<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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COMMISSION FILE NUMBER: 1-8497
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KLEER-VU INDUSTRIES, INC.
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(Name of Registrant as specified in its charter)
<TABLE>
<S><C>
DELAWARE 13-5671924
- --------------------------------------------------- --------------------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification Number)
or Organization)
921 WEST ARTESIA BOULEVARD, COMPTON, CALIFORNIA 90220
- -------------------------------------------------- ---------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(310) 603-9330
- ---------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- ---------------------------------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last year)
</TABLE>
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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There were 2,725,020 shares outstanding of the issuer's common stock, $0.10
par value, as of August 12, 1996.
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KLEER-VU INDUSTRIES, INC.
June 30, 1996
(Unaudited)
INDEX
PAGE NO.
PART I - Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of
June 30, 1996 (Unaudited) and December 31, 1995 3
Consolidated Condensed Statements of Operations
for the Three and Six Months Ended June 30, 1996
and 1995 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows for
the Six Months Ended June 30, 1996 and 1995 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - Other Information 8
Signatures 10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
/KLEER-VU INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
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<TABLE>
<CAPTION>
June 30, December
1996 31,
(Unaudited) 1995
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<S> <C> <C>
Current Assets:
Cash $ 94 $ 87
Accounts receivable, less allowance of $409 and $366 4,678 5,676
Inventories 7,031 9,557
Other 109 129
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Total current assets 11,912 15,449
Property and equipment, less accumulated depreciation and
amortization of $5,217 and $4,785 3,670 3,857
Due from officers 29 68
Other 716 682
Cost in excess of net assets acquired 1,049 -
$ 17,376 $ 20,056
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Loans from affiliates $ 700 $ 700
Bank line of credit 6,775 9,851
Accounts payable 3,984 3,253
Cash overdraft 273 299
Accounts payable to affiliated company 1,842 1,748
Restructuring costs 402 1,597
Accrued expenses 2,810 1,236
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Total current liabilities 16,786 18,684
Long-term debt
Loan from affiliate 1,387 1,377
Long-term debt 6,012 4,666
Other noncurrent liabilities 144 138
--------- ---------
7,543 6,181
Stockholders' equity:
Preferred stock, $10 par value; 1,000,000 shares authorized;
900,000 shares issued, aggregate liquidation preference of $900 9,000 9,000
Common stock, $0.10 par value; 10,000,000 shares authorized,
2,725,020 shares issued 272 272
Additional paid-in capital 17,466 17,466
Deficit (33,409) (31,265)
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(6,671) (4,527)
Less: Deferred compensation and notes from officers (239) (239)
Common stock held in treasury, at cost; 7,144 shares (43) (43)
--------- ---------
Total stockholders' equity (6,953) (4,809)
$ 17,376 $ 20,056
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</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 3
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KLEER-VU INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Net sales $ 5,653 $ 6,348 $ 12,517 $ 12,143
Costs and expenses:
Cost of goods sold 4,549 6,085 11,105 11,145
Selling 542 844 1,126 1,599
General and administrative 598 1,047 1,295 2,210
Interest expense 588 419 1,135 752
--------- --------- --------- ---------
Total costs and expenses 6,277 8,395 14,661 15,706
Net loss $ (624) $ (2,047) $ (2,144) $ (3,563)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share $ (.23) $ (.77) $ (.79) $ (1.34)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares used in
computation of loss per share 2,725,020 2,672,316 2,725,020 2,656,160
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</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 4
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KLEER-VU INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
---------------------------
1996 1995
Cash flows from operating activities:
Net loss $ (2,144) $ (3,563)
Adjustments to reconcile loss to cash used by
operations:
Depreciation and amortization 432 282
Deferred compensation and other amortization - 411
Provision for bad debts 43 22
Changes in assets and liabilities:
Accounts receivable 955 3,174
Due from officers 39 (19)
Inventories 2,526 (2,792)
Other assets and liabilities (8) (275)
Accounts payable 731 (377)
Accrued expenses 1,574 124
Restructuring costs (1,195) -
Cost in excess of net assets acquired (1,049) -
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Net cash provided by (used in) operations 1,904 (3,013)
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Cash flows from investing activities:
Capital expenditures (245) (306)
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Net cash used in investing activities (245) (306)
Cash flows from financing activities:
Notes payable and line of credit (3,076) (1,502)
Issuance of long-term debt 1,346 5,000
Issuance of common stock 40
Debt issuance cost (405)
Loans from affiliate 104 876
Payments of long-term debt (272)
Cash overdraft (26) (451)
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Net cash provided by (used in) financing activities (1,652) 3,286
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Net increase (decrease) in cash 7 (33)
Cash, beginning of period 87 55
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Cash, end of period $ 94 $ 22
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See accompanying notes to consolidated condensed financial statements.
Page 5
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KLEER-VU INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of presentation:
The consolidated financial statements include the accounts of Kleer Vu
Industries, Inc. (the Company) and its subsidiaries, Kleer Vu Plastics
Corporation ("KVP"), PAS Industry, Inc. ("PAS"), ProLine Storage Corporation
("ProLine"), The Channel Group, Inc. ("Channel") and Style Frames, Inc.
("Style"). All of the subsidiaries are wholly-owned and all intercompany
balances and transactions have been eliminated. In the opinion of the Company,
the accompanying unaudited consolidated condensed financial statements contain
all adjustments necessary to a fair presentation of the financial position as of
June 30, 1996, and the results of operations and the statements of cash flows
for the six months ended June 30, 1996 and 1995.
The Company's financial statements for the year ended December 31, 1995 were
prepared on a going concern basis. The Company incurred a net loss of
$14,020,000 for the year ended December 31, 1995 and had significant net losses
in 1994 and 1993. Furthermore, as of December 31, 1995 the Company had a
stockholders' deficit of $4,809,000 and negative working capital of $3,235,000
and missed or is slow in making payments to vendors. As of June 30, 1996, the
Company was not in compliance with certain of its bank covenants. Future
compliance is contingent upon the closing of an additional financing. See
Note 3 below for a description of an anticipated $1.25 million financing.
The Company's independent certified public accountants have included an
explanatory paragraph in their report indicating there is substantial doubt
with respect to the Company's ability to continue as a going concern.
Management plans to raise approximately $1.25 million in capital during the
third quarter of 1996. Management is concurrently exploring other financing
options. If the Company is unable to obtain additional financing, management
may have to reduce or stop planned product expansion or scale back
operations. There is no assurance that an offering will be successful. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets amounts or the amount
and classification of liabilities that might be necessary should the Company
be unable to continue in existence.
2. Inventories:
Inventories consisted of the following: (Dollars in Thousands)
June 30, December
31,
1996 1995
---- ----
Raw materials $ 4,391 $ 4,613
Work-in process 80 31
Finished products 2,560 4,913
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$ 7,031 $ 9,557
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3. Subsequent Events:
The Company is currently exploring avenues to raise an additional $1.25 million
in capital which it expects to close by the end of the third quarter of 1996.
The Company is also continuing discussions with certain subordinated debt
holders and affiliated debt holders to convert an aggregate of approximately
$6.7 million of debt into equity. Various conversion structures are being
discussed with these creditors. Management can not assure that it will be able
to raise such capital in the anticipated time frame, or at all, or that such
conversion of indebtedness will be consummated. The Company contemplates that
any conversion of indebtedness will occur contemporaneously with the closing
of a financing.
The Company has reached an agreement in principal with Eastman Kodak Company
('Kodak") to renew the Company's license to manufacture and distribute Kodak
branded photograph albums in the United States and Canada for an additional 18
months. The Company and Kodak are formulating sales targets for the renewal
term in order to finalize the agreement. The original terms of the license
continue in effect during the interim period while the agreement is finalized.
Page 6
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
In December of 1995, the Board of Directors assembled a new management team to
return the Company to profitability. The new management team immediately
implemented a multi-step plan to improve margins, reduce operating expenses,
lower working capital requirements and restructure the balance sheet. Since
December of 1995 the Company has:
- - Consolidated Brownsville, Tennessee manufacturing operations into the
California facilities.
- - Consolidated Mexicali, Mexico manufacturing operations into the California
facilities.
- - Significantly reduced corporate administrative personnel.
- - Implemented an inventory liquidation program, reducing inventories from $12
million at the end of October 1995 to approximately $7 million at the end of
March 1996.
For the six months ended June 30, 1996, financial results reflect reduced
operating expenses and improved inventory turnover as a result of the new
operating strategy. Based upon the foregoing, the Company anticipates but can
not assure, that improvements to the Company's operations and working capital
will continue for the balance of 1996
FIRST QUARTER 1996 VERSUS FIRST QUARTER 1995
Sales for the three month period ended June 30, 1996 decreased by $695,000 or
10.9% over those for the same period in 1995. Sales for the Company's album
business posted a sales decrease of $570,000 for the quarter. The decrease in
album sales was compounded by a $1,084,000 decrease in ProLine sales reflecting
the loss of a significant customer account in the Custom Products division and
the closing of the Government division. Included in the second quarter are
sales of $958,000 from Channel and Style which were acquired in January of 1996.
Gross profit margin increased from 4.2% during the second quarter of 1995 to
19.5% during the second quarter of 1996 This increase was primarily
attributable to decreased costs for the Company's principal raw materials,
polypropylene and paper as well as a firming in the Company's product sales
prices
Selling expenses decreased by $302,000, due primarily to the reduction in sales
staff.
General and administrative costs decreased by $449,000. The decrease was
comprised of (i) staff layoffs in the first quarter, and (ii) the elimination of
amortization of cost in excess of net assets acquired.
Interest expense was $169,000 higher as a result of additional borrowings.
FIRST HALF 1996 VERSUS FIRST HALF 1995
Sales from the first half of 1996 improved by $374,000 or 3% over those for the
first half of 1995 reflecting the inclusion of Style and Channel sales of
$1,705,000 and an increase in album sales of $181,000. Offsetting the sales of
Style, Channel and album products were decreased sales by Pro-line Storage of
$1,512,000 reflecting the relocation of the manufacturing operations from
Brownsville, Tennessee to California and due to the loss of a significant
customer account and the closing of the Government division.
Gross profit as a percentage of sales increased from 8.2% in 1995 to 11.3% in
1996 due to the reasons noted above for the second quarter which are offset by
the (i) recognition of a $500,000 manufacturing variance incurred in 1995 which
was capitalized as part of inventory at year end and expensed as the related
inventory was sold during the first quarter of 1996, (ii) significant close-out
sales in the first quarter of 1996 which sold albums at a loss of approximately
$487,000 and (iii) inclusion of Channel and Style in operations.
Page 7
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Selling expenses decreased from 13.2% of sales in 1995 to 9.0% in 1996 due to
the lower staffing levels described above.
General and administrative expenses decreased from 18.2% of sales in 1995 to
10.3% in 1996 as a result of the staff reductions accomplished in the first
quarter of 1996
Interest expense increased in the first half of 1996 by $383,000 over 1995
due to the factors noted above in the discussion of the second quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations of $1,904,000 in 1996 improved significantly over
those for the comparable period in 1995. The collection of accounts receivable,
the decrease in inventories and the increase accounts payable and accrued
expenses were primarily responsible for providing cash from operations and were
offset somewhat by a decrease in restructuring costs and cost in excess of net
assets acquired. The cash provided by operations was principally used to repay
borrowings under the Company's bank line of credit.
PROSPECTS
The losses experienced in the first six months of 1996 were anticipated by the
Company due to the seasonal nature of the business and the amount of close-out
sales included in the first quarter of 1996. As noted above, management's plan
to return the Company to profitability has had the immediate impact of
increasing gross margin (the first six months 1996 gross margin when adjusted
for first quarter 1996 close-out sales and the 1995 manufacturing variance was
15.9% as compared to 8.2% for the first six months of 1995) and lowering
selling, general and administrative expenses (second quarter 1996 selling,
general and administrative expense was $1,140,000 versus $1,891,000 for the
second quarter in 1995).
The Company is currently exploring avenues to raise an additional $1.25 million
in capital which it expects to close by the end of the third quarter of 1996.
The Company is also continuing discussions with certain subordinated debt
holders and affiliated debt holders to convert an aggregate of approximately
$6.7 million of debt into equity. Various conversion structures are being
discussed with these creditors. Management can not assure that it will be able
to raise such capital in the anticipated time frame, or at all, or that such
conversion of indebtedness will be consummated. The Company contemplates that
any conversion of indebtedness will occur contemporaneously with the closing
of a financing.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES
Not applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
On June 26, 1996, the Board of Directors named David W. Hardee as its President
and CEO, replacing the vacancy left by the resignation of W. Blake Winchell.
Mr. Winchell had entered into an employment agreement with the Company with an
initial term of December 1995 through March 31, 1996 to restructure the
operations of Kleer-Vu. At the Company's request Mr. Winchell remained as
President an additional 2 1/2 months to complete his assignment. The remaining
task of restructuring the balance sheet will be managed by the Kleer-Vu
management team.
Page 8
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The Board of Directors elected Fred Acker as a director to fill a vacancy on the
Board of Directors. Mr. Acker is the Executive Vice President of sales of
Kleer-Vu Plastics Corporation, the photograph album subsidiary of the Company,
and of Proline Storage Corporation, the Company's telemarketing and original
equipment manufacturing subsidiary.
The Company was advised that Hardee Capital Partners, L. P. ("HCP") and Hee
Poong Park ("Park") had defaulted on their respective payment obligations to
MicroTel International ("MicroTel"), and Elk International Corporation Ltd.
("Elk") which is MicroTel's principal stockholder. Based upon information
contained in Schedule 13Ds filed by MicroTel and Elk respectively, MicroTel
and Elk have taken the position that the defaults result in MicroTel's
immediate right to vote 641,944 common shares of the Company and Elk's
immediate right to vote 1,340,236 common shares and 900,000 voting preferred
shares outstanding. The 641,944 common shares securing HCP's obligation to
MicroTel represents approximately 18% of the Company's voting shares and the
1,340,236 voting shares securing HCP's and Park's obligations to Elk
represent approximately 37% of the Company's voting shares. The Company has
been further advised that MicroTel and Elk have commenced legal action against
HCP and Hardee as guarantor of HCP's obligation and Park to enforce HCP's and
Park's respective payment obligations.
The Company has also been advised that the respective partners are in
negotiation to settle their disputes. However, the Company is unable to
predict whether or not such negotiations will yield a settlement or what the
outcome of the pending litigation would be. If a settlement is not reached
and MicroTel and Elk prevail in their actions a change in control of the
Company would occur if MicroTel and Elk retain the common shares and
preferred shares toward the payment of the indebtedness or dispose of such
shares in a foreclosure sale.
The HCP obligations arise out of a $1,444,445 Promissory Note by HCP to
MicroTel payable on December 15, 1996 and a $805,555 Promissory Note by HCP to
Elk payable on December 15, 1996. Park's obligation arises out of a $2,700,000
Promissory Note payable to Elk on December 15, 1996.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
Page 9
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KLEER-VU INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KLEER-VU INDUSTRIES, INC.
Date: August 12, 1996 /s/ David W. Hardee
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David W. Hardee
President and Chief Executive Officer
Principal Financial Officer
Page 10
<TABLE> <S> <C>
<PAGE>
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<CIK> 0000719729
<NAME> KLEER-VU INDUSTRIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
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