<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 June 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.)
48-62 36th Street
Long Island City, New York 11101
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(718) 433-2170
--------------------------------------------------
(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 August 13, 1999 was 14,120,891 shares.
- --------------------------------------------------------------------------------
<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>
June 30, December 31,
1999 1998
--------------- -------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 3,203 $ 4,841
Accounts receivable, (less allowance for doubtful accounts of:
June 1999, $2,637; December 1998, $2,519)......................... 21,383 17,883
Inventories.......................................................... 14,097 13,084
Costs and estimated earnings in excess of billings on
uncompleted contracts............................................. 1,040 838
Prepaid expenses and other current assets............................ 2,501 2,474
-------- --------
Total current assets............................................. 42,224 39,120
Property, plant and equipment, net................................... 17,056 17,768
Goodwill, net........................................................ 61,019 61,402
Other assets......................................................... 3,658 3,918
-------- --------
Total assets.................................................. $123,957 $122,208
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................... $ 135 $ 235
Current maturities of long-term debt................................ 1,141 363
Accounts payable.................................................... 9,297 7,223
Accrued expenses.................................................... 11,342 12,283
Billings in excess of costs and estimated
earnings on uncompleted contracts................................. 448 503
-------- --------
Total current liabilities....................................... 22,363 20,607
Long-term debt, less current maturities............................. 71,755 74,511
Other long-term liabilities......................................... 6,682 6,169
-------- --------
Total liabilities.............................................. 100,800 101,287
-------- --------
Stockholders' equity:
Series B preferred stock at liquidation value....................... 12,848 12,848
Series C preferred stock at liquidation value....................... 5,000 5,000
Common stock, $.001 par value; authorized 40,000,000 shares;
14,118,525 shares and 14,092,750 shares issued at
June 30, 1999 and December 31, 1998, respectively................ 14 14
Additional paid-in capital.......................................... 70,780 70,750
Accumulated deficit................................................. (67,308) (67,783)
Cumulative foreign currency translation adjustment.................. 1,823 92
-------- --------
Total stockholders' equity....................................... 23,157 20,921
-------- --------
Total liabilities and stockholders' equity..................... $123,957 $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
(unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales........................................ $ 26,816 $ 9,676 $49,104 $ 18,044
Cost of goods sold............................... 16,910 6,909 31,975 12,722
-------- ------- ------- --------
Gross profit................................. 9,906 2,767 17,129 5,322
Selling, general and administrative.............. 5,062 2,191 10,229 4,457
Amortization of goodwill......................... 409 35 832 71
-------- ------- ------- --------
Operating income............................. 4,435 541 6,068 794
Interest (expense), net.......................... (2,093) (212) (4,215) (449)
Other income, net................................ 167 107 273 138
-------- ------- ------- --------
Income before income taxes and
extraordinary gain......................... 2,509 436 2,126 483
Provision for income taxes....................... 647 15 847 15
-------- ------- ------- --------
Income before extraordinary gain............. 1,862 421 1,279 468
Extraordinary gain on the early extinguishment
of debt.................................... - 436 - 436
-------- ------- ------- --------
Net income .................................. 1,862 857 1,279 904
Preferred stock dividends........................ (402) - (804) (172)
-------- ------- ------- --------
Net income applicable to common stock........ $1,460 $ 857 $ 475 $ 732
-------- ------- ------- --------
-------- ------- ------- --------
Net income per share of common stock:
Basic:
Income before extraordinary gain........... $ 0.13 $ 0.05 $ 0.09 $ 0.06
Extraordinary gain on early extinguishment
of debt.................................. - 0.05 - 0.05
Preferred stock dividends.................. (0.03) - (0.06) (0.02)
-------- ------- ------- --------
Net income per basic share of common
stock................................. $ 0.10 $ 0.10 $ 0.03 $ 0.09
-------- ------- ------- --------
-------- ------- ------- --------
Diluted:
Income before extraordinary gain........... $ 0.09 $ 0.05 $ 0.07 $ 0.06
Extraordinary gain on early extinguishment
of debt.................................. - 0.05 - 0.05
Preferred stock dividends.................. (0.02) - (0.04) (0.02)
-------- ------- ------- --------
Net income per diluted share of common
stock................................. $ 0.07 $ 0.10 $ 0.03 $ 0.09
-------- ------- ------- --------
-------- ------- ------- --------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 1,279 $ 904
Adjustments to reconcile net income to net cash
provided by (used for) operations:
Depreciation and amortization................................. 2,071 220
Amortization of deferred financing costs and accretion
of debt discount.......................................... 990 -
Compensation expense for stock grants......................... 5 -
Deferred income tax benefit................................... (218) -
Change in assets and liabilities:
Accounts receivable........................................ (3,500) 703
Inventories................................................ (1,013) (739)
Other current assets....................................... (229) (516)
Other assets............................................... (8) 19
Accounts payable and accrued expenses 1,153 (687)
Other liabilities.......................................... (55) (462)
------- -----
Cash provided by (used for) operating activities....................... 475 (558)
------- -----
Cash flows from investing activities:
Capital expenditures, net.......................................... (1,087) 162
Other.............................................................. (206) -
------- -----
Cash provided by (used for) investing activities....................... (1,293) 162
------- -----
Cash flows from financing activities:
Repayments of short-term borrowings................................ (155) (57)
Repayments of long-term borrowings................................. (1,266) -
Borrowings under revolving credit facilities, net.................. 1,000 413
Proceeds from exercise of stock options............................ 25 -
Advances from The Alpine Group, Inc. .............................. - 201
------- -----
Cash provided by (used for) financing activities....................... (396) 557
------- -----
Effect of exchange rate changes on cash and cash equivalents........... (424) -
------- -----
Net increase (decrease) in cash and cash equivalents................... (1,638) 161
Cash and cash equivalents at beginning of year......................... 4,841 283
------- -----
Cash and cash equivalents at end of year............................... $3,203 $ 444
------- -----
------- -----
Supplemental disclosures:
Cash paid for interest ............................................ $ 1,650 $ 151
------- -----
------- -----
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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"). Certain reclassifications have been made to the
prior period presentation to conform to the current period presentation.
PolyVision operates through its wholly-owned subsidiaries: Greensteel,
Inc. ("Greensteel") and Posterloid Corporation ("Posterloid"). Greensteel
operates in two divisions, Greensteel and Alliance. Through Greensteel,
PolyVision manufactures and sells custom-designed and engineered writing,
projection and other visual display surfaces, custom cabinets and workstation
and conference center casework primarily to schools and offices. Through
Alliance, PolyVision 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. Alliance 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. Through Posterloid, PolyVision 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 were as follows at June 30, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(in thousands)
<S> <C> <C>
Raw materials .......................... $ 8,026 $ 7,035
Work in process ........................ 647 476
Finished goods ......................... 5,424 5,573
------- -------
$14,097 $13,084
------- -------
------- -------
</TABLE>
3. CONTRACTS IN PROGRESS
The status of contract costs on uncompleted construction contracts was as
follows at June 30, 1999:
<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...... $4,965 $4,974 $9,939
Billings.......................... 3,925 5,422 9,347
----- ----- -----
$1,040 $(448) $ 592
====== ====== ======
</TABLE>
6
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
3. CONTRACTS IN PROGRESS (CONTINUED)
The status of contract costs on uncompleted construction contracts was as
follows at December 31, 1998:
<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 June 30, 1999 and December 31, 1998 included amounts
billed but not yet paid by customers under retainage provisions of approximately
$1,239,000 and $1,122,000, respectively. Such amounts are generally due within
one year.
4. 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
International Group, Inc. ("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 June 30, 1999, $432,000 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 first
half of the year.
5. ACQUISITION OF ALLIANCE INTERNATIONAL GROUP
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 Alliance acquisition as if the purchase 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.
7
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
PRO FORMA FINANCIAL DATA (UNAUDITED) (CONTINUED)
The pro forma financial information does not purport to be indicative of
either the results of operations that would have occurred had the acquisition
taken place at the beginning of the periods presented or of future results of
operations.
<TABLE>
<CAPTION>
Six Months ended
June 30,
Pro Forma
-----------------------------------
1999 1998
------ ------
(in thousands, except per share data)
<S> <C> <C>
Net sales......................................................................... $49,104 $48,303
Income (loss) from operations before income taxes and extraordinary gain ......... 2,126 (984)
Income (loss) from operations..................................................... 1,279 (1,702)
Extraordinary gain on early extinguishment of debt................................ - 436
Net income (loss) applicable to common stock...................................... 475 (2,070)
Net income (loss) per diluted share of common stock:
Income (loss) from operations..................................................... $ 0.07 $ (0.12)
Extraordinary gain on early extinguishment of debt................................ - 0.03
Preferred stock dividends......................................................... (0.04) (0.06)
------ -------
Net income (loss) per diluted share of common stock............................... $ 0.03 $ (0.15)
------ -------
------ -------
</TABLE>
6. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the three and six
months ended June 30,1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months ended June 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 $1,862 $ 421
Less: preferred stock dividends.. (402) -
------ ------
Basic earnings per common share
before extraordinary gain..... 1,460 14,117 $ 0.10 421 8,562 $ 0.05
------- -------
------- -------
Dilutive impact of stock options,
warrants and grants............. - 3,378 - 47
Assumed conversion of convertible
seller note........................ 160 2,667 -
Assumed conversion of preferred stock 402 6,783 -
------ ----- ------ -----
Diluted earnings per common share
before extraordinary gain..... $2,022 26,945 $ 0.07 $ 421 8,609 $ 0.05
------ ------ ------- ------ ----- -------
------ ------ ------- ------ ----- -------
</TABLE>
8
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
6. Earnings Per Share (continued)
<TABLE>
<CAPTION>
Six Months ended June 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..... $1,279 $ 468
Less: preferred stock dividends...... (804) (172)
------ ------
Basic earnings per common share before
extraordinary gain.................. $ 475 14,117 $ 0.09 $ 296 8,562 $ 0.03
------- ------ --------
------- ------ --------
Dilutive impact of stock options,
warrants and grants................. - 3,409 - 24
------ ------- ------- ------ ------ -------
Diluted earnings per common share
before extraordinary gain........... $ 475 $17,526 $ 0.03 $ 296 $8,586 $ 0.03
------ ------- ------- ------ ------ -------
------ ------- ------- ------ ------ -------
</TABLE>
For the six months ended June 30, 1999, the effect of assuming conversion of
convertible debt and preferred stock is antidilutive and therefore, have not
been considered in determining the diluted earnings per common share.
7. Comprehensive Income
The components of comprehensive income for the three and six months ended
June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
------ ------ ------ ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income............................... $1,862 $857 $ 1,279 $ 904
Foreign currency translation adjustment.. 489 - 1,731 -
------ ---- ------- ------
Comprehensive income.................. $2,351 $857 $ 3,010 $ 904
------ ---- ------- ------
------ ---- ------- ------
</TABLE>
8. SEGMENT REPORTING
PolyVision currently conducts business in three industry segments: visual
display surfaces and casework through Greensteel, menuboard display systems
through Posterloid, and ceramicsteel surfaces through Alliance. Alliance
includes the operations of Alliance America and Alliance Europe. The accounting
policies of the segments are the same as described in the summary of significant
accounting policies included in the footnotes of PolyVision's Transition Report
on Form 10-K for the eight months ended December 31, 1998. PolyVision evaluates
segment performance based on income from operations. Sales for each segment are
based on the location of the third-party customer. All significant intercompany
transactions between segments have been eliminated. PolyVision's selling,
general and administrative expenses are charged to each segment 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.
9
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
8. SEGMENT REPORTING (CONTINUED)
The following provides information about each business segment for the
three and six months ended June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- -----------------------------
1999 1998 1999 1998
-------------- -------------- ------------ -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales:
Greensteel.................................... $8,466 $7,912 $15,199 $14,578
Posterloid.................................... 1,964 1,764 3,798 3,466
Alliance...................................... 16,386 - 30,107 -
-------- ------- -------- ---------
$26,816 $9,676 $49,104 $18,044
Depreciation and amortization expense:
Greensteel.................................... $ 45 $ 57 $ 96 $ 111
Posterloid.................................... 59 54 117 107
Alliance...................................... 826 - 1,858 -
-------- ------- -------- ---------
$ 930 $ 111 $2,071 $ 218
-------- ------- -------- ---------
-------- ------- -------- ---------
Operating income:
Greensteel.................................... $ 799 $ 384 $ 991 $ 495
Posterloid.................................... 189 166 386 297
Alliance...................................... 3,450 - 4,696 -
Corporate and other........................... (3) (9) (5) 2
-------- ------- -------- ---------
$4,435 $ 541 $6,068 $ 794
-------- ------- -------- ---------
-------- ------- -------- ---------
</TABLE>
9. SUBSEQUENT EVENT
On May 18, 1999, PolyVision announced its intention to acquire 100% of the
outstanding common stock of A. Lawer Corporation (doing business as the
Nelson-Adams Company) for $30.0 million in a combination of cash and preferred
stock. The acquisition will be accounted for using the purchase method. The
purchase price will be allocated based upon the estimated fair values of assets
and liabilities at the date of acquisition. The excess of the purchase price
over the net assets acquired will be amortized on a straight-line basis over 40
years.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
PolyVision, though its wholly-owned subsidiaries, Greensteel and
Posterloid, operates in three industry segments: Greensteel, Alliance
(acquired in November 1998) and Posterloid. Greensteel manufactures and sells
custom-designed and engineered writing, projection and other visual display
surfaces (such as porcelain chalkboards and markerboards), custom cabinets
and workstation and conference center casework primarily to schools and
offices. Alliance 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 products, such as tunnel
and people-moving systems. Alliance 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. Posterloid 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 segment basis. Such segment
data is presented on a historical reporting basis for the three and six months
ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months ended Six Months ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------ ------ ------ ------
(unaudited and in thousands, except percentages)
<S> <C> <C> <C> <C>
Net sales:
Greensteel.................... $ 8,466 $ 7,912 $15,199 $14,578
Posterloid.................... 1,964 1,764 3,798 3,466
Alliance...................... 16,386 - 30,107 -
------- ------- ------- ------
$26,816 $ 9,676 $49,104 $18,044
------- ------- ------- ------
------- ------- ------- ------
Gross profit....................... $ 9,906 $ 2,767 $17,129 $ 5,322
------- ------- ------- ------
------- ------- ------- ------
Gross margin....................... 36.9% 28.6% 34.9% 29.5%
Selling, general and administrative
expenses....................... $ 5,062 $ 2,191 $10,229 $ 4,457
------- ------- ------- ------
------- ------- ------- ------
Amortization of goodwill........... $ 409 $ 35 $ 832 $ 71
------- ------- ------- ------
------- ------- ------- ------
Operating income (loss):
Greensteel.................... $ 799 $ 384 $ 991 $ 495
Posterloid.................... 189 166 386 297
Alliance...................... 3,450 - 4,696 -
Corporate..................... (3) (9) (5) 2
------------- ----------- ------------- ------------
$ 4,435 $ 541 $ 6,068 $ 794
------- ------- ------- ------
------- ------- ------- ------
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1999 totaled $26.8 million,
representing an increase of $17.1 million, or 177.1%, over net sales of $9.7
million for the quarter ended June 30, 1998. Net sales for the six months ended
June 30, 1999 totaled $49.1 million, representing an increase of $31.1 million,
or 172.1%, over net sales of $18.0 million for the six months ended June 30,
1998. The increase in net sales for the quarter and six months resulted
primarily from the contribution of $16.4 million and $30.1 million,
respectively, in net sales from the acquired operations of Alliance. In
addition, net sales for the quarter and six months of Greensteel increased by
$0.6 million in both periods, and Posterloid's net sales increased $0.2
million and $0.3 million, respectively. The increase in Greensteel's net
sales reflects continuing strong demand in the educational visual display
market, along with PolyVision's improved distribution strategy. Posterloid's
net sales increased as a result of increased business activity at
Posterloid's traditional customer base.
Gross profit for the quarter ended June 30, 1999 totaled $9.9 million,
representing an increase of $7.1 million, or 258.0%, as compared to the same
quarter in the prior year. For the six months ended June 30, 1999, gross
profit was $17.1 million, representing an increase of $11.8 million, or 221.9%,
as compared to the same quarter in the prior year. Gross margin for the quarter
ended June 30, 1999 increased to 36.9% from 28.6% for the quarter ended June 30,
1998. Gross margin for the six months ended June 30, 1999 increased to 34.9%
from 29.5% for the six months ended June 30, 1998. The increase in gross
profit resulted primarily from the contribution of $6.8 million and $11.5
million for the quarter and six months ended June 30, 1999, respectively, in
gross profit from Alliance and an incremental $0.4 million and $0.3 million
for such quarter and six months, respectively, in gross profit contribution
from Greensteel and Posterloid. The increase in gross margin resulted
primarily from the inclusion of Alliance, which achieves higher margins in
its product lines than Greensteel. For the quarter ended June 30, 1999,
Greensteel's gross margin increased to 28.3% as compared to the prior year
due primarily to product mix. PolyVision expects gross margins to
continue to improve through the remainder of 1999 as the impact of improved
cost-savings resulting from higher production volume combined with
manufacturing cost reductions due to the closure of Greensteel's Alliance,
Ohio facility and continuing focus on cost-reduction initiatives is reflected
in operating results.
Selling, general and administrative expenses ("SG&A") for the quarter ended
June 30, 1999 totaled $5.1 million, representing an increase of $2.9 million, or
131.0%, as compared to the same period in the prior year. For the six months
ended June 30, 1999, SG&A was $10.2 million, representing an increase of $5.8
million, or 129.5%, as compared to the same period in the prior fiscal year. The
increase in SG&A for the quarter and six months resulted primarily from the
inclusion of $2.9 million and $6.1 million, respectively, in SG&A from the
acquired operations of Alliance, offset by a $0.1 million and $0.3 million
decline in SG&A, respectively, at Greensteel and Posterloid. The SG&A
reduction at Greensteel and Posterloid resulted primarily from administrative
cost reductions resulting from the Alliance acquisition combined with reduced
bad debt expenses and professional fees. PolyVision expects to achieve
further consolidation savings in SG&A as a result of the Alliance acquisition
during the remainder of 1999.
Amortization expense increased to $0.4 million and $0.8 million during the
quarter and six months ended June 30, 1999, respectively, as compared to $35,000
and $71,000, respectively, in the same periods in the prior year. The increase
is due to the goodwill recorded as a result of the Alliance acquisition.
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 six months ended June 30, 1999 increased to $4.4 million and $6.1 million,
respectively, as compared to $0.5 million and $0.8 million, respectively, for
the comparable periods in the prior year.
Net interest expense in the quarter ended June 30, 1999 increased to $2.1
million from $0.2 million in the same period in the prior year. For the six
months ended June 30, 1999, interest expense was $4.2 million as compared to
$0.5 million for the six months ended June 30, 1998. The increase is due
principally to debt incurred in connection with the Alliance acquisition.
Provision for income tax expense for the quarter and six months ended June
30, 1999 was $0.6 million and $0.8 million, respectively, compared to $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.
12
<PAGE>
Income before extraordinary gain for the quarter ended June 30, 1999 was
$1.9 million ($0.09 per diluted share), as compared to $0.4 million ($0.05 per
diluted share) for the comparable period in the prior year. For the six months
ended June 30, 1999, income before extraordinary gain was $1.3 million ($0.07
per diluted share), as compared to $0.5 million ($0.06 per diluted share), for
the comparable period in the prior year. The comparative increase in net income
for the quarter and six months ended June 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 acquisition and higher
incremental tax rates.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, PolyVision generated $0.5 million
in cash flow from operating activities consisting of $4.1 million in cash flow
generated from operations (net income plus non-cash charges), reduced by $3.6
million in cash flow used for net working capital changes. Significant working
capital changes included a $3.5 million increase in accounts receivable and a
$1.0 million increase in inventories offset by a $1.2 million increase in
accounts payable and accrued expenses. Cash used for investing activities
amounted to $1.3 million and cash used for financing activities amounted to $0.4
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
$25.0 million and (c) a Term Loan B in the principal amount of $20.0 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 August 13, 1999, PolyVision had $13.6 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 loan is guaranteed by PolyVision's
domestic subsidiaries. The loan 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
loan 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 loan,
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.
13
<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 October 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 80%
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 75% 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 October 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 October 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 is installing 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 is being upgraded to adequately
handle the Y2K compliance issues, at an approximate cost of $150,000.
Management believes its other computer systems are Y2K compliant.
14
<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
six months ended June 30, 1999 by approximately $215,000.
15
<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
a) On May 18, 1999, PolyVision held its 1998 Annual Meeting of
Shareholders.
b) Not applicable.
c) At the Annual Meeting, the following matters were voted upon:
(i) Election of four Class I directors to the Board of Directors, each
to hold office until year 2000 Annual Meeting and until his successor is
elected and qualified.
The following table sets forth the name of each nominee and the voting with
respect to each nominee for director:
<TABLE>
<CAPTION>
Withhold
Name For Authority Broker Non-Votes
---- --- --------- ----------------
<S> <C> <C> <C>
Ivan Berkowitz............. 8,200,044 42,351 0
Michael H. Dunn............ 8,200,024 42,371 0
Stephen C. Knup............ 8,200,044 42,351 0
Bragi F. Schut............. 8,237,044 5,351
</TABLE>
(ii) Approval of an amendment to PolyVision's Certificate of
Incorporation increasing the number of authorized shares of common stock
from 25,000,000 shares to 40,000,000 shares.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
--- ------- -------
8,119,610 75,885 46,900
</TABLE>
(iii) Ratification of the adoption by the Board of Directors of
PolyVision's 1999 Stock Option Plan.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
--- ------- -------
8,072,360 88,670 81,365
</TABLE>
16
<PAGE>
(iv) Authorization and approval of the issuance of warrants to purchase
common stock, and the possible issuance of common stock underlying such
warrants, which would represent 20% or more of the outstanding shares of
PolyVision's common stock.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
--- ------- -------
8,079,115 110,335 52,945
</TABLE>
(v) Ratification of the selection of Arthur Andersen LLP as PolyVision's
independent auditor.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
--- ------- -------
8,169,683 23,979 48,733
</TABLE>
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
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to e signed on its behalf by the
undersigned thereunto duly authorized.
POLYVISION CORPORATION
Date: August 16, 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)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,203
<SECURITIES> 0
<RECEIVABLES> 24,020
<ALLOWANCES> 2,637
<INVENTORY> 14,097
<CURRENT-ASSETS> 42,224
<PP&E> 19,370
<DEPRECIATION> 2,314
<TOTAL-ASSETS> 123,957
<CURRENT-LIABILITIES> 22,363
<BONDS> 70,364
0
17,848
<COMMON> 14
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 123,957
<SALES> 49,104
<TOTAL-REVENUES> 49,104
<CGS> 31,975
<TOTAL-COSTS> 31,975
<OTHER-EXPENSES> 10,229
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,215
<INCOME-PRETAX> 2,126
<INCOME-TAX> 847
<INCOME-CONTINUING> 1,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,279
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
