Coleco Industries Inc. set the stage for another home-computer fire sale Wednesday as it announced the long-expected discontinuation of its poor-selling Adam home computer.
The West Hartford, Conn., toy company, whose wildly popular Cabbage Patch dolls are barely offsetting deficits on its ill-fated computer venture, said it has sold its entire Adam inventory at a loss to an unidentified chain of retail stores. It contradicted its own repeated denials in recent weeks that it was getting out of the home-computer business.
The announcement, in which Coleco said it would report "substantial losses" for the fourth quarter of 1984 and for the year, was welcomed on Wall Street because the company is expected to return to profitability after ridding itself of the Adam.
Coleco said its toy business earned a pretax profit "well in excess" of $100 million in 1984.
Coleco stock closed Wednesday on the New York Stock Exchange at $14.375, up $2.25, with 352,900 shares trading hands.
"It's a constructive step forward," said analyst Walter Kirchberger of Paine Webber in Troy, Mich. "We'd expected them to figure a way to get out of the Adam situation. I expect a substantial profit in 1985, in the $60 (million) to $70 million range."
Kirchberger said Coleco will probably take a $100-million write-off in the fourth quarter because of the Adam sale, which would be partly offset by about $40 million in profits from Cabbage Patch dolls and other products.
That would mean a $60-million loss for the quarter, handily wiping out Coleco's $13.4-million earnings for the first nine months.
Coleco would not comment on Kirchberger's estimate but added that details would be available in about 60 days when the company's financial results are released.
Coleco said it will continue assembling Adam machines in Amsterdam, N.Y., for "several months," until components on hand are used up. The buyer of the machines will pay Coleco on a monthly basis through the next Christmas season, Executive Vice President Morton E. Handel said.
Handel said that there will be "some layoffs" in Amsterdam and West Hartford but that most of the job loss can be handled through attrition. More than 4,000 work in the Amsterdam facility but most aren't involved in Adam production, he said.
Coleco, a maker of traditional toys that enjoyed a major success with its ColecoVision video games, announced with much fanfare in June, 1983--the same month it introduced the Cabbage Patch Kids--that it was going into the home-computer business. But by its own later admission, the machines it began shipping that October had major technical problems and a much higher return rate than normal for new computer products.
"Some of the early products just didn't measure up, and we were never able to recover," Handel said.
In addition to its poor reputation, the Adam in 1984 suffered from the dwindling popularity of under-$1,000 computers in favor of more-sophisticated machines in the $1,500 range. Despite a cut in the wholesale price of the Adam to $475 from $650 in October that boosted sales somewhat, distributors reported thousands of unsold machines still in stores after Christmas.
The company won't say how many machines it shipped in 1984. But in 1983 it shipped only about 20% of the predicted 500,000, leaving it with bulging, costly inventories. Coleco also cited stiff competition, industrywide price cutting and frequent technological advances that made it difficult and costly to keep up.
"With particularly attractive opportunities available at present in the toy segment of our business, we believe it is no longer in the company's best interests to continue to incur the significant costs and risks necessary to keep Adam competitive," President Arnold C. Greenberg and Chairman Leonard E. Greenberg said in a letter to shareholders.
Coleco said it intends to continue making and selling video games. But the games and Coleco's more conventional toys have become minor items in comparison to the Cabbage Patch Kid dolls and related items, which Coleco said accounted for more than $500 million of its estimated $800 million in revenue in 1984.
Moreover, scheduled first-quarter Cabbage Patch shipments of $150 million are more than double the year-earlier figures, the firm said.
Coleco also promised a "major new toy product line in an important, high-volume category" to be unveiled in February.
Meanwhile, competitors, distributors and others predicted that the remaining Adam systems will be offered for about $300, compared to the $499 asked now. (The systems include keyboard, high-speed tape drive and memory, letter-quality printer and software.)
Coleco's Handel would say only that it is selling them at a "significant loss, so you can assume it will be a pretty good deal."
An executive at one competitor said the Adam story recalls the sale during the 1983 Christmas season of discontinued Texas Instruments home computers for $50 apiece. Sales of the machine, which originally cost $499, went through the roof.
Coleco promised continued service and software support for the Adam. An official at one of Adam's competitors said it is believed that Coleco has $50 million to $100 million worth of Adam parts in inventory, an amount that is not enough to seriously undermine sales of other home computers.
In last year's fourth quarter, including the Christmas season, this executive estimated that Adam captured no more than 5% of the under-$1,000 computer market.