U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 5, 2002
OVERHILL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
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TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION Page No.
------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 2002 and September 30, 2001 2
Consolidated Condensed Statements of
Operations for the Three Months Ended
June 30, 2002 and 2001 4
Consolidated Condensed Statements of
Operations for the Nine Months Ended
June 30, 2002 and 2001 5
Consolidated Condensed Statements of
Cash Flows for the Nine Months Ended
June 30, 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 21
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 22
Item 3. Defaults Upon Senior Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature Page 24
-1-
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
Assets
June 30, September 30,
------------- -------------
2002 2001
------------- -------------
(Unaudited)
Current assets:
Cash $ 1,613,225 $ 686,382
Receivables, net of allowance for doubtful accounts
of $698,158 and $626,200
Trade accounts 1,726,996 3,399,591
Current portion of sales contracts 3,564,857 5,029,362
Related parties 2,176,205 1,927,768
Notes 3,753,509 4,191,128
Inventories 16,582,845 16,374,797
Net current assets of discontinued operations - 17,271,667
Prepaid expenses and other 2,735,286 2,044,969
------------- -------------
Total current assets 32,152,923 50,925,664
------------- -------------
Property and equipment:
Land 432,000 432,000
Buildings and improvements 2,750,585 2,722,595
Machinery, equipment and other 3,307,382 3,053,909
------------- -------------
6,489,967 6,208,504
Less-Accumulated depreciation (2,750,679) (2,348,410)
------------- -------------
3,739,288 3,860,094
------------- -------------
Other assets:
Noncurrent receivables, net of allowance for
doubtful accounts of $1,033,671
Sales contracts 2,015,600 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 541,249 522,709
Assets held for sale 1,926,264 1,926,264
Net long-term assets of discontinued operations 20,237,195 -
Other 1,072,385 1,192,074
------------- -------------
29,787,717 10,257,023
------------- -------------
$ 65,679,928 $ 65,042,781
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
Liabilities and Stockholders' Equity
June 30, September 30,
------------- --------------
2002 2001
------------- --------------
(Unaudited)
Current liabilities:
Notes payable $ 6,875,288 $ 13,313,743
Notes payable and accrued interest to related party 23,528,043 -
Accounts payable 2,204,946 2,085,200
Advance from related party 165,000 -
Accrued expenses and other 1,207,419 1,066,932
Net current liabilities related to discontinued operations 21,141,232 -
Current maturities of long-term debt 1,048,105 -
------------- --------------
Total current liabilities 56,170,033 16,465,875
Notes payable and accrued interest to related party - 22,337,631
Long-term debt, net of current portion 1,333,672 -
Net long-term liabilities related to discontinued operations - 17,668,829
Reserve for credit guarantees 541,249 522,709
------------- --------------
Total liabilities 58,044,954 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 (20,210,135) (19,797,372)
------------- --------------
Total stockholders' equity 7,634,974 8,047,737
------------- --------------
$ 65,679,928 $ 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
June 30,
-----------------------------
2002 2001
----------- -----------
Net revenues $ 8,397,763 $12,830,395
Cost of sales 6,416,114 10,715,565
----------- -----------
Gross profit 1,981,649 2,114,830
Selling, general and administrative expenses 1,880,277 2,056,589
----------- -----------
Operating income 101,372 58,241
----------- -----------
Other income (expenses):
Interest expense (607,131) (605,403)
Interest income and other 89,973 121,991
----------- -----------
Total other (expenses) (517,158) (483,412)
----------- -----------
Loss before income taxes and discontinued operations (415,786) (425,171)
Income tax benefit 191,128 478,932
----------- -----------
Income (loss) before discontinued operations (224,658) 53,761
Discontinued operations, net of income taxes 127,390 585,757
----------- -----------
Net income (loss) $ (97,268) $ 639,518
=========== ===========
Net income (loss) per share - basic and diluted:
Before discontinued operations $ (.01) $ -
Discontinued operations .01 .04
----------- -----------
Net income (loss) per share $ - $ .04
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
OVERHILL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended
June 30,
----------------------------
2002 2001
------------ ------------
Net revenues $ 27,749,657 $ 29,760,403
Cost of sales 21,511,581 23,540,636
------------ ------------
Gross profit 6,238,076 6,219,767
Selling, general and administrative expenses 5,514,533 6,422,426
------------ ------------
Operating income (loss) 723,543 (202,659)
------------ ------------
Other income (expenses):
Interest expense (1,703,323) (1,798,048)
Interest income and other (49,313) 707,628
------------ ------------
Total other (expenses) (1,752,636) (1,090,420)
------------ ------------
Loss before income taxes and discontinued operations (1,029,093) (1,293,079)
Income tax benefit 458,217 1,102,816
------------ ------------
Loss before discontinued operations (570,876) (190,263)
Discontinued operations, net of income taxes 158,113 1,345,948
------------ ------------
Net income (loss) $ (412,763) $ 1,155,685
============ ============
Net income (loss) per share - basic and diluted:
Before discontinued operations $ (.03) $ (.01)
Discontinued operations .01 .07
------------ ------------
Net income (loss) per share $ (.02) $ .06
============ ============
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 Nine Months Ended
June 30,
------------------------------
2002 2001
----------- ------------
Cash flows provided by (used in) operating activities:
Net income (loss) $ (412,763) $ 1,155,685
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 404,966 686,878
Provision for doubtful accounts 257,396 209,421
Interest accrual on notes to related party 1,190,412 1,190,412
Loss on investment in limited
liability company 628,416 157,581
(Income) from discontinued operations (552,621) (1,345,948)
Changes in:
Accounts and sales contracts receivable 3,491,572 (715,034)
Inventories (208,048) (456,213)
Prepaid expenses and other (199,044) 950,539
Accounts payable 119,746 4,581,755
Accrued expenses and other 199,983 (2,237,861)
----------- -----------
Net cash provided by operating activities 4,920,015 4,177,215
----------- -----------
Cash flows provided by (used in) investing activities:
Notes and other receivables 437,619 (477,796)
Receivables from related parties (254,953) (398,925)
Capital expenditures, net (284,160) (722,862)
----------- -----------
Net cash (used in) investing activities $ (101,494) $(1,599,583)
----------- -----------
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 Nine Months Ended
June 30,
-----------------------------
2002 2001
----------- -----------
Cash flows provided by (used in) financing activities:
Net borrowings (principal payments) on line
of credit arrangements $(6,438,455) $(1,915,714)
Borrowings on other notes payable and long-term debt 2,500,000 185,205
Principal payments on long-term debt (118,223) (1,042,566)
Advance from related party, net of repayments 165,000 -
Exercise of common stock options - 7,500
Repurchase of stock purchase warrants - (45,938)
----------- -----------
Net cash (used in) financing activities (3,891,678) (2,811,513)
----------- -----------
Net increase (decrease) in cash 926,843 (233,881)
Cash - beginning of period 686,382 963,387
----------- -----------
Cash - end of period $ 1,613,225 $ 729,506
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest $ 412,105 $ 564,056
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
June 30, 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: June 30, September 30,
2002 2001
---------------- ---------------
Logging and construction equipment $ 13,813,150 $ 14,469,372
Finished wood products 1,154,025 1,050,468
Unharvested and harvested but unprocessed timber 1,615,670 854,957
---------------- ---------------
Total $ 16,582,845 $ 16,374,797
================ ===============
4. TAXES
For the period ended June 30, 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 $458,000 for the nine months ended June
30, 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 distribution, 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 expected to occur during the Company's fourth 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 filing of information to
obtain clearance by 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 $12.5 million at June 30, 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 (net current liabilities related to discontinued
operations) in the Company's
-9-
balance sheet as of June 30, 2002. In connection with Overhill Farms entering
into a lease on a new facility in Vernon, California, the line of credit was
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 were increased by .25% to prime plus .50% or to
LIBOR plus 3%. To facilitate the spin-off, 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, provide
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 nine months ended
June 30, 2002 and 2001 and are summarized as follows:
For the Nine Months Ended
June 30,
----------------------------
2002 2001
------------ ------------
Net revenues $101,927,639 $119,585,953
Gross profit 16,181,673 21,575,613
Operating income 5,266,398 7,338,696
Income before income taxes 1,141,595 2,747,561
Net income $ 683,378 $ 1,644,745
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 the
arrangement with SFP were not formally documented, SFP repaid such advance in
weekly installments which included interest at prime (approximately 4.75% at
June 30, 2002). The unpaid balance of $165,000 at June 30, 2002 was repaid
during July 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
June 30,
----------------------------
2002 2001
------------ ------------
Numerator:
Income (loss) before discontinued operations $ (224,659) $ 53,761
Discontinued operations 127,391 585,757
------------ ------------
Net income (loss) attributable to common stockholders $ (97,268) $ 639,518
============ ============
Denominator:
Denominator for basic earnings
per share - weighted average shares 18,615,464 17,827,464
------------ ------------
Effect of dilutive securities:
Stock options - 44,576
Warrants - -
------------ ------------
Dilutive potential common shares - 44,576
------------ ------------
Denominator for diluted earnings per share 18,615,464 17,872,040
============ ============
Net income (loss) per share - basic and diluted:
Before discontinued operations $ (.01) $ -
Discontinued operations .01 .04
------------ ------------
Net income per share $ - $ .04
============ ============
-11-
For the Nine Months Ended
June 30,
--------------------------
2001 2002
------------ ------------
Numerator:
Income (loss) before discontinued operations $ (570,877) $ (190,263)
Discontinued operations 158,114 1,345,948
------------ ------------
Net income (loss) attributable to common stockholders $ (412,763) $ 1,155,685
============ ============
Denominator:
Denominator for basic earnings
per share - weighted average shares 18,615,464 17,826,090
------------ ------------
Effect of dilutive securities:
Stock options - 52,541
Warrants - -
------------ ------------
Dilutive potential common shares - 52,541
------------ ------------
Denominator for diluted earnings per share 18,615,464 17,878,631
============ ============
Net income (loss) per share - basic and diluted:
Before discontinued operations $ (.03) $ (.01)
Discontinued operations .01 .07
------------ ------------
Net income per share $ (.02) $ .06
============ ============
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
-12-
nine months ended June 30, 2002, the net related party receivable from the
LLC increased approximately $187,000 since September 30, 2001.
Additionally, the Company recorded a loss of approximately $628,000
relating to TTI's investment in the LLC during the nine months ended June
30, 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 Overhill Farms to the Company's shareholders.
Separate financial data for each of the Company's operating segments,
excluding discontinued operations, is provided below (in thousands):
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
--------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- --------- ----------
Net revenues
Equipment $ 4,807 $ 9,144 $ 18,885 $ 21,611
Timber 3,591 3,686 8,865 8,149
-------- -------- -------- --------
Consolidated 8,398 12,830 27,750 29,760
Gross profit
Equipment $ 1,326 $ 1,381 $ 4,604 $ 4,692
Timber 656 734 1,634 1,528
-------- -------- -------- --------
Consolidated 1,982 2,115 6,238 6,220
Operating profit (loss)
Equipment $ (70) $ (57) $ 541 $ 56
Timber 348 299 738 314
Corporate expenses (177) (184) (555) (573)
-------- -------- -------- --------
Consolidated 101 58 724 (203)
-13-
11. DEBT REFINANCING
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 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. At June 30, 2002, $3.2 million was
outstanding under this line of credit.
Amounts originally advanced by BancorpSouth were made pursuant to (1) a
5.975% 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 which was repaid in June 2002. The $500,000
note was replaced by a 6.275% term note in the amount of $1.0 million,
payable in monthly installments of approximately $31,000 (including
interest) through June 2005. Amounts payable to BancorpSouth under these
notes are collateralized by a significant portion of TTI's inventory and
real estate and 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. SUBSEQUENT EVENTS
As of June 30, 2002, the Company's Overhill Farms subsidiary was in
noncompliance with certain financial covenants under two borrowing
arrangements.
In August 2002, Overhill Farms reached an agreement with its senior
subordinated lender to amend its securities purchase agreement, including
revisions to the financial covenants retroactive to June 30, 2002, subject
only to the approval of Overhill Farms' senior secured lender pursuant to
an existing intercreditor agreement between the lenders. The agreement that
Overhill Farms has reached with its senior subordinated lender provides
for, among other things, modification of the existing securities purchase
agreement to allow, in certain circumstances, for all of the senior
subordinated lender's equity interest in Overhill Farms to be repurchased
by Overhill Farms at certain specified levels, the elimination of the
provision requiring Overhill Farms to pay the senior subordinated lender a
$500,000 fee in the event Overhill Farms does not exercise an existing
repurchase option, and the grant of a conditional option for Overhill Farms
to extend the maturity date of the senior subordinated note through October
2005. The agreement also provides for the senior subordinated lender to
receive additional cash consideration of approximately $400,000 and
additional equity ownership of Overhill Farms of approximately 4.5%, the
form of which is currently being finalized, and an increase in the stated
interest rate of the senior subordinated note to 13.25% per annum.
As of June 30, 2002, Overhill Farms was in noncompliance with a financial
covenant in its loan agreement with its senior secured lender. Overhill
Farms has initiated discussions with its senior secured lender to obtain a
waiver of its noncompliance as of June 30, 2002 and to revise one financial
covenant.
Pending finalization and formal documentation of these arrangements, the
Company has classified all amounts payable to its senior subordinated
lender as a current liability (net current liabilities related to
discontinued operations) in the Company's consolidated condensed balance
sheet as of June 30, 2002. The Company believes it will be successful in
finalizing and formally documenting amendments with each of its lenders in
the near future. However, there can be no assurances that the Company will
be successful in finalizing and formally documenting these amendments as
anticipated, or at all. Should the Company not be successful in this regard
prior to amounts under either of the facilities being declared due and
payable, there could be a material adverse impact to the Company's
financial condition, results of operations or cash flows.
-14-
13. 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 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 $213,000 ($.01 per share) and $71,000 ($0 per share) for the
nine months and three months ended June 30, 2001, respectively.
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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 June 30, 2002 Compared to Three Months Ended June 30,
2001
Net Revenues - Revenues for the three months ended June 30, 2002 decreased
$4,432,000 (34.5%) to $8,398,000 from $12,830,000 for the three months
ended June 30, 2001. This decrease consists of decreased revenues of
$4,337,000 in the equipment segment and $95,000 in the timber segment. The
decrease in equipment related revenues was due largely to wet weather
conditions during the period.
Gross Profits - Gross profits for the three months ended June 30, 2002
declined slightly from the amounts for the three months ended June 30,
2001. For such periods, gross profits for the equipment segment decreased
$55,000 while gross profits for the timber segment decreased $78,000.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for the three months ended June 30, 2002 decreased
$177,000 to $1,880,000 from $2,057,000 during the three months ended June
30, 2001, due primarily to the continued decreases in personnel costs in
both operating segments of Texas Timberjack and the discontinuation of the
amortization of goodwill.
Other Expenses - Other expenses for the three months ended June 30, 2002
increased $34,000 to $517,000 from $483,000 during the three months ended
June 30, 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 $191,000 for the three
months ended June 30, 2002 and $479,000 for the same period in 2001.
Nine Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net Revenues - For the nine months ended June 30, 2002, revenues decreased
$2,010,000 (6.8%) to $27,750,000 from $29,760,000 during the nine months
ended June 30, 2001. This decrease in revenues is due to a decrease in
sales of $2,726,000 from the Company's equipment
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segment, which was partially offset by a $716,000 increase in sales from
the Company's timber segment.
Gross Profits - For the nine months ended June 30, 2002, gross profits
increased $18,000 to $6,238,000 in the current year from $6,220,000 in the
prior year due primarily to the increase in volume in the timber segment.
Gross margin rates in the equipment segment increased slightly due to a
change in sales mix from the lower margin sales of major units to the
higher margin sales of used equipment. The margin rate for the timber
segment did not change significantly from the prior year.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses for the nine months ended June 30, 2002 decreased
$908,000 to $5,514,000 from $6,422,000 during the nine months ended June
30, 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 $213,000 during the nine months
ended June 30, 2001.
Other Expenses - For the nine months ended June 30, 2002, net other
expenses increased $662,000 to $1,752,000 in the current year from
$1,090,000 for the nine months ended June 30, 2001. This increase is
primarily 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
$458,000 for the nine months ended June 30, 2002 and $1,103,000 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 $927,000 to $1,613,000 at June 30,
2002 as compared to $686,000 at September 30, 2001.
During the nine months ended June 30, 2002, the Company's operating
activities resulted in cash provided of approximately $4,920,000, compared
to cash provided of $4,177,000 during the comparable period in the
previous year. The source of cash during the current year is related
primarily to the results of operations, together with decreases in trade
accounts and sales contracts receivable.
During the nine months ended June 30, 2002, the Company's investing
activities resulted in a use of cash of approximately $101,000, compared
to a use of cash of $1,600,000 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 somewhat offset by increases in related party
receivables.
During the nine months ended June 30, 2002, the Company's financing
activities resulted in a
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use of cash of approximately $3,892,000, compared to a use of cash of
$2,812,000 during the comparable period in the previous year. The cash
utilized resulted from the repayment of Timberjack's previous credit
lines, largely with new longer term indebtedness, and is net of a cash
advance made to SFP by Mr. Harold Estes.
The aforementioned advance by Mr. Estes, in the original amount of
$850,000, was made to SFP in March 2002 for the purchase of timber. While
the terms of the arrangement with SFP were not formally documented, SFP
repaid such advance in weekly installments which included interest at
prime (approximately 4.75% at June 30, 2002). The unpaid balance of
$165,000 at June 30, 2002 was repaid during July 2002.
The Company's note payable to Mr. Estes has a current balance at June 30,
2002 of approximately $22 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 June 30, 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 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.
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 and
collateralized by certain assets of TTI. At June 30, 2002, $3.2 million
was outstanding under this line of credit.
Amounts originally advanced by BancorpSouth were made pursuant to (1) a
5.975% 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 which was repaid in June 2002. The $500,000
note was replaced by a 6.275% term note in the amount of $1.0 million,
payable in monthly installments of approximately $31,000 (including
interest) through June 2005. Amounts payable to BancorpSouth under these
notes are collateralized by a significant portion of TTI's inventory and
real estate and 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.
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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 $541,000 at June 30, 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 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 June 30, 2002,
Timberjack has guaranteed approximately $324,000 of indebtedness of this
company. See "Management's Discussion and Analysis-- Related and Certain
Other Parties."
TTI 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.
Discontinued Operations
As of June 30, 2002, the Company's Overhill Farms subsidiary was in
noncompliance with certain financial covenants under two borrowing
arrangements.
In August 2002, Overhill Farms reached an agreement with its senior
subordinated lender to amend its securities purchase agreement, including
revisions to the financial covenants retroactive to June 30, 2002, subject
only to the approval of Overhill Farms' senior secured lender pursuant to
an existing intercreditor agreement between the lenders. The agreement that
Overhill Farms has reached with its senior subordinated lender provides
for, among other things, modification of the existing securities purchase
agreement to allow, in certain circumstances, for all of the senior
subordinated lender's equity interest in Overhill Farms to be repurchased
by Overhill Farms at certain specified levels, the elimination of the
provision requiring Overhill Farms to pay the senior subordinated lender a
$500,000 fee in the event Overhill Farms does not exercise an existing
repurchase option, and the grant of a conditional option for Overhill Farms
to extend the maturity date of the senior subordinated note through October
2005. The agreement also provides for the senior subordinated lender to
receive additional cash consideration of approximately $400,000 and
additional equity ownership of Overhill Farms of approximately 4.5%, the
form of which is currently being finalized, and an increase in the stated
interest rate of the senior subordinated note to 13.25% per annum.
As of June 30, 2002, Overhill Farms was in noncompliance with a financial
covenant in its loan agreement with its senior secured lender. Overhill
Farms has initiated discussions with its senior secured lender to obtain a
waiver of its noncompliance as of June 30, 2002 and to revise one financial
covenant.
Pending finalization and formal documentation of these arrangements, the
Company has classified all amounts payable to its senior subordinated
lender as a current liability (net current liabilities related to
discontinued operations) in the Company's consolidated condensed balance
sheet as of June 30, 2002. The Company believes it will be successful in
finalizing and formally documenting amendments with each of its lenders in
the near future. However, there can be no assurances that the Company will
be successful in finalizing and formally documenting these amendments as
anticipated, or at all. Should the Company not be successful in this regard
prior to amounts under either of the facilities being declared due and
payable, there could be a material adverse impact to the Company's
financial condition, results of operations or cash flows.
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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 nine months ended June 30, 2002, the net related
party receivables from the LLC increased approximately $187,000 from
September 30, 2001. Additionally, the Company recorded a loss of
approximately $628,000 relating to TTI's investment in the LLC for the
nine months ended June 30, 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.
In connection 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 June 30, 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 $35,000, based on the outstanding line of credit balances at
June 30, 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
renew their motions to dismiss in the form of motions for summary
judgment. After pretrial discovery by plaintiffs, the remaining
defendants filed motions for summary judgment, 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. 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. 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 did not appeal that decision by the
District Court.
On June 5, 2002, the Ninth Circuit rendered a decision that affirmed
several of the trial court's rulings but reversed other rulings and
remanded portions of the case for further proceedings in the District
Court. Among other things, the Court of Appeals remanded certain
claims against the Company and four individual defendants for further
consideration by the trial court. Both sides then filed petitions for
rehearing, and on July 18, 2002, the appellate court revised certain
statements in its original opinion.
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 3. Defaults Upon Senior Securities
As of June 30, 2002, the Company's Overhill Farms subsidiary was in
noncompliance with certain financial covenants under two borrowing
arrangements.
In August 2002, Overhill Farms reached an agreement with its senior
subordinated lender to amend its securities purchase agreement, including
revisions to the financial covenants retroactive to June 30, 2002, subject
only to the approval of Overhill Farms' senior secured lender pursuant to
an existing intercreditor agreement between the lenders. The agreement that
Overhill Farms has reached with its senior subordinated lender provides
for, among other things, modification of the existing securities purchase
agreement to allow, in certain circumstances, for all of the senior
subordinated lender's equity interest in Overhill Farms to be repurchased
by Overhill Farms at certain specified levels, the elimination of the
provision requiring Overhill Farms to pay the senior subordinated lender a
$500,000 fee in the event Overhill Farms does not exercise an existing
repurchase option, and the grant of a conditional option for Overhill Farms
to extend the maturity date of the senior subordinated note through October
2005. The agreement also provides for the senior subordinated lender to
receive additional cash consideration of approximately $400,000 and
additional equity ownership of Overhill Farms of approximately 4.5%, the
form of which is currently being finalized, and an increase in the stated
interest rate of the senior subordinated note to 13.25% per annum.
As of June 30, 2002, Overhill Farms was in noncompliance with a financial
covenant in its loan agreement with its senior secured lender. Overhill
Farms has initiated discussions with its senior secured lender to obtain a
waiver of its noncompliance as of June 30, 2002 and to revise one financial
covenant.
Pending finalization and formal documentation of these arrangements, the
Company has classified all amounts payable to its senior subordinated
lender as a current liability (net current liabilities related to
discontinued operations) in the Company's consolidated condensed balance
sheet as of June 30, 2002. The Company believes it will be successful in
finalizing and formally documenting amendments with each of its lenders in
the near future. However, there can be no assurances that the Company will
be successful in finalizing and formally documenting these amendments as
anticipated, or at all. Should the Company not be successful in this regard
prior to amounts under either of the facilities being declared due and
payable, there could be a material adverse impact to the Company's
financial condition, results of operations or cash flows.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Promissory Note, dated June 12, 2002, in the principal amount of
$1,000,000, payable to BancorpSouth Bank, as lender, by Texas
Timberjack, Inc., as borrower
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended June 30, 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: August 13, 2002 By: /s/ James Rudis
-----------------------------
James Rudis
Chairman, President and
Chief Executive Officer
Date: August 13, 2002 By: /s/ William E. Shatley
--------------------------
William E. Shatley
Senior Vice President and
Chief Financial Officer
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