Small kitchen-appliance manufacturer National Presto (NYSE:NPK) may soon find its plug has been pulled, and not because of anything particularly wrong with its appliances. Sales were up 5.5% year over year, which is pretty good when you compare that with competitor Salton (NYSE:SFP), whose sales were off 0.5% for its fiscal year. Indeed, Salton's first six months of revenues for 2006 are already down more than 20% from last year.
No, National Presto's problems stem from the Securities and Exchange Commission's criminal pursuit of its investment operations. As Motley Fool Senior Editor Bill Mann railed two years ago, the SEC has charged Presto with holding itself out as an operating company when, in fact, it is an investment company. It's coming to a head now, since the courts have upheld the SEC's charge and the regulatory agency is preparing for enforcement action.
While it's not often I disagree with Bill's admittedly superior analytical abilities, perhaps it's my law-enforcement background which causes me to think that the SEC's argument here isn't as quixotic or misguided as Bill suggests.
The Investment Company Act of 1940 defines an "investment company" as a business primarily engaged in trading securities, or one that owns securities that exceed 40% of its total assets. The SEC complaint holds that from 1994 to 2002, Presto's total value of investment securities to assets had regularly exceeded 75% on a consolidated basis. While Bill might say that shows a prudent and conservative management team operating in the face of a crumbling industry, to me it looks as though National Presto has truly changed the nature of its business from manufacturer to investor.
It seems a dubious argument that the company can't find some better use for its $100 million in cash. Not long after the SEC lodged its complaint that Presto was improperly sitting on a wad of cash, the company suddenly managed to find a small munitions and ordnance manufacturer to buy, as well as an adult-incontinence product maker. Since it has branched out beyond its core business, there are dozens of investment opportunities -- and it can't argue that there's nothing worth buying.
National Presto's actions also show a management team willing to thumb its nose at the law. In December, a federal court sided with the SEC and ordered National Presto to register as an investment company -- which it did, since defying the order would bring far greater legal repercussions. Yet within days of registering, it then filed an application with the SEC to deregister. Moreover, when it filed its annual 10-K, it did so as an operating company, not as an investment company, despite having been told by the SEC that it was inaccurate and misleading to do so.
Needless to say, the regulators were not amused. They directed National Presto to file financial statements -- even if they were incomplete, since something was better than nothing -- that showed the company's operations as an investment company. The SEC also wanted answers from Grant Thornton -- Presto's accountant, which had signed off on the 10-K -- as to why the company gave an unqualified opinion on the company's finances, despite its non-compliance. That was all Grant Thornton had to hear; it immediately notified National Presto not to rely upon its opinion anymore, since the company had falsely assured the accounting firm that it was OK to file solely as an operating company.
The investment company -- er, small-appliance maker -- is under the gun. It's highly doubtful the SEC will approve National Presto's application to deregister, and the appeals courts will undoubtedly not look kindly on the company's conduct since the original federal court decision. Even if it doesn't agree with the order, Presto has operated for four months as a registered investment company and has yet to comply with the regulations governing such companies. With its financial statements not in order, it's only matter of time before it receives a delisting notice from the New York Stock Exchange.
As someone entrusted with upholding the law, I believe that the rules need to be followed. Yet as a libertarian, I wholeheartedly agree with the principle of "that government governs best which governs least." Still, even the most misguided regulation was enacted for the purpose of offering protection, and the financial markets are no trifling matter. By continuously defying these laws, National Presto does a disservice to its shareholders -- one that might end up cooking management's goose.
Read Bill Mann's reasons why Presto should stay its course .
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
