Troubled Helionetics Heads for Showdown on Wednesday

Eight years ago, Bernard Katz found a bankrupt Orange County defense electronics firm and arranged a financial rescue so it could remain in business. He gave the company a new name with a high-tech ring: Helionetics.

Today, Helionetics is bankrupt again. And the flamboyant Beverly Hills investor with a controversial past wants it back.

Helionetics attracted national attention in the early 1980s when Katz recruited Edward Teller, father of the hydrogen bomb, and several other military and scientific luminaries to serve on the company’s board.

The company was developing an exotic blue laser that would allow submarines to communicate beneath the ocean depths for the first time. Some experts later said the laser could play an important role in the “Star Wars” missile defense program.

Helionetics enjoyed some heady days as its revenue and stock price soared. But things came crashing to a halt in July, 1986, when the Irvine firm filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

The big-name board members and the exotic blue laser are gone now, and the company is struggling to stay afloat in the midst of a bitter bankruptcy battle that has veteran attorneys shaking their heads in wonderment.

Competing Reorganization Plans

Four different bidders are seeking control of the company and have proposed competing reorganization plans to the U.S. Bankruptcy Court in Santa Ana.

The submission of four rival reorganization plans is extraordinary, bankruptcy attorneys said, pointing out that it is rare to have even two plans in most Chapter 11 cases.

The Helionetics case involves a complex web of financial dealings and multimillion-dollar lawsuits alleging fraud, extortion and racketeering. And almost everyone involved in the case seems to be suing or being sued by somebody.

At stake in the battle are millions of dollars in creditor and shareholder claims, the future of the company’s 60 employees, and the outcome of several multimillion-dollar lawsuits.

The complexity of the case has at times bewildered the scores of attorneys, creditors and others involved in the proceedings. The confusion has led to some humorous moments in the courtroom.

For example, U.S. Bankruptcy Judge John E. Ryan recently asked attorneys to “pick a number between 1 and 10” to determine which of the four plans would appear at the top of ballots to be sent to creditors.

Two attorneys immediately began arguing over whether Ryan should write the winning number down or whether he could simply recall it from memory. Ryan told the bickering lawyers that his children always trusted him to keep a number in his head, so they ought to as well.

The four-way contest could be settled Wednesday at a hearing in Ryan’s courtroom. But attorneys and others involved in the case say the outcome is still uncertain. In a recent vote by creditors, none of the four plans received enough support to guarantee confirmation by Ryan. Downey Savings & Loan Assn., which is owed $4.5 million by Helionetics, rejected all four plans.

James I. Bibb, a Garden Grove businessman who wants to run the reorganized company, predicts that the hearing will be “a bloody war.”

“It will be wild and woolly,” agreed Bankruptcy Trustee Jeffrey C. Coyne.

The center of attention in the case is Katz, an accountant who has specialized in investing in high-technology businesses. Katz and several associates, including a former Helionetics president, Charles W. Jobbins, have submitted one of the four rival plans.

A key issue in the bankruptcy case is whether Katz, whose controversial business background and strategic influence caused problems for Helionetics, should be allowed to be a major force in the reorganized company.

Critics of Katz maintain that he played a key role in a string of unsuccessful acquisitions by Helionetics in 1983 and 1984. The purchases drained the company’s cash and ultimately led to its financial downfall.

Although Katz was not a Helionetics officer during that period, he received finder’s fees from the company for searching out many of those acquisitions.

Katz declined to be interviewed for this article and referred questions to Jobbins, who maintained that Katz wasn’t entirely responsible for the acquisitions that turned sour.

One of many legal entanglements in the case is Katz’s bitterly contested divorce from his former wife, Joyce Katz.

The court has frozen nearly $3 million of assets claimed by Joyce Katz as community property, according to her attorneys. With his assets tied up in the divorce case, Katz has had difficulty raising the funds needed to carry out his proposed reorganization plan for Helionetics, according to filings in the divorce case.

Coyne originally endorsed the Katz-Jobbins plan but withdrew that support in August after Katz failed to post a “good faith” deposit of $1.5 million required by the trustee and requested by the Bank of America. Coyne then drew up his own reorganization plan, which he calls a “safety net” should none of the three other proposals be approved by the judge.

Another bidder, Bibb, is president of Phoenix Laboratories, a small environmental testing firm in Garden Grove. Before submitting his reorganization plan, Bibb was chairman of the committee that represents Helionetics’ unsecured creditors. He said he entered the bidding war because he mistrusted Katz’s motives.

“I’m in this thing because of Bernie Katz,” Bibb said. “If he wasn’t involved, I would have walked away a long time ago.”

Richard A. Walden, 40, a business consultant and critic of Katz, is also bidding for the company. From 1982 to 1985, Walden headed Helionetics’ largest division. Walden was dismissed in May, 1985. He contends that he was fired because he challenged accounting practices at Helionetics. But Helionetics officials said Walden lost his job because he refused a reassignment. Walden rejoined the company as a paid consultant in early 1988.

Each of the four rival bidders would handle the company’s financial obligations differently. Here is a brief look at the reorganization plans they have submitted to the court:

- The Katz-Jobbins plan: Jobbins would become chief executive and Stanley J. Emeterio, a Mission Hills accountant, would become president and chief operating officer. Katz would be a major shareholder but would not serve as an officer or director. The plan is the only one of the four under which Helionetics would retain its Vard Newport division, a Santa Ana aerospace-components company that has been put up for sale by the bankruptcy court. Under Katz and Jobbins, Helionetics would attempt to expand through acquisition of related businesses.

- The Phoenix plan: Current corporate officers would be replaced, with Bibb becoming president and chief executive. Bibb would attempt to expand the company by introducing products based on new technologies. He would seek to attract new investment.

- The trustee’s plan: Current corporate officers would be replaced and a new president and chief executive appointed. The new officers would be selected by the company’s shareholders, primarily current creditors. The plan does not specify how the company would be operated.

- The Walden plan: Current corporate officers would be replaced. Walden would become president and chief executive. He would try to expand the company’s business around its electronic power supply conversion operations.

Two key players in the Helionetics case are the company’s principal secured creditors, Bank of America and Downey Savings & Loan, which are owed a combined total of $17 million. As secured creditors, the two banks have the most clout in determining who gets control.

Helionetics’ bankruptcy filing followed unsuccessful negotiations on repayment of an overdue, $4.5-million debt owed Downey. The thrift had threatened to foreclose on Helionetics assets and auction off its businesses on the steps of the Orange County Courthouse.

“I’m mad,” Downey Savings President Maurice L. McAlister said when asked to comment on the Helionetics bankruptcy.

Before the bankruptcy filing, McAlister said, “we were looking at financial statements that showed a huge net worth. And then 8 or 9 months later, the results showed there was nothing there. We want to find out what happened. We don’t like being taken in.”

Employee Stock Plan Sued

In April, 1987, Downey sued Helionetics’ employee stock plan, Katz, the Bank of America and the accounting firm of Arthur Anderson & Co. The $155-million suit claims that the defendants engaged in a conspiracy to transfer the assets of Helionetics’ prized laser division to Katz and a newly formed company, HLX Laser of San Diego, to shield those assets from the claims of Downey and other creditors. The case is still pending and no trial date has been set.

In September, 1987, Katz filed a $315-million suit against Bank of America, Downey and HLX Laser, alleging breach of contract in the sale of HLX Laser to General Dynamics Corp. Katz owned 45% of HLX. The suit has not yet come to trial.

Katz’s involvement with Helionetics began in 1980, when he took over Delta Electronic Control Corp., a bankrupt manufacturer of electronic power conversion equipment.

Katz became the firm’s largest shareholder.

One of Katz’s first moves was to sell Helionetics the patent rights to a laser-switching device that Katz had purchased in 1979 from Jeffrey Levatter, a UC Davis researcher, for $36,000. Katz sold the patent rights to Helionetics for $700,000, plus an additional $3,000 a month and a percentage of royalties based on sales.

Katz then recruited to the company the prestigious group of scientists who had been involved in laser research at Lawrence Livermore and other major defense firms.

Katz also assembled an all-star board, offering directors cheap stock as an incentive. Board members included Teller, a founder of Lawrence Livermore and Nobel prize-winning physicist; William Simon, former secretary of the Treasury; retired Adm. Thomas Hayward, former chief of U.S. naval operations, and Gen. David Jones, former chairman of the Joint Chiefs of Staff. All four later resigned from the Helionetics board.

In 1983 and 1984, Helionetics grew rapidly through acquisitions of other firms in fields as diverse as oil-exploration equipment, personal computers and energy research. According to an agreement with the company, Katz was to receive $1.5 million in finder’s fees for four of those acquisitions.

The company’s revenue soared from $2.4 million in 1980 to more than $17 million in 1983. The company’s stock rose to a high of $31 a share in 1983.

But Helionetics ran into trouble in 1985, when many of its acquisitions turned sour. The company lost $19 million that year.

Even before it began losing money, Helionetics had become embroiled in controversy. The company’s stock rose sharply just before President Reagan delivered a speech in March, 1983, outlining his plans for the space-based missile defense system known as “Star Wars.”

Teller, a prominent “Star Wars” advocate, came under scrutiny for backing a program that might potentially help Helionetics, whose laser was thought to have potential use in the program.

White House Investigation

The White House conducted an investigation into a possible conflict of interest by Teller in his dual role as Helionetics shareholder and unpaid scientific adviser to the White House. The Securities and Exchange Commission, meanwhile, looked into possible insider-trading activity at Helionetics. Teller was cleared of any wrongdoing, and the SEC eventually dropped its investigation.

It wasn’t Katz’s first brush with the SEC. In 1977, the agency accused Xonics Inc., a high-tech firm that Katz founded and headed until the late 1970s, of fraud and stock manipulation. Katz and three other officers of the company signed a consent decree agreeing not to engage in such activities in the future.

Katz had other troubles with Helionetics. In 1984, Wendell Sell, a former Helionetics chairman, and Marvin Stern, a former consultant, accused Katz of violating federal securities laws and state fraud laws. Katz, who denied the charges in court filings, agreed to settle the suit last May by paying $475,000 to the pair.

Katz was also named in a $30-million suit brought in September, 1986, by Michael Mann shortly after he was fired as Helionetics’ president. The suit accused Katz and six other company insiders of fraud and racketeering, among other charges. The case is set to go to trial in federal court in Los Angeles on Dec. 6.

Jobbins stressed that Katz would not be involved in the firm’s day-to-day activities if their reorganization plan is accepted by the court.

“I don’t think his presence will hurt the company,” Jobbins said. “It’ll be an advantage to have him on the sidelines, which is where he’s going to be. I insisted he not be a board member or member of management.”

‘Great Promoter’

Jobbins praised Katz as someone “with a great deal of imagination and a great promoter. He is a very flamboyant figure and does a lot of unusual things. I’m more conservative than he is, and I sort of hold him down.”

And Jobbins already is laying plans to rebuild the Helionetics board with some familiar names of the past. Jobbins said he has asked both Teller and Hayward if they would be interested in rejoining the Helionetics board. He said neither one has agreed to do so.

Teller did not respond to several requests for an interview. However, associates of Teller said they doubt that he would have any further involvement with Katz or Helionetics.

“He was pretty disgusted,” said one Teller associate, who asked that his name not be used. “He didn’t want anything to do with any of the people involved with Helionetics.”

No matter who winds up with control, Helionetics will be a much different business than the glamorous laser company that Katz built.

Since filing for bankruptcy, Helionetics has divested most of its operations. One of those units, Marinco Computer Products, was purchased by Katz.

Helionetics’ principal remaining business is Delta Electronic Control, a modestly profitable manufacturer of electronic power conversion equipment for the military.

Ironically, Delta was the bankrupt electronics firm acquired by Katz 8 years ago.

Katz took it out of bankruptcy then, and now he would like to do it again.

The History

From Bankruptcy in ’79 to Profitability--and Back to Bankruptcy in 1986

November, 1979: Bernard Katz acquires rights to blue laser technology from Jeffrey Levatter, a UC Davis physicist.

January, 1980: Katz purchases assets of Delta Electronic Control Corp. of Irvine in a bankruptcy sale. He becomes the company’s principal shareholder and renames it Helionetics.

October, 1980: Edward Teller, a Nobel Prize-winning physicist and often called the “father of the hydrogen bomb,” is named a director of Helionetics.

June, 1981: Helionetics raises $3.1 million in a public stock offering.

March, 1984: Helionetics reports record annual revenue of $17.5 million and profits of $2.2 million.

April, 1984: Katz resigns as a Helionetics director, acknowledging that his controversial business background is hindering investment in the firm.

May, 1985: Katz, who had rejoined the Helionetics board in January, resigns as a director for a second time.

April 3, 1986: Helionetics discloses that it is in default on a $4.5-million loan from Downey Savings & Loan Assn.

April 16, 1986: Helionetics reports a $22.4-million loss for 1985.

July 1, 1986: Helionetics announces that four of its 10 directors have resigned. The resignations include Teller; Thomas B. Hayward, retired Navy admiral; David C. Jones, retired Air Force general, and George de B. Bell, co-chairman of a Philadelphia investment firm.

July 31, 1986: Helionetics files for protection from creditors under Chapter 11 of the federal bankruptcy code.

October, 1987: The U.S. Bankruptcy Court in Santa Ana approves the sale of Helionetics’ HLX Laser division to General Dynamics for $4.25 million.