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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16885 Dallas Parkway, Suite 400
Dallas, Texas 75248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 732-0010
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------------
Common Stock, $.01 par value per share American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes 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 31, 1997, was
approximately $7.8 million. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and 10% beneficial owners are affiliates. As of
December 31, 1997 the registrant had issued and outstanding 14,376,171 shares
of the Company's common stock, $ .01 par value.
POLYPHASE CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Part I
Item 1 Description of Business 1
Item 2 Description of Property 7
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security 8
Holders
Part II
Item 5 Market for Registrant's Common Equity and 9
Related Stockholder Matters
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of
Financial Condition and
Results of Operation 12
Item 7A Quantitative and Qualitative Disclosures about 18
Market Risk
Item 8 Financial Statements 18
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 18
Part III
Item 10 Directors and Executive Officers of the 19
Registrant
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial 23
Owners and Management
Item 13 Certain Relationships and Related Transactions 26
Part IV
Item 14 Exhibits, Financial Statement Schedules and 28
Reports on Form 8-K
PART I
ITEM 1. Description of Business.
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General
The Company is a diversified holding company that, through its
subsidiaries, currently operates primarily in three industry segments: the food
segment, which produces high quality entrees, plated meals, soups, sauces and
poultry, meat and fish specialties (the "Food Group"); the forestry segment,
which distributes, leases and provides financing for industrial and logging
equipment (the "Forestry Group"); and the transformer manufacturing segment,
which manufactures and markets electronic transformers, inductors and filters
(the "Transformer Group"). The Company was incorporated in New Jersey in 1963
under the name Kappa Networks, Inc. In June 1991, through a merger with a
wholly owned subsidiary, the Company reincorporated in Pennsylvania and formally
changed its name to Polyphase Corporation. In June 1994, the Company, through a
merger with a wholly owned subsidiary, reincorporated in Nevada.
During 1993, under the direction of the current management team, the
Company embarked on an aggressive long-term program to diversify its activities
and expand its operations. At that time, the Company's sole operating entity
was Polyphase Instrument Co. ("PIC"), which conducts the Company's transformer-
related activities. PIC, active since 1956, manufactures and sells customized
transformers and communications filters, primarily to defense contractors and
their suppliers.
In connection with the Company's program of diversification and expansion,
the more significant acquisitions consummated by the Company were:
. Computer-Related Activities ("Computer Group") Through various
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transactions in fiscal 1993 and 1994, the Company acquired the operations of
several computer-related companies which were engaged in the computer marketing,
service and networking business and in software development. These operations
were all purchased from individuals and were generally accomplished through the
issuance of shares of various series of the Company's convertible preferred
stock. All such preferred stock issued was subsequently converted into shares
of the Company's common stock. The Company, during fiscal 1996, relinquished
control of the Computer Group, first by contributing the stock of Network
America, Inc. ("NAI"), Letronix, Inc., dba Computer Systems Concepts ("CSC"), PC
Repair of Florida, Inc. ("PCR") and Register-Mate, Inc. ("RMI") to a wholly-
owned subsidiary, PC Networx America, Inc. ("PCNA") and selling 51% of PCNA to
an unrelated corporation; and by selling 100% of the stock of Micro
Configurations, Inc. to the same unrelated entity. During fiscal 1997, the
Company disposed of its remaining 49% ownership interest, incurring a loss of
$3,614,000 in connection therewith. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation-Liquidity and Capital
Resources."
. Texas Timberjack, Inc. ("Timberjack" or "TTI") In June 1994, the
----------------------------------------------
Company acquired all of the outstanding capital stock of TTI from Harold Estes,
current President of TTI. Timberjack, with locations in Lufkin, Jasper,
Cleveland and Atlanta, Texas, is a distributor of industrial and logging
equipment in East Texas and Western Louisiana. The capital stock of TTI was
acquired from Mr. Estes for consideration of approximately $4,000,000 in cash, a
$10,000,000 promissory note payable to the order of Mr. Estes, and 100,000
shares of the Company's Series A Preferred Stock, which were subsequently
converted into 2,000,000 shares of Common Stock. Subsequent to June 1994, the
Company and Mr. Estes have modified, renewed and extended the promissory note
payable. As of September 30, 1997 the promissory note has a balance of
$13,998,916 (including accrued and unpaid interest) and is due April 6, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation- Liquidity and Capital Resources."
. Overhill Farms, Inc. ("Overhill") In May 1995, the Company acquired
---------------------------------
all the operating assets of IBM Foods, Inc. The purchase, which was
accomplished through Overhill, a newly-formed subsidiary of the
1
Company, provided for cash payment to the seller of $31.3 million plus the
assumption by the Company of certain liabilities of the acquired business.
Overhill, located in Culver City, California, is a food processor that produces
high quality entrees, meals, soups, sauces and poultry, meat and fish
specialities primarily for customers in the weight loss, airline and restaurant
chain industries.
Products and Services
Food Group
The Food Group, through Overhill, is a value-added manufacturer of quality
frozen food products including entrees, plated meals, soups, sauces, poultry,
meat and fish specialities. Overhill's strategy has been to position itself as a
provider of prepared foods to a number of prominent customers such as American
Airlines, Jenny Craig, United Airlines, Albertsons, Carl's Jr., Jack in the Box
and King's Hawaiian. Historically, Overhill has served four industry segments:
airlines, weight loss, food service and retail.
Forestry Group
The Forestry Group, through Timberjack, is a distributor of industrial and
logging equipment with locations in Lufkin, Jasper, Cleveland and Atlanta,
Texas. TTI carries the Timberjack, Blount and Hyundai lines of industrial and
logging equipment and the Ford and New Holland lines of farm equipment. TTI is
involved in the sale, leasing and financing of the equipment it distributes as
well as the servicing of all major brands of related equipment. TTI's
operations are primarily concentrated in the forested areas of East Texas
although its market extends to surrounding states. TTI operates in a fragmented
industry where its major competition is from distributors and dealers of
Caterpillar and John Deere equipment. TTI estimates that it currently holds
approximately 60% of the shear (a machine that cuts the timber) market, 35% of
the skidder (a machine that transports the logs out of the forest onto a loader)
market and 70% of the loader (a machine that stacks trees onto trucks) market in
Texas.
Transformer Group
The Company's Transformer Group consists solely of PIC. Transformers are
electromagnetic mechanisms used in a wide variety of electronic and electro-
mechanical applications to convert electrical currents from one voltage level to
another. The Transformer Group's products include power transformers used in
direct current power supplies; audio transformers used in voice and audio signal
circuits for transferral of low level, precise signals; pulse transformers used
in radar, digital signaling and computer applications; telephone modem
transformers used in telephone circuits; and ferro-resonant transformers used in
computers and stabilized power systems. PIC manufactures a large line of
transformers ranging from miniaturized versions to oil-filled units, with power
levels ranging from microwatts to over 20 kilowatts, voltage levels of up to 20
kilovolts and currents ranging from micro-amperes to 700 amperes. PIC supplies
products to meet its customers' exact specification requirements.
Specifications include frequency response and temperature range; energy loss;
and voltage, current, and energy levels.
Sales and Marketing
Food Group
Overhill markets its products through an internal sales force and outside
food brokers. While Overhill will continue to service the airline and weight
loss industries, management has identified the retail and food service markets,
particularly the emerging home meal replacement market, as areas of potential
significant future growth. Overhill management has restructured its sales force
and redirected its marketing efforts to concentrate on these markets. During
fiscal 1997, Overhill began to see the effects of these efforts, with products
under both the Overhill brand and under private label now being sold in major
retail and food service chains.
2
Approximately 56% of Overhill's sales in fiscal 1997 were derived from
three customers, Jenny Craig, Inc. (31%), American Airlines (13%) and King's
Hawaiian (12%). On a consolidated basis these three customers represented
approximately 20%, 8% and 8% of the Company's total sales, respectively.
Although the Company's relationships with these customers remains strong,
signified by Jenny Craig entering into a two year supplier agreement in August
1997 (with an option for a third year), there can be no assurance that these
relationships will continue. A decline in the sales of the Food Group's
products to these customers or the loss of, or a significant change in the
relationship between the Company and any of these key customers could have a
material adverse effect on the Company's business and operating results. It is
management's objective to reduce the reliance on this concentration of accounts
by further expansion into the retail and food service markets as described
above.
Forestry Group
Timberjack currently maintains sales and distribution offices in Lufkin,
Jasper, Cleveland and Atlanta, Texas primarily to serve Eastern Texas and
Western Louisiana. Sales are generated through repeat customers, advertisements
in various trade publications and direct marketing calls on companies located in
the area. A general sales manager and branch managers supply technical and
operational support at the Lufkin headquarters while nine salesman have direct
responsibility for customer relationships. TTI meets customers' orders for new
equipment and replacement parts out of existing inventory or through purchase
orders placed with the manufacturers TTI currently represents.
Approximately 54% of TTI sales during fiscal 1997 are from new equipment
sold to companies involved in the forestry industries. Additional revenues are
derived from sales of used equipment (24%), servicing of equipment (5%), sales
of parts (15%) and financing equipment sales (2%). No single customer accounts
for more than 10% of TTI's sales. Equipment sales financed by TTI are typically
for periods ranging from 12 to 24 months at interest rates ranging from 12.5% to
18% per annum.
Transformer Group
The Company sells transformers and filters directly to customers and
through commissioned sales representatives and outside brokers principally in
the Mid-Atlantic and Northeast regions of the United States. As of September 30,
1997, PIC had an in-house sales and marketing staff of two full-time employees.
To obtain new business, PIC relies on referrals from its existing customer base,
advertisements in various trade journals and leads generated by its reputation .
Approximately 83% of the transformers and filters sold by PIC are
components of systems used by the United States Armed Forces. Most of the
remaining 17% is utilized in various industrial processing systems and
commercial avionics. Major projects in which PIC's products are currently used
include the United States Navy's Aegis Destroyer, Airborne Self Protection
Jammer and new nuclear attack submarine as well as the United States Army's
Bradley Infantry Fighting Vehicle and PLGR Global Positioning System Receiver.
Approximately 5% of PIC's sales from these operations in fiscal 1997 were direct
spares procurement from various government activities.
PIC's products are sold to approximately 200 active accounts, consisting
principally of defense contractors and their suppliers. Nine customers
accounted for approximately 80%, 76%, and 78% of PIC's sales for fiscal 1997,
1996, and 1995, respectively, which percentages represented approximately 1%,
1%, and 2% of the Company's consolidated sales, respectively. The three largest
accounts, Lockheed Martin, Rockwell International, and ITT Avionics comprise
approximately 20%, 20% and 12%, respectively, of PIC's overall sales.
3
Manufacturing and Sourcing
Food Group
Overhill's manufacturing operations are located in three separate
facilities near Los Angeles, California. The operations are labor intensive
requiring semi-skilled employees. All manufacturing employees are unionized
with contracts covering each plant. Such contracts are due to expire at various
times over the next three years. A single plant is currently concluding
negotiations with the local Teamsters Union to renew the labor contract which
expired on November 30, 1997 and anticipates ratification by the union in early
1998. Until ratification the union has agreed to work under the prior
contract. 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 1997, the plants each operated at
approximately 75% of capacity.
The Company's ability to economically produce large quantities of its
products, while at the same time maintaining a high degree of quality, depends
in a large part on its ability to procure raw materials on a reasonable basis.
The Company relies on a few large suppliers for its poultry products with the
remaining raw materials purchased from suppliers in the open market. The Company
does not anticipate any difficulty in acquiring these materials in the future.
Raw materials, packaging for production and finished goods are stored on site or
in a public frozen food storage facility until shipment is required.
Transformer Group
PIC operates a manufacturing facility in Fort Washington, Pennsylvania that
produces approximately 92% of the Transformer Group's transformers and all
filters. Transformers are also manufactured at a leased facility in Haiti. See
"Description of Property - Transformer Group."
The manufacturing process for PIC's products is labor intensive, involving
mostly low-technology, manually operated machinery. The process is not highly
automated since PIC's products are custom designed to customer specifications.
Wherever economically feasible, operations are automated. Given the nature of
PIC's products and their end uses, PIC maintains extensive test equipment for
its quality control operation.
Raw materials used by PIC include ferrites, laminates, copper wire and
electronic components purchased in predesigned configurations. Substantially
all raw materials and components are purchased from domestic sources and are
widely available. PIC carries adequate inventories of raw materials and other
product components as required to meet open customer orders.
Backlog
Food Group
At September 30, 1997, Overhill had unfilled purchase orders aggregating
approximately $2,400,000, as compared to $2,350,000 at September 30, 1996.
Substantially all of the backlog is expected to be delivered to customers within
the following twelve month period. Overhill typically delivers product directly
from finished goods inventory and as such does not maintain a large backlog.
The Company 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 its business. Orders are subject to changes in quantities or to
cancellation with thirty days notice without penalties to customers.
4
Forestry Group
As a dealer, servicer and financier of forestry equipment, TTI does not
maintain a backlog of orders. Equipment ordered by a customer that is not in
inventory takes approximately one to six weeks to be shipped from the
manufacturer or another distributor.
Transformer Group
At September 30, 1997, PIC had unfilled purchase orders aggregating
approximately $2,200,000 as compared to $1,200,000 at September 30, 1996.
Orders may be subject to cancellation at the customer's discretion subject to
substantial cancellation charges. Based on current delivery schedules and
shipments, management believes that the Transformer Group will ship
substantially all of its current backlog within the following twelve months.
The Transformer Group's backlog may not provide meaningful period-to-period
comparisons and such comparisons and the backlog may not be indicative of future
results.
Product Development
Food Group
Overhill maintains a comprehensive test kitchen, staffed by four chefs,
which formulate recipes and upgrade specific products for current customers and
establish production and quality standards. Products are developed based upon
either customers' specifications, conventional recipes, or new product
developments. Overhill is continuously developing recipes as customers' tastes
change. Overhill also maintains a quality control department for testing and
quality control. In 1997 the Company continued its expansion into the retail
and food service areas with branded and private label entrees.
Forestry Group
TTI does not develop products for sale to the public. TTI relies primarily
upon two suppliers, Timberjack, Inc. and Blount, for a majority of its new units
and parts.
Transformer Group
PIC does not maintain a formal research and development program, nor are
material amounts expended for research and development. However, PIC's
engineering, marketing and operations staff are regularly engaged in engineering
design and product development since most products are designed to customers'
specifications. Customers either supply PIC with design specifications or submit
proposed designs and require PIC to determine whether such designs will meet the
customers' performance specifications. PIC continuously modifies and enhances
its transformers and communication filters to accommodate its customers' systems
and equipment and, in this manner, attempts to increase its market penetration.
Patents, Trademarks and Copyrights
The Company does not have patents or patent applications pending on any of
its products, although it may file such patent applications in the future. The
Company attempts to protect its proprietary interests in its products by
entering into non-disclosure agreements with customers.
The Company has registered the trademarks "Polyphase" and "Overhill Farms"
in the United States Patent and Trademark Office.
5
Regulation
The Food Group is subject to strict government regulation particularly in
the health and environmental areas by the United States Department of
Agriculture ("USDA"), the Food and Drug Administration ("FDA"), Occupational
Safety and Health Organization ("OSHA") and the Environmental Protection Agency
("EPA"). The Food Group anticipates increased regulation by the USDA and FDA
concerning food processing and storage. The Company's food processing
facilities are subject to on-site examination, inspection and regulation by the
USDA. Compliance with the current applicable federal, state and local
environmental regulations has not had, and the Company does not believe that in
the future such compliance will have, a material effect on its financial
position, results of operations, expenditures or competitive position. During
1997, the Company implemented a Hazard Analysis Critical Point Plan to ensure
proper handling of all food items.
The Transformer and Forestry Groups are required to comply with various
governmental regulations and requirements concerning the discharge of materials
into the environment or otherwise relating to the protection of the environment.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position.
The Company takes all reasonable precautions to ensure that its operations,
processing plants and facilities operate in a safe, sanitary and
environmentally-sound manner. However, events beyond the control of the
Company, such as the adoption by the government of more stringent environmental
regulations could adversely affect its operations. Management believes that the
Company is in substantial compliance with all applicable laws and regulations
relating to the operations of facilities.
Competition
In General
Competition in the industries in which the Company operates generally is
intense. Many of the Company's competitors have greater market recognition and
greater, financial, technical, marketing and human resources than the Company.
There can be no assurance that the Company will compete successfully against
existing companies or new entrants to the marketplace. Furthermore, the
development by competitors of new or improved products, services and/or
technologies may render the Company's products or services (or proposed products
or services) obsolete or less competitive.
Food Group
Overhill's food products, consisting primarily of poultry, pasta and to a
lesser extent beef and assorted related products, compete with those produced by
numerous regional and national firms. Many of these companies are divisions of
larger fully integrated companies such as Tyson Foods and ConAgra, which have
greater financial and marketing resources than the Company. Competition is
intense with most firms producing similar products for the food service and
retail industries. Competitive factors include price, product quality, product
development, customer service and, on a retail basis, brand name recognition.
Overhill competes in this market by its ability to produce small/custom product
runs within a short time frame and on a cost effective basis.
Forestry Group
Competition in the forestry segment is highly fragmented in the Eastern
Texas and Western Louisiana area where TTI principally operates. Because of it
lengthy historical presence in these regions, TTI believes it has established a
strong local identity in its field with a proven record of delivering equipment
on a timely basis, providing satisfactory financing and strong customer support
and service. TTI is one of only a few distributors of Timberjack and Blount
forestry equipment in its operating area. TTI has the added advantage of being
a leading seller and financier of various makes and models of used logging
equipment. Principal competitors include local John Deere and Caterpillar
distributors.
6
Transformer Group
The business in which PIC is engaged is highly competitive, characterized
by ease of entry and intense regionally-based competition. Competition is based
on such factors as price, performance, reliability and product quality. The
Company believes that the reputation of PIC's engineering department and the
relationships it has established with its customers (having been in business
over 30 years) are important to its ability to compete successfully.
PIC competes directly with a number of manufacturers, primarily in the
United States, certain of which have financial and other resources substantially
greater than PIC. In addition, such manufacturers generally have more extensive
facilities than those that are, or in the foreseeable future may become,
available to PIC. In this market, changing governmental policies can rapidly
create or eliminate areas of competition and market share. There is no assurance
that PIC will be able to maintain or further increase its market share.
Employees
As of September 30, 1997, the Company had approximately 893 employees as
follows: approximately 725 full-time employees in the Food Group; 89 full-time
employees in the Forestry Group; 72 full-time employees in the Transformer
Group; and 7 full-time employees in the corporate office. All subsidiaries
presently provide group health plans for their domestic employees and pay a
portion of the costs associated with such plans. TTI also maintains a profit
sharing plan for its employees.
ITEM 2. Description of Property.
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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. Effective December 1, 1997 the Company entered into an agreement to sell
its corporate headquarters building and expects to relocate in early 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Food Group
Overhill leases three manufacturing facilities in the Los Angeles,
California area. Plant No.1 is located in Inglewood, California and has 39,000
square feet of manufacturing area. Plants No. 2 and No. 3 are located in
Vernon, California and have 49,000 and 27,000 square feet of manufacturing area,
respectively. In addition to the manufacturing facilities, Overhill also leases
two dry goods warehouses of 13,500 and 11,500 square feet, a 7,700 square foot
frozen storage facility in Inglewood, California and a 7,900 square foot office
in Culver City, California. While Overhill believes that the existing
facilities are adequate to meet its requirements in the foreseeable future, the
Company is currently reviewing the cost effectiveness of consolidating all
manufacturing and administrative functions into one location.
Forestry Group
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas
and leases buildings in Cleveland and Atlanta, Texas. One building in Lufkin,
Texas has 38,500 square feet, of which 18,900 square feet comprise the shop
area. The other two buildings in Lufkin have 3,600 and 4,200 square feet and
comprise the wash room and storage room, respectively. One building in Jasper,
Texas has 10,000 square feet of which 6,600 square feet comprises the shop area.
The other building in Jasper has 900 square feet and is used as a wash and paint
room. The Cleveland building has approximately 1,800 square feet and is used as
a shop and for parts.
7
The Atlanta building has approximately 7,500 square feet of which 3,750
comprises the shop area. The remaining area is used for parts sales.
Transformer Group
PIC's domestic transformer and filter manufacturing operations are housed
in a 44,000 square foot, leased, single-story facility in Fort Washington,
Pennsylvania, located about 30 miles from Philadelphia. The Company is
currently in negotiations and intends to renew the lease for this facility,
which is due to expire in May 1998. PIC's foreign manufacturing operations are
based in an 8,400 square foot building in Port-au-Prince, Haiti, which is rented
by PIC on a month-to-month basis. Management believes that these facilities are
in suitable condition and are adequate for PIC's needs in the foreseeable
future.
8
ITEM 3. Legal Proceedings.
------------------
In January 1997, a suit was filed in District Court of Dallas County
against the Company by Rice Partners II, L.P., subordinated debt holders of
Overhill. The suit claimed, among other things, that the Company breached
covenants of the subordinated debt agreement and refused to cure the defaults
within a reasonable period of time. On December 4, 1997, the suit was settled
and the action has been dismissed by the Court. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation - Liquidity and
Capital Resources."
During fiscal 1997, five substantially identical complaints were filed in
the United States District Court for the District of Nevada against the Company
and certain of its officers and directors. The suits seek class action status
and assert liability based on alleged misrepresentations that resulted in the
market price of the stock being artificially inflated. The Company intends to
vigorously defend these actions. One of such suits was dismissed by the Court
subsequent to September 30, 1997.
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.
The Company is not a party to any other material pending litigation.
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.
9
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
----------------------------------------------------------------------
The Common Stock is listed on the American Stock Exchange under the symbol
"PLY." The following table sets forth the range of high and low sales prices
for the Common Stock on the American Stock Exchange for the periods indicated:
Fiscal 1997 High Low
----------- ---------------- ----------------
Quarter from October 1, 1996
to December 31, 1996 $ 7.4375 $ 3.8750
Quarter from January 1, 1997
to March 31, 1997(1) $ 5.5000 $ 3.8125
Quarter from April 1, 1997
to June 30, 1997(1) $ 2.6250 $ 1.2500
Quarter from July 1, 1997
to September 30, 1997 $ 2.5000 $ 0.8750
Fiscal 1996 High Low
----------- ---------------- ----------------
Quarter from October 1, 1995
to December 31, 1995 $ 4.7500 $ 3.1250
Quarter from January 1, 1996
to March 31, 1996 $ 4.3750 $ 2.7500
Quarter from April 1, 1996
to June 30, 1996 $ 4.2500 $ 3.0625
Quarter from July 1, 1996
to September 30, 1996 $ 7.2500 $ 1.8750
Fiscal 1995 High Low
----------- ---------------- ----------------
Quarter from October 1, 1994
to December 31, 1994 $ 5.7500 $ 3.1250
Quarter from January 1, 1995
to March 31, 1995 $ 3.7500 $ 2.1250
Quarter from April 1, 1995
to June 30, 1995 $ 3.6250 $ 2.6875
Quarter from July 1, 1995
to September 30, 1995 $ 3.8750 $ 3.0625
- --------------------------------------------------------------------------------
(1) On February 3, 1997, the Company agreed with the American Stock Exchange,
Inc. to temporarily halt trading of its Common Stock pending the filing of its
annual report on Form 10-K for the fiscal year ended September 30, 1996. On
June 16, 1997 the Form 10-K and the Forms 10-Q for the quarters ended December
31, 1996 and March 31, 1997, were filed and trading resumed on June 17, 1997.
10
The Company has never paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such
policy is, within the limitations and restrictions described below, subject to
change based on current industry and market conditions, as well as other factors
beyond the control of the Company.
The Company is restricted from paying dividends on its Common Stock
pursuant to the indenture (the "1999 Indenture") executed in connection with the
issuance of $4,000,000 of original principal amount of 12% Senior Convertible
Debentures due July 1, 1999 (the "1999 Bonds"). In general, the 1999 Indenture
prohibits the Company from paying or making within any 12-month period dividends
or distributions on its Common Stock having a value in excess of 50% of the
consolidated net income of the Company, unless each holder of the 1999 Bonds
receives an amount equal to its pro rata portion of the dividend or distribution
(on an as-converted into Common Stock basis). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
As of September 30, 1997, the Company estimates that there were
approximately 2,200 beneficial owners of the Company's Common Stock, represented
by 217 holders of record.
Recent Sales of Unregistered Equity Securities
In November 1995, the Company sold in a private transaction with Infinity
Investors, Ltd. ("Infinity") for $2,500,000 cash, 250,000 shares of Series A-3
Preferred Stock having an aggregate redemption value of $2,500,000 and
convertible into Common Stock as provided in the Certificate of Designations for
the Series A-3 Preferred Stock.
In August 1997, the Company sold in a private transaction with Black Sea
Investments, Ltd. ("Black Sea") for net proceeds of approximately $734,000 cash,
7,500 shares of Series F - 6% Convertible Preferred Stock having an aggregate
redemption value of $750,000 and convertible into Common Stock at a variable
rate equal to 75% of the average closing market price for the Company's common
stock for the previous five trading days prior to conversion.
The shares of Preferred Stock described above were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), and were issued by
the Company in reliance on exemptions to the Securities Act. With respect to the
shares of Series A-3 Preferred Stock issued to Infinity, such shares were issued
pursuant to the exemption provided by Section 4(2) of the Securities Act.
Infinity was in compliance with the necessary requirements of Section 4(2) to
receive such exemption. Of the shares of Series A-3 Preferred Stock, that were
issued no such shares were issued to any party other than Infinity. With respect
to the shares of Series F - 6% Convertible Stock issued to Black Sea, such
shares were issued pursuant to the exemption provided by Regulation S of the
Securities Act. Black Sea is a non United States person as that term is defined
in the Securities Act. Of the shares of the Series F-6% Convertible Stock that
were issued, no such shares were issued to any party other than Black Sea.
11
ITEM 6. Selected Financial Data
-----------------------
The table set forth below is selected financial data for the Company for
each of the last five fiscal years. This information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations, and the Consolidated Financial Statements and Notes
included elsewhere herein.
Fiscal Year Ended September 30
- ----------------------------------------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
Income Statement Data: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Revenues $ 151,949 $ 149,541 $ 102,035 $ 24,970 $ 7,326
Operating Income 6,584 6,665 6,752 355 390
Earnings (Loss) Before
Extraordinary Items and
Cumulative Effect of Change
in Accounting Principle (18,825) (242) 3,286 (1,384) 852
Net Income (Loss) $ (18,825) $ (242) $ 3,286 $ (1,017) $ 1,036
=========== =========== =========== ========== ==========
Income (Loss) per Common Share:
Before Cumulative Effect of
Extraordinary Item and Change
in Accounting Principle $ (1.41) $ (.03) $ .26 $ (.28) $ .24
Extraordinary Items - - - .01 .05
Cumulative Effect of
Accounting Change - - - .06 -
----------- ----------- ----------- ---------- ----------
Net Income (Loss) $ (1.41) $ (.03) $ .26 $ (.21) $ .29
=========== =========== =========== ========== ==========
Weighted Average Common
and Common Equivalent
Shares Outstanding 13,632,357 13,722,552 12,745,701 4,881,454 3,616,795
As of September 30
- ----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 72,149 $94,179 $88,159 $37,975 $ 9,034
Long-Term Debt 23,272 - 27,230 5,259 169
Total Liabilities 62,748 68,991 66,335 23,618 1,740
Accumulated (Deficit) (20,717) (1,488) (1,095) (4,381) (3,365)
Stockholders' Equity 7,402 23,998 21,137 14,357 7,293
12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operation.
-------------
Statements contained in this Form 10-K that are not historical facts,
including, but not limited to, any projections contained herein, are forward-
looking statements and involve a number of risks and uncertainties. The actual
results of the future events described in such forward-looking statements in
this Form 10-K could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996
For the year ended September 30, 1997 the Company's revenues increased
$2,408,000 (1%), to $151,949,000 from $149,541,000 in fiscal 1996. Operating
income for the year ended September 30, 1997 decreased $81,000 (1%) to
$6,584,000 from $6,665,000 in fiscal 1996. Net loss attributable to common
stockholders for the year ended September 30, 1997 was $19,229,000, a decrease
of $18,837,000 from the net loss of $392,000 in fiscal 1996.
Revenues from the Forestry Group increased substantially as that industry
continues to recover from a slump in timber prices experienced in 1995 and 1996.
This revenue increase more than offset the revenue reductions resulting from
the disposal of the computer operations and the slight decrease in revenues of
the Food Group. Selling general and administrative expenses on a consolidated
basis decreased $3,210,000 primarily due to the disposal of the computer
operations in July 1996. Operating income on a consolidated basis remained flat
for fiscal 1997 as compared to fiscal 1996, primarily due to slightly lower
gross margins in the Food segment.
For the year ended September 30, 1997, the Company had nonrecurring charges
to income of $18,452,000 consisting of $14,838,000 from the Company's writeoff
of its related party receivable from Stadium Partners and $3,614,000 in losses
relating to the disposal of its remaining interest in the computer operations.
(See "Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended
September 30, 1995"). The advances made to PLY Stadium Partners Inc. ("Stadium
Partners"), a private investment firm headed by Mr. Paul A. Tanner, Chairman and
Chief Executive Officer of the Company, during fiscal 1997, 1996 and 1995 were
deemed uncollectible, as the project could not secure long term financing on the
land or otherwise gain the support required to construct the stadium. The
Company is pursuing the recovery of at least a portion of its loans to Stadium
Partners either through the sale of assets or the guarantees of the principals.
Amounts due the Company consisted of convertible debt, cash advances and amounts
accrued in 1996 for management fees, services and interest. The Company
recorded a reserve for amounts due the Company for management fees, services,
and interest totaling $3,340,000 in fiscal 1996.
During fiscal 1997, the purchaser of the Computer Group elected to
discontinue that company's efforts to effect a public registration of DataTell's
stock, thus precluding the Company from making a distribution of the stock to
its shareholders; additionally, purchase price adjustments of $87,000 resulted
in the elimination of the note receivable set up in prior year. The purchaser
also elected not to further pursue the operation of MCC, and, since the Company
has been unsuccessful in its attempts to recover MCC's assets, the amount due
under the $951,000 note receivable set up in the prior year has been determined
not to be realizable. The Company, in response to these actions by DataTell,
made the decision to further reduce its involvement in computer-related
businesses and entered into a new agreement with the controlling shareholder to
dispose of its remaining direct ownership of DataTell. The notes and certain
other assets were exchanged with the same unrelated third party for $200,000
cash and preferred stock convertible into a 3% equity interest in DataTell.
This transaction resulted in a loss of $2,576,000, which in addition to the
$1,038,000 loss on notes receivable described above resulted in a total loss of
$3,614,000 being charged to operations during fiscal 1997 relating to the
disposal of its remaining interest in the computer operations.
The Company does not expect there to be any significant ongoing liabilities from
either the stadium or computer operations and intends to focus its direction on
expanding through acquisitions in its two remaining core businesses.
13
The Company's interest expense increased $790,000 to $7,180,000 (12%) for
the year ended September 30, 1997 as compared to $6,390,000 for the prior year.
The increase was primarily due to the increased rate charged by Rice Partners,
LP on the subordinated debt at Overhill. The rate increased from 13% to a
default rate of 15% beginning January 1997 and continued through December 1997,
at which time the Company refinanced the debt. The Company also incurred
additional interest at 16% on the second lien note on the Company's corporate
headquarters building beginning in January 1997. See "Liquidity and Capital
Resources."
The Company recognized a tax benefit of approximately $654,000 for the year
ended September 30, 1997 as compared to tax expense of $1,594,000 for the year
ended September 30, 1996. The benefit in 1997 resulted primarily from the
statutory tax benefit of the $18.7 million loss by the Company, reduced by the
valuation allowance relating to the portion of the tax benefits that the Company
was not able to utilize through carryback of such losses to prior years.
The Company incurred a noncash charge for warrant accretion of $811,000 for
the year ended September 30, 1997, as compared to $503,000 for the year ended
September 30, 1996. The charge consisted of warrant accretion to fair market
value in anticipation of the redemption in connection with the refinancing of
the Rice debt in December 1997. See "Liquidity and Capital Resources."
Sales in the Food Group decreased $2,594,000 (2%) to $96,177,000 in fiscal
1997 from $98,771,000 in 1996. Increased competitive pressure, particularly in
the airline segment, resulted in a decline in gross profits to $14,696,000 or
15.3% as compared to $16,098,000 or 16.3% in the previous fiscal year. During
the period, management has implemented programs to restore margins to historical
levels, primarily through more aggressive raw materials purchasing procedures,
increased account profitability reviews, customer price adjustments where
possible and the further implementation of manufacturing cost reduction
procedures, including a significant reduction in inventory levels, especially in
the area of finished goods.
Sales in the Forestry Group increased $17,955,000 (52%) to $52,202,000 in
fiscal 1997 from $34,247,000 in fiscal 1996. Operating income increased
$1,243,000 (41%) to $4,282,000 in fiscal 1997 from $3,039,000 in fiscal 1996.
Increased revenues were primarily due to increased demand for new equipment in
East Texas as the lumber prices stabilized in fiscal 1997 and large operators
resumed making capital expenditures. Overall gross profit margin rates decreased
in fiscal 1997 due largely to a change in the sales mix, from used to new
equipment. During the year, sales of new units increased substantially and the
number of used units, which are traditionally sold at higher margins, decreased.
Management anticipates that this sales trend will continue through 1998, as
demand in the forestry industry remains strong for wood based products.
Operating income increased primarily as a result of higher sales volume, offset
by an increase in selling, general and administrative expenses associated with
the new facility in Lufkin, an additional sales office and a larger operations
staff.
The Transformer Group's sales increased $21,000 (1%) to $3,570,000 in
fiscal 1997 from $3,549,000 in fiscal 1996. Operating income decreased $144,000
(187%) primarily due to higher general and administrative costs during the year.
The Company anticipates that revenues and operating income will not increase
significantly as the industry is being affected by technical innovations in
alternative sources of electro-mechanical devices.
The Company has reviewed its operational and accounting computer systems
for compliance in the year 2000. Based upon management's assessment, the Year
2000 issue is not expected to have material impact on the Company.
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995
For the year ended September 30, 1996 the Company's revenues increased
$47,506,000 (47%), to $149,541,000 from $102,035,000 in fiscal 1995. Operating
income for the year ended September 30, 1996 decreased $87,000 (1%) to
$6,665,000 from $6,752,000 in fiscal 1995. Net income attributable to common
shareholders for the year ended September 30, 1996 was a loss of $392,000, a
decrease of $3,678,000 (112%) from net income of $3,286,000 in fiscal 1995. The
increase in revenues was attributable to the inclusion of Overhill for a full
twelve months in fiscal 1996 as compared to twenty one weeks in fiscal 1995,
offset somewhat by reduced sales at TTI and the Computer Group, control of the
latter of which was divested in July 1996. The
14
decrease in net income to common stockholders was attributable to increased
interest expense from the Overhill acquisition, the reduction of tax benefits
available during the year, reduction of profits at TTI, losses incurred by the
Computer Group and dividends on the outstanding preferred stock.
After evaluating the industry and growth potential of the Computer Group,
management determined current and future operating margins within the Computer
Group no longer met long term objectives. Consequently, in July 1996 the Company
sold a controlling interest in the Computer Group to an unrelated third party.
The sale of 51% of a newly-formed subsidiary, whose sole assets consisted of
the capital stock of Network America, Inc., PC Repair of Florida, Computer
Systems Concepts, and Register Mate, Inc., occurred in July 1996. For the year
ended September 30, 1996 the Computer Group contributed revenues of $10,398,000
and operating losses of $1,531,000. The Company, in fiscal 1996 without the
Computer Group, would have realized revenues of approximately $139,142,000 and
operating income of $8,196,000.
Also during fiscal 1996 the Company reached an agreement to manage the
development and construction of a domed stadium in Las Vegas, Nevada, a project
being developed by PLY Stadium Partners, Inc. ("Stadium Partners"), a private
investment firm headed by Mr. Paul A. Tanner, Chairman and Chief Executive
Officer of the Company. The Company's involvement was to include the marketing
of luxury suites, premium seating and sales of concessions, sponsorships and
other ancillary rights. The Company funded $4,000,000 of debt that (1) is
convertible into a 14% economic interest in Stadium Partners and (2) is
guaranteed by Mr. Tanner and the Pyrenees Group, a private investment firm
controlled by Mr. Tanner. Beginning in January 1996, the Company began
recording a monthly fee for managing the project. For the twelve months ended
September 30, 1996, the Company accrued management and service revenues of
$2,550,000 and interest income of $790,000 related to the Company's activities
with Stadium Partners. At September 30, 1996, the total amount receivable from
Stadium Partners amounted to approximately $13.3 million, which included the
convertible debt and management fees discussed above, as well as additional
advances made by the Company. The collectibility of this receivable, which
approximated $18 million, remains dependent upon the success of the project
and/or performance under the guarantees referred to above.
On November 15, 1996, Stadium Partners, through a newly-formed partnership
(the "Partnership"), purchased 62 acres in Las Vegas for the development of the
stadium and adjacent convention facility. Financing was provided by a Lehman
Brothers affiliate ("Lehman"), with the lender also receiving 50% equity
interest in the partnership. As a result of the new partnership arrangement,
Stadium Partners is precluded from making any revenue distributions until
permanent financing is arranged or until revenues from the sale of luxury
suites, premium seats and/or concession rights are sufficient to repay the
financing provided by Lehman. Stadium Partners launched its marketing campaign
in Las Vegas on January 15, 1997, but by March 15, 1997, sales were insufficient
to satisfy the Lehman repayment. As a result of Stadium Partners' failure to
make timely payment of its obligation to Polyphase, the Company was required to
establish a reserve of $3.34 million against the income accrued, which after
applicable taxes reduced net income by $2.2 million. The reserve will be
reduced as collections and distributions, if any, are made pursuant to the
Stadium Partner's loan agreements. There was no assurance that payments would
be made and the Company discontinued accruing for interest and management fees
after fiscal 1996.
Sales in the Food Group increased $58,376,000 (145%) to $98,771,000 in
fiscal 1996 from $40,395,000 for the twenty one week period during fiscal 1995
in which the Company owned the Overhill operations. Overall sales remained
stable during the year despite the downturn in the weight loss sectors and
airline sectors. Overhill's expansion into brand name entrees and restaurant
specialty products offset the sales decline in other sectors. Brand name frozen
entrees have begun to gain name recognition and sales momentum at the regional
level while specialty products for the restaurant industry are developing market
share in a competitive environment. Operating income for fiscal 1996 was
$6,260,000 as compared to $2,708,000 for the twenty one weeks of fiscal 1995.
Gross margins on sales increased while operating income as a percentage of
revenues decreased. The changes resulted from a change in the product mix as
more emphasis was placed on the higher margined specialty products which require
higher marketing and administrative expenses.
The Forestry Group sales decreased $8,531,000 (20%) from $42,778,000 in
fiscal 1995 to $34,247,000 in fiscal 1996. Operating income decreased
$1,651,000 (35%) from $4,691,000 in fiscal 1995 to $3,040,000 in fiscal 1996.
The decreases in revenues and operating income are attributable to unseasonable
weather in fiscal
15
1996, contributing to weaker timber prices and decreased sales of logging
equipment. Timberjack also incurred additional expenses while moving its Lufkin
location to a larger facility and opening a sales office in Atlanta, Texas. See
"Business-Properties" and "Liquidity and Capital Resources."
The Transformer Group's sales decreased $54,000 (1%) from $3,603,000 in
fiscal 1995 to $3,549,000 in fiscal 1996. Operating income also decreased
$226,000 (75%) primarily due to higher general and administrative costs during
the year and the effects of a fire which closed the business for three weeks.
The Computer Group, as mentioned above, was consolidated into PC Networx
America, Inc., a 51% interest of which was sold July 1, 1996. Revenues for the
nine months of fiscal 1996 were $10,398,000 as compared to revenues of
$15,259,000 for twelve months in fiscal 1995. The group incurred operating
losses of $1,530,000 in fiscal 1996 as compared to operating income of $549,000
in fiscal 1995. The decreases in revenue and losses in Computer Group were
attributable to inventory adjustments in the third quarter of fiscal 1996 and
significant declines in prices of memory and other components. These factors
contributing with the lower gross margins on "clone" computers resulted in
management's decision to sell a controlling interest in the group.
Liquidity and Capital Resources
Principal sources of liquidity for the Company are cash flow from
operations, cash balances and additional financing capacity. The Company's cash
and cash equivalents increased $783,000 to $1,064,000 at September 30, 1997,
compared to $281,000 at September 30, 1996.
The Company generated $6,514,000 cash from operations in fiscal 1997 as
compared to $2,775,000 in fiscal 1996. The increase in cash flow from
operations results primarily from decreases in inventory levels at the Overhill
Farms subsidiary and increased operating profits from Texas Timberjack.
Management at Overhill continues to streamline the manufacturing operation and
reduce inventory levels by improvements in production scheduling and timing of
materials purchased.
The Company's investing activities for the year ended September 30, 1997
resulted in a use cash of approximately $4,750,000 as compared to $9,812,000 for
the year ended September 30, 1996. During fiscal 1997 and 1996 the Company's
use of cash consisted primarily of advances to Stadium Partners. The funds
advanced during fiscal 1997 included $2.4 million drawn from an existing line of
credit and $2.5 million from a six month term note described below. Capital
expenditures resulted in a use of cash of $758,000 in fiscal 1997, primarily
for new manufacturing equipment at Overhill.
The Company's financing activities for the year ended September 30, 1997
resulted in the use of cash of $981,000, compared to cash provided of $4,043,000
in fiscal 1996. During fiscal 1997, the Company borrowed $2.8 million on a note
payable secured by real estate and received $734,000, net of transaction costs,
in a private placement of preferred stock. The funds of these transactions were
used repay an existing real estate mortgage relating to the corporate office
building and to repay a note incurred for funds advanced to Stadium Partners
described below.
During January 1997, in connection with an advance made to Stadium
Partners, the Company borrowed $2.5 million on a 16% six month note,
collateralized by a second lien on the Company's corporate headquarters
building. When the Company was unable to make the principal payment when due,
the lender elected to post the real estate for foreclosure. Prior to the
foreclosure proceeding, the Company entered into two transactions described
below which enabled it to repay this loan as well as the unpaid balance of the
first mortgage payable to Comerica Bank-Texas in the amount of $773,000.
The Company in August 1997, through its subsidiary Dallas Parkway
Properties Incorporated ("DPPI"), whose principal asset is the corporate office
building, borrowed $2.8 million on a first mortgage note payable to National
Operating, L.P. The note, collateralized by the office building and guaranteed
by the Company, is payable monthly, interest only at 14% per annum through July
1, 1999, with all remaining interest and principal, together with an "exit fee"
of $56,000, due and payable on August 1, 1999. The Company sold DPPI effective
December 1, 1997, with the buyer assuming the debt on the corporate office
building. The Company, subsequent
16
to the sale, is paying the buyer rent of approximately $13,000 on a month to
month basis and expects to relocate its corporate office in early 1998.
The Company also sold in August 1997, for net proceeds of approximately
$734,000 cash, 7,500 shares of newly-designated Series F 6% Convertible
Preferred Stock to Black Sea Investments, Ltd. ("Black Sea"). This preferred
stock is immediately convertible into the Company's Common Stock at a conversion
price equal to 75% of the average bid price of the Common Stock for the five
consecutive trading days immediately preceding the date of conversion. In
connection with this transaction, the Company recorded a non-cash dividend of
$250,000 representing the value assigned to the preferred stock's discount
feature. Subsequent to September 30, 1997, Black Sea has tendered 6,250 shares
of the Preferred Stock for conversion into 712,062 shares of the Company's
Common Stock. The Company also issued to Black Sea a warrant to purchase up to
500,000 shares of the Company's Common Stock at an exercise price of $1.50 per
share (subject to adjustment in certain circumstances) up to and including the
warrant expiration date of September 30, 2002. Such warrants were valued at
$150,000 and were recorded as a debt discount. The proceeds from the sale of
the preferred stock and the loan described in the preceding paragraph enabled
the Company to retire all previous indebtedness against the corporate office
real estate.
In connection with the acquisition of Texas Timberjack in 1994, the Company
sold $4.0 million in principal amount of the 1999 Bonds to Merrill Lynch World
Income Fund, Inc. and Convertible Holdings, Inc. (collectively, the "Purchasers"
or "Merrill Lynch"). Such Bonds bear interest at 12% per annum and are
convertible 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 a conversion price as provided in the agreements
equal to the approximate market price on the grant date. See "Market for Common
Equity and Related Stockholder Matters" relating to dividend restrictions
imposed by the Indenture. In December 1995, the Company sold $1.5 million of
principal amount of the 1997 Bonds to Merrill Lynch on generally the same terms
and conditions. See below for a description of the December 1997 refinancing
and payments of certain amounts due to Merrill Lynch.
Also in connection with the acquisition of Texas Timberjack, the Company
issued a note to Harold Estes, the seller and the current President of TTI, in
the original principal amount of $10.0 million, originally due on October 31,
1994, collateralized by all the capital stock of TTI as well as certain assets
of TTI. As of various maturity dates, the Company and Mr. Estes have entered
into subsequent agreements which have since modified, extended and renewed the
note. At September 30, 1997, the total amount unpaid under the note, including
accrued interest, was approximately $14.0 million, due December 1, 1997. The
note was further extended upon maturity at an interest rate of 16% and is
currently due on April 6, 1998. The Company anticipates that it will be
required to refinance this note upon maturity and is presently in negotiations
to accomplish this objective. There is no certainty, however, that the Company
will be able to refinance this note on acceptable terms, or at all, before April
6, 1998. In the event of default on the above note, the Company may be required
to transfer some or all of its ownership interest in TTI to Mr. Estes and the
Company would likely incur a noncash loss represented by the difference between
its net asset position in TTI (approximately $23 million at September 30, 1997)
and the note balance due Mr. Estes (approximately $14 million at September 30,
1997). Further, as of September 30, 1997, Polyphase is indebted to TTI for
approximately $6.4 million on a non-interest bearing intercompany advance from
TTI offset by an intercompany receivable due to Polyphase from TTI of
approximately $4.4 million. Theses amounts may be required to be settled in the
event of default on the Estes Note. The noteholder has no recourse against any
assets or capital stock of the Company, other than the stock of TTI, or any of
the Company's other subsidiaries except that Mr. Estes holds, as secondary
collateral, 2,000,000 shares of the Company's Common Stock owned by the Pyrenees
Group, a private investment firm owned in part by Paul A. Tanner, Chairman and
Chief Executive Officer of Polyphase. Also , in the event of default on this
Note, if the primary collateral, the Company's ownership in TTI, is not
sufficient to satisfy the balance owed to Mr. Estes, it is possible that some or
all of the Polyphase shares owned and pledged by Pyrenees as additional
collateral against the note would be retained by Mr. Estes.
Texas Timberjack currently has a $13.0 million revolving line of credit at
prime plus 1/2% at Comerica Bank-Texas. The line of credit is collateralized by
receivables and inventories of Timberjack, has been guaranteed by the Company
and expires in February 1998. The terms of the line of credit provide various
restrictive covenants, including, among other things, a limit on capital
expenditures to certain agreed levels, maintenance
17
of specified debt to net worth and fixed charge coverage ratios, limits on the
amount of TTI's contingent liabilities and maintenance of agreed upon levels of
working capital and tangible net worth, as well as restrictions as to amounts
that may be paid to the Company as dividends. At September 30, 1997, $5.6
million was outstanding on the credit line, with remaining availability, subject
to the borrowing base limitations, of approximately $6.7 million. Management is
currently in negotiations with Comerica and believes that this line of credit
will be extended upon expiration on favorable terms.
During 1995, the Company, through Overhill, entered into a financing
arrangement which provided a senior credit facility of $18.0 million with Finova
Capital Corporation ("Finova") and a subordinated debt placement of $13.0
million with Rice Partners II, L.P. ("Rice"). These funds were used to provide
financing for the acquisition of the operating assets of IBM Foods, Inc.
The senior credit facility included a revolving line of credit limited to
the lesser of $12.0 million, or an amount determined by a defined borrowing base
(based upon eligible receivables and inventory), and two term loans in initial
principal amounts totalling $6.0 million. At September 30, 1997, approximately
$7.9 million was outstanding under the line of credit, which bears interest at
the Citibank base rate plus 1.5%, and a total of approximately $2.0 million
under the term loans. The term loans were repaid in December 1997 as described
below. The senior credit facility contains various covenants which include
without limitation, a restriction on Overhill's capital expenditures, specified
debt to net worth ratios, specified levels of net worth and a limitation on the
ability of the Company to realize monies, including dividends, management and
consulting fees, from Overhill to $250,000 per annum.
The subordinated debt placement with Rice provided $13.0 million, bearing
interest at 13% per annum, payable semiannually, with principal payment
requirements of $6.5 million each due in 2002 and 2003. Rice was also granted
warrants, exercisable at a nominal price of $100, to purchase up to 22.5% of
the common stock of Overhill; Rice was further granted a "put" of the warrants
to the Company at a price based upon the higher of fair market, book or
appraised value of Overhill. The subordinated debt facility contained covenants
similar to those described relating to the senior credit facility.
Noncompliance with certain of the covenants resulted in litigation between the
Company and Rice as described below and in Item 3. As summarized below, in
December 1997, all amounts due Rice under the subordinated debt facility were
repaid, the warrants repurchased and the litigation settled.
As of September 30, 1997, the Company had not complied with certain
covenants involving most of its loan agreements, particularly those with Merrill
Lynch, Finova and Rice. In addition, the Company was involved in litigation
with Rice relating to the breach of certain covenants of the subordinated debt
agreement and the failure to cure such defaults within a reasonable period of
time.
On December 4, 1997, the Company, with Overhill as the borrower and the
Company as guarantor, obtained a $24.1 million term loan from The Long Horizons
Fund, LP ("Long Horizons"). The note is payable monthly, interest-only at prime
plus 4% through April 1999 and thereafter provides for principal amortization of
$250,000 per month, plus interest, until a final payment of approximately $19.9
million is due in December 2000. During the term of the loan, Overhill is
required to pay, on a quarterly basis, annual loan servicing fees totalling
$140,000, $300,000 and $440,000 for the first, second and third years of the
loan, respectively. The lender also received commitment and closing fees
totalling approximately $1.7 million. In the event the loan is paid in full
prior to maturity, the principal amounts due under the loan are to be reduced by
$1.0 million if the loan is repaid in full during the first year and $500,000 if
paid during the second year of the loan. Long Horizons was also issued a
warrant which entitles the lender to acquire, at a nominal price of $.01 per
share, 30% of the outstanding stock of Overhill; the Company has the option,
under certain circumstances, to repurchase from the lender, during the two-year
period following the date of the agreement, warrants to purchase 25% of the
Overhill stock (5/6 of the warrant held by Long Horizons), at a redemption cost
of $2.0 million. The loan is collateralized by all the outstanding stock of
Overhill owned by the Company as well as certain assets of Overhill.
Upon closing of the loan in December 1997, certain payments were made and
other obligations restructured as follows:
18
Merrill Lynch was paid in full all amounts due for principal and interest
under the 1997 bonds (approximately $1.6 million). Additionally, a partial
payment of $2.8 principal, plus accrued interest of approximately $200,000, was
made on the Merrill Lynch 1999 Bonds. The conversion price of the remaining
$1.2 million principal amount of 1999 Bonds was reduced to $3.00 per share (from
$5.65 per share), subject to further adjustment as provided by the Indenture.
Merrill Lynch was also granted warrants to purchase 400,000 shares of the
Company's Common Stock, exercisable over a five-year period, with certain
registration rights. The warrants are exercisable into 200,000 shares at $.01
per share and 200,000 shares at $1.125 per share, the market price on the date
of grant; the exercise prices are subject to adjustment to prevent dilution of
the holders' interests.
Finova was paid approximately $1.7 million, representing payment in full of
Term Loans A and B. Finova also entered into an Intercreditor Agreement with
Long Horizons and extended the revolving line of credit until December 2000 at
substantially the same terms and conditions.
Rice was paid all principal ($13.0 million) plus accrued interest and
expenses totalling approximately $362,000 under the subordinated debt facility.
Rice also received approximately $2.0 million as payment for the warrants and
legal expenses in connection with the litigation. The Company also agreed to
pay Rice an additional $2.0 million if Overhill were sold during the first six
months, or $750,000 ($2.0 million if to certain identified parties) during the
second six months, following the date of the agreement. These payments were
provided for under a Compromise and Settlement Agreement With Mutual Release and
resulted in the dismissal of all litigation between the Company and Rice. For
the quarter ended December 31, 1997 the Company anticipates recording a non cash
extraordinary pretax charge to income of approximately $600,000, resulting from
the early extinguishment of the Rice debt. The financing also provided the
Company with approximately $900,000 in working capital.
In addition, the Company has guaranteed, in certain circumstances, a loan
from Lehman Brothers Holdings, Inc. ("Lehman") to a Nevada partnership formed by
an entity headed by Mr. Tanner, and Lehman, to purchase a parcel of land in Las
Vegas, Nevada for the development of a multi-purpose sports facility and
adjacent convention center. The aforementioned Nevada partnership is currently
in default on its loan from Lehman and foreclosure proceedings by Lehman have
been initiated. The Company, based on the advice of legal counsel, does not
believe that it will incur any significant liability as a result of the
aforementioned guarantee. As a result, the Company believes the existence of
such guarantee will not have a material adverse effect on the Company's
financial condition or results of operations.
Furthermore, Polyphase may be required to retain legal representation on
various matters, including but not limited to those matters described in Notes
13 and 14, to the consolidated financial statements included elsewhere herein,
affecting the Company. The fees to be incurred could be substantial in relation
to the Company's cash position.
In addition, Polyphase is indebted to Overhill for approximately $11.0
million, including the $5.5 million intercompany advance in December 1997, on
non-interest bearing intercompany advances from Overhill, which eliminate in
consolidation. The Company intends to satisfy this intercompany obligation
through dividends or intercompany charges for Federal income taxes, management
and transaction fees, subject to obtaining the necessary approvals from the
Company's lenders. However, no assurance can be given that Polyphase will be
able to repay or otherwise reduce its obligation to Overhill.
Due to subsidiary debt covenant and other restrictions, the ability of the
Company's corporate office to obtain funds from its subsidiaries is limited (See
Note 3 to the Consolidated Financial Statement included elsewhere herein).
Additionally, the Company's corporate office has no operating revenues and may
be highly dependent on its subsidiaries for its liquidity needs, and there is no
assurance that, based upon the above, such liquidity will be available.
The Company has currently undertaken several initiatives at its corporate
office in order to reduce its corporate operating cash flow requirements. In
December 1997, the Company sold its Dallas Parkway Properties, Incorporated
subsidiary, whose principal asset was the Company's corporate headquarters
building, with the buyer assuming the related debt of approximately $2.8
million. The Company expects to relocate its corporate
19
offices during the second quarter of fiscal 1998 and expects to reduce its cash
flow requirements as a result of lower expected future lease payments. In
addition, the Company has eliminated certain corporate level positions to
further reduce future corporate cash requirements.
As a result of the refinancing and restructuring, the Company obtained
waivers with respect to noncompliance under the various loan agreements referred
to above, effective December 5, 1997, and the Company expects that it will be
able to meet its liquidity requirements for fiscal year 1998.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
-----------------------------------------------------------
The Company does not own, nor does it have an interest in any market risk
sensitive investments.
ITEM 8. Financial Statements.
---------------------
See Index to Consolidated Financial Statements included in Item 14.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
- ---------------------
None
20
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The following table sets forth certain information regarding the directors
and executive officers of the Company.
Name Age Positions
---- --- ---------
Paul A. Tanner 67 Chairman of the Board and Chief
Executive Officer
James Rudis 48 President and Director
William E. Shatley 51 Senior Vice President, Chief
Financial Officer and Treasurer
Michael F. Buck 60 Director
George R. Schrader 66 Director
Paul A. Tanner, Jr. 44 Director
Harold Estes 57 President of Texas Timberjack, Inc.
- --------------------------------------------------------------------------------
Paul A. Tanner was elected to the Board of Directors in December 1992 and
has served as Chairman of the Board and Chief Executive Officer since that time.
He served as President from December 1992 until July 1997 and as Chief Financial
Officer and Chief Accounting Officer from December 1992 until March 1994. He
has been a licensed Texas Real Estate Broker for over 30 years and is President
of Southland Resources, Inc., a private investment firm. Since 1956, Mr. Tanner
has been the owner and Chief Executive Officer of several companies engaged in
oil and gas development, real estate development, computer manufacturing and the
national distribution of office and telecommunications products.
James Rudis was elected to the Board of Directors in December 1992 and has
served as President of the Company since July 1997. He served as Executive Vice
President of the Company from March 1994 until July 1997. He is President of
Quorum Corporation, a private consulting firm involved in acquisitions and
market development and has held that position since September 1984. From 1970
until 1984, he held various executive positions in CIT Financial Corporation,
including Vice President and Regional Manager of that company's Commercial
Finance Division.
William E. Shatley was named as Senior Vice President and Treasurer of the
Company in March 1994. He joined the Company in an executive capacity in October
1993, having previously served the Company on an advisory basis since the
relocation of its corporate offices to Texas in 1992. Mr. Shatley, a Certified
Public Accountant since 1970, previously conducted his own consulting and
accounting practice (1982-1993), after having served as Vice President and Chief
Financial Officer of Datotek, Inc., a manufacturer of electronic communications
security equipment (1977-1982) and in an executive capacity with Arthur Andersen
& Co. (1968-1977).
Michael F. Buck is President of Mimatian Co., an operations and materials
consulting firm. From August 1990 to August 1994, Mr. Buck served as Vice
President of Bath Iron Works, Inc., a company engaged in building Aegis Class
cruisers and destroyers for the United States Navy. From August 1989 to August
1990, Mr. Buck was a Vice President of Sabreliner Corporation, a company engaged
in building, maintaining and overhauling executive jet aircraft. From March
1986 to August 1989, Mr. Buck was Vice President and Director
21
of Procurement for International Telephone and Telegraph. He became a director
of the Company in December 1989.
George R. Schrader was appointed as a director in March 1994 to fill a
vacancy on the Board. He is currently a named member of Schrader & Cline, LLC,
a financial and governmental management consulting firm. From 1983 to 1993, he
was a principal of Schrader Investment Company, whose activities paralleled
those of Schrader & Cline, LLC. Mr. Schrader's additional experience includes
ten years as City Manager for the city of Dallas, Texas and a total of nine
years experience as City Manager for the Texas cities of Mesquite and Ennis.
Paul A. Tanner, Jr. was elected as a director in February 1996. He served
as a Vice President of the Company's wholly owned subsidiary Letronix, Inc. from
October 1993 until its sale in July 1996. From February 1990 to October 1993,
he served as Vice President of Southland Resources, Inc., a private investment
firm controlled by Paul A. Tanner. He is the son of Paul A. Tanner.
Harold Estes was elected as a director in February 1996 and resigned from
the board in April 1997. He is the President of Texas Timberjack, Inc. a wholly
owned subsidiary of the Company. TTI is a distributor of industrial and
commercial timber and logging equipment with locations in Lufkin, Cleveland,
Atlanta and Jasper, Texas. Mr. Estes has been President of TTI since 1984, when
he acquired TTI from Eaton Corporation.
Meetings of the Board of Directors and its Committees
The Board has standing Compensation and Audit Review Committees. The
Compensation Committee is comprised of Messrs. Buck and Schrader. During fiscal
1997, the Compensation Committee did not meet. The Compensation Committee (i)
administers the Company's employee stock option plans and approves the granting
of stock options and (ii) approves compensation for officers.
The Audit Review Committee is composed of Messrs. Buck and Schrader.
During fiscal 1997, the Audit Review Committee did not meet. Its functions are
to (i) recommend the appointment of independent accountants; (ii) review the
arrangements for and scope of the audit by independent accountants; (iii)
consider the adequacy of the system of internal controls and review any proposed
corrective actions; and (iv)review and monitor the Company's policies regarding
business ethics and conflicts of interest.
The full Board of Directors met six times during fiscal 1997. No director
attended fewer than 75% of the total number of meetings of the Committee on
which such director served.
The Executive Committee, which was disbanded in June 1997, was composed of
Messrs. Tanner and Rudis. During fiscal 1997, the Executive Committee met seven
times. Except as restricted under Nevada law, the Executive Committee possessed
all of the power and authority of the Board of Directors between meetings of the
Board of Directors.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's directors, officers and persons who own more than 10
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the American Stock Exchange. Directors, officers and greater
than 10 percent beneficial owners are required by applicable regulations to
furnish the Company with copies of all forms they file with the Commission
pursuant to Section 16(a).
Based solely upon a review of the copies of forms furnished to the
Company, the Company believes that during fiscal 1997, all filing requirements
applicable to its directors, executive officers and greater than 10% beneficial
owners were satisfied.
22
ITEM 11. Executive Compensation.
------------------------
EXECUTIVE COMPENSATION
The following table sets forth for fiscal 1997, 1996 and 1995 compensation
awarded or paid to Mr. Paul A. Tanner, the Company's Chairman of the Board and
Chief Executive Officer, Mr. James Rudis, the Company's President and Mr.
William E. Shatley, the Company's Senior Vice President, Treasurer and Chief
Financial Officer, (collectively, the "Named Executive Officers"). Other than
as indicated in the table below, no executive officer of the Company received
salary plus bonus in excess of $100,000 for the year ended September 30, 1997.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------- -------------
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation Options/SARs Compensation
- ----------------------- -------- --------- ----- --------------- ------------ --------------
Paul A. Tanner . . . . 1997 $224,640 $ 0 $ --(1) - $ -
Chairman, Chief 1996 $196,560 $ 0 $ --(1) 130,000 $ -
Executive Officer and 1995 $187,200 $ 0 $ --(1) - $ -
Director (2)
James Rudis . . . . . . 1997 $138,240 $ 0 $ --(1) - $ -
President and 1996 $120,960 $ 0 $ --(1) 130,000 $ -
Director (2) 1995 $115,200 $ 0 $ --(1) - $ -
William E. Shatley . . . 1997 $108,000 $ 0 $ --(1) - $ -
Senior Vice President, 1996 $ 94,500 $ 0 $ --(1) 100,000 $ -
Treasurer and Chief 1995 $ 90,000 $ 0 $ --(1) - $ -
Financial Officer
- -----------------
(1) The Named Executive Officers each received certain perquisites and other
personal benefits from the Company during fiscal 1997, 1996 and 1995.
These perquisites and other personal benefits, however, did not equal or
exceed 10% of Named Executive Officers, salary and bonus during fiscal
1996,1995 or 1994.
(2) Mr. Rudis, formerly the Company's Executive Vice President, became
President in July 1997, replacing Mr. Tanner in that position.
No individual grants of stock options were made to the Named Executive
Officers during the fiscal year ended September 30, 1997.
23
The following table describes for the Named Executive Officers options and
the potential realizable value for his options as of September 30, 1997, which
were granted in prior fiscal years.
Fiscal Year End September 30, 1997 Option/SAR Values
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs at Options/SARs at
September 30, 1997 September 30, 1997(1)
------------------------------ ----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- -------------- ----------- -------------
Paul A. Tanner . 130,000 - $ - $ -
James Rudis . . . 276,500 - $ 155,656 $ -
William E. Shatley 246,500 - $ 155,656 $ -
- -----------
(1) Based on $1.8125 per share of Common Stock, which was the closing price per
share of Common Stock on September 30, 1997 on the AMEX as reported by The
Wall Street Journal.
Director Compensation
Directors who are also employees of the Company receive no additional
compensation for services as directors. Nonemployee directors receive an annual
fee of $1,000 and are also reimbursed for all expenses incident to their service
on the Board of Directors.
During July 1996, the following directors were granted options to purchase
Common Stock, exercisable at $2.00 per share (the fair market value at the date
of grant) in whole or in part, expiring in July 2006, as follows:
Name Option Shares
--------------------- -------------
Michael Buck 30,000
George R. Schrader 30,000
Paul A. Tanner, Jr. 30,000
In March 1994, Mr. Schrader was granted options to purchase 50,000 shares
of Common Stock. Mr. Schrader's options are exercisable at $5.25 per share (the
fair market value at the date of grant), in whole or in part, and will expire in
March 1999.
During July 1993, Mr. Buck was granted options to purchase 75,000 shares of
Common Stock, exercisable at $0.75 per share (the fair market value at the date
of grant). Such options were exercised in September 1996.
24
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following table sets forth information regarding the beneficial
ownership of Common Stock as of December 31, 1997, by each person or group who
owned, to the Company's knowledge, more than five percent of the Common Stock,
each of the Company's directors, the Company's Chief Executive Officer, and all
of the Company's directors and executive officers as a group.
Amount and
Nature of Percent
Beneficial of
Name Ownership (1) Class (1)
------------------------------- ----------------------------- -------------
Paul A. Tanner . . . . . . . . . 295,874 (2) 2
James Rudis . . . . . . . . . 557,900 (3) 3.8
Michael F. Buck . . . . . . . . 30,100 (4) *
George R. Schrader . . . . . . . 80,000 (5) *
Paul A. Tanner, Jr. . . . . . . 179,126 (6) 1.2
Harold Estes . . . . . . . . . 4,000,000 (7) 27.8
The Pyrenees Group . . . . . . . 173,000 (8) 1.2
Tanner Family Trust . . . . . . 59,685 (9) *
Elizabeth Carter Children's
Foundation . . . . . . . . . . 89,441 (10) *
Merrill Lynch . . . . . . . . . 800,000 (11) 5.3
Black Sea Investments, Ltd. . . 864,030 (12) 5.7
Infinity Investors Limited . . . 1,769,231 (13) 11.0
All directors and executive
officers as a group (6 persons) 1,547,700 (14) 10.2
- ----------------
* Less than 1%.
(1) Except as noted, the listed persons have sole investment power and sole
voting power as to all shares of Common Stock for which they are identified
as being the beneficial owners. Information as to beneficial ownership has
been furnished to the Company by such individuals. Such presentation is
based on 14,376,171 shares of Common Stock outstanding as of December 31,
1997.
25
(2) Includes 130,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
Includes 23,874 shares that Mr. Paul A. Tanner may be deemed to
beneficially own as a 13.8% owner of the Pyrenees Group (see Footnote 8
below). Does not include 89,441 shares that Mr. Paul A. Tanner may be
deemed to beneficially own as a member of the board of trustees of the
Elizabeth Carter Children's Foundation, (the "Foundation") (see Footnote
10 below), and also does not include the remaining 149,126 shares of the
Pyrenees Group (that Mr. Paul A. Tanner does not own as owner), which Mr.
Paul A. Tanner may be deemed to beneficially own because he is the
president and sole director of the Pyrenees Group.
(3) Includes 276,500 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(4) Includes 30,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(5) Includes 80,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(6) Includes 30,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
Includes 89,441 shares that Mr. Paul A. Tanner, Jr. may be deemed to
beneficially own as chairman of the board of trustees of the Foundation.
See Footnote 10 below. Also includes 59,685 shares that Mr. Paul A.
Tanner, Jr. may be deemed to beneficially own as trustee of the Tanner
Family Trust. See Footnote 9 below.
(7) Mr. Estes' address is Highway 59 South, Route 15, Box 9475, Lufkin, Texas
75901. Includes 2,000,000 shares owned by the Pyrenees Group, for which
Mr. Estes has sole voting power, and which is held as collateral by Mr.
Estes on the Company's note payable to Mr. Estes. See "Liquidity and
Capital Resources".
(8) The address of the Pyrenees Group is 2 Kelvingate Court, Dallas, Texas
75225. The Pyrenees Group, a Nevada corporation, is owned by Paul A.
Tanner (13.8%), the Tanner Family Trust (34.5%) and the Foundation (51.7%).
Does not include 2,000,000 shares held as collateral by Mr. Estes and for
which he holds sole voting power (see Footnote 7 above.)
(9) Includes 59,685 shares that the Tanner Family Trust may be deemed to
beneficially own as a stockholder in the Pyrenees Group. See Footnote 8.
The address of the Tanner Family Trust is 9909 Inwood Road, Dallas, Texas
75220. Mr. Paul A. Tanner, Jr., the trustee of the Tanner Family Trust, is
the adult son of Mr. Paul A. Tanner, the Chairman of the Board and Chief
Executive Officer of the Company. Unless otherwise indicated herein, all
references to "Mr. Tanner" shall mean Mr. Paul A. Tanner.
(10) Includes 89,441 shares that may be deemed to be beneficially owned by the
Foundation as a stockholder in the Pyrenees Group. The address of the
Foundation is 9909 Inwood Road, Dallas, Texas 75220. The Foundation was
formed to construct and operate a non-profit home for children. The shares
of the Pyrenees Group owned by the Foundation are voted by the board of
trustees of the Foundation, of which Mr. Paul A. Tanner, Jr. is chairman
and Mr. Paul A. Tanner is a member.
(11) For purposes of the table above, Merrill Lynch consists of Merrill Lynch
World Income Fund, Inc. ("MLW") and Convertible Holdings, Inc. ("CH"). The
address of MLW and CH is c/o Merrill Lynch Asset Management, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536. This figure includes 400,000
shares of Common Stock into which certain of the Company's bonds held by
Merrill Lynch are convertible within 60 days subsequent to the date hereof;
such figure is subject to adjustment as specified in the indenture
governing the terms of such bonds. Also includes 400,000 shares that could
be purchased pursuant to the exercise of certain warrants held by Merrill
Lynch exercisable within 60 days subsequent to the date hereof.
26
(12) The address of Black Sea Investments, Ltd. ("Black Sea") is Cockburn House,
Cockburn Town, Grand Turk, Turks & Caicos Islands. Includes 211,649 shares
of Common Stock into which certain of the Company's preferred stock held by
Black Sea is convertible within 60 days subsequent to the date hereof.
Also includes 500,000 shares that could be purchased pursuant to the
exercise of certain warrants held by Black Sea which are exercisable within
60 days subsequent to the date hereof.
(13) The address of Infinity Investors Limited ("Infinity") is 38 Hertford
Street, London W1Y7TG, England. Includes 1,769,231 shares of Common Stock
into which certain of the Company's preferred stock (and accrued dividends
thereon) held by Infinity is convertible within 60 days subsequent to the
date hereof.
(14) Includes 23,874 shares that may be deemed to be beneficially owned by Mr.
Paul A. Tanner due to his 13.8% ownership of the Pyrenees Group, but does
not include 89,441 shares that Mr. Paul A. Tanner may be deemed to
beneficially own as a trustee of the Foundation or the remaining 149,126
shares of the Pyrenees Group (that Mr. Paul A. Tanner does not own as a
13.8% owner), which Mr. Paul A. Tanner may be deemed to beneficially own
because he is the president and a director of the Pyrenees Group (see
Footnote 2 above). Includes 89,441 shares that Mr. Paul A. Tanner, Jr. may
be deemed to beneficially own as chairman of the board of trustees of the
Foundation; also includes 59,685 shares that Mr. Paul A. Tanner, Jr. may be
deemed to beneficially own as trustee of the Tanner Family Trust. Includes
793,000 shares that could be purchased pursuant to the exercise of stock
options exercisable within 60 days subsequent to the date hereof. Does not
include 2,000,000 shares owned by the Pyrenees Group held as collateral by
Mr. Estes (see Footnote 7 above).
ITEM 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance to the
Pyrenees Group, or its assignees, options to purchase up to 1,000,000 shares of
convertible preferred stock for $10 per share. The options were issued subject
to approval by the Company's shareholders and were approved and ratified at the
Company's Annual Meeting held May 31, 1994. Pyrenees, a private investment firm
controlled by Paul A. Tanner, Chairman and Chief Executive Officer, 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 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
========= =========
During fiscal 1994 and 1995 Pyrenees exercised and converted Series A, B, and C
Preferred Stock into common stock. In November, 1995, Pyrenees exercised the
Series D option through the issuance of a 7% recourse note in the amount of
$2,000,000, collateralized by the shares issued. During fiscal 1996 the shares
were converted to 500,000 shares of common stock. Principal payments of
approximately $1,025,000 were made on the note during fiscal 1996 and 1997. The
Series E option expired unexercised.
Advances to Related Parties
During fiscal 1994, the Company made aggregate non-interest bearing cash
advances to Mr. Tanner in the amount of approximately $282,000. At September
30, 1994, Mr. Tanner had repaid $150,000 of such advances. During fiscal 1995,
following the repayment of the unpaid 1994 advances, additional advances
amounting to
27
approximately $63,000 were made to Mr. Tanner which were unpaid at
September 30, 1995. During fiscal 1996, additional amounts were advanced to or
on behalf of Mr. Tanner which aggregated approximately $1.5 million. On
December 8, 1995, the aforementioned advances and an unpaid promissory note
receivable from Mr. Tanner were refinanced through the issuance to the Company
of a 12% unsecured demand note from Mr. Tanner in the principal amount of
$2,000,872.
Also during the above described period, the Company made disbursements to the
Pyrenees Group totalling approximately $2.67 million, of which $1,153,000
represented repayment of existing advances from Pyrenees, with the balance
representing an advance to Pyrenees of approximately $1.5 million.
During January 1996, the Company reached an agreement to manage a project to
develop and build a multi-purpose sports facility in Las Vegas, Nevada. The
project was being developed by PLY Stadium Partners, Inc. ("Stadium Partners"),
a private investment firm headed by Mr. Tanner. As part of the agreement, the
Company was also entitled to participate in the facility's management, sales of
suites and seat options, concessions and events and was to be compensated for
such services. The Company agreed to provide to Stadium Partners up to $4
million of debt that (1) was convertible into a 14% economic interest in the
project and (2) was guaranteed by Mr. Tanner and Pyrenees. As part of this
agreement, the aforementioned accounts receivable from Mr. Tanner and Pyrenees
(approximately $3.5 million), together with subsequent amounts advanced, charged
or accrued to or on behalf of Stadium Partners were considered as components of
the $4 million of convertible debt, bearing interest at 12% and guaranteed by
Mr. Tanner and Pyrenees. Through September 30, 1996, the Company advanced an
additional $9.3 million.
During the twelve months ended September 30, 1996, the Company accrued
management and service revenues of $2,550,000 and interest income of $790,000
related to the Company's activities with Stadium Partners, the collectibility of
which was dependent upon the success of the project and/or the guarantees
referred to above. As a result of the terms of the financing arrangements with
Lehman described below, Stadium Partners was precluded from making any
distributions until permanent project financing was secured or stadium suite
sales were made that were sufficient to repay the financing from Lehman. As a
consequence of Stadium Partners' inability to effect such sales or obtain such
financing by March 15, 1997, in order to make its payment to the Company on such
date, the Company established a reserve of $3.34 million as of September 30,
1996, which represents the income accrued in 1996.
On November 15, 1996, Stadium Partners, through a newly-formed partnership,
purchased 62 acres in Las Vegas for the development of the stadium and adjacent
convention facility. Financing was provided by Lehman Brothers Holdings, Inc.
("Lehman") through a partnership, Nevada Stadium Partners Limited Partnership
("Nevada Partnership") with Lehman receiving an equity interest in the project.
The Company has guaranteed the repayment of the loan from Lehman to the Nevada
partnership in the above mentioned transaction, in certain circumstances or upon
the occurrence of certain events. Such guarantee is effective upon the
occurrence of certain conditions, including without limitation if Nevada
Partnership files for bankruptcy or insolvency, if representations by the
Partnership prove to be fraudulent regarding the financial condition of the
Partnership, the land securing the loan is further encumbered or ownership is
transferred without the consent of Lehman.
The loan agreement with Lehman required certain prepayments by Nevada
Partnership, the first of which, in the amount of $5.0 million became due in
January 1997. This was paid primarily with funds advanced by the Company, of
which $2.4 million was obtained from an existing credit line and $2.5 million
was obtained from a six month term note, collateralized by the Company's
corporate office building. In connection with the loan transaction, the Company
entered into a consulting agreement with a principal of the lender, whereby the
Company granted such party an option to purchase 200,000 shares of the
Company's common stock at $.01 per share; this option was assigned a value of
$973,000 which was charged to expense during fiscal 1997.
The second prepayment requirement of $20.0 million became due in May 1997; this
payment was not made. As a result of the failure to make this payment, another
agreement was entered into among the borrower, Lehman and the Company as of July
1, 1997. This agreement generally provided forbearance by Lehman until
September 30, 1997, to allow additional time to raise the funds to make the
principal payment.
28
The terms of the forbearance agreement were not met by the September deadline,
and the note matured unpaid in November 1997. Stadium Partners and Mr. Tanner
continue to pursue various alternatives with respect to the repayment of amounts
due Lehman, including among other things, the sale or refinancing of the
property. There is no assurance that these efforts will be successful or that
the Company can expect to collect any amounts due from Stadium Partners or the
guarantors.
As a result of the above, the Company has recorded a charge to earnings for the
year ended September 30, 1997, in the amount of $14.8 million, representing all
amounts remaining unpaid by Stadium Partners, net of the reserve established in
1996. Amounts which may subsequently be recovered, if any, will be recognized
as income when collection is assured.
At September 30, 1997, the Company also had an outstanding balance due from Mr.
Tanner amounting to $173,526, resulting from advances made to or on Mr. Tanner's
behalf during fiscal 1997.
Other Transactions
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September 30,
1997, the insurance premium receivable was $552,006.
In connection with the purchase of TTI, the Company acquired a note receivable
from an officer. The note is secured by marketable securities, is payable
within one year and bears interest at 3.96%. As of September 30, 1997 the
balance outstanding was $340,071.
29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
(a) 1. and 2. Financial Statements and Financial Statement Schedules.
1. The following consolidated financial statements of Polyphase Corporation
and subsidiaries, included in the annual report of the registrant to its
shareholders for the year ended September 30, 1997, are included in Item
8:
Report of Independent Auditors F-2
Consolidated Balance Sheets-September 30, 1997 and 1996 F-3
Consolidated Statements of Operations-Years ended September 30, 1997,
1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity-Years ended September
30, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows-Years ended September 30, 1997,
1996, and 1995 F-8
Notes to Consolidated Financial Statements F-11
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-41
Schedule II - Valuation and Qualifying Accounts F-45
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
3. Exhibits
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3 through
4.8 to the Company's registration statement on Form S-8 [No. 33-82008],
filed with the Commission on July 27, 1994 [the "1994 Form S-8"])
3.2 Bylaws of Polyphase Corporation (incorporated by reference from Exhibit
4.2 to the 1994 Form S-8)
4.1 Certificate of Designation relating to the Series A-2 Preferred Stock
(incorporated by reference from Exhibit 4.9 to the Company's
Registration Statement on Form SB-2 [No. 33-85334] filed with the
Commission on October 19, 1994 [the "Form SB-2"])
4.2 Certificate of Designation relating to the Series A-3 Preferred Stock
(incorporated by reference from Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1995 [the "1995
Form 10-K"])
30
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)
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)
31
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
(incorporated by reference from Exhibit 10.25 to the Form SB-2)
10.20 Stock Purchase Agreement among PC Repair of Florida, Inc., Gene H.
Thurston, Jr. and Polyphase Corporation, dated February 15, 1994
(incorporated by reference from Exhibit 10.26 to the Form SB-2)
10.21 Agreement and Plan of Reorganization between the Shareholders of Micro
Configurations, Inc. and Polyphase Corporation, dated July 1, 1994
(incorporated by reference from Exhibit 10.27 to the Form SB-2)
10.22 Credit Agreement, dated August 29, 1994, between Texas Timberjack, Inc.
and Comerica Bank-Texas (incorporated by reference from Exhibit 10.28
to the Form SB-2)
10.23 Guaranty, dated August 29, 1994, from Polyphase Corporation to Comerica
Bank-Texas (incorporated by reference from Exhibit 10.29 to the
Form SB-2)
10.24 Deed of Trust, dated as of August 30, 1994, from Texas Timberjack, Inc.
to J. Patrick Faubion, Trustee (incorporated by reference from Exhibit
10.30 to the Form SB-2)
10.25 Security Agreement, dated as of August 29, 1994, between Texas
Timberjack, Inc. and Comerica Bank-Texas (incorporated by reference
from Exhibit 10.31 to the Form SB-2)
10.26 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated August 29, 1994 (incorporated by
reference from Exhibit 10.32 to the Form SB-2)
10.27 First Amendment to Credit Agreement dated September 1, 1995, between
Texas Timberjack, Inc. and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.27 to the 1995 Form 10-K)
10.28 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated September 1, 1995 (incorporated by
reference from Exhibit 10.28 to the 1995 Form 10-K)
10.29 Promissory Note in the amount of $2,000,000, from Pyrenees Group, as
maker, to Polyphase Corporation, dated November 1, 1995, related to the
exercise of options on Series D Preferred Stock (incorporated by
reference from Exhibit 10.29 to the 1995 Form 10-K)
10.30 Security Agreement, dated as of November 1, 1995, between Pyrenees
Group and Polyphase Corporation (incorporated by reference from Exhibit
10.30 to the 1995 Form 10-K)
10.31 Promissory Note in the amount of $2,000,872, from Paul A. Tanner, as
maker, to Polyphase Corporation, dated December 8, 1995 (incorporated
by reference from Exhibit 10.31 to the 1995 Form 10-K)
10.32 Convertible Preferred Stock Purchase Agreement, dated as of November
10, 1995, by and between Polyphase Corporation and Infinity Investors,
Limited (incorporated by reference from Exhibit 10.32 to the 1995 Form
10-K)
10.33 Securities Purchase Agreement, dated as of December 1, 1995, by and
among Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.33 to the 1995 Form 10-K)
10.34 Registration Rights Agreement, dated as of December 1, 1995, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.34 to the 1995 Form 10-K)
32
10.35 Indenture, dated as of December 1, 1995, from Polyphase Corporation to
IBJ Schroder Bank & Trust Company (incorporated by reference from
Exhibit 10.35 to the 1995 Form 10-K)
10.36 Form of 12% Senior Convertible Debenture No. 1, dated December 1, 1995
payable to Bridge Rope & Co. or registered assigns (incorporated by
reference from Exhibit 10.36 to the 1995 Form 10-K)
10.37 Form of 12% Senior Convertible Debenture No. 2, dated December 1, 1995
payable to Kane & Co. or registered assigns (incorporated by reference
from Exhibit 10.37 to the 1995 Form 10-K)
10.38 Renewal Promissory Note in the amount of $12,842,916, dated December
31, 1996, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.41 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1996 [the "1996
Form 10-K"])
10.39 Amended Pledge Agreement, dated as of December 31, 1996, between
Polyphase Corporation and Harold Estes (incorporated by reference from
Exhibit 10.42 to the 1996 Form 10-K)
10.40 Amended Security Agreement, dated as of December 31, 1996, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.43 to the 1996 Form 10-K)
10.41 Stock Purchase Agreement among Letronix Acquisition Corp. and Polyphase
Corporation dated June 28, 1996 (incorporated by reference from Exhibit
10.44 to the 1996 Form 10-K)
10.42 Security and Pledge Agreement, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.45 to the 1996 Form 10-K)
10.43 Secured Promissory Note, dated June 28, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by reference
from Exhibit 10.46 to the 1996 Form 10-K)
10.44 Security Agreement, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by reference
from Exhibit 10.47 to the 1996 Form 10-K)
10.45 Promissory Note, dated July 1, 1996 by and between Letronix Acquisition
Corp. and Polyphase Corporation (incorporated by reference from Exhibit
10.48 to the 1996 Form 10-K)
10.46 Stock Purchase Agreement among Letronix Acquisition Corp. and Polyphase
Corporation dated July 1, 1996 (incorporated by reference from Exhibit
10.49 to the 1996 Form 10-K)
+10.47 Stock Option Agreement for Paul A. Tanner dated July 23, 1996
(incorporated by reference from Exhibit 10.50 to the 1996 Form 10-K)
+10.48 Stock Option Agreement for James Rudis dated July 23, 1996
(incorporated by reference from Exhibit 10.51 to the 1996 Form 10-K)
+10.49 Stock Option Agreement for William E. Shatley dated July 23, 1996
(incorporated by reference from Exhibit 10.52 to the 1996 Form 10-K)
+10.50 Stock Option Agreement for Michael F. Buck dated July 23, 1996
(incorporated by reference from Exhibit 10.53 to the 1996 Form 10-K)
+10.51 Stock Option Agreement for George R. Schrader dated July 23, 1996
(incorporated by reference from Exhibit 10.54 to the 1996 Form 10-K)
+10.52 Stock Option Agreement for Paul A. Tanner, Jr. dated July 23, 1996
(incorporated by reference from Exhibit 10.55 to the 1996 Form 10-K)
33
10.53** Convertible Promissory Note, dated January 1, 1996 by and between PLY
Stadium Partners, Inc. and Polyphase Corporation.
10.54** Master Loan Agreement, dated January 1, 1996 by and between Polyphase
Corporation and PLY Stadium Partners, Inc.
10.55** Guaranty, dated January 1, 1996 by Paul A. Tanner to Polyphase
Corporation.
10.56** Guaranty, dated January 1, 1996 by Pyrenees Group, Inc. to Polyphase
Corporation.
10.57** Management Agreement, dated January 1, 1996 by and between PLY
Stadium Partners, Inc. and Polyphase Corporation.
10.58** Security Agreement, dated January 1, 1996, between Paul A. Tanner and
Polyphase Corporation.
10.59** Security Agreement, dated January 1, 1996, between Pyrenees Group,
Inc. and Polyphase Corporation.
+10.60** Stock Option Agreement for David Weinreb dated January 17, 1997
10.61** Amended Renewal Promissory Note in the amount of $14,341,256 dated
December 2, 1997, payable by Polyphase Corporation to Harold Estes.
10.62** Amended Pledge Agreement, dated as of December 2, 1997, between
Polyphase Corporation and Harold Estes
10.63** Amended Security Agreement, dated as of December 2, 1997, between
Texas Timberjack, Inc. and Harold Estes
10.64** Term Loan Agreement in the amount of $22,500,000, dated December 4,
1997, among Overhill Farms, Inc. as borrower, Polyphase Corporation
as guarantor and The Long Horizons, Fund, L.P. as lender.
10.65** Security Agreement, dated December 4, 1997, between Overhill Farms,
Inc. as grantor and The Long Horizons Fund, L.P. as lender.
10.66** Assignment for Security (Trademarks) dated December 4, 1997, between
Overhill Farms, Inc. as assignor and The Long Horizons Fund, L.P. as
assignee.
10.67** Pledge and Security Agreement, dated December 4, 1997, among
Polyphase Corporation as the pledgor, in favor of The Long Horizons
Fund, L.P. as the lender and Overhill Farms, Inc. as the borrower.
10.68** Registration Rights Agreement, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P.
10.69** Common Stock Purchase Warrant, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P.
10.70** Voting Rights Agreement, dated December 4, 1997, among Polyphase
Corporation, The Long Horizons Fund, L.P. and Overhill Farms, Inc.
10.71** Supplemental Indenture, dated as of December 5, 1997, from Polyphase
Corporation to IBJ Schroder Bank & Trust Company.
10.72** Compromise Settlement Agreement with Mutual Release between Polyphase
Corporation and Rice Partners II, L.P..
34
10.73** Stock Purchase Agreement between Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1997.
10.74** Certificate of Designation of Preferences of Series B Preferred Stock
of Letronix Acquisition Corporation dated July 2, 1997.
10.75** Term Loan Agreement in the amount of $2,800,000, dated August 29,
1997, between Dallas Parkway Properties, Incorporated and National
Operating, L.P.
10.76** Warrant to Purchase 500,000 Shares of Common Shares of Polyphase
Corporation by Black Sea Investments, Ltd., dated August 29,1997.
10.77** Offshore Securities Subscription Agreement to purchase 7,500 Shares
of Series F 6% Convertible Preferred between Polyphase Corporation
and Black Sea Investments, Ltd., dated August 29,1997.
10.78** Stock Exchange Agreement by and between Tollway Properties, Inc. and
Polyphase Corporation date as of December 1, 1997.
10.79** Release and Settlement Agreement between Dallas Parkway Properties,
Incorporated and Polyphase Corporation dated as of December 1, 1997.
10.80** General Release between Dallas Parkway Properties, Incorporated and
National Operating, L.P. dated as of December 1, 1997.
21.1** Subsidiaries of the Registrant.
23.1** Consent of Ernst & Young LLP
27.1** Financial Data Schedule
- ------------------------------
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
(b). Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant during the last quarter
of the Fiscal Year Ended September 30, 1997.
35
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ James Rudis February 5, 1998
---------------------------
James Rudis, 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 February 5, 1998
- --------------------------------
Paul A. Tanner
Chief Executive Officer,
Chairman of the
Board and Director
(Principal Executive Officer)
/s/ James Rudis February 5, 1998
- --------------------------------
James Rudis
President and Director
/s/ William E. Shatley February 5, 1998
- --------------------------------
William E. Shatley
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ George R. Schrader February 5, 1998
- --------------------------------
George R. Schrader
Director
/s/ Paul A. Tanner, Jr. February 5, 1998
- --------------------------------
Paul A. Tanner, Jr.
Director
/s/ Michael F. Buck February 5, 1998
- --------------------------------
Michael F. Buck
Director
36
POLYPHASE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Financial Statements:
- ---------------------
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-11
Financial Statement Schedules:
- -----------------------------
Schedule I - Condensed Financial Information of Registrant F-41
Schedule II - Valuation and Qualifying Accounts F-45
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders of
Polyphase Corporation
We have audited the accompanying consolidated balance sheets of Polyphase
Corporation and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1997. Our audits also
include the financial statement schedules listed in the Index at Item 14 (a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Polyphase
Corporation and subsidiaries at September 30, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming that Polyphase
Corporation will continue as a going concern. As more fully described in Notes
3, 9 and 10, the Company has certain liquidity conditions that raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.
ERNST & YOUNG LLP
February 5, 1998
Dallas, Texas
F-2
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
September 30,
--------------------------
1997 1996
------------- -----------
Current assets:
Cash $ 1,064,259 $ 280,969
Receivables, net of allowance for doubtful
accounts of $576,192 and $519,104
in 1997 and 1996, respectively:
Trade accounts 11,576,650 12,098,852
Current portion of sales contracts 5,770,626 6,625,727
Notes receivable 939,621 972,422
Inventories 23,002,020 28,027,779
Prepaid expenses and other 1,607,644 2,676,336
------------- -----------
Total current assets 43,960,820 50,682,085
------------- -----------
Property and equipment:
Land 765,000 765,000
Buildings and improvements 4,660,582 4,279,917
Machinery, equipment and other 8,953,076 8,575,687
------------- -----------
14,378,658 13,620,604
Accumulated depreciation 5,954,554 4,212,872
------------- -----------
8,424,104 9,407,732
------------- -----------
Other assets:
Noncurrent receivables:
Sales contracts 2,027,518 1,333,150
Notes receivable - 1,037,890
Related parties, net of allowance of $0 and
$3,340,000 in 1997 and 1996, respectively 522,597 10,298,688
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$2,370,455 and $1,557,165 in 1997 and 1996,
respectively 14,228,284 15,041,574
Other intangible assets 1,197,139 1,402,239
Restricted cash 717,358 882,383
Other 1,071,629 4,092,780
------------- -----------
19,764,525 34,088,704
------------- -----------
Total Assets $72,149,449 $94,178,521
============= ===========
F-3
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
Liabilities and Stockholders' Equity
September 30,
----------------------------
1997 1996
------------ -----------
Current liabilities:
Notes payable $ 9,013,099 $ 9,516,219
Note payable and accrued interest to related
party 13,998,916 -
Accounts payable 7,775,022 8,581,071
Accrued expenses and other 2,251,035 4,415,011
Current maturities of long-term debt 5,720,000 31,573,716
------------ -----------
Total current liabilities 38,758,072 54,086,017
Note payable and accrued interest to related
party - 12,546,600
Long-term debt, less current maturities 23,272,280 -
Reserve for credit guarantees 717,358 882,383
Deferred income taxes - 1,475,897
------------ -----------
Total liabilities 62,747,710 68,990,897
Commitments and contingencies
Warrants to purchase common stock of subsidiary 2,000,000 1,189,224
Stockholders' equity:
Preferred stock, $.01 par value, authorized
50,000,000 shares, issued and outstanding,
132,500 and 250,000 in 1997 and 1996,
respectively 1,325 2,500
Common stock, $.01 par value, authorized
100,000,000 shares, issued and outstanding,
13,664,109 and 13,196,966 in 1997 and 1996,
respectively 136,641 131,970
Paid-in capital 28,955,695 26,630,714
Accumulated deficit (20,716,603) (1,487,695)
Notes receivable from related party (975,319) (1,279,089)
------------ -----------
Total stockholders' equity 7,401,739 23,998,400
------------ -----------
Total Liabilities and Stockholders' Equity $ 72,149,449 $94,178,521
============ ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
Net revenues $ 151,948,553 $ 149,540,785 $ 102,035,472
Cost of sales 126,565,112 120,865,827 82,055,637
------------- ------------- -------------
Gross profit 25,383,441 28,674,958 19,979,835
Selling, general and administrative expenses 18,799,917 22,009,991 13,228,134
------------- ------------- -------------
Operating income 6,583,524 6,664,967 6,751,701
------------- ------------- -------------
Other income (expenses):
Loss on related party receivable (14,838,456) - -
Loss on investment in computer operations (3,613,815) - -
Gain on sale of assets - 827,852 -
Interest expense (7,179,973) (6,389,926) (3,791,059)
Interest income and other 380,655 751,385 592,055
------------- ------------- -------------
Total other income (expenses) (25,251,589) (4,810,689) (3,199,004)
------------- ------------- -------------
Income (loss) before income taxes
and warrant accretion (18,668,065) 1,854,278 3,552,697
Income tax (benefit) expense (653,683) 1,593,542 76,227
------------- ------------- -------------
(18,014,382) 260,736 3,476,470
Accretion of warrants to purchase
common stock of subsidiary 810,776 502,948 190,871
------------- ------------- -------------
Net income (loss) (18,825,158) (242,212) 3,285,599
Dividends on preferred stock 403,750 150,000 -
------------- ------------- -------------
Net income (loss) attributable to
common stockholders $ (19,228,908) $ (392,212) $ 3,285,599
============= ============= =============
Per share data:
Weighted average common and common
equivalent shares 13,632,357 13,722,552 12,745,701
============= ============= =============
Net income (loss) per common share $ (1.41) $ (.03) $ .26
============= ============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997 (continued)
Preferred Stock Common Stock
Shares Amount Shares Amount
----------- ----------- ------------- ------------
Balance, September 30, 1994 477,000 $ 4,770 5,880,616 $ 58,806
----------- ----------- ------------- ------------
Exercise of Series C
preferred stock options
by Pyrenees 100,000 1,000
Conversions of preferred
shares to common shares (577,000) (5,770) 6,618,500 66,185
Issuance of Micro
escrow shares 120,000 1,200
Issuance of shares for
interest on convertible
subordinated debentures 2,850 29
Payments on Pyrenees notes
Stock issuance costs
Net income for 1995
----------- ----------- ------------- ------------
Balance,
September 30, 1995 - - 12,621,966 126,220
----------- ----------- ------------- ------------
Retained
Earnings
Paid-in (Accumulated Notes
Capital Deficit) Receivable Total
------------- ------------- -------------- -------------
Balance, September 30, 1994 $ 20,924,331 $ (4,381,082) $ (2,250,000) $ 14,356,825
------------- ------------- -------------- -------------
Exercise of Series C
preferred stock options
by Pyrenees 999,000 (1,000,000)
Conversions of preferred
shares to common shares (60,415)
Issuance of Micro
escrow shares 366,600 367,800
Issuance of shares for
interest on convertible
subordinated debentures 9,091 9,120
Payments on Pyrenees notes 3,250,000 3,250,000
Stock issuance costs (132,001) (132,001)
Net income for 1995 3,285,599 3,285,599
------------- ------------- -------------- -------------
Balance, September 30, 1995 22,106,606 (1,095,483) - 21,137,343
------------- ------------- -------------- -------------
F-6
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997 (continued)
Preferred Stock Common Stock
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Exercise of Series D
preferred stock options
by Pyrenees 200,000 2,000
Conversion of preferred shares
to common shares (200,000) (2,000) 500,000 5,000
Private placement of
Series A-3 preferred stock 250,000 2,500
Exercise of common
stock options 75,000 750
Payments on Pyrenees note
Stock issuance costs
Dividends on preferred stock
Net loss for 1996
---------- ---------- ---------- ----------
Balance,
September 30, 1996 250,000 2,500 13,196,966 131,970
---------- ---------- ---------- ----------
Exercise of common stock options 110,000 1,100
Preferred shares tendered
for exercise of options (125,000) (1,250) 357,143 3,571
Stock issuance costs
Payments on Pyrenees note
Stock option granted for services
Private placement of Series F
preferred stock 7,500 75
Issuance of warrant
Dividends on preferred stock
Net loss for 1997
---------- ---------- ---------- ----------
Balance,
September 30,1997 132,500 $ 1,325 13,664,109 $ 136,641
========== ========== ========== ==========
Retained
Earnings
Paid-in (Accumulated Notes
Capital Deficit) Receivable Total
------------ -------------- -------------- ------------
Exercise of Series D
preferred stock options
by Pyrenees 1,998,000 (2,000,000)
Conversion of preferred shares
to common shares (3,000)
Private placement of
Series A-3 preferred stock 2,497,500 2,500,000
Exercise of common
stock options 49,250 50,000
Payments on Pyrenees note 720,911 720,911
Stock issuance costs (17,642) (17,642)
Dividends on preferred stock (150,000) (150,000)
Net loss for 1996 (242,212) (242,212)
------------ -------------- -------------- ------------
Balance,
September 30, 1996 26,630,714 (1,487,695) (1,279,089) 23,998,400
------------ -------------- -------------- ------------
Exercise of common stock options 55,500 56,600
Preferred shares tendered
for exercise of options 197,679 200,000
Stock issuance costs (35,000) (35,000)
Payments on Pyrenees note 303,770 303,770
Stock option granted for services 973,000 973,000
Private placement of Series F
preferred stock 983,802 983,877
Issuance of warrant 150,000 150,000
Dividends on preferred stock (403,750) (403,750)
Net loss for 1997 (18,825,158) (18,825,158)
------------ -------------- -------------- ------------
Balance,
September 30,1997 $ 28,955,695 $ (20,716,603) $ (975,319) $ 7,401,739
============ ============== ============== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flow provided by (used in) operating activities:
Net income (loss) $(18,825,158) $ (242,212) $ 3,285,599
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 3,968,100 3,417,137 1,935,559
Equity in the loss of
non-consolidated subsidiaries -- 22,437 --
Provision for doubtful accounts 57,088 58,094 (73,446)
Loss on related party receivable 14,838,456 3,340,000 --
Loss on disposition of computer segment 3,613,815 -- --
Deferred income tax 233,339 134,268 (449,651)
Issuance of common stock for accrued
interest payable on convertible
subordinated debentures -- -- 9,120
Imputed interest on TTI acquisition note -- -- 66,225
Accretion of warrants to purchase common
stock of subsidiary 810,776 502,948 190,871
Recognition of deferred rent reductions -- (80,413) (82,944)
Changes in, net of effects of
acquisitions and dispositions:
Accounts and sales contracts receivable 625,847 (3,461,283) (4,857,876)
Inventories 5,025,759 (3,618,788) (5,677,039)
Prepaid expenses and other 845,100 575,814 (1,099,427)
Accounts payable (806,048) 1,414,236 1,959,902
Accrued expenses and other (3,873,212) 712,401 2,486,034
------------ ------------ ------------
Net cash provided by (used in)
operating activities $ 6,513,862 $ 2,774,639 $ (2,307,073)
------------ ------------ ------------
F-8
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows provided by (used in) investing activities:
Acquisition of net assets of Overhill Farms $ -- $ -- $(31,292,910)
Capital expenditures, net (758,054) (2,656,209) (975,883)
Decrease in notes and other receivables 1,070,691 242,967 202,247
Advances to related parties (5,062,365) (9,560,696) --
Cash from the sale of subsidiaries -- 475,000 --
Change in operating assets and liabilities
due to sale of subsidiaries -- 1,687,124 --
------------ ------------ ------------
Net cash used in investing activities (4,749,728) (9,811,814) (32,066,546)
------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Net borrowings (principal payments) on
notes payable (2,685,537) (1,293,837) 9,177,364
Net borrowings (principal payments) on
other notes payable and long-term debt 799,196 1,886,644 23,707,169
Proceeds from the issuance of
12% subordinated debentures -- 1,500,000 --
Proceeds from private placements of
preferred stock 733,877 2,500,000 --
Advances from (payments to)
related parties -- (1,153,000) 1,153,000
Exercise of common stock options 56,600 50,000 --
Principal collections on Pyrenees
notes receivable 303,770 720,911 3,250,000
Issuance of warrants to purchase
common stock of subsidiary -- -- 495,405
Dividends on preferred stock (153,750) (150,000) --
Common stock issuance costs (35,000) (17,642) (132,001)
Loan acquisition costs and other -- -- (1,039,089)
------------ ------------ ------------
Net cash provided by (used in)
financing activities (980,844) 4,043,076 36,611,848
------------ ------------ ------------
Net increase (decrease) in cash 783,290 (2,994,099) 2,238,229
Cash at beginning of year 280,969 3,275,068 1,036,839
------------ ------------ ------------
Cash at end of year $ 1,064,259 $ 280,969 $ 3,275,068
============ ============ ============
F-9
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended
September 30,
--------------------------------------
1997 1996 1995
----------- ----------- -----------
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest $ 5,510,229 $ 4,354,072 $ 2,249,778
Income taxes $ 1,001,461 $ 75,000 $ 377,442
Supplemental schedule of noncash investing and financing activities:
In October 1996, an unrelated third party exercised an option to purchase
357,143 shares of common stock. As consideration, the Company received 125,000
shares of Series A-3 Preferred Stock having a redemption value of $1,250,000.
In November 1996, a former executive of the Company exercised options on 35,000
of common stock at $.01 per share. Such options were granted in consideration
for a consulting contract and were valued at $200,000.
In January 1997, an unrelated third party was granted an option on 200,000
shares of common stock, exercisable at $.01 per share, in exchange for a two
year consulting agreement and were valued at $973,000.
In August 1997, in connection with the sale of Series F 6% Preferred Stock to an
unrelated third party, the Company issued warrants to purchase 500,000 shares of
the Company's common stock, exercisable at $1.50 per share. The Company valued
the warrants at $150,000 (See Note 10). Also in connection with the transaction,
the Company recorded a dividend of $250,000 representing the value assigned to
the preferred stock's discount feature (See Note 11).
The accompanying notes are an integral part
of these consolidated financial statements.
F-10
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. COMPANY AND ORGANIZATIONAL MATTERS
Nature of Business
Polyphase Corporation (the "Company" or "Polyphase") is a diversified holding
company that, through its subsidiaries, operates primarily in three industry
segments: the food segment, which produces high quality entrees, plated
meals, soups, sauces and poultry, meat and fish specialties (the "Food
Group"); the forestry segment, which distributes, leases and provides
financing for industrial and commercial timber and logging equipment (the
"Forestry Group"); and the transformer segment, which manufactures and
markets electronic transformers, inductors and filters (the "Transformer
Group").
Corporate History and Organization
The Company was incorporated in New Jersey in 1963 under the name Kappa
Networks, Inc. Through a merger with a wholly-owned subsidiary in June 1991,
the Company reincorporated in Pennsylvania and formally changed its name to
Polyphase Corporation. A subsequent merger with a wholly-owned subsidiary in
June 1994 effected a change in the state of incorporation from Pennsylvania
to Nevada, together with certain changes to the Company's charter and bylaws.
These changes resulted in the authorization of 100,000,000 shares of $.01 par
value common stock and 50,000,000 shares of $.01 par value preferred stock
with rights and preferences as designated by the Board of Directors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions are eliminated. Certain prior year amounts have been
reclassified to conform to the 1997 presentation.
Fiscal Year
The Company and its subsidiaries' fiscal year, except for the Food Group,
ends on September 30. The Food Group utilizes a 52 - 53 week accounting
period which ends on the Sunday closest to September 30.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of receivables and demand deposits. Demand
deposits sometimes exceed the amount of insurance provided by the Federal
Deposit Insurance Corporation. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers except as discussed below.
F-11
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's Forestry Group subsidiary, Texas Timberjack, Inc, ("TTI"), is a
retailer of timber and logging equipment. TTI grants credit to customers,
substantially all of whom are located in East Texas or the western portion of
Louisiana, and which rely on the logging industry for their ability to repay
debt to TTI. Collateral is generally the equipment sold for amounts due under
installment sales contracts.
Financial Instruments
The fair value of financial instruments is determined by reference to market
data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their recorded
values.
Inventories
Inventories of raw materials, work-in-process and finished goods for
manufacturing and assembly operations and food processing are stated at the
lower of cost or market as determined by the first-in, first-out (FIFO)
method. Inventories of major units purchased in the forestry segment are
valued at the lower of cost or market or, in the case of repossessed and used
units, net realizable value, based upon the specific identification method.
Concentration of Sources of Labor
The Food Group's total hourly and salaried work force consists of
approximately 721 employees. Approximately 77% of the Company's work force is
covered by collective bargaining agreements expiring in fiscal years 1998 and
1999. The Company considers its union relations to be good.
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 15-20 years. The Company determines the period to be
benefited by using qualitative measuring factors such as competition, demand
and obsolescence, as well as legal, regulatory and contractual provisions. In
addition, the Company evaluates the existence of goodwill impairment on the
basis of whether the goodwill is fully recoverable from projected,
undiscounted cash flows of the related business
F-12
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
unit.
Stock Options
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and
related Interpretations in accounting for its employee stock options. The
Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation", which provides for either recognition or disclosure of a
hypothetical charge for the fair value of stock options granted. The Company
did not recognize any charge in its Statements of Operations for the fiscal
year ending September 30, 1997, but has provided the required disclosures in
Note 11.
Revenue Recognition
The Company generally recognizes revenue when products are shipped or services
are performed and provides for estimated returns and allowances at the time of
sale.
A significant amount of business in the Company's forestry segment relates to
the sale of equipment through sales/finance contracts. Revenue is recognized
on these accounts using the installment method (See Note 5). Under the
installment method, the Company records at the point of sale both a sale and a
cost of sale for the total cost of the unit. Gross profit is initially
recorded in a deferred profit account to be recognized as proceeds are
received. These deferred profits are recorded as sales revenue as funds are
received, based on the relative percentage of transaction profit to the sales
price. Interest on the contract is recognized on a cash basis due to frequent
late payments and periodic repossessions.
Key sales and income information for the forestry segment for fiscal 1997,
1996 and 1995 are:
1997 1996 1995
------------ ------------ ------------
Equipment sales total $ 43,460,398 $ 28,210,292 $ 35,837,259
Equipment sales financed 3,608,210 3,005,776 10,121,004
Income earned on installment basis 1,613,172 2,046,730 2,777,209
Interest income earned on installment notes 1,457,125 1,634,621 1,562,486
Income Taxes
Deferred income taxes recorded using the liability method reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Income (Loss) Per Share
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. Common equivalent
F-13
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
shares assume the exercise of all preferred stock, dilutive stock options and
warrants using the treasury stock method. See Note 11 for descriptions of
common stock equivalents.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share," which is
required to be adopted by the Company in the first quarter of fiscal year
1998. At that time, the Company will be required to change the method
currently used to compute income (loss) per share and restate all prior
periods presented. Under the new requirements for calculating basic income
(loss) per share, the dilutive effect of stock options will be excluded. Pro-
forma basic and diluted income (loss) per share, had the Company used the
method required by SFAS 128 for the years ended September 30, 1997, 1996 and
1995 would have been as follows:
Year Ended September 30, Basic Diluted
------------------------ ------- --------
1997 $(1.41) $(1.41)
1996 (.03) (.03)
1995 .27 .26
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates.
3. LIQUIDITY
As described in Note 1, the Company operates primarily in three industry
segments: the Food Group, the Forestry Group and the Transformer Group. The
majority of the Company's net sales, operating profit and identifiable assets
are in the Food and Forestry Groups. The Company's corporate entity has no
significant operations and has historically been partially dependent upon
cash flows from its Food and Forestry Groups to meet its ongoing liquidity
requirements. As a result of various restrictions in debt agreements that
exist at the Food and Forestry Group levels (See Notes 9 and 10), the Company
is generally restricted from receiving management fees, dividends, loans or
certain other advances in excess of $830,000 per year from those
subsidiaries.
As of September 30, 1997, the Company had not complied with certain covenants
involving most of its loan agreements, including covenants that restrict
transactions with affiliates.
On December 5, 1997, the Company's subsidiary, Overhill, obtained a $24.1
million, three-year term loan from The Long Horizons Fund, LP ("Long
Horizons"). The note requires interest-only payments monthly at prime plus 4%
(12.5% as of December 5, 1997) through April 1999, and thereafter provides
for principal amortization of $250,000 per month, plus interest, until a
final payment of approximately $19,850,000 is due on December 5, 2000. In
addition, under the terms of the agreement, the Company granted stock
warrants that entitle Long Horizons to immediately
F-14
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
acquire at $.01 per share, 30% of the common stock of Overhill, of which 25%
(5/6 of the total shares under warrant) can be repurchased by the Company for
$2,000,000 during the two-year period following the date of the agreement.
There are no assurances that the Company will be able to repurchase the
aforementioned shares.
In December 1997, in connection with the Long Horizons refinancing, Overhill
was allowed per the terms of the new note agreement to effect a one-time cash
advance to Polyphase of approximately $5.5 million. These proceeds were
subsequently used by Polyphase to reduce corporate borrowings plus accrued
interest by $4.6 million and provide cash flow for working capital and other
needs of $900,000. The remaining proceeds of the $24.1 million Long Horizons
note were used by Overhill to refinance existing principal plus accrued
interest, repurchase existing warrants to purchase 22.5% of Overhill's common
stock for $2 million and pay certain costs related to the financing. In
addition, the refinancing enabled the Company and Overhill to cure all
previous defaults under all of their loan agreements. The Company is not
currently in default under any of its existing loan agreements.
As of September 30, 1997, the Company has a note payable outstanding to Mr.
Harold Estes, former owner of Texas Timberjack, Inc. (TTI), in the amount of
$14.0 million due April 6, 1998 (See Note 9). Mr. Estes has no recourse to
any of the assets or capital stock of the Company or any of its other
subsidiaries other than its ownership interest in TTI, except that Mr. Estes
holds as secondary collateral 2,000,000 shares of the Company's common stock
owned by the Pyrenees Group, a private investment firm owned in part by Paul
A. Tanner, Chairman and Chief Executive Officer of Polyphase.
In the event of default on the above note, the Company may be required to
transfer some or all of its ownership interest in TTI to Mr. Estes and the
Company would likely incur a noncash loss represented by the difference
between its net asset position in TTI (approximately $23 million at September
30, 1997) and the note balance due Mr. Estes (approximately $14 million at
September 30, 1997). Further, as of September 30, 1997, Polyphase is indebted
to TTI for approximately $6.4 million on a non-interest bearing intercompany
advance from TTI offset by an intercompany receivable due to Polyphase from
TTI of approximately $4.4 million. These amounts may be required to be
settled in the event of default on the Estes note. Also, in the event of
default on this note, if the primary collateral, the Company's ownership
interest in TTI, is not sufficient to satisfy the balance owed to Mr. Estes,
it is possible that some or all of the Polyphase shares owned and pledged by
Pyrenees would be retained by Mr. Estes.
The Company anticipates it will be required to refinance the aforementioned
note payable to Mr. Estes upon maturity and is presently in negotiations to
accomplish this objective. However, there is no certainty that the Company
will be able to refinance this note on acceptable terms, or at all, before
April 6, 1998.
As discussed more fully in Note 14, the Company has guaranteed, in certain
circumstances, a loan from Lehman Brothers Holdings, Inc. ("Lehman") to a
Nevada partnership formed by an entity headed by Mr. Tanner, and Lehman, to
purchase a parcel of land in Las Vegas, Nevada for the development of a multi-
purpose sports facility and adjacent convention center. The
F-15
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
aforementioned Nevada partnership is currently in default on its loan from
Lehman and foreclosure proceedings by Lehman have been initiated. The
Company, based on the advice of legal counsel, does not believe that it will
incur any significant liability as a result of this guarantee. As a result,
the Company believes the existence of such guarantee will not have a material
adverse effect on the Company's financial condition or results of operations.
Furthermore, Polyphase may be required to retain legal representation on
various matters, including but not limited to those matters described in
Notes 13 and 14, affecting the Company. The fees to be incurred could be
substantial in relation to the Company's cash position.
In addition, Polyphase is indebted to Overhill for approximately $11.0
million, including the $5.5 million intercompany advance in December 1997, on
a non-interest bearing intercompany advance from Overhill. The Company
intends to satisfy this intercompany obligation through dividends or
intercompany charges for Federal income taxes, management and transaction
fees, subject to obtaining the necessary approvals from the Company's
lenders. However, no assurance can be given that Polyphase will be able to
repay or otherwise reduce its obligation to Overhill.
The Company has currently undertaken several initiatives at its corporate
office in order to reduce its corporate operating cash flow requirements. In
December 1997, the Company sold its Dallas Parkway Properties, Incorporated
subsidiary, whose principal asset was the Company's corporate headquarters
building, with the buyer assuming the related debt of approximately $2.8
million. The Company expects to relocate its corporate offices during the
second quarter of fiscal 1998 and expects to reduce its cash flow
requirements as a result of lower expected future lease payments. In
addition, the Company has eliminated certain corporate level positions to
further reduce future corporate cash requirements.
4. ACQUISITION
Effective May 5, 1995, the Company acquired the assets and operations of IBM
Foods, Inc., a food processing company located in Culver City, California,
which operated using the name Overhill Farms. The purchase, which was
accomplished through Overhill Farms, Inc. a newly-formed subsidiary of the
Company ("Overhill"), provided for cash payment to the seller of $31.3
million, subject to certain adjustments, plus the assumption of certain
liabilities of the acquired business. The transaction was financed by
Overhill in part using (1) a $12 million revolving line of credit, of which
$9.7 million was initially drawn, (2) term loans totalling $6 million,
payable monthly over 4 and 5-year periods and (3) the sale of $13 million of
senior subordinated notes and warrants, due in 2002 and 2003. The acquisition
has been accounted for by the purchase method of accounting. The operating
results of Overhill are included in the Company's results of operations from
the date of acquisition. Goodwill attributable to the acquisition totaled
$10.3 million and is being amortized on a straight-line basis over a 20-year
period.
Proforma Financial Information
The following 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
F-16
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
indicative of what would have occurred had the acquisition 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 the proforma
consolidated net sales and net income per share would have been $164,138,000
and $.33 per share, respectively.
5. SALES CONTRACTS RECEIVABLE
The Company's Forestry Group provides financing to customers on certain
equipment sales using installment sales contracts. The following is a summary
of the components of the Company's net investment in these contracts as of
September 30, 1997 and 1996 and the related deferred income based on the
installment method of income recognition.
1997 1996
------------ ------------
Contracts outstanding $ 11,749,849 $ 12,401,689
Less deferred income (3,834,107) (4,324,627)
------------ ------------
7,915,742 8,077,422
Less allowance for doubtful accounts (117,598) (118,545)
------------ ------------
Net investment in sales contracts
receivable $ 7,798,144 $ 7,958,877
============ ============
The following is a summary of the maturities of the sales contracts receivable
and related deferred income:
Contracts Deferred
Due September 30, Outstanding Income Net
- ----------------- ------------- ------------ ------------
1998 $ 8,702,806 $ (2,839,922) $ 5,862,884
1999 2,455,600 (801,328) 1,654,272
2000 557,654 (182,120) 375,534
2001 33,789 (10,737) 23,052
------------ ------------ ------------
$ 11,749,849 $ (3,834,107) $ 7,915,742
============ ============ ============
6. NOTES RECEIVABLE
The Forestry Segment periodically makes advances to certain unrelated
individuals and corporations. These notes have interest rates that range from
12% to 18%, are due within one year and are secured by a variety of
marketable collateral. Interest is accrued on notes receivable as long as the
Company believes the notes are collectible. The accrued interest is added to
the note and is shown as part of that balance in the accompanying statements.
Allowances are established periodically if, at the date of valuation,
management feels it is probable that a loss exists in the portfolio. The
allowance is established based upon payment history, evaluation of the
portfolio and the related expected credit risk.
F-17
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company had $939,621 and $972,422 of short term notes receivable as of
September 30, 1997 and 1996, respectively, from unrelated corporations and
individuals, net of allowances of $277,092 and $248,259, respectively. The
loans are secured primarily by land, timber and equipment. At September 30,
1997, approximately $434,332 of such notes receivable were no longer accruing
interest. All notes receivable are due in less than one year.
In connection with the sale of the computer subsidiaries to an unrelated
third party in July 1996, (See Note 16) the Company received, as
consideration, notes receivable totalling $1,037,890. During fiscal 1997,
these notes and certain other Company assets were exchanged with the same
unrelated third party for $200,000 cash and preferred stock convertible into
a 3% equity interest in DataTell Solutions, Inc. (See Note 16).
7. INVENTORIES
Inventories are summarized as follows: September 30
-------------------------
1997 1996
----------- -----------
Finished goods 19,241,149 22,490,026
Work-in-process 691,284 694,683
Raw material 3,269,587 4,898,070
Inventory reserve (200,000) (55,000)
----------- -----------
Total $23,002,020 $28,027,779
=========== ===========
8. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
September 30,
-------------------------
1997 1996
----------- -----------
Non-compete agreements (a) $ 700,000 $ 700,000
Deferred financing costs (b) 878,216 1,039,089
Consulting contract (c) 200,000 -
Other 421,733 258,560
----------- -----------
2,199,949 1,997,649
Less accumulated amortization (1,002,810) (595,410)
----------- -----------
$ 1,197,139 $ 1,402,239
=========== ===========
(a) The Company entered into noncompete agreements with the seller and an
officer of Texas Timberjack, Inc. with such amounts being amortized over the 7
year life of each agreement.
(b) 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.
F-18
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) The Company granted a former executive options on 35,000 shares of common
stock at $.01 per share. The options were granted in consideration of a two
year consulting contract and were valued at $200,000 based on the fair market
value at the date of grant. The contract is being amortized over the two year
period.
In January 1997, an unrelated third party was granted an option to purchase
200,000 shares of the Company's common stock, exercisable at $.01 per share,
in exchange for a two-year consulting agreement. The transaction was valued
at $973,000. As of September 30, 1997, the unrelated third party is no longer
performing services for the Company. Accordingly, the Company has recognized
the entire amount associated with the consulting contract as an expense in
the current fiscal year.
9. NOTES PAYABLE
Notes payable consist of the following:
September 30,
--------------------------
1997 1996
----------- -------------
Note payable to Ford Motor Credit Corporation (a) $ 536,885 $ 99,036
Note payable to Associates First Capital Corporation (b) 550,845 -
Note payable to Finova Capital Corporation (c) 7,875,369 9,417,183
Other notes payable 50,000 -
----------- -------------
$ 9,013,099 $ 9,516,219
=========== =============
(a) TTI has a floor plan note with Ford Motor Credit Corporation. The floor
plan note accrues no interest provided the equipment financed under the note
is sold within a predetermined period, typically nine to twelve months from
the time TTI takes delivery of the equipment.
(b) TTI has a floor plan agreement with Associates First Capital Corporation
to finance equipment. The agreement accrues interest on an individual unit
basis with an average interest rate of prime plus 1/2% (approximately 9% at
September 30, 1997), and the equipment can be financed up to one year.
(c) In connection with the acquisition of Overhill Farms, Inc. (See Note 4),
the Company's Overhill subsidiary obtained an $18,000,000 credit facility
with Finova Capital Corporation which consists of Term Loan A (See Note 10)
in the original amount of $2,000,000, Term Loan B (See Note 10) in the
original amount of $4,000,000 and a $12,000,000 revolving line of credit.
Borrowings under the revolving line of credit are limited to the lesser of
$12,000,000 or an amount determined by a defined borrowing base which is
based on eligible receivables and inventory. Borrowings under the line of
credit facility bear interest at the Citibank base rate plus 1.5% (11.0% at
September 30, 1997). This amount is classified as a current liability in the
consolidated balance sheets due to a requirement for Overhill to maintain a
blocked account in favor of the lender for collections on all accounts
receivable, which are immediately applied to
F-19
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
reduce borrowings under the line of credit. Overhill's revolving line of
credit requires the payment of an unused line fee of .25% per annum and an
annual facility fee of .50% per annum. The agreement with Finova relating to
this facility contains various covenants including without limitation,
Overhill's pledge to restrict capital expenditures to certain agreed upon
levels, maintain specified current and debt to net worth ratios and specified
levels of net worth. Additionally, the terms of the credit facility prohibit
loans, advances or dividends from Overhill to the Company and limit management
fees the Company may collect from Overhill to $250,000 per annum. Furthermore,
the capital stock and substantially all the assets of Overhill as of September
30, 1997 were pledged as collateral and the Company has guaranteed all
obligations under the credit facility. In December 1997 the credit facility
was extended for three years in connection with the Long Horizons refinancing
(See Note 10 ).
Note Payable and Accrued Interest to Related Party
In connection with the acquisition of TTI on June 24, 1994, the Company
recorded a note to the seller (Mr. Harold Estes) in the amount of $9,737,719
with interest at 8% due October 31, 1994 and collateralized by all the capital
stock of TTI. As of various maturity dates, the seller has entered into
subsequent agreements with the Company to modify and extend the term of the
note. As of September 30, 1997, the note had a principal balance plus accrued
interest of $13,998,916 bearing interest at 16% per annum with a maturity date
of December 1, 1997. On December 2, 1997 the note was further modified and
extended to April 6, 1998 at an interest rate of 16%. In connection with the
December 2, 1997 extension, the Company agreed to pay the seller $150,000 in
addition to outstanding principal and accrued interest under the loan at
maturity. The note holder has no recourse to any of the assets or capital
stock of the Company or any of its other subsidiaries other than its ownership
interest in TTI except that Mr. Estes holds, as secondary collateral,
2,000,000 shares of the Company's Common Stock owned by the Pyrenees Group.
(See Notes 3 and 11).
Weighted Average Interest Rate
The weighted average interest rate on short term borrowings for the year ended
September 30, 1997 was 9.6%.
Restricted Net Assets of Subsidiaries
Due to subsidiary debt covenant and other restrictions, the Company's ability
to obtain funds from its subsidiaries is limited (See Note 3). In addition,
the Company's ownership of Texas Timberjack is pledged as collateral against
the note payable to related party which is scheduled to mature in April 1998,
and there is no assurance that said note can be refinanced or otherwise paid
(See Notes 3 and 9). Additionally, the Company has no operating revenues and
may be highly dependent on its subsidiaries for its liquidity needs, and there
is no assurance that, based upon the above, such liquidity will be available.
F-20
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
------------------------------
1997 1996
----------- --------------
Term loan payable to bank bearing interest at 8.5%,
due in monthly installments of $12,465 through May
1999, collateralized by real estate. $ - $ 845,544
Note payable, due August 1, 1999, $2,800,000
face amount, less $150,000 allocated to
warrants, interest only at 14% due in monthly
installments, collateralized by real estate. 2,650,000 -
Senior convertible debentures due July 1, 1999,
bearing interest at 12%, with interest payable
semi-annually in January and July (the "1999 Bonds"). 4,000,000 4,000,000
Senior convertible debentures due December 1, 1997,
bearing interest at 12%, with interest payable semi-
annually in June and December (the "1997 Bonds"). 1,500,000 1,500,000
Revolving credit agreement of TTI with Comerica Bank-
Texas, bearing interest at prime plus 1/2% (9% at
September 30, 1997), collateralized by notes, trade
accounts receivable and inventory, due March 1, 1998. 5,600,000 8,900,000
Term Loan A payable to financial institution, with
interest at prime rate plus 2.5%, (11% at
September 30, 1997), due in monthly installments
of $33,333 plus accrued interest through
May 1, 2000 (See Note 9). 1,066,676 1,466,672
Term Loan B payable to financial institution, with
interest at prime rate plus 2.5% (11% at
September 30, 1997), due in monthly
installments of $83,333 plus accrued interest
through May 1, 1999 (See Note 9). 915,604 1,915,600
F-21
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Senior subordinated notes payable of Overhill due to
a financial institution, bearing interest at 13%
payable quarterly, net of discount of $0 and $404,100 at
September 30, 1997 and 1996, respectively. 13,000,000 12,595,900
Other 260,000 350,000
------------ -------------
28,992,280 31,573,716
Less current maturities (5,720,000) (31,573,716)
------------ -------------
Total long-term debt $ 23,272,280 $ -
============ =============
Scheduled maturities after giving consideration to the refinancing discussed
below are as follows:
Outstanding Application of
Indebtedness Long Horizons For the Years Ending September 30,
September 30, 1997 Proceeds (a) 1998 1999 2000 2001
----------------------------------------------------------------------------------------------
Note Payable due 8/1/99 $ 2,650,000 $ - $ - $ 2,650,000 $ - $ -
The 1999 Bonds 4,000,000 (2,800,000) - 1,200,000 - -
The 1997 Bonds 1,500,000 (1,500,000) - - - -
The Comerica Revolver 5,600,000 - 5,600,000 - - -
Term Loan A 1,066,676 (1,066,676) - - - -
Term Loan B 915,604 (915,604) - - - -
Subordinated Debentures 13,000,000 (13,000,000) - - - -
Long Horizons - - - 1,250,000 3,000,000 19,850,000
Other 260,000 - 120,000 140,000 - -
----------------------------------------------------------------------------------------------
$28,992,280 $(19,282,280) $ 5,720,000 $ 5,240,000 $3,000,000 $19,850,000
(a) Existing debt as of September 30, 1997 that was refinanced through the new
$24.1 million credit facility is discussed further below. Of the total
$24.1 million of borrowing under the facility, approximately $19.3 million
was used to refinance existing debt as described in the above table and
$4.8 million represents new debt. In addition, the Note Payable due 8/1/99
totalling $2.7 million was assumed in December 1997 in connection with the
sale of the corporate office building (see further discussion below).
In December 1997, Overhill refinanced a certain portion of the existing debt.
The new financing amounted to a total facility of $24.1 million which is
structured as a three-year term loan maturing in December 2000. The note
requires interest-only payments at prime plus 4% ( 12.5% as of December 5,
1997) through April 1999 and thereafter provides for principal amortization of
$250,000 per month, plus interest, until a final payment of approximately
$19,850,000 is due on December 5, 2000. The agreement also requires Overhill
to pay on a quarterly basis, service fees
F-22
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
totalling $140,000, $300,000 and $440,000 for the first, second and third
years of the loan respectively. Under the terms of the new financing
agreement, the lender was granted warrants to purchase 30% of Overhill's
common stock, exercisable immediately at a nominal value, 25% of which can be
repurchased by the Company over the next two years for $2,000,000.
Additionally, the lender received fees totalling approximately $1.7 million in
connection with this financing, which are partially refundable on a pro rata
basis upon early repayment of the loan through a refinancing, sale or initial
public offering of Overhill. As a result of this transaction Overhill repaid
in full the $13.0 million subordinated debentures and repurchased for
approximately $2.0 million the warrants previously held by Rice to purchase up
to 22.5% of Overhill's common stock. These payments to Rice resulted in the
Company and Rice reaching a settlement of their litigation. The Company also
used a portion of the proceeds to repay Term Loans A and B, the $1,500,000
senior convertible debenture and $2,800,000 of principal of the $4,000,000
senior convertible debentures described below. The refinancing also enabled
the Company and Overhill to cure all previous defaults under various loan
agreements and provided the Company with approximately $900,000 in working
capital. The early extinguishment of this indebtedness will result in an
extraordinary charge to operations of approximately $600,000 (before income
taxes) during the quarter ended December 31, 1997. Overhill's credit
facilities generally restrict loans, advances, dividends or transfers from
Overhill to the Company to $250,000 per year.
The $4,000,000 senior convertible debentures issued in July 1994 (the 1999
Bonds) are convertible at the option of the holder into shares of common stock
equal to the principal amount of each bond (or in $1,000 increments) divided
by a $5.65 conversion price subject to adjustment in certain circumstances.
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 1997 Bonds 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. In December 1997, the Company
paid in full all amounts due for principal and interest under the 1997 bonds.
Additionally, a partial payment of $2.8 million principal, plus accrued
interest, was made on the 1999 Bonds. As part of this partial payment, the
conversion price of the remaining $1.2 million principal amount of 1999 Bonds
was reduced to $3.00 per share (from $5.65 per share), subject to further
adjustment as provided by the Indenture and the holders were granted warrants
to purchase 400,000 shares of the Company's common stock, exercisable over a
five-year period, with certain registration rights. The warrants are
exercisable for 200,000 shares at $.01 per share and 200,000 shares at $1.125
per share, the market price of the Company's Common Stock on the date of
grant.
F-23
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TTI's revolving line of credit with Comerica Bank-Texas is due March 1, 1998.
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 (See Note 3). The Company has guaranteed all
obligations under TTI's revolving line of credit. Availability under the line
of credit at September 30, 1997, after giving effect to base limitations
amounted to approximately $6,700,000. TTI is currently in negotiations with
Comerica to extend the line of credit upon expiration.
During January 1997, in connection with an advance made to Stadium Partners,
the Company borrowed $2.5 million on a 16% six month note, collateralized by a
second lien on the Company's corporate headquarters building. When the
Company was unable to make the principal payment when due, the lender elected
to post the real estate for foreclosure. Prior to the foreclosure proceeding,
the Company entered into two transactions described below which enabled it to
repay this loan as well as the unpaid balance of the first mortgage payable to
Comerica Bank-Texas in the amount of $773,000.
In August 1997, the Company issued a $2.8 million note payable bearing
interest at 14% with a maturity date of August 1999. The proceeds were used
to repay debt outstanding on the Company's corporate headquarters building
which secures the new note payable. At the same time, an entity related to
this note holder purchased $750,000 of Series F Preferred Stock and received
warrants convertible into 500,000 shares of the Company's common stock at
$1.50 a share, which approximated market at the date of issuance (See Note
11). The Company has valued the warrants at $150,000 with such amount being
reflected as a debt discount. In addition, the Company recorded a non-cash
dividend of $250,000 representing the value assigned to the preferred stock's
discount feature (See Note 11). In December 1997, the Company sold the
entity, whose principal asset was the corporate office building, in exchange
for nominal consideration plus the assumption of this note payable (See Notes
11 and 16).
F-24
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
11. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has 50,000,000 authorized shares of $.01 par value preferred
stock, with the rights and preferences as designated by the Board of
Directors, as follows:
Authorized Conversion
Series Shares Price
---------- ---------- ----------
A 375,000 $ .50
B 300,000 1.00
C 300,000 2.00
D 600,000 4.00
E 1,425,000 10.00
F 10,000 Variable
A-2 750,000 5.00
A-3 750,000 5.00
A-5 750,000 5.00
All shares of preferred stock designated above generally have a redemption
value of $10 per share, have a liquidation preference of $10 per share and are
callable by the Company at 105% of the redemption value.
Holders of the Series A-2 preferred shares are entitled to two votes per share
on all matters on which the holders of common stock have one vote per share.
No other series of preferred stock has voting rights.
During November 1995, the Company, in a transaction with an unrelated
corporation, sold 250,000 shares of Series A-3 preferred stock for $2,500,000
cash. The designations of the Series A-3 stock are similar to those of other
series of preferred stock, except that Series A-3 preferred stock has voting
rights, is entitled to cumulative annual dividends of 12% and is convertible
into common stock as provided in the preferred stock designations, subject to
adjustment in certain circumstances. Subsequent to September 30, 1997, the
conversion rate has been adjusted to current market as of the date of
conversion. Also, during fiscal 1996, the Company entered into an agreement
with an associate of the corporation to provide consulting services to the
Company over a 36-month period. The consideration for such services was the
grant of options to purchase 357,143 shares of common stock at $3.50 per share
(the fair market value at the date of grant) plus hourly fees and expenses.
In October 1996, the associate of the aforementioned corporation exercised the
stock option to purchase 357,143 shares of common stock. Consideration for
the transaction was the tender of 125,000 shares of Series A-3 preferred
stock, having a redemption value of $1,250,000, which had been assigned by the
corporation to its associate.
During August 1997, the Company sold 7,500 shares of newly designated Series F
6% Preferred Stock for $750,000 less expenses. The designations for Series F
preferred stock provide for a
F-25
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
redemption value of $100 per share, cumulative annual dividends of 6%, payable
quarterly and are convertible at 75% of the average five day closing price of
the Company's common stock prior to conversion. Holders of the Series F
preferred stock have no voting rights. In connection with the transaction, the
Company recorded a non-cash dividend of $250,000 representing the value
assigned to the preferred stock's discount feature.
Stock Options
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 1,000,000 shares
of its common stock for issuance to eligible employees of, and consultants to,
the Company. The Plan provides for the grant of both incentive stock options
(at exercise prices no less than fair value at the date of grant) and
nonqualified stock options (at exercise prices as determined by the
Compensation Committee of the Board of Directors), that such options may be
exercisable as determined by such Committee and that the Plan will expire ten
years following its adoption.
In January 1997, an unrelated third party was granted an option to purchase
200,000 shares of the Company's common stock, exercisable at $.01 per share,
in exchange for a two-year consulting agreement. The transaction was valued
at $973,000. As of September 30, 1997, the unrelated third party is no longer
performing services for the Company. Accordingly, the Company has recognized
the entire amount associated with the consulting contract as an expense in the
current fiscal year.
In November 1996, a former executive of the Company was granted and exercised
options on 35,000 of common stock at $.01 per share. Such options were
granted in consideration for a consulting contract and were valued at
$200,000, with this amount being amortized over the life of the consulting
contract.
During July 1996, the Board of Directors granted to certain officers,
directors and employees options to purchase 510,000 shares at $2.00 per share
which was equal to the fair value at the date of the grant. The options are
exercisable in whole or in part and expire ten years from the date of grant.
F-26
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary in changes in common stock options during the three years ended
September 30, 1997, is as follows:
Number of Exercise Weighted Avg.
Shares Price Exercise Price
---------- ---------- --------------
Outstanding, September 30, 1994 493,000 $ .50-5.25 $1.04
Granted - - -
Exercised - - -
Cancelled - - -
---------
Outstanding, September 30, 1995 493,000 $ .50-5.25 $1.04
Granted 867,143 $2.00-3.50 $2.61
Exercised (75,000) $ .50-.75 $0.67
Cancelled - - -
---------
Outstanding, September 30, 1996 1,285,143 $ .75-5.25 $2.01
Granted 235,000 $ .01 $0.01
Exercised (467,143) $ .01-3.50 $2.80
Cancelled (30,000) $ 2.00 $2.00
---------
Outstanding, September 30, 1997 1,023,000 $ .01-5.25 $2.01
=========
Exercisable, September 30, 1997 1,023,000 $ .01-5.25 $1.41
Exercisable, September 30, 1996 1,285,143 $ .75-5.25 $1.78
Summarized information about stock options outstanding and exercisable at
September 30, 1997, is as follows:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------ ------------------------------------
Outstanding Weighted Average Exercisable
Exercise at Remaining Weighted Average at Weighted Average
Prices September 30, 1997 Contractual Life Exercise Price September 30, 1997 Exercise Price
- ---------- ------------------ ---------------- ---------------- ------------------ ----------------
$0.01 200,000 9.25 Yrs $0.01 200,000 $0.01
$0.75 293,000 0.75 Yrs $0.75 293,000 $0.75
$2.00 480,000 8.75 Yrs $2.00 480,000 $2.00
$5.25 50,000 1.50 Yrs $5.25 50,000 $5.25
Proforma information regarding net income (loss) is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method specified by SFAS No. 123. The fair value
of options granted during the year ended September 30, 1997 was estimated at
the date of grant using the Black-Scholes method with the following weighted
average risk assumptions: risk free interest rate of 5.21% ; no dividends
expected to be declared; volatility factor of .994; and a weighted average
expected life of six
F-27
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
months. The fair value of options granted during the year ended September 30,
1996 was estimated at the date of grant using the Black-Scholes method with
the following weighted average risk assumptions: risk free interest rate of
6.59%; no dividends expected to be declared; volatility factor of .994; and a
weighted average expected life of five years. The effect of applying the fair
value method under SFAS No. 123 to the Company's 1996 and 1997 stock-based
awards would result in net loss during the year ended September 30, 1996 of
$763,942 ($0.06 per share) and a net loss during the year ended September 30,
1997 that is not materially different from amounts reported.
Stock Options-Others
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance to
the Pyrenees Group, or its assignees, options to purchase up to 1,000,000
shares of convertible preferred stock for $10 per share. The options were
issued subject to approval by the Company's shareholders and were approved and
ratified at the Company's Annual Meeting held May 31, 1994. Pyrenees, a
private investment firm controlled by Paul A. Tanner, Chairman and Chief
Executive Officer, 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 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
========= =========
During fiscal 1994 and 1995 Pyrenees exercised and converted Series A, B, and
C Preferred Stock into common stock. In November, 1995, Pyrenees exercised
the Series D option through the issuance of a 7% recourse note in the amount
of $2,000,000, collateralized by the shares issued. During fiscal 1996 the
shares were converted to 500,000 shares of common stock. During the years
ended September 30, 1996 and 1997, principal payments of approximately
$721,000 and $304,000, respectively were made on the note. The Series E
option expired unexercised. See Note 15.
Warrants
The warrant to purchase common stock of subsidiary, issued in connection with
the $13 million subordinated debt described in Note 10, provides that the
warrant holders may purchase shares of the Company's Overhill subsidiary
(representing 22.5 % of its common stock) at any time over a ten year period
which ends May 5, 2005 for a nominal exercise price of $100. The warrant
F-28
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. As
discussed further in Note 10, as of December 5, 1997, the warrants were
repurchased from Rice for approximately $2,000,000.
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 estimated the fair value of the Overhill
common stock and accreted the warrant liability accordingly through a charge
to earnings. As of September 30, 1997, the warrant was accreted to a value of
$2 million, representing the purchase price paid by the Company on December 5,
1997.
In connection with the issuance of the Series F Preferred Stock, (See Note 11)
and the $2.8 million note payable (See Note 10), in August 1997, the Company
issued warrants to purchase 500,000 shares of common stock with an exercise
price of $1.50 per share. The Company has valued the warrants at $150,000
with such amount being reflected as a debt discount.
In connection with obtaining the $24.1 million note (see Notes 3, 9 and 10) a
warrant was issued to Long Horizons Fund, LP that provides the for purchase up
to 30% of the common stock of Overhill at any time during the three year
agreement. The Company has the option to repurchase a portion this warrant
representing 25% of the Overhill shares during the two year period following
the date of the agreement for $2,000,000.
12. INCOME TAXES
Income tax expense (benefit) consists of the following:
For the Years Ended
September 30,
1997 1996 1995
------------- ------------ -----------
Current:
Federal $ (1,126,891) $ 1,193,807 $ 111,589
State 239,869 265,467 414,289
Deferred:
Federal 168,278 115,233 (396,409)
State 65,061 19,035 (53,242)
------------- ------------ -----------
Total income taxes $ (653,683) $ 1,593,542 $ 76,227
============= ============ ===========
F-29
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The effective tax rate on earnings (loss) before income tax charges (benefits)
was different than the federal statutory tax rate. The following summary
reconciles the federal statutory tax rate with the actual effective rate:
For the Years Ended
September 30,
1997 1996 1995
------ ------ ------
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 (3.8) 9.2 7.7
Officer life insurance premiums,
amortization of goodwill, accretion
of stock warrants 2.9 12.5 6.7
Utilization of net operating losses - (4.3) (31.9)
Change in valuation allowance 26.6 - (14.2)
Sale of subsidiaries 5.7 27.9 -
Other (0.7) 6.6 (0.2)
------ ------ ------
Effective tax expense (benefit) rate (3.3%) 85.9% 2.1%
====== ====== ======
The components of deferred tax balances as of September 30, 1997 and 1996 are
summarized as follows:
1997 1996
-------------- --------------
Deferred tax assets:
Allowance for doubtful accounts $ 1,915,501 $ 1,348,559
Inventory 112,890 132,732
Accrued expenses 175,000 167,036
Capital loss carryforwards 596,243 -
Net operating loss carryforwards 3,267,780 -
AMT and other credit carryforwards 257,111 -
Investment in subsidiary (unconsolidated) - 45,206
Other 5,215 14,748
Stock options 381,628 -
-------------- --------------
Total deferred tax assets 6,711,368 1,708,281
Valuation allowance (5,233,603) -
-------------- --------------
Net deferred tax assets 1,477,765 1,708,281
============== ==============
F-30
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deferred tax liabilities:
Stock option exercises - (17,572)
Prepaid expenses (212,515) (235,624)
Intangibles (985,284) (788,775)
Depreciation (279,966) (422,591)
Other - (11,335)
----------- -----------
Total deferred tax liabilities (1,477,765) (1,475,897)
----------- -----------
Net deferred tax assets $ - $ 232,384
=========== ===========
The Company has net operating losses available for carryforward of $8,169,451,
due to expire in 2012 and capital losses available for carryforward of
$1,490,607. Additionally, the Company has alternative minimum tax credit
carryforwards of $177,278 which have no expiration and general business
credits of $79,833 which expire in 2012. Deferred tax assets for fiscal year
1996 are included in prepaid expenses and other assets in the accompanying
consolidated balance sheets.
13. COMMITMENTS AND CONTINGENCIES
Commitments
Future minimum lease payments for all operating leases at September 30, 1997
are as follows:
For the Years Ending
September 30,
----------------------
1998 $ 1,535,983
1999 709,364
2000 182,135
2001 57,975
2002 5,600
------------
$ 2,491,057
============
Certain of the leases provide for renewal options for periods from 1998 to
2005 at substantially the same terms as the current leases.
Rent expense, including monthly equipment rentals, was approximately
$1,847,000, $1,510,000, and $893,000 for the years ended September 30, 1997,
1996, and 1995, respectively.
The Company's subsidiary, TTI relies on two suppliers for the majority of its
new units and parts. As of September 30, 1997, TTI had commitments to purchase
inventory amounting to $4,671,000.
F-31
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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,
1997, TTI's guarantees totaled $8,568,121. TTI receives a fee, in the form of
interest participation on certain of the notes upon which it is contingently
liable. This fee is recognized as interest income and is usually held by the
institution to meet reserve requirements. Funds held in escrow by the lenders
of $717,358 at September 30, 1997 are included in the consolidated balance
sheet as restricted cash and are fully offset by a reserve for credit
guarantees.
TTI has an interest in two partnerships. The total investment in these
partnerships at September 30, 1997 of $328,782 is included in other assets.
TTI guarantees the debt of these partnerships. The amount guaranteed at
September 30, 1997 of $403,422 is collateralized by accounts receivable,
inventory, equipment, buildings and real estate.
Contingencies
In January 1997, a suit was filed in District Court of Dallas County against
the Company by Rice Partners II, L.P., subordinated debt holders of the
Overhill Farms subsidiary. The suit claims, among other things, that the
Company breached covenants of the subordinated debt agreement and refused to
cure the defaults within a reasonable period of time. Subsequent to year end,
in connection with the refinancing of corporate debt, the Company and Rice
Partners settled all litigation related to the suit. (See Notes 3, 9 and 10)
During 1997, five substantially identical complaints were filed in the United
States District Court for the District of Nevada against the Company and
certain of its officers and directors. The suits seek class action status and
assert liability based on alleged misrepresentations that resulted in the
market price of the stock being artificially inflated. The Company intends to
vigorously defend these actions. Subsequent to September 30, 1997, one of
these lawsuits was dismissed.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based
on advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial position or results of
operations.
See Note 14 for a description of a guarantee of related party indebtedness.
14. RELATED PARTY TRANSACTIONS
During fiscal 1994, the Company made aggregate non-interest bearing cash
advances to Mr. Tanner in the amount of approximately $282,000. At September
30, 1994, Mr. Tanner had repaid $150,000 of such advances. During fiscal
1995, following the repayment of the unpaid 1994 advances, additional advances
amounting to approximately $63,000 were made to Mr. Tanner which were unpaid
at September 30, 1995. During fiscal 1996, additional amounts were advanced
to or on behalf of Mr. Tanner which aggregated approximately $1.5 million.
On
F-32
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 8, 1995, the aforementioned advances and an unpaid promissory note
receivable from Mr. Tanner were refinanced through the issuance to the Company
of a 12% unsecured demand note from Mr. Tanner in the principal amount of
$2,000,872.
Also during the above described period, the Company made disbursements to the
Pyrenees Group, a corporation controlled by Mr. Tanner, of approximately $2.67
million, of which $1,153,000 represented repayment of existing advances from
Pyrenees, with the balance representing an advance to Pyrenees of
approximately $1.5 million.
During January 1996, the Company reached an agreement to manage a project to
develop and build a multi-purpose sports facility in Las Vegas, Nevada. The
project was being developed by PLY Stadium Partners, Inc. ("Stadium
Partners"), a private investment firm headed by Mr. Tanner. As part of the
agreement, the Company was also entitled to participate in the facility's
management, sales of suites and seat options, concessions and events and was
to be compensated for such services. The Company agreed to provide to Stadium
Partners up to $4 million of debt that (1) is convertible into a 14% economic
interest in the project and (2) was guaranteed by Mr. Tanner and Pyrenees. As
part of this agreement, the aforementioned accounts receivable from Mr. Tanner
and Pyrenees (approximately $3.5 million), together with subsequent amounts
advanced, charged or accrued to or on behalf of Stadium Partners were
considered as components of the $4 million of convertible debt, bearing
interest at 12% and guaranteed by Mr. Tanner and Pyrenees. Through September
30, 1996, the Company advanced an additional $9,271,054.
During the twelve months ended September 30, 1996, the Company accrued
management and service revenues of $2,550,000 and interest income of $790,000
related to the Company's activities with Stadium Partners, the collectibility
of which was dependent upon the success of the project and/or the guarantees
referred to above. As a result of the terms of the financing arrangements with
Lehman described below, Stadium Partners was precluded from making any
distributions until permanent project financing was secured or stadium suite
sales were made that were sufficient to repay the financing from Lehman. As a
consequence of Stadium Partners' inability to effect such sales or obtain such
financing by March 15, 1997, in order to make its payment to the Company on
such date, the Company established a reserve of $3.34 million as of September
30, 1996, which represents the income accrued in 1996.
On November 15, 1996, Stadium Partners, through a newly-formed partnership,
purchased 62 acres in Las Vegas for the development of the stadium and
adjacent convention facility. Financing was provided by Lehman Brothers
Holdings, Inc. ("Lehman") through a partnership, Nevada Stadium Partners
Limited Partnership ("Nevada Partnership") with Lehman receiving an equity
interest in the project.
The Company has guaranteed the repayment of the loan from Lehman to the Nevada
partnership in the above mentioned transaction, in certain circumstances or
upon the occurrence of certain events. Such guarantee is effective upon the
occurrence of certain conditions, including without limitation if Nevada
Partnership files for bankruptcy or insolvency, if representations by the
Partnership prove to be fraudulent regarding the financial condition of the
Partnership, the land
F-33
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
securing the loan is further encumbered or ownership is transferred without
the consent of Lehman. Management believes, based upon the advice of legal
counsel, the Company has no significant liability as a result of the
aforementioned guarantees.
The loan agreement with Lehman required certain prepayments by Nevada
Partnership, the first of which, in the amount of $5.0 million became due in
January 1997. This was paid primarily with funds advanced by the Company, of
which $2.4 million was obtained from an existing credit line and $2.5 million
was obtained from a six month term note, collateralized by the Company's
corporate office building. In connection with the loan transaction, the
Company entered into a consulting agreement with a principal of the lender,
whereby the Company granted such party an option to purchase 200,000 shares of
the Company's common stock at $.01 per share; this option was assigned a value
of $973,000 which was charged to expense during fiscal 1997.
The second prepayment requirement of $20.0 million became due in May 1997;
this payment was not made. As a result of the failure to make this payment,
another agreement was entered into among the borrower, Lehman and the Company
as of July 1, 1997. This agreement generally provided forbearance by Lehman
until September 30, 1997, to allow additional time to raise the funds to make
the principal payment.
The terms of the forbearance agreement were not met by the September deadline,
and the note matured unpaid in November 1997. Stadium Partners and Mr. Tanner
continue to pursue various alternatives with respect to the repayment of
amounts due Lehman, including among other things, the sale or refinancing of
the property. There is no assurance that these efforts will be successful or
that the Company can expect to collect any amounts due from Stadium Partners
or the guarantors.
As a result of the above, the Company has recorded a charge to earnings for
the year ended September 30, 1997, in the amount of $14.8 million,
representing all amounts remaining unpaid by Stadium Partners, net of the
reserve established in 1996. Amounts which may subsequently be recovered, if
any, will be recognized as income when collection is assured.
At September 30, 1997, the Company also had an outstanding balance due from
Mr. Tanner amounting to $173,526, resulting from advances made to or on Mr.
Tanner's behalf during fiscal 1997.
Other Transactions
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September
30, 1997, the insurance premium receivable was $552,006.
In connection with the purchase of TTI, the Company acquired a note receivable
from an officer. The note is secured by marketable securities, is payable
within one year and bears interest at 3.96%. As of September 30, 1997 the
balance outstanding was $340,071.
F-34
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
See Note 11 for discussion of options granted to the Pyrenees Group, a related
party.
See Note 9 for discussion of notes payable to Mr. Estes.
15. PROFIT SHARING PLAN
In 1986, prior to its acquisition by the Company, TTI adopted a profit sharing
plan. In order to participate in the plan, an employee must be at least 21
years of age, have been employed by TTI at least one year and be a full time
employee. Vesting begins in the third year of employment and increases each
year until full vesting is achieved in the seventh year. The plan is
administered by an independent third party. Trustees for the plan are the
president and controller of TTI. The maximum contribution is the lesser of
15% of eligible salaries or net income plus retained earnings. Profit sharing
expense for the years ended September 30, 1997 and 1996 was $298,000 and
$264,000, respectively.
16. SALE OF SUBSIDIARIES
In July 1996, the Company completed a transaction with an unrelated third
party to sell a controlling interest in the Company's computer subsidiaries.
The transaction was accomplished through the sale of 51% of a newly formed
subsidiary, PC Networx America, Inc. (PCNA), whose sole assets consisted of
the capital stock of Network America, Inc., PC Repair of Florida, Inc.,
Computer Systems Concepts and Register Mate, Inc. The consideration for this
sale amounted to $1,736,457 (subject to adjustments) consisting of $475,000 of
cash, $86,457 of notes receivable and $1,175,000 of preferred stock. At that
time it was the intention of the Company to publicly distribute to its
shareholders a dividend of 30% of the PCNA stock. In a related transaction
with the same party, the Company sold 100% of the stock of Micro
Configurations, Inc. (MCC) for a note receivable in the amount of $951,433
secured by the stock and assets of MCC. Subsequent to this transaction, PCNA's
name was changed to DataTell Solutions, Inc. ("DataTell").
During fiscal 1997, the purchaser and controlling shareholder of DataTell
elected to discontinue that company's efforts to effect a public registration
of DataTell's stock, thus precluding the Company from making a distribution of
the stock to its shareholders. Additionally, certain purchase price
adjustments resulted in the elimination of the note for $86,457. The
purchaser also elected not to further pursue the operation of MCC, and, since
the Company has been unsuccessful in its attempts to recover MCC's assets, the
amount due under the $951,433 note has been determined not to be realizable.
The balance of these notes, totalling $1,037,890, was charged to operations
during fiscal 1997.
The Company, during the latter part of fiscal 1997, having made the decision
to further reduce its involvement in computer-related businesses, entered into
a new agreement with the controlling shareholder of DataTell to dispose of its
remaining direct ownership of DataTell. In connection therewith, the Company
agreed to exchange its 49% interest in DataTell, together with the $1,175,000
of preferred stock referred to above, for cash of $200,000 and a new series of
the
F-35
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
purchaser's preferred stock which carries certain rights to be exchanged for
DataTell stock. This transaction resulted in a loss of $2,575,925 and has been
charged to operations during fiscal 1997.
The Company, during February 1995, entered into a transaction whereby it
exchanged 100% of the common stock of Taylor-Built Industries, Inc., a wholly
owned subsidiary, for 200,000 shares of restricted common stock of Optimax,
Inc., a publicly held company; such shares were sold in a private transaction
in February 1996. No significant gain or loss was recognized on these
transactions.
Subsequent to September 30, 1997, the Company sold Dallas Parkway Properties
Incorporated, its subsidiary which owns the Company's corporate headquarters
building, in exchange for stock in a privately held company; this transaction
resulted in a gain which will be reported in the first quarter of fiscal 1998.
17. SALE OF ASSETS
During the year ended September 30, 1996, TTI completed the sale of a parcel
of land in Lufkin, Texas which resulted in a gain of $875,000.
18. INFORMATION BY INDUSTRY SEGMENT
The Company's industry segments are outlined below.
Food
The food segment produces high quality entrees, plated meals, soups, sauces
and poultry, meat and fish specialties primarily for customers in the airline,
restaurant and weight loss industries.
Forestry
The forestry segment sells, finances, and repairs timber and logging equipment
in East Texas and Western Louisiana. Customers range from small logging
operations to large integrated paper mills.
Transformer Manufacturing
The transformer manufacturing segment manufactures and sells custom designed
transformer and communication filters. Customers are primarily defense
contractors or defense contractor suppliers in the Mid-Atlantic and
Northeastern regions of the United States.
F-36
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
------------------------------------------------------------
Transformer
Food Forestry Manufacturing Total
------------ ------------ -------------- -------------
Net Sales:
Sales to unaffiliated customers $ 96,176,505 $ 52,201,622 $ 3,570,426 $151,948,553
============ ============ ============ ============
Operating profit before income taxes:
Operating profit $ 4,953,194 $ 4,496,570 $ (67,224) $ 9,382,540
============ ============ ============
General corporate expenses (2,799,016)
Non-recurring charge related
to loss on related party receivable (14,838,456)
Interest expense (7,179,973)
Interest income and other 380,655
Loss on investment in computer operations (3,613,815)
------------
Loss before income taxes and warrant accretion $(18,668,065)
============
Identifiable assets:
Segment assets $ 35,565,596 $ 42,442,019 $ 2,807,683 $ 80,815,298
============ ============ ============
Corporate assets (8,665,849)
------------
Total assets $ 72,149,449
============
Capital expenditures:
Segment $ 507,825 $ 222,562 $ 27,667 $ 758,054
============ ============ ============
Corporate --
------------
Total capital expenditures $ 758,054
============
Depreciation and amortization:
Segment $ 2,045,568 $ 691,630 $ 67,137 $ 2,804,335
============ ============ ============
Corporate 1,163,765
------------
Total depreciation and amortization $ 3,968,100
============
The Company's Food segment had sales to Jenny Craig, Inc. in fiscal 1997 which
comprised approximately 20% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 1997.
F-37
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
------------------------------------------------------------------------------------------
Computer
Transformer Sales and Corporate
Food Forestry Manufacturing Service and Other Totals
------------ ------------ ------------- -------------- ------------ -------------
Net Sales:
Sales to unaffiliated customers $ 98,771,224 $ 34,247,283 $ 3,549,126 $ 10,398,177 $ 2,574,975 $ 149,540,785
============ ============ ============ ============== ============ =============
Operating profit (loss) and income
before income taxes:
Operating profit (loss) $ 6,260,382 $ 3,039,922 $ 76,726 $ (1,530,277) $ (1,181,786) $ 6,664,967
Interest and other income 751,385
Interest expense (6,389,926)
Gain on sale of assets 827,852
Income before income taxes and -------------
warrant accretion $ 1,854,278
=============
Identifiable assets:
Segment assets $ 38,746,696 $ 41,073,186 $ 3,305,280 $ -- $ 11,053,359 $ 94,178,521
============ ============ ============ ============== ============ =============
Capital expenditures:
Segment $ 392,668 $ 2,159,674 $ 87,875 $ -- $ 15,992 $ 2,656,209
============ ============ ============ ============== ============ =============
Depreciation and amortization:
Segment $ 2,024,902 $ 611,070 $ 82,402 $ 229,659 $ 469,104 $ 3,417,137
============ ============ ============ ============== ============ =============
The Company's Food segment had sales to Jenny Craig, Inc. in fiscal 1996 which
comprised approximately 26% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 1996.
Computer Sales and Service
The computer sales and service segment assembled and sold personal computers and
provided systems setup and hardware maintenance services. Customers serviced
ranged from individuals to large corporations. Subsidiaries included in the
segment were Network America, Inc., in Tulsa, Oklahoma; Letronix and Computer
System Concepts in Queens, New York; PC Repair in Sarasota, Florida and Micro
Configurations Inc., in Brooklyn, New York. Effective July 1, 1996, the Company
sold 51% of its interests in the computer operations. Effective July 1, 1997,
the Company sold its remaining interests in the computer operations. (See Note
16)
Corporate and Other
The Corporate segment provided management and advisory services to Stadium
Partners, a privately owned development corporation engaged in the development
of a multi purpose sports facility in Las Vegas, Nevada. (See Note 14).
F-38
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 and warrant $ 3,552,697
accretion ============
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 segment had sales to Jenny Craig, Inc. in fiscal 1995 which
comprised approximately 15% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 1995.
F-39
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
19. QUARTERLY FINANCIAL DATA (Unaudited)
For the Year Ended September 30, 1997
-----------------------------------------------------------
December 31 March 31 June 30 September 30
------------- ------------- ------------- -------------
Net revenues $ 36,165,789 $ 38,409,223 $ 38,478,729 $ 38,894,812
Gross profit 6,108,874 5,786,039 6,964,065 6,524,463
Operating income 1,485,204 1,974,853 2,224,511 898,956
Net income (loss) $ (67,237) $ (132,001) $ 277,111 $ (18,903,031)
============= ============= ============= =============
Net income (loss) per common share $ (.01) $ (.01) $ .02 $ (1.41)
============= ============= ============= =============
The Company's results for the quarter ending September 30, 1997 reflect a charge
to earnings in the amount of approximately $14.8 million, (before income
taxes), representing all amounts remaining unpaid by Stadium Partners, net of
the reserve established in fiscal 1996 (See Note 14), and a charge to earnings
in the amount of approximately $3.6 million (before income taxes), representing
the combined loss on disposal of the computer operations (See Note 16).
For the Year Ended September 30, 1996
-----------------------------------------------------------
December 31 March 31 June 30 September 30
------------- ------------- ------------- -------------
Net revenues $ 37,497,289 $ 37,749,771 $ 36,477,962 $ 37,815,763
Gross profit 7,578,229 8,705,251 6,415,347 5,976,131
Operating income 2,955,640 2,945,518 926,614 (162,805)
Net income $ 797,296 $ 1,018,001 $ (41,243) $ (2,016,266)
============= ============= ============= =============
Net income (loss) per common share $ .06 $ .07 $ (.01) $ (.15)
============= ============= ============= =============
The Company's results for the quarter ending June 30, 1996 have been adjusted to
reflect changes in inventory valuation. The inventory adjustments were
identified in the Computer Group and revised in the third quarter, the last
quarter the Company controlled the Computer Group. The Company recorded a
reserve of $3.34 million in the quarter ending September 30, 1996 related to the
Company's activities with Stadium Partners (See Note 14).
For the Year Ended September 30, 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
============= ============= ============= =============
Net income per common share $ .05 $ .05 $ .07 $ .09
============= ============= ============= =============
F-40
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Balance Sheets
September 30,
--------------------------
1997 1996
--------------------------
Cash $ 8,341 $ 38,391
Prepaid expenses and other 223,378 2,755,841
----------- -----------
Total current assets 231,719 2,794,232
Property and equipment 1,758,267 1,758,267
Less-Accumulated depreciation (223,563) (162,763)
----------- -----------
1,534,704 1,595,504
Non current receivables:
Related parties, net of allowance for
doubtful accounts of $0 and $3,340,000 182,526 9,931,054
Other - 1,037,890
Other assets (primarily investments
in subsidiaries) 28,707,603 28,179,575
----------- -----------
Total assets $30,656,552 $43,538,255
=========== ===========
Accounts payable $ 494,980 $ 346,105
Accrued expenses 610,917 -
Note payable and accrued
interest, related party 13,998,916 -
Current maturities of long term debt 1,500,000 6,345,544
----------- -----------
Total current liabilities 16,604,813 6,691,649
Note payable and accrued
interest, related party - 12,546,000
Long term debt, net 6,650,000 -
Deferred income taxes - 302,206
----------- -----------
Total liabilities 23,254,813 19,539,855
----------- -----------
Stockholders' equity:
Preferred stock 1,325 2,500
Common stock 136,641 131,970
Additional paid in capital 28,955,695 26,630,714
Retained earnings (deficit) (20,716,603) (1,487,695)
Note receivable (975,319) (1,279,089)
----------- -----------
Total stockholders' equity 7,401,739 23,998,400
----------- -----------
$30,656,552 $43,538,255
=========== ===========
See note to condensed financial information of registrant.
F-41
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Income
For the Years Ended
September 30,
---------------------------
1997 1996
------------ ------------
Net revenues $ - $ -
Cost of sales - -
------------ ------------
Gross Profit - -
Selling general and administrative expenses 2,799,016 4,369,130
------------ ------------
Operating income (loss) (2,799,016) (4,369,130)
Other income (expense)
Loss on unconsolidated subsidiaries - (855,565)
Loss on investment in computer operations (3,613,815) -
Loss on related party receivable (14,838,456) -
Interest expense (2,480,808) (2,276,195)
Interest income and other 156,825 71,129
------------ ------------
Total other income (20,776,254) (3,060,631)
Loss before income taxes (23,575,270) (7,429,761)
Income taxes (benefit) (2,746,436) (985,908)
------------ ------------
(20,828,834) (6,443,853)
Equity in net income of subsidiaries 2,003,676 6,201,641
------------ ------------
Net income (loss) (18,825,158) (242,212)
Dividends on preferred stock (403,750) 150,000
------------ ------------
Net income (loss) attributable
to common shareholders $(19,228,908) $ (392,212)
============ ============
See note to condensed financial information of registrant.
F-42
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
For the Years Ended
September 30,
1997 1996
------------ -----------
Cash flow provided by operating activities:
Net income (loss) $(18,825,158) $ (242,212)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,163,765 59,946
Provision for doubtful accounts - -
Deferred income tax (1,370,366) 147,698
Loss on related party receivable 14,838,456 3,340,000
Loss on disposition of computer segment 3,613,815 -
Increase (decrease) in, net of effects of acquisitions:
Prepaid expenses and other 2,497,299 34,916
Accounts payable and other 148,875 (512,371)
Accrued expenses and other 610,917 (343,878)
------------ -----------
Net cash used in operating activities 2,677,603 2,484,099
------------ -----------
Cash flows used in investing activities:
Notes receivable - (1,037,890)
Notes receivable from related parties (5,089,928) (12,901,704)
Capital expenditures - (15,992)
Other assets (1,930,594) 6,696,697
------------ -----------
Net cash used in investing activities (7,020,522) (7,258,889)
------------ -----------
Cash flows provided by financing activities:
Net borrowings (payments) on notes payable 3,407,372 1,360,719
Advances from (payments to) related party - (1,153,000)
Proceeds from private placement
of preferred stock 733,877 2,500,000
Proceeds from the issuance of
12% subordinated debentures - 1,500,000
Exercise of common stock options 56,600 50,000
Dividends on preferred stock (153,750) (150,000)
Principal collections on Pyrenees note 303,770 720,911
Common stock issuance costs (35,000) (17,642)
------------ -----------
Net cash provided by financing activities 4,312,869 4,810,988
------------ -----------
Net increase (decrease) in cash (30,050) 36,198
Cash - beginning of year 38,391 2,193
------------ -----------
Cash - end of year $ 8,341 $ 38,391
============ ===========
See note to condensed financial information of registrant.
F-43
POLYPHASE CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Note A - Basis of Presentation
In the parent company only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company's share of net income
of its unconsolidated subsidiaries is included in consolidated income using the
equity method. The parent company only financial statements should be read in
conjunction with the Company's consolidated financial statements.
Due to subsidiary debt covenant and other restrictions, the Company's ability to
obtain funds from its subsidiaries is limited (See Note 3). In addition, the
parent company's ownership of Texas Timberjack is pledged as collateral against
the note payable to related which is scheduled to mature in April 1998, and
there is no assurance that said note can be refinanced or otherwise paid (See
Notes 3 and 9). Additionally, the parent company has no operating revenues and
may be highly dependent on its subsidiaries for its liquidity needs, and there
is no assurance that, based upon the above, such liquidity will be available.
F-44
POLYPHASE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Three Years in the Period Ended September 30, 1997
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, 1997 $ 519,104 $ 374,233 $ (317,145) $ - $ 576,192
===========================================================
Year ended September 30, 1996 $ 506,805 $ 146,666 $ (134,367) $ - $ 519,104
===========================================================
Year ended September 30, 1995 $ 580,251 $ 73,446 $ (146,892) $ - $ 506,805
===========================================================
F-45