70-2552
BERNHARDT, Raymond S., 1908- A CRITICAL EVALUATION OF STOCK REPURCHASE PROGRAMS OF UNLISTED INDUSTRIAL CORPORATIONS.
The American University, Ph.D., 1969 Economics, finance
University Microfilms, Inc., Ann Arbor, Michigan
© Raymond S. Bernhardt 1970
ALL RIGHTS RESERVED A CRITICAL EVALUATION OF STOCK REPURCHASE PROGRAMS
OF UNLISTED INDUSTRIAL CORPORATIONS
by
Raymond S. Bernhardt
Submitted to the
Faculty of the School of Business Administration
of The American University
in Partial Fulfillment of
the Requirements for the Degree
of
Doctor of Philosophy
in
Business Administration
Dissertation Advisory Conmittei
Dean of the Doctoral Program: Chairmai
TLJ I
AMERICAN UNIVERSITY l i b r a r y 1969 The American University AUG 5 1969 Washington, D.C. WASHINGTON. D. C. A CRITICAL EVALUATION OF STOCK REPURCHASE PROGRAMS OF UNLISTED INDUSTRIAL CORPORATIONS
& Raymond S. Bernhardt,! 1970 ACKNOWLEDGEMENTS
To the many who have contributed so much to the successful
consummation of this study, my very sincere thanks and appreciation.
Chief among these has been the able Chairman of my Dissertation Advisory
Committee, Professor Walter P. Muhlbach, who has given so generously of
his wise counsel, advice, and time. I am greatly Indebted also to
Dr. Edward R. Lehman, unsparing in his encouragement, guidance, and time;
and to Dr. Elcanon Isaacs and Dr. Richard H. Rush, all valued members of my Committee.
Dr. Nikos G. Photias, Director of the Doctoral Program of the
School of Business Administration of The American University, has been
a steady source of inspiration and encouragement through his insistence
on high academic standards and quality performance.
I also wish to express my appreciation to my former faculty
associates at the University of Akron, particularly to Dr. Charles F.
Poston, Dr. James W. Dunlap, Dr. Stephen S. Castle, Dr. Richard C. Roberts, and Dr. Howard L. Taylor.
/ Dean Edwina B. Hogadone, of the College of Business of the Rochester
Institute of Technology, and Jerry D. Young, Director of the School of
Business Administration, have been of great assistance by their encourage ment and furtherance of the completion of this study: and my faculty associ ate, Dr. Clifford D. Brown, has aided me with his counsel,
I am indebted also to the help and advice contributed by the staff of the Securities and Exchange Commission in Washington, D. C., particularly iii
Ira Pearce and Robert H, Menke; and to the staffs of the libraries of
The American University and of the University of Akron.
My thanks and appreciation are expressed to those who have helped so much with their able clerical services: to Mrs. Lillyan Fahy, Mrs.
Grace Hahn, Miss Belinda Henry, and Miss Gail Carlson.
I am most grateful to Dr. Talal A. Bisat for his encouragement and friendly advice and to Professor Maxwell Kaufman of UCLA, a former member of my Dissertation Committee.
Above all, I wish to express my thanks j:o my wife, Ruth, for her steadfast belief in and encouragement of my efforts, and for her willingness to "loan" me for the duration.
R.S.B. TABLE OF CONTENTS
CHAPTER PAGE
I. INTRODUCTION...... 1
The P r o b l e m ...... 4
The Study ...... 5
Research Methodology ...... 6
Definition of Terms U s e d ...... 11
Scope and Limitation of the S t u d y ...... 14
Organization of the S t u d y ...... 16
II. THE QUESTIONNAIRE...... 19
Introduction ...... 19
Selection of Companies...... 19
The Questionnaire (first r e q u e s t ) ...... 20
Replies from the Questionnaire...... 20
The Second Request ...... 22
Expansion of the Questionnaire Group...... 22
Replies from the Second Questionnaire Group. 24
S u m m a r y ...... 24
Responses to the Questionnaire...... 24
Managements' Stated Reasons ...... 32
Comments by Management ...... 34 CHAPTER PAGE
Evaluation...... 39
A Study of Listed Companies: Comparison .... 42
Questionnaire ...... 46
Covering Letter Sent with Questionnaire .... 49
III. THE RESEARCH STUDY...... 50
Purpose and Objectives ...... 50
Source Materials...... 50
Selection of Companies...... 51
Extent of Repurchase: Frequency and Volume . . . 51
Lack of Disclosure of Essential Information . . 58
Purposes of Repurchase...... 66
Removal of large blocks from the market. . . . 67
Acquisition of other companies ...... 73
Stock option plans ...... 80
For bonuses, employee incentive awards,
and prizes...... 89
Available at a low price...... 97
Use as stock dividends...... 101
No reasons gi v e n ...... 104
Characteristics of Repurchasing Companies . . . 105
Methods Used to Repurchase...... 109
S u m m a r y ...... 112 vl
CHAPTER PAGE
IV. THE EFFECT OF REPURCHASE UPON
STOCKHOLDERS...... 115
Quantitative Tests ...... 116
Market Quotations of Common Stock ...... 116
Earnings Per Share...... 129
Maintenance of Corporate Control By The
Principal H o l d e r s ...... 136
The Risk Factor: Effect On The Debt/Equity
Relationship ...... 141
Dividend Payments Prior To, During, and
Subsequent To The Repurchase Period .... 144
Relationship of Repurchases, In Dollars,
To Net I n c o m e ...... 154
Qualitative Tests ...... 164
The Adequacy of Disclosure...... 164
Test Of The Criteria For Adequate Disclosure . 166
Advance notice of intent ...... 166
Methods employed in repurchase ...... 167
Notification to stockholders after
repurchase has been made ...... 169
V. SUMMARY AND CONCLUSION...... 171
Summary...... 171
The Questionnaire...... 171 vii
CHAPTER PAGE
The Research Study...... 175
The Effect of Repurchase Upon
Stockholders...... 179
Conclusion...... 186
The Research S tudy...... 186
The Questionnaire...... 191
Limitations Of The Research St u d y ...... 193
A Different Approach ...... 195
Recommendations For Future Research ...... 197
APPENDIX A
Historical and Legal Background...... 201
APPENDIX B
The Responsibility of Directors of Unlisted
Industrial Corporation To Their
Stockholders...... 239
BIBLIOGRAPHY ...... 259 LIST OF TABLES
TABLE PAGE
I. Corporate Stock Issued and Repurchased
By Domestic Corporations, 1964-1968 ...... 1
II. Holdings and Dollar Cost of Treasury Stock
By Ninety-Five Companies in Second
Questionnaire Group (1965-1966 Fiscal Years). . 25
III. Fifty Unlisted Industrial Companies Which
Have Repurchased Common Stock ...... 52
IV. Repurchase of Stock By Unlisted Industrial
Corporations (1964-1966) ...... 56
V. Treasury Stock Holdings of Fifty Unlisted
Industrial Corporations ...... 59
VI. Relationship of 1966 Treasury Stock Holdings
to Issued Stock of Forty-Six
Unlisted Companies ...... 63
VII. Insider.Stock Holdings of Fifty Unlisted
Industrial Companies ...... 95
VIII. Market Price vs. Repurchased Cost Per
Share; Shares Repurchased in 1964 ...... 118
IX. Market Price vs. Repurchase Cost Per
Share; Shares Repurchased in 1965 ...... 121 TABLE PAGE
X. National Quotation Bureau Over-The-
Counter Industrial Stock Average
(1965-1967) Bid Prices ...... 124
XI. Market Price vs. Repurchase Cost Per
Share; Shares Repurchased in 1966 ...... 126
XII. Earnings Per Share Relative to Outstanding
And Issued Stock Of Fifty Unlisted
Industrial Companies, 1964-1966 130
XIII. Dividend Payments Per Share By Fifty
Unlisted Industrial Corporations
(1963-1967 inc.) ...... 145
XIV. Shares Repurchased By Fifty Unlisted
Industrial Corporations ...... 150
XV. Dollar Cost Of Repurchase Compared
To Annual Net Income ...... 155 CHAPTER I
INTRODUCTION
The dollar cost of the repurchase of equities by domestic corporations in the five years 1964-1968, inclusive, has rivalled
the aggregate dollar receipts from new issues. In those five years, although $15,304,000,000 in proceeds were realized from such Issues,
the sum of $14,458,000,000 was expended by United States corporations
in buying back their own capital stock. As Table I shows, the amount spent on repurchase was greater in two of those five years, 1965 and
1968. The increase in the dollar receipts from cash issues from 1967 to
1968 was sixty-one per cent; the increase in the dollar cost of equities repurchased was one hundred twenty-six per cent.
TABLE I
CORPORATE STOCK ISSUED AND REPURCHASED BY DOMESTIC CORPORATIONS 1964-1968, (millions of dollars)1
1964 1965 1966 1967 1968 TOTAL
Issued for Cash 3,091 2,272 2,513 2,844 3,583 15,304
Repurchased 1,804 2,519 2,344 2,390 5,401 14,458
Securities and Exchange Commission, Branch of Capital Markets, "Domestic Corporate Securities Issued and Retired" (Washington, D. C., March, 1969, unpublished). Available for inspection. The very magnitude of repurchase has induced a few empirical studies and many articles, but they have been confined to a con sideration of the effect of repurchase upon the corporations them selves, from the point of view of management. Little consideration, however, has been given to its effect upon the stockholders of these corporations. This is an area which has been neglected; on it this study has focussed.
Moreover, since the empirical studies and articles were re stricted to the repurchase activities of Mew York Stock Exchange listed companies, there was an implicit admission that a gap existed, that investigation into the repurchase activities of unlisted companies
(on which information was then largely unavailable) provided an area of desirable future research. This was true not only because of the dearth of published material on unlisted companies per se, particularly prior to the publication in July 1963 of the Report of Special Study of
Securities Markets of the Securities and Exchange Commission, but also because of the unavailability of Information on repurchased stock prior to May 1, 1965.
There has long been a definite lack of information about un listed corporations and the over-the-counter markets. An excellent series of studies by the Securities Research Unit, Wharton School,
University of Pennsylvania, was published in 1958 but roost of the statistical data presented and analyzed related to a three-month period 3 2 of the year 1949.
In sharp contrast, there has been a voluminous amount of written material on listed companies. Listed corporations have long been subject to the strict disclosure requirements of the New
York Stock Exchange and its insistence upon frequent and complete financial reports and statements, certified by competent, responsible accounting firms. With unlisted companies the reverse has been true.
Professor Sidney Robbins, the former Chief Economist of the
Special Study of Securities Markets, has indicated that the Securities and Exchange Commission, in repeated examinations of over-the-counter companies, concluded that about half of their published statements did not meet its minimum standards. In 1961, the Special Study of the
Commission discovered that more than twenty-five per cent of the 1965 issuers covered in a survey did not disseminate any financial information 3 at all to shareholders.
The operations of many listed corporations are guided by pro fessional managers and ownership of their stock is widely dispersed.
This has not been the case, generally, with unlisted companies. Many of these, even though they may have been in existence for 75 to 100 years, and particularly so with the more recently established firms, are still managed by the founders or their descendants who still retain control by virtue of a high percentage of stock ownership.
^Irwin Friend, G. Wright Hoffman, and Willis J. Winn, The Over-the- Counter Securities Markets (New York: McGraw-Hill Book Company, Inc. 1958). 3 Sidney Robbins, The Securities Markets (New York: Free Press, 1966), p. 51. 4
As Indicated by Professor Robbins, there has been a general im pression that owner-managers of unlisted companies have tended to shun disclosure, avoid regulation of their activities, and evidence a dis regard for the rights of minority stockholders as a consequence of 4 their high degree of voting control.
Because of these differences between listed and unlisted companies, it is believed that a study of repurchase activities de voted to unlisted companies may be more effective in disclosing their effects upon stockholders' welfare.
I. THE PROBLEM
Major Problem
The purpose of the present study is to determine whether, and under what circumstances, the repurchase by unlisted industrial corpora tions of their own common stock has been in the best interests of their stockholders.
Supporting Research Problems
The research of this study has involved investigation into areas posed by the following questions:
What specific reasons have unlisted industrial corporations given for their repurchases? Did subsequent events indicate that the stated purposes, and the actual purposes, were similar or different? If different, which of these purposes have been beneficial to the stockholders
4 Ibid.. p. 51. as well as to the corporation and which, on the baBis of factual information, have been harmful?
What has been the possible effect of repurchase upon stock holders as determined by such tests as market prices of common stock relative to actual cost of repurchase, earnings per share (giving effect to year-end holdings of treasury stock) compared to earnings per share on issued stock, maintenance of corporate control by the principal holders, the risk factor: effect on the debt/equity relationship, dividend payments prior to, during, and after the repurchase period, and the relationship of repurchases, in dollars, to net income?
When the directors of unlisted industrial corporations approved repurchase, was there any evidence that they took into consideration its possible effect upon the minority stockholders?
What procedures can be or could have been employed by company officials to implement repurchase activities with fairness to all the stockholders?
II. THE STUDY
Importance
After a period of some thirty-odd years, during which no empirical study of repurchase was made, attention has once again been focussed on this subject, particularly in the three unpublished studies by Richard A. 5 Stevenson, Leo A. Guthart, and Wilbur A. Rapp, respectively.
^Richard A. Stevenson, "The Reacquisition of Corporate Stock," Un published Doctoral Dissertation, Michigan State University, Lansing, However, while these investigations stressed the importance
of repurchase as a demand factor in the market-place and as a tool
of financial management, they have likewise recognized the need for a
probing examination of the problems posed by repurchase. Paramount among these problems is the effect of repurchase upon a company's
stockholders.
Accordingly, it is the purpose of this study to investigate
the repurchase activities of unlisted companies, utilizing primary
source material; to determine their effect upon stockholders and the presence or absence of disclosure of all the material and relevant
facts.
Research Methodology
Since this has been a pioneering effort in the evaluation of
stock repurchase by unlisted Industrial corporations, it has been based upon the use, investigation, and analysis of original source material.
Also, although the nature of the study invites prudence and carefully
guarded expressions from corporation executives, interviews have been
held with many whose companies have repurchased common stock.
1965., pp. 122-136 (Available via University Microfilm).
Leo A. Guthart, "Corporate Repurchases of Already Outstanding Common Stock," Unpublished Doctoral Dissertation, Graduate School of Business Administration, Harvard University, Boston, 1966., pp. 1-11. (Available for Inspection, Baker Library).
Wilbur A. Rapp, "The Role of Reacquired Common Stock in Financial Management," Unpublished Doctoral Dissertation, Northwestern University, Evanston, 1966., p. 215. (Available via University Microfilm). In order to secure informative data from a representative group of unlisted companies, it has seemed desirable to work with those companies whose common equities had a fair degree of market ability, as well as being of sufficient size to warrant their in clusion in the asset and shareholder size classification previously established under Section 12(g) (1) of the amended Securities Exchange
Act of 1934.** This would provide the availability of data necessary for this study.
It was decided that the 950 unlisted companies whose stock quotations (bid and asked prices) were recorded in Barron’s Over-The-
Counter Market each week would fit the criteria adequately. The list of companies selected comprised those whose stock quotations appeared in the May 29, 1967 issue, pp. 44-46.
From this group a random sample of 178 companies, approximately
18.7 per cent of the whole, was drawn.^ Seven companies were discarded since their numbers exceeded 950, and eleven were found to be duplicates.
Of the remaining one hundred and sixty companies, fifty were eliminated because they did not fit the category of "industrial" companies. The balance, one hundred and ten companies, constituted the working group.
The reports of these one hundred and ten companies were individually examined at the main office of the Securities and Exchange Commission in
^As of April 30, 1965, applicable to issuers with total assets in excess of $1,000,000 and a class of equity security held of record by 750 or more persons (reduced to 500 or more persons after July 1, 1966). Securities Exchange Act of 1934, as amended to August 20, 1964, p. 12.
^Ronald A. Fisher and Frank Yates, Statistical Tables for Biological, Agricultural, and Medical Research (London: Oliver and Boyd Ltd., 1949), Table XXXIII, Random Numbers (1), p. 104. 8
Washington, D. C.
These company files included the Registration Statements,
Forms S-l and F-l (required under the Securities Act of 1933), and
Forms 8a, 10, and 12 (covering registration of securities required under
the Securities Exchange Act of 1934); also the 10-K (annual) reports, and 8-K (current) reports, the 9-K (semi-annual) reports, the 16-K
(relating to voting trust certificates) reports, and proxy statements.
All are required to be filed with the Commission in accordance with
Sections 12(g), 13(a), 14, and 15(d) of the amended Securities Ex
change Act of 1934 (the 1964 Amendments extended the provisions of the
1934 Act, relating to reports, to over-the-counter companies).
In some instances, companies in the working group had become
subject to the periodic reporting provisions of the 1934 Act as the
result of a prior public offering of stock under the Securities Act of
1933; in such cases, although information was available for earlier
years, only data from 1959 on was examined. (For consistently comparable
data, only repurchases from 1964 on were included, but reports of prior years were examined to determine company policy).
However, the great majority of unlisted companies did not become
subject to the periodic reporting provisions of Section 12(g) of the 1934
Act until April 30, 1965. For this reason, the balance sheets, income
statements, proxy statements, etc. of such companies were not available
prior to that date.
The examination of the one hundred and ten unlisted Industrial
corporations, which have been under study, revealed those which had
engaged in repurchase and those which had not. Reference to the "pink," "green," and "white" sheets, issued by the National Daily Quotation Service, provided the bid and asked quotations for each security as furnished by three responsible "market Q makers" on selected dates: December 31, 1964; March 31, 1965;
April 30, 1965; June 30, 1965; and the end of each quarterly period thereafter, including December 29, 1967.
Information on dividend payments was secured by reference to
Moody's Dividend Record, including payments from 1963 on up to the date of writing of this study.
Since April 30, 1965, when unlisted companies became subject to the periodic reporting provisions of the Securities Exchange Act of 1934, as amended in 1964 (Section 12(g) (1), it has become necessary for direc tors, officers, and principal stockholders of such companies, in accordance with Section 16(a) of the Act, to file with the Securities and Exchange
Commission a statement "of the amount of all equity securities of such issuer of which he is the beneficial owner, and within ten days after the close of each calendar month thereafter, if there has been a change in such ownership during such month, shall file with the Commission . . . a statement indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred during such calendar month." This information on holdings, transactions, and resultant
Bid and asked quotations are representative of the market but do not constitute actual transactions. 10 holdings must be filed not only for the director, officer, and principal stockholder himself but also for the "immediate family," since Rule 16a-8 extends beneficial ownership of a security to that degree.
The Securities and Exchange Commission makes this information publicly available, each month, in its "OFFICIAL SUMMARY of Security
Transactions and Holdings"; this material has been examined, beginning with the issue of February 1963, although it was determined that only two companies of the repurchasing group had reported information on holdings and transactions prior to the issue of May 1965.
In order to secure the basis for a critical evaluation of stock repurchase activities, it has seemed essential to determine from the companies themselves their specific reasons for repurchasing their own common stock. This was accomplished by sending a questionnaire in
November 1967 to a senior financial executive of each of the fifty com panies which had engaged in repurchase activities, as established by examination of their company files at the offices of the Securities and
Exchange Commission.
A covering letter was sent with the questionnaire. This in dicated the specific purpose which the writer had in mind and the use to which the answers would be put. With the realization that the general subject of repurchase was under current scrutiny by the Securities and
Exchange Commission and covered by pending Federal legislation (S510), the senior financial executive was asked to answer the questions personally 11 with the assurance given that names of Individual companies would not be divulged and that answers would be merged so as to keep
Identities unknown.
Approximately five months later the questionnaire was mailed again to the twenty companies, of the original group of fifty, which had not replied to the initial mailing.
Two weeks later, in order to secure a wider sample, the same questionnaire was sent to an additional ninety-five companies. These were part of the original list of 950 companies whose stocks were quoted in Barron’s Over-The-Counter Market. It was found, by examination of balance sheets and income statements (as detailed in Chapter II), that
252 companies of this group held treasury stock as of the close of their
1966 fiscal year. Ninety-five of these companies held substantial amounts of stock, based on number of shares or cost, and to this selected list questionnaires were sent. Thus, a total of one hundred and forty- five companies were included in this survey.
III. DEFINITION OF TERMS USED
Treasury stock. Treasury shares are shares of the corporation's issued and fully-paid stock which have been reacquired by the corporation by purchase or donation, but which have not been (1) retired by a form of statutory reduction; (2) cancelled; or (3) returned to the status of un- 9 issued shares.
9 Zolman Cavitch, Business Organizations ; Securities Regulation f (New York: Matthew Bender, 1967). Sec. 147.07. 12
Unissued stock. This has been defined as "that part of the authorized capital stock, whether or not subscribed, which has not yet 10 been issued."
Over-the counter market. The term "over-the-counter" is synonymous with "unlisted" and includes the purchase and sales of all securities which are not executed on an organized exchange. Two of the most important characteristics of over-the-counter markets are these: first, the absence of a central market-place (each purchase or sale of a security between broker/dealers, by vocal communication, letter, tele phone, or teletype, constitutes a market); and second, their heterogeneity, as characterized by the variety of securities traded, the participating broker/dealers, and their trading practices.
Unlisted companies. The companies whose securities are traded over-the-counter vary considerably in size of assets, number of share holders, and shares outstanding. Many over-the-counter companies are not distinguishable from listed companies by these characteristics
(actually, it is often from this group that newly-listed companies come).
However, there are also many over-the-counter companies which are small in size and in the early stages of their corporate life. Some are re cently-financed companies and speculative in nature.
Market makers. This term is a synonym for wholsesale dealers, the firms which form the fabric of a primary market in specific securities.
^®Eric L. Kohler, A Dictionary for Accountants, (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 3rd ed. 1963), p. 507. Their functions are twofold: firBt, to buy from or sell to broker- dealers whose customers are either selling or buying; second, to add to the marketability of the specific securities in which they trade by assuming long or short positions with their own financial resources.
Their functions are thus comparable to those of a specialist firm on the New York Stock Exchange.^
The wholesale dealer "makes the market" in specific securities by indicating his willingness to buy or sell for his own account and risk, with the expectation of buying at his bid price and selling at his offering, or asked, price. Such a firm makes its profit on the
"spread" between the bid and asked prices. Frequently, negotiation between buyer and seller reduces the spread.
In most exchange stocks, only one specialist or specialist firm
"makes the market"; in over-the-counter trading, there may be one firm or a few dozen which perform the same function, the number being depen dent on the activity of trading in that particular security.
The willingness of the "market-maker" to buy or sell a specific security is Indicated by advertising in the "sheets".
The pink, green, and white "sheets". Each day the "market makers" throughout the country furnish to the National Quotation Bureau, Inc. their bid and asked quotations on the specific securities in which they 12 maintain a trading interest.
^Report of Special Study of Securities Markets of the Securities and Exchange Commission, Fart 2, Chapter VII, p. 554.
^Representative of the market; they do not constitute actual sales. 14
The Bureau, a privately owned company, assembles and collates this
Information. Then, after It Is arranged alphabetically by name of security, it is printed on approximately 200 pages (The National
Daily Quotation Service). The reader may see at a glance the names and telephone numbers of the "market makers" for each security, and the bid and asked prices that such firms were willing to trade at, as of the time they furnished their quotations.
These printed pages are colored "pink" for the Eastern Section of the country, "green" for the Western Section (essentially the
Chicago and Midwestern area), and "white" for the Pacific Coast.
These "sheets" are then distributed by messenger, rail, plane, mall, or truck to the firms which subscribe to the service: the professionals, the wholesale and retail broker/dealer firms throughout the country.
In this fashion, such firms are informed of the "market makers" in the particular security in which they have a buying or selling interest, either for their own account or for the account and risk of their cus tomers, the general public.
IV. SCOPE AND LIMITATION OF THE STUDY
Scope
It has been the aim of this study to determine the extent of repurchase activities which have been undertaken by unlisted industrial corporations, as distinct from those of listed corporations; to find out the purposes cited by the management of these companies for using 15
funds in this fashion, the characteristics of corporations which under
take such activities, the methods employed by management to Implement
them, and the resulting effect on the stockholders.
A corollary purpose is to find out whether directors take into consideration the potential effect of repurchase upon public stockholders and what methods, if any, they use to apprise stockholders, in advance, of all the material and relevant facts in connection with the decision to repurchase.
Limitations
This study has not taken into consideration the repurchases of
listed companies, since several empirical studies and many published articles have examined this area from various aspects. However, up to
the present time, no examination has been made of the repurchase activi-
tives of unlisted industrial companies, nor has any attention yet been
focussed on the effect on stockholders of such companies, as differenti ated from the objectives contemplated by the managements of such companies.
The Information contained in the 10-K and 8-K reports to the
Securities and Exchange Commission, as well as the proxy statements, provided basic data for this study. However, the unavailability of such data prior to April 30, 1965 necessarily limited the study to the period
from that data forward.
The problem of this study, to determine whether repurchase has been in the best interests of their stockholders, is one which, according
to Guthart and Stevenson, corporate management would prefer to minimize, or 16 to avoid its implications. Leo A, Guthart wondered whether it were 13 always equitable for a company to buy shares from its own stockholders; and Richard A. Stevenson indicated that both accountants and financial managers should be greatly concerned by the ethical problems raised by 14 the increased interest in corporate stock reacquisition.
Thus, first-hand information has been difficult to obtain except by securing stated reasons via the questionnaire method (and promising anonymity to those who answer) and then examining those reasons in the crucible of subsequent happenings.
V. ORGANIZATION OF THE STUDY
Since this is primarily an empirical study, the historical back ground as well as the legal and regulatory constraints relevant to the subject of repurchase have been discussed in Appendix A. In addition, consideration has been given to the basic Federal legislation requiring disclosure and reporting provisions: The Securities Act of 1933 and the Securities Exchange Act of 1934; The Report of Special Study of
Securities Markets of the Securities and Exchange Commission in 1963, which gave rise to the Securities Acts Amendments of 1964; and the Full
Disclosure Act, enacted into law on July 29, 1968 as Public Law 90-439.
13 Leo A. Guthart, "More Companies are Buying Back Their Stock," Harvard Business Review. Vol. XLIII (March-Aprll 1965), p. 53.
■^Richard A. StevenBon, "Corporate Stock Reacquisitions," The Accounting Review. Vol. XLI No. 2 (April 1966), pp. 312-317. 17
The responsibility of directors of unlisted industrial corporations to their stockholders, from the standpoint of their consideration of the possible effect of repurchase programs on the public stockholders, has been evaluated in Appendix B. Consideration is given to the extension of the law of disclosure to unlisted com panies, the attitude of the Securities and Exchange Commission, the recent legal trend toward the inclusion of the corporation itself among those who are classified as "corporate insiders", the differing regulations imposed externally on the directors of listed and unlisted companies, and the very recent passage of Public Law 90-439.
The results of the questionnaire, which was sent to the one hundred and forty-five unlisted industrial corporations which engaged in repurchase, have been reported in Chapter II. These reflected managements' stated reasons for repurchases and the methods which were used.
The empirical method was employed in the research study of Chapter
III to reveal the actual repurchases of the individual companies and the extent to which they did, or did not, keep their stockholders informed of their reasons for and the results of such transactions.
In Chapter IV the effect which such repurchases had upon the selling and non-selling stockholders was examined, as measured both by quantitative and qualitative tests.
The quantitative tests included the following:
a. Market prices of common stock relative to actual cost of repurchase. 18
b. Earnings per share, giving effect to year-end holdings of treasury stock, compared to earnings per share on issued stock.
c. Maintenance of corporate control by the principal holders.
d. The risk factor: effect on the debt/equity relationship.
e. Dividend payments prior to, during, and subsequent to the repurchase period.
f. Relationship of repurchases, in dollars, to net income.
The qualitative factors which were used in evaluation included the adequacy of disclosure (such as advance notice to the stockholders, timing, and communication of all the material and relevant facts) as well as the methods used, and the notification to stockholders of the re sults.
This study is terminated in Chapter V with a summary of the con clusions developed in Chapters 11 to IV, inclusive and an evaluation of them.
Since this study has revealed conditions existing prior to the recent passage of Public Law 90-439, the Full Disclosure Act, it is sug gested that a further study, a few years hence, determine what effect the law has had in providing more adequate disclosure to, and protection for, the stockholders of unlisted industrial corporations. CHAPTER II
THE QUESTIONNAIRE
Introduction
In order to determine whether repurchase by unlisted industrial corporations of their own common stock has been in the best interests of selling as well as non-selling stockholders, first-hand information was sought from management by means of a questionnaire (and covering letter) which was sent to a senior financial executive of each company which, according to research previously conducted in the company files of the Securities and Exchange Commission, had repurchased its own common stock within the past few years.
The objective of the questionnaire was to determine managements' stated reasons for repurchase, the source of funds, advance information provided to stockholders, and the use of repurchased stock after it was acquired.
Since unlisted (over-the-counter) companies, as previously in dicated, did not become subject to the periodic reporting and other provisions of the amended Securities Act of 1934 until April 30, 1965
(Rule 12g-l(a), the distinction between repurchasing and non-repurchasing companies was limited by the unavailability of data prior to that date.
Selection of Companies
Since the Intent was to secure informative data from a representa tive group of unlisted companies, as well as to use the list as a basis for the questionnaire, one hundred and ten companies, almost 11.6 per cent
19 20 of the original group of 950 unlisted companies, were selected as the working group of companies in accord with the procedure previously indicated on pages 7 and 8 of Chapter I.
The examination of the one hundred and ten unlisted industrial corporations revealed those which had repurchased their own common stock and those which had not.
It was found that fifty companies (45 per cent) had repurchased stock in recent years; sixty companies (55 per cent) had not repurchased any.
In addition to the selection of these fifty companies for ques tionnaire purposes, they were also used as an essential part of the re search study itself, as detailed in Chapter III.
The Questionnaire (first request)
The questionnaire was mailed to a senior financial executive of each of the fifty unlisted companies which had engaged in repurchase activities in recent years.
A covering letter was sent with the questionnaire; this indicated the purpose which the writer had in mind and the use to which the answers would be put.
Replies from the Questionnaire
From the fifty questionnaires which were sent out from November
15-27, 1967, inclusive, a total of twenty-five completed questionnaires
(50 per cent) were returned. In addition, six companies (12 per cent) sent replies but did not fill out and return the questionnaires them selves. Thus, information was received from 62 per cent of the companies f
21
to which inquiries were sent.
Some of the replies, from the six companies, provided an
indication of the company's attitude toward stockholders:
Thank you for your letter of the______of . We feel that, our policy is strictly proprietary. We are not in a position to answer your requirements.
We recently repurchased some small quantities of our stock under a plan to pay a part of executive incentive bonuses in stock. This program was short-lived and has been discontinued. The quantities purchased were small and purchases were made in the open market. I would suggest you consider our experience as insignificant and not to be included in your considerations.
______has not purchased its own stock in the past few years except in closing out its interest in a ______company when the shares were used by that company to pay off our interest.
We do not have a stock repurchase program. Any of our own stock which we have purchased in the open market during the past few years has been used exclusively for sales contests. The purchase has been made from a broker and re-registered to employees as awards, thus having no effect on the number of shares outstanding. Under the circumstances, filling out your questionnaire would perhaps be of no particular value.
In another instance, the company merely referred to two letters which had been sent to stockholders. The first letter was sent to share holders who owned less than ten shares each and the company offered to buy all such holdings at a flat, net (absorbing transfer taxes and brokerage
charges) price. The letter stated the company's intention to hold in its
treasury any shares purchased for use in connection with "possible future 22 acquisitions, for resale or other corporate purposes."
In the second letter, which was sent to holders of less than twenty-five shares, the company offered to purchase all such shares at a price two dollars higher than on the previous occasion (three and one- half months earlier). The purposes stated for reacquisition were the same as before, although an additional cited reason was "for a qualified
Stock Option Plan for key management employees," Also the company fur nished such stockholders with current information, a recent balance sheet, and an Interim profit and loss statement.
The Second Request
Several months later (April 12, 1968) a follow-up letter, accom panied by a copy of the original questionnaire, was sent to twenty of the original list of fifty companies which had not replied. Four companies responded by sending in completed questionnaires. Thus, from the fifty companies, a total of twenty-nine completed replies (58 per cent), as well as six letters, were received.
Expansion of the Questionnaire Group
Although the percentage of replies (58 per cent) to the original quesionnaire had been quite high, information from only twenty-nine companies was available as a basis for determining managements' stated reasons for repurchase. After careful consideration, it was decided to expand the list from fifty to one hundred and forty-five companies.
To that end, the writer reverted to the original list of 950 companies whose stocks were quoted in the May 29, 1967 issue of Barron1s 23
Over-The-Counter-Market. Rather than using the statistical procedure of a random sample, it was determined to make a selection from those industrial companies, using Moody's Industrial Manual as a reference source, which reported treasury stock holdings as of the end of their
1965 and 1966 fiscal years. Such holdings would indicate that they had repurchased stock, though not necessarily in either those two years or even in the past five or six.
Of the original list of 950 companies, 416 were eliminated for the following reasons:
Mon-industrial 245 Data not available in Moody's 120 Merged with other companies 18 Listed on New York Stock Exchange or American Stock Exchange subsequently 18 Duplicates (preferred stocks) 15
Total eliminations 416
Of the remaining 534 companies, by careful examination of their balance sheets and income statements in Moody's 1967 Industrial Manual, it was discovered that 282 companies held no treasury stock; and that
252 companies (47.19 per cent) did hold treasury stock at the end of either the 1965 or 1966 fiscal year.
From the repurchasing group of 252 companies (which included the fifty companies to whom questionnaires had been sent in November 1967 and April 12, 1968) ninety-five companies were selected, thus making a total of 145 companies, equal to 57.54 per cent. As Bhown in Table II, the selected companies held substantial amounts of treasury shares, based on the criteria of percentage of issued stock and/or dollar cost. Of 24
174,610,346 shares of issued common stock, these ninety-five companies had retained as treasury stock 9,612,996 shares (5.51 per cent of the
total issued), which had been repurchased at a cost of $132,378,689.
Since these companies had participated in repurchase activities
on a fairly extensive scale, it was felt that their reasons, if they
chose to participate in this study, would be meaningful. To these ninety-five companies was sent a copy of the original questionnaire, and
an individually-typed cover letter, during the period April 24 to
May 6 , 1968.
Replies From the Second Questionnaire Group
Forty-four companies (46.32 per cent) returned completed question
naires and seven additional companies (7.37 per cent) sent letters. Thus,
fifty-one companies (53.68 per cent) stated their reasons for repurchase
in one form or the other.
Summary
In summation, it is noteworthy that of 145 companies to which ques
tionnaires were sent, seventy-three (50.34 per cent) responded with completed
questionnaires and an additional thirteen companies (8.97 per cent) sent
letters in reply. Moreover, the seventy-three companies represented 28,97
per cent of the 252 companies which held treasury stock as of the end of
their respective 1965 or 1966 fiscal years.
Responses to the Questionnaire
In only twelve instances were all the specific questions on each n i n vO a v 25
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CO v *"s J2 w o u _ CO 3 0 • ) * Mt VO vt n m on Ov in CM 00 o O -a-o in CM rH VO v o r— O INr— s cooo o n c o vo M o CM H ov u~l > H ■U u 3 o 3 3 03 M a O a* 0) OJ3 CO CO * . AAA n A A a Mt vO m on co cn O r- r-N rH no on A o on o oo o on oo o on 43 rH U 3 4-1 44 3 3 I m O CM 3 U B 3 . A A A Mt 00 CM 00 CM « i o rH TJ rH *H 144 in M •H cn o o o •H w H 3= 43 *H — 44 44 44 h O 3 3 M 0 03 a O rt 00 O 3 3 3 a CO 3 CO . A •t ) I mi- t m CO Sf 00 CO OV co vo m -a- o in IN. on mt ov rH rH n o o on ov OV CM H O T3 m cm n» n» in H tn •H I* t* -3 O 44 3 3 CM M O 3 B O 3 3 O U M • 3 M 5) *H O ' CO EH O 3 W 3 CM P> 3 3 . ■ A A r- HrH rH I in CO rH in o CM rH n 3 O 00 • A f M Mt VO on VO i H IN on CNl r- 00 vo oo •n CM vo vo on Ov OV w tJ rH H OV OV —1 O # A A a A A A *n co on w o u o 3 3 : Moody's Industrial Manual, 1967 Edition. 31 32 questionnaire answered by the responding companies. For this reason, the "Yes" and "No" answers to each question do not add up to the potential total of seventy-three. It is worthy of observation that, despite the assurance given in the cover letter to the effect that "Your response will be regarded as confidential. Names will not be divulged and the answers will be merged so as to keep identities unknown", several companies returned the completed questionnaire in envelopes which were completely free of identifying marks, thus hoping to insure against any possible identi fication. Two of the letters which were received from companies in the second group (ninety-five companies) gave expression to the sensitive nature of the subject of repurchase: "Regret we do not desire to parti cipate in this survey"; and "I sincerely regret that it will be impossible for me to comply with your request. Matters of this type Involve questions of policy within the province of the Board of Directors, thus limiting my liberty to comment. I am sorry this is the case." Managements' Stated Reasons Replies to specific questions. A. Was repurchase an isolated transaction or part of a program? Yes No Isolated purchase 41 26 Repurchase program 31 33 Reasons for repurchase? Yes No Stock purchase plan for employees 9 50 Stock available for stock options 32 33 33 For use in future acquisitions 33 31 For occasional or regular stock dividends 1 56 To be used for convertible issues 1 56 To increase earnings per share 16 43 Stock available at low price A3 18 Selling below book value 19 41 To increase financial leverage 7 48 Improve market price 17 47 Reduce cash dividend pay-out 9 48 Prevent "corporate raiding" 2 53 Permit stockholders' capital gains tax benefits 1 54 Source of funds? Yes No Sale of assets 3 52 Excess cash 64 6 Borrowed funds 9 46 Advance information to stockholders? Yes No 10 64 How was advance notice given? Yes No Special notice 5 28 Authorization at annual meeting 8 26 Were stockholders informed of the repurchase? Yes No Reasons for repurchase 17 34 Source of funds 12 39 Number of shares to be repurchased 14 40 Price or price range 11 41 Method of repurchase 14 37 Time of repurchase 10 40 All material and relevant facts 18 34 What method of repurchase was used? Yes No Tender offer 1 54 Open market purchase 56 11 Purchase from large stockholder 23 36 After repurchase, how was stock used? Yes No Treasury stock 69 1 Retired 4 45 34 Comments by Management The format of the questionnaire provided an opportunity for senior financial executives of answering companies to elaborate on their answers or to indicate reasons which had not been stated specifically. The following are representative: To satisfy a personal requirement of an indivi dual leaving the company. Awards or gifts to employees with 25 or more years of service. To eliminate large minority ownership by ______in our company whose customers are principally ______companies who compete with______. To meet obligations under employee bonus incen tive program which was paid in part with company stock. A basic difference of opinion developed between the two co-founders. One of the men left the company and offered to sell his stock back to the company at a price well below market. Common stock purchased as an inducement to stock holder to sell his preferred stock to the corporation. Many executives accepted the opportunity to make comments concerning various aspects of their repurchase activities. These provide a good in sight into the thinking, reasons, and plans of their managements: Our stock may be repurchased by our Executive Committee. Of course, if there are any questions from the stockholders they would be answered. It was a 'one-time1 situation. The following statement was included in our Annual Report to stockholders for the year 1966: Another gratifying program was the distribution of shares of the company's Common Stock to employees 35 with service of twenty-five years or more. Twenty- five year employees received two shares with one additional share for each additional five years service. There were 1,721 shares distributed to 497 people. This Is a continuing program, and the employee reaction has been most favorable. Our situation may not be appropriate for inclusion in your study as it was an isolated, one-time purchase which was the by product of a split in management. Certain early purchases were made to support value of stock during two recessions. Because of our continuing need for working capital and stock issuance throughout the years . . . it has not been possible for this company to become active in the purchase of its own stock. The following comments were made by two companies in explaining their repurchase of large blocks of stock: We purchased 290,000 shares of our stock from one stockholder. This stock was originally issued in exchange for the stock of !a corporation which was— owned by us. The stock was issued with the under standing that it had to be offered back to us if sold. Upon being offered it was purchased by us. We have on three or four occasions repurchased blocks of stock when made available by a stockholder who might wish to dispose of his entire holdings. Purchases have been made at the bid price, and to date these pur chases have been used for stock options or for acquisitions with the balance remaining in treasury. Because of the relatively small amounts purchased we have not notified stockholders other than through the annual report. Other explanatory comments were volunteered by managements: We do not have a plan for purchase of our stock. The initial purchase was for the purpose of fulfilling the requirements of a compensation agreement. We have also issued some shares of our Treasury Stock as Contest awards. Our stock is not widely traded and is listed in Over-The-Counter only. Brokers call us whenever any of the stock is available and, if we feel the price is attractive, we consider purchase of it. 36 The Company adopted a Restricted Stock Option Plan in October, 1962. In the late fall of 1962, the Company went public (Over-The-Counter) and not long thereafter, began to acquire stock in restricted amounts to fund its Stock Option plan. The Company also acquired a block of stock from the estate of a deceased Company officer. Your questionnaire appears to be aimed at companies with a much stronger repurchasing program than the one we have followed. Over a five year period common shares outstanding has been reduced by only 38,000 shares, or 3.2%. We would anticipate using this for a desirable acquisition if one should appear where stock would be the purchasing medium. We have had a small "repurchase agreement program" for key employees to assist them in buying company stock. From time to time we have repurchased according to these agreements. At one time we also purchased shares on the open market sufficient to meet obligations of an estab lished stock option program. Now that this has been completed no other purchases of this type are contemplated. One company which indicated an accumulation of cash in excess of its needs made an Isolated purchase of stock in the open market to "freeze some surplus cash" and has retained the stock in its treasury. The only company, of the seventy-three responding, which repurchased stock via a tender offer, indicated that this was done "as a condition in connection with shareholder approval of sale of assets and business of company." The stockholders were informed, in advance, of the decision to repurchase, via special notice. They were told the reasons, the number of shares to be repurchased (no limit), the source of funds, the price, the method and time and, after repurchase, the stock was retired. One company repurchased stock in the open market, using cash in excess of the contemplated needs of the business. Its reasons were to have stock available for future acquisitions and to increase earnings per 37 share. Management felt that another reason was to improve the market price of the stock "but only in as much as improved earnings per share would have that effect." Another company indicated that its stockholders were not infor med in advance of the decision to repurchase, which was consummated in the open market, nor were any data given them. However, the price "could be figured from balance sheet and footnotes for current and prior years." In that connection also, a company explained the circumstances of its answer that stockholders were not informed, in advance, of the decision to repurchase: Ownership of stock by Officers and Directors repre sented control. Since purchase took place over several years the stockholders were aware of the program before it was completed. Another company repurchased stock in the open market and from large and small stockholders, to have stock available for stock bonus plans and employees stock purchase plan. Although stockholders were not informed, in advance, of the decision to repurchase, they were given the reasons and number of shares repurchased, after the purchases had been made. "All purchases are reported each quarter to stockholders. Stockholder approval was received for both plans, which authorize use of treasury stock or previously unissued stock." Still another company gave no advance information to stockholders of the decision to repurchase, nor any reasons, but explained the situation in this way: This repurchase of stock was not too significant— only about 4% of outstanding stock being involved. It was 38 of a one-time nature, since we had substantial excess cash funds, and the price of our stock was definitely cheap by all standards. It was the de cision of the Board of Directors only. One company advised that its repurchase was part of a program; its reasons were specific and well considered and its stockholders were informed in advance and kept apprised of results: The primary purpose for repurchase of stock was two fold. 1. For use in future acquisitions. 2. Because stock was available at a low price. To increase earnings per share and to improve the market price of the stock, are by-products of a re purchase plan but are not, in our opinion, the moti vation for a repurchase program. Although no formal notice outlining the details of a proposed repurchase plan was mailed to stockholders all stockholders were advised through our quarterly stockholder releases of management's plan to repur chase shares offered to the company if, in the opinion of management, such purchase would be beneficial to the company. At no time did we ever go into the market on a 'bid basis' nor was any broker or dealer authorized to purchase shares on order for the company. A final comment came from a company which indicated that its repur chase also was part of a program. Its reasons were to use stock in future acquisitions and to increase earnings per share; a motivating factor was that stock was available at a low price and selling below book value. It used funds from the sale of assets, did not give advance information to stockholders but, after purchasing in the open market, gave management's reasons for its action. Its clarification follows: Our company's stock was selling far below book value. Management felt that to purchase some of its own stock would be as good an investment as company could make, and sold other securities in order to make funds available. Board of Directors unanimously voted for the program, 39 modest in scope, beginning in late December 1963 and running until mid-February, 1967, purchases totaling about 154,000 shares at average price of about $4.00 per share. Book value of stock ranged between $11-$12 during this period. Evaluation The very large consensus on excess cash as a source of funds (as stated by 64 of 73 reporting managements) is significant because it represents the increase in funds which had been generated from depreciation and depletion and net income less cash dividends paid, income taxes, and capital expenditures.^ It is significant, moreover, because it emphasizes the increased attention paid by financial managers to the management of cash (a use of funds) in recent years. Having excess cash, they have attempted to in crease the return on Investment by judicious uses, of which repurchase of stock has become one. It will be interesting to note how the high interest rates offered on negotiable certificates of deposit in the 1968-69 period will affect the amount of funds devoted to stock repurchase. It is evident that a majority of managements considered their ..own stock a good investment, if it were available at a low price, and con sidered themselves capable of determining what a "low-price" was, without reference to the opinions of outside financial experts. Forty-three, of seventy-three reporting companies, made this decision and nineteen com panies cited the fact that their stock was "selling below book value" as representing a desirable use of funds. ^The Increased funds, in an on-going concern, are reflected in cash, accounts receivable, inventory, and fixed assets. 40 The current trend toward mergers perhaps has been foreshadowed by the decision of companies (thirty-three in this group) to repurchase stock for use in future acquisitions; and the accumulation of excess cash undoubtedly has been a motivating factor in that direction. Despite the decision by managements to employ excess cash for repurchase, there is evident no obligation or intent to inform their stockholders in advance or to acquaint them with the reasons for this use of funds. Of the seventy-three reporting companies, only ten indicated that they had given advance information, while sixty-four said that they had not. (The discrepancy of one was probably due to a confusion as to what "advance information" meant.) Only five companies Informed their stock holders via a special notice; eight companies indicated "authorization at annual meeting" but some of these probably included notification after repurchase had been underway or completed. Moreover, only seventeen companies advised that they had informed stockholders of the reasons for repurchase (in many cases, after the fact) and fewer companies, ten to fourteen, noted that they had provided stock holders with data as to the source of funds, the number of shares to be repurchased (or previously repurchased), the price or price range, and the method and time of repurchase. The inadequacy of disclosure to stockholders is further evidenced by the method of repurchase which was used. A tender offer usually re quires advance Information to stockholders as to reasons, source of funds, price to be paid for the stock, number of shares to be purchased, and some 41 Indication as to current earnings. Contrariwise, repurchase of stock in the open market usually does not require disclosure to stockholders per se. The same is true with regard to purchases of blocks of stock from large stockholders, although it is quite likely that a large holder might be in a position to know, or to require information about, the current status of the company prior to the completion of the transaction. Yet neither method of repurchase would bar the disclosure of essential information to stockholders in ad vance of the transaction. Of the seventy-three companies which had completed the questionnaire, only one company had requested tenders of stock from its stockholders. Fifty-six, a great preponderance, made their purchases in the open market. Twenty-three companies (indicating use of both methods) had purchased stock from large stockholders, presumably in substantial blocks. There was decided unanimity by the responding companies on the use of the reput'chased stock. Sixty-nine companies retained it as treasury stock; only four companies retired their repurchases via cancellation. This disposition would convey the impression that the acquisitions were not part of a well-conceived program. This viewpoint is substantiated by four of the major reasons stated by managements: available at low price (43), selling below book value (19), improve market price (17), and in crease earnings per share (16). Availability of the stock at a price considered favorable by manage ment, and below book value, could well have provided the stimulus to action. Repurchase in and of Itself would increase the earnings per share on the 42 reduced balance of outstanding shares. This, In turn, might Improve the market price of the stock as a normal consequence. A smaller number of companies indicated a carefully-planned use of the stock. Thirty-two companies reported that repurchase was to secure stock to fulfil the requirements of stock option plans; and thirty-three planned to hold stock for use in connection with future acquisitions. Thus, two conclusions may be drawn from the retention as treasury stock. First, companies wished to maintain their freedom of action. Secondly, they had no immediate use for the stock. Short-term considera tions provided the stimulus for repurchase. The act of repurchase per se (with or without formal cancellation of the shares) induced higher earnings per share and a probable increase in the market price. The eventual dis position of the stock was a future consideration. No immediate decision was needed or taken. A Study of Listed Companies; Comparison o A recent article, based upon a field study of fifteen listed 3 corporations, all of which repurchased ten per cent or more of their out standing equity capital during the decade from 1954 to 1963, provided the following reasons for repurchase of their own stock, based upon the large amount of cash being generated: ^Leo A. Guthart, "Why Companies Buy Their Own Stock," Financial Analysts Journal. Vol. XXIII (March-April 1967), pp. 105-110. q Leo A. Guthart, "Corporate Repurchases of Already Outstanding Common Stock," (Unpublished Doctoral disseration, Graduate School of Business Administration, Harvard University, Boston, 1966). Available for inspection, Baker Library. 43 1. Shrinking the equity base. a. Direct effect upon earnings per share. b. Minimum risk offered by repurchase. c. Effective distribution of funds to stockholders at capital gains tax rates. 2. Avoid increasing equity. a. To satisfy stock option requirements. b. To provide shares for acquisitions. c. To use shares to avoid dilution resulting from . conversion of outstanding convertible debentures and exercise of warrants. 3. A good Investment of corporate funds. a. Book value as the principal yardstick. 4. To support the market for their stock. a. Increase the demand for the stock. b. Absorb large blocks of overhanging stock. 5. To eliminate small stockholders. 6 . To obtain or improve control. The current study, of seventy-three unlisted corporations, has pro vided somewhat different reasons for their repurchase activities. The immediate stimulus was comparable to that of listed companies. Of the seventy-three unlisted companies, sixty-four stated that avail ability of excess cash was the motivating factor. However, the indicated reasons do not convey the impression of well conceived, carefully-planned programs. Rather than based upon an Intent to shrink the equity base, the major reason stated by a substantial majori ty (59 per cent) of the companies (43) was the availability of the stock Only sixteen companies (22 per cent) Indicated the desire to Increase earnings per share as a reason; and there was scant evidence (one company said yes, fifty-four said no) that the effect of taxation upon the stockholder group was given serious consideration. The listed study cited the desire to avoid increasing equity (stock options, acquisitions, and conversions) as the second most impor tant reason. The current, unlisted study leads to different conclusions. Thirty-two companies (44 per cent) gave the fulfillment of stock options as a reason, and thirty-three companies mentioned future acquisi tions. But only one company stated that it wished to have stock avail able to avoid dilution resulting from conversion and only one company wished to use repurchased stock for regular or occasional stock dividends. In each case, fifty-six companies indicated that these were not the reasons. Thus, they were willing to use unissued stock for these purposes which would increase the equity base. The study of listed companies concluded that book value was the principal yardstick in determining that their own stock was "a good invest ment" (the leading secondary motivation). The unlisted companies stated that this factor was of lesser significance; only nineteen companies, (26 per cent), agreed that their repurchase was because the stock was selling below book value. Moreover, forty-three companies, (59 per cent), stressed the availability of stock at a_low price as the principal stimulus to action. Support of the market was determined in the listed study as being the second most important secondary motivation. In this unlisted study 45 seventeen companies, (23 per cent), stated that improvement of market price was a reason, but forty-seven companies denied it. Elimination of small stockholders and the desire to obtain or improve control were the final two reasons evidenced in the listed study. In the current, unlisted, study only one company (by letter) detailed its attempt to eliminate small stockholdings; but no one company mentioned control as a motivating factor. The element of control would seem to differentiate the unlisted corporation from the listed. In many cases, the stockholdings of the managements of unlisted companies provide unquestioned voting control. On the other band, the "professional managers" and directors of many listed corporations frequently own a small percentage of the outstanding stock. Furthermore, the possession of voting control may be a material factor in the unwillingness, as well as lack of interest, on the part of managements of unlisted companies to take the minority stockholder into their confidence by revealing the relevant facts about repurchase prior to, or even after, the fact. This point of view is further documented by the method of repur chase used— open market purchase~in contrast to the use of tenders. 46 QUESTIONNAIRE KINDLY ANSWER ALL QUESTIONS EITHER BY "YES” OR "NO" OR EXPLAIN IN YOUR ANSWER TO QUESTION NO. 9 (LAST PAGE). YES NO 1. Was repurchase an isolated transaction or part of a repurchase program a. Isolated purchase? 41 26 b. Part of a repurchase program? 31 33 2. Were the reasons for repurchasing stock a. To meet obligations under employee stock purchase plan? 9 50 b. To have stock available for stock options? 32 33 c. To use in future acquisitions? 33 31 d. To use for regular or occasional stock dividends? 1 56 e. To use in conversion of convertible issues? 1 56 f. To increase earnings per share? 16 43 g. Stock available at low price? 43 18 h. Stock was selling below book value? 19 41 i. To increase financial leverage (reduce stock as per cent of total capitalization)? 7 48 j . Improve market price of stock? 17 47 k. Reduce total cash dividend payout? 9 48 1. Prevent threat to control of company by "corporate raiders"? 2 53 m. To permit stockholders to benefit from capital gains tax rates rather than to receive in creased dividend income? 1 54 QUESTIONNAIRE (CONT'D) YES NO What was the source of funds for this purchase a. Sale of assets? 3 52 b. Accumulation of cash In excess of contem plated needs of the business? 64 6 c. Borrowed funds? 9 46 Were stockholders Informed, In advance, of the decision to repurchase? 10 64 If so, how were the stockholders Informed a. Special notice? 5 28 b. Authorization by stockholders at annual meeting via Inclusion in proxy statement? 8 26 Were the stockholders given the following information a. The reason(s)? 17 34 b. Number of shares to be repurchased? 12 39 c. Source of funds? 14 40 d. Price, or price range? 11 41 e. Method of purchase? 14 37 f. Time of repurchase? 10 40 g. All material and relevant facts? 18 34 What method of repurchase was used a. Tender offer to stockholders? 1 54 b. Purchase in open market? 56 11 c. Purchase from large stockholder? 23 36 48 QUESTIONNAIRE (CONT'D) YES NO 8 . After repurchase of stock, how was it used a. Held as treasury stock? 69 1 b. Stock was retired? 4 45 c. 9. If you wish to make any comments, please do so below. 49 COVERING LETTER November 20, 1967 Mr. William S. ______President ______Corporation Boston, Massachusetts Dear Mr. ______: To fulfill one of the requirements for a Ph.D. degree at The American University I am writing a dissertation on "Stock Repurchase Programs of Unlisted Industrial Corporations." Your company has been selected, by random sampling, as one company, among many, which has repurchased its own common stock in the past few years. You are asked, personally, to fill out the enclosed questionnaire which (hopefully) will not take up too much of your time. Your response will be regarded as confidential. Names will not be divulged and the answers will be merged so as to keep identities unknown. The questionnaire requests "Yes" and "No" answers to specific questions. Any additional comments which you care to make will be gratefully received and your identity safeguarded from any possible detection. I solicit your cooperation in making this study a meaningful one. Sincerely, Raymond S. Bernhardt RSB:mg CHAPTER III THE RESEARCH STUDY Purpose and Objectives In order to supplement and evaluate the reasons stated by mana gements, via the questionnaire method, for engaging In repurchase activities and the methods used to Implement them,. It was decided to make a careful examination of the actual information which had been sent by the companies to their stockholders. The basic objectives, as with the questionnaires, was to determine the purpose and extent of such repurchases, their effect upon stockholders, and the presence or absence of disclosure of all the material and relevant facts which a selling or non-selling stockholder might need, or be en titled to have, in order to make a rational and intelligent decision. Source Materials The information which a stockholder might expect to receive directly from a company would normally include quarterly and annual reports, circulars, notices of special meetings, and notices of annual meetings, in cluding proxy statements and the proxies themselves. Such reports and notices, insofar as unlisted companies are concerned, are publicly available in their entirety in only one place, the main office of the Securities and Exchange Commission in Washington, D. C. Accordingly, it was decided to utilize those facilities to examine and analyze the com pany files of each of the working group of companies. 50 51 Selection of Companies As detailed In pages six to eight of Chapter I, from the list of 950 unlisted companies whose stock quotations were recorded in the May 29, 1967 issue of Barron's Over-The-Counter Market, one hundred and ten companies had been selected as the working group for examination and study. Of these one hundred and ten companies, it was desired to know: 1. Which of these had repurchased their own stock. 2. Which companies had not repurchased their stock. 3. How many shares were purchased. 4. What was the dollar cost of the shares repurchased. 5. When (in what years) did repurchasing take place. The examination of the company files of each company revealed those which had repurchased stock and those which had not. It was found that fifty companies (Table III) had repurchased stock in recent years. Sixty companies (almost 55 per cent) had not repurchased any stock. Since the fifty repurchasing companies also met the criteria of size of assets, number of stockholders, fair degree of marketability of stock, as well as availability of data, it was determined that they would constitute the basis of the research study. Extent of Repurchase: Frequency and Volume The frequency of repurchase' depends on many variables such as the profitability of the company, the accumulation of cash, the price of the TABLE III FIFTY UNLISTED INDUSTRIAL COMPANIES WHICH HAVE REPURCHASED COMMON STOCK AVM Corporation Aerosonic Corporation American Heritage Publishing Co., Inc. Asgrow Seed Company Athlone Industries Barnes-Hind Pharmaceuticals, Inc. A. J. Bayless Markets, Inc. Bergstrom Paper Company Boston Herald-Traveler Corporation Bristol Brass Corporation Cannon Mills Company C-E-I-R Inc. Cincinnati Enquirer Inc. Colonial Stores, Inc. W. S. Dickey Clay Manufacturing Company Dorchester Gas Producing Company Economics Laboratory Inc. Electrolux Corporation Girltown, Inc. Global Marine Inc. Gulf Interstate Company The Hanover Shoe Incorporated TABLE III (CONT'D) FIFTY UNLISTED INDUSTRIAL COMPANIES WHICH HAVE REPURCHASED COMMON STOCK Heath Tecna Corporation Hexcel Corporation Hudson Pulp & Paper Corporation Charles Jacquin et Cie., Inc. Jessop Steel Company E. F. Johnson Company Kentucky Fried Chicken Corporation McCormick & Company Inc. Metalfab Inc. Midas-International Corporation Midwest Rubber Reclaiming Company Monmouth Park Jockey Club Nuclear Data Inc. Ozite Corporation Pacific Gamble Robinson Company Petrolite Corporation The Reynolds & Reynolds Company Sawhlll Tubular Products Inc. Shepard Niles Crane & Hoist Corporation Super Valu Stores Inc. United States Banknote Corporation 54 TABLE III (CONT'D) FIFTY UNLISTED INDUSTRIAL COMPANIES WHICH HAVE REPURCHASED COMMON STOCK United States Envelope Company Vocaline Company of America Incorporated The Wackenhut Corporation H. War show & Sons Incorporated Weiss Bros. Stores Incorporated Western Publishing Company Incorporated Zenith Laboratories Incorporated Source: Company 10-K (annual) reports on file with Securities and Exchange Commission, Washington, D. C. 55 stock relative to current and anticipated earnings, alternative uses of cash funds, the degree of voting control by management, the reasons for repurchase, the anticipated uses for the repurchased stock, and the availability of the stock in the market-place. The volume of repurchase concerns the amount of the repurchase per se, its relationship to the number of shares issued and outstanding, and its dollar cost. As Indicated in Table IV, forty-six unlisted companies (42 per cent of the working group of 110 companies) have repurchased stock in at least one of the three years, 1964 to 1966 inclusive.^ Twenty-four (22 per cent) had repurchased in 1964; twenty-three (21 per cent) in 1965; and thirty-one companies (28 per cent) in 1966. Moreover, of the forty-six repurchasing companies, eleven (24 per cent) repurchased stock in each of the three years; ten (22 per cent) re acquired stock in each of two years; while twenty-five (54 per cent) repur chased stock in one of those years. Aggregate repurchases of stock totaled 553,892 shares in 1964; 952,606 shares in 1965; and 485,106 shares in 1966 (Table XIV, p.150)* The treasury stock holdings of the fifty unlisted industrial cor porations for each of the three years, 1964 to 1966 inclusive, are shown 2 in Table IV. Total holdings aggregated 1,242,859 shares in 1964; "''Four companies, Athlone Industries, Hexcel Corporation, Midwest Rubber Reclaiming Co., and Shepart Niles Crane & Hoist Corporation, had repurchased stock in prior years. 2 . - One company, Electrolux Corporation, had repurchased 11,000 shares in 1964 but had disposed of them prior to the end of the fiscal year; no subsequent repurchases were made. 56 TABLE IV REPURCHASE OF STOCK BY UNLISTED INDUSTRIAL CORPORATIONS (1964-1966) 1966 1965 1964 AVM Corporation X X X Aerosonic Corporation X American Heritage Purlishing Co., Inc. X Asgrow Seed Company X X X Barnes-Hind Pharmaceuticals, Inc. X Bayless (A.J.) Markets, Inc. X X Bergstrom Paper Company X Boston Herald-Traveler Corporation X Bristol Brass Corporation X X Cannon Mills Company X X C-E-I-R, Inc. X Cincinnati Enquirer X X Colonial Stores, Inc. X X X W. S. Dickey Clay Manufacturing Company X Dorchester Gas Producing Company XX Economics Laboratory, Inc. X Electrolux Corporation X Girltown, Inc. X XX Global Marine Inc. XXX Gulf Interstate Company X X X The Hanover Shoe Incorporated X Heath Tecna Corporation X Hudson Pulp & Paper Corporation X XX Charles Jacquin et Cie., Inc. X X X Jessop Steel Company X E. F. Johnson Company X Kentucky Fried Chicken Corporation X McCormick & Company Incorporated X X X Metalfab Incorporated X X Midas-International Corporation X 57 TABLE IV (CONT'D) REPURCHASE OF STOCK BY UNLISTED INDUSTRIAL CORPORATION (1964-1966) 1966 1965 1964 Monmouth Park Jockey Club X XX Nuclear Data Incorporated X Ozite Corporation X Pacific Gamble Robinson Company XX X Petrolite Corporation X X The Reynolds & Reynolds Company X X Sawhill Tubular Products Incorporated X X Super Valu Stores Incorporated X United States Banknote Corporation X United States Envelope Company X Vocaline Company of America Incorporated X The Wackenhut Corporation X H. Warshow & Sons Incorporated X Weiss Bros. Stores Incorporated X Western Publishing Company Incorporated XX Zenith Laboratories Incorporated - X - TOTALS (46 companies) 31 23 24 Source: Company 10-K (annual) reports on file with Securities and Exchange Commission, Washington, D. C. 58 1,255,840 shares In 1965; and 1,530,686 shares In 1966. The cost of 3 the shares held In 1966 totaled $31,807,263. The relationship of 1966 treasury stock holdings to the issued stock of forty-six companies (four companies had disposed of their holdings by the end of 1966) is indicated in Table VI. Total holdings of these companies were 1,530,686 shares. These represented 3.44 per cent of the total issued shares, which aggregated 44,553,073. It is noteworthy that twelve of the forty-six companies had treasury stock holdings which exceeded five per cent of the issued stock; and four companies had holdings which exceeded ten per cent. This is significant because of the manner in which these companies were chosen for analysis. They were selected not because they had been active repurchasers of stock but merely because they were included in a group of companies which were selected on a random sampling basis. Lack of Disclosure of Essential Information The most enduring impression which is secured from an examination of the reports which are sent to stockholders by the companies in which they have invested is the lack of information with regard to repurchase of stock. There were few instances in which approval was sought from stock holders prior to repurchase. Even then, it is uncommon for specific reasons ^Partly estimated. Four companies either did not show cost of treasury stock or did not segregate total cost s b between holdings of their preferred and common stock. TABLE V 1^1 vO DOCO O Ov VO VD m vO u ■S rt M t r dO td 5 u at d 0 0J j» 60 n O B 00 o i /-v« v j j v vo vo sr o m vo rt vo VO >!t p VO o o O O vo o o in o o m co CJ J C 1 vO O O O rt in (71 r-. d O at n 1 i H ft A «i A * n ft —N/ v <7 t r - 09 p CO vO CO 00 ooo o co j t r oj rt CM vo O O rt o o o o cm (0 CM CM I— m coo VO o oo VO < < o » I r» co C J J C CO d ) rt H a) t rt r O 0 3 S d ) o o rt co 60 t r at _ o o > a ftA | ft ft ft ft ft ft O 1 O at d in o J rt t r p OO * CTV OV 00 d 09 h 09 H 3 A r—I t r a .d pH n w d O at L Q CJ at at d g at 09 (0 09 i OO' O N p co o a>covo o rt rt AJ rt I 1 O i t t o v O in co Ov CO Mf VO CO O or-> o o rt 1 1 O tCO t t O o 00 M7 rt _ < *0at rt u A n n n S » a j « a O 09 ) t r a a) at a) _ rt d qi at at o o at at o a o a u to « § ct M U S H CM II I t I II I I I I •PiD ft ft ft ft ft ft ft o o to SJ V o w B 6 1 I Drt g u td o o M o CO a i 1 H s 0VO 1 Ov V0 rt in m O CO VO rt O rt 0d O rt rt t a w rt a PQ rt rt 09 o o U CJ U A t ’ V-* H O rt rt d to d t r U tH P. pL >» n 9 • ^ 09 09 09Prt PP O e o u t u > d o t r at few « d o i d to 7 •k ft t I td CJ rtS Cd ft 8 rt. to tn tn to co vo o o CM rt o o rt oo o r- o o VO O I co i i O inrt o t r O 00 1 rt o M «Sf CM rt O i o m CM O CM 60 ft ft 1 f A ft » «« I d d <7 vo VO I rt I CO rt I CM rt CO * I m H 59 60 cn St 1 00 1 rs 1 in O st cn i m o o o o VO 1 VO 1 in i m o rs cn i !"- o o CM VO CTV I cn i OV 1 CTV o O CTV 1 m o cn m rH rH 1 * 1 » i •» A A A | AAA A A 00 o o o 00 CM O CO vo r>. vo oo rH o rs H CJ CM cn in OV rH rs i VO ts o cn m m H o I I vo ov cn cn i o v < r c n 1—I I m t i r s CJ t i ov m oo o I ‘ I o H H m I m co st m i i H * a l l A A A A | AAA I I rs oo CO a) / s rH rH r s o ov cn m cn m cm 00 St CM CTV O o cj cn cm 1 ✓-N /-V w VO Ov H CTV ov cn i cn rs s t ov cn cj m o cn O o VO O cn rs m o i m s t co O rH st rs ov cn CM o CTV rs cn cn oo cn i cn h rs CM rH rs m cn CTV m S t rH AAA A A | AAA A A A AA A A I rs CTVSt o cn 00 cn rH cn rs O CJ H rs rs vo H cn CO CM CM rH CM rH /S < 0 O m *H 00 ta JJ I 0 0 rH Jj aJj CJ * O 3 o8 3 ft JJ o • 0 JJ CJ o • H o cj a) 00 0 a. u a UH O M f t 0 jj A •h a 0 O o 3 0 § 3 n o 3 • •H CJ •H fcs 3 3 in -H CO ft o JJ CJ f t 0 A! 0 D h u 0 0 0 0 Jj 0 0 3 O 0) M O O to 3 CJ o H Jj 0 3 JJ 0 ft sH CJ m o h 0 c j O O f t 3 f t 0 J3 h a ^ efl 3 ot o O O H 3 O* *H 0 a OCJ 3 CO rH jj f t 3 O Jj JJ PH o CJ 0*010 CO O M JJ J3 O 0a CJ •3 3 Jj ffl J3 O 0 0 3 0 CO o Jj 3 0 3 ft O ft U 0 CJ 0 0 0 JJ O a* rH O *H JJ 3 M M *H 0 jj 0 . f t ft 3 3 0 Jj Jj ^ X Jj U 3 0 M rH 0 3 ft JJ CJ 3 CO 3 A A 3 3 > 3 O 3 •n JJ 2 Bl H vH JJ 3 rH JJ o 3 CJ PH CO O f t g 0 « 09 *H o 1 8 s 0 0 H » 3 0 u O O rH H 0 rH 0 3 ft 3 •HO* •0 2 j j JJ JJ CO s3 JS 3 O rH O « 3 3 O CO CJ 0 3 rH rH J3 *4H JJ CJ u JJ 0 ft JJ 0 rH is O 3 Jj JJ O rH 3 0 K T3 0 0 0 • H O * O CJ •H r t rH 3 J3 3 3 3 J3 3 • 3 u u U Q ft ft O C3 O O H ft (3 f t CJ »n f t ft TREASURY STOCK HOLDINGS OF FIFTY UNLISTED CJ s r r s o v o v vO t s CTl vO a B* 1 CTl n c cj o VI o CO AS •rt JVI s CJ 4 VI s r «4 CJ c a o 0 a) >v 3 o s a Q. *-r N H I O N tn vo o m cn co co cn m m t s s i CM N in M cn vD CM m IN O (O Ol is cn is o cn cn rt • > VI o o p 60 A A A A A A n n A S / rs w n o no v in vo o cn cs tn cn vo in vn ov oven rH vo m cn cn n nc vo cn tn H cn O CM t s OV CM 25 H 25 •rt VI a) p > 60 o P CO 1 AAA A ,n m V 1 ■VI H S JJ CJ P p P P rs I I Ol 1 r- I • 0k vr rH m c rt m c CJ rH rt •O •rt CJ •rt H £ £ VI VI O Hi P O Vi P P P PH CO os ,p p P P CD • t MO St t r St St vo t s H 0 0 O O CM VO O s t tn rt tn t s in vo O t r O rt rH rH t tS M O o CM H CM c CM cn t r t s cn o o 3 CJ •rt 3 • Pi Ji rQ Pi IVI VI p P P o Vi 3 a P 60 * i p o 2 p 3 P u A A A AAA AAA A AA t s VO cm h 00 vO t s CM rH rO cm A! AS CJ rt rt £ PH P o p o >v p IH □ £3 p nc cn cn cn in cn sr rt CM m rt in rt rH 1—1 HVI rH a m S3 VI P CJ p p M p P o a A v s r tn tn rt CM rs CM rt cn cn rt rt Oi rt rt cn o t r m is cnrt oo o 00 m OV v s m is ov cn CTV cn O tn tn v n is tn av cm rt rt O rt CTl r O ■rt O •H CJ VI VI _ P DO *» P MH P M O O p o Vl P Hp PH A A A A A A AAA AAA AAA A A ■> n oo cn t s 00 CTV cm H m o cm rH CM iH rH O •rt •rt Pi •9 CJ fv o p o P § § CJ p O p Q, P P CJ a cn CO 00 is cn rt •rt m * rt •H CJ PH VI VI VI o M O P M U P p O PH c rs cn t s O s r r s 00 CTl O O m cn m m n o H oo tn o oi n tn tn rH *3 CTl cn t r rH TJ OV cn o n m cn oo 3 < CJ H rH Jp CJ CO i P *4 Pi O HP rH P t O p p u to CO iP Hi P P >> •P P O P O CTV O 1 1 O IS 1 1 # AAA CTV CM CM CM *3 tn tn ov IS rH H IS CM CM M 0 0 CM rH EH P VI P O 3 o PP •P P P H Hi P P 9 P P m A A a 0k i rH at is rt CM St rs rt 3> •3 rH •rt O <4 PS OCO CO 2! •rt JM CJ VI Hi O Hi O CHiH P Hi P PH P P PH • cn st st cn vo CM CM vo s i tn ov o ov tn n o cn H HrH v n cn cn ov o O m OV rH HH CO VI O P P 3, P P p P I cn I I 1 1 rH 1 1 i i • 1 i i l n i 1 cn l l A A AAA A a AAA A s t t s o o cm rt CM rt rs rt rs n CMcn a•3 •a •rt AS CJ to M pi VI VI VI VI VI p Hi o Hi P 0 P o O p O PH p P p p P p p 1 1 1 CM CM cn cn rH rt n00 cn rt cn rH rt CM CJ •rt a CO W VI VI VI p O a p p p P >> > P PH PH P P P •> 61 CO o CO o H n rH H O rH CTV o m s I—) Is cn cn cn rH O s i •h HH d (3 id < H 3 t r •rt CJ > o o g )*t • a)*rt hO CO p 3 P AS P o a P P O o P PH Pk CJ I I I I I I I I i 1 c St cn i 1 A A O o in rH .5 .P CJ EH VI o VlM Hi a Hi P 3 p p P PH P A tn 1 i 00 1 •C <4 CO H 3 o o P P P p k 0 • srs rs 00 CO tn rt r s rt CJ rs ■■t « VO rs m rt o o o rt vO m rt tn vo Is P P A A 0k TREASURY STOCK HOLDINGS OF FIFTY UNLISTED cj 3 § o B CO % v—/ S / sr r s Ois s i vO H O C H s r s r J CDCJ CJ CJ n a/s o nH P vO PI H cn ii a I 4 CO CO P A A A A s »n •H u CO 3 3 CO a bo I m & a u 4 O s r s r co r s r s r o o vo sr i p vo ov H tn 00 0 0 n t rH s s r I I rH P CM rH cocn m m cm cn m = A A AAA M A M r cn sr in in o rs vo r co sr vo co rs rs co in av ov rH s f in in H cm rH PQ <*>CO A a ov ■s . s ' H pi p) pi pi A3 ■s cn s r p p» •H s i rH OV s r ►J N 4-1 8 n u o at o a) CO a a a > c/l- VO CO VO CM sr cm co CO sr o s r CM § g m v o CM m m oo o cn H m cn cn rH o H co A A A A A3 •o .§ •H o t CO ¥ rH co ■H •H w CJ CJ 4J 4-) 4 o (3 a a) O 3 bo a) CO o o * Is O CJ 4) o <0 I <0 Is o H s co U ai CO g a o CO ai A a 3 §■ & J !3 ■ f3 Js .3 44 3 o 00 3 A 62 63 TABLE VI RELATIONSHIP OF 1966 TREASURY STOCK HOLDINGS TO ISSUED STOCK OF FORTY-SIX UNLISTED COMPANIES* Total Company Shares Shares Per Held Issued Cent AVM Corporation 7,570 547,192 1.38 Aerosonic Corporation 3,803 625,500 .61 American Heritage (Class A & B) 21,000 516,632 4.06 Asgrow Seed Company 2,361 913,944 .26 Athlone Industries 81,000 981,884 8.25 Barnes-Hind Pharmaceuticals, Inc. 6,000 700,000 .86 Bayless (A.J.) Markets, Inc. (Common) 18,000 779,760 2.31 Bergstrom Paper Company (Class A) 14,660 375,514 3.90 Boston Herald-Traveler Corp. 1,937 549,016 .35 Cannon Mills Company (Voting and non-voting) 166,966 2,074,198 8.05 Cincinnati Enquirer, Inc. 7,709 840,360 .92 Colonial Stores, Inc. 9,331 2,825,638 .33 W. S. Dickey Clay Mfg. Co. 4,379 997,725 .44 Dorchester Gas Producing Co. 60,859 937,072 6.49 Economics Laboratory, Inc. 13,303 2,515,725 .53 Girltown, Inc. (Class A & B) 41,500 646,500 6.42 Global Marine, Inc. 1,784 1,828,281 .10 Gulf Interstate Company 183,209 1,141,088 16.06 The Hanover Shoe Inc. 113 1/3 608,330 .02 Heath Tecna Corp. 7,742 1/2 692,736 1/2 1.12 Hexcel Corporation 20,575 392,844 5.24 Hudson Pulp & Paper Corp. (Class A) 22,390 654,390 3.42 Charles Jacquin et Cie, Inc. 11,933 408,000 2.92 Jessop Steel Company 7,520 776,289 .97 64 TABLE VI (CONT'D) RELATIONSHIP OF 1966 TREASURY STOCK HOLDINGS TO ISSUED STOCK OF FORTY-■SIX UNLISTED COMPANIES* Total Company Shares Shares Per Held Issued Cent Kentucky Fried Chicken Corp. 27,400 1,035,141 2.65 McCormick & Company, Inc. (voting and non-voting) 9,217 529,394 1.74 Metalfab, Inc. 58,517 343,038 17.06 Midas-International Corp. (Class A) 2,177 856,374 .25 Midwest Rubber Reclaiming Co. 1,400 351,387 .40 Monmouth Park Jockey Club 28,561 859,298 3.32 Nuclear Data, Inc. 132,145 625,781 21.12 Ozite Corporation 31,110 973,770 3.19 Pacific Gamble Robinson Co. 2,908 1,309,024 .22 Petrolite Corporation 17,759 1,469,585 1.21 Reynolds & Reynolds Co. (Class A) 10,950 1,031,809 1.06 Sawhlll Tubular Products, Inc. 7,295 665,850 1.10 Shepard Niles Crane & Hoist Corp. 31,279 287,000 10.90 Super Valu Stores, Inc. 63,500 2,022,115 3.14 United States Banknote Corp. 24,712 1,569,911 1.57 United States Envelope Co. 13,123 627,535 2.09 Vocaline Company of America Inc. 37,059 716,355 5.17 The Wackenhut Corp. (Common) 1,500 329,525 .46 H. Warshow & Sons, Inc. (Class A & B) 15,476 267,372) 2.56 8,338 662,844) Weiss Bros. Stores, Inc. 30,000 425,140 7.06 Western Publishing Co., Inc. (Class A & B) 172,683 3,910,719 4.42 65 TABLE VI (CONT’D) RELATIONSHIP OF 1966 TREASURY STOCK HOLDINGS TO ISSUED STOCK OF FORTY-SIX UNLISTED COMPANIES* Total Company Shares Shares Per Held Issued Cent Zenith Laboratories, Inc. 87,933 1/3 355,488 1/3 24.74 TOTAL (46 companies) 1,530,686 44,553,073 3.44 *NOTE: The following companies had disposed of their treasury stock holdings prior to 1966: Bristol Brass Corporation C-E-I-R, Inc. Electrolux Corporation E. F. Johnson Company Source: Company 10-K (annual) reports on file with Securities and Exchange Commission, Washington, D. C. 66 to be Indicated or the use for which the stock Is Intended. Blanket approval Is normally sought. After repurchase, there Is a similar lack of Information. This Is particularly true with regard to the amount of stock repurchased, Its cost, and the actual dates or periods when repurchase took place. The only exception to this occurs in connection with the purchase of large blocks of stock, the use of treasury stock to acquire other businesses and to pay stock dividends, and in connection with the use of treasury stock for bonuses, employee incentive awards, and prizes. The companies fall to indicate clearly whether treasury stock, or unissued stock, has been used to fulfil their obligations under stock option plans. Usually (because Securities and Exchange Commission rules require it) the annual reports provide information as to the number of shares held as treasury stock at fiscal year-end and its cost. However, it is difficult to determine how much stock has been repurchased during the year and the use, if any, to which it has been put. Thus, it is possible for a substantial amount of stock to be pur chased during the year and subsequently resold or used in connection with acquisitions or for stock options. Yet, only the balancing amount will be revealed as additions or deductions to the treasury stock account at year- end. This is an omission in information which a change in Securities and Exchange Commission rules could rectify. Purposes of Repurchase Analysis of the records of the fifty companies under study revealed 67 these primary purposes for the reacquisition of stock: 1. Removal of large blocks from the market 9 2. Acquisition of other companies 6 3. Stock option plans 6 4. For bonuses, employee incentive awards, and prizes 5 5. Availability at a low price 3 6. Use as stock dividends 2 7. No reason given 19 TOTAL 50 1. Removal of large blocks from the market Nine companies, of the fifty examined, repurchased large blocks of stock which were overhanging the market. In some cases, part of the repurchased stock was used to fulfil the requirements of stock option plans, but this was a secondary factor. This group included the following companies: AVM Corporation Vocallne Company of America, Inc. Bergstrom Paper Company Weiss Bros. Stores, Inc. Global Narine, Inc. Western Publishing Company, Inc. E. F. Johnson Company Zenith Laboratories, Inc. Nuclear Data, Inc. AVM Corporation repurchased 45,000 shares (out of 523,092 shares issued) from Rane Tool Company on January 25, 1965; 47,500 shares were re sold on the same day, but no information was given as to the purchaser or the sale price. Two hundred shares were sold on March 4 to an unspecified buyer at an unspecified price, and 400 shares were sold to L. A. Hobbs, an option holder, on December 31. As a result, after including miscellaneous 68 purchases of 329 shares during the year, there was a net increase of 2,771 shares in treasury stock at the end of the year. In 1966 the company repurchased 12,000 shares from R. E. King on October 3. After reflecting 5,300 treasury shares which were sold under the option plan, and a miscellaneous increase of 141 shares, there was a net increase of 6,559 shares of treasury stock. Bergstrom Paper Company was established in 1904 and became a publicly owned company in 1955. However, not until 1966, at which time 50,000 shares of stock options were outstanding, did the company repurchase any stock. The annual report for 1966 explained it in this fashion: During 1966, the estate of a major stockholder made 15,000 shares of Class A common stock available at an attractive block age price in October. These shares were acquired for $16.25 per share and placed in treasury to be made available as a management incentive to key employees under our restricted and qualified stock option plans. As of December 31, 1966, there were unexercised stock options granted to employees to pur chase Class A common stock aggregating 11,960 shares at $17.60, 7,640 shares at $16,875, and 5,720 shares at $14.50. A total of 24,000 shares remained available for future grants. The treasury stock acquired will now be available for that purpose. Nevertheless, during that year, 1966, options were exercised on only 680 shares of stock, of which but 340 were taken from the treasury stock. Global Marine. Inc. merged with Global Marine Exploration Company on November 30, 1964. On October 28, the company had agreed to repurchase at $9.25 per share (no quoted market then existed) 800,000 shares from Union Oil Company of California. This was an important phase of the merger agreement and was intended to eliminate a large minority interest. On December 30, 1964, 200,000 shares were actually repurchased and the remaining 600,000 shares on February 3, 1965. For this purpose available funds were used, as well as the proceeds from the sale of common stock and of units consisting of debentures and common stock. Subsequent sales of common stock to employees and investors in 1965 secured funds for capital expenditures. At the annual meeting on May 3, 1965 (as requested in the proxy statement) the stockholders authorized the retirement of the 800,000 shares reacquired from Union Oil Company. The net effect of retiring 800,000 shares and selling 780,000 shares of previously unissued stock was to reduce issued stock by 20,000 shares. E. F. Johnson Company. In June, 1963, the company had repurchased 100 shares of stock from a former director and employee at book value of $126,907. On September 15, 1964, each share was reclassified into 280 shares. The resulting 28,000 shares of treasury stock (adjusted cost of $4.53 per share) were cancelled, coincident with the original public offering of 250,000 shares by selling shareholders (none by the company) at $15.50 on September 15, 1964. Nuclear Data, Inc. On January 7, 1964, Robert W. Schumann resigned as President and Chairman of the Board of this company. On February 19, 1964, the company purchased from Mr. Schumann and his wife, Barbara, a total of 132,045 shares at a total cost of $660,225. The repurchased shares represented 21.5 per cent of the 612,900 shares Issued. The purchase cost of $660,225 was large in comparison to the net income of $341,589 in 1963 and $396,489 in 1962. The purchase was financed in large part by funds borrowed from banks 70 for that purpose. The agreement with the bank provided that the corporation should "refrain from payment of cash dividends and repur chase of Its shares." The repurchased shares were still held as treasury stock as of February 28, 1967, the fiscal year-end. Vocaline Company of America. Inc. In the 8-K current report for the month of November, 1966, the company provided the details of a large block repurchase: As of November 1966 Midtex Incorporated (formerly Midwest Technical Development Corp.) of Minneapolis, Minnesota agreed to sell and the Vocaline Company of America, Inc. agreed to purchase 37,059 shares of the Vocaline common stock, $1.50 par value, at a price of $3.70 per share. The sum total of this transaction was $137,118.30 and completely eliminated Midtex Incorporated as a stockholder. The 37,059 shares purchased will be held by the Company as treasury stock. It is noteworthy that the 8-K report is sent to the Securities and Exchange Commission, not to the stockholders. In the annual report for 1966, issued in mid-March, 1967, some in formation was given but no details. A careful stockholder, looking at the liability side of the balance sheet, could have noticed the item of Treasury Stock, 37,059 shares, carried at par value of $55,588, as well as the parenthetical explanation of capital surplus "Excess of cost over par value, $81,530, of 37,059 shares of treasury stock acquired." Weiss Bros. Stores. Inc. In the 8-K report for the month of November, 1964, it was stated that "David B. Weiss, former president and chairman of the Board of Directors, died in an automobile accident one business day prior to the mailing by the Registrant of its Notice of Annual Meeting .... " In the 8-K report for September, 1965, the company reported the 71 following: On September 14, 1965, the Registrant acquired from the Estate of David B. Weiss 26 shares of its Class A common stock and 29,974 shares of its Class B common stock, representing in total approximately seven per cent of its Issued and outstanding common stock at a total purchase price of $407,636.70. This amount was paid to the said Estate on the date of this acquisition. The said purchase price of $407,636.70 represented a per share cost to the Registrant of approximately $13.59. The asked price of the Registrant's Class A common stock on September 14, 1965, was $14.50 and the bid price was $14.00. The Registrant’s Class B common stock was not traded . . . the Registrant has been in formed that the offer was made by the said Executors in order to obtain sufficient cash to pay certain of the Estate's ob ligations, including estate taxes. The Estate of David B. Weiss remains, after the consummation of this transaction, the owner of 48,241 shares of the Registrant's common stock (12.3 per cent of the total issued and outstanding common stock.) Exhibit A, dated September 3, 1965, detailed the basis for the establishment of the price of the block as based on the median between the bid and asked price, as of August 13, 1965, as established by a well-known brokerrdealer of New Orleans, less the standard brokerage commission and less a discount of 15 cents per share for the 14,987 shares of "B-4" stock and a discount of 75 cents per share for the 14,987 shares of "B-5" stock. ‘ Western Publishing Company Inc. The 1966 annual report of this company provided details on the acquisition of a very substantial block of stock, using borrowed funds in the amount of $10,000,000, thus increasing the company's financial leverage materially and increasing the earnings per share. An agreement completed in December 1966, to purchase for cancellation 290,587 shares of Western common stock was con summated in early January, 1967 . . . one of the terms of the 1964 exchange of Western common stock for one-half of the out standing shares of Golden Press, Inc., owned by Simon and Schuster, Inc., was the requirement that, before any contemplated 72 sale of such stock, Simon and Schuster must first offer it to the Company at the current market price. In conformity thereto, Simon and Schuster, Inc. on December 1, 1966, made an offer to sell its 290,587 shares of Western common stock to Western Publishing Company Inc. and Western thereupon accepted the offer to purchase such shares at the current market price of $20.50 per share. The transaction was completed on January 6, 1967 and had the effect of reducing the outstanding shares of common and Class B common stock to 3,447,449 shares. This purchase, and other requirements, led to a private sale to a group of Institutional investors of $10,000,000 principal amount of its 5 3/4 per cent Promissory Notes due 1982. Also, this block purchase of 290,587 shares amounted to 7.43 per cent of the 3,910,719 shares issued as of December 31, 1966 and to 7.77 per cent of the then outstanding 3,738,036 shares. Total treasury stock holdings of 463,270 shares amounted to 11.85 per cent of those issued. Zenith Laboratories. Inc. By the end of 1966 this company had repurchased 87,933 1/3 shares, 24.74 per cent of the total issue of $117,936.87. This represented a sizable investment for a company whose total assets were $1,687,462.36 and whose total debt was $764,803.95. In Post-effective Amendment No. 1 to its S-l registration statement, the company reported on its first acquisition of its own stock: In 1961 Zenith Laboratories, Inc. contracted to purchase from a principal stockholder 58,333 1/3 shares of common stock of the company at a cost of $75,000. To finance such acquisition, Zenith borrowed $75,000 from Weinger Associates. To induce Weinger Associates to make the loan, three principal stockholders of Zenith sold to Weinger Associates a total of 15,000 shares at a cost of $.50 per share, which would be registered but not offered for public sale unless and until a poBt-effective amendment to the Registration Statement is filed . . . the 58,333 1/3 shares were then acquired and returned to the Treasury of the Company, and are still Treasury stock. Also during 1961 the three top officials of the company (Messrs. 73 Benjamin and Harry Wiener and Bernard Bedrick) had donated 15,000 shares equally to the company. In 1962, 1,300 shares were repurchased at a cost of $3,640 and, in 1963, 3,400 shares were repurchased for a cost of $5,445. Thus, on December 31, 1963 there were 276,000 outstanding shares, exclusive of 78,033 1/3 shares held in treasury at a cost of $85,731.87. The three top officials then owned, in equal amounts, a total of 140,000 shares, 50.7 per cent of the stock outstanding. In Post-effective Amendment No. 4, received by the Securities and Exchange Commission on February 14, 1967, it was revealed that the company had repurchased 9,900 shares of its stock at a cost of $32,205. The 140,000 shares still owned by the three top officials at that time repre sented 52.2 per cent of the 267,555 shares outstanding, thus cementing their control even more strongly. The company had previously (May 15, 1964) advised the Commission as follows: The company submits annual reports to stockholders, which reports contain certified financial statements. No other re ports are expected to be sent by management, although from time to time the stockholders will be apprised of developments. In the above connection it is worthy of note that, although this company is subject to the Securities Act of 1933, it is not subject to Section 12(g) of the 1934 Act since it evidently does not have 500 stock holders or over, thus, it does not file either 10-K (annual) or 8-K (current) reports with the Commission. 2. Acquisition of other companies Six companies, of the fifty examined, either used repurchased stock for the purpose of acquiring other companies or repurchased their own 74 stock with the Intention of using It in future acquisitions. Included In this group were these companies: Aerosonic Corporation Electrolux Corporation Cannon Mills Company Metalfab, Incorporated C-E-I-R, Incorporated Ozite Corporation Aerosonic Corporation was organized as a Florida corporation in 1957. At its fiscal year-end, it had treasury stock of 4,305 shares. On March 31, 1966 it issued 502 shares in the acquisition of MacLeon Instru ment Corporation. Since the market on its stock on that date was 8 1/4 bid, 8 1/2 asked, it was a small transaction, without material significance. Cannon Mills Company was organized in 1887 and has been for many years a very profitable textile manufacturer. As of June 30, 1964 the company exchanged 3,960 shares of its treasury stock, voting common, for 990 shares of Travora Textiles, Inc. Of Travora*s 990 shares, Charles A. Cannon, chairman of the board of Cannon Mills, owned 150 shares and J. Harris Cannon, vice-president and a director of Cannon Mills, owned 520 shares, so the transaction was essenti ally within the family. Travora owned 1,500 shares of the voting common stock of Cannon, at a cost of $68,000, and this holding was added to Cannon Mill's treasury stock, after the remaining ten Bhares of Travora were ac quired in 1966. Cannon Mills had repurchased 2,010 of its voting common shares in 1963 and 8,827 shares more in 1964 so, after giving effect to the Travora purchase in June, it reported treasury holdings of 6,877 shares of voting common and 119,680 shares of Class B non-voting at a combined cost of $7,780,315, as of December 31, 1964. 75 A year later, December 31, 1965, the company had treasury stock holdings of 20,856 20/100 shares of voting common and 146,109 shares of Class B non-voting, at a combined cost of $11,733,612. These holdings represented 2.01 per cent of the voting common Issued of 1,037,189 shares, and 14.09 per cent of the Class B non-voting Issued of 1,037,009 shares. The 10-K report to the Commission, received on May 2, 1966, de tailed the principal holders of voting securities as of December 31, 1965: Of Record % Benefically % Charles A. Cannon 10,155 .98 150,000 14.46 The Cannon Foundation, Inc 167,118 16.11 none Ruth Coltrane Cannon Estate— Charles A. Cannon, Executor and Beneficiary 55,058 5.31 55,058 5.31 Cannon Mills Company had become subject to the proxy statement re quirements of the Securities Exchange Act of 1934 as of April 30, 1965. Accordingly on March 23, 1966 it sent out a notice of the annual meeting to be held April 12, 1966. Included was the proxy statement which stated, as one of the purposes of the meeting, the proposed authorization by stockholders of the purchase by the company of its own voting stock and its Class B non-voting stock. The resolution to be offered read as follows Resolved: That the directors are authorized in their discretion to purchase, prior to the next annual meeting of the stockholders out of surplus funds, not more than 100,000 shares of common voting stock and not more than 100,000 shares of Class B common non-voting stock at a price not exceeding the market value at the time, or times, of purchase. Said shares shall be held as treasury stock and be available for use in expansion of the business and 76 for general corporate purposes . . . management favors the adoption of the resolution. The 8-K Current Report for the month of April, 1966, showed 891,318 affirmative and 2,780 negative votes on the resolution to pur chase . The company thus was authorized, within the year, to purchase an additional 9.84 per cent of the outstanding voting common of 1,016,333 shares and also 11.22 per cent of the outstanding Class B non-voting common of 890.000 shares. At prevailing prices for the two classes of stock, this might have entailed an expenditure of funds of about $22,000,000. This com pared to net income of $25,394,995 in the year 1965. The proxy statement Included with the notice of the annual meeting to be held on April 11, 1967, contained a resolution regarding purchase of the companyTs own stock similar to that of the previous year. Management requested authorization to purchase 100,000 shares of voting common and 100.000 shares of Class B non-voting stock. The reason given was the same and no mention was made of a request for tender by shareholders. The annual report for 1967 indicated that the company had increased its treasury stock holdings over those of 1966 as follows: Voting common 3,634 shares Class B non-voting 1.640 shares TOTAL 5,274 The aggregate cost of the repurchases was $431,655, an average of $81.85 per combined share. C-E-I-R. Inc. in 1961 acquired a forty-two and one half per cent 77 Interest in a French computer company (CFRO); stock was used as part pay ment. In 1964 the company disposed of its interest and received back 14,000 shares. These were recorded at fair value of $157,500 and retained as treasury stock. In 1965 the company acquired the three Automation Institute Companies, for which were issued a total of 62,604 Class A shares, of which 14,000 shares came from the treasury. Since the company had 1,555,210 outstanding shares on September 30, 1964, its use of treasury shares for acquisitions has not been meaningful. The same is true of the company's Stock Option Plan, which permits the use of unissued or treasury shares. However, the 4,988 shares which were is sued to optionees in 1965 came wholly from previously unissued stock. Electrolux Corporation has not been an active repurchase of stock. At the end of 1962 it held 7,000 shares in its treasury, carried at cost of $112,000. In its Form 10 Registration Statement pursuant to Section 12(g) of the 1934 Act, filed as of April 30, 1965, details were provided on two acquisitions which had taken place on August 30, 1963 and January 14, 1964: In 1963 Registrant acquired 67,000 shares of its out standing common stock, 46,095 shares from the Wenner-Gren Founda tion for Anthropological Research, New York, N. Y. and 20,905 shares from a subsidiary of A. B. Electrolux, Stockholm, Sweden. These shares which had been held by these two stockholders for a number of years were sold to Registrant, at its request, at prices of $49.50-$50.00 per share, which were the approximate over-the-counter prices of the stock at that time. Such shares were eventually used by Registrant to acquire the assets and busi ness of White Mop Wringer Company. Hence the 7,000 shares of treasury stock owned at the end of 1962, plus the 67,000 shares"acquired as above, constituted the 74,000 shares which were exchanged for all business and assets of White Mop Wringer 78 Company. On January 14, 1964, 11,000 shares of treasury stock were ex changed for all the outstanding shares of ah unnamed subsidiary. In this Instance, the company did not reveal even to the Commission the cost, method, or date of repurchase, nor even the name of the acquired company. Metalfab, Inc. Prior to June 30, 1965, the fiscal year-end, the company had repurchased 3,000 shares, at cost of $21,188, and these were shown as treasury shares In the annual report. Note B of the report, In explaining the change in Stockholders Equity, mentioned the repurchase of 3,000 shares and added the following: Subsequent to June 30, 1965 the Corporation purchased an additional 31,810 shares of its common stock at an ag gregate price of $270,445. In connection therewith, $300,000 of short-term borrowings were obtained from a bank. The com mon stock reacquired is intended for use in acquisition of other businesses. The total cost of repurchased stock was $291,633; this compares with reported net income, after taxes, of $282,951 in 1965. The annual meeting was held on September 28, 1965 but the proxy statement of September 17th made no mention of the repurchases nor was the approval of stockholders sought. In Schedule XIII of the 10-K (annual) report for the fiscal year ended June 30, 1966, treasury holdings of 58,517 shares, at cost of $509,736, were shown. This was an increase of 23,707 shares from the previous item and represented a total increase for the year of 55,517 shares at a cost of $488,548. 79 The annual report to stockholders showed that on December 31, 1965 the company Issued 22,185 shares of common stock (previously held in trea sury) In exchange for the common stock of Fliteway Sales, Inc. On July 12, It had purchased improved real property for $72,500, payable in cash ($35,000) and 5,000 treasury shares. Included in the Notice of Annual Meeting (September 27, 1966) was the proxy statement of September 8th, which showed outstanding stock of 289,521 shares, not including 53,517 shares held of record by the Company in its treasury; also 22,185 shares held in a Management voting trust. The source of the 22,185 shares of common stock "previously held in treasury" was revealed with the filing of the 8-K Current Report for June 1, 1966 (received by the Commission on September 21st). The report read as follows: Re: Acquisition Fliteway Sales, Inc. Date: March 14, 1966 22,185 shares exchanged for 1,000 shares of Fliteway Sales, Inc. a. 3,342 shares formerly held as treasury shares b. 18,843 shares were transferred from a voting trust (Voting Trust Agreement dated May 1, 1965) No reason was given as to why the 18,843 shares were taken from the voting trust for this purpose when the corporation already held 58,517 shares of treasury stock. Ozite Corporation does not provide specific data with regard to its repurchase transactions. However, in its Form 10 Registration Statement (May 2, 1966) treasury stock was shown as consisting of 10,402 shares $6 preferred and 31,110 shares of common, at an aggregate cost of $1,110,191. 80 No breakdown was given. As of March 3, 1966, all directors and officers as a group held 533,880 shares, 57.13 per cent of the 930,660 shares outstanding. In 1958 the company had acquired 6,197 shares of common stock. This was held continuously as treasury stock. On December 30, 1965, the common was split five for one, resulting in 30,985 shares of treasury stock; an incidental purchase of 125 shares accounted for the reported total of 31,110. Nowhere was there any breakdown of cost as between the preferred and common stock. On November 1, 1965, the company acquired the West Virginia Sponge Rubber Products & Plastics Company for $300,000 and 13,000 shares of com mon stock. However, the information revealed by the company, either to its stockholders or to the Commission, was so fragmentary that it was not possible to determine whether unissued or treasury shares were used in the acquisition. 3. Stock option plans Six companies repurchased stock for the primary purpose of having stock available to fulfil requirements under stock option plans. In this category were these: American Heritage Publishing Company Dorchester Gas Producing Company Hanover Shoe Incorporated Sawhlll Tubular Products Incorporated United States Envelope Company H. Warshow & Sons Incorporated American Heritage Publishing Company, Inc.. in its October 15, 1962 81 Notice of Annual Meeting of Stockholders, indicated that optioned stock had been increased from 35,000 to 50,000 shares and said: "the Corporation has recently repurchased 10,000 shares of its common stock which are now held in the treasury. These shares would be available for issuance under the Plan." This information was confirmed in the annual report for the year ended June 30, 1963: "The company purchased during the year and now holds in its treasury an additional 10,100 shares of its common stock as a re serve for possible exercise of stock options." These shares were acquired at a total cost of $79,370, equal to $7.86 per share. In the fiscal year ended June 30, 1964, the company acquired an additional 7,000 shares of stock at a cost of $48,217. On March 19, 1964, an option on 4,000 shares of Class B stock at $8 was granted to Ralph W. Hench Jr., a vice-president. For the first time in nine years the company operated at a deficit, $364,588 and no stock was repurchased that year. In 1966 the company re ported a net income of $428,460 but no repurchases were made. However, 16,600 shares of common stock and 4,400 shares of Class B, acquired prior to June 30, 1964, were retained as treasury stock. The company continued its profitable course during the six-month period ending December 31, 1966, showing net income of $591,000; 3,600 shares of common stock were acquired at cost of $36,985 and held as treasury stock. There is no evidence that any of the outstanding options were exercised during this period. The number of issued common and Class B shares remained stationary at 516,632. 82 Dorchester Gas Producing Company had 841,547 shares of common stock, $1 par, Issued as of December 31, 1963. Of these, 90,007 shares had been repurchased and held as treasury shares (43,050 shares were reserved for Issuance under restricted stock options). Net in come had increased in 1963 to $565,105 from $34,529 in 1962, equal to $0.75 per share compared to $0.05. In its 10-K annual report for the year ending December 31, 1963, the ''parents1' of the corporation were revealed as: Metropolitan Dallas Corporation 64,047 shs. (8.5 per cent) (George S. Rooker and Preston A. Peak owned 79.5 per cent of voting stock) George S. Rooker, chairman of the board 20,000 shs. (2.7 per cent) Preston A. Peak, chairman of executive committee 23,000 shs. (3.1 per cent) Another director, D. H. Byrd owned 37,471 shares. The annual report for 1964 showed a reduction in treasury shares from 90,007 to 80,957, a net of 9,050. The 10-K form confirmed this figure indicating that they had been used for stock options. However, neither the purchaser, nor the option price, nor the market price at date of the exercise of the option was revealed. It did show the holdings of Metro politan Dallas as being 52,469 shares and of D. H. Byrd as 47,021, leading to the supposition that the latter had exercised the option and had pur chased an additional 500 shares. In the annual report for 1965 it was shown that treasury stock had declined to 63,037 shares, a net reduction of 17,920 shares from the preced- 83 ing year. 20,800 shares had been used to fulfil stock options and 2,880 shares had been repurchased at a cost of $27,870. The average repurchase price was $9.68 per share. This was the first stock to be repurchased in several years. The 10-K report provided further details. George S. Rooker and Preston A. Peak each had exercised options to buy 10,400 shares at $2.88 in December 1965 (b9d price was $12.25 in the over-the-counter mar ket). The repurchased stock had been acquired earlier in the year: May 11 500 shares June 8 1,540 June 21 840 TOTAL 2,880 $27,870 Also, 30,293 shares had been issued as a 4 per cent stock dividend, payable May 28, 1965. Previously unissued stock was used. The October 1965 issue of the "Official Summary of Security Trans actions and Holdings", as released by the Commission, showed that D. H. Byrd, who had exercised stock options in 1964 and received a 4 per cent stock dividend in May, 1965, had sold 4,400 shares on September 28, 1965, leaving him with 44,397 shares, plus 69,076 shares owned by a holding company which he controlled. The same source, in the January, 1966 issue, showed that Mr. Rooker and Mr. Peak had exercised options on December 21, 1965. In May, 1966 the company’s 8-K report indicated that J. G. Eckel, president, had exercised a stock option to buy 14,560 shares in April at $3.85 (bid price of $12,125 in over-the-counter market) and that treasury shares were used for this purpose. The "Official Summary" gave the precise 84 date of April 26th and his total holdings, subsequent to exercise of! 26,208 shares. Using previously unissued stock, 32,043 shares were issued by the company as a 4 per cent stock dividend, payable May 27, 1966. The company also reported that "during the period after December 31, 1965, and prior to May 13, 1966, the registrant purchased a total of 11,612 outstanding shares of common stock which were transferred into its treasury." The company repurchased an additional 500 shares between May 13 and December 31, 1966; also 8,855 shares in the period from January 1 to March 15, 1967; but no details as to cost were provided. Hanover Shoe Incorporated filed a Registration Statement with the Commission on March 23, 1956, using Form S-l as required under the Securi ties Act of 1933. No repurchases of stock were reported until the year ended December 31, 1962, at which time 4,900 shares were shown as treasury stock, at a cost of $72,462. However, nothing was said by the chairman of the board, L. B. Sheppard, about the repurchase in his letter "To Our Stockholders." Likewise, "no proxy statement, form of proxy, or proxy soliciting material was sent to stockholders for the last annual meeting." No options were granted in 1962 but an option for 600 shares was exercised at $14.74 (market value of $15.38 on date of exercise). For this option previously unissued stock was used, increasing issued stock to 604,030 shares. At the end of 1963 treasury stock had been increased to 14,233 1/3 shares, at a total cost of $204,587. Nothing was said to stockholders nor were any new options granted. Yet, on February 4th, an option was exercised 85 to purchase 1,500 shares at $14.41 (market value of $15.88). Judging only from the amount of Issued stock, the conclusion was drawn that treasury stock was used. In 1964 the company reported holdings of 12,933 1/3 shares of treasury stock at cost of $186,647. However, 3,100 shares were purchased, at four different dates during the year, at the option price of $14.41 (market prices varied from 16 5/8 to 17.6875 at date of exercise). Since the net reduction in treasury shares was only 1,300 shares, the presum ption is that the company repurchased 1,800 shares but made no mention of the fact. In 1965 the company's annual report showed that treasury shares had been reduced to 4,513 1/3 shares, a reduction of 8,420 from the previous year. Stock options for that amount were exercised and the treasury stock cost $121,808. No stock options were granted in 1965 and it was reported that the Restricted Stock Option Plan which had been adopted on April 6, 1959 was terminated on May 14, 1964. The beneficial holdings of the two chief officers, L. B. Sheppard and R. H. Sheppard, totalled 270,015 shares, 44.7 per cent of the 604,030 issued shares. In 1966 the holdings of treasury stock dropped to 113 1/3 shares, a reduction from the previous year of 4,400 shares. E. S. Fitzgibbons, the general manager, exercised options in the amount of 4,800 shares, of which 4,300 were previously unissued and only 500 shares were treasury stock. Hence, 3,900 shares must have been disposed of in some fashion but details were not provided. 86 Basically, the company, In its reports to stockholders and to the Commission, disclosed no facts as to its repurchases, either the amounts, cost or timing. The proxy statements showed the number of treasury shares held but not the cost. What the company did reveal was the cost of treasury shares which were sold to optionees and the number of treasury shares, and their cost, held at the close of the fiscal year. Complete disclosure as to repurchase, per se, was definitely inadequate. Sawhill Tubular Products. Inc. was a closely-held corporation prior to the initial public offering by certain stockholders of 225,000 shares at $18.25 on February 24, 1959. The first repurchase of stock occurred in 1963; the annual report showed 1,500 shares in treasury, at cost of $18,375. In 1964 the company repurchased 2,000 shares on August 20, 1964; of this amount, 600 shares were sold to optionees. The net addition of 1,400 shares resulted in a total of 2,900 treasury shares at cost of $37,025. In 1965 no repurchases were made but 110 shares were sold to optionees on March 9th and December 28th, resulting in treasury shares held of 2,790 at cost of $35,678. In 1966 during the period from March 28 to May 16 the company re purchased 5,747 shares in the over-the-counter market; of these, 1,242 shares were sold to optionees from January 11 to August 19. The net addition of 4,505 shares brought treasury holdings to 7,295 shares at a cost of $123,538. United States Envelope Company had a change of control in 1960. On May 19 the West Virginia Pulp & Paper Company purchased 176,088 shares 87 of preferred stock and 357,898 shares of common. There were at the time 627,535 shares of common Issued and outstanding. No stock was repurchased In 1961 but In 1962, 1,261 shares were shown as treasury shares, at a cost of $29,000. At fiscal year-end of October 31, 1963, treasury shares had risen to 3,191 at a cost of $60,000. On April 13, 1964, the company sent to stockholders a Notice of Special Meeting of Stockholders and Statement Regarding Proxies; the company recommended adoption of a Stock Option Plan covering 40,000 shares, as follows: The plan provides that the stock to be Issued on the exercise of options may be either new shares of common stock of the Company or shares reacquired and held in the CompanyTs treasury. This provision has been inserted in the Plan for the sake of flexibility in the event the Company at any time may not have sufficient shares of stock available in its treasury. The Board In approving the Plan has specifically directed that only treasury shares be used until the Board directs otherwise. At the end of the 1964 fiscal year treasury shares had risen to 13,123 shares, at a total cost of $233,000, but no options were granted under the plan that year. In 1965 no options were granted under the plan nor were any additional shares held as treasury stock. The proxy statement for the annual meeting to be held on February 11, 1966, indicated that as of December 24, 1965, 11,462 treasury shares were held in trust. The annual report for 1966 amplified this by stating that these shares, previously acquired at cost of $188,000, were transferred to an Independent trustee for possible use under the Stock Option Plan. This left a balance of 1,661 shares as treasury stock. Options were granted for 9,900 shares during the year at $18.75 (fair market value at date of 88 grant) but none were exercised in 1966. H. Warshow & Sons. Inc.. in its first annual report since the company became publicly held, reported 47,716 treasury shares of Class B stock, at cost of $230,596, reserved for options granted at prices of $6.4075 and $6.8294. At that time the Warshow family comprising Joseph Warshow, the president, his brother-in-law, nephew, and two sons, and their respec tive wives, held a combined total of 543,712 Class B shares. These were equivalent to 84.27 per cent of the 645,216 issued shares and 91.00 per cent of the 597,500 shares outstanding. On February 4, 1963, Donald W. Layton, Joseph Warshow's nephew and a vice-president, exercised an option on 32,240 shares of Class B stock at 6.4075 (no market value on Class B, but value of $12.4375 on Class A into which Class B was convertible). On April 29, 1963, the corporation granted options, good for five years, on a total of 20,000 shares of Class A stock to the two Warshow sons and Donald W. Layton, nephew. The option price on 15,000 shares was $11.97 and on 5,000 shares, $10.34. The Wall Street Journal of April 30 showed the April 29 closing price as 10 1/4 bid and 11 1/2 asked. The annual report for 1963, as of June 29, showed treasury holdings of 15,476 Class B shares, reflecting exercise of 32,240 shares by Donald W. Layton, and a new holding of 7,220 Class A shares. No purchase cost was shown for the Class A shares nor was any time of purchase shown. The 8-K report, for the month of January, 1964, indicated that "Company purchased 8,338 shares of its Class A stock in the over-the-counter market at market prices availing on the various purchase dates during 1963." 89 No cost was given, no reason, and no prior authorization by stockholders was indicated. No options to purchase securities were either granted or exercised during 1964 and 1965. On June 30, 1966, treasury holdings of 8,338 Class A and 15,476 Class B were still maintained. On January 3, 1967, Robert B. Klausner, vice-president, exercised an option to buy 6,878 shares of Class B at 6.8294. It seems evident that the repurchase program of this company was devoted basically to fulfilling requirements under the Stock Option Flan. 4. For bonuses, employee incentive awards, and prizes Analysis of company records indicated that five companies used stock repurchases primarily as incentive awards: Asgrow Seed Company Boston Herald-Traveler Corporation The Cincinnati Enquirer, Incorporated Colonial StoreB, Incorporated Pacific Gamble Robinson Company Asgrow Seed Company was originally established in 1956 as the Everett B. Clark Seed Company. In the S-l Registration Statement under the 1933 Act, the company reported that on October 14, 1963, 380 treasury shares had been transferred to eighteen executives as part of their executive bonus; on November 2, 1964, 1,792 shares were transferred to forty-one employees under a similar arrangement. The stock was split two for one on August 25, 1965. There after, on October 28, 1965, a total of 3,407 shares were distributed to thirty-five employees. Also, on May 7, 1964, (prior to the stock split) 398 shares were sold from the treasury to a registered broker-dealer. 90 It has been possible to piece together bits of information in order to determine the amount of stock repurchased by the company. The company did not see fit to provide such data nor was it required to do so. Nor were figures provided as to the cost of repurchase. The only specific information, other than recorded above, were the holdings of treasury stock at year-end and its cost. 1966 1965 1964 Treasury stock (shares)* 2,361 3,368 600 Treasury stock (cost) $26,708 $30,322 $ 4,500 Repurchase of stock shares* 2,400 6,352 1,340 cost ? ? ? ♦Adjusted for two for one stock split, August 25, 1965. The holdings of treasury shares, and cost, at year-end 1964 and 1965 were approximately half of the repurchases during the year. It is evident that year-end holdings, a figure currently required by the Com mission, do not accurately reflect the extent of a company's repurchase program. Boston Herald-Traveler Corporation made no repurchases of stock prior to 1966. In that year, out of 549,016 issued, 3,658 shares were re purchased. Of this amount 1,721 shares were distributed to employees; the remaining 1,937 shares were not shown as treasury stock but as an asset: Boston Herald-Traveler Corporation common stock held for employee service awards (1,937 shares) $146,000. In the annual report, under "review 6f operations", it was stated: Another gratifying program was the distribution of shares of the Company's common stock to employees with service of twenty-five years or more. Twenty-five year employees received 91 two shares with one additional share for each additional five years of service. There were 1,721 shares distri buted to 497 people. This is a continuing program, and the employee reaction has been most favorable. The 10-K report commented on its distribution of 1,721 shares, with further elaboration: An aggregate of 3,658 shares were acquired by or for the Registrant at various times during 1966 to be used for such distribution and for possible similar distribu tions in the future. Since such shares were acquired for this specific purpose and not for retirement they are not shown as treasury shares on the balance sheet of the Registrant. It is of interest to note that the stockholders, at a March 21, 1967 meeting, approved a Qualified Stock Option Plan. There was no in dication whether the company intended to use unissued stock or treasury shares in this connection. The Cincinnati Enquirer. Inc. The annual report for the year ending September 30, 1965 showed 840,360 whares of issued common stock, of which 7,599 shares were held in treasury at cost of $193,199. No comment was made in the report to stockholders, but the 10-K report to the Commission stated that: On April 19, 1965, the Company commenced purchasing its common shares, no par value, on the open market (over- the-counter), and as of September 30, 1965, the company held 7,599 of these shares as treasury shares. The annual report for 1966 showed treasury shares of 7,709, at cost of $207,711, a net Increase of 110 shares. However, the source and applica tion of funds schedule was more revealing: Disposition of $211,778 Purchase of $210,975 treasury stock treasury stock 92 Again the 10-K report to the Commission provided further details: From time to time during the year the Company purchased 7,811 of Its common shares on the open market (over-the-counter). On March 11, 1966, 7,500 common shares of these treasury shares were Issued to Francis L. Dale, President and Publisher of the Company. In addition, the company gave away 201 treasury shares as prizes. At September 30, 1966, the company held 7,709 common shares as treasury shares. Control of the company was essentially held by the Enquirer Share holders Second Voting Trust which, as of July 31, 1965, had superseded the First Voting Trust created originally on August 1, 1952. The Second Voting Trust on September 30, 1966, owned 534,993 shares, equal to 64.2 per cent of the outstanding shares. Of this amount, as stated in the proxy statement for the annual meeting on January 17, 1967: The E. W. Scripps Company is the beneficial owner of 491,436 common shares of the Company (approximately 59.2 per cent of the outstanding shares) through the holding of Voting Trust Certificates representing that number of shares. The 7,500 common shares were issued to President Dale in accordance with his employment agreement. In addition to a specific salary, under a Contingent Compensation Plan, he was permitted as a bonus award to "earn out" over a five year period a portion or all of the 7,500 shares set aside, in accord with the determination made annually by the Board of Directors. It is evident that the 1966 year-end treasury stock holdings did not reveal the magnitude of the repurchase program that year. Colonial Stores. Inc. has a history of profit-sharing distributions in common stock. 93 Total Stock Treasury Distributed Stock 1959 8,983 shs 1,869 shs 1960 11,642 1,801 1961 7,377 2,542 1962 4,995 738 1963 9,090 769 In the annual report for 1964, the Issued shares totalled 2,798,574, of which 8,368 were treasury shares at a cost of $187,612, up substantially from 4,407 shares at cost of $79,333 at the end of 1963. In March, 10,169 shares of treasury common stock, having a market value of $190,770, were distributed, Indicating that 14,130 shares must have been repurchased. However, this fact was not mentioned nor was any cost Indicated. In 1965 8,831 treasury shares, at cost of $245,616, were held; 8,542 shares of treasury stock were distributed, thus indicating the repur chase of 9,005 shares during the year. In 1966 the company held 9,331 shares of treasury stock, at cost of $259,241. No shares were distributed that year, so the 500 repurchased shares presumably were added to previous holdings in the treasury. The major stockholder of the corporation throughout this period was the National Food Products Corporation, which held 868,275 shares, or 31.5 per cent of the total outstanding as of February 16, 1960. Its holdings increased gradually, each year, reaching 926,804 shares in 1962 and 938,294 shares at February 16, 1967, equal to 33.2 per cent of the out standing stock. Although the yearly discharge of bonus incentive liability by the issue, in part, of reacquired treasury shares was clearly evident to 94 interested stockholders, it is likewise true that more adequate dis closure of details relative to the repurchase program could have been made. There is nothing in the record to show that the approval of stockholders was ever sought or granted. Pacific Gamble Robinson Company filed an original Form 10 Regis tration Statement, pursuant to Section 12(g) of the 1934 Act, with the Commission on May 28, 1965. As of the end of 1964, 212 shares at a cost of $2,611 were held in the treasury. In the annual report for 1965 nothing about repurchase was men tioned in the "Letter to Stockholders" but note 6 to the balance sheet read as follows: At December 31, 1965, 1,078 shares of the Company's common stock purchased on the open market were held in its treasury and included in sundry other assets at cost of $15,818. The 10-K report to the Commission was more revealing. In it was disclosed the issuance of 876 shares to employees as prizes and 4,719 treasury shares purchased at various dates. However, the cost of the repurchased shares was not shown. In 1966 note 6 to the balance sheet stated that: At December 31, 1966, 2,908 shares of the Company's common stock purchased on the open market were included in sundry other assets at cost of $33,741. At December 31, 1966, there were no stock options outstanding. Again the 10-K report was more informative; 1,027 shares were issued to employees as incentive awards and 2,800 treasury shares were purchased at various dates. As is evident from the above, the information about repurchases 95 TABLE VII INSIDER STOCK HOLDINGS OF FIFTY UNLISTED INDUSTRIAL COMPANIES Per Cent of Outstanding Stock Aerosonic Corporation 50.0 % American Heritage Publishing Company, Inc. 55.8 Asgrow Seed Company 54.4 Athlone Industries n.a. AVM Corporation 27.0 Barnes-Hind Pharmaceuticals, Inc. 52.4 Bayless (A. J.)Markets, Inc. 40.86 Bergstrom Paper Company 41.86 Boston Herald-Traveler Corporation 16.3 Bristol Brass Corporation 6.6 Cannon Mills Company 31.36 *C-E-I-R, Inc. 18.1 Cincinnati Enquirer 59.2 Colonial Stores, Inc. 33.1 W. S. Dickey Clay Manufacturing Company 19.4 Dorchester Gas Producing Company 16.9 Economics Laboratory, Inc. 19.0 Electrolux Corporation 48.8 Girltown, Inc. 73.0 Global Marine, Inc. 36.10 Gulf Interstate Company 29.3 The Hanover Shoe, Inc. 44.7 Heath Tecna Corporation 56.45 Hexcel Corporation 35.00 Hudson Pulp & Paper Corporation 63.54 Charles Jacquin et Cie., Inc. 74.7 Jessop Steel Company n.a. E. F. Johnson Company 41.0 Kentucky Fried Chicken Corporation 82.6 McCormick & Company, Inc. 49.33 96 TABLE VII (CONT'D) INSIDER STOCK HOLDINGS OF FIFTY UNLISTED INDUSTRIAL COMPANIES Per Cent of Outstanding Stock Metalfab, Inc. 43.1 % Midas-International Corporation 64.67 Midwest Rubber Reclaiming n.a. Monmouth Park Jockey Club 80.0 Nuclear Data, Inc. 22.0 Ozlte Corporation 54.65 Pacific Gamble Robinson Company 12.8 Petrolite Corporation 46.0 Reynolds & Reynolds Company 89.0 Sawhill Tubular Products, Inc. 38.27 Shepard Niles Crane & Hoist 8.96 Super Valu Stores 67.41 United States Banknote 27.24 United States Envelope 55.5 Vocaline Company of America 22.7 Wackenhut Corporation 67.5 H. Warshow & Sons, Inc. 54.5 Weiss Bros. Stores, Inc. 64.77 Western Publishing Company 17.6 Zenith Laboratories, Inc. 50.7 SUMMARY 20 companies 50% or over 13 companies 30 - 50% 11 companies 15 - 30% 6 companies under 15% 50 ^acquired 11/22/67 by Control Data Corporation. Source: Company 10-K (annual) reports on file with Securities and Exchange Commission, Washington, D. C. 97 was very sparse. Amounts repurchased in 1964, 1965, and 1966 were reported to the Commission but not directly to the stockholders. Neither the cost, the reason, nor the potential use of treasury shares was expressed to them. It was possible for a probing stockholder to learn partially what had happened months after the fact; but there was no approval sought, or information given, in advance. 5. Available at a low price Of the fifty companies whose reports were scrutinized, three re purchased stock primarily because it was available at a low price. These were Hexcel Corporation. Kentucky Fried Chicken Corporation, and Shepard Niles Crane & Holst Corporation. Hexcel Corporation (formerly Hexcel Products, Inc.) was incorporated in 1948 but made its first public offering of stock— 50,000 shares at $17.75'— on July 31, 1959. At the end of 1959 the five principal officers owned a total of 98,336 shares, 39.44 per cent of the 249,330 shares issued and outstanding. No repurchase took place in 1961 but the 8-K report for June, 1962, provided details of action which had been taken: At a special meeting of the Board of Directors of Hexcel Products, Inc., held May 31, 1962, the Vice-President of Finance was directed to purchase capital stock of the company on the open market to hold as treasury stock. The authoriza tion was for not more than 15,000 shares at a price not to exceed $12.50 per share. During the month of June, a total of 12,635 shares was purchased for a total price of $143,000, or an average of $11.31 per share. In the quarterly report to stockholders, for the period ending June 30, 1962, the letter from the president stated: 98 An opportunity to purchase a limited amount of Hexcel Products, Inc. stock on the open market at a price below book value resulted from the stock market drop. Subse- quently in June the company purchased 12,635 shares to be held as treasury stock. This reduction In shares outstanding will be reflected in increased earnings per remaining shares. The 10-K report for 1962 revealed that treasury holdings had in creased to 20,575 shares, acquired at a total cost of $222,228. It is interesting to note that the net income of the company for that year was $253,802. The company mentioned the repurchase specifically to its stockholders in the 1962 annual report and noted that the Board of Direc tors, at its meeting on February 28, 1962, had increased the annual divi dend from $0.20 to $0.30 per share. In 1963 dividends were Increased to $0.40 per share. Although no additional options were granted in 1963, an option on 10,000 shares granted in 1961 to the president, W. S. Powell, was reduced in price from $15.91 to $11.17 per share "to reflect declines in the market value of the stock." In 1964 all long-term debt was retired, the quarterly dividend was raised from $0.10 to $0.15 per share, and a stock split of 6 for 5, payable February 15, 1965, was announced, as was the intention to maintain the $0.15 quarterly dividend on the increased number of shares to be outstanding. The company continued to prosper during 1965 and 1966. In the latter year, net income rose to a new high of $966,375. Throughout this period, from 1962 to 1966 Inclusive, the treasury stock of 20,575 shares was maintained unchanged. Although stock options were exercised during that time, unissued stock was used to fulfil the 99 requirements. According to the proxy statement issued for the annual meeting in May, 1967, the total holdings of six principal officers were 130,297 shares, equal to 35.0 per cent of the 372,269 shares then issued. Kentucky Fried Chicken Corporation has had a brief existence and its experience with repurchases of stock is limited. It was incorporated on March 4, 1964 when it acquired all of the outstanding stock of the former Kentucky Fried Chicken Inc. for $2,000,000. Throughout 1964 and 1965 there was no quoted market for the stock of the new company. However, on December 30, 1965, 20,000 shares were repurchased at $10.00 per share and held as treasury stock. There had been 510,000 shares outstanding at September 30, 1965, the end of the previous fiscal year, with a stated value of $1,654,496, so that the repurchase was equal to almost four per cent of issued stock. According to the 10-K report for the fiscal year ended September 30, 1966, the company had resold, between December 31, 1965 and January 20, 1966, 7,300 shares, leaving 12,700 shares in the treasury. The stock was split two for one, effective February 11, 1966, thus doubling the amount of treasury shares. On March 17, 1966 425,000 shares of stock were publicly offered at $15.00 per share, all from present shareholders, none from the company. The prospectus of that date included the balance sheet of January 31, 1966 which showed treasury stock of 25,400 shares at a cost of $127,000. From this information it was possible to determine that the company had resold the 7,300 shares at the purchase price of $10.00 per share, although the company did not so indicate specifically. Adjusting for the stock split 100 on February 11th, the price was $5.00. After the new issue offering on March 17th at $15.00 per share, the stock was quoted in the "pink sheets" at 21 1/4-21 1/2 on March 31st, and at 28-28 1/4 on Spetember 30th. The annual report for the year ending September 30, 1966 showed 27,400 treasury shares at a cost of $184,500; and the 10-K report amplified this by indicating that 2,000 shares had been repurchased in the over-the- counter market on September 29th at prices ranging between $28.50 and $28.75 per share (a total of $57,500). This proved to have been a good purchase. A year later, September 29, 1967, the market price was 82 1/2-84, despite the five for four split on December 29, 1966. The company provided scant information to stockholders as to its repurchases. Such disclosure as was made was reported in the 10-K reports to the Commission and in the prospectus required by the new issue. Prior approval was not sought from the body of stockholders and little data was provided subsequent to the repurchases* Shepard Niles Crane & Hoist Corporation has been in business since 1903. Although its stock has been traded in the over-the-counter market for many years, information about the company's activities has been rela tively meager. However, it filed its Form 10 Registration Statement on April 26, 1965 and revealed its repurchases. At that time 287,000 shares had been issued, 31,279 shares were held in treasury, and 255,721 shares were outstanding. On August 13, 1947 the company had split its stock five for one, 101 after which 281,595 shares had been outstanding and 5,405 shares were in the treasury. Subsequent repurchases were explained in this way: Since August 13, 1947 Registrant has purchased a total of 25,874 shares of common stock on the market at various prices not in excess of the book value of the stock, the largest single purchase in excess of three per cent of the issued and outstanding common stock, consisting in a purchase of 21,900 shares in December 1962 at a price of $18.00 per share. On May 21, 1963 the company adopted its 1963 Employees Stock Option Plan covering 25,000 shares of issued and reacquired common stock. However, no options were granted under the Plan and it became ineffective on June 9, 1966, according to the Notice of Annual Meeting on May 16, 1967. At the end of 1966 the company still had 287,000 shares Issued, of which 31,279 shares were in the treasury. As of April, 1965 no person owned of record or beneficially more than ten per cent of any class of securities. All directors and officers of the company as a group, directly and indirectly, had beneficial owner ship of 22,904 shares, 8.96 per cent of outstanding stock. There have been, according to the "Official Summary", no significant changes in holdings since then. 6. Use as stock dividends Analysis of the records indicated that only two companies, Bristol Brass Corporation and Charles Jacquin et Cie Inc., repurchased common stock for the primary purpose of paying stock dividends. Bristol Brass Corporation has 500,000 shares of $10.00 par common stock outstanding. As of December 31, 1963, 10,020 shares were held in 102 Its treasury, at cost of $102,091. A year later the treasury stock amounted to 15,036 shares, at cost of $147,770. Since no additional v data was offered, it was assumed that 5,016 shares were repurchased during 1964 at a cost of $45,679. In 1965 there were 400 shares purchased on December 8th at cost of $3,700. At year-end a total of 15,436 treasury shares were held at an aggregate cost of $151,470. This information was gleaned from the schedule of use of working capital. However, no mention was made of the reason for repurchase, either in the annual report or in the proxy statement, dated April 7, 1966, which was sent with the notice of annual meeting held on April 28th. The 8-K report for March 1967 indicated a restriction imposed by a loan agreement: "it will not. . . acquire any of its capital stock, except to the extent of 75 per cent of consolidated net income after December 31, 1965." In 1966 the company completely eliminated its treasury shares, according to the 10-K report: Shares of tresury stock sold November 10, 1966 809 November 18, 1966 1.000 1,809 Shares of treasury stock issued as a stock dividend November 15, 1966 13.627 TOTAL 15,436 103 Despite the fact that repurchases took place for several years and that the treasury shares were not Issued as a stock dividend until November 15, 1966, a careful scrutiny of company reports has failed to uncover any disclosure to stockholders. Charles Jacquin et Cie.. Inc. was one of the few companies which provided very complete information about its repurchase activities. Throughout the period 1962 to 1966 inclusive, the company had 408,000 shares of issued stock. During the fiscal year ended September 30, 1962, the company reacquired 2,300 shares at a cost of $14,651.38; on May 29, 1962 it dis tributed 8,000 shares as a two per cent stock dividend. In 1963 the company repurchased 7,902 shares at cost of $46,179.92 and paid a two per cent stock dividend of 7,996 shares on May 31, 1963. During 1964 the company acquired 11,884 shares at cost of $61,491.34 and distributed 7,790 shares as a two per cent stock dividend on May 22nd. Between September 30, 1964 and September 30, 1965 the company pur chased 20,633 shares in the open market at prevailing prices; the total cost was $109,906.02. In its 8-K report for April, 1965 the company showed the number of shares bought each month since the previous September; the lowest and highest prices paid per share were recorded ($4.25 in November 1964 and $6.00 in April, 1965) as well as the aggregate cost. On May 26, 1965 a three per cent stock dividend distributed 11,462 shares of treasury stock acquired on the open market at cost of $58,883. In 1966 the company repurchased 8,110 shares at cost of $53,134.96 and paid a three per cent stock dividend of 11,648 shares, acquired at 104 cost of $66,512, on May 20th. On May 23, 1967 a three per cent dlvldent of 11,702 shares was distributed; 5,997 shares of treasury stock had been acquired since September 30, 1966. The tabular presentation below shows the holdings, and cost, of treasury shares at the end of each year; also the number of shares repur chased and the number of shares distributed as stock dividend, with their respective costs. 1966 1965 1964 1963 In treasury Shares 11,933 15,471 6,300 2,206 Cost $67,642 $81,019 $29,996 $13,958 Repurchase of stock Shares 8,110 20,633 11,884 7,902 Cost $53,135 $109,906 $61,491 $46,180 Stock dividend Shares 11,648 11,462 7,790 7,996 Cost $66,512 $58,883 $45,453 $46,873 It is noteworthy that the holdings of treasury shares at year-end do not adequately reflect the amount of shares repurchased and/or distributed in the form of a stock dividend. Yet current Commission re gulations do not require the complete presentation provided above. Without it the stockholder is uninformed. 7. No reasons given Of the fifty companies which repurchased stock, nineteen, 38 per cent, mentioned no reasons for this expenditure of funds in their reports to stock holders or in the reports which the 1934 Act required that they furnish to the Commission. These companies Included the following: 105 Athlone Industries Barnes-Hind Pharmaceuticals Incorporated Bayless (A. J.) Markets, Incorporated W. S. Dickey Clay Manufacturing Company Economics Laboratory Incorporated Girltown Incorporated Gulf Interstate Company Heath Tecna Corporation Hudson Pulp & Paper Corporation Jessop Steel Company McCormick & Company, Incorporated Midas-International Corporation Midwest Rubber Reclaiming Company Monmouth Park Jockey Club Petrolite Corporation Reynolds & Reynolds Company Super Valu Stores, Incorporated United States Banknote Corporation Wackenhut Corporation Characteristics of Repurchasing Companies A. They are almost uniformly profitable. The unlisted industrial companies included in this study were found to be profit-makers, particularly during the period of repurchase. There were a few exceptions. One company, American Heritage Pub lishing Company, Inc.. incurred a net loss of $364,588 in 1965, the first in nine years. No stock was acquired that year nor in the following year, 1966, even though a sizable net income of $428,460 was then shown. However, in the six months' period ending December 31, 1966, 3,600 shares were acquired at a cost of $36,985. Athlone Industries had operated at a deficit from 1962 to 1965 Inclusive, but its repurchased stock had been acquired in 1957 and prior years. C-E-I-R. Inc. lost money in 1962 and 1963 but its acquisition of stock occurred in 1961. A substantial net income was reported in 1964, 1965, and 1966. 106 B. There is a high degree of voting control by the family group, or by the officers and directors. As shown by Table VII, of the fifty companies studied, twenty reported control of at least fifty per cent of voting stock. Thirteen indicated control of thirty to fifty per cent; and eleven reported holdings of fifteen to thirty per cent. Only six showed holdings by management in terests of under fifteen per cent. Of these seven companies— Athlone Industries. Boston Herald-Traveler. Bristol Brass. Jessop Steel. Midwest Rubber Reclaiming. Pacific Gamble Robinson, and Shepard Niles Crane & Hoist— specific data was furnished on only the latter two companies. It is possible, then, that a different con clusion might result from more adequate data. Without such data, however, thirty-three companies, or sixty-six per cent of those studied, were controlled to the extent of at least thirty per cent by management. C. These companies typically pay cash dividends. Of the fifty companies whose reports were scrutinized, forty-three, eighty-six per cent, paid dividends to stockholders in cash. The following seven companies did not: Athlone Industries Barnes-Hind Pharmaceuticals, Incorporated C-E-I-R, Incorporated Global Marine Heath Tecna Charles Jacquin et Cie, Incorporated Nuclear Data Athlone Industries (Holland Furnace Company until May 24, 1966) had not paid dividends since 1961. It had operated at a deficit from 1962 to 1965 inclusive. Barnes-Hind Pharmaceuticals. Inc. has a company policy against pay ing cash dividends, as stated in its prospectus dated September 28, 1965: The Company has never paid cash dividends on its common stock. It has been the policy of the Company to use funds available from earnings to finance the development of its business. It is expected that this policy will continue. C-E-I-R. Inc. had a substantial operating loss in its fiscal years of 1962 and 1963. It earned a goodly profit in 1964, 1965, and 1966 but had a deficit in its retained earnings account which precluded dividends. Global Marine Inc. was organized out of a merger in October 1964. It has paid dividends on preferred stock but none on common. Heath Tecna Corporation was organized as recently as April 25, 1958 it has become a most prosperous business since then. Net sales expanded from $6,137,918 in 1964 to $24,086,323 in the fiscal year ended April 30, 1967. In the same period net Income rose from $202,301 to $1,724,998 in a steady upward trend. Certainly, the company’s earnings picture justi fied the initiation of dividends, unless the rapid growth required the retention of cash funds, in the opinion of the directors. At any rate, no payments have been made nor any explanation or exposition of the company’s attitude in this regard. Charles Jacquin et Cie.. Inc. followed a policy of paying dividends in stock, rather than in cash. In the four fiscal years ending September 30, 1963-1966 inclusive, the company repurchased a total of 48,529 shares at a cost of $319,241 and paid dividends of 38,896 shares in treasury stock which had cost $217,721. From September 30, 1966 to May 8 , 1967 additional pur chases of 5,997 shares were made in the open market and 11,702 shares were 108 used to pay the three per cent stock dividend on May 23rd. The company did not state its policy in so many words, but its actions could leave no stockholder uninformed. Nuclear Data. Inc. had operated profitably during the three fiscal years ending February 28, 1962 to 1964 inclusive. However, on February 19, 1964, the company purchased from Robert W. Schumann, the then president, and his wife a total of 132,045 shares (21.5 per cent of the issued stock) for an aggregate purchase price of $660,225. The purchase was financed by the issuance of five per cent unsecured notes. The loan agreement stated "the Corporation has agreed, among other things, to maintain net current assets of at least $700,000, to refrain from payment of cash dividends and repurchases of its shares . . . " Under a subsequent refunding plan, in January 1966, the company agreed to a further restriction on payment of cash dividends and repurchases of its shares. D. The repurchasing companies, with the exception of those which used shares specifically in mergers, for options, dividends, and bonuses, continue to retain the repurchased stock as treasury shares. 1. Of the nine companies which purchased to remove large blocks from the market, only four companies did not hold on to the stock. AVM Corporation used its shares as stock option, and Global Marine as bonuses; E. F. Johnson Company had purchased 6,160 shares from a former director and employee in June 1963 at book value. These were cancelled on December 31, 1964. Western Publishing Company repurchased 290,587 shares from Simon and Schuster, Inc., per previous agreement, and cancelled the stock. 109 The other five companies retained their holdings in the treasury. 2. Of the six companies which acquired stock for the primary purpose of acquiring other companies, Cannon Mills and Ozite maintained their holdings in the treasury. 3. Of the three companies which repurchased stock because it was available at a low price, Hexcel Corporation and Shepard Niles Crane & Hoist Corporation made their acquisitions in 1962 and held them intact throughout. The third company, Kentucky Fried Chicken, repurchased 20,000 shares in December 1965, sold 7,300 shares within three weeks, and has kept the remainder. 4. Of the six companies which indicated that the purpose of their repurchased stock was in connection with stock options, two companies, American Heritage Publishing Company and H. Warshow & Sons. Inc., kept their holdings intact and did not use them for options. 5. Of the nineteen companies which provided no specific reason for repurchasing, eighteen companies retained their shares as treasury stock. One company, Athlone Industries (then Holland Furnace) had held 198,700 shares as treasury stock since 1957. After a change in ownership the company sold 117,700 shares on February 11, 1966. This was evidently done to save taxes, by using the tax loss as an offset against the net income of that year. In summary, thirty of the fifty companies, sixty per cent, retained their repurchased shares, from year to year, as treasury stock. Methods Used to Repurchase Unlike the situation with respect to listed companies, in no single 110 Instance did any one of these fifty unlisted industrial companies purchase, or attempt to purchase, their shares from shareholders by means of a tender offer.^ Thus, repurchase was effected in either of two ways: 1. Purchase of shares in the open market. 2. Purchase of large blocks of stock from large stockholders, from the estates of large stock holders, officers, or directors, and as a conse quence of mergers. Of the nine companies whose primary purpose was to remove large blocks from the market; one company, Nuclear Data. Inc.. repurchased the holdings of the president and his wife and effected a change in control, since the president resigned as officer and director shortly after the sale; one company, Global Marine. Inc. repurchased 800,000 shares of its stock from Union Oil Company of California in accordance with the speci fic provisions of the merger agreement. The reasons for the purchase of stock in the open market and the non-use of the tender offer method stem naturally from the characteristics of the repurchasing companies and the circumstances under which repurchasing took place. a. No change of control was desired. Since this was a management project, it was decided upon by ^Only one company, of the second questionnaire group (95 companies) indicated that the tender method had been used; none of the fifty companies under study had used this method. the officers and directors then holding office. Vith specific regard to that group, at least thirty per cent of the voting stock was already owned by thirty-three (66 per cent) of the fifty companies studied. It is quite possible that, if the appropriate data were publicly accessible, this high degree of voting control would be present in even more companies. There was thus no need, from a control standpoint, to attempt to purchase addi tional stock in large amounts. There was no substantial build-up of cash to require directors to decide upon repurchases as the most desirable alternative use of funds. On the contrary, of the nine companies which purchased large blocks of stock, four (Global Marine, Nuclear Data. Western Publishing. and Zenith Laboratories) financed them with borrowed funds. So, too, with Metalfab, which borrowed $300,000 from a bank to finance its repurchase of 31,810 shares. There is no evidence that a substantial accumulation of funds was a motivating factor in repurchase (despite managements' statements to the contrary in the replies to the questionnaire). There was no compulsion to disclose their activities with respect to repurchase. Purchase by tender would have necessitated disclosure; purchase in the open 112 market Imposed no such constraint. The failure of every company to utilize tender stresses the unwillingness to tell their stockholders what they were doing and the reasons which manage ment had in mind, d. In many cases, the companies had not indicated in their published reports any specific reason for repurchase of their own common stock.^ Of the fifty companies under study, nineteen re vealed no specific reason for repurchase. Use of the tender method normally requires a company to inform its stockholders of intent to purchase, approximate price, number of shares desired, source of funds, reasons for purchase, and proposed use of the shares to be acquired. Hence, in their case it was more desirable to purchase stock in the open market or to purchase a substantial block, from a large stockholder. Summary From an original list of 950 unlisted companies, one hundred and ten companies were selected as the working group for examination and study. Of these, it was found (after examination of company files) that fifty companies had repurchased stock in recent years. It was determined that ^This was also indicated by reports from the original quesionnaire group of the same fifty companies. 113 they would constitute the basis of the research study. As regards the frequency of repurchase, It was found that four companies had repurchased stock in years prior to 1964, and forty-six companies had repurchased stock in at least one of the three years, 1964-1966 inclusive. Twenty-four had repurchased In 1964, twenty-three in 1965, and thirty-one in 1966. Of the forty-six companies which had repurchased stock in the years 1964 to 1966 inclusive, aggregate repurchases totaled 553,892 shares in 1964; 952,606 shares in 1965; and 485,106 shares in 1966. Of the forty-six companies which showed treasury stock holdings at the end of 1966 (four companies had disposed of them), total holdings ag gregated 1,530,686 shares. These represented 3.44 per cent of the total issuance of 44,553,073 shares. Twelve of the forty-six companies had treasury stock holdings which exceeded five per cent of the issued stock; and four companies had holdings which exceeded ten per cent. There were few Instances in which approval from stockholders was sought prior to repurchase. After repurchase, there is a similar lack of in formation. Usually the annual reports provide information as to the cost, but it is difficult to determine how much stock has been repurchased during the year and the use, if any, to which it has been put. Only the balancing amount is shown. This is an omission in information which a change in Securities and Exchange Commission rules could rectify. The primary purposes of repurchase were found to be the removal of large blocks from the market. the acquisition of other companies, fulfilment 114 of commitments under stock option plans. use for bonuses, employee Incentive awards, and prizes, availability at tilow price, and use as stock dividends. Of the fifty companies under study, nineteen gave no specific reason for their repurchase of stock. Among the characteristics of unlisted repurchasing companies are these: a. They are almost uniformly profitable. b. There is a high degree of voting control by the family group or by the officers and directors. c. These companies typically pay cash dividends. d. With the exception of those which used shares specifically in mergers, for options, divi dends, and bonuses, they continue to hold the repurchased stock as treasury shares. Of the fifty companies under study, thirty retained their repurchased shares from year to year. The methods used to repurchase were two: a. Purchase in the open market. b. Purchase of large blocks of stock "off the market." The reasons for the non-use of the tender offer method were due to the characteristics of the repurchasing companies and the attendant circumstances: a. No change of control was desired. b. There was no substantial build-up of cash. c. There was no compulsion to disclose their activities with respect to repurchase. d. In many cases, the companies stated no specific reason for repurchase of their own common stock. There were nineteen such companies of the fifty companies under study. CHAPTER IV THE EFFECT OF REPURCHASE UPON STOCKHOLDERS In Chapter II the replies to the questionnaire from seventy- three companies provided the reasons stated by the various managements for the repurchase of their own common stock. In Chapter III the research study revealed the actual repurchase transactions of the individual companies and the extent to which they did, or did not, keep their stockholders informed of their reasons for and the results of such programs. It is now appropriate to determine the effect which such repur chases had upon the selling and non-selling stockholders, as measured both by quantitative and qualitative tests. The effects of repurchase will be measured by the following quantitative tests: a. Market prices of common stock relative to actual cost of repurchase. b. Earnings per share, giving effect to year-end holdings of treasury stock, compared to earnings per share on issued stock. c. Maintenance of corporate control by the principal holders. d. The risk factor: effect on the debt/equity relationship. e. Dividends payments prior to, during, and subsequent to the repurchase period. f. Relationship of repurchases, in dollars, to net income. 116 The qualitative factors which are employed in evaluation include these: a. The adequacy of disclosure. 1. Advance notice to stockholders. 2. Timing. 3. Communication of all the material and relevant facts. b. The methods used to effectuate the program. c. The notification, to stockholders, of the results of the repurchase program after its conclusion. I. QUANTITATIVE TESTS Market Quotations of Common Stock Of the fifty companies included in the study, four had repurchased stock prior to 1964: Athlone Industries, in 1957 and prior years; Hexcel ' (Products) Corporation in 1962; Midwest Rubber Reclaiming in years prior to 1961; and Shepard Niles Crane & Holst in December, 1962 and prior years. Athlone Industries1 average cost of reacquired stock was $14.23; at December 31, 1964, the "pink sheets" showed a market quotation of 7/8 - 1. Hexcel Corporation1s stock cost $10.80 per share in 1962; by the end of 1964, the quotation was 25 3/4 - 26 1/4. Midwest Rubber Reclaiming1s cost for 1,400 shares was an average $10.00; by year-end, the quotation was 16 1/4 - 17 1/4. The most recent repurchase by Shepard Niles Crane & Holst was in 1962 at $18 per share; by the end of 1964, the quotation had risen to 21 - 21 1/2 . The market reaction in Athlone Industries' stock was not related to its repurchase program (when it bore the name of Holland Furnace Company) 117 but was due primarily to unprofitable operations which began in 1960. The stock was quoted as high at 29 5/8 bid in 1961 but then declined steadily to a low of 3/8 bid in 1965. Midwest Rubber Reclaiming* s repurchase of 1,400 shares was not significant relative to its total issue of 351,387 shares and the in creased market quotation of its stock should not be attributed to that phase of its operations. However, both Hexcel Corporation and Shepard Niles Crane & Hoist admittedly bought stock in 1962 because of its low price; and the repur chased amount of approximately eight per cent, in each case, was substantial and price-influencing. In each case the officers and directors concurred in the judgment that repurchase, at the time and price prevailing, was a desirable use of funds. The subsequent rise in quotation of the stock indicated that the non-selling stockholders had benefited from the decision taken. The selling stockholders sold their stock out for their own private reasons and I voluntarily. Table VIII shows the relationship between the cost of stock repur chased in 1964 by twenty-four unlisted industrial companies and the range of bid prices of their common stock in the following year. Also shown is the relationship of repurchased stock to the total issue, as a percentage. The lack of available data relative to the amount of shares repur chased and their cost is evidenced by this table. Eight companies, of a total twenty-four, did not see fit to make this information available to their own stockholders. 1X8 TO 0) o S'S CO p .3 0)■fl • • CM «n o\ • in r l • u P 0) r- co fl O CO O' (0 (d rH or^ rt CM O' fl p cO 3 • * • • * * 0 .G CO H fl H (3 C G CM rH CO G rH CM G a co CO Pia M 01 OH CO O CO .fl s r P CJ VO v t O ' • H • m • <00 m o • vn r- * 10 M O I S- 00 CO rH CO sf Mt oo cm sr 00 St 00 Mf 00 ■M*^. CO rH H H r- rH in co m •H'G i n 5- m vo o o' m o r*. vo CO si- CM Mf O ' 1-3 O' rH CM C+H rH O t l l 1 l 1 t 1 1 1 CO a) fl sf 00 CM 00 CM 00 Ml- 00 00 O .fl ■M, fl -H 00 CO r~ rH rH h m co m (2 PH W co i-* O' r«. m 00 00 VO 00 f" w CJ H CM rH rH CM I CO o a o a u o • 00 P CJ fl fl fl •H P H ja fl ■3 O CO o fl CP * •H •H ►v P p • rH P fl fl fl o fl 33 fl • o fl PU iH I fl P to o •H c p O CJ >» CP PH >v O fl fl P • a CP p a B fl CP fl H fl CJ o P (U P a o fl fl p a P fl CJ O CP fl p p c j 00 a. o a m, O H o fl a fl fl a CJ O 00 a, fl fl CP fl o o p o u fl p • p H •H CJ •H ■H c j CO • p o a fl fl Vfl 3 p P (0 CO a o c j fl fl p fl 3* rH fl fl T3 fl rH fl p M iH CO O CP CJ fl p m fl P rH M CO KP p .fl rH fl fl o fl « iH 3 fl fl CO 3 ►o p CP fl CO 2 #t rH H fl 2 p PH CO Vl fl rH ~ Pi fl O 5 fl p CO 0 O & 0 fl 1 •H P o rH H fl fl fl CP CJ o P O H fl P p fl > O rH o P p CO fl 1 O O H .O CP o CO P fl 2 fl oo •H fl W rH fl p O rH fl •3 fl fl > i CO P fl 1 O rH •H i—t 3 fl 3 a fl ■fl <3 ■fl (O CJ u CJ W O o CJ a a CJ TABLE VIII (CONT'D) IH OB 43 M-l m*H vo m V 0 ^ -0 $ $ rt o' P3 J P< CJ U Clio Clio U 01 o ed h 0 d i l r ti Id iH 0 (U K O u 43 43 co to a H -0 -0 ►J s 0 11 00 u ►o *d ►o (H o o (H W 0 o a I O U D (3 m cd cd co o 0 o _ I # * • ■ • * • IT) • • . • ’ ’ AM A CM l f CJ . O O W (0 £ u 0 0 CJ S o „ - 6 a A .W 0 £» g * 4a * to H *o H H CO H H H rH H CM a CM H 0 HH rH 10 CM H fl 04 £ O 0 0 0 1 } — VO rl m CO CO H CO CO m rl VO mo n CM VO 00 00 00 CM 0 "f 00 O' vO rirt H O , H H rH H LT| CM CM CO O O' CM O 0 S 04 04 04 S u l 3 J H iH CJ 0 0 cj 0 IH O O IH 0 0 o cd W 0 O D 1 1 1 1 43 4-J 3 4 • • * • • H M » rH 0 05 o y , r H H *rt rH *d" CO rH iH -H -H iH c_> 0 o o 0 0 CO 0 0 O 4) CM 0 _ 0 0 i X M . V VO -0 rl rl rl rl rl rl rl rl rl rl rH t rH o oo m co H CO rH 00 CO CM H H O H vo co oo r s N co l r (O 1 04 CO 4J 0 O H H o o 0 0 0 u a 1 1 1 1 • i • • • O H OO 00 TJ 1 * 3 CO 43 43 CO w g 4-1 o « 0 0 0 0 U 0 0 a & 0 CM vO -a CO 0 o 0 0 a a 0 •a -a CO •H j c CO 04 4J 4J 0 U a 0 S 0 u g o 0 O 0 o o H 0 o 0 O 119 120 However, this presentation does not suffer In effectiveness be cause It was possible to determine from a comparative analysis of treasury stock holdings that the repurchases of seven of these companies were not significant In comparison to the total amount of Issued stock. Only In the case of Cannon Hills were the purchases substantial. Based on changes In the amount of treasury stock at year-end, and assuming no sales of stock during the year, It has been possible to cal culate that Cannon Mills repurchased 20,518 shares of Class B, non-voting stock In 1962 at an average price of $66.08, and 18,546 shares in 1963 at an average price of $78.78. These amounts represented 1.98 per cent and 1.79 per cent, respectively, of the 1,037,009 Issued shares. At the end of 1964, the "pink sheets" recorded a market quotation of 93 1/2 - 95; and In 1965, the bid price ranged from a low of 90 to a high of 127. Reference to Table VIII indicates that, of the sixteen companies which publicized the number of shares repurchased in 1964 and the cost of repur chase, in every single instance the bid price of the stock In 1965 was at least as high (and higher in fifteen cases) at some point during the year as the average cost of the repurchased stock in 1964. Expressed in a dif ferent fashion, it may be said that if a stockholder who sold his stock in 1964 had not sold out then but retained his stock until 1965, his proceeds might have been greater. Had the selling stockholder been advised that the company was repurchasing stock and decided, for that reason alone, not to sell his holdings, his financial situation could have been improved. In 1965 twenty-three of the companies repurchased some of their own common stock. Table IX presents a comparison between the cost of repur- 121 T3 s~\ 01 o to VI to 03 0) •o o Vi 0) s t _ CO IT) s t O 00 VI cd 3 c o r - t " NC0 O\ o> t o 0) CO o Cd j3 m • t o • r-» to • CM OO 0 0 cm m r~» VI CJ vo cd o v cd OO M cd S t CQ VO H CM r l CO VI o\ • • • . . . o 3 H d rH d 00 th d u~i r- a\ r~- crt io CJ p . CM CM 0) Pd try vt o o 'd 00 Sf CM s t St 00 M N rl m m CO CO H rH H CO ov co co N O l U l | s r l O m o s t CM CM H rH ■ I I 1 1 1 1 1 1 1 1 1 CM s t s t S t CM CM a rH rH CO rH rH rH w m 0 0 CM rH IT| CO CO CO S t Ov rH VO t— 1 rH rH H CM CM CM H CO I CP to CO cd 1—1 CJ 0 0 d •H I VI CV • o o > I d 7 u HI 3 d o o 00 r » A •H 2 a < 01 VI W •H & V) cd • CJ to cd & g VI >» O 3 CO & a. X9 o a M C T) cd • S X> d H o . cd 0) M O rH CJ o cd td Vi CJ CJ i a p . H n w d c j u a. o s iH «■ Pm M d O 0 CJ o 3 10 3 P . O r r i CJ CUD • *S VI o A (Class Corp. Paper 33 1/2 22 - 25.47 1.28 •H M CJ • to d h cd O 3 3 St U O_ to CO w o o d d VI m o t ) . Cd rH ■U H •H CO n 0) eq U 3 m 3 cn d d H U 3 VI d CO H d cd n § d o o CO o d d *h aj orH M c j to § 0) VI o *n d 3 VI Ctf o rH to d O O CJ rH S i CJH SJ Vt &— > v r l 5 d rH Vi M O H p fl) ffl 5 ! Vi cd •H O O •H rH 3 Charles Jacquin et Cie., Inc. Inc. Cie., et Jacquin Charles 3/4 4 1/2 - 7 5.33 5.06 m O CJ Q Pulp Hudson OCJ (Non-voting) Inc. Company, & McCormick 42 1/2 32 - 37.55 .5 TABLE IX (CONT'D) ft ft M-l ft ft ft ft ft VO o J2 ft cd ft VI fl iH 60 CO 0 VO ft O t3 ft tCOft 1 ft n f m cn in ft ft CM r- O ft VOCM CO cn ft in tM ft VI <0 at atft 3 at a I1i i 1 I I l 1 1 • • • • • A ft m tatft ft tf ft ftft CM ft < rH ft cd CN u ft tftft ft ft at o u ft 3 a o o b 3 a at Of CJ ft CO at * • • -"A* VO CO ft ft X X rO cn cn m cn cn CN ft ft U ft flv, M o ft o o 3 o 0 cd 3 Sn ■ ~N X cn ft ft '0 ft rO 00 Nl- 00 «* cn NT CN in ft ov o in H O O f l i i p N f lE* l 3 Cld U n n t a ,3 VI ft at >, ft ft M .a3 3 ft 3 fto 3 O ft 0) Ift Vl CDO n at at oo O o. 3 3 a cn •ft* • •• » • » • 0.n o 0 a t ft ft cd K 3 ft O 3 o o 3 CO ft . m < cn t00 3 ft cO ov CD CD as O ft 3 3 O 3 3 O3 CO CO 3 ►t 0 CV 3 O 3 ft ft •ft -ft /ft V-/ CN in st st cn Nf 00 ft m ft CO <■ VO CN ft OO ft Vl Jfl O ov m CN ft ft ft cn m cs CN pq ft • ft 3 O Vl CD " ft Vi PL. 3 VI ft at 3 vi O VI o 3 VI 3 3 3 3 3 3 3 ft * • • • ft • • • 3 /V ja a 3 O 3 /v/v ft ft ft 3 ft ft m m ft ’ftO S S C VI VI 1-| 3a 3 ft O 3 o o Vl3 3 3 3 ft 3 3 3 ft 3 m 3 vi 3 o • VI vO £> ft ft ft ft m ft cn o ov VI 3 W /1 at 3 3 Si3 3 s u 3 M A • A •o •o ft « ft u w VI VI u n o o u o u o u 3 o a o 3 a a) § (0 ft 122 123 chase per share in 1965 and the range of bid prices on the stock during the following year, 1966; and the relationship between the number of repurchased shares and the issued stock. Five of the twenty-three companies did not provide any information as to the cost of the shares which they repurchased, but the high and low range of bid prices for their stock is included in the list. Two noteworthy observations regarding this compilation should be made. First, the spread between the high and low bid prices of each stock was very wide, with the sole exception of Cincinnati Enquirer, whose stock is closely held and rarely traded. In the case of Aerosonic Corporation. Global Marine, and Reynolds & Reynolds Company, the high bid price was at least double the low bid during the year. In the case of seven other companies, specifically AVM Corpora tion. Bayless Markets. Bristol Brass. Cannon Mills Class B, Charles Jacquln, Ozlte Corporation, and Western Publishing Class B, the advance from the low price was fifty per cent or more. In every other case but two (McCormick & Company. 29.2, and Zenith Laboratories. 25.9), the advance from the low bid exceeded thirty per cent. Another way of expressing the wide spread is to say that, of twenty- three companies which repurchased their own stock in 1965, twenty-two com panies had an advance from the low bid of at least twenty-five per cent. This compares with a range of the National Quotation Bureau Over-the- Counter Industrial Stock average in 1965 from a low bid of 197.28 to a high of 249.11, an Increase of twenty-six per cent. (Table X). The second significant observation derived from the list in Table IX NATIONAL QUOTATION BUREAU OVER-THE-COUNTER S* 4 M cd J3 TJ TJ 'O o u .fl >4 a o I o OO A \ v-/ r s rH cn VO r-r CM CM O cn m CM i—1 CM o o cn m m ncn cn H H rH CM CM n91 cn rH >n CM CM CO cn cn m r- + a — CU CJ cd 9 • • • ■ * • * rH VO vO 00 Ov CM cn CM o CM CM rH o —1 I— CM w v© in rH rH CM r-» rH The situation was most pronounced in the case of Global Marine. Inc., which repurchased over twenty-four per cent of its Issued stock in 1965, at a cost of $9.25 per share. In 1966 the bid price on its stock ranged from a low of 15 1/4 to a high of 31 1/3. Table XI compares the cost of stock repurchased by thirty-one com panies in 1966 with the range of the high and low bid prices of their stock in 1967. Of these thirty-one companies, only twenty-five informed their stockholders of the cost of repurchase. As was the case in 1966, the range in quotations was remarkably wide in 1967. Of the thirty-one repurchasing companies, twelve companies recorded an increase of at least 100 per cent from the low bid price of their stock (seven companies had an increase exceeding 200 per cent); seven others recorded increases of fifty to ninety-six per cent; nine had increases of twenty-five to forty per cent; and the remaining three had increases of ten, twenty-one, and seventeen per cent respectively. The National Quotation Bureau Over-the-Counter Industrial Stock Average in 1967 ranged from a low bid of 228.93 to a high of 359.57, an increase of fifty-seven per cent. The high bid price of the stock exceeded the cost of repurchase in every case but two. Colonial Stores repurchased only 500 shates of a total TABLE XI co *CT rx <44 A CJ fcj m m CTV 4CJ44 VO 01 P M M 0 (UQ> CO bM OJ O cd o CO COCP,a P 10 09 Pt CTV *S O H O C A CJ pfl pec ^.d 44 S3 0 a a rH BO CD 1 if 1 0 ^ U N O 0 I ) vo 00 x W ■ l P N N CM h rx xf rH CM fx H H rx - r 00 00 o cd co M3 CM O cn CM CM CM h s r n in n » s r M 0 r CM s 00 a O U u d O Of M o a to to a o Pd to . o 00 d d t" ; ; t" d d r-( (0 CO 1 1 1 1 . . • H • • • cn _ I _ n cn cn CTV < CM fx rH m H * 0*0 m 1 11 ) ^ « S 00 m CM rx •rt rH H 44 01 CO CJ o CO a> 3 d cj . . * . a s x - X o cn o • 0 0 m oo cn H n n to O in f cn < H d co o c x r rx rx CO 00 cn cn o rx rx 0 CM 00 A M M (S (S O j x H 44 0 U 00 M U S 1 1 1 1 . . . e ) A id N ctv CTV rX H "CTrH H Q. rH H < CJ d • cd cd d CO > > O a CP rH >» m . . r-» co U 0 pc 0 cd ) ) T O XT X O CTV x^ x r xr cn | CM \| C m N MJO cm o CM O h O f C P CM c o o i h CM rx CTv M3 00 CM cd 1 1 1 . N CM m c CM rH f x rH H CM CM rH * m • x-^ Hr rH rH rH CM J C 1 — 3 O 00 m o cm m \ x - x ■ « x^ x x«. v VO Ov M O M o v H 00 h O H oo m H in Global Marine, Inc. (Class A) b) 42 - 13 3/4 205.5 n.a. .2 Gulf Interstate Company 16 - 4 1/2 255.6 4.90 3.34 Heath Tecna Corporation c) 53 1/2 - 7 3/4 590.3 4.12 1.12 126 TABLE XI (CONT'D) C/3 •fl mm .fl 6>S •fl M-l Pi •H vo $ H CJ p Cfl 4-1 fl u a cd o 0 Or C/3 M o fl a fl vo s / /"x 'fl a OV fl 00 CO st m •4* CM 00 CM cm H N H CM co CM co ov cn sf fx CM OO VO vO — cn co a •H n m CJ cj £ -H a 4J a u-03d) o fl fl a W S ■ st co st 00 St sf H H 1 U o cn oo H H l r d l r H H cn vo fx. CM VO cm h cn r~- o o H CM St- CM H OV Ov rH cj H Hi u ■H S S E o cd fl o 0 a S>t fl 0 o fl a o H A U I I I ... • • • • • fl CM CM vo vo o o m cm Ho iH MM 4J Hi O cd fl fl cd )oC d> Cd o d) a *k m & rH rH CJ (O ■n a 4*4 la fl >t a A a fl cd O CM M st m c H cn cn cn cn H H iH cn iH n vo cn OV m CM CM fx m H m st Pi •H CJ Xi •H rH MM H •rl A a a a a o ' S o d) Cd rH o o fl C m cn cn m C fx H cd lo fl 3 J4J CJ J*H •« CJ 0 l I l * • < a a « a a • OV M vo onvo cm O vo cn cn HCO •H 4 CJ 4-» a o fl lf .fl fl fl fl ifl pi o Ft a 0 O fl J ) st - 00 h cm Jfl fl CJ Pi 3fl v3 )rM d) fl o cd o 5 Ft 0 ucd o n in H oo vo M1 |X n in in m H cn fx fx cn H CM st 00 LTV CM rl CM S OV cn cn o H m cm CM O O Stst CM H •fl rM OV *00 •H rH A H a C/3 C/3 p 4J EM fl cj fl o cd CJ 00 3 I I I • • • • a • • • • M d oo cd XSV n rH cn CM rH h CM St H cn > 4*4 l cn fl lrt r fl o 0 o d) fl cd CO a fl fl fl a ) A cn cn rH Hi T) CJ * cn 4J 4-1 4-1 4-1 a fl o CO fl fl Vocaline Company of America, Inc. 18 7/8 - 3 1/2 439.3 3.70 5.17 The Wackenhut Corporation 29 1/4 - 7 1/4 303.4 7.00 .5 Weiss Bros. Stores, Inc. (Class A) 15 - 11 3/4 27.7 13.59 7.06 127 TABLE XI (CONT'D) tj v CO q 0 cj o A A A ) • •k A A A 1 n -a- cn sr io n o in o rs cn OH vO cn Al CN CJ •H p P 0 0 P o O Or O o 0 0 A A cn 000 00 H cn H CN fe CJ P 0 P •H p 0 P 1 0 0 0 CJ 0 rH Or o A • • ■ • • • • • » • • 1