-----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, JA90T3x5cxorP+XLxCzgOngNupraFMXCB6/swILKfkcMf+dMm8mryNxTegRuDZ0I LIUbsbIohRKzaQcem3R7lg== 0000930661-99-001295.txt : 19990524 0000930661-99-001295.hdr.sgml : 19990524 ACCESSION NUMBER: 0000930661-99-001295 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990521 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: 99632348 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 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, 1999 [ ] 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 18, 1999 POLYPHASE CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Page No. - ----------------------------- -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of March 31, 1999 and September 30, 1998 2 Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 1999 and 1998 4 Consolidated Condensed Statements of Operations for the Six Months Ended March 31, 1999 and 1998 5 Consolidated Condensed Statements of Cash Flows for the Six Months Ended March 31, 1999 and 1998 7 Notes to Consolidated Condensed Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature Page 17 -1- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS Assets
March 31, September 30, ----------- ------------- 1999 1998 ----------- ------------- (Unaudited) Current assets: Cash $ 2,053,056 $ 423,957 Receivables, net of allowance for doubtful accounts of $485,031 and $562,800 Trade accounts 16,589,638 13,839,250 Current portion of sales contracts 5,161,701 3,879,420 Notes receivable 1,926,052 1,813,232 Inventories 34,787,355 34,568,628 Prepaid expenses and other 882,487 527,999 ----------- ------------- Total current assets 61,400,289 55,052,486 ----------- ------------- Property and equipment: Land 432,000 432,000 Buildings and improvements 4,627,425 4,054,854 Machinery, equipment and other 9,616,002 9,490,827 ----------- ------------- 14,675,427 13,977,681 Less-Accumulated depreciation (8,311,501) (7,526,281) ----------- ------------- 6,363,926 6,451,400 ----------- ------------- Other assets: Noncurrent receivables Sales contracts 1,813,570 1,363,039 Related parties 751,331 670,655 Excess of cost over fair value of net assets of businesses acquired, net of accumulated amortization of $3,590,388 and $3,183,743 13,008,351 13,414,996 Other intangible assets 1,887,133 2,494,754 Restricted cash 610,787 672,898 Other 1,449,341 1,425,147 ----------- ------------- 19,520,513 20,041,489 ----------- ------------- $87,284,728 $ 81,545,375 =========== =============
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, ------------ ------------- 1999 1998 ------------ ------------- (Unaudited) Current liabilities: Notes payable $ 14,983,453 $ 14,409,681 Note payable and accrued interest to related party 17,115,733 16,307,405 Accounts payable 11,081,882 6,085,703 Accrued expenses and other 3,540,471 3,514,685 Current maturities of long-term debt 5,033,333 3,533,333 ------------ ------------ Total current liabilities 51,754,872 43,850,807 Long term debt, less current maturities 27,423,037 29,220,972 Reserve for credit guarantees 610,787 672,898 ------------ ------------ Total liabilities 79,788,696 73,744,677 ------------ ------------ Warrants to purchase common stock in subsidiary 1,200,000 1,200,000 Stockholders' equity: Preferred stock, $.01 par value, authorized 50,000,000 shares, issued and outstanding 65,543 and 115,000 shares, respectively 655 1,150 Common stock, $.01 par value, authorized 100,000,000 shares, issued and outstanding 17,482,321 and 15,080,050 shares, respectively 174,823 150,800 Paid-in capital 28,886,895 28,623,811 Accumulated deficit (21,791,022) (21,199,744) Notes receivable (975,319) (975,319) ------------ ------------ Total stockholders' equity 6,296,032 6,600,698 ------------ ------------ $ 87,284,728 $ 81,545,375 ============ ============
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, -------------------------- 1999 1998 ----------- ----------- Net revenues $41,178,567 $33,328,696 Cost of sales 34,229,808 26,818,115 ----------- ----------- Gross profit 6,948,759 6,510,581 Selling, general and administrative expenses 5,102,516 4,600,107 ----------- ----------- Operating income 1,846,243 1,910,474 ----------- ----------- Other income (expenses): Interest expense (2,195,586) (2,262,859) Interest income and other 155,784 134,279 ----------- ----------- Total other income (expenses) (2,039,802) (2,128,580) ----------- ----------- Loss before income taxes (193,559) (218,106) Income taxes - - ----------- ----------- Net loss (193,559) (218,106) Dividends on preferred stock (24,236) (39,375) ----------- ----------- Net loss attributable to common stockholders $ (217,795) $ (257,481) =========== =========== Basic loss per share $ (.01) $ (.02) =========== =========== Diluted loss per share $ (.01) $ (.02) =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. -4- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended March 31, -------------------------- 1999 1998 ----------- ----------- Net revenues $77,234,535 $70,721,013 Cost of sales 64,130,324 57,243,275 ----------- ----------- Gross profit 13,104,211 13,477,738 Selling, general and administrative expenses 9,614,867 9,196,593 ----------- ----------- Operating income 3,489,344 4,281,145 ----------- ----------- Other income (expenses): Interest expense (4,361,735) (4,112,627) Interest income and other 338,447 123,329 Gain on sale of assets - 987,857 ----------- ----------- Total other income (expenses) (4,023,288) (3,001,441) ----------- ----------- Income (loss) before income taxes and extraordinary item (533,944) 1,279,704 Income taxes - - ----------- ----------- Net income (loss) before extraordinary item (533,944) 1,279,704 Extraordinary item: Early extinguishment of debt - (616,239) ----------- ----------- Net income (loss) (533,944) 663,465 Dividends on preferred stock (57,334) (80,250) ----------- ----------- Net income (loss) attributable to common stockholders $ (591,278) $ 583,215 =========== ===========
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, -------------------------- 1999 1998 ----------- ----------- Basic income (loss) per share: Income (loss) before extraordinary item $ (.04) $ .08 Extraordinary item - (.04) ----------- ----------- Net income (loss) per share: $ (.04) $ .04 =========== =========== Diluted income (loss) per share: Income (loss) before extraordinary item $ (.04) $ .07 Extraordinary item - (.04) ----------- ----------- Net income (loss) per share $ (.04) $ .03 =========== ===========
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, -------------------------- 1999 1998 ----------- ----------- Cash flow provided by (used in) operating activities: Net income (loss) $ (533,944) $ 663,465 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,022,286 2,104,938 Provision for doubtful accounts 79,000 188,701 Gain on sale of assets - (987,857) (Increase) decrease in: Accounts and sales contracts receivable (4,562,200) 278,349 Inventories (218,727) (6,947,947) Prepaid expenses and other (378,682) 396,166 Accounts payable 4,996,179 1,631,940 Accrued expenses and other 288,298 148,838 ----------- ----------- Net cash provided by (used in) operating activities 1,692,210 (2,523,407) ----------- ----------- Cash flows provided by (used in) investing activities: Notes and other receivables (112,820) (1,214,554) Receivables from related parties (80,676) 7,963 Capital expenditures, net (697,746) (399,328) ----------- ----------- Net cash used in investing activities $ (891,242) $(1,605,919) ----------- -----------
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, --------------------------- 1999 1998 ----------- ------------ Cash flows provided by (used in) financing activities: Borrowings (principal payments) under line of credit arrangements, net $ 1,382,100 $ 2,308,445 Borrowings (principal payments) on other notes payable and long term debt, net (497,935) 25,877,710 Exercise of common stock options 1,300 - 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) Dividends on preferred stock (57,334) (80,250) Deferred financing costs - (2,753,552) Common stock issuance costs - (17,500) ----------- ------------ Net cash provided by financing activities 828,131 4,052,573 ----------- ------------ Net increase (decrease) in cash 1,629,099 (76,753) Cash - beginning of period 423,957 1,064,259 ----------- ------------ Cash - end of period $ 2,053,056 $ 987,506 =========== ============
-8- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
For the Six Months Ended March 31, ------------------------ 1999 1998 ---------- ---------- Supplemental schedule of cash flow information: Cash paid during the period for : Interest $2,947,163 $2,594,632 Income taxes $ - $ -
Supplemental schedule of noncash investing and financing activities: In December 1997, in connection with the Overhill Farms credit agreement, warrants were issued having an estimated fair market value of $1,200,000. In connection with the repayment of certain indebtedness to Merrill Lynch in December 1997, 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. During the period 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 period 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. -9- POLYPHASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements March 31, 1999 1. NATURE OF BUSINESS Polyphase Corporation (the "Company" or "Polyphase") is a diversified holding company that, through its subsidiaries, operates in three industry segments: the food segment, the forestry segment and the transformer 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 forestry segment ("Forestry Group"), which consists of the Company's wholly-owned subsidiary Texas Timberjack, Inc. ("TTI") and TTI's 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 transformer segment (the "Transformer Group"), which consists of the Company's wholly-owned subsidiary Polyphase Instrument Co. ("PIC"), manufactures and markets electric transformers, inductors and filters. 2. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned subsidiaries. All material intercompany accounts and transactions are eliminated. Certain prior year amounts have been reclassified to conform to the 1998 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, 1998. 3. INVENTORIES Inventories are summarized as follows: March 31, September 30 1999 1998 ----------- ----------- Finished goods $24,344,422 $24,162,010 Work-in-process 495,117 430,507 Raw materials 10,204,816 10,228,111 Inventory reserve (257,000) (252,000) ----------- ----------- Total $34,787,355 $34,568,628 =========== =========== -10- As of March 31, 1999, finished goods inventories are comprised of approximately $6,846,000 in inventories at the Food Group, $15,585,000 in timber and logging related equipment, $1,371,000 in finished wood products and $542,000 in transformers. As of March 31, 1999, raw materials inventories are comprised of approximately $5,521,000 in inventories at the Food Group, $3,511,000 in harvested but unprocessed timber and $1,173,000 in transformer parts. 4. TAXES For the six months ended March 31, 1999, the actual Federal income tax expense attributable to income from operations differed from the net amounts recorded by the Company. The Company recorded a provision for Federal income taxes of $74,000 using the statutory tax rate of 34% and then applied a like amount of its existing valuation allowance, resulting in a net provision for the period of zero. As of March 31, 1999, the Company had a remaining valuation allowance of approximately $5.4 million and net operating loss carry forwards of approximately $12.0 million. Additionally, the Federal income tax returns of TTI for the year ended March 31, 1994 and for the stub period ended June 24, 1994, were audited by the Internal Revenue Service. Both these tax periods were prior to the acquisition of TTI by Polyphase. During the current quarter, the Internal Revenue Service assessed TTI additional taxes of approximately $752,000 for the year ended March 31,1994. The Company and TTI are appealing the IRS decision and, if necessary, intend to further contest the matter in District Court, and believe, based upon the advice of counsel, that this issue will be resolved without a material effect on the financial position, results of operations or cash flows of the Company. 5. EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
For the Three Months Ended March 31, -------------------------- 1999 1998 ----------- ----------- Numerator: Net loss $ (193,559) (218,106) Preferred dividends (24,236) (39,375) ----------- ----------- Net loss attributable to common stockholders $ (217,795) $ (257,481) =========== =========== Denominator: Denominator for basic earnings per share - weighted average shares (a) 6,828,432 14,491,396 =========== ===========
-11-
For the Six Months Ended March 31, -------------------------- 1999 1998 ----------- ----------- Numerator: Net income (loss) before extraordinary item $ (533,944) $ 1,279,704 Preferred dividends (57,334) (80,250) ----------- ----------- (591,278) 1,199,454 Extraordinary item - (616,239) ----------- ----------- Income (loss) available to common stockholders $ (591,278) $ 583,215 =========== =========== Denominator: Denominator for basic earnings per share- weighted average shares 16,104,381 14,236,542 ----------- ----------- Effect of dilutive securities: Convertible preferred stock - 1,607,430 Stock options - 291,478 Warrants - 132,618 ----------- ----------- Dilutive potential common shares (a) - 2,031,526 ----------- ----------- 16,104,381 16,268,068 =========== ===========
(a) Dilutive potential common shares were excluded from the computation in loss periods since their effect would have been antidilutive. 6. STOCKHOLDERS' EQUITY During the period ended March 31, 1999, Infinity Investors Limited, the holder of the Company's Series A-3 Preferred Stock, converted a total of 49,457 shares of such stock, together with accrued dividends of $172,876, into a total of 1,972,271 shares of common stock. Based upon the market price of the Company's common stock as of March 31, 1999, the holder would have been entitled to approximately 2.4 million common shares upon conversion of its remaining preferred stock and accrued dividends. Pursuant to a further conversion in April 1999, the holder was issued an additional 330,143 shares of common stock. Any additional conversions of the Series A-3 Preferred Stock will require that the Company file an application with the American Stock Exchange ("AMEX") for the listing of additional shares prior to issuance. The AMEX Company Guide requires shareholder approval as a prerequisite to the filing of such additional listing application. The Company, during November 1998, entered into an agreement, whereby the Company 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 six months ended March 31, 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. -12- 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, 1999 increased $6,514,000 (9.2%) to $77,235,000 from $70,721,000 during the six months ended March 31, 1998. The increase in revenues is primarily attributable to sales gains by Overhill. On a consolidated basis, gross margins decreased from the comparable period in 1998 from 19.1% to 17.0%, resulting in decreased gross profit and operating income. For the six months ended March 31, 1999, operating income decreased $792,000 (18.5%) to $3,489,000 from $4,281,000 during the comparable period in 1998. Interest expense for the six months ended March 31, 1999 increased $249,000 over the comparable period in 1998 primarily due to additional borrowings outstanding during the period. Consolidated net income before extraordinary item for the six months ended March 31, 1999 decreased $1,814,000 to a net loss of $534,000 from net income of $1,280,000 during the six months ended March 31, 1998. Net income for the prior period included a one time gain of $988,000 from the sale of the Company's corporate headquarters in December 1997. Consolidated net income was adversely affected by a decrease in gross margins, higher selling, general and administrative expenses and higher interest expense. The Food Group's revenues increased $6,161,000 (13.6%) to $51,506,000 for the six months ended March 31, 1999 as compared to $45,345,000 for the six months ended March 31, 1998. Gross profits increased 11.7% ($883,000) to $8,433,000, compared to $7,550,000 in the prior year, primarily due to increased business from new national accounts and decreased raw materials costs. Operating income increased $437,000 to $3,008,000, compared to $2,571,000 in fiscal 1998. Revenues for the Forestry Group for the six months ended March 31, 1999 decreased $238,000 (1.0%) to $23,044,000 from $23,282,000 for the six months ended March 31, 1998. Operating income for the same period decreased $1,958,000 to $548,000 for the six months ended March 31, 1999 from $2,506,000 for the six months ended March 31, 1998. The decreases were primarily attributable a softness in the East Texas timber market, resulting in a decrease in gross margins for the current period, and higher selling, general and administrative expenses associated with the sawmill subsidiary which were not material in fiscal 1998. Revenues for the Transformer Group for the six months ended March 31, 1999 increased $591,000 to $2,684,000 from $2,093,000 for the comparable period in fiscal 1998. Operating income decreased to $24,000 for the six months ended March 31, 1999 from $29,000 for the comparable period in fiscal 1998. -13- Liquidity and Capital Resources During the six months ended March 31, 1999, the Company's operating activities provided cash of approximately $1,692,000, compared to cash used of $2,523,000 during the comparable period in fiscal 1998. This increase over the comparable period resulted primarily from increases in payables related to volume increases at Overhill. During the six months ended March 31, 1999, the Company's investing activities resulted in a use of cash of approximately $891,000, compared to a use of cash in the amount of $1,606,000 in fiscal 1998. The Company's use of cash consisted primarily of capital expenditures at Texas Timberjack and its subsidiaries. During the six months ended March 31, 1999, the Company's financing activities provided cash of approximately $828,000 as compared to cash provided of $4,053,000 in the comparable period in fiscal 1998. The source of cash during the prior period consisted primarily of the loan facility of approximately $24 million at Overhill. 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 also has principal payment obligations to Merrill Lynch, Long Horizons and Mr. Harold Estes. The Company's management believes that cash generated from operations, together with available lines of credit, possible refinancings and contemplated debt and/or equity placements, will be sufficient to meet the Company's liquidity requirements for the next twelve months. Year 2000 The Company has 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 is to avoid interruption of the operations of the Company as a result of the century change that will occur on January 1, 2000. The Company's program includes review of its software systems, review of its operating systems, upgrade or retirement of non-compliant hardware and contacting key suppliers to assess their Year 2000 readiness. The Food Group is completing 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 has been implemented as a parallel system. The Forestry Group has reviewed its existing software and is the process of completing an upgrade modification. The corporate office's hardware and software systems are in the process of upgrading for obsolescence, which complements the Year 2000 Project. Each group will retire or replace its existing hardware as deemed necessary and should be completely tested and on line by June 1999. The Company began the second phase of its Year 2000 compliance project in late January. The Company's subsidiaries are contacting key vendors to assess their Year 2000 readiness and evaluate the effect of non-compliance on the Company's future business. -14- Despite efforts to address the Year 2000 problem, there can be no guarantee that critical suppliers or entities on which the Company relies will be converted on a timely basis. The Company believes, based upon preliminary findings, that most vendors are performing internal Year 2000 projects similar to the Company's and that non-compliant vendors will offer alternative measures for time sensitive products. Contingency plans for obtaining goods and services from non-compliant vendors will be addressed on a case by case basis. To date, the Company has had no material expenditures for direct Year 2000 compliance procedures. The Company believes that neither the cost of its planned upgrade and modification program nor a failure to timely complete such program, will have a material adverse effect on the Company's financial condition, results of operations or cash flows. 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. -15- 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 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 within thirty (30) days, finding that their original allegations failed to state a claim under the federal securities laws. The plaintiffs then filed a motion for reconsideration of the Court's ruling. The defendants opposed that motion, and the Court, in March 1999, denied the plaintiffs' motion for reconsideration. The plaintiffs did not file an amended complaint within the specified thirty (30) day time period. However, the plaintiffs are claiming that they are entitled to additional time to file an amended pleading by reason of a scheduling order issued by the Court. Consequently, it cannot be determined at this time whether the plaintiffs' failure to file an amended complaint will lead to a dismissal of the consolidated actions. However, management believes 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 Financial Data Schedule (b) Reports on Form 8-K - The following reports were filed on Form 8-K during the quarter ended March 31, 1999. None -16- 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 19, 1999 By: /s/ James Rudis ------------------------------ James Rudis Chairman, President and Chief Executive Officer Date: May 19, 1999 By: /s/ William E. Shatley ------------------------------ William E. Shatley Senior Vice President, Treasurer and Chief Financial Officer -17- INDEX TO EXHIBITS Exhibit No. Exhibit ------------- ---------------------------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS SEP-30-1998 MAR-31-1999 2,053 0 23,677 485 34,787 61,400 14,675 8,312 87,285 51,755 27,423 0 1 175 6,120 87,285 77,235 77,235 64,130 64,130 9,615 0 4,362 (534) 0 (534) 0 0 0 (591) (.04) (.04)
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