U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[ ] 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
OVERHILL CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2708876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4800 Broadway, Suite A
Addison, Texas 75001
(Address of principal executive offices)
(972) 386-0101
(Registrants's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12
months (or for such shorter period the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 18,615,464
--------------------------------
Outstanding at May 6, 2002
OVERHILL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
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TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION Page No.
------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
March 31, 2002 and September 30, 2001 2
Consolidated Condensed Statements of
Operations for the Three Months Ended
March 31, 2002 and 2001 4
Consolidated Condensed Statements of
Operations for the Six Months Ended
March 31, 2002 and 2001 5
Consolidated Condensed Statements of
Cash Flows for the Six Months Ended
March 31, 2002 and 2001 6
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature Page 23
-1-
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
Assets
------
March 31, September 30,
------------ ------------
2002 2001
------------ ------------
(Unaudited)
Current assets:
Cash $ 1,769,000 $ 686,382
Receivables, net of allowance for doubtful accounts
of $626,200
Trade accounts 2,270,120 3,399,591
Current portion of sales contracts 4,780,298 5,029,362
Related parties 2,161,580 1,927,768
Notes 3,933,524 4,191,128
Inventories 16,240,044 16,374,797
Net current assets of discontinued operations 7,039,866 17,271,667
Prepaid expenses and other 2,315,291 2,044,969
------------ ------------
Total current assets 40,509,723 50,925,664
------------ ------------
Property and equipment:
Land 432,000 432,000
Buildings and improvements 2,919,759 2,722,595
Machinery, equipment and other 3,303,590 3,053,909
------------ ------------
6,655,349 6,208,504
Less-Accumulated depreciation (2,642,855) (2,348,410)
------------ ------------
4,012,494 3,860,094
------------ ------------
Other assets:
Noncurrent receivables, net of allowance for
doubtful accounts of $1,033,671
Sales contracts 2,511,135 2,627,468
Related parties 382,444 375,928
Excess of cost over fair value of net assets
of businesses acquired 3,612,580 3,612,580
Restricted cash 537,855 522,709
Assets held for sale 1,926,264 1,926,264
Other 1,139,723 1,192,074
------------ ------------
10,110,001 10,257,023
------------ ------------
$ 54,632,218 $ 65,042,781
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
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OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
Liabilities and Stockholders' Equity
------------------------------------
March 31, September 30,
------------ ------------
2002 2001
------------ ------------
(Unaudited)
Current liabilities:
Notes payable $ 11,715,599 $ 13,313,743
Note payable and accrued interest to related party 23,131,239 --
Accounts payable 1,548,255 2,085,200
Advance from related party 850,000 --
Accrued expenses and other 1,245,953 1,066,932
------------ ------------
Total current liabilities 38,491,046 16,465,875
Notes payable and accrued interest to related party -- 22,337,631
Net long-term liabilities related to discontinued operations 7,871,075 17,668,829
Reserve for credit guarantees 537,855 522,709
------------ ------------
Total liabilities 46,899,976 56,995,044
------------ ------------
Stockholders' equity:
Common stock, $.01 par value, authorized
100,000,000 shares, issued and outstanding
18,615,464 shares 186,155 186,155
Paid-in capital 28,156,204 28,156,204
Notes receivable from officers and directors (497,250) (497,250)
Accumulated deficit (20,112,867) (19,797,372)
------------ ------------
Total stockholders' equity 7,732,242 8,047,737
------------ ------------
$ 54,632,218 $ 65,042,781
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
March 31,
----------------------------
2002 2001
------------ ------------
Net revenues $ 10,574,659 $ 8,679,922
Cost of sales 8,443,408 6,529,188
------------ ------------
Gross profit 2,131,251 2,150,734
Selling, general and administrative expenses 1,868,864 2,288,498
------------ ------------
Operating income (loss) 262,387 (137,764)
------------ ------------
Other income (expenses):
Interest expense (551,628) (566,155)
Interest income and other (75,000) 157,594
------------ ------------
Total other income (expenses) (626,628) (408,561)
------------ ------------
Loss before income taxes and discontinued operations (364,241) (546,325)
Income tax benefit 147,460 406,195
------------ ------------
Loss before discontinued operations (216,781) (140,130)
Discontinued operations, net of income taxes 32,876 492,344
------------ ------------
Net income (loss) $ (183,905) $ 352,214
============ ============
Net income (loss) per share - basic and diluted:
Before discontinued operations $ (.01) $ (.01)
Discontinued operations -- .03
------------ ------------
Net income (loss) per share $ (.01) $ .02
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
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OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended
March 31,
----------------------------
2002 2001
------------ ------------
Net revenues $ 19,351,894 $ 16,930,008
Cost of sales 15,095,467 12,825,071
------------ ------------
Gross profit 4,256,427 4,104,937
Selling, general and administrative expenses 3,634,256 4,365,837
------------ ------------
Operating income (loss) 622,171 (260,900)
------------ ------------
Other income (expenses):
Interest expense (1,096,192) (1,192,645)
Interest income and other (139,286) 585,638
------------ ------------
Total other income (expenses) (1,235,478) (607,007)
------------ ------------
Loss before income taxes and discontinued operations (613,307) (867,907)
Income tax benefit 267,089 623,884
------------ ------------
Loss before discontinued operations (346,218) (244,023)
Discontinued operations, net of income taxes 30,723 760,190
------------ ------------
Net income (loss) $ (315,495) $ 516,167
============ ============
Net income (loss) per share - basic and diluted:
Before discontinued operations $ (.02) $ (.01)
Discontinued operations -- .04
------------ ------------
Net income (loss) per share $ (.02) $ .03
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
March 31,
--------------------------
2002 2001
----------- -----------
Cash flows provided by (used in) operating activities:
Net income (loss) $ (315,495) $ 516,167
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 270,404 456,772
Provision for doubtful accounts 86,477 147,451
Interest accrual on notes to related party 793,608 793,608
Loss on investment in limited
liability company 462,817 40,814
(Income) from discontinued operations (325,449) (760,190)
Changes in:
Accounts and sales contracts receivable 1,408,391 405,650
Inventories 134,753 (1,206,822)
Prepaid expenses and other 19,212 970,742
Accounts payable (536,945) 3,510,281
Accrued expenses and other 238,517 (1,708,694)
----------- -----------
Net cash provided by operating activities 2,236,290 3,165,779
----------- -----------
Cash flows provided by (used in) investing activities:
Notes and other receivables 257,604 (810,882)
Receivables from related parties (240,328) (28,016)
Capital expenditures, net (422,804) (350,141)
----------- -----------
Net cash (used in) investing activities $ (405,528) $(1,189,039)
----------- -----------
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Six Months Ended
March 31,
--------------------------
2002 2001
------------ -----------
Cash flows provided by (used in) financing activities:
Net borrowings (principal payments) on line
of credit arrangements $(1,598,144) $(1,383,219)
Borrowings on other notes payable and long-term debt -- 185,205
Principal payments on long-term debt -- (582,246)
Advance from related party 850,000 --
Exercise of common stock options -- 7,500
Repurchase of stock purchase warrants -- (45,938)
----------- -----------
Net cash (used in) financing activities (748,144) (1,818,698)
----------- -----------
Net increase in cash 1,082,618 158,042
Cash - beginning of period 686,382 963,387
----------- -----------
Cash - end of period $ 1,769,000 $ 1,121,429
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest $ 267,445 $ 374,983
Income taxes $ 58,000 $ 50,000
The accompanying notes are an integral part
of these consolidated financial statements.
-7-
OVERHILL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
March 31, 2002
1. NATURE OF BUSINESS
Overhill Corporation, formerly Polyphase Corporation, (the "Company") is a
holding company that, through its subsidiaries, currently operates in
forestry and timber related businesses. These operations are conducted
through the Company's wholly-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
logging and construction equipment and is also engaged in certain timber
and sawmill operations.
The Company's Board of Directors, in 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.
Overhill Farms has been accounted for as discontinued operations in the
accompanying financial statements.
2. BASIS OF PRESENTATION
The consolidated financial statements include the continuing operations and
related accounts of the Company, its wholly-owned subsidiaries and its
majority-owned subsidiaries. All material intercompany accounts and
transactions are eliminated. Certain prior year amounts have been
reclassified to conform to the current year presentation.
The financial statements included herein have been prepared by the Company,
without an audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading.
The information presented reflects all adjustments (consisting solely of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods when read
in conjunction with the financial statements and the notes thereto included
in the Company's latest financial statements filed as part of its Form 10-K
for the year ended September 30, 2001.
The balance sheet at September 30, 2001 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
-8-
3. INVENTORIES
Inventories are summarized as follows: March 31, September 30,
2002 2001
----------- -----------
Logging and construction equipment $12,760,459 $14,469,372
Finished wood products 1,281,070 1,050,468
Unharvested and harvested but unprocessed timber 2,198,515 854,957
----------- -----------
Total $16,240,044 $16,374,797
=========== ===========
4. TAXES
For the period ended March 31, 2002, the Company recorded a tax benefit to
the extent that current and prior year operating losses reduce the income
taxes attributable to the discontinued operations of Overhill Farms. This
benefit amounted to approximately $267,000 for the six months ended March
31, 2002, and the results of operations of Overhill Farms included in the
accompanying financial statements are presented net of income tax expense
of the same amount. The Company continues to maintain a valuation allowance
against all net deferred tax assets that relate to its continuing
operations due to uncertainty with respect to the future recoverability of
all such amounts.
5. DISCONTINUED OPERATIONS
In August 2001, the Company's Board of Directors approved a plan to spin
off all of the Company's shares of Overhill Farms to the holders 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 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 as
established by the Board. The Company is currently in the process of
completing the various steps necessary to effect the spin-off transaction,
which is now expected to occur during the Company's third fiscal quarter.
These steps include, among other things, obtaining final lender approvals,
making necessary changes to Overhill Farms' capital structure to effect the
distribution of the dividend, the updating and refiling of information with
the Securities and Exchange Commission.
In connection with the spin-off, Overhill Farms expects to receive the
necessary consents, waivers and amendments, as appropriate, relating to its
financing arrangements with Union Bank of California, N.A. ("Union Bank")
and Levine Leichtman Capital Partners II, L.P. ("LLCP"). These consents,
waivers and amendments are necessary to comply with certain provisions of
the agreements with each of Union Bank and LLCP that are affected by the
spin-off. Additionally, it is also expected that Overhill Farms will amend
and restate its securities purchase agreement and related documents with
LLCP.
The line of credit with Union Bank expires in November 2002, and the
outstanding balance of approximately $11.4 million at March 31, 2002 has
accordingly been reclassified from a long term obligation (net long-term
liabilities related to discontinued operations) at September 30, 2001 to a
current liability (a reduction of net current assets of discontinued
operations) in the
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Company's balance sheet as of March 31, 2002. In connection with the
spin-off and Overhill Farms entering into a lease on a new facility in
Vernon, California, the line of credit is expected to be amended to provide
for borrowings limited to the lesser of $20 million, from $16 million, or
an amount determined by a defined borrowing base consisting of eligible
receivables and inventories. In addition, interest rates on amounts
advanced under the credit line are to be increased by .25% to prime plus
.50% or to LIBOR plus 3%. Overhill Corporation is to be released from its
guarantee of the credit facility and Union Bank is to release the Overhill
Farms common stock that it holds as collateral. Union Bank charged Overhill
Farms $120,000 for these amendments.
Overhill Farms also has reached agreement with LLCP with respect to certain
amendments of its arrangements with LLCP which, among other things,
provides consent by LLCP to the lease of the Vernon, California facility.
As consideration for this consent and for the additional investment
monitoring costs and expenses to be incurred by LLCP, Overhill Farms issued
to LLCP 23.57 shares of Series A Convertible Preferred Stock. The
designation for the new preferred stock provide the holder with, among
other things, a liquidation preference totaling approximately $750,000,
voting rights along with holders of common stock, conversion rights and
dilution protection. The agreement with LLCP also provides that, after the
issuance of the Series A Convertible Preferred Stock and following the
spin-off, LLCP shall be entitled to anti-dilution protection so that its
warrants and shares of preferred stock will be exercisable for or
convertible into an aggregate of not less than 19.5% of Overhill Farms
outstanding shares of common stock.
The operating results of Overhill Farms have been classified as
discontinued operations in the accompanying financial statements for the
six months ended March 31, 2002 and 2001 and are summarized as follows:
For the Six Months Ended
March 31,
--------------------------
2002 2001
------------ ------------
Net revenues $67,460,774 $78,915,981
Gross profit 10,370,351 13,886,014
Operating income 3,365,443 4,695,382
Income before income taxes 665,443 1,554,349
Net income $ 398,344 $ 930,465
6. ADVANCE FROM RELATED PARTY
During March 2002, Mr. Harold Estes made a cash advance in the amount of
$850,000 to SFP for the purchase of timber. While the terms of this
arrangement with SFP are not formally documented, SFP is repaying such
advance in weekly installments of approximately $55,000 which includes
interest at prime (approximately 4.75% at March 31, 2002).
-10-
7. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share:
For the Three Months Ended
March 31,
----------------------------
2002 2001
------------ ------------
Numerator:
Income (loss) before discontinued operations $ (216,781) $ (140,130)
Discontinued operations 32,876 492,344
------------ ------------
Net income (loss) attributable to common stockholders $ (183,905) $ 352,214
============ ============
Denominator:
Denominator for basic earnings
per share - weighted average shares 18,615,464 17,827,464
------------ ------------
Effect of dilutive securities:
Stock options -- 109,120
Warrants -- --
------------ ------------
Dilutive potential common shares -- 109,120
------------ ------------
Denominator for diluted earnings per share 18,615,464 17,936,584
============ ============
Net income (loss) per share - basic and diluted:
Before discontinued operations $ (.01) $ (.01)
Discontinued operations -- .03
------------ ------------
Net income per share $ (.01) $ .02
============ ============
-11-
For the Six Months Ended
March 31,
----------------------------
2002 2001
------------ ------------
Numerator:
Income (loss) before discontinued operations $ (346,218) $ (244,023)
Discontinued operations 30,723 760,190
------------ ------------
Net income (loss) attributable to common stockholders $ (315,495) $ 516,167
============ ============
Denominator:
Denominator for basic earnings
per share - weighted average shares 18,615,464 17,825,404
------------ ------------
Effect of dilutive securities:
Stock options -- 75,417
Warrants -- --
------------ ------------
Dilutive potential common shares -- 75,417
------------ ------------
Denominator for diluted earnings per share 18,615,464 17,900,821
============ ============
Net income (loss) per share - basic and diluted:
Before discontinued operations $ (.02) $ (.01)
Discontinued operations -- .04
------------ ------------
Net income per share $ (.02) $ .03
============ ============
8. STOCKHOLDERS' EQUITY
Stock Options-
During the three months ended December 31, 2000, options to purchase 15,000
shares at an exercise price of $.50 per share were exercised.
Warrants-
During the three months ended December 31, 2000, the Company repurchased
warrants covering 210,000 shares exercisable at $1.125 per share for total
consideration of approximately $46,000.
9. INVESTMENT IN LIMITED LIABILITY COMPANY
TTI has a 49.9% ownership in a construction related limited liability
company (the "LLC"), which is accounted for under the equity method. TTI's
initial capital investment in the LLC was nominal, and its investment in
the LLC is comprised primarily of related party receivables arising from
operating advances and financed equipment sales to the LLC, with such sales
being transacted primarily at Texas Timberjack's cost of acquiring the
related equipment. During the six months ended March 31, 2002, the net
related party receivable from the LLC increased
-12-
approximately $280,000 since September 30, 2001. Additionally, the Company
recorded a loss of approximately $463,000 relating to TTI's investment in
the LLC during the six months ended March 31, 2002.
10. SEGMENT INFORMATION
The Company currently operates in two reportable business segments (1) the
equipment segment, which distributes, leases and provides financing for
logging and construction equipment and (2) the timber segment, which
includes sawmill operations and the treatment and sale of timber 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. subsidiary to
shareholders. Separate financial data for each of the Company's operating
segments, excluding discontinued operations, is provided below (in
thousands):
For the Three Months For the Six Months
Ended March 31, Ended March 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenues
Equipment $ 7,451 $ 6,548 $ 14,077 $ 12,467
Timber 3,124 2,132 5,275 4,463
-------- -------- -------- --------
Consolidated 10,575 8,680 19,352 16,930
Gross profit
Equipment $ 1,622 $ 1,680 $ 3,279 $ 3,311
Timber 509 471 977 794
-------- -------- -------- --------
Consolidated 2,131 2,151 4,256 4,105
Operating profit (loss)
Equipment $ 261 $ -- $ 610 $ 113
Timber 212 77 391 1
Corporate expenses (211) (215) (379) (389)
-------- -------- -------- --------
Consolidated 262 (138) 622 (261)
-13-
11. SUBSEQUENT EVENTS
At March 31, 2002, the Company's notes payable included approximately $7.2
million due to Bank of America, N.A. ("Bank of America") by TTI and SFP under
arrangements which had expired as of March 31, 2002. In early April, pursuant to
borrowings under loan agreements reached with First Bank and Trust East Texas
("FB&T") and BancorpSouth Bank ("BancorpSouth"), TTI and SFP repaid all amounts
due and owing to Bank of America.
The arrangement with FB&T provides TTI with a $5.0 million revolving line of
credit expiring in April 2003, bearing interest at prime plus .5% and
collateralized by certain assets of TTI. The loan agreement with FB&T provides,
among other things, that TTI will maintain a debt to equity ratio not to exceed
one to one at any time and provide the bank with specified financial data on a
timely basis; and that TTI, without the prior written consent of FB&T, will not
permit any material change in executive management or ownership of TTI, become
liable for any indebtedness of Overhill Corporation or its affiliates or to pay
any dividends or make other distributions of equity.
Amounts advanced by BancorpSouth were pursuant to (1) a 6% term note in the
amount of $1.5 million, payable in monthly installments of approximately $67,000
(including interest) through April 2004; and (2) a $500,000 note maturing in
June 2002, which bears interest at prime plus .5% and is collateralized by a
portion of TTI's major unit inventory. Amounts advanced by BancorpSouth were
guaranteed by Overhill Corporation. The loan agreement with BancorpSouth
provides, among other things, that TTI will provide the lender with specified
financial data on a timely basis, and that without prior approval by the bank,
TTI will not pay dividends, loans or advances to its parent, Overhill
Corporation, except for the payment of taxes.
12. 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 supersede 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. SFAS 144 also
supersedes the provisions of APB Opinion 30 with regard to reporting the effects
of a disposal of a segment of a business and requires 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.) SFAS 144 is effective for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years, although earlier application is encouraged. The Company has
adopted SFAS 144 as of October 1, 2001. The adoption of SFAS 144 did not have a
material effect on the Company's financial position, results of operations or
cash flows.
In June 2001, the Financial Accounting Standards Board issued Statement No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), which requires that
goodwill no longer be amortized, but instead will be tested at least annually
for impairment by reporting unit. The
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Company has elected to early adopt SFAS 142 as of October 1, 2001. The Company
believes that the adoption of SFAS 142 did not have an immediate effect on its
financial statements. Had the Company been accounting for its goodwill under
SFAS 142 for all periods presented, the Company's net income would have
increased by approximately $142,000 ($.01 per share) and $71,000 ($0 per share)
for the six months and three months ended March 31, 2001, respectively.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Statements contained in this Form 10-Q that are not historical facts, including,
but not limited to, any projections contained herein, are forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this Form
10-Q could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, government regulation and possible future litigation.
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Net Revenues - Revenues for the three months ended March 31, 2002 increased
$1,895,000 (21.8%) to $10,575,000 from $8,680,000 for the three months ended
March 31, 2001. This increase consists of increased revenues of $992,000 in the
timber segment and $903,000 in the equipment segment.
Gross Profits - Gross profits for the three months ended March 31, 2002 remained
substantially unchanged for the amounts for the three months ended March 31,
2002. For such periods, gross profits for the equipment segment decreased
$58,000 while gross profits for the timber segment increased $38,000.
Selling,General and Administrative Expenses - Selling, general and
administrative expenses for the three months ended March 31, 2002 decreased
$419,000 to $1,869,000 from $2,288,000 during the three months ended March 31,
2001, due primarily to the continued decreases in personnel costs in both
operating segments of Texas Timberjack.
Other Expenses - Other expenses for the three months ended March 31, 2002
increased $218,000 to $627,000 from $409,000 during the three months ended March
31, 2001, due largely to losses related to Timberjack's 49.9% investment in a
construction company accounted for on the equity method. See "Management's
Discussion and Analysis--Related and Certain Other Parties".
Income Taxes - The Company records a tax benefit to the extent that current and
prior year operating losses reduce the income taxes attributable to the
discontinued operations of Overhill Farms. Accordingly, the results of
operations of Overhill Farms are presented within the consolidated financial
statements net of income tax expense of $147,000 for the three months ended
March 31, 2002 and $406,000 for the same period in 2001.
Six Months Ended March 31, 2002 Compared to Six Months Ended March 31, 2001
Net Revenues - For the six months ended March 31, 2002, revenues increased
$2,422,000 (14.3%) to $19,352,000 from $16,930,000 during the six months ended
March 31, 2001. This increase in revenues during the first six months is due to
increased sales of $1,610,000 in the Company's equipment segment, while revenues
from the timber segment increased by $812,000.
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Gross Profits - For the six months ended March 31, 2002, gross profits increased
$151,000 to $4,256,000 in the current year from $4,105,000 in the prior year,
due primarily to the increase in volume in the timber segment. Gross margin
rates in the equipment segment decreased slightly due to a change in sales mix
to the lower margin sales of major units from the higher margin parts and
service sales.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for the six months ended March 31, 2002 decreased
$732,000 to $3,634,000 from $4,366,000 during the six months ended March 31,
2001, due to reductions in personnel costs in both the equipment and timber
segments of TTI, together with the adoption by TTI of SFAS 142 effective October
1, 2001, thereby eliminating the amortization of goodwill which amounted to
approximately $142,000 during the six months ended March 31, 2001.
Other Expenses - For the six months ended March 31, 2002, net other expenses
increased $628,000 to $1,235,000 in the current year from $607,000 for the six
months ended March 31, 2001. This increase is largely attributable to recorded
losses related to Timberjack's 49.9% investment in a construction company
accounted for on the equity method. See "Management's Discussion and
Analysis--Related and Certain Other Parties."
Income Taxes - The Company records a tax benefit to the extent that current and
prior year operating losses reduce the income taxes attributable to the
discontinued operations of Overhill Farms. Accordingly, the results of
operations of Overhill Farms are presented within the consolidated financial
statements net of income tax expense of $267,000 for the six months ended March
31, 2002 and $624,000 for the same period in 2001.
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 $1,083,000 to $1,769,000 at March 31, 2002 as compared to
$686,000 at September 30, 2001.
During the six months ended March 31, 2002, the Company's operating activities
resulted in cash provided of approximately $2,236,000, compared to cash provided
of $3,166,000 during the comparable period in the previous year. The source of
cash during the current year is related primarily to results of operations,
together with decreases in trade accounts and sales contracts receivable, offset
somewhat by reductions in trade accounts payable.
During the six months ended March 31, 2002, the Company's investing activities
resulted in a use of cash of approximately $406,000, compared to a use of cash
of $1,189,000 during the comparable period in the previous year. The Company's
use of cash during the current year resulted primarily from capital expenditures
by TTI, with decreases in notes and other receivables being offset by increases
in related party receivables.
During the six months ended March 31, 2002, the Company's financing activities
resulted in a use of cash of approximately $748,000, compared to cash used of
approximately $1,819,000 during the comparable period in the previous year. The
cash utilized resulted from principal payments on Timberjack's lines of credit,
and is net of a cash advance made to SFP by Mr. Harold Estes.
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The aforementioned advance by Mr. Estes, in the amount of $850,000, was made to
SFP in March 2002 for the purchase of timber. While the terms of this
arrangement are not formally documented, SFP is repaying such advance in weekly
payments of approximately $55,000 which include interest at prime (approximately
4.75% at March 31, 2002).
The Company's note payable to Mr. Estes has a current balance at March 31, 2002
of approximately $21.6 million, including accrued interest, is collateralized by
the stock and certain assets of Texas Timberjack and matures in October 2002.
Since the note's inception in 1994, Mr. Estes and the Company have agreed to a
number of extensions of the maturity date and related terms of this note. The
Company intends to seek further extension of the maturity date from Mr. Estes
prior to the note's maturity. There can be no assurance, however, that the
maturity date of the note can be successfully extended on favorable terms, or at
all.
SFP's Quantum Fuel & Refining, Inc. subsidiary ("Quantum") has a note payable to
Mr. Estes. As of March 31, 2002, the note had a total unpaid balance, including
accrued interest, of approximately $1.5 million, bearing interest at 12%, with
maturity in October 2002 and collateralized by the assets of Quantum. Mr. Estes
has agreed to previous extensions of the maturity date with Quantum, including
one extension since Quantum's acquisition by SFP. Timberjack intends to seek
further extension of the maturity date from Mr. Estes prior to the notes
maturity. There can be no assurance, however, that the maturity date of the note
can be successfully extended on favorable terms, or at all.
At March 31, 2002, Texas Timberjack and SFP had notes payable to Bank of America
totaling approximately $7.2 million under arrangements which had expired as of
that date. In early April 2002, pursuant to borrowings under new loan
arrangements reached with FB&T and BancorpSouth, all amounts due and owing by
TTI and SFP to Bank of America were repaid in full.
The arrangement with FB&T provides TTI with a $5.0 million revolving line of
credit expiring in April 2003, bearing interest at prime plus .5% and
collateralized by certain assets of TTI. Following repayment of the Bank of
America notes, availability under this credit line amounted to approximately
$300,000.
Amounts advanced by BancorpSouth were pursuant to (1) a 6% term note in the
amount of $1.5 million, payable in monthly installments of approximately $67,000
(including interest) through April 2004; and (2) a $500,000 note, bearing
interest at prime plus .5% and collateralized by a portion of TTI's major unit
inventory, and which matures June 11, 2002. Amounts advanced by BancorpSouth
were guaranteed by Overhill Corporation. TTI has a commitment from BancorpSouth
to loan up to an additional $2.0 million, to be collateralized by real estate,
the proceeds of which are expected to be used, in part, to repay the $500,000
note upon closing during June 2002.
Texas Timberjack guarantees on behalf of various customers certain lines of
credit and secured borrowings with banks and financial institutions, primarily
related to customer purchases of its equipment products. The portion of the
credit lines or secured borrowings guaranteed ranges from zero to 100% on a
customer-by-customer basis. Funds held in escrow by the lenders, amounting to
approximately $538,000 at March 31, 2002, are included in the consolidated
balance sheet as restricted cash and are fully offset by the Company's reserve
for credit guarantees. Historically, amounts held in escrow by lenders have been
sufficient to cover any
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losses incurred by Texas Timberjack as a result of these guarantees. However,
losses on guarantees significantly in excess of amounts held in escrow by the
lenders could have a material impact on the Company's liquidity position and
results of operations.
Texas Timberjack has a 49.9% investment in a construction related business which
operates as a limited liability company. As of March 31, 2002, Timberjack has
guaranteed approximately $432,000 of indebtedness of this company. See
"Management's Discussion and Analysis--Related and Certain Other Parties."
The Company has various other commitments incurred through the ordinary course
of its business, primarily noncancelable operating leases related to its
facilities and equipment in Bon Weir, Texas and inventory purchase commitments
from three companies which supply the majority of its new units and parts. There
has been no significant change in the type or amount of these commitments since
September 30, 2001.
The Company believes, providing that Mr. Estes grants the aforementioned note
extensions on acceptable terms, that funds available to it from operations and
existing capital resources will be adequate for its capital requirements,
including any cash requirements resulting from the various commitments and
contingencies described above, for the next twelve months.
Related and Certain Other Parties
TTI has a 49.9% ownership in a construction related limited liability company
(the "LLC"), which is accounted for under the equity method. TTI does not
exercise control over this minority investment. TTI's initial capital investment
in the LLC was nominal and its investment in the LLC is comprised primarily of
related party receivables arising from operating advances and financed equipment
sales to the LLC, with such sales being transacted primarily at Texas
Timberjack's cost of acquiring the related equipment. During the six months
ended March 31, 2002, the net related party receivables from the LLC increased
approximately $280,000 from September 30, 2001. Additionally, the Company
recorded a loss of approximately $463,000 relating to TTI's investment in the
LLC for the six months ended March 31, 2002.
See "Management's Discussion and Analysis--Liquidity and Capital Resources" for
discussion of an advance from and notes payable to Mr. Harold Estes, former
owner and current President of Texas Timberjack and holder of approximately
4,000,000 shares of the Company's common stock.
Inconnection with the acquisition of TTI, the Company acquired a note receivable
from an officer of TTI collateralized by marketable securities and a receivable
from Mr. Estes for insurance premiums paid by TTI on his behalf. As of March 31,
2002, such receivables have remained substantially unchanged since September 30,
2001.
The former owner of Quantum is TTI's 25% minority partner in SFP. TTI's 25%
minority partner in SFP was a guarantor of TTI's and SFP's note payable to, and
SFP's revolving line of credit with, Bank of America, N.A. The father of TTI's
25% minority partner is a former officer of SFP. The Company's outstanding
receivables from this former officer of SFP, or from companies owned or
controlled by him, have not substantially changed since September 30, 2001.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest expense is affected by changes in prime lending rates as
a result of its various line of credit arrangements. If these market rates were
to increase by an average of 1% in fiscal 2002, the Company's interest expense
for the next twelve months would increase by approximately $80,000, based on the
outstanding line of credit balances at March 31, 2002.
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, in a majority of cases, are collateralized by a variety of
marketable assets, primarily timber and land. The value of these notes is
subject to market risk due to changing interest rates and the condition of the
related collateral.
The Company does not own, nor does it have an interest in any other market risk
sensitive instruments.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During fiscal 1997, five substantially identical complaints were filed in the
United States District Court for the District of Nevada against the Company and
certain of its officers and directors. The lawsuits 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 several of 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. 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. The plaintiffs then
filed a motion for rehearing, which the District Court denied in March 2001.
The plaintiffs appealed those decisions to the United States Court of Appeals
for the Ninth Circuit. Appellate briefs were filed by both sides, and oral
argument in the Court of Appeals took place on February 13, 2002.
In September 2001, the plaintiffs requested the Ninth Circuit to enjoin the
Company's proposed spin-off of Overhill Farms. The Court of Appeals denied the
plaintiffs' request and directed them to address their request to the District
Court. The plaintiffs thereafter filed an application with the District Court,
which restrained the spin-off for a few days until a hearing could be conducted
with respect to the proposed spin-off. Following an October 11, 2001 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 that 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. Management believes (based,
in part, on the 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.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Loan Agreement, dated April 12, 2002, by and between First Bank &
Trust East Texas, as lender, and Texas Timberjack, Inc., as borrower
10.2 Commercial Promissory Note, dated April 12, 2002, in the principal
amount of $5,000,000, payable to First Bank & Trust East Texas, as lender,
by Texas Timberjack, Inc., as borrower
10.3 Commercial Security Agreement, dated April 12, 2002, by and between
First Bank & Trust East Texas, as lender, and Texas Timberjack, Inc., a
debtor
10.4 Letter Loan Agreement, dated April 12, 2002, by and between
BancorpSouth Bank, as lender, and Texas Timberjack, Inc., as borrower
10.5 Promissory Note, dated April 12, 2002, in the principal amount of
$1,500,000, payable to BancorpSouth Bank, as lender, by Texas Timberjack,
Inc., as borrower
10.6 Promissory Note, dated April 12, 2002, in the principal amount of
$500,000, payable to BancorpSouth Bank, as lender, by Texas Timberjack,
Inc., as borrower
10.7 Commercial Security Agreement, dated April 12, 2002, by and between
BancorpSouth Bank, as secured party, and Texas Timberjack, Inc., as debtor
10.8 Unconditional and Continuing Guaranty, executed as of April 12, 2002,
by Overhill Corporation, as guarantor, in favor of BancorpSouth, as payee
of obligations executed by Texas Timberjack, Inc., as borrower
10.9 Addendum to Unconditional and Continuing Guaranty, executed as of
April 12, 2002, by Overhill Corporation and BancorpSouth Bank
10.10 Mutual Release, entered into, effective September 30, 1999, by and
between Harold Estes, Overhill Corporation and Overhill Farms, Inc.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter
ended March 31, 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OVERHILL CORPORATION
(Registrant)
Date: May 13, 2002 By: /s/ James Rudis
---------------------------
James Rudis
Chairman, President and
Chief Executive Officer
Date: May 13, 2002 By: /s/ William E. Shatley
--------------------------
William E. Shatley
Senior Vice President and
Chief Financial Officer
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