-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GUnJJyT7Ydl/GBznMYzYiWjalYvHz8IEo34Dx3hud9xjkTodMavRha3aA3aD3dyN EkfvMFnu/CaICEGEjyOgSA== 0000930661-97-001982.txt : 19970815 0000930661-97-001982.hdr.sgml : 19970815 ACCESSION NUMBER: 0000930661-97-001982 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLYPHASE CORP CENTRAL INDEX KEY: 0000748212 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CONSTRUCTION & MINING (NO PETRO) MACHINERY & EQUIP [5082] IRS NUMBER: 232708876 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09083 FILM NUMBER: 97661251 BUSINESS ADDRESS: STREET 1: 16885 DALLAS PARKWAY CITY: DALLAS STATE: TX ZIP: 75248 BUSINESS PHONE: 2147320010 MAIL ADDRESS: STREET 1: 16885 DALLAS PKWY CITY: DALLAS STATE: TX ZIP: 75248 FORMER COMPANY: FORMER CONFORMED NAME: KAPPA NETWORKS INC DATE OF NAME CHANGE: 19910721 10-Q 1 QUARTERLY REPORT 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 June 30, 1997 [ ] 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) (972) 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 13,644,109 ----------------------------- Outstanding at August 8, 1997 POLYPHASE CORPORATION FORM 10-Q QUARTER ENDED JUNE 30, 1997 - -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Page No. - ----------------------------- -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of June 30, 1997 and September 30, 1996 2 Consolidated Condensed Statements of Operations for the Three Months Ended June 30, 1997 and 1996 4 Consolidated Condensed Statements of Operations for the Nine Months Ended June 30, 1997 and 1996 5 Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 30, 1997 and 1996 6 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 14 Signature Page 15 -1- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) ASSETS
June 30, September 30, ----------- ------------- 1997 1996 ----------- ------------- Current assets: Cash $ 524,648 $ 280,969 Receivables, net of allowance for doubtful accounts of $643,018 and $519,104 Trade accounts 10,396,816 12,098,852 Current portion of sales contracts 6,549,458 6,625,727 Notes receivable 748,628 972,422 Receivables from related parties 511,771 367,634 Inventories 25,866,750 28,027,779 Prepaid expenses and other 2,320,833 2,676,336 ----------- ----------- Total current assets 46,918,904 51,049,719 ----------- ----------- Property and equipment: Land 765,000 765,000 Buildings and improvements 4,660,582 4,279,917 Machinery, equipment and other 8,881,725 8,575,687 ----------- ----------- 14,307,307 13,620,604 Less-Accumulated depreciation 5,494,602 4,212,872 ----------- ----------- 8,812,705 9,407,732 ----------- ----------- Other assets: Noncurrent receivables Sales contracts 1,341,455 1,333,150 Notes receivable 951,433 1,037,890 Related parties, net of allowance of $3,340,000 14,801,647 9,931,054 Excess of cost over fair value of net assets of businesses acquired, net of accumulated amortization of $2,162,970 and $1,557,165 14,435,769 15,041,574 Other intangible assets 1,864,060 1,402,239 Restricted cash 799,149 882,383 Other 4,159,814 4,092,780 ----------- ----------- 38,353,327 33,721,070 ----------- ----------- $94,084,936 $94,178,521 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -2- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30, ----------- ------------- 1997 1996 Current liabilities: Notes payable $20,050,196 $ 9,516,219 Note payable and accrued interest to related party 13,484,916 - Accounts payable 7,209,269 8,581,071 Accrued expenses and other 2,776,997 4,415,011 Current maturities of long-term debt 21,269,520 31,573,716 ----------- ----------- Total current liabilities 64,790,898 54,086,017 Note payable and accrued interest to related party - 12,546,600 Reserve for credit guarantees 799,149 882,383 Deferred income taxes 1,475,897 1,475,897 ----------- ----------- Total liabilities 67,065,944 68,990,897 ----------- ----------- Warrants to purchase common stock in subsidiary 1,539,350 1,189,224 Stockholders' equity: Preferred stock, $.01 par value, authorized 50,000,000 shares, issued and outstanding 125,000 and 250,000 shares, respectively 1,250 2,500 Common stock, $.01 par value, authorized 100,000,000 shares, issued and outstanding 13,664,109 and 13,196,966 shares, respectively 136,641 131,970 Paid-in capital 27,839,392 26,630,714 Accumulated deficit (1,522,322) (1,487,695) Notes receivable (975,319) (1,279,089) ----------- ----------- Total stockholders' equity 25,479,642 23,998,400 ----------- ----------- $94,084,936 $94,178,521 =========== ===========
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 June 30, -------------------------- 1997 1996 ------------ ------------ (Restated) Net revenues $38,478,729 $36,477,962 Cost of sales 31,514,664 30,062,615 ----------- ----------- Gross profit 6,964,065 6,415,347 Selling, general and administrative expenses 4,739,554 5,488,733 ----------- ----------- Operating income 2,224,511 926,614 ----------- ----------- Other income (expenses): Interest expense (1,666,379) (1,451,969) Interest income and other 36,474 165,790 Gain on sale of assets - 875,087 ----------- ----------- Total other income (expenses) (1,629,905) (411,092) ----------- ----------- Income before income taxes and warrant accretion 594,606 515,522 Income taxes 186,889 483,174 ----------- ----------- 407,717 32,348 Accretion of common stock purchase warrants of subsidiary 130,606 73,591 ----------- ----------- Net income (loss) 277,111 (41,243) Dividends on preferred stock (37,500) (37,500) ----------- ----------- Net income (loss) attributable to common stockholders $ 239,611 $ (78,743) =========== =========== Weighted average common and common equivalent shares 14,296,234 13,981,686 =========== =========== Net income (loss) per common share $ .02 $ (.01) =========== ===========
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 Nine Months Ended June 30, ------------------------------- 1997 1996 ------------ ------------ (Restated) Net revenues $113,053,741 $111,725,023 Cost of sales 94,194,763 89,026,195 ------------ ------------ Gross profit 18,858,978 22,698,828 Selling, general and administrative expenses 13,174,410 15,871,056 ------------ ------------ Operating income 5,684,568 6,827,772 ------------ ------------ Other income (expenses): Interest expense (5,080,729) (4,595,990) Interest income and other 131,577 651,327 Gain on sale of assets - 875,087 ------------ ------------ Total other income (expenses) (4,949,152) (3,069,576) ------------ ------------ Income before income taxes and warrant accretion 735,416 3,758,196 Income taxes 307,417 1,652,979 ------------ ------------ 427,999 2,105,217 Accretion of common stock purchase warrants of subsidiary 350,126 331,166 ------------ ------------ Net income 77,873 1,774,051 Dividends on preferred stock (112,500) (112,500) ------------ ------------ Net income (loss) attributable to common stockholders $ (34,627) $ 1,661,551 ============ ============ Weighted average common and common equivalent shares 13,621,658 13,846,821 ============ ============ Net income (loss) per common share $ - $ .12 ============ ============
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 Nine Months Ended June 30, ------------------------- 1997 1996 ----------- ----------- (Restated) Cash flow provided by (used in) operating activities: Net income $ 77,873 $ 1,774,051 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,453,680 2,252,943 Provision for doubtful accounts 123,914 (43,795) Accretion of warrants to purchase common stock of subsidiary 350,126 331,166 (Increase) decrease in, net of effects of acquisitions: Accounts and sales contracts receivable 1,646,086 2,025,064 Inventories 2,161,029 (2,647,810) Prepaid expenses and other 488,469 793,649 Increase (decrease) in, net of effects of acquisitions: Accounts payable (1,371,802) 1,535,577 Accrued expenses and other (699,698) 1,614,191 ----------- ------------ Net cash provided by operating activities 5,229,677 7,635,036 ----------- ------------ Cash flows provided by (used in) investing activities: Notes and other receivables 310,251 230,012 Receivables from related parties (5,014,730) (11,932,302) Capital expenditures (686,703) (1,826,869) ----------- ------------ Net cash used in investing activities (5,391,182) (13,529,159) ----------- ------------
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 Nine Months Ended June 30, -------------------------- 1997 1996 ------------ ------------ Cash flows provided by (used in) financing activities: Borrowings (principal payments) under line of credit arrangements, net $(1,206,023) (2,107,242) Borrowings (principal payments) on notes payable and long term debt, net (1,119,163) 2,131,036 Borrowings on other notes payable 2,500,000 - Proceeds from the issuance of 12% subordinated debentures - 1,500,000 Advances from (payments to) related parties - (1,153,000) Principal collections on Pyrenees note receivable 303,770 589,231 Exercise of common stock options 56,600 12,500 Dividends on preferred stock (112,500) (112,500) Common stock issuance costs (17,500) (17,642) Proceeds from private placement of preferred stock - 2,500,000 ----------- ----------- Net cash provided by financing activities 405,184 3,342,383 ----------- ----------- Net increase (decrease) in cash 243,679 (2,551,740) Cash - beginning of period 280,969 3,275,068 ----------- ----------- Cash - end of period $ 524,648 $ 723,328 =========== =========== Supplemental schedule of cash flow information: Cash paid during the period for : Interest $ 4,045,806 $ 3,372,468 Income taxes $ 1,311,055 $ 189,536
Supplemental schedule of noncash investing and financing activities: In October 1996, an unrelated third party exercised an option to purchase 357,143 shares of common stock. As consideration, the Company received 125,000 shares of Series A-3 Preferred Stock having a redemption value of $1,250,000. In November 1996, a former executive of the Company exercised options on 35,000 of common stock at $.01 per share. Such options were granted in consideration for a consulting contract and were valued at $200,000. In January 1997, an unrelated third party was granted an option on 200,000 shares of common stock, exercisable at $.01 per share, in exchange for a two- year consulting agreement. The accompanying notes are an integral part of these consolidated financial statements. -7- POLYPHASE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS JUNE 30, 1997 1. NATURE OF BUSINESS The Company is a diversified holding company that, through its subsidiaries, operates in three industry segments: the forestry segment, which distributes, leases and provides financing for commercial and industrial timber and logging equipment (the "Forestry Group"); the transformer segment, which manufactures and markets electronic transformers, inductors and filters (the "Transformer Group"); and the food processing segment, which produces high quality entrees, plated meals, soups, sauces and poultry, meat and fish specialties (the "Food Group"). 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. The Company's results for the period ending June 30, 1996 have been restated to reflect changes in inventory valuation. The inventory adjustments were identified in the Computer Group and revised in the third quarter, the last quarter the Company controlled the Computer Group. 3. LIQUIDITY The Company has not complied with certain covenants involving most of its loan agreements, including covenants that restrict transactions with affiliates and which require the filing of audited financial statements for the Company and its subsidiaries on a timely basis. The Company has been notified by substantially all of its lenders that it is in default under the loan agreements; however, such lenders have not yet attempted to accelerate maturity of the otherwise long-term indebtedness. Accordingly, the Company's debt has been classified as current as of June 30, 1997. Overhill has been given notice by its senior lender that it is delinquent in making a mandatory prepayment of approximately $751,000 on certain term notes payable to such lender; failure to make such payment would constitute an event of default under the loan agreement. -8- The Company is in the process of negotiating a transaction involving Overhill that the Company expects will resolve the Rice lawsuit (see Note 5) and improve the Company's overall debt structure, but there can be no assurances that such transaction will be consummated. Upon completion of the transaction, the Company believes it will be able to negotiate with the remaining debt holders and obtain waivers to the covenant violations that exist. As such, the Company expects that it will be able to meet its liquidity requirements. The Company did not pay when due on July 16, 1997, the principal balance of $2,500,000 (plus accrued interest) on the 16% six-month note incurred in January 1977, as described in Note 4 below. As a result, the lender has elected to post the real estate securing the loan for foreclosure. The Company is currently negotiating a transaction whereby this obligation would be paid in full, but there can be no assurance that such transaction will be consummated. 4. RELATED PARTY TRANSACTIONS 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. ("Stadium Partners"), a private investment firm headed by Mr. Paul A. Tanner, Chairman and Chief Executive Officer of the Company. 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 and is to be compensated for such services. The Company has provided $4 million of debt, bearing interest at 12%, to Stadium Partners. The debt is (1) convertible into a 14% economic interest in the project and (2) is guaranteed by Mr. Tanner and Pyrenees Group, a private investment firm headed by Mr. Tanner. 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 the newly-formed partnership referred to above, Nevada Stadium Partners Limited Partnership ("Nevada Partnership"), with Lehman as the lender receiving an equity interest in the project. The Company has guaranteed the repayment of the loan from Lehman to the partnership in the above mentioned transaction, upon the occurrence of certain events. Such guarantee is effective upon the occurrence of certain conditions, including without limitation if the Partnership files for bankruptcy or insolvency, if representation by the Partnership proves to be fraudulent regarding the financial condition of the Borrower, the land securing the loan is further encumbered or ownership transferred without the consent of Lehman. In January 1997, the Company further advanced Stadium Partners $4.9 million. The funds advanced consisted of $2.4 million, drawn from an existing line of credit, and $2.5 million from a six-month term note. The term note bears interest at 16%, is payable monthly and is secured by a second lien on the Company's headquarters. As additional collateral, the Company agreed to issue an option on 500,000 shares of Series A-2 preferred stock (convertible into 1,000,000 shares of common stock) which is exercisable upon default of certain covenants of the agreement. (See Note 3.) -9- In connection with the aforementioned transaction, the Company entered into a two-year consulting agreement with a principal of the lender. In consideration of the agreement, the Company issued an option to purchase 200,000 shares of common stock at $.01 per share. 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. As a result of the financing described above Stadium Partners is precluded from making any distributions until permanent project financing is secured. As a consequence of Stadium Partners inability to make its payment to the Company due March 15,1997, the Company established a reserve of $3.34 million as of September 30, 1996, which represents the income accrued. The reserve will be reduced as collections and distributions, if any, are made pursuant to the Stadium Partners loan agreements. The Company no longer accrues management fees or interest income on the existing advances. During the nine months ended June 30, 1997, the Company made additional advances to Stadium Partners totalling $4,870,593, resulting in a balance due of $14,801,647. These advances are currently due and payable, and their collectibility is dependent upon the success of the project and/or the guarantees referred to above. During the nine months ended June 30, 1997, the Company made advances to Mr. Tanner totalling $137,902, resulting in a balance due of $152,762 as of that date. In connection with the acquisition of Texas Timberjack, Inc., the Company issued a non-interest bearing note to Harold Estes for $10,000,000 originally due October 31, 1994. The Company has since modified, extended and renewed the note whereby the note currently having a balance of $12,842,916 (plus accrued interest) has been extended to December 1, 1997, bearing interest at 10% through June 30, 1997 and 16% thereafter. The Company anticipates that it will be required to refinance this note payable on a long-term basis and is presently in negotiations with potential lenders to accomplish this goal. There is no certainty that Company will be able to refinance this note on acceptable terms or at all, by December 1, 1997. The note holder has no recourse to any of the assets or capital stock of Polyphase Corporation or any of its other subsidiaries and no cross-default provisions exist between this note and any other Company debt. 5. CONTINGENCIES In January 1997, a suit was filed in District Court of Dallas County against the Company by Rice Partners II, L.P. ("Rice"), subordinated debt holder of the Company's Overhill Farms subsidiary. The suit claims, 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. The Company has filed a counter suit claiming Rice (i) refused to comply with verbal agreements to the indenture (ii) conspired with the former general manager of Overhill to force the Company to sell Overhill Farms at a distressed price in order to benefit Rice and (iii) caused the halting of trading of the Company's stock. In June 1997, two 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 -10- 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. 6. STOCKHOLDERS' EQUITY In October 1996, a director of the Company exercised options on 75,000 of common stock at $.75 per share. In October 1996, an associate of the holders of the Company's Series A-2 Preferred Stock tendered 125,000 shares of such preferred stock as consideration for the exercise of options on 357,143 shares of common stock at $3.50 per share. In November 1996, a former executive of the Company exercised options on 35,000 of common stock at $.01 per share. Such options were granted in consideration for a consulting contract and were valued at $200,000. -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 pending or possible future litigation. RESULTS OF OPERATIONS Revenues for the nine months ended June 30, 1997 increased $1,329,000 (1%) to $113,054,000 from $111,725,000 during the nine months ended June 30, 1996. The increase in revenue is primarily attributable to significantly higher revenues in the Forestry Group. Operating income decreased $1,143,000 (17%) from the comparable prior period due primarily to lower gross margins in the Food and Timber Groups. Net income for the nine months ended June 30, 1997 decreased $1,696,000 (96%) to net income of $78,000 from $1,774,000 during the nine months ended June 30, 1996. Net income was adversely affected by lower gross margins, higher operating and interest expense and the one time gain on sale of property in fiscal 1996. The Food Group's revenues increased slightly to $73,549,000 for the nine months ended June 30, 1997 as compared to $72,203,000 for the nine months ended June 30, 1996. Operating income decreased $891,000 (18%) to $4,022,000, from $4,913,000 in the comparable prior period. The decrease in operating profits was primarily due to increased competitive pressure in all segments. Overhill management has initiated improvements in the company's raw materials purchasing procedures and has made pricing adjustments to certain low margin accounts. Management anticipates near term improvement in Overhill's gross margins and operating profits. Revenues for the Forestry Group for the nine months ended June 30, 1997 increased $12,828,000 (53%) to $36,860,000 from $24,032,000 for the nine months ended June 30, 1996. Operating income for the comparable period increased $912,000 (41%) to $3,121,000 for the nine months ended June 30, 1997 from $2,209,000 for the nine months ended June 30, 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. Profit margins decreased significantly in fiscal 1997 due largely to a change in the sales mix. During the period, sales of new units increased substantially and the number of used units, which are traditionally sold at much higher margins, decreased. Management anticipates that this sales trend will continue through 1997. Revenues in the Transformer Group for the six months ended June 30, 1997 decreased $53,000 to $2,645,000 from $2,698,000 for the comparable period in fiscal 1996. Operating income also decreased to $27,000 for the nine months ended June 30, 1997 from $63,000 for the comparable period in fiscal 1997. The decreases are primarily attributable the competitive market and the lower profit margins on government contracts. -12- LIQUIDITY AND CAPITAL RESOURCES During the nine months ended June 30, 1997, the Company's operating activities provided cash of approximately $5,229,000 compared to $7,635,000 of cash provided in the comparable period of fiscal 1996. This decrease was primarily due to significantly lower net income and large decreases in accounts payable and accruals. During the nine months ended June 30, 1997, the Company's investing activities used cash of approximately $5,391,000 compared to a use of cash in the amount of $13,529,000 during the comparable period in fiscal 1996. The Company's use of cash consisted primarily of advances to Stadium Partners, a company affiliated with Mr. Paul A. Tanner, the Company's Chairman and Chief Executive Officer. During the nine months ended June 30, 1997, the Company's financing activities provided cash of approximately $405,000 as compared to $3,342,000 of cash provided in the comparable period in fiscal 1996. During the period the Company borrowed approximately $4.9 million consisting of $2.4 million from an existing line of credit and $2.5 million from a six month term note. The term note bears interest at 16%, is payable monthly and is secured by a second lien on the Company's headquarters. As additional collateral, the Company agreed to issue an option on 500,000 shares of Series A-2 preferred stock (convertible into 1,000,000 shares of common stock) which is exercisable upon default of certain covenants of the agreement. The funds from these transactions were used in making advances to Stadium Partners. The Company has not complied with certain covenants involving substantially all of the Company's loan agreements, including covenants that restrict transactions with affiliates and which require the filing of audited financial statements for the Company and its subsidiaries on a timely basis. The Company has been notified by substantially all of its lenders that it is in default under the loan agreements; however, such lenders have not yet attempted to accelerate maturity of the otherwise long-term indebtedness. Accordingly, the Company's debt has been classified as current as of September 30, 1996 and June 30, 1997. Overhill has been given notice by its senior lender that it is delinquent in making a mandatory prepayment of approximately $751,000 on certain term notes payable to such lender; failure to make such payment would constitute an event of default under the loan agreement. The Company is in the process of negotiating a transaction involving Overhill that the Company expects will resolve the Rice lawsuit and improve the Company's overall debt structure, but there can be no assurance that such transaction will be consummated. The Company did not pay when due on July 16, 1997, the principal, balance of $2,500,000 plus accrued interest on the 16% six-month note incurred in January 1997, as described above. As a result, the lender has elected to post the real estate securing the loan for foreclosure. The Company is currently negotiating a transaction whereby this obligation would be paid in full, but there can be no assurances that such transaction will be consummated. Accordingly, the Company's management believes that cash generated from the proposed Overhill transaction and from operations, together with existing lines of credit, will be sufficient to enable the Company to meet its liquidity requirements for the next 12 months. -13- PART II - OTHER INFORMATION ITEM 1. 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 claims, 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. The Company has filed a counter suit claiming Rice Partners II, L.P. (i) refused to comply with verbal agreements to the indenture (ii) conspired with the former general manager of Overhill to force the Company to sell Overhill Farms at a distressed price in order to benefit Rice Partners, II, L.P. and (iii) caused the halting of trading of the Company's stock. In June 1997, two 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 June 30, 1997. NONE -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: August 12, 1997 By: /s/ Paul A. Tanner ----------------------- Paul A. Tanner Chairman and Chief Executive Officer -15- INDEX TO EXHIBITS Exhibit No. Exhibit ----------------- ------------------------------- 27 Financial Data Schedule EX-27 2 FINANICAL DATA SCHEDULE
5 9-MOS SEP-30-1996 JUN-30-1997 524,648 0 18,206,673 643,018 25,866,750 46,918,904 14,307,307 5,494,602 94,084,936 64,790,898 0 136,641 0 1,250 25,341,751 94,084,936 113,053,741 113,053,741 94,194,763 94,194,763 13,174,410 0 5,080,729 735,416 307,417 (34,627) 0 0 0 (34,627) (.00) (.00)
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