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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 Broadway, Suite A
Addison, Texas 75001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 386-0101
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------------
Common Stock, $.01 par value per share American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based on the closing price of such stock on December 4, 2000, was
approximately $7.6 million. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and 10% beneficial owners are affiliates. As of
December 4, 2000, the registrant had issued and outstanding 17,827,464 shares of
common stock, $.01 par value.
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POLYPHASE CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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Part I
Item 1 Description of Business 1
Item 2 Description of Property 7
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk 16
Item 8 Financial Statements 16
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 16
Part III
Item 10 Directors and Executive Officers of the Registrant 17
Item 11 Executive Compensation 17
Item 12 Security Ownership of Certain Beneficial Owners and Management 17
Item 13 Certain Relationships and Related Transactions 17
Part IV
Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K 18
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PART I
ITEM 1. Description of Business.
------------------------
General
Polyphase Corporation ("Polyphase" or "the Company"), incorporated in 1963 and
now a Nevada corporation, is a holding company that, through its subsidiaries,
currently operates in two industry segments: the food segment, which produces
high quality entrees, plated meals, meal components, soups, sauces and poultry,
meat and fish specialties (the "Food Group"); and the forestry segment, which
distributes, leases and provides financing for industrial farming and logging
equipment and also participates in related timber and sawmill operations (the
"Forestry Group").
Operating Companies
Overhill Farms, Inc. ("Overhill") In May 1995, the Company acquired all the
---------------------------------
operating assets of IBM Foods, Inc. The purchase, which was accomplished through
Overhill, a newly-formed subsidiary of the Company, provided for a cash payment
to the seller of $31.3 million plus the assumption by the Company of certain
liabilities of the acquired business. Overhill's operations are located in
Culver City, California. During August 2000, Overhill purchased the operating
assets and trademarks of the Chicago Brothers food operations from a subsidiary
of Schwan's Sales Enterprises, Inc. for total consideration of $4.2 million,
consisting of cash of $3.3 million and a note payable to the seller for
$900,000.
Texas Timberjack, Inc. ("Timberjack" or "TTI") In June 1994, the Company
----------------------------------------------
acquired all of the outstanding capital stock of TTI from Harold Estes, current
President of TTI. Timberjack, with locations in Lufkin, Jasper, Cleveland and
Atlanta, Texas, is a distributor of industrial farming and logging equipment in
East Texas and Western Louisiana. The capital stock of TTI was acquired from Mr.
Estes for consideration of approximately $4.0 million in cash, a $10.0 million
promissory note payable to the order of Mr. Estes, and 100,000 shares of the
Company's Series A Preferred Stock, which were subsequently converted into 2.0
million shares of common stock. Subsequent to June 1994, the Company and Mr.
Estes have modified, renewed and extended the promissory note payable to Mr.
Estes. As of September 30, 2000 the promissory note had a balance of
approximately $19.4 million (including accrued and unpaid interest) and is due
October 10, 2002. In fiscal 1998, TTI acquired an interest in timber and sawmill
operations. In fiscal 2000, TTI acquired a non-operating refinery and assumed a
note payable to Mr. Estes of approximately $1.4 million (including accrued and
unpaid interest).
Disposition
Polyphase Instrument Co. ("PIC") Effective September 30, 1999, the Company sold
--------------------------------
its wholly-owned subsidiary, PIC, to an investment group headed by management of
that company. PIC, which manufactures and markets electronic transformers,
inductors and filters comprised the Company's Transformer Group. The transaction
was completed as a sale of 100% of the outstanding capital stock of PIC for
total consideration of approximately $2.8 million, consisting of $1.8 million
cash and a subordinated note receivable for $1.0 million. The Company recorded a
loss from discontinued operations of approximately $1.2 million in 1999 as a
result of this transaction.
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Business Strategy
Management believes the Company's future growth opportunities will be primarily
in its Food Group segment. The business environment of the food industry is
mandating consolidation of small and mid-size food processing companies to
enhance operating efficiencies and provide service to national accounts. The
Food Group has recently completed the purchase of the Chicago Brothers food
operations and continues to evaluate selected acquisition candidates, which can
complement the operations of Overhill by providing one or more of the following
selected criteria: regional brand labels, additional production capacity,
geographical diversification, new markets and/or new customers. The Forestry
Group continues to operate in a difficult market. In an effort to offset
decreased sales in its equipment operations, TTI continued its efforts to reduce
expenses and to seek synergistic opportunities outside of its traditional
customer base and geographic territory. During fiscal 2000, TTI placed increased
emphasis on its efforts to increase construction and farm equipment sales,
primarily through its distribution arrangement for New Holland equipment.
Polyphase will continue to review long term strategies and alternatives for TTI
and its subsidiaries in order to maximize shareholder value.
To achieve future growth within the Company, management has identified the
following basic initiatives:
1) Continue to provide high quality products and superior services to our
customers.
2) Seek internal growth by developing new products, adding customers,
leveraging its geographic presence and securing distribution rights to
additional products.
3) Seek additional growth through strategic acquisitions of complementary
businesses with strong management, solid product lines and growth
potential.
Operating Segments
The following table sets forth business segment information with respect to the
percentage of net sales and operating income contributed by each segment for the
years ended September 30, 2000, 1999 and 1998.
2000 1999 1998
---- ---- ----
Net Sales
Food Group 77% 71% 64%
Forestry Group 23% 29% 33%
Transformer Group - 3%
--- ---
Total 100% 100% 100%
Operating Income
Food Group 98% 83% 55%
Forestry Group 2% 17% 45%
Transformer Group - - -
--- --- ---
Total 100% 100% 100%
-------------------------------------------------------------------------------
Reference is made to Note 17 to the Company's consolidated financial statements
for revenues, operating profits or losses and identifiable assets attributable
to each industry segment for each of the last three fiscal years.
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Food Group
Products and Services - The Food Group, through Overhill, is a value-added
manufacturer of quality frozen food products including entrees, plated meals,
meal components, soups, sauces, poultry, meat and fish specialties. Overhill is
positioned as a provider of custom prepared foods to a number of prominent
customers such as Albertson's, Jenny Craig, Carl's Jr., Jack in the Box, Panda
Express, Specialty Brands and King's Hawaiian as well as most domestic airlines,
including American, United and Delta. Historically, Overhill has served four
industries: airlines, health care, foodservice and retail.
Sales and Marketing - Overhill markets its products through an internal sales
force and outside food brokers. Overhill believes that the airline industry,
while mature, represents an area for moderate growth potential in the future.
The Company has refocused its attention on domestic carriers not currently being
served to any great extent by Overhill and on foreign carriers who are
increasingly choosing frozen entrees as part of their in-flight feeding
programs. The Company projects that its health care business may diminish
somewhat in the near term. The Company is predominantly focusing on the retail,
club stores and foodservice markets as areas of significant future growth. As a
result, Overhill management has realigned its sales force and redirected its
marketing efforts to concentrate on these markets.
Approximately 64% of Overhill's sales in fiscal 2000 were derived from five
customers, King's Hawaiian (16%), American Airlines (13%), Jenny Craig (12%),
Panda Express (12%), and Delta Airlines (11%). On a consolidated basis each of
these five customers represented approximately 8-12% of the Company's total
sales. Although the Company's relationships with these customers continue to
remain strong, there can be no assurance that these relationships will continue.
As in the previous year, the Company has made a concerted effort to sign multi-
year supply agreements with its major customers. Major contracts that were
signed or extended in fiscal 2000 include American Airlines, Delta Airlines,
Panda Express, and Schwan's. A decline in sales of Overhill's products to these
customers or the loss of, or a significant change in the relationship between
the Company and any of these key customers, could have a material adverse effect
on the Company's business and operating results. It is management's objective to
continue to reduce the reliance on a small concentration of accounts by further
expansion into custom products for retail and foodservice customers nationwide.
Manufacturing and Sourcing - Overhill's manufacturing operations are located in
six separate facilities with three in the Los Angeles area and three in the San
Diego area. Most operations are labor intensive, generally requiring semi-
skilled employees. Also, the Los Angeles manufacturing employees are unionized
with contracts covering each of the three plants. The union contract with
Teamsters Local 986, which represents Overhill's Plant No. 1 employees, expired
on November 30, 2000; the contract has been extended by mutual agreement as
negotiations continue. Management anticipates that the results of those
negotiations will have no material adverse effect on Overhill's operations.
Union contracts for the other Overhill Los Angeles operations expire February
28, 2002. Management believes relations with the unions are excellent and does
not anticipate any problems, which would affect future production.
With the addition of the San Diego facilities and the outsourcing of certain
products, management estimates that the combined facilities are operating at
approximately 75% of capacity based on current product production mix. Overhill
management is currently reviewing several proposals to improve manufacturing
efficiencies including the consolidation of facilities and the addition of
equipment to improve freezing capabilities and to automate some operations.
Additionally, the Company will consider adding an east coast facility, which
could significantly reduce both storage and shipping expenses for a growing
segment of Overhill's business.
During fiscal 2000 Overhill continued its program of outsourcing certain
production where it proved economically efficient. Management considers this
program a success and plans to continue this program and expand it, where
practicable.
3
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The San Diego operations consist of two manufacturing facilities and a
warehouse/administration facility. Manufacturing processes in San Diego are more
machine intensive, requiring more skilled machine operators, mechanics, and
supervision. The workforce in San Diego is not unionized and labor relations
have continued to be supportive of the recent management change. Currently, the
San Diego facilities are operating on a one-shift basis, but management
anticipates additional capacity requirements within the next twelve months.
The Company's ability to economically produce large quantities of its products,
while at the same time maintaining a high degree of quality, depends in large
part on its ability to procure raw materials on a reasonable basis. The Company
relies on a few large suppliers for its poultry products with the remaining raw
materials purchased from suppliers in the open market. The Company does not
anticipate any difficulty in acquiring these materials in the future. Raw
materials, packaging for production and finished goods are stored on site or in
a public frozen food storage facility until shipment is required.
Backlog - Overhill typically delivers products directly from finished goods
inventory, and as such does not maintain a large backlog of unfilled purchase
orders. While at any given time there may be a small backlog of orders, such
backlog is not material in relation to total sales, nor is it necessarily
indicative of trends in its business. Orders are subject to changes in
quantities or to cancellation with thirty days notice without penalties to
customers.
Product Development - Overhill maintains a comprehensive, fully staffed test
kitchen, which formulates recipes and upgrades specific products for current
customers and establishes production and quality standards. Products are
developed based upon either customers' specifications, conventional recipes or
new product developments. Overhill is continuously developing recipes as
customers' tastes and client requirements change. Overhill also maintains a
quality control department for testing and quality control. The Company
manufactures products in the retail and foodservice areas with branded and
private label entrees.
Competition - Overhill's food products, consisting primarily of poultry, pasta,
beef and assorted related products, compete with products produced by numerous
regional and national firms. Many of these companies are divisions of larger
fully integrated companies such as Tyson Foods and ConAgra, which have greater
financial, technical, human and marketing resources than the Company.
Competition is intense with most firms producing similar products for the
foodservice and retail industries. Competitive factors include price, product
quality, product development, customer service and, on a retail basis, name
recognition. There can be no assurance that the Company will compete
successfully against existing companies or new entrants to the marketplace.
Overhill competes in this market by its ability to produce small/custom product
runs, within a short time frame and on a cost effective basis.
4
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Forestry Group
Products and Services - The Forestry Group, through Timberjack and its majority-
owned subsidiaries, is a distributor of industrial and logging equipment with
investments in related timber and sawmill operations. TTI has four locations in
eastern Texas; TTI's headquarters are located in Lufkin, with smaller satellite
showrooms and repair facilities located in Jasper, Cleveland and Atlanta, Texas.
TTI carries the Timberjack, Blount and Hyundai lines of industrial and logging
equipment and the New Holland line of farm and construction equipment. TTI is
involved in the sale, leasing and financing of the equipment it distributes as
well as the servicing of all major brands of related equipment. TTI's operations
are primarily concentrated in the forested areas of East Texas although its
market extends into Western Louisiana. TTI operates in a fragmented industry
where its major competition is from distributors and dealers of Caterpillar and
John Deere equipment. TTI estimates that in Eastern Texas it currently holds
approximately 60% of the shear (a machine that cuts timber) market, 45% of the
skidder (a machine that transports logs out of the forest onto a loader) market
and 70% of the loader (a machine that stacks trees onto trucks) market.
Sales and Marketing - Timberjack currently maintains sales and distribution
offices in Lufkin, Jasper, Cleveland and Atlanta, Texas primarily to serve
Eastern Texas and Western Louisiana. Sales are generated through repeat
customers, advertisements in various trade publications and direct marketing
calls on companies located in the area. A general sales manager and several
branch managers supply technical and operational support, while eleven salesmen
have direct responsibility for customer relationships. TTI meets customers'
orders for new equipment and replacement parts out of existing inventory or
through purchase orders placed with the manufacturers TTI currently represents.
Approximately 36% of TTI's revenues during fiscal 2000 are from new equipment
sold to companies involved in the forestry and construction industries.
Additional equipment related revenues are derived from sales of used equipment
(12%), servicing of equipment (7%), sales of parts (17%) and financing equipment
sales (8%). The remaining 20% of TTI's revenues is derived from the sale of
finished timber products through its timber and sawmill operations. No single
customer accounts for more than 10% of TTI's sales. Equipment sales financed by
TTI are typically for periods ranging from 12 to 24 months at interest rates
ranging from 10% to 18% per annum.
Backlog - As a dealer, servicer and financier of forestry equipment, TTI does
not maintain a backlog of orders. Equipment ordered that is not in inventory
takes approximately one to six weeks to be shipped to a customer from the
manufacturer or another distributor.
Product Development - TTI does not develop products for sale to the public. TTI
relies primarily upon its suppliers (Timberjack, Blount, New Holland, Hyundai)
for a majority of its new units and parts.
Competition - Competition in the forestry segment is highly fragmented in the
Eastern Texas and Western Louisiana areas where TTI principally operates.
Because of its lengthy historical presence in these regions, TTI believes it has
established a strong local identity in its field with a proven record of
delivering equipment on a timely basis, providing satisfactory financing and
strong customer support and service. TTI is one of only a few distributors of
Timberjack and Blount forestry equipment in its operating areas. TTI has the
added advantage of being a leading seller and financier of various makes and
models of used logging equipment. Principal competitors include local John Deere
and Caterpillar distributors.
During the current fiscal year, Deere and Company (the manufacturer of John
Deere equipment) purchased the Timberjack Group from the Metso Corporation of
Finland (the manufacturer of Timberjack equipment). While the impact of this
purchase is not known, it is not expected to have significant implications on
Texas Timberjack's operations.
5
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Patents, Trademarks and Copyrights
The Company does not have patents or patent applications pending on any of its
products, although it may file such patent applications in the future. The
Company attempts to protect its proprietary interests in its products by
entering into non-disclosure agreements with customers.
The Company has registered the trademarks "Polyphase" and "Overhill Farms" in
the United States Patent and Trademark Office. In addition, Overhill recently
acquired from Schwan's several trademarks relating to the acquired operations,
including, among others, "Chicago Brothers" and "Florence Pasta and Cheese."
Regulation
The Food Group is subject to strict government regulation, particularly in the
health and environmental areas, by the United States Department of Agriculture
("USDA"), the Food and Drug Administration ("FDA"), Occupational Safety and
Health Organization ("OSHA") and the Environmental Protection Agency ("EPA").
The Food Group anticipates increased regulation by the USDA and FDA concerning
food processing and storage. The Company's food processing facilities are
subject to on-site examination, inspection and regulation by the USDA.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position. During 1997, the Company
implemented a Hazard Analysis Critical Point Plan to ensure proper handling of
all food items.
The Forestry Group is required to comply with various governmental regulations
and requirements concerning the discharge of materials into the environment or
otherwise relating to the protection of the environment. Compliance with the
current applicable federal, state and local environmental regulations has not
had, and the Company does not believe that in the future such compliance will
have, a material effect on its financial position, results of operations,
expenditures or competitive position.
The Company takes all reasonable precautions to ensure that its operations,
processing plants and facilities operate in a safe, sanitary and
environmentally-sound manner. However, events beyond the control of the Company,
such as the adoption by the government of more stringent environmental
regulations could adversely affect its operations. Management believes that the
Company is in substantial compliance with all applicable laws and regulations
relating to the operations of facilities.
Employees
As of September 30, 2000, the Company had approximately 1200 employees as
follows: approximately 1052 full-time employees in the Food Group; 145 full-time
employees in the Forestry Group; and 3 full-time employees in the corporate
office. All subsidiaries presently provide group health plans for their domestic
employees and pay a portion of the costs associated with such plans. TTI also
maintains a profit sharing plan for its employees.
Safe Harbor Statement
The nature of the Company's operations, and the environment in which it
operates, subjects the Company to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company notes the following factors, which among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Forward looking statements
contained in this document include the amount of future capital expenditures and
the
6
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possible uses of proceeds from any future borrowings under the Company's
currently effective credit facilities. Factors which could cause results to
differ include, but are not limited to: changes in the Company's business
environment, including actions of competitors and changes in customer
preferences; changes in governmental laws and regulations, including income
taxes; market demand for new and existing products; and raw material pricing.
ITEM 2. Description of Property.
------------------------
Corporate Headquarters
The Company leases an approximately 4,000 square foot facility located at 4800
Broadway, Suite A, Addison, Texas 75001, which serves as the corporate
headquarters. The lease, which began in February 1998, has a five year term and
a provision for a tenant cancellation option during the last two years for a
nominal amount.
Food Group
Overhill leases three manufacturing facilities in the Los Angeles, California
area. Plant No. 1 is located in Inglewood, California and has 39,000 square feet
of manufacturing area. Plants No. 2 and No. 3 are located in Vernon, California
and have 49,000 and 27,000 square feet of manufacturing area, respectively. In
addition to the manufacturing facilities, Overhill also leases two dry goods
warehouses of 13,500 and 11,500 square feet, a 7,700 square foot frozen storage
facility in Inglewood, California and a 7,900 square foot office in Culver City,
California. Overhill's recently acquired Chicago Brothers operations are
conducted in leased facilities in San Diego, California consisting of
manufacturing facilities of 33,300 and 30,000 square feet and a 9,400 square
foot warehouse/administration facility. While Overhill believes that the
existing facilities are adequate to meet its requirements in the foreseeable
future, the Company is currently reviewing the cost effectiveness of
consolidating certain manufacturing and administrative functions and is also
actively seeking a facility on the east coast to more efficiently and
effectively meet current and future customer requirements.
Forestry Group
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas, a
building in Cleveland, Texas and leases a building in Atlanta, Texas. The
largest building in Lufkin has 38,500 square feet, which is used for
administrative offices, showroom, parts sales and shop area. The remaining
buildings have 3,600 and 4,200 square feet, respectively. The Jasper, Cleveland
and Atlanta buildings have approximately 10,000, 6,700 and 7,500 square feet,
respectively, which are used for sales offices, parts sales and shop areas. TTI
also leases six buildings on 68 acres in Bon Wier, Texas for a sawmill
operation. The sawmill is leased at a basic rent of $19,000 per month, which
includes certain equipment, with an option to purchase the land, buildings and
equipment for $1,250,000 in April 2003. In addition, TTI owns a non-operating
crude oil refining and blending facility, together with related buildings and
administrative office space, situated on approximately 120 acres of land in
Egan, Louisiana, which currently is held for sale.
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ITEM 3. Legal Proceedings.
------------------
During fiscal 1997, five substantially identical complaints were filed in the
United States District Court for the District of Nevada against the Company and
certain of its current and past officers and directors. The complaints each
sought certification as a class action and asserted liability based on alleged
misrepresentations that the plaintiffs claimed resulted in the market price of
the Company's stock being artificially inflated. Without certifying the cases as
class actions, the District Court consolidated the cases into a single action.
In March 2000, the District Court dismissed the plaintiffs' claims against one
of the Company's officers and directors and restricted the plaintiffs from
pursuing a number of their claims against the other defendants. The Court also
granted the remaining defendants leave to file motions for summary judgment.
Motions for summary judgment were thereafter filed, pointing out that there was
no evidence to support the plaintiffs' claims. In November 2000, in a lengthy
decision addressing the plaintiffs' claims against each of the remaining
defendants, the District Court granted the motions for summary judgment, thereby
disposing of all of the claims asserted by the plaintiffs. Without presenting
any new evidence or any new arguments for the Court to consider, the plaintiffs
have sought reargument of the summary judgment motions. The defendants have
responded and have requested that the District Court impose sanctions against
plaintiffs' counsel pursuant to the applicable securities laws.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. However, management believes
(based, in part, on advice of legal counsel) that such litigation and claims
will be resolved without material effect on the Company's financial condition,
results of operations or cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the Company's
fiscal year.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
----------------------------------------------------------------------
The common stock is listed on the American Stock Exchange under the symbol
"PLY." The following table sets forth the range of high and low sales prices
for the common stock on the American Stock Exchange for the periods indicated:
Fiscal 2000 High Low
------------ ------- -------
Quarter from October 1, 1999
to December 31, 1999 $0.7500 $0.3750
Quarter from January 1, 2000
to March 31, 2000 $1.5000 $0.4375
Quarter from April 1, 2000
to June 30, 2000 $1.2500 $0.6875
Quarter from July 1, 2000
to September 30, 2000 $1.0625 $0.7500
Fiscal 1999 High Low
------------ ------- -------
Quarter from October 1, 1998
to December 31, 1998 $0.5625 $0.2500
Quarter from January 1, 1999
to March 31, 1999 $0.5625 $0.3125
Quarter from April 1, 1999
to June 30, 1999 $0.5625 $0.3125
Quarter from July 1, 1999
to September 30, 1999 $0.8750 $0.3125
Fiscal 1998 High Low
------------ ------- -------
Quarter from October 1, 1997
to December 31, 1997 $1.8750 $0.7500
Quarter from January 1, 1998
to March 31, 1998 (1) $1.0625 $0.5000
Quarter from April 1, 1998
to June 30, 1998 $1.1875 $0.6250
Quarter from July 1, 1998
to September 30, 1998 $0.7500 $0.3125
(1) On January 14, 1998, trading in the Company's stock was temporarily halted
pending the Company's filing of its Annual Report on Form 10-K for the fiscal
year ended September 30, 1997. The stock resumed trading on February 23, 1998.
9
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The Company has never paid cash dividends on its common stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such policy
is, within the limitations and restrictions described below, subject to change
based on current industry and market conditions, as well as other factors beyond
the control of the Company.
As of December 4, 2000, the Company estimates that there were approximately
3,200 beneficial owners of the Company's common stock, represented by 217
holders of record.
Recent Sales of Unregistered Equity Securities
In November 1995, the Company sold in a private transaction with Infinity
Investors, Ltd. ("Infinity") for $2,500,000 cash, 250,000 shares of Series A-3
Preferred Stock having an aggregate redemption value of $2,500,000 and
convertible into common stock as provided in the Certificate of Designations for
the Series A-3 Preferred Stock. During the years ended September 30, 1998 and
1999, the Company issued 197,586 and 2,302,414 shares of common stock,
respectively, in partial satisfaction of Infinity's conversion rights. Effective
November 30, 1999, the Company reacquired Infinity's remaining unconverted
Series A-3 Preferred Stock.
In August 1997, the Company sold in a private transaction with Black Sea
Investments, Ltd. ("Black Sea") for net proceeds of approximately $734,000 cash,
7,500 shares of Series F 6% Convertible Preferred Stock having an aggregate
redemption value of $750,000 and convertible into Common stock at a variable
rate equal to 75% of the average closing market price for the Company's common
stock for the previous five trading days prior to conversion. During the year
ended September 30, 1998, the Company issued a total of 1,008,355 shares of
common stock in satisfaction of Black Sea's conversion rights.
The shares of Preferred Stock described above were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), and were issued by
the Company in reliance on exemptions to the Securities Act. With respect to the
shares of Series A-3 Preferred Stock issued to Infinity, such shares were issued
pursuant to the exemption provided by Section 4(2) of the Securities Act.
Infinity was in compliance with the necessary requirements of Section 4(2) to
receive such exemption. Of the shares of Series A-3 Preferred Stock that were
issued, no such shares were issued to any party other than Infinity.
With respect to the shares of Series F 6% Convertible Preferred Stock issued to
Black Sea, such shares were issued pursuant to the exemption provided by
Regulation S of the Securities Act. Black Sea is a non United States person as
that term is defined in the Securities Act. Of the shares of the Series F 6%
Convertible Preferred Stock that were issued, no such shares were issued to any
party other than Black Sea.
In December 1997, in connection with the refinancing of certain indebtedness to
Merrill Lynch World Income Fund, Inc. and Convertible Holdings, Inc.
(collectively "Merrill Lynch"), the Company issued warrants covering a total of
420,000 shares of the Company's Common Stock. The warrants issued to Merrill
Lynch covered 210,000 shares exercisable at $.01 per share (the "Penny
Warrants") and an additional 210,000 shares exercisable at $1.125 per share (the
"Market Warrants.") The Penny Warrants were exercised and 210,000 shares of
Common Stock were issued in May 1998; the Market Warrants were repurchased by
the Company in December 2000 for approximately $46,000. The shares of Common
Stock issued to Merrill Lynch were not registered under the Securities Act, and
were issued pursuant to the exemption provided by Section 4(2) of the Securities
Act. Merrill Lynch was in compliance with the necessary requirements of Section
4(2) to receive such exemption.
10
<PAGE>
ITEM 6. Selected Financial Data
-----------------------
The following table sets forth selected financial data for the Company for each
of the last five fiscal years. This information should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes included
elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30
----------------------------------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Income Statement Data: 2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ---------------- ----------------
Revenues $ 189,098 $ 158,308 $ 141,398 $ 148,378 $ 145,992
Operating Income 10,552 8,494 7,633 6,651 6,588
Net Income (Loss) Before
Discontinued Operations
and Extraordinary Item 5,112 (415) 277 (18,349) (280)
Net Income (Loss) $ 3,821 $ (1,598) $ (329) $ (18,825) $ (242)
Per Share Data - Basic and Diluted:
Net Income (Loss) Before
Discontinued Operations
and Extraordinary Item $ .30 $ (.03) $ .01 $ (1.38) $(.03)
Discontinued Operations - (.07) - (.03) -
Extraordinary Item (.07) - (.04) - -
---------------- ---------------- ---------------- ---------------- ----------------
Net Income (Loss) $ .23 $ (.10) $ (.03) $ (1.41) $(.03)
================ ================ ================ ================ ================
Weighted Average Shares
Outstanding - Basic 17,812,464 16,947,195 14,552,462 13,632,357 13,722,552
Weighed Average Shares
Outstanding - Diluted 18,110,421 16,947,195 16,452,433 13,632,357 13,722,552
================ ================ ================ ================ ================
As of September 30
----------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ---------------- ----------------
Total Assets $ 104,633 $ 83,522 $ 80,843 $ 71,321 $ 93,330
Long-Term Debt 40,860 33,593 29,221 23,272 -
Total Liabilities 92,713 76,647 73,042 61,920 68,142
Accumulated Deficit (18,716) (22,889) (21,200) (20,717) (1,488)
Stockholders' Equity 9,113 5,450 6,601 7,402 23,998
</TABLE>
11
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
--------------
Statements contained in this Form 10-K that are not historical facts, including,
but not limited to, any projections contained herein, are forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this Form
10-K could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September 30,
1999
For the year ended September 30, 2000, the Company's revenues increased
$30,790,000 (19.4%) to $189,098,000 as compared to $158,308,000 for the year
ended September 30, 1999. This increase was due to continued revenue gains by
the Company's Overhill Farms operations. Gross margins, on a consolidated basis,
increased to 18.5% in fiscal 2000 as compared to 18.0% for the preceding fiscal
year. Operating income increased 24.2% to $10,552,000 in fiscal 2000 from
$8,494,000 in fiscal 1999.
Other expenses in fiscal 2000 decreased $1,340,000 to $6,989,000 from $8,329,000
in fiscal 1999, due primarily to a reduction in the interest rate and a one time
charge in 1999 on the note payable to related party.
Net income before discontinued operations and extraordinary item increased to
$5,112,000 in fiscal 2000 from a loss of $415,000 in fiscal 1999. After the
effect in fiscal 2000 of an extraordinary expense of $1,290,000 related to the
early extinguishment of debt in connection with a major refinancing by Overhill
and a gain of $351,000 related to the reacquisition of preferred stock, and in
fiscal 1999 a loss from discontinued operations of $1,183,000, net income
attributable to common stockholders amounted to $4,173,000 ($.23 per share) in
the current year compared to a loss of $1,689,000 ($.10 per share) in fiscal
1999.
The Food Group revenues through Overhill increased $32,545,000 (28.9%) to
$145,041,000 for the year ended September 30, 2000 as compared to $112,496,000
for the prior year. Compared to the prior fiscal year, Overhill experienced a
69.8% growth rate in airline sales, 33.7% growth in foodservice sales and 19.2%
growth in retail sales. Gross margins rose to 19.2% for fiscal 2000 as compared
to 18.0% for the preceding fiscal year. Operating income increased 46.4% to
$10,813,000 in fiscal 2000 from $7,384,000 in fiscal 1999. Margin improvements
and gains in operating income were the result of improved purchasing practices,
including the outsourcing of certain production, a more effective pricing and
costing strategy together with manufacturing improvements and efficiencies.
For the year ended September 30, 2000, revenues for the Forestry Group through
Texas Timberjack and its subsidiaries decreased $1,755,000 (3.8%) to $44,057,000
as compared to $45,812,000 for fiscal 1999. Gross margins decreased from 22.0%
in fiscal 1999 to 16.6% in fiscal 2000. Operating income in fiscal 2000 was
$221,000 as compared to $1,490,000 in the prior period. Decreases in gross
margins and operating income were primarily the result of the performance of
TTI's sawmill operations. Management of TTI has made certain operational and
personnel changes which it believes will have a favorable impact on future non-
equipment operating results.
12
<PAGE>
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998
For the year ended September 30, 1999, the Company's revenues from continuing
operations increased $16,910,000 (12%) to $158,308,000 as compared to
$141,398,000 for the year ended September 30, 1998. The increase was due to
revenue gains in the Company's Overhill Farms subsidiary. Gross margins, on a
consolidated basis, remained constant at 18% with a decrease in margins at TTI
offset by improvements at Overhill Farms. During the period, operating income
increased 11% to $8,494,000 for fiscal 1999 from $7,633,000 the preceding year.
Other income and expenses amounted to a net expense of $8,329,000 in 1999 as
compared to $7,299,000 in 1998. The prior year amounts were reported net of a
one time gain of $988,000 from the sale of the Company's office building in
December 1997.
The net loss for fiscal 1999 of $1,598,000, increased by $1,269,000 from a loss
of $329,000 reported in the prior year. The net loss for the year included
charges for $300,000 related to a tax assessment against TTI, $225,000 for
income allocable to subsidiary warrant holder and $1,183,000 related to the
discontinued operations of PIC. The 1998 amount was reported net of an
extraordinary charge of $616,000, related to the early extinguishment of
Overhill debt.
The Food Group's revenues increased $19,147,000 (21%) to $112,496,000 for the
period ending September 30, 1999 as compared to $93,349,000 the same period in
the prior year. Revenue gains were made in three of the four market segments the
Company serves with the largest gains coming from the foodservice segment.
Increases in this area were driven by the acquisition of two new national
accounts (Panda Express and Denny's) as well as increases from existing
accounts. Gross margins for fiscal 1999 for the Food Group rose to 18% as
compared to 15.8% for the previous year. Operating income for fiscal 1999
increased by $2,408,000 (48%) to $7,384,000 as compared to $4,976,000 for fiscal
1998. Improvements in gross margins and operating income are attributed to a
cost reduction program initiated in 1999 involving outsourcing some of the
Company's production, improved purchasing practices and the addition of new
profitable accounts. Income before income taxes for the Food Group increased to
$1,647,000 for fiscal 1999 as compared to a loss before income taxes of $180,000
in the prior fiscal year.
For the year ended September 30, 1999, revenues for the Forestry Group decreased
$2,237,000 (5%) to $45,812,000 as compared to $48,049,000 for the fiscal year
ended September 30, 1998. Gross margins decreased from almost 22% in fiscal 1998
to 18% in fiscal 1999. Operating income for the Forestry Group in fiscal 1999
was $1,490,000 as compared to $4,077,000 for the prior year. The decrease in
gross margins and operating income for the current period are primarily the
result of a change in product mix sold by the group in fiscal 1999. During the
period, sales of logging equipment, particularly used equipment, which
historically yields relatively higher percentage gross profits, decreased
markedly. Total equipment sales were down approximately 24% as compared to
fiscal 1998. These decreased sales were partially offset by gains in sales of
raw wood and timber products, which brought lower gross margins than historical
equipment sales.
Liquidity and Capital Resources
Principal sources of liquidity for the Company are cash flow from operations,
cash balances and additional financing capacity. The Company's cash and cash
equivalents increased $1,147,000 to $1,522,000 at September 30, 2000, compared
to $375,000 at September 30, 1999.
13
<PAGE>
The Company's operating activities in 2000 resulted in cash provided of
$3,775,000, as compared to cash provided of $2,552,000 in 1999. The cash
generated during the current year is generally related to improved operating
profits, along with increases in trade accounts payable at both Overhill and
Texas Timberjack, in part due to a new vendor program, offset by increases in
accounts receivable and inventories, primarily related to the volume increases
at Overhill.
The Company's investing activities for the year ended September 30, 2000
resulted in a use of cash of $5,701,000, as compared to a use of cash of
$1,994,000 in 1999. The use of cash resulted primarily from Overhill's
acquisition of the Chicago Brothers operations, coupled with capital
expenditures primarily related to the growth of Overhill.
The Company's financing activities for the current year resulted in cash
provided of $3,073,000, as compared to a use of cash of $584,000 in 1999. This
year's results were impacted primarily by the refinancing, on a long term basis,
of Overhill's indebtedness, as discussed below, together with debt incurred in
connection with the Chicago Brothers purchase by Overhill.
In November 1999, Overhill refinanced substantially all of its existing debt.
The total facility amounted to $44 million, consisting of a $16 million line of
credit provided by Union Bank of California, N.A. ("Union Bank") together with
$28 million in the form of a five-year term loan provided by Levine Leichtman
Capital Partners II, L.P. ("LLCP").
The line of credit with Union Bank expires in November 2002 and provides for
borrowings limited to the lesser of $16 million or an amount determined by a
defined borrowing base consisting of eligible Overhill receivables and
inventories. Borrowings under the line of credit bear interest at a rate, as
selected by Overhill at the time of borrowing, of prime plus .25% or LIBOR plus
2.75%. The Union Bank agreement provides, among other things, that Overhill will
be subject to an unused line of credit fee of .25% per annum. The agreement
contains various covenants including restrictions on capital expenditures, and
specified net worth levels and debt service ratios. In addition, the terms of
the agreement generally prohibit loans, dividends or advances from Overhill to
the Company and limit payments of taxes and other expenses to Polyphase to
specified levels. The line of credit is guaranteed by the Company and
collateralized by certain assets of Overhill and all of the Overhill common
stock owned by the Company.
The term loan with LLCP is a secured senior subordinated note bearing interest
at 12% per annum, with interest payable monthly until maturity in October 2004.
Principal payments in an amount equal to 50% of the excess cash flow, as
defined, for Overhill's previous fiscal year are also payable annually
commencing in January 2001. The amount of such principal payment for the year
ended September 30, 2000 is approximately $2.0 million. Voluntary principal
payments are permitted after October 31, 2001, subject to certain prepayment
penalties. The agreement contains various covenants including restrictions on
capital expenditures, minimum EBITDA and net worth levels, and specified debt
service and debt to equity ratios. In addition, the terms of the agreement
restrict changes in control, generally prohibit loans, dividends, or advances by
Overhill to the Company and limit payments of taxes and other expenses to
Polyphase to specified levels. The term loan with LLCP is guaranteed by the
Company and collateralized by certain assets of Overhill. The agreement also
requires Overhill to pay to LLCP, during each January, annual consulting fees of
$180,000.
14
<PAGE>
In connection with the agreement, LLCP was granted stock warrants to purchase
17.5% of the common stock of Overhill, exercisable immediately at a nominal
exercise price. During the first two years following the date of the agreement,
Overhill has the right to repurchase 5% of Overhill's shares from LLCP for $3
million and/or to repurchase all 17.5% of the Overhill shares subject to the
LLCP warrant within five days of the term loan being repaid at their then
determined fair market value. If such shares are not repurchased, LLCP will be
entitled under the agreement to receive a cash payment of $500,000 from
Overhill. At the date of issuance, the warrants granted to LLCP were estimated
to have a fair value of $2.37 million.
As a result of these transactions, Overhill repaid in full the $22.7 million
senior subordinated notes payable and the $9.6 million revolving line of credit.
Additionally, Overhill repurchased for $3.7 million the warrants held by the
previous subordinated lender to purchase 30% of Overhill's common stock. Also in
connection with the refinancing, Overhill was permitted to make a one-time
advance of $1.25 million to Polyphase for working capital and other specified
purposes. Overhill incurred costs and expenses in connection with the
refinancing totaling approximately $1.9 million, substantially all of which was
paid to the lenders. The early extinguishment of the previous indebtedness
resulted in an extraordinary loss of approximately $1.3 million (net of a
$500,000 refund for early payment of the senior subordinated notes), which was
recognized during the year ended September 30, 2000.
In connection with the acquisition of TTI in June 1994, the Company initially
issued a note to the seller (Mr. Harold Estes) in the amount of $10.0 million,
with interest at 8% due October 31, 1994 and collateralized by all the capital
stock of TTI. As of various maturity dates thereafter, Mr. Estes has entered
into subsequent agreements with the Company to modify and extend the term of the
note. As of September 30, 2000, the note had a total unpaid balance of
$19,390,120 (principal of $16,347,191 and accrued interest of $3,042,900),
bearing interest at 9% per annum with a maturity date of October 10, 2002, and
allowing for principal and interest payments to be made with amounts upstreamed
to Polyphase by Timberjack for the payment of taxes (subject to the approval of
Timberjack's Board of Directors and its lenders). In connection with a previous
modification in 1998, the Company agreed to assign Mr. Estes any interest it may
have or subsequently obtain with respect to 2,000,000 shares of the Company's
common stock owned by the Pyrenees Group ("Pyrenees"), a private investment firm
controlled by Paul A. Tanner, the Company's former Chairman and Chief Executive
Officer, and previously held by Mr. Estes as secondary collateral. These shares,
which were recovered in 1999 on behalf of Mr. Estes, had a value of $875,000,
which was charged to interest expense in 1999.
TTI has an $8.0 million revolving line of credit with Bank of America, N.A.
(formerly NationsBank of Texas, N.A.). Amounts advanced under the line of credit
bear interest at prime less .25% (approximately 9.25% at September 30, 2000),
and are collateralized by substantially all of TTI's assets. The line of credit
agreement contains various covenants related to receivables, capital
expenditures, inventories, debt ratios, contingent liabilities and payment of
dividends. Furthermore, the terms of the revolving line of credit generally
prohibit dividends, loans or advances from TTI to the Company, but permit the
payment of taxes. The Company has guaranteed all obligations under the TTI
revolving line of credit. Availability under the line as of September 30, 2000
amounted to approximately $5.5 million. TTI intends to renew the revolving
credit facility upon maturity in March 2001.
TTI's majority-owned subsidiary, Southern Forest Products, LLC ("SFP"), has a
$589,000 revolving line of credit with Bank of America, N.A. The line of credit
expires in March 2001, and amounts advanced under the line bear interest at
prime plus .5% (approximately 10% at September 30, 2000), are collateralized by
substantially all of the assets of SFP and are guaranteed by a related party.
Availability under the line as of September 30, 2000 amounted to approximately
$89,000.
15
<PAGE>
TTI and SFP, jointly and severally, also have a $3.5 million loan with Bank of
America, N.A. The term note requires interest payments monthly at prime plus
.5%, is collateralized by substantially all the assets of SFP and is guaranteed
by a related party. The note matures March 2001, at which time TTI intends to
renew the facility on a favorable amortization basis.
The Company believes that the funds available to it from operations and existing
capital resources will be adequate for its capital requirements for the next
twelve months.
Year 2000
The Company has experienced no significant disruptions related to the Year 2000
Issue subsequent to January 1, 2000. Costs incurred to replace and/or modify
software and hardware related to the Year 2000 issue were immaterial and charged
to expense as incurred.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
-----------------------------------------------------------
The Company's interest expense is affected by changes in prime and LIBOR rates
as a result of its various line of credit arrangements (see Item 7). If these
market rates increase by an average of 1% in fiscal 2001, the Company's interest
expense would increase by approximately $250,000 based on the outstanding line
of credit balances at September 30, 2000.
The Company does not own, nor does it have an interest in any other market risk
sensitive instruments. See Item 1 "Description of Business."
ITEM 8. Financial Statements.
---------------------
See Index to Consolidated Financial Statements included in Item 14.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
---------------------
None
16
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. Executive Compensation.
-----------------------
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
17
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
---------------------------------------------------------------
(a) 1. and 2. Financial Statements and Financial Statement Schedule.
1. The following consolidated financial statements of Polyphase Corporation
and subsidiaries, included in the annual report of the registrant to its
shareholders for the year ended September 30, 2000, are included in Item 8:
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets--September 30, 2000 and 1999 F-3
Consolidated Statements of Operations--Years ended September 30, 2000, 1999
and 1998 F-5
Consolidated Statements of Stockholders' Equity--Years ended September 30, 2000,
1999 and 1998 F-7
Consolidated Statements of Cash Flows--Years ended September 30, 2000, 1999
and 1998 F-8
Notes to Consolidated Financial Statements F-11
</TABLE>
2. The following consolidated financial statement schedule of Polyphase
Corporation and subsidiaries is included in item 14(a):
Schedule I -- Condensed Financial Information of Registrant F-41
All other schedules for which provision is made in the applicable rules and
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
3. Exhibits
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3 through
4.8 to the Company's registration statement on Form S-8 [No. 33-82008],
filed with the Commission on July 27, 1994 [the "1994 Form S-8"])
3.2 Bylaws of Polyphase Corporation, as amended April 26, 1999
(incorporated by reference from Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1999 [the "1999
Form 10-K"])
4.1 Certificate of Designation relating to the Series A-3 Preferred
Stock (incorporated by reference from Exhibit 4.2 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1995 [the
"1995 Form 10-K"])
18
<PAGE>
+10.1 Stock Option Agreement for James Rudis (incorporated by
reference from Exhibit 10.5 to the Company's Form 8-B, filed with the
Commission on August 27, 1994 [the "Form 8-B"])
+10.2 Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
+10.3 Employment Agreement, dated as of November 1, 1993, between
Harold Estes and Texas Timberjack, Inc. (incorporated by reference from
Exhibit 2 to the Company's Form 8-K dated June 24, 1994 [the "1994 Form
8-K"])
10.4 Pledge Agreement, dated as of June 24, 1994, between Polyphase
Corporation and Harold Estes (incorporated by reference from Exhibit
10.10 to the Form 8-B)
10.5 Security Agreement, dated as of June 24, 1994, between Texas
Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.11 to the Form 8-B)
10.6 Stock Option Agreement, dated as of October 21, 1992, between
Polyphase Corporation and the Pyrenees Group (incorporated by reference
from Exhibit 10.12 to the Form 8-B)
10.7 Promissory Note in the amount of $2,000,000, from Pyrenees Group,
as maker, to Polyphase Corporation, dated November 1, 1995, related to
the exercise of options on Series D Preferred Stock (incorporated by
reference from Exhibit 10.29 to the 1995 Form 10-K)
10.8 Security Agreement, dated as of November 1, 1995, between
Pyrenees Group and Polyphase Corporation (incorporated by reference
from Exhibit 10.30 to the 1995 Form 10-K)
10.9 Convertible Preferred Stock Purchase Agreement, dated as of
November 10, 1995, by and between Polyphase Corporation and Infinity
Investors, Limited (incorporated by reference from Exhibit 10.32 to the
1995 Form 10-K)
+10.10 Stock Option Agreement for James Rudis dated July 23, 1996
(incorporated by reference from Exhibit 10.51 to the Company's Annual
Report on form 10-K for the year ended September 30, 1996 [the "1996
Form 10-K"])
+10.11 Stock Option Agreement for William E. Shatley dated July 23, 1996
(incorporated by reference from Exhibit 10.52 to the 1996 Form 10-K)
+10.12 Stock Option Agreement for Michael F. Buck dated July 23, 1996
(incorporated by reference from Exhibit 10.53 to the 1996 Form 10-K)
+10.13 Stock Option Agreement for George R. Schrader dated July 23, 1996
(incorporated by reference from Exhibit 10.54 to the 1996 Form 10-K)
10.14 Term Loan Agreement in the amount of $22,500,000, dated
December 4, 1997, among Overhill Farms, Inc. as borrower, Polyphase
Corporation as guarantor and The Long Horizons, Fund, L.P. as lender
(incorporated by reference from Exhibit 10.64 to the Company's Annual
Report on form 10-K for the year ended September 30, 1997 [the "1997
Form 10-K"])
19
<PAGE>
10.15 Common Stock Purchase Warrant, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P. (incorporated by
reference from Exhibit 10.69 to the 1997 Form 10-K)
10.16 Voting Rights Agreement, dated December 4, 1997, among Polyphase
Corporation, The Long Horizons Fund, L.P. and Overhill Farms, Inc.
(incorporated by reference from Exhibit 10.70 to the 1997 Form 10-K)
10.17 Warrant to Purchase 500,000 Shares of Common Shares of Polyphase
Corporation by Black Sea Investments, Ltd., dated August 29, 1997
(incorporated by reference from Exhibit 10.76 to the 1997 Form 10-K)
10.18 Offshore Securities Subscription Agreement to purchase 7,500
Shares of Series F 6% Convertible Preferred between Polyphase
Corporation and Black Sea Investments, Ltd., dated August 29,1997
(incorporated by reference from Exhibit 10.77 to the 1997 Form 10-K)
10.19 Common Stock Purchase Warrant, dated April 24, 1998, covering
105,000 shares issued to Merrill Lynch World Income Fund,
Inc.(incorporated by reference from Exhibit 10.81 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1998 [the
"1998 Form 10-K])
10.20 Common Stock Purchase Warrant, dated April 24, 1998, covering
105,000 shares issued to Merrill Lynch Convertible Fund, Inc.
(incorporated by reference from Exhibit 10.82 to the 1998 Form 10-K)
10.21 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch Convertible Fund, Inc. (w-1)
(incorporated by reference from Exhibit 10.83 to the 1998 Form 10-K)
10.22 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch Convertible Fund, Inc. (w-1a)
(incorporated by reference from Exhibit 10.84 to the 1998 Form 10-K)
10.23 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch World Income Fund, Inc. (w-2)
(incorporated by reference from Exhibit 10.85 to the 1998 Form 10-K)
10.24 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch World Income Fund, Inc. (w-2a)
(incorporated by reference from Exhibit 10.86 to the 1998 Form 10-K)
10.25 Registration Rights Agreement, dated as of April 24, 1998, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Merrill Lynch Convertible Fund, Inc. (incorporated by reference from
Exhibit 10.87 to the 1998 Form 10-K)
10.26 Guaranty, dated August 7, 1998 by Polyphase Corporation to
NationsBank (incorporated by reference from Exhibit 10.88 to the 1998
Form 10-K)
20
<PAGE>
10.27 Loan Agreement in the amount of $12,000,000 dated August 7, 1998
between NationsBank, as lender and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.89 to the 1998 Form 10-K)
10.28 Promissory Note in the amount of $4,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.90 to the 1998 Form 10-K)
10.29 Promissory Note in the amount of $8,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.91 to the 1998 Form 10-K)
10.30 Security Agreement dated August 7, 1998 by Texas Timberjack to
NationsBank (incorporated by reference from Exhibit 10.92 to the 1998
Form 10-K)
+10.31 Stock Option Agreement for Michael F. Buck, dated March 17, 1998
(incorporated by reference from Exhibit 10.93 to the 1998 Form 10-K)
+10.32 Stock Option Agreement for George R. Schrader, dated March 17, 1998
(incorporated by reference from Exhibit 10.94 to the 1998 Form 10-K)
10.33 Stock Purchase Agreement, effective of September 30, 1999, by and among
Polyphase Corporation, Polyphase Instrument Acquisition Corporation and
Polyphase Instrument Co. (incorporated by reference from Exhibit 10.76
to the 1999 Form 10-K)
10.34 Promissory Note, dated September 30, 1999 in the principal amount of
$1,000,000, payable to the order of Polyphase Corporation, as payee by
Polyphase Instrument Acquisition Corporation, as maker (incorporated by
reference from Exhibit 10.77 to the 1999 Form 10-K)
10.35 Pledge Agreement, entered into on September 30, 1999, by and between
Polyphase Instrument Acquisition Corporation, as pledgor, and Polyphase
Corporation, as secured party (incorporated by reference from Exhibit
10.78 to the 1999 Form 10-K)
10.36 Guaranty, executed as of September 30, 1999, by Polyphase
Instrument Co., as guarantor, in favor of Polyphase Corporation, as
payee, on promissory note executed by Polyphase Instrument Acquisition
Corporation, as maker (incorporated by reference from Exhibit 10.79 to
the 1999 Form 10-K)
10.37 Security Agreement entered into effective September 30, 1999, by
and between Polyphase Instrument Co., as pledgor, and Polyphase
Corporation, as secured party (incorporated by reference from Exhibit
10.80 to the 1999 Form 10-K)
+10.38 Employment Agreement, entered into as of November 1, 1999
between Polyphase Corporation and Overhill Farms, Inc., jointly and
severally, and James Rudis (incorporated by reference from Exhibit
10.81 to the 1999 Form 10-K)
+10.39 Employment Agreement, entered into as of November 1, 1999
between Polyphase Corporation and Overhill Farms, Inc., jointly and
severally, and William E. Shatley (incorporated by reference from
Exhibit 10.82 to the 1999 Form 10-K)
21
<PAGE>
10.40 Settlement Agreement and Mutual Release of Claims, effective November
30, 1999, by and among Infinity Investors Limited, Polyphase
Corporation, James Rudis, William E. Shatley, Michael F. Buck, and
George R. Schrader (incorporated by reference from Exhibit 10.83 to
the 1999 Form 10-K)
10.41 Loan and Security Agreement, dated November 24, 1999, between
Overhill Farms, Inc., Overhill L.C. Ventures, Inc. and Union Bank of
California, N.A. (incorporated by reference from Exhibit 10.1 to the
Company's Form 10-Q for the period ended December 31, 1999 [the
December 1999 Form 10-Q"])
10.42 Revolving Note, dated November 24, 1999, in the principal amount of
$16,000,000, payable to the order of Union Bank of California, N.A.,
as payee, by Overhill Farms, Inc., as borrower (incorporated by
reference from Exhibit 10.2 to the December 1999 Form 10-Q)
10.43 Continuing Guaranty, dated November 24, 1999, by Overhill L.C.
Ventures, Inc. and Polyphase Corporation in favor of Union Bank of
California, N.A. (incorporated by reference from Exhibit 10.3 to the
December 1999 Form 10-Q)
10.44 Pledge Agreement, dated November 24, 1999, by Overhill Farms, Inc.,
Polyphase Corporation and Overhill L.C. Ventures, Inc. in favor of
Union Bank of California, N.A. (incorporated by reference from
Exhibit 10.4 to the December 1999 Form 10-Q)
10.45 Intercreditor and Subordination Agreement, entered into as of
November 24, 1999, by and between Levine Leichtman Capital Partners
II, L.P., as subordinated lender, and Union Bank of California, N.A.,
as senior lender (incorporated by reference from Exhibit 10.5 to the
December 1999 Form 10-Q)
10.46 Securities Purchase Agreement, dated as of November 24, 1999, by and
among Overhill Farms, Inc., as issuer, Polyphase Corporation and
Overhill L.C. Ventures, Inc., as guarantors, and Levine Leichtman
Capital Partners II, L.P., as purchaser (incorporated by reference
from Exhibit 10.6 to the December 1999 Form 10-Q)
10.47 Secured Senior Subordinated Note, dated November 24, 1999, in the
principal amount of $28,000,000, payable to the order of Levine
Leichtman Capital Partners II, L.P., as holder, by Overhill Farms,
Inc., as borrower (incorporated by reference from Exhibit 10.7 to the
December 1999 Form 10-Q)
10.48 Warrant to Purchase 166.04 Shares of Common Stock of Overhill Farms,
Inc., dated November 24, 1999, by Levine Leichtman Capital Partners
II, L.P. (incorporated by reference from Exhibit 10.8 to the December
1999 Form 10-Q)
10.49 Investor Rights Agreement, entered into as of November 24, 1999, by
and among Overhill Farms, Inc., Polyphase Corporation and Levine
Leichtman Capital Partners II, L. P. (incorporated by reference from
Exhibit 10.9 to the December 1999 Form 10-Q)
10.50** Asset Purchase Agreement, entered into as of August 7, 2000, by and
between Overhill Farms, Inc. and SSE Manufacturing, Inc.
22
<PAGE>
10.51** Master Co-Pack Agreement, entered into as of August 7, 2000, by and
between Schwan's Sales Enterprises, Inc. and Overhill Farms, Inc.
10.52** First Amendment to Loan and Security Agreement, entered into as of
August 23, 2000, by and between Overhill Farms, Inc., Overhill L.C.
Ventures, Inc. and Union Bank of California, N. A.
10.53** First Amendment to Intercreditor and Subordination Agreement, entered
into as of August 23, 2000, by and between Levine Leichtman Capital
Partners II, L.P. and Union Bank of California, N.A,
10.54** Term Note, dated August 23, 2000, in the principal amount of
$2,400,000, payable to the order of Union Bank of California, N.A.,
as payee, and Overhill Farms, Inc., as borrower
10.55** Consent and First Amendment to Securities Purchase Agreement, entered
into as of August 23, 2000, by and among Overhill Farms, Inc., Levine
Leichtman Capital Partners II, L.P., Polyphase Corporation and
Overhill L.C. Ventures, Inc.
10.56** Amendment to Investor Rights Agreement, entered into as of August 25,
2000, by and among Overhill Farms, Inc., Polyphase Corporation and
Levine Leichtman Capital Partners II, L.P.
21.1** Subsidiaries of the Registrant.
23.1** Consent of Independent Auditors
27.1** Financial Data Schedule
__________
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last quarter of
the fiscal year ended September 30, 2000.
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ James Rudis December 12, 2000
---------------
James Rudis
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ James Rudis December 12, 2000
----------------
James Rudis
Chief Executive Officer,
Chairman of the Board and
President (Principal Executive
Officer)
/s/ William E. Shatley December 12, 2000
-----------------------
William E. Shatley
Senior Vice President, Secretary,
Treasurer, Chief Financial Officer
and Director (Principal Financial
and Accounting Officer)
/s/ George R. Schrader December 12, 2000
-----------------------
George R. Schrader
Director
/s/ Michael F. Buck December 12, 2000
--------------------
Michael F. Buck
Director
24
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ........................................ F-2
Financial Statements:
--------------------
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-5
Consolidated Statements of Stockholders' Equity..................... F-7
Consolidated Statements of Cash Flows............................... F-8
Notes to Consolidated Financial Statements.......................... F-11
Financial Statement Schedule:
----------------------------
Schedule I - Condensed Financial Information of Registrant.......... F-41
F-1
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of
Polyphase Corporation
We have audited the accompanying consolidated balance sheets of Polyphase
Corporation and subsidiaries as of September 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2000. Our audits also
include the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Polyphase
Corporation and subsidiaries at September 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2000 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
ERNST & YOUNG LLP
December 11, 2000
Dallas, Texas
F-2
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets
September 30,
----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Current assets:
Cash $ 1,522,347 $ 375,408
Receivables, net of allowance for doubtful accounts of
$433,359 and $502,667 in 2000 and 1999, respectively:
Trade accounts 20,399,265 17,373,364
Current portion of sales contracts, net of deferred
income of $1,498,581 and $2,393,263 in 2000 and 1999,
respectively 4,145,318 4,765,072
Notes 3,642,112 3,359,777
Inventories 36,120,187 30,924,744
Prepaid expenses and other 3,062,932 1,663,269
------------ -----------
Total current assets 68,892,161 58,461,634
------------ -----------
Property and equipment:
Land 432,000 432,000
Buildings and improvements 3,792,009 3,481,009
Machinery, equipment and other 11,986,465 8,929,988
------------ -----------
16,210,474 12,842,997
Accumulated depreciation 8,281,568 7,114,989
------------ -----------
7,928,906 5,728,008
------------ -----------
Other assets:
Noncurrent receivables, net of allowance for
doubtful accounts of $1,200,000 and $1,305,220
in 2000 and 1999, respectively:
Sales contracts, net of deferred income of $710,297
and $781,724 in 2000 and 1999, respectively 2,094,718 2,114,591
Related parties 1,202,183 1,523,096
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $4,687,461
and $3,754,614 in 2000 and 1999, respectively 16,881,886 12,178,209
Other intangible assets, net 1,734,858 1,216,393
Restricted cash 633,124 625,623
Assets held for sale 1,926,264 -
Other 3,338,653 1,674,388
------------ -----------
27,811,686 19,332,300
------------ -----------
Total Assets $104,632,753 $83,521,942
============ ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-3
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
Current liabilities:
Notes payable $ 7,674,131 $ 4,403,264
Accounts payable 14,903,684 9,937,347
Accrued expenses and other 4,004,971 3,374,493
Current maturities of long-term debt 3,891,579 6,798,467
----------------- ------------------
Total current liabilities 30,474,365 24,513,571
Long-term debt, less current maturities 40,859,613 33,592,522
Notes payable and accrued interest to related party 20,746,384 17,914,842
Reserve for credit guarantees 633,124 625,623
----------------- ------------------
Total liabilities 92,713,486 76,646,558
Commitments and contingencies
Warrants to purchase common stock of subsidiary 2,806,175 1,425,378
Stockholders' equity:
Preferred stock, $.01 par value, authorized 50,000,000
shares, issued and outstanding, none and 56,440 shares
in 2000 and 1999, respectively - 564
Common stock, $.01 par value, authorized 100,000,000
shares, issued and outstanding, 17,812,464 shares 178,125 178,125
Paid-in capital 27,650,734 28,159,887
Accumulated deficit (18,715,767) (22,888,570)
----------------- ------------------
Total stockholders' equity 9,113,092 5,450,006
----------------- ------------------
Total Liabilities and Stockholders' Equity $104,632,753 $ 83,521,942
================= ==================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-4
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
---------------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net revenues $ 189,097,939 $ 158,308,110 $ 141,398,339
Cost of sales 153,990,653 129,840,884 116,076,348
----------------- ----------------- -----------------
Gross profit 35,107,286 28,467,226 25,321,991
Selling, general and administrative expenses 24,555,438 19,973,627 17,688,569
----------------- ----------------- -----------------
Operating income 10,551,848 8,493,599 7,633,422
Other income (expenses):
Interest expense (8,072,133) (9,485,892) (8,830,391)
Interest income and other 1,082,993 1,156,433 1,530,937
----------------- ----------------- -----------------
Total other expenses (6,989,140) (8,329,459) (7,299,454)
----------------- ----------------- -----------------
Income before income taxes, income
allocable to subsidiary warrant holder,
discontinued operations and
extraordinary item 3,562,708 164,140 333,968
Income tax (expense) benefit 1,985,244 (353,881) (56,575)
----------------- ----------------- -----------------
5,547,952 (189,741) 277,393
Income allocable to subsidiary warrant
holder 436,175 225,378 -
----------------- ----------------- -----------------
Net income (loss) before discontinued
operations and extraordinary item 5,111,777 (415,119) 277,393
Discontinued operations - (1,182,508) 9,955
Extraordinary item--early
extinguishment of debt (1,290,431) - (616,239)
----------------- ----------------- -----------------
Net income (loss) 3,821,346 (1,597,627) (328,891)
Gain (dividends) on reacquired
preferred stock 351,457 (91,199) (154,250)
----------------- ----------------- -----------------
Net income (loss) attributable to
common stockholders $ 4,172,803 $ (1,688,826) $ (483,141)
================= ================= =================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-5
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
For the Years Ended
September 30,
------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per share data - basic and diluted:
Net income (loss) per common share:
Net income (loss) before discontinued
operations and extraordinary item $ .30 $ (.03) $ .01
Discontinued operations - (.07) -
Extraordinary item (.07) - (.04)
------------------ ------------------ ------------------
Net income (loss) per common share $ .23 $ (.10) $ (.03)
================== ================== ==================
Weighted average shares outstanding - basic 17,812,464 16,947,195 14,552,462
================== ================== ==================
Weighted average shares outstanding - diluted 18,110,421 16,947,195 16,452,433
================== ================== ==================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-6
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, September 30, 1997 132,500 $1,325 13,664,109 $136,641
Conversion of preferred shares and
accrued dividends to common stock (17,500) (175) 1,205,941 12,059
Issuance of warrants
Exercise of stock purchase warrants 210,000 2,100
Stock issuance costs
Settlement of stock option cancellation
Dividends on preferred stock
Net loss (comprehensive loss)
---------- ---------- ---------- ----------
Balance, September 30, 1998 115,000 1,150 15,080,050 150,800
---------- ---------- ---------- ----------
Conversion of preferred shares and
accrued dividends to common stock (58,560) (586) 2,302,414 23,025
Exercise of stock options 430,000 4,300
Reduction of Pyrenees note upon
recovery of common stock
Dividends on preferred stock
Net loss (comprehensive loss)
---------- ---------- ---------- ----------
Balance, September 30, 1999 56,440 564 17,812,464 178,125
---------- ---------- ---------- ----------
Reacquision of preferred stock (56,440) (564)
Stock option granted for services
Net income (comprehensive income)
---------- ---------- ---------- ----------
Balance, September 30, 2000 -- $ -- 17,812,464 $ 178,125
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Paid-in Accumulated Notes
Capital Deficit Receivable Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, September 30, 1997 $28,955,695 $(20,716,603) $(975,319) $7,401,739
Conversion of preferred shares and
accrued dividends to common stock 10,616 22,500
Issuance of warrants 175,000 175,000
Exercise of stock purchase warrants 2,100
Stock issuance costs (17,500) (17,500)
Settlement of stock option cancellation (500,000) (500,000)
Dividends on preferred stock (154,250) (154,250)
Net loss (comprehensive loss) (328,891) (328,891)
----------- ------------ --------- ----------
Balance, September 30, 1998 28,623,811 (21,199,744) (975,319) 6,600,698
----------- ------------ --------- ----------
Conversion of preferred shares and
accrued dividends to common stock 183,208 205,647
Exercise of stock options 109,437 113,737
Reduction of Pyrenees note upon
recovery of common stock (756,569) 975,319 218,750
Dividends on preferred stock (91,199) (91,199)
Net loss (comprehensive loss) (1,597,627) (1,597,627)
----------- ------------ --------- ----------
Balance, September 30, 1999 28,159,887 (22,888,570) -- 5,450,006
----------- ------------ --------- ----------
Reacquision of preferred stock (563,842) 351,457 (212,949)
Stock option granted for services 54,689 54,689
Net income (comprehensive income) 3,821,346 3,821,346
----------- ------------ --------- ----------
Balance, September 30, 2000 $27,650,734 $(18,715,767) $ -- $9,113,092
=========== ============ ========= ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-7
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
September 30,
-----------------------------------------------------------------
2000 1999 1998
----------------- ------------------ -------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net income (loss) $ 3,821,346 $(1,597,627) $ (328,891)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 3,275,817 4,559,507 4,192,271
Provision for doubtful accounts 302,719 176,793 535,489
Gain on sale of assets - - (987,857)
Recoveries on related party
receivable (656,250) -
Stock options granted for services 54,689 - -
Deferred income taxes (2,074,000) - -
Income allocable to subsidiary warrant
holder 436,175 225,378 -
Loss (income) from discontinued
operations - 1,182,508 (9,955)
Extraordinary item 1,290,431 - 616,239
Changes in:
Accounts and sales contracts receivable (2,488,993) (5,901,611) (143,202)
Inventories (5,595,443) 1,433,645 (11,737,432)
Prepaid expenses and other (989,928) (1,197,500) 223,504
Accounts payable 4,966,337 3,998,249 (1,388,710)
Accrued expenses and other 775,481 329,190 593,440
----------------- ------------------ -------------------
Net cash provided by (used in)
operating activities 3,774,631 2,552,282 (8,435,104)
----------------- ------------------ -------------------
Cash flows provided by (used in) investing
activities:
Capital expenditures, net (1,317,882) (1,299,306) (1,315,403)
Acquisition of Chicago Brothers (4,221,551) - -
Notes and other receivables (282,335) (1,622,461) (1,131,537)
Receivables from related parties 120,913 (852,441) 13,654
Cash from sale of subsidiary - 1,780,000 -
----------------- ------------------ -------------------
Net cash used in investing
activities $(5,700,855) $(1,994,208) $ (2,433,286)
----------------- ------------------ -------------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-8
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
For the Years Ended
September 30,
-----------------------------------------------------------------
2000 1999 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
Cash flows provided by (used in) financing
activities:
Net borrowings (principal payments) on
line of credit arrangements $ 2,659,331 $ 1,404,600 $ 3,041,139
Borrowings on other notes payable
and long-term debt 30,682,504 1,607,437 31,293,906
Principal payments on long term debt (1,510,765) (3,533,333) (6,282,280)
Repayment of subordinated debt (22,675,000) - (13,000,000)
Redemption of Overhill warrants (3,700,000) - (2,000,000)
Deferred financing costs (1,932,907) - (2,718,015)
Repurchase of preferred stock (450,000) - -
Exercise of common stock options
and warrants - 28,436 2,100
Dividends on preferred stock - (91,199) (154,250)
Common stock issuance costs - - (17,500)
------------------ ----------------- ------------------
Net cash provided by (used in)
financing activities 3,073,163 (584,059) 10,165,100
------------------ ----------------- ------------------
Net increase (decrease) in cash 1,146,939 (25,985) (703,290)
Cash at beginning of year 375,408 401,393 1,104,683
------------------ ----------------- ------------------
Cash at end of year $ 1,522,347 $ 375,408 $ 401,393
================== ================= ==================
Supplemental schedule of cash flow
information:
Cash paid during the year for:
Interest $ 5,762,406 $ 4,895,427 $ 5,391,913
================== ================= ==================
Income taxes $ 19,858 $ - $ -
================== ================= ==================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-9
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Supplemental schedule of non-cash investing and financing activities:
In connection with the Overhill Farms refinancing in November 1999, warrants to
purchase 17.5% of the common stock of Overhill at a nominal exercise price were
issued having an estimated fair market value of $2,370,000 (see Notes 8 and 10).
In connection with the Overhill Farms refinancing in November 1999, the Company
accrued a $500,000 liability related to a cash payment obligation of the Company
in the event Overhill does not repurchase the warrants to purchase 17.5% of
Overhill's common stock, which were issued in connection with the refinancing
(see Notes 8 and 10).
In connection with Overhill Farms' acquisition of Chicago Brothers during fiscal
2000, $900,000 of the purchase price was represented by a note to the seller
(see Note 8).
During the current fiscal year, the Company exchanged timber inventory valued at
$400,000 for stock of a company which was previously owned by a related party
(see Note 13).
During 1999, the Company recovered 2,000,000 shares of its common stock from a
former related party, of which 500,000 shares were used to satisfy a note
receivable and 1,500,000 shares were recorded as other income. As the Company
had previously assigned all of its rights to the 2,000,000 shares to another
related party in connection with a previous debt extension, interest expense of
$875,000 was recorded in connection with the recovery (see Notes 9, 10 and 13).
In December 1998, the Company settled certain obligations by granting options on
145,000 shares of common stock, exercisable 130,000 shares at $.01 per share and
15,000 shares at $.50 per share. The options were valued at $28,000 and charged
to expense in fiscal 1999.
The Company issued common shares valued at $205,647 in 1999 and $22,500 in 1998
in payment of accrued dividends on preferred stock.
In September 1998, the Company recorded a liability, together with a
corresponding charge to paid in capital, for $500,000 in connection with the
settlement of a lawsuit. In December 1998 and January 1999, the Company made
partial payments on the obligation, together with certain associated expenses,
by granting options on 300,000 shares of common stock, exercisable at $.01 per
share. The options were valued at of $85,000 and charged to expense in fiscal
1998.
In connection with the refinancing of certain indebtedness with Merrill Lynch in
December 1997, the Company issued warrants to purchase 210,000 shares of the
Company's common stock exercisable at $.01 per share and 210,000 shares
exercisable at $1.125 per share. Such warrants were valued at $175,000 and
charged to expense ratably over the remaining term of the associated loan.
In connection with the Overhill Farms refinancing in December 1997, warrants to
purchase 30% of the common stock of Overhill at a nominal exercise price were
issued having an estimated fair market value of $1,200,000 (see Notes 8 and 10).
The accompanying notes are an integral part
of these consolidated financial statements
F-10
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. COMPANY AND ORGANIZATIONAL MATTERS
Nature of Business
Polyphase Corporation (the "Company" or "Polyphase") is a diversified
holding company that, through its subsidiaries, currently operates in two
industry segments: the food segment and the forestry segment. The food
segment (the "Food Group"), which consists of the Company's Overhill Farms,
Inc. ("Overhill") subsidiary, produces high quality entrees, plated meals,
meal components, soups, sauces and poultry, meat and fish specialties.
Overhill is a wholly-owned subsidiary of the Company, subject to warrants
outstanding to purchase Overhill's common stock (see Note 10). The forestry
segment (the "Forestry Group"), which consists of the Company's wholly-owned
subsidiary Texas Timberjack, Inc. ("Timberjack" or "TTI") and TTI's
majority-owned subsidiaries Southern Forest Products LLC ("SFP") and Wood
Forest Products LLC ("WFP"), distributes, leases and provides financing for
industrial and commercial timber equipment and is also engaged in certain
related timber and sawmill operations. The Company's transformer segment
(the "Transformer Group") was discontinued in fiscal 1999, as a result of
the sale by the Company of its wholly-owned subsidiary, Polyphase Instrument
Co. ("PIC"), which manufactures and markets electronic transformers,
inductors and filters.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and its majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Fiscal Year
The Company and its subsidiaries' fiscal year, except for the Food Group,
ends on September 30. The Food Group utilizes a 52 - 53 week accounting
period which ends on the Sunday closest to September 30. In fiscal 2000, the
Food Group has a 53 week accounting period.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of receivables and demand
deposits. Demand deposits sometimes exceed the amount of insurance provided
by the Federal Deposit Insurance Corporation. The Company performs ongoing
credit evaluations of its customers' financial condition and generally
requires no collateral from its customers except as discussed below.
F-11
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TTI grants credit to customers, substantially all of whom are located in
East Texas or the western portion of Louisiana, which rely on the logging
industry for their ability to repay debt to TTI. Collateral is generally the
equipment sold for amounts due under installment sales contracts.
For the years ended September 30, 2000, 1999 and 1998, the Company had
write-offs, net of recoveries, to the allowance for doubtful accounts of
$377,247, $188,269 and $556,881, respectively.
Financial Instruments
The fair value of financial instruments is determined by reference to market
data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their
recorded values.
Inventories
Inventories of raw materials and finished goods for the food processing
operations are stated at the lower of cost or market as determined by the
first-in, first-out (FIFO) method and using the average cost method for raw
timber and finished wood products. Inventories of timber equipment are
valued at the lower of cost or market or, in the case of repossessed and
used equipment, net realizable value, based upon the specific identification
method.
Concentration of Sources of Labor
The Food Group's total hourly and salaried work force consists of
approximately 1050 employees. Approximately 67% of the Food Group's work
force is covered by collective bargaining agreements expiring in fiscal
years 2001 and 2002. The Company is in negotiations with representatives of
employees under collective bargaining agreements. These agreements expired
on November 30, 2000, and have been extended by mutual agreement as
negotiations continue.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
primarily using the straight-line method for financial reporting purposes
over the estimated useful lives of the assets. Useful lives generally range
from five to thirty years. Leasehold improvements are amortized over the
lesser of the term of the lease or the estimated useful life of the assets.
Repairs and maintenance costs are expensed, while additions and betterments
are capitalized. The cost and related accumulated depreciation of assets
sold or retired are eliminated from the accounts and any gains or losses are
reflected in earnings.
F-12
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired (goodwill) at the
date of acquisition is amortized on a straight line basis over 20 years. The
Company determines the period to be benefited by using qualitative measuring
factors such as competition, demand and obsolescence, as well as legal,
regulatory and contractual provisions. In addition, the Company evaluates
the existence of goodwill impairment on the basis of whether the goodwill is
fully recoverable from projected, undiscounted cash flows of the related
business unit.
Stock Options
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and
related Interpretations in accounting for its employee stock options. The
Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation," which provides for either recognition or disclosure of a
hypothetical charge for the fair value of stock options granted. The Company
has provided the required SFAS 123 disclosures in Note 10.
Revenue Recognition
The Company generally recognizes revenue when products are shipped or
services are performed and provides for estimated returns and allowances at
the time of sale. However, a portion of the business in the Company's
Forestry Group relates to the sale of equipment through sales/finance
contracts. Revenue is recognized on these accounts using the installment
method (see Note 3). Under the installment method, the Company records at
the point of sale both a sale and a cost of sale for the total cost of the
unit. Gross profit is initially recorded in a deferred profit account to be
recognized as proceeds are received. These deferred profits are recorded as
sales revenue as funds are received, based on the relative percentage of
transaction profit to the sales price. Interest on the contract is
recognized on a cash basis due to frequent late payments and periodic
repossessions.
Key sales and income information for the Forestry Group for fiscal 2000,
1999 and 1998 are:
<TABLE>
<S> <C> <C> <C>
2000 1999 1998
--------------- --------------- ---------------
Equipment sales total $25,758,730 $28,455,430 $35,459,912
Equipment sales financed 1,423,069 3,155,817 3,255,692
Income earned on installment basis 823,438 776,789 2,343,423
Interest income earned on installment notes 863,757 883,542 1,317,215
</TABLE>
F-13
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes
Deferred income taxes recorded using the liability method reflect the net
tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Income (Loss) Per Share
In fiscal 2000, 298,000 common stock equivalents included in the calculation
of diluted earnings per share were comprised of 29,000 equivalent shares
related to options to purchase common stock and 269,000 equivalent shares
related to preferred stock convertible into shares of common stock. Options
to purchase approximately 290,000 shares of common stock at a weighted
average exercise price of $2.00 per share and warrants to purchase 710,000
shares of common stock at a weighted average exercise price of $1.39 per
share were outstanding during the year ended September 30, 2000, and
excluded from the calculation of diluted earnings per share as the effect
would be antidilutive. Options to purchase approximately 1.2 million shares
of common stock at a weighted average exercise price of $0.99 per share,
warrants to purchase 710,000 shares of common stock at a weighted average
exercise price of $1.39 per share and 115,000 shares of preferred stock
convertible into shares of common stock at market prices were outstanding
during the year ended September 30,1999, and excluded from the calculation
of diluted earnings per share as the effect would be antidilutive. In 1998,
1,899,000 common stock equivalents included in the calculation of diluted
earnings per share were comprised of 32,000 related to options to purchase
shares of common stock, 90,000 related to warrants to purchase shares of
common stock and 1,777,000 related to preferred stock convertible into
shares of common stock.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), as amended, which is required to be adopted by the Company on October
1, 2000. SFAS No. 133 requires that all derivatives be recorded on the
balance sheet at fair value. Changes in derivatives that are not hedges are
adjusted to fair value through income. Changes in derivatives that meet the
Statement's hedge criteria will either be offset through income, or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The adoption of SFAS 133 on October 1, 2000 did not have any
impact on the Company's financial condition, results of operations or cash
flows.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-14
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. SALES CONTRACTS RECEIVABLE
The Company's Forestry Group provides financing to customers on certain
equipment sales using installment sales contracts. The following is a
summary of the components of the Company's net investment in these contracts
as of September 30, 2000 and 1999 and the related deferred income based on
the installment method of income recognition.
2000 1999
----------- -------------
Contracts outstanding $ 8,514,389 $10,194,090
Less deferred income (2,208,878) (3,174,987)
----------- -------------
6,305,511 7,019,103
Less allowance for doubtful accounts (65,475) (139,440)
----------- -------------
Net investment in sales contracts
receivable $ 6,240,036 $ 6,879,663
=========== =============
The following is a summary of the maturities of the sales contracts
receivable and related deferred income:
<TABLE>
Contracts Deferred
Due September 30, Outstanding Income Net
---------------- ------------- ----------- -------------
<S> <C> <C> <C>
2001 $5,678,074 $1,498,581 $4,179,493
2002 2,349,028 588,266 1,760,762
2003 410,633 102,835 307,798
2004 76,654 19,196 57,458
------------- ----------- -------------
$8,514,389 $2,208,878 $6,305,511
============= =========== =============
</TABLE>
4. NOTES RECEIVABLE
The Forestry Group periodically makes advances under promissory notes to
certain unrelated individuals and corporations. These notes have interest
rates that range from 10% to 18%, are generally due within one year and a
majority are secured by a variety of marketable collateral. Interest is
accrued on notes receivable as long as the Company believes such amounts are
collectible. The accrued interest is added to the note and is shown as part
of that balance in the accompanying statements. Allowances are established
periodically if, at the date of valuation, management feels it is probable
that a loss exists on a note. The allowance is established based upon
payment history, evaluation of the portfolio and the related expected credit
risk.
The Company had $3,642,112 and $3,359,777 of short-term notes receivable as
of September 30, 2000 and 1999, respectively, from unrelated corporations
and individuals, net of allowances of $243,184 and $173,184, respectively.
The loans are secured primarily by land, timber and equipment. At September
30, 2000, approximately $655,000 of such notes receivable were no longer
accruing interest. All notes receivable are due in less than one year.
F-15
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. INVENTORIES
Inventories are summarized as follows:
September 30,
---------------------------
2000 1999
----------- -----------
Finished goods $26,179,043 $22,409,448
Raw materials 10,091,144 8,565,296
Inventory reserve (150,000) (50,000)
----------- -----------
Total $36,120,187 $30,924,744
=========== ===========
As of September 30, 2000 and 1999, finished goods inventories are comprised
of approximately $9,655,000 and $7,804,000 in inventories at the Food Group,
$15,690,000 and $13,603,000 in timber and logging related equipment, and
$834,000 and $1,003,000 in finished wood products, respectively. As of
September 30, 2000 and 1999, raw materials inventories are comprised of
approximately $9,289,000 and $5,872,000 in inventories at the Food Group,
and $802,000 and $2,693,000 in both unharvested and harvested but
unprocessed timber, respectively.
6. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
September 30,
---------------------------
2000 1999
----------- -----------
Non-compete agreements (a) $ 700,000 $ 700,000
Deferred financing costs (b) 1,932,907 2,608,733
Consulting contract (c) 200,000 200,000
Other - 22,800
----------- -----------
2,832,907 3,531,533
Less accumulated amortization (1,098,049) (2,315,140)
----------- -----------
$ 1,734,858 $ 1,216,393
=========== ===========
(a) The Company has noncompete agreements with two officers of Texas
Timberjack, Inc. Such amounts are being amortized over the seven-year
life of each agreement.
(b) The Company incurred certain legal, brokerage and other costs
associated with the financing of the initial acquisition of Overhill
Farms and the subsequent refinancings of debt in December 1997 and
November 1999. These costs are being amortized over periods of three to
five years. (see Note 8 regarding the write-off of certain costs
associated with the initial acquisition financing and the December 1997
and November 1999 refinancings).
F-16
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) The Company granted a former executive options to purchase 35,000
shares of common stock at $.01 per share. The options were granted in
consideration of a five year consulting contract and were valued at
$200,000 based on the fair market value at the date of grant. The
contract is being amortized over the five-year period.
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
September 30,
------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Note payable to Bank of America (a) $2,508,556 $3,900,000
Note payable to Bank of America (b) 3,500,000 -
Note payable to Bank of America (c) 500,000 -
Note payable to Associates First Capital Corporation (d) 991,204 -
Note payable to Ford Motor Credit Corporation (e) 174,371 228,616
Other notes payable - 274,648
---------------- ----------------
$7,674,131 $4,403,264
================ ================
</TABLE>
(a) TTI has an $8.0 million revolving line of credit with Bank of America,
N.A. (formerly NationsBank of Texas, N.A.). Amounts advanced under the
line of credit bear interest at prime less .25% (approximately 9.25% at
September 30, 2000), and are collateralized by substantially all of
TTI's assets. The line of credit agreement contains various covenants
related to receivables, capital expenditures, inventories, debt ratios,
contingent liabilities and payment of dividends. Furthermore, the terms
of the revolving line of credit generally prohibit dividends, loans or
advances from TTI to the Company, but permit the payment of taxes. The
Company has guaranteed all obligations under the TTI revolving line of
credit. Availability under the line as of September 30, 2000 amounted
to approximately $5.5 million. TTI intends to renew the revolving
credit facility upon maturity in March 2001.
(b) TTI and SFP, jointly and severally, have a note payable to Bank of
America, which is guaranteed by a related party. The note requires
monthly interest payments at prime plus .5% (approximately 10% at
September 30, 2000), is collateralized by substantially all the assets
of SFP and matures in March 2001 (see Note 13).
(c) SFP has a note payable to Bank of America, pursuant to a $589,000 line
of credit facility that expires in March 2001. Amounts advanced under
the line bear interest at prime plus .5% (approximately 10% at
September 30, 2000) payable monthly, are collateralized by the assets
of SFP and are guaranteed by TTI and a related party (see Note 13).
F-17
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) TTI has a floor plan agreement with Associates First Capital
Corporation to finance equipment. The agreement provides that interest
accrues on an individual unit basis with an average interest rate of
prime (approximately 9.5% at September 30, 2000), and the equipment may
be financed for up to one year.
(e) TTI has a floor plan note with Ford Motor Credit Corporation. The floor
plan note accrues no interest provided the equipment financed under the
note is sold within a predetermined period, typically nine to twelve
months from the time TTI takes delivery of the equipment.
The weighted average interest rate on short-term borrowings for the year
ended September 30, 2000 was 8.78%.
F-18
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
---------------------------------------
2000 1999
------------------ ----------------
<S> <C> <C>
Revolving credit agreement of Overhill with Union Bank of
California, N.A. ("Union Bank"), bearing interest at prime
plus .25% or LIBOR plus 2.75% (approximately 9.5% at
September 30, 2000), guaranteed by the Company and
collateralized by certain assets of Overhill and the
Overhill common stock owned by the Company. $14,493,967 $ --
Secured senior subordinated note of Overhill payable to
Levine Leichtman Capital Partners II, L.P. ("LLCP"), net
of discount of $2,391,667, bearing interest payable
monthly at 12% until maturity in October 2004, guaranteed
by the Company and collateralized by certain assets of
Overhill. 25,608,333 --
Term loan payable to Union Bank, bearing interest at prime
plus 1% (approximately 10.5% at September 30, 2000),
payable in monthly installments of $50,000 plus interest
until November 24, 2002, at which time the remaining
principal balance of $1,050,000 plus interest is due and
payable, guaranteed by the Company and collateralized by
certain assets of Overhill. 2,350,000 --
Unsecured promissory note of Overhill, bearing interest at
9% payable quarterly through June 2001 and thereafter in
quarterly installments of $150,000 plus interest through
maturity in December 2002. This note was issued in
connection with the Chicago Brothers purchase and is
subordinated to all indebtedness to Union Bank and to
LLCP described above. 900,000 --
Senior subordinated notes payable of Overhill due to a
financial institution, net of discount of $466,667,
bearing interest at prime plus 4.0%, (12.25% at September
30, 1999) or 12.5%, whichever is greater. The note was
repaid in November 1999. -- 22,708,333
</TABLE>
F-19
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<S> <C> <C>
Revolving credit agreement of Overhill with a financial
institution, bearing interest at the Citibank base rate
plus 1.5% and collateralized by accounts receivable and
inventories. The agreement terminated upon repayment in
November 1999. -- 9,647,005
Revolving credit agreements of TTI subsidiaries with a
financial institution, bearing interest at prime (8.25% at
September 30, 1999) and collateralized by accounts
receivable, inventory and fixed assets of subsidiaries.
This facility expired in April 2000 and was replaced by -- 5,458,498
Notes Payable as described in Note 7.
Term loan of TTI in the amount of $4,000,000 payable to a
financial institution, bearing interest at 8.3%, due in
monthly installments of $111,111 plus accrued interest,
with maturity in August 2001. 1,111,111 2,555,556
Other 287,781 21,597
------------------ ----------------
44,751,192 40,390,989
Less current maturities (3,891,579) (6,798,467)
------------------ ----------------
Total long-term debt $40,859,613 $33,592,522
================== ================
</TABLE>
Scheduled maturities of long-term debt are summarized as follows:
2001 $ 3,891,579
2002 1,247,101
2003 15,841,068
2004 47,101
2005 26,116,010
-----------
Total 47,142,859
Less: unamortized debt discount (2,391,667)
-----------
$44,751,192
===========
In November 1999, Overhill refinanced substantially all of its existing
debt. The total facility amounted to $44 million, consisting of a $16
million line of credit provided by Union Bank together with $28 million in
the form of a five-year term loan provided by LLCP.
F-20
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The line of credit with Union Bank expires in November 2002 and provides for
borrowings limited to the lesser of $16.0 million or an amount determined by
a defined borrowing base consisting of eligible Overhill receivables and
inventories ($22.3 million at September 30, 2000). Borrowings under the line
of credit bear interest at a rate, as selected by Overhill at the time of
borrowing, of prime plus .25% or LIBOR plus 2.75%. The Union Bank agreement
provides, among other things, that Overhill will be subject to an unused
line of credit fee of .25% per annum. The agreement contains various
covenants including restrictions on capital expenditures, specified net
worth levels and debt service ratios. In addition, the terms of the
agreement generally prohibit loans, dividends or advances from Overhill to
the Company and limit payments of taxes and other expenses to Polyphase to
specified levels.
The term loan with LLCP provides for principal payments in an amount equal
to 50% of the excess cash flow, as defined, for Overhill's previous fiscal
year, payable annually commencing in January 2001. The amount of such
principal payment, based on excess cash flows, as defined, for the year
ended September 30, 2000 is approximately $2.0 million. Such amount has been
included in current maturities on the September 30, 2000 balance sheet.
Voluntary principal payments are also permitted after October 31, 2001,
subject to certain prepayment penalties. Any unpaid balance will be payable
at maturity in October 2004. The agreement contains various covenants
including restrictions on capital expenditures, minimum EBITDA and net worth
levels, and specified debt service and debt to equity ratios. In addition,
the terms of the agreement restrict changes in control, generally prohibit
loans, dividends, or advances by Overhill to the Company and limit payments
of taxes and other expenses to Polyphase to specified levels. The agreement
also requires Overhill to pay to LLCP, during each January, annual
consulting fees of $180,000.
In connection with the agreement, LLCP was granted stock warrants to
purchase 17.5% of the common stock of Overhill, exercisable immediately at a
nominal exercise price. During the first two years following the date of the
agreement, Overhill has the right to repurchase 5% of Overhill's shares from
LLCP for $3 million and/or to repurchase all 17.5% of the Overhill shares
subject to the LLCP warrant within five days of the term loan being repaid
at their then determined fair market value. If such shares are not
repurchased, LLCP will be entitled under the agreement to receive a cash
payment of $500,000 from Overhill. This amount is being charged to expense
over the term of the facility. At the date of issuance, the warrants granted
to LLCP were estimated to have a fair value of $2.37 million.
As a result of these transactions, Overhill repaid in full the $22.7 million
senior subordinated notes payable and the $9.6 million revolving line of
credit, which were outstanding at September 30, 1999. Additionally, Overhill
repurchased for $3.7 million the warrants held by the previous subordinated
lender to purchase 30% of Overhill's common stock. Also in connection with
the refinancing, Overhill was permitted to make a one-time advance of $1.25
million to Polyphase for working capital and other specified purposes.
Overhill incurred costs and expenses in connection with the refinancing
totaling approximately $1.9 million, substantially all of which was paid to
the lenders. The early extinguishment of the previous indebtedness resulted
in an extraordinary loss of approximately $1.3 million (net of a $500,000
F-21
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
refund for early payment of the senior subordinated notes) during the year
ended September 30, 2000. A similar extraordinary charge of approximately
$600,000 was incurred as a result of a previous refinancing during the year
ended September 30, 1998.
9. NOTES PAYABLE AND ACCRUED INTEREST TO RELATED PARTY
In connection with the acquisition of TTI in June 1994, the Company
initially issued a note to the seller (Mr. Harold Estes) in the amount of
$10.0 million, with interest at 8% due October 31, 1994 and collateralized
by all the capital stock and certain assets of TTI. As of various maturity
dates thereafter, Mr. Estes has entered into subsequent agreements with the
Company to modify and extend the term of the note. As of September 30, 2000,
the note had a total unpaid balance of $19,390,120 (principal of $16,347,191
and accrued interest of $3,042,900), bearing interest at 9% per annum with a
maturity date of October 10, 2002, and allowing for principal and interest
payments to be made with amounts upstreamed to Polyphase by Timberjack for
the payment of taxes (subject to the approval of Timberjack's Board of
Directors and its lenders). In connection with a previous modification in
1998, the Company agreed to assign Mr. Estes any interest it may have or
subsequently obtain with respect to 2,000,000 shares of the Company's common
stock owned by the Pyrenees Group ("Pyrenees"), a private investment firm
controlled by Paul A. Tanner, the Company's former Chairman and Chief
Executive Officer, and previously held by Mr. Estes as secondary collateral.
These shares, which were recovered in 1999 on behalf of Mr. Estes, had a
value of $875,000, which was charged to interest expense in 1999 (see Notes
10 and 13).
As discussed in Note 16, Quantum Fuel and Refining, Inc. ("Quantum"), when
acquired by SFP, had a note payable to Mr. Estes. As of September 30, 2000,
the note had a total unpaid balance of $1,356,264 (principal of $1,000,000
and accrued interest of $356,264), bearing interest at 12% per annum with a
maturity date of March 31, 2002, and collateralized by the assets of
Quantum.
10. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has 50,000,000 authorized shares of $.01 par value preferred
stock, with the rights and preferences as designated by the Board of
Directors. The Board has designated a total of ten series of preferred stock
with various conversion prices, dividend rates and voting rights. All shares
of preferred stock generally have a redemption value and liquidation
preference of $10 per share and are callable by the Company at 105% of
redemption value.
During prior fiscal years, the holder of a series of preferred stock,
Infinity Investors Limited ("Infinity"), converted a total of 68,560 shares
of such stock having a redemption value of $685,600, together with accrued
dividends of $228,147, into a total of 2,500,000 shares of the
F-22
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Company's common stock. Any additional conversions would have required that
the Company file an application with the American Stock Exchange ("AMEX")
for the listing of such additional common shares prior to issuance. The AMEX
Company Guide requires stockholder approval as a prerequisite to the filing
of such additional listing application. At the Company's Annual Meeting held
May 27, 1999, a majority of the Company's stockholders voted against a
proposal to file an additional listing application with respect to the
conversion of additional preferred shares to common shares by Infinity. The
Company's inability to honor conversion requests resulted in litigation by
Infinity against the Company. During November 1999, the Company and Infinity
entered into a settlement agreement wherein, among other things, the Company
agreed to repurchase all remaining preferred stock owned by Infinity,
including all accrued but unpaid dividends, for $450,000 cash, and Infinity
agreed to the dismissal of all litigation against the Company with respect
to matters related to the ownership of the preferred stock. As a result of
the settlement, the Company realized a gain of approximately $351,000,
related to the difference between the carrying value of the preferred shares
plus accrued dividends and the settlement amount. Such amount was accounted
for by recording a reduction of the Company's accumulated deficit during the
year ended September 30, 2000.
During August 1997, the Company sold 7,500 shares of a newly designated
series of preferred stock for $750,000, less expenses. The designations for
this series of preferred stock provided for a redemption value of $100 per
share, cumulative annual dividends of 6%, payable quarterly, and for a
conversion price equal to 75% of the average closing price of the Company's
common stock for the five trading days immediately preceding conversion. In
connection with this transaction, the Company recorded a non-cash dividend
of $250,000, representing the value assigned to the discount feature related
to the conversion of the preferred stock. During the year ended September
30, 1998, the holder converted all 7,500 shares of the preferred stock into
a total of 1,008,355 shares of the Company's common stock.
Stock Options
Under the terms of the 1994 Employee Stock Option Plan (as amended) adopted
by the Board of Directors in March 1994, the Company has reserved a total of
1,750,000 shares of its common stock for issuance to eligible employees of,
and consultants to, the Company. The Plan provides for the grant of both
incentive stock options (at exercise prices no less than fair value at the
date of grant) and non-qualified stock options (at exercise prices as
determined by the Compensation Committee of the Board of Directors), that
such options may be exercisable as determined by such Committee and that the
Plan will expire ten years following its adoption. As of September 30, 2000,
options for 775,000 shares were available for future grant under the Plan.
In January 1997, an unrelated third party was granted an option to purchase
200,000 shares of the Company's common stock, exercisable at $.01 per share,
in exchange for a two-year consulting agreement. The contract was valued at
$973,000 based upon the trading value of the Company's common stock at the
date of grant. The option holder ceased performing services for the Company
during the year ended September 30, 1997; accordingly, the Company
F-23
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
recognized the entire amount associated with the consulting contract as an
expense during fiscal 1997. During fiscal 1998, the Company canceled these
options and refused to allow the holder to exercise them. This matter became
the subject of litigation, which resulted in a judgment of $500,000 against
the Company, which was recorded as a liability as of September 30, 1998,
with a corresponding charge to paid-in capital. Subsequently, the Company
and the unrelated third party entered into a settlement agreement whereby
the Company agreed to pay the judgment amount over a period of eighteen
months beginning in October 1998, with a balloon payment at the end of that
period. As consideration for this forbearance and for partial payment
against the judgment, together with certain costs associated therewith, the
Company issued the unrelated third party a total of 300,000 shares of its
common stock valued at $85,000. All payments due under this agreement were
completed during the year ended September 30, 2000.
A summary of changes in common stock options during the three years ended
September 30, 2000, is as follows:
<TABLE>
<CAPTION>
Number of Exercise Weighted Avg.
Shares Price Exercise Price
------------------- -------------------- -----------------------
<S> <C> <C> <C>
Outstanding, September 30, 1997 1,023,000 $ .01 - 5.25 $ 1.41
Granted 80,000 $ .75 $ .75
Canceled (375,000) $ .01 - 2.00 $ .94
------------------- -------------------- -----------------------
Outstanding, September 30, 1998 728,000 $ .75 - 5.25 $ 1.58
Granted 445,000 $ .01 - .50 $ .03
Exercised (430,000) $ .01 $ .01
Canceled (65,000) $ 2.00 - 5.25 $ 4.50
------------------- -------------------- -----------------------
Outstanding, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
Granted 125,000 $ .4375 $.4375
------------------- -------------------- -----------------------
Outstanding, September 30, 2000 803,000 $.4375 - 2.00 $ 1.15
=================== ==================== =======================
Exercisable, September 30, 2000 803,000 $.4375 - 2.00 $ 1.15
Exercisable, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
Exercisable, September 30, 1998 728,000 $ .75 - 5.25 $ 1.58
</TABLE>
F-24
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Summarized information about stock options outstanding at September 30,
2000, all of which are exercisable, is as follows:
<TABLE>
<CAPTION>
Options Outstanding/ Weighted Average
Exercise Exercisable at Remaining
Price September 30, 2000 Contractual Life
--------------------- ------------------------- ------------------------
<S> <C> <C>
$.4375 125,000 Shares 1.38 Years
$ .50 150,000 Shares 0.08 Years
$ .75 373,000 Shares 3.82 Years
$ 2.00 290,000 Shares 5.75 Years
</TABLE>
Proforma information regarding net income (loss) is required by SFAS 123,
and has been determined as if the Company had accounted for its employee
stock options under the fair value method specified by SFAS 123. The fair
value of options granted during the years ended September 30, 2000 was
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for grants for the years
ending September 30, 2000, 1999 and 1998, respectively: risk free interest
rate of 5.99%, 4.86% and 5.52%; no dividends expected to be declared;
volatility factor of 0.82, 0.92, and 1.15; and a weighted average expected
life of eighteen months, five years and six months. The effect of applying
the fair value method under SFAS 123 to the Company's stock-based awards
would result in a net income or loss during the years ended September 30,
2000, 1999 and 1998 that is not materially different from amounts reported
and would have no effect on reported per share amounts.
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance of
options to purchase five series of convertible preferred stock to the
Pyrenees Group, a private investment firm controlled by Paul A. Tanner, the
Company's former Chairman and Chief Executive Officer, or its assignees.
In November 1995, Pyrenees exercised certain of these options through the
issuance of a 7% recourse note in the amount of $2,000,000, collateralized
by the shares issued, which was treated as an in-substance stock option at
the date of grant. During fiscal 1996, these shares were converted to
500,000 shares of common stock. After deducting principal payments on the
note, the remaining balance of $975,000 became uncollectible, and during
fiscal 1999, the 500,000 shares of common stock that secured this note were
recovered pursuant to certain litigation against Pyrenees and Mr. Tanner.
This recovery was accounted for as an unexercised stock option in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." As such, $756,000, representing the difference between
the note
F-25
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
balance and the fair market value of the 500,000 shares as of the recovery
date was recorded as a reduction in paid-in capital during fiscal 1999.
Warrants
Polyphase Warrants
------------------
In connection with the issuance of a series of preferred stock in 1997, the
Company issued warrants to purchase 500,000 shares of its common stock at
$1.50 per share, exercisable through September 2002. The warrants were
valued at $150,000 which was charged to operations in fiscal 1998.
In connection with the restructuring of certain indebtedness in 1997, the
Company issued warrants to purchase 420,000 shares of the Company's common
stock. The warrants covered 210,000 shares exercisable at $.01 per share,
which were exercised in May 1998, and an additional 210,000 shares
exercisable at $1.125 per share, exercisable through April 24, 2003. These
warrants were valued at $175,000, which was amortized over the remaining
term of the associated loan. Subsequent to September 30, 2000, the Company
repurchased the unexercised warrants covering 210,000 shares exercisable at
$1.125 per share for total consideration of approximately $46,000.
Subsidiary Warrants
-------------------
In connection with the financing provided by LLCP in November 1999 (see Note
8), the Company granted stock purchase warrants that entitle LLCP to
immediately acquire 17.5% of the common stock of Overhill, at a nominal
exercise price. Such warrants were valued at $2.37 million, which has been
recorded as a debt discount and is being amortized over the term of the LLCP
loan. During the first two years following the date of the agreement,
Overhill has the right to repurchase 5% of Overhill's shares from LLCP for
$3 million and/or to repurchase all 17.5% of the Overhill shares subject to
the LLCP warrant within five days of the loan being repaid at their then
determined fair market value. If such shares are not repurchased, LLCP will
be entitled under the agreement to receive a cash payment of $500,000 from
Overhill. As these warrants to purchase common stock of a subsidiary have a
nominal exercise price, the Company is accounting for the warrants as a
minority interest. Accordingly, for the fiscal year ended September 30,
2000, the Company recorded income allocable to subsidiary warrant holder of
approximately $436,000.
In connection with Overhill's December 1997 refinancing (see Note 8), the
Company granted stock purchase warrants that entitled the holder to
immediately acquire at $.01 per share, 30% of the common stock of Overhill.
Such warrants were valued at $1,200,000, which was recorded as debt discount
and which was being amortized during the period such loan was outstanding.
The agreement provided that warrants for the purchase of 25% of Overhill
could be repurchased by the Company for $2,000,000 during the two-year
period following the date of the agreement. In June 1998, in connection with
amending certain covenants and
F-26
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
restrictions, the percentage of Overhill that the Company could repurchase
for $2,000,000 was reduced to 20% from 25%. As these warrants to purchase
common stock of a subsidiary had a nominal exercise price, the Company
accounted for the warrants as a minority interest. Accordingly, for the
fiscal year ended September 30, 1999, the Company recorded income allocable
to subsidiary warrant holder of approximately $225,000. In connection with
the November 1999 refinancing discussed above, Overhill repurchased all
warrants held by the previous subordinated lender for total consideration of
$3.7 million. This transaction was treated as a reacquisition of a minority
interest, resulting in approximately $2.2 million of goodwill being recorded
in connection with this repurchase transaction.
Also in connection with the refinancing in December 1997, an unrelated
consultant was issued a warrant to purchase 1% of Overhill's common stock at
a purchase price of $50,000. The warrant was exercised subsequent to year
end.
11. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
For the Years Ended
September 30,
---------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ 48,295 $300,000 $ -
State 40,461 53,881 56,575
Deferred:
Federal (2,074,000) - -
State - - -
---------------- ---------------- ----------------
Total income taxes $(1,985,244) $353,881 $56,575
================ ================ ================
</TABLE>
F-27
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The effective tax rate on income (loss) before income taxes was different
than the federal statutory tax rate. The following summary reconciles the
federal statutory tax rate with the actual effective rate:
<TABLE>
<CAPTION>
For the Years Ended
September 30,
-----------------------------------------------------
2000 1999 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Effective statutory tax expense rate 34.0% 34.0% 34.0%
Increase (decrease) in effective tax rate
resulting from:
Federal tax assessment - 182.8 -
State taxes, net of federal tax benefit 1.3 32.8 16.9
Officer life insurance premiums,
amortization of goodwill, income allocable
to subsidiary warrant holder 13.7 (9.1) 81.0
Change in valuation allowance (156.6) (26.1) (87.8)
Sale of subsidiaries - - (9.7)
Other - (4.9) 5.7
Tax credits - 6.1 (23.2)
-------------- -------------- ---------------
Effective tax expense (benefit) rate (107.6)% 215.6% 16.9%
============== ============== ===============
</TABLE>
F-28
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of deferred tax balances are summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 697,399 $ 683,249
Inventory 231,831 158,628
Accrued expenses 511,156 399,360
Capital loss carryforwards 390,730 394,388
Net operating loss carryforwards 3,150,204 4,434,471
AMT and other credit carryforwards 465,072 416,777
Investment in partnerships 204,766 -
Fixed assets 264,220 341,190
----------------- -----------------
Total deferred tax assets 5,915,378 6,828,063
Valuation allowance (2,805,409) (5,694,986)
----------------- -----------------
Deferred tax assets 3,109,969 1,133,077
----------------- -----------------
Deferred tax liabilities:
Prepaid expenses (273,490) (124,528)
Intangibles (547,916) (682,934)
Investment in partnerships - (88,338)
Other (214,563) (237,277)
Deferred tax liabilities (1,035,969) (1,133,077)
----------------- -----------------
Net deferred tax assets $ 2,074,000 $ -
================= =================
</TABLE>
At September 30, 2000, the Company has federal net operating losses
available for carryforward of approximately $8.4 million which will expire
in 2020. The Company has recorded a valuation allowance against a portion of
its net deferred tax assets as of September 30, 2000 and 1999, due to
uncertainty with respect to the future recoverability of all such amounts.
During 1999, the federal income tax returns of TTI for the year ended March
31, 1994 and for the stub period ended June 24, 1994 were audited by the
Internal Revenue Service ("IRS"). Both of these tax periods were prior to
the acquisition of TTI by Polyphase. In connection with these audits, the
IRS assessed TTI with additional taxes of approximately $752,000 for the
year ended March 31, 1994. The Company and TTI appealed the IRS decision,
and in anticipation of further contesting the matter in District Court, TTI
made a cash payment to the IRS of $1,185,000, representing the above tax
assessment plus penalties and interest of $433,000. Such appeal was denied
by the IRS, and TTI is currently planning to seek recovery through
F-29
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
District Court proceedings. Based upon the amounts expected to be recovered
through protective refund claims filed with the IRS for the tax periods
ending March 31, 1992 and June 24, 1994, as well as TTI's evaluation (based
on the advice of counsel) of its remedies through litigation, TTI expensed
$300,000 during the fiscal year ended September 30, 1999, representing
amounts considered not recoverable.
12. COMMITMENTS AND CONTINGENCIES
Commitments
Future minimum lease payments for all operating leases at September 30, 2000
are as follows:
2001 $2,206,139
2002 1,247,421
2003 535,181
2004 21,626
2005 --
----------
$4,010,367
==========
Certain of the leases provide for renewal options for periods from 2001 to
2005 at substantially the same terms as the current leases.
Rent expense, including monthly equipment rentals, was approximately
$2,384,000, $2,227,000 and $1,946,000 for the years ended September 30,
2000, 1999 and 1998, respectively.
TTI relies on three suppliers for the majority of its new units and parts.
As of September 30, 2000, TTI had commitments to purchase inventory from
these suppliers amounting to approximately $337,000.
TTI guarantees on behalf of various customers certain lines of credit with
banks and financial institutions. The portion of the credit lines guaranteed
ranges from zero to 100% on a customer-by-customer basis. At September 30,
2000, TTI's guarantees totaled approximately $4,406,000 on total customer
indebtedness of approximately $19,970,000. TTI receives a fee, in the form
of interest participation, on certain of the notes upon which it is
contingently liable. This fee is recognized as interest income on the
accrual basis and is usually held by the institution to meet reserve
requirements. Funds held in escrow by the lenders amounting to $633,124 at
September 30, 2000, are included in the consolidated balance sheet as
restricted cash and are fully offset by the Company's reserve for credit
guarantees.
F-30
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TTI has an interest in two unconsolidated partnerships. The total investment
in these partnerships at September 30, 2000 of $469,533 is included in other
assets. TTI guarantees the debt of these partnerships. The amount guaranteed
at September 30, 2000 of $135,843 is collateralized by the accounts
receivable, inventory, equipment, buildings and real estate of the
partnerships.
Contingencies
During fiscal 1997, five substantially identical complaints were filed in
the United States District Court for the District of Nevada against the
Company and certain of its current and past officers and directors. The
complaints each sought certification as a class action and asserted
liability based on alleged misrepresentations that the plaintiffs claimed
resulted in the market price of the Company's stock being artificially
inflated. Without certifying the cases as class actions, the District Court
consolidated the cases into a single action.
In March 2000, the District Court dismissed the plaintiffs' claims against
one of the Company's officers and directors and restricted the plaintiffs
from pursuing a number of their claims against the other defendants. The
Court also granted the remaining defendants leave to file motions for
summary judgment. Motions for summary judgment were thereafter filed,
pointing out that there was no evidence to support the plaintiffs' claims.
In November 2000, in a lengthy decision addressing the plaintiffs' claims
against each of the remaining defendants, the District Court granted the
motions for summary judgment, thereby disposing of all of the claims
asserted by the plaintiffs. Without presenting any new evidence or any new
arguments for the Court to consider, the plaintiffs have sought reargument
of the summary judgment motions. The defendants have responded and have
requested that the District Court impose sanctions against plaintiffs'
counsel pursuant to the applicable securities laws.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business and are subject to
potential environmental remediation liabilities in connection with the
acquisition of Quantum. However, management believes (based, in part, on
advice of legal counsel) that such contingencies will be resolved
without material effect on the Company's financial condition, results of
operations or cash flows.
13. RELATED PARTY TRANSACTIONS
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 vacated
positions. Following the resignation, the Company charged to expense
approximately $165,000, representing all outstanding advances due from Mr.
Tanner.
F-31
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During prior fiscal years, the Company made significant advances to Mr.
Tanner, Pyrenees and PLY Stadium Partners, Inc. ("Stadium Partners"), both
of which companies were controlled by Mr. Tanner. A significant portion of
the advances related to a project by Stadium Partners to develop and build a
multi-purpose sports facility in Las Vegas, Nevada. In November 1996,
Stadium Partners, through a newly-formed partnership, purchased 62 acres in
Las Vegas for the development of the stadium and adjacent convention
facility. Financing was provided by Lehman Brothers Holdings, Inc.
("Lehman") through a partnership, Nevada Stadium Partners Limited
Partnership ("Nevada Partnership"), with Lehman receiving an equity interest
in the project. After making the first required prepayment on the loan,
primarily from funds advanced by the Company, Nevada Partnership failed to
make the second prepayment when due or by the end of an agreed upon
forbearance period. Lehman subsequently instituted foreclosure proceedings,
and a foreclosure sale was conducted in July 1998. The Company, recognizing
Stadium Partners' inability to meet its obligations, recorded a charge to
earnings of $14.8 million during the year ended September 30, 1997.
During April 1998, the Company filed suit against PLY Stadium Partners,
Inc., and against Mr. Tanner and Pyrenees, the guarantors of the debt. In
May 1999, the Company was awarded a judgment against such defendants,
jointly and severally, in the amount of approximately $19.5 million, plus
interest. In connection therewith, the defendants were ordered to turn over
all ownership of the stock of Polyphase, as well as the stock and assets of
PLY Stadium Partners, Inc. and Pyrenees, which included the rights to
2,000,000 shares of Polyphase common stock owned by Pyrenees and held by Mr.
Harold Estes as secondary collateral. In connection with this recovery of
the 2,000,000 Polyphase shares, the Company recorded interest expense of
$875,000, the fair value assigned to the shares, resulting from its
assignment to Mr. Estes. Additionally, the Company recorded income of
$656,000 related to the recovery of 1,500,000 shares and accounted for the
remaining 500,000 shares as an unexercised stock option in accordance with
APB No. 25.
After evaluating the possibility of any potential post judgment collections
and the additional legal expenses to be incurred in pursuing such
collections, and further considering the likelihood of one or all of the
defendants seeking protection under bankruptcy laws, the Company reached an
agreement to settle the judgment. The settlement agreement provided, among
other things, for the defendants to execute and deliver assignments of
certain assets to the Company and to execute and deliver to the Company two
promissory notes totaling $450,000, which are collateralized by first or
second liens on real properties controlled by the judgment debtors. While
the total dollar value of the settlement amounts to slightly over $1.0
million, the amount which may be ultimately recoverable as a result of this
settlement is not presently determinable and will be recorded as income only
when collection is assured.
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September
30, 2000 and 1999, the insurance premium receivable was $600,206 and
$592,006, respectively.
F-32
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the purchase of TTI, the Company acquired a note
receivable from an officer of TTI. The note which has been renewed and
extended each year since issuance is secured by marketable securities, is
payable within one year and bears interest at 3.96%. As of September 30,
2000 and 1999, the balance outstanding was $352,580 and $341,305,
respectively, and the note has been classified as a non-current related
party receivable.
As discussed in Note 16, in September 2000, SFP acquired all of the
outstanding common stock of Quantum from TTI's 25% minority partner in SFP.
TTI's 25% minority partner in SFP is a guarantor of TTI and SFP's note
payable to and SFP's revolving line of credit facility with, Bank of
America, N.A. (See Note 7). The father of TTI's 25% minority partner in SFP
is a former officer of SFP. In connection with the acquisition, SFP assumed
a $1.0 million note and $356,000 of accrued interest payable to Harold
Estes, president and former owner of TTI (See Notes 9 and 16).
Included in related party receivables at September 30, 2000 is approximately
$483,900 of receivables, net of allowance, from the aforementioned former
officer of SFP or from companies owned or controlled by such officer, of
which approximately $188,000 in receivables are unsecured. Additionally,
included in related party receivables at September 30, 2000 are $306,000 in
receivables from real estate partnerships in which TTI has minority
interests and $59,400 in receivables from a company owned by another related
party arising from the sale of timber. As of September 30, 2000,
approximately $496,000 of related party receivables are notes which are no
longer accruing interest and the Company has provided a $200,000 reserve
against all related party receivables as of that date. The Company expects
the remaining amounts due under related party receivables to be realized.
Included in related party receivables at September 30, 1999 are
approximately $683,000 in receivables from employees from the Company and
its subsidiaries and $499,000 in receivables from partnerships in which TTI
has minority interests. As of September 30, 1999, approximately $570,000 of
such receivables are notes which are no longer accruing interest. During
1999, the Company established a $100,000 reserve against receivables from
employees of the Company.
See Note 9 for discussion of the notes payable to Mr. Estes.
See Note 10 for discussion of options granted to the Pyrenees Group, a
related party.
F-33
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
14. EMPLOYEE BENEFIT PLANS
In 1986, prior to its acquisition by the Company, TTI adopted a profit
sharing plan. In order to participate in the plan, an employee must be at
least 21 years of age, have been employed by TTI at least one year and be a
full time employee. Vesting begins in the third year of employment and
increases each year until full vesting is achieved in the seventh year. The
plan is administered by an independent third party. Trustees for the plan
are the president and controller of TTI. The maximum contribution is the
lesser of 15% of eligible salaries or net income plus retained earnings.
Profit sharing expense for the years ended September 30, 2000, 1999 and 1998
was $179,000, $329,000 and $353,000, respectively.
In April 1997, Overhill introduced a retirement savings plan under Section
401(k) of the Internal Revenue Code. The plan covers substantially all
employees meeting minimum service requirements. Under the plan,
contributions are voluntarily made by employees. Overhill does not provide
for a match to the employees' contributions, and its expenses related to the
plan have not been significant.
15. SALE OF SUBSIDIARY
Effective September 30, 1999, the Company sold its wholly-owned subsidiary,
Polyphase Instrument Co. ("PIC"), to an investment group headed by
management of that company. The transaction was completed as a sale of 100%
of the outstanding capital stock of PIC for total consideration of
approximately $2.8 million, consisting of $1.8 million in cash and a
subordinated note receivable for $1.0 million. The note, which is
subordinated to bank indebtedness of up to $1.375 million, bears interest at
8%, payable interest-only on a quarterly basis through July 2001 and payable
thereafter in quarterly amounts of $50,000 principal plus accrued interest
through October 2006. The note is collateralized by all of the capital stock
and assets of PIC, subject to the subordination referred to above. Because
of the highly leveraged nature of the purchaser, the implicit reliance on
the future operations of PIC to provide cash flows for debt service and the
subordination of the note to other creditors of PIC, the Company fully
reserved the subordinated note receivable. As a result of this transaction,
the Company reported a loss from discontinued operations of approximately
$1.2 million for the year ended September 30, 1999.
F-34
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended September 30, 1999 and 1998, PIC's operations
(unaudited) are summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended
September 30,
---------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Net revenues $6,373,500 $4,832,600
Gross profit 700,400 530,100
Operating income (loss) 59,300 51,100
Net income (loss) before tax 39,000 10,000
</TABLE>
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, which was included in other income for the year ended September
30, 1998.
16. ASSETS ACQUIRED
In August 2000, Overhill purchased certain assets of the Chicago Brothers
food operations from SSE Manufacturing, Inc., a subsidiary of Schwan's Sales
Enterprises, Inc.("Schwan's".) Under the terms of the agreement, Overhill
acquired the production and food processing equipment together with certain
leasehold interests and improvements in two plants and an administrative
facility in San Diego, California. In addition, Overhill acquired the rights
to certain trademarked brands as well as recipes and other intellectual
property. The transaction was accounted for using the purchase method of
accounting. The purchase price of the assets amounted to a total of $4.2
million, consisting of cash of $3.3 million, a significant portion of which
was provided by a term loan from Union Bank, and a $900,000 note payable to
the seller (see Note 8). The Company recorded approximately $3.3 million of
goodwill on the transaction, which is being amortized over 20 years. In
addition, Overhill also entered into a three-year renewable agreement to
provide Schwan's with a specified number of pounds of meals and meal
components. Results of the acquired operations have been combined with the
Company's results for the period subsequent to the acquisition date.
In September 2000, in exchange for approximately $400,000 of raw timber
inventory and the assumption of certain liabilities, SFP acquired all of the
outstanding common stock of Quantum from TTI's 25% minority partner in SFP.
Quantum's assets consist primarily of a non-operating crude oil refinery and
blending facility, along with certain other site amenities, situated on
approximately 120 acres of land in Egan, Louisiana. Liabilities assumed in
the
F-35
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Quantum acquisition include (a) a $1.0 million note and $356,000 of accrued
interest payable to Harold Estes. (See Notes 9 and 13), and (b) certain
environmental liabilities. As SFP has acquired Quantum for resale, the
Company has classified this investment as assets held for sale in the
accompanying consolidated balance sheet as of September 30, 2000. See Note
13 for related party transactions related to the acquisition of Quantum.
During March 1998, TTI obtained a majority ownership interest in Wood Forest
Products LLC, which subsequently acquired the rights to harvest timber from
a tract of land owned by the U.S. Forestry Service. Concurrently, the
Company obtained a majority ownership interest in Southern Forest Products
LLC, whose primary purpose is to lease and operate a sawmill in East Texas.
For the years ended September 30, 2000, 1999 and 1998, these forestry
products businesses contributed revenues of approximately $9.0 million, $7.4
million and $3.0 million, respectively, and a net loss of approximately
$1,069,000, $329,000 and $170,000, respectively.
17. INFORMATION BY INDUSTRY SEGMENT
The Company's industry segments are described below.
Food
The food segment produces high quality entrees, plated meals, soups, sauces
and poultry, meat and fish specialties primarily for customers in the
airline, restaurant and weight loss industries.
Forestry
The forestry segment sells, finances and repairs timber and logging
equipment in East Texas and Western Louisiana and participates in other
forestry-related activities. Customers range from small logging operations
to large integrated paper mills.
Transformer
The transformer segment manufactured and marketed electronic transformers,
inductors and filters. The Company's wholly-owned subsidiary, Polyphase
Instrument Co. (PIC), was included in the transformer segment. Effective
September 30, 1999, all of the capital stock of PIC was sold (see Note 15).
F-36
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 30, 2000
---------------------------------------------------------------
Food Forestry Total
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net Sales:
Sales to unaffiliated customers $145,041,215 $44,056,724 $189,097,939
================= ================= ==================
Operating income $ 10,812,991 $ 220,761 $ 11,033,752
================= =================
General corporate expenses (481,904)
Interest expense (8,072,133)
Interest income and other 1,082,993
------------------
Income before income taxes, income allocable to
subsidiary warrant holder and extraordinary item $ 3,562,708
==================
Identifiable assets:
Segment assets $ 69,272,927 $50,341,136 $119,614,063
================= =================
Corporate assets 28,593,242
Eliminations (43,574,552)
------------------
Total assets $104,632,753
==================
Capital expenditures, net:
Segment $ 3,180,814 $ 296,715 $ 3,477,529
================= =================
Corporate -
------------------
Total capital expenditures, net $ 3,477,529
==================
Depreciation and amortization:
Segment $ 2,364,098 $ 903,919 $ 3,268,017
================= =================
Corporate 7,800
------------------
Total depreciation and amortization $ 3,275,817
==================
</TABLE>
The Company's Food segment had sales to King's Hawaiian in fiscal 2000 which
comprised approximately 12% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 2000.
F-37
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------------------
Food Forestry Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Sales:
Sales to unaffiliated customers $112,495,726 $45,812,384 $158,308,110
================= ================= =================
Operating income $ 7,384,385 $ 1,490,012 $ 8,874,397
================= =================
General corporate expenses (380,798)
Recovery of related party receivables 656,250
Interest expense (9,485,892)
Interest income and other 500,183
-----------------
Income before income taxes, income allocable to
subsidiary warrant holder, discontinued
and extraordiary item $ 164,140
=================
Identifiable assets:
Segment assets $ 50,024,950 $50,181,108 $100,206,058
================= =================
Corporate assets 24,851,716
Eliminations (41,535,832)
-----------------
Total assets $ 83,521,942
=================
Capital expenditures, net:
Segment $ 295,405 $ 1,002,611 $ 1,298,016
================= =================
Corporate 1,290
-----------------
Total capital expenditures, net $ 1,299,306
=================
Depreciation and amortization:
Segment $ 2,715,121 $ 834,467 $ 3,549,588
================= =================
Corporate 1,009,919
-----------------
Total depreciation and amortization $ 4,559,507
=================
</TABLE>
The Company's Food segment had sales to Jenny Craig, American Airlines and
King's Hawaiian in fiscal 1999 which comprised approximately 14%, 13% and 12%,
respectively, of consolidated sales. No other customer accounted for more than
10% of the Company's sales in fiscal 1999.
F-38
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------------
Food Forestry Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Sales:
Sales to unaffiliated customers $93,348,856 $48,049,483 $141,398,339
================= ================= =================
Operating income $ 4,976,930 $ 4,076,683 $ 9,053,613
================= =================
General corporate expenses (1,420,191)
Gain on sale of assets 987,857
Interest expense (8,830,391)
Interest income and other 543,080
-----------------
Income before income taxes, income allocable to
subsidiary warrant holder, discontinued
operations and extraordinary item $ 333,968
=================
Identifiable assets:
Segment assets $45,221,575 $50,082,526 $ 95,304,101
================= =================
Corporate assets 25,376,181
Eliminations (39,837,746)
-----------------
Total assets $ 80,842,536
=================
Capital expenditures, net:
Segment $ 604,853 $ 680,299 $ 1,285,152
================= =================
Corporate 30,251
-----------------
Total capital expenditures, net $ 1,315,403
=================
Depreciation and amortization:
Segment $ 3,041,237 $ 749,991 $ 3,791,228
================= =================
Corporate 401,043
-----------------
Total depreciation and amortization $ 4,192,271
=================
</TABLE>
The Company's Food segment had sales to Jenny Craig in fiscal 1998 which
comprised approximately 22% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 1998.
F-39
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
18. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
For the Year Ended September 30, 2000
---------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net revenues $44,442,950 $43,487,234 $46,647,829 $54,519,926
Gross profit 9,442,692 8,796,021 9,137,836 7,730,737
Operating income 3,126,082 2,819,417 2,747,392 1,858,957
Extraordinary item (1,290,431) - - -
Net income (loss) $ (11,088) $ 811,235 $ 1,025,373 $ 1,995,826
================= ================= ================= =================
Net income (loss) per
common share $ .02 $ .05 $ .06 $ .11
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended September 30, 1999
-----------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net revenues $34,854,998 $39,695,102 $37,702,120 $ 46,055,890
Gross profit 6,024,188 6,805,493 7,387,110 8,250,435
Operating income 1,631,301 1,834,349 2,207,632 2,820,311
Discontinued operations 3,326 7,418 3,819 (1,197,071)
Net income (loss) $ (340,385) $ (193,559) $ 165,495 $ (1,229,178)
================= ================= ================= ==================
Net income (loss) per
common share $ (.02) $ (.01) $ .01 $ (.07)
================= ================= ================= ==================
</TABLE>
F-40
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Balance Sheets
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
2000 1999
---------------------- ------------------
<S> <C> <C>
Cash $ 353,184 $ 51,471
Receivable from sale of subsidiary - 780,000
Prepaid expenses and other - 9,000
---------------------- ------------------
Total current assets 353,184 840,471
Property and equipment 50,191 50,191
Less-Accumulated depreciation (46,481) (44,981)
---------------------- ------------------
3,710 5,210
Non current receivables:
Deferred federal income taxes 2,075,334 572,280
Income tax receivable 6,654,314 5,959,121
Other assets (primarily investments
in subsidiaries) 19,506,700 17,474,634
---------------------- ------------------
Total assets
$ 28,593,242 $ 24,851,716
====================== ==================
Accounts payable $ 62,780 $ 140,359
Accrued expenses 27,250 981,840
Deferred income taxes - 364,669
---------------------- ------------------
Total current liabilities 90,030 1,486,868
Note payable and accrued interest,
related party 19,390,120 17,914,842
---------------------- ------------------
Total liabilities 19,480,150 19,401,710
---------------------- ------------------
Stockholders' equity:
Preferred stock - 564
Common stock 178,125 178,125
Paid in capital 27,650,734 28,159,887
Accumulated deficit (18,715,767) (22,888,570)
---------------------- ------------------
Total stockholders' equity 9,113,092 5,450,006
---------------------- ------------------
$ 28,593,242 $ 24,851,716
====================== ==================
</TABLE>
See note to condensed financial information of registrant.
F-41
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Income
<TABLE>
<CAPTION>
For the Years Ended
September 30,
----------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Net revenues $ - $ -
Cost of sales - -
----------------- -----------------
Gross Profit - -
Selling general and administrative expenses 481,789 380,798
----------------- -----------------
Operating income (loss) (481,789) (380,798)
Other income (expense)
Recoveries on related party receivable - 656,250
Interest expense (1,499,662) (2,776,376)
Interest income and other 118,371 -
----------------- -----------------
Total other expense (1,381,291) (2,120,126)
----------------- -----------------
Loss before income taxes, equity in net income of
subsidiaries and discontinued operations (1,863,080) (2,500,924)
Income taxes (benefit) (3,523,064) (941,008)
----------------- -----------------
Income (loss) before equity in net income of
subsidiaries and discontinued operations 1,659,984 (1,559,916)
Equity in net income of subsidiaries 2,161,362 1,144,797
----------------- -----------------
Income (loss) before discontinued operations 3,821,346 (415,119)
Discontinued operations - (1,182,508)
----------------- -----------------
Net income (loss) 3,821,346 (1,597,627)
Gain (dividends) on reacquired preferred stock 351,457 (91,199)
----------------- -----------------
Net income (loss) attributable to common shareholders $ 4,172,803 $(1,688,826)
================= =================
</TABLE>
See note to condensed financial information of registrant.
F-42
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
September 30,
----------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flow provided by (used in) operating activities:
Net income (loss) $ 3,821,346 $(1,597,627)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,500 1,009,919
Equity in income of subsidiaries (2,161,372) (1,144,797)
Deferred income tax (3,523,064) 225,061
Stock option granted for services 54,689 -
Recoveries on related party receivable - (656,250)
Loss (income) from discontinued operations - 1,182,508
Increase (decrease) in, net of effects of disposition:
Receivables from sale of subsidiary 780,000 (780,000)
Prepaid expenses and other 9,000 (735,813)
Accounts payable and accrued expenses (795,117) 457,385
----------------- -----------------
Net cash used in operating activities (1,813,018) (2,039,614)
----------------- -----------------
Cash flows provided by (used in) investing activities:
Receivable from related parties - 9,000
Proceeds from sale of subsidiary - 1,780,000
Capital expenditures - (1,289)
----------------- -----------------
Net cash provided by investing activities - 1,787,711
----------------- -----------------
Cash flows provided by (used in) financing activities:
Net borrowings on notes payable 1,475,278 1,607,437
Advances from (payments to) subsidiary 1,089,453 (47,174)
Repurchase of preferred stock (450,000) -
Payments on long term borrowings - (1,200,000)
Exercise of common stock options and warrants - 28,436
Dividends on preferred stock - (91,199)
----------------- -----------------
Net cash provided by financing activities $ 2,114,731 $ 297,500
----------------- -----------------
</TABLE>
See note to condensed financial information of registrant.
F-43
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
<TABLE>
<S> <C> <C>
Net increase in cash $301,713 $45,597
Cash - beginning of year 51,471 5,874
----------------- -----------------
Cash - end of year $353,184 $51,471
================= =================
</TABLE>
See note to condensed financial information of registrant.
F-44
<PAGE>
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Note A - Basis of Presentation
In these parent company only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company's share of net income of
its unconsolidated subsidiaries is included in consolidated income using the
equity method. These parent company only financial statements should be read in
conjunction with the Company's consolidated financial statements and the notes
applicable thereto.
Due to subsidiary debt covenant and other restrictions, the Company's ability to
obtain funds from its subsidiaries is limited (See Note 8). In addition, as
discussed in Notes 8 and 9, the parent company's ownership of Overhill Farms is
pledged as collateral on a bank loan and its ownership of Texas Timberjack is
pledged as collateral against the note payable to related party. Additionally,
the Company has no operating revenues and may be highly dependent on its
subsidiaries for its liquidity needs.
F-45
