SEC Division of Investment Management staff letter: Keene Corporation

PUBLIC

RESPONSE OF THE OFFICE OF Our Ref. No. 93-3-ICR

-INVESTMENT-eeMPAN-REGUbATìON . --Keene Corporation DIVISION OF INVESTMENT MAAGEMENT File No. 812 - 7763

On September 9, 1992, Keene Corporation ("Keene") received

an order of the Commission (the "Order") under sections 6 (c) and

6(e) of the Investment Company Act of 1940 (the "Act"). 1./ The

Order exempted Keene from all of the provisions of the Act except

sections 9(a), 17(a), 17(d), 17(e), 17(f) and 36-53 until the

earlier of September 9, 1993 or such time as Keene would no

longer be considered an investment company.

Keene represented in its application for the Order that

during the period from 1968 through 1974, it acquired and

operated a small manufacturer of acoustic ceilings, ventilation systems, and thermal insulation products. Some of the therml insulation products contained asbestos. As a result, Keene is

currently one of multiple defendants in thousands of asbestos-

related cases. Keene maintains a substantial part of if its

assets in highly liquid investments to cover its potential

liability arising out of the asbestos litigation (including the

collateralization of appeal bonds). Keene's contingent

liabilities constitute a significant impediment to Keene's

ability to divest itself of its investment securities in an

amount sufficient to exclude Keene from the definition of

investment company. Moreover, the resolution of those

liabilities is, to a large extent, beyond Keene's control.

In your letter of April 27, 1993, you request assurance that

the Division of Investment Management will not recommend that the

Commission rescind or modify the Order or take enforcement action

if Keene continues to rely on the Order notwithstanding certain

changes in the representations contained in the application for

the Order. Most significantly, you state that Keene has decided

to distribute rights to purchase all of the capital stock of its

only operating subsidiary, Reinhold Industries, Ine"

("Reinhold"). Following the proposed sale of Reinhold, Keene

will not be engaged in any operating businesses. Moreover, all

of Keene's assets, exclusive of government securities and cash

items, will consist of investment securities. You state that

Keene decided to sell Reinhold, among other reasons, to allow

Keene's management to focus on the asbestos-related litigation,

to provide additional funds for Keene's use in attempting to

resolve the litigation, and to prevent the possibility that Keene

would have to sell Reinhold at distress values later should it

not resolve the asbestos - related claims successfully.

Based upon the representations in your letter, the Division

will not recommend that the Commission rescind or modify the

Order or take enforcement action under the Act if Keene proceeds

1./ Investment Company Act Release Nos. 18893 (Aug. 12, 1992) (notice) and 18934 (Sept. 9, 1992) (order).

wi th the sale of Reinhold and fails to register as an investment

company u-riEie-F-t-Ìle-Ae-E-i-n--rel-ia-ne-e--on .tl'le-Oràer . 'Ilie--IJi-v i sien ~.._--- notes that Keene remains subj ect to various provisions of the

Act. Moreover, the Order will expire no later than September 3,

1993, and if Keene applies for an extension of the Order the

appropriateness of any extension will be considered at that time.

This response expresses the Division's position on an enforcement

action and recision and modification of the Order only t and does

not purport to express any legal conclusions on the questions

presented.
~~
Staff Attorney

Office of Investment

Company Regulation

June 2, 1993

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~VAmILITY-& ø 2---9-3- --2S.-R-F.-E: P /'':----U-- 200 Park Avenue, New York, NY 10166 212/557.1900 FAX 212/972-3959 Apri 27, 1993

Securities and Exchange Commission
Division of Investment Management

450 Fifth Street, N.W.

Washington, D.C. 20549

Attention: Elaie M. Boggs
Staff Attorney
RE: KEENE CORPORATION

FILE NO. 812-7763

PROPOSED DISTRIBUTION OF RIGHTS TO PURCHASE ALL THE CAPITAL STOCK OF REINHOLD INDUSTRIES, INC. Dear Sirs:
As discussed in telephone conversations between the undersigned and Elaie M. Boggs, Esq. of the staff, Keene Corporation ("Keene") is proposing to distrbute rights to purchase all the capital stock of its wholly owned subsidiar, Reinold Industres, Inc. (the "Rights Offerig"). In connection with the Rights Offerig, we respectfully request that the Division of Investment Management (the "Division"):
(1) confir that it wil not recommend to the Securties and Exchange Commission

(the "Commission") that the conditional order under sections 6(c) and 6(e) of The Investment Company Act of 1940 (the "Act") granting Keene an exemption from all provisions of the Act except sections 9(a), 17(a), 17(d), 17(e), 17(f) and 36-53 as if it were a registered investment company issued on September 9, 1992 (Release No. IC-18934) be rescinded or modified; and (2) confir that it wil not recommend that enforcement action be taken by the

Commission as a result of the change in circumstances and plans upon which the representations contaied in Keene's application for the exemptive order were based.

Background
The application for the exemptive order was fied on July 29, 1991 and amended on Januar 21, 1992 and June 15, 1992. Based upon the information and representations made in the application, on September 9, 1992 the Commission issued a conditional order under sections 6(c) and 6(e) of the Act grantig Keene an exemption from all provisions of the Act except sections 9(a), 17(a), 17(d), 17(e), 17(f) and 36-53 as if it were a registered investment company (Release No IC-18934). Current Circumstances Durig the intervening period of time between the fiing of the application and March 31, 1993, cenai circumstances related to Keene's position have changed. Following is a summar of relevant information included in the original application updated though March 31, 1993, the most recent date for which the information is available:

1. At March 31, 1993, up to $49 milion of the original $190 milion remaied

available in Keene's asbestos compensation/defense program ("Asbestos Compensation Program") and approximately 98,00 cases were pendig agaist Keene.

2. As of March 31, 1993, 218 plaitiff verdicts were outstandig agaist Keene as

defendant. Keene's share of these verdicts totalled approximately $65 milion. Dependig on the coun's treatment of the shares of the other defendats who have settled or are banpt or insolvent, Keene's share may increase or decrease.
3. As of March 31, 1993, Keene held approximately $89 milion in cash, cash
equivalents, and marketable securities. Of that amount, approximately $66 milion is subject to collateralization or escrow arangements to secure appeal bonds.
4. Keene stil maintains a substantial par of its assets in highly liquid investments to
cover its potential contingent liabilties arsing out of the asbestos litigation (includig the collateralization of appeal bonds).
5. As of March 31, 1993, Keene had tota assets of $118.5 millon which includes the

estimated net realizable value of assets attrbutable to Reinold Industres, Inc., a wholly-owned subsidiar. Of this amount, investment securties accounted for $10.5 milion or only 26.3% of

Keene's total assets exclusive of $78.5 milion in government securties and cash items. For the last four fiscal quarers ended March 31, 1993 Keene incured a net (loss) of $(78.6) milion primarly as a result of recordig asbestos-related expenses as described below and received $1.1

milion of income from securities other than government securties. However, due to potential futue fluctuations in the percentage of Keene's assets consisting of investment securties and the proponionate income produced by such securities (relative to Keene's operating income), from time to time, Keene could be deemed an investment company pursuant to section 3(a)(3). At 2

March 31, 1993, the percentage of Keene's assets consisting of securties other than government securities was 2K3%~ ------
6. At March 31, 1993, approximately $28 milion of insurance coverage remais;

however, Keene has recorded a receivable of $17 milion due from insurers which, when paid, wil reduce the insurance coverage available to Keene to $11 milion.
7. The ponion of Keene's ponfolio that is collateralized or in escrow still canot be
used by Keene for other puroses, hence Keene believes it should not be viewed as highly liquid investments. Keene's bondig capacity to prevent the execution of potential futue judgments agaist Keene's assets is limited to those assets not curently pledged to collateralize appeals. Given the volume of cases pendig agaist Keene and Keene's related need to collateralize appeals, Keene does not believe that its pool of liquid investments is excessively high.
8. In December 1992, the Board of Directors of Keene decided to sell its one
operating subsidiar, Reinold Industres, Inc., a custom manufacturer of heat-absorbing

composite components, sheet moldig compounds and strctural composite components for a varety of defense, aerospace and commercial applications, to Keene's existing stockholders and the investing public for fair value. Consequently, Keene recorded a charge to earings of $8 milion relating to the write-down of Keene's investment in Reinhold to estimated net realizable

value.
9. Durig 1992, it became apparent that Keene would exhaust substantially all of its
asbestos-related Bodily Injury products liability insurance coverage. The accounting rules require that Keene attempt to quantify a liabilty for Bodily Injury Cases currently pendig and to be received in the future. There are many opportities for significant error in such an exercise. Keene must make assumptions concerning many varables and uncenaities includig the disease mix of pending Bodily Injury Cases and projections of the number and disease mix of potential futue Bodily Inj¥ry Cases as well as the rate and cost of future defense legal fees and disposition costs of currently pending and future potential Bodily Injury Cases, all of which may not prove correct. Becausd of the dynamic nature of this litigation, it is not reasonably possible to estimate how many Bodily Injury Cases wil be received in the future nor the costs of disposing of those future Bodily Injury Cases. Notwithstandig the inerent risk of significant error in such an exercise, at December 31, 1992 the amount to defend and dispose of Bodily Injur Cases curently pending and potential future cases could range from $65 milion to an unquantifiable amount in excess of Keene's net

wort. No amounts for defendig and disposing of Propeny Cases are included since management and its counsel believe that the Propeny Cases have no merit. Durg the four quarer, Keene recorded a liabilty of $76 milion for uneimbursed costs

of resolving Bodily Injury Cases curently pendig and to be received in the futue to satisfy the requirements of Financial Accounting Standards Board Statement of Financial Accounting

Standards No.5 "Accounting for Contingencies." Approximately $11 milion of asbestos-related 3

expenses were charged agaist this liabilty durg the four quarer. Management believes that the numberuöf-fütïe poienfialBodily.IjüryCa-Ses arô-iletate and cost of futue dispositions of currently pendig and future potential Bodily Injury Cases canot be accurately predicted. As a result, management canot determine the ultimate effect of the asbestos-related liabilty upon Keene's financial position. Change in Circumstances Although a large number of plaitiffs' lawyers have accepted Keene's Asbestos

Compensation Program, some have not. The number of new Bodily Injur Cases filed agaist

Keene has continued unabated and these cases continue to go to tral. Cert verdicts adverse

to Keene have been higher than expected and several appeals couns have refused to review verdicts management and counsel believed had meritorious appeals issues. As a result, Keene continues to incur substantial settlement and defense costs and the requirement to maitai substantial amounts of liquid investments as collateral for appeal bonds has increased. Keene has exhausted all its remaiing insurance coverage and must now use amounts in the investment portolio to finance the asbestos litigation. In addition, Reinold has begun to receive inquires from its customers concerned about the impact of the asbestos litigation on Reinold and Reinold's ability to continue supplying product. The combination of these factors led to the decision to sell Reinhold in order to:

1. Allow Keene stockholders and any standby investors to parcipate diectly in any
   growth opportnities resulting from Reinold's operations in defense, aerospace and commercial

markets;
2. Allow Reinhold's management to focus exclusively on the management and
development of its composites business, though internal growth and acquisitions, without the specter of Keene's asbestos-related litigation. This wil also allow Keene's management to focus on resolving the asbestos-related litigation; and
3. Provide Keene with additional funds for its use in attempting to resolve its
asbestos-related litigation. By receiving fai value for the sale of Reinold's shares now, Keene wil avoid the possibilty that it would have to sell these assets at distress values later should the solutions its supports be unattaiable. Conclusion As discussed above, we do not believe that Keene should be deemed to be engaged in the business of investing in securities because approximately 75% of its cash, cash equivalents, and marketable securities currently must be maitaied as collateral for appeal bonds. In addition, Keene still has substantial unesolved contingent liabilities. Accordigly, we believe that, 4

notwithst~dii~g the Ri~hts gff~riE,the exeIlption granted b)'~e CO~ini~~ionon September 9, 1992 (Release No. IC-18934T should remai in full force and effect. Should you have any questions regardig this matter, please contact the undersigned at 212-557-1900. Seven additional copies of this letter are enclosed for your use. Please acknowledge receipt of this letter by stamping the additional enclosed copy of this letter and retuing it to the undersigned in the enclosed self-addessed, stamped envelope.

Very trly yours,

,/ . 1\ ¡, /.
"/ . ~, (-l IJ-l.l7 ,_.;
..v1-'t.IA1C:t'/ '- . L~ j "

• Timothy E:iOyne
  Vice President - Finance and
  Administration
  TEC:gm
  Enclosure
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