Slater Development Corp.

May 9, 1988

SEC-REPLY-1:

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

April 7, 1988

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF CORPORATION FINANCE

Re: Slater Development Corporation (formerly Slater Electric, Inc.) (the "Company")

Incoming letter dated January 22, 1988

While the question presented is not free from doubt, on the basis of the facts presented, this Division will not recommend any enforcement action to the Commission if the proposed merger is consummated without registration of the Deferred Cash Consideration Rights ("Rights") under the Securities Act of 1933 (the "1933 Act"). In arriving at this position, we have particularly considered the following: (1) the Rights are to be granted to the selling shareholders as an integral part of the consideration for the proposed merger; (2) the Rights do not represent an ownership interest in the Company; (3) the Rights are not transferable except by operation of law; (4) the Rights will not be represented by any form of certificate or instrument; and (5) any amount ultimately paid to the selling shareholders pursuant to the Rights will not depend upon the operating results of the Company.

Becausethis position is based upon the representations made in your letter, it should be noted that any different facts or conditions might require a different conclusion. Further, this response only represents the Division's position on enforcement action and does not purport to express any legal conclusion on the question presented.

Sincerely,

William H. Carter

Special Counsel

INQUIRY-1:

ROSENMAN & COLIN

575 MADISON AVENUE, NEW YORK, NY 10022-2585

TELEPHONE (212) 940-8840

January 22, 1987

William E. Morley, Esquire

Chief Counsel

Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Re: Slater Development Corp.

(formerly Slater Electric Inc.)

Commision File No. 2-18136

Deferred Cash Consideration Rights

Securities Act of 1933, Section 2(1)

Dear Mr. Morley:

On behalf of our client, Slater Development Corp. ("Slater"), we request that the Staff of the Division of Corporation Finance concur in our view that the Deferred Cash Consideration Rights described in this letter, and to be received by the public shareholders of Slater in connection with a proposed merger transaction, are not securities for purposes of, and are not requiredto be registered under, the Securities Act of 1933 (the "Act"). In our view, the characteristics of the Deferred Cash Consideration Rights would not bring such Rights within the definition of "security" contained in Section 2(1) of the Act.

I. Background.

Slater is a New York corporation registered pursuant to Section 12(g) of the Securities Exchange Act of 1934. Its common stock is traded in the over-the-counter market. On January 21, 1988, Slater filed a Form 15 (Notice of Termination of Registration under Section 12(g)) in reliance on the provisions of Rule 12g-4(a)(1)(i). On such date Slater had 293 holders of record. Prior to the sale of substantially all of its operating assets as described below, Slater was principally engaged in the manufacture and sale of electrical wiring devices.

On January 22, 1988, Slater (formerly Slater Electric inc.) sold (the "Sale") substantially all of the liabilities related thereto, to an unaffiliated third party. For the convenience of the staff, attached hereto is the proxy statement (the "Sale Proxy Statement") relating to the Sale. In connection with the Sale, Slater (i) received cash, (ii) retained ownership of its real estateassets and (iii) retained rights with respect to certain patents. The patents were retained to enable Slater to continue to pursue a patent infringement lawsuit commenced by it on October 21, 1981 and potential subsequent similar lawsuits. (See pp. 24-25 of the Sale Proxy Statement for a description of the patents and the infringement lawsuit.) Slater's patent counsel, Messrs. Morgan & Finnegan, believes that there is a reasonable likelihood that Slater will obtain a significant monetary judgment in connection therewith. The continuing costs of litigation will be funded with a reserve (the "Reserve") established by Slater from the proceeds of the Sale. It is presently anticipated that the Reserve will be $ 1,000,000.

Following the expiration of the 90 day waiting period provided for in Rule 12(g)-4, the holders of Slater common stock who will be asked to vote upon a proposed merger (the "Merger") pursuant to which Slater will be merged into a newly created corporation wholly-owned by members of the Slater family and certain trusts of which members of the Slater family are the beneficiaries (collectively, the "Slater Group"). The Slater Group presently owns approximately 70% of Slater. On January 15, 1988, the Slater Group filed a Schedule 13D setting forth their intention to "take Slater private".

In connection with the proposed Merger, each share of common stock owned by the Public Shareholders, other than shares held by persons who perfect statutory appraisal rights under New York law, will be converted into the right to receive a stated amount of cash (based primarily on the net per share value of Slater's assets which remain after the Sale, other than the patent rights and the associated litigations). In addition, since the patent rights and associated litigation(s) are not susceptible of valuation at this point in time because of the uncertainty of litigation, in the proposed Merger, the Public Shareholders will also receive one Deferred Cash Consideration Right for each share of common stock of Slater held. The Deferred Cash Consideration Rights will represent the right to receive the future certain additional payments from Slater with respect to the patent rights and associated litigation(s).

II. The Deferred Cash Consideration Rights

Specifically, each Deferred Cash Consideration Right will represent the right to receive a percentage (determined by dividing 100% by the total number of shares of common stock outstanding on the record date established with respect to the Merger) of the sum of (x) the amount, if any, received by Slater in connection with its lawsuit (either by settlement or judgment), (y) the residual value, if any, of the patents remaining after the conlusion of the lawsuit as determined by an independent third party appraiser and (z) any amounts remaining in the Reserve after the conclusion of the lawsuit, which sum shall be net of any federal, state and local tax liabilities that will be due and payable by the Corporation in respect thereof and net of all of the Corporation's costs and expenses in excess of the Reserve arising out of the lawsuit and the appraisal of the residual value of the patents. Slater believes that, at the concluion of the lawsuit, the residual value of the patents will be objectively determineable by evaluating, based upon the results of the present lawsuit, other potential patent infringement lawsuits and/or revenues which could be derived by the further licensing of the patents. To attempt to put a value on the patents and associated litigations at the present timewould be mere conjuncture and therefore unfair to the Public Shareholders.

The Public Shareholders will receive payment in respect of the Deferred Cash Conideration Rights as soon as practicable after the conclusion of the present lawsuit (anticipated to be in approximately two years; four years if there is an appeal) and the receipt of an appraisal of the residual value of the patents. The expiration date of the patents is May 11, 1993. If the present lawsuit is not concluded (including all appeals, if any) by such date, Slater will engage an independent appraiser to value the patents and the present lawsuit and make payment on the Deferred Cash Consideration Rights based on such valuation as soon as practicable thereafter (notwithstanding the valuation difficulties which will exist as a result of continued uncertainties relating to the outcome of the lawsuit). The Deferred Cash Consideration Rights will not be represented by any form of certificate or instrument (they will be created in the Merger as a contract right to the Public Shareholders) and will not be transferable except by operation of law. They will pay no dividends and bear no interest; and will have no voting rights.

[*8]

III. Discussion.

Questions have arisen in the past as to whether rights such as the Deferred Cash Consideration Rights constitute securities under the Act, and thus would be required to be registered under Section 5 of the Act. Section 2(1) of the Act broadly defines "security" as any

"note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein based on the value thereof), or any put, call, straddle, option or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a 'security,' or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrantor right to subscribe to or purchase, any of the foregoing."

We do not believe the Deferred Cash Consideration Rights are within the definition and therefore are not required to be registered under the Act in connection with the Merger or otherwise.

First, the Deferred Cash Consideration Rights are not readily identifable as any of the traditional "securities" specified in the definition. Nor do we, in this regard, believe that the Deferred Cash Consideration Rights meet the criteria necessary for an "investment contract". In 1946, the Supreme Court defined an investment contract in S.E.C. v. W. J. Howey Co., 328 U.S. 293 (1946), as a "scheme [which] involves an investment of money in a common enterprise with profits to come solely from the efforts of others." The Howey test has undergone several refinements since 1946, but essentially remains the same. To be an investment contract (1) the Deferred Cash Consideration Rights must involve an investment of money in a common enterprise and (2) the holders of the Rights must expect profits to come from the efforts of others. The Public Shareholders are not receiving the Deferred Cash Consideration Rights in exchangefor a cash investment -- they will merely be receiving the Deferred Cash Consideration Rights as part of the Merger as a vehicle to allow them to share in the benefits of the patents and the associated lawsuits when the value thereof is ultimately determinable. In addition, the eventual payments made by Slater on account of the Deferred Cash Consideration Rights will not constitute "profits" as contemplated in Howey and subsequent cases. In 1975, the Supreme Court said that by "profits" it meant "either capital appreciation resulting from the development of the initial investment . . . or a participation in earnings resulting from the use of investors' funds." United Housing Foundation, Inc. v. Forman, 421 U.S. at 852. While it is true that the original investment by the Public Shareholders in Slater common stock was used to fund the development of the outlet box which is covered by the patents and that a portion of the proceeds of the Sale will be used to fund the lawsuit, we do not believe that the ultimate benefits derived by Slater (and therefor the Public Shareholders) from the patents litigation was what was intended to be considered "profit" for purposes ofthis element.

Second, and perhaps more importantly, the specific characteristics of the Deferred Cash Consideration Rights remove them from the common indicia of a security. Chief among those characteristics are (1) that the Deferred Cash Consideration Rights will not be presented by any form of certificate or instrument; (2) that the holders thereof have no rights common to shareholders such as voting and dividend rights, nor do they bear a stated interest rate; (3) that the Deferred Cash Consideration Rights will not represent any equity or ownership interest in Slater or the corporation into which it will be merged; (5) that the ultimate payments made on account of the Deferred Cash Consideration Rights are in no way related to the other operations or assets of Slater or the Corporation into which it will be merged; and (6) that the holders have not invested any money in the Deferred Cash Consideration Rights. The Deferred Cash Consideration Rights represent solely the right to receive a pro-rata portion of the value, if any, of the patents and the associated lawsuits.

As succintly stated by counsel to CMC Real Estate Corporation in a no-action letter available March 21, 1987 and as similarly applicable to the present situation:

"The purpose of the Merger is to purchase, for a fair amount of cash, the Common Stock held by the Public Shareholders. While complicated in form, the Deferred Cash Consideration Rights represent nothing more than a deferred non-interest bearing cash payment representing a certain portion of the Company's assets, not accounted for in the cash to be paid to Public Shareholders immediately after the Merger, but deferred solely until such time as the value of such assets may be definitely determined".

In the context of the rights with similar characteristics to the Deferred Cash Consideration Rights described above, the Staff has taken the view that such rights may be distributed without registering them under the Act.

Thus, in CMC Real Estate Corporation, avail. March 21, 1987, the Staff took a "no action" position with respect to registration under the Act of rights similar to those herein. In CMC, each share of common stock of CMC Real Estate Corporation ("CMC"), would be converted into the right to receive cash and one non-transferable deferred cash consideration right ("CMC Right") following the merger of CMCinto a wholly owned subsidiary of Chicago Milwaukee Corporation. Each CMC Right would represent the right to receive a stated sum of either the cash proceeds received from the sale or other disposition of commuter rail lines then subject to a pending eminent domain condemnation proceeding or the amount of cash equal to the fair market value of the rail lines. The Staff based its position not to recommend action to the Commission if the CMC Rights were not registered under the Act on the facts that (1) the CMC Rights granted to the shareholders were part of the consideration for the merger; (2) the CMC Rights did not represent an ownership interest in CMC or its parent; (3) the CMC Rights would not be transferable except by operation of law; (4) the CMC Rights would not be represented by a certificate or instrument; and (5) the amount ultimately paid to the CMC Right holders would not depend upon the operating results of CMC or its parent. All of these factors are present with respect to Slater's Deferred Cash Consideration Rights described above.

Similarly, in Lorimar, Inc., avail. Nov. 4, 1985, the Staff also took the view that deferred payment rights would not need to be registered under the Act. The deferred payment rights in Lorimar were to consist of three annual payments following the closing date of a merger. Those rights were subject to a reduction if revenues did not reach a certain level or if the representations and warranties made by the acquired company were not true or correct. The characteristics of the Lorimar deferred payment rights were that (1) such rights would not be transferable except by operation of law; (2) the holders of the rights would have no voting or dividend rights; (3) such rights would not bear any stated interest, except for certain tax purposes; and (4) the rights would not represent an ownership interest in the acquired or acquiring business. Again, these characteristics are also shared by the Slater Deferred Cash Consideration Rights.

Several other no-action requests have been granted under facts similar to CMC, Lorimar and those contained herein. See, e.g., Northwestern Mutual Life Insurance Company, avail. March 3, 1983; Star Supermarket, Inc., avail. Dec. 22, 1982; and Lifemark Corporation, avail, Nov. 17, 1981. While the Staff no-action responses do not specifically state that deferred rights are not securities, they do take the position that registration would not be required. Such a position is consistent with the notion that there is no public interest in requiring registration of deferred rights, such as the Deferred Cash Consideration Rights described herein.

IV. Conclusion.

On the basis of the foregoing, we believe that the Deferred Cash Consideration Rights are neither securities as defined in, nor required to be registered under, the Act. Therefore, we request that the Staff of the Division of Corporation Finance not recommend enforcement action to the Commission if the Merger is consummated without the Deferred Cash Consideration Rights to be received by the Public Shareholders in connection therewith being registered under the Act.

Please contact me collect at (212) 940-8787 or Alan Cooper of this office at (212) 940-7085 if you require any further information or would like to discuss this matter in greater detail.

Very truly yours,

Howard Schneider