[Federal Register Volume 59, Number 117 (Monday, June 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14936]


[[Page Unknown]]

[Federal Register: June 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20352; 812-8554]

 

AI Holdings Inc., Notice of Application

June 14, 1994.
AGENCY: Secrities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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Applicant: AI Holdings, Inc. (``AI Holdings'').

Relevant Act Sections: Declaration of the Commission sought under 
sections 2(a)(9) and 3(b)(2).

Summary of Application: AI Holdings requests an order declaring that it 
controls American Innovation, Inc. (``Newco''), notwithstanding that it 
owns less than 25% of the voting securities of Newco, and declaring 
that it is primarily engaged in a non-investment company business.

Filing Date: The application was filed on August 19, 1993 and amended 
on December 27, 1993.

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 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on July 11, 1994, 
and should be accompanied by proof of service on applicants, 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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicants, 3355 Bee Cave Road, Suite 305, Austin, Texas 78746.

FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Staff Attorney, at (202) 942-0572, or Robert A. 
Robertson, Branch Chief, at (202) 942-0564 (Division of investment 
Management, Office of Investment Company Regulations).

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. AI Holdings is a holding company with more than 100 shareholders 
whose principal asset is the stock of Newco, a developer and 
manufacturer of automatic meter reading products for utility companies. 
The founders of the business, James Heisey and Carl Morris, serve as 
chief executive officer and president, respectively, of AI Holdings and 
Newco.
    2. AI Holdings entered into a reorganization agreement in 1992 with 
Ketema, Inc. because the business required further capitalization to 
sustain its levels of operations. The reorganization provided Newco 
with $1.8 million in additional capital. Ketema is a publicly traded 
holding company listed on the American Stock Exchange. Ketema has 
interests in a number of diversified businesses and, as of September 
30, 1993, had total assets exceeding $500 million.
    3. In connection with the reorganization, Newco acquired all of the 
operating assets of the meter reading business, and AI Holdings 
received 20% of Newco's voting stock. In exchange for its capital 
contribution, Ketema received 80% of the voting stock of Newco. Ketema 
also received four votes on Newco's board of directors and AI Holdings 
received one vote. Since the reorganization in 1992, Newco's board of 
directors has not had a meeting, and the board practice has been to 
allow Heisey and Morris to operate Newco without active board 
involvement.
    4. As part of the reorganization, AI Holdings was provided with 
certain rights and privileges with respect to Newco. For fiscal years 
1994, 1995, and 1996, AI Holdings as a preferred stockholder is 
entitled to dividend payments from Newco in an amount equal to 80% of 
Newco's earnings before taxes and interest on a consolidated basis. In 
addition, a shareholders' agreement between AI Holdings and Ketema, and 
the terms of AI Holdings preferred stock (the ``Agreements''), prohibit 
Newco from effecting any merger, exchange, consolidation, 
reorganization or recapitalization in which the then shareholders of 
American Innovations do not own at least 50% of the capital stock of 
the surviving corporation following the transaction. In addition, 
without the approval of AI Holdings, American Innovations is prohibited 
from selling all or substantially all of its assets, liquidating or 
dissolving, and from amending its certificate of incorporation or 
bylaws to affect the terms of AI Holdings preferred stock adversely. 
Further, the Agreements give AI Holdings right of first refusal to 
purchase Ketema's Newco shares in the event Ketema decides to sell such 
shares. Ketema also has agreed not to acquire additional equity 
securities in Newco without the prior consent of AI Holdings.

Applicant's Legal Analysis

    1. AI Holdings is an investment company under section 3(a)(3) 
because most of its assets are investment securities as defined under 
the Act.\1\ AI Holdings requests an order under section 3(b)(2) 
declaring that it is primarily engaged in a non-investment company 
business through a controlled company and under section 2(a)(9) 
declaring that it controls Newco even though it owns less than 25% of 
the voting securities of Newco.
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    \1\An issuer is considered an investment company under section 
3(a)(3) if it is engaged in the business of owning or holding 
investment securities having a value exceeding 40% of the value of 
the issuer's total assets, exclusive of government securities and 
cash. The Newco stock of AI Holdings meets the section 3(a) 
definition of investment securities.
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    2. Section 3(b)(2) authorizes the Commission to except an issuer 
from the section 3(a)(3) definition of investment company if the 
Commission finds that the issuer is primarily engaged in a non-
investment company business through a controlled company. Because AI 
Holdings owns less than 25% of the voting securities of Newco, a 
determination under section 2(a)(9) that AI Holdings controls Newco is 
a prerequisite to the ultimate determination of AI Holdings' investment 
company status.
    3. Section 2(a)(9) defines ``control'' as the power to exercise a 
controlling influence over the management or policies of a company. The 
section creates a presumption that owners of 25% or less of a company's 
voting securities do not control such company but this presumption may 
be rebutted by evidence of control.
    4. AI Holdings argues that a finding of control under section 
2(a)(9) is warranted for the following reasons:
    a. Since the reorganization, AI Holdings, through its officers, 
directors, and principal shareholders, has made substantially all of 
the decisions about the management and operations of Newco. Further, 
without the engineering and management skills of Heisey and Morris, 
Newco would be inoperable.
    b. Newco's board of directors does not take an active role in 
Newco's management. In addition, because of the Agreements, the ability 
of Newco's board of directors to make any major corporate changes 
without the consent of AI Holdings is limited, providing AI Holdings 
with effective control of such actions.
    c. The reorganization was effected in an effort to raise capital 
for the meter reading products business. The structure of the 
reorganization was chosen to provide Katema with sufficient ownership 
to let it consolidate its financial statements for tax and accounting 
purposes, while not diminishing AI Holdings' controlling influence over 
Newco and its operations. Applicant argues that although the 
reorganization altered the ownership of the business, it did not change 
its method of operation or the key individuals who had developed the 
product and managed the operations.
    5. AI Holdings also believes that a finding should be made under 
section 3(b)(2) that it is primarily engaged in a non-investment 
company business through Newco for the following reasons:
    a. AI Holdings was organized as an operating company to develop, 
manufacture, and market automatic meter reading products. The 
reorganization was effected because the business needed additional 
capital. The basic operations of the automatic meter reading business 
has not changed.
    b. AI Holdings has never held itself out as being engaged in the 
business of investing, reinvesting, or trading in securities.
    c. The business activities of the senior officers of AI Holdings 
have been almost exclusively limited to the automatic meter reading 
products of Newco. None of the officers or directors are affiliated 
with any other investment company or securities broker-dealer.
    d. The only assets of AI Holdings are its shares of stock in Newco 
and approximately $3,400 in cash.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-14936 Filed 6-17-94; 8:45 am]
BILLING CODE 8010-01-M