[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

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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