<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from Commission file number
to 1-10555
POLYVISION CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-3482597
--------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4888 SOUTH OLD PEACHTREE ROAD
NORCROSS, GEORGIA 30071
------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
(770) 447-5043
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share, as of November 11, 1999 was 14,120,525 shares.
===============================================================================
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the requirements of Form
10-Q and, therefore, do not include all information and footnotes required by
generally accepted accounting principles. However, in the opinion of
management, all adjustments (which, except as disclosed elsewhere herein,
consist only of normal recurring accruals) necessary for a fair presentation
of the results of operations for the relevant periods have been made. Results
for the interim periods are not necessarily indicative of the results to be
expected for the year. These condensed consolidated financial statements
should be read in conjunction with the summary of significant accounting
policies and the notes to the consolidated financial statements included in
PolyVision Corporation's Transition Report on Form 10-K for the eight months
ended December 31, 1998.
2
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- -------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 5,273 $ 4,841
Accounts receivable, (less allowance for doubtful accounts of:
September 1999, $2,747; December 1998, $2,519).................... 31,968 17,883
Inventories.......................................................... 15,886 13,084
Costs and estimated earnings in excess of billings on
uncompleted contracts............................................. 2,171 838
Prepaid expenses and other current assets............................ 2,927 2,474
-------- --------
Total current assets............................................. 58,225 39,120
Property, plant and equipment, net................................... 17,515 17,768
Goodwill, (less accumulated amortization:September 1999, $3,096;
December 1998, $1,793)............................................... 85,499 61,402
Other assets......................................................... 4,099 3,918
-------- --------
Total assets.................................................. $165,338 $122,208
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................... $ 154 $ 235
Current maturities of long-term debt................................ 3,773 363
Accounts payable.................................................... 12,797 7,223
Accrued expenses.................................................... 15,792 12,283
Billings in excess of costs and estimated
earnings on uncompleted contracts................................. 1,171 503
-------- --------
Total current liabilities....................................... 33,687 20,607
Long-term debt, less current maturities............................. 91,047 74,511
Other long-term liabilities......................................... 7,667 6,169
-------- --------
Total liabilities.............................................. 132,401 101,287
-------- --------
Shareholders' equity:
Series B preferred stock at liquidation value....................... 12,848 12,848
Series C preferred stock at liquidation value....................... 7,000 5,000
Series D preferred stock at liquidation value....................... 6,000 -
Common stock, $.001 par value; authorized 40,000,000 shares;
14,120,750 shares and 14,092,750 shares issued at
September 30, 1999 and December 31, 1998, respectively........... 14 14
Additional paid-in capital.......................................... 70,778 70,750
Retained deficit.................................................... (65,161) (67,783)
Cumulative foreign currency translation adjustment.................. 1,458 92
-------- --------
Total shareholders' equity....................................... 32,937 20,921
-------- --------
Total liabilities and shareholders' equity..................... $165,338 $122,208
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -----------------------------
1999 1998 1999 1998
-------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales........................................ $ 36,432 $ 11,919 $ 85,536 $ 29,963
Cost of goods sold............................... 23,286 8,514 55,261 21,236
-------------- -------------- ------------ -------------
Gross profit................................. 13,146 3,405 30,275 8,727
Selling, general and administrative.............. 6,389 2,108 16,618 6,565
Amortization of goodwill......................... 555 36 1,387 107
-------------- -------------- ------------ -------------
Operating income............................. 6,202 1,261 12,270 2,055
Interest expense................................. (2,324) (231) (6,539) (680)
Other income (expense), net...................... 364 (80) 637 58
-------------- -------------- ------------ -------------
Income before income taxes and
extraordinary gain......................... 4,242 950 6,368 1,433
Provision for income taxes....................... (1,612) - (2,459) (15)
-------------- -------------- ------------ -------------
Income before extraordinary gain............. 2,630 950 3,909 1,418
Extraordinary gain on early extinguishment
of debt.................................... - - - 436
-------------- -------------- ------------ -------------
Net income .................................. 2,630 950 3,909 1,854
Preferred stock dividends........................ (483) - (1,287) (172)
-------------- -------------- ------------ -------------
Net income applicable to common stock........ $ 2,147 $ 950 $ 2,622 $ 1,682
============== ============== ============ =============
Net income per share of common stock:
Basic:
Income before extraordinary gain........... $ 0.18 $ 0.11 $ 0.28 $ 0.17
Extraordinary gain on early extinguishment
of debt.................................. - - - 0.05
Preferred stock dividends.................. (0.03) - (0.09) (0.02)
-------------- -------------- ------------ -------------
Net income per basic share of common
stock................................. $ 0.15 $ 0.11 $ 0.19 $ 0.20
============== ============== ============ =============
Diluted:
Income before extraordinary gain........... $ 0.12 $ 0.11 $ 0.22 $ 0.16
Extraordinary gain on early extinguishment
of debt.................................. - - - 0.05
Preferred stock dividends.................. (0.02) - (0.06) (0.02)
-------------- -------------- ------------ -------------
Net income per diluted share of common
stock................................. $ 0.10 $ 0.11 $ 0.16 $ 0.19
============== ============== ============ =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- --------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------------------- -------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998........ 256,951 $12,848 100,000 $5,000 14,092,750 $14
Exercise of stock options.......... 28,000
Net income..........................
Dividends on preferred stock........
Issuance of preferred stock
in connection with acquisition (Note 4) 40,000 2,000 120,000 $6,000
Foreign currency translation
adjustment........................
----------- ------- ------- ------- -------- ------ ----------- ------
Balance at September 30, 1999 256,951 $12,848 140,000 $7,000 120,000 $6,000 14,120,750 $14
=========== ======= ======= ======= ======== ====== =========== ======
<CAPTION>
CUMULATIVE
ADDITIONAL FOREIGN CURRENCY
PAID IN RETAINED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT TOTAL
----------- ---------- ------------------ ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1998........ $70,750 ($67,783) $ 92 $20,921
Exercise of stock options.......... 28 28
Net income.......................... 3,909 3,909
Dividends on preferred stock........ (1,287) (1,287)
Issuance of preferred stock
in connection with acquisition (Note 4) 8,000
Foreign currency translation
adjustment........................ 1,366 1,366
------- --------- ------ -------
Balance at September 30, 1999 $70,778 ($65,161) $1,458 $32,937
======= ========= ====== =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 3,909 $ 1,854
Adjustments to reconcile net income to net cash
provided by (used for) operations:
Depreciation and amortization................................... 3,055 328
Amortization of deferred financing costs and accretion
of debt discount............................................ 1,516 -
(Gain) loss on sale of property, plant and equipment............ (423) 234
Change in assets and liabilities, net of effects from
acquisition:
Accounts receivable.......................................... (6,484) (1,319)
Inventories.................................................. 37 (779)
Other current assets......................................... (638) (676)
Other assets................................................. 40 19
Accounts payable and accrued expenses........................ 3,377 (618)
Other liabilities............................................ 191 (440)
-------- -------
Cash provided by (used for) operating activities......................... 4,580 (1,397)
-------- -------
Cash flows from investing activities:
Capital expenditures................................................. (1,528) (127)
Purchase of business, net of cash acquired........................... (24,364) -
Proceeds from sale of property, plant and equipment.................. 945 -
Other................................................................ 1 -
-------- -------
Cash used for investing activities....................................... (24,946) (127)
-------- -------
Cash flows from financing activities:
Repayments of long-term borrowings................................... (2,600) (54)
Long-term borrowings................................................. 22,000 -
(Repayments) borrowings under revolving credit facilities, net....... (714) 1,397
Proceeds from exercise of stock options.............................. 28 -
Proceeds from issuance of preferred stock............................ 2,000 -
Debt issuance cost................................................... (608) -
Advances from The Alpine Group, Inc. ................................ - 201
-------- -------
Cash provided by financing activities.................................... 20,106 1,544
-------- -------
Effect of exchange rate changes on cash and cash equivalents............. 692 -
-------- -------
Net increase in cash and cash equivalents................................ 432 20
Cash and cash equivalents at beginning of period......................... 4,841 283
-------- -------
Cash and cash equivalents at end of period............................... $ 5,273 $ 303
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
1999 1998
---------------------- ----------------
<S> <C> <C>
Supplemental disclosures:
Cash paid for interest .............................................. $ 4,625 $ 247
======= =====
Cash paid for tax.................................................... $ 257 $ -
======= =====
Acquisition of business:
Assets, net of cash acquired......................................... $31,084
Liabilities assumed.................................................. (6,720)
-------
Net cash paid........................................................ $24,364
=======
Issuance of preferred stock for acquisition..............................
Series C preferred stock........................................... $ 2,000
=======
Series D preferred stock........................................... $ 6,000
=======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of PolyVision Corporation and its majority-owned
subsidiaries ("PolyVision" or the "Company"). Certain reclassifications have
been made to the prior period presentation to conform to the current period
presentation.
Subsequent to the acquisition of Nelson Adams in August 1999 (See Note
4) the Company reorganized its operating units into three divisions, OEM
(Original Equipment Manufacture), Public Sector, and Commercial. The OEM
division, which includes the former operations of Alliance International
Group Inc. ("Alliance"), acquired in November, 1998 (see Note 7 to the
Company's Transitional Report on Form 10-K for the eight months ended
December 31, 1998), manufactures continuous coil ceramicsteel (a high grade,
fused ceramic surface on light gauge steel producing a non-porous, uniform
finish) used in writing surfaces for schools, conference rooms and other
business environments, as well as for construction projects, such as tunnel
and people-moving systems. The OEM division also produces proprietary
projection screen surfaces, screen printed and non-screen printed
ceramicsteel surfaces used for interior and exterior architectural
applications and high-endurance signage. The Public Sector division, which
includes the former operations of Nelson Adams, acquired in August 1999,
manufactures and sells custom-designed and engineered writing, projection and
other visual display surfaces, custom cabinets, workstations and conference
center casework and folding tables primarily to schools and offices. The
Commercial division manufactures and sells menuboard display systems to the
fast food and convenience store industries, and merchandising displays used
principally by banks.
2. INVENTORIES
The components of inventories at September 30, 1999 and December 31, 1998
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(in thousands)
<S> <C> <C>
Raw materials......................... $ 8,983 $ 7,035
Work in process....................... 1,506 476
Finished goods........................ 5,397 5,573
-------- --------
$ 15,886 $ 13,084
======== ========
</TABLE>
3. CONTRACTS IN PROGRESS
The status of contract costs on uncompleted construction contracts at
September 30, 1999 was as follows:
<TABLE>
<CAPTION>
COSTS AND ESTIMATED BILLINGS IN EXCESS OF
EARNINGS IN EXCESS OF COSTS AND ESTIMATED
BILLINGS EARNINGS TOTAL
--------------------- ---------------------- ---------
(in thousands)
<S> <C> <C> <C>
Costs and estimated earnings...... $11,499 $ 5,738 $17,237
Billings.......................... 9,328 6,909 16,237
------- ------- -------
$ 2,171 $(1,171) $ 1,000
======= ======== =======
</TABLE>
8
<PAGE>
3. CONTRACTS IN PROGRESS (CONTINUED)
The status of contract costs on uncompleted construction contracts at
December 31, 1998 was as follows:
<TABLE>
<CAPTION>
COSTS AND ESTIMATED BILLINGS IN EXCESS OF
EARNINGS IN EXCESS OF COSTS AND ESTIMATED
BILLINGS EARNINGS TOTAL
--------------------- ---------------------- ---------
(in thousands)
<S> <C> <C> <C>
Costs and estimated earnings...... $ 5,022 $ 2,473 $ 7,495
Billings.......................... 4,184 2,976 7,160
------- ------- -------
$ 838 $ (503) $ 335
======= ======= =======
</TABLE>
Accounts receivable at September 30, 1999 and December 31, 1998
included amounts billed but not yet paid by customers under retainage provisions
of approximately $3.3 million and $1.1 million, respectively. Such amounts are
generally due within one year.
4. ACQUISITIONS
NELSON-ADAMS COMPANY
In August 1999, PolyVison acquired all of the outstanding
common stock of A. Lawer Corporation (doing business as Nelson-Adams
Company) ("Nelson Adams") for approximately $30.4 million, including
expenses. The consideration consisted of $24.4 million in cash and $6.0
million in shares of PolyVision's Series D convertible preferred stock
("Series D Preferred"). The acquisition was accounted for using the
purchase method and, accordingly, the results of operations of Nelson
Adams have been included in the consolidated financial statements on a
prospective basis from the date of acquisition. The purchase price was
allocated based upon preliminary assessment of the fair values of
assets and liabilities at the date of the acquisition. The allocation
and related accruals are subject to adjustments. The excess of the
purchase price over the net assets acquired is being amortized on a
straight-line basis over 40 years.
The cash portion of the acquisition was principally funded
by a $22.0 million increase in PolyVision's senior secured credit
facility (see note 9 to the Company's Transitional Report on Form
10-K for the eight months ended December 31, 1998) and $2.0 million
in cash proceeds from the sale of shares of PolyVision's Series C
convertible preferred stock ("Series C Preferred") to The Alpine
Group, Inc.
ALLIANCE INTERNATIONAL GROUP INC.
In November 1998, PolyVision acquired from Wind Point Partners
III, L.P. and certain minority stockholders all of the outstanding
common stock of Alliance for approximately $76.0 million. The
acquisition was accounted for using the purchase method and,
accordingly, the results of operations of Alliance have been included
in the consolidated financial statements on a prospective basis from
the date of acquisition.
PRO FORMA FINANCIAL DATA (UNAUDITED)
Unaudited condensed pro forma results of operations, which
give effect to the Nelson Adams and Alliance acquisitions as if the
purchases occurred on January 1, 1998, are presented below. The pro
forma amounts reflect acquisition-related purchase accounting
adjustments, including adjustments to depreciation and amortization
expense and interest expense on acquisition debt and certain other
adjustments, together with related income tax effects. The pro forma
financial information does not purport to be indicative of either the
results of operations that would have occurred had the acquisitions
taken place at the beginning of the periods presented or of future
results of operations.
9
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
PRO FORMA
-------------------------------------
1999 1998
------------------ -------------
(in thousands, except per share data)
<S> <C> <C>
Net sales......................................................................... $100,821 $97,516
Income from operations before income taxes and extraordinary gain ................ 7,163 3,946
Income from operations before extraordinary gain.................................. 5,014 2,762
Extraordinary gain on early extinguishment of debt................................ - 436
Net income applicable to common stock............................................. 3,292 1,326
Net income per diluted share of common stock:
Income from operations ....................................................... $ 0.24 $ 0.20
Extraordinary gain on early extinguishment of debt............................ - 0.03
Preferred stock dividends..................................................... (0.06) (0.13)
-------- --------
Net income per diluted share of common stock...................................... $ 0.18 $ 0.10
======== ========
</TABLE>
5. RESTRUCTURING CHARGE
During the eight months ended December 31, 1998, PolyVision recorded a
nonrecurring restructuring charge of $500,000 related to the costs incurred in
closing one of PolyVision's manufacturing facilities. This manufacturing
facility was operated by PolyVision prior to the purchase of Alliance, after
which the production was moved into an Alliance facility. The plan to close
the PolyVision manufacturing facility was in place as of December 31, 1998,
and production ceased February 1999. The activities performed by this
facility will continue to be performed at the Alliance facility. PolyVision
does not anticipate a decline in revenues or operating profit due to the
closing of the facility.
The $500,000 charge recorded in 1998 represented approximately
$160,000 of employee severance and other employee termination costs, $150,000
of unsalable inventory which was disposed and $190,000 of facility costs,
including utilities, maintenance, insurance and real estate taxes, incurred
while PolyVision cleaned the facility and held it for sale. Of the 23
employees at the facility, 22 were terminated as a result of the closing. As
of September 30, 1999, $500,000 of these costs were paid and charged against
the liability, including payment of $130,000 of employee severance costs and
disposal of approximately $150,000 of unsalable inventory during the year.
6. SERIES D PREFERRED STOCK
The Series D Preferred earns cumulative cash dividends at an annual
rate of 8% and has priority as to dividends over the common stock. In the case
of the voluntary or involuntary liquidation or dissolution of PolyVision, the
holders of the Series D Preferred will be entitled to receive a liquidation
price of $50.00 per share plus any accrued and unpaid dividends. Dividends are
prohibited through July 2001 under the terms of PolyVision's senior subordinated
credit facility and thereafter are restricted in amount and can only be paid if
PolyVision is in compliance with specified financial ratios. These shares have
no voting rights, except for certain significant business transactions of
PolyVision, and have customary antidilution provisions for stock dividends,
stock splits, share combinations, recapitalizations and other capital
adjustments. The Series D Preferred rank senior to all other classes of stock,
except for the Series B and Series C Preferred Stock.
The Series D Preferred may be converted into 1,500,000 shares of common
stock at any time at a conversion price of $4.00 per share.
7. EARNINGS PER SHARE
10
<PAGE>
The computation of basic and diluted earnings per share for the three and nine
months ended September 30,1999 and 1998 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
1999 1998
-------------------------------- ------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- -------- --------- ------- ------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Income attributable to common
stock before extraordinary gain..... $2,630 $ 950
Less: preferred stock dividends........ (483) -
------ ------
Basic earnings per common share
before extraordinary gain........... 2,147 14,118 $ 0.15 950 8,577 $ 0.11
====== ======
Dilutive impact of stock options,
warrants and grants............. - 3,305 - 99
Assumed conversion of convertible
seller note........................ 160 2,667 - -
Assumed conversion of preferred stock.. 483 8,033
------ ------ ------- -------
Diluted earnings per common share
before extraordinary gain..... $2,790 28,123 $ 0.10 $ 950 8,676 $ 0.11
====== ====== ====== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
1999 1998
-------------------------------- ------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- -------- --------- ------- ------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Income attributable to common stock
before extraordinary gain.......... $ 3,909 $ 1,418
Less: preferred stock dividends...... (1,287) (172)
------- -------
Basic earnings per common share before
extraordinary gain................. $ 2,622 14,118 $ 0.19 $ 1,246 8,567 $ 0.15
====== ======= ======
Dilutive impact of stock options, warrants
and grants......................... 3,337 63
Assumed conversion of convertible seller
note.............................. 360 2,667
Assumed conversion of preferred stock 576 2,688 -
------- ------ ------ ------- ------ ------
Diluted earnings per common share before
extraordinary gain................. $ 3,558 22,810 $ 0.16 $ 1,246 8,630 $ 0.14
======= ====== ====== ======= ====== ======
</TABLE>
11
<PAGE>
8. COMPREHENSIVE INCOME
The components of comprehensive income for the three and nine months
ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- ----------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income............................... $2,630 $ 950 $ 3,909 $ 1,854
Foreign currency translation adjustment.. (365) - 1,366 -
------- ------ -------- ---------
Comprehensive income.................. $2,265 $ 950 $ 5,275 $ 1,854
======= ====== ======== =========
</TABLE>
9. DIVISIONAL REPORTING
The company currently conducts business through three operating
divisions: OEM, Commercial and Public Sector Group. The accounting policies
of the divisions are the same as described in the summary of significant
accounting policies included in the footnotes of PolyVision's Transitional
Report on Form 10-K for the eight months ended December 31, 1998. PolyVision
evaluates divisional performance based on income from operations. Sales for
each division are based on the location of the third-party customer. All
significant intercompany transactions between divisions have been eliminated.
PolyVision's selling, general and administrative expenses are charged to each
division based on the region where the expenses are incurred. As a result,
the components of operating income for one segment may not be comparable to
another segment.
The following provides information about each operating division for
the three and nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -----------------------------
1999 1998 1999 1998
-------------- -------------- ------------ -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales:
OEM Group..................................... $ 12,151 $ - $ 36,298 $ -
Commercial Group.............................. 1,956 1,750 5,754 5,216
Public Sector Group........................... 22,325 10,169 43,484 24,747
-------- ------------ -------- --------
$ 36,432 $ 11,919 $ 85,536 $ 29,963
======== ============ ======== ========
Depreciation and amortization expense:
OEM Group..................................... $ 709 $ - $ 2,418 $ -
Commercial Group.............................. 61 55 177 162
Public Sector Group........................... 237 55 460 166
-------- ------------ -------- --------
$ 1,007 $ 110 $ 3,055 $ 328
======== ============ ======== ========
Operating income:
OEM Group..................................... $ 2,720 $ - $ 7,251 $ -
Commercial Group.............................. 206 187 592 484
Public Sector Group........................... 3,330 1,091 4,486 1,586
Corporate and other........................... (54) (17) (59) (15)
-------- ------------ -------- --------
$ 6,202 $ 1,261 $ 12,270 $ 2,055
======== ============ ======== ========
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Subsequent to the acquisition of Nelson Adams in August 1999 (See
Note 4 to the accompanying condensed consolidated financial statements) the
Company reorganized its operating units into three divisions, OEM (Original
Equipment Manufacture), Public Sector, and Commercial. The OEM division,
which includes the former operations of Alliance International Group Inc.
("Alliance"), acquired in November 1998 (see Note 7 to the Company's
Transitional Report on Form 10-K for the eight months ended December 31,
1998), manufactures continuous coil ceramicsteel (a high grade, fused ceramic
surface on light gauge steel producing a non-porous, uniform finish) used in
writing surfaces for schools, conference rooms and other business
environments, as well as for construction projects, such as tunnel and
people-moving systems. The OEM division also produces proprietary projection
screen surfaces, screen-printed and non-screen printed ceramicsteel surfaces
used for interior and exterior architectural applications and high-endurance
signage. The Public Sector division, which includes the former operations of
Nelson Adams, acquired in August 1999, manufactures and sells custom-designed
and engineered writing, projection and other visual display surfaces, custom
cabinets, workstations and conference center casework, and folding tables
primarily to schools and offices. The Commercial division manufactures and
sells menuboard display systems to the fast food and convenience store
industries, and merchandising displays used principally by banks.
The following comparative table summarizes, for the periods presented,
sales and operating income data for PolyVision on a divisional basis. Such
segment data is presented on an historical reporting basis for the three and
nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
1999 1998 1999 1998
------- ---------- -------- ------
(unaudited and in thousands, except percentages)
<S> <C> <C> <C> <C>
Net sales:
OEM Group..................... $ 12,151 $ - $ 36,298 $ -
Commercial Group.............. 1,956 1,750 5,754 5,216
Public Sector................. 22,325 10,169 43,484 24,747
-------- ---------- --------- ---------
$ 36,432 $ 11,919 $ 85,536 $ 29,963
======== ========== ========= =========
Gross profit....................... $ 13,146 $ 3,405 $ 30,275 $ 8,727
======== ========== ========= =========
Gross margin....................... 36.1% 28.6% 35.4% 29.1%
Selling, general and administrative
expenses....................... $ 6,389 $ 2,108 $ 16,618 $ 6,565
======== ========== ========= =========
Amortization of goodwill........... $ 555 $ 36 $ 1,387 $ 107
======== ========== ========= =========
Operating income (loss):
OEM Group $ 2,720 $ - $ 7,251 $ -
Commercial Group.............. 206 187 592 484
Public Sector................. 3,330 1,091 4,486 1,586
Corporate..................... (54) (17) (59) (15)
--------- ---------- --------- ---------
$ 6,202 $ 1,261 $ 12,270 $ 2,055
========= ========== ========= =========
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
Net sales for the quarter ended September 30, 1999 totaled $36.4
million, representing an increase of $24.5 million, or 205.7%, over net sales of
$11.9 million for the quarter ended September 30, 1998. Net sales for the nine
months ended September 30, 1999 totaled $85.5 million, representing an increase
of $55.6 million, or 185.5%, over net sales of $30.0 million for the nine months
ended September 30, 1998. The increase in net sales for the quarter and nine
months resulted primarily from the contribution of $24.6 million and $54.7
million, respectively, in net sales from the acquired operations of Alliance and
Nelson Adams, respectively. OEM sales of $12.2 million and $36.3 million for
the quarter and nine months ended September 30, 1999, respectively, represent
sales of manufactured continuous coil ceramicsteel products from the acquired
manufacturing operations of Alliance. Public Sector sales of $22.3 million
and $43.5 million for the quarter and nine months ended September 1999,
respectively, represent an increase of $12.2 million and $18.8 million over
sales of $10.2 million and $24.7 million for the quarter and nine months
ended September 30, 1998. The increase is due to the inclusion of $12.1
million and $18.4 million in sales contributed by the acquired operations of
Alliance and Nelson Adams in the quarter and nine months ended September 30,
1999, respectively. Commercial sales of $2.0 million and $5.8 million for the
quarter and nine months ended September 30, 1999, respectively, represent an
increase of $0.2 million and $0.5 million over sales of $1.8 million and $5.2
million for the quarter and nine months ended September 30, 1998,
respectively.
Gross profit for the quarter ended September 30, 1999 totaled $13.1
million, representing an increase of $9.7 million, or 286.1%, as compared to the
same quarter in the prior year. For the nine months ended September 30, 1999,
gross profit was $30.3 million, representing an increase of $21.5 million, or
246.9%, as compared to the same quarter in the prior year. Gross margin for the
quarter ended September 30, 1999 increased to 36.1% from 28.6% for the quarter
ended September 30, 1998. Gross margin for the nine months ended September 30,
1999 increased to 35.4% from 29.1% for the nine months ended September 30, 1998.
The increase in gross profit resulted primarily from the contribution of $9.7
million and $21.5 million for the quarter and nine months ended September 30,
1999, respectively, in gross profit from Alliance and Nelson Adams. The increase
in gross margin resulted primarily from the inclusion of higher margin product
lines from both Alliance and Nelson Adams. Gross profit and gross margin are
expected to show continued improvement on a comparative basis due to the impact
of the Alliance and Nelson Adams acquisitions, improved cost savings resulting
from higher production volumes and manufacturing cost reduction resulting from
the closure of Greensteel's, Alliance, Ohio facility and Riverside, California
facility combined with a continuing focus on cost reduction initiatives as
reflected in the operating results.
Selling, general and administrative expenses ("SG&A") for the quarter
ended September 30, 1999 totaled $6.4 million, representing an increase of $4.3
million, or 203.1%, as compared to the same period in the prior year. For the
nine months ended September 30, 1999, SG&A was $16.6 million, representing an
increase of $10.1 million, or 153.9%, as compared to the same period in the
prior fiscal year. The increase in SG&A for the quarter and nine months resulted
primarily from the inclusion of $4.0 million and $10.1 million, respectively, in
SG&A from the acquired operations of Alliance and Nelson Adams, offset by a $0.1
million and $0.4 million decline in SG&A, respectively, at the Company's
existing facilities. The Company expects to achieve a significant reduction in
SG&A from the integration of the Nelson Adams acquisition and continues to focus
on achieving consolidation synergies resulting from the Alliance acquisition and
improved cost controls.
Amortization expense increased to $0.6 million and $1.4 million during
the quarter and nine months ended September 30, 1999, respectively, as compared
to $36,000 and $0.1million, respectively, in the same periods in the prior year.
The increase is due to the goodwill recorded as a result of the Alliance and
Nelson Adams acquisitions.
As a result of the increase in net sales and gross margin offset by the
increase in SG&A and goodwill amortization, operating income for the quarter and
nine months ended September 30, 1999 increased to $6.2 million and $12.3
million, respectively, as compared to $1.3 million and $2.1 million,
respectively, for the comparable periods in the prior year.
Interest expense in the quarter ended September 30, 1999 increased to
$2.3 million from $0.2 million in the same period in the prior year. For the
nine months ended September 30, 1999, interest expense was $6.5 million as
compared to $0.7 million for the comparable period in the prior year. The
increase is due principally to debt incurred in connection with the Alliance
and Nelson Adams acquisitions.
14
<PAGE>
Provision for income taxes for the quarter and nine months ended
September 30, 1999 was $1.6 million and $2.5 million, respectively, compared to
$0 and $15,000 for the comparable periods in the prior year. The increase in
income tax expense reflects the impact of non-deductible goodwill amortization,
as well as the inclusion of Alliance's European business which does not benefit
from prior periods' operating losses incurred in the United States.
Net income for the quarter ended September 30, 1999 was $2.6 million
($0.12 per diluted share), as compared to $1.0 million ($0.11 per diluted share)
for the comparable period in the prior year. For the nine months ended September
30, 1999, net income was $3.9 million ($0.22 per diluted share), as compared
income before extraordinary gain of $1.4 million ($0.16 per diluted share), for
the comparable period in the prior year. The comparative increase in net income
for the quarter and nine months ended September 30, 1999 was due to the
significant increase in operating income, offset by higher interest expense
resulting from acquisition debt incurred in connection with the Alliance and
Nelson Adams acquisitions and higher incremental tax rates.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, PolyVision generated $4.6
million in cash flow from operating activities consisting of $8.1 million in
cash flow generated from operations (net income plus non-cash charges), reduced
by $3.5 million in cash flow used for net working capital changes. Significant
working capital changes included a $6.5 million increase in accounts receivable
offset by a $3.4 million increase in accounts payable and accrued expenses. Cash
used for investing activities amounted to $24.9 million consisting principally
of $24.4 million in cash paid for the acquisition of Nelson Adams and $1.5
million in capital expenditures offset by cash received from the sale of
property, plant and equipment. Cash used for financing activities amounted to
$20.1 million consisting principally of $22.0 million in borrowings on
PolyVision's senior secured credit facility and $2.0 million in proceeds from
issuance of PolyVision's Series C Preferred Stock, the proceeds of which were
used to fund the acquisition of Nelson Adams offset by net debt repayments of
$3.3 million.
PolyVision's senior credit facilities consist of (a) a revolving line
of credit in the maximum principal amount of $15.0 million (of which $9.5
million is available in the United States and $5.5 million is available to
PolyVision's European subsidiaries), (b) a Term Loan A in the aggregate
principal amount of $36.0 million and (c) a Term Loan B in the principal amount
of $31.0 million. Advances under the revolving line of credit will be available
through November 20, 2004, and borrowings thereunder may not at any time exceed
(1) for the United States borrowers, an amount equal to the lesser of $9.5
million or the sum of 85% of eligible accounts receivable plus 60% of eligible
inventory, and (2) for the European borrowers, the lesser of $5.5 million or the
sum of 85% of eligible accounts receivable and 50% of eligible inventory. The
term loans are repayable in quarterly principal installments through October 31,
2005. The senior credit facilities are secured by liens and security interests
on substantially all of PolyVision's real and personal property, including the
assets of PolyVision's subsidiaries and a pledge of the outstanding stock of
such subsidiaries. PolyVision is required to comply with customary performance
and financial covenants and is prohibited from paying any dividends on its
common stock without the lenders' prior written consent, and from paying
dividends on its preferred stock until it attains prescribed financial ratio
levels. At November 13, 1999, PolyVision had $14.0 million in excess
availability under its revolving line of credit.
PolyVision's senior subordinated loan of $25.0 million bears interest
at a fixed rate of 12.5% per annum, payable quarterly in arrears and matures on
December 30, 2006. The senior subordinated note is guaranteed by PolyVision's
domestic subsidiaries. The note agreement contains certain customary performance
and financial covenants similar to (but less stringent than) the financial
covenants applicable to the senior credit facilities. The senior subordinated
note is junior in right of payment to the senior credit facilities, but senior
in right of payment to the $8.0 million promissory note issued by PolyVision in
connection with the Alliance acquisition. In conjunction with the borrowing of
the senior subordinated note, PolyVision issued to the lender detachable
warrants entitling the holder thereof to purchase, for nominal consideration,
2,986,467 shares of common stock of PolyVision, representing approximately
12.5% of its fully-diluted common stock.
PolyVision believes its current cash position and unused credit
facilities, when combined with cash flows generated from current operations, are
adequate to meet PolyVision's current liquidity needs during the next 12 months.
15
<PAGE>
YEAR 2000 COMPLIANCE
OVERVIEW
The year 2000 ("Y2K") problem is the result of computer programs having
been written using two digits (rather than four) to define the applicable year,
thus not properly recognizing dates after December 31, 1999. During 1998,
PolyVision began identifying and resolving Year 2000 issues. These efforts
include identification and review of internal operating systems and
applications, and customer projects and services, as well as discussions with
information providers and other key suppliers to the business. At this time,
based upon the efforts taken to date and those yet to be taken, PolyVision does
not expect any serious disruptions in its business operations and, therefore,
does not anticipate any material negative effect upon its revenues or earnings
as a result of the Y2K issue. Remediation costs for problems identified thus far
are not expected to be material to PolyVision's consolidated financial position,
liquidity or results of operations. PolyVision has established a timetable for
resolving Year 2000 issues so as not to interrupt ongoing operations.
POLYVISION'S STATE OF READINESS
The Year 2000 project plan, including assessment, improvement, testing
and implementation, has been established. The assessment phase is 80% complete
and should be completed in December 1999 upon receipt of all remaining vendor
and supplier Y2K readiness inquiries.
Assessment of the Year 2000 compliance of third parties with whom
PolyVision has material relationships is in process. PolyVision's material
third-party relationships include the following:
(a) Raw material vendors: PolyVision's raw material purchases are
through third-party raw material vendors. Most mission
critical raw material vendors have responded to PolyVision's
Y2K readiness inquiry;
(b) Equipment vendors: The response to the Y2K readiness inquiries
from equipment vendors, which includes all embedded chip
equipment, is 100% complete;
(c) Service providers: The response to the Y2K readiness inquiries
from third-party service providers, which include utilities,
phone service and all facility related services, is 85%
complete; and
(d) Software vendors: PolyVision has upgraded most licensed
software to the Y2K compliant version and is in the testing
phase.
The responses received, thus far, from PolyVision's third-party vendors
and suppliers indicate compliance on or before December 1999.
The preliminary assessment of internal IT and non-IT systems has been
completed. Internal non-complaint items have been identified and prioritization
of internal non-compliant items is in process. A system for tracking remediation
has been established and non-compliant items identified are expected to be
completed in December 1999. Based on the findings of the planning and
assessment phases completed to date, PolyVision does not believe independent
verification and validation processes will be necessary.
COSTS TO ADDRESS POLYVISION'S YEAR 2000 ISSUES
The current estimate of the cost of remediation and equipment and
software replacement is approximately $500,000 and is summarized below.
PolyVision has installed a new computer system at its manufacturing
facilities in France and Denmark. The cost of computer hardware/software for
these locations will be approximately $250,000 and $80,000, respectively.
PolyVision's computer system in Belgium has been upgraded to adequately handle
the Y2K compliance issues, at an approximate cost of $150,000. Management
believes its other computer systems are Y2K compliant.
16
<PAGE>
RISKS OF POLYVISION'S YEAR 2000 ISSUES AND POLYVISION'S CONTINGENCY
PLANS
A reasonable worst case Y2K scenario is not known at this time. This
determination will be made after the receipt of the remaining material
third-party questionnaires. However, the shipment of product to customers is
expected to continue with minimal interruption and no material loss of revenues
is anticipated. The Y2K project has had minimal impact on the schedule of other
major IT projects.
PolyVision continues to develop and monitor its contingency planning.
Each manufacturing facility is incorporating Y2K into their existing contingency
plans. This planning will ensure that: (i) adequate levels of inventory will be
on hand to mitigate the impact of any potential short-term disruptions in
production; (ii) adequate supply of raw materials will be available from
alternate sources; and (iii) the necessary backup measures for computer
processing are identified.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements are based largely on PolyVision's expectations and are subject to a
number of risks and uncertainties, certain of which are beyond PolyVision's
control. Actual results could differ materially from these forward-looking
statements as a result of, among other factors, risks related to PolyVision's
history of operating losses and accumulated deficit; future capital
requirements; competition, technical advances and seasonally; environmental
matters; dependence on the construction market generally; and other risks. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this report will in fact occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PolyVision's exposure to market risk primarily relates to interest
rates on long-term debt. For example, a one percent increase in interest rates
affecting PolyVision's floating rate debt would increase the interest expense
during the nine months ended September 30, 1999 by approximately $443,000.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K, dated August 19, 1999,
reporting the acquisition of A. Lawer Corporation.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLYVISION CORPORATION
Date: November 15, 1999 By: /s/ GARY L. EDWARDS
-----------------------------------
Gary L. Edwards
Chief Financial Officer, Treasurer and
Secretary (as both a duly authorized
officer of the registrant and the
principal financial officer or chief
accounting officer of the registrant)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 5,273 0
<SECURITIES> 0 0
<RECEIVABLES> 34,715 0
<ALLOWANCES> 2,747 0
<INVENTORY> 15,886 0
<CURRENT-ASSETS> 58,225 0
<PP&E> 20,238 0
<DEPRECIATION> 2,723 0
<TOTAL-ASSETS> 165,338 0
<CURRENT-LIABILITIES> 33,687 0
<BONDS> 91,047 0
0 0
25,848 0
<COMMON> 14 0
<OTHER-SE> 1,458 0
<TOTAL-LIABILITY-AND-EQUITY> 165,338 0
<SALES> 36,432 85,536
<TOTAL-REVENUES> 36,432 85,536
<CGS> 23,286 55,261
<TOTAL-COSTS> 23,286 55,261
<OTHER-EXPENSES> 6,944 18,005
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,324 6,539
<INCOME-PRETAX> 4,242 6,368
<INCOME-TAX> 1,612 2,459
<INCOME-CONTINUING> 2,630 3,909
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,630 3,909
<EPS-BASIC> 0.15 0.19
<EPS-DILUTED> 0.10 0.16
</TABLE>
