[Federal Register Volume 60, Number 114 (Wednesday, June 14, 1995)]
[Notices]
[Pages 31340-31343]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14472]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-21124; 813-138]
Merrill Lynch KECALP L.P. 1994 and KECALP Inc.; Notice of
Application
June 8, 1995.
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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APPLICANTS: Merrill Lynch KECALP L.P. 1994 (the ``1994 Partnership'')
and KECALP Inc. (the ``General Partner'').
RELEVANT ACT SECTIONS: Order requested under sections 6(b) and 17(b)
from section 17(a).
SUMMARY OF APPLICATION: Applicants request an order which would let the
General Partner sell to future partnerships certain investments that
were purchased and held by the General Partner on behalf of a future
partnership prior to the closing of such partnership's initial
offering. The order also would let the General Partner sell to the 1994
Partnership four investments that the General Partner has purchased and
is holding as nominee for the 1994 Partnership.
FILING DATES: The application was filed on November 10, 1994, and was
amended on February 22, 1995, May 31, 1995, and June 7, 1995.
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 3, 1995 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 request, 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 Fifth Street N.W., Washington, D.C.
20549. Applicants, South Tower, World Financial Center, 225 Liberty
Street, New York, New York 10080-6123.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Wagman, Staff Attorney, at (202) 942-0654, or C. David
Messman, 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
[[Page 31341]]
may be obtained for a fee at the SEC's Public Reference Branch.
Applicant's Representations
1. The 1994 Partnership is a Delaware limited partnership
registered under the Act as a closed-end management investment company.
The 1994 Partnership is an ``employees' securities company,'' as
defined in section 2(a)(13) of the Act, and operates under the terms of
an order issued in 1982 (the ``1982 Order'') that exempts under section
6(b) of the Act the Merrill Lynch KECALP Ventures Limited Partnership
1982, and future similar limited partnerships in which Merrill Lynch &
Co., Inc. (``ML & Co.'') is a general partner, from certain provisions
of the Act to the extent necessary to permit the partnerships to
function as employees securities companies.\1\ Interests in the 1994
Partnership were offered to certain employees of ML & Co. and its
subsidiaries, and to non-employee directors of ML & Co. The General
Partner may organize additional limited partnerships for employees of
ML & Co. and its subsidiaries. Applicants request that the relief
sought herein apply to these future KECALP partnerships, which will
operate under the terms of the 1982 Order (each, a ``Future
Partnership;'' together with the 1994 Partnership, the
``Partnerships'').
\1\Merrill Lynch KECALP Ventures Limited Partnership 1982,
KECALP Inc., Investment Company Act Release Nos. 12290 (Mar. 11,
1982) (notice) and 12363 (Apr. 8, 1982) (order).
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2. The General Partner is an indirect, wholly-owned subsidiary of
ML & Co. The General Partner is registered as an investment adviser
under the Investment Advisers Act of 1940. All investments and
dispositions of investments by the Partnerships are approved by the
board of directors of the General Partner.
3. Applicants request an amendment to the 1982 Order to allow the
General Partner, ML & Co., and direct or indirect wholly-owned
subsidiaries of ML & Co. (together, ``ML'') to acquire and hold certain
investments (``Warehoused Investments'') on behalf of a Future
Partnership pending the closing of the Partnership's initial offering.
An investment will only qualify as a Warehoused Investment where (a) ML
acquires an investment on behalf of a Future Partnership with the
intention of selling such investment to the Future Partnership
following the completion of its initial offering, and (b) the board of
directors of the General Partner approves such investment. ML may sell
a Warehoused Investment to a Partnership only during the lesser of (a)
one year from the time ML purchases the Warehoused Investment, or (b)
30 days from the date of closing of a Partnership's initial offering.
4. The purchase price to be paid by the Partnership to ML for a
Warehoused Investment will be the lesser of (a) the fair value of the
Warehoused Investment on the date it is acquired by the Partnership or
(b) the cost to ML of purchasing the Warehoused Investment. ML may only
charge the Partnership carrying costs to the extent the fair value of
the Warehoused Investment exceeds the cost, and such costs will accrue
from the date ML acquires the Warehoused Investment on behalf of the
Partnership. Carrying costs will consist of interest charges computed
at the lower of (a) the prime commercial lending rate charged by
Citibank, N.A. during the period for which carrying costs are being
paid or (b) the effective cost of borrowings by ML & Co. during such
period. The effective cost of borrowings by ML & Co. is its actual
``Average Cost of Funds,'' which it calculates on a monthly basis by
dividing its consolidated financing expenses by the total amount of
borrowings during the period.
5. Applicants are subject to an order issued in 1991 (the ``1991
Order'')2 that, in relevant part, allows ML to acquire ``Merrill
Lynch Investments''3 on behalf of a KECALP partnership, and sell
such investments to the partnership within 30 days of ML's acquisition
of such investments. To the extent ML acquires on behalf of a KECALP
partnership investments that are not Merrill Lynch investments, and
that are not sold to the partnership within 30 days of ML's purchase,
the partnership must obtain exemptive relief from the Commission prior
to acquiring the Warehoused Investment.
2Merrill Lynch KECALP Growth Investments Limited
Partnership 1983, Investment Company Act Release Nos. 18082 (Apr. 8,
1991) (notice) and 18137 (May 7, 1991) (order).
3``Merrill Lynch Investments'' consist of equity and
equity-related transactions in (a) companies that are the subject of
transactions commonly referred to as ``leveraged'' or ``management''
buyouts (``Buyouts'') structured by ML & Co. or an affiliate, or
Buyouts with respect to which ML & Co. or an affiliate assisted in
the transaction and/or (b) companies that are the subject of other
transactions structured by ML & Co.'s investment banking group. In
either case, ML & Co. or an affiliate must hold a long-term equity
or equity-related investment as part of the transaction.
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6. Applicants also request an order under section 17(b) of the Act
exempting them from section 17(a) in order to permit the General
Partner to sell to the 1994 Partnership four investments that the
General Partner has purchased and is holding as nominee for the 1994
Partnership. Applicants also request that the General Partner be
permitted to recover carrying costs related to such investments, to the
extent that the fair value of a Warehoused Investment on the date it is
acquired by the 1994 Partnership exceeds the cost to the General
Partner of purchasing and holding such investment. Each of the four
Warehoused Investments was acquired by the General Partner, and upon
receipt of the requested order, will be acquired by the 1994
Partnership, in accordance with the conditions to the requested order,
as described below.
A. ZML Partners Limited Partnership III (``Zell III'')
1. Zell III is a limited partnership formed to act as the managing
general partner of Zell/Merrill Lynch Real Estate Opportunity Partners
Limited Partnership III (the ``Zell Fund''). The Zell Fund is a limited
partnership formed to acquire a high quality, geographically
diversified portfolio of real estate assets. Zell III has committed to
invest up to $25 million in the Zell Fund. The Zell Fund closed its
initial offering in March 1994 with aggregate capital commitments of
approximately $680 million. On March 10, 1994, the General Partner
funded $600,000 of its $2.0 million commitment in return for an 8%
limited partnership interest in Zell III, held on behalf of the 1994
Partnership, pending the closing of the 1994 Partnership's initial
offering and receipt of the requested order. Upon its acquisition of
the investment in Zell III, the 1994 Partnership will be allocated
generally its proportional share of all items of income, loss and gain,
and its proportional share of distributions, received by Zell III from
its investment in the Zell Fund.
2. The proposed investment in Zell III involves a joint transaction
under section 17(d) of the Act, and rule 17d-1 thereunder, that is
permitted by the 1982 Order. Because the 1982 Order does not provide
relief to allow the General Partner to sell Warehoused Investments to
the Partnerships, and because the investment in Zell III is not a
Merrill Lynch Investment within the meaning of the 1991 Order,
applicants seek an exemption from section 17(a) to allow the General
Partner to sell the Warehoused Investment to the 1994 Partnership.
B. Gemini Holdings, Inc. (``Gemini'')
1. PCA Holding Corporation (``Holding'') is an acquisition vehicle
created to acquire PC Accessories, Inc. (``PCA''), a distributor of
computer accessory products. On July 28, 1994, the General Partner
acquired 119,000 shares of Holding's common stock at
[[Page 31342]]
$10 per share for an aggregate of $1.19 million on behalf of the 1994
Partnership, pending the closing of the 1994 Partnership's initial
offering and the receipt of the requested order. At the same time,
Merrill Lynch KECALP L.P. 1991 (``KECALP 1991'') also acquired 119,000
shares of Holding's common stock at $10 per share for an aggregate of
$1.19 million.
2. PCA was subsequently merged into Gemini, a producer and marketer
of accessories for home electronic and entertainment systems. As a
result of the merger, shares of PCA held by the General Partner on
behalf of the 1994 Partnership were converted into 52,479 shares of
Gemini's cumulative convertible preferred stock. At such time, KECALP
1991's shares of Holding were likewise converted into 52,479 shares of
Gemini's cumulative convertible preferred stock.
3. The proposed investment in Holding involves a joint transaction
under section 17(d) of the Act, and rule 17d-1 thereunder, that is
permitted by the 1991 Order. Applicants seek an exemption from section
17(a) to allow the General Partner to sell the Warehoused Investment to
the 1994 Partnership. The 1991 Order does not provide the necessary
relief from section 17(a) because the 1994 Partnership will acquire the
Warehoused Investment more than 30 days after its purchase by the
General Partner.
C. Mail-Well Holdings, Inc. (``Mail-Well'')
1. Mail-Well is a manufacturer of customized envelopes and related
packaging products. In February 1994, the General Partner acquired
84,112 shares of Mail-Well's common stock at a cost of $10.70 per share
for an aggregate of $899,998 on behalf of the 1994 Partnership, pending
the closing of the 1994 Partnership's initial offering and the receipt
of the requested order. At the same time, KECALP 1991 likewise acquired
84,112 shares of Mail-Well's common stock at a cost of $10.70 per share
for an aggregate of $899,998.
2. The proposed investment in Mail-Well involves a joint
transaction under section 17(d) of the Act, and rule 17d-1 thereunder,
that is permitted by the 1991 Order. Applicants seek an exemption from
section 17(a) to allow the General Partner to sell the Warehoused
Investment to the 1994 Partnership. The 1991 Order does not provide the
necessary relief from section 17(a) because the 1994 Partnership will
acquire the Warehoused Investment more than 30 days after its purchase
by the General Partner.
D. Westlink Holdings, Inc. (``Westlink'')
1. Westlink is a telephone paging company formed in 1994 to acquire
the Westlink Company. In July, 1994, the General Partner acquired
200,000 shares of Westlink's common stock for $10 per share for an
aggregate of $2.0 million on behalf of the 1994 Partnership, pending
the closing of the 1994 Partnership's initial offering and the receipt
of the requested order. At the same time, KECALP 1991 acquired 100,000
shares of Westlink's common stock for $10 per share for an aggregate of
$1.0 million.
2. The proposed investment in Westlink under section 17(d) involves
a joint transaction under section 17(d) of the Act, and rule 17d-1
thereunder, that is permitted by the 1991 Order. Applicants seek an
exemption from section 17(a) to allow the General Partner to sell the
Warehoused Investment to the 1994 Partnership. The 1991 Order does not
provide the necessary relief from section 17(a) because the 1994
Partnership will acquire the Warehoused Investment more than 30 days
after its purchase by the General Partner.
Applicant's Legal Analysis
1. Section 6(b) authorizes the Commission, upon application, to
exempt an employees' securities company from provisions of the Act if,
and to the extent that, the exemption is consistent with the protection
of investors. Section 17(a) makes it unlawful for an affiliated person
of a registered investment company to sell securities to, or purchase
securities, from the company.
2. The General Partner is an indirect, wholly-owned subsidiary of
ML & Co. Thus, ML & Co. and each of its direct or indirect wholly-owned
subsidiaries is an ``affiliated person'' of the General Partner, within
meaning of section 2(a)(3)(C). In addition, the General Partner is an
``affiliated person'' of the Partnerships, within the meaning of
section 2(a)(3)(D). As a result of these affiliations, ML is prohibited
from selling securities to the Partnerships, and the Partnerships are
prohibited from buying such securities, unless applicants obtain an
exemptive order.
3. Applicants believe that the terms of the requested order are
consistent with the standards set forth in sections 6(b) and 17(b).
Applicants submit that the conditions to the requested order are
designed to insure that sales of Warehoused Investments by ML to the
Partnerships are consistent with the protection of the Partnerships'
limited partners. Applicants are aware of the policies underlying
section 17(a), and the potential conflicts that could arise in
connection with the Partnerships' purchase of Warehoused Investments
from ML. Applicants submit that the conditions to the requested order
effectively address these concerns.
Applicant's Conditions
Applicants agree that the terms of relief are subject to the
following conditions:
1. In order for an investment to qualify as a Warehoused Investment
to be purchased pursuant to the requested relief, (a) the board of
directors of the General Partner must approve such investment for the
Future Partnership in the same manner in which the board would approve
an investment for such Partnership prior to the time the investment is
acquired by ML and (b) such investment must be acquired by ML with the
intention of acquiring the Warehoused Investment for the Future
Partnership and selling it to such Partnership after the completion of
its initial offering. The General Partner will maintain at the
Partnerships' office written records stating the General Partner's
intention in acquiring such security, and stating the factors
considered by the General Partner's board of directors in approving the
investment.
2. Once the limited partners have contributed their capital to a
Partnership, prior to the acquisition of a Warehoused Investment by the
Partnership, (a) the board of directors must make the following
findings: (i) The terms of the Warehoused Investment, including the
consideration to be paid, are reasonable and fair and do not involve
overreaching of the Partnership or its Partners on the part of any
person concerned, (ii) the proposed transaction is consistent with the
policy of the Partnership as indicated in its filings under the
Securities Act of 1933 and its reports to Partners, and (iii)
participation by the Partnership in the proposed transaction is in the
best interest of the Partners of the Partnership; and (b) with respect
to any Warehoused Investment that is part of a co-investment with an
affiliate, the board of directors must approve the investment in
accordance with the terms of any orders issued by the Commission that
are applicable to such co-investment, including the required findings
by the board of directors of the General Partner. The General Partner
will maintain at the Partnerships' office written records of the
factors considered in any decision regarding a Warehoused Investment.
3. The purchase price to be paid by the Partnership for a
Warehoused
[[Page 31343]]
Investment shall be the lesser of (a) the fair value of the securities
on the date acquired by the Partnership as determined by the General
Partner or (b) the cost to ML of purchasing the Warehoused Investment
(``Cost''). Carrying costs may be paid by the Partnership to ML to the
extent such fair value exceeds Cost. To the extent the value of the
securities is determined to be less than Cost, ML may determine not to
sell the Warehoused Investment to the Partnership. The General Partner
will maintain at the Partnerships' office written records of the
factors considered in any determination regarding the value of a
Warehoused Investment.
4. Carrying costs shall be calculated from the date ML acquired the
proposed investment on behalf of the Partnership to the date of the
acquisition of the proposed investment by the Partnership from ML, and
shall consist of interest charges computed at the lower of (a) the
prime commercial lending rate charged by Citibank, N.A., during the
period for which carrying costs are permitted to be paid until the
Partnership acquires the securities or (b) the effective cost of
borrowings by ML & Co. during such period. The effective cost of
borrowings by ML & Co. is its actual ``Average Cost of Funds,'' which
it calculates on a monthly basis by dividing its consolidated financing
expenses by the total amount of borrowings during this period.
5. The Partnership may only acquire a Warehoused Investment from ML
during the lesser of (a) one year from the time ML purchases the
Warehoused Investment or (b) 30 days from the date of closing of the
Partnership's initial offering.
6. The General Partner will maintain the records required by
section 57(f)(3) of the Act and will comply with the provisions of
section 57(h) of the Act as if each Partnership were a business
development company. All records referred to or required under these
conditions will be available for inspection by the limited partners of
each Partnership and the Commission.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14472 Filed 6-13-95; 8:45 am]
BILLING CODE 8010-01-M