Presto's cash a siren call for investors
Some betting SEC crackdown will force firm to issue dividend
Posted: May 6, 2006
A losing battle with the Securities and Exchange Commission has turned
out to be the best thing for National Presto Industries Inc. shareholders
since the Salad Shooter.
Late last month, shares of the Eau Claire small appliance manufacturer
soared over $60 for the first time since 1992, when the company's hand-held
electric vegetable slicer was the hot new kitchen accessory. Shares closed
Friday up 5 cents at $57.60.
Presto shares hit their all-time high of $82.50 in March 1992 but slid
later that year to around $50. They had continued to bump along in the $30
to $40 range ever since.
But now, with Presto's SEC woes coming to a head, it appears that some
investors see an opportunity to get their hands on the cash horde that is
the source of the company's legal troubles.
"I believe nearly all of the speculation is related to speculation over a
breakup or a sale of the company," said Bruce Laning, a partner at Marietta
Investment Partners in Milwaukee, which owns Presto shares.
For nearly 20 years, Presto's cash pile has been the subject of financial
stories about the company. In 1988, for example, a story in Barron's called
the company's balance sheet "a thing of beauty," noting the $165 million in
cash and short-term investments that Presto held.
Presto had accumulated the money by selling off businesses and closing
plants, and the Barron's writer suggested that the cash, rather than the
company's product line, was the reason to buy the stock.
Presto's then-chairman, Melvin Cohen, said he was looking for investment
opportunities to make use of the cash but said he would be careful in
seeking businesses that met his criteria for a good return.
Some analysts joked that Presto was the bank that made Salad Shooters.
In the mid-1990s, Cohen's daughter, Maryjo, who had succeeded him as
chief executive officer, acknowledged those jibes with a good-natured
chuckle.
'Unwelcome' scrutiny
But after years of waiting for the conservative Cohens to make an
acquisition, and with the stock price mired in the $40s, investors became
less amused. Institutional fund managers who bought Presto shares because
the stock is part of an index were frustrated at the Cohens' lack of
response to their concerns.
John Hull, then-deputy state comptroller for New York, wrote to Melvin
Cohen in 1996 of his concern for the lack of return that the New York
pension funds were getting from their investment in Presto. Hull also noted
the lack of independent directors on Presto's board.
Cohen wrote back to Hull and suggested that he could sell the shares if
he was unhappy with the state's investment.
"Your study of our company should have revealed that the family, of which
I am the patriarch, holds approximately 30% of its stock. It should be
obvious, therefore, that prodding from the outside is totally unnecessary.
Try as I might, I can see no advantage to either of us by your proposed
monitoring. It is unneeded, distracting and hence most unwelcome," Cohen
wrote.
Things came to a head in 1999 when the New York Society of Security
Analysts decided to make Presto a case study for a corporate governance
project.
The ensuing publicity drew the attention of the Securities and Exchange
Commission, which launched an investigation into allegations that Presto's
huge longstanding cash holdings qualified the company as an investment
company. The Investment Company Act of 1940 says that companies investing
securities worth more than 40% of its total assets are classified as
investment companies.
The SEC sued Presto in 2002 claiming that the company met the standard
for an investment company. A federal court judge in Chicago agreed and in
December ordered Presto to register as an investment company and comply with
regulatory reporting requirements.
Presto has appealed the ruling and has filed to deregister as an
investment company.
Betting on a payout
Despite its new status as an investment company, Presto filed its annual
report to the SEC as an operating company. Presto's auditor, Grant Thornton,
gave the company an unqualified opinion on the report, meaning they found no
fault with it.
In mid-April, the SEC told Presto the report was inaccurate and
misleading in its characterization of the SEC's position on the report. The
SEC said Presto should have included investment company information in a
footnote, and said that Grant Thornton should not have issued an unqualified
opinion.
With that disclosure, Presto shares took off. People familiar with the
company's situation believe that investors are hoping that Presto will
attempt to get out of its investment company status by paying a dividend to
reduce its cash and short-term investments, which most recently were
reported at $173.6 million.
"Somebody's betting on a one-time distribution," said Tom Harenburg,
president of the Carl M. Hennig Inc. brokerage in Oshkosh.
Earlier, Presto's shares had moved from the mid-$40 range to around $50
after the company announced a new $80 million multiyear defense contract at
the end of March.
But people who are familiar with Presto and the Cohens doubt that they
will resort to a distribution to bring down the cash reserve. And they say
that the company now is in jeopardy of being delisted from the New York
Stock Exchange because of the irregularities in the way Presto filed its
annual report.
Presto shares dropped back from the recent $60 high after the company
disclosed on April 28 that Grant Thornton had quit, alleging that Presto had
acted illegally in the way it filed its 2005 annual report.
Len Rosenthal, a professor of finance at Bentley College, bought the
stock a few years ago in the $40 range. He sold at $60 because he's worried
that the stock will be delisted.
If the delisting happens, the shares could trade over the counter or in
pink sheets. But those transactions typically involve a larger spread
between bid and ask prices, which depresses the share price.
Rosenthal doesn't expect Presto to distribute its cash unless a court
orders it.
"Constitutionally, she's not capable of doing that," Rosenthal said of
Maryjo Cohen. "That's why I didn't want to be part of it anymore."
Gary Lutin, a New York investment banker who headed the study project on
Presto, said Presto's defiance of the court order also could cause the
company to lose its defense contract.
Lutin attributes the decline in Presto shares last week to fears of
delisting.
Presto shareholders will meet May 15 to vote on a proposal from the
company that would allow it to take unspecified actions to cease being an
investment company. In its proxy statement, Presto said it needs the
authorization to ensure that it can continue to operate its manufacturing
businesses.
Institutional Shareholder Services, a proxy advisory service for
investors, has endorsed the proposal as well as Maryjo Cohen's re-election
to the board of directors. The report was issued the day before Grant
Thornton's resignation was disclosed.
But Glass Lewis & Co., another proxy advisory service, is recommending
that shareholders withhold a vote for Cohen and vote against the
authorization to stop being an investment company.
"We believe that the company is subverting the intent of the (1940) act's
mandatory obligation to seek shareholder approval of a specific fundamental
change in the nature of the business," Glass Lewis said.
From the May 7, 2006 editions of the Milwaukee Journal Sentinel
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