Current Woes : Troubles at Electric Bus Firm

Last fall, a small company called CleanAir Transit announced the “Santa Barbara Success Story”: By acquiring a proven technology and a respected board of directors, it was setting out to become the nation’s first company to build buses that run on electric batteries.

That would be no small triumph. The company could expect to gain a significant share of an estimated $3.6-billion worldwide market in pollution-free shuttles serving airports, downtown shopping loops and recreational complexes.

Now, just seven months after its founding, the company is struggling. Its two top executives have resigned. Its first and most influential customer is disenchanted. And its efforts to raise capital and sell more buses have reached an unwelcome pause.

CleanAir Transit’s woes reveal a rough-and-tumble side to the exploding world of new environmental technologies--an industry rife with visionary, if opportunistic, entrepreneurs at a stage that many investors compare to the adolescent computer business of the 1950s.

“This is a product that is needed,” said CleanAir investor and board member Donald P. Hodel, who served as secretary of energy and then secretary of the interior in the Reagan Administration. “The demand potential out there is very, very substantial.”

But CleanAir Transit has already had more than its share of problems meeting that demand:

* Founder Larry H. Welch, a charismatic and talented fund-raiser, is a defendant in suits filed by shareholders of his previous company--the nation’s second-largest burglar alarm firm--which filed for bankruptcy reorganization.

* Former President Richard M. Harmon turned out to have bankruptcy problems of his own--which Welch tried to ease with a dose of CleanAir’s start-up funds.

* The current chief executive, who replaced them, is at war with the owners of the last company he ran. They accuse him of plotting to sell the company without the board’s approval.

CleanAir Transit has also managed to alienate the man who by all accounts is responsible for much of whatever “Santa Barbara success story” has been achieved: Gary Gleason, general manager of the Santa Barbara Metropolitan Transit District.

“Part of the allure of CleanAir Transit was their representation that they were going to raise all sorts of capital to advance electric vehicles,” Gleason said. “They were going to make Santa Barbara the (nation’s) premier electric vehicle operation.”

Gleason--who set the electric-bus saga in motion in 1989, when city officials asked the transit district to devise a downtown shuttle--no longer believes that promise will be fulfilled. At least not by CleanAir.

“This business is at the stage where technical accomplishment promotes the product, as opposed to salesmanship,” Gleason said.

Gleason’s agency first encountered CleanAir when the firm purchased the design of a respected Santa Barbara manufacturer that had built two electric buses for Santa Barbara Transit with backing from Southern California Edison Co.

Given the success of those first vehicles, no one was asking questions about CleanAir’s management, recalled Richard Schweinberg, Edison’s manager of electric vehicles.

“It wasn’t as though it was a new technology from people we didn’t know,” Schweinberg said. “On a normal procurement, we don’t check out the careers of officers of the company.”

Indeed, CleanAir’s first bus was dependably gliding along Santa Barbara’s downtown streets when those careers became an issue, as the Santa Barbara News Press and the New York Times published articles detailing Welch’s background.

At least four shareholder lawsuits filed in recent months have alleged that Welch and other executives of Alert Holdings Inc.--an Englewood, Colo.-based burglar alarm monitoring company--engaged in fraud and mismanagement as the company tumbled into Chapter 11.

Welch founded Alert in 1985. At a blistering pace, he raised more than $250 million to buy hundreds of small remote-alarm systems in 45 states. The idea was to profit from economies of scale by combining all the monitoring offices in a central location.

But in practice, one of the lawsuits alleges, Alert’s “management and internal controls were wholly inadequate to supervise and control properly the business activities in which Alert was engaged.”

Alert Holdings’ problems, Welch counters, were the result of the capital-raising failures of another executive.

Whatever the case, a powerful Alert investor forced Welch’s resignation last August. The first lawsuits were filed in November, after the company announced that hefty quarterly payments due Alert’s limited partners would not be forthcoming. Alert Holdings filed for Chapter 11 in December.

Some of Welch’s previous ventures also ended in bankruptcy filings.

In May, 1985, Welch bought a controlling interest in Schaak Electronics Inc., a Minnesota-based consumer electronics chain, becoming chairman and chief executive.

Welch was ousted by the founder in weeks. He sued to get his job back, and the firm sought Chapter 11 protection that July.

Welch had attempted to merge Schaak with Connecting Point of America Inc., a consumer electronics firm he had founded. Connecting Point filed for Chapter 11 before he could bring the merger off.

With Schaak, “I was only involved with the company for seven weeks,” Welch said, “and I couldn’t turn it around.” He said Connecting Point has rebounded from its financial ills.

“I am not an operating person,” Welch acknowledged last week. “I am an investor and conceptualizer, but I have virtually no operating skills at all. I haven’t operated a business in at least a decade.” Welch also believes that the press has unfairly singled out five problem businesses among the 25 companies with which he has been associated.

Welch was not the only CleanAir executive with financial question marks on his resume. It emerged that Harmon, CleanAir Transit’s super salesman, filed personal bankruptcy in the mid-1980s.

In fact, when he hired Harmon, Welch said, he promised him a $250,000 payment--later reduced--in part to help clean up his debts. The payment is described in CleanAir documents prepared for potential investors as a fee for preparing the firm’s business plan.

“He didn’t come up with the business plan,” Welch acknowledged. Harmon “convinced me that he would not be effective” if he couldn’t pay off some of his debts.

Welch, said Harmon, “was the one who elected to do it that way.”

In an investor’s summary issued Nov. 15, Harmon’s biographical sketch emphasized his experience as chief executive of Golf Car Services Inc. in Rancho Mirage. Yet that venture failed the previous spring, according to investors.

Harmon describes Golf Car as “dormant . . . a seasonal business.” He acknowledged owing the partners about $55,000.

Former Cabinet member Hodel--who first heard of Welch and Harmon’s business problems in December--dismisses them as “start-up issues.”

Welch resigned as chief executive in October and left the board in January. He is now trying to raise capital for the company.

Harmon resigned Feb. 4 and has since incorporated his own electric vehicle company, Electric Vehicle Marketing Corp. Both men retain major investments in CleanAir Transit.

New Chief Executive C. Paul Davis has taken on a company with the wind knocked out of its sails.

He hopes to finish raising $2 million in capital in the next 45 to 90 days; the original goal was the end of 1991. A November sales projection--40 vehicles in 1991, 143 by the end of 1992--is ancient history. No new orders have been signed since November; sales so far total seven buses.

And while Davis said he has successfully run four other companies, there are those who believe otherwise.

By most accounts, Davis was forced out in 1986 as president and chief executive of PerfectData--then a Chatsworth-based producer of computer products he had founded 14 years before. Davis said that he resigned and that a challenge from another investor was “never put to the test.”

His next job, in 1990, was president and then chief executive of Award Software, a privately held computer software firm in Los Gatos.

Little more than a year after joining the $6-million company, Davis was out. He and Award’s chief financial officer at the time have sued the firm’s owners in Santa Clara County Superior Court, alleging breach of their employment contracts.

Deborah Marlow-Vishney and her husband, co-owners of the company, have countersued, alleging that Davis breached his fiduciary duty, was insubordinate to the board and made personal use of company funds.

John J. Morrissey, a veteran auto industry executive who serves on CleanAir’s board, is untroubled by Davis’ background. The new CEO, he believes, is doing “a fine job.”

As for the company, he sees reason for optimism.

“We’ve probably moved more people in an electric vehicle than anybody else in the world,” he said, “and there is something to be said for that.”