MLX Corporation; Notice of Application

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

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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

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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