Eau Claire, Wisconsin (April 19, 2006) -- National Presto
Industries, Inc. (NYSE: NPK) announced today clarification
by the Securities Exchange Commission’s (SEC) staff of
its position on the format of the Company’s financial
filings for the year ended December 31, 2005, and resulting
action taken by its auditors.
As previously disclosed, the SEC
sued the Company in 2002 alleging that National Presto was
an unregistered investment company
from 1994 to 2002. The case does not involve fraud, deceptive
practices, or questionable accounting methods. The Company
denies that it is or ever has been an investment company. In
December 2005, a federal district court in Chicago granted
the SEC’s motion for summary judgment and ordered the
Company to register under the Investment Company Act. In order
to avoid being barred from operating in interstate commerce
the Company filed the requisite notice of registration, indicating
that it did not believe that it met the statutory definition
of an investment company and as such, the filing was being
made pursuant to the court’s order, rather than the terms
and requirements of the Act. It also indicated that it would
shortly be filing an application to deregister. That application
was subsequently filed in January 2006 and is pending with
the SEC staff. The Company has also appealed the district court’s
decision to the United States Court of Appeals for the 7th
Circuit. A brief in support of that appeal was filed on April
7, 2006.
While these actions were ongoing, discussions were
initiated by the Company’s counsel with the SEC staff
on the filing of financials for the year ended December 31,
2005. Pursuant
to these discussions, the SEC staff proposed in mid-February
that the Company continue to file financial statements that
were consistent with the financial reporting requirements for
operating companies on Form 10-K, provided that those financials
also included an additional footnote with pro forma financial
statement information consistent with that dictated by the
Investment Company Act regulations S-X and Form N-CSR. To the
extent the data was not available, the Company was encouraged
to file incomplete financial information, as the staff deemed
filing unaudited or incomplete financial information preferable
to filing no financial information by the filing deadline.
That information did not exist when Form 10-K was filed. Because
the proposed footnote was still under discussion the Company,
on the advise of counsel, characterized it in the 10-K disclosure
as “under consideration”, indicating discussions
about this and other issues were ongoing.
During and beyond
the time frame that fiscal year 2005 earnings were released
(February 10, 2006), and the Form10-K filed (March
16), the Company’s attorney
and the SEC Staff had several conversations in which the issues surrounding the
proposed footnote were discussed. Then on March 28, the SEC sent a letter to
Presto and its public accountants taking exception to that which was filed, in
particular branding as “inaccurate and misleading to investors” the
Company’s characterization of the status of the discussions with the SEC.
After further correspondence both with the Company and the Company’s public
accountants, the SEC staff clarified matters in a letter dated April 14, 2006,
indicating that its mid-February proposal was its final position and that it
would require that the financials include the pro forma audited investment company
footnote. In a letter dated April 11, based on its final position, the staff
also questioned Grant Thornton’s, the Company’s public accountants,
basis for issuing an unqualified opinion given the staff’s most recent
clarification of its financial filing requirements. As a result, Grant Thornton
did notify the company in a letter dated April 12, 2006, that its opinions on
the Company’s financials as of and for the three years ended December 31,
2005 and on the Company’s audit controls could no longer be relied upon
due to the absence of a pro forma investment company footnote, and on the failure
to apply investment company accounting principles as the basis of the operating
company audit.
In light of the SEC staff’s recent clarification, the
Company is expediting its continuing efforts to obtain investment
company financials
for inclusion
in a footnote in its financial statements. Because the investment company accounting
rules are not applicable to an operating company like Presto, preparing financial
statements under those accounting rules necessarily involves many difficult
judgment calls, and the Company has been advised that no reputable
audit firm will enter
such an engagement without financials prepared by an accountant with the requisite
background in investment company accounting. Doubt has likewise been cast that
even with such financials, the Company will be able to find an audit firm that
will accept such an audit engagement, much less provide an unqualified opinion
on the footnoted statements. Moreover, given the SEC Staff’s statement
to Grant Thornton that the operating company audit should be done based on
Investment Company accounting principles, there is further doubt that even
with such a footnote,
that an unqualified opinion can be rendered on the entire report. Nevertheless,
the Company is seeking to comply with the staff’s request.
In the interim,
the Company has provided notice by filing an 8-K of the SEC’s
final position on the filing of financials for the year ended December 31,
2005 and the resulting withdrawal of Grant Thornton’s opinion. During
the process of the appeal and the SEC’s consideration of its deregistration
application, the Company will continue to provide the investment community
with operating
financial information prepared in a fashion that is consistent with its historical
filings, so that investors will have a meaningful way of monitoring the Company’s
performance.
The Company also emphasized that these developments will not
adversely affect ongoing efforts to enhance shareholder value though internal
growth and acquisitions
in each of its three business segments of housewares/small appliances,
defense and absorbent products
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