[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
