Presto loses fight with SEC over investment status

By DORIS HAJEWSKI
dhajewski@journalsentinel.com

Posted: Nov. 7, 2005

National Presto Industries Inc., the Eau Claire maker of small appliances, adult diapers and ammunition, is an "inadvertent" investment company because of its huge cash holdings, a Federal Court judge in Chicago has ruled.

The ruling released Friday ends a three-year fight Presto has waged against a lawsuit filed by the Securities and Exchange Commission.

Presto shares closed down 14 cents Monday, at $45.96.

The SEC filed the suit in 2002, seeking to force Presto to comply with the Investment Company Act of 1940. The suit also asks for a permanent injunction to stop Presto from offering or selling securities and to refrain from engaging in any business in interstate commerce while in violation of Section 7 of the Investment Company Act.

The company did not return a phone call seeking comment Monday and has not issued a statement on the ruling.

Judge Charles R. Norgle of the U.S. District Court for the Northern District of Illinois ruled against Presto by granting the SEC's request for a summary judgment.

"This is a fairly comprehensive defeat," said Peter Chan, assistant regional director at the Midwest regional office of the SEC. Chan said the judge made the ruling without a trial.

Norgle directed the SEC to submit by Nov. 30 a proposed order requiring Presto to comply with the law and a proposed order of permanent injunction.

Presto either will have to register with the SEC and comply with requirements for investment companies, or restructure its assets so it won't be acting as an investment company.

Presto has qualified as an investment company since 1994 because well over 40% of its assets were represented by investment securities, the court said.

For the three months ended July 3, the company reported assets of $287.9 million, of which $156.8 million, or 54%, were in cash and marketable securities.

The SEC's analysis of Presto's assets from 1994 to 2003 showed percentages as high as 92% in 1998, down to 62% in 2003, according to court documents. Presto's income from marketable securities and cash ranged from 27% to 133% of net earnings during the period, the court said.

"The nature of Presto's assets and income therefore strongly indicates that Presto's primary engagement is in investment securities," the court said.

Presto amassed the cash through the sale of subsidiaries during the 1970s and 1980s. Around 1979, Presto created the National Holding Investment Co. as a subsidiary that invested cash the company held in excess of its operating needs. Presto could have distributed the money to shareholders in the form of a dividend, reinvested in its manufacturing business or acquired other operating businesses, but it did not, the court said.

Presto made two acquisitions in 2001 - AMTEC Corp., a munitions plant in Janesville, and RMED International Inc., a disposable diaper manufacturer in Eau Claire that is now named Presto Absorbent Products Inc. Presto paid $8.5 million for AMTEC and $7.3 million for RMED.

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