[Federal Register Volume 62, Number 80 (Friday, April 25, 1997)]
[Notices]
[Pages 20230-20233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10762]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22626/812-10226]
MLX Corporation; Notice of Application
April 21, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption Under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANT: MLX Corporation (``MLX'').
RELEVANT ACT SECTIONS: Order requested pursuant to sections 6(c) and
6(e) of the Act.
SUMMARY OF APPLICATION: Applicant requests an order that would exempt
it from all of the provisions of the Act except sections 9, 17(a),
17(d) (modified as discussed herein), 17(e), 17(f) (modified as
discussed herein), and 36 through 53 and the rules and regulations
thereunder during the period from July 1, 1996 to December 31, 1997.
FILING DATE: The application was filed on June 28, 1996 and amended on
November 1, 1996, and April 15, 1997. Applicants have agreed to file an
additional amendment, the substance of which is incorporated herein,
during the notice period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on May 16, 1997,
and should be accompanied by proof of service on applicant, in the form
of an affidavit or, for lawyers, a certificate of service. Hearing
requests should state the nature of the writer's interest, the reason
for the request, and the issues contested. Persons who wish to be
notified of a hearing may request notification by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
MLX, 1000 Center Place, Norcross, Georgia 30093.
FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Staff Attorney, at (202) 942-0574, or Mercer E. Bullard,
Branch Chief, at (202) 942-0564 (Division of Investment Management,
Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicant's Representations
1. MLX was formed in 1984 as part of the reorganization of McLouth
Steel Company (``McLouth''), a maker of steel products that filed for
bankruptcy in 1982. Under the terms of the reorganization, McLouth was
renamed ``MLX Corporation'' and McLouth shares were exchanged for new
MLX shares. As part of the reorganization, McLouth's operating business
was sold to a separate entity. MLX's sole remaining asset is the net
operating losses generated by McLouth's unprofitable operations. These
net operating losses are still available to offset future taxable
income from operations and are one of MLX's most important assets. MLX
has approximately 8,900 shareholders.
2. In 1985, MLX acquired S.K. Wellman Limited, Inc. (``Wellman''),
a company engaged in the design and manufacture of high energy friction
materials used primarily in aircraft brakes and heavy equipment brakes,
transmissions, and clutches (the ``Wellman Business''). From 1985
through 1987, MLX consummated various other acquisitions that
complemented the Wellman Business (the ``Wellman Acquisitions''). In
addition to the Wellman Acquisitions, in 1986, 1897, and 1988, MLX
acquired the companies and assets comprising Pameco Corporation
(``Pameco''), a distributor of heating and air conditioning units. In
1992, MLX sold Pameco, which enabled MLX to focus its efforts
exclusively on the Wellman Business.
3. In August 1994, a foreign competitor approached MLX management
with an unsolicited expression of interest in a business combination
with Wellman. This led to negotiations for the sale of all the capital
stock of its wholly-owned subsidiary, Wellman (the ``Wellman
Transaction''). The Wellman Transaction, which closed June 30, 1995,
left MLX with approximately $38 million in cash and cash equivalents,
no debt, and federal net operating loss carryforwards of approximately
$300 million available to offset future taxable income from operations.
4. Since the Wellman Transaction, MLX has been engaged in the
process of identifying and evaluating potential acquisition candidates
for the purpose of acquiring a suitable operating business as soon as
reasonably possible. MLX's president and chief executive officer, the
only officer and one of only two employees, spends substantially all of
his time seeking acquisition candidates for MLX to consider. In
addition, MLX's other employee spends substantially all of her time
supporting the activities of MLX's president and attending to the
ministerial functions of operating the company. MLX has developed
financial and operational criteria as a basis for evaluating
prospective target businesses and for narrowing the focus of its
search. MLX's executive officers and board of directors have been in
constant communications with professional groups, including investment
bankers, lenders, attorneys and accountants (collectively ``Financial
Intermediaries'') for the purposes of discussing MLX's acquisition
opportunities. MLX has discussed its acquisition criteria directly with
over fifty Financial Intermediaries. Three Cities Research, Inc.
(``Three Cities''), a New York investment banking firm that owns
approximately 39% of MLX's outstanding common stock, has assisted MLX
in identifying, evaluating and negotiating potential acquisitions. In
addition, MLX has engaged, on a non-exclusive basis, the investment
banking firm of Smith Barney to canvas the market of businesses for
sale and analyze these against MLX's acquisition criteria.
5. As of March 31, 1997, MLX had evaluated 181 transactions and
made seventeen offers or valuation proposals. A substantial majority of
the potential acquisitions have been rejected by MLX because of
valuation issues. In other instances, MLX has been outbid for the
target. MLX is in the process of evaluating an additional seven
potential acquisitions.
6. MLX's cash resources, its debt-free balance sheet, its
substantial federal net operating loss carryforwards, its management
experience and its status as a publicly-held company make it extremely
attractive to any potential acquisition target. MLX's federal net
operating loss carryforwards represent substantial value that may only
be maximized by acquiring a profitable operating company at a fair
price. The net operating loss carryforwards expire as follows: $144.3
million in 1997; $1.2 million in 1998; $73.8 million in 1999; $2.7
million in 2000; $2.2 million in 2002; $5.0 million in 2005; $2.0
million in 2006 and $47.3 million in 2007. The existence of the federal
operating net loss carryforwards, together with their expiration
schedule, provide MLX with
[[Page 20231]]
a strong incentive to close the acquisition of a profitable operating
business as soon as possible. Though currently in transition, MLX
expects to have acquired an operating business by no later than
December 31, 1997. In the event that MLX is unable to acquire an
operating business by December 31, 1997, MLX's board of directors will
consider the alternatives available, including registration as an
investment company or dissolution. Such alternatives would be
considered in advance of December 31, 1997 in order to allow sufficient
time for the implementation of any board decision.
7. During the three-month period that ended on December 31, 1995,
and the three- and six-month periods that ended on March 31, 1996 and
June 30, 1996, respectively, MLX had revenue of $1,056,000, $460,000
and $924,000, respectively, related to the investment of substantially
all of its assets in overnight repurchase agreements collateralized by
United States Treasury and agency securities. MLX's overnight
repurchase agreement investment program (the ``Program'') is
administered by five large national banks approved by MLX's board of
directors. The Program is designed to: (a) Maximize safety of capital,
(b) assure availability of funds for the purpose of consummating an
acquisition, and (c) relieve MLX management of the time-consuming
management of those funds.
8. Access to MLX's funds is severely restricted. MLX has one
operating account for the purpose of executing routine operating
disbursements and business expenses, including salaries, rent and
taxes. The maximum amount of funds deposited in such account is limited
to no more than the anticipated expense level for the upcoming two
months, based on MLX's budget as approved by the board of directors.
Any disbursements from the operating account must be approved by the
chief executive officer and the account is reconciled on a monthly
basis. In addition, MLX's board of directors receives a monthly summary
report of expenses.
9. Five national banks invest the remainder of MLX's funds as part
of the Program, each of which is responsible for approximately equal
portions of $7 million. MLX's board of directors has designated First
Union National Bank as the primary bank. The non-primary banks are
Wachovia Bank of Georgia, NationsBank, SunTrust Bank, and National Bank
of Detroit. All five banks are United States regulated banks and meet
the qualifications prescribed in section 26(a)(1) of the Act. The non-
primary banks have been instructed in writing to wire money only to
MLX's account at First Union National Bank and not to any other person
or entity. In addition, MLX's agreements with all of the banks (``Bank
Agreements'') contain provisions requiring the banks to segregate and
identify all securities owned by MLX as subject to the respective Bank
Agreement.
10. Transfers from any non-primary bank investment account in any
amount must be approved by an MLX executive officer and the Funds
Management Committee of the board of directors, and primary account
transfers (including check disbursements) in amounts above $5,000 must
be approved by an MLX executive officer and a member of the Committee.
In addition, the bank must verify the authenticity of the wire transfer
request by voice verification with a second, non-initiating MLX officer
in a phone call initiated by the bank. MLX also has secured an
executive protection policy from the Chubb Group of Insurance Companies
insuring MLX for, among other things, losses of money, securities and
other property caused by theft or forgery by any employee or agent of
MLX or by any other person in an amount not to exceed $5 million.
11. MLX has two stock option plans. Under the MLX Corporation Stock
Option Plan, adopted in 1985 (the ``1985 Plan''), MLX granted stock
options to certain officers, directors and key employees at prices not
less than the market value on the date the options were granted. No new
options may be granted under the 1985 Plan, although some options are
still outstanding. Under the MLX Corporation Stock Option and Incentive
Award Plan, adopted in 1995 (the ``1995 Plan''), stock-based awards may
be issued to key employees (including directors who are also employees)
and certain others. Such awards may include incentive stock options,
non-qualified stock options, restricted stock and outright stock
awards. A total of 125,000 shares of MLX common stock are reserved
under the 1995 Plan. In addition, on February 11, 1991, MLX issued
options to Brian R. Esher, its then Chief Executive Officer and
currently a director of MLX, to acquire 190,400 shares of MLX common
stock at a price of $5.00 per share, exercisable (subject to vesting
schedules which have been satisfied) at any time prior to February 10,
1998. Mr. Esher's options were converted to stock appreciation rights
and exercised as of February 28, 1997. On October 3, 1993, December 29,
1994 and July 26, 1995, MLX issued options to Thomas Waggoner, its then
Chief Financial Officer and current Chief Executive Officer, to acquire
an aggregate 50,000 shares of MLX common stock at prices ranging from
$2.50 to $9.25 per share, exercisable (subject to vesting schedules
which have been satisfied as to 40,000 shares) at any time prior to
July 25, 2000. It is also possible for Mr. Waggoner's options to be
converted to stock appreciation rights.
12. MLX requests an order pursuant to sections 6(c) and 6(e) of the
Act exempting it from all the provisions of the Act except sections 9,
17(a), 17(d), 17(e), 17(f), and 36 through 53 and the rules and
regulations thereunder during the period from the date of the order
until December 31, 1997. MLX also requests a limited and specific
exemption from section 17(f) to permit it to continue its present
custodial arrangement and from section 17(d) to permit it to maintain,
operate and comply with its stock option plans and agreements during
the period from the date of the order until December 31, 1997, all as
described in the application.
Applicant's Legal Analysis:
1. Section 3(a)(3) of the Act defines an investment company as an
issuer who is engaged or proposes to engage in the business of
investing, reinvesting, owning, holding, or trading in securities and
owns investment securities having a value in excess of 40% of the
issuer's total assets (excluding Government securities and cash). MLX
believes it may be an investment company under section 3(a)(3).
2. Rule 3a-2 under the Act generally provides that, for purposes of
section 3(a)(3), an issuer will not be deemed to be engaged in the
business of investing, reinvesting, owning, holding, or trading in
securities for a period not exceeding one year if the issuer has a bona
fide intent to be engaged in a non-investment company business. For the
period from July 1, 1995 through June 30, 1996, MLX operated under the
exemption provided by rule 3a-2.
3. Section 6(c) provides that the SEC may conditionally or
unconditionally exempt any person, security or transaction, or any
class thereof, from any provision of the Act, or of any rule or
regulation thereunder, if and to the extent that such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policies and provisions of the Act. Section 6(e) permits the SEC to
require companies exempted from the registration requirements of the
Act to comply with certain specified provisions thereof as though the
[[Page 20232]]
company were a registered investment company.
4. Applicant asserts that registration under the Act would involve
unnecessary burden and expense for MLX and its shareholders where there
is no likelihood of abuse. MLX believes that registration would require
costly changes in its financial reporting requirements, because the
requirements are significantly different for investment companies. MLX
contends that making such changes during this interim period, until it
consummates the acquisition of an operating business, is likely to
result in considerable and unwarranted confusion of its shareholders
and the investing public. MLX states that many shareholders, as a
result of such confusion, might sell their positions in MLX, an event
which might have an adverse effect on the market price of MLX's
securities and consequently on MLX's remaining shareholders. MLX
asserts that those shareholders also would be deprived of the benefits
of a potential acquisition.
5. MLX contends that certain provisions of the Act also might
impair its ability to carry out its stated intention to acquire an
operating business. For example, MLX believes that: (a) The shareholder
approval requirement of section 13(a)(4) of the Act would be a
significant obstacle to effecting any acquisition requiring rapid
action, (b) the cross-ownership prohibition of section 20(c) of the Act
would limit MLX's ability to attempt a takeover which was not favored
by the target sought to be acquired, and (c) the debt limitations of
section 18 of the Act might preclude bridge financing of an
acquisition.
6. MLX states that it is a reporting company under the Securities
Exchange Act of 1934 and is subject to extensive reporting and other
requirements for the protection of its shareholders. Further, MLX
asserts that its shareholders and the investing public have been
informed on numerous occasions of its intention to acquire an operating
business and the framework for its acquisition efforts. MLX also
asserts that it has pursued and remains committed to the acquisition of
a suitable operating business consistent with the best interests of its
shareholders.
7. MLX notes that, in determining whether to grant an exemption for
a transient investment company, the SEC considers such factors as: (1)
Whether the failure of the company to become primarily engaged in a
non-investment company business within one year was due to factors
beyond its control; (2) whether the company's officers and employees
during that period tried, in good faith, to effect the company's
investment of its assets in a non-investment company business; and (3)
whether the company invested in securities solely to preserve the value
of its assets.
8. MLX states that, while it is using its best efforts, in good
faith, to acquire an operating business with the proceeds of the
Wellman Transaction, it has been unable to negotiate a favorable
transaction. MLX asserts that this is attributable solely to factors
beyond its control, including the unavailability of suitable
acquisition candidates and the unwillingness of certain candidates to
accept what MLX believed to be reasonable offers. Moreover, MLX states
that the purchase of a suitable operating business of the size being
pursued often requires a long period of time. MLX contends that its
ability to acquire an operating business will depend upon the
availability of suitable acquisition candidates, the willingness of
those candidates to accept MLX's offers and the time needed to
negotiate the terms of the acquisition and other factors outside of its
control.
9. MLX submits that management's efforts to invest its assets in a
non-investment company business are evident from the efforts of Three
Cities and the other Financial Intermediaries to provide assistance in
identifying acquisition candidates, and the facts that MLX's management
spends substantially all of their time on MLX's acquisition search and
MLX's investments in overnight repurchase agreements are made solely to
maximize the safety of its assets. MLX contends that its investments in
overnight repurchase agreements, motivated primarily by a desire to
consummate an acquisition and to preserve the value of capital pending
consumation of such acquisition, should not be subject to registration
and regulation under the Act.
10. Section 17(d) and rule 17d-1 thereunder make it unlawful for
any affiliated person of a registered investment company, acting as
principal, to effect any transaction in which the company is a joint or
joint and several participant with the affiliated person unless the
transaction has been approved by order of the SEC. MLX believes that
compliance with section 17(d) of the Act and the rules thereunder would
prohibit operation of and compliance with the 1985 Plan, the 1995 Plan,
and Messrs. Esher's and Waggoner's Option Agreements. MLX states that
these options were granted as compensation to various executive
officers and key employees at different times prior to the Wellman
Transaction. MLX asserts that the inability to realize the value of
those options would be unfair to such officers without such result
being necessary or appropriate in the public interest.
11. Section 17(f) provides that the securities and similar
investments of a registered management investment company must be
placed in the custody of a bank, a member of a national securities
exchange, or the company itself in accordance with SEC rules. MLX does
not believe that its current custodial arrangement present any material
risk to investors. MLX states that all assets invested under the
Program are in the custody of qualified banks and the ability of such
banks to transfer money in and out is subject to numerous restrictions
and checks and balances. Furthermore, MLX states that those assets are
insured up to $5 million, an amount substantially in excess of what
would be required under a fidelity bond obtained pursuant to section
17(g) of the Act. MLX also states that its custodial arrangements are
consistent with the substantive requirements of rule 17f-2 under the
Act, except for the requirements of paragraph (f) thereof regarding the
requirement for MLX's independent accountants to conduct three actual
examinations. MLX also submits that its financial statements are
audited annually be its independent accountants. Under these
circumstances, MLX asserts that there are clearly no shareholder or
investor interests to be served by requiring it to register under the
Act.
Applicant's Conditions
Applicant agrees that any order will be subject to the following
conditions:
1. During the period of time MLX is exempted from registration
under the Act, MLX will not purchase or otherwise acquire any
additional securities other than securities that are rated investment
grade or higher by a nationally recognized statistical rating
organization or, if unrated, deemed to be of comparable quality under
guidelines approved by MLX's board of directors, except that MLX may
make equity investments in issuers that are not investment companies,
as defined in section 3(a) of the Act (unless such issuer is covered by
a specific exclusion from the definition of investment company under
section 3(c) other than sections 3(c)(1) and 3(c)(7)), in the following
circumstances: (a) In connection with the consideration of the possible
acquisition of an operating business as evidenced by a resolution
approved by MLX's board of directors, and (b) in connection with the
[[Page 20233]]
acquisition of majority-owned subsidiaries.
2. MLX will allocate and utilize its accumulated cash and short-
term securities for the purpose of funding cash requirements for its
existing businesses or for acquiring one or more new businesses.
3. While any order is in effect, MLX's 10-K, 10-Q, and annual
reports to shareholders will state that an exemptive order has been
granted pursuant to sections 6(c) and 6(e) of the Act and that MLX and
other persons, in their transactions and relations with applicant, are
subject to sections 9, 17(a), 17(d) (except as discussed in the
application), 17(e), 17(f) (except as discussed in the application),
and 36 through 53 of the Act as if MLX were a registered investment
company.
4. MLX will obtain an amended order from the SEC prior to any
material modification of MLX's custodial arrangement in a manner not
described in the application.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10762 Filed 4-24-97; 8:45 am]
BILLING CODE 8010-01-M