U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 20002001
OR
[ ] 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
POLYPHASEOVERHILL 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) (Zip Code)
Registrant's telephone number, including area code: (972) 386-0101
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------------------------------------------
Common Stock, $.01 par value per share American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
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
pastpreceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X[X] No ----- -----___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant, based on the closing price of such stock on December 4, 2000,7, 2001,
was approximately $7.6$11.6 million. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and 10% beneficial owners are affiliates. As of
December 4, 2000,7, 2001, the registrant had issued and outstanding 17,827,46418,615,464 shares of
common stock, $.01 par value.
POLYPHASEOVERHILL CORPORATION
20002001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Part I
Item 1 Description of Business 1
Item 2 Description of PropertyProperties 7
Item 3 Legal Proceedings 87
Item 4 Submission of Matters to a Vote of Security Holders 8
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk 1615
Item 8 Financial Statements 16
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 16
Part III
Item 10 Directors and Executive Officers of the Registrant 17
Item 11 Executive Compensation 1719
Item 12 Security Ownership of Certain Beneficial Owners and Management 1725
Item 13 Certain Relationships and Related Transactions 1725
Part IV
Item 14 Exhibits, Financial Statement ScheduleSchedules and Reports on Form 8-K 1829
i
PART I
ITEM 1. Description of Business.
------------------------
General
Overhill Corporation, formerly Polyphase Corporation ("Polyphase" or "the Company"(the "Company"),
incorporated in 1963 and now a Nevada corporation, is a holding company that,
through its subsidiaries, currently operates in two industry segments: the
food segment, which produces
high quality entrees, plated meals, meal components, soups, saucesequipment, parts and poultry,
meat and fish specialties (the "Food Group"); and the forestryservice segment, which distributes, leases and provides
financing for industrial farming and logging equipment and also participates in relatedthe timber and wood
products segment, which includes sawmill operations (the
"Forestry Group").
Operating Companiesand the treatment and sale
of lumber products. The Company's food segment, which previously had been
included as a separate segment is classified as a discontinued operation based
upon management's plan to spin-off its Overhill Farms, Inc. ("Overhill") In May 1995, the Company acquired all the
- ---------------------------------
operating assets of IBM Foods, Inc. The purchase, which was accomplished through
Overhill, a newly-formed subsidiary of the Company, provided for a cash payment
to
the seller of $31.3 million plus the assumption by the Company of certain
liabilities of the acquired business. Overhill's operations are located in
Culver City, California. During August 2000, Overhill purchased the operating
assets and trademarks of the Chicago Brothers food operations from a subsidiary
of Schwan's Sales Enterprises, Inc. for total consideration of $4.2 million,
consisting of cash of $3.3 million and a note payable to the seller for
$900,000.
Texas Timberjack, Inc. ("Timberjack" or "TTI")shareholders.
In June 1994, the Company
- ---------------------------------------------- acquired all of the outstanding capital stock of TTITexas
Timberjack, Inc. ("Timberjack" or "TTI") from Harold Estes, current President of
TTI. Timberjack, with locations in Lufkin, Houston, Jasper, Cleveland and
Atlanta, Texas, is a distributor of industrial construction, farming and logging
equipment in East Texas and Western Louisiana. The capital stock of TTI was
acquired from Mr. Estes for consideration of approximately $4.0 million in cash,
a $10.0 million promissory note payable to the order of Mr. Estes, and 100,000
shares of the Company's Series A Preferred Stock, which were subsequently
converted into 2.0 million shares of common stock. Subsequent to June 1994, the
Company and Mr. Estes have modified, renewed and extended the promissory note
payable to Mr. Estes. As of September 30, 20002001, the promissory note had a
balance of approximately $19.4$20.8 million (including accrued and unpaid interest)
and is due October 10, 2002. In fiscal 1998, TTI acquired an interest in timber
and sawmill operations. In fiscal 2000, TTI acquired a non-operating refinery
and assumed a note payable to Mr. Estes, which currently has an unpaid balance
of approximately $1.4$1.5 million (including accrued and unpaid interest).
DispositionDispositions
Overhill Farms, Inc. ("Overhill Farms"). In August 2001, the Company's Board of
Directors approved a plan to spin-off all of its shares of Overhill Farms to the
holders of the Company's common stock. Overhill Farms, which produces high
quality entrees, plated meals, meal components, soups, sauces and poultry, meat
and fish specialties, previously comprised the Company's Food Group. The
transaction to effect the spin-off is expected to be tax-free and will result in
the issuance to the Company's stockholders, of one share of Overhill Farms
common stock for every two shares of the Company's common stock owned on the
record date of the transaction as established by the Board. The assets,
liabilities and operations of Overhill Farms have been reported as discontinued
in the Company's consolidated financial statements.
Polyphase Instrument Co. ("PIC"). Effective September 30, 1999, the Company sold
- --------------------------------
its wholly-ownedwholly owned subsidiary, PIC, to an investment group headed by management of
that company. PIC, which manufactures and markets electronic transformers,
inductors and filters, previously comprised the Company's Transformer Group. The
transaction was completed as a sale of 100% of the outstanding capital stock of
PIC for total consideration of approximately $2.8 million, consisting of $1.8
million cash and a subordinated note receivable for $1.0 million. The Company
recorded a loss from discontinued operations of approximately $1.2 million in
1999 as a result of this transaction.
1
Business Strategy
Management believes the Company's future growth opportunities will be primarily
in its Food Group segment. The business environment of the food industry is
mandating consolidation of small and mid-size food processing companies to
enhance operating efficiencies and provide service to national accounts. The
Food Group has recently completed the purchase of the Chicago Brothers food
operations and continues to evaluate selected acquisition candidates, which can
complement the operations of Overhill by providing one or more of the following
selected criteria: regional brand labels, additional production capacity,
geographical diversification, new markets and/or new customers. The Forestry
GroupCompany, through Timberjack, continues to operate in a difficult market. In
an effort to offset decreased sales in its equipment operations, TTI continued
its efforts to reduce expenses and to seek synergistic opportunities outside of
its traditional customer base and geographic territory. During fiscal 2000 and
2001, TTI placed increased emphasis on its efforts to increase construction and farm
equipment sales, primarily through its distribution arrangement for New Holland
equipment. PolyphaseThe Company will continue to review long termlong-term strategies and
alternatives for TTI and its subsidiaries in order to maximize shareholder
value.
To achieve future growth within the Company, management has identified the
following basic initiatives:
1) Continue to provide high quality products and superior services to ourits
customers.
2) Seek internal growth by developing new products, adding customers, leveraging its geographic
presence and securing distribution rights to additional products.
3) Seek additional growth through strategic acquisitions of complementary
businesses with strong management, solid product lines and growth
potential.
Operating Segments
The following table sets forth business segment information with respect to the
percentage of net sales and operating income contributed by each segment for the
years ended September 30, 2001, 2000 1999 and 1998.
2000 1999 1998
---- ---- ----
Net Sales
Food Group 77% 71% 64%
Forestry Group 23% 29% 33%
Transformer Group - 3%
--- ---
Total 100% 100% 100%
Operating Income
Food Group 98% 83% 55%
Forestry Group 2% 17% 45%
Transformer Group - - -
--- --- ---
Total 100% 100% 100%
- -------------------------------------------------------------------------------1999.
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Net Sales
Equipment, Parts and Service 75% 80% 84%
Timber and Wood Products 25 20 16
--------- --------- ----------
Total 100% 100% 100%
Operating Income
Equipment, Parts and Service 31% 425% 82%
Timber and Wood Products 69 (325) 18
--------- ------------ -----------
Total 100% 100% 100%
- ----------------------------------------------------------------------------------------------------------
Reference is made to Note 17 to the Company's consolidated financial statements
for revenues, operating profits or losses and identifiable assets attributable
to each industry segment for each of the last three fiscal years.
2
Food Group
Products and Services
- The Food Group, through Overhill, is a value-added
manufacturer of quality frozen food products including entrees, plated meals,
meal components, soups, sauces, poultry, meat and fish specialties. Overhill is
positioned as a provider of custom prepared foods to a number of prominent
customers such as Albertson's, Jenny Craig, Carl's Jr., Jack in the Box, Panda
Express, Specialty Brands and King's Hawaiian as well as most domestic airlines,
including American, United and Delta. Historically, Overhill has served four
industries: airlines, health care, foodservice and retail.
Sales and Marketing - Overhill markets its products through an internal sales
force and outside food brokers. Overhill believes that the airline industry,
while mature, represents an area for moderate growth potential in the future.
The Company, has refocused its attention on domestic carriers not currently being
served to any great extent by Overhill and on foreign carriers who are
increasingly choosing frozen entrees as part of their in-flight feeding
programs. The Company projects that its health care business may diminish
somewhat in the near term. The Company is predominantly focusing on the retail,
club stores and foodservice markets as areas of significant future growth. As a
result, Overhill management has realigned its sales force and redirected its
marketing efforts to concentrate on these markets.
Approximately 64% of Overhill's sales in fiscal 2000 were derived from five
customers, King's Hawaiian (16%), American Airlines (13%), Jenny Craig (12%),
Panda Express (12%), and Delta Airlines (11%). On a consolidated basis each of
these five customers represented approximately 8-12% of the Company's total
sales. Although the Company's relationships with these customers continue to
remain strong, there can be no assurance that these relationships will continue.
As in the previous year, the Company has made a concerted effort to sign multi-
year supply agreements with its major customers. Major contracts that were
signed or extended in fiscal 2000 include American Airlines, Delta Airlines,
Panda Express, and Schwan's. A decline in sales of Overhill's products to these
customers or the loss of, or a significant change in the relationship between
the Company and any of these key customers, could have a material adverse effect
on the Company's business and operating results. It is management's objective to
continue to reduce the reliance on a small concentration of accounts by further
expansion into custom products for retail and foodservice customers nationwide.
Manufacturing and Sourcing - Overhill's manufacturing operations are located in
six separate facilities with three in the Los Angeles area and three in the San
Diego area. Most operations are labor intensive, generally requiring semi-
skilled employees. Also, the Los Angeles manufacturing employees are unionized
with contracts covering each of the three plants. The union contract with
Teamsters Local 986, which represents Overhill's Plant No. 1 employees, expired
on November 30, 2000; the contract has been extended by mutual agreement as
negotiations continue. Management anticipates that the results of those
negotiations will have no material adverse effect on Overhill's operations.
Union contracts for the other Overhill Los Angeles operations expire February
28, 2002. Management believes relations with the unions are excellent and does
not anticipate any problems, which would affect future production.
With the addition of the San Diego facilities and the outsourcing of certain
products, management estimates that the combined facilities are operating at
approximately 75% of capacity based on current product production mix. Overhill
management is currently reviewing several proposals to improve manufacturing
efficiencies including the consolidation of facilities and the addition of
equipment to improve freezing capabilities and to automate some operations.
Additionally, the Company will consider adding an east coast facility, which
could significantly reduce both storage and shipping expenses for a growing
segment of Overhill's business.
During fiscal 2000 Overhill continued its program of outsourcing certain
production where it proved economically efficient. Management considers this
program a success and plans to continue this program and expand it, where
practicable.
3
The San Diego operations consist of two manufacturing facilities and a
warehouse/administration facility. Manufacturing processes in San Diego are more
machine intensive, requiring more skilled machine operators, mechanics, and
supervision. The workforce in San Diego is not unionized and labor relations
have continued to be supportive of the recent management change. Currently, the
San Diego facilities are operating on a one-shift basis, but management
anticipates additional capacity requirements within the next twelve months.
The Company's ability to economically produce large quantities of its products,
while at the same time maintaining a high degree of quality, depends in large
part on its ability to procure raw materials on a reasonable basis. The Company
relies on a few large suppliers for its poultry products with the remaining raw
materials purchased from suppliers in the open market. The Company does not
anticipate any difficulty in acquiring these materials in the future. Raw
materials, packaging for production and finished goods are stored on site or in
a public frozen food storage facility until shipment is required.
Backlog - Overhill typically delivers products directly from finished goods
inventory, and as such does not maintain a large backlog of unfilled purchase
orders. While at any given time there may be a small backlog of orders, such
backlog is not material in relation to total sales, nor is it necessarily
indicative of trends in its business. Orders are subject to changes in
quantities or to cancellation with thirty days notice without penalties to
customers.
Product Development - Overhill maintains a comprehensive, fully staffed test
kitchen, which formulates recipes and upgrades specific products for current
customers and establishes production and quality standards. Products are
developed based upon either customers' specifications, conventional recipes or
new product developments. Overhill is continuously developing recipes as
customers' tastes and client requirements change. Overhill also maintains a
quality control department for testing and quality control. The Company
manufactures products in the retail and foodservice areas with branded and
private label entrees.
Competition - Overhill's food products, consisting primarily of poultry, pasta,
beef and assorted related products, compete with products produced by numerous
regional and national firms. Many of these companies are divisions of larger
fully integrated companies such as Tyson Foods and ConAgra, which have greater
financial, technical, human and marketing resources than the Company.
Competition is intense with most firms producing similar products for the
foodservice and retail industries. Competitive factors include price, product
quality, product development, customer service and, on a retail basis, name
recognition. There can be no assurance that the Company will compete
successfully against existing companies or new entrants to the marketplace.
Overhill competes in this market by its ability to produce small/custom product
runs, within a short time frame and on a cost effective basis.
4
Forestry Group
Products and Services - The Forestry Group, through Timberjack and its majority-
ownedmajority-owned subsidiaries, is a
distributor of construction, industrial and logging equipment with investments
in related timber and sawmill operations. TTI has fourfive locations in eastern
Texas;Texas. TTI's headquarters are located in Lufkin, with smaller satellite
showrooms and repair facilities located in Jasper, Cleveland, Atlanta and
Atlanta,Houston, Texas. TTI carries the Timberjack Blount(an unrelated manufacturer) and
HyundaiBlount lines of industrial and logging equipment and the New Holland line of
farm and construction equipment. TTI is involved in the sale, leasing and
financing of the equipment it distributes as well as the servicing of all major
brands of related equipment. TTI's operations are primarily concentrated in the
forested areas of Easteastern Texas although its market extends into Westernwestern
Louisiana. TTI operates in a fragmented industry where its major competition is
from distributors and dealers of Caterpillar and John Deere equipment. TTI
estimates that in Easterneastern Texas it currently holds approximately 60%65% of the
shear (a machinemarket for shears (machines that cutscut timber) market, 45%, 50% of the skidder (a machinemarket for skidders
(machines that transportstransport logs out of the forest onto a loader) market
and 70% of the
loader (a machinemarket for loaders (machines that stacksstack trees onto trucks) market..
Sales and Marketing -
Timberjack currently maintains sales and distribution offices in Lufkin, Jasper,
Cleveland, Atlanta and Atlanta,Houston, Texas primarily to serve Easterneastern Texas and
Westernwestern Louisiana. Sales are generated through repeat customers, advertisements
in various trade publications and direct marketing calls on companies located in
the area. A general sales manager and several branch managers supply technical
and operational support, while eleven salesmen have direct responsibility for
customer relationships. TTI meets customers' orders for new equipment and
replacement parts out of existing inventory or through purchase orders placed
with the manufacturers TTI currently represents.
Approximately 36%29% of TTI's revenues during fiscal 20002001 are from new equipment
sold to companies involved in the forestry and construction industries.
Additional equipment relatedequipment-related revenues are derived from sales of used equipment
(12%(21%), servicing of equipment (7%(6%), sales of parts (17%) and financing equipment
sales (8%(2%). The remaining 20%25% of TTI's revenues is derived from the sale of
finished timber products through its timber and sawmill operations. No single
customer accounts for more than 10% of TTI's sales. Equipment sales financed by
TTI are typically for periods ranging from 12 to 24 months at interest rates
ranging from 10%9% to 18% per annum.
Backlog -
As a dealer, servicer and financier of forestry equipment, TTI does not maintain
a backlog of orders. Equipment ordered that is not in inventory takes
approximately one to six weeks to be shipped to a customer from the manufacturer
or another distributor.
Product Development
- TTI does not develop products for sale to the public. TTI relies primarily upon
its suppliers (Timberjack, Blount and New Holland, Hyundai)Holland) for a majority of its new
units and parts.
Competition
- Competition in the forestry segmentindustry is highly fragmented in the Easterneastern Texas
and Westernwestern Louisiana areas where TTI principally operates. Because of its
lengthy historical presence in these regions, TTI believes it has established a
strong local identity in its field with a proven record of delivering equipment
on a timely basis, providing satisfactory financing and strong customer support
and service. TTI is one of only a few distributors of Timberjack and Blount
forestry equipment in its operating areas. TTI has the added advantage of
being a leading seller and financier of various makes and models of used logging
3
equipment. Principal competitors include local John Deere and Caterpillar
distributors.
During the current fiscal year 2000, Deere and Company (the manufacturer of John Deere
equipment) purchased the Timberjack Group from the Metso Corporation of Finland
(the manufacturer of Timberjack equipment). While the impact of this purchase is
not known, it is not expected to have a significant implicationseffect on
Texas Timberjack's
operations.
5
Patents, Trademarks and Copyrights
The Company does not have patents or patent applications pending on any of its
products, although it may file such patent applications in the future.
The
Company attempts to protect its proprietary interests in its products by
entering into non-disclosure agreements with customers.
The Company has registered the trademarks "Polyphase" and "Overhill Farms" in
the United States Patent and Trademark Office. In addition, Overhill recently
acquired from Schwan's several trademarks relating to the acquired operations,
including, among others, "Chicago Brothers" and "Florence Pasta and Cheese."
Regulation
The Food Group is subject to strict government regulation, particularly in the
health and environmental areas, by the United States Department of Agriculture
("USDA"), the Food and Drug Administration ("FDA"), Occupational Safety and
Health Organization ("OSHA") and the Environmental Protection Agency ("EPA").
The Food Group anticipates increased regulation by the USDA and FDA concerning
food processing and storage. The Company's food processing facilities are
subject to on-site examination, inspection and regulation by the USDA.
Compliance with the current applicable federal, state and local environmental
regulations has not had, and the Company does not believe that in the future
such compliance will have, a material effect on its financial position, results
of operations, expenditures or competitive position. During 1997, the Company
implemented a Hazard Analysis Critical Point Plan to ensure proper handling of
all food items.
The Forestry Group is required to comply with various governmental regulations and
requirements concerning the discharge of materials into the environment or
otherwise relating to the protection of the environment. Compliance with the
current applicable federal, state and local environmental regulations has not
had, and the Company does not believe that in the future such compliance will
have, a material effect on its financial position, results of operations,
expenditures or competitive position.
The Company takes all reasonable precautions to ensure that its operations processing plants and
facilities operate in a safe, sanitary and environmentally-soundenvironmentally sound manner.
However, events beyond the control of the Company, such as the adoption by the
government of more stringent environmental regulations, could adversely affect
its operations. Management believes that the Company is in substantial
compliance with all applicable laws and regulations relating to the operations
of facilities.
Employees
As of September 30, 2000,2001, the Company had approximately 1200148 full time employees
as
follows: approximately 1052 full-time employees in the Food Group; 145 full-time
employees in the Forestry Group;at Timberjack and 3 full-time employees in the corporate office. All subsidiariesTTI presently
provideprovides a group health plansplan for their domesticits employees and paypays a portion of the costs
associated with such plans.the plan. TTI also maintains a profit sharing plan for its
employees.
Overhill Farms - Discontinued Operation
General - In May 1995, the Company acquired all the operating assets of IBM
Foods, Inc. The purchase, which was accomplished through Overhill Farms, a newly
formed subsidiary of the Company, provided for a cash payment to the seller of
$31.3 million plus the assumption by the Company of certain liabilities of the
acquired business. Overhill Farms' corporate headquarters are located in Culver
City, California, with manufacturing facilities located throughout Southern
California. During August 2000, Overhill Farms purchased the operating assets
and trademarks of the Chicago Brothers food operations from a subsidiary of
Schwan's Sales Enterprises, Inc. for total consideration of $4.2 million,
consisting of cash of $3.3 million and a note payable to the seller for
$900,000.
Products and Services - Overhill Farms is a value-added manufacturer of quality
frozen food products including entrees, plated meals, meal components, soups,
sauces, poultry, meat and fish specialties. Overhill Farms is positioned as a
provider of custom prepared foods to a number of prominent customers such as
Albertson's, Jenny Craig, Carl's Jr., Jack in the Box, Panda Restaurant Group
and King's Hawaiian, as well as most domestic airlines, including American,
United and Delta. Historically, Overhill Farms has served four industries:
airlines, health care, foodservice and retail.
Sales and Marketing - Overhill Farms markets its products through an internal
sales force and outside food brokers. Prior to September 11, 2001, Overhill
Farms projected that the airline industry, while
4
mature, represented an area for moderate growth potential in the future.
Additionally, the company estimated that its health care business, predominantly
sales to Jenny Craig, would have little or no growth in the near term. As such,
the Company is focusing on the retail, club store and foodservice segments to
continue its growth. Management has realigned it sales organization and
redirected its marketing efforts to concentrate on these rapidly growing
markets. The results of the tragic events of September 11, 2001, have
significantly impacted the company's sales to airlines. The effect of these
events on the airline industry, airline revenues and on Overhill Farms' business
in particular, cannot be accurately determined at this time. The results of the
September events have resulted in a decreased demand for air travel and a
reduction in the number of meals served as a result of airline cost savings
measures. A significant portion of Overhill Farms' business focuses on the
airline industry, and these effects, depending upon their scope and duration,
which we cannot predict at this time, could negatively impact on the company's
financial position, results of operations or cash flows. Overhill Farms
continues to work closely with its airline customers to offer lower cost menu
alternatives to air carriers and to maintain and strengthen its market position
for the return to normal air travel conditions. It is the company's objective to
mitigate the effects of decreased airline sales through reductions in operating
costs and increased sales in other customer segments.
Approximately 62% of Overhill Farms' sales in fiscal 2001 were derived from five
customers, King's Hawaiian (14%), American Airlines (10%), Jenny Craig (12%),
Panda Restaurant Group (14%), and Delta Airlines (12%). Although Overhill Farms'
relationships with these customers continue to remain strong, there can be no
assurance that these relationships will continue. As in the previous year,
Overhill Farms has made a concerted effort to sign multi-year supply agreements
with its major customers. Major contracts that were signed or extended in fiscal
2001 include Jenny Craig, Panda Restaurant Group, American Airlines and King's
Hawaiian. A decline in sales of Overhill Farms' products to these customers or
the loss of, or a significant change in the relationship between Overhill Farms
and any of these key customers, could have a material adverse effect on Overhill
Farms' business and operating results. It is management's objective to continue
to reduce the reliance on a small concentration of accounts by further expansion
into custom products for retail and foodservice customers nationwide.
Manufacturing and Sourcing - Overhill Farms' manufacturing operations are
located in six separate facilities with three in the Los Angeles area and three
in the San Diego area. Most operations are labor intensive, generally requiring
semiskilled employees. Also, the Los Angeles manufacturing employees are
unionized with contracts covering each of the three plants. Approximately 67% of
Overhill Farms' workforce is covered by collective bargaining arrangements
expiring in fiscal 2002 and 2003. Management believes relations with the unions
are excellent and does not anticipate any problems which would affect future
production.
With the addition of the San Diego facilities and the outsourcing of certain
products, management estimates that the combined facilities are operating at
approximately 70% of capacity based on current product production mix. Overhill
Farms' management is in the final phase of reviewing a plan to improve
manufacturing efficiencies including the consolidation of facilities and the
addition of equipment to improve freezing capabilities and to automate some
operations.
The San Diego operations consist of two manufacturing facilities and a
warehouse/administration facility. Manufacturing processes in San Diego are more
machine intensive, requiring more skilled machine operators, mechanics, and
supervision. The workforce in San Diego is not unionized.
Overhill Farms' ability to economically produce large quantities of its
products, while at the same time maintaining a high degree of quality, depends
in large part on its ability to procure raw materials on a reasonable basis.
Overhill Farms relies on a few large suppliers for its poultry products, with
the remaining raw materials purchased from suppliers in the open market.
Management does not anticipate any difficulty in acquiring these materials
in the future. Raw materials, packaging for production and finished goods are
stored on site or in a public frozen food storage facility until shipment is
required.
5
Backlog - Overhill Farms typically delivers products directly from finished
goods inventory, and as such does not maintain a large backlog of unfilled
purchase orders. While at any given time there may be a small backlog of orders,
such backlog is not material in relation to total sales, nor is it necessarily
indicative of trends in its business. Orders are subject to changes in
quantities or to cancellation with thirty days' notice without penalties to
customers.
Product Development - Overhill Farms maintains a comprehensive, fully staffed
test kitchen which formulates recipes and upgrades specific products for current
customers and establishes production and quality standards. Products are
developed based either upon customers' specifications, conventional recipes or
new product developments. Overhill Farms is continuously developing recipes as
customers' tastes and client requirements change. Overhill Farms also maintains
a quality control department for testing and quality control. Overhill Farms
manufactures products in the retail and foodservice areas with branded and
private label entrees.
Competition - Overhill Farms' food products, consisting primarily of poultry,
pasta, beef and assorted related products, compete with products produced by
numerous regional and national firms. Many of these companies are divisions of
larger fully integrated companies, such as Tyson Foods and ConAgra, which have
greater financial, technical, human and marketing resources than Overhill Farms.
Competition is intense with most firms producing similar products for the
foodservice and retail industries. Competitive factors include price, product
quality, product development, customer service and, on a retail basis, name
recognition. There can be no assurance that Overhill Farms will compete
successfully against existing companies or new entrants to the marketplace.
Overhill Farms competes in this market by its ability to produce small/custom
product runs, within a short time frame and on a cost-effective basis.
Regulation - Overhill Farms is subject to strict government regulation,
particularly in the health and environmental areas, by the United States
Department of Agriculture ("USDA"), the Food and Drug Administration ("FDA"),
Occupational Safety and Health Organization and the Environmental Protection
Agency. Overhill Farms anticipates increased regulation by the USDA and FDA
concerning food processing and storage. Overhill Farms' food processing
facilities are subject to on-site examination, inspection and regulation by the
USDA. Compliance with the current applicable federal, state and local
environmental regulations has not had, and Overhill Farms does not believe that
in the future such compliance will have, a material effect on its financial
position, results of operations, expenditures or competitive position. During
1997, Overhill Farms implemented a Hazard Analysis Critical Point Plan to ensure
proper handling of all food items.
Employees - As of September 30, 2001, Overhill Farms had approximately 1,050
full-time employees.
Safe Harbor Statement
The nature of the Company's operations, and the environment in which it
operates, subjects the Company to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company notes the following factors, which among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Forward lookingForward-looking statements
contained in this document include the amount of future capital expenditures and
the
6
possible uses of proceeds from any future borrowings under the Company's
currently effective credit facilities. Factors which could cause results to
differ include, but are not limited to:to, changes in the Company's business
environment, including actions of competitors and changes in customer
preferences; changes in governmental laws and regulations, including income
taxes; market demand for new and existing products; and raw materialequipment manufacturers'
and timber pricing.
6
ITEM 2. Description of Property.
------------------------Properties.
Corporate Headquarters
The Company leases an approximately 4,000 square foot facility located at 4800
Broadway, Suite A, Addison, Texas 75001, which serves as the corporate
headquarters. The lease, which began in February 1998, has a five yearfive-year term and
a provision for a tenant cancellation option during the last two years for a
nominal amount.
Food Group
Overhill leases three manufacturing facilities in the Los Angeles, California
area. Plant No. 1 is located in Inglewood, California and has 39,000 square feet
of manufacturing area. Plants No. 2 and No. 3 are located in Vernon, California
and have 49,000 and 27,000 square feet of manufacturing area, respectively. In
addition to the manufacturing facilities, Overhill also leases two dry goods
warehouses of 13,500 and 11,500 square feet, a 7,700 square foot frozen storage
facility in Inglewood, California and a 7,900 square foot office in Culver City,
California. Overhill's recently acquired Chicago Brothers operations are
conducted in leased facilities in San Diego, California consisting of
manufacturing facilities of 33,300 and 30,000 square feet and a 9,400 square
foot warehouse/administration facility. While Overhill believes that the
existing facilities are adequate to meet its requirements in the foreseeable
future, the Company is currently reviewing the cost effectiveness of
consolidating certain manufacturing and administrative functions and is also
actively seeking a facility on the east coast to more efficiently and
effectively meet current and future customer requirements.
Forestry GroupTimberjack
TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas and a
building in Cleveland, Texas and leases a buildingbuildings in Atlanta and Houston, Texas.
The largest building in Lufkin has 38,500 square feet, which is used for
administrative offices, showroom, parts sales and shop area.service areas. The remaining
buildings have 3,600 and 4,200 square feet, respectively. The Jasper, Cleveland,
Atlanta and AtlantaHouston buildings have approximately 10,000, 900, 6,700, 7,500 and
7,50010,000 square feet, respectively, which are used for sales offices, parts sales
and shop areas. TTI also leases six buildings on 68 acres in Bon Wier, Texas for
a sawmill operation. The sawmill is leased at a basic rent of $19,000 per month,
which includes certain equipment, with an option to purchase the land, buildings
and equipment for $1,250,000 in April 2003. In addition, TTI owns a
non-operating crude oil refining and blending facility, together with related
buildings and administrative office space, situated on approximately 120 acres
of land in Egan, Louisiana, which currently is held for sale.
7
Overhill Farms - Discontinued Operation
Overhill Farms leases three manufacturing facilities in the Los Angeles,
California area. Plant No. 1 is located in Inglewood, California and has 39,000
square feet of manufacturing area. Plants No. 2 and No. 3 are located in Vernon,
California and have 49,000 and 27,000 square feet of manufacturing area,
respectively. In addition to the manufacturing facilities, Overhill Farms also
leases two dry goods warehouses of 13,500 and 11,500 square feet, a 7,700 square
foot frozen storage facility in Inglewood, California and a 7,900 square foot
office in Culver City, California. Overhill Farms' recently acquired Chicago
Brothers operations are conducted in leased facilities in San Diego, California
consisting of manufacturing facilities of 33,300 and 30,000 square feet and a
9,400 square foot warehouse/administration facility. While Overhill Farms
believes that the existing facilities are adequate to meet its requirements in
the foreseeable future, management is continuing to review the
cost-effectiveness of combining certain manufacturing and administrative
functions into one consolidated facility in order to more efficiently and
effectively meet current and future customer requirements.
ITEM 3. 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 current and past officers and directors. The complaintslawsuits 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 March 2000, the District Court dismissed the plaintiffs' claims against one
of the Company's officers and directors and restricted the plaintiffs from
pursuing a number of their claims against the other defendants. The Court also
granted the remaining defendants leave to file motions for summary judgment.
Motions for summary judgment were thereafter filed, pointing out that there was
no evidence to support the plaintiffs' claims.filed. In November 2000, in a
lengthy decision addressing the plaintiffs' claims against each of the remaining
defendants, the District Court granted the
7
motions for summary judgment, thereby disposing of all of the claims
asserted by the plaintiffs. Without presenting
any new evidence or any new argumentsThe plaintiffs then filed a motion for rehearing,
which the Court denied in March 2001.
The plaintiffs have appealed these decisions to the United States Court of
Appeals for the Ninth Circuit. Appellate briefs have been filed by both sides,
but oral argument in the Court to consider,of Appeals has not yet occurred.
Recently, the plaintiffs have sought reargumentrequested the Ninth Circuit to enjoin the Company's
proposed spin-off of Overhill Farms. The Court of Appeals denied the summary judgment motions.plaintiffs'
request and directed them to address their request to the District Court. The
defendants have
responded and have requested thatplaintiffs thereafter filed an application with the District Court, impose sanctions against
plaintiffs' counsel pursuantwhich
restrained the spin-off for a few days until a hearing could be conducted with
respect to the applicable securities laws.proposed spin-off. Following a hearing at which counsel for all
parties appeared, the District Court dissolved its temporary restraining order,
thereby allowing the Company to proceed with the proposed spin-off. The
plaintiffs have not appealed the most recent decision by the District Court.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. However, management believes
(based, in part, on advice of legal counsel) that such litigation and claims
will be resolved without material effect on the Company's financial condition,
results of operations or cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submittedOn September 25, 2001, the Company held a Special Meeting of Stockholders. The
only matter considered and voted upon at this meeting was an amendment to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the
Company's fiscal year.Articles of Incorporation to change the Company's name, in connection
with the spin-off of Overhill Farms, to "TreeCon Resources, Inc." The following
table sets forth certain information relating to the voting by stockholders on
this matter:
For Against Withheld
--------- ------- --------
Proposal to amend the Company's
Articles of Incorporation 9,893,071 7,574 12,800
8
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
----------------------------------------------------------------------
The common stock is listed on the American Stock Exchange under the symbol
"PLY."OVH." Following the proposed spin-off of Overhill Farms, the Company intends to
change its name to "TreeCon Resources, Inc." and continue to trade its common
stock on the American Stock Exchange under the new ticker symbol "LOG." The
following table sets forth the range of high and low sales prices for the common
stock on the American Stock Exchange for the periods indicated:
Fiscal 2001 High Low
----------- ------------- -------------
Quarter from October 1, 2000
to December 31, 2000 $ 1.0000 $ 0.5000
Quarter from January 1, 2001
to March 31, 2001 $ 1.1875 $ 0.6000
Quarter from April 1, 2001
to June 30, 2001 $ 0.7700 $ 0.5000
Quarter from July 1, 2001
to September 30, 2001 $ 1.0900 $ 0.5000
Fiscal 2000 High Low
------------ ------- ------------------ ------------- -------------
Quarter from October 1, 1999
to December 31, 1999 $0.7500 $0.3750$ 0.7500 $ 0.3750
Quarter from January 1, 2000
to March 31, 2000 $1.5000 $0.4375$ 1.5000 $ 0.4375
Quarter from April 1, 2000
to June 30, 2000 $1.2500 $0.6875$ 1.2500 $ 0.6875
Quarter from July 1, 2000
to September 30, 2000 $1.0625 $0.7500$ 1.0625 $ 0.7500
Fiscal 1999 High Low
------------ ------- ------------------ ------------- -------------
Quarter from October 1, 1998
to December 31, 1998 $0.5625 $0.2500$ 0.5625 $ 0.2500
Quarter from January 1, 1999
to March 31, 1999 $0.5625 $0.3125$ 0.5625 $ 0.3125
Quarter from April 1, 1999
to June 30, 1999 $0.5625 $0.3125$ 0.5625 $ 0.3125
Quarter from July 1, 1999
to September 30, 1999 $0.8750 $0.3125
Fiscal 1998 High Low
------------ ------- -------
Quarter from October 1, 1997
to December 31, 1997 $1.8750 $0.7500
Quarter from January 1, 1998
to March 31, 1998 (1) $1.0625 $0.5000
Quarter from April 1, 1998
to June 30, 1998 $1.1875 $0.6250
Quarter from July 1, 1998
to September 30, 1998 $0.7500 $0.3125
(1) On January 14, 1998, trading in the Company's stock was temporarily halted
pending the Company's filing of its Annual Report on Form 10-K for the fiscal
year ended September 30, 1997. The stock resumed trading on February 23, 1998.$ 0.8750 $ 0.3125
9
The Company has never paid cash dividends on its common stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such policy
is, within the limitations and restrictions described below, subject to change
based on current industry and market conditions, as well as other factors beyond
the control of the Company.
As of December 4,7, 2000, the Company estimates that there were approximately
3,2003,000 beneficial owners of the Company's common stock, represented by 217
holders of record.
Recent Sales of Unregistered Equity Securities
In November 1995, the Company sold, in a private transaction with Infinity
Investors, Ltd. ("Infinity") for $2,500,000 cash, 250,000 shares of Series A-3
Preferred Stock having an aggregate redemption value of $2,500,000 and
convertible into common stock as provided in the Certificate of Designations for
the Series A-3 Preferred Stock. During the years ended September 30, 1998 and
1999, the Company issued 197,586 and 2,302,414 shares of common stock,
respectively, in partial satisfaction of Infinity's conversion rights. Effective
November 30, 1999, the Company reacquired Infinity's remaining unconverted
Series A-3 Preferred Stock.
In August 1997, the Company sold in a private transaction with Black Sea
Investments, Ltd. ("Black Sea") for net proceeds of approximately $734,000 cash,
7,500 shares of Series F 6% Convertible Preferred Stock having an aggregate
redemption value of $750,000 and convertible into Common stock at a variable
rate equal to 75% of the average closing market price for the Company's common
stock for the previous five trading days prior to conversion. During the year
ended September 30, 1998, the Company issued a total of 1,008,355 shares of
common stock in satisfaction of Black Sea's conversion rights.
The shares of Preferred Stock described above were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), and were issued by
the Company in reliance on exemptions to the Securities Act. With respect to the
shares of Series A-3 Preferred Stock issued to Infinity, such shares were issued
pursuant to the exemption provided by Section 4(2) of the
Securities Act.
Infinity was in compliance with the necessary requirements of Section 4(2) to
receive such exemption. Of the shares of Series A-3 Preferred Stock that were issued, no
such shares were issued to any party other than Infinity.
With respect to the shares of Series F 6% Convertible Preferred Stock issued to
Black Sea, such shares were issued pursuant to the exemption provided by
Regulation S of the Securities Act. Black Sea is a non United States person as
that term is defined in the Securities Act. Of the shares of the Series F 6%
Convertible Preferred Stock that were issued, no such shares were issued to any
party other than Black Sea.
In December 1997, in connection with the refinancing of certain indebtedness to
Merrill Lynch World Income Fund, Inc. and Convertible Holdings, Inc.
(collectively "Merrill Lynch"), the Company issued warrants covering a total of
420,000 shares of the Company's Common Stock. The warrants issued to Merrill
Lynch covered 210,000 shares exercisable at $.01 per share (the "Penny
Warrants") and an additional 210,000 shares exercisable at $1.125 per share (the
"Market Warrants.") The Penny Warrants were exercised and 210,000 shares of
Common Stock were issued in May 1998;1998, and the Market Warrants were repurchased
by the Company in December 2000 for approximately $46,000. The shares of Common
Stock issued to Merrill Lynch were not registered under the Securities Act, and
were issued pursuant to the exemption provided by Section 4(2) of the Securities
Act.
Merrill Lynch was in compliance with the necessary requirements of Section
4(2) to receive such exemption.
10
ITEM 6. Selected Financial Data
-----------------------
The following table sets forth selected financial data for the Company for each
of the last five fiscal years. This information should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes included
elsewhere herein.
------------------------------------------------------------------------------------------
Fiscal Year Ended September 30
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
Income Statement Data: 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------
Income Statement Data: 2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ---------------- ----------------
Revenues $ 189,09843,295 $44,057 $45,812 $48,049 $ 158,308 $ 141,398 $ 148,378 $ 145,99252,202
Operating Income 10,552 8,494 7,633 6,651 6,588(Loss) (119) (261) 1,109 2,656 1,698
Net Income (Loss) Before
Discontinued Operations and Extraordinary Item 5,112 (415) 277 (18,349) (280)(2,621) 1,765 (1,192) 167 (18,213)
Net Income (Loss) $(1,082) $ 3,821 $ (1,598)$(1,598) $ (329) $ (18,825) $ (242)$(18,825)
Per Share Data - Basic and Diluted:
Net Income (Loss) Before
Discontinued Operations and Extraordinary Item $ .30(.15) $ (.03).12 $ .01(.08) $ (1.38) $(.03)- $ (1.37)
Discontinued Operations - (.07) -.09 .11 (.02) (.03) -
Extraordinary Item (.07) - (.04) - -
---------------- ---------------- ---------------- ---------------- ----------------
Net Income (Loss) $ (.06) $ .23 $ (.10) $ (.03) $ (1.41)
$(.03)
================ ================ ================ ================ ================
Weighted Average Shares
Outstanding - Basic 17,845,793 17,812,464 16,947,195 14,552,462 13,632,357 13,722,552
Weighed Average Shares
Outstanding - Diluted 18,110,421 16,947,195 16,452,433 13,632,357 13,722,552
================ ================ ================ ================ ================17,845,793 18,110,532 16,947,195 16,452,433 13,632,357
As of September 30
----------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance Sheet Data: 2001 2000 1999 1998 1997
1996
---------------- ---------------- ---------------- ---------------- ---------------------------------------------------------------------------------------------------------
Total Assets $ 104,63365,043 $ 83,52269,523 $ 80,84368,108 $ 71,32156,162 $ 93,330
Long-Term51,257
Long Term Debt 40,860 33,593 29,221 23,272 - - 1,238 5,913 8,290
Total Liabilities 92,713 76,647 73,042 61,920 68,14256,995 60,410 62,658 49,561 43,855
Accumulated Deficit (19,797) (18,716) (22,889) (21,200) (20,717)
(1,488)
Stockholders' Equity 8,048 9,113 5,450 6,601 7,402 23,998
11
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results -----------------------------------------------------------------------
of Operations.
- --------------
Statements contained in this Form 10-K 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-K could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are:are adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended
September 30, 2000
Net Revenues - For the year ended September 30, 2001, the Company's revenues
decreased $761,000 (1.7%) to $43,296,000 as compared to $44,057,000 for the
fiscal year ended September 30, 2000. During 2001, net revenues from the
equipment segment were $2.5 million lower than in 2000 due primarily to
continued softness in the East Texas timber market, while net revenues from the
timber segment increased $1.7 million in 2001 due primarily to increases in
demand for the Company's treated timber products and higher overall timber
shipments as compared to fiscal 2000. The Company continued to diversify its
equipment products during 2001 and opened a sales location in Houston, Texas
during the fourth quarter in order to expand its marketing and distribution of
New Holland construction equipment.
Gross Profit - For the year ended September 30, 2001, the Company's gross profit
increased $578,000 to $7,900,000 as compared to $7,322,000 for the fiscal year
ended September 30, 2000. Gross profit as a percentage of net revenues for the
fiscal year ended September 30, 2001 was 18.2% compared to 16.6% in the
comparable prior year period. The 2001 increase is primarily attributable to
efficiency and productivity increases in the Company's sawmill operations within
the timber segment. Gross profit as a percentage of net revenues for the fiscal
year ended September 30, 2001 for the equipment segment did not significantly
change from 2000 levels.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for the fiscal year ended September 30, 2001 increased
$434,000 (5.7%) to $8,018,000 as compared to $7,584,000 for the fiscal year
ended September 30, 2000. This increase is primarily attributable to increased
operating expenses related to the opening of the new construction equipment
sales facility, higher bad debt and warranty related expenses and higher legal
expenses offset by a decrease in selling, general and administrative expenses at
the Company's sawmill operations.
Other Expenses - For the fiscal year ended September 30, 2001, net other
expenses increased $337,000 from the comparable 2000 period due primarily to a
decrease in interest income and other due to lower interest income on notes
receivable and the 2000 balance including a $240,000 gain on the sale of land,
offset by a decrease in interest expense due primarily to lower interest rates
in 2001.
Income Taxes - For the fiscal year ended September 30, 2001, the Company
recorded a net income tax provision of $860,000 compared to a net income tax
benefit of $3,330,000 recorded for the fiscal year ended September 30, 2000.
During the fourth quarter of 2001, in connection with the planned spin-off of
its Overhill Farms, Inc. subsidiary, the Company recorded an additional $2.1
million valuation allowance against its net deferred tax assets. This 2001
provision was offset by a $1.3 million tax benefit taken as a result of the use
of its net operating loss carryforward to reduce taxable income generated by
Overhill Farms, Inc. For the fiscal year ended September 30, 2000, the $3.3
million income tax benefit was primarily attributable to a $2.1 million decrease
in the valuation allowance against the Company's net deferred tax assets and a
$1.2 million income tax benefit taken as a result of the use of its net
operating loss carryforward to reduce taxable income generated by Overhill
Farms. The results of operations for the Company's Overhill Farms, Inc.
subsidiary are presented within the consolidated financial statements as
discontinued operations. For the fiscal year ended September 30, 2001 and 2000,
the net results of Overhill Farms' operations are presented in the consolidated
statements of operations net of $1.3 million
12
and $1.2 million in income tax expense, respectively.
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended
September 30, 1999
Net Revenues - For the year ended September 30, 2000, the Company's revenues
increased
$30,790,000 (19.4%) to $189,098,000 as compared to $158,308,000 for the year
ended September 30, 1999. This increase was due to continued revenue gains by
the Company's Overhill Farms operations. Gross margins, on a consolidated basis,
increased to 18.5% in fiscal 2000 as compared to 18.0% for the preceding fiscal
year. Operating income increased 24.2% to $10,552,000 in fiscal 2000 from
$8,494,000 in fiscal 1999.
Other expenses in fiscal 2000 decreased $1,340,000 to $6,989,000 from $8,329,000
in fiscal 1999, due primarily to a reduction in the interest rate and a one time
charge in 1999 on the note payable to related party.
Net income before discontinued operations and extraordinary item increased to
$5,112,000 in fiscal 2000 from a loss of $415,000 in fiscal 1999. After the
effect in fiscal 2000 of an extraordinary expense of $1,290,000 related to the
early extinguishment of debt in connection with a major refinancing by Overhill
and a gain of $351,000 related to the reacquisition of preferred stock, and in
fiscal 1999 a loss from discontinued operations of $1,183,000, net income
attributable to common stockholders amounted to $4,173,000 ($.23 per share) in
the current year compared to a loss of $1,689,000 ($.10 per share) in fiscal
1999.
The Food Group revenues through Overhill increased $32,545,000 (28.9%) to
$145,041,000 for the year ended September 30, 2000 as compared to $112,496,000
for the prior year. Compared to the prior fiscal year, Overhill experienced a
69.8% growth rate in airline sales, 33.7% growth in foodservice sales and 19.2%
growth in retail sales. Gross margins rose to 19.2% for fiscal 2000 as compared
to 18.0% for the preceding fiscal year. Operating income increased 46.4% to
$10,813,000 in fiscal 2000 from $7,384,000 in fiscal 1999. Margin improvements
and gains in operating income were the result of improved purchasing practices,
including the outsourcing of certain production, a more effective pricing and
costing strategy together with manufacturing improvements and efficiencies.
For the year ended September 30, 2000, revenues for the Forestry Group through
Texas Timberjack and its subsidiaries decreased $1,755,000 (3.8%) to $44,057,000 as compared to $45,812,000 for the
fiscal year ended September 30, 1999. During 2000, increases in net revenues
from the Company's sawmill operations were offset by decreases in net revenues
from the equipment segment due to a continued softening of the east Texas timber
market.
Gross marginsProfit - For the year ended September 30, 2000, the Company's gross profit
decreased from 22.0%
in fiscal 1999$946,000 to 16.6% in fiscal 2000. Operating income in fiscal 2000 was
$221,000$7,322,000 as compared to $1,490,000$8,268,000 for the fiscal year
ended September 30, 1999. Gross profit as a percentage of net revenues for the
fiscal year ended September 30, 2000 was 16.6% compared to 18.0% in the
comparable prior year period. Decreases in gross
margins and operating income wereThe 2000 decrease is primarily attributable to
production inefficiencies within the result oftimber segment, specifically the performance of
TTI'sCompany's
sawmill operations. Management of TTI has made certain operational and personnel changes which
it believes will have a favorable impact on future non-
equipmenttimber segment operating
results.
12
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998
For the year ended September 30, 1999, the Company's revenues from continuing
operations increased $16,910,000 (12%) to $158,308,000 as compared to
$141,398,000 for the year ended September 30, 1998. The increase was due to
revenue gains in the Company's Overhill Farms subsidiary. Gross margins, on a
consolidated basis, remained constant at 18% with a decrease in margins at TTI
offset by improvements at Overhill Farms. During the period, operating income
increased 11% to $8,494,000 for fiscal 1999 from $7,633,000 the preceding year.
Other incomeSelling, General and expenses amounted to a net expense of $8,329,000 in 1999 as
compared to $7,299,000 in 1998. The prior year amounts were reported net of a
one time gain of $988,000 from the sale of the Company's office building in
December 1997.
The net loss for fiscal 1999 of $1,598,000, increased by $1,269,000 from a loss
of $329,000 reported in the prior year. The net loss for the year included
charges for $300,000 related to a tax assessment against TTI, $225,000 for
income allocable to subsidiary warrant holderAdministrative Expenses - Selling, general and
$1,183,000 related to the
discontinued operations of PIC. The 1998 amount was reported net of an
extraordinary charge of $616,000, related to the early extinguishment of
Overhill debt.
The Food Group's revenues increased $19,147,000 (21%) to $112,496,000 for the
period ending September 30, 1999 as compared to $93,349,000 the same period in
the prior year. Revenue gains were made in three of the four market segments the
Company serves with the largest gains coming from the foodservice segment.
Increases in this area were driven by the acquisition of two new national
accounts (Panda Express and Denny's) as well as increases from existing
accounts. Gross margins for fiscal 1999 for the Food Group rose to 18% as
compared to 15.8% for the previous year. Operating income for fiscal 1999
increased by $2,408,000 (48%) to $7,384,000 as compared to $4,976,000 for fiscal
1998. Improvements in gross margins and operating income are attributed to a
cost reduction program initiated in 1999 involving outsourcing some of the
Company's production, improved purchasing practices and the addition of new
profitable accounts. Income before income taxes for the Food Group increased to
$1,647,000 for fiscal 1999 as compared to a loss before income taxes of $180,000
in the prior fiscal year.
For the year ended September 30, 1999, revenues for the Forestry Group decreased
$2,237,000 (5%) to $45,812,000 as compared to $48,049,000administrative expenses for the fiscal year ended September 30, 1998. Gross margins decreased from almost 22% in fiscal 19982000 increased
$425,000 (5.9%) to 18% in fiscal 1999. Operating income for the Forestry Group in fiscal 1999
was $1,490,000$7,584,000 as compared to $4,077,000$7,159,000 for the prior year. Thefiscal year
ended September 30, 1999. This increase is primarily attributable to higher
operating expenses related to the Company's sawmill operations.
Other Expenses - For the fiscal year ended September 30, 2000, net other
expenses decreased $1,288,000 from the comparable 1999 period due primarily to a
decrease in gross marginsinterest expense as a result of lower borrowing levels and operatingfalling
variable interest rates, as well as a $240,000 gain on the sale of land in 2000.
Income Taxes - For the fiscal year ended September 30, 2000, the Company
recorded a net income tax benefit of $3,330,000 compared to a net income tax
benefit of $291,000 recorded for the current period are primarily the
result of a change in product mix sold by the group in fiscal year ended September 30, 1999.
During the period, salesfourth quarter of logging equipment, particularly used equipment, which
historically yields relatively higher percentage gross profits, decreased
markedly. Total equipment sales were down approximately 24%2000, the Company recorded a reduction in its
valuation allowance against net deferred tax assets, as comparedit believes such assets
are more likely than not to be recovered. Additionally, the 2000 income tax
benefit includes a $1.2 million benefit taken as a result of the use of the
Company's net operating loss carryforward to reduce taxable income generated by
Overhill Farms. For the fiscal 1998. These decreased sales were partially offsetyear ended September 30, 1999, the $291,000
income tax benefit was primarily attributable to the benefit taken as a result
of the use of the Company's net operating loss carryforward to reduce taxable
income generated by gainsOverhill Farms. The results of operations for the Company's
Overhill Farms subsidiary are presented within the consolidated financial
statements as discontinued operations. For the fiscal year ended September 30,
2000 and 1999, the net results of Overhill Farms' operations are presented in
salesthe consolidated statements of raw woodoperations net of $1.2 million and timber products, which brought lower gross margins than historical
equipment sales.$935,000 in
income tax expense, respectively.
Liquidity and Capital Resources
Principal sources of liquidity for the Company are cash flow from operations,
cash balances and additional financing capacity. The Company's cash and cash
equivalents increased $1,147,000decreased $277,000 to $1,522,000$686,000 at September 30, 2000,2001, compared to
$375,000$963,000 at September 30, 1999.
13
2000.
The Company's operating activities in 20002001 resulted in cash provided of
$3,775,000,$282,000, as compared to cash provided of $2,552,000$5,200,000 in 1999.2000. The decrease in
cash generatedprovided during the current year is generally relateddue to improved operating
profits,increases in accounts
receivable at Timberjack along with smaller increases in trade accounts payable
at both Overhillas compared to the prior fiscal year which were offset somewhat by decreases in
inventories in the Timberjack operations. Additionally, the Company's valuation
reserve on deferred tax assets was decreased in the prior fiscal year, and
Texas Timberjack,the reserve was re-established in partthe 2001 fiscal period due to a new vendor program, offset by increases in
accounts receivable and inventories, primarily related to the volume increases
at Overhill.expected
spin-off of Overhill Farms.
13
The Company's investing activities for the year ended September 30, 20002001
resulted in a use of cash of $5,701,000,$2,241,000, as compared to a use of cash of
$1,994,000$491,000 in 1999.2000. The use of cash in 2001 resulted primarily from Overhill's
acquisition of the Chicago Brothers operations, coupled with capital
expenditures primarilyby Timberjack, together with increases in its notes and related
to the growth of Overhill.party receivables.
The Company's financing activities for the current year resulted in cash
provided of $3,073,000,$1,681,000, as compared to a use of cash of $584,000$4,093,000 in 1999. This
year's2000. The
current year results were impacteddue primarily by the refinancing, on a long term basis,
of Overhill's indebtedness, as discussed below, together with debt incurred in
connection with the Chicago Brothers purchase by Overhill.
In November 1999, Overhill refinanced substantially all of its existing debt.
The total 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 Overhill receivables and
inventories. Borrowings under the line of credit bear interest at a rate, as
selected by Overhill at the time of borrowing, of prime plus .25% or LIBOR plus
2.75%. The Union Bank agreement provides, among other things, that Overhill will
be subject to an unused line ofincrease in borrowings under
Timberjack's credit fee of .25% per annum. The agreement
contains various covenants including restrictions on capital expenditures, and
specified net worth levels and debt service ratios. In addition, the terms of
the agreement generally prohibit loans, dividends or advances from Overhill to
the Company and limit 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 all of the Overhill common
stock owned by the Company.
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. The amount of such principal payment for the year
ended September 30, 2000 is approximately $2.0 million. 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.
14
In connection with the agreement, LLCP was granted stock 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 repurchased, 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 these transactions, Overhill repaid in full the $22.7 million
senior subordinated notes payable and the $9.6 million revolving line of credit.
Additionally, Overhill repurchased for $3.7 million the warrants held by the
previous subordinated lender to purchase 30% of Overhill's common stock. Also 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 was
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), which was
recognized during the year ended September 30, 2000.facilities.
In connection with the acquisition of TTI in June 1994, the Company initially
issued a note to the seller (Mr. Harold Estes) in the amount of $10.0 million,
with interest at 8% due October 31, 1994 and collateralized by all the capital
stock of TTI. As of various maturity dates thereafter, Mr. Estes has entered
into subsequent agreements with the Company to modify and extend the term of the
note. As of September 30, 2000,2001, the note had a total unpaid balance of
$19,390,120$20,861,000 (principal of $16,347,191$16,347,000 and accrued interest of $3,042,900)$4,514,000),
bearing interest at 9% per annum with a maturity date of October 10, 2002, and
allowing2002. The
arrangement allows for principal and interest payments to be made with amounts
upstreamed to Polyphasethe Company by Timberjack for the payment of taxes (subject to the
approval of Timberjack's Board of Directors and its lenders). In connection with
a previous modification in 1998, the Company agreed to assign Mr. Estes any
interest it may have or subsequently obtain with respect to 2,000,000 shares of
the Company's common stock owned by the Pyrenees Group ("Pyrenees"), a private
investment firm controlled by Paul A. Tanner, the Company's former Chairman and
Chief Executive Officer, and previously held by Mr. Estes as secondary
collateral. These shares, which were recovered in 1999 on behalf of Mr. Estes,
had a value of $875,000, which was charged to interest expense in 1999.
Quantum Fuel and Refining, Inc. ("Quantum"), when acquired by SFP, had a note
payable to Mr. Estes. As of September 30, 2001, the note had a total unpaid
balance of $1,476,264 (principal of $1,000,000 and accrued interest of
$476,264), bearing interest at 12% per annum with a maturity date of March 31,
2002, and collateralized by the assets of Quantum. In January 2002, Mr. Estes
extended the maturity date to October 31, 2002.
TTI has an $8.0 million revolving line of credit with Bank of America, N.A.
(formerly NationsBank of Texas, N.A.). Amounts advanced under the line of credit bear interest at prime less .25%plus .5%
(approximately 9.25%6.5% at September 30, 2000)2001), and are collateralized by substantially allcertain
assets of TTI's assets. The line of credit
agreement contains various covenants related to receivables, capital
expenditures, inventories, debt ratios, contingent liabilities and payment of
dividends. Furthermore, the terms of the revolving line of credit generally
prohibit dividends, loans or advances from TTI to the Company, but permit the
payment of taxes.TTI. The Company has guaranteed all obligations under the TTI
revolving line of credit. Availability under the line as of September 30, 20002001
amounted to approximately $5.5$4.1 million. TTI intends to renew the revolving
credit facility upon maturity in March 2001.2002.
TTI's majority-owned subsidiary, Southern Forest Products, LLC ("SFP"), has a
$589,000$500,000 revolving line of credit with Bank of America, N.A. The line of credit
expires in March 2001,2002, and amounts advanced under the line bear interest at
prime plus .5% (approximately 10%6.5% at September 30, 2000)2001), are collateralized by
substantially all of the assets of SFP and are guaranteed by a related party.
Availability under the line as of September 30, 2000 amounted to approximately
$89,000.
15
See Item 13. "Certain Relationships and Related Transactions."
TTI and SFP, jointly and severally, also have a $3.5$3.4 million loan with Bank of
America, N.A. The term note requires interestmonthly payments monthlyconsisting of principal of
$111,111 plus interest at prime plus .5% (approximately 6.5% at September 30,
2001), is collateralized by substantially all the assets of SFP, and is guaranteed
by a related party. Theparty and matures in March 2002. Management of TTI expects this
note matures March 2001,to be renewed upon maturity. See Item 13. "Certain Relationships and
Related Transactions."
TTI has two floor plan agreements to finance equipment. These floor plan
agreements have interest rates that range from no interest to prime minus 0.25%
(approximately 5.75% at which time TTI intendsSeptember 30, 2001) for a period of up to renew the facility onone year with
a favorable amortization basis.combined balance of $5.5 million at September 30, 2001.
The Company believes that the 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 intends to renew the current lines of credit upon
maturity, however, there can be no assurance that the credit facilities can be
renewed on favorable terms to TTI, or at all.
14
Recent Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board issued Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).
These rules supercede FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, providing a
single accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of
Statement 121, the new rules significantly change the criteria that would have
to be met to classify an asset as held-for-sale. Statement 144 also supercedes
the provisions of APB Opinion 30 with regard to reporting the effects of a
disposal of a segment of a business and require expected future operating losses
from discontinued operations to be displayed in discontinued operations in the
period(s) in which the losses are incurred (rather than as of the measurement
date as previously required by APB 30). The Statement is effective for year-ends
beginning after December 15, 2001 and interim periods within those fiscal years,
although earlier application is encouraged. The Company does not expect the
adoption of SFAS 144 to have a significant impact on the Company's future
results of operations or financial position.
In June 2001, the Financial Accounting Standards Board issued Statement No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), which requires that
goodwill will no longer be amortized, but instead will be tested at least
annually for impairment by reporting unit. The Company is required to adopt SFAS
142 effective as of October 1, 2002, though early adoption as of October 1, 2001
is permitted. The Company intends to early adopt SFAS 142 as of October 1, 2001.
The Company is currently in the process of evaluating the relevant provisions of
SFAS 142 and has experienced no significant disruptionsnot determined whether the adoption of SFAS 142 will have an
immediate effect on the financial statements. However, amortization of goodwill,
which amounted to approximately $283,000 in each of the three fiscal years ended
September 30, 2001, before any related tax effects, will be eliminated
prospectively upon the adoption of SFAS 142.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended, which was required to be adopted by the Year 2000
Issue subsequent to JanuaryCompany on October 1, 2000.
Costs incurredSFAS 133 requires that all derivatives be recorded on the balance sheet at fair
value. Changes in derivatives that are not hedges are adjusted to replace and/fair value
through income. Changes in derivatives that meet SFAS 133's hedge criteria will
either be offset through income, or modify
software and hardware related torecognized in other comprehensive income
until the Yearhedged item is recognized in earnings. The adoption of SFAS 133 on
October 1, 2000 issue were immaterial and charged
to expense as incurred.did not have any impact on the Company's financial condition,
results of operations or cash flows.
ITEM 7A. 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 (see Item 7). If these market rates
increase by an average of 1% in fiscal 2001,2002, the Company's interest expense
would increase by approximately $250,000$85,000 based on the outstanding line of credit
balances at September 30, 2000.2001.
The Company's Texas Timberjack subsidiary periodically makes advances under
promissory notes to certain unrelated individuals and corporations. These notes
generally have fixed interest rates ranging from 10% to 18%, are generally due
within one year and a majority are secured by a variety of marketable
collateral, primarily timber and land. The value of these notes is subject to
market risk due to changing interest rates and the condition of related
collateral.
The Company does not own, nor does it have an interest in any other market risk
sensitive instruments. See Item 1 "Description of Business."
15
ITEM 8. Financial Statements.
---------------------
See Index to Consolidated Financial Statements included in Item 14.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
- ---------------------
None
16
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The following table sets forth certain information required in response to this Item is incorporated herein by
referenceregarding the directors and
executive officers of the Company.
Name Age Position
James Rudis 52 Chairman of the Board,
Chief Executive Officer and President
William E. Shatley 55 Senior Vice President, Chief Financial
Officer, Secretary, Treasurer and
Director
Michael F. Buck 64 Director
Donald J. Ervin 58 Director
George R. Schrader 69 Director
James Rudis was elected to the Company's proxy statementBoard of Directors (the "Board") in December 1992
and has served as Chairman and Chief Executive Officer since February 1998 and
President since July 1997. He also served as Executive Vice President of the
Company from March 1994 until July 1997. Prior to his employment with the
Company, Mr. Rudis was President of Quorum Corporation, a private consulting
firm involved in acquisitions and market development. From 1970 until 1984, he
held various executive positions in CIT Financial Corporation, including Vice
President and Regional Manager of that company's Commercial Finance Division.
William E. Shatley was named as Senior Vice President of the Company in March
1994 and was elected to the Board in February 1998. He joined the Company in an
executive capacity in October 1993, having previously served the Company on an
advisory basis since the relocation of its corporate offices to Texas in 1992.
Mr. Shatley, a Certified Public Accountant since 1970, previously conducted his
own consulting and accounting practice from 1982 to 1993, after having served as
Vice President and Chief Financial Officer of Datotek, Inc. from 1977 to 1982
and in an executive capacity with Arthur Andersen from 1968 to 1977.
Michael F. Buck, for the last five years, has been President of Mimatian
Co., an operations and materials consulting firm. From August 1990 to August
1994, Mr. Buck served as Vice President of Bath Iron Works, Inc., a company
engaged in building Aegis Class cruisers and destroyers for the United States
Navy. From August 1989 to August 1990, Mr. Buck was a Vice President of
Sabreliner Corporation, a company engaged in building, maintaining and
overhauling executive jet aircraft. From March 1986 to August 1989, Mr. Buck was
Vice President and Director of Procurement for International Telephone and
Telegraph. He became a director of the Company in December 1989.
Donald J. Ervin was named to the Board in June 2001. He is currently
employed with Ervin Consulting, a firm whose areas of focus encompass the entire
food manufacturing supply chain, including production, planning, logistics,
materials management, engineering and facilities planning. Mr. Ervin has 34
years
17
experience in food operations with General Foods and ConAgra, most recently as
Vice President of Operations for ConAgra Frozen Foods.
George R. Schrader was appointed as a director in March 1994. For the last five
years, he has been a named member of Schrader & Cline, LLC, a financial and
governmental management consulting firm. From 1983 to 1993, he was a principal
of Schrader Investment Company, whose activities paralleled those of Schrader &
Cline, LLC. Mr. Schrader's additional experience includes ten years as City
Manager for the city of Dallas, Texas and a total of nine years experience as
City Manager for the Texas cities of Mesquite and Ennis.
Significant Employee
Mr. Harold Estes, although not an executive officer, is considered to be fileda
key employee of the Company. Mr. Estes, age 60, is the President of Texas
Timberjack, Inc., a wholly owned subsidiary of the Company. He was elected as a
director in February 1996 and resigned from the Board in April 1997. TTI is a
distributor of industrial and commercial timber and logging equipment and is
also engaged in certain related timber and sawmill operations. Mr. Estes has
been President of TTI since 1984, when he acquired that company from Eaton
Corporation.
Meetings of the Board of Directors and its Committees
The Board has standing Compensation and Audit Committees. The Compensation
Committee is comprised of Messrs. Buck and Schrader. The Compensation Committee
met one time (in conjunction with a meeting of the Board) during fiscal 2001 and
met one time during fiscal 2000. The Compensation Committee (i) administers the
Company's employee stock option plans and approves the granting of stock options
and (ii) approves compensation for officers.
The Audit Committee is comprised of Messrs. Buck, Ervin and Schrader. The Audit
Committee met one time during fiscal 2001 and one time during fiscal 2000. The
Audit Committee operates pursuant to a Charter approved by the Company's Board
of Directors. Its functions are to (i) monitor the Company's financial reporting
process and internal control system; (ii) review and appraise the audit efforts
of the Company's independent accountants; and (iii) provide an avenue of
communication among the Company's independent accountants, financial and senior
management and the Board of Directors.
The full Board of Directors met four times during fiscal 2001 and one time
during fiscal 2000. Each director attended all meetings of the Board of
Directors and each Committee on which such director served.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the Securities Exchange Act of 1934 ("Exchange Act") requires
the Company's directors, officers and persons who own more than 10 percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission") and the American Stock Exchange. Directors, officers and
greater than 10 percent beneficial owners of the Company's equity securities are
required by applicable regulations to furnish the Company with copies of all
forms they file with the Commission pursuant to Regulation 14A, not later than 120 days after
the endSection 16(a).
Based upon (i) a review of the copies of forms furnished to the Company pursuant
to the requirements of Section 16(a) and (ii) information received by the
Company in connection with various purchases and sales of the Company's equity
securities, the Company believes that, during fiscal year covered by this report.2001, all filing
requirements applicable to its directors, executive officers and greater than 10
percent beneficial owners were satisfied.
18
ITEM 11. Executive Compensation.
-----------------------
The information requiredfollowing table sets forth for fiscal 2001, 2000 and 1999 compensation
awarded or paid to Mr. James Rudis, the Company's Chairman, Chief Executive
Officer and President and Mr. William E. Shatley, the Company's Senior Vice
President, Secretary, Treasurer and Chief Financial Officer (collectively, the
"Named Executive Officers"). Other than as indicated in responsethe table below, no
executive officer of the Company received salary plus bonus in excess of
$100,000 for the year ended September 30, 2001.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------------------------------
Name and Principal Fiscal Other Annual All/Other
Position Year Salary Bonus Compensation Options/SARs Compensation
- -------------------------------------------------------------------------------------------------------------------------------
James Rudis 2001 $230,000 $40,000 $ - (1) 130,000 (2) $ -
Chairman, Chief 2000 $225,769 $25,000 $ - (1) - $ -
Executive Officer, 1999 $180,000 $ 0 $ - (1) - $ -
President and
Director
William E. Shatley 2001 $168,000 $15,000 $ - (1) 100,000 (3) $ -
Senior Vice President 2000 $165,000 $15,000 $ - (1) - $ -
Secretary, Treasurer, 1999 $132,000 $ 0 $ - (1) - $ -
Chief Financial Officer
and Director
---------------
(1) The Named Executive Officers each received certain perquisites and other
personal benefits from the Company during fiscal 2001, 2000 and 1999.
These perquisites and other personal benefits, however, did not equal or
exceed 10% of the Named Executive Officers' salary and bonus during
fiscal 2001, 2000 or 1999.
(2) Consists of 130,000 shares subject to this Item is incorporated hereinrepricing from $2.00 per share to
$0.75 per share. See "Ten-Year Option Repricings." These options were
exercised in September 2001.
(3) Consists of 100,000 shares subject to repricing from $2.00 per share to
$0.75 per share. See "Ten-Year Option Repricings." These options were
exercised in September 2001.
19
Option Grants in Last Fiscal Year
- -----------------------------------------------------------------------------------------------------------------------
Number of
Securities Percentage of Total
Underlying Options Options Granted to
Repriced or Employees in Fiscal Exercise Expiration
Name Amended Year Price ($/Sh) Date
- -----------------------------------------------------------------------------------------------------------------------
James Rudis 130,000 (1) 56.5% (3) $0.75 7/23/06
Chairman, Chief
Executive Officer,
President and
Director
William E. Shatley 100,000 (2) 43.5% (3) $0.75 7/23/06
Senior Vice
President,
Secretary,
Treasurer, Chief
Financial Officer
and Director
- ----------------------
(1) Consists of 130,000 shares subject to repricing from $2.00 per share to
$0.75 per share. See "Ten-Year Option Repricings." These options were
exercised in September 2001.
(2) Consists of 100,000 shares subject to repricing from $2.00 per share to
$0.75 per share. See "Ten-Year Option Repricings." These options were
exercised in September 2001.
(3) Consists solely of options previously granted subject to repricing. No
other options were issued by referencethe Company in the last fiscal year.
20
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
- -----------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised
Shares Options at FY-End
Acquired on Value Exercise Exercisable
Name Exercise ($) Realized ($) Price ($/Sh) Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
James Rudis 276,500 - (1) $0.75 -
Chairman, Chief
Executive Officer,
President and
Director
William E. Shatley 246,500 - (1) $0.75 -
Senior Vice
President,
Secretary,
Treasurer, Chief
Financial Officer
and Director
- --------------------
(1) The fair market value of the securities underlying the options was less
than the exercise price of the options at exercise. See "Ten-Year Option
Repricings."
21
Ten-Year Option Repricings
Market Length of
Price of Exercise Original
Securities Stock at Price at Option Term
Underlying Time of Time of Remaining at
Options Repricing or Repricing or Date of
Repriced or Amendment Amendment New Exercise Repricing or
Name Date Amended ($) ($) Price ($) Amendment
- -------------------------------------------------------------------------------------------------------------------------------
James Rudis 8/14/01 130,000 $0.74 $2.00 $0.75 4.9 years
Chairman, Chief
Executive Officer,
President and
Director
William E. Shatley 8/14/01 100,000 $0.74 $2.00 $0.75 4.9 years
Senior Vice
President, Secretary,
Treasurer,
Chief Financial
Officer and Director
Board of Directors Report on Repricing of Options
In August 2001, the Board of Directors reviewed options granted to certain
directors and executive officers of the Company pursuant to the Company's proxy statement1994
Employee Stock Option Plan and determined that the exercise price of these
options exceeded the fair market value of the Company's Common Stock. The
options granted to such executives had an exercise price of $2.00 per share. The
Board was concerned that the Company's total compensation package for its
directors and executive officers was less attractive than compensation offered
by its competitors and other comparable companies because the exercise price of
options granted to new executives of such companies would afford greater
opportunity for appreciation than the Company's options.
The Board concluded that (i) the Company's future success is dependent in
large part on its ability to retain its directors and executive officers; (ii)
competition for such personnel is intense; (iii) the loss of its directors and
executive officers would have an adverse impact on the Company's business; and
(iv) it is important and cost-effective to provide equity incentives to
directors and executive officers of the Company to improve the Company's
performance and the value of the Company for its shareholders. On balance,
considering all of these factors, the Board determined it to be filedin the best
interests of the Company and its shareholders to restore the incentive for its
directors and executive officers to remain with the SecuritiesCompany and to exert their
maximum efforts on behalf of the Company by repricing outstanding options with
exercise prices reflecting recent trading prices.
As a consequence, on August 14, 2001 the Board of Directors approved the
repricing of the options granted to James Rudis, Michael F. Buck, George R.
Schrader and William E. Shatley on July 23, 1996. Donald J. Ervin abstained from
the voting for the repricing. All such options granted to Mr. Rudis, Mr. Buck,
Mr. Schrader and Mr. Shatley under the 1994 Employee Stock Option Plan having an
exercise price of $2.00 were repriced to an exercise price of $0.75 per share.
The closing price of the Company's shares on the American Stock Exchange Commissionon
August 13, 2001 was $0.74 per share.
22
The foregoing report has been furnished by the Board of Directors of the
Company consisting of Messrs. James Rudis, William E. Shatley, Michael F. Buck,
Donald J. Ervin and George R. Schrader.
Compensation Committee Report on Executive Compensation
The Board of Directors has established a Compensation Committee to review and
approve the compensation levels of executive officers of the Company, evaluate
the performance of the executive officers and consider senior management
succession issues and any related matters for the Company. The Compensation
Committee is charged with reviewing with the Board of Directors in detail all
aspects of cash compensation for the executive officers of the Company. Stock
option compensation for the executive officers is also considered by the
Compensation Committee.
The philosophy of the Company's compensation program is to employ, retain and
reward executives capable of leading the Company in achieving its business
objectives. These objectives include preserving a strong financial posture,
increasing the assets of the Company, positioning the Company's assets and
business operations in geographic markets and industry segments offering long
term growth opportunities, enhancing shareholder value and ensuring the survival
of the Company. The accomplishment of these objectives is measured against
conditions prevalent in the industries within which the Company operates. In
recent years these conditions reflect a highly competitive market environment
and rapidly changing regional, geographic and overall industry market
conditions.
The available forms of executive compensation include base salary, cash bonus
awards and incentive stock options. Performance of the Company is a key
consideration (to the extent that such performance can fairly by attributed or
related to such executive's performance), as well as the nature of each
executive's responsibilities and capabilities. The Company's compensation policy
recognizes, however, that stock price performance is only one measure of
performance and, given industry business conditions and the long term strategic
direction and goals of the Company, it may not necessarily be the best current
measure of executive performance. Therefore, the Company's compensation policy
also gives consideration to the Company's achievement of specified business
objectives when determining executive officer compensation. Compensation paid to
executive officers is based upon a Company-wide salary structure consistent for
each position relative to its authority and responsibility compared to industry
peers.
Based on comparative industry data, and after due consideration to the factors
mentioned above, the Compensation Committee set Mr. Rudis' salary at $230,000,
and his cash bonus at $40,000, for fiscal 2001. The Compensation Committee
believes that the compensation of the Company's other executive officer was
reasonably related to the performance of the Company and of that individual
during fiscal 2001.
COMPENSATION COMMITTEE
Michael F. Buck
George R. Schrader
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was an officer or employee of the
Company or any of its subsidiaries or had any relationship requiring disclosure
pursuant to Item 404 of Commission Regulation 14A, not later than 120 days after
the endS-K. No executive officer of the
fiscalCompany served as a member of a compensation committee of another
corporation (or other board committee of such company performing similar
functions or, in the absence
23
of any such committee, the entire board of directors of such corporation),
one of whose executive officers served on the Compensation Committee. No
executive officer of the Company served as a director of another corporation,
one of whose executive officers served on the Compensation Committee. No
executive officer of the Company served as a member of a compensation committee
of another corporation (or other board committee of such corporation performing
similar functions or, in the absence of any such committee, the entire board of
directors), one of whose executive officers served as a director of the Company.
Director Compensation
Directors who are also employees of the Company receive no additional
compensation for services as directors. Nonemployee directors receive an annual
fee of $8,500, with additional fees of $2,500 and $1,500 for service on the
Audit Committee and Compensation Committee, respectively, plus additional fees
of $500 to $750 per Board and Committee meeting attended. Directors are also
reimbursed for all expenses incident to their service on the Board of Directors.
During March 1998, Mr. Michael F. Buck and Mr. George R. Schrader were granted
options to purchase 30,000 and 50,000 shares, respectively, of Common Stock,
exercisable at $0.75 per share (the fair market value at the date of grant) in
whole or in part, expiring in March 2008. During the year coveredended September 30,
2001, the exercise price of options covering 60,000 shares (30,000 shares for
Mr. Buck and 30,000 shares for Mr. Schrader) which had been granted in 1996, was
reduced to $.75 per share from $2.00 per share.
Common Stock Performance Table
The following performance table compares the five-year cumulative return of the
Common Stock with that of a Broad Market Index (American Stock Exchange) and a
Published Industry Index (MG Industry Group 342 - Food and Beverage - Processed
and Packaged Goods). Each index assumes $100 invested at September 30, 1996, and
is calculated assuming quarterly reinvestment of dividends and quarterly
weighting by this report.market capitalization. Following the proposed spin-off of Overhill
Farms, the Company will utilize a new Published Industry Index (MG Industry
Group 752 - Industrial Equipment Wholesale) to reflect the Timberjack business.
Comparative Five-Year Total Returns
Overhill Corporation, Broad Market and Peer Group
(Performance Results Through 9/30/01)
Company 1996 1997 1998 1999 2000 2001
- -------------------------------------------------------------------------------------------------
Overhill Corporation 100.00 25.36 6.36 10.00 12.73 10.18
Industry Index 100.00 137.59 130.52 128.01 153.36 179.36
AMEX Market Index 100.00 121.60 106.22 123.70 147.94 110.93
24
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following table sets forth information required in response to this Item is incorporated hereinregarding the beneficial ownership of
Common Stock as of the Record Date by referenceeach person or group who owned, to the
Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not laterknowledge, more than 120 days after
the endfive percent of the fiscal year coveredCommon Stock, each of the
Company's directors, the Company's Chief Executive Officer, and all of the
Company's directors and executive officers as a group.
Amount and Nature of
Name Beneficial Ownership (1) Percent of Class (1)
- -------------------------------------------------------------------------------
James Rudis 557,900 3.0%
William E. Shatley 404,700 (2) 2.2
Michael F. Buck 60,100 *
Donald J. Ervin 10,000 *
George R. Schrader 80,000 *
Harold Estes 4,015,500 (3) 21.6
John E. McConnaughy, Jr. 1,220,600 (4) 6.6
All directors and executive
officers as a group (5 persons) 1,112,700 6.0
- ----------------
* Less than 1%.
(1) Except as noted, to the knowledge of the Company, the listed persons and
entities have sole investment power and sole voting power as to all
shares of Common Stock for which they are identified as being the
beneficial owners. Information as to beneficial ownership has been
furnished to the Company by this report.such persons. Such presentation is based on
18,615,464 shares of Common Stock outstanding as of September 30, 2001.
(2) Includes 158,200 shares that Mr. Shatley may be deemed to beneficially
own as a general partner in a family limited partnership.
(3) Mr. Estes' address is Highway 59 South, Route 15, Box 9475,
Lufkin, Texas 75901.
(4) Mr. McConnaughy's address is 1011 High Ridge Road, Stamford,
Connecticut 06905.
ITEM 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The information required in responsePyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance of
options to this Item is incorporated herein by
referencepurchase five series of convertible preferred stock to the Pyrenees
Group, a private investment firm controlled by Paul A. Tanner, the Company's
proxy statementformer Chairman and Chief Executive Officer, or its assignees.
In November 1995, Pyrenees exercised certain of these options through the
issuance of a 7% recourse note in the amount of $2,000,000, collateralized by
the shares issued, which was treated as an in-substance stock option at the date
of grant. During fiscal 1996, these shares were converted to 500,000 shares of
common stock. After deducting principal payments on the note, the remaining
balance of
25
$975,000 became uncollectible, and during fiscal 1999, the 500,000
shares of common stock that secured this note were recovered pursuant to certain
litigation against Pyrenees and Mr. Tanner. This recovery was accounted for as
an unexercised stock option in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." As such, $756,000,
representing the difference between the note balance and the fair market value
of the 500,000 shares as of the recovery date, was recorded as a reduction in
paid-in capital during fiscal 1999.
Notes Payable and Accrued Interest to Related Party
In connection with the acquisition of TTI in June 1994, the Company initially
issued a note to the seller (Mr. Harold Estes) in the amount of $10.0 million,
with interest at 8% due October 31, 1994 and collateralized by all the capital
stock and certain assets of TTI. As of various maturity dates thereafter, Mr.
Estes has entered into subsequent agreements with the Company to modify and
extend the term of the note. As of September 30, 2001, the note had a total
unpaid balance of $20,861,367 (principal of $16,347,191 and accrued interest of
$4,514,176), bearing interest at 9% per annum with a maturity date of October
10, 2002. In connection with a previous modification in 1998, the Company agreed
to assign Mr. Estes any interest it may have or subsequently obtain with respect
to 2,000,000 shares of the Company's common stock owned by the Pyrenees Group
("Pyrenees"), a private investment firm controlled by Paul A. Tanner, the
Company's former Chairman and Chief Executive Officer, and previously held by
Mr. Estes as secondary collateral. These shares, which were recovered in 1999 on
behalf of Mr. Estes, had a value of $875,000, which was charged to interest
expense in 1999.
Quantum Fuel and Refining, Inc. ("Quantum"), when acquired by SFP, had a note
payable to Mr. Estes. As of September 30, 2001, the note had a total unpaid
balance of $1,476,264 (principal of $1,000,000 and accrued interest of
$476,264), bearing interest at 12% per annum with a maturity date of March 31,
2002, and collateralized by the assets of Quantum. SFP intends to renew the note
at maturity.
Advances to Related Parties
During April 1998, the Company filed suit against Mr. Paul Tanner, PLY Stadium
Partners, Inc. ("Stadium Partners"), and Pyrenees, related to the nonpayment of
indebtedness for significant advances made by the Company to or on behalf of
such parties in previous years. In May 1999, the Company was awarded a judgment
against such defendants, jointly and severally, in the amount of approximately
$19.5 million, plus interest. In connection therewith, the defendants were
ordered to turn over all ownership of the stock of the Company, as well as the
stock and assets of Stadium Partners and Pyrenees. This included the rights to
2,000,000 shares of the Company's common stock owned by Pyrenees and held by Mr.
Harold Estes as secondary collateral. In connection with the recovery of the
2,000,000 shares, the Company recorded interest expense of $875,000, the fair
value assigned to the shares, resulting from its assignment to Mr. Estes.
Additionally, the Company recorded income of $656,000 related to the recovery of
1,500,000 shares and accounted for the remaining 500,000 shares as an
unexercised stock option in accordance with APB No. 25.
After evaluating the possibility of any potential post-judgment collections and
the additional legal expenses to be filedincurred in pursuing such collections, and
further considering the likelihood of one or all of the defendants seeking
protection under bankruptcy laws, the Company reached an agreement to settle the
judgment. The settlement agreement provided, among other things, for the
defendants to execute and deliver assignments of certain assets to the Company
and to execute and deliver to the Company two promissory notes totaling
$450,000, which are collateralized by first or second liens on real properties
controlled by the judgment debtors. While the total dollar value of the
settlement amounts to slightly over $1.0 million, the amount that may be
ultimately recoverable as a result of this settlement is not presently
determinable and will be recorded as income only when collection is assured.
In September 2000, SFP acquired all of the outstanding common stock of Quantum
Fuel & Refining, Inc.
26
from a related party. In connection with the Securitiesacquisition, SFP assumed a
$1.0 million note and Exchange Commission pursuant$356,000 of accrued interest payable to Regulation 14A, not later than 120 days afterHarold Estes,
president and former owner of TTI. As of September 30, 2001 and 2000, amounts
outstanding under the endnote including accrued but unpaid interest thereon were
approximately $1.5 million and $1.4 million, respectively. The principal balance
of the note, plus any accrued but unpaid interest thereon, matures on March 31,
2002.
The former owner of Quantum is TTI's 25% minority partner in SFP. TTI's 25%
minority partner in SFP is a guarantor of TTI's and SFP's note payable to, and
SFP's revolving line of credit facility with, Bank of America, N.A. (see Note
6). The father of TTI's 25% minority partner in SFP is a former officer of SFP.
As of September 30, 2001 and 2000, the Company has total receivables of $685,000
and $684,000, respectively, from this former officer of SFP or from companies
owned or controlled by such officer, of which approximately $188,000 and
$188,000, respectively, are unsecured.
During 1999, TTI obtained a 49.99% limited partnership interest in a
construction related company, which is accounted for under the equity method and
is included in other assets. TTI does not participate in the management of this
partnership nor does it exercise control over the partnership activities. As of
September 30, 2001 and 2000, the Company had sales contracts receivable of
approximately $1.4 million and $306,000, respectively, and accounts receivable
of approximately $34,000 and $0, respectively, due from the partnership and
secured by equipment. These receivable balances are included in related party
receivables on the accompanying consolidated balance sheets. During the fiscal
years ended September 30, 2001, 2000 and 1999, TTI recorded sales of
approximately $517,000, $722,000 and $622,000 million to the partnership,
respectively. Additionally, during the fiscal years ended September 30, 2001,
2000 and 1999, TTI recorded income from the sale of equipment to and interest
income on receivables from the partnership of $94,000, $150,000 and $41,000,
respectively.
In connection with the purchase of TTI, among the assets that the Company
acquired was a note receivable from an officer of TTI. The note has been renewed
and extended each year coveredsince issuance and is collateralized by this report.
17marketable
securities. As of September 30, 2001 and 2000, the balance outstanding was
$363,234 and $352,580, respectively, and the note has been classified as a
noncurrent related party receivable.
As of September 30, 2001 and 2000, approximately $497,000 and $496,000,
respectively, of related party receivables are represented by notes, which are
no longer accruing interest. As of September 30, 2001 and 2000, the Company has
provided allowances for doubtful accounts of $345,000 and $200,000,
respectively, against all related party receivables as of those dates. The
Company expects the remaining amounts due under related party receivables to be
realized either through collection or receipt of related collateral.
During the year ended September 30, 2001, the exercise price of options granted
in 1996 under the Company's 1994 Employee Stock Option Plan (the "Plan") to
purchase an aggregate 290,000 shares of the Company's common stock was reduced
to $0.75 per share from $2.00 per share. Of these options,
. options to purchase 130,000 shares were held by James Rudis,
. options to purchase 30,000 shares were held by Michael F. Buck,
. options to purchase 30,000 shares were held by George R. Schrader, and
. options to purchase 100,000 shares were held by William E. Shatley,
all of whom are directors of the Company. No compensation expense was recorded
in connection with these repricings, as the options were repriced above fair
market value. All of these repriced options were exercised in September 2001.
In addition to the repriced options, Mr. Buck and Mr. Schrader also
exercised options to purchase 30,000 and 50,000 shares of the Company's common
stock, respectively, granted under the Plan in 1998; and
27
Mr. Rudis and Mr. Shatley each also exercised options to purchase 146,500 shares
which were granted under individual option agreements in 1993. These option
exercises by each of Mr. Rudis, Mr. Buck, Mr. Schrader and Mr. Shatley in
September 2001 were exercised with the issuances of 2-year promissory notes to
the Company in an aggregate amount of $497,250, bearing interest at 3.82% and
collateralized by the shares issued. The outstanding principal amounts of the
notes are:
. $207,375 for Mr. Rudis,
. $45,000 for Mr. Buck,
. $60,000 for Mr. Schrader, and
. $184,875 for Mr. Shatley.
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September 30,
2001 and 2000, the insurance premium receivable was approximately $600,000.
28
PART IV
ITEM 14. Exhibits, Financial Statement ScheduleSchedules and Reports on Form 8-K.
---------------------------------------------------------------
(a) 1. and 2. Financial Statements and Financial Statement Schedule.
1. The following consolidated financial statements of Polyphase Corporation
and subsidiaries, included in the annual report of the registrant to its
shareholders for the year ended September 30, 2000,
(a) 1. and 2. Financial Statements and Financial Statement Schedules.
1. The following consolidated financial statements of Overhill Corporation
and subsidiaries, included in the annual report of the registrant to
its shareholders for the year ended September 30, 2001, are included in
Item 8:
Report of Independent Auditors F-2
Consolidated Balance Sheets--September 30, 20002001 and 19992000 F-3
Consolidated Statements of Operations--Years ended September 30, 2001, 2000
1999
and 19981999 F-5
Consolidated Statements of Stockholders' Equity--Years ended September 30, 2001,
2000 1999 and 19981999 F-7
Consolidated Statements of Cash Flows--Years ended September 30, 2001, 2000
and 1999 F-8
Notes to Consolidated Financial Statements F-11
2. The following consolidated financial statement schedules of Overhill
Corporation and 1998 F-8
Notes to Consolidatedsubsidiaries are included in item 14(a):
Schedule I -- Condensed Financial Statements F-11Information of Registrant F-39
Schedule II -- Valuation and Qualifying Accounts F-43
2. The following consolidated financial statement schedule of Polyphase
Corporation and subsidiaries is included in item 14(a):
Schedule I -- Condensed Financial Information of Registrant F-41
All other schedules for which provision is made in the applicable rules and
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
3. Exhibits
3.1 Articles of Incorporation of Polyphase Corporation, as amended
(incorporated by reference from Exhibits 4.1 and Exhibits 4.3 through
4.8 to the Company's registration statement on Form S-8 [No. 33-82008],
filed with the Commission on July 27, 1994 [the "1994 Form S-8"])
3.2 Bylaws of Polyphase Corporation, as amended April 26, 1999
(incorporated by reference from Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1999 [the "1999
Form 10-K"])
3.3 Certificate of Amendment of Articles of Incorporation of Polyphase
Corporation, as adopted by stockholders on March 1, 2001 (incorporated
by reference from Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 2001)
29
4.1 Certificate of Designation relating to the Series A-3 Preferred
Stock (incorporated by reference from Exhibit 4.2 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1995
[the "1995 Form 10-K"])
18
+10.1 Stock Option Agreement for James Rudis (incorporated by reference
from Exhibit 10.5 to the Company's Form 8-B, filed with the
Commission on August 27, 1994 [the "Form 8-B"])
+10.2 Stock Option Agreement for William E. Shatley (incorporated by
reference from Exhibit 10.6 to the Form 8-B)
+10.3 Employment Agreement, dated as of November 1, 1993, between Harold
Estes and Texas Timberjack, Inc. (incorporated by reference from
Exhibit 2 to the Company's Form 8-K dated June 24, 1994 [the
"1994 Form 8-K"])
10.4 Pledge Agreement, dated as of June 24, 1994, between Polyphase
Corporation and Harold Estes (incorporated by reference from
Exhibit 10.10 to the Form 8-B)
10.5 Security Agreement, dated as of June 24, 1994, between Texas
Timberjack, Inc. and Harold Estes (incorporated by reference from
Exhibit 10.11 to the Form 8-B)
10.6 Stock Option Agreement, dated as of October 21, 1992, between
Polyphase Corporation and the Pyrenees Group (incorporated by
reference from Exhibit 10.12 to the Form 8-B)
10.7 Promissory Note in the amount of $2,000,000, from Pyrenees Group,
as maker, to Polyphase Corporation, dated November 1, 1995,
related to the exercise of options on Series D Preferred Stock
(incorporated by reference from Exhibit 10.29 to the 1995
Form 10-K)
10.8 Security Agreement, dated as of November 1, 1995, between Pyrenees
Group and Polyphase Corporation (incorporated by reference from
Exhibit 10.30 to the 1995 Form 10-K)
10.9 Convertible Preferred Stock Purchase Agreement, dated as of
November 10, 1995, by and between Polyphase Corporation and
Infinity Investors, Limited (incorporated by reference from
Exhibit 10.32 to the 1995 Form 10-K)
+10.10 Stock Option Agreement for James Rudis dated July 23, 1996
(incorporated by reference from Exhibit 10.51 to the Company's
Annual Report on formForm 10-K for the year ended September 30, 1996
[the "1996 Form 10-K"])
+10.11 Stock Option Agreement for William E. Shatley dated July 23, 1996
(incorporated by reference from Exhibit 10.52 to the 1996
Form 10-K)
+10.12 Stock Option Agreement for Michael F. Buck dated July 23, 1996
(incorporated by reference from Exhibit 10.53 to the 1996
Form 10-K)
+10.13 Stock Option Agreement for George R. Schrader dated July 23, 1996
(incorporated by reference from Exhibit 10.54 to the 1996
Form 10-K)
30
10.14 Term Loan Agreement in the amount of $22,500,000, dated
December 4, 1997, among Overhill Farms, Inc. as borrower, Polyphase
Corporation as guarantor and The Long Horizons,Horizon Fund, L.P. as lender
(incorporated by reference from Exhibit 10.64 to the Company's
Annual Report on formForm 10-K for the year ended September 30, 1997
[the "1997 Form 10-K"])
19
10.15 Common Stock Purchase Warrant, dated December 4, 1997, between
Overhill Farms, Inc. and The Long Horizons Fund, L.P. (incorporated
by reference from Exhibit 10.69 to the 1997 Form 10-K)
10.16 Voting Rights Agreement, dated December 4, 1997, among Polyphase
Corporation, The Long Horizons Fund, L.P. and Overhill Farms, Inc.
(incorporated by reference from Exhibit 10.70 to the 1997
Form 10-K)
10.17 Warrant to Purchase 500,000 Shares of Common Shares of Polyphase
Corporation by Black Sea Investments, Ltd., dated August 29, 1997
(incorporated by reference from Exhibit 10.76 to the 1997
Form 10-K)
10.18 Offshore Securities Subscription Agreement to purchase 7,500 Shares
of Series F 6% Convertible Preferred between Polyphase Corporation
and Black Sea Investments, Ltd., dated August 29,1997 (incorporated
by reference from Exhibit 10.77 to the 1997 Form 10-K)
10.19 Common Stock Purchase Warrant, dated April 24, 1998, covering
105,000 shares issued to Merrill Lynch World Income Fund, Inc.(incorporated
(incorporated by reference from Exhibit 10.81 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1998
[the "1998 Form 10-K])
10.20 Common Stock Purchase Warrant, dated April 24, 1998, covering
105,000 shares issued to Merrill Lynch Convertible Fund, Inc.
(incorporated by reference from Exhibit 10.82 to the 1998
Form 10-K)
10.21 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch Convertible Fund, Inc.
(w-1) (incorporated by reference from Exhibit 10.83 to the 1998
Form 10-K)
10.22 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch Convertible Fund, Inc. (w-1a)
(incorporated by reference from Exhibit 10.84 to the 1998
Form 10-K)
10.23 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch World Income Fund, Inc.
(w-2) (incorporated by reference from Exhibit 10.85 to the 1998
Form 10-K)
10.24 Common Stock Purchase Warrant, dated April 24, 1998, covering
52,500 shares issued to Merrill Lynch World Income Fund, Inc.
(w-2a) (incorporated by reference from Exhibit 10.86 to the 1998
Form 10-K)
10.25 Registration Rights Agreement, dated as of April 24, 1998, among
Polyphase Corporation, Merrill Lynch World Income Fund, Inc. and
Merrill Lynch Convertible Fund, Inc. (incorporated by reference
from Exhibit 10.87 to the 1998 Form 10-K)
10.26 Guaranty, dated August 7, 1998 by Polyphase Corporation to
NationsBank (incorporated by reference from Exhibit 10.88 to the 1998
Form 10-K)
2031
10.2710.26 Loan Agreement in the amount of $12,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.89 to the 1998
Form 10-K)
10.28 Promissory Note in the amount of $4,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.90 to the 1998 Form 10-K)
10.29 Promissory Note in the amount of $8,000,000 dated August 7, 1998
between NationsBank, as lender, and Texas Timberjack, as borrower
(incorporated by reference from Exhibit 10.91 to the 1998 Form 10-K)
10.3010.27 Security Agreement dated August 7, 1998 by Texas Timberjack to
NationsBank (incorporated by reference from Exhibit 10.92 to the
1998 Form 10-K)
+10.3110.28 Guaranty, dated August 7, 1998, by Polyphase Corporation to
NationsBank (incorporated by reference from Exhibit 10.88 to the
1998 Form 10-K)
+10.29 Stock Option Agreement for Michael F. Buck, dated March 17, 1998
(incorporated by reference from Exhibit 10.93 to the 1998 Form
10-K)
+10.32+10.30 Stock Option Agreement for George R. Schrader, dated March 17,
1998 (incorporated by reference from Exhibit 10.94 to the 1998
Form 10-K)
10.3310.31 Stock Purchase Agreement, effective as of September 30, 1999, by
and among Polyphase Corporation, Polyphase Instrument Acquisition
Corporation and Polyphase Instrument Co. (incorporated by reference
from Exhibit 10.76 to the 1999 Form 10-K)
10.3410.32 Promissory Note, dated September 30, 1999 in the principal amount
of $1,000,000, payable to the order of Polyphase Corporation, as
payee, by Polyphase Instrument Acquisition Corporation, as maker
(incorporated by reference from Exhibit 10.77 to the 1999 Form
10-K)
10.3510.33 Pledge Agreement, entered into on September 30, 1999, by and
between Polyphase Instrument Acquisition Corporation, as pledgor,
and Polyphase Corporation, as secured party (incorporated by
reference from Exhibit 10.78 to the 1999 Form 10-K)
10.3610.34 Guaranty, executed as of September 30, 1999, by Polyphase
Instrument Co., as guarantor, in favor of Polyphase Corporation,
as payee, on promissory note executed by Polyphase Instrument
Acquisition Corporation, as maker (incorporated by reference from
Exhibit 10.79 to the 1999 Form 10-K)
10.3710.35 Security Agreement entered into effective September 30, 1999, by
and between Polyphase Instrument Co., as pledgor, and Polyphase
Corporation, as secured party (incorporated by reference from
Exhibit 10.80 to the 1999 Form 10-K)
+10.38+10.36 Employment Agreement, entered into as of November 1, 1999 between
Polyphase Corporation and Overhill Farms, Inc., jointly and
severally, and James Rudis (incorporated by reference from Exhibit
10.81 to the 1999 Form 10-K)
+10.39+10.37 Employment Agreement, entered into as of November 1, 1999 between
Polyphase Corporation and Overhill Farms, Inc., jointly and
severally, and William E. Shatley (incorporated by reference from
Exhibit 10.82 to the 1999 Form 10-K)
2132
10.4010.38 Settlement Agreement and Mutual Release of Claims, effective
November 30, 1999, by and among Infinity Investors Limited,
Polyphase Corporation, James Rudis, William E. Shatley,
Michael F. Buck, and George R. Schrader (incorporated by reference
from Exhibit 10.83 to the 1999 Form 10-K)
10.4110.39 Loan and Security Agreement, dated November 24, 1999, between
Overhill Farms, Inc., Overhill L.C. Ventures, Inc. and Union Bank
of California, N.A. (incorporated by reference from Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1999 [the December"December 1999 Form 10-Q"])
10.4210.40 Revolving Note, dated November 24, 1999, in the principal amount
of $16,000,000, payable to the order of Union Bank of California,
N.A., as payee, by Overhill Farms, Inc., as borrower (incorporated
by reference from Exhibit 10.2 to the December 1999 Form 10-Q)
10.4310.41 Continuing Guaranty, dated November 24, 1999, by Overhill L.C.
Ventures, Inc. and Polyphase Corporation in favor of Union Bank of
California, N.A. (incorporated by reference from Exhibit 10.3 to
the December 1999 Form 10-Q)
10.4410.42 Pledge Agreement, dated November 24, 1999, by Overhill Farms, Inc.,
Polyphase Corporation and Overhill L.C. Ventures, Inc. in favor of
Union Bank of California, N.A. (incorporated by reference from
Exhibit 10.4 to the December 1999 Form 10-Q)
10.4510.43 Intercreditor and Subordination Agreement, entered into as of
November 24, 1999, by and between Levine Leichtman Capital Partners
II, L.P., as subordinated lender, and Union Bank of California,
N.A., as senior lender (incorporated by reference from Exhibit
10.5 to the December 1999 Form 10-Q)
10.4610.44 Securities Purchase Agreement, dated as of November 24, 1999, by
and among Overhill Farms, Inc., as issuer, Polyphase Corporation
and Overhill L.C. Ventures, Inc., as guarantors, and Levine
Leichtman Capital Partners II, L.P., as purchaser (incorporated by
reference from Exhibit 10.6 to the December 1999 Form 10-Q)
10.4710.45 Secured Senior Subordinated Note, dated November 24, 1999, in the
principal amount of $28,000,000, payable to the order of Levine
Leichtman Capital Partners II, L.P., as holder, by Overhill Farms,
Inc., as borrower (incorporated by reference from Exhibit 10.7 to
the December 1999 Form 10-Q)
10.4810.46 Warrant to Purchase 166.04 Shares of Common Stock of Overhill
Farms, Inc., dated November 24, 1999, by Levine Leichtman Capital
Partners II, L.P. (incorporated by reference from Exhibit 10.8 to
the December 1999 Form 10-Q)
10.4910.47 Investor Rights Agreement, entered into as of November 24, 1999,
by and among Overhill Farms, Inc., Polyphase Corporation and
Levine Leichtman Capital Partners II, L. P.L.P. (incorporated by
reference from Exhibit 10.9 to the December 1999 Form 10-Q)
10.50**10.48 Asset Purchase Agreement, entered into as of August 7, 2000, by and
between Overhill Farms, Inc. and SSE Manufacturing, Inc.
22(incorporated by reference from Exhibit 10.50 to the Company's
Annual Report on Form 10-K for the year ended September 30, 2000
[the "2000 Form 10-K"])
33
10.51**10.49 Master Co-Pack Agreement, entered into as of August 7, 2000, by
and between Schwan's Sales Enterprises, Inc. and Overhill Farms,
Inc. 10.52**(incorporated by reference from Exhibit 10.51 to the 2000
Form 10-K)
10.50 First Amendment to Loan and Security Agreement, entered into as of
August 23, 2000, by and between Overhill Farms, Inc., Overhill L.C.
Ventures, Inc. and Union Bank of California, N. A. 10.53**(incorporated
by reference from Exhibit 10.52 to the 2000 Form 10-K)
10.51 First Amendment to Intercreditor and Subordination Agreement,
entered into as of August 23, 2000, by and between Levine Leichtman
Capital Partners II, L.P. and Union Bank of California, N.A,
10.54**N.A.
(incorporated by reference from Exhibit 10.53 to the 2000
Form 10-K)
10.52 Term Note, dated August 23, 2000, in the principal amount of
$2,400,000, payable to the order of Union Bank of California, N.A.,
as payee, and Overhill Farms, Inc., as borrower 10.55**(incorporated by
reference from Exhibit 10.54 to the 2000 Form 10-K)
10.53 Consent and First Amendment to Securities Purchase Agreement,
entered into as of August 23, 2000, by and among Overhill Farms,
Inc., Levine Leichtman Capital Partners II, L.P., Polyphase
Corporation and Overhill L.C. Ventures, Inc. 10.56**(incorporated by
reference from Exhibit 10.55 to the 2000 Form 10-K)
10.54 Amendment to Investor Rights Agreement, entered into as of
August 25, 2000, by and among Overhill Farms, Inc., Polyphase
Corporation and Levine Leichtman Capital Partners II, L.P.
(incorporated by reference from Exhibit 10.56 to the 2000
Form 10-K)
10.55** Second Amendment to Amended and Restated Loan Agreement, entered
into on March 1, 2001, by and between Texas Timberjack, Inc. and
Bank of America, N.A.
10.56** Promissory Note, dated March 30, 2001, in the principal amount of
$8,000,000, payable to Bank of America, N.A., as payee, by
Texas Timberjack, Inc., as borrower
10.57** Promissory Note, dated March 30, 2001, in the principal amount of
$3,500,000, payable to Bank of America, N.A., as payee, by
Texas Timberjack, Inc. and Southern Forest Products, LLC,
as borrowers
10.58** Promissory Note, dated March 30, 2001, in the principal amount of
$589,000, payable to Bank of America, N.A., as payee, by
Texas Timberjack, Inc. and Southern Forest Products, LLC,
as borrowers
21.1** Subsidiaries of the Registrant.Registrant
23.1** Consent of Independent Auditors
27.1** Financial Data Schedule
__________- ----------
+ Management contract or compensatory plan or arrangement.
** Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last quarter of
the fiscal year ended September 30, 2000.
232001.
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POLYPHASE CORPORATION
By: /s/ James Rudis December 12, 2000
---------------
James Rudis
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ James Rudis December 12, 2000
- ----------------
James Rudis
Chief Executive Officer,
Chairman of the Board and
President (Principal Executive
Officer)
/s/ William E. Shatley December 12, 2000
- -----------------------
William E. Shatley
Senior Vice President, Secretary,
Treasurer, Chief Financial Officer
and Director (Principal Financial
and Accounting Officer)
/s/ George R. Schrader December 12, 2000
- -----------------------
George R. Schrader
Director
/s/ Michael F. Buck December 12, 2000
- --------------------
Michael F. Buck
Director
24
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ........................................Auditors.......................................... F-2
Financial Statements:
- --------------------
Consolidated Balance Sheets.........................................Sheets.......................................... F-3
Consolidated Statements of Operations...............................Operations................................ F-5
Consolidated Statements of Stockholders' Equity.....................Equity...................... F-7
Consolidated Statements of Cash Flows...............................Flows................................ F-8
Notes to Consolidated Financial Statements..........................Statements........................... F-11
Financial Statement Schedule:Schedules:
- ---------------------------------------------------------
Schedule I - Condensed Financial Information of Registrant.......... F-41Registrant........... F-39
Schedule II - Valuation and Qualifying Accounts...................... F-43
F-1
Report of Independent AuditorsREPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
PolyphaseOverhill Corporation
We have audited the accompanying consolidated balance sheets of PolyphaseOverhill
Corporation and subsidiaries as of September 30, 20002001 and 1999,2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2000.2001. Our audits also
include the financial statement scheduleschedules listed in the Index at Item 14(a).
These financial statements and scheduleschedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and scheduleschedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PolyphaseOverhill
Corporation and subsidiaries at September 30, 20002001 and 1999,2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 20002001 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule,schedules, when considered in relation to the basic
financial statements taken as a whole, presentspresent fairly, in all material respects,
the information set forth therein.
ERNST & YOUNG LLP
December 7, 2001,
except for the last paragraphs of Notes 6 and 7,
as to which the date is
January 11, 2000
Dallas, Texas2002
F-2
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AssetsASSETS
September 30,
---------------------------------------------------------------
2001 2000
1999
----------------------- -----------
Current assets:
Cash $ 1,522,347686,382 $ 375,408963,387
Receivables, net of allowance for doubtful accounts of
$433,359$626,200 and $502,667$557,305 in 20002001 and 1999,2000, respectively:
Trade accounts 20,399,265 17,373,3643,399,591 2,353,809
Current portion of sales contracts, net of deferred income of
$809,158 and $1,498,581 in 2001 and $2,393,263 in 2000, and 1999,
respectively 5,029,362 4,145,318
4,765,072Related parties 1,927,768 963,932
Notes 4,191,128 3,642,112
3,359,777
Inventories 36,120,187 30,924,74416,374,797 17,326,351
Net current assets of discontinued operations 17,271,667 21,318,705
Prepaid expenses and other 3,062,932 1,663,269
------------2,044,969 2,540,640
----------- -----------
Total current assets 68,892,161 58,461,634
------------50,925,664 53,254,254
----------- -----------
Property and equipment:
Land 432,000 432,000
Buildings and improvements 3,792,009 3,481,0092,722,595 2,643,492
Machinery, equipment and other 11,986,465 8,929,988
------------3,053,909 2,548,641
----------- 16,210,474 12,842,997-----------
6,208,504 5,624,133
Accumulated depreciation 8,281,568 7,114,989
------------2,348,410 1,904,701
----------- 7,928,906 5,728,008
-----------------------
3,860,094 3,719,432
----------- -----------
Other assets:
Noncurrent receivables, net of allowance for doubtful accounts of $1,200,000$1,033,671
and $1,305,220$1,021,054 in 20002001 and 1999,2000, respectively:
Sales contracts, net of deferred income of $387,781 and $710,297 in
2001 and $781,724 in 2000, and 1999, respectively 2,627,468 2,094,718 2,114,591
Related parties 1,202,183 1,523,096375,928 352,580
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $4,687,461$2,054,212
and $3,754,614$1,770,872 in 2001 and 2000, and 1999, respectively 16,881,886 12,178,209
Other intangible assets, net 1,734,858 1,216,3933,612,580 3,895,920
Restricted cash 522,709 633,124 625,623
Assets held for sale 1,926,264 -1,926,264
Other 3,338,653 1,674,388
------------1,192,074 3,646,372
----------- 27,811,686 19,332,300
-----------------------
10,257,023 12,548,978
----------- -----------
Total Assets $104,632,753 $83,521,942
============$65,042,781 $69,522,664
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
F-3
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSSHEET (continued)
Liabilities and Stockholders' Equity
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
----------------------------------------------------------------------------
2001 2000
1999
----------------- ----------------------------- -----------
Current liabilities:
Notes payable $ 7,674,131 $ 4,403,264$13,313,743 $10,526,893
Accounts payable 14,903,684 9,937,3472,085,200 1,555,378
Accrued expenses and other 4,004,971 3,374,4931,066,932 782,657
Current maturities of long-term debt 3,891,579 6,798,467
----------------- ------------------- 1,121,927
----------- -----------
Total current liabilities 30,474,365 24,513,571
Long-term debt, less current maturities 40,859,613 33,592,52216,465,875 13,986,855
Notes payable and accrued interest to related party 22,337,631 20,746,384
17,914,842Net long-term liabilities related to discontinued operations 17,668,829 25,043,209
Reserve for credit guarantees 522,709 633,124
625,623
----------------- ----------------------------- -----------
Total liabilities 92,713,486 76,646,55856,995,044 60,409,572
----------- -----------
Commitments and contingencies
Warrants to purchase common stock of subsidiary 2,806,175 1,425,378
Stockholders' equity:
Preferred stock, $.01 par value, authorized 50,000,000
shares, issued and outstanding, none and 56,440 shares
in 2000 and 1999, respectively - 564
Common stock, $.01 par value, authorized 100,000,000 shares, issued and
outstanding, 18,615,464 and 17,812,464 shares 178,125in 2001 and 2000,
respectively 186,155 178,125
Paid-in capital 28,156,204 27,650,734 28,159,887
Accumulated deficit (19,797,372) (18,715,767)
(22,888,570)
----------------- ------------------Notes receivable from officers and directors (497,250) -
----------- -----------
Total stockholders' equity 8,047,737 9,113,092
5,450,006
----------------- ----------------------------- -----------
Total Liabilities and Stockholders' Equity $104,632,753 $ 83,521,942
================= ==================$65,042,781 $69,522,664
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
F-4
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
---------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
1998
----------------- ----------------- ----------------------------- ----------- -----------
Net revenues $ 189,097,939 $ 158,308,110 $ 141,398,339$43,295,544 $44,056,724 $45,812,384
Cost of sales 153,990,653 129,840,884 116,076,348
----------------- ----------------- -----------------35,395,985 36,734,278 37,544,362
----------- ----------- -----------
Gross profit 35,107,286 28,467,226 25,321,9917,899,559 7,322,446 8,268,022
Selling, general and administrative expenses 24,555,438 19,973,627 17,688,569
----------------- ----------------- -----------------8,018,395 7,583,589 7,158,808
------------ ----------- -----------
Operating income 10,551,848 8,493,599 7,633,422(loss) (118,836) (261,143) 1,109,214
Other income (expenses):
Interest expense (8,072,133) (9,485,892) (8,830,391)(2,405,665) (2,521,019) (3,740,921)
Interest income and other 1,082,993 1,156,433 1,530,937
----------------- ----------------- -----------------764,051 1,216,804 1,148,934
------------ ----------- -----------
Total other expenses (6,989,140) (8,329,459) (7,299,454)
----------------- ----------------- -----------------
Income(1,641,614) (1,304,215) (2,591,987)
------------ ----------- -----------
Loss before income taxes income
allocable to subsidiary warrant holder,and discontinued
operations and
extraordinary item 3,562,708 164,140 333,968(1,760,450) (1,565,358) (1,482,773)
Income tax (expense) benefit 1,985,244 (353,881) (56,575)
----------------- ----------------- -----------------
5,547,952 (189,741) 277,393
Income allocable to subsidiary warrant
holder 436,175 225,378 -
----------------- ----------------- -----------------(860,286) 3,330,450 290,851
------------ ----------- -----------
Net income (loss) before discontinued operations and extraordinary item 5,111,777 (415,119) 277,393(2,620,736) 1,765,092 (1,191,922)
Discontinued operations, - (1,182,508) 9,955
Extraordinary item--early
extinguishmentnet of
debt (1,290,431) - (616,239)
----------------- ----------------- -----------------income taxes 1,539,131 2,056,254 (405,705)
------------ ----------- -----------
Net income (loss) (1,081,605) 3,821,346 (1,597,627) (328,891)
Gain (dividends) on reacquired
preferred stock - 351,457 (91,199)
(154,250)
----------------- ----------------- ----------------------------- ----------- -----------
Net income (loss) attributable to
common stockholders $(1,081,605) $ 4,172,803 $ (1,688,826) $ (483,141)
================= ================= =================$(1,688,826)
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
F-5
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
For the Years Ended
September 30,
-----------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
1998
------------------ ------------------ ------------------------- -------- -------
Per share data - basic and diluted:
Net income (loss) per common share:
Net income (loss) before discontinued
operations and extraordinary item $ .30(.15) $ (.03) $ .01.12 $(.08)
Discontinued operations - (.07) -
Extraordinary item (.07) - (.04)
------------------ ------------------ ------------------.09 .11 (.02)
---------- ---------- ----------
Net income (loss) per common share $ (.06) $ .23 $ (.10)
$ (.03)
================== ================== ============================ ========== ==========
Weighted average shares outstanding - basic 17,845,793 17,812,464 16,947,195
14,552,462
================== ================== ============================ ========== ==========
Weighted average shares outstanding - diluted 17,845,793 18,110,421 16,947,195
16,452,433
================== ================== ============================ ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements
F-6
POLYPHASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 2000
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 2001
Preferred Stock Common Stock Paid-in Accumulated Notes
Shares Amount Shares Amount ----------------------------------------------------------------Capital Deficit Receivable Total
------ ------ ------ ------ ------- ------- ------------ -----
Balance, September 30, 1997 132,500 $1,325 13,664,109 $136,641
Conversion of preferred shares and
accrued dividends to common stock (17,500) (175) 1,205,941 12,059
Issuance of warrants
Exercise of stock purchase warrants 210,000 2,100
Stock issuance costs
Settlement of stock option cancellation
Dividends on preferred stock
Net loss (comprehensive loss)
---------- ---------- ---------- ----------
Balance, September 30, 1998 115,000 $ 1,150 15,080,050 $ 150,800 ---------- ---------- ---------- ----------$ 28,623,811 $ (21,199,744) $ (975,319) $ 6,600,698
Conversion of preferred shares and
accrued dividends to common stock (58,560) (586) 2,302,414 23,025 183,208 205,647
Exercise of stock options 430,000 4,300
Reduction of Pyrenees note upon
recovery of common stock
Dividends on preferred stock
Net loss (comprehensive loss)
---------- ---------- ---------- ----------
Balance, September 30, 1999 56,440 564 17,812,464 178,125
---------- ---------- ---------- ----------
Reacquision of preferred stock (56,440) (564)
Stock option granted for services
Net income (comprehensive income)
---------- ---------- ---------- ----------
Balance, September 30, 2000 -- $ -- 17,812,464 $ 178,125
========== ========== ========== ==========
Paid-in Accumulated Notes
Capital Deficit Receivable Total
--------------------------------------------------------------
Balance, September 30, 1997 $28,955,695 $(20,716,603) $(975,319) $7,401,739
Conversion of preferred shares and
accrued dividends to common stock 10,616 22,500
Issuance of warrants 175,000 175,000
Exercise of stock purchase warrants 2,100
Stock issuance costs (17,500) (17,500)
Settlement of stock option cancellation (500,000) (500,000)
Dividends on preferred stock (154,250) (154,250)
Net loss (comprehensive loss) (328,891) (328,891)
----------- ------------ --------- ----------
Balance, September 30, 1998 28,623,811 (21,199,744) (975,319) 6,600,698
----------- ------------ --------- ----------
Conversion of preferred shares and
accrued dividends to common stock 183,208 205,647
Exercise of stock options 109,437 113,737
Reduction of Pyrenees note upon
recovery of common stock (756,569) 975,319 218,750
Dividends on preferred stock (91,199) (91,199)
Net loss (comprehensive loss) (1,597,627) (1,597,627)
----------- ------------ --------- -------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 56,440 564 17,812,464 178,125 28,159,887 (22,888,570) --- 5,450,006
----------- ------------ --------- -------------------------------------------------------------------------------------------------------
Reacquision of preferred stock (56,440) (564) (563,842) 351,457 (212,949)
Stock option granted for services 54,689 54,689
Net income (comprehensive income) 3,821,346 3,821,346
----------- ------------ --------- -------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $27,650,734 $(18,715,767)- - 17,812,464 178,125 27,650,734 (18,715,767) - 9,113,092
---------------------------------------------------------------------------------------------
Exercise of stock options 803,000 8,030 551,408 (497,250) 62,188
Repurchase of warrants (45,938) (45,938)
Net loss (comprehensive loss) (1,081,605) (1,081,605)
---------------------------------------------------------------------------------------------
Balance, September 30, 2001 - $ -- $9,113,092
=========== ============ ========= ==========- 18,615,464 $ 186,155 $ 28,156,204 $ (19,797,372) $ (497,250) $ 8,047,737
=============================================================================================
The accompanying notes are an integral part
of these consolidated financial statements
F-7
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
----------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
1998
----------------- ------------------ ---------------------------- -------- --------
Cash flows provided by (used in) operating activities:
Net income (loss) $ 3,821,346$(1,081,605) $3,821,346 $(1,597,627) $ (328,891)
Adjustments to reconcile net lossincome (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,275,817 4,559,507 4,192,271563,732 522,079 459,127
Amortization 358,340 389,639 1,385,259
Provision for doubtful accounts 302,719 176,793 535,489
Gain541,764 272,719 141,793
Interest accrual on sale of assets - - (987,857)notes payable to related party 1,591,247 1,475,278 1,607,437
Recoveries on related party receivable - - (656,250) -
Stock options granted for services - 54,689 - -
Deferred income taxes (2,074,000)2,106,683 (2,252,664) -
-
Income allocable to subsidiary warrant
holder 436,175 225,378 -
Loss (income)(Income) loss from discontinued operations
- 1,182,508 (9,955)
Extraordinary item 1,290,431 - 616,239(1,831,342) (2,056,254) 405,705
Changes in:
Accounts and sales contracts receivable (2,488,993) (5,901,611) (143,202)(3,004,340) 1,960,932 (2,331,060)
Inventories (5,595,443) 1,433,645 (11,737,432)951,554 (427,475) 4,851,442
Prepaid expenses and other (989,928) (1,197,500) 223,504(738,571) (1,506,631) (977,016)
Accounts payable 4,966,337 3,998,249 (1,388,710)529,822 2,003,213 396,810
Accrued expenses and other 775,481 329,190 593,440
----------------- ------------------ -------------------295,132 942,665 (668,985)
----------- --------- -----------
Net cash provided by (used in)
operating activities 3,774,631 2,552,282 (8,435,104)
----------------- ------------------ -------------------282,416 5,199,536 3,016,635
----------- --------- -----------
Cash flows provided by (used in) investing activities:
Capital expenditures, net (1,317,882) (1,299,306) (1,315,403)
Acquisition of Chicago Brothers (4,221,551) - -(704,394) (309,780) (1,003,900)
Notes and other receivables (549,016) (282,335) (1,622,461) (1,131,537)
Receivables from related parties 120,913(987,184) 100,913 (852,441)
13,654
Cash from saleSale of subsidiaryPolyphase Instrument Company - - 1,780,000
-
----------------- ------------------ ------------------------------ --------- -----------
Net cash used in investing activities $(5,700,855) $(1,994,208) $ (2,433,286)
----------------- ------------------ -------------------$(2,240,594) $(491,202) $(1,698,802)
----------- --------- -----------
The accompanying notes are an integral part
of these consolidated financial statements
F-8
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended
September 30,
---------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
1998
------------------ ----------------- ------------------------ ------ ------
Cash flows provided by (used in) financing activities:
Net borrowings (principal payments) on line of credit
and floor plan arrangements $ 2,659,3312,786,850 $ 1,404,600(2,176,815) $ 3,041,139
Borrowings on other notes payable
and long-term debt 30,682,504 1,607,437 31,293,9061,317,020
Principal payments on long termlong-term debt (1,510,765) (3,533,333) (6,282,280)
Repayment(1,121,927) (1,466,042) (2,533,333)
Exercise of subordinated debt (22,675,000)stock options 62,188 - (13,000,000)
Redemption28,436
Repurchase of Overhillstock purchase warrants (3,700,000)(45,938) - (2,000,000)
Deferred financing costs (1,932,907) - (2,718,015)
Repurchase of preferred stock - (450,000) - -
Exercise of common stock options
and warrants - 28,436 2,100
Dividends on preferred stock - - (91,199)
(154,250)
Common stock issuance costs - - (17,500)
------------------ ----------------- ----------------------------- ------------ ------------
Net cash provided by (used in) financing activities 3,073,163 (584,059) 10,165,100
------------------ ----------------- ------------------1,681,173 (4,092,857) (1,279,076)
----------- ------------ ------------
Net increase (decrease) in cash 1,146,939 (25,985) (703,290)(277,005) 615,477 38,757
Cash at beginning of year 375,408 401,393 1,104,683
------------------ ----------------- ------------------963,387 347,910 309,153
----------- ------------ ------------
Cash at end of year $ 1,522,347686,382 $ 375,408963,387 $ 401,393
================== ================= ==================347,910
=========== ============ ============
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest $ 5,762,406841,381 $ 4,895,427997,890 $ 5,391,913
================== ================= ==================1,133,514
=========== ============ ============
Income taxes $ 82,344 $ 19,858 $ -
$ -
================== ================= ============================= ============ ============
The accompanying notes are an integral part
of these consolidated financial statements
F-9
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Supplemental schedule of non-cash investing and financing activities:
In connection with the Overhill Farms refinancing in November 1999, warrants to
purchase 17.5% of the common stock of Overhill at a nominal exercise price were
issued having an estimated fair market value of $2,370,000 (see Notes 8 and 10).
In connection with the Overhill Farms refinancing in November 1999, the Company
accrued a $500,000 liability related to a cash payment obligation of the Company
in the event Overhill does not repurchase the warrants to purchase 17.5% of
Overhill's common stock, which were issued in connection with the refinancing
(see Notes 8 and 10).
In connection with Overhill Farms' acquisition of Chicago Brothers during fiscal
2000, $900,000 of the purchase price was represented by a note to the seller
(see Note 8).
During the current fiscal year ended September 30, 2000, the Company exchanged timber inventory
valued at $400,000 for stock of a company whichthat was previously owned by a related
party (see Note 13)11).
During 1999, the Company recovered 2,000,000 shares of its common stock from a
former related party, of which 500,000 shares were used to satisfy a note
receivable and 1,500,000 shares were recorded as other income. As the Company
had previously assigned all of its rights to the 2,000,000 shares to another
related party in connection with a previous debt extension, interest expense of
$875,000 was recorded in connection with the recovery (see Notes 9, 107, 8 and 13)11).
In December 1998, the Company settled certain obligations by granting options on
145,000 shares of common stock, exercisable 130,000 shares at $.01 per share and
15,000 shares at $.50 per share. The options were valued at $28,000 and charged
to expense in fiscal 1999.
The Company issued common shares valued at $205,647 in 1999 and $22,500 in 1998
in payment of
accrued dividends on preferred stock.
In September 1998, the Company recorded a liability, together with a
corresponding charge to paid inpaid-in capital, for $500,000 in connection with the
settlement of a lawsuit. In December 1998 and January 1999, the Company made
partial payments on the obligation, together with certain associated expenses,
by granting options on 300,000 shares of common stock, exercisable at $.01 per
share. The options were valued at of $85,000 and charged to expense in fiscal 1998.
In connection with the refinancingCertain officers and directors of certain indebtedness with Merrill Lynch in
December 1997, the Company exercised options during the 2001
fiscal period in exchange for notes issued warrants to purchase 210,000 sharesthe Company by these officers and
directors, collateralized by the stock of the Company's common stock exercisable at $.01 per share and 210,000 shares
exercisable at $1.125 per share. Such warrants were valued at $175,000 and
charged to expense ratably over the remaining term of the associated loan.
In connection with the Overhill Farms refinancing in December 1997, warrants to
purchase 30% of the common stock of Overhill at a nominal exercise price were
issued having an estimated fair market value of $1,200,000 (see Notes 8 and 10).Company.
The accompanying notes are an integral part
of these consolidated financial statements
F-10
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY AND ORGANIZATIONAL MATTERS
Nature of Business
Overhill Corporation, formerly Polyphase Corporation, (the "Company" or "Polyphase") is a diversified
holding company that, through its subsidiaries, currently operates in
two
industry segments: the food segmentforestry and the forestry segment. The food
segment (the "Food Group"), which consists oftimber related businesses. These operations are conducted
through the Company's Overhill Farms,
Inc. ("Overhill") subsidiary, produces high quality entrees, plated meals,
meal components, soups, sauces and poultry, meat and fish specialties.
Overhill is a wholly-owned subsidiary of the Company, subject to warrants
outstanding to purchase Overhill's common stock (see Note 10). The forestry
segment (the "Forestry Group"), which consists of the Company's wholly-ownedwholly owned subsidiary Texas Timberjack, Inc.
("Timberjack" or "TTI") and TTI's majority-owned subsidiaries Southern Forest
Products, LLC ("SFP") and Wood Forest Products LLC ("WFP"),. Through these
entities, the Company distributes, leases and provides financing for
industrialconstruction and commercial timber equipment and is also engaged in certain related timber and
sawmill operations.
The Company's Board of Directors, during August 2001, approved a plan to
spin-off all of its shares of Overhill Farms, Inc. ("Overhill Farms") to the
holders of the Company's common stock. Overhill Farms, a producer of high
quality entrees, plated meals, meal components, soups, sauces and poultry,
meat and fish specialties, previously comprised the Company's food segment
(the "Food Group"). The Company's transformer segment (the "Transformer
Group") was discontinued in fiscal 1999, as a result of the sale by the
Company of its wholly-ownedwholly owned subsidiary, Polyphase Instrument Co. ("PIC"),
which manufactures and markets electronic transformers, inductors and
filters. Both Overhill Farms and PIC have been accounted for as discontinued
operations in the accompanying financial statements and are discussed further
in Notes 13 and 14 to the financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the continuing operations and
related accounts of the Company, its wholly-ownedwholly 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 current year presentation.
Fiscal Year
The Company and its subsidiaries' fiscal year, except for the Food Group,
ends on September 30. The Food Group utilizes a 52 - 53 week accounting
period which ends on the Sunday closest to September 30. In fiscal 2000, the
Food Group has a 53 week accounting period.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of receivables and demand
deposits. Demand deposits sometimes exceed the amount of insurance provided
by the Federal Deposit Insurance Corporation. The Company performs ongoing
credit evaluations of its customers' financial condition and generally
requires no collateral from its customers except as discussed below.
F-11
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
TTI grants credit to customers, substantially all of whom are located in Easteast
Texas or the western portion of Louisiana, which rely on the logging,
industryconstruction or timber industries for their ability to repay debt to TTI.
Collateral is generally the equipment sold for amounts due under installment
sales contracts.
For the years ended September 30, 2000, 1999 and 1998, the Company had
write-offs, net of recoveries, to the allowance for doubtful accounts of
$377,247, $188,269 and $556,881, respectively.
Financial Instruments
The fair value of financial instruments is determined by reference to market
data and by other valuation techniques as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their
recorded values.
Inventories
Inventories of raw materials and finished goods for the food processing
operations are stated at the lower of cost or market as determined by the
first-in, first-out (FIFO) method and using the average cost method for raw
timber and finished wood products. Inventories of timberconstruction equipment are valued at the lower of
cost or market or, in the case of repossessed and used equipment, net
realizable value, based upon the specific identification method. ConcentrationInventories
of Sourcesraw timber and finished wood products are stated at the lower of Labor
The Food Group's total hourly and salaried work force consists of
approximately 1050 employees. Approximately 67% of the Food Group's work
force is covered by collective bargaining agreements expiring in fiscal
years 2001 and 2002. The Company is in negotiations with representatives of
employees under collective bargaining agreements. These agreements expired
on November 30, 2000, and have been extended by mutual agreement as
negotiations continue.average
cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed primarily
using the straight-line method for financial reporting purposes over the
estimated useful lives of the assets. Useful lives generally range from five
to thirty years. Leasehold improvements are amortized over the lesser of the
term of the lease or the estimated useful life of the assets.
Repairs and maintenance costs are expensed, while additions and betterments
are capitalized. The cost and related accumulated depreciation of assets sold
or retired are eliminated from the accounts and any gains or losses are
reflected in earnings.
F-12
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Excess of Cost Overover Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired (goodwill) at the
date of acquisition is amortized on a straight linestraight-line basis over 20 years. The
Company determines the period to be benefited by using qualitative measuring
factors such as competition, demand and obsolescence, as well as legal,
regulatory and contractual provisions. In addition, the Company evaluates the
existence of goodwill impairment on the basis of whether the goodwill is
fully recoverable from projected, undiscounted cash flows of the related
business unit.
F-12
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Options
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25 (APB 25)("APB 25"), "Accounting for Stock Issued to Employees"Employees," and
related Interpretations in accounting for its employee stock options. The
Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 (SFAS 123)("SFAS 123"), "Accounting for Stock BasedStock-Based
Compensation," which provides for either recognition or disclosure of a
hypothetical charge for the fair value of stock options granted. The Company
has provided the required SFAS 123 disclosures in Note 10.8.
Revenue Recognition
The Company generally recognizes revenue when products are shipped, which is
when title and risk of loss pass to the buyer, or services are performed and
provides for estimated returns and allowances at the time of sale. However, a
portion of the business in the Company's
Forestry Group relates to the sale of equipment is through sales/finance contracts.
Revenue is recognized on these accounts using the installment method (see Note
3). Under the installment method, the Company records at the point of sale both
a sale and a cost of sale for the total cost of the unit. Gross profit is
initially recorded in a deferred profit account to be recognized as proceeds are
received. These deferred profits are recorded as sales revenue as funds are
received, based on the relative percentage of transaction profit to the sales
price. Interest on the contract is recognized on a cash basis due to frequent
late payments and periodic repossessions.
Key sales and income information for the Forestry Group for fiscal 2001, 2000
and 1999 and 1998 are:is:
2001 2000 1999
------ ------ ------
2000 1999 1998
--------------- --------------- ---------------
Equipment sales total $23,385,642 $25,758,730 $28,455,430 $35,459,912
Equipment sales financed 2,600,413 1,423,069 3,155,817 3,255,692
Income earned on installment basis 514,829 823,438 776,789 2,343,423
Interest income earned on installment notes 774,203 863,757 883,542 1,317,215
F-13
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes
Deferred income taxes recorded using the liability method reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
F-13
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income (Loss) Per Share
During 2001, warrants to purchase 710,000 shares of common stock, at a
weighted average exercise price of $1.39 per share, and options to purchase
803,000 shares, at a weighted average exercise price of $1.15 per share, were
outstanding and excluded from the calculation of diluted earnings per share
as the effect would be antidilutive. In fiscal 2000, 298,000 common stock
equivalents included in the calculation of diluted earnings per share were
comprised of 29,000 equivalent shares related to options to purchase common
stock and 269,000 equivalent shares related to preferred stock convertible
into shares of common stock. Options to purchase approximately 290,000 shares
of common stock, at a weighted average exercise price of $2.00 per share, and
warrants to purchase 710,000 shares of common stock, at a weighted average
exercise price of $1.39 per share, were outstanding during the year ended
September 30, 2000, and excluded from the calculation of diluted earnings per
share as the effect would be antidilutive. Options to purchase approximately
1.2 million shares of common stock at a weighted average exercise price of
$0.99 per share, warrants to purchase 710,000 shares of common stock at a
weighted average exercise price of $1.39 per share and 115,000 shares of
preferred stock convertible into shares of common stock at market prices were
outstanding during the year ended September 30,1999,30, 1999, and excluded from the
calculation of diluted earnings per share as the effect would be
antidilutive.
Recent Accounting Pronouncements
In 1998,
1,899,000 common stock equivalents includedNovember 2001, the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment or Diposal of Long-Lived Assets
(SFAS 144). These rules supercede FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, providing a single accounting model for long-lived assets to
be disposed of. Although retaining many of the fundamental recognition and
measurement provisions of Statement 121, the new rules significantly change
the criteria that would have to be met to classify an asset as
held-for-sale. Statement 144 also supercedes the provisions of APB Opinion
30 with regard to reporting the effects of a disposal of a segment of a
business and require expected future operating losses from discontinued
operations to be displayed in discontinued operations in the calculationperiod(s) in
which the losses are incurred (rather than as of diluted
earnings per share were comprisedthe measurement date as
previously required by APB 30). The Statement is effective for year-ends
beginning after December 15, 2001 and interim periods within those fiscal
years, although earlier application is encouraged. The Company intends to
adopt SFAS 144 as of 32,000October 1, 2001. The Company is currently in the
process of evaluating the impact of SFAS 144 on its financial statements and
does not expect the adoption of SFAS 144 to have a material effect on its
financial position, results of operations or cash flows.
F-14
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In June 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which requires that
goodwill will no longer be amortized, but instead will be tested at least
annually for impairment by reporting unit. The Company is required to adopt
SFAS 142 effective as of October 1, 2002, though early adoption as of October
1, 2001 is permitted. The Company intends to early adopt SFAS 142 as of
October 1, 2001. The Company is currently in the process of evaluating the
relevant provisions of SFAS 142 and has not determined whether the adoption
of SFAS 142 will have an immediate effect on the financial statements.
However, amortization of goodwill, which amounted to approximately $283,000
in each of the three fiscal years ended September 30, 2001, before any
related to options to purchase
sharestax effects, will be eliminated prospectively upon the adoption of
common stock, 90,000 related to warrants to purchase shares of
common stock and 1,777,000 related to preferred stock convertible into
shares of common stock.
New Accounting PronouncementSFAS 142.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133)("SFAS
133"), as amended, which iswas required to be adopted by the Company on October
1, 2000. SFAS No. 133 requires that all derivatives be recorded on the
balance sheet at fair value. Changes in derivatives that are not hedges are
adjusted to fair value through income. Changes in derivatives that meet the
Statement's hedge criteria will either be offset through income, or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The adoption of SFAS 133 on October 1, 2000 did not have any
impact on the Company's financial condition,position, results of operations or cash
flows.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles, generally accepted accounting principlesin the United States, requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
F-14
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. SALES CONTRACTS RECEIVABLE
The Company's Forestry GroupCompany provides financing to customers on certain equipment sales using
installment sales contracts. The following is a summary of the components of
the Company's net investment in these contracts as of September 30, 20002001 and
19992000 and the related deferred income based on the installment method of
income recognition.
2000 1999
----------- -------------
Contracts outstanding $ 8,514,389 $10,194,090
Less deferred income (2,208,878) (3,174,987)
----------- -------------
6,305,511 7,019,103
Less allowance for doubtful accounts (65,475) (139,440)
----------- -------------
Net investment in sales contracts
receivable $ 6,240,036 $ 6,879,663
2001 2000
------ ------
Contracts outstanding $ 10,370,655 $ 8,514,389
Less deferred income (1,196,939) (2,208,878)
------------ -----------
9,173,716 6,305,511
Less allowance for doubtful accounts (120,255) (65,475)
------------ -----------
Net investment in sales contracts receivable $ 9,053,461 $ 6,240,036
============ ===========
=============
F-15
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of the maturities of the sales contracts
receivable and related deferred income:
Contracts Deferred
Due September 30, Outstanding Income Net
---------------- ------------- ----------- -------------
2001 $5,678,074 $1,498,581 $4,179,493
2002 2,349,028 588,266 1,760,762
2003 410,633 102,835 307,798
2004 76,654 19,196 57,458
------------- ----------- -------------
$8,514,389 $2,208,878 $6,305,511
=============Contracts Deferred
Due September 30, Outstanding Income Net
----------------- ----------- --------- ---
2002 $ 7,382,190 $ 809,158 $ 6,573,032
2003 2,471,069 314,064 2,157,005
2004 499,266 72,986 426,280
2005 11,402 731 10,671
2006 6,728 - 6,728
------------ ----------- -----------
$ 10,370,655 $ 1,196,939 $ 9,173,716
============ =========== =========== =============
4. NOTES RECEIVABLE
The Forestry GroupTexas Timberjack periodically makes advances under promissory notes to
certain unrelated individuals and corporations. These notes have interest
rates that range from 10% to 18%, are generally due within one year and a
majority are secured by a variety of marketable collateral.collateral, primarily timber
and land. Interest is accrued on these notes receivable as long as the Company believes
such amounts are collectible. The accrued interest is added to the note and
is shown as part of that balance in the accompanying statements. Allowances
are established periodically if, at the date of valuation, management feels
it is probable that a loss exists on a note. The allowance is established
based upon payment history, evaluation of the portfolio and the related
expected credit risk.
The Company had $3,642,112$4,191,128 and $3,359,777$3,642,112 of short-term notes receivable as
of September 30, 20002001 and 1999,2000, respectively, from unrelated corporations and
individuals, net of allowances of $116,934 and $243,184, and $173,184, respectively.
The loans are secured primarily by land, timber and equipment. At
September 30, 2000,2001, approximately $655,000$1,462,000 of such notes receivable were no
longer accruing interest. All notes receivable are due in less than one year.
F-15
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. INVENTORIES
Inventories are summarized as follows:
September 30,
---------------------------------------------------------
2001 2000
1999
----------- ----------------- ------
Timber and construction equipment $14,469,372 $15,689,760
Finished goods $26,179,043 $22,409,448
Raw materials 10,091,144 8,565,296
Inventory reserve (150,000) (50,000)
----------- -----------
Total $36,120,187 $30,924,744
=========== ===========
As of September 30, 2000 and 1999, finished goods inventories are comprised
of approximately $9,655,000 and $7,804,000 in inventories at the Food Group,
$15,690,000 and $13,603,000 in timber and logging related equipment, and
$834,000 and $1,003,000 in finished wood products respectively. As of
September 30, 2000 and 1999, raw materials inventories are comprised of
approximately $9,289,000 and $5,872,000 in inventories at the Food Group,
and $802,000 and $2,693,000 in both unharvested1,050,468 834,808
Unharvested and harvested but unprocessed timber respectively.
6. OTHER INTANGIBLE ASSETS
Other intangible assets are summarized as follows:
September 30,
---------------------------
2000 1999854,957 801,783
----------- -----------
Non-compete agreements (a) $ 700,000 $ 700,000
Deferred financing costs (b) 1,932,907 2,608,733
Consulting contract (c) 200,000 200,000
Other - 22,800
----------- -----------
2,832,907 3,531,533
Less accumulated amortization (1,098,049) (2,315,140)
----------- -----------
$ 1,734,858 $ 1,216,393Total $16,374,797 $17,326,351
=========== ===========
(a) The Company has noncompete agreements with two officers of Texas
Timberjack, Inc. Such amounts are being amortized over the seven-year
life of each agreement.
(b) The Company incurred certain legal, brokerage and other costs
associated with the financing of the initial acquisition of Overhill
Farms and the subsequent refinancings of debt in December 1997 and
November 1999. These costs are being amortized over periods of three to
five years. (see Note 8 regarding the write-off of certain costs
associated with the initial acquisition financing and the December 1997
and November 1999 refinancings).
F-16
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) The Company granted a former executive options to purchase 35,000
shares of common stock at $.01 per share. The options were granted in
consideration of a five year consulting contract and were valued at
$200,000 based on the fair market value at the date of grant. The
contract is being amortized over the five-year period.
7.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. NOTES PAYABLE
Notes payable consist of the following:
September 30,
---------------------------------------------------------------------
2001 2000
1999
---------------- ---------------------- ------
Note payable to Bank of America (a) $2,508,556 $3,900,000$ 3,900,000 $ 2,508,556
Note payable to Bank of America (b) 3,388,889 3,500,000 -
Note payable to Bank of America (c) 500,000 -500,000
Note payable to Associates First Capital Corporation (d) 522,259 991,204 -
Note payable to Ford MotorNew Holland Credit Corporation (e) 174,371 228,616
Other notes payable - 274,648
---------------- ----------------
$7,674,131 $4,403,264
================ ================5,002,595 3,027,133
----------- -----------
$13,313,743 $10,526,893
=========== ===========
(a) TTI has an $8.0 million revolving line of credit with Bank of America,
N.A. (formerly NationsBank of Texas, N.A.). Amounts advanced under the line of credit bear interest at prime less .25%plus
.5% (approximately 9.25%6.5% at September 30, 2000)2001), and are collateralized by
substantially allcertain assets of TTI's assets. The line of credit agreement contains various covenants
related to receivables, capital expenditures, inventories, debt ratios,
contingent liabilities and payment of dividends. Furthermore, the terms
of the revolving line of credit generally prohibit dividends, loans or
advances from TTI to the Company, but permit the payment of taxes.TTI. The Company has guaranteed all obligations under
the TTI revolving line of credit. Availability under the line as of
September 30, 20002001 amounted to approximately $5.5$4.1 million. TTI intends to
renew the revolving credit facility upon maturity in March 2001.2002.
(b) TTI and SFP, jointly and severally, have a note payable to Bank of
America, which is guaranteed by a related party. The note requires monthly
interest payments at prime plus .5% (approximately 10%6.5% at September 30,
2000)2001), is collateralized by substantially all the assets of SFP and
matures in March 20012002 (see Note 13)11). TTI and SFP intend to renew the note
at maturity.
(c) SFP has a note payable to Bank of America, pursuant to a $589,000$500,000 line of
credit facility that expires in March 2001.2002. Amounts advanced under the
line bear interest at prime plus .5% (approximately 10%6.5% at September 30,
2000)2001) payable monthly, are collateralized by the assets of SFP and are
guaranteed by TTI and a related party (see Note 13)11). F-17
POLYPHASE CORPORATION AND SUBSIDIARIES
NotesTTI intends to Consolidated Financial Statementsrenew
the LOC at maturity.
(d) TTI has a floor plan agreement with Associates First Capital Corporation
to finance equipment. The agreement provides that interest accrues on an
individual unit basis with an average interest rate of prime minus .25%
(approximately 9.5%5.75% at September 30, 2000)2001), and the equipment may be
financed for up to one year.
(e) TTI has a floor plan note with Ford MotorNew Holland Credit Corporation. The floor
plan note accrues no interest provided the equipment financed under the
note is sold within a predetermined period, typically nine to twelve
months from the time TTI takes delivery of the equipment.
F-17
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The weighted average interest rate on short-term borrowings for the year
ended September 30, 20002001 was 8.78%.
F-18
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
---------------------------------------
2000 1999
------------------ ----------------
Revolving credit agreement of Overhill with Union Bank of
California, N.A. ("Union Bank"), bearing interest at prime
plus .25% or LIBOR plus 2.75% (approximately 9.5% at
September 30, 2000), guaranteed by the Company and
collateralized by certain assets of Overhill and the
Overhill common stock owned by the Company. $14,493,967 $ --
Secured senior subordinated note of Overhill payable to
Levine Leichtman Capital Partners II, L.P. ("LLCP"), net
of discount of $2,391,667, bearing interest payable
monthly at 12% until maturity in October 2004, guaranteed
by the Company and collateralized by certain assets of
Overhill. 25,608,333 --
Term loan payable to Union Bank, bearing interest at prime
plus 1% (approximately 10.5% at September 30, 2000),
payable in monthly installments of $50,000 plus interest
until November 24, 2002, at which time the remaining
principal balance of $1,050,000 plus interest is due and
payable, guaranteed by the Company and collateralized by
certain assets of Overhill. 2,350,000 --
Unsecured promissory note of Overhill, bearing interest at
9% payable quarterly through June 2001 and thereafter in
quarterly installments of $150,000 plus interest through
maturity in December 2002. This note was issued in
connection with the Chicago Brothers purchase and is
subordinated to all indebtedness to Union Bank and to
LLCP described above. 900,000 --
Senior subordinated notes payable of Overhill due to a
financial institution, net of discount of $466,667,
bearing interest at prime plus 4.0%, (12.25% at September
30, 1999) or 12.5%, whichever is greater. The note was
repaid in November 1999. -- 22,708,333
F-19
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revolving credit agreement of Overhill with a financial
institution, bearing interest at the Citibank base rate
plus 1.5% and collateralized by accounts receivable and
inventories. The agreement terminated upon repayment in
November 1999. -- 9,647,005
Revolving credit agreements of TTI subsidiaries with a
financial institution, bearing interest at prime (8.25% at
September 30, 1999) and collateralized by accounts
receivable, inventory and fixed assets of subsidiaries.
This facility expired in April 2000 and was replaced by -- 5,458,498
Notes Payable as described in Note 7.
Term loan of TTI in the amount of $4,000,000 payable to a
financial institution, bearing interest at 8.3%, due in
monthly installments of $111,111 plus accrued interest,
with maturity in August 2001. 1,111,111 2,555,556
Other 287,781 21,597
------------------ ----------------
44,751,192 40,390,989
Less current maturities (3,891,579) (6,798,467)
------------------ ----------------
Total long-term debt $40,859,613 $33,592,522
================== ================
Scheduled maturities of long-term debt are summarized as follows:
2001 $ 3,891,579
2002 1,247,101
2003 15,841,068
2004 47,101
2005 26,116,010
-----------
Total 47,142,859
Less: unamortized debt discount (2,391,667)
-----------
$44,751,192
===========
In November 1999, Overhill refinanced substantially all of its existing
debt. The total facility amounted to $44 million, consisting of a $16
million line of credit provided by Union Bank together with $28 million in
the form of a five-year term loan provided by LLCP.
F-20
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The line of credit with Union Bank expires in November 2002 and provides for
borrowings limited to the lesser of $16.0 million or an amount determined by
a defined borrowing base consisting of eligible Overhill receivables and
inventories ($22.3 million at September 30, 2000). Borrowings under the line
of credit bear interest at a rate, as selected by Overhill at the time of
borrowing, of prime plus .25% or LIBOR plus 2.75%approximately 4.03%.
The Union Bank agreement
provides, among other things,Company's discontinued operation, Overhill Farms, has debt in place that
Overhill will be subject to an unused
line of credit fee of .25% per annum. The agreement contains various
covenants including restrictions onrestricts that Company's capital expenditures specifiedand specifies net worth levels,
minimum EBITDA and certain debt-to-equity and debt service ratios. In
addition, the terms of the agreementagreements generally prohibit loans, dividends or
advances from Overhillthe discontinued operation to the Company and limit payments of
taxes and other expenses to Polyphasethe Company from the discontinued operation to
specified levels. Additionally, the Company's discontinued operation is
required to pay their subordinated lenders annual consulting fees of
approximately $180,000. The term loanCompany's ownership of Overhill Farms is pledged
as collateral on these debt arrangements.
As of September 30, 2001, the Company's Overhill Farms subsidiary was in
violation of one of its financial covenants under two lending arrangements.
In January 2002, the Company obtained waivers of this violation from each
lender and amended each lending agreement, including the financial covenant
previously violated. The Company believes its Overhill Farms subsidiary
will be in compliance with LLCP provides for principal payments in an amount equal
to 50%all of its financial and other debt covenants
during the excess cash flow, as defined, for Overhill's previous fiscal
year, payable annually commencing in January 2001. The amount of such
principal payment, based on excess cash flows, as defined, for the year ended September 30, 2000 is approximately $2.0 million. Such amount has been
included in current maturities on the September 30, 2000 balance sheet.
Voluntary principal payments are also permitted after October 31, 2001,
subject to certain prepayment penalties. Any unpaid balance will be payable
at maturity in October 2004. 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 agreement
also requires Overhill to pay to LLCP, during each January, annual
consulting fees of $180,000.
In connection with the agreement, LLCP was granted stock 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
repurchased, LLCP will be entitled under the agreement to receive a cash
payment of $500,000 from Overhill. This amount is being charged to expense
over the term of the facility. 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 these transactions, Overhill repaid in full the $22.7 million
senior subordinated notes payable and the $9.6 million revolving line of
credit, which were outstanding at September 30, 1999. Additionally, Overhill
repurchased for $3.7 million the warrants held by the previous subordinated
lender to purchase 30% of Overhill's common stock. Also 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 was 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
F-21
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
refund for early payment of the senior subordinated notes) during the year
ended September 30, 2000. A similar extraordinary charge of approximately
$600,000 was incurred as a result of a previous refinancing during the year
ended September 30, 1998.
9.2002.
7. NOTES PAYABLE AND ACCRUED INTEREST TO RELATED PARTY
In connection with the acquisition of TTI in June 1994, the Company initially
issued a note to the seller (Mr. Harold Estes) in the amount of $10.0
million, with interest at 8% due October 31, 1994 and collateralized by all
the capital stock and certain assets of TTI. As of various maturity dates
thereafter, Mr. Estes has entered into subsequent agreements with the Company
to modify and extend the term of the note. As of September 30, 2000,2001, the note
had a total unpaid balance of $19,390,120$20,861,367 (principal of $16,347,191 and
accrued interest of $3,042,900)$4,514,176), bearing interest at 9% per annum with a
maturity date of October 10, 2002, and allowing for principal and interest
payments to be made with amounts upstreamed to Polyphase by Timberjack for
the payment of taxes (subject to the approval of Timberjack's Board of
Directors and its lenders).2002. In connection with a previous modification
in 1998, the Company agreed to assign Mr. Estes any interest it may have or
subsequently obtain with respect to 2,000,000 shares of the Company's common
stock owned by the Pyrenees Group ("Pyrenees"), a private investment firm
controlled by Paul A. Tanner, the Company's former Chairman and Chief
Executive Officer, and previously held by Mr. Estes as secondary collateral.
These shares, which were recovered in 1999 on behalf of Mr. Estes, had a
value of $875,000, which was charged to interest expense in 1999 (see Notes 108
and 13)11).
As discussed in Note 16,
Quantum Fuel and Refining, Inc. ("Quantum"), when acquired by SFP, had a note
payable to Mr. Estes. As of September 30, 2000,2001, the note had a total unpaid
balance of $1,356,264$1,476,264 (principal of $1,000,000 and accrued interest of
$356,264)$476,264), bearing interest at 12% per annum with a maturity date of
March 31, 2002, and collateralized by the assets of Quantum. 10.In January 2002,
Mr. Estes extended the maturity date to October 31, 2002.
F-18
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has 50,000,000 authorized shares of $.01 par value preferred
stock, with the rights and preferences as designated by the Board of
Directors. The Board has designated a total of ten series of preferred stock
with various conversion prices, dividend rates and voting rights. All shares
of preferred stock generally have a redemption value and liquidation
preference of $10 per share and are callable by the Company at 105% of
redemption value.
During prior fiscal years, the holder of a series of preferred stock,
Infinity Investors Limited ("Infinity"), converted a total of 68,560 shares
of such stock having a redemption value of $685,600, together with accrued
dividends of $228,147, into a total of 2,500,000 shares of the
F-22
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements Company's
common stock. Any additional conversions would have required that the Company
file an application with the American Stock Exchange ("AMEX") for the listing
of such additional common shares prior to issuance. The AMEX Company Guide
requires stockholder approval as a prerequisite to the filing of such
additional listing application. At the Company's Annual Meeting held May 27,
1999, a majority of the Company's stockholders voted against a proposal to
file an additional listing application with respect to the conversion of
additional preferred shares to common shares by Infinity. The Company's
inability to honor conversion requests resulted in litigation by Infinity
against the Company. During November 1999, the Company and Infinity entered
into a settlement agreement wherein, among other things, the Company agreed
to repurchase all remaining 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 matters
related to the ownership of the preferred stock. As a result of the
settlement, the Company realized a gain of approximately $351,000, related to
the difference between the carrying value of the preferred shares plus
accrued dividends and the settlement amount. Such amount was accounted for by
recording a reduction of the Company's accumulated deficit during the year
ended September 30, 2000.
During August 1997, the Company sold 7,500 shares of a newly designated
series of preferred stock for $750,000, less expenses. The designations for
this series of preferred stock provided for a redemption value of $100 per
share, cumulative annual dividends of 6%, payable quarterly, and for a
conversion price equal to 75% of the average closing price of the Company's
common stock for the five trading days immediately preceding conversion. In
connection with this transaction, the Company recorded a non-cash dividend
of $250,000, representing the value assigned to the discount feature related
to the conversion of the preferred stock. During the year ended September
30, 1998, the holder converted all 7,500 shares of the preferred stock into
a total of 1,008,355 shares of the Company's common stock.
Stock Options
Under the terms of the 1994 Employee Stock Option Plan (as amended) adopted
by the Board of Directors in March 1994, the Company has reserved a total of
1,750,000 shares of its common stock for issuance to eligible employees of,
and consultants to, the Company. The Plan provides for the grant of both
incentive stock options (at exercise prices no less than fair value at the
date of grant) and non-qualified stock options (at exercise prices as
determined by the Compensation Committee of the Board of Directors), that
such options may be exercisable as determined by such Committee and that the
Plan will expire ten years following its adoption. As of September 30, 2000,2001,
options for 775,000 shares were available for future grantgrants under the Plan.
In January 1997, an unrelated third party was granted an optionF-19
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the year ended September 30, 2001, the exercise price of options to
purchase 200,000an aggregate of 290,000 shares of the Company's common stock, exercisable at $.01which
were granted under the Plan during fiscal 1996, was reduced to $0.75 per
share in exchange for a two-year consulting agreement. The contract was valued at
$973,000 based upon the trading valuefrom $2.00 per share. These options, held by Messrs. James Rudis,
Michael F. Buck, George R. Schrader and William E. Shatley, all of whom are
directors of the Company's common stock atCompany, together with options on an additional 80,000
shares granted to Messrs. Buck and Schrader under the datePlan in 1998, and on
293,000 shares granted to Messrs. Rudis and Shatley under individual plans in
1993, were exercised in September 2001. These exercises were accomplished
through the issuance of grant. The option holder ceased performing services for2-year promissory notes to the Company duringin an
aggregate amount of $497,250, bearing interest at 3.82% and collateralized by
the year ended September 30, 1997; accordingly,shares issued. No compensation expense has been recorded in connection
with these repricings as the Company
F-23
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
recognized the entire amount associated with the consulting contract as an
expense during fiscal 1997. During fiscal 1998, the Company canceled these
options and refused to allow the holder to exercise them. This matter became
the subject of litigation, which resulted in a judgment of $500,000 against
the Company, which was recorded as a liability as of September 30, 1998,
with a corresponding charge to paid-in capital. Subsequently, the Company
and the unrelated third party entered into a settlement agreement whereby
the Company agreed to pay the judgment amount over a period of eighteen
months beginning in October 1998, with a balloon payment at the end of that
period. As consideration for this forbearance and for partial payment
against the judgment, together with certain costs associated therewith, the
Company issued the unrelated third party a total of 300,000 shares of its
common stock valued at $85,000. All payments due under this agreement were completed during the year ended September 30, 2000.repriced above fair market value.
A summary of changes in common stock options during the three years ended
September 30, 2000,2001, is as follows:
Number of Exercise Weighted Avg.
Shares Price Exercise Price
------------------- -------------------- -----------------------
Number of Exercise Weighted Avg.
Shares Price Exercise Price
------------ -------- --------------
Outstanding, September 30, 1997 1,023,000 $ .01 - 5.25 $ 1.41
Granted 80,000 $ .75 $ .75
Canceled (375,000) $ .01 - 2.00 $ .94
------------------- -------------------- -----------------------
Outstanding, September 30, 1998 728,000 $ .75 - 5.25 $ 1.58
Granted 445,000 $ .01 - .50 $ .03
Exercised (430,000) $ .01 $ .01
Canceled (65,000) $ 2.00 - 5.25 $ 4.50
------------------- -------------------- -----------------------
Outstanding, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
Granted 125,000 $ .4375 $.4375
------------------- -------------------- -----------------------
Outstanding, September 30, 2000 803,000 $.4375 - 2.00 $ 1.15
=================== ==================== =======================
Exercisable, September 30, 2000 803,000 $.4375 - 2.00 $ 1.15
Exercisable, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
Exercisable, September 30, 1998 728,000 $ .75 - 5.25 $ 1.58
F-24Granted 445,000 $ .01 - .50 $ .03
Exercised (430,000) $ .01 $ .01
Canceled (65,000) $ 2.00 - 5.25 $ 4.50
-------- ------------- ----------
Outstanding, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
Granted 125,000 $ .4375 $ .4375
-------- ------------- ----------
Outstanding, September 30, 2000 803,000 $.4375 - 2.00 $ 1.15
Exercised (803,000) $ .4375 - .75 $ .70
-------- ------------- ----------
Outstanding, September 30, 2001 - - -
======== ============= ==========
Exercisable, September 30, 2001 - - -
Exercisable, September 30, 2000 803,000 $.4375 - 2.00 $ 1.15
Exercisable, September 30, 1999 678,000 $ .50 - 2.00 $ 1.28
F-20
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Summarized information about stock options outstanding at September 30,
2000, all of which are exercisable, is as follows:
Options Outstanding/ Weighted Average
Exercise Exercisable at Remaining
Price September 30, 2000 Contractual Life
--------------------- ------------------------- ------------------------
$.4375 125,000 Shares 1.38 Years
$ .50 150,000 Shares 0.08 Years
$ .75 373,000 Shares 3.82 Years
$ 2.00 290,000 Shares 5.75 Years
ProformaNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma information regarding net income (loss) is required by SFAS 123,
and has been determined as if the Company had accounted for its employee
stock options under the fair value method specified by SFAS 123. The fair
value of options granted during the years ended September 30, 2000 and 1999,
was estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted-averageweighted average assumptions for grants for the
years endingended September 30, 2000 and 1999, and 1998, respectively: risk freerisk-free interest
rate of 5.99%, and 4.86% and 5.52%; no dividends expected to be declared; volatility
factor of 0.82 0.92, and 1.15;0.92; and a weighted average expected life of eighteen months, five years
and six months. The effect of applying the fair value method under SFAS 123
to the Company's stock-based awards would result in a net income or loss
during the years ended September 30, 2001, 2000 1999 and 19981999 that is not
materially different from amounts reported and would have no effect on
reported per share amounts.
The Pyrenees Option
In October 1992, the Company's Board of Directors authorized the issuance of
options to purchase five series of convertible preferred stock to the
Pyrenees Group, a private investment firm controlled by Paul A. Tanner, the
Company's former Chairman and Chief Executive Officer, or its assignees.
In November 1995, Pyrenees exercised certain of these options through the
issuance of a 7% recourse note in the amount of $2,000,000, collateralized by
the shares issued, which was treated as an in-substance stock option at the
date of grant. During fiscal 1996, these shares were converted to 500,000
shares of common stock. After deducting principal payments on the note, the
remaining balance of $975,000 became uncollectible, and during fiscal 1999,
the 500,000 shares of common stock that secured this note were recovered
pursuant to certain litigation against Pyrenees and Mr. Tanner. This recovery
was accounted for as an unexercised stock option in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." As such, $756,000, representing the difference between the note
F-25
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
balance and the fair market value of the 500,000 shares as of the recovery
date, was recorded as a reduction in paid-in capital during fiscal 1999.
Warrants
Polyphase Warrants
------------------
In connection with the issuance of a series of preferred stock in 1997, theThe Company issuedhas warrants outstanding to purchase 500,000 shares of its common
stock at $1.50 per share, exercisable through September 2002. The warrants were
valued at $150,000 which was charged to operations in fiscal 1998.
In connection with the restructuring of certain indebtedness in 1997, the
Company issued warrants to purchase 420,000 shares of the Company's common
stock. The warrants covered 210,000 shares exercisable at $.01 per share,
which were exercised in May 1998, and an additional 210,000 shares
exercisable at $1.125 per share, exercisable through April 24, 2003. These
warrants were valued at $175,000, which was amortized over the remaining term
of the associated loan. Subsequent toDuring the year ended September 30, 2000,2001, the Company
repurchased the unexercised warrants covering 210,000 shares exercisable at
$1.125 per share for total consideration of approximately $46,000.
Subsidiary Warrants
-------------------
In connection with the financing provided by LLCP in November 1999 (see Note
8), the Company granted stock purchase warrants that entitle LLCP to
immediately acquire 17.5% of the common stock of Overhill, at a nominal
exercise price. Such warrants were valued at $2.37 million, which has been
recorded as a debt discount and is being amortized over the term of the LLCP
loan. 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 loan being repaid at their then
determined fair market value. If such shares are not repurchased, LLCP will
be entitled under the agreement to receive a cash payment of $500,000 from
Overhill. As these warrants to purchase common stock of a subsidiary have a
nominal exercise price, the Company is accounting for the warrants as a
minority interest. Accordingly, for the fiscal year ended September 30,
2000, the Company recorded income allocable to subsidiary warrant holder of
approximately $436,000.
In connection with Overhill's December 1997 refinancing (see Note 8), the
Company granted stock purchase warrants that entitled the holder to
immediately acquire at $.01 per share, 30% of the common stock of Overhill.
Such warrants were valued at $1,200,000, which was recorded as debt discount
and which was being amortized during the period such loan was outstanding.
The agreement provided that warrants for the purchase of 25% of Overhill
could be repurchased by the Company for $2,000,000 during the two-year
period following the date of the agreement. In June 1998, in connection with
amending certain covenants and
F-26F-21
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
restrictions, the percentage of Overhill that the Company could repurchase
for $2,000,000 was reduced to 20% from 25%. As these warrants to purchase
common stock of a subsidiary had a nominal exercise price, the Company
accounted for the warrants as a minority interest. Accordingly, for the
fiscal year ended September 30, 1999, the Company recorded income allocable
to subsidiary warrant holder of approximately $225,000. In connection with
the November 1999 refinancing discussed above, Overhill repurchased all
warrants held by the previous subordinated lender for total consideration of
$3.7 million. This transaction was treated as a reacquisition of a minority
interest, resulting in approximately $2.2 million of goodwill being recorded
in connection with this repurchase transaction.
Also in connection with the refinancing in December 1997, an unrelated
consultant was issued a warrant to purchase 1% of Overhill's common stock at
a purchase price of $50,000. The warrant was exercised subsequent to year
end.
11.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. INCOME TAXES
Income tax expense (benefit) consists of the following:
For the Years Ended
September 30,
--------------------------------------------------------------------------------------------------------
2001 2000 1999
1998
---------------- ---------------- ---------------------- ------ ------
Continuing Operations:
Current:
Federal $ 48,295 $300,000 $ -$(1,292,889) $(1,116,648) $(406,009)
State 40,461 53,881 56,57546,242 38,861 (175,353)
----------- ----------- ---------
(1,246,647) (1,077,787) (581,362)
Deferred:
Federal (2,074,000) - -2,106,932 (2,252,663) 246,072
State - - 44,437
----------- ----------- ---------
2,106,932 (2,252,663) 290,511
----------- ----------- ---------
Total provision for continuing operations 860,285 (3,330,450) (290,851)
----------- ----------- ---------
Discontinued Operations:
Current:
Federal 1,344,141 1,164,943 706,009
State 1,600 1,600 229,234
----------- ----------- ---------
1,345,741 1,166,543 935,243
Deferred:
Federal (177,932) 178,663 (246,074)
State - ---------------- ---------------- ----------------- (44,437)
----------- ----------- ---------
(177,932) 178,663 (290,511)
----------- ----------- ---------
Total provision for discontinued operations 1,167,809 1,345,206 644,732
----------- ----------- ---------
Total provision for income taxes $ 2,028,094 $(1,985,244) $353,881 $56,575
================ ================ ================$ 353,881
=========== =========== =========
F-27F-22
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The effective tax rate on income (loss) before income taxes was different
than the federal statutory tax rate. The following summary reconciles the
federal statutory tax rate with the actual effective rate:
For the Years Ended
September 30,
--------------------------------------------------------------------------------
2001 2000 1999
1998
-------------- -------------- ------------------- ---- ----
Effective statutory tax expense rate 34.0% 34.0% 34.0%
Increase (decrease) in effective tax rate
resulting from:
Federal tax assessment - 182.8 - (20.2)
State taxes, net of federal tax benefit 1.3 32.8 16.9(0.6) 0.2 (3.5)
Officer life insurance premiums, amortization of
goodwill, income allocable to subsidiary
warrant holder 13.7 (9.1) 81.0(13.0) (12.1) 1.0
Change in valuation allowance (156.6) (26.1) (87.8)
Sale of subsidiaries(70.8) 145.0 8.5
Other 3.1 - - (9.7)
Other - (4.9) 5.70.5
Tax credits - 6.1 (23.2)
-------------- -------------- ---------------- (0.7)
----- ----- ----
Effective tax expense (benefit) rate (107.6)% 215.6% 16.9%
============== ============== ===============(47.3) 167.1 19.6
===== ===== ====
F-28F-23
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of deferred tax balances are summarized as follows:
September 30,
----------------------------------------------------------------
2001 2000
1999
----------------- --------------------- ----
Deferred tax assets:
Allowance for doubtful accounts $ 753,804 $ 697,399
$ 683,249
Inventory 246,752 231,831 158,628
Accrued expenses 425,925 511,156 399,360
Capital loss carryforwards 423,229 390,730 394,388
Net operating loss carryforwards 1,645,798 3,150,204 4,434,471
AMT and other credit carryforwards 516,324 465,072 416,777
Investment in partnerships 528,495 204,766 -
Fixed assets 519,664 264,220
341,190
----------------- --------------------------- ------------
Total deferred tax assets 5,059,991 5,915,378 6,828,063
Valuation allowance (4,094,740) (2,805,409)
(5,694,986)
----------------- --------------------------- ------------
Deferred tax assets 965,251 3,109,969
1,133,077
----------------- --------------------------- ------------
Deferred tax liabilities:
Prepaid expenses (437,115) (273,490)
(124,528)
Intangibles (237,048) (547,916) (682,934)
Investment in partnerships - (88,338)-
Other (145,838) (214,563)
(237,277)---------- ------------
Deferred tax liabilities (820,001) (1,035,969)
(1,133,077)
----------------- --------------------------- ------------
Net deferred tax assets $ 145,250 $ 2,074,000
$ -
================= =========================== ============
At September 30, 2000,2001, the Company has federal net operating losses available
for carryforward of approximately $8.4$3.8 million, which will expire in 2020.
The net deferred tax assets at September 30, 2001 relate to the Company's
discontinued operation. The Company has recorded a valuation allowance
against a portionall of its net deferred tax assets that relate to its continuing
operations as of September 30, 2000 and 1999,2001, due to uncertainty with respect to the
future recoverability of all such amounts.
F-24
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 1999, 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 ("IRS"). Both of these tax periods were prior to the
acquisition of TTI by Polyphase.the Company. In connection with these audits, the IRS
assessed TTI with additional taxes of approximately $752,000 for the year
ended March 31, 1994. The Company and TTI appealed the IRS decision, and in
anticipation of further contesting the matter in District Court, TTI made a
cash payment to the IRS of $1,185,000, representing the above tax assessment
plus penalties and interest of $433,000. Such appeal was denied by the IRS,
and TTI is currently planning to seekseeking recovery through
F-29
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements District Court proceedings.
Based upon the amounts expected to be recovered through protective refund
claims filed with the IRS for the tax periods endingended March 31, 1992 and June
24, 1994, as well as TTI's evaluation (based on the advice of counsel) of its
remedies through litigation, TTI expensed $300,000 during the fiscal year
ended September 30, 1999, representing amounts considered not recoverable.
12. COMMITMENTS10.COMMITMENTS AND CONTINGENCIES
Commitments
SFP leases its facilities and equipment in Bon Wier, Texas. Future minimum
lease payments for allcommitments under these noncancelable operating leases at September 30, 2000
are
as follows:
2001 $2,206,139approximately $228,000 and $133,000 for fiscal years 2002 1,247,421and 2003,
535,181
2004 21,626
2005 --
----------
$4,010,367
==========respectively. Certain of the leases provide for renewal options for periods
from 2001 to 2005 at substantially the same terms as the current leases.
Rent expense including monthly equipment rentals, was approximately $2,384,000, $2,227,000$326,000, $328,000 and $1,946,000$413,000 for the years
ended September 30, 2001, 2000 1999 and 1998,1999, respectively.
TTI relies on three suppliers for the majority of its new units and parts. As
of September 30, 2000,2001, TTI had commitments to purchase inventory from these
suppliers amounting to approximately $337,000.$237,000.
TTI guarantees on behalf of various customers certain lines of credit with
banks and financial institutions. The portion of the credit lines guaranteed
ranges from zero to 100% on a customer-by-customer basis. At September 30,
2000,2001, TTI's guarantees totaled approximately $4,406,000$3,720,000 on total customer
indebtedness of approximately $19,970,000.$16,859,000. TTI receives a fee, in the form of
interest participation, on certain of the notes upon which it is contingently
liable. This fee is recognized as interest income on the accrual basis and is
usually held by the institution to meet reserve requirements. Funds held in
escrow by the lenders amounting to $633,124approximately $523,000 at September 30,
2000,2001, are included in the consolidated balance sheet as restricted cash and
are fully offset by the Company's reserve for credit guarantees.
F-30F-25
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
TTI has an interest in two unconsolidated partnerships. The total investment
in these partnerships at September 30, 20002001 of $469,533approximately $484,000 is
included in other assets. TTI guaranteesin prior years has guaranteed the debt of these
partnerships. The amount guaranteed
at September 30, 2000 of $135,843 ispartnerships, which has been collateralized by the accounts
receivable, inventory, equipment, buildings and real estateassets of the partnerships. ContingenciesAt
September 30, 2001, no guarantees were in effect for partnership debts.
CONTINGENCIES
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 current and past officers and directors. The complaintslawsuits 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 March 2000, the District Court dismissed the plaintiffs' claims against
one of the Company's officers and directors and restricted the plaintiffs
from pursuing a number of their claims against the other defendants. The
Court also granted the remaining defendants leave to file motions for summary
judgment. Motions for summary judgment were thereafter filed,
pointing out that there was no evidence to support the plaintiffs' claims.filed. In November
2000, in a lengthy decision addressing the plaintiffs' claims against each of
the remaining defendants, the District Court granted the motions for summary
judgment, thereby disposing of all of the claims asserted by the plaintiffs.
Without presenting any new evidence or any new
argumentsThe plaintiffs then filed a motion for rehearing, which the Court denied in
March 2001.
The plaintiffs have appealed these decisions to the United States Court of
Appeals for the Ninth Circuit. Appellate briefs have been filed by both
sides, but oral argument in the Court to consider,of Appeals has not yet occurred.
Recently, the plaintiffs have sought reargumentrequested the Ninth Circuit to enjoin the Company's
proposed spin-off of Overhill Farms. The Court of Appeals denied the
summary judgment motions.plaintiffs' request and directed them to address their request to the
District Court. The defendants have responded and have
requested thatplaintiffs thereafter filed an application with the
District Court, impose sanctions against plaintiffs'
counsel pursuantwhich restrained the spin-off for a few days until a hearing
could be conducted with respect to the applicable securities laws.proposed spin-off. Following a hearing
at which counsel for all parties appeared, the District Court dissolved its
temporary restraining order, thereby allowing the Company to proceed with the
proposed spin-off. The plaintiffs have not yet appealed the most recent
decision by the District Court.
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business and are subject to
potential environmental remediation liabilities in connection with the
acquisition of Quantum.business. However, management
believes (based, in part, on advice of legal counsel) that such contingencieslitigation
and claims will be resolved without material effect on the Company's
financial condition,position, results of operations or cash flows.
13.F-26
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. RELATED PARTY TRANSACTIONS
On February 23,During April 1998, the Company filed suit against Mr. Paul A. Tanner, resigned as Chief Executive Officer
and Chairman of the Company's Board of Directors. Mr. James Rudis, the
Company's President, was elected by the Board to assume the vacated
positions. Following the resignation, the Company charged to expense
approximately $165,000, representing all outstanding advances due from Mr.
Tanner.
F-31
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During prior fiscal years, the Company made significant advances to Mr.
Tanner, Pyrenees and PLY
Stadium Partners, Inc. ("Stadium Partners"), both
of which companies were controlled by Mr. Tanner. A significant portion of
the advancesand Pyrenees, related to a project by Stadium Partners to develop and build a
multi-purpose sports facility in Las Vegas, Nevada. In November 1996,
Stadium Partners, through a newly-formed partnership, purchased 62 acres in
Las Vegasthe
nonpayment of indebtedness 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 receiving an equity interest
in the project. After making the first required prepayment on the loan,
primarily from funds advancedsignificant advances made by the Company Nevada Partnership failed to
make the second prepayment when due or by the endon behalf of an agreed upon
forbearance period. Lehman subsequently instituted foreclosure proceedings,
and a foreclosure sale was conductedsuch parties in July 1998. The Company, recognizing
Stadium Partners' inability to meet its obligations, recorded a charge to
earnings of $14.8 million during the year ended September 30, 1997.
During April 1998, the Company filed suit against PLY Stadium Partners,
Inc., and against Mr. Tanner and Pyrenees, the guarantors of the debt.previous years. In May 1999, the Company
was awarded a judgment against such defendants, jointly and severally, in
the amount of approximately $19.5 million, plus interest. In connection
therewith, the defendants were ordered to turn over all ownership of the
stock of Polyphase,the Company, as well as the stock and assets of PLY Stadium Partners
Inc. and Pyrenees, whichPyrenees. This included the rights to 2,000,000 shares of Polyphasethe Company's
common stock owned by Pyrenees and held by Mr. Harold Estes as secondary
collateral. In connection with thisthe recovery of the 2,000,000 Polyphase shares, the
Company recorded interest expense of $875,000, the fair value assigned to
the shares, resulting from its assignment to Mr. Estes. Additionally, the
Company recorded income of $656,000 related to the recovery of 1,500,000
shares and accounted for the remaining 500,000 shares as an unexercised
stock option in accordance with APB No. 25.
After evaluating the possibility of any potential post judgmentpost-judgment collections
and the additional legal expenses to be incurred in pursuing such
collections, and further considering the likelihood of one or all of the
defendants seeking protection under bankruptcy laws, the Company reached an
agreement to settle the judgment. The settlement agreement provided, among
other things, for the defendants to execute and deliver assignments of
certain assets to the Company and to execute and deliver to the Company two
promissory notes totaling $450,000, which are collateralized by first or
second liens on real properties controlled by the judgment debtors. While
the total dollar value of the settlement amounts to slightly over $1.0
million, the amount whichthat may be ultimately recoverable as a result of this
settlement is not presently determinable and will be recorded as income
only when collection is assured.
Other assets include an insurance premium receivable from Mr. Harold Estes
representing insurance premiums paid by TTI on his behalf. As of September
30, 2000 and 1999, the insurance premium receivable was $600,206 and
$592,006, respectively.
F-32
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the purchase of TTI, the Company acquired a note
receivable from an officer of TTI. The note which has been renewed and
extended each year since issuance is secured by marketable securities, is
payable within one year and bears interest at 3.96%. As of September 30,
2000 and 1999, the balance outstanding was $352,580 and $341,305,
respectively, and the note has been classified as a non-current related
party receivable.
As discussed in Note 16, in September 2000, SFP acquired all of the outstanding common stock of
Quantum Fuel & Refining, Inc. from TTI's 25% minority partner in SFP.
TTI's 25% minority partner in SFP is a guarantor of TTI and SFP's note
payable to and SFP's revolving line of credit facility with, Bank of
America, N.A. (See Note 7). The father of TTI's 25% minority partner in SFP
is a former officer of SFP.related party. In connection with the
acquisition, SFP assumed a $1.0 million note and $356,000 of accrued
interest payable to Harold Estes, president and former owner of TTI (See Notes 9 and 16)(see
Note 7). Included in related party receivables atAs of September 30, 2001 and 2000, amounts outstanding under the
note including accrued but unpaid interest thereon were approximately $1.5
million and $1.4 million, respectively. The principal balance of the note,
plus any accrued but unpaid interest thereon, matures on March 31, 2002.
The former owner of Quantum is approximately
$483,900TTI's 25% minority partner in SFP. TTI's 25%
minority partner in SFP is a guarantor of TTI's and SFP's note payable to,
and SFP's revolving line of credit facility with, Bank of America, N.A.
(see Note 6). The father of TTI's 25% minority partner in SFP is a former
officer of SFP. As of September 30, 2001 and 2000, the Company has total
receivables net of allowance,$685,000 and $684,000, respectively, from the aforementionedthis former
officer of SFP or from companies owned or controlled by such officer, of
which approximately $188,000 at each balance sheet date is unsecured.
F-27
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 1999, TTI obtained a 49.99% limited partnership interest in receivablesa
construction related company, which is accounted for under the equity
method and is included in other assets. TTI does not participate in the
management of this partnership nor does it exercise control over the
partnership activities. As of September 30, 2001 and 2000, the Company had
sales contracts receivable of approximately $1.4 million and $306,000,
respectively, and accounts receivable of approximately $34,000 and $0,
respectively, due from the partnership and secured by equipment. These
receivable balances are unsecured. Additionally, included in related party receivables aton the
accompanying consolidated balance sheets. During the fiscal years ended
September 30, 2001, 2000 are $306,000 in
receivables from real estate partnerships in whichand 1999, TTI has minority
interestsrecorded sales of approximately
$517,000, $722,000 and $59,400 in receivables from a company owned by another related
party arising$622,092 to the partnership, respectively.
Additionally, during the fiscal years ended September 30, 2001, 2000 and
1999, TTI recorded income from the sale of timber.equipment to and interest income
on receivables from the partnership of $94,000, $150,000 and $41,000,
respectively.
In connection with the purchase of TTI, the Company acquired a note
receivable from an officer of TTI. The note has been renewed and extended
each year since issuance and is collateralized by marketable securities. As
of September 30, 2001 and 2000, the balance outstanding was $363,234 and
$352,580, respectively, and the note has been classified as a noncurrent
related party receivable.
As of September 30, 2001 and 2000, approximately $497,000 and $496,000,
respectively, of related party receivables are represented by notes which
are no longer accruing interestinterest. As of September 30, 2001 and 2000, the
Company has provided aallowances for doubtful accounts of $345,000 and
$200,000, reserverespectively, against all related party receivables as of that date.those
dates. The Company expects the remaining amounts due under related party
receivables to be realized.
Included inrealized either through collection or receipt of related
party receivables at September 30, 1999 are
approximately $683,000 in receivablescollateral.
Other assets include an insurance premium receivable from employees from the Company and
its subsidiaries and $499,000 in receivables from partnerships in whichMr. Harold Estes
representing insurance premiums paid by TTI has minority interests.on his behalf. As of September
30, 1999,2001 and 2000, the insurance premium receivable was approximately
$570,000 of
such receivables are notes which are no longer accruing interest. During
1999, the Company established a $100,000 reserve against receivables from
employees of the Company.$600,000.
See Note 97 for discussion of the notes payable to Mr. Estes.
See Note 108 for discussion of options granted to the Pyrenees Group, a
related party.
F-33
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
14.See Note 8 for discussion of options exercised by directors of the Company
in exchange for notes receivable.
12. EMPLOYEE BENEFIT PLANSPLAN
In 1986, prior to its acquisition by the Company, TTI adopted a profit
sharing plan. In order to participate in the plan, an employee must be at
least 21 years of age, have been employed by TTI at least one year and be a
full timefull-time employee. Vesting begins in the third year of employment and
increases each year until full vesting is achieved in the seventh year. The
plan
F-28
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
is administered by an independent third party. Trustees for the plan are
the president and controllerexecutive officers of TTI. The maximum contribution is the lesser of
15% of eligible salaries or net income plus retained earnings. Profit
sharing expense for the years ended September 30, 2001, 2000 and 1999 was
approximately $107,000, $179,000 and 1998
was $179,000, $329,000, and $353,000, respectively.
13. DISPOSITION OF SUBSIDIARIES
Overhill Farms, Inc.
In April 1997, Overhill introducedAugust 2001, the Company's Board of Directors approved a retirement savings plan under Section
401(k)to
spin-off all of the Internal Revenue Code. The plan covers substantially all
employees meeting minimum service requirements. Under the plan,
contributions are voluntarily made by employees.Company's shares of Overhill does not provide
for a matchFarms to the employees' contributions, and its expenses relatedholders of
the Company's common stock. The transaction to effect the spin-off will
result in the issuance, expected to be a tax free dividend to the planCompany's
stockholders, of one share of Overhill Farms common stock for every two
shares of the Company's common stock owned on the record date of the
transaction as established by the Board. The Company is currently in the
process of completing all of the applicable steps necessary to effect the
spin-off transaction.
The operations of Overhill Farms have not been significant.
15. SALE OF SUBSIDIARYreclassified as discontinued
operations in the accompanying consolidated statements of operations for
the three years ended September 30, 2001 and are summarized as follows:
For the Years Ended
-------------------------------------------------
September 30, October 1, September 26,
2001 2000 1999
------------- ------------- --------------
Net revenues $ 162,158,000 $ 145,418,000 $ 113,016,000
Gross profit 28,516,000 28,162,000 20,719,000
Operating income 9,483,000 10,813,000 7,384,000
Income before income taxes
and extraordinary item 3,409,000 5,128,000 1,647,000
Extraordinary item - early
extinguishment of debt, net
of income tax benefit of
$452,000 in 2000 - 838,000 -
Net income $ 2,242,000 $ 2,492,000 $ 1,002,000
F-29
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company's investment in Overhill Farms has been reclassified as net current
assets and as net long-term liabilities in the accompanying consolidated balance
sheets as of September 30, 2001 and 2000. The net assets of Overhill Farms as of
those dates, and, after deducting amounts allocable to the minority owner and
warrant holder, the Company's net investment in Overhill Farms, is summarized as
follows:
September 30,
------------------------------
2001 2000
------------- -------------
Assets:
Current assets $ 35,808,208 $ 39,017,160
Property, plant and equipment, net
of accumulated depreciation 4,819,092 4,209,474
Other assets 13,579,751 14,719,432
------------- -------------
Total assets 54,207,051 57,946,066
------------- -------------
Liabilities:
Current liabilities 18,536,541 17,698,455
Long-term debt, net 32,801,294 41,165,940
------------- -------------
51,337,835 58,864,395
------------- -------------
Net assets (deficit) of Overhill Farms 2,869,216 (918,329)
Net assets allocable to minority owner and
warrant holder (3,266,378) (2,806,175)
------------- -------------
Net investment (liability) $ (397,162) $ (3,724,504)
============= =============
F-30
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Polyphase Instrument Co.
Effective September 30, 1999, the Company sold its wholly-ownedwholly owned subsidiary,
Polyphase Instrument Co. ("PIC"), to an investment group headed by management
of that company. The transaction was completed as a sale of 100% of the
outstanding capital stock of PIC for total consideration of approximately
$2.8 million, consisting of $1.8 million in cash and a subordinated note
receivable for $1.0 million. The note, which is subordinated to bank
indebtedness of up to $1.375 million, bears interest at 8%, payable
interest-only on a quarterly basis through July 2001 and payable thereafter
in quarterly amounts of $50,000 principal plus accrued interest through
October 2006. The note is collateralized by all of the capital stock and
assets of PIC, subject to the subordination referred to above. Because of the
highly leveraged nature of the purchaser, the implicit reliance on the future
operations of PIC to provide cash flows for debt service and the
subordination of the note to other creditors of PIC, the Company fully
reserved the subordinated note receivable. As a result of this transaction,
the Company reported a loss from discontinued operations of approximately
$1.2 million for the year ended September 30, 1999.
F-34
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended September 30, 1999 and 1998, PIC's operations (unaudited) are summarized as follows:
For the Years Ended
September 30,
---------------------------------------------
1999 1998
-------------------- --------------------
Net revenues $6,373,500 $4,832,600
Gross profit 700,400 530,100
Operating income (loss) 59,300 51,100
Net income (loss) before tax 39,000 10,000
In December 1997, the Company sold Dallas Parkway Properties, Incorporated,
a subsidiary whose principal asset was the corporate office building, in
exchange for nominal consideration plus the assumption of a note payable for
$2.8 million. The Company realized a gain of approximately $988,000 on this
transaction, which was included in other income for the year ended September 30, 1998.
16.1999 are
summarized as follows:
Net revenues $ 6,373,500
Gross profit 700,400
Operating income 59,300
Net income 24,000
F-31
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. PRO FORMA FINANCIAL INFORMATION (Unaudited)
In connection with the spin-off of Overhill Farms, the Company expects to
issue an unsecured promissory note to Overhill Farms in the amount of
approximately $8.0 million, representing an agreed upon payment for all net
amounts advanced to the Company by Overhill Farms. The note is expected to
be payable three years from the effective date of the spin-off and will
bear interest at a rate to be determined at the time of the spin-off.
Following is an unaudited pro forma presentation of the of the Company's
financial position following the spin-off, assuming the transactions
described above occurred as of September 30, 2001:
Balance
September 30, Issuance
2001 Spin-off of Note Pro Forma
-----------------------------------------------------------------------------------
Current assets $50,925,664 $(17,271,667) $ - $33,653,997
Property & equipment 3,860,094 3,860,094
Other assets 10,257,023 10,257,023
----------- ------------ ----------- -----------
$65,042,781 $(17,271,667) $ - 47,771,114
=========== ============ =========== ===========
Current liabilities $16,465,875 $16,465,875
Long-term liabilities 40,529,169 $(17,668,829) $ 8,000,000 30,860,340
----------- ------------ ----------- -----------
56,995,044 (17,668,829) 8,000,000 47,326,215
Stockholders' equity 8,047,737 397,162 (8,000,000) 444,899
----------- ------------ ----------- -----------
$65,042,781 $(17,271,667) $ - $47,771,114
=========== ============ =========== ===========
F-32
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. ASSETS ACQUIRED
In August 2000, Overhill purchased certain assets of the Chicago Brothers
food operations from SSE Manufacturing, Inc., a subsidiary of Schwan's Sales
Enterprises, Inc.("Schwan's".) Under the terms of the agreement, Overhill
acquired the production and food processing equipment together with certain
leasehold interests and improvements in two plants and an administrative
facility in San Diego, California. In addition, Overhill acquired the rights
to certain trademarked brands as well as recipes and other intellectual
property. The transaction was accounted for using the purchase method of
accounting. The purchase price of the assets amounted to a total of $4.2
million, consisting of cash of $3.3 million, a significant portion of which
was provided by a term loan from Union Bank, and a $900,000 note payable to
the seller (see Note 8). The Company recorded approximately $3.3 million of
goodwill on the transaction, which is being amortized over 20 years. In
addition, Overhill also entered into a three-year renewable agreement to
provide Schwan's with a specified number of pounds of meals and meal
components. Results of the acquired operations have been combined with the
Company's results for the period subsequent to the acquisition date.
In September 2000, in exchange for approximately $400,000 of raw timber
inventory and the assumption of certain liabilities, SFP acquired all of
the outstanding common stock of Quantum from TTI's 25% minority partner in
SFP. Quantum's assets consist primarily of a non-operating crude oil
refinery and blending facility, along with certain other site amenities,
situated on approximately 120 acres of land in Egan, Louisiana. Liabilities
assumed in the F-35
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Quantum acquisition includeincluded (a) a $1.0 million note and
$356,000 of accrued interest payable to Harold Estes. (See Notes 9 and 13)Estes (see Note 7), and (b)
certain environmental liabilities. As SFP has acquired Quantum for resale,
the Company has classified this investment as assets held for sale in the
accompanying consolidated balance sheet as of September 30, 2001 and 2000.
See Note 1311 for related party transactions related to the acquisition of
Quantum.
During March 1998, TTI obtained16. APPROVAL OF SHAREHOLDER RIGHTS PLAN
On November 13, 2001, the Board of Directors approved a majorityShareholder Rights
Plan to be implemented in coordination with the proposed distribution by
the Company of all of its shares of common stock of Overhill Farms to the
shareholders of the Company. The Shareholder Rights Plan was adopted to
provide protection to shareholders in the event of an unsolicited attempt
to acquire the Company.
Pursuant to the Shareholder Rights Plan, the Company plans to distribute
preferred stock purchase rights (each a "Right") as a dividend at the rate
of one Right for each share of the Company's common stock held by
shareholders of record on a record date to be determined upon the
occurrence of certain specified events. Each share of common stock issued
after the record date will be issued with an attached Right. Each Right
entitles the holder, upon the occurrence of certain events, to purchase one
one-thousandth of a share of the Company's Series A Junior Participating
Preferred Stock at an initial exercise price of $4.00, subject to
adjustments. The Rights are exercisable only if a person or group acquires
20 percent or more of the Company's common stock or announces an intention
to commence a tender or exchange offer, the consummation of which would
result in ownership interest in Wood Forest
Products LLC, which subsequently acquiredby such person or group of 20 percent or more of the
rights to harvest timber from
a tractCompany's common stock. In addition, if any person or group acquires 20
percent or more of landthe Company's common stock, each Right not owned by the
U.S. Forestry Service. Concurrently,acquirer would become exercisable for the number of shares of the Company's
common stock that at the time have a market value of two (2) times the
exercise price of the Right. If, after any person or group acquires 20
percent or more of the Company's common stock, the Company obtainedis acquired in a
majority ownership interestmerger or other business transaction in Southern Forest Products
LLC, whose primary purposewhich the Company is not the
surviving corporation, the Rights, under certain circumstances will be
modified so as to leaseentitle the holder to buy a number of the acquiring
corporation's common stock having a market value of two (2) times the
exercise price of each Right. The Rights may be redeemed by the Board of
Directors until certain specified times at a redemption price of $0.01 per
Right, and operate a sawmill in East Texas.
Formay be amended by the years ended September 30, 2000, 1999 and 1998, these forestry
products businesses contributed revenues of approximately $9.0 million, $7.4
million and $3.0 million, respectively, and a net loss of approximately
$1,069,000, $329,000 and $170,000, respectively.Board at any time prior to becoming
exercisable.
F-33
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. INFORMATION BY INDUSTRY SEGMENT
The Company's industrybusiness is concentrated in the East Texas forestry business
with operations in the segments are described below.
FoodEQUIPMENT, PARTS AND SERVICE
The foodequipment, parts and service segment produces high quality entrees, plated meals, soups, saucesoperates equipment dealerships,
which sell major units, parts and poultry, meatrepair services and fish specialties primarily for customers infinances the airline, restaurantsale of
industrial and weight loss industries.
Forestry
The forestry segment sells, finances and repairscommercial timber and logging equipment in East Texas and
Western Louisiana and participates in other
forestry-related activities.western Louisiana. Customers range from small logging operations to large
integrated paper mills.
Transformertimber related operations.
TIMBER AND WOOD PRODUCTS
The transformertimber products segment manufacturedincludes sawmill operations and marketed electronic transformers,
inductorsthe treatment
and filters. The Company's wholly-owned subsidiary, Polyphase
Instrument Co. (PIC), was included in the transformer segment. Effective
September 30, 1999, allsale of the capital stock of PIC was sold (see Note 15).
F-36lumber products.
F-34
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
---------------------------------------------------------------
Food Forestry2001
-------------------------------------------------
Equipment, Timber and
and Parts Wood
Service Products Total
----------------- ----------------- ------------------------------- -------------- ------------
Net Sales:
Sales to unaffiliated customers $145,041,215 $44,056,724 $189,097,939
================= ================= ==================$32,591,941 $ 10,703,603 $43,295,544
=========== ============ ===========
Operating income $ 10,812,991237,271 $ 433,488 $ 670,759
=========== ============
General corporate expenses (789,595)
Interest expense (2,405,665)
Interest income and other 764,051
-----------
Loss before income taxes and
discontinued operations $(1,760,450)
===========
Identifiable assets:
Segment assets $ 41,943,475 $ 5,486,549 $47,430,024
============ ============
Corporate assets 17,578,815
Eliminations 33,942
-----------
Total assets $65,042,781
===========
Capital expenditures, net:
Segment $ 309,117 $ 395,277 $ 704,394
============ ============
Corporate -
-----------
Total capital expenditures, net $ 704,394
===========
Depreciation and amortization:
Segment $ 763,422 $ $ 156,150 $ 919,572
============ ============
Corporate 2,500
-----------
Total depreciation and amortization $ 922,072
===========
No customer accounted for more than 10% of the Company's sales in fiscal 2001.
F-35
OVERHILL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
-------------------------------------------------
Equipment, Timber and
and Parts Wood
Service Products Total
------------- -------------- ------------
Net Sales:
Sales to unaffiliated customers $ 35,079,971 $ 8,976,753 $ 44,056,724
============ =========== ============
Operating income $ 938,367 $ (717,606) $ 220,761
$ 11,033,752
================= ============================= ===========
General corporate expenses (481,904)
Interest expense (8,072,133)(2,521,019)
Interest income and other 1,082,993
------------------
Income1,216,804
------------
Loss before income taxes income allocable to
subsidiary warrant holder and
extraordinary item $ 3,562,708
==================discontinued operations $(1,565,358)
============
Identifiable assets:
Segment assets $ 69,272,927 $50,341,136 $119,614,063
================= =================39,495,972 $ 4,943,551 $ 44,439,523
============ ===========
Corporate assets 28,593,24224,666,061
Eliminations (43,574,552)
------------------417,080
------------
Total assets $104,632,753
==================$ 69,522,664
============
Capital expenditures, net:
Segment $ 3,180,814168,881 $ 296,715 $ 3,477,529
================= =================140,899 309,780
============ ===========
Corporate -
------------------------------
Total capital expenditures, net $ 3,477,529
==================309,780
============
Depreciation and amortization:
Segment $ 2,364,098800,384 $ 103,535 903,919
$ 3,268,017
================= ============================= ===========
Corporate 7,800
------------------7,799
------------
Total depreciation and amortization $ 3,275,817
==================911,718
============
The Company's Food segment had sales to King's Hawaiian in fiscal 2000 which
comprised approximately 12% of consolidated sales. No other customer accounted for more than 10% of the Company's sales in fiscal 2000.
F-37F-36
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
-------------------------------------------------------------
Food Forestry-------------------------------------------------
Equipment, Timber and
and Parts Wood
Service Products Total
----------------- ----------------- ------------------------------ -------------- ------------
Net Sales:
Sales to unaffiliated customers $112,495,726 $45,812,384 $158,308,110
================= ================= =================$ 38,365,377 $ 7,447,007 $ 45,812,384
============ =========== ============
Operating income $ 7,384,3851,223,005 $ 267,007 $ 1,490,012
$ 8,874,397
================= ============================= ===========
General corporate expenses (380,798)
Recovery of related party receivables 656,250
Interest expense (9,485,892)(3,740,921)
Interest income and other 500,183
-----------------
Income492,684
------------
Loss before income taxes income allocable to
subsidiary warrant holder,and
discontinued and extraordiary item $ 164,140
=================operations $(1,482,773)
============
Identifiable assets:
Segment assets $ 50,024,950 $50,181,108 $100,206,058
================= =================44,731,523 $ 5,117,633 $ 49,849,156
============ ===========
Corporate assets 24,851,71617,926,277
Eliminations (41,535,832)
-----------------331,952
------------
Total assets $ 83,521,942
=================68,107,385
============
Capital expenditures, net:
Segment $ 295,405410,871 $ 1,002,611 $ 1,298,016
================= =================593,029 1,003,900
============ ===========
Corporate 1,290
------------------
------------
Total capital expenditures, net $ 1,299,306
=================1,003,900
============
Depreciation and amortization:
Segment $ 2,715,121775,159 $ 834,4677,516 $ 3,549,588
================= =================782,675
============ ===========
Corporate 1,009,919
-----------------1,061,711
------------
Total depreciation and amortization $ 4,559,507
=================1,844,386
============
The Company's Food segment had sales to Jenny Craig, American Airlines and
King's Hawaiian in fiscal 1999 which comprised approximately 14%, 13% and 12%,
respectively, of consolidated sales. No other customer accounted for more than 10% of the Company's sales in fiscal 1999.
F-38F-37
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
-------------------------------------------------------------
Food Forestry Total
----------------- ----------------- -----------------
Net Sales:
Sales to unaffiliated customers $93,348,856 $48,049,483 $141,398,339
================= ================= =================
Operating income $ 4,976,930 $ 4,076,683 $ 9,053,613
================= =================
General corporate expenses (1,420,191)
Gain on sale of assets 987,857
Interest expense (8,830,391)
Interest income and other 543,080
-----------------
Income before income taxes, income allocable to
subsidiary warrant holder, discontinued
operations and extraordinary item $ 333,968
=================
Identifiable assets:
Segment assets $45,221,575 $50,082,526 $ 95,304,101
================= =================
Corporate assets 25,376,181
Eliminations (39,837,746)
-----------------
Total assets $ 80,842,536
=================
Capital expenditures, net:
Segment $ 604,853 $ 680,299 $ 1,285,152
================= =================
Corporate 30,251
-----------------
Total capital expenditures, net $ 1,315,403
=================
Depreciation and amortization:
Segment $ 3,041,237 $ 749,991 $ 3,791,228
================= =================
Corporate 401,043
-----------------
Total depreciation and amortization $ 4,192,271
=================
The Company's Food segment had sales to Jenny Craig in fiscal 1998 which
comprised approximately 22% of consolidated sales. No other customer accounted
for more than 10% of the Company's sales in fiscal 1998.
F-39
POLYPHASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. QUARTERLY FINANCIAL DATA (Unaudited)
For the Year Ended September 30, 2000
---------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------------- ----------------- ----------------- -----------------
Net revenues $44,442,950 $43,487,234 $46,647,829 $54,519,926
Gross profit 9,442,692 8,796,021 9,137,836 7,730,737
Operating income 3,126,082 2,819,417 2,747,392 1,858,957
Extraordinary item (1,290,431) - - -
Net income (loss) $ (11,088) $ 811,235 $ 1,025,373 $ 1,995,826
================= ================= ================= =================
Net income (loss) per
common share $ .02 $ .05 $ .06 $ .11
================= ================= ================= =================
For the Year Ended September 30, 1999
-----------------------------------------------------------------------------------2001
--------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------------- ----------------- ----------------- ------------------
Net revenues $34,854,998 $39,695,102 $37,702,120 $ 46,055,8908,250,086 $ 8,679,922 $12,830,395 $13,535,141
Gross profit 6,024,188 6,805,493 7,387,110 8,250,4351,954,203 2,150,734 2,114,830 1,679,792
Operating income 1,631,301 1,834,349 2,207,632 2,820,311(loss) (123,136) (137,764) 78,241 17,330
Net income (loss) before
discontinued operations (103,893) (139,130) 65,733 (2,443,446)
Discontinued operations 3,326 7,418 3,819 (1,197,071)267,846 492,344 573,785 205,156
Net income (loss) $ (340,385)163,953 $ (193,559)353,214 $ 165,495 $ (1,229,178)
================= ================= ================= ==================639,518 $(2,238,290)
=========== =========== =========== ===========
Net income (loss) per
common share $ (.02) $ (.01) $ .01 $ (.07)
================= ================= ================= ==================.02 $ .04 $ (.13)
=========== =========== =========== ===========
For the Year Ended September 30, 2000
--------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------------- ----------------- ------------------ ------------------
Net revenues $10,280,892 $10,906,675 $ 9,444,673 $13,424,484
Gross profit 2,375,838 2,555,259 1,910,455 480,894
Operating income (loss) 288,594 370,829 (170,379) (750,187)
Net income (loss) before
discontinued operations (110,608) 313,647 275,257 1,286,796
Discontinued operations 99,520 497,588 750,116 709,030
Net income (loss) $ (11,088) $ 811,235 $ 1,025,373 $ 1,995,826
========== =========== =========== ===========
Net income (loss) per
common share $ - $ .05 $ .06 $ .12
========== =========== =========== ===========
F-40F-38
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Balance SheetsSUMMARY BALANCE SHEETS
September 30,
--------------------------------------------------------------------------------
2001 2000
1999
---------------------- ---------------------------------- --------------
Current assets:
Cash $ 353,184190,084 $ 51,471
Receivable from sale of subsidiary - 780,000353,184
Prepaid expenses and other 96,544 -
9,000
---------------------- ------------------Net current assets of discontinued operations 17,271,667 21,318,705
---------------- --------------
Total current assets 353,184 840,47117,558,295 21,671,889
Property and equipment 20,191 50,191
50,191
Less-AccumulatedLess accumulated depreciation (18,981) (46,481)
(44,981)
---------------------- ---------------------------------- --------------
1,210 3,710
5,210
Non current receivables:Noncurrent assets:
Deferred federal income taxes - 2,075,334 572,280
Income tax receivable 6,724,954 6,654,314 5,959,121
Other assets (primarily investmentsinvestment in subsidiaries) 19,506,700 17,474,634
---------------------- ------------------23,333,058 23,231,204
---------------- --------------
Total assets $ 28,593,24247,617,517 $ 24,851,716
====================== ==================53,636,451
================ ==============
Current liabilities:
Accounts payable $ 62,780350,904 $ 140,35962,780
Accrued expenses 30,250 27,250 981,840
Deferred income taxes 658,430 -
364,669
---------------------- ---------------------------------- --------------
Total current liabilities 1,039,584 90,030
1,486,868Noncurrent liabilities:
Note payable and accrued interest
payable to related party 20,861,367 19,390,120
17,914,842
---------------------- ------------------Net noncurrent liabilities related to discontinued
operations 17,668,829 25,043,209
---------------- --------------
Total liabilities 19,480,150 19,401,710
---------------------- ------------------39,569,780 44,523,359
---------------- --------------
Stockholders' equity:
Preferred stock - 564
Common stock 186,155 178,125
178,125
Paid inPaid-in capital 28,156,204 27,650,734 28,159,887
Accumulated deficit (19,797,372) (18,715,767)
(22,888,570)
---------------------- ------------------Notes receivable (497,250) -
---------------- --------------
Total stockholders' equity 8,047,737 9,113,092
5,450,006
---------------------- ---------------------------------- --------------
$ 28,593,24247,617,517 $ 24,851,716
====================== ==================53,636,451
================ ==============
See note to condensed financial information of registrant.
F-41F-39
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of IncomeSUMMARY STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
----------------------------------------------------------------------------
2001 2000
1999
----------------- -------------------------------- ---------------
Net revenues $ - $ -
Cost of sales - -
----------------- -------------------------------- ---------------
Gross Profitprofit - -
Selling, general and administrative expenses 789,479 481,789
380,798
----------------- -------------------------------- ---------------
Operating income (loss) (789,479) (481,789) (380,798)
Other income (expense)
Recoveries on related party receivable - 656,250:
Interest expense (1,472,493) (1,499,662) (2,776,376)
Interest income and other 80,000 118,371
-
----------------- -------------------------------- ---------------
Total other expense (1,392,493) (1,381,291)
(2,120,126)
----------------- -------------------------------- ---------------
Loss before income taxes, equity in net income of
subsidiaries and discontinued operations (2,181,972) (1,863,080) (2,500,924)
Income taxes (benefit) 652,930 (3,523,064)
(941,008)
----------------- -------------------------------- ---------------
Income (loss) before equity in net income of subsidiaries
and discontinued operations (2,834,902) 1,659,984 (1,559,916)
Equity in net income of subsidiaries 2,161,362 1,144,797
----------------- -----------------
Income214,166 105,108
--------------- ---------------
Net income (loss) before discontinued operations 3,821,346 (415,119)(2,620,736) 1,765,092
Discontinued operations, - (1,182,508)
----------------- -----------------net of income taxes 1,539,131 2,056,254
--------------- ---------------
Net income (loss) (1,081,605) 3,821,346
(1,597,627)
Gain (dividends) on reacquired preferred stock - 351,457
(91,199)
----------------- -------------------------------- ---------------
Net income (loss) attributable to common shareholders $ (1,081,605) $ 4,172,803
$(1,688,826)
================= ================================ ===============
See note to condensed financial information of registrant.
F-42F-40
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash FlowsSUMMARY STATEMENTS OF CASH FLOWS
For the Years Ended
September 30,
--------------------------------------------------------------------------
2001 2000
1999
----------------- -------------------------------- -------------
Cash flow provided by (used in) operating activities:
Net income (loss) $ (1,081,605) $ 3,821,346 $(1,597,627)
Adjustments to reconcile net lossincome (loss)
to net cash used in operating activities:
Depreciation and amortization 2,500 1,500 1,009,919
Equity in income of subsidiaries (2,161,372) (1,144,797)(214,166) (105,108)
Discontinued operations (1,831,342) (2,056,254)
Interest accrual on note payable to related party 1,471,247 1,475,278
Deferred income tax (3,523,064) 225,0612,637,220 (2,433,621)
Stock option granted for services 54,689 - Recoveries on related party receivable - (656,250)
Loss (income) from discontinued operations - 1,182,50854,689
Increase (decrease) in, net of effects of disposition:in:
Receivables from sale of subsidiary - 780,000 (780,000)
Prepaid expenses and other (12,688) 9,000
(735,813)Income tax receivable (1,566,640) -
Accounts payable and accrued expenses 416,124 (795,117)
457,385
----------------- -------------------------------- -------------
Net cash used in operating activities (1,813,018) (2,039,614)
----------------- -----------------
Cash flows provided by (used in) investing activities:
Receivable from related parties - 9,000
Proceeds from sale of subsidiary - 1,780,000
Capital expenditures - (1,289)
----------------- -----------------
Net cash provided by investingoperating activities - 1,787,711
----------------- -----------------(179,350) 751,713
--------------- -------------
Cash flows provided by (used in) financing activities:
Net borrowings on notes payable 1,475,278 1,607,437
Advances from (payments to) subsidiary 1,089,453 (47,174)
Repurchase of preferred stock (450,000) -
Payments on long term borrowings - (1,200,000)
Exercise of common stock options and62,188 -
Repurchase of stock purchase warrants (45,938) -
28,436
Dividends onRepurchase of preferred stock - (91,199)
----------------- -----------------(450,000)
--------------- -------------
Net cash provided by (used in) financing activities 16,250 (450,000)
--------------- -------------
Net increase (decrease) in cash (163,100) 301,713
Cash at beginning of year 353,184 51,471
--------------- -------------
Cash at end of year $ 2,114,731190,084 $ 297,500
----------------- -----------------353,184
=============== =============
See note to condensed financial information of registrant.
F-43F-41
POLYPHASEOVERHILL CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summary Statements of Cash Flows
Net increase in cash $301,713 $45,597
Cash - beginning of year 51,471 5,874
----------------- -----------------
Cash - end of year $353,184 $51,471
================= =================
See note to condensed financial information of registrant.
F-44
POLYPHASE CORPORATION AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATIONSUMMARY STATEMENTS OF REGISTRANTCASH FLOWS
Note A - Basis of Presentation
In these parent company only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company's share of net income of
its unconsolidated subsidiaries is included in consolidatedparent company income using the
equity method. In addition, the Company's investment in and the operations of
discontinued operations are separately stated in these financial statements.
These parent company only financial statements should be read in conjunction
with the Company's consolidated financial statements and the notes applicable
thereto.
Due to subsidiary debt covenant and other restrictions, the Company's ability to
obtain funds from its subsidiaries is limited (See Note 8).limited. In addition, as discussed in
Notes 8 and 9,Note 11, the parent company's ownership of Overhill Farms is
pledged as collateral on a bank loan and its ownership of Texas Timberjack is pledged as
collateral against the note payable to related party. Additionally, the Company
has no operating revenues and may be highly dependent on its subsidiaries for
its liquidity needs.
F-45F-42
OVERHILL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Costs Balance at End
Description Beginning of Period and Expenses Deductions of Period
- -------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,578,359 $ 541,764 $ 460,252(1) $ 1,659,871
------------ ------------ ------------ ------------
Total $ 1,578,359 $ 541,764 $ 460,252 $ 1,659,871
============ ============ ============ ============
Year Ended September 30, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,782,887 $ 272,719 $ 477,247(1) $ 1,578,359
------------ ------------ ------------ ------------
Total 1,782,887 $ 272,719 $ 477,247 $ 1,578,359
============ ============ ============ ============
Year Ended September 30, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 719,363 $ 1,141,793 $ 78,269(1) $ 1,782,887
------------ ------------ ------------ ------------
Total $ 719,363 $ 1,141,793 $ 78,269 $ 1,782,887
============ ============ ============ ============
(1) Uncollectible accounts written off, net of recoveries
F-43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OVERHILL CORPORATION
By: /s/ James Rudis January 11, 2002
---------------------
James Rudis
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
/s/ James Rudis January 11, 2002
- ------------------------------
James Rudis
Chief Executive Officer,
Chairman of the Board and
President (Principal Executive
Officer)
/s/ William E. Shatley January 11, 2002
- ------------------------------
William E. Shatley
Senior Vice President, Secretary,
Treasurer, Chief Financial Officer
and Director (Principal Financial
and Accounting Officer)
/s/ Michael F. Buck January 11, 2002
- ------------------------------
Michael F. Buck
Director
/s/ Donald J. Ervin January 11, 2002
- ------------------------------
Donald J. Ervin
Director
/s/ George R. Schrader January 11, 2002
- ------------------------------
George R. Schrader
Director
35