Document/Exhibit Description Pages Size
1: 10-K Annual Report 57 295K
2: EX-4.5 Instrument Defining the Rights of Security Holders 25 89K
3: EX-10.38 Material Contract 10 51K
4: EX-10.39 Material Contract 9 41K
5: EX-10.40 Material Contract 2 13K
6: EX-10.41 Material Contract 122 444K
7: EX-10.42 Material Contract 18 63K
8: EX-10.43 Material Contract 5 22K
9: EX-21.1 Subsidiaries of the Registrant 1 6K
10: EX-23.1 Consent of Experts or Counsel 1 6K
11: EX-27.1 Financial Data Schedule (Pre-XBRL) 2 7K
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period for Commission file number
the eight months ended December 31, 1998 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 (Zip Code)
executive offices)
Registrant's telephone number, including area code: (718) 433-2170
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------------------- -----------------------------------------
Common Stock, par value
$.001 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 the
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
The aggregate market value of the voting stock held by
non-affiliates of the Registrant was $17,891,000 as of March 24, 1999.
The number of shares outstanding of the Registrant's common stock as
of March 24, 1999 was 14,117,750 shares.
--------------------
The following document is incorporated by reference into Part III of this
Form 10-K:
Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 with respect to the 1998 annual meeting of
shareholders.
================================================================================
POLYVISION CORPORATION
1998 FORM 10-K TRANSITION REPORT
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS ........................................................ 3
ITEM 2. PROPERTIES ...................................................... 10
ITEM 3. LEGAL PROCEEDINGS ............................................... 11
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS ............ 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................. 12
ITEM 6. SELECTED FINANCIAL DATA ......................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................. 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ................... 53
PART III
ITEMS 10, 11, 12 AND 13 ................................................... 53
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ..................................................... 54
2
PART I
ITEM 1. BUSINESS
OVERVIEW
PolyVision Corporation, through its operating units, Greensteel, Alliance
and Posterloid, manufactures and sells information display products.
o Through Greensteel, it manufactures and sells custom-designed and
engineered writing, projection and other visual display surfaces
(such as ceramicsteel chalkboards and markerboards), custom
cabinets, and workstation and conference center casework primarily
for schools and offices.
o Through the recently-purchased Alliance division, it manufactures
continuous coiled 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.
o Through Posterloid, it manufactures and sells menuboard display
systems to the fast food and convenience store industries, and
merchandising displays used principally by banks.
Greensteel combines its own direct marketing network with approximately 65
independent dealers, which enables it to market its products to schools,
healthcare facilities, offices and other institutions throughout the country.
Most of Greensteel's products are sold in connection with new facility
construction and renovation. These products are generally sold as part of a bid
process conducted through architects and general contractors working with
Greensteel's sales staff and those of its dealers, and are custom-made to
specifications. Successful marketing of these products is dependent on
Greensteel's maintenance of strong relationships with its dealers, architects
and general contractors. Greensteel has been advised by its customers that
Greensteel products have achieved general recognition as quality products.
Alliance's products are sold in the United States and, through facilities
in Belgium, France and Denmark, throughout Europe and the rest of the world. In
the United States, Alliance uses its direct sales personnel to sell its products
to fabricators/original equipment manufacturers ("OEMs") of finished board
products for the educational, office supply and other markets, and screen and
non-screen printed interior and exterior panels for the transportation, building
construction and other markets ("infrastructure products"). Outside the United
States, Alliance sells its products to OEMs and, through its facilities in
France and Denmark, finished products, in each case predominantly for schools.
Alliance's infrastructure product sales are made by direct sales efforts through
employees and sales agents working with architects and designers on specific
projects, such as vehicular tunnels and transportation terminals having
specialized durability, cosmetic or signage requirements.
Posterloid uses a direct sales force to sell throughout the United States.
Its customers are restaurants (mostly in the fast food and stadium/terminal food
concession markets), banks and design firms serving these types of customers.
Posterloid manufactures its products with a variety of materials and is able to
supply its customers an assortment of menuboards and merchandising displays,
such as interior back lit menuboards, interior magnetic menuboards,
drive-through menuboards, and specifically for banks, magnetic interest rate
boards and other merchandising displays.
3
PolyVision has achieved its current position in the specialized markets it
serves largely because it performs a full range of services, including the
custom design, production and installation of products. PolyVision believes this
integrated approach enhances its responsiveness to customer needs and allows its
customers to obtain a full line of products and services from a single source.
This makes it easier for PolyVision to establish ongoing relationships with
customers and provide for their future requirements. Competition in PolyVision's
markets is based largely on price, product quality, customer service and
reliability.
RECENT DEVELOPMENTS
Acquisition of Alliance International Group and Change in Fiscal Year
In November 1998, PolyVision purchased, from Wind Point Partners III, L.P.
and certain minority stockholders, all of the outstanding capital stock of
Alliance International Group, Inc. (usually referred to as "Alliance"), a
leading manufacturer of ceramicsteel products. The purchase price was $75.8
million, consisting of $32.6 million in cash, $8.0 million in a 10% convertible
subordinated promissory note due in 2007 and $35.2 million of third-party debt
which was assumed or refinanced by PolyVision. Following the purchase, Alliance
became a division of PolyVision.
Alliance has its headquarters in Norcross, Georgia, and manufacturing
facilities in Oklahoma, Belgium, France and Denmark. It had approximately $60.0
million in revenues during calendar 1997. Following the closing of the Alliance
acquisition, Michael H. Dunn, Alliance's Chairman and Chief Executive Officer,
became the new President and Chief Operating Officer of PolyVision, as well as a
member of the PolyVision Board of Directors.
The cash portion of the Alliance acquisition and the simultaneous
refinancing of PolyVision's existing credit facility was funded by a $60.0
million senior secured bank loan, a $25.0 million senior subordinated bank loan,
and $5.0 million in cash proceeds from the sale of shares of PolyVision 9%
Series C Convertible Preferred Stock to The Alpine Group, Inc. ("Alpine").
In December 1998, PolyVision announced its decision to change to a
December 31 fiscal year from an April 30 fiscal year, consistent with Alliance's
fiscal period.
Recapitalization of Preferred Stock and Debt
In November 1998, under an Exchange Agreement between PolyVision and
Alpine and another preferred stockholder, PolyVision accepted approximately
$25.7 million in liquidation value of its Series A Preferred Stock (plus accrued
dividends) and approximately $7.4 million debt that PolyVision owed to Alpine,
in exchange for approximately 5.3 million shares of PolyVision's common stock
and approximately $12.4 million in liquidation value of its 9% Series B
Convertible Preferred Stock. As a result of this transaction, Alpine directly
owns approximately 48.4% of PolyVision's outstanding shares of common stock
(including 16.8% of such shares previously owned) and could own after conversion
of the Series A and Series B Preferred Stock as much as 65.1% of PolyVision's
outstanding shares.
4
BUSINESS OPERATIONS
Greensteel
Products
Greensteel manufactures custom-made systems incorporating ceramicsteel
chalkboards and markerboards, tackboards, display cases and bulletin boards.
Greensteel also manufactures wood and plastic laminate casework, Mostly, these
products are sold in new construction, usually construction of schools.
Ceramicsteel used by Greensteel is now being manufactured at Alliance's Oklahoma
plant, where porcelain is fused to continuous coil steel in gas furnaces.
Ceramicsteel writing surfaces, which are available in a range of colors
and surface types, are virtually indestructible and maintenance free, and are
warranted by Greensteel to retain their original writing and erasing qualities
under normal usage and wear. As a result of these product qualities, Greensteel
believes that ceramicsteel writing surfaces currently account for approximately
75% of all chalkboard and markerboard sales in the United States and will
continue to grow for the foreseeable future.
Greensteel's chalkboards, tackboards, markerboards and cabinetry are
typically sold together as a package to finish facility wall surfaces in schools
and offices. These products are manufactured at one or more of Greensteel's
production and fabrication facilities and are generally sold together as part of
a package to end-users through a sales force operating out of Greensteel's
regional sales offices and through independent dealer organizations.
Greensteel's writing surface products are normally priced from $100 to $900 per
unit, depending on the core material, dimension, steel, gauge and trim, and
whether the products are being sold through its own sales staff or through
independent dealers.
Sales and Markets
Most of Greensteel's products are sold pursuant to a bid process conducted
through architects and general contractors working with Greensteel's sales
staff. Warranties made by Greensteel with respect to its products and services
are consistent with industry standards, except for a 50-year warranty on the
writing surface of its ceramicsteel chalkboards, which is in keeping with
industry standards. Greensteel markets its products through a direct sales staff
of six persons, most of whom work on a salary plus commission basis, and
maintains four sales offices. Greensteel has converted part of its distribution
channel to sales efforts through independent dealers who do their own
estimating, quoting, project management and installation, and who bear the cost
of performance bonds and contract retainage. As of December 31, 1998, Greensteel
had approximately 65 dealers covering various geographical areas of the United
States. Sales to educational institutions and facilities account for a majority
of Greensteel's revenues. Greensteel's business is concentrated in the eastern
half of the United States, California, Florida and select other states that
represent the highest educational spending and growth.
Manufacturing
Greensteel conducts manufacturing operations primarily at its 200,000
square-foot facility in Dixonville, Pennsylvania, and a second 31,000
square-foot facility in Riverside, California.
Raw Materials
Greensteel purchases its ceramicsteel requirements from its recently
acquired Alliance division. As a result, its ceramicsteel writing surfaces are
readily available as are all other raw materials.
5
Competition
Greensteel competes with a variety of companies that manufacture visual
display products (such as chalkboards, markerboards and tackboards) and
institutional cabinetry, primarily for sale in the education market (such as
schools, pre-schools and day-care centers). There are more than 100 companies
that compete in the sale of visual display products, of which approximately 20
companies compete in large geographical regions, and two of which, Nelson-Adams
and Claridge Products & Equipment, Inc., compete nationally through a network of
independent distributors and sales offices. Greensteel also competes with
numerous local woodworking firms with respect to its cabinetry, and at least
nine such companies that sell nationally, either through a system of dealers,
direct sales offices, or both. Greensteel maintains a competitive position
through design quality, reliability, and its constant attention to costs.
Seasonality
Greensteel's business is seasonal and much of its revenues and most of its
operating profits occur during the late spring and summer months of the year.
This occurs primarily as a result of increased business activity in the summer
months when schools are closed and construction and renovation activity
increases. Greensteel typically incurs a loss in the winter months.
Backlog
As of December 31, 1998, Greensteel's backlog was approximately $18.0
million, as compared with $15.4 million as of December 31, 1997. Management
expects that most of the backlog will be filled in fiscal 1999. Revenues from
sales of specific products are recorded when title transfers, which is typically
upon shipment. Revenues from construction of custom installations under
contracts are recorded on the percentage-of-completion method of accounting,
measured on the basis of costs incurred to estimated total costs, which
approximates contract performance to date. See Note 2, "Revenue Recognition" to
the Notes to Consolidated Financial Statements included herein.
Employees
As of December 31, 1998, Greensteel employed approximately 240 people.
Approximately 100 employees at Greensteel's Dixonville, Pennsylvania plant are
members of the Carpenters Union. In February 1999, Greensteel and the Carpenters
Union ratified a new three-year collective bargaining agreement. Greensteel
considers relations with its employees to be good.
Patents and Trademarks
Greensteel holds a number of trademarks covering various products and
processes relating to its business. Greensteel believes that its "Greensteel"
trademark is important because it is highly recognized by customers, general
contractors and architects in the education and institutional markets as
providers of quality products used in construction projects. Greensteel
periodically monitors for infringing uses of this mark and has never encountered
any such infringement. Management of Greensteel believes that such infringement
is unlikely. None of Greensteel's trademarks are considered to be material to
Greensteel's ongoing business.
Insurance
Greensteel maintains insurance with respect to its properties and
operations in such form, in such amounts and with such insurers as is customary
in the businesses in which Greensteel is engaged. Greensteel believes that the
amount and form of its insurance coverage is sufficient.
6
Environmental Matters
Greensteel's manufacturing operations are subject to numerous federal,
state and local laws and regulations relating to the storage, handling,
emission, transportation and discharge of hazardous materials and waste
products. Compliance with these laws has not resulted in a material cost to
Greensteel and has not had a material effect upon its capital expenditures,
earnings or competitive position.
Alliance
Products
Alliance manufactures continuous coil, light-gauge ceramicsteel for a wide
range of market applications, including visual communications products,
transportation/infrastructure and industrial markets. Alliance's ceramicsteel
combines the strength of steel with the unique properties of ceramicsteel,
utilizing proprietary processes developed by Alliance. Certain characteristics
of ceramicsteel that Alliance believes distinguishes it from other types of
durable surfaces are longevity, ease of maintenance, non-toxicity and resistance
to harsh environments.
Alliance's ceramicsteel coils and sheets, which are available in a variety
of surface finishes, treatments and colors, are used primarily as writing
surfaces for markerboards and chalkboards and also as surfaces for projection
screens. Alliance also manufactures non-standard, high performance,
application-specific ceramicsteel coils and sheets with distinctive graphics,
such as calendars, maps, artwork and signage. Ceramicsteel, used in visual
communications and finished visual display products, accounted for approximately
80% of Alliance's fiscal 1998 revenues, with most of the remaining sales from
infrastructure and industrial products described below.
Alliance's ceramicsteel surfaces are particularly well-suited for interior
and exterior surfaces of tunnel systems, subways, airports, bus terminals and
train stations, and are frequently chosen substitutes for ceramic tile, glazed
block and painted aluminum, because of its longevity, non-toxicity,
fire-resistance, aesthetic potential, surface uniformity and relative ease of
installation and maintenance. In addition, Alliance's ceramicsteel surfaces have
a variety of industrial applications, such as components in radiant heaters and
as surfaces for industrial graphic displays due to its ability to withstand high
temperatures and high abuse environments.
Sales and Markets
Alliance's visual display products are sold in the United States and,
through facilities in Belgium, France and Denmark, throughout Europe and to over
40 countries worldwide. In the United States, Alliance uses its direct sales
personnel to sell its products to fabricators/OEMs that produce visual
communication products, such as markerboards, chalkboards and other related
products. These products are sold through a variety of distribution channels to
a broad range of end users, particularly educational facilities and businesses.
Outside the United States, Alliance sells its products to OEMs and, through its
facilities in France and Denmark, it sells finished visual communications
products predominantly to educational and business institutions. Sales of
Alliance's infrastructure and industrial products are made by direct sales
efforts through employees and other sales agents working with architects and
designers on specific projects in the United States, Europe and the Far East.
As of December 31, 1998, Alliance had a total of approximately 15 sales
agents covering various geographical areas outside of the United States,
principally in Europe and the Far East. In addition, Alliance employs six direct
sales personnel in the US and 17 sales personnel in Europe.
Manufacturing
Alliance conducts manufacturing operations at its 180,000 square-foot
facility in Okmulgee, Oklahoma (near Tulsa), its 124,000 square-foot facility in
Genk, Belgium, a 155,200 square-foot facility in Crespin, France and a 29,800
square-foot facility in Odense, Denmark.
7
The following table summarizes Alliance's manufacturing facilities:
[Enlarge/Download Table]
Okmulgee, Oklahoma Genk, Belgium Odense, Denmark Crespin, France
------------------ ------------- --------------- ---------------
Products o Coils & Sheets o Coils & Sheets o Finished Visual o Finished Visual
Manufactured o Graphic Sheets o Graphic Sheets Communication Communication
------------ o Laminated Panels o Laminated Panels o Surfaces o Surfaces
o Tunnel Panels Laminated Panels Laminated Panels
o Heating Elements
o Projection Screens
Equipment o 4ft. Coil Line o 4ft. Coil Line o Laminating Line o 4ft. Sheet Line
--------- o 5ft. Coil Line o Silkscreen Graphics o Laminating Line
o Aluminum Molding o Furniture Molding o Assembly Lines
Line o Polyurethane Molding o Silkscreen
o Silkscreen o Laminating Equipment Graphics
Graphics o Printed Circuit Assembly
o Laminating
Equipment
Raw Materials
The production of ceramicsteel requires three basic materials: steel coil,
frit (glass fragments) and pigments or oxides. Alliance has never experienced
any difficulty in obtaining these materials in adequate quantity or quality and
relies predominately on a range of suppliers in the United States, Europe and
Japan. Alliance maintains multiple sources of supply on all critical items and
manages its purchasing commitments on a worldwide basis to leverage its
purchasing strength.
Competition
Although Alliance believes that its ceramicsteel visual display surfaces
currently occupy approximately 70% to 80% of the North American and European OEM
markets for such surfaces, respectively, it competes with several domestic and
international companies, some of which may have substantially greater financial
and other resources than those of Alliance. In North America, Alliance faces
competition from companies such as Claridge Products & Equipment, Inc., Kawasaki
and NGK. Claridge is Alliance's most significant competitor in North America,
but differs from Alliance in its market focus and production capabilities.
Although Kawasaki and NGK are large companies with substantial resources, they
manufacture ceramicsteel in only a limited range of products. In Europe, NGK and
Kawasaki are Alliance's most significant ceramicsteel competitors but, as in
North America, offer only a limited range of products. Alliance believes that
its future success will depend upon its ability to develop and produce reliable
products which incorporate developments in technology and satisfy consumer
tastes with respect to style and design and its ability to market a broad range
of such products in each applicable category at competitive prices.
Seasonality
Alliance's business is somewhat seasonal with much of its revenues and
operating profits occurring in the spring and summer months of the year. This is
due to the increased business activity in the months when schools are closed and
general construction activity increases.
Backlog
As of December 31, 1998, Alliance's backlog totaled approximately
$7,840,000. Due to the nature of its manufacturing process and customer base,
Alliance produces and ships products to its customers without incurring material
backlog.
8
Employees
As of December 31, 1998, Alliance employed approximately 360 people.
Approximately 65 employees at Alliance's Okmulgee, Oklahoma facility are members
of the Steel Workers of America Union. A renewed labor agreement with the Steel
Workers of America became effective in July 1998, and expires in April 2001. In
Alliance's European operations, including Crespin, France, and Odense, Denmark,
most of the employees are members of various national unions within each
country. To date, neither the Steel Workers of America Union nor the European
unions have engaged in strikes or work stoppages against Alliance. Alliance
believes that its relationships with both its union and non-union employees are
good.
Patents and Trademarks
In June 1998, Alliance filed a federal trademark application that covers
the mark "QuartzVue" for use with its front projection screens. During recent
years, Alliance has filed for and received a number of patents relating to its
core products and processes. It believes these patents continue to provide a
competitive advantage in the markets served by Alliance and it will continue to
ensure its position is protected and defended when necessary.
Insurance
Alliance maintains insurance with respect to its properties and operations
in such form, in such amounts and with such insurers as is customary in the
businesses in which Alliance is engaged. Alliance believes that the amount and
form of its insurance coverage is sufficient.
Environmental Matters
Alliance's manufacturing operations are subject to numerous U.S. federal,
state and local laws and regulations, as well as foreign laws and regulations
relating to the storage, handling, emission, transportation and discharge of
hazardous materials and waste products. Compliance with these laws has not been
a material cost to Alliance and has not had a material effect upon its capital
expenditures, earnings or competitive position. Alliance continues to monitor a
project to achieve full environmental compliance on a facility no longer owned
by Alliance and it is fully indemnified by owners prior to Alliance. To date,
this project has not had a material impact on Alliance, and Alliance does not
expect it to have a material impact in the future.
Posterloid
Posterloid is engaged in the development, manufacture and sale of indoor
and outdoor menuboard display systems to the fast food and convenience store
industries. The Viscon division of Posterloid develops, manufactures and markets
changeable magnetic display signage used primarily by banks to display interest
rates, currency exchange rates and other information. Posterloid's displays are
custom manufactured in arrays of screen printed plastic strips for ceiling
hanging or for window or counter displays. As of December 31, 1998, Posterloid
had approximately 800 customers. Posterloid's marketing activities are conducted
through both a direct sales force and sales representatives. Raw materials used
in Posterloid's operations are widely available but are purchased from a limited
number of sources in order to obtain favorable prices and terms. Posterloid
competes with three other significant national menuboard manufacturers and a
large number of local manufacturers. Menuboard products compete on the basis of
design capability, price, quality and ability to meet delivery requirements.
Posterloid had approximately 65 employees as of December 31, 1998, and considers
its employee relations to be good. None of its employees are covered by a
collective bargaining agreement.
9
ITEM 2. PROPERTIES
Greensteel owns two of its facilities. Real estate owned by Greensteel is
subject to mortgages. Greensteel believes that all of its facilities are
well-maintained, in good condition and adequate for its present business.
Greensteel's production facilities are currently utilized to the extent of one
production shift per day and are scheduled for additional shifts as demand
requires during the busy seasonal period. At such levels of utilization,
Greensteel's production facilities have sufficient capacity to meet the current
demand for Greensteel's products.
Information concerning the principal facilities of Greensteel is set forth
below:
Floor Area
Location Owned or Leased (Square Feet) Lease Expiration
-------------------------- --------------- ----------- ----------------
Dixonville, Pennsylvania Owned 199,200 --
Alliance, Ohio (1) Owned 28,000 --
Landis, North Carolina (2) Leased 16,000 1999
Riverside, California Leased 31,000 2002
Fraser, Michigan Leased 4,700 2000
(1) This facility was closed in February 1999 and operations were moved to
Alliance's Oklahoma manufacturing facility. Greensteel is currently in the
process of selling this facility.
(2) Greensteel intends to renew this lease.
Alliance owns all of its facilities. Real estate owned by Alliance has
been pledged as collateral under PolyVision's credit facilities, both in the
United States and Europe. Alliance believes that all of its facilities are
well-maintained, in good condition and adequate for its present business.
Alliance's Oklahoma and three European production facilities are currently
utilized to the extent of two to three production shifts per day and are
scheduled for additional shifts as demand requires during the busy seasonal
period. At such levels of utilization, Alliance's production facilities have
sufficient capacity to meet the current demand for Alliance's products.
Information concerning the principal facilities of Alliance is set forth
below:
Approximate Owned or Floor Area
Location Leased (Square Feet)
------------------------------- ---------------- -------------------
Norcross, Georgia Owned 9,500
Okmulgee, Oklahoma Owned 180,000
Crespin, France Owned 155,200
Genk, Belgium Owned 124,000
Odense, Denmark Owned 29,800
The only facility used by Posterloid, which is leased, is as follows:
Approximate Owned or Floor Area Lease
Location Leased (Square Feet) Expiration
------------------------------- ---------------- -------------- -----------
Long Island City, New York Leased 54,000 2001
10
ITEM 3. LEGAL PROCEEDINGS
PolyVision and its subsidiaries are parties to routine litigation
incidental to their business, none of which in the opinion of management will
have a material impact on the financial condition of PolyVision.
In 1994, Reliance Insurance Company of New York (the "Plaintiff")
commenced an action in the Supreme Court of the State of New York, County of
Suffolk, against several defendants including PolyVision seeking money damages
based on the purported sale and delivery by defendants of some 860 insulated
metal curtain wall panels manufactured by PolyVision in 1987 and of an
additional 520 replacement panels in 1991 and 1992. Plaintiff has alleged that
such panels were defective in their design and manufacture. Among the theories
of liability advanced by Plaintiff are breach of contract, breach of express
warranty and implied warranty. Pursuant to orders of the Court, the causes of
action based on the 1987 transaction were dismissed on statute of limitation
grounds. However, Plaintiff has been granted leave to serve an amended complaint
to allege, among other things, a claim under the New Jersey Consumer Fraud Act
(the "NJCFA") (which might permit treble damages), while preserving the right of
the defendants, including PolyVision, to challenge the applicability of the
NJCFA.
The amended complaint was served during April 1997 and Plaintiff currently
seeks $1,405,000 in damages from all defendants, as well as treble damages under
the NJCFA. PolyVision has served its answer to the amended complaint
substantially denying Plaintiff's allegations of defective design and
manufacture and pleading affirmative defenses, as well as commencing third party
claims against an adhesives supplier whose product was utilized by PolyVision in
fabricating the subject panels. As of the date hereof, discovery is
continuing, but it is premature to render an estimate of the outcome of this
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during two months
ended December 31, 1998.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock Information
The common stock of PolyVision is traded on the American Stock Exchange
under the symbol PLI. The following table shows the high and low closing prices
for trades on the American Stock Exchange:
High Low
---- ---
Fiscal April 1997
First Quarter..................... $2-1/4 $5/8
Second Quarter.................... 1-1/8 5/8
Third Quarter..................... 15/16 11/16
Fourth Quarter.................... 3/4 1/4
Fiscal April 1998
First Quarter..................... 3/4 1/4
Second Quarter.................... 1 3/8
Third Quarter..................... 15/16 11/16
Fourth Quarter.................... 1-1/2 3/4
Eight Months ended December 1998
May to July 1998.................. 1-5/8 7/8
August to October 1998............ 2-1/4 7/8
November to December 1998......... 2-3/8 1-1/2
The approximate number of security holders of PolyVision's common stock
was 1,895 as of March 22, 1999. This number does not include the number of
security holders for whom shares are held in a "nominee" or "street" name. The
closing price of PolyVision's common stock on March 24, 1999, as reported by the
American Stock Exchange, was $2-11/16 per share.
Dividend Policy
PolyVision has never declared or paid dividends on its common stock and
does not expect to pay dividends on its common stock at any time in the
foreseeable future. Also, the terms of PolyVision's credit facilities prohibit
the payment of common stock dividends and the terms of PolyVision's Series B and
Series C Preferred Stock prohibit PolyVision from paying dividends on all
classes of stock junior to such stock (including the common stock) while shares
of PolyVision's Series B and Series C Preferred Stock remain outstanding.
Recent Sales of Unregistered Securities
Subordinated Note Financing; Warrants to Purchase Common Stock
In December 1998, PolyVision issued $25,000,000 of 12.5% Senior
Subordinated Notes due December 30, 2006 (the "Hancock Notes") to John Hancock
Mutual Life Insurance Company and certain of its affiliates (collectively, "John
Hancock") pursuant to a Senior Subordinated Note and Warrant Purchase Agreement
(the "Subordinated Note Agreement"). Under the Subordinated Note Agreement, John
Hancock purchased from PolyVision the Hancock Notes and warrants to purchase up
to 2,986,467 shares of PolyVision common stock (the "Warrants"). John Hancock
may exercise the Warrants at any time during their ten-year term. The exercise
price of the Warrants is $.001 per share.
12
Exchange Transaction; Common Stock and Series B Convertible Preferred
Stock
In November 1998, shortly before the Alliance purchase, PolyVision
completed a related transaction (the "Exchange Transaction") with Alpine and
another preferred shareholder. In the transaction, PolyVision exchanged
approximately $25.7 million in liquidation value of PolyVision Series A
Preferred Stock (plus accrued dividends) and indebtedness of approximately $7.4
million due from PolyVision, for approximately 5.3 million shares of common
stock and approximately $12.4 million in liquidation value of Series B Preferred
Stock to Alpine and another entity. The Series B Preferred Stock may be
converted into 4,132,517 shares of common stock at any time at a conversion
price of $3.00 per share. Alpine is entitled to the payment of cumulative cash
dividends at the rate of 9% per year. These dividends, however, are prohibited
through July 2001 under the terms of PolyVision's senior subordinated credit
facility, and thereafter can only be paid if PolyVision is in compliance with
specified financial ratios set forth in the senior secured credit facility and
senior subordinated credit facility. Also, although PolyVision can redeem the
Series B Preferred Stock under the terms of the preferred stock agreement at
face value, plus accrued but unpaid dividends, at any time, the terms of
PolyVision's credit facilities prohibit PolyVision from doing so. Shares of
Series B Preferred Stock have no voting rights, except (voting as a separate
class) for certain significant business transactions such as the merger or
consolidation of PolyVision, the sale of all or substantially all of
PolyVision's assets or an amendment of PolyVision's Certificate of Incorporation
or By-laws which adversely affects the rights of holders of Series B Preferred
Stock. However, if Alpine were to transfer ownership of its shares of Series B
Preferred Stock to an unaffiliated third party, such transferee would be
entitled to vote (together with common shareholders) the equivalent number of
shares of common stock as it would hold if it converted its shares immediately
prior to the record date of such vote. The Series B Preferred Stock also has
customary anti-dilution provisions for stock dividends, stock splits, share
combinations, recapitalizations and other capital adjustments.
Also, in November 1998, PolyVision issued to Alpine an additional 209,790
shares of common stock and Series B Preferred Stock convertible into 150,000
shares of common stock, valued together at $750,000, as compensation for
structuring and assisting PolyVision in completing the Alliance purchase.
Series C Convertible Preferred Stock
In November 1998, PolyVision sold to Alpine for $5.0 million in cash,
shares of PolyVision Series C Preferred Stock. PolyVision applied the $5.0
million to the purchase price for Alliance. The Series C Preferred Stock may be
converted into 2,500,000 shares of common stock at any time. Other than the
conversion price, the terms of the Series C Preferred Stock are identical to the
terms of the Series B Preferred Stock and rank equally with respect to
distribution rights upon the liquidation, dissolution or winding-up of the
affairs of PolyVision, and with respect to dividend rights.
10% Convertible Subordinated Promissory Note
The purchase price in the Alliance acquisition included an $8.0 million,
10% convertible subordinated promissory note due in 2007 (the "Note"), which was
issued to Wind Point Partners III, L.P., as agent for the sellers in the
transaction. The Note may be converted at any time after May 20, 1999 into
shares of common stock at a conversion price of $3.00 per share. However, if the
Note has not been repaid by November 20, 2004, the conversion price will be
reduced by $.25 to $2.75 per share. Likewise, the conversion price will be
reduced by another $.25 per share on each of November 20, 2005, 2006 and 2007
(to a final conversion price of $2.00 per share) if the Note has not been repaid
by any such date. The principal amount of the Note may also be reduced, by up to
$2.0 million, for claims made by PolyVision against Wind Point Partners and the
other sellers on account of misrepresentations or breaches of warranty stemming
from the Stock Purchase Agreement among the parties in the Alliance purchase. If
this were to happen, the number of shares available to Wind Point Partners for
conversion would be proportionally reduced.
All of the foregoing issuances of PolyVision securities were made pursuant
to private placements under Section 4(2) of the Securities Act.
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements of PolyVision and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Report.
[Enlarge/Download Table]
EIGHT MONTHS ENDED
DECEMBER 31, TWELVE MONTHS ENDED APRIL 30,
---------------------------- ---------------------------------------------
1998(4) 1997(3) 1998 1997(2) 1996 1995(1)
------------ -------------- -------- ------------- -------- ----------
(in thousands, except per share data)
Statement of Operations Data:
Net sales from operations ................ $ 33,877 $ 22,860 $ 34,167 $ 32,233 $ 35,627 $ 13,572
Income (loss) from operations ............ 2,050 1,288 1,392 (4,289) (5,245) (5,644)
Net income (loss) ........................ 591 1,097 1,010 (5,109) (5,769) (5,728)
Preferred stock dividends ................ (179) (1,376) (1,545) (2,059) (2,040) (448)
Accretion of preferred stock ............. (312) -- -- -- -- --
Gain on conversion ....................... 19,252 -- -- -- -- --
Income (loss) applicable to common stock . 19,352 (279) (535) (7,168) (7,809) (6,176)
Income (loss) per share-basic and diluted 2.04 (.03) (0.06) (0.84) (0.94) (0.67)
Balance Sheet Data:
Total assets ............................. 122,208 19,091 18,464 16,901 18,983 22,153
Long-term obligations .................... 74,511 13,537 13,842 11,499 7,380 1,785
Preferred stock .......................... 17,848 25,731 25,731 25,731 25,731 25,502
Total shareholders' equity (deficit) ..... 20,921 (3,207) (3,475) (2,990) 4,084 11,090
----------
(1) Includes the results of Greensteel for the four months ended April 30,
1995.
(2) Includes a $650,000 restructuring charge for the discontinuance of APV's
operations.
(3) Eight month results for the period ended December 31, 1997 are unaudited.
(4) Includes a $1,250,000 nonrecurring charge related to the acquisition of
Alliance.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table summarizes, for the periods presented, the respective
amounts of Greensteel, Posterloid, Alliance and APV, PolyVision's primary
operating segments:
[Enlarge/Download Table]
EIGHT MONTHS ENDED
DECEMBER 31, TWELVE MONTHS ENDED APRIL 30,
----------------------- ----------------------------------
1998 1997 1998 1997 1996
----------- ----------- ---------- ------------ --------
(in thousands, except percentages)
Net sales
Greensteel .................... $ 23,058 $ 18,803 $ 27,813 $ 26,152 $ 30,070
Posterloid .................... 4,202 4,057 6,354 6,081 5,557
Alliance ...................... 6,617 -- -- -- --
------------------------------------------------------------
33,877 22,860 34,167 32,233 35,627
Gross profit
Greensteel .................... 6,362 5,090 7,459 5,740 6,129
Posterloid .................... 1,564 1,532 2,422 1,738 1,635
Alliance ...................... 2,591 -- -- -- --
------------------------------------------------------------
10,517 6,622 9,881 7,478 7,764
Gross margin ...................... 31.0% 29.0% 28.9% 23.2% 21.8%
Greensteel .................... 27.6% 27.1% 26.8% 21.9% 20.4%
Posterloid .................... 37.2% 37.8% 38.1% 28.6% 29.4%
Alliance ...................... 39.2% -- -- -- --
Selling, general and administrative
expenses
Greensteel .................... 4,330 4,024 6,184 6,967 6,356
Posterloid .................... 1,182 1,150 1,725 1,668 1,766
Alliance ...................... 1,209 -- -- -- --
APV and Corporate ............. 218 64 435 1,179 1,856
------------------------------------------------------------
6,939 5,238 8,344 9,814 9,978
Amortization of goodwill
Posterloid .................... 97 96 145 145 145
Alliance ...................... 151 -- -- -- --
------------------------------------------------------------
248 96 145 145 145
Research and development
APV ........................... -- -- -- 1,158 2,886
Alliance ...................... 30 -- -- -- --
------------------------------------------------------------
30 -- -- 1,158 2,886
Operating income (loss)
Greensteel .................... 2,032 1,066 1,275 (1,227) (227)
Posterloid .................... 285 286 552 (75) (276)
Alliance ...................... 1,201 -- -- -- --
APV and Corporate ............. (218) (64) (435) (2,337) (4,742)
Non-recurring expenses ........ (1,250) -- -- (650)
------------------------------------------------------------
2,050 1,288 1,392 (4,289) (5,245)
Net interest expense .............. 1,408 533 839 910 516
Other (income) expense ............ 201 (342) (472) (90) (8)
15
RESULTS OF OPERATIONS
EIGHT MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE UNAUDITED EIGHT MONTHS
ENDED DECEMBER 31, 1997 [TRANSITION PERIOD]
Net sales for the eight months ended December 31, 1998, totaled
$33,877,000, an increase of 48% over the 1997 comparable eight-month period of
$22,860,000. The increase of $11,017,000 was primarily due to the inclusion of
the results of Alliance which was purchased on November 20, 1998, ($6,617,000),
combined with increased business activity at Greensteel and Posterloid. For the
eight months ended December 31, 1998, Greensteel's net sales increased
$4,255,000, to $23,058,000, or 23% over the prior's year eight-month period of
$18,803,000, due to continuing demand in the education visual display market.
Posterloid's net sales also increased in the eight month period ended December
31, 1998, as compared to the previous year, from $4,057,000 to $4,202,000.
Gross profit for the eight-month period ended December 31, 1998, totaled
$10,517,000 compared to $6,622,000 for the comparable 1997 eight-month period.
The increase in gross profit of $3,895,000 was due in part to the inclusion of
$2,591,000 of gross profit earned by Alliance since its purchase on November 20,
1998. Greensteel's gross profit increased by $1,272,000 in the 1998 eight-month
period, to $6,362,000 versus $5,090,000 in 1997. This increase was due to the
sales gains noted above. Gross profit margin, as a percent of sales revenue,
increased from 29.0% in 1997 to 31.0% in 1998. This increase was principally due
to the purchase of Alliance on November 20, 1998, combined with production
efficiencies at Greensteel during the 1998 period. Due to the nature of its
business, Alliance's gross profit margin is normally higher than Greensteel's
gross profit margin.
Selling, general and administrative costs in the eight-month period ended
December 31, 1998 were $6,939,000, an increase of $1,701,000 over the 1997 total
of $5,238,000. Of the increase, $1,209,000 was due to the normal and customary
business activities of Alliance since the purchase on November 20, 1998. The
remaining increase in the 1998 eight-month period compared to 1997 was
principally due to higher selling commissions and increased professional fees.
An additional $1,250,000 of nonrecurring expense recorded in the
eight-month period ended December 31, 1998, was directly related to the purchase
of Alliance, and included a one-time fee of $750,000 paid to an affiliate for
investment banking advisory services, and $500,000 of nonrecurring restructuring
costs related to consolidation of manufacturing activities.
Interest expense in the eight-month period ended December 31, 1998
increased by $875,000, to $1,408,000, versus $533,000 in the 1997 comparable
eight-month period. Most of the increase is attributable to the purchase of
Alliance (See "Liquidity and Capital Resources").
Income tax expense for the 1998 eight month period increased $286,000,
compared to no expense in the 1997 comparable period, and relates principally to
income taxes for the European business income of Alliance.
16
EIGHT MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH TWELVE MONTHS ENDED APRIL 30,
1998
For the eight months ended December 31, 1998, PolyVision's net sales
totaled $33,877,000 compared to net sales of $34,167,000 for the full year ended
April 30, 1998, a decline of $290,000. The decline in net sales is the result of
the shorter period comparison through December 31, which was offset by the
inclusion of the net sales of Alliance since the purchase on November 20, 1998
($6,617,000).
Gross profit for the eight month period ended December 31, 1998, totaled
$10,517,000 compared to $9,881,000 for the twelve months ended April 30, 1998.
Despite the shorter period comparison through December 31, 1998, gross profit
increased $636,000, as the eight month period included Alliance's gross profit
of $2,591,000 since the purchase. As a percent of sales revenue, gross profit
margin was 31.0% for the eight-month period ended December 31, 1998, versus a
gross profit margin of 28.9% for the twelve-month period ended April 30, 1998.
The increase in gross profit margin was principally due to the inclusion of
Alliance's gross profit since the purchase, combined with production
efficiencies at Greensteel. Since Alliance normally earns a higher gross profit
margin than Greensteel, the overall gross profit margin increased.
Consolidated selling, general and administrative expenses for the eight
months ended December 31, 1998, totaled $6,939, a decrease from the twelve month
total of $8,344 for the period ended April 30, 1998. The decline was due to the
shorter comparison period during the eight months ended December 31, 1998,
partially offset by the inclusion of Alliance's operating expenses since the
purchase.
Interest expense in the eight month 1998 period ended December 31, 1998,
increased $569,000, to $1,408,000, compared to $839,000 for the twelve month
period ended April 30, 1998. Most of the increase is attributable to the
acquisition of Alliance (See "Liquidity and Capital Resources").
Income tax expense for the 1998 eight month period ended December 31, 1998
totaled $286,000, compared to $15,000 in the twelve-month period ended April 30,
1998. The increase was caused by the inclusion of income taxes related to the
European business income of Alliance since the purchase.
TWELVE MONTHS ENDED APRIL 30, 1998 COMPARED WITH TWELVE MONTHS ENDED APRIL 30,
1997
PolyVision's net sales for the fiscal year ended April 30, 1998 increased
by 6% to $34,167,000 compared to net sales of $32,233,000 for the fiscal year
ended April 30, 1997. Sales at Greensteel improved by 6% to $27,813,000, an
increase of $1,661,000 over the previous fiscal year. PolyVision's conversion to
a dealer network using specialty school supply dealers, rather than a direct
sales effort, resulted in increased volume due to better geographical coverage.
Dealer revenue for the fiscal year ended April 30, 1998 improved from the
previous year by $4,713,000 or 40% and represented 58% of total sales. This
increase was partially offset by the loss of installation work that was
previously done by PolyVision and is currently performed by the dealer. Total
bookings for the fiscal year for Greensteel were $32,700,000 as compared to
$26,438,000 for the prior year, an increase of $6,262,000, or 24%. Backlog at
April 30, 1998 was $16,761,000 as compared to $11,874,000 at the end of the
previous year. Posterloid's net sales for fiscal 1998 were $6,354,000 as
compared to $6,081,000 for the previous year, an increase of 4%. This increase
was due to added sales of menuboards to several restaurant and theater chains.
Bookings for the fiscal year were $6,541,000 as compared to $6,168,000 for the
prior year, an increase of 6%. The backlog at April 30, 1998 was $760,000 as
compared to a backlog at April 30, 1997 of $573,000, an increase of $187,000, or
33%.
17
Consolidated gross profit for the fiscal year ended April 30, 1998
improved by $2,403,000 to $9,881,000, or 32%, as compared to $7,478,000 in the
previous year. The gross margin increased to 28.9% from 23.2% of net sales.
Greensteel's gross margin improved to 26.8% from 21.9% reflecting improved
product mix related to additional sales to dealers and increased plant
throughput. The gross profit and gross margin for Posterloid were higher in
fiscal 1998 than in fiscal 1997, being $2,422,000 compared with $1,738,000, and
38.1% compared with 28.6%. This increase in gross profit was principally due to
a change in product mix, including a sales shift to more exterior signage, which
typically generates higher profit margins. In addition, Posterloid moved
operations into one facility during 1998, which reduced manufacturing costs in
the 1998 period compared to 1997.
Selling, general and administrative expenses for the fiscal year ended
April 30, 1998 decreased by $1,470,000 as compared to the previous year. This
decrease was due to lower bad debt expenses and lower selling expenses resulting
from the conversion to a dealer network, to rather than direct sales.
In April 1997, PolyVision determined to discontinue its research and
development efforts and market its PolyVision flat panel technology solely
through third-party licensing agreements. Therefore, in fiscal 1998, there were
no research and development costs. The restructuring costs in fiscal 1997
represented the costs to discontinue APV.
Other income in 1998 includes a $307,000 gain on the sale of PolyVision's
property in North Carolina.
TWELVE MONTHS ENDED APRIL 30, 1997 COMPARED WITH TWELVE MONTHS ENDED APRIL 30,
1996
PolyVision's net sales for the fiscal year ended April 30, 1997 decreased
10% to $32,233,000 compared to net sales of $35,627,000 for the fiscal year
ended April 30, 1996. This decline resulted from reduced sales of $3,918,000 at
Greensteel. In fiscal 1997, Greensteel had been in the process of converting its
distribution channels to sales through dealers which do not require extended
project management and are not subject to construction cost overruns or
increased working capital requirements for performance bonds and retainage. As a
result of selling through dealers, installation work that was previously done by
PolyVision is performed by the dealer, resulting in reduced revenues. During
fiscal 1997, PolyVision added 19 new dealers covering various geographic areas
of the United States.
Distributor sales for fiscal 1997 increased by 27% compared to fiscal
1996. Net sales for Posterloid increased by $524,000 or 9% in fiscal 1997. These
additional sales were due to a significant increase in volume with a fast food
restaurant chain.
PolyVision's gross profit for fiscal 1997 decreased to $7,478,000 from
$7,764,000 for fiscal 1996. Gross profit decreased at Greensteel from $6,129,000
to $5,740,000 due to lower revenues. Gross profit margins improved, however, to
22.0% from 20.4% due to higher margins on dealer sales and lower benefits costs
due to a more favorable union contract. Posterloid increased its gross profit by
$103,000 due to higher revenues, however the gross margin decreased from 29.4%
in fiscal 1996 to 28.6% in fiscal 1997 due to increased costs.
Selling, general and administrative costs for fiscal 1997 were $9,814,000
compared to $9,978,000 for the prior year. The decrease was due to lower
administrative personnel expense and related items offset by higher bad debt
expense.
Interest expense increased by $394,000 for fiscal 1997 due to a higher
level of debt in order to fund working capital needs and research and
development expenses.
Research and development costs related to the PolyVision flat panel
technology decreased by $1,728,000 for fiscal 1997. In April 1997, PolyVision
made the decision to discontinue its research and development efforts and market
the PolyVision flat panel technology through licensing agreements. This decision
permitted PolyVision to better utilize its financial resources and resulted in a
charge of $650,000 for restructuring expenses. This includes the estimated costs
of severance pay and benefits and the write-down of assets to net realizable
value.
18
LIQUIDITY AND CAPITAL RESOURCES
Acquisition and Ongoing Working Capital Financing
PolyVision believes its credit facilities, combined with cash flows
generated from current operations, are adequate to meet PolyVision's current
and anticipated liquidity needs for at least the next 24 months.
Financing for the Alliance purchase, and for PolyVision's ongoing working
capital requirements, was and will be provided through:
o senior credit facilities provided by Fleet National Bank and KBC
Bank, N.V., in the maximum aggregate principal amount of $60,000,000
(the "Senior Credit Facilities"),
o a $25,000,000 senior subordinated loan provided by John Hancock
Mutual Life Insurance Company and certain of its affiliates (the
"Subordinated Loan"), and
o the purchase by Alpine of $5,000,000 of Series C Preferred Stock of
PolyVision.
The Senior Credit Facilities consist of (a) a revolving line of credit in
the maximum principal amount of $15,000,000 (of which $9,500,000 is available in
the United States, and $5,500,000 is available to PolyVision's European
subsidiaries), (b) term loans (the "Tranche A Loans") in the aggregate principal
amount of $25,000,000 (of which $4,369,392 was loaned in the United States, and
$20,630,608 was loaned in Europe), and (c) an additional term loan (the "Tranche
B Loan") in the principal amount of $20,000,000 (all of which was loaned in the
United States). 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 $9,500,000
or the sum of 85% of eligible accounts receivable plus 60% of eligible
inventory, and (2) for the European borrowers, the lesser of $5,500,000 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,
2004 (in the case of the Tranche A Loans) and October 31, 2005 (in the case of
the Tranche B Loan), and such principal installments have been weighted so that
the majority of payments do not come due until the later years (including a
$14,900,000 balloon payment under the Tranche B Loan due on October 31, 2005).
PolyVision has the option of selecting interest rates on these loans based on
either the announced prime rate of interest or the prevailing LIBOR rate, and
the rate of interest in effect at any time will be dependent upon PolyVision's
ratio of consolidated indebtedness to EBITDA (earnings before interest, taxes,
depreciation and amortization) from time to time. The Tranche A Loan and Tranche
B Loan are subject to mandatory prepayment to the extent of net unreinvested
proceeds of certain asset sales and proceeds of certain future debt issuances by
PolyVision, and out of a portion of annual excess cash flow and net proceeds of
certain future equity issuances by PolyVision.
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, and by cross-guarantees by PolyVision and its subsidiaries.
PolyVision is required to comply with customary affirmative and negative
covenants, and with financial covenants including a maximum ratio of total
indebtedness to EBITDA, a minimum ratio of EBITDA to interest expense, a minimum
ratio of EBITDA to fixed charges, and a maximum amount of annual capital
expenditures. PolyVision will also be prohibited from paying any dividends on
its common stock without the lenders' prior written consent, and from paying
dividends on its preferred stock until such time as PolyVision reduces its ratio
of total debt to EBITDA to certain prescribed levels. The lenders have reserved
the right to declare all of these loans to be immediately due and payable upon
the occurrence and during the continuance of certain customary events of
default, including non-payment of principal or interest, bankruptcy, insolvency,
default on other material indebtedness, and other material adverse developments
or occurrences relating to PolyVision.
19
The Senior Subordinated Loan bears interest at a fixed rate of 12.5% per
annum, payable quarterly in arrears, and matures as to all principal in a single
installment on December 30, 2006, subject to mandatory prepayment (at the option
of the lender) at 101% of the principal balance (together with accrued interest)
upon a change of control of PolyVision. Except for the guaranty thereof by
PolyVision's domestic subsidiaries, the Senior Subordinated Loan is an unsecured
obligation of PolyVision. The loan agreement includes customary affirmative and
negative covenants, financial covenants similar to (but less stringent than) the
financial covenants applicable to the Senior Credit Facilities, and customary
events of default. The Senior Subordinated Loan is junior in right of payment to
the Senior Credit Facilities, but senior in right of payment to the $8,000,000
promissory note issued by PolyVision to the Sellers as part of the purchase
price in 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 the fully diluted common stock
of PolyVision. PolyVision has agreed to file a registration statement with the
Securities and Exchange Commission covering the shares of common stock
underlying the warrants, to enable the resale of such shares to the public, by
no later than April 30, 1999 and to use its best efforts to make such
registration statement effective by no later than June 15, 1999.
Immediately after giving effect to the consummation of the acquisition,
all of the Tranche A Loans and the Tranche B Loan under the Senior Credit
Facilities, and the entire Senior Subordinated Loan, had been borrowed and were
outstanding. In addition, approximately $1,557,000 of borrowings were
outstanding under the European portion of the revolving credit facilities, and
no amounts were outstanding under the United States portion of the revolving
credit facilities.
As of December 31, 1998, PolyVision's cash position totaled $4,841,000,
an increase of $4,550,000 over the balance as of April 30, 1998. Most of the
increase was due to the cash at Alliance on the purchase date combined with
the proceeds remaining from the financing of the acquisition discussed above.
For the eight-month period ended December 31, 1998, cash flows provided by
operating activities totaled $1,469,000. During this period, PolyVision
experienced a decrease in trade accounts receivable, net of effects from the
purchase of Alliance, of $729,000 over the balance as of April 30, 1998,
principally due to the seasonality of PolyVision's business, which is
normally more active during the summer months. Also, PolyVision experienced a
decrease in accounts payable and accrued expenses, net of effects from the
purchase of Alliance, of $1,170,000 compared with the April 30, 1998
balance. This decline was also due to business seasonality.
Exchange Transaction and Alpine Financing
In May 1995, PolyVision entered into an agreement with Alpine,
PolyVision's largest single shareholder, pursuant to which PolyVision had the
right to borrow, prior to May 24, 1997, up to $5,000,000 from Alpine to be used
by PolyVision to fund its working capital needs, including research, development
and commercialization activities in connection with the flat panel display
technology of APV, Inc., a wholly-owned subsidiary of PolyVision. Borrowings
under the agreement were unsecured and accrued interest at a market rate
reflecting Alpine's cost of borrowing such funds (then approximately 8-1/2%),
with interest payable semiannually in cash. The principal balance was due on May
24, 2005, subject to mandatory prepayment of principal and interest, in whole or
in part, from the net cash proceeds of any public or private equity or debt
financing received by PolyVision at any time before maturity. In April 1997,
PolyVision entered into a second agreement with Alpine to borrow $811,000 to
fund its corporate borrowing requirements. Borrowings under this agreement were
also at Alpine's cost of borrowing such funds. PolyVision had historically
relied upon the support of Alpine to meet its working capital needs and
financial commitments.
In November 1998, all indebtedness of PolyVision due Alpine was exchanged
for shares of PolyVision common stock and Series B Preferred Stock and is no
longer outstanding.
EFFECTS OF INFLATION
Inflation remains at a low rate and is not expected to have a significant
effect on PolyVision in the near term.
20
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. The six-digit date
(YYMMDD) has become the standard for date representations and is embedded in a
multitude of computer programs and computer chips. Information Technology ("IT")
hardware, "embedded" technology, such as microprocessors, or software that is
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculations or system and mechanical
failures. PolyVision does not manufacture or sell products with embedded
technology.
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 75% complete and
should be completed in May 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 includes utilities, phone
service and all facility related services, is 75% complete; and
(d) Software vendors: PolyVision has upgraded most purchased software to
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 1, 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 April 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.
21
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
facility in France and Denmark. The cost of computer hardware/software for these
locations will approximate $250,000 and $80,000, respectively. PolyVision's
computer system in Belgium is being upgraded to adequately handle the Year 2000
compliance issues, at an approximate cost of $150,000. Management believes its
other computer systems are Year 2000 Compliant.
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 has not completed a contingency plan, however, it will by May
1999. Each manufacturing facility will incorporate Year 2000 into their existing
disaster contingency plan. The contingency plan 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset, or
liability measured at its fair value. SFAS No. 133 requires that changes in a
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. PolyVision will be required to adopt the new
statement in 2000. PolyVision has not yet quantified the impact of adopting SFAS
No. 133 and has not determined the method of adoption. However, SFAS No. 133
could increase the volatility in earnings and other comprehensive income.
Effective December 31, 1998, PolyVision adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires disclosures regarding PolyVision's
comprehensive income defined as the total of net income and all other non-owner
changes in equity, and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information, " which revises disclosure requirements
related to segment reporting. SFAS No. 130 and SFAS No. 131 require disclosure
only; therefore their adoption had no impact on PolyVision's financial position
or results of operations.
FOREIGN CURRENCY
With the purchase of Alliance, PolyVision has foreign-based operations,
primarily in Europe, which it anticipates will account for approximately 35% of
its sales during calendar 1999. In the conduct of its foreign operations,
PolyVision makes intercompany sales principally between its European
subsidiaries. These transactions are primarily denominated in Belgian and French
francs, the functional currencies of PolyVision's major European subsidiaries.
PolyVision does not have a significant amount of intercompany sales between its
European and U.S. businesses, and does not routinely transfer funds between its
domestic and foreign operations.
22
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 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.
ITEM 7A. 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 eight months ended December 31, 1998 by approximately
$50,000 and PolyVision's budgeted interest expense for the year ending
December 31, 1999 by approximately $450,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of PolyVision and its subsidiaries
are listed below:
Report of independent public accountants ................................. 24
Consolidated balance sheets as of December 31, 1998 and April 30,
1998 and 1997 ........................................................ 25
For the periods ended December 31, 1998 and April 30, 1998, 1997 and 1996:
Consolidated statements of operations ................................ 27
Consolidated statements of shareholders' equity (deficit) ............ 28
Consolidated statements of cash flows ................................ 30
Notes to consolidated financial statements ............................... 32
The following financial statement schedules of PolyVision and its
subsidiaries are included:
Consolidated Financial Statement Schedules:*
II - Valuation and Qualifying Accounts ............................... 52
----------
* Schedules other than those listed above are omitted because the conditions
requiring their filing do not exist or because the required information is
provided in the financial statements, including the notes thereto.
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PolyVision Corporation:
We have audited the accompanying consolidated balance sheets of PolyVision
Corporation (a New York corporation) and subsidiaries as of December 31, 1998
and April 30, 1998 and 1997 and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the eight months
ended December 31, 1998 and each of the three years in the period ended April
30, 1998. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PolyVision Corporation and
subsidiaries as of December 31, 1998 and April 30, 1998 and 1997 and the results
of their operations and their cash flows for the eight months ended December 31,
1998 and each of the three years in the period ended April 30, 1998 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
consolidated financial statements. The schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects, the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 18, 1999
24
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
[Enlarge/Download Table]
December 31, April 30,
1998 1998 1997
-------- -------------------
ASSETS
CURRENT ASSETS:
Cash $ 4,841 $ 291 $ 415
Accounts receivable, net of allowance for
doubtful accounts of $2,519, $795 and $1,013 17,883 7,267 7,020
Inventories 13,084 4,519 3,336
Costs and estimated earnings in excess of
billings on uncompleted contracts 838 719 690
Prepaid expenses and other current assets 1,532 453 146
Deferred taxes 942 -- --
-------- -------- --------
Total current assets 39,120 13,249 11,607
Property, plant and equipment, net 17,768 1,513 1,442
Goodwill, net 61,402 3,692 3,836
Deferred financing costs, net 3,661 -- --
Other assets 257 10 16
-------- -------- --------
TOTAL ASSETS $122,208 $ 18,464 $ 16,901
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term borrowings $ 235 $ 2,965 $ 2,298
Current maturities of long-term debt 363 240 980
Accounts payable 7,223 2,499 2,361
Accrued expenses 12,283 2,014 2,494
Billings in excess of costs and estimated
earnings on uncompleted contracts 503 379 259
-------- -------- --------
Total current liabilities 20,607 8,097 8,392
Long-term debt, less current maturities 74,511 160 --
Indebtedness to The Alpine Group, Inc. -- 7,028 6,382
Deferred taxes 5,418 -- --
Accrued dividends 178 5,643 4,099
Royalties payable -- 750 750
Excess of assets over purchase price of acquisition 256 261 268
Other noncurrent liabilities 317 -- --
-------- -------- --------
TOTAL LIABILITIES $101,287 $ 21,939 $ 19,891
-------- -------- --------
25
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(amounts in thousands, except share amounts)
[Enlarge/Download Table]
December 31, April 30,
1998 1998 1997
------------ --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Series A Preferred Stock, $.01 par value, at
$25 per share liquidation value;
1,500,000 shares authorized; 1,029,253
shares issued and outstanding at
April 30, 1998 and April 30, 1997 $ -- $ 25,731 $ 25,731
Series B Preferred Stock, $.01 par value, at $50 per
share liquidation value; 300,000 shares authorized;
256,951 shares issued and outstanding at
December 31, 1998 12,848 -- --
Series C Preferred Stock, $.01 par value, at $50 per
share liquidation value; 150,000 shares authorized;
100,000 shares issued and outstanding at
December 31, 1998 5,000 -- --
Common Stock, $.001 par value, 25,000,000
shares authorized; 14,092,750, 8,561,762 and
8,540,762 shares issued and outstanding
at December 31, 1998, April 30, 1998, and
April 30, 1997, respectively 14 9 9
Additional paid-in capital 70,750 38,668 38,618
Retained deficit (67,783) (67,883) (67,348)
Cumulative foreign currency translation adjustment 92 -- --
--------- --------- ---------
Total shareholders' equity (deficit) 20,921 (3,475) (2,990)
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) $ 122,208 $ 18,464 $ 16,901
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
26
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(amounts in thousands, except per share amounts)
[Enlarge/Download Table]
Eight months ended Twelve months ended
December 31, April 30,
------------------- ----------------------------------
1998 1998 1997 1996
NET SALES $ 33,877 $ 34,167 $ 32,233 $ 35,627
COST OF GOODS SOLD 23,360 24,286 24,755 27,863
-------- -------- -------- --------
GROSS PROFIT 10,517 9,881 7,478 7,764
Selling, general and administrative 6,939 8,344 9,814 9,978
Research and development 30 -- 1,158 2,886
Amortization of goodwill 248 145 145 145
Nonrecurring expenses 1,250 -- 650 --
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 2,050 1,392 (4,289) (5,245)
Interest expense, net (1,408) (839) (910) (516)
Other income (expense), net (201) 472 90 (8)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN ON THE
EARLY EXTINGUISHMENT OF DEBT 441 1,025 (5,109) (5,769)
INCOME TAXES 286 15 -- --
-------- -------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY GAIN ON THE
EARLY EXTINGUISHMENT OF DEBT 155 1,010 (5,109) (5,769)
EXTRAORDINARY GAIN ON THE EARLY
EXTINGUISHMENT OF DEBT 436 -- -- --
-------- -------- -------- --------
NET INCOME (LOSS) 591 1,010 (5,109) (5,769)
PREFERRED STOCK DIVIDENDS (179) (1,545) (2,059) (2,040)
ACCRETION OF PREFERRED STOCK (312) -- -- --
GAIN ON CONVERSION 19,252 -- -- --
-------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE
TO COMMON SHAREHOLDERS $ 19,352 $ (535) $ (7,168) $ (7,809)
======== ======== ======== ========
Net income (loss) per share of common stock:
Basic and Diluted
Income (loss) before extraordinary gain 0.02 0.12 (0.60) (0.69)
Extraordinary gain on early extinguishment
of debt 0.05 -- -- --
Preferred stock dividends (0.02) (0.18) (0.24) (0.25)
Accretion of preferred stock (0.03) -- -- --
Gain on conversion 2.02 -- -- --
-------- -------- -------- --------
Net income (loss) per basic and diluted share
of common stock $ 2.04 $ (0.06) $ (0.84) $ (0.94)
======== ======== ======== ========
Average common shares outstanding
Basic and Diluted 9,506 8,562 8,535 8,339
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(amounts in thousands, except share amounts)
[Enlarge/Download Table]
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
---------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------
Balance at April 30, 1995 1,020,076 $ 25,502 -- $ -- -- $ --
Dividends on preferred stock -- -- -- -- -- --
Share issued in connection with Union
agreement -- -- -- -- -- --
Issuance of preferred stock in lieu of
deferred interest 9,177 229 -- -- -- --
Compensation expense related to stock grants -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance at April 30, 1996 1,029,253 25,731 -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Compensation expense related to stock grants -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance at April 30, 1997 1,029,253 25,731 -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Compensation expense related to stock grants -- -- -- -- -- --
Net income -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance at April 30, 1998 1,029,253 25,731 -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Compensation expense related to stock grants -- -- -- -- -- --
Conversion of preferred stock, accrued
dividends and notes payable (1,029,253) (25,731) 247,951 12,398 -- --
Issuance of shares for investment advisory
services -- -- 9,000 450 -- --
Issuance of common stock warrants -- -- -- -- -- --
Issuance of preferred stock -- -- -- -- 100,000 4,688
Accretion of preferred stock -- -- -- -- -- 312
Foreign currency translation adjustment -- -- -- -- -- --
Net income -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance at December 31, 1998 -- $ -- 256,951 $ 12,848 100,000 $ 5,000
=================================================================================
28
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (continued)
(amounts in thousands, except share amounts)
[Enlarge/Download Table]
Cumulative
Foreign
Common Stock Additional Currency
------------------- Paid-In Retained Translation Comprehensive
Shares Amount Capital Deficit Adjustment Total Income (Loss)
----------------------------------------------------------------------------------
Balance at April 30, 1995 8,301,073 $ 8 $37,951 $(52,371) $-- $ 11,090 $ --
Dividends on preferred stock -- -- -- (2,040) -- (2,040) --
Shares issued in connection with Union
agreement 229,000 1 486 -- -- 487 --
Issuance of preferred stock in lieu of
deferred interest -- -- -- -- -- 229 --
Compensation expense related to stock
grants -- -- 87 -- -- 87 --
Net loss -- -- -- (5,769) -- (5,769) (5,769)
----------------------------------------------------------------------------------
Balance at April 30, 1996 8,530,073 9 38,524 (60,180) -- 4,084 (5,769)
=======
Dividends on preferred stock -- -- -- (2,059) -- (2,059) --
Compensation expense related to stock
grants 10,689 -- 94 -- -- 94 --
Net loss -- -- -- (5,109) -- (5,109) (5,109)
----------------------------------------------------------------------------------
Balance at April 30, 1997 8,540,762 9 38,618 (67,348) -- (2,990) (5,109)
=======
Dividends on preferred stock -- -- -- (1,545) -- (1,545) --
Compensation expense related to stock
grants 21,000 -- 50 -- -- 50 --
Net income -- -- -- 1,010 -- 1,010 1,010
----------------------------------------------------------------------------------
Balance at April 30, 1998 8,561,762 9 38,668 (67,883) -- (3,475) 1,010
=======
Dividends on preferred stock -- -- -- (179) -- (179) --
Compensation expense related to stock
grants 46,333 -- 9 -- -- 9 --
Conversion of preferred stock, accrued
dividends and notes payable 5,274,865 5 26,235 -- -- 12,907 --
Issuance of shares for investment advisory
services 209,790 -- 300 -- -- 750 --
Issuance of common stock warrants -- -- 5,226 -- -- 5,226 --
Issuance of preferred stock -- -- 312 -- -- 5,000 --
Accretion of preferred stock -- -- -- (312) -- -- --
Foreign currency translation adjustment -- -- -- -- 92 92 92
Net income -- -- -- 591 -- 591 591
----------------------------------------------------------------------------------
Balance at December 31, 1998 14,092,750 $14 $70,750 $(67,783) $92 $ 20,921 $ 683
==================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
29
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
[Enlarge/Download Table]
Eight months
ended Twelve months ended
December 31, April 30,
1998 1998 1997 1996
--------------- -------------------------------
Cash flows from operating activities:
Net income (loss) $ 591 $ 1,010 $(5,109) $(5,769)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operations:
Depreciation and amortization 781 382 498 1,156
Amortization of deferred financing costs and
accretion of debt discount 129 -- -- --
Deferred interest 260 87 571 229
Compensation expense for stock grants 9 50 94 574
Investment advisory service fee 750 -- -- --
Extraordinary gain on early extinguishment
of debt (436) -- -- --
Gain on sale of assets -- (307) -- --
Deferred income tax provision 194 -- -- --
Change in assets and liabilities, net of
effects from acquisition:
Accounts receivable 729 (247) 1,007 331
Inventories (601) (1,183) 399 1,294
Other current assets (2) (336) 332 31
Other assets 112 5 (16) --
Accounts payable and accrued expenses (1,170) (119) (689) (1,468)
Other liabilities 123 120 (244) (19)
-------- ------- ------- -------
Cash provided by (used for) operating activities 1,469 (538) (3,157) (3,641)
-------- ------- ------- -------
Cash flows from investing activities:
Acquisition, net of cash acquired (65,728) -- -- --
Purchase of fixed assets (586) (539) (435) (774)
Proceeds from sale of assets -- 307 35 --
-------- ------- ------- -------
Cash used for investing activities (66,314) (232) (400) (774)
-------- ------- ------- -------
Cash flows from financing activities:
Net short-term borrowings (repayments) -- 667 1,046 (127)
Long-term borrowings 71,565 920 -- 1,200
Repayments of long-term borrowings (3,365) (1,500) (220) (1,115)
Proceeds from issuance of preferred stock 5,000 -- -- --
Deferred financing costs (3,750) -- -- --
Advances from The Alpine Group, Inc. -- 559 2,476 --
Promissory note borrowings -- -- -- 3,335
Net repayments of receivable from affiliates -- -- -- 1,532
Other (14) -- -- --
-------- ------- ------- -------
Cash provided by financing activities 69,436 646 3,302 4,825
-------- ------- ------- -------
Effect of exchange rate changes on cash (41) -- -- --
Increase (decrease) in cash 4,550 (124) (255) 410
Cash at beginning of period 291 415 670 260
-------- ------- ------- -------
Cash at end of period $ 4,841 $ 291 $ 415 $ 670
======== ======= ======= =======
30
POLYVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(amounts in thousands)
[Enlarge/Download Table]
Eight months
ended Twelve months ended
December 31, April 30,
1998 1998 1997 1996
---------- -----------------------------
Supplemental disclosures:
Interest paid $ 609 $ 291 $ 245 $ 358
======= ======= ======= =======
Noncash investing and financing activities:
Conversion of The Alpine Group, Inc. indebtedness:
Preferred stock -- -- -- $ 229
======= ======= ======= =======
Acquisition of business:
Assets, net of cash acquired $95,231 -- -- --
Liabilities assumed 29,503 -- -- --
------- ------- ------- -------
Net cash paid $65,728 -- -- --
======= ======= ======= =======
Issuance of note payable for acquisition $ 8,000 -- -- --
======= ======= ======= =======
Shares issued in connection with Union agreement -- -- -- $ 487
======= ======= ======= =======
Investment advisory fee to The Alpine Group, Inc.
Issuance of common stock $ 300 -- -- --
Issuance of preferred stock 450 -- -- --
------- ------- ------- -------
$ 750 -- -- --
======= ======= ======= =======
Conversion of notes payable, accrued
dividends and preferred stock:
Preferred stock acquired $25,731 -- -- --
Issuance of preferred stock 12,398 -- -- --
Conversion of accrued dividends 5,643 -- -- --
Conversion of notes payable to The Alpine Group, Inc. 7,388 -- -- --
Issuance of common stock 7,126 -- -- --
The accompanying notes are an integral part of these consolidated
financial statements.
31
POLYVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Business
PolyVision Corporation (the "Company") operates through its wholly-owned
subsidiaries and operating units: Greensteel, Inc. ("Greensteel"), APV, Inc.
("APV"), Posterloid Corporation ("Posterloid"), Alliance America, Alliance
Europe, Aubecq and Pentagon (collectively "Alliance"). Through Greensteel, it
manufactures and sells custom-designed and engineered writing, projection and
other visual display surfaces, custom cabinets, and workstation and conference
center casework primarily for schools and offices. Through Posterloid, it
manufactures and sells menuboard display systems to the fast food and
convenience store industries, and merchandising displays used principally by
banks.
Through Alliance, it manufactures continuous coiled 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.
In May 1995, the Company (then named Information Display Technology, Inc.
("IDT") and consisting only of Greensteel) acquired by merger (the "Merger") the
information display group, consisting of Posterloid and APV, of The Alpine
Group, Inc. ("Alpine"). The Company issued approximately 7,400,000 shares of
Common Stock and 1,000,000 shares of its Series A Preferred Stock (liquidation
preference $25.00 per share) to Alpine in connection with the Merger, increasing
Alpine's beneficial stock ownership percentage in the Company to approximately
90% at that time. Alpine had previously acquired, in a separate stock
transaction, control of the Company's principal shareholder, Adience, Inc.
("Adience") (currently known as Premier Refractories Inc.), a manufacturer of
refractory products, which then owned approximately 80% of such outstanding
shares. Shortly following the Merger, in June 1995, Alpine distributed
approximately 73% of the outstanding shares of Common Stock as a one-time
dividend to its stockholders and retained approximately 17% of the shares of
Common Stock.
In April 1997, the Company discontinued its research and development efforts and
began to market its PolyVision display technology solely through third-party
licensing agreements. This decision resulted in a restructuring charge of
$650,000 in 1997 representing severance pay and benefits and the write-down of
assets to net realizable value. All of the costs were paid as of December 31,
1998.
2. Summary of Significant Accounting Policies
Change in Fiscal Year
Effective December 23, 1998, the Company changed its fiscal year-end from April
30 to December 31. The eight month transition period from May 1, 1998 to
December 31, 1998 ("transition period") precedes the start of the new fiscal
year. See Note 3 for a comparative consolidated income statement.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior period financial
statements to present them in a manner consistent with the current year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
32
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of trade receivables. Greensteel's concentration
of credit risk within the construction industry is somewhat mitigated by the
large number of customers comprising Greensteel's customer base. In addition, a
majority of Greensteel's revenues are derived from educational institutions in
the eastern half of the United States. Most public school projects require
performance bonds from general contractors that allow Greensteel to make bond
claims or file liens in the event of nonpayment for bonafide contract work
performed by Greensteel. Ultimately, the taxing authority of municipalities and
public school districts provides much of the funding for Greensteel's business.
Posterloid's revenues are derived from a large customer base of fast-food
restaurant chains and outfitters of municipal arenas and theater chains
throughout the United States. Retrofits of large chains may result in
significant customer concentrations of credit risk to Posterloid from time to
time, however, in management's opinion, no such concentration existed at
December 31, 1998.
Fair Value of Financial Instruments
The carrying amounts of long-term debt, including the Company's revolving credit
facility, approximate fair value based on the borrowing rates currently
available to the Company for loans with similar terms and average maturities.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out basis. Market is net realizable value for finished goods
and replacement cost for raw materials and work in process.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization are provided over the estimated useful lives of
the assets using the straight-line method. The estimated useful lives are as
follows:
Furniture and fixtures 5 - 10 years
Machinery and equipment 2 - 10 years
Buildings and improvements 2 - 40 years
Maintenance and repairs are charged to expense as incurred. Long-term
improvements are capitalized as additions to property, plant and equipment. Upon
retirement or other disposal, the asset cost and related accumulated
depreciation are removed from the accounts and the net amount, less any
proceeds, is charged or credited to income.
Goodwill
Goodwill in the accompanying consolidated balance sheets represents the excess
of cost over the fair value of net assets acquired related to the 1998
acquisition of Alliance and the previous acquisition of Posterloid and is being
amortized on a straight-line basis over 40 years. The Company reviews goodwill
to assess recoverability whenever events or changes in circumstances indicate
that its carrying value may not be recoverable. In performing such reviews, the
Company estimates the future cash flows expected to result from each entity. If
the sum of the expected future cash flows (undiscounted and without interest
charges) were to be less than the carrying amount, an impairment loss would be
recognized based on the difference between carrying values and estimated fair
market value. As a result of such reviews, no impairment loss has been
recognized. Accumulated amortization of goodwill was approximately $1,793,000,
$1,540,000 and $1,396,000 at December 31, 1998, April 30, 1998 and April 30,
1997, respectively.
Warranty Claims
Provisions for warranty claims are recorded based upon historical experience.
Workers' Compensation
The Company is partially self-insured for workers' compensation claims in the
U.S. The Company has accrued for its workers' compensation claims based on an
assessment of claims outstanding, as well as an estimate, based on experience,
of incurred workers' compensations claims which have not yet been reported.
33
Excess of Net Assets Over Purchase Price of Acquisition
Negative goodwill represents the excess of the fair value of net assets acquired
over the cost of IDT and is being amortized on a straight-line basis over forty
years (See Note 1).
Revenue Recognition
Greensteel's revenues are from sales of specific products and construction of
custom installations under contracts. Revenues from sales of specific products
are recorded when title transfers, which is typically when shipment occurs.
Revenues from contracts are recorded on the percentage-of-completion method of
accounting, measured on the basis of costs incurred to estimated total costs,
which approximates contract performance to date. Approximately 46%, 42% and 57%
of Greensteel's revenues and approximately 51%, 52% and 65% of the related costs
of revenues were from contracts for the periods ended December 31, 1998, April
30, 1998 and April 30, 1997, respectively. Provisions for losses on uncompleted
contracts are made in the period in which it is determined that a contract will
ultimately result in a loss.
Alliance and Posterloid recognize revenue from sales of products when title
transfers and all conditions of the sale are complete, which is typically when
shipment occurs.
Foreign Currency Translations
The financial statements of the Company's foreign subsidiaries are translated
into United States currency in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation." Assets and
liabilities are translated to United States dollars at period-end exchange
rates. Income and expense items are translated at average rates of exchange
prevailing during the period. Translation adjustments are accumulated as a
separate component of shareholders' equity. Gains and losses which result from
foreign currency transactions are included in the accompanying consolidated
statements of income.
Research and Development
Research and development costs are expensed as incurred.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in a derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company will be required to adopt the new statement in
2000. The Company has not yet quantified the impact of adopting SFAS No. 133 and
has not determined the method of adoption. However, the Company believes the
effect of adoption will not be material.
Effective December 31, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires disclosures regarding the Company's
comprehensive income defined as the total of net income and all other nonowner
changes in equity, and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information, " which revises disclosure requirements
related to segment reporting (See Note 18). SFAS No. 130 and SFAS No. 131
require disclosure only; therefore, their adoption had no impact on the
Company's financial position or results of operations.
Comprehensive Income
The Company reports comprehensive income in the Consolidated Statements of
Shareholders' Equity (Deficit). The foreign currency translation adjustment is
the sole component of other comprehensive income.
34
Earnings (Loss) Per Common Share
The computation, presentation and disclosure requirements for earnings per share
are presented in accordance with Financial Accounting Standards Board SFAS No.
128, "Earnings Per Share." Basic earnings per common share are computed by
dividing net income by the weighted average number of common shares outstanding
during each period. Diluted earnings per share assume exercise of outstanding
stock options, warrants and grants under the treasury stock method and the
conversion of convertible preferred stock (See Note 13) and the convertible
promissory note (See Note 9) into common stock during the periods outstanding.
As the Company had net losses before extraordinary gain applicable to common
shareholders for each of the periods presented, there would be no reconciling
dilutive securities, as all options, warrants and grants outstanding to purchase
common stock would have been antidilutive had they been exercised. In addition,
the convertible securities were antidilutive for the period ending December 31,
1998. The dilutive effect of options, grants, and warrants not included in
earnings per share because of the net loss before extraordinary gain applicable
to common shareholders for the eight months ended December 31, 1998 was
approximately 618,000 shares.
In accordance with generally accepted accounting principles, the Exchange
Transaction (See Note 7) was accounted for as a redemption of preferred stock at
a discount to the carrying value, and therefore, the excess of the carrying
amount of the preferred stock over the fair value of the consideration
transferred to the holders of the preferred stock was added to net income
attributable to common shareholders for the period ending December 31, 1998.
3. Change in Fiscal Year
Effective December 23, 1998, the Company changed its fiscal year-end from April
30 to December 31. The eight-month transition period of May 1, 1998 to December
31, 1998 precedes the start of the new fiscal year. The unaudited financial
information for the eight months ended December 31, 1997 is presented for
comparative purposes and includes any adjustments (consisting of normal,
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation (in thousands).
35
3. Change in Fiscal Year (continued)
Eight months ended
December 31,
------------------------
1998 1997
NET SALES $ 33,877 $ 22,860
COST OF GOODS SOLD 23,360 16,238
-------- --------
GROSS PROFIT 10,517 6,622
Selling, general and administrative 6,939 5,238
Research and development 30 --
Amortization of goodwill 248 96
Nonrecurring expenses 1,250 --
-------- --------
INCOME FROM OPERATIONS 2,050 1,288
Interest expense, net (1,408) (533)
Other income (expense), net (201) 342
-------- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN ON EARLY
EXTINGUISHMENT OF DEBT 441 1,097
INCOME TAXES 286 --
-------- --------
INCOME BEFORE EXTRAORDINARY GAIN
ON EARLY EXTINGUISHMENT OF DEBT 155 1,097
EXTRAORDINARY GAIN ON EARLY
EXTINGUISHMENT OF DEBT 436 --
-------- --------
NET INCOME 591 1,097
PREFERRED STOCK DIVIDENDS (179) 1,376
ACCRETION OF PREFERRED STOCK (312) --
GAIN ON CONVERSION 19,252 --
-------- --------
NET INCOME (LOSS) APPLICABLE
TO COMMON SHAREHOLDERS $ 19,352 $ (279)
======== ========
Net income (loss) per share of common stock:
Basic and Diluted
Income before extraordinary gain $ 0.02 $ 0.13
Extraordinary gain on early extinguishment
of debt 0.05 --
Preferred stock dividends (0.02) (0.16)
Accretion of preferred stock (0.03) --
Gain on conversion 2.02 --
-------- --------
Net income (loss) per basic and diluted share
of common stock $ 2.04 $ (0.03)
======== ========
Average common shares outstanding
Basic and Diluted 9,506 8,559
======== ========
36
4. Inventories
The components of inventories are as follows at December 31, 1998, April 30,
1998 and April 30, 1997 (in thousands):
December 31, April 30, April 30,
1998 1998 1997
------------------------------------------
Raw materials $ 7,035 $3,242 $2,679
Work in process 476 967 527
Finished goods 5,573 310 130
------- ------ ------
$13,084 $4,519 $3,336
======= ====== ======
5. Contracts in Progress
The status of contract costs on uncompleted construction contracts was as
follows at December 31, 1998 (in thousands):
[Enlarge/Download Table]
Costs and Estimated Billings in Excess of
Earnings in Excess of Costs and Estimated
Billings Earnings Total
--------------------------------------------------------
Costs and estimated earnings $ 5,022 $ 2,473 $7,495
Billings 4,184 2,976 7,160
------- ------- ------
$ 838 $ (503) $ 335
======= ======= ======
The status of contract costs on uncompleted construction contracts was as
follows at April 30, 1998 (in thousands):
[Enlarge/Download Table]
Costs and Estimated Billings in Excess of
Earnings in Excess of Costs and Estimated
Billings Earnings Total
--------------------------------------------------------
Costs and estimated earnings $ 4,400 $ 4,015 $8,415
Billings 3,681 4,394 8,075
------- ------- ------
$ 719 $ (379) $ 340
======= ======= ======
The status of contract costs on uncompleted construction contracts was as
follows at April 30, 1997 (in thousands):
[Enlarge/Download Table]
Costs and Estimated Billings in Excess of
Earnings in Excess of Costs and Estimated
Billings Earnings Total
--------------------------------------------------------
Costs and estimated earnings $ 2,779 $ 6,218 $8,997
Billings 2,089 6,477 8,566
------- ------- ------
$ 690 $ (259) $ 431
======= ======= ======
Accounts receivable at December 31, 1998, April 30, 1998 and April 30, 1997
included amounts billed but not yet paid by customers under retainage provisions
of approximately $1,122,000, $1,096,000 and $1,384,000, respectively. Such
amounts are generally due within one year.
37
6. Property, Plant and Equipment
Property, plant and equipment are as follows at December 31, 1998, April 30,
1998 and April 30, 1997 (in thousands):
December 31, April 30, April 30,
1998 1998 1997
------------------------------------------
Land and improvements $ 537 $ -- $ --
Buildings and improvements 8,149 604 1,507
Machinery and equipment 10,268 1,619 2,282
-------- ------- -------
18,954 2,223 3,789
Less accumulated depreciation and
amortization (1,186) (710) (2,347)
-------- ------- -------
Property, plant and equipment, net $ 17,768 $ 1,513 $ 1,442
======== ======= =======
Depreciation and amortization expense for the periods ended December 31, 1998
and April 30, 1998, 1997, and 1996 was $533, $382, $498 and $1,156,
respectively.
7. Acquisition of Alliance International Group
In November 1998, the Company acquired from Wind Point Partners III, L.P. and
certain minority stockholders all of the outstanding common stock of Alliance
for $75.8 million, consisting of $32.6 million in cash, $8.0 million in a 10%
convertible subordinated promissory note due 2007 and $35.2 million of
third-party debt which was assumed or refinanced by PolyVision. Following the
purchase, Alliance became a division of PolyVision.
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. The
purchase price was allocated based upon the fair values of the assets and
liabilities at the date of acquisition and is subject to adjustment. The excess
of the purchase price over the net assets acquired was approximately $57.9
million and is being amortized on a straight-line basis over 40 years.
In conjunction with the acquisition, the Company recorded a nonrecurring
restructuring charge of $500,000 related to the costs to be incurred at the
Company's existing manufacturing facilities in connection with the consolidation
of duplicative manufacturing capacity and administrative functions and a
$750,000 investment advisory fee to an affiliate. The $500,000 represented
approximately $160,000 of employee termination costs, $100,000 of unusable
inventory and supplies and $240,000 of facility costs. None of the costs have
been paid as of December 31, 1998.
In a related transaction (the "Exchange Transaction"), Alpine and another
preferred stockholder exchanged approximately $25.7 million in liquidation value
of its Series A Preferred Stock of the Company (plus accrued dividends) and
indebtedness of approximately $7.4 million due from the Company for
approximately 5.3 million shares of the Company's common stock and approximately
$12.4 million in liquidation value of its 9% Series B Convertible Preferred
Stock of the Company. As a result, Alpine owns directly approximately 48% of the
Company's current outstanding shares of Common Stock.
38
Pro Forma Financial Data (Unaudited)
Unaudited condensed pro forma results of operations, which give effect to the
Alliance acquisition as if the transaction occurred on May 1, 1997, 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 acquisition taken place at the beginning of the periods
presented or of future results of operations.
[Enlarge/Download Table]
Eight months
ended Year ended
December 31, 1998 April 30, 1998
------------------------------------------
Net sales $ 71,987 $ 94,834
Income (loss) from continuing operations before income taxes 875 (1,589)
Loss from continuing operations (283) (1,121)
Preferred stock dividends (1,072) (1,606)
Net loss applicable to common stock $ (1,355) $ (2,727)
======== ========
Net loss per basic and diluted share of common stock
Loss from continuing operations (0.02) (0.08)
Preferred stock dividend (0.08) (0.11)
-------- --------
Net loss per share of common stock $ (0.10) $ (0.19)
======== ========
The pro forma statements above do not include the nonrecurring charges or the
extraordinary gain for the eight months ended December 31, 1998. In addition,
the earnings per share calculation excludes the one time gain as a result of the
exchange transaction and the accretion of the preferred stock for the period
ended December 31, 1998.
8. Accrued Expenses
Accrued expenses are as follows for the periods indicated below (in thousands):
December 31, April 30, April 30,
1998 1998 1997
------------------------------------------
Accrued wages, salaries and
employee benefits $ 5,324 $1,633 $1,268
Accrued taxes 1,331 -- --
Accrued interest 511 -- --
Accrued warranty 758 -- --
Accrued professional fees 612 -- --
Other accrued expenses 3,247 381 576
Restructuring expenses 500 -- 650
------- ------ ------
$12,283 $2,014 $2,494
======= ====== ======
39
9. Debt
Debt consists of the following at December 31, 1998, April 30, 1998 and April
30, 1997 (in thousands):
[Download Table]
December 31, April 30, April 30,
1998 1998 1997
------------------------------------------
Revolving credit facility $ 1,557 (a) $ 2,965 (b) $ 2,298 (b)
Term Loan A (a) 24,873 -- --
Term Loan B (a) 20,000 -- --
Term loan (b) -- 400 980
Subordinated note (a) 25,000 -- --
Subordinated promissory note (a) 8,000 -- --
Other 831 -- --
-------- ------- -------
Total debt 80,261 3,365 3,278
Less short-term borrowings and
current maturities (598) (3,205) (3,278)
Less warrant valuation (5,152) -- --
-------- ------- -------
Long-term debt $ 74,511 $ 160 $ --
======== ======= =======
(a) In connection with the November 1998 acquisition of Alliance and the
simultaneous refinancing of PolyVision's already existing indebtedness,
the Company entered into a $60.0 million senior secured bank loan
consisting of a $9.5 million revolving credit facility in the U.S., a $5.5
million revolving credit facility in Europe, a $25.0 million term loan A
facility of which $4.4 million was loaned in the U.S. and $20.6 million
was loaned in Europe, and a $20.0 million term loan B facility (together
"Senior Credit Facilities").
Advances under the revolving credit facility in the U.S. may not at any
time exceed an amount equal to the lesser of $9.5 million or the sum of
85% of eligible accounts receivable and 60% of eligible inventory and in
Europe may not exceed an amount equal to the lesser of $5.5 million or the
sum of 85% of eligible accounts receivable and 50% of eligible inventory.
Interest is payable at least quarterly based upon either the prime rate of
interest or the prevailing LIBOR rate plus an applicable spread. The
spread in effect is dependent upon the Company's ratio of consolidated
indebtedness to EBITDA. As of December 31, 1998, the spread was 1.75% on
the prime rate and 3.0% on the LIBOR rate (6.875%). The facility
terminates on November 20, 2004. At December 31, 1998, $1.6 million of
borrowings were outstanding under the European portion of the revolving
credit facilities and no amounts were outstanding under the U.S. portion
of the facilities.
The term loan A facility is repayable quarterly in varying amounts with
such principal installments weighted so that the majority of payments do
not come due until the later years. Interest is also payable at least
quarterly based upon either the prime rate of interest or the prevailing
LIBOR rate plus an applicable spread. The spread in effect is dependent
upon the Company's ratio of consolidated indebtedness to EBITDA. As of
December 31, 1998, the spread was 1.75% on the prime rate and 3.0% on the
LIBOR rate. The term loan A facility terminates on October 31, 2004.
The term loan B facility is repayable quarterly in varying amounts with
such principal installments weighted so that the majority of payments do
not come due until the later years. Interest is also payable at least
quarterly based upon either the prime rate of interest or the prevailing
LIBOR rate plus an applicable spread. The spread in effect is dependent
upon the Company's ratio of consolidated indebtedness to EBITDA. As of
December 31, 1998, the spread was 2.0% on the prime rate and 3.25% on the
LIBOR rate. The term loan B facility terminates on October 31, 2005. As of
December 31, 1998, the weighted-average interest rate on the term loan
facilities was approximately 8.35%.
40
The Senior Credit Facilities are secured by liens and security interests
on substantially all of the Company's real and personal property,
including the assets of its subsidiaries and a pledge of the outstanding
stock of such subsidiaries, and by cross-guarantees by the Company and its
subsidiaries. The Company must comply with certain nonfinancial and
financial covenants including, among other things, a maximum ratio of
total indebtedness to EBITDA, a minimum ratio of EBITDA to interest
expense, a minimum ratio of EBITDA to fixed charges, and a maximum amount
of annual capital expenditures. The Company is also prohibited from paying
any dividends on its common stock without the lenders' prior written
consent and from paying dividends on its preferred stock until such time
as it reduces its ratio of total debt to EBITDA to certain prescribed
levels.
In addition, the Company entered into a $25.0 million senior subordinated
credit facility with interest payable quarterly at 12.5%. This facility
was refinanced in December 1998. This facility matures and is payable on
December 30, 2006. In connection with the senior subordinated credit
facility, the Company issued detachable warrants to purchase up to
2,986,467 shares of the Company's common stock at $.001 per share. The
holder may exercise the warrants at any time during their ten-year term.
The Company has valued these warrants at $1.75 per share and is amortizing
them to interest expense over the life of the facility.
The Company also entered into an $8.0 million convertible subordinated
promissory note with the previous shareholders of Alliance. Interest
accrues on this note at a rate of 10% per year. All accrued interest and
the principal amount are due on November 20, 2007. In addition, the note
may be converted at any time after May 20, 1999 into shares of the
Company's common stock at a conversion price of $3.00 per share. However,
if the note has not been repaid by November 20, 2004, the conversion price
will be reduced by $.25 to $2.75 per share, and will be reduced by another
$.25 per share on each anniversary thereafter to a final conversion price
of $2.00 per share on November 20, 2007.
(b) On April 25, 1996, Greensteel, as borrower, and the Company, as guarantor,
entered into a $5,000,000 Master Credit Agreement (the "Agreement") to
provide financing for Greensteel's general working capital requirements.
The Agreement provided for a revolving credit facility of up to $3,800,000
based upon eligible accounts receivable and inventory as defined at the
prime rate plus 1% and a $1,200,000 term loan payable in equal monthly
installments of $20,000 with interest at prime rate plus 1-1/2% beginning
June 1, 1996 through August 1, 1997, with the remaining unpaid principal
amount of $900,000 due on August 31, 1997.
On July 23, 1997, the agreement was amended to provide for a revolving
credit line of up to $3,800,000, based upon eligible accounts receivable
and inventory, at the prime rate plus a margin based on certain
performance ratios and a $920,000 term loan payable in 17 consecutive
equal monthly installments of $20,000 with interest at the prime rate plus
a margin based on certain performance ratios with the remaining unpaid
principal amount of $580,000 due on May 31, 1999. On June 25, 1998, the
revolving credit line was increased to $4,250,000. These loans were
refinanced in November 1998 when the Company acquired Alliance.
The aggregate maturities of long-term debt for the five years subsequent to
December 31, 1998 are as follows:
Year ending
December 31, Amount
---------------------------------------------
1999 $ 598
2000 2,249
2001 5,017
2002 5,663
2003 6,159
Thereafter 60,575
-------
$80,261
=======
41
10. Employee Benefits
Defined Contribution Plans
Greensteel maintains a 401(k) savings plan which covers substantially all
nonbargaining employees of Greensteel and Posterloid who meet minimum age and
service requirements. The Company matches employee contributions of up to 6% of
compensation at a rate of 50%. Amounts charged against income totaled $64,000,
$101,000, $164,000 and $179,000 for the eight-month period ending December 31,
1998 and the fiscal years ended April 30, 1998, 1997 and 1996, respectively.
Alliance maintains a 401(k) savings plan for its domestic employees who meet
minimum age and service requirements. The Company matches employee contributions
equal to 50% of the participant's contribution not to exceed $1,000 annually for
each union participant and $1,050 annually for each nonunion participant.
Contributions vest to the participants at a rate of 20% per year. The amount
expensed under this plan since the acquisition of Alliance was $5,000. In
addition, Alliance also has the authority to contribute profit sharing payments
for the accounts of eligible employees but did not elect to make any such
contributions in 1998.
Alliance's European operation maintains a defined contribution pension plan
covering all European employees. Contributions to the plan are paid by both the
Company and the employees. The Company's contributions are allocated on the
basis of gross salaries. Pension expense since the acquisition of Alliance
amounted to $31,000 for the eight months ended December 31, 1998.
Union Agreement
On February 28, 1996, Greensteel entered into a new three-year labor agreement
with the local bargaining unit of the Carpenters Union at its Dixonville,
Pennsylvania, facility (the "Union"), whose members voted on that date to accept
the new labor agreement. The labor agreement provides for a working partnership
between Greensteel's management and the Union whereby bargaining unit members
received an aggregate of 229,000 shares of the Company's common stock and will
share in 50% of the excess of "targeted gross profit" generated at the
Dixonville facility. In exchange for such equity participation and the
understanding of the importance of reducing Greensteel cost structure to the
future growth of the business, union members agreed to an approximate 14%
reduction in direct wages and a 6% reduction in benefits. The labor agreement
further provided for the termination of the bargaining employees' defined
benefit pension plan with any excess funding to be distributed to its
participants. The issuance of common stock and the termination of the pension
plan resulted in a fourth quarter charge of approximately $700,000 in the year
ended April 30, 1996. Subsequent to year-end, Greensteel and the Carpenters
Union ratified a new three-year collective bargaining agreement.
Alliance is also committed to a three-year labor agreement with the local
bargaining unit of the Steel Workers of America Union at its Okmulgee, Oklahoma,
facility. A renewed labor agreement with the Steel Workers of America was signed
July 17, 1998 and expires April 30, 2001. In Alliance's European operations,
most of the employees are also members of various known national unions within
each country.
Defined Benefit Pension Plan
Greensteel previously maintained a defined benefit pension plan covering
substantially all hourly employees. The plan provided pension benefits based on
the employee's years of service. Greensteel's funding policy was to make annual
contributions to the extent deductible for federal income tax purposes. In
connection with the Union agreement noted above and after required notice to
participants, benefits under the plan were curtailed and ceased to accrue on
March 31, 1996. The Company applied for and received approval for termination of
the plan from the Pension Benefit Guaranty Corporation and the Internal Revenue
Service. On March 10, 1997, benefits were paid to each plan participant in the
form of a lump-sum distribution based on each participant's accrued benefit and
the plan was terminated. During the fiscal year ended April 30, 1998, the
Company incurred a settlement loss under the defined benefit pension plan of
approximately $260,000 related to a change in the method used to calculate the
lump-sum distribution of the terminated defined benefit pension plan.
42
Certain union employees of Greensteel are covered by multiemployer defined
benefit retirement plans. These employees perform services for the Company on
various contract installation projects and are employed only during the
installation period. Expenses relating to these plans amounted to $82,000,
$79,000, $68,000 and $97,000 for the periods ended December 31, 1998 and April
30, 1998, 1997, and 1996, respectively.
11. Stock Option and Stock Grant Plans
Stock option transactions during the periods ended December 31, 1998, April 30,
1998, April 30, 1997 and April 30, 1996 were as follows:
[Enlarge/Download Table]
April 30,
December 31, ----------------------------------------
1998 1998 1997 1996
------------------------------------------------------
Beginning options outstanding 417,500 297,500 400,000 --
Options granted 721,000 120,000 185,000 400,000
Options canceled (97,500) -- (287,500) --
---------- -------- -------- -------
Ending options outstanding 1,041,000 417,500 297,500 400,000
Ending options available for
grant 234,000 282,500 402,500 300,000
Option price ranges per share:
Granted $1.25 - 1.50 $ 1.00 $ 0.50 $ 3.86
Canceled 1.25 - 3.86 -- 0.50 - 3.86 --
Weighted average exercise price:
Granted $ 1.45 $ 1.00 $ 0.50 $ 3.86
Canceled 3.58 -- 2.11 --
Information with respect to stock-based compensation plan stock options
outstanding and exercisable at December 31, 1998 is as follows:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted
Average Weighted
Number of Weighted Average Contractual Number of Average
Exercise Prices Shares Exercise Price Life (Years) Shares Exercise Price
--------------- ----------- ---------------- ------------- --------- ----------------
$1.00 225,000 $1.00 7.95 166,250 $1.00
1.25 141,000 1.25 9.33 -- --
1.50 575,000 1.50 9.92 -- --
3.86 100,000 3.86 6.75 75,000 3.86
On November 20, 1998, the Company granted options to purchase an aggregate of
575,000 shares to key employees at an exercise price of $1.50 per share. These
shares were to be issued out of a stock option plan which was approved by the
board on January 26, 1999. Under this plan, 1,000,000 shares are reserved for
grants to key personnel, including the 575,000 shares granted above.
On May 24, 1995, the Company adopted a stock option plan under which 400,000
shares are reserved for grants to key personnel. 34,000 options are available
for grant under this plan at December 31, 1998.
During the year ended April 30, 1996, the Board of Directors adopted the 1995
Directors Stock Option Plan under which 300,000 shares are reserved for grants
to directors of the Company. At December 31, 1998, 200,000 options are available
for grant under this plan.
43
During the year ended April 30, 1996, the Board of Directors also adopted the
1995 Directors Stock Grant Plan. The Company reserved for issuance 200,000
shares of the Company's common stock for the stock grant plans. In addition, the
Board of Directors approved stock grants of an aggregate of 100,000 shares for
directors and key employees. During the periods ended December 31, 1998, April
30, 1998 and April 30, 1997, 46,333, 21,000 and 10,689 shares, respectively,
were issued. For the periods ending December 31, 1998 and April 30, 1998 and
1997, charges relating to the current year vesting of these grants were $9,000,
$50,000 and $94,000 respectively. These grants and options typically vest over
three to five years.
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in 1997,
and, if fully adopted, changed the method for recognition of cost on stock-based
plans similar to those of the Company. In accordance with the provisions of SFAS
No. 123, the Company elected to continue to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock-based compensation plans (including options issued
under the Plans). Had the Company elected to recognize compensation expense
based on the fair value at the grant date for awards under its stock-based
compensation plans as prescribed by SFAS No. 123, the pro forma net income
(loss) for December 31, 1998 and April 30, 1998, 1997, and 1996 would have been:
[Enlarge/Download Table]
April 30,
December 31, ----------------------------------------------------
1998 1998 1997 1996
--------------------------------------------------------------------------
Net income (loss) $524,000 $947,000 $(5,211,000) $(5,862,000)
Basic and diluted net income
(loss) per share of common
stock $ 2.03 $ (0.07) $ (0.85) $ (0.95)
The effects of applying SFAS No. 123 in the pro forma disclosure are not
necessarily indicative of future amounts, since the estimated fair value of
common stock options is amortized to expense over the vesting period and
additional options may be granted in future years. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for the periods
ending December 31, 1998 and April 30, 1998, 1997, and 1996, respectively:
dividend yield of 0% for each year; expected volatility of 50% for December 31,
1998 and 20% for each previous year; risk-free interest rate of 5.61% for
December 31, 1998, 6.13% for April 30, 1998, 6.44% for April 30, 1996; and
expected life of five years for each year. The weighted-average fair value of
options granted during the eight months ended December 31, 1998 was $1.10.
12. Royalties Payable
Connecticut Innovations, Inc. ("CII") advanced amounts to APV pursuant to a
Development Agreement to finance a portion of APV's product development costs.
The Development Agreement provided for a minimum annual royalty of $75,000 per
annum or 5% of sponsored product sales up to a cumulative royalty of $3,250,000.
Thereafter, a royalty of 1/2% on sponsored product sales was payable. The
Development Agreement contained covenants relating to technology licensing of
the sponsored product. In addition, the Development Agreement provided for an
assignment of and collateral interest in the technology, including all patents
and know-how. Included in the accompanying consolidated balance sheets as of
April 30, 1998 and 1997 is a $750,000 liability representing the aggregate
amount advanced by CII under the terms of the agreement.
With the discontinuance of the operations of APV as of April 30, 1997, the
Company entered into an agreement dated June 9, 1998, that terminated the
royalty arrangement with CII, since no product was ever developed. The agreement
provided for the Company to deliver 9,509 registered shares of Alpine common
stock and a payment of $125,000 in the form of a promissory note in exchange for
the extinguishment of the $750,000 liability currently reflected on the
Company's consolidated balance sheet. The purchase of the Alpine common stock
was financed by loans from Alpine. In connection with this agreement, the
Company recorded an extraordinary gain of $436,000. The current portion,
$62,500, is due July 1999.
44
13. Preferred Stock
Series A Preferred Stock
The Company is authorized to issue up to 1,500,000 shares of Series A Preferred
Stock ("Series A Preferred"). The Series A Preferred earns quarterly cash
dividends at an annual rate of $2.00 per share and has priority as to dividends
over the common stock. In the case of the voluntary or involuntary liquidation
or dissolution of the Company, the holders of the Series A Preferred will be
entitled to receive a liquidation price of $25.00 per share ($25,731,000
aggregate liquidation value at April 30, 1998 and April 30, 1997), plus any
accrued and unpaid dividends. The holders of the Series A Preferred have no
voting rights, except as required by New York law as noted below. Effective
February 1, 1998, the Company amended its Certificate of Incorporation to cease
the accrual of dividends on the Series A Preferred Stock. As such, the
accompanying balance sheet and income statement for the year ended April 30,
1998 reflected nine months of accrued dividends.
Effective April 30, 1996, the Company agreed to issue an additional 9,177 shares
of Series A Preferred Stock to Alpine in lieu of payment of deferred interest in
the amount of $229,425 (See Note 15).
As part of the Exchange Transaction (See Note 7), all outstanding Series A
Preferred was retired.
Series B Cumulative Convertible Preferred Stock
As part of the Exchange Transaction (See Note 7), the Company issued to Alpine
and one other holder approximately 248,000 shares of its Series B Cumulative
Convertible Preferred Stock ("Series B Preferred"). In addition, the Company
issued 9,000 shares of the Series B Preferred valued at $450,000 to Alpine as
compensation for structuring and assisting the Company in completing the
acquisition of Alliance (See Note 7). The Series B Preferred earns cumulative
cash dividends at an annual rate of 9% and has priority as to dividends over the
common stock. In the case of the voluntary or involuntary liquidation or
dissolution of the Company, the holders of the Series B Preferred will be
entitled to receive a liquidation price of $50.00 per share ($12,848,000
aggregate liquidation value at December 31, 1998) plus any accrued and unpaid
dividends. These dividends are prohibited through July 2001 under the terms of
the Company's senior subordinated credit facility and thereafter are restricted
in amount and can only be paid if the Company is in compliance with specified
financial ratios. These shares have no voting rights, except for certain
significant business transactions of the Company, and have customary
antidilution provisions for stock dividends, stock splits, share combinations,
recapitalizations and other capital adjustments.
The Series B Preferred may be converted into 4,283,000 shares of common stock at
any time at a conversion price of $3.00 per share.
Series C Cumulative Convertible Preferred Stock
In November 1998, the Company sold to Alpine, for $5.0 million, 100,000 shares
of its Series C Cumulative Convertible Preferred Stock ("Series C Preferred"),
the proceeds of which were used to finance a portion of the purchase price for
Alliance. The Series C Preferred may be converted at any time into 2,500,000
shares of common stock at a conversion price of $2.00 per share. Other than the
conversion price, the terms of the Series C Preferred are identical to the terms
of the Series B Preferred and rank equally with respect to distribution rights
upon the liquidation, dissolution or winding-up of the affairs of the Company
and with respect to dividend rights.
14. Income Taxes
The Company recognizes income taxes in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 utilizes the
liability method, and deferred taxes are determined based on the estimated
future tax effects of differences between the financial statement and tax bases
of assets and liabilities given the provisions of enacted tax laws. The Company
and its subsidiaries will file a consolidated federal income tax return in the
U.S. and will file foreign tax returns required in each of the European
countries where it maintains a presence.
45
The sources of income (loss) before income taxes and extraordinary gain for the
eight months ending December 31, 1998 and the years ended April 30, 1998, April
30, 1997 and April 30, 1996 were as follows (in thousands):
[Enlarge/Download Table]
April 30,
December 31, --------------------------------------
1998 1998 1997 1996
-----------------------------------------------------
United States $(204) $1,025 $(5,109) $(5,769)
Foreign 645 -- -- --
-----------------------------------------------------
Income (loss) before income
taxes and extraordinary gain $ 441 $1,025 $(5,109) $(5,769)
=====================================================
The provision for income taxes by location of the taxing jurisdiction for the
periods ending December 31, 1998 and April 30, 1998, 1997, and 1996 consisted of
the following (in thousands):
April 30,
December 31, -------------------------------------
1998 1998 1997 1996
----------------------------------------------------
Current:
United States:
Federal $ -- $15 -- --
State -- -- -- --
Foreign 92 -- -- --
----------------------------------------------------
92 15 -- --
Deferred:
United States:
Federal -- -- -- --
State -- -- -- --
Foreign 194 -- -- --
----------------------------------------------------
194 -- -- --
----------------------------------------------------
Provision for income
taxes $286 $15 -- --
====================================================
The differences between the Company's federal effective tax rate and the
statutory tax rate for the periods ended December 31, 1998 and April 30, 1998,
1997, and 1996 arises from the following:
[Enlarge/Download Table]
April 30,
December 31, ------------------------------
1998 1998 1997 1996
---------------------------------------------
Federal statutory rate 35% (35%) (35%) (35%)
Increase resulting from:
Goodwill amortization not deductible 19 1 1 1
Increase (reduction) in valuation
allowance (60) 34 34 34
Alternative minimum tax -- 1 -- --
Non-deductible expense 29 -- -- --
Deemed dividend 28 -- -- --
Difference in foreign and U.S. statutory
rate 12 -- -- --
--------------------------------------------
63% 1% 0% 0%
============================================
46
The tax effect of the primary temporary differences giving rise to the Company's
consolidated deferred tax assets and liabilities at December 31, 1998, April 30,
1998 and April 30, 1997 are as follows (in thousands):
[Enlarge/Download Table]
December 31, 1998 April 30, 1998 April 30, 1997
Current Long-Term Current Long-Term Current Long-Term
Asset Asset Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability) (Liability) (Liability
---------------------------------------------------------------------------------------------------
Bad debt allowancee $ 372 $ -- $ 334 $ -- $ 425 $ --
Inventory related (60) -- 132 -- 242 --
Accrued payroll
and related costs 1,333 75 293 -- 336 --
Fixed assets -- (3,893) -- 320 -- 445
NOL carryforwards -- 9,571 -- 11,324 -- 11,654
Other -- (1,061) 72 -- 399 --
Valuation allowance (703) (10,110) (831) (11,644) (1,402) (12,099)
---------------------------------------------------------------------------------------------------
$ 942 $ (5,418) $ -- $ -- $ -- $ --
===================================================================================================
As reflected in the preceding table, the Company established a valuation
allowance of approximately $10,813,000, $12,475,000 and $13,501,000 as of
December 31, 1998, April 30, 1998 and April 30, 1997, respectively, due to
uncertainty regarding the realizability of certain deferred tax assets. The
valuation primarily relates to operating loss carryforwards, which are available
to reduce future taxable income of certain entities.
In connection with the acquisition of Alliance, the U.S. entity had unused
federal net operating loss carryforwards of approximately $3,298,000, the use of
which is restricted as a result of previous ownership changes of Alliance under
Section 382 of the Internal Revenue Code.
At December 31, 1998, APV had unused federal net operating loss carryforwards of
approximately $7,819,000 that may be used to offset future taxable income. Such
carryforwards expire in various amounts from fiscal 2003 to 2009. The use of
these carryforwards may be restricted as a result of ownership changes under
Section 382 of the Internal Revenue Code and other limitations.
At December 31, 1998, APV and Posterloid had additional unused federal net
operating loss carryforwards of approximately $11,498,000 and $1,961,000,
respectively, that may be used to offset future taxable income. These
carryforwards expire in various amounts from fiscal 2009 through 2012. The use
of these carryforwards may also be restricted as a result of ownership changes
under Section 382 of the Internal Revenue Code and other limitations.
As of December 31, 1995 and December 31, 1998, IDT, on a separate-company basis,
had net operating loss carryforwards for federal income tax purposes of
approximately $2,109,000, which will expire in 2008 and 2009. Under Internal
Revenue Code Section 382 and other limitations, the use of the loss
carryforwards will be limited as a result of the December 21, 1994 ownership
change.
As a result of the transaction described further in Note 1, Posterloid's and
APV's loss carryforwards may not be available to Posterloid, APV, Greensteel or
Alliance. Based on the Company's history of prior operating losses, no assurance
can be given that sufficient taxable income will be generated for utilization of
any net operating loss carryforwards and reversal of temporary differences.
Thus, the Company did not record any current or deferred federal income tax
expense during the periods ended December 31, 1998 and April 30, 1997 and 1996
due to losses incurred during such periods and the availability of net operating
loss carryforwards. For the year ended April 30, 1998, the Company recorded a
tax expense of $15,000 for federal alternative minimum income tax.
15. Related-Party Transactions
As part of the acquisition of Alliance, the Company entered into the Exchange
Transaction with Alpine in November 1998 (See Note 7). Alpine exchanged
approximately $25.2 million in liquidation value of its Series A
47
Preferred (plus accrued dividends) and indebtedness of approximately $7.4
million due from the Company for approximately 5.2 million shares of the
Company's common stock and approximately $12.3 million in liquidation value of
its 9% Series B Preferred. In addition, the Company issued to Alpine 209,790
shares of its common stock and 9,000 shares of its Series B Preferred as
compensation for structuring and assisting the Company in its acquisition of
Alliance. The Company has recognized a $750,000 charge, included in nonrecurring
expenses, for this compensation against its eight-month income as of December
31, 1998. As a result of these transactions, Alpine owns approximately 48% of
the Company's common stock.
On May 24, 1995, the Company entered into an agreement with Alpine, pursuant to
which the Company had the right to borrow prior to May 24, 1997 up to $5,000,000
from Alpine to be used by the Company to fund its working capital needs,
including research, development and commercialization activities in connection
with APV's PolyVision-TM-display technology. Borrowings under the agreement were
unsecured with interest at market rate, reflecting Alpine's cost of borrowing
such funds. For the year ended April 30, 1996, Alpine agreed to a modification
of terms pursuant to which the Company issued 9,177 shares of the Company's
Series A Preferred Stock to Alpine in lieu of the addition of approximately
$229,000 of interest to the outstanding principal amount at April 30, 1996. All
amounts were canceled in the Exchange Transaction (See Note 7).
The Company also executed a promissory note to Alpine to borrow an additional
$2,028,000, including accrued interest, to fund the Company's corporate
borrowing requirements. Borrowings under the agreement are at Alpine's cost of
borrowing such funds (8-1/2 % at April 30, 1998). As of April 30, 1998, the
Company owed Alpine a total of $7,028,000 under this note and the foregoing
agreement, including accrued interest of $658,000.
The Company's obligations to Alpine are comprised of accrued dividends and
indebtedness, which totaled $12,671,000 as of April 30, 1998. The accrued
dividends and indebtedness were converted to preferred and common stock in the
Exchange Transaction (See Note 7).
16. Commitments and Contingencies
In 1994, Reliance Insurance Company of New York (the "Plaintiff") commenced an
action in the Supreme Court of the State of New York, County of Suffolk, against
several defendants, including the Company, seeking money damages based on the
purported sale and delivery by defendants of some 860 insulated metal curtain
wall panels manufactured by the Company in 1987 and of an additional 520
replacement panels in 1991 and 1992. Plaintiff has alleged that such panels were
defective in their design and manufacture. Among the theories of liability
advanced by Plaintiff are breach of contract, breach of express warranty and
implied warranty. Pursuant to orders of the Court, the causes of action based on
the 1987 transaction were dismissed on statute of limitation grounds. However,
Plaintiff has been granted leave to serve an amended complaint to allege, among
other things, a claim under New Jersey Consumer Fraud Act (the "NJCFA") (which
might permit treble damages), while preserving the right of the defendants,
including the Company, to challenge the applicability of the NJCFA. The amended
complaint was served during April 1997, and Plaintiff currently seeks $1,405,000
in damages, from all defendants, as well as treble damages under NJCFA. The
Company has served its answer to the amended complaint substantially denying
Plaintiff's allegations of defective design and manufacture and pleading
affirmative defenses, as well as commencing third party claims against an
adhesives supplier whose product was utilized by the Company in fabricating the
subject panels. As of the date hereof, discovery is continuing but it is
premature to render an estimate of the outcome of the litigation.
48
The Company is involved in other various matters of litigation incidental to the
normal conduct of its business. In management's opinion, the disposition of that
litigation will not have a material adverse impact on the Company.
Approximately 80% of the Company's hourly labor force is covered by collective
bargaining agreements. Subsequent to December 31, 1998, the Company ratified a
new three-year collective bargaining agreement representing approximately 25% of
the total hourly labor force. None of the Company's collective bargaining
agreements will expire within one year.
Certain executives of the Company have employment contracts which generally
provide minimum base salaries, cash bonuses based on the Company's achievement
of certain performance objectives, stock options, and certain retirement and
other employee benefits. Further, in the event of termination or voluntary
resignation for "good reason" accompanied by a change in control of PolyVision,
as defined, such employment agreements provide for severance payments not in
excess of two times annual cash compensation and bonus and the continuation for
stipulated periods of other benefits, as defined.
17. Lease Commitments
The Company and its subsidiaries lease property, plant and equipment under a
number of leases extending for varying periods of time. Operating lease rental
expense amounted to approximately $381,000, $569,000, $569,000, and $664,000 for
the periods ended December 31, 1998 and April 30, 1998, 1997, and 1996,
respectively.
Minimum rental commitments as of December 31, 1998, under noncancelable leases
with terms of more than one year, are as follows:
Year ending
December 31, Amount
----------------------------------------------------------------
1999 $1,010,000
2000 864,000
2001 795,000
2002 408,000
2003 34,000
----------
Total $3,111,000
==========
18. 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. Domestic
ceramicsteel surfaces are produced through Alliance America and foreign
ceramicsteel surfaces are produced through Alliance Europe. Included in other
are corporate expenses and expenses associated with the Company's information
display technology during the years ended April 30, 1997 and April 30, 1996. The
majority of goodwill associated with the purchase of Alliance has been
preliminarily allocated to Alliance America. The accounting policies of the
segments are the same as described in the summary of significant accounting
policies. The Company evaluates segment performance based on income from
operations. Sales for each segment are based on location of the third-party
customer. All significant intercompany transactions between segments have been
eliminated. The Company'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.
49
The following provides information about each business segment for December 31
1998 and April 30, 1998, 1997, and 1996 (in thousands):
[Enlarge/Download Table]
Eight months ended December 31, 1998
Alliance Alliance
Greensteel Posterloid America Europe Other Consolidated
----------------------------------------------------------------------------------
Net sales: $23,058 $4,202 $ 2,792 $ 3,825 $ -- $ 33,877
Operating income (loss) 2,032 285 423 902 (1,592) 2,050
Depreciation and
amortization 143 148 317 173 -- 781
Capital expenditures 102 73 24 387 -- 586
Identifiable assets 13,891 6,021 77,248 21,550 3,498 122,208
[Download Table]
Twelve months ended April 30, 1998
Greensteel Posterloid Other Consolidated
----------------------------------------------------------
Net sales: $27,813 $6,354 $ -- $34,167
Operating income (loss) 1,275 552 (435) 1,392
Depreciation and
amortization 169 213 -- 382
Capital expenditures 520 19 -- 539
Identifiable assets 12,252 5,995 217 18,464
[Download Table]
Twelve months ended April 30, 1997
Greensteel Posterloid Other Consolidated
----------------------------------------------------------
Net sales: $ 26,152 $ 6,081 $ -- $ 32,233
Operating loss (1,227) (75) (2,987) (4,289)
Depreciation and
amortization 106 191 201 498
Capital expenditures 228 207 -- 435
Identifiable assets 10,925 5,446 530 16,901
[Download Table]
Twelve months ended April 30, 1996
Greensteel Posterloid Other Consolidated
----------------------------------------------------------
Net sales: $ 30,070 $ 5,557 $ -- $ 35,627
Operating loss (227) (276) (4,742) (5,245)
Depreciation and
amortization 31 221 904 1,156
Capital expenditures 714 60 -- 774
Identifiable assets 12,992 5,229 762 18,983
50
19. Quarterly Financial Data (Unaudited)
[Enlarge/Download Table]
(In thousands, except per share amounts)
Net Income
(Loss)
Operating Applicable Basic Diluted
Net Gross Income to Common Earnings Earnings
Sales Margin (Loss) Shareholders Per Share Per Share
----------------------------------------------------------------------------------
Eight months ended December 31, 1998
May to July 1998 $11,021 $ 3,278 $ 1,155 $ 1,357 $ 0.16 $ 0.16
August to October 1998 10,929 3,228 1,010 709 0.08 0.08
November to December 1998 11,927 4,011 (115) 17,286 1.41 1.41
----------------------------------------------------------------------------------
$33,877 $ 10,517 $ 2,050 $ 19,352 $ 2.04 $ 2.04
==================================================================================
Twelve months ended April 30, 1998
First Quarter $ 8,499 $ 2,617 $ 657 $ (17) $ (0.00) $ (0.00)
Second Quarter 9,540 2,712 736 328 0.04 0.04
Third Quarter 7,672 2,129 37 (689) (0.08) (0.08)
Fourth Quarter 8,456 2,423 (38) (157) (0.02) (0.02)
----------------------------------------------------------------------------------
$34,167 $ 9,881 $ 1,392 $ (535) $ (0.06) $ (0.06)
==================================================================================
Twelve months ended April 30, 1997
First Quarter $ 9,642 $ 2,858 $ 257 $ (391) $ (0.05) $ (0.05)
Second Quarter 9,523 2,427 21 (680) (0.08) (0.08)
Third Quarter 5,972 1,161 (1,397) (2,120) (0.25) (0.25)
Fourth Quarter 7,096 1,032 (3,170) (3,977) (0.46) (0.46)
----------------------------------------------------------------------------------
$32,233 $ 7,478 $ (4,289) $ (7,168) $ (0.84) $ (0.84)
==================================================================================
51
SCHEDULE II Valuation and Qualifying Accounts (amounts in thousands)
[Enlarge/Download Table]
Balance at Charged to Charged to Purchased Balance at
Beginning Costs and Other Reserves/ End
of Period Expenses Accounts Other of Period
-----------------------------------------------------------------------------------
Eight months ended
December 31, 1998:
Allowance for doubtful accounts $ 795 $ 448 $ 411(1) $1,687 $2,519
Inventory obsolescence reserve 315 48 195 1,080 1,248
Nonrecurring reserve -- 500 -- -- 500
------ ------ ------ ------ ------
Total $1,110 $ 996 $ 606 $2,767 $4,267
====== ====== ====== ====== ======
Twelve months ended
April 30, 1998:
Allowance for doubtful accounts $1,013 $ 289 $ 507(1) $ 795
Inventory obsolescence reserve 540 -- 225(4) 315
Nonrecurring reserve 650 -- 650 --
------ ------ ------ ------
Total $2,203 $ 289 $1,382 $1,110
====== ====== ====== ======
Environmental liability $ 26 $ 26(3) $ --
====== ====== ======
Twelve months ended
April 30, 1997:
Allowance for doubtful accounts $ 575 $ 757 $ 319(1) $1,013
Inventory obsolescence reserve 270 270 -- 540
Nonrecurring reserve -- 650 -- -- 650
------ ------ ------ ------ ------
Total $ 845 $1,677 $ 319 $2,203
====== ====== ====== ======
Environmental liability $ 20 $ 6(3) $ 26
====== ====== ======
Twelve months ended
April 30, 1996:
Allowance for doubtful accounts $ 521 $ 289 $ 235(1) $ 575
Inventory obsolescence reserve 400 20 150(2) 270
------ ------ ------ ------
Total $ 921 $ 309 $ 385 $ 845
====== ====== ====== ======
Environmental liability $ 179 $ 159(3) $ 20
====== ====== ======
(1) Uncollectible accounts written off, net of recoveries.
(2) Disposal of obsolete inventory in connection with plant consolidations.
(3) Payments made related to the Ohio EPA Consent Order (See Note 16).
(4) Disposal of obsolete inventory and change of Greensteel's inventory
reserve policy.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Part III (Items 10 through 13) is omitted since PolyVision expects
to file with the Securities and Exchange Commission within 120 days after the
close of the fiscal year ended December 31, 1998, a definitive proxy statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934 which
involves the election of directors. If for any reason such a statement is not
filed within such a period, this report will be appropriately amended.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(3) Exhibits:
Exhibit Number and Description
------------------------------
2.1 Agreement and Plan of Merger, dated as of December 21, 1994, as
amended, among PolyVision (formerly Information Display Technology,
Inc.), The Alpine Group, Inc., Alpine PolyVision, Inc. and
Posterloid Corporation. (1)
2.2 Stock Purchase Agreement, dated as of September 1, 1998, by and
among PolyVision, Alliance International Group, Inc., Wind Point
Partners III, L.P. and the other stockholders of Alliance, as
amended by letter agreement dated November 20, 1998. (8)
3.1 Restated Certificate of Incorporation of PolyVision. (1)
3.2 By-laws of PolyVision. (1)
4.4 Specimen form of Common Stock Certificate of PolyVision. (3)
4.5 Certificate of Amendment of the Certificate of Incorporation of
PolyVision.
10.15 1994 Stock Option Plan of PolyVision. (1)
10.16 Credit Commitment Letter Agreements, dated May 24, 1995, between
PolyVision and The Alpine Group, Inc. (3)
10.17 Registration Rights Agreement, dated May 24, 1995, between
PolyVision and The Alpine Group, Inc. (3)
10.18 Form of Indemnification Agreement for Directors of PolyVision. (3)
10.19 1996 Union Stock Grant Plan of PolyVision. (6)
10.20 1995 Directors Stock Grant Plan of PolyVision. (7)
10.21 1995 Directors Stock Option Plan of PolyVision. (7)
10.23 Amended and Restated Employment Agreement, dated as of May 1, 1995,
between PolyVision and Joseph A. Menniti.(7)
10.25 Articles of Agreement, dated February 28, 1996, between Greensteel,
Inc. and The Carpenters' District Council of Western
Pennsylvania.(7)
10.26 Master Credit Agreement, dated as of April 25, 1996, among Bank of
Boston Connecticut (the "Bank"), Greensteel, Inc. and PolyVision.
(7)
10.27 Security Agreement, dated as of April 25, 1996, between the Bank and
Greensteel, Inc. (7)
10.28 Pledge Agreement, dated as of April 25, 1996, between the Bank and
Greensteel, Inc. (7)
10.29 Unlimited Continuing Guaranty Agreement, dated as of April 25, 1996,
between the Bank and PolyVision. (7)
10.30 Stock Pledge Agreement, dated as of April 25, 1996, between the Bank
and PolyVision. (7)
10.31 Agreement of Transfer, dated as of January 31, 1996, between
PolyVision and Greensteel, Inc. (7).
10.32 Credit Agreement, dated as of November 20, 1998, between PolyVision,
Greensteel,
54
Exhibit Number and Description
------------------------------
Inc. and Posterloid Corporation, as borrowers, and a syndicate of
banks, financial institutions and other institutional lenders named
therein and Fleet National Bank, as administrative agent and in
certain other capacities. (8)
10.33 Credit Facility Agreement, dated as of November 20, 1998, between
Alliance Europe N.V., Alliance Graphics N.V., Emailleries de Blanc
Misseron A. Aubecq S.A. and Alliance Pentagon A/S, as borrowers, and
KBC Bank N.V. (8)
10.34 Credit Facility Agreement, dated as of November 20, 1998, between
PolyVision Belgium N.V. and PolyVision France EURL, as borrowers,
and KBC Bank N.V. (8)
10.35 Senior Subordinated Loan Agreement, dated as of November 20, 1998,
between PolyVision and Fleet Corporate Finance, Inc. (8)
10.36 Exchange Agreement, dated as of November 16, 1998, between
PolyVision and The Alpine Group, Inc. and Kirkbi Projekt A/S. (8)
10.37 Series C Preferred Stock Purchase Agreement, dated as of November
20, 1998, between PolyVision and The Alpine Group, Inc. (8)
10.38 Employment Agreement, dated November 20, 1998, between PolyVision
and Michael H. Dunn.
10.39 Employment Agreement, dated November 20, 1998, between PolyVision
and Richard J. Still.
10.40 Amendment No. 1 to Amended and Restated Employment Agreement, dated
November 20, 1998, between PolyVision and Joseph A. Menniti.
10.41 Senior Subordinated Note and Warrant Purchase Agreement, dated as of
December 30, 1998, among PolyVision, as borrower, and John Hancock
Mutual Life Insurance Company and the other institutional investors
identified therein, and Posterloid Corporation and Greensteel, Inc.,
as guarantors.
10.42 Warrant Agreement, dated as of December 30, 1998, among PolyVision
and John Hancock Mutual Life Insurance Company, John Hancock
Variable Life Insurance Company and Hancock Mezzanine Partners, L.P.
10.43 Amendment to Master Credit Agreement, dated June 12, 1998, between
BankBoston, N.A. and Greensteel, Inc.
21.1 Subsidiaries of PolyVision.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
----------
(1) Incorporated by reference to the exhibits filed with the Proxy Statement
for the Annual Meeting of Shareholders, dated May 1, 1995.
(2) Incorporated by reference to the exhibits with the Current Report on Form
8-K, dated April 24, 1990.
(3) Incorporated by reference to the exhibits with the Registration Statement
on Form S-2 (No. 33-93010), effective June 9, 1995.
(4) Incorporated by reference to the exhibits with the Annual Report on Form
10-K for the fiscal year ended December 31, 1990.
55
(5) Incorporated by reference to the exhibits filed with Post-Effective
Amendment No. 1 to Registration Statement No. 33-22701 NY.
(6) Incorporated by reference to the exhibits with the Registration Statement
on Form S-8 (No. 333-3897), effective May 16, 1996.
(7) Incorporated by reference to the exhibits with the Annual Report on Form
10-K for the fiscal year ended April 30, 1996.
(8) Incorporated by reference to the exhibits filed with the Current Report on
Form 8-K, dated November 20, 1998.
(b) Reports on Form 8-K.
PolyVision filed two reports on Form 8-K for the quarter ended
December 31, 1998. The first report, filed on November 20, 1998, reported
the purchase of all of the outstanding shares of capital stock of Alliance
International Group, Inc. This report was amended on February 3, 1999 to
include required historical financial statements of Alliance and pro forma
financial statements of PolyVision. The second report, filed December 30,
1998, reported the change in PolyVision's fiscal year to December 31 from
April 30.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POLYVISION CORPORATION
Date: March 24, 1999 By: /s/Joseph A. Menniti
--------------------------
Joseph A. Menniti
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
[Download Table]
/s/Steven S. Elbaum Chairman of the Board and Director March 24, 1999
--------------------------
Steven S. Elbaum
/s/Joseph A. Menniti Chief Executive Officer and Director March 24, 1999
-------------------------- (principal executive officer)
Joseph A. Menniti
/s/Michael H. Dunn President, Chief Operating Officer and March 24, 1999
-------------------------- Director
Michael H. Dunn
/s/Richard J. Still Chief Financial Officer (principal March 24, 1999
-------------------------- financial and accounting officer)
Richard J. Still
/s/Ivan Berkowitz Director March 24, 1999
--------------------------
Ivan Berkowitz
/s/Lyman C. Hamilton, Jr. Director March 24, 1999
--------------------------
Lyman C. Hamilton, Jr.
/s/Stephen C. Knup Director March 24, 1999
--------------------------
Stephen C. Knup
/s/Bragi F. Schut Director March 24, 1999
--------------------------
Bragi F. Schut
57
Dates Referenced Herein and Documents Incorporated by Reference
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