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The Wall Street Journal Interactive Edition -- July 28, 1999

Heard on the Street

National Presto in Spotlight;
Management Feels the Heat



As president and chief executive officer of housewares maker National Presto Industries, Maryjo Cohen long has known pressure cookers. Suddenly, she is feeling heat of a different sort.

For years, Ms. Cohen, 46, and her 81-year-old father (and chairman) have managed to run National Presto -- whose financial and stock performances have been lackluster -- without any major analysts scrutinizing them.

Not anymore. A group of New York Society of Security Analysts members, examining how corporate-governance practices could enhance shareholder value, will release as early as Wednesday a six-month inquiry into its first test subject: National Presto.

The results aren't pretty. "Existing management is not willing or able to take the necessary actions to increase shareholders' wealth," concludes Hefni Investments' John Tully after studying National Presto's use of assets and talking with several former institutional investors in the Eau Claire, Wis., company. Together the Cohens control nearly 30% of company shares.

The society's members chose National Presto because they believed the company presented many attributes typical of an underperforming concern. But Ms. Cohen believes the company is simply being picked on.

The move by the members of the 62-year-old society -- which holds luncheon meetings for companies to make presentations to analysts -- is the latest effort on Wall Street to link corporate governance and shareholder value. The California Public Employees' Retirement System has for years issued an annual list of underperforming companies. Its target list reflects companies' relative rates of shareholder return and weaknesses in corporate-governance practices. And shareholder activists Robert Monks and Nell Minow, through their Lens Investment Management, have been targeting companies for anti-shareholder behavior for years as well.

Mr. Tully suggests several alternatives to boosting the company's return on assets. Among them: taking the company private, paying a special cash dividend or even selling the company. He also believes National Presto appears to qualify as an investment company, noting that 80% of its assets are in cash or cash-equivalents that totaled $241 million at the end of 1998. But he says management hasn't registered as an investment company with the U.S. Securities and Exchange Commission to provide tax and regulatory benefits to shareholders. He suggests the SEC begin its own inquiry into the matter.

Ms. Cohen, for her part, says National Presto doesn't consider itself an investment company that would require it to register with the SEC. "It's a fairly complicated area that has been reviewed" by lawyers, she adds. She says the SEC hasn't contacted the company about the issue. An SEC spokesman says the agency wouldn't comment on the investment-company issue regarding National Presto.

More broadly, Ms. Cohen says the proposed draft of the analyst report she saw "contained many errors." She declines to elaborate. But in a recent letter to the group's adviser, she contended the group's suggestions were "speculative" and "unrealistic."

What is clear is that National Presto stock has been a dud. In the past five years, while the Standard & Poor's 500-stock index has climbed 200%, National Presto shares have been virtually flat.

So it is no surprise that some current investors are frustrated. Says Kenneth Bertsch, director of corporate governance at the Teachers Insurance Annuity Association-College Retirement Equities Fund, the huge pension system that owns 90,000 National Presto shares: "We've had concerns about the lack of board independence" at the company. He says TIAA-CREF voted in favor of three shareholder resolutions at a recent annual meeting. "The company has not been terribly receptive to input from the outside, especially on how to deal with its cash situation," he says.

In the corporate-governance analysis, Brean Murray & Co. analyst Gina Sockolow suggests steps the company could take to deploy non-operating assets to increase earnings per share by 33%, including investing the cash reserves "in any low risk, low-growth business operation instead of investing in a changing portfolio of municipal bonds."

Mark Nurse of Chase Personal Asset Management contends a "shake-up" of National Presto's six-member board which includes three members of management and others with management ties "will be a step in the right direction."

And Arthur Andersen's James Reda criticizes executive compensation, suggesting the company pays its top executives too little to attract "professional senior executives." Last year, National Presto's engineering vice president received a base salary of only $45,000 and its sales vice president got just $37,204; Ms. Cohen's salary was $64,000. Senior executives do get bonuses, but they aren't based on any particular performance criteria.

So how did such a small company -- its sales in 1998 were only $107 million -- draw the society's spotlight? The analysts' aim, says Mr. Reda, has been to "analyze corporate-governance issues on a similar level as corporate-finance issues in the decision to buy, hold, or sell a stock." Initially, 20 to 30 companies were considered because each had generated some questions over asset management and also had some corporate-governance issues.

Group members say National Presto was selected for several reasons, including the Cohens' large stake in the company and because they have "vigorously" criticized previous attempts by shareholders to effect change. (At this year's annual meeting in May, for instance, Mr. Cohen suggested that shareholders who dislike the company's policies simply sell their shares).

One factor that weighed in the selection: A substantial number of large institutional investors own National Presto shares because the stock is included in the S&P small-cap stock index. Many of these holders are unhappy with the performance of the company's stock, whose price peaked at $62 in 1992 and has languished in the 30s and 40s for over a year. National Presto shares were unchanged Tuesday at $38.4375 in composite trading on the New York Stock Exchange.

Another reason for its selection is the company's huge pool of cash or cash-equivalents, representing nearly 90% of stockholders equity. The company has maintained similar levels of cash without expanding its operating business for over a decade; it hasn't had a significant new product introduction since the slicer-dicer Salad Shooter over a decade ago. Presto also makes pressure cookers and Presto pressure canners for home canning of vegetables and fruits.

Then there are the corporate-governance issues: The company's board isn't independent of management and met only twice last year, and directors aren't elected annually.

The Cohens naturally are boiling over the attention, and they have tried to apply a bit of heat of their own. Ms. Cohen repeatedly declined to participate in the project or attend group meetings. She only agreed to respond to the group's individual analyses after the company's chief legal officer sent a letter trying to discourage release of the study, the report says.

In a June 22 letter to Gary Lutin, a former New York investment banker and the group's adviser and co-sponsor, Ms. Cohen asserts that "not a single broad educational value is served by the group" and terms the report "confrontational, judgmental, and critical of a company's practices." Among other criticisms, Ms. Coven says the analysts adopted "speculative, unrealistic and wildly conjectural hypotheticals."

"Perhaps your authors, none of which appear to be CFAs [certified financial analysts], lacked motivation or found reporting on [National Presto] of insufficient complexity or general interest to merit a study in the first instance," Ms. Cohen said, adding: "Most people in your position would take their markdown and abandon the project."

Mr. Lutin acknowledges that without Ms. Cohen's cooperation, the project "wasn't all that was hoped for." But, he has agreed to co-sponsor another similar project. He hopes, however, that the next company "will actively participate and clearly benefit from the process." He adds: "This shouldn't be a process of picking a company and beating it up."

Copyright 1999 Dow Jones & Company, Inc. All Rights Reserved.



Material presented on this page was distributed to participants in a "Forum Program" conducted for public educational purposes, co-sponsored by Gary Lutin with the New York Society of Security Analysts ("NYSSA") Committee for Corporate Governance and Shareholder Rights from January 1999 to July 2001.

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