FYI ......
SUSPICIOUS STOCKS
Suspicious: JPE Inc.
By Bob Davis
Friday, August 11, 2000 11:46:00 AM
As a company, JPE Inc. (OTCBB: JPEI) is a successful turnaround situation. In 1998, the company was experiencing what it describes in its latest 10-Q Report as "operational and financial difficulties." During that year, several of its subsidiaries fell under the control of various bankruptcy courts, and certain of them were sold off to satisfy the company's debts. However, this process was largely completed by the late spring of 1999, by which time the company's "core operations" had been purchased by a group of investors, a new management team was in place, and it began its return to profitability.
In recent months, JPEI has been enthusiastically recommended by a number of Internet small-stock "gurus" and it is regularly predicted that this stock will soon return to Nasdaq. However, they have overlooked one small detail -- a detail that makes it unlikely that any significant earnings will be assigned to the company's common stock in the near future.
What is the "Story"?
The company operates under the name "ASC Exterior Technologies." This is a very common practice and there is nothing "Suspicious" about it whatsoever.
The Penny Profiler, one of the Internet stock-picking sites recommending the stock, provides a generally accurate description of the company:
ASC Exterior Technologies is a Tier 1 supplier of automotive exterior trim systems such as body side moldings, greenhouse system moldings and glass runs, roof aperture moldings, fascia trim, pillar appliques, wheel lip moldings and closeout gimps. Based in Bingham Farms, Mich., ASC Exterior Technologies' operations are located in Beavercreek, Ohio, East Tawas, Mich., and Harrisburg, Pa. The company employs approximately 950, with sales of approximately $150 million.
Overall, the points made in the rest of this "Profile" are accurate, and I do not believe that this represents a deliberate attempt to deceive. However, this "Profile" is missing one small but very important detail.
What's Wrong with the "Story"?
The "missing detail" is easily overlooked unless the person performing proper due diligence on the company's most recent 10-Q Report asks the appropriate questions and carefully reads the footnotes to its financial statements.
When I recently looked at JPEI's most recent Securities and Exchange Commission filing, one item jumped out at me.
Although the company's financial statements generally appeared to be in order, the earnings per share calculation that followed the "Consolidated Condensed Statements of Operations" seemed odd in that it presented one EPS number for the "Common Shares" and another one for the "First Series Preferred Shares."
Even stranger, the "Preferred Shares" stated earnings per share of $0.15, while the "Common Shares" showed no earnings whatsoever, even though the company had reported a reasonably profitable quarter.
This told me that I needed to pay attention to the terms attached to those "Preferred Shares." I then quickly began reading the "Notes" to the financial statements, which normally makes for very "dry reading." But after about five paragraphs I spotted the word "Bankruptcy."
Now, I know that when a company goes through this particular process and survives the experience, its original common stockholders often end up "disadvantaged," especially if new capital is invested in the entity. The rights of the new investors often are "senior" to those of the original stockholders, whose investment was made largely valueless as the result of the bankruptcy.
This is both logical and legal. After all, if a company had no capital, and thus no stockholders'equity, when it went into bankruptcy, the investors contributing new capital to the company in order to revive it should receive "more" for their investment than the original stockholders.
Reading a little farther, I learned that:
On May 27, 1999 in accordance with the terms of an Investment Agreement (the "Investment Agreement") among JPE, Inc., ASC Holdings LLC ("ASC") and Kojaian Holdings LLC ("Kojaian") dated April 28, 1999 the Company issued 1,952,352.19 shares of First Series Preferred Shares on May 27, 1999 (the "Closing Date"), in equal proportions to ASC and Kojaian for an aggregate purchase price of $16,413,274 payable in cash.
This $16.4 million represents an investment of new capital into JPEI by "ASC" and by "Kojaian."
But the next sentence stopped me cold -I had found the proverbial "smoking gun." This sentence stated that "Each First Series Preferred Share possesses voting and equity rights equal to 50 common shares of the Company."
The key word in this sentence is "equity rights" -- a legal term that refers to the right to the entity's earnings. In other words, when calculating the company's earnings per share, the Preferred Stock Shares each count as 50 common stock shares.
This fact is confirmed by Note M, entitled "Earnings Per Share," which states:
The issuance of the First Series Preferred Shares resulted in the Successor Company having a participating security. In accordance with Statement of Financial Accounting Standards No. 128 - Earnings per Share, the "two class" method is used for computing earnings per share. Under this method, an earnings allocation formula is used to determine the amount of earnings allocated to each class stock. Based on the participating rights of the First Series Preferred Shares approximately 87.5% of the earnings will be allocated to these shares and 12.5% of earnings to the Common Stock.
In other words, it is unlikely that JPEI's common stock will see any significant earnings per share in the near future, since 87.5 percent of the company's earnings will be assigned to the Preferred Stock.
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Bob Davis is the editor and founder of The Napeague Letter, has 15 years' experience as Chief Financial Officer of two different Nasdaq companies and a Harvard MBA. He does not own stock in, has not been compensated by and has no affiliation with any of the companies he analyzes or their agents or affiliates.
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