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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, 1997
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.)
16885 Dallas Parkway, Suite 400
Dallas, Texas 75248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 732-0010
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------------
Common Stock, $.01 par value per share American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based on the closing price of such stock on December 31, 1997, was
approximately $7.8 million. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and 10% beneficial owners are affiliates. As of
December 31, 1997 the registrant had issued and outstanding 14,376,171 shares
of the Company's common stock, $ .01 par value.
POLYPHASE CORPORATION
1997 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 8
Item 4 Submission of Matters to a Vote of Security 8
Holders
Part II
Item 5 Market for Registrant's Common Equity and 9
Related Stockholder Matters
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 18
Market Risk
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 19
Registrant
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial 23
Owners and Management
Item 13 Certain Relationships and Related Transactions 26
Part IV
Item 14 Exhibits, Financial Statement Schedules and 28
Reports on Form 8-K
PART I
ITEM 1. Description of Business.
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General
The Company is a diversified holding company that, through its
subsidiaries, currently operates primarily 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.
During 1993, under the direction of the current management team, the
Company embarked on an aggressive long-term program to diversify its activities
and expand its operations. At that time, the Company's sole operating entity
was Polyphase Instrument Co. ("PIC"), which conducts the Company's transformer-
related activities. PIC, active since 1956, manufactures and sells customized
transformers and communications filters, primarily to defense contractors and
their suppliers.
In connection with the Company's program of diversification and expansion,
the more significant acquisitions consummated by the Company were:
. Computer-Related Activities ("Computer Group") Through various
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transactions in fiscal 1993 and 1994, the Company acquired the operations of
several computer-related companies which were engaged in the computer marketing,
service and networking business and in software development. These operations
were all purchased from individuals and were generally accomplished through the
issuance of shares of various series of the Company's convertible preferred
stock. All such preferred stock issued was subsequently converted into shares
of the Company's common stock. The Company, during fiscal 1996, relinquished
control of the Computer Group, first by contributing the stock of Network
America, Inc. ("NAI"), Letronix, Inc., dba Computer Systems Concepts ("CSC"), PC
Repair of Florida, Inc. ("PCR") and Register-Mate, Inc. ("RMI") to a wholly-
owned subsidiary, PC Networx America, Inc. ("PCNA") and selling 51% of PCNA to
an unrelated corporation; and by selling 100% of the stock of Micro
Configurations, Inc. to the same unrelated entity. During fiscal 1997, the
Company disposed of its remaining 49% ownership interest, incurring a loss of
$3,614,000 in connection therewith. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation-Liquidity and Capital
Resources."
. 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. As of September 30, 1997 the promissory note has a balance of
$13,998,916 (including accrued and unpaid interest) and is due April 6, 1998.
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
1
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, located in Culver City, California, is a food processor that produces
high quality entrees, meals, soups, sauces and poultry, meat and fish
specialities primarily for customers in the weight loss, airline and restaurant
chain industries.
Products and Services
Food Group
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's strategy has been to position itself as a
provider of prepared foods to a number of prominent customers such as American
Airlines, Jenny Craig, United Airlines, Albertsons, Carl's Jr., Jack in the Box
and King's Hawaiian. Historically, Overhill has served four industry segments:
airlines, weight loss, food service and retail.
Forestry Group
The Forestry Group, through Timberjack, is a distributor of industrial and
logging equipment with locations in Lufkin, Jasper, Cleveland and Atlanta,
Texas. TTI carries the Timberjack, Blount and Hyundai lines of industrial and
logging equipment and the Ford and New Holland lines 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 brands of related equipment. TTI's
operations are primarily concentrated in the forested areas of East Texas
although its market extends to surrounding states. TTI operates in a fragmented
industry where its major competition is from distributors and dealers of
Caterpillar and John Deere equipment. TTI estimates that it currently holds
approximately 60% of the shear (a machine that cuts the timber) market, 35% of
the skidder (a machine that transports the logs out of the forest onto a loader)
market and 70% of the loader (a machine that stacks trees onto trucks) market in
Texas.
Transformer Group
The Company's Transformer Group consists solely of 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
Food Group
Overhill markets its products through an internal sales force and outside
food brokers. While Overhill will continue to service the airline and weight
loss industries, management has identified the retail and food service markets,
particularly the emerging home meal replacement market, as areas of potential
significant future growth. Overhill management has restructured its sales force
and redirected its marketing efforts to concentrate on these markets. During
fiscal 1997, Overhill began to see the effects of these efforts, with products
under both the Overhill brand and under private label now being sold in major
retail and food service chains.
2
Approximately 56% of Overhill's sales in fiscal 1997 were derived from
three customers, Jenny Craig, Inc. (31%), American Airlines (13%) and King's
Hawaiian (12%). On a consolidated basis these three customers represented
approximately 20%, 8% and 8% of the Company's total sales, respectively.
Although the 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 the Food Group'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.
Forestry Group
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 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 54% of TTI sales during fiscal 1997 are from new equipment
sold to companies involved in the forestry industries. Additional revenues are
derived from sales of used equipment (24%), servicing of equipment (5%), sales
of parts (15%) and financing equipment sales (2%). 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.
Transformer Group
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,
1997, 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 .
Approximately 83% of the transformers and filters sold by PIC are
components of systems used by the United States Armed Forces. Most of the
remaining 17% 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 5% of PIC's sales from these operations in fiscal 1997 were direct
spares procurement from various government activities.
PIC's products are sold to approximately 200 active accounts, consisting
principally of defense contractors and their suppliers. Nine customers
accounted for approximately 80%, 76%, and 78% of PIC's sales for fiscal 1997,
1996, and 1995, respectively, which percentages represented approximately 1%,
1%, and 2% of the Company's consolidated sales, respectively. The three largest
accounts, Lockheed Martin, Rockwell International, and ITT Avionics comprise
approximately 20%, 20% and 12%, respectively, of PIC's overall sales.
3
Manufacturing and Sourcing
Food Group
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. A single plant is currently concluding
negotiations with the local Teamsters Union to renew the labor contract which
expired on November 30, 1997 and anticipates ratification by the union in early
1998. Until ratification the union has agreed to work under the prior
contract. 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 of the product. In fiscal 1997, the plants each operated 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.
Transformer Group
PIC operates a manufacturing facility in Fort Washington, Pennsylvania that
produces approximately 92% of the Transformer Group's transformers and all
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
Food Group
At September 30, 1997, Overhill had unfilled purchase orders aggregating
approximately $2,400,000, as compared to $2,350,000 at September 30, 1996.
Substantially all of the backlog is expected to be delivered to customers within
the following twelve month period. Overhill typically delivers product directly
from finished goods inventory and as such does not maintain a large backlog.
The Company may experience variations in the total amount of the backlog at any
given date and, accordingly, Overhill's backlog is not 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.
4
Forestry Group
As a dealer, servicer and financier of forestry equipment, TTI does not
maintain a backlog of orders. Equipment ordered by a customer that is not in
inventory takes approximately one to six weeks to be shipped from the
manufacturer or another distributor.
Transformer Group
At September 30, 1997, PIC had unfilled purchase orders aggregating
approximately $2,200,000 as compared to $1,200,000 at September 30, 1996.
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 be indicative of future
results.
Product Development
Food Group
Overhill maintains a comprehensive test kitchen, staffed by four chefs,
which formulate recipes and upgrade specific products for current customers and
establish 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. In 1997 the Company continued its expansion into the retail
and food service areas with branded and private label entrees.
Forestry Group
TTI does not develop products for sale to the public. TTI relies primarily
upon two suppliers, Timberjack, Inc. and Blount, for a majority of its new units
and parts.
Transformer Group
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.
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.
5
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 and Forestry Groups 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.
Competition
In General
Competition in the industries in which the Company operates generally is
intense. Many of the Company's competitors have greater market recognition and
greater, financial, technical, marketing and human resources than the Company.
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.
Food Group
Overhill's food products, consisting primarily of poultry, pasta and to a
lesser extent beef and assorted related products, compete with those 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 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, brand name recognition.
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
Competition in the forestry segment is highly fragmented in the Eastern
Texas and Western Louisiana area where TTI principally operates. Because of it
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 area. 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.
6
Transformer Group
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.
Employees
As of September 30, 1997, the Company had approximately 893 employees as
follows: approximately 725 full-time employees in the Food Group; 89 full-time
employees in the Forestry Group; 72 full-time employees in the Transformer
Group; and 7 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.
ITEM 2. Description of Property.
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Corporate Headquarters
The Company's corporate headquarters are located at 16885 Dallas Parkway,
Dallas, Texas 75248 and contain approximately 40,000 square feet of office
space. Effective December 1, 1997 the Company entered into an agreement to sell
its corporate headquarters building and expects to relocate in early 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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 all
manufacturing and administrative functions into one location.
Forestry Group
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas
and leases buildings in Cleveland and Atlanta, Texas. One building in Lufkin,
Texas has 38,500 square feet, of which 18,900 square feet comprise the shop
area. The other two buildings in Lufkin have 3,600 and 4,200 square feet and
comprise the wash room and storage room, respectively. One building in Jasper,
Texas has 10,000 square feet of which 6,600 square feet comprises the shop area.
The other building in Jasper has 900 square feet and is used as a wash and paint
room. The Cleveland building has approximately 1,800 square feet and is used as
a shop and for parts.
7
The Atlanta building has approximately 7,500 square feet of which 3,750
comprises the shop area. The remaining area is used for parts sales.
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 Company is
currently in negotiations and intends to renew the lease for this facility,
which is due to expire in May 1998. 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.
8
ITEM 3. Legal Proceedings.
------------------
In January 1997, a suit was filed in District Court of Dallas County
against the Company by Rice Partners II, L.P., subordinated debt holders of
Overhill. The suit claimed, among other things, that the Company breached
covenants of the subordinated debt agreement and refused to cure the defaults
within a reasonable period of time. On December 4, 1997, the suit was settled
and the action has been dismissed by the Court. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation - Liquidity and
Capital Resources."
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 suits seek class action status
and assert liability based on alleged misrepresentations that resulted in the
market price of the stock being artificially inflated. The Company intends to
vigorously defend these actions. One of such suits was dismissed by the Court
subsequent to September 30, 1997.
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 position or results of
operations.
The Company is not a party to any other material pending litigation.
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.
9
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
----------------------------------------------------------------------
The Common Stock is listed on the American Stock Exchange under the symbol
"PLY." The following table sets forth the range of high and low sales prices
for the Common Stock on the American Stock Exchange for the periods indicated:
Fiscal 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
Fiscal 1995 High Low
----------- ---------------- ----------------
Quarter from October 1, 1994
to December 31, 1994 $ 5.7500 $ 3.1250
Quarter from January 1, 1995
to March 31, 1995 $ 3.7500 $ 2.1250
Quarter from April 1, 1995
to June 30, 1995 $ 3.6250 $ 2.6875
Quarter from July 1, 1995
to September 30, 1995 $ 3.8750 $ 3.0625
- --------------------------------------------------------------------------------
(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.
10
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, 1997, the Company estimates that there were
approximately 2,200 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.
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.
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.
11
ITEM 6. Selected Financial Data
-----------------------
The table set forth below is 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: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Revenues $ 151,949 $ 149,541 $ 102,035 $ 24,970 $ 7,326
Operating Income 6,584 6,665 6,752 355 390
Earnings (Loss) Before
Extraordinary Items and
Cumulative Effect of Change
in Accounting Principle (18,825) (242) 3,286 (1,384) 852
Net Income (Loss) $ (18,825) $ (242) $ 3,286 $ (1,017) $ 1,036
=========== =========== =========== ========== ==========
Income (Loss) per Common Share:
Before Cumulative Effect of
Extraordinary Item and Change
in Accounting Principle $ (1.41) $ (.03) $ .26 $ (.28) $ .24
Extraordinary Items - - - .01 .05
Cumulative Effect of
Accounting Change - - - .06 -
----------- ----------- ----------- ---------- ----------
Net Income (Loss) $ (1.41) $ (.03) $ .26 $ (.21) $ .29
=========== =========== =========== ========== ==========
Weighted Average Common
and Common Equivalent
Shares Outstanding 13,632,357 13,722,552 12,745,701 4,881,454 3,616,795
As of September 30
- ----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 72,149 $94,179 $88,159 $37,975 $ 9,034
Long-Term Debt 23,272 - 27,230 5,259 169
Total Liabilities 62,748 68,991 66,335 23,618 1,740
Accumulated (Deficit) (20,717) (1,488) (1,095) (4,381) (3,365)
Stockholders' Equity 7,402 23,998 21,137 14,357 7,293
12
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, 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
continues 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.
(See "Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended
September 30, 1995"). The advances made to PLY Stadium Partners Inc. ("Stadium
Partners"), a private investment firm headed by Mr. Paul A. Tanner, 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 either through the sale of assets or 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 prior year. The purchaser
also elected not to further pursue the operation of MCC, and, since the Company
has 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 has been 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 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.
13
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 has 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.
Management anticipates that this sales trend will continue through 1998, as
demand in the forestry industry remains strong for wood based products.
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.
The Company anticipates that revenues and operating income will not increase
significantly as the industry is being affected by technical innovations in
alternative sources of electro-mechanical devices.
The Company has reviewed its operational and accounting computer systems
for compliance in the year 2000. Based upon management's assessment, the Year
2000 issue is not expected to have material impact on the Company.
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995
For the year ended September 30, 1996 the Company's revenues increased
$47,506,000 (47%), to $149,541,000 from $102,035,000 in fiscal 1995. Operating
income for the year ended September 30, 1996 decreased $87,000 (1%) to
$6,665,000 from $6,752,000 in fiscal 1995. Net income attributable to common
shareholders for the year ended September 30, 1996 was a loss of $392,000, a
decrease of $3,678,000 (112%) from net income of $3,286,000 in fiscal 1995. The
increase in revenues was attributable to the inclusion of Overhill for a full
twelve months in fiscal 1996 as compared to twenty one weeks in fiscal 1995,
offset somewhat by reduced sales at TTI and the Computer Group, control of the
latter of which was divested in July 1996. The
14
decrease in net income to common stockholders was attributable to increased
interest expense from the Overhill acquisition, the reduction of tax benefits
available during the year, reduction of profits at TTI, losses incurred by the
Computer Group and dividends on the outstanding preferred stock.
After evaluating the industry and growth potential of the Computer Group,
management determined current and future operating margins within the Computer
Group no longer met long term objectives. Consequently, in July 1996 the Company
sold a controlling interest in the Computer Group to an unrelated third party.
The sale of 51% of a newly-formed subsidiary, whose sole assets consisted of
the capital stock of Network America, Inc., PC Repair of Florida, Computer
Systems Concepts, and Register Mate, Inc., occurred in July 1996. For the year
ended September 30, 1996 the Computer Group contributed revenues of $10,398,000
and operating losses of $1,531,000. The Company, in fiscal 1996 without the
Computer Group, would have realized revenues of approximately $139,142,000 and
operating income of $8,196,000.
Also during fiscal 1996 the Company reached an agreement to manage the
development and construction of a domed stadium in Las Vegas, Nevada, a project
being developed by PLY Stadium Partners, Inc. ("Stadium Partners"), a private
investment firm headed by Mr. Paul A. Tanner, Chairman and Chief Executive
Officer of the Company. The Company's involvement was to include the marketing
of luxury suites, premium seating and sales of concessions, sponsorships and
other ancillary rights. The Company funded $4,000,000 of debt that (1) is
convertible into a 14% economic interest in Stadium Partners and (2) is
guaranteed by Mr. Tanner and the Pyrenees Group, a private investment firm
controlled by Mr. Tanner. Beginning in January 1996, the Company began
recording a monthly fee for managing the project. For the twelve months ended
September 30, 1996, the Company accrued management and service revenues of
$2,550,000 and interest income of $790,000 related to the Company's activities
with Stadium Partners. At September 30, 1996, the total amount receivable from
Stadium Partners amounted to approximately $13.3 million, which included the
convertible debt and management fees discussed above, as well as additional
advances made by the Company. The collectibility of this receivable, which
approximated $18 million, remains dependent upon the success of the project
and/or performance under the guarantees referred to above.
On November 15, 1996, Stadium Partners, through a newly-formed partnership
(the "Partnership"), purchased 62 acres in Las Vegas for the development of the
stadium and adjacent convention facility. Financing was provided by a Lehman
Brothers affiliate ("Lehman"), with the lender also receiving 50% equity
interest in the partnership. As a result of the new partnership arrangement,
Stadium Partners is precluded from making any revenue distributions until
permanent financing is arranged or until revenues from the sale of luxury
suites, premium seats and/or concession rights are sufficient to repay the
financing provided by Lehman. Stadium Partners launched its marketing campaign
in Las Vegas on January 15, 1997, but by March 15, 1997, sales were insufficient
to satisfy the Lehman repayment. As a result of Stadium Partners' failure to
make timely payment of its obligation to Polyphase, the Company was required to
establish a reserve of $3.34 million against the income accrued, which after
applicable taxes reduced net income by $2.2 million. The reserve will be
reduced as collections and distributions, if any, are made pursuant to the
Stadium Partner's loan agreements. There was no assurance that payments would
be made and the Company discontinued accruing for interest and management fees
after fiscal 1996.
Sales in the Food Group increased $58,376,000 (145%) to $98,771,000 in
fiscal 1996 from $40,395,000 for the twenty one week period during fiscal 1995
in which the Company owned the Overhill operations. Overall sales remained
stable during the year despite the downturn in the weight loss sectors and
airline sectors. Overhill's expansion into brand name entrees and restaurant
specialty products offset the sales decline in other sectors. Brand name frozen
entrees have begun to gain name recognition and sales momentum at the regional
level while specialty products for the restaurant industry are developing market
share in a competitive environment. Operating income for fiscal 1996 was
$6,260,000 as compared to $2,708,000 for the twenty one weeks of fiscal 1995.
Gross margins on sales increased while operating income as a percentage of
revenues decreased. The changes resulted from a change in the product mix as
more emphasis was placed on the higher margined specialty products which require
higher marketing and administrative expenses.
The Forestry Group sales decreased $8,531,000 (20%) from $42,778,000 in
fiscal 1995 to $34,247,000 in fiscal 1996. Operating income decreased
$1,651,000 (35%) from $4,691,000 in fiscal 1995 to $3,040,000 in fiscal 1996.
The decreases in revenues and operating income are attributable to unseasonable
weather in fiscal
15
1996, contributing to weaker timber prices and decreased sales of logging
equipment. Timberjack also incurred additional expenses while moving its Lufkin
location to a larger facility and opening a sales office in Atlanta, Texas. See
"Business-Properties" and "Liquidity and Capital Resources."
The Transformer Group's sales decreased $54,000 (1%) from $3,603,000 in
fiscal 1995 to $3,549,000 in fiscal 1996. Operating income also decreased
$226,000 (75%) primarily due to higher general and administrative costs during
the year and the effects of a fire which closed the business for three weeks.
The Computer Group, as mentioned above, was consolidated into PC Networx
America, Inc., a 51% interest of which was sold July 1, 1996. Revenues for the
nine months of fiscal 1996 were $10,398,000 as compared to revenues of
$15,259,000 for twelve months in fiscal 1995. The group incurred operating
losses of $1,530,000 in fiscal 1996 as compared to operating income of $549,000
in fiscal 1995. The decreases in revenue and losses in Computer Group were
attributable to inventory adjustments in the third quarter of fiscal 1996 and
significant declines in prices of memory and other components. These factors
contributing with the lower gross margins on "clone" computers resulted in
management's decision to sell a controlling interest in the group.
Liquidity and Capital Resources
Principal sources of liquidity for the Company are cash flow from
operations, cash balances and additional financing capacity. The Company's cash
and cash equivalents increased $783,000 to $1,064,000 at September 30, 1997,
compared to $281,000 at September 30, 1996.
The Company generated $6,514,000 cash from operations in fiscal 1997 as
compared to $2,775,000 in fiscal 1996. The increase in cash flow from
operations results primarily from decreases in inventory levels at the Overhill
Farms subsidiary and increased operating profits from Texas Timberjack.
Management at Overhill continues to streamline the manufacturing operation and
reduce inventory levels by improvements in production scheduling and timing of
materials purchased.
The Company's investing activities for the year ended September 30, 1997
resulted in a use cash of approximately $4,750,000 as compared to $9,812,000 for
the year ended September 30, 1996. During fiscal 1997 and 1996 the Company's
use of cash consisted primarily of advances to Stadium Partners. The funds
advanced during fiscal 1997 included $2.4 million drawn from an existing line of
credit and $2.5 million from a six month term note described below. Capital
expenditures resulted in a use of cash of $758,000 in fiscal 1997, primarily
for new manufacturing equipment at Overhill.
The Company's financing activities for the year ended September 30, 1997
resulted in the use of cash of $981,000, compared to cash provided of $4,043,000
in fiscal 1996. During fiscal 1997, the Company borrowed $2.8 million on a note
payable secured by real estate and received $734,000, net of transaction costs,
in a private placement of preferred stock. The funds of these transactions were
used repay an existing real estate mortgage relating to the corporate office
building and to repay a note incurred for funds advanced to Stadium Partners
described below.
During January 1997, in connection with an advance made to Stadium
Partners, the Company borrowed $2.5 million on a 16% six month note,
collateralized by a second lien on the Company's corporate headquarters
building. When the Company was unable to make the principal payment when due,
the lender elected to post the real estate for foreclosure. Prior to the
foreclosure proceeding, the Company entered into two transactions described
below which enabled it to repay this loan as well as the unpaid balance of the
first mortgage payable to Comerica Bank-Texas in the amount of $773,000.
The Company in August 1997, through its subsidiary Dallas Parkway
Properties Incorporated ("DPPI"), whose principal asset is 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, is 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, subsequent
16
to the sale, is paying the buyer rent of approximately $13,000 on a month to
month basis and expects to relocate its corporate office in early 1998.
The Company also sold in August 1997, for net proceeds of approximately
$734,000 cash, 7,500 shares of newly-designated Series F 6% Convertible
Preferred Stock to Black Sea Investments, Ltd. ("Black Sea"). This preferred
stock is immediately convertible into the Company's Common Stock at a conversion
price equal to 75% of the average bid price of the Common Stock for the five
consecutive trading days immediately preceding the date of conversion. In
connection with this transaction, the Company recorded a non-cash dividend of
$250,000 representing the value assigned to the preferred stock's discount
feature. Subsequent to September 30, 1997, Black Sea has tendered 6,250 shares
of the Preferred Stock for conversion into 712,062 shares of the Company's
Common Stock. The Company also issued to Black Sea a warrant to purchase up to
500,000 shares of the Company's Common Stock at an exercise price of $1.50 per
share (subject to adjustment in certain circumstances) up to and including the
warrant expiration date of September 30, 2002. Such warrants were valued at
$150,000 and were recorded as a debt discount. The proceeds from the sale of
the preferred stock and the loan described in the preceding paragraph enabled
the Company to retire all previous indebtedness against the corporate office
real estate.
In connection with the acquisition of Texas Timberjack in 1994, the Company
sold $4.0 million in principal amount of the 1999 Bonds to Merrill Lynch World
Income Fund, Inc. and Convertible Holdings, Inc. (collectively, the "Purchasers"
or "Merrill Lynch"). Such Bonds bear interest at 12% per annum and are
convertible at any time prior to June 30, 1999 into such number of shares of
Common Stock as is equal to the principal amount of such Bond (or in $1,000
increments thereof) divided by a conversion price as provided in the agreements
equal to the approximate market price on the grant date. See "Market for Common
Equity and Related Stockholder Matters" relating to dividend restrictions
imposed by the Indenture. In December 1995, the Company sold $1.5 million of
principal amount of the 1997 Bonds to Merrill Lynch on generally the same terms
and conditions. See below for a description of the December 1997 refinancing
and payments of certain amounts due to Merrill Lynch.
Also in connection with the acquisition of Texas Timberjack, the Company
issued a note to Harold Estes, the seller and the current President of TTI, in
the original principal amount of $10.0 million, originally due on October 31,
1994, collateralized by all the capital stock of TTI as well as certain assets
of TTI. As of various maturity dates, the Company and Mr. Estes have entered
into subsequent agreements which have since modified, extended and renewed the
note. At September 30, 1997, the total amount unpaid under the note, including
accrued interest, was approximately $14.0 million, due December 1, 1997. The
note was further extended upon maturity at an interest rate of 16% and is
currently due on April 6, 1998. The Company anticipates that it will be
required to refinance this note upon maturity and is presently in negotiations
to accomplish this objective. There is no certainty, however, that the Company
will be able to refinance this note on acceptable terms, or at all, before April
6, 1998. In the event of default on the above note, the Company may be required
to transfer some or all of its ownership interest in TTI to Mr. Estes and the
Company would likely incur a noncash loss represented by the difference between
its net asset position in TTI (approximately $23 million at September 30, 1997)
and the note balance due Mr. Estes (approximately $14 million at September 30,
1997). Further, as of September 30, 1997, Polyphase is indebted to TTI for
approximately $6.4 million on a non-interest bearing intercompany advance from
TTI offset by an intercompany receivable due to Polyphase from TTI of
approximately $4.4 million. Theses amounts may be required to be settled in the
event of default on the Estes Note. The noteholder has no recourse against any
assets or capital stock of the Company, other than the stock of TTI, or any of
the Company's other subsidiaries except that Mr. Estes holds, as secondary
collateral, 2,000,000 shares of the Company's Common Stock owned by the Pyrenees
Group, a private investment firm owned in part by Paul A. Tanner, Chairman and
Chief Executive Officer of Polyphase. Also , in the event of default on this
Note, if the primary collateral, the Company's ownership in TTI, is not
sufficient to satisfy the balance owed to Mr. Estes, it is possible that some or
all of the Polyphase shares owned and pledged by Pyrenees as additional
collateral against the note would be retained by Mr. Estes.
Texas Timberjack currently has a $13.0 million revolving line of credit at
prime plus 1/2% at Comerica Bank-Texas. The line of credit is collateralized by
receivables and inventories of Timberjack, has been guaranteed by the Company
and expires in February 1998. The terms of the line of credit provide various
restrictive covenants, including, among other things, a limit on capital
expenditures to certain agreed levels, maintenance
17
of specified debt to net worth and fixed charge coverage ratios, limits on the
amount of TTI's contingent liabilities and maintenance of agreed upon levels of
working capital and tangible net worth, as well as restrictions as to amounts
that may be paid to the Company as dividends. At September 30, 1997, $5.6
million was outstanding on the credit line, with remaining availability, subject
to the borrowing base limitations, of approximately $6.7 million. Management is
currently in negotiations with Comerica and believes that this line of credit
will be extended upon expiration on favorable terms.
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 totalling $6.0 million. At September 30, 1997, approximately
$7.9 million was outstanding under the line of credit, which bears interest at
the Citibank base rate plus 1.5%, and a total of approximately $2.0 million
under the term loans. The term loans were repaid in December 1997 as described
below. 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 subordinated debt placement with Rice provided $13.0 million, bearing
interest at 13% per annum, payable semiannually, with principal payment
requirements of $6.5 million each due in 2002 and 2003. Rice was also granted
warrants, exercisable at a nominal price of $100, to purchase up to 22.5% of
the common stock of Overhill; Rice was further granted a "put" of the warrants
to the Company at a price based upon the higher of fair market, book or
appraised value of Overhill. The subordinated debt facility contained covenants
similar to those described relating to the senior credit facility.
Noncompliance with certain of the covenants resulted in litigation between the
Company and Rice as described below and in Item 3. As summarized below, in
December 1997, all amounts due Rice under the subordinated debt facility were
repaid, the warrants repurchased and the litigation settled.
As of September 30, 1997, the Company had not complied with certain
covenants involving most of its loan agreements, particularly those with Merrill
Lynch, Finova and Rice. In addition, the Company was involved in litigation
with Rice relating to the breach of certain covenants of the subordinated debt
agreement and the failure to cure such defaults within a reasonable period of
time.
On December 4, 1997, the Company, with Overhill as the borrower and the
Company as guarantor, obtained a $24.1 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 $19.9
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 totalling
$140,000, $300,000 and $440,000 for the first, second and third years of the
loan, respectively. The lender also received commitment and closing fees
totalling approximately $1.7 million. In the event the loan is paid in full
prior to maturity, the principal amounts due under the loan are to be reduced by
$1.0 million if the loan is repaid in full during the first year and $500,000 if
paid during the second year of the loan. Long Horizons was also issued a
warrant which entitles the lender to acquire, at a nominal price of $.01 per
share, 30% of the outstanding stock of Overhill; the Company has the option,
under certain circumstances, to repurchase from the lender, during the two-year
period following the date of the agreement, warrants to purchase 25% of the
Overhill stock (5/6 of the warrant held by Long Horizons), at a redemption cost
of $2.0 million. 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:
18
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 principal, plus accrued interest of approximately $200,000, was
made on the Merrill Lynch 1999 Bonds. The conversion price of the remaining
$1.2 million principal amount of 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 400,000 shares of the
Company's Common Stock, exercisable over a five-year period, with certain
registration rights. The warrants are exercisable into 200,000 shares at $.01
per share and 200,000 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 totalling 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 anticipates recording a non cash
extraordinary pretax charge to income of approximately $600,000, resulting from
the early extinguishment of the Rice debt. The financing also provided the
Company with approximately $900,000 in working capital.
In addition, the Company has guaranteed, in certain circumstances, a loan
from Lehman Brothers Holdings, Inc. ("Lehman") to a Nevada partnership formed by
an entity headed by Mr. Tanner, and Lehman, to purchase a parcel of land in Las
Vegas, Nevada for the development of a multi-purpose sports facility and
adjacent convention center. The aforementioned Nevada partnership is currently
in default on its loan from Lehman and foreclosure proceedings by Lehman have
been initiated. The Company, based on the advice of legal counsel, does not
believe that it will incur any significant liability as a result of the
aforementioned guarantee. As a result, the Company believes the existence of
such guarantee will not have a material adverse effect on the Company's
financial condition or results of operations.
Furthermore, Polyphase may be required to retain legal representation on
various matters, including but not limited to those matters described in Notes
13 and 14, to the consolidated financial statements included elsewhere herein,
affecting the Company. The fees to be incurred could be substantial in relation
to the Company's cash position.
In addition, Polyphase is indebted to Overhill for approximately $11.0
million, including the $5.5 million intercompany advance in December 1997, on
non-interest bearing intercompany advances from Overhill, which eliminate in
consolidation. The Company intends to satisfy this intercompany obligation
through dividends or intercompany charges for Federal income taxes, management
and transaction fees, subject to obtaining the necessary approvals from the
Company's lenders. However, no assurance can be given that Polyphase will be
able to repay or otherwise reduce its obligation to Overhill.
Due to subsidiary debt covenant and other restrictions, the ability of the
Company's corporate office to obtain funds from its subsidiaries is limited (See
Note 3 to the Consolidated Financial Statement included elsewhere herein).
Additionally, the Company's corporate office has no operating revenues and may
be highly dependent on its subsidiaries for its liquidity needs, and there is no
assurance that, based upon the above, such liquidity will be available.
The Company has currently undertaken several initiatives at its corporate
office in order to reduce its corporate operating cash flow requirements. In
December 1997, the Company sold its Dallas Parkway Properties, Incorporated
subsidiary, whose principal asset was the Company's corporate headquarters
building, with the buyer assuming the related debt of approximately $2.8
million. The Company expects to relocate its corporate
19
offices during the second quarter of fiscal 1998 and expects to reduce its cash
flow requirements as a result of lower expected future lease payments. In
addition, the Company has eliminated certain corporate level positions to
further reduce future corporate cash requirements.
As a result of the refinancing and restructuring, the Company obtained
waivers with respect to noncompliance under the various loan agreements referred
to above, effective December 5, 1997, and the Company expects that it will be
able to meet its liquidity requirements for fiscal year 1998.
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.
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
20
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The following table sets forth certain information regarding the directors
and executive officers of the Company.
Name Age Positions
---- --- ---------
Paul A. Tanner 67 Chairman of the Board and Chief
Executive Officer
James Rudis 48 President and Director
William E. Shatley 51 Senior Vice President, Chief
Financial Officer and Treasurer
Michael F. Buck 60 Director
George R. Schrader 66 Director
Paul A. Tanner, Jr. 44 Director
Harold Estes 57 President of Texas Timberjack, Inc.
- --------------------------------------------------------------------------------
Paul A. Tanner was elected to the Board of Directors in December 1992 and
has served as Chairman of the Board and Chief Executive Officer since that time.
He served as President from December 1992 until July 1997 and as Chief Financial
Officer and Chief Accounting Officer from December 1992 until March 1994. He
has been a licensed Texas Real Estate Broker for over 30 years and is President
of Southland Resources, Inc., a private investment firm. Since 1956, Mr. Tanner
has been the owner and Chief Executive Officer of several companies engaged in
oil and gas development, real estate development, computer manufacturing and the
national distribution of office and telecommunications products.
James Rudis was elected to the Board of Directors in December 1992 and has
served as President of the Company since July 1997. He served as Executive Vice
President of the Company from March 1994 until July 1997. He is President of
Quorum Corporation, a private consulting firm involved in acquisitions and
market development and has held that position since September 1984. From 1970
until 1984, he held various executive positions in CIT Financial Corporation,
including Vice President and Regional Manager of that company's Commercial
Finance Division.
William E. Shatley was named as Senior Vice President and Treasurer of the
Company in March 1994. He joined the Company in an executive capacity in October
1993, having previously served the Company on an advisory basis since the
relocation of its corporate offices to Texas in 1992. Mr. Shatley, a Certified
Public Accountant since 1970, previously conducted his own consulting and
accounting practice (1982-1993), after having served as Vice President and Chief
Financial Officer of Datotek, Inc., a manufacturer of electronic communications
security equipment (1977-1982) and in an executive capacity with Arthur Andersen
& Co. (1968-1977).
Michael F. Buck is President of Mimatian Co., an operations and materials
consulting firm. From August 1990 to August 1994, Mr. Buck served as Vice
President of Bath Iron Works, Inc., a company engaged in building Aegis Class
cruisers and destroyers for the United States Navy. From August 1989 to August
1990, Mr. Buck was a Vice President of Sabreliner Corporation, a company engaged
in building, maintaining and overhauling executive jet aircraft. From March
1986 to August 1989, Mr. Buck was Vice President and Director
21
of Procurement for International Telephone and Telegraph. He became a director
of the Company in December 1989.
George R. Schrader was appointed as a director in March 1994 to fill a
vacancy on the Board. He is currently a named member of Schrader & Cline, LLC,
a financial and governmental management consulting firm. From 1983 to 1993, he
was a principal of Schrader Investment Company, whose activities paralleled
those of Schrader & Cline, LLC. Mr. Schrader's additional experience includes
ten years as City Manager for the city of Dallas, Texas and a total of nine
years experience as City Manager for the Texas cities of Mesquite and Ennis.
Paul A. Tanner, Jr. was elected as a director in February 1996. He served
as a Vice President of the Company's wholly owned subsidiary Letronix, Inc. from
October 1993 until its sale in July 1996. From February 1990 to October 1993,
he served as Vice President of Southland Resources, Inc., a private investment
firm controlled by Paul A. Tanner. He is the son of Paul A. Tanner.
Harold Estes was elected as a director in February 1996 and resigned from
the board in April 1997. He is the President of Texas Timberjack, Inc. a wholly
owned subsidiary of the Company. TTI is a distributor of industrial and
commercial timber and logging equipment with locations in Lufkin, Cleveland,
Atlanta and Jasper, Texas. Mr. Estes has been President of TTI since 1984, when
he acquired TTI from Eaton Corporation.
Meetings of the Board of Directors and its Committees
The Board has standing Compensation and Audit Review Committees. The
Compensation Committee is comprised of Messrs. Buck and Schrader. During fiscal
1997, the Compensation Committee did not meet. The Compensation Committee (i)
administers the Company's employee stock option plans and approves the granting
of stock options and (ii) approves compensation for officers.
The Audit Review Committee is composed of Messrs. Buck and Schrader.
During fiscal 1997, the Audit Review Committee did not meet. Its functions are
to (i) recommend the appointment of independent accountants; (ii) review the
arrangements for and scope of the audit by independent accountants; (iii)
consider the adequacy of the system of internal controls and review any proposed
corrective actions; and (iv)review and monitor the Company's policies regarding
business ethics and conflicts of interest.
The full Board of Directors met six times during fiscal 1997. No director
attended fewer than 75% of the total number of meetings of the Committee on
which such director served.
The Executive Committee, which was disbanded in June 1997, was composed of
Messrs. Tanner and Rudis. During fiscal 1997, the Executive Committee met seven
times. Except as restricted under Nevada law, the Executive Committee possessed
all of the power and authority of the Board of Directors between meetings of the
Board of Directors.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's directors, officers and persons who own more than 10
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the American Stock Exchange. Directors, officers and greater
than 10 percent beneficial owners are required by applicable regulations to
furnish the Company with copies of all forms they file with the Commission
pursuant to Section 16(a).
Based solely upon a review of the copies of forms furnished to the
Company, the Company believes that during fiscal 1997, all filing requirements
applicable to its directors, executive officers and greater than 10% beneficial
owners were satisfied.
22
ITEM 11. Executive Compensation.
------------------------
EXECUTIVE COMPENSATION
The following table sets forth for fiscal 1997, 1996 and 1995 compensation
awarded or paid to Mr. Paul A. Tanner, the Company's Chairman of the Board and
Chief Executive Officer, Mr. James Rudis, the Company's President and Mr.
William E. Shatley, the Company's Senior Vice President, Treasurer and Chief
Financial Officer, (collectively, the "Named Executive Officers"). Other than
as indicated in the table below, no executive officer of the Company received
salary plus bonus in excess of $100,000 for the year ended September 30, 1997.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------- -------------
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation Options/SARs Compensation
- ----------------------- -------- --------- ----- --------------- ------------ --------------
Paul A. Tanner . . . . 1997 $224,640 $ 0 $ --(1) - $ -
Chairman, Chief 1996 $196,560 $ 0 $ --(1) 130,000 $ -
Executive Officer and 1995 $187,200 $ 0 $ --(1) - $ -
Director (2)
James Rudis . . . . . . 1997 $138,240 $ 0 $ --(1) - $ -
President and 1996 $120,960 $ 0 $ --(1) 130,000 $ -
Director (2) 1995 $115,200 $ 0 $ --(1) - $ -
William E. Shatley . . . 1997 $108,000 $ 0 $ --(1) - $ -
Senior Vice President, 1996 $ 94,500 $ 0 $ --(1) 100,000 $ -
Treasurer and Chief 1995 $ 90,000 $ 0 $ --(1) - $ -
Financial Officer
- -----------------
(1) The Named Executive Officers each received certain perquisites and other
personal benefits from the Company during fiscal 1997, 1996 and 1995.
These perquisites and other personal benefits, however, did not equal or
exceed 10% of Named Executive Officers, salary and bonus during fiscal
1996,1995 or 1994.
(2) Mr. Rudis, formerly the Company's Executive Vice President, became
President in July 1997, replacing Mr. Tanner in that position.
No individual grants of stock options were made to the Named Executive
Officers during the fiscal year ended September 30, 1997.
23
The following table describes for the Named Executive Officers options and
the potential realizable value for his options as of September 30, 1997, which
were granted in prior fiscal years.
Fiscal Year End September 30, 1997 Option/SAR Values
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs at Options/SARs at
September 30, 1997 September 30, 1997(1)
------------------------------ ----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- -------------- ----------- -------------
Paul A. Tanner . 130,000 - $ - $ -
James Rudis . . . 276,500 - $ 155,656 $ -
William E. Shatley 246,500 - $ 155,656 $ -
- -----------
(1) Based on $1.8125 per share of Common Stock, which was the closing price per
share of Common Stock on September 30, 1997 on the AMEX as reported by The
Wall Street Journal.
Director Compensation
Directors who are also employees of the Company receive no additional
compensation for services as directors. Nonemployee directors receive an annual
fee of $1,000 and are also reimbursed for all expenses incident to their service
on the Board of Directors.
During July 1996, the following directors were granted options to purchase
Common Stock, exercisable at $2.00 per share (the fair market value at the date
of grant) in whole or in part, expiring in July 2006, as follows:
Name Option Shares
--------------------- -------------
Michael Buck 30,000
George R. Schrader 30,000
Paul A. Tanner, Jr. 30,000
In March 1994, Mr. Schrader was granted options to purchase 50,000 shares
of Common Stock. Mr. Schrader's options are exercisable at $5.25 per share (the
fair market value at the date of grant), in whole or in part, and will expire in
March 1999.
During July 1993, Mr. Buck was granted options to purchase 75,000 shares of
Common Stock, exercisable at $0.75 per share (the fair market value at the date
of grant). Such options were exercised in September 1996.
24
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following table sets forth information regarding the beneficial
ownership of Common Stock as of December 31, 1997, by each person or group who
owned, to the Company's knowledge, more than five percent of the Common Stock,
each of the Company's directors, the Company's Chief Executive Officer, and all
of the Company's directors and executive officers as a group.
Amount and
Nature of Percent
Beneficial of
Name Ownership (1) Class (1)
------------------------------- ----------------------------- -------------
Paul A. Tanner . . . . . . . . . 295,874 (2) 2
James Rudis . . . . . . . . . 557,900 (3) 3.8
Michael F. Buck . . . . . . . . 30,100 (4) *
George R. Schrader . . . . . . . 80,000 (5) *
Paul A. Tanner, Jr. . . . . . . 179,126 (6) 1.2
Harold Estes . . . . . . . . . 4,000,000 (7) 27.8
The Pyrenees Group . . . . . . . 173,000 (8) 1.2
Tanner Family Trust . . . . . . 59,685 (9) *
Elizabeth Carter Children's
Foundation . . . . . . . . . . 89,441 (10) *
Merrill Lynch . . . . . . . . . 800,000 (11) 5.3
Black Sea Investments, Ltd. . . 864,030 (12) 5.7
Infinity Investors Limited . . . 1,769,231 (13) 11.0
All directors and executive
officers as a group (6 persons) 1,547,700 (14) 10.2
- ----------------
* Less than 1%.
(1) Except as noted, the listed persons have sole investment power and sole
voting power as to all shares of Common Stock for which they are identified
as being the beneficial owners. Information as to beneficial ownership has
been furnished to the Company by such individuals. Such presentation is
based on 14,376,171 shares of Common Stock outstanding as of December 31,
1997.
25
(2) Includes 130,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
Includes 23,874 shares that Mr. Paul A. Tanner may be deemed to
beneficially own as a 13.8% owner of the Pyrenees Group (see Footnote 8
below). Does not include 89,441 shares that Mr. Paul A. Tanner may be
deemed to beneficially own as a member of the board of trustees of the
Elizabeth Carter Children's Foundation, (the "Foundation") (see Footnote
10 below), and also does not include the remaining 149,126 shares of the
Pyrenees Group (that Mr. Paul A. Tanner does not own as owner), which Mr.
Paul A. Tanner may be deemed to beneficially own because he is the
president and sole director of the Pyrenees Group.
(3) Includes 276,500 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(4) Includes 30,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(5) Includes 80,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
(6) Includes 30,000 shares that could be purchased pursuant to the exercise of
stock options exercisable within 60 days subsequent to the date hereof.
Includes 89,441 shares that Mr. Paul A. Tanner, Jr. may be deemed to
beneficially own as chairman of the board of trustees of the Foundation.
See Footnote 10 below. Also includes 59,685 shares that Mr. Paul A.
Tanner, Jr. may be deemed to beneficially own as trustee of the Tanner
Family Trust. See Footnote 9 below.
(7) Mr. Estes' address is Highway 59 South, Route 15, Box 9475, Lufkin, Texas
75901. Includes 2,000,000 shares owned by the Pyrenees Group, for which
Mr. Estes has sole voting power, and which is held as collateral by Mr.
Estes on the Company's note payable to Mr. Estes. See "Liquidity and
Capital Resources".
(8) The address of the Pyrenees Group is 2 Kelvingate Court, Dallas, Texas
75225. The Pyrenees Group, a Nevada corporation, is owned by Paul A.
Tanner (13.8%), the Tanner Family Trust (34.5%) and the Foundation (51.7%).
Does not include 2,000,000 shares held as collateral by Mr. Estes and for
which he holds sole voting power (see Footnote 7 above.)
(9) Includes 59,685 shares that the Tanner Family Trust may be deemed to
beneficially own as a stockholder in the Pyrenees Group. See Footnote 8.
The address of the Tanner Family Trust is 9909 Inwood Road, Dallas, Texas
75220. Mr. Paul A. Tanner, Jr., the trustee of the Tanner Family Trust, is
the adult son of Mr. Paul A. Tanner, the Chairman of the Board and Chief
Executive Officer of the Company. Unless otherwise indicated herein, all
references to "Mr. Tanner" shall mean Mr. Paul A. Tanner.
(10) Includes 89,441 shares that may be deemed to be beneficially owned by the
Foundation as a stockholder in the Pyrenees Group. The address of the
Foundation is 9909 Inwood Road, Dallas, Texas 75220. The Foundation was
formed to construct and operate a non-profit home for children. The shares
of the Pyrenees Group owned by the Foundation are voted by the board of
trustees of the Foundation, of which Mr. Paul A. Tanner, Jr. is chairman
and Mr. Paul A. Tanner is a member.
(11) For purposes of the table above, Merrill Lynch consists of Merrill Lynch
World Income Fund, Inc. ("MLW") and Convertible Holdings, Inc. ("CH"). The
address of MLW and CH is c/o Merrill Lynch Asset Management, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536. This figure includes 400,000
shares of Common Stock into which certain of the Company's bonds held by
Merrill Lynch are convertible within 60 days subsequent to the date hereof;
such figure is subject to adjustment as specified in the indenture
governing the terms of such bonds. Also includes 400,000 shares that could
be purchased pursuant to the exercise of certain warrants held by Merrill
Lynch exercisable within 60 days subsequent to the date hereof.
26
(12) The address of Black Sea Investments, Ltd. ("Black Sea") is Cockburn House,
Cockburn Town, Grand Turk, Turks & Caicos Islands. Includes 211,649 shares
of Common Stock into which certain of the Company's preferred stock held by
Black Sea is convertible within 60 days subsequent to the date hereof.
Also includes 500,000 shares that could be purchased pursuant to the
exercise of certain warrants held by Black Sea which are exercisable within
60 days subsequent to the date hereof.
(13) The address of Infinity Investors Limited ("Infinity") is 38 Hertford
Street, London W1Y7TG, England. Includes 1,769,231 shares of Common Stock
into which certain of the Company's preferred stock (and accrued dividends
thereon) held by Infinity is convertible within 60 days subsequent to the
date hereof.
(14) Includes 23,874 shares that may be deemed to be beneficially owned by Mr.
Paul A. Tanner due to his 13.8% ownership of the Pyrenees Group, but does
not include 89,441 shares that Mr. Paul A. Tanner may be deemed to
beneficially own as a trustee of the Foundation or the remaining 149,126
shares of the Pyrenees Group (that Mr. Paul A. Tanner does not own as a
13.8% owner), which Mr. Paul A. Tanner may be deemed to beneficially own
because he is the president and a director of the Pyrenees Group (see
Footnote 2 above). Includes 89,441 shares that Mr. Paul A. Tanner, Jr. may
be deemed to beneficially own as chairman of the board of trustees of the
Foundation; also includes 59,685 shares that Mr. Paul A. Tanner, Jr. may be
deemed to beneficially own as trustee of the Tanner Family Trust. Includes
793,000 shares that could be purchased pursuant to the exercise of stock
options exercisable within 60 days subsequent to the date hereof. Does not
include 2,000,000 shares owned by the Pyrenees Group held as collateral by
Mr. Estes (see Footnote 7 above).
ITEM 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance to the
Pyrenees Group, or its assignees, options to purchase up to 1,000,000 shares of
convertible preferred stock for $10 per share. The options were issued subject
to approval by the Company's shareholders and were approved and ratified at the
Company's Annual Meeting held May 31, 1994. Pyrenees, a private investment firm
controlled by Paul A. Tanner, Chairman and Chief Executive Officer, was granted
these options as consideration for the sale to the Company of its collected due
diligence materials for acquisitions Pyrenees was contemplating, which were to
be used by the Company in its own acquisition program. The options, covering
Series A, B, C, D and E Preferred Stock, are summarized as follows:
Preferred Conversion Common
Series Shares Price Shares
--------- ----------- ----------- ----------
A 125,000 $ .50 2,500,000
B 100,000 1.00 1,000,000
C 100,000 2.00 500,000
D 200,000 4.00 500,000
E 475,000 10.00 475,000
--------- ---------
1,000,000 4,975,000
========= =========
During fiscal 1994 and 1995 Pyrenees exercised and converted Series A, B, and C
Preferred Stock into common stock. In November, 1995, Pyrenees exercised the
Series D option through the issuance of a 7% recourse note in the amount of
$2,000,000, collateralized by the shares issued. During fiscal 1996 the shares
were converted to 500,000 shares of common stock. Principal payments of
approximately $1,025,000 were made on the note during fiscal 1996 and 1997. The
Series E option expired unexercised.
Advances to Related Parties
During fiscal 1994, the Company made aggregate non-interest bearing cash
advances to Mr. Tanner in the amount of approximately $282,000. At September
30, 1994, Mr. Tanner had repaid $150,000 of such advances. During fiscal 1995,
following the repayment of the unpaid 1994 advances, additional advances
amounting to
27
approximately $63,000 were made to Mr. Tanner which were unpaid at
September 30, 1995. During fiscal 1996, additional amounts were advanced to or
on behalf of Mr. Tanner which aggregated approximately $1.5 million. On
December 8, 1995, the aforementioned advances and an unpaid promissory note
receivable from Mr. Tanner were refinanced through the issuance to the Company
of a 12% unsecured demand note from Mr. Tanner in the principal amount of
$2,000,872.
Also during the above described period, the Company made disbursements to the
Pyrenees Group totalling approximately $2.67 million, of which $1,153,000
represented repayment of existing advances from Pyrenees, with the balance
representing an advance to Pyrenees of approximately $1.5 million.
During January 1996, the Company reached an agreement to manage a project to
develop and build a multi-purpose sports facility in Las Vegas, Nevada. The
project was being developed by PLY Stadium Partners, Inc. ("Stadium Partners"),
a private investment firm headed by Mr. Tanner. As part of the agreement, the
Company was also entitled to participate in the facility's management, sales of
suites and seat options, concessions and events and was to be compensated for
such services. The Company agreed to provide to Stadium Partners up to $4
million of debt that (1) was convertible into a 14% economic interest in the
project and (2) was guaranteed by Mr. Tanner and Pyrenees. As part of this
agreement, the aforementioned accounts receivable from Mr. Tanner and Pyrenees
(approximately $3.5 million), together with subsequent amounts advanced, charged
or accrued to or on behalf of Stadium Partners were considered as components of
the $4 million of convertible debt, bearing interest at 12% and guaranteed by
Mr. Tanner and Pyrenees. Through September 30, 1996, the Company advanced an
additional $9.3 million.
During the twelve months ended September 30, 1996, the Company accrued
management and service revenues of $2,550,000 and interest income of $790,000
related to the Company's activities with Stadium Partners, the collectibility of
which was dependent upon the success of the project and/or the guarantees
referred to above. As a result of the terms of the financing arrangements with
Lehman described below, Stadium Partners was precluded from making any
distributions until permanent project financing was secured or stadium suite
sales were made that were sufficient to repay the financing from Lehman. As a
consequence of Stadium Partners' inability to effect such sales or obtain such
financing by March 15, 1997, in order to make its payment to the Company on such
date, the Company established a reserve of $3.34 million as of September 30,
1996, which represents the income accrued in 1996.
On November 15, 1996, Stadium Partners, through a newly-formed partnership,
purchased 62 acres in Las Vegas for the development of the stadium and adjacent
convention facility. Financing was provided by Lehman Brothers Holdings, Inc.
("Lehman") through a partnership, Nevada Stadium Partners Limited Partnership
("Nevada Partnership") with Lehman receiving an equity interest in the project.
The Company has guaranteed the repayment of the loan from Lehman to the Nevada
partnership in the above mentioned transaction, in certain circumstances or upon
the occurrence of certain events. Such guarantee is effective upon the
occurrence of certain conditions, including without limitation if Nevada
Partnership files for bankruptcy or insolvency, if representations by the
Partnership prove to be fraudulent regarding the financial condition of the
Partnership, the land securing the loan is further encumbered or ownership is
transferred without the consent of Lehman.
The loan agreement with Lehman required certain prepayments by Nevada
Partnership, the first of which, in the amount of $5.0 million became due in
January 1997. This was paid primarily with funds advanced by the Company, of
which $2.4 million was obtained from an existing credit line and $2.5 million
was obtained from a six month term note, collateralized by the Company's
corporate office building. In connection with the loan transaction, the Company
entered into a consulting agreement with a principal of the lender, whereby the
Company granted such party an option to purchase 200,000 shares of the
Company's common stock at $.01 per share; this option was assigned a value of
$973,000 which was charged to expense during fiscal 1997.
The second prepayment requirement of $20.0 million became due in May 1997; this
payment was not made. As a result of the failure to make this payment, another
agreement was entered into among the borrower, Lehman and the Company as of July
1, 1997. This agreement generally provided forbearance by Lehman until
September 30, 1997, to allow additional time to raise the funds to make the
principal payment.
28
The terms of the forbearance agreement were not met by the September deadline,
and the note matured unpaid in November 1997. Stadium Partners and Mr. Tanner
continue to pursue various alternatives with respect to the repayment of amounts
due Lehman, including among other things, the sale or refinancing of the
property. There is no assurance that these efforts will be successful or that
the Company can expect to collect any amounts due from Stadium Partners or the
guarantors.
As a result of the above, the Company has recorded a charge to earnings for the
year ended September 30, 1997, in the amount of $14.8 million, representing all
amounts remaining unpaid by Stadium Partners, net of the reserve established in
1996. Amounts which may subsequently be recovered, if any, will be recognized
as income when collection is assured.
At September 30, 1997, the Company also had an outstanding balance due from Mr.
Tanner amounting to $173,526, resulting from advances made to or on Mr. Tanner's
behalf during fiscal 1997.
Other Transactions
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September 30,
1997, the insurance premium receivable was $552,006.
In connection with the purchase of TTI, the Company acquired a note receivable
from an officer. The note is secured by marketable securities, is payable
within one year and bears interest at 3.96%. As of September 30, 1997 the
balance outstanding was $340,071.
29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
(a) 1. and 2. Financial Statements and Financial Statement Schedules.
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, 1997, are included in Item
8:
Report of Independent Auditors F-2
Consolidated Balance Sheets-September 30, 1997 and 1996 F-3
Consolidated Statements of Operations-Years ended September 30, 1997,
1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity-Years ended September
30, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows-Years ended September 30, 1997,
1996, and 1995 F-8
Notes to Consolidated Financial Statements F-11
2. The following consolidated financial statement schedules of Polyphase
Corporation and subsidiaries are included in item 14(d):
Schedule I - Condensed Financial Information of Registrant F-41
Schedule II - Valuation and Qualifying Accounts F-45
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"])
30
10.1+ Stock Option Agreement for Paul A. Tanner (incorporated by reference
from Exhibit 4.12 to the 1994 Form S-8)
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 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
Pol