Investor Struggles to Oust Management at Jammed Irvine Copier Firm : Technology: The chairman of a New York publishing firm is heading the move to oust Gradco’s directors.
For a while, Martin E. Tash, chairman of a small New York publishing firm, seemed content to wait until his investment in an Irvine company that is the world’s largest supplier of office copier accessories bore fruit.
Last fall, Tash’s Plenum Publishing Corp., a publisher of obscure technical journals, paid $5.9 million for a 6.3% stake in Gradco Systems Inc., a struggling manufacturer of office copier sorters and computer printer products.
But in the past year, Tash’s investment has gone sour--in a big way. He’s taken more than a $3-million paper loss on his initial investment. And he’s lost patience with Gradco’s management, in particular Chairman Keith B. Stewart, the company’s controversial co-founder, who is described by critics and admirers as an autocrat who controls the firm with a tight rein.
Tash’s $50-million publishing firm has launched a proxy battle to oust Gradco’s directors and replace them with its own slate of directors. In the meantime, Plenum has filed a lawsuit against Gradco management alleging that company officers tried to enrich themselves at the expense of other shareholders through a recent reorganization involving Gradco’s Japanese subsidiary.
Some industry observers give Plenum a good chance of taking control of Gradco, which has been beset by a string of problems.
“I think Plenum has a good shot at a successful proxy fight,” said Jeff Kilpatrick, president of Newport Securities Corp., a Costa Mesa investment firm. “It seems to me the management of Gradco has left itself open to questions from shareholders.”
A few facts from Gradco’s past year tell the story: A management buyout engineered by Stewart collapsed; the company lost its biggest customer, which accounted for 25% of its total sales, and Gradco has been plagued by repeated delays in bringing new products to market. Moreover, Gradco lost $28.1 million for its year ended March 31, has been hit with several lawsuits and has seen its stock tumble by nearly 70% from a high of $19 per share in December to $5.75 per share. It closed Friday at $5.625, up 0.125. The company has lost about $100 million in market value in nine months.
“We are seeking to replace the board of directors of Gradco,” said Bernard Bressler, Plenum’s corporate counsel and secretary. “Mr. Tash is a plaintiff in a lawsuit against Mr. Stewart. Draw your own conclusions from that.”
Both Stewart and Tash declined to be interviewed for this article.
Newton H. Lee, Gradco’s corporate secretary, scoffs at Plenum’s bid, contending that the New York firm began acquiring Gradco shares in October, hoping to make a quick profit amid rumors of a possible management buyout.
“They came in at a high price with a view to profiting,” Lee said. “It’s clear they do not have a long-term interest in Gradco. They have not indicated they would manage Gradco.”
Tash’s dissatisfaction with Gradco has been brewing since last fall. In December, 1989, after Plenum made its initial investment at an average price of $13.36 a share, Stewart’s proposed management buyout of the company fell apart, and Gradco’s stock began to plunge.
In March, Gradco announced a complicated restructuring in which it transferred ownership of its most valuable operation--the copier product unit that provides about 70% of the company’s revenue--to its Gradco Japan subsidiary. Then, in August, the company disclosed it had granted Stewart and other key Gradco managers warrants to buy a 17% stake in the now more-valuable Japanese subsidiary.
That was the last straw for Tash. In late August, Plenum sued Stewart and Gradco’s top officers, accusing them of breaching their fiduciary responsibility to shareholders by using the restructuring to misappropriate the company’s most valuable asset.
According to Plenum’s suit, filed in Orange County Superior Court in Santa Ana, Gradco Systems sold a 27% stake in Gradco Japan in June to a Japanese investor group for $26.5 million, or $6.50 a share. At the same time, Gradco directors awarded Stewart and certain other Gradco executives warrants to buy 2.5 million shares, or 17% of the Japanese subsidiary, for only $1.86 a share, according to the suit and Gradco’s proxy statement.
The suit alleges that by approving warrants at below-market prices, Stewart and Gradco’s officers sought to pocket a windfall of more than $12 million for themselves. It also alleges that the board sought to hide the misappropriation of corporate assets through a complex transaction.
Lee said the company will defend itself “vigorously” against the lawsuit.
“The straw that broke the camel’s back was the Japanese deal,” said John Orendain, a broker-dealer with Dean Witter Reynolds in Carlsbad who represents shareholders with about 3% of Gradco’s stock. “Something smells fishy.”
At the time the suit was filed, Plenum also began raising its stake in Gradco. It now owns 9.4% of the company’s outstanding 7.6 million shares of common stock.
Plenum’s shareholder suit apparently flushed out other outraged investors. The showdown between Tash and Stewart surfaced publicly in late August, when Stewart abruptly canceled the company’s annual meeting in New York. Stewart apparently realized when he walked into the meeting that Plenum had enough votes to unseat several management board members, sources at the meeting said.
Stewart postponed the company’s annual meeting until Oct. 12. Meantime, both sides say they plan to launch a publicity blitz this week aimed at eliciting support from institutional investors, who hold 22% of Gradco’s stock. Gradco has hired a law firm and public relations company to try to blunt Plenum’s bid.
Plenum has nominated five candidates for board positions. The candidates are Tash; Bressler, the Plenum corporate counsel and secretary; Harvey L. Schein, a private investor and former chief executive of Sony Corp. of America; Harland L. Mischler, chairman of an investment firm, H & M Resources; and Robert J. Stillwell, founder of a Pennsylvania insurance company.
Gradco is a one-time high-flyer on Wall Street that drew big-name investors such as the Pritzker family of Chicago. The company holds some key patents on technology used to sort papers spewed out by office copiers. Before losing its largest customer, Xerox Corp., Gradco held about 70% of the world sorter market and 100% of the moving-bin sorter market.
The loss of Xerox’s business has been a financial blow to Gradco. For its first quarter ended June 30, the company reported net income of $15.5 million--but a loss from operations of $2.3 million--on revenue of $20.3 million. Gradco lost $28.1 million on revenue of $89.5 million for the year ended March 31.
Gradco has filed a $100-million lawsuit against Xerox, claiming that it infringed Gradco patents. Xerox has begun manufacturing its own sorter products after previously buying them from Gradco.
Kilpatrick, the Newport Securities analyst, said Gradco will be especially vulnerable if Xerox has found a way to circumvent the Irvine firm’s patents.
Despite Gradco’s problems and its clash with Gradco management, Plenum isn’t willing to give up on its investment in Gradco.
Plenum was founded in 1956 to translate and publish Russian scientific journals in English. The company, which employs 320 people, publishes more than 300 books a year.
Tash, 49, an accountant by training, joined Plenum in 1971 as a financial vice president and in 1977 was named chairman, president and chief executive. Though he has admitted he does not understand the scientific journals his company publishes, he is credited with making the company highly profitable and personally guiding its investment strategies. He lives in Boca Raton, Fla., and is an avid golfer.
Gradco’s Stewart, 50, is credited with engineering Gradco’s earlier successes and is considered an excellent manager. But critics say he has run Gradco with an iron fist and has had sometimes acrimonious relations with with investors, ex-employees and customers.
A native of the United Kingdom raised in Zimbabwe, he co-founded Gradco in 1972. He lives in Laguna Beach and drives a Rolls Royce with “GRADCO” license plates. He also owns a 100-foot yacht and has been spending a lot of time in France.
Stewart retains about 10% of the company’s stock, and other company officers hold about 2%. One Stewart loyalist, Steve Naber, the former chief financial officer of Gradco, said he would vote his shares with the management because he did not believe Plenum has a plan for managing the company.
But other analysts say that shareholders may be so fed up with Gradco’s recent poor financial performance that they would welcome bringing some new blood to the company’s management.
The proxy fight itself, as long as it does not last too long, could breathe life into Gradco’s sagging stock price, Dean Witter’s Orendain said.
“It’s going to be a real slugfest,” he said.
