-----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, Qns+4c9Qvd7SLAboYDWUeWAL3qQn+7RERPw5nh/zKDR9dKbj5Dz+oS05d+q0a+qr jezLmBDimzTfB7AEF5hHKg== 0000930661-00-001167.txt : 20000511 0000930661-00-001167.hdr.sgml : 20000511 ACCESSION NUMBER: 0000930661-00-001167 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000510 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: 624429 BUSINESS ADDRESS: STREET 1: 4800 BROADWAY SUITE A CITY: ADDISON STATE: TX ZIP: 75001 BUSINESS PHONE: 9723860101 MAIL ADDRESS: STREET 1: 4800 BROADWAY SUITE A CITY: ADDISON STATE: TX ZIP: 75001 FORMER COMPANY: FORMER CONFORMED NAME: KAPPA NETWORKS INC DATE OF NAME CHANGE: 19910721 10-Q 1 FORM 10Q 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, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 1-9083 POLYPHASE CORPORATION (Exact name of registrant as specified in its charter) Nevada 23-2708876 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4800 Broadway, Suite A Addison, Texas 75001 (Address of principal executive offices) (972) 386-0101 (Registrants's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months ( or for such shorter period the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 17,812,464 -------------------------- Outstanding at May 3, 2000 POLYPHASE CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 2000 - -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Page No. - ----------------------------- -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of March 31, 2000 and September 30, 1999 2 Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2000 and 1999 4 Consolidated Condensed Statements of Operations for the Six Months Ended March 31, 2000 and 1999 5 Consolidated Condensed Statements of Cash Flows for the Six Months Ended March 31, 2000 and 1999 7 Notes to Consolidated Condensed Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K 18 Signature Page 19 -1- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS Assets
March 31, September 30, ----------- ------------- 2000 1999 ----------- ------------- (Unaudited) Current assets: Cash $ 1,679,962 $ 375,408 Receivables, net of allowance for doubtful accounts of $530,268 and $502,667 Trade accounts 17,617,493 17,373,364 Current portion of sales contracts 4,197,018 4,765,072 Notes receivable 3,445,539 3,359,777 Inventories 33,066,624 30,924,744 Prepaid expenses and other 2,684,402 1,663,269 ----------- ----------- Total current assets 62,691,038 58,461,634 ----------- ----------- Property and equipment: Land 432,000 432,000 Buildings and improvements 3,755,213 3,481,009 Machinery, equipment and other 9,115,549 8,929,988 ----------- ----------- 13,302,762 12,842,997 Less-Accumulated depreciation (7,864,683) (7,114,989) ----------- ----------- 5,438,079 5,728,008 ----------- ----------- Other assets: Noncurrent receivables, net of allowance for doubtful accounts of $1,264,563 and $1,305,220 Sales contracts 1,795,090 2,114,591 Notes receivable - - Related parties 1,230,034 1,523,096 Excess of cost over fair value of net assets of businesses acquired, net of accumulated amortization of $4,201,851 and $3,754,614 14,005,594 12,178,209 Other intangible assets 1,904,250 1,216,393 Restricted cash 748,632 625,623 Other 1,564,177 1,674,388 ----------- ----------- 21,247,777 19,332,300 ----------- ----------- $89,376,894 $83,521,942 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -2- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (continued) Liabilities and Stockholders' Equity
March 31, September 30, ----------- ------------- 2000 1999 ----------- ------------- (Unaudited) Current liabilities: Notes payable $ 7,205,669 $ 4,403,264 Accounts payable 8,321,969 9,937,347 Accrued expenses and other 3,041,593 3,374,493 Current maturities of long-term debt 6,050,118 6,798,467 ------------ ------------ Total current liabilities 24,619,349 24,513,571 Long term debt, less current maturities 36,949,227 33,592,522 Note payable and accrued interest to related party 18,652,481 17,914,842 Reserve for credit guarantees 748,632 625,623 ------------ ------------ Total liabilities 80,969,689 76,646,558 ------------ ------------ Warrants to purchase common stock in subsidiary 2,370,000 1,425,378 Stockholders' equity: Preferred stock, $.01 par value, authorized 50,000,000 shares, issued and outstanding none and 56,440 shares, respectively - 564 Common stock, $.01 par value, authorized 100,000,000 shares, issued and outstanding 17,812,464 shares 178,125 178,125 Paid-in capital 27,596,046 28,159,887 Accumulated deficit (21,736,966) (22,888,570) ------------ ------------ Total stockholders' equity 6,037,205 5,450,006 ------------ ------------ $ 89,376,894 $ 83,521,942 ============ ============
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, --------------------------- 2000 1999 ----------- ----------- Net revenues $43,487,234 $39,695,102 Cost of sales 34,691,213 32,889,609 ----------- ----------- Gross profit 8,796,021 6,805,493 Selling, general and administrative expenses 5,976,604 4,971,144 ----------- ----------- Operating income 2,819,417 1,834,349 ----------- ----------- Other income (expenses): Interest expense (2,081,631) (2,191,110) Interest income and other 167,150 155,784 ----------- ----------- Total other income (expenses) (1,914,481) (2,035,326) ----------- ----------- Income (loss) before income taxes and discontinued operations 904,936 (200,977) Income taxes 93,701 - ----------- ----------- Income (loss) before discontinued operations 811,235 (200,977) Discontinued operations - 7,418 ----------- ----------- Net income (loss) 811,235 (193,559) Dividends on preferred stock - (24,236) ----------- ----------- Net income (loss) attributable to common stockholders $ 811,235 $ (217,795) =========== =========== Net income (loss) per share - basic and diluted: Before discontinued operations $ .05 $ (.01) Discontinued operations - - ----------- ----------- Net income (loss) per share $ .05 $ (.01) =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -4- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (continued) (Unaudited)
For the Six Months Ended March 31, -------------------------- 2000 1999 ----------- ----------- Net revenues $87,930,184 $74,550,100 Cost of sales 69,691,471 61,720,419 ----------- ----------- Gross profit 18,238,713 12,829,681 Selling, general and administrative expenses 12,293,214 9,364,031 ----------- ----------- Operating income 5,945,499 3,465,650 ----------- ----------- Other income (expenses): Interest expense (4,074,355) (4,348,785) Interest income and other 331,876 338,447 ----------- ----------- Total other income (expenses) (3,742,479) (4,010,338) ----------- ----------- Income (loss) before income taxes, discontinued operations and extraordinary item 2,203,020 (544,688) Income taxes 112,442 - ----------- ----------- Income (loss) before discontinued operations and extraordinary item 2,090,578 (544,688) Discontinued operations - 10,744 Extraordinary item--early extinguishment of debt (1,290,431) - ----------- ----------- Net income (loss) 800,147 (533,944) Gain (dividends) on reacquired preferred stock 351,457 (57,334) ----------- ----------- Net income (loss) attributable to common stockholders $ 1,151,604 $ (591,278) =========== ===========
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, ------------------------ 2000 1999 ----------- ----------- Net income (loss) per share - basic and diluted: Before discontinued operations and extraordinary item $ .13 $ (.04) Discontinued operations - - Extraordinary item (.07) - ----------- ----------- Net income (loss) per share: $ .06 $ (.04) =========== ===========
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, ---------------------------- 2000 1999 ----------- ----------- Cash flow provided by (used in) operating activities: Net income (loss) $ 800,147 $ (533,944) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,691,068 1,976,686 Provision for doubtful accounts 69,820 79,000 Discontinued operations - (10,744) Extraordinary item 1,290,431 - Changes in: Accounts and sales contracts receivable 573,606 (4,611,381) Inventories (2,141,880) (418,727) Prepaid expenses and other (910,922) (381,654) Accounts payable (1,615,378) 4,988,205 Accrued expenses and other 61,799 306,386 ----------- ----------- Net cash provided by (used in) operating activities (181,309) 1,393,827 ----------- ----------- Cash flows provided by (used in) investing activities: Notes and other receivables (85,762) (112,820) Receivables from related parties 293,062 (80,676) Capital expenditures, net (459,765) (669,261) ----------- ----------- Net cash used in investing activities $ (252,465) $ (862,757) ----------- -----------
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, --------------------------- 2000 1999 ------------ ------------ Cash flows provided by (used in) financing activities: Refinancing of Overhill indebtedness: Borrowings $ 38,502,176 $ - Repayments (32,322,005) - Redemption of warrants (3,700,000) - Deferred financing costs (1,832,907) - Borrowings (principal payments) on other notes payable and long term debt, net 1,541,064 981,165 Exercise of common stock options - 1,300 Repurchase of preferred stock (450,000) - ------------ ------------ Net cash provided by financing activities 1,738,328 982,465 ------------ ------------ Net increase (decrease) in cash 1,304,554 1,513,535 Cash - beginning of period 375,408 401,393 ------------ ------------ Cash - end of period $ 1,679,962 $ 1,914,928 ============ ============ Supplemental schedule of cash flow information: Cash paid during the period for : Interest $ 3,169,457 $ 2,934,213 Income taxes $ 5,000 $ -
Supplemental schedule of noncash investing and financing activities: In November 1999, in connection with the Overhill Farms refinancing, warrants were issued having an estimated fair market value of $2,370,000. During the six months ended March 31, 1999, the Company made partial payments on a lawsuit obligation, together with certain associated expenses, by issuing 300,000 shares of common stock valued at $85,000. During the six months ended March 31, 1999, the Company settled certain disputed obligations by granting an option on 130,000 shares of common stock, exercisable at $.01 per share. The options were assigned a value of $28,000. The accompanying notes are an integral part of these consolidated financial statements. -8- POLYPHASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements March 31, 2000 1. NATURE OF BUSINESS Polyphase Corporation (the "Company" or "Polyphase") is a diversified holding company that, through its subsidiaries, operates in two industry segments: the food segment and the forestry segment. The food segment (the "Food Group"), which consists of the Company's wholly-owned subsidiary, Overhill Farms, Inc. ("Overhill"), produces high quality entrees, plated meals, soups, sauces and poultry, meat and fish specialities. The Company's 100% ownership of Overhill is subject to warrants outstanding to purchase a minority position in Overhill. The forestry segment (the "Forestry Group"), which consists of the Company's wholly-owned subsidiary Texas Timberjack, Inc. ("Timberjack" or "TTI") and its majority-owned subsidiaries Southern Forest Products LLC ("SFP") and Wood Forest Products LLC ("WFP"), distributes, leases and provides financing for industrial and commercial timber equipment and is also engaged in certain related timber and sawmill operations. The Company's transformer segment, which manufactures and markets electronic transformers, inductors and filters (the "Transformer Group"), was discontinued in fiscal 1999, as a result of the sale of the Company's wholly-owned subsidiary, Polyphase Instrument Co. ("PIC"). 2. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. The financial statements included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. The information presented reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods when read in conjunction with the financial statements and the notes thereto included in the Company's latest financial statements filed as part of Form 10-K for the year ended September 30, 1999. -9- 3. INVENTORIES
Inventories are summarized as follows: March 31, September 30, 2000 1999 ------------- ------------- Finished goods $ 24,450,177 $ 22,409,448 Raw materials 8,676,953 8,565,296 Inventory reserve (60,506) (50,000) ------------- ------------- Total $ 33,066,624 $ 30,924,744 ============= =============
As of March 31, 2000 and September 30, 1999, finished goods inventories consisted of approximately $8,309,000 and $7,804,000 in inventories at the Food Group, $15,494,000 and $13,603,000 in timber and logging related equipment, and $647,000 and $1,003,000 in finished wood products, respectively. As of March 31, 2000 and September 30, 1999, raw materials inventories consisted of approximately $6,392,000 and $5,872,000 in inventories at the Food Group and $2,285,000 and $2,693,000 in harvested but unprocessed timber, respectively. 4. TAXES For the six months ended March 31, 2000, the actual federal income tax expense attributable to income from continuing operations differed from the net amounts recorded by the Company. The Company's subsidiaries recorded a provision for federal income taxes of approximately $597,000 using the statutory rate of 34% and the Company then applied a like amount of its existing valuation allowance as a reduction of this amount, resulting in a net federal provision for the period of zero. The provision for the period represents state income taxes only. 5. LONG-TERM DEBT In November 1999, Overhill refinanced substantially all its existing debt. The new facility amounted to $44 million, consisting of a $16 million line of credit provided by Union Bank of California, N.A. ("Union Bank"), together with $28 million in the form of a five-year term loan provided by Levine Leichtman Capital Partners II, L.P. ("LLCP"). The line of credit with Union Bank expires in November 2002 and provides for borrowings limited to the lesser of $16 million or an amount determined by a defined borrowing base consisting of eligible receivables and inventories. Borrowings under the line bear interest at a rate, as selected by Overhill at the time of borrowing, of prime plus .25% or LIBOR plus 2.75%. The agreement contains various covenants including restrictions on capital expenditures, requirements to maintain specified net worth levels and debt service ratios, and generally prohibits loans, advances or dividends from Overhill to the Company and limits payments of taxes and other expenses to Polyphase to specified levels. The line of credit is guaranteed by the Company and collateralized by certain assets of Overhill and the Overhill common stock owned by Polyphase. -10- The term loan with LLCP is a secured senior subordinated note bearing interest at 12% per annum, with interest payable monthly until maturity in October 2004. Principal payments in an amount equal to 50% of the excess cash flow, as defined, for Overhill's previous fiscal year are also payable annually commencing in January 2001. Voluntary principal payments are permitted after October 31, 2001, subject to certain prepayment penalties. The agreement contains various covenants including restrictions on capital expenditures, minimum EBITDA and net worth levels, and specified debt service and debt to equity ratios. In addition, the terms of the agreement restrict changes in control, generally prohibit loans, dividends or advances by Overhill to the Company and limit payments of taxes and other expenses to Polyphase to specified levels. The term loan with LLCP is guaranteed by the Company and collateralized by certain assets of Overhill. The agreement also requires Overhill to pay to LLCP, during each January, annual consulting fees of $180,000. In connection with the agreement, LLCP was issued warrants to purchase 17.5% of the common stock of Overhill, exercisable immediately at a nominal exercise price. During the first two years following the date of the agreement, Overhill has the right to repurchase 5% of Overhill's shares from LLCP for $3 million and/or to repurchase all 17.5% of the Overhill shares subject to the LLCP warrant within five days of the term loan being repaid at their then determined fair market value. If such shares are not purchased, LLCP will be entitled under the agreement to receive a cash payment of $500,000 from Overhill. At the date of issuance, the warrants granted to LLCP were estimated to have a fair value of $2.37 million. As a result of the transactions, Overhill repaid in full the $22.7 million senior subordinated notes and the $9.7 million balance of its revolving line of credit with previous lenders. Additionally, Overhill repurchased, for $3.7 million, the warrants held by a previous lender to purchase 30% of Overhill's common stock; the excess of such repurchase amount over the carrying value of the warrant amounted to approximately $2.3 million and was recorded as goodwill. In connection with the refinancing, Overhill was permitted to make a one-time advance of $1.25 million to Polyphase for working capital and other specified purposes. Overhill incurred costs and expenses in connection with the refinancing totaling approximately $1.9 million, substantially all of which has been, or will be, paid to the lenders. The early extinguishment of the previous indebtedness resulted in an extraordinary loss of approximately $1.3 million (net of a $500,000 refund for early payment of the senior subordinated notes) during the six months ended March 31, 2000. -11- 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, -------------------------- 2000 1999 ----------- ----------- Numerator: Income (loss) before discontinued operations $ 811,235 $ (200,977) Dividends on preferred stock - (24,236) ----------- ----------- 811,235 (225,213) Discontinued operations - 7,418 ----------- ----------- Net income (loss) attributable to common stockholders $ 811,235 $ (217,795) =========== =========== Denominator: Denominator for basic earnings per share- weighted average shares 17,812,464 16,104,381 ----------- ----------- Effect of dilutive securities (a): Convertible preferred stock - - Stock options 32,273 - Warrants - - ----------- ----------- Dilutive potential common shares (a) 32,273 - ----------- ----------- Denominator for diluted earnings per share 17,844,737 16,104,381 =========== =========== Net income (loss) per share - basic and diluted: Before discontinued operations $ .05 $ (.01) Discontinued operations - - ----------- ----------- Net income (loss) per share $ .05 $ (.01) =========== ===========
-12-
For the Six Months Ended March 31, ------------------------- 2000 1999 ----------- ----------- Numerator: Income (loss) before discontinued operations and extraordinary item $ 2,090,578 $ (544,688) Gain (dividends) on reacquired preferred stock 351,457 (57,334) ----------- ----------- 2,442,035 (602,022) Discontinued operations - 10,744 Extraordinary item (1,290,431) - ----------- ----------- Net income (loss) attributable to common stockholders $1,151,604 $ (591,278) =========== =========== Denominator: Denominator for basic earnings per share- weighted average shares 17,812,464 16,104,381 ----------- ----------- Effect of dilutive securities (a): Convertible preferred stock 537,926 - Stock options 3,739 - Warrants - - ----------- ----------- Dilutive potential common shares (a) 541,665 - ----------- ----------- Denominator for diluted earnings per share 18,354,129 16,104,381 =========== =========== Net income (loss) per share - basic and diluted: Before discontinued operations and extraordinary item $ .13 $ (.04) Discontinued operations - - Extraordinary item (.07) - ----------- ----------- Net income (loss) per share $ .06 $ (.04) =========== ===========
(a) Dilutive potential common shares were excluded from the computation in loss periods since their effect would have been antidilutive. -13- 7. STOCKHOLDERS' EQUITY During November 1999, the Company and Infinity Investors Limited ("Infinity"), the holder of the Company's Series A-3 preferred stock, entered into a settlement agreement whereby, among other things, the Company agreed to repurchase all Series A-3 preferred stock owned by Infinity, including all accrued but unpaid dividends, for $450,000 cash, and Infinity agreed to the dismissal of all litigation against the Company with respect to various matters related to its ownership of the preferred stock. As a result of the settlement, the Company recorded a gain of approximately $351,000, related to the difference in the carrying value of the preferred stock plus the accrued dividends and the settlement amount. Such amount was accounted for by recording a reduction of the Company's accumulated deficit during the six months ended March 31, 2000. The Company, during November 1998, entered into an agreement, whereby it agreed to pay a $500,000 judgment relating to certain litigation in fiscal 1998, in monthly payments of $8,000 (including interest at 10% per annum) over an eighteen month period, with a balloon payment due at the end of that period. In connection therewith, the Company, during the year ended September 30, 1999, issued a total of 300,000 shares of its common stock valued at $85,000, as partial payment against the judgment, together with certain costs associated therewith. The remaining balance related to the judgment obligation was repaid during the six months ended March 31, 2000. -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, 2000 increased $13,380,000 (17.9%) to $87,930,000 from $74,550,000 during the six months ended March 31, 1999. The increase in revenues is primarily attributable to sales gains by Overhill. Gross profits increased $5,409,000 to $18,239,000 in the current year from $12,830,000 in the comparable period in 1999, as a result of both the volume increase, as well as an increase in gross margin rates to 20.7% in the current year as compared to 17.2% in the comparable period in fiscal 1999. During the current six month period, operating income increased 71.5% to $5,945,000 from $3,466,000 for the comparable period in the prior year. Consolidated income before discontinued operations and extraordinary item for the six months ended March 31, 2000 increased $2,636,000 to $2,091,000 from a loss of $545,000 during the six months ended March 31, 1999. After the effect of an extraordinary expense of $1,290,000 related to the early extinguishment of debt in connection with major refinancing by Overhill and a gain of $351,000 on the reacquisition of preferred stock, net income attributable to common stockholders amounted to $1,152,000 ($.06 per share) in the current year compared to a loss of $591,000 ($.04 per share) in fiscal 1999. The Food Group's revenues increased $15,237,000 (29.6%) to $66,743,000 for the six months ended March 31, 1999 as compared to $51,506,000 for the six months ended March 31, 1999. Gross profits increased $4,875,000 to $13,308,000, compared to $8,433,000 in the prior year, primarily due to continued volume increases from both new and existing national accounts, together with the effect of improved purchasing practices, including the outsourcing of certain production. Operating income increased $2,278,000 to $5,286,000 in the current period, compared to $3,008,000 for the same period in fiscal 1999. Revenues for the Forestry Group for the six months ended March 31, 2000 decreased $1,856,000 (8.0%) to $21,188,000 from $23,044,000 for the six months ended March 31, 1999. Operating income for the same period increased $256,000 to $804,000 for the six months ended March 31, 2000 from $548,000 for the six months ended March 31, 1999. This increase is due to improved results from increased sales and margins on timber product operations, and, while sales of logging equipment decreased due to a continued softness in the East Texas timber market, gross profits improved somewhat from the comparable period in the prior year. -15- Liquidity and Capital Resources During the six months ended March 31, 2000, the Company's operating activities resulted in a use of cash of approximately $181,000, compared to cash provided of $1,394,000 during the comparable period in fiscal 1999. The use of cash in the current year is generally due to improved operating results which were offset by an increase in inventories by Overhill and reductions in trade accounts payable by both Timberjack and Overhill. During the six months ended March 31, 2000, the Company's investing activities resulted in a use of cash of approximately $252,000, compared to a use of cash of $863,000 during the comparable period in fiscal 1999. The Company's use of cash in the current year consisted primarily of capital expenditures. During the six months ended March 31, 2000, the Company's financing activities provided cash of approximately $1,738,000 as compared to cash provided of $982,000 during the comparable period in fiscal 1999. The cash provided in the current year resulted generally from the refinancing of substantially all indebtedness of Overhill which was offset somewhat by the repurchase of the Company's Series A-3 preferred stock. The Company believes that funds available to it from operations and existing capital resources will be adequate for its capital requirements for the next twelve months. Year 2000 The Company initiated a Year 2000 program to identify and address issues associated with the ability of its business systems and equipment to properly recognize the Year 2000. The purpose of this effort was to avoid interruption of the operations of the Company as a result of the century change that occurred on January 1, 2000. The Company's program included a review of its software systems, a review of its operating systems, upgrading or retirement of non- compliant hardware and contacting key suppliers to assess their Year 2000 readiness. The Food Group completed the installation of a new integrated accounting, inventory, sales and purchasing system to replace the existing manual and computer systems supporting operations. The system software and hardware has been certified by the vendor to be Year 2000 compliant and was implemented as a parallel system. The Forestry Group has reviewed its existing software and completed an upgrade modification. The Company's subsidiaries also contacted key vendors to assess their Year 2000 readiness and evaluate the effect of non- compliance on the Company's future business. Subsequent to December 31, 1999, the Company has not experienced any disruptions or additional costs as a result of the century change. However, because all Year 2000 issues may not reveal themselves until later in 2000, no assurances can be given that the Company will not experience any interruptions due to Year 2000 issues. The Company will continue to monitor these matters throughout the year. To date, the Company has had no material expenditures for direct Year 2000 compliance procedures. -16- Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's interest expense is affected by changes in prime and LIBOR rates as a result of its various line of credit arrangements. If these market rates increase by an average of 1% in fiscal 2000, the Company's interest expense would increase by approximately $200,000 based on the outstanding line of credit balances at March 31, 2000. The Company does not own, nor does it have an interest in any other market risk sensitive instruments. -17- PART II - OTHER INFORMATION Item 1. Legal Proceedings During fiscal 1997, five substantially identical complaints were filed in the United States District Court for the District of Nevada against the Company and certain of its officers and directors. The complaints each sought certification as a class action and asserted liability based on alleged misrepresentations that the plaintiffs claimed resulted in the market price of the Company's stock being artificially inflated. The defendants named in those original complaints filed motions to dismiss in each of the lawsuits. Without certifying the cases as class actions, the District Court consolidated the cases into a single action. In June 1998, the District Court ordered the plaintiffs to file an amended complaint which satisfied the Court's interpretation of the pleading standards set by the Private Securities Law Reform Act (the "PSLRA"). The plaintiffs then filed a motion for reconsideration of the Court's ruling. The defendants opposed that motion, and the Court subsequently denied the plaintiffs' motion for reconsideration. The plaintiffs then filed an amended complaint which named two additional companies as defendants. The original defendants moved to dismiss the amended complaint, among other things, on the grounds that it failed to state a claim for securities fraud under the PSLRA. The plaintiffs sought a stay of the Court's consideration of the original defendants' second motion to dismiss, asserting that there was uncertainty as to the legal standards to be applied in securities fraud cases. At a hearing held on March 3, 2000, the Court denied the plaintiffs' motion to stay and ruled on the second motion to dismiss, granting it in part and denying it in part. The Court gave the plaintiffs ninety (90) days to conduct discovery on a limited issue and directed that any motions for summary judgment should be submitted shortly after the conclusion of the discovery period. Following the March 3, 2000 hearing, the two companies named as additional defendants in the amended complaint filed a motion to dismiss, claiming that the plaintiffs had failed to state a claim against them under the PSLRA. The Court has not ruled on that motion to dismiss. In addition, the ninety (90) day period for the limited pretrial discovery has not expired, and no motions for summary judgment have been filed. However, there have been disputes over the scope of discovery permitted by the Court which have been resolved favorably to the defendants. Management believes (based upon advice of legal counsel) that this litigation will be resolved without material effect on the Company's financial condition, results of operations or cash flows. The Company and its subsidiaries are involved in certain legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effect on the Company's financial position or results of operations. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K - No reports on form 8-K were filed during the quarter ended March 31, 2000. -18- 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 5, 2000 By: /s/ James Rudis ----------------------------------- James Rudis Chairman, President and Chief Executive Officer Date: May 5, 2000 By: /s/ William E. Shatley ----------------------------------- William E. Shatley Senior Vice President and Chief Financial Officer -19- INDEX TO EXHIBITS Exhibit No. Exhibit ------------- ---------------------------------------- 27.1 Financial Data Schedule -20- EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS SEP-30-1999 MAR-31-2000 1,680 0 25,260 530 33,067 62,691 13,303 7,865 89,377 24,619 36,949 0 0 178 5,859 89,377 87,930 87,930 69,691 69,691 12,293 0 4,074 2,203 112 2,090 0 (1,290) 0 800 .06 .06
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