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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 Broadway, Suite A
Addison, Texas 75001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 386-0101
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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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____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based on the closing price of such stock on December 3, 1999, was
approximately $6.7 million. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and 10% beneficial owners are affiliates. As of
December 3, 1999, the registrant had issued and outstanding 17,812,464 shares of
common stock, $.01 par value.
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POLYPHASE CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Part I
Item 1 Description of Business 3
Item 2 Description of Property 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation 13
Item 7A Quantitative and Qualitative Disclosures about Market Risk 18
Item 8 Financial Statements 18
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 18
Part III
Item 10 Directors and Executive Officers of the Registrant 19
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners and Management 24
Item 13 Certain Relationships and Related Transactions 25
Part IV
Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K 28
2
PART I
ITEM 1. Description of Business.
-----------------------
General
The Company is a diversified holding company that, through its subsidiaries,
currently operates in two industry segments: the food segment, which produces
high quality entrees, plated meals, soups, sauces and poultry, meat and fish
specialties (the "Food Group"); and the forestry segment, which distributes,
leases and provides financing for industrial and logging equipment and also
participates in related timber and sawmill operations (the "Forestry Group").
The Company's transformer manufacturing operation, which manufactures and
markets electronic transformers, inductors and filters (the "Transformer Group")
was discontinued in fiscal 1999, as a result of the sale of a wholly-owned
subsidiary, Polyphase Instrument Co. ("PIC"). The Company was incorporated in
New Jersey in 1963 under the name Kappa Networks, Inc. In June 1991, through a
merger with a wholly owned subsidiary, the Company reincorporated in
Pennsylvania and formally changed its name to Polyphase Corporation. In June
1994, the Company, through a merger with a wholly owned subsidiary,
reincorporated in Nevada.
Acquisitions
In connection with the Company's program of diversification and expansion, the
more significant acquisitions consummated by the Company over the past five
years were:
Texas Timberjack, Inc. ("Timberjack" or "TTI") In June 1994, the Company
- --------------------------------------------
acquired all of the outstanding capital stock of TTI from Harold Estes, current
President of TTI. Timberjack, with locations in Lufkin, Jasper, Cleveland and
Atlanta, Texas, is a distributor of industrial and logging equipment in East
Texas and Western Louisiana. The capital stock of TTI was acquired from Mr.
Estes for consideration of approximately $4,000,000 in cash, a $10,000,000
promissory note payable to the order of Mr. Estes, and 100,000 shares of the
Company's Series A Preferred Stock, which were subsequently converted into
2,000,000 shares of common stock. Subsequent to June 1994, the Company and Mr.
Estes have modified, renewed and extended the promissory note payable to Mr.
Estes. As of September 30, 1999 the promissory note had a balance of $17,914,842
(including accrued and unpaid interest) and was due December 15, 1999. The note
was modified, renewed and extended through October 10, 2002. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation-
Liquidity and Capital Resources."
Overhill Farms, Inc. ("Overhill") In May 1995, the Company acquired all the
- ---------------------------------
operating assets of IBM Foods, Inc. The purchase, which was accomplished through
Overhill, a newly-formed subsidiary of the Company, provided for a cash payment
to the seller of $31.3 million plus the assumption by the Company of certain
liabilities of the acquired business. Overhill's operations are located in
Culver City, California.
Disposition
Polyphase Instrument Co. ("PIC") Effective September 30, 1999, the Company sold
- -------------------------------
its wholly-owned subsidiary, PIC, to an investment group headed by management of
that company. The transaction was completed as a sale of 100% of the outstanding
capital stock of PIC for total consideration of approximately $2.8 million,
consisting of $1.8 million cash and a subordinated note receivable for $1.0
million. As discussed in Note 15 to the Company's consolidated financial
statements, the Company recorded a loss from discontinued operations of
approximately $1.2 million in 1999 as a result of this transaction.
3
Business Strategy
Management believes the Company's future growth opportunities will be
concentrated in the two core operations described above, the Food Group and
Forestry Group. The business environment of the food industry is mandating
consolidation of smaller regional food processing companies to enhance operating
efficiencies and provide service to mid-size and large national accounts. The
Food Group is evaluating selected acquisition candidates which can complement
the operations of Overhill by providing one or more of the following selected
criteria such as: regional brand labels, additional production capacity,
geographical diversification, new markets and/or new customers. The Forestry
Group continues to develop its internal growth through product line extensions
and geographic expansions. It is the intention of TTI to offer a wider range of
products to both its existing customer base and to "non-logging" companies in
TTI's marketing area using the Company's existing infrastructure. TTI's long
term objective is to continue to diversify with synergistic activities and to
move forward on reducing costs to defray the cyclical effects of the timber
market.
To achieve future growth within the Company, Management has identified the
following basic initiatives:
1) Continue to provide high quality products and superior services to our
customers.
2) Seek internal growth by developing new products, adding customers,
leveraging its geographic presence and securing distribution rights to
additional products.
3) Seek additional growth through strategic acquisitions of complementary
businesses with strong management, solid product lines and growth
potential.
Operating Segments
The following table sets forth business segment information with respect to the
percentage of net sales and operating income contributed by each segment for the
years ended September 30, 1999, 1998 and 1997.
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Net Sales
Food Group 71% 64% 63%
Forestry Group 29% 33% 34%
Transformer Group - 3% 3%
---- ---- -----
Total 100% 100% 100%
Operating Income
Food Group 83% 55% 53%
Forestry Group 17% 45% 48%
Transformer Group - - (1%)
---- ---- -----
Total 100% 100% 100%
- --------------------------------------------------------------------------------
Reference is made to Note 17 to the Company's consolidated statements for
revenues, operating profits or losses and identifiable assets attributable to
each industry segment for each of the last three fiscal years.
4
Food Group
Products and Services - The Food Group, through Overhill, is a value-added
manufacturer of quality frozen food products including entrees, plated meals,
soups, sauces, poultry, meat and fish specialties. Overhill is positioned as a
provider of custom prepared foods to a number of prominent customers such as
American Airlines, Jenny Craig, Albertsons, Carl's Jr., Jack in the Box, Panda
Express and King's Hawaiian. Historically, Overhill has served four industry
segments: airlines, health care, food service and retail.
Sales and Marketing - Overhill markets its products through an internal sales
force and outside food brokers. Overhill believes that the airline industry,
while mature, represents an area for moderate growth potential in the future.
The Company has re-focused its attention on domestic carriers not currently
being served to any great extent by Overhill and on foreign carriers who are
increasingly choosing frozen entrees as part of their in-flight feeding
programs. The Company projects that its health care business will diminish
somewhat in the near term. The Company is predominantly focusing on the retail,
club stores and food service markets as areas of significant future growth. As a
result, Overhill management has realigned its sales force and redirected its
marketing efforts to concentrate on these markets. During fiscal 1999, Overhill
continued to concentrate on building on and increasing the profitability of
existing accounts while establishing new relationships with companies such as
Panda Express, Albertson's and Denny's.
Approximately 54% of Overhill's sales in fiscal 1999 were derived from three
customers, Jenny Craig (20%), American Airlines (18%) and King's Hawaiian (18%).
On a consolidated basis each of these three customers represented approximately
12-14% of the Company's total sales. Although the Company's relationships with
these customers remains strong, there can be no assurance that these
relationships will continue. During fiscal 1999, the Company has made a
concerted effort to sign multi-year supply agreements with its major customers.
Major contracts that were signed or extended in fiscal 1999 include Panda
Express, Jenny Craig and Carl's Jr. The Company is currently negotiating a three
year agreement with King's Hawaiian. A decline in the sales of Overhill's
products to these customers or the loss of, or a significant change in the
relationship between the Company and any of these key customers, could have a
material adverse effect on the Company's business and operating results. It is
management's objective to reduce the reliance on this concentration of accounts
by further expansion into the retail and food service markets as described
above.
Manufacturing and Sourcing - Overhill's manufacturing operations are located in
three separate facilities near Los Angeles, California. The operations are labor
intensive, generally requiring semi-skilled employees. All manufacturing
employees are unionized with contracts covering each plant. Such contracts are
due to expire at various times over the next three years. Management believes
relations with the unions are excellent and does not anticipate any problems
which would affect future production. Each plant specializes in different
processing operations allowing efficiencies in production. In fiscal 1999, the
plants operated collectively at approximately 80-85% of capacity.
The Company's ability to economically produce large quantities of its products,
while at the same time maintaining a high degree of quality, depends in a large
part on its ability to procure raw materials on a reasonable basis. The Company
relies on a few large suppliers for its poultry products with the remaining raw
materials purchased from suppliers in the open market. The Company does not
anticipate any difficulty in acquiring these materials in the future. Raw
materials, packaging for production and finished goods are stored on site or in
a public frozen food storage facility until shipment is required.
Backlog - Overhill typically delivers products directly from finished goods
inventory, and as such does not maintain a large backlog of unfilled purchase
orders. While at any given time there may be a small backlog of orders, such
backlog is not material in relation to total sales, nor is it necessarily
indicative of
5
trends in its business. Orders are subject to changes in quantities or to
cancellation with thirty days notice without penalties to customers.
Product Development - Overhill maintains a comprehensive, fully staffed test
kitchen, which formulates recipes and upgrades specific products for current
customers and establishes production and quality standards. Products are
developed based upon either customers' specifications, conventional recipes or
new product developments. Overhill is continuously developing recipes as
customers' tastes and client requirements change. Overhill also maintains a
quality control department for testing and quality control. The Company
manufactures products in the retail and food service areas with branded and
private label entrees.
Competition - Overhill's food products, consisting primarily of poultry, pasta,
beef and assorted related products, compete with products produced by numerous
regional and national firms. Many of these companies are divisions of larger
fully integrated companies such as Tyson Foods and ConAgra, which have greater
financial, technical, human and marketing resources than the Company.
Competition is intense with most firms producing similar products for the food
service and retail industries. Competitive factors include price, product
quality, product development, customer service and, on a retail basis, name
recognition. There can be no assurance that the Company will compete
successfully against existing companies or new entrants to the marketplace.
Overhill competes in this market by its ability to produce small/custom product
runs, within a short time frame and on a cost effective basis.
Forestry Group
Products and Services - The Forestry Group, through Timberjack and its
majority-owned subsidiaries, is a distributor of industrial and logging
equipment with investments in related timber and sawmill operations. TTI has
four locations in eastern Texas; TTI's headquarters are located in Lufkin, with
smaller satellite showrooms and repair facilities located in Jasper, Cleveland
and Atlanta, Texas. TTI carries the Timberjack, Blount and Hyundai lines of
industrial and logging equipment and the New Holland line of farm equipment.
Subsequent to September 30, 1999, TTI signed an agreement to distribute New
Holland construction equipment. TTI is involved in the sale, leasing and
financing of the equipment it distributes as well as the servicing of all major
brands of related equipment. TTI's operations are primarily concentrated in the
forested areas of East Texas although its market extends into Western Louisiana.
TTI operates in a fragmented industry where its major competition is from
distributors and dealers of Caterpillar and John Deere equipment. TTI estimates
that in Eastern Texas it currently holds approximately 60% of the shear (a
machine that cuts timber) market, 35% of the skidder (a machine that transports
logs out of the forest onto a loader) market and 70% of the loader (a machine
that stacks trees onto trucks) market.
Sales and Marketing - Timberjack currently maintains sales and distribution
offices in Lufkin, Jasper, Cleveland and Atlanta, Texas primarily to serve
Eastern Texas and Western Louisiana. Sales are generated through repeat
customers, advertisements in various trade publications and direct marketing
calls on companies located in the area. A general sales manager and several
branch managers supply technical and operational support at the Lufkin
headquarters, while nine salesman have direct responsibility for customer
relationships. TTI meets customers' orders for new equipment and replacement
parts out of existing inventory or through purchase orders placed with the
manufacturers TTI currently represents.
Approximately 44% of TTI's equipment sales during fiscal 1999 are from new
equipment sold to companies involved in the forestry industries. Additional
revenues are derived from sales of used equipment (13%), servicing of equipment
(7%), sales of parts (22%) and financing equipment sales (14%). No single
customer accounts for more than 10% of TTI's sales. Equipment sales financed by
6
TTI are typically for periods ranging from 12 to 24 months at interest rates
ranging from 12.5% to 18% per annum.
Backlog - As a dealer, servicer and financier of forestry equipment, TTI does
not maintain a backlog of orders. Equipment ordered that is not in inventory
takes approximately one to six weeks to be shipped to a customer from the
manufacturer or another distributor.
Product Development - TTI does not develop products for sale to the public. TTI
relies primarily upon its suppliers (Timberjack, Blount, New Holland, Hyundai)
for a majority of its new units and parts.
Competition - Competition in the forestry segment is highly fragmented in the
Eastern Texas and Western Louisiana areas where TTI principally operates.
Because of its lengthy historical presence in these regions, TTI believes it has
established a strong local identity in its field with a proven record of
delivering equipment on a timely basis, providing satisfactory financing and
strong customer support and service. TTI is one of only a few distributors of
Timberjack and Blount forestry equipment in its operating areas. TTI has the
added advantage of being a leading seller and financier of various makes and
models of used logging equipment.
Principal competitors include local John Deere and Caterpillar distributors.
Patents, Trademarks and Copyrights
The Company does not have patents or patent applications pending on any of its
products, although it may file such patent applications in the future. The
Company attempts to protect its proprietary interests in its products by
entering into non-disclosure agreements with customers.
The Company has registered the trademarks "Polyphase" and "Overhill Farms" in
the United States Patent and Trademark Office.
Regulation
The Food Group is subject to strict government regulation, particularly in the
health and environmental areas, by the United States Department of Agriculture
("USDA"), the Food and Drug Administration ("FDA"), Occupational Safety and
Health Organization ("OSHA") and the Environmental Protection Agency ("EPA").
The Food Group anticipates increased regulation by the USDA and FDA concerning
food processing and storage. The Company's food processing facilities are
subject to on-site examination, inspection and regulation by the USDA.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position. During 1997, the Company
implemented a Hazard Analysis Critical Point Plan to ensure proper handling of
all food items.
The Forestry Group is required to comply with various governmental regulations
and requirements concerning the discharge of materials into the environment or
otherwise relating to the protection of the environment. Compliance with the
current applicable federal, state and local environmental regulations has not
had, and the Company does not believe that in the future such compliance will
have, a material effect on its financial position, results of operations,
expenditures or competitive position.
The Company takes all reasonable precautions to ensure that its operations,
processing plants and facilities operate in a safe, sanitary and
environmentally-sound manner. However, events beyond the control of the Company,
such as the adoption by the government of more stringent environmental
regulations could adversely affect its operations. Management believes that the
Company is in
7
substantial compliance with all applicable laws and regulations relating to the
operations of facilities.
Employees
As of September 30, 1999, the Company had approximately 912 employees as
follows: approximately 750 full-time employees in the Food Group; 159 full-time
employees in the Forestry Group; and 3 full-time employees in the corporate
office. All subsidiaries presently provide group health plans for their domestic
employees and pay a portion of the costs associated with such plans. TTI also
maintains a profit sharing plan for its employees.
Safe Harbor Statement
The nature of the Company's operations, and the environment in which it
operates, subjects the Company to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company notes the following factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Forward looking statements
contained in this document include, but are not limited to Year 2000 issues
(particularly with regard to the Company's business partners and suppliers), the
amount of future capital expenditures, and the possible uses of proceeds from
any future borrowings under the Company's currently effective credit facilities.
Factors which could cause results to differ include, but are not limited to:
changes in the Company's business environment, including actions of competitors
and changes in customer preferences; changes in governmental laws and
regulations, including income taxes; market demand for new and existing
products; and raw material pricing.
ITEM 2. Description of Property.
-----------------------
Corporate Headquarters
The Company leases an approximately 4,000 square foot facility which serves as
the corporate headquarters. The office space is located at 4800 Broadway, Suite
A, Addison, Texas 75001 and is leased at a basic rent of $4,100 per month. The
lease which began in February 1998 has a five year term with an option to buy
out the last two years for a nominal amount.
Food Group
Overhill leases three manufacturing facilities in the Los Angeles, California
area. Plant No. 1 is located in Inglewood, California and has 39,000 square feet
of manufacturing area. Plants No. 2 and No. 3 are located in Vernon, California
and have 49,000 and 27,000 square feet of manufacturing area, respectively. In
addition to the manufacturing facilities, Overhill also leases two dry goods
warehouses of 13,500 and 11,500 square feet, a 7,700 square foot frozen storage
facility in Inglewood, California and a 7,900 square foot office in Culver City,
California. While Overhill believes that the existing facilities are adequate to
meet its requirements in the foreseeable future, the Company is currently
reviewing the cost effectiveness of consolidating some manufacturing and
administrative functions and is actively seeking a facility on the east coast to
more cost effectively meet current and future customer requirements.
Forestry Group
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas, a
building in Cleveland,
8
Texas and leases a building in Atlanta, Texas. The largest building in Lufkin
has 38,500 square feet, which is used for administrative offices, showroom,
parts sales and shop area. The remaining buildings have 3,600 and 4,200 square
feet, respectively. The Jasper, Cleveland and Atlanta buildings have
approximately 10,000, 6,700 and 7,500 square feet, respectively, which are used
for sales offices, parts sales and shop areas. TTI also leases six buildings on
68 acres in Bon Weir, Texas for a sawmill operation. The sawmill is leased at a
basic rent of $19,000 per month, which includes certain equipment, with an
option to purchase the land, buildings and equipment for $1,525,000 in March
2000.
ITEM 3. Legal Proceedings.
-----------------
During fiscal 1997, five substantially identical complaints were filed in the
United States District Court for the District of Nevada against the Company and
certain of its officers and directors. The complaints each sought certification
as a class action and asserted liability based on alleged misrepresentations
that the plaintiffs claimed resulted in the market price of the Company's stock
being artificially inflated. The defendants filed motions to dismiss in each of
the lawsuits. Without certifying the cases as class actions, the District Court
consolidated the cases into a single action. In June 1998, the District Court
ordered the plaintiffs to file an amended complaint within thirty days, finding
that their original allegations failed to state a claim under the federal
securities laws. The plaintiffs then filed a motion for re-consideration of the
Court's ruling. The defendants opposed that motion, and the Court denied the
plaintiff's motion for reconsideration. The plaintiffs did not file an amended
complaint within the specified thirty day time period, but subsequently filed an
amended complaint, claiming that they were entitled to additional time within
which to file an amended pleading by reason of a scheduling order issued by the
Court. The defendants moved to dismiss the case on the grounds that the amended
complaint was filed too late and failed to state a claim for securities fraud
under applicable legal authorities. The plaintiffs have sought a stay of the
Court's consideration of defendants' motion to dismiss, asserting that there is
uncertainty as to the legal standards to be applied in securities fraud cases.
The Court has not ruled on plaintiff's motion to stay or defendants' motion to
dismiss. However, management believes (based upon advice of legal counsel) that
this litigation will be resolved without material effect on the Company's
financial condition, results of operations or cash flows.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based on
the advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial condition, results of
operations or cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the Company's
fiscal year.
9
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 1999 High Low
----------- ------------ ------------
Quarter from October 1, 1998
to December 31, 1998 $ 0.5625 $ 0.2500
Quarter from January 1, 1999
to March 31, 1999 $ 0.5625 $ 0.3125
Quarter from April 1, 1999
to June 30, 1999 $ 0.5625 $ 0.3125
Quarter from July 1, 1999
to September 30, 1999 $ 0.8750 $ 0.3125
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
(1) On February 3, 1997, the Company agreed with the American Stock Exchange,
Inc. to temporarily halt trading of its Common Stock pending the filing of its
Annual Report on Form 10-K for the fiscal year ended September 30, 1996. On June
16, 1997 the Form 10-K and the Forms 10-Q for the quarters ended December 31,
1996 and March 31, 1997, were filed and trading resumed on June 17, 1997.
(2) On January 14, 1998, trading in the Company's stock was temporarily halted
pending the Company's filing of its Annual Report on Form 10-K for the fiscal
year ended September 30, 1998. The stock resumed trading on February 23, 1998.
10
The Company has never paid cash dividends on its common stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such policy
is, within the limitations and restrictions described below, subject to change
based on current industry and market conditions, as well as other factors beyond
the control of the Company.
As of September 30, 1999, the Company estimates that there were approximately
3,200 beneficial owners of the Company's common stock, represented by 213
holders of record.
Recent Sales of Unregistered Equity Securities
In November 1995, the Company sold in a private transaction with Infinity
Investors, Ltd. ("Infinity") for $2,500,000 cash, 250,000 shares of Series A-3
Preferred Stock having an aggregate redemption value of $2,500,000 and
convertible into Common stock as provided in the Certificate of Designations for
the Series A-3 Preferred Stock. During the years ended September 30, 1998 and
1999, the Company issued 197,586 and 2,302,414 shares of common stock,
respectively, in partial satisfaction of Infinity's conversion rights.
Subsequent to September 30, 1999, the Company agreed to repurchase Infinity's
remaining Series A-3 Preferred Stock.
In August 1997, the Company sold in a private transaction with Black Sea
Investments, Ltd. ("Black Sea") for net proceeds of approximately $734,000 cash,
7,500 shares of Series F 6% Convertible Preferred Stock having an aggregate
redemption value of $750,000 and convertible into Common stock at a variable
rate equal to 75% of the average closing market price for the Company's common
stock for the previous five trading days prior to conversion. During the year
ended September 30, 1998, the Company issued a total of 1,008,355 shares of
common stock in satisfaction of Black Sea's conversion rights.
The shares of Preferred Stock described above were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), and were issued by
the Company in reliance on exemptions to the Securities Act. With respect to the
shares of Series A-3 Preferred Stock issued to Infinity, such shares were issued
pursuant to the exemption provided by Section 4(2) of the Securities Act.
Infinity was in compliance with the necessary requirements of Section 4(2) to
receive such exemption. Of the shares of Series A-3 Preferred Stock that were
issued, no such shares were issued to any party other than Infinity.
With respect to the shares of Series F 6% Convertible Preferred Stock issued to
Black Sea, such shares were issued pursuant to the exemption provided by
Regulation S of the Securities Act. Black Sea is a non United States person as
that term is defined in the Securities Act. Of the shares of the Series F 6%
Convertible Preferred Stock that were issued, no such shares were issued to any
party other than Black Sea.
In December 1997, in connection with the refinancing of certain indebtedness to
Merrill Lynch World Income Fund, Inc. and Convertible Holdings, Inc.
(collectively "Merrill Lynch"), the Company issued warrants covering a total of
420,000 shares of the Company's Common Stock. The warrants issued to Merrill
Lynch covered 210,000 shares exercisable at $.01 per share (the "Penny
Warrants") and an additional 210,000 shares exercisable at $1.125 per share. The
Penny Warrants were exercised and 210,000 shares of Common Stock were issued in
May 1998. The shares of Common Stock issued to Merrill Lynch were not registered
under the Securities Act, and were issued pursuant to the exemption provided by
Section 4(2) of the Securities Act. Merrill Lynch was in compliance with the
necessary requirements of Section 4(2) to receive such exemption.
11
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: 1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
Revenues $ 158,308 $ 141,398 $ 148,378 $ 145,992 $ 98,433
Operating Income 8,494 7,633 6,651 6,588 6,449
Net Income (Loss) Before
Discontinued Operations and
Extraordinary Item (415) 277 (18,349) (280) 2,999
Net Income (Loss) $ (1,598) $ (329) $ (18,825) $ (242) $ 3,286
Per Share Data - Basic and Diluted:
Net Income (Loss) Before
Discontinued Operations and
Extraordinary Item $ (.03) $ .01 $ (1.38) $ (.03) $ .24
Discontinued Operations (.07) - (.03) - .02
Extraordinary Item - (.04) - - -
------------ ------------ ----------- ------------ -----------
Net Income (Loss) $ (.10) $ (.03) $ (1.41) $ (.03) $ .26
============ ============ =========== ============ ===========
Weighted Average Shares
Outstanding - Basic 16,947,195 14,552,462 13,632,357 13,722,552 12,745,701
============ ============ =========== ============ ===========
Weighed Average Shares
Outstanding - Diluted 16,947,195 16,452,433 13,632,357 13,722,552 12,745,701
============ ============ =========== ============ ===========
As of September 30
- -----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
Total Assets $ 83,522 $ 80,843 $ 71,321 $ 93,330 $ 87,360
Long-Term debt 33,593 29,221 23,272 - 27,080
Total Liabilities 76,647 73,042 61,920 68,142 65,536
Accumulated Deficit (22,889) (21,200) (20,717) (1,488) (1,095)
Stockholders' Equity 5,450 6,601 7,402 23,998 21,137
12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operation.
------------
Statements contained in this Form 10-K that are not historical facts, including,
but not limited to, any projections contained herein, are forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this Form
10-K could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998
For the year ended September 30, 1999 the Company's revenues from continuing
operations increased $16,910,000 (12%) to $158,308,000 as compared to
$141,398,000 for the year ended September 30, 1998. The increase was due to
revenue gains in the Company's Overhill Farms subsidiary. Gross margins, on a
consolidated basis, remained constant at 18% with a decrease in margins at TTI
offset by improvements at Overhill Farms. During the period, operating income
increased 11% to $8,494,000 for fiscal 1999 from $7,633,000 last year.
Other income and expenses amounted to a net expense of $8,329,000 in 1999 as
compared to $7,299,000 in 1998. The prior year amounts were reported net of a
one time gain of $988,000 from the sale of the Company's office building in
December 1997.
The net loss for the year of $1,598,000, increased by $1,269,000 from a loss of
$329,000 reported in the prior year. The net loss for 1999 included charges for
$300,000 related to a tax assessment against TTI, $225,000 of accretion related
to Overhill's warrants and $1,183,000 related to the discontinued operations of
PIC. The 1998 amount was reported net of an extraordinary charge of $616,000,
related to the early extinguishment of Overhill debt.
The Food Group's revenues increased $19,147,000 (21%) to $112,496,000 for the
period ending September 30, 1999 as compared to $93,349,000 the same period last
year. Revenue gains were made in three of the four market segments the Company
serves with the largest gains coming from the food service segment. Increases in
this area were driven by the acquisition of two new national accounts (Panda
Express and Denny's) as well as increases from existing accounts. Gross margins
for the current period for the Food Group rose to 18% as compared to 15.8% for
the previous year. Operating income for fiscal 1999 increased by $2,408,000
(48%) to $7,384,000 as compared to $4,976,000 for fiscal 1998. Improvements in
gross margins and operating income are attributed to a cost reduction program
initiated in 1999 involving outsourcing some of the Company's production,
improved purchasing practices and the addition of new profitable accounts.
Income before income taxes for the Food Group increased to $1,647,000 for fiscal
1999 as compared to a loss before income taxes of $180,000 in the prior fiscal
year.
For the year ended September 30, 1999, revenues for the Forestry Group decreased
$2,237,000 (5%) to $45,812,000 as compared to $48,049,000 for the fiscal year
ended September 30, 1998. Gross margins decreased from almost 22% in fiscal 1998
to 18% in fiscal 1999. Operating income for the Forestry Group in fiscal 1999
was $1,490,000 as compared to $4,077,000 for the prior year. The decrease in
gross margins and operating income for the current period are primarily the
result of a change in product mix sold by the group in fiscal 1999. During the
period, sales of logging equipment, particularly used equipment, which
historically yields relatively higher percentage gross profits, decreased
markedly. Total equipment sales were down approximately 24% as compared to
fiscal 1998. These decreased sales were partially offset by gains in sales of
raw wood and timber products which brought lower gross margins than historical
equipment sales.
13
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30,
1997
For the year ended September 30, 1998, the Company's revenues decreased
$6,980,000 (5%) to $141,398,000 from $148,378,000 for the year ended September
30, 1997. On a consolidated basis, gross margins increased from 17% to 18%
during the period, resulting in an increase in operating income. Operating
income for the year ended September 30, 1998 increased $982,000 (15%) to
$7,633,000 from $6,651,000 during the comparable prior period. The Company
attributes the higher gross margins to the elimination of lower margin business
and improved purchasing of raw materials and inventory. Operating income
improved primarily from improved gross margins and the reduction of salaries and
other general and administrative expenses at the corporate level.
For the year ended September 30, 1998, the Company's interest expense increased
$1,701,000 (24%) to $8,830,000 from $7,129,000 in fiscal 1997. The increase in
interest is primarily due to additional borrowings and increased charges on the
Company's indebtedness to Mr. Harold Estes.
For the year ended September 30, 1998, the Company recorded a tax expense of
$57,000 primarily related to state tax liabilities. The benefit in 1997 resulted
primarily from the statutory tax benefit of the $18.7 million loss by the
Company, reduced by the valuation allowance relating to the portion of the tax
benefits that the Company was not able to utilize through carryback of such
losses to prior years.
Net income before discontinued operations and extraordinary item for the year
ended September 30, 1998 increased to $277,000 from a net loss before
discontinued operations and extraordinary item of $18,349,000 in fiscal 1997.
Net income for the fiscal 1998 period included a one time gain of $988,000 from
the sale of the Company's corporate headquarters in December 1997. Net income
for the fiscal 1998 was adversely affected by an extraordinary expense of
$616,000 relating to the early extinguishment of debt associated with the
refinancing of certain indebtedness by Overhill Farms.
The Food Group's revenues decreased $2,828,000 (3%) to $93,349,000 in fiscal
1998 from $96,177,000 in fiscal 1997. The decrease in revenue is primarily due
to the intentional paring of lower margin business and the aggressive bidding by
competitors, which if met, would have reduced profitability below minimum
requirements. During the year, the Company worked closely with American Airlines
and Jenny Craig to improve product selection and quality resulting in increased
sales to those customers of $900,000 and $1.1 million respectively. The food
service segment revenues decreased primarily because of decisions to forego
sales due to profitability considerations. Carl's Jr., Jack in the Box and Koo
Koo Roo continue to be key food service customers while Panda Express and
Denny's, new in fiscal 1998, are expected to be significant accounts in the near
future. Gross margins improved during the year due primarily to selectivity of
sales, reduction in manufacturing expenses from capital investments and
improvements in purchases of raw materials. Operating expenses increased
primarily from higher general and administrative costs, professional fees and
amortization associated with the refinancing of debt.
The Forestry Group's revenues decreased $4,153,000 (8%) to $48,049,000 from
$52,202,000 in fiscal 1997. The decrease in revenue is primarily attributable to
drier weather conditions in East Texas, reducing demand for new equipment. Gross
margins increased due to a change in the sales mix from new equipment to used
equipment sales and parts and service. Operating expenses increased $843,000
during the fiscal year resulting in a $420,000 (9%) decrease in operating income
for the year ended September 30, 1998. The operating expense increase resulted
from TTI's investment in a controlling interest of two forestry products
businesses. In the third quarter of fiscal 1998, Timberjack arranged the
purchase of the rights to harvest 94,500 tons of raw timber from the U.S.
Forestry Service. The timber was cut in late spring and early summer and will be
processed at a sawmill the Company leased in Bon Weir, Texas. The sawmill is
located in six main buildings on 68 acres which serves as storage for raw
14
materials and finished goods. For the year ended September 30, 1998 these
forestry products businesses contributed revenues of approximately $3.0 million
and a net loss of approximately $170,000.
Liquidity and Capital Resources
Principal sources of liquidity for the Company are cash flow from operations,
cash balances and additional financing capacity. The Company's cash and cash
equivalents decreased $26,000 to $375,000 at September 30, 1999, compared to
$401,000 at September 30, 1998.
The Company's operating activities in 1999 resulted in cash provided of
$2,552,000, as compared to a use of cash of $8,435,000 in 1998. The cash
generated during the current year is generally related to improved operating
profits at Overhill, along with increases in accounts payables offset by
increases in accounts receivable, both related to the volume increases at
Overhill, together with the reductions in inventories by TTI and its
subsidiaries.
The Company's investing activities for the year ended September 30, 1999
resulted in a use of cash of $1,994,000, as compared to a use of cash of
$2,433,000 in 1998. The use of cash resulted primarily from increases in notes
and related party receivables and capital expenditures by Texas Timberjack and
its subsidiaries, offset by $1,780,000 in cash proceeds from the sale of PIC.
The Company's financing activities for the year ended September 30, 1999
resulted in a use of cash of $584,000, as compared to cash provided of
$10,165,000 in 1998. The use of cash resulted from the repayment of $1,200,000
of convertible bonds held by Merrill Lynch reduced by slight increases in net
borrowings by Overhill and TTI.
In December 1997, Overhill refinanced a certain portion of its existing debt.
The new financing amounted to a total facility of $24.2 million which is
structured as a three-year term loan maturing in December 2000. The agreement
also requires Overhill to pay on a quarterly basis, service fees totaling
$180,000, $300,000 and $440,000 for the first, second and third years of the
loan respectively. Under the terms of the agreement, the Company granted stock
warrants that entitle the holder to immediately acquire at $.01 per share, 30%
of the common stock of Overhill, of which 25% (5/6 of the total shares under
warrant) could be repurchased by the Company for $2,000,000 during the two-year
period following the date of the agreement. In June 1998, in connection with
amending certain covenants and restrictions, the percentage of Overhill that the
Company can repurchase for $2,000,000 was reduced to 20% from 25%. Additionally,
the lender received fees totaling approximately $1.7 million in connection with
this financing, of which $500,000 is refundable if the loan is paid in full
during the second year of the loan. The Company used a portion of the proceeds
to repay Term Loans A and B, and $2,800,000 of principal of the $4,000,000
senior convertible debentures described below. The early extinguishment of this
indebtedness resulted in an extraordinary charge of approximately $616,000 in
fiscal 1998.
In November 1999, Overhill refinanced substantially all of its existing debt.
The total facility amounted to $44 million, consisting of a $16 million line of
credit provided by Union Bank of California, N.A. ("Union Bank") together with
$28 million in the form of a five-year term loan provided by Levine Leichtman
Capital Partners II, L.P. ("LLCP").
The line of credit with Union Bank expires in November 2002 and provides for
borrowings limited to the lesser of $16 million or an amount determined by a
defined borrowing base consisting of eligible receivables and inventories.
Borrowings under the line of credit will bear interest at a rate, as selected by
Overhill at the time of borrowing, of prime plus .25% or LIBOR plus 2.75%.
Availability under the line through December 15, 1999 ranged from approximately
$2 million to $5 million. The Union Bank agreement provides, among other things,
that Overhill will be subject to an unused line of credit fee of
15
.25% per annum. The agreement contains various covenants including restrictions
on capital expenditures, and specified net worth levels and debt service ratios.
In addition, the terms of the agreement generally prohibit loans, dividends or
advances from Overhill to the Company and limit payments of taxes and other
expenses to Polyphase to specified levels. The line of credit is guaranteed by
the Company and collateralized by certain assets of Overhill and all of the
Overhill common stock owned by the Company.
The term loan with LLCP is a secured senior subordinated note bearing interest
at 12% per annum, with interest payable monthly until maturity in October 2004.
Principal payments in an amount equal to 50% of the excess cash flow, as
defined, for Overhill's previous fiscal year are also payable annually
commencing in January 2001. Voluntary principal payments are permitted after
October 31, 2001, subject to certain prepayment penalties. The agreement
contains various covenants including restrictions on capital expenditures,
minimum EBITDA and net worth levels, and specified debt service and debt to
equity ratios. In addition, the terms of the agreement restrict changes in
control, generally prohibit loans, dividends, or advances by Overhill to the
Company and limit payments of taxes and other expenses to Polyphase to specified
levels. The term loan with LLCP is guaranteed by the Company and collateralized
by certain assets of Overhill. The agreement also requires Overhill to pay to
LLCP, during each January, annual consulting fees of $180,000.
In connection with the agreement, LLCP was granted stock warrants to purchase
17.5% of the common stock of Overhill, exercisable immediately at a nominal
exercise price. During the first two years following the date of the agreement,
Overhill has the right to repurchase 5% of Overhill's shares from LLCP for $3
million and/or to repurchase all 17.5% of the Overhill shares subject to the
LLCP warrant within five days of the term loan being repaid at their then
determined fair market value. If such shares are not repurchased, LLCP will be
entitled under the agreement to receive a cash payment of $500,000 from
Overhill. At the date of issuance, the warrants granted to LLCP were estimated
to have a fair value of $2.37 million.
As a result of these transactions, Overhill repaid in full the $22.7 million
senior subordinated notes payable and the $9.6 million revolving line of credit.
Additionally, Overhill repurchased for $3.7 million the warrants held by the
lender to purchase 30% of Overhill's common stock. In addition, in connection
with the refinancing, Overhill was permitted to make a one-time advance of $1.25
million to Polyphase for working capital and other specified purposes. Overhill
incurred costs and expenses in connection with the refinancing totaling
approximately $2.5 million, substantially all of which has been, or will be,
paid to the lenders. The early extinguishment of the previous indebtedness will
result in an extraordinary loss of approximately $1.2 million (net of a $500,000
refund for early payment of the senior subordinated notes) to be recognized
during the Company's quarter ending December 31, 1999.
In connection with its acquisition in 1995, Overhill obtained a credit facility
with Finova Capital Corporation in the original amount of $18,000,000,
consisting of a $12,000,000 revolving line of credit and two term loans, A and B
for $2,000,000 and $4,000,000, respectively. Term Loans A and B were repaid in
December 1997 as described above. Borrowings under the revolving line of credit
are limited to the lesser of $12,000,000 or an amount determined by a defined
borrowing base which is based on eligible receivables and inventory. Borrowings
under the line of credit facility bear interest at the Citibank base rate plus
1.5% (approximately 9.75% at September 30, 1999). Overhill's revolving line of
credit requires the payment of an unused line fee of .25% per annum and an
annual facility fee of .50% per annum. The credit facility is collateralized by
Overhill's receivables and inventories and has been guaranteed by the Company.
The borrowings are classified as long-term debt due to their subsequent
refinancing under a long-term arrangement with Union Bank as discussed above.
The 1999 Bonds were repaid in July 1999. Such Bonds, in the original principal
amount of $4,000,000,
16
were convertible at the option of the holder into shares of common stock equal
to the principal amount of each bond (or in $1,000 increments) divided by a
$3.00 per share conversion price, subject to adjustment in certain
circumstances. As part of the 1997 refinancing, the holders were granted
warrants to purchase 420,000 shares of the Company's common stock, exercisable
over a five-year period, with certain registration rights. The warrants are
exercisable for 210,000 shares at $.01 per share (which were exercised during
fiscal 1998) and 210,000 shares at $1.125 per share, the market price of the
Company's common stock on the date of grant.
In connection with the acquisition of TTI in June 1994, the Company recorded a
note to the seller (Mr. Harold Estes) in the amount of $9,737,719 with interest
at 8% due October 31, 1994 and collateralized by all the capital stock of TTI.
As of various maturity dates, Mr. Estes has entered into subsequent agreements
with the Company to modify and extend the term of the note. As of September 30,
1999, the note had a total unpaid balance of $17,914,842 (principal of
$16,347,191 and accrued interest of $1,567,651), bearing interest at 9.75% per
annum with a maturity date of December 15, 1999. During November 1999, the note
was further modified and extended to mature October 10, 2002 at an interest rate
of 9% per annum, and to allow for principal and interest payments to be made
with amounts upstreamed to Polyphase by TTI for the payment of taxes (subject to
the approval of Timberjack's Board of Directors and its lenders). In connection
with a previous modification in 1998, the Company agreed to assign any interest
it may have or subsequently obtain with respect to 2,000,000 shares of the
Company's common stock owned by the Pyrenees Group ("Pyrenees"), a private
investment firm controlled by Paul A. Tanner, the Company's former Chairman and
Chief Executive Officer, and held by Mr. Estes as secondary collateral. These
shares, which were recovered in 1999 on behalf of Mr. Estes, had a value of
$875,000, which was charged to interest expense in 1999.
TTI has an $8.0 million revolving line of credit with Bank of America, N.A.
(formerly NationsBank of Texas, N.A.). Amounts advanced under the line of credit
bear interest at prime less .25% (approximately 8.0% at September 30, 1999), and
are collateralized by substantially all of TTI's assets. The line of credit
agreement contains various covenants related to receivables, capital
expenditures, inventories, debt ratios, contingent liabilities and payment of
dividends. Furthermore, the terms of the revolving line of credit generally
prohibit dividends, loans or advances from TTI to the Company, but permit the
payment of taxes. The Company has guaranteed all obligations under the TTI
revolving line of credit. Availability under the line as of September 30, 1999
amounted to approximately $4.1 million. TTI intends to renew the revolving
credit facility upon maturity in March 2000.
TTI's majority-owned subsidiary, Southern Forest Products, LLC, has an $8.0
million revolving line of credit with Bank of America, N.A. (formerly
NationsBank of Texas, N.A.) The line of credit expires in April 2000 and amounts
advanced under the line bear interest at prime (approximately 8.25% at September
30, 1999), and are collateralized by substantially all of the assets of Southern
Forest Products. Availability under the line as of September 30, 1999 amounted
to approximately $2.5 million.
The Company believes that the funds available to it from operations and existing
capital resources will be adequate for its capital requirements for the next
twelve months.
Year 2000
The Company has initiated a Year 2000 program to identify and address issues
associated with the ability of its business systems and equipment to properly
recognize the Year 2000. The purpose of this effort is to avoid interruption of
the operations of the Company as a result of the century change that will occur
on January 1, 2000. The Company's program includes review of its software
systems, review of its operating systems, upgrade or retirement of non-compliant
hardware and contacting key suppliers to assess their Year 2000 readiness.
17
The Food Group has completed the installation of a new integrated accounting,
inventory, sales and purchasing system to replace the previous manual and
computer systems supporting operations. The system software and hardware has
been certified by the vendor to be Year 2000 compliant and has been implemented
as a parallel system. The Forestry Group has reviewed its existing software and
has completed an upgrade modification.
The Company began the second phase of its Year 2000 compliance project in late
January. The Company's subsidiaries are contacting key vendors to assess their
Year 2000 readiness and evaluate the effect of non-compliance on the Company's
future business.
Despite efforts to address the Year 2000 problem, there can be no guarantee that
critical suppliers or entities on which the Company relies will be converted on
a timely basis. The Company believes, based upon preliminary findings, that most
vendors are performing internal Year 2000 projects similar to the Company's and
that non-compliant vendors will offer alternative measures for time sensitive
products. Contingency plans for obtaining goods and services from non-compliant
vendors will be addressed on a case by case basis.
To date, the Company has had no material expenditures for direct Year 2000
compliance procedures.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
----------------------------------------------------------
The Company's interest expense is affected by changes in prime and LIBOR rates
as a result of its various line of credit arrangements (see Item 7). If these
market rates increase by an average of 1% in fiscal 2000, the Company's interest
expense would increase by approximately $200,000 based on the outstanding line
of credit balances at September 30, 1999.
The Company does not own, nor does it have an interest in any other market risk
sensitive instruments. See Item 1 "Description of Business".
ITEM 8. Financial Statements.
--------------------
See Index to Consolidated Financial Statements included in Item 14.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
- --------------------
None
18
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
The following table sets forth certain information regarding the directors and
executive officers of the Company.
Name Age Position
- --------------------------------------------------------------------------------
James Rudis 50 Chairman of the Board,
Chief Executive Officer and President
William E. Shatley 53 Senior Vice President,
Chief Financial Officer, Treasurer and
Director
Michael F. Buck 62 Secretary and Director
George R. Schrader 68 Director
James Rudis was elected to the Board of Directors (the "Board") in December 1992
and has served as Chairman and Chief Executive Officer since February 1998 and
President since July 1997. He also served as Executive Vice President of the
Company from March 1994 until July 1997. Prior to his employment with the
Company, Mr. Rudis was President of Quorum Corporation, a private consulting
firm involved in acquisitions and market development. From 1970 until 1984, he
held various executive positions in CIT Financial Corporation, including Vice
President and Regional Manager of that company's Commercial Finance Division.
William E. Shatley was named as Senior Vice President and Treasurer of the
Company in March 1994 and was elected to the Board in February 1998. He joined
the Company in an executive capacity in October 1993, having previously served
the Company on an advisory basis since the relocation of its corporate offices
to Texas in 1992. Mr. Shatley, a Certified Public Accountant since 1970,
previously conducted his own consulting and accounting practice (1982-1993),
after having served as Vice President and Chief Financial Officer of Datotek,
Inc. (1977-1982) and in an executive capacity with Arthur Andersen (1968-1977).
Michael F. Buck is President of Mimatian Co., an operations and materials
consulting firm. From August 1990 to August 1994, Mr. Buck served as Vice
President of Bath Iron Works, Inc., a company engaged in building Aegis Class
cruisers and destroyers for the United States Navy. From August 1989 to August
1990, Mr. Buck was a Vice President of Sabreliner Corporation, a company engaged
in building, maintaining and overhauling executive jet aircraft. From March 1986
to August 1989, Mr. Buck was Vice President and Director of Procurement for
International Telephone and Telegraph. He became a director of the Company in
December 1989.
George R. Schrader was appointed as a director in March 1994. He is currently a
named member of Schrader & Cline, LLC, a financial and governmental management
consulting firm. From 1983 to 1993, he was a principal of Schrader Investment
Company, whose activities paralleled those of Schrader & Cline, LLC. Mr.
Schrader's additional experience includes ten years as City Manager for the city
of Dallas, Texas and a total of nine years experience as City Manager for the
Texas cities of Mesquite and Ennis.
19
Significant Employee
Mr. Harold Estes is the President of Texas Timberjack, Inc., a wholly owned
subsidiary of the Company. He was elected as a director in February 1996 and
resigned from the board in April 1997. TTI is a distributor of industrial and
commercial timber and logging equipment with locations in Lufkin, Cleveland,
Atlanta and Jasper, Texas. Mr. Estes has been President of TTI since 1984, when
he acquired it from the Eaton Corporation.
Meetings of the Board of Directors and its Committees
The Board has standing Compensation and Audit Review Committees. The
Compensation Committee is comprised of Messrs. Buck and Schrader. During fiscal
1999, the Compensation Committee met one time. The Compensation Committee (i)
administers the Company's employee stock option plans and approves the granting
of stock options and (ii) approves compensation for officers.
The Audit Review Committee is composed of Messrs. Buck and Schrader. During
fiscal 1999, the Audit Review Committee met two times. Its functions are to (i)
recommend the appointment of independent accountants; (ii) review the
arrangements for and scope of the audit by independent accountants; (iii)
consider the adequacy of the system of internal controls and review any proposed
corrective actions; and (iv) review and monitor the Company's policies regarding
business ethics and conflicts of interest.
The full Board of Directors met four times during fiscal 1999. Each director
attended all meetings of the Board of Directors and each Committee on which such
director served.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the Securities Exchange Act of 1934 ("Exchange Act") requires
the Company's directors, officers and persons who own more than 10 percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission") and the American Stock Exchange. Directors, officers and
greater than 10 percent beneficial owners of the Company's equity securities are
required by applicable regulations to furnish the Company with copies of all
forms they file with the Commission pursuant to Section 16(a).
Based upon (i) a review of the copies of forms furnished to the Company pursuant
to the requirements of Section 16(a); (ii) information received by the Company
in connection with various purchases and sales of the Company's equity
securities; and (iii) the knowledge of the Company that Infinity Investors
Limited ("Infinity") may have owned greater than ten percent of the Company's
equity securities and did not file the required forms with the Commission
pursuant to Section 16(a), the Company believes that during fiscal 1999, all
filing requirements applicable to its directors and executive officers were
satisfied. However, with respect to the Company's greater than 10% beneficial
owners of equity securities, Infinity is delinquent in its Section 16(a) filing
obligations.
Based solely upon a review of the copies of forms furnished to the Company,
pursuant to the requirements of Section 16(a) and excluding Infinity, all
holders of greater than 10% of the Company's equity securities have satisfied
their Section 16(a) filing requirements.
20
ITEM 11. Executive Compensation.
----------------------
The following table sets forth for fiscal 1999, 1998 and 1997 compensation
awarded or paid to Mr. James Rudis, the Company's Chairman, Chief Executive
Officer and President and Mr. William E. Shatley, the Company's Senior Vice
President, Treasurer and Chief Financial Officer (collectively, the "Named
Executive Officers"). Other than as indicated in the table below, no executive
officer of the Company received salary plus bonus in excess of $100,000 for the
year ended September 30, 1999.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------ -------------------
Name and Principal Fiscal Other Annual All/Other
Position Year Salary Bonus Compensation Options/SARs Compensation
- ------------------------------------------------------------------------------------------------------------------------
James Rudis 1999 $180,000 $ 0 $ -(1) - $ -
Chairman, Chief 1998 $168,077 $ 0 $ -(1) - $ -
Executive Officer, 1997 $138,240 $ 0 $ -(1) - $ -
President and
Director (2)
William E. Shatley 1999 $132,000 $ 0 $ -(1) - $ -
Senior Vice President, 1998 $126,000 $ 0 $ -(1) - $ -
Treasurer, Chief 1997 $108,000 $ 0 $ -(1) - $ -
Financial Officer and
Director
_______________
(1) The Named Executive Officers each received certain perquisites and other
personal benefits from the Company during fiscal 1999, 1998 and 1997. These
perquisites and other personal benefits, however, did not equal or exceed
10% of the Named Executive Officers' salary and bonus during fiscal 1999,
1998 or 1997.
(2) Mr. Rudis was named Chairman and Chief Executive Officer in February 1998.
Mr. Rudis formerly the Company's Executive Vice President, became President
in July 1997.
No individual grants or exercises of stock options were made to the Named
Executive Officers during the fiscal year ended September 30, 1999.
The following table describes for the Named Executive Officers options and the
potential realizable value for his options as of September 30, 1999, which were
granted in prior fiscal years.
21
Fiscal Year End September 30, 1999 Option/SAR Values
Number of Unexercised Value of Unexercised In-the-Money
Options/SARs at Options/SARs at
September 30, 1999 September 30, 1999 (1)
--------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------
James Rudis 276,500 - $ - $ -
William E. Shatley 246,500 - $ - $ -
_________
(1) Based on $.6875 per share of Common Stock, which was the closing price per
share of Common Stock on September 30, 1999 on the AMEX as reported by The
Wall Street Journal.
Compensation Committee Report on Executive Compensation
The Board of Directors has established a Compensation Committee to review and
approve the compensation levels of executive officers of the Company, evaluate
the performance of the executive officers, consider senior management succession
issues and any related matters for the Company. The Compensation Committee is
charged with reviewing with the Board of Directors in detail all aspects of cash
compensation for the executive officers of the Company. Stock option
compensation for the executive officers is also considered by the Compensation
Committee.
The philosophy of the Company's compensation program is to employ, retain and
reward executives capable of leading the Company in achieving its business
objectives. These objectives include preserving a strong financial posture,
increasing the assets of the Company, positioning the Company's assets and
business operations in geographic markets and industry segments offering long
term growth opportunities, enhancing shareholder value and ensuring the survival
of the Company. The accomplishment of these objectives is measured against
conditions prevalent in the industries within which the Company operates. In
recent years these conditions reflect a highly competitive market environment
and rapidly changing regional, geographic and overall industry market
conditions.
The available forms of executive compensation include base salary, cash bonus
awards and incentive stock options. Performance of the Company is a key
consideration (to the extent that such performance can fairly by attributed or
related to such executive's performance), as well as the nature of each
executive's responsibilities and capabilities. The Company's compensation policy
recognizes, however, that stock price performance is only one measure of
performance and, given industry business conditions and the long term strategic
direction and goals of the Company, it may not necessarily be the best current
measure of executive performance. Therefore, the Company's compensation policy
also gives consideration to the Company's achievement of specified business
objectives when determining executive officer compensation. Compensation paid to
executive officers is based upon a Company-wide salary structure consistent for
each position relative to its authority and responsibility compared to industry
peers.
Based on comparative industry data, and after due consideration to the factors
mentioned above, the Compensation Committee set Mr. Rudis' salary at $180,000
for fiscal 1999. The Company did not pay any cash bonuses to Mr. Rudis for
fiscal 1999.
22
The Compensation Committee believes that the compensation of the Company's other
executive officers was reasonably related to the performance of the Company and
those individuals during fiscal 1999.
COMPENSATION COMMITTEE
Michael F. Buck
George R. Schrader
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was an officer or employee of the
Company or any of its subsidiaries or had any relationship requiring disclosure
pursuant to Item 404 of Commission Regulation S-K. No executive officer of the
Company served as a member of a compensation committee of another corporation
(or other board committee of such company performing similar functions or, in
the absence of any such committee, the entire board of directors of such
corporation), one of whose executive officers served on the Compensation
Committee. No executive officer of the Company served as a director of another
corporation, one of whose executive officers served on the Compensation
Committee. No executive officer of the Company served as a member of a
compensation committee of another corporation (or other board committee of such
corporation performing similar functions or, in the absence of any such
committee, the entire board of directors), one of whose executive officers
served as a director of the Company.
Director Compensation
Directors who are also employees of the Company receive no additional
compensation for services as directors. Nonemployee directors receive an annual
fee of $8,500, with additional fees of $2,500 and $1,500 for service on the
Audit Committee and Compensation Committee, respectively, plus additional fees
of $500 to $750 per Board and Committee meeting attended. Directors are also
reimbursed for all expenses incident to their service on the Board of Directors.
During March 1998, Mr. Michael F. Buck and Mr. George R. Schrader were granted
options to purchase 30,000 and 50,000 shares, respectively, of Common Stock,
exercisable at $0.75 per share (the fair market value at the date of grant) in
whole or in part, expiring in March 2008.
During July 1996, Mr. Buck and Mr. Schrader were each granted options to
purchase 30,000 shares of Common Stock, exercisable at $2.00 per share (the fair
market value at the date of grant), in whole or in part, expiring in July 2006.
Common Stock Performance Table
The following performance table compares the five-year cumulative return of the
Common Stock with that of a Broad Market Index (American Stock Exchange) and a
Published Industry Index (MG Industry Group 342 - Food and Beverage - Processed
and Packaged Goods). Each index assumes $100 invested at September 30, 1994, and
is calculated assuming quarterly reinvestment of dividends and quarterly
weighting by market capitalization.
23
Comparative Five-Year Total Returns
Company 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
Polyphase Corporation 100.00 59.78 119.57 31.52 7.61 11.96
Industry Index 100.00 97.88 113.31 155.90 147.89 145.05
AMEX Market Index 100.00 120.49 125.40 152.50 133.20 155.13
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
The following table sets forth information regarding the beneficial ownership of
Common Stock as of September 30, 1999, by each person or group who owned, to the
Company's knowledge, more than five percent of the Common Stock, each of the
Company's directors, the Company's Chief Executive Officer, and all of the
Company's directors and executive officers as a group.
Amount and Nature of
Name Beneficial Ownership (1) Percent of Class (1)
- ------------------------------------------------------------------------------------------
James Rudis 557,900 (2) 3.1%
William E. Shatley 404,700 (3) 2.2
Michael F. Buck 60,100 (4) *
George R. Schrader 80,000 (5) *
Harold Estes 3,921,200 (6) 22.0
Infinity Investors Limited 1,165,756 (7) 6.1
John E. McConnaughy, Jr. 1,511,900 (8) 8.5
All directors and executive officers
as a group (4 persons) 1,102,700 (9) 6.0
- ----------------
* Less than 1%.
(1) Except as noted, to the knowledge of the Company, the listed persons and
entities have sole investment power and sole voting power as to all shares
of Common Stock for which they are identified as being the beneficial
owners. Information as to beneficial ownership has been furnished to the
Company by such persons. Such presentation is based on 17,812,464 shares of
Common Stock outstanding as of September 30, 1999.
(2) Includes 276,500 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(3) Includes 246,500 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
Includes 158,200 shares that Mr. Shatley may be deemed to beneficially own
as a general partner in a family limited partnership.
(4) Includes 60,000 shares that could be purchased pursuant to the exercise of
stock options
24
exercisable within 60 days subsequent to the date hereof.
(5) Includes 80,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(6) Mr. Estes' address is Highway 59 South, Route 15, Box 9475, Lufkin, Texas
75901.
(7) The address of Infinity is 38 Hertford Street, London W1Y7TG, England. As
discussed in the subsection to Item 10 entitled "Section 16(a) Beneficial
Ownership Reporting Compliance," the number of shares reportedly held by
Infinity consists solely of 1,165,756 shares, 6.1% of the class on an "as
converted" basis, of Common Stock into which certain of the Company's
preferred stock (and accrued dividends thereon) held by Infinity is
convertible within 60 days subsequent to the date hereof.
(8) Mr. McConnaughy's address is 1011 High Ridge Road, Stamford, Connecticut
06905.
(9) Includes 663,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
ITEM 13. Certain Relationships and Related Transactions.
----------------------------------------------
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance of
options to purchase five series of convertible preferred stock to the Pyrenees
Group, a private investment firm controlled by Paul A. Tanner, the Company's
former Chairman and Chief Executive Officer, or its assignees. The options are
summarized as follows:
Preferred Conversion Common
Series Shares Price Shares
-------- --------- ---------- ---------
A 125,000 $ .50 2,500,000
B 100,000 1.00 1,000,000
C 100,000 2.00 500,000
D 200,000 4.00 500,000
E 475,000 10.00 475,000
--------- ---------
1,000,000 4,975,000
During fiscal 1994 and 1995, Pyrenees exercised and converted Series A, B and C
Preferred Stock into common stock. In November 1995, Pyrenees exercised the
Series D option through the issuance of a 7% recourse note in the amount of
$2,000,000, collateralized by the shares issued, which was treated as an
in-substance stock option at the date of grant. During fiscal 1996, these shares
were converted to 500,000 shares of common stock. During the years ended
September 30, 1996 and 1997, principal payments of approximately $721,000 and
$304,000, respectively, were made on the note. The remaining balance of $975,000
became uncollectible, and the 500,000 shares of common stock that secure this
note have been recovered pursuant to certain litigation against Pyrenees and Mr.
Tanner. This recovery has been accounted for as an unexercised stock option in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". As such, $756,000, representing the difference
between the note balance and the fair market value of the 500,000 shares as of
the recovery date was recorded as a reduction in paid-in capital.
25
Advances to Related Parties
On February 23, 1998, Mr. Paul A. Tanner resigned as Chief Executive Officer and
Chairman of the Company's Board of Directors. Mr. James Rudis, the Company's
President, was elected by the Board to assume the vacated positions. Following
the resignation, a reserve of approximately $165,000 was established against all
outstanding advances due from Mr. Tanner.
During fiscal years 1994 and 1995 a number of advances were made to Mr. Tanner
which aggregated approximately $2.0 million. In December 1995, the advances were
refinanced though the issuance to the Company of a 12% unsecured demand note
from Mr. Tanner. Also during the aforementioned periods, the Company made
non-interest bearing cash advances of approximately $1.5 million to the Pyrenees
Group, a company controlled by Mr. Tanner.
Effective in January 1996, the Company reached an agreement to manage a project
to develop and build a multi-purpose sports facility in Las Vegas, Nevada. The
project was being developed by PLY Stadium Partners, Inc. ("Stadium Partners"),
a private investment firm headed by Mr. Tanner. The Company agreed to provide to
Stadium Partners up to $4 million of debt (1) convertible into a 14% economic
interest in the project and (2) guaranteed personally by Mr. Tanner and
Pyrenees. As part of this agreement, amounts which had been advanced during
fiscal 1994 and 1995 to Mr. Tanner and Pyrenees (approximately $3.5 million),
together with subsequent amounts advanced, charged or accrued to or on behalf of
Stadium Partners were considered as components of the $4 million of convertible
debt, bearing interest at 12.0% and guaranteed personally by Mr. Tanner and by
Pyrenees. Through September 30, 1996, the Company advanced an additional $9.27
million, for an approximate total of $13.3 million.
In addition to the cash advances referred to above, the Company, during fiscal
1996 accrued management and service revenues of $2,550,000 and interest income
of $790,000 related to the Company's activities with Stadium Partners, the
collectibility of which was dependent upon the success of the project and/or the
guarantees referred to above. As a result of the terms of the financing
arrangements with Lehman described below, Stadium Partners was precluded from
making any distributions until permanent project financing was secured or
stadium suite sales were made that were sufficient to repay the financing from
Lehman. As a consequence of Stadium Partners' inability to effect such sales or
obtain such financing by March 15, 1997 in order to make its payment to the
Company on such date, the Company established a reserve of $3.34 million as of
September 30, 1996, which represented all income accrued in 1996.
On November 15, 1996, Stadium Partners, through a newly-formed partnership,
purchased 62 acres in Las Vegas for the development of the stadium and adjacent
convention facility. Financing was provided by Lehman Brothers Holdings, Inc.
("Lehman") through a partnership, Nevada Stadium Partners Limited Partnership
("Nevada Partnership"), with Lehman receiving an equity interest in the project.
The Company guaranteed the repayment of the Lehman loan on behalf of Stadium
Partners. The guarantee is only effective in certain circumstances or upon the
occurrence of certain events. A foreclosure sale was conducted during July 1998.
Notwithstanding such foreclosure action, the Company, based on the advice of
legal counsel, does not believe that it will incur any significant liability as
a result of this guarantee. As a result, the Company believes the existence of
such guarantee will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
The loan agreement with Lehman required certain prepayments by Nevada
Partnership, the first of which in the amount of $5.0 million became due in
January 1997. This was paid primarily with funds advanced by the Company. The
second prepayment requirement of $20.0 million became due in May 1997; this
payment was not made. As a result of the failure to make this payment, another
agreement was entered into among the borrower, Lehman and the Company as of July
1, 1997. This agreement generally
26
provided forbearance by Lehman until September 30, 1997, to allow additional
time to raise the funds to make the principal payment. The terms of the
forbearance agreement were not met by the September deadline, and the note
matured unpaid in November 1997.
As a result of the above, the Company recorded a charge to earnings for the year
ended September 30, 1997, in the amount of $14.8 million, representing all
amounts remaining uncollected from Stadium Partners, net of the reserve
established in 1996. Amounts which may subsequently be recovered, if any, will
be recognized as income when collection is assured.
During April 1998, the Company filed suit against PLY Stadium Partners, Inc.,
and against Mr. Tanner and Pyrenees, the guarantors of the debt. In May 1999,
the Company was awarded a judgment against such defendants, jointly and
severally, in the amount of approximately $19.5 million, plus interest. In
connection therewith, the defendants were ordered to turn over all ownership of
the stock of Polyphase, as well as the stock and assets of PLY Stadium Partners,
Inc. and Pyrenees, which includes the rights to 2,000,000 shares of Polyphase
common stock owned by Pyrenees and held by Mr. Harold Estes as secondary
collateral. In connection with this recovery of the 2,000,000 Polyphase shares,
the Company recorded interest expense of $875,000, the fair value assigned to
the shares, resulting from its assignment to Mr. Estes. Additionally, the
Company recorded income of $656,000 related to the recovery of 1,500,000 shares
and accounted for the remaining 500,000 shares as an unexercised stock option in
accordance with APB No. 25. After evaluating the possibility of any potential
post judgment collections and the additional legal expenses to be incurred in
pursuing such collections, and further considering the likelihood of one or all
of the defendants seeking protection under bankruptcy laws, the Company is
presently in negotiations to settle the judgment. The objective is to secure
recoveries, in addition to the Polyphase shares discussed above, through the
collections of proceeds using either first or second liens on properties held by
other than the judgment debtors. Any further amounts ultimately recoverable as a
result of this judgment and turnover order or the settlement negotiations is not
presently determinable.
Other Transactions
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September 30,
1999, the insurance premium receivable was $592,006.
In connection with the purchase of TTI, the Company acquired a note receivable
from an officer of TTI. The note which has been renewed and extended each year
since issuance is secured by marketable securities, is payable within one year
and bears interest at 3.96%. As of September 30, 1999 the balance outstanding
was $341,305 and the note has been classified as a non-current related party
receivable. Also included in related party receivables at September 30, 1999 are
approximately $683,000 in receivables from employees the Company and its
subsidiaries and $499,000 in receivables from partnerships in which TTI has
minority interests. As of September 30, 1999, approximately $570,000 of such
receivables are notes which are no longer accruing interest. During 1999, the
Company established a $100,000 reserve against receivables from employees of the
Company. The Company expects the remaining amounts due under related party
receivables to be realizable.
27
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
--------------------------------------------------------------
(a) 1. and 2. Financial Statements and Financial Statement Schedule.
1. The following consolidated financial statements of Polyphase
Corporation and subsidiaries, included in the annual report of the
registrant to its shareholders for the year ended September 30, 1999,
are included in Item 8:
Report of Independent Auditors F-2
Consolidated Balance Sheets-September 30, 1999 and 1998 F-3
Consolidated Statements of Operations-Years ended September 30, 1999, 1998,
and 1997 F-5
Consolidated Statements of Stockholders' Equity-Years ended September 30, 1999,
1998, and 1997 F-7
Consolidated Statements of Cash Flows-Years ended September 30, 1999, 1998,
and 1997 F-9
Notes to Consolidated Financial Statements F-12
2. The following consolidated financial statement schedule of Polyphase
Corporation and subsidiaries is included in item 14(a):
Schedule I - Condensed Financial Information of Registrant F-44
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
3. Exhibits
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3 through
4.8 to the Company's registration statement on Form S-8
[No. 33-82008], filed with the Commission on July 27, 1994 [the "1994
Form S-8"])
3.2** Bylaws of Polyphase Corporation (as amended April 26, 1999)
4.1 Certificate of Designation relating to the Series A-2 Preferred Stock
(incorporated by reference from Exhibit 4.9 to the Company's
Registration Statement on Form SB-2 [No. 33-85334] filed with the
Commission on October 19, 1994 [the "Form SB-2"])
28
4.2 Certificate of Designation relating to the Series A-3 Preferred Stock
(incorporated by reference from Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1995 [the "1995
Form 10-K"])
+10.1 Stock Option Agreement for Paul A. Tanner (incorporated by reference
from Exhibit 4.12 to the 1994 Form S-8)
+10.2 Stock Option Agreement for George R. Schrader (incorporated by
reference from Exhibit 4.15 to the 1994 Form S-8)
+10.3 Stock Option Agreement for James Rudis (incorporated by reference
from Exhibit 10.5 to the Company's Form 8-B, filed with the
Commission on August 27, 1994 [the "Form 8-B"])
+10.4 Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
+10.5 Employment Agreement, dated as of November 1, 1993, between Harold
Estes and Texas Timberjack, Inc. (incorporated by reference from
Exhibit 2 to the Company's Form 8-K dated June 24, 1994 [the "1994
Form 8-K"])
10.6 Pledge Agreement, dated as of June 24, 1994, between Polyphase
Corporation and Harold Estes (incorporated by reference from Exhibit
10.10 to the Form 8-B)
10.7 Security Agreement, dated as of June 24, 1994, between Texas
Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.11 to the Form 8-B)
10.8 Stock Option Agreement, dated as of October 21, 1992, between
Polyphase Corporation and the Pyrenees Group (incorporated by
reference from Exhibit 10.12 to the Form 8-B)
10.9 Securities Purchase Agreement, dated as of July 5, 1994, by and among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.16 to the Form 8-B)
10.10 Registration Rights Agreement, dated as of July 5, 1994, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.17 to the Form 8-B)
10.11 Indenture, dated as of July 5, 1994, from Polyphase Corporation to
IBJ Schroder Bank & Trust Company (incorporated by reference from
Exhibit 10.18 to the Form 8-B)
10.12 Form of 12% Senior Convertible Debenture No. 1, payable to Bridge
Rope & Co. or registered assigns (incorporated by reference from
Exhibit 10.19 to the Form 8-B)
10.13 Form of 12% Senior Convertible Debenture No. 2, payable to Vault &
Co. or registered assigns (incorporated by reference from Exhibit
10.20 to the Form 8-B)
10.14 Promissory Note in the amount of $2,000,000, from Pyrenees Group, as
maker, to Polyphase Corporation, dated November 1, 1995, related to
the exercise of options on Series D Preferred Stock (incorporated by
reference from Exhibit 10.29 to the 1995 Form 10-K)
29
10.15 Security Agreement, dated as of November 1, 1995, between Pyrenees
Group and Polyphase Corporation (incorporated by reference from
Exhibit 10.30 to the 1995 Form 10-K)
10.16 Promissory Note in the amount of $2,000,872, from Paul A. Tanner, as
maker, to Polyphase Corporation, dated December 8, 1995 (incorporated
by reference from Exhibit 10.31 to the 1995 Form 10-K)
10.17 Convertible Preferred Stock Purchase Agreement, dated as of November
10, 1995, by and between Polyphase Corporation and Infinity
Investors, Limited (incorporated by reference from Exhibit 10.32 to
the 1995 Form 10-K)
10.18 Securities Purchase Agreement, dated as of December 1, 1995, by and
among Polyphase Corporation, Merrill Lynch World Income Fund, Inc.,
and Convertible Holdings, Inc. (incorporated by reference from
Exhibit 10.33 to the 1995 Form 10-K)
10.19 Registration Rights Agreement, dated as of December 1, 1995, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.34 to the 1995 Form 10-K)
10.20 Indenture, dated as of December 1, 1995, from Polyphase Corporation
to IBJ Schroder Bank & Trust Company (incorporated by reference from
Exhibit 10.35 to the 1995 Form 10-K)
10.21 Form of 12% Senior Convertible Debenture No. 1, dated December 1,
1995 payable to Bridge Rope & Co. or registered assigns (incorporated
by reference from Exhibit 10.36 to the 1995 Form 10-K)
10.22 Form of 12% Senior Convertible Debenture No. 2, dated December 1,
1995 payable to Kane & Co. or registered assigns (incorporated by
reference from Exhibit 10.37 to the 1995 Form 10-K)
10.23 Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated June 28, 1996 (incorporated by reference
from Exhibit 10.44 to the 1996 Form 10-K)
10.24 Security and Pledge Agreement, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.45 to the 1996 Form 10-K)
10.25 Secured Promissory Note, dated June 28, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.46 to the 1996 Form 10-K)
10.26 Security Agreement, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.47 to the 1996 Form 10-K)
10.27 Promissory Note, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.48 to the 1996 Form
30
10-K)
10.28 Stock Purchase Agreement among Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1996 (incorporated by reference
from Exhibit 10.49 to the 1996 Form 10-K)
+10.29 Stock Option Agreement for Paul A. Tanner dated July 23, 1996
(incorporated by reference from Exhibit 10.50 to the 1996 Form 10-K)
+10.30 Stock Option Agreement for James Rudis dated July 23, 1996
(incorporated by reference from Exhibit 10.51 to the 1996 Form 10-K)
+10.31 Stock Option Agreement for William E. Shatley dated July 23, 1996
(incorporated by reference from Exhibit 10.52 to the 1996 Form 10-K)
+10.32 Stock Option Agreement for Michael F. Buck dated July 23, 1996
(incorporated by reference from Exhibit 10.53 to the 1996 Form 10-K)
+10.33 Stock Option Agreement for George R. Schrader dated July 23, 1996
(incorporated by reference from Exhibit 10.54 to the 1996 Form 10-K)
10.34 Convertible Promissory Note, dated January 1, 1996 by and between
PLY Stadium Partners, Inc. and Polyphase Corporation (incorporated
by reference from Exhibit 10.53 to the Company's Annual Report on
Form 10-K for the year ended September 30, 1997 [the "1997 Form
10-K"])
10.35 Master Loan Agreement, dated January 1, 1996 by and between
Polyphase Corporation and PLY Stadium Partners, Inc. (incorporated
by reference from Exhibit 10.54 to the 1997 Form 10-K)
10.36 Guaranty, dated January 1, 1996 by Paul A. Tanner to Polyphase
Corporation (incorporated by reference from Exhibit 10.55 to the
1997 Form 10-K)
10.37 Guaranty, dated January 1, 1996 by Pyrenees Group, Inc. to Polyphase
Corporation (incorporated by reference from Exhibit 10.56 to the
1997 Form 10-K)
10.38 Management Agreement, dated January 1, 1996 by and between PLY
Stadium Partners, Inc. and Polyphase Corporation (incorporated by
reference from Exhibit 10.57 to the 1997 Form 10-K)
10.39 Security Agreement, dated January 1, 1996, between Paul A. Tanner
and Polyphase Corporation (incorporated by reference from Exhibit
10.58 to the 1997 Form 10-K)
10.40 Security Agreement, dated January 1, 1996, between Pyrenees Group,
Inc. and Polyphase Corporation (incorporated by reference from
Exhibit 10.59 to the 1997 Form 10-K)
+10.41 Stock Option Agreement for David Weinreb dated January 17, 1997
(incorporated by reference from Exhibit 10.60 to the 1997 Form 10-K)
10.42 Amended Renewal Promissory Note in the amount of $14,341,256 dated
December 2, 1997, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.61 to the 1997 Form 10-K)
31
10.43 Amended Pledge Agreement, dated as of December 2, 1997, between
Polyphase Corporation and Harold Estes (incorporated by reference
from Exhibit 10.62 to the 1997 Form 10-K)
10.44 Amended Security Agreement, dated as of December 2, 1997, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference
from Exhibit 10.63 to the 1997 Form 10-K)
10.45 Term Loan Agreement in the amount of $22,500,000, dated December 4,
1997, among Overhill Farms, Inc. as borrower, Polyphase Corporation
as guarantor and The Long Horizons, Fund, L.P. as lender
(incorporated by reference from Exhibit 10.64 to the 1997 Form 10-K)
10.46 Security Agreement, dated December 4, 1997, between Overhill Farms,
Inc. as grantor and The Long Horizons Fund, L.P. as lender
(incorporated by reference from Exhibit 10.65 to the 1997 Form 10-K)
10.47 Assignment for Security (Trademarks) dated December 4, 1997, between
Overhill Farms, Inc. as assignor and The Long Horizons Fund, L.P. as
assignee (incorporated by reference from Exhibit 10.66 to the 1997
Form 10-K)
10.48 Pledge and Security Agreement, dated December 4, 1997, among
Polyphase Corporation as the pledgor, in favor of The Long Horizons
Fund, L.P. as the lender and Overhill Farms, Inc. as the borrower
(incorporated by reference from Exhibit 10.67 to the 1997 Form 10-K)
10.49 Registration Rights Agreement, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P. (incorporated
by reference from Exhibit 10.68 to the 1997 Form 10-K)
10.50 Common Stock Purchase Warrant, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P. (incorporated
by reference from Exhibit 10.69 to the 1997 Form 10-K)
10.51 Voting Rights Agreement, dated December 4, 1997, among Polyphase
Corporation, The Long Horizons Fund, L.P. and Overhill Farms, Inc.
(incorporated by reference from Exhibit 10.70 to the 1997 Form 10-K)
10.52 Supplemental Indenture, dated as of December 5, 1997, from Polyphase
Corporation to IBJ Schroder Bank & Trust Company (incorporated by
reference from Exhibit 10.71 to the 1997 Form 10-K)
10.53 Compromise Settlement Agreement with Mutual Release between Polyphase
Corporation and Rice Partners II, L.P. (incorporated by reference
from Exhibit 10.72 to the 1997 Form 10-K)
10.54 Stock Purchase Agreement between Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1997 (incorporated by reference
from Exhibit 10.73 to the 1997 Form 10-K)
32
10.55 Certificate of Designation of Preferences of Series B Preferred
Stock of Letronix Acquisition Corporation dated July 2, 1997
(incorporated by reference from Exhibit 10.74 to the 1997 Form
10-K)
10.56 Term Loan Agreement in the amount of $2,800,000, dated August 29,
1997, between Dallas Parkway Properties, Incorporated and
National Operating, L.P. (incorporated by reference from Exhibit
10.75 to the 1997 Form 10-K)
10.57 Warrant to Purchase 500,000 Shares of Common Shares of Polyphase
Corporation by Black Sea Investments, Ltd., dated August 29, 1997
(incorporated by reference from Exhibit 10.76 to the 1997 Form
10-K)
10.58 Offshore Securities Subscription Agreement to purchase 7,500
Shares of Series F 6% Convertible Preferred between Polyphase
Corporation and Black Sea Investments, Ltd., dated August 29,1997
(incorporated by reference from Exhibit 10.77 to the 1997 Form
10-K)
10.59 Stock Exchange Agreement by and between Tollway Properties, Inc.
and Polyphase Corporation date as of December 1, 1997
(incorporated by reference from Exhibit 10.78 to the 1997 Form
10-K)
10.60 Release and Settlement Agreement between Dallas Parkway
Properties, Incorporated and Polyphase Corporation dated as of
December 1, 1997 (incorporated by reference from Exhibit 10.79 to
the 1997 Form 10-K)
10.61 General Release between Dallas Parkway Properties, Incorporated
and National Operating, L.P. dated as of December 1, 1997
(incorporated by reference from Exhibit 10.80 to the 1997 Form
10-K)
10.62 Common Stock Purchase Warrant, dated April 24, 1998, covering
105,000 shares issued to Merrill Lynch World Income Fund,
Inc.(incorporated by reference from Exhibit 10.81 to the
Company's Annual Report on Form 10-K for the year ended September
30, 1998 [the "1998 Form 10-K])
10.63 Common Stock Purchase Warrant, dated April 24, 1998, covering
105,000 shares issued to Merrill Lynch Convertible Fund, Inc.
(incorporated by reference from Exhibit 10.82 to the 1998 Form
10-K)
10.64 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch Convertible Fund, Inc. (w-
1) (incorporated by reference from Exhibit 10.83 to the 1998 Form
10-K)
10.65 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch Convertible Fund, Inc. (w-
1a) (incorporated by reference from Exhibit 10.84 to the 1998
Form 10-K)
10.66 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch World Income Fund, Inc. (w-
2) (incorporated by reference from Exhibit 10.85 to the 1998 Form
10-K)
10.67 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to
33
Merrill Lynch World Income Fund, Inc. (w-2a) (incorporated by
reference from Exhibit 10.86 to the 1998 Form 10-K)
10.68 Registration Rights Agreement, dated as of April 24, 1998, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Merrill Lynch Convertible Fund, Inc. (incorporated by reference
from Exhibit 10.87 to the 1998 Form 10-K)
10.69 Guaranty, dated August 7, 1998 by Polyphase Corporation to
NationsBank (incorporated by reference from Exhibit 10.88 to the
1998 Form 10-K)
10.70 Loan Agreement in the amount of $12,000,000 dated August 7, 1998
between NationsBank, as lender and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.89 to the 1998 Form
10-K)
10.71 Promissory Note in the amount of $4,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.90 to the 1998 Form
10-K)
10.72 Promissory Note in the amount of $8,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.91 to the 1998 Form
10-K)
10.73 Security Agreement dated August 7, 1198 by Texas Timberjack to
NationsBank (incorporated by reference from Exhibit 10.92 to the
1998 Form 10-K)
+10.74 Stock Option Agreement for Michael F. Buck, dated March 17, 1998
(incorporated by reference from Exhibit 10.93 to the 1998 Form
10-K)
+10.75 Stock Option Agreement for George R. Schrader, dated March 17,
1998 (incorporated by reference from Exhibit 10.94 to the 1998
Form 10-K)
10.76** Stock Purchase Agreement, effective of September 30, 1999, by and
among Polyphase Corporation, Polyphase Instrument Acquisition
Corporation and Polyphase Instrument Co.
10.77** Promissory Note, dated September 30, 1999 in the principal amount
of $1,000,000, payable to the order of Polyphase Corporation, as
payee by Polyphase Instrument Acquisition Corporation, as maker.
10.78** Pledge Agreement, entered into on September 30, 1999, by and
between Polyphase Instrument Acquisition Corporation, as pledgor,
and Polyphase Corporation, as secured party.
10.79** Guaranty, executed as of September 30, 1999, by Polyphase
Instrument Co., as guarantor, in favor of Polyphase Corporation,
as payee, on promissory note executed by Polyphase Instrument
Acquisition Corporation, as maker.
10.80** Security Agreement entered into effective September 30, 1999, by
and between Polyphase Instrument Co., as pledgor, and Polyphase
Corporation, as secured party.
+10.81** Employment Agreement, entered into as of November 30, 1999
between Polyphase
34
Corporation and Overhill Farms, Inc., jointly and severally, and
James Rudis.
+10.82** Employment Agreement, entered into as of November 30, 1999
between Polyphase Corporation and Overhill Farms, Inc., jointly
and severally, and William E. Shatley.
10.83** Settlement Agreement and Mutual Release of Claims, effective
November 30, 1999, by and among Infinity Investors Limited,
Polyphase Corporation, James Rudis, William E. Shatley, Michael
F. Buck, and George R. Schrader.
21.1** Subsidiaries of the Registrant.
23.1** Consent of Ernst & Young LLP
27.1** Financial Data Schedule
- ----------
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last quarter of
the Fiscal Year Ended September 30, 1999.
35
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ James Rudis December 21, 1999
-------------------------
James Rudis
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ James Rudis December 21, 1999
- -----------------------------
James Rudis
Chief Executive Officer,
Chairman of the Board,
President and Director
(Principal Executive Officer)
/s/ William E. Shatley December 21, 1999
- -------------------------------------
William E. Shatley
Senior Vice President, Treasurer,
Chief Financial Officer and Director
(Principal Financial and
Accounting Officer)
/s/ George R. Schrader December 21, 1999
- ------------------------------
George R. Schrader
Director
/s/ Michael F. Buck December 21, 1999
- ------------------------------
Michael F. Buck
Director
36
POLYPHASE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors...................................... F-2
Financial Statements:
- --------------------
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-5
Consolidated Statements of Stockholders' Equity.................. F-7
Consolidated Statements of Cash Flows............................ F-9
Notes to Consolidated Financial Statements....................... F-12
Financial Statement Schedule:
- ----------------------------
Schedule - Condensed Financial Information of Registrant......... F-44
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders of
Polyphase Corporation
We have audited the accompanying consolidated balance sheets of Polyphase
Corporation and subsidiaries as of September 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1999. Our audits also
include the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Polyphase
Corporation and subsidiaries at September 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1999 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG LLP
December 16, 1999
Dallas, Texas
F-2
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
September 30,
------------------------------
1999 1998
------------- -------------
Current assets:
Cash $ 375,408 $ 401,393
Receivables, net of allowance for doubtful
accounts of $502,667 and $509,646
in 1999 and 1998, respectively:
Trade accounts 17,373,364 13,209,834
Current portion of sales contracts 4,765,072 3,879,420
Notes receivable 3,359,777 1,813,232
Inventories 30,924,744 32,358,389
Prepaid expenses and other 1,663,269 498,788
------------- -------------
Total current assets 58,461,634 52,161,056
------------- -------------
Property and equipment:
Land 432,000 432,000
Buildings and improvements 3,481,009 3,726,296
Machinery, equipment and other 8,929,988 7,535,255
------------- -------------
12,842,997 11,693,551
Accumulated depreciation 7,114,989 5,558,155
------------- -------------
5,728,008 6,135,396
------------- -------------
Other assets:
Noncurrent receivables, net of allowance for doubtful accounts
of $1,305,220 and $209,717 in 1999 and 1998, respectively:
Sales contracts 2,114,591 1,363,039
Notes receivable - -
Related parties 1,523,096 670,655
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $3,754,614
and $2,957,972 in 1999 and 1998, respectively 12,178,209 12,974,851
Other intangible assets 1,216,393 2,494,754
Restricted cash 625,623 672,898
Net assets of discontinued operations - 2,962,508
Other 1,674,388 1,407,379
------------- -------------
19,332,300 22,546,084
------------- -------------
Total Assets $ 83,521,942 $ 80,842,536
============= =============
The accompanying notes are an integral part
of these consolidated financial statements
F-3
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
Liabilities and Stockholders' Equity
September 30,
-------------------------------
1999 1998
------------- -------------
Current liabilities:
Notes payable $ 4,403,264 $ 4,209,256
Accounts payable 9,937,347 5,939,098
Accrued expenses and other 3,374,493 3,199,451
Current maturities of long-term debt 6,798,467 13,492,758
------------- -------------
Total current liabilities 24,513,571 26,840,563
Long-term debt, less current maturities 33,592,522 29,220,972
Note payable and accrued interest to related party 17,914,842 16,307,405
Reserve for credit guarantees 625,623 672,898
------------- -------------
Total liabilities 76,646,558 73,041,838
Commitments and contingencies
Warrants to purchase common stock of subsidiary 1,425,378 1,200,000
Stockholders' equity:
Preferred stock, $.01 par value, authorized 50,000,000 shares,
issued and outstanding, 56,440 and 115,000 shares in 1999 and
1998, respectively 564 1,150
Common stock, $.01 par value, authorized 100,000,000 shares,
issued and outstanding, 17,812,464 and 15,080,050 shares
in 1999 and 1998, respectively 178,125 150,800
Paid-in capital 28,159,887 28,623,811
Accumulated deficit (22,888,570) (21,199,744)
Note receivable from related party - (975,319)
------------- -------------
Total stockholders' equity 5,450,006 6,600,698
------------- -------------
Total Liabilities and Stockholders' Equity $ 83,521,942 $ 80,842,536
============= =============
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,
--------------------------------------------------------------
1999 1998 1997
-------------- ---------------- ---------------
Net revenues $ 158,308,110 $141,398,339 $ 148,378,127
Cost of sales 129,840,884 116,076,348 123,374,610
------------- ------------ --------------
Gross profit 28,467,226 25,321,991 25,003,517
Selling, general and administrative expenses 19,973,627 17,688,569 18,352,769
------------- ------------ --------------
Operating income 8,493,599 7,633,422 6,650,748
------------- ------------ --------------
Other income (expenses):
(Loss) recoveries on related party receivable
656,250 - (14,838,456)
Loss on investment in computer operations - - (3,613,815)
Gain on sale of assets - 987,857 -
Interest expense (9,485,892) (8,830,391) (7,129,406)
Interest income and other 500,183 543,080 738,943
------------- ------------ --------------
Total other expenses (8,329,459) (7,299,454) (24,842,734)
------------- ------------ --------------
Income (loss) before income taxes,
warrant accretion, discontinued operations and
extraordinary item 164,140 333,968 (18,191,986)
Income tax (benefit) expense 353,881 56,575 (653,683)
------------- ------------ --------------
(189,741) 277,393 (17,538,303)
Accretion of warrants to purchase
common stock of subsidiary 225,378 - 810,776
------------- ------------ --------------
Net income (loss) before discontinued operations and
extraordinary item (415,119) 277,393 (18,349,079)
Discontinued operations (1,182,508) 9,955 (476,079)
Extraordinary item - (616,239) -
------------- ------------ --------------
Net loss (1,597,627) (328,891) (18,825,158)
Dividends on preferred stock 91,199 154,250 403,750
------------- ------------ --------------
Net loss attributable to
common stockholders $ (1,688,826) $ (483,141) $ (19,228,90)
============= ============ ==============
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,
----------------------------------------------------------
1999 1998 1997
-------------- -------------- ------------
Per share data - basic and diluted:
Net income (loss) per common share:
Net income (loss) before discontinued
operations and extraordinary item $ (.03) $ .01 $ (1.38)
Discontinued operations (.07) - (.03)
Extraordinary item - (.04) -
------------ ------------ ------------
Net loss per common share $ (.10) $ (.03) $ (1.41)
============ ============ ============
Weighted average shares outstanding - basic 16,947,195 14,552,462 13,632,357
============ ============ ============
Weighted average shares outstanding - diluted 16,947,195 16,452,433 13,632,357
============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements
F-6
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1999
Preferred Stock Common Stock Paid-in Accumulated Notes
Shares Amount Shares Amount Capital Deficit Receivable Total
-------- -------- ---------- --------- ----------- ------------ ------------ ------------
Balance, September 30, 1996 250,000 $ 2,500 13,196,966 $ 131,970 $ 26,630,714 $ (1,487,695) $ (1,279,089) $ 23,998,400
Exercise of common stock options 110,000 1,100 55,500 56,600
Preferred shares tendered for
exercise of options (125,000) (1,250) 357,143 3,571 197,679 200,000
Stock issuance costs (35,000) (35,000)
Payments on Pyrenees note 303,770 303,770
Stock option granted for services 973,000 973,000
Private placement of Series F
preferred stock 7,500 75 983,802 983,877
Issuance of warrant 150,000 150,000
Dividends on preferred stock (403,750) (403,750)
Net loss for 1997 (18,825,158) (18,825,158)
--------- ------- ---------- --------- ------------ ------------ ------------ ------------
Balance, September 30, 1997 132,500 1,325 13,664,109 136,641 28,955,695 (20,716,603) (975,319) 7,401,739
--------- ------- ---------- --------- ------------ ------------ ------------ ------------
Conversion of preferred shares and
accrued dividends to common
stock (17,500) (175) 1,205,941 12,059 10,616 22,500
Issuance of warrants 175,000 175,000
Exercise of stock purchase warrants 210,000 2,100 2,100
Stock issuance costs (17,500) (17,500)
Settlement of stock option
cancellation (500,000) (500,000)
Dividends on preferred stock (154,250) (154,250)
Net loss for 1998 (328,891) (328,891)
--------- ------- ---------- --------- ------------ ------------ ------------ ------------
Balance, September 30, 1998 115,000 $ 1,150 15,080,050 $ 150,800 $ 28,623,811 $(21,199,744) $ (975,319) $ 6,600,698
--------- ------- ---------- --------- ------------- ------------ ------------ ------------
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1999
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 (58,560) $ (586) 2,302,414 $ 23,025 $ 183,208 205,647
Exercise of stock options 430,000 4,300 109,437 113,737
Reduction of Pyrenees note upon
recovery of common stock (756,569) 975,319 218,750
Dividends on preferred stock (91,199) (91,199)
Net loss for 1999 (1,597,627) (1,597,627)
-------- -------- ---------- --------- ------------ ------------- ------------ ----------
Balance, September 30, 1999 56,440 $ 564 17,812,464 $178,125 $28,159,887 $(22,888,570) $ - $5,450,006
======== ======== ========== ========== ============ ============= ============ ==========
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,
------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- --------------------
Cash flows provided by (used in) operating activities:
Net loss $ (1,597,627) $ (328,891) $ (18,825,158)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 4,559,507 4,192,271 3,900,963
Provision for doubtful accounts 176,793 535,489 317,145
Gain on sale of assets - (987,857) -
Loss (recoveries) on related party
receivable (656,250) - 14,838,456
Loss on disposition of computer segment - - 3,613,815
Deferred income tax - - 233,339
Accretion of warrants to purchase
common stock of subsidiary 225,378 - 810,776
Loss (income) from discontinued
operations 1,182,508 (9,955) 476,079
Extraordinary item - 616,239 -
Changes in:
Accounts and sales contracts receivable (5,901,611) (143,202) 466,381
Inventories 1,433,645 (11,737,432) 4,843,429
Prepaid expenses and other (1,197,500) 223,504 487,648
Accounts payable 3,998,249 (1,388,710) (813,864)
Accrued expenses and other 329,190 593,440 (3,883,876)
------------ ------------- ---------------
Net cash provided by (used in)
operating activities 2,552,282 (8,435,104) 6,465,133
------------ ------------- ---------------
Cash flows provided by (used in) investing activities:
Capital expenditures, net (1,299,306) (1,315,403) (730,387)
Notes and other receivables (1,622,461) (1,131,537) 1,070,691
Receivables from related parties (852,441) 13,654 (5,062,365)
Cash from sale of subsidiary 1,780,000 - -
------------ ------------- ----------------
Net cash used in investing
activities $ (1,994,208) $ (2,433,286) $ (4,722,061)
------------ ------------- ---------------
The accompanying notes are an integral part
of these consolidated financial statements
F-9
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
-------------------------------------------
1999 1998 1997
------------ ------------ -------------
Cash flows provided by (used in) financing activities:
Net borrowings (principal payments) on line of credit
arrangements $ 1,404,600 $ 3,041,139 $ (2,685,537)
Net borrowings on other notes payable
and long-term debt 1,607,437 31,293,906 839,196
Principal payments on term notes (2,333,333) (1,982,280) -
Principal payments on convertible bonds (1,200,000) (4,300,000) -
Principal payments on subordinated debentures - (13,000,000) -
Redemption of Overhill warrants - (2,000,000) -
Deferred financing costs - (2,718,015) -
Proceeds from private placements of preferred stock - - 733,877
Exercise of common stock options
and warrants 28,436 2,100 56,600
Principal collection on Pyrenees note receivable - - 303,770
Dividends on preferred stock (91,199) (154,250) (153,750)
Common stock issuance costs - (17,500) (35,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities (584,059) 10,165,100 (940,844)
------------ ------------ ------------
Net increase (decrease) in cash (25,985) (703,290) 802,228
Cash at beginning of year 401,393 1,104,683 302,455
------------ ------------ ------------
Cash at end of year $ 375,408 $ 401,393 $ 1,104,683
============ ============ ============
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest $ 4,895,427 $ 5,391,913 $ 5,459,662
============ ============ ============
Income taxes $ - $ - $ 1,001,461
============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements
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 an option on
35,000 shares of common stock at $.01 per share. Such options were granted in
consideration for a consulting contract and were valued at $200,000.
In January 1997, an unrelated third party was granted an option on 200,000
shares of common stock, exercisable at $.01 per share, in exchange for a two
year consulting agreement valued at $973,000.
In August 1997, in connection with the sale of Series F 6% Preferred Stock to an
unrelated third party, the Company issued warrants to purchase 500,000 shares of
the Company's common stock, exercisable at $1.50 per share. The Company valued
the warrants at $150,000. Also in connection with the transaction, the Company
recorded a dividend of $250,000 representing the value assigned to the preferred
stock's discount feature (see Note 10).
In December 1997, in connection with the Overhill Farms credit agreement,
warrants to purchase 30% of the common stock of Overhill at a nominal exercise
price were issued having an estimated fair value of $1,200,000 (see Notes 8 and
10).
In connection with the refinancing of certain indebtedness with Merrill Lynch in
December 1997, the Company issued warrants to purchase 210,000 shares of the
Company's common stock exercisable at $.01 per share and 210,000 shares
exercisable at $1.125 per share. Such warrants were valued at $175,000.
In September 1998, the Company recorded a liability, together with a
corresponding charge to paid in capital, for $500,000 in connection with the
settlement of a lawsuit. In December 1998 and January 1999, the Company made
partial payments on the obligation, together with certain associated expenses,
by granting options on 300,000 shares of common stock, exercisable at $.01 per
share. The options were assigned a value of $85,000.
The Company issued common shares valued at $205,647 in 1999 and $22,500 in 1998
in payment of accrued dividends on preferred stock (see Note 10).
In December 1998, the Company settled certain obligations by granting options on
145,000 shares of common stock, exercisable 130,000 shares at $.01 per share and
15,000 shares at $.50 per share. The options were assigned a value of $28,000.
During 1999, the Company recovered 2,000,000 shares of its common stock from a
former related party, of which 500,000 shares were used to satisfy a note
receivable and 1,500,000 shares were recorded as other income. As the Company
has previously assigned all of its rights to the 2,000,000 shares to a related
party in connection with a previous debt extension, interest expense of $875,000
was recorded in connection with the recovery (see Notes 9, 10 and 13).
The accompanying notes are an integral part
of these consolidated financial statements
F-11
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. COMPANY AND ORGANIZATIONAL MATTERS
Nature of Business
Polyphase Corporation (the "Company" or "Polyphase") is a diversified
holding company that, through its subsidiaries, currently operates in two
industry segments: the food segment and the forestry segment. The food
segment (the "Food Group"), which consists of the Company's Overhill Farms,
Inc. ("Overhill") subsidiary, produces high quality entrees, plated meals,
soups, sauces and poultry, meat and fish specialties. Overhill is a wholly-
owned subsidiary of the Company, subject to warrants outstanding to
purchase Overhill's common stock (see Note 10). The forestry segment (the
"Forestry Group"), which consists of the Company's wholly-owned subsidiary
Texas Timberjack, Inc. ("Timberjack" or "TTI") and TTI's majority-owned
subsidiaries Southern Forest Products LLC ("SFP") and Wood Forest Products
LLC ("WFP"), distributes, leases and provides financing for industrial and
commercial timber equipment and is also engaged in certain related timber
and sawmill operations. The Company's transformer segment, which
manufactures and markets electronic transformers, inductors and filters
(the "Transformer Group") was discontinued in fiscal 1999, as a result of
the sale of its wholly-owned subsidiary Polyphase Instrument Co. ("PIC").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and its majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Certain
prior year amounts have been reclassified to conform to the 1999
presentation.
Fiscal Year
The Company and its subsidiaries' fiscal year, except for the Food Group,
ends on September 30. The Food Group utilizes a 52 - 53 week accounting
period which ends on the Sunday closest to September 30.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of receivables and demand
deposits. Demand deposits sometimes exceed the amount of insurance provided
by the Federal Deposit Insurance Corporation. The Company performs ongoing
credit evaluations of its customers' financial condition and generally
requires no collateral from its customers except as discussed below.
F-12
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's wholly-owned Forestry Group subsidiary, Texas Timberjack,
Inc, ("TTI"), is a retailer of timber and logging equipment. TTI grants
credit to customers, substantially all of whom are located in East Texas or
the western portion of Louisiana, which rely on the logging industry for
their ability to repay debt to TTI. Collateral is generally the equipment
sold for amounts due under installment sales contracts.
For the years ended September 30, 1999, 1998 and 1997, the Company has
write-offs, net of recoveries, to the allowance for doubtful accounts of
$188,269, $556,881 and $260,057, respectively.
Financial Instruments
The fair value of financial instruments is determined by reference to
market data and by other valuation techniques as appropriate. Unless
otherwise disclosed, the fair value of financial instruments approximates
their recorded values.
Inventories
Inventories of raw materials, work-in-process and finished goods for food
processing operations are stated at the lower of cost or market as
determined by the first-in, first-out (FIFO) method and using the average
cost method for raw timber and finished wood products. Inventories of
timber equipment are valued at the lower of cost or market or, in the case
of repossessed and used equipment, net realizable value, based upon the
specific identification method.
Concentration of Sources of Labor
The Food Group's total hourly and salaried work force consists of
approximately 750 employees. Approximately 76% of the Food Group's work
force is covered by collective bargaining agreements expiring in fiscal
years 2000 and 2001. The Company has begun preliminary negotiations with
representatives of employees under collective bargaining agreements
expiring in fiscal 2000 and considers its union relations to be good.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
primarily using the straight-line method for financial reporting purposes
over the estimated useful lives of the assets. Useful lives generally range
from five to thirty years. Leasehold improvements are amortized over the
lesser of the term of the lease or the estimated useful life of the assets.
Repairs and maintenance costs are expensed, while additions and betterments
are capitalized. The cost and related accumulated depreciation of assets
sold or retired are eliminated from the accounts and any gains or losses
are reflected in earnings.
F-13
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired (goodwill) at the
date of acquisition is amortized on a straight line basis over 20 years.
The Company determines the period to be benefited by using qualitative
measuring factors such as competition, demand and obsolescence, as well as
legal, regulatory and contractual provisions. In addition, the Company
evaluates the existence of goodwill impairment on the basis of whether the
goodwill is fully recoverable from projected, undiscounted cash flows of
the related business unit.
Stock Options
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and
related Interpretations in accounting for its employee stock options. The
Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation", which provides for either recognition or disclosure of a
hypothetical charge for the fair value of stock options granted. The
Company has provided the required SFAS 123 disclosures in Note 10.
Revenue Recognition
The Company generally recognizes revenue when products are shipped or
services are performed and provides for estimated returns and allowances at
the time of sale.
A significant amount of business in the Company's Forestry Group relates to
the sale of equipment through sales/finance contracts. Revenue is
recognized on these accounts using the installment method (see Note 3).
Under the installment method, the Company records at the point of sale both
a sale and a cost of sale for the total cost of the unit. Gross profit is
initially recorded in a deferred profit account to be recognized as
proceeds are received. These deferred profits are recorded as sales revenue
as funds are received, based on the relative percentage of transaction
profit to the sales price. Interest on the contract is recognized on a cash
basis due to frequent late payments and periodic repossessions.
Key sales and income information for the Forestry Group for fiscal 1999,
1998 and 1997 are:
1999 1998 1997
----------- ----------- -----------
Equipment sales total $28,455,430 $35,459,912 $43,460,398
Equipment sales financed 3,155,817 3,255,692 3,608,210
Income earned on installment basis 776,789 2,343,423 1,613,172
Interest income earned on installment notes 883,542 1,317,215 1,457,125
F-14
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes
Deferred income taxes recorded using the liability method reflect the net
tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Income (Loss) Per Share
Options to purchase approximately 1.2 million shares of common stock at a
weighted average exercise price of $0.99 per share, warrants to purchase
710,000 shares of common stock at a weighted average exercise price of
$1.39 per share and 115,000 shares of preferred stock convertible into
shares of common stock at market prices were outstanding during the year
ended September 30, 1999 and excluded from the calculation of diluted
earnings per share as the effect would be antidilutive. In 1998, 1,899,000
common stock equivalents included in the calculation of diluted earnings
per share were comprised of options to purchase 32,000 shares of common
stock, warrants to purchase 90,000 shares of common stock and preferred
stock convertible into 1,777,000 shares of common stock. Options to
purchase approximately 1.5 million shares of common stock at a weighted
average exercise price of $1.70 per share, warrants to purchase 500,000
shares of common stock at a weighted average exercise price of $1.50 per
share and 257,500 shares of preferred stock convertible into shares of
common stock at various prices were outstanding during the year ended
September 30, 1997 and excluded from the calculation of diluted earnings
per share as the effect would be antidilutive.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), as amended, which is required to be adopted by the Company on October
1, 2000. SFAS No. 133 requires that all derivatives be recorded on the
balance sheet at fair value. Changes in derivatives that are not hedges are
adjusted to fair value through income. Changes in derivatives that meet the
Statement's hedge criteria will either be offset through income, or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company is currently evaluating the impact of
SFAS 133 on its future financial condition, results of operations and cash
flows.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
F-15
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. SALES CONTRACTS RECEIVABLE
The Company's Forestry Group provides financing to customers on certain
equipment sales using installment sales contracts. The following is a
summary of the components of the Company's net investment in these
contracts as of September 30, 1999 and 1998 and the related deferred income
based on the installment method of income recognition.
1999 1998
------------ ------------
Contracts outstanding $ 10,194,090 $ 8,738,682
Less deferred income (3,174,987) (3,322,066)
------------ ------------
7,019,103 5,416,616
Less allowance for doubtful accounts (139,440) (174,157)
------------ ------------
Net investment in sales contracts receivable $ 6,879,663 $ 5,242,459
============ ============
The following is a summary of the maturities of the sales contracts
receivable and related deferred income:
Contracts Deferred
Due September 30, Outstanding Income Net
----------------- ------------- ------------- ------------
2000 $ 7,257,118 $ 2,393,264 $ 4,863,854
2001 2,418,652 699,916 1,718,736
2002 477,455 77,570 399,885
2003 40,865 4,237 36,628
------------- ------------- ------------
$ 10,194,090 $ 3,174,987 $ 7,019,103
============= ============= ============
4. NOTES RECEIVABLE
The Forestry Group periodically makes advances under promissory notes to
certain unrelated individuals and corporations. These notes have interest
rates that range from 12% to 18%, are generally due within one year and are
secured by a variety of marketable collateral. Interest is accrued on notes
receivable as long as the Company believes the notes are collectible. The
accrued interest is added to the note and is shown as part of that balance
in the accompanying statements. Allowances are established periodically if,
at the date of valuation, management feels it is probable that a loss
exists on a note. The allowance is established based upon payment history,
evaluation of the portfolio and the related expected credit risk.
The Company had $3,359,777 and $1,813,232 of short-term notes receivable as
of September 30, 1999 and 1998, respectively, from unrelated corporations
and individuals, net of allowances of $173,184 and $208,743, respectively.
The loans are secured primarily by land, timber and equipment. At September
30, 1999, approximately $848,000 of such notes receivable were no longer
accruing interest. All notes receivable are due in less than one year.
F-16
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. INVENTORIES
Inventories are summarized as follows:
September 30,
-----------------------------
1999 1998
------------- -------------
Finished goods $ 22,409,448 $ 23,520,114
Raw materials 8,565,296 8,890,275
Inventory reserve (50,000) (52,000)
------------- -------------
Total $ 30,924,744 $ 32,358,389
============= =============
As of September 30, 1999 and 1998, finished goods inventories are comprised
of approximately $7,804,000 and $5,576,000 in inventories at the Food
Group, $13,603,000 and $16,745,000 in timber and logging related equipment,
and $1,003,000 and $1,198,000 in finished wood products, respectively. As
of September 30, 1999 and 1998, raw materials inventories are comprised of
approximately $5,872,000 and $4,684,000 in inventories at the Food Group,
and $2,693,000 and $4,207,000 in harvested but unprocessed timber,
respectively.
6. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
September 30,
-----------------------------
1999 1998
------------- -------------
Non-compete agreements (a) $ 700,000 $ 700,000
Deferred financing costs (b) 2,608,733 2,608,733
Consulting contract (c) 200,000 200,000
Other 22,800 322,132
------------- -------------
3,531,533 3,830,865
Less accumulated amortization (2,315,140) (1,336,111)
------------- -------------
$ 1,216,393 $ 2,494,754
============= =============
(a) The Company has noncompete agreements with two officers of Texas
Timberjack, Inc. Such amounts are being amortized over the seven-year
life of each agreement.
(b) The Company incurred certain legal, brokerage and other costs
associated with the financing of the initial acquisition of Overhill
Farms and the subsequent refinancing of debt in December 1997 and
November 1999. These costs are being amortized over periods of three
to five years (see Note 8 regarding the write-off of certain costs
associated with the initial acquisition financing and the December
1997 and November 1999 refinancings).
(c) The Company granted a former executive options to purchase 35,000
shares of common stock at $.01 per share. The options were granted in
consideration of a five year consulting contract and were valued at
$200,000 based on the fair market value at the date of grant. The
contract is being amortized over the five-year period.
F-17
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7. NOTES PAYABLE
Notes payable consist of the following:
September 30,
-----------------------------
1999 1998
------------ ------------
Note payable to Ford Motor Credit Corporation (a) $ 228,616 $ 979,451
Note payable to Associates First Capital Corporation (b) - 905,948
Note payable to Bank of America (c) 3,900,000 2,200,000
Other notes payable 274,648 123,857
------------ ------------
$ 4,403,264 $ 4,209,256
============ ============
(a) TTI has a floor plan note with Ford Motor Credit Corporation. The
floor plan note accrues no interest provided the equipment financed
under the note is sold within a predetermined period, typically nine
to twelve months from the time TTI takes delivery of the equipment.
(b) TTI has a floor plan agreement with Associates First Capital
Corporation to finance equipment. The agreement accrues interest on an
individual unit basis with an average interest rate of prime
(approximately 8.25% at September 30, 1999), and the equipment may be
financed for up to one year. There were no amounts outstanding under
the agreement as of September 30, 1999.
(c) TTI has an $8.0 million revolving line of credit with Bank of America,
N.A. (formerly NationsBank of Texas, N.A.). Amounts advanced under the
line of credit bear interest at prime less .25% (approximately 8.0% at
September 30, 1999), and are collateralized by substantially all of
TTI's assets. The line of credit agreement contains various covenants
related to receivables, capital expenditures, inventories, debt
ratios, contingent liabilities and payment of dividends. Furthermore,
the terms of the revolving line of credit generally prohibit
dividends, loans or advances from TTI to the Company, but permit the
payment of taxes. The Company has guaranteed all obligations under the
TTI revolving line of credit. Availability under the line as of
September 30, 1999 amounted to approximately $4.1 million. TTI intends
to renew the revolving credit facility upon maturity in March 2000.
The weighted average interest rate on short-term borrowings for the year
ended September 30, 1999 was 6.9%.
F-18
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
----------------------------
1999 1998
------------ ------------
Senior subordinated notes payable of Overhill due to a financial
institution, bearing interest at prime plus 4.0%, (12.25% at September
30, 1999) or 12.5%, whichever is greater, maturing December 5, 2000,
interest payable monthly, with $250,000 per month principal payments
beginning in May 1999 through maturity, net of discount of $466,667 and
$866,667, for 1999 and 1998, respectively. $ 22,708,333 $ 23,308,333
Revolving credit agreement of Overhill with a financial institution,
bearing interest at the Citibank base rate plus 1.5% (approximately 9.75%
at September 30, 1999) and collateralized by accounts receivable and
inventories. The agreement expires in November 2002. 9,647,005 9,959,425
Revolving credit agreements of TTI subsidiaries with a financial
institution, bearing interest at prime (8.25% at September 30, 1999) and
collateralized by accounts receivable, inventory and fixed assets of
subsidiaries. The agreements are guaranteed by TTI and expire in
April 2000. 5,458,498 4,357,083
Term loan of TTI in the amount of $4,000,000 payable to a financial
institution, bearing interest at 8.3%, due in monthly installments of
$111,111 plus accrued interest, with maturity in August 2001. 2,555,556 3,888,889
Senior convertible debentures, bearing interest at 12%, due July 1,
1999 (the "1999 Bonds"). - 1,200,000
Other 21,597 -
------------ ------------
40,390,989 42,713,730
Less current maturities (6,798,467) (13,492,758)
------------ ------------
Total long-term debt $ 33,592,522 $ 29,220,972
============ ============
F-19
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Scheduled maturities of long-term debt, after giving effect to the November
1999 refinancing discussed below, are as follows:
2000 $ 6,798,467
2001 1,228,858
2002 9,653,641
2003 1,690
2004 23,175,000
------------
Total 40,857,656
Less: unamortized debt discount 466,667
------------
$ 40,390,989
============
In December 1997, Overhill refinanced a certain portion of its existing
debt. The new financing amounted to a total facility of $24.2 million which
is structured as a three-year term loan maturing in December 2000. The
agreement also requires Overhill to pay on a quarterly basis, service fees
totaling $180,000, $300,000 and $440,000 for the first, second and third
years of the loan respectively. Under the terms of the agreement, the
Company granted stock warrants that entitle the holder to immediately
acquire at $.01 per share, 30% of the common stock of Overhill, of which
25% (5/6 of the total shares under warrant) could be repurchased by the
Company for $2,000,000 during the two-year period following the date of the
agreement. In June 1998, in connection with amending certain covenants and
restrictions, the percentage of Overhill that the Company can repurchase
for $2,000,000 was reduced to 20% from 25%. Additionally, the lender
received fees totaling approximately $1.7 million in connection with this
financing, of which $500,000 is refundable if the loan is paid in full
during the second year of the loan. The Company used a portion of the
proceeds to repay Term Loans A and B, and $2,800,000 of principal of the
$4,000,000 senior convertible debentures described below. The early
extinguishment of this indebtedness resulted in an extraordinary charge of
approximately $616,000 in fiscal 1998.
In November 1999, Overhill refinanced substantially all of its existing
debt. The total facility amounted to $44 million, consisting of a $16
million line of credit provided by Union Bank of California, N.A. ("Union
Bank") together with $28 million in the form of a five-year term loan
provided by Levine Leichtman Capital Partners II, L.P. ("LLCP").
The line of credit with Union Bank expires in November 2002 and provides
for borrowings limited to the lesser of $16 million or an amount determined
by a defined borrowing base consisting of eligible Overhill receivables and
inventories. Borrowings under the line of credit will bear interest at a
rate, as selected by Overhill at the time of borrowing, of prime plus .25%
or LIBOR plus 2.75%. The Union Bank agreement provides, among other things,
that Overhill will be subject to an unused line of credit fee of .25% per
annum. The agreement contains various covenants including restrictions on
capital expenditures, and specified net worth levels and debt service
ratios. In addition, the terms of the agreement generally prohibit loans,
dividends or advances from Overhill to the Company and limit payments of
taxes and other
F-20
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
expenses to Polyphase to specified levels. The line of credit is guaranteed
by the Company and collateralized by certain assets of Overhill and all of
the Overhill common stock owned by the Company.
The term loan with LLCP is a secured senior subordinated note bearing
interest at 12% per annum, with interest payable monthly until maturity in
October 2004. Principal payments in an amount equal to 50% of the excess
cash flow, as defined, for Overhill's previous fiscal year are also payable
annually commencing in January 2001. Voluntary principal payments are
permitted after October 31, 2001, subject to certain prepayment penalties.
The agreement contains various covenants including restrictions on capital
expenditures, minimum EBITDA and net worth levels, and specified debt
service and debt to equity ratios. In addition, the terms of the agreement
restrict changes in control, generally prohibit loans, dividends, or
advances by Overhill to the Company and limit payments of taxes and other
expenses to Polyphase to specified levels. The term loan with LLCP is
guaranteed by the Company and collateralized by certain assets of Overhill.
The agreement also requires Overhill to pay to LLCP, during each January,
annual consulting fees of $180,000.
In connection with the agreement, LLCP was granted stock warrants to
purchase 17.5% of the common stock of Overhill, exercisable immediately at
a nominal exercise price. During the first two years following the date of
the agreement, Overhill has the right to repurchase 5% of Overhill's shares
from LLCP for $3 million and/or to repurchase all 17.5% of the Overhill
shares subject to the LLCP warrant within five days of the term loan being
repaid at their then determined fair market value. If such shares are not
repurchased, LLCP will be entitled under the agreement to receive a cash
payment of $500,000 from Overhill. At the date of issuance, the warrants
granted to LLCP were estimated to have a fair value of $2.37 million.
As a result of these transactions, Overhill repaid in full the $22.7
million senior subordinated notes payable and the $9.6 million revolving
line of credit. Additionally, Overhill repurchased for $3.7 million the
warrants held by the lender to purchase 30% of Overhill's common stock. In
addition, in connection with the refinancing, Overhill was permitted to
make a one-time advance of $1.25 million to Polyphase for working capital
and other specified purposes. Overhill incurred costs and expenses in
connection with the refinancing totaling approximately $2.5 million,
substantially all of which has been, or will be paid, to the lenders. The
early extinguishment of the previous indebtedness will result in an
extraordinary loss of approximately $1.2 million (net of a $500,000 refund
for early payment of the senior subordinated notes) to be recognized during
the Company's quarter ending December 31, 1999.
In connection with its acquisition in 1995, Overhill obtained a credit
facility with Finova Capital Corporation in the original amount of
$18,000,000, consisting of a $12,000,000 revolving line of credit and two
term loans, A and B for $2,000,000 and $4,000,000, respectively. Term Loans
A and B were repaid in December 1997 as described above. Borrowings under
the revolving line of credit are limited to the lesser of $12,000,000 or an
amount determined by a defined borrowing base which is based on eligible
receivables and inventory. Borrowings under the line of credit facility
bear interest at the Citibank base rate
F-21
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
plus 1.5% (approximately 9.75% at September 30, 1999). Overhill's revolving
line of credit requires the payment of an unused line fee of .25% per annum
and an annual facility fee of .50% per annum. The credit facility is
collateralized by Overhill's receivables and inventories and has been
guaranteed by the Company. The borrowings are classified as long-term debt
due to their subsequent refinancing under a long-term arrangement with
Union Bank as discussed above.
The 1999 Bonds were repaid in July 1999. Such Bonds, in the original
principal amount of $4,000,000, were convertible at the option of the
holder into shares of common stock equal to the principal amount of each
bond (or in $1,000 increments) divided by a $3.00 per share conversion
price, subject to adjustment in certain circumstances. As part of the 1997
refinancing, the holders were granted warrants to purchase 420,000 shares
of the Company's common stock, exercisable over a five-year period, with
certain registration rights. The warrants are exercisable for 210,000
shares at $.01 per share (which were exercised during fiscal 1998) and
210,000 shares at $1.125 per share, the market price of the Company's
common stock on the date of grant (see Note 10).
9. NOTE PAYABLE AND ACCRUED INTEREST TO RELATED PARTY
In connection with the acquisition of TTI in June 1994, the Company
recorded a note to the seller (Mr. Harold Estes) in the amount of
$9,737,719 with interest at 8% due October 31, 1994 and collateralized by
all the capital stock of TTI. As of various maturity dates, Mr. Estes has
entered into subsequent agreements with the Company to modify and extend
the term of the note. As of September 30, 1999, the note had a total unpaid
balance of $17,914,842 (principal of $16,347,191 and accrued interest of
$1,567,651), bearing interest at 9.75% per annum with a maturity date of
December 15, 1999. During November 1999, the note was further modified and
extended to mature October 10, 2002 at an interest rate of 9% per annum,
and to allow for principal and interest payments to be made with amounts
upstreamed to Polyphase by Timberjack for the payment of taxes (subject to
the approval of Timberjack's Board of Directors and its lenders). In
connection with a previous modification in 1998, the Company agreed to
assign Mr. Estes any interest it may have or subsequently obtain with
respect to 2,000,000 shares of the Company's common stock owned by the
Pyrenees Group ("Pyrenees"), a private investment firm controlled by Paul
A. Tanner, the Company's former Chairman and Chief Executive Officer, and
previously held by Mr. Estes as secondary collateral. These shares, which
were recovered in 1999 on behalf of Mr. Estes, had a value of $875,000,
which was charged to interest expense in 1999 (see Notes 10 and 13).
F-22
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has 50,000,000 authorized shares of $.01 par value preferred
stock, with the rights and preferences as designated by the Board of
Directors, as follows:
Authorized Conversion
Series Shares Price
---------- ---------- ----------
A 375,000 $ .50
B 300,000 1.00
C 300,000 2.00
D 600,000 4.00
E 1,425,000 10.00
F 10,000 Variable
G 5,000 Variable
A-2 750,000 $ 5.00
A-3 750,000 Variable
A-5 750,000 $ 5.00
All shares of preferred stock referred to above generally have a redemption
value of $10 per share, have a liquidation preference of $10 per share and
are callable by the Company at 105% of the redemption value.
Holders of the Series A-2 preferred shares are entitled to two votes per
share on all matters on which the holders of common stock have one vote per
share. Only Series A-2 and Series A-3 (described below) entitle holders of
preferred stock to voting rights.
The designations of the Series A-3 stock are similar to those of other
series of preferred stock, except that holders of the Series A-3 preferred
stock have voting rights (two votes for each preferred share held) and are
entitled to cumulative annual dividends of 12%. The conversion rate of the
Series A-3 preferred stock, originally $5.00 per share, was adjusted in
November 1997 (pursuant to the preferred stock designations) to the market
price of the Company's common stock immediately preceding the date of
conversion. Additionally, the designations were amended to permit payment
of dividends, at the option of the Company, in either cash or common stock.
Also during November 1995, the Company entered into an agreement with an
associate of the corporate purchaser of the Series A-3 preferred stock to
provide consulting services to the Company over a 36-month period.
Consideration for such services was the grant of options to purchase
357,143 shares of common stock at $3.50 per share (the fair market value at
the date of grant) plus hourly fees and expenses. The associate of the
aforementioned corporation subsequently exercised this stock option. The
consideration for the exercise of the option on 357,143 shares was the
tender of 125,000 shares of Series A-3 preferred stock, having a
F-23
redemption value of $1,250,000, which had been assigned by the corporation to
its associate.
Since issuance, the holder of the Series A-3 preferred stock, Infinity
Investors Limited ("Infinity"), has converted a total of 68,560 shares of
such stock having a redemption value of $685,600, together with accrued
dividends of $228,147, into a total of 2,500,000 shares of the Company's
common stock. Based upon the market price of the Company's common stock as of
September 30, 1999, Infinity would have been entitled to approximately 1.2
million common shares upon conversion of its remaining preferred stock and
accrued dividends. Any additional conversions of Infinity's Series A-3
preferred stock for common shares in excess of the 2,500,000 shares obtained
in previous conversions would require that the Company file an application
with the American Stock Exchange ("AMEX") for the listing of such additional
common shares prior to issuance. The AMEX Company Guide requires stockholder
approval as a prerequisite to the filing of such additional listing
application. At the Company's Annual Meeting held May 27, 1999, a majority of
the Company's stockholders voted against a proposal to file an additional
listing application with respect to the conversion of additional preferred
shares to common shares by Infinity. The Company's inability to honor
conversion requests resulted in litigation by Infinity against the Company.
During November 1999, the Company and Infinity entered into a settlement
agreement wherein, among other things, the Company agreed to repurchase all
remaining Series A-3 preferred stock owned by Infinity, including all accrued
but unpaid dividends, for $450,000 cash, and Infinity agreed to the dismissal
of all litigation against the Company with respect these matters. As a result
of the settlement, the Company will record an increase in stockholders'
equity of approximately $351,000, related to the difference between the
carrying value of the preferred shares plus accrued dividends and the
settlement amount, in the first quarter of fiscal 2000.
During August 1997, the Company sold 7,500 shares of newly designated Series
F 6% preferred stock for $750,000, less expenses. The designations for Series
F preferred stock provide for a redemption value of $100 per share,
cumulative annual dividends of 6%, payable quarterly, and for a conversion
price equal to 75% of the average closing price of the Company's common stock
for the five trading days immediately preceding conversion. In connection
with this transaction, the Company recorded a non-cash dividend of $250,000,
representing the value assigned to the discount feature related to the
conversion of the preferred stock. During the year ended September 30, 1998,
the holder converted all 7,500 shares of the Series F 6% preferred stock into
a total of 1,008,355 shares of the Company's common stock.
Stock Options
During July 1993, the Board of Directors granted to certain officers, both of
whom are directors of the Company, options to purchase 293,000 shares of the
Company's common stock at an exercise price of $.75 per share, which was
equal to the fair value at the date of grant. The expiration date of these
options was extended to July 2003 by the Board of Directors in March 1998.
Under the terms of the 1994 Employee Stock Option Plan (as amended) adopted
by the Board
F-24
of Directors in March 1994, the Company has reserved a total of 1,750,000
shares of its common stock for issuance to eligible employees of, and
consultants to, the Company. The Plan provides for the grant of both
incentive stock options (at exercise prices no less than fair value at the
date of grant) and non-qualified stock options (at exercise prices as
determined by the Compensation Committee of the Board of Directors), that
such options may be exercisable as determined by such Committee and that the
Plan will expire ten years following its adoption. As of September 30, 1999,
options for 900,000 shares were available for future grant under the Plan.
At September 30, 1999, options outstanding that were granted pursuant to the
Plan consist of a total of 385,000 shares, of which 290,000 were granted in
July 1996 at $2.00 per share to certain officers and directors; 80,000 of
which were granted to certain directors in March 1998 at an exercise price of
$.75 per share; and 15,000 of which were granted to a consultant in April
1999 at an exercise price of $.50 per share; all such exercise prices were
equal to the fair market value as of the date of grant.
In January 1997, an unrelated third party was granted an option to purchase
200,000 shares of the Company's common stock, exercisable at $.01 per share,
in exchange for a two-year consulting agreement. The contract was valued at
$973,000 based upon the trading value of the Company's common stock at the
date of grant. The option holder ceased performing services for the Company
during the year ended September 30, 1997; accordingly, the Company recognized
the entire amount associated with the consulting contract as an expense
during fiscal 1997. During fiscal 1998, the Company canceled these options
and refused to allow the holder to exercise them. This matter became the
subject of litigation which resulted in a judgment of $500,000 against the
Company which was recorded as a liability as of September 30, 1998, with a
corresponding charge to paid-in capital. Subsequently, the Company entered
into a settlement agreement with the aforementioned unrelated third party
whereby the Company agreed to pay the judgment amount at a rate of $8,000
(including interest at 10% per annum) per month for eighteen months beginning
in October 1998 with a balloon payment of the remaining principal and
interest balances at the end of that period. In addition, as consideration
for this forbearance and for partial payment against the judgment, together
with certain costs associated therewith, the Company issued the unrelated
third party a total of 300,000 shares of its common stock valued at $85,000.
During January 1999, a former employee of the Company was granted and
exercised options covering 130,000 shares of common stock at $.01 per share.
Such options were granted in consideration for past and future consulting
services, and were valued at $28,000 which was charged to expense in 1999.
In November 1996, a former executive of the Company was granted and exercised
options covering 35,000 shares of common stock at $.01 per share. Such
options were granted in consideration for a consulting contract and were
valued at $200,000, with this amount being amortized over a five-year period.
F-25
A summary of changes in common stock options during the years ended
September 30, 1999, 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
Canceled (375,000) $ .01 - 2.00 $ .94
-------- ------------ ---------
Outstanding, September 30, 1998 728,000 $ .75 - 5.25 $ 1.58
Granted 445,000 $ .01 - .50 $ .03
Exercised (430,000) $ .01 $ .01
Canceled (65,000) $2.00 - 5.25 $ 4.50
------- ------------ ---------
Outstanding, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
======= ============ =========
Exercisable, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
Exercisable, September 30, 1998 728,000 $ .75 - 5.25 $ 1.58
Exercisable, September 30, 1997 1,023,000 $ .01 - 5.25 $ 1.41
Summarized information about stock options outstanding at September 30, 1999,
all of which are exercisable, is as follows:
Options Outstanding/ Weighted Average
Exercise Exercisable at Remaining
Price September 30, 1999 Contractual Life
------------------------ ---------------------------- --------------------------
$ .50 15,000 Shares 1.08 Years
$ .75 373,000 Shares 4.82 Years
$ 2.00 290,000 Shares 6.75 Years
Proforma information regarding net income (loss) is required by SFAS 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method specified by SFAS 123. The fair value of
options granted during the years ended September 30, 1999 was estimated at
the date of grant using the Black-Scholes option pricing
F-26
model with the following weighted-average assumptions for grants for the
years ending September 30, 1999, 1998 and 1997, respectively: risk free
interest rate of 4.86%, 5.52% and 5.21%; no dividends expected to be
declared; volatility factor of .916, 1.150 and .994; and a weighted average
expected life of less than one month, five years and six months. The effect
of applying the fair value method under SFAS 123 to the Company's stock-based
awards would result in a net loss during the years ended September 30, 1999,
1998 and 1997 that is not materially different from amounts reported and
would have no effect on reported per share amounts.
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance of
options to purchase five series of convertible preferred stock to the
Pyrenees Group, a private investment firm controlled by Paul A. Tanner, the
Company's former Chairman and Chief Executive Officer, or its assignees. The
options are summarized as follows:
Preferred Conversion Common
Series Shares Price Shares
----------------- ---------------- ---------------- ----------------
A 125,000 $ .50 2,500,000
B 100,000 1.00 1,000,000
C 100,000 2.00 500,000
D 200,000 4.00 500,000
E 475,000 10.00 475,000
---------------- ----------------
1,000,000 4,975,000
During fiscal 1994 and 1995, Pyrenees exercised and converted Series A, B and
C Preferred Stock into common stock. In November 1995, Pyrenees exercised the
Series D option through the issuance of a 7% recourse note in the amount of
$2,000,000, collateralized by the shares issued, which was treated as an
in-substance stock option at the date of grant. During fiscal 1996, these
shares were converted to 500,000 shares of common stock. During the years
ended September 30, 1996 and 1997, principal payments of approximately
$721,000 and $304,000, respectively, were made on the note. The remaining
balance of $975,000 became uncollectible, and the 500,000 shares of common
stock that secure this note have been recovered pursuant to certain
litigation against Pyrenees and Mr. Tanner (see Note 13). This recovery has
been accounted for as an unexercised stock option in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". As such, $756,000, representing the difference between the note
balance and the fair market value of the 500,000 shares as of the recovery
date was recorded as a reduction in paid-in capital.
F-27
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Warrants
Polyphase Warrants
------------------
In connection with the issuance of the Series F 6% Preferred Stock referred
to above, the Company issued warrants to purchase 500,000 shares of it
common stock at $1.50 per share, exercisable through September 2002. The
warrants were valued at $150,000 which was charged to operations in fiscal
1998.
In connection with the restructuring of the 1999 Bonds in December 1997
(see Note 8), the Company issued to the holders warrants totaling 420,000
shares of the Company's common stock. The warrants cover 210,000 shares
exercisable at $.01 per share, which were exercised in May 1998, and an
additional 210,000 shares exercisable at $1.125 per share, exercisable
through April 24, 2003. These warrants were valued at $175,000, which was
amortized over the remaining term of the 1999 Bonds.
Subsidiary Warrants
-------------------
As of September 30, 1997, the Company had recorded a liability for a
warrant to purchase 22.5% of the common stock of the Company's Overhill
subsidiary for $2,000,000, which represents the price at which the warrants
were repurchased by the Company from the holder in December 1997. During
1997 and prior fiscal years, the Company systematically provided for
accretion in the estimated value of the warrant by periodic charges to
operations in amounts representing the change in the estimated fair value
of the warrant.
In connection with Overhill's December 1997 refinancing (see Note 8), the
Company granted stock purchase warrants that entitled the holder to
immediately acquire at $.01 per share, 30% of the common stock of Overhill.
Such warrants were valued at $1,200,000, which was recorded as debt
discount and is being amortized over the term of the loan. The agreement
provided that warrants for the purchase of 25% of Overhill could be
repurchased by the Company for $2,000,000 during the two-year period
following the date of the agreement. In June 1998, in connection with
amending certain covenants and restrictions, the percentage of Overhill
that the Company could repurchase for $2,000,000 was reduced to 20% from
25%. As these warrants to purchase common stock of a subsidiary have a
nominal exercise price, the Company has accounted for the warrants as a
minority interest. Accordingly, for the fiscal year ended September 30,
1999, the Company has recorded warrant accretion of approximately $225,000.
In connection with the November 1999 refinancing discussed below, Overhill
repurchased all warrants held by Long Horizons for total consideration of
$3.7 million. This transaction was treated as a reacquisition of minority
interest resulting in $2.2 million of goodwill being recorded in connection
with this repurchase transaction.
F-28
Also in connection with the Long Horizons refinancing in December 1997, an
unrelated consultant was issued a warrant to purchase 1% of Overhill's
common stock, exercisable through December 3, 2000, at a purchase price of
$50,000. Such warrant remains outstanding following the November 1999
refinancing described below.
In connection with the financing provided by LLCP in November 1999 (see
Note 8), the Company granted stock purchase warrants that entitle LLCP to
immediately acquire 17.5% of the common stock of Overhill, at a nominal
exercise price. Such warrants were valued at $2.37 million and will be
recorded as a debt discount to be amortized over the term of the LLCP loan.
During the first two years following the date of the agreement, Overhill
has the right to repurchase 5% of Overhill's shares from LLCP for $3
million and/or to repurchase all 17.5% of the Overhill shares subject to
the LLCP warrant within five days of the loan being repaid at their then
determined fair market value. If such shares are not repurchased, LLCP will
be entitled under the agreement to receive a cash payment of $500,000 from
Overhill.
11. INCOME TAXES
Income tax expense (benefit) consists of the following:
For the Years Ended
September 30,
-----------------------------------------------------------
1999 1998 1997
---------------- ----------------- -----------------
Current:
Federal $300,000 $ - $(1,126,891)
State 53,881 56,575 239,869
Deferred:
Federal - - 168,278
State - - 65,061
---------------- ----------------- -----------------
Total income taxes $353,881 $ 56,575 $ (653,683)
================ ================= =================
F-29
The effective tax rate on income (loss) before income taxes was different
than the federal statutory tax rate. The following summary reconciles the
federal statutory tax rate with the actual effective rate:
For the Years Ended
September 30,
-----------------------------------------------------
1999 1998 1997
--------------- -------------- ----------------
Effective statutory tax expense (benefit) rate 34.0% 34.0% (34.0%)
Increase (decrease) in effective tax rate resulting
from:
Federal tax assessment 182.8 - -
State taxes, net of federal tax benefit 32.8 16.9 (4.1)
Officer life insurance premiums, amortization of
goodwill, accretion of stock warrants
(9.1) 81.0 2.9
Change in valuation allowance (26.1) (87.8) 26.6
Sale of subsidiaries - (9.7) 5.7
Other (4.9) 5.7 (0.7)
Tax credits 6.1 (23.2) -
--------------- -------------- ----------------
Effective tax expense (benefit) rate 215.6% 16.9% (3.6%)
=============== ============== ================
F-30
The components of deferred tax balances are summarized as follows:
September 30,
-----------------------------------
1999 1998
--------------- ---------------
Deferred tax assets:
Allowance for doubtful accounts $ 683,249 $ 290,945
Inventory 158,628 215,747
Accrued expenses 399,360 395,545
Capital loss carryforwards 394,388 240,318
Net operating loss carryforwards 4,434,471 4,865,745
AMT and other credit carryforwards 416,777 336,944
Fixed assets 341,190 54,098
--------------- ---------------
Total deferred tax assets 6,828,063 6,399,342
Valuation allowance (5,694,986) (5,354,856)
--------------- ---------------
Deferred tax assets 1,133,077 1,044,486
--------------- ---------------
Deferred tax liabilities:
Prepaid expenses (124,528) (120,938)
Intangibles (682,934) (681,916)
Investments in partnerships (88,338) -
Other (237,277) (241,632)
--------------- ---------------
Deferred tax liabilities (1,133,077) (1,044,486)
--------------- ---------------
Net deferred tax assets $ - $ -
=============== ===============
The Company has net operating losses available for carryforward of
approximately $11,000,000, which begin to expire in 2012 and capital losses
available for carryforward of approximately $986,000. Additionally, the
Company has alternative minimum tax credit carryforwards of $177,277 which
have no expiration and general business credits of $239,500 which begin to
expire in 2012. The Company has recorded a valuation allowance for its net
deferred tax asset position at September 30, 1999 and 1998 due to
uncertainty with respect to the future recoverability of such amounts.
During 1999, the federal income tax returns of TTI for the year ended March
31, 1994 and for the stub period ended June 24, 1994 were audited by the
Internal Revenue Service ("IRS"). Both of these tax periods were prior to
the acquisition of TTI by Polyphase. In connection with these audits, the
IRS assessed TTI with additional taxes of approximately $752,000 for the
year ended March 31, 1994. The Company and TTI appealed the IRS decision,
and in anticipation of further contesting the matter in District Court, TTI
made a cash payment to the IRS of $1,185,000, representing the above tax
assessment plus penalties and interest of $433,000. Such appeal was denied
by the IRS, and TTI is currently planning to seek recovery through
F-31
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
District Court proceedings pending the results of settlement negotiations.
Based upon the amounts expected to be recovered through protective refund
claims filed with the IRS for the tax periods ending March 31, 1992 and
June 24, 1994, as well as TTI's evaluation (based on the advice of counsel)
of its remedies through litigation, TTI has expensed $300,000 for the
fiscal year ended September 30, 1999, representing amounts considered not
recoverable.
12. COMMITMENTS AND CONTINGENCIES
Commitments
Future minimum lease payments for all operating leases at September 30,
1999 are as follows:
2000 $1,777,627
2001 1,425,253
2002 709,708
2003 32,536
2004 4,110
-------------------
$3,949,234
===================
Certain of the leases provide for renewal options for periods from 1999 to
2005 at substantially the same terms as the current leases.
Rent expense, including monthly equipment rentals, was approximately
$2,226,559, $1,946,000 and $1,847,000 for the years ended September 30,
1999, 1998 and 1997, respectively.
TTI relies on two suppliers for the majority of its new units and parts. As
of September 30, 1999, TTI had commitments to purchase inventory from these
suppliers amounting to $4,115,000.
TTI guarantees on behalf of various customers certain lines of credit with
banks and financial institutions. The portion of the credit lines
guaranteed ranges from zero to 100% on a customer-by-customer basis. At
September 30, 1999, TTI's guarantees totaled $22,340,875. TTI receives a
fee, in the form of interest participation, on certain of the notes upon
which it is contingently liable. This fee is recognized as interest income
and is usually held by the institution to meet reserve requirements. Funds
held in escrow by the lenders amounting to $625,623 at September 30, 1999,
are included in the consolidated balance sheet as restricted cash and are
fully offset by the Company's reserve for credit guarantees.
F-32
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TTI has an interest in two unconsolidated partnerships. The total
investment in these partnerships at September 30, 1999 of $420,295 is
included in other assets. TTI guarantees the debt of these partnerships.
The amount guaranteed at September 30, 1999 of $232,935 is collateralized
by the accounts receivable, inventory, equipment, buildings and real estate
of the partnerships.
Contingencies
During fiscal 1997, five substantially identical complaints were filed in
the United States District Court for the District of Nevada against the
Company and certain of its officers and directors. The complaints each
sought certification as a class action and asserted liability based on
alleged misrepresentations that the plaintiffs claimed resulted in the
market price of the Company's stock being artificially inflated. The
defendants filed motions to dismiss in each of the lawsuits. Without
certifying the cases as class actions, the District Court consolidated the
cases into a single action. In June 1998, the District Court ordered the
plaintiffs to file an amended complaint within thirty days, finding that
their original allegations failed to state a claim under the federal
securities laws. The plaintiffs then filed a motion for re-consideration of
the Court's ruling. The defendants opposed that motion, and the Court
denied the plaintiff's motion for reconsideration. The plaintiffs did not
file an amended complaint within the specified thirty day time period, but
subsequently filed an amended complaint, claiming that they were entitled
to additional time within which to file an amended pleading by reason of a
scheduling order issued by the Court. The defendants moved to dismiss the
case on the grounds that the amended complaint was filed too late and
failed to state a claim for securities fraud under applicable legal
authorities. The plaintiffs have sought a stay of the Court's consideration
of defendants' motion to dismiss, asserting that there is uncertainty as to
the legal standards to be applied in securities fraud cases. The Court has
not ruled on plaintiff's motion to stay or defendants' motion to dismiss.
However, management believes (based upon advice of legal counsel) that this
litigation will be resolved without material effect on the Company's
financial condition, results of operations or cash flows.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. However, management
believes (based on advice of legal counsel) that such litigation and claims
will be resolved without material effect on the Company's financial
condition, results of operations or cash flows.
See Note 13 for a description of a guarantee of related party indebtedness.
13. RELATED PARTY TRANSACTIONS
On February 23, 1998, Mr. Paul A. Tanner resigned as Chief Executive
Officer and Chairman of the Company's Board of Directors. Mr. James Rudis,
the Company's President, was elected by the Board to assume the vacated
positions. Following the resignation, a reserve of approximately $165,000
was established against all outstanding advances due from Mr. Tanner.
F-33
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During fiscal years 1994 and 1995 a number of advances were made to Mr.
Tanner which aggregated approximately $2.0 million. In December 1995, the
advances were refinanced though the issuance to the Company of a 12%
unsecured demand note from Mr. Tanner. Also during the aforementioned
periods, the Company made non-interest bearing cash advances of
approximately $1.5 million to the Pyrenees Group, a company controlled by
Mr. Tanner.
Effective in January 1996, the Company reached an agreement to manage a
project to develop and build a multi-purpose sports facility in Las Vegas,
Nevada. The project was being developed by PLY Stadium Partners, Inc.
("Stadium Partners"), a private investment firm headed by Mr. Tanner. The
Company agreed to provide to Stadium Partners up to $4 million of debt (1)
convertible into a 14% economic interest in the project and (2) guaranteed
personally by Mr. Tanner and Pyrenees. As part of this agreement, amounts
which had been advanced during fiscal 1994 and 1995 to Mr. Tanner and
Pyrenees (approximately $3.5 million), together with subsequent amounts
advanced, charged or accrued to or on behalf of Stadium Partners were
considered as components of the $4 million of convertible debt, bearing
interest at 12.0% and guaranteed personally by Mr. Tanner and by Pyrenees.
Through September 30, 1996, the Company advanced an additional $9.27
million, for an approximate total of $13.3 million.
On November 15, 1996, Stadium Partners, through a newly-formed partnership,
purchased 62 acres in Las Vegas for the development of the stadium and
adjacent convention facility. Financing was provided by Lehman Brothers
Holdings, Inc. ("Lehman") through a partnership, Nevada Stadium Partners
Limited Partnership ("Nevada Partnership"), with Lehman receiving an equity
interest in the project.
The Company guaranteed the repayment of the Lehman loan on behalf of
Stadium Partners. The guarantee is only effective in certain circumstances
or upon the occurrence of certain events. A foreclosure sale was conducted
during July 1998. Notwithstanding such foreclosure action, the Company,
based on the advice of legal counsel, does not believe that it will incur
any significant liability as a result of this guarantee. As a result, the
Company believes the existence of such guarantee will not have a material
adverse effect on the Company's financial condition, results of operations
or cash flows.
The loan agreement with Lehman required certain prepayments by Nevada
Partnership, the first of which in the amount of $5.0 million became due in
January 1997. This was paid primarily with funds advanced by the Company.
The second prepayment requirement of $20.0 million became due in May 1997;
this payment was not made. As a result of the failure to make this payment,
another agreement was entered into among the borrower, Lehman and the
Company as of July 1, 1997. This agreement generally provided forbearance
by Lehman until September 30, 1997, to allow additional time to raise the
funds to make the principal payment. The terms of the forbearance agreement
were not met by the September deadline, and the note matured unpaid in
November 1997.
F-34
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As a result of the above, the Company recorded a charge to earnings for the
year ended September 30, 1997, in the amount of $14.8 million, representing
all amounts remaining uncollected from Stadium Partners, net of a reserve
established in 1996. Amounts which may subsequently be recovered, if any,
will be recognized as income when collection is assured.
During April 1998, the Company filed suit against PLY Stadium Partners,
Inc., and against Mr. Tanner and Pyrenees, the guarantors of the debt. In
May 1999, the Company was awarded a judgment against such defendants,
jointly and severally, in the amount of approximately $19.5 million, plus
interest. In connection therewith, the defendants were ordered to turn over
all ownership of the stock of Polyphase, as well as the stock and assets of
PLY Stadium Partners, Inc. and Pyrenees, which includes the rights to
2,000,000 shares of Polyphase common stock owned by Pyrenees and held by
Mr. Harold Estes as secondary collateral (see Notes 9 and 10). In
connection with this recovery of the 2,000,000 Polyphase shares, the
Company recorded interest expense of $875,000, the fair value assigned to
the shares, resulting from its assignment to Mr. Estes. Additionally, the
Company recorded income of $656,000 related to the recovery of 1,500,000
shares and accounted for the remaining 500,000 shares as an unexercised
stock option in accordance with APB No. 25 (see Note 10). After evaluating
the possibility of any potential post judgment collections and the
additional legal expenses to be incurred in pursuing such collections, and
further considering the likelihood of one or all of the defendants seeking
protection under bankruptcy laws, the Company is presently in negotiations
to settle the judgment. The objective is to secure recoveries, in addition
to the Polyphase shares discussed above, through the collections of
proceeds using either first or second liens on properties held by other
than the judgment debtors. Any further amounts ultimately recoverable as a
result of this judgment and turnover order or the settlement negotiations
is not presently determinable.
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September
30, 1999, the insurance premium receivable was $592,006.
In connection with the purchase of TTI, the Company acquired a note
receivable from an officer of TTI. The note which has been renewed and
extended each year since issuance is secured by marketable securities, is
payable within one year and bears interest at 3.96%. As of September 30,
1999 the balance outstanding was $341,305 and the note has been classified
as a non-current related party receivable. Also included in related party
receivables at September 30, 1999 are approximately $683,000 in receivables
from employees of the Company and its subsidiaries and $499,000 in
receivables from partnerships in which TTI has minority interests. As of
September 30, 1999, approximately $570,000 of such receivables are notes
which are no longer accruing interest. During 1999, the Company established
a $100,000 reserve against receivables from employees of the Company. The
Company expects the remaining amounts due under related party receivables
to be realizable.
See Note 10 for discussion of options granted to the Pyrenees Group, a
related party.
F-35
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
See Note 9 for discussion of the note payable to Mr. Estes.
14. PROFIT SHARING PLAN
In 1986, prior to its acquisition by the Company, TTI adopted a profit
sharing plan. In order to participate in the plan, an employee must be at
least 21 years of age, have been employed by TTI at least one year and be a
full time employee. Vesting begins in the third year of employment and
increases each year until full vesting is achieved in the seventh year. The
plan is administered by an independent third party. Trustees for the plan
are the president and controller of TTI. The maximum contribution is the
lesser of 15% of eligible salaries or net income plus retained earnings.
Profit sharing expense for the years ended September 30, 1999, 1998 and
1997 was $329,000, $353,000 and $298,000 respectively.
15. SALE OF SUBSIDIARIES
Effective September 30, 1999, the Company sold its wholly-owned subsidiary,
Polyphase Instrument Co. ("PIC"), to an investment group headed by
management of that company. The transaction was completed as a sale of 100%
of the outstanding capital stock of PIC for total consideration of
approximately $2.8 million, consisting of $1.8 million in cash and a
subordinated note receivable for $1.0 million. The note, which is
subordinated to bank indebtedness of up to $1.375 million, bears interest
at 8%, payable interest-only on a quarterly basis through July 2001 and
payable thereafter in quarterly amounts of $50,000 principal plus accrued
interest through October 2006. The note is collateralized by all of the
capital stock and assets of PIC, subject to the subordination referred to
above. Because of the highly leveraged nature of the purchaser, the
implicit reliance on the future operations of PIC to provide cash flows for
debt service and the subordination of the note to other creditors of PIC,
the Company was required to fully reserve for the subordinated note
receivable. As of September 30, 1999, the Company has recorded a loss from
discontinued operations of approximately $1.2 million as a result of this
transaction.
F-36
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended September 30, 1999, 1998 and 1997, PIC's operations
(unaudited) are summarized as follows:
For the Years Ended
September 30,
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Net revenues $6,373,500 $4,832,600 $3,570,400
Gross profit 700,400 530,100 379,900
Operating income (loss) 59,300 51,100 (67,200)
Net income (loss) before tax $ 39,000 $ 10,000 $ (476,100)
The net assets of PIC at the end of the prior fiscal year have been
reclassified from prior presentations as other assets in the accompanying
consolidated balance sheet as of September 30, 1998. The net assets of PIC
as of that date (unaudited) amounted to approximately $2,962,500 and are
summarized as follows:
September 30,
1998
------------------
Assets:
Cash, receivables and inventories $2,891,400
Property and equipment, net of
accumulated depreciation 316,000
Other assets 457,900
------------------
Total assets 3,665,300
------------------
Liabilities (current):
Notes payable 241,000
Accounts payable and accrued expenses 461,800
------------------
Total liabilities 702,800
------------------
Net assets $2,962,500
==================
In December 1997, the Company sold Dallas Parkway Properties, Incorporated,
a subsidiary whose principal asset was the corporate office building, in
exchange for nominal consideration plus the assumption of a note payable
for $2.8 million. The Company realized a gain of approximately $988,000 on
this transaction.
In July 1996, the Company completed a transaction with an unrelated third
party to sell a controlling interest in the Company's computer
subsidiaries. The transaction was accomplished
F-37
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
through the sale of 51% of a newly formed subsidiary, PC Networx America,
Inc. (PCNA), whose sole assets consisted of the capital stock of Network
America, Inc., PC Repair of Florida, Inc., Computer Systems Concepts and
Register Mate, Inc. The consideration for this sale amounted to $1,736,457
(subject to adjustments) consisting of $475,000 of cash, $86,457 of notes
receivable and $1,175,000 of preferred stock. At that time it was the
intention of the Company to publicly distribute to its shareholders a
dividend of 30% of the PCNA stock. In a related transaction with the same
party, the Company sold 100% of the stock of Micro Configurations, Inc.
(MCC) for a note receivable in the amount of $951,433 secured by the stock
and assets of MCC. Subsequent to this transaction, PCNA's name was changed
to DataTell Solutions, Inc. ("DataTell").
During fiscal 1997, the purchaser and controlling shareholder of DataTell
elected to discontinue that company's efforts to effect a public
registration of DataTell's stock, thus precluding the Company from making a
distribution of the stock to its shareholders. Additionally, certain
purchase price adjustments resulted in the elimination of the note for
$86,457. The purchaser also elected not to further pursue the operation of
MCC, and since the Company was unsuccessful in its attempts to recover
MCC's assets, the amount due under the $951,433 note was determined not to
be realizable. The balance of these notes, totaling $1,037,890, was charged
to operations during fiscal 1997.
The Company, during the latter part of fiscal 1997, having made the
decision to further reduce its involvement in computer-related businesses,
entered into a new agreement with the controlling shareholder of DataTell
to dispose of its remaining direct ownership of DataTell. In connection
therewith, the Company agreed to exchange its 49% interest in DataTell,
together with the $1,175,000 of preferred stock referred to above, for cash
of $200,000 and a new series of the purchaser's preferred stock which
carries certain rights to be exchanged for DataTell stock. This transaction
resulted in a loss of $2,575,925 and was charged to operations during
fiscal 1997.
16. ASSETS ACQUIRED
In March 1998, TTI obtained a majority ownership interest in Wood Forest
Products LLC ("Wood"), which subsequently acquired the rights to harvest
timber from a tract of land owned by the U.S. Forestry Service.
Concurrently, the Company obtained a majority ownership interest in
Southern Forest Products LLC ("Southern"), whose primary purpose is to
lease and operate a sawmill in East Texas. For the years ended September
30, 1999 and 1998, these forestry products businesses contributed revenues
of approximately $7.4 million and $3.0 million, respectively, and a net
loss of approximately $329,000 and $170,000, respectively.
F-38
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
17. INFORMATION BY INDUSTRY SEGMENT
The Company's industry segments are described below.
Food
The food segment produces high quality entrees, plated meals, soups, sauces
and poultry, meat and fish specialties primarily for customers in the
airline, restaurant and weight loss industries.
Forestry
The forestry segment sells, finances and repairs timber and logging
equipment in East Texas and Western Louisiana and participates in other
forestry-related activities. Customers range from small logging operations
to large integrated paper mills.
Corporate and Other
The corporate and other segment, prior to fiscal 1998, provided management
and advisory services to Stadium Partners, a privately owned development
corporation engaged in the development of a multi purpose sports facility
in Las Vegas, Nevada (see Note 13).
Transformer
The transformer segment manufactured and marketed electronic transformers,
inductors and filters. The Company's wholly-owned subsidiary, Polyphase
Instrument Co. (PIC), was included in the transformer segment. Effective
September 30, 1999, all of the capital stock of PIC was sold (see Note 15).
Computer Sales and Service
The computer sales and service segment assembled and sold personal
computers and provided systems setup and hardware maintenance services.
Customers serviced ranged from individuals to large corporations.
Subsidiaries included in the segment were Network America, Inc., in Tulsa,
Oklahoma; Letronix and Computer System Concepts in Queens, New York; PC
Repair in Sarasota, Florida and Micro Configurations Inc., in Brooklyn, New
York. Effective July 1996 and July 1997, the Company sold 51% and 49% of
its interests in the computer operations, respectively (see Note 15).
F-39
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
------------------------------------------------------------------
Food Forestry Total
------------------ ------------------ ------------------
Net Sales:
Sales to unaffiliated customers $ 112,495,726 $ 45,812,384 $ 158,308,110
================== ================== ==================
Operating income $ 7,384,385 $ 1,490,012 $ 8,874,397
================== ==================
General corporate expenses (380,798)
Recovery of related party receivables 656,250
Interest expense (9,485,892)
Interest income and other 500,183
------------------
Income (loss) before income taxes, warrant accretion, discontinued
operations and extraordinary item $ 164,140
==================
Identifiable assets:
Segment assets $ 50,024,950 $ 50,181,108 $ 100,206,058
================== ==================
Corporate assets 24,851,716
Eliminations (41,535,832)
==================
Total assets $ 83,521,942
==================
Capital expenditures, net:
Segment $ 295,405 $ 1,002,611 $ 1,298,016
================== ==================
Corporate 1,290
------------------
Total capital expenditures, net $ 1,299,306
==================
Depreciation and amortization:
Segment $ 2,715,121 $ 834,467 $ 3,549,588
================== ==================
Corporate 1,009,919
------------------
Total depreciation and amortization $ 4,559,507
==================
The Company's Food segment had sales to Jenny Craig, American Airlines and
King's Hawaiian in fiscal 1999 which comprised approximately 14%, 13% and 12%,
respectively, of consolidated sales. No other customer accounted for more than
10% of the Company's sales in fiscal 1999.
F-40
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
----------------------------------------------------------------
Food Forestry Total
------------------ ------------------ ---------------
Net Sales:
Sales to unaffiliated customers $93,348,856 $48,049,483 $ 141,398,339
================== ================== ==============
Operating income $ 4,976,930 $ 4,076,683 $ 9,053,613
================== ==================
General corporate expenses (1,420,191)
Gain on sale of assets 987,857
Interest expense (8,830,391)
Interest income and other 543,080
--------------
Income (loss) before income taxes, warrant accretion,
discontinued operations and extraordinary item $ 333,968
==============
Identifiable assets:
Segment assets $45,221,575 $50,082,526 $ 95,304,101
================== ==================
Corporate assets 25,376,181
Eliminations (39,837,746)
--------------
Total assets $ 80,842,536
==============
Capital expenditures, net:
Segment $ 604,853 $ 680,299 $ 1,285,152
================== ==================
Corporate 30,251
--------------
Total capital expenditures, net $ 1,315,403
==============
Depreciation and amortization:
Segment $ 3,041,237 $ 749,991 $ 3,791,228
================== ==================
Corporate 401,043
--------------
Total depreciation and amortization $ 4,192,271
==============
The Company's Food segment had sales to Jenny Craig in fiscal 1998 which
comprised approximately 22% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 1998.
F-41
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
----------------------------------------------------------
Food Forestry Total
----------- ----------- ------------
Net Sales:
Sales to unaffiliated customers $96,176,505 $52,201,622 $148,378,127
=========== =========== ============
Operating income $ 4,953,194 $ 4,496,570 $ 9,449,764
=========== ===========
General corporate expenses (2,799,016)
Non-recurring charged related to loss on related
party receivable (14,838,456)
Interest expense (7,129,406)
Interest income and other 738,943
Loss on investment in computer operations (3,613,815)
------------
Income (loss) before income taxes, warrant accretion,
discontinued operations and extraordinary item $(18,191,986)
============
Identifiable assets:
Segment assets $35,565,596 $42,442,019 $ 78,007,615
=========== ===========
Corporate assets 30,814,790
Eliminations (37,500,695)
=============
Total assets $ 71,321,710
=============
Capital expenditures, net:
Segment $ 507,825 $ 222,562 $ 730,387
============ ===========
Corporate -
-------------
Total capital expenditures, net $ 730,387
=============
Depreciation and amortization:
Segment $ 2,045,568 $ 691,630 $ 2,737,198
============ ===========
Corporate 1,163,765
-------------------
Total depreciation and amortization $ 3,900,963
===================
The Company's Food segment had sales to Jenny Craig in fiscal 1997 which
comprised approximately 20% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 1997.
F-42
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
18. QUARTERLY FINANCIAL DATA (Unaudited)
For the Year Ended September 30, 1999
------------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
------------------ ------------------ ----------------- -------------------
Net revenues $34,854,998 $39,695,102 $37,702,120 $46,055,890
Gross profit 6,024,188 6,805,493 7,387,110 8,250,435
Operating income 1,631,301 1,834,349 2,207,632 2,820,311
Discontinued Operations 3,326 7,418 3,819 (1,197,071)
Net income (loss) $ (340,385) $ (193,559) $ 165,495 $(1,229,178)
================== ================== ================= ===================
Net income (loss) per
common share $ (.02) $ (.01) $ .01 $ (.07)
================== ================== ================= ===================
For the Year Ended September 30, 1998
------------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
------------------ ------------------ ------------------ -------------------
Net revenues $36,482,246 $32,145,391 $36,165,064 $36,605,638
Gross profit 6,841,897 6,364,733 6,341,798 5,773,563
Operating income 2,364,392 1,887,372 1,664,874 1,716,784
Discontinued Operations (3,478) 13,400 (3,938) 3,971
Extraordinary item (616,239) - - -
Net income (loss) $ 881,571 $ (218,106) $ (675,037) $ (317,319)
================== ================== ================== ===================
Net income (loss) per
common share $ .06 $ (.02) $ (.05) $ (.02)
================== ================== ================== ===================
F-43
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Balance Sheets
September 30,
---------------------------------
1999 1998
-------------- --------------
Cash $ 51,471 $ 5,874
Receivable from sale of subsidiary 780,000 -
Prepaid expenses and other 9,000 20,000
-------------- --------------
Total current assets 840,471 25,874
Property and equipment 50,191 48,902
Less-Accumulated depreciation (44,981) (36,981)
-------------- --------------
5,210 11,921
Non current receivables:
Related parties, net of allowance for
doubtful accounts of $164,563 and $164,563 - 9,000
Deferred federal income taxes 572,280 767,789
Income tax receivable 5,959,121 5,202,507
Investment in discontinued operations - 2,962,508
Other assets (primarily investments
in subsidiaries) 17,474,634 16,396,582
-------------- --------------
Total assets $ 24,851,716 $ 25,376,181
============== ==============
Accounts payable $ 140,359 $ 139,948
Accrued expenses 981,840 793,013
Deferred income taxes 364,669 335,117
Current maturities of long-term debt - 1,200,000
-------------- --------------
Total current liabilities 1,486,868 2,468,078
Note payable and accrued interest,
related party 17,914,842 16,307,405
-------------- --------------
Total liabilities 19,401,710 18,775,483
-------------- --------------
Stockholders' equity:
Preferred stock 564 1,150
Common stock 178,125 150,800
Additional paid in capital 28,159,887 28,623,811
Accumulated deficit (22,888,570) (21,199,744)
Note receivable - (975,319)
-------------- --------------
Total stockholders' equity 5,450,006 6,600,698
-------------- --------------
$ 24,851,716 $ 25,376,181
============== ==============
See note to condensed financial information of registrant.
F-44
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
For the Years Ended
September 30,
------------------------------------------
1999 1998
----------------- ----------------
Cash flow provided by (used in) operating activities:
Net loss $ (1,597,627) $ (328,891)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,009,919 370,896
Equity in income of subsidiaries (1,144,797) (1,945,745)
Provision for doubtful accounts - 164,563
Gain on sale of assets - (987,857)
Deferred income tax 225,061 2,707
Recoveries on related party receivable (656,250) -
Loss (income) from discontinued operations 1,182,508 (9,955)
Increase (decrease) in, net of effects of acquisitions:
Receivables from sale of subsidiary (780,000) -
Prepaid expenses and other (735,813) 352,106
Accounts payable and other 411 (355,032)
Accrued expenses and other 456,974 (243,404)
---------------- ----------------
Net cash used in operating activities (2,039,614) (2,980,612)
---------------- ----------------
Cash flows provided by (used in) investing activities:
Notes receivable from related parties 9,000 8,963
Proceeds from sale of subsidiary 1,780,000 -
Capital expenditures (1,289) (5,870)
---------------- ----------------
Net cash provided by investing activities 1,787,711 3,093
---------------- ----------------
Cash flows provided by (used in) financing activities:
Net borrowings on notes payables 1,607,437 2,308,489
Advances from (payments to) subsidiary (47,174) 5,300,000
Payments on long term borrowings (1,200,000) (4,300,000)
Payment of deferred financing costs - (163,787)
Exercise of common stock options and warrants 28,436 2,100
Dividends on preferred stock (91,199) (154,250)
Common stock issuance costs - (17,500)
---------------- ----------------
Net cash provided by financing activities $ 297,500 $ 2,975,052
---------------- ----------------
See notes to condensed financial information of registrant.
F-45
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
For the Years Ended
September 30,
------------------------------
1999 1998
------------ ------------
Cash flow provided by (used in) operating activities:
Net loss $ (1,597,627) $ (328,891)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,009,919 370,896
Equity in income of subsidiaries (1,144,797) (1,945,745)
Provision for doubtful accounts - 164,563
Gain on sale of assets - (987,857)
Deferred income tax 225,061 2,707
Recoveries on related party receivable (656,250) -
Loss (income) from discontinued operations 1,182,508 (9,955)
Increase (decrease) in, net of effects of acquisitions:
Receivables from sale of subsidiary (780,000) -
Prepaid expenses and other (735,813) 352,106
Accounts payable and other 411 (355,032)
Accrued expenses and other 456,974 (243,404)
------------ ------------
Net cash used in operating activities (2,039,614) (2,980,612)
============ ============
Cash flows provided by (used in) investing activities:
Notes receivable from related parties 9,000 8,963
Proceeds from sale of subsidiary 1,780,000 -
Capital expenditures (1,289) (5,870)
------------ ------------
Net cash provided by investing activities 1,787,711 3,093
------------ ------------
Cash flows provided by (used in) financing activities:
Net borrowings on notes payables 1,607,437 2,308,489
Advances from (payments to) subsidiary (47,174) 5,300,000
Payments on long term borrowings (1,200,000) (4,300,000)
Payment of deferred financing costs - (163,787)
Exercise of common stock options and warrants 28,436 2,100
Dividends on preferred stock (91,199) (154,250)
Common stock issuance costs - (17,500)
------------ ------------
Net cash provided by financing activities $ 297,500 $ 2,975,052
============ ============
See note to condensed financial information of registrant.
F-46
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
Net increase (decrease) in cash $ 45,597 $ (2,467)
Cash - beginning of year 5,874 8,341
============ ============
Cash - end of year $ 51,471 $ 5,874
============ ============
Note A - Basis of Presentation
In the parent company only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company's share of net income of
its unconsolidated subsidiaries is included in consolidated income using the
equity method. The parent company only financial statements should be read in
conjunction with the Company's consolidated financial statements.
See note to condensed financial information of registrant.
F-47