ ------------------ ---------------
<S> <C> <C> <C>
Net Sales:
Sales to unaffiliated customers $93,348,856 $48,049,483 $ 141,398,339
================== ================== ==============
Operating income $ 4,976,930 $ 4,076,683 $ 9,053,613
================== ==================
General corporate expenses (1,420,191)
Gain on sale of assets 987,857
Interest expense (8,830,391)
Interest income and other 543,080
--------------
Income (loss) before income taxes, warrant accretion,
discontinued operations and extraordinary item $ 333,968
==============
Identifiable assets:
Segment assets $45,221,575 $50,082,526 $ 95,304,101
================== ==================
Corporate assets 25,376,181
Eliminations (39,837,746)
--------------
Total assets $ 80,842,536
==============
Capital expenditures, net:
Segment $ 604,853 $ 680,299 $ 1,285,152
================== ==================
Corporate 30,251
--------------
Total capital expenditures, net $ 1,315,403
==============
Depreciation and amortization:
Segment $ 3,041,237 $ 749,991 $ 3,791,228
================== ==================
Corporate 401,043
--------------
Total depreciation and amortization $ 4,192,271
==============
</TABLE>
The Company's Food segment had sales to Jenny Craig in fiscal 1998 which
comprised approximately 22% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 1998.
F-41
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------------------------------
Food Forestry Total
----------- ----------- ------------
<S> <C> <C> <C>
Net Sales:
Sales to unaffiliated customers $96,176,505 $52,201,622 $148,378,127
=========== =========== ============
Operating income $ 4,953,194 $ 4,496,570 $ 9,449,764
=========== ===========
General corporate expenses (2,799,016)
Non-recurring charged related to loss on related
party receivable (14,838,456)
Interest expense (7,129,406)
Interest income and other 738,943
Loss on investment in computer operations (3,613,815)
------------
Income (loss) before income taxes, warrant accretion,
discontinued operations and extraordinary item $(18,191,986)
============
Identifiable assets:
Segment assets $35,565,596 $42,442,019 $ 78,007,615
=========== ===========
Corporate assets 30,814,790
Eliminations (37,500,695)
=============
Total assets $ 71,321,710
=============
Capital expenditures, net:
Segment $ 507,825 $ 222,562 $ 730,387
============ ===========
Corporate -
-------------
Total capital expenditures, net $ 730,387
=============
Depreciation and amortization:
Segment $ 2,045,568 $ 691,630 $ 2,737,198
============ ===========
Corporate 1,163,765
-------------------
Total depreciation and amortization $ 3,900,963
===================
</TABLE>
The Company's Food segment had sales to Jenny Craig in fiscal 1997 which
comprised approximately 20% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 1997.
F-42
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
18. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
For the Year Ended September 30, 1999
------------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
------------------ ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Net revenues $34,854,998 $39,695,102 $37,702,120 $46,055,890
Gross profit 6,024,188 6,805,493 7,387,110 8,250,435
Operating income 1,631,301 1,834,349 2,207,632 2,820,311
Discontinued Operations 3,326 7,418 3,819 (1,197,071)
Net income (loss) $ (340,385) $ (193,559) $ 165,495 $(1,229,178)
================== ================== ================= ===================
Net income (loss) per
common share $ (.02) $ (.01) $ .01 $ (.07)
================== ================== ================= ===================
For the Year Ended September 30, 1998
------------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
------------------ ------------------ ------------------ -------------------
Net revenues $36,482,246 $32,145,391 $36,165,064 $36,605,638
Gross profit 6,841,897 6,364,733 6,341,798 5,773,563
Operating income 2,364,392 1,887,372 1,664,874 1,716,784
Discontinued Operations (3,478) 13,400 (3,938) 3,971
Extraordinary item (616,239) - - -
Net income (loss) $ 881,571 $ (218,106) $ (675,037) $ (317,319)
================== ================== ================== ===================
Net income (loss) per
common share $ .06 $ (.02) $ (.05) $ (.02)
================== ================== ================== ===================
</TABLE>
F-43
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Balance Sheets
<TABLE>
<CAPTION>
September 30,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash $ 51,471 $ 5,874
Receivable from sale of subsidiary 780,000 -
Prepaid expenses and other 9,000 20,000
-------------- --------------
Total current assets 840,471 25,874
Property and equipment 50,191 48,902
Less-Accumulated depreciation (44,981) (36,981)
-------------- --------------
5,210 11,921
Non current receivables:
Related parties, net of allowance for
doubtful accounts of $164,563 and $164,563 - 9,000
Deferred federal income taxes 572,280 767,789
Income tax receivable 5,959,121 5,202,507
Investment in discontinued operations - 2,962,508
Other assets (primarily investments
in subsidiaries) 17,474,634 16,396,582
-------------- --------------
Total assets $ 24,851,716 $ 25,376,181
============== ==============
Accounts payable $ 140,359 $ 139,948
Accrued expenses 981,840 793,013
Deferred income taxes 364,669 335,117
Current maturities of long-term debt - 1,200,000
-------------- --------------
Total current liabilities 1,486,868 2,468,078
Note payable and accrued interest,
related party 17,914,842 16,307,405
-------------- --------------
Total liabilities 19,401,710 18,775,483
-------------- --------------
Stockholders' equity:
Preferred stock 564 1,150
Common stock 178,125 150,800
Additional paid in capital 28,159,887 28,623,811
Accumulated deficit (22,888,570) (21,199,744)
Note receivable - (975,319)
-------------- --------------
Total stockholders' equity 5,450,006 6,600,698
-------------- --------------
$ 24,851,716 $ 25,376,181
============== ==============
</TABLE>
See note to condensed financial information of registrant.
F-44
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Cash flow provided by (used in) operating activities:
Net loss $ (1,597,627) $ (328,891)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,009,919 370,896
Equity in income of subsidiaries (1,144,797) (1,945,745)
Provision for doubtful accounts - 164,563
Gain on sale of assets - (987,857)
Deferred income tax 225,061 2,707
Recoveries on related party receivable (656,250) -
Loss (income) from discontinued operations 1,182,508 (9,955)
Increase (decrease) in, net of effects of acquisitions:
Receivables from sale of subsidiary (780,000) -
Prepaid expenses and other (735,813) 352,106
Accounts payable and other 411 (355,032)
Accrued expenses and other 456,974 (243,404)
---------------- ----------------
Net cash used in operating activities (2,039,614) (2,980,612)
---------------- ----------------
Cash flows provided by (used in) investing activities:
Notes receivable from related parties 9,000 8,963
Proceeds from sale of subsidiary 1,780,000 -
Capital expenditures (1,289) (5,870)
---------------- ----------------
Net cash provided by investing activities 1,787,711 3,093
---------------- ----------------
Cash flows provided by (used in) financing activities:
Net borrowings on notes payables 1,607,437 2,308,489
Advances from (payments to) subsidiary (47,174) 5,300,000
Payments on long term borrowings (1,200,000) (4,300,000)
Payment of deferred financing costs - (163,787)
Exercise of common stock options and warrants 28,436 2,100
Dividends on preferred stock (91,199) (154,250)
Common stock issuance costs - (17,500)
---------------- ----------------
Net cash provided by financing activities $ 297,500 $ 2,975,052
---------------- ----------------
</TABLE>
See notes to condensed financial information of registrant.
F-45
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flow provided by (used in) operating activities:
Net loss $ (1,597,627) $ (328,891)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,009,919 370,896
Equity in income of subsidiaries (1,144,797) (1,945,745)
Provision for doubtful accounts - 164,563
Gain on sale of assets - (987,857)
Deferred income tax 225,061 2,707
Recoveries on related party receivable (656,250) -
Loss (income) from discontinued operations 1,182,508 (9,955)
Increase (decrease) in, net of effects of acquisitions:
Receivables from sale of subsidiary (780,000) -
Prepaid expenses and other (735,813) 352,106
Accounts payable and other 411 (355,032)
Accrued expenses and other 456,974 (243,404)
------------ ------------
Net cash used in operating activities (2,039,614) (2,980,612)
============ ============
Cash flows provided by (used in) investing activities:
Notes receivable from related parties 9,000 8,963
Proceeds from sale of subsidiary 1,780,000 -
Capital expenditures (1,289) (5,870)
------------ ------------
Net cash provided by investing activities 1,787,711 3,093
------------ ------------
Cash flows provided by (used in) financing activities:
Net borrowings on notes payables 1,607,437 2,308,489
Advances from (payments to) subsidiary (47,174) 5,300,000
Payments on long term borrowings (1,200,000) (4,300,000)
Payment of deferred financing costs - (163,787)
Exercise of common stock options and warrants 28,436 2,100
Dividends on preferred stock (91,199) (154,250)
Common stock issuance costs - (17,500)
------------ ------------
Net cash provided by financing activities $ 297,500 $ 2,975,052
============ ============
</TABLE>
See note to condensed financial information of registrant.
F-46
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
<TABLE>
<S> <C> <C>
Net increase (decrease) in cash $ 45,597 $ (2,467)
Cash - beginning of year 5,874 8,341
============ ============
Cash - end of year $ 51,471 $ 5,874
============ ============
</TABLE>
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.
See note to condensed financial information of registrant.
F-47
<PAGE>
EXHIBIT 3.2
POLYPHASE CORPORATION
(formerly known as PPN, INC.)
B Y L A W S
-----------
(as amended 4/26/99)
ARTICLE I
OFFICES
Section 1. The principal office of the corporation shall be located at
such place within the State of Nevada as the board of directors may determine
from time to time. The initial principal office of the corporation shall be as
specified in the Articles of Incorporation of the corporation.
Section 2. The corporation may also have offices at such other places,
within and without the State of Nevada, as the board of directors may from time
to time determine or as the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All annual meetings of stockholders shall be held at the
offices of the corporation in the City of Dallas, State of Texas, or at such
other place as from time to time may be designated by resolution of the Board of
Directors. Special meetings of the stockholders may be held at such time and
place, within or without the State of Nevada, as may be stated in the notice of
the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year 1995,
shall be held at such time and date as may be designated by the board of
directors, at which the stockholders shall elect directors and transact such
other business as may properly be brought before the meeting.
<PAGE>
Section 3. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the articles of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the board of
directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 4. Notices of meetings shall be in writing and signed by the
president, a vice president, the secretary, an assistant secretary, or by such
other person or persons as the directors shall designate. Such notice shall
state the purpose or purposes for which the meeting is called and the time when,
and the place, which may be within or without this state, where it is to be
held. A copy of such notice shall be either delivered personally to, or shall be
mailed postage prepaid to, each stockholder of record entitled to vote at such
meeting not less than ten nor more than sixty days before such meeting. If
mailed, it shall be directed to a stockholder at his address as it appears upon
the records of the corporation and upon such mailing of any such notice, the
service thereof shall be complete, and the time of the notice shall begin to run
from the date upon which such notice is deposited in the mail for transmission
to such stockholder. Personal delivery of any such notice to any officer of a
corporation or association, or to any member of a partnership shall constitute
delivery of such notice to such corporation, association or partnership. In the
event of the transfer of stock after delivery or mailing of the notice of and
prior to the holding of the meeting, it shall not be necessary to deliver or
mail notice of the meeting to the transferee.
Section 5. Business transacted at any special meeting shall be limited to
the purposes stated in the notice.
-2-
<PAGE>
Section 6. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the articles of
incorporation. If, however, a quorum shall not be present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat, present
in person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified.
Section 7. When a quorum is present or represented at any meeting, the
vote of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which, by express provision of the
statutes or of the articles of incorporation, a different vote is required, in
which case such express provision shall govern and control the decision of such
question.
Section 8. Each outstanding share, regardless of class, shall be entitled
to one vote on each matter submitted to a vote at a meeting of stockholders,
except to the extent that voting rights of any class are increased, limited or
denied by the Articles of Incorporation or the Nevada General Corporation Law,
as amended.
Section 9. At any meeting of the stockholders, any stockholder may be
represented and voted by a proxy or proxies appointed by an instrument in
writing. In the event that any such instrument in writing shall designate two
or more persons to act as proxies, a majority of such persons present at the
meeting, or, if only one shall be present, then that one shall have and may
exercise all of the powers conferred by such written instrument upon all of the
persons so
-3-
<PAGE>
designated unless the instrument shall otherwise provide. No such proxy shall be
valid after the expiration of six months from the date of its execution, unless
coupled with an interest, or unless the person executing it specifies therein
the length of time for which it is to continue in force, which in no case shall
exceed seven years from the date of its execution. Subject to the above, any
proxy duly executed is not revoked and continues in full force and effect until
an instrument revoking it or a duly executed proxy bearing a later date is filed
with the secretary of the corporation.
Section 10. Any action which may be taken by the vote of the stockholders
at a meeting, may be taken without a meeting if authorized by the written
consent of stockholders holding at least a majority of the voting power, unless
the provisions of the statutes or of the articles of incorporation require a
greater proportion of voting power to authorize such action, in which case such
greater proportion of written consents shall be required.
ARTICLE III
DIRECTORS
Section 1. The number of directors shall be neither more than nine (9) nor
less than one (1), as such number may be from time to time specified by
resolution of the board of directors; provided, however, that no director's term
shall be shortened by reason of a resolution reducing the number of directors.
The number of directors constituting the initial board of directors shall be
four (4), and shall remain at such number until changed by resolution of the
board of directors as aforesaid. The directors shall be elected at the annual
meeting of the stockholders, and except as provided in Section 2 of this
article, each director elected shall hold office until his successor is elected
and qualified. Directors need not be stockholders.
-4-
<PAGE>
Nominations of persons for election to the board of directors may be made
by the board of directors, by a nominating committee established by the board of
directors or by any stockholder of the corporation entitled to vote for the
election of directors. Any stockholder of the corporation entitled to vote for
the election of directors at a meeting may nominate persons for election as
directors only if written notice is received by the board of directors of such
stockholder's intent to make such nomination not later than: (a) with respect to
the annual meeting of stockholders to be held on May 27, 1999, not less than 20
days prior to such meeting; (b) with respect to any annual meeting of
stockholders to be held after the May 27, 1999 annual meeting, not less than 90
days prior to the date one year from the date of the immediately proceeding
annual meeting; or (c) with respect to any special meeting at which the election
of directors is to be held, seven days after the date that the notice of the
special meeting is mailed, or otherwise given. Each written notice delivered to
the board of directors by the stockholder shall set forth: (a) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (b) a representation that the stockholder is a
holder of record of stock of the corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (c) a description of all arrangements
or understandings between the stockholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such other information
regarding each nominee proposed by such stockholder as would have been required
to be included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had each nominee been nominated, or intended
to be nominated, by the board of directors; and (e) the written consent of each
nominee to serve as a Director of the corporation if so
-5-
<PAGE>
elected. The Chairman of the meeting may refuse to acknowledge the nomination of
any person not made in full compliance with the foregoing procedure.
Section 2. Vacancies, including those caused by an increase in the number
of directors, may be filled by a majority of the remaining directors though less
than a quorum. When one or more directors shall give notice of his or their
resignation to the board, effective at a future date, the board shall have the
power to fill such vacancy or vacancies to take effect when such resignation or
resignations shall become effective, each director so appointed to hold office
during the remainder of the term of office of the resigning director or
directors.
Section 3. The business of the corporation shall be managed by its board
of directors which may exercise all such powers of the corporation and do all
such lawful acts and things as are not by statute or by the articles of
incorporation or by these bylaws directed or required to be exercised or done by
the stockholders.
Section 4. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Nevada.
Section 5. The first meeting of each newly elected board of directors
shall be held at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the board of directors, or as shall
be specified in a written waiver signed by all of the directors.
Section 6. Regular meetings of the board of directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
Section 7. Special meetings of the board of directors may be called by the
president or secretary on the written request of two directors. Written notice
of special meetings of the board of directors shall be given to each director at
least one (1) day before the date of the meeting.
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<PAGE>
Section 8. A majority of the directors, at a meeting duly assembled, shall
be necessary to constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which a quorum is
present shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the articles of incorporation. Any
action required or permitted to be taken at a meeting of the directors may be
taken without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the directors entitled to vote with respect to
the subject matter thereof.
Section 9. The board of directors may, by resolution passed by a majority
of the whole board, designate one or more committees, each committee to consist
of one or more of the directors of the corporation, which, to the extent
provided in the resolution, shall have and may exercise the powers of the board
of directors in the management of the business and affairs of the corporation,
and may have power to authorize the seal of the corporation to be affixed to all
papers which may require it. Such committee or committees shall have such name
or names as may be determined from time to time by resolution adopted by the
board of directors.
Section 10. The committees shall keep regular minutes of their proceedings
and report the same to the board when required.
Section 11. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and may be paid a fixed sum
for attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
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<PAGE>
ARTICLE IV
NOTICES
Section 1. Notices to directors and stockholders shall be in writing and
delivered personally or mailed to the directors or stockholders at their
addresses appearing on the books of the corporation. Notice by mail shall be
deemed to be given at the time when same shall be mailed. Notice to directors
may also be given by telegram or facsimile.
Section 2. Whenever all parties entitled to vote at any meeting, whether
of directors or stockholders, consent, either by a writing on the records of the
meeting or filed with the secretary, or by presence at such meeting and oral
consent entered on the minutes, or by taking part in the deliberations at such
meeting without objection, the doings of such meeting shall be as valid as if
had at a meeting regularly called and noticed, and at such meeting any business
may be transacted which is not excepted from the written consent or to the
consideration of which no objection for want of notice is made at the time, and
if any meeting be irregular for want of notice or of such consent, provided a
quorum was present at such meeting, the proceedings of said meeting may be
ratified and approved and rendered likewise valid and the irregularity or defect
therein waived by a writing signed by all parties having the right to vote at
such meetings; and such consent or approval of stockholders may be by proxy or
attorney, but all such proxies and powers of attorney must be in writing.
Section 3. Whenever any notice is required to be given under the
provisions of the statutes, of the articles of incorporation or of these bylaws,
a waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
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<PAGE>
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the board of
directors and shall be at a minimum a president, a secretary and a treasurer.
Any person may hold two or more offices.
Section 2. The board of directors at its first meeting after each annual
meeting of stockholders shall choose at a minimum a president, and a secretary,
none of whom need be a member of the board.
Section 3. The board of directors may appoint additional officers,
including vice presidents, assistant secretaries and assistant treasurers, and
such agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the
board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Any vacancy occurring in any office of the
corporation by death, resignation, removal or otherwise shall be filled by the
board of directors.
Section 6. The president shall be the chief executive officer of the
corporation, shall preside at all meetings of the stockholders and the board of
directors, shall have general and active management of the business of the
corporation, and shall see that all orders and resolutions of the board of
directors are carried into effect.
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<PAGE>
Section 7. The president shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
board of directors to some other officer or agent of the corporation.
Section 8. The executive vice president (or, in case there is no executive
vice president, the senior vice president) shall, in the absence or disability
of the president, perform the duties and exercise the powers of the president
and shall perform such other duties as the board of directors may from time to
time prescribe.
Section 9. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of directors or
president, under whose supervision he shall be. He shall keep in safe custody
the seal of the corporation and, when authorized by the board of directors,
affix the same to any instrument requiring it and, when so affixed, it shall be
attested by his signature or by the signature of the treasurer or an assistant
secretary.
Section 10. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors.
Section 11. The treasurer shall disburse the funds of the corporation as
may be ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the
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<PAGE>
president and the board of directors, at the regular meetings of the board, or
when the board of directors so requires, an account of all his transactions as
treasurer and of the financial condition of the corporation.
Section 12. If required by the board of directors, the treasurer shall
give the corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the board of directors for the faithful performance of
the duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession or
under his control belonging to the corporation.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Every stockholder shall be entitled to have a certificate,
signed by the president or a vice president and the treasurer or an assistant
treasurer, or the secretary or an assistant secretary of the corporation,
certifying the number of shares owned by him in the corporation. When the
corporation is authorized to issue shares of more than one class or more than
one series of any class, there shall be set forth upon the face or back of the
certificate, or the certificate shall have a statement that the corporation will
furnish to any stockholders upon request and without charge, a full or summary
statement of the designations, preferences and relative, participating, optional
or other special rights of the various classes of stock or series thereof and
the qualifications, limitations or restrictions of such rights, and, if the
corporation shall be authorized to issue only special stock, such certificate
shall set forth in full or summarize the rights of the holders of such stock.
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<PAGE>
Section 2. Whenever any certificate is countersigned or otherwise
authenticated by a transfer agent or transfer clerk, and by a registrar, then a
facsimile of the signatures of the officers or agents of the corporation may be
printed or lithographed upon such certificate in lieu of the actual signatures.
In case any officer or officers who shall have signed, or whose facsimile
signature or signatures shall have been used on, any such certificate or
certificates shall cease to be such officer or officers of the corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the corporation, such certificate or
certificates may nevertheless be adopted by the corporation and be issued and
delivered as though the person or persons who signed such certificate or
certificates, or whose facsimile signature or signatures shall have been used
thereon, had not ceased to be the officer or officers of such corporation.
Section 3. The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate of stock to be lost or destroyed. When authorizing such issue of a
new certificate or certificates, the board of directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost or destroyed.
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<PAGE>
Section 4. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 5. The directors may prescribe a period not exceeding sixty days
prior to any meeting of the stockholders during which no transfer of stock on
the books of the corporation may be made, or may fix a day not more than sixty
days prior to the holding of any such meeting as the day as of which
stockholders entitled to notice of and to vote at such meeting shall be
determined; and only stockholders of record on such day shall be entitled to
notice or to vote at such meeting.
Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of the
State of Nevada.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the articles of incorporation, if any, may be declared by the
board of directors at any regular or special meeting pursuant to law. Dividends
may be paid in cash, in property, or in shares of the capital stock, subject to
the provisions of its articles of incorporation.
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<PAGE>
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserves in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by resolution
of the board of directors.
SEAL
Section 5. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its incorporation and the words "Corporate Seal,
Nevada."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered or repealed at any regular meeting
of the stockholders or of the board of directors, or at any special meeting of
the stockholders or of the board of directors if notice of such alteration or
repeal be contained in the notice of such special meeting.
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<PAGE>
THE UNDERSIGNED, being the secretary of Polyphase Corporation (formerly
known as PPN, Inc.), DOES HEREBY CERTIFY the foregoing to be the amended bylaws
of said corporation, as adopted by unanimous consent of all of the members of
the Board of Directors on the 26th day of April, 1999.
_________________________________
Secretary
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<PAGE>
EXHIBIT 10.76
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), is effective as of the
30/th/ day of September 1999, is made by and among Polyphase Corporation, a
corporation duly organized and existing pursuant to the laws of the state of
Nevada (hereinafter referred to as "Seller"), Polyphase Instrument Acquisition
Corporation, a Pennsylvania corporation (hereinafter referred to as "Buyer"),
and Polyphase Instrument Co, a corporation duly organized and existing pursuant
to the laws of the Commonwealth of Pennsylvania (hereinafter referred to as the
"Company").
W I T N E S S E T H:
WHEREAS, the Company is authorized to issue 20,000 shares of common stock, One
Dollar ($1) par value per share, and
WHEREAS, all of the issued and outstanding capital stock of the Company
consists of 20,000 shares of common stock, One Dollar ($1) par value per share
(the "Shares"), and
WHEREAS, Seller is currently the owner of the Shares; and
WHEREAS, Seller desires to sell, and Buyer desires to purchase the Shares for
the consideration and on the terms set forth in this Agreement, and
WHEREAS, the Board of Directors of the Seller and the Board of Directors of
the Company believe it is in the best interest of the stockholders of each such
corporation for Buyer to purchase and Seller to sell the Shares on the terms and
conditions set forth herein.
<PAGE>
NOW, THEREFORE, for and in consideration of the premises and of the mutual
covenants, representations, warranties and agreements herein contained, the
parties hereto agree as follows:
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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 Two Million Seven Hundred Eighty Thousand Dollars ($2,780,000),
payable as follows:
(a) $750,000 previously deposited with the Seller on June 30, 1999;
and
(b) $250,000 previously deposited with the Seller on September 30,
1999;
(c) $1,780,000 to be paid as follows:
(i) $780,000 cash at Closing; and
(ii) A subordinated promissory note (the "Note"), in the original
principal amount of One Million Dollars ($1,000,000), in the form attached
hereto as Exhibit "A." The promissory note shall bear interest at eight
percent (8%) per annum. Payments of interest only shall begin on January
1, 2000 and be due quarterly in arrears until October 1, 2001, when
interest, together with quarterly principal reductions in the amount of
Fifty Thousand Dollars ($50,000) shall become payable with the final
payment of principal and interest due and payable on the seventh year
anniversary of the Closing Date. The Note shall be secured by a lien on
the Shares being acquired by the Buyer, and by a lien on all of the assets
of the Company. The Buyer's obligations under the Note
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shall be subordinate and subject in right of payment to the prior payment
of the obligations of the Buyer under credit facilities provided to the
Buyer and the Company by Sovereign Bank in an amount not to exceed One
Million Three Hundred Seventy Five Thousand Dollars ($1,375,000), exclusive
of interest and fees (the "Original Principal Amount") (the "Sovereign
Credit Facility") and to all extensions, renewals and replacements of the
Sovereign Credit Facility up to but not in excess of the Original Principal
Amount (such extensions, renewals, and replacements collectively with the
Sovereign Credit Facility, the "Senior Indebtedness"). All liens securing
the obligations of the Buyer or the Company with respect to the Note shall
also be subordinate and subject in right to the prior liens arising under
the Senior Indebtedness. The Seller agrees to execute and deliver such
documentation as may from time to time reasonably be requested by the
holders of the Senior Indebtedness to confirm the terms of the
subordination provided by this Section.
1.3 Closing. The purchase and sale (the "Closing") provided for in
-------
this Agreement will take place at the offices of Seller's attorney at 16901
N. Dallas Parkway, Suite 230, Addison, Texas 75001 contemporaneously with
the execution and delivery of this Agreement, or at such other time and
place as the parties may agree (the "Closing Date"). Subject to the
provisions of Section 8, 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.
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<PAGE>
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);
(ii) An assignment to Buyer in the form of Exhibit B-1 of all
claims of any nature that Seller or any affiliate of Seller may have
against the Company, Polyphase Haiti, S.A., or any of their directors,
officers, employees, consultants, advisors, or representatives
(collectively, the "Representatives") and an acknowledgement that, as
a result of such assignment, Seller and its affiliates have no further
claims against the Company, Polyphase Haiti, S.A., or their
Representatives, except for any claims against the Company or the
Buyer arising under the express provisions of this Agreement;
(iii) A certificate of the Secretary of the Seller, certifying
the adoption by the Seller's Board of Directors of resolutions
approving the execution, delivery and performance of this Agreement by
Seller;
(iv) An assignment of all equity interests and other rights in
Polyphase Haiti, S.A; and
(v) The documents required by Sections 6.2 and 6.3.
(b) Buyer will deliver to Seller:
(i) the remaining balance of the Purchase Price, as follows:
(a) $780,000 cash; and
(b) The Note.
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(ii) The Company's release of any claims for liability against
Seller in the form attached hereto as Exhibit "B-2";
(iii) Gus Monastero's release of any claims for liability
against Seller in the form attached hereto as Exhibit "B-2";
(iv) Keith Harper's release of any claims for liability against
Seller in the form attached hereto as Exhibit "B-2";
(v) Louis Monastero's release of any claims for liability
against Seller in the form attached hereto as Exhibit "B-2" ;
(vi) Donald Fields' release of any claims for liability against
Seller in the form attached hereto as Exhibit "B-2";
(vii) The guaranty of the Company in the form attached hereto as
Exhibit "C";
(viii) A security agreement securing the indebtedness evidenced
by the Note executed by the Company in favor of Seller in the form
attached hereto as Exhibit "D"; and
(ix) A pledge agreement executed by the Buyer in favor of
Seller pledging all of the Shares as security for the indebtedness
evidenced by the Note in the form attached hereto as Exhibit "E".
2. Representations and Warranties of Seller:
-----------------------------------------
Seller represents and warrants to Buyer as follows:
2.1 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
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<PAGE>
absolute and unrestricted right, power, authority, and capacity to execute,
deliver and perform this Agreement and has taken all corporate action
necessary to perform its obligations hereunder. This Agreement has been
duly executed and delivered by the Seller.
(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 Seller
or 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 of regulation or any injunction, judgment, order or
decree of any court, administrative agency or other governmental body
to which the Seller, the Company, or any of their assets 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 contract
applicable to the Company or the Seller; or
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(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 the
Company.
2.2 Capitalization. The authorized capital stock of the Company
--------------
consists of 20,000 authorized shares of Common Stock, $1.00 par value per share,
all of which shares are issued and outstanding. The Company has no other capital
stock authorized, issued, or outstanding. The Seller owns beneficially and of
record 100% of the issued and outstanding Shares.
2.3 Filing of Tax Returns. The Seller has timely filed with the
---------------------
Internal Revenue Service all Tax Returns in respect of Federal Income Taxes due
with respect to the operations of the Company required to be filed through the
date hereof. Such Tax Returns as filed are complete and accurate in all
material respects. The Seller has not requested any extension of time within
which to file Tax Returns in respect of any Taxes. The Seller has delivered to
the Buyer complete and accurate copies of all Tax Returns of the Company
required to be filed. For the purposes of this Section 2.3, the following terms
shall have the following meanings:
"Tax Return" means any report, return, document, declaration or
other information or filing required to be supplied to the
Internal Revenue Service, with respect to Taxes, including
information returns, any documents with respect to or
accompanying requests for the extension of time in which to file
any such report, return, document, declaration or other
information.
"Taxes" means any and all taxes, charges, fees, levies or other
assessments, including income, gross receipts, excise, real or
personal property, sales, withholding, social security,
retirement, unemployment, occupation, use, service, license, net
worth, payroll, franchise and transfer and recording, imposed by
the Internal Revenue Service, whether computed on a separate,
consolidated, unitary, combined or any other
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basis; and such term shall include any interest whether paid or
received, fines, penalties or additional amounts attributable to,
or imposed upon, or with respect to, any such taxes, charges,
fees, levies or other assessments.
2.4 Books and Records. To the knowledge of the Seller the minute book of
-----------------
the Company contains accurate and complete records of all meetings held of, and
corporate action taken by, the stockholders and the Board of Directors of the
Company.
2.5 No Misstatements or Omissions. No representation or warranty of
-----------------------------
Seller in this Agreement 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.
2.6 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 and will
indemnify and hold Buyer harmless from any such payment alleged to be due by or
through Seller as a result of the action of Seller or its officers or agents.
3. Representations and Warranties of Buyer. Buyer represents and warrants to
---------------------------------------
Seller as follows:
3.1 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 and
has taken all corporate action
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necessary to perform its obligations hereunder. This Agreement has been
duly executed and delivered by the Buyer.
(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 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
(ii) 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.
3.2 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 of 1933.
(b) Buyer has received all information it believes necessary to make
an informed decision about its acquisition of the Shares.
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(c) 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.
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'
fee 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.
3.5 Access and Investigation. Buyer, its directors, officers and agents
------------------------
and prospective lenders and their representatives (collectively, "Buyer's
Advisors") have had full and free access to the Company's personnel, properties,
contracts, books and records, and other documents and data, and such financial,
operating, and other date and information as Buyer deemed necessary.
3.6 Seller's Contingent Liability. On or before the expiration of sixty
-----------------------------
days following the Closing, Buyer shall cause the Company to extinguish the
indebtedness owed to third parties identified on Schedule 3.6 to this Agreement
for which the Seller has contingent or direct liability. If Buyer is unable to
retire all such indebtedness, Buyer shall cause Seller to be released from any
and all liability with respect to all such indebtedness.
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<PAGE>
4. Conditions Precedent to Buyer's Obligation to Close.
---------------------------------------------------
Buyer's obligations to purchase the Shares and to take the other actions
required to be taken by Buyer at the Closing are 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).
4.1 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.
4.2 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 compiled with in all material
respects.
(b) Each document required to be delivered pursuant to Section 1.4
must have been delivered.
4.3 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
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<PAGE>
rescind the proposed acquisition, or to limit in any way Buyer's right to
acquire the Company.
4.4 Additional Documents. Seller must have caused to be delivered to
--------------------
Buyer such documents as Buyer may reasonably request for the purpose of (i)
evidencing the accuracy of any representation or warranty of Seller, (ii)
evidencing the performance by Seller, or the compliance by Seller with, any
covenant or obligation required to be performed or complied with by the Seller,
or (iii) evidencing the satisfaction of any condition referred to in this
Section 4.
5. Conditions Precedent to Seller's Obligation to Close. Seller's obligations
----------------------------------------------------
to sell the Shares and to take the other actions required to be taken by Seller
at the Closing are subject to the satisfaction, at or prior to the Closing, or
each of the following conditions (any of which may be waived by Seller, in whole
or in part).
5.1 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.
13
<PAGE>
5.2 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 remaining
balance of the Purchase Price required to be made by Buyer pursuant to
Section 1.4(b).
5.3 Additional Documents. Buyer must have caused to be delivered to
--------------------
Seller such documents as Seller may reasonably request for the purposes 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
5.
5.4 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 Company.
6. Tax Matters
-----------
14
<PAGE>
6.1 Seller's Federal Income Tax Return. Seller and Buyer agree that the
Company will be included in the consolidated Federal income tax return filed by
Seller for the period through the Closing Date.
6.2 Section 1445 Affidavit. Prior to or at the Closing, Seller shall
furnish a non-foreign person affidavit as required by Section 1445 of the Code
prior to the Closing.
6.3 Section 338 (h)(10) Election. The Seller agrees to join with the
Buyer in making an election under Section 338(h)(10) of the Code (and any
corresponding elections under state, local, or foreign tax law) (collectively, a
"Section 338(h)(10) Election") with respect to the purchase and sale of the
capital stock of the Company hereunder. The Company shall prepare and the
Purchaser, the Seller, and the Company shall execute at the Closing any and all
forms necessary to effectuate the Section 338(h)(10) Election (including
Internal Revenue Service Form 8023 and any similar forms under applicable state
income tax law). The Seller shall pay any taxes attributable to the making of
the Section 338(h)(10) Election.
6.4 Allocation of Purchase Price. Each of the parties hereto agrees to
the allocation of the consideration payable by the Buyer set forth in Schedule
--------
6.4 of this Agreement.
- ---
7. Termination.
------------
7.1 Termination Events. This Agreement may, by notice given prior to or
------------------
at the Closing, be terminated:
15
<PAGE>
(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) by mutual consent of Buyer and Seller; or
(c) 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 the
date of this Agreement is executed and delivered by both parties, or such
later date as the parties may agree upon.
7.2 Effect of Termination. Each party's right of termination under
---------------------
Section 7.1 is in lieu of any other rights it may have under this Agreement or
otherwise, and the exercise of a right of termination will be an election of
remedies. If this Agreement is terminated pursuant to Section 7.1, all further
obligations of the parties under this Agreement will terminate, except that the
obligations in Sections 8.1 and 8.2 will survive.
8. Indemnification; Remedies.
--------------------------
8.1 Indemnification and Payment of Damages by Seller. Seller will
------------------------------------------------
indemnify and hold harmless Buyer, the Company, and its respective directors,
officers, stockholders, controlling persons, and affiliates (collectively, the
"Buyer Indemnified Persons") for, and will pay to the Buyer 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, arising, directly or
indirectly, from or in connection with the breach of any
16
<PAGE>
warranty, representation, covenant or agreement of Seller contained in this
Agreement or in any certificate or instrument of conveyance delivered by or on
behalf of the Seller in connection with the transactions contemplated by this
Agreement.
8.2 Indemnification and Payment of Damages by Buyer. Buyer will indemnify
-----------------------------------------------
and hold harmless Seller and its respective directors, officers, stockholders,
controlling persons, and affiliates (collectively, the "Seller Indemnified
Persons") for, and will pay to the Seller 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, arising, directly or indirectly, from or in
connection with the breach of any warranty, representation, covenant or
agreement of Buyer of contained in this Agreement or in any certificate or
instrument with the transactions contemplated by this Agreement.
8.3 Time Limitations. If the Closing occurs, neither party will have
----------------
liability (for indemnification or otherwise) with respect to any representation
or warranty, unless on or before the 545th day following 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;
provided, that the limitation set forth in this Section 8.3 shall not apply to
(i) any liability for the breach of the representations and warranties contained
in Section 2.2 or 2.6 or (ii) any liability under Section 8.1 or 8.2 for the
breach of any covenant or agreement of Seller or Buyer.
8.4 Procedure for Indemnification-Third Party Claims.
------------------------------------------------
17
<PAGE>
(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 indemnified party's failure to give such
notice.
(b) If any proceeding referred to in Section 8.4(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
reasonably 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 8 for any fees of other counsel or any other expenses with
respect to the defense of such proceeding, in each case subsequently
incurred by
18
<PAGE>
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 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
19
<PAGE>
compromise or settlement effected without its consent which may not be
unreasonably withheld).
8.5 Procedure for Indemnification-Other Claims. A claim for
------------------------------------------
indemnification for any matter not involving a third party may be asserted by
notice to the party from whom indemnification is sought.
9. General Provisions.
------------------
9.1 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.
9.2 Public Announcements. Except as required by law or on advice of
--------------------
counsel, neither party shall issue any press release or make any public
statement regarding the transactions contemplated hereby without the prior
approval of the other parties, and the parties hereto shall issue a mutually
acceptable press release as soon as practicable after the date hereof.
Notwithstanding the foregoing, either party shall be permitted to make any
public statement without obtaining the consent of any other party hereto if (i)
the disclosure is required by law and (ii) such party has first used its
reasonable efforts to consult with (but not to obtain the consent of) the other
parties about the form and substance of such disclosure.
9.3 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
20
<PAGE>
(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):
if to Buyer:
Polyphase Instrument Acquisition Corporation
175 Commerce Drive
Forth Washington, Pennsylvania 19034
Attention: Mr. Gus M. Monastero
Facsimile No.: 215-646-4911
with a copy to:
Stuart M. Brown, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, Pennsylvania 19103
Facsimile No.: 215-665-8760
if to the Company:
Polyphase Instrument Co.
175 Commerce Drive
Fort Washington, Pennsylvania 19034
Attention: Mr. Gus M. Monastero
Facsimile No.: 215-646-4911
if to Seller:
Polyphase Corporation
4800 Broadway, Suite A
Addison, Texas 75001
Attention: President
Facsimile: 972-386-8008
21
<PAGE>
with a copy to:
Albert B. Greco, Jr., Esquire
Law Offices of Albert B. Greco, Jr.
16901 Dallas Parkway, Suite 230
Addison, Texas 75001
Facsimile No.: 972-818-7343
Any party may be given notice in accordance with this Section by any other party
at another address or directed to another person for receipt of notices, if such
party so designates such other person or address in writing in accordance with
this Section 9.3
9.4 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 state or federal courts located
in 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.
9.5 Further Assurances. Each party agrees (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.
9.6 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
22
<PAGE>
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.
9.7 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.
9.8 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; provided, that Buyer may assign this Agreement and its rights
--------
hereunder to the holders of the Senior Indebtedness without the consent of the
Seller. Subject to the preceding sentence, this Agreement will apply to, be
binding all respects upon, and
23
<PAGE>
inure to the benefit of the successors and permitted assigns of the parties.
Except for Section 8 hereinabove, 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 permitted successors and assigns.
9.9 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.
9.10 Section Heading, 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
required. Unless otherwise expressly provided the word "including" does not
limit the preceding words or terms.
9.11 Time of Essence. With regard to all dates and time periods set forth
---------------
or referred to in this Agreement, time is of the essence.
24
<PAGE>
9.12 Governing Law. This Agreement will be governed by the laws of the
-------------
State of Texas without regard to conflicts of law principles, except with
respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters the law of the jurisdiction under which the respective entity
derives its powers shall govern and in respect of such matters the parties
hereby submit to the authority of the courts of such jurisdiction.
9.13 Presumption Against Scrivener. Each party waives the presumption that
-----------------------------
this Agreement is presumed to be in favor of the party, which did not prepare
it, in case of a dispute as to interpretation.
9.14 Representation by Counsel. Each party acknowledges that it has had the
-------------------------
opportunity to be represented by separate independent counsel in the negotiation
of this Agreement, that any such respective attorneys were of its own choosing.
The parties warrant and represent that they have consulted with their counsel
concerning the execution, the meaning and the import of this Agreement, and each
has read this Agreement and fully understands the terms hereof as signified by
their signatures below, and are executing the same of their own free will for
the purposes and consideration herein expressed. The parties warrant and
represent that they have had sufficient time to consider whether to enter into
this Agreement and that they are relying solely on their own judgment and the
device of their own counsel in deciding to execute this Agreement.
9.15 Counterparts. This Agreement may be executed by the parties hereto in
------------
separate counterparts, each of which when so executed and delivered shall be an
25
<PAGE>
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
Seller
POLYPHASE CORPORATION
____________________________________
By: James Rudis
Its: President
26
<PAGE>
Buyer
POLYPHASE INSTRUMENT
ACQUISITION CORPORATION
____________________________________
By: Gus M. Monastero
Its: President
The Company
POLYPHASE INSTRUMENT CO.
____________________________________
By: Gus M. Monastero
Its: President
27
<PAGE>
EXHIBIT 10.77
PROMISSORY NOTE
$1,000,000 Dallas, Texas September 30, 1999
FOR VALUE RECEIVED, the undersigned, Polyphase Instrument Acquisition
Corporation, a Pennsylvania corporation (the "Maker") with a principal place of
business at 175 Commerce Drive Fort Washington, Pennsylvania 19034, hereby
promises to pay to the order of Polyphase Corporation, a Nevada corporation
("Payee") with a principal place of business at 4800 Broadway, Suite A, Addison
Texas 75001, or at any such other place as Payee may designate in writing, the
principal amount of ONE MILLION DOLLARS ($1,000,000) (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 has been delivered by Maker pursuant to the provisions of the Stock
Purchase Agreement dated the date hereof (the "Stock Purchase Agreement") by and
between Maker and Payee.
This Note is due and payable as follows:
Interest Only. Interest only shall be due and payable quarterly in
-------------
arrears through July 2001. Thereafter interest payments will be due
quarterly in addition to principal reductions as set forth
hereinbelow. The first such payment of interest only is due and
payable on the 1st day of January 2000, in the amount of TWENTY
THOUSAND DOLLARS ($20,000), with a like payment of interest only on
the first day of each of the months of April, July, October and
January through July 2001.
Principal Reductions. Beginning on October 1, 2001 principal
--------------------
reductions in the amount of FIFTY THOUSAND DOLLARS ($50,000) shall be
due and payable quarterly, in advance, together with interest payments
on the then outstanding balance. The first such principal reduction
payment is due and payable on the 1st day of October 2001, with like
principal reductions being due and payable quarterly thereafter on the
first day of each of the months of April, July, October and January
through maturity.
<PAGE>
Maturity. On October 1, 2006, 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 in inverse order of maturity of
the principal reduction payments.
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. If any payment or action to be made or taken hereunder shall be stated
to be or become due on a day which is a Saturday, Sunday, or other day on which
commercial banks in Philadelphia, Pennsylvania are obligated or authorized by
law to close (a "Business Day"), such payment or action shall be made or taken
on the next following Business Day and such extension of time shall be included
in computing interest or fees in connection with such payment or action.
Waivers. Maker and any other person who signs, makes, guarantees or endorses
this Note, jointly and severally, to the extent allowed by law, hereby waives
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 Payee. Upon any change in the
terms of this Note, and unless otherwise expressly stated in writing, no party
who signs this Note, whether as the Maker, guarantor, accommodation or endorser,
shall be release from liability. All such parties agree that Payee may renew,
extend (repeatedly and for any length of time) or modify this loan, or release
any party or guarantor or collateral; or impair, fail to realize upon or perfect
Payee's security interest in the collateral without the consent of or notice to
anyone.
Event of Default. In case an Event of Default (as defined below) shall occur,
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, an Event of Default shall have occurred if:
(i) Maker shall fail to make any payment of interest or principal
pursuant hereto and such failure shall continue for a period of five
(5) Business Days after Maker's receipt of written notice thereof;
-2-
<PAGE>
(ii) Maker fails to perform any other obligation under this Note
promptly at the time and strictly in the manner provided in this Note,
other than a monetary default, and such failure shall continue to a
period of thirty (30) calendar days after Maker's receipt of written
notice thereof;
(iii) Maker shall dispose of substantially all of the Collateral (as
that term is hereafter defined) by sale or otherwise;
(iv) Maker 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 affect Payee's
rights hereunder, or (d) take any action to authorize any of the
foregoing;
(v) If default be made in the payment of any installment of
principal or interest under this Note or any provision of the Security
Agreement, or other instrument executed in connection herewith or
securing the payment hereof, in each case within five (5) Business
Days after Maker's receipt of written notice thereof;
(vi) Maker shall involuntarily (a) have an order, judgement or
decree entered against it by any tribunal pursuant to any debtor
relief law that could suspend or otherwise affect any of Payee's
rights hereunder; (b) have a petition filed against it seeking the
benefit or benefits provided for by any debtor relief law that could
suspend or otherwise affect any of Payee's rights hereunder and such
order, judgment or decree, or petition is not discharged within ninety
(90) days after the entry or filing thereof;
(vii) A final judgment order for the payment of money in the amount
of $25,000 or greater shall be rendered against Maker or its assets
and such judgment by its terms is payable and within thirty (30) days
of its entry, shall not have been discharged or execution thereof
stayed, or within thirty (30) days after the expiration of any such
stay, such judgment shall not have been discharged; or
(viii) Any of the forgoing events of default delineated in sections
(iii), or (iv), of this paragraph shall occur against or with respect
to Polyphase Instrument Co.
-3-
<PAGE>
Default Rate. All past due amounts under the Note and all accrued but unpaid
interest thereon and fees shall bear interest from maturity (stated or by
acceleration) at eighteen percent (18%) per annum until paid, regardless of
whether such payment is made before or after entry of a judgment.
Special Provisions. Maker shall be allowed to prepay this Note in full at any
time without penalty or the consent of the Payee or any holder.
Attorney's Fees. If this Note is placed in the hands of an attorney for
collection after default, or if all or any part of the indebtedness represented
hereby is proved, established or collected in any court or in any bankruptcy
receivership, debtor relief or other court proceedings, Maker agrees to pay
reasonable attorney's fees and collection costs to the Payee(s) hereof in
addition to the principal and interest payable hereunder. After default, Maker
also will pay Payee all other amounts actually incurred by Payee as court costs,
lawful fees for filing, recording, or releasing to any public office any
instrument securing this loan; the reasonable cost actually expended for
repossessing, storing, preparing for sale, and selling any security and fees for
noting a lien on or transferring a certificate of title to any titled collateral
offered as security for this loan.
Severability. If any part of this Note cannot be enforced, this fact will not
affect the rest of the Note.
Usury. All agreements between the undersigned and Payee, 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
receive by Payee exceed the maximum amount permissible under applicable law. In
particular, this paragraph means (among other things) that Maker 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 Texas (as applicable). Any such excess interest or unauthorized
fee shall, instead of anything stated to the contrary, be applied first to
reduce the Principal Amount of this Note, and when the principal has been paid
in full, be refunded to the Maker. 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
-4-
<PAGE>
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 Payee hereof in
excess of the maximum lawful amount, the interest payable to Payee hereof shall
be reduced to the amount permitted under applicable law; and if for any
circumstances, Payee 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 Amount
hereof and such excess shall be refunded to the Maker. This Section shall
control all agreements between Maker and Payee.
Collateral. The payment of the indebtedness evidenced by this Note is secured by
the following (collectively, the "Collateral") (i) the guaranty of the Polyphase
Instrument Co., a corporation duly authorized and existing pursuant to laws of
the Commonwealth of Pennsylvania ("PIC"), as evidenced by that certain Guaranty
executed this date by PIC, (ii) PIC's pledge to Payee of all of PIC's assets now
owned or hereafter acquired including PIC's accounts, accounts receivable,
inventory, equipment and general intangibles and the replacements and proceeds
thereof as evidenced by that certain Security Agreement executed this date by
PIC, Payee and Maker; and (iii) the pledge by Maker of the shares of common
stock of PIC purchased on even date herewith by Maker from Payee, which pledge
is evidenced by that certain Pledge Agreement executed this date by Maker and
Payee. A copy of the above referenced Guaranty, Security Agreement and Pledge
Agreement are attached hereto as Exhibits "C," "D," and "E", respectively, for
the purposes of identification.
Subordination. The Maker's obligations under this Note are subordinated and
subject in right to the prior payment of the Senior Indebtedness (as that term
is defined in the Stock Purchase Agreement).
Cumulative Remedies. No delay on the part of Payee in the exercise of any power
or right under this Note or under the Security Agreement or under the Pledge
Agreement shall operate as a waiver thereof; nor shall a single or partial
exercise of any other power or right operate as a waiver hereof. Failure of
Payee
-5-
<PAGE>
to exercise any right granted herein shall not constitute a waiver of the right
to exercise the same upon the occurrence of a subsequent Event of Default.
Enforcement by Payee of any security for the payment hereof shall not constitute
an election by Payee of remedies so as to preclude the exercise of any other
remedy available to Payee.
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.
Assignment. The indebtedness evidenced by this Promissory Note shall be binding
upon and inure to the benefit of the parties and their legal representatives and
permitted assigns. The Promissory Note may not be assigned without the prior
written consent of the Maker, which shall not be unnecessarily withheld.
Governing Law. THIS NOTE 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, Maker has executed this Promissory Note as of the
30/th/ day of September 1999.
POLYPHASE INSTRUMENT
ACQUISITION CORPORATION
_________________________________
By: Gus A. Monastero
Title: President
-6-
<PAGE>
EXHIBIT 10.78
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT, (the "Agreement"), is made and entered into in
Dallas County, Texas on this the 30/th/ day of September 1999, by and between
Polyphase Instrument Acquisition Corporation, a Pennsylvania corporation with
its principal place of business at 175 Commerce Drive Fort Washington,
Pennsylvania 19034 (hereinafter the "Pledgor"), and Polyphase Corporation a
corporation duly authorized and existing pursuant to the state of Nevada
(hereinafter the "Secured Party").
W I T N E S S E T H:
WHEREAS, Pledgor is indebted to the Secured Party pursuant to that certain
Subordinated Promissory Note dated of even date herewith in the original
principal amount of ONE MILLION DOLLARS ($1,000,000) and being due and payable
as therein provided (hereinafter the "Note"); and
WHEREAS, as a material inducement to the Secured Party to loan Pledgor the
sum of ONE MILLION DOLLARS ($1,000,000), pursuant to the terms and conditions
set forth in the Note and the Stock Purchase Agreement dated the date hereof
(the "Stock Purchase Agreement") between Maker and Payee, Pledgor has agreed to
pledge 20,000 shares of the common stock, (hereinafter the "Pledged Shares"),
one dollar par value, of Polyphase Instrument Co., (hereinafter "PIC"), a
corporation duly authorized and existing pursuant to the laws of the
Commonwealth of Pennsylvania with its principal place of business at 175
Commerce Drive, Fort Washington, Pennsylvania 19034, to the Secured Party to
secure payment of the indebtedness evidenced by the Note;
WHEREAS, the Pledged Shares represent all of the shares purchased by
Pledgor from the Secured Party on even date herewith pursuant to the Stock
Purchase Agreement;
WHEREAS, the Secured Party has required that the Pledged Collateral (as
hereinafter defined) act as security for the payment and performance of any and
all obligations of Pledgor to the Secured Party under the Note and this
Agreement;
WHEREAS, Pledgor has deemed it to be in Pledgor's best interest to pledge
the Pledged Collateral to the Secured Party as security for the payment by
Pledgor of the indebtedness evidenced by the Note; and
WHEREAS, the parties desire to set forth in writing their agreement as to
the administration and disposition of the Pledged Collateral and certain other
matters as set forth herein;
<PAGE>
NOW, THEREFORE, for and in consideration of the above stated premises and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged and confessed, the parties hereby agree as follows:
2
<PAGE>
1. Pledge. As collateral security for the payment and performance of the
------
Obligations (as defined in Section 2 hereof) of Pledgor, Pledgor hereby pledges
to the Secured Party, and grants, transfers, assigns and hypothecates to the
Secured Party a continuing security interest in, the following property owned by
Pledgor (hereinafter the "Pledged Collateral"):
(a). Pledged Shares. The Pledged Shares and the certificates
--------------
representing the Pledged Shares;
(b). Dividends and Proceeds. All dividends, (except as permitted
----------------------
under the Guaranty), cash, products, proceeds, securities, instruments
and other property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the Pledged
Shares, including, but not limited to, all distributions or payments
in partial or complete liquidation or redemption of the Pledged
Shares; and
(c). Additional Shares. All additional shares of stock of PIC from
-----------------
time to time hereafter acquired by Pledgor arising from the Pledged
Shares as a result of any reclassification, readjustment, stock split,
stock dividend, or reorganization and the certificates representing
such additional shares, and all dividends, cash, products, proceeds,
securities instruments and other property from time to time received,
receivable or otherwise distributed in respect of or exchange for any
or all of such shares.
2. Security for Obligations. This Agreement secures the payment and
------------------------
performance of (i) all obligations of Pledgor to the Secured Party now or
hereafter existing under the Note whether for indebtedness (principal and
interest), fees, damages, expenses or otherwise, and whether evidenced by any
instrument, agreement or book account, and (ii) all obligations of Pledgor to
the Secured Party now or hereafter existing under this Agreement, regardless of
whether the amounts referred to in clause (i) or (ii) above are due or to become
due, direct or indirect, primary or secondary, joint, several, or joint and
several, or fixed or contingent obligations of Pledgor. All of such obligations
are collectively referred to herein as the "Obligations."
3. Delivery of Pledged Collateral. The Pledged Collateral is subject to
------------------------------
an existing first priority lien in favor of the holder of the Senior
Indebtedness (as that term is defined in the Stock Purchase Agreement) (the
"Priority Lien"). Pledgor is not currently in possession of the Pledged
Collateral. Upon the retirement of the Senior Indebtedness, Pledgor shall
immediately deliver and deposit with the Secured Party the stock certificate or
certificates or other instruments evidencing the Pledged Collateral owned by
Pledgor, along with such assignments, financing statements, endorsements, and/or
transfer powers duly executed by Pledgor in blank as will enable the Secured
Party after an Event of Default (as hereafter defined) to register the Pledged
Collateral in the Secured Party's name or in the name of the Secured Party's
nominee in the appropriate record books until such time as the Obligations of
Pledgor to the Secured Party have been discharged. All of the foregoing
documents shall be in form and
3
<PAGE>
substance satisfactory to the Secured Party. The Secured Party shall return the
Pledged Collateral to Pledgor upon payment in full of the Obligations.
4. Further Assurances and Documentation. Pledgor agrees that at any time
------------------------------------
and from time to time, at the expense of Pledgor, Pledgor will 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 to perfect and protect any security interest granted or
purported to be granted hereby or to enable the Secured Party to exercise and
enforce the Secured Party's rights and remedies hereunder with respect to any
Pledged Collateral.
5. Representations and Warranties. Pledgor represents and warrants to
------------------------------
the Secured Party as follows:
(a). Authorization. The execution, delivery, and performance of this
-------------
Agreement are within Pledgor's powers and are not in contravention of
any applicable law;
(b). Absence of Conflicts. Except for the Senior Indebtedness (as
--------------------
that term is defined in the Stock Purchase Agreement), Pledgor is not
obligated under any contract or agreement, which materially or
adversely affects Pledgor's properties or assets, or Pledgor's
financial condition, and neither the execution nor delivery of this
Agreement nor the consummation of any transaction contemplated hereby
will conflict with or result in any breach of the terms, conditions,
or provisions of, or constitute a default under any agreement or
instrument relative thereto to which Pledgor is subject;
(c). Authorized Shares. The Pledged Shares have been duly authorized
-----------------
and validly issued and are fully paid and non-assessable;
(d). Unencumbered Title to Pledged Collateral. Pledgor is the legal
----------------------------------------
and beneficial owner of the Pledged Collateral owned by Pledgor free
and clear of any lien, security interest, option or other charge or
encumbrance whatsoever except for the Priority Lien and the security
interest created by this Agreement and except for restrictions imposed
upon the transferability of unregistered stock by the Securities Act
of 1933, as amended. Until such time as the Obligations have been
paid in full, Pledgor, at Pledgor's sole expense, will keep the
Pledged Collateral free from other liens, security interests,
encumbrances or claims (other than those arising with respect to the
Senior Indebtedness); and Pledgor will defend the Pledged Collateral
against the claims and demands of all persons claiming the Pledged
Collateral or any part thereof or interest therein (other than those
arising with respect to the Senior Indebtedness);
4
<PAGE>
(e). Perfected Security Interest. The pledge of the Pledged Shares
-----------------------------
pursuant to this Agreement creates a valid and perfected security
interest in the Pledged Collateral, securing the payment of the
Obligations;
(f). No Approval Required. No authorization, approval, or other
--------------------
action by, and no notice to or filing with, any governmental authority
or regulatory body is required either (i) for the pledge by Pledgor of
the Pledged Collateral pursuant to this Agreement or for the
execution, delivery or performance of this Agreement by Pledgor or
(ii) for the exercise by the Secured Party of the rights provided for
in this Agreement or the remedies in respect of the Pledged Collateral
pursuant to this Agreement (except as may be required in connection
with such disposition by laws affecting the offering and sale or
securities generally); and
(g). Accurate Information. All information contained in statements
--------------------
furnished or to be furnished to the Secured Party by or on behalf of
Pledgor in connection with the Pledged Collateral or the Obligations
is complete and accurate in all material respects.
6. Expenses. Pledgor will upon demand pay to the Secured Party the
--------
amount of any and all reasonable expenses, including the reasonable fees and
expenses of the Secured Party's counsel and of any experts and agents, which the
Secured Party may incur after the occurrence of an Event of Default (as
hereinafter defined) in connection with (i) the custody or preservation of, or
the sale of, collection from, or other realization upon, any of the Pledged
Collateral, or (ii) the exercise or enforcement of any of the rights of the
Secured Party hereunder.
7. Voting Rights and Dividends.
---------------------------
(a). Rights Prior to Default. So long as no Event of Default shall
-----------------------
have occurred and be continuing:
(i). Pledgor shall be entitled to exercise any and all voting
and other consensual rights pertaining to the Pledged Collateral
or any part thereof for any purpose not inconsistent with the
terms of this Agreement; provided, however, Pledgor may not
exercise such voting rights so as to (a) dilute the Secured
Party's ownership percentage represented by the Pledged
Collateral and Secured Party shall not be required to exercise
preemptive rights; or (b) other than in the ordinary course of
business, impair the value of the Pledged Collateral; and
(ii). Pledgor shall be entitled to receive and retain any and all
dividends and interest paid in respect of the Pledged Collateral;
provided, however, that any and all
5
<PAGE>
A. dividends and interest paid or payable other than 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. dividends and other distributions paid or payable in
cash in respect of any Pledged Collateral in connection with
a partial or total liquidation or dissolution or in
connection with a reduction of capital, capital surplus or
paid-in-surplus, and
6
<PAGE>
C. cash paid, payable or otherwise distributed in
redemption of, or in exchange for, any Pledged Collateral
shall be forthwith delivered to the Secured Party to hold
as, pledged Collateral and shall, if received by Pledgor,
be received in trust for the benefit of the Secured Party
and the holders of the Senior Indebtedness, be segregated
from the other property or funds of Pledgor, and, upon
retirement of the Senior Indebtedness, be forthwith
delivered to the Secured Party as Pledged Collateral in
the same form as so received (with any necessary
endorsements). Pledgor shall promptly notify the Secured
Party of the occurrence of any of the above matters upon
the occurrence thereof; and
(iii). The Secured Party shall execute and deliver (or cause to
be executed and delivered) to Pledgor all such proxies and other
instruments as Pledgor may reasonably request for the purpose of
enabling Pledgor to exercise voting and other rights which
Pledgor is entitled to exercise pursuant to paragraph (i) above
and to receive the dividends or interest payments which Pledgor
is authorized to receive and retain pursuant to paragraph (ii)
above.
(b). Rights Upon Default. Upon the occurrence and during the
-------------------
continuance of an Event of Default:
(i). All rights of Pledgor to exercise the voting and other
consensual rights which Pledgor would otherwise be entitled to
exercise pursuant to Section 7(a)(i) and to receive the dividends
and interest payments which Pledgor would otherwise be authorized
to receive and retain pursuant to Section 7(a)(ii) 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 and other consensual rights and to receive and hold as
Pledged Collateral such dividends and interest payments;
(ii). All dividends and interest payments which are received by
Pledgor contrary to the provisions or paragraph (i) of this
Section 7(b) shall be received in trust for the benefit of the
Secured Party and the holders of the Senior Indebtedness, shall
be segregated from other funds of' Pledgor and, upon retirement
of the Senior Indebtedness, shall be forthwith paid over to the
Secured Party as Pledged Collateral in the same form as so
received (with any necessary endorsements).
8. Events of Default. The occurrence of any one or more of the following
-----------------
events shall constitute an Event of Default hereunder:
7
<PAGE>
(a). Default Under Note. An Event of Default shall have occurred
------------------
under the Note;
(b). Insolvency. Pledgor shall admit in writing Pledgor's inability
----------
to pay Pledgor's debts, or shall make a general assignment of
Pledgor's assets or property rights for the benefit of Pledgor's
creditors; or any proceeding shall be instituted by or against Pledgor
seeking to adjudicate Pledgor a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of Pledgor or
Pledgor's debts under any law relating to bankruptcy, insolvency or
reorganization or release of debtors, or seeking appointment of a
receiver, custodian, trustee, or other similar official for Pledgor or
for any substantial part of the property of Pledgor, and in the case
of any such proceeding instituted against Pledgor shall remain
undismissed for a period of' ninety (90) days;
(c). Falsity of Representation. Any warranty, representation or
-------------------------
statement made by Pledgor in this Agreement shall prove to have been
false in any material respect when made ; or
(d). Levy Against Collateral. The levy against the Pledged
-----------------------
Collateral, or any part hereof, of any execution, attachment,
sequestration or other writ, which shall remain undismissed for a
period of sixty (60) days.
9. Remedies Upon Default.
---------------------
(a). Remedies. Upon the occurrence of an Event of Default, and in
--------
addition to any and all other rights and remedies which the Secured
Party may then have hereunder, or under the Texas Business and
Commerce Code (the "Code"), or otherwise, the Secured Party may at the
Secured Party's option (i) declare the entire unpaid balance of
principal of, and all accrued interest on, the Obligations immediately
due and payable without demand, presentment, notice of default, notice
of intent to accelerate or notice of acceleration of maturity, all of
which are hereby expressly waived; (ii) notify any person obligated on
any of the Pledged Collateral of the security interest of the Secured
Party therein and request such person to make payment directly to the
Secured Party, (iii) demand, sue for, collect or otherwise reduce the
Secured Party's claims to judgment, foreclose or otherwise enforce the
Secured Party's security interest through judicial procedure or make
any settlement or compromise the Secured Party deems desirable with
respect to any of the Pledged Collateral; (iv) after notification
expressly provided for herein sell or otherwise dispose of, at the
office of the Secured Party, or elsewhere, as chosen by the Secured
Party, all or any part of the Pledged Collateral, and any such sale or
other disposition may be as a unit or in parcels, by public or private
proceedings, and by way of one or more contracts (it being agreed that
the sale of any part of the Pledged Collateral shall not exhaust
8
<PAGE>
the power of sale granted hereunder, but sales may be made from time
to time until all of the Pledged Collateral has been sold or until the
Obligations have been paid in full) and at such sale it shall not be
necessary to exhibit the Pledged Collateral; (v) at the Secured
Party's discretion, retain the Pledged Collateral in satisfaction of
the Obligations whenever the circumstances are such that the Secured
Party is entitled to do so under the Code; (vi) apply by appropriate
judicial proceedings for appointment of a receiver for the Pledged
Collateral, or any part thereof, (vii) purchase the Pledged Collateral
at any public sale; (viii) purchase the Pledged Collateral at any
private sale; and/or (ix) exercise the rights set forth in Section
7(b) hereof. The foregoing remedies shall be cumulative and except for
the provisions of Section 9(a)(v) above without prejudice to the
Secured Party's right to recover any deficiency including reasonable
attorneys' fees and costs permitted by this Agreement.
(b). Sale of Pledged Collateral. The Secured Party is authorized, at
--------------------------
any sale of the Pledged Collateral, if the Secured Party deems it
advisable, to restrict the prospective bidders or purchasers to those
persons who will represent and agree that they are purchasing for
their own account, for investment, and not with a view to distribution
or sale of any of the Pledged Collateral. Upon any such sale, the
Secured Party shall have the right to deliver, assign, and transfer to
the purchaser thereof the Pledged Collateral so sold. Each purchaser
at any such sale shall hold the property sold absolutely, free from
any claim or right of whatsoever kind. The Secured Party may, without
notice or publication, adjourn any public or private sale or cause the
same to be adjourned from time to time by announcement at the time and
place fixed for the sale, and such sale may be made at any time or
place to which the same may be so adjourned. In case of' any sale of
all or any part of the Pledged Collateral on credit or for future
delivery, the Pledged Collateral so sold may be retained by the
Secured Party until the selling price is paid by the purchaser
thereof, but the Secured Party shall not incur any liability in case
of the failure of such purchaser to take up and pay such selling
price, and such Pledged Collateral may again be sold upon like notice.
The Secured Party may also, at the Secured Party's discretion, proceed
by a suit or suits at law, or in equity to foreclose the pledge and
sell the Pledged Collateral, or any portion thereof, under a judgment
or decree of a court or courts of competent jurisdiction. If any
consent, approval or authorization of any state, municipal or other
governmental department, agency or authority should be necessary to
effectuate any sale or other disposition of the Pledged Collateral, or
any part thereof, Pledgor will execute all such applications and other
instruments as may be required in connection with securing any such
consent, approval or authorization, and will otherwise use its best
efforts to secure the same.
9
<PAGE>
(c). Notification. Reasonable notification of the time and place of
------------
any public sale of the Pledged Collateral, or any reasonable
notification of the time after which any private sale or other
intended disposition of the Pledged Collateral is to be made, shall be
sent to Pledgor and to any other person entitled under the Code to
notice. It is agreed that notice sent or given not less than ten (10)
calendar days prior to the taking of the action to which the notice
relates is reasonable notification and notice for the purpose of this
Agreement. Notice shall be deemed to be sent when it is deposited in
the United States Mail, return receipt requested, bearing the proper
postage and addressed to the Pledgor and/or any other person entitled
to receive notice, at their last known address according to the
records of the Secured Party.
(d). Application of Proceeds. Upon the occurrence of an Event of
-----------------------
Default or maturity of any instrument evidencing the Obligations or
any part thereof whether such maturity be by such terms of such
instruments or through the exercise of any power of acceleration, the
Secured Party is authorized and empowered to apply any and all funds
realized from the sale of the Pledged Collateral not previously
credited against the Obligations first toward the payment of the
costs, charges and expenses, if any, incurred in the collection of
such funds hereunder, and then toward the payment of the Obligations,
and shall pay any balance remaining to the Pledgor in accordance with
the written instructions executed by such Pledgor or as prescribed by
the Code.
10. Secured Party Appointed Attorney-in-Fact. Pledgor hereby irrevocably
----------------------------------------
appoints the Secured Party as Pledgor's attorney-in-fact, with full authority in
the place and stead of Pledgor and in the name of Pledgor or otherwise, from
time to time in the Secured Party's discretion after the occurrence of an Event
of Default to take any action and to execute any instrument which the Secured
Party may deem necessary or advisable to accomplish the purpose of this
Agreement, including, without limitation, (i) the right and power to execute and
deliver any and all powers and other instruments, documents, certificates and
agreements necessary or appropriate to transfer ownership of the Pledged
Collateral, and (ii) the right and power to receive, endorse and collect all
checks and other instruments made payable to Pledgor representing any dividend,
interest payment or other distribution in respect of the Pledged Collateral or
any part thereof and to give full acquittance for the same. The foregoing
appointment of the Secured Party as Pledgor's attorney-in-fact is irrevocable
and is coupled with an interest.
11. Certain Rights Before and After a Default.
-----------------------------------------
(a). Secured Party May Perform. If Pledgor fails to perform any
-------------------------
agreement contained herein, the Secured Party may perform, or cause
performance of, such agreement, and the expenses of the Secured Party
10
<PAGE>
incurred in connection therewith shall be payable by Pledgor pursuant
to the provisions of Section 6 hereof.
(b). Notification of Issuer. The Secured Party shall have the right
----------------------
to notify the issuer of the Pledged Collateral that the Pledged
Collateral has been pledged.
12. Substitution of Collateral. Pledgor may substitute collateral for the
--------------------------
Pledged Collateral provided each of the following, condition is satisfied: (i)
the substituted collateral has a fair market value equal to or greater than the
then unpaid principal balance and accrued interest on the Note, (ii) the
substituted collateral is not subject to any liens, encumbrances or other
restrictions other than a security interest in favor of the Secured Party, (iii)
the substituted collateral consists of marketable and registered securities, a
certificate of deposit, or other property acceptable to the Secured Party, (iv)
the Secured Party will have a security interest in the substituted collateral
with a priority equivalent to the priority of Secured Party's security interest
in the Pledged Collateral, and (v) the Secured Party consents to the receipt and
substitution of the substituted collateral and Pledgor executes and delivers all
documents and instruments necessary to grant the Secured Party a security
interest in the substituted collateral with a priority equivalent to the
priority of Secured Party's security interest in the Pledged Collateral.
13. Surrender of Collateral. The Secured Party may surrender, release,
-----------------------
exchange or alter any collateral or security for the Obligations without
effecting the liability of Pledgor under this Agreement, and this Agreement
shall continue effective notwithstanding any legal disability of Pledgor to
incur any indebtedness or obligation incurred to the Secured Party.
14. General Provisions.
------------------
(a). 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.
(b). 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.
(c). 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"
11
<PAGE>
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.
(d). Presumption Against Scrivener. Each party waives the presumption
-----------------------------
that this Agreement is presumed to be in favor of the party that did
not prepare it, in case of a dispute as to interpretation.
(e). Representation by Counsel. Each party acknowledges that it has
-------------------------
had the opportunity to be represented by separate independent counsel
in the negotiation of this Agreement, that any such respective
attorneys were of its own choosing. The parties warrant and represent
that they have consulted with their counsel concerning the execution,
the meaning and the import of this Agreement, and each has read this
Agreement and fully understands the terms hereof as signified by their
signatures below, and are executing the same of their own free will
for the purposes and consideration herein expressed. The parties
warrant and represent that they have had sufficient time to consider
whether to enter into this Agreement and that they are relying solely
on their own judgment and the advice of their own counsel in deciding
to execute this Agreement.
(f). Counterparts. This Agreement may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall
together constitute one and the same instrument. Each counterpart may
consist of a number of copies hereof each signed by less than all, but
together signed by all of the parties hereto.
(g). Choice of Law and Venue. THIS AGREEMENT SHALL BE GOVERNED BY AND
-----------------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. HOWEVER,
ANY LITIGATION, SPECIAL PROCEEDING OR OTHER PROCEEDING AS BETWEEN THE
PARTIES THAT MAY BE BROUGHT, OR ARISE OUT OF, IN CONNECTION WITH OR BY
REASON OF THIS AGREEMENT SHALL BE BROUGHT IN THE APPLICABLE FEDERAL OR
STATE COURT LOCATED IN DALLAS COUNTY, TEXAS., WHICH COURTS SHALL BE
THE EXCLUSIVE COURTS OF JURISDICTION AND VENUE.
(h). Notices. Any notices or other communications required or
-------
permitted hereunder shall be sufficiently given if delivered in
writing personally or sent by registered or certified mail, postage
prepaid, addressed to the parties as follows:
if to Pledgor:
12
<PAGE>
Polyphase Instrument Acquisition Corporation
175 Commerce Drive
Fort Washington, Pennsylvania 19034
Facsimile No.: 215-646-4911
with a copy to:
Stuart M. Brown, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, PA 19103-2985
if to Secured Party:
Polyphase Corporation
4800 Broadway, Suite A
Addison, Texas 75001
Attention: President
Facsimile: 972-386-8008
13
<PAGE>
with a copy to:
Albert B. Greco, Jr.
Law Offices of Albert B. Greco, Jr.
16901 Dallas Parkway, Suite 230
Addison, Texas 75001
Facsimile No.: 972-818-7343
Each party hereto may change such party's address for notice hereunder
by furnishing such new address in writing to the other parties hereto
in accordance with the provisions of this Section. All notices
hereunder shall be deemed to have been given as of the date so
delivered, if delivered in person, or three (3) days after a written
document containing such notice, properly addressed and with postage
prepaid, is deposited in a receptacle maintained by the United States
Postal Service for such purpose.
(i). Continuing Security Interest This Agreement shall create a
----------------------------
continuing security interest in the Pledged Collateral and shall
remain in full force and effect until payment in full of the
Obligations.
(j). Nonwaiver. Unless otherwise expressly provided herein, no waiver
---------
by the Secured Party of any provision hereof shall be deemed to have
been made unless expressed in writing and signed by the Secured Party.
No delay or omission in the exercise of any right or remedy accruing
to the Secured Party upon any breach under this Agreement shall impair
such right or remedy or be construed as a waiver of any such breach
theretofore or thereafter occurring. The waiver by the Secured Party
of any breach of any term, covenant or condition herein stated shall
not be deemed to be a waiver of any other breach, or of a subsequent
breach of the same or any other term, covenant or condition herein
contained.
(k). Entire Agreement. This Agreement sets forth the entire
----------------
understanding of the parties with respect to the Pledged Collateral
and supersedes all prior or contemporaneous representations,
understandings and agreements, oral. or written, made between the
parties effecting the, subject matter hereof, and all such prior or
contemporaneous representations, understandings and agreements are
hereby terminated.
(l). Parties Bound. This Agreement shall be binding upon and inure to
-------------
the benefit of the parties and their respective successors, assigns,
heirs, and personal representatives.
(m). Subordination. Notwithstanding any provision in this Agreement
-------------
to the contrary, the security interest of Secured Party in the Pledged
14
<PAGE>
Collateral is subordinated and subject in right to the security
interest of the holders of the Senior Indebtedness in the Pledged
Collateral.
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
PLEDGOR:
POLYPHASE INSTRUMENT ACQUISITION CORPORATION
____________________________________________
By: Gus M. Monastero
Its: President
SECURED PARTY:
POLYPHASE CORPORATION
____________________________________________
By: James Rudis
Its: President
16
<PAGE>
EXHIBIT 10.79
GUARANTY
FOR VALUE RECEIVED, and as direct inducement to Polyphase Corporation, a
corporation duly authorized and existing pursuant to the state of Nevada with
its principal place of business at 4800 Broadway, Suite A, Addison Texas 75001
in Dallas County, Texas, (hereinafter "Payee"), to loan and advance funds to
Polyphase Instrument Acquisition Corporation, a Pennsylvania corporation
("Maker") pursuant to that certain Subordinated Promissory Note executed of even
date herewith (the "Note"), POLYPHASE INSTRUMENT CO., a corporation duly
authorized and existing pursuant to the laws of the Commonwealth of Pennsylvania
with its principal place of business at 175 Commerce Drive, Fort Washington,
Pennsylvania 19034 (hereinafter referred to as "PIC" or "Guarantor"), does
hereby absolutely, unconditionally and irrevocably guaranty the full, complete
and prompt payment and performance to Payee of all amounts that become due and
owing to it, whether at stated maturity, upon acceleration or otherwise, and at
all times thereafter pursuant to the terms of the Note, a true and correct copy
of which is attached hereto as Exhibit "A."
1. Guaranty. This is an absolute, irrevocable, present and continuing
guaranty and shall remain in full force and effect from the date hereof
until any and all amounts due and owing by Maker pursuant to the Note have
been paid in full or until this Guaranty shall be revoked by the mutual
written agreement of Payee and Guarantor, whichever first occurs.
2. Payee's Remedies. Guarantor is a primary obligor of the indebtedness
and not merely a surety. In the event of any default by Maker in payment of
the obligations under the Note (the "Obligations"), Guarantor agrees, on
demand by Payee, to pay all sums due hereunder and to perform all
Obligations of Maker under the Note. In any action to enforce this
Guaranty, Payee, at its election, may proceed against the Guarantor, with
or without: (i) joining Maker in any such action; (ii) commencing any
action against or obtaining any judgment against Maker; or (iii) commencing
any proceeding to enforce the Note.
3. No Discharge. Guarantor agrees that the obligations, covenants, and
agreements of Guarantor under this Guaranty shall not be affected or
impaired by any act of Payee, or any event or condition except payment in
full and full performance of the Obligations. Specifically,
<PAGE>
Guarantor agrees that, without payment in full and full performance of the
Obligations, the liability of Guarantor hereunder shall not be discharged
by: (i) the renewal or extension of time for the payment of or performance
of the Obligations; or (ii) any waiver or modification of the Note; (iii)
any failure, omission, delay or inadequacy, whether entire or partial, of
Payee to exercise any right, power or remedy regarding the Obligations; and
(iv) the addition of any and all other endorsers, guarantors, obligors and
other persons liable for the payment or performance of the Obligations and
the acceptance of any and all other security for the payment of performance
of the Obligations; all whether or not Guarantor shall have had notice or
knowledge of any act or omission referred to in the foregoing clauses (i)
through (iv) of this Section 4.
4. Negative Covenants. So long as any principal of or interest on the
Note (whether or not due) shall remain unpaid, the Guarantor shall not,
unless the Payee shall otherwise consent in writing:
(a) Pay total compensation, including salaries, withdrawals, fees,
bonuses, commission, drawing accounts and other payments, whether
directly or indirectly, in money or otherwise, during any fiscal
year to the four most highly compensated of Guarantor's
executives, officers, directors or employees in an amount in
excess of Six Hundred Thousand Dollars ($600,000), plus annual
increases in the ordinary course of business consistent with past
practice; provided, that during any year Guarantor may pay, in
addition to such amounts the amount necessary to permit the Maker
to provide to its shareholders the amount of the federal and
state income taxes payable by them with respect to any income of
Maker attributable to them.
(b) Declare or pay any dividends, purchase or otherwise acquire for
value any of its capital stock now or hereafter outstanding,
return any capital to its stockholders, or make any other payment
or distribution of assets to its stockholders except as may be
necessary to make payments on the Note and the Senior
Indebtedness (as that term is defined in the Stock Purchase
Agreement dated the date hereof between Maker, Payee, and
Guarantor) and except as may be necessary to fund administrative
expenses of Maker
-2-
<PAGE>
(not to exceed $45,000 in any one calendar year), and except as
provided for herein.
(c) Enter into any transaction, which materially and adversely
affects the Collateral for the Note or this Guaranty.
(d) Amend or otherwise modify its certificate of incorporation or by-
laws.
(e) Make any loan or advance to any person or entity.
(f) Create, incur, or suffer to exist any obligations as lessee for
the payment of rent for any real or personal property other than
in the ordinary course of business.
(g) Make or be committed to make any capital expenditure (by purchase
or capitalized lease) other than in the ordinary course of its
business.
5. Waiver. Guarantor expressly waives: (i) notice of the acceptance by
Payee of this Guaranty; and (ii) presentment, demand, notice of dishonor
and protest. No modification or waiver of any of the provisions of this
Guaranty will be valid and enforceable unless in a writing duly signed and
delivered by Payee.
6. Assignment. This Guaranty will inure to the benefit of Payee and
permitted successors and assigns and will bind Guarantor and its successors
and assigns. Payee may assign this Guaranty and any or all of its rights,
privileges, interests and remedies hereunder in whole or in part, to any
other person, firm, association, or corporation without the prior consent
of Guarantor. If assigned, any such assignee will be entitled to the
benefits of this Guaranty so assigned and to exercise all rights, interests
and remedies so assigned as fully as Payee. Guarantor may assign or
transfer its obligations hereunder only with the prior written consent of
Payee and in the event of any such assignment or transfer, Guarantor and
each assignee or transferee will be primarily and jointly and severally
liable under this Guaranty.
7. Binding Effect. This Guaranty shall insure to the benefit of and be
binding upon Payee, Guarantor and their respective permitted successors and
assigns.
-3-
<PAGE>
8. Governing Law. THIS GUARANTY HAS BEEN DELIVERED AT DALLAS, DALLAS
COUNTY, TEXAS, AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF TEXAS.
9. Representations and Warranties of Guarantor. Guarantor hereby
represents and warrants to Payee as follows:
a. This Guaranty has been duly and validly executed and delivered by
Guarantor and constitutes the legal, valid and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms.
b. The execution and delivery of this Guaranty by Guarantor and the
consummation of the transactions contemplated hereby will not conflict
with or result in a material breach of any terms or provisions of, or
constitute a material default under, (i) any note, bond, mortgage,
indenture, license, lease, contract, commitment, agreement or other
instrument or obligation to which Guarantor is a party or by which
Guarantor may be bound; or (ii) any statute, order, writ, injunction,
decree, rule or regulation applicable to Guarantor or any of its
properties.
c. No material consent, approval, authorization, declaration or
other order of, or registration or filing with, any court or
regulatory authority or any third person is required for the valid
execution, delivery and performance of this Guaranty by Guarantor or
their consummation of the transactions contemplated hereby.
10. Subordination, The obligations of Guarantor under this Guaranty are
-------------
subordinate and subject to the obligations of Guarantor with respect to the
Senior Indebtedness (as that term is defined on the Stock Purchase
Agreement dated the date hereof by and between Payee and Maker).
IN WITNESS WHEREOF, POLYPHASE INSTRUMENT CO has executed this Guaranty as
of September 30, 1999, and to be executed on its behalf by its officer thereunto
duly authorized.
GUARANTOR:
-4-
<PAGE>
POLYPHASE INSTRUMENT CO.
______________________________
By: Gus M. Monastero
Its: President
-5-
<PAGE>
EXHIBIT 10.80
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is entered into effective as of the 30th day of
September 1999, by and between POLYPHASE INSTRUMENT CO., a corporation duly
authorized and existing pursuant to the laws of the Commonwealth of
Pennsylvania, with its principal place of business at 175 Commerce Drive, Fort
Washington, Pennsylvania 19034, (hereinafter referred to as "Pledgor" or "PIC")
and POLYPHASE CORPORATION, a corporation duly authorized and existing pursuant
to the laws of the State of Nevada, with its principal place of business at 4800
Broadway, Suite A, Addison Texas 75001, (hereinafter "Secured Party").
WHEREAS, Polyphase Instrument Acquisition Corporation contemporaneously
with the execution hereof has purchased from the Secured Party one hundred
percent (100%) of the common stock of Pledgor pursuant to that certain Stock
Purchase Agreement of even date herewith (the "Stock Purchase Agreement"); and
WHEREAS, Polyphase Instrument Acquisition Corporation is indebted to the
Secured Party pursuant to that certain Promissory Note dated of even date
herewith in the original principal amount of ONE MILLION DOLLARS ($1,000,000),
and being due and payable as therein provided (hereinafter the "Note");
WHEREAS, as a material inducement to the Secured Party to loan Polyphase
Instrument Acquisition Corporation the sum of ONE MILLION DOLLARS ($1,000,000)
pursuant to the terms and conditions set forth in the Stock Purchase Agreement
and Note, Pledgor agrees to pledge all of its assets to the Secured Party to
secure payment of the indebtedness evidenced by the Note; and
WHEREAS, the Board of Directors of Pledgor has determined it to be in the
best interest of PIC to enter into this Agreement and pledge its assets
hereunder as security for the payment of the Note.
Now Therefore in consideration of the foregoing:
The undersigned Pledgor hereby grants to the above named Secured Party a
Security Interest under the Uniform Commercial Code, in the following described
property (hereinafter the "Collateral") subject to all applicable conditions
contained herein and including all proceeds, products and accessions thereto:
All of the assets owned by Pledgor, including without limitation;
accounts, accounts receivable, inventory, equipment, and general intangibles,
both as of the date hereof and hereafter acquired.
Pledgor Warrants, Represents, and Agrees:
1. The Pledgor is a corporation duly organized and existing pursuant to
the laws of the Commonwealth of Pennsylvania and is in good standing
in the Commonwealth of Pennsylvania;
<PAGE>
2. The Pledgor will not allow the Collateral to be the subject of any
other security interest from and after the date of the execution
hereof, except for the following (each, a "Permitted Lien");
(a) Security interests in favor of the holder of the Senior
Indebtedness (as that term is defined in the Stock Purchase
Agreement);
(b) Security interests in favor of the Secured Party;
(c) Liens of landlords or landlords' lenders with respect to real
property leases of the Company;
(d) The following, (a) if the invalidity or amount thereof is being
contested in good faith by appropriate and lawful proceedings
diligently conducted so long as levy and execution thereon have
been stayed and continue to be stayed, or (b) if a final judgment
is entered and such judgment is discharged or bonded within five
(5) days of entry, and in either case they do not materially
impair the ability of the Polyphase Instrument Acquisition
Corporation to perform its obligations under the Note:
(i) claims or liens for taxes, assessments or charges due and
payable and subject to interest or penalty, provided that
the Pledgor maintains such reserves or other appropriate
provisions as shall be required by generally accepted
accounting principles and pays all taxes, assessments or
charges forthwith upon the commencement of proceedings to
foreclose any such lien; and
(ii) claims or liens of mechanics, materialmen, warehousemen,
carriers, or other statutory nonconsensual liens; and
(e) purchase money security interests in any property acquired by the
Pledgor prior to or after the date hereof.
3. The Pledgor has all requisite authority to execute this Agreement and
grant the security interest created hereby;
4. The execution hereof and performance hereunder by the Pledgor shall
not constitute a breach or violation by Pledgor under any other
agreement to which Pledgor is a party; and
5. The Board of Directors of Pledgor has approved the execution of this
Agreement by Pledgor and the consummation of the transaction
contemplated hereby.
Secured Obligations:
This Security Interest will secure the payment of the Note plus all other
obligations of Pledgor pursuant to this Agreement, specifically including
attorney's fees and collection costs, subject to the terms and conditions as
outlined therein and herein (hereinafter the "Secured Obligations").
-2-
<PAGE>
The occurrence of any of the following events shall constitute an Event of
Default:
1. An Event of Default under the Note.
2. Failure of Pledgor to perform any agreement or obligation of Pledgor
contained herein which continues for a period of thirty (30) days
after Pledgor has received written notice of such failure;
3. Pledgor 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 the Secured Party's rights
hereunder, or (d) take any corporate action to authorize any of the
forgoing; or
4. The levy against the Collateral, or any part thereof, of any
execution, attachment, sequestration or other writ, and the same shall
not be discharged on or before the expiration of sixty (60) days
thereafter.
Whenever an Event of Default shall exist, the Secured Party may, at its
option and without demand or notice, declare all or any part of the unpaid
balance of the Promissory Note plus accrued interest of the Secured Obligation
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
Pledgor can give authority therefor, enter upon any premises on which the
Collateral or any part thereof may be situated, and remove the same therefrom.
Pledgor agrees, in the event of an 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 Obligations 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 Pledgor
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 Pledgor'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 Accounts 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 and to sell the Collateral or any part
thereof at a public or private sale.
-3-
<PAGE>
3. After any Default, in the name of the Pledgor or otherwise, to demand,
collect, receive and give 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, including any
moneys due or to become due under or in respect to 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 Pledgor any checks, drafts, notes or other
instruments or documents received in payment of or on account of the
Collateral.
5. Pledgor hereby appoints the Secured Party as its attorney-in-fact to
take all actions consistent with the terms hereof that Secured Party
deems reasonable and necessary to accomplish the purposes hereof. The
foregoing appointment of the Secured Party as Pledgor's attorney-in-
fact is irrevocable and is coupled with an interest.
6. After any Default, the Secured Party may exercise any right or remedy
they may have under the Uniform Commercial Code or an applicable state
adoption thereof in addition to any and all rights and remedies the
Secured Party may then have hereunder.
7. Secured Party's liability to Pledgor for the Collateral shall be
limited to reasonable care for property similar to that of property
owned by the Secured Party. Specifically, Secured Party shall have no
duty to collect or protect the Collateral, sell the Collateral or use
diligence in disposition of the Collateral, other than as provided by
the Uniform Commercial Code, but shall be liable only to account to
Pledgor for what the Secured Party may actually collect or receive on
the Collateral.
Secured Party's Acknowledgment of Pledgor's Right to Demand Subordination:
The Secured Party acknowledges that the security interest created hereby,
shall be subordinated and subject to the security interest of the holders
of the Senior Indebtedness (as that term is defined in the Stock Purchase
Agreement) on the Collateral. The Secured Party agrees to execute any and
all documents necessary to effectuate and confirm such subordination.
General terms and conditions:
1. Pledgor will keep accurate books, records and accounts with respect to
the Collateral, and with respect to the general business of Pledgor,
and will make the same available to the Secured Party at its request
for examination and inspection; and will make and render to the
Secured Party such reports, accounts and statements as the Secured
Party from time to time may request with respect to the Collateral;
and will permit any authorized representative of the Secured Party to
examine and inspect, during normal business hours, any and all
premises where the Collateral is or may be kept or located. Without
limiting the foregoing, within forty-five (45) calendar days after the
end of each quarter until the Secured
-4-
<PAGE>
Obligations have been paid in full, Pledgor shall provide the Secured
Party with its addresses as set forth herein with the following
documents: (i) an unaudited balance sheet of Pledgor as of the end of
the quarter, an unaudited income statement of Pledgor for the previous
quarter, and an unaudited income statement of Pledgor for the period
commencing with the beginning of Pledgor's taxable year and ending on
the last day of the previous quarter, each of which documents shall be
prepared in accordance with generally accepted accounting principles
consistently applied, subject to the absence of footnotes and normal
year-end adjustments, and certified by the Chief Financial Officer of
Pledgor as being true, complete and correct to the best of his
knowledge; and (ii) a sworn statement of either the Chief Executive
Officer, the President or the Chief Financial Officer of Pledgor
stating that he has no knowledge that an Event of Default has
occurred, or such event has occurred and is continuing as of the date
of such statement and a statement as to the nature thereof and the
action which Pledgor proposes to take with respect thereto.
2. Pledgor has or will acquire title to and will at all times keep the
Collateral free of all liens and encumbrances, except for Permitted
Liens and except for the Security Interest created hereby and pursuant
to the provisions contained in "Secured Party's Acknowledgment of
Pledgor's Right to Demand Subordination" hereinabove, unless any such
lien is expressly subordinate hereto and has been pre-approved in
writing by the Secured Party. Pledgor has full power and authority to
execute this Security Agreement, to perform Pledgor's obligations
hereunder, and to subject the Collateral to the Security Interest
created hereby.
3. Pledgor 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, Pledgor authorizes the Secured Party at the
expense of the Pledgor to execute and file on Pledgor's behalf a
financing statement or statements in those public offices deemed
necessary by the Secured Party to protect its security interest in the
Collateral. Pledgor 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. Pledgor shall pay all expenses, and upon request, take any
action reasonably deemed advisable by Secured Party to preserve the
Collateral or to establish, determine priority of, perfect, continue
perfected, terminate and/or enforce the Secured Party's Interest in it
or rights under this Agreement.
4. Pledgor shall timely pay and discharge all taxes assessed or levied on
the Collateral.
5. Pledgor shall maintain insurance on the Collateral pledged hereunder
in an amount not less than the indebtedness outstanding to the Secured
Party.
6. Upon Default by Pledgor in any of the preceding warranties,
representations and agreements, the Secured Party at its option may
pay and discharge any taxes, liens and encumbrances on the Collateral.
All sums so advanced or paid by the
-5-
<PAGE>
Secured Party shall be payable by Pledgor on demand with interest at
the maximum rate allowed by law and shall be a part of the Secured
Obligations.
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.
If more than one party shall sign this Agreement, the term "Pledgor" shall
mean all such parties, and each of them, and all such parties shall be jointly
and severally obligated hereunder and all provisions hereof regarding the
Secured Obligations or Collateral of such parties shall apply to any Secured
Obligation or any Collateral of any or all of them. This Security Agreement and
the provisions hereof are to be binding upon the heirs, executors,
administrators or successors and assigns 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.
This Agreement shall in no way be construed as a limitation or
extinguishment of any guaranty, security agreement, pledge agreement or any
other instrument, document or agreement granting an interest in collateral for
or guaranteeing the payment or performance of the Secured Obligations executed
by any person prior, contemporaneously or subsequent to the execution of this
Agreement, but all such guaranties, security agreements, pledge agreements or
any other instruments, documents or agreements granting an interest in
collateral for or guaranteeing the payment or performance of the Secured
Obligations shall remain in full force and effect in accordance with their
terms.
This Agreement shall create a continuing security interest in the
Collateral and shall remain in full force and effect until payment in full of
the Secured Obligations. Upon actual receipt of the final payment of the
Secured Obligations, the Secured Party hereunder agrees to execute any written
memorandum as required by the Pledgor hereunder to release and extinguish the
security interests created hereby.
-6-
<PAGE>
EXECUTED effective as of the day first above written.
PLEDGOR
POLYPHASE INSTRUMENT CO.
_________________________
By: Gus M. Monastero
Its: President
SECURED PARTY
POLYPHASE CORPORATION
_________________________
By: James Rudis
Its: President
******************
COMMONWEALTH OF PENNSYLVANIA (S)
(S)
COUNTY OF ____________________ (S)
BEFORE ME, the undersigned authority, on this ____ day of November 1999,
personally appeared Gus M. Monastero, known to me or proven to me to be the
person whose name is subscribed to the foregoing instrument and after being duly
sworn on his oath acknowledged to me that he is the President of POLYPHASE
INSTRUMENT CO., a corporation duly organized pursuant to the laws of the
Commonwealth of Pennsylvania, and that he has the authority to and executed this
Security Agreement for the purposes and consideration therein expressed.
SUBSCRIBED AND SWORN to before me on the date first written above.
______________________________________________
Notary Public in and for the
Commonwealth of Pennsylvania
-7-
<PAGE>
EXHIBIT 10.81
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is made and entered into
between Polyphase Corporation, a Nevada Corporation and Overhill Farms, Inc.,
jointly and severally, (the "Companies") and James Rudis (the "Employee"), a
resident of Hicksville, New York as of the first day of November, 1999.
ARTICLE I
Section 1.1: Employment. The Companies hereby employ the Employee as
------------ -----------
President and Chief Operating Officer, and Employee hereby
accepts employment in such capacity, upon and subject to the
terms and conditions of this Agreement.
ARTICLE II
Section 2.1: Term. Subject to the provisions for termination hereinafter
------------ -----
provided, the initial term of this Agreement shall begin on
the 1st day of November, 1999, and shall end five (5) years
thereafter. This Agreement shall continue from year to year
thereafter unless terminated by either party hereto as
herein provided.
Section 2.2: Compensation. For all services rendered by the Employee
------------ -------------
under this Agreement, the Company shall pay the Employee an
initial salary of $230,000 per year during the term of this
Agreement, payable in monthly installments on or before the
last day of each month during the full term hereof, or in
such other convenient periodic payments as the Company and
the Employee may mutually agree. Compensation shall be
reviewed on an annual basis and shall be subject to a
minimum increase in a percentage not less than that of the
annual increase in the cost of living. The Employee will be
entitled to participate in any Stock Option or Bonus Plans
offered by the Companies. In the event that Overhill Farms,
Inc. meets or exceeds the Board of Directors approved budget
for fiscal 2000, Employee will be entitled to a minimum
annual cash bonus of $40,000 for that fiscal year.
Section 2.3: Other Benefits. During the Employment Term the Company
------------ ---------------
shall provide Employee with the same insurance and other
benefits that the Company makes available to other employees
in accordance with the Company's policies as they exist from
time to time. Additionally, the Company shall make
available, at its cost, a life insurance policy in the
amount of $1 million (the Policy") for the sole and
exclusive benefit of the Employee. The Employee shall at all
times during the term of this Agreement and afterwards be
entitled to name
-1-
<PAGE>
the beneficiary under the Policy, and the Companies shall,
upon demand from the Employee at any and all times, execute
and deliver any forms, notices or other documentation
requested by the Employee in connection with the Policy.
Upon request of the Employee, the Companies agrees to
transfer ownership of the Policy the Employee.
Section 2.4: Vacation and Sick Pay. The Employee shall be entitled to an
------------ ----------------------
annual vacation of fifteen (20) business days with full pay.
Such vacation shall be taken at a time selected by the
Employee. In addition, the Employee shall be entitled to ten
(10) business days per year as sick leave or personal
business days with full pay. Vacation time, sick leave and
personal business days may be accumulated and used anytime
during the term of this agreement. Companies acknowledge
that Employee has thirty (30) days accumulated unused
vacation time that will be carried forward with this
agreement.
Section 2.5: Holidays. The Employee shall be entitled to a holiday with
------------ ---------
full pay on New Year's Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, Christmas Day, and such other
days as the Companies shall from time to time determine.
Section 2.6: Business Expenses. The Employee is authorized to incur
------------ ------------------
reasonable and necessary business expenses in the
performance of the Employee's duties under this Agreement,
including expenditures for travel and entertainment. The
Companies will reimburse the Employee from time to time for
all such business expenses. Companies acknowledge that
Employee maintains his principal residence in the state of
New York, and Companies agree to pay all travel and related
expenses to and from New York as in past practice.
Section 2.7: Automobile. The Companies shall pay, in advance, for a
------------ -----------
leased (at a maximum lease rate of $800 per month) or a
company-owned automobile (with choice of leased or owned
vehicle at Companies' option) that is equivalent with his
position; in either case, the automobile shall be one of the
Employee's selection. The Companies also agree to pay all
automobile operating expenses, including (without
limitation) maintenance and repair, gas, oil, car washes,
insurance and deductible amounts arising from any claim
against such insurance. Every two years the automobile shall
be replaced. In the event that Employee personally
guarantees a company leased vehicle obligation, Companies
agree to fully indemnify employee for all lease and related
costs.
Section 2.8: Relocation. If the Companies and Employee mutually agree to
------------ -----------
relocate the Employee, the Companies will pay the reasonable
expenses incurred by Employee in relocation. Relocation
expenses to be paid by the Companies
-2-
<PAGE>
shall include, temporary living costs for up to six (6)
months; all fees and expenses associated with the purchase
of a residence, such as, real estate agency commissions or
fees, appraisal fees, credit reports, survey fees,
inspection fees, recording fees for mortgage or deed, title
insurance or guarantee premiums, and tax title search and
attorney fees. Further, the Companies will pay all costs and
expenses to transport the household goods and other
possessions of the Employee including, but not limited to,
packing (including disconnection of appliances), unpacking
(including connection of appliances), storage for up to six
(6) months and the transportation of the Employee's
automobile.
ARTICLE III
Section 3.1: Duties. The Employee shall carry out those duties normally
------------ -------
assigned to the President and Chief Operating Officer and
Director of a similar corporation.
Section 3.2: Disclosure of Information. The Employee recognizes and
------------ --------------------------
acknowledges that his position with the Companies is one of
the highest trust and confidence by reason of his access to
confidential and proprietary business information of the
Companies. Accordingly, the Employee agrees to sign a non-
competition and confidentiality agreement in a form
satisfactory to the Companies.
ARTICLE IV
Section 4.1: Resignation of the Employee. In the event of the
------------ ----------------------------
termination of this Agreement prior to the completion of the
term of employment specified above by the voluntary
resignation of the Employee, the Employee shall be entitled
to:
(a) His base salary earned prior to the date of termination as provided
for in Section 2.2 of this Agreement computed pro rata up to and
including the date of termination or resignation;
(b) All accrued but unused vacation, sick leave, and personal business
days paid at a per diem rate equivalent to the Employee's then current
salary rate;
(c) Reimbursement for reasonable and necessary business expenses incurred
before resignation;
(d) All rights granted under Section 2.3 hereof with respect to the
Policy; and
-3-
<PAGE>
(e) All amounts to which the Employee is entitled under the Companies's
Profit Sharing Plan.
Section 4.2: Termination by Reason of Death or Disability.
------------ ---------------------------------------------
(a) Upon the death of the Employee, the Employment Term shall
automatically terminate on the last day of the month in which the
death of Employee occurs.
(b) If Employee is determined to be Disabled (as hereinafter defined)
then the Companies may, upon thirty (30) days written notice to
Employee, terminate Employee's employment hereunder, but in addition
to the benefits described in Section 4.2 (c) below, Employee shall
continue to receive full salary for six months or until he is
eligible to receive any benefits to which he may be entitled under
the terms of the long-term disability coverage provided by the
Companies. For the purposes of this Agreement, the "Disability" of
Employee shall mean any incapacity or inability to perform Employee's
normal or assigned duties to the Companies, in either case due to
injury or illness (physical or mental), for a period of at least
forty-five (45) consecutive days out of any calendar year.
(c) Upon termination of employment pursuant to Section 4.2 (a) or (b) of
the Employee or his estate shall be entitled to receive:
(i) The base salary provided by Section 2.2 that the Employee was then
receiving through the date of termination as provided above;
(ii) All bonuses earned through the date of termination, paid in
accordance with the terms of the bonus plan pursuant to which the
bonus was earned;
(iii) Accrued but unused vacation and sick leave pay;
(iv) Reimbursement for reasonable and necessary business expenses
previously incurred;
(v) All rights granted under Section 2.3 hereof with respect to the
Policy; and
(vi) All amounts to which the Employee is entitled under any Profit
Sharing Plan of the Companies.
Section 4.3: Termination by the Companies for Cause. Subject to any
------------ ---------------------------------------
opportunity to cure on the part of Employee, the Companies may for Cause (as
hereinafter defined) terminate Employee's employment hereunder upon written
notice specifying the particulars of the Cause. "Cause" shall mean:
-4-
<PAGE>
(a) Any intentional material breach by the Employee of any of the terms
and conditions of this Agreement;
(b) A breach of the Employee's fiduciary duties to the Companies;
(c) Misappropriation of any material amount of the Companies's assets; or
(d) Employee's habitual negligence or nonfeasance in the performance of
his duties hereunder; and
With respect to any of the events specified in (a), (b), (c) and (d) above,
the Companies will provide Employee with written notice thereof and a ten (10)
day opportunity to cure such matter to the satisfaction of the Companies.
In the event of the termination of this Agreement for any of the reasons
set forth in this Section 4.3 the Employee shall be entitled to receive:
(a) His base salary earned prior to the date of termination as provided in
Section 2.2 of this Agreement computed pro rata up to and including
the date of termination;
(b) All rights granted under Section 2.3 hereof with respect to the
policy; and
(c) All amounts to which the Employee is entitled under the Companies's
Profit Sharing Plan; and
(d) Any bonuses earned through the date of termination, paid in accordance
with the terms of the bonus plan pursuant to which any bonus may have
been earned. The Employee's share of any annual cash bonus pool shall
be computed pro rata based on the actual number of days during the
year the Employee was employed by the Companies; provided, however,
nothing herein shall be construed to require the Companies to
calculate or pay any bonus prior to the regularly scheduled time for
making such calculation or payment; and
(e) Any accrued but unused vacation and sick leave pay.
Section 4.4: Termination on Grounds Other Than Cause, Disability or
------------ ------------------------------------------------------
Should the Employee's employment hereunder be terminated by the Companies on
grounds other than for Cause, disability, resignation or death, the Employee
shall be entitled to receive, as the Employee's sole remedy and as liquidated
damages:
(a) The base salary that the Employee was then receiving for the remainder
of the term of employment set forth in Section 2.2 above, paid in a
lump sum and
-5-
<PAGE>
(b) Any bonuses earned through the date of termination, paid in accordance
with the terms of the bonus plan pursuant to which any bonus may have
been earned. The Employee's share of any annual cash bonus pool shall
be computed pro rata based on the actual number of days during the
year the Employee was employed by the Companies; provided, however,
nothing herein shall be construed to require the Companies to
calculate or pay any bonus prior to the regularly scheduled time for
making such calculation or payment.
(c) Accrued but unused vacation and sick leave pay;
(d) Have all indebtedness owed by him to the Companies forgiven;
(e) Use of the car provided pursuant to the provisions of Section 2.7
hereof for one year following the date of termination;
(f) Reimbursement for reasonable and necessary business expenses
previously incurred;
(g) All rights granted under Section 2.3 hereof with respect to the
Policy;
(h) All amounts to which the Employee is entitled under any Profit Sharing
Plan of the Companies;
(i) Monthly payments for one year equal to the monthly premium required by
the Employee to maintain his health insurance benefits pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") under
the Companies's group health insurance plan.
ARTICLE V
Section 5.1: Covenant Not to Compete. During the period of this
------------ ------------------------
Agreement and expiring one (1) year after the end of
Employee's employment by the Companies, Employee shall not,
without the approval of the Board of Directors, directly or
indirectly compete with Companies in the manufacture, sale
or distribution of frozen foods or in any other businesses
in which the Companies may then be active.
ARTICLE VI
Section 6.1: Notices. Any notice required or permitted to be given under
------------ --------
this Agreement shall be in writing and shall be deemed to
have been duly given on the date of service if served
personally on the party to whom notice is to be given, or on
-6-
<PAGE>
the third (3) day after mailing if mailed to the party to
whom notice is to be given properly addressed, certified
mail, return receipt requested, postage prepaid, addressed
as follows:
Section 6.1.1: In the case of the Employee, to his residence as shown on
--------------
the Companies's records; and
Section 6.1.2: In the case of the Companies, to the principal offices.
--------------
Section 6.2: Waiver of Breach. The waiver by the Companies or the
------------ -----------------
Employee of a breach of any provision of this Agreement by
the other party hereto shall not operate or be construed as
a waiver of any subsequent breach of the same or any other
provision hereof by the same party.
Section 6.3: Assignment. Neither the Companies nor the Employee may
------------ -----------
assign rights or obligations under this Agreement.
Section 6.4: Benefit. This Agreement shall be binding upon and inure to
------------ --------
the benefit of the legal representatives, successors and
assigns of the Companies and the Employee.
Section 6.5: Amendments. No charge, alteration or amendment to this
------------ -----------
Agreement shall be valid or binding upon the parties hereto
unless made in writing and signed by both parties hereto.
Section 6.6: Construction. This Agreement constitutes the entire
------------ -------------
understanding between the parties and the parties hereby
declare that there are no oral or other agreements or
understandings between them. This Agreement supersedes all
previous agreements between the parties.
Section 6.7: Multiple Counterparts. This Agreement is being execute in
------------ ----------------------
multiple identical counterparts, each of which shall be
deemed an original, and all of which taken together shall
constitute but one and the same instrument; but in making
proof of this Agreement, it shall not be necessary to
produce or account for more than one counterpart executed by
the party sought to be charged with performance hereunder.
Section 6.8: Jurisdiction. The parties agree that the courts of the
------------ -------------
State of New York, and any courts whose jurisdiction is
derivative on the jurisdiction of the courts of the State of
New York, shall have personal jurisdiction over all parties
to this Agreement.
Section 6.9: Attorneys' Fees. If any civil action, whether at law or in
------------ ----------------
equity, is necessary
-7-
<PAGE>
to enforce or interpret any of the
terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, court costs and
other reasonable expense of litigation, in additional to any
other relief to which such party may be entitled.
Section 6.11: Headings and Pronouns. The subject headings of the sections
------------- ----------------------
of this Agreement are included for purposes of convenience
only, and shall not affect the construction or
interpretation of any of its provisions. All pronouns and
any variations thereof shall be deemed to refer to the
masculine, feminine, neuter, singular or plural as the
identity of the entities or persons referred to may require.
IN WITNESS HEREOF, this Agreement has been executed by the Employee and the duly
authorized officer of the Companies on the day and year first above written
effective on the date hereinabove set forth.
Employee: _____________________ Companies:
Polyphase Corporation.
By: _________________________________
William E. Shatley
Senior Vice President
Overhill Farms, Inc.
By: _________________________________
William E. Shatley
Vice President
Acknowledged and Approved by the Compensation Committee of Polyphase
Corporation:
_____________________________ _______________________________
Michael F. Buck George R. Schrader
-8-
<PAGE>
EXHIBIT 10.82
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is made and entered into
between Polyphase Corporation, a Nevada Corporation and Overhill Farms, Inc.,
jointly and severally, (the "Companies") and William E. Shatley (the
"Employee"), a resident of Dallas, Texas as of the first day of November, 1999.
ARTICLE I
Section 1.1: Employment. The Companies hereby employ the Employee as
------------ -----------
Senior Vice President, Treasurer and Chief Financial Officer
of Polyphase and as Vice President of Overhill, and Employee
hereby accepts employment in such capacity, upon and subject
to the terms and conditions of this Agreement.
ARTICLE II
Section 2.1: Term. Subject to the provisions for termination hereinafter
------------ -----
provided, the initial term of this Agreement shall begin on
the 1st day of November, 1999, and shall end five (5) years
thereafter. This Agreement shall continue from year to year
thereafter unless terminated by either party hereto as
herein provided.
Section 2.2: Compensation. For all services rendered by the Employee
------------ -------------
under this Agreement, the Company shall pay the Employee a
salary of $168,000 per year during the term of this
Agreement, payable in monthly installments on or before the
last day of each month during the full term hereof, or in
such other convenient periodic payments as the Company and
the Employee may mutually agree. Compensation shall be
reviewed on an annual basis and shall be subject to a
minimum increase in a percentage not less than that of the
annual increase in the cost of living. The Employee will be
entitled to participate in any Stock Option or Bonus Plans
offered by the Companies. In the event that Overhill Farms,
Inc. meets or exceeds the Board of Directors approved budget
for fiscal 2000, Employee will be entitled to a cash bonus
for that fiscal year as approved by the Board of Directors.
Section 2.3: Other Benefits. During the Employment Term the Company
------------ ---------------
shall provide Employee with the same insurance and other
benefits that the Company makes available to other employees
in accordance with the Company's policies as they exist from
time to time. Additionally, the Company shall make
available, at its cost, a life insurance policy in the
amount of $1 million (the Policy") for the sole and
exclusive benefit of the Employee. The Employee shall at all
-1-
<PAGE>
times during the term of this Agreement and afterwards be
entitled to name the beneficiary under the Policy, and the
Companies shall, upon demand from the Employee at any and
all times, execute and deliver any forms, notices or other
documentation requested by the Employee in connection with
the Policy. Upon request of the Employee, the Companies
agrees to transfer ownership of the Policy the Employee.
Section 2.4: Vacation and Sick Pay. The Employee shall be entitled to an
------------ ----------------------
annual vacation of fifteen (20) business days with full pay.
Such vacation shall be taken at a time selected by the
Employee. In addition, the Employee shall be entitled to ten
(10) business days per year as sick leave or personal
business days with full pay. Vacation time, sick leave and
personal business days may be accumulated and used anytime
during the term of this agreement. Companies acknowledge
that Employee has thirty (30) days accumulated unused
vacation time that will be carried forward with this
agreement.
Section 2.5: Holidays. The Employee shall be entitled to a holiday with
------------ ---------
full pay on New Year's Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, Christmas Day, and such other
days as the Companies shall from time to time determine.
Section 2.6: Business Expenses. The Employee is authorized to incur
------------ ------------------
reasonable and necessary business expenses in the
performance of the Employee's duties under this Agreement,
including expenditures for travel and entertainment. The
Companies will reimburse the Employee from time to time for
all such business expenses.
Section 2.7: Automobile. The Companies shall pay, in advance, for a
------------ -----------
leased (at a maximum lease rate of $800 per month) or a
company-owned automobile (with choice of leased or owned
vehicle at Companies' option) that is equivalent with his
position; in either case, the automobile shall be one of the
Employee's selection. The Companies also agree to pay all
automobile operating expenses, including (without
limitation) maintenance and repair, gas, oil, car washes,
insurance and deductible amounts arising from any claim
against such insurance. Every two years the automobile shall
be replaced. In the event that Employee personally
guarantees a company leased vehicle obligation, Companies
agree to fully indemnify employee for all lease and related
costs.
Section 2.8: Relocation. If the Companies and Employee mutually agree to
------------ -----------
relocate the Employee, the Companies will pay the reasonable
expenses incurred by Employee in relocation. Relocation
expenses to be paid by the Companies shall include,
temporary living costs for up to six (6) months; all fees
and expenses associated with the purchase of a residence,
such as, real estate
-2-
<PAGE>
agency commissions or fees, appraisal fees, credit reports,
survey fees, inspection fees, recording fees for mortgage or
deed, title insurance or guarantee premiums, and tax title
search and attorney fees. Further, the Companies will pay
all costs and expenses to transport the household goods and
other possessions of the Employee including, but not limited
to, packing (including disconnection of appliances),
unpacking (including connection of appliances), storage for
up to six (6) months and the transportation of the
Employee's automobile.
ARTICLE III
Section 3.1: Duties. The Employee shall carry out those duties normally
------------ -------
assigned to the Vice President and Chief Financial Officer
and Director of similar corporations.
Section 3.2: Disclosure of Information. The Employee recognizes and
------------ --------------------------
acknowledges that his position with the Companies is one of
the highest trust and confidence by reason of his access to
confidential and proprietary business information of the
Companies. Accordingly, the Employee agrees to sign a non-
competition and confidentiality agreement in a form
satisfactory to the Companies.
ARTICLE IV
Section 4.1: Resignation of the Employee. In the event of the
------------ ----------------------------
termination of this Agreement prior to the completion of the
term of employment specified above by the voluntary
resignation of the Employee, the Employee shall be entitled
to:
(a) His base salary earned prior to the date of termination as provided
for in Section 2.2 of this Agreement computed pro rata up to and
including the date of termination or resignation;
(b) All accrued but unused vacation, sick leave, and personal business
days paid at a per diem rate equivalent to the Employee's then current
salary rate;
(c) Reimbursement for reasonable and necessary business expenses incurred
before resignation;
(d) All rights granted under Section 2.3 hereof with respect to the
Policy; and
(e) All amounts to which the Employee is entitled under the Companies's
Profit Sharing Plan.
-3-
<PAGE>
Section 4.2: Termination by Reason of Death or Disability.
------------ ---------------------------------------------
(a) Upon the death of the Employee, the Employment Term shall
automatically terminate on the last day of the month in which the
death of Employee occurs.
(b) If Employee is determined to be Disabled (as hereinafter defined)
then the Companies may, upon thirty (30) days written notice to
Employee, terminate Employee's employment hereunder, but in addition
to the benefits described in Section 4.2 (c) below, Employee shall
continue to receive full salary for six months or until he is
eligible to receive any benefits to which he may be entitled under
the terms of the long-term disability coverage provided by the
Companies. For the purposes of this Agreement, the "Disability" of
Employee shall mean any incapacity or inability to perform Employee's
normal or assigned duties to the Companies, in either case due to
injury or illness (physical or mental), for a period of at least
forty-five (45) consecutive days out of any calendar year.
(c) Upon termination of employment pursuant to Section 4.2 (a) or (b) of
the Employee or his estate shall be entitled to receive:
(i) The base salary provided by Section 2.2 that the Employee was then
receiving through the date of termination as provided above;
(ii) All bonuses earned through the date of termination, paid in
accordance with the terms of the bonus plan pursuant to which the
bonus was earned;
(iii) Accrued but unused vacation and sick leave pay;
(iv) Reimbursement for reasonable and necessary business expenses
previously incurred;
(v) All rights granted under Section 2.3 hereof with respect to the
Policy; and
(vi) All amounts to which the Employee is entitled under any Profit
Sharing Plan of the Companies.
Section 4.3: Termination by the Companies for Cause. Subject to any
------------ ---------------------------------------
opportunity to cure on the part of Employee, the Companies may for Cause (as
hereinafter defined) terminate Employee's employment hereunder upon written
notice specifying the particulars of the Cause. "Cause" shall mean:
(a) Any intentional material breach by the Employee of any of the terms
and conditions of this Agreement;
-4-
<PAGE>
(b) A breach of the Employee's fiduciary duties to the Companies;
(c) Misappropriation of any material amount of the Companies's assets; or
(d) Employee's habitual negligence or nonfeasance in the performance of
his duties hereunder; and
With respect to any of the events specified in (a), (b), (c) and (d) above,
the Companies will provide Employee with written notice thereof and a ten (10)
day opportunity to cure such matter to the satisfaction of the Companies.
In the event of the termination of this Agreement for any of the reasons
set forth in this Section 4.3 the Employee shall be entitled to receive:
(a) His base salary earned prior to the date of termination as provided in
Section 2.2 of this Agreement computed pro rata up to and including
the date of termination;
(b) All rights granted under Section 2.3 hereof with respect to the
policy; and
(c) All amounts to which the Employee is entitled under the Companies's
Profit Sharing Plan; and
(d) Any bonuses earned through the date of termination, paid in accordance
with the terms of the bonus plan pursuant to which any bonus may have been
earned. The Employee's share of any annual cash bonus pool shall be
computed pro rata based on the actual number of days during the year the
Employee was employed by the Companies; provided, however, nothing herein
shall be construed to require the Companies to calculate or pay any bonus
prior to the regularly scheduled time for making such calculation or
payment; and
(e) Any accrued but unused vacation and sick leave pay.
Section 4.4: Termination on Grounds Other Than Cause, Disability or Death.
------------ -------------------------------------------------------------
Should the Employee's employment hereunder be terminated by the Companies on
grounds other than for Cause, disability, resignation or death, the Employee
shall be entitled to receive, as the Employee's sole remedy and as liquidated
damages:
(a) The base salary that the Employee was then receiving for the remainder
of the term of employment set forth in Section 2.2 above, paid in a
lump sum; and
(b) Any bonuses earned through the date of termination, paid in accordance
with the terms of the bonus plan pursuant to which any bonus may have
been earned. The
-5-
<PAGE>
Employee's share of any annual cash bonus pool shall be computed pro
rata based on the actual number of days during the year the Employee
was employed by the Companies; provided, however, nothing herein shall
be construed to require the Companies to calculate or pay any bonus
prior to the regularly scheduled time for making such calculation or
payment.
(c) Accrued but unused vacation and sick leave pay;
(d) Have all indebtedness owed by him to the Companies forgiven;
(e) Use of the car provided pursuant to the provisions of Section 2.7
hereof for one year following the date of termination;
(f) Reimbursement for reasonable and necessary business expenses
previously incurred;
(g) All rights granted under Section 2.3 hereof with respect to the
Policy;
(h) All amounts to which the Employee is entitled under any Profit Sharing
Plan of the Companies;
(i) Monthly payments for one year equal to the monthly premium required by
the Employee to maintain his health insurance benefits pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") under
the Companies's group health insurance plan.
ARTICLE V
Section 5.1: Covenant Not to Compete. During the period of this
------------ ------------------------
Agreement and expiring one (1) year after the end of
Employee's employment by the Companies, Employee shall not,
without the approval of the Board of Directors, directly or
indirectly compete with Companies in the manufacture, sale
or distribution of frozen foods or in any other businesses
in which the Companies may then be active.
ARTICLE VI
Section 6.1: Notices. Any notice required or permitted to be given under
------------ --------
this Agreement shall be in writing and shall be deemed to
have been duly given on the date of service if served
personally on the party to whom notice is to be given, or on
the third (3) day after mailing if mailed to the party to
whom notice is to be given properly addressed, certified
mail, return receipt requested, postage
-6-
<PAGE>
prepaid, addressed as follows:
Section 6.1.1: In the case of the Employee, to his residence as shown on
--------------
the Companies's records; and
Section 6.1.2: In the case of the Companies, to the principal offices.
--------------
Section 6.2: Waiver of Breach. The waiver by the Companies or the
------------ -----------------
Employee of a breach of any provision of this Agreement by
the other party hereto shall not operate or be construed as
a waiver of any subsequent breach of the same or any other
provision hereof by the same party.
Section 6.3: Assignment. Neither the Companies nor the Employee may
------------ -----------
assign rights or obligations under this Agreement.
Section 6.4: Benefit. This Agreement shall be binding upon and inure to
------------ --------
the benefit of the legal representatives, successors and
assigns of the Companies and the Employee.
Section 6.5: Amendments. No charge, alteration or amendment to this
------------ -----------
Agreement shall be valid or binding upon the parties hereto
unless made in writing and signed by both parties hereto.
Section 6.6: Construction. This Agreement constitutes the entire
------------ -------------
understanding between the parties and the parties hereby
declare that there are no oral or other agreements or
understandings between them. This Agreement supersedes all
previous agreements between the parties.
Section 6.7: Multiple Counterparts. This Agreement is being execute in
------------ ----------------------
multiple identical counterparts, each of which shall be
deemed an original, and all of which taken together shall
constitute but one and the same instrument; but in making
proof of this Agreement, it shall not be necessary to
produce or account for more than one counterpart executed by
the party sought to be charged with performance hereunder.
Section 6.8: Jurisdiction. The parties agree that the courts of the
------------ -------------
State of Texas, and any courts whose jurisdiction is
derivative on the jurisdiction of the courts of the State of
Texas, shall have personal jurisdiction over all parties to
this Agreement.
Section 6.9: Attorneys' Fees. If any civil action, whether at law or in
------------ ----------------
equity, is necessary to enforce or interpret any of the
terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, court costs and
other reasonable
-7-
<PAGE>
expense of litigation, in additional to any other relief to
which such party may be entitled.
Section 6.11: Headings and Pronouns. The subject headings of the sections
------------- ----------------------
of this Agreement are included for purposes of convenience
only, and shall not affect the construction or
interpretation of any of its provisions. All pronouns and
any variations thereof shall be deemed to refer to the
masculine, feminine, neuter, singular or plural as the
identity of the entities or persons referred to may require.
IN WITNESS HEREOF, this Agreement has been executed by the Employee and the duly
authorized officer of the Companies on the day and year first above written
effective on the date hereinabove set forth.
Employee: _____________________ Companies:
Polyphase Corporation.
By: ____________________________
James Rudis
President
Overhill Farms, Inc.
By: ____________________________
James Rudis
President
Acknowledged and Approved by the Compensation Committee of Polyphase
Corporation:
_____________________________ ____________________________
Michael F. Buck George R. Schrader
-8-
<PAGE>
EXHIBIT 10.83
SETTLEMENT AGREEMENT
--------------------
AND MUTUAL RELEASE OF CLAIMS
----------------------------
This Settlement Agreement and Mutual Release of Claims (the
"Agreement") is entered into and effective as of this 30th day of November,
1999, by and between Infinity Investors Limited ("Infinity"), Polyphase
Corporation ("Polyphase"), James Rudis ("Rudis"), William E. Shatley
("Shatley"), Michael F. Buck ("Buck") and George R. Shrader ("Shrader").
WHEREAS, certain disputes have arisen between the parties, as more
particularly described in the lawsuits styled, Infinity Investors Limited v.
-----------------------------
Polyphase Corporation, Cause No. 3 :99CV-0394-T, pending in the United States
- ---------------------
District Court for the Northern District of Texas, Dallas Division (hereinafter
referred to as the "Breach of Contract Action"), and Infinity Investors Limited
v. James Rudis, William E. Shatley, Michael F. Buck, and George R. Shrader,
Defendants and Polyphase Corporation, Nominal Defendant, Cause No. 3:99CV-03 93-
H, pending in the United States District Court for the Northern District of
Texas, Dallas Division (hereinafter referred to as the "Derivative Action"); and
WHEREAS, in order to avoid the risks, uncertainty and costs of
litigation and to buy peace, the parties desire to compromise and settle all
claims and causes of action which they have or may have alleged or raised in
connection with the Breach of Contract Action and/or the Derivative Action.
NOW, THEREFORE, in consideration of the above stated premises, the
mutual promises and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Settlement Terms and Conditions. In full payment, settlement and
-------------------------------
satisfaction of all claims or causes of action alleged between the parties,
Infinity shall sell to Polyphase all Preferred Stock which Infinity presently
owns in Polyphase, in exchange for Polyphase's consideration of four hundred
fifty thousand dollars ($450,000), which Polyphase shall wire to Infinity. By
way of further consideration, the parties hereby incorporate by reference each
of the additional settlement terms set forth in that certain November 30, 1999
letter agreement, attached hereto as Exhibit 1 ("Letter Agreement"). The parties
further agree that, upon complete satisfaction by Polyphase of each and every
term of the Letter Agreement, the parties, within ten (10) business days
thereafter, shall cause to be filed in the Breach of Contract Action and in the
Derivative Action, sufficient pleadings and/or other documents which will
effectively cause the dismissal with prejudice of said Actions. Further, the
parties agree to release each of the claims against the other, as set forth
below.
2. Releases.
--------
(a) Rudis, and each of his heirs, assigns, employees, agents,
attorneys, administrators, beneficiaries, executors and all other
persons claiming through Rudis,
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 1
<PAGE>
hereby release, acquit and forever discharge Infinity and its assigns,
successors, officers, directors, employees, agents, attorneys, administrators,
beneficiaries, trustees, and all corporations, partnerships or other entities
owned or controlled by Infinity, from all claims, counterclaims, demands, causes
of action, obligations, express and implied warranties, suits, debts, damages,
punitive and exemplary damages, common law and statutory penalties, liens,
attorneys' fees, judgments, interest and expenses of any type whatsoever,
whether known or unknown, in any manner that have been asserted or could have
been asserted arising out of, related to, connected with, or the subject of the
Breach of Contract Action, the Derivative Action or the acquisition, ownership,
conversion and/or sale of Polyphase stock by Infinity (the "Stock Ownership
Claim").
(b) Shatley, and each of his heirs, assigns, employees, agents,
attorneys, administrators, beneficiaries, executors and all other
persons claiming through Shatley, hereby release, acquit and forever
discharge Infinity and its assigns, successors, officers, directors,
employees, agents, attorneys, administrators, beneficiaries, trustees,
and all corporations, partnerships or other entities owned or
controlled by Infinity, from all claims, counterclaims, demands, causes
of action, obligations, express and implied warranties, suits, debts,
damages, punitive and exemplary damages, common law and statutory
penalties, liens, attorneys' fees, judgments, interest and expenses of
any type whatsoever, whether known or unknown, in any manner that have
been asserted or could have been asserted arising out of, related to,
connected with, or the subject of the Breach of Contract Action, the
Derivative Action or the Stock Ownership Claim.
(c) Buck, and each of his heirs, assigns, employees, agents,
attorneys, administrators, beneficiaries, executors and all other
persons claiming through Buck, hereby release, acquit and forever
discharge Infinity and its assigns, successors, officers, directors,
employees, agents, attorneys, administrators, beneficiaries, trustees,
and all corporations, partnerships or other entities owned or
controlled by Infinity, from all claims, counterclaims, demands, causes
of action, obligations, express and implied warranties, suits, debts,
damages, punitive and exemplary damages, common law and statutory
penalties, liens, attorneys' fees, judgments, interest and expenses of
any type whatsoever, whether known or unknown, in any manner that have
been asserted or could have been asserted arising out of, related to,
connected with, or the subject of the Breach of Contract Action, the
Derivative Action or the Stock Ownership Claim.
(d) Schrader, and each of his heirs, assigns, employees, agents,
attorneys, administrators, beneficiaries, executors and all other
persons claiming through Schrader, hereby release, acquit and forever
discharge Infinity and its assigns, successors, officers, directors,
employees, agents, attorneys, administrators, beneficiaries, trustees,
and all corporations, partnerships or other entities owned or
controlled by Infinity, from all claims, counterclaims, demands, causes
of action, obligations, express and implied warranties, suits, debts,
damages, punitive and exemplary damages, common law and statutory
penalties, liens, attorneys' fees, judgments, interest and expenses of
any type whatsoever, whether known or unknown, in any manner that have
been asserted or could
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 2
<PAGE>
have been asserted arising out of related to, connected with, or the subject of
the Breach of Contract Action, the Derivative Action or the Stock Ownership
Claim.
(e) Polyphase, and each of its assigns, successors, directors,
officers, employees, agents, attorneys, administrators, beneficiaries, trustees,
and all corporations, partnerships or other entities owned or controlled by
Polyphase, and all other persons claiming through Polyphase, hereby release,
acquit and forever discharge Infinity and its assigns, successors, directors,
officers, employees, agents, attorneys, administrators, beneficiaries, trustees,
and all corporations, partnerships or other entities owned or controlled by
Infinity, from all claims, counterclaims, demands, causes of action,
obligations, express and implied warranties, suits, debts, damages, punitive and
exemplary damages, common law and statutory penalties, liens, attorneys' fees,
judgments, interest and expenses of any type whatsoever, whether known or
unknown, in any manner that have been asserted or could have been asserted
arising out of related to, connected with, or the subject of the Breach of
Contract Action, the Derivative Action or the Stock Ownership Claim.
(f) Infinity, and each of its assigns, successors, directors,
officers, employees, agents, attorneys, administrators, beneficiaries, trustees,
and all corporations, partnerships or other entities owned or controlled by
Infinity, and all other persons claiming through Infinity, hereby release,
acquit and forever discharge Polyphase and its assigns, successors, directors,
officers, employees, agents, attorneys, administrators, beneficiaries, trustees,
and all corporations, partnerships or other entities owned or controlled by
Polyphase, from all claims, counterclaims, demands, causes of action,
obligations, express and implied warranties, suits, debts, damages, punitive and
exemplary damages, common law and statutory penalties, liens, attorneys' fees,
judgments, interest and expenses of any type whatsoever, whether known or
unknown, in any manner that have been asserted or could have been asserted
arising out of, related to, connected with, or the subject of the Breach of
Contract Action or the Derivative Action.
(g) Infinity, and each of its assigns, successors, directors,
officers, employees, agents, attorneys, administrators, beneficiaries, trustees,
and all corporations, partnerships or other entities owned or controlled by
Infinity, and all other persons claiming through Infinity, hereby release,
acquit and forever discharge Rudis, and each of his heirs, assigns, employees,
agents, attorneys, administrators, beneficiaries, executors and all other
persons claiming through Rudis, from all claims, counterclaims, demands, causes
of action, obligations, express and implied warranties, suits, debts, damages,
punitive and exemplary damages, common law and statutory penalties, liens,
attorneys' fees, judgments, interest and expenses of any type whatsoever,
whether known or unknown, in any manner that have been asserted or could have
been asserted arising out of related to, connected with, or the subject of the
Breach of Contract Action or the Derivative Action.
(h) Infinity, and each of its assigns, successors, directors,
officers, employees, agents, attorneys, administrators, beneficiaries, trustees,
and all corporations, partnerships
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 3
<PAGE>
or other entities owned or controlled by Infinity, and all other persons
claiming through Infinity, hereby release, acquit and forever discharge
Shatley, and each of his heirs, assigns, employees, agents, attorneys,
administrators, beneficiaries, executors and all other persons claiming
through Shatley, from all claims, counterclaims, demands, causes of action,
obligations, express and implied warranties, suits, debts, damages,
punitive and exemplary damages, common law and statutory penalties, liens,
attorneys' fees, judgments, interest and expenses of any type whatsoever,
whether known or unknown, in any manner that have been asserted or could
have been asserted arising out of; related to, connected with, or the
subject of the Breach of Contract Action or the Derivative Action.
(i) Infinity, and each of its assigns, successors, directors, officers,
employees, agents, attorneys, administrators, beneficiaries, trustees, and all
corporations, partnerships or other entities owned or controlled by Infinity,
and all other persons claiming through Infinity, hereby release, acquit and
forever discharge Buck, and each of his heirs, assigns, employees, agents,
attorneys, administrators, beneficiaries, executors and all other persons
claiming through Buck, from all claims, counterclaims, demands, causes of
action, obligations, express and implied warranties, suits, debts, damages,
punitive and exemplary damages, common law and statutory penalties, liens,
attorneys' fees, judgments, interest and expenses of any type whatsoever,
whether known or unknown, in any manner that have been asserted or could have
been asserted arising out of; related to, connected with, or the subject of the
Breach of Contract Action or the Derivative Action.
(j) Infinity, and each of its assigns, successors, directors, officers,
employees, agents, attorneys, administrators, beneficiaries, trustees, and all
corporations, partnerships or other entities owned or controlled by Infinity,
and all other persons claiming through Infinity, hereby release, acquit and
forever discharge Schrader, and each of his heirs, assigns, employees, agents,
attorneys, administrators, beneficiaries, executors and all other persons
claiming through Schrader, from all claims, counterclaims, demands, causes of
action, obligations, express and implied warranties, suits, debts, damages,
punitive and exemplary damages, common law and statutory penalties, liens,
attorneys' fees, judgments, interest and expenses of any type whatsoever,
whether known or unknown, in any manner that have been asserted or could have
been asserted arising out of; related to, connected with, or the subject of the
Breach of Contract Action or the Derivative Action.
3. Intention of Parties. It is expressly understood and agreed that the
--------------------
terms hereof are contractual in nature and not merely recitals, and that the
agreements and releases contained herein are made and given in order to
compromise and settle doubtful and disputed claims, to avoid the cost, risk and
uncertainty of litigation and to buy peace. It is further understood and agreed
that no term, provision or agreement contained herein shall be construed or
interpreted as an admission of liability by or on behalf of any party hereto,
all such liability being expressly denied.
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 4
<PAGE>
4. Full Settlement and Release. It is expressly understood and agreed
---------------------------
that this Agreement represents a full and complete compromise and settlement of
all claims, causes of action and defenses of the parties which are raised, or
which could have been raised in the Breach of Contract Action and/or in the
Derivative Action. It is the intent of the parties to this Agreement to give the
broadest releases and discharges possible under the law and the provisions
hereof should be interpreted so as to give effect to such intent of the releases
as set forth in paragraph 2 herein.
5. Confidentiality of Settlement. Each of the parties stipulates and
-----------------------------
agrees that the terms of this Agreement shall remain confidential and shall not
be disclosed to any third party3 except for the parties' attorneys, accountants,
pursuant to a court order or subpoena issued by a court of competent
jurisdiction, as required by the IRS in connection with the terms of this or as
otherwise required by the IRS, or as required by the Securities Exchange
Commission ("SEC") for any required disclosures in connection with this
settlement (or as Polyphase shall deem necessary in its discretion in its
capacity as a public company). The breach or threatened breach of this
confidentiality and non-disclosure agreement by either party shall entitle the
other party to seek injunctive relief to enjoin such conduct.
6. Binding Effect. This Agreement and the releases granted herein shall
--------------
inure to the benefit of and be binding against the parties hereto and their
respective heirs, successors and assigns.
7. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Texas and shall be performed in Dallas
County, Texas, which shall be the county of exclusive venue.
8. Voluntary Agreement. Each of the parties hereto acknowledges that this
-------------------
Agreement has been executed freely and voluntarily, without economic compulsion,
and with full knowledge of its legal significance and consequences. Each of the
parties hereto expressly acknowledges that he/it has consulted with his/its own
legal counsel concerning the terms of this Agreement and has not relied on any
representation or other statements of counsel for the opposing party.
9. Ownership of Claims. Each of the parties hereto represents and
-------------------
warrants that it is the sole owner and holder of the various claims and causes
of action released herein and that it has not sold, assigned, conveyed, or in
any way transferred any of its rights in and to any of the claims and causes of
action to any third party.
10. Severability. This Agreement is intended to be severable. If any term,
------------
covenant, condition, or provision hereof is illegal, invalid or unenforceable
for any reason whatsoever, such illegality, invalidity or unenforceability shall
not affect the legality, validity or enforceability of the remaining parts of
this Agreement.
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 5
<PAGE>
11. Counterparts. This Agreement may be executed by facsimile
------------
and in counterparts or with detachable signature pages and shall constitute one
agreement binding upon all parties hereto as if all parties signed the same
document.
12. Headings. The headings used in this Agreement are intended solely for
--------
the convenience of reference, and should not in any manner amplify, limit,
modify or otherwise be used in the interpretation of any of the provisions of
this Agreement.
13. Authority. Each of the persons executing this Agreement as an agent or
---------
in a representative capacity warrants that he or she is duly authorized to do
so.
14. Entire Agreement. This Agreement constitutes the entire understanding
---------------
and agreement of the parties and supersedes and replaces all prior oral and
written agreements with respect to the subject matter hereof, save such
agreements as are incorporated herein by reference. There are no oral agreements
between the parties hereto.
[Signature page follows]
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 6
<PAGE>
EXECUTED as of the date first above written.
Dated:_____________________________ ___________________________________
JAMES RUDIS
Dated:_____________________________ ____________________________________
WILLIAM E. SHATLEY
Dated:_____________________________ ____________________________________
MICHAEL F. BUCK
Dated:_____________________________ ____________________________________
GEORGE R. SCHRADER
POLYPHASE CORPORATION
Dated:_____________________________ By:_________________________________
Its:_________________________________
INFINITY INVESTORS LIMITED
Dated:_____________________________ By:_________________________________
Its:_________________________________
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 7
<PAGE>
EXHIBIT A
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 8
<PAGE>
INFINITY INVESTORS LIMITED
38 Hartford Street
London, England W1Y 7TG
November 30, 1999
Polyphase Corporation
4800 Broadway, Suite A
Dallas, Texas 75248
Re: Series A-3 Preferred Stock of Polyphase Corporation (the "Preferred
Stock")
Gentlemen:
Reference is hereby made to that certain Convertible Preferred Stock
Purchase Agreement dated as of November 10, 1995, by and between Polyphase
Corporation ("Polyphase") and Infinity Investors Limited ("Infinity") (the
"Purchase Agreement"), together with that certain Certificate of Designation of
Preferences of Series A-3 Preferred Stock (the "Preferred Stock") of Polyphase
Corporation executed November 8, 1995 by Polyphase and filed with the Secretary
of State of Nevada (the "Certificate of Designation"). The Purchase Agreement
and Certificate of Designation were amended by that certain letter agreement
dated November 11, 1998 (the "Amended Agreement").
Polyphase and Infinity desire herein to set forth certain supplemental
agreements concerning the Purchase Agreement, as amended by the Amended
Agreement, as follows:
1. The parties hereby agree to settle all claims against each other with
regards to the Preferred Stock upon the terms stated herein.
2. Infinity covenants and agrees to sell to Polyphase all Preferred Stock
which Infinity presently owns, which has not previously been converted.
3. Polyphase covenants and agrees to pay to Infinity, by wire transfer,
the sum of four hundred fifty thousand dollars ($450,000) as consideration for
the sale of the Preferred Stock to Polyphase (which purchase price includes all
accrued and unpaid dividends thereon). Attached are wire transfer instructions
for Infinity.
4. Polyphase acknowledges that Infinity has previously delivered the
Stock Certificate representing the Preferred Stock to Polyphase.
5. Each party covenants and agrees to execute mutual releases of all
claims substantially in the form attached hereto (the "Release") and to deliver
the Release to Al Greco (the "Escrow Agent").
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 9
<PAGE>
November 30, 1999
Page 2
6. Each party acknowledges and understands that the Escrow Agent shall
not release the Release until Infinity has acknowledged receipt of the four
hundred fifty thousand dollars ($450,000) from Polyphase.
7. If Infinity has not received the $450,000 on or before December 6,
1999, the settlement described in this letter agreement shall be of no further
force and effect, and the mutual releases described in the Release shall be null
and void. Upon the occurrence of such event, the Escrow Agent shall destroy this
Letter Agreement and the Release and all copies thereof.
[Signature Page Follows]
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 10
<PAGE>
November 30, 1999
Page 3
If the foregoing accurately reflecting our agreement, please so
indicate by countersigning this letter in the space provided below. This letter
may be executed in one or more counterparts and by facsimile signature.
Yours very truly,
INFINITY INVESTORS LIMITED
By:______________________________________
Title:___________________________________
ACKNOWLEDGED AND AGREED:
POLYPHASE CORPORATION
By:_____________________________________
Title:__________________________________
- ----------------------------------------
Al Greco
(as Escrow Agent)
SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF CLAIMS - Page 11
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
Texas Timberjack, Inc.
Overhill Farms, Inc.
Phasenet, Incorporated
<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 and No. 33-
72458) pertaining to the 1994 Stock Option Plan and various stock option
agreements of our report dated December 16, 1999, 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,
1999.
ERNST & YOUNG LLP
December 21, 1999
Dallas, Texas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 375
<SECURITIES> 0
<RECEIVABLES> 25,498
<ALLOWANCES> 503
<INVENTORY> 30,925
<CURRENT-ASSETS> 58,462
<PP&E> 12,843
<DEPRECIATION> 7,115
<TOTAL-ASSETS> 83,522
<CURRENT-LIABILITIES> 24,514
<BONDS> 33,593
178
0
<COMMON> 1
<OTHER-SE> 5,271
<TOTAL-LIABILITY-AND-EQUITY> 83,522
<SALES> 158,308
<TOTAL-REVENUES> 158,308
<CGS> 129,841
<TOTAL-COSTS> 129,841
<OTHER-EXPENSES> 19,974
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,486
<INCOME-PRETAX> 164
<INCOME-TAX> 354
<INCOME-CONTINUING> (415)
<DISCONTINUED> (1,183)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,597)
<EPS-BASIC> ($.10)
<EPS-DILUTED> ($.10)
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