<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 September 30, 1996.
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to_______.
COMMISSION FILE NUMBER: 1-8497
------
KLEER-VU INDUSTRIES, INC.
(Name of Registrant as specified in its charter)
DELAWARE 13-5671924
- ---------------------------------------------------- -------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
601 HANSON STREET, KEMAH, TEXAS 77565
- ---------------------------------------------------- -------------------------
(Address of Principal Executive Offices) (Zip Code)
(713) 654-7777
- ----------------------------------------------------
(Registrant's telephone number, including area code)
921 WEST ARTESIA BOULEVARD, COMPTON, CALIFORNIA 90220
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
------------- -------------
There were 2,725,020 shares outstanding of the issuer's common stock,
$0.10 par value, as of November 12, 1996.
<PAGE>
KLEER-VU INDUSTRIES, INC.
September 30, 1996
(Unaudited)
INDEX
-----
Page No.
--------
PART I - Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of September 30,
1996 (Unaudited) and December 31, 1995 3
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1996 and 1995
(Unaudited) 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 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 8
PART II - Other Information 9
Signatures 11
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
KLEER-VU INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
------------- ------------
<S> <C> <C>
Current Assets:
Cash $ 336 $ 87
Accounts receivable, less allowance of $425 and $366 3,472 5,676
Inventories 6,831 9,557
Other 257 129
-------- --------
Total current assets 10,896 15,449
Property and equipment, less accumulated depreciation
and amortization of $5,376 and $4,785 3,511 3,857
Due from officers 29 68
Other 622 682
Cost in excess of net assets acquired 1,049 -
-------- --------
$ 16,107 $ 20,056
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Loans from affiliates $ 700 $ 700
Bank line of credit 5,610 9,851
Accounts payable 4,247 3,253
Cash overdraft 443 299
Accounts payable to affiliated company 1,891 1,748
Restructuring costs 351 1,597
Accrued expenses 3,038 1,236
-------- --------
Total current liabilities 16,280 18,684
Long-term debt
Loan from affiliate 1,392 1,377
Long-term debt 6,051 4,666
Other noncurrent liabilities 147 138
-------- --------
7,590 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 (34,219) (31,265)
-------- --------
(7,481) (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 (7,763) (4,809)
-------- --------
$ 16,107 $ 20,056
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
KLEER-VU INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 5,870 $ 6,467 $ 18,387 $ 18,610
Costs and expenses:
Cost of goods sold 4,939 5,849 16,044 16,994
Selling 548 863 1,674 2,462
General and administrative 586 1,134 1,881 3,344
Interest expense 607 510 1,742 1,262
--------- ---------- --------- ---------
Total costs and expenses 6,680 8,356 21,341 24,062
Net loss $ (810) $ (1,889) $ (2,954) $ (5,452)
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Net loss per share $ (.30) $ (.71) $ (1.08) $ (2.05)
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Weighted average common shares used in computation
of loss per share 2,725,020 2,675,876 2,725,020 2,662,804
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
KLEER-VU INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,954) $ (3,563)
Adjustments to reconcile loss to cash used by operations:
Depreciation and amortization 490 282
Deferred compensation and other amortization - 411
Provision for bad debts 59 22
Changes in assets and liabilities:
Accounts receivable 2,145 3,174
Due from officers 39 (19)
Inventories 2,726 (2,792)
Other assets and liabilities (59) (275)
Accounts payable 994 (377)
Accrued expenses 1,802 124
Restructuring costs (1,246) -
Cost in excess of net assets acquired (1,049) -
--------- ---------
Net cash provided by (used in) operations 2,947 (3,013)
--------- ---------
Cash flows from investing activities:
Capital expenditures (144) (306)
--------- ---------
Net cash used in investing activities 2,803 (306)
Cash flows from financing activities:
Notes payable and line of credit (4,241) (1,502)
Issuance of long-term debt 1,385 5,000
Issuance of common stock 40
Debt issuance cost (405)
Loans from affiliate 158 876
Payments of long-term debt (272)
Cash overdraft 144 (451)
--------- ---------
Net cash provided by (used in) financing activities (2,554) 3,286
--------- ---------
Net increase (decrease) in cash 249 (33)
Cash, beginning of period 87 55
--------- ---------
Cash, end of period $ 336 $ 22
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
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 September 30, 1996, and the results of operations
and the statements of cash flows for the nine months ended September 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
September 30, 1996, the Company was not in compliance with certain of its
bank and senior subordinated loan covenants. See Note 3 below for a
description of the senior subordinated lender's and senior lender's advice
that the Company defaulted on its respective obligations to each of them and
the senior subordinated lender's action to foreclose on all of the KVP common
shares. The Company's independent certified public accountants included an
explanatory paragraph in their report on the Company's audited financial
statements for the year ended December 31, 1995, indicating there is
substantial doubt with respect to the Company's ability to continue as a
going concern. Management is currently exploring financing options but does
not have any commitments for financing. If the Company is unable to obtain
financing, the Company may have to reduce or stop planned product expansion
or scale back operations. There is no assurance that the Company will be
able to obtain debt or equity financing on reasonable terms or at all. 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)
September 30, December 31,
1996 1995
------------- ------------
Raw materials $ 4,246 $ 4,613
Work-in process 16 31
Finished products 2,569 4,913
------- -------
$ 6,831 $ 9,557
------- -------
------- -------
3. Subsequent Events:
FORECLOSURE
In October 1996 the Company received a notice of default (the "PMF Notice")
from Pacific Mezzanine Fund, L. P. ("PMF"), the Company's senior subordinated
lender, stating that payment defaults and other technical defaults had
occurred under the PMF Loan. The PMF Notice stated that the Company's debt to
PMF of approximately $5.15 million, which includes a $150,000 bridge loan
(collectively the "PMF Obligation"), to the Company's subsidiaries KVP, PAS
and Proline, was due and payable. The PMF Obligation is secured by a first
lien on the subsidiaries' machinery and equipment. The bridge loan portion
of the PMF Obligation, plus interest thereon and legal fees incurred in
connection therewith, is secured by all of the outstanding capital stock of
KVP. The bridge loan agreement also provides that PMF has proxy over all of
the KVP common shares. PMF advised the Company that it would dispose of the
KVP common shares in a private sale on or after October 22, 1996, or
alternatively, retain the KVP common shares in satisfaction of the bridge
loan on or after November 1, 1996. On November 2, 1996, PMF advised the
Company that it had foreclosed upon and retained the KVP common shares.
6
<PAGE>
The Company is contesting PMF's foreclosure on the KVP common shares. The
Company and PMF are currently negotiating the disposition of this matter,
however, the Company cannot predict the outcome of these negotiations. The
Company has retained counsel to investigate potential lender liability and
other claims against PMF regarding the foreclosure.
KVP accounted for 80% and 74% of the Company's revenues for the fiscal year
1995 and for the nine months ended September 30, 1996, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". If the Company is not successful in contesting PMF's foreclosure
or the Company does not reach an agreement with PMF whereby the Company will
retain or reacquire KVP, the Company's operations will consist of Proline,
Style and Channel. Additionally, if PMF's foreclosure stands and KVP is no
longer part of the Company's consolidated operations, the Company will still
remain the lessee on its Compton, California premises and the licensee of the
Kodak License.
Contemporaneously with the PMF Notice, the Company's senior lender, LaSalle
National Bank ("LaSalle"), advised the Company that the Company had breached
certain net worth and loan limit covenants, and covenants to perform under
the LaSalle loan. The LaSalle loan is also at the subsidiary level, and
notwithstanding the LaSalle notice of default, LaSalle has agreed to continue
to fund KVP under certain conditions, including KVP maintaining its vendor
and customer relationships.
RESTRUCTURE OF COMPANY BOARD
On October 28, 1996, the Board of Directors filled three existing vacancies
on the board. The new directors are Daniel Dror, William King and Ehud Laska.
Mr. King and Mr. Laska are both outside independent directors. The entire
board of directors consists of Fred Acker, Daniel Dror, David W. Hardee,
William King, Ehud Laska and H. P. Park. David Hardee continues as Chairman
of the Board, Chief Executive Officer and President of the Company.
SHIFT IN VOTING CONTROL
The Company has been advised by Elk International Corporation Limited ("Elk")
that H. P. Park, (one of the Company's principal stockholders and a director)
had defaulted under his agreement with Elk (which agreement cured a
previously announced default by Mr. Park). Additionally, Hardee Capital
Partners, L. P. ("HCP"), a limited partnership affiliated with David Hardee,
continues in default in its payment obligations to Elk as previously
announced. (The HCP obligation to Elk includes HCP's former obligation to
MicroTel International, Inc. ("MicroTel") which advised the Company that it
had assigned the HCP promissory note ("HCP Note") back to Elk). The defaults
arise from a transaction in 1993 in which Mr. Park and HCP acquired all of
the Company's common shares owned by Elk. Based on Elk's and MicroTel's
default notices, Elk (as sole holder of the HCP obligations following
MicroTel's assignment of the HCP Note back to Elk) has the right to vote all
shares of Mr. Park and HCP. Pursuant to Schedule 13Ds previously filed by
each of Elk and MicroTel, Elk (as sole holder of the HCP obligations
following MicroTel's assignment of the HCP Note back to Elk) controls
approximately 60% of the voting securities of the Company. Elk is a company
controlled by Mr. Dror's brother. Pursuant to Elk's Schedule 13D, Mr. Dror
disclaims any beneficial ownership of Elk.
NONCOMPLIANCE WITH AMERICAN STOCK EXCHANGE LISTINGS GUIDELINES
The American Stock Exchange ("AMEX") has advised the Company that it does not
currently meet the AMEX's financial guidelines for continued listing. In the
event that the Company does not cure its noncompliance with the AMEX listing
guidelines, the Company could be delisted from the AMEX. The Company is
taking steps to rectify the situation but it cannot assure that the AMEX
listing will be continued.
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
For the nine months ended September 30, 1996, financial results reflect
reduced operating expenses and improved inventory turnover as a result of the
consolidation of manufacturing operations into California, corporate staff
reductions and implementation of an inventory liquidation program. Based upon
the foregoing and assuming the Company retains ownership of KVP, the Company
anticipates but can not assure that improvements to the Company's operations
and working capital will continue for the balance of 1996. If PMF's
foreclosure stands and KVP is no longer a part of the Company's consolidated
operations, the Company will suffer a material adverse effect in its
operations. KVP accounted for 80% and 74% of the Company's revenues for the
fiscal year 1995 and for the nine months ended September 30, 1996, respectively.
THIRD QUARTER 1996 VERSUS THIRD QUARTER 1995
Sales for the three month period ended September 30, 1996 decreased by
$597,000 or 9% over those for the same period in 1995. Sales for the
Company's album business posted a sales decrease of $1.4 million for the
quarter. The decrease in album sales was compounded by a $481,000 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 third quarter are sales of $1.2 million from Channel and
Style which were acquired in January of 1996.
Gross profit margin increased from 10% during the third quarter of 1995 to
16% during the third 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 $315,000, due primarily to the reduction in
sales staff.
General and administrative costs decreased by $548,000. 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 $97,000 higher as a result of additional borrowings.
NINE MONTHS 1996 VERSUS NINE MONTHS 1995
Sales from the first nine months of 1996 declined by $223,000 or 1% over
those for the first nine months of 1995 reflecting a decrease in album sales
of $1.2 million and decreased sales by Pro-line Storage of $2 million due to
the relocation of the manufacturing operations from Brownsville, Tennessee to
California, the loss of a significant customer account and the closing of the
Government division. Offsetting the declines experienced by album products
and Pro-line were Style and Channel sales of $3 million.
Gross profit as a percentage of sales increased from 9% for the nine month
period in 1995 to 13% for the nine month period in 1996 due to the reasons
noted above for the third 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.
8
<PAGE>
Selling expenses decreased by $788,000 due to the lower staffing levels
described above.
General and administrative expenses decreased by $1.5 million as a result of
the staff reductions accomplished in the first quarter of 1996.
Interest expense increased in 1996 by $480,000 over 1995 due to the factors
noted above in the discussion of the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations of $2.9 million 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 nine months of 1996 were anticipated by
the Company due to the restructuring of the business and the amount of
close-out sales included in the first quarter of 1996. As noted above,
management's plan to curtail losses had the impact of increasing gross
margin and lowering selling, general and administrative expenses.
If PMF's foreclosure on the KVP common shares stands, KVP will no longer be
part of the Company's consolidated operations which will cause a material
adverse effect on the Company's operations. The Company is currently
negotiating a disposition of its relationship with PMF, but it cannot predict
the outcome of such negotiations. The Company cannot assure that it will be
able to secure any debt or equity financing on acceptable terms or at all or
that it will identify an appropriate business combination candidate. Even if
it does identify an appropriate business combination candidate there is no
assurance it will be able to enter into an agreement with such candidate.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES
Not applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
In October 1996 the Company received the PMF Notice from PMF, the Company's
senior subordinated lender, stating that payment defaults and other technical
defaults had occurred under the PMF Loan. The PMF Notice stated that the
Company's debt to PMF of approximately $5.15 million, which includes a
$150,000 bridge loan, to the Company's subsidiaries KVP, PAS and Proline, was
due and payable. The PMF Obligation is secured by a first lien on the
subsidiaries' machinery and equipment. The bridge loan portion of the PMF
Obligation, plus interest thereon and legal fees incurred in connection
therewith, is secured by all of the outstanding capital stock of KVP. The
bridge loan agreement also provides that PMF has proxy over all of the KVP
common shares. PMF advised the Company that it would dispose of the KVP
common shares in a private sale on or after October 22, 1996, or
alternatively, retain the KVP common shares in satisfaction of the bridge
loan on or after November 1, 1996. On November 2, 1996, PMF advised the
Company that it had foreclosed upon and retained the KVP common shares.
The Company is contesting PMF's foreclosure on the KVP common shares. The
Company and PMF are currently negotiating the disposition of this matter,
however, the Company cannot predict the outcome of these negotiations.
Company has retained counsel to investigate potential lender liability and
other claims against PMF regarding the foreclosure.
Contemporaneously with the PMF Notice, the Company's senior lender, LaSalle,
advised the Company, that the Company had breached certain net worth and loan
limit covenants, and covenants to perform under the LaSalle loan. The LaSalle
loan is also at the subsidiary level, and notwithstanding the LaSalle notice
of default, LaSalle has agreed to continue to fund KVP under certain
conditions, including KVP maintaining its vendor and customer relationships.
The Company received a notice of foreclosure from the senior lender of Style
and Channel indicating that it intended to foreclose on all the assets of
both Companies. If the foreclosure is affectuated, and it abandons the
corporate shells, its consolidated book value will increase by approximately
$1 million. Additionally, the Company will also lose the revenues
attributable to Style and Channel which was $3 million for the nine months
ended September 30, 1996 and losses associated with them.
9
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
RESTRUCTURE OF COMPANY BOARD
On October 28, 1996, the Board of Directors filled three existing vacancies
on the board. The new directors are Daniel Dror, William King and Ehud Laska.
Mr. King and Mr. Laska are both outside independent directors. The entire
board of directors consists of Fred Acker, Daniel Dror, David W. Hardee,
William King, Ehud Laska and H. P. Park. David Hardee continues as Chairman
of the Board, Chief Executive Officer and President of the Company.
SHIFT IN VOTING CONTROL
The Company has been advised by Elk that H. P. Park, (one of the Company's
principal stockholders and a director) had defaulted under his agreement with
Elk (which agreement cured a previously announced default by Mr. Park).
Additionally, HCP, a limited partnership affiliated with David Hardee,
continues in default in its payment obligations to Elk as previously
announced. (The HCP obligation to Elk includes HCP's former obligation to
MicroTel) which advised the Company that it had assigned the HCP Note back to
Elk). The defaults arise from a transaction in 1993 in which Mr. Park and HCP
acquired all of the Company's common shares owned by Elk. Based on Elk's and
MicroTel's default notices, Elk (as sole holder of the HCP obligations
following MicroTel's assignment of the HCP Note back to Elk) has the right to
vote all shares of Mr. Park and HCP. Pursuant to Schedule 13Ds previously
filed by each of Elk and MicroTel, Elk (as sole holder of the HCP obligations
following MicroTel's assignment of the HCP Note back to Elk) controls
approximately 60% of the voting securities of the Company. Elk is a company
controlled by Mr. Dror's brother. Pursuant to Elk's Schedule 13D, Mr. Dror
disclaims any beneficial ownership of Elk.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
10
<PAGE>
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: NOVEMBER 12, 1996 /s/ David W. Hardee
--------------------------- -------------------------------------
David W. Hardee
President and Chief Executive Officer
Principal Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000719729
<NAME> KLEER-VU INDUSTRIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 336
<SECURITIES> 0
<RECEIVABLES> 3,897
<ALLOWANCES> 425
<INVENTORY> 6831
<CURRENT-ASSETS> 10,896
<PP&E> 8887
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0
9,000
<COMMON> 272
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<SALES> 18,387
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