Codercard, an Irvine technology firm, has settled a lawsuit filed by best-selling author Sidney Sheldon and two other investors as part of what its chairman characterized as an unsuccessful effort to seize control of the company.
The Sheldon suit alleged that Codercard insiders, including company founder and president Robert W. Herman, had issued millions of shares of Codercard stock to themselves in a bid "to control Codercard for their own benefit."
As part of the settlement, Herman and two other Codercard officers are to surrender stock worth about $4 million.
Codercard, a developer of computer security devices, has been losing money for several years as it tries to find a market for its products.
The price of the company's stock has soared in recent months, however, from about 10 cents a share in December to 60 to 70 cents in the last week.
Analysts said the stock has been reacting to recent Codercard management changes and rumors that the Irvine firm is favored to win an important federal contract.
After Codercard issued 15 million shares of stock to three of its executives, the suit was filed last July by Sheldon, William Haber, Sheldon's agent, and Paul Abramowitz, a Los Angeles investor.
The suit alleged that the additional shares decreased the value of the existing stock held by other shareholders. Sheldon, Abramowitz and Haber collectively own about 2 million shares of Codercard stock, according to Abramowitz.
The 15 million shares were issued in equal portions to former Codercard Chairman Herman, Executive Vice President Willis Marsing and Vice President Robert Gray in lieu of two years of contracted salaries totaling $650,000.
Codercard, which lost $477,000 on sales of $193,000 in the fiscal year ended last June, could not afford to pay the executives, Chairman Ronald W. Hofer said.
Under the settlement, Codercard has agreed to cancel 23 million shares of stock, about a fourth of the firm's 92 million shares outstanding. The company will now have 69 million shares outstanding.
The canceled stock includes 6.5 million shares held by Herman, Marsing and Gray. At 60 cents a share, those shares have a value of about $4 million.
Under the settlement, which must be approved by a Superior Court judge, the three executives will retain 8.5 million shares, Hofer said.
Most of the remaining shares to be canceled under the settlement were issued by the company in connection with proposed acquisitions and other transactions.
Hofer contended that the suit was part of an effort by Sheldon, author of such books as "Rage of Angels" and "Windmill of the Gods," Abramowitz and Haber to gain control of Codercard. Hofer said the three shareholders filed the suit after Codercard management refused to sell them newly issued stock that would have given them a majority stake in the company.
"They wanted to put in new management and take control of the company," Hofer said. "They made a proposal to buy additional shares but were refused by the company."
Abramowitz said he, Sheldon and Haber last year talked with Codercard officials about boosting their investment in the Irvine firm because it was struggling financially. But he denied that they intended to take control of Codercard.
Founded in 1983, Codercard makes electronic cards designed to foil computer hackers and others trying to gain unlawful access to computer files. The company has been trying to interest government agencies, financial institutions and other potential customers but has reported little success.
Hofer said Codercard expects to announce later this week a joint venture agreement with an Australian firm. Hofer, a Scottsdale, Ariz., attorney and international business consultant, was named chairman of Codercard in October.
Dennis M. Dougherty, a securities analyst with Marshall Davis, a Denver investment firm, said there have been rumors that the company is favored to win a major competitive contract to develop computer security devices for the National Security Agency.