-----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, Hj20gLTQLTx0wioeZq4HCfzS9SCE+ABAJ30e3RBy5GOoqVRsSorM7Orpq3cUVoMa 4QM3O4rHpgi9n0WSajfHzA== 0000930661-98-001230.txt : 19980525 0000930661-98-001230.hdr.sgml : 19980525 ACCESSION NUMBER: 0000930661-98-001230 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980521 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: SEC FILE NUMBER: 001-09083 FILM NUMBER: 98629347 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 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, 1998 [_] 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 DALLAS, TEXAS 75248 (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 14,672,464 -------------------------- Outstanding at May 8, 1998 POLYPHASE CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 1998 - -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of March 31, 1998 and September 30, 1997 2 Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 1998 and 1997 4 Consolidated Condensed Statements of Operations for the Six Months Ended March 31, 1998 and 1997 5 Consolidated Condensed Statements of Cash Flows for the Six Months Ended March 31, 1998 and 1997 7 Notes to Consolidated Condensed Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 Signature Page 18 -1- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
ASSETS March 31, September 30, ----------- ------------- 1998 1997 ----------- ------------- Current assets: Cash $ 987,506 $ 1,064,259 Receivables, net of allowance for doubtful accounts of $600,330 and $576,192 Trade accounts 12,046,892 11,576,650 Current portion of sales contracts 5,198,806 5,770,626 Notes receivable 2,154,175 939,621 Inventories 29,949,967 23,002,020 Prepaid expenses and other 1,042,445 1,607,644 ----------- ------------- Total current assets 51,379,791 43,960,820 ----------- ------------- Property and equipment: Land 415,000 765,000 Buildings and improvements 3,482,680 4,660,582 Machinery, equipment and other 9,225,071 8,953,076 ----------- ------------- 13,122,751 14,378,658 Less-Accumulated depreciation (6,602,927) (5,954,554) ----------- ------------- 6,519,824 8,424,104 ----------- ------------- Other assets: Noncurrent receivables Sales contracts 1,826,609 2,027,518 Related parties, net of allowance of $164,563 and $0, respectively 350,071 522,597 Excess of cost over fair value of net assets of businesses acquired, net of accumulated amortization of $2,777,098 and $2,370,455 13,821,641 14,228,284 Other intangible assets 3,196,239 1,197,139 Restricted cash 706,714 717,358 Other 1,194,618 1,071,629 ----------- ------------- 21,095,892 19,764,525 ----------- ------------- $78,995,507 $ 72,149,449 =========== =============
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, ------------ -------------- 1998 1997 ------------ -------------- Current liabilities: Notes payable $ 11,179,664 $ 9,013,099 Note payable and accrued interest to related party 15,103,506 13,998,916 Accounts payable 9,406,962 7,775,022 Accrued expenses and other 2,347,873 2,251,035 Current maturities of long-term debt 6,600,000 5,720,000 ------------ -------------- Total current liabilities 44,638,005 38,758,072 Long term debt, less current maturities 24,308,334 23,272,280 Reserve for credit guarantees 706,714 717,358 ------------ -------------- Total liabilities 69,653,053 62,747,710 ------------ -------------- Warrants to purchase common stock in subsidiary 1,200,000 2,000,000 Stockholders' equity: Preferred stock, $.01 par value, authorized 50,000,000 shares, issued and outstanding 125,000 and 132,500 shares, respectively 1,250 1,325 Common stock, $.01 par value, authorized 100,000,000 shares, issued and outstanding 14,672,464 and 13,664,109 shares, respectively 146,725 136,641 Paid-in capital 29,103,186 28,955,695 Accumulated deficit (20,133,388) (20,716,603) Notes receivable (975,319) (975,319) ------------ -------------- Total stockholders' equity 8,142,454 7,401,739 ------------ -------------- $ 78,995,507 $ 72,149,449 ------------ --------------
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, ---------------------------- 1998 1997 ----------- ------------- Net revenues $33,328,696 $ 38,409,223 Cost of sales 26,818,115 32,623,184 ----------- ------------- Gross profit 6,510,581 5,786,039 Selling, general and administrative expenses 4,600,107 3,811,186 ----------- ------------- Operating income 1,910,474 1,974,853 ----------- ------------- Other income (expenses): Interest expense (2,262,859) (1,839,932) Interest income and other 134,279 (115,857) ----------- ------------- Total other income (expenses) (2,128,580) (1,955,789) Income (loss) before income taxes and warrant accretion (218,106) 19,064 Income taxes - 41,418 ----------- ------------- (218,106) (22,354) Accretion of common stock purchase warrants of subsidiary - 109,647 ----------- ------------- Net income (loss) (218,106) (132,001) Dividends on preferred stock (39,375) (37,500) ----------- ------------- Net income (loss) attributable to common stockholders $ (257,481) $ (169,501) ----------- ------------- Basic income (loss) per share $ (.02) $ (.01) =========== ============= Diluted income (loss) per 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 Six Months Ended March 31, -------------------------- 1998 1997 ----------- ----------- Net revenues $70,721,013 $74,575,012 Cost of sales 57,243,275 62,680,099 ----------- ----------- Gross profit 13,477,738 11,894,913 Selling, general and administrative expenses 9,196,593 8,434,856 ----------- ----------- Operating income 4,281,145 3,460,057 ----------- ----------- Other income (expenses): Interest expense (4,112,627) (3,414,350) Interest income and other 123,329 95,103 Gain on sale of assets 987,857 - ----------- ----------- Total other income (expenses) (3,001,441) (3,319,247) ----------- ----------- Income before income taxes, warrant accretion and extraordinary item 1,279,704 140,810 Income taxes - 120,528 ----------- ----------- 1,279,704 20,282 Accretion of common stock purchase warrants of subsidiary - 219,520 ----------- ----------- Net income (loss) before extraordinary item 1,279,704 (199,238) Extraordinary item: Early extinguishment of debt (616,239) - ----------- ----------- Net income (loss) 663,465 (199,238) Dividends on preferred stock (80,250) (75,000) ----------- ----------- Net income (loss) attributable to common stockholders $ 583,215 $ (274,238) =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -5- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (CONTINUED) (UNAUDITED)
For the Six Months Ended March 31, ------------------------ 1998 1997 --------- ---------- Basic income (loss) per share: Income (loss) before extraordinary item $ .08 $ (.02) Extraordinary item (.04) - --------- ---------- Net income (loss) per share: $ .04 $ (.02) --------- ---------- Diluted income (loss) per share: Income (loss) before extraordinary item $ .07 $ (.02) Extraordinary item (.04) - --------- ---------- Net income (loss) per share $ .03 $ (.02) ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. -6- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended March 31, --------------------------- 1998 1997 ------------ ------------ Cash flow provided by (used in) operating activities: Net income (loss) $ 663,465 $ (199,238) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,104,938 1,534,924 Provision for doubtful accounts 188,701 (8,296) Gain on sale of assets (987,857) - Accretion of warrants to purchase common stock of subsidiary - 219,520 (Increase) decrease in: Accounts and sales contracts receivable 278,349 1,986,390 Inventories (6,947,947) 1,306,662 Prepaid expenses and other 396,166 129,849 Accounts payable 1,631,940 (1,256,817) Accrued expenses and other 148,838 (1,486,209) ----------- ----------- Net cash provided by (used in) operating activities (2,523,407) 2,226,785 ----------- ----------- Cash flows provided by (used in) investing activities: Notes and other receivables (1,214,554) 437,139 Receivables from related parties 7,963 (4,826,425) Capital expenditures, net (399,328) (440,996) ----------- ----------- Net cash used in investing activities (1,605,919) (4,830,282) ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. -7- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
For the Six Months Ended March 31, --------------------------- 1998 1997 ------------ ------------ Cash flows provided by (used in) financing activities: Borrowings (principal payments) under line of credit arrangements, net $ 2,308,445 $ 3,618,528 Borrowings (principal payments) on other notes payable and long term debt, net 25,877,710 - Principal payments on term notes (1,982,280) - Principal payments on convertible bonds (4,300,000) - Principal payments on subordinated debentures (13,000,000) - Redemption of Overhill warrants (2,000,000) - Principal collections on Pyrenees note receivable - 303,774 Exercise of common stock options - 56,600 Dividends on preferred stock (80,250) (75,000) Deferred financing costs (2,753,552) - Common stock issuance costs (17,500) (17,500) ------------ ------------ Net cash provided by financing activities 4,052,573 3,886,402 ------------ ------------ Net increase (decrease) in cash (76,753) 1,282,905 Cash - beginning of period 1,064,259 280,969 ------------ ------------ Cash - end of period $ 987,506 $ 1,563,874 ============ ============
-8- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
For the Six Months Ended March 31, --------------------------- 1998 1997 ------------ ------------ Supplemental schedule of cash flow information: Cash paid during the period for : Interest $2,594,632 $2,643,554 Income taxes $ - $1,311,055
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 was tendered 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 and were valued at $973,000. In December 1997, in connection with the new Overhill Farms credit agreement, warrants were issued having a fair market value of $1,200,000. In connection with the repayment of certain indebtedness to Merrill Lynch, the Company issued warrants covering 210,000 shares exercisable at $.01 per share and 210,000 shares exercisable at $1.125 per share. Such warrants were assigned a value of $175,000. The accompanying notes are an integral part of these consolidated financial statements. -9- POLYPHASE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS MARCH 31, 1998 1. NATURE OF BUSINESS The Company is a diversified holding company that, through its subsidiaries, operates in three industry segments: the food segment, which produces high quality entrees, plated meals, soups, sauces and poultry, meat and fish specialties; the forestry segment, which distributes, leases and provides financing for commercial and industrial timber and logging equipment; and the transformer segment, which manufactures and markets electronic transformers, inductors and filters. 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. LONG-TERM DEBT In December 1997, the Company's subsidiary, Overhill Farms, Inc., refinanced a certain portion of existing debt. The new financing amounted to a total facility of $24.1 million which is structured as a three-year term loan maturing in December 2000. The note requires interest-only payments at prime plus 4% (12.5% as of March 31, 1998) through April 1999 and thereafter provides for principal amortization of $250,000 per month, plus interest, until a final payment of approximately $19,850,000 is due on December 5, 2000. The agreement also requires Overhill to pay on a quarterly basis, service fees totalling $140,000, $300,000 and $440,000 for the first, second and third years of the loan, respectively. Under the terms of the new financing arrangements, the lender was granted warrants to purchase 30% of Overhill's common stock, exercisable immediately, at a nominal value. The Company was originally granted the right to repurchase 25% of Overhill's shares from the lender over a two year period for consideration of $2,000,000. The Company and the lender are currently renegotiating certain amendments to the agreement relating to short and long term covenant restrictions, as well as the price and percentage for the warrant repurchase. Such warrants were assigned a value of $1,200,000, which has been recorded as debt discount and is being amortized over the term of the loan. Additionally, the lender received fees totalling approximately $1.7 million in connection with -10- this financing, which are partially refundable upon early repayment of the loan through a refinancing, sale or initial public offering of Overhill. As a result of this transaction Overhill repaid in full the $13.0 million subordinated debentures and repurchased for approximately $2.0 million the warrants previously held by Rice to purchase up to 22.5% of Overhill's common stock. These payments to Rice resulted in the Company and Rice reaching a settlement of their litigation. The Company also used a portion of the proceeds to repay Term Loans A and B due Finova, the $1,500,000 senior convertible debenture and $2,800,000 of principal of the $4,000,000 senior convertible debentures due Merrill Lynch. The refinancing also enabled the Company and Overhill to cure all previous defaults under various loan agreements and provided the Company with approximately $900,000 in working capital. The early extinguishment of this indebtedness resulted in an extraordinary charge to operations of approximately $616,000 (before income taxes) during the quarter ended December 31, 1997. Overhill's credit facilities generally restrict loans, advances, dividends or transfers from Overhill to the Company to $250,000 per year. 4. SALE OF SUBSIDIARY In December 1997, the Company sold Dallas Parkway Properties, Incorporated, a subsidiary whose principal asset was the corporate office building, in exchange for nominal consideration plus the assumption of a note payable for $2.8 million. The Company realized a gain of approximately $988,000 on this transaction. 5. TAXES For the six months ended March 31, 1998, the actual Federal income tax expense attributable to income from continuing operations differed from the net amounts recorded by the Company. The Company recorded a provision for Federal income taxes of $226,000 using the statutory tax rate of 34% and then applied a like amount of the existing valuation allowance, resulting in a net provision for the quarter of zero. As of March 31, 1998, the Company had a remaining valuation allowance of approximately $5.0 million and net operating loss carryforwards of approximately $7.3 million. 6. EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
For the Three Months Ended March 31, ----------------------------- 1998 1997 ------------ ------------- Numerator: Net income (loss) $ (218,106) (132,001) Preferred dividends (39,375) (37,500) ----------- ----------- Net income (loss) attributable to common shareholders $ (257,481) $ (169,501) =========== =========== Denominator: Denominator for basic earnings per share- weighted average shares (a) 14,491,396 13,600,432 =========== ===========
-11-
For the Three Months Ended March 31, ----------------------------- 1998 1997 ------------ ------------- Numerator: Net income (loss) before extraordinary item $ 1,279,704 $ (199,238) Preferred dividends (80,250) (75,000) ----------- ----------- 1,199,454 (274,238) Extraordinary item (616,239) - ----------- ----------- Income (loss) available to common shareholders $ 583,215 $ (274,238) =========== =========== Denominator: Denominator for basic earnings per share- weighted average shares 14,236,542 13,600,432 ----------- ----------- Effect of dilutive securities: Convertible preferred stock 1,607,430 - Stock options 291,478 - Warrants 132,618 - ----------- ----------- Dilutive potential common shares 2,031,526 - (a) ----------- ----------- 16,268,068 13,600,432 =========== ===========
(a) Dilutive potential common shares were excluded from the computation in loss periods since their effect would have been antidilutive. 7. STOCKHOLDERS' EQUITY During the period ended March 31, 1998, the holders of the Company's Series F 6% Preferred Stock converted 7,500 shares into 1,008,355 shares of common stock. During the quarter ended December 31, 1997, the conversion price of the Company's Series A-3 Preferred Stock was adjusted, pursuant to the Certificate of Designation for such preferred stock, to market value as of the date of conversion. Accordingly, at March 31, 1998, the Series A-3 Preferred Stock is convertible into a total of approximately 2.0 million shares. In connection with the repayment of certain indebtedness to Merrill Lynch as described in Note 3, the Company issued warrants covering 210,000 shares exercisable at $.01 per share and 210,000 shares exercisable at $1.125 per share. Such warrants were assigned a value of $175,000. 8. LIQUIDITY As described in Note 1, the Company operates primarily in three industry segments. The majority of the Company's net sales, operating profit and identifiable assets are in the Food and Forestry Groups. The Company's corporate entity has no significant operations and has -12- historically been partially dependent upon cash flows from its Food and Forestry Groups to meet its ongoing liquidity requirements. As a result of various restrictions in debt agreements that exist at the Food and Forestry Group levels, the Company is generally restricted from receiving management fees, dividends, loans or certain other advances in excess of $830,000 per year from those subsidiaries. In December 1997, in connection with the Long Horizons refinancing, Overhill was allowed per the terms of the new note agreement to effect a one-time cash advance to Polyphase of $5.5 million. These proceeds were subsequently used by Polyphase to reduce corporate borrowings plus accrued interest by $4.6 million and provide cash flow for working capital and other needs of $900,000. The remaining proceeds of the $24.1 million Long Horizons note were used by Overhill to refinance existing principal plus accrued interest, repurchase existing warrants to purchase 22.5% of Overhill's common stock for $2 million and pay certain costs related to the financing. In addition, the refinancing enabled the Company and Overhill to cure all previous defaults under all of their loan agreements. Upon maturity of its note payable to Mr. Harold Estes, former owner of Texas Timberjack, Inc. (TTI), the Company, in April 1998, entered into a verbal agreement with Mr. Estes to extend the maturity of the note for an additional six months on essentially the same terms and conditions as previously in effect. The new principal amount of $15,127,000 will bear interest at 16% and will become due in October 1998. Mr. Estes has no recourse to any of the assets or capital stock of the Company or any of its other subsidiaries other than its ownership interest in TTI, 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. 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 and the note balance due Mr. Estes. Further, as of March 31, 1998, 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 $4.7 million. These amounts may be required to be settled in the event of default on the Estes note. Also, in the event of default on this note, if the primary collateral, the Company's ownership interest 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 would be retained by Mr. Estes. Furthermore, Polyphase may be required to retain legal representation on various matters affecting the Company. The fees to be incurred could be substantial in relation to the Company's cash position. -13- 9. CONTINGENCIES On February 23, 1998, Mr. Paul A. Tanner resigned as Chief Executive Officer and Chairman of the Company's Board of Directors. Mr. James Rudis, the Company's President was elected by the Board to assume the positions of Chief Executive Officer and Chairman. Following the resignation, a reserve of approximately $165,000 was established against outstanding advances due from Mr. Tanner. The Company has guaranteed the repayment of a loan on behalf of PLY Stadium Partners, Inc. ("Stadium Partners"), a private investment firm headed by the former Chairman of the Company, Mr. Paul A. Tanner. The loan was made by a financial institution in connection with the purchase of land by a partnership affiliated with Stadium Partners to build a multi purpose stadium in Las Vegas. The guarantee is effective, in certain circumstances or upon the occurrence of certain events, including without limitation if the 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 the lender. The aforementioned partnership is currently in default on its loan from Lehman, and foreclosure proceedings by Lehman were initiated in January of this year. A foreclosure sale was scheduled for May 4, 1998. Stadium Partners filed for protection pursuant to Chapter 11 of Title 11 USC (S) 101 et. seq. on May 1, 1998. The foreclosure sale has been temporarily postponed pending judicial intervention. Notwithstanding such actions the Company, based on the advice of legal counsel, considering available defenses and the fair market value of the real estate, does not believe that it will incur any significant liability as a result of this guarantee. As a result, the Company believes the existence of such guarantee will not have a material adverse effect on the Company's financial condition or results of operations. During 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 these lawsuits was subsequently dismissed. -14- 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 six months ended March 31, 1998 decreased $3,854,000 (5%) to $70,721,000 from $74,575,000 during the six months ended March 31, 1997. The decrease in revenue is primarily attributable to the elimination of low margined business at Overhill Farms. On a consolidated basis, gross margins increased over the comparable period in the prior year from 16% to 19%, resulting in increased operating income despite slightly higher selling, general and administrative expenses. For the six months ended March 31 1998, operating income increased $821,000 (24%) to $4,281,000 from $3,464,000 during the comparable period in 1997. Interest expense increased $699,000 over the comparable period primarily due to the refinancing of the Company's indebtedness to Harold Estes. Net income before extraordinary item for the six months ended March 31, 1998 increased $1,479,000 to net income of $1,280,000 from a net loss of $199,000 during the six months ended March 31, 1997. Net income for the period included a one time gain of $988,000 from the sale of the Company's corporate headquarters in December 1997. Net income was adversely affected by an extraordinary expense of $616,000, the early extinguishment of debt, associated with the refinancing of certain indebtedness by Overhill Farms. The Food Group's revenues decreased to $45,345,000 for the six months ended March 31, 1998 as compared to $48,732,000 for the six months ended March 31, 1997. Operating income remained flat at $2,571,000, compared to $2,561,000 in the prior year. Revenues have decreased primarily due to the paring of lower margined business and the improvement in the quality of sales, increasing Overhill's gross margins by 1.5% for the period. Revenues for the Timber Group for the six months ended March 31, 1998 decreased $798,000 (3%) to $23,282,000 from $24,080,000 for the six months ended March 31, 1997. Operating income for the comparable period increased $1,094,000 (77%) to $2,506,000 for the six months ended March 31, 1998 from $1,412,000 for the six months ended March 31, 1997. Sales of new equipment decreased during the period as sales of used equipment remained strong generating a product mix with higher gross margins than the comparable period in 1997. For the six months ending March 31, 1997 gross margins rose 7.0% to 24.3 % from 17.3% in 1997. Revenues in the Transformer Group for the six months ended March 31, 1998 increased $330,000 to $2,093,000 from $1,763,000 for the comparable period in fiscal 1997. Operating income -15- decreased to $29,000 for the six months ended March 31, 1998 from $43,000 for the comparable period in fiscal 1997. This decrease is primarily attributable to the competitive market and the lower profit margins on government contracts. LIQUIDITY AND CAPITAL RESOURCES During the six months ended March 31, 1998, the Company used cash of approximately $2,523,000 in its operating activities compared to cash provided of $2,227,000 during the comparable period in fiscal 1997. The increased use of cash over the comparable period resulted primarily from increases in inventories at Overhill and Timberjack. During the six months ended March 31, 1998, the Company's investing activities used cash of approximately $1,606,000 compared to a use of cash in the amount of $4,830,00 in fiscal 1997. The Company's use of cash consisted primarily of new notes receivable. During the six months ended March 31, 1998, the Company's financing activities provided cash of approximately $4,053,000 as compared to cash provided of $3,886,000 in the comparable period in fiscal 1997. The source of cash during the period consisted primarily from the loan facility of approximately $24 million at Overhill Farms. 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 primarily from a combination of internally generated funds 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not own, nor does it have an interest in any market risk sensitive investments. -16- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During 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. During the six month period ended March 31, 1998, one of these lawsuits was dismissed. 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, 1998. None -17- 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 18, 1998 By: /s/ James Rudis -------------------------------- James Rudis Chairman, President and Chief Executive Officer Date: May 18, 1998 By: /s/ William E. Shatley -------------------------------- William E. Shatley Senior Vice President, Treasurer and Chief Financial Officer -18- INDEX TO EXHIBITS Exhibit No. Exhibit - ------------- ----------------------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS SEP-30-1997 MAR-31-1998 987,506 0 19,399,873 600,330 29,949,967 51,379,791 13,122,751 6,602,927 78,995,507 44,638,005 0 146,725 0 1,250 7,994,479 78,995,507 70,721,013 70,721,013 57,243,275 57,243,275 9,196,593 0 4,112,627 1,279,704 0 1,279,704 0 (616,239) 0 663,465 .04 .03
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