May File Under Chapter 11 Today : Amid Losses, Helionetics Plays Defense
Things never were terribly quiet around Helionetics. The tiny Irvine defense contractor first won national attention five years ago after it emerged from Chapter 11 bankruptcy and began attracting a number of top military guns to its board of directors.
Heads turned when it won a Navy contract to develop a potentially lucrative laser communications system. And eyebrows were raised by the machinations of Bernard Katz, its controversial founder and major shareholder.
But while outsiders’ attention was often focused on the amusing sideshow, Helionetics’ business faltered. And now the company faces bankruptcy, possibly as early as today if negotiations with one of its lenders break down.
Although Helionetics representatives continued to talk to Downey Savings & Loan Assn. of Costa Mesa late Tuesday, company officials said they were fully prepared to file today for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.
Breathing Space
“The talks are continuing, but we’re presuming that we’ll be filing,” said Michael Mann, Helionetics president. Mann said the company was forced to consider bankruptcy when Downey, its second-largest lender, threatened to foreclose on the company for non-payment of a $4.5-million loan. Downey had set its foreclosure action for Thursday.
The Chapter 11 filing would give Helionetics some much-needed breathing room to refinance its $16 million of outstanding debts, line up new investors and strengthen its newly refocused business strategy.
Katz, Helionetics’ founder, former board member and largest shareholder, said Tuesday that he has spent the last several months unsuccessfully looking for a merger or joint venture partner for the troubled company. Katz said his search would continue even if the company files for bankruptcy.
A colorful and controversial Beverly Hills investor, Katz brought the company a good portion of the notoriety and technological renown it attracted over the last six years.
Katz first started tongues wagging by packing the company’s board of directors with a Who’s Who of national military advisers, including hydrogen bomb developer Edward Teller, retired Navy Adm. Thomas B. Hayward and retired Air Force Gen. David C. Jones, former chairman of the Joint Chiefs of Staff. In addition, Katz convinced former U.S. Treasury Secretary William E. Simon to join the board.
In recruiting them, Katz offered Simon, Teller and the former Pentagon officials Helionetics stock and options to acquire more if the company’s fortunes soared as originally planned.
Katz also focused the company’s attention on a relatively obscure blue-green laser technology, developed for nuclear weaponry at the Lawrence Livermore Laboratory. Katz personally bought patents for the technology and sold them to Helionetics.
However, when the company won military contracts to develop blue-green laser communications systems for the Navy, critics complained that the company was profiting from its board members’ Pentagon connections. Further, Teller, who owns nearly 34,000 Helionetics shares, was criticized for his role in advocating a space-based laser defense system because he could potentially profit from any Helionetics laser success. Teller was cleared of any conflict of interest after a White House investigation.
Remained Controversial
Throughout all of this, Katz remained the company’s most controversial figure because of a 1977 Securities and Exchange Commission inquiry into his stock promotion activities.
Some Helionetics officials complained rather publicly and loudly that Katz’s checkered background prevented the company from getting the respect and financial backing it deserved from Wall Street. To appease his critics on several occasions, Katz resigned from the board, only to return to it later. The latest resignation, his third, came earlier this month.
Simon resigned from the board in late 1984. Teller, Hayward and Jones resigned earlier this month. A few weeks later, Wilson K. Talley resigned as chairman of the board and was succeeded by John Shelton, a UCLA professor and board member since 1980.
Katz, who once controlled nearly 1.5 million shares of the company, now owns about 500,000--about 7% of the outstanding shares--and is gradually selling his stake because of his recent divorce settlement. The stock of Teller, Jones and Hayward is almost entirely pledged as collateral for Helionetics’ $11.5-million loan from Bank of America, the company’s biggest lender. According to SEC records, they did little, if any, trading of their stock and exercised few of their options.
While the company’s notoriety under Katz diverted attention and helped to increase the price of Helionetics stock to nearly $30 in 1983, the company wandered from its original defense orientation. As its problems became more visible, the firm’s stock slipped to its current value of less than $1 a share.
Strategy Blamed
Helionetics executives and others familiar with the company blame its ills on an overambitious expansion strategy undertaken in 1984. Under an aggressive acquisition program, Helionetics--which had built its reputation on its laser and power-supply equipment for the military--bought an offshore oil exploration equipment manufacturer, a personal computer products company and an alternative energy research firm.
“That wonderful hodgepodge of things really was crazy,” said William Hughett, a stockbroker for Prudential-Bache Securities in Indianapolis who has tracked the company for years.
Although Mann trimmed the company’s operations, expenses and employees after assuming the presidency in early 1985, the losses continued. In the last 18 months alone, the company has lost more than $23 million. Meanwhile, sales have slowed to an annual rate of about $14 million.
Mann, who has sold many of the non-defense operations, says the new strategy calls for Helionetics to concentrate on its laser and power-supply businesses. The laser subsidiary, which the company said will not be affected by any bankruptcy filing, is considered to offer Helionetics the most promising opportunities.
Mann said the company is currently working on a $5-million Navy contract to develop a submarine communications system based on the blue-green laser, which is ideally suited for the transmission of undersea messages.
Mann said that if the laser system is successful, it could mean up to $100 million in business for the company. Analysts have said the laser system could be used to replace the communications system compromised by the James Walker spy ring, the group of Navy seamen recently convicted of selling military secrets to the Russians.
“The company’s thrust is the laser,” said George deB. Bell, co-chairman of the Philadelphia investment banking firm of Janney Montgomery Scott who resigned from Helionetics’ board earlier this month. “That’s where the growth will be.”
HELIONETICS AT A GLANCE
Quarter 1st 2nd 3rd 4th 1983 Revenue $2,758,000 3,346,000 5,127,000 5,873,000 Net Income 506,000 479,000 642,000 624,000 1984 Revenue $4,436,000 5,052,000 3,795,000 4,055,000 Net Income 860,000 556,000 (960,000) 130,000 1985 Revenue $3,409,000 2,172,000 3,653,000 2,960,000 Net Income 103,000 (5,047,000) 104,000 (17,608,000) 1986 Revenue $3,560,000 NA Net Income (1,380,000) NA
