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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, 2001
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
OVERHILL 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
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] 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 7, 2001,
was approximately $11.6 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 7, 2001, the registrant had issued and outstanding 18,615,464 shares of
common stock, $.01 par value.
OVERHILL CORPORATION
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
Part I
Item 1 Business 1
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 8
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk 15
Item 8 Financial Statements 16
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 16
Part III
Item 10 Directors and Executive Officers of the Registrant 17
Item 11 Executive Compensation 19
Item 12 Security Ownership of Certain Beneficial Owners and Management 25
Item 13 Certain Relationships and Related Transactions 25
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
i
PART I
ITEM 1. Business.
General
Overhill Corporation, formerly Polyphase Corporation (the "Company"),
incorporated in 1963 and now a Nevada corporation, is a holding company that,
through its subsidiaries, currently operates in two industry segments: the
equipment, parts and service segment, which distributes, leases and provides
financing for industrial farming and logging equipment and the timber and wood
products segment, which includes sawmill operations and the treatment and sale
of lumber products. The Company's food segment, which previously had been
included as a separate segment is classified as a discontinued operation based
upon management's plan to spin-off its Overhill Farms, Inc. subsidiary to
shareholders.
In June 1994, the Company acquired all of the outstanding capital stock of Texas
Timberjack, Inc. ("Timberjack" or "TTI") from Harold Estes, current President of
TTI. Timberjack, with locations in Lufkin, Houston, Jasper, Cleveland and
Atlanta, Texas, is a distributor of industrial construction, farming and logging
equipment in East Texas and Western Louisiana. The capital stock of TTI was
acquired from Mr. Estes for consideration of approximately $4.0 million in cash,
a $10.0 million 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 2.0 million 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, 2001, the promissory note had a
balance of approximately $20.8 million (including accrued and unpaid interest)
and is due October 10, 2002. In fiscal 1998, TTI acquired an interest in timber
and sawmill operations. In fiscal 2000, TTI acquired a non-operating refinery
and assumed a note payable to Mr. Estes, which currently has an unpaid balance
of approximately $1.5 million (including accrued and unpaid interest).
Dispositions
Overhill Farms, Inc. ("Overhill Farms"). In August 2001, the Company's Board of
Directors approved a plan to spin-off all of its shares of Overhill Farms to the
holders of the Company's common stock. Overhill Farms, which produces high
quality entrees, plated meals, meal components, soups, sauces and poultry, meat
and fish specialties, previously comprised the Company's Food Group. The
transaction to effect the spin-off is expected to be tax-free and will result in
the issuance to the Company's stockholders, of one share of Overhill Farms
common stock for every two shares of the Company's common stock owned on the
record date of the transaction as established by the Board. The assets,
liabilities and operations of Overhill Farms have been reported as discontinued
in the Company's consolidated financial statements.
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. PIC, which manufactures and markets electronic transformers,
inductors and filters, previously comprised the Company's Transformer Group. 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. The Company
recorded a loss from discontinued operations of approximately $1.2 million in
1999 as a result of this transaction.
1
Business Strategy
The Company, through Timberjack, continues to operate in a difficult market. In
an effort to offset decreased sales in its equipment operations, TTI continued
its efforts to reduce expenses and to seek synergistic opportunities outside of
its traditional customer base and geographic territory. During fiscal 2000 and
2001, TTI placed increased emphasis on its efforts to increase construction
equipment sales, primarily through its distribution arrangement for New Holland
equipment. The Company will continue to review long-term strategies and
alternatives for TTI and its subsidiaries in order to maximize shareholder
value.
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 its
customers.
2) Seek internal growth by 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, 2001, 2000 and 1999.
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Net Sales
Equipment, Parts and Service 75% 80% 84%
Timber and Wood Products 25 20 16
--------- --------- ----------
Total 100% 100% 100%
Operating Income
Equipment, Parts and Service 31% 425% 82%
Timber and Wood Products 69 (325) 18
--------- ------------ -----------
Total 100% 100% 100%
- ----------------------------------------------------------------------------------------------------------
Reference is made to Note 17 to the Company's consolidated financial statements
for revenues, operating profits or losses and identifiable assets attributable
to each industry segment for each of the last three fiscal years.
2
Products and Services
The Company, through Timberjack and its majority-owned subsidiaries, is a
distributor of construction, industrial and logging equipment with investments
in related timber and sawmill operations. TTI has five locations in eastern
Texas. TTI's headquarters are located in Lufkin, with smaller satellite
showrooms and repair facilities located in Jasper, Cleveland, Atlanta and
Houston, Texas. TTI carries the Timberjack (an unrelated manufacturer) and
Blount lines of industrial and logging equipment and the New Holland line of
farm and 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 eastern 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 65% of the
market for shears (machines that cut timber), 50% of the market for skidders
(machines that transport logs out of the forest onto a loader) and 70% of the
market for loaders (machines that stack trees onto trucks).
Sales and Marketing
Timberjack currently maintains sales and distribution offices in Lufkin, Jasper,
Cleveland, Atlanta and Houston, 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, while eleven salesmen 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 29% of TTI's revenues during fiscal 2001 are from new equipment
sold to companies involved in the forestry and construction industries.
Additional equipment-related revenues are derived from sales of used equipment
(21%), servicing of equipment (6%), sales of parts (17%) and financing equipment
sales (2%). The remaining 25% of TTI's revenues is derived from the sale of
finished timber products through its timber and sawmill operations. No single
customer accounts for more than 10% of TTI's sales. Equipment sales financed by
TTI are typically for periods ranging from 12 to 24 months at interest rates
ranging from 9% 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 and New Holland) for a majority of its new
units and parts.
Competition
Competition in the forestry industry 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
3
equipment. Principal competitors include local John Deere and Caterpillar
distributors.
During fiscal year 2000, Deere and Company (the manufacturer of John Deere
equipment) purchased the Timberjack Group from the Metso Corporation of Finland
(the manufacturer of Timberjack equipment). While the impact of this purchase is
not known, it is not expected to have a significant effect on Timberjack's
operations.
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.
Regulation
The Company 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 and
facilities operate in a safe, sanitary and environmentally sound manner.
However, events beyond the control of the Company, such as the adoption by the
government of more stringent environmental regulations, could adversely affect
its operations. Management believes that the Company is in substantial
compliance with all applicable laws and regulations relating to the operations
of facilities.
Employees
As of September 30, 2001, the Company had approximately 148 full time employees
at Timberjack and 3 full-time employees in the corporate office. TTI presently
provides a group health plan for its employees and pays a portion of the costs
associated with the plan. TTI also maintains a profit sharing plan for its
employees.
Overhill Farms - Discontinued Operation
General - In May 1995, the Company acquired all the operating assets of IBM
Foods, Inc. The purchase, which was accomplished through Overhill Farms, 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 Farms' corporate headquarters are located in Culver
City, California, with manufacturing facilities located throughout Southern
California. During August 2000, Overhill Farms purchased the operating assets
and trademarks of the Chicago Brothers food operations from a subsidiary of
Schwan's Sales Enterprises, Inc. for total consideration of $4.2 million,
consisting of cash of $3.3 million and a note payable to the seller for
$900,000.
Products and Services - Overhill Farms is a value-added manufacturer of quality
frozen food products including entrees, plated meals, meal components, soups,
sauces, poultry, meat and fish specialties. Overhill Farms is positioned as a
provider of custom prepared foods to a number of prominent customers such as
Albertson's, Jenny Craig, Carl's Jr., Jack in the Box, Panda Restaurant Group
and King's Hawaiian, as well as most domestic airlines, including American,
United and Delta. Historically, Overhill Farms has served four industries:
airlines, health care, foodservice and retail.
Sales and Marketing - Overhill Farms markets its products through an internal
sales force and outside food brokers. Prior to September 11, 2001, Overhill
Farms projected that the airline industry, while
4
mature, represented an area for moderate growth potential in the future.
Additionally, the company estimated that its health care business, predominantly
sales to Jenny Craig, would have little or no growth in the near term. As such,
the Company is focusing on the retail, club store and foodservice segments to
continue its growth. Management has realigned it sales organization and
redirected its marketing efforts to concentrate on these rapidly growing
markets. The results of the tragic events of September 11, 2001, have
significantly impacted the company's sales to airlines. The effect of these
events on the airline industry, airline revenues and on Overhill Farms' business
in particular, cannot be accurately determined at this time. The results of the
September events have resulted in a decreased demand for air travel and a
reduction in the number of meals served as a result of airline cost savings
measures. A significant portion of Overhill Farms' business focuses on the
airline industry, and these effects, depending upon their scope and duration,
which we cannot predict at this time, could negatively impact on the company's
financial position, results of operations or cash flows. Overhill Farms
continues to work closely with its airline customers to offer lower cost menu
alternatives to air carriers and to maintain and strengthen its market position
for the return to normal air travel conditions. It is the company's objective to
mitigate the effects of decreased airline sales through reductions in operating
costs and increased sales in other customer segments.
Approximately 62% of Overhill Farms' sales in fiscal 2001 were derived from five
customers, King's Hawaiian (14%), American Airlines (10%), Jenny Craig (12%),
Panda Restaurant Group (14%), and Delta Airlines (12%). Although Overhill Farms'
relationships with these customers continue to remain strong, there can be no
assurance that these relationships will continue. As in the previous year,
Overhill Farms has made a concerted effort to sign multi-year supply agreements
with its major customers. Major contracts that were signed or extended in fiscal
2001 include Jenny Craig, Panda Restaurant Group, American Airlines and King's
Hawaiian. A decline in sales of Overhill Farms' products to these customers or
the loss of, or a significant change in the relationship between Overhill Farms
and any of these key customers, could have a material adverse effect on Overhill
Farms' business and operating results. It is management's objective to continue
to reduce the reliance on a small concentration of accounts by further expansion
into custom products for retail and foodservice customers nationwide.
Manufacturing and Sourcing - Overhill Farms' manufacturing operations are
located in six separate facilities with three in the Los Angeles area and three
in the San Diego area. Most operations are labor intensive, generally requiring
semiskilled employees. Also, the Los Angeles manufacturing employees are
unionized with contracts covering each of the three plants. Approximately 67% of
Overhill Farms' workforce is covered by collective bargaining arrangements
expiring in fiscal 2002 and 2003. Management believes relations with the unions
are excellent and does not anticipate any problems which would affect future
production.
With the addition of the San Diego facilities and the outsourcing of certain
products, management estimates that the combined facilities are operating at
approximately 70% of capacity based on current product production mix. Overhill
Farms' management is in the final phase of reviewing a plan to improve
manufacturing efficiencies including the consolidation of facilities and the
addition of equipment to improve freezing capabilities and to automate some
operations.
The San Diego operations consist of two manufacturing facilities and a
warehouse/administration facility. Manufacturing processes in San Diego are more
machine intensive, requiring more skilled machine operators, mechanics, and
supervision. The workforce in San Diego is not unionized.
Overhill Farms' ability to economically produce large quantities of its
products, while at the same time maintaining a high degree of quality, depends
in large part on its ability to procure raw materials on a reasonable basis.
Overhill Farms relies on a few large suppliers for its poultry products, with
the remaining raw materials purchased from suppliers in the open market.
Management 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.
5
Backlog - Overhill Farms 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 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 Farms 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 either upon customers' specifications, conventional recipes or
new product developments. Overhill Farms is continuously developing recipes as
customers' tastes and client requirements change. Overhill Farms also maintains
a quality control department for testing and quality control. Overhill Farms
manufactures products in the retail and foodservice areas with branded and
private label entrees.
Competition - Overhill Farms' 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 Overhill Farms.
Competition is intense with most firms producing similar products for the
foodservice 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 Overhill Farms will compete
successfully against existing companies or new entrants to the marketplace.
Overhill Farms competes in this market by its ability to produce small/custom
product runs, within a short time frame and on a cost-effective basis.
Regulation - Overhill Farms 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 and the Environmental Protection
Agency. Overhill Farms anticipates increased regulation by the USDA and FDA
concerning food processing and storage. Overhill Farms' 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 Overhill Farms 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, Overhill Farms implemented a Hazard Analysis Critical Point Plan to ensure
proper handling of all food items.
Employees - As of September 30, 2001, Overhill Farms had approximately 1,050
full-time 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 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 equipment manufacturers'
and timber pricing.
6
ITEM 2. Properties.
Corporate Headquarters
The Company leases an approximately 4,000 square foot facility located at 4800
Broadway, Suite A, Addison, Texas 75001, which serves as the corporate
headquarters. The lease, which began in February 1998, has a five-year term and
a provision for a tenant cancellation option during the last two years for a
nominal amount.
Timberjack
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas and a
building in Cleveland, Texas and leases buildings in Atlanta and Houston, Texas.
The largest building in Lufkin has 38,500 square feet, which is used for
administrative offices, showroom, parts sales and service areas. The remaining
buildings have 3,600 and 4,200 square feet, respectively. The Jasper, Cleveland,
Atlanta and Houston buildings have approximately 10,000, 900, 6,700, 7,500 and
10,000 square feet, respectively, which are used for sales offices, parts sales
and shop areas. TTI also leases six buildings on 68 acres in Bon Wier, 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 $1,250,000 in April 2003. In addition, TTI owns a
non-operating crude oil refining and blending facility, together with related
buildings and administrative office space, situated on approximately 120 acres
of land in Egan, Louisiana, which currently is held for sale.
Overhill Farms - Discontinued Operation
Overhill Farms 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 Farms 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. Overhill Farms' recently acquired Chicago
Brothers operations are conducted in leased facilities in San Diego, California
consisting of manufacturing facilities of 33,300 and 30,000 square feet and a
9,400 square foot warehouse/administration facility. While Overhill Farms
believes that the existing facilities are adequate to meet its requirements in
the foreseeable future, management is continuing to review the
cost-effectiveness of combining certain manufacturing and administrative
functions into one consolidated facility in order to more efficiently and
effectively meet current and future customer requirements.
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 lawsuits 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 March 2000, the District Court dismissed the plaintiffs' claims against one
of the Company's officers and directors and restricted the plaintiffs from
pursuing a number of their claims against the other defendants. The Court also
granted the remaining defendants leave to file motions for summary judgment.
Motions for summary judgment were thereafter filed. In November 2000, in a
lengthy decision addressing the plaintiffs' claims against each of the remaining
defendants, the District Court granted the
7
motions for summary judgment, thereby disposing of all of the claims
asserted by the plaintiffs. The plaintiffs then filed a motion for rehearing,
which the Court denied in March 2001.
The plaintiffs have appealed these decisions to the United States Court of
Appeals for the Ninth Circuit. Appellate briefs have been filed by both sides,
but oral argument in the Court of Appeals has not yet occurred.
Recently, the plaintiffs requested the Ninth Circuit to enjoin the Company's
proposed spin-off of Overhill Farms. The Court of Appeals denied the plaintiffs'
request and directed them to address their request to the District Court. The
plaintiffs thereafter filed an application with the District Court, which
restrained the spin-off for a few days until a hearing could be conducted with
respect to the proposed spin-off. Following a hearing at which counsel for all
parties appeared, the District Court dissolved its temporary restraining order,
thereby allowing the Company to proceed with the proposed spin-off. The
plaintiffs have not appealed the most recent decision by the District Court.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. However, management believes
(based, in part, 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.
ITEM 4. Submission of Matters to a Vote of Security Holders.
On September 25, 2001, the Company held a Special Meeting of Stockholders. The
only matter considered and voted upon at this meeting was an amendment to the
Company's Articles of Incorporation to change the Company's name, in connection
with the spin-off of Overhill Farms, to "TreeCon Resources, Inc." The following
table sets forth certain information relating to the voting by stockholders on
this matter:
For Against Withheld
--------- ------- --------
Proposal to amend the Company's
Articles of Incorporation 9,893,071 7,574 12,800
8
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock is listed on the American Stock Exchange under the symbol
"OVH." Following the proposed spin-off of Overhill Farms, the Company intends to
change its name to "TreeCon Resources, Inc." and continue to trade its common
stock on the American Stock Exchange under the new ticker symbol "LOG." 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:
Fiscal 2001 High Low
----------- ------------- -------------
Quarter from October 1, 2000
to December 31, 2000 $ 1.0000 $ 0.5000
Quarter from January 1, 2001
to March 31, 2001 $ 1.1875 $ 0.6000
Quarter from April 1, 2001
to June 30, 2001 $ 0.7700 $ 0.5000
Quarter from July 1, 2001
to September 30, 2001 $ 1.0900 $ 0.5000
Fiscal 2000 High Low
----------- ------------- -------------
Quarter from October 1, 1999
to December 31, 1999 $ 0.7500 $ 0.3750
Quarter from January 1, 2000
to March 31, 2000 $ 1.5000 $ 0.4375
Quarter from April 1, 2000
to June 30, 2000 $ 1.2500 $ 0.6875
Quarter from July 1, 2000
to September 30, 2000 $ 1.0625 $ 0.7500
Fiscal 1999 High Low
----------- ------------- -------------
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
9
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 December 7, 2000, the Company estimates that there were approximately
3,000 beneficial owners of the Company's common stock, represented by 217
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. Effective
November 30, 1999, the Company reacquired Infinity's remaining unconverted
Series A-3 Preferred Stock.
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 the exemption provided by Section 4(2) of the
Securities Act. Of the shares of Series A-3 Preferred Stock that were issued, no
such shares were issued to any party other than Infinity.
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
"Market Warrants.") The Penny Warrants were exercised and 210,000 shares of
Common Stock were issued in May 1998, and the Market Warrants were repurchased
by the Company in December 2000 for approximately $46,000. 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.
10
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.
------------------------------------------------------------------------------------------
Fiscal Year Ended September 30
------------------------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
Income Statement Data: 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------
Revenues $ 43,295 $44,057 $45,812 $48,049 $ 52,202
Operating Income (Loss) (119) (261) 1,109 2,656 1,698
Net Income (Loss) Before
Discontinued Operations (2,621) 1,765 (1,192) 167 (18,213)
Net Income (Loss) $(1,082) $ 3,821 $(1,598) $ (329) $(18,825)
Per Share Data - Basic and Diluted:
Net Income (Loss) Before
Discontinued Operations $ (.15) $ .12 $ (.08) $ - $ (1.37)
Discontinued Operations .09 .11 (.02) (.03) (.04)
Net Income (Loss) $ (.06) $ .23 $ (.10) $ (.03) $ (1.41)
Weighted Average Shares
Outstanding - Basic 17,845,793 17,812,464 16,947,195 14,552,462 13,632,357
Weighed Average Shares
Outstanding - Diluted 17,845,793 18,110,532 16,947,195 16,452,433 13,632,357
As of September 30
(Thousands of Dollars)
Balance Sheet Data: 2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------
Total Assets $ 65,043 $ 69,523 $ 68,108 $ 56,162 $ 51,257
Long Term Debt - - 1,238 5,913 8,290
Total Liabilities 56,995 60,410 62,658 49,561 43,855
Accumulated Deficit (19,797) (18,716) (22,889) (21,200) (20,717)
Stockholders' Equity 8,048 9,113 5,450 6,601 7,402
11
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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, 2001 Compared to Fiscal Year Ended
September 30, 2000
Net Revenues - For the year ended September 30, 2001, the Company's revenues
decreased $761,000 (1.7%) to $43,296,000 as compared to $44,057,000 for the
fiscal year ended September 30, 2000. During 2001, net revenues from the
equipment segment were $2.5 million lower than in 2000 due primarily to
continued softness in the East Texas timber market, while net revenues from the
timber segment increased $1.7 million in 2001 due primarily to increases in
demand for the Company's treated timber products and higher overall timber
shipments as compared to fiscal 2000. The Company continued to diversify its
equipment products during 2001 and opened a sales location in Houston, Texas
during the fourth quarter in order to expand its marketing and distribution of
New Holland construction equipment.
Gross Profit - For the year ended September 30, 2001, the Company's gross profit
increased $578,000 to $7,900,000 as compared to $7,322,000 for the fiscal year
ended September 30, 2000. Gross profit as a percentage of net revenues for the
fiscal year ended September 30, 2001 was 18.2% compared to 16.6% in the
comparable prior year period. The 2001 increase is primarily attributable to
efficiency and productivity increases in the Company's sawmill operations within
the timber segment. Gross profit as a percentage of net revenues for the fiscal
year ended September 30, 2001 for the equipment segment did not significantly
change from 2000 levels.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for the fiscal year ended September 30, 2001 increased
$434,000 (5.7%) to $8,018,000 as compared to $7,584,000 for the fiscal year
ended September 30, 2000. This increase is primarily attributable to increased
operating expenses related to the opening of the new construction equipment
sales facility, higher bad debt and warranty related expenses and higher legal
expenses offset by a decrease in selling, general and administrative expenses at
the Company's sawmill operations.
Other Expenses - For the fiscal year ended September 30, 2001, net other
expenses increased $337,000 from the comparable 2000 period due primarily to a
decrease in interest income and other due to lower interest income on notes
receivable and the 2000 balance including a $240,000 gain on the sale of land,
offset by a decrease in interest expense due primarily to lower interest rates
in 2001.
Income Taxes - For the fiscal year ended September 30, 2001, the Company
recorded a net income tax provision of $860,000 compared to a net income tax
benefit of $3,330,000 recorded for the fiscal year ended September 30, 2000.
During the fourth quarter of 2001, in connection with the planned spin-off of
its Overhill Farms, Inc. subsidiary, the Company recorded an additional $2.1
million valuation allowance against its net deferred tax assets. This 2001
provision was offset by a $1.3 million tax benefit taken as a result of the use
of its net operating loss carryforward to reduce taxable income generated by
Overhill Farms, Inc. For the fiscal year ended September 30, 2000, the $3.3
million income tax benefit was primarily attributable to a $2.1 million decrease
in the valuation allowance against the Company's net deferred tax assets and a
$1.2 million income tax benefit taken as a result of the use of its net
operating loss carryforward to reduce taxable income generated by Overhill
Farms. The results of operations for the Company's Overhill Farms, Inc.
subsidiary are presented within the consolidated financial statements as
discontinued operations. For the fiscal year ended September 30, 2001 and 2000,
the net results of Overhill Farms' operations are presented in the consolidated
statements of operations net of $1.3 million
12
and $1.2 million in income tax expense, respectively.
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended
September 30, 1999
Net Revenues - For the year ended September 30, 2000, the Company's revenues
decreased $1,755,000 (3.8%) to $44,057,000 as compared to $45,812,000 for the
fiscal year ended September 30, 1999. During 2000, increases in net revenues
from the Company's sawmill operations were offset by decreases in net revenues
from the equipment segment due to a continued softening of the east Texas timber
market.
Gross Profit - For the year ended September 30, 2000, the Company's gross profit
decreased $946,000 to $7,322,000 as compared to $8,268,000 for the fiscal year
ended September 30, 1999. Gross profit as a percentage of net revenues for the
fiscal year ended September 30, 2000 was 16.6% compared to 18.0% in the
comparable prior year period. The 2000 decrease is primarily attributable to
production inefficiencies within the timber segment, specifically the Company's
sawmill operations. TTI has made certain operational and personnel changes which
it believes will have a favorable impact on future timber segment operating
results.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for the fiscal year ended September 30, 2000 increased
$425,000 (5.9%) to $7,584,000 as compared to $7,159,000 for the fiscal year
ended September 30, 1999. This increase is primarily attributable to higher
operating expenses related to the Company's sawmill operations.
Other Expenses - For the fiscal year ended September 30, 2000, net other
expenses decreased $1,288,000 from the comparable 1999 period due primarily to a
decrease in interest expense as a result of lower borrowing levels and falling
variable interest rates, as well as a $240,000 gain on the sale of land in 2000.
Income Taxes - For the fiscal year ended September 30, 2000, the Company
recorded a net income tax benefit of $3,330,000 compared to a net income tax
benefit of $291,000 recorded for the fiscal year ended September 30, 1999.
During the fourth quarter of 2000, the Company recorded a reduction in its
valuation allowance against net deferred tax assets, as it believes such assets
are more likely than not to be recovered. Additionally, the 2000 income tax
benefit includes a $1.2 million benefit taken as a result of the use of the
Company's net operating loss carryforward to reduce taxable income generated by
Overhill Farms. For the fiscal year ended September 30, 1999, the $291,000
income tax benefit was primarily attributable to the benefit taken as a result
of the use of the Company's net operating loss carryforward to reduce taxable
income generated by Overhill Farms. The results of operations for the Company's
Overhill Farms subsidiary are presented within the consolidated financial
statements as discontinued operations. For the fiscal year ended September 30,
2000 and 1999, the net results of Overhill Farms' operations are presented in
the consolidated statements of operations net of $1.2 million and $935,000 in
income tax expense, respectively.
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 $277,000 to $686,000 at September 30, 2001, compared to
$963,000 at September 30, 2000.
The Company's operating activities in 2001 resulted in cash provided of
$282,000, as compared to cash provided of $5,200,000 in 2000. The decrease in
cash provided during the current year is generally due to increases in accounts
receivable at Timberjack along with smaller increases in trade accounts payable
as compared to the prior fiscal year which were offset somewhat by decreases in
inventories in the Timberjack operations. Additionally, the Company's valuation
reserve on deferred tax assets was decreased in the prior fiscal year, and
the reserve was re-established in the 2001 fiscal period due to the expected
spin-off of Overhill Farms.
13
The Company's investing activities for the year ended September 30, 2001
resulted in a use of cash of $2,241,000, as compared to a use of cash of
$491,000 in 2000. The use of cash in 2001 resulted primarily from capital
expenditures by Timberjack, together with increases in its notes and related
party receivables.
The Company's financing activities for the current year resulted in cash
provided of $1,681,000, as compared to a use of cash of $4,093,000 in 2000. The
current year results were due primarily to an increase in borrowings under
Timberjack's credit facilities.
In connection with the acquisition of TTI in June 1994, the Company initially
issued a note to the seller (Mr. Harold Estes) in the amount of $10.0 million,
with interest at 8% due October 31, 1994 and collateralized by all the capital
stock of TTI. As of various maturity dates thereafter, Mr. Estes has entered
into subsequent agreements with the Company to modify and extend the term of the
note. As of September 30, 2001, the note had a total unpaid balance of
$20,861,000 (principal of $16,347,000 and accrued interest of $4,514,000),
bearing interest at 9% per annum with a maturity date of October 10, 2002. The
arrangement allows for principal and interest payments to be made with amounts
upstreamed to the Company 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.
Quantum Fuel and Refining, Inc. ("Quantum"), when acquired by SFP, had a note
payable to Mr. Estes. As of September 30, 2001, the note had a total unpaid
balance of $1,476,264 (principal of $1,000,000 and accrued interest of
$476,264), bearing interest at 12% per annum with a maturity date of March 31,
2002, and collateralized by the assets of Quantum. In January 2002, Mr. Estes
extended the maturity date to October 31, 2002.
TTI has an $8.0 million revolving line of credit with Bank of America, N.A.
Amounts advanced under the line of credit bear interest at prime plus .5%
(approximately 6.5% at September 30, 2001), and are collateralized by certain
assets of TTI. The Company has guaranteed all obligations under the TTI
revolving line of credit. Availability under the line as of September 30, 2001
amounted to approximately $4.1 million. TTI intends to renew the revolving
credit facility upon maturity in March 2002.
TTI's majority-owned subsidiary, Southern Forest Products, LLC ("SFP"), has a
$500,000 revolving line of credit with Bank of America, N.A. The line of credit
expires in March 2002, and amounts advanced under the line bear interest at
prime plus .5% (approximately 6.5% at September 30, 2001), are collateralized by
substantially all of the assets of SFP and are guaranteed by a related party.
See Item 13. "Certain Relationships and Related Transactions."
TTI and SFP, jointly and severally, also have a $3.4 million loan with Bank of
America, N.A. The note requires monthly payments consisting of principal of
$111,111 plus interest at prime plus .5% (approximately 6.5% at September 30,
2001), is collateralized by substantially all the assets of SFP, is guaranteed
by a related party and matures in March 2002. Management of TTI expects this
note to be renewed upon maturity. See Item 13. "Certain Relationships and
Related Transactions."
TTI has two floor plan agreements to finance equipment. These floor plan
agreements have interest rates that range from no interest to prime minus 0.25%
(approximately 5.75% at September 30, 2001) for a period of up to one year with
a combined balance of $5.5 million at September 30, 2001.
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. The Company intends to renew the current lines of credit upon
maturity, however, there can be no assurance that the credit facilities can be
renewed on favorable terms to TTI, or at all.
14
Recent Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board issued Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).
These rules supercede FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, providing a
single accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of
Statement 121, the new rules significantly change the criteria that would have
to be met to classify an asset as held-for-sale. Statement 144 also supercedes
the provisions of APB Opinion 30 with regard to reporting the effects of a
disposal of a segment of a business and require expected future operating losses
from discontinued operations to be displayed in discontinued operations in the
period(s) in which the losses are incurred (rather than as of the measurement
date as previously required by APB 30). The Statement is effective for year-ends
beginning after December 15, 2001 and interim periods within those fiscal years,
although earlier application is encouraged. The Company does not expect the
adoption of SFAS 144 to have a significant impact on the Company's future
results of operations or financial position.
In June 2001, the Financial Accounting Standards Board issued Statement No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), which requires that
goodwill will no longer be amortized, but instead will be tested at least
annually for impairment by reporting unit. The Company is required to adopt SFAS
142 effective as of October 1, 2002, though early adoption as of October 1, 2001
is permitted. The Company intends to early adopt SFAS 142 as of October 1, 2001.
The Company is currently in the process of evaluating the relevant provisions of
SFAS 142 and has not determined whether the adoption of SFAS 142 will have an
immediate effect on the financial statements. However, amortization of goodwill,
which amounted to approximately $283,000 in each of the three fiscal years ended
September 30, 2001, before any related tax effects, will be eliminated
prospectively upon the adoption of SFAS 142.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended, which was required to be adopted by the Company on October 1, 2000.
SFAS 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 SFAS 133's hedge criteria will
either be offset through income, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The adoption of SFAS 133 on
October 1, 2000 did not have any impact on the Company's financial condition,
results of operations or cash flows.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company's interest expense is affected by changes in prime 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 2002, the Company's interest expense
would increase by approximately $85,000 based on the outstanding line of credit
balances at September 30, 2001.
The Company's Texas Timberjack subsidiary periodically makes advances under
promissory notes to certain unrelated individuals and corporations. These notes
generally have fixed interest rates ranging from 10% to 18%, are generally due
within one year and a majority are secured by a variety of marketable
collateral, primarily timber and land. The value of these notes is subject to
market risk due to changing interest rates and the condition of related
collateral.
The Company does not own, nor does it have an interest in any other market risk
sensitive instruments. See Item 1 "Description of Business."
15
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
16
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.
Name Age Position
James Rudis 52 Chairman of the Board,
Chief Executive Officer and President
William E. Shatley 55 Senior Vice President, Chief Financial
Officer, Secretary, Treasurer and
Director
Michael F. Buck 64 Director
Donald J. Ervin 58 Director
George R. Schrader 69 Director
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 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 from 1982 to 1993, after having served as
Vice President and Chief Financial Officer of Datotek, Inc. from 1977 to 1982
and in an executive capacity with Arthur Andersen from 1968 to 1977.
Michael F. Buck, for the last five years, has been 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.
Donald J. Ervin was named to the Board in June 2001. He is currently
employed with Ervin Consulting, a firm whose areas of focus encompass the entire
food manufacturing supply chain, including production, planning, logistics,
materials management, engineering and facilities planning. Mr. Ervin has 34
years
17
experience in food operations with General Foods and ConAgra, most recently as
Vice President of Operations for ConAgra Frozen Foods.
George R. Schrader was appointed as a director in March 1994. For the last five
years, he has been 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.
Significant Employee
Mr. Harold Estes, although not an executive officer, is considered to be a
key employee of the Company. Mr. Estes, age 60, 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 and is
also engaged in certain related timber and sawmill operations. Mr. Estes has
been President of TTI since 1984, when he acquired that company from Eaton
Corporation.
Meetings of the Board of Directors and its Committees
The Board has standing Compensation and Audit Committees. The Compensation
Committee is comprised of Messrs. Buck and Schrader. The Compensation Committee
met one time (in conjunction with a meeting of the Board) during fiscal 2001 and
met one time during fiscal 2000. 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 Committee is comprised of Messrs. Buck, Ervin and Schrader. The Audit
Committee met one time during fiscal 2001 and one time during fiscal 2000. The
Audit Committee operates pursuant to a Charter approved by the Company's Board
of Directors. Its functions are to (i) monitor the Company's financial reporting
process and internal control system; (ii) review and appraise the audit efforts
of the Company's independent accountants; and (iii) provide an avenue of
communication among the Company's independent accountants, financial and senior
management and the Board of Directors.
The full Board of Directors met four times during fiscal 2001 and one time
during fiscal 2000. 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) and (ii) information received by the
Company in connection with various purchases and sales of the Company's equity
securities, the Company believes that, during fiscal 2001, all filing
requirements applicable to its directors, executive officers and greater than 10
percent beneficial owners were satisfied.
18
ITEM 11. Executive Compensation.
The following table sets forth for fiscal 2001, 2000 and 1999 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, Secretary, 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, 2001.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------------------------------
Name and Principal Fiscal Other Annual All/Other
Position Year Salary Bonus Compensation Options/SARs Compensation
- -------------------------------------------------------------------------------------------------------------------------------
James Rudis 2001 $230,000 $40,000 $ - (1) 130,000 (2) $ -
Chairman, Chief 2000 $225,769 $25,000 $ - (1) - $ -
Executive Officer, 1999 $180,000 $ 0 $ - (1) - $ -
President and
Director
William E. Shatley 2001 $168,000 $15,000 $ - (1) 100,000 (3) $ -
Senior Vice President 2000 $165,000 $15,000 $ - (1) - $ -
Secretary, Treasurer, 1999 $132,000 $ 0 $ - (1) - $ -
Chief Financial Officer
and Director
---------------
(1) The Named Executive Officers each received certain perquisites and other
personal benefits from the Company during fiscal 2001, 2000 and 1999.
These perquisites and other personal benefits, however, did not equal or
exceed 10% of the Named Executive Officers' salary and bonus during
fiscal 2001, 2000 or 1999.
(2) Consists of 130,000 shares subject to repricing from $2.00 per share to
$0.75 per share. See "Ten-Year Option Repricings." These options were
exercised in September 2001.
(3) Consists of 100,000 shares subject to repricing from $2.00 per share to
$0.75 per share. See "Ten-Year Option Repricings." These options were
exercised in September 2001.
19
Option Grants in Last Fiscal Year
- -----------------------------------------------------------------------------------------------------------------------
Number of
Securities Percentage of Total
Underlying Options Options Granted to
Repriced or Employees in Fiscal Exercise Expiration
Name Amended Year Price ($/Sh) Date
- -----------------------------------------------------------------------------------------------------------------------
James Rudis 130,000 (1) 56.5% (3) $0.75 7/23/06
Chairman, Chief
Executive Officer,
President and
Director
William E. Shatley 100,000 (2) 43.5% (3) $0.75 7/23/06
Senior Vice
President,
Secretary,
Treasurer, Chief
Financial Officer
and Director
- ----------------------
(1) Consists of 130,000 shares subject to repricing from $2.00 per share to
$0.75 per share. See "Ten-Year Option Repricings." These options were
exercised in September 2001.
(2) Consists of 100,000 shares subject to repricing from $2.00 per share to
$0.75 per share. See "Ten-Year Option Repricings." These options were
exercised in September 2001.
(3) Consists solely of options previously granted subject to repricing. No
other options were issued by the Company in the last fiscal year.
20
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
- -----------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised
Shares Options at FY-End
Acquired on Value Exercise Exercisable
Name Exercise ($) Realized ($) Price ($/Sh) Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
James Rudis 276,500 - (1) $0.75 -
Chairman, Chief
Executive Officer,
President and
Director
William E. Shatley 246,500 - (1) $0.75 -
Senior Vice
President,
Secretary,
Treasurer, Chief
Financial Officer
and Director
- --------------------
(1) The fair market value of the securities underlying the options was less
than the exercise price of the options at exercise. See "Ten-Year Option
Repricings."
21
Ten-Year Option Repricings
Market Length of
Price of Exercise Original
Securities Stock at Price at Option Term
Underlying Time of Time of Remaining at
Options Repricing or Repricing or Date of
Repriced or Amendment Amendment New Exercise Repricing or
Name Date Amended ($) ($) Price ($) Amendment
- -------------------------------------------------------------------------------------------------------------------------------
James Rudis 8/14/01 130,000 $0.74 $2.00 $0.75 4.9 years
Chairman, Chief
Executive Officer,
President and
Director
William E. Shatley 8/14/01 100,000 $0.74 $2.00 $0.75 4.9 years
Senior Vice
President, Secretary,
Treasurer,
Chief Financial
Officer and Director
Board of Directors Report on Repricing of Options
In August 2001, the Board of Directors reviewed options granted to certain
directors and executive officers of the Company pursuant to the Company's 1994
Employee Stock Option Plan and determined that the exercise price of these
options exceeded the fair market value of the Company's Common Stock. The
options granted to such executives had an exercise price of $2.00 per share. The
Board was concerned that the Company's total compensation package for its
directors and executive officers was less attractive than compensation offered
by its competitors and other comparable companies because the exercise price of
options granted to new executives of such companies would afford greater
opportunity for appreciation than the Company's options.
The Board concluded that (i) the Company's future success is dependent in
large part on its ability to retain its directors and executive officers; (ii)
competition for such personnel is intense; (iii) the loss of its directors and
executive officers would have an adverse impact on the Company's business; and
(iv) it is important and cost-effective to provide equity incentives to
directors and executive officers of the Company to improve the Company's
performance and the value of the Company for its shareholders. On balance,
considering all of these factors, the Board determined it to be in the best
interests of the Company and its shareholders to restore the incentive for its
directors and executive officers to remain with the Company and to exert their
maximum efforts on behalf of the Company by repricing outstanding options with
exercise prices reflecting recent trading prices.
As a consequence, on August 14, 2001 the Board of Directors approved the
repricing of the options granted to James Rudis, Michael F. Buck, George R.
Schrader and William E. Shatley on July 23, 1996. Donald J. Ervin abstained from
the voting for the repricing. All such options granted to Mr. Rudis, Mr. Buck,
Mr. Schrader and Mr. Shatley under the 1994 Employee Stock Option Plan having an
exercise price of $2.00 were repriced to an exercise price of $0.75 per share.
The closing price of the Company's shares on the American Stock Exchange on
August 13, 2001 was $0.74 per share.
22
The foregoing report has been furnished by the Board of Directors of the
Company consisting of Messrs. James Rudis, William E. Shatley, Michael F. Buck,
Donald J. Ervin and George R. Schrader.
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 and 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 $230,000,
and his cash bonus at $40,000, for fiscal 2001. The Compensation Committee
believes that the compensation of the Company's other executive officer was
reasonably related to the performance of the Company and of that individual
during fiscal 2001.
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
23
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 the year ended September 30,
2001, the exercise price of options covering 60,000 shares (30,000 shares for
Mr. Buck and 30,000 shares for Mr. Schrader) which had been granted in 1996, was
reduced to $.75 per share from $2.00 per share.
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, 1996, and
is calculated assuming quarterly reinvestment of dividends and quarterly
weighting by market capitalization. Following the proposed spin-off of Overhill
Farms, the Company will utilize a new Published Industry Index (MG Industry
Group 752 - Industrial Equipment Wholesale) to reflect the Timberjack business.
Comparative Five-Year Total Returns
Overhill Corporation, Broad Market and Peer Group
(Performance Results Through 9/30/01)
Company 1996 1997 1998 1999 2000 2001
- -------------------------------------------------------------------------------------------------
Overhill Corporation 100.00 25.36 6.36 10.00 12.73 10.18
Industry Index 100.00 137.59 130.52 128.01 153.36 179.36
AMEX Market Index 100.00 121.60 106.22 123.70 147.94 110.93
24
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 the Record Date 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.
Amount and Nature of
Name Beneficial Ownership (1) Percent of Class (1)
- -------------------------------------------------------------------------------
James Rudis 557,900 3.0%
William E. Shatley 404,700 (2) 2.2
Michael F. Buck 60,100 *
Donald J. Ervin 10,000 *
George R. Schrader 80,000 *
Harold Estes 4,015,500 (3) 21.6
John E. McConnaughy, Jr. 1,220,600 (4) 6.6
All directors and executive
officers as a group (5 persons) 1,112,700 6.0
- ----------------
* 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
18,615,464 shares of Common Stock outstanding as of September 30, 2001.
(2) Includes 158,200 shares that Mr. Shatley may be deemed to beneficially
own as a general partner in a family limited partnership.
(3) Mr. Estes' address is Highway 59 South, Route 15, Box 9475,
Lufkin, Texas 75901.
(4) Mr. McConnaughy's address is 1011 High Ridge Road, Stamford,
Connecticut 06905.
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.
In November 1995, Pyrenees exercised certain of these options 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. After deducting principal payments on the note, the remaining
balance of
25
$975,000 became uncollectible, and during fiscal 1999, the 500,000
shares of common stock that secured this note were recovered pursuant to certain
litigation against Pyrenees and Mr. Tanner. This recovery was 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 during fiscal 1999.
Notes Payable and Accrued Interest to Related Party
In connection with the acquisition of TTI in June 1994, the Company initially
issued a note to the seller (Mr. Harold Estes) in the amount of $10.0 million,
with interest at 8% due October 31, 1994 and collateralized by all the capital
stock and certain assets of TTI. As of various maturity dates thereafter, Mr.
Estes has entered into subsequent agreements with the Company to modify and
extend the term of the note. As of September 30, 2001, the note had a total
unpaid balance of $20,861,367 (principal of $16,347,191 and accrued interest of
$4,514,176), bearing interest at 9% per annum with a maturity date of October
10, 2002. 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.
Quantum Fuel and Refining, Inc. ("Quantum"), when acquired by SFP, had a note
payable to Mr. Estes. As of September 30, 2001, the note had a total unpaid
balance of $1,476,264 (principal of $1,000,000 and accrued interest of
$476,264), bearing interest at 12% per annum with a maturity date of March 31,
2002, and collateralized by the assets of Quantum. SFP intends to renew the note
at maturity.
Advances to Related Parties
During April 1998, the Company filed suit against Mr. Paul Tanner, PLY Stadium
Partners, Inc. ("Stadium Partners"), and Pyrenees, related to the nonpayment of
indebtedness for significant advances made by the Company to or on behalf of
such parties in previous years. 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 the Company, as well as the
stock and assets of Stadium Partners and Pyrenees. This included the rights to
2,000,000 shares of the Company's common stock owned by Pyrenees and held by Mr.
Harold Estes as secondary collateral. In connection with the recovery of the
2,000,000 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 reached an agreement to settle the
judgment. The settlement agreement provided, among other things, for the
defendants to execute and deliver assignments of certain assets to the Company
and to execute and deliver to the Company two promissory notes totaling
$450,000, which are collateralized by first or second liens on real properties
controlled by the judgment debtors. While the total dollar value of the
settlement amounts to slightly over $1.0 million, the amount that may be
ultimately recoverable as a result of this settlement is not presently
determinable and will be recorded as income only when collection is assured.
In September 2000, SFP acquired all of the outstanding common stock of Quantum
Fuel & Refining, Inc.
26
from a related party. In connection with the acquisition, SFP assumed a
$1.0 million note and $356,000 of accrued interest payable to Harold Estes,
president and former owner of TTI. As of September 30, 2001 and 2000, amounts
outstanding under the note including accrued but unpaid interest thereon were
approximately $1.5 million and $1.4 million, respectively. The principal balance
of the note, plus any accrued but unpaid interest thereon, matures on March 31,
2002.
The former owner of Quantum is TTI's 25% minority partner in SFP. TTI's 25%
minority partner in SFP is a guarantor of TTI's and SFP's note payable to, and
SFP's revolving line of credit facility with, Bank of America, N.A. (see Note
6). The father of TTI's 25% minority partner in SFP is a former officer of SFP.
As of September 30, 2001 and 2000, the Company has total receivables of $685,000
and $684,000, respectively, from this former officer of SFP or from companies
owned or controlled by such officer, of which approximately $188,000 and
$188,000, respectively, are unsecured.
During 1999, TTI obtained a 49.99% limited partnership interest in a
construction related company, which is accounted for under the equity method and
is included in other assets. TTI does not participate in the management of this
partnership nor does it exercise control over the partnership activities. As of
September 30, 2001 and 2000, the Company had sales contracts receivable of
approximately $1.4 million and $306,000, respectively, and accounts receivable
of approximately $34,000 and $0, respectively, due from the partnership and
secured by equipment. These receivable balances are included in related party
receivables on the accompanying consolidated balance sheets. During the fiscal
years ended September 30, 2001, 2000 and 1999, TTI recorded sales of
approximately $517,000, $722,000 and $622,000 million to the partnership,
respectively. Additionally, during the fiscal years ended September 30, 2001,
2000 and 1999, TTI recorded income from the sale of equipment to and interest
income on receivables from the partnership of $94,000, $150,000 and $41,000,
respectively.
In connection with the purchase of TTI, among the assets that the Company
acquired was a note receivable from an officer of TTI. The note has been renewed
and extended each year since issuance and is collateralized by marketable
securities. As of September 30, 2001 and 2000, the balance outstanding was
$363,234 and $352,580, respectively, and the note has been classified as a
noncurrent related party receivable.
As of September 30, 2001 and 2000, approximately $497,000 and $496,000,
respectively, of related party receivables are represented by notes, which are
no longer accruing interest. As of September 30, 2001 and 2000, the Company has
provided allowances for doubtful accounts of $345,000 and $200,000,
respectively, against all related party receivables as of those dates. The
Company expects the remaining amounts due under related party receivables to be
realized either through collection or receipt of related collateral.
During the year ended September 30, 2001, the exercise price of options granted
in 1996 under the Company's 1994 Employee Stock Option Plan (the "Plan") to
purchase an aggregate 290,000 shares of the Company's common stock was reduced
to $0.75 per share from $2.00 per share. Of these options,
. options to purchase 130,000 shares were held by James Rudis,
. options to purchase 30,000 shares were held by Michael F. Buck,
. options to purchase 30,000 shares were held by George R. Schrader, and
. options to purchase 100,000 shares were held by William E. Shatley,
all of whom are directors of the Company. No compensation expense was recorded
in connection with these repricings, as the options were repriced above fair
market value. All of these repriced options were exercised in September 2001.
In addition to the repriced options, Mr. Buck and Mr. Schrader also
exercised options to purchase 30,000 and 50,000 shares of the Company's common
stock, respectively, granted under the Plan in 1998; and
27
Mr. Rudis and Mr. Shatley each also exercised options to purchase 146,500 shares
which were granted under individual option agreements in 1993. These option
exercises by each of Mr. Rudis, Mr. Buck, Mr. Schrader and Mr. Shatley in
September 2001 were exercised with the issuances of 2-year promissory notes to
the Company in an aggregate amount of $497,250, bearing interest at 3.82% and
collateralized by the shares issued. The outstanding principal amounts of the
notes are:
. $207,375 for Mr. Rudis,
. $45,000 for Mr. Buck,
. $60,000 for Mr. Schrader, and
. $184,875 for Mr. Shatley.
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September 30,
2001 and 2000, the insurance premium receivable was approximately $600,000.
28
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. and 2. Financial Statements and Financial Statement Schedules.
1. The following consolidated financial statements of Overhill Corporation
and subsidiaries, included in the annual report of the registrant to
its shareholders for the year ended September 30, 2001, are included in
Item 8:
Report of Independent Auditors F-2
Consolidated Balance Sheets--September 30, 2001 and 2000 F-3
Consolidated Statements of Operations--Years ended September 30, 2001, 2000
and 1999 F-5
Consolidated Statements of Stockholders' Equity--Years ended September 30, 2001,
2000 and 1999 F-7
Consolidated Statements of Cash Flows--Years ended September 30, 2001, 2000
and 1999 F-8
Notes to Consolidated Financial Statements F-11
2. The following consolidated financial statement schedules of Overhill
Corporation and subsidiaries are included in item 14(a):
Schedule I -- Condensed Financial Information of Registrant F-39
Schedule II -- Valuation and Qualifying Accounts F-43
All other schedules for which provision is made in the applicable rules and
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
(incorporated by reference from Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1999 [the "1999
Form 10-K"])
3.3 Certificate of Amendment of Articles of Incorporation of Polyphase
Corporation, as adopted by stockholders on March 1, 2001 (incorporated
by reference from Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 2001)
29
4.1 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 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"])
+10.2 Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
+10.3 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"])
10.4 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)
10.5 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)
10.6 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)
10.7 Promissory Note in the amount of $2,000,000, from Pyrenees Group,
as maker, to Polyphase Corporation, dated November 1, 1995,
related to the exercise of options on Series D Preferred Stock
(incorporated by reference from Exhibit 10.29 to the 1995
Form 10-K)
10.8 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)
10.9 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)
+10.10 Stock Option Agreement for James Rudis dated July 23, 1996
(incorporated by reference from Exhibit 10.51 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1996
[the "1996 Form 10-K"])
+10.11 Stock Option Agreement for William E. Shatley dated July 23, 1996
(incorporated by reference from Exhibit 10.52 to the 1996
Form 10-K)
+10.12 Stock Option Agreement for Michael F. Buck dated July 23, 1996
(incorporated by reference from Exhibit 10.53 to the 1996
Form 10-K)
+10.13 Stock Option Agreement for George R. Schrader dated July 23, 1996
(incorporated by reference from Exhibit 10.54 to the 1996
Form 10-K)
30
10.14 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 Horizon Fund, L.P. as lender
(incorporated by reference from Exhibit 10.64 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1997
[the "1997 Form 10-K"])
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 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])
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.24 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch World Income Fund, Inc.
(w-2a) (incorporated by reference from Exhibit 10.86 to the 1998
Form 10-K)
10.25 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)
31
10.26 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)
10.27 Security Agreement dated August 7, 1998 by Texas Timberjack to
NationsBank (incorporated by reference from Exhibit 10.92 to the
1998 Form 10-K)
10.28 Guaranty, dated August 7, 1998, by Polyphase Corporation to
NationsBank (incorporated by reference from Exhibit 10.88 to the
1998 Form 10-K)
+10.29 Stock Option Agreement for Michael F. Buck, dated March 17, 1998
(incorporated by reference from Exhibit 10.93 to the 1998 Form
10-K)
+10.30 Stock Option Agreement for George R. Schrader, dated March 17,
1998 (incorporated by reference from Exhibit 10.94 to the 1998
Form 10-K)
10.31 Stock Purchase Agreement, effective as of September 30, 1999, by
and among Polyphase Corporation, Polyphase Instrument Acquisition
Corporation and Polyphase Instrument Co. (incorporated by reference
from Exhibit 10.76 to the 1999 Form 10-K)
10.32 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
(incorporated by reference from Exhibit 10.77 to the 1999 Form
10-K)
10.33 Pledge Agreement, entered into on September 30, 1999, by and
between Polyphase Instrument Acquisition Corporation, as pledgor,
and Polyphase Corporation, as secured party (incorporated by
reference from Exhibit 10.78 to the 1999 Form 10-K)
10.34 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 (incorporated by reference from
Exhibit 10.79 to the 1999 Form 10-K)
10.35 Security Agreement entered into effective September 30, 1999, by
and between Polyphase Instrument Co., as pledgor, and Polyphase
Corporation, as secured party (incorporated by reference from
Exhibit 10.80 to the 1999 Form 10-K)
+10.36 Employment Agreement, entered into as of November 1, 1999 between
Polyphase Corporation and Overhill Farms, Inc., jointly and
severally, and James Rudis (incorporated by reference from Exhibit
10.81 to the 1999 Form 10-K)
+10.37 Employment Agreement, entered into as of November 1, 1999 between
Polyphase Corporation and Overhill Farms, Inc., jointly and
severally, and William E. Shatley (incorporated by reference from
Exhibit 10.82 to the 1999 Form 10-K)
32
10.38 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 (incorporated by reference
from Exhibit 10.83 to the 1999 Form 10-K)
10.39 Loan and Security Agreement, dated November 24, 1999, between
Overhill Farms, Inc., Overhill L.C. Ventures, Inc. and Union Bank
of California, N.A. (incorporated by reference from Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1999 [the "December 1999 Form 10-Q"])
10.40 Revolving Note, dated November 24, 1999, in the principal amount
of $16,000,000, payable to the order of Union Bank of California,
N.A., as payee, by Overhill Farms, Inc., as borrower (incorporated
by reference from Exhibit 10.2 to the December 1999 Form 10-Q)
10.41 Continuing Guaranty, dated November 24, 1999, by Overhill L.C.
Ventures, Inc. and Polyphase Corporation in favor of Union Bank of
California, N.A. (incorporated by reference from Exhibit 10.3 to
the December 1999 Form 10-Q)
10.42 Pledge Agreement, dated November 24, 1999, by Overhill Farms, Inc.,
Polyphase Corporation and Overhill L.C. Ventures, Inc. in favor of
Union Bank of California, N.A. (incorporated by reference from
Exhibit 10.4 to the December 1999 Form 10-Q)
10.43 Intercreditor and Subordination Agreement, entered into as of
November 24, 1999, by and between Levine Leichtman Capital Partners
II, L.P., as subordinated lender, and Union Bank of California,
N.A., as senior lender (incorporated by reference from Exhibit
10.5 to the December 1999 Form 10-Q)
10.44 Securities Purchase Agreement, dated as of November 24, 1999, by
and among Overhill Farms, Inc., as issuer, Polyphase Corporation
and Overhill L.C. Ventures, Inc., as guarantors, and Levine
Leichtman Capital Partners II, L.P., as purchaser (incorporated by
reference from Exhibit 10.6 to the December 1999 Form 10-Q)
10.45 Secured Senior Subordinated Note, dated November 24, 1999, in the
principal amount of $28,000,000, payable to the order of Levine
Leichtman Capital Partners II, L.P., as holder, by Overhill Farms,
Inc., as borrower (incorporated by reference from Exhibit 10.7 to
the December 1999 Form 10-Q)
10.46 Warrant to Purchase 166.04 Shares of Common Stock of Overhill
Farms, Inc., dated November 24, 1999, by Levine Leichtman Capital
Partners II, L.P. (incorporated by reference from Exhibit 10.8 to
the December 1999 Form 10-Q)
10.47 Investor Rights Agreement, entered into as of November 24, 1999,
by and among Overhill Farms, Inc., Polyphase Corporation and
Levine Leichtman Capital Partners II, L.P. (incorporated by
reference from Exhibit 10.9 to the December 1999 Form 10-Q)
10.48 Asset Purchase Agreement, entered into as of August 7, 2000, by and
between Overhill Farms, Inc. and SSE Manufacturing, Inc.
(incorporated by reference from Exhibit 10.50 to the Company's
Annual Report on Form 10-K for the year ended September 30, 2000
[the "2000 Form 10-K"])
33
10.49 Master Co-Pack Agreement, entered into as of August 7, 2000, by
and between Schwan's Sales Enterprises, Inc. and Overhill Farms,
Inc. (incorporated by reference from Exhibit 10.51 to the 2000
Form 10-K)
10.50 First Amendment to Loan and Security Agreement, entered into as of
August 23, 2000, by and between Overhill Farms, Inc., Overhill L.C.
Ventures, Inc. and Union Bank of California, N. A. (incorporated
by reference from Exhibit 10.52 to the 2000 Form 10-K)
10.51 First Amendment to Intercreditor and Subordination Agreement,
entered into as of August 23, 2000, by and between Levine Leichtman
Capital Partners II, L.P. and Union Bank of California, N.A.
(incorporated by reference from Exhibit 10.53 to the 2000
Form 10-K)
10.52 Term Note, dated August 23, 2000, in the principal amount of
$2,400,000, payable to the order of Union Bank of California, N.A.,
as payee, and Overhill Farms, Inc., as borrower (incorporated by
reference from Exhibit 10.54 to the 2000 Form 10-K)
10.53 Consent and First Amendment to Securities Purchase Agreement,
entered into as of August 23, 2000, by and among Overhill Farms,
Inc., Levine Leichtman Capital Partners II, L.P., Polyphase
Corporation and Overhill L.C. Ventures, Inc. (incorporated by
reference from Exhibit 10.55 to the 2000 Form 10-K)
10.54 Amendment to Investor Rights Agreement, entered into as of
August 25, 2000, by and among Overhill Farms, Inc., Polyphase
Corporation and Levine Leichtman Capital Partners II, L.P.
(incorporated by reference from Exhibit 10.56 to the 2000
Form 10-K)
10.55** Second Amendment to Amended and Restated Loan Agreement, entered
into on March 1, 2001, by and between Texas Timberjack, Inc. and
Bank of America, N.A.
10.56** Promissory Note, dated March 30, 2001, in the principal amount of
$8,000,000, payable to Bank of America, N.A., as payee, by
Texas Timberjack, Inc., as borrower
10.57** Promissory Note, dated March 30, 2001, in the principal amount of
$3,500,000, payable to Bank of America, N.A., as payee, by
Texas Timberjack, Inc. and Southern Forest Products, LLC,
as borrowers
10.58** Promissory Note, dated March 30, 2001, in the principal amount of
$589,000, payable to Bank of America, N.A., as payee, by
Texas Timberjack, Inc. and Southern Forest Products, LLC,
as borrowers
21.1** Subsidiaries of the Registrant
23.1** Consent of Independent Auditors
- ----------
+ 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, 2001.
34
OVERHILL 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-8
Notes to Consolidated Financial Statements........................... F-11
Financial Statement Schedules:
- -----------------------------
Schedule I - Condensed Financial Information of Registrant........... F-39
Schedule II - Valuation and Qualifying Accounts...................... F-43
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Overhill Corporation
We have audited the accompanying consolidated balance sheets of Overhill
Corporation and subsidiaries as of September 30, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2001. Our audits also
include the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 Overhill
Corporation and subsidiaries at September 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2001 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
ERNST & YOUNG LLP
December 7, 2001,
except for the last paragraphs of Notes 6 and 7,
as to which the date is
January 11, 2002
F-2
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
-----------------------------------
2001 2000
----------- -----------
Current assets:
Cash $ 686,382 $ 963,387
Receivables, net of allowance for doubtful accounts of
$626,200 and $557,305 in 2001 and 2000, respectively:
Trade accounts 3,399,591 2,353,809
Current portion of sales contracts, net of deferred income of
$809,158 and $1,498,581 in 2001 and 2000, respectively 5,029,362 4,145,318
Related parties 1,927,768 963,932
Notes 4,191,128 3,642,112
Inventories 16,374,797 17,326,351
Net current assets of discontinued operations 17,271,667 21,318,705
Prepaid expenses and other 2,044,969 2,540,640
----------- -----------
Total current assets 50,925,664 53,254,254
----------- -----------
Property and equipment:
Land 432,000 432,000
Buildings and improvements 2,722,595 2,643,492
Machinery, equipment and other 3,053,909 2,548,641
----------- -----------
6,208,504 5,624,133
Accumulated depreciation 2,348,410 1,904,701
----------- -----------
3,860,094 3,719,432
----------- -----------
Other assets:
Noncurrent receivables, net of allowance for doubtful accounts of $1,033,671
and $1,021,054 in 2001 and 2000, respectively:
Sales contracts, net of deferred income of $387,781 and $710,297 in
2001 and 2000, respectively 2,627,468 2,094,718
Related parties 375,928 352,580
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $2,054,212
and $1,770,872 in 2001 and 2000, respectively 3,612,580 3,895,920
Restricted cash 522,709 633,124
Assets held for sale 1,926,264 1,926,264
Other 1,192,074 3,646,372
----------- -----------
10,257,023 12,548,978
----------- -----------
Total Assets $65,042,781 $69,522,664
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
F-3
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
-----------------------------------
2001 2000
----------- -----------
Current liabilities:
Notes payable $13,313,743 $10,526,893
Accounts payable 2,085,200 1,555,378
Accrued expenses and other 1,066,932 782,657
Current maturities of long-term debt - 1,121,927
----------- -----------
Total current liabilities 16,465,875 13,986,855
Notes payable and accrued interest to related party 22,337,631 20,746,384
Net long-term liabilities related to discontinued operations 17,668,829 25,043,209
Reserve for credit guarantees 522,709 633,124
----------- -----------
Total liabilities 56,995,044 60,409,572
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 100,000,000 shares, issued and
outstanding, 18,615,464 and 17,812,464 shares in 2001 and 2000,
respectively 186,155 178,125
Paid-in capital 28,156,204 27,650,734
Accumulated deficit (19,797,372) (18,715,767)
Notes receivable from officers and directors (497,250) -
----------- -----------
Total stockholders' equity 8,047,737 9,113,092
----------- -----------
Total Liabilities and Stockholders' Equity $65,042,781 $69,522,664
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
F-4
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
------------------------------------------------------------
2001 2000 1999
------------ ----------- -----------
Net revenues $43,295,544 $44,056,724 $45,812,384
Cost of sales 35,395,985 36,734,278 37,544,362
----------- ----------- -----------
Gross profit 7,899,559 7,322,446 8,268,022
Selling, general and administrative expenses 8,018,395 7,583,589 7,158,808
------------ ----------- -----------
Operating income (loss) (118,836) (261,143) 1,109,214
Other income (expenses):
Interest expense (2,405,665) (2,521,019) (3,740,921)
Interest income and other 764,051 1,216,804 1,148,934
------------ ----------- -----------
Total other expenses (1,641,614) (1,304,215) (2,591,987)
------------ ----------- -----------
Loss before income taxes and discontinued
operations (1,760,450) (1,565,358) (1,482,773)
Income tax (expense) benefit (860,286) 3,330,450 290,851
------------ ----------- -----------
Net income (loss) before discontinued operations (2,620,736) 1,765,092 (1,191,922)
Discontinued operations, net of
income taxes 1,539,131 2,056,254 (405,705)
------------ ----------- -----------
Net income (loss) (1,081,605) 3,821,346 (1,597,627)
Gain (dividends) on reacquired
preferred stock - 351,457 (91,199)
------------ ----------- -----------
Net income (loss) attributable to
common stockholders $(1,081,605) $ 4,172,803 $(1,688,826)
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
F-5
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
For the Years Ended
September 30,
-----------------------------------------------------------
2001 2000 1999
------- -------- -------
Per share data - basic and diluted:
Net income (loss) per common share:
Net income (loss) before discontinued
operations $ (.15) $ .12 $(.08)
Discontinued operations .09 .11 (.02)
---------- ---------- ----------
Net income (loss) per common share $ (.06) $ .23 $ (.10)
========== ========== ==========
Weighted average shares outstanding - basic 17,845,793 17,812,464 16,947,195
========== ========== ==========
Weighted average shares outstanding - diluted 17,845,793 18,110,421 16,947,195
========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements
F-6
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 2001
Preferred Stock Common Stock Paid-in Accumulated Notes
Shares Amount Shares Amount Capital Deficit Receivable Total
------ ------ ------ ------ ------- ------- ------------ -----
Balance, September 30, 1998 115,000 $ 1,150 15,080,050 $ 150,800 $ 28,623,811 $ (21,199,744) $ (975,319) $ 6,600,698
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 (comprehensive loss) (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
---------------------------------------------------------------------------------------------
Reacquision of preferred stock (56,440) (564) (563,842) 351,457 (212,949)
Stock option granted for services 54,689 54,689
Net income (comprehensive income) 3,821,346 3,821,346
---------------------------------------------------------------------------------------------
Balance, September 30, 2000 - - 17,812,464 178,125 27,650,734 (18,715,767) - 9,113,092
---------------------------------------------------------------------------------------------
Exercise of stock options 803,000 8,030 551,408 (497,250) 62,188
Repurchase of warrants (45,938) (45,938)
Net loss (comprehensive loss) (1,081,605) (1,081,605)
---------------------------------------------------------------------------------------------
Balance, September 30, 2001 - $ - 18,615,464 $ 186,155 $ 28,156,204 $ (19,797,372) $ (497,250) $ 8,047,737
=============================================================================================
The accompanying notes are an integral part
of these consolidated financial statements
F-7
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
-----------------------------------------------------------
2001 2000 1999
--------- -------- --------
Cash flows provided by (used in) operating activities:
Net income (loss) $(1,081,605) $3,821,346 $(1,597,627)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 563,732 522,079 459,127
Amortization 358,340 389,639 1,385,259
Provision for doubtful accounts 541,764 272,719 141,793
Interest accrual on notes payable to related party 1,591,247 1,475,278 1,607,437
Recoveries on related party receivable - - (656,250)
Stock options granted for services - 54,689 -
Deferred income taxes 2,106,683 (2,252,664) -
(Income) loss from discontinued operations
(1,831,342) (2,056,254) 405,705
Changes in:
Accounts and sales contracts receivable (3,004,340) 1,960,932 (2,331,060)
Inventories 951,554 (427,475) 4,851,442
Prepaid expenses and other (738,571) (1,506,631) (977,016)
Accounts payable 529,822 2,003,213 396,810
Accrued expenses and other 295,132 942,665 (668,985)
----------- --------- -----------
Net cash provided by operating activities 282,416 5,199,536 3,016,635
----------- --------- -----------
Cash flows provided by (used in) investing activities:
Capital expenditures, net (704,394) (309,780) (1,003,900)
Notes and other receivables (549,016) (282,335) (1,622,461)
Receivables from related parties (987,184) 100,913 (852,441)
Sale of Polyphase Instrument Company - - 1,780,000
----------- --------- -----------
Net cash used in investing activities $(2,240,594) $(491,202) $(1,698,802)
----------- --------- -----------
The accompanying notes are an integral part
of these consolidated financial statements
F-8
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended
September 30,
----------------------------------------------------------
2001 2000 1999
------ ------ ------
Cash flows provided by (used in) financing activities:
Net borrowings (principal payments) on line of credit
and floor plan arrangements $ 2,786,850 $ (2,176,815) $ 1,317,020
Principal payments on long-term debt (1,121,927) (1,466,042) (2,533,333)
Exercise of stock options 62,188 - 28,436
Repurchase of stock purchase warrants (45,938) - -
Repurchase of preferred stock - (450,000) -
Dividends on preferred stock - - (91,199)
----------- ------------ ------------
Net cash provided by (used in) financing activities 1,681,173 (4,092,857) (1,279,076)
----------- ------------ ------------
Net increase (decrease) in cash (277,005) 615,477 38,757
Cash at beginning of year 963,387 347,910 309,153
----------- ------------ ------------
Cash at end of year $ 686,382 $ 963,387 $ 347,910
=========== ============ ============
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest $ 841,381 $ 997,890 $ 1,133,514
=========== ============ ============
Income taxes $ 82,344 $ 19,858 $ -
=========== ============ ============
The accompanying notes are an integral part
of these consolidated financial statements
F-9
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Supplemental schedule of non-cash investing and financing activities:
During the year ended September 30, 2000, the Company exchanged timber inventory
valued at $400,000 for stock of a company that was previously owned by a related
party (see Note 11).
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
had previously assigned all of its rights to the 2,000,000 shares to another
related party in connection with a previous debt extension, interest expense of
$875,000 was recorded in connection with the recovery (see Notes 7, 8 and 11).
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 valued at $28,000 and charged
to expense in fiscal 1999.
The Company issued common shares valued at $205,647 in 1999 in payment of
accrued dividends on preferred stock.
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 valued at $85,000 and charged to expense in fiscal 1998.
Certain officers and directors of the Company exercised options during the 2001
fiscal period in exchange for notes issued to the Company by these officers and
directors, collateralized by the stock of the Company.
The accompanying notes are an integral part
of these consolidated financial statements
F-10
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY AND ORGANIZATIONAL MATTERS
Nature of Business
Overhill Corporation, formerly Polyphase Corporation, (the "Company") is a
holding company that, through its subsidiaries, currently operates in
forestry and timber related businesses. These operations are conducted
through 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"). Through these
entities, the Company distributes, leases and provides financing for
construction and timber equipment and is also engaged in certain timber and
sawmill operations.
The Company's Board of Directors, during August 2001, approved a plan to
spin-off all of its shares of Overhill Farms, Inc. ("Overhill Farms") to the
holders of the Company's common stock. Overhill Farms, a producer of high
quality entrees, plated meals, meal components, soups, sauces and poultry,
meat and fish specialties, previously comprised the Company's food segment
(the "Food Group"). The Company's transformer segment (the "Transformer
Group") was discontinued in fiscal 1999, as a result of the sale by the
Company of its wholly owned subsidiary, Polyphase Instrument Co. ("PIC"),
which manufactures and markets electronic transformers, inductors and
filters. Both Overhill Farms and PIC have been accounted for as discontinued
operations in the accompanying financial statements and are discussed further
in Notes 13 and 14 to the financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the continuing operations and
related 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 current year presentation.
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-11
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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,
construction or timber industries for their ability to repay debt to TTI.
Collateral is generally the equipment sold for amounts due under installment
sales contracts.
Financial Instruments
The fair value of financial instruments is determined by reference to market
data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their
recorded values.
Inventories
Inventories of timber and construction 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. Inventories
of raw timber and finished wood products are stated at the lower of average
cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed primarily
using the straight-line method for financial reporting purposes over the
estimated useful lives of the assets. Useful lives generally range from five
to thirty years. Leasehold improvements are amortized over the lesser of the
term of the lease or the estimated useful life of the assets.
Repairs and maintenance costs are expensed, while additions and betterments
are capitalized. The cost and related accumulated depreciation of assets sold
or retired are eliminated from the accounts and any gains or losses are
reflected in earnings.
Excess of Cost over Fair Value of Net Assets Acquired
The excess of cost over 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.
F-12
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 8.
Revenue Recognition
The Company generally recognizes revenue when products are shipped, which is
when title and risk of loss pass to the buyer, or services are performed and
provides for estimated returns and allowances at the time of sale. However, a
portion of the Company's sale of equipment is 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 2001, 2000
and 1999 is:
2001 2000 1999
------ ------ ------
Equipment sales total $23,385,642 $25,758,730 $28,455,430
Equipment sales financed 2,600,413 1,423,069 3,155,817
Income earned on installment basis 514,829 823,438 776,789
Interest income earned on installment notes 774,203 863,757 883,542
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.
F-13
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income (Loss) Per Share
During 2001, warrants to purchase 710,000 shares of common stock, at a
weighted average exercise price of $1.39 per share, and options to purchase
803,000 shares, at a weighted average exercise price of $1.15 per share, were
outstanding and excluded from the calculation of diluted earnings per share
as the effect would be antidilutive. In 2000, 298,000 common stock
equivalents included in the calculation of diluted earnings per share were
comprised of 29,000 equivalent shares related to options to purchase common
stock and 269,000 equivalent shares related to preferred stock convertible
into shares of common stock. Options to purchase approximately 290,000 shares
of common stock, at a weighted average exercise price of $2.00 per share, and
warrants to purchase 710,000 shares of common stock, at a weighted average
exercise price of $1.39 per share, were outstanding during the year ended
September 30, 2000, and excluded from the calculation of diluted earnings per
share as the effect would be antidilutive. 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.
Recent Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment or Diposal of Long-Lived Assets
(SFAS 144). These rules supercede FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, providing a single accounting model for long-lived assets to
be disposed of. Although retaining many of the fundamental recognition and
measurement provisions of Statement 121, the new rules significantly change
the criteria that would have to be met to classify an asset as
held-for-sale. Statement 144 also supercedes the provisions of APB Opinion
30 with regard to reporting the effects of a disposal of a segment of a
business and require expected future operating losses from discontinued
operations to be displayed in discontinued operations in the period(s) in
which the losses are incurred (rather than as of the measurement date as
previously required by APB 30). The Statement is effective for year-ends
beginning after December 15, 2001 and interim periods within those fiscal
years, although earlier application is encouraged. The Company intends to
adopt SFAS 144 as of October 1, 2001. The Company is currently in the
process of evaluating the impact of SFAS 144 on its financial statements and
does not expect the adoption of SFAS 144 to have a material effect on its
financial position, results of operations or cash flows.
F-14
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In June 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which requires that
goodwill will no longer be amortized, but instead will be tested at least
annually for impairment by reporting unit. The Company is required to adopt
SFAS 142 effective as of October 1, 2002, though early adoption as of October
1, 2001 is permitted. The Company intends to early adopt SFAS 142 as of
October 1, 2001. The Company is currently in the process of evaluating the
relevant provisions of SFAS 142 and has not determined whether the adoption
of SFAS 142 will have an immediate effect on the financial statements.
However, amortization of goodwill, which amounted to approximately $283,000
in each of the three fiscal years ended September 30, 2001, before any
related tax effects, will be eliminated prospectively upon the adoption of
SFAS 142.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), as amended, which was 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 adoption of SFAS 133 on October 1, 2000 did not have any
impact on the Company's financial position, results of operations or cash
flows.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles, generally accepted in the United States, 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.
3. SALES CONTRACTS RECEIVABLE
The Company 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, 2001 and
2000 and the related deferred income based on the installment method of
income recognition.
2001 2000
------ ------
Contracts outstanding $ 10,370,655 $ 8,514,389
Less deferred income (1,196,939) (2,208,878)
------------ -----------
9,173,716 6,305,511
Less allowance for doubtful accounts (120,255) (65,475)
------------ -----------
Net investment in sales contracts receivable $ 9,053,461 $ 6,240,036
============ ===========
F-15
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
----------------- ----------- --------- ---
2002 $ 7,382,190 $ 809,158 $ 6,573,032
2003 2,471,069 314,064 2,157,005
2004 499,266 72,986 426,280
2005 11,402 731 10,671
2006 6,728 - 6,728
------------ ----------- -----------
$ 10,370,655 $ 1,196,939 $ 9,173,716
============ =========== ===========
4. NOTES RECEIVABLE
Texas Timberjack periodically makes advances under promissory notes to
certain unrelated individuals and corporations. These notes have interest
rates that range from 10% to 18%, are generally due within one year and a
majority are secured by a variety of marketable collateral, primarily timber
and land. Interest is accrued on these notes as long as the Company believes
such amounts 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 $4,191,128 and $3,642,112 of short-term notes receivable as
of September 30, 2001 and 2000, respectively, from unrelated corporations and
individuals, net of allowances of $116,934 and $243,184, respectively. At
September 30, 2001, approximately $1,462,000 of such notes receivable were no
longer accruing interest. All notes receivable are due in less than one year.
5. INVENTORIES
Inventories are summarized as follows:
September 30,
------------------------------
2001 2000
------ ------
Timber and construction equipment $14,469,372 $15,689,760
Finished wood products 1,050,468 834,808
Unharvested and harvested but unprocessed timber 854,957 801,783
----------- -----------
Total $16,374,797 $17,326,351
=========== ===========
F-16
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. NOTES PAYABLE
Notes payable consist of the following:
September 30,
---------------------------------
2001 2000
------ ------
Note payable to Bank of America (a) $ 3,900,000 $ 2,508,556
Note payable to Bank of America (b) 3,388,889 3,500,000
Note payable to Bank of America (c) 500,000 500,000
Note payable to Associates First Capital Corporation (d) 522,259 991,204
Note payable to New Holland Credit Corporation (e) 5,002,595 3,027,133
----------- -----------
$13,313,743 $10,526,893
=========== ===========
(a) TTI has an $8.0 million revolving line of credit with Bank of America,
N.A. Amounts advanced under the line of credit bear interest at prime plus
.5% (approximately 6.5% at September 30, 2001), and are collateralized by
certain assets of TTI. The Company has guaranteed all obligations under
the TTI revolving line of credit. Availability under the line as of
September 30, 2001 amounted to approximately $4.1 million. TTI intends to
renew the revolving credit facility upon maturity in March 2002.
(b) TTI and SFP, jointly and severally, have a note payable to Bank of
America, which is guaranteed by a related party. The note requires monthly
interest payments at prime plus .5% (approximately 6.5% at September 30,
2001), is collateralized by substantially all the assets of SFP and
matures in March 2002 (see Note 11). TTI and SFP intend to renew the note
at maturity.
(c) SFP has a note payable to Bank of America, pursuant to a $500,000 line of
credit facility that expires in March 2002. Amounts advanced under the
line bear interest at prime plus .5% (approximately 6.5% at September 30,
2001) payable monthly, are collateralized by the assets of SFP and are
guaranteed by TTI and a related party (see Note 11). TTI intends to renew
the LOC at maturity.
(d) TTI has a floor plan agreement with Associates First Capital Corporation
to finance equipment. The agreement provides that interest accrues on an
individual unit basis with an average interest rate of prime minus .25%
(approximately 5.75% at September 30, 2001), and the equipment may be
financed for up to one year.
(e) TTI has a floor plan note with New Holland 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.
F-17
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The weighted average interest rate on short-term borrowings for the year
ended September 30, 2001 was approximately 4.03%.
The Company's discontinued operation, Overhill Farms, has debt in place that
restricts that Company's capital expenditures and specifies net worth levels,
minimum EBITDA and certain debt-to-equity and debt service ratios. In
addition, the terms of the agreements generally prohibit loans, dividends or
advances from the discontinued operation to the Company and limit payments of
taxes and other expenses to the Company from the discontinued operation to
specified levels. Additionally, the Company's discontinued operation is
required to pay their subordinated lenders annual consulting fees of
approximately $180,000. The Company's ownership of Overhill Farms is pledged
as collateral on these debt arrangements.
As of September 30, 2001, the Company's Overhill Farms subsidiary was in
violation of one of its financial covenants under two lending arrangements.
In January 2002, the Company obtained waivers of this violation from each
lender and amended each lending agreement, including the financial covenant
previously violated. The Company believes its Overhill Farms subsidiary
will be in compliance with all of its financial and other debt covenants
during the fiscal year ended September 30, 2002.
7. NOTES PAYABLE AND ACCRUED INTEREST TO RELATED PARTY
In connection with the acquisition of TTI in June 1994, the Company initially
issued a note to the seller (Mr. Harold Estes) in the amount of $10.0
million, with interest at 8% due October 31, 1994 and collateralized by all
the capital stock and certain assets of TTI. As of various maturity dates
thereafter, Mr. Estes has entered into subsequent agreements with the Company
to modify and extend the term of the note. As of September 30, 2001, the note
had a total unpaid balance of $20,861,367 (principal of $16,347,191 and
accrued interest of $4,514,176), bearing interest at 9% per annum with a
maturity date of October 10, 2002. 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 8
and 11).
Quantum Fuel and Refining, Inc. ("Quantum"), when acquired by SFP, had a note
payable to Mr. Estes. As of September 30, 2001, the note had a total unpaid
balance of $1,476,264 (principal of $1,000,000 and accrued interest of
$476,264), bearing interest at 12% per annum with a maturity date of
March 31, 2002, and collateralized by the assets of Quantum. In January 2002,
Mr. Estes extended the maturity date to October 31, 2002.
F-18
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. 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. The Board has designated a total of ten series of preferred stock
with various conversion prices, dividend rates and voting rights. All shares
of preferred stock generally have a redemption value and liquidation
preference of $10 per share and are callable by the Company at 105% of
redemption value.
During prior fiscal years, the holder of a series of preferred stock,
Infinity Investors Limited ("Infinity"), 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. Any additional conversions would have required 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 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 to matters
related to the ownership of the preferred stock. As a result of the
settlement, the Company realized a gain of approximately $351,000, related to
the difference between the carrying value of the preferred shares plus
accrued dividends and the settlement amount. Such amount was accounted for by
recording a reduction of the Company's accumulated deficit during the year
ended September 30, 2000.
Stock Options
Under the terms of the 1994 Employee Stock Option Plan (as amended) adopted
by the Board 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, 2001,
options for 775,000 shares were available for future grants under the Plan.
F-19
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the year ended September 30, 2001, the exercise price of options to
purchase an aggregate of 290,000 shares of the Company's common stock, which
were granted under the Plan during fiscal 1996, was reduced to $0.75 per
share from $2.00 per share. These options, held by Messrs. James Rudis,
Michael F. Buck, George R. Schrader and William E. Shatley, all of whom are
directors of the Company, together with options on an additional 80,000
shares granted to Messrs. Buck and Schrader under the Plan in 1998, and on
293,000 shares granted to Messrs. Rudis and Shatley under individual plans in
1993, were exercised in September 2001. These exercises were accomplished
through the issuance of 2-year promissory notes to the Company in an
aggregate amount of $497,250, bearing interest at 3.82% and collateralized by
the shares issued. No compensation expense has been recorded in connection
with these repricings as the options were repriced above fair market value.
A summary of changes in common stock options during the three years ended
September 30, 2001, is as follows:
Number of Exercise Weighted Avg.
Shares Price Exercise Price
------------ -------- --------------
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
Granted 125,000 $ .4375 $ .4375
-------- ------------- ----------
Outstanding, September 30, 2000 803,000 $.4375 - 2.00 $ 1.15
Exercised (803,000) $ .4375 - .75 $ .70
-------- ------------- ----------
Outstanding, September 30, 2001 - - -
======== ============= ==========
Exercisable, September 30, 2001 - - -
Exercisable, September 30, 2000 803,000 $.4375 - 2.00 $ 1.15
Exercisable, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
F-20
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma 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, 2000 and 1999,
was estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions for grants for the
years ended September 30, 2000 and 1999, respectively: risk-free interest
rate of 5.99% and 4.86%; no dividends expected to be declared; volatility
factor of 0.82 and 0.92; and a weighted average expected life of 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 income or loss
during the years ended September 30, 2001, 2000 and 1999 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.
In November 1995, Pyrenees exercised certain of these options 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. After deducting principal payments on the note, the
remaining balance of $975,000 became uncollectible, and during fiscal 1999,
the 500,000 shares of common stock that secured this note were recovered
pursuant to certain litigation against Pyrenees and Mr. Tanner. This recovery
was 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 during fiscal 1999.
Warrants
The Company has warrants outstanding to purchase 500,000 shares of its common
stock at $1.50 per share, exercisable through September 2002.
In connection with the restructuring of certain indebtedness in 1997, the
Company issued warrants to purchase 420,000 shares of the Company's common
stock. The warrants covered 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 associated loan. During the year ended September 30, 2001, the Company
repurchased the unexercised warrants covering 210,000 shares exercisable at
$1.125 per share for total consideration of approximately $46,000.
F-21
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. INCOME TAXES
Income tax expense (benefit) consists of the following:
For the Years Ended
September 30,
-----------------------------------------------
2001 2000 1999
------ ------ ------
Continuing Operations:
Current:
Federal $(1,292,889) $(1,116,648) $(406,009)
State 46,242 38,861 (175,353)
----------- ----------- ---------
(1,246,647) (1,077,787) (581,362)
Deferred:
Federal 2,106,932 (2,252,663) 246,072
State - - 44,437
----------- ----------- ---------
2,106,932 (2,252,663) 290,511
----------- ----------- ---------
Total provision for continuing operations 860,285 (3,330,450) (290,851)
----------- ----------- ---------
Discontinued Operations:
Current:
Federal 1,344,141 1,164,943 706,009
State 1,600 1,600 229,234
----------- ----------- ---------
1,345,741 1,166,543 935,243
Deferred:
Federal (177,932) 178,663 (246,074)
State - - (44,437)
----------- ----------- ---------
(177,932) 178,663 (290,511)
----------- ----------- ---------
Total provision for discontinued operations 1,167,809 1,345,206 644,732
----------- ----------- ---------
Total provision for income taxes $ 2,028,094 $(1,985,244) $ 353,881
=========== =========== =========
F-22
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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:
For the Years Ended
September 30,
---------------------------
2001 2000 1999
---- ---- ----
Effective statutory tax expense 34.0% 34.0% 34.0%
Increase (decrease) in effective tax rate
resulting from:
Federal tax assessment - - (20.2)
State taxes, net of federal tax benefit (0.6) 0.2 (3.5)
Officer life insurance premiums, amortization of
goodwill, income allocable to subsidiary
warrant holder (13.0) (12.1) 1.0
Change in valuation allowance (70.8) 145.0 8.5
Other 3.1 - 0.5
Tax credits - - (0.7)
----- ----- ----
Effective tax expense (benefit) (47.3) 167.1 19.6
===== ===== ====
F-23
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of deferred tax balances are summarized as follows:
September 30,
-------------------------
2001 2000
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 753,804 $ 697,399
Inventory 246,752 231,831
Accrued expenses 425,925 511,156
Capital loss carryforwards 423,229 390,730
Net operating loss carryforwards 1,645,798 3,150,204
AMT and other credit carryforwards 516,324 465,072
Investment in partnerships 528,495 204,766
Fixed assets 519,664 264,220
---------- ------------
Total deferred tax assets 5,059,991 5,915,378
Valuation allowance (4,094,740) (2,805,409)
---------- ------------
Deferred tax assets 965,251 3,109,969
---------- ------------
Deferred tax liabilities:
Prepaid expenses (437,115) (273,490)
Intangibles (237,048) (547,916)
Investment in partnerships - -
Other (145,838) (214,563)
---------- ------------
Deferred tax liabilities (820,001) (1,035,969)
---------- ------------
Net deferred tax assets $ 145,250 $ 2,074,000
========== ============
At September 30, 2001, the Company has federal net operating losses available
for carryforward of approximately $3.8 million, which will expire in 2020.
The net deferred tax assets at September 30, 2001 relate to the Company's
discontinued operation. The Company has recorded a valuation allowance
against all of its net deferred tax assets that relate to its continuing
operations as of September 30, 2001, due to uncertainty with respect to the
future recoverability of such amounts.
F-24
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the Company. 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 seeking recovery through District Court proceedings.
Based upon the amounts expected to be recovered through protective refund
claims filed with the IRS for the tax periods ended 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 expensed $300,000 during the fiscal year
ended September 30, 1999, representing amounts considered not recoverable.
10.COMMITMENTS AND CONTINGENCIES
Commitments
SFP leases its facilities and equipment in Bon Wier, Texas. Future minimum
lease commitments under these noncancelable operating leases are
approximately $228,000 and $133,000 for fiscal years 2002 and 2003,
respectively. Certain of the leases provide for renewal options for periods
from 2001 to 2005 at substantially the same terms as the current leases.
Rent expense was approximately $326,000, $328,000 and $413,000 for the years
ended September 30, 2001, 2000 and 1999, respectively.
TTI relies on three suppliers for the majority of its new units and parts. As
of September 30, 2001, TTI had commitments to purchase inventory from these
suppliers amounting to approximately $237,000.
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,
2001, TTI's guarantees totaled approximately $3,720,000 on total customer
indebtedness of approximately $16,859,000. 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 on the accrual basis and is
usually held by the institution to meet reserve requirements. Funds held in
escrow by the lenders amounting to approximately $523,000 at September 30,
2001, are included in the consolidated balance sheet as restricted cash and
are fully offset by the Company's reserve for credit guarantees.
F-25
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
TTI has an interest in two unconsolidated partnerships. The total investment
in these partnerships at September 30, 2001 of approximately $484,000 is
included in other assets. TTI in prior years has guaranteed the debt of these
partnerships, which has been collateralized by assets of the partnerships. At
September 30, 2001, no guarantees were in effect for partnership debts.
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 lawsuits 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 March 2000, the District Court dismissed the plaintiffs' claims against
one of the Company's officers and directors and restricted the plaintiffs
from pursuing a number of their claims against the other defendants. The
Court also granted the remaining defendants leave to file motions for summary
judgment. Motions for summary judgment were thereafter filed. In November
2000, in a lengthy decision addressing the plaintiffs' claims against each of
the remaining defendants, the District Court granted the motions for summary
judgment, thereby disposing of all of the claims asserted by the plaintiffs.
The plaintiffs then filed a motion for rehearing, which the Court denied in
March 2001.
The plaintiffs have appealed these decisions to the United States Court of
Appeals for the Ninth Circuit. Appellate briefs have been filed by both
sides, but oral argument in the Court of Appeals has not yet occurred.
Recently, the plaintiffs requested the Ninth Circuit to enjoin the Company's
proposed spin-off of Overhill Farms. The Court of Appeals denied the
plaintiffs' request and directed them to address their request to the
District Court. The plaintiffs thereafter filed an application with the
District Court, which restrained the spin-off for a few days until a hearing
could be conducted with respect to the proposed spin-off. Following a hearing
at which counsel for all parties appeared, the District Court dissolved its
temporary restraining order, thereby allowing the Company to proceed with the
proposed spin-off. The plaintiffs have not yet appealed the most recent
decision by the District Court.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. However, management
believes (based, in part, on advice of legal counsel) that such litigation
and claims will be resolved without material effect on the Company's
financial position, results of operations or cash flows.
F-26
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. RELATED PARTY TRANSACTIONS
During April 1998, the Company filed suit against Mr. Paul Tanner, PLY
Stadium Partners, Inc. ("Stadium Partners"), and Pyrenees, related to the
nonpayment of indebtedness for significant advances made by the Company to
or on behalf of such parties in previous years. 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 the Company, as well as the stock and assets of Stadium Partners
and Pyrenees. This included the rights to 2,000,000 shares of the Company's
common stock owned by Pyrenees and held by Mr. Harold Estes as secondary
collateral. In connection with the recovery of the 2,000,000 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 reached an
agreement to settle the judgment. The settlement agreement provided, among
other things, for the defendants to execute and deliver assignments of
certain assets to the Company and to execute and deliver to the Company two
promissory notes totaling $450,000, which are collateralized by first or
second liens on real properties controlled by the judgment debtors. While
the total dollar value of the settlement amounts to slightly over $1.0
million, the amount that may be ultimately recoverable as a result of this
settlement is not presently determinable and will be recorded as income
only when collection is assured.
In September 2000, SFP acquired all of the outstanding common stock of
Quantum Fuel & Refining, Inc. from a related party. In connection with the
acquisition, SFP assumed a $1.0 million note and $356,000 of accrued
interest payable to Harold Estes, president and former owner of TTI (see
Note 7). As of September 30, 2001 and 2000, amounts outstanding under the
note including accrued but unpaid interest thereon were approximately $1.5
million and $1.4 million, respectively. The principal balance of the note,
plus any accrued but unpaid interest thereon, matures on March 31, 2002.
The former owner of Quantum is TTI's 25% minority partner in SFP. TTI's 25%
minority partner in SFP is a guarantor of TTI's and SFP's note payable to,
and SFP's revolving line of credit facility with, Bank of America, N.A.
(see Note 6). The father of TTI's 25% minority partner in SFP is a former
officer of SFP. As of September 30, 2001 and 2000, the Company has total
receivables of $685,000 and $684,000, respectively, from this former
officer of SFP or from companies owned or controlled by such officer, of
which approximately $188,000 at each balance sheet date is unsecured.
F-27
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 1999, TTI obtained a 49.99% limited partnership interest in a
construction related company, which is accounted for under the equity
method and is included in other assets. TTI does not participate in the
management of this partnership nor does it exercise control over the
partnership activities. As of September 30, 2001 and 2000, the Company had
sales contracts receivable of approximately $1.4 million and $306,000,
respectively, and accounts receivable of approximately $34,000 and $0,
respectively, due from the partnership and secured by equipment. These
receivable balances are included in related party receivables on the
accompanying consolidated balance sheets. During the fiscal years ended
September 30, 2001, 2000 and 1999, TTI recorded sales of approximately
$517,000, $722,000 and $622,092 to the partnership, respectively.
Additionally, during the fiscal years ended September 30, 2001, 2000 and
1999, TTI recorded income from the sale of equipment to and interest income
on receivables from the partnership of $94,000, $150,000 and $41,000,
respectively.
In connection with the purchase of TTI, the Company acquired a note
receivable from an officer of TTI. The note has been renewed and extended
each year since issuance and is collateralized by marketable securities. As
of September 30, 2001 and 2000, the balance outstanding was $363,234 and
$352,580, respectively, and the note has been classified as a noncurrent
related party receivable.
As of September 30, 2001 and 2000, approximately $497,000 and $496,000,
respectively, of related party receivables are represented by notes which
are no longer accruing interest. As of September 30, 2001 and 2000, the
Company has provided allowances for doubtful accounts of $345,000 and
$200,000, respectively, against all related party receivables as of those
dates. The Company expects the remaining amounts due under related party
receivables to be realized either through collection or receipt of related
collateral.
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September
30, 2001 and 2000, the insurance premium receivable was approximately
$600,000.
See Note 7 for discussion of the notes payable to Mr. Estes.
See Note 8 for discussion of options granted to the Pyrenees Group, a
related party.
See Note 8 for discussion of options exercised by directors of the Company
in exchange for notes receivable.
12. EMPLOYEE BENEFIT 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
F-28
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
is administered by an independent third party. Trustees for the plan are
the executive officers 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, 2001, 2000 and 1999 was
approximately $107,000, $179,000 and $329,000, respectively.
13. DISPOSITION OF SUBSIDIARIES
Overhill Farms, Inc.
In August 2001, the Company's Board of Directors approved a plan to
spin-off all of the Company's shares of Overhill Farms to the holders of
the Company's common stock. The transaction to effect the spin-off will
result in the issuance, expected to be a tax free dividend to the Company's
stockholders, of one share of Overhill Farms common stock for every two
shares of the Company's common stock owned on the record date of the
transaction as established by the Board. The Company is currently in the
process of completing all of the applicable steps necessary to effect the
spin-off transaction.
The operations of Overhill Farms have been reclassified as discontinued
operations in the accompanying consolidated statements of operations for
the three years ended September 30, 2001 and are summarized as follows:
For the Years Ended
-------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ------------- --------------
Net revenues $ 162,158,000 $ 145,418,000 $ 113,016,000
Gross profit 28,516,000 28,162,000 20,719,000
Operating income 9,483,000 10,813,000 7,384,000
Income before income taxes
and extraordinary item 3,409,000 5,128,000 1,647,000
Extraordinary item - early
extinguishment of debt, net
of income tax benefit of
$452,000 in 2000 - 838,000 -
Net income $ 2,242,000 $ 2,492,000 $ 1,002,000
F-29
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company's investment in Overhill Farms has been reclassified as net current
assets and as net long-term liabilities in the accompanying consolidated balance
sheets as of September 30, 2001 and 2000. The net assets of Overhill Farms as of
those dates, and, after deducting amounts allocable to the minority owner and
warrant holder, the Company's net investment in Overhill Farms, is summarized as
follows:
September 30,
------------------------------
2001 2000
------------- -------------
Assets:
Current assets $ 35,808,208 $ 39,017,160
Property, plant and equipment, net
of accumulated depreciation 4,819,092 4,209,474
Other assets 13,579,751 14,719,432
------------- -------------
Total assets 54,207,051 57,946,066
------------- -------------
Liabilities:
Current liabilities 18,536,541 17,698,455
Long-term debt, net 32,801,294 41,165,940
------------- -------------
51,337,835 58,864,395
------------- -------------
Net assets (deficit) of Overhill Farms 2,869,216 (918,329)
Net assets allocable to minority owner and
warrant holder (3,266,378) (2,806,175)
------------- -------------
Net investment (liability) $ (397,162) $ (3,724,504)
============= =============
F-30
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Polyphase Instrument Co.
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 fully
reserved the subordinated note receivable. As a result of this transaction,
the Company reported a loss from discontinued operations of approximately
$1.2 million for the year ended September 30, 1999.
PIC's operations (unaudited) for the year ended September 30, 1999 are
summarized as follows:
Net revenues $ 6,373,500
Gross profit 700,400
Operating income 59,300
Net income 24,000
F-31
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. PRO FORMA FINANCIAL INFORMATION (Unaudited)
In connection with the spin-off of Overhill Farms, the Company expects to
issue an unsecured promissory note to Overhill Farms in the amount of
approximately $8.0 million, representing an agreed upon payment for all net
amounts advanced to the Company by Overhill Farms. The note is expected to
be payable three years from the effective date of the spin-off and will
bear interest at a rate to be determined at the time of the spin-off.
Following is an unaudited pro forma presentation of the of the Company's
financial position following the spin-off, assuming the transactions
described above occurred as of September 30, 2001:
Balance
September 30, Issuance
2001 Spin-off of Note Pro Forma
-----------------------------------------------------------------------------------
Current assets $50,925,664 $(17,271,667) $ - $33,653,997
Property & equipment 3,860,094 3,860,094
Other assets 10,257,023 10,257,023
----------- ------------ ----------- -----------
$65,042,781 $(17,271,667) $ - 47,771,114
=========== ============ =========== ===========
Current liabilities $16,465,875 $16,465,875
Long-term liabilities 40,529,169 $(17,668,829) $ 8,000,000 30,860,340
----------- ------------ ----------- -----------
56,995,044 (17,668,829) 8,000,000 47,326,215
Stockholders' equity 8,047,737 397,162 (8,000,000) 444,899
----------- ------------ ----------- -----------
$65,042,781 $(17,271,667) $ - $47,771,114
=========== ============ =========== ===========
F-32
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. ASSETS ACQUIRED
In September 2000, in exchange for approximately $400,000 of raw timber
inventory and the assumption of certain liabilities, SFP acquired all of
the outstanding common stock of Quantum from TTI's 25% minority partner in
SFP. Quantum's assets consist primarily of a non-operating crude oil
refinery and blending facility, along with certain other site amenities,
situated on approximately 120 acres of land in Egan, Louisiana. Liabilities
assumed in the Quantum acquisition included (a) a $1.0 million note and
$356,000 of accrued interest payable to Harold Estes (see Note 7), and (b)
certain environmental liabilities. As SFP has acquired Quantum for resale,
the Company has classified this investment as assets held for sale in the
accompanying consolidated balance sheet as of September 30, 2001 and 2000.
See Note 11 for related party transactions related to the acquisition of
Quantum.
16. APPROVAL OF SHAREHOLDER RIGHTS PLAN
On November 13, 2001, the Board of Directors approved a Shareholder Rights
Plan to be implemented in coordination with the proposed distribution by
the Company of all of its shares of common stock of Overhill Farms to the
shareholders of the Company. The Shareholder Rights Plan was adopted to
provide protection to shareholders in the event of an unsolicited attempt
to acquire the Company.
Pursuant to the Shareholder Rights Plan, the Company plans to distribute
preferred stock purchase rights (each a "Right") as a dividend at the rate
of one Right for each share of the Company's common stock held by
shareholders of record on a record date to be determined upon the
occurrence of certain specified events. Each share of common stock issued
after the record date will be issued with an attached Right. Each Right
entitles the holder, upon the occurrence of certain events, to purchase one
one-thousandth of a share of the Company's Series A Junior Participating
Preferred Stock at an initial exercise price of $4.00, subject to
adjustments. The Rights are exercisable only if a person or group acquires
20 percent or more of the Company's common stock or announces an intention
to commence a tender or exchange offer, the consummation of which would
result in ownership by such person or group of 20 percent or more of the
Company's common stock. In addition, if any person or group acquires 20
percent or more of the Company's common stock, each Right not owned by the
acquirer would become exercisable for the number of shares of the Company's
common stock that at the time have a market value of two (2) times the
exercise price of the Right. If, after any person or group acquires 20
percent or more of the Company's common stock, the Company is acquired in a
merger or other business transaction in which the Company is not the
surviving corporation, the Rights, under certain circumstances will be
modified so as to entitle the holder to buy a number of the acquiring
corporation's common stock having a market value of two (2) times the
exercise price of each Right. The Rights may be redeemed by the Board of
Directors until certain specified times at a redemption price of $0.01 per
Right, and may be amended by the Board at any time prior to becoming
exercisable.
F-33
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. INFORMATION BY INDUSTRY SEGMENT
The Company's business is concentrated in the East Texas forestry business
with operations in the segments described below.
EQUIPMENT, PARTS AND SERVICE
The equipment, parts and service segment operates equipment dealerships,
which sell major units, parts and repair services and finances the sale of
industrial and commercial timber and logging equipment in East Texas and
western Louisiana. Customers range from small logging operations to large
integrated timber related operations.
TIMBER AND WOOD PRODUCTS
The timber products segment includes sawmill operations and the treatment
and sale of lumber products.
F-34
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2001
-------------------------------------------------
Equipment, Timber and
and Parts Wood
Service Products Total
------------- -------------- ------------
Net Sales:
Sales to unaffiliated customers $32,591,941 $ 10,703,603 $43,295,544
=========== ============ ===========
Operating income $ 237,271 $ 433,488 $ 670,759
=========== ============
General corporate expenses (789,595)
Interest expense (2,405,665)
Interest income and other 764,051
-----------
Loss before income taxes and
discontinued operations $(1,760,450)
===========
Identifiable assets:
Segment assets $ 41,943,475 $ 5,486,549 $47,430,024
============ ============
Corporate assets 17,578,815
Eliminations 33,942
-----------
Total assets $65,042,781
===========
Capital expenditures, net:
Segment $ 309,117 $ 395,277 $ 704,394
============ ============
Corporate -
-----------
Total capital expenditures, net $ 704,394
===========
Depreciation and amortization:
Segment $ 763,422 $ $ 156,150 $ 919,572
============ ============
Corporate 2,500
-----------
Total depreciation and amortization $ 922,072
===========
No customer accounted for more than 10% of the Company's sales in fiscal 2001.
F-35
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
-------------------------------------------------
Equipment, Timber and
and Parts Wood
Service Products Total
------------- -------------- ------------
Net Sales:
Sales to unaffiliated customers $ 35,079,971 $ 8,976,753 $ 44,056,724
============ =========== ============
Operating income $ 938,367 $ (717,606) $ 220,761
============ ===========
General corporate expenses (481,904)
Interest expense (2,521,019)
Interest income and other 1,216,804
------------
Loss before income taxes and
discontinued operations $(1,565,358)
============
Identifiable assets:
Segment assets $ 39,495,972 $ 4,943,551 $ 44,439,523
============ ===========
Corporate assets 24,666,061
Eliminations 417,080
------------
Total assets $ 69,522,664
============
Capital expenditures, net:
Segment $ 168,881 $ 140,899 309,780
============ ===========
Corporate -
------------
Total capital expenditures, net $ 309,780
============
Depreciation and amortization:
Segment $ 800,384 $ 103,535 903,919
============ ===========
Corporate 7,799
------------
Total depreciation and amortization $ 911,718
============
No customer accounted for more than 10% of the Company's sales in fiscal 2000.
F-36
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
-------------------------------------------------
Equipment, Timber and
and Parts Wood
Service Products Total
------------- -------------- ------------
Net Sales:
Sales to unaffiliated customers $ 38,365,377 $ 7,447,007 $ 45,812,384
============ =========== ============
Operating income $ 1,223,005 $ 267,007 $ 1,490,012
============ ===========
General corporate expenses (380,798)
Recovery of related party receivables 656,250
Interest expense (3,740,921)
Interest income and other 492,684
------------
Loss before income taxes and
discontinued operations $(1,482,773)
============
Identifiable assets:
Segment assets $ 44,731,523 $ 5,117,633 $ 49,849,156
============ ===========
Corporate assets 17,926,277
Eliminations 331,952
------------
Total assets $ 68,107,385
============
Capital expenditures, net:
Segment $ 410,871 $ 593,029 1,003,900
============ ===========
Corporate -
------------
Total capital expenditures, net $ 1,003,900
============
Depreciation and amortization:
Segment $ 775,159 $ 7,516 $ 782,675
============ ===========
Corporate 1,061,711
------------
Total depreciation and amortization $ 1,844,386
============
No customer accounted for more than 10% of the Company's sales in fiscal 1999.
F-37
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. QUARTERLY FINANCIAL DATA (Unaudited)
For the Year Ended September 30, 2001
--------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------------- ----------------- ----------------- ------------------
Net revenues $ 8,250,086 $ 8,679,922 $12,830,395 $13,535,141
Gross profit 1,954,203 2,150,734 2,114,830 1,679,792
Operating income (loss) (123,136) (137,764) 78,241 17,330
Net income (loss) before
discontinued operations (103,893) (139,130) 65,733 (2,443,446)
Discontinued operations 267,846 492,344 573,785 205,156
Net income (loss) $ 163,953 $ 353,214 $ 639,518 $(2,238,290)
=========== =========== =========== ===========
Net income (loss) per
common share $ .01 $ .02 $ .04 $ (.13)
=========== =========== =========== ===========
For the Year Ended September 30, 2000
--------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------------- ----------------- ------------------ ------------------
Net revenues $10,280,892 $10,906,675 $ 9,444,673 $13,424,484
Gross profit 2,375,838 2,555,259 1,910,455 480,894
Operating income (loss) 288,594 370,829 (170,379) (750,187)
Net income (loss) before
discontinued operations (110,608) 313,647 275,257 1,286,796
Discontinued operations 99,520 497,588 750,116 709,030
Net income (loss) $ (11,088) $ 811,235 $ 1,025,373 $ 1,995,826
========== =========== =========== ===========
Net income (loss) per
common share $ - $ .05 $ .06 $ .12
========== =========== =========== ===========
F-38
OVERHILL CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY BALANCE SHEETS
September 30,
------------------------------------
2001 2000
---------------- --------------
Current assets:
Cash $ 190,084 $ 353,184
Prepaid expenses and other 96,544 -
Net current assets of discontinued operations 17,271,667 21,318,705
---------------- --------------
Total current assets 17,558,295 21,671,889
Property and equipment 20,191 50,191
Less accumulated depreciation (18,981) (46,481)
---------------- --------------
1,210 3,710
Noncurrent assets:
Deferred federal income taxes - 2,075,334
Income tax receivable 6,724,954 6,654,314
Other assets (primarily investment in subsidiaries) 23,333,058 23,231,204
---------------- --------------
Total assets $ 47,617,517 $ 53,636,451
================ ==============
Current liabilities:
Accounts payable $ 350,904 $ 62,780
Accrued expenses 30,250 27,250
Deferred income taxes 658,430 -
---------------- --------------
Total current liabilities 1,039,584 90,030
Noncurrent liabilities:
Note payable and accrued interest
payable to related party 20,861,367 19,390,120
Net noncurrent liabilities related to discontinued
operations 17,668,829 25,043,209
---------------- --------------
Total liabilities 39,569,780 44,523,359
---------------- --------------
Stockholders' equity:
Common stock 186,155 178,125
Paid-in capital 28,156,204 27,650,734
Accumulated deficit (19,797,372) (18,715,767)
Notes receivable (497,250) -
---------------- --------------
Total stockholders' equity 8,047,737 9,113,092
---------------- --------------
$ 47,617,517 $ 53,636,451
================ ==============
See note to condensed financial information of registrant.
F-39
OVERHILL CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
------------------------------------
2001 2000
--------------- ---------------
Net revenues $ - $ -
Cost of sales - -
--------------- ---------------
Gross profit - -
Selling, general and administrative expenses 789,479 481,789
--------------- ---------------
Operating income (loss) (789,479) (481,789)
Other income (expense):
Interest expense (1,472,493) (1,499,662)
Interest income and other 80,000 118,371
--------------- ---------------
Total other expense (1,392,493) (1,381,291)
--------------- ---------------
Loss before income taxes, equity in net income of
subsidiaries and discontinued operations (2,181,972) (1,863,080)
Income taxes (benefit) 652,930 (3,523,064)
--------------- ---------------
Income (loss) before equity in net income of subsidiaries
and discontinued operations (2,834,902) 1,659,984
Equity in net income of subsidiaries 214,166 105,108
--------------- ---------------
Net income (loss) before discontinued operations (2,620,736) 1,765,092
Discontinued operations, net of income taxes 1,539,131 2,056,254
--------------- ---------------
Net income (loss) (1,081,605) 3,821,346
Gain on reacquired preferred stock - 351,457
--------------- ---------------
Net income (loss) attributable to common shareholders $ (1,081,605) $ 4,172,803
=============== ===============
See note to condensed financial information of registrant.
F-40
OVERHILL CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
----------------------------------
2001 2000
--------------- -------------
Cash flow provided by (used in) operating activities:
Net income (loss) $ (1,081,605) $ 3,821,346
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 2,500 1,500
Equity in income of subsidiaries (214,166) (105,108)
Discontinued operations (1,831,342) (2,056,254)
Interest accrual on note payable to related party 1,471,247 1,475,278
Deferred income tax 2,637,220 (2,433,621)
Stock option granted for services - 54,689
Increase (decrease) in:
Receivables from sale of subsidiary - 780,000
Prepaid expenses and other (12,688) 9,000
Income tax receivable (1,566,640) -
Accounts payable and accrued expenses 416,124 (795,117)
--------------- -------------
Net cash provided by (used in) operating activities (179,350) 751,713
--------------- -------------
Cash flows provided by (used in) financing activities:
Exercise of common stock options 62,188 -
Repurchase of stock purchase warrants (45,938) -
Repurchase of preferred stock - (450,000)
--------------- -------------
Net cash provided by (used in) financing activities 16,250 (450,000)
--------------- -------------
Net increase (decrease) in cash (163,100) 301,713
Cash at beginning of year 353,184 51,471
--------------- -------------
Cash at end of year $ 190,084 $ 353,184
=============== =============
See note to condensed financial information of registrant.
F-41
OVERHILL CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY STATEMENTS OF CASH FLOWS
Note A - Basis of Presentation
In these 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 parent company income using the
equity method. In addition, the Company's investment in and the operations of
discontinued operations are separately stated in these financial statements.
These parent company only financial statements should be read in conjunction
with the Company's consolidated financial statements and the notes applicable
thereto.
Due to subsidiary debt covenant and other restrictions, the Company's ability to
obtain funds from its subsidiaries is limited. In addition, as discussed in
Note 11, the parent company's ownership of Texas Timberjack is pledged as
collateral against the note payable to related party. Additionally, the Company
has no operating revenues and may be highly dependent on its subsidiaries for
its liquidity needs.
F-42
OVERHILL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Costs Balance at End
Description Beginning of Period and Expenses Deductions of Period
- -------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,578,359 $ 541,764 $ 460,252(1) $ 1,659,871
------------ ------------ ------------ ------------
Total $ 1,578,359 $ 541,764 $ 460,252 $ 1,659,871
============ ============ ============ ============
Year Ended September 30, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,782,887 $ 272,719 $ 477,247(1) $ 1,578,359
------------ ------------ ------------ ------------
Total 1,782,887 $ 272,719 $ 477,247 $ 1,578,359
============ ============ ============ ============
Year Ended September 30, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 719,363 $ 1,141,793 $ 78,269(1) $ 1,782,887
------------ ------------ ------------ ------------
Total $ 719,363 $ 1,141,793 $ 78,269 $ 1,782,887
============ ============ ============ ============
(1) Uncollectible accounts written off, net of recoveries
F-43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OVERHILL CORPORATION
By: /s/ James Rudis January 11, 2002
---------------------
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 January 11, 2002
- ------------------------------
James Rudis
Chief Executive Officer,
Chairman of the Board and
President (Principal Executive
Officer)
/s/ William E. Shatley January 11, 2002
- ------------------------------
William E. Shatley
Senior Vice President, Secretary,
Treasurer, Chief Financial Officer
and Director (Principal Financial
and Accounting Officer)
/s/ Michael F. Buck January 11, 2002
- ------------------------------
Michael F. Buck
Director
/s/ Donald J. Ervin January 11, 2002
- ------------------------------
Donald J. Ervin
Director
/s/ George R. Schrader January 11, 2002
- ------------------------------
George R. Schrader
Director
35