<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 December 31, 1996
[ ] 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
(Registrant'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 No X
----------- ------------
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 13,664,109
---------------------------
Outstanding at June 5, 1997
<PAGE>
POLYPHASE CORPORATION
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page No.
- ----------------------------- --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
December 31, 1996 and September 30, 1996 2
Consolidated Condensed Statements of
Operations for the Three Months Ended
December 31, 1996 and 1995 4
Consolidated Condensed Statements of
Cash Flows for the Three Months Ended
December 31, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
- ------------------------------------------
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 13
-1-
<PAGE>
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1996 1996
------------ -------------
<S> <C> <C>
Current assets:
Cash $ 639,810 $ 280,969
Receivables, net of allowance for doubtful accounts
of $510,808 and $519,104
Trade accounts 10,991,380 12,098,852
Current portion of sales contracts 6,167,422 6,625,727
Notes receivable 798,495 972,422
Receivables from related parties 479,000 367,634
Inventories 29,478,289 28,027,779
Prepaid expenses and other 2,086,835 2,676,336
----------- -----------
Total current assets 50,641,231 51,049,719
----------- -----------
Property and equipment:
Land 765,000 765,000
Buildings and improvements 4,459,265 4,279,917
Machinery, equipment and other 8,697,643 8,575,687
----------- -----------
13,921,908 13,620,604
Less-Accumulated depreciation 4,642,043 4,212,872
----------- -----------
9,279,865 9,407,732
----------- -----------
Other assets:
Noncurrent receivables
Sales contracts 1,263,207 1,333,150
Notes receivable 1,037,890 1,037,890
Related party, net allowance of $3,340,000 9,739,328 9,931,054
Excess of cost over fair value of net assets of businesses
acquired, net of accumulated amortization of $1,760,488
and $1,557,165 14,838,251 15,041,574
Other intangible assets 1,306,054 1,402,239
Restricted cash 769,765 882,383
Other 4,101,928 4,092,780
----------- -----------
33,056,423 33,721,070
----------- -----------
$92,977,519 $94,178,521
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1996 1996
------------ -------------
Current liabilities:
Notes payable $ 8,052,831 $ 9,516,219
Accounts payable 8,713,801 8,581,071
Accrued expenses and other 2,481,059 4,415,011
Current maturities of long-term debt 33,110,168 31,573,716
----------- -----------
Total current liabilities 52,357,859 54,086,017
Note payable and accrued interest to related party 12,842,916 12,546,600
Reserve for credit guarantees 769,765 882,383
Deferred income taxes 1,475,897 1,475,897
----------- -----------
Total liabilities 67,446,437 68,990,897
----------- -----------
Warrants to purchase common stock
in subsidiary 1,299,097 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 26,866,392 26,630,714
Accumulated deficit (1,592,432) (1,487,695)
Notes receivable (1,179,866) (1,279,089)
----------- -----------
Total stockholders' equity 24,231,985 23,998,400
----------- -----------
$92,977,519 $94,178,521
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
December 31,
----------------------------
1996 1995
------------- -----------
Net revenues $36,165,789 $37,497,289
Cost of sales 30,056,915 29,919,060
----------- -----------
Gross profit 6,108,874 7,578,229
Selling, general and administrative
expenses 4,623,670 4,622,589
----------- -----------
Operating income 1,485,204 2,955,640
----------- -----------
Other income (expenses):
Interest expense (1,574,418) (1,573,736)
Interest income and other 210,960 99,694
----------- -----------
Total other income (expenses) (1,363,458) (1,474,042)
----------- -----------
Income before income taxes and
warrant accretion 121,746 1,481,598
Income taxes 79,110 526,637
----------- -----------
42,636 954,961
Accretion of common stock purchase
warrants of subsidiary 109,873 157,665
----------- -----------
Net income (loss) (67,237) 797,296
Dividends on preferred stock (37,500) (37,500)
----------- -----------
Net income (loss) attributable to
common stockholders $ (104,737) $ 759,796
=========== ===========
Weighted average common and common
equivalent shares 13,538,138 13,584,484
=========== ===========
Net income per common share $ (.01) $ .06
========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
December 31,
--------------------------
1996 1995
------------- ----------
Cash flow provided by operating activities:
Net income (loss) $ (67,237) $ 797,296
Adjustments to reconcile net income (loss)
to net cash provided by (used in ) operating
activities:
Depreciation and amortization 728,679 690,843
Provision for doubtful accounts (8,296) (5,770)
Accretion of warrants to purchase common stock
of subsidiary 109,873 157,665
(Increase) decrease in, net of effects of
acquisitions:
Accounts and sales contracts receivable 1,644,016 3,599,054
Inventories (1,450,510) (3,203,642)
Prepaid expenses and other 580,353 501,071
Increase (decrease) in, net of effects of
acquisitions:
Accounts payable 132,730 (369,035)
Accrued expenses and other (1,933,952) 130,686
----------- ----------
Net cash provided by (used in)
operating activities (264,344) 2,298,168
----------- ----------
Cash flows provided by (used in)
investing activities:
Notes and other receivables 173,927 369,871
Receivables from related parties 80,360 (3,146,022)
Capital expenditures (301,304) (110,459)
----------- -----------
Net cash used in
investing activities (47,017) (2,886,610)
----------- -----------
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Three Months Ended
December 31
--------------------------
1996 1995
----------- -------------
Cash flows provided by (used in) financing
activities:
Borrowings (principal payments) under
line of credit arrangements, notes
payable and long-term debt, net $ 369,380 $(4,545,072)
Proceeds from the issuance of 12%
subordinated debentures - 1,500,000
Principal collection of Pyrenees
notes receivable 99,223 -
Dividend on preferred stock (37,500) (37,500)
Exercise of common stock options 256,599 -
Payments on advances from related parties - (1,153,000)
Proceeds from private placement of
preferred stock - 2,500,000
Stock issuance costs (17,500) -
---------- -----------
Net cash provided by (used in)
financing activities 670,202 (1,735,572)
---------- -----------
Net increase (decrease) in cash 358,841 (2,324,014)
Cash - beginning of period 280,969 3,275,068
---------- -----------
Cash - end of period $ 639,810 $ 951,054
========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for :
Interest $1,210,053 $ 1,016,580
Income taxes $1,311,055 $ 189,536
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 was tendered
125,000 shares of Series A-3 Preferred Stock having a redemption value of
$1,250,000.
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 transformer segment, which manufactures and markets
electronic transformers, inductors and filters; and the food processing
segment, which produces high quality entrees, plated meals, soups, sauces and
poultry, meat and fish specialties.
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.
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. (See Note 5) As a result,
the Company's debt has been classified as current as of December 31, 1996.
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 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 it liquidity requirements.
-7-
<PAGE>
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, 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 a partnership, 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.
In connection with the aforementioned transaction, the Company in January
1997 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, the collectibility
of which is dependent upon the success of the project and/or the guarantees
referred to above. 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
are made pursuant to the Stadium Partners loan agreements. The Company no
longer accrues management fees or interest income on the existing advances.
-8-
<PAGE>
During the six months ended December 31, 1996, the Company made advances to
Mr. Tanner totalling $70,300 resulting in a balance due of $85,160 as of that
date.
In connection with the TTI acquisition, the Company also issued a non-
interest bearing note to Harold Estes for $10,000,000 due October 31, 1994,
on which the Company imputed interest at 8.0% per annum. The Company has
since modified, extended and renewed the note whereby the note currently
having a balance including accrued interest of $12,842,916 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 their 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 Polyphase
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., 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. 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
partner 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.
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 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.
-9-
<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, the 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 possible future litigation.
RESULTS OF OPERATIONS
Revenues for the three months ended December 31, 1996 decreased $1,331,000 (4%)
to $36,166,000 from $37,497,000 during the three months ended December 31, 1995.
Operating income also decreased $1,470,000 (50%) over the comparable period.
The decreases in the first quarter were primarily attributable to the exclusion
of the Computer Group, which was sold in July 1996.
Net income for the three months ended December 31, 1996 decreased $864,000
(108%) to a loss of $67,000 from net income of $797,000 during the three months
ended December 31, 1995. The loss is attributable to overall lower sales volume
and lower gross margins in the Forestry Group. Selling, general and
administrative costs and interest expense remained constant with the comparable
periods which coupled with lower gross margins and lower sales, adversely
affected net income.
Revenues for the Food Group for the three months ended December 31, 1996
increased $1,319,000 (6%) to $23,890,000 from $22,571,000 for the three months
ended December 31, 1995. Operating income for the three months ended December
31, 1996 decreased $649,000 (34%) to $1,280,000 from $1,929,000 for the three
months ended December 31, 1995. Increases in volume were primarily due to
increased sales in the weight loss and airline sectors of Overhill which offset
a downward trend in prior quarters. Management continues to develop the retail
and food service sectors by increasing advertising, marketing and personnel
expenses resulting in higher selling general and administrative costs and in
decreased operating income. As revenue increases in these divisions, management
does not anticipate increasing operating costs significantly.
Revenues for the Forestry Group for the three months ended December 31, 1996
increased $529,000 (5%) to $11,342,000 from $10,814,000 for the three months
ended December 31, 1995, while operating income for the comparable period
decreased $665,000 (52%). The increase in revenue is primarily due to
continuing demand for lumber equipment as timber prices have begun to firm in
the commodity markets. Operating income decreased due to lower gross margins on
new equipment as the manufacturer raised prices which could not all be passed on
to the consumer. The Company also experienced higher selling general and
administrative costs associated with the opening of the Atlanta, Texas office
and the relocation of the Lufkin office. Management expects the demand for
equipment to increase slowly over the fiscal year and does not expect the slow
down which occurred in fiscal 1996.
Revenues for the Transformer Group for the three months ended December 31, 1996
increased $35,000 (4%) to $933,000 from $898,000 for the three months ended
December 31, 1995, while operating income for the comparable period decreased
$18,000 (40%). The decrease in operating income is primarily attributable to
increased competition and lower gross profit margins.
-10-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended December 31, 1996, the Company used cash of
approximately $264,000 in its operating activities compared to $2,298,000 cash
provided during the comparable period in fiscal 1996. The decrease in cash
provided over the comparable periods was primarily from an operating loss and a
large decrease in accrued expenses.
During the three months ended December 31, 1996, the Company's investing
activities used cash of approximately $47,000 compared to a use of cash in the
amount of $2,887,000 in fiscal 1996. The Company's use of cash consisted
primarily of capital expenditures in the Forestry and Food Groups.
During the three months ended December 31, 1996, the Company's financing
activities provided cash of approximately $670,000 as compared to a use of cash
of $1,736,000 in the comparable period in fiscal 1996. During the three month
period, the holders of the Series A-3 Preferred Stock tendered 125,000 shares
in connection with the exercise of an option on approximately 360,000 shares of
common stock at $3.50 per share.
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. As a result, the
Company's debt has been classified as current as of September 30, 1996 and
December 31, 1996.
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.
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 twelve months.
-11-
<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 debtholders in Overhill. The
suit claims, among other things, that the Company breached covenants of the debt
agreements 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 indentures (ii) conspired with
the former general manager of Overhill to force the Company to sell Overhill at
a distressed price in order to benefit Rice Partners and (iii) caused the
halting of trading of the Company's stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See "Management's Discussion and Analysis--Liquidity and Capital Resources" for
a description of certain defaults.
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 December 31, 1996.
NONE
-12-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POLYPHASE CORPORATION
(REGISTRANT)
Date: June 9, 1997 By: /s/ Paul A. Tanner
-------------------------------------
Paul A. Tanner
President and
Chief Executive Officer
-13-
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 639,810
<SECURITIES> 0
<RECEIVABLES> 18,436,297
<ALLOWANCES> 510,808
<INVENTORY> 29,478,289
<CURRENT-ASSETS> 50,641,231
<PP&E> 13,921,908
<DEPRECIATION> 4,642,043
<TOTAL-ASSETS> 92,977,519
<CURRENT-LIABILITIES> 52,357,859
<BONDS> 0
0
1,250
<COMMON> 136,641
<OTHER-SE> 24,094,094
<TOTAL-LIABILITY-AND-EQUITY> 92,977,519
<SALES> 36,165,789
<TOTAL-REVENUES> 36,165,789
<CGS> 30,056,915
<TOTAL-COSTS> 30,056,915
<OTHER-EXPENSES> 4,623,676
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,574,418
<INCOME-PRETAX> 121,746
<INCOME-TAX> 79,110
<INCOME-CONTINUING> (104,737)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104,737)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
