U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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) (214) 732-0010 (Registrants's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months ( or for such shorter period the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------- ----------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 13,146,966 ------------------------------ Outstanding at August 15, 1996 POLYPHASE CORPORATION FORM 10-Q QUARTER ENDED JUNE 30, 1996 - -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Page No. - ----------------------------- -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of June 30, 1996 and September 30, 1995 2 Consolidated Condensed Statements of Operations for the Three Months Ended June 30, 1996 and 1995 4 Consolidated Condensed Statements of Operations for the Nine Months Ended June 30, 1996 and 1995 5 Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 30, 1996 and 1995 6 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K 13 Signature Page 14 -1- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unuadited) Assets June 30, September 30, ------------ ------------- 1996 1995 ------------ ------------- Current assets: Cash $ 723,328 $ 3,275,068 Receivables, net of allowance for doubtful accounts of $463,010 and $509,669 Trade accounts 11,551,441 11,602,628 Current portion of sales contracts 5,660,645 6,973,101 Notes receivable 995,215 1,215,389 Related parties 8,670,294 737,992 Inventories 29,370,713 26,007,672 Prepaid expenses and other 1,184,091 1,836,150 ------------ ------------- Total current assets 58,155,727 51,648,000 ------------ ------------- Property and equipment: Land 380,000 505,000 Buildings and improvements 4,941,451 3,641,470 Machinery, equipment and other 8,584,770 7,932,882 ------------ ------------- 13,906,221 12,079,352 Less-Accumulated depreciation 3,993,659 2,761,966 ------------ ------------- 9,912,562 9,317,386 ------------ ------------- Other assets: Noncurrent receivables Sales contracts 2,663,833 3,281,459 Notes receivable 358,268 368,106 Related parties 4,000,000 - Excess of cost over fair value of net assets of businesses acquired, net of accumulated amortization of $1,771,684 and $1,037,734 18,639,386 19,374,134 Other intangible assets 1,783,929 2,021,652 Restricted cash 951,479 916,275 Other 1,090,261 1,231,851 ------------ ------------- 29,487,156 27,193,477 ------------ ------------- $ 97,555,445 $ 88,158,863 ============ ============= The accompanying notes are an integral part of these consolidated financial statements. -2- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (continued) (Unuadited) Liabilities and Stockholders' Equity June 30, September 30, -------------- ------------- 1996 1995 -------------- ------------- Current liabilities: Notes payable $ 9,398,333 $11,130,056 Note payable to related party 11,855,000 11,100,000 Accounts payable 9,543,304 8,007,727 Accrued expenses and other 5,385,906 3,771,715 Advances from related party - 1,153,000 Current maturities of long-term debt 1,601,253 2,589,077 ------------ ----------- Total current liabilities 37,783,796 37,751,575 Long-term debt, less current maturities 30,766,785 27,229,665 Reserve for credit guarantees 951,479 916,275 Deferred income taxes 437,729 437,729 ------------ ----------- Total liabilities 69,939,789 66,335,244 ------------ ----------- Warrants to purchase common stock in subsidiary 1,017,442 686,276 Stockholders' equity: Preferred stock, $.01 par value, authorized 50,000,000 shares, issued and outstanding 250,000 shares and none, respectively 2,500 - Common stock, $.01 par value, authorized 100,000,000 shares, issued and outstanding 13,146,966 and 12,621,966 shares, respectively 131,470 126,220 Paid-in capital 26,593,714 22,106,606 ------------ ----------- Accumulated income (deficit) 1,281,299 (1,095,483) Notes receivable (1,410,769) - ------------ ----------- Total stockholders' equity 26,598,214 21,137,343 ------------ ----------- $97,555,445 $88,158,863 ============ =========== The accompanying notes are an integral part of these consolidated financial statements. -3- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended June 30, ---------------------------- 1996 1995 ------------ ------------ Net revenues $ 36,477,962 $ 33,363,240 Cost of sales 29,347,384 27,348,219 ------------ ------------ Gross profit 7,130,578 6,285,021 Selling, general and administrative expenses 5,488,733 4,133,491 ------------ ------------ Operating income 1,641,845 2,151,530 ------------ ------------ Other income (expenses): Interest expense (1,451,969) (1,140,280) Interest income and other 165,790 92,830 Gain on sale of assets 875,087 - ------------ ------------ Total other income (expenses) (411,092) (1,047,450) ------------ ------------ Income before income taxes and warrant accretion 1,230,753 1,104,080 Income taxes 483,174 79,144 ------------ ------------ 747,579 1,024,936 Accretion of common stock purchase warrants of subsidiary 73,591 107,475 ------------ ------------ Net income 673,988 917,461 Dividends on preferred stock 37,500 - ------------ ------------ Net income attributable to common stockholders $ 636,488 $ 917,461 ============ ============ Weighted average common and common equivalent shares 13,981,686 12,838,294 ============ ============ Net income per common share $ .05 $ .07 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. -4- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) For the Nine Months Ended June 30, -------------------------- 1996 1995 ------------ ------------ Net revenues $111,725,023 $ 60,075,817 Cost of sales 88,310,964 47,691,615 ------------ ------------ Gross profit 23,414,059 12,384,202 Selling, general and administrative expenses 15,871,056 8,349,546 ------------ ------------ Operating income 7,543,003 4,034,656 ------------ ------------ Other income (expenses): Interest expense (4,595,990) (2,215,806) Interest income and other 651,327 509,557 Gain on sale of assets 875,087 - ------------ ------------ Total other income (expenses) (3,069,576) (1,706,249) ------------ ------------ Income before income taxes and warrant accretion 4,473,427 2,328,407 Income taxes 1,652,979 124,144 ------------ ------------ 2,820,448 2,204,263 Accretion of common stock purchase warrants of subsidiary 331,166 107,475 ------------ ------------ Net income 2,489,282 2,096,788 Dividends on preferred stock 112,500 - ------------ ------------ Net income attributable to common stockholders $ 2,376,782 $ 2,096,788 ============ ============ Weighted average common and common equivalent shares 13,846,821 12,674,441 ============ ============ Net income per common share $ .17 $ .17 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. -5- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended June 30, ------------------------- 1996 1995 ----------- ----------- Cash flow provided by (used in) operating activities: Net income $ 2,489,282 $ 2,096,788 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,252,943 1,049,896 Provision for doubtful accounts (43,795) (58,949) Accretion of warrants to purchase common stock 331,166 107,475 of subsidiary Dividends on preferred stock (112,500) (62,208) (Increase) decrease in, net of effects of acquisitions: Accounts and sales contracts receivable 2,025,064 (4,187,611) Inventories (3,363,041) (3,311,211) Prepaid expenses and other 793,649 836,455 Increase (decrease) in, net of effects of acquisitions: Accounts payable 1,535,577 652,632 Accrued expenses and other 1,614,191 1,021,626 ----------- ----------- Net cash provided by (used in) operating activities 7,522,536 (1,855,107) ----------- ----------- Cash flows provided by (used in) investing activities: Acquisition of the net assets of Overhill Farms, Inc. (32,225,782) Notes and other receivables 230,012 (319,189) Receivables from related parties (11,932,302) - Capital expenditures, net (1,826,869) (773,994) Other intangibles - (106,732) ----------- ----------- Net cash used in investing activities (13,529,159) (33,425,697) ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. -6- POLYPHASE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued) (Unaudited) For the Nine Months Ended June 30, -------------------------- 1996 1995 ------------ ------------ Cash flows provided by (used in) financing activities: Borrowings (principal payments) under line of credit arrangements, net $ (2,107,242) $ 11,468,461 Borrowings on notes payable and long-term debt, net 2,131,036 18,333,341 Proceeds from the issuance of 12% subordinated debentures 1,500,000 Advances from (payments to) related parties (1,153,000) 1,153,000 Principal collections on Pyrenees note receivable 589,231 2,250,000 Exercise of common stock options 12,500 1,000,000 Issuance of warrants to purchase common stock of subsidiary - 495,405 Common stock issuance costs (17,642) (132,002) Proceeds from private placement of preferred stock 2,500,000 - ------------ ------------ Net cash provided by financing activities 3,454,883 34,568,205 ------------ ------------ Net (decrease) in cash (2,551,740) (712,599) Cash - beginning of period 3,275,068 1,036,839 ------------ ------------ Cash - end of period $ 723,328 $ 324,240 ============ ============ Supplemental schedule of cash flow information: Cash paid during the period for : Interest $ 3,372,468 $ 1,036,793 Income taxes $ 189,536 $ - The accompanying notes are an integral part of these consolidated financial statements. -7- POLYPHASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements June 30, 1996 1. NATURE OF BUSINESS The Company is a diversified holding company that, through its subsidiaries, currently operates in three industry segments: the forestry segment, which distributes, leases and provides financing for commercial and industrial timber and logging equipment; the computer and electronics segment, which markets, services and provides the networking of computers and related equipment and electronic parts, and 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. NOTES PAYABLE In connection with the acquisition of Texas Timberjack, Inc. (TTI) on June 24, 1994, the Company issued a non-interest bearing note to the seller in the amount of $10,000,000, collateralized by all the capital stock of TTI and initially due October 31,1994. As of the maturity date, the Company and the seller entered into an agreement providing for the modification, extension and renewal of the note, whereby the note was to bear interest at 12% and mature on October 31, 1995. As of October 31, 1995 the seller further extended and modified the note whereby the note, at that time having a principal balance of $11,200,000, was to bear interest at 17.5% and mature on February 29, 1996. On February 29, 1996 the seller further extended and modified the note whereby the note currently bears interest at 10% and matures on December 31, 1996. The note holder has no recourse to any of the assets or capital stock of Polyphase or any of its other subsidiaries and no cross-default provisions exist between this note agreement and any other Company debt. -8- 4. LONG TERM DEBT Effective December 1, 1995, the Company entered into additional agreements with the holders of its 12% senior convertible debentures, whereby the Company sold an additional $1,500,000 of debentures on generally the same terms and conditions as those previously issued. The new debentures bear interest at 12%, payable semiannually in June and December, are convertible into common stock at the rate of $5.00 per share (subject to adjustment) and become due and payable on December 1, 1997. 5. STOCKHOLDERS' EQUITY During November 1995, the Company, in a transaction with an unrelated corporation, sold 250,000 shares of newly designated Series A-3 Preferred Stock for $2,500,000 cash. The designations of the Series A-3 stock are similar to those of other series of preferred stock, except that each share of Series A-3 preferred stock is, except as otherwise required by law, entitled to two votes per share on all matters on which holders of common stock are entitled to vote, is entitled to cumulative annual dividends of 12% and is convertible into two shares of common stock (subject to adjustment in certain circumstances.) The Company also entered into an agreement with an associate of the aforementioned corporation to provide consulting services to the Company over a 36-month period. The consideration for such services was the grant of options to purchase 357,143 shares of common stock at $3.50 per share (the fair market value of the common stock at the date of grant) plus hourly fees and expenses. During October 1995, the Pyrenees Group exercised its option to purchase 200,000 shares of the Company's Series D Preferred Stock through the issuance of a 7% demand note in the amount of $2,000,000 collateralized by the shares issued. During the nine month period ended June 30, 1996 the shares were converted to 500,000 shares of common stock and principal payments of approximately $589,000 were made on the note. 6. ASSET DISPOSITION During the period ended June 30, 1996, the Company's Texas Timberjack subsidiary completed the sale of a parcel of land in Lufkin, Texas. The Company realized a gain of $875,000 on the property having a book value of approximately $625,000. 7. SALE OF COMPUTER OPERATIONS In July 1996, the Company completed a transaction with an unrelated third party to sell a controlling interest in the Computer Group. The transaction was accomplished through the sale of 51% of a newly formed subsidiary, PC Networx America, Inc. (PCNA), whose sole assets consist of the capital stock of Network America, Inc., PC Repair of Florida, Inc., Computer Systems Concepts and Register Mate, Inc. The consideration for this sale amounted to $2,500,000 (subject to adjustments) consisting of cash, notes receivable and preferred stock. The Company intends to publicly distribute to its shareholders a dividend of 30% of the outstanding stock of PCNA with the Company retaining 19%. This distribution is expected to occur within six months of closing. In a related transaction with the same party, the Company sold 100% of the stock of Micro Configurations, Inc. for a note receivable in the amount of $900,000, secured by the stock and assets of MCC. No gain or loss was realized on either of these transactions. -9- As of June 30, 1996 and September 30, 1995 the net assets of the operations sold in these transactions were $5,071,000 and $5,891,000 respectively. For the three months ending June 30,1996 and 1995, the operations contributed a loss of $404,000 and $5,000 respectively. For the nine months ending June 30, 1996 and 1995, these operations contributed a loss of $833,000 and $422,000 respectively. 8. RELATED PARTIES During the period ended December 31, 1995, the Company advanced to or on behalf of Mr. Paul A. Tanner, Chairman and Chief Executive Officer of the Company, amounts which aggregated approximately $1.5 million. Effective December 8, 1995, the advances and an unpaid promissory note receivable from Mr. Tanner were refinanced through the issuance to the Company of a 12% unsecured demand note from Mr. Tanner in the principal amount of $2,000,872. Also during the period ended December 31, 1995, the Company made disbursements to the Pyrenees Group, a corporation controlled by Mr. Tanner, of approximately $2.67 million, of which $1,153,000 represented repayment of existing advances from Pyrenees, with the balance representing an advance to Pyrenees of approximately $1.5 million. 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. (PLY), a private investment firm headed by Mr. Tanner. 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 agreed to provide to PLY up to $4 million of debt that (1) is convertible into a 14% economic interest in the project and (2) is to be guaranteed by certain members of the investment group. As part of this agreement, the amounts receivable from Mr. Tanner and Pyrenees (approximately $3.5 million), together with any subsequent amounts advanced, charged or accrued to or on behalf of PLY are to be considered as components of the $4 million of convertible debt, to bear interest at 12% and are to be guaranteed by Mr. Tanner and Pyrenees. Amounts advanced in excess of $4 million, also subject to such guarantees, are due and payable currently by PLY. During the nine months ended June 30, 1996, the Company accrued management and service revenues of $2.4 million and interest income of $240,000 related to the Company's activities with PLY. At June 30, 1996, the total amount receivable from PLY amounted to approximately $12.3 million, the collectibility of which is dependent upon the success of the project and/or the guarantees referred to above. It was recently announced that PLY's exclusive right to purchase a certain parcel of real estate in Las Vegas had expired pursuant to the terms of the purchase contract. Efforts are continuing to finance the stadium construction either on another site or on all or a portion of the parcel originally under contract. PLY has recently received acceptable term sheets from two investment banking firms and is currently in the latter stages of negotiating the funding for purchase of the land. Completion of the transaction is subject to, among other things, final approvals and the negotiation and execution of acceptable documentation. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Revenues for the nine months ended June 30, 1996 increased $51,649,000 (86%) to $111,725,000 from $60,076,000 during the nine months ended June 30, 1995. Operating income also increased $3,508,000 (87%) over the comparable period, primarily attributable to the inclusion of the operations of Overhill Farms, Inc ("Overhill Farms") for the full period which were acquired by the Company in May 1995. Net income for the nine months ended June 30, 1996 increased $280,000 (13%) to $2,377,000 from $2,097,000 during the nine months ended June 30, 1995. Net income was affected by increased interest expense from the acquisition of Overhill Farms, the reduction of tax benefits available during the period and dividends paid on the outstanding Series A-3 Preferred Stock. The Food Group's revenues for the nine months ended June 30, 1996 and 1995 were $72,203,000 and $16,574,000 respectively. Operating income for the nine months ended June 30, 1996 and 1995 were $4,913,000 and $1,418,000 respectively. The increase in revenues and operating income reflect the inclusion of the food operations for a full nine months in fiscal 1996 compared to two months in fiscal 1995. Revenues from the Food Group's airline and healthcare customers have begun to stabilize over the past three months, while growth continues in the retail and food service sectors. The retail sector's growth is in the development of branded and unbranded frozen entrees for the grocery and warehouse outlets. Revenues for the Forestry Group for the nine months ended June 30, 1996 decreased $5,861,000 to $24,032,000 from $29,893,000 for the nine months ended June 30, 1995. Operating income for the comparable period decreased $989,000. The decreases in revenue and operating income were primarily due to the strong demand for lumber and favorable weather conditions in Eastern Texas during calendar 1995 as compared to 1996. Consequently, logging companies upgraded or purchased new equipment in 1995 to satisfy the lumber mills' demand. The drought conditions which began in late 1995 in East Texas have caused an unfavorable economic environment in the timber industry through the winter and spring of 1996. Management expects the weakness in the timber industry to continue for the remainder of fiscal 1996 and into fiscal 1997. As discussed in Note 6, the Company completed the sale of a parcel of land in June 1996 realizing a gain of $875,000. During the nine months ended June 30, 1996, revenues for the Computer and Electronics Group decreased $513,000 to $13,095,000 from $13,608,000 for the nine months ended June 30, 1995. Operating income for the nine months ending June 30, 1996 decreased to a loss of approximately $752,000. The loss was primarily attributable to inventory adjustments as a result of the significant declines in the price of memory and other components in the third quarter of fiscal 1996. Subsequent to June 30, 1996, as discussed in Note 7, the Company disposed of 51% of its computer operations. -11- Liquidity and Capital Resources During the nine months ended June 30, 1996, the Company generated cash of approximately $7,522,536 in its operating activities compared to a use of cash in the amount of $1,855,000 during the comparable period in fiscal 1995. The cash was provided primarily from increases in depreciation and amortization expenses associated with the acquisition of Overhill Farms, increased accruals and decreases in trade receivables at TTI. This was partially offset by increased inventories, primarily at Overhill and TTI, during the period. During the nine months ended June 30, 1996, the Company's investing activities used cash of approximately $13,529,000 compared to a use of cash in the amount of $33,426,000 during the comparable period in fiscal 1995. The Company's use of cash during the nine months ended June 30, 1996 consisted primarily of advances to PLY. (See Note 8) During the nine months ended June 30, 1996 the Company's financing activities provided cash of approximately $3,455,000 as compared to $34,568,000 of cash provided in the comparable period in fiscal 1995. During the period the Company placed $2,500,000 of Series A-3 Preferred Stock and sold $1,500,000 of 12% convertible debentures. The funds from these transactions were used, in part, in the repayment of advances of $1,153,000 from related parties in connection with the acquisition of Overhill Farms and prepaying approximately $750,000 on existing Overhill Farms term loans. On April 1, 1996, the Company utilized a line of credit for approximately $6 million for an advance made to PLY. 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 from a combination of internally generated funds, proceeds from the issuance of shares of preferred stock and from additional borrowings. The Company's management believes that cash generated from operations, together with available lines of credit and contemplated debt and/or equity placements, will be sufficient to meet the Company's liquidity requirements for the next 12 months. Certain statements contained in this Form 10-Q are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions that could prove not to be accurate. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. The Company's ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the existence of demand for and acceptance of the Company's products and services, the availability of appropriate candidates for acquisition by the Company, regulatory approvals, economic conditions, the impact of competition and pricing, results of financing efforts and other factors affecting the Company's business that are beyond the Company's control, including but not limited to the matters described in "Management's Discussion and Analysis of Financial Conditions and Results of Operations." -12- PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K - The following reports were filed on Form 8-K during the quarter ended June 30, 1996. NONE -13- SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLYPHASE CORPORATION (Registrant) Date: August 16, 1996 By: /s/Paul A. Tanner --------------------------------- Paul A. Tanner President and Chief Executive Officer -14- INDEX TO EXHIBITS Exhibit Exhibit No. ----------------------------------- --------------- Financial Data Schedule 27