Psychiatrist Maneuvers to Control Pay-Fone

Times Staff Writer

Most company presidents want financial analysts to follow their firm. Much to the regret of Pay-Fone Systems President Lewis Greenwood, the only analyst paying any attention to his Van Nuys-based company is a psychiatrist. And, if Dr. Allen Kahn gets his way, next week Greenwood is going to be looking for work.

Pay-Fone stockholders cast their votes Friday in a bitter proxy battle that should determine whether Kahn, a psychiatrist-cum-investor from Chicago, or Greenwood, will control the $7-million payroll and accounting services company. The tally will be announced next week.

Called Poor Manager

Kahn, owner of 9% of Pay-Fone's stock, and his supporters contend that Greenwood is a poor manager responsible for Pay-Fone's weak stock performance, and that Greenwood and his wife have inappropriately received company funds.

"The investment community is interested in knowledgeable and goal-directed companies. But Pay-Fone is a kind of publicly owned family business and they are turned off," Kahn said. The solution, he said, is to "replace Mr. Greenwood" and bring in new management.

But Greenwood, who owns 29% of the company's stock, replied, "I did not get to $7 million . . . by being a loser."

In short, Pay-Fone finds itself embroiled in one of those nasty takeover battles now so commonplace in corporate America.

Lobbied for Votes

At Pay-Fone's annual stockholders' meeting last week at the Airtel Plaza hotel in Van Nuys, Kahn and Greenwood worked the arriving crowd like feverish politicians hunting for last-minute support. One of the elements of circus in a proxy fight is that shareholders can vote early and often; only their last vote counts.

Kahn and a group of supporters came well-equipped, hiring a court reporter and setting up a video camera to record every detail of the meeting. But Greenwood had security guards toss out the court reporter and remove the camera.

Kahn's side asked for an independent observer to be on hand for the vote count. Pay-Fone said it wasn't necessary.

Later, during his five minute speech to shareholders, Kahn said, "There has been no growth in this company. This company has been doing extremely poorly." At that moment, Pay-Fone's management told Kahn his time was up.

The dispute dates from 1982, when Kahn, who besides running a Chicago psychiatric practice is an active stock player, began buying Pay-Fone shares. Kahn, 66, hunts small, undervalued companies with good growth potential.

An articulate man, Kahn is a veteran investor and obviously has a lot of money to invest. His Pay-Fone holdings alone are worth nearly $700,000. He said he owns other stocks but declined to go into much detail.

Started in 1955

The company was founded by Greenwood, now 61, with a few hundred dollars back in 1955. In the late 1960s, the company came up with a way of transmitting payroll data over telephone lines using touch-tone phones.

Pay-Fone's clients are small companies, with 15 to 200 employees, whose executives don't want the headaches of issuing payroll checks, keeping accounting records or filing the necessary tax forms. It's often faster and cheaper to hire a third party, like Pay-Fone. Although Pay-Fone does business in several states, two-thirds of its customers are in the greater Los Angeles area.

Thanks to increasing computer sophistication, the 1980s has been a boom time for many payroll and accounting firms. Automatic Data Processing (ADP), a $1.2-billion Pay-Fone rival in Roseland, N.J., has seen its profits more than double since 1981, while its stock has tripled. Another firm, Paychex, based in Rochester, N.Y., has $50 million in revenue, tripling its earnings and stock price since it went public in 1983.

Performance Dismal

By contrast, Pay-Fone's performance has been dismal. In 1981, when Pay-Fone had its last stock offering at $6.50 a share, the company earned $558,436 on $4.5 million in revenue. Since then, Pay-Fone has yet to match 1981's profit for a full year and, in 1984, it lost a record $606,058.

In the meantime, Kahn and other Pay-Fone investors have seen the Dow Jones Industrial Average jump from 800 to 2200 during the stock market surge that began in 1982. Pay-Fone has not added to that surge. The company's stock closed Monday at $5.125.

Greenwood lays much of the blame for his company's recent poor performance on two marketing executives he hired. Marketing techniques were overhauled, he said, and costs rose dramatically. "We got sidetracked," he said.

In late 1985, Greenwood took over the company's marketing himself.

There was also an ill-fated attempt to set up Pay-Fone franchises across the country. Pay-Fone ended up paying $370,000 to several franchisees who won arbitration cases against the company.

"We have conquered so many of our obstacles," Greenwood said, insisting that Pay-Fone has "a bright future." He notes that for the six months ended Dec. 31, Pay-Fone's profits more than tripled, to $525,343, on flat revenue of $3.7 million.

But Kahn and his group contend that Pay-Fone hasn't found any new business, that all Greenwood has done is cut marketing costs to help short-term earnings without boosting the company's long-term prospects.

Kahn also objects to Greenwood's executive perks.

Entitled to Bonus

Besides Greenwood's $120,000 annual salary, his employment contract entitles him to a bonus equal to 5% of the company's year-end pretax income. (If the company's first six months results hold up for the full fiscal year, Greenwood would earn an extra $55,521.)

For the last fiscal year, Greenwood also received $52,877 for renting to Pay-Fone a building he owns in North Hollywood.

Greenwood is also a pilot and flies Pay-Fone's single-engine airplane. When the company bought the plane in 1978, it paid for some of Greenwood's flying lessons. Greenwood says by piloting the plane he can make distant meetings, save commuting time and add to his productivity.

Kahn countered: "A company this size should not be in the flying business."

A final point of dispute is the $98,634 real estate commission Greenwood's wife, Helen, received from Pay-Fone. Helen Greenwood, a real estate broker, was hired to find a site for the company's new headquarters.

Pay-Fone signed a 40-year ground lease on the vacant 1.5 acres that she found next to Van Nuys Airport. The ground lease, at $1,824 a month, is a bargain, real estate experts say.

Commission Contested

Good deal or no, however, a broker usually gets a commission based only on the cost of the ground lease. Pay-Fone then spent $2.9 million to construct a headquarters building on the land and based Helen Greenwood's commission on both the land lease and the building cost.

Greenwood said the fee was reasonable because the overall deal was a "once-in-a-lifetime situation," and that "I would have paid the same commission to any broker."

But Bruce Kusada, a broker with Charles Dunn Co., said basing a commission on building as well as land costs is unusual.

Kahn has argued to shareholders that a real-estate agent with Coldwell Banker on a similar deal would have received a commission of $17,000, not $98,000. He also objects to Greenwood hiring his wife. "It's not prudent or appropriate business practice for a public company," the psychiatrist said.

Refused Seat on Board

Upset by Greenwood's handling of the company, Kahn last summer asked Greenwood for a seat on the company's board of directors. Greenwood refused. "He'd had no experience in running a company of this kind," Greenwood explained. Kahn then decided to launch a proxy fight to oust Greenwood.

Kahn was in a similar situation in the early 1980s. He'd invested in Hollymatic, an Illinois company that sold machinery used to make hamburgers. Kahn eventually led a successful proxy fight and sold off one of the company's divisions. His investment in the reorganized firm, Kahn claims, "is worth five times what I paid for it."

Greenwood might have avoided this headache if he had sold his 29% share of Pay-Fone to outsiders last year, something he considered. Greenwood, weary of the management responsibility, liked the idea of selling his stock for a premium price and perhaps continuing to do some marketing for Pay-Fone.

Guy Lundberg, a Mar Vista resident, and Richard Kelton, a Santa Monica real estate developer, wanted to buy out Greenwood. Lundberg, son of the late Dan Lundberg, who published a celebrated oil industry newsletter, had run his own data processing firm and liked Pay-Fone's potential.

Deal Fell Apart

But the Lundberg-Kelton deal fell apart. Lundberg says Greenwood insisted on a contract that would have indemnified Greenwood against lawsuits. Greenwood says he broke off negotiations because Lundberg and Kelton wouldn't guarantee him that they didn't intend to "loot" the company.

Lundberg and Kelton, who control about 3% of Pay-Fone's stock, then threw their support to Kahn. Kahn says that, if his group wins control of the company, Lundberg will be named Pay-Fone's chief executive.

If Kahn's side doesn't win the proxy fight, he says, it might launch a full takeover bid and try to buy a majority of Pay-Fone's shares.

About the only point Greenwood and Kahn agree on is that Pay-Fone could have a rosy future.

"This company can grow immensely with proper management. If I thought otherwise, I would have sold my shares and taken my licking," Kahn said.

"We're at the very brink of a tremendous upsurge of growth and profitability," Greenwood said. "If Dr. Kahn had a little more patience, he'd be pleased with the end result."

It looks, however, as if only one of them is going to end up happy.

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