<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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 BROADWAY, SUITE A
DALLAS, TEXAS 75248
(Address of principal executive offices)
(972) 386-0101
(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 14,882,464
-----------------------------
Outstanding at August 10, 1998
<PAGE>
POLYPHASE CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page No.
- ----------------------------- --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 1998 and September 30, 1997 2
Consolidated Condensed Statements of
Operations for the Three Months Ended
June 30, 1998 and 1997 4
Consolidated Condensed Statements of
Operations for the Nine Months Ended
June 30, 1998 and 1997 5
Consolidated Condensed Statements of
Cash Flows for the Nine Months Ended
June 30, 1998 and 1997 7
Notes to Consolidated Condensed Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
----------- -----------
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 727,973 $ 1,064,259
Receivables, net of allowance for doubtful accounts
of $595,477 and $576,192
Trade accounts 12,155,929 11,576,650
Current portion of sales contracts 5,292,706 5,770,626
Notes receivable 1,961,364 939,621
Inventories 33,142,140 23,002,020
Prepaid expenses and other 742,650 1,607,644
----------- -----------
Total current assets 54,022,762 43,960,820
----------- -----------
Property and equipment:
Land 432,000 765,000
Buildings and improvements 3,552,210 4,660,582
Machinery, equipment and other 9,749,756 8,953,076
----------- -----------
13,733,966 14,378,658
Less-accumulated depreciation (7,053,416) (5,954,554)
----------- -----------
6,680,550 8,424,104
----------- -----------
Other assets:
Noncurrent receivables
Sales contracts 1,859,600 2,027,518
Related parties, net of allowance of
$164,563 and $0, respectively 349,071 522,597
Excess of cost over fair value of net assets of businesses
acquired, net of accumulated amortization of $2,980,421
and $2,370,455 13,618,318 14,228,284
Other intangible assets 2,844,339 1,197,139
Restricted cash 700,942 717,358
Other 1,062,485 1,071,629
----------- -----------
20,434,755 19,764,525
----------- -----------
$81,138,067 $72,149,449
=========== ===========
</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 (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
----------- -----------
<S> <C> <C>
Current liabilities:
Notes payable $ 9,690,876 $ 9,013,099
Note payable and accrued interest to related party 15,697,378 13,998,916
Accounts payable 6,569,035 7,775,022
Accrued expenses and other 2,914,801 2,251,035
Current maturities of long-term debt 8,550,000 5,720,000
----------- -----------
Total current liabilities 43,422,090 38,758,072
Long term debt, less current maturities 28,383,015 23,272,280
Reserve for credit guarantees 700,942 717,358
----------- -----------
Total liabilities 72,506,047 62,747,710
----------- -----------
Warrants to purchase common stock
in subsidiary 1,200,000 2,000,000
Stockholders' equity:
Preferred stock, $.01 par value, authorized
50,000,000 shares, issued and outstanding
125,000 and 132,500 shares, respectively 1,250 1,325
Common stock, $.01 par value, authorized
100,000,000 shares, issued and outstanding
14,882,464 and 13,664,109 shares, respectively 148,825 136,641
Paid-in capital 29,103,186 28,955,695
Accumulated deficit (20,845,922) (20,716,603)
Notes receivable (975,319) (975,319)
----------- -----------
Total stockholders' equity 7,432,020 7,401,739
----------- -----------
$81,138,067 $72,149,449
=========== ===========
</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,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net revenues $37,272,305 $38,478,729
Cost of sales 30,806,581 31,514,664
----------- -----------
Gross profit 6,465,724 6,964,065
Selling, general and administrative expenses 4,793,848 4,739,554
----------- -----------
Operating income 1,671,876 2,224,511
----------- -----------
Other income (expenses):
Interest expense (2,338,925) (1,666,379)
Interest income and other (7,985) 36,474
----------- -----------
Total other income (expenses) (2,346,910) (1,629,905)
----------- -----------
Income (loss) before income taxes and warrant accretion (675,034) 594,606
Income taxes - 186,889
----------- -----------
(675,034) 407,717
Accretion of common stock purchase warrants
of subsidiary - 130,606
----------- -----------
Net income (loss) (675,034) 277,111
Dividends on preferred stock (37,500) (37,500)
----------- -----------
Net income (loss) attributable to common stockholders $ (712,534) 239,611
=========== ===========
Basic income (loss) per share $ (.05) $ .02
=========== ===========
Diluted income (loss) per share $ (.05) $ .02
=========== ===========
</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)
For the Nine Months Ended
June 30,
--------------------------
1998 1997
------------ ------------
Net revenues $107,993,318 $113,053,741
Cost of sales 88,049,856 94,194,763
------------ ------------
Gross profit 19,943,462 18,858,978
Selling, general and administrative expenses 13,990,441 13,174,410
------------ ------------
Operating income 5,953,021 5,684,568
------------ ------------
Other income (expenses):
Interest expense (6,451,552) (5,080,729)
Interest income and other 115,344 131,577
Gain on sale of assets 987,857 -
------------ ------------
Total other income (expenses) (5,348,351) (4,949,152)
------------ ------------
Income before income taxes,
warrant accretion and extraordinary item 604,670 735,416
Income taxes - 307,417
------------ ------------
604,670 427,999
Accretion of common stock purchase
warrants of subsidiary - 350,126
------------ ------------
Net income before extraordinary item 604,670 77,873
Extraordinary item:
Early extinguishment of debt (616,239) -
------------ ------------
Net income (loss) (11,569) 77,873
Dividends on preferred stock (117,750) (112,500)
------------ ------------
Net loss attributable to common stockholders $ (129,319) $ (34,627)
============ ============
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 (CONTINUED)
(UNAUDITED)
For the Nine Months Ended
June 30,
--------------------------
1998 1997
---------- ----------
Basic income (loss) per share:
Income (loss) before
extraordinary item $ .03 $ -
Extraordinary item (.04) -
---------- ----------
Net income (loss) per share: $ (.01) $ -
========== ==========
Diluted income (loss) per share:
Income (loss) before
extraordinary item $ .03 $ -
Extraordinary item (.04) -
---------- ----------
Net income (loss) per share: $ (.01) $ -
========== ==========
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)
For the Nine Months Ended
June 30,
-------------------------
1998 1997
----------- -----------
Cash flow provided by (used in) operating activities:
Net income (loss) $ (11,569) $ 77,873
----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 3,210,649 2,453,680
Provision for doubtful accounts 183,848 123,914
Gain on sale of assets (987,857) -
Accretion of warrants to purchase common stock
of subsidiary - 350,126
Changes in:
Accounts and sales contracts receivable 47,274 1,646,086
Inventories (10,140,120) 2,161,029
Prepaid expenses and other 828,094 488,469
Accounts payable (1,205,987) (1,371,802)
Accrued expenses and other 715,766 (699,698)
----------- -----------
Net cash provided by (used in)
operating activities (7,359,902) 5,229,677
----------- -----------
Cash flows provided by (used in) investing
activities:
Notes and other receivables (1,021,743) 310,251
Receivables from related parties 8,963 (5,014,730)
Capital expenditures, net (1,010,543) (686,703)
----------- -----------
Net cash (used in)
investing activities (2,023,323) (5,391,182)
----------- -----------
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 (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows provided by (used in) financing activities:
Borrowings (principal payments) under line of
credit arrangements, net $ 2,174,882 $ (1,206,023)
Borrowings (principal payments) on other
notes payable and long term debt, net 31,041,039 1,380,837
Principal payments on term notes (1,982,280) -
Principal payments on convertible bonds (4,300,000) -
Principal payments on subordinated debentures (13,000,000) -
Redemption of Overhill warrants (2,000,000) -
Principal collections on Pyrenees note receivable - 303,770
Exercise of common stock options and warrants 2,100 56,600
Dividends on preferred stock (117,750) (112,500)
Deferred financing costs (2,753,552) -
Common stock issuance costs (17,500) (17,500)
------------ ------------
Net cash provided by
financing activities 9,046,939 405,184
------------ ------------
Net increase (decrease) in cash (336,286) 243,679
Cash - beginning of period 1,064,259 280,969
------------ ------------
Cash - end of period $ 727,973 $ 524,648
============ ============
</TABLE>
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Nine Months Ended
June 30,
-------------------------
1998 1997
---------- ----------
Supplemental schedule of cash flow information:
Cash paid during the period for :
Interest $3,069,653 $4,045,806
Income taxes $ - $1,311,055
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.
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 December 1997, in connection with the new Overhill Farms credit agreement,
warrants were issued having a fair market value of $1,200,000.
In connection with the repayment of certain indebtedness to Merrill Lynch, the
Company issued warrants covering 210,000 shares exercisable at $.01 per share
and 210,000 shares exercisable at $1.125 per share. Such warrants were assigned
a value of $175,000.
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
1. NATURE OF BUSINESS
The Company is a diversified holding company that, through its subsidiaries,
operates in three industry segments: the food segment, which produces high
quality entrees, plated meals, soups, sauces and poultry, meat and fish
specialties; the forestry segment, which distributes, leases and provides
financing for commercial and industrial timber and logging equipment; and
the transformer segment, which manufactures and markets electronic
transformers, inductors and filters.
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. LONG-TERM DEBT
In December 1997, the Company's subsidiary, Overhill Farms, Inc., refinanced
a certain portion of 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 June 30, 1998) 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 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, 20% of
which can be repurchased by the Company over the next two years for
$2,000,000. Such warrants were assigned a value of $1,200,000, which has
been recorded as debt discount and is being amortized over the term of the
loan. Additionally, the lender received fees totalling approximately $1.7
million in connection with
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<PAGE>
this financing, which are partially refundable 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 due Finova, the $1,500,000
senior convertible debenture and $2,800,000 of principal of the $4,000,000
senior convertible debentures due Merrill Lynch. 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 resulted in
an extraordinary charge to operations of approximately $616,000 (before
income taxes). Overhill's credit facilities generally restrict loans,
advances, dividends or transfers from Overhill to the Company to $350,000
per year.
4. SALE OF SUBSIDIARY
In December 1997, the Company sold Dallas Parkway Properties, Incorporated,
a subsidiary whose principal asset was the corporate office building, in
exchange for nominal consideration plus the assumption of a note payable for
$2.8 million. The Company realized a gain of approximately $988,000 on this
transaction.
5. TAXES
For the nine months ended June 30, 1998, the actual Federal income tax
expense attributable to income from continuing operations differed from the
net amounts recorded by the Company. The Company recorded a provision for
Federal income taxes of $4,000 using the statutory tax rate of 34% and then
applied a like amount of the existing valuation allowance, resulting in a
net provision for the period of zero. As of June 30, 1998, the Company had a
remaining valuation allowance of approximately $5.0 million and net
operating loss carryforwards of approximately $7.3 million.
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<PAGE>
6. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Numerator:
Net income (loss) $ (675,034) 277,111
Preferred dividends (37,500) (37,500)
----------- -----------
Net income (loss) attributable to common shareholders $ (712,534) $ 239,611
=========== ===========
Denominator:
Denominator for basic earnings
per share- weighted average shares 14,785,541 13,664,109
----------- -----------
Effect of dilutive securities:
Convertible preferred stock - 250,000
Stock options - 382,125
----------- -----------
Dilutive potential common shares - (a) 632,125
----------- -----------
14,785,541 14,296,234
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Numerator:
Net income (loss) before extraordinary item $ 604,670 $ 77,873
Preferred dividends (117,750) (112,500)
----------- -----------
486,920 (34,627)
Extraordinary item (616,239) -
----------- -----------
Income (loss) attributable to common shareholders $ (129,319) $ (34,627)
=========== ===========
Denominator:
Denominator for basic earnings per share-
weighted average shares (a) 14,419,541 13,621,658
=========== ===========
</TABLE>
(a) Dilutive potential common shares were excluded from the computation in
loss periods since their effect would have been antidilutive.
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<PAGE>
7. STOCKHOLDERS' EQUITY
During the period ended June 30, 1998, the holders of the Company's Series F
6% Preferred Stock converted 7,500 shares into a total of 1,008,355 shares of
common stock.
During the quarter ended December 31, 1997, the conversion price of the
Company's Series A-3 Preferred Stock was adjusted, pursuant to the
Certificate of Designation for such preferred stock, to market value as of
the date of conversion. Accordingly, at June 30, 1998, the Series A-3
Preferred Stock is convertible into a total of approximately 2.0 million
shares.
In connection with the repayment of certain indebtedness to Merrill Lynch as
described in Note 3, the Company issued warrants covering 210,000 shares
exercisable at $.01 per share, which were exercised during the period ended
June 30, 1998, and 210,000 shares exercisable at $1.125 per share. Such
warrants were assigned a value of $175,000, which is being amortized over the
remaining term of the loan.
8. LIQUIDITY
As described in Note 1, the Company operates primarily in three industry
segments. 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, the Company
is generally restricted as to the amount of management fees, dividends,
loans or certain other advances that may be upstreamed from those
subsidiaries.
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 $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 defaults under all
of their previous loan agreements.
Upon maturity of its note payable to Mr. Harold Estes, former owner of Texas
Timberjack, Inc. (TTI), the Company, in April 1998, entered into a verbal
agreement with Mr. Estes to extend the maturity of the note for an additional
six months on essentially the same terms and conditions as previously in
effect. The new principal amount of $15,127,000 bears interest at 16% and
will become due in October 1998. 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 on 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.
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<PAGE>
In the event of default on the above note, the Company may be required to
transfer at least some portion 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 and the note balance due Mr.
Estes. Further, as of June 30, 1998, 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 $4.7 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 could be retained by Mr. Estes.
Furthermore, Polyphase may be required to retain legal representation on
various matters affecting the Company. The fees to be incurred could be
substantial in relation to the Company's cash position.
9. CONTINGENCIES
On February 23, 1998, Mr. Paul A. Tanner resigned as Chief Executive Officer
and Chairman of the Company's Board of Directors. Mr. James Rudis, the
Company's President was elected by the Board to assume the positions of Chief
Executive Officer and Chairman. Following the resignation, a reserve of
approximately $165,000 was established against outstanding advances due from
Mr. Tanner.
The Company has guaranteed the repayment of a loan on behalf of PLY Stadium
Partners, Inc. ("Stadium Partners"), a private investment firm headed by the
former Chairman of the Company, Mr. Paul A. Tanner. The loan was made by a
financial institution in connection with the purchase of land by a
partnership affiliated with Stadium Partners to build a multi purpose stadium
in Las Vegas. The guarantee is only effective, in certain circumstances or
upon the occurrence of certain events. A foreclosure sale was conducted on
or about July 15, 1998. Notwithstanding such foreclosure action the Company,
based on the advice of legal counsel, does not believe that it will incur any
significant liability as a result of this guarantee. As a result, the Company
believes the existence of such guarantee will not have a material adverse
effect on the Company's financial condition or results of operations.
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 plaintiffs' complaints each sought
certification as class action and asserted liability based on alleged
misrepresentations that resulted in the market price of the stock being
artificially inflated. The defendants filed motions to dismiss in each of
the lawsuits. Without certifying the cases as class actions, the District
Court consolidated the cases into a single action.
During the period ended June 30, 1998, the District Court dismissed the
complaint in the consolidated action and ordered that the plaintiffs replead
such complaints. The plaintiffs then filed a motion for reconsideration of
the Court's ruling. The defendants opposed the motion for reconsideration.
The Court has not ruled upon plaintiffs' motion; however, the plaintiffs have
not filed an amended complaint. Consequently, it cannot be determined at
this time whether the dismissal of the complaint will lead to a dismissal of
the consolidated action.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 possible future litigation.
RESULTS OF OPERATIONS
Revenues for the nine months ended June 30, 1998 decreased $5,061,000 (4%) to
$107,993,000 from $113,054,000 during the nine months ended June 30, 1997. The
decrease in revenue is primarily attributable to the elimination of low margined
business at Overhill Farms and slower than anticipated growth in the food
services sector. On a consolidated basis, gross margins increased over the
comparable period in the prior year from 16.7% to 18.5%, resulting in a slight
increase in operating income despite higher selling, general and administrative
expenses. For the nine months ended June 30 1998, operating income increased
$268,000 to $5,953,000 from $5,685,000 during the comparable period in 1997.
Interest expense increased $1,371,000 over the comparable period in 1997,
primarily due to additional borrowings and the refinancing of the Company's
indebtedness to Harold Estes.
Net income before extraordinary item for the nine months ended June 30, 1998
increased $527,000 to net income of $605,000 from $78,000 during the nine
months ended June 30, 1997. Net income for the period included a one time gain
of $988,000 from the sale of the Company's corporate headquarters in December
1997. Net income was negatively affected by an extraordinary expense of
$616,000, the early extinguishment of debt, associated with the refinancing of
certain indebtedness by Overhill Farms.
The Food Group's revenues decreased $5,000,000 to $68,550,000 for the nine
months ended June 30, 1998 as compared to $73,550,000 for the nine months ended
June 30, 1997. Operating income decreased to $3,647,000 for the period,
compared to $4,022,000 in the prior year. Revenues have decreased primarily due
to Overhill's emphasis on higher margined business and the slow growth of its
food services sector.
Revenues for the Forestry Group for the nine months ended June 30, 1998
decreased $617,000 to $36,243,000 from $36,860,000 for the nine months ended
June 30, 1997. Operating income for the comparable period increased $342,000
to $3,463,000 for the nine months ended June 30, 1998 from $3,121,000 for the
nine months ended June 30, 1997. Sales of new equipment decreased during the
period as sales of used equipment remained strong, generating a product mix with
higher gross margins than the comparable period in 1997.
-15-
<PAGE>
Revenues in the Transformer Group for the nine months ended June 30, 1998
increased $556,000 to $3,201,000 from $2,645,000 for the comparable period in
fiscal 1997. Operating income increased slightly to $36,000 for the nine months
ended June 30, 1998 from $27,000 for the comparable period in fiscal 1997. The
increase is primarily attributable to higher sales of filters and transformers
on government contracts.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 1998, the Company used cash of
approximately $7,360,000 in its operating activities compared to cash provided
of $5,230,000 during the comparable period in fiscal 1997. The increased use of
cash over the comparable period resulted from increases in inventories,
primarily at Timberjack.
During the nine months ended June 30, 1998, the Company's investing activities
used cash of approximately $2,023,000 compared to a use of cash in the amount of
$5,391,000 in fiscal 1997. The Company's use of cash consisted primarily of new
notes receivable and fixed asset additions.
During the nine months ended June 30, 1998 , the Company's financing activities
provided cash of approximately $9,047,000 as compared to cash provided of
$405,000 in the comparable period in fiscal 1997. The source of cash during the
period consisted primarily from the loan facility of approximately $24 million
at Overhill Farms and additional borrowings to finance inventory at Timberjack.
Subsequent to June 30, 1998 , Texas Timberjack refinanced its existing line of
credit with a new loan agreement with NationsBank, N.A. The new facility
includes a $4.0 million term note, at 8.3% maturing August 2001, amortizing
monthly, and an $8.0 million revolving line of credit at prime less 1/4%, due
March 31, 1999.
The Company plans to continue its program of expansion and diversification
through the acquisition of additional operating companies. Funding for these
acquisitions is anticipated to come primarily from a combination of internally
generated funds and from additional borrowings. The Company's management
believes that cash generated from operations, together with available lines of
credit and contemplated debt and/or equity placements, will be sufficient to
meet the Company's liquidity requirements for the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not own, nor does it have an interest in any market risk
sensitive investments.
-16-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 plaintiffs' complaints each sought
certification as class action and asserted liability based on alleged
misrepresentations that resulted in the market price of the stock being
artificially inflated. The defendants filed motions to dismiss in each of the
lawsuits. Without certifying the cases as class actions, the District Court
consolidated the cases into a single action.
During the period ended June 30, 1998, the District Court dismissed the
complaint in the consolidated action and ordered that the plaintiffs replead
such complaints. The plaintiffs then filed a motion for reconsideration of the
Court's ruling. The defendants opposed the motion for reconsideration. The
Court has not ruled upon plaintiffs' motion; however, the plaintiffs have not
filed an amended complaint. Consequently, it cannot be determined at this time
whether the dismissal of the complaint will lead to a dismissal of the
consolidated action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 1998, the Company held its 1998 Annual Meeting of Stockholders (the
"Annual Meeting"). At the Annual Meeting, the only matter considered and voted
upon by stockholders was the election of four (4) directors.
The following table sets forth certain information relating to the voting by
stockholders on the matter referred to above:
Votes Cast Votes Against Broker
Nominee For Or Withheld Abstentions Non-Votes
James Rudis 11,573,994 480,799 - -
Michael F. Buck 11,578,594 476,199 - -
George R. Schrader 11,578,594 476,199 - -
William E. Shatley 11,579,094 475,699 - -
Reference is made to the Company's definitive proxy statement, mailed on March
27, 1998 to stockholders of record on March 16, 1998, for more complete
information relating to the Annual Meeting.
-17-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
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, 1998.
None
-18-
<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 10, 1998 By: /s/ James Rudis
------------------------------
James Rudis
Chairman, President and
Chief Executive Officer
Date: August 10, 1998 By: /s/ William E. Shatley
------------------------------
William E. Shatley
Senior Vice President, Treasurer
and Chief Financial Officer
-19-
<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-30-1997
<PERIOD-END> JUN-30-1998
<CASH> 727,973
<SECURITIES> 0
<RECEIVABLES> 19,409,999
<ALLOWANCES> 595,477
<INVENTORY> 33,142,140
<CURRENT-ASSETS> 54,022,762
<PP&E> 13,733,966
<DEPRECIATION> 7,053,416
<TOTAL-ASSETS> 81,138,067
<CURRENT-LIABILITIES> 43,422,090
<BONDS> 28,383,015
0
1,250
<COMMON> 148,825
<OTHER-SE> 7,281,945
<TOTAL-LIABILITY-AND-EQUITY> 81,138,067
<SALES> 107,993,318
<TOTAL-REVENUES> 107,993,318
<CGS> 88,049,856
<TOTAL-COSTS> 88,049,856
<OTHER-EXPENSES> 13,990,441
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,451,552
<INCOME-PRETAX> 604,670
<INCOME-TAX> 0
<INCOME-CONTINUING> 604,670
<DISCONTINUED> 0
<EXTRAORDINARY> (616,239)
<CHANGES> 0
<NET-INCOME> (11,569)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
