New York Society of Security Analysts
Committee On Corporate Governance and Shareholder Rights
Discussion Papers Regarding National Presto Industries, Inc.
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Table of Contents
- History and Purpose
- James F. Reda
- Vahan Janjigian
- Gina H. Sockolow
- John Tully
- Mark S. Nurse
- Management’s Response
- Maryjo Cohen, President
NYSSA Work Group Participants
Peter F. Brennan, Chair
Barbara M. Eden
Gina H. Sockolow
James F. Reda
History and Purpose of the NYSSA Demonstration Project
By James F. Reda
Over the past five months members of the New York Society
of Security Analysts ("NYSSA") have been working on a special project
examining how potential changes in a publicly traded company's corporate
governance practices might increase shareholder value.
The primary purpose of the project is to educate NYSSA
members in the effects of governance practices on publicly traded companies,
analyzing the impact of potential changes on firm value. Our intention was
that this project would provide a real world, practical application of
corporate governance principles for the training of NYSSA's analyst
The project was administered under the auspices of the
Corporate Governance and Shareholder Rights Committee (the "Committee"),
which is one of many standing committees of the NYSSA.
What We Are Doing?
We want to analyze corporate governance issues on a
similar level as corporate finance issues in the decision to buy, hold, or
sell a stock. Our purpose is to provide analysts and investment managers
with the tools to evaluate this type of investment situation.
A summary of the process to evaluate a stock is as
a) Assess the potential value of change in use of
b) Assess the likelihood that the board of directors can
be expected to implement the changes.
c) In the absence of board action, assess the likelihood
that shareholders have the practical ability to exercise their rights to
replace directors or take other appropriate actions. Or, in the absence of
real rights, should a shareholder just sell the stock?
How We Got Here
Under the new leadership of Peter Brennan as chairman of
the Committee in the Spring of 1998, with John McCabe as vice-chairman (the
past Committee chairman and current president of the NYSSA), the Committee
quickly attracted interested members who were committed to provide a forum
for corporate governance and shareholder rights issues.
The Committee determined that its focus should be on how
corporate governance issues relate to shareholder value, reflecting the
NYSSA membership's professional investment perspective. The Committee
discussed the issue of corporate governance with various investment
professionals, corporate officers, and consultants such as Institutional
Shareholder Services (advisors in matters of proxy voting and corporate
governance to institutional shareholders), who confirmed our belief that
there was a need to go beyond the academic and legal theories of "good
Among other things, the Committee evaluated various
formats to present the measurable effects of corporate governance principles
and practices on the value of a stock, such as case studies, speakers, panel
discussions, and conferences. The case study approach was selected by the
Committee because it would best allow the Committee to show the NYSSA
membership the value of good corporate governance principles as it would
involve using practical methods with an existing company – not just a
hypothetical, academic exercise.
These Committee discussions led to a meeting with Gary
Lutin, whose background is in investment banking and the management of
controlling shareholder interests. Mr. Lutin expressed considerable interest
in our plans for a small work study group to conduct a "real life" case for
the purpose of assessing the relevance of potential corporate governance
changes to the ultimate object of value enhancement, and agreed to be an
advisor of the project.
Why National Presto Industries?
For its test case, the Committee decided to draw up a
list of companies with a combination of two conditions: first, a controversy
concerning the management of shareholder assets, and, second, the existence
of relevant corporate governance issues. The Committee considered 20 to 30
companies, eventually reducing it to a short list of a few companies based
on published reports of corporate governance issues and potential value
enhancement opportunities associated with proposed changes in uses of
We finally selected National Presto Industries (the
"Company"), based on a variety of considerations which included the
- Approximately 93 percent of 1997 stockholders equity, and 80 percent
of the Company's total assets, were in cash or cash-equivalents.
- The Company had been maintaining similar levels of cash without
growing its operating business for over a decade.
- The Chairman and President of the Company are a father and daughter
who control approximately 29% of the stock, including approximately 23%
held in a voting trust for family members.
- The Company had enacted several entrenchment provisions, including
supermajority voting requirements, a staggered board and a poison pill.
- The six member board included three Company officers and, according to
the 1998 proxy statement, met only twice during the past year.
- More than half of senior executives’ total compensation, which was
generally below industry norms, consisted of "discretionary" bonuses based
entirely on subjective judgment, without any formulas, defined performance
criteria, or ties to shareholder value.
- Although the Company was small and not covered by any major analysts,
it was familiar to many investors because of its position in an S&P index
and some 1998 news coverage.
- There was a wide range of differing views among investors concerning
the Company’s management policies and prospects.
- Management had demonstrated a willingness to vigorously express its
views regarding corporate governance issues in response to past investor
inquiries and attempts by shareholders to effect change.
This author was professionally interested in the
selection criteria concerning director qualifications and executive
compensation. A more detailed review of these issues follows:
Outside Director Issues: The three
outside directors currently receive $1,000 for each Board and $275 for each
Audit Committee meeting attended. Under this fee schedule, the maximum
amount earned by a director would be $2,550. This amount is well below
competitive practice of approximately $15,000 per year, for companies of
comparable size. This could be an inhibitor to attracting qualified,
seasoned board members.
There is no indication from the proxy statement of
stock-based director compensation. The 1998 proxy showed that the two
continuing outside directors, Messrs. Sirianni, and O’Meara owned only 500
and 100 shares, respectively.
The 1998 proxy statement’s listing of director
credentials and relationships, summarized in the accompanying chart,
suggested a lack of independence. As noted above, three of the six members
of the board are Company executives. Of the “outside” directors, Mr.
Sirianni is a manager of the local brokerage office of Piper Jaffray, from
which the Company buys and sells marketable securities. Mr. O'Meara is
President of a community bank in Eau Claire, Wisconsin, where the Company is
headquartered. A new outside director, Professor Cardozo, appears to have no
financial or familial ties to the Company. However, Professor Cardozo told
Mr. Lutin that he expected the Company to be considering some form of
relationship involving his programs for marketing and product development.
The board does not have a compensation committee. Rather,
each member of the board, including the three inside directors, signs the
compensation committee report.
Executive Officer Issues: The overall
compensation levels are relatively low in relation to companies of similar
size. And, as noted above, more than half of that compensation is made up of
a discretionary bonus based entirely on the subjective judgment of the
management team. This type of compensation format is unusual and may be
unappealing to professional senior executives.
Highlights of the Compensation Committee Report presented
in the Company’s 1999 proxy statement are as follows:
- The Company has not relied on stock incentives as a principal part of
its compensation program for its executives. The rationale for this
policy, according to the Company, is that Mr. Cohen, Ms. Cohen, and Mr.
Bartl already own substantial amounts of company stock in relation to
their compensation levels.
- The Company does not employ an outside compensation consultant.
- Annual bonuses are not based on upon a percentage or other formula
utilizing revenues, income or other financial data as predicates.
- The Company has maintained salary levels below competitive levels.
- The Company has used the same compensation philosophy approach for
more than 25 years and is not considering changing the philosophy.
- The defined benefit pension plan results in a maximum annual benefit
of only $30,000 per year.
- There are no employment agreements.
The net result of this compensation program is that
National Presto could have difficulty in attracting senior executive talent.
Reliance on a discretionary annual bonus for most of their compensation
places the executives in a very difficult position. There is apparently no
objective measure tied directly to shareholder value to measure executive’s
performance. This de-linking of shareholder value and executive compensation
is exacerbated by a lack of stock-based long-term incentive program.
The Committee assembled a Working Group for this
demonstration case study consisting of a mixture of NYSSA members intended
to represent a range of expertise and perspectives. Task assignments for the
information gathering and research phase of the project were as follows:
|Work Group Member
coordination of analytical and presentation methodology
||General description of company
|Mark S. Nurse
||Index comparisons, peer group
and benchmark definition, minimum and average standards for asset
|James F. Reda
||Director and officer
qualifications, resource requirements, and performance measurement
evaluation of action alternatives, coordination of communications with
||Investor perceptions of
alternatives, coordination of communications with investors
The Participation of the Company
National Presto was invited to participate in the project
prior to the first meeting of the work group in January 1999. Maryjo Cohen,
the Company's President and CEO, declined. As the project progressed the
Company declined to attend work group meetings, to respond to work group
questions, or to present management views at an NYSSA luncheon. We
nevertheless assured the Company that we would provide it with an
opportunity to comment on the analyses prepared by work group members, and
that we would include any Company response with the final forum papers.
According to the project's original 90-day research
schedule, drafts of the work group members' analyses were submitted to the
Company for review at the end of April 1999. Ms. Cohen urged our deferral of
the discussion papers until after the company's annual shareholders'
meeting, which had by then been scheduled for May 19th, stating that our
work group's analyses were "replete with factual errors and dubious
conclusions" which the Company needed time to identify. After several
letters from Ms. Cohen, we agreed to her requested one-month deferral. Ms.
Cohen submitted her promised response on June 22, 1999.
Analyses of Work Group Members
The analyses prepared by the work group members presented
similar views concerning the Company's use of shareholder assets. In
summary, the analyses indicate that value could be enhanced by changing from
the past decade's practice of investing most of the assets in short-term
The accompanying discussion papers by the work group
members were prepared in April 1999. Some of the authors have added footnote
references to the Company's June 1999 comments.
Monitoring Future Developments
The original project plan provided for continuing
monitoring of the Company to learn what happens.
The only significant development at the time of this
writing was the voting on dissident shareholder proposals at the Company's
May 19, 1999 annual meeting. The results confirmed the expectations stated
in Mr. Tully's report, that shareholder votes were not likely to force
change because of the significant holdings of the Cohen family and the
supermajority requirements for passage of key measures. But the results did
show significant shareholder support for change:
|% votes cast FOR:
||NPK excl Mgmt
||1998 IRRC Avg*
|Sale of company
|* 1998 average of companies monitored by the Investor
Responsibility Research Center
Regarding the possibility of the SEC requiring the
Company's compliance with the Investment Company Act, based on our
understanding of SEC procedures as discussed at work group meetings, we
should not expect the SEC to disclose the status of any inquiries unless it
takes formal action.
List of Directors - National Presto Industries, Inc.
||Director’s Term to
Director, Piper Jaffray Inc.
||Son of person who was
previously on the Board. Assists firm in management of investments.
Carlson Chair in Entrepreneurial Studies, University of Minnesota
||Not available at time of
1998 proxy statement.
||Professor of Management for
at least 10 years. On two other boards.
|James F. Bartl
Resident Counsel of the Company
||Corporate Secretary since
||Chairman of the
Board, People's National Bank, Eau Claire Wisconsin
|Melvin S. Cohen
||Mr. Cohen joined the
Company in 1944.
||Daughter of Chairman.
Full-time employee since 1976, officer since 1983, and President since
- Does not include 42,042 shares held by pension and
retirement trusts of the Company or affiliates that Mr. Bartl, Mr.
Cohen and Ms. Cohen share voting and investment powers.
- According to the 1998 proxy statement, Mr. Cohen
assumed the added responsibilities of Chief Executive Officer and
Chief Financial Officer.
- Includes 1,669,664 shares that Ms. Cohen has voting
Description and Summary
Prepared by Vahan Janjigian
(Note—Footnotes are in response to management’s comments.)
National Presto (NPK) manufactures and markets various
appliances and accessories commonly used in the kitchen. Some of the
company’s more popular products include pressure cookers, fry pans,
griddles, slicers and shredders, toasters, electric knives and sharpeners,
coffeemakers and popcorn poppers.(1) The company segments sales
into three major product lines: cast products, noncast/thermal appliances
and motorized nonthermal appliances. These product lines accounted for 59%,
25% and 13%, respectively, of 1998 sales. Although most of the company’s
products are manufactured at its plants in Mississippi and New Mexico,
approximately 14% of 1998 sales were generated from products imported from
independent firms in the Pacific Rim.
The company has a sales force of ten employees, yet it
also relies on independent distributors. NPK’s biggest customer is Wal-Mart,
which accounted for 44% of 1998 revenues. This figure has risen steadily
during recent years. NPK’s increasing dependence on Wal-Mart is worrisome.
This development is largely due to the loss of business from other
customers: For example, Caldor and Service Merchandise have suffered serious
financial difficulties.(2) And Kmart halted purchases in 1993
following a dispute over terms and conditions that affected its net cost.(3)
During 1998, NPK experienced a 2.3% decrease in net
sales, yet its gross margin increased from 32.4% to 33.8%. Management
attributes the rise in the gross margin to improved operating efficiencies
and cost reductions. Indeed, the widely reported economic problems in Asia
resulted in a reduction in the cost of the company’s imported products. And
the failure to introduce new products has minimized the company’s
The operating profit margin rose by an even more
impressive amount from 11.1% to 17.1%. This was primarily due to a
significant reduction in advertising expenditures from $13 million in 1997
to less than $7 million in 1998.(5) In fact, NPK has embarked on
a new advertising strategy that deemphasizes network television.(6)
Although the new strategy is less expensive, it is not yet clear if it will
be more effective. The 1998 sales decline may have been one unintended
In order to boost sales significantly in the long run,
NPK needs to develop and market new products. Recent product introductions
involved only marginal improvements to existing designs rather than new
inventions. Management has alluded to the existence of new products in the
pipeline, but claims to be awaiting the results of significant patent
applications. Management’s apparent frustration in this arena has prompted
it to announce plans to “overtly seek products conceived by outside
inventors,” who will be identified through print advertisements and
networking activities.(8) Yet management recognizes the
uncertainty of this “inventor relations” program. It tries to restrain
expectations in the 1998 annual report by citing Minnesota Mining and
Manufacturing as an example of a company that has yet to benefit from a
Finally, and most importantly, NPK’s working capital
management policy can be described as excessively conservative. The
company’s most recent balance sheet shows $241 million in cash, cash
equivalents and marketable securities, which comes out to about $32 per
outstanding share of common stock. This is more than 92% of shareholders’
equity and more than 81% of total assets. These excess funds are invested
primarily in investment grade, tax-exempt securities. During 1998, NPK
reported more than $9 million of “other income,” most of which was interest
earned from these investments. Yet this income is then distributed to
shareholders in the form of taxable dividends. Thus, in effect, NPK
stockholders incur a tax liability on otherwise tax-exempt income. NPK’s
need for such an excessive degree of liquidity is highly questionable.
Management’s inability to make better use of shareholder funds is the most
likely explanation for the company’s depressed stock market valuation.
- These and other products are listed on page 3 of the company’s 1998
- Indeed, Caldor is currently being liquidated.
- As reported by Dow Jones News Service, Nov. 9, 1993. Management claims
Kmart subsequently resumed purchasing.
- Management disputes this assessment and claims that “the absence of
new products stimulates even greater efforts to develop them.” Management
also says, “Development costs precede the marketing of a product, and do
not appear simultaneously therewith.” Yet on page 4 of the 1998 Form 10-K
it is stated that, for each of the past three years, research and
development expenses “were not a material element in the aggregate costs
incurred by the Company.”
- See pages 9 and F-7 in 1998 Form 10-K.
- The shift from network television to cable is discussed on Page 7 of
the company’s 1998 Annual Report.
- We note, however, that NPK did report an increase in revenues for the
first quarter of fiscal 1999.
- See pages 3 and 4 of 1998 Annual Report.
- See page 6 of 1998 Annual Report.
NPK Achieving Industry Standards
By Gina H. Sockolow
National Presto is facing the following financial challenges to at least
be in line with the industry:
- Improving sales growth, in line with the industry;
- Improving operating profitability; and
- Improving return on equity.
We believe that National Presto can improve its return on equity by
improving specific non-operating business operations. The process of
improving sales growth and lowering operating costs, to at least be in line
with those of the industry, are functions of corporate management expertise.
Improving the return on non-operating assets is a function of more
effectively deploying existing non-industry specific resources, such as
non-operating income (see Table below). We believe that this could be
accomplished by taking the following steps:
- Investing the cash reserves, about $241 million in 1998, in a suitable
low risk, low growth business operation instead of investing in a changing
portfolio of municipal bonds;
- Given NPK’s high asset turnover investment pattern, achieving a rate
of return on reserves of 10%, from 4%, could be expected to increase
pre-tax income by 55% and would reduce a non-operating business expense,
transaction costs; and
- Allowing for a higher effective tax rate on the pre-tax income, due to
the lower tax rate on income generated by investing in municipal bonds
compared to a business operation, the after-tax income would increase 33%,
to $26 million.
The result of NPK deploying reserves at a higher rate, with lower
transaction costs and without increasing the investment risk, would have the
following benefits, given the 1998 data:
- Increase NPK’s EPS by 33%, to $3.56 per share from $2.68 per share;
- Raise NPK’s return on equity to 10.3% from 7.8%.
National Presto Corp.: Achieving Industry Standards
Fiscal Year ending Dec. 1998
(In thousands except per share and percent data)
||Notes and Calculations
|Income generated from $241 mil. of Reserves
||Projection assumes investment in a suitable
low risk, low growth business operation
|Rate of Return on Reserves
|Effective Tax Rate
|After Tax Income
||Shares outstanding of 7,358
|Return on Equity
||Stockholders equity of 254,405
Analysis of National Presto Industries
By John Tully
The purpose of this analysis is to assess if a change in
the use of shareholders’ assets could significantly enhance value and if so,
would the current management be willing and capable to execute these
As of 12/31/98, the company had $241 million invested in
cash equivalents and marketable securities. The company earned less than 4%
before taxes on these reserves in 1998. In its annual report management
forecasts no improvement on this return in 1999. (1)
If the company invested the $241 million alternatively in
conservative ventures generating only 10% returns, the pre-tax income would
equal $24.1 million. (2) Assessing a tax rate of 38.2% to this
and the existing $18.3 million 1998 operating income (assuming no growth),
EPS would increase to $3.56 per share. This represents an increase of $.88
(33%) to EPS. If the market assigned a modest P/E of 15, a conservative
price objective for the stock would be in the mid-50’s.
If the company were instead to continue its practices of
the past decade, a more appropriate valuation model would be a dividend
discount model with no growth and no reversionary value. If one assumes a 25
year liquidation of the company’s assets and a 6% discount rate, the value
for the stock would be $25.57. If you extend the liquidation out to 50 years
and increase the discount rate to 8%, the value declines to $24.47.(3)
Several alternatives to increase the return on
shareholders’ assets were suggested in discussions I had with current and
past institutional investors. Since the purpose of this analysis is not to
choose a particular action for the company to implement, it is not necessary
here to evaluate or rank these suggestions:
New Product Development.
Series of Small Acquisitions.
Increased channels of distribution for the company’s products to reduce the
company’s reliance on Wal-Mart.
Special Cash Dividend.
Sale of Company.
Take the Company Private.
Although not suggested by investors, the chairman has
stated in the 1998 Annual Report that the Company is considering the
possibility of an increased role for their dormant subsidiary, National
Defense Corporation: “A multitude of problems throughout the world may
require military solutions. Under these circumstances, 1999 could prove a
timely period for renewed efforts by this Company’s executives in pursuit of
an elevated military role”.
Regarding management's willingness to change their use of
shareholders' assets, some other concerns were raised:
- The president of the company serves as both a corporate director and
as the sole trustee of a family voting trust. Does this dual service raise
issues regarding possible conflicts of different fiduciary duties?
- The company might qualify as an investment company.
- Some past institutional investors I spoke with were not able to open a
dialogue with the Chairman on ways to maximize shareholder value. (See
Exhibit "A"). (4)
Based on this information and the company's current use
of assets, it leads me to believe that existing management is not willing or
able to take the necessary actions to increase shareholders' wealth.
If shareholders do not think the current board of
directors is willing and capable of taking actions necessary to increase the
return on assets, they may consider steps that could change the company's
governance. These steps could include:
- Shareholder Votes
There are three shareholder proposals included in this
year's proxy statement. Proxy votes are not necessarily the most efficient
way to stimulate change, especially in this case with 29% of the votes
controlled by management, but are the most frequently used activist tool.
The proposals are:
- prompt sale of company
- directors to be elected annually
- independent board
- SEC Action
Shareholders could request an inquiry by the SEC to
determine if the company is operating as an investment company and
therefore would have to be registered as such under the Investment Company
Act of 1940.
- Shareholder Action
Litigation against the current Board could commence
litigation proceedings against the current directors alleging
The following footnotes are in response to the Company’s
June 22, 1999 “Analysis”
- Cash and Marketable Securities
These are the amounts of cash and marketable securities reported in the
Company’s 10Q reports for the 3 quarters preceding and one quarter after
the 1999 fiscal year end :
04/05/98 $ 222,312,000, after the payment of $ 14,710,000 in dividends.
07/05/98 $ 219,097,000
10/04/98 $ 216,057,000
04/04/99 $ 227,369,000, after the payment of $ 14,719,000 in dividends.
The analyst does not believe these end of quarter reserves are materially
different than the $ 241 million as of 12/31/98.
- Assumptions of 10% Returns
The analyst assumed a level of return at or below the lowest levels
reported for various industry and stock indices as a basis for a pre-tax
hurdle rate of 10%.
- Dividend Discount Model
The analyst used conventional valuation methodologies, which are not based
on knowledge of the industry. The assumptions made by the analyst are
based on the historical record of the company’s relative proportion of
investment in cash and marketable securities compared with its investment
in operating businesses and the fact that the company has not raised its
dividend since 1995.
- Exhibit A
The analyst relied on interviews with current and past institutional
holders and not exclusively on
- Shareholder Votes
The draft of this report misstated the percentage (35%) of shareholder
votes controlled by management, based on the work group’s
misinterpretation of footnote explanations in the Company’s 1998 proxy
statement. The final draft uses the 29% portion of control based on the
Company’s June 22, 1999 Analysis.
The analyst did not have access to the results of the May
19, 1999 stockholders meeting at the time of preparing this analysis in
State of New York
Office Of The State Comptroller
|H. Carl McCall
||John E. Hull
August 29, 1996
Mr. Melvin S. Cohen
National Presto Industries Inc.
3925 North Hastings Way
Eau Claire, WI 54703-3703
Dear Mr. Cohen:
Comptroller McCall as the sole trustee of the $77 billion
New York State and Local Retirement Systems (“Systems”) is committed to
achieving superior performance over the long term. With over $37 billion in
domestic equities, including 43,200 shares of National Presto Industries
Inc. we are concerned when the long term performance shows continued signs
of lagging behind the Industry.
To monitor long term performance we have implemented an
extensive analysis and review process. A database of the Systems’ 900
largest domestic holdings captures and evaluates performance indicators such
as stock returns, valuation ratios, accounting data and capital spending.
These indicators are reviewed for both one and five year periods, (with
return risk adjusted) and grouped by industry. Twice a year the portfolio is
screened to identify these companies that have underperformed in comparison
with their industry peers. In addition, our investment staff reviews
collateral materials to ascertain whether management, governance or
strategic changes have been announced that might mitigate or explain the
results of the objective financial screening. Those companies identified in
two consecutive reviews are contacted in the hope that the directors may
provide additional insight as to the future direction of the business or
Our most recent objective screening and subjective review
has raised concern regarding National Presto Industries Inc.’s performance.
We are writing the Board to learn your reaction to our concerns and to
obtain assurance that actions are being taken to enhance and maintain
performance on a long-term basis. Indeed, with such an assurance, we
believe, the reed for direct shareholder involvement in any other corporate
other corporate governance matter is significantly reduced.
Since the Board’s response will be a factor in our monitoring process, we
encourage you to maintain the line of communication we hope this latter has
established. Your cooperation in providing a reply within the next two weeks
would be greatly appreciated.
John E. Hull
National Presto Industries, Inc.
Eau Claire, Wisconsin 54701
September 9, 1996
Dear Mr. Hull:
In response to your letter of August 29, it seems apparent that your
belief that this company is underperforming its industry is predicated upon
a false definition of the constituents of that industry.
The problem to which reference is made is not uncommon. Quite frequently,
we find our company cast with producers of consumer consumables, such as
Proctor and Gamble with manufacturers of major appliances, or with huge
conglomerates such as Black & Decker and Premark International, both of whom
do indeed have a segment of their business engaged in competition with us,
but whose results, in those areas, are neither clearly defined nor
controlling their respective destinies.
Should our assumption be correct, you may want to narrow your definition
of the industry in which this company competes to producers of durable
housewares, and, to be even more precise, consumers of durable electric
housewares. Our arena does not extend to consumable items or to major
You may not be aware that over an extensive period of time this company
has consistently outperformed most of its peers in terms of returns on sales
and significant areas measured by accountants. We do not purport to
influence the stock market, and regard those who keep one eye on Wall Street
as failing to concentrate an their businesses which are difficult to run in
any event, without dissipating talent and energy chasing a market
So that you will appreciate our performance against our immediate peers,
I am enclosing comparative data for those who are properly recognized as our
competitors as of the close of the second quarter 1996. Wherever second
quarter data was not found, first quarter information has been supplied.
Additional enclosures that should be of interest relate to two of the
recognized pre-eminent companies in our industry, Sunbeam and Rubbermaid,
both of which are troubled, indeed. Finally, so that you may observe that
our industry is beleaguered even offshore, I am enclosing an article
relating to an international leader, Krups, and a very recent clipping from
The Wall Street Journal demonstrating that companies in our industry
from Japan and Thailand are market laggards.
There was a time when we disdained comparative performance with other
members of our industry, since we found such a study inappropriate. However,
with the changes in distribution which have occurred in recent years,
resulting in the pre-eminence of discount retailers such as Wal-Mart and
Target, we must now accept that "price is king", and absent new product
introductions of a revolutionary nature (which unfortunately are
increasingly rare), profit opportunities have been seriously leveled.
In the last analysis, we recognize, as we believe you should, that our
industry is under siege, with none of us showing any immediate promise of
acceptable profitability. Under the circumstances, while we would regret
losing you as a shareholder, would be fully sympathetic with a decision on
your part to seek better returns elsewhere, and admit that doing so might be
a part of your long-term responsibility.
Because of the rules of law that preclude our sharing “additional insight
as to the future direction of the business or governance strategy” with any
one shareholder rather than all simultaneously, our directors must
regrettably decline any further comments. I believe, however, that if you
read the last several annual and quarterly reports, the information you are
seeking can be found in the appropriate public declarations.
Melvin S. Cohen
Mr. John E. Hull, Deputy Comptroller
Division of Investments and Cash Management
State of New York
Office of the State Comptroller
Albany, NY 12236
STATE OF NEW YORK
OFFICE OF THE STATE COMPTROLLER
ALBANY, NEW YORK
|H. Carl McCall
November 13, 1996
Mr. Melvin S. Cohen
National Presto Industries, Inc.
3923 North Hastings Way
Eau Claire, Wisconsin 54703
Dear Mr. Cohen:
As indicated in my letter of August 29, 1996, the Now York State Common
Retirement Fund is concerned about the performance of National Presto
Industries, Inc., and will be monitoring the corporation to determine
whether actions are being taken to enhance and maintain performance on a
long term basis.
Our investment staff recently completed a thorough review of National
Presto’s performance. We recognize that the company is difficult to classify
and have not weighed heavily its comparisons to industry medians.
Nevertheless, we note that the company's stock returns have been
consistently negative, and its performance has been disappointing. At the
same time, there are positive signs – such as the introduction of three new
products – which encourage us to give management an opportunity to
demonstrate its ability.
The Fund remains greatly concerned about issues of corporate governance.
Ws are particularly disturbed that none of the directors are non –
management independents with no direct relationship with the company. We
firmly believe that independence encourages board members to act in the best
interest of shareholders.
Similarly, we are disturbed that National Presto’s board does not include
a separate compensation or nominating committee. Such committees, when they
consist of independent directors, can ensure the quality of director
nominees as well as provide shareholders a means to be involved in the
nomination and compensation process.
Finally, because the Common Retirement Fund holds equity through index
funds, we do not have the option to sell our shares in National Presto,
contrary to the suggestion in your letter of September 9, 1996. For that
reason, we remain committed to close monitoring of performance and
communication with portfolio companies to obtain the reassurances that might
preclude the need for direct shareholder involvement in other corporate
I look forward to hearing from you.
National Presto Industries, Inc.
Eau Claire, Wisconsin 54701
November 22, 1996
Dear Mr. Hull:
Quite frankly, I was hoping that my letter to you of September 9 would
put to rest any need for further correspondence.
So that you will not be laboring under false premises with respect to our
three new products, I an enclosing a copy of our most recent press release
which indicates that results are proving disappointing.
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.
You are quite wrong in your assessment of our outside directors. Our
newest director, Michael O'Meara, who replaced our general counsel , is a
commercial banker, having had no previous relationship to our family or this
company, and not acting in a banking capacity with us now. Walter Ryberg is
a former Vice President for Sales, who has been disassociated from us, in
all respects, for 13 years. Finally, John Sirianni is an investment banker
who handles only occasional transactions for the company or our family. All
of these men have been selected for their independence and maturity of
While some huge corporations may be in need of the committees to which
you refer, they would be as useful for us as a flea on the hair of a tail of
a dog. Any concern with respect to compensation should be quickly
dissipated, if you look at our forms filed with the SEC which show that both
officer and director compensation is among the lowest, if not the lowest, of
all companies of our size on the New York Stock Exchange.
From the fact that your shareholdings are derivative, with the primary
shareholder being the fund in which you invested, I believe your quarrel
lies with it, rather than us. If you disapprove of the mix in which the fund
has invested, please express your disappointment, chagrin or recommendations
to the fund manager. An alternative would be to substitute a fund which does
not include our equity.
Please believe me, it is my desire to avoid rudeness, under any
circumstances. Nevertheless, we should both recognize that correspondence
between us is proving fruitless, and is consuming time, which could
otherwise be properly devoted to our respective more direct concerns.
Perhaps yours could be aimed at more individual stock selection (as opposed
to the indiscriminate mix found in indices, such as the Mid-Cap 400) which
would provide the flexibility in stock selection and rejection which you
apparently sorely desire, but cannot secure in your present sterile posture.
Melvin S. Cohen
Mr. John E. Hull, Deputy Comptroller
Division of Investments and Cash Management
State of New York
Office of the State Comptroller
Albany, NY 12236
Peer Group Analysis of National Presto Industries
One important way to measure how well a company is doing
is to make comparisons to other companies in its peer group. Companies that
compete in the same industry are usually subject to the same market
conditions, and in most cases, only the strong will survive. When compared
to companies in its peer group, the picture does not look too good for
National Presto. Top line growth has decreased an average of 2% over the
past ten years, compared to 5% growth for the industry. Return on equity,
five-year average, is 8%, compared to the 15.6% industry average. National
Presto superficially appears to produce a healthy EBIT margin, averaging
23.5% for the past five years, but much of this can be attributed to
approximately $ 9 million annual interest income rather than profits
generated by operations. Excluding interest income, EBIT margin averages
16.9%, which is more in line with the industry standard. With numbers such
as these, it should come as no surprise that for the past 10 years, National
Presto has traded at an average P/E of 14.7, while the average for its peer
group is 21.7 (see attached).
It is widely believed that the problem at National Presto
is the under-utilization of assets. The company is cash rich, with over $
200 million on the balance sheet, and no debt. In reality, National Presto
utilizes approximately 14 % of its total assets in its housewares business,
while the remaining is invested primarily in Tax Exempt securities. This
means that more than 80% of the company’s assets is earning less than 5%. At
the same time, management has significantly reduced advertising expenses,
and the company has not developed a new product for quite some time.
It is our belief that management could act to increase
shareholder value. The question is whether the current Board of Directors is
interested in implementing changes. At present, the board comprises of 6
members, three of whom are directly employed by the company and others
appear to have other direct or indirect financial interests controlled by
management. Shareholders are entitled to a voice on the Board of Directors.
With this structure, there is insufficient non-insider shareholder
representation. Maybe one genuine outsider would be able to champion a new
direction for the company. Though management controls 35% of shares
outstanding, shareholders have the right to voice their concerns about the
future of this company by demanding changes.
Management should be more open to suggestions on how to
proceed. Everyone I spoke to agrees that management need not do an
acquisition that does not make sense. But in the meanwhile, there are other
ways to win back the support of disgruntled shareholders, and Wall Street.
As stated elsewhere by other analysts in this forum's papers, excess cash on
the balance sheet can be used in research and development, and for
advertising. If the company’s assets are adequately utilized, it will have a
positive reflection on profits and growth, and thus ultimately on the common
stock. But these changes do not have to come overnight. Any attempt by
management to address the issues that are of concern to shareholders can be
viewed as positive. A shake-up of the board of directors will be a step in
the right direction.
Regarding management’s reluctance to use media (TV)
advertising, just recently I read an article which stated that Volkswagen
Passat is now the number one selling car in the nation. Much of this
vehicle’s success was directly attributed to (TV) advertising. Maybe
National Presto can take a page from Volkswagen. Also, with the recent boom
in the housing market, there are a lot of new kitchens that need appliances.
I think this offers an excellent opportunity for National Presto to improve
its top line. Instead of reducing advertising and copying an “inventor
relations” program which management says has not worked for others, maybe
National Presto should copy the practices of industry leaders like Salton .
National Presto should be capable to grow at the same pace of its
competitors, instead of being a laggard. The future is bright, National
Presto should open the door wider to let the light in.
REVENUE 1998 (MILL)
REVENUE 10YR HIST GR RATE
5 YR AVG0
CALENDAR EARNINGS 1998
EARNINGS ESTIMATE 1999
REL TO SPX
PER SHR 4/23/99
RTRN % CHG 10 YRS
LT DEBT TO CAPITAL
CAP (MILS) 4/23/99
|HOME PRODUCTS INT'L
|NACCO INDUSTRIES 'A'
|S&B SMALLCAP 600
National Presto Industries, Inc.
Eau Claire, WI 54 703-3703
June 22, 1999
Mr. Gary Lutin
Lutin & Company
5 75 Madison Avenue – 10th Floor
New York, NY 10022
Dear Mr. Lutin:
As promised, the enclosed material comments upon your submissions of
April 26, 1999.
Shortly after receipt, I advised that just a quick reading revealed
numerous factual errors, as well as dubious conclusions. My weekend review,
which provided time for a careful examination, unfortunately leads me to
believe that my initial impressions were charitable. Frankly, if I had been
aware of the amount of work and hence time required to satisfy my
obligation, I would not have undertaken the task. I became so tired that I
may have failed to comment upon other obvious errors or false conclusions.
The enclosed analysis of each of the four reports demonstrate, among
others, the following:
- Your analyst assigned the task of listing our popular products, failed
to perform her task.
- Your analysts have not been able to identify the industry in which we
are engaged, and, as a consequence, reached incorrect untenable
- Your analyst failed to understand the differentials in timing between
cost of development and product availability.
- Your analysts adopted speculative, unrealistic and wildly conjectural
- Your analyst completely disregarded frequently stated corporate
policies and objectives.
- Your analysts evidenced a misunderstanding of the role of advertising
in the small appliance industry, generally, and this company specifically.
- Your analyst misrepresents the status of our Directors, as to
Perhaps your authors, none of which appear to be CFAs, lacked motivation
or found reporting on NPK of insufficient complexity or general interest to
merit a study in the first instance. If the latter is at the root of their
difficulty, I must say I concur fully with them. Certainly their problem
could not have been lack of transparency, since data supporting my comments
upon factual matters are readily available in public documents.
Most people in your position would take their markdown and abandon the
project. Such abandonment seems the appropriate course in that the project
presumably was directed to the subject of corporate governance. Following
the necessary editorial modifications to Mr. Tully's report, comments upon
corporate governance are very few, and those that remain have been obviated
by the overwhelming shareholder vote at our May 18, 1999 Annual Meeting
endorsing our company's practices (to which Mr. Tully is opposed). Moreover,
not a single broad educational value is served by the group, despite the
fact that this was the second stated objective of the study. Finally, your
report is confrontational, judgmental and critical of a company's practices,
all of which appear to be out of harmony with the Society's policy in
Should you decide that the report is still worthy of publication in any
written form, I would appreciate receiving a copy, fully reflecting my
analysis. My expectations in that regard stem from your repeated assurances
that "anything you provide will be incorporated in the presentation of
project material to be made available to NYS SA members and to the public".
While I recognize as strictly within your discretion the choice of format
whereby the presentation of project material can be made available to NYSSA
members and to the public, I think it would be helpful if my analytical
comments appeared opposite or immediately following the exact statement(s)
of the analyst, to which they relate.
NATIONAL PRESTO INDUSTRIES, INC.
NATIONAL PRESTO ANALYSIS OF:
NPK - Description and Summary
By Vahan Janjigian
This author begins his commentary by purporting to identify NPK's more
popular products, but fails to do so from both a positive and a negative
point of view. Illustratively, this company does not produce a toaster, as a
reading of the 1998 annual report demonstrates. On the other hand, while
including inconsequential categories, such as knife sharpeners, not
mentioned is one of the most significant product categories manufactured and
marketed by the company, its deep fryers, which have been consistently
advertised on TV over the last decade (and so declared in Annual Reports).
Reference to your files will disclose that Mr. Janjigian is mistaken with
respect to Kmart not being a customer; to misapprehension concluding that
failure to introduce significant new products in a given year minimized
development expense in that same year; and that a new advertising strategy
de-emphasized TV advertising, which in turn enabled the increases in
operating margins achieved by the company. In response to your request for
three obvious errors, we had provided you with the following comments on May
3 and May 4, 1999 (after receiving these comments, you decided to defer
publication of the report pending your receipt of our full analysis):
The Kmart Corporation has been a continuous customer for
a number of years, and was so identified in the 1994 Annual Report.
A statement appears that earnings improvements in 1998 are
sourced in the fact that the "failure to introduce new products has
minimized development expenses". Anyone with knowledge of the operation of a
business in our industry would know that, if anything, the absence of new
products stimulates even greater efforts to develop them. As explained in
the 1997 Annual Report:
"It is common knowledge that products are conceptualized
in a given time frame, with ultimate design (both mechanical and
aesthetic), patenting, production, and commercial introduction occurring
The conclusion would be erroneous as a blanket statement not only in our
industry, but in practically all others. "Development costs” precede the
marketing of a product, and do not appear simultaneously therewith.
In the same paragraph, increased earnings are stated to be "primarily due
to a significant reduction in advertising expenditures". The writer failed
to read the Annual Report, which recites at page 7 that "Because market
analysis indicated the price sensitivity of the PowerPop® microwave
multi-popper made it advisable to offer the unit at a price from which the
advertising cost had been eliminated, that product was not included in the
television campaign." Inasmuch as pricing includes the cost of advertising,
it should be apparent that revenue had likewise been relieved of the cost of
the advertising, and hence the writer’s conclusion is in error.
An inference of dubious practices by us in construction of our sales
force lies in the contention that "the company has a sales force of 1O
employees, yet it also relies on independent distributors" (emphasis
supplied). Certainly, multilayered sales forces are not strange to industry.
Some successful companies supplement their sales force with telephonic
solicitations, door-to-door salesmen, etc. It has historically been
uneconomical for any company in our industry to call upon/ship directly to
the "ma and pa" stores, or their equivalent, when our salesman represents
only one line. On the other hand, distributors representing a multiplicity
of lines can do so effectively and economically.
The author identifies Caldor as a customer suffering financial
difficulties - Caldor no longer exists - it was liquidated in January 1999.
The 1998 Annual Report in fact stated that it failed to emerge from
A fresh error occurs in the allegation by the author that management’s
frustration with its efforts to develop and market new products prompted it
to announce plans to seek products conceived by outside inventors. The
alleged frustration never occurred. Opening avenues for the flow of new
product ideas from outside inventors is a supplementary process, to
complement ongoing internal efforts.
Contrary to your analysts statements, identification means for securing
new product opportunities from outside the company are not limited to print
ads and "networking activities" (whatever that means). Our annual report
expressly states we would not disclose more than a sampling of our methods
since doing so would provide assistance to competitors.
The analyst's conclusion that the double tax liability allegedly visited
upon shareholders by virtue of dividends derived from tax exempt securities
has rendered investment in such instruments imprudent, is inappropriate.
First, it should not be forgotten that in most years the company enjoys some
retention of income. While no attempt is made to identify the sources of
that retention, clearly one would expect income from tax-free securities to
be the major source thereof. Of primary importance, however, it should be
understood that tax-free securities are purchased only when net yield to the
company is greater than it would be on taxable instruments at the moment in
time that the company enters the market with funds for investment. Our
experience has demonstrated that, over time, there are substantially more
opportunities for superior net yield, sourced from tax-free instruments. On
the other hand, there are times when net yields favor taxable securities.
Thus, when appropriate, investments occur in the taxable securities arena.
Before rendering false judgements, your analyst should ask himself if it
makes sense to purchase taxable instruments, with a lesser net yield, only
for the purpose of being able to tell shareholders double taxation has been
NPK - Achieving Industry Standards
By Gina H. Sockolow
This analysis, as well as that by Mark Nurse entitled "National Presto
Industries Peer Group Analysis" commits the cardinal sin of comparing vital
statistics for National Presto Industries against those of companies that
are not truly competitors, and, indeed, does not represent any known
industrial group. Your authors have fabricated a new category, consisting of
some of NPK’s competitors, major appliance producers and large
conglomerates. Major appliance companies operate in a totally separate
sphere from the points of view of manufacturing, advertising, pricing,
buyers, location within stores for sale, sales outlets, etc. This company
with its competitors are popularly grouped in a category dubbed the traffic
appliance industry. That name was intentionally selected to distinguish it
from major appliance producers. The word "traffic" implies that a customer
can walk out of the store with a small appliance under her arm, whereas
treating a refrigerator or clothes washer, in the same fashion, would be
most difficult. Comparison with a conglomerate group is highly misleading,
since earnings from NPK's competitors included within these operations
represent only a tiny sliver of those companies' total sales and income, and
in most cases the competitive entities enjoy either only very modest
profits, or, indeed, suffer losses.
If Ms. Sockolow and Mr. Nurse had examined public documents prior to
undertaking their editorial projects, they could not have avoided the pure
and clean description of all components of the small electric appliance
industry, which includes National Presto, as provided in the NPK 1999 proxy
statement, at page 15. Supporting evidence can be found in the first three
paragraphs of your own Exhibit A (letter of M.S. Cohen to John Hull dated
September 9, 1996).
Nor is it acceptable to contend that because of some special elevated
status enjoyed by analysts, they need not stick to the facts, but may
depart, freely, in defining an industry in which the studied company is
engaged. Mr. Lutin was guilty of that observation in a conversation with our
James Bartl in which he stated that the judgment of analysts is not
susceptible to criticism, so that as per the illustration Mr. Bartl used in
the conversation, if a cereal company were compared to the automotive
industry by any analyst, rather than to other marketers of breakfast
cereals, contradiction would not be in order.
Ms. Sackolow next posits a multiplicity of low risk, low growth business
operations, which can easily enjoy a 1O% return, from which the company
could make a selection. Unhappily, such businesses are probably impossible
to find. Certainly, it would have been helpful, if Ms. Sockolow is aware of
these operations, if she would have named a few. Moreover, to achieve the
elevated earnings per share, the author expands funds beyond those we
possess (see the second paragraph of my remarks upon Mr. Tully's essay, at
pages 4-5). Certainly, she would not recommend borrowing money for her
proposed purposes, since the interest cost, over time, would probably exceed
the net yield from the portion of the business, so funded. In this same
context, what intelligent management seeking expansion and growth, would
spend every dollar in its treasury (as Ms. Sokolow proposes) to make a
pedestrian acquisition? Even accepting presumed availability, one must
question the amount of premium that would be involved in the acquisition,
amortization of which might depress the yield below the stated threshold.
Probably the most serious drawback to the author's scenario is the extent
our company would become entangled with its acquisition. NPK's apparent (and
oft repeated) strategy in maintaining its cash position is its long term
plan to invest the funds in a business or businesses with high potential
which will enable it to escape its complete dependence upon the beleaguered
small appliance business, thus providing contraseasonal and other apparent
benefits (see, for example, the concluding paragraph in the Chairman's and
President's letter to shareholders in the Annual Report for 1997). To enjoy
the liquidity necessary to make a timely acquisition or engage in a new
business, yield has been sacrificed. One must assume that a pedestrian type
business would, in all likelihood, prove difficult to sell or liquidate,
without a substantial loss in so doing, when and if time pressure
necessitated such action. The chances are high that the amount of the
capital loss would exceed any increment of additional yield secured over the
term the acquisition was in place.
In view of the foregoing comments and explanation, analyzing the
consequences of the yield improvement presumably to be enjoyed from the
acquisition, becomes a thoroughly idle pursuit. Engaging in such projections
can be fun. Just imagine how much better the earnings per share would become
if a simple 15% return were inserted, rather than the 10% arbitrarily
chosen. Unhappily, speculation rarely meets the standards of reality.
Analysis of National Presto Industries
By John Tully
As evidenced by the second and fourth paragraphs in his report, Mr. Tully
is inordinately fond of presupposing static data, as opposed to the dynamics
which pervade the industrial and commercial worlds.
In the second paragraph, the author presupposes December 31 cash and
securities sums of $241,000,000 as being available for investment by the
company throughout the year, and then makes an earnings calculation
predicated thereupon. A more thoughtful approach would take into account the
fact that at year-end finished goods, work-in-process and material
(including parts) inventories are at low ebb, receivables have been
substantially paid down, payrolls have been trimmed because production to
meet Christmas business is no longer needed, etc. We believe it obvious that
well prior to the Christmas season (September through
November) substantial funds are needed to support the materials needed
for manufacturing, manufacturing activities per se, such as payrolls,
ballooning of accounts receivable reflecting pre-Christmas sales, etc.
Accordingly, sums needed for operation of the business (working capital)
fluctuate throughout the year, with a final balance, at year-end,
unreflective of the dynamism inherent in the operation. Likewise, in large
part at year-end, earnings enjoyed during the year have been transformed
into cash and securities on the balance sheet. Obviously, these were not
available during the entire year for investment; certainly, as of the
beginning of the year they did not even exist. Moreover, the author
overlooks the approximately $15,000,000, at a minimum, required for dividend
distribution in early March, availability of which is dependent upon cash
and cash equivalents on hand.
A repetition of Ms. Sockolow's assumption of the ready availability of a
low risk business operation carrying a 10% return, and that such a business
would fit within the policy considerations of this company, is included as a
part of Mr. Tully's analysis. Our comments in response to Ms. Sockolow are,
of course, applicable, so that no further remarks are required.
The foregoing errors fade into insignificance when compared to an
assumption of a totally stagnant period for the company over periods of 25
and 50 years, to be utilized as a predicate for forecasting stock values. A
basic rule of nature is that change will and does occur. While we will not
and cannot contend that the future may hold nothing but progress for this
company, so that, indeed, adversities might be encountered, we find it
impossible to accept total stagnancy. Please read the last incomplete
paragraph at column one and the first incomplete paragraph in column two at
page 4 of our 1998 Annual Report, as well as the concluding paragraph of the
Chairman's and President's letter at page 6. Experience and history have
both taught us the fallibility of forecasting in our business, even for one
year ahead. Few would contend, in view of our intimacy with our own
business, that a forecast from us would not have greater value than that
from strangers. Under these circumstances, how does one find value in
projections 25 and 50 years distant, by an individual who should not be
expected to be familiar with the vagaries of the small electric appliance
A dire conclusion is predicted for this company's stock price "If it
continues its practices of the past decade." It would seem that the author's
criticism should be aimed at the market's predilections, rather than alleged
corporate practices. This company has suffered market snubs in the face of
increasing its year-over-year earnings by 15% in 1997 and by 16% in 1998.
Moreover, first quarter 1999 shows an improvement in quarter-over-quarter
sales of 13.9% accompanied by an earnings increase of 16%. Unfortunately for
NPK and many other companies suffering the same fate, today's markets are
enamored of small company growth stocks (that lose money), while small
company value stocks, such as NPK, are clearly out of favor. If Mr. Tully
believes that the current market favorites will continue to be such for the
next 25 or 50 years, he should find most interesting a study of the market's
history, which describes, in vivid language, how today’s favorites become
the dogs of tomorrow.
If this company remains confined to its present industry, a reasonable
expectation on its stock price during the next 25 years (not to mention 50)
is that it will fluctuate in keeping with the rate of success and failure of
its new product introductions. Product introduction fruitful periods, such
as those enjoyed by NPK in the latter 1980s and early 1990s, will probably
happen again, with similar market results. By the same token, droughts can
also occur. Nor can general economic health during these intervals be
overlooked. A robust economy versus one that is depressed will produce
widely different scenarios, regardless of the internal activities pertaining
to new product development.
No comment will be contained herein upon Mr. Tully's remarks as contained
in the second and third paragraphs at page 6 (numbered 1 and 2), the final
two paragraphs on that page (numbered 2 and 3), and items classified as (b)
and (c) at page 7. It seems apparent that with the elimination of an exhibit
originally planned for attachment, statements bottomed upon it must likewise
Exhibit A, appended to Mr. Tully's remarks, is submitted as a
demonstration of the alleged unwillingness of our company's Chairman to
participate in a dialogue with institutional investors. This conclusion is
dependent upon the presumed disaffection of a "past institutional investor".
It should be noted that the entity involved at no point owned shares in NPK,
but rather had invested in a mid-cap index fund. Upon NPK's elimination from
the fund’s portfolio (a sound move since NPK is a small company rather than
a mid-cap company, by definition) the investor's derivative interest was
extinguished. It does not take careful examination of the two initial
letters in that exchange to conclude that Mr. Tully is in error, when
stating his conclusion. In his two page letter of September 9, Mr. Cohen
endeavored to answer Mr. Hull's questions in a complete and courteous
fashion, while expressing sympathy for Mr. Hull's point-of-view. Admittedly,
upon learning from Mr. Hull's later letter that he had misrepresented
holdings of the entity he represented, it became apparent that Mr. Cohen's
patience was worm thin indeed. Bullies are not respected anywhere. Bullies
that misrepresent suffer even a lower status.
We find inexplicable Mr. Tully's statement that "proxy votes are not
necessarily the most efficient way to stimulate change". To the best of our
knowledge, there is no alternative way for owners to express their
preferences. Certainly corporate governance should not, instead, be decreed
by a pool of market analysts. Apparently, as a part of Mr. Tully's
dissatisfaction with corporate governance being entrusted to the owners of
the company, he specifically laments an alleged share ownership of 35% by
management. It should be noted that his ownership figure is in error.
Management controls approximately 29% of the votes. (See 1998 and 1999 proxy
statement, at page 3.)
Finally, Mr. Tully predicts benefits that would flow from votes by
shareholders favoring resolutions to sell the company and to require the
majority of the Board's members to be independent. Concern is expressed,
however, that the desired result might not eventualize because of
management’s holdings. Not surprisingly to us (and contrary to Mr. Tully’s
preferences), a resounding vote endorsing management’s methods of operation
and governance was directed by shareholders at our annual meeting on May 18.
The results of the vote would have been precisely the same with or without
In the last analysis, the people that own this company do not share Mr.
Tully's discontent. It seems apparent that they continue to repose
confidence in the judgment of the management that was able to earn the cash
and cash equivalents, the accumulation of which so disturbs academic
critics, such as Mr. Tully. Similarly, they are prepared to await
availability of a prudent purchase, rather than advocate the inpatient
tactics of those who might temporarily expand yield at the expense of long
term value. Last but not least, they respect the dedication and competency
of the Board they have chosen to represent them, and the management
responsible to that Board.
NATIONAL PRESTO INDUSTRIES PEER GROUP ANALYSIS
By Mark Nurse
Among the four analysts, Mr. Nurse is the leading proponent of comparing
NPK to non-peers, while labeling the latter as peers. Adequate comment on
this egregious error appears elsewhere in this analysis, so that repetition
is not required.
Following repetition of the false conclusion with respect to advertising
at this company upon which I have already commented, the analyst states that
"The company has not developed a new product for quite some time."
(emphasis added.) We believe it apparent that no one outside this company is
aware of products in development. Activities in our laboratory, and those
being considered by our new products committee, are not disclosed to anyone,
for very apparent reasons.
Your analyst is hopelessly at sea when he ventures into the area of
advertising. At page 19 he charges us with "significantly reducing
advertising expense" while at page 20 he suggests using "excess cash for
advertising purposes". As explained in our earlier exchange of facsimile
messages, reduction in ad expense in 1998 was largely the consequence of
accepting the recommendation of important customers to the effect that our
microwave popper was, in their opinion, extremely price sensitive, so that
eliminating ads comparable to those which had been run for several prior
Christmas seasons, while simultaneously reducing the product price by the
planned cost of the ads, could lead to a welcome increase in volume. It is
important for Mr. Nurse to understand that TV costs are very high, with such
costs absorbable only by either new or totally unique products where
competitors cannot erode prices (which include TV costs within them). Were
NPK to advertise, utilizing TV, its fry pans, pressure cookers, or other
products where it shares the market with other producers, the resultant
price would be so high as to assure competitors a preferred counter
position, with our products being uncompetitive. On the other hand, new
patented products can and properly do sustain TV costs. As a result, NPK's
TV budget will be dictated by product positioning in the marketplace, and
not by an overall advertising strategy influenced by allegedly excess cash
positions, and hence fluctuate from year-to-year. Most of our competitors do
not venture into television, but confine their advertising to dealer print.
The few that have, e.g., Fantom and Salton referenced by Mr. Nurse, have
done so with the requisite new or totally unique products. NPK has
historically been among the leaders in TV advertising, certainly in the
preferred time slots with the greatest number of the target viewing
audience. Our company will continue to enjoy that position, with budgets
rising or falling in keeping with new patentable products entering the
At page 19 and 20, a contention is made that all NPK Directors bear the
taint of financial dependence, and hence there is not a single genuine
outsider to champion a new direction for the company. This contention is
utterly false. Everyone (other than Mr. Nurse) agree that Mr. O'Meara and
Professor Cardozo qualify as independent Directors, while most fair minded
evaluators find Mr. Sirianni similarly qualified.
It should be observed that Mr. Nurse is in error, as was Mr. Tully, of
assuming a 35% management stock ownership, whereas the figure is
Unfortunately, this writer is guilty of selective reading. While
criticizing attempts to open up new product opportunities sourced from
outside inventors, as described in the 1998 Annual Report's President's and
Chairman's letter, he laments the lack of "any attempt by management to
address the issues that are of concern to shareholders". Just a little
investigation would disclose that in the very same page of the 1998 Annual
Report devoted to externally sourced inventions, extensive comment appears
describing studies being undertaken to identify and capitalize upon new
business ventures, not arising via the acquisition route, and without
foregoing efforts to consummate acquisitions via normal channels.
In previous communications, I have solicited a legible copy of Mr.
Nurse's "Peer Group Comparison", as presented at page 21. Since none has
been received, comment, here, is not possible. However, inasmuch as the peer
group has been incorrectly identified, I suspect that any remarks would be