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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 [FEE REQUIRED]
For the fiscal year ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission file number: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16885 Dallas Parkway, Suite 400
Dallas, Texas 75248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 732-0010
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
----- -----
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 15, 1995,
was approximately $32,393,599. 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 15, 1995, the registrant had issued and outstanding 13,121,966 shares
of the Company's common stock, $ .01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report, is
incorporated by reference into Part III of this report.
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POLYPHASE CORPORATION
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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Part I
Item 1 Description of Business 1
Item 2 Description of Property 10
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 12
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8 Financial Statements 18
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 19
Part III
Item 10 Directors and Executive Officers of the Registrant 20
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial Owners and
Management 20
Item 13 Certain Relationships and Related Transactions 20
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 21
i
PART I
ITEM 1. Description of Business.
------------------------
General
The Company is a diversified holding company that, through its subsidiaries,
currently operates primarily in four industry segments: the forestry segment,
which distributes, leases and provides financing for industrial and commercial
timber and logging equipment (the "Forestry Group"); the computer segment, which
markets, services and provides the networking of computers and related equipment
and electronic parts (the "Computer Group"); the transformer segment, which
manufactures and markets electronic transformers, inductors and filters (the
"Transformer Group"); and the food processing segment, which produces high
quality entrees, plated meals, soups, sauces and poultry, meat and fish
specialties (the "Food Group"). The Company was incorporated in New Jersey in
1963 under the name Kappa Networks, Inc. In June 1991, through a merger with a
wholly owned subsidiary, the Company reincorporated in Pennsylvania and formally
changed its name to Polyphase Corporation. In June 1994, the Company, through a
merger with a wholly owned subsidiary, reincorporated in Nevada.
During 1993, under the direction of a new management team, the Company
embarked on an aggressive long-term program to diversify its activities and
expand its operations. In connection therewith, the Company consummated the
following acquisitions during fiscal 1993, 1994 and 1995:
. Computer System Concepts ("CSC") Effective January 1, 1993, the Company
--------------------------------
acquired certain assets of CSC from Michael Panayiotis. CSC, located in Long
Island City, New York, represented the first of two strategic acquisitions by
the Company in the computer marketing, service and networking businesses. The
assets of CSC were acquired in exchange for 30,000 shares of the Company's
Series C Preferred Stock, which were subsequently converted into 150,000 shares
of the Company's common stock (the "Common Stock"). The Company currently
operates the assets acquired from CSC through its wholly owned subsidiary,
Letronix, Inc.
. Network America, Inc. ("NAI") Effective April 1, 1993, the Company
-----------------------------
acquired all of the outstanding capital stock of NAI from Steven T. Douglas.
NAI is a Tulsa, Oklahoma-based assembler and retailer of computer hardware. The
NAI acquisition represented the Company's second strategic acquisition in the
computer marketing, service and networking businesses. The capital stock of NAI
was acquired in exchange for 250,000 shares of Series A-5 Preferred Stock, which
were subsequently converted into 500,000 shares of Common Stock.
. Taylor-Built Industries, Inc. ("TBI") In October 1993, the Company
-------------------------------------
acquired all of the outstanding capital stock of TBI from James T. Taylor in
exchange for 5,000 shares of Series B Preferred Stock, which were subsequently
converted into 50,000 shares of Common Stock. TBI, located in Dallas, Texas, is
a manufacturer and distributor of automotive aftermarket products. On February
13, 1995, the Company exchanged 100% of the common stock of TBI for 200,000
restricted shares of a publicly-held Company. No significant gain or loss was
recorded on the transaction.
. Dallas Parkway Properties Inc. ("DPPI") The Company, during October 1993,
---------------------------------------
acquired from Weldon Hays all the outstanding stock of DPPI in exchange for
100,000 shares of Series D Preferred Stock, which were subsequently converted
into 250,000 shares of Common Stock. At the time of the acquisition, DPPI was a
single-asset Texas corporation that owned (subject to related indebtedness) a
40,000 square foot office building in Dallas, Texas, which is used as the
Company's corporate headquarters. Ownership of the property was subsequently
conveyed to the Company.
. Register-Mate, Inc. ("RMI") The Company, in March 1994, acquired the
---------------------------
rights to the point-of-sale software system marketed under the name "Register-
Mate" together with certain other assets from the system's developers. The
consideration for this purchase amounted to approximately $500,000, consisting
of debt forgiveness of approximately $215,000 together with stock options valued
at $285,000. Pursuant to an employment agreement entered into between the sole
stockholder of the seller and the
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Company, the sole stockholder was granted stock options to acquire 57,000 shares
of Common Stock at an exercise price of $.50 per share. Such options were
exercised in full during September 1994. The assets acquired were transferred to
a newly formed subsidiary of the Company operating as Register-Mate, Inc., a
Texas corporation. As of September 30, 1995 the operations of RMI have not been
material.
. PC Repair of Florida, Inc. ("PCR") In May 1994, the Company acquired all
----------------------------------
of the outstanding capital stock of PCR from Gene H. Thurston, Jr. for 7,500
shares of Series B Preferred Stock, which were subsequently converted into
75,000 shares of Common Stock. PCR is a Sarasota, Florida-based retailer of
computer hardware and networks. In addition, PCR provides service and
maintenance of computer systems for business in the Sarasota region. The PCR
acquisition was undertaken as a means of expanding the Company's computer sales
and service operations.
. Texas Timberjack, Inc. ("TTI") In June 1994, the Company acquired all of
------------------------------
the outstanding capital stock of TTI from Harold Estes. TTI, with locations in
Lufkin, Jasper, and Cleveland, Texas, is a distributor of industrial and
commercial timber and logging equipment in East Texas and Western Louisiana.
The capital stock of TTI was acquired from Mr. Estes in consideration of
approximately $4,000,000 in cash, a $10,000,000 promissory note payable to the
order of Mr. Estes, (as modified, renewed and extended) due February 29, 1996,
and 100,000 shares of Series A Preferred Stock, which were subsequently
converted into 2,000,000 shares of Common Stock.
. Micro Configurations, Inc. ("Micro") In August 1994, the Company acquired
------------------------------------
all of the outstanding capital stock of Micro from Brett Ashley, Michel Swornik
and Serge Bien-Aime in exchange for 120,000 shares of Series A-2 Preferred
Stock, which were subsequently converted into 240,000 shares of Common Stock.
Micro, located in Brooklyn, New York, is engaged in the assembly, sale and
service of computers and related electronic products and represents further
expansion of the Company's computer sales and service operations.
. Overhill Farms, Inc. ("Overhill") In May 1995, the Company acquired
---------------------------------
substantially all the assets and operations of IBM Foods, Inc. The purchase,
which was accomplished through Overhill, a newly-formed subsidiary of the
Company, provided for cash payment to the seller of $31.3 million, subject to
certain adjustments, plus the assumption of certain liabilities of the acquired
business. Overhill Farms, located in Culver City, California, is a food
processor that produces high quality entrees, meals, soup, sauces and poultry,
meat and fish specialities primarily for customers in the weight loss, airline
and restaurant chain industries.
Prior to fiscal 1993, the Company's sole operating entity was Polyphase
Instrument Co. ("PIC"), which conducts the Company's transformer-related
activities. PIC, active since 1956, manufactures and sells customized
transformers and communication filters primarily to defense contractors and
their suppliers. In April 1993, the Company announced its intention to sell PIC
to prior management and reported PIC's financial results as discontinued
operations. After reviewing PIC's current financial performance and the effect
of management's cost-reduction measures, the sale of PIC was cancelled by mutual
agreement of the parties. Accordingly, the operating results of PIC were
reconsolidated in the Company's financial statements for fiscal 1993.
In January 1993, the Company relocated its corporate headquarters, together
with its accounting, administrative and investor relations functions, to Dallas,
Texas. See "Properties--Corporate Headquarters."
Products and Services
Transformer Group
The Company's Transformer Group currently consists of PIC. Transformers are
electromagnetic mechanisms used in a wide variety of electronic and electro-
mechanical applications to convert electrical currents from one voltage level to
another. The Transformer Group's products include power transformers used in
direct current power supplies; audio transformers used in voice and audio signal
circuits for transferral of low level, precise signals; pulse transformers used
in radar, digital signaling and computer
2
applications; telephone modem transformers used in telephone circuits; and
ferro-resonant transformers used in computers and stabilized power systems. PIC
manufactures a large line of transformers ranging from miniaturized versions to
oil-filled units, with power levels ranging from microwatts to over 20
kilowatts, voltage levels of up to 20 kilovolts and currents ranging from micro-
amperes to 700 amperes.
PIC's communications filters are electronic, frequency-selective devices that
isolate and permit the passage through electronic equipment of selected
information carried by electrical energy. Such filters include filter chokes
and low pass, bank pass and high pass filter-to-signal circuits that separate
frequencies from one another. Filter sales currently account for only a small
portion of the transformer group's total sales.
PIC supplies products to meet its customers' exact specification requirements.
Specifications include frequency response and temperature range; energy loss;
and voltage, current, and energy levels.
Computer Group
Through its subsidiaries NAI, PCR, Micro and Letronix, the Company sells,
installs and provides ongoing maintenance and repair for major brand computer
hardware including IBM, Compaq/(R)/, Apple/(R)/, Hewlett-Packard, Epson, Citizen
and Okidata products. The Computer Group integrates hardware with various
software packages and operating systems including DOS, Windows, Novell/(R)/,
Unix/(R)/, WordPerfect/(R)/, Lotus 123/(R)/, Great Plains/(R)/, Accpac/(R)/, and
DBase/(R)/.
A major emphasis of the Computer Group has been expansion of its role in
integrating personal computers into local and wide area networks (LAN and WAN)
for major corporate accounts. In addition to providing equipment and
installation, the Computer Group provides on-site training and ongoing technical
support to those accounts.
Forestry Group
The Forestry Group, through TTI, is a distributor of industrial and commercial
timber and logging equipment with locations in Lufkin, Jasper, and Cleveland,
Texas. TTI carries the Timberjack, Blount and Ford-New Holland lines of timber
and logging equipment. During fiscal 1995 TTI began carrying the Hyundai line
of equipment which is priced competitively to complement the existing lines.
TTI is involved in the sale, leasing, and financing of the equipment it
distributes as well as the servicing of all major brands of related equipment.
TTI's operations are primarily concentrated in the forested areas of East Texas
although its market extends to surrounding states. TTI operates in a fragmented
industry where its major competition is from distributors and dealers of
Caterpillar and John Deere equipment. TTI estimates that it currently holds 50%
of the skidder and 60% of the shear market and approximately 70% of the loader
market in East Texas.
Food Group
The Food Group, through Overhill, has a growing market among national accounts
as a proprietary packer of high quality entrees, plated meals, soups, sauces,
poultry, meat and fish specialties. Overhill focuses on three major segments of
the food industry: 1) mass feeding consisting primarily of airlines such as
American, Continental and United, and, to a lesser extent, hospitals, senior
citizens homes and prisons; 2) private label packaging for Jenny Craig Weight
Loss Centers, King Hawaiian brands and Price/Costco; and 3) food service
consisting of full service and fast food restaurants such as International House
of Pancakes, Carl Jr. and Jack in the Box.
Sales
Transformer Group
Approximately 90% of the transformers and filters sold by PIC are incorporated
into equipment and systems used by branches of the United States Armed Forces,
primarily as components in state-of-the-art defense equipment programs. The
remainder are used as components in industrial processing systems.
3
Major design projects in which PIC's products are currently used include the
United States Navy's Aegis Nuclear Cruiser and Aircraft Signal Protection Jammer
programs. In these programs, PIC acts as a subcontractor to major defense
contractors. Approximately 11% of PIC's sales from these operations in fiscal
1995 were direct sales to branches of the United States Armed Forces.
PIC's products are sold to approximately 150 active accounts, principally
defense contractors and their suppliers. Nine customers accounted for
approximately 78%, 84% and 77% of PIC's sales for fiscal 1995, 1994 and 1993,
respectively, which percentages represented approximately 2%, 12% and 32% of the
Company's consolidated sales, respectively. Martin Marietta, its predecessor
company, and its affiliates accounted for approximately 27% of such sales in
fiscal 1995, 55% in fiscal 1994 and 41% in fiscal 1993, which percentages
represented approximately 1%, 8% and 17% of the Company's consolidated sales,
respectively. Other major customers of the Transformer Group currently include
SPD Technologies, Rockwell International, Hughes, Eaton and Raytheon.
Transformers' sales prices range from $.05 to $20,000 per unit, while
communication filters' sales prices range from $30 to $5,000. PIC provides a
limited one-year product warranty on all its products.
Computer Group
Approximately 60% of the Computer Group's products and services are sold to
corporate accounts ranging from Fortune 500 companies to smaller businesses such
as local accounting, architectural, and advertising firms; the balance of such
products and services are sold to retail consumers.
In fiscal 1995, hardware and software package sales represented
approximately 60% of the Computer Group's sales, while service, repairs and
system maintenance accounted for approximately 40% of the Computer Group's
sales. Service is provided on either an as needed basis or as part of service
and maintenance contracts offered by CSC, NAI, Micro and PCR. Currently, the
Computer Group services over 250 commercial accounts. For companies with service
contracts, agreements provide for on-site coverage for specified equipment,
normally for a 12-month period. Service and maintenance contracts are
established either on a fixed hourly rate plus materials or on an all-inclusive
fixed annual rate. CSC, NAI, Micro and PCR maintain adequate spare parts
inventory and a staff of service managers and trained technicians to service
accounts. All hardware and spare parts provided by CSC, NAI, Micro and PCR carry
the manufacturers' warranties.
The customer list for the Computer Group is diversified with no single
account representing more than 2% of the Computer Group's total sales.
Forestry Group.
Approximately 37% of TTI sales during fiscal 1995 are from new equipment
sold to companies involved in the forestry industries. Additionally, TTI derived
10%, 5%, 17% and 31% of its revenues from sales of used equipment, servicing of
equipment, sales of parts and financing equipment sales, respectively. No single
customer accounts for more than 10% of TTI's sales. Equipment sales are
typically financed by TTI for periods ranging from 12 to 24 months at interest
rates ranging from 12% to 18% per annum.
Food Group
Approximately 75% of Overhill's sales in fiscal 1995 were derived from five
customers, two of which accounted for approximately 51.3% of its total sales,
Jenny Craig, Inc. (37.6%) and American Airlines (13.7%). On a consolidated
basis Jenny Craig and American represented approximately 14.8% and 5.4% of total
sales, respectively. Although the Company considers its relationships with
these customers to be good, there can be no assurance that these relationships
will continue as presently in effect. A decline in the sales of the Food Group's
products to these five 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.
4
Marketing
Transformer Group
The Company sells transformers and filters directly to customers and through
commissioned sales representatives principally in the Mid-Atlantic and Northeast
regions of the United States. As of September 30, 1995, PIC had an in-house
sales and marketing staff of two full-time employees. To obtain new business,
PIC relies on leads generated from its reputation and existing customer base.
In addition, PIC advertises in various trade journals.
Computer Group
Commercial business is generated by the sales executives of CSC, NAI, Micro
and PCR through customer and vendor referrals and through bid awards from local
and state agencies. The Computer Group's marketing efforts are presently
concentrated in New York, Oklahoma, Arkansas and Florida, where it maintains
offices. Retail sales are primarily generated through local advertising and
repeat business.
Forestry Group
TTI currently maintains sales and distribution offices in Lufkin, Jasper and
Cleveland, 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 timber companies located in the area.
TTI's sales staff consists of six salesmen. A general sales manager and branch
managers supply technical and operational support. 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.
Food Group
Overhill markets its products through its own internal staff and, to a lesser
degree, outside food brokers. Sales efforts have been concentrated on
Overhill's (formerly IBM's) traditional customer base of fast food restaurant
chains, airlines and weight loss centers. Management has begun focusing on the
development of retail products to be sold through warehouse club stores and
grocery store chains using the Overhill brand name or private labels. These
products are aimed at consumers willing to buy larger than normal quantities or
food service operators who buy in smaller quantities. Among the products
currently marketed are a teryaki rice bowl and noodle pudding under a private
label and a complete line of 14 oz. frozen microwaveable dinners featuring a
variety of entrees using the Overhill brand name. The success of these products
has encouraged the development of other private label items including a variety
of gourmet sauces and a line of frozen entrees from respected chefs.
Manufacturing and Sourcing
Transformer Group
PIC operates a manufacturing facility in Fort Washington, Pennsylvania that
produces approximately 90% of the Transformer Group's transformers and all
filters. Transformers are also manufactured at a leased facility in Haiti. See
"Properties--Transformer Group."
Management does not anticipate that the recent political events in Haiti will
have a material adverse effect on the Transformer Group's operations. To date,
production and shipments have continued on schedule. Management continues to
monitor events in Haiti and, if necessary, management believes that production
from this facility can be promptly replaced by domestic sub-contractors with no
significant cost increase.
The manufacturing process for PIC's transformers and filters is labor
intensive, involving mostly low-technology, manually operated machinery. The
process is not highly automated since PIC's products are custom designed to
customer specifications. Wherever economically feasible, operations are
automated.
5
To date, PIC has automated the following operations: testing, coil winding and
a portion of the assembly operation. Given the nature of PIC's products and
their end uses, PIC maintains extensive test equipment for its quality control
operation.
Raw materials used by PIC include ferrites, laminates, copper wire and
electronic components purchased in predesigned configurations. Substantially
all raw materials and components are purchased from domestic sources and are
widely available. PIC carries adequate inventories of raw materials and other
product components as required to meet open customer orders. To avoid the
impact of commodity price fluctuations on items such as copper wire, the Company
endeavors to quote prices to customers based upon the known costs of such
materials at the time of such quotation.
Computer Group
CSC, NAI, Micro and PCR assemble computers in various configurations based on
customer requirements. Components such as motherboards, memory chips, cases,
and processors are readily available from numerous sources nationwide as are
software packages and peripheral equipment such as printers, modems, monitors
and keyboards. As a result, it is not necessary to maintain large inventories
of equipment for sale.
The assembly of computers is a relatively low-technology process supervised by
service managers. All computers are tested with commercial diagnostic software
prior to customer delivery. The servicing and repair of equipment and systems
require various levels of skill depending on the nature of the equipment or the
operating environment. CSC, NAI, Micro and PCR employ technicians with the
various skill levels to meet each of such requirements.
Food Group
Overhill's manufacturing operations are located in three separate facilities
in Los Angeles, California, which account for 100% of its production. The
operations are labor intensive requiring semi-skilled employees. All
manufacturing employees are unionized with contracts covering each plant and due
to expire at various times over the next three to five years. Management
believes relations with the unions are excellent and does not anticipate any
problems which would affect future production. Each plant specializes in
different processing operations allowing efficiencies in production of the
product. In fiscal 1995, the plants each operated at approximately 70% of
capacity.
The Company's ability to produce economically a large quantity of product,
while at the same time maintaining a high degree of quality, depends in a large
part on its ability to procure raw materials on a reasonable basis. The Company
relies on a few large suppliers for its poultry products with the remaining raw
materials purchased from suppliers in the open market. The Company does not
anticipate any difficulty in acquiring these materials in the future. The
Company maintains three dry warehouses and one frozen warehouse to supply
ingredients, raw materials and packaging for production. Finished goods are
stored on site or in a public frozen food storage facility until shipment is
required.
Backlog
Transformer Group
At September 30, 1995, PIC had unfilled purchase orders aggregating
approximately $700,000 as compared to $1,600,000 at September 30, 1994. Orders
may be subject to cancellation at the customer's discretion subject to
substantial cancellation charges. Based on current delivery schedules and
shipments, management believes that the Transformer Group will ship
substantially all of its current backlog within the following 12 months. The
Transformer Group's backlog may not provide meaningful period-to-period
comparisons and such comparisons and the backlog may not be indicative of future
results.
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Computer Group
There is no significant backlog in the Computer Group. Most orders are
assembled from inventory and shipped within twenty-four hours of completion.
Equipment unavailable from inventory generally is ordered directly from a
variety of national manufacturers and distributors, received from such
manufacturers and/or distributors, assembled, and shipped within seventy-two
hours of the customer order.
Forestry Group
As a dealer, servicer and financier of forestry equipment, TTI does not
maintain a backlog of orders. Equipment ordered by a customer that is not in
inventory takes approximately one to six weeks to be shipped from the
manufacturer or another representative.
Food Group
At September 30, 1995, Overhill had unfilled purchase orders aggregating
approximately $2,222,000. Substantially all of the backlog is expected to be
delivered to customers within the following 12 month period. Overhill may
experience variations in the total amount of the backlog at any given date and,
accordingly, Overhill's backlog is not necessarily indicative of trends in the
Company's business. Orders are subject to changes in quantities or to
cancellation with thirty days notice without penalties to customers.
Product Development
Transformer Group
PIC does not maintain a formal research and development program, nor are
material amounts expended for research and development. However, PIC's
engineering, marketing and operations staff are regularly engaged in engineering
design and product development since most products are designed to customers'
specifications. The cost of such development is expensed as incurred. Accurate
figures with respect to prototype development, product and material
modifications, design changes and similar product development for customers are
not available; many of these costs are included in the assembly costs of
specific orders, which assembly costs include work other than product design and
development. Customers either supply PIC with design specifications or submit
proposed designs and require PIC to determine whether such designs will meet the
customers' performance specifications. PIC continuously modifies and enhances
its transformers and communication filters to accommodate its customers' systems
and equipment and, in this manner, attempts to increase its market penetration.
Computer Group
The Computer Group does not develop products or software for sale to the
public, and as such does not engage in any research and development. However,
the Computer Group, through seminars, publications, and vendor information,
keeps current information on new product and software enhancements as they
become available.
Forestry Group
TTI does not develop products for sale to the public.
Food Group
Overhill maintains a separate research and development department consisting
of three chefs who formulate recipes and upgrade specific products for current
customers. For weight loss and mass feeding, products are developed based upon
customers' specifications or suggestions from the marketing department. Overhill
is continuously modifying recipes as customers' tastes change. During fiscal
1995, the Company began developing private label products for warehouse club
stores and a branded line featuring the Overhill line of frozen entrees.
7
Patents, Trademarks and Copyrights
The Company does not have patents or patent applications pending on any of its
products, although it may file such patent applications in the future. The
Company attempts to protect its proprietary interest in its products by entering
into non-disclosure agreements with customers.
The Company has registered the trademark "Polyphase" in the United States
Patent and Trademark Office.
Regulation
The Computer, Transformer, and Forestry Groups are required to comply with
various governmental regulations and requirements concerning the discharge of
materials into the environment or otherwise relating to the protection of the
environment. Compliance with the current applicable federal, state and local
environmental regulations has not had, and the Company does not believe that in
the future such compliance will have, a material effect on its financial
position, results of operations, expenditures or competitive position.
The Food Group is subject to significantly stricter 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.
The Company takes all reasonable precautions to ensure that its operations,
processing plants and facilities operate in a safe, sanitary and
environmentally-sound manner. However, events beyond the control of the
Company, such as the adoption by the government of more stringent environmental
regulations could adversely affect its operations. Management believes that the
Company is in substantial compliance with all applicable laws and regulations
relating to the operations of facilities.
Competition
General
Competition in the industries in which the Company operates generally is
intense. Many of the Company's competitors have greater market recognition and
greater, financial, technical, marketing and human resources than the Company.
There can be no assurance that the Company will compete successfully against
existing companies or new entrants to the marketplace. Furthermore, the
development by competitors of new or improved products, services and/or
technologies may render the Company's products or services (or proposed products
or services) obsolete or less competitive.
Transformer Group
The business in which PIC is engaged is highly competitive, characterized by
ease of entry and intense regionally-based competition. Competition is based on
such factors as price, performance, reliability and product quality. The
Company believes that the reputation of PIC's engineering department and the
relationships it has established with its customers (having been in business
over 30 years) are important to its ability to compete successfully.
PIC competes directly with a number of manufacturers, primarily in the United
States, certain of which have financial and other resources substantially
greater than PIC. In addition, such manufacturers generally have more extensive
facilities than those that are, or in the foreseeable future may become,
8
available to PIC. In this market, changing governmental policies can rapidly
create or eliminate areas of competition.
PIC's business is heavily dependent on continued demand for its products for
use in equipment and systems employed by branches of the United States Armed
Forces in defense equipment programs. See "Description of Business--Sales--
Transformer Group." In recent times, the United States Government has reduced
its expenditures for defense equipment programs and is likely to continue to do
so in the future. Such cutbacks have reduced, and may be expected to continue to
reduce, the overall market for PIC's products. The Company believes, however,
that these cutbacks have also caused a reduction in the number of PIC's
competitors, enabling PIC to increase its market share. There is no assurance
that PIC will be able to maintain or further increase its market share.
Computer Group
The competition for computer sales at both the retail and commercial level is
extremely strong and is primarily price driven. Competition comes by direct
sales from large, well-financed manufacturers, strong mass marketers, and from
small independents.
Forestry Group
Competition in the Forestry Segment is highly fragmented in the Eastern Texas
and Western Louisiana area where TTI principally operates. In business for many
years, TTI believes it has established a strong local identity in its field with
a proven record of delivering equipment on a timely basis, providing
satisfactory financing and strong customer support and service. TTI is one of
only a few distributors of Timberjack and Blount forestry equipment in its
operating area. TTI has the added advantage of being a leading seller and
financier of various makes and models of used logging equipment. Principal
competitors include local John Deere and Caterpillar distributors.
Food Group
Overhill's food products, consisting primarily of poultry and to a lesser
extent pasta, beef and assorted related products, compete with those produced by
numerous regional and national firms. Many of these companies are divisions of
larger fully integrated companies including Tyson Foods, Hudson Foods and
ConAgra which have greater financial and marketing resources. Competition is
intense with most firms producing similar products for the fast food and retail
industries. Competitive factors include price, product quality, product
development, customer service and, on a retail basis, brand name recognition.
Employees
As of September 30, 1995, the Company had approximately 932 employees as
follows: 48 full-time employees at PIC in Pennsylvania, 77 full-time employees
in its Computer Group, 47 full-time employees in the Forestry Group,
approximately 750 employees in its Food Group and 10 full-time employees in the
corporate office. All subsidiaries presently provide group health plans for
their domestic employees and pay a portion of the costs associated with plans.
TTI also maintains profit sharing plans for their employees.
9
ITEM 2. Description of Property.
------------------------
Corporate Headquarters
The Company's corporate headquarters are located at 16885 Dallas Parkway,
Dallas, Texas 75248 and contain approximately 40,000 square feet of office
space. This building, formerly owned by DPPI, now a wholly owned subsidiary of
the Company, is subject to a first priority lien mortgage held by Comerica Bank-
Texas. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Transformer Group
PIC's domestic transformer and filter manufacturing operations are housed in a
44,000 square foot, leased, single-story facility in Fort Washington,
Pennsylvania, about 30 miles from Philadelphia. The lease for this facility is
due to expire in May 1996 and the company is currently in the process of
renewing the lease. PIC's foreign manufacturing operations are based in an
8,400 square foot building in Port-au-Prince, Haiti, which is rented by PIC on a
month-to-month basis. Management believes that these facilities are in suitable
condition and are adequate for PIC's needs in the foreseeable future.
Computer Group
NAI is located in a 6,000 square foot facility in Tulsa, Oklahoma. The lease
for this facility expires in May 1996. CSC leases 6,000 square feet in
Manhattan, New York. PCR is located in an approximate 4,000 square foot leased
facility in Sarasota, Florida that management believes is adequate for its needs
in the foreseeable future. Micro is located in a 3,000 square foot leased
facility in Brooklyn, New York that management believes is in suitable condition
and is adequate for its needs in the foreseeable future. RMI operations are
located at the corporate headquarters.
Forestry Group
TTI owns two buildings in Lufkin, Texas, two buildings in Jasper, Texas and
leases a building in Cleveland, Texas. One building in Lufkin, Texas has 18,000
square feet, of which 11,000 square feet comprise the shop area. The other
building in Lufkin has 1,500 square feet and is used as a wash and paint room.
One building in Jasper, Texas has 10,000 square feet, of which 6,600 square feet
comprise the shop area. The other building in Jasper has 900 square feet and is
used as a wash and paint room. The Cleveland building has approximately 1800
square feet and is used for shop and parts. During fiscal 1995 Texas Timberjack
determined relocation of its existing Lufkin facilities was necessary to
facilitate the expanded growth of its operations. Consequently, the Company is
in the process of selling the Lufkin, Texas facilities of TTI and completing the
purchase of a larger facility outside of Lufkin, Texas.
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 54,000 square feet of manufacturing area,
respectively. In addition to the manufacturing facilities, Overhill also leases
two dry goods warehouses of 13,500 and 11,500 square feet, a 7,700 square foot
frozen storage facility in Inglewood, California and 7,927 square feet of office
space in Culver City, California. Overhill believes the existing facilities are
adequate to meet its requirements in the foreseeable future.
10
ITEM 3. Legal Proceedings.
------------------
On February 28, 1995, a class action suit was filed in New York federal
district court against the Company, Paul A. Tanner, James Rudis and William E.
Shatley, seeking at least $15 million in damages plus an unspecified amount for
plaintiffs' costs. The claims were brought pursuant to Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), and Rule 10b-5 promulgated
thereunder, and against Mr. Tanner, Mr. Rudis and Mr. Shatley pursuant to
Section 20 of the Exchange Act. The suit claims, among other things, that the
Company and Mr. Tanner, Mr. Rudis and Mr. Shatley were responsible for
artificially inflating the market price of the Common Stock during the period of
October 26, 1993 through January 15, 1995. The New York court has transferred
venue for the suit to the United States District Court for the Northern District
of Texas. The Company intends to vigorously defend these allegations on both
the factual and legal grounds and does not expect the outcome of this matter to
have a material impact on the Company's financial position or results of
operations.
The Company is not a party to any other material pending litigation.
11
ITEM 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
12
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
----------------------------------------------------------------------
The Common Stock is listed on the American Stock Exchange under the symbol
"PLY." The following table sets forth the range of high and low sales prices
for the Common Stock on the American Stock Exchange for the periods indicated:
Fiscal 1996 High Low
----------- ---- ---
Quarter from October 1, 1995
December 31, 1995 $4.6875 $3.25
Fiscal 1995 High Low
----------- ---- ---
Quarter from October 1, 1994
to December 31, 1994 $5.750 $3.125
Quarter from January 1, 1995
to March 31, 1995 $3.750 $2.125
Quarter from April 1, 1995
to June 30, 1995 $3.625 $2.6875
Quarter from July 1, 1995
to September 30, 1995 $3.875 $3.065
Fiscal 1994 High Low
----------- ---- ---
Quarter from October 1, 1993 $6.375 $3.3125
to December 31, 1993
Quarter from January 1, 1994
to March 31, 1994 $7.375 $4.375
Quarter from April 1, 1994
to June 30, 1994 $6.250 $3.625
Quarter from July 1, 1994
to September 30, 1994 $6.375 $4.000
The Company has never paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such
policy is, within the limitations and restrictions described below, subject to
change based on current industry and market conditions, as well as other factors
beyond the control of the Company.
The Company is restricted from paying dividends on its Common Stock pursuant
to the indenture (the "1999 Indenture") executed in connection with the issuance
of $4,000,000 in principal amount of 12% Senior Convertible Debentures due July
1, 1999 (the "1999 Bonds"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
In general, the 1999 Indenture prohibits the Company from paying or making
within any 12-month period dividends or distributions on its Common Stock having
a value in excess of 50% of the consolidated net income of the Company, unless
each holder of the 1999 Bonds receives an amount equal to its pro rata portion
of the dividend or distribution (on an as-converted into Common Stock basis).
Subsequent to year end, the Company issued additional debentures to the holders
of the 1999 bonds and in connection therewith, entered into an additional
agreements which contain dividend restrictions similar to those previously
described.
13
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
On December 29, 1995, the closing sales price for the Company's Common Stock
on the American Stock Exchange was $4.00 per share. However, there is no
assurance that a market in the Company's securities will continue.
As of December 29, 1995, the Company estimates that there were approximately
2,200 beneficial owners of the Company's Common Stock, represented by
approximately 168 holders of record.
ITEM 6. Selected Financial Data
-----------------------
The table set forth below is selected financial data for the Company for each
of the last five fiscal years. This information should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operation, 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: 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
Revenues $ 102,035 $ 24,970 $ 7,326 $ 5,563 $ 7,614
Operating Income 6,752 355 390 (833) 967
Earnings (Loss) Before
Extraordinary Item and
Cumulative Effect of Change
in Accounting Principle 3,286 (1,384) 852 (883) 483
Net Income (Loss) 3,286 (1,017) 1,036 (883) 1,641
Income (Loss) per Common Share:
Before Cumulative Effect of
Extraordinary Item and Change
in Accounting Principle $.26 $(.28) $.24 $(.35) $.31
Extraordinary Items .01 .05 .75
Cumulative Effect of
Accounting Change .06
---- ----- ---- ----- -----
Net Income (Loss) $.26 $(.21) $.29 $(.35) $1.06
==== ===== ==== ===== =====
Weighted Average Common
and Common Equivalent
Shares Outstanding 12,745,701 4,881,454 3,616,795 2,505,785 1,549,526
Fiscal Year Ended September 30
- ----------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
Total Assets $ 88,159 $ 37,975 $ 9,034 $ 3,904 $ 5,379
Long-term Debt 27,230 5,259 169 620 688
Total Liabilities 66,335 23,618 1,740 1,926 3,465
Accumulated Deficit (1,095) (4,381) (3,365) (4,400) (3,517)
Stockholders' Equity 21,137 14,357 7,293 1,977 1,914
14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operation.
-------------
Results of Operations
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended September 30,
1994
During fiscal 1995, the Company made its largest acquisition to date
purchasing substantially all of the assets of IBM Foods, Inc. of Los Angeles,
California through its Overhill subsidiary. Overhill is a leading provider of
portion entrees to the airline and weight loss industry and a processor of food
for the retail and wholesale industries. Consequently, the Company is on its
way to achieving internal growth goals it established when the management
changed during fiscal 1993. The Company over the past three years has changed
its makeup from a small supplier of transformers and filters to the defense
industry to a well rounded holding company with interests in frozen food
preparation, forestry equipment distribution and computer sales and service.
The Company has attempted to maximize shareholder value over the past four
fiscal years through strategic acquisitions of well-managed companies in select
industries. The acquisitions have enabled overall revenues to increase from
$5,563,000 in fiscal 1992 to $102,035,000 in fiscal 1995, an increase of 1734%
over the four year period, net income to increase from a loss of $883,000 in
fiscal 1992 to income of $ 3,286,000, in fiscal 1995, an increase of 472% over
the four year period, and stockholders' equity to increase from $1,977,000 in
fiscal 1992 to $21,137,000 to fiscal 1995, (an increase of 969% over the four
year period.)
Net sales for the Company increased $77,065,000 (308%) from $24,970,000 in
1994 to $102,035,00 in fiscal 1995. The increase in sales was primarily
attributable to the Overhill acquisition during the 1995 fiscal year. Operating
income increased $6,396,000 (1800%) from $355,000 in fiscal 1994 to $6,752,000
in fiscal 1995. Increased operating income was primarily the result of
economies of scale achieved through higher revenues and additional companies.
Sales in the Computer Group increased $4,960,000 (48%) from $10,300,000 in
fiscal 1994 to $15,260,000 in fiscal 1995, while operating income increased
$82,000 (18%) from $466,000 in fiscal 1994 to $549,000 in fiscal 1995. The
increase in revenue was largely attributable to a full year contribution by
Micro, PCR and RMI. The Computer Group also benefited from increased demand by
customers for hardware with increased processing power, networking upgrades, CD-
ROM kits, and Internet expertise. The significant interest initially shown by
the public over the Internet has compelled the Company to investigate potential
sales opportunities related to the Internet, which in the future may include the
sale and installation of hardware, and the development of, and programming
for, Internet sites.
Sales in the Transformer Group have remained relatively flat due to the
decreased spending in military contracts. In fiscal 1995 sales increased
$86,000 (2%) from $3,517,000 in 1994 to $3,603,000 in fiscal 1995. Operating
income improved $86,000 (38%) as management continued to reduce staff and other
selling general and administrative expenses. The Company expects that, during
the foreseeable future, revenues in the Transformer Group will remain at
approximately the same level as fiscal 1995 with a slight decrease in operating
profits.
The Forestry Group's sales increased $31,624,000 (283%) from $11,154,000 in
fiscal 1994 to $40,395,000 in fiscal 1995, while operating income increased
$3,815,000 (435%) from $ 876,000 in fiscal 1994 to $4,691,000 in fiscal 1995.
Most of the increase in sales was attributable to a full year's contribution of
TTI's results of operations in fiscal 1995 versus only three months in fiscal
1994. The remaining increase was due to a robust timber and logging market in
the East Texas region as wood prices remained firm through fiscal 1995. The
Forestry Group has attempted to increase its market share by aggressive sales
and marketing throughout the region and attractive financing packages.
The Food Group contributed sales of $40,395,000 and operating income of
$2,708,000 for the approximately five-month period during fiscal 1995 in which
the Company owned the Overhill operations.
15
Fiscal Year Ended September 30, 1994 Compared to Fiscal Year Ended September 30,
1993.
During 1994, the Company continued to implement its expansion strategy
through five acquisitions. The Company acquired three operations in the computer
sales and service field during the fiscal year, as well as a company involved in
the manufacture of specialty parts for the automotive aftermarket. The
automotive aftermarket company acquired by the Company in fiscal 1994 was
subsequently sold during fiscal 1995 for no significant gain or loss.
Additionally, during fiscal 1994 the Company completed the acquisition of TTI, a
company involved in the sales, servicing and financing of logging equipment.
Net sales for the Company increased $17,644,055 (241%) from $7,326,349 in
fiscal 1993 to $24,970,404 in fiscal 1994. The total net sales for fiscal were
comprised as follows: $10,299,578 from the Computer Group, $11,154,096 from the
Forestry Group and $3,516,730 from Transformer Group. Operating income for the
Company decreased $34,184 (8%) from $389,566 in fiscal 1993 to $355,382 in
fiscal 1994.
Sales for the Computer Group rose 135% from $4,375,194 in 1993 to
$10,299,578 in 1994. Operating profit from this group remained virtually
unchanged from $466,876 in 1993 to $466,322, principally because margins at NAI
were lower in fiscal 1994 than fiscal 1993, partially due to the start-up of its
Arkansas operation. The increase in reported sales of this group was
attributable to the inclusion of operations acquired in fiscal 1993 for the full
fiscal year of 1994 and the addition of those operations acquired in 1994.
Sales in the Transformer Group increased 19% from $2,951,155 in 1993 to
$3,516,730 in fiscal 1994. This increase was attributable primarily to the
increased sales of replacement components under existing military contracts.
The number of new military contracts won during fiscal 1994 remained flat
despite the downturn in total defense spending by the United States government.
Operating profits decreased 60% from $547,630 in fiscal 1993 to $216,401 in
fiscal 1994, primarily due to lower gross margins on components sold to the
contractors in the defense program, which resulted from increased competitive
pressure within that sales area, and unchanged fixed manufacturing overhead
costs.
The Forestry Group contributed sales of $11,154,096 and operating income of
$876,257 for the approximate three-month period during fiscal 1994 in which the
Company owned TTI. Prior management's unaudited financial statements for the
comparative three-month period of the prior fiscal year reflect sales of
$7,555,301 and operating income of $591,746. The stronger sales and net income
were primarily attributable to increased demand for logging equipment in East
Texas and western Louisiana, expansion of the sales territory and efforts to
capture a greater share of the existing market.
Overall, the Company showed a substantial gain in gross profit which
increased from $1,836,308 in 1993 to $5,000,169 in 1994, an increase of 172%.
Operating income remained relatively consistent, decreasing from $389,566 in
1993 to $355,382 in 1994, primarily due to increased administrative expenses and
management overhead expense in connection with acquisitions and as the Company
built the infrastructure necessary to support its acquisition program. Earnings
for fiscal 1993 included other income totalling $678,006. Of this amount,
$527,500 represented the gain on sale of the purchase of certain installment
notes from TTI, and the resale, without recourse, of such installment notes in
a transaction with an unrelated party. The Company, in May 1994, also recorded
a non-recurring charge of $1,400,000 related to a grant of stock options, an
extraordinary gain of $62,000 on debt extinguishment and income of $305,000 from
the cumulative effect of a change in accounting for income taxes. As a result
of the non-recurring charge, the Company recorded a net loss for the year
totalling $1,016,755.
Liquidity and Capital Resources
The Company's primary sources of cash are from operations and external
credit facilities. During 1995 the Company entered into a financing arrangement
which provided a senior credit facility of $18,000,000 and a subordinated debt
placement of $13,000,000. These funds were used to provide financing for the
acquisition of the net assets of IBM Foods, Inc.
16
The senior credit facility was provided by Finova Capital Corporation and
included a line of credit, of which approximately $9,700,000 was initially
drawn, and two term loans. Borrowings under the line of credit are limited to
the lesser of $12,000,000 or an amount determined by a defined borrowing base
which is based upon eligible receivables and inventory. At September 30, 1995
approximately $10,482,000 was outstanding under the revolving line of credit.
Term Loan A in the original amount of $2,000,000 is payable in monthly
installments of $33,333 plus interest at prime plus 2.5%. Term Loan B in the
original amount of $4,000,000 is payable in monthly installments of $83,333 plus
interest at prime plus 2.5%. The senior credit facility contains various
covenants which include, without limitation, a restriction on the permissible
capital expenditures of Overhill, specified current debt to net worth ratios,
specified levels of net worth and limit the ability of the Company to realize
monies, including dividends, and management and consulting fees, from Overhill
to $250,000 per annum. Furthermore, the capital stock and substantially all
assets of Overhill are pledged as collateral for the credit facility.
The subordinated debt placement in the amount of $13,000,000 bears interest
at 13% per annum, payable semiannually. Principal payments in the amount of
$6,500,000 each are due in April 2002 and 2003. The subordinated debt includes
warrants to purchase shares of Overhill (representing up to 22.5% of its
common stock) at any time over a ten year period which ends May 5, 2005 for a
nominal exercise price of $100. The warrant holders also have the option to
"put" the warrants to the Company at a "put" price based upon the higher of
fair market, book or appraised value of the subsidiary. The "put option"
becomes exercisable anytime after May 5, 2000 or at any time Overhill
experiences a change in control or merges with another unaffiliated company.
Additionally the Company has the option of calling the outstanding warrants for
cash at anytime after May, 5, 2001. The call price is determined using the
same formula as provided for determining the "put" price of the warrants. The
subordinated debt facility contains covenants similar to those described in the
senior credit facility.
In May 1994, the Company obtained a $1,000,000 term loan from Comerica Bank
- -- Texas, N.A. ("Comerica"), payable in equal monthly installments through
maturity in May 1999, at which time the unpaid balance of approximately $600,000
becomes due and payable. The term loan with Comerica bears interest at an
annual rate of 8.5% and is collateralized by the building in which the Company
maintains its headquarters. See "Properties--Corporate Headquarters." At
September 30, 1995, the term loan with Comerica had $930,825 outstanding.
In connection with the acquisition of TTI, the Company sold $4,000,000 in
principal amount of the 1999 Bonds to Merrill Lynch World Income Fund, Inc. and
Convertible Holdings, Inc. (collectively, the "Purchasers" or "Merrill Lynch").
The 1999 Bonds are convertible by a Bond holder at any time prior to June 30,
1999 into such number of shares of Common Stock as is equal to the principal
amount of such Bond (or in $1,000 increments thereof) divided by $5.65 (such
conversion price being subject to adjustment in certain instances). See "Market
for Common Equity and Related Stockholder Matters." The 1999 Indenture requires
the Company to maintain key-man life insurance policies on Paul A. Tanner and
James Rudis. The policies on each of Mr. Tanner and Mr. Rudis must name as loss
payee the trustee under the Indenture for the benefit of the 1999 Bond holders
and must be in an amount at least equal to the principal amount of the 1999
Bonds outstanding from time to time multiplied by the redemption price in effect
at such time. Subsequent to year end, the Company entered into additional
agreements with Merril Lynch, whereby the Company sold an additional $1,500,000
of debentures on generally the same terms and conditions as previously
described. The new debentures bear interest at 12%, are payable semiannually in
June and December, are convertible into Common Stock at the rate of $5.00 per
share and become due and payable on December 1, 1997.
In connection with the TTI acquisition, the Company also issued a non-
interest bearing note to Harold Estes for $10,000,000 due October 31, 1994, on
which the Company imputed interest at 8.0% per annum. As of the maturity date,
the Company and Estes entered into an agreement providing for the modification,
extension and renewal of the note, whereby the note with interest at 12% was to
mature on October 31, 1995. As of October 31, 1995 Estes further extended and
modified the note whereby the note currently having a principal balance of
$11,200,000, bears interest at 17.5% and matures on February 29, 1996. The
Company anticipates that it will be required to refinance this note payable on a
long-term basis and is presently in negotiations with potential lenders to
accomplish their goal. There is no certainty that
17
Company will be able to refinance this note on acceptable terms or at all, by
February 29, 1996. The note holder has no recourse to any of the assets or
capital stock of Polyphase or any of its subsidiaries and no cross-default
provisions exist between this note and any other Polyphase debt.
On August 23, 1994, the Company obtained a $6,000,000 line of credit from
Comerica at prime plus 1/2% to replace an existing line of credit for TTI. The
agreement with Comerica relating to this line of credit contains various
restrictive covenants, including requiring TTI to maintain a tangible net worth
of at least $10,000,000 and a ratio of total liabilities to tangible net worth
of no more than 1.1 to 1. TTI's initial borrowings under the new credit line
occurred during September 1994, and were used to retire the outstanding
indebtedness under the prior line of credit. On September 1, 1995 the Company
amended the agreement, increasing the line of credit to $11,000,000 and amending
the covenants to restrict annual dividends the Company may collect from TTI to
$580,000. The balance at September 30, 1995 on the Comerica line of credit was
$6,199,999.
During the year ended September 30, 1995 the Company's operating activities
used approximately $3,407,000 of cash. The cash was primarily used to finance
increased inventories and sales contracts receivable at TTI which experienced a
large increase in sales for fiscal 1995.
The Company's investing activities during fiscal 1995 used approximately
$32,067,000 of cash, primarily for the Overhill acquisition and capital
expenditures.
The Company's financing activities during fiscal 1995 provided cash of
approximately $37,712,000 which were primarily derived from the senior credit
facility and the subordinated debt contracted for in connection with the
Overhill acquisition, additional borrowings on the Comerica line of credit, and
the exercise of stock options (which subsequently resulted in the collection of
$3,250,000 from the Pyrenees Group on the notes given to the Company as
consideration for option exercises). As noted above, the proceeds from these
financing sources were used primarily in the acquisition of Overhill.
The Company's working capital at September 30, 1995 amounted to
approximately $13,977,000, compared to $1,941,000 in the prior year. This
increase in working capital was primarily the result of the acquisition of
Overhill's inventory and accounts receivable and the increased inventories at
TTI.
Subsequent to fiscal year end, the Company sold to an unrelated corporation
250,000 shares of newly designated Series A-3 Preferred Stock for $2,500,000
cash. The Series A-3 Preferred Stock is entitled to a 12% cumulative dividend
payable quarterly and each share of Series A-3 Preferred Stock is convertible by
the holder thereof from time to time into two shares of common, subject to
certain adjustments.
The Company plans to continue its program of expansion and diversification
through the acquisition of additional operating companies. Funding for these
acquisitions is anticipated to come from a combination of internally generated
funds, proceeds from the exercise of options, the issuance of additional shares
of the Company's preferred stock and from additional borrowings. The Company's
management believes that cash generated from operations, together with existing
lines of credit and contemplated debt and/or equity placements, will be
sufficient to meet the Company's liquidity requirements for the next 12 months.
ITEM 8. Financial Statements.
---------------------
See Index to Consolidated Financial Statements included in Item 14.
18
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
- ---------------------
The Company's independent accountants for fiscal 1994 were Price Waterhouse
LLP ("Price Waterhouse"). Price Waterhouse resigned as the principal
accountants for the Company on May 8, 1995. None of the reports of Price
Waterhouse on the financial statements of the Company for either of fiscal 1993
or 1994 contained an adverse opinion or a disclaimer of opinion, or were
qualified as to uncertainty, audit scope, or accounting principles. During the
Company's two most recent fiscal years and the subsequent interim period
preceding such resignation, there were no disagreements with Price Waterhouse on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures.
On May 31, 1995, Ernst & Young LLP ("Ernst & Young") was engaged as
principal accountants for the Company to, among other things, audit the
financial statements of the Company for fiscal 1995. The selection of Ernst &
Young was made by the Board of Directors upon recommendation of the Audit Review
Committee. Prior to its engagement, the Company did not consult with Ernst &
Young on either the application of accounting principles to a completed or
proposed specific transaction, or the type of audit opinion that might be
rendered on the Company's financial statements.
19
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. Executive Compensation.
------------------------
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
(a) 1. and 2. Financial Statements and Financial Statement Schedules.
1. The following consolidated financial statements of Polyphase
Corporation and subsidiaries, included in the annual report of
the registrant to its shareholders for the year ended September 30,
1995, are included in Item 8:
Report of Independent Auditors - Ernst & Young LLP F-2
Report of Independent Accountants - Price Waterhouse LLP F-3
Consolidated Balance Sheets-September 30, 1995 and 1994 F-4
Consolidated Statements of Operations-Years ended September 30,
1995, 1994 and 1993 F-6
Consolidated Statements of Stockholders' Equity-Years ended
September 30, 1995, 1994 and 1993 F-8
Consolidated Statements of Cash Flows-Years ended September 30,
1995, 1994, and 1993 F-11
Notes to Consolidated Financial Statements-September 30, 1995 F-14
2. The following consolidated financial statement schedules of
Polyphase Corporation and subsidiaries are included in item 14(d):
Schedule I Condensed Financial Information of Registrant F-43
Schedule II Valuation and Qualifying Accounts F-47
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
3. Exhibits
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3
through 4.8 to the Company's registration statement on Form S-8
(No.33-82008), filed with the Commission on July 27, 1994 (the
"1994 Form S-8"))
3.2 Bylaws of Polyphase Corporation (incorporated by reference from
Exhibit 4.2 to the 1994 Form S-8)
4.1* Certificate of Designation relating to the Series A-2 Preferred
Stock (Exhibit 4.9)
4.2** Certificate of Designation relating to the Series A-3 Preferred
Stock
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 Michael F. Buck (incorporated by
reference from Exhibit 4.13 to the 1994 Form S-8)
21
10.3+ Stock Option Agreement for Don E. McMillen (incorporated by
reference from Exhibit 4.14 to the 1994 Form S-8)
10.4+ Stock Option Agreement for George R. Schrader (incorporated
by reference from Exhibit 4.15 to the 1994 Form S-8)
10.5+ Stock Option Agreement for James Rudis (incorporated by
reference from Exhibit 10.5 to the Company's Form 8-B, filed
with the Commission on August 27, 1994 (the "Form 8-B"))
10.6+ Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
10.7+ Employment Agreement, dated as of November 1, 1993, between
Harold Estes and Texas Timberjack, Inc. (incorporated by
reference from Exhibit 2 to the 1994 Form 8-K)
10.8 Pledge Agreement, dated as of June 24, 1994, between Polyphase
Corporation and Harold Estes (incorporated by reference from
Exhibit 10.10 to the Form 8-B)
10.9 Security Agreement, dated as of June 24, 1994, between Texas
Timberjack, Inc. and Harold Estes (incorporated by reference
from Exhibit 10.11 to the Form 8-B)
10.10 Stock Option Agreement, dated as of October 21, 1992, between
Polyphase Corporation and the Pyrenees Group (incorporated
by reference from Exhibit 10.12 to the Form 8-B)
10.11 Deed of Trust Note in the amount of $1,000,000, dated May 25,
1994, by Polyphase Corporation in favor of Comerica Bank-Texas
(incorporated by reference from Exhibit 10.4 to the Company's
Form 10-Q for the quarter ended June 30, 1994 (the "1994 Form
10-Q"))
10.12 Deed of Trust (With Security Agreement and Assignment of Rents),
dated May 25, 1994, covering real property in Dallas County,
Texas between Polyphase Corporation and Comerica Bank-Texas
(incorporated by reference from Exhibit 10.3 to the 1994
Form 10-Q)
10.13 Letter Agreement, dated May 25, 1994, between Polyphase
Corporation and Comerica Bank-Texas (incorporated by reference
from Exhibit 10.4 to the 1994 Form 10-Q)
10.14 Securities Purchase Agreement, dated as of July 5, 1994, by and
among Polyphase Corporation, Merrill Lynch World Income Fund,
Inc., and Convertible Holdings, Inc. (incorporated by reference
from Exhibit 10.16 to the Form 8-B)
10.15 Registration Rights Agreement, dated as of July 5, 1994, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc.,
and Convertible Holdings, Inc. (incorporated by reference from
Exhibit 10.17 to the Form 8-B)
10.16 Indenture, dated as of July 5, 1994, from Polyphase Corporation
to IBJ Schroder Bank & Trust Company (incorporated by reference
from Exhibit 10.18 to the Form 8-B)
10.17 Form of 12% Senior Convertible Debenture No. 1, payable to
Bridge Rope & Co. or registered assigns (incorporated by
reference from Exhibit 10.19 to the Form 8-B)
10.18 Form of 12% Senior Convertible Debenture No. 2, payable to
Vault & Co. or registered assigns (incorporated by reference
from Exhibit 10.20 to the Form 8-B)
10.19* Asset Purchase Agreement among Champ Computer Systems, Inc.,
Liberty United Trust and Polyphase Corporation, dated
March 23, 1994 (Exhibit 10.25)
10.20* Stock Purchase Agreement among PC Repair of Florida, Inc.,
Gene H. Thurston, Jr. and Polyphase Corporation, dated
February 15, 1994 (Exhibit 10.26)
22
10.21* Agreement and Plan of Reorganization between the Shareholders
of Micro Configurations, Inc. and Polyphase Corporation, dated
July 1, 1994 (Exhibit 10.27)
10.22* Credit Agreement, dated August 29, 1994, between Texas
Timberjack, Inc. and Comerica Bank-Texas (Exhibit 10.28)
10.23* Guaranty, dated August 29, 1994, from Polyphase Corporation to
Comerica Bank-Texas (Exhibit 10.29)
10.24* Deed of Trust, dated as of August 30, 1994, from Texas
Timberjack, Inc. to J. Patrick Faubion, Trustee (Exhibit 10.30)
10.25* Security Agreement, dated as of August 29, 1994, between Texas
Timberjack, Inc. and Comerica Bank-Texas (Exhibit 10.31)
10.26* Fluctuating Rate Line of Credit Note from Texas Timberjack,
Inc., as maker, to Comerica Bank-Texas, dated August 29, 1994
(Exhibit 10.32)
10.27**First Amendment to Credit Agreement dated September 1, 1995,
between Texas Timberjack, Inc. and Comerica Bank-Texas
10.28**Fluctuating Rate Line of Credit Note from Texas Timberjack,
Inc., as maker, to Comerica Bank-Texas, dated September 1, 1995
10.29**Promissory Note in the amount of $2,000,000, from Pyrenees
Group, as maker, to Polyphase Corporation, dated November 1,
1995, related to the exercise of options on Series D Preferred
Stock
10.30**Security Agreement, dated as of November 1, 1995, between
Pyrenees Group and Polyphase Corporation
10.31**Promissory Note in the amount of $2,000,872, from Paul A.
Tanner, as maker, to Polyphase Corporation, dated December 8,
1995
10.32**Convertible Preferred Stock Purchase Agreement, dated as of
November 10, 1995, by and between Polyphase Corporation and
Infinity Investors, Ltd.
10.33**Securities Purchase Agreement, dated as of December 1, 1995,
by and among Polyphase Corporation, Merrill Lynch World Income
Fund, Inc., and Convertible Holdings, Inc.
10.34**Registration Rights Agreement, dated as of December 1, 1995,
among Polyphase Corporation, Merrill Lynch World Income Fund,
Inc. and Convertible Holdings, Inc.
10.35**Indenture, dated as of December 1, 1995, from Polyphase
Corporation to IBJ Schroder Bank & Trust Company
10.36**Form of 12% Senior Convertible Debenture No. 1, dated
December 1, 1995 payable to Bridge Rope & Co. or registered
assigns
10.37**Form of 12% Senior Convertible Debenture No. 2, dated
December 1, 1995 payable to Kane & Co. or registered assigns
10.38**Renewal Promissory Note in the amount of $11,200,000, dated
October 31, 1995, payable by Polyphase Corporation to Harold
Estes
23
10.39**Amended Pledge Agreement, dated as of October 31, 1995, between
Polyphase Corporation and Harold Estes
10.40**Amended Security Agreement, dated as of October 31, 1995,
between Texas Timberjack, Inc. and Harold Estes
21.1** Subsidiaries of the Registrant
23.1** Consent of Ernst & Young LLP
23.2** Consent of Price Waterhouse LLP
27.1** Financial Data Schedule
------------------------------------
+ Management contract or compensatory plan or arrangement.
* Incorporated by reference to the exhibit shown in parenthesis
contained in the Company's Registration Statement on Form SB-2
(No. 33-85334) filed with the Commission on October 19, 1994 (the
"Form SB-2").
** Filed herewith.
(b). Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed by the Registrant during the last
quarter of the Fiscal Year Ended September 30, 1995.
24
POLYPHASE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Report of Independent Accountants F-3
Financial Statements:
- --------------------
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-8
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-14
Financial Statement Schedules:
- -----------------------------
Condensed Financial Information of Registrant F-43
Valuation and Qualifying Accounts F-47
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders of
Polyphase Corporation
We have audited the accompanying consolidated balance sheet of Polyphase
Corporation and subsidiaries as of September 30, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedules
listed in the Index at Item 14 (a). These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audit.
We conducted our audit 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 audit provides 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, 1995, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
December 8, 1995
F-2
Report of Independent Accountants
To the Board of Directors and Stockholders of
Polyphase Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Polyphase Corporation and its subsidiaries at September 30, 1994,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Polyphase Corporation and its
subsidiaries for any period subsequent to September 30, 1994.
As discussed in Note 11 to the consolidated financial statements, effective
October 1, 1993, the Company changed its method of accounting for income
taxes.
PRICE WATERHOUSE LLP
Dallas, Texas
January 4, 1995
F-3
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
September 30,
------------------------
1995 1994
----------- -----------
Current assets:
Cash $ 3,275,068 $ 1,036,839
Receivables, net of allowance for
doubtful accounts of $506,805 and $580,251:
Trade accounts 11,602,628 3,023,052
Current portion of sales contracts 6,973,101 3,827,052
Notes receivable 1,215,389 1,234,188
Receivables from related parties 737,992 860,048
Inventories 26,007,672 8,953,780
Prepaid expenses and other 1,836,150 362,462
----------- -----------
Total current assets 51,648,000 19,297,421
----------- -----------
Property and equipment:
Land 505,000 505,000
Buildings and improvements 3,641,470 2,310,261
Machinery, equipment and other 7,932,882 2,406,535
----------- -----------
12,079,352 5,221,796
Less-Accumulated depreciation 2,761,966 1,901,945
----------- -----------
9,317,386 3,319,851
----------- -----------
Other assets:
Noncurrent receivables:
Sales contracts 3,281,459 2,669,151
Notes receivable 368,106 379,344
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $1,037,734 and $349,982 19,374,134 9,383,289
Other intangible assets 2,021,652 1,314,800
Restricted cash 916,275 639,589
Other 1,231,851 971,504
----------- -----------
27,193,477 15,357,677
----------- -----------
$88,158,863 $37,974,949
=========== ===========
F-4
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
Liabilities and Stockholders' Equity
September 30,
--------------------------
1995 1994
------------ ------------
Current liabilities:
Notes payable $11,130,056 $ 2,092,268
Note payable and accrued
interest to related party 11,100,000 9,933,775
Accounts payable 8,007,727 3,311,885
Accrued expenses and other 3,691,302 1,330,524
Advances from related party 1,153,000 -
Current maturities of long-term debt 2,589,077 687,954
----------- -----------
Total current liabilities 37,671,162 17,356,406
Long-term debt, less current maturities 27,229,665 5,258,772
Reserve for credit guarantees 916,275 639,589
Deferred income taxes 437,729 200,000
Other 80,413 163,357
----------- -----------
Total liabilities 66,335,244 23,618,124
----------- -----------
Warrants to purchase common stock
of subsidiary 686,276 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, authorized
50,000,000 shares, issued and outstanding
none in 1995 and 477,000 shares in 1994 - 4,770
Common stock, $.01 par value, authorized
100,000,000 shares, issued and outstanding
12,621,966 shares in 1995 and
5,880,616 shares in 1994 126,220 58,806
Paid-in capital 22,106,606 20,924,331
Accumulated deficit (1,095,483) (4,381,082)
Notes receivable - (2,250,000)
----------- -----------
Total stockholders' equity 21,137,343 14,356,825
----------- -----------
$88,158,863 $37,974,949
=========== ===========
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,
----------------------------------------
1995 1994 1993
------------- ------------ -----------
Net revenues $ 102,035,472 $ 24,970,404 $ 7,326,349
Cost of sales 82,055,637 19,970,235 5,490,041
------------- ------------ -----------
Gross profit 19,979,835 5,000,169 1,836,308
Selling, general and administrative
expenses 13,228,134 4,644,787 1,446,742
------------- ------------ -----------
Operating income 6,751,701 355,382 389,566
Other income (expenses):
Non-recurring charge related to
grant of stock options - (1,400,000) -
Gain on sale of installment notes - - 527,500
Gain on sale of assets - - 200,000
Interest expense (3,791,059) (447,987) (56,378)
Interest income and other 592,055 125,730 6,887
------------- ------------ -----------
Total other income (expenses) (3,199,004) (1,722,257) 678,009
------------- ------------ -----------
Income (loss) before income taxes,
warrant accretion, extraordinary
items and cumulative effect of
accounting change 3,552,697 (1,366,875) 1,067,575
Income taxes 76,227 17,000 215,000
------------- ------------ -----------
3,476,470 (1,383,875) 852,575
Accretion of warrants to purchase
common stock of subsidiary 190,871 - -
------------- ------------ -----------
Income (loss) before extraordinary
items and cumulative effect of
accounting change 3,285,599 (1,383,875) 852,575
Extraordinary items:
Early extinguishment of debt - 62,120 -
Benefit from utilization of
net operating loss carryforwards - - 183,000
Cumulative effect of change in method
of accounting for income taxes - 305,000 -
------------- ------------ -----------
Net income (loss) $ 3,285,599 $ (1,016,755) $ 1,035,575
============= ============ ===========
F-6
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
-----------------------------------
1995 1994 1993
----------- ---------- ----------
Per share data:
Weighted average common and common
equivalent shares 12,745,701 4,881,454 3,508,454
=========== ========== ==========
Income (loss) per common share:
Before extraordinary items and cumulative
effect of accounting change $ .26 $ (.28) $ .25
Extraordinary items - .01 .05
Cumulative effect of accounting change - .06 -
----------- ---------- ----------
Net income (loss) per common share $ .26 $ (.21) $ .30
=========== ========== ==========
Per share data assuming full dilution:
Weighted average common and common
equivalent shares 12,745,701 4,881,454 3,616,795
=========== ========== ==========
Income (loss) per common share
assuming full dilution:
Before extraordinary items and cumulative
effect of accounting change $ .26 $ (.28) $ .24
Extraordinary items - .01 .05
Cumulative effect of accounting change - .06 -
----------- ---------- ----------
Net income (loss) per common share $ .26 $ (.21) $ .29
=========== ========== ==========
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, 1995
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
--------- -------- --------- -------- -----------
Balance,
September 30, 1992 2,921,995 $ 29,220 $ 6,565,933
Issuance of shares for
interest on
convertible sub-
ordinated debentures 10,260 102 9,018
Conversion of sub-
ordinated debentures
into common stock 8,765 88 51,412
Issuance of shares for
settlement of obligations 250,000 2,500 176,945
Reissuance of treasury
stock
Subscription payable
Private placements of
Series A, B, and D
preferred shares 71,100 $ 711 710,289
Issuance of preferred
shares issued in
connection with
acquisitions--
NAI -Series A-5 and B 251,000 2,510 2,507,490
CSC-Series C 30,000 300 299,700
Redemption of Series
A preferred shares (4,400) (44) (43,956)
Net income for 1993
------- ------ --------- ------- ----------
Balance,
September 30, 1993 347,700 3,477 3,191,020 31,910 10,276,831
------- ------ --------- ------- ----------
Retained Notes/Stock
Common Stock Earnings Subscription
Held in Treasury (Accumlated (Receivable)
Shares Amount Deficit) Payable Total
------------ --------- ------------ ----------- -------------
Balance,
September 30, 1992 250,000 $ (187,859) $ (4,399,902) $ (30,000) $ 1,977,392
Issuance of shares for
interest on
convertible sub-
ordinated debentures 9,120
Conversion of sub-
ordinated debentures
into common stock 51,500
Issuance of shares for
settlement of obligations 179,445
Reissuance of treasury
stock (250,000) 187,859 187,859
Subscription payable 375,000 375,000
Private placements of
Series A, B, and D
preferred shares 711,000
Issuance of preferred
shares issued in
connection with
acquisitions--
NAI -Series A-5 and B 2,510,000
CSC-Series C 300,000
Redemption of Series
A preferred shares (44,000)
Net income for 1993 1,035 ,575 1,035,575
-------- -------- ----------- -------- ----------
Balance,
September 30, 1993 - - (3,364,327) 345,000 7,292,891
-------- -------- ----------- -------- ----------
F-8
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1995
Preferred Stock Common Stock
Shares Amount Shares Amount
----------- -------------- ----------- ----------------
Issuance of common
stock subscribed 500,000 5,000
Issuance of shares for
interest on convertible
subordinated debentures 1,596 16
Private placements of
Series B and C preferred
shares 34,000 340 339,660
Exercise of common
stock options 689,000 6,890
Issuance of preferred
shares in connection
with acquisitions-
DPPI-Series D 100,000 1,000
TBI-Series A-5 and B 20,000 200
PCR-Series B 7,500 75
TTI-Series A 100,000 1,000
Micro-Series A-2 60,000 600
Issuance of Series A-5,
A and B preferred
shares for services 11,000 110
Dividends on Series
A-5 preferred shares
Conversions of
preferred shares to
common shares (428,200) (4,282) 1,499,000 14,990
Grant of Pyrenees
options (Note 10)
Options granted in
purchase of
Register- Mate assets
Cancellation of stock
subscription receivable
Retained Notes/Stock
Common Stock Earnings Subscription
Paid-in Held in Treasury (Accumlated (Receivable)
Capital Shares Amount Deficit) Payable Total
------------ ----------- ------------ ------------- ------------ -------------
Issuance of common
stock subscribed 370,000 (375,000)
Issuance of shares for
interest on convertible
subordinated debentures 9,104 9,120
Private placements of
Series B and C preferred
shares 339,660 340,000
Exercise of common
stock options 533,110 540,000
Issuance of preferred
shares in connection
with acquisitions-
DPPI-Series D 999,000 1,000,000
TBI-Series A-5 and B 210,823 211,023
PCR-Series B 159,925 160,000
TTI-Series A 3,499,000 3,500,000
Micro-Series A-2 615,000 615,600
Issuance of Series A-5,
A and B preferred
shares for services 110,640 110,750
Dividends on Series
A-5 preferred shares (62,500) (62,500)
Conversions of
preferred shares to
common shares (10,708)
Grant of Pyrenees
options (Note 10) 1,400,000 1,400,000
Options granted in
purchase of
Register- Mate assets 285,000 285,000
Cancellation of stock
subscription receivable 30,000 30,000
F-9
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1995
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- -----------
Exercise of Series A
and B preferred
stock options by
Pyrenees (Note 10) 225,000 2,250 2,247,750
Stock issuance costs
Net loss for 1994 (58,304)
---------- ----------- ---------- -------- ------------
Balance,
September 30, 1994 477,000 4,770 5,880,616 58,806 20,924,331
---------- ----------- ---------- -------- ------------
Exercise of Series C
preferred stock options
by Pyrenees (Note 10) 100,000 1,000 999,000
Conversions of
preferred shares to
common shares (577,000) (5,770) 6,618,500 66,185 (60,415)
Issuance of Micro
escrow shares 120,000 1,200 366,600
Issuance of shares for
interest on
convertible sub-
ordinated debentures 2,850 29 9,091
Payment on Pyrenees Notes
Stock issuance costs (132,001)
Net income for 1995
Balance, ---------- ----------- ---------- --------- ------------
September 30, 1995 - $ - 12,621,966 $ 126,220 $ 22,106,606
========== =========== ========== ========= ============
Retained Notes/Stock
Common Stock Earnings Subscription
Held in Treasury (Accumlated (Receivable)
Shares Amount Deficit) Payable Total
----------- ---------- ----------- ------------ -----------
Exercise of Series A
and B preferred
stock options by
Pyrenees (Note 10) (2,250,000)
Stock issuance costs (58,304)
Net loss for 1994 (1,016,755) (1,016,755)
----------- ---------- ------------ ---------- -------------
Balance,
September 30, 1994 - - (4,381,082) (2,250,000) 14,356,825
----------- ---------- ------------ ---------- -------------
Exercise of Series C
preferred stock options
by Pyrenees (Note 10) (1,000,000)
Conversions of
preferred shares to
common shares
Issuance of Micro
escrow shares 367,800
Issuance of shares for
interest on
convertible sub-
ordinated debentures 9,120
Payment on Pyrenees Notes 3,250,000 3,250,000
Stock issuance costs (132,001)
Net income for 1995 3,285,599 3,285,599
----------- ---------- ------------ ---------- ------------
Balance,
September 30, 1995 - - $ (1,095,483) $ - $ 21,137,343
=========== ========== ============ ========== ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-10
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
--------------------------------------
1995 1994 1993
----------- ----------- ----------
Cash flow provided by
operating activities:
Net income (loss) $ 3,285,599 $(1,016,755) $1,035,575
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,935,559 497,514 213,478
Provision for doubtful accounts (73,446) (110,822) (40,197)
Deferred income tax (449,651) - -
Gain on sale of assets - - (200,000)
Gain on sale of installment notes - - (527,500)
Extraordinary item-early
extinguishment of debt - (62,120) -
Non-recurring charge related to
grant of stock options - 1,400,000 -
Cumulative effect of change in method
of accounting for income taxes - (305,000) -
Issuance of common stock for accrued
interest payable on convertible
subordinated debentures 9,120 9,120 9,120
Imputed interest on TTI
acquisition note 66,225 196,056 -
Consulting contract and cancellation of
stock subscriptions of former
officer and director - 105,000 -
Accretion of warrants to
purchase common stock of subsidiary 190,871 - -
Issuance of preferred stock
for services - 35,750 -
Recognition of deferred
rent reductions (82,944) (94,944) -
(Increase) decrease in, net
of effects of acquisitions
Accounts and sales
contracts receivable (4,857,876) (2,876,615) 117,755
Inventories (5,677,039) 1,640,037 (851,492)
Prepaid expenses and other (1,099,427) 139,746 126,998
Increase (decrease) in, net
of effects of acquisitions:
Accounts payable 1,959,902 1,251,207 (332,564)
Accrued expenses and other 2,486,034 (194,388) 125,524
----------- ----------- ----------
Net cash provided by (used in)
operating activities (2,307,073) 613,786 (323,303)
----------- ----------- ----------
F-11
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30,
---------------------------------------
1995 1994 1993
------------ ----------- -----------
Cash flows provided by (used in)
investing activities:
Acquisition of Texas Timberjack, Inc. $ - $(4,146,360) $ -
Acquisition of net assets of
Overhill Farms (31,292,910) - -
Net cash received from purchase and
sale of installment notes - - 527,500
Capital expenditures (975,883) (347,521) (34,544)
Notes and other receivables 202,247 (318,649) -
Cash of acquired businesses - 36,407 97,534
------------ ----------- ----------
Net cash provided by (used in)
investing activities (32,066,546) (4,776,123) 590,490
------------ ----------- ----------
Cash flows provided by financing
activities:
Net borrowings (repayments) under
line of credit agreements 9,177,364 5,162,000 (48,900)
Principal payments on other notes
payable and long-term debt (763,191) (1,741,948) (80,167)
Borrowings on notes payable
and long term debt 24,470,360 - -
Proceeds from private placements of
preferred stock - 340,000 711,000
Advances from related parties 1,153,000 - -
Redemption of Series A Preferred Stock - - (44,000)
Sale of treasury stock - - 125,000
Exercise of stock options - 540,000 -
Cash received from common stock
subscribed - - 250,000
Principal collections on Pyrenees
notes receivable 3,250,000 - -
Issuance of warrants to purchase
common stock of subsidiary 495,405 - -
Dividends paid on Series A-5
preferred stock - (62,500) -
Common stock issuance costs (132,001) (58,304) -
Loan acquisition costs and other (1,039,089) (214,907) 3,872
---------- ---------- ----------
Net cash provided by financing
activities 36,611,848 3,964,341 916,805
---------- ---------- ----------
Net increase (decrease) in cash 2,238,229 (197,996) 1,183,992
Cash at beginning of year 1,036,839 1,234,835 50,843
---------- ---------- ----------
Cash at end of year $3,275,068 $1,036,839 $1,234,835
========== ========== ==========
F-12
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended
September 30,
----------------------------------
1995 1994 1993
---------- ---------- ----------
Supplemental schedules of noncash investing
and financing activities:
Issuances of preferred stock
in connection with acquisitions:
Dallas Parkway Properties Incorporated $ - $1,000,000 $ -
PC Repair of Florida, Inc. - 160,000 -
Taylor-Built Industries, Inc. - 211,023 -
Texas Timberjack, Inc. - 3,500,000 -
Micro Configurations, Inc. 367,800 615,600 -
Computer System Concepts - - 300,000
Network America, Inc. - - 2,510,000
Granting of stock options in connection with
purchase of Register-Mate - 285,000 -
Additional common stock issued for
conversion of subordinated debentures - - 51,500
Supplemental schedule of cash flow
information:
Cash paid during the year for:
Interest $2,249,778 $ 126,558 $ 42,396
Income taxes $ 377,442 $ 40,706 -
See note 3 for disclosures of additional noncash financing and investing
activities.
The accompanying notes are an integral part
of these consolidated financial statements.
F-13
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. COMPANY AND ORGANIZATIONAL MATTERS
Nature of Business
The Company is a diversified holding company that, through its subsidiaries,
currently operates primarily in four industry segments: the forestry segment,
which distributes, leases and provides financing for industrial and commercial
timber and logging equipment (the "Forestry Group"); the computer segment, which
markets, services and provides the networking of computers and related equipment
and electronic parts (the "Computer Group"); the transformer segment, which
manufactures and markets electronic transformers, inductors and filters (the
"Transformer Group"); and the food processing segment, which produces high
quality entrees, plated meals, soups, sauces and poultry, meat and fish
specialties (the "Food Group").
Corporate History and Organization
The Company was incorporated in New Jersey in 1963 under the name Kappa
Networks, Inc. Through a merger with a wholly-owned subsidiary in June 1991, the
Company reincorporated in Pennsylvania and formally changed its name to
Polyphase Corporation. A subsequent merger with a wholly-owned subsidiary in
June 1994 effected a change in the state of incorporation from Pennsylvania to
Nevada, together with certain changes to the Company's charter and bylaws. These
changes resulted in the authorization of 100,000,000 shares of $.01 par value
common stock and 50,000,000 shares of $.01 par value preferred stock with rights
and preferences as designated by the Board of Directors. The financial
statements for 1993 have been retroactively restated to reflect the change in
the par value of the common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions are eliminated. Certain prior year amounts have been reclassified
to conform to the 1995 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
F-14
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral from its customers except as discussed below.
The Company's subsidiary, TTI, is a retailer of timber and logging equipment.
TTI grants credit to customers, substantially all of whom are located in East
Texas or the western portion of Louisiana, and rely on the logging industry for
their ability to repay debt to TTI. Collateral is generally the equipment sold
for amounts due under installment sales contracts.
Financial Instruments
The fair value of financial instruments is determined by reference to market
data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their recorded
values.
Inventories
Inventories of raw materials, work-in-process and finished goods for
manufacturing operations, computer sales and service operations and food
processing are stated at the lower of cost or market as determined by the first-
in, first-out (FIFO) method. Inventories of major units purchased in the
forestry segment are valued at the lower of cost or market or, in the case of
repossessed and used units, net realizable value, based upon the specific
identification method.
Repossession and Warranty Work
The Company's forestry unit records repossessed equipment at the lower of the
balance of the receivable, net of any deferred profit or net realizable value.
In most cases repossessions are recorded at the balance of the note, net of
deferred profit. Repossessed equipment is generally resold at book value,
including refurbishment costs.
Warranty work performed by the Company to be reimbursed by the manufacturer is
recorded as a receivable and sale. The company periodically performs services
on equipment sold not warranted by the manufacturer, with the cost of such
service charged to expense as incurred.
The Company's Computer Segment sells configured personal computers and related
products. Virtually all products carry original manufacturers' warranties,
which are passed on to the customer.
The Transformer Segment warrants all items shipped for a period of 12 months.
Because the Transformer Group's products are made to order, returns are a small
percentage of sales and are typically due to cosmetic marking problems.
Returns, when they do occur, are recorded as a reduction to revenues, repaired
by manufacturing and rebilled upon shipment within 30 days.
F-15
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed primarily
using the straight-line method for financial reporting purposes over the
estimated useful lives of the assets. Useful lives generally range from five to
thirty years. Leasehold improvements are amortized over the lesser of the term
of the lease or the estimated useful life of the assets.
Repairs and maintenance costs are expensed, while additions and betterments are
capitalized. The cost and related accumulated depreciation of assets sold or
retired are eliminated from the accounts and any gains or losses are reflected
in earnings.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over the fair value of net assets acquired (goodwill) at the
date of acquisition is amortized on a straight line basis over periods generally
ranging from 15-25 years. The Company determines the period to be benefited by
using qualitative measuring factors such as competition, demand and
obsolescence, as well as legal, regulatory and contractual provisions. In
addition, the Company evaluates the existence of goodwill impairment on the
basis of whether the goodwill is fully recoverable from projected, undiscounted
cash flows of the related business unit.
Revenue Recognition
The Company generally recognizes sales when products are shipped or services
are performed. The Company provides for estimated returns and allowances at the
time of sale.
A significant amount of business in the Company's forestry segment relates to
the sale of equipment through sales/finance contracts. Revenue is recognized on
these accounts using the installment method. (See Note 4.) Under the
installment method, the Company records at the point of sale both a sale and a
cost of sale for the total cost of the unit. Gross profit is initially recorded
in a deferred profit account to be recognized as proceeds are received. These
deferred profits are recorded as sales revenue as funds are received, based on
the relative percentage of transaction profit to the sales price. Interest on
the contract is recognized on a cash basis due to frequent late payments and
periodic repossessions.
Key sales and income information for the forestry segment for fiscal 1995 and
the period from acquisition (June 24, 1994) to September 30, 1994 are:
1995 1994
----------- ----------
Equipment sales total $35,837,259 $9,815,444
Equipment sales financed 10,121,004 3,445,670
Income earned on installment basis 2,777,209 132,971
Interest income earned on installment notes 1,562,486 351,614
F-16
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes
Effective October 1, 1993 the Company prospectively adopted Statement of
Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes." SFAS 109
requires the recognition of deferred tax liabilities and assets for the
anticipated future tax effects of temporary differences that arise as a result
of differences in the financial reporting and tax bases of assets and
liabilities. The standard also requires a valuation allowance for deferred tax
assets in certain circumstances. See Note 11 for the cumulative effect of the
adoption of SFAS 109. Prior to October 1, 1993, the Company calculated income
taxes using the deferred method in accordance with the provisions of Accounting
Principles Board Opinion No. 11,"Accounting for Income Taxes."
Income (Loss) per Share
Primary income (loss) per share is computed on the basis of the weighted average
number of common and common equivalent shares outstanding during each year. It
is assumed that all preferred stock is converted and that all dilutive stock
options and warrants are exercised at the beginning of each year or at the time
of issuance if later, and that the proceeds are used to purchase shares of the
Company's common stock at the average market price during the period. Fully
diluted income per share is computed on the basis of the weighted average number
of common and common equivalent shares outstanding and the assumed conversion of
outstanding convertible debentures into common shares. It is assumed that the
proceeds from all dilutive stock options and warrants are used to purchase
shares of the Company's common stock at the higher of the average or the year-
end market price.
Primary and fully diluted income (loss) per share do not give effect to any
common equivalent shares if their inclusion would have the effect of increasing
earnings per share or decreasing the loss per share.
See Note 10 for descriptions of common stock equivalents.
3. BUSINESS COMBINATIONS
Fiscal 1995 Acquisition
Effective May 5, 1995, the Company acquired the assets and operations of IBM
Foods, Inc., a food processing company located in Culver City, California, which
operated using the name Overhill Farms. The purchase, which was accomplished
through Overhill Farms, Inc. a newly-formed subsidiary of the Company
("Overhill"), provided for cash payment to the seller of $31.3 million, subject
to certain adjustments, plus the assumption of certain liabilities of the
acquired business. The transaction was financed by Overhill in part using (1) a
$12 million revolving line of credit, of which $9.7 million was initially drawn,
(2) term loans totalling $6 million, payable monthly over 4 and 5-year periods
and (3) the sale of $13 million of senior subordinated notes
F-17
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and warrants, due in 2002 and 2003. The acquisition has been accounted for by
the purchase method of accounting. The operating results of Overhill are
included in the Company's results of operations from the date of acquisition.
Goodwill attributable to the acquisition totalled $10.3 million and is being
amortized on a straight-line basis over a 20-year period.
Fiscal Year 1994 Acquisitions
In October 1993, the Company acquired all of the outstanding capital stock of
Taylor-Built Industries, Inc. (TBI), a privately held Texas Corporation, in
exchange for 5,000 shares of Series B Preferred Stock, which were subsequently
converted into 50,000 shares of common stock. The Company valued the
acquisition at $50,000. TBI, located in Dallas, Texas, is a manufacturer and
distributor of automotive aftermarket products. During August 1994, the Company
purchased a note payable by TBI to its former owner in the amount of
approximately $161,000 (including accrued interest) in consideration for the
issuance of 15,000 shares of Series A-5 Preferred stock which were subsequently
converted into 30,000 shares of common stock.
The Company, during October 1993, acquired all the outstanding stock of Dallas
Parkway Properties Incorporated (DPPI) in exchange for 100,000 shares of Series
D Preferred Stock, which were subsequently converted into 250,000 shares of
common stock. The Company valued the acquisition at $1,000,000. At the time of
acquisition, DPPI was a single-asset Texas corporation which owned (subject to
related indebtedness) a 40,000 square foot office building in Dallas, Texas,
which is now used as the Company's corporate headquarters. Ownership of the
property was subsequently conveyed to the Company.
The Company, in March 1994, acquired the rights to the point-of-sale software
system marketed under the name "Register-Mate" together with certain other
assets from the system's developer. The consideration for this purchase
amounted to approximately $500,000, consisting of note forgiveness of
approximately $215,000 and stock options valued at $285,000. In addition, the
Company assumed certain liabilities. Such stock options, covering 57,000 shares
of common stock at an exercise price of $0.50 per share, were exercised in
September 1994. The assets acquired were transferred to a newly-formed
subsidiary of the Company operating as Register-Mate, Inc. (RMI), a Texas
corporation. See Note 7.
In May 1994, the Company acquired all of the outstanding capital stock of PC
Repair of Florida, Inc. (PCR) for 7,500 shares of Series B Preferred Stock,
which were subsequently converted into 75,000 shares of common stock. PCR is a
provider and servicer of computer systems located in Sarasota, Florida. The
transaction was accounted for as a purchase and valued at $210,000. The excess
of cost over fair value of the assets acquired approximated $195,000 and is
being amortized over 15 years.
In June 1994, the Company acquired all of the outstanding capital stock of
Texas Timberjack, Inc. (TTI), a distributor of commercial and industrial timber
and logging equipment, in Lufkin, Texas. The consideration for the purchase
consisted of (1) $4,026,000 cash; (2) 100,000 shares of the Company's Series A
Preferred Stock, which were converted into 2,000,000 shares of
F-18
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
common stock and valued by an independent valuation firm at approximately $3.5
million; and (3) a non-interest bearing promissory note payable to the seller in
the amount of $10,000,000. The transaction was recorded as a purchase and
valued at approximately $17.5 million. The excess of cost over fair value of the
assets acquired approximated $5.7 million and is being amortized over 20 years.
See Notes 7 and 8.
In August 1994, the Company acquired all of the outstanding capital stock of
Micro Configurations, Inc. (Micro) in exchange for 60,000 shares of Series A-2
Preferred Stock, which were subsequently converted into 120,000 shares of common
stock. Under the terms of the Micro acquisition the sellers were entitled to an
additional 60,000 shares of such preferred stock subject to certain operational
performance. The transaction was initially recorded as a purchase and valued at
approximately $616,000 with the excess of cost over fair value of the net assets
acquired approximating $746,000. In July 1995, the escrowed shares were issued
and converted into 120,000 shares of common stock which resulted in an
increase in goodwill of $367,800. Goodwill related to the Micro acquisition is
being amortized over 15 years. Micro is engaged in the assembly, sale and
service of computers and related electronic products.
The consolidated statement of operations for the year ended September 30, 1994
includes the results of operations of the businesses acquired in 1994 from the
respective acquisition dates.
Fiscal Year 1993 Acquisitions
Effective January 1, 1993, the Company acquired certain operating assets of
Computer System Concepts (CSC), an assembler and servicer of computer systems,
in exchange for 30,000 shares of the Company's Series C Preferred Stock. Such
shares were converted into 150,000 shares of common stock in March 1994. The
Company accounted for the transaction as a purchase and valued the acquisition
at $300,000. The excess of cost over the fair value of the assets acquired
approximated $129,000 and is being amortized over 15 years.
Effective April 1, 1993, the Company acquired all the outstanding stock of
Network America, Inc. (NAI), an assembler and servicer of computer systems, in
exchange for 250,000 shares of the Company's Series A-5 Preferred Stock, which
were converted into 500,000 shares of common stock in March 1994. The
transaction was accounted for as a purchase and valued at $2,650,000. The excess
of cost over fair value of the assets acquired approximated $2,325,000, and is
being amortized over 25 years.
The consolidated statement of operations for the year ended September 30, 1993
includes the results of operations of CSC and NAI from the respective dates of
their acquisition.
F-19
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Proforma Financial Information
The following unaudited proforma summary for fiscal year 1994 represents the
results of operations as if the acquisitions of Overhill and TTI had occurred at
October 1, 1993. The proforma effect of the other 1994 acquisitions would not
be material and are not presented herein. For fiscal year 1995, the unaudited
proforma summary represents the results of operations as if the acquisition of
Overhill had occurred at October 1, 1994. This summary does not purport to be
indicative of what would have occurred had the acquisitions been made as of
that date or of results that may occur in the future. This method of combining
the companies is for the presentation of unaudited proforma summary results of
operations.
For the Year Ended
September 30,
---------------------------
1995 1994
------------ ------------
Net sales $164,138,000 $150,270,000
Income before extraordinary item
and cumulative effect of accounting
change $ 4,176,000 $ 340,000
Net income $ 4,176,000 $ 645,000
Income per share:
Before extraordinary items and
cumulative effect of accounting
change $ .33 $ .04
Extraordinary item - -
Cumulative effect of accounting change - .04
------------ ------------
Net income $ .33 $ .08
============ ============
4. SALES CONTRACTS RECEIVABLE
The Company's forestry segment provides financing to customers on certain
equipment sales using installment sales contracts. Following is a summary of
the components of the Company's net investment in these contracts as of
September 30, 1995 and 1994 and the related deferred income based on the
installment method of income recognition.
1995 1994
------------ ------------
Contracts outstanding $15,252,646 $ 8,357,923
Less deferred income (4,820,047) (1,690,291)
----------- -----------
10,432,599 6,667,632
Less allowance for doubtful accounts (178,039) (171,429)
----------- -----------
Net investment in sales contracts receivable $10,254,560 $ 6,496,203
=========== ===========
F-20
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following is a summary of the maturities of the contracts receivable and
related deferred income for the next five years:
Contracts Deferred
Due September 30, Outstanding Income Net
------------------- ----------- ---------- -----------
1996 $10,348,801 $3,270,364 $ 7,078,437
1997 4,094,863 1,294,033 2,800,830
1998 768,421 242,832 525,589
1999 40,561 12,818 27,743
----------- ---------- -----------
$15,252,646 $4,820,047 $10,432,599
=========== ========== ===========
5. NOTES RECEIVABLE
The Company periodically makes advances to certain unrelated individuals and
corporations. These notes have interest rates that range from 12% to 18%,
are due within one year and are secured by a variety of marketable
collateral. Allowances are established periodically if, at the date of
valuation, management feels it is probable that a loss exists in the
portfolio. The allowance is established based upon interest payment history,
evaluation of the portfolio and the related expected credit risk.
The Company had $1,215,389 and $1,234,188 of notes receivable as of
September 30, 1995 and 1994, respectively from unrelated corporations and
individuals net of allowances of $187,103 and $199,135. The loans are
secured primarily by land, timber and equipment. At September 30, 1995,
approximately $493,000 of such notes receivable were no longer accruing
interest. All notes receivable are due in less than one year.
6. INVENTORIES
Inventories are summarized as follows:
September 30,
----------------------
1995 1994
---------- ----------
Finished goods:
Forestry Group $ 9,640,664 $ 5,717,297
Computer Group 1,598,681 985,709
Transformer Group 885,492 822,082
Food Group 9,418,418 -
Work-in-process:
Transformer Group 603,929 479,133
Raw material:
Transformer Group 1,003,399 949,559
Food Group 2,857,089 -
------------ -----------
Total $ 26,007,672 $ 8,953,780
============ ===========
F-21
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
September 30,
-----------------------
1995 1994
---------- ----------
Register-Mate software $ 512,500 $ 512,500
Non-compete agreements 700,000 700,000
Deferred financing costs 1,039,089 -
Other 164,565 198,136
----------- -----------
2,416,154 1,410,636
Less accumulated amortization (394,502) (95,836)
----------- -----------
$ 2,021,652 $ 1,314,800
=========== ===========
The Register-Mate software was acquired in March 1994 (See Note 3). The
software links retailers and credit card processors, interfacing with both
point-of-sale hardware and accounting systems. The software is being
amortized over its estimated useful life of 5 years.
The Company entered into noncompete agreements with the seller of TTI (See
Note 3) and an officer of TTI with such amount being amortized over the 7
year life of each agreement.
The Company incurred certain legal, brokerage and other costs associated
with the financing of the acquisition of Overhill Farms. These costs are
being amortized over a period of 5 years.
8. NOTES PAYABLE
Notes payable consists of the following:
September 30,
------------------------
1995 1994
----------- ----------
Note payable to Ford Motor Credit Corporation (a) $ 252,692 $ 157,893
Note payable to Comerica (b) - 1,700,000
Note payable to Finova Capital Corporation (c) 10,482,364 -
Other notes payable (d) 395,000 234,375
------------ -----------
$ 11,130,056 $ 2,092,268
============ ===========
(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.
F-22
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) TTI's revolving line of credit with Comerica Bank-Texas was converted to
long term debt (See Note 9).
(c) In connection with the acquisition of Overhill Farms, Inc. (See Note 3) the
Company's Overhill subsidiary obtained a $18,000,000 credit facility with Finova
Capital Corporation which consists of Term Loan A (See Note 9) in the original
amount of $2,000,000, Term Loan B (See Note 9) in the original amount of
$4,000,000 and a $12,000,000 revolving line of credit. Borrowings under the
revolving line of credit are limited to the lesser of $12,000,000 or an amount
determined by a defined borrowing base which is based on eligible receivables
and inventory. Borrowings under the line of credit facility bear interest at
the Citibank base rate plus 1.5% (10.25% at October 1, 1995). A total of
$10,482,364 was outstanding under the revolving line of credit at September 30,
1995. This amount is classified as a current liability in the accompanying
balance sheet due to a requirement for Overhill to maintain a blocked account in
favor of the lender for collections on all accounts receivable, which are
immediately applied to reduce borrowings under the line of credit. Overhill's
revolving line of credit requires the payment of an unused line fee of .25% per
annum and an annual facility fee of .50% per annum. The agreement with Finova
relating to this facility contains various covenants including without
limitation, Overhill's pledge to restrict capital expenditures to certain
agreed upon levels, maintain specified current and debt to net worth ratios and
specified levels of net worth. Additionally, the terms of the credit facility
prohibit loans, advances or dividends from Overhill to the Company and limit
management fees the Company can charge Overhill to $250,000 per annum.
Furthermore, the capital stock and substantially all assets of Overhill are
pledged as collateral for the credit facility. The credit facility expires on
May 5, 1998. The Company has guaranteed all obligations under Overhill's credit
facility.
(d) The Company's Computer and Transformer segments have entered into various
credit agreements with banks in their region that extend through July 1996.
These agreements bear interest from prime to prime plus 2.0% and are
collateralized by accounts receivable, inventories and fixed assets.
Note Payable and Accrued Interest to Related Party
In connection with the acquisition of TTI on June 24, 1994 (see Note 3), the
Company recorded a note to the seller (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 the maturity date, the Company and the seller entered into
an agreement providing for the modification, extension and renewal of the note,
whereby the note in the amount of $10,000,000 was to bear interest at 12% and
mature on October 31, 1995. As of October 31, 1995 the seller further extended
and modified the note whereby the note currently having a principal balance of
$11,200,000 bears interest at 17.5% and matures on February 29, 1996. The
Company anticipates that it will be required to refinance this note payable into
a long-term facility and is presently in negotiations with potential lenders.
The note holder has no recourse to any of the assets or capital stock of
Polyphase or any of its other subsidiaries and no cross-default provisions exist
between this note agreement and any other Polyphase debt.
F-23
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The weighted average interest rate on short term borrowings for the year ended
September 30, 1995 was 8.9%.
Restricted Net Assets of Subsidiaries
At September 30, 1995, restricted net assets of subsidiaries totalled
$26,227,956. Such net assets consist of the net assets of Overhill and TTI
which were restricted by the terms of debt agreements as discussed above and in
Note 9.
F-24
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
----------------------
1995 1994
-------- --------
Term loan payable to bank bearing interest
at 8.5%, due in monthly installments of
$12,465 through May 1999, collateralized by
real estate. A final payment of approximately
$602,000 is due in May 1999. $ 930,825 $ 980,158
Senior convertible debentures due July 1, 1999,
bearing interest at 12% with interest payable
semi-annually in January and July. 4,000,000 4,000,000
Revolving credit agreement of TTI with Comerica
Bank-Texas prime plus 1/2%, collateralized by
notes, trade accounts receivable and inventory,
due in February 1997. (See Note 8) 6,199,999 -
Term Loan A payable to financial institution
at prime rate plus 2.5%, due in monthly
installments of $33,333 plus accrued interest
through May 1, 2000 (See Note 8). 1,866,668 -
Term Loan B payable to financial institution
at prime rate plus 2.5%, due in monthly
installments of $83,333 plus accrued interest
through May 1, 1999 (See Note 8). 3,666,668 -
Senior subordinated notes payable to of Overhill
to a financial institution bearing interest 13%
payable quarterly, net of discount of
$470,134. Principal payments of $6,500,000
are due on April 29, 2002 and 2003. 12,529,866 -
Other 624,716 966,568
----------- ----------
29,818,742 5,946,726
Less current maturities (2,589,077) (687,954)
----------- ----------
Total long-term debt $27,229,665 $5,258,772
=========== ==========
F-25
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Maturities of long-term debt are as follows:
For the Years Ending
September 30,
------------------------
1997 $ 7,858,829
1998 1,494,339
1999 4,496,695
2000 371,931
2001 12,893,322
Thereafter 13,065,296
------------
$ 27,229,665
============
The senior convertible debentures issued July 1994 are convertible at the
option of the holder into shares of common stock equal to the principal amount
of each bond (or in $1,000 increments) divided by a $5.65 conversion price
subject to adjustment in certain circumstances. The indenture requires the
Company to maintain key man life insurance policies on two executives in an
amount equal to the redemption value of the bonds naming the trustee as
beneficiary on behalf of the bond holders. The senior convertible debentures
prohibit the Company from paying or making within any 12-month period dividends
or distributions on its Common Stock having a value in excess of 50% of the
consolidated net income of the Company, unless each holder of the senior
convertible debentures receives an amount equal to its pro rata portion of the
dividend or distribution (on an as-converted into Common Stock basis).
Effective December 1, 1995, the Company entered into additional agreements with
the holders of the 12% senior convertible debentures, whereby the Company sold
an additional $1,500,000 of debentures on generally the same terms and
conditions as those previously issued. The new debentures bear interest at 12%,
payable semiannually in June and December, are convertible into common stock at
the rate of $5.00 per share and become due and payable on December 1, 1997.
The terms of the revolving line of credit require TTI to restrict capital
expenditures to certain agreed upon levels, maintain specified debt to net worth
and fixed charge coverage ratios, limit the amount of its contingent liabilities
and maintain agreed upon levels of working capital and tangible net worth.
Furthermore, the terms of the revolving line of credit prohibit loans or
advances from TTI to the Company and limit dividends from TTI to the Company to
$580,000 per year. The Company has guaranteed all obligations under TTI's
revolving line of credit. Availability under the line of credit at September 30,
1995 amounted to $4,800,000.
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. Series
A, B, C, D, E, A-2 and A-5 of Preferred Stock are authorized for issuance of
375,000, 300,000, 300,000, 600,000, 1,425,000,
F-26
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
750,000 and 750,000 shares of preferred stock, respectively. All shares of
preferred stock designated above have a redemption value of $10 per share, are
noncumulative at the annual rate of 5% of the redemption value, are convertible
at the option of the holder into 20, 10, 5, 2-1/2, 1, 2 and 2 shares of
restricted common stock, respectively, have a liquidation preference of $10 per
share and are callable by the Company at 105% of the redemption value.
Series A-2 preferred shares are entitled to two votes per share on all matters
on which the holders of common stock have one vote per share. No other series
of preferred shares have voting rights.
During November 1995, the Company, in a transaction with an unrelated
corporation, sold 250,000 shares of newly-designated Series A-3 Preferred Stock
for $2,500,000 cash. The designations of the Series A-3 stock are similar to
those of other series of preferred stock, except that Series A-3 preferred stock
has voting rights, is entitled to cumulative annual dividends of 12% and is
convertible into 2 shares of common stock (subject to adjustment in certain
circumstances.) The Company also entered into an agreement with an associate of
the aforementioned corporation to provide consulting services to the Company
over a 36-month period. The consideration for such services was the grant of
options to purchase 357,143 shares of common stock at $3.50 per share (the fair
market value at the date of grant) plus hourly fees and expenses.
Stock Options to Officers, Directors and Employees
In April 1991, the Board of Directors granted to certain officers and directors
options covering 175,000 shares of the Company's common stock at an exercise
price of $.50 per share. Such options are exercisable in cumulative annual
increments of 33% following the first anniversary from the date of grant and
expire five years after the date of grant.
During July 1993 and March 1994, the Board of Directors granted to certain
officers and directors options to purchase 650,000 shares at option prices of
$.75 (600,000 shares) and $5.25 (50,000 shares) per share, respectively, which
were equal to the fair value at the date of grant. The options are exercisable
in whole or in part and expire five years from the date of grant.
Under the terms of the 1994 Employee Stock Option Plan adopted by the Board of
Directors in March 1994, the Company has reserved a total of 500,000 shares of
its common stock for issuance to eligible employees of, and consultants to, the
Company. The Plan provides for the grant of both incentive stock options (at
exercise prices no less than fair value at the date of grant) and nonqualified
stock options (at exercise prices as determined by the Compensation Committee of
the Board of Directors), that such options may be exercisable as determined by
such Committee and that the Plan will expire ten years following its adoption.
F-27
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Option transactions pursuant to the above plans during the three years ended
September 30, 1995 are summarized as follows:
Number of Exercise Shares
Shares Price Exercisable
----------- ---------- -------------
Outstanding, September 30, 1992 202,900 $.50-2.50 86,233
Granted 293,000 .75 -
Exercised - - -
Cancelled (127,900) - -
---------
Outstanding, September 30, 1993 368,000 .50-2.50 359,667
Granted 357,000 .75-5.25 -
Exercised (232,000) .75 -
Cancelled - - -
---------
Outstanding, September 30, 1994 493,000 .50-5.25 493,000
Granted - - -
Exercised - - -
Cancelled - - -
---------
Outstanding, September 30, 1995 493,000 $.50-5.25 493,000
========= ========= =========
Stock Options-Others
During March 1993, the Company entered into an agreement with an unrelated
corporation to obtain, over a twelve-month period, consultation and assistance
relative to various corporate matters. As consideration for the services to be
obtained thereunder, the Company granted the consulting organization an option
to purchase 250,000 shares of the Company's common stock at an exercise price of
$.50 per share; such option was exercised in April 1993 by the reissuance of
250,000 shares of treasury stock for $125,000 cash.
In July 1993, the Company entered into a similar agreement with an unrelated
corporation to obtain, over a five-year period, services related to the finding
and evaluation of potential acquisition targets. In consideration thereof, the
Company granted the consulting organization an option to purchase 500,000 shares
of the Company's common stock at an exercise price of $.50 per share. The fair
value of the common stock at date of grant was $.75 per share; accordingly, the
Company valued the option at $125,000. The option was exercised in September
1993 and the Company received cash proceeds of $250,000.
In July 1993, the Company entered into an agreement with an unrelated individual
to obtain, over a five-year period, services related to the finding and
evaluation of potential acquisition targets. In consideration thereof the
Company granted the individual an option to purchase 400,000
F-28
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
shares of the Company's common stock at an exercise price of $.875 per share,
the fair value at the date of grant. The option was exercised during the year
ended September 30, 1994.
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance to the
Pyrenees Group, or its assigns, options to purchase up to 1,000,000 shares of
convertible preferred stock for $10 per share. The options were issued subject
to approval by the Company's shareholders and were approved and ratified at the
Company's Annual Meeting held May 31, 1994. Pyrenees, a private investment
firm in which certain executive officers of the Company are affiliated and have
ownership positions, was granted these options as consideration for the sale to
the Company of its collected due diligence materials for acquisitions Pyrenees
was contemplating, which were to be used by the Company in its own previously
announced acquisition program. The options, covering Series A, B, C, D and E
Preferred Stock, are summarized as follows:
Preferred Conversion Common
Series Shares Price Shares
--------- --------- ---------- --------
A 125,000 $ .50 2,500,000
B 100,000 1.00 1,000,000
C 100,000 2.00 500,000
D 200,000 4.00 500,000
E 475,000 10.00 475,000
--------- ---------
1,000,000 4,975,000
========= =========
In fiscal 1994, the Pyrenees Group exercised options with respect to the Series
A and Series B Preferred Stock through the issuance of two 7% demand notes in an
aggregate amount of $2,250,000, collateralized by the shares issued; such notes
were reflected as a reduction in the stockholders' equity accounts in the
accompanying consolidated balance sheet as of September 30, 1994. In fiscal
1995, the Pyrenees Group exercised the Series C option through an additional
demand note bearing interest at 7% and collateralized by the shares issued. On
May 5, 1995 in conjunction with the acquisition of Overhill Farms, Pyrenees paid
$4,000,000 to IBM on the Company's behalf. Of this amount, $2,992,000
represented repayment of the 7% notes with the excess, $1,008,000, representing
a temporary advance by Pyrenees to the Company. This amount plus other payments
made by Pyrenees resulted in a temporary advance of $1,153,000 at September 30,
1995. During fiscal 1995, Pyrenees converted Series A, B and C Preferred Stock
into common stock. Subsequent to September 30, 1995, Pyrenees exercised the
Series D option through an additional 7% note in the amount of $2,000,000; such
preferred shares were then converted into common stock.
The Company recognized a non-recurring, non-cash charge for the fair value of
the Pyrenees options as of the date of approval by the shareholders. The fair
value of the options, as determined by an independent valuation firm, amounted
to $1,400,000; such amount was recorded as a non-cash charge against income with
a corresponding credit to paid-in capital.
F-29
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Warrant to Purchase Common Stock of Subsidiary
The warrant to purchase common stock of subsidiary issued in connection with the
$13 million subordinated debt described in Note 9 provides that the warrant
holders may purchase shares of the Company's Overhill subsidiary (representing
22.5% of its common stock) at any time over a ten year period which ends May 5,
2005 for a nominal exercise price of $100. The warrant holders also have the
option to "put" the warrants to the Company any time after the warrant's fifth
anniversary at a "put" price based upon the higher of fair market, book or
appraised value of the subsidiary. The "put option" is exercisable anytime after
May 5, 2000 or immediately, if the subsidiary experiences a change in control or
merges with another unaffiliated company. Additionally the Company has the
option of "calling" the outstanding warrants for cash anytime after May 5, 2001.
The "call" price is determined using the same formula as provided for
determining the warrant's "put" price.
In order to account for the obligation associated with the warrant's "put"
feature, the Company estimated the fair value of the warrants to be $900,000 at
the date of issuance. This amount was discounted at 12% for a five-year period
which resulted in a $495,405 liability and related debt discount on the senior
subordinated note being recorded for the warrant's "put" feature at the date of
issuance. In order to account for changes in the estimated warrant liability,
the Company periodically estimates the fair value of the Overhill common stock
and accretes the warrant liability accordingly through a charge to earnings.
11. INCOME TAXES
Income tax expense (benefit) consists of the following:
For the Years Ended
September 30,
1995 1994 1993
-------- -------- --------
Current:
Federal $111,589 $ - $129,000
State 414,289 127,000 20,000
Deferred:
Federal (449,651) (94,000) 57,000
State - (16,000) 9,000
-------- -------- --------
Total income taxes $ 76,227 $ 17,000 $215,000
======== ======== ========
The effective tax rate on earnings (loss) before income tax charges (benefits)
was different than the federal statutory tax rate. The following summary
reconciles the federal statutory tax rate with the actual effective rate:
F-30
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended
September 30,
1995 1994 1993
------ ------ ------
Effective statutory tax expense (benefit) rate 34.0% (34.0%) 34.0%
Increase (decrease) in effective tax rate
resulting from:
State taxes, net of federal tax benefit 7.7 9.0 1.9
Officer life insurance premiums,
amortization of goodwill 6.7 6.5 1.9
Exercise of stock options - (10.2) (16.7)
Limitation on utilization of net
operating losses - 30.0 -
Utilization of net operating losses (31.9) - -
Change in valuation allowance (14.2) - -
Other (0.2) - -
------ ------ ------
Effective tax expense rate 2.1% 1.3% 21.1%
====== ====== ======
F-31
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Financial Accounting Standards Board (FASB) adopted Statement No. 109,
"Accounting for Income Taxes," which significantly changes prior practice by
requiring among other things, a liability approach to calculating deferred
income taxes. As stated in Note 2, the Company adopted FASB Statement No. 109
effective October 1, 1993. The implementation of FASB Statement No. 109
resulted in a credit of $305,000 from the cumulative effect of this accounting
change. The components of deferred tax balances as of September 30, 1995 and
1994 are summarized as follows:
1995 1994
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 209,628 $ 297,000
Inventory 459,231 32,000
Accrued expenses 192,812 -
Deferred sales 62,080 -
Net operating loss carryforwards 69,232 1,824,000
AMT credit carryforwards 69,945 -
---------- ----------
Deferred tax assets 1,062,928 2,153,000
Valuation allowance - (1,560,000)
---------- ----------
Net deferred tax assets 1,062,928 593,000
---------- ----------
Deferred tax liabilities:
Purchase accounting adjustments - (472,000)
Stock option exercises (27,572) (149,000)
Prepaid expenses (216,501) -
Intangibles (296,357) -
Other (43,178) -
Depreciation (112,668) (55,000)
---------- ----------
Deferred tax liabilities (696,276) (676,000)
---------- ----------
Net deferred tax asset (liability) $ 366,652 $ (83,000)
========== ==========
The Company has unused net operating losses available for carryforward
approximating $173,000 expiring in 2009. Additionally, the Company has
alternative minimum tax credit carryforwards of $69,945.
Under section 382 of the Internal Revenue Code of 1986, as amended, the
utilization of net operating loss carryforwards may be delayed or permanently
lost if there has been a cumulative change in ownership during the past three
years of more than 50%. Based on Proposed Treasury Regulations, the Company
believes there was an ownership change during the fiscal year ended September
30, 1994; therefore there is an annual limitation on the amount of net
operating loss carryforwards that can be utilized.
F-32
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The decrease in the valuation allowance during fiscal year 1995 was due to the
utilization of net operating loss carryforwards and a change in judgement about
the realizability of the related deferred tax asset in future years.
12. COMMITMENTS AND CONTINGENCIES
Commitments
Future minimum lease payments for all operating leases at September 30, 1995 are
as follows:
For the Years Ending
September 30,
--------------------
1996 $1,138,858
1997 1,046,024
1998 941,401
1999 532,675
2000 68,830
Thereafter -
----------
$3,727,788
==========
Certain of the leases provide for renewal options for periods from 1998 to 2005
at substantially the same terms as the current leases.
Rent expense, including monthly equipment rentals, was approximately $893,000,
$190,000 and $146,000 for the years ended September 30, 1995, 1994 and 1993,
respectively.
The Company's subsidiary, TTI relies on two suppliers for the majority of their
new units and parts. As of September 30, 1995, TTI had commitments to purchase
inventory amounting to $6,160,000.
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, 1995 the
Company's guarantees totalled $8,034,178. The Company receives a fee, in the
form of interest participation on certain of the notes upon which it is
contingently liable. This fee is recognized as interest income by the Company
and is usually held by the institution to meet reserve requirements. Company
funds held in escrow by the lenders of $916,275 at September 30, 1995 are
included in the balance sheet as restricted cash and are fully offset by a
reserve for credit guarantees.
TTI has an interest in two partnerships. The total investment in these
partnerships at September 30, 1995 of $297,556 is included in other assets. TTI
guarantees the debt of these partnerships. The amount guaranteed at September
30, 1995 of $557,552 is collateralized by accounts
F-33
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
receivable, inventory, equipment, buildings and real estate.
Contingencies
On February 28, 1995 a class action lawsuit was filed in the United States
District Court for the Eastern District of New York against the Company and
certain officers seeking at least $15 million in damages plus an unspecified
amount for plaintiffs' costs. The suit claims, among other things, that the
Company and the officers were responsible for artificially inflating the market
price of the Company's common stock during the period of October 26, 1993
through January 15, 1995. The New York court has transferred venue of the suit
to the United States District Court for the Northern District of Texas. The
Company intends to defend these allegations vigorously and does not expect the
outcome of this matter to have a material impact on the Company's financial
position or results of operations.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based
on advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial position or results of
operations.
13. RELATED PARTY TRANSACTIONS
Effective January 1, 1993, the Company was charged $12,500 per month by a
company controlled by Paul A. Tanner, an executive officer and director of the
Company, for its use of corporate facilities, office furniture, equipment and
supplies, and related office, clerical and management expenses. These monthly
charges were accrued by the Company from January 1993 to September 1993.
Following the Company's acquisition of DPPI (See Note 3) in October 1993, this
arrangement was terminated and $112,500 that had accrued as of September 1993
was paid in full.
During the year ended September 30, 1993, the Company had purchases of
inventories for resale amounting to $474,000 from the company controlled by Mr.
Tanner. During the fiscal year ended September 30, 1994, because the Company
elected not to fully develop the business for which these inventories were
originally purchased, Mr. Tanner agreed to repurchase the unsold balance of
inventories, at no gain or loss to the Company, in consideration of a 7%
promissory note in the amount of $369,350, which was payable on September 30,
1995. This note, together with accrued interest was refinanced in connection
with the issuance of the promissory note described below.
During fiscal 1994, the Company made aggregate non-interest bearing cash
advances to Mr. Tanner in the amount of approximately $282,000. At September
30, 1994, Mr. Tanner had repaid $150,000 of such advances. During fiscal 1995,
following the repayment of the unpaid 1994 advances, additional advances
amounting to approximately $63,000 were made to Mr. Tanner which were unpaid at
September 30, 1995. Subsequent to September 30, 1995, additional
F-34
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
amounts were advanced to or on behalf of Mr. Tanner which aggregated
approximately $1.5 million.
Effective December 8, 1995, the unpaid balance of the 7% promissory note (plus
interest) referred to above plus the unpaid advances referred to in the
preceding paragraph were refinanced by Mr. Tanner through the issuance of a 12%
demand note in the principal amount of $2,000,872.
Other assets include an insurance premium receivable of $432,006 representing
insurance premiums paid by TTI on behalf of Harold Estes, President and former
owner of TTI.
In February 1994, a company owned by Harold Estes, loaned DPPI $350,000 to pay a
previous mortgage on the Company's principal executive offices. The outstanding
principal and interest on this loan was $363,347 as of May 25, 1994, when such
loan was paid in full by the Company.
In connection with the purchase of TTI, the Company acquired a note receivable
from an officer. The note is secured by marketable securities, payable within
one year and bears interest at 3.96%. As of September 30, 1995 the balance
outstanding was $368,642.
Upon the resignation of Paul Stevens from the Board of Directors and as
President of PIC in October 1993, the Company and Mr. Stevens entered into an
agreement whereby Mr. Stevens was to provide consulting services to PIC in
consideration for (1) the issuance of 7,500 shares of Series A Preferred Stock,
valued at $75,000 and convertible into 150,000 shares of restricted common
stock, and (2) a monthly retainer of $12,500 cash for a 5-year period. This
agreement was terminated in September 1994, whereby Mr. Stevens agreed to waive
all remaining cash payment requirements and the Company agreed to register the
common stock underlying Mr. Stevens Series A Preferred Stock and to cancel stock
subscriptions receivable from Mr. Stevens in the amount of $30,000. The
Company's expense for the year ended September 30, 1994 amounted to
approximately $200,000 as a result of this consulting contract and its
subsequent termination.
During 1993, the Company sold certain finished goods inventories, which had a
carrying value of zero, and a note receivable to a company controlled by Mr.
Stevens in exchange for a promissory note of approximately $468,000. During
the year ended September 30, 1992, the Company recognized a loss of $100,000 on
the note receivable sold to Mr. Stevens. The promissory note is payable in
quarterly installments of $21,075 plus interest.
As discussed in Note 10, the Company, at September 30, 1995, was obligated to
the Pyrenees Group for $1,153,000. Subsequent to year end, the Company, after
repayment of this amount, made additional cash advances to Pyrenees amounting to
$1,514,500.
See Note 10 for discussion of options granted to the Pyrenees Group, a related
party.
See Notes 3 and 8 for discussion of note payable to Harold Estes.
F-35
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
14. GAIN ON SALE OF INSTALLMENT NOTES
In September 1993, the Company acquired from Texas Timberjack, Inc. prior to its
acquisition certain installment notes in exchange for $452,000 cash. The
Company subsequently sold the notes, without recourse, to another unrelated
party for $979,500, recognizing a gain of $527,500. This transaction was prior
and unrelated to the TTI transaction disclosed in Note 3.
15. PROFIT SHARING PLAN
In 1986, prior to acquisition by the Company, TTI adopted a profit sharing plan.
In order to participate in the plan, an employee must be at least 21 years of
age, have been employed by TTI at least one year and be a full time employee.
Vesting begins in the third year of employment and increases each year until
full vesting is achieved in the seventh year. The plan is administered by an
independent third party. Trustees for the plan are the president and
controller of TTI. The maximum contribution is the lesser of 15% of eligible
salaries or net income plus retained earnings. Profit sharing expense for the
year ended September 30, 1995 was $211,000 and for the period from acquisition
through September 30, 1994 was approximately $45,000.
16. SALE OF SUBSIDIARY
The Company, during February 1995, entered into a transaction whereby it
exchanged 100% of the common stock of Taylor-Built Industries, Inc., a wholly
owned subsidiary, for 200,000 shares of restricted common stock of Optimax,
Inc., a publicly held company. No gain or loss was recognized on this
transaction.
17. INFORMATION BY INDUSTRY SEGMENT
The Company's industry segments are outlined below.
Transformer Manufacturing
The transformer manufacturing segment manufactures and sells custom designed
transformer and communication filters. Customers are primarily defense
contractors or defense contractor suppliers in the Mid-Atlantic and Northeastern
regions of the United States.
Computer Sales and Service
The computer sales and service segment assembles and sells personal computers
and provides systems setup and hardware maintenance services. Customers
serviced range from individuals
F-36
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
to large corporations. Subsidiaries included in the segment are Network
America, Inc., in Tulsa, Oklahoma; Letronix and Computer System Concepts in
Queens, New York; PC Repair in Sarasota, Florida and Micro Configurations Inc.,
in Brooklyn, New York.
Forestry
The Forestry segment sells, finances, and repairs timber and logging equipment
in East Texas and Western Louisiana. Customers range from small logging
operations to large integrated paper mills.
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.
F-37
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995
------------------------------------------------------------------------
Computer
Transformer Sales and
Food Forestry Manufacturing Service Totals
------------ ------------ ------------- ------------ ---------------
Net Sales:
Sales to unaffiliated customers $40,395,326 $42,778,102 $3,602,678 $15,259,366 $102,035,472
=========== =========== ========== =========== ============
Operating profit and earnings
before income taxes
extraordinary items and cumulative
effect of accounting changes:
Operating profit $ 2,707,773 $ 4,691,322 $ 302,512 $ 548,601 $ 8,250,208
=========== =========== ========== ===========
General corporate expenses (1,498,507)
Interest and other income 592,055
Interest expense (3,791,059)
------------
Income before income taxes $ 3,552,697
============
Identifiable assets:
Segment assets $38,991,764 $34,423,387 $2,988,017 $ 7,149,085 $ 83,552,253
=========== =========== ========== ===========
Corporate assets 4,606,610
------------
Total assets $ 88,158,863
============
Capital expenditures:
Segment $ 133,118 $ 590,052 $ 68,729 $ 157,408 $ 949,307
=========== =========== ========== ===========
Corporate 26,576
------------
Total capital expenditures $ 975,883
============
Depreciation and amortization:
Segment $ 857,813 $ 559,872 $ 69,321 $ 322,767 $ 1,809,773
=========== =========== ========== ===========
Corporate 125,786
------------
Total depreciation and amortization $ 1,935,559
============
The Company's food group had sales to a single customer in fiscal 1995 which
comprised approximately 15% percent of consolidated sales. No other customer
accounted for more than 10% of the Company's sales in fiscal 1995.
F-38
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1994
------------------------------------------------------
Computer
Transformer Sales and
Forestry Manufacturing Service Total
---------- ------------- ----------- --------
Net Sales:
Sales to unaffiliated customers $11,154,096 $3,516,730 $10,299,578 $24,970,404
=========== ========== =========== ===========
Operating profit and earnings
before income taxes
extraordinary items and cumulative
effect of accounting changes:
Operating profit $ 876,257 $ 216,401 $ 466,322 $ 1,558,980
=========== ========== ===========
General corporate expenses (1,203,598)
Non-recurring charge related
to the grant of stock options (1,400,000)
Interest and other income 125,730
Interest expense (447,987)
-----------
Loss before income taxes, extraordinary
item and cumulative effect of accounting
change $(1,366,875)
===========
Identifiable assets:
Segment assets $24,868,598 $3,910,465 $ 6,311,229 $35,090,292
=========== ========== ===========
Corporate assets 2,884,657
-----------
Total assets $37,974,949
===========
Capital expenditures:
Segment $ 61,670 $ 20,749 $ 151,812 $ 234,231
=========== ========== ===========
Corporate 113,290
-----------
Total capital expenditures $ 347,521
===========
Depreciation and amortization:
Segment $ 128,470 $ 109,072 $ 182,979 $ 420,521
=========== ========== ===========
Corporate 76,993
-----------
Total depreciation and amortization $ 497,514
===========
No customer accounted for more than 10% of the Company's consolidated sales in
fiscal 1994
F-39
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1993
-------------------------------------------
Computer
Transformer Sales and
Manufacturing Service Total
------------- ------------- ----------
Net Sales:
Sales to unaffiliated customers $2,951,155 $4,375,194 $7,326,349
========== ========== ==========
Operating profit and earnings
before income taxes and
extraordinary items:
Operating profit $ 547,630 $ 466,876 $1,014,506
========== ==========
Gain on installment notes (Note 14) 527,500
General corporate expenses (418,053)
Interest expense (56,378)
----------
Earnings before income taxes and
extraordinary items $1,067,575
==========
Identifiable assets:
Segment assets $3,810,025 $4,049,357 $7,859,382
========== ==========
Corporate assets 1,174,313
----------
Total assets $9,033,695
==========
Capital expenditures: $ 11,229 $ 23,315 $ 34,544
========== ========== ==========
Depreciation and amortization:
Segment $ 200,604 $ 6,789 $ 207,393
========== ==========
Corporate 6,085
----------
Total depreciation and amortization $ 213,478
==========
For the year ended September 30, 1993, approximately 17% of the Company's
sales were to a single customer, which is a supplier to various branches of
the U.S. Government, all of which were made through the transformer segment.
F-40
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
18. QUARTERLY FINANCIAL DATA (Unaudited)
For the Year Ended September 30, 1995
--------------------------------------------------------
December 31 March 31 June 30 September 30
------------- ----------- ----------- --------------
Net revenues $12,611,165 $13,831,411 $33,633,241 $41,959,655
Gross profit 3,064,609 3,034,572 6,285,021 7,595,633
Operating income 877,489 1,005,637 2,151,530 2,717,045
Net income $ 574,354 $ 604,974 $ 917,461 $ 1,188,810
=========== =========== =========== ===========
Income per common
share:
Net income $ .05 $ .05 $ .07 $ .09
=========== =========== =========== ===========
F-41
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
18. QUARTERLY FINANCIAL DATA (Unaudited)
For the Year Ended September 30, 1994
------------------------------------------------------
December 31 March 31 June 30 September 30
----------- ---------- --------- ------------
Net sales $3,722,093 $3,482,599 $ 4,837,293 $12,928,419
Gross profit 1,070,197 971,372 1,015,160 1,943,440
Operating income (loss) 310,046 184,250 94,812 (233,726)
Income (loss) before
extraordinary item and
cumulative effect of
accounting change 282,643 158,832 (1,325,688) (499,662)
Extraordinary item-early
extinguishment of debt 62,120
Cumulative effect of
change in method of
accounting for taxes 305,000 - - -
---------- ---------- ----------- -----------
Net income (loss) $ 587,643 $ 158,832 $(1,325,688) $ (437,542)
========== ========== =========== ===========
Income (loss) per common
share:
Before extraordinary item
and cumulative effect of
accounting change $ .05 $ .03 $ (.24) $ (.09)
Extraordinary item .01
Cumulative effect of
change in method of
accounting for taxes .05 - - -
---------- ---------- ----------- -----------
Net income (loss) $ .10 $ .03 $ (.24) $ (.08)
========== ========== =========== ===========
Quarterly per share data does not total to annual amounts reported due to the
weighting of common stock equivalents and the changes in the Company's capital
structure during the year. Amounts reported for the quarter ended June 30, 1994
have been restated from those included in Form 10-QSB for such quarter to
eliminate antidilutive common stock equivalents from the computation of loss per
share and to adjust the consideration in connection with the purchase of the
Register-Mate assets.
F-42
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Balance Sheet
September 30, 1995
Cash $ 2,193
Receivables from related parties 369,350
Receivable from subsidiaries 2,259,115
Prepaid expenses and other 531,642
-----------
Total current assets 3,162,300
Property and equipment 1,742,275
Less-Accumulated depreciation (102,817)
-----------
1,639,458
Other assets (principally investment in
and amounts due from wholly-owned
subsidiaries) 34,876,272
-----------
$39,678,030
===========
Note payable and accrued interest
to related party $11,100,000
Accounts payable 858,476
Accrued expense 343,878
Due to affiliated party 1,153,000
Current maturities of long term debt 80,398
-----------
Total current liabilities 13,535,752
-----------
Deferred income taxes 154,508
Long term debt, net 4,850,427
-----------
Total liabilities 18,540,687
Stockholders' equity:
Common stock 126,220
Additional paid in capital 22,106,606
Retained earnings (1,095,483)
-----------
Total stockholders' equity 21,137,343
-----------
$39,678,030
===========
See note to condensed financial
information of registrant.
F-43
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statement of Income
For the Year Ended September 30, 1995
Net revenues $ -
Cost of sales -
-----------
Gross Profit -
Selling general and administrative expenses 1,498,508
-----------
Operating income (loss) (1,498,508)
Other income (expense)
Interest income (127,145)
Interest expense 1,877,883
-----------
Total other income 1,750,738
Income (loss) before income taxes (3,249,247)
Income taxes (benefit) (2,133,986)
-----------
(1,115,261)
Equity in net income of subsidiaries 4,400,860
-----------
Net income $ 3,285,599
===========
See note to condensed financial
information of registrant.
F-44
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statement of Cash Flows
Cash flow provided by operating activities:
Net income (loss) $ 3,285,599
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 125,786
Issuance of common stock for accrued interest
payable on convertible subordinated debentures 9,120
Imputed interest on TTI acquisition note 66,225
Deferred income tax 293,616
Increase (decrease) in, net of effects of acquisitions:
Receivables from subsidiaries (1,941,392)
Prepaid expenses and other (423,523)
Accounts payable and other 710,920
Accrued expenses and other 1,279,321
-----------
Net cash used in operating activities 3,405,672
Cash flows used in investing activities:
Notes receivable 132,000
Capital expenditures (26,576)
Investment in Overhill Farms, Inc. (4,000,000)
Other assets (3,770,824)
-----------
Net cash used in investing activities (7,665,400)
Cash flows provided by financing activities:
Payments on notes payable (160,104)
Due to affiliated party 1,153,000
Principal collections on Pyrenees
notes receivable 3,250,000
Common stock issuance costs (132,001)
-----------
Net cash provided by financing activities 4,110,895
-----------
Net decrease in cash (148,833)
Cash - beginning of year 151,026
-----------
Cash - end of year $ 2,193
===========
See note to condensed financial
information of registrant.
F-45
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Note A - Basis of Presentation
In the parent company only financial statements, the company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The company's share of net income
of its unconsolidated subsidiaries is included in consolidated income using the
equity method. The parent company only financial statements should be read in
conjunction with the Company's consolidated financial statements.
The Company filed under the SB regulations for fiscal 1994 and 1993 and was not
required to complete Schedule I. Accordingly, the condensed financial
statements for these years have been omitted.
F-46
POLYPHASE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Three Years in the Period Ended September 30, 1995
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------------------
Balance at Charged to Balance at
beginning costs and end of
Classification of period expenses Deductions Other period
- --------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended September 30, 1995 $ 580,251 $ 73,446 $ (146,892) $ -- $ 506,805
=========================================================
Note: The Company filed under the SB regulations for fiscal 1994 and 1993 and
was not required to complete Schedule II. Accordingly, the Valuation and
Qualifying Accounts for these years have been omitted.
F-47
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ Paul A. Tanner January 11, 1996
-----------------------------
Paul A. Tanner, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ Paul A. Tanner January 11, 1996
- ------------------------------------
Paul A. Tanner
President and Chief Executive
Officer, Chairman of the
Board and Director
(Principal Executive Officer)
/s/ James Rudis January 11, 1996
- -------------------------------------
James Rudis
Executive Vice President
and Director
/s/ William E. Shatley January 11, 1996
- ---------------------------------
William E. Shatley
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Michael F. Buck January 11, 1996
- -----------------------------------
Michael F. Buck
Director
/s/ George R. Schrader January 11, 1996
- --------------------------------
George R. Schrader
Director
25