The board has nominated
one candidate, Ms. Cohen to serve a three-year term. If elected,
Ms. Cohen's term would expire at the Company's 2009 annual meeting
of shareholders.
Two of the five directors
are insiders. We believe this raises doubts about the objectivity
and independence of the board and its ability to perform its
proper oversight role. We prefer boards with a lower percentage of
affiliates and insiders.
Nominee COHEN is
the Company's chairman, president and CEO and is the only director
up for election at this year's annual meeting. We recommend that
shareholders withhold votes from Ms. Cohen based on the following
issues:
In July 2002, the SEC
filed a lawsuit in federal district court, in Chicago,
Illinois, against National Presto Industries, Inc. alleging the
Company operated as an unregistered investment company from 1994
through 2002. Under the Investment Company Act of 1940 (the “1940
Act”), companies with cash and marketable securities exceeding 40%
of their total assets are considered investment companies having
reporting requirements different from operating companies, which
report under the Securities Exchange Act of 1934 (the “1934 Act”).
During the fourth quarter of 2005, the federal district judge
granted the SEC’s motion for summary judgment and ordered the
Company to register under the Investment Company Act. The Company
has appealed the decision to the United States Circuit Court of
Appeals for the Seventh Circuit. On December 23, 2005, the
district court denied the Company’s request for a stay of its
order while the appeal is pending.
On December 27, 2005, the
Company filed a formal investment company registration document
with the SEC, but stated that the purpose of doing so was strictly
to comply with the court order. On January 19, 2006, the Company
filed a formal Section 8(f) application with the SEC requesting
deregistration as an investment company. The SEC has not yet acted
on the deregistration application.
On March 15, 2006, the
Company disclosed in a Form 10-K, in the footnotes to the
financial statements:
"Management
believes that in the interim, the SEC staff will not object if
the Company files its financial statements and related
information for the year ending December 31, 2005, under the
1934 Act as an operating company rather than as an investment
company under the Investment Company Act. The SEC staff has
asked the Company to consider supplementing its operating
company financial statements with additional financial
information like that prepared by registered investment
companies. Discussions regarding that request and related issues
are ongoing with the SEC staff.”
On April 25,
2006, the Company disclosed in an exhibit to a Form 8-K/A that the
SEC, in a letter dated March 28, 2006, stated that it believes
that this disclosure is materially inaccurate and misleading to
investors, and contrary to its prior discussions with the Company.
The SEC staff had previously advised the Company that it did not
object if the Company filed operating company financial statements
under the 1934 Act as long as the filing is supplemented
with a footnote including audited pro forma financial information
consistent with investment company reporting requirements. The
SEC also noted, in its letter, dated March 28, 2006, that the
Company's financial statements contained in its annual report were
not prepared in compliance with its registration status as an
investment company under the 1940 Act. The SEC further stated that
it would turn the matter over to its enforcement division.
Additionally, the Company
disclosed that the SEC requested that Grant Thornton, the
Company’s public accountants, withdraw its unqualified opinion due
to the absence of the pro forma footnote and the failure of Grant
Thornton to use investment company accounting principles as the
basis of the operating company audit that it did perform.
Furthermore, upon learning that the SEC did, in fact, object to
the Company's filing of its 2005 financial statements on Form 10-K
without inclusion of the pro forma footnote, Grant Thornton, in a
letter dated April 12, 2006, notified the Company that its
opinions on the Company’s financials for the three years ended
December 31, 2005 and on the Company’s audit controls could no
longer be relied upon.
On April 19, 2006, the
Company disclosed in a Form 8-K that SEC staff had further advised
the Company that, if audited pro forma financial information is
not available at the filing deadline, unaudited/incomplete
investment company financial data should be supplied as an
intermediate step, but stated its view that if the Company
provided unaudited/incomplete financial statements the Company
would not be deemed by the SEC staff to have met its disclosure
obligations under the federal securities laws. The Company states
that it has not supplemented its Form 10-K financial statements
with unaudited/incomplete financial data upon advice of counsel.
The Company also stated that it is unable to find a reputable
accounting firm that will accept the investment company financial
statements that the Company is currently able to prepare as the
basis for an audit engagement.
As further discussed in
Proposal 2, the Company is seeking shareholder approval to enter
into any transactions which could lead to reverting
to registering as an operating company. The 1940 Act prohibits a
registered investment company from changing "the nature of its
business so as to cease to be an investment company" without prior
shareholder approval. In a footnote to its 2006 DEF 14A, the
company states that the proposal is not "a request to change the
nature of the business, but merely an authorization to continue to
administer and nurture its operating business." We are concerned
that this proposal gives the company unfettered discretion to
pursue its goal of deregistering as an investment company in
defiance of the court order and contrary to its obligations under
the 1940 Act. Furthermore, by seeking shareholder approval of an
open-ended attempt to deregister as an investment company, we
believe that the Company is subverting the intent of the Act's
mandatory obligation to seek shareholder approval of a specific
fundamental change in the nature of the business.
We also are seriously
concerned by the Company's delay tactics in dealing with
regulators and its expending corporate assets to litigate theses
issues. The Company was ordered to register as an investment
company on December 9, 2005, its request for a stay was denied on
December 23, 2005, it filed its registration on December 27, 2005,
and it became and has remained a registered investment company
since that date. To our knowledge, we believe that the Company
has not disputed the categorization by the SEC as to the size of
its cash and securities holdings as a percentage of its assets,
thereby making the Company subject to the 1940 Act. Rather the
Company has argued that it does not fall within the definition of
an investment company because it is primarily engaged in the
business of producing small household appliances.
We believe that the
Company should have addressed this issue before the SEC brought a
lawsuit against the Company for operating as an unregistered
investment company. In particular, we note that in the SEC's
lawsuit against the Company, the SEC alleges that the Company has
been operating as an investment company since as early as 1994. We
believe the board should be accountable for this dereliction in
its duty to oversee management and assure that significant laws
and regulations are not being skirted. Furthermore, we believe
that the Company could have addressed these matters by either: (i)
registering as an investment company in compliance with its
obligations under the 1940 Act; (ii) providing the additional
disclosure required under the 1940 Act, as requested by the
SEC; or (iii) divesting its financial investments and/or
distributing the Company's excess cash to shareholders, by means
of distributing a dividend or repurchasing shares.
While we ordinarily would
recommend withholding votes from the entire board because of its
abuse of corporate assets, inadequate disclosure, and effective
defiance of a court order and its obligations under the 1940 Act
and 1934 Act, we note that only nominee Cohen is up for election
and therefore only recommend withholding votes from her at this
time. We will continue to monitor this issue going forward.
We believe it is
important for shareholders to also be mindful of the following
issues:
The audit committee did
not put the selection of the auditor up for shareholder
ratification at the 2006 annual meeting, an omission which we
believe constitutes a failure to fulfill the committee's duty to
shareholders. Given that audit fees are reasonable in proportion
to non-audit fees, we would ordinarily recommend withholding votes
only from the chair of the audit committee this year. However, to
the best of our knowledge, the board has not appointed a director
to serve as the chair of this committee. Accordingly, we believe
it is appropriate for shareholders to hold Mr. Cardozo, as the
audit committee member with the longest tenure on the board,
accountable for the committee's failure to address this issue.
However, since he is not up for election at this year’s annual
meeting, we refrain from recommending to withhold votes on this
basis at this time. We believe that the audit committee should
allow shareholders to ratify its selection of the independent
auditor going forward.
In addition, we note
that, on March 27, 2006, the Company discloses in a Form N-2 that
Ms. Cohen and Mr. Cardozo are first cousins by marriage. To the
best of our knowledge, the Company has failed to disclose this
family relationship in its DEF 14A or any other previous filings
pursuant to the 1934 Act. We believe that this omission is
represents a serious failure to provide the type of full
disclosure of relevant information that shareholders expect. We
are particularly concerned by this omission in light of the fact
that Mr. Cardozo is the Company's presiding director for
non-management director meetings. Since Ms. Cohen is the Company's
chairman, president and CEO, we believe that her familial
relationship with Mr. Cardozo precludes him from being
independent. Mr. Cardozo is also a member of the audit ,
compensation and nominating/corporate governance committees, which
we believe should consist solely of independent directors.
However, since Mr. Cardozo is not up for election at this year's
annual meeting, we refrain from recommending to withhold votes on
this basis at this time.
We believe that the
Company should appoint a truly independent director to preside
over meetings of non-management directors as soon as is
practicable. When the position of chairman of the board is held by
either an insider or affiliate, we believe that it is the
responsibility of the nominating/corporate governance committee to
appoint an independent lead or presiding director to ensure proper
oversight. While we would ordinarily only recommend withholding
votes only from the chair of the nominating/corporate governance
committee on this basis, we believe in this instance that it is
appropriate for shareholders to withhold votes from all directors
currently serving on this committee, on this basis that they
allowed Mr. Cardozo to serve as presiding director even though he
is Ms. Cohen's first cousin, and that they allowed the Company to
withhold this information from shareholders until recently.
However, since no members of the nominating/corporate governance
committee are up for election at this year's annual meeting, we
refrain from recommending to withhold votes on this basis at this
time.
In summary, we recommend
that shareholders WITHHOLD from Ms. Cohen for the reasons
further described above.
