Out-of-Sorts Gradco Caught in Test of Wills : Proxy fight: A small publishing firm may take control of the Irvine company and oust its controversial, strong-willed chairman.

IRVINE — 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 independent supplier of paper-handling equipment 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 has taken more than a $3-million paper loss on his initial investment. And he has 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 keeps a tight rein on the firm.

Tash’s $50-million publishing firm has launched a proxy battle to oust Gradco’s directors and replace them with its own slate. 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 that 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 that accounted for 25% of its total sales and Gradco has been plagued by repeated delays in bringing new products to market. Moreover, Gradco lost a whopping $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 $18.50 per share in December to $5.75 per share. Gradco closed Friday at 5 5/8, up 1/8. 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--its 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 Japanese subsidiary, which had become more valuable.

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 alleged.

Stewart postponed the company’s annual meeting until Oct. 12. Meanwhile, 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; Bernard Bressler, 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 the investment firm of 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 Gradco lost its largest customer, Xerox Corp., the company 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 Corp., claiming that the company infringed on Gradco patents. Xerox has begun manufacturing its own sorter products after previously buying them from Gradco. Kilpatrick, the Newport Securities analyst, said that Gradco will be especially vulnerable if Xerox has found a way to circumvent the Irvine firm’s patents.

But Plenum, despite Gradco’s problems and its clash with Gradco management, isn’t willing to give up on its investment in Gradco. Plenum has been an unwelcome suitor before.

Plenum has raised some eyebrows on Wall Street before by seeking control of a company that was far afield of the publishing industry. In July, 1987, Plenum made an unsolicited bid of $128 million to acquire Arthur D. Little Inc., a prestigious Cambridge, Mass., consulting firm that was six times Plenum’s size.

Tash said at the time that he made the move because publishing acquisitions were overpriced and the bid was a sound business move. But Arthur D. Little would have nothing to do with Plenum, which later raised its bid to $143 million, and Tash abandoned the effort.

Plenum was founded in 1956 to translate and publish Russian scientific journals in English. Of its roster of 229 journals in 1989, 96 were still published under a license with the Soviet Union. 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. Though he has admitted he does not understand the scientific journals that 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.

In 1977, Tash was named Plenum’s chairman, president and chief executive. He has continued to oversee the company’s stock market investments, which the company uses as a reserve against future liabilities. Plenum dipped into this pool to finance its investments in Gradco.

For its second quarter ended June 30, Plenum earned $4.4 million, up 19% from a year earlier. Revenue was $13.3 million, up 9.3% from a year earlier.

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 that he has had sometimes acrimonious relations 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.

“Keith Stewart is certainly controversial, and people may choose to take issue with a lot of the things he has done,” said Dean Witter’s Orendain. But he added that because Stewart is generally recognized as the guiding force behind Gradco, Tash will have a tough fight on his hands.

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, Orendain said, but he added:

“It’s going to be a real slugfest.”

GRADCO’S HISTORY 1972: Keith B. Stewart and Peter Shea launch Gradco Systems Inc. as a distributor of paper-handling gear. 1979: Gradco designs the moving-bin sorter for copying machines, which will become its best-selling product line. 1983: Gradco goes public in May at $18 a share. 1985: Gradco moves most of its manufacturing operations from Santa Ana to South Korea. 1985: In June Gradco reports a $5.5-million loss for fiscal 1985, attributing it to the shutdown of its dealer network and the cost of moving its manufacturing offshore. 1986: Gradco acquires Ziyad Inc., a New Jersey manufacturer of paper-feeders for computer printers, for $22 million in December. 1987: John C. Hamma, ex-Gradco engineer, sues the company, alleging that he was fraudulently deprived of royalties on products he invented. 1988: Gradco reports record earnings of $4.6 million for fiscal 1988. Revenue increases 65% to nearly $91 million. 1989: In January, Stewart first raises the possibility of taking Gradco’s Japanese subsidiary public on the Japanese stock exchange. 1989: Xerox Corp., Gradco’s biggest customer, begins manufacturing its own sorters. 1989: Between September and December, Plenum Publishing Corp. acquires a 6.3% stake in Gradco. 1989: Stewart discloses in December that Gradco has been unable to raise the financing for a management buyout. March 2, 1990: Gradco announces it will restructure itself into two operating units, Gradco Japan and Gradco Printer Systems. It also says it will shut its manufacturing plant in Santa Ana. June 18: Gradco reports a loss of $28.7 million for fiscal 1989, due mainly to a $23-million charge related to the restructuring and the loss of Xerox as a customer. The company also reports that it has filed a patent-infringement suit against Xerox and that it has sold a 27% interest in its Gradco Japan subsidiary. Aug. 14: Gradco reports an operating loss of $2.3 million for its first quarter ended June 30, and a one-time gain of $17.8 million related to the sale of stock to Japanese investors. Aug. 24: Plenum sues Gradco’s board for allegedly trying to pocket $12 million from the company’s Gradco Japan subsidiary. Aug. 29: Plenum announces it has an 8.9% stake in Gradco and will nominate at least two candidates to Gradco’s board of directors. Aug. 31: Stewart cancels the company’s annual meeting in New York and announces that the company will fight Plenum’s attempt to take over the board. The annual meeting is rescheduled Oct. 12. Sept. 5: A Plenum filing with the Securities and Exchange Commission shows that the company plans to nominate five directors to Gradco’s board, including Plenum Chairman Martin E. Tash and former Sony Corp. of America Chairman Harvey L. Schein. BATTLING FOR CONTOL OF GRADCO SYSTEMS INC GRADCO STCK HISTORY Nov. 1987: $5.00 Sept. 1989: $18.50 Sept. 1990: $$5.63 GRADCO REVENUES In millions of dollars: ’84 19.7 ’85 21.3 ’86 43.7 ’87 55.1 ’88 90.9 ’89 115.1 ’90 89.5 GRADCO NET INCOME ’84 2.5 ’85 -5.5 ’86 1.1 ’87 1.3 ’88 4.1 ’89 5.6 ’90 -28.1 GRADCO’S DISPUTED TRANSACTION * In March,. Gradco Japan issued $4.6 million in debentures with detachable warrants to Gradco’s senior management. * The debentures were sold to a Japanese bank and the warrants were retained by management. Gradco Japan has invested the funds borrowed from the bank to repay the debentures at maturity. * The warrants allow management to buy 2.5 million shares, or 17% of common stock in Gradco Japan, at $1.86 a share until March 29, 1991. The stock purchased upon exercise of the warrants cannot be sold until Gradco Japan’s initial public offering. * The company said that the $1.86 a share price was fair market value. But on June 18, Gradco announced that it sold a 27% interest in Gradco Japan to a group of Japanese investor led by Japan Associated Finance Co. Ltd. for $26.5 million, or $6.70 a share. * In a suit, Plenum Publishing Corp. alleges that the transaction had no purpose except to obscure the “misappropriation of corporate assets.” * Plenum claims that the fair-market value was much higher. Based on the difference in prices, Plenum charged that Gradco officials would pocket a windfall of $12.1 million. * In March,. Gradco Japan issued $4.6 million in debentures with detachable warrants to Gradco’s senior management. * The debentures were sold to a Japanese bank and the warrants were retained by management. Gradco Japan has invested the funds borrowed from the bank to repay the debentures at maturity. * The warrants allow management to buy 2.5 million shares, or 17% of common stock in Gradco Japan, at $1.86 a share until March 29, 1991. The stock purchased upon exercise of the warrants cannot be sold until Gradco Japan’s initial public offering. * The company said that the $1.86 a share price wa fair market value. But on June 18, Gradco announced that it sold a 27% interest in Gradco Japan to a group of Japanese investor led by Japan Associated Finance Co. Ltd. for $26.5 million, or $6.70 a share. * In a suit, Plenum Publishing Corp. alleges that the transaction had no purpose except to obscure the “misappropriation of corporate assets.” * Plenum claims that the fair-market value was much higher. Based on the difference in prices, Plenum charged that Gradco officials would pocket a windfall of $12.1 million. VALUE OF WARRANTS Gradco management was granted stock warrants with a stated alue of “1.86 per share, totalling $4.65 million, on March 29. Ten weeks later, a group of investors paid $6.70 per share, a price that would make the Gradco management warrants worth $16.75 million. March 29, $4.65 mil. June 18, $16.75mil. PLENUM VS. GRADCO Martin E. Tash, left, chairrman and president of Plenum Publihsing, Plenum’s Slate: * Martin E. Tash, chairman and CEO of Plenum Publishing Corp. * Harvey L. Schein, investor, executive vice president of News America Publishing Inc.,1983 to 1988, and president and CEO of Polygram Corp., 1980 to 1982. * Harland L. Mischier, president and chairman of investment firm H&M; Resources * Bernard Bressler, corporate counsel and secretary of Plenum. Keith B. Stewart, chairman of Gradco Systems. Gradco’s Slate: * Keith B. Stewart, chairman and chief executive of Gradco Systems Inc. * Joseph C. Sanchez, president and chief operating officer. * Mark M. Takeuchi, president of Gradco Japan and senior vice president for far eastoperations. * Horst O. Sieben, chief financial officer. * John Rehfeld, president and chief operating officer of Seiko Instruments USA. Sources: Gradco Systems Inc. and Plenum Publihsing Corp.