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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, 1998
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 November 30, 1998, was
approximately $3.4 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
November 30, 1998, the registrant had issued and outstanding 15,177,321 shares
of common stock, $ .01 par value.
POLYPHASE CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1 Description of Business 1
Item 2 Description of Property 7
Item 3 Legal Proceedings 7
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 Operation 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk 18
Item 8 Financial Statements 18
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 18
PART III
Item 10 Directors and Executive Officers of the Registrant 18
Item 11 Executive Compensation 18
Item 12 Security Ownership of Certain Beneficial Owners and Management 18
Item 13 Certain Relationships and Related Transactions 18
PART IV
Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K 19
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
------------------------
GENERAL
The Company is a diversified holding company that, through its subsidiaries,
currently operates in three industry segments: the food segment, which produces
high quality entrees, plated meals, soups, sauces and poultry, meat and fish
specialties (the "Food Group"); the forestry segment, which distributes, leases
and provides financing for industrial and logging equipment (the "Forestry
Group"); and the transformer manufacturing segment, which manufactures and
markets electronic transformers, inductors and filters (the "Transformer
Group"). The Company was incorporated in New Jersey in 1963 under the name
Kappa Networks, Inc. In June 1991, through a merger with a wholly owned
subsidiary, the Company reincorporated in Pennsylvania and formally changed its
name to Polyphase Corporation. In June 1994, the Company, through a merger with
a wholly owned subsidiary, reincorporated in Nevada.
ACQUISITIONS
In connection with the Company's program of diversification and expansion, the
more significant acquisitions consummated by the Company over the past five
years were:
. Texas Timberjack, Inc. ("Timberjack" or "TTI") In June 1994, the
----------------------------------------------
Company acquired all of the outstanding capital stock of TTI from Harold Estes,
current President of TTI. Timberjack, with locations in Lufkin, Jasper,
Cleveland and Atlanta, Texas, is a distributor of industrial and logging
equipment in East Texas and Western Louisiana. The capital stock of TTI was
acquired from Mr. Estes for consideration of approximately $4,000,000 in cash, a
$10,000,000 promissory note payable to the order of Mr. Estes, and 100,000
shares of the Company's Series A Preferred Stock, which were subsequently
converted into 2,000,000 shares of common stock. Subsequent to June 1994, the
Company and Mr. Estes have modified, renewed and extended the promissory note
payable to Mr. Estes. As of September 30, 1998 the promissory note had a
balance of $16,307,405 (including accrued and unpaid interest) and was due
October 6, 1998. Subsequent to year end the note was modified, renewed and
extended through December 15, 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation- Liquidity and Capital Resources."
. Overhill Farms, Inc. ("Overhill") In May 1995, the Company acquired
---------------------------------
all the operating assets of IBM Foods, Inc. The purchase, which was
accomplished through Overhill, a newly-formed subsidiary of the Company,
provided for cash payment to the seller of $31.3 million plus the assumption by
the Company of certain liabilities of the acquired business. Overhill is
located in Culver City, California.
BUSINESS STRATEGY
Management believes the Company's future growth opportunities will concentrate
on the two largest core holdings, the Food Group and Forestry Group. The
business environment of the food industry is mandating consolidation of smaller
regional food processing companies to enhance operating efficiencies and provide
service to large national accounts. The Food Group is evaluating selected
acquisition candidates which can complement Overhill Farms by providing one or
more of the following selected criteria such as: regional brand labels,
additional production capacity, geographical diversification , new markets
and/or new customers. The Forestry Group continues to develop internal growth
through product line extensions and geographic expansions. Additional growth
will be primarily from the investment in or acquisitions of other forestry
related industries.
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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, 1998, 1997 and 1996.
1998 1997 1996
- --------------------------------------------------------------------------------
Net Sales
Food Group 64% 63% 66%
Forestry Group 33% 34% 23%
Transformer Group 3% 3% 2%
Other - - 9%
--- --- ---
Total 100% 100% 100%
Operating Income
Food Group 55% 53% 94%
Forestry Group 45% 48% 46%
Transformer Group - (1%) -
Other - - (40%)
--- --- ---
Total 100% 100% 100%
- --------------------------------------------------------------------------------
Reference is made to Note 18 to the Company's consolidated statements for
revenues, operating profits or losses and identifiable assets attributable to
each industry segment for each of the last three fiscal years.
FOOD GROUP
PRODUCTS AND SERVICES - The Food Group, through Overhill, is a value-added
manufacturer of quality frozen food products including entrees, plated meals,
soups, sauces, poultry, meat and fish specialities. Overhill is positioned as a
provider of custom prepared foods to a number of prominent customers such as
American Airlines, Jenny Craig, Albertsons, Carl's Jr., Jack in the Box, Panda
Express and King's Hawaiian. Historically, Overhill has served five industry
segments: airlines, health care, food service, club stores and retail.
SALES AND MARKETING - Overhill markets its products through an internal sales
force and outside food brokers. Overhill believes the airline and health care
industries are mature industries with stable growth potential over the next five
years. The Company is focusing on the retail, club stores and food service
markets as areas of significant future growth. As a result, Overhill management
has restructured its sales force and redirected its marketing efforts to
concentrate on these markets. During fiscal 1998, Overhill has concentrated on
building on and increasing the profitability of existing accounts while
establishing new relationships with companies such as, Panda Express, American
Stores, Wolfgang Puck Food Services and Denny's.
Approximately 62% of Overhill's sales in fiscal 1998 were derived from three
customers, Jenny Craig, Inc. (32%), King's Hawaiian (15%) and American Airlines
(15%). On a consolidated basis these three customers represented approximately
22%, 9% and 9% of the Company's total sales, respectively. Although the
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Company's relationships with these customers remains strong, signified by Jenny
Craig entering into a two year supplier agreement in August 1997 (with an option
for a third year), there can be no assurance that these relationships will
continue. A decline in the sales of 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
reduce the reliance on this concentration of accounts by further expansion into
the retail and food service markets as described above.
MANUFACTURING AND SOURCING - Overhill's manufacturing operations are located in
three separate facilities near Los Angeles, California. The operations are
labor intensive requiring semi-skilled employees. All manufacturing employees
are unionized with contracts covering each plant. Such contracts are due to
expire at various times over the next three years. Management believes
relations with the unions are excellent and does not anticipate any problems
which would affect future production. Each plant specializes in different
processing operations allowing efficiencies in production. In fiscal 1998, the
plants operated collectively at approximately 75% of capacity.
The Company's ability to economically produce large quantities of its products,
while at the same time maintaining a high degree of quality, depends in a large
part on its ability to procure raw materials on a reasonable basis. The Company
relies on a few large suppliers for its poultry products with the remaining raw
materials purchased from suppliers in the open market. The Company does not
anticipate any difficulty in acquiring these materials in the future. Raw
materials, packaging for production and finished goods are stored on site or in
a public frozen food storage facility until shipment is required.
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 change. Overhill also maintains a quality control department
for testing and quality control. The Company manufactures products in the
retail and food service 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 food
service 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.
Furthermore, the development by competitors of new or improved products,
services and/or technologies may render the Company's products or services (or
proposed products or services) obsolete or less competitive. Overhill competes
in this market by its ability to produce small/custom product runs, within a
short time frame and on a cost effective basis.
FORESTRY GROUP
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 and smaller
satellite showrooms and repair facilities are 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 equipment.
TTI is involved in the sale, leasing and financing of the equipment it
distributes as well as the servicing of all major
3
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, 35% 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 at the Lufkin
headquarters, while nine salesman have direct responsibility for customer
relationships. TTI meets customers' orders for new equipment and replacement
parts out of existing inventory or through purchase orders placed with the
manufacturers TTI currently represents.
Approximately 49% of TTI's equipment sales during fiscal 1998 are from new
equipment sold to companies involved in the forestry industries. Additional
revenues are derived from sales of used equipment (11%), servicing of equipment
(7%), sales of parts (19%) and financing equipment sales (14%). No single
customer accounts for more than 10% of TTI's sales. Equipment sales financed by
TTI are typically for periods ranging from 12 to 24 months at interest rates
ranging from 12.5% to 18% per annum.
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.
TRANSFORMER GROUP
PRODUCTS AND SERVICES - The Company's Transformer Group consists solely of
Polyphase Instrument Co. ("PIC"). Transformers are electromagnetic mechanisms
used in a wide variety of electronic and electro-mechanical applications to
convert electrical currents from one voltage level to another. The Transformer
Group's products include power transformers used in direct current power
supplies; audio transformers used in voice and audio signal circuits for
transferral of low level, precise signals; pulse transformers used in radar,
digital signaling and computer applications; telephone modem transformers used
in telephone circuits; and ferro-resonant transformers used in computers and
stabilized power systems. PIC manufactures a large line of transformers ranging
from miniaturized versions to oil-filled units, with power levels ranging from
microwatts to over 20 kilowatts, voltage levels of up to 20 kilovolts and
currents ranging from micro-amperes to 700 amperes. PIC supplies products to
meet its customers' exact specification requirements. Specifications include
frequency response and temperature range; energy loss; and voltage, current, and
energy levels.
SALES AND MARKETING - The Company sells transformers and filters directly to
customers and through commissioned sales representatives and outside brokers
principally in the Mid-Atlantic and Northeast regions of the United States. As
of September 30, 1998, PIC had an in-house sales and marketing staff of two
full-time employees. To obtain new business, PIC relies on referrals from its
existing customer base, advertisements in various trade journals and leads
generated by its reputation.
4
Approximately 92% of the transformers and filters sold by PIC are components of
systems used by the United States Armed Forces. Most of the remaining 8% is
utilized in various industrial processing systems and commercial avionics.
Major projects in which PIC's products are currently used include the United
States Navy's Aegis Destroyer, Airborne Self Protection Jammer and new nuclear
attack submarine as well as the United States Army's Bradley Infantry Fighting
Vehicle and PLGR Global Positioning System Receiver. Approximately 4% of PIC's
sales from these operations in fiscal 1998 were direct replacement parts
procurement for various government activities.
PIC's products are sold to approximately 120 active accounts, consisting
principally of defense contractors and their suppliers. Nine customers
accounted for approximately 83%, 80% and 76% of PIC's sales for fiscal 1998,
1997, and 1996 respectively, which percentages represented approximately 3% of
the Company's consolidated sales, over the respective years. The three largest
accounts, Eaton, Enosa and Rockwell International comprise approximately 17%,
14% and 11%, respectively, of PIC's overall sales.
MANUFACTURING AND SOURCING - PIC operates a manufacturing facility in Fort
Washington, Pennsylvania that produces approximately 92% of the Transformer
Group's transformers and 100% of its filters. Transformers are also
manufactured at a leased facility in Haiti. See "Description of Property -
Transformer Group."
The manufacturing process for PIC's products is labor intensive, involving
mostly low-technology, manually operated machinery. The process is not highly
automated since PIC's products are custom designed to customer specifications.
Wherever economically feasible, operations are automated. Given the nature of
PIC's products and their end uses, PIC maintains extensive test equipment for
its quality control operation.
Raw materials used by PIC include ferrites, laminates, copper wire and
electronic components purchased in predesigned configurations. Substantially
all raw materials and components are purchased from domestic sources and are
widely available. PIC carries adequate inventories of raw materials and other
product components as required to meet open customer orders.
BACKLOG - At September 30, 1998, PIC had unfilled purchase orders aggregating
approximately $2,800,000 as compared to $2,200,000 at September 30, 1997.
Orders may be subject to cancellation at the customer's discretion subject to
substantial cancellation charges. Based on current delivery schedules and
shipments, management believes that the Transformer Group will ship
substantially all of its current backlog within the following twelve months.
The Transformer Group's backlog may not provide meaningful period-to-period
comparisons and such comparisons and the backlog may not necessarily be
indicative of future results.
PRODUCT DEVELOPMENT - PIC does not maintain a formal research and development
program, nor are material amounts expended for research and development.
However, PIC's engineering, marketing and operations staff are regularly engaged
in engineering design and product development since most products are designed
to customers' specifications. Customers either supply PIC with design
specifications or submit proposed designs and require PIC to determine whether
such designs will meet the customers' performance specifications. PIC
continuously modifies and enhances its transformers and communication filters to
accommodate its customers' systems and equipment and, in this manner, attempts
to increase its market penetration.
COMPETITION - The business in which PIC is engaged is highly competitive,
characterized by ease of entry and intense regionally-based competition.
Competition is based on such factors as price, performance, reliability and
product quality. The Company believes that the reputation of PIC's engineering
department and the relationships it has established with its customers (having
been in business over 30 years) are important to its ability to compete
successfully.
PIC competes directly with a number of manufacturers, primarily in the United
States, certain of which have financial and other resources substantially
greater than PIC. In addition, such manufacturers generally have more extensive
facilities than those that are, or in the foreseeable future may become,
available to PIC. In this market, changing governmental policies can rapidly
create or eliminate areas of competition and market share. There is no assurance
that PIC will be able to maintain or further increase its market share.
5
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.
REGULATION
The Food Group is subject to strict government regulation, particularly in the
health and environmental areas, by the United States Department of Agriculture
("USDA"), the Food and Drug Administration ("FDA"), Occupational Safety and
Health Organization ("OSHA") and the Environmental Protection Agency ("EPA").
The Food Group anticipates increased regulation by the USDA and FDA concerning
food processing and storage. The Company's food processing facilities are
subject to on-site examination, inspection and regulation by the USDA.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position. During 1997, the Company
implemented a Hazard Analysis Critical Point Plan to ensure proper handling of
all food items.
The Transformer Group and the Forestry Group are required to comply with
various governmental regulations and requirements concerning the discharge of
materials into the environment or otherwise relating to the protection of the
environment. Compliance with the current applicable federal, state and local
environmental regulations has not had, and the Company does not believe that in
the future such compliance will have, a material effect on its financial
position, results of operations, expenditures or competitive position.
The Company takes all reasonable precautions to ensure that its operations,
processing plants and facilities operate in a safe, sanitary and
environmentally-sound manner. However, events beyond the control of the
Company, such as the adoption by the government of more stringent environmental
regulations could adversely affect its operations. Management believes that the
Company is in substantial compliance with all applicable laws and regulations
relating to the operations of facilities.
EMPLOYEES
As of September 30, 1998, the Company had approximately 925 employees as
follows: approximately 710 full-time employees in the Food Group; 150 full-time
employees in the Forestry Group; 60 full-time employees in the Transformer
Group; and 5 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, but are not limited to Year 2000
issues (particularly with regard to the Company's business partners and
suppliers), the amount of future capital expenditures, and the 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.
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ITEM 2. DESCRIPTION OF PROPERTY.
------------------------
CORPORATE HEADQUARTERS
The Company leases an approximately 4,000 square foot facility which serves as
the corporate headquarters. The office space is located at 4800 Broadway, Suite
A, Addison, Texas 75001 and is leased at a basic rent of $4,100 per month. The
lease which began in February 1998 has a five year term with an option to buy
out 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. 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 some manufacturing and
administrative functions.
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, part sales and shop areas. TTI
also leases six buildings on 68 acres in Bon Weir, 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 $1,525,000 in March 2000.
TRANSFORMER GROUP
PIC's domestic transformer and filter manufacturing operations are housed in a
44,000 square foot, leased, single-story facility in Fort Washington,
Pennsylvania, located about 30 miles from Philadelphia. The lease expires in
May 2001. PIC's foreign manufacturing operations are based in an 8,400 square
foot building in Port-au-Prince, Haiti, which is rented by PIC on a month-to-
month basis. Management believes that these facilities are in suitable
condition and are adequate for PIC's needs in the foreseeable future.
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 officers and directors. The plaintiffs' complaints each sought
certification as a class action and asserted liability based on alleged
misrepresentations that resulted in the market price of the Company's stock
being artificially inflated. The defendants filed motions to dismiss in each of
the lawsuits. Without certifying the cases as class actions, the District Court
consolidated the cases into a single action. The District Court, in June 1998,
dismissed the complaint in the consolidated action and ordered that the
plaintiffs replead such complaints. The plaintiffs then filed a motion for
reconsideration of the Court's ruling. The defendants opposed the motion for
reconsideration. The Court has not ruled upon plaintiff's motion; however, the
plaintiffs have not filed an amended complaint. Consequently, it cannot be
determined at this time whether the dismissal of the complaint will lead to a
dismissal of the consolidated action. Management believes (based on advice of
legal counsel) that such litigation will be resolved without material effect on
the Company's financial condition, results of operations or cash flows.
7
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based
on advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
----------------------------------------------------------------------
The Common stock is listed on the American Stock Exchange, Inc. 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 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 (2) $ 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
Fiscal 1997 High Low
----------- --------- ----------
Quarter from October 1, 1996
to December 31, 1996 $ 7.4375 $ 3.8750
Quarter from January 1, 1997
to March 31, 1997 (1) $ 5.5000 $ 3.8125
Quarter from April 1, 1997
to June 30, 1997 (1) $ 2.6250 $ 1.2500
Quarter from July 1, 1997
to September 30, 1997 $ 2.5000 $ 0.8750
Fiscal 1996 High Low
----------- --------- ----------
Quarter from October 1, 1995
to December 31, 1995 $ 4.7500 $ 3.1250
Quarter from January 1, 1996
to March 31, 1996 $ 4.3750 $ 2.7500
Quarter from April 1, 1996
to June 30, 1996 $ 4.2500 $ 3.0625
Quarter from July 1, 1996
to September 30, 1996 $ 7.2500 $ 1.8750
- --------------------------------------------------------------------------------
(1) On February 3, 1997, the Company agreed with the American Stock Exchange,
Inc. to temporarily halt trading of its Common stock pending the filing of its
annual report on Form 10-K for the fiscal year ended September 30, 1996. On
June 16, 1997 the Form 10-K and the Forms 10-Q for the quarters ended December
31, 1996 and March 31, 1997, were filed and trading resumed on June 17, 1997.
(2) 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
The Company has never paid cash dividends on its common stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such
policy is, within the limitations and restrictions described below, subject to
change based on current industry and market conditions, as well as other factors
beyond the control of the Company.
The Company is restricted from paying dividends on its common stock pursuant to
the indenture (the "1999 Indenture") executed in connection with the issuance of
$4,000,000 of original principal amount of 12% Senior Convertible Debentures due
July 1, 1999 (the "1999 Bonds"). In general, the 1999 Indenture prohibits the
Company from paying or making within any 12-month period dividends or
distributions on its common stock having a value in excess of 50% of the
consolidated net income of the Company, unless each holder of the 1999 Bonds
receives an amount equal to its pro rata portion of the dividend or distribution
(on an as-converted into common stock basis). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
As of September 30, 1998, the Company estimates that there were approximately
4,200 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 year ended September 30, 1998, the
Company issued 197,586 shares of common stock in partial satisfaction of
Infinity's conversion rights.
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 Stock issued to Black
Sea, such shares were issued pursuant to the exemption provided by Regulation S
of the Securities Act. Black Sea is a non United States person as that term is
defined in the Securities Act. Of the shares of the Series F - 6% Convertible
Stock that were issued, no such shares were issued to any party other than Black
Sea.
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 Penny Warrants were exercised and 210,000 shares of Common stock were issued
in May 1998. 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
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.
Fiscal Year Ended September 30
- -----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
Income Statement Data: 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 146,231 $ 151,949 $ 149,541 $ 102,035 $ 24,970
Operating Income 7,685 6,584 6,665 6,752 355
Earnings (Loss) Before
Extraordinary Items and
Cumulative Effect of Change
in Accounting Principle 287 (18,825) (242) 3,286 (1,384)
Net Income (Loss) $ (329) $ (18,825) $ (242) $ 3,286 $ (1,017)
=========== =========== =========== =========== ==========
Income (Loss) per Common Share - Basic and Diluted
Before Cumulative Effect of
Extraordinary Item and Change
in Accounting Principle $ .01 $ (1.41) $ (.03) $ .26 $ (.28)
Extraordinary Items (.04) - - - .01
Cumulative Effect of
Accounting Change - - - - .06
----------- ----------- ----------- ----------- ----------
Net Income (Loss) $ (.03) $ (1.41) $ (.03) $ .26 $ (.21)
=========== =========== =========== =========== ==========
Weighted Average Common
and Common Equivalent
Shares Outstanding - Basic
and Diluted 14,552,462 13,632,357 13,722,552 12,745,701 4,881,454
As of September 30
- -----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $ 81,545 $ 72,149 $94,179 $88,159 $37,975
Long-Term Debt 29,221 23,272 - 27,230 5,259
Total Liabilities 73,745 62,748 68,991 66,335 23,618
Accumulated Deficit (21,200) (20,717) (1,488) (1,095) (4,381)
Stockholders' Equity 6,601 7,402 23,998 21,137 14,357
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATION.
-------------
Statements contained in this Form 10-K that are not historical facts, including,
but not limited to, any projections contained herein, are forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this Form
10-K could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30,
1997
For the year ended September 30, 1998 the Company's revenues decreased
$5,718,000 (4%), to $146,231,000 from $151,949,000 for the year ended September
30, 1997. On a consolidated basis gross margins increased from 16.71% to 17.68%
during the period, resulting in an increase in operating income. Operating
income for the year ended September 30, 1998 increased $1,101,000 (17%) to
$7,685,000 from $6,584,000 during the comparable period. The Company attributes
the higher gross margins to the elimination of lower margin business and
improved purchasing of raw materials and inventory. Operating income improved
primarily from improved gross margins and the reduction of salaries and other
general and administrative expenses at the corporate level.
For the year ended September 30, 1998, the Company's interest expense increased
$1,692,000 (24%) to $8,872,000 from $7,180,000 in fiscal 1997. The increase in
interest is primarily due to additional borrowings and increased charges on the
Company's indebtedness to Mr. Harold Estes.
For the year ended September 30, 1998, the Company recorded a tax expense of
$57,000 primarily related to state tax liabilities. The benefit in 1997
resulted primarily from the statutory tax benefit of the $18.7 million loss by
the Company, reduced by the valuation allowance relating to the portion of the
tax benefits that the Company was not able to utilize through carryback of such
losses to prior years.
Net income before extraordinary items for the year ended September 30, 1998
increased to $287,000 from a net loss of $18,825,000 in fiscal 1997. Net income
for the period included a one time gain of $988,000 from the sale of the
Company's corporate headquarters in December 1997. Net income was adversely
affected by an extraordinary expense of $616,000, relating to the early
extinguishment of debt associated with the refinancing of certain indebtedness
by Overhill Farms.
The Food Group's revenues decreased $2,828,000 (3%) to $93,349,000 from
$96,177,000 in fiscal 1997. The decrease in revenue is primarily due to the
intentional paring of lower margin business and the aggressive bidding by
competitors, which if met, would have reduced profitability below minimum
requirements. During the year, the Company worked closely with American
Airlines and Jenny Craig to improve product selection and quality resulting in
increased sales to those customers of $0.9 and $1.1 million respectively. The
food service segment revenues decreased primarily because of decisions to forego
sales due to profitability considerations. Carl's Jr., Jack in the Box, and Koo
Koo Roo continue to be key food service customers while Panda Express and
Denny's, new in fiscal 1998, expect to be significant accounts in the near
future. Gross margins improved during the year due primarily to selectivity of
sales, reduction in manufacturing expenses from capital investments and
improvements in purchases of raw materials. The Company anticipates continued
gross margin improvements in the future. Operating expenses increased primarily
from higher general and administrative costs, professional fees and amortization
associated with the refinancing of debt. Net income decreased primarily from
increased interest and amortization expenses.
The Forestry Group's revenues decreased $4,153,000 (8%) to $48,049,000 from
$52,202,000 in fiscal 1997. The decrease in revenue is primarily attributable to
drier weather conditions in East Texas, reducing demand for new equipment.
Gross margins increased due to a change in the sales mix from new equipment to
used equipment sales and parts and service. Management anticipates revenues
will continue to decline slightly in fiscal 1999 while gross margins will remain
firm. Operating expenses increased $843,000 during the fiscal year resulting in
a $420,000 (9%) decrease in operating income for the year ended September 30,
1998. The
12
operating expense increase resulted from TTI's investment in a controlling
interest of two forestry products businesses. In the third quarter of fiscal
1998, Timberjack arranged the purchase of the rights to harvest 94,500 tons of
raw timber from the U.S. Forestry Service. The timber was cut in late spring and
early summer and will be processed at a sawmill the Company leased in Bon Weir,
Texas. The sawmill is located in six main buildings on 68 acres which serves as
storage for raw materials and finished goods. For the year ended September 30,
1998 these forestry products businesses contributed revenues of approximately
$3.0 million and a net loss of approximately $170,000. Management believes this
operation will be profitable in fiscal 1999 and provide the Company with
diversification within the forestry industry.
The Transformer Group's sales increased $1,262,000 (35%) to $4,833,000 in fiscal
1998 from $3,570,000 in fiscal 1997. Operating income increased $118,000 (176%)
to $51,000 in fiscal 1998 from a $67,000 loss in fiscal 1998. Despite higher
gross margins, increased selling, general and administrative costs during the
year had an adverse impact on operating income. The Company anticipates that
revenues and operating income for the Transformer Group will not increase
significantly as the industry is being affected by technical innovations in
alternative sources of electro-mechanical devices.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996
For the year ended September 30, 1997 the Company's revenues increased
$2,408,000 (1%), to $151,949,000 from $149,541,000 in fiscal 1996. Operating
income for the year ended September 30, 1997 decreased $81,000 (1%) to
$6,584,000 from $6,665,000 in fiscal 1996. Net loss attributable to common
stockholders for the year ended September 30, 1997 was $19,229,000, a decrease
of $18,837,000 from the net loss of $392,000 in fiscal 1996.
Revenues from the Forestry Group increased substantially as that industry
continued to recover from a slump in timber prices experienced in 1995 and 1996.
This revenue increase more than offset the revenue reductions resulting from
the disposal of the computer operations and the slight decrease in revenues of
the Food Group. Selling general and administrative expenses on a consolidated
basis decreased $3,210,000 primarily due to the disposal of the computer
operations in July 1996. Operating income on a consolidated basis remained flat
for fiscal 1997 as compared to fiscal 1996, primarily due to slightly lower
gross margins in the Food segment.
For the year ended September 30, 1997, the Company had nonrecurring charges to
income of $18,452,000, consisting of $14,838,000 from the Company's writeoff of
its related party receivable from Stadium Partners and $3,614,000 in losses
relating to the disposal of its remaining interest in the computer operations.
The advances made to PLY Stadium Partners Inc. ("Stadium Partners"), a private
investment firm headed by Mr. Paul A. Tanner, former Chairman and Chief
Executive Officer of the Company, during fiscal 1997, 1996 and 1995 were deemed
uncollectible, as the project could not secure long term financing on the land
or otherwise gain the support required to construct the stadium. The Company is
pursuing the recovery of at least a portion of its loans to Stadium Partners
through the guarantees of the principals. Amounts due the Company consisted of
convertible debt, cash advances and amounts accrued in 1996 for management fees,
services and interest. The Company recorded a reserve for amounts due the
Company for management fees, services, and interest totaling $3,340,000 in
fiscal 1996.
During fiscal 1997, the purchaser of the Computer Group elected to discontinue
that company's efforts to effect a public registration of DataTell's stock, thus
precluding the Company from making a distribution of the stock to its
shareholders; additionally, purchase price adjustments of $87,000 resulted in
the elimination of the note receivable set up in the prior year. The purchaser
also elected not to further pursue the operation of MCC, and, since the Company
had been unsuccessful in its attempts to recover MCC's assets, the amount due
under the $951,000 note receivable set up in the prior year was determined not
to be realizable. The Company, in response to these actions by DataTell, made
the decision to further reduce its involvement in computer-related businesses
and entered into a new agreement with the controlling shareholder to dispose of
its remaining direct ownership of DataTell. The notes and certain other assets
were exchanged with the same unrelated third party for $200,000 cash and
preferred stock convertible into a 3% equity interest in DataTell. This
transaction resulted in a loss of $2,576,000, which in addition to the
$1,038,000 loss on notes receivable described above
13
resulted in a total loss of $3,614,000 being charged to operations during fiscal
1997 relating to the disposal of its remaining interest in the computer
operations.
The Company does not expect there to be any significant ongoing liabilities from
either the stadium or computer operations and intends to focus its direction on
expanding through acquisitions in its two remaining core businesses.
The Company's interest expense increased $790,000 to $7,180,000 (12%) for the
year ended September 30, 1997 as compared to $6,390,000 for the prior year. The
increase was primarily due to the increased rate charged by Rice Partners, LP on
the subordinated debt at Overhill. The rate increased from 13% to a default
rate of 15% beginning January 1997 and continued through December 1997, at which
time the Company refinanced the debt. The Company also incurred additional
interest at 16% on the second lien note on the Company's corporate headquarters
building beginning in January 1997. See "Liquidity and Capital Resources."
The Company recognized a tax benefit of approximately $654,000 for the year
ended September 30, 1997 as compared to tax expense of $1,594,000 for the year
ended September 30, 1996. The benefit in 1997 resulted primarily from the
statutory tax benefit of the $18.7 million loss by the Company, reduced by the
valuation allowance relating to the portion of the tax benefits that the Company
was not able to utilize through carryback of such losses to prior years.
The Company incurred a noncash charge for warrant accretion of $811,000 for the
year ended September 30, 1997, as compared to $503,000 for the year ended
September 30, 1996. The charge consisted of warrant accretion to fair market
value in anticipation of the redemption in connection with the refinancing of
the Rice debt in December 1997. See "Liquidity and Capital Resources."
Sales in the Food Group decreased $2,594,000 (2%) to $96,177,000 in fiscal 1997
from $98,771,000 in 1996. Increased competitive pressure, particularly in the
airline segment, resulted in a decline in gross profits to $14,696,000 or 15.3%
as compared to $16,098,000 or 16.3% in the previous fiscal year. During the
period, management implemented programs to restore margins to historical levels,
primarily through more aggressive raw materials purchasing procedures, increased
account profitability reviews, customer price adjustments where possible and the
further implementation of manufacturing cost reduction procedures, including a
significant reduction in inventory levels, especially in the area of finished
goods.
Sales in the Forestry Group increased $17,955,000 (52%) to $52,202,000 in fiscal
1997 from $34,247,000 in fiscal 1996. Operating income increased $1,243,000
(41%) to $4,282,000 in fiscal 1997 from $3,039,000 in fiscal 1996. Increased
revenues were primarily due to increased demand for new equipment in East Texas
as the lumber prices stabilized in fiscal 1997 and large operators resumed
making capital expenditures. Overall gross profit margin rates decreased in
fiscal 1997 due largely to a change in the sales mix, from used to new
equipment. During the year, sales of new units increased substantially and the
number of used units, which are traditionally sold at higher margins, decreased.
Operating income increased primarily as a result of higher sales volume, offset
by an increase in selling, general and administrative expenses associated with
the new facility in Lufkin, an additional sales office and a larger operations
staff.
The Transformer Group's sales increased $21,000 (1%) to $3,570,000 in fiscal
1997 from $3,549,000 in fiscal 1996. Operating income decreased $144,000 (187%)
primarily due to higher general and administrative costs during the year.
14
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 decreased $640,000 to $424,000 at September 30, 1998, compared to
$1,064,000 at September 30, 1997.
The Company used $8,229,000 cash in operations in fiscal 1998, as compared to
cash generated of $6,514,000 in fiscal 1997. The decrease in cash flow from
operations results primarily from an $11.6 million increase in the Company's
inventories. Approximately $5.4 million of the increase was inventory located
at TTI's sawmill operation consisting of raw timber ($4.0 million) and finished
goods ($1.4 million). Additionally, TTI's distribution operations increased
equipment and parts inventory by $3.8 million for the year ended September 30,
1998. The remaining inventory increases were at Overhill.
The Company's investing activities for the year ended September 30, 1998
resulted in a use of cash of approximately $2,508,000, as compared to a use of
cash of $4,750,000 for the year ended September 30, 1997. The Company's use of
cash in fiscal 1998 was primarily an increase in notes receivable generated by
TTI and capital expenditures at Overhill. During fiscal 1997, the Company's
use of cash consisted primarily of advances to Stadium Partners.
The Company's financing activities for the year ended September 30, 1998
resulted in cash provided of $10,096,000, compared to cash used of $981,000 in
fiscal 1997. In December 1997, the Company completed the refinancing of a
portion of Overhill Farms debt. The refinancing included repayment of existing
term debt with Finova, the repayment of the Rice subordinated debentures and the
payment of certain Corporate obligations. In August 1998, TTI completed the
refinancing by NationsBank of its previous credit facility with Comerica. See
below for a description of the terms and payments of refinancing.
The Company in August 1997, through its subsidiary Dallas Parkway Properties,
Incorporated ("DPPI"), whose principal asset was the corporate office building,
borrowed $2.8 million on a first mortgage note payable to National Operating,
L.P. The note, collateralized by the office building and guaranteed by the
Company, was payable monthly, interest only at 14% per annum through July 1,
1999, with all remaining interest and principal, together with an "exit fee" of
$56,000, due and payable on August 1, 1999. The Company sold DPPI effective
December 1, 1997, with the buyer assuming the debt on the corporate office
building. The Company was released from its guarantee and realized a gain of
approximately $988,000 on the sale.
During 1995, the Company, through Overhill, entered into a financing arrangement
which provided a senior credit facility of $18.0 million with Finova Capital
Corporation ("Finova") and a subordinated debt placement of $13.0 million with
Rice Partners II, L.P. ("Rice"). These funds were used to provide financing for
the acquisition of the operating assets of IBM Foods, Inc.
The senior credit facility included a revolving line of credit limited to the
lesser of $12.0 million, or an amount determined by a defined borrowing base
(based upon eligible receivables and inventory), and two term loans in initial
principal amounts totaling $6.0 million. At September 30, 1998, approximately
$10.0 million was outstanding under the line of credit, which bears interest at
the Citibank base rate plus 1.5% (approximately 10.0% at September 30, 1998).
The senior credit facility contains various covenants which include without
limitation, a restriction on Overhill's capital expenditures, specified debt to
net worth ratios, specified levels of net worth and a limitation on the ability
of the Company to realize monies, including dividends, management and consulting
fees, from Overhill to $250,000 per annum. The term loans were repaid in
December 1997 as described below.
On December 4, 1997, the Company, with Overhill as the borrower and the Company
as guarantor, obtained a $24.175 million term loan from The Long Horizons Fund,
LP ("Long Horizons"). The note is payable monthly, interest-only at prime plus
4% through April 1999 and thereafter provides for principal amortization of
$250,000 per month, plus interest, until a final payment of approximately
$19.675 million is due in December 2000. During the term of the loan, Overhill
is required to pay, on a quarterly basis, annual loan servicing fees totaling
$180,000, $300,000 and $440,000 for the first, second and third years of the
loan, respectively. The lender also received commitment and closing fees
totaling approximately $1.7 million. In
15
the event the loan is paid in full prior to maturity, the principal amounts due
under the loan are to be reduced by $500,000 if the loan is repaid in full
during the second year of the loan. Long Horizons was also issued stock warrants
which entitle Long Horizons to immediately acquire, at a nominal price of $.01
per share, 30% of the outstanding stock of Overhill, of which 25% (5/6 of the
total shares under warrant) 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 restrictions, the percentage of
Overhill that the Company can repurchase for $2,000,000 was reduced to 20% from
25%. The loan is collateralized by all the outstanding stock of Overhill owned
by the Company as well as certain assets of Overhill.
Upon closing of the loan in December 1997, certain payments were made and other
obligations restructured as follows:
Merrill Lynch was paid in full all amounts due for principal and interest under
the 1997 bonds (approximately $1.6 million). Additionally, a partial payment of
$2.8 million in principal, plus accrued interest of approximately $200,000, was
made on the 1999 Bonds. The conversion price of the remaining $1.2 million
principal amount of the 1999 Bonds was reduced to $3.00 per share (from $5.65
per share), subject to further adjustment as provided by the Indenture. Merrill
Lynch was also granted warrants to purchase 420,000 shares of the Company's
Common stock, exercisable over a five-year period, with certain registration
rights. The warrants are exercisable into 210,000 shares at $.01 per share and
210,000 shares at $1.125 per share, the market price on the date of grant; the
exercise prices are subject to adjustment to prevent dilution of the holders'
interests.
Finova was paid approximately $1.7 million, representing payment in full of Term
Loans A and B. Finova also entered into an Intercreditor Agreement with Long
Horizons and extended the revolving line of credit until December 2000 at
substantially the same terms and conditions.
Rice was paid all principal ($13.0 million) plus accrued interest and expenses
totaling approximately $362,000 under the subordinated debt facility. Rice also
received approximately $2.0 million as payment for the warrants and legal
expenses in connection with the litigation. The Company also agreed to pay Rice
an additional $2.0 million if Overhill were sold during the first six months, or
$750,000 ($2.0 million if to certain identified parties) during the second six
months, following the date of the agreement. These payments were provided for
under a Compromise and Settlement Agreement With Mutual Release and resulted in
the dismissal of all litigation between the Company and Rice. For the quarter
ended December 31, 1997 the Company recorded a non-cash extraordinary charge to
income of approximately $616,000, resulting from the early extinguishment of the
Rice debt. The financing also provided the Company with approximately $900,000
in working capital.
As of September 30, 1998, the Company has a note payable outstanding to Mr.
Harold Estes, former owner of Texas Timberjack, Inc. (TTI), in the amount of
$16.3 million due October 6, 1998. In December 1998, the Company entered into
an agreement with Mr. Estes to modify and extend the note payable to December
15, 1999 at an interest rate of 9.75% per annum, effective as of October 6,
1998. In connection with the modification, the Company agreed to assign to 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, a private
investment firm owned in part by Paul A. Tanner, former Chairman and Chief
Executive Officer of Polyphase, and held by Mr. Estes as secondary collateral.
The Company currently expects to obtain the rights to 2,000,000 shares owned by
Pyrenees in connection with the enforcement of Pyrenees' guarantee of certain
related party receivables written off in prior years. Mr. Estes has no recourse
to any of the assets or capital stock of the Company or any of its other
subsidiaries other than its ownership interest in TTI.
In August 1998, Timberjack obtained an $8.0 million revolving line of credit and
a $4.0 million term note ("the facility") with NationsBank of Texas, N.A.
("NationsBank") to replace a previously maintained a line of credit with
Comerica Bank-Texas ("Comerica"). The line of credit expires in March 1999 and
amounts advanced under the line of credit bear interest at prime less .25%
(approximately 8.0% at September 30, 1998), and are collateralized by
substantially all of TTI's assets. Availability under the line as of September
30, 1998, after giving effect to base limitations, amounted to approximately
$5.8 million ($2.2 million is outstanding at September 30, 1998). The three year
term note has a fixed interest rate of 8.3%, is due in monthly installments
16
of $111,111 plus accrued interest, and will mature in August 2001. The facility
agreement contains various covenants related to receivables, capital
expenditures, inventories, debt ratios, contingent liabilities and payment of
dividends. Furthermore, the terms of the facility generally prohibit loans or
advances from TTI to the Company, but permit the payment of taxes. The Company
has guaranteed all obligations under the TTI facility.
In connection with TTI's participation in the forestry related investments,
TTI's majority-owned subsidiaries, Southern Forest Products LLC and Wood Forest
Products LLC, collectively obtained an $8.0 million revolving line of credit
with NationsBank. The line of credit expires in April 2000 and amounts advanced
under the line of credit bear interest at prime (approximately 8.25% at
September 30, 1998), and are collateralized by substantially all of the assets
of the forestry subsidiaries. Availability under the line as of September 30,
1998, after giving effect to base limitations, amounted to approximately $1.5
million.
The Company guaranteed the repayment of the Lehman loan on behalf of Stadium
Partners. The guarantee is only effective, in certain circumstances or upon
the occurrence of certain events. A foreclosure sale was conducted on or about
July 15, 1998. Notwithstanding such foreclosure action, the Company, based on
the advice of legal counsel, does not believe that it will incur any significant
liability as a result of this guarantee. As a result, the Company believes the
existence of such guarantee will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
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 initiated a Year 2000 program to identify and address issues
associated with the ability of its business systems and equipment to properly
recognize the Year 2000. The purpose of this effort is to avoid interruption of
the operations of the Company as a result of the century change that will occur
on January 1, 2000. The Company's program includes review of its software
systems, review of its operating systems, upgrade or retirement of non-compliant
hardware and contacting key suppliers to assess their Year 2000 readiness.
The Food Group is completing the installation of a new integrated accounting,
inventory, sales and purchasing system to replace the existing manual and
computer systems supporting operations. The system software and hardware has
been certified by the vendor to be Year 2000 compliant and has been implemented
as a parallel system. The Forestry Group has reviewed its existing software and
is the process of completing an upgrade modification. The corporate office's
hardware and software systems are in the process of upgrading for obsolescence,
which complements the Year 2000 Project. Each group will retire or replace its
existing hardware as deemed necessary and should be completely tested and on
line by June 1999.
The Company intends to begin the second phase of its Year 2000 compliance
project in late January. The Company's subsidiaries will contact key vendors to
access their Year 2000 readiness and evaluate non-compliance on the Company's
future business.
Despite efforts to address the Year 2000 problem, there can be no guarantee that
critical suppliers or entities on which the Company relies will be converted on
a timely basis. The Company believes that based upon preliminary findings that
most vendors are performing internal Year 2000 projects similar to the Company's
and that non compliant vendors will offer alternative measures for time
sensitive products. Contingency plans for obtaining goods and services from non
compliant vendors will be addressed on a case by case basis.
To date, the Company has had no material expenditures for direct Year 2000
compliance procedures. The Company believes that neither the cost of its
planned upgrade and modification program nor a failure to timely complete such
program, will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
The Company does not own, nor does it have an interest in any market risk
sensitive investments. 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
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
The information required in response to this Item 10 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 11 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, no 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 12 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 by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The information required in response to this Item 13 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 by this report.
18
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, 1998, are included in Item 8:
Report of Independent Auditors F-2
Consolidated Balance Sheets-September 30, 1998 and 1997 F-3
Consolidated Statements of Operations-Years ended September 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity-Years ended
September 30, 1998, 1997 and 1996 F-7
Consolidated Statements of Cash Flows-Years ended September 30, 1998, 1997, and 1996 F-9
Notes to Consolidated Financial Statements F-12
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-42
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
3. Exhibits
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3 through
4.8 to the Company's registration statement on Form S-8 [No. 33-82008],
filed with the Commission on July 27, 1994 [the "1994 Form S-8"])
3.2 Bylaws of Polyphase Corporation (incorporated by reference from
Exhibit 4.2 to the 1994 Form S-8)
4.1 Certificate of Designation relating to the Series A-2 Preferred
Stock (incorporated by reference from Exhibit 4.9 to the Company's
Registration Statement on Form SB-2 [No. 33-85334] filed with the
Commission on October 19, 1994 [the "Form SB-2"])
4.2 Certificate of Designation relating to the Series A-3 Preferred Stock
(incorporated by reference from Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1995 [the "1995
Form 10-K"])
+10.1 Stock Option Agreement for Paul A. Tanner (incorporated by reference
from Exhibit 4.12 to the 1994 Form S-8)
19
+10.2 Stock Option Agreement for Michael F. Buck (incorporated by reference
from Exhibit 4.13 to the 1994 Form S-8)
+10.3 Stock Option Agreement for Don E. McMillen (incorporated by reference
from Exhibit 4.14 to the 1994 Form S-8)
+10.4 Stock Option Agreement for George R. Schrader (incorporated by
reference from Exhibit 4.15 to the 1994 Form S-8)
+10.5 Stock Option Agreement for James Rudis (incorporated by reference from
Exhibit 10.5 to the Company's Form 8-B, filed with the Commission on
August 27, 1994 [the "Form 8-B"])
+10.6 Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
+10.7 Employment Agreement, dated as of November 1, 1993, between Harold
Estes and Texas Timberjack, Inc. (incorporated by reference from
Exhibit 2 to the Company's Form 8-K dated June 24, 1994 [the "1994 Form
8-K"])
10.8 Pledge Agreement, dated as of June 24, 1994, between Polyphase
Corporation and Harold Estes (incorporated by reference from Exhibit
10.10 to the Form 8-B)
10.9 Security Agreement, dated as of June 24, 1994, between Texas
Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.11 to the Form 8-B)
10.10 Stock Option Agreement, dated as of October 21, 1992, between Polyphase
Corporation and the Pyrenees Group (incorporated by reference from
Exhibit 10.12 to the Form 8-B)
10.11 Deed of Trust Note in the amount of $1,000,000, dated May 25, 1994, by
Polyphase Corporation in favor of Comerica Bank-Texas (incorporated by
reference from Exhibit 10.4 to the Company's Form 10-Q for the quarter
ended June 30, 1994 [the "1994 Form 10-Q"])
10.12 Deed of Trust (With Security Agreement and Assignment of Rents), dated
May 25, 1994, covering real property in Dallas County, Texas between
Polyphase Corporation and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.3 to the 1994 Form 10-Q)
10.13 Letter Agreement, dated May 25, 1994, between Polyphase Corporation and
Comerica Bank -Texas (incorporated by reference from Exhibit 10.4 to
the 1994 Form 10-Q)
10.14 Securities Purchase Agreement, dated as of July 5, 1994, by and among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.16 to the Form 8-B)
10.15 Registration Rights Agreement, dated as of July 5, 1994, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.17 to the Form 8-B)
10.16 Indenture, dated as of July 5, 1994, from Polyphase Corporation to IBJ
Schroder Bank & Trust Company (incorporated by reference from Exhibit
10.18 to the Form 8-B)
10.17 Form of 12% Senior Convertible Debenture No. 1, payable to Bridge Rope
& Co. or registered assigns (incorporated by reference from Exhibit
10.19 to the Form 8-B)
10.18 Form of 12% Senior Convertible Debenture No. 2, payable to Vault & Co.
or registered assigns (incorporated by reference from Exhibit 10.20 to
the Form 8-B)
20
10.19 Asset Purchase Agreement among Champ Computer Systems, Inc., Liberty
United Trust and Polyphase Corporation, dated March 23, 1994
(incorporated by reference from Exhibit 10.25 to the Form SB-2)
10.20 Stock Purchase Agreement among PC Repair of Florida, Inc., Gene H.
Thurston, Jr. and Polyphase Corporation, dated February 15, 1994
(incorporated by reference from Exhibit 10.26 to the Form SB-2)
10.21 Agreement and Plan of Reorganization between the Shareholders of Micro
Configurations, Inc. and Polyphase Corporation, dated July 1, 1994
(incorporated by reference from Exhibit 10.27 to the Form SB-2)
10.22 Credit Agreement, dated August 29, 1994, between Texas Timberjack, Inc.
and Comerica Bank-Texas (incorporated by reference from Exhibit 10.28
to the Form SB-2)
10.23 Guaranty, dated August 29, 1994, from Polyphase Corporation to Comerica
Bank-Texas (incorporated by reference from Exhibit 10.29 to the Form
SB-2)
10.24 Deed of Trust, dated as of August 30, 1994, from Texas Timberjack, Inc.
to J. Patrick Faubion, Trustee (incorporated by reference from Exhibit
10.30 to the Form SB-2)
10.25 Security Agreement, dated as of August 29, 1994, between Texas
Timberjack, Inc. and Comerica Bank-Texas (incorporated by reference
from Exhibit 10.31 to the Form SB-2)
10.26 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated August 29, 1994 (incorporated by
reference from Exhibit 10.32 to the Form SB-2)
10.27 First Amendment to Credit Agreement dated September 1, 1995, between
Texas Timberjack, Inc. and Comerica Bank-Texas (incorporated by
reference from Exhibit 10.27 to the 1995 Form 10-K)
10.28 Fluctuating Rate Line of Credit Note from Texas Timberjack, Inc., as
maker, to Comerica Bank-Texas, dated September 1, 1995 (incorporated by
reference from Exhibit 10.28 to the 1995 Form 10-K)
10.29 Promissory Note in the amount of $2,000,000, from Pyrenees Group, as
maker, to Polyphase Corporation, dated November 1, 1995, related to the
exercise of options on Series D Preferred Stock (incorporated by
reference from Exhibit 10.29 to the 1995 Form 10-K)
10.30 Security Agreement, dated as of November 1, 1995, between Pyrenees
Group and Polyphase Corporation (incorporated by reference from Exhibit
10.30 to the 1995 Form 10-K)
10.31 Promissory Note in the amount of $2,000,872, from Paul A. Tanner, as
maker, to Polyphase Corporation, dated December 8, 1995 (incorporated
by reference from Exhibit 10.31 to the 1995 Form 10-K)
10.32 Convertible Preferred Stock Purchase Agreement, dated as of November
10, 1995, by and between Polyphase Corporation and Infinity Investors,
Limited (incorporated by reference from Exhibit 10.32 to the 1995 Form
10-K)
10.33 Securities Purchase Agreement, dated as of December 1, 1995, by and
among Polyphase Corporation, Merrill Lynch World Income Fund, Inc., and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.33 to the 1995 Form 10-K)
10.34 Registration Rights Agreement, dated as of December 1, 1995, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Convertible Holdings, Inc. (incorporated by reference from Exhibit
10.34 to the 1995 Form 10-K)
21
10.35 Indenture, dated as of December 1, 1995, from Polyphase Corporation to
IBJ Schroder Bank & Trust Company (incorporated by reference from
Exhibit 10.35 to the 1995 Form 10-K)
10.36 Form of 12% Senior Convertible Debenture No. 1, dated December 1, 1995
payable to Bridge Rope & Co. or registered assigns (incorporated by
reference from Exhibit 10.36 to the 1995 Form 10-K)
10.37 Form of 12% Senior Convertible Debenture No. 2, dated December 1, 1995
payable to Kane & Co. or registered assigns (incorporated by reference
from Exhibit 10.37 to the 1995 Form 10-K)
10.38 Renewal Promissory Note in the amount of $12,842,916, dated December
31, 1996, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.41 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1996 [the "1996
Form 10-K"])
10.39 Amended Pledge Agreement, dated as of December 31, 1996, between
Polyphase Corporation and Harold Estes (incorporated by reference from
Exhibit 10.42 to the 1996 Form 10-K)
10.40 Amended Security Agreement, dated as of December 31, 1996, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.43 to the 1996 Form 10-K)
10.41 Stock Purchase Agreement among Letronix Acquisition Corp. and Polyphase
Corporation dated June 28, 1996 (incorporated by reference from Exhibit
10.44 to the 1996 Form 10-K)
10.42 Security and Pledge Agreement, dated June 28, 1996 by and between
Letronix Acquisition Corp. and Polyphase Corporation (incorporated by
reference from Exhibit 10.45 to the 1996 Form 10-K)
10.43 Secured Promissory Note, dated June 28, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by reference
from Exhibit 10.46 to the 1996 Form 10-K)
10.44 Security Agreement, dated July 1, 1996 by and between Letronix
Acquisition Corp. and Polyphase Corporation (incorporated by reference
from Exhibit 10.47 to the 1996 Form 10-K)
10.45 Promissory Note, dated July 1, 1996 by and between Letronix Acquisition
Corp. and Polyphase Corporation (incorporated by reference from Exhibit
10.48 to the 1996 Form 10-K)
10.46 Stock Purchase Agreement among Letronix Acquisition Corp. and Polyphase
Corporation dated July 1, 1996 (incorporated by reference from Exhibit
10.49 to the 1996 Form 10-K)
+10.47 Stock Option Agreement for Paul A. Tanner dated July 23, 1996
(incorporated by reference from Exhibit 10.50 to the 1996 Form 10-K)
+10.48 Stock Option Agreement for James Rudis dated July 23, 1996
(incorporated by reference from Exhibit 10.51 to the 1996 Form 10-K)
+10.49 Stock Option Agreement for William E. Shatley dated July 23, 1996
(incorporated by reference from Exhibit 10.52 to the 1996 Form 10-K)
+10.50 Stock Option Agreement for Michael F. Buck dated July 23, 1996
(incorporated by reference from Exhibit 10.53 to the 1996 Form 10-K)
+10.51 Stock Option Agreement for George R. Schrader dated July 23, 1996
(incorporated by reference from Exhibit 10.54 to the 1996 Form 10-K)
22
+10.52 Stock Option Agreement for Paul A. Tanner, Jr. dated July 23, 1996
(incorporated by reference from Exhibit 10.55 to the 1996 Form 10-K)
10.53 Convertible Promissory Note, dated January 1, 1996 by and between PLY
Stadium Partners, Inc. and Polyphase Corporation (incorporated by
reference from Exhibit 10.53 to the Company's Annual Report on Form
10-K for the year ended September 30, 1997 [the "1997 Form 10-K"])
10.54 Master Loan Agreement, dated January 1, 1996 by and between Polyphase
Corporation and PLY Stadium Partners, Inc. (incorporated by reference
from Exhibit 10.54 to the 1997 Form 10-K)
10.55 Guaranty, dated January 1, 1996 by Paul A. Tanner to Polyphase
Corporation (incorporated by reference from Exhibit 10.55 to the 1997
Form 10-K)
10.56 Guaranty, dated January 1, 1996 by Pyrenees Group, Inc. to Polyphase
Corporation (incorporated by reference from Exhibit 10.56 to the 1997
Form 10-K)
10.57 Management Agreement, dated January 1, 1996 by and between PLY Stadium
Partners, Inc. and Polyphase Corporation (incorporated by reference
from Exhibit 10.57 to the 1997 Form 10-K)
10.58 Security Agreement, dated January 1, 1996, between Paul A. Tanner and
Polyphase Corporation (incorporated by reference from Exhibit 10.58 to
the 1997 Form 10-K)
10.59 Security Agreement, dated January 1, 1996, between Pyrenees Group,
Inc. and Polyphase Corporation (incorporated by reference from Exhibit
10.59 to the 1997 Form 10-K)
+10.60 Stock Option Agreement for David Weinreb dated January 17, 1997
(incorporated by reference from Exhibit 10.60 to the 1997 Form 10-K)
10.61 Amended Renewal Promissory Note in the amount of $14,341,256 dated
December 2, 1997, payable by Polyphase Corporation to Harold Estes
(incorporated by reference from Exhibit 10.61 to the 1997 Form 10-K)
10.62 Amended Pledge Agreement, dated as of December 2, 1997, between
Polyphase Corporation and Harold Estes (incorporated by reference from
Exhibit 10.62 to the 1997 Form 10-K)
10.63 Amended Security Agreement, dated as of December 2, 1997, between
Texas Timberjack, Inc. and Harold Estes (incorporated by reference
from Exhibit 10.63 to the 1997 Form 10-K)
10.64 Term Loan Agreement in the amount of $22,500,000, dated December 4,
1997, among Overhill Farms, Inc. as borrower, Polyphase Corporation as
guarantor and The Long Horizons, Fund, L.P. as lender (incorporated by
reference from Exhibit 10.64 to the 1997 Form 10-K)
10.65 Security Agreement, dated December 4, 1997, between Overhill Farms,
Inc. as grantor and The Long Horizons Fund, L.P. as lender
(incorporated by reference from Exhibit 10.65 to the 1997 Form 10-K)
10.66 Assignment for Security (Trademarks) dated December 4, 1997, between
Overhill Farms, Inc. as assignor and The Long Horizons Fund, L.P. as
assignee (incorporated by reference from Exhibit 10.66 to the 1997
Form 10-K)
10.67 Pledge and Security Agreement, dated December 4, 1997, among Polyphase
Corporation as the pledgor, in favor of The Long Horizons Fund, L.P.
as the lender and Overhill Farms, Inc. as the borrower (incorporated
by reference from Exhibit 10.67 to the 1997 Form 10-K)
23
10.68 Registration Rights Agreement, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P. (incorporated by
reference from Exhibit 10.68 to the 1997 Form 10-K)
10.69 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)
10.70 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)
10.71 Supplemental Indenture, dated as of December 5, 1997, from Polyphase
Corporation to IBJ Schroder Bank & Trust Company (incorporated by
reference from Exhibit 10.71 to the 1997 Form 10-K)
10.72 Compromise Settlement Agreement with Mutual Release between Polyphase
Corporation and Rice Partners II, L.P. (incorporated by reference from
Exhibit 10.72 to the 1997 Form 10-K)
10.73 Stock Purchase Agreement between Letronix Acquisition Corp. and
Polyphase Corporation dated July 1, 1997 (incorporated by reference
from Exhibit 10.73 to the 1997 Form 10-K)
10.74 Certificate of Designation of Preferences of Series B Preferred Stock
of Letronix Acquisition Corporation dated July 2, 1997 (incorporated
by reference from Exhibit 10.74 to the 1997 Form 10-K)
10.75 Term Loan Agreement in the amount of $2,800,000, dated August 29,
1997, between Dallas Parkway Properties, Incorporated and National
Operating, L.P. (incorporated by reference from Exhibit 10.75 to the
1997 Form 10-K)
10.76 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)
10.77 Offshore Securities Subscription Agreement to purchase 7,500 Shares of
Series F 6% Convertible Preferred between Polyphase Corporation and
Black Sea Investments, Ltd., dated August 29,1997 (incorporated by
reference from Exhibit 10.77 to the 1997 Form 10-K)
10.78 Stock Exchange Agreement by and between Tollway Properties, Inc. and
Polyphase Corporation date as of December 1, 1997 (incorporated by
reference from Exhibit 10.78 to the 1997 Form 10-K)
10.79 Release and Settlement Agreement between Dallas Parkway Properties,
Incorporated and Polyphase Corporation dated as of December 1, 1997
(incorporated by reference from Exhibit 10.79 to the 1997 Form 10-K)
10.80 General Release between Dallas Parkway Properties, Incorporated and
National Operating, L.P. dated as of December 1, 1997 (incorporated by
reference from Exhibit 10.80 to the 1997 Form 10-K)
10.81** Common Stock Purchase Warrant, dated April 24, 1998, covering 105,000
shares issued to Merrill Lynch World Income Fund, Inc.
10.82** Common Stock Purchase Warrant, dated April 24, 1998,
covering 105,000 shares issued to Merrill Lynch Convertible Fund, Inc.
24
10.83** Common Stock Purchase Warrant, dated April 24, 1998, covering 52,500
shares issued to Merrill Lynch Convertible Fund, Inc. (w-1)
10.84** Common Stock Purchase Warrant, dated April 24, 1998, covering 52,500
shares issued to Merrill Lynch Convertible Fund, Inc. (w-1a)
10.85** Common Stock Purchase Warrant, dated April 24, 1998, covering 52,500
shares issued to Merrill Lynch World Income Fund, Inc. (w-2)
10.86** Common Stock Purchase Warrant, dated April 24, 1998, covering 52,500
shares issued to Merrill Lynch World Income Fund, Inc. (w-2a)
10.87** Registration Rights Agreement, dated as of April 24, 1998, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Merrill Lynch Convertible Fund, Inc.
10.88** Guaranty, dated August 7, 1998 by Polyphase Corporation to
NationsBank
10.89** Loan Agreement in the amount of $12,000,000 dated August 7,
1998 between NationsBank, as lender and Texas Timberjack, as borrower.
10.90** Promissory Note in the amount of $4,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower.
10.91** Promissory Note in the amount of $8,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower.
10.92** Security Agreement dated August 7, 1998 by Texas Timberjack
to NationsBank
+10.93** Stock Option Agreement for Michael F. Buck, dated March 17, 1998
+10.94** Stock Option Agreement for George R. Schrader, dated March 17, 1998
21.1** Subsidiaries of the Registrant.
23.1** Consent of Ernst & Young LLP
27.1** Financial Data Schedule
--------------------------
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
(b). Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant during the last quarter of
the Fiscal Year Ended September 30, 1998.
25
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 22, 1998
---------------
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 22, 1998
- ----------------
James Rudis
Chief Executive Officer,
Chairman of the Board,
President and Director
(Principal Executive Officer)
/s/ William E. Shatley December 22, 1998
- -----------------------
William E. Shatley
Senior Vice President, Treasurer,
Chief Financial Officer and Director
(Principal Financial and
Accounting Officer)
/s/ George R. Schrader December 22, 1998
- -----------------------
George R. Schrader
Director
/s/ Michael F. Buck December 22, 1998
- --------------------
Michael F. Buck
Director
26
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-9
Notes to Consolidated Financial Statements F-12
Financial Statement Schedule:
- -----------------------------
Schedule I - Condensed Financial Information of Registrant F-42
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders of
Polyphase Corporation
We have audited the accompanying consolidated balance sheets of Polyphase
Corporation and subsidiaries as of September 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Polyphase
Corporation and subsidiaries at September 30, 1998 and 1997 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998 in conformity with generally accepted
accounting principles. 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 18, 1998
Dallas, Texas
F-2
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
--------------------------
1998 1997
----------- -----------
Current assets:
Cash $ 423,957 $ 1,064,259
Receivables, net of allowance for doubtful
accounts of $562,800 and $576,192
in 1998 and 1997, respectively:
Trade accounts 13,839,250 11,576,650
Current portion of sales contracts 3,879,420 5,770,626
Notes receivable 1,813,232 939,621
Inventories 34,568,628 23,002,020
Prepaid expenses and other 527,999 1,607,644
----------- -----------
Total current assets 55,052,486 43,960,820
----------- -----------
Property and equipment:
Land 432,000 765,000
Buildings and improvements 4,054,854 4,660,582
Machinery, equipment and other 9,490,827 8,953,076
----------- -----------
13,977,681 14,378,658
Accumulated depreciation 7,526,281 5,954,554
----------- -----------
6,451,400 8,424,104
----------- -----------
Other assets:
Noncurrent receivables:
Sales contracts 1,363,039 2,027,518
Related parties 670,655 522,597
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $3,183,743
and $2,370,455 in 1998 and 1997, respectively 13,414,996 14,228,284
Other intangible assets 2,494,754 1,197,139
Restricted cash 672,898 717,358
Other 1,425,147 1,071,629
----------- -----------
20,041,489 19,764,525
----------- -----------
Total Assets $81,545,375 $72,149,449
=========== ===========
F-3
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
-----------------------------
1998 1997
------------- -------------
Current liabilities:
Notes payable $ 14,409,681 $ 9,013,099
Accounts payable 6,085,703 7,775,022
Accrued expenses and other 3,514,685 2,251,035
Current maturities of long-term debt 3,533,333 5,720,000
------------ ------------
Total current liabilities 27,543,402 24,759,156
Long-term debt, less current maturities 29,220,972 23,272,280
Note payable and accrued interest to related party 16,307,405 13,998,916
Reserve for credit guarantees 672,898 717,358
------------ ------------
Total liabilities 73,744,677 62,747,710
Commitments and contingencies
Warrants to purchase common stock of subsidiary 1,200,000 2,000,000
Stockholders' equity:
Preferred stock, $.01 par value, authorized 50,000,000
shares, issued and outstanding, 115,000
and 132,500 in 1998 and 1997, respectively 1,150 1,325
Common stock, $.01 par value, authorized 100,000,000
shares, issued and outstanding, 15,080,050
and 13,664,109 in 1998 and 1997, respectively 150,800 136,641
Paid-in capital 28,623,811 28,955,695
Accumulated deficit (21,199,744) (20,716,603)
Notes receivable from related party (975,319) (975,319)
------------ ------------
Total stockholders' equity 6,600,698 7,401,739
------------ ------------
Total Liabilities and Stockholders' Equity $ 81,545,375 $ 72,149,449
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
-----------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Net revenues $ 146,230,922 $ 151,948,553 $ 149,540,785
Cost of sales 120,378,877 126,565,112 120,865,827
------------- ------------- -------------
Gross profit 25,852,045 25,383,441 28,674,958
Selling, general and administrative expenses 18,167,524 18,799,917 22,009,991
------------- ------------- -------------
Operating income 7,684,521 6,583,524 6,664,967
------------- ------------- -------------
Other income (expenses):
Loss on related party receivable - (14,838,456) -
Loss on investment in computer operations - (3,613,815) -
Gain on sale of assets 987,857 - 827,852
Interest expense (8,871,535) (7,179,973) (6,389,926)
Interest income and other 543,080 380,655 751,385
------------- ------------- -------------
Total other expenses (7,340,598) (25,251,589) (4,810,689)
------------- ------------- -------------
Income (loss) before income taxes,
warrant accretion and extraordinary item 343,923 (18,668,065) 1,854,278
Income tax (benefit) expense 56,575 (653,683) 1,593,542
------------- ------------- -------------
287,348 (18,014,382) 260,736
Accretion of warrants to purchase
common stock of subsidiary - 810,776 502,948
------------- ------------- -------------
Net income (loss) before
extraordinary item 287,348 (18,825,158) (242,212)
Extraordinary item:
Early extinguishment of debt (616,239) - -
------------- ------------- -------------
Net loss (328,891) (18,825,158) (242,212)
Dividends on preferred stock 154,250 403,750 150,000
------------- ------------- -------------
Net loss attributable to
common stockholders $ (483,141) $ (19,228,908) $ (392,212)
============= ============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Per share data, basic and diluted:
Net income (loss) per common share:
Income (loss) before
extraordinary item $ .01 $ (1.41) $ (.03)
Extraordinary item (.04) - -
----------- ----------- -----------
Net loss per common share $ (.03) $ (1.41) $ (.03)
=========== =========== ===========
Weighted average shares outstanding,
basic and diluted 14,552,462 13,632,357 13,722,552
=========== =========== ===========
F-6
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998
Preferred Stock Common Stock Paid-in Accumulated Notes
Shares Amount Shares Amount Capital Deficit Receivable Total
----------- ----------- ---------- ---------- ----------- ------------- ------------ -----------
Balance,
September 30, 1995 - $ - 12,621,966 $ 126,220 $22,106,606 $ (1,095,483) $ - $21,137,343
Exercise of Series D
preferred stock options
by Pyrenees 200,000 2,000 1,998,000 (2,000,000)
Conversion of preferred
shares to common shares (200,000) (2,000) 500,000 5,000 (3,000)
Private placement of
Series A-3 preferred stock 250,000 2,500 2,497,500 2,500,000
Exercise of common
stock options 75,000 750 49,250 50,000
Payments on Pyrenees note 720,911 720,911
Stock issuance costs (17,642) (17,642)
Dividends on preferred
stock (150,000) (150,000)
Net loss for 1996 (242,212) (242,212)
----------- ----------- ---------- ---------- ----------- -