U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-9083
POLYPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 Broadway, Suite A
Addison, Texas 75001
(Address of principal executive offices)
(972) 386-0101
(Registrants's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12
months (or for such shorter period the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 17,827,464
-------------------------------
Outstanding at February 8, 2001
POLYPHASE CORPORATION
FORM 10-Q
QUARTER ENDED DECEMBER 31, 2000
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page No.
----------------------------- --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
December 31, 2000 and September 30, 2000 2
Consolidated Condensed Statements of
Operations for the Three Months Ended
December 31, 2000 and 1999 4
Consolidated Condensed Statements of
Cash Flows for the Three Months Ended
December 31, 2000 and 1999 5
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
-1-
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
Assets
December 31, September 30,
------------ -------------
2000 2000
------------ -------------
(Unaudited)
Current assets:
Cash $ 808,218 $ 1,522,347
Receivables, net of allowance for doubtful accounts
of $431,361 and $433,359
Trade accounts 19,908,198 20,399,265
Current portion of sales contracts 3,772,608 4,145,318
Notes 4,093,786 3,642,112
Inventories 38,778,812 36,120,187
Prepaid expenses and other 3,282,267 3,062,932
------------ -------------
Total current assets 70,643,889 68,892,161
------------ -------------
Property and equipment:
Land 432,000 432,000
Buildings and improvements 3,805,682 3,792,009
Machinery, equipment and other 12,570,094 11,986,465
------------ -------------
16,807,776 16,210,474
Less-Accumulated depreciation (8,528,346) (8,281,568)
------------ -------------
8,279,430 7,928,906
------------ -------------
Other assets:
Noncurrent receivables, net of allowance for
doubtful accounts of $1,200,000
Sales contracts 1,924,593 2,094,718
Related parties 1,230,640 1,202,183
Excess of cost over fair value of net assets of businesses
acquired, net of accumulated amortization of $4,965,967
and $4,687,461 16,635,847 16,881,886
Other intangible assets 1,590,903 1,734,858
Restricted cash 621,613 633,124
Assets held for sale 1,926,264 1,926,264
Other 3,446,770 3,338,653
------------ -------------
27,376,630 27,811,686
------------ -------------
$106,299,949 $ 104,632,753
============ =============
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (continued)
Liabilities and Stockholders' Equity
December 31, September 30,
------------ -------------
2000 2000
------------ -------------
(Unaudited)
Current liabilities:
Notes payable $ 8,516,501 $ 7,674,131
Accounts payable 15,629,263 14,903,684
Accrued expenses and other 3,546,164 4,004,971
Current maturities of long-term debt 3,547,429 3,891,579
------------ -------------
Total current liabilities 31,239,357 30,474,365
Long term debt, less current maturities 41,190,162 40,859,613
Note payable and accrued interest to related party 21,147,219 20,746,384
Reserve for credit guarantees 621,613 633,124
------------ -------------
Total liabilities 94,198,351 92,713,486
------------ -------------
Warrants to purchase common stock
in subsidiary 2,862,991 2,806,175
Stockholders' equity:
Common stock, $.01 par value, authorized
100,000,000 shares, issued and outstanding
17,827,464 and 17,812,464 shares 178,275 178,125
Paid-in capital 27,612,146 27,650,734
Accumulated deficit (18,551,814) (18,715,767)
------------ -------------
Total stockholders' equity 9,238,607 9,113,092
------------ -------------
$106,299,949 $ 104,632,753
============ =============
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
December 31,
--------------------------------
2000 1999
------------- -------------
Net revenues $ 46,728,575 $ 44,442,950
Cost of sales 38,128,318 35,000,258
------------- -------------
Gross profit 8,600,257 9,442,692
Selling, general and administrative expenses 6,572,279 6,316,610
------------- -------------
Operating income 2,027,978 3,126,082
------------- -------------
Other income (expenses):
Interest expense (2,173,086) (1,992,724)
Interest income and other 365,877 164,726
------------- -------------
Total other income (expenses) (1,807,209) (1,827,998)
------------- -------------
Income before income taxes, income allocable to subsidiary
warrant holder and extraordinary item 220,769 1,298,084
Income taxes - (18,741)
Income allocable to subsidiary warrant holder (56,816) -
------------- -------------
Income before extraordinary item 163,953 1,279,343
Extraordinary item--early extinguishment of debt - (1,290,431)
------------- -------------
Net income (loss) 163,953 (11,088)
Gain on reacquired preferred stock - 351,457
------------- -------------
Net income attributable to common stockholders $ 163,953 $ 340,369
============= =============
Net income (loss) per share - basic and diluted:
Before extraordinary item $ .01 $ .09
Extraordinary item - (.07)
------------- -------------
Net income (loss) per share $ .01 $ .02
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
December 31,
--------------------------------
2000 1999
------------- -------------
Cash flow provided by (used in) operating activities:
Net income (loss) $ 163,953 $ (11,088)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 834,048 855,192
Provision for doubtful accounts 96,976 34,000
Income allocable to subsidiary warrant holder 56,816 -
Extraordinary item - 1,290,431
Changes in:
Accounts and sales contracts receivable 936,926 (1,578,258)
Inventories (2,658,625) (5,353,120)
Prepaid expenses and other (327,452) (235,219)
Accounts payable 725,579 6,410,674
Accrued expenses and other (57,972) 95,457
------------- -------------
Net cash provided by (used in)
operating activities (229,751) 1,508,069
------------- -------------
Cash flows provided by (used in)
investing activities:
Notes and other receivables (451,674) 350,497
Receivables from related parties (28,457) 27,042
Capital expenditures, net (651,078) (223,175)
------------- -------------
Net cash provided by (used in)
investing activities $ (1,131,209) $ 154,364
------------- -------------
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Three Months Ended
December 31,
--------------------------------
2000 1999
------------- -------------
Cash flows provided by (used in) financing activities:
Net borrowings (principal payments ) on line
of credit arrangements $ 1,002,864 $ 855,171
Borrowings on other notes payable and long-term debt 185,205 28,000,000
Principal payments on long-term debt (502,800) (867,486)
Repayment of subordinated debt - (22,675,000)
Exercise of common stock options 7,500 -
Repurchase of stock purchase warrants (45,938) -
Redemption of Overhill warrants - (3,700,000)
Deferred financing costs - (1,832,907)
Repurchase of convertible preferred stock - (450,000)
------------- -------------
Net cash provided by (used in)
financing activities 646,831 (670,222)
------------- -------------
Net increase (decrease) in cash (714,129) 992,211
Cash - beginning of period 1,522,347 375,408
------------- -------------
Cash - end of period $ 808,218 $ 1,367,619
============= =============
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest $ 1,486,676 $ 1,667,989
Income taxes $ 50,000 $ 5,000
Supplemental schedule of noncash investing and financing activities:
In November 1999, in connection with the Overhill Farms refinancing, warrants
were issued having an estimated fair market value of $2,370,000.
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
December 31, 2000
1. NATURE OF BUSINESS
Polyphase Corporation (the "Company" or "Polyphase") is a diversified
holding company that, through its subsidiaries, operates in two industry
segments: the food segment and the forestry segment. The food segment (the
"Food Group"), which consists of the Company's wholly-owned subsidiary,
Overhill Farms, Inc. ("Overhill"), produces high quality entrees, plated
meals, meal components, soups, sauces and poultry, meat and fish
specialities. The Company's ownership of Overhill is subject to warrants
outstanding to purchase a minority position in Overhill. The forestry
segment (the "Forestry Group"), which consists of the Company's wholly-owned
subsidiary Texas Timberjack, Inc. ("Timberjack" or "TTI") and its majority-
owned subsidiaries Southern Forest Products LLC ("SFP") and Wood Forest
Products LLC ("WFP"), distributes, leases and provides financing for
industrial and commercial timber equipment and is also engaged in certain
related timber and sawmill operations.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and its majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
The financial statements included herein have been prepared by the Company,
without an audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading.
The information presented reflects all adjustments (consisting solely of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods when read
in conjunction with the financial statements and the notes thereto included
in the Company's latest financial statements filed as part of Form 10-K for
the year ended September 30, 2000.
-7-
3. INVENTORIES
Inventories are summarized as follows: December 31, September 30,
2000 2000
------------ ------------
Finished goods $ 28,944,243 $ 26,179,043
Raw materials 9,844,306 10,091,144
Inventory reserve (9,737) (150,000)
------------ ------------
Total $ 38,778,812 $ 36,120,187
============ ============
As of December 31, 2000 and September 30, 2000, finished goods inventories
consisted of approximately $10,763,000 and $9,655,000 in inventories at the
Food Group, $17,253,000 and $15,690,000 in timber and logging related
equipment, and $928,000 and $834,000 in finished wood products,
respectively. As of December 31, 2000 and September 30, 2000, raw materials
inventories consisted of approximately $9,015,000 and $9,289,000 in
inventories at the Food Group and $829,000 and $802,000 in both unharvested
and harvested but unprocessed timber, respectively.
4. TAXES
For the quarter ended December 31, 2000, the actual income tax expense
attributable to income from continuing operations differed from the net
amounts recorded by the Company. The Company's subsidiaries recorded a
provision for income taxes of approximately $300,000, based upon their
effective tax rates determined as if they were separate taxpayers; the
Company then applied a like amount of its existing valuation allowance as a
reduction of this amount, resulting in a net income tax provision for the
quarter of zero. The Company continues to maintain a valuation allowance
against a portion of its net deferred tax assets due to uncertainty with
respect to the future recoverability of all such amounts.
5. LONG-TERM DEBT
In November 1999, Overhill refinanced substantially all its existing debt.
The new facility amounted to $44 million, consisting of a $16 million line
of credit provided by Union Bank of California, N.A. ("Union Bank"),
together with $28 million in the form of a five-year term loan provided by
Levine Leichtman Capital Partners II, L.P. ("LLCP").
The line of credit with Union Bank expires in November 2002 and provides for
borrowings limited to the lesser of $16 million or an amount determined by a
defined borrowing base consisting of eligible receivables and inventories.
Borrowings under the line bear interest at a rate, as selected by Overhill
at the time of borrowing, of prime plus .25% or LIBOR plus 2.75%. The
agreement contains various covenants including restrictions on capital
expenditures, requirements to maintain specified net worth levels and debt
service ratios, and generally prohibits loans, advances or dividends from
Overhill to the Company and limits payments of taxes and other expenses to
Polyphase to specified levels. The line of credit is guaranteed by the
Company and collateralized by certain assets of Overhill and the Overhill
common stock owned by Polyphase.
-8-
The term loan with LLCP is a secured senior subordinated note bearing
interest at 12% per annum, with interest payable monthly until maturity in
October 2004. Principal payments in an amount equal to 50% of the excess
cash flow, as defined, for Overhill's previous fiscal year are also payable
annually commencing in January 2001. Voluntary principal payments are
permitted after October 31, 2001, subject to certain prepayment penalties.
The agreement contains various covenants including restrictions on capital
expenditures, minimum EBITDA and net worth levels, and specified debt
service and debt to equity ratios. In addition, the terms of the agreement
restrict changes in control, generally prohibit loans, dividends or advances
by Overhill to the Company and limit payments of taxes and other expenses to
Polyphase to specified levels. The term loan with LLCP is guaranteed by the
Company and collateralized by certain assets of Overhill. The agreement also
requires Overhill to pay to LLCP, during each January, annual consulting
fees of $180,000.
In connection with the agreement, LLCP was issued warrants to purchase 17.5%
of the common stock of Overhill, exercisable immediately at a nominal
exercise price. During the first two years following the date of the
agreement, Overhill has the right to repurchase 5% of Overhill's shares from
LLCP for $3 million and/or to repurchase all 17.5% of the Overhill shares
subject to the LLCP warrant within five days of the term loan being repaid
at their then determined fair market value. If such shares are not
purchased, LLCP will be entitled under the agreement to receive a cash
payment of $500,000 from Overhill; such amount is being charged to expense
over the term of the facility. At the date of issuance, the warrants granted
to LLCP were estimated to have a fair value of $2.37 million.
As a result of the transactions, Overhill repaid in full the $22.7 million
senior subordinated notes and the $9.7 million balance of its revolving line
of credit with previous lenders. Additionally, Overhill repurchased, for
$3.7 million, the warrants held by a previous lender to purchase 30% of
Overhill's common stock; the excess of such repurchase amount over the
carrying value of the warrant amounted to approximately $2.3 million and was
recorded as goodwill. In connection with the refinancing, Overhill was
permitted to make a one-time advance of $1.25 million to Polyphase for
working capital and other specified purposes. Overhill incurred costs and
expenses in connection with the refinancing totaling approximately $1.9
million, substantially all of which has been, or will be, paid to the
lenders. The early extinguishment of the previous indebtedness resulted in
an extraordinary loss of approximately $1.3 million (net of a $500,000
refund for early payment of the senior subordinated notes) during the
quarter ended December 31, 1999.
-9-
6. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share:
For the Three Months Ended
December 31,
--------------------------
2000 1999
----------- -----------
Numerator:
Income before extraordinary item $ 163,953 $ 1,279,343
Gain on reacquired preferred stock - 351,457
----------- -----------
163,953 1,630,800
Extraordinary item - (1,290,431)
----------- -----------
Net income attributable to common stockholders $ 163,953 $ 340,369
=========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average shares 17,823,387 17,812,464
----------- -----------
Effect of dilutive securities:
Convertible preferred stock - 1,075,853
Stock options 50,290 -
Warrants - -
----------- -----------
Dilutive potential common shares 50,290 1,075,853
----------- -----------
Denominator for diluted earnings per share 17,873,677 18,888,317
=========== ===========
Net income per share - basic and diluted:
Before extraordinary item $ .01 $ .09
Extraordinary item - (.07)
----------- -----------
Net income per share $ .01 $ .02
=========== ===========
-10-
7. STOCKHOLDERS' EQUITY
Stock Options-
During the three months ended December 31, 2000, options to purchase 15,000
shares at an exercise price of $.50 per share were exercised.
Warrants-
During the three months ended December 31, 2000, the Company repurchased
warrants covering 210,000 shares exercisable at $1.125 per share for total
consideration of approximately $46,000.
Convertible Preferred Stock-
During November 1999, the Company and Infinity Investors Limited, the holder
of a series of the Company's preferred stock, entered into an agreement
whereby, among other things, the Company agreed to repurchase all remaining
preferred stock owned by Infinity, including all accrued but unpaid
dividends, for $450,000 cash, and Infinity agreed to the dismissal of all
litigation against the Company with respect to various matters related to
its ownership of the preferred stock. As a result of the settlement, the
Company recorded a gain of approximately $351,000, related to the difference
in the carrying value of the preferred stock plus the accrued dividends and
the settlement amount. Such amount was accounted for by recording a
reduction of the Company's accumulated deficit during the quarter ended
December 31, 1999.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Statements contained in this Form 10-Q that are not historical facts, including,
but not limited to, any projections contained herein, are forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this Form
10-Q could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Results of Operations
Revenues for the three months ended December 31, 2000 increased $2,286,000 (5%)
to $46,729,000 from $44,443,000 during the three months ended December 31, 1999.
The increase in revenues is primarily attributable to continued sales gains by
Overhill. Gross profits decreased $843,000 to $8,600,000 in the current year
from $9,443,000 in the prior year, due in part to a decrease in gross margins
rates to 18.4% in the current quarter as compared to 21.2% in the first quarter
of fiscal 2000. During the period, operating income decreased to $2,028,000 in
fiscal 2001 from $3,126,000 in fiscal 2000.
Consolidated net income before extraordinary item for the three months ended
December 31, 2000 decreased to $164,000 from $1,279,000 during the three months
ended December 31, 1999. After the effect in the prior year of an extraordinary
expense of $1,290,000 related to the early extinguishment of debt in connection
with major refinancing by Overhill, and a gain of $351,000 on the reacquisition
of preferred stock, net income attributable to common stockholders decreased to
$164,000 ($.01 per share) in fiscal 2001 from $340,000 ($.02 per share) in
fiscal 2000.
The Food Group's revenues increased $4,316,000 (13%) to $38,478,000 for the
three months ended December 31, 2000, as compared to $34,162,000 for the three
months ended December 31, 1999. Gross profits decreased $421,000 (6%) to
$6,646,000, compared to $7,067,000 in the prior year, due primarily to startup
expenses related to the recently acquired Chicago Brothers operations and
increased energy costs in Overhill's California based facilities. Operating
income decreased $686,000 to $2,151,000 in the current period, compared to
$2,837,000 for the same period in fiscal 2000.
Revenues for the Forestry Group for the three months ended December 31, 2000
decreased $2,031,000 (19.8%) to $8,250,000 from $10,281,000 for the three months
ended December 31, 1999. Operating income for the same period decreased $287,000
to $51,000 for the three months ended December 31, 2000 from $338,000 for the
three months ended December 31, 1999. These decreases in revenues and operating
results are due to a continued softness in the East Texas timber market,
affecting the Texas Timberjack core equipment business as well as its sawmill
operations, which is expected to continue at least through the next fiscal
quarter.
-12-
Liquidity and Capital Resources
During the three months ended December 31, 2000, the Company's operating
activities resulted in a use of cash of approximately $230,000, compared to cash
provided of $1,508,000 during the comparable period in the previous year. The
use of cash during the current year is related primarily to increases in
inventories by both Overhill and Texas Timberjack.
During the three months ended December 31, 2000, the Company's investing
activities resulted in a use of cash of approximately $1,131,000, compared to
cash provided of $154,000 during the comparable period in the previous year. The
Company's use of cash resulted primarily from increases in notes receivable by
Texas Timberjack and from capital expenditures by both operating units.
During the three months ended December 31, 2000, the Company's financing
activities resulted in cash provided of approximately $647,000, compared to a
use of cash of approximately $670,000 in the comparable period in the previous
year. The cash provided resulted primarily from additional borrowings under
Timberjack's lines of credit, utilized primarily for increases in its
inventories and notes receivable and for reductions in its term loan.
The Company believes that funds available to it from operations and existing
capital resources will be adequate for its capital requirements for the next
twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest expense is affected by changes in prime and LIBOR-based
lending rates as a result of its various line of credit arrangements. If these
market rates increase by an average of 1% in fiscal 2001, the Company's interest
expense would increase by approximately $250,000 based on the outstanding line
of credit balances at December 31, 2000.
The Company does not own, nor does it have an interest in any other market risk
sensitive instruments.
-13-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During fiscal 1997, five substantially identical complaints were filed in the
United States District Court for the District of Nevada against the Company and
certain of its current and past officers and directors. The complaints each
sought certification as a class action and asserted liability based on alleged
misrepresentations that the plaintiffs claimed resulted in the market price of
the Company's stock being artificially inflated. Without certifying the cases as
class actions, the District Court consolidated the cases into a single action.
In March 2000, the District Court dismissed the plaintiffs' claims against one
of the Company's officers and directors and restricted the plaintiffs from
pursuing a number of their claims against the other defendants. The Court also
granted the remaining defendants leave to file motions for summary judgment.
Motions for summary judgment were thereafter filed, pointing out that there was
no evidence to support the plaintiffs' claims. In November 2000, in a lengthy
decision addressing the plaintiffs' claims against each of the remaining
defendants, the District Court granted the motions for summary judgment, thereby
disposing of all of the claims asserted by the plaintiffs. The decision in these
suits, which the Company maintained all along were without merit, remains
subject to appeal by the plaintiffs.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based on
the advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial condition, results of
operations or cash flows.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended December 31, 1999.
-14-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
(Registrant)
Date: February 12, 2000 By: /s/ James Rudis
----------------------
James Rudis
Chairman, President and
Chief Executive Officer
Date: February 12, 2000 By: /s/ William E. Shatley
----------------------
William E. Shatley
Senior Vice President and
Chief Financial Officer
-15-
INDEX TO EXHIBITS
Exhibit No. Exhibit
----------- -----------------------
27.1 Financial Data Schedule