10-Q 1 FORM 10-Q 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 March 31, 1996 [ ] 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) (214) 732-0010 (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 13,146,966 ---------- Outstanding at May 17, 1996 POLYPHASE CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 1996 -------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
PART I. FINANCIAL INFORMATION Page No. ----------------------------- -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of March 31, 1996 and September 30, 1995 2 Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 1996 and 1995 4 Consolidated Condensed Statements of Operations for the Six Months Ended March 31, 1996 and 1995 5 Consolidated Condensed Statements of Cash Flows for the Six Months Ended March 31, 1996 and 1995 6 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 Signature Page 14
-1- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) ASSETS
March 31, September 30, ----------- ------------- 1996 1995 ----------- ------------- Current assets: Cash $ 1,141,433 $ 3,275,068 Receivables, net of allowance for doubtful accounts of $501,035 and $509,669 Trade accounts 10,553,656 11,602,628 Current portion of sales contracts 5,965,887 6,973,101 Notes receivable 1,393,376 1,215,389 Related parties 1,504,014 737,992 Inventories 30,855,521 26,007,672 Prepaid expenses and other 1,309,691 1,836,150 ----------- ----------- Total current assets 52,723,578 51,648,000 ----------- ----------- Property and equipment: Land 505,000 505,000 Buildings and improvements 3,704,036 3,641,470 Machinery, equipment and other 8,242,364 7,932,882 ----------- ----------- 12,451,400 12,079,352 Less-Accumulated depreciation 3,602,927 2,761,966 ----------- ----------- 8,848,473 9,317,386 ----------- ----------- Other assets: Noncurrent receivables Sales contracts 2,807,476 3,281,459 Notes receivable 358,268 368,106 Related parties 4,000,000 - Excess of cost over fair value of net assets of businesses acquired, net of accumulated amortization of $1,541,978 and $1,037,734 18,869,890 19,374,134 Other intangible assets 1,884,384 2,021,652 Restricted cash 944,714 916,275 Other 1,097,101 1,231,851 ----------- ----------- 29,961,833 27,193,477 ----------- ----------- $91,533,884 $88,158,863 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -2- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30, ----------- ------------- 1996 1995 ----------- ------------- Current liabilities: Notes payable $10,360,489 $11,130,056 Note payable to related party 11,855,000 11,100,000 Accounts payable 8,133,036 8,007,727 Accrued expenses and other 4,659,537 3,771,715 Advances from related party - 1,153,000 Current maturities of long-term debt 1,613,168 2,589,077 ----------- ----------- Total current liabilities 36,621,230 37,751,575 Long-term debt, less current maturities 26,834,631 27,229,665 Reserve for credit guarantees 944,714 916,275 Deferred income taxes 437,729 437,729 ----------- ----------- Total liabilities 64,838,304 66,335,244 ----------- ----------- Warrants to purchase common stock in subsidiary 943,851 686,276 Stockholders' equity: Preferred stock, $.01 par value, authorized 50,000,000 shares, issued and outstanding 250,000 shares and none, respectively 2,500 - Common stock, $.01 par value, authorized 100,000,000 shares, issued and outstanding 13,146,966 and 12,621,966 shares, respectively 131,470 126,220 Paid-in capital 26,593,714 22,106,606 Accumulated income (deficit) 644,814 (1,095,483) Notes receivable (1,620,769) - ----------- ----------- Total stockholders' equity 25,751,729 21,137,343 ----------- ----------- $91,533,884 $88,158,863 =========== ===========
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 March 31, -------------------------- 1996 1995 ----------- ----------- Net revenues $37,749,771 $13,831,411 Cost of sales 29,044,520 10,796,839 ----------- ----------- Gross profit 8,705,251 3,034,572 Selling, general and administrative expenses 5,759,733 2,028,935 ----------- ----------- Operating income 2,945,518 1,005,637 ----------- ----------- Other income (expenses): Interest expense (1,570,285) (606,967) Interest income and other 385,844 231,304 ----------- ----------- Total other income (expenses) (1,184,441) (375,663) ----------- ----------- Income before income taxes and warrant accretion 1,761,077 629,974 Income taxes 643,165 25,000 ----------- ----------- 1,117,912 604,974 Accretion of common stock purchase warrants of subsidiary 99,911 - ----------- ----------- Net income 1,018,001 604,974 Dividends on preferred stock 37,500 - ----------- ----------- Net income attributable to common stockholders $ 980,501 $ 604,974 =========== =========== Weighted average common and common equivalent shares 13,974,294 12,341,517 =========== =========== Net income per common share $ .07 $ .05 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -4- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six Months Ended March 31, -------------------------- 1996 1995 ----------- ----------- Net revenues $75,247,061 $26,442,576 Cost of sales 58,963,580 20,343,395 ----------- ----------- Gross profit 16,283,481 6,099,181 Selling, general and administrative expenses 10,382,323 4,216,055 ----------- ----------- Operating income 5,901,158 1,883,126 ----------- ----------- Other income (expenses): Interest expense (3,144,021) (1,075,525) Interest income and other 485,540 416,727 ----------- ----------- Total other income (expenses) (2,658,481) (658,798) ----------- ----------- Income before income taxes and warrant accretion 3,242,677 1,224,328 Income taxes 1,169,805 45,000 ----------- ----------- 2,072,872 1,179,328 Accretion of common stock purchase warrants of subsidiary 257,575 - ----------- ----------- Net income 1,815,297 1,179,328 Dividends on preferred stock 75,000 - ----------- ----------- Net income attributable to common stockholders $1,740,297 $ 1,179,328 =========== =========== Weighted average common and common equivalent shares 13,779,389 12,361,287 =========== =========== Net income per common share $ .13 $ .10 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -5- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended March 31, -------------------------- 1996 1995 ----------- ----------- Cash flow provided by (used in) operating activities: Net income $ 1,815,297 $ 1,179,328 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,514,505 539,600 Provision for doubtful accounts (5,770) (70,582) Accretion of warrants to purchase common stock of subsidiary 257,575 - Imputed interest on TTI acquisition note - 66,225 Recognition of deferred rent reductions - (41,472) Dividends on Series A-3 Preferred Stock (75,000) - (Increase) decrease in, net of effects of acquisitions: Accounts and sales contracts receivable 2,535,939 (1,188,318) Inventories (4,847,849) (3,823,690) Prepaid expenses and other 661,209 (239,137) Increase (decrease) in, net of effects of acquisitions: Accounts payable 125,309 (4,988) Accrued expenses and other 887,822 963,520 ----------- ----------- Net cash provided by (used in) operating activities 2,869,037 (2,619,514) ----------- ----------- Cash flows provided by (used in) investing activities: Notes and other receivables (168,149) (1,392,747) Receivables from related parties (4,766,022) - Capital expenditures (372,048) (572,419) Other intangibles - (106,732) ----------- ----------- Net cash used in investing activities (5,306,219) (2,071,898) ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. -6- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
For the Six Months Ended March 31, -------------------------- 1996 1995 ----------- ----------- Cash flows provided by (used in) financing activities: Borrowings (principal payments) under line of credit arrangements, net $ (703,847) $4,100,000 Principal payments on notes payable and long-term debt, net (2,213,695) (303,997) Proceeds from the issuance of 12% subordinated debentures 1,500,000 - Advances from (payments to) related parties (1,153,000) 258,000 Principal collections on Pyrenees note receivable 379,231 - Exercise of common stock options 12,500 Common stock issuance costs (17,642) (123,501) Proceeds from private placement of preferred stock 2,500,000 - ----------- ---------- Net cash provided by financing activities 303,547 3,930,502 ----------- ---------- Net (decrease) in cash (2,133,635) (760,910) Cash - beginning of period 3,275,068 1,036,839 ----------- ---------- Cash - end of period $ 1,141,433 $ 275,929 =========== ========== Supplemental schedule of cash flow information: Cash paid during the period for : Interest $ 2,220,593 $ 43,935 Income taxes $ 189,536 $ -
The accompanying notes are an integral part of these consolidated financial statements. -7- POLYPHASE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS MARCH 31, 1996 1. NATURE OF BUSINESS The Company is a diversified holding company that, through its subsidiaries, currently operates in three industry segments: the forestry segment, which distributes, leases and provides financing for commercial and industrial timber and logging equipment; the computer and electronics segment, which markets, services and provides the networking of computers and related equipment and electronic parts, and manufactures and markets electronic transformers, inductors and filters; and the food processing segment, which produces high quality entrees, plated meals, soups, sauces and poultry, meat and fish specialties. 2. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions are eliminated. The financial statements included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. The information presented reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods when read in conjunction with the financial statements and the notes thereto included in the Company's latest financial statements filed as part of Form 10-K. 3. NOTES PAYABLE In connection with the acquisition of Texas Timberjack, Inc. (TTI) on June 24, 1994, the Company issued a non-interest bearing note to the seller in the amount of $10,000,000, collateralized by all the capital stock of TTI and initially due October 31,1994. As of the maturity date, the Company and the seller entered into an agreement providing for the modification, extension and renewal of the note, whereby the note was to bear interest at 12% and mature on October 31, 1995. As of October 31, 1995 the seller further extended and modified the note whereby the note, at that time having a principal balance of $11,200,000, was to bear interest at 17.5% and mature on February 29, 1996. On February 29, 1996 the seller further extended and modified the note whereby the note currently bears interest at 10% and matures on December 31, 1996. The note holder has no recourse to any of the assets or capital stock of Polyphase or any of its other subsidiaries and no cross-default provisions exist between this note agreement and any other Company debt. -8- 4. LONG TERM DEBT Effective December 1, 1995, the Company entered into additional agreements with the holders of its 12% senior convertible debentures, whereby the Company sold an additional $1,500,000 of debentures on generally the same terms and conditions as those previously issued. The new debentures bear interest at 12%, payable semiannually in June and December, are convertible into common stock at the rate of $5.00 per share (subject to adjustment) and become due and payable on December 1, 1997. 5. STOCKHOLDERS' EQUITY During November 1995, the Company, in a transaction with an unrelated corporation, sold 250,000 shares of newly designated Series A-3 Preferred Stock for $2,500,000 cash. The designations of the Series A-3 stock are similar to those of other series of preferred stock, except that each share of Series A-3 preferred stock is, except as otherwise required by law, entitled to two votes per share on all matters on which holders of common stock are entitled to vote, is entitled to cumulative annual dividends of 12% and is convertible into two shares of common stock (subject to adjustment in certain circumstances.) The Company also entered into an agreement with an associate of the aforementioned corporation to provide consulting services to the Company over a 36-month period. The consideration for such services was the grant of options to purchase 357,143 shares of common stock at $3.50 per share (the fair market value of the common stock at the date of grant) plus hourly fees and expenses. During October 1995, the Pyrenees Group exercised its option to purchase 200,000 shares of the Company's Series D Preferred Stock through the issuance of a 7% demand note in the amount of $2,000,000 collateralized by the shares issued. During the six month period ended March 31, 1996 the shares were converted to 500,000 shares of common stock and principal payments of approximately $379,000 were made on the note. 6. RELATED PARTIES During the period ended December 31, 1995, the Company advanced to or on behalf of Mr. Paul A. Tanner, Chairman and Chief Executive Officer of the Company, amounts which aggregated approximately $1.5 million. Effective December 8, 1995, the advances and an unpaid promissory note were refinanced by Mr. Tanner through the issuance to the Company of a 12% unsecured demand note in the principal amount of $2,000,872. Also during the period ended December 31, 1995, the Company made disbursements to the Pyrenees Group of 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 in principle to manage a project to develop and build a multi-purpose sports facility in Las Vegas, Nevada. The project is being developed by PLY Stadium Partners, Inc. (PLY), a private investment firm headed by Mr. Tanner. As part of the transaction, the Company is also to participate in the facility's management, sales of suites and seat options, concessions and events. The Company agreed to provide up to $4 million of debt that (1) is convertible into a 14% economic interest in the project -9- and (2) is to be guaranteed by certain members of the investment group. As part of this agreement, the amounts receivable from Mr. Tanner and Pyrenees (as described above), together with any subsequent amounts advanced, charged or accrued to or on behalf of PLY are to be considered as components of the $4 million of convertible debt, to bear interest at 12% and are to be guaranteed by Mr. Tanner and Pyrenees. Amounts advanced in excess of $4 million, also subject to such guarantees, are due and payable currently by PLY. During the three months ended March 31, 1996, the Company accrued management and service revenues of $1.5 million and interest income of $120,000 related to the Company's activities with PLY. At March 31, 1996, the total amount receivable from PLY amounted to approximately $5.2 million, the collectibility of which is dependent upon the success of the project or the guarantees referred to above. Subsequent to March 31, 1996, the Company made additional advances in excess of $6 million related to the PLY project. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Revenues for the six months ended March 31, 1996 increased $48,804,000 (185%) to $75,247,000 from $26,443,000 during the six months ended March 31, 1995. Operating income also increased $4,018,000 (213%) over the comparable period, primarily attributable to the inclusion of the operations of Overhill Farms, Inc ("Overhill Farms") which were acquired by the Company in May 1995. Net income for the six months ended March 31, 1996 increased $561,000 (48%) to $1,740,000 from $1,179,000 during the six months ended March 31, 1995. Net income, while up substantially from the comparable prior year period, was affected by increased interest expense from the acquisition of Overhill Farms, the reduction of tax benefits available during the period and dividends paid on the outstanding Series A-3 Preferred Stock. The Company is currently reviewing several alternatives to increase earnings by refinancing existing debt, streamlining operations, and continuing its program of strategic acquisitions. The Food Group's revenues and operating income for the six months ended March 31, 1996 were $47,738,000 and $3,428,000, respectively. Since the food operations were acquired during fiscal 1995, no comparative amounts are available for the prior year. Revenues continue to grow as the Food Group has expanded its product line for the food service and retail segments. The Group's strong test results during the quarter of single and multiple serve entrees have met with favorable response from a variety of grocery and warehouse chains. The Company anticipates the retail segment to produce substantial gains in the next few months as additional products are developed for the market. Revenues for the Forestry Group for the six months ended March 31, 1996 increased $358,000 to $17,479,000 from $17,121,000 for the six months ended March 31, 1995. Operating income for the comparable period decreased $178,000. The slight increases in revenue and decrease in operating income were primarily due to the strong demand for lumber and favorable weather conditions in Eastern Texas during calendar 1995. Consequently, logging companies have upgraded or purchased new equipment in prior months to satisfy the lumber mills' demand and business has stabilized. Management expects the demand to stabilize over the remainder of the fiscal year as the mills begin to fulfill their timber requirements. During the six months ended March 31, 1996 revenues for the Computer and Electronics Group decreased $491,000 to $8,830,000 from $9,321,000 for the six months ended March 31, 1995. Operating income also decreased to a loss of approximately $54,000 for the current period. The decreases are primarily attributable to increased competition and lower gross profit margins. Management has taken steps to increase marketing and offer expanded services to computer customers as well as begin to identify additional markets for transformers and electronic filters. LIQUIDITY AND CAPITAL RESOURCES During the six months ended March 31, 1996, the Company generated cash of approximately $2,869,000 in its operating activities compared to a use of cash in the amount of $2,620,000 during -11- the comparable period in fiscal 1995. The cash was provided primarily from increases in depreciation and amortization expenses associated with the acquisition of Overhill Farms and decreases in trade receivables at TTI. This was partially offset by increased inventories, primarily at TTI, during the period. During the six months ended March 31, 1996, the Company's investing activities used cash of approximately $5,306,000 compared to a use of cash in the amount of $2,072,000 during the comparable period in fiscal 1995. The Company's use of cash consisted primarily of advances to PLY Stadium Partners a company affiliated with Mr. Paul A. Tanner, the Company's Chairman of the Board, President and Chief Executive Officer. Subsequent to March 31, 1996, the Company made additional advances in excess of $6 million to the PLY project During the six months ended March 31, 1996 the Company's financing activities provided cash of approximately $304,000 as compared to $3,931,000 of cash provided in the comparable period in fiscal 1995. During the period the Company placed $2,500,000 of Series A-3 Preferred Stock and sold $1,500,000 of 12% convertible debentures. The funds from these transactions were used, in part, in the repayment of advances of $1,153,000 from related parties in connection with the acquisition of Overhill Farms and prepaying approximately $750,000 on existing Overhill Farms term loans. Subsequent to March 31, 1996 the Company utilized a line of credit for approximately $6 million for the advance made to PLY. The Company plans to continue its program of expansion and diversification through the acquisition of additional operating companies. Funding for these acquisitions is anticipated to come from a combination of internally generated funds, proceeds from the exercise of options, the issuance of shares of preferred stock and from additional borrowings. The Company's management believes that cash generated from operations, together with available lines of credit and contemplated debt and/or equity placements, will be sufficient to meet the Company's liquidity requirements for the next 12 months. -12- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 10, 1996 the United States District Court for the Northern District of Texas dismissed a class action suit that initially had been filed in the Eastern District of New York against the Company, Paul A. Tanner, James Rudis and William E. Shatley. The suit sought at least $15 million in damages plus an unspecified amount for plaintiffs' costs. The claims against the Company had been brought pursuant to Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and against the individuals pursuant to Section 20 of the Exchange Act. The Company is not a party to any other material pending litigation ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 27, 1996, the Company held its 1996 Annual Meeting of Stockholders (the "Annual Meeting"). At the Annual Meeting, the following matters were considered and voted upon: (a) the election of six (6) directors of the Company; and (b) the amendment to the 1994 Employee Stock Option Plan for Polyphase Corporation ("the 1994 Employee Plan") to increase the number of shares of common stock authorized and reserved for issuance upon exercise of stock options granted pursuant to the 1994 Employee Plan by 500,000 shares. The following table sets forth certain information relating to the voting by stockholders on the proposal referred to in (b) above:
Votes Cast Votes Cast Broker For Against Abstaining Non-Votes 9,561,900 219,743 120,850 -
Reference is made to the Company's definitive proxy statement, mailed on January 29, 1996 to stockholders of record on January 22, 1996, for more complete information relating to the matters discussed above. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K - The following reports were filed on Form 8-K during the quarter ended March 31, 1996. NONE -13- 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: May 17, 1996 By: /s/Paul A. Tanner ---------------------------- Paul A. Tanner President and Chief Executive Officer -14- INDEX TO EXHIBITS Exhibit No. Exhibit ----------------- ----------------------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1 6-MOS SEP-30-1996 MAR-31-1996 1,141,433 0 19,416,933 501,035 30,855,521 52,723,578 12,451,400 3,602,927 91,533,884 36,621,230 26,834,631 2,500 0 131,470 25,617,759 91,533,884 75,247,061 75,247,061 58,963,580 58,963,580 10,382,323 0 3,144,021 3,242,677 1,169,805 1,815,297 0 0 0 1,815,297 .13 .13