IN THE MONEY : Digging Through Spear & Jackson's Books (beat ya TruthSeeker)
By CAROL S. REMOND
A Dow Jones Newswires Column
NEW YORK -- Spear & Jackson Inc. (SJCK) investors could definitely use some of the U.K. company's manufactured tools and shovels to dig their way through this one.
Until recently, the stock was riding high on the promise of increased sales and earnings. But when you rake under the surface, there are a few rocks investors need to look under before they plant any money into this company.
For starters, it's difficult to figure out the company's financials. The same line entries on some Securities and Exchange Commission filings seem to change inexplicably in amendments.
Then, it's worth noting that this company was a shell corporation until last September when it bought almost all of its assets from U.S. Industries (now called Jacuzzi Brands), a New York Stock Exchange listed company that had been trying to unload Spear & Jackson for some time as part of a restructuring. To say it "sold" Spear & Jackson for peanuts is not an overstatement.
Need more? Take a look at Dennis Crowley, Spear & Jackson's chief executive, who was barred from the securities industry in the early 1990s for trading without permission in a customers account. That was after he and 13 other brokers and executives of the since-shuttered First Jersey Securities Inc. settled with regulators on charges of putting clients in unsuitable investments.
Top it off with a promoter in South Florida called International Media Solutions Inc. which is heavily pushing the stock and you have reason to be wary.
(Spear & Jackson's stock was hit with heavy selling Friday morning after a report on www.stocklemon.com questioned some of its accounting. Recently, the stock was off 24% at $8.75, off $3.26 in very heavy volume).
Spear & Jackson officials in the U.S. and U.K. did not return phone calls over the past few days.
This story of Spear & Jackson as a publicly traded company begins last September when a shell called MegaPro Tools bought the Spear & Jackson assets from what is now Jacuzzi Brands (JJZ). MegaPro did a reverse merger and renamed itself Spear & Jackson.
According to one filing with the SEC not long after the acquisition, Spear & Jackson bought the assets from Jacuzzi for roughly $7.8 million in stock and a promissory note for 150,000 British Pounds, valued at the time around $234,000.
But according to an annual report filed with the SEC on January 13, 2003, Spear & Jackson upped the purchase consideration, saying it was closer to $19 million. Then, four months later, Spear & Jackson filed an amendment with the SEC to that same annual report, that now lists the purchase consideration at $305,000. How the big difference? Here are some examples. Originally it said it was purchasing assets that included $21.1 million of inventory as of Sept. 6, 2002. But the amended filing said those inventories were really worth only $271,000. In the original filing it said it was buying trade receivables worth $17.5 million. The amended filing lists those trade receivables at $101,000.
Why the big difference? You wouldn't know by looking at the filings because they don't explain. It is worth noting that while the company changes the values of what it purchased in one part of the filings, it wasn't consistent in doing so in other parts. For example, the original filing shows inventories on the balance sheet of $19.8 million while the amended filing shows inventory roughly the same at $19.6 million.
Also confusing is trying to figure out what Spear & Jackson's sales and earnings are. In the filing made in January, it listed sales for the nine month period ending Sept. 30, 2002, of $7.1 million with net income of $67,000. Then in the amended filing, it changes its fiscal year. Now, it says it had sales of $90.9 million for the year ended Sept. 30, 2002, and had a net loss of $2.4 million.
Another significant change in these two filings has a big impact on the shareholder equity or book value of the company. In the original annual report filed on January 13, Spear & Jackson said it had a pension liability of roughly $30 million (more on the pension liability in a minute). Four months later, in the amended filing that underfunded pension fund now apparently had a surplus because the liability disappears from the balance sheet and shows up as a $14.9 million asset.
So, the company goes from having book value of $21.6 million in the initial filing to one having book value of $54 million - more than doubled. It's market capitalization Friday was just under $100 million.
Investors listening to a conference call on May 12 with CEO Crowley may have gotten the sense something was up with the pension fund. On the call, Crowley conceded that Spear & Jackson had "an underfunded pension plan right now like most other companies." Crowley said that if Spear & Jackson had to fund its pension plan right now, the company would need between $15 million to $16 million, not the $30 million liability showing up on its books. "That was the worst case scenario," Crowley told listeners.
Now, back to that $30 million liability.
Jacuzzi Brands' General Counsel Steven Barre said that Spear & Jackson's $30 million pension liability "was part of the analysis" behind the decision to sell the company. Barre, whose company is the second largest shareholder with 3.5 million shares or about 30%, said he wasn't familiar with the basis for the accounting changes at Spear & Jackson. The largest holder is Crowley, who has about 6 million shares.
Unexplained changes in accounting reporting aside, shareholders may want to check out the previous regulatory problems of Spear & Jackson's CEO, Secretary, Treasurer and Chairman of the Board, Dennis Crowley.
According to an NASD complaint, Crowley was voluntarily terminated by BC Financial in April 1990 after a customer complained that Crowley placed his account on margin without his knowledge and sold stock at a $6,000 loss without informing him of the loss. Crowley failed to answer NASD requests for information and was permanently barred by the NASD in late 1991.
This was not Crowley's first run-in with securities regulators. In late 1990, Crowley was one of 14 First Jersey Securities Inc. brokers and executives who settled, without admitting or denying the truth of the findings, an NASD complaint alleging, among other things, that the firm and its brokers recommended and executed transactions unsuitable for their clients and failed to warn them that those transactions involved substantial risks.
The NASD censured, fined and banned Crowley for 15 business days. First Jersey's flamboyant chairman and chief officer Robert Brennan, who was also named in the complaint, is now serving a nine-year sentence at Fort Dix Correctional Institution for bankruptcy fraud.
Meanwhile, the relationship between Spear & Jackson and promotional firm International Media Solutions is unclear given that the company hasn't made any public announcement about it.
International Media Solutions president Kermit Silva declined to speak with Dow Jones Newswires.
The authors of a research report sent around by International Media Solutions staffers to generate interest in Spear & Jackson's stock declined to comment on the content of the report.
When asked whether his firm looked into Spear & Jackson's accounting, Atlanta Equity Research LLC's Kenneth Smith, one of the two analysts listed on the report, said "our research is really not meant for general distribution...Just our subscribers."
Asked about International Media Solutions and Spear & Jackson, Smith said "it must be their PR firm." He said that International Media Solutions was not a subscriber and that he was unaware that the firm was using his report to market Spear & Jackson.
(Carol S. Remond is one of four "In The Money " columnists who take a sophisticated look at the value of companies and their securities and explore unique trading strategies.)
-By Carol S. Remond; Dow Jones Newswires; 201 938 2074;
carol.remond@dowjones.com
Updated July 11, 2003 3:03 p.m. |
