The Aggressive Conservative Investor

The relevant laws and regulations are the federal securities laws administered by the Securities and Exchange Commission: the Federal Securities Act of 1933 as amended, the Securities Exchange Act of 1934 as amended, the Investment Company Act of 1940 as amended, the Investment Advisers Act of 1940 as amended, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939 and the Securities Investors Protection Act of 1970.

“Blue sky statutes” refers to state statutes governing the terms and conditions on which offerings to sell securities to the public or to buy them from the public can be made in that jurisdiction. There is a further discussion in Appendix I of blue sky laws as they impact on the underwriting of new issues. The origin of the term “blue sky” is derived from the promises of promoters who foisted upon unsuspecting outside investors investments that had no substance, only blue sky.

Benjamin Graham, David L. Dodd and Sidney Cottle, with Charles Tatham, Security Analysis: Principles and Techniques, 4th ed. (New York: McGraw-Hill, 1962).

The Form 10-K is an annual report filed with the Securities and Exchange Commission by most companies whose securities are publicly held. Descriptions of the 10-K and other forms filed with the SEC are contained in Chapter 6 and in Appendix III.

In the area of contested takeovers, raiders frequently have nothing but the public record to rely upon. It appears that most successful raiders who based their pretakeover analysis on the public record were not faced with unpleasant surprises after they obtained control of companies. The surprises seem mostly to have been pleasant ones. We think this is additional evidence that the public record in many instances is quite good enough to enable investors to analyze satisfactorily.

American Manufacturing’s public disclosures are used as a basis for the discussion in Appendix IV, “Examples of Variables Using the Financial-Integrity Approach.”

“Cash-carry” refers to the relationship of cash income to be received from holding an investment with the cost of money tied up in the investment. “Positive cash-carry” means that dividend or interest income exceeds the cost of borrowing to carry the security.

In late 1978, a new federal bankruptcy law was enacted. Chapters X and XI of the old bankruptcy law, which were concerned with corporate reorganizations, are now superceded by a new Chapter 11. Also, the old Chapter XII, which was used essentially for the reorganization of real estate partnerships, is now covered by the new Chapter 11.

In a short-form merger, stockholders can be forced out of a company in a merger or similar transaction, and have no right to vote on the transaction.

74 S. Ct. 1042 (1976).

Unlike class-action suits in federal court, in appraisal procedures in states such as Delaware and New York dissenting stockholders may be liable not only for their own court costs, including attorneys’ and experts’ fees, but also for similar costs incurred by the company, in the discretion of the court.

See Singer v. Magnavox Co., 380 A. 2d 969, 980 (1977), and Tanzer v. International General Industries, Inc., 392 A. 2d 1121 (1977).

Contrast these statutes in these three states with state-law protections for companies and incumbent managements in corporate contests for control. At this writing, thirty-two states have enacted anti-takeover statutes to protect companies and incumbent managements from raids.

For example, see Tentative Conclusions on Objectives of Financial Statements of Business Enterprises, published by the Financial Accounting Standards Board (Stamford, Conn., December 2, 1976).

The underlying assumption of beta-coefficient theories is that at any moment, a security price is in equilibrium, that is, correctly assesses the trade-off between risk and reward. The beta states that lower-quality securities can appreciate more and decline more than higher-quality securities.

American Institute of Certified Public Accountants, Current Text, Vol. 1, & Original Pronouncements, Vol. 2, Accounting Principles (Chicago: Commerce Clearing House, 1975).

For a good example of how beliefs that stock market prices are the common denominator of value are used, see “Fair Shares in Corporate Mergers and Takeovers” by Victor Brudney and Marvin A. Chirelstein, which appeared in the Harvard Law Review, vol. 88, December 1974. The gravamen of the article is that an underlying value is established by stock market prices, but that certain gains over and above market price may be generated by a combination of two companies, and such gains, if any, should be shared with minority stockholders. (Contrast this with our view that there is no necessary relationship at any given time, nor should there be general expectations that there should be any relationship, between the market price of a common stock and the value of a business.)

For example, see G. M. Loeb, The Battle for Investment Survival (New York: Simon and Schuster, 1965), p. 57:

“Losses must always be ‘cut.’ They must be cut quickly long before they become of any financial consequence ... Cutting losses is the one and only rule of the markets that can be taught with the assurance that it is always the correct thing to do.”

Modern capital theory is discussed in Chapter 4.

Myron Scholes, “Professional Measurement—Past, Present and Future,” Evaluation and Management of Investment Performance (Charlottesville, Va.: The Financial Analysts Research Foundation, 1977).

Even when viewed as abstract theory, the efficient-market writings appear to us to be unsatisfactory. The theorizing fails to account for thin markets, priceformation mechanisms, nonsymmetric information and general equilibrium considerations. These items can be and have been treated by methods of noncooperative game theory.

Although in terms of strict econometric analysis there is no hard statistical evidence that these groups have outperformed the efficient-market advocates, there is also no clear evidence that they have not. Furthermore, many of these investors may hardly be conscious, if conscious at all, of whether or not they are outperforming the market.

C. W. Granger and O. Morgenstern, Predictability of Stock Market Prices (Lexington, Mass.: D. C. Heath, 1970).

Granger and Morgenstern, op. cit.

B. Mandelbrot, “The Variations of Certain Speculative Prices,” Journal of Business, XXXVI (1963), pp. 392-417.

S. S. Alexander, “The Movements in Speculative Markets: Trends or Random Walks,” Industrial Management Review, II (1961), pp. 7-26.

M. D. Ketchum, “Investment Management Through Formula Timing Plans,” Journal of Business, XX (1947), pp. 157-58.

J. F. Weston, “Some Theoretical Aspects of Formula Timing Plans,” Journal of Business, XXII (1949), pp. 249-70.

E. O. Thorpe and S. T. Kassouf, Beat the Market—A Scientific Market System (New York: Random House, 1967).

H. M. Markowitz, Portfolio Selection (New Haven, Conn.: Yale University Press, 1959).

J. R. Francis and S. H. Archer, Portfolio Analysis (Englewood Cliffs, N.J.: Prentice Hall, 1971), p. 187.

C. P. E. Clarkson, Portfolio Selection: A Simulation of Trust Investment (Englewood Cliffs, N.J.: Prentice Hall, 1962).

Francis and Archer, op. cit., p. 3.

loc. cit. p. 448.

In price-of-the-issue considerations, a security is deemed to be low-priced or high-priced only in relation to the analyst’s perception of the underlying values behind that security. The actual price per se is immaterial. Under this approach, a common stock selling at 2 can be high (overpriced) and a common stock selling at 200 can be low, or underpriced.

Although SEC disclosures are crucial for most analyses of public companies, they are far from the only disclosure documents that may be important in a given situation. The others, however, are beyond the scope of a book as short as this one. Chapters 32, 33 and 34 of Volume II of the Financial Analyst’s Handbook (Sumner N. Levine, ed., Homewood, Ill.: Dow Jones-Irwin, 1975, p. 852) are excellent overviews of the types of public non-SEC disclosures that are generally available. Chapter 32, by Dorothy Hennessey Sussman, is entitled “Information Sources—An Overview.” Chapter 33, by Sylvia Mechanic, is entitled “Key Reference Sources.” Chapter 34, “A Guide to Industry Publications,” is a reprint of a brochure originally issued by the New York Society of Security Analysts.

A good pamphlet describing the principal documents filed with the SEC is included here as Appendix III with the permission of Disclosure Incorporated.

The SEC, as of the time of this writing in early 1979, is deeply involved in studying methods for improving these proxy-statement and Part II disclosures. One recent change made in management remuneration is to require, for fiscal years ending after December 25, 1978, disclosure about remuneration for the five highest-paid executive officers or directors whose annual compensation exceeds $50,000, instead of (formerly required) disclosures about compensation to directors and the three highest-paid officers whose annual compensation exceeded $40,000. Also, the remuneration table will contain three types of information about remuneration for these five executive officers and all directors and executive officers as a group: (1) salaries and similar amounts actually distributed or accrued during the fiscal year; (2) other forms of contingent remuneration, such as insurance premiums and other benefits; and (3) contingent remuneration. (See Exchange Act Release 15380, dated December 4, 1978.)

We are convinced this remains true despite what we consider to be the Supreme Court’s unfortunate language in regard to Section 10(b)5 in Ernst and Ernst v. Hochfelder (see supra). The vast majority of financial professionals appear to us to be honest and ethical because they want to be, not because they have to be.

10(b)5 is part of the Securities Exchange Act of 1934 as amended. Prospectus preparers operate under similar and additional strictures growing out of Section 17 of the Securities Act of 1933 as amended. In addition, there are similar strictures existing under other parts of the Securities Exchange Act of 1934 as amended. But 10(b)5 is the catchall of the antifraud regulations, covering situations not otherwise enumerated specifically.

Prior to the end of 1978, there were no necessary Schedule 13D disclosures for certain beneficial owners of 5 percent or more of an issue, to wit, if beneficial ownership of the securities was acquired prior to December 22, 1970; or if the acquirers had not been “rapid accumulators” and had never obtained more than 2 percent within a twelve-month period; or if beneficial ownership was acquired in certain stock-for-stock exchanges. Filing by these beneficial owners will, after 1978, be made on Schedule 13G, required to be filed once a year within forty-five days after the end of a calendar year. (Securities Act Release 15317, November 9, 1978.)

Four leading services are Disclosure Incorporated, Washington, D.C. (301-951-0100); The National Investment Library, New York (212-982-2000), Boston (617-227-6666) and San Francisco (415-398-6900); Stock Research Corporation, New York (212-964-2440); and the Washington Service Bureau, Washington, D.C. (202-833-9200).

Though perhaps not part of any glossary, “on-balance-sheet items” commonly refers to assets or liabilities stated directly on a balance sheet, whereas “off-balance-sheet disclosures” usually refers to information about balance-sheet items disclosed in footnotes to financial statements.

The management remuneration section of a proxy statement (or Part II of a Form 10-K) will contain information not only about salaries, but also about all other types of remuneration, such as stock options, stock-appreciation rights, pension-plan benefits, bonuses, profit-sharing plans and employment contracts. The SEC is considering requiring that information about management perquisites, such as company hunting lodges or the use of company planes for private purposes, be disclosed.

However, because of fraud, junior-security holders can sometimes become at least general creditors. The Equity Funding Corporation Chapter X bankruptcy is one example of this. Here, the common survived the Chapter X bankruptcy reorganization as a creditor class with the common’s creditorship position arising out of the fraud claim. It is our view, however, that Equity Funding types of frauds are rare among public companies.

We note what appears to be a trend in recent years toward improved disclosure of soft information without any changes in laws, rules and regulations about such disclosures. For example, see the S-14 Prospectus and Merger Proxy issued in 1975 in connection with the acquisition of General Crude by a subsidiary of International Paper. An exhibit to that document gave values for all of General Crude’s oil properties—not only proved reserves, but also probable and possible reserves as well as undeveloped acreage. We are not aware that such soft information had ever been disclosed previously in any SEC prospectus, proxy statement, or 10-K.

The SEC, however, is now intensively examining the question of expanding the promulgation of soft information through new rules and regulations. A breakthrough in requiring soft information probably occurred in 1976 when the SEC, for the first time, required companies with inventories and gross property, plant and equipment aggregating more than $100 million and comprising more than 10 percent of total assets to provide supplementary data in the 10-K about estimated replacement costs. (Accounting Series Release 190, dated March 23, 1976.) In 1978, the SEC proposed guides that would permit and encourage projections of financial information by companies. These forecasts were to be made voluntarily and forecasters were to be given a “safe harbor,” that is, they generally would not be held liable under the federal securities laws for reasonably based projections that did not work out (Exchange Act Releases 15305 and 15306, dated November 7, 1978). Also, in Accounting Series Release 253, dated August 31, 1978, the SEC adopted requirements for supplemental disclosures for fiscal years ending after December 25, 1979,

of the valuation (and changes in valuation during the year) of certain companies’ proved oil and gas reserves; this is a method of accounting the SEC calls reserve recognition accounting, or RRA. RRA was adopted despite SEC reservations that “the feasibility of developing RRA, however, is not assured at the present time because of the inherent imprecision of estimates of proved oil and gas reserves and the need to establish standards for valuations of these reserves in order to achieve an acceptable degree of reliability.”

Accounting Research and Terminology Bulletin—Final Edition (New York: American Institute of Certified Public Accountants), p. 9.

American Institute of Certified Public Accountants, op. cit.

Ibid., Sec. 510.03, p. 31.

The Financial Accounting Standards Board is currently studying interim financial reporting and expects to issue a draft in early 1979.

American Institute of Certified Public Accountants, op. cit.

Ibid., Sec. 1022.27, pp. 138-39.

Paragraph 13 of Statement of Financial Accounting Standards 9 (issued in October 1975 by the Financial Accounting Standards Board) gives oil- and gasproducing companies an election as to whether a company desires to “flow through” or “normalize” excess statutory depletion.

Since FASB 13 is being phased in at the time of this writing, we have not yet uncovered any footnotes to financial statements covering the finance method for lessors that is as specific as the language used by Leasco. The best FASB 13 language we found was contained in the 1977 financial statements of ACF Industries Incorporated. ACF’s accounting practice for finance leases under FASB 13 appears to be substantially similar to Leasco’s under APB Opinion 7. See the ACF footnote on the opposite page.

In addition, certain railroad cars were leased in 1976 and 1977 under the finance method. The Company recognized the applicable manufacturing revenues, costs and profit and recorded the aggregate rental receivable net of the amount of unearned financing charges. The unearned financing charges are to be recognized in decreasing amounts over the life of the lease which will provide a level rate of return on the unrecovered investment. A summary of the amounts outstanding resulting from the finance leasing of railroad cars is as follows:

	December 31
	1977	1976
Aggregate rental receivable	$20,750,000	$22,398,000
Unearned financing charges	(10,219,000)	(11,303,000)
Net receivable from finance leasing	10,531,000	11,095,000
Portion to be recovered within one year	(623,000)	(564,000)
Balance, receivable in installments through 1992	$9,908,000	$10,531,000

At December 31, 1977, minimum future rentals to be received from finance leases for each of the five succeeding years are as follows: $1,648,000 in 1978 and 1979; $1,653,000 in 1980; $1,645,000 in 1981; and $1,493,000 in 1982. The estimated residual value of $751,000 of these railroad cars is included on the consolidated balance sheet with specialized railroad cars leased to others.

Charles Ponzi was a notorious Boston swindler in the 1920’s. He borrowed money from unsuspecting persons, promising them inordinately high returns. He obtained funds to repay his early investors their principal and interest by inducing increasing numbers of people to invest with him. Eventually, this chain-letter scheme collapsed when new investors could not be found fast enough to keep old investors satisfied. What survived was a description of this method of operations, commonly called a Ponzi scheme or a Ponzi game.

In addition, there have been a number of pronouncements about particular industries that have proved especially helpful to investors. These are contained in the Industry Audit Guides, published by the American Institute of Certified Public Accountants, and in the SEC Accounting Series Releases.

“Net, net, net” refers to the complete passivity of a landlord. The landlord holding a net, net, net position is responsible for no function in the operation of a property. The landlord merely is a recipient of rents.

Abraham J. Briloff, Unaccountable Accounting (New York: Harper & Row, 1972).

David Norr, Accounting Theory Illustrated, Vol. II, 1974 reports (New York: First Manhattan Co., 1975).

American Institute of Certified Public Accountants, op. cit. Secs. 1022.18 and 1026.01, p. 136.

Since the effective date of FASB Statement 2 (January 1, 1975), corporations have been required to charge all research and development costs to expense when incurred.

See Appendix II, “Creative Finance Applied to a Corporate Takeover,” where the acquisition of Reliance Insurance Company, a solidly financed, profitable firm, was financed because the acquirer, Leasco Data Processing, was able to issue its high-priced glamorous equity securities for Reliance stock.

Arthur S. Dewing, The Financial Policy of Corporations (New York: Roland Press, 1920).

J. C. Bonbright, The Valuation of Property (New York: McGraw-Hill, 1937).

Graham and Dodd et al., op. cit.

J. A. Mauriello, Accounting for the Financial Analyst (Homewood, Ill.: Irwin, 1967).

Jules I. Bogen, ed., Financial Handbook, 4th ed. (New York: Ronald Press, 1964).

Marshall McLuhan’s original statement was “The Medium is the Massage.”

One of our students at Yale University, Philip Bareiss, coined a related acronym, CIX—meaning contacts, information and experience—to describe what Joseph Kennedy did to achieve such great success as an investor and promoter. CIX offers an explanation of how many people approach business and investments, and why those who can combine CIX with good judgment turn out to be Joe Kennedys, or reasonable facsimiles. It is a sine qua non for obtaining the most valuable types of SOTT and OPM.

For simplicity of discussion, we ignore both the bank’s taxes and the finer points of compound interest. Here the customer is paying 5 percent simple interest.

One such variation is the so-called Rule of 78, a sum-of-the-digits formula based on using twelve accounting periods: 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78. The first period’s accrual is 12/78, the second’s 11/78, the third’s 10/78 and so on.

Ibid.; see, especially, pp. 551-52.

American Institute of Certified Public Accountants, Accounting Principles, Section 1022.04, p. 132.

Herman W. Bevis, Corporate Financial Reporting in a Competitive Economy (New York: Macmillan, 1965), p. 50.

George D. McCarthy and Robert E. Healy, Valuing a Company: Practices & Procedures (New York: Ronald Press, 1971), pp. 103-4.

A study of fiscal 1975 year-end statements shows that retained earnings for twenty-nine of the thirty industrial companies in the Dow Jones Industrial Average (excluding American Telephone and Telegraph) equaled 75 percent of the total of capital, capital surplus and retained earnings.

The correlation between the series shown in Table I is strong, equal to .899.

“Return on investment” is usually defined as net income (before interest costs) as a percentage of net worth and funded debt. “Return on equity” is usually defined as net income as a percentage of capital stock and surplus; sometimes when preferred stocks are outstanding, ROE is defined as net income as a percentage of net worth (with the net-worth account including preferred stock, common stock and surplus).

Target’s becoming an investment trust is a principal component of a form of transaction that has come to be known as the most common type of leveraged buy-out. In this type of leveraged buy-out, three elements are present. First, assets are purchased at, or below (hopefully below, so that tax refunds may be obtained), their tax cost basis, so that no tax liabilities are created regardless of how low the cost basis for common stock held by principal stockholders may be. Second, the acquiring company hires the operating management of Target, giving them attractive long-term contracts, to run the business represented by the assets the acquiring company has purchased. Third, Target converts into an open-end investment trust, that is, a mutual fund, whose investments are restricted to tax-free securities issued by city and state governments. Target then offers to redeem shares at net asset value ($33 per share in Table II), at which time most public shareholders redeem and principal stockholders do not. The principal stockholders then control a mutual fund which has invested in tax-free obligations and which flows through without taxation all interest received to the remaining shareholders of Target. In effect, then, principal shareholders have converted their active business interests into a portfolio of taxexempt securities without incurring any income tax liabilities even though their cost basis for their common stock holdings may be zero or close to zero.

“Surplus surplus” is a name we think, but are not sure, was invented by the New York State superintendent of insurance around 1969.

The price-earnings ratio or multiple refers to the relationship between stock price and earnings per share. Thus, if a common stock sells at 22 and the earnings attributable to that common stock are $2.50 per share, the price-earnings ratio or multiplier is 8.8 times (22 divided by $2.50).

Blockage occurs when a holder of a large block of freely tradable securities is unable, because of “thin markets,” to dispose of that block at any prices other than ones that are at a substantial discount from prevailing market prices.

John Burr Williams, The Theory of Investment Value (Cambridge, Mass.: Harvard University Press, 1938).

F. Modigliani and M. H. Miller, “The Cost of Capital, Corporation Finance and the Theory of Investment,” American Economic Review, Vol. 48, No. 3 (June 1958).

Graham and Dodd et al., op. cit.

John Kenneth Galbraith, The New Industrial State (Boston: Houghton Mifflin, 1967).

The one group that might be viewed in the broadest perspective as dedicated almost solely to the interests of outside, passive investors is the Securities and Exchange Commission. On a practical level this is not wholly true, but it is our view that the Securities and Exchange Commission has been more dedicated to the interests of outside, passive investors than any other group in the economy.

Graham and Dodd et al., op. cit., pp. 480-81.

Ibid., p. 484.

Section 12(g)4 of the Securities Exchange Act of 1934 states:

Registration of any class of security pursuant to this subsection shall be terminated ninety days, or such shorter period as the Commission may determine, after the issuer files a certification with the Commission that the number of holders of record of such class of security is reduced to less than three hundred persons. The Commission shall after notice and opportunity for hearing deny termination of registration if it finds that the certification is untrue. Termination of registration shall be deferred pending final determination on the question of denial.

Companies filing with the Securities and Exchange Commission comply with either Section 12 or Section 15 of the Securities Exchange Act of 1934. Section 15d has language similar to Section 12(g)4, permitting deregistration when an issuer has fewer than three hundred shareholders of record.

Graham and Dodd et al., op. cit., p. 490.

(Oldwich, N.J.: A. M. Best Co., 1976).

However, it should be noted that according to Opinion 16 of the Accounting Principles Board, companies buying in their own shares are prohibited for a twoyear period thereafter from using pooling-of-interests accounting for financial-reporting purposes in connection with mergers and acquisitions.

The principal stricture against open-market purchases is contained in the Proposed Securities and Exchange Act Regulation 13(e)2. Most would-be corporate open-market repurchases abide by 13(e)2 (though it is only a proposal, in existence since 1972) in order to avoid running into accusations of market manipulations that are violations of antifraud statutes, particularly Rule 10(b)5.

Proposed Rule 13(e)3 is contained in Securities Exchange Act Release 14185, dated November 17, 1977.

At this writing, thirty-two states, including such important corporate states as Delaware, New York and Ohio, have anti-takeover statutes. State anti-takeover statutes, however, have become a considerably less important deterrent to raiders because of recent court decisions holding that takeover regulations are essentially a federal concern and that state laws are preempted by federal laws, particularly the Williams Act, enacted in 1968 to regulate cash tender offers. (Great Western United Corporation v. Kidwell, 577 F 2d 1256, 1281-87 [5th Cir 1978].)

See Appendix II.

One indication that Brewing’s accounting practices were conservative was that Brewing, which was charging over $4 million per year against the income accounts for depreciation, used the same depreciation methods (the 200 percent, double-declining-balance method) for book purposes as it did for tax purposes. Nor does the fact that Brewing “flowed through” investment credits, which amounted to $275,000 in 1967, indicate otherwise; the amount involved was small, particularly compared with depreciation charges. The company’s five-year statements had been audited by Price Waterhouse and Company, and certified “clean.”

Brewing had plans to construct a new 1.7-million-barrel facility in eastern Pennsylvania. The initial phase of the Pennsylvania construction was to provide an 850,000-barrel annual capacity at an estimated cost of approximately $38 million, or $44.71 per barrel, some five times as much as the net book value of existing plant. Even assuming that the remainder of the proposed Pennsylvania plant could be built for a relatively small sum, the total cost was unlikely to be less than $25 per barrel, or some three times the net book carrying value of the existing plant. Notwithstanding any other factors, such as labor-saving innovations and other efficiencies in new plants, Brewing’s property, plant and equipment do not seem to have been overvalued on the books.

100

Parenthetically, restricted shares issued after the passage of Rule 144 in April 1972 can only be sold publicly pursuant to that rule or via registration. “No action” letters and “change of circumstances” opinions no longer exist in such cases. From 1972 until late 1978, when resale restrictions were liberalized, sales under Rule 144 could occur only once every six months, and the number of shares that could be sold was limited to the lesser of 1 percent of the outstanding stock of the company, or the weekly average traded for the four weeks preceding the filing of a Form 144.

101

The other members of Corporation’s twelve-man board of directors were three Schaefer family members, three executives of Brewing, two executives of Pressprich, and two outside directors—the chief executive officer of United Aircraft and a vice-chairman of the board of the First National City Bank.

102

Corporation also entered into an agreement with First National City on November 25, 1968, under which the bank would provide any interim funds that might be needed to meet the payments due the four Schaefer trusts by July 15, 1969. This was estimated at under $25 million.

103

In some instances, warrants can be exercised by the surrender of senior securities valued, for purposes of exercise, at par. If the senior security has a market value of less than par, then the senior-security-warrant package becomes the equivalent of a convertible security.

104

This phenomenon reached its peak in recent years with the debt restructuring of a number of troubled real estate investment trusts. In certain instances, such as Chase Manhattan Mortgage and Realty Trust, senior lenders even invested new funds in the real estate investment trusts, part of which were in fact used to continue to fully service the subordinated debentures. See additional discussion on page 92.

105

At year-end, its price was 30 bid. Corporation’s stock was listed for trading on the New York Stock Exchange on January 24, 1969.

106

This gross spread was about standard for a fairly large new-issue offering of an industrial issuer going public. Although there have been new issues of common stock marketed at a smaller gross spread when a company was going public (most notably Communications Satellite Corporation, or Comsat, whose gross spread was 4 percent when it went public in 1965), this is unusual.

Smaller, unseasoned issuers call for higher gross spreads, frequently as high as 18 percent, exclusive of other considerations—such as continued financial consulting fees, board representation and rights of first refusal on future company offerings—granted to the underwriter.

107

This sales commission of $.85, or $85 per 100 shares, was considerably higher than $.32 per share, or $32 per 100 shares selling at 26, the standard commission prevailing in 1968 for round lots (usually 100 shares) of outstanding stock listed on the New York Stock Exchange.

108

The Revenue Act of 1976 removes virtually all economic incentives for qualified stock options. As such, they are now rarely used for executive compensation.

109

The tax rate on tax preference items was raised to 15 percent from 10 percent in 1976.

110

An excellent account of the Leasco attempt to take over Chemical appears in John Brooks’s The Go-Go Years (New York: Doubleday, 1974).

111

Theoretically, the return on equity could have been infinite, assuming that the purchaser securing his purchase with Leasco’s credit borrowed all of the purchase price. The purchaser would pay over the one year, say, 7 percent interest, which would compare with his guaranteed minimum return of 15.6 percent. However, the type of investors who bought the deal was institutions, which typically invest their own funds and for which the 15.6 percent to 50 percent return is more appropriate.

112

The suit did not result in any material liability to the institutional investors.

113

There is some question as to whether Leasco should ever have accounted for the Reliance acquisition on a pooling-of-interest basis, regardless of who paid cash for the 14 percent interest—but that subject is not part of this book.

114

In fact, the lever in Leasco’s call was that if the institutional investors chose not to heed the call, Leasco’s guarantee, or put, would no longer be operative.

115

116

Accounting Trends and Techniques, an annual issued by the American Institute of Certified Public Accountants (New York), provides excellent surveys of how specific companies handle specific accounting items within financial accounting. Accounting Trends and Techniques is an annual compilation of the accounting practices of six hundred companies that are publicly owned.

117

Medallion Group does not solicit proxies for its annual meetings. Accordingly, it makes the same disclosures in Part II of the 10-K that are made in proxy statements by companies that solicit proxies annually.

118

[Descriptions of additional items under “Item 18. Interest of Management and Others in Certain Transactions” are described in the next 9 pages of the 1977 Medallion Group 10-K.]

119