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 December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________to________________ Commission file number: 1-9083 POLYPHASE CORPORATION (Exact name of registrant as specified in its charter) NEVADA 23-2708876 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16885 DALLAS PARKWAY, SUITE 400 DALLAS, TEXAS 75248 (Address of principal executive offices) (972) 732-0010 (Registrant'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 No X ----------- ------------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 13,664,109 --------------------------- Outstanding at June 5, 1997 POLYPHASE CORPORATION FORM 10-Q QUARTER ENDED DECEMBER 31, 1996 TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Page No. - ----------------------------- -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of December 31, 1996 and September 30, 1996 2 Consolidated Condensed Statements of Operations for the Three Months Ended December 31, 1996 and 1995 4 Consolidated Condensed Statements of Cash Flows for the Three Months Ended December 31, 1996 and 1995 5 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II - OTHER INFORMATION - ------------------------------------------ Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 Signature Page 13 -1- ASSETS December 31, September 30, 1996 1996 ------------ ------------- Current assets: Cash $ 639,810 $ 280,969 Receivables, net of allowance for doubtful accounts of $510,808 and $519,104 Trade accounts 10,991,380 12,098,852 Current portion of sales contracts 6,167,422 6,625,727 Notes receivable 798,495 972,422 Receivables from related parties 479,000 367,634 Inventories 29,478,289 28,027,779 Prepaid expenses and other 2,086,835 2,676,336 ----------- ----------- Total current assets 50,641,231 51,049,719 ----------- ----------- Property and equipment: Land 765,000 765,000 Buildings and improvements 4,459,265 4,279,917 Machinery, equipment and other 8,697,643 8,575,687 ----------- ----------- 13,921,908 13,620,604 Less-Accumulated depreciation 4,642,043 4,212,872 ----------- ----------- 9,279,865 9,407,732 ----------- ----------- Other assets: Noncurrent receivables Sales contracts 1,263,207 1,333,150 Notes receivable 1,037,890 1,037,890 Related party, net allowance of $3,340,000 9,739,328 9,931,054 Excess of cost over fair value of net assets of businesses acquired, net of accumulated amortization of $1,760,488 and $1,557,165 14,838,251 15,041,574 Other intangible assets 1,306,054 1,402,239 Restricted cash 769,765 882,383 Other 4,101,928 4,092,780 ----------- ----------- 33,056,423 33,721,070 ----------- ----------- $92,977,519 $94,178,521 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. -2- LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30, 1996 1996 ------------ ------------- Current liabilities: Notes payable $ 8,052,831 $ 9,516,219 Accounts payable 8,713,801 8,581,071 Accrued expenses and other 2,481,059 4,415,011 Current maturities of long-term debt 33,110,168 31,573,716 ----------- ----------- Total current liabilities 52,357,859 54,086,017 Note payable and accrued interest to related party 12,842,916 12,546,600 Reserve for credit guarantees 769,765 882,383 Deferred income taxes 1,475,897 1,475,897 ----------- ----------- Total liabilities 67,446,437 68,990,897 ----------- ----------- Warrants to purchase common stock in subsidiary 1,299,097 1,189,224 Stockholders' equity: Preferred stock, $.01 par value, authorized 50,000,000 shares, issued and outstanding 125,000 and 250,000 shares, respectively 1,250 2,500 Common stock, $.01 par value, authorized 100,000,000 shares, issued and outstanding 13,664,109 and 13,196,966 shares, respectively 136,641 131,970 Paid-in capital 26,866,392 26,630,714 Accumulated deficit (1,592,432) (1,487,695) Notes receivable (1,179,866) (1,279,089) ----------- ----------- Total stockholders' equity 24,231,985 23,998,400 ----------- ----------- $92,977,519 $94,178,521 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. -3- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended December 31, ---------------------------- 1996 1995 ------------- ----------- Net revenues $36,165,789 $37,497,289 Cost of sales 30,056,915 29,919,060 ----------- ----------- Gross profit 6,108,874 7,578,229 Selling, general and administrative expenses 4,623,670 4,622,589 ----------- ----------- Operating income 1,485,204 2,955,640 ----------- ----------- Other income (expenses): Interest expense (1,574,418) (1,573,736) Interest income and other 210,960 99,694 ----------- ----------- Total other income (expenses) (1,363,458) (1,474,042) ----------- ----------- Income before income taxes and warrant accretion 121,746 1,481,598 Income taxes 79,110 526,637 ----------- ----------- 42,636 954,961 Accretion of common stock purchase warrants of subsidiary 109,873 157,665 ----------- ----------- Net income (loss) (67,237) 797,296 Dividends on preferred stock (37,500) (37,500) ----------- ----------- Net income (loss) attributable to common stockholders $ (104,737) $ 759,796 =========== =========== Weighted average common and common equivalent shares 13,538,138 13,584,484 =========== =========== Net income per common share $ (.01) $ .06 ========== =========== The accompanying notes are an integral part of these consolidated financial statements. -4- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended December 31, -------------------------- 1996 1995 ------------- ---------- Cash flow provided by operating activities: Net income (loss) $ (67,237) $ 797,296 Adjustments to reconcile net income (loss) to net cash provided by (used in ) operating activities: Depreciation and amortization 728,679 690,843 Provision for doubtful accounts (8,296) (5,770) Accretion of warrants to purchase common stock of subsidiary 109,873 157,665 (Increase) decrease in, net of effects of acquisitions: Accounts and sales contracts receivable 1,644,016 3,599,054 Inventories (1,450,510) (3,203,642) Prepaid expenses and other 580,353 501,071 Increase (decrease) in, net of effects of acquisitions: Accounts payable 132,730 (369,035) Accrued expenses and other (1,933,952) 130,686 ----------- ---------- Net cash provided by (used in) operating activities (264,344) 2,298,168 ----------- ---------- Cash flows provided by (used in) investing activities: Notes and other receivables 173,927 369,871 Receivables from related parties 80,360 (3,146,022) Capital expenditures (301,304) (110,459) ----------- ----------- Net cash used in investing activities (47,017) (2,886,610) ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. -5- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued) (Unaudited) For the Three Months Ended December 31 -------------------------- 1996 1995 ----------- ------------- Cash flows provided by (used in) financing activities: Borrowings (principal payments) under line of credit arrangements, notes payable and long-term debt, net $ 369,380 $(4,545,072) Proceeds from the issuance of 12% subordinated debentures - 1,500,000 Principal collection of Pyrenees notes receivable 99,223 - Dividend on preferred stock (37,500) (37,500) Exercise of common stock options 256,599 - Payments on advances from related parties - (1,153,000) Proceeds from private placement of preferred stock - 2,500,000 Stock issuance costs (17,500) - ---------- ----------- Net cash provided by (used in) financing activities 670,202 (1,735,572) ---------- ----------- Net increase (decrease) in cash 358,841 (2,324,014) Cash - beginning of period 280,969 3,275,068 ---------- ----------- Cash - end of period $ 639,810 $ 951,054 ========== =========== Supplemental schedule of cash flow information: Cash paid during the period for : Interest $1,210,053 $ 1,016,580 Income taxes $1,311,055 $ 189,536 Supplemental schedule of noncash investing and financing activities: In October 1996, an unrelated third party exercised an option to purchase 357,143 shares of common stock. As consideration, the Company was tendered 125,000 shares of Series A-3 Preferred Stock having a redemption value of $1,250,000. The accompanying notes are an integral part of these consolidated financial statements. -6- POLYPHASE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. NATURE OF BUSINESS The Company is a diversified holding company that, through its subsidiaries, operates in three industry segments: the forestry segment, which distributes, leases and provides financing for commercial and industrial timber and logging equipment; the transformer segment, which manufactures and markets electronic transformers, inductors and filters; and the food processing segment, which produces high quality entrees, plated meals, soups, sauces and poultry, meat and fish specialties. 2. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions are eliminated. The financial statements included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. The information presented reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods when read in conjunction with the financial statements and the notes thereto included in the Company's latest financial statements filed as part of Form 10-K. 3. LIQUIDITY The Company has not complied with certain covenants involving most of its loan agreements, including covenants that restrict transactions with affiliates and which require the filing of audited financial statements for the Company and its subsidiaries on a timely basis. (See Note 5) As a result, the Company's debt has been classified as current as of December 31, 1996. The Company is in the process of negotiating a transaction involving Overhill that the Company expects will resolve the Rice lawsuit and improve the Company's overall debt structure, but there can be no assurances that such transaction will be consummated. Upon completion of the transaction, the Company believes it will be able to negotiate with the remaining debt holders and obtain waivers to the covenant violations that exist. As such, the Company expects that it will be able to meet it liquidity requirements. -7- 4. RELATED PARTY TRANSACTIONS During January 1996, the Company reached an agreement in principle to manage a project to develop and build a multi-purpose sports facility in Las Vegas, Nevada. The project is being developed by PLY Stadium Partners, Inc. ("Stadium Partners"), a private investment firm headed by Mr. Paul A. Tanner, Chairman and Chief Executive Officer of the Company. As part of the transaction, the Company is also to participate in the facility's management, sales of suites and seat options, concessions and events and is to be compensated for such services. The Company has provided $4 million of debt, bearing interest at 12%, to Stadium Partners. The debt is (1) convertible into a 14% economic interest in the project and (2) is guaranteed by Mr. Tanner and Pyrenees, a private investment firm headed by Mr. Tanner. On November 15, 1996, Stadium Partners, through a newly-formed partnership, purchased 62 acres in Las Vegas for the development of the stadium and adjacent convention facility. Financing was provided by Lehman Brothers Holdings, Inc. ("Lehman") through a partnership, Nevada Stadium Partners Limited Partnership ("Nevada Partnership") with Lehman as the lender receiving an equity interest in the project. The Company has guaranteed the repayment of the loan from Lehman to the partnership in the above mentioned transaction, upon the occurrence of certain events. Such guarantee is effective upon the occurrence of certain conditions, including without limitation if the Partnership files for bankruptcy or insolvency, if representation by the Partnership proves to be fraudulent regarding the financial condition of the Borrower, the land securing the loan is further encumbered or ownership transferred without the consent of Lehman. In January 1997, the Company further advanced Stadium Partners $4.9 million. The funds advanced consisted of $2.4 million, drawn from an existing line of credit, and $2.5 million from a six month term note. The term note bears interest at 16%, is payable monthly and is secured by a second lien on the Company's headquarters. As additional collateral, the Company agreed to issue an option on 500,000 shares of Series A-2 preferred stock (convertible into 1,000,000 shares of common stock) which is exercisable upon default of certain covenants of the agreement. In connection with the aforementioned transaction, the Company in January 1997 entered into a two year consulting agreement with a principal of the lender. In consideration of the agreement, the Company issued an option to purchase 200,000 shares of common stock at $.01 per share. During the twelve months ended September 30, 1996, the Company accrued management and service revenues of $2,550,000 and interest income of $790,000 related to the Company's activities with Stadium Partners, the collectibility of which is dependent upon the success of the project and/or the guarantees referred to above. As a result of the financing described above Stadium Partners is precluded from making any distributions until permanent project financing is secured. As a consequence of Stadium Partners inability to make its payment to the Company due March 15,1997, the Company established a reserve of $3.34 million as of September 30, 1996, which represents the income accrued. The reserve will be reduced as collections and distributions are made pursuant to the Stadium Partners loan agreements. The Company no longer accrues management fees or interest income on the existing advances. -8- During the six months ended December 31, 1996, the Company made advances to Mr. Tanner totalling $70,300 resulting in a balance due of $85,160 as of that date. In connection with the TTI acquisition, the Company also issued a non- interest bearing note to Harold Estes for $10,000,000 due October 31, 1994, on which the Company imputed interest at 8.0% per annum. The Company has since modified, extended and renewed the note whereby the note currently having a balance including accrued interest of $12,842,916 has been extended to December 1, 1997 bearing interest at 10% through June 30, 1997 and 16% thereafter. The Company anticipates that it will be required to refinance this note payable on a long-term basis and is presently in negotiations with potential lenders to accomplish their goal. There is no certainty that Company will be able to refinance this note on acceptable terms or at all, by December 1, 1997. The note holder has no recourse to any of the assets or capital stock of Polyphase Corporation or any of its other subsidiaries and no cross-default provisions exist between this note and any other Polyphase debt. 5. CONTINGENCIES In January 1997, a suit was filed in District Court of Dallas County against the Company by Rice Partners II, L.P., subordinated debt holders of the Overhill Farms subsidiary. The suit claims, among other things, that the Company breached covenants of the subordinated debt agreement and refused to cure the defaults within a reasonable period of time. The Company has filed a counter suit claiming Rice Partners II, L.P. (i) refused to comply with verbal agreements to the indenture (ii) conspired with the former general partner of Overhill to force the Company to sell Overhill Farms at a distressed price in order to benefit Rice Partners II, L.P. and (iii) caused the halting of trading of the Company's stock. 6. STOCKHOLDERS' EQUITY In October 1996 a director of the Company exercised options on 75,000 of common stock at $.75 per share. In October 1996 an associate of the holders of the Company's Series A-2 Preferred Stock tendered 125,000 shares of preferred stock as consideration for the exercise of options on 357,143 shares of common stock at $3.50 per share. In November 1996 a former executive of the Company exercised options on 35,000 of common stock at $.01 per share. Such options were granted in consideration for a consulting contract and were valued at $200,000. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Statements contained in this Form 10-Q that are not historical facts, including, but not limited to, the 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 three months ended December 31, 1996 decreased $1,331,000 (4%) to $36,166,000 from $37,497,000 during the three months ended December 31, 1995. Operating income also decreased $1,470,000 (50%) over the comparable period. The decreases in the first quarter were primarily attributable to the exclusion of the Computer Group, which was sold in July 1996. Net income for the three months ended December 31, 1996 decreased $864,000 (108%) to a loss of $67,000 from net income of $797,000 during the three months ended December 31, 1995. The loss is attributable to overall lower sales volume and lower gross margins in the Forestry Group. Selling, general and administrative costs and interest expense remained constant with the comparable periods which coupled with lower gross margins and lower sales, adversely affected net income. Revenues for the Food Group for the three months ended December 31, 1996 increased $1,319,000 (6%) to $23,890,000 from $22,571,000 for the three months ended December 31, 1995. Operating income for the three months ended December 31, 1996 decreased $649,000 (34%) to $1,280,000 from $1,929,000 for the three months ended December 31, 1995. Increases in volume were primarily due to increased sales in the weight loss and airline sectors of Overhill which offset a downward trend in prior quarters. Management continues to develop the retail and food service sectors by increasing advertising, marketing and personnel expenses resulting in higher selling general and administrative costs and in decreased operating income. As revenue increases in these divisions, management does not anticipate increasing operating costs significantly. Revenues for the Forestry Group for the three months ended December 31, 1996 increased $529,000 (5%) to $11,342,000 from $10,814,000 for the three months ended December 31, 1995, while operating income for the comparable period decreased $665,000 (52%). The increase in revenue is primarily due to continuing demand for lumber equipment as timber prices have begun to firm in the commodity markets. Operating income decreased due to lower gross margins on new equipment as the manufacturer raised prices which could not all be passed on to the consumer. The Company also experienced higher selling general and administrative costs associated with the opening of the Atlanta, Texas office and the relocation of the Lufkin office. Management expects the demand for equipment to increase slowly over the fiscal year and does not expect the slow down which occurred in fiscal 1996. Revenues for the Transformer Group for the three months ended December 31, 1996 increased $35,000 (4%) to $933,000 from $898,000 for the three months ended December 31, 1995, while operating income for the comparable period decreased $18,000 (40%). The decrease in operating income is primarily attributable to increased competition and lower gross profit margins. -10- LIQUIDITY AND CAPITAL RESOURCES During the three months ended December 31, 1996, the Company used cash of approximately $264,000 in its operating activities compared to $2,298,000 cash provided during the comparable period in fiscal 1996. The decrease in cash provided over the comparable periods was primarily from an operating loss and a large decrease in accrued expenses. During the three months ended December 31, 1996, the Company's investing activities used cash of approximately $47,000 compared to a use of cash in the amount of $2,887,000 in fiscal 1996. The Company's use of cash consisted primarily of capital expenditures in the Forestry and Food Groups. During the three months ended December 31, 1996, the Company's financing activities provided cash of approximately $670,000 as compared to a use of cash of $1,736,000 in the comparable period in fiscal 1996. During the three month period, the holders of the Series A-3 Preferred Stock tendered 125,000 shares in connection with the exercise of an option on approximately 360,000 shares of common stock at $3.50 per share. The Company has not complied with certain covenants involving substantially all of the Company's loan agreements, including covenants that restrict transactions with affiliates and which require the filing of audited financial statements for the Company and its subsidiaries on a timely basis. As a result, the Company's debt has been classified as current as of September 30, 1996 and December 31, 1996. The Company is in the process of negotiating a transaction involving Overhill that the Company expects will resolve the Rice lawsuit and improve the Company's overall debt structure, but there can be no assurance that such transaction will be consummated. Accordingly, the Company's management believes that cash generated from the proposed Overhill transaction and from operations, together with existing lines of credit, will be sufficient to enable the Company to meet its liquidity requirements for the next twelve months. -11- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In January 1997, a suit was filed in District Court of Dallas County against the Company by Rice Partners II, L.P. subordinated debtholders in Overhill. The suit claims, among other things, that the Company breached covenants of the debt agreements and refused to cure the defaults within a reasonable period of time. The Company has filed a counter suit claiming Rice Partners II, L.P. (i) refused to comply with verbal agreements to the indentures (ii) conspired with the former general manager of Overhill to force the Company to sell Overhill at a distressed price in order to benefit Rice Partners and (iii) caused the halting of trading of the Company's stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES See "Management's Discussion and Analysis--Liquidity and Capital Resources" for a description of certain defaults. 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 December 31, 1996. NONE -12- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLYPHASE CORPORATION (REGISTRANT) Date: June 9, 1997 By: /s/ Paul A. Tanner ------------------------------------- Paul A. Tanner President and Chief Executive Officer -13- INDEX TO EXHIBITS Exhibit No. Exhibit ----------- ------- 27 Financial Data Schedule