Pacific Scientific Co. said Monday it has agreed to pay $7 million in cash and stock to settle a class-action lawsuit filed by shareholders who accused the Newport Beach electronics company of making false and misleading sales estimates in 1983.
The immediate effect of the settlement, half in cash and half in a new series of preferred stock, will be a drastic increase in the company’s loss last year. The settlement will drive the firm’s annual loss to $4.1 million from its previously reported loss of $793,000.
The settlement came Friday morning after a federal court jury in Los Angeles had been selected to hear the suit brought by the A&J; Deutscher Family Fund of Fort Lauderdale, Fla., which bought 1,000 shares of Pacific Scientific stock on March 16, 1983.
The settlement is the biggest pay-out from litigation that the 70-year-old company has ever made, said Richard V. Plat, the company’s senior vice president for finance. He said the company did not admit any liability in settling the case.
A Few Details Left
A few details in the settlement still must be ironed out, he said. The preferred stock, for instance, will carry a 10% interest rate, but the amount of time the company has to pay the principal has not been determined, he said.
Because the lawsuit was a class action that affects all investors who bought stock from March 7, 1983, through Sept. 29, 1983, the final settlement must be approved by U.S. District Judge Pamela Ann Rymer, who has presided over the litigation. The company estimated that 1,000 to 2,000 shareholders could collect under the settlement.
“This was a good thing for the company to settle,” Plat said. “Prolonged litigation is a very expensive item, and you are never sure what the outcome will be.”
Pacific Scientific spent nearly $2 million on defense fees and costs, he said. The company’s insurance carrier has paid half the legal fees, Plat said, and will pay a “substantial portion” of the settlement.
Attorneys for the Deutscher fund could not be reached for comment.
In its 1985 lawsuit, the Deutscher fund claimed that Pacific Scientific violated various federal and state securities laws. It alleged that corporate officers knew or should have known in 1983 that orders for the company’s mechanical shock arresters would decline significantly. It also alleged that certain insiders sold shares of Pacific Scientific stock with non-public information.
Mechanical shock arresters are used primarily in nuclear power plants to support the piping systems and protect them from possible rupture in the event of an earthquake or other events.
In its 1983 annual report, issued in 1984, the company said the decline in sales “had been anticipated, but not at the scale at which it occurred.” By the end of 1983, the backlog of orders for shock arresters had fallen to $6 million from $27 million a year earlier.