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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16885 DALLAS PARKWAY, SUITE 400
DALLAS, TEXAS 75248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 732-0010
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
COMMON STOCK, $.01 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes _______ No X
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based on the closing price of such stock on December 31, 1996, was
approximately $45.1 million. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and 10% beneficial owners are affiliates. As of
December 31, 1996, the registrant had issued and outstanding 13,664,109 shares
of the Company's common stock, $ .01 par value.
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POLYPHASE CORPORATION
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Description of Business 1
Item 2 Description of Property 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation 14
Item 8 Financial Statements 19
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 19
PART III
Item 10 Directors and Executive Officers of the Registrant 20
Item 11 Executive Compensation 23
Item 12 Security Ownership of Certain Beneficial Owners and Management 25
Item 13 Certain Relationships and Related Transactions 27
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The Company is a diversified holding company that, through its subsidiaries,
currently operates primarily in three industry segments: the forestry segment,
which distributes, leases and provides financing for industrial and logging
equipment (the "Forestry Group"); the food processing segment, which produces
high quality entrees, plated meals, soups, sauces and poultry, meat and fish
specialties (the "Food Group"); and the transformer segment, which manufactures
and markets electronic transformers, inductors and filters (the "Transformer
Group"). The Company was incorporated in New Jersey in 1963 under the name
Kappa Networks, Inc. In June 1991, through a merger with a wholly owned
subsidiary, the Company reincorporated in Pennsylvania and formally changed its
name to Polyphase Corporation. In June 1994, the Company, through a merger with
a wholly owned subsidiary, reincorporated in Nevada.
During 1993, under the direction of a new management team, the Company
embarked on an aggressive long-term program to diversify its activities and
expand its operations. At that time, the Company's sole operating entity was
Polyphase Instrument Co. ("PIC"), which conducts the Company's transformer-
related activities. PIC, active since 1956, manufactures and sells customized
transformers and communications filters, primarily to defense contractors and
their suppliers.
In connection with the Company's program of diversification and expansion, a
number of acquisitions were consummated during fiscal 1993, 1994 and 1995:
. Computer-Related Activities ("Computer Group") Through various
transactions in fiscal 1993 and 1994, the Company acquired the operations of
several computer-related companies which were engaged in the computer marketing,
service and networking business and in software development. These operations
were all purchased from individuals and were generally accomplished through the
issuance of shares of various series of the Company's convertible preferred
stock. All such preferred stock issued was subsequently converted into shares
of the Company's common stock. The Company, during fiscal 1996, relinquished
control of the Computer Group, first by contributing the stock of Network
America, Inc. ("NAI"), Letronix, Inc., dba Computer Systems Concepts ("CSC"), PC
Repair of Florida, Inc. ("PCR") and Register-Mate, Inc. ("RMI") to a wholly-
owned subsidiary, PC Networx America, Inc. ("PCNA") and selling 51% of PCNA to
an unrelated corporation; and by selling 100% of the stock of Micro
Configurations, Inc. to the same unrelated entity. No significant gain or loss
was recorded on the transactions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
. Taylor-Built Industries, Inc. ("TBI") In October 1993, the Company
acquired all of the outstanding capital stock of TBI from James T. Taylor in
exchange for 5,000 shares of Series B Preferred Stock, which were subsequently
converted into 50,000 shares of Common Stock. TBI, located in Dallas, Texas,
was a manufacturer and distributor of automotive aftermarket products. In
February 1995, the Company exchanged 100% of the common stock of TBI for
200,000 restricted shares of a publicly-held Company; such shares were sold in a
private transaction in fiscal 1996. No significant gain or loss was recorded on
these transactions.
. Dallas Parkway Properties Inc. ("DPPI") The Company, during October 1993,
acquired from Weldon Hays all the outstanding stock of DPPI in exchange for
100,000 shares of Series D Preferred Stock, which were subsequently converted
into 250,000 shares of Common Stock. At the time of the acquisition, DPPI was a
single-asset Texas corporation that owned (subject to related indebtedness) a
40,000 square foot office building in Dallas, Texas, which is used as the
Company's corporate headquarters. Ownership of the property was subsequently
conveyed to the Company.
1
. Texas Timberjack, Inc. ("TTI") In June 1994, the Company acquired all of
the outstanding capital stock of TTI from Harold Estes. TTI, with locations in
Lufkin, Jasper, Cleveland and Atlanta, Texas, is a distributor of industrial and
logging equipment in East Texas and Western Louisiana. The capital stock of TTI
was acquired from Mr. Estes in consideration of approximately $4,000,000 in
cash, a $10,000,000 promissory note payable to the order of Mr. Estes, due
December 31, 1997 (as modified, renewed and extended), and 100,000 shares of
Series A Preferred Stock, which were subsequently converted into 2,000,000
shares of Common Stock.
. Overhill Farms, Inc. ("Overhill") In May 1995, the Company acquired all
the operating assets of IBM Foods, Inc. The purchase, which was accomplished
through Overhill, a newly-formed subsidiary of the Company, provided for cash
payment to the seller of $31.3 million plus the assumption of certain
liabilities of the acquired business. Overhill, located in Culver City,
California, is a food processor that produces high quality entrees, meals, soup,
sauces and poultry, meat and fish specialities primarily for customers in the
weight loss, airline and restaurant chain industries.
PRODUCTS AND SERVICES
Food Group
The Food Group, through Overhill, is a value-added manufacturer of quality
frozen food products including entrees, plated meals, soups, sauces, poultry,
meat and fish specialities. Overhill's strategy has been to position itself as a
short run provider to a number of prominent customers such as American Airlines,
Jenny Craig International, United Airlines, Albertsons, Price Costco and King's
Hawaiian. Historically, Overhill has served four industry segments: airlines,
weight loss, food service and retail.
Forestry Group
The Forestry Group is a distributor of industrial and logging equipment with
locations in Lufkin, Jasper, Cleveland and Atlanta, Texas. TTI carries the
Timberjack, Blount and Hyundai lines of industrial and logging equipment and the
New Holland line of farm equipment. TTI is involved in the sale, leasing, and
financing of the equipment it distributes as well as the servicing of all major
brands of related equipment. TTI's operations are primarily concentrated in the
forested areas of East Texas although its market extends to surrounding states.
TTI operates in a fragmented industry where its major competition is from
distributors and dealers of Caterpillar and John Deere equipment. TTI estimates
that it currently holds 60% of the shear (a machine that cuts the timber)
market, 50% of the skidder (machine which transports the logs out of the forest
to a loader) market and approximately 70% of the loader (machine that stacks
trees on trucks) market in Texas.
Transformer Group
The Company's Transformer Group currently consists of PIC. Transformers are
electromagnetic mechanisms used in a wide variety of electronic and electro-
mechanical applications to convert electrical currents from one voltage level to
another. The Transformer Group's products include power transformers used in
direct current power supplies; audio transformers used in voice and audio signal
circuits for transferral of low level, precise signals; pulse transformers used
in radar, digital signaling and computer applications; telephone modem
transformers used in telephone circuits; and ferro-resonant transformers used in
computers and stabilized power systems. PIC manufactures a large line of
transformers ranging from miniaturized versions to oil-filled units, with power
levels ranging from microwatts to over 20 kilowatts, voltage levels of up to 20
kilovolts and currents ranging from micro-amperes to 700 amperes. PIC's
communications filters are electronic, frequency-selective devices that isolate
and permit the passage through electronic equipment of selected information
carried by electrical energy. Such filters include filter chokes and low pass,
bank pass and high pass filter-to-signal circuits that separate frequencies from
one another. Filter sales currently account for only a small portion of the
transformer group's total sales. PIC supplies products to meet its customers'
exact specification requirements. Specifications include frequency response and
temperature range; energy loss; and voltage, current, and energy levels.
2
SALES AND MARKETING
Food Group
Overhill markets its products through an internal sales force and outside food
brokers. While Overhill will continue to service the airline and weight loss
segments, current management has identified the retail and food service markets,
particularly the emerging home meal replacement market, as areas of potential
significant future growth. Overhill management has restructured its sales force
and redirected its marketing efforts to concentrate on these markets. During
fiscal 1996, Overhill began to see the effects of these efforts with products
under both the Overhill brand and under private label now being sold in major
retail and food service chains.
Approximately 83% of Overhill's sales in fiscal 1996 were derived from six
customers, two of which accounted for approximately 51% of its total sales,
Jenny Craig, Inc. (39%) and American Airlines (12%). On a consolidated basis
Jenny Craig, Inc. and American Airlines represented approximately 26% and 8% of
Company total sales, respectively. Although the Company considers its
relationships with these customers to be good, there can be no assurance that
these relationships will continue as presently in effect. A decline in the
sales of the Food Group's products to these six customers or the loss of, or a
significant change in the relationship between the Company and any of these key
customers could have a material adverse effect on the Company's business and
operating results. It is management's objective to reduce the reliance on this
concentration of accounts by further expansion into the retail service markets
described above.
Forestry Group
TTI currently maintains sales and distribution offices in Lufkin, Jasper,
Cleveland and Atlanta, Texas primarily to serve Eastern Texas and Western
Louisiana. Sales are generated through repeat customers, advertisements in
various trade publications and direct marketing calls on companies located in
the area. A general sales manager and branch managers supply technical and
operational support at the Lufkin headquarters while nine sales have direct
responsibility for customer relationships. TTI meets customers' orders for new
equipment and replacement parts out of existing inventory or through purchase
orders placed with the manufacturers TTI currently represents.
Approximately 45% of TTI sales during fiscal 1996 are from new equipment sold
to companies involved in the forestry industries. Additional revenues are
derived from sales of used equipment (11%), servicing of equipment (5%), sales
of parts (17%) and financing equipment sales (22%). No single customer accounts
for more than 10% of TTI's sales. Equipment sales are typically financed by TTI
for periods ranging from 12 to 24 months at interest rates ranging from 12% to
18% per annum.
Transformer Group
The Company sells transformers and filters directly to customers and through
commissioned sales representatives principally in the Mid-Atlantic and Northeast
regions of the United States. As of September 30, 1996, PIC had an in-house
sales and marketing staff of two full-time employees. To obtain new business,
PIC relies on referrals from the existing customer base, advertisements in
various trade journals and leads generated from its reputation .
Approximately 83% of the transformers and filters sold by PIC are components
of systems used by the United States Armed Forces. Most of the remaining 17% is
utilized in various industrial processing systems and commercial avionics.
Major projects in which PIC's products are currently used include the United
States Navy's Aegis Destroyer, Airborne Self Protection Jammer and new nuclear
attack submarine as well as the United States Army's Bradley Infantry Fighting
Vehicle and PLGR Global Positioning System Receiver. Approximately 5% of PIC's
sales from these operations in fiscal 1996 were direct spares procurement from
various government activities.
PIC's products are sold to approximately 200 active accounts, principally
defense contractors and their suppliers. Nine customers accounted for
approximately 76%, 78% and 84% of PIC's sales for fiscal 1996, 1995 and 1994,
respectively, which percentages represented approximately 1%, 2% and 12% of the
Company's
3
consolidated sales, respectively. Four accounts now have 12% to 14% of PIC's
overall sales each. These four accounts are Lockheed Martin, Rockwell
International, Eaton Corporation and ITT Avionics.
MANUFACTURING AND SOURCING
Food Group
Overhill's manufacturing operations are located in three separate facilities
in Los Angeles, California. The operations are labor intensive requiring semi-
skilled employees. All manufacturing employees are unionized with contracts
covering each plant and due to expire at various times over the next three to
six years. Management believes relations with the unions are excellent and does
not anticipate any problems which would affect future production. Each plant
specializes in different processing operations allowing efficiencies in
production of the product. In fiscal 1996, the plants each operated at
approximately 70% of capacity.
The Company's ability to produce economically a large quantity of product,
while at the same time maintaining a high degree of quality, depends in a large
part on its ability to procure raw materials on a reasonable basis. The Company
relies on a few large suppliers for its poultry products with the remaining raw
materials purchased from suppliers in the open market. The Company does not
anticipate any difficulty in acquiring these materials in the future. The
Company maintains three dry warehouses and one frozen warehouse to supply
ingredients, raw materials and packaging for production. Finished goods are
stored on site or in a public frozen food storage facility until shipment is
required.
Transformer Group
PIC operates a manufacturing facility in Fort Washington, Pennsylvania that
produces approximately 92% of the Transformer Group's transformers and all
filters. Transformers are also manufactured at a leased facility in Haiti. See
"Properties--Transformer Group."
The manufacturing process for PIC's transformers and filters is labor
intensive, involving mostly low-technology, manually operated machinery. The
process is not highly automated since PIC's products are custom designed to
customer specifications. Wherever economically feasible, operations are
automated. Given the nature of PIC's products and their end uses, PIC maintains
extensive test equipment for its quality control operation.
Raw materials used by PIC include ferrites, laminates, copper wire and
electronic components purchased in predesigned configurations. Substantially
all raw materials and components are purchased from domestic sources and are
widely available. PIC carries adequate inventories of raw materials and other
product components as required to meet open customer orders. To avoid the
impact of commodity price fluctuations on items such as copper wire, the Company
endeavors to quote prices to customers based upon the known costs of such
materials at the time of such quotation.
BACKLOG
Food Group
At September 30, 1996, Overhill had unfilled purchase orders aggregating
approximately $2,350,000, as compared to $2,222,000 at September 30, 1995.
Substantially all of the backlog is expected to be delivered to customers within
the following 12 month period. Overhill may experience variations in the
total amount of the backlog at any given date and, accordingly, Overhill's
backlog is not necessarily indicative of trends in the Company's business.
Orders are subject to changes in quantities or to cancellation with thirty days
notice without penalties to customers.
4
Forestry Group
As a dealer, servicer and financier of forestry equipment, TTI does not
maintain a backlog of orders. Equipment ordered by a customer that is not in
inventory takes approximately one to six weeks to be shipped from the
manufacturer or another representative.
Transformer Group
At September 30, 1996, PIC had unfilled purchase orders aggregating
approximately $1,200,000 as compared to $700,000 at September 30, 1995. Orders
may be subject to cancellation at the customer's discretion subject to
substantial cancellation charges. Based on current delivery schedules and
shipments, management believes that the Transformer Group will ship
substantially all of its current backlog within the following 12 months. The
Transformer Group's backlog may not provide meaningful period-to-period
comparisons and such comparisons and the backlog may not be indicative of future
results.
PRODUCT DEVELOPMENT
Food Group
Overhill maintains a separate research, development and quality control
departments who formulate recipes and upgrade specific products for current
customers and establish production and quality standards. Products are
developed based upon either customers' specifications or recipes from the
marketing and research and development departments. Overhill is continuously
modifying recipes as customers' tastes change. During fiscal 1996, the Company
continued its expansion into the retail and food service areas with branded and
private label entrees.
Forestry Group
TTI does not develop products for sale to the public. TTI relies primarily
upon two suppliers, Timberjack, Inc. and Blount, for a majority of its new units
and parts.
Transformer Group
PIC does not maintain a formal research and development program, nor are
material amounts expended for research and development. However, PIC's
engineering, marketing and operations staff are regularly engaged in engineering
design and product development since most products are designed to customers'
specifications. Customers either supply PIC with design specifications or
submit proposed designs and require PIC to determine whether such designs will
meet the customers' performance specifications. PIC continuously modifies and
enhances its transformers and communication filters to accommodate its
customers' systems and equipment and, in this manner, attempts to increase its
market penetration.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company does not have patents or patent applications pending on any of its
products, although it may file such patent applications in the future. The
Company attempts to protect its proprietary interest in its products by entering
into non-disclosure agreements with customers.
The Company has registered the trademark "Polyphase" in the United States
Patent and Trademark Office.
5
REGULATION
The Food Group is subject to strict government regulation particularly in the
health and environmental areas by the United States Department of Agriculture
("USDA"), the Food and Drug Administration ("FDA"), Occupational Safety and
Health Organization ("OSHA") and the Environmental Protection Agency ("EPA").
The Food Group anticipates increased regulation by the USDA and FDA concerning
food processing and storage. The Company's food processing facilities are
subject to on-site examination, inspection and regulation by the USDA.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position. During 1996, the Company
implemented a Hazard Analysis Critical Point Plan to ensure proper handling of
all food items.
The Transformer and Forestry Groups are required to comply with various
governmental regulations and requirements concerning the discharge of materials
into the environment or otherwise relating to the protection of the environment.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position.
The Company takes all reasonable precautions to ensure that its operations,
processing plants and facilities operate in a safe, sanitary and
environmentally-sound manner. However, events beyond the control of the
Company, such as the adoption by the government of more stringent environmental
regulations could adversely affect its operations. Management believes that the
Company is in substantial compliance with all applicable laws and regulations
relating to the operations of facilities.
COMPETITION
General
Competition in the industries in which the Company operates generally is
intense. Many of the Company's competitors have greater market recognition and
greater, financial, technical, marketing and human resources than the Company.
There can be no assurance that the Company will compete successfully against
existing companies or new entrants to the marketplace. Furthermore, the
development by competitors of new or improved products, services and/or
technologies may render the Company's products or services (or proposed products
or services) obsolete or less competitive.
Food Group
Overhill's food products, consisting primarily of poultry, pasta and to a
lesser extent beef and assorted related products, compete with those produced by
numerous regional and national firms. Many of these companies are divisions of
larger fully integrated companies including Tyson Foods, Hudson Foods and
ConAgra which have greater financial and marketing resources. Competition is
intense with most firms producing similar products for the fast food and retail
industries. Competitive factors include price, product quality, product
development, customer service and, on a retail basis, brand name recognition.
Overhill competes in this market by its ability to produce small/custom product
runs within a short time frame and on a cost effective basis.
Forestry Group
Competition in the Forestry Segment is highly fragmented in the Eastern Texas
and Western Louisiana area where TTI principally operates. In business for many
years, TTI believes it has established a strong local identity in its field with
a proven record of delivering equipment on a timely basis, providing
satisfactory financing and strong customer support and service. TTI is one of
only a few distributors of Timberjack and Blount forestry equipment in its
operating area. TTI has the added advantage of being a leading seller and
financier of various makes and models of used logging equipment. Principal
competitors include local John Deere and Caterpillar distributors.
6
Transformer Group
The business in which PIC is engaged is highly competitive, characterized by
ease of entry and intense regionally-based competition. Competition is based on
such factors as price, performance, reliability and product quality. The
Company believes that the reputation of PIC's engineering department and the
relationships it has established with its customers (having been in business
over 30 years) are important to its ability to compete successfully.
PIC competes directly with a number of manufacturers, primarily in the United
States, certain of which have financial and other resources substantially
greater than PIC. In addition, such manufacturers generally have more extensive
facilities than those that are, or in the foreseeable future may become,
available to PIC. In this market, changing governmental policies can rapidly
create or eliminate areas of competition and market share. There is no
assurance that PIC will be able to maintain or further increase its market
share.
EMPLOYEES
As of September 30, 1996, the Company had approximately 989 employees as
follows: 59 full-time employees at PIC in Pennsylvania, 74 full-time employees
in the Forestry Group, approximately 846 full-time employees in its Food Group
and 10 full-time employees in the corporate office. All subsidiaries presently
provide group health plans for their domestic employees and pay a portion of the
costs associated with such plans. TTI also maintains profit sharing plans for
its employees.
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ITEM 2. DESCRIPTION OF PROPERTY.
CORPORATE HEADQUARTERS
The Company's corporate headquarters are located at 16885 Dallas Parkway,
Dallas, Texas 75248 and contain approximately 40,000 square feet of office
space. This building is subject to a first priority lien mortgage held by
Comerica Bank-Texas. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
FOOD GROUP
Overhill leases three manufacturing facilities in the Los Angeles, California
area. Plant No.1 is located in Inglewood, California and has 39,000 square feet
of manufacturing area. Plants No. 2 and No. 3 are located in Vernon, California
and have 49,000 and 27,000 square feet of manufacturing area, respectively. In
addition to the manufacturing facilities, Overhill also leases two dry goods
warehouses of 13,500 and 11,500 square feet, a 7,700 square foot frozen storage
facility in Inglewood, California and 7,927 square feet of office space in
Culver City, California. While Overhill believes the existing facilities are
adequate to meet its requirements in the foreseeable future, the Company is
currently reviewing the cost effectiveness of consolidating all manufacturing
and administrative functions into one location.
FORESTRY GROUP
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas and
leases buildings in Cleveland and Atlanta, Texas. One building in Lufkin, Texas
has 38,500 square feet, of which 18,900 square feet comprise the shop area. The
other two buildings in Lufkin have 3,600 and 4,200 square feet and comprise the
wash rack and storage room, respectively. One building in Jasper, Texas has
10,000 square feet of which 6,600 square feet comprises the shop area. The
other building in Jasper has 900 square feet and is used as a wash and paint
room. The Cleveland building has approximately 1,800 square feet and is used as
a shop and for parts. The Atlanta building has approximately 7,500 square feet
and is used for parts sales.
During the year, Texas Timberjack completed the real estate transaction in
which Lowe's Home Centers, Inc. acquired the five acres on Loop 287 that was the
site of the Company's Lufkin operations. TTI relocated to its newly constructed
facilities on thirty-one acres located five miles south of Lufkin on Highway 59.
TRANSFORMER GROUP
PIC's domestic transformer and filter manufacturing operations are housed in a
44,000 square foot, leased, single-story facility in Fort Washington,
Pennsylvania, about 30 miles from Philadelphia. The lease for this facility is
due to expire in May 1998. PIC's foreign manufacturing operations are based in
an 8,400 square foot building in Port-au-Prince, Haiti, which is rented by PIC
on a month-to-month basis. Management believes that these facilities are in
suitable condition and are adequate for PIC's needs in the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS.
In January 1997, a suit was filed in District Court of Dallas County against
the Company by Rice Partners II, L.P., subordinated debt holders of Overhill.
The suit claims, among other things, that the Company breached covenants of the
subordinated debt agreement and refused to cure the defaults within a reasonable
period of time. The Company has filed a counter suit claiming Rice Partners II,
L.P. (i) refused to comply with verbal agreements to the indenture (ii)
conspired with the former general manager of Overhill to force the Company to
sell Overhill Farms at a distressed price in order to benefit Rice Partners II,
L.P. and (iii) caused the halting of trading of the Company's stock.
The Company is not a party to any other material pending litigation.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is listed on the American Stock Exchange under the symbol
"PLY." The following table sets forth the range of high and low sales prices
for the Common Stock on the American Stock Exchange for the periods indicated:
Fiscal 1997 High Low
----------- ----- ---
Quarter from October 1, 1996
to December 31, 1996 $ 7.4375 $ 3.8750
Quarter from January 1, 1997
to February 3, 1997 (1) $ 5.5000 $ 3.8125
Fiscal 1996 High Low
----------- ----- ---
Quarter from October 1, 1995
to December 31, 1995 $ 4.7500 $ 3.1250
Quarter from January 1, 1996
to March 31, 1996 $ 4.3750 $ 2.7500
Quarter from April 1, 1996
to June 30, 1996 $ 4.2500 $ 3.0625
Quarter from July 1, 1996
to September 30, 1996 $ 7.2500 $ 1.8750
Fiscal 1995 High Low
----------- ----- ---
Quarter from October 1, 1994
to December 31, 1994 $ 5.7500 $ 3.1250
Quarter from January 1, 1995
to March 31, 1995 $ 3.7500 $ 2.1250
Quarter from April 1, 1995
to June 30, 1995 $ 3.6250 $ 2.6875
Quarter from July 1, 1995
to September 30, 1995 $ 3.8750 $ 3.0625
- --------------------------------------------------------------------------------
(1) On February 3, 1997 the Company agreed with the American Stock Exchange,
Inc. to temporarily halt trading of its Common Stock pending the filing of this
annual report on Form 10-K for the fiscal year ended September 30, 1996.
The Company has never paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such
policy is, within the limitations and restrictions described below, subject to
change based on current industry and market conditions, as well as other factors
beyond the control of the Company.
11
The Company is restricted from paying dividends on its Common Stock pursuant
to the indenture (the "1999 Indenture") executed in connection with the issuance
of $4,000,000 in principal amount of 12% Senior Convertible Debentures due July
1, 1999 (the "1999 Bonds"), and is further restricted pursuant to the indenture
(the "1997 Indenture") executed in connection with the issuance of $1,500,000 in
principal amount of 12% Senior Convertible Debentures due December 1, 1997 (the
"1997 Bonds"). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." In general, the
1999 Indenture and the 1997 Indenture prohibit the Company from paying or making
within any 12-month period dividends or distributions on its Common Stock having
a value in excess of 50% of the consolidated net income of the Company, unless
each holder of the 1999 Bonds and 1997 Bonds receives an amount equal to its pro
rata portion of the dividend or distribution (on an as-converted into Common
Stock basis). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources."
On February 3, 1997, the closing sales price for the Company's Common Stock on
the American Stock Exchange was $3.8125 per share.
As of December 31, 1996, the Company estimates that there were approximately
2,200 beneficial owners of the Company's Common Stock, represented by 215
holders of record.
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
In November 1995, the Company sold in a private transaction to Infinity
Investors, Ltd. for $2,500,000, 250,000 shares of Series A-3 Preferred Stock
having an aggregate redemption value of $2,500,000 and convertible into 500,000
shares of common stock.
The shares of Preferred Stock described above were not registered under the
1933 Act and were issued by the Company in reliance on the exemptions provided
under Section 4(2) of the 1933 Act.
12
ITEM 6. SELECTED FINANCIAL DATA
The table set forth below is selected financial data for the Company for each
of the last five fiscal years. This information should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Consolidated Financial Statements and Notes included
elsewhere herein.
Fiscal Year Ended September 30
---------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
Income Statement Data: 1996 1995 1994 1993 1992
---------------------------------------------------------------
Revenues $ 149,541 $ 102,035 $ 24,970 $ 7,326 $ 5,563
Operating Income 6,665 6,752 355 390 (833)
Earnings (Loss) Before
Extraordinary Item and
Cumulative Effect of Change
in Accounting Principle (242) 3,286 (1,384) 852 (883)
Net Income (Loss) (242) 3,286 (1,017) 1,036 (883)
Income (Loss) per Common Share:
Before Cumulative Effect of
Extraordinary Item and Change
in Accounting Principle $ (.03) $ .26 $ (.28) $ .24 $ (.35)
Extraordinary Items .01 .05
Cumulative Effect of
Accounting Change .06
----------
Net Income (Loss) $ (.03) $ .26 $ (.21) $ .29 $ (.35)
=========== =========== ========== ========== ==========
Weighted Average Common
and Common Equivalent
Shares Outstanding 13,184,466 12,745,701 4,881,454 3,616,795 2,505,785
As of September 30
---------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 1996 1995 1994 1993 1992
---------------------------------------------------------------
Total Assets $ 94,179 $ 88,159 $ 37,975 $ 9,034 $ 3,904
Long-Term Debt - 27,230 5,259 169 620
Total Liabilities 68,991 66,335 23,618 1,740 1,926
Accumulated Income (Deficit) (1,488) (1,095) (4,381) (3,365) (4,400)
Stockholders' Equity 23,998 21,137 14,357 7,293 1,977
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Statements contained in this Form 10-K that are not historical facts,
including, but not limited to, the projections contained herein, are forward-
looking statements and involve a number of risks and uncertainties. The actual
results of the future events described in such forward-looking statements in
this Form 10-K could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Results of Operations
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995
For the year ended September 30, 1996 the Company's revenues increased
$47,506,000 (47%), to $149,541,000 from $102,035,000 in fiscal 1995. Operating
income for the year ended September 30, 1996 decreased $87,000 (1%) to
$6,665,000 from $6,752,000 in fiscal 1995. Net income to common shareholders
for the year ended September 30, 1996 was a loss of $392,000, a decrease of
$3,678,000 (112%) from net income of $3,285,599 in fiscal 1995. The increase in
revenues was attributable to the inclusion of Overhill for a full twelve months
in fiscal 1996 as compared to twenty one weeks in fiscal 1995, offset somewhat
by reduced sales at TTI and the Computer Group, control of the latter of which
was divested in July 1996. The decrease in net income to common stockholders
was attributable to increased interest expense from the Overhill acquisition,
the reduction of tax benefits available during the year, reduction of profits at
TTI, losses incurred by the Computer Group and dividends on the outstanding
preferred stock.
After evaluating the industry and growth potential of the Computer Group,
management determined current and future operating margins within the Computer
Group no longer met long term expectations. Consequently, in July 1996 the
Company sold a controlling interest in the Computer Group to an unrelated third
party. The sale of 51% of a newly-formed subsidiary whose sole assets
consisted of the capital stock of Network America, Inc., PC Repair of Florida,
Computer Systems Concepts, and Register Mate, Inc. occurred in July 1996. For
the year ended September 30, 1996 the Computer Group contributed revenues of
$10,398,000 and operating losses of $1,531,000. The Company in fiscal 1996
without the Computer Group would have realized revenues of approximately
$139,142,000 and operating income of $8,196,000.
Also during the fiscal year the Company reached an agreement to manage the
development and construction of a domed stadium in Las Vegas, Nevada. The
project is being developed by PLY Stadium Partners, Inc. ("Stadium Partners"), a
private investment firm headed by Mr. Paul A. Tanner, Chairman and Chief
Executive Officer of the Company. Preliminary design specifications for the
facility include accommodations for 85,000 and the ability to reduce capacity
for arena-style events. The Company's involvement will also include the
marketing of luxury suites, premium seating and sales of concessions,
sponsorships and other ancillary rights. The Company has funded $4,000,000 of
debt that (1) is convertible into a 14% economic interest in Stadium Partners
and (2) is guaranteed by Mr. Tanner and the Pyrenees Group, a private investment
firm controlled by Mr. Tanner. Beginning in January 1996, the Company began
recording a monthly fee for managing the project. For the twelve months ended
September 30, 1996, the Company accrued management and service revenues of
$2,550,000 and interest income of $790,000 related to the Company's activities
with Stadium Partners. At September 30, 1996, the total amount receivable from
Stadium Partners amounted to approximately $13.3 million, which includes the
convertible debt and managment fees discussed above as well as additional
advances made by the Company. The collectibility of this receivable, which is
currently approximatly $18 million, is dependent upon the success of the project
and/or performance under the guarantees referred to above. However, all such
amounts are guaranteed by Mr. Tanner and the Pyrenees Group.
On November 15, 1996, PLY Stadium Partners, Inc., through a newly-formed
partnership (the "Partnership"), purchased 62 acres in Las Vegas for the
development of the stadium and adjacent convention facility. Financing was
provided by a Lehman Brothers affiliate ("Lehman"), with the lender also
receiving 50% equity interest in the partnership. As a result of the new
partnership arrangement, Stadium Partners is precluded
14
from making any revenue distributions until permanent financing is arranged or
until revenues from the sale of luxury suites, premium seats and/or concession
rights are sufficient to repay the financing provided by Lehman. Stadium
Partners launched its marketing campaign in Las Vegas on January 15, 1997, but
by March 15, 1997, sales were insufficient to satisfy the Lehman repayment. As a
result of Stadium Partners' failure to make timely payment of its obligation to
Polyphase, the Company was required to establish a reserve of $3.34 million
against the income accrued, which after applicable taxes reduced net income by
$2.2 million. The reserve will be reduced as collections and distributions are
made pursuant to the Stadium Partners loan agreements. There can be no assurance
that payments will be made and the Company has discontinued accruing for
interest and management fees.
Sales in the Food Group increased $58,376,000 (145%) to $98,771,000 in fiscal
1996 from $40,395,000 for the twenty one week period during fiscal 1995 in which
the Company owned the Overhill operations. Overall sales have remained stable
during the year despite the turndown in the weight loss sectors and airline
sectors. Overhill's expansion into brand name entrees and restaurant specialty
products offset the sales decline in other sectors. Brand name frozen entrees
have begun to gain name recognition and sales momentum at the regional level
while specialty products for the restaurant industry are developing market
share in a competitive environment. Operating income for fiscal 1996 was
$6,260,000 as compared to $2,708,000 for the twenty one weeks of fiscal 1995.
Gross margins on sales increased while operating income as a percentage of
revenues decreased. The changes resulted from a change in the product mix as
more emphasis is placed on the higher margined specialty products which require
higher marketing and administrative expenses.
The Forestry Group sales decreased $8,531,000 (20%) from $42,778,000 in
fiscal 1995 to $34,247,000 in fiscal 1996. Operating income decreased
$1,651,000 (35%) from $4,691,000 in fiscal 1995 to $3,040,000 in fiscal 1996.
The decreases in revenues and operating income are attributable to unseasonable
weather in fiscal 1996, contributing to weaker timber prices and decreased sales
of logging equipment. The Company also incurred additional expenses while
moving its Lufkin location to a larger facility and opening a third sales office
in Atlanta, Texas. See "Business-Properties" and "Liquidity and Capital
Resources."
The Transformer Group sales decreased $54,000 (1%) from $3,603,000 in fiscal
1995 to $3,549,000 in fiscal 1996. Operating income also decreased $226,000
(75%) primarily due to higher general and administrative costs during the year
and the effects of a fire which closed the business for three weeks. The
Company anticipates revenues and operating income will continue to decrease over
the next few periods as the industry begins a slow decline due to innovations in
alternative sources of electro-mechanical devices.
The Computer Group as mentioned above was consolidated into PC Networx
America, Inc. and a 51% interest was sold July 1, 1996. Revenues for the nine
months of fiscal 1996 were $10,398,000 as compared to revenues of $15,259,000
for twelve months of fiscal 1995. The group incurred operating losses of
$1,530,000 in fiscal 1996 as compared to operating income of $549,000 in fiscal
1995. The decreases in revenue and losses in Computer Group were attributable
to inventory adjustments in the third quarter of fiscal 1996 and significant
declines in prices of memory and other components. These factors contributing
with the lower gross margins on "clone" computers resulted in management's
decision to sell a controlling interest in the group.
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended September 30,
1994
During fiscal 1995, the Company made its largest acquisition to date
purchasing substantially all of the assets of IBM Foods, Inc. of Los Angeles,
California through its Overhill subsidiary. Overhill is a leading provider of
portion entrees to the airline and weight loss industry and a processor of food
for the retail and wholesale industries.
Net sales for the Company increased $77,065,000 (308 %) from $24,970,000 in
1994 to $102,035,00 in fiscal 1995. The increase in sales was primarily
attributable to the Overhill acquisition during the 1995 fiscal year.
Operating income increased $6,396,000 (1800%) from $355,000 in fiscal 1994 to
$6,752,000 in fiscal
15
1995. Increased operating income was primarily the result of economies of scale
achieved through higher revenues and additional companies.
Sales in the Computer Group increased $4,960,000 (48%) from $10,300,000 in
fiscal 1994 to $15,260,000 in fiscal 1995, while operating income increased
$82,000 (18%) from $466,000 in fiscal 1994 to $549,000 in fiscal 1995. The
increase in revenue was largely attributable to a full year contribution by
Micro, PCR and RMI. The Computer Group also benefited from increased demand by
customers for hardware with increased processing power, networking upgrades, CD-
ROM kits, and Internet expertise. The significant interest initially shown by
the public over the Internet has compelled the Company to investigate potential
sales opportunities related to the Internet, which in the future may include the
sale and installation of hardware, and the development of, and programming
for, Internet sites.
Sales in the Transformer Group remained relatively flat due to the decreased
spending in military contracts. In fiscal 1995 sales increased $86,000 (2%)
from $3,517,000 in 1994 to $3,603,000 in fiscal 1995. Operating income improved
$86,000 (38%) as management continued to reduce staff and other selling general
and administrative expenses. The Company expects that, during the foreseeable
future, revenues in the Transformer Group will remain at approximately the same
level as fiscal 1995 with a slight decrease in operating profits.
The Forestry Group's sales increased $31,624,000 (283%) from $11,154,000 in
fiscal 1994 to $40,395,000 in fiscal 1995, while operating income increased
$3,815,000 (435%) from $ 876,000 in fiscal 1994 to $4,691,000 in fiscal 1995.
Most of the increase in sales was attributable to a full year's contribution of
TTI's results of operations in fiscal 1995 versus only three months in fiscal
1994. The remaining increase was due to a robust timber and logging market in
the East Texas region as wood prices remained firm through fiscal 1995. The
Forestry Group has attempted to increase its market share by aggressive sales
and marketing throughout the region and attractive financing packages.
The Food Group contributed sales of $40,395,000 and operating income of
$2,708,000 for the approximately five-month period during fiscal 1995 in which
the Company owned the Overhill operations.
LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity for the Company are cash flow from operations,
cash balances and additional financing capacity. The Company's cash and cash
equivalents decreased $2,994,000 to $281,000 at September 30, 1996 compared to
$3,275,000 at September 30, 1995.
The Company generated $2,775,000 cash from operations in fiscal 1996 as
compared to a use of $2,307,000 in fiscal 1995. The increase in cash flow from
operations results from larger increases in depreciation and amortization
expenses associated with the acquisition of Overhill, larger provision for
doubtful accounts in the current year over the prior year coupled with changes
in working capital items.
The Company's investing activities for the year ended September 30, 1996 used
cash of approximately $9,812,000 as compared to a use of cash (primarily due to
the Overhill acquisition) of $32,067,000 in the year ended September 30,1995.
During fiscal 1996 the Company's use of cash consisted primarily of advances to
Stadium Partners. In January 1996 the Company agreed to provide Stadium Partners
$4,000,000 of debt (bearing interest at 12%), convertible to a 14% economic
interest in Stadium Partners and guaranteed by Mr. Tanner and Pyrenees.
Additional advances were made during the year totalling approximately $9,271,000
consisting of cash advances of $5,931,000 and accrued revenue and interest of
$3,340,000; such accrued revenue and interest has been reserved at September 30,
1996. Effective October 1, 1996 the Company no longer accrues management fees or
interest income on the existing advances. The additional advances are subject to
the above guarantees and are currently due and payable by Stadium Partners.
Subsequent to September 30, 1996 the Company further advanced Stadium Partners
$4.9 million. The funds advanced consisted of $2.4 million, drawn from an
existing line of credit, and $2.5 million from a six month term note. The term
note bears interest at 16%, is payable monthly and is secured by a second lien
on the Company's headquarters. As additional collateral, the Company
16
agreed to issue an option on 500,000 shares of Series A-2 preferred stock
(convertible into 1,000,000 shares of common stock) which is exercisable upon
default of certain covenants of the agreement.
The Company's financing activities provided cash of $4,043,000 for the year
ended September 30, 1996 as compared to $36,612,000 cash provided in the year
ended September 30, 1995. During fiscal 1996, the Company placed $2,500,000 of
Series A-3 Preferred Stock. The Series A-3 Preferred Stock is entitled to a 12%
cumulative dividend payable quarterly and each share of Series A-3 Preferred
Stock is convertible by the holder from time to time into two shares of common
stock subject to certain adjustments. Also during the year the Company entered
into an agreement with Merrill Lynch whereby the Company sold the 1997 Bonds on
generally the same terms and conditions of the offering of the 1999 Bonds. The
1997 Bonds bear interest at 12% are payable semiannually in June and December,
are convertible into common stock at the rate of $5.00 per share and become due
and payable on December 1, 1997. The funds from these transactions were used,
in part, in the repayment of advances of $1,153,000 from related parties in
connection with the acquisition of Overhill and prepaying $750,000 on existing
Overhill term loans. On April 1, 1996 the Company utilized a line of credit for
approximately $6 million for an advance made to Stadium Partners.
During the year, TTI completed the real estate transaction in which Lowe's
Home Centers, Inc. acquired the five acres on Loop 287 that was the site of the
Company's Lufkin operations. TTI relocated to its newly constructed facilities
on thirty-one acres located five miles south of Lufkin on Highway 59. TTI
realized a gain of $875,000 on the transaction.
During 1995 the Company entered into a financing arrangement which provided a
senior credit facility of $18,000,000 and a subordinated debt placement of
$13,000,000. These funds were used to provide financing for the acquisition of
the net assets of IBM Foods, Inc.
The senior credit facility was provided by Finova Capital Corporation and
included a line of credit, of which approximately $9,700,000 was initially
drawn, and two term loans. Borrowings under the line of credit are limited to
the lesser of $12,000,000 or an amount determined by a defined borrowing base
which is based upon eligible receivables and inventory. At September 30, 1996
approximately $9,714,000 was outstanding under the revolving line of credit.
Term Loan A in the original amount of $2,000,000 is payable in monthly
installments of $33,333 plus interest at prime plus 2.5%. Term Loan B in the
original amount of $4,000,000 is payable in monthly installments of $83,333 plus
interest at prime plus 2.5%. The senior credit facility contains various
covenants which include, without limitation, a restriction on the permissible
capital expenditures of Overhill, specified current debt to net worth ratios,
specified levels of net worth and a limitation on the ability of the Company to
realize monies, including dividends, and management and consulting fees, from
Overhill to $250,000 per annum. Furthermore, the capital stock and substantially
all assets of Overhill are pledged as collateral for the credit facility.
The subordinated debt placement in the amount of $13,000,000 bears interest at
13% per annum, payable semiannually. Principal payments in the amount of
$6,500,000 each are due in April 2002 and 2003. The subordinated debt includes
warrants to purchase shares of Overhill (representing up to 22.5% of its common
stock) at any time over a ten-year period which ends May 5, 2005 for a nominal
exercise price of $100. The warrant holders also have the option to "put" the
warrants to the Company at a "put" price based upon the higher of fair market,
book or appraised value of the subsidiary. The "put option" becomes exercisable
anytime after May 5, 2000 or at any time Overhill experiences a change in
control or merges with another unaffiliated company. Additionally the Company
has the option of calling the outstanding warrants for cash at anytime after May
5, 2001. The call price is determined using the same formula as provided for
determining the "put" price of the warrants. The subordinated debt facility
contains covenants similar to those described in the senior credit facility. At
September 30, 1996 the Company's subordinated debt balance, net of discount, was
$12,596,000. The lender and the subordinated debt are subject to litigation as
described in Item 3.
In May 1994, the Company obtained a $1,000,000 term loan from Comerica Bank --
Texas, N.A. ("Comerica"), payable in equal monthly installments through maturity
in May 1999, at which time the unpaid balance of approximately $600,000 becomes
due and payable. The term loan with Comerica bears interest at an annual rate
of 8.5% and is collateralized by the building in which the Company maintains
its headquarters.
17
See "Properties--Corporate Headquarters." At September 30, 1996, the term loan
with Comerica had approximately $846,000 outstanding.
In connection with the acquisition of TTI, the Company sold $4,000,000 in
principal amount of the 1999 Bonds to Merrill Lynch World Income Fund, Inc. and
Convertible 1999 Holdings, Inc. (collectively, the "Purchasers" or "Merrill
Lynch"). The 1999 Bonds are convertible by a Bond holder at any time prior to
June 30, 1999 into such number of shares of Common Stock as is equal to the
principal amount of such Bond (or in $1,000 increments thereof) divided by $5.65
(such conversion price being subject to adjustment in certain instances). See
"Market for Common Equity and Related Stockholder Matters." The 1999 Indenture
requires the Company to maintain key-man life insurance policies on Paul A.
Tanner and James Rudis. The policies on each of Mr. Tanner and Mr. Rudis must
name as loss payee the trustee under the Indenture for the benefit of the 1999
Bond holders and must be in an amount at least equal to the principal amount of
the 1999 Bonds outstanding from time to time multiplied by the redemption price
in effect at such time.
In December 1995, the Company sold the 1997 Bonds to Merrill Lynch on
generally the same terms and conditions. The bonds are convertible by the Bond
Holder anytime prior to December 1997 into shares of Common Stock at a rate of
$1,000 increments divided by $5.00 per share.
In connection with the TTI acquisition, the Company also issued a non-interest
bearing note to Harold Estes for $10,000,000 due October 31, 1994, on which the
Company imputed interest at 8.0% per annum. The Company has since modified,
extended and renewed the note whereby the note currently having a balance
including accrued interest of $12,546,600 has been extended to December 1, 1997
bearing interest at 10% through June 30, 1997 and 16% thereafter. The Company
anticipates that it will be required to refinance this note payable on a long-
term basis and is presently in negotiations with potential lenders to accomplish
their goal. There is no certainty that Company will be able to refinance this
note on acceptable terms or at all, by December 1, 1997. The note holder has no
recourse to any of the assets or capital stock of Polyphase Corporation or any
of its other subsidiaries and no cross-default provisions exist between this
note and any other Polyphase debt.
TTI currently has an $11,000,000 line of credit at prime + 1/2% at Comerica
maturing on February 1, 1997 and extended on a month to month basis. The
agreement with Comerica relating to this line of credit contains various
restrictive covenants, including requiring TTI to maintain a tangible net worth
of $4,500,000, total debt divided by the tangible net worth of no greater than
4.0 to 1.0, fixed charged coverage of 1.5 to 1.0 and a minimum working capital
of $2,200,000. The balance at September 30, 1996 on the Comerica line of credit
was $8,900,000. The line has been extended for renewal pending receipt of
audited financial statements.
The Company has not complied with certain covenants involving the Rice,
Finova, Merrill Lynch, and Comerica loan agreements, including covenants that
restrict transactions with affiliates and requiring the filing of audited
financial statements for the Company and its subsidiaries on a timely basis. As
a result, the Company's debt has been classified as current as of September 30,
1996.
The Company is in the process of negotiating a transaction involving Overhill
that the Company expects will resolve the Rice lawsuit and improve the
Company's overall debt structure, but there can be no assurance that such
transaction will be consummated.
Accordingly, the Company's management believes that cash generated from the
proposed Overhill transaction and from operations, together with existing lines
of credit, will be sufficient to enable the Company to meet its liquidity
requirements for the next 12 months.
18
ITEM 8. FINANCIAL STATEMENTS.
See Index to Consolidated Financial Statements included in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company's independent accountants for fiscal 1994 were Price Waterhouse
LLP ("Price Waterhouse"). Price Waterhouse resigned as the principal
accountants for the Company on May 8, 1995. None of the reports of Price
Waterhouse on the financial statements of the Company for either of fiscal 1993
or 1994 contained an adverse opinion or a disclaimer of opinion, or were
qualified as to uncertainty, audit scope, or accounting principles. During the
Company's two most recent fiscal years and the subsequent interim period
preceding such resignation, there were no disagreements with Price Waterhouse on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures.
On May 31, 1995, Ernst & Young LLP ("Ernst & Young") was engaged as principal
accountants for the Company to, among other things, audit the financial
statements of the Company for fiscal 1995. The selection of Ernst & Young was
made by the Board of Directors upon recommendation of the Audit Review
Committee. Prior to its engagement, the Company did not consult with Ernst &
Young on either the application of accounting principles to a completed or
proposed specific transaction, or the type of audit opinion that might be
rendered on the Company's financial statements.
19
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 Positions
---- --- ---------
Paul A. Tanner 66 Chairman of the Board, President
and Chief Executive Officer
James Rudis 47 Executive Vice President and
Director
William E. Shatley 50 Senior Vice President, Chief
Financial Officer and Treasurer
Paul A. Tanner, Jr. 43 Director
Harold Estes 56 President of Texas Timberjack,
Inc.
and Director (1)
Michael F. Buck 57
Director
George R. Schrader 65 Director
- --------------------------------------------------------------------------------
(1) Mr. Estes resigned as director of Polyphase Corporation on April 5, 1997
PAUL A. TANNER was elected to the Board of Directors on December 21, 1992 and
has served as Chairman of the Board, President and Chief Executive Officer since
December 29, 1992. He served as Chief Financial Officer and Chief Accounting
Officer from December 29, 1992 until March 2, 1994. He has been a licensed
Texas Real Estate Broker for over 30 years and is President of Southland
Resources, Inc., a private investment firm. Since 1956, Mr. Tanner has been the
owner and Chief Executive Officer of several companies engaged in oil and gas
development, real estate development, computer manufacturing and the national
distribution of office and telecommunications products.
JAMES RUDIS was elected to the Board of Directors in December 1992 and has
served as Executive Vice President of the Company since March 2, 1994. He is
President of Quorum Corporation, a private consulting firm involved in
acquisitions and market development and has held that position since September
1984. From 1970 until 1984, he held various executive positions in CIT
Financial Corporation, including Vice President and Regional Manager of that
company's Commercial Finance Division.
WILLIAM E. SHATLEY was named as Senior Vice President and Treasurer of the
Company in March 1994. He joined the Company in an executive capacity in
October 1993, having previously served the Company on an advisory basis since
the relocation of its corporate offices to Texas in 1992. Mr. Shatley, a
Certified Public Accountant since 1970, previously conducted his own consulting
and accounting practice (1982-1993), after having served as Vice President and
Chief Financial Officer of Datotek, Inc., a manufacturer of electronic
communications security equipment (1977-1982) and in an executive capacity with
Arthur Andersen & Co. (1968-1977).
MICHAEL F. BUCK is President of Mimatian Co., an operations and materials
consulting firm. From August 1990 to August 1994, Mr. Buck served as Vice
President of Bath Iron Works, Inc., a company engaged in building Aegis Class
cruisers and destroyers for the United States Navy. From August 1989 to
August 1990, Mr. Buck was a Vice President of Sabreliner Corporation, a company
engaged in building, maintaining and
20
overhauling executive jet aircraft. From March 1986 to August 1989, Mr. Buck was
Vice President and Director of Procurement for International Telephone and
Telegraph. He became a director of the Company in December 1989.
GEORGE R. SCHRADER was appointed as a director in March 1994 to fill a vacancy
on the Board. He is currently a named member of Schrader & Cline, LLC, a
financial and governmental management consulting firm. From 1983 to 1993, he
was a principal of Schrader Investment Company, whose activities paralleled
those of Schrader & Cline, LLC. Mr. Schrader's additional experience includes
10 years as City Manager for the city of Dallas, Texas and a total of nine years
experience as City Manager for the Texas cities of Mesquite and Ennis.
PAUL A. TANNER, JR. was elected as a director in February 1996. He served as
a Vice President of the Company's wholly owned subsidiary Letronix, Inc. from
October 1993 until its sale in July 1996. From February 1990 to October 1993,
he served as Vice President of Southland Resources, Inc. a private investment
firm controlled by Paul A. Tanner. He is the son of Paul A. Tanner.
HAROLD ESTES was elected as a director in February 1996. He is the President
of Texas Timberjack, Inc. a wholly owned subsidiary of the Company. TTI is a
distributor of industrial and commercial timber and logging equipment with
locations in Lufkin, Cleveland, Atlanta and Jasper, Texas. Mr. Estes has been
President of TTI since 1984, when he acquired TTI from Eaton Corporation. On
April 5, 1997 Mr. Estes resigned from the Board of Directors.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board has standing Executive, Compensation and Audit Review Committees.
The Compensation Committee is comprised of Messrs. Buck and Schrader. During
fiscal 1996, the Compensation Committee met two times. The Compensation
Committee (i) administers the Company's employee stock option plans and approves
the granting of stock options and (ii) approves compensation for officers.
The Executive Committee is composed of Messrs. Tanner and Rudis. During
fiscal 1996, the Executive Committee met 10 times. Except as restricted under
Nevada law, the Executive Committee possesses all of the power and authority of
the Board of Directors between meetings of the Board of Directors.
The Audit Review Committee is composed of Messrs. Buck and Schrader. During
fiscal 1996, the Audit Review Committee did not meet. Its functions are to (i)
recommend the appointment of independent accountants; (ii) review the
arrangements for and scope of the audit by independent accountants; (iii)
consider the adequacy of the system of internal controls and review any proposed
corrective actions; and (iv)review and monitor the Company's policies regarding
business ethics and conflicts of interest.
The full Board of Directors met four times during fiscal 1996. No director
attended fewer than 75% of the total number of meetings of the Committee on
which such director served.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's directors, officers and persons who own more than 10
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the American Stock Exchange. Directors, officers and greater
than 10 percent beneficial owners are required by applicable regulations to
furnish the Company with copies of all forms they file with the Commission
pursuant to Section 16(a).
Based solely upon a review of the copies of forms furnished to the Company,
the Company believes that during fiscal 1996, all filing requirements
applicable to its directors, executive officers and greater than 10% beneficial
owners were satisfied, with the exception that (i) the Pyrenees Group failed to
report eleven transactions
21
on Form 4, which were reported on a Form 5 that was filed late, (ii) Paul A.
Tanner failed to report thirteen transactions that occurred during fiscal 1996
and prior fiscal years, which were reported on a Form 5 that was filed late and
on an amended Form 5 from a previous reporting year, (iii) Michael F. Buck
failed to report four transactions on Form 4, which were reported on a Form 5
that was filed late, (iv) Harold Estes failed to report one transaction on Form
4, which was reported on a Form 5 that was filed late, (v) Paul A. Tanner, Jr.
filed his Form 3 late and failed to report one transaction on Form 4, which was
reported on a Form 5 that was filed late, (vi) James Rudis failed to report
three transactions on Form 4, which were reported on a Form 5 that was filed
late (vii) William E. Shatley failed to report five transactions on Form 4,
which were reported on a Form 5 that was filed late and (viii) George R.
Schrader failed to report one transaction on Form 4, which was reported on a
Form 5 that was filed late.
22
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth for fiscal 1996, 1995 and 1994 compensation
awarded or paid to Mr. Paul A. Tanner, the Company's Chairman of the Board,
President and Chief Executive Officer and Mr. James Rudis, the Company's
Executive Vice President (collectively, the "Named Executive Officers"). Other
than as indicated in the table below, no executive officer of the Company
received salary plus bonus in excess of $100,000 for the year ended September
30, 1996.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------- ---------------
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation Options/SARs Compensation
- ------------------ -------- --------- --------- -------------- ---------------- ------------
Paul A. Tanner............... 1996 $196,560 $ 0 $ --(1) 130,000 $ -
President, Chief 1995 $187,200 $ 0 $ --(1) - $ -
Executive Officer and 1994 $166,200 $ 0 $ --(1) - $ -
Director
James Rudis.................. 1996 $120,960 $ 0 $ --(1) 130,000 $ -
Executive Vice 1995 $115,200 $ 0 $ --(1) - $ -
President and 1994 $ 96,300 $ 0 $ --(1) - $ -
Director
_______________
(1) Mr. Tanner and Mr. Rudis each received certain perquisites and other
personal benefits from the Company during fiscal 1996, 1995 and 1994.
These perquisites and other personal benefits, however, did not equal or
exceed 10% of Mr. Tanner's or Mr. Rudis', as the case may be, salary and
bonus during fiscal 1996,1995 or 1994.
The following table sets forth, for the Named Executive Officers,
information concerning individual grants of stock options made during the last
completed fiscal year ended September 30, 1996.
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
NUMBER OF SECURITIES % OF TOTAL OPTIONS/SAR'S FOR OPTION TERM
UNDERLYING OPTIONS/SAR'S GRANTED TO EMPLOYEE EXERCISE PRICE EXPIRATION -------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ----------------- ------------------------- ------------------------ --------------- ----------- --------- -----------
Paul A. Tanner 130,000 25.5% $2.00 7-22-06 423,800 674,375
James Rudis 130,000 25.5% $2.00 7-22-06 423,800 674,375
_______________
(1) The exercise price for each option is the fair market value of the Common
Stock on the date of grant, and such options are immediately exerciseable.
23
The following table describes for the Named Executive Officers options and
the potential realizable value for his options at September 30, 1996.
FISCAL YEAR END SEPTEMBER 30, 1996 OPTION/SAR VALUES
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs at Options/SARs at
September 30, 1996 September 30, 1996(1)
--------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ ------------- ----------- -------------
Paul A. Tanner.. 130,000 - $ 609,375 $ -
James Rudis..... 276,500 - $1,479,219 $ -
- ---------
(1) Based on $6.875 per share of Common Stock, which was the closing price per
share of Common Stock on September 30, 1996 on the AMEX as reported by The
Wall Street Journal.
DIRECTOR COMPENSATION
Directors who are also employees of the Company receive no additional
compensation for services as directors. Nonemployee directors receive an annual
fee of $1,000 and are also reimbursed for all expenses incident to their service
on the Board of Directors.
During July 1996, the following directors were granted options to
purchase Common Stock, exercisable at $2.00 per share (the fair market value at
the date of grant) in whole or in part, expiring in July 2006, as follows:
Name Option Shares
------------------ -------------
Michael Buck 30,000
George R. Schrader 30,000
Paul A. Tanner, Jr. 30,000
In March 1994, Mr. Schrader was granted options to purchase 50,000
shares of Common Stock. Mr. Schrader's options are exercisable at $5.25 per
share (the fair market value at the date of grant), in whole or in part, and
will expire in March 1999.
During July 1993, Mr. Buck was granted options to purchase 75,000
shares of Common Stock. Mr. Buck's options, are exercisable at $0.75 per share
(the fair market value at the date of grant), in whole or in part, and will
expire in July 1998.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of Common Stock as of December 31, 1996 by each person or group who
owned, to the Company's knowledge, more than five percent of the Common Stock,
each of the Company's directors, the Company's Chief Executive Officer, and all
of the Company's directors and executive officers as a group.
AMOUNT AND NATURE PERCENT
OF OF
NAME BENEFICIAL OWNERSHIP CLASS (1)
- ------------------------------------------- --------------------- ------------
Paul A. Tanner............................. 490,882 (2) 3.6
James Rudis................................ 557,900 (3) 4.0
Michael F. Buck............................ 31,000 (4) *
Harold Estes............................... 2,700,000 (5) 19.8
George R. Schrader......................... 80,000 (6) *
Paul A. Tanner, Jr......................... 1,148,964 (7) 8.4
The Pyrenees Group......................... 1,903,000 (8) 13.9
Tanner Family Trust........................ 447,205 (9) 3.3
Elizabeth Carter Children's
Foundation................................ 671,759 (10) 4.9
Wayne H. Creasy............................ 447,205 (11) 3.3
Merrill Lynch.............................. 1,007,965 (12) 6.9
All directors and executive officers as a
group (7 persons)......................... 5,254,346 (13) 36.3
- ----------------
* Less than 1%.
(1) Except as noted, the listed persons have sole investment power and sole
voting power as to all shares of Common Stock for which they are
identified as being the beneficial owners. Information as to beneficial
ownership has been furnished to the Company by such individuals. Such
presentation is based on 13,664,109 shares of Common Stock outstanding
as of December 31, 1996.
(2) Includes 130,000 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof. Includes 178,882 shares that Mr. Paul A. Tanner may be deemed
to beneficially own as a 9.4% owner of the Pyrenees Group (see footnote
8 below). Does not include 671,759 shares that Mr. Paul A. Tanner may
be deemed to beneficially own as a member of the board of trustees of
the Elizabeth Carter Children's Foundation, (the "Foundation") (see
footnote 10 below), and also does not include the remaining 1,724,118
shares of the Pyrenees Group (that Mr. Paul A. Tanner does not own as
owner), which Mr. Paul A. Tanner may be deemed to beneficially own
because he is the president and sole director of the Pyrenees Group.
(3) Includes 276,500 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof.
(4) Includes 30,000 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof.
25
(5) Mr. Estes' address is Highway 59 South, Route 15 - Box 9475, Lufkin,
Texas 75901.
(6) Includes 80,000 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof.
(7) Includes 30,000 shares that could be purchased pursuant to the exercise
of stock options exercisable within 60 days subsequent to the date
hereof. Includes 671,759 shares that Mr. Paul A. Tanner, Jr. may be
deemed to beneficially own as a member of the board of trustees of the
Foundation. See Footnote 10. Also includes 447,205 shares that Mr.
Paul A. Tanner, Jr. may be deemed to beneficially own as trustee of the
Tanner Family Trust. See Footnote 9.
(8) The address of the Pyrenees Group is 2 Kelvingate Court, Dallas, Texas
75225. The Pyrenees Group, a Nevada corporation, is owned by Paul A.
Tanner (9.4%), Wayne H. Creasy (23.5%), the Tanner Family Trust (23.5%),
the Foundation (35.3%), and four other investors.
(9) Includes 447,205 shares that the Tanner Family Trust may be deemed to
beneficially own as a stockholder in the Pyrenees Group. See footnote
8. The address of the Tanner Family Trust is 16885 Dallas Parkway,
Dallas, Texas 75248. Mr. Paul A. Tanner, Jr., the trustee of the Tanner
Family Trust, is the adult son of Mr. Paul A. Tanner, the Chairman of
the Board, President, and Chief Executive Officer of the Company.
Unless otherwise indicated herein, all references to "Mr. Tanner" shall
mean Mr. Paul A. Tanner.
(10) Includes 671,759 shares that may be deemed to be beneficially owned by
the Foundation as a 35.3% stockholder in the Pyrenees Group. The
address of the Foundation is 9909 Inwood Road, Dallas, Texas 75220. The
Foundation was formed to construct and operate a non-profit home for
children. The shares of the Pyrenees Group owned by the Foundation are
voted by the board of trustees of the Foundation, of which Mr. Paul A.
Tanner is a member.
(11) Includes shares that Mr. Creasy may be deemed to beneficially own as a
23.5% stockholder in the Pyrenees Group. The address of Mr. Creasy is
3225 South Norwood, Tulsa, Oklahoma 74135.
(12) For purposes of the table above, Merrill Lynch consists of Merrill Lynch
World Income Fund, Inc. ("MLW") and Convertible Holdings, Inc. ("CH").
The address of MLW and CH is c/o Merrill Lynch Asset Management, 800
Scudders Mill Road, Plainsboro, New Jersey 08536. This figure consists
of 1,007,965 shares of Common Stock into which certain of the Company's
bonds held by Merrill Lynch are convertible within 60 days subsequent to
the date hereof. Such figure is subject to adjustment as specified in
the indenture governing the terms of such bonds.
(13) Includes 178,882 shares that may be deemed to be beneficially owned by
Mr. Paul A. Tanner due to his 9.4% ownership of the Pyrenees Group, but
does not include 671,759 shares that Mr. Paul A. Tanner may be deemed to
beneficially own as a trustee of the Foundation or the remaining
1,724,118 shares of the Pyrenees Group (that Mr. Paul A. Tanner does not
own as an 9.4% owner), which Mr. Paul A. Tanner may be deemed to
beneficially own because he is the president and a director of the
Pyrenees Group (see footnote 2 hereto). Includes 671,759 shares that
Mr. Paul A. Tanner, Jr. may be deemed to beneficially own as a member of
the board of trustees of the Foundation; also includes 447,205 shares
that Mr. Paul A. Tanner, Jr. may be deemed to beneficially own as
trustee of the Tanner Family Trust. Includes 823,000 shares that could
be purchased pursuant to the exercise of stock options exercisable
within 60 days subsequent to the date hereof.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE PYRENEES OPTION
In October 1992, the Company's Board of Directors authorized the
issuance to the Pyrenees Group, or its assignees, options to purchase up to
1,000,000 shares of convertible preferred stock for $10 per share. The options
were issued subject to approval by the Company's shareholders and were approved
and ratified at the Company's Annual Meeting held May 31, 1994. Pyrenees, a
private investment firm controlled by Paul A. Tanner, Chairman and Chief
Executive Officer and Paul A. Tanner, Jr., Director of the Company was granted
these options as consideration for the sale to the Company of its collected due
diligence materials for acquisitions Pyrenees was contemplating, which were to
be used by the Company in its own previously announced acquisition program. The
options, covering Series A, B, C, D and E Preferred Stock, are summarized as
follows:
Preferred Conversion Common
Shares Series Price Shares
------ --------- ---------- ---------
A 125,000 $ .50 2,500,000
B 100,000 1.00 1,000,000
C 100,000 2.00 500,000
D 200,000 4.00 500,000
E 475,000 10.00 475,000
--------- ---------
1,000,000 4,975,000
========= =========
In fiscal 1994, the Pyrenees Group exercised options with respect to
the Series A and Series B Preferred Stock through the issuance of two 7% demand
notes in an aggregate amount of $2,250,000, collateralized by the shares issued;
such notes were reflected as a reduction in the stockholders' equity accounts in
the accompanying consolidated balance sheet as of September 30, 1994. In fiscal
1995, the Pyrenees Group exercised the Series C option through an additional
demand note bearing interest at 7% and collateralized by the shares issued. On
May 5, 1995 in conjunction with the acquisition of Overhill Farms, Pyrenees paid
$4,000,000 to IBM on the Company's behalf. Of this amount, $2,992,000
represented repayment of the 7% notes with the excess, $1,008,000, representing
a temporary advance by Pyrenees to the Company. This amount plus other payments
made by Pyrenees resulted in a temporary advance of $1,153,000 at September 30,
1995. During fiscal 1995, Pyrenees converted Series A, B and C Preferred Stock
into common stock.
During the year ended September 30, 1996, Pyrenees exercised the
Series D option through an additional 7% note in the amount of $2,000,000,
collateralized by the shares issued. These shares were subsequently converted
to 500,000 shares of common stock and principal payments of approximately
$721,000 were made on the note. The Series E option expired unexercised.
The Company recognized a non-recurring, non-cash charge for the fair
value of the Pyrenees options as of the date of approval by the shareholders.
The fair value of the options, as determined by an independent valuation firm,
amounted to $1,400,000; such amount was recorded as a non-cash charge against
income with a corresponding credit to paid-in capital.
ADVANCES TO RELATED PARTIES
During fiscal 1994, the Company made aggregate non-interest bearing
cash advances to Mr. Tanner in the amount of approximately $282,000. At
September 30, 1994, Mr. Tanner had repaid $150,000 of such advances. During
fiscal 1995, following the repayment of the unpaid 1994 advances, additional
advances amounting to approximately $63,000 were made to Mr. Tanner which were
unpaid at September 30, 1995.
During fiscal 1996, additional amounts were advanced to or on behalf
of Mr. Tanner which aggregated approximately $1.5 million. On December 8,
1995, the aforementioned advances and an unpaid promissory note receivable from
Mr. Tanner were refinanced through the issuance to the Company of a 12%
unsecured demand note from Mr. Tanner in the principal amount of $2,000,872.
27
Also during the period, the Company made disbursements to the Pyrenees
Group, a corporation controlled by Mr. Tanner, of approximately $2.67 million,
of which $1,153,000 represented repayment of existing advances from Pyrenees,
with the balance representing an advance to Pyrenees of approximately $1.5
million.
During January 1996, the Company reached an agreement in principle to
manage a project to develop and build a multi-purpose sports facility in Las
Vegas, Nevada. The project is being developed by Stadium Partners, a private
investment firm headed by Mr. Tanner. As part of the transaction, the Company
is also to participate in the facility's management, sales of suites and seat
options, concessions and events and is to be compensated for such services. The
Company agreed to provide to Stadium Partners up to $4 million of debt that (1)
is convertible into a 14% economic interest in Stadium Partners and (2) is to be
guaranteed by certain members of the investment group. As part of this
agreement, the aforementioned accounts receivable from Mr. Tanner and Pyrenees
(approximately $3.5 million), together with any subsequent amounts advanced,
charged or accrued to or on behalf of Stadium Partners were considered as
components of the $4 million of convertible debt, to bear interest at 12% and
are guaranteed by Mr. Tanner and Pyrenees. During the year ended September 30,
1996, the Company advanced an additional $9,271,054 which are subject to the
above guarantees, and are due and payable currently by Stadium Partners. As of
September 30, 1996 the Company has reserved $3,340,000 against the existing
receivable.
During the year ended September 30, 1996, the Company accrued
management and service revenues of $2,550,000 and interest income of $790,000
related to the Company's activities with Stadium Partners, the collectibility of
which is dependent upon the success of the project and/or the guarantees
referred to above. As a result of the financing described above, Stadium
Partners is precluded from making any distributions until permanent project
financing is secured. As a consequence of Stadium Partners' inability to make
its payment to the Company due March 15,1997, the Company has subsequently
established a reserve of $3.34 million as of September 30, 1996, which
represents the income accrued. The reserve will be reduced as collections and
distributions are made pursuant to the Stadium Partner loan agreements.
Subsequent to year end, the Company no longer accrues management fees or
interest income on the existing advances. On November 15, 1996, Stadium
Partners through a newly-formed partnership purchased 62 acres for the
development of the stadium and adjacent convention facility. Financing was
provided by a national financial institution with the lender receiving an equity
interest in the project.
In January 1997, the Company further advanced Stadium Partners $4.9
million. The funds advanced consisted of $2.4 million, received from an
existing line of credit, and $2.5 million from a six month term note. The term
note bears interest at 16%, payable monthly and is secured by a second lien on
the Company's headquarters. As additional collateral, the Company agreed to
issue an option on 500,000 shares of Series A-2 preferred stock convertible into
1,000,000 shares of common stock which is exercisable upon default of certain
covenants of the agreement.
In connection with the aforementioned transaction, the Company entered
into a two year consulting agreement with a principal of the lender. In
consideration of the agreement, the Company issued an option to purchase 200,000
shares of common stock at $.01 per share.
Polyphase Corporation, upon the occurrence of certain events, has
guaranteed repayment of the $48,000,000 loan from Lehman to the Partnership.
Such guarantee is effective upon the occurrence of certain "bad acts", including
without limitation if the Partnership or any general partner of the Partnership
makes an assignment for the benefit of creditors, the Partnership or any general
partner of the Partnership files a petition seeking relief under Federal or any
state bankruptcy or insolvency law, if any representation or warranty of the
Partnership or the Company made in any document furnished in connection with the
loan from Lehman proves to be fraudulent in any material respect regarding the
financial condition of the Borrower or the Company, the Partnership or the
Company fails, after any applicable cure period, to deliver certain financial
certificates and documents required to be delivered under the terms of the loan
from Lehman, the land securing the loan from Lehman (the "Land") is further
encumbered or ownership transferred without the consent of Lehman or the
Partnership incurs any additional debt for borrowed money (other than trade debt
and similar unsecured obligations in the ordinary course of business) without
the consent of Lehman, or, upon the Partnership's failure or refusal to pay when
due any mandatory prepayment under the security documents governing the loan
from Lehman, the Partnership or any of its general partners or the Company takes
or fails to take any action that materially interferes, impedes or otherwise
impairs Lehman's ability to convey the Land or any interest in the Partnership
to Lender or the sale of the Land through foreclosure or by the power of sale
provided for in the security documents governing the loan.
28
OTHER TRANSACTIONS
Other assets include an insurance premium receivable representing
insurance premiums paid by TTI on behalf of Harold Estes, President and former
owner of TTI and currently a principal shareholder of the Company. As of
September 30, 1996, insurance premium receivable was $492,000.
In connection with the TTI acquisition, the Company issued a
non-interest bearing note to Harold Estes, a principal shareholder of the
Company, for $10,000,000 due October 31, 1994, on which the Company imputed
interest at 8.0% per annum. The Company has since modified, extended and renewed
the note whereby the note currently having a balance including accrued interest
of $12,546,600 has been extended to December 1, 1997, bearing interest at 10%
per annum through June 30, 1997 and 16% thereafter.
In February 1994, a company owned by Harold Estes, loaned DPPI
$350,000 to pay a previous mortgage on the Company's principal executive
offices. The outstanding principal and interest on this loan was $363,347 as of
May 25, 1994, when such loan was paid in full by the Company.
In connection with the purchase of TTI, the Company acquired a note
receivable from an officer. The note is secured by marketable securities,
payable within one year and bears interest at 3.96%. As of September 30, 1996,
the balance outstanding was $367,634.
Upon the resignation of Paul Stevens from the Board of Directors and
as President of PIC in October 1993, the Company and Mr. Stevens entered into an
agreement whereby Mr. Stevens was to provide consulting services to PIC in
consideration for (1) the issuance of 7,500 shares of Series A Preferred Stock,
valued at $75,000 and convertible into 150,000 shares of restricted common
stock, and (2) a monthly retainer of $12,500 cash for a 5-year period. This
agreement was terminated in September 1994, whereby Mr. Stevens agreed to waive
all remaining cash payment requirements and the Company agreed to register the
common stock underlying Mr. Stevens Series A Preferred Stock and to cancel stock
subscriptions receivable from Mr. Stevens in the amount of $30,000. The
Company's expense for the year ended September 30, 1994 amounted to
approximately $200,000 as a result of this consulting contract and its
subsequent termination.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. and 2. Financial Statements and Financial Statement Schedules.
1. The following consolidated financial statements of Polyphase Corporation
and subsidiaries, included in the annual report of the registrant to
its shareholders for the year ended September 30, 1995, are included in
Item 8:
Report of Independent Auditors - Ernst & Young LLP F-2
Report of Independent Accountants - Price Waterhouse LLP F-3
Consolidated Balance Sheets-September 30, 1996 and 1995 F-4
Consolidated Statements of Operations-Years ended September 30, 1996, 1995 and 1994 F-6
Consolidated Statements of Stockholders' Equity-Years ended September 30, 1996, 1995 and 1994 F-8
Consolidated Statements of Cash Flows-Years ended September 30, 1996, 1995, and 1994 F-11
Notes to Consolidated Financial Statements-September 30, 1996 F-14
2. The following consolidated financial statement schedules of Polyphase Corporation and subsidiaries
are included in item 14(d):
Schedule I Condensed Financial Information of Registrant F-43
Schedule II Valuation and Qualifying Accounts F-47
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been
omitted.
3. Exhibits
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3 through
4.8 to the Company's registration statement on Form S-8 (No. 33-82008),
filed with the Commission on July 27, 1994 (the "1994 Form S-8"))
3.2 Bylaws of Polyphase Corporation (incorporated by reference from Exhibit
4.2 to the 1994 Form S-8)
4.1 Certificate of Designation relating to the Series A-2 Preferred Stock
(incorporated by reference from Exhibit 4.9 to the Company's
Registration Statement on Form SB-2 [No. 33-85334] filed with the
Commission on October 19, 1994 [the "Form SB-2"])
4.2 Certificate of Designation relating to the Series A-3 Preferred Stock
(incorporated by reference from Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1995 [the "1995
Form 10-K"])
10.1+ Stock Option Agreement for Paul A. Tanner (incorporated by reference
from Exhibit 4.12 to the 1994 Form S-8)
30
10.2+ Stock Option Agreement for Michael F. Buck (incorporated by reference
from Exhibit 4.13 to the 1994 Form S-8)
10.3+ Stock Option Agreement for Don E. McMillen (incorporated by reference
from Exhibit 4.14 to the 1994 Form S-8)
10.4+ Stock Option Agreement for George R. Schrader (incorporated by
reference from Exhibit 4.15 to the 1994 Form S-8)
10.5+ Stock Option Agreement for James Rudis (incorporated by reference from
Exhibit 10.5 to the Company's Form 8-B, filed with the Commission on
August 27, 1994 (the "Form 8-B"))
10.6+ Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
10.7+ Employment Agreement, dated as of November 1, 1993, between Harold
Estes and Texas Timberjack, Inc. (incorporated by reference from
Exhibit 2 to the 1994 Form 8-K)
10.8 Pledge Agreement, dated as of June 24, 1994, between Polyphase
Corporation and Harold Estes (incorporated by reference from Exhibit
10.10 to the Form 8-B)
10.9 Security Agreement, dated as of June 24, 1994, between Texas
Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.11 to the Form 8-B)
10.10 Stock Option Agreement, dated as of October 21, 1992, between
Polyphase Corporation and the Pyrenees Group (incorporated by
reference from Exhibit 10.12 to the Form 8-B)
10.11 Deed of Trust Note in the amount of $1,000,000, dated May 25, 1994, by
Polyphase Corporation in favor of Comerica Bank-Texas (incorporated by
reference from Exhibit 10.4 to the Company's Form 10-Q for the quarter
ended June 30, 1994 (the "1994 Form 10-Q"))
10.12 Deed of Trust (With Security Agreement and Assignment of Rents), dated
May 25, 1994, covering real property in Dallas County, Texas between
Polyphase Corporation and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.3 to the 1994 Form 10-Q)
10.13 Letter Agreement, dated May 25, 1994, between Polyphase Corporation
and Comerica Bank -Texas (incorporated by reference from Exhibit 10.4
to the 1994 Form 10-Q)
10.14 Securities Purchase Agreement, dated as of July 5, 1994, by and among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.16 to the Form 8-B)
10.15 Registration Rights Agreement, dated as of July 5, 1994, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.17 to the Form 8-B)
10.16 Indenture, dated as of July 5, 1994, from Polyphase Corporation to IBJ
Schroder Bank & Trust Company (incorporated by reference from Exhibit
10.18 to the Form 8-B)
10.17 Form of 12% Senior Convertible Debenture No. 1, payable to Bridge Rope
& Co. or registered assigns (incorporated by reference from Exhibit
10.19 to the Form 8-B)
10.18 Form of 12% Senior Convertible Debenture No. 2, payable to Vault & Co.
or registered assigns (incorporated by reference from Exhibit 10.20 to
the Form 8-B)
31
10.19 Asset Purchase Agreement among Champ Computer Systems, Inc., Liberty
United Trust and Polyphase Corporation, dated March 23, 1994
(incorporated by reference from Exhibit 10.25 to the Form SB-2)
10.20 Stock Purchase Agreement among PC Repair of Florida, Inc., Gene H.
Thurston, Jr. and Polyphase Corporation, dated February 15, 1994
(incorporated by reference from Exhibit 10.26 to the Form SB-2)
10.21 Agreement and Plan of Reorganization between the Shareholders of Micro
Configurations, Inc. and Polyphase Corporation, dated July 1, 1994
(incorporated by reference from Exhibit 10.27 to the Form SB-2)
10.22 Credit Agreement, dated August 29, 1994, between Texas Timberjack,
Inc. and Comerica Bank-Texas (incorporated by reference from Exhibit
10.28 to the Form SB-2)
10.23 Guaranty, dated August 29, 1994, from Polyphase Corporation to
Comerica Bank-Texas (incorporated by reference from Exhibit 10.29 to
the Form SB-2)
10.24 Deed of Trust, dated as of August 30, 1994, from Texas Timberjack,
Inc. to J. Patrick Faubion, Trustee (incorporated by reference from
Exhibit 10.30 to the Form SB-2)
10.25 Security Agreement, dated as of August 29, 1994, between Texas
Timberjack, Inc. and Comerica Bank-Texas (incorporated by reference
from Exhibit 10.31 to the Form SB-2)
10.26 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated August 29, 1994 (incorporated by
reference from Exhibit 10.32 to the Form SB-2)
10.27 First Amendment to Credit Agreement dated September 1, 1995, between
Texas Timberjack, Inc. and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.27 to the 1995 Form 10-K)
10.28 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated September 1, 1995 (incorporated
by reference from Exhibit 10.28 to the 1995 Form 10-K)
10.29 Promissory Note in the amount of $2,000,000, from Pyrenees Group, as
maker, to Polyphase Corporation, dated November 1, 1995, related to
the exercise of options on Series D Preferred Stock (incorporated by
reference from Exhibit 10.29 to the 1995 Form 10-K)
10.30 Security Agreement, dated as of November 1, 1995, between Pyrenees
Group and Polyphase Corporation (incorporated by reference from
Exhibit 10.30 to the 1995 Form 10-K)
10.31 Promissory Note in the amount of $2,000,872, from Paul A. Tanner, as
maker, to Polyphase Corporation, dated December 8, 1995 (incorporated
by reference from Exhibit 10.31 to the 1995 Form 10-K)
10.32 Convertible Preferred Stock Purchase Agreement, dated as of November
10, 1995, by and between Polyphase Corporation and Infinity Investors,
Ltd. (incorporated by reference from Exhibit 10.32 to the 1995
Form 10-K)
10.33 Securities Purchase Agreement, dated as of December 1, 1995, by and
among Polyphase Corporation, Merrill Lynch World Income Fund, Inc.,
and Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.33 to the 1995 Form 10-K)
10.34 Registration Rights Agreement, dated as of December 1, 1995, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.34 to the 1995 Form 10-K)
10.35 Indenture, dated as of December 1, 1995, from Polyphase Corporation to
IBJ Schroder Bank & Trust Company (incorporated by reference from
Exhibit 10.35 to the 1995 Form 10-K)
32
10.36 Form of 12% Senior Convertible Debenture No. 1, dated December 1,
1995 payable to Bridge Rope & Co. or registered assigns (incorporated
by reference from Exhibit 10.36 to the 1995 Form 10-K)
10.37 Form of 12% Senior Convertible Debenture No. 2, dated December 1,
1995 payable to Kane & Co. or registered assigns (incorporated by
reference from Exhibit 10.37 to the 1995 Form 10-K)
10.38 Renewal Promissory Note in the amount of $11,200,000, dated October
31, 1995, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.38 to the 1995 Form 10-K)
10.39 Amended Pledge Agreement, dated as of October 31, 1995, between
Polyphase Corporation and Harold Estes (incorporated by reference
from Exhibit 10.39 to the 1995 Form 10-K)
10.40 Amended Security Agreement, dated as of October 31, 1995, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference
from Exhibit 10.40 to the 1995 Form 10-K)
10.41** Renewal Promissory Note in the amount of $12,842,916, dated December
31, 1996, payable by Polyphase Corporation to Harold Estes
10.42** Amended Pledge Agreement, dated as of December 31, 1996, between
Polyphase Corporation and Harold Estes
10.43** Amended Security Agreement, dated as of December 31, 1996, between
Texas Timberjack, Inc. and Harold Estes
10.44** Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated June 28, 1996
10.45** Security and Pledge Agreement, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation
10.46** Secured Promissory Note, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation
10.47** Security Agreement, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation
10.48** Promissory Note, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation
10.49** Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1996
+10.50** Stock Option Agreement for Paul A. Tanner dated July 23, 1996
+10.51** Stock Option Agreement for James Rudis dated July 23, 1996
+10.52** Stock Option Agreement for William E. Shatley dated July 23, 1996
+10.53** Stock Option Agreement for Michael F. Buck dated July 23, 1996
+10.54** Stock Option Agreement for George R. Schrader dated July 23, 1996
+10.55** Stock Option Agreement for Paul A. Tanner, Jr. dated July 23, 1996
21.1** Subsidiaries of the Registrant
33
23.1** Consent of Ernst & Young LLP
23.2** Consent of Price Waterhouse LLP
27.1** Financial Data Schedule
--------------------------------
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
(b). Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the Fiscal Year Ended September 30, 1996.
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner June 9, 1997
-------------------------
Paul A. Tanner, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ Paul A. Tanner June 9, 1997
- -----------------------------
Paul A. Tanner
President and Chief Executive
Officer, Chairman of the
Board and Director
(Principal Executive Officer)
/s/ James Rudis June 9, 1997
- -----------------------------
James Rudis
Executive Vice President
and Director
/s/ William E. Shatley June 9, 1997
- -----------------------------
William E. Shatley
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ George R. Schrader June 9, 1997
- -----------------------------
George R. Schrader
Director
/s/ Paul A. Tanner, Jr. June 9, 1997
- -----------------------------
Paul A. Tanner, Jr.
Director
June 9, 1997
- -----------------------------
Michael F. Buck
Director
35
POLYPHASE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Report of Independent Accountants F-3
Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-8
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-14
Financial Statement Schedules:
Condensed Financial Information of Registrant F-44
Valuation and Qualifying Accounts F-48
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Polyphase Corporation
We have audited the accompanying consolidated balance sheets of Polyphase
Corporation and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. Our audits also include the financial statement schedules
listed in the Index at Item 14 (a). These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Polyphase
Corporation and subsidiaries at September 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that Polyphase
Corporation will continue as a going concern. As more fully described in Notes
3 and 10, the Company has not complied with certain covenants of loan
agreements. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Dallas, Texas
December 15, 1996
except for Note 3, Note 9, Note 10, Note 13
and Note 14, as to which the date is June 9, 1997
F-2
Report of Independent Accountants
To the Board of Directors and Stockholders
of Polyphase Corporation
In our opinion, the consolidated statements of operations, of cash flows and of
stockholders' equity for the year ended September 30, 1994 as listed in the
accompanying index present fairly, in all material respects, the results of
operations and cash flows of Polyphase Corporation and its subsidiaries for the
year ended September 30, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Polyphase
Corporation and its subsidiaries for any period subsequent to September 30,
1994.
As discussed in Note 12 to the consolidated financial statements, effective
October 1, 1993, the Company changed its method of accounting for income taxes.
The above-referenced financial statements were prepared assuming that Polyphase
Corporation will continue as going concern. Subsequent to January 4, 1995 and
as more fully described in Notes 3 and 10, the Company has not complied with
certain covenants of loan agreements. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 3. The above-referenced
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Dallas, Texas
January 4, 1995, except for the last paragraph above as to which the date is
June 10, 1997.
F-3
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
---------------------------
1996 1995
------------ ------------
Current assets:
Cash $ 280,969 $ 3,275,068
Receivables, net of allowance for doubtful accounts
of $519,104 and $506,805:
Trade accounts 12,098,852 11,602,628
Current portion of sales contracts 6,625,727 6,973,101
Notes receivable 972,422 1,215,389
Receivables from related parties 367,634 737,992
Inventories 28,027,779 26,007,672
Prepaid expenses and other 2,676,336 1,836,150
------------ ------------
Total current assets 51,049,719 51,648,000
------------ ------------
Property and equipment:
Land 765,000 505,000
Buildings and improvements 4,279,917 3,641,470
Machinery, equipment and other 8,575,687 7,932,882
------------ ------------
13,620,604 12,079,352
Less-Accumulated depreciation 4,212,872 2,761,966
------------ ------------
9,407,732 9,317,386
------------ ------------
Other assets:
Noncurrent receivables:
Sales contracts 1,333,150 3,281,459
Notes receivable 1,037,890 368,106
Related party, net of allowance of $3,340,000 9,931,054 -
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $1,557,165
and $1,037,734 15,041,574 19,374,134
Other intangible assets 1,402,239 2,021,652
Restricted cash 882,383 916,275
Other 4,092,780 1,231,851
------------ ------------
33,721,070 27,193,477
------------ ------------
$ 94,178,521 $ 88,158,863
============ ============
F-4
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
--------------------------
1996 1995
------------ ------------
Current liabilities:
Notes payable $ 9,516,219 $ 11,130,056
Accounts payable 8,581,071 8,007,727
Accrued expenses and other 4,415,011 3,691,302
Advances from related party - 1,153,000
Current maturities of long-term debt 31,573,716 2,589,077
------------ ------------
Total current liabilities 54,086,017 26,571,162
Note payable and accrued
interest to related party 12,546,600 11,100,000
Long-term debt, less current maturities - 27,229,665
Reserve for credit guarantees 882,383 916,275
Deferred income taxes 1,475,897 437,729
Other - 80,413
------------ ------------
Total liabilities 68,990,897 66,335,244
------------ ------------
Commitments and contingencies
Warrants to purchase common stock
of subsidiary 1,189,224 686,276
Stockholders' equity:
Preferred stock, $.01 par value, authorized
50,000,000 shares, issued and outstanding
250,000 in 1996 and none in 1995 2,500 -
Common stock, $.01 par value, authorized
100,000,000 shares, issued and outstanding
13,196,966 in 1996 and 12,621,966 in 1995 131,970 126,220
Paid-in capital 26,630,714 22,106,606
Accumulated deficit (1,487,695) (1,095,483)
Notes receivable (1,279,089) -
------------ ------------
Total stockholders' equity 23,998,400 21,137,343
------------ ------------
$ 94,178,521 $ 88,158,863
============ ============
The accompanying notes are an integral part
of theses consolidated financial statements.
F-5
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Net revenues $ 149,540,785 $ 102,035,472 $ 24,970,404
Cost of sales 120,865,827 82,055,637 19,970,235
------------- ------------- -------------
Gross profit 28,674,958 19,979,835 5,000,169
Selling, general and administrative expenses 22,009,991 13,228,134 4,644,787
------------- ------------- -------------
Operating income 6,664,967 6,751,701 355,382
Other income (expenses):
Non-recurring charge related to
grant of stock options - - (1,400,000)
Gain on sale of assets 827,852 - -
Interest expense (6,389,926) (3,791,059) (447,987)
Interest income and other 751,385 592,055 125,730
------------- ------------- -------------
Total other income (expenses) (4,810,689) (3,199,004) (1,722,257)
Income (loss) before income taxes, warrant
accretion, extraordinary item and
cumulative effect of accounting change 1,854,278 3,552,697 (1,366,875)
Income taxes 1,593,542 76,227 17,000
------------- ------------- -------------
260,736 3,476,470 (1,383,875)
Accretion of warrants to purchase
common stock of subsidiary 502,948 190,871 -
------------- ------------- -------------
Income (loss) before extraordinary item
and cumulative effect of accounting change (242,212) 3,285,599 (1,383,875)
Extraordinary item:
Early extinguishment of debt - - 62,120
Cumulative effect of change in method of
accounting for income taxes - - 305,000
------------- ------------- -------------
Net income (loss) (242,212) 3,285,599 (1,016,755)
Dividends on preferred stock 150,000 - -
------------- ------------- -------------
Net income (loss) attributable to
common stockholders $ (392,212) $ 3,285,599 $ (1,016,755)
============= ============= =============
F-6
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Per share data:
Weighted average common and common
equivalent shares 13,722,552 12,745,701 4,881,454
============= ============= =============
Income (loss) per common share:
Before extraordinary item and cumulative
effect of accounting change $ (.03) $ .26 $ (.28)
Extraordinary item - - .01
Cumulative effect of accounting change - - .06
------------- ------------- -------------
Net income (loss) per common share $ (.03) $ .26 $ (.21)
------------- ------------- -------------
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
Retained Notes/Stock
Earnings Subscription
Preferred Stock Common Stock Paid-in (Accumulated (Receivable)
Shares Amount Shares Amount Capital Deficit) Payable Total
------ ------ ------ ------ ------- ------------ -------------- -------
Balance
September 30, 1993 347,700 $ 3,477 3,191,020 $ 31,910 $10,276,831 $ (3,364,327) $ 345,000 $ 7,292,891
Issuance of common
stock subscribed 500,000 5,000 370,000 (375,000)
Issuance of shares for
interest on convertible
subordinated debentures 1,596 16 9,104 9,120
Private placements of
Series B and C preferred shares 34,000 340 339,660 340,000
Exercise of common
stock options 689,000 6,890 533,110 540,000
Issuance of preferred shares
in connection with
acquisitions -
DPPI - Series D 100,000 1,000 999,000 1,000,000
TBI - Series A-5 and B 20,000 200 210,823 211,023
PCR - Series B 7,500 75 159,925 160,000
TTI - Series A 100,000 1,000 3,499,000 3,500,000
Micro - Series A-2 60,000 600 615,000 615,600
Issuance of Series A-5,
A and B preferred shares
for services 11,000 110 110,640 110,750
Dividends on Series
A-5 preferred shares (62,500) (62,500)
Conversions of preferred shares
to common shares (428,200) (4,282) 1,499,000 14,990 (10,708)
Grant of Pyrenees
options 1,400,000 1,400,000
Options granted in purchase
of Register-Mate assets 285,000 285,000
Cancellation of stock
subscription receivable 30,000 30,000
F-8
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
Retained Notes/Stock
Earnings Subscription
Preferred Stock Common Stock Paid-in (Accumulated (Receivable)
Shares Amount Shares Amount Capital Deficit) Payable Total
------ ------ ------ ------ ------- ------------ -------------- -------
Exercise of Series A and B
preferred stock options
by Pyrenees 225,000 2,250 2,247,750 (2,250,000)
Stock issuance costs (58,304) (58,304)
Net loss for 1994 (1,016,755) (1,016,755)
-------- ------ ---------- -------- ---------- ---------- ----------- -----------
Balance,
September 30, 1994 477,000 4,770 5,880,616 58,806 20,924,331 (4,381,082) (2,250,000) 14,356,825
-------- ------ ---------- -------- ---------- ---------- ----------- -----------
Exercise of Series C
preferred stock options
by Pyrenees 100,000 1,000 999,000 (1,000,000)
Conversions of preferred
shares to common shares (577,000)(5,770) 6,618,500 66,185 (60,415)
Issuance of Micro
escrow shares 120,000 1,200 366,600 367,800
Issuance of shares for
interest on convertible
subordinated debentures 2,850 29 9,091 9,120
Payments on Pyrenees notes 3,250,000 3,250,000
Stock issuance costs (132,001) (132,001)
Net income for 1995 3,285,599 3,285,599
-------- ------ ---------- -------- ---------- ---------- ----------- -----------
Balance,
September 30, 1995 - - 12,621,966 126,220 22,106,606 (1,095,483) - 21,137,343
-------- ------ ---------- -------- ---------- ---------- ----------- -----------
F-9
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
Retained Notes/Stock
Earnings Subscription
Preferred Stock Common Stock Paid-in (Accumulated (Receivable)
Shares Amount Shares Amount Capital Deficit) Payable Total
------ ------ ------ ------ ------- ------------ -------------- -------
Exercise of Series D
preferred stock options
by Pyrenees 200,000 2,000 1,998,000 (2,000,000)
Conversion of preferred shares
to common shares (200,000) (2,000) 500,000 5,000 (3,000)
Private placement of
Series A-3 preferred stock 250,000 2,500 2,497,500 2,500,000
Exercise of common
stock options 75,000 750 49,250 50,000
Payments on Pyrenees note 720,911 720,911
Stock issuance costs (17,642) (17,642)
Dividends on
preferred shares (150,000) (150,000)
Net loss for 1996 (242,212) (242,212)
--------- ------- ---------- -------- ----------- ----------- ----------- -----------
Balance,
September 30, 1996 250,000 $ 2,500 13,196,966 $131,970 $26,630,714 $(1,487,695) $(1,279,089) $23,998,400
========= ======= ========== ======== =========== =========== =========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-10
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Cash flow provided by (used in)
operating activities:
Net income (loss) $ (242,212) $ 3,285,599 $ (1,016,755)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 3,417,137 1,935,559 497,514
Equity in the loss of
non-consolidated subsidiaries 22,437 - -
Provision for doubtful accounts 3,398,094 (73,446) (110,822)
Deferred income tax 134,268 (449,651) -
Extraordinary item -
early extinguishment of debt - - (62,120)
Non-recurring charge related to
grant of stock options - - 1,400,000
Cumulative effect of change in
method of accounting for income taxes - - (305,000)
Issuance of common stock for
accrued interest payable on convertible
subordinated debentures - 9,120 9,120
Imputed interest on TTI
acquisition note - 66,225 196,056
Consulting contract and cancellation
of stock subscriptions of former
officer and director - - 105,000
Accretion of warrants to
purchase common stock of subsidiary 502,948 190,871 -
Issuance of preferred stock for
services - - 35,750
Recognition of deferred rent reductions (80,413) (82,944) (94,944)
(Increase) decrease in, net of
effects of acquisitions and dispositions
Accounts and sales contracts receivable (3,461,283) (4,857,876) (2,876,615)
Inventories (3,618,788) (5,677,039) 1,640,037
Prepaid expenses and other 575,814 (1,099,427) 139,746
Increase (decrease) in, net of
effects of acquisitions:
Accounts payable 1,414,236 1,959,902 1,251,207
Accrued expenses and other 712,401 2,486,034 (194,388)
------------- ------------- -------------
Net cash provided by (used in)
operating activities 2,774,639 (2,307,073) 613,786
------------- ------------- -------------
F-11
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Cash flows provided by (used in)
investing activities:
Acquisition of Texas
Timberjack, Inc. $ - $ - $ (4,146,360)
Acquisition of net assets of
Overhill Farms - (31,292,910) -
Capital expenditures, net (2,656,209) (975,883) (347,521)
Notes and other receivables 242,967 202,247 (318,649)
Receivables from related parties (9,560,696) - -
Cash of acquired businesses - - 36,407
Cash from the sale of
subsidiaries 475,000 - -
Change in operating assets and liabilities
due to sale of subsidiaries 1,687,124 - -
------------- ------------- -------------
Net cash used in
investing activities (9,811,814) (32,066,546) (4,776,123)
------------- ------------- -------------
Cash flows provided by (used in)
financing activities:
Net borrowings (repayments) on
notes payable (1,293,837) 9,177,364 5,162,000
Net borrowings (repayments) on
other notes payable and
long-term debt 1,886,644 (763,191) (1,741,948)
Borrowings on notes payable
and long term debt - 24,470,360 -
Proceeds from the issuance of
12% subordinated debentures 1,500,000 - -
Proceeds from private
placements of preferred stock 2,500,000 - 340,000
Advances from (payments to)
related parties (1,153,000) 1,153,000 -
Exercise of common stock options 50,000 - 540,000
Principal collections on
Pyrenees notes receivable 720,911 3,250,000 -
Issuance of warrants to purchase
common stock of subsidiary - 495,405 -
Dividends on preferred stock (150,000) - (62,500)
Common stock issuance costs (17,642) (132,001) (58,304)
Loan acquisition costs and other - (1,039,089) (214,907)
------------- ------------- -------------
Net cash provided by financing
activities 4,043,076 36,611,848 3,964,341
------------- ------------- -------------
Net increase (decrease) in cash (2,994,099) 2,238,229 (197,996)
Cash at beginning of year 3,275,068 1,036,839 1,234,835
------------- ------------- -------------
Cash at end of year $ 280,969 $ 3,275,068 $ 1,036,839
============= ============= =============
F-12
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended
September 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Supplemental schedules of noncash investing
and financing activities:
Issuances of preferred stock in
connection with acquisitions:
Dallas Parkway Properties Incorporated $ - $ - $ 1,000,000
PC Repair of Florida, Inc. - - 160,000
Taylor-Built Industries, Inc. - - 211,023
Texas Timberjack, Inc. - - 3,500,000
Micro Configurations, Inc. - 367,800 615,600
Granting of stock options in connection
with purchase of Register-Mate - - 285,000
Supplemental schedule of cash flow
information:
Cash paid during the year for:
Interest $ 4,354,072 $ 2,249,778 $ 126,558
Income taxes $ 75,000 $ 377,442 $ 40,706
See Note 4 for disclosures of additional noncash financing and investing
activities.
The accompanying notes are an integral part
of these consolidated financial statements.
F-13
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY AND ORGANIZATIONAL MATTERS
NATURE OF BUSINESS
The Company is a diversified holding company that, through its subsidiaries,
operates primarily in three industry segments: the forestry segment, which
distributes, leases and provides financing for industrial and commercial
timber and logging equipment (the "Forestry Group"); the transformer
segment, which manufactures and markets electronic transformers, inductors
and filters (the "Transformer Group"); and the food processing segment,
which produces high quality entrees, plated meals, soups, sauces and
poultry, meat and fish specialties (the "Food Group").
CORPORATE HISTORY AND ORGANIZATION
The Company was incorporated in New Jersey in 1963 under the name Kappa
Networks, Inc. Through a merger with a wholly-owned subsidiary in June 1991,
the Company reincorporated in Pennsylvania and formally changed its name to
Polyphase Corporation. A subsequent merger with a wholly-owned subsidiary in
June 1994 effected a change in the state of incorporation from Pennsylvania
to Nevada, together with certain changes to the Company's charter and
bylaws. These changes resulted in the authorization of 100,000,000 shares of
$.01 par value common stock and 50,000,000 shares of $.01 par value
preferred stock with rights and preferences as designated by the Board of
Directors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions are eliminated. Certain prior year amounts have been
reclassified to conform to the 1996 presentation.
FISCAL YEAR
The Company and its subsidiaries' fiscal year, except for the Food Group,
ends on September 30. The Food Group utilizes a 52 - 53 week accounting
period which ends on the Sunday closest to September 30.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of receivables and demand
deposits. Demand deposits sometimes exceed the amount of insurance provided
by the Federal Deposit Insurance Corporation. The Company performs ongoing
credit evaluations of its customers' financial condition and generally
requires no collateral from its customers except as discussed below.
F-14
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's Forestry Group subsidiary, Texas Timberjack, Inc, ("TTI"), is
a retailer of timber and logging equipment. TTI grants credit to customers,
substantially all of whom are located in East Texas or the western portion
of Louisiana, and rely on the logging industry for their ability to repay
debt to TTI. Collateral is generally the equipment sold for amounts due
under installment sales contracts.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to market
data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their
recorded values.
INVENTORIES
Inventories of raw materials, work-in-process and finished goods for
manufacturing and assembly operations and food processing are stated at the
lower of cost or market as determined by the first-in, first-out (FIFO)
method. Inventories of major units purchased in the forestry segment are
valued at the lower of cost or market or, in the case of repossessed and
used units, net realizable value, based upon the specific identification
method.
REPOSSESSION AND WARRANTY WORK
The Company's Forestry Group records repossessed equipment at the lower of
the balance of the receivable, net of any deferred profit, or net realizable
value. In most cases repossessions are recorded at the balance of the note,
net of deferred profit. Repossessed equipment is generally resold at book
value, including refurbishment costs.
Warranty work performed by the Forestry Group to be reimbursed by the
manufacturer is recorded as a receivable and sale. The Company periodically
performs services on equipment sold not warranted by the manufacturer, with
the cost of such service charged to expense as incurred.
The Transformer Group warrants all items shipped for a period of 12 months.
Because the segment's products are made to order, returns are a small
percentage of sales and are typically due to cosmetic marking problems.
Returns, when they do occur, are recorded as a reduction to revenues,
repaired by manufacturing and rebilled upon shipment within 30 days.
CONCENTRATION OF SOURCES OF LABOR
The Food Group's total hourly and salaried work force consists of 846
employees. Approximately 77% of the Company's work force is covered by
collective bargaining agreements expiring in fiscal years 1998 and 1999. The
Company considers its union relations to be good.
F-15
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
primarily using the straight-line method for financial reporting purposes
over the estimated useful lives of the assets. Useful lives generally range
from five to thirty years. Leasehold improvements are amortized over the
lesser of the term of the lease or the estimated useful life of the assets.
Repairs and maintenance costs are expensed, while additions and betterments
are capitalized. The cost and related accumulated depreciation of assets
sold or retired are eliminated from the accounts and any gains or losses are
reflected in earnings.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over the fair value of net assets acquired (goodwill) at
the date of acquisition is amortized on a straight line basis over periods
generally ranging from 15-25 years. The Company determines the period to be
benefited by using qualitative measuring factors such as competition, demand
and obsolescence, as well as legal, regulatory and contractual provisions.
In addition, the Company evaluates the existence of goodwill impairment on
the basis of whether the goodwill is fully recoverable from projected,
undiscounted cash flows of the related business unit.
STOCK OPTIONS
The Company follows Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options. The Company expects to continue
to follow the expense recognition criteria in APB 25. Therefore, Statement
of Financial Accounting Standards No. 123 , "Accounting for Stock Based
Compensation", will have no effect on the Company's financial statements
except for the proforma disclosures that will be required for the fiscal
year ending September 30, 1997.
REVENUE RECOGNITION
The Company generally recognizes revenue when products are shipped or
services are performed and provides for estimated returns and allowances at
the time of sale.
A significant amount of business in the Company's forestry segment relates
to the sale of equipment through sales/finance contracts. Revenue is
recognized on these accounts using the installment method (See Note 5).
Under the installment method, the Company records at the point of sale both
a sale and a cost of sale for the total cost of the unit. Gross profit is
initially recorded in a deferred profit account to be recognized as proceeds
are received. These deferred profits are recorded as sales revenue as funds
are received, based on the relative percentage of transaction profit to the
sales price. Interest on the contract is recognized on a cash basis due to
frequent late payments and periodic repossessions.
F-16
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Key sales and income information for the forestry segment for fiscal 1996 and
1995 and the period from acquisition (June 24, 1994) to September 30, 1994 are:
1996 1995 1994
------------- ------------- ------------
Equipment sales total $ 28,210,292 $ 35,837,259 $ 9,815,444
Equipment sales financed 3,005,776 10,121,004 3,445,670
Income earned on installment basis 2,046,730 2,777,209 132,971
Interest income earned on installment notes 1,634,621 1,562,486 351,614
INCOME TAXES
Effective October 1, 1993 the Company prospectively adopted Statement of
Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes."
SFAS 109 requires the recognition of deferred tax liabilities and assets for the
anticipated future tax effects of temporary differences that arise as a result
of differences in the financial reporting and tax bases of assets and
liabilities. The standard also requires a valuation allowance for deferred tax
assets in certain circumstances. See Note 12 for the cumulative effect of the
adoption of SFAS 109. Prior to October 1, 1993, the Company calculated income
taxes using the deferred method in accordance with the provisions of Accounting
Principles Board Opinion No. 11, "Accounting for Income Taxes."
INCOME (LOSS) PER SHARE
Primary income (loss) per share is computed on the basis of the weighted average
number of common and common equivalent shares outstanding during each year. It
is assumed that all preferred stock is converted and that all dilutive stock
options and warrants are exercised at the beginning of each year or at the time
of issuance if later, and that the proceeds are used to purchase shares of the
Company's common stock at the average market price during the period. It is
assumed that the proceeds from all dilutive stock options and warrants are used
to purchase shares of the Company's common stock at the average market price for
the period.
Primary income (loss) per share does not give effect to any common equivalent
shares if their inclusion would have the effect of increasing earnings per share
or decreasing the loss per share.
See Note 11 for descriptions of common stock equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
F-17
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LIQUIDITY
As described in Note 10, the Company has not complied with certain covenants
involving most of its loan agreements, including covenants that restrict
transactions with affiliates and require the filing of audited financial
statements for the Company and its subsidiaries on a timely basis. In
addition, in January 1997, a suit was filed in District Court of Dallas
County against the Company by Rice Partners II, L.P. ("Rice"), subordinated
debt holders of the Overhill Farms subsidiary. The suit claims, among other
things, that the Company breached covenants of the subordinated debt
agreement and refused to cure the defaults within a reasonable period of
time. The Company has filed a counter suit claiming Rice Partners II, L.P.
(i) refused to comply with verbal agreements to the indenture (ii) conspired
with the former general manager of Overhill to force the Company to sell
Overhill Farms at a distressed price in order to benefit Rice and (iii)
caused the halting of trading of the Company's stock. As a result, the
Company's debt has been classified as current as of September 30, 1996.
The Company is in the process of negotiating a transaction involving
Overhill that the Company expects will resolve the Rice lawsuit and improve
the Company's overall debt structure, but there can be no assurances that
such transaction will be consummated. Upon completion of the transaction,
the Company believes it will be able to negotiate with the remaining debt
holders and obtain waivers to the covenant violations that exist. As such,
the Company expects that it will be able to meet its liquidity requirements.
4. BUSINESS COMBINATIONS
FISCAL 1995 ACQUISITION
Effective May 5, 1995, the Company acquired the assets and operations of IBM
Foods, Inc., a food processing company located in Culver City, California,
which operated using the name Overhill Farms. The purchase, which was
accomplished through Overhill Farms, Inc. a newly-formed subsidiary of the
Company ("Overhill"), provided for cash payment to the seller of $31.3
million, subject to certain adjustments, plus the assumption of certain
liabilities of the acquired business. The transaction was financed by
Overhill in part using (1) a $12 million revolving line of credit, of which
$9.7 million was initially drawn, (2) term loans totalling $6 million,
payable monthly over 4 and 5-year periods and (3) the sale of $13 million of
senior subordinated notes and warrants, due in 2002 and 2003. The
acquisition has been accounted for by the purchase method of accounting. The
operating results of Overhill are included in the Company's results of
operations from the date of acquisition. Goodwill attributable to the
acquisition totaled $10.3 million and is being amortized on a straight-line
basis over a 20-year period.
FISCAL YEAR 1994 ACQUISITIONS
In October 1993, the Company acquired all of the outstanding capital stock
of Taylor-Built Industries, Inc. (TBI), a privately held Texas Corporation,
in exchange for 5,000 shares of Series B Preferred Stock, which were
subsequently converted into 50,000 shares of common stock. The
F-18
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company valued the acquisition at $50,000. TBI, located in Dallas, Texas, is
a manufacturer and distributor of automotive aftermarket products. During
August 1994, the Company purchased a note payable by TBI to its former owner
in the amount of approximately $161,000 (including accrued interest) in
consideration for the issuance of 15,000 shares of Series A-5 Preferred
stock which were subsequently converted into 30,000 shares of common stock.
TBI was sold during fiscal 1995. See Note 16.
The Company, during October 1993, acquired all the outstanding stock of
Dallas Parkway Properties Incorporated (DPPI) in exchange for 100,000 shares
of Series D Preferred Stock, which were subsequently converted into 250,000
shares of common stock. The Company valued the acquisition at $1,000,000. At
the time of acquisition, DPPI was a single-asset Texas corporation which
owned (subject to related indebtedness) a 40,000 square foot office building
in Dallas, Texas, which is now used as the Company's corporate headquarters.
Ownership of the property was subsequently conveyed to the Company.
The Company, in March 1994, acquired the rights to the point-of-sale
software system marketed under the name "Register-Mate" together with
certain other assets from the system's developer. The consideration for this
purchase amounted to approximately $500,000, consisting of note forgiveness
of approximately $215,000 and stock options valued at $285,000. In addition,
the Company assumed certain liabilities. Such stock options, covering 57,000
shares of common stock at an exercise price of $0.50 per share, were
exercised in September 1994. The assets acquired were transferred to a
newly-formed subsidiary of the Company operating as Register-Mate, Inc.
(RMI), a Texas corporation. RMI was sold during fiscal 1996. See Note 16.
In May 1994, the Company acquired all of the outstanding capital stock of PC
Repair of Florida, Inc. (PCR) for 7,500 shares of Series B Preferred Stock,
which were subsequently converted into 75,000 shares of common stock. PCR is
a provider and servicer of computer systems located in Sarasota, Florida.
The transaction was accounted for as a purchase and valued at $210,000. The
excess of cost over fair value of the assets acquired approximated $195,000
and is being amortized over 15 years. PCR was sold during fiscal 1996. See
Note 16.
In June 1994, the Company acquired all of the outstanding capital stock of
Texas Timberjack, Inc. (TTI), a distributor of commercial and industrial
timber and logging equipment, in Lufkin, Texas. The consideration for the
purchase consisted of (1) $4,026,000 cash; (2) 100,000 shares of the
Company's Series A Preferred Stock, which were converted into 2,000,000
shares of common stock and valued by an independent valuation firm at
approximately $3.5 million; and (3) a non-interest bearing promissory note
payable to the seller in the amount of $10,000,000. The transaction was
recorded as a purchase and valued at approximately $17.5 million. The excess
of cost over fair value of the assets acquired approximated $5.7 million and
is being amortized over 20 years. See Notes 8 and 9.
In August 1994, the Company acquired all of the outstanding capital stock of
Micro Configurations, Inc. (Micro) in exchange for 60,000 shares of Series
A-2 Preferred Stock, which were subsequently converted into 120,000 shares
of common stock. Under the terms of the Micro acquisition the sellers were
entitled to an additional 60,000 shares of such preferred stock
F-19
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subject to certain operational performance. The transaction was initially
recorded as a purchase and valued at approximately $616,000 with the excess
of cost over fair value of the net assets acquired approximating $746,000.
In July 1995, the escrowed shares were issued and converted into 120,000
shares of common stock which resulted in an increase in goodwill of
$367,800. Goodwill related to the Micro acquisition is being amortized over
15 years. Micro is engaged in the assembly, sale and service of computers
and related electronic products. Micro was sold during fiscal 1996.
See Note 16.
The consolidated statement of operations for the year ended September 30,
1994 includes the results of operations of the businesses acquired in 1994
from the respective acquisition dates.
PROFORMA FINANCIAL INFORMATION
The following unaudited proforma summary for fiscal year 1994 represents the
results of operations as if the acquisitions of Overhill and TTI had
occurred at October 1, 1993. The proforma effect of the other 1994
acquisitions would not be material and are not presented herein. For fiscal
year 1995, the unaudited proforma summary represents the results of
operations as if the acquisition of Overhill had occurred at October 1,
1994. This summary does not purport to be indicative of what would have
occurred had the acquisitions been made as of those dates or of results that
may occur in the future. This method of combining the companies is for the
presentation of unaudited proforma summary results of operations.
For the Year Ended
September 30,
----------------------------
1995 1994
------------ ------------
Net sales $164,138,000 $150,270,000
Income before extraordinary item
and cumulative effect of accounting change $ 4,176,000 $ 340,000
Net income $ 4,176,000 $ 645,000
Income per share:
Before extraordinary items and
and cumulative effect of accounting change $ .33 $ .04
Extraordinary item - -
Cumulative effect of accounting change .04
------------ ------------
Net income $ .33 $ .08
============ ============
F-20
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SALES CONTRACTS RECEIVABLE
The Company's forestry segment provides financing to customers on certain
equipment sales using installment sales contracts. The following is a summary
of the components of the Company's net investment in these contracts as of
September 30, 1996 and 1995 and the related deferred income based on the
installment method of income recognition.
1996 1995
------------- -------------
Contracts outstanding $ 12,401,689 $ 15,252,646
Less deferred income (4,324,627) (4,820,047)
------------- -------------
8,077,422 10,432,599
Less allowance for doubtful accounts (118,545) (178,039)
------------- -------------
Net investment in sales contracts receivable $ 7,958,877 $ 10,254,560
============= =============
The following is a summary of the maturities of the contracts receivable and
related deferred income:
Contracts Deferred
Due September 30, Outstanding Income Net
- ------------------ ------------- ------------- -------------
1997 $ 10,279,299 $ 3,589,142 $ 6,690,157
1998 1,853,528 648,640 1,204,888
1999 268,862 86,485 182,377
------------- ------------- -------------
$ 12,401,689 $ 4,324,267 $ 8,077,422
============= ============= =============
6. NOTES RECEIVABLE
The forestry segment periodically makes advances to certain unrelated
individuals and corporations. These notes have interest rates that range from
12% to 18%, are due within one year and are secured by a variety of marketable
collateral. Allowances are established periodically if, at the date of
valuation, management feels it is probable that a loss exists in the portfolio.
The allowance is established based upon interest payment history, evaluation of
the portfolio and the related expected credit risk.
The Company had $972,422 and $1,215,389 of notes receivable as of September 30,
1996 and 1995, respectively from unrelated corporations and individuals net of
allowances of $248,259 and $187,103. The loans are secured primarily by land,
timber and equipment. At September 30, 1996, approximately $378,000 of such
notes receivable were no longer accruing interest. All notes receivable are due
in less than one year.
In connection with the sale of the computer segment in July 1996 (See Note 16),
the Company
F-21
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
received as consideration notes receivable totalling $1,037,890. The term notes
bear interest of 7% payable semi-annually in June and December and are due
January 1, 1998.
7. INVENTORIES
Inventories are summarized as follows: September 30
------------------------
1996 1995
----------- -----------
Finished goods:
Forestry Group $12,172,607 $ 9,640,664
Computer Group - 1,598,681
Transformer Group 548,624 885,492
Food Group 9,768,795 9,418,418
Work-in-process:
Transformer Group 694,683 603,929
Raw material:
Transformer Group 1,320,086 1,003,399
Food Group 3,522,984 2,857,089
----------- -----------
Total $28,027,779 $26,007,672
=========== ===========
F-22
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
September 30,
-------------------------
1996 1995
---------- -----------
Register-Mate software $ - $ 512,500
Non-compete agreements 700,000 700,000
Deferred financing costs 1,039,089 1,039,089
Other 258,560 164,565
---------- -----------
1,997,649 2,416,154
Less accumulated amortization (595,410) (394,502)
---------- -----------
$1,402,239 $ 2,021,652
========== ===========
The Company entered into noncompete agreements with the seller of TTI (See
Note 4) and an officer of TTI with such amount being amortized over the 7
year life of each agreement.
The Company incurred certain legal, brokerage and other costs associated
with the financing of the acquisition of Overhill Farms. These costs are
being amortized over a period of 5 years.
9. NOTES PAYABLE
Notes payable consist of the following:
September 30,
-------------------------
1996 1995
---------- -----------
Note payable to Ford Motor Credit Corporation (a) $ 99,036 $ 252,692
Note payable to Finova Capital Corporation (b) 9,417,183 10,482,364
Other notes payable - 395,000
---------- -----------
$9,516,219 $11,130,056
========== ===========
(a) TTI has a floor plan note with Ford Motor Credit Corporation. The floor
plan note accrues no interest provided the equipment financed under the
note is sold within a predetermined period, typically nine to twelve months
from the time TTI takes delivery of the equipment.
(b) In connection with the acquisition of Overhill Farms, Inc. (See Note
4), the Company's Overhill subsidiary obtained an $18,000,000 credit
facility with Finova Capital Corporation which consists of Term Loan A (See
Note 10) in the original amount of $2,000,000, Term Loan B (See Note 10) in
the original amount of $4,000,000 and a $12,000,000 revolving line of
credit. Borrowings under the revolving line of credit are limited to the
lesser of $12,000,000 or an amount determined by a defined borrowing base
which is based on eligible receivables
F-23
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and inventory. Borrowings under the line of credit facility bear interest
at the Citibank base rate plus 1.5% (10.25% at September 30,1996). This
amount is classified as a current liability in the consolidated balance
sheets due to a requirement for Overhill to maintain a blocked account in
favor of the lender for collections on all accounts receivable, which are
immediately applied to reduce borrowings under the line of credit.
Overhill's revolving line of credit requires the payment of an unused line
fee of .25% per annum and an annual facility fee of .50% per annum. The
agreement with Finova relating to this facility contains various covenants
including without limitation, Overhill's pledge to restrict capital
expenditures to certain agreed upon levels, maintain specified current and
debt to net worth ratios and specified levels of net worth. Additionally,
the terms of the credit facility prohibit loans, advances or dividends from
Overhill to the Company and limit management fees the Company can charge
Overhill to $250,000 per annum. Furthermore, the capital stock and
substantially all the assets of Overhill are pledged as collateral and the
Company has guaranteed all obligations under the credit facility. The
credit facility expires on May 5, 1998. As of June 9, 1997, the Company is
in violation of certain covenants in the credit facility including those
restricting affiliated transactions and requiring the filing of audited
financial statements for the Company and its subsidiaries on a timely
basis. The debt is in default and has been classified current as of
September 30, 1996. See Note 3.
NOTE PAYABLE AND ACCRUED INTEREST TO RELATED PARTY
In connection with the acquisition of TTI on June 24, 1994 (see Note 4),
the Company recorded a note to the seller (Mr. Harold Estes) in the amount
of $9,737,719 with interest at 8% due October 31, 1994 and collateralized
by all the capital stock of TTI. As of various maturity dates, the seller
has entered into subsequent agreements with the Company to modify and
extend the term of the note. As of September 30, 1996, the note had a
principal balance of $11,855,000 (plus accrued interest of $691,600) due
December 1, 1997. The note bears interest at 10% through June 30, 1997 and
interest at 16% thereafter through the term of the note. As part of the
most recent modification and extension agreement, upon certain conditions
including the sale of any of the Company's subsidiaries, $9,000,000 of the
note would become immediately due and payable. The note holder has no
recourse to any of the assets or capital stock of Polyphase or any of its
other subsidiaries other than its ownership interest in TTI and no cross-
default provisions exist between this note agreement and any other
Polyphase debt.
The weighted average interest rate on short term borrowings for the year
ended September 30, 1996 was 9.75%.
RESTRICTED NET ASSETS OF SUBSIDIARIES
At September 30, 1996, restricted net assets of subsidiaries totaled
$7,235,702. Such net assets consist of the net assets of Overhill and TTI
which were restricted by the terms of debt agreements as discussed above
and in Note 10.
F-24
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LONG-TERM DEBT
Long-term debt consists of the following: September 30,
----------------------------
1996 1995
------------ -----------
Term loan payable to bank bearing interest
at 8.5%, due in monthly installments of
$12,465 through May 1999, collateralized by
real estate. A final payment of approximately
$600,000 is due in May 1999. $ 845,544 $ 930,825
Senior convertible debentures due July 1, 1999,
bearing interest at 12%, with interest payable
semi-annually in January and July. 4,000,000 4,000,000
Senior convertible debentures due December 1, 1997,
bearing interest at 12%, with interest payable
semi-annually in June and December. 1,500,000 -
Revolving credit agreement of TTI with Comerica Bank-
Texas, bearing interest at prime plus 1/2%,
collateralized by notes, trade accounts receivable
and inventory, originally due in February 1997 and
extended pending lenders receipt of financial statements. 8,900,000 6,199,999
Term Loan A payable to financial institution, with
interest at prime rate plus 2.5%, due in monthly
installments of $33,333 plus accrued interest
through May 1, 2000 (See Note 9). 1,466,672 1,866,668
Term Loan B payable to financial institution, with
interest at prime rate plus 2.5%, due in monthly
installments of $83,333 plus accrued interest
through May 1, 1999 (See Note 9). 1,915,600 3,666,668
Senior subordinated notes payable of Overhill
to a financial institution bearing interest 13%
payable quarterly, net of discount of $404,100
and $470,134. Principal payments of $6,500,000
are due on April 29, 2002 and 2003. 12,595,900 12,529,866
Other 350,000 624,716
------------ -----------
31,573,716 29,818,742
Less current maturities (31,573,716) (2,589,077)
------------ -----------
Total long-term debt $ - $27,229,665
============ ===========
F-25
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of long-term debt are as follows, assuming the debt is
not called prior to maturity:
For the Years Ending
September 30,
--------------------------
1997 $11,428,127
1998 2,206,226
1999 5,076,779
2000 266,684
2001 -
Thereafter 12,595,900
-----------
$31,573,716
===========
As of June 9, 1997, the Company is in violation of certain covenants in existing
credit agreements including those restricting affiliated transactions and
requiring the filing of audited financial statements for the Company and its
subsidiaries on a timely basis. The debt continues to be in default and has
been classified current as of September 30, 1996.
The senior convertible debentures issued July 1994 are convertible at the
option of the holder into shares of common stock equal to the principal amount
of each bond (or in $1,000 increments) divided by a $5.65 conversion price
subject to adjustment in certain circumstances. The indenture requires the
Company to maintain key man life insurance policies on two executives in an
amount equal to the redemption value of the bonds naming the trustee as
beneficiary on behalf of the bond holders. The senior convertible debentures
prohibit the Company from paying or making within any 12-month period dividends
or distributions on its Common Stock having a value in excess of 50% of the
consolidated net income of the Company, unless each holder of the senior
convertible debentures receives an amount equal to its pro rata portion of the
dividend or distribution (on an as-converted into Common Stock basis).
Effective December 1, 1995, the Company entered into additional agreements with
the holders of the 12% senior convertible debentures, whereby the Company sold
an additional $1,500,000 of debentures on generally the same terms and
conditions as those previously issued. The new debentures bear interest at 12%,
payable semiannually in June and December, are convertible into common stock at
the rate of $5.00 per share and become due and payable on December 1, 1997.
TTI's revolving line of credit with Comerica Bank-Texas which was originally due
February 1997 has been extended pending lenders renewal upon receipt of audited
financial statements. The terms of the revolving line of credit require TTI to
restrict capital expenditures to certain agreed upon levels, maintain specified
debt to net worth and fixed charge coverage ratios, limit the amount of its
contingent liabilities and maintain agreed upon levels of working capital and
tangible net worth. Furthermore, the terms of the revolving line of credit
prohibit loans or advances from TTI to the Company and limit dividends from TTI
to the Company to $580,000 per year. The Company has guaranteed all obligations
under TTI's revolving line of credit. Availability under the line of credit at
September 30, 1996 amounted to approximately $2,000,000.
F-26
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has 50,000,000 authorized shares of $.01 par value preferred stock
with the rights and preferences as designated by the Board of Directors. Series
A, B, C, D, E, A-2 and A-5 of Preferred Stock are authorized for issuance of
375,000, 300,000, 300,000, 600,000, 1,425,000, 750,000 and 750,000 shares of
preferred stock, respectively. All shares of preferred stock designated above
have a redemption value of $10 per share, are noncumulative at the annual rate
of 5% of the redemption value, are convertible at the option of the holder into
20, 10, 5, 2-1/2, 1, 2 and 2 shares of restricted common stock, respectively,
have a liquidation preference of $10 per share and are callable by the Company
at 105% of the redemption value.
Series A-2 preferred shares are entitled to two votes per share on all matters
on which the holders of common stock have one vote per share. No other series
of preferred shares has voting rights.
During November 1995, the Company, in a transaction with an unrelated
corporation, sold 250,000 shares of newly-designated Series A-3 Preferred Stock
for $2,500,000 cash. The designations of the Series A-3 stock are similar to
those of other series of preferred stock, except that Series A-3 preferred stock
has voting rights, is entitled to cumulative annual dividends of 12% and is
convertible into 2 shares of common stock (subject to adjustment in certain
circumstances.) The Company also entered into an agreement with an associate of
the corporation to provide consulting services to the Company over a 36-month
period. The consideration for such services was the grant of options to
purchase 357,143 shares of common stock at $3.50 per share (the fair market
value at the date of grant) plus hourly fees and expenses.
In October 1996, the associate of the aforementioned corporation exercised the
stock option to purchase 357,143 shares of common stock. Consideration for the
transaction was the retirement of 125,000 shares of Series A-3 preferred stock
having a book value of $1,250,000. The Series A-3 preferred stock had been
assigned by the corporation to the associate.
STOCK OPTIONS TO OFFICERS, DIRECTORS AND EMPLOYEES
In April 1991, the Board of Directors granted to certain officers and directors
options covering 175,000 shares of the Company's common stock at an exercise
price of $.50 per share. Such options are exercisable in cumulative annual
increments of 33% following the first anniversary from the date of grant and
expire five years after the date of grant.
During July 1993 and March 1994, the Board of Directors granted to certain
officers and directors options to purchase 650,000 shares at option prices of
$.75 (600,000 shares) and $5.25 (50,000 shares) per share, respectively, which
were equal to the fair value at the date of grant. The options are exercisable
in whole or in part and expire five years from the date of grant.
Under the terms of the 1994 Employee Stock Option Plan adopted by the Board of
Directors in
F-27
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 1994, the Company has reserved a total of 1,000,000 shares of its common
stock for issuance to eligible employees of, and consultants to, the Company.
The Plan provides for the grant of both incentive stock options (at exercise
prices no less than fair value at the date of grant) and nonqualified stock
options (at exercise prices as determined by the Compensation Committee of the
Board of Directors), that such options may be exercisable as determined by such
Committee and that the Plan will expire ten years following its adoption.
During July 1996, the Board of Directors granted to certain officers, directors
and employees options to purchase 510,000 shares at $2.00 per share which was
equal to the fair value at the date of the grant. The options are exercisable
in whole or in part and expire ten years from the date of grant.
Option transactions pursuant to the above plans during the three years ended
September 30, 1996 are summarized as follows:
Number of Exercise Shares
Shares Price Exercisable
--------- ---------- -----------
Outstanding, September 30, 1993 368,000 $ .50-2.50 359,667
Granted 357,000 .75-5.25 -
Exercised (232,000) .75 -
--------
Cancelled - - -
Outstanding, September 30, 1994 493,000 $ .50-5.25 493,000
Granted - - -
Exercised - - -
Cancelled - - -
--------
Outstanding, September 30, 1995 493,000 $ .50-5.25 493,000
Granted 510,000 2.00 510,000
Exercised (75,000) .50-.75 -
Cancelled - - -
--------
Outstanding, September 30, 1996 928,000 $50 - 5.25 1,003,000
========
STOCK OPTIONS-OTHERS
In July 1993, the Company entered into an agreement with an unrelated individual
to obtain, over a five-year period, services related to the finding and
evaluation of potential acquisition targets. In consideration thereof the
Company granted the individual an option to purchase 400,000 shares of the
Company's common stock at an exercise price of $.875 per share, the fair value
at the date of grant. The option was exercised during the year ended September
30, 1994.
F-28
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PYRENEES OPTION
In October 1992, the Company's Board of Directors authorized the issuance to the
Pyrenees Group, or its assignees, options to purchase up to 1,000,000 shares of
convertible preferred stock for $10 per share. The options were issued subject
to approval by the Company's shareholders and were approved and ratified at the
Company's Annual Meeting held May 31, 1994. Pyrenees, a private investment
firm controlled by Paul A. Tanner, Chairman and Chief Executive Officer and Paul
A. Tanner, Jr., Director of the Company were granted these options as
consideration for the sale to the Company of its collected due diligence
materials for acquisitions Pyrenees was contemplating, which were to be used by
the Company in its own previously announced acquisition program. The options,
covering Series A, B, C, D and E Preferred Stock, are summarized as follows:
Preferred Conversion Common
Series Shares Price Shares
------ --------- ------- ---------
A 125,000 $ .50 2,500,000
B 100,000 1.00 1,000,000
C 100,000 2.00 500,000
D 200,000 4.00 500,000
E 475,000 10.00 475,000
--------- ---------
1,000,000 4,975,000
========= =========
In fiscal 1994, the Pyrenees Group exercised options with respect to the Series
A and Series B Preferred Stock through the issuance of two 7% demand notes in an
aggregate amount of $2,250,000, collateralized by the shares issued; such notes
were reflected as a reduction in the stockholders' equity accounts in the
accompanying consolidated balance sheet as of September 30, 1994. In fiscal
1995, the Pyrenees Group exercised the Series C option through an additional
demand note bearing interest at 7% and collateralized by the shares issued. On
May 5, 1995 in conjunction with the acquisition of Overhill Farms, Pyrenees paid
$4,000,000 to IBM on the Company's behalf. Of this amount, $2,992,000
represented repayment of the 7% notes with the excess, $1,008,000, representing
a temporary advance by Pyrenees to the Company. This amount plus other payments
made by Pyrenees resulted in a temporary advance of $1,153,000 at September 30,
1995. During fiscal 1995, Pyrenees converted Series A, B and C Preferred Stock
into common stock. During November, 1995, Pyrenees exercised the Series D
option through an additional 7% note in the amount of $2,000,000, collateralized
by the shares issued. The Series E option expired unexercised.
The Company recognized a non-recurring, non-cash charge for the fair value of
the Pyrenees options as of the date of approval by the shareholders. The fair
value of the options, as determined by an independent valuation firm, amounted
to $1,400,000; such amount was recorded as a non-cash charge against income with
a corresponding credit to paid-in capital.
During the year ended September 30, 1996, the shares were converted to 500,000
shares of common stock and principal payments of approximately $721,000 were
made on the note.
F-29
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANT TO PURCHASE COMMON STOCK OF SUBSIDIARY
The warrant to purchase common stock of subsidiary issued in connection with the
$13 million subordinated debt described in Note 10 provides that the warrant
holders may purchase shares of the Company's Overhill subsidiary (representing
22.5 % of its common stock) at any time over a ten year period which ends May 5,
2005 for a nominal exercise price of $100. The warrant holders also have the
option to "put" the warrants to the Company any time after the warrant's fifth
anniversary at a "put" price based upon the higher of fair market, book or
appraised value of the subsidiary. The "put option" is exercisable anytime
after May 5, 2000 or immediately, if the subsidiary experiences a change in
control or merges with another unaffiliated company. Additionally the Company
has the option of "calling" the outstanding warrants for cash anytime after May
5, 2001. The "call" price is determined using the same formula as provided for
determining the warrant's "put" price.
In order to account for the obligation associated with the warrant's "put"
feature, the Company estimated the fair value of the warrants to be $900,000 at
the date of issuance. This amount was discounted at 12% for a five-year period
which resulted in a $495,405 liability and related debt discount on the senior
subordinated note being recorded for the warrant's "put" feature at the date of
issuance. In order to account for changes in the estimated warrant liability,
the Company periodically estimates the fair value of the Overhill common stock
and accretes the warrant liability accordingly through a charge to earnings.
(See Notes 3 and 4.)
12. INCOME TAXES
Income tax expense (benefit) consists of the following:
For the Years Ended
September 30,
1996 1995 1994
---------- --------- ----------
Current:
Federal $1,193,807 $ 111,589 $ -
State 265,467 414,289 127,000
Deferred:
Federal 115,233 (396,409) (94,000)
State 19,035 (53,242) (16,000)
---------- --------- ---------
Total income taxes $1,593,542 $ 76,227 $ 17,000
========== ========= =========
F-30
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective tax rate on earnings (loss) before income tax charges (benefits)
was different than the federal statutory tax rate. The following summary
reconciles the federal statutory tax rate with the actual effective rate:
For the Years Ended
September 30,
1996 1995 1994
------ ------ ------
Effective statutory tax expense (benefit) rate 34.0% 34.0% (34.0%)
Increase (decrease) in effective tax rate
resulting from:
State taxes, net of federal tax benefit 9.2 7.7 9.0
Officer life insurance premiums,
amortization of goodwill, accretion
of stock warrants 12.5 6.7 6.5
Exercise of stock options - - (10.2)
Limitation on utilization of net
operating losses - - 30.0
Utilization of net operating losses (4.3) (31.9) (14.2)
Change in losses losses
Sale of subsidiaries 27.9 - -
Other 6.6 (0.2) -
------ ------ ------
Effective tax expense rate 85.9% 2.1% 1.3%
====== ====== ======
F-31
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As stated in Note 2, in 1993 the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
among other things a liability approach to calculating deferred income taxes.
The components of deferred tax balances as of September 30, 1996 and 1995 are
summarized as follows:
1996 1995
----------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 1,348,559 $ 209,628
Inventory 132,732 459,231
Accrued expenses 167,036 192,812
Deferred sales - 62,080
Net operating loss carryforwards - 69,232
AMT credit carryforwards - 69,945
Investment in subsidiary (unconsolidated) 45,206 -
Other 14,748 -
----------- ----------
Deferred tax assets 1,708,281 1,062,928
----------- ----------
Deferred tax liabilities:
Stock option exercises (17,572) (27,572)
Prepaid expenses (235,624) (216,501)
Intangibles (788,775) (296,357)
Depreciation (422,591) (112,668)
Other (11,335) (43,178)
----------- ----------
Deferred tax liabilities (1,475,897) (696,276)
----------- ----------
Net deferred tax assets $ 232,384 $ 366,652
=========== ==========
The Company has utilized all net operating losses available for carryforward.
Additionally, the Company has utilized all alternative minimum tax credit
carryforwards. Deferred tax assets are included in prepaid expenses and other
assets in the accompanying consolidated Balance Sheets.
F-32
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Future minimum lease payments for all operating leases at September 30, 1996 are
as follows:
For the Years Ending
September 30,
--------------------
1997 $1,323,131
1998 1,113,113
1999 473,206
2000 43,224
2001 24,375
----------
$2,977,049
==========
Certain of the leases provide for renewal options for periods from 1998 to 2005
at substantially the same terms as the current leases.
Rent expense, including monthly equipment rentals, was approximately $1,510,000,
$893,000 and $190,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.
The Company's subsidiary, TTI relies on two suppliers for the majority of their
new units and parts. As of September 30, 1996, TTI had commitments to purchase
inventory amounting to $3,944,000.
TTI guarantees on behalf of various customers certain lines of credit with banks
and financial institutions. The portion of the credit lines guaranteed ranges
from zero to 100% on a customer-by-customer basis. At September 30, 1996, the
Company's guarantees totaled $7,493,671. The Company receives a fee, in the
form of interest participation on certain of the notes upon which it is
contingently liable. This fee is recognized as interest income by the Company
and is usually held by the institution to meet reserve requirements. Company
funds held in escrow by the lenders of $882,383 at September 30, 1996 are
included in the Consolidated Balance Sheet as restricted cash and are fully
offset by a reserve for credit guarantees.
TTI has an interest in two partnerships. The total investment in these
partnerships at September 30, 1996 of $307,985 is included in other assets. TTI
guarantees the debt of these partnerships. The amount guaranteed at September
30, 1996 of $494,890 is collateralized by accounts receivable, inventory,
equipment, buildings and real estate.
F-33
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINGENCIES
On May 10, 1996, the United States District Court for the Northern District of
Texas dismissed a class action suit that initially had been filed in the Eastern
District of New York. The suit claimed that the Company and its officers were
responsible for artificially inflating the market price of the Company's common
stock during the period of October 26, 1993 through January 15, 1995.
In January 1997, a suit was filed in District Court of Dallas County against the
Company by Rice Partners II, L.P., subordinated debt holders of the Overhill
Farms subsidiary. The suit claims, among other things, that the Company
breached covenants of the subordinated debt agreement and refused to cure the
defaults within a reasonable period of time. The Company has filed a counter
suit claiming Rice Partners II, L.P. (i) refused to comply with verbal
agreements to the indenture (ii) conspired with the former general manager of
Overhill to force the Company to sell Overhill Farms at a distressed price in
order to benefit and (iii) caused the halting of trading of the Company's stock.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based
on advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial position or results of
operations.
See Note 14 for a guarantee of related party indebtedness.
14. RELATED PARTY TRANSACTIONS
During fiscal 1994, the Company made aggregate non-interest bearing cash
advances to Mr. Tanner in the amount of approximately $282,000. At September
30, 1994, Mr. Tanner had repaid $150,000 of such advances. During fiscal 1995,
following the repayment of the unpaid 1994 advances, additional advances
amounting to approximately $63,000 were made to Mr. Tanner which were unpaid at
September 30, 1995. During fiscal 1996, additional amounts were advanced to or
on behalf of Mr. Tanner which aggregated approximately $1.5 million. On
December 8, 1995, the aforementioned advances and an unpaid promissory note
receivable from Mr. Tanner were refinanced through the issuance to the Company
of a 12% unsecured demand note from Mr. Tanner in the principal amount of
$2,000,872.
Also during the period, the Company made disbursements to the Pyrenees Group, a
corporation controlled by Mr. Tanner, of approximately $2.67 million, of which
$1,153,000 represented repayment of existing advances from Pyrenees, with the
balance representing an advance to Pyrenees of approximately $1.5 million.
During January 1996, the Company reached an agreement in principle to manage a
project to develop and build a multi-purpose sports facility in Las Vegas,
Nevada. The project is being developed by PLY Stadium Partners, Inc. ("Stadium
Partners"), a private investment firm headed by Mr. Tanner. As part of the
transaction, the Company is also to participate in the facility's
F-34
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
management, sales of suites and seat options, concessions and events and is to
be compensated for such services. The Company agreed to provide to Stadium
Partners up to $4 million of debt that (1) is convertible into a 14% economic
interest in the project and (2) is to be guaranteed by certain members of the
investment group. As part of this agreement, the aforementioned accounts
receivable from Mr. Tanner and Pyrenees (approximately $3.5 million), together
with any subsequent amounts advanced, charged or accrued to or on behalf of
Stadium Partners were considered as components of the $4 million of convertible
debt, to bear interest at 12% and are guaranteed by Mr. Tanner and Pyrenees. As
of September 30, 1996, the Company advanced an additional $9,271,054 which are
subject to the above guarantees, and are due and payable currently by Stadium
Partners.
On November 15, 1996, Stadium Partners, through a newly-formed partnership,
purchased 62 acres in Las Vegas for the development of the stadium and adjacent
convention facility. Financing was provided by Lehman Brothers Holdings, Inc.
("Lehman") through a partnership, Nevada Stadium Partners Limited Partnership
("Nevada Partnership") with Lehman receiving an equity interest in the project.
The Company has guaranteed the repayment of the loan from Lehman to the Nevada
partnership in the above mentioned transaction, in certain circumstances or upon
the occurrence of certain events. Such guarantee is effective upon the
occurrence of certain conditions, including without limitation if Nevada
Partnership files for bankruptcy or insolvency, if representations by the
Partnership prove to be fraudulent regarding the financial condition of the
Partnership or, the land securing the loan is further encumbered or ownership is
transferred without the consent of Lehman.
During the twelve months ended September 30, 1996, the Company accrued
management and service revenues of $2,550,000 and interest income of $790,000
related to the Company's activities with Stadium Partners, the collectibility of
which is dependent upon the success of the project and/or the guarantees
referred to above. As a result of the terms of the financing described above
Stadium Partners is precluded from making any distributions until permanent
project financing is secured or stadium suite sales are made that are sufficient
to repay the financing from Lehman. As a consequence of Stadium Partners
inability to effect such sales or obtain such financing by March 15, 1997 in
order to make its payment to the Company on such date, the Company has
established a reserve of $3.34 million as of September 30, 1996, which
represents the income accrued. The reserve will be reduced as collections and
distributions are made pursuant to the Stadium Partners loan agreements.
Subsequent to year end, the Company no longer accrues management fees or
interest income on the existing advances.
In January 1997, the Company further advanced Stadium Partners $4.9 million.
The funds advanced consisted of $2.4 million, drawn from an existing line of
credit, and $2.5 million from a six month term note. The term note bears
interest at 16%, is payable monthly and is secured by a second lien on the
Company's headquarters. As additional collateral, the Company agreed to issue
an option on 500,000 shares of Series A-2 preferred stock (convertible into
1,000,000 shares of common stock) which is exercisable upon default of certain
covenants of the agreement.
F-35
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the aforementioned transaction, the Company entered into a
two year consulting agreement with a principal of the lender. In consideration
of the agreement, the Company issued an option to purchase 200,000 shares of
common stock at $.01 per share.
OTHER TRANSACTIONS
Other assets include an insurance premium receivable representing insurance
premiums paid by TTI on behalf of Harold Estes, President and former owner of
TTI. As of September 30, 1996, insurance premium receivable was $492,000.
In February 1994, a company owned by Harold Estes, loaned DPPI $350,000 to pay a
previous mortgage on the Company's principal executive offices. The outstanding
principal and interest on this loan was $363,347 as of May 25, 1994, when such
loan was paid in full by the Company.
In connection with the purchase of TTI, the Company acquired a note receivable
from an officer. The note is secured by marketable securities, payable within
one year and bears interest at 3.96%. As of September 30, 1996 the balance
outstanding was $367,634
Upon the resignation of Paul Stevens from the Board of Directors and as
President of PIC in October 1993, the Company and Mr. Stevens entered into an
agreement whereby Mr. Stevens was to provide consulting services to PIC in
consideration for (1) the issuance of 7,500 shares of Series A Preferred Stock,
valued at $75,000 and convertible into 150,000 shares of restricted common
stock, and (2) a monthly retainer of $12,500 cash for a 5-year period. This
agreement was terminated in September 1994, whereby Mr. Stevens agreed to waive
all remaining cash payment requirements and the Company agreed to register the
common stock underlying Mr. Stevens Series A Preferred Stock and to cancel stock
subscriptions receivable from Mr. Stevens in the amount of $30,000. The
Company's expense for the year ended September 30, 1994 amounted to
approximately $200,000 as a result of this consulting contract and its
subsequent termination.
See Note 11 for discussion of options granted to the Pyrenees Group, a related
party.
See Notes 4 and 9 for discussion of note payable to Harold Estes.
15. PROFIT SHARING PLAN
In 1986, prior to acquisition by the Company, TTI adopted a profit sharing plan.
In order to participate in the plan, an employee must be at least 21 years of
age, have been employed by TTI at least one year and be a full time employee.
Vesting begins in the third year of employment and increases each year until
full vesting is achieved in the seventh year. The plan is administered by an
independent third party. Trustees for the plan are the president and controller
of TTI. The maximum contribution is the lesser of 15% of eligible salaries or
net income plus retained earnings. Profit sharing expense for the years ended
September 30, 1996 and 1995 were $264,000 and $211,000 and for the period from
acquisition through September 30, 1994 was approximately $45,000.
F-36
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SALE OF SUBSIDIARIES
The Company, during February 1995, entered into a transaction whereby it
exchanged 100% of the common stock of Taylor-Built Industries, Inc., a wholly
owned subsidiary, for 200,000 shares of restricted common stock of Optimax,
Inc., a publicly held company - such shares were sold in a private transaction
in February 1996. No significant gain or loss was recognized on these
transactions.
In July 1996, the Company completed a transaction with an unrelated third
party to sell a controlling interest in the Company's computer subsidiaries.
The transaction was accomplished through the sale of 51% of a newly formed
subsidiary, PC Networx America, Inc. (PCNA), whose sole assets consist of the
capital stock of Network America, Inc., PC Repair of Florida, Inc., Computer
Systems Concepts and Register Mate, Inc. The consideration for this sale
amounted to approximately $1,600,000 (subject to adjustments) consisting of
$475,000 of cash, $86,457 of notes receivable and $1,175,000 of preferred stock.
The Company intends to publicly distribute to its shareholders a dividend of 30%
of the outstanding stock of PCNA with the Company retaining 19%. This
distribution is expected to occur as soon as practicable. In a related
transaction with the same party, the Company sold 100% of the stock of Micro
Configurations, Inc. (MCC) for a note receivable in the amount of $951,433
secured by the stock and assets of MCC. Total notes receivable outstanding at
September 30, 1996 related to these two transactions amounted to $1,037,890.
See Note 6. No gain or loss was realized on either of these transactions.
Subsequent to this transaction, PCNA's name was changed to DataTell Solutions,
Inc.
17. SALE OF ASSETS
During the period ended June 30, 1996, the Company's Texas Timberjack subsidiary
completed the sale of a parcel of land in Lufkin, Texas. The Company realized a
gain of $875,000 on the property having a book value of approximately $625,000.
18. INFORMATION BY INDUSTRY SEGMENT
The Company's industry segments are outlined below.
TRANSFORMER MANUFACTURING
The transformer manufacturing segment manufactures and sells custom designed
transformer and communication filters. Customers are primarily defense
contractors or defense contractor suppliers in the Mid-Atlantic and Northeastern
regions of the United States.
F-37
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORESTRY
The forestry segment sells, finances, and repairs timber and logging equipment
in East Texas and Western Louisiana. Customers range from small logging
operations to large integrated paper mills.
COMPUTER SALES AND SERVICE
The computer sales and service segment assembles and sells personal computers
and provides systems setup and hardware maintenance services. Customers
serviced range from individuals to large corporations. Subsidiaries included in
the segment are Network America, Inc., in Tulsa, Oklahoma; Letronix and Computer
System Concepts in Queens, New York; PC Repair in Sarasota, Florida and Micro
Configurations Inc., in Brooklyn, New York. Effective July 1, 1996, the Company
sold 51% of its interests in the computer operations. (See Note 16)
FOOD
The food segment produces high quality entrees, plated meals, soups, sauces and
poultry, meat and fish specialties primarily for customers in the airline,
restaurant and weight loss industries.
CORPORATE AND OTHER
The Corporate segment provides management and advisory services to Stadium
Partners, a privately owned development corporation engaged in the development
of a multi purpose sports facility in Las Vegas, Nevada.
F-38
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
------------------------------------------------------------------------------------
Transformer Computer
Manufacturing Sales and Corporate
Food Forestry Corp. Service and Other Totals
------------ ------------ ----------- ------------ ------------ -------------
Net Sales:
Sales to unaffiliated customers $ 98,771,224 $ 34,247,283 $ 3,549,126 $ 10,398,177 $ 2,574,975 $ 149,540,785
============ ============ =========== ============ =========== =============
Operating profit (loss) and income
before income taxes:
Operating profit (loss) $ 6,260,382 $ 3,039,922 $ 76,726 $ (1,530,277) (1,181,786) $ 6,664,967
Interest and other income 751,385
Interest expense (6,389,926)
Gain on sale of assets 827,852
-------------
Income before income taxes $ 1,854,278
=============
Identifiable assets:
Segment assets $ 38,746,696 $ 41,073,186 $ 3,305,280 $ - $11,053,359 $ 94,178,521
============ ============ =========== ============ =========== =============
Capital expenditures:
Segment $ 392,668 $ 2,159,674 $ 87,875 $ - $ 15,992 $ 2,656,209
============ ============ =========== ============ =========== =============
Depreciation and amortization:
Segment $ 2,024,902 $ 611,070 $ 82,402 $ 229,659 $ 469,104 $ 3,417,137
============ ============ =========== ============ =========== =============
The Company's food group had sales to a single customer in fiscal 1996 which
comprised approximately 26% percent of consolidated sales. No other customer
accounted for more than 10% of the Company's sales in fiscal 1996.
F-39
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
------------------------------------------------------------------
Computer
Transformer Sales and
Food Forestry Manufacturing Service Totals
----------- ----------- ------------- ----------- ------------
Net Sales:
Sales to unaffiliated customers $40,395,326 $42,778,102 $3,602,678 $15,259,366 $102,035,472
=========== =========== ========== =========== ============
Operating profit and earnings
before income taxes
extraordinary items and cumulative
effect of accounting changes:
Operating profit $ 2,707,773 $ 4,691,322 $ 302,512 $ 548,601 $ 8,250,208
General corporate expenses (1,498,507)
Interest and other income 592,055
Interest expense (3,791,059)
------------
Income before income taxes $ 3,552,697
============
Identifiable assets:
Segment assets $38,991,764 $34,423,387 $2,988,017 $ 7,149,085 $ 83,552,253
=========== =========== ========== =========== ============
Corporate assets 4,606,610
------------
Total assets $ 88,158,863
============
Capital expenditures:
Segment $ 133,118 $ 590,052 $ 68,729 $ 157,408 $ 949,307
=========== =========== ========== =========== ============
Corporate 26,576
------------
Total capital expenditures $ 975,883
============
Depreciation and amortization:
Segment $ 857,813 $ 559,872 $ 69,321 $ 322,767 $ 1,809,773
=========== =========== ========== =========== ============
Corporate 125,786
------------
Total depreciation and amortization $ 1,935,559
============
The Company's food group had sales to a single customer in fiscal 1995 which
comprised approximately 15% percent of consolidated sales. No other customer
accounted for more than 10% of the Company's sales in fiscal 1995.
F-40
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
----------------------------------------------------
Computer
Transformer Sales and
Forestry Manufacturing Service Total
----------- ------------- ----------- -----------
Net Sales:
Sales to unaffiliated customers $11,154,096 $3,516,730 $10,299,578 $24,970,404
=========== ========== ========== ===========
Operating profit and earnings
before income taxes
extraordinary items and cumulative
effect of accounting changes:
Operating profit $ 876,257 $ 216,401 $ 466,322 $ 1,558,980
=========== ========== ==========
General corporate expenses (1,203,598)
Non-recurring charge related
to the grant of stock options (1,400,000)
Interest and other income 125,730
Interest expense (447,987)
-----------
Loss before income taxes, extraordinary
item and cumulative effect of accounting change $(1,366,875)
===========
Identifiable assets:
Segment assets $24,868,598 $3,910,465 $6,311,229 $35,090,292
=========== ========== ==========
Corporate assets 2,884,657
-----------
Total assets $37,974,949
===========
Capital expenditures:
Segment $ 61,670 $ 20,749 $ 151,812 $ 234,231
=========== ========== ==========
Corporate 113,290
-----------
Total capital expenditures $ 347,521
===========
Depreciation and amortization:
Segment $ 128,470 $ 109,072 $ 182,979 $ 420,521
=========== ========== ==========
Corporate 76,993
-----------
Total depreciation and amortization $ 497,514
===========
No customer accounted for more than 10% of the Company's consolidated sales in
fiscal 1994
F-41
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Year Ended September 30, 1996
-----------------------------------------------------
December 31 March 31 June 30 September 30
----------- ----------- ------------ -------------
Net revenues $37,497,289 $37,749,771 $36,477,962 $37,815,763
Gross profit 7,578,229 8,705,251 6,415,347 5,976,131
Operating income 2,955,640 2,945,518 926,614 (162,805)
Net income $ 797,296 $ 1,018,001 $ (41,243) $(2,166,266)
=========== =========== =========== ===========
Income per common
share:
Net income $ .06 $ .07 $ (.01) $ (.15)
=========== =========== =========== ===========
The Company's results for the quarter ending June 30, 1996 have been adjusted to
reflect changes in inventory valuation. The inventory adjustments were
identified in the Computer Group and revised in the third quarter, the last
quarter the Company controlled the Computer Group. The Company recorded a
reserve of $3.34 million in the quarter ending September 30, 1996 related to the
Company's activities with Stadium Partners. (See Note 14)
For the Year Ended September 30, 1996
-----------------------------------------------------
December 31 March 31 June 30 September 30
----------- ----------- ------------ -------------
Net revenues $12,611,165 $13,831,411 $33,633,241 $41,959,655
Gross profit 3,064,609 3,034,572 6,285,021 7,595,633
Operating income 877,489 1,005,637 2,151,530 2,717,045
Net income $ 574,354 $ 604,974 $ 917,461 $ 1,188,810
=========== =========== =========== ===========
Income per common
share:
Net income $ .05 $ .05 $ .07 $ .09
=========== =========== =========== ===========
F-42
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Year Ended September 30, 1994
----------------------------------------------------
December 31 March 31 June 30 September 30
----------- ---------- ------------ -------------
Net sales $3,722,093 $3,482,599 $ 4,837,293 $12,928,419
Gross profit 1,070,197 971,372 1,015,160 1,943,440
Operating income (loss) 310,046 184,250 94,812 (233,726)
Income (loss) before
extraordinary item and
cumulative effect of
accounting change 282,643 158,832 (1,325,688) (499,662)
Extraordinary item-early
extinguishment of debt 62,120
Cumulative effect of
change in method of
accounting for taxes 305,000 - - -
========== ========== =========== ===========
Net income (loss) $ 587,643 $ 158,832 $(1,325,688) $ (437,542)
========== ========== =========== ===========
Income (loss) per common
share:
Before extraordinary item
and cumulative effect of
accounting change $ .05 $ .03 $ (.24) $ (.09)
Extraordinary item .01
Cumulative effect of
change in method of
accounting for taxes .05 - - -
---------- ---------- ----------- -----------
Net income (loss) $ .10 $ .03 $ (.24) $ (.08)
========== ========== =========== ===========
Quarterly per share data does not total to annual amounts reported due to the
weighting of common stock equivalents and the changes in the Company's capital
structure during the year. Amounts reported for the quarter ended June 30, 1994
have been restated from those included in Form 10-QSB for such quarter to
eliminate antidilutive common stock equivalents from the computation of loss per
share and to adjust the consideration in connection with the purchase of the
Register-Mate assets.
F-43
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY BALANCE SHEETS
September 30,
------------------------
1996 1995
----------- -----------
Cash $ 38,391 $ 2,193
Receivables from related parties 369,350
Receivables from subsidiaries - 2,259,115
Prepaid expenses and other 2,755,841 531,642
----------- -----------
Total current assets 2,794,232 3,162,300
Property and equipment 1,758,267 1,742,275
Less-Accumulated depreciation (162,763) (102,817)
----------- -----------
1,595,504 1,639,458
Non current receivables:
Related party for doubtful accounts of $3,340,000 9,931,054 -
Other 1,037,890 -
Other assets (primarily investments
in subsidiaries) 28,179,575 34,876,272
----------- -----------
Total assets $43,538,255 $39,678,030
=========== ===========
Accounts payable 346,105 858,476
Accrued expense - 343,878
Due to affiliated party - 1,153,000
Current maturities of long term debt 6,345,544 80,398
----------- -----------
Total current liabilities 6,691,649 2,435,752
Note payable- related party 12,546,000 11,100,000
Long term debt, net - 4,850,427
Deferred income taxes 302,206 154,508
----------- -----------
Total liabilities 19,539,855 18,540,687
----------- -----------
Stockholders' equity:
Preferred stock 2,500 -
Common stock 131,970 126,220
Additional paid in capital 26,630,714 22,106,606
Retained earnings (deficit) (1,487,695) (1,095,483)
Note receivable (1,279,089) -
----------- -----------
Total stockholders' equity 23,998,400 21,137,343
----------- -----------
$43,538,255 $39,678,030
=========== ===========
See note to condensed financial
information of registrant.
F-44
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY STATEMENTS OF INCOME
For the Years Ended
September 30,
--------------------------
1996 1995
----------- -----------
Net revenues $ - $ -
Cost of sales - -
----------- -----------
Gross Profit - -
Selling general and administrative expenses 4,369,130 1,498,508
----------- -----------
Operating income (loss) (4,369,130) (1,498,508)
Other income (expense)
Loss on unconsolidated subsidiaries (855,565) -
Other expense (837,235) -
Interest income 908,364 127,145
Interest expense (2,276,195) (1,877,883)
----------- -----------
Total other income (3,060,631) (1,750,738)
Loss before income taxes (7,429,761) (3,249,247)
Income taxes (benefit) (985,908) (2,133,986)
----------- -----------
(6,443,853) (1,115,261)
Equity in net income of subsidiaries 6,201,641 4,400,860
----------- -----------
Net income (loss) (242,212) 3,285,599
Dividends on preferred stock 150,000 -
----------- -----------
Net income (loss) attributable
to common shareholder $ (392,212) $ 3,285,599
=========== ===========
See note to condensed financial
information of registrant.
F-45
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
-----------------------------
1996 1995
------------- -------------
Cash flow provided by operating activities:
Net income (loss) $ (242,212) $ 3,285,599
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 59,946 125,786
Provision for doubtful accounts 3,340,000 -
Issuance of common stock for accrued interest
payable on convertible subordinated debentures - 9,120
Imputed interest on TTI acquisition note - 66,225
Deferred income tax 147,698 293,616
Increase (decrease) in, net of effects of acquisitions:
Receivables from subsidiaries 2,259,115 (1,941,392)
Prepaid expenses and other (2,224,199) (423,523)
Accounts payable and other (512,371) 710,920
Accrued expenses and other (343,878) 1,279,321
------------- -------------
Net cash used in operating activities 2,484,099 3,405,672
------------- -------------
Cash flows used in investing activities:
Notes receivable (1,037,890) 132,000
Notes receivable from related parties (12,901,704) -
Capital expenditures (15,992) (26,576)
Investment in Overhill Farms, Inc. - (4,000,000)
Other assets 6,696,697 (3,770,824)
------------- -------------
Net cash used in investing activities (7,258,889) (7,665,400)
------------- -------------
Cash flows provided by financing activities:
Net borrowings (payments) on notes payable 1,360,719 (160,104)
Advances from (payments to ) related party (1,153,000) 1,153,000
Proceeds from private placement
of preferred stock 2,500,000 -
Proceeds from the issuance of
12% subordinated debentures 1,500,000 -
Exercise of common stock options 50,000 -
Principal collections on Pyrenees
Dividends on preferred stock (150,000) -
notes receivable 720,911 3,250,000
Common stock issuance costs (17,642) (132,001)
------------- -------------
Net cash provided by financing activities 4,810,988 4,110,895
------------- -------------
Net increase (decrease) in cash 36,198 (148,833)
Cash - beginning of year 2,193 151,026
------------- -------------
Cash - end of year $ 38,391 $ 2,193
============= =============
See note to condensed financial
information of registrant.
F-46
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Note A - Basis of Presentation
In the parent company only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The company's share of net income
of its unconsolidated subsidiaries is included in consolidated income using the
equity method. The parent company only financial statements should be read in
conjunction with the Company's consolidated financial statements.
The Company filed under the SB regulations for fiscal 1994 and was not required
to complete Schedule I. Accordingly, the condensed financial statements for
that year have been omitted.
F-47
POLYPHASE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Three Years in the Period Ended September 30, 1996
Column A Column B Column C Column D Column E Column F
- -----------------------------------------------------------------------------------------------
Balance at Charged to Balance at
beginning costs and end of
Classification of period expenses Deductions Other period
- -----------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended September 30, 1996 $506,805 $146,666 $(134,367) $ $519,104
===========================================================
Year ended September 30, 1995 $580,251 $ 73,446 $(146,892) $ -- $506,805
===========================================================
Note: The Company filed under the SB regulations for fiscal 1994 and was not
required to complete Schedule II. Accordingly, the Valuation and Qualifying
Accounts for that year have been omitted.
F-48
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner June 9, 1997
-------------------------
Paul A. Tanner, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ Paul A. Tanner June 9, 1997
- -----------------------------
Paul A. Tanner
President and Chief Executive
Officer, Chairman of the
Board and Director
(Principal Executive Officer)
/s/ James Rudis June 9, 1997
- -----------------------------
James Rudis
Executive Vice President
and Director
/s/ William E. Shatley June 9, 1997
- -----------------------------
William E. Shatley
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ George R. Schrader June 9, 1997
- -----------------------------
George R. Schrader
Director
/s/ Paul A. Tanner, Jr. June 9, 1997
- -----------------------------
Paul A. Tanner, Jr.
Director
June 9, 1997
- -----------------------------
Michael F. Buck
Director
S-1
EXHIBIT INDEX
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3 through
4.8 to the Company's registration statement on Form S-8 (No. 33-82008),
filed with the Commission on July 27, 1994 (the "1994 Form S-8"))
3.2 Bylaws of Polyphase Corporation (incorporated by reference from Exhibit
4.2 to the 1994 Form S-8)
4.1 Certificate of Designation relating to the Series A-2 Preferred Stock
(incorporated by reference from Exhibit 4.9 to the Company's
Registration Statement on Form SB-2 [No. 33-85334] filed with the
Commission on October 19, 1994 [the "Form SB-2"])
4.2 Certificate of Designation relating to the Series A-3 Preferred Stock
(incorporated by reference from Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1995 [the "1995
Form 10-K"])
10.1+ Stock Option Agreement for Paul A. Tanner (incorporated by reference
from Exhibit 4.12 to the 1994 Form S-8)
-1-
10.2+ Stock Option Agreement for Michael F. Buck (incorporated by reference
from Exhibit 4.13 to the 1994 Form S-8)
10.3+ Stock Option Agreement for Don E. McMillen (incorporated by reference
from Exhibit 4.14 to the 1994 Form S-8)
10.4+ Stock Option Agreement for George R. Schrader (incorporated by
reference from Exhibit 4.15 to the 1994 Form S-8)
10.5+ Stock Option Agreement for James Rudis (incorporated by reference from
Exhibit 10.5 to the Company's Form 8-B, filed with the Commission on
August 27, 1994 (the "Form 8-B"))
10.6+ Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
10.7+ Employment Agreement, dated as of November 1, 1993, between Harold
Estes and Texas Timberjack, Inc. (incorporated by reference from
Exhibit 2 to the 1994 Form 8-K)
10.8 Pledge Agreement, dated as of June 24, 1994, between Polyphase
Corporation and Harold Estes (incorporated by reference from Exhibit
10.10 to the Form 8-B)
10.9 Security Agreement, dated as of June 24, 1994, between Texas
Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.11 to the Form 8-B)
10.10 Stock Option Agreement, dated as of October 21, 1992, between
Polyphase Corporation and the Pyrenees Group (incorporated by
reference from Exhibit 10.12 to the Form 8-B)
10.11 Deed of Trust Note in the amount of $1,000,000, dated May 25, 1994, by
Polyphase Corporation in favor of Comerica Bank-Texas (incorporated by
reference from Exhibit 10.4 to the Company's Form 10-Q for the quarter
ended June 30, 1994 (the "1994 Form 10-Q"))
10.12 Deed of Trust (With Security Agreement and Assignment of Rents), dated
May 25, 1994, covering real property in Dallas County, Texas between
Polyphase Corporation and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.3 to the 1994 Form 10-Q)
10.13 Letter Agreement, dated May 25, 1994, between Polyphase Corporation
and Comerica Bank -Texas (incorporated by reference from Exhibit 10.4
to the 1994 Form 10-Q)
10.14 Securities Purchase Agreement, dated as of July 5, 1994, by and among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.16 to the Form 8-B)
10.15 Registration Rights Agreement, dated as of July 5, 1994, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.17 to the Form 8-B)
10.16 Indenture, dated as of July 5, 1994, from Polyphase Corporation to IBJ
Schroder Bank & Trust Company (incorporated by reference from Exhibit
10.18 to the Form 8-B)
10.17 Form of 12% Senior Convertible Debenture No. 1, payable to Bridge Rope
& Co. or registered assigns (incorporated by reference from Exhibit
10.19 to the Form 8-B)
10.18 Form of 12% Senior Convertible Debenture No. 2, payable to Vault & Co.
or registered assigns (incorporated by reference from Exhibit 10.20 to
the Form 8-B)
-2-
10.19 Asset Purchase Agreement among Champ Computer Systems, Inc., Liberty
United Trust and Polyphase Corporation, dated March 23, 1994
(incorporated by reference from Exhibit 10.25 to the Form SB-2)
10.20 Stock Purchase Agreement among PC Repair of Florida, Inc., Gene H.
Thurston, Jr. and Polyphase Corporation, dated February 15, 1994
(incorporated by reference from Exhibit 10.26 to the Form SB-2)
10.21 Agreement and Plan of Reorganization between the Shareholders of Micro
Configurations, Inc. and Polyphase Corporation, dated July 1, 1994
(incorporated by reference from Exhibit 10.27 to the Form SB-2)
10.22 Credit Agreement, dated August 29, 1994, between Texas Timberjack,
Inc. and Comerica Bank-Texas (incorporated by reference from Exhibit
10.28 to the Form SB-2)
10.23 Guaranty, dated August 29, 1994, from Polyphase Corporation to
Comerica Bank-Texas (incorporated by reference from Exhibit 10.29 to
the Form SB-2)
10.24 Deed of Trust, dated as of August 30, 1994, from Texas Timberjack,
Inc. to J. Patrick Faubion, Trustee (incorporated by reference from
Exhibit 10.30 to the Form SB-2)
10.25 Security Agreement, dated as of August 29, 1994, between Texas
Timberjack, Inc. and Comerica Bank-Texas (incorporated by reference
from Exhibit 10.31 to the Form SB-2)
10.26 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated August 29, 1994 (incorporated by
reference from Exhibit 10.32 to the Form SB-2)
10.27 First Amendment to Credit Agreement dated September 1, 1995, between
Texas Timberjack, Inc. and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.27 to the 1995 Form 10-K)
10.28 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated September 1, 1995 (incorporated
by reference from Exhibit 10.28 to the 1995 Form 10-K)
10.29 Promissory Note in the amount of $2,000,000, from Pyrenees Group, as
maker, to Polyphase Corporation, dated November 1, 1995, related to
the exercise of options on Series D Preferred Stock (incorporated by
reference from Exhibit 10.29 to the 1995 Form 10-K)
10.30 Security Agreement, dated as of November 1, 1995, between Pyrenees
Group and Polyphase Corporation (incorporated by reference from
Exhibit 10.30 to the 1995 Form 10-K)
10.31 Promissory Note in the amount of $2,000,872, from Paul A. Tanner, as
maker, to Polyphase Corporation, dated December 8, 1995 (incorporated
by reference from Exhibit 10.31 to the 1995 Form 10-K)
10.32 Convertible Preferred Stock Purchase Agreement, dated as of November
10, 1995, by and between Polyphase Corporation and Infinity Investors,
Ltd. (incorporated by reference from Exhibit 10.32 to the 1995
Form 10-K)
10.33 Securities Purchase Agreement, dated as of December 1, 1995, by and
among Polyphase Corporation, Merrill Lynch World Income Fund, Inc.,
and Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.33 to the 1995 Form 10-K)
10.34 Registration Rights Agreement, dated as of December 1, 1995, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.34 to the 1995 Form 10-K)
10.35 Indenture, dated as of December 1, 1995, from Polyphase Corporation to
IBJ Schroder Bank & Trust Company (incorporated by reference from
Exhibit 10.35 to the 1995 Form 10-K)
-3-
10.36 Form of 12% Senior Convertible Debenture No. 1, dated December 1,
1995 payable to Bridge Rope & Co. or registered assigns (incorporated
by reference from Exhibit 10.36 to the 1995 Form 10-K)
10.37 Form of 12% Senior Convertible Debenture No. 2, dated December 1,
1995 payable to Kane & Co. or registered assigns (incorporated by
reference from Exhibit 10.37 to the 1995 Form 10-K)
10.38 Renewal Promissory Note in the amount of $11,200,000, dated October
31, 1995, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.38 to the 1995 Form 10-K)
10.39 Amended Pledge Agreement, dated as of October 31, 1995, between
Polyphase Corporation and Harold Estes (incorporated by reference
from Exhibit 10.39 to the 1995 Form 10-K)
10.40 Amended Security Agreement, dated as of October 31, 1995, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference
from Exhibit 10.40 to the 1995 Form 10-K)
10.41** Renewal Promissory Note in the amount of $12,842,916, dated December
31, 1996, payable by Polyphase Corporation to Harold Estes
10.42** Amended Pledge Agreement, dated as of December 31, 1996, between
Polyphase Corporation and Harold Estes
10.43** Amended Security Agreement, dated as of December 31, 1996, between
Texas Timberjack, Inc. and Harold Estes
10.44** Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated June 28, 1996
10.45** Security and Pledge Agreement, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation
10.46** Secured Promissory Note, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation
10.47** Security Agreement, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation
10.48** Promissory Note, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation
10.49** Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1996
+10.50** Stock Option Agreement for Paul A. Tanner dated July 23, 1996
+10.51** Stock Option Agreement for James Rudis dated July 23, 1996
+10.52** Stock Option Agreement for William E. Shatley dated July 23, 1996
+10.53** Stock Option Agreement for Michael F. Buck dated July 23, 1996
+10.54** Stock Option Agreement for George R. Schrader dated July 23, 1996
+10.55** Stock Option Agreement for Paul A. Tanner, Jr. dated July 23, 1996
21.1** Subsidiaries of the Registrant
-4-
23.1** Consent of Ernst & Young LLP
23.2** Consent of Price Waterhouse LLP
27.1** Financial Data Schedule
--------------------------------
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
-5-