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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, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 BROADWAY, SUITE A
ADDISON, TEXAS 75001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 386-0101
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ----------------------------------------- ------------------------
COMMON STOCK, $.01 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No _______
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based on the closing price of such stock on November 30, 1998, was
approximately $3.4 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
November 30, 1998, the registrant had issued and outstanding 15,177,321 shares
of common stock, $ .01 par value.
POLYPHASE CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1 Description of Business 1
Item 2 Description of Property 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk 18
Item 8 Financial Statements 18
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 18
PART III
Item 10 Directors and Executive Officers of the Registrant 18
Item 11 Executive Compensation 18
Item 12 Security Ownership of Certain Beneficial Owners and Management 18
Item 13 Certain Relationships and Related Transactions 18
PART IV
Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K 19
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
------------------------
GENERAL
The Company is a diversified holding company that, through its subsidiaries,
currently operates in three industry segments: the food segment, which produces
high quality entrees, plated meals, soups, sauces and poultry, meat and fish
specialties (the "Food Group"); the forestry segment, which distributes, leases
and provides financing for industrial and logging equipment (the "Forestry
Group"); and the transformer manufacturing 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.
ACQUISITIONS
In connection with the Company's program of diversification and expansion, the
more significant acquisitions consummated by the Company over the past five
years were:
. Texas Timberjack, Inc. ("Timberjack" or "TTI") In June 1994, the
----------------------------------------------
Company acquired all of the outstanding capital stock of TTI from Harold Estes,
current President of TTI. Timberjack, with locations in Lufkin, Jasper,
Cleveland and Atlanta, Texas, is a distributor of industrial and logging
equipment in East Texas and Western Louisiana. The capital stock of TTI was
acquired from Mr. Estes for consideration of approximately $4,000,000 in cash, a
$10,000,000 promissory note payable to the order of Mr. Estes, and 100,000
shares of the Company's Series A Preferred Stock, which were subsequently
converted into 2,000,000 shares of common stock. Subsequent to June 1994, the
Company and Mr. Estes have modified, renewed and extended the promissory note
payable to Mr. Estes. As of September 30, 1998 the promissory note had a
balance of $16,307,405 (including accrued and unpaid interest) and was due
October 6, 1998. Subsequent to year end the note was modified, renewed and
extended through December 15, 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation- Liquidity and Capital Resources."
. Overhill Farms, Inc. ("Overhill") In May 1995, the Company acquired
---------------------------------
all the operating assets of IBM Foods, Inc. The purchase, which was
accomplished through Overhill, a newly-formed subsidiary of the Company,
provided for cash payment to the seller of $31.3 million plus the assumption by
the Company of certain liabilities of the acquired business. Overhill is
located in Culver City, California.
BUSINESS STRATEGY
Management believes the Company's future growth opportunities will concentrate
on the two largest core holdings, the Food Group and Forestry Group. The
business environment of the food industry is mandating consolidation of smaller
regional food processing companies to enhance operating efficiencies and provide
service to large national accounts. The Food Group is evaluating selected
acquisition candidates which can complement Overhill Farms by providing one or
more of the following selected criteria such as: regional brand labels,
additional production capacity, geographical diversification , new markets
and/or new customers. The Forestry Group continues to develop internal growth
through product line extensions and geographic expansions. Additional growth
will be primarily from the investment in or acquisitions of other forestry
related industries.
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To achieve future growth within the Company , Management has identified the
following basic initiatives:
1) Continue to provide high quality products and superior services to our
customers.
2) Seek internal growth by developing new products, adding customers,
leveraging its geographic presence and securing distribution rights to
additional products.
3) Seek additional growth through strategic acquisitions of complementary
businesses with strong management, solid product lines and growth
potential.
OPERATING SEGMENTS
The following table sets forth business segment information with respect to the
percentage of net sales and operating income contributed by each segment for the
years ended September 30, 1998, 1997 and 1996.
1998 1997 1996
- --------------------------------------------------------------------------------
Net Sales
Food Group 64% 63% 66%
Forestry Group 33% 34% 23%
Transformer Group 3% 3% 2%
Other - - 9%
--- --- ---
Total 100% 100% 100%
Operating Income
Food Group 55% 53% 94%
Forestry Group 45% 48% 46%
Transformer Group - (1%) -
Other - - (40%)
--- --- ---
Total 100% 100% 100%
- --------------------------------------------------------------------------------
Reference is made to Note 18 to the Company's consolidated statements for
revenues, operating profits or losses and identifiable assets attributable to
each industry segment for each of the last three fiscal years.
FOOD GROUP
PRODUCTS AND SERVICES - The Food Group, through Overhill, is a value-added
manufacturer of quality frozen food products including entrees, plated meals,
soups, sauces, poultry, meat and fish specialities. Overhill is positioned as a
provider of custom prepared foods to a number of prominent customers such as
American Airlines, Jenny Craig, Albertsons, Carl's Jr., Jack in the Box, Panda
Express and King's Hawaiian. Historically, Overhill has served five industry
segments: airlines, health care, food service, club stores and retail.
SALES AND MARKETING - Overhill markets its products through an internal sales
force and outside food brokers. Overhill believes the airline and health care
industries are mature industries with stable growth potential over the next five
years. The Company is focusing on the retail, club stores and food service
markets as areas of significant future growth. As a result, Overhill management
has restructured its sales force and redirected its marketing efforts to
concentrate on these markets. During fiscal 1998, Overhill has concentrated on
building on and increasing the profitability of existing accounts while
establishing new relationships with companies such as, Panda Express, American
Stores, Wolfgang Puck Food Services and Denny's.
Approximately 62% of Overhill's sales in fiscal 1998 were derived from three
customers, Jenny Craig, Inc. (32%), King's Hawaiian (15%) and American Airlines
(15%). On a consolidated basis these three customers represented approximately
22%, 9% and 9% of the Company's total sales, respectively. Although the
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Company's relationships with these customers remains strong, signified by Jenny
Craig entering into a two year supplier agreement in August 1997 (with an option
for a third year), there can be no assurance that these relationships will
continue. A decline in the sales of Overhill's products to these customers or
the loss of, or a significant change in the relationship between the Company and
any of these key customers, could have a material adverse effect on the
Company's business and operating results. It is management's objective to
reduce the reliance on this concentration of accounts by further expansion into
the retail and food service markets as described above.
MANUFACTURING AND SOURCING - Overhill's manufacturing operations are located in
three separate facilities near Los Angeles, California. The operations are
labor intensive requiring semi-skilled employees. All manufacturing employees
are unionized with contracts covering each plant. Such contracts are due to
expire at various times over the next three years. Management believes
relations with the unions are excellent and does not anticipate any problems
which would affect future production. Each plant specializes in different
processing operations allowing efficiencies in production. In fiscal 1998, the
plants operated collectively at approximately 75% of capacity.
The Company's ability to economically produce large quantities of its products,
while at the same time maintaining a high degree of quality, depends in a large
part on its ability to procure raw materials on a reasonable basis. The Company
relies on a few large suppliers for its poultry products with the remaining raw
materials purchased from suppliers in the open market. The Company does not
anticipate any difficulty in acquiring these materials in the future. Raw
materials, packaging for production and finished goods are stored on site or in
a public frozen food storage facility until shipment is required.
BACKLOG - Overhill typically delivers products directly from finished goods
inventory, and as such does not maintain a large backlog of unfilled purchase
orders. While at any given time there may be a small backlog of orders, such
backlog is not material in relation to total sales, nor is it necessarily
indicative of trends in its business. Orders are subject to changes in
quantities or to cancellation with thirty days notice without penalties to
customers.
PRODUCT DEVELOPMENT - Overhill maintains a comprehensive, fully staffed test
kitchen, which formulates recipes and upgrades specific products for current
customers and establishes production and quality standards. Products are
developed based upon either customers' specifications, conventional recipes or
new product developments. Overhill is continuously developing recipes as
customers' tastes change. Overhill also maintains a quality control department
for testing and quality control. The Company manufactures products in the
retail and food service areas with branded and private label entrees.
COMPETITION - Overhill's food products, consisting primarily of poultry, pasta,
beef and assorted related products, compete with products produced by numerous
regional and national firms. Many of these companies are divisions of larger
fully integrated companies such as Tyson Foods and ConAgra, which have greater
financial, technical, human and marketing resources than the Company.
Competition is intense with most firms producing similar products for the food
service and retail industries. Competitive factors include price, product
quality, product development, customer service and, on a retail basis, name
recognition. There can be no assurance that the Company will compete
successfully against existing companies or new entrants to the marketplace.
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. Overhill competes
in this market by its ability to produce small/custom product runs, within a
short time frame and on a cost effective basis.
FORESTRY GROUP
PRODUCTS AND SERVICES - The Forestry Group, through Timberjack and its majority-
owned subsidiaries, is a distributor of industrial and logging equipment with
investments in related timber and sawmill operations. TTI has four locations
in eastern Texas; TTI's headquarters are located in Lufkin and smaller
satellite showrooms and repair facilities are located in Jasper, Cleveland and
Atlanta, Texas. TTI carries the Timberjack, Blount and Hyundai lines of
industrial and logging equipment and the New Holland line of farm equipment.
TTI is involved in the sale, leasing and financing of the equipment it
distributes as well as the servicing of all major
3
brands of related equipment. TTI's operations are primarily concentrated in the
forested areas of East Texas although its market extends into Western Louisiana.
TTI operates in a fragmented industry where its major competition is from
distributors and dealers of Caterpillar and John Deere equipment. TTI estimates
that in Eastern Texas it currently holds approximately 60% of the shear (a
machine that cuts timber) market, 35% of the skidder (a machine that transports
logs out of the forest onto a loader) market and 70% of the loader (a machine
that stacks trees onto trucks) market.
SALES AND MARKETING - Timberjack currently maintains sales and distribution
offices in Lufkin, Jasper, Cleveland and Atlanta, Texas primarily to serve
Eastern Texas and Western Louisiana. Sales are generated through repeat
customers, advertisements in various trade publications and direct marketing
calls on companies located in the area. A general sales manager and several
branch managers supply technical and operational support at the Lufkin
headquarters, while nine salesman have direct responsibility for customer
relationships. TTI meets customers' orders for new equipment and replacement
parts out of existing inventory or through purchase orders placed with the
manufacturers TTI currently represents.
Approximately 49% of TTI's equipment sales during fiscal 1998 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
(7%), sales of parts (19%) and financing equipment sales (14%). No single
customer accounts for more than 10% of TTI's sales. Equipment sales financed by
TTI are typically for periods ranging from 12 to 24 months at interest rates
ranging from 12.5% to 18% per annum.
BACKLOG - As a dealer, servicer and financier of forestry equipment, TTI does
not maintain a backlog of orders. Equipment ordered that is not in inventory
takes approximately one to six weeks to be shipped to a customer from the
manufacturer or another distributor.
PRODUCT DEVELOPMENT - TTI does not develop products for sale to the public. TTI
relies primarily upon its suppliers (Timberjack, Blount, New Holland, Hyundai)
for a majority of its new units and parts.
COMPETITION - Competition in the forestry segment is highly fragmented in the
Eastern Texas and Western Louisiana areas where TTI principally operates.
Because of its lengthy historical presence in these regions, TTI believes it has
established a strong local identity in its field with a proven record of
delivering equipment on a timely basis, providing satisfactory financing and
strong customer support and service. TTI is one of only a few distributors of
Timberjack and Blount forestry equipment in its operating areas. TTI has the
added advantage of being a leading seller and financier of various makes and
models of used logging equipment. Principal competitors include local John Deere
and Caterpillar distributors.
TRANSFORMER GROUP
PRODUCTS AND SERVICES - The Company's Transformer Group consists solely of
Polyphase Instrument Co. ("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 supplies products to
meet its customers' exact specification requirements. Specifications include
frequency response and temperature range; energy loss; and voltage, current, and
energy levels.
SALES AND MARKETING - The Company sells transformers and filters directly to
customers and through commissioned sales representatives and outside brokers
principally in the Mid-Atlantic and Northeast regions of the United States. As
of September 30, 1998, PIC had an in-house sales and marketing staff of two
full-time employees. To obtain new business, PIC relies on referrals from its
existing customer base, advertisements in various trade journals and leads
generated by its reputation.
4
Approximately 92% of the transformers and filters sold by PIC are components of
systems used by the United States Armed Forces. Most of the remaining 8% 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 4% of PIC's
sales from these operations in fiscal 1998 were direct replacement parts
procurement for various government activities.
PIC's products are sold to approximately 120 active accounts, consisting
principally of defense contractors and their suppliers. Nine customers
accounted for approximately 83%, 80% and 76% of PIC's sales for fiscal 1998,
1997, and 1996 respectively, which percentages represented approximately 3% of
the Company's consolidated sales, over the respective years. The three largest
accounts, Eaton, Enosa and Rockwell International comprise approximately 17%,
14% and 11%, respectively, of PIC's overall sales.
MANUFACTURING AND SOURCING - PIC operates a manufacturing facility in Fort
Washington, Pennsylvania that produces approximately 92% of the Transformer
Group's transformers and 100% of its filters. Transformers are also
manufactured at a leased facility in Haiti. See "Description of Property -
Transformer Group."
The manufacturing process for PIC's products 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.
BACKLOG - At September 30, 1998, PIC had unfilled purchase orders aggregating
approximately $2,800,000 as compared to $2,200,000 at September 30, 1997.
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 twelve months.
The Transformer Group's backlog may not provide meaningful period-to-period
comparisons and such comparisons and the backlog may not necessarily be
indicative of future results.
PRODUCT DEVELOPMENT - 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.
COMPETITION - 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.
5
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company does not have patents or patent applications pending on any of its
products, although it may file such patent applications in the future. The
Company attempts to protect its proprietary interests in its products by
entering into non-disclosure agreements with customers.
The Company has registered the trademarks "Polyphase" and "Overhill Farms" in
the United States Patent and Trademark Office.
REGULATION
The Food Group is subject to strict government regulation, particularly in the
health and environmental areas, by the United States Department of Agriculture
("USDA"), the Food and Drug Administration ("FDA"), Occupational Safety and
Health Organization ("OSHA") and the Environmental Protection Agency ("EPA").
The Food Group anticipates increased regulation by the USDA and FDA concerning
food processing and storage. The Company's food processing facilities are
subject to on-site examination, inspection and regulation by the USDA.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position. During 1997, the Company
implemented a Hazard Analysis Critical Point Plan to ensure proper handling of
all food items.
The Transformer Group and the Forestry Group 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.
EMPLOYEES
As of September 30, 1998, the Company had approximately 925 employees as
follows: approximately 710 full-time employees in the Food Group; 150 full-time
employees in the Forestry Group; 60 full-time employees in the Transformer
Group; and 5 full-time employees in the corporate office. All subsidiaries
presently provide group health plans for their domestic employees and pay a
portion of the costs associated with such plans. TTI also maintains a profit
sharing plan for its employees.
SAFE HARBOR STATEMENT
The nature of the Company's operations, and the environment in which it
operates, subjects the Company to changing economic, competitive, regulatory
and technological conditions, risks and uncertainties. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company notes the following factors which, among others, could cause
future results to differ materially from the forward-looking statements,
expectations and assumptions expressed or implied herein. Forward looking
statements contained in this document include, but are not limited to Year 2000
issues (particularly with regard to the Company's business partners and
suppliers), the amount of future capital expenditures, and the possible uses of
proceeds from any future borrowings under the Company's currently effective
credit facilities. Factors which could cause results to differ include, but are
not limited to: changes in the Company's business environment, including
actions of competitors and changes in customer preferences; changes in
governmental laws and regulations, including income taxes; market demand for new
and existing products; and raw material pricing.
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ITEM 2. DESCRIPTION OF PROPERTY.
------------------------
CORPORATE HEADQUARTERS
The Company leases an approximately 4,000 square foot facility which serves as
the corporate headquarters. The office space is located at 4800 Broadway, Suite
A, Addison, Texas 75001 and is leased at a basic rent of $4,100 per month. The
lease which began in February 1998 has a five year term with an option to buy
out the last two years for a nominal amount.
FOOD GROUP
Overhill leases three manufacturing facilities in the Los Angeles, California
area. Plant No.1 is located in Inglewood, California and has 39,000 square feet
of manufacturing area. Plants No. 2 and No. 3 are located in Vernon, California
and have 49,000 and 27,000 square feet of manufacturing area, respectively. In
addition to the manufacturing facilities, Overhill also leases two dry goods
warehouses of 13,500 and 11,500 square feet, a 7,700 square foot frozen storage
facility in Inglewood, California and a 7,900 square foot office in Culver City,
California. While Overhill believes that the existing facilities are adequate
to meet its requirements in the foreseeable future, the Company is currently
reviewing the cost effectiveness of consolidating some manufacturing and
administrative functions.
FORESTRY GROUP
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas, a
building in Cleveland, Texas and leases a building in Atlanta, Texas. The
largest building in Lufkin has 38,500 square feet, which is used for
administrative offices, showroom, parts sales and shop area. The remaining
buildings have 3,600 and 4,200 square feet, respectively. The Jasper, Cleveland
and Atlanta buildings have approximately 10,000, 6,700 and 7,500 square feet
respectively which are used for sales offices, part sales and shop areas. TTI
also leases six buildings on 68 acres in Bon Weir, Texas for a sawmill
operation. The sawmill is leased at a basic rent of $19,000, per month, which
includes certain equipment, with an option to purchase the land, buildings and
equipment for $1,525,000 in March 2000.
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, located about 30 miles from Philadelphia. The lease expires in
May 2001. 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.
ITEM 3. LEGAL PROCEEDINGS.
------------------
During fiscal 1997, five substantially identical complaints were filed in the
United States District Court for the District of Nevada against the Company and
certain of its officers and directors. The plaintiffs' complaints each sought
certification as a class action and asserted liability based on alleged
misrepresentations that resulted in the market price of the Company's stock
being artificially inflated. The defendants filed motions to dismiss in each of
the lawsuits. Without certifying the cases as class actions, the District Court
consolidated the cases into a single action. The District Court, in June 1998,
dismissed the complaint in the consolidated action and ordered that the
plaintiffs replead such complaints. The plaintiffs then filed a motion for
reconsideration of the Court's ruling. The defendants opposed the motion for
reconsideration. The Court has not ruled upon plaintiff's motion; however, the
plaintiffs have not filed an amended complaint. Consequently, it cannot be
determined at this time whether the dismissal of the complaint will lead to a
dismissal of the consolidated action. Management believes (based on advice of
legal counsel) that such litigation will be resolved without material effect on
the Company's financial condition, results of operations or cash flows.
7
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 condition, results of
operations or cash flows.
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.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
----------------------------------------------------------------------
The Common stock is listed on the American Stock Exchange, Inc. under the symbol
"PLY." The following table sets forth the range of high and low sales prices
for the Common stock on the American Stock Exchange for the periods indicated:
Fiscal 1998 High Low
- ----------- --------- ----------
Quarter from October 1, 1997
to December 31, 1997 $ 1.8750 $ 0.7500
Quarter from January 1, 1998
to March 31, 1998 (2) $ 1.0625 $ 0.5000
Quarter from April 1, 1998
to June 30, 1998 $ 1.1875 $ 0.6250
Quarter from July 1, 1998
to September 30, 1998 $ 0.7500 $ 0.3125
Fiscal 1997 High Low
----------- --------- ----------
Quarter from October 1, 1996
to December 31, 1996 $ 7.4375 $ 3.8750
Quarter from January 1, 1997
to March 31, 1997 (1) $ 5.5000 $ 3.8125
Quarter from April 1, 1997
to June 30, 1997 (1) $ 2.6250 $ 1.2500
Quarter from July 1, 1997
to September 30, 1997 $ 2.5000 $ 0.8750
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
- --------------------------------------------------------------------------------
(1) On February 3, 1997, the Company agreed with the American Stock Exchange,
Inc. to temporarily halt trading of its Common stock pending the filing of its
annual report on Form 10-K for the fiscal year ended September 30, 1996. On
June 16, 1997 the Form 10-K and the Forms 10-Q for the quarters ended December
31, 1996 and March 31, 1997, were filed and trading resumed on June 17, 1997.
(2) On January 14, 1998, trading in the Company's stock was temporarily halted
pending the Company's filing of its Annual Report on Form 10-K for the fiscal
year ended September 30, 1997. The stock resumed trading on February 23, 1998.
9
The Company has never paid cash dividends on its common stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such
policy is, within the limitations and restrictions described below, subject to
change based on current industry and market conditions, as well as other factors
beyond the control of the Company.
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 of original principal amount of 12% Senior Convertible Debentures due
July 1, 1999 (the "1999 Bonds"). In general, the 1999 Indenture prohibits 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
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."
As of September 30, 1998, the Company estimates that there were approximately
4,200 beneficial owners of the Company's common stock, represented by 217
holders of record.
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
In November 1995, the Company sold in a private transaction with Infinity
Investors, Ltd. ("Infinity") for $2,500,000 cash, 250,000 shares of Series A-3
Preferred Stock having an aggregate redemption value of $2,500,000 and
convertible into Common stock as provided in the Certificate of Designations for
the Series A-3 Preferred Stock. During the year ended September 30, 1998, the
Company issued 197,586 shares of common stock in partial satisfaction of
Infinity's conversion rights.
In August 1997, the Company sold in a private transaction with Black Sea
Investments, Ltd. ("Black Sea") for net proceeds of approximately $734,000 cash,
7,500 shares of Series F - 6% Convertible Preferred Stock having an aggregate
redemption value of $750,000 and convertible into Common stock at a variable
rate equal to 75% of the average closing market price for the Company's common
stock for the previous five trading days prior to conversion. During the year
ended September 30, 1998, the Company issued a total of 1,008,355 shares of
common stock in satisfaction of Black Sea's conversion rights.
The shares of Preferred Stock described above were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), and were issued by
the Company in reliance on exemptions to the Securities Act. With respect to
the shares of Series A-3 Preferred Stock issued to Infinity, such shares were
issued pursuant to the exemption provided by Section 4(2) of the Securities Act.
Infinity was in compliance with the necessary requirements of Section 4(2) to
receive such exemption. Of the shares of Series A-3 Preferred Stock that were
issued, no such shares were issued to any party other than Infinity.
With respect to the shares of Series F - 6% Convertible Stock issued to Black
Sea, such shares were issued pursuant to the exemption provided by Regulation S
of the Securities Act. Black Sea is a non United States person as that term is
defined in the Securities Act. Of the shares of the Series F - 6% Convertible
Stock that were issued, no such shares were issued to any party other than Black
Sea.
In December 1997, in connection with the refinancing of certain indebtedness to
Merrill Lynch World Income Fund, Inc. and Convertible Holdings, Inc.
(collectively "Merrill Lynch") the Company issued warrants covering a total of
420,000 shares of the Company's Common stock. The warrants issued to Merrill
Lynch covered 210,000 shares exercisable at $.01 per share (the "Penny
Warrants") and an additional 210,000 shares exercisable at $1.125 per share.
The Penny Warrants were exercised and 210,000 shares of Common stock were issued
in May 1998. The shares of common stock issued to Merrill Lynch were not
registered under the Securities Act, and were issued pursuant to the exemption
provided by Section 4(2) of the Securities Act. Merrill Lynch was in compliance
with the necessary requirements of Section 4(2) to receive such exemption.
10
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following table sets forth selected financial data for the Company for each
of the last five fiscal years. This information should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes included
elsewhere herein.
Fiscal Year Ended September 30
- -----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
Income Statement Data: 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 146,231 $ 151,949 $ 149,541 $ 102,035 $ 24,970
Operating Income 7,685 6,584 6,665 6,752 355
Earnings (Loss) Before
Extraordinary Items and
Cumulative Effect of Change
in Accounting Principle 287 (18,825) (242) 3,286 (1,384)
Net Income (Loss) $ (329) $ (18,825) $ (242) $ 3,286 $ (1,017)
=========== =========== =========== =========== ==========
Income (Loss) per Common Share - Basic and Diluted
Before Cumulative Effect of
Extraordinary Item and Change
in Accounting Principle $ .01 $ (1.41) $ (.03) $ .26 $ (.28)
Extraordinary Items (.04) - - - .01
Cumulative Effect of
Accounting Change - - - - .06
----------- ----------- ----------- ----------- ----------
Net Income (Loss) $ (.03) $ (1.41) $ (.03) $ .26 $ (.21)
=========== =========== =========== =========== ==========
Weighted Average Common
and Common Equivalent
Shares Outstanding - Basic
and Diluted 14,552,462 13,632,357 13,722,552 12,745,701 4,881,454
As of September 30
- -----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $ 81,545 $ 72,149 $94,179 $88,159 $37,975
Long-Term Debt 29,221 23,272 - 27,230 5,259
Total Liabilities 73,745 62,748 68,991 66,335 23,618
Accumulated Deficit (21,200) (20,717) (1,488) (1,095) (4,381)
Stockholders' Equity 6,601 7,402 23,998 21,137 14,357
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATION.
-------------
Statements contained in this Form 10-K that are not historical facts, including,
but not limited to, any projections contained herein, are forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this Form
10-K could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30,
1997
For the year ended September 30, 1998 the Company's revenues decreased
$5,718,000 (4%), to $146,231,000 from $151,949,000 for the year ended September
30, 1997. On a consolidated basis gross margins increased from 16.71% to 17.68%
during the period, resulting in an increase in operating income. Operating
income for the year ended September 30, 1998 increased $1,101,000 (17%) to
$7,685,000 from $6,584,000 during the comparable period. The Company attributes
the higher gross margins to the elimination of lower margin business and
improved purchasing of raw materials and inventory. Operating income improved
primarily from improved gross margins and the reduction of salaries and other
general and administrative expenses at the corporate level.
For the year ended September 30, 1998, the Company's interest expense increased
$1,692,000 (24%) to $8,872,000 from $7,180,000 in fiscal 1997. The increase in
interest is primarily due to additional borrowings and increased charges on the
Company's indebtedness to Mr. Harold Estes.
For the year ended September 30, 1998, the Company recorded a tax expense of
$57,000 primarily related to state tax liabilities. The benefit in 1997
resulted primarily from the statutory tax benefit of the $18.7 million loss by
the Company, reduced by the valuation allowance relating to the portion of the
tax benefits that the Company was not able to utilize through carryback of such
losses to prior years.
Net income before extraordinary items for the year ended September 30, 1998
increased to $287,000 from a net loss of $18,825,000 in fiscal 1997. Net income
for the period included a one time gain of $988,000 from the sale of the
Company's corporate headquarters in December 1997. Net income was adversely
affected by an extraordinary expense of $616,000, relating to the early
extinguishment of debt associated with the refinancing of certain indebtedness
by Overhill Farms.
The Food Group's revenues decreased $2,828,000 (3%) to $93,349,000 from
$96,177,000 in fiscal 1997. The decrease in revenue is primarily due to the
intentional paring of lower margin business and the aggressive bidding by
competitors, which if met, would have reduced profitability below minimum
requirements. During the year, the Company worked closely with American
Airlines and Jenny Craig to improve product selection and quality resulting in
increased sales to those customers of $0.9 and $1.1 million respectively. The
food service segment revenues decreased primarily because of decisions to forego
sales due to profitability considerations. Carl's Jr., Jack in the Box, and Koo
Koo Roo continue to be key food service customers while Panda Express and
Denny's, new in fiscal 1998, expect to be significant accounts in the near
future. Gross margins improved during the year due primarily to selectivity of
sales, reduction in manufacturing expenses from capital investments and
improvements in purchases of raw materials. The Company anticipates continued
gross margin improvements in the future. Operating expenses increased primarily
from higher general and administrative costs, professional fees and amortization
associated with the refinancing of debt. Net income decreased primarily from
increased interest and amortization expenses.
The Forestry Group's revenues decreased $4,153,000 (8%) to $48,049,000 from
$52,202,000 in fiscal 1997. The decrease in revenue is primarily attributable to
drier weather conditions in East Texas, reducing demand for new equipment.
Gross margins increased due to a change in the sales mix from new equipment to
used equipment sales and parts and service. Management anticipates revenues
will continue to decline slightly in fiscal 1999 while gross margins will remain
firm. Operating expenses increased $843,000 during the fiscal year resulting in
a $420,000 (9%) decrease in operating income for the year ended September 30,
1998. The
12
operating expense increase resulted from TTI's investment in a controlling
interest of two forestry products businesses. In the third quarter of fiscal
1998, Timberjack arranged the purchase of the rights to harvest 94,500 tons of
raw timber from the U.S. Forestry Service. The timber was cut in late spring and
early summer and will be processed at a sawmill the Company leased in Bon Weir,
Texas. The sawmill is located in six main buildings on 68 acres which serves as
storage for raw materials and finished goods. For the year ended September 30,
1998 these forestry products businesses contributed revenues of approximately
$3.0 million and a net loss of approximately $170,000. Management believes this
operation will be profitable in fiscal 1999 and provide the Company with
diversification within the forestry industry.
The Transformer Group's sales increased $1,262,000 (35%) to $4,833,000 in fiscal
1998 from $3,570,000 in fiscal 1997. Operating income increased $118,000 (176%)
to $51,000 in fiscal 1998 from a $67,000 loss in fiscal 1998. Despite higher
gross margins, increased selling, general and administrative costs during the
year had an adverse impact on operating income. The Company anticipates that
revenues and operating income for the Transformer Group will not increase
significantly as the industry is being affected by technical innovations in
alternative sources of electro-mechanical devices.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996
For the year ended September 30, 1997 the Company's revenues increased
$2,408,000 (1%), to $151,949,000 from $149,541,000 in fiscal 1996. Operating
income for the year ended September 30, 1997 decreased $81,000 (1%) to
$6,584,000 from $6,665,000 in fiscal 1996. Net loss attributable to common
stockholders for the year ended September 30, 1997 was $19,229,000, a decrease
of $18,837,000 from the net loss of $392,000 in fiscal 1996.
Revenues from the Forestry Group increased substantially as that industry
continued to recover from a slump in timber prices experienced in 1995 and 1996.
This revenue increase more than offset the revenue reductions resulting from
the disposal of the computer operations and the slight decrease in revenues of
the Food Group. Selling general and administrative expenses on a consolidated
basis decreased $3,210,000 primarily due to the disposal of the computer
operations in July 1996. Operating income on a consolidated basis remained flat
for fiscal 1997 as compared to fiscal 1996, primarily due to slightly lower
gross margins in the Food segment.
For the year ended September 30, 1997, the Company had nonrecurring charges to
income of $18,452,000, consisting of $14,838,000 from the Company's writeoff of
its related party receivable from Stadium Partners and $3,614,000 in losses
relating to the disposal of its remaining interest in the computer operations.
The advances made to PLY Stadium Partners Inc. ("Stadium Partners"), a private
investment firm headed by Mr. Paul A. Tanner, former Chairman and Chief
Executive Officer of the Company, during fiscal 1997, 1996 and 1995 were deemed
uncollectible, as the project could not secure long term financing on the land
or otherwise gain the support required to construct the stadium. The Company is
pursuing the recovery of at least a portion of its loans to Stadium Partners
through the guarantees of the principals. Amounts due the Company consisted of
convertible debt, cash advances and amounts accrued in 1996 for management fees,
services and interest. The Company recorded a reserve for amounts due the
Company for management fees, services, and interest totaling $3,340,000 in
fiscal 1996.
During fiscal 1997, the purchaser of the Computer Group elected to discontinue
that company's efforts to effect a public registration of DataTell's stock, thus
precluding the Company from making a distribution of the stock to its
shareholders; additionally, purchase price adjustments of $87,000 resulted in
the elimination of the note receivable set up in the prior year. The purchaser
also elected not to further pursue the operation of MCC, and, since the Company
had been unsuccessful in its attempts to recover MCC's assets, the amount due
under the $951,000 note receivable set up in the prior year was determined not
to be realizable. The Company, in response to these actions by DataTell, made
the decision to further reduce its involvement in computer-related businesses
and entered into a new agreement with the controlling shareholder to dispose of
its remaining direct ownership of DataTell. The notes and certain other assets
were exchanged with the same unrelated third party for $200,000 cash and
preferred stock convertible into a 3% equity interest in DataTell. This
transaction resulted in a loss of $2,576,000, which in addition to the
$1,038,000 loss on notes receivable described above
13
resulted in a total loss of $3,614,000 being charged to operations during fiscal
1997 relating to the disposal of its remaining interest in the computer
operations.
The Company does not expect there to be any significant ongoing liabilities from
either the stadium or computer operations and intends to focus its direction on
expanding through acquisitions in its two remaining core businesses.
The Company's interest expense increased $790,000 to $7,180,000 (12%) for the
year ended September 30, 1997 as compared to $6,390,000 for the prior year. The
increase was primarily due to the increased rate charged by Rice Partners, LP on
the subordinated debt at Overhill. The rate increased from 13% to a default
rate of 15% beginning January 1997 and continued through December 1997, at which
time the Company refinanced the debt. The Company also incurred additional
interest at 16% on the second lien note on the Company's corporate headquarters
building beginning in January 1997. See "Liquidity and Capital Resources."
The Company recognized a tax benefit of approximately $654,000 for the year
ended September 30, 1997 as compared to tax expense of $1,594,000 for the year
ended September 30, 1996. The benefit in 1997 resulted primarily from the
statutory tax benefit of the $18.7 million loss by the Company, reduced by the
valuation allowance relating to the portion of the tax benefits that the Company
was not able to utilize through carryback of such losses to prior years.
The Company incurred a noncash charge for warrant accretion of $811,000 for the
year ended September 30, 1997, as compared to $503,000 for the year ended
September 30, 1996. The charge consisted of warrant accretion to fair market
value in anticipation of the redemption in connection with the refinancing of
the Rice debt in December 1997. See "Liquidity and Capital Resources."
Sales in the Food Group decreased $2,594,000 (2%) to $96,177,000 in fiscal 1997
from $98,771,000 in 1996. Increased competitive pressure, particularly in the
airline segment, resulted in a decline in gross profits to $14,696,000 or 15.3%
as compared to $16,098,000 or 16.3% in the previous fiscal year. During the
period, management implemented programs to restore margins to historical levels,
primarily through more aggressive raw materials purchasing procedures, increased
account profitability reviews, customer price adjustments where possible and the
further implementation of manufacturing cost reduction procedures, including a
significant reduction in inventory levels, especially in the area of finished
goods.
Sales in the Forestry Group increased $17,955,000 (52%) to $52,202,000 in fiscal
1997 from $34,247,000 in fiscal 1996. Operating income increased $1,243,000
(41%) to $4,282,000 in fiscal 1997 from $3,039,000 in fiscal 1996. Increased
revenues were primarily due to increased demand for new equipment in East Texas
as the lumber prices stabilized in fiscal 1997 and large operators resumed
making capital expenditures. Overall gross profit margin rates decreased in
fiscal 1997 due largely to a change in the sales mix, from used to new
equipment. During the year, sales of new units increased substantially and the
number of used units, which are traditionally sold at higher margins, decreased.
Operating income increased primarily as a result of higher sales volume, offset
by an increase in selling, general and administrative expenses associated with
the new facility in Lufkin, an additional sales office and a larger operations
staff.
The Transformer Group's sales increased $21,000 (1%) to $3,570,000 in fiscal
1997 from $3,549,000 in fiscal 1996. Operating income decreased $144,000 (187%)
primarily due to higher general and administrative costs during the year.
14
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 $640,000 to $424,000 at September 30, 1998, compared to
$1,064,000 at September 30, 1997.
The Company used $8,229,000 cash in operations in fiscal 1998, as compared to
cash generated of $6,514,000 in fiscal 1997. The decrease in cash flow from
operations results primarily from an $11.6 million increase in the Company's
inventories. Approximately $5.4 million of the increase was inventory located
at TTI's sawmill operation consisting of raw timber ($4.0 million) and finished
goods ($1.4 million). Additionally, TTI's distribution operations increased
equipment and parts inventory by $3.8 million for the year ended September 30,
1998. The remaining inventory increases were at Overhill.
The Company's investing activities for the year ended September 30, 1998
resulted in a use of cash of approximately $2,508,000, as compared to a use of
cash of $4,750,000 for the year ended September 30, 1997. The Company's use of
cash in fiscal 1998 was primarily an increase in notes receivable generated by
TTI and capital expenditures at Overhill. During fiscal 1997, the Company's
use of cash consisted primarily of advances to Stadium Partners.
The Company's financing activities for the year ended September 30, 1998
resulted in cash provided of $10,096,000, compared to cash used of $981,000 in
fiscal 1997. In December 1997, the Company completed the refinancing of a
portion of Overhill Farms debt. The refinancing included repayment of existing
term debt with Finova, the repayment of the Rice subordinated debentures and the
payment of certain Corporate obligations. In August 1998, TTI completed the
refinancing by NationsBank of its previous credit facility with Comerica. See
below for a description of the terms and payments of refinancing.
The Company in August 1997, through its subsidiary Dallas Parkway Properties,
Incorporated ("DPPI"), whose principal asset was the corporate office building,
borrowed $2.8 million on a first mortgage note payable to National Operating,
L.P. The note, collateralized by the office building and guaranteed by the
Company, was payable monthly, interest only at 14% per annum through July 1,
1999, with all remaining interest and principal, together with an "exit fee" of
$56,000, due and payable on August 1, 1999. The Company sold DPPI effective
December 1, 1997, with the buyer assuming the debt on the corporate office
building. The Company was released from its guarantee and realized a gain of
approximately $988,000 on the sale.
During 1995, the Company, through Overhill, entered into a financing arrangement
which provided a senior credit facility of $18.0 million with Finova Capital
Corporation ("Finova") and a subordinated debt placement of $13.0 million with
Rice Partners II, L.P. ("Rice"). These funds were used to provide financing for
the acquisition of the operating assets of IBM Foods, Inc.
The senior credit facility included a revolving line of credit limited to the
lesser of $12.0 million, or an amount determined by a defined borrowing base
(based upon eligible receivables and inventory), and two term loans in initial
principal amounts totaling $6.0 million. At September 30, 1998, approximately
$10.0 million was outstanding under the line of credit, which bears interest at
the Citibank base rate plus 1.5% (approximately 10.0% at September 30, 1998).
The senior credit facility contains various covenants which include without
limitation, a restriction on Overhill's capital expenditures, specified debt to
net worth ratios, specified levels of net worth and a limitation on the ability
of the Company to realize monies, including dividends, management and consulting
fees, from Overhill to $250,000 per annum. The term loans were repaid in
December 1997 as described below.
On December 4, 1997, the Company, with Overhill as the borrower and the Company
as guarantor, obtained a $24.175 million term loan from The Long Horizons Fund,
LP ("Long Horizons"). The note is payable monthly, interest-only at prime plus
4% through April 1999 and thereafter provides for principal amortization of
$250,000 per month, plus interest, until a final payment of approximately
$19.675 million is due in December 2000. During the term of the loan, Overhill
is required to pay, on a quarterly basis, annual loan servicing fees totaling
$180,000, $300,000 and $440,000 for the first, second and third years of the
loan, respectively. The lender also received commitment and closing fees
totaling approximately $1.7 million. In
15
the event the loan is paid in full prior to maturity, the principal amounts due
under the loan are to be reduced by $500,000 if the loan is repaid in full
during the second year of the loan. Long Horizons was also issued stock warrants
which entitle Long Horizons to immediately acquire, at a nominal price of $.01
per share, 30% of the outstanding stock of Overhill, of which 25% (5/6 of the
total shares under warrant) could be repurchased by the Company for $2,000,000
during the two-year period following the date of the agreement. In June 1998, in
connection with amending certain covenants and restrictions, the percentage of
Overhill that the Company can repurchase for $2,000,000 was reduced to 20% from
25%. The loan is collateralized by all the outstanding stock of Overhill owned
by the Company as well as certain assets of Overhill.
Upon closing of the loan in December 1997, certain payments were made and other
obligations restructured as follows:
Merrill Lynch was paid in full all amounts due for principal and interest under
the 1997 bonds (approximately $1.6 million). Additionally, a partial payment of
$2.8 million in principal, plus accrued interest of approximately $200,000, was
made on the 1999 Bonds. The conversion price of the remaining $1.2 million
principal amount of the 1999 Bonds was reduced to $3.00 per share (from $5.65
per share), subject to further adjustment as provided by the Indenture. Merrill
Lynch was also granted warrants to purchase 420,000 shares of the Company's
Common stock, exercisable over a five-year period, with certain registration
rights. The warrants are exercisable into 210,000 shares at $.01 per share and
210,000 shares at $1.125 per share, the market price on the date of grant; the
exercise prices are subject to adjustment to prevent dilution of the holders'
interests.
Finova was paid approximately $1.7 million, representing payment in full of Term
Loans A and B. Finova also entered into an Intercreditor Agreement with Long
Horizons and extended the revolving line of credit until December 2000 at
substantially the same terms and conditions.
Rice was paid all principal ($13.0 million) plus accrued interest and expenses
totaling approximately $362,000 under the subordinated debt facility. Rice also
received approximately $2.0 million as payment for the warrants and legal
expenses in connection with the litigation. The Company also agreed to pay Rice
an additional $2.0 million if Overhill were sold during the first six months, or
$750,000 ($2.0 million if to certain identified parties) during the second six
months, following the date of the agreement. These payments were provided for
under a Compromise and Settlement Agreement With Mutual Release and resulted in
the dismissal of all litigation between the Company and Rice. For the quarter
ended December 31, 1997 the Company recorded a non-cash extraordinary charge to
income of approximately $616,000, resulting from the early extinguishment of the
Rice debt. The financing also provided the Company with approximately $900,000
in working capital.
As of September 30, 1998, the Company has a note payable outstanding to Mr.
Harold Estes, former owner of Texas Timberjack, Inc. (TTI), in the amount of
$16.3 million due October 6, 1998. In December 1998, the Company entered into
an agreement with Mr. Estes to modify and extend the note payable to December
15, 1999 at an interest rate of 9.75% per annum, effective as of October 6,
1998. In connection with the modification, the Company agreed to assign to Mr.
Estes any interest it may have or subsequently obtain with respect to 2,000,000
shares of the Company's common stock owned by the Pyrenees Group, a private
investment firm owned in part by Paul A. Tanner, former Chairman and Chief
Executive Officer of Polyphase, and held by Mr. Estes as secondary collateral.
The Company currently expects to obtain the rights to 2,000,000 shares owned by
Pyrenees in connection with the enforcement of Pyrenees' guarantee of certain
related party receivables written off in prior years. Mr. Estes has no recourse
to any of the assets or capital stock of the Company or any of its other
subsidiaries other than its ownership interest in TTI.
In August 1998, Timberjack obtained an $8.0 million revolving line of credit and
a $4.0 million term note ("the facility") with NationsBank of Texas, N.A.
("NationsBank") to replace a previously maintained a line of credit with
Comerica Bank-Texas ("Comerica"). The line of credit expires in March 1999 and
amounts advanced under the line of credit bear interest at prime less .25%
(approximately 8.0% at September 30, 1998), and are collateralized by
substantially all of TTI's assets. Availability under the line as of September
30, 1998, after giving effect to base limitations, amounted to approximately
$5.8 million ($2.2 million is outstanding at September 30, 1998). The three year
term note has a fixed interest rate of 8.3%, is due in monthly installments
16
of $111,111 plus accrued interest, and will mature in August 2001. The facility
agreement contains various covenants related to receivables, capital
expenditures, inventories, debt ratios, contingent liabilities and payment of
dividends. Furthermore, the terms of the facility generally prohibit loans or
advances from TTI to the Company, but permit the payment of taxes. The Company
has guaranteed all obligations under the TTI facility.
In connection with TTI's participation in the forestry related investments,
TTI's majority-owned subsidiaries, Southern Forest Products LLC and Wood Forest
Products LLC, collectively obtained an $8.0 million revolving line of credit
with NationsBank. The line of credit expires in April 2000 and amounts advanced
under the line of credit bear interest at prime (approximately 8.25% at
September 30, 1998), and are collateralized by substantially all of the assets
of the forestry subsidiaries. Availability under the line as of September 30,
1998, after giving effect to base limitations, amounted to approximately $1.5
million.
The Company guaranteed the repayment of the Lehman loan on behalf of Stadium
Partners. The guarantee is only effective, in certain circumstances or upon
the occurrence of certain events. A foreclosure sale was conducted on or about
July 15, 1998. Notwithstanding such foreclosure action, the Company, based on
the advice of legal counsel, does not believe that it will incur any significant
liability as a result of this guarantee. As a result, the Company believes the
existence of such guarantee will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
The Company believes that the funds available to it from operations and existing
capital resources will be adequate for its capital requirements for the next
twelve months.
YEAR 2000
The Company has initiated a Year 2000 program to identify and address issues
associated with the ability of its business systems and equipment to properly
recognize the Year 2000. The purpose of this effort is to avoid interruption of
the operations of the Company as a result of the century change that will occur
on January 1, 2000. The Company's program includes review of its software
systems, review of its operating systems, upgrade or retirement of non-compliant
hardware and contacting key suppliers to assess their Year 2000 readiness.
The Food Group is completing the installation of a new integrated accounting,
inventory, sales and purchasing system to replace the existing manual and
computer systems supporting operations. The system software and hardware has
been certified by the vendor to be Year 2000 compliant and has been implemented
as a parallel system. The Forestry Group has reviewed its existing software and
is the process of completing an upgrade modification. The corporate office's
hardware and software systems are in the process of upgrading for obsolescence,
which complements the Year 2000 Project. Each group will retire or replace its
existing hardware as deemed necessary and should be completely tested and on
line by June 1999.
The Company intends to begin the second phase of its Year 2000 compliance
project in late January. The Company's subsidiaries will contact key vendors to
access their Year 2000 readiness and evaluate non-compliance on the Company's
future business.
Despite efforts to address the Year 2000 problem, there can be no guarantee that
critical suppliers or entities on which the Company relies will be converted on
a timely basis. The Company believes that based upon preliminary findings that
most vendors are performing internal Year 2000 projects similar to the Company's
and that non compliant vendors will offer alternative measures for time
sensitive products. Contingency plans for obtaining goods and services from non
compliant vendors will be addressed on a case by case basis.
To date, the Company has had no material expenditures for direct Year 2000
compliance procedures. The Company believes that neither the cost of its
planned upgrade and modification program nor a failure to timely complete such
program, will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
The Company does not own, nor does it have an interest in any market risk
sensitive investments. See Item 1 "Description of Business".
ITEM 8. FINANCIAL STATEMENTS.
---------------------
See Index to Consolidated Financial Statements included in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
The information required in response to this Item 10 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION.
------------------------
The information required in response to this Item 11 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, no later than 120 days after the
end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information required in response to this Item 12 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The information required in response to this Item 13 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year by this report.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
--------------------------------------------------------------
(a) 1. and 2. Financial Statements and Financial Statement Schedule.
1. The following consolidated financial statements of Polyphase Corporation
and subsidiaries, included in the annual report of the registrant to its
shareholders for the year ended September 30, 1998, are included in Item 8:
Report of Independent Auditors F-2
Consolidated Balance Sheets-September 30, 1998 and 1997 F-3
Consolidated Statements of Operations-Years ended September 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity-Years ended
September 30, 1998, 1997 and 1996 F-7
Consolidated Statements of Cash Flows-Years ended September 30, 1998, 1997, and 1996 F-9
Notes to Consolidated Financial Statements F-12
2. The following consolidated financial statement schedule of Polyphase
Corporation and subsidiaries is included in item 14(a):
Schedule I - Condensed Financial Information of Registrant F-42
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)
19
+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 Company's Form 8-K dated June 24, 1994 [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)
20
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,
Limited (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)
21
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)
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 $12,842,916, dated December
31, 1996, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.41 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1996 [the "1996
Form 10-K"])
10.39 Amended Pledge Agreement, dated as of December 31, 1996, between
Polyphase Corporation and Harold Estes (incorporated by reference from
Exhibit 10.42 to the 1996 Form 10-K)
10.40 Amended Security Agreement, dated as of December 31, 1996, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.43 to the 1996 Form 10-K)
10.41 Stock Purchase Agreement among Letronix Acquisition Corp. and Polyphase
Corporation dated June 28, 1996 (incorporated by reference from Exhibit
10.44 to the 1996 Form 10-K)
10.42 Security and Pledge Agreement, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.45 to the 1996 Form 10-K)
10.43 Secured Promissory Note, dated June 28, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by reference
from Exhibit 10.46 to the 1996 Form 10-K)
10.44 Security Agreement, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by reference
from Exhibit 10.47 to the 1996 Form 10-K)
10.45 Promissory Note, dated July 1, 1996 by and between Letronix Acquisition
Corp. and Polyphase Corporation (incorporated by reference from Exhibit
10.48 to the 1996 Form 10-K)
10.46 Stock Purchase Agreement among Letronix Acquisition Corp. and Polyphase
Corporation dated July 1, 1996 (incorporated by reference from Exhibit
10.49 to the 1996 Form 10-K)
+10.47 Stock Option Agreement for Paul A. Tanner dated July 23, 1996
(incorporated by reference from Exhibit 10.50 to the 1996 Form 10-K)
+10.48 Stock Option Agreement for James Rudis dated July 23, 1996
(incorporated by reference from Exhibit 10.51 to the 1996 Form 10-K)
+10.49 Stock Option Agreement for William E. Shatley dated July 23, 1996
(incorporated by reference from Exhibit 10.52 to the 1996 Form 10-K)
+10.50 Stock Option Agreement for Michael F. Buck dated July 23, 1996
(incorporated by reference from Exhibit 10.53 to the 1996 Form 10-K)
+10.51 Stock Option Agreement for George R. Schrader dated July 23, 1996
(incorporated by reference from Exhibit 10.54 to the 1996 Form 10-K)
22
+10.52 Stock Option Agreement for Paul A. Tanner, Jr. dated July 23, 1996
(incorporated by reference from Exhibit 10.55 to the 1996 Form 10-K)
10.53 Convertible Promissory Note, dated January 1, 1996 by and between PLY
Stadium Partners, Inc. and Polyphase Corporation (incorporated by
reference from Exhibit 10.53 to the Company's Annual Report on Form
10-K for the year ended September 30, 1997 [the "1997 Form 10-K"])
10.54 Master Loan Agreement, dated January 1, 1996 by and between Polyphase
Corporation and PLY Stadium Partners, Inc. (incorporated by reference
from Exhibit 10.54 to the 1997 Form 10-K)
10.55 Guaranty, dated January 1, 1996 by Paul A. Tanner to Polyphase
Corporation (incorporated by reference from Exhibit 10.55 to the 1997
Form 10-K)
10.56 Guaranty, dated January 1, 1996 by Pyrenees Group, Inc. to Polyphase
Corporation (incorporated by reference from Exhibit 10.56 to the 1997
Form 10-K)
10.57 Management Agreement, dated January 1, 1996 by and between PLY Stadium
Partners, Inc. and Polyphase Corporation (incorporated by reference
from Exhibit 10.57 to the 1997 Form 10-K)
10.58 Security Agreement, dated January 1, 1996, between Paul A. Tanner and
Polyphase Corporation (incorporated by reference from Exhibit 10.58 to
the 1997 Form 10-K)
10.59 Security Agreement, dated January 1, 1996, between Pyrenees Group,
Inc. and Polyphase Corporation (incorporated by reference from Exhibit
10.59 to the 1997 Form 10-K)
+10.60 Stock Option Agreement for David Weinreb dated January 17, 1997
(incorporated by reference from Exhibit 10.60 to the 1997 Form 10-K)
10.61 Amended Renewal Promissory Note in the amount of $14,341,256 dated
December 2, 1997, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.61 to the 1997 Form 10-K)
10.62 Amended Pledge Agreement, dated as of December 2, 1997, between
Polyphase Corporation and Harold Estes (incorporated by reference from
Exhibit 10.62 to the 1997 Form 10-K)
10.63 Amended Security Agreement, dated as of December 2, 1997, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference
from Exhibit 10.63 to the 1997 Form 10-K)
10.64 Term Loan Agreement in the amount of $22,500,000, dated December 4,
1997, among Overhill Farms, Inc. as borrower, Polyphase Corporation as
guarantor and The Long Horizons, Fund, L.P. as lender (incorporated by
reference from Exhibit 10.64 to the 1997 Form 10-K)
10.65 Security Agreement, dated December 4, 1997, between Overhill Farms,
Inc. as grantor and The Long Horizons Fund, L.P. as lender
(incorporated by reference from Exhibit 10.65 to the 1997 Form 10-K)
10.66 Assignment for Security (Trademarks) dated December 4, 1997, between
Overhill Farms, Inc. as assignor and The Long Horizons Fund, L.P. as
assignee (incorporated by reference from Exhibit 10.66 to the 1997
Form 10-K)
10.67 Pledge and Security Agreement, dated December 4, 1997, among Polyphase
Corporation as the pledgor, in favor of The Long Horizons Fund, L.P.
as the lender and Overhill Farms, Inc. as the borrower (incorporated
by reference from Exhibit 10.67 to the 1997 Form 10-K)
23
10.68 Registration Rights Agreement, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P. (incorporated by
reference from Exhibit 10.68 to the 1997 Form 10-K)
10.69 Common Stock Purchase Warrant, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P. (incorporated by
reference from Exhibit 10.69 to the 1997 Form 10-K)
10.70 Voting Rights Agreement, dated December 4, 1997, among Polyphase
Corporation, The Long Horizons Fund, L.P. and Overhill Farms, Inc.
(incorporated by reference from Exhibit 10.70 to the 1997 Form 10-K)
10.71 Supplemental Indenture, dated as of December 5, 1997, from Polyphase
Corporation to IBJ Schroder Bank & Trust Company (incorporated by
reference from Exhibit 10.71 to the 1997 Form 10-K)
10.72 Compromise Settlement Agreement with Mutual Release between Polyphase
Corporation and Rice Partners II, L.P. (incorporated by reference from
Exhibit 10.72 to the 1997 Form 10-K)
10.73 Stock Purchase Agreement between Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1997 (incorporated by reference
from Exhibit 10.73 to the 1997 Form 10-K)
10.74 Certificate of Designation of Preferences of Series B Preferred Stock
of Letronix Acquisition Corporation dated July 2, 1997 (incorporated
by reference from Exhibit 10.74 to the 1997 Form 10-K)
10.75 Term Loan Agreement in the amount of $2,800,000, dated August 29,
1997, between Dallas Parkway Properties, Incorporated and National
Operating, L.P. (incorporated by reference from Exhibit 10.75 to the
1997 Form 10-K)
10.76 Warrant to Purchase 500,000 Shares of Common Shares of Polyphase
Corporation by Black Sea Investments, Ltd., dated August 29,1997
(incorporated by reference from Exhibit 10.76 to the 1997 Form 10-K)
10.77 Offshore Securities Subscription Agreement to purchase 7,500 Shares of
Series F 6% Convertible Preferred between Polyphase Corporation and
Black Sea Investments, Ltd., dated August 29,1997 (incorporated by
reference from Exhibit 10.77 to the 1997 Form 10-K)
10.78 Stock Exchange Agreement by and between Tollway Properties, Inc. and
Polyphase Corporation date as of December 1, 1997 (incorporated by
reference from Exhibit 10.78 to the 1997 Form 10-K)
10.79 Release and Settlement Agreement between Dallas Parkway Properties,
Incorporated and Polyphase Corporation dated as of December 1, 1997
(incorporated by reference from Exhibit 10.79 to the 1997 Form 10-K)
10.80 General Release between Dallas Parkway Properties, Incorporated and
National Operating, L.P. dated as of December 1, 1997 (incorporated by
reference from Exhibit 10.80 to the 1997 Form 10-K)
10.81** Common Stock Purchase Warrant, dated April 24, 1998, covering 105,000
shares issued to Merrill Lynch World Income Fund, Inc.
10.82** Common Stock Purchase Warrant, dated April 24, 1998,
covering 105,000 shares issued to Merrill Lynch Convertible Fund, Inc.
24
10.83** Common Stock Purchase Warrant, dated April 24, 1998, covering 52,500
shares issued to Merrill Lynch Convertible Fund, Inc. (w-1)
10.84** Common Stock Purchase Warrant, dated April 24, 1998, covering 52,500
shares issued to Merrill Lynch Convertible Fund, Inc. (w-1a)
10.85** Common Stock Purchase Warrant, dated April 24, 1998, covering 52,500
shares issued to Merrill Lynch World Income Fund, Inc. (w-2)
10.86** Common Stock Purchase Warrant, dated April 24, 1998, covering 52,500
shares issued to Merrill Lynch World Income Fund, Inc. (w-2a)
10.87** Registration Rights Agreement, dated as of April 24, 1998, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Merrill Lynch Convertible Fund, Inc.
10.88** Guaranty, dated August 7, 1998 by Polyphase Corporation to
NationsBank
10.89** Loan Agreement in the amount of $12,000,000 dated August 7,
1998 between NationsBank, as lender and Texas Timberjack, as borrower.
10.90** Promissory Note in the amount of $4,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower.
10.91** Promissory Note in the amount of $8,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower.
10.92** Security Agreement dated August 7, 1998 by Texas Timberjack
to NationsBank
+10.93** Stock Option Agreement for Michael F. Buck, dated March 17, 1998
+10.94** Stock Option Agreement for George R. Schrader, dated March 17, 1998
21.1** Subsidiaries of the Registrant.
23.1** Consent of Ernst & Young LLP
27.1** Financial Data Schedule
--------------------------
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
(b). Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant during the last quarter of
the Fiscal Year Ended September 30, 1998.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ James Rudis December 22, 1998
---------------
James Rudis
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ James Rudis December 22, 1998
- ----------------
James Rudis
Chief Executive Officer,
Chairman of the Board,
President and Director
(Principal Executive Officer)
/s/ William E. Shatley December 22, 1998
- -----------------------
William E. Shatley
Senior Vice President, Treasurer,
Chief Financial Officer and Director
(Principal Financial and
Accounting Officer)
/s/ George R. Schrader December 22, 1998
- -----------------------
George R. Schrader
Director
/s/ Michael F. Buck December 22, 1998
- --------------------
Michael F. Buck
Director
26
POLYPHASE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Financial Statements:
- ---------------------
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-12
Financial Statement Schedule:
- -----------------------------
Schedule I - Condensed Financial Information of Registrant F-42
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1998. Our audits also
include the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Polyphase
Corporation and subsidiaries at September 30, 1998 and 1997 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects the information set forth
therein.
ERNST & YOUNG LLP
December 18, 1998
Dallas, Texas
F-2
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
--------------------------
1998 1997
----------- -----------
Current assets:
Cash $ 423,957 $ 1,064,259
Receivables, net of allowance for doubtful
accounts of $562,800 and $576,192
in 1998 and 1997, respectively:
Trade accounts 13,839,250 11,576,650
Current portion of sales contracts 3,879,420 5,770,626
Notes receivable 1,813,232 939,621
Inventories 34,568,628 23,002,020
Prepaid expenses and other 527,999 1,607,644
----------- -----------
Total current assets 55,052,486 43,960,820
----------- -----------
Property and equipment:
Land 432,000 765,000
Buildings and improvements 4,054,854 4,660,582
Machinery, equipment and other 9,490,827 8,953,076
----------- -----------
13,977,681 14,378,658
Accumulated depreciation 7,526,281 5,954,554
----------- -----------
6,451,400 8,424,104
----------- -----------
Other assets:
Noncurrent receivables:
Sales contracts 1,363,039 2,027,518
Related parties 670,655 522,597
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $3,183,743
and $2,370,455 in 1998 and 1997, respectively 13,414,996 14,228,284
Other intangible assets 2,494,754 1,197,139
Restricted cash 672,898 717,358
Other 1,425,147 1,071,629
----------- -----------
20,041,489 19,764,525
----------- -----------
Total Assets $81,545,375 $72,149,449
=========== ===========
F-3
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
-----------------------------
1998 1997
------------- -------------
Current liabilities:
Notes payable $ 14,409,681 $ 9,013,099
Accounts payable 6,085,703 7,775,022
Accrued expenses and other 3,514,685 2,251,035
Current maturities of long-term debt 3,533,333 5,720,000
------------ ------------
Total current liabilities 27,543,402 24,759,156
Long-term debt, less current maturities 29,220,972 23,272,280
Note payable and accrued interest to related party 16,307,405 13,998,916
Reserve for credit guarantees 672,898 717,358
------------ ------------
Total liabilities 73,744,677 62,747,710
Commitments and contingencies
Warrants to purchase common stock of subsidiary 1,200,000 2,000,000
Stockholders' equity:
Preferred stock, $.01 par value, authorized 50,000,000
shares, issued and outstanding, 115,000
and 132,500 in 1998 and 1997, respectively 1,150 1,325
Common stock, $.01 par value, authorized 100,000,000
shares, issued and outstanding, 15,080,050
and 13,664,109 in 1998 and 1997, respectively 150,800 136,641
Paid-in capital 28,623,811 28,955,695
Accumulated deficit (21,199,744) (20,716,603)
Notes receivable from related party (975,319) (975,319)
------------ ------------
Total stockholders' equity 6,600,698 7,401,739
------------ ------------
Total Liabilities and Stockholders' Equity $ 81,545,375 $ 72,149,449
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
-----------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Net revenues $ 146,230,922 $ 151,948,553 $ 149,540,785
Cost of sales 120,378,877 126,565,112 120,865,827
------------- ------------- -------------
Gross profit 25,852,045 25,383,441 28,674,958
Selling, general and administrative expenses 18,167,524 18,799,917 22,009,991
------------- ------------- -------------
Operating income 7,684,521 6,583,524 6,664,967
------------- ------------- -------------
Other income (expenses):
Loss on related party receivable - (14,838,456) -
Loss on investment in computer operations - (3,613,815) -
Gain on sale of assets 987,857 - 827,852
Interest expense (8,871,535) (7,179,973) (6,389,926)
Interest income and other 543,080 380,655 751,385
------------- ------------- -------------
Total other expenses (7,340,598) (25,251,589) (4,810,689)
------------- ------------- -------------
Income (loss) before income taxes,
warrant accretion and extraordinary item 343,923 (18,668,065) 1,854,278
Income tax (benefit) expense 56,575 (653,683) 1,593,542
------------- ------------- -------------
287,348 (18,014,382) 260,736
Accretion of warrants to purchase
common stock of subsidiary - 810,776 502,948
------------- ------------- -------------
Net income (loss) before
extraordinary item 287,348 (18,825,158) (242,212)
Extraordinary item:
Early extinguishment of debt (616,239) - -
------------- ------------- -------------
Net loss (328,891) (18,825,158) (242,212)
Dividends on preferred stock 154,250 403,750 150,000
------------- ------------- -------------
Net loss attributable to
common stockholders $ (483,141) $ (19,228,908) $ (392,212)
============= ============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Per share data, basic and diluted:
Net income (loss) per common share:
Income (loss) before
extraordinary item $ .01 $ (1.41) $ (.03)
Extraordinary item (.04) - -
----------- ----------- -----------
Net loss per common share $ (.03) $ (1.41) $ (.03)
=========== =========== ===========
Weighted average shares outstanding,
basic and diluted 14,552,462 13,632,357 13,722,552
=========== =========== ===========
F-6
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998
Preferred Stock Common Stock Paid-in Accumulated Notes
Shares Amount Shares Amount Capital Deficit Receivable Total
----------- ----------- ---------- ---------- ----------- ------------- ------------ -----------
Balance,
September 30, 1995 - $ - 12,621,966 $ 126,220 $22,106,606 $ (1,095,483) $ - $21,137,343
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
stock (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
----------- ----------- ---------- ---------- ----------- ------------- ------------ -----------
Exercise of common stock
options 110,000 1,100 55,500 56,600
Preferred shares tendered
for exercise of options (125,000) (1,250) 357,143 3,571 197,679 200,000
Stock issuance costs (35,000) (35,000)
Payments on Pyrenees note 303,770 303,770
Stock option granted for
services 973,000 973,000
Private placement of
Series F preferred stock 7,500 75 983,802 983,877
Issuance of warrant 150,000 150,000
Dividends on preferred
stock (403,750) (403,750)
Net loss for 1997 (18,825,158) (18,825,158)
----------- ----------- ---------- ---------- ----------- ------------- ------------ -----------
Balance,
September 30, 1997 132,500 $ 1,325 13,664,109 $ 136,641 $28,955,695 $(20,716,603) $ (975,319) $ 7,401,739
----------- ----------- ---------- ---------- ----------- ------------- ------------ -----------
F-7
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998
Preferred Stock Common Stock Paid-in Accumulated Notes
Shares Amount Shares Amount Capital Deficit Receivable Total
----------- ----------- ---------- ---------- ----------- ------------- ------------ -----------
Conversion of preferred
shares
and accrued dividends to
common stock (17,500) (175) 1,205,941 12,059 10,616 22,500
Issuance of warrants 175,000 175,000
Exercise of stock purchase
warrants 210,000 2,100 2,100
Stock issuance costs (17,500) (17,500)
Settlement of stock option
cancellation (500,000) (500,000)
Dividends on preferred
stock (154,250) (154,250)
Net loss for 1998 (328,891) (328,891)
---------- ----------- ------------ ---------- ----------- ------------- ----------- ------------
Balance,
September 30, 1998 115,000 $ 1,150 15,080,050 $ 150,800 $28,623,811 $(21,199,744) $ (975,319) $ 6,600,698
========== =========== ============ ========== =========== ============= =========== ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-8
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
---------------------------------------------------
1998 1997 1996
--------------- --------------- -----------------
Cash flow provided by (used in)
operating activities:
Net loss $ (328,891) $(18,825,158) $ (242,212)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 4,270,728 3,968,100 3,417,137
Equity in the loss of
non-consolidated subsidiaries - - 22,437
Provision for doubtful accounts 151,171 57,088 58,094
Gain on sale of assets (987,857) - -
Loss on related party receivable - 14,838,456 3,340,000
Loss on disposition of computer segment - 3,613,815 -
Deferred income tax - 233,339 134,268
Accretion of warrants to purchase common
stock of subsidiary - 810,776 502,948
Recognition of deferred rent reductions - - (80,413)
Extraordinary item- early extinguishment
of debt 616,239 - -
Changes in:
Accounts and sales contracts receivable 238,128 625,847 (3,461,283)
Inventories (11,566,608) 5,025,759 (3,618,788)
Prepaid expenses and other 229,513 845,100 575,814
Accounts payable (1,689,319) (806,048) 1,414,236
Accrued expenses and other 838,150 (3,873,212) 712,401
-------------- ------------ ----------------
Net cash provided by (used in)
operating activities (8,228,746) 6,513,862 2,774,639
-------------- ------------ ----------------
Cash flows provided by (used in)
investing activities:
Capital expenditures, net (1,389,773) (758,054) (2,656,209)
Notes and other receivables (1,131,537) 1,070,691 242,967
Receivables from related parties 13,654 (5,062,365) (9,560,696)
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 $ (2,507,656) $ (4,749,728) $ (9,811,814)
-------------- ------------ ----------------
F-9
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
---------------------------------------------------------------------
1998 1997 1996
---------------- ------------------- -------------------
Cash flows provided by (used in)
financing activities:
Net borrowings (principal payments) on
line of credit arrangements $ 3,041,139 $ (2,685,537) $ (1,293,837)
Net borrowings on other notes payable
and long-term debt 31,224,906 799,196 1,886,644
Proceeds from the issuance of
12% subordinated debentures - - 1,500,000
Principal payments on term notes (1,982,280) - -
Principal payments on convertible bonds (4,300,000) - -
Principal payments on
subordinated debentures (13,000,000) - -
Redemption of Overhill warrants (2,000,000) - -
Deferred financing costs (2,718,015) - -
Proceeds from private placements of
preferred stock - 733,877 2,500,000
Advances to related parties - - (1,153,000)
Exercise of common stock options
and warrants 2,100 56,600 50,000
Principal collections on Pyrenees
note receivable - 303,770 720,911
Dividends on preferred stock (154,250) (153,750) (150,000)
Common stock issuance costs (17,500) (35,000) (17,642)
-------------- ---------------- ----------------
Net cash provided by (used in)
financing activities 10,096,100 (980,844) 4,043,076
-------------- ---------------- ----------------
Net increase (decrease) in cash (640,302) 783,290 (2,994,099)
Cash at beginning of year 1,064,259 280,969 3,275,068
-------------- ---------------- ----------------
Cash at end of year $ 423,957 $ 1,064,259 $ 280,969
============== ================ ================
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest $ 5,433,057 $ 5,510,229 $ 4,354,072
Income taxes $ - $ 1,001,461 $ 75,000
F-10
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash investing and financing activities:
In October 1996, an unrelated third party exercised an option to purchase
357,143 shares of common stock. As consideration, the Company received 125,000
shares of Series A-3 Preferred Stock having a redemption value of $1,250,000.
In November 1996, a former executive of the Company exercised options on 35,000
shares of common stock at $.01 per share. Such options were granted in
consideration for a consulting contract and were valued at $200,000.
In January 1997, an unrelated third party was granted an option on 200,000
shares of common stock, exercisable at $.01 per share, in exchange for a two
year consulting agreement valued at $973,000.
In August 1997, in connection with the sale of Series F 6% Preferred Stock to an
unrelated third party, the Company issued warrants to purchase 500,000 shares of
the Company's common stock, exercisable at $1.50 per share. The Company valued
the warrants at $150,000. Also in connection with the transaction, the Company
recorded a dividend of $250,000 representing the value assigned to the preferred
stock's discount feature (See Note 10).
In December 1997, in connection with the new Overhill Farms credit agreement,
warrants to purchase 30% of the common stock of Overhill at a nominal exercise
price were issued having an estimated fair value of $1,200,000 (See Notes 3
and 9).
In connection with the refinancing of certain indebtedness with Merrill Lynch,
the Company issued warrants to purchase 210,000 shares of the Company's common
stock exercisable at $.01 per share and 210,000 shares exercisable at $1.125 per
share. Such warrants were valued at $175,000.
In September 1998, the Company recorded a liability, together with a
corresponding charge to paid in capital, for $500,000 in connection with the
settlement of a lawsuit (See Note 10).
In September 1998, the Company issued common shares valued at $22,500 in payment
of accrued dividends (See Note 10).
The accompanying notes are an integral part
of these consolidated financial statements.
F-11
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY AND ORGANIZATIONAL MATTERS
NATURE OF BUSINESS
Polyphase Corporation (the "Company" or "Polyphase") is a diversified holding
company that, through its subsidiaries, operates in three industry segments:
the food segment, the forestry segment and the transformer segment. The food
segment (the "Food Group"), which consists of the Company's wholly-owned
subsidiary Overhill Farms, Inc. ("Overhill"), produces high quality entrees,
plated meals, soups, sauces and poultry, meat and fish specialties. The
forestry segment (the "Forestry Group"), which consists of the Company's
wholly-owned subsidiary Texas Timberjack, Inc.("TTI") and TTI's majority-owned
subsidiaries Southern Forest Products LLC ("SFP")and Wood Forest Products LLC
("WFP"), distributes, leases and provides financing for industrial and
commercial timber equipment and is also engaged in certain related timber and
saw mill operations. The transformer segment (the "Transformer Group"), which
consists of the Company's wholly-owned subsidiary Polyphase Instrument Co.
("PIC"), manufactures and markets electronic transformers, inductors and
filters.
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, its
wholly-owned subsidiaries and its majority-owned subsidiaries. All material
intercompany accounts and transactions are eliminated. Certain prior year
amounts have been reclassified to conform to the 1998 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.
F-12
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company's wholly-owned Forestry Group subsidiary, Texas Timberjack, Inc,
("TTI"), is a retailer of timber and logging equipment. TTI grants credit to
customers, substantially all of whom are located in East Texas or the western
portion of Louisiana, and which rely on the logging industry for their ability
to repay debt to TTI. Collateral is generally the equipment sold for amounts
due under installment sales contracts.
For the years ended September 30, 1998, 1997 and 1996, the Company had charges
to the allowance for doubtful accounts of $535,489, $317,145 and $134,367,
respectively.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to market
data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their recorded
values.
INVENTORIES
Inventories of raw materials, work-in-process and finished goods for
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
and using the average cost method for raw timber and finished wood products.
Inventories of major units 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.
CONCENTRATION OF SOURCES OF LABOR
The Food Group's total hourly and salaried work force consists of
approximately 710 employees. Approximately 77% of the Company's work force is
covered by collective bargaining agreements expiring in fiscal years 1999 and
2000. The Company has currently begun preliminary negotiations with
representatives of employees under collective bargaining agreements expiring
in fiscal 1999 and considers its union relations to be good.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed primarily
using the straight-line method for financial reporting purposes over the
estimated useful lives of the
F-13
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 15-20 years. The Company determines the period to be
benefited by using qualitative measuring factors such as competition, demand
and obsolescence, as well as legal, regulatory and contractual provisions. In
addition, the Company evaluates the existence of goodwill impairment on the
basis of whether the goodwill is fully recoverable from projected,
undiscounted cash flows of the related business unit.
STOCK OPTIONS
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and
related Interpretations in accounting for its employee stock options. The
Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation", which provides for either recognition or disclosure of a
hypothetical charge for the fair value of stock options granted. The Company
has provided the required SFAS 123 disclosures in Note 10.
REVENUE RECOGNITION
The Company generally recognizes revenue when products are shipped or services
are performed and provides for estimated returns and allowances at the time of
sale.
A significant amount of business in the Company's Forestry Group relates to
the sale of equipment through sales/finance contracts. Revenue is recognized
on these accounts using the installment method (See Note 4). 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-14
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Key sales and income information for the Forestry Group for fiscal 1998, 1997
and 1996 are:
1998 1997 1996
------------- ------------- -------------
Equipment sales total $ 35,459,912 $ 43,460,398 $ 28,210,292
Equipment sales financed 3,255,692 3,608,210 3,005,776
Income earned on installment basis 2,343,423 1,613,172 2,046,730
Interest income earned on installment notes 1,317,215 1,457,125 1,634,621
INCOME TAXES
Deferred income taxes recorded using the liability method reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share".
SFAS 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS 128 requirements.
Options to purchase 728,000 shares of common stock at a weighted average
exercise price of $1.58 per share, warrants to purchase 920,000 shares of
common stock at a weighted average exercise price of $1.07 per share, and
132,500 shares of preferred stock convertible into shares of common stock
based on various prices were outstanding during the year ended September 30,
1998. These equity securities were not included in the computation of diluted
earnings per share because the effect would be antidilutive.
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-15
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LIQUIDITY
As described in Note 1, the Company operates in three industry segments: the
Food Group, the Forestry Group and the Transformer Group. The majority of the
Company's net sales, operating profit and identifiable assets are in the Food
and Forestry Groups. The Company's corporate entity has no significant
operations and has historically been primarily dependent upon cash flows from
its Food and Forestry Groups to meet its ongoing liquidity requirements. As a
result of various restrictions in debt agreements that exist at the Food and
Forestry Group levels (See Notes 8 and 9), the Company is generally restricted
from receiving any dividends, loans or other advances from those subsidiaries
and is limited to management fees of $250,000 per year from Overhill.
As of September 30, 1998, the Company had a note payable outstanding to Mr.
Harold Estes, former owner of Texas Timberjack, Inc. (TTI), in the amount of
$16.3 million due October 6, 1998 (See Note 9). In December 1998, the
Company entered into an agreement with Mr. Estes to modify and extend the note
payable to December 15, 1999, at an interest rate of 9.75% per annum,
effective as of October 6, 1998. In connection with the modification, the
Company agreed to assign to Mr. Estes any interest it may have or subsequently
obtain with respect to 2,000,000 shares of the Company's common stock owned by
the Pyrenees Group, a private investment firm owned in part by Paul A. Tanner,
former Chairman and Chief Executive Officer of Polyphase, and held by Mr.
Estes as secondary collateral. Mr. Estes has no recourse to any of the assets
or capital stock of the Company or any of its other subsidiaries other than
its ownership interest in TTI.
As of September 30, 1998, the Company has senior convertible debentures
outstanding with a principal balance of $1.2 million, bearing interest at 12%
per annum, with all principal and accrued interest due and payable July 1,
1999. The Company currently intends to pursue the refinancing of this
obligation on a long-term basis prior to maturity, either through the existing
lender or otherwise. However, there can be no assurance that such
indebtedness can be refinanced. In the event an extension of this obligation
cannot be obtained, the Company plans to use corporate working capital and
funds received from its subsidiaries for management fees and federal income
taxes to satisfy this obligation.
On December 5, 1997, the Company's subsidiary, Overhill Farms, obtained a
$24.175 million, three-year term loan from The Long Horizons Fund, L.P. (Long
Horizons). The note requires interest-only payments monthly at prime plus 4%
through April 1999, and thereafter provides for principal amortization of
$250,000 per month, plus interest, until a final payment of approximately
$19,675,000 is due on December 5, 2000. In addition, under the terms of the
agreement, the Company granted stock warrants that entitle Long Horizons to
immediately acquire at $.01 per share, 30% of the common stock of Overhill, of
which 25% (5/6 of the total shares under warrant) could be repurchased by the
Company for $2,000,000 during the two-year period following the date of the
agreement. In June 1998, in connection with amending certain covenants and
restrictions, the percentage of Overhill that the Company can repurchase for
F-16
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$2,000,000 was reduced to 20% from 25%. There are no assurances that the
Company will be able to repurchase the aforementioned shares.
During the fiscal year ended September 30, 1998, the Company violated several
financial covenants under Overhill's credit agreements. In June 1998, the
Company amended certain of these covenants and obtained waivers for all
previous defaults. As of September 30, 1998, the Company was in compliance
with all covenants under its credit facilities, with the exception of one
covenant with respect to a limitation on capital expenditures at Overhill.
Subsequent to September 30, 1998, the Company obtained a waiver for the
capital expenditure issue. Cross-default provisions are currently in effect
on certain of the Company's debt agreements. Based upon Overhill's operating
budget, the Company expects to be in compliance with all of its debt covenants
during fiscal 1999.
As discussed more fully in Note 13, the Company has guaranteed, in certain
circumstances, a loan from Lehman Brothers Holdings, Inc. ("Lehman") to a
Nevada partnership formed by an entity headed by Mr. Tanner, and Lehman, to
purchase a parcel of land in Las Vegas, Nevada. The Company, based on the
advice of legal counsel, does not believe that it will incur any significant
liability as a result of this guarantee.
The Company during fiscal 1998, undertook several initiatives in order to
reduce the costs of operating its corporate offices. In December 1997, the
Company sold its Dallas Parkway Properties, Incorporated subsidiary, whose
principal asset was the Company's corporate headquarters building, with the
buyer assuming the related debt of approximately $2.8 million. Additionally,
the Company relocated its corporate offices during the second quarter of
fiscal 1998 and reduced its cash flow requirements as a result of lower
occupancy expenses. In addition, the Company eliminated certain corporate
level positions to further reduce future corporate cash requirements.
4. SALES CONTRACTS RECEIVABLE
The Company's Forestry Group provides financing to customers on certain
equipment sales using installment sales contracts. The following is a summary
of the components of the Company's net investment in these contracts as of
September 30, 1998 and 1997 and the related deferred income based on the
installment method of income recognition.
1998 1997
------------ -------------
Contracts outstanding $ 8,738,682 $ 11,749,849
Less deferred income (3,322,066) (3,834,107)
------------ ------------
5,416,616 7,915,742
Less allowance for doubtful accounts (174,157) (117,598)
------------ ------------
Net investment in sales contracts receivable $ 5,242,459 $ 7,798,144
============ ============
F-17
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the maturities of the sales contracts receivable
and related deferred income:
Contracts Deferred
Due September 30, Outstanding Income Net
- ----------------- ------------- ------------- -------------
1999 $ 6,473,008 $ 2,529,302 $ 3,943,706
2000 1,908,353 676,397 1,231,956
2001 321,478 109,334 212,144
2002 35,843 7,033 28,810
------------- ------------- -------------
$ 8,738,682 $ 3,322,066 $ 5,416,616
============= ============= =============
5. NOTES RECEIVABLE
The Forestry Group periodically makes advances under promissory notes to
certain unrelated individuals and corporations. These notes have interest
rates that range from 12% to 18%, are due within one year and are secured by a
variety of marketable collateral. Interest is accrued on notes receivable as
long as the Company believes the notes are collectible. The accrued interest
is added to the note and is shown as part of that balance in the accompanying
statements. Allowances are established periodically if, at the date of
valuation, management feels it is probable that a loss exists in the
portfolio. The allowance is established based upon payment history,
evaluation of the portfolio and the related expected credit risk.
The Company had $1,813,232 and $939,621 of short term notes receivable as of
September 30, 1998 and 1997, respectively, from unrelated corporations and
individuals, net of allowances of $208,743 and $277,092, respectively. The
loans are secured primarily by land, timber and equipment. At September 30,
1998, approximately $371,000 of such notes receivable were no longer accruing
interest. All notes receivable are due in less than one year.
6. INVENTORIES
Inventories are summarized as follows: September 30
---------------------------
1998 1997
------------- ------------
Finished goods $ 24,162,010 $ 19,241,149
Work-in-process 430,507 691,284
Raw materials 10,228,111 3,269,587
Inventory reserve (252,000) (200,000)
------------ ------------
Total $ 34,568,628 $ 23,002,020
============ ============
As of September 30, 1998, finished goods inventories are comprised of
approximately $5,576,000 in inventories at the Food Group, $16,745,000 in
timber and logging related
F-18
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
equipment, $1,198,000 in finished wood products and $642,000 in transformers.
As of September 30, 1998, raw materials inventories are comprised of
approximately $4,684,000 in inventories at the Food Group, $4,207,000 in
harvested but unprocessed timber and $1,338,000 in transformer parts.
7. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
September 30,
-----------------------------
1998 1997
------------ ------------
Non-compete agreements (a) $ 700,000 $ 700,000
Deferred financing costs (b) 2,608,733 878,216
Consulting contract (c) 200,000 200,000
Other 322,132 421,733
------------ ------------
3,830,865 2,199,949
Less accumulated amortization (1,336,111) (1,002,810)
------------ ------------
$ 2,494,754 $ 1,197,139
============ ============
(a) The Company has noncompete agreements with the seller and an officer of
Texas Timberjack, Inc.; such amounts are being amortized over the seven year
life of each agreement.
(b) The Company incurred certain legal, brokerage and other costs associated
with the financing of the initial acquisition of Overhill Farms and the
subsequent refinancing of debt in December 1997. These costs are being
amortized over periods of three to five years (See Note 8 regarding the write
off of certain costs associated with the initial acquisition financing).
(c) The Company granted a former executive options on 35,000 shares of common
stock at $.01 per share. The options were granted in consideration of a two
year consulting contract and were valued at $200,000 based on the fair market
value at the date of grant. The contract is being amortized over the two year
period.
8. NOTES PAYABLE
Notes payable consist of the following:
September 30,
--------------------------------------
1998 1997
-------------- ----------------
Note payable to Ford Motor Credit Corporation (a) $ 979,451 $ 536,885
Note payable to Associates First Capital Corporation (b) 905,948 550,845
Note payable to Finova Capital Corporation (c) 9,959,425 7,875,369
Note payable to NationsBank (d) 2,200,000 -
Other notes payable 364,857 50,000
-------------- ----------------
$ 14,409,681 $ 9,013,099
============== ================
F-19
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) TTI has a floor plan note with Ford Motor Credit Corporation. The floor
plan note accrues no interest provided the equipment financed under the note
is sold within a predetermined period, typically nine to twelve months from
the time TTI takes delivery of the equipment.
(b) TTI has a floor plan agreement with Associates First Capital Corporation
to finance equipment. The agreement accrues interest on an individual unit
basis with an average interest rate of prime plus .50% (approximately 8.75%
at September 30, 1998), and the equipment may be financed for up to one
year.
(c) In connection with its acquisition in 1995, the Company's Overhill Farms,
Inc. subsidiary ("Overhill") obtained a credit facility with Finova Capital
Corporation in the original amount of $18,000,000, consisting of a
$12,000,000 revolving line of credit and two term loans, A and B for
$2,000,000 and $4,000,000, respectively. Term Loans A and B were repaid in
December 1997 as described in Note 9. Borrowings under the revolving line of
credit are limited to the lesser of $12,000,000 or an amount determined by a
defined borrowing base which is based on eligible receivables and inventory.
Borrowings under the line of credit facility bear interest at the Citibank
base rate plus 1.5% (approximately 10.0% at September 30, 1998). 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 may collect from Overhill to $250,000
per annum. The credit facility is collateralized by Overhill's receivables
and inventories and has been guaranteed by the Company. In December 1997,
the credit facility was extended for three years in connection with the Long
Horizons refinancing (See Note 9).
(d) TTI previously maintained a line of credit with Comerica Bank-Texas
("Comerica"). In August 1998, Timberjack obtained an $8.0 million revolving
line of credit with NationsBank of Texas, N.A. ("NationsBank") expiring in
March 1999 to replace its Comerica line. Amounts advanced under the line of
credit bear interest at prime less .25% (approximately 8.0% at September 30,
1998), and are collateralized by substantially all of TTI's assets. The line
of credit agreement contains various covenants related to receivables,
capital expenditures, inventories, debt ratios, contingent liabilities and
payment of dividends. Furthermore, the terms of the revolving line of credit
generally prohibit dividends, loans or advances from TTI to the Company, but
permit the payment of taxes. The Company has guaranteed all obligations
under the TTI revolving line of credit. Availability under the line as of
September 30, 1998, after giving effect to base limitations, amounted to
approximately $5.8 million. The Company intends to renew the revolving
credit facility upon maturity in March 1999.
F-20
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WEIGHTED AVERAGE INTEREST RATE
The weighted average interest rate on short-term borrowings for the year ended
September 30, 1998 was 8.89%.
9. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
-------------------------------
1998 1997
-------------- --------------
Note payable, due August 1, 1999,
collateralized by real estate $ - $ 2,650,000
Senior convertible debentures due July 1, 1999,
bearing interest at 12%, with interest payable
semi-annually in January and July (the "1999 Bonds") 1,200,000 4,000,000
Senior convertible debentures due December 1, 1997,
(the "1997 Bonds") - 1,500,000
Revolving credit agreement of TTI with Comerica
Bank-Texas, bearing interest at prime plus 0.5%
due March 1, 1998 - 5,600,000
Term Loan A payable to financial institution, with
interest at prime rate plus 2.5% - 1,066,676
Term Loan B payable to financial institution, with
interest at prime rate plus 2.5% - 915,604
Senior subordinated notes payable of Overhill due to
Rice Partners II, L.P. (Rice), bearing interest at 13.0% - 13,000,000
Senior subordinated notes payable of Overhill due to a
financial institution, bearing interest at prime plus 4.0%,
(12.25% at September 30, 1998) maturing on December
5, 2000, interest payable monthly, with $250,000 per
month principal payments beginning in May 1999
through maturity, net of discount of $866,667 23,308,333 -
F-21
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revolving credit agreements of TTI subsidiaries with a
financial institution, bearing interest at prime (8.25% at
September 30, 1998) collateralized by accounts
receivable, inventory and fixed assets. The facility is
guaranteed by TTI and expires in April 2000 4,357,083 -
Term loan of TTI in the amount of $4,000,000 payable to
a financial institution, bearing interest at 8.3%, due in
monthly installments of $111,111 plus accrued interest,
with maturity in August 2001 3,888,889 -
Other - 260,000
------------ ------------
32,754,305 28,992,280
Less current maturities (3,533,333) (5,720,000)
------------ ------------
Total long-term debt $ 29,220,972 $ 23,272,280
============ ============
Maturities of long-term debt are as follows:
For the Years Ending
September 30,
---------------------------------
1999 $ 3,533,333
2000 8,690,416
2001 21,397,223
-------------
Total 33,620,972
Less: unamortized debt discount (866,667)
-------------
$ 32,754,305
=============
In December 1997, Overhill refinanced a certain portion of the existing debt.
The new financing amounted to a total facility of $24.2 million which is
structured as a three-year term loan maturing in December 2000. The note
requires interest-only payments at prime plus 4.0% (12.25% as of September 30,
1998) through April 1999, and thereafter provides for principal amortization
of $250,000 per month, plus interest, until a final payment of approximately
$19,675,000 is due on December 5, 2000. The agreement also requires Overhill
to pay on a quarterly basis, service fees totaling $180,000, $300,000 and
$440,000 for the first, second and third years of the loan respectively.
Under the terms of the agreement, the Company granted stock warrants that
entitle Long Horizons to immediately acquire at $.01 per share, 30% of the
common stock of Overhill, of which 25% (5/6 of the total shares under warrant)
could be repurchased by the Company for $2,000,000 during the two-year period
following the date of the agreement. In June 1998, in connection with
amending certain covenants and restrictions, the percentage of Overhill that
the Company can repurchase for $2,000,000 was reduced to 20%
F-22
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
from 25%. Additionally, the lender received fees totaling approximately $1.7
million in connection with this financing, of which $500,000 is refundable if
the loan is paid in full during the second year of the loan. As a result of
this transaction, Overhill repaid in full the $13.0 million subordinated
debentures and repurchased for approximately $2.0 million the warrants
previously held by Rice to purchase up to 22.5% of Overhill's common stock.
These payments to Rice resulted in the Company and Rice reaching a settlement
of their litigation. The Company also used a portion of the proceeds to repay
Term Loans A and B, the $1,500,000 senior convertible debentures and
$2,800,000 of principal of the $4,000,000 senior convertible debentures
described below. The early extinguishment of this indebtedness resulted in an
extraordinary charge to operations of approximately $616,000. The new credit
facility generally restricts loans, advances, dividends or transfers from
Overhill to the Company to $350,000 per year.
The 1999 Bonds 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 $3.00 per share conversion price, subject to
adjustment in certain circumstances. These 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 "1997 Bonds"). In December 1997, the Company paid in
full all amounts due for principal and interest under the 1997 bonds.
Additionally, a partial payment of $2.8 million principal, plus accrued
interest, was made on the 1999 Bonds. As part of this partial payment, the
conversion price of the remaining $1.2 million principal amount of 1999 Bonds
was reduced to $3.00 per share (from $5.65 per share), subject to further
adjustment as provided by the Indenture and the holders were granted warrants
to purchase 420,000 shares of the Company's common stock, exercisable over a
five-year period, with certain registration rights. The warrants are
exercisable for 210,000 shares at $.01 per share (which were exercised during
fiscal 1998) and 210,000 shares at $1.125 per share, the market price of the
Company's Common Stock on the date of grant.
During January 1997, in connection with an advance made to Stadium Partners
(see Note 13), the Company borrowed $2.5 million on a 16% six month note,
collateralized by a second lien on the Company's corporate headquarters
building. When the Company was unable to make the principal payment when due,
the lender elected to post the real estate for foreclosure. Prior to the
foreclosure proceeding, the Company entered into two transactions described
below which enabled it to repay this loan as well as the unpaid balance of the
first mortgage payable to Comerica Bank-Texas in the amount of $773,000.
In August 1997, the Company issued a $2.8 million note payable bearing
interest at 14%, with a maturity date of August 1999. The proceeds were used
to repay debt outstanding on the Company's corporate headquarters building
which secures the note. At the same time, an entity related to this note
holder purchased $750,000 of Series F Preferred Stock and received warrants
F-23
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
covering 500,000 shares of the Company's common stock, exercisable at $1.50
per share, which approximated market at the date of issuance (See Note 10).
The Company has valued the warrants at $150,000 with such amount being
reflected as a debt discount. In addition, the Company recorded a non-cash
dividend of $250,000 representing the value assigned to the preferred stock's
discount feature (See Note 10). In December 1997, the Company sold the entity
whose principal asset was the corporate office building, in exchange for
nominal consideration plus the assumption of this note payable (See Notes 10
and 15).
NOTE PAYABLE AND ACCRUED INTEREST TO RELATED PARTY
In connection with the acquisition of TTI in June 1994, the Company recorded a
note to the seller (Mr. Harold Estes) in the amount of $9,737,719 with
interest at 8% due October 31, 1994 and collateralized by all the capital
stock of TTI. As of various maturity dates, the seller has entered into
subsequent agreements with the Company to modify and extend the term of the
note. As of September 30, 1998, the note had an unpaid balance (including
accrued interest) of $16,307,405, bearing interest at 16% per annum with a
maturity date of October 6, 1998. Upon maturity, the note, with a new
principal amount of $16,347,191, was further modified and extended to mature
December 15, 1999 at an interest rate of 9.75% per annum. In connection with
the modification, effective as of October 6, 1998, the Company agreed to
assign any interest it may have or subsequently obtain with respect to
2,000,000 shares of the Company's common stock owned by the Pyrenees Group
("Pyrenees"), a private investment firm controlled by Paul A. Tanner, the
Company's former Chairman and Chief Executive Officer, and held as secondary
collateral (See Notes 3, 10 and 12). Mr. Estes has no recourse to any of the
assets or capital stock of the Company or any of its other subsidiaries other
than its ownership interest in TTI.
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has 50,000,000 authorized shares of $.01 par value preferred
stock, with the rights and preferences as designated by the Board of
Directors, as follows:
Authorized Conversion
Series Shares Price
---------- ---------- ----------
A 375,000 $ .50
B 300,000 1.00
C 300,000 2.00
D 600,000 4.00
E 1,425,000 10.00
F 10,000 Variable
A-2 750,000 $ 5.00
A-3 750,000 Variable
A-5 750,000 $ 5.00
All shares of preferred stock referred to above generally have a redemption
value of $10 per
F-24
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
share, have a liquidation preference of $10 per share and are callable by the
Company at 105% of the redemption value.
Holders of the Series A-2 preferred shares are entitled to two votes per share
on all matters on which the holders of common stock have one vote per share.
Only Series A-2 and Series A-3 (described below) entitle holders of preferred
stock to voting rights.
During November 1995, the Company, in a transaction with an unrelated
corporation, sold 250,000 shares of 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 holders of the Series A-3 preferred
stock have voting rights (two votes for each preferred share held) and are
entitled to cumulative annual dividends of 12%. The conversion rate of the
Series A-3 preferred stock, originally $5.00 per share, was adjusted in
November 1997 (pursuant to the preferred stock designations) to the market
price of the Company's common stock immediately preceding the date of
conversion. Additionally, the designations were amended to permit payment of
dividends in common stock. Accordingly, based upon the market price of the
Company's common stock as of September 30, 1998, the holder of the Series A-3
preferred stock would have been entitled to approximately 3.4 million common
shares upon conversion of the preferred stock and accrued dividends.
Also during November 1995, the Company entered into an agreement with an
associate of the corporate purchaser of the Series A-3 preferred stock to
provide consulting services to the Company over a 36-month period.
Consideration for such services was the grant of options to purchase 357,143
shares of common stock at $3.50 per share (the fair market value at the date
of grant) plus hourly fees and expenses. The associate of the aforementioned
corporation subsequently exercised this stock option. The consideration for
the exercise of the option on 357,143 shares was the tender of 125,000 shares
of Series A-3 preferred stock having a redemption value of $1,250,000, which
had been assigned by the corporation to its associate.
During August 1997, the Company sold 7,500 shares of newly designated Series F
6% preferred stock for $750,000, less expenses. The designations for Series F
preferred stock provide for a redemption value of $100 per share, cumulative
annual dividends of 6%, payable quarterly, and for a conversion price equal to
75% of the average closing price of the Company's common stock for the five
trading days immediately preceding conversion. In connection with this
transaction, the Company recorded a non-cash dividend of $250,000,
representing the value assigned to the discount feature of the preferred
stock. During the year ended September 30, 1998, the holder converted all
7,500 shares of the Series F 6% preferred stock into a total of 1,008,355
shares of the Company's common stock.
STOCK OPTIONS
During July 1993 and March 1994, the Board of Directors granted to certain
officers and directors of the Company options to purchase shares of the
Company's common stock, of which 343,000 shares are outstanding, at option
prices of $.75 (293,000 shares) and $5.25 (50,000 shares) per share,
respectively, which prices were equal to the fair value at the date of grant.
The
F-25
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expiration date of the July 1993 options (held by certain officers) was
extended to July 2003 by the Board of Directors in March 1998; the March 1994
options (held by a Director) expire in March 1999.
Under the terms of the 1994 Employee Stock Option Plan adopted by the Board of
Directors in 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 non-
qualified stock options (at exercise prices as determined by the Compensation
Committee of the Board of Directors), that such options may be exercisable as
determined by such Committee and that the Plan will expire ten years following
its adoption. As of September 30, 1998, options for 580,000 shares were
available for grant under the plan.
At September 30, 1998, options outstanding that were granted pursuant to the
Plan consist of a total of 385,000 shares, of which 305,000 were granted in
July 1996 at $2.00 per share to certain officers and directors and an
additional 80,000 shares of which were granted to certain directors in March
1998 at an exercise price of $.75 per share; such prices were equal to the
fair market value as of the date of grant.
In January 1997, an unrelated third party was granted an option to purchase
200,000 shares of the Company's common stock, exercisable at $.01 per share,
in exchange for a two-year consulting agreement. The contract was valued at
$973,000 based upon the trading value of the Company's common stock at the
date of grant. The option holder ceased performing services for the Company
during the year ended September 30, 1997; accordingly, the Company recognized
the entire amount associated with the consulting contract as an expense during
fiscal 1997. During the current year, the Company canceled these options and
refused to allow the holder to exercise them. This matter became the subject
of litigation which resulted in a judgment of $500,000 against the Company
which has been recorded as a liability as of September 30, 1998, with a
corresponding charge to paid-in capital. Subsequently, the Company entered
into a settlement agreement with the aforementioned unrelated third party
whereby the Company agreed to pay the judgment amount at a rate of $8,000
(including interest at 10% per annum) per month for eighteen months beginning
in October 1998 with a balloon payment of the remaining principal and interest
balances at the end of that period. In addition, as consideration for this
forbearance, the Company issued the unrelated third party 150,000 shares of
Polyphase common stock and agreed to issue up to an additional 150,000 shares
of Polyphase common stock.
In November 1996, a former executive of the Company was granted and exercised
options on 35,000 shares of common stock at $.01 per share. Such options were
granted in consideration for a consulting contract and were valued at
$200,000, with this amount being amortized over a two year period.
F-26
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of changes in common stock options during the years ended September
30, 1998, is as follows:
Number of Exercise Weighted Avg.
Shares Price Exercise Price
----------- --------- --------------
Outstanding, September 30, 1996 1,285,143 $.75-5.25 $2.01
Granted 235,000 $.01 $.01
Exercised (467,143) $.01-3.50 $2.80
Canceled (30,000) $2.00 $2.00
----------
Outstanding, September 30, 1997 1,023,000 $.01-5.25 $1.41
Granted 80,000 $.75 $.75
Exercised - - -
Canceled (375,000) $.01-2.00 $.94
----------
Outstanding, September 30, 1998 728,000 $.75-5.25 $1.58
==========
Exercisable, September 30, 1998 728,000 $.75-5.25 $1.58
Exercisable, September 30, 1997 1,023,000 $.01-5.25 $1.41
Summarized information about stock options outstanding at September 30, 1998,
all of which are exercisable, is as follows:
Options Outstanding/ Weighted Average
Exercise Exercisable at Remaining
Price September 30, 1998 Contractual Life
---------- -------------------- ----------------
$ 0.75 373,000 Shares 5.82 Years
$ 2.00 305,000 Shares 7.75 Years
$ 5.25 50,000 Shares .50 Years
Proforma information regarding net income (loss) is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method specified by SFAS No. 123. The fair value
of options granted during the years ended September 30, 1998 was estimated at
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for grants for the years ending
September 30, 1998, 1997 and 1996, respectively: risk free interest rate of
5.52%, 5.21% and 6.59%; no dividends expected to be declared; volatility
factor of 1.150, .994 and .994; and a weighted average expected life of five
years, six months, and five years. The effect of applying the fair value
method under SFAS No. 123 to the Company's stock-based awards would result in
a net loss during the years ended September 30, 1998 and 1997 that is not
materially different from amounts reported and a net loss during the year
ended September 30, 1996 of $763,942 ($0.06 per share).
F-27
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PYRENEES OPTION
In October 1992, the Company's Board of Directors authorized the issuance of
options to purchase convertible preferred stock to the Pyrenees Group, a
private investment firm controlled by Paul A. Tanner, the Company's former
Chairman and Chief Executive Officer, or its assignees. The options are
summarized as follows:
Preferred Conversion Common
Series Shares Price Shares
--------- --------- ---------- ---------
A 125,000 $ .50 2,500,000
B 100,000 1.00 1,000,000
C 100,000 2.00 500,000
D 200,000 4.00 500,000
E 475,000 10.00 475,000
--------- ---------
1,000,000 4,975,000
========= =========
During fiscal 1994 and 1995 Pyrenees exercised and converted Series A, B, and
C Preferred Stock into common stock. In November, 1995, Pyrenees exercised
the Series D option through the issuance of a 7% recourse note in the amount
of $2,000,000, collateralized by the shares issued. During fiscal 1996 the
shares were converted to 500,000 shares of common stock. During the years
ended September 30, 1996 and 1997, principal payments of approximately
$721,000 and $304,000, respectively were made on the note. The Company
believes the remaining balance of $975,000 will be uncollectible and that it
will recover the 500,000 shares of common stock that secure this note. As
discussed in Note 13, the Company expects to recover these shares subsequent
to September 30, 1998 and will account for this recovery as an unexercised
stock option in accordance with Accounting Principles Board opinion No. 25,
"Accounting for Stock Issued to Employees". As such, the difference between
the note balance ($975,000) and the fair market value of the 500,000 shares
(approximately $218,500 at September 30, 1998) will be recorded as a reduction
in paid-in capital.
WARRANTS
As of September 30, 1997, the Company had recorded a liability for a warrant
to purchase common stock of the Company's Overhill subsidiary in the amount of
$2,000,000, which represents the price at which the warrants were repurchased
by the Company from the holder in December 1997. During 1997 and prior fiscal
years, the Company, because the holder had a "put" to the Company with respect
to the warrants, systematically provided for accretion in the estimated value
of the warrant by periodic charges to operations in an amount representing the
change in the estimated value of the warrant.
In connection with the financing provided by Long Horizons in December 1997
(see Note 9), the Company granted stock warrants that entitle Long Horizons
to immediately acquire at $.01 per share, 30% of the common stock of Overhill,
of which 25% (5/6 of the total shares under warrant) could be repurchased by
the Company for $2,000,000 during the two-year period following the date of
the agreement. In June 1998, in connection with amending certain covenants
and restrictions, the percentage of Overhill that the Company can repurchase
for
F-28
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$2,000,000 was reduced to 20% from 25%. Such warrants were valued at
$1,200,000, which has been recorded as debt discount and is being amortized
over the term of the loan. Additionally, in connection with the Long Horizons
financing, an unrelated consultant was issued a warrant to purchase 1% of
Overhill's common stock, exercisable through December 3, 2000, at a purchase
price of $50,000.
In connection with the issuance of the Series F 6% Preferred Stock referred to
above and the $2.8 million note payable (see Note 9), the Company issued
warrants to purchase 500,000 shares of it common stock at $1.50 per share,
exercisable through September 2002. The warrants were valued at $150,000,
with such amount being reflected as debt discount.
In connection with the repayment and restructuring of the 1997 Bonds and 1999
Bonds in December 1997 (see Note 9), the Company issued to the holders
warrants totaling 420,000 shares of the Company's common stock. The warrants
cover 210,000 shares exercisable at $.01 per share, which were exercised in
May 1998, and an additional 210,000 shares exercisable at $1.125 per share,
exercisable through April 24, 2003. These warrants were valued at $175,000,
which is being amortized over the remaining term of the loan.
F-29
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
Income tax expense (benefit) consists of the following:
For the Years Ended
September 30,
1998 1997 1996
----------- ------------- -------------
Current:
Federal $ - $ (1,126,891) $ 1,193,807
State 56,575 239,869 265,467
Deferred:
Federal - 168,278 115,233
State - 65,061 19,035
----------- ------------- -------------
Total income taxes $ 56,575 $ (653,683) $ 1,593,542
=========== ============= =============
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,
1998 1997 1996
-------- -------- --------
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 16.4 (3.8) 9.2
Officer life insurance premiums,
amortization of goodwill, accretion
of stock warrants 81.0 2.9 12.5
Utilization of net operating losses - - (4.3)
Change in valuation allowance (87.8) 26.6 -
Sale of subsidiaries (9.7) 5.7 27.9
Other 5.7 (0.7) 6.6
Tax credits (23.2) - -
--------- -------- --------
Effective tax expense (benefit) rate 16.4% (3.3%) 85.9%
========= ======== ========
F-30
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred tax balances as of September 30, 1998 and 1997 are
summarized as follows:
1998 1997
------------- -------------
Deferred tax assets:
Allowance for doubtful accounts $ 290,945 $ 1,915,501
Inventory 215,747 112,890
Accrued expenses 395,545 175,000
Capital loss carryforwards 240,318 596,243
Net operating loss carryforwards 4,865,745 3,267,780
AMT and other credit carryforwards 336,944 257,111
Other - 5,215
Stock options - 381,628
Fixed assets 54,098 -
------------- -------------
Total deferred tax assets 6,399,342 6,711,368
Valuation allowance (5,354,856) (5,233,603)
------------- -------------
Net deferred tax assets 1,044,486 1,477,765
------------- -------------
Deferred tax liabilities:
Prepaid expenses (120,938) (212,515)
Intangibles (681,916) (985,284)
Depreciation - (279,966)
Other (241,632) -
------------- -------------
Total deferred tax liabilities 1,044,486 (1,477,765)
------------- -------------
Net deferred tax assets $ - $ -
============= =============
The Company has net operating losses available for carryforward of
approximately $12,000,000, due to expire in 2012 and capital losses available
for carryforward of approximately $600,000. Additionally, the Company has
alternative minimum tax credit carryforwards of $177,278 which have no
expiration and general business credits of $159,666 which expire in 2012.
F-31
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Future minimum lease payments for all operating leases at September 30, 1998
are as follows:
For the Years Ending
September 30,
--------------------
1999 $ 1,676,274
2000 569,295
2001 202,659
2002 53,888
2003 16,096
------------
$ 2,518,212
============
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
$1,946,000, $1,847,000, and $1,510,000 for the years ended September 30, 1998,
1997, and 1996, respectively.
The Company's subsidiary, TTI relies on two suppliers for the majority of its
new units and parts. As of September 30, 1998, TTI had commitments to purchase
inventory amounting to $1,782,846.
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,
1998, TTI's guarantees totaled $6,505,865. TTI receives a fee, in the form of
interest participation, on certain of the notes upon which it is contingently
liable. This fee is recognized as interest income and is usually held by the
institution to meet reserve requirements. Funds held in escrow by the lenders
amounting to $672,898 at September 30, 1998, 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 unconsolidated partnerships. The total investment
in these partnerships at September 30, 1998 of $378,890 is included in other
assets. TTI guarantees the debt of these partnerships. The amount guaranteed
at September 30, 1998 of $321,920 is collateralized by accounts receivable,
inventory, equipment, buildings and real estate.
See Note 10 for a description of a judgment against the Company in the amount
of $500,000 plus certain expenses and the related settlement terms.
F-32
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINGENCIES
In January 1997, a suit was filed in District Court of Dallas County against
the Company by Rice Partners II, L.P., former subordinated debt holders of
Overhill Farms. In December 1997 in connection with the refinancing of
corporate debt, the Company and Rice Partners settled all litigation related
to this suit (See Note 9).
During fiscal 1997, five substantially identical complaints were filed in the
United States District Court for the District of Nevada against the Company
and certain of its officers and directors. The plaintiffs complaints each
sought certification as a class action and asserted liability based on alleged
misrepresentations that resulted in the market price of the Company's stock
being artificially inflated. The defendants filed motions to dismiss in each
of the lawsuits. Without certifying the cases as class actions, the District
Court consolidated the cases into a single action. The District Court, in June
1998, dismissed the complaint in the consolidated action and ordered that the
plaintiff's replead such complaints. The plaintiffs then filed a motion for
reconsideration of the Court's ruling. The defendants opposed the motion for
reconsideration. The Court has not ruled upon plaintiff's motion; however,
the plaintiffs have not filed an amended complaint. Consequently, it cannot be
determined at this time whether the dismissal of the complaint will lead to a
dismissal of the consolidated action. However, management believes (based on
advice of legal counsel) that this litigation will be resolved without
material effect on the Company's financial condition, results of operations or
cash flows.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. However, management
believes (based on advice of legal counsel) that such litigation and claims
will be resolved without material effect on the Company's financial condition,
results of operations or cash flows.
See Note 13 for a description of a guarantee of related party indebtedness.
13. RELATED PARTY TRANSACTIONS
On February 23, 1998, Mr. Paul A. Tanner resigned as Chief Executive Officer
and Chairman of the Company's Board of Directors. Mr. James Rudis, the
Company's President, was elected by the Board to assume the vacated positions.
Following the resignation, a reserve of approximately $165,000 was established
against all outstanding advances due from Mr. Tanner.
During fiscal years 1994 and 1995 a number of advances were made to Mr. Tanner
which aggregated approximately $2,000,000. In December 1995 the advances were
refinanced though the issuance to the Company of a 12% unsecured demand note
from Mr. Tanner. Also during the aforementioned periods the Company had made
non-interest bearing cash advances to the Pyrenees Group, a Company controlled
by Mr. Tanner, of approximately $1,500,000.
During January 1996, the Company reached an agreement to manage a project to
develop and build a multi-purpose sports facility in Las Vegas, Nevada. The
project was being developed by PLY Stadium Partners, Inc. ("Stadium
Partners"), a private investment firm headed by Mr.
F-33
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tanner. The Company agreed to provide to Stadium Partners up to $4 million of
debt (1) convertible into a 14% economic interest in the project and (2)
guaranteed personally by Mr. Tanner and Pyrenees. As part of this agreement,
the aforementioned accounts receivable from Mr. Tanner and Pyrenees
(approximately $3.5 million), together with subsequent amounts advanced,
charged or accrued to or on behalf of Stadium Partners were considered as
components of the $4 million of convertible debt, bearing interest at 12.0%
and guaranteed personally by Mr. Tanner and Pyrenees. Through September 30,
1996, the Company advanced an additional $9,271,054, for an approximate total
of $13.3 million.
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 was dependent upon the success of the project and/or the guarantees
referred to above. As a result of the terms of the financing arrangements with
Lehman described below, Stadium Partners was precluded from making any
distributions until permanent project financing was secured or stadium suite
sales were made that were sufficient to repay the financing from Lehman. As a
consequence of Stadium Partners' inability to effect such sales or obtain such
financing by March 15, 1997, in order to make its payment to the Company on
such date, the Company established a reserve of $3.34 million as of September
30, 1996, which represented all income accrued in 1996.
On November 15, 1996, Stadium Partners, through a newly-formed partnership,
purchased 62 acres in Las Vegas for the development of the stadium and
adjacent convention facility. Financing was provided by Lehman Brothers
Holdings, Inc. ("Lehman") through a partnership, Nevada Stadium Partners
Limited Partnership ("Nevada Partnership") with Lehman receiving an equity
interest in the project.
The Company guaranteed the repayment of the Lehman loan on behalf of Stadium
Partners. The guarantee is only effective, in certain circumstances or upon
the occurrence of certain events. A foreclosure sale was conducted on or about
July 15, 1998. Notwithstanding such foreclosure action, the Company, based on
the advice of legal counsel, does not believe that it will incur any
significant liability as a result of this guarantee. As a result, the Company
believes the existence of such guarantee will not have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
The loan agreement with Lehman required certain prepayments by Nevada
Partnership, the first of which, in the amount of $5.0 million became due in
January 1997. This was paid primarily with funds advanced by the Company, of
which $2.4 million was obtained from an existing credit line and $2.5 million
was obtained from a six month term note, collateralized by the Company's
corporate office building. In connection with the loan transaction, the
Company entered into a consulting agreement with a principal of the lender,
whereby the Company granted such party an option to purchase 200,000 shares of
the Company's common stock at $.01 per share; this option was assigned a value
of $973,000 which was charged to expense during fiscal 1997.
The second prepayment requirement of $20.0 million became due in May 1997;
this payment was not made. As a result of the failure to make this payment,
another agreement was entered
F-34
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
into among the borrower, Lehman and the Company as of July 1, 1997. This
agreement generally provided forbearance by Lehman until September 30, 1997,
to allow additional time to raise the funds to make the principal payment. The
terms of the forbearance agreement were not met by the September deadline, and
the note matured unpaid in November 1997.
As a result of the above, the Company recorded a charge to earnings for the
year ended September 30, 1997, in the amount of $14.8 million, representing
all amounts remaining unpaid by Stadium Partners, net of the reserve
established in 1996. Amounts which may subsequently be recovered, if any,
will be recognized as income when collection is assured.
During April 1998, the Company filed suit against PLY Stadium Partners, Inc.,
and against Mr. Tanner and Pyrenees, the guarantors of the debt. As of
September 30, 1998, the amount ultimately recoverable as a result of this
litigation, if any, is not determinable. However, in enforcing these
guarantees, the Company expects either through judicial foreclosure or
otherwise, to obtain the rights to 2,000,000 shares of Polyphase common stock
owned by Pyrenees and held by Mr. Harold Estes as secondary collateral (See
Notes 3, 9 and 10).
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September
30, 1998, the insurance premium receivable was $592,000.
In connection with the purchase of TTI, the Company acquired a note receivable
from an officer of TTI. The note is secured by marketable securities, is
payable within one year and bears interest at 3.96%. As of September 30, 1998
the balance outstanding was $335,380 and the note has been classified as a
related party receivable. Also included in related party receivables at
September 30, 1998 are approximately $335,275 in notes receivable from
employees of TTI subsidiaries payable within one year.
See Note 10 for discussion of options granted to the Pyrenees Group, a related
party.
See Note 9 for discussion of the note payable to Mr. Estes.
14. PROFIT SHARING PLAN
In 1986, prior to its acquisition by the Company, TTI adopted a profit sharing
plan. In order to participate in the plan, an employee must be at least 21
years of age, have been employed by TTI at least one year and be a full time
employee. Vesting begins in the third year of employment and increases each
year until full vesting is achieved in the seventh year. The plan is
administered by an independent third party. Trustees for the plan are the
president and controller of TTI. The maximum contribution is the lesser of
15% of eligible salaries or net income plus retained earnings. Profit sharing
expense for the years ended September 30, 1998, 1997 and 1996 was $353,000,
$298,000, and $264,000 respectively.
F-35
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SALE OF SUBSIDIARIES
In December 1997, the Company sold Dallas Parkway Properties, Incorporated, a
subsidiary whose principal asset was the corporate office building, in
exchange for nominal consideration plus the assumption of a note payable for
$2.8 million. The Company realized a gain of approximately $988,000 on this
transaction.
In July 1996, the Company completed a transaction with an unrelated third
party to sell a controlling interest in the Company's computer subsidiaries.
The transaction was accomplished through the sale of 51% of a newly formed
subsidiary, PC Networx America, Inc. (PCNA), whose sole assets consisted of
the capital stock of Network America, Inc., PC Repair of Florida, Inc.,
Computer Systems Concepts and Register Mate, Inc. The consideration for this
sale amounted to $1,736,457 (subject to adjustments) consisting of $475,000 of
cash, $86,457 of notes receivable and $1,175,000 of preferred stock. At that
time it was the intention of the Company to publicly distribute to its
shareholders a dividend of 30% of the PCNA stock. In a related transaction
with the same party, the Company sold 100% of the stock of Micro
Configurations, Inc. (MCC) for a note receivable in the amount of $951,433
secured by the stock and assets of MCC. Subsequent to this transaction, PCNA's
name was changed to DataTell Solutions, Inc. ("DataTell").
During fiscal 1997, the purchaser and controlling shareholder of DataTell
elected to discontinue that company's efforts to effect a public registration
of DataTell's stock, thus precluding the Company from making a distribution of
the stock to its shareholders. Additionally, certain purchase price
adjustments resulted in the elimination of the note for $86,457. The
purchaser also elected not to further pursue the operation of MCC, and, since
the Company was unsuccessful in its attempts to recover MCC's assets, the
amount due under the $951,433 note was determined not to be realizable. The
balance of these notes, totaling $1,037,890, was charged to operations during
fiscal 1997.
The Company, during the latter part of fiscal 1997, having made the decision
to further reduce its involvement in computer-related businesses, entered into
a new agreement with the controlling shareholder of DataTell to dispose of its
remaining direct ownership of DataTell. In connection therewith, the Company
agreed to exchange its 49% interest in DataTell, together with the $1,175,000
of preferred stock referred to above, for cash of $200,000 and a new series of
the purchaser's preferred stock which carries certain rights to be exchanged
for DataTell stock. This transaction resulted in a loss of $2,575,925 and was
charged to operations during fiscal 1997.
16. SALE OF ASSETS
During the year ended September 30, 1996, TTI completed the sale of a parcel
of land in Lufkin, Texas which resulted in a gain of $875,000.
F-36
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. ASSETS ACQUIRED
In March 1998, TTI obtained a majority interest in Wood Forest Products LLC
("Wood"), which subsequently acquired the rights to harvest timber from a
tract of land owned by the U.S. Forestry Service. Concurrently, the Company
obtained a majority interest in Southern Forest Products LLC ("Southern"),
whose primary purpose is to lease and operate a sawmill in East Texas. For
the year ended September 30, 1998, these forestry products business
contributed revenues of approximately $3.0 million and a net loss of
approximately $170,000.
18. INFORMATION BY INDUSTRY SEGMENT
The Company's industry segments are described below.
FOOD
The food segment produces high quality entrees, plated meals, soups, sauces
and poultry, meat and fish specialties primarily for customers in the airline,
restaurant and weight loss industries.
FORESTRY
The forestry segment sells, finances, and repairs timber and logging equipment
in East Texas and Western Louisiana and participates in other forestry-related
activities. Customers range from small logging operations to large integrated
paper mills.
TRANSFORMER
The transformer 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
September 30, 1998
----------------------------------------------------------------
Food Forestry Transformer Total
------------ ------------ ------------ ------------
Net Sales:
Sales to unaffiliated customers $ 93,348,856 $ 48,049,483 $ 4,832,583 $146,230,922
============ ============ ============ ============
Operating profit $ 4,976,930 $ 4,076,683 $ 51,099 $ 9,104,712
============ ============ ============
General corporate expenses (1,420,191)
Gain on sale of assets 987,857
Interest expense (8,871,535)
Interest income and other 543,080
Income before income taxes, warrant accretion ------------
and extraordinary item $ 343,923
============
Identifiable assets:
Segment assets $ 45,221,575 $ 50,082,526 $ 2,692,737 $ 97,996,838
============ ============ ============
Corporate assets (16,451,463)
------------
Total assets $ 81,545,375
============
Capital expenditures, net:
Segment $ 604,853 $ 680,299 $ 74,370 $ 1,359,522
============ ============ ============
Corporate 30,251
------------
Total capital expenditures, net $ 1,389,773
============
Depreciation and amortization:
Segment $ 3,041,237 $ 749,991 $ 91,916 $ 3,883,144
============ ============ =============
Corporate 387,584
------------
Total depreciation and amortization $ 4,270,728
============
The Company's Food segment had sales to Jenny Craig, Inc. in fiscal 1998 which
comprised approximately 22% of consolidated sales. No other customer
accounted for more than 10% of the Company's sales in fiscal 1998.
F-38
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
----------------------------------------------------------------
Transformer
Food Forestry Manufacturing Total
------------ ------------ ------------- ------------
Net Sales:
Sales to unaffiliated customers $ 96,176,505 $ 52,201,622 $ 3,570,426 $151,948,553
============ ============ ============= ============
Operating profit $ 4,953,194 $ 4,496,570 $ (67,224) $ 9,382,540
============ ============ =============
General corporate expenses (2,799,016)
Non-recurring charge related
to loss on related party receivable (14,838,456)
Interest expense (7,179,973)
Interest income and other 380,655
Loss on investment in computer operations (3,613,815)
------------
Loss before income taxes and warrant accretion $(18,668,065)
============
Identifiable assets:
Segment assets $ 35,565,596 $ 42,442,019 $ 2,807,683 $ 80,815,298
============ ============ =============
Corporate assets (8,665,849)
------------
Total assets $ 72,149,449
============
Capital expenditures:
Segment $ 507,825 $ 222,562 $ 27,667 $ 758,054
============ ============ =============
Corporate -
------------
Total capital expenditures $ 758,054
============
Depreciation and amortization:
Segment $ 2,045,568 $ 691,630 $ 67,137 $ 2,804,335
============ ============ =============
Corporate 1,163,765
------------
Total depreciation and amortization $ 3,968,100
============
The Company's Food segment had sales to Jenny Craig, Inc. in fiscal 1997
which comprised approximately 20% of consolidated sales. No other customer
accounted for more than 10% of the Company's sales in fiscal 1997.
F-39
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
------------------------------------------------------------------------------------------
Computer
Sales and
Food Forestry Transformer Service and Other Total
------------ ------------ ------------- ------------- ------------- ------------
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) $ 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 and warrant
accretion $ 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 segment had sales to Jenny Craig, Inc. in fiscal 1996
which comprised approximately 26% of consolidated sales. No other customer
accounted for more than 10% of the Company's sales in fiscal 1996.
COMPUTER SALES AND SERVICE
The computer sales and service segment assembled and sold personal computers
and provided systems setup and hardware maintenance services. Customers
serviced ranged from individuals to large corporations. Subsidiaries
included in the segment were Network America, Inc., in Tulsa, Oklahoma;
Letronix and Computer System Concepts in Queens, New York; PC Repair in
Sarasota, Florida and Micro Configurations Inc., in Brooklyn, New York.
Effective July 1, 1996, the Company sold 51% of its interests in the computer
operations. Effective July 1, 1997, the Company sold its remaining interests
in the computer operations. (See Note 15)
CORPORATE AND OTHER
The Corporate segment, prior to fiscal 1998, provided management and advisory
services to Stadium Partners, a privately owned development corporation
engaged in the development of a multi purpose sports facility in Las Vegas,
Nevada (See Note 13).
F-40
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Year Ended September 30, 1998
-------------------------------------------------------
December 31 March 31 June 30 September 30
------------ ------------ ------------ -------------
Net revenues $ 37,392,317 $ 33,328,696 $ 37,272,305 $ 38,237,604
Gross profit 6,967,157 6,510,581 6,465,724 5,908,583
Operating income 2,370,671 1,910,474 1,671,876 1,731,500
Extraordinary item (616,239) - - -
Net income (loss) $ 881,571 $ (218,106) $ (675,037) $ (317,319)
============ ============ =========== =============
Net income (loss) per common share $ .06 $ (.02) $ (.05) $ (.02)
============ ============ =========== =============
For the Year Ended September 30, 1997
-------------------------------------------------------
December 31 March 31 June 30 September 30
------------- ------------ ------------ ------------
Net revenues $ 36,165,789 $ 38,409,223 $ 38,478,729 $ 38,894,812
Gross profit 6,108,874 5,786,039 6,964,065 6,524,463
Operating income 1,485,204 1,974,853 2,224,511 898,956
Net income (loss) $ (67,237) $ (132,001) $ 277,111 $(18,903,031)
============= ============ ============ ============
Net income (loss) per common share $ (.01) $ (.01) $ .02 $ (1.41)
============= ============ ============ ============
The Company's results for the quarter ending September 30, 1997 reflect a charge
to earnings in the amount of approximately $14.8 million, (before income
taxes), representing all amounts remaining unpaid by Stadium Partners, net of
the reserve established in fiscal 1996 (See Note 13), and a charge to earnings
in the amount of approximately $3.6 million (before income taxes), representing
the combined loss on disposal of the computer operations (See Note 15).
F-41
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY BALANCE SHEETS
September 30,
-------------------------
1998 1997
------------ ------------
Cash $ 5,874 $ 8,341
Prepaid expenses and other 20,000 381,616
----------- -----------
Total current assets 25,874 389,957
Property and equipment 48,902 1,758,267
Less-Accumulated depreciation (36,981) (223,563)
----------- -----------
11,921 1,534,704
Non current receivables:
Related parties, net of allowance for
doubtful accounts of $164,563 and $0 9,000 182,526
Deferred federal income taxes 767,789 1,068,160
Income tax receivable 5,202,507 4,727,964
Other assets (primarily investments
in subsidiaries) 19,359,090 22,911,479
----------- -----------
Total assets $25,376,181 $30,814,790
=========== ===========
Accounts payable $ 139,948 $ 494,980
Accrued expenses 793,013 610,917
Deferred income taxes 335,117 158,238
Current maturities of long term debt 1,200,000 1,500,000
----------- -----------
Total current liabilities 2,468,078 2,764,135
Long term debt, net - 6,650,000
Note payable and accrued
interest, related party 16,307,405 13,998,916
----------- -----------
Total liabilities 18,775,483 23,413,051
----------- -----------
Stockholders' equity:
Preferred stock 1,150 1,325
Common stock 150,800 136,641
Additional paid in capital 28,623,811 28,955,695
Retained earnings (deficit) (21,199,744) (20,716,603)
Note receivable (975,319) (975,319)
----------- -----------
Total stockholders' equity 6,600,698 7,401,739
----------- -----------
$25,376,181 $30,814,790
=========== ===========
See note to condensed financial information of registrant.
F-42
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY STATEMENTS OF INCOME
For the Years Ended
September 30,
---------------------------------
1998 1997
------------ ------------
Net revenues $ - $ -
Cost of sales - -
------------ ------------
Gross Profit -
Selling general and administrative expenses 1,420,191 2,799,016
------------ ------------
Operating income (loss) (1,420,191) (2,799,016)
Other income (expense)
Gain on disposition of subsidiary (987,857) -
Loss on investment in computer operations - (3,613,815)
Loss on related party receivable - (14,838,456)
Interest expense 2,886,448 (2,480,808)
Interest income and other - 156,825
------------ ------------
Total other income (expense) (1,898,591) (20,776,254)
Loss before income taxes (3,318,782) (23,575,270)
Income taxes (benefit) (1,034,177) (2,746,436)
------------ ------------
(2,284,605) (20,828,834)
Equity in net income of subsidiaries 1,955,714 2,003,676
------------ ------------
Net income (loss) (328,891) (18,825,158)
Dividends on preferred stock 154,250 403,750
------------ ------------
Net income (loss) attributable
to common shareholders $ (483,141) $(19,228,908)
============ ============
See note to condensed financial information of registrant.
F-43
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUMMARY STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
----------------------------
1998 1997
------------- -------------
Cash flow provided by used by operating activities:
Net loss $ (328,891) $ (18,825,158)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 370,896 1,163,765
Equity in income of subsidiaries (1,955,901) (1,930,594)
Provision for doubtful accounts 164,563 -
Gain on sale of assets (987,857) -
Deferred income tax - (1,370,366)
Loss on related party receivable - 14,838,456
Loss on disposition of computer segment - 3,613,815
Increase (decrease) in, net of effects of acquisitions:
Prepaid expenses and other 355,014 2,497,299
Accounts payable and other (355,032) 148,875
Accrued expenses and other (243,404) 610,917
------------ -------------
Net cash provided by (used in) operating activities (2,980,612) 747,009
------------ -------------
Cash flows provided by (used in) investing activities:
Notes receivable from related parties 8,963 (5,089,928)
Capital expenditures (5,870) -
------------ -------------
Net cash provided by (used in) investing activities 3,093 (5,089,928)
------------ -------------
Cash flows provided by (used in) financing activities:
Net borrowings (payments) on notes payable 2,308,489 3,407,372
Advances from subsidiary 5,300,000 -
Payments on long term borrowing (4,300,000) -
Payment of deferred financing costs (163,787) -
Proceeds from private placement of preferred stock - 733,877
Exercise of common stock options and
warrants 2,100 56,600
Dividends on preferred stock (154,250) (153,750)
Principal collections on Pyrenees note - 303,770
Common stock issuance costs (17,500) (35,000)
------------ -------------
Net cash provided by financing activities 2,975,052 4,312,869
------------ -------------
Net increase (decrease) in cash (2,467) (30,050)
Cash - beginning of year 8,341 38,391
------------ -------------
Cash - end of year $ 5,874 $ 8,341
============ =============
See note to condensed financial information of registrant.
F-44
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.
Due to subsidiary debt covenant and other restrictions, the Company's ability
to obtain funds from its subsidiaries is limited (See Note 3). In addition,
the parent company's ownership of Texas Timberjack is pledged as collateral
against the note payable to related party which is scheduled to mature in
December 1999 (See Notes 3 and 9). Additionally, the parent company has no
operating revenues and may be highly dependent on its subsidiaries for its
liquidity needs.
F-45