<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------------------
For the quarter ended September 30, 1995 Commission File Number 1-8355
HELIONETICS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-2629097
(State of incorporation) (IRS Employer ID No.)
or organization)
6849 Hayvenhurst Avenue, Van Nuys, CA 91406
(Address of principal executive offices)
(818) 778-0000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common stock, no par value American Stock Exchange, Inc.
The Company resigned from the American Stock Exchange in September 19, 1995. The
Company's common stock trades on the NASDQ Bulletin Board as a non designated
security under the symbol ZAPP.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO ______
Shares of common stock outstanding as of November 20, 1995: 49,936,601
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HELIONETICS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page #
--------------------- ------
Item 1. Financial Statements
Statements of Operations 1
Balance Sheets 2-4
Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15-16
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. None
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands except share data)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
---- ---- ---- ----
REVENUES $22,831 $16,457 $64,410 $51,661
------- ------- ------- -------
COSTS AND EXPENSES
Cost of sales 18,654 13,094 52,141 40,408
Selling, general and administrative 3,987 7,328 13,054 12,718
Interest 148 110 461 251
------- ------- ------- -------
22,789 20.412 65,656 53,377
------- ------- ------- -------
OTHER INCOME (EXPENSE): 197 (69) 345 (69)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 239 (4,024) (901) (1,785)
Provision for income tax (Note 5) (119) (174) (274) 383
------- ------- ------- -------
NET INCOME (LOSS) $ 120 $(3,850) $(1,175) $(2,168)
======= ======= ======= =======
EARNING PER COMMON AND COMMON
EQUIVALENT SHARE (Note 1):
PRIMARY $ -- $ (0.14) $ (0.03) $ (0.09)
======= ======= ======= =======
FULLY DILUTED N/A $ (0.14) N/A $ (0.09)
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
1
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30 December 31
1995 1994
---- ----
(unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 5,290 $ 5,464
Marketable Securities 114 --
Accounts receivable, less allowance of $1,020
in 1995 and $643 in 1994 20,612 11,866
Notes receivable from officers 40 40
Inventories (Note 1) 8,289 8,174
Prepaid expenses and other 951 1,714
--------- ---------
Total current assets 35,296 27,258
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
at cost:
Leasehold improvements 1,417 1,345
Machinery and equipment 9,051 6,600
--------- ---------
10,468 7,945
Less--Accumulated depreciation and amortization (7,050) (4,886)
--------- ---------
3,418 3,059
--------- ---------
OTHER ASSETS:
Patent costs (Note 1) 307 331
Excess of cost over net assets of acquired
companies, net (Note 1) 14,124 11,367
Notes receivable and other assets (Note 1) 481 1,636
--------- ---------
14,912 13,334
--------- ---------
$ 53,626 $ 43,651
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
2
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30 December 31
1995 1994
---- ----
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Line of credit (Note 3) $ 3,804 $ 3,005
Current maturities of long-term debt (Note 2) 214 254
Current maturities of notes and loans payable
to proponents and shareholders (Note 4) 25 25
Accounts payable 17,849 14,813
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,239 754
Accrued payroll and payroll taxes 1,686 1,612
Accrued liabilities 2,753 $ 2,441
------- -------
Total current liabilities 27,570 22,904
------- -------
LONG-TERM DEBT, net of current maturities (Note 2) 1,734 735
------- -------
NOTES and LOANS PAYABLE to proponents and
shareholder (Note 4) 2,088 4,520
------- -------
CONVERTIBLE NOTE PAYABLE 300 --
------- -------
MINORITY INTEREST 4,746 4,171
------- -------
MANDATORILY REDEEMABLE COMMON STOCK 500 500
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
Authorized--2,000,000 shares; none outstanding -- --
Class A and B convertible preferred stock
No stated value
Authorized--150,000 shares of each
Outstanding --
51,175 shares of Class A in 1995 and 1994 and 57,629
shares of Class B in 1995 and 1994, respectively -- --
Class C convertible preferred stock,
$3.50 stated value
Authorized--2,800,000 shares
Outstanding--310,665 shares in 1995 and 333,053
shares in 1994 694 793
The accompanying notes are an integral part of these
consolidated balance sheets.
3
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HELIONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30 December 31
1995 1994
---- ----
(unaudited)
SHAREHOLDERS' EQUITY (cont'd)
Class D convertible preferred stock
$10.00 stated value
Authorized--100,000 shares
Outstanding--none -- --
Class E convertible preferred stock
$10.00 stated value
Authorized--90,000 shares
Outstanding--none -- --
Class F convertible preferred stock
no stated value
Authorized--2,800,000 shares
Outstanding--52,700 shares in 1995
and 93,700 in 1994 116 206
Class H convertible preferred stock
1,150,000 shares to be authorized
None outstanding -- --
Common stock
No par value
Authorized--50,000,000 shares
Outstanding--35,444,375 shares in 1995
and 26,576,572 shares in 1994 73,312 70,292
Common stock subscribed (Note 4) 4,765 555
Additional paid-in capital 2,674 2,674
Accumulated deficit (64,873) (63,699)
-------- --------
Total shareholders' equity 16,688 10,821
-------- --------
$ 53,626 $ 43,651
======== ========
The accompanying notes are an integral part of these
consolidated balance sheets.
4
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $(1,175) $ (2,168)
Adjustment to reconcile net income to net cash
cash provided by (used in) operating activities
of continuing operations--
Depreciation and amortization 1197 862
Minority interest (434) (30)
Interest -- proponent 78 --
Change in operating assets and liabilities (2,410) (3,268)
------- --------
Net cash provided by (used in) operations (2,744) (4,263)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (751) (574)
Cash (paid) acquired in business acquisition 16 (278)
Deferred product costs -- (2,016)
Other assets 1,244 (1,823)
------- --------
Net cash provided by (used in) investing activities $ 509 $(4,691)
------- --------
The accompanying notes are an integral part of these statements.
5
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands except share data)
Nine Months Ended
September 30
1995 1994
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in note payable, net $ 300 $ --
Increase (decrease) in long term debt, net (553) (2,370)
Increase (decrease) in notes payable to
proponents and shareholders, net 2,614 (328)
Proceeds from exercise of Series F warrants -- 55
Proceeds from sales of common stock, net -- 15,463
Payment in lieu of issuance of redeemable
common stock -- (1,000)
-------- -------
Net cash provided by (used in) financing
activities 2,061 11,820
-------- -------
Net increase (decrease) in cash and
equivalents (174) 2,866
Cash and equivalents at beginning of period 5,464 2,969
-------- -------
Cash and equivalents at end of period $ 5,290 $ 5,835
======== =======
Interest paid $ 461 $ 251
======== =======
The accompanying notes are an integral part of these statements.
6
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HELIONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Summary of Significant Accounting Policies
The unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and are unaudited except for the balance sheet as of December 31, 1994. Certain
information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K. In the opinion of management the
accompanying financial statements contain all adjustments necessary to present
fairly the Company's financial position and the results of operations for the
periods presented. The results of operations for the three and nine months
ended September 30, 1995, are not necessarily indicative of the results to be
expected for the full year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. Upon consolidation all material
intercompany transactions and accounts have been eliminated.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or estimated net realizable value. Costs include direct material, direct labor
and applicable manufacturing and engineering overhead.
Other Assets
Patent costs are amortized on a straight-line basis over the shorter of
the estimated periods to be benefitted or the term of the patent. Accumulated
amortization at September 30, 1995 and December 31, 1994, amounted to
approximately $145,000 and $111,000, respectively.
Excess of cost over net assets of acquired companies is amortized on a
straight-line basis over ten to thirty years.
Earnings Per Share
Earnings per common share is based upon the weighted average number of
shares outstanding during each period including common equivalent shares.
Earnings per common share, assuming full dilution, is based upon the
weighted average number of shares outstanding plus the common shares issuable
upon conversion in exercise of securities whose exercise as of January 1 would
reduce earnings per common and common equivalent share for that year.
7
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The weighted average shares used in calculating earnings per share are
summarized as follows:
(amounts in thousands)
Three Months Nine Months
------------ -----------
1995 1994 1995 1994
---- ---- ---- ----
Primary 40,842 26,124 34,746 24,742
Fully diluted -- 26,605 -- 25,351
Reclassifications and Restatements
Certain account reclassifications have been made to the 1994 balances to
conform to the 1995 presentation.
(2) Long-Term Debt and Credit Facilities
Notes and long-term debt at September 30, 1995 and December 31, 1994
were as follows (in thousands):
1995 1994
---- ----
Convertible unsecured note payable bearing interest at 6%,
with interest payable quarterly beginning March 31, 1994
and principal and remaining accrued interest due on
December 31, 1996. $ 400 $ 400
Priority tax payable quarterly with interest ranging from
10% to 14% per annum 53 53
Laser Photonics, Inc:
Secured loans, with interest, payable quarterly at 9% and
principal due October 1999 with option (on $165,000) for
early payout at 50% discount 448 --
Priority tax payable monthly with interest ranging
from 9% to 18% per annum 432 --
Others 138 --
------ -----
Sub-Total - Laser Photonics 1,018 --
Others 477 453
------ -----
1,948 989
Less: Current maturities (214) (254)
------ -----
$1,734 $ 735
====== =====
8
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(3) Line of Credit
Tri-Lite, Inc. has a line of credit agreement with Star Bank of Cleveland,
Ohio which provides for borrowings of up to $5 million based on eligible
accounts receivable. The outstanding borrowings under this agreement bear
interest at 2% over the bank's prime rate and are collateralized by
substantially all of the assets of Tri-Lite, Inc. The Company is a co-guarantor
for this new line of credit and assuming Tri-Lite issues its own stock for
amount owing to Helionetics, Helionetics will own approximately 64% of Tri-Lite.
The Company has notified Tri-Lite's management that it has revoked its
guarantee on the line of credit and has revoked its proxy to elect the current
members of the Tri-Lite's Board of Directors who were NOT duly elected pursuant
to the annual meeting of Tri-Lite's shareholders.
(4) Notes and Loans Payable to Proponents and Shareholders
At September 30, 1995 and December 31, 1994, the Company had notes and
loans payable to proponents and shareholders totaling $2,113,000 and $4,545,000,
respectively. The notes and loans bear interest at 10 percent per annum. The
notes and loans represent advances between the Company and the proponents and
are secured by the appropriate UCC-1 filings.
As of September 30, 1995, notes and loans of approximately $5,517,465
payable to Ms. Barnes will be extinguished through the issuance of common stock
of approximately 16,946,006 shares. The value of the common stock (for debt
totalling $4,110,518) which was based on 60% of the market value of the stock at
$0.53 per share and $0.35 per share (for debt totalling $1,406,947) representing
the market value of the stock at the date of the agreed exchange is currently
shown under common stock ($2,466,629) and common stock subscribed ($3,050,836).
After the consummation of the exchange above, the Company will be owing Ms.
Barnes approximately $2,088,000. Ms. Barnes has agreed and continues to loan
funds to the Company.
(5) Income Taxes
No provision for federal taxes was provided for the period as a result of
the taxable losses incurred. Through December 31, 1992, the Company accounted
for income taxes under Statement of Financial Accounting Standards No. 96
"Accounting for Income Taxes". This standard required income taxes to be
provided based upon a liability approach, under which deferred taxes were
recorded at the rates to be in effect when such taxes were due.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under Statement
109, the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. As permitted by Statement 109, the Company
has elected not to restate the consolidated financial statements of any prior
years. The effect of the change was not material to the consolidated financial
statements.
At September 30, 1995, the Company believes it has significant net
operating loss carryforwards for federal and state income tax purposes. Such
amounts would be available to reduce future federal and state income tax
liabilities as appropriate and, to the extent not used, would expire through
2009. As a result of various stock transactions during the past two years,
certain of these net operating loss carryforwards are subject to annual
limitations of approximately $1,400,000 to be used in future periods. The
provision at September 1995 reflects the estimated state income tax for KSWI.
9
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) Acquisitions
The U.S. Bankruptcy Court, on May 12, 1995, and effective May 22, 1995,
confirmed the plan of reorganization of Laser Photonics, Inc. ("LPI"), a Florida
company, in which the Company received 75% of the common stock of LPI in
exchange for capital infusion of $1 million borrowed from Ms. Susan Barnes, the
Company's principal shareholder and wife of Bernard B. Katz, Chairman of the
Board, and the transfer to LPI of all of the common stock of AccuLase, Inc.
owned by the Company. The value of the Company's investment in Acculase at May
22, 1995 totalled $879,023. LPI is a publicly-traded company with the symbol
LAZR, and will continue to trade separately. LPI is a FDA GMP (Good
Manufacturing Practices) manufacturer of medical and scientific laser devices.
The Company's primary reason for the acquisition is to enable AccuLase access to
the manufacturing expertise of its excimer laser. AccuLase's excimer laser has
various medical applications including TMR. The excess of approximately $1.5
million of cost over LPI's net assets has been capitalized as goodwill after
application by LPI of Statement of Position 90-7, "fresh start accounting",
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code".
The unaudited pro-forma effects of LPI's results of operations on the
consolidated results of operations as though the acquisitions had occurred
January 1, 1994, are as follows (in thousands except share data):
1995 1994
---- ----
Revenues $65,652 $55,784
Net income (loss) 3,766(1) (2,488)
Income (loss) per share 0.11 (0.10)
Weighted average shares 34,746,000 24,742,000
(1) Include gain from reorganization of $5,645,000.
10
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7) Subsequent Events
In August and November 1995, the Company announced its decision to
distribute as dividend to its shareholders its approximately 80% interest in
KSWI, subject to filing of a Form 10 with the Securities and Exchange
Commission, among others. Following is a proforma balance sheet and results of
operations, on a stand-alone basis after giving effect the "push-down"
accounting, of KSWI as of September 30, 1995 (in thousands):
Sales $35,393
Income before tax and goodwill amortization 1,493
Goodwill amortization 122
Provision for income tax 620
Net income $ 751
Current assets $18,946
Property and equipment 757
Cost in excess of net assets of
business acquired 4,740
Other assets 35
Due from Parent 1,166
Total assets $25,644
Current liabilities $13,504
Shareholders' equity $12,140
Tabulated below is the "Pro-forma" consolidated results of operations for
the period ended September 30, 1995 and 1994, reflecting the spin-off of KSWI
(in thousands):
Nine Months Three Months
----------- ------------
1995 1994 1995 1994
---- ---- ---- ----
Sales $29,017 $21,650 $10,141 $7,404
======= ======= ======= =======
Income (Loss) from Continuing Operation (2,162) (3,171) (449) (4,316)
Income from Discontinued Operation 987 1,003 569 466
------- ------- ------- -------
Net Income (Loss) $(1,175) $(2,168) $ 120 $(3,850)
======= ======= ======= =======
11
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Working capital increased by $3,372,000 for the quarter ended September
30, 1995 after a decrease in March 31, 1995 of $682,000 from December 31, 1994.
Working capital stand at $7,726,000 at September 30, 1995 compared with
$4,354,000 at December 31, 1994. For the nine months ended September 30, 1995,
cash and equivalents decreased by $174,000 whereas receivables and inventories
increased by a combined total of $8,861,000. Trade payables and accrued
liabilities, including billings in excess of costs and estimated earnings in
uncompleted contracts, combined, increased by $3,907,000. Capital expenditures
are minimal and totalled $480,000 for the nine months period. No major capital
expenditures is anticipated for the balance of 1995.
Approximately $5,133,000 of the total consolidated cash of $5,290,000 is
from KSWI and Tri-lite. Both subsidiaries either has loan covenants and bonding
requirements that restrict transfers of their cash to the parent company and its
other subsidiaries.
KSWI and Tri-Lite accounted for an approximate 96% of the consolidated
revenues, and each is being funded primarily from cash generated by its
operations. Tri-Lite, due to its improved operations and new management, has
replaced its existing line of credit in July 1995 with a three year $5 million
asset-based credit facility on favorable terms. Tri-Lite's line of credit
served as its primary source of credit and working capital. Tri-Lite's
inventory requirements continue to be financed by its credit facilities with its
offshore suppliers. KSWI funds its operations internally and has the ability to
obtain additional funding through borrowings, if needed. KSWI believes it has
significant borrowing capability due to absence of any long-term obligations in
its balance sheet and the strength of its operations.
In May 1995 the Company acquired, from a Chapter 11 proceeding, 75% of
Laser Photonics, Inc., ("LPI") a Florida based company. LPI is a manufacturer
of various laser products. As part of the acquisition, the Company contributed
its approximately 76% ownership of AccuLase, Inc. ("AccuLase") and cash
totalling approximately $1 million. LPI was acquired to be the manufacturer of
the AccuLase excimer laser applications. The cash portion of the acquisition,
totalling $1.5 million, was obtained from a loan from Ms. Susan Barnes, the
Company's principal shareholder. Funding of the combined AccuLase and LPI
operations will be provided by the Company either from sales of assets or equity
and from loans from Ms. Barnes. None was provided in the third quarter of 1995.
Moreover, LPI, being a public company of its own, has the ability to acquire
necessary funding from the equity market. The timing and the amount of the
funds, however, will have a negative effect on the ability of LPI to fill its
customer backlog and fund its operations if not provided timely.
The remaining operations of the Company, primarily, Sentinel and the DECC
Division will rely on loans to be provided by Ms. Susan Barnes and from the
internal cash generation by the DECC Division. The sale of the Company's
Tri-Lite holdings continue to be a possibility if a favorable price can be
obtained.
As approved by the Board of Directors of the Company, loans totalling
$4,110,518, and subsequently an additional $1,406,947, of Ms. Barnes were
exchanged, effective April 21, 1995 and October, 1995, for shares of the
Company's common stock at the discount rate of 60% of $0.53 per share, the fair
market value, as of that date, of the Company's common stock (for the $4,110,518
loan) and $0.35 per share (for the additional loan of $1,406,947), the market
price at the date of the exchange. The discount (40%) is in recognition of the
restriction in transferability of the stock and 20% lower than previous similar
exchanges. The amount of the exchange is shown under common stock and common
stock subscribed in the September 1995 financial statements.
12
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
The Company, in August 1995 and November 1995, announced its decision to
distribute as dividend to its shareholders its approximately 80% holding in
KSWI, subject to the filing of a Form 10 with the Securities and Exchange
Commission, among others. The Company is anticipating to complete the
distribution by year end and the formation of a new publicly-owned company.
KSWI's net worth is approximately $12 million and might be worth substantially
more than the current total market capitalization of the Company.
As part of the Company's cost containment program, the Company moved its
Corporate facility including the DECC Division operations to an approximately
19,000 square feet building in the City of Van Nuys, California. The lease
commenced September 1, 1995 and will terminate August 1, 2005 for an annual
lease payment of $216,000, commensurate with existing facilities in the same
area. The previous lease calls for annual payment currently of approximately
$526,300. The current building is owned by Susan Barnes/KB Equities, the
Company's principal shareholder.
The class-action lawsuit against the Company was settled effective in June
1995, subject to court approval and the availability of funds to pay the legal
fees of both the Company's and plaintiff's counsel. The availability of funds
required by the settlement agreement is subject to the pledging and disposing of
certain assets held by Ms. Barnes to guarantee such payments. Ms Barnes neither
received nor requested any consideration from the Company for the pledging and
placing at risk of her personal assets including her home. The agreement calls
for the issuance of 2,000,000 shares and 2,000,000 common stock purchase
warrants at 1-5/8 for two years, 1,000,000 of which is exercisable if the
Company's common stock resume trading at the American Stock Exchange ("AMEX").
In view of the fact that the Company has limited cash to pay both counsel of
approximately $500,000, the plaintiff counsel decided to continue the litigation
inspite of the settlement reached. The Company has filed a general denial of all
allegations and may file for summary judgement. No assurance can be given that
the Company's motion, if filed for summary judgement, will be granted or that
plaintiff may ultimately prevail in their action against the Company. Discovery
is on-going.
Results of Operations
The Company reported income from operations of $120,000 in the quarter
September 1995 compared with an income of $186,000 in the quarter ended June
1995 and loss from operations of $1,481,000 in March 1995. The results reflect
the Company's improved results of operations and the results of the
restructuring that began in the fourth quarter of 1994. Revenues for the nine
months ended September 30, 1995 and 1994 were $64,410,000 and $51,661,000
respectively, or a growth of 24% ($12.7 million) compared to the same period
last year. Revenues for the three months September 1995 and 1994 were
$22,831,000 and $16,457,000 respectively, a 39% increase ($6.4 million) from
1994. The increase for the nine months and three months ended September 30,
1995 as compared with the comparable periods in 1994 were accounted as follows:
Tri-Lite contributed $7.0 million and $1.4 million respectively; KSWI reported
an increase of $5.4 million and $3.6 million, respectively. These increases
were offset by a decrease in the revenues of the power conversion products
group. Revenues for the nine months of 1995 included $826,000 from LPI,
acquired effective May 22, 1995. The increase in revenue of KSWI in 1995
reflects its transition from the temporary decline in revenues in the first
quarter of 1995 and the effect of its work from its increased backlog.
Tri-Lite reported a loss of approximately $807,000 for the third quarter
of 1995 and Tri-Lite's management stated that the loss is reflective of the loss
in volume in NL Corporation and losses from the Trio Lighting business unit.
Tri-Lite disclosed that the loss in volume stems from the delay in the
replacement of Tri-Lite's line of credit which did not consummate until July
1995.
Income contribution by KSWI for the nine months of the current year were
offset by the combined expenses of AccuLase and Sentinel totalling approximately
$1,375,000.
Cost of sales were 81% and 78% for the nine months and 82% and 80% for the
three months of
13
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
1995 and 1994, respectively. The decline in margin was partly attributed to
KSWI which in 1995 does not have the same favorable revenues mix as it had in
its 1994 results, otherwise the margin percentages generally remain similar in
both periods.
Selling, general and administrative expenses were $13,054,000 and
$12,718,000 for the nine months and $3,987,000 and $7,328,000 for the three
months of 1995 and 1994, respectively. As a percent of revenue, these expenses
were 20% and 25% for the nine months and 17% and 44% for 1995 and 1994,
respectively. Tri-Lite contributed $1.3 million and ($513,000) increases and
(decreases) for the nine months and three months, respectively. The balance of
the increase was principally the expenses of AccuLase ($525,000) and Sentinel
($586,000). Selling, general and administrative expenses for the nine months of
1995 was favorably impacted by a downward adjustment in a general litigation and
miscellaneous reserve of approximately $600,000 based on current information.
Expenses in 1994 included, among others, a one-time charge of approximately
$600,000 for issuance of minority interest in KSWI.
14
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 1, 1992, Definicon International Corporation (DIC) filed a
Complaint in Los Angeles Superior Court (Case No. LC 016711) against a former
officer of the corporation, Dr. Vincent P. Williams, alleging that Williams had
embezzled $270,000 from the corporation. DIC was acquired by Helionetics, Inc.
in June 1990. On October 23, 1992, Williams, who had also served for a short
time as an officer of Helionetics, and members of his family filed a complaint
in Orange County Superior Court (Case No. 698 766) against Helionetics, Inc.,
DIC and others. A first amended complaint was filed on February 17, 1993,
seeking unspecified monetary damages, including punitive damages, for breach of
Williams' employment contract; indemnification with respect to several personal
guarantees Williams made for Helionetics and/or Definicon loans; slander;
conversion; and infliction of emotional distress. This litigation has been
satisfactorily resolved in October 1995 with no material effect in the
accompanying financial statements.
In March 1995, an action was instituted by Bo B. Sramek and Hevka H.
Sramek against Helionetics and Bernard B. Katz in the Superior Court of
California, Central Orange County District (Case No. 743947) alleging that about
June 15, 1994, Plaintiffs sold and delivered to Helionetics 2,404,333 shares of
the common stock of Cardio Dynamics, Inc. in exchange for 665,800 shares of
Helionetics' common stock which Helionetics has failed to deliver. The
Defendants intend to vigorously defend this action and have filed related cross
claims for fraud and deceit by both Srameks.
With respect to the other details of the Grodin action see Item 2 -
Management Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources.
Helionetics and its subsidiaries are also the defendants in lawsuits
involving trade creditors and others which may be deemed, separately or
collectively, immaterial and ordinary routine litigation incidental to its
business. Some of these lawsuits have proceeded to judgment. As of September
30, 1995, the Company had unpaid judgments and unresolved claims against it
totaling approximately $800,000-$1,000,000. The Company believes that these
amounts can be resolved for significantly less than originally claimed.
On March 31, 1993, the Company's subsidiary, Definicon International
Corporation, and its wholly owned subsidiary TrueTech, Inc. filed for relief
under Chapter 7 of the Bankruptcy Code. In April 1995, the Chapter 7 Trustee in
the U.S. Bankruptcy Court, Central District of California, brought several
adversary proceedings against transfers. Helionetics believes the adversary
proceedings have no merit.
The Company, on July 19, 1995, filed a civil complaint in Superior Court
of Los Angeles County, Case No. BC 131 749, against U.S. Surgical Corporation
and others. The Complaint seeks over $2,500,000 compensatory damages and
unspecified punitive damages. The Defendants removed the case to the U.S.
District Court for the Central District of California under Case No. 95-5513 RAP
(RNBx). The Company expects this to be a significant and protracted litigation.
The Company can give no assurance that it will prevail in this litigation
although management believes it has a meritorious cause of action. The Company
believes the cost of the litigation will have no material effect on subsequent
earnings of the Company. In connection with this litigation, the Company will
be seeking FDA approval to relocate its previously approved Phase 1 clinical
trial at an East coast university to another university where there will be no
conflicts of interest. The Company will be seeking regulatory FDA approval for
such action in the next thirty days.
The Company's counsel, Callahan, Blaine and Williams, as previously
announced, will be filing a lawsuit against the American Stock Exchange for
damages to the Company's shareholders as a result of their suspension in trading
of the Company's common stock.
15
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
In October 1995, Tri-Lite, Inc. filed a complaint in the U.S. District
Court for the Northern District of Ohio against the Company for $2,000,000 in
compensatory damages and $2,000,000 in punitive damages for the alleged
repudiation and revocation of the Company's guaranty of Tri-Lite's credit
facility with its senior lender along with other cause of actions.
The Company disputes all of Tri-Lite's claims and is preparing a
countersuit against Tri-lite, Lawrence Terkel, Tri-Lite's President, its Board
of Directors, and Tri-Lite's bank, seeking to recover the intercompany sums it
claims are due, seeking to rescind the proxy delivered to Tri-Lite management,
and seeking damages for corporate mismanagement, corporate waste, and likely
other claims.
The Company is contemplating filing a separate cause of action alleging
conspiracy against the Company's shareholders in order to gain control of
Tri-Lite that benefits the alleged conspirators and violates the fiduciary
duties to both the Company and Tri-Lite which is majority (65%) owned by the
Company. The alleged conspirators that will be named, but not limited to, are
Lawrence Terkel, Tri-Lite's President, Maurice Terkel (Lawrence father), certain
legal counsel and all members of the Board of Directors who will be held
personally accountable for such action. The Company will be seeking substantial
compensatory and punitive damages against the alleged conspirators. No
Assurance can be given that the Company will prevail on this litigation.
16
<PAGE>
HELIONETICS, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
A. None
B. None
17
<PAGE>
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.
HELIONETICS, INC.
DATE: November 22, 1995 /s/ E. Maxwell Malone
--------------------------------------------------
E. Maxwell Malone
Chief Executive Officer
DATE: November 22, 1995 /s/ Chaim Markheim
--------------------------------------------------
Chaim Markheim
Vice-President
DATE: November 22, 1995 /s/ Adrian Cayetano
--------------------------------------------------
Adrian Cayetano
Controller
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