<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
<TABLE>
<S> <C>
For the transition period from Commission file number
to 1-10555
</TABLE>
POLYVISION CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-3482597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4888 SOUTH OLD PEACHTREE ROAD 30071
NORCROSS, GEORGIA (Zip Code)
(Address of principal executive
offices)
</TABLE>
(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 14, 2000 was 14,168,527 shares.
--------------------------------------------------------------------------------
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<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 Report on Form 10-K
for the year ended December 31, 1999.
2
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,249 $ 8,128
Accounts receivable, (net of allowance for doubtful
accounts of $1,884 and $2,264 at September 2000 and
December 1999, respectively)............................ 37,740 24,927
Inventories............................................... 19,270 14,033
Prepaid expenses and other current assets................. 10,583 7,639
-------- --------
Total current assets.................................... 69,842 54,727
Property, plant and equipment, net........................ 18,206 17,307
Goodwill, (less accumulated amortization of $5,462 and
$3,747 at September 2000 and December 1999,
respectively)........................................... 86,802 80,953
Other assets.............................................. 4,327 3,947
-------- --------
Total assets............................................ $179,177 $156,934
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 8,120 $ 4,616
Accounts payable.......................................... 16,074 9,986
Accrued expenses.......................................... 19,106 17,228
-------- --------
Total current liabilities............................... 43,300 31,830
Long-term debt, less current maturities................... 95,362 89,250
Other long-term liabilities............................... 7,844 6,671
-------- --------
Total liabilities....................................... 146,506 127,751
-------- --------
Stockholders' equity:
Series B preferred stock at liquidation value............. 12,750 12,750
Series C preferred stock at liquidation value............. 7,000 7,000
Series D preferred stock at liquidation value............. 6,000 6,000
Common stock $.001 par value; authorized 40,000,000
shares; 14,165,527 shares and 14,156,193 shares issued
at September 30, 2000 and December 31, 1999,
respectively............................................ 14 14
Additional paid-in capital................................ 70,893 70,884
Retained deficit.......................................... (62,564) (66,553)
Cumulative foreign currency translation adjustment........ (1,422) (912)
-------- --------
Total stockholders' equity.............................. 32,671 29,183
-------- --------
Total liabilities and stockholders' equity............ $179,177 $156,934
======== ========
</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,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.............................................. $47,029 $36,432 $119,182 $85,536
Cost of goods sold..................................... 31,599 23,286 78,698 55,261
------- ------- -------- -------
Gross profit......................................... 15,430 13,146 40,484 30,275
Selling, general and administrative.................... 7,450 6,389 21,799 16,618
Amortization of goodwill............................... 607 555 1,763 1,387
------- ------- -------- -------
Operating income..................................... 7,373 6,202 16,922 12,270
Interest expense....................................... (3,011) (2,339) (8,906) (6,599)
Interest income........................................ 31 15 168 60
Other income (expense), net............................ (24) 364 173 637
------- ------- -------- -------
Income before income taxes........................... 4,369 4,242 8,357 6,368
Provision for income taxes............................. (1,378) (1,612) (2,675) (2,459)
------- ------- -------- -------
Net income........................................... 2,991 2,630 5,682 3,909
Preferred stock dividends.............................. (565) (483) (1,693) (1,287)
------- ------- -------- -------
Net income applicable to common stock................ $ 2,426 $ 2,147 $ 3,989 $ 2,622
======= ======= ======== =======
Net income per share of common stock:
Basic:
Net income......................................... $ 0.21 $ 0.18 $ 0.40 $ 0.28
Preferred stock dividends.......................... (0.04) (0.03) (0.12) (0.09)
------- ------- -------- -------
Net income per basic share of common Stock....... $ 0.17 $ 0.15 $ 0.28 $ 0.19
======= ======= ======== =======
Diluted:
Net income......................................... $ 0.11 $ 0.10 $ 0.21 $ 0.19
Preferred stock dividends.......................... -- (0.01) (0.03)
------- ------- -------- -------
Net income per diluted share of common Stock..... $ 0.11 $ 0.10 $ 0.20 $ 0.16
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(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, 1999......... 255,000 $12,750 140,000 $7,000 120,000 $6,000 14,156,193 $14
Exercise of stock options............ 9,334
Net income...........................
Dividends on preferred stock.........
Foreign currency translation
Adjustment.........................
------- ------- ------- ------ ------- ------ ---------- ---
Balance at September 30, 2000........ 255,000 $12,750 140,000 $7,000 120,000 $6,000 14,165,527 $14
======= ======= ======= ====== ======= ====== ========== ===
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
PAID-IN RETAINED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1999......... $70,884 $(66,553) $ (912) $29,183
Exercise of stock options............ 9 9
Net income........................... 5,682 5,682
Dividends on preferred stock......... (1,693) (1,693)
Foreign currency translation
Adjustment......................... (510) (510)
------- -------- ------- -------
Balance at September 30, 2000........ $70,893 $(62,564) $(1,422) $32,671
======= ======== ======= =======
</TABLE>
The accompanying notes on an integral part of these condensed consolidated
financial statement.
5
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 5,682 $ 3,909
Adjustments to reconcile net income to net cash provided
by (used for) operations:
Depreciation and amortization........................... 3,701 3,077
Amortization of deferred financing costs and accretion
of debt discount...................................... 1,742 1,516
Other, net.............................................. (188) (445)
Change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable................................... (11,319) (6,484)
Inventories........................................... (3,635) 37
Other assets.......................................... (1,734) (598)
Accounts payable and accrued expenses................. 3,415 3,377
Other liabilities..................................... 1,786 191
-------- --------
Cash flow (used for) provided by operating activities....... (550) 4,580
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (1,966) (1,528)
Purchase of businesses, net of cash acquired.............. (13,632) (24,364)
Other..................................................... -- 946
-------- --------
Cash flow used for investing activities..................... (15,598) (24,946)
-------- --------
Cash flows from financing activities:
Repayments of long-term borrowings........................ (3,769) (2,600)
Long-term borrowings...................................... 10,000 22,000
Borrowings (repayments) under revolving credit facilities,
net..................................................... 4,500 (714)
Proceeds from exercise of stock options................... 9 28
Proceeds from issuance of preferred stock................. -- 2,000
Deferred financing costs.................................. (206) (608)
-------- --------
Cash flow provided by financing activities.................. 10,534 20,106
-------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (265) 692
-------- --------
Net change in cash and cash equivalents..................... (5,879) 432
Cash and cash equivalents at beginning of period............ 8,128 4,841
-------- --------
Cash and cash equivalents at end of period.................. $ 2,249 $ 5,273
======== ========
Supplemental disclosures:
Cash paid for interest.................................... $ 6,341 $ 4,625
======== ========
Cash paid for taxes....................................... $ 1,678 $ 257
======== ========
Acquisition of businesses:
Assets, net of cash acquired.............................. $ 16,465 $ 37,084
Issuance of Series D Preferred stock...................... -- (6,000)
Liabilities assumed....................................... (2,833) (6,720)
-------- --------
Net cash paid............................................. $ 13,632 $ 24,364
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
6
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of PolyVision Corporation and its subsidiaries
("PolyVision"). Certain reclassifications have been made to the prior period
presentation to conform to the current period presentation.
PolyVision is an international manufacturer and installer of static, active
and interactive products for communicating usually in the educational, office
and corporate markets and is the leading supplier of light-gauge ceramicsteel
used in the manufacture of quality writing and projection surfaces. PolyVision's
operations are currently divided into four groups: the OEM (Original Equipment
Manufacture) Group, the Public Sector Group, the Commercial Group and the
Technology Group. The OEM Group 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 tunnels and
people-moving systems. The OEM Group also produces proprietary projection screen
surfaces, screen and non-screen printed ceramicsteel surfaces used for interior
and exterior architectural applications and high-endurance signage. The Public
Sector Group 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 Group manufactures and sells menuboard display systems to the
fast food and convenience store industries, and merchandising displays used
principally by banks. The Technology Group manufactures and sells active and
interactive whiteboards including gas-plasma and rear projection displays in the
educational, office and corporate markets. These products allow the user to
capture data directly from a white board or similar surface to a windows-based
PC or Macintosh computer.
2. INVENTORIES
The components of inventories at September 30, 2000 and December 31, 1999
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $13,811 $ 8,510
Work in process............................................. 1,075 526
Finished goods.............................................. 4,384 4,997
------- -------
$19,270 $14,033
======= =======
</TABLE>
3. ACQUISITIONS
IBID
In May 2000, PolyVision acquired substantially all of the assets and certain
liabilities of MicroTouch Systems, Inc's IBID division ("IBID") for
approximately $3.2 million in cash, including expenses, and a contingent
consideration payable over a five-and-half year period based upon net sales of
IBID products. The acquisition was accounted for using the purchase method and,
accordingly, the results of operations of IBID have been included in the
consolidated financial statements on a
7
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
3. ACQUISITIONS (CONTINUED)
prospective basis from the date of acquisition. The purchase price was allocated
based upon a preliminary assessment of the fair value 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 20 years.
The cash portion of the IBID acquisition was funded by a $2.0 million draw
on the Company's available revolving credit facility and internal cash
resources.
AMERICAN CHALKBOARD COMPANY, L.L.C.
In January 2000, PolyVision acquired substantially all of the assets and
certain liabilities of American Chalkboard Company, L.L.C ("American
Chalkboard") for approximately $5.3 million, including expenses. The
consideration consisted of $5.3 million in cash. The acquisition was accounted
for using the purchase method and, accordingly, the results of operations of
American Chalkboard have been included in the consolidated financial statements
on a prospective basis from the date of acquisition. The purchase price was
allocated based upon a preliminary assessment of the fair value 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 was $3.1 million and is being amortized on a straight-line basis over
40 years.
PENINSULAR SLATE COMPANY
In January 2000, PolyVision acquired substantially all of the assets and
certain liabilities of Peninsular Slate Company ("Peninsular Slate") for
approximately $4.2 million, including expenses, subject to a working capital
adjustment. The consideration consisted of $4.2 million in cash. The acquisition
was accounted for using the purchase method and, accordingly, the results of
operations of Peninsular Slate have been included in the consolidated financial
statements on a prospective basis from the date of acquisition. The purchase
price was allocated based upon a preliminary assessment of the fair value 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 was approximately $3.7 million and is being
amortized on a straight-line basis over 40 years.
The cash portion of the American Chalkboard and the Peninsular Slate
acquisitions was funded by a $10.0 million increase in PolyVision's senior
secured credit facility (see Note 9 to PolyVision's Report on Form 10-K for the
year ended December 31, 1999).
NELSON ADAMS COMPANY
In August 1999, PolyVision acquired all of the outstanding common stock of
A. Lawer Corporation (doing business as Nelson Adams Company) ("Nelson Adams")
for approximately $31.1 million, including expenses. The consideration consisted
of $25.1 million in cash and $6.0 million in shares of PolyVision's Series D
convertible preferred stock. 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 excess of the
8
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
3. ACQUISITIONS (CONTINUED)
purchase price over the net assets acquired was approximately $25.1 million and
is being amortized on a straight-line basis over 40 years.
The cash portion of the acquisition was funded by a $22.0 million increase
in PolyVision's senior secured credit facility (see Note 9 to the PolyVision's
Report on Form 10-K for the year ended December 31, 1999), $2.0 million in cash
proceeds from the sale of shares of PolyVision's Series C convertible preferred
stock to The Alpine Group, Inc. and internal cash resources.
PRO FORMA FINANCIAL DATA (UNAUDITED)
Unaudited condensed pro forma results of operations, which give effect to
the IBID, American Chalkboard, Peninsular Slate and Nelson Adams acquisitions as
if the purchases occurred on January 1, 1999, 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.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales................................................... $121,286 $110,996
Income before income taxes.................................. 8,143 7,136
Net income.................................................. 5,537 4,781
Preferred stock dividends................................... (1,693) (1,672)
Net income applicable to common stock....................... $ 3,844 $ 3,109
Net income per diluted share of common stock................ $ 0.20 $ 0.17
======== ========
</TABLE>
4. RESTRUCTURING CHARGE
During fiscal 1999, PolyVision recorded a pre-tax nonrecurring restructuring
charge of approximately $2.9 million in connection with the Nelson Adams
acquisition. The charge related to costs to be incurred in consolidating
PolyVision's Public Sector Group with those of the acquired Nelson Adams'
operations. The restructuring charge included (i) $0.3 million for future
operating expenses associated with the closure of a manufacturing facility,
mainly a noncancelable operating lease, (ii) $0.8 million for replacing
duplicative, existing computer hardware and its related noncancelable operating
lease, (iii) $1.3 million for severance cost related to 58 employees terminated
due to duplicative functions, (iv) $0.2 million for cost incurred to consolidate
the operations of the closed facility, and (v) $0.3 million for other cost
incurred related to duplicative functions. As of
9
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
4. RESTRUCTURING CHARGE (CONTINUED)
September 30, 2000, PolyVision had actually incurred $2.2 million of the
$2.9 million charge and expects to spend the balance by year end.
5. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the three and
nine months ended September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
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.............. $2,991 $2,630
Less: preferred stock dividends.................. (565) (483)
------ ------
Basic earnings per common share.................. 2,426 14,165 $0.17 2,147 14,118 $0.15
===== =====
Dilutive impact of stock options, warrants and
grants......................................... 3,354 3,305
Assumed conversion of convertible seller note.... 153 2,667 160 2,667
Assumed conversion of accrued preferred stock
dividends...................................... -- 444 -- --
Assumed conversion of preferred stock............ 565 9,250 483 8,033
------ ------ ------ ------
Diluted earnings per common share................ $3,144 29,880 $0.11 $2,790 28,123 $0.10
====== ====== ===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
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............ $ 5,682 $ 3,909
Less: preferred stock dividends................ (1,693) (1,287)
------- -------
Basic earnings per common share................ 3,989 14,163 $0.28 2,622 14,118 $0.19
===== =====
Dilutive impact of stock options, warrants and
grants....................................... 3,472 3,337
Assumed conversion of convertible seller
note......................................... 440 2,667 360 2,667
Assumed conversion of accrued preferred stock
dividends.................................... -- 366 -- --
Assumed conversion of preferred stock.......... 1,341 7,750 576 2,688
------- ------ ------- ------
Diluted earnings per common share.............. $ 5,770 28,418 $0.20 $ 3,558 22,810 $0.16
======= ====== ===== ======= ====== =====
</TABLE>
10
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
6. COMPREHENSIVE INCOME
The components of comprehensive income for the three and nine months ended
September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income.................................................. $2,991 $2,630 $5,682 $3,909
Foreign currency translation adjustment..................... (470) (365) (510) 1,366
------ ------ ------ ------
Comprehensive income...................................... $2,521 $2,265 $5,172 $5,275
====== ====== ====== ======
</TABLE>
7. DIVISIONAL REPORTING
The company currently conducts business through four operating divisions:
the OEM Group, the Public Sector Group, the Commercial Group and the Technology
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 Report on Form 10-K for the year ended December 31, 1999.
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.
11
<PAGE>
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
7. DIVISIONAL REPORTING (CONTINUED)
The following provides information about each business division for the
three and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales:
OEM Group............................................ $15,037 $14,392 $ 43,525 $44,030
Public Sector Group.................................. 32,142 22,492 78,903 43,859
Commercial Group..................................... 2,434 1,956 8,029 5,753
Technology Group..................................... 1,383 -- 2,010 --
Inter-Company Elimination............................ (3,967) (2,408) (13,285) (8,106)
------- ------- -------- -------
$47,029 $36,432 $119,182 $85,536
======= ======= ======== =======
Depreciation and amortization expense:
OEM Group............................................ $ 726 $ 709 $ 2,222 $ 2,439
Public Sector Group.................................. 398 238 1,190 461
Commercial Group..................................... 67 59 198 177
Technology Group..................................... 53 -- 71 --
Corporate............................................ 9 -- 20 --
------- ------- -------- -------
$ 1,253 $ 1,006 $ 3,701 $ 3,077
======= ======= ======== =======
Operating income (loss):
OEM Group............................................ $ 4,001 $ 2,936 $ 10,327 $ 7,933
Public Sector Group.................................. 3,983 3,478 8,081 4,961
Commercial Group..................................... 107 215 561 619
Technology Group..................................... 14 -- 81 --
Corporate............................................ (732) (427) (2,128) (1,243)
------- ------- -------- -------
$ 7,373 $ 6,202 $ 16,922 $12,270
======= ======= ======== =======
</TABLE>
8. SUBSEQUENT EVENT
On October 25, 2000, PolyVision completed the acquisition of the
intellectual property and operating assets of the Softboard Interactive computer
conferencing product line from Microfield Graphics Inc., for approximately
$2.0 million in cash and a contingent consideration payable over a five year
period based upon net sales of Softboard products. The transaction will be
accounted for as a purchase, and as such, the purchase price will be allocated
based on the fair values of the assets and liabilities at the date of the
acquisition.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
PolyVision operates through four operating groups, which manufacture a broad
range of products principally for the educational products market. The four
groups are: the OEM (Original Equipment Manufacture) Group, the Public Sector
Group, the Commercial Group and the Technology Group.
- The OEM Group 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
tunnels and people-moving systems. The OEM Group also produces proprietary
projection screen surfaces, as well as screen and non-screen printed
ceramicsteel surfaces used for interior and exterior architectural
applications and high-endurance signage.
- The Public Sector Group 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 for schools and offices.
- The Commercial Group manufactures and sells menuboard display systems to
the fast food and convenience store industries, and merchandising displays
used principally by banks.
- The Technology Group manufactures and sells active and interactive
whiteboards including gas-plasma and rear projection displays in the
educational, office and corporate markets. These products allow the user
to capture data directly from a white board or similar surface to a
windows-based PC or Macintosh computer.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. When we use words like
"believe", "expect", "anticipate", "predict", "potential", "seek",
"continue", "will", "may", "could", "intend", "plan", and "estimate" or
similar expressions, we are making forward-looking statements. 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
seasonality; 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.
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The following comparative table summarizes, for the periods presented, sales
and operating income data for PolyVision on a group basis. Such group data is
presented on an historical reporting basis for the three and nine months ended
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED AND IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Net sales:
OEM Group.............................. $15,037 $14,392 $ 43,525 $44,030
Public Sector Group.................... 32,142 22,492 78,903 43,859
Commercial Group....................... 2,434 1,956 8,029 5,753
Technology Group....................... 1,383 -- 2,010 --
Inter-Company Elimination.............. (3,967) (2,408) (13,285) (8,106)
------- ------- -------- -------
$47,029 $36,432 $119,182 $85,536
======= ======= ======== =======
Gross profit............................. $15,431 $13,146 $ 40,484 $30,275
======= ======= ======== =======
Gross margin............................. 32.8% 36.1% 34.0% 35.4%
======= ======= ======== =======
Selling, general and administrative
expenses............................... $ 7,450 $ 6,389 $ 21,799 $16,618
======= ======= ======== =======
Amortization of goodwill................. $ 607 $ 555 $ 1,763 $ 1,387
======= ======= ======== =======
Operating income (loss):
OEM Group.............................. $ 4,001 $ 2,936 $ 10,327 $ 7,933
Public Sector Group.................... 3,983 3,478 8,081 4,961
Commercial Group....................... 107 215 561 619
Technology Group....................... 14 -- 81 --
Corporate.............................. (732) (427) (2,128) (1,243)
------- ------- -------- -------
$ 7,373 $ 6,202 $ 16,922 $12,270
======= ======= ======== =======
</TABLE>
RESULTS OF OPERATIONS
Net sales for the quarter ended September 30, 2000 totaled $47.0 million,
representing an increase of $10.6 million, or 29.1%, over net sales of
$36.4 million for the quarter ended September 30, 1999. Net sales for the nine
months ended September 30, 2000 totaled $119.2 million, representing an increase
of $33.6 million, or 39.3%, over net sales of $85.5 million for the nine months
ended September 30, 1999. The increase in net sales resulted primarily from the
contribution of $10.0 million and $31.1 million in net sales from the acquired
operations of Nelson Adams, American Chalkboard, Peninsular Slate and IBID. On a
proforma basis, sales for the three and nine-month periods ended September 30,
2000 increased by 7% over the comparable periods in the prior year. OEM Group
sales of $15.0 million and $43.5 million for the three and nine-month periods
ended September 30, 2000, respectively, were consistent with prior periods due
to continuing strong sales in visual communication products offset by an
approximately 14% decline in the value of the Belgium Franc and a slow down in
the sale of infrastructure products. Public Sector Group sales of $32.1 million
and $78.9 million for the three and nine-month periods ended September 30, 2000,
respectively, represent an increase of $9.6 million and $35.0 million over net
sales of $22.5 million and $43.9 million for the three and nine-month periods
ended September 30, 1999, respectively. The increase was due to the inclusion of
sales contributed by the acquired operations of Nelson Adams, American
Chalkboard and Peninsular Slate in the three and nine-month periods ended
September 30, 2000. Commercial Group sales of $2.4 million and $8.0 million for
the three and nine-month periods ended September 30, 2000, respectively,
represent an increase of $0.5 million and $2.3 million over sales of
$2.0 million and
14
<PAGE>
$5.8 million for the three and nine-month periods ended September 30, 1999. The
increase in Commercial Group sales resulted from a number of large orders
received from customers in the fast food market. Technology Group sales of
$1.4 million and $2.0 million for the three and nine months ended September 30,
2000, respectively, represent the sales contributed by the acquired operations
of IBID (see Note 3 to the accompanying unaudited condensed consolidated
financial statements).
Gross profit for the quarter ended September 30, 2000 totaled
$15.4 million, representing an increase of $2.3 million, or 17.4%, as compared
to the same quarter in the prior year. For the nine months ended September 30,
2000, gross profit was $40.5 million, representing an increase of
$10.2 million, or 33.7%, as compared to the same period in the prior year. Gross
margin for the quarter ended September 30, 2000 decreased to 32.8% from 36.1%
for the quarter ended September 30, 1999. Gross margin for the nine months ended
September 30, 2000 decreased to 34.0% from 35.4% for the nine months ended
September 30, 1999. The increase in gross profit resulted primarily from the
contribution of gross profit from Nelson Adams, American Chalkboard, Peninsular
Slate and IBID. Gross profit is expected to show continued improvement on a
comparative basis due to (i) the impact of the Nelson Adams, American
Chalkboard, Peninsular Slate and IBID acquisitions, (ii) higher production
volumes and (iii) manufacturing cost reduction resulting from the closure of
three manufacturing facilities, combined with a continuing focus on cost
reduction initiatives. The decline in gross margins resulted from weaker than
expected gross margins contributed by the Public Sector Group due to higher raw
material prices, lower than expected margins in acquired backlog and the failure
to implement budgeted price increases. PolyVision has taken corrective action
and although margins are expected to remain weak for the remainder of the year,
they are expected to improve substantially in the early part of fiscal 2001.
Selling, general and administrative expenses ("SG&A") for the quarter ended
September 30, 2000 totaled $7.5 million, representing an increase of
$1.1 million, or 17.4%, as compared to the same period in the prior year. For
the nine months ended September 30, 2000, SG&A was $21.8 million, representing
an increase of $5.2 million, or 31.5%, 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 SG&A from the acquired operations of Nelson
Adams, American Chalkboard, Peninsular Slate and IBID. PolyVision continues to
see a reduction in SG&A expense resulting from the consolidation of the Nelson
Adams, American Chalkboard and Peninsular Slate facilities. SG&A expense as a
percentage of net sales has declined on a pro-forma basis from 20.2% for the
nine months ended September 30, 1999 to 18.6% for the nine months ended
September 30, 2000.
Amortization expense increased to $1.8 million during the nine months ended
September 30, 2000 as compared to $1.4 million in the same period in the prior
year. The increase is due to the goodwill recorded as a result of the Nelson
Adams, American Chalkboard, Peninsular Slate and IBID acquisitions.
As a result of the increase in net sales and gross profit offset by the
increase in SG&A and goodwill amortization, operating income for the quarter and
nine months ended September 30, 2000 increased to $7.4 million and
$16.9 million, respectively, as compared to $6.2 million and $12.3 million,
respectively, for the comparable periods in the prior year.
Interest expense in the quarter ended September 30, 2000 increased to
$3.0 million from $2.3 million in the same period in the prior year. For the
nine months ended September 30, 2000, interest expense was $8.9 million as
compared to $6.6 million in the same period in the prior year. The increase was
due principally to debt incurred in connection with the Nelson Adams, American
Chalkboard, Peninsular Slate and IBID acquisitions and to a lesser degree,
higher short term interest rates in the current period.
Provision for income taxes for the quarter and nine months ended
September 30, 2000 was $1.4 million and $2.7 million, respectively, compared to
$1.6 million and $2.5 million for the
15
<PAGE>
comparable periods in the prior year. The increase in income tax expense
reflects the impact of non-deductible goodwill amortization, offset by the use
of net operating losses incurred in the United States.
Net income for the quarter ended September 30, 2000 was $2.4 million or
$0.11 per diluted share, as compared to $2.1 million or $0.10 per diluted share
for the comparable period in the prior year. For the nine months ended
September 30, 2000, net income was $4.0 million or $0.20 per diluted share, as
compared to net income of $2.6 million or $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, 2000 was due to the significant
increase in operating income, offset by higher interest expense resulting from
acquisition debt incurred in connection with the Nelson Adams, American
Chalkboard, Peninsular Slate and IBID acquisitions and higher incremental tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, PolyVision used $0.6 million
in cash flow from operating activities consisting of $9.3 million in cash flow
generated from operations (net income plus non-cash charges), reduced by
$9.9 million in cash flow used for net working capital changes. Significant
working capital changes included a $11.3 million increase in accounts receivable
and $3.6 million increase in inventory offset by a $3.5 million increase in
accounts payable and accrued expenses. Cash used for investing activities
amounted to $15.6 million consisting principally of $13.6 million in cash paid
for the acquisitions of American Chalkboard, Peninsular Slate and IBID and
$2.0 million in capital expenditures. Cash provided by financing activities
amounted to $10.5 million consisting principally of $14.5 million in borrowings
on PolyVision's senior secured credit facility, the proceeds of which were used
to fund the acquisitions of American Chalkboard, Peninsular Slate and IBID,
offset by net debt repayments of $3.8 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
$46.0 million and (c) a Term Loan B in the aggregate 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 11, 2000, PolyVision had
$7.0 million of borrowings outstanding on the revolving credit facility.
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 $8.9 million convertible subordinated 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
16
<PAGE>
entitling the holder thereof to purchase, for nominal consideration, 2,986,467
shares of common stock of PolyVision representing approximately 10.0% of its
fully-diluted common stock.
PolyVision's convertible subordinated promissory note issued in connection
with the Alliance acquisition accrues interest at a rate of 10% per year, which
is added to the face amount of the note.
At September 30, 2000, PolyVision had $2.2 million in cash and cash
equivalents. PolyVision's principal debt service commitments over for the next
12 months amount to approximately $8.1 million and capital expenditures are
expected to approximate $4.0 million. Management 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, providing for a one year delay of the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instrument and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. Polyvision will be required to
adopt SFAS No. 133 in 2001. In June 2000, the FASB issued SFAS No. 138 that
amends the accounting and reporting of derivatives under SFAS No. 133 to
exclude, among other things, contracts for normal purchases and normal sales.
Management has evaluated the effect of this statement on PolyVision's derivative
instruments: primarily interest rate swaps and foreign currency forward
contracts. The impact of adjustments to fair value is not expected to be
material to the PolyVision's consolidated financial position.
In December 1999, the Securities and Exchange Commission (the "SEC")
released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") which provides the SEC's views on applying generally
accepted accounting principles to selected revenue recognition issues. According
to SAB 101, revenue generally is realized or realizable when persuasive evidence
of an arrangement exists, delivery has occurred or services have been rendered,
the Seller's price to the buyer is fixed or determinable and collectibility is
reasonably assured. The SEC subsequently released SAB 101B deferring
implementation of SAB 101 to the fourth quarter of 2000. PolyVision has
evaluated SAB 101 and believes that it is in compliance with this bulletin and
that this bulletin will not have an effect on results of operations or financial
position of PolyVision.
In September 2000, the EITF reached a final consensus on Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10").
EITF 00-10 is also effective in the fourth quarter of 2000 and addresses the
income statement classification of amounts charged to customers for shipping and
handling, as well as costs incurred related to shipping and handling. The EITF
concluded that amounts billed to a customer in a sale transaction related to
shipping and handling should be classified as revenue. The EITF also concluded
that if costs incurred related to shipping and handling are significant and not
included in cost of sales, an entity should disclose both the amount of such
costs and the line item on the income statement that include them. PolyVision
has evaluated EITF 00-10 and believes that it is in compliance with this Issue
and that this Issue will have not have a significant effect on expense
classifications, results of operations or financial position of PolyVision.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in PolyVision's market risk sensitive instruments
and positions are the potential loss arising from adverse changes in interest
rate and foreign currency exchange rates.
INTEREST RATES
PolyVision primarily issues long-term debt obligations to support general
corporate purposes including capital expenditures and working capital needs as
well as to fund acquisitions. The majority of PolyVision's long-term debt
obligations bear a fixed rate of interest. A one-percentage point increase in
interest affecting PolyVision's floating rate long-term debt would reduce
pre-tax income by $0.5 million over the next fiscal year.
FOREIGN CURRENCY EXCHANGE RATES
Although a majority of PolyVision's operations are in the United States,
PolyVision does have foreign subsidiaries. The net investments in foreign
subsidiaries translated into dollars using month-end exchange rates at
September 30, 2000, are $21.2 million. The potential loss in fair value
impacting other comprehensive income resulting from a hypothetical 10% change in
quoted foreign currency exchange rates amounts to $2.1 million. PolyVision does
not use derivative financial instruments to hedge its exposure to changes in
foreign currency exchange rates.
18
<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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1--Financial Data Schedule
(b) No reports on Form 8-K were filed during this quarter.
19
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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.
<TABLE>
<S> <C> <C>
POLYVISION CORPORATION
Date: November 14, 2000 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)
</TABLE>
20
