<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] 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)
(972) 732-0010
(Registrants's telephone number, including area code)
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 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value 13,644,109
-----------------------------
Outstanding at August 8, 1997
<PAGE>
POLYPHASE CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page No.
- ----------------------------- --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 1997 and September 30, 1996 2
Consolidated Condensed Statements of
Operations for the Three Months Ended
June 30, 1997 and 1996 4
Consolidated Condensed Statements of
Operations for the Nine Months Ended
June 30, 1997 and 1996 5
Consolidated Condensed Statements of
Cash Flows for the Nine Months Ended
June 30, 1997 and 1996 6
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
----------- -------------
1997 1996
----------- -------------
<S> <C> <C>
Current assets:
Cash $ 524,648 $ 280,969
Receivables, net of allowance for doubtful
accounts of $643,018 and $519,104
Trade accounts 10,396,816 12,098,852
Current portion of sales contracts 6,549,458 6,625,727
Notes receivable 748,628 972,422
Receivables from related parties 511,771 367,634
Inventories 25,866,750 28,027,779
Prepaid expenses and other 2,320,833 2,676,336
----------- -----------
Total current assets 46,918,904 51,049,719
----------- -----------
Property and equipment:
Land 765,000 765,000
Buildings and improvements 4,660,582 4,279,917
Machinery, equipment and other 8,881,725 8,575,687
----------- -----------
14,307,307 13,620,604
Less-Accumulated depreciation 5,494,602 4,212,872
----------- -----------
8,812,705 9,407,732
----------- -----------
Other assets:
Noncurrent receivables
Sales contracts 1,341,455 1,333,150
Notes receivable 951,433 1,037,890
Related parties, net of allowance of
$3,340,000 14,801,647 9,931,054
Excess of cost over fair value of net
assets of businesses acquired, net
of accumulated amortization of
$2,162,970 and $1,557,165 14,435,769 15,041,574
Other intangible assets 1,864,060 1,402,239
Restricted cash 799,149 882,383
Other 4,159,814 4,092,780
----------- -----------
38,353,327 33,721,070
----------- -----------
$94,084,936 $94,178,521
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, September 30,
----------- -------------
1997 1996
<S> <C> <C>
Current liabilities:
Notes payable $20,050,196 $ 9,516,219
Note payable and accrued interest to
related party 13,484,916 -
Accounts payable 7,209,269 8,581,071
Accrued expenses and other 2,776,997 4,415,011
Current maturities of long-term debt 21,269,520 31,573,716
----------- -----------
Total current liabilities 64,790,898 54,086,017
Note payable and accrued interest to
related party - 12,546,600
Reserve for credit guarantees 799,149 882,383
Deferred income taxes 1,475,897 1,475,897
----------- -----------
Total liabilities 67,065,944 68,990,897
----------- -----------
Warrants to purchase common stock
in subsidiary 1,539,350 1,189,224
Stockholders' equity:
Preferred stock, $.01 par value,
authorized 50,000,000 shares,
issued and outstanding 125,000
and 250,000 shares, respectively 1,250 2,500
Common stock, $.01 par value,
authorized 100,000,000 shares,
issued and outstanding 13,664,109
and 13,196,966 shares, respectively 136,641 131,970
Paid-in capital 27,839,392 26,630,714
Accumulated deficit (1,522,322) (1,487,695)
Notes receivable (975,319) (1,279,089)
----------- -----------
Total stockholders' equity 25,479,642 23,998,400
----------- -----------
$94,084,936 $94,178,521
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
--------------------------
1997 1996
------------ ------------
(Restated)
<S> <C> <C>
Net revenues $38,478,729 $36,477,962
Cost of sales 31,514,664 30,062,615
----------- -----------
Gross profit 6,964,065 6,415,347
Selling, general and administrative expenses 4,739,554 5,488,733
----------- -----------
Operating income 2,224,511 926,614
----------- -----------
Other income (expenses):
Interest expense (1,666,379) (1,451,969)
Interest income and other 36,474 165,790
Gain on sale of assets - 875,087
----------- -----------
Total other income (expenses) (1,629,905) (411,092)
----------- -----------
Income before income taxes and
warrant accretion 594,606 515,522
Income taxes 186,889 483,174
----------- -----------
407,717 32,348
Accretion of common stock purchase
warrants of subsidiary 130,606 73,591
----------- -----------
Net income (loss) 277,111 (41,243)
Dividends on preferred stock (37,500) (37,500)
----------- -----------
Net income (loss) attributable to
common stockholders $ 239,611 $ (78,743)
=========== ===========
Weighted average common and common
equivalent shares 14,296,234 13,981,686
=========== ===========
Net income (loss) per common share $ .02 $ (.01)
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30,
-------------------------------
1997 1996
------------ ------------
(Restated)
<S> <C> <C>
Net revenues $113,053,741 $111,725,023
Cost of sales 94,194,763 89,026,195
------------ ------------
Gross profit 18,858,978 22,698,828
Selling, general and administrative
expenses 13,174,410 15,871,056
------------ ------------
Operating income 5,684,568 6,827,772
------------ ------------
Other income (expenses):
Interest expense (5,080,729) (4,595,990)
Interest income and other 131,577 651,327
Gain on sale of assets - 875,087
------------ ------------
Total other income (expenses) (4,949,152) (3,069,576)
------------ ------------
Income before income taxes
and warrant accretion 735,416 3,758,196
Income taxes 307,417 1,652,979
------------ ------------
427,999 2,105,217
Accretion of common stock purchase
warrants of subsidiary 350,126 331,166
------------ ------------
Net income 77,873 1,774,051
Dividends on preferred stock (112,500) (112,500)
------------ ------------
Net income (loss) attributable to
common stockholders $ (34,627) $ 1,661,551
============ ============
Weighted average common and common
equivalent shares 13,621,658 13,846,821
============ ============
Net income (loss) per common share $ - $ .12
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30,
-------------------------
1997 1996
----------- -----------
(Restated)
<S> <C> <C>
Cash flow provided by (used in) operating
activities:
Net income $ 77,873 $ 1,774,051
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Depreciation and amortization 2,453,680 2,252,943
Provision for doubtful accounts 123,914 (43,795)
Accretion of warrants to purchase common
stock of subsidiary 350,126 331,166
(Increase) decrease in, net of effects of
acquisitions:
Accounts and sales contracts receivable 1,646,086 2,025,064
Inventories 2,161,029 (2,647,810)
Prepaid expenses and other 488,469 793,649
Increase (decrease) in, net of effects of
acquisitions:
Accounts payable (1,371,802) 1,535,577
Accrued expenses and other (699,698) 1,614,191
----------- ------------
Net cash provided by
operating activities 5,229,677 7,635,036
----------- ------------
Cash flows provided by (used in) investing
activities:
Notes and other receivables 310,251 230,012
Receivables from related parties (5,014,730) (11,932,302)
Capital expenditures (686,703) (1,826,869)
----------- ------------
Net cash used in
investing activities (5,391,182) (13,529,159)
----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows provided by (used in) financing
activities:
Borrowings (principal payments) under
line of credit arrangements, net $(1,206,023) (2,107,242)
Borrowings (principal payments) on
notes payable and long term debt, net (1,119,163) 2,131,036
Borrowings on other notes payable 2,500,000 -
Proceeds from the issuance of 12%
subordinated debentures - 1,500,000
Advances from (payments to) related
parties - (1,153,000)
Principal collections on Pyrenees note
receivable 303,770 589,231
Exercise of common stock options 56,600 12,500
Dividends on preferred stock (112,500) (112,500)
Common stock issuance costs (17,500) (17,642)
Proceeds from private placement of
preferred stock - 2,500,000
----------- -----------
Net cash provided by
financing activities 405,184 3,342,383
----------- -----------
Net increase (decrease) in cash 243,679 (2,551,740)
Cash - beginning of period 280,969 3,275,068
----------- -----------
Cash - end of period $ 524,648 $ 723,328
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for :
Interest $ 4,045,806 $ 3,372,468
Income taxes $ 1,311,055 $ 189,536
</TABLE>
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.
The accompanying notes are an integral part
of these consolidated financial statements.
-7-
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
1. NATURE OF BUSINESS
The Company is a diversified holding company that, through its subsidiaries,
operates in three industry segments: the forestry segment, which distributes,
leases and provides financing for commercial and industrial timber and logging
equipment (the "Forestry Group"); the transformer segment, which manufactures
and markets electronic transformers, inductors and filters (the "Transformer
Group"); and the food processing segment, which produces high quality entrees,
plated meals, soups, sauces and poultry, meat and fish specialties (the "Food
Group").
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany accounts and
transactions are eliminated.
The financial statements included herein have been prepared by the Company,
without an audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. The Company believes that the disclosures are
adequate to make the information presented not misleading. The information
presented reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods when read in conjunction with the
financial statements and the notes thereto included in the Company's latest
financial statements filed as part of Form 10-K.
The Company's results for the period ending June 30, 1996 have been restated
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.
3. LIQUIDITY
The Company has not complied with certain covenants involving most of its loan
agreements, including covenants that restrict transactions with affiliates and
which require the filing of audited financial statements for the Company and
its subsidiaries on a timely basis. The Company has been notified by
substantially all of its lenders that it is in default under the loan
agreements; however, such lenders have not yet attempted to accelerate
maturity of the otherwise long-term indebtedness. Accordingly, the Company's
debt has been classified as current as of June 30, 1997.
Overhill has been given notice by its senior lender that it is delinquent in
making a mandatory prepayment of approximately $751,000 on certain term notes
payable to such lender; failure to make such payment would constitute an event
of default under the loan agreement.
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<PAGE>
The Company is in the process of negotiating a transaction involving Overhill
that the Company expects will resolve the Rice lawsuit (see Note 5) and
improve the Company's overall debt structure, but there can be no assurances
that such transaction will be consummated. Upon completion of the transaction,
the Company believes it will be able to negotiate with the remaining debt
holders and obtain waivers to the covenant violations that exist. As such, the
Company expects that it will be able to meet its liquidity requirements.
The Company did not pay when due on July 16, 1997, the principal balance of
$2,500,000 (plus accrued interest) on the 16% six-month note incurred in
January 1977, as described in Note 4 below. As a result, the lender has
elected to post the real estate securing the loan for foreclosure. The Company
is currently negotiating a transaction whereby this obligation would be paid
in full, but there can be no assurance that such transaction will be
consummated.
4. RELATED PARTY TRANSACTIONS
During January 1996, the Company reached an agreement in principle to manage a
project to develop and build a multi-purpose sports facility in Las Vegas,
Nevada. The project is being developed by PLY Stadium Partners, Inc. ("Stadium
Partners"), a private investment firm headed by Mr. Paul A. Tanner, Chairman
and Chief Executive Officer of the Company. As part of the transaction, the
Company is also to participate in the facility's management, sales of suites
and seat options, concessions and events and is to be compensated for such
services. The Company has provided $4 million of debt, bearing interest at
12%, to Stadium Partners. The debt is (1) convertible into a 14% economic
interest in the project and (2) is guaranteed by Mr. Tanner and Pyrenees
Group, a private investment firm headed by Mr. Tanner.
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 the newly-formed partnership referred to
above, Nevada Stadium Partners Limited Partnership ("Nevada Partnership"),
with Lehman as the lender receiving an equity interest in the project.
The Company has guaranteed the repayment of the loan from Lehman to the
partnership in the above mentioned transaction, upon the occurrence of certain
events. Such guarantee is effective upon the occurrence of certain conditions,
including without limitation if the Partnership files for bankruptcy or
insolvency, if representation by the Partnership proves to be fraudulent
regarding the financial condition of the Borrower, the land securing the loan
is further encumbered or ownership transferred without the consent of Lehman.
In January 1997, the Company further advanced Stadium Partners $4.9 million.
The funds advanced consisted of $2.4 million, drawn from an existing line of
credit, and $2.5 million from a six-month term note. The term note bears
interest at 16%, is payable monthly and is secured by a second lien on the
Company's headquarters. As additional collateral, the Company agreed to issue
an option on 500,000 shares of Series A-2 preferred stock (convertible into
1,000,000 shares of common stock) which is exercisable upon default of certain
covenants of the agreement. (See Note 3.)
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<PAGE>
In connection with the aforementioned transaction, the Company entered into a
two-year consulting agreement with a principal of the lender. In
consideration of the agreement, the Company issued an option to purchase
200,000 shares of common stock at $.01 per share.
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. As a result of the
financing described above Stadium Partners is precluded from making any
distributions until permanent project financing is secured. As a consequence
of Stadium Partners inability to make its payment to the Company due March
15,1997, the Company established a reserve of $3.34 million as of September
30, 1996, which represents the income accrued. The reserve will be reduced as
collections and distributions, if any, are made pursuant to the Stadium
Partners loan agreements. The Company no longer accrues management fees or
interest income on the existing advances.
During the nine months ended June 30, 1997, the Company made additional
advances to Stadium Partners totalling $4,870,593, resulting in a balance due
of $14,801,647. These advances are currently due and payable, and their
collectibility is dependent upon the success of the project and/or the
guarantees referred to above.
During the nine months ended June 30, 1997, the Company made advances to Mr.
Tanner totalling $137,902, resulting in a balance due of $152,762 as of that
date.
In connection with the acquisition of Texas Timberjack, Inc., the Company
issued a non-interest bearing note to Harold Estes for $10,000,000 originally
due October 31, 1994. The Company has since modified, extended and renewed the
note whereby the note currently having a balance of $12,842,916 (plus accrued
interest) has been extended to December 1, 1997, bearing interest at 10%
through June 30, 1997 and 16% thereafter. The Company anticipates that it will
be required to refinance this note payable on a long-term basis and is
presently in negotiations with potential lenders to accomplish this goal.
There is no certainty that Company will be able to refinance this note on
acceptable terms or at all, by December 1, 1997. The note holder has no
recourse to any of the assets or capital stock of Polyphase Corporation or any
of its other subsidiaries and no cross-default provisions exist between this
note and any other Company debt.
5. CONTINGENCIES
In January 1997, a suit was filed in District Court of Dallas County against
the Company by Rice Partners II, L.P. ("Rice"), subordinated debt holder of
the Company's Overhill Farms subsidiary. The suit claims, among other things,
that the Company breached covenants of the subordinated debt agreement and
refused to cure the defaults within a reasonable period of time. The Company
has filed a counter suit claiming Rice (i) refused to comply with verbal
agreements to the indenture (ii) conspired with the former general manager of
Overhill to force the Company to sell Overhill Farms at a distressed price in
order to benefit Rice and (iii) caused the halting of trading of the Company's
stock.
In June 1997, two 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
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<PAGE>
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.
6. STOCKHOLDERS' EQUITY
In October 1996, a director of the Company exercised options on 75,000 of
common stock at $.75 per share.
In October 1996, an associate of the holders of the Company's Series A-2
Preferred Stock tendered 125,000 shares of such preferred stock as
consideration for the exercise of options on 357,143 shares of common stock at
$3.50 per share.
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.
-11-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Statements contained in this Form 10-Q 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-Q 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 pending or possible future
litigation.
RESULTS OF OPERATIONS
Revenues for the nine months ended June 30, 1997 increased $1,329,000 (1%) to
$113,054,000 from $111,725,000 during the nine months ended June 30, 1996. The
increase in revenue is primarily attributable to significantly higher revenues
in the Forestry Group. Operating income decreased $1,143,000 (17%) from the
comparable prior period due primarily to lower gross margins in the Food and
Timber Groups.
Net income for the nine months ended June 30, 1997 decreased $1,696,000 (96%) to
net income of $78,000 from $1,774,000 during the nine months ended June 30,
1996. Net income was adversely affected by lower gross margins, higher
operating and interest expense and the one time gain on sale of property in
fiscal 1996.
The Food Group's revenues increased slightly to $73,549,000 for the nine months
ended June 30, 1997 as compared to $72,203,000 for the nine months ended June
30, 1996. Operating income decreased $891,000 (18%) to $4,022,000, from
$4,913,000 in the comparable prior period. The decrease in operating profits was
primarily due to increased competitive pressure in all segments. Overhill
management has initiated improvements in the company's raw materials purchasing
procedures and has made pricing adjustments to certain low margin accounts.
Management anticipates near term improvement in Overhill's gross margins and
operating profits.
Revenues for the Forestry Group for the nine months ended June 30, 1997
increased $12,828,000 (53%) to $36,860,000 from $24,032,000 for the nine months
ended June 30, 1996. Operating income for the comparable period increased
$912,000 (41%) to $3,121,000 for the nine months ended June 30, 1997 from
$2,209,000 for the nine months ended June 30, 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. Profit margins decreased significantly in fiscal 1997 due largely
to a change in the sales mix. During the period, sales of new units increased
substantially and the number of used units, which are traditionally sold at much
higher margins, decreased. Management anticipates that this sales trend will
continue through 1997.
Revenues in the Transformer Group for the six months ended June 30, 1997
decreased $53,000 to $2,645,000 from $2,698,000 for the comparable period in
fiscal 1996. Operating income also decreased to $27,000 for the nine months
ended June 30, 1997 from $63,000 for the comparable period in fiscal 1997. The
decreases are primarily attributable the competitive market and the lower profit
margins on government contracts.
-12-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 1997, the Company's operating activities
provided cash of approximately $5,229,000 compared to $7,635,000 of cash
provided in the comparable period of fiscal 1996. This decrease was primarily
due to significantly lower net income and large decreases in accounts payable
and accruals.
During the nine months ended June 30, 1997, the Company's investing activities
used cash of approximately $5,391,000 compared to a use of cash in the amount of
$13,529,000 during the comparable period in fiscal 1996. The Company's use of
cash consisted primarily of advances to Stadium Partners, a company affiliated
with Mr. Paul A. Tanner, the Company's Chairman and Chief Executive Officer.
During the nine months ended June 30, 1997, the Company's financing activities
provided cash of approximately $405,000 as compared to $3,342,000 of cash
provided in the comparable period in fiscal 1996. During the period the Company
borrowed approximately $4.9 million consisting of $2.4 million from an existing
line of credit and $2.5 million from a six month term note. The term note bears
interest at 16%, is payable monthly and is secured by a second lien on the
Company's headquarters. As additional collateral, the Company agreed to issue an
option on 500,000 shares of Series A-2 preferred stock (convertible into
1,000,000 shares of common stock) which is exercisable upon default of certain
covenants of the agreement. The funds from these transactions were used in
making advances to Stadium Partners.
The Company has not complied with certain covenants involving substantially all
of the Company's loan agreements, including covenants that restrict transactions
with affiliates and which require the filing of audited financial statements for
the Company and its subsidiaries on a timely basis. The Company has been
notified by substantially all of its lenders that it is in default under the
loan agreements; however, such lenders have not yet attempted to accelerate
maturity of the otherwise long-term indebtedness. Accordingly, the Company's
debt has been classified as current as of September 30, 1996 and June 30, 1997.
Overhill has been given notice by its senior lender that it is delinquent in
making a mandatory prepayment of approximately $751,000 on certain term notes
payable to such lender; failure to make such payment would constitute an event
of default under the loan agreement. The Company is in the process of
negotiating a transaction involving Overhill that the Company expects will
resolve the Rice lawsuit and improve the Company's overall debt structure, but
there can be no assurance that such transaction will be consummated.
The Company did not pay when due on July 16, 1997, the principal, balance of
$2,500,000 plus accrued interest on the 16% six-month note incurred in January
1997, as described above. As a result, the lender has elected to post the real
estate securing the loan for foreclosure. The Company is currently negotiating a
transaction whereby this obligation would be paid in full, but there can be no
assurances that such transaction will be consummated.
Accordingly, the Company's management believes that cash generated from the
proposed Overhill transaction and from operations, together with existing lines
of credit, will be sufficient to enable the Company to meet its liquidity
requirements for the next 12 months.
-13-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1997, a suit was filed in District Court of Dallas County against the
Company by Rice Partners II, L.P., subordinated debt holders of Overhill. The
suit claims, among other things, that the Company breached covenants of the
subordinated debt agreement and refused to cure the defaults within a reasonable
period of time. The Company has filed a counter suit claiming Rice Partners II,
L.P. (i) refused to comply with verbal agreements to the indenture (ii)
conspired with the former general manager of Overhill to force the Company to
sell Overhill Farms at a distressed price in order to benefit Rice Partners, II,
L.P. and (iii) caused the halting of trading of the Company's stock.
In June 1997, two 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
The following reports were filed on Form 8-K during the quarter ended June
30, 1997.
NONE
-14-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
(REGISTRANT)
Date: August 12, 1997 By: /s/ Paul A. Tanner
-----------------------
Paul A. Tanner
Chairman and
Chief Executive Officer
-15-
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit
----------------- -------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1997
<CASH> 524,648
<SECURITIES> 0
<RECEIVABLES> 18,206,673
<ALLOWANCES> 643,018
<INVENTORY> 25,866,750
<CURRENT-ASSETS> 46,918,904
<PP&E> 14,307,307
<DEPRECIATION> 5,494,602
<TOTAL-ASSETS> 94,084,936
<CURRENT-LIABILITIES> 64,790,898
<BONDS> 0
136,641
0
<COMMON> 1,250
<OTHER-SE> 25,341,751
<TOTAL-LIABILITY-AND-EQUITY> 94,084,936
<SALES> 113,053,741
<TOTAL-REVENUES> 113,053,741
<CGS> 94,194,763
<TOTAL-COSTS> 94,194,763
<OTHER-EXPENSES> 13,174,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,080,729
<INCOME-PRETAX> 735,416
<INCOME-TAX> 307,417
<INCOME-CONTINUING> (34,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,627)
<EPS-PRIMARY> (.00)
<EPS-DILUTED> (.00)
</TABLE>
