Spear Financial will slim to its insurance business.

CEO quits, firm will sell or spin off securities unit

Glendale-based Spear Financial Services, Inc. is in the midst of a shake-up, with the founding chairman resigning and the future of the brokerage business up for grabs.

Historically a brokerage firm, Spear Financial announced in early December that 49-year-old Charles M. Spear, chairman and chief executive officer, would resign on Dec. 31 to "pursue new opportunities," and that the retail securities brokerage unit would be sold or spun off in 1993.

"I'm not inclined to describe it as the death of a local brokerage firm yet," said Barry Laufman, chief financial officer for Spear. "But that's where this may end up."

In 1988, the company purchased James Mitchell & Co., a San Diego-based insurance firm specializing in annuities sales. The annuities sales portion of the business has increasingly dominated the company, accounting for more than 80 percent of all business during 1992, said analysts.

As evidence of the company's new direction, James K. Mitchell, the 53-year-old CEO of James Mitchell & Co., was elected Charles Spear's successor on Dec. 22. Herman A. Schaefer, a current member of the board and former chief financial officer for Pepsico, Inc., was named vice chairman of the firm.

"The insurance side of the business quickly became the locomotive that drove this train," Laufman said. "The profitability of the brokerage has not stood up."

The brokerage division accounted for an estimated 19 percent of 1992 sales and 2 percent of operating income. Expected to be divested are two subsidiaries: Spear Rees & Co., which operates a self-clearing brokerage and employs 65 people in Glendale, and TCW Inc., a market specialist on the Los Angeles floor of Pacific Stock Exchange.

While Laufman said the company's shareholders had requested Spear to get rid of brokerage operations, stock prices failed to take off after the announcement. In national over-the-counter trading the day after the announcement, company stock rose $1 to close at $6.50 per share. By late December, the stock had slipped to trading at $6.25 per share.

"I thought it was going to be great for the stock, but I don't see that reflected in the price," said John Mincy, partner with Nashville, Tenn.-based Hermitage Capital Services. He said Hermitage purchased more than one million shares of Spear's stock for its customers.

"We were certainly in favor of the action. We're stockholders," said Beverly Landstreet III, chairman of Hermitage Capital.

"My prediction was that the stock would be in the low teens this year. It's destined to be there. They have the most structured sales force. They're knocking the lights out," Landstreet said.

Laufman predicted Spear would sell the brokerage unit, rather than spin it off, because of complicated Securities and Exchange Commission rules regarding spinoffs.

He said likely buyers could be existing brokerages, possibly L.A. County-based. One analyst, who did not wish to be named, said former CEO Charles Spear could be a potential buyer.

Mark Matheson, senior analyst with Crowell, Weedon & Co., based in downtown L.A., who has watched Spear for several years, said the move to get rid of the brokerage operations was "something everyone wanted to happen."

However, he said he thought it would take longer. "I think people were surprised about (Charles Spear) leaving so quickly."

The company has agreed to buy from Charles Spear about 500,000 of its shares, an estimated 6.8 percent of its stock outstanding, at an average price of $7.50 per share.

Matheson predicted the stock would do well in the next couple years and "could easily" rise to $20 per share.

"We're still waiting for some numbers to come out," he said.

Analysts at Greenway Capital Corp., a New York-based investment banking company, released a report late last year recommending purchase of Spear Financial because of the "popularity of tax-deferred insurance annuities is growing rapidly."

Greenway noted companies like Spear Financial are doing well because banks and savings and loans have not effectively marketed annuities.

Greenway predicted Spear Financial's 1992 earnings per share would increase 172.7 percent to 60 cents. This year, earnings per share are expected to jump 50 percent to 90 cents, according to Greenway.

The company calls Spear's stock "undervalued and underfollowed," predicting the securities could appreciate by 80 percent during 1993.

In late October, the company reported third quarter revenues of $11.7 million, up 64 percent from the $7.18 million a year earlier. Year-to-date revenues were $35.9 million, an increase of 115 percent from the previous year.