Lawsuit Alleges Pacific Scientific Misled Investors
Pacific Scientific Co. said Thursday it has been hit with an investor lawsuit alleging that the company and its chief executive made misleading statements about a line of fluorescent lightbulbs and related devices touted as a revolutionary breakthrough that would propel the company’s sales to record heights.
The complaint, filed in U.S. District Court in Santa Ana, alleges that the Newport Beach-based company’s stock was “artificially inflated” for nearly two years on management promises that its “Solium” technology would revolutionize the lighting industry by overcoming drawbacks to use of fluorescent lighting.
Among other claims, the company said the technology could be used to control the brightness of fluorescent lights and boost the company’s annual sales by $50 million to $100 million a year. The product line included a screw-in fluorescent lightbulb and electronic devices with built-in dimmers for use in fluorescent lamps.
However, the products have never lived up to expectations, the suit claims.
The company denies any wrongdoing and plans a vigorous defense, said chief executive Edgar S. Brower.
The suit, brought by investor Sheldon Kriegel of New York, seeks class-action status for several thousand investors who bought Pacific Scientific’s stock between October 1994 and July 1996. A lawyer for Kriegel said plaintiffs hope to recover millions of dollars in damages.
In the fall of 1994, the company’s stock doubled in price to $23.75 after Pacific Scientific announced plans to launch the product line. One of the products was a screw-in fluorescent lightbulb that can be dimmed, making it a potential energy-saving substitute for incandescent lighting.
The suit claims that although analysts raised questions about the company’s start-up difficulties, management continued to insist until a few months ago that prospects looked strong for the product line, the suit contends.
Then on July 2, the company acknowledged that the products hadn’t met its expectations. The company also said it was no longer making sales projections, and was taking a $4.5-million charge for restructuring the Solium fluorescent lighting unit, which is based in Randolph, Mass. The company, which projected two years ago that the Solium unit could have sales of up to $100 million this year, said Solium sales totaled $1.3 million for the first six months.
Brower said at the time that the company had “made a severe mistake” in estimating sales “until we thoroughly understood our product and how it would be accepted in the marketplace. I guess we were seduced by the size of the marketplace.”
That day, the stock fell $2.375, or 15%, to close at $14. The stock closed Thursday at $11.125, up 25 cents in trading on the New York Stock Exchange.
Brower attributed the product’s problems to faulty engineering, and said the company had to make a costly return to the drawing board. “When you are developing new products, you cannot predict what the end result will be,” he added.
He said the company has been forthcoming with both good and bad news.
John Westergaard, a New York analyst, blamed the troubles on management’s fervent belief in the huge prospects for its technology, rather than any intent to mislead investors.
“They’re engineers who I think fell madly in love with this technology,” he said. “They truly believed they were going to change the world and my sense is that they still believe that.”
As for the future, Brower added, “We will continue to have losses in that business into 1997 and we’ve not made any projections as to what the sales levels will be.”
The company also designs, makes and markets other electrical and safety equipment. Last year, it earned $12.8 million on revenue of $284.8 million.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Sinking Stock
Pacific Scientific’s stock price has declined by more than 50% since the beginning of the year. Monthly closing prices (adjusted for stock splits and dividends):
Thursday’s close: $11.13
Source: Dow Jones Information Services; Researched by JANICE L. JONES / Los Angeles Times
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Chain of Events
Key dates in Pacific Scientific’s journey from announcing a new product line to a stockholder’s suit:
1994
Oct. 3: Pacific Scientific chief executive Edgar S. Brower tells Wall Street analysts his company’s new energy-efficient Solium fluorescent lightbulbs could add $50 million to $100 million to its annual sales within two years.
Nov. 23: Company begins gearing up for major production of bulbs; stock trading between $18.75 and $23.
Dec. 8: Two-for-one stock split declared; dividend doubles to 3 cents
1995
June 21: Stock closes at $16; company executives say there is no fundamental reason for recent declines. Analysts say company has failed to line up major distributor and bulb’s dimming capacity is not a desirable factor in fluorescent bulbs.
1996
July 3: Stock prices fall 15% after company announces Solium has not met its expectations and major restructuring of Solium unit is in the works. Company also takes $4.5 million charge in second quarter, forcing it to report loss of about 32 cents per share.
July 18: Company posts second-quarter loss of $3.7 million.
Oct. 24: Company says it is being sued by an investor alleging Pacific Scientific and its chief executive made misleading statements about Solium’s prospects to inflate its stock price.
Stock closes at $11.13
*
Source: Times reports;
Researched by JANICE L. JONES / Los Angeles Times
