Financial Analyst Advises Investors to Sell Helionetics Stock : Technology: Report says company has a history of exaggerating sales and earnings potential of prospects.

A financial analyst has recommended that investors sell the stock of Helionetics Inc., saying that the company has a history of touting the sales and earnings potential of its up-and-coming technologies.

Peter Miller, an analyst and principal with Roffman Miller Research, a money management and securities company in Philadelphia, issued a report earlier this month advising, “Don’t get zapped by Helionetics.”

“Over the last 12 years, Helionetics has promised investors high-tech breakthroughs . . . promises that have never been fulfilled,” wrote Miller, who was initially hired to produce a company-sponsored report but never received payment. “Why should we believe them now?”

Chaim Markheim, Helionetics’ chief operating officer, acknowledged that the company’s revenue projections have fallen far short of reality.

In March, C. Maxwell Malone, president and chief executive officer, projected sales of more than $35 million for 1992 and $214 million by 1996; in July, Chairman Bernard Katz revised this year’s estimate down to $20 million.

Katz, a controversial Beverly Hills financier, said earlier this month that annual revenue would be between $16 million to $17 million. Markheim would not make another projection.

Katz and Malone were traveling late last week and could not be reached for comment. In 1977, the Securities and Exchange Commission accused Xonics Inc., a high-tech firm that Katz headed until the late 1970s, of fraud and stock manipulation. Katz and three other officers signed a consent degree not to engage in such activities in the future.

Markheim maintains that the company is not hyping its prospects.

“Our ability to predict things seems to be lousy,” Markheim said. “Certainly we are telling the world about important products in the future. The problem has been arranging the financing. If you consider that hype, that’s fine. Mr. Miller can have his opinion.”

A tentative joint venture partner agrees with Markheim about the potential of one of Helionetics new technologies, the adaptive injection mode (AIM) filter, which is designed to reduce overheating in office-building wiring.

“We have done a preliminary investigation into the technology, and they have a lot to do to bring it to market, but we hope to market it for them as early as January,” said Michael Yugo, vice president of sales and marketing at Emerson Industrial Controls in Grand Island, N.Y. “We hope to finalize a joint venture to market an industrial product in the next week.”

But not all Helionetics’ ventures have succeeded. In the early 1980s, after emerging from bankruptcy with a new name, Helionetics attracted national attention by touting a new laser technology and its prestigious slate of directors, which included hydrogen bomb inventor Edward Teller. However, by 1986 the company was back in bankruptcy. After a protracted struggle, the company emerged from court protection a second time in 1989.

In December, 1991, company executives addressing a meeting of the New York Society of Security Analysts forecast 1991 sales of $10 million and a profit of $2.5 million. But the year’s profit was wiped out with a fourth-quarter loss of $2.3 million.

For the first six months of this year, however, the company reported a profit of $2.1 million, or 17 cents a share, up 40% from $1.5 million, or 16 cents a share, for the same period a year earlier. Revenue was $8.1 million, up 62% from $5 million.

A factor in this year’s revenue increase is Helionetics’ acquisition in January of Tri-Lite Corp., a Philadelphia maker of electrical lighting products, which was owned by Alvin Katz, Bernard Katz’s brother.

Even with the revenue gain from Tri-Lite, which had $10 million in sales last year, Markheim acknowledged that Malone’s March projection of $35 million in revenue for this year was based on optimistic forecasts.

And while the company has received infusions of cash from Katz’s wife, Susan Barnes, the company has reported cash shortages that have left it owing money to the Internal Revenue Service, the state of California and other creditors.

An unaudited filing in August with the Securities and Exchange Commission showed that Helionetics owed $900,000 in payroll taxes to the IRS and the state. The company owed an additional $500,000 in unpaid judgments won by creditors, according to the filing, while another $300,000 was in dispute.

And Definicon, a Helionetics subsidiary, owed at least $900,000 to creditors, the SEC filing said.

Markheim said the company is trying to settle the litigation favorably and is not under pressure to pay the judgments immediately.

Working capital on June 30 was $1.7 million, according to the SEC filing. Markheim said working capital has always been the company’s biggest problem and will continue to hamper its ability to bring new products to market.

The company reported current assets of $10.1 million and current liabilities of $8.4 million. But the assets on June 30 included accounts receivable of $6 million, which Miller said is unusually high for a company with six-month sales of $8 million.

Overseas deals haven’t panned out the way the company envisioned.

Helionetics had been counting on collecting $2.7 million in debt from a computer-components customer in Brazil but settled the suit in August for no cash and rights to some unspecified technology. Markheim said it was pointless to “chase a customer in Brazil.”

In February, 1991, the company said it had launched a venture to manufacture computer workstations in China. The company said it had a “preliminary inquiry for what may amount to up to $10 million in purchase orders.”

Although that deal has yet to contribute significantly to revenue, Helionetics continues to pursue business overseas. In September, the company said it signed a deal with a South Korean company to manufacture its graphics adapter boards for personal computers.

Miller, who with his father owns 35,000 restricted shares of stock, wrote in his report that investors should be wary of Helionetics’ claims for its new laser technology, add-on boards for computer monitors and a “revolutionary new product,” the AIM filter for safeguarding office-building wiring.

He also noted that the company’s stock outstanding has grown from 5.5 million shares in the past year to 10.1 million outstanding, and 12.8 million shares fully diluted. At Friday’s close of $4.375 a share, that gives the company a market value in excess of $40 million. Helionetics trades on the American Stock Exchange.

“That’s a high price for a company with little assets,” Miller said. “Especially when there are insiders selling stock.”

The reason for the growth in shares is that Susan Barnes, Katz’s wife, has been issued preferred stock in exchange for forgiving debt. The preferred stock can be converted to common shares. Markheim said the private placements of stock have produced additional financing for the company in tough times.

Miller counters: “My experience is very few companies will make claims like this. . . . The biggest growth in Helionetics is in its shares outstanding.”

Miller said that, although he cannot evaluate Helionetics’ technology, he thinks the company is so weak financially that it will have a hard time bringing to market anything developed in its laboratories. He said the company often reports that it is negotiating with customers or potential lenders but that those negotiations drag on.

Carl Frederick, an analyst at Frederick Research Corp., a brokerage in Plainfield, N.J., produced a research report on Helionetics--paid for by the company--that he said contains his independent opinion. He said he believed Helionetics has a good future if it gets financing.

“This company’s problem is more a problem of the American banking system,” he said. “It looks real to me.”