-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TRpBntLI4ueqzzy1CYCirciKdKu5hp06uuYhgGkpUENjwq2D83KR7rpNfiMrkC2o FPl6IGiVjPo96XnpHfyAag== 0000862255-03-000001.txt : 20030331 0000862255-03-000001.hdr.sgml : 20030331 20030328194026 ACCESSION NUMBER: 0000862255-03-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REINHOLD INDUSTRIES INC/DE/ CENTRAL INDEX KEY: 0000862255 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 132596288 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18434 FILM NUMBER: 03626864 BUSINESS ADDRESS: STREET 1: 12827 EAST IMPERIAL HWY CITY: SANTA FE SPRINGS STATE: CA ZIP: 90670-4713 BUSINESS PHONE: 5629443281 MAIL ADDRESS: STREET 1: 12827 EAST IMPERIAL HWY CITY: SANTA FE SPRINGS STATE: CA ZIP: 90670 FORMER COMPANY: FORMER CONFORMED NAME: KEENE CORP /DE/ DATE OF NAME CHANGE: 19930328 10-K 1 reinhold10k2002.txt 10-K - DECEMBER 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT - ----- OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES - ------ EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to --------------- -------------- COMMISSION FILE NUMBER 0-18434 REINHOLD INDUSTRIES, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 13-2596288 - -------------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 12827 East Imperial Hwy, Santa Fe Springs, California 90670 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code (562) 944-3281 CLASS A COMMON STOCK, PAR VALUE $.01 NASDAQ - -------------------------------------------------------------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered under Section 12(g) of the Exchange Act: NONE - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. X --- Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). ___ The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 28, 2002 was $17,985,000. The number of shares of common stock outstanding as of March 13, 2003 was 2,659,812. Documents incorporated in part by reference: Parts I, II and IV incorporate certain information by reference from the registrant's Annual Report to shareholders for the fiscal year ended December 31, 2002. Part III incorporates certain information by reference from the registrant's definitive proxy statement for the annual meeting of shareholders to be held on April 30, 2003, which proxy statement will be filed no later than 120 days after the close of the registrant's fiscal year ended December 31, 2002. From time to time, Reinhold Industries, Inc. ("Reinhold" or the "Company") makes certain comments and disclosures in reports and statements, including this report or statements made by its officers or directors which may be forward-looking in nature. Examples include statements related to Company growth, the adequacy of funds to service debt and the Company's opinions about trends and factors which may impact future operating results. These forward-looking statements could also involve, among other things, statements regarding the Company's intent, belief or expectation with respect to (i) the Company's results of operations and financial condition, (ii) the consummation of acquisition, disposition or financing transactions and the effect thereof on the Company's business, and (iii) the Company's plans and objectives for future operations and expansion or consolidation. Any forward-looking statements are subject to the risks and uncertainties that could cause actual results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements. Any forward-looking statements are also subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally. These assumptions would be based on facts and conditions as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond the Company's control. As a result, the reader is cautioned not to rely on these forward-looking statements. The Company wishes to caution readers that forward-looking statements, including disclosures which use words such as the Company "believes," "anticipates," "expects," "estimates" and similar statements, are subject to certain risks and uncertainties which could cause actual results of operations to differ materially from expectations. Any forward-looking statements should be considered in context with the various disclosures made by the Company about its businesses, including without limitation the risk factors more specifically described below in Item 1. Business. Available Information The Company is subject to the informational requirements of the Securities Exchange Act of 1934 that require the Company to electronically file reports, proxy and information statements, and other information with the SEC. The public may read and copy the Company's filings at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public can obtain information on the operation of the Public Reference Room by calling 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company will provide electronic or paper copies of such filings free of charge upon request. REINHOLD INDUSTRIES, INC. FORM 10-K INDEX PART 1 PAGE Item 1 - Business 4 Item 2 - Properties 11 Item 3 - Legal Proceedings 11 Item 4 - Submission Of Matters To A Vote Of Security Holders 13 PART II Item 5 - Market For Registrant's Common Equity And Related Stockholder Matters 14 Item 6 - Selected Financial Data 14 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A - Quantitative And Qualitative Disclosures About Market Risk 15 Item 8 - Financial Statements And Supplementary Data 15 Item 9 - Changes In And Disagreements With Accountants On Accounting And Financial Disclosure 16 PART III Item 10 - Directors And Executive Officers Of The Registrant 17 Item 11 - Executive Compensation 17 Item 12 - Security Ownership Of Certain Beneficial Owners And Management 17 Item 13 - Certain Relationships And Related Transactions 17 Item 14 - Controls And Procedures 18 PART IV Item 15 - Exhibits, Financial Statement Schedules And Reports On Form 8-K 19 SIGNATURES 23 CERTIFICATIONS 25 EXHIBITS 29 PART I Item 1. BUSINESS Reinhold Engineered Plastics, the forerunner to today's Reinhold Industries, Inc., was founded in 1928. The purpose of the business was the molding of components from Bakelite, the first commercially available polymer molding material. In the 1940's, Reinhold was a pioneer in making some of the earliest fiberglass plastic components for the aircraft industry such as radomes and antenna covers. In the early 1950's, with the advent of the missile industry, Reinhold moved into the newly created field of ablative composites. Ablative composites are fiber reinforced polymer structures which absorb, as they decay, the destructive thermal energy generated by burning rocket propellants or hypersonic re-entry. This field became Reinhold's core business for decades to come. In the 1970's, the molding of structures from fiberglass polyester Sheet Molding Compound (SMC) was a new and growing industry in the Eastern U.S. Reinhold was convinced that the potential of the SMC material was broad enough that markets in the West could be found and developed. These markets included swimming pool filter tanks and in-ground lighting housings. From the 1950's through the early 1980's, Reinhold went through a number of ownership and name changes. In June 1984, Reinhold was sold to Keene Corporation, an operating division of Bairnco Corporation. In 1990, following Bairnco's spin-off of its Keene Corporation subsidiary to Bairnco's shareholders, Reinhold became an incorporated (Delaware) entity and a direct wholly-owned subsidiary of Keene Corporation. On December 3, 1993, Keene Corporation ("Keene") filed a voluntary petition for relief under Chapter 11 of Title 11 of the United State Code (the "Bankruptcy Code") in the United States Bankruptcy Court in the Southern District of New York (the "Bankruptcy Court"), Case No. 93-B-46090 (SMB). Keene's Chapter 11 filing came as a direct result of tens of thousands of asbestos-related lawsuits which named Keene as a party. Reinhold did not file any petitions for relief under the bankruptcy code and continued to operate in the normal course of business. Keene's asbestos-related liabilities stem entirely from its 1968 purchase of Baldwin-Ehret-Hill, Inc. ("BEH"), a manufacturer of acoustical ceilings, ventilation systems, and thermal insulation products. Over the past 20 years, Keene spent over $530 million (approximately 75% of which has been in the form of insurance proceeds) in connection with Asbestos-Related Claims asserted against Keene, all stemming from Keene's ownership, for a period of approximately five years, of BEH. By the end of 1992, Keene had exhausted substantially all of its insurance coverage for Asbestos-Related Personal Injury Claims and by 1993, Keene had exhausted substantially all of its insurance related to Asbestos In Building Claims. Therefore, Keene had to bear directly the costs of all Claims. In May 1993, Keene filed a limited fund, mandatory settlement action ("Limited Fund Action"). This Limited Fund Action sought a declaration that Keene had only limited funds available to resolve the numerous Asbestos-Related Claims against it, including Asbestos-Related Claims that might be filed in the future. In November 1993, Keene reached an agreement in principle with the lawyers representing each subclass with respect to the allocation of Keene's remaining assets. However, on December 1, 1993, the Court of Appeals for the Second Circuit issued a decision dismissing the Limited Fund Action on the grounds of lack of subject matter jurisdiction. In light of this decision, on December 3, 1993, Keene filed its voluntary petition for relief under Chapter 11. On March 28, 1995, Keene, the Official Committee of Unsecured Creditors' and the Legal Representative for Future Claimants entered into a stipulation to file a consensual plan of reorganization that would resolve Keene's Chapter 11 Case. On March 11, 1996, the Bankruptcy Court approved the Second Amended Disclosure Statement regarding Keene's Fourth Amended Plan of Reorganization for solicitation. On June 12, 1996, the Bankruptcy Court and the U.S. District Court held a confirmation hearing on Keene's Fourth Amended Plan of Reorganization, as modified (the "Plan"). The Plan was confirmed by the U.S. District Court by order entered on June 14, 1996. On July 31, 1996, Keene's Fourth Amended Plan of Reorganization, as modified, became effective (the "Effective Date"). On the Effective Date, Keene's wholly-owned subsidiary, Reinhold Industries, Inc. ("Reinhold") was merged into and with Keene, with Keene becoming the surviving entity. Pursuant to the merger, all the issued and outstanding capital stock of Reinhold was canceled. Keene, as the surviving corporation of the merger, was renamed Reinhold. On the Effective Date, Reinhold issued 1,998,956 shares of Common Stock, of which 1,020,000 shares of Class B Common Stock were issued to the Trustees of a Creditors' Trust (the "Creditors' Trust") set up to administer Keene's asbestos claims. The remaining 978,956 shares, identified as Class A Common Stock, were issued to Keene's former shareholders as of record date, June 30, 1996. All of Keene's previously outstanding Common Stock was canceled. Today, Reinhold Industries, Inc. is a manufacturer of advanced custom composite components, sheet molding compounds and rubber rollers for a variety of applications in the United States and Europe. Reinhold derives revenues from the defense, aerospace, printing and other commercial industries. Reinhold is currently organized in six operating segments as follows: Aerospace - The Aerospace business unit manufactures structural and ablative composite components mainly for subcontractors of the U.S. defense industry. These components include rocket nozzles, exit cones, re-entry heatshields, radomes, and airframe and missile frames. In March 1992, to strengthen its market position in defense and aerospace markets, Reinhold acquired 100% of the outstanding common stock of Reynolds & Taylor, Inc. ("R & T"), a California corporation and manufacturer of structural composite components serving, primarily, the defense and aerospace markets. R & T's operations were consolidated into Reinhold's existing facility. During 2002, Aerospace's sales increased by 87% due mainly to increased shipments of components related to the Minuteman III Propulsion Replacement Program. Because a substantial portion of Reinhold's business has been as a supplier to government contractors, Reinhold has developed a limited number of customers with which it does significant amounts of business. Sales to one major customer constituted approximately 83% of this business unit's total sales in 2002. Reinhold's future prospects will depend on the continued business of such customers and on Reinhold's continued status as a qualified supplier to such customers.Additionally, as a supplier to government contractors, nearly all of Aerospace's backlog is subject to termination. Cancellation of the Minuteman III Propulsion Replacement Program would have a significant impact on the profitability of this business unit. Due to reduced military spending in recent years, business consolidations in the markets the Company serves continue to persist. In 2001, Alliant Techsystems, Inc. ("ATK") acquired Thiokol Propulsion ("Thiokol") from Alcoa, Inc. Both ATK and Thiokol are major customers of the Company. The impact, if any, to the Company due to this transaction is indeterminable at this time. CompositAir - In May 1994, Reinhold acquired CompositAir from SP Systems, Inc. CompositAir is a niche manufacturer of composite commercial aircraft seatbacks and other commercial products. CompositAir has been in continuous production of composite seatback frames since 1980. Composites of epoxy, phenolic, or other resin systems, reinforced with aramid or other glass fibers, are laminated into the complex shapes required by today's feature-packed commercial aircraft seats. The weight of the frames is 30% to 40% less than equivalent aluminum frames. CompositAir operates in both Oxnard, California and Santa Fe Springs, California. Over 80% of CompositAir's sales are from two major customers. Reinhold's future prospects will depend on the continued business of such customers and on Reinhold's continued status as a qualified supplier to such customers. In 2002, sales increased by 11% compared to 2001. However, we expect that the impact of 9/11/2001 and the recent severe financial difficulties encountered by the airline industry could negatively impact future operating results. Commercial - The Commercial business unit manufactures compression molded "SMC" (Sheet Molding Compound) products for lighting, water filtration and other various commercial and aerospace applications. SMC formulations include thermosetting polymer matrix resins, glass fibers and other additives which provide strength, stiffness, and protection from corrosion, chemical environments and ultraviolet degradation. Sales in 2002 decreased 6% to $2.9 million from $3.1 million in 2001 due to lower shipments of both in-ground lighting housings and pool filter tanks. Thermal Insulation - On April 20, 2001, Reinhold, purchased certain assets and assumed certain liabilities of Edler Industries, Inc. ("Edler"). Edler is a manufacturer of structural and ablative composite components mainly for subcontractors of the U.S. defense industry. The operation has been renamed the "Thermal Insulation" division of Reinhold. Sales in 2002 decreased 28% to $1.4 million from $2.0 million in 2001. Due to the similarity in products and customer base, the Thermal Insulation division will be combined with the Aerospace division beginning January 1, 2003. NP Aerospace - On April 24, 1998, NP Aerospace Limited ("NP Aerospace"), a wholly-owned subsidiary of Reinhold, purchased from Courtaulds Aerospace Limited ("CAL"), a U.K. Corporation, which is a wholly-owned subsidiary of Courtaulds plc, a U.K. Corporation, certain assets (consisting of Accounts Receivable, Inventory, Machinery and Equipment, Land and Intellectual Property and Patents) and assumed certain liabilities of the Ballistic and Performance Composites Division of CAL. NP Aerospace operates in Coventry, England. NP Aerospace manufactures a wide variety of composite products including compression molded canopies for street lights, commercial aircraft seatback frames, aramid composite combat helmets, protective personal body armor, carbon composite radiography support couches and light-armored composite vehicle structures. NP Aerospace operates in niche marketplaces for the sale of commercial aircraft seatbacks, helmets and light armored vehicles. Due to the limited marketplaces for these products, sales from year-to-year are very unpredictable. Due to the high selling price of armored vehicles, large annual swings in revenue are possible. Sales in 2002 increased 43% to $13.3 million from $9.3 million in 2001 due to higher shipments of body armor and military helmets. Additional information on NP Aerospace is set forth in "Management Discussion and Analysis of Financial Condition and Results of Operations " on page 16 of Reinhold's 2002 Annual Report to Stockholders, which is incorporated herein by reference. Samuel Bingham Enterprises, Inc. - On March 9, 2000, Samuel Bingham Enterprises, Inc., a newly formed wholly-owned subsidiary of Reinhold Industries, Inc., purchased certain assets and assumed certain liabilities of Samuel Bingham Company. Samuel Bingham Company ("Bingham") is a manufacturer and supplier of graphic arts and industrial rollers for a variety of applications. Samuel Bingham was born in 1789 and began manufacturing rollers for the printing industry in 1848. The Company has been in continuous existence since that date. In addition to serving the graphic arts marketplace, the Company also serves other industries such as steel mills, paper mills, converters, metal coaters, textile mills and plastic processors. Products are manufactured from various elastomers including SBR, silicones, EPDM's, Hypalons, Buna N, Neoprenes, natural rubber, vinyl-nitriles, fluoroelastomers, polyether urethanes and polyester urethanes. Bingham manufactures at various locations throughout the United States and sells through a direct sales force to approximately 3,000 customers. Due to the existence of many other manufacturers in this marketplace, the Company is forced to be highly competitive. In 2001, the Company recorded a charge of approximately $5.4 million to write-down long-lived assets associated with the Bingham operating segment. Included in the $5.4 million charge was approximately $1.3 million write-down of fixed assets related to the seven manufacturing and administrative locations of Bingham that were closed or were in the process of being closed. The fixed assets were written down to their estimated fair value which was determined based on the proceeds received and estimated to be received from the sales of the respective facilities. The Company then determined that the estimated future undiscounted operating cash flows of the remaining Bingham operations were less than the carrying amount of Bingham's remaining long-lived assets. Based on its evaluation, the Company determined Bingham's long-lived assets, with a carrying value of $10.7 million, were impaired and wrote them down by approximately $4.0 million to their estimated fair value. This write-down was charged against goodwill. Fair value was based on estimated discounted future operating cash flows of the Bingham operations. Additional information on the Bingham acquisition is set forth in Note 2 to the Consolidated Financial Statements on page 30 and "Management Discussion and Analysis of Financial Condition and Results of Operations " on page 16 of Reinhold's 2002 Annual Report to Stockholders, which is incorporated herein by reference. Additional information on operating segments is set forth in Note 8 to the Consolidated Financial Statements on pages 42 through 43 and "Management Discussion and Analysis of Financial Condition and Results of Operations " on pages 16 through 18 of Reinhold's 2002 Annual Report to Stockholders, which is incorporated herein by reference. Significant Customers Information about significant customers is set forth in Note 10 to the Consolidated Financial Statements on page 45 of Reinhold's 2002 Annual Report to Stockholders, which is incorporated herein by reference. Distribution Products are marketed by company sales personnel and sales representatives in the United States and Europe. Competition Reinhold competes with many companies in the sale of ablative and structural composite products. The markets served by Reinhold are specialized and competitive. Several of its competitors have greater financial, technical and operating resources than Reinhold. Although Reinhold has competed successfully in the critical areas of price, product performance and engineering support services, there is no assurance that Reinhold will be able to continue to manufacture and sell its products profitably in competitive markets. Because a substantial portion of Reinhold's business has been as a supplier to government contractors, Reinhold has developed a limited number of customers with which it does significant amounts of business. Reinhold's future prospects will depend on the continued business of such customers and on Reinhold's continued status as a qualified supplier to such customers. Reinhold's success also depends on developing additional commercial composite products to replace heavier and shape restrictive metals-based products. Raw Materials and Purchased Components The principal raw materials for composite fabrication include pre-impregnated fiber cloth (made of carbon, graphite, aramid or fiberglass fibers which have been heat-treated), molding compounds, resins (phenolic and epoxy), hardware, adhesives and solvents. Occasionally, certain raw materials and parts are supplied by customers for incorporation into the finished product. Reinhold's principal suppliers of raw materials are Cytec Fiberite, Inc. and Newport Adhesives and Composites, Inc. No significant supply problems have been encountered in recent years. Reinhold uses PAN (polyacrylonitrile) and rayon in the manufacture of composites. However, the supply of rayon used to make carbon fiber cloth typically used in ablative composites is highly dependent upon the qualification of the rayon supplier by the United States Department of Defense. North American Rayon has ceased production of the rayon used in Reinhold's ablative products. This could have an effect on the rayon supply in the coming years. Also, a European company has become the world's sole supplier of graphite and carbon, which is used in Reinhold's ablative applications. At this time, Reinhold cannot determine if there will be any significant impact on price or supply. Environmental Matters Reinhold's manufacturing facilities are subject to regulation by federal, state and local environmental agencies. Management believes all facilities meet or exceed all applicable environmental requirements in all material respects and believes that continued compliance will not materially affect capital expenditures, earnings or competitive position. Refer to Item 3 for additional environmental legal proceedings. Patents and Trademarks Reinhold, through its wholly-owned subsidiary, Samuel Bingham Enterprises, Inc., owns one patent registered with the United States Patent and Trademark Office for the "Method of Making Roll for Use in Printing" (U.S. Patent No. 4,492,012). The patent expired in January 2002. Samuel Bingham Enterprises, Inc. holds nine registered trademarks with expiration dates ranging from February 2004 through August 2009. Research and Development Research and development expenditures were approximately $314,000, $348,000 and $327,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Employees At December 31, 2002, Reinhold had 360 full-time employees and 19 part-time employees. Of these employees, 288 (269 full-time and 19 part-time) were employed in manufacturing and 91 (all full-time) in administration, product development and sales. Approximately 34% of the personnel are based at Reinhold's Santa Fe Springs, California facility, approximately 22% are based at NP Aerospace located in Coventry, England and approximately 44% are based at the various manufacturing and administration facilities of Samuel Bingham. Approximately 56 of the employees in Coventry, England are represented by a labor union. Certain Samuel Bingham employees, approximately 32, located in San Leandro, California, Searcy, Arkansas and Blacklick, Pennsylvania are also represented by a labor union. Reinhold believes its workforce to be relatively stable and considers its employee relations to be excellent. Item 2. PROPERTIES The following chart lists the principal locations and size of Reinhold's facilities and indicates whether the property is owned or leased and, if leased, the lease expiration.
LEASED OR OWNED LOCATION USE SIZE LEASE EXPIRATION Santa Fe Springs, CA Administration and 130,000 sq. ft. Leased (Expires 2014) Manufacturing Oxnard, CA R&D 3,600 sq. ft. Leased (Expires 2005) Coventry, England Administration and 80,000 sq. ft. Own Manufacturing Samuel Bingham Properties Portland, OR Manufacturing 14,000 sq. ft. Leased (Expires 2006) San Leandro, CA Manufacturing 21,000 sq. ft. Own Kansas City, MO Manufacturing 10,000 sq. ft. Own Kansas City, MO Manufacturing 19,000 sq. ft. Leased (Expires 2003) Searcy, AK Manufacturing 38,000 sq. ft. Own Jonesboro, GA Manufacturing 9,000 sq. ft. Leased (Expires 2004) Forney, TX Manufacturing 5,000 sq. ft. Leased (Expires 2004) Houston, TX Manufacturing 9,000 sq. ft. Own Blacklick, PA Manufacturing 22,000 sq. ft. Own Palmyra, NY Manufacturing 17,000 sq. ft. Leased (Expires 2003) Franklin Park, IL Manufacturing 13,000 sq. ft. Leased (Expires 2003) Bloomingdale, IL Administration 4,000 sq. ft. Leased (Expires 2004)
Construction of a new building and additional improvements at the Santa Fe Springs location were substantially completed in 2001. Reinhold believes its facilities are utilized consistent with economic conditions and the requirements of its operations. Item 3. LEGAL PROCEEDINGS The Company has been informed that it may be a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), with respect to certain environmental liabilities arising at the Valley Forge National Historical Park Site ("Valley Forge Site") located in Montgomery County, Pennsylvania and at a site formerly known as the Casmalia Resources Hazardous Waste Management Facility, located in Santa Barbara County, California ("Casmalia Site"). CERCLA imposes liability for the costs of responding to a release or threatened release of "hazardous substances" into the environment. CERCLA liability is imposed without regard to fault. PRPs under CERCLA include current owners and operators of the site, owners and operators at the time of disposal, as well as persons who arranged for disposal or treatment of hazardous substances sent to the site, or persons who accepted hazardous substances for transport to the site. Because PRPs' CERCLA liability to the government is joint and several, a PRP may be required to pay more than its proportional share of such costs. Liability among PRPs, however, is subject to equitable allocation through contribution actions. On June 16, 2000 the U.S. Department of Justice notified the Company that it may be a PRP with respect to the Valley Forge Site and demanded payment for past costs incurred by the United States in connection with the site, which the Department of Justice estimated at $1,753,726 incurred by the National Park Service ("NPS") as of May 31, 2000 and $616,878 incurred by the United States Environmental Protection Agency ("EPA") as of November 30, 1999. Payment of these past costs would not release the Company from liability for future response costs. Management believes that in or about 1977, the Company's predecessor, Keene Corporation ("Keene"), sold to the U.S. Department of Interior certain real property and improvements now located within the Valley Forge Site. Prior to the sale, Keene operated a manufacturing facility on the real property and may have used friable asbestos, the substance which gives rise to the claim at the Valley Forge Site. On December 30, 2002, the United States District Court for the Southern District of New York approved and entered a Consent Decree agreed upon by the United States and the Company settling the claims asserted by the National Park Service against the Company. The United States and the Company stipulated that the EPA will not seek reimbursement of its response costs with respect to the Valley Forge Site and that the Company's claim for a declaratory judgment with respect to those costs may be dismissed with prejudice. Under the terms of the Consent Decree, the Company was obligated to pay $500,000 to the Department of the Interior. In return, the Company has received from the United States a covenant not to sue, subject to certain limited exceptions, for claims under CERCLA Sections 106, 107 and 113 and RCRA Section 7003 relating to the Site. The payment to the Department of the Interior was made on January 23, 2003. In September 2002, in accordance with SFAS No. 5, Accounting for Contingencies, the Company recorded a reserve of $500,000 for the estimated cost to conclude this matter. These costs are included in the December 31, 2002 balance sheet as a component of "Accrued Expenses." Pursuant to the Consent Decree and CERCLA Section 113(f)(2), the Company's settlement with the United States bars any other party from asserting claims for contribution for any response costs incurred with respect to the Valley Forge Site by the United States, any State or other governmental entity, or any other party. With respect to the Casmalia Site, on August 11, 2000, the EPA notified the Company that it is a PRP by virtue of waste materials deposited at the site. The EPA has designated the Company as a "de minimis" waste generator at this site, based on the amount of waste at the Casmalia Site attributed to the Company. The Company is not currently a party to any litigation concerning the Casmalia Site, and based on currently available data, the Company believes that the Casmalia Site is not likely to have a material adverse impact on the Company's consolidated financial position or results of operations. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's financial position, results of operations, or liquidity. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders during the fourth quarter of 2002. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS a. Data regarding the market price of Reinhold's common stock is included in the "Selected Financial Data" on page 1 and under Stockholder Information on page 49 of Reinhold's 2002 Annual Report to Stockholders, which is incorporated herein by reference. Reinhold's common stock is traded on the NASDAQ National Market under the symbol RNHDA. The stock price quotations incorporated herein reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. b. The approximate number of common equity security holders is as follows: Approximate Number of Holders of Record Title of Class as of March 5, 2003 -------------- ------------------- Class A Common Stock, par value $.01 per share 1,443 c. A 10% stock dividend was declared on May 8, 2001 payable to shareholders of record as of July 13, 2001. The dividend was payable on or about July 31, 2001. Fractional shares were paid in cash. Fractional share cash payments totaled $8,278.05. A 10% stock dividend was declared on May 1, 2002 payable to shareholders of record as of May 31, 2002. The dividend was paid on June 21, 2002. Fractional shares were paid in cash. Fractional share cash payments totaled $5,913.60. Item 6. SELECTED FINANCIAL DATA Reference is made to the "Selected Financial Data" on page 1 of Reinhold's 2002 Annual Report to Stockholders, which is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 15 of Reinhold's 2002 Annual Report to Stockholders, which is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has two main areas of market risk: interest rates on outstanding debt and fluctuations in the value of the British Pound Sterling to the United States Dollar. All of the Company's debt at December 31, 2002 is at variable interest rates based on LIBOR plus 2.50%. A hypothetical 10% change in interest rates would have had a $0.04 million and $0.08 million impact on interest expense for the years ended December 31, 2002 and 2001, respectively. The functional currency of the Company's wholly-owned subsidiary, NP Aerospace, is the British Pound Sterling (the "Pound"). The exchange rate of the Pound to the Dollar from April 28, 1998 to December 31, 2002 has fluctuated from 1.68 to 1.39, a range of 17%. A hypothetical 10% change in exchange rate would have had a $0.1 million and $0.02 million impact on net income for the years ended December 31, 2002 and 2001, respectively. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information for Item 8 is included in Reinhold's consolidated financial statements as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 and Reinhold's unaudited quarterly financial data for the two year period ended December 31, 2002, in the Consolidated Financial Statements (including the Consolidated Balance Sheet, Consolidated Statement of Operations, Consolidated Statement of Cash Flows, Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss) and Notes to Consolidated Financial Statements) and unaudited Quarterly Financial Data sections of Reinhold's 2002 Annual Report to shareholders, which are incorporated herein by reference. The report of independent auditors on Reinhold's consolidated financial statements is in the Management's and Independent Auditors' Reports section of Reinhold's 2002 Annual Report to shareholders and is also incorporated herein by reference.
Schedule II-A - Valuation and Qualifying Accounts Allowance for Doubtful Accounts Receivable (in thousands) Additions Charged to Balance at -------------------------- Balance at Beginning of Costs and End of Period Expenses Other Deductions Period - ------------------------------------------------------------------------------------------------------------- December 31, 2000 60 105 165 - ------------------------------------------------------------------------------------------------------------- December 31, 2001 165 105 104 166 - ------------------------------------------------------------------------------------------------------------- December 31, 2002 166 179 272 73 - -------------------------------------------------------------------------------------------------------------
Schedule II-B - Valuation and Qualifying Accounts Inventory Reserves (in thousands)
Additions Charged to Balance at -------------------------- Balance at Beginning of Costs and End of Period Expenses Other Deductions Period - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- December 31, 2001 1,183 56 1,127 - ------------------------------------------------------------------------------------------------------------- December 31, 2002 1,127 38 443 722 - -------------------------------------------------------------------------------------------------------------
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On May 1, 2001, by written consent of the Board of Directors, KPMG LLP was dismissed as the Registrant's certifying accountant. Ernst & Young LLP was engaged as the Registrant's new certifying accountant. During 2000, there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure or any reportable events. KPMG LLP's report on the financial statements for fiscal 2000 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required with respect to directors and officers of Reinhold is included in the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders of Reinhold, to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year and is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The information required by Item 11 is included in the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders of Reinhold, to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year and is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is included in the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders of Reinhold, to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year and is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is included in the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders of Reinhold, to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year and is incorporated herein by reference. Item 14. CONTROLS AND PROCEDURES (a)Evaluation of Disclosure Controls and Procedures As of December 31, 2002, an evaluation was performed by the Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. (b)Changes in Internal Controls There have been no significant changes in internal controls or in factors that could significantly affect internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. Financial Statements: The following financial statements are contained in the Company's 2002 Annual Report to shareholders: Report of Independent Auditors Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 Consolidated Balance Sheets at December 31, 2002 and 2001 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss) for the years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements See Part II, Item 8 of this report for information regarding the incorporation by reference herein of such financial statements. 2. Financial Statement Schedules: Certain schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. Schedule II -A - Valuation and Qualifying Accounts Schedule II - B - Valuation and Qualifying Accounts Report of Independent Auditors on Financial Statement Schedules 3) EXHIBITS 2.1 Keene Corporation's Fourth Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated March 11, 1996, incorporated herein by reference to Exhibit 99(a) to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 2.2 Motion to Approve Modifications to the Keene Corporation Fourth Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated June 12, 1996, incorporated herein by reference to Exhibit 99(b) to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 2.3 Finding of Fact, Conclusions of Law and Order Confirming Keene's Fourth Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, as modified, entered June 14, 1996, incorporated herein by reference to Exhibit 99(c) to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 3.1 Amended and restated Certificate of Incorporation of Reinhold Industries, Inc., incorporated herein by reference to Exhibit 99(a), Exhibit A to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 3.2 Amended and restated By-laws of Reinhold Industries, Inc. (Formerly Keene Corporation), incorporated herein by reference to Exhibit 99(a), Exhibit B to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 3.3 Certificate of Merger of Reinhold Industries, Inc. into Keene Corporation, incorporated herein by reference to Exhibit 99(a), Exhibit C to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 3.4 Second amended and restated Certificate of Incorporation and amended By-laws of Reinhold Industries, Inc., on Form DEFS14A filed with the Commission on September 24, 1999. 3.5 Third amended and restated Certificate of Incorporation of Reinhold Industries, Inc., on Form DEF14C filed with the Commission on October 10, 2000. 4.1 Share Authorization Agreement, incorporated herein by reference to Exhibit 99(a), Exhibit H to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 4.2 Registration Rights Agreement, incorporated herein by reference to Exhibit 99(a), Exhibit G to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28,1996. 9.1 Creditors' Trust Agreement, incorporated herein by reference to Exhibit 99(a), Exhibit D to the Plan, to Keene Corporation's Form 8-K filed with the Commission on June 28, 1996. 10.1 Reinhold Industries, Inc. Stock Incentive Plan, on Form S-8, filed with the Commission on November 10, 1997. 10.2 Reinhold Management Incentive Compensation Plan, incorporated by reference to Page 34 to Keene's (Predecessor Co.) Form 10, dated April 4, 1990, as amended by Form 8, Exhibit 10(e), dated July 19, 1990. 10.3 Lease, dated January 4, 1990, by and between Imperial Industrial Properties, Inc. and Reinhold Industries, incorporated by reference to Exhibit 10(b) to Keene's Form 10 dated April 4, 1990, as amended by Form 8, dated July 19, 1990. 10.4 Reinhold Industries, Inc. Retirement Plan (formerly Keene Retirement Plan), incorporated by reference to Exhibit 10(i) to Keene's Form 10 dated April 4, 1990, as amended by Form 8, dated July 19, 1990. 10.5 Management Agreement between Reinhold Industries, Inc. and Hammond, Kennedy, Whitney & Company, Inc. dated May 31, 1999 on Form 10-QSB filed with the Commission on August 16, 1999. 10.6 Stock Option Agreement between Reinhold Industries, Inc. and Michael T. Furry dated June 3, 1999 on Form 10-QSB filed with the Commission on August 16, 1999. 10.7 Stock Price Deficiency Payment Agreement between Reinhold Industries, Inc. and various Stockholders dated June 16, 1999 on Form 10-QSB filed with the Commission on August 16, 1999. 10.8 Asset Purchase Agreement by and between Samuel Bingham Company, a Delaware corporation, and Samuel Bingham Enterprises, Inc. dated February 3, 2000 on Form 8-K/A filed with the Commission on May 23, 2000. 10.9 Amended and Restated Reinhold Industries, Inc. Stock Incentive Plan, on Form S-8, filed with the Commission on December 1, 2002. 10.10 Credit Agreement between Reinhold Industries, Inc., Samuel Bingham Enterprises, Inc., NP Aerospace Limited (the "Borrowers") and LaSalle Bank National Association dated March 21, 2002 on Form 10-Q filed with the Commission on May 9, 2002. 10.11 Directors' Deferred Stock Plan 13 Certain portions of 2002 Annual Report to shareholders (with the exception of the information incorporated by reference into Items 1, 5, 6, 7, 7A and 8 of this report, Reinhold's 2002 Annual Report to shareholders is not deemed to be filed as a part of this report) 16 Letter Regarding Change in Independent Accountants 21 Subsidiaries of the registrant 1) Samuel Bingham Enterprises, Inc. (incorporated in Indiana) 2) NP Aerospace Limited (organized under the laws of the United Kingdom) 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Independent Auditors and Report on Schedule - KPMG LLP 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K NONE SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. REINHOLD INDUSTRIES, INC. Registrant Date: March 28, 2003 By:/s/ Brett R. Meinsen -------------------- -------------------- Brett R. Meinsen Vice President - Finance & Administration (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ Michael T. Furry March 28, 2003 -------------------------------------- Michael T. Furry- President and Director (Principal Executive Officer) /s/ Ralph R. Whitney, Jr. March 28, 2003 --------------------------------------- Ralph R. Whitney, Jr.- Chairman /s/ Andrew McNally, IV March 28, 2003 ------------------------------------- Andrew McNally, IV- Director /s/ Glenn Scolnik March 28, 2003 ------------------------------------------- Glenn Scolnik- Director /s/ Thomas A. Brand March 28, 2003 ----------------------------------------- Thomas A. Brand- Director /s/ Richard A. Place March 28, 2003 ------------------------------------------- Richard A. Place- Director CERTIFICATIONS I, Michael T. Furry, certify that: 1. I have reviewed this annual report on Form 10-K of Reinhold Industries, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ MICHAEL T. FURRY Michael T. Furry President and Chief Executive Officer March 28, 2003 CERTIFICATIONS I, Brett R. Meinsen, certify that: 1. I have reviewed this annual report on Form 10-K of Reinhold Industries, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ BRETT R. MEINSEN Brett R. Meinsen Vice President - Finance and Administration March 28, 2003 EX-10 3 directorsstockplan.txt DIRECTORS STOCK PLAN Exhibit 10.11 REINHOLD INDUSTRIES, INC. DIRECTORS' DEFERRED STOCK PLAN 1. Purpose. The purpose of this Reinhold Industries, Inc. Directors' Deferred Stock Plan (the "Plan") is to assist Reinhold Industries, Inc., a Delaware corporation (the "Corporation") in recruiting and retaining highly qualified directors and to strengthen the commonality of interest between directors and shareholders by providing for the receipt by the directors of the Corporation of all or a portion of their Director Fees (as defined below) in the form of Deferred Stock Rights (as defined below). Any rights created under this Plan shall be mere unsecured contractual rights of participants and their beneficiaries against the Corporation. However, nothing in this Plan shall prohibit the Corporation from establishing a trust to fund the benefits provided under this Plan. 2. Administration. The Plan will be administered by a committee comprising at least two outside directors as defined in Rule 16b-3 promulgated under Section 16 of the Exchange Act of 1934. The composition of the Committee is intended to satisfy Internal Revenue Code Section 162(m) and Rule 16b-3, if applicable. 3. Participation in the Plan. All directors of the Corporation who are not employees of the Corporation ("Eligible Directors") shall be eligible to be granted Deferred Stock Rights under the Plan. The Corporation will maintain an account for each of the Eligible Directors who receives Deferred Stock Rights under the Plan ("Participants"), which account will be maintained even after the Eligible Director ceases to provide services as a Director, and until the Eligible Director's Account in the Plan has been distributed in accordance with the provisions of Section 6 of the Plan. During the period of time the Corporation maintains an account for an Eligible Director, the Eligible Director will be a "Participant" participating in the Plan. 4. Stock Subject to the Plan. The maximum number of shares that may be issued under the Plan is twenty five thousand (25,000) shares of the Corporation's Common Stock, subject to adjustment as provided in Section 10. 5. Defined Terms. "Account" means an account set up for each Participant in the Plan to which Units are allocated pursuant to Deferred Stock Rights, including dividend equivalents. "Board" means the Corporation's Board of Directors. "Change in Control" is defined in Section 7(b). "Deferral Amount" is the amount of Directors' Fees a Director elects to defer into the Plan each calendar quarter, calendar year or the aggregate amount deferred into the Plan over the Participant's years of participation, as the context requires. "Deferred Stock Rights" represent the right to receive the Directors' Fees deferred under this Plan in the form of Common Stock from the Corporation on a later date as elected by the Participant in accordance with Section 6 of the Plan. "Directors' Fees" means the amount that a director is entitled to receive for serving as a director for a calendar year, including, but not limited to an annual retainer and any other fees, as determined from time to time by the Board. An Eligible Director will be entitled to receive 1/12 of his annual retainer for each full calendar month during which the Eligible Director serves as a Director during the applicable calendar year, and any other fees related to serving as a director approved by the Board of Directors. "Distribution Date" means the date on which the Participant first becomes eligible to receive a distribution of Common Stock under the Plan. "Election Form" is defined in Section 6(a). "Fair Market Value" shall be the closing price of the stock as of the day in question (or, the nearest preceding trading day if the day in question is not a trading day) as reported with respect to the market in which shares of such stock are then traded, or, if no such closing prices are reported, on the basis of the mean between the high bid and low asked prices that day on the principal market or quotation system on which shares of such stock are then quoted, or, if not so quoted, as furnished by a professional securities dealer making a market in such stock selected by the Board or the Committee. "Payment Date" Payment Dates are dates within five (5) days of each March 31, June 30, September 30 and December 31 of each calendar year and are the dates on which Units are allocated to Participants' Accounts. "Retirement" means the date the Eligible Director attains age 70 and has participated in the Plan for five years. "Separation from Service" means the date upon which the Eligible Director ceases to serve as a director of the Corporation for any reason including, but not limited to death, disability, removal or resignation. "Special Distribution" is defined in Section 6(g). "Units" are the units of measure allocated to a Participants account on each Payment Date that represent shares of Common Stock that will be distributed in the future pursuant to a Participant's election .. 6. Terms, Conditions and Form of Deferred Stock Rights. Each election to receive Deferred Stock Rights granted under the Plan shall be evidenced by a written agreement in such form as the Committee shall from time to time approve ("Election Form"), which agreement shall comply with and be subject to the following terms and conditions: (a) Amount of Deferral. With respect to each calendar year, an Eligible Director may elect to defer all of his Directors' Fees ("Deferral Amount") by filing an Election Form prior to the beginning of such calendar year. An Eligible Director shall have the right to elect to defer each calendar year. If a Participant does not file a new Election Form, the Election Form on file will remain effective. A Participant may terminate such election by filing a subsequent Election Form with the Committee. Any such change shall be effective as of the first day of the calendar year immediately succeeding the calendar year in which such Election Form is filed with the Committee. The Deferred Stock Right shall be paid out in shares of Common Stock as set forth in Section 6(e). (b) Deferred Stock Rights. Subject to Section 14, effective as of each January 1 of each calendar year (or as soon thereafter as reasonably practicable) commencing for the 2003 calendar year, each Eligible Director then in office who has elected to defer his Directors' Fees in the form of Deferred Stock Rights will be granted a Deferred Stock Right in respect of the Deferral Amount. Any Eligible Director who is first elected other than at an annual meeting of shareholders shall be entitled to receive a Deferred Stock Right for the Deferral Amount (appropriately prorated) provided such election is made within 30 days from the date the Eligible Director is elected. (b) Accounts. Promptly following January 1 of each calendar year, the Corporation shall establish an account for each Eligible Director who elected to receive a Deferred Stock Right ("Account"). The Corporation shall credit to each Eligible Director's Account a number of units representing whole shares of Common Stock ("Units") four times per calendar year, on each Payment Dates. On each Payment Date, for each Eligible Director who elected to defer Directors' Fees, the Corporation will allocate a number of Units to such Participant's Account determined by dividing the Deferral Amount earned in the calendar quarter preceding the Payment Date, by the Fair Market Value of the shares of Common Stock on a date within five (5) days of the Payment Date. The Corporation shall also credit to each Participant's Account, Units equal to any cash dividends (or the Fair Market Value of dividends paid in property other than dividends payable in Common Stock of the Corporation) payable on the number of shares of Common Stock represented by the number of Units in each Participant's Account divided by the Fair Market Value on the date such dividends are declared. A Participant's Account shall continue to be credited with dividends in the foregoing manner until the Participant's Distribution Date. To the extent that the application of the foregoing formula would result in the issuance of fractional shares, no fractional shares shall be issued, but instead, the Corporation shall maintain a separate non-interest-bearing account for each Participant with an Account, a sub-account ("Sub-Account"), which Sub-Account shall be credited with the amount of any Deferral Amounts not convertible into whole shares of Common Stock, which amounts shall be combined with Deferral Amounts that are paid for the next following calendar year. When Units representing whole shares of Common Stock are allocable by the Corporation to the Participant for any calendar quarter, the amounts in such Sub-Accounts shall be reduced by that amount which results in the allocation of the maximum number of whole Units representing whole shares of Common Stock to such Participant's Account. The Corporation shall pay any and all fees and commissions incurred in connection with the payment of Deferred Amounts to a Participant in shares of Common Stock. (d) Calculation of Payment. Each Participant's Account will have a specified number of Units representing shares of Common Stock allocated to it each year a Deferred Stock Right is elected. The number of shares equal to the will become distributable upon the Distribution Date. If a Director terminates service as a Director during the calendar year, he shall forfeit any Directors' Fees that have not yet been earned. (e) Time of Payment. Subject to Section 7, each Participant may elect to receive payment of his Deferred Stock Right as soon as practicable after (i) the date upon which the grantee ceases to serve as a director of the Corporation for any reason including, but not limited to death, disability, removal or resignation ("Separation from Service"), or (ii) the date the Eligible Director attains age 70 years of age ("Retirement") as submitted in the Election Form. In the event of a Participant's death, the shares of Common Stock issuable to the Participant under Deferred Stock Rights shall be issued to the legal representative or legatee of the Participant. In the alternative, a Participant may elect to designate a beneficiary to receive his shares issuable under Deferred Stock Rights in the event of such Participant's death. In order to designate a beneficiary or beneficiaries, such director must complete and deliver to the Corporation a written form (the "Beneficiary Form") on which he makes such designation. Such a designation will become effective when received by the Corporation. If the Participant dies without making a designation, the shares underlying Deferred Stock Rights shall be issued to the legal representative or legatee of the Participant's estate. The first date on which the Participant becomes eligible to receive a distribution under this Section 6(e) shall be the "Distribution Date." At any time not less than 60 days prior to a Distribution Date, the Participant shall be entitled to further defer or postpone the Distribution Date to any specific date or age which will occur at least one year after the previously elected Distribution Date. To be effective, however, the new distribution election form must be completed and filed with the Corporation no later than 60 days prior to the Distribution Date. Distribution will then begin on the age or date selected by the Participant. A Participant can only defer the Distribution Date one time. In no event can a Participant ever accelerate the distribution of his Account to a date prior to a previous Distribution Date. (f) Form of Payment. Eligible Directors will be paid in shares of Common Stock. The Account shall be distributed in the proportion of one share of Common Stock for one Unit. The Account shall be valued and converted to a number of Common Stock as described in Section 6(d)(ii) (any fractional shares shall be converted to and paid in cash). The Director can elect to receive his distribution in either (i) one lump sum payments or (ii) payment in three equal, annual installments, with 1/3 of the shares of Common Stock distributed as soon as practicable after the Participant's Distribution Date and 1/3 of the shares of Common Stock distributed on or near each of the two anniversaries thereafter. (g) Special Distributions. Notwithstanding any other provision of this Section 6, a Participant may elect to receive a distribution ("Special Distribution") of part or all of his Account balance in one or more distributions if (and only if) the Committee determines, in its discretion, that the Participant has experienced an unforeseen emergency that is caused by an event beyond the control of the Participant and that would result in severe financial hardship to the Participant if the early distribution were not permitted. Upon such Special Distribution, the amount of the Participant's Account balance subject to such distribution is reduced by ten percent (10%). Any distribution made pursuant to such an election shall be made within sixty days of the date such election is submitted to the Committee. The remaining ten percent (10%) of the portion of the electing Participant's Account balance subject to such distribution shall be forfeited. 7. Change in Control. The following provisions of this Section 7 will become effective upon a Change in Control. No portion of this Section 7 will apply to any transaction or event referred to herein to the extent it is inconsistent with applicable state or federal law. Notwithstanding any other provision of this Plan to the contrary and subject to the provisions of Section 10(b) of this Plan, upon the occurrence of a Change in Control, the benefit provided by this Section 7 shall be the exclusive benefit provided under this Plan to the Eligible Directors (and to their spouses and beneficiaries), and accordingly, each such person shall not be entitled to any other benefits under this Plan. Upon receipt of his benefit under this Section 7, a person shall cease being a Participant in the Plan. (a) Subject to Section 10(b) of this Plan, effective on a Change in Control, each Participant's Account (including all contributions and earnings as of that date) shall be paid to the Eligible Director and/or beneficiary, as applicable, by the Committee as soon as administratively practicable following the Change in Control in the form of a lump sum cash payment. (b) "Change in Control" shall mean (i) the direct or indirect acquisition by any person, entity or group of persons, within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of securities possessing more than 30 percent (30%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's shareholders which the Board of Directors does not recommend such shareholders to accept or (ii) the approval by the shareholders of the Corporation of a reorganization, merger, or consolidation, in each case, with respect to which persons who were shareholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 30 percent (30%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Corporation's then outstanding securities, (iii) a liquidation or dissolution of the Corporation, or (iv) the sale of all or substantially all of the Corporation's assets. 8. Assignments. Each Deferred Stock Right granted under the Plan by its terms shall not be transferable by the Participant otherwise than by will or by the laws of descent and distribution, or pursuant to a qualified domestic relations order (as defined in Section 414(p) of the Internal Revenue Code of 1986, as amended). 9. Limitation of Rights. (a) No Right to Continue as Director. Neither the Plan, nor the granting of a Deferred Stock Right nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, expressed or implied, that the Corporation will retain a director for any period of time. (b) No Shareholder Rights. Except as specifically set forth in this Plan, a grantee shall have no rights as a shareholder with respect to the Common Stock covered by his Deferred Stock Rights until the date of the issuance to him of a stock certificate covering the shares underlying such Deferred Stock Rights, and no adjustment will be made for rights for which the record date is prior to the date such certificate is issued. Any voting rights with respect to shares covered by a Deferred Stock Right shall be exercised by the Committee. 10. Adjustment Provisions. (a) Recapitalizations. If, through or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Corporation, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, (i) the outstanding shares of Common Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Corporation, or (ii) additional shares or new or different shares or other securities of the Corporation or other non-cash assets of the Corporation are distributed with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment may be made in (x) the maximum number and kind of shares reserved for issuance under the Plan, (y) the number and kind of shares or other securities subject to any then outstanding Deferred Stock Right under the Plan, and (z) the price for each share subject to any then outstanding Deferred Stock Right under the Plan. In the event of any other extraordinary dividend or distribution, whether in stock, cash or other property, or a spinoff, split up or other extraordinary transaction, the number of shares issuable under this Plan shall be subject to such adjustment as the Committee or the Board may deem appropriate, and the number of shares issuable pursuant to any Deferred Stock Right theretofore granted and the price of such Deferred Stock Right shall be subject to such adjustment as the Committee or the Board may deem appropriate with a view toward preserving the value of such Deferred Stock Right. (b) Successors. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Corporation expressly to assume and to agree to perform this Plan in the same manner and to the same extent the Corporation would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Corporation and any successor of or to the Corporation, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Corporation whether by sale, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Corporation" for the purpose of this Plan), and the heirs, beneficiaries, executors and administrators of each Eligible Director. 11. Amendment of the Plan. The Board may at any time amend or discontinue the Plan and the Committee may at any time amend or cancel any outstanding Deferred Stock Right for any purpose, including, but not limited to satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Deferred Stock Right without the holder's consent. 12. Notice. Any written notice to the Corporation required by any of the provisions of the Plan shall be addressed to the Secretary of the Corporation and shall become effective when it is received. 13. Effective Date and Duration of the Plan. (a) Effective Date. The Plan shall become effective on the date set forth below. Amendments to the Plan shall become effective when adopted by the Board of Directors, unless otherwise provided. No shareholder approval is required to implement this Plan. (b) Termination. The Plan shall terminate upon the date on which all shares available for issuance, and all cash payable under, the Plan shall have been issued and paid pursuant to the Deferred Stock Rights granted under the Plan. 14. Miscellaneous (a) Investment Representations. The Corporation may require any person to whom a Deferred Stock Right is granted, as a condition of such Deferred Stock Right, to give written assurances in substance and form satisfactory to the Corporation to the effect that such person is acquiring the Common Stock subject to the Deferred Stock Right for his own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Corporation deems necessary or appropriate in order to comply with federal and applicable state securities laws. (b) Compliance with Securities Laws. Each Deferred Stock Right shall be subject to the requirements that if, at any time, counsel to the Corporation shall determine that the listing, registration or qualification of the shares subject to such Deferred Stock Rights upon any securities exchange or under any state or federal law is necessary as a condition of, or in connection with, the issuance or purchase of shares thereunder, such shares may not be issued unless such listing, registration, qualification, consent or approval, or satisfaction of such condition shall have been effected or obtained on conditions acceptable to the Board. Nothing herein shall be deemed to require the Corporation to apply for or to obtain listing, registration or qualification, or to satisfy such condition. (c) Withholding Taxes. The Corporation shall have no withholding obligations with respect to Deferred Stock Rights or the issuance of Common Stock under this Plan and each Eligible Director will be responsible for taxes owed under the Plan. The Corporation will issue the required information return on Form 1099 as appropriate. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, this Plan is effective as of the 30th day of September, 2002. REINHOLD INDUSTRIES, INC. By: /s/ Michael T. Furry -------------------- Michael T. Furry, President and Chief Executive Officer Attest: /s/ Brett R. Meinsen -------------------- Brett R. Meinsen, Secretary EX-13 4 annual2002.txt 2002 ANNUAL REPORT Reinhold Industries, Inc. 2002 Annual Report We, THE UNDERSIGNED /s/ Ralph R. Whitney, Jr. --------------------------- Ralph R. Whitney, Jr.- Chairman /s/ Glenn Scolnik ----------------------------- Glenn Scolnik /s/ Andrew McNally, IV ----------------------------- Andrew McNally, IV /s/ Thomas A. Brand ----------------------------- Thomas A. Brand /s/ Richard A. Place ----------------------------- Richard A. Place /s/ Michael T. Furry ----------------------------- Michael T. Furry The following principles shall always guide the Board of Directors of Reinhold Industries, Inc. Principles of the board of directors I We shall constantly strive to enhance shareholder value. II We will conduct the Company's business so as to hold the highest standards of integrity and ethical values, as measured by any review. We, our officers, management and employees, will be held to these same standards. III Each and all shareholders shall be treated alike. IV The shareholders will be regularly informed as to the conduct of the Board, the Company, and its service providers. V Profits and cash in the Company will be expended first to reduce debt, secondly, to finance internal growth and achieve purposeful acquisitions, and thirdly, as dividends to shareholders. VI Management compensation will be appropriate compared to similar industry positions and responsibilities. VII We will strive to achieve the highest standards of honesty, openness, and fairness in our relationships with our shareholders, customers, suppliers, and employees. Board of Directors Michael T. Furry President and CEO Ralph R._Whitney, Jr. Chairman Andrew McNally IV Thomas A. Brand Richard A. Place Glenn Scolnik SELECTED FINANCIAL DATA Reinhold Industries, Inc.
2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------- Summary of operations (in thousands) Net sales $ 59,042 48,947 49,287 39,140 25,996 Gross profit $ 18,221 13,140 14,789 10,783 6,503 Write-down of long-lived assets $ - 5,351 - - - Operating income (loss) $ 6,978 (2,921) 5,364 5,704 2,196 Gain on sale of asset $ - - 962 - - Interest (expense) income, net $ (320) (532) (529) 100 (17) Net income (loss) $ 4,152 (3,723) 3,517 3,570 1,435 Year end position (in thousands) Cash and cash equivalents $ 3,037 4,105 7,121 9,419 3,622 Working capital $ 10,495 10,981 14,589 13,256 8,961 Net property and equipment $ 11,307 10,564 11,280 5,726 5,476 Total assets $ 36,734 33,029 40,709 25,234 20,215 Long-term debt $ 124 6,280 8,721 1,125 1,550 Long-term liabilities $ 5,872 4,178 449 204 2,559 Stockholders' equity $ 19,802 15,077 22,905 18,423 11,263 Per share data (Note 1) Net income (loss): Basic $ 1.56 (1.40) 1.32 1.34 0.54 Diluted $ 1.55 (1.40) 1.31 1.34 0.54 Stockholders' equity $ 7.44 5.67 8.62 6.93 4.24 Market price range: High $ 8.99 7.85 10.75 9.86 6.95 Low $ 4.73 4.70 4.95 4.88 4.14 Other data (in thousands except stockholder & employee data) Orders on hand $ 34,735 25,263 16,442 13,841 16,194 Average shares outstanding - basic 2,660 2,658 2,658 2,658 2,658 Average shares outstanding - diluted 2,681 2,658 2,695 2,667 2,658 Average number of common stockholders 1,465 1,516 1,629 1,711 1,808 Average number of employees 382 418 439 289 220 Note 1: All share information presented has been adjusted for the Company's 10% stock dividends in 2002, 2001 and 2000.
(Graph) Sales 1998 - 2002 (In Millions) 1998 - 26.0 1999 - 39.1 2000 - 49.3 2001 - 48.9 2002 - 59.0 1 A MESSAGE FROM THE PRESIDENT Preface Our annual report this year is conceived to serve two purposes. The first is the usual one, to inform stockholders, employees, customers, suppliers, potential investors, and the financial community at large about the state of our company. The other is to address all people, and to define our own position in regard to matters of ethics and integrity in the conduct of business. Preface Our annual report this year is conceived to serve two purposes. The first is the usual one, to inform stockholders, employees, customers, suppliers, potential investors, and the financial community at large about the state of our company. The other is to address all people, and to define our own position in regard to matters of ethics and integrity in the conduct of business. Revelations of ignorance and abuse of ethical standards leading to violations of law are reported almost daily in the media. And yet, most businesses, large and small, are managed by people of integrity. The depredations of a few have tarnished the honest labors of many. In the quest of profit, it is not sufficient that business do things right. Business must do the right thing. It must not only be right, it must seem right. It must serve the public interest as well as those of its stockholders. There is no anomaly in that. Ethical standards are good not only for your conscience, they are good for business. As technology has expanded the world has contracted, and the interdependence of all people has been magnified. Each of us is a microcosm of that world. Each of us, in our sense of integrity, in our respect for ourselves and others, affects the lives of everyone we deal with. Prophetically, John Donne wrote, "No man is an island." He also admonished, "Ask not then for whom the bell tolls, it tolls for thee." (Graph) Net Income 1998 - 2002 (In Millions) 1998 - 1.4 1999 - 3.6 2000 - 3.5 2001 - (3.7) 2002 - 4.2 (Picture) Michael T. Furry President and Chief Executive Officer 2 (Graph) Earnings per Share 1998 - 2002 (In Dollars) 1998 - 0.54 1999 - 1.34 2000 - 1.31 2001 - (1.40) 2002 - 1.55 It seems that with every new day we experience complex and increasingly difficult ethical issues. Without surcease we are impelled to re-examine and refine our ethical beliefs and values. It is in that context that we publish in this report the Principles of the Board of Directors. It is representative of the codes of conduct that have long governed us at Reinhold Industries. It is also in the nexus of these concerns that we publish here four stories about American businessmen who have exemplified the best of us by the integrity of their conduct in trying circumstances. It is fitting in the top of this report that we inform you of the bottom line: 2002 was a record year for Reinhold Industries, with $59.0 million in gross sales, $4.2 million in net income, and a year ending backlog of $34.7 million. Two business units, Aerospace and NP Aerospace, enter 2003 with very strong backlogs. Four business units finished in the black, at a time when business generally is treading water in a sea of red. The Aerospace Business Unit led the way with pretax earnings of $7.0 million on sales of $17.8 million. NP Aerospace, our United Kingdom subsidiary, followed with a pre-tax profit of $1.6 million on sales of $13.3 million, their best performance since 1999. CompositAir earned $0.4 million pre-tax on sales of $6.5 million, and our Commercial unit earned $0.2 million pre-tax on sales of $2.9 million. Thermal Insulation lost $0.2 million on sales of $1.4 million. Overall, we are pleased, but we are not satisfied. Bingham Business Unit This beleaguered subsidiary, acquired in March of 2000, had a disappointing year with sales of $17.1 million, down $2.1 million from 2001, and an operating loss of $0.5 million. This, despite significant cost reductions initiated since acquisition, follows a loss of $0.6 million in 2001, when the printing industry fell into a slump that was exacerbated by the events of 9/11 and continues to deepen. The need for printing rollers has declined with it, and so have profit margins. We have responded by focusing our marketing efforts on rollers for steel mills and other industrial applications. Our San Leandro, California plant does well in such markets, and we are carrying our knowledge and expertise from there to users in South Carolina, Pennsylvania, Arkansas, and Alabama. We have a proprietary rubber material Ultra Tuff that was designed for abrasive applications, and it sets us apart in industries that have not experienced the severe decline that graphic arts has. Consequently, profit margins are more easily protected. We have closed our Houston plant and moved manufacturing from there to Kansas City. The Houston property is up for sale. This concentration of production leaves us with plants in Kansas City, Missouri; Black Lick, Pennsylvania; Palmyra, New York; Searcy, Arkansas; and San Leandro, California. We have depots in Dallas and Atlanta. 3 (Graph) Return on Capital Employed 1998 - 2002 (In Percentage) 1998 - 10.2 1999 - 19.4 2000 - 10.9 2001 - (13.3) 2002 - 17.2 Business may slow down, but we won't. We are moving aggressively in anticipation of the turnaround that is certain to come, upgrading equipment to cut costs. To that end, we continue to invest in new equipment, most recently for more efficient roller grinding machines. We are also engaged in a program of continuous training for regional plant managers. In comparison to 2002, we expect slightly improved performance from Bingham in 2003. Construction Project A This program entailed the design and construction of our new, 50,000-square-foot Santa Fe Springs facility, completed in 2001, and the renovation of existing buildings comprising 84,000 square feet, completed in 2002. Construction Project B Originally scheduled for completion in mid 2002, this program entailed the design and fulfillment of discrete work places for each business unit to eliminate work force movement from building to building. The ponderous labors required to make it happen: old to new slabs, walls, wiring, lighting, ducting, painting, heavy machinery relocation and repairs, and old to new parking lots, have been impeded by on-going production demands. Nevertheless, it will be completed in the second quarter of 2003. Commercial Business Unit This unit will benefit immensely from Project B. Plant supervision and workforce will inhabit one building instead of three. Sheet molding compounds will be made close to the presses, which have undergone needed repairs and maintenance and been anchored to slabs that raise the work to optimum levels. There is now room enough for work tables that facilitate materials handling and pattern processes, and safety has been enhanced by prudent task space allotment. Five years of spade work in trade shows in San Francisco, Las Vegas, and New York has cultivated a widening acceptance of a fundamental Reinhold precept, that advanced composites are superior to metals where corrosive conditions exist, especially where in-ground electrical installations are required. Our marketing effort targets architects, engineers, owners, and material specifiers in emphasizing the benefits of composites over metals where longevity and facility for architectural shapes are factors. A new product, swimming pool heater covers, is doing well. This is another example of how the advantages of sheet molding compounds for corrosion resistance and ease of fabrication are capturing buyers. We expect steady sales and profit growth in 2003 and beyond. CompositAir Business Unit This unit entered 2002 under a cloud of uncertainty. The move from Camarillo to Santa Fe Springs consumed much of the first quarter, with most of the work force, having settled in the Camarillo environs, declining to make the 65-mile relocation. This necessitated the hiring 4 (Graph) Backlog 1998 - 2002 (In Millions) 1998 - 16.2 1999 - 13.8 2000 - 16.4 2001 - 25.3 2002 - 34.7 and training of new employees for each phase of the seatback-making operation. Nevertheless, the unit exceeded budgeted sales and profits for the year, improving their performance in each succeeding quarter. The future, however, is impossible to predict considering the tentative state of the airline industry. We expect a modest profit in 2003. NP Aerospace Business Unit The momentum that this business unit generated in 2002 augured well for 2003. The backlog was $10.3 million at December 31, 2002. This strong opening backlog will virtually assure the anticipated sales growth in 2003. Work in progress includes an order from Sicma, a French airline seating company, for tourist seatbacks for Air France. A gratifying aspect of the order is that it was pulled through by Air France, the ultimate customer. Their demands were at the core of Reinhold's marketing thrust: advanced composites are lighter, more amenable to special shapes, and stronger than aluminum. This order is especially significant because Sicma owns an aluminum fabrication plant. Despite that, with the impetus of the Air France initiative, we were able to convince Sicma engineers of the benefits of composites over metal, a significant breakthrough. Another far-reaching piece of business in house is an order for 900 highly sophisticated helmets with built-in lifesaving features for Italian police. It is the product of close collaboration between NP Aerospace designers and the customer and is expected to be a secure source of business for many years. Aerospace Business Unit The backlog for this unit at December 31, 2002, was $22.3 million, including the backlog for Thermal Insulation, which has been blended into Aerospace. We anticipate continued sales growth for this unit in 2003. Valley Forge On December 30, 2002, the United States District Court for the Southern District of New York approved a consent decree by which the company agreed to, and made, a $500,000 payment in full and final settlement of our dispute with the National Park Service relative to the reimbursement of costs incurred or to be incurred at the Valley Forge National Historic Park in connection with the release or threatened release of hazardous substances. This unfortunate episode is now closed. Debt Reduction In December of 2002 we paid $2.0 million to LaSalle Bank. During the full yearwe reduced our debt from $9.7 to $3.0 million, and we plan to pay off the remaining $3.0 million by the end of the second quarter of 2003. An acquisition could modify that plan, but there are no acquisition prospects currently under consideration. Our present focus is on improving the operations of our present business units. Insurance Costs Workers Compensation Insurance costs increased 31% for the new policy period. The cost now represents more than 10% of wages, higher than the cost of Social Security. Group health costs rose roughly 8%, and Property & Casualty Insurance is up 25%. (continued on page 14) 5 THE 5 DOLLAR DAY By 1903, the motor car craze was rampant in Europe and America. Companies were founded daily to make cars run by steam, electricity, gasoline. Already there were 57, among them Oldsmobile, Packard, Buick, Cadillac, Pierce, Franklin, Daimler, Stanley. In June of that year, The Ford Motor Car became another. By 1904 there would be 178. There were 12 stockholders. Henry Ford and Alexander Malcomson, a successful Detroit businessman, held a majority interest. Ford held the patents upon which the company was based. He envisioned a lightweight vehicle, a low maintenance "family horse" for the common man, one that could be "mass produced" (the phrase originated at that time) to sell for $500 or less. His was a singular, egalitarian concept, one that would rend his company before it was fully validated by the Model T, which would not be introduced until 1908. Ford grew rapidly. From October 1, 1903 until September 30, 1904, 1,700 cars were sold at an average price of $907. Dividends of $98,000, nearly equal to their original investment, were paid to the 12 stockholders. Earnings reached $27 million in 1913; dividends amounted to $15.2 million. In 1914-1915, 308,213 uniform Model Ts, available in any color the buyer wanted (so long as it was black) were sold at $490 per car. It was a turbulent time. Immigration was at its zenith; 8,795,386 came from 1901-1910. Jobs were available, but skilled labor was scarce. Wages were dismally low. Child labor and piecework were prevalent. Industrial accidents were numerous. Workers were restive. Labor unions were struggling to survive. Many didn't. A cauldron of management-labor hostility boiled over into sporadic violence. Discord between work and home life was manifest. Everywhere, sociologists and reformers were outspoken about abuses. As early as 1911, the Ford Motor Company recognized the existence of these deepening problems. The company's response was to hire John Lee to take charge of employment. Burning with ambition to make Ford a model of labor management, he went to work on multiple fronts. Safety had long been a prime concern at Ford, but Lee improved and extended it. He reformed worker rights policies, insulated employees from discriminatory conduct by foremen, instituted proper pay increases and continuous employment, curtailed layoffs, and reformed the wage system through job evaluation. By comparison with labor policy generally, Ford's was enlightened. A history of profit-sharing ran back to 1905, when $10 was paid to office workers at Christmas. Seniority and efficiency bonuses were paid to select groups from 1908 to 1913. Against this backdrop of history, a consciousness of the need for change was coalescing. A presentiment of some moment, a revelation whose time had come, seemed surely to be at hand. A few weeks before the end of 1913, Henry and his son, Edsel, walking through the factory, saw two men fighting. Henry was stunned and ashamed. Why would his employees use their fists against one 6 (PICTURE) another? He remembered then something that he had been told: men under barbarous living conditions acted like savages, and conditions were barbarous when men were paid mere subsistence wages. Shareholders, executives, and customers benefited from high profits, he reasoned, but what about benefits for the workers? On New Year's Day of 1914, Ford convened a meeting of Plant Manager James Couzens and five other top managers in his office to discuss production and wages for the coming year. It was noted Ford was in a thoughtful mood. As discussion progressed, he covered his blackboard with figures. The current wage for unskilled labor was $2.34 for a 9-hour day, slightly higher than the average for heavy industry generally, but when Ford considered the totals for wages, they seemed puny compared with anticipated profits. He kept raising the minimum - - to $3, to $3.50, and then, over vehement protests from one of his managers, to $4 and $4.50 - for an 8-hour day! A volcanic Couzens watched with smoldering hostility. Finally, he erupted: "Well, you're up to $4.75!" he ranted. "I dare you to make it $5!" "Done!" said Ford at once, turning to inscribe a big $5 boldly upon his blackboard. Acknowledgment in part to "The Times, The Man, The Company" by Alan Nevins and Frank Ernest Hill. 7 MAKE NO LITTLE PLANS San Francisco 5:13 a.m. April 17, 1906 "The ground seemed to twist like a top while it jerked this way and that, and up and down and every way. . . My God, we're going into the Bay!" - Police Sergeant Jessie Cook. Office buildings, apartment houses and churches collapsed. Gas and water mains burst. Terrified people and terrified horses stampeded through rubble-strewn streets. The next day, fire raged through the city, fed by wood- and coal-burning furnaces in larger buildings and gas lighting fixtures in many rooms. Destroyed were hotels, businesses, hospitals, the city hall, and the opera house where opera superstar Enrico Caruso was billed to sing the night of the quake. Chaos spawned countless acts of heroism and sacrifice - along with looting, and heartless shootings of confused innocents by over-zealous police. When the fires were finally out, officials tallied the losses: 5,000 or more dead; 200,000 homeless; 490 city blocks destroyed; 28,000 buildings worth more than $350 million - two-thirds of the city's property value - gone. A week later, the city's once-robust business life was still paralyzed. City services were crippled. People needed cash to live on and businesses needed loans to rebuild with, but not one of the city's forty big banks was anywhere near ready to reopen. One small bank was open for business. It was Amadeo Peter Giannini's Bank of Italy [later Bank of America], also known as the People's Bank because it loaned money to small-business owners who had been turned away by the big banks. Giannini, respected in the Italian community as one businessman who would never deal with the notoriously corrupt municipal government, was used to solving his own problems. Somehow, he had gotten two teams of horses and fruit wagons and carted $80,000 in gold and silver - the entire wealth of the bank - through the smoldering streets to his home in San Mateo, 17 miles from the city. Nine days after the fire, Giannini was dispensing cash and making loans at the Washington Street wharf using two barrels and a plank as his desk. In the days, weeks and months that followed, the people of San Francisco worked tirelessly to rebuild their city. For a master plan, they turned to architect Daniel Burnham, whom they had hired before the disaster to draw up plans for a modern 20th Century city. Those plans were long overdue. San Francisco was only three generations beyond the Gold Rush days of '49 when "there arose a unique criminal district that for almost seventy years was the scene of more viciousness and depravity, but which at the same time possessed more glamour, than any other area of vice and iniquity on the American continent," in the words of Herbert Asbury's chronicle, The Barbary Coast. In 1906, men still outnumbered women by a wide margin; gambling, opium and prostitution were still a city hallmark. 8 (PICTURE) "Make no little plans. They have no magic to stir men's blood," Burnham advised the shaken city officials. He laid out the vision of a new San Francisco - an exciting city whose busy deep-water harbor would be integrated with livable neighborhoods and modern centers of business, finance and culture. Money and manpower poured in from around the country to help turn those plans into sparkling reality. A. P. Giannini's tiny bank played an important role in the rebuilding and eventually became one of the nation's largest banks. By 1915 a new city had risen from the ashes. In 1936 the Oakland Bay Bridge linked the city to mainland commerce. In 1937 the Golden Gate Bridge spanned the entrance to the harbor and connected a sophisticated city to the posh rural environs of the upper peninsula. Thus did San Francisco earn the right to the motto bestowed on it by columnist Herb Caen: The City That Knows How. 9 THAT WAS A HELL OF A LOT OF FUN The setting was classic business myth: two ambitious contrarians sketching plans on a cocktail napkin for a new kind of business that would break all the rules and show the arrogant big guys who's number one. At least, that's how Rollin King and Herb Kelleher like to tell the story of the meeting in 1966 when they invented Southwest Airlines. Indeed, outsize ambition, bare-knuckle political infighting . . . and outrageous fun . . . are so commingled in the Southwest story that it is impossible to separate myth from reality. Today, Southwest is a living business legend, the only profitable airline in the industry. Since 1973, through recessions, oil shocks, and Gulf War I, Southwest has never lost a penny. For most of 2002, Southwest's total market value hovered around $9 billion -- more than that of all other major US airlines combined. Today the "big guys" - US Airways, United, Continental - are trying to figure out how to make their airlines more like Southwest. Rollin operated a commuter airline. Kelleher was his lawyer and Southwest's charismatic board chairman after mid-1978. The napkin meeting took place in San Antonio. The plan for the new airline had these elements: Operate only within the borders of Texas (for starters, Dallas-San Antonio-Houston) to avoid federal regulation. Fly point-to-point (no hubs) to eliminate nonproductive waiting for connecting flights. Fly often (every half hour is not too often) so you need fewer planes and keep them in the air more hours (per passenger) than your competition. Keep prices low to keep customers coming. Create a corporate culture of fun - in the boardroom, in the office, in the air. Keep costs down -- except wages, benefits and profit sharing. Southwest almost didn't get off the ground. Its competitors fought them with injunctions all the way to the US Supreme Court. Frantic associate to Kelleher: "What do I do if the sheriff shows up?" Kelleher: Leave tire tracks on his shirt. We're going, hell or high water. When Braniff cut the price of a one-way fare from Houston-Dallas from $26 to $13, Kelleher's response: We offered customers a choice: $13 fare or $26 plus a bottle of whiskey. That made us the largest liquor distributor in Texas for a couple of months. Soon after, Braniff was out of business. Later, when Southwest was operating in Ohio, US Airways pulled out of six cities in that state. Kelleher to his financial officer: Get out there, get extra airplanes, get extra gates. Business rationale: The way you have to be in the airline business is: ready, fire, aim. But still later, when a rival offered a free trip to Polynesia on a contested route, Southwest dropped out. Business rationale: When something turns into a financial mistake, just stop it. . . You can't get emotional about it. The conservative manager: Manage in good times so you're ready for bad times. We never get dangerously in debt. Never let costs get out of hand. So when fuel costs went down to $10 a barrel, Kelleher bought oil in the futures market: When the [high-priced oil] crisis hit, we were ready. 10 (PICTURE) The Southwest culture stresses that respecting employees and customers is good business: I think showing respect for people's ideas is very very important because as soon as you stop doing that, you stop getting ideas. Southwest is 85% unionized, but disputes are rare, turnover rate lowest in the industry: Nothing kills your company's culture like layoffs. Nobody has ever been furloughed here. We could have furloughed at various times and been more profitable. Early on, Kelleher had an agreement with his board that he would step down at age 70 (in 2001): You should never become infatuated with power. Riding into the sunset: When I look back on all my years at Southwest - all the fights, the fare wars, the political battles - I just think to myself: `That was a hell of a lot of fun.' And I wouldn't change a thing. [Kelleher quotes from Los Angeles Times 6/9/96 and Fortune 5/28/01] 11 WE'RE COMING BACK Tylenol was Jim Burke's baby. As a rising star at Johnson & Johnson, Burke had bet his career on transforming Tylenol from a pricey specialty product into a staple in everybody's medicine cabinet. Top management had balked, but Burke had persuaded them that Tylenol either had to make the leap into the mass market or face extinction. Five years later, by the end of the 1970s, Tylenol had won a dazzling 35% market share. And James Edward Burke was now J&J's board chairman and CEO. Burke was naturally pleasant and optimistic, but always steeled to take a blow from unexpected adversity. He had grown up in the 1930s in the hardscrabble country of rural Vermont and upstate New York. His father had sold insurance to farmers and small-business owners trying to make ends meet through a grinding Depression that promised never to end. Still, he loved his small town life. His high school yearbook dubbed him The Happy Warrior. World War II changed everything. Young Burke joined the Navy and was sent to the Pacific, a freshly minted officer in command of a flat-bottomed ship designed to unload tanks and men onto island beachheads. It's possible that only the hell of Hiroshima and Nagasaki spared him from the hell of an assault on the Japanese homeland. Burke had come back from the war, finished college, and gone to Harvard Business School under the GI Bill, which paid all expenses. Now, in the fall of 1982, everything was about to change again. An associate burst into Burke's office with the news that three people in Chicago had died as a result of taking Tylenol capsules laced with cyanide. Four more would die in the same way. A kaleidoscope of unknowns obscured his insight to what had happened, what might come next, what to do. His first move was characteristic. Rather than delegate the handling of the crisis, Burke took personal charge of it and delegated all his other duties to associates. Burke recalled all Tylenol products, heedless of the $100 million cost. The recall was big news. Almost every American knew about the poisoning. Burke's reputation hung in the balance. So did Tylenol's, the business press clucked. Tylenol's share of the over-the-counter market dropped to 7%. Rival makers of Anacin worked around the clock to fill the sudden void in supply. After writing notes of condolence to the families of poison victims, Burke introduced a triple-sealed tamper-detectable bottle and launched an aggressive ad campaign featuring discount coupons for bottles of the new Tylenol. Later, he urged his sales force to frankly acknowledge the "national tragedy" that had occurred and the awful grief it had inflicted on the victims and on all Americans. He ended with the ringing commitment: "We're coming back." And back they came. Soon J&J stock was hitting all-time highs. Tylenol recaptured its pre-crisis market share and then some. 12 (PICTURE) In February 1986 the unthinkable happened again: a young woman in Yonkers, New York took two Tylenol capsules to help herself get to sleep. . . and never woke up. The capsules had been pried open and a few tablets laced with potassium cyanide. Again, Burke took charge. He concluded that there could never be a truly tamper-proof package, since one had somehow been successfully overcome in the second incident. Neither Tylenol nor J&J could survive a third incident, he felt. The new "package" kept the triple-sealed bottle but changed the hollow capsule that held granular medicine to a user's choice of hard, oval-shaped "caplets" or round tablets -- both types coated to make them easier to swallow and much harder to contaminate without detection. By now, J&J's many publics had come to trust the century-old company, and it lost little or no momentum in its markets. President Reagan praised Burke for embodying "the highest ideals of corporate responsibility and grace under pressure." In 1987 Johnson and Johnson was rated among the ten most admired companies in America. In 1989 Burke stepped down as chairman and the next year was named to the Business Hall of Fame. Characteristically, he brushed aside the accolades: "My God, what did people expect we'd do?" 13 A Message From The President, continued from page 5 Pension Assets Decline The Reinhold and Bingham Pension Assets incurred losses in 2001 that will reduce earnings in 2003 by $740,000. We have prepared for the impact of the decline in the 2003 budget. There is no cash consequence for 2003, but in 2004 we will be compelled to pay $980,000 in cash into the pension fund. Sarbanes-Oxley A new devil jumped up in the past year. The Sarbanes-Oxley Act of 2002 is a reaction to the Enron debacle, and the expense it creates is a glaring example of the high costs to others that can result from the corruption of one. Section 404 of that act requires that we document and report on our internal financial controls. Our external auditors will be required anually to attest to and report on management's assertion on the effectiveness of Reinhold's internal controls and procedures for financial reporting. This process will consume a significant amount of our financial human resources. Compliance with the Sarbanes-Oxley Act will have a significant impact on our finance, accounting and auditing costs for 2003. All things considered, positives far out-weigh negatives for the year 2002. For that we are grateful to our employees, our customers, and our suppliers. Let us all work together, with integrity and intelligence, to make 2003 an even better year. /s/ Michael T. Furry Michael T. Furry, President and CEO 14 Reinhold Industries, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reinhold Industries, Inc. (Reinhold or the Company) is a manufacturer of advanced custom composite components, sheet molding compounds and rubber rollers for a variety of applications in the United States and Europe. Reinhold derives revenues from the defense, aerospace, printing and other commercial industries. Critical Accounting Policies The Company's consolidated financial statements and related public financial information are based on the application of generally accepted accounting principles ("GAAP"). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in the external disclosures of the Company including information regarding contingencies, risk and financial condition. The Company believes its use of estimates and underlying accounting assumptions adhere to generally accepted accounting principles and are consistently and conservatively applied. Valuations based on estimates are reviewed for reasonableness and conservatism on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenues, receivables, inventories, acquisitions, valuation of long-lived and intangible assets, pension and post-retirement benefits, the realizability of deferred tax assets, and foreign exchange translation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. Revenue Recognition and Allowances for Doubtful Accounts The Company recognizes revenue when title and risk of ownership have passed to the buyer. Allowances for doubtful accounts are estimated based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have a material effect on reserve balances required. Inventories We value our inventories at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The Company writes down its inventory for estimated obsolescence equal to the cost of the inventory. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations. Fair Value of Assets Acquired and Liabilities Assumed in Purchase Combinations The purchase combinations carried out by us require management to estimate the fair value of the assets acquired and liabilities assumed in the combinations. These estimates of fair value are based on our business plan for the entities acquired including planned redundancies, restructuring, use of assets acquired and assumptions as to the ultimate resolution of obligations assumed for which no future benefit will be received. Should actual use of assets or resolution of obligations differ from our estimates, revisions to the estimated fair values would be required. If a change in estimate occurs after one year of the acquisition, the change would be recorded in our statement of operations. Pensions and Post Retirement Benefits The valuation of the Company's pension and other post-retirement plans requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. These assumptions include discount rates, investment returns, projected salary increases and benefits, and mortality rates. The actuarial assumptions used in the Company's pension reporting are reviewed annually and compared with external benchmarks to assure that they accurately account for our future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on the Company's pension expenses and related funding requirements. Valuation of Long-lived and Intangible Assets In accordance with SFAS No. 142 and SFAS No. 144, we assess the fair value and recoverability of our long-lived assets, including goodwill, whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. In doing so, we make assumptions and estimates regarding future cash flows and other factors to make our determination. The fair value of our long-lived assets and goodwill is dependent upon the forecasted performance of our business and the overall economic environment. When we determine that the carrying value of our long-lived assets and goodwill may not be recoverable, we measure any impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, we may have to record additional impairment charges not previously recognized. During 2001, we performed an assessment of the goodwill related to our acquisition of Samuel Bingham Company ("Bingham"), pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." As a result, we recorded a charge of $4.0 million during the third quarter of 2001 to reduce goodwill associated with the purchase of Bingham. The charge was based on the amount by which the carrying amount of these assets exceeded their fair value. 15 Reinhold Industries, Inc. MANAGEMENT' DISCUSSION AND ANALYSIS (cont'd) Income Taxes We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. Cumulative Foreign Exchange Translation Accounting In preparing our consolidated financial statements, we are required to translate the financial statements of NP Aerospace from the currency in which they keep their accounting records, the British Pound Sterling, into United States dollars. This process results in exchange gains and losses which are either included within the statement of operations or as a separate part of our net equity under the caption "foreign currency translation adjustment." Under the relevant accounting guidance, the treatment of these translation gains or losses is dependent upon management's determination of the functional currency of NP Aerospace. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures would be considered the functional currency but any dependency upon the parent and the nature of the subsidiary's operations must also be considered. If any subsidiary's functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is included in cumulative translation adjustments. However, if the functional currency is deemed to be the United States dollar then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. Based on our assessment of the factors discussed above, we consider NP Aerospace's local currency to be the functional currency. Accordingly, we recorded foreign currency translation gains of approximately $465,000 and foreign currency losses of approximately $437,000 that were included as part of "accumulated other comprehensive loss" within our balance sheet at December 31, 2002 and 2001, respectively. Environmental Liabilities With respect to outstanding actions that are in preliminary procedural stages, as well as any actions that may be filed in the future, insufficient information exists upon which judgments can be made as to the validity or ultimate disposition of such actions, thereby making it difficult to reasonably estimate what, if any, potential liability or costs may be incurred. Accordingly, no estimate of future liability has been included for such claims. See Note 9 of the accompanying consolidated financial statements for additional discussion of legal proceedings. 2002 Compared with 2001 Backlog at December 31, 2002 was $34.7 million, up 37% from December 31, 2001, due to increased orders for the Minuteman III Propulsion Replacement Program, rocket nozzles, and personal protection products. In 2002, order input increased 22% to $68.8 million. Total net sales increased by 21% to $59.0 million from $48.9 million in 2001. Sales increased by $8.3 million (87%) for the Aerospace business unit compared to 2001 due mainly to increased shipments of missile components for the Minuteman III Propellant Replacement Program. Sales also increased by $4.0 million (43%) for NP Aerospace due to increased shipments of body armor and military helmets. Sales for the CompositAir business unit increased by $0.7 million (11%) due to higher shipments of commercial aircraft seatbacks. Sales for the Commercial business unit decreased by $0.2 million (6%) due primarily to lower sales of inground lighting housings and pool filter tanks. Sales for the Thermal Insulation business unit decreased by $0.6 million (28%) due to lower sales of missile components. Sales decreased by $2.0 million (11%) at the Bingham business unit due to poor general economic conditions. Gross profit margin increased to 30.9% from 26.8% due primarily to higher sales and the resulting absorption of overhead expenses for both the Aerospace and NP Aerospace business units. Gross profit margin from CompositAir increased to 17.1% from 16.3% due mainly to higher sales offset by higher labor costs. Gross profit margin from Commercial decreased to 20.4% from 23.6% due to lower sales and the resulting underabsorption of overhead expenses. Gross profit margin from Thermal Insulation decreased to 6.2% from 35.5% due to unfavorable product mix and lower sales. Gross profit margin from Bingham increased to 25.7% from 24.5% due to higher selling prices and lower material costs. In 2002, selling, general and administrative expenses were $11.2 million (19.0% of sales) compared with $10.7 million (21.9% of sales) in 2001. The increase is due primarily to the legal and settlement costs related to the Valley Forge Historical Park litigation. In 2001, the Company recorded a charge of approximately $5.4 million to write-down long-lived assets associated with the Bingham operating segment. Included in the $5.4 million charge was approximately $1.3 million write-down of fixed assets related to the seven manufacturing and administrative locations of Bingham that were closed or were in the process of being closed. The fixed assets were written down to their estimated fair value which was determined based on the proceeds received and estimated to be received from the sales of the respective facilities. The Company then determined that the estimated future undiscounted operating cash flows of the remaining Bingham operations were less than the carrying amount of Bingham's remaining long-lived assets. Based on its evaluation, the Company determined Bingham's long-lived assets, with a carrying value of $10.7 million, were impaired and wrote them down by approximately $4.0 million to their estimated fair value. In 2002, no additional charges were recorded. 16 Reinhold Industries, Inc. In 2002, net interest expense decreased to $0.3 million from $0.5 million due to lower debt and lower effective interest rates. Income (loss) before income taxes was $6.7 million or 11.3% of sales in 2002, ($3.5) million or -7.1% of sales in 2001 and $5.8 million or 11.8% of sales in 2000. Income before income taxes at the Aerospace business unit increased to $7.0 million (39.1% of sales) in 2002 from $2.7 million (28.3% of sales) in 2001 due to higher sales and the resulting absorption of overhead expenses. Income before income taxes for CompositAir increased to $0.5 million in 2002 (6.9% of sales) from $0.2 million in 2001 (3.0% of sales) due to higher sales of commercial aircraft seatbacks. Income before income taxes for the Commercial business unit decreased to $0.2 million (7.7% of sales) from $0.3 million (10.1% of sales) due to lower sales of in-ground lighting housings. A loss before income taxes of $0.2 million (-11.9% of sales) was realized in 2002 for Thermal Insulation compared to income before income taxes of $0.4 million (21.1% of sales) in 2001 due to lower sales, unfavorable product mix, and underabsorption of overhead costs. A loss before income taxes of $0.7 million (-4.4% of sales) in 2002 was realized at Bingham compared to a loss of $6.6 million (-34.6% of sales) in 2001 due mainly to the $5.4 million write-down of long-lived assets offset by higher selling prices. Income before income taxes for NP Aerospace increased to $1.6 million in 2002 (12.1% of sales) from $0.4 million in 2001 (3.9% of sales) due mainly to higher sales of body armor and military helmets. A tax provision of $2.5 million was recorded in 2002 compared with a provision of $0.3 million in 2001 due to higher income before income taxes. The effective tax rate in 2002 was 37.6% as compared to 7.5% in 2001. The effective tax rate in the United Kingdom was 30%.At December 31, 2002 and 2001, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $21.2 million and $25.6million, respectively. At December 31, 2002 and 2001, the Company's net operating loss carryforwards for State income tax purposes had expired. The Company may utilize the Federal net operating losses by carrying them forward to offset future Federal taxable income, if any, through 2011. As more fully described in note 3 to notes to consolidated financial statements, benefits realized from loss carry forwards and deductible temporary differences arising prior to the reorganization have been recorded directly to additional paid-in capital. Such benefits amounted to $1.8 million in 2002 and zero in 2001. Net income totaled $4.2 million, or $1.55 per diluted share in 2002 compared with a net loss of $3.7 million, or ($1.40) per diluted share in 2001. Liquidity and Capital Resources As of December 31, 2002, working capital was $10.5 million, down $0.5 million from December 31, 2001. Cash and cash equivalents of $3.0 million held at December 31, 2002 were $1.1 million lower than cash and cash equivalents held at December 31, 2001 due primarily to $6.4 million repayment of debt and $2.5 million of capital expenditures offset by $7.3 million of cash provided by operating activities. Net cash provided by operating activities amounted to $7.3 million in 2002 and $3.5 million in 2001. The increase over the prior period relates mainly to the increased profitability of the Company. Net cash used in investing activities in 2002 totaled $2.4 million, consisting primarily of capital expenditures. Net cash used in investing activities in 2001 totaled $3.8 million, which consisted of the acquisition of the Thermal Insulation business unit ($2.6 million) and capital expenditures ($2.4 million) offset by the proceeds on the sale of various assets ($1.3 million). Net cash used in financing activities in 2002 totaled $6.4 million, consisting of the borrowings against the LaSalle line of credit ($7.2 million) less subsequent repayments ($4.2 million) and the payoff of the Bank of America loans ($9.3) and capital leases ($0.1). Net cash used in financing activities in 2001 totaled $2.3 million, consisting of the repayment of the Bank of America loans. The Company does not have any current significant commitments for capital expenditures at December 31, 2002. The Company believes that its current working capital of $10.5 million, the available line of credit, and anticipated working capital to be generated by future operations will be sufficient to support the Company's working capital requirements through at least December 31, 2003. 2001 Compared with 2000 Backlog at December 31, 2001 was $25.3 million, up 54% from December 31, 2000, primarily due to a $13.0 million contract received from Thiokol Propulsion for components related to the Minuteman III Propulsion Replacement Program. In 2001, order input increased 10% to $56.2 million. However, net sales decreased less than 1% to $48.9 million from $49.3 million in 2000, due primarily to lower sales of commercial aircraft seatbacks at CompositAir ($1.7 million) and reduced sales across all product lines at NP Aerospace ($2.6 million). Sales increased $1.1 million for Aerospace products due to increased shipments of Minuteman III components. Sales increased $0.8 million at Bingham. Bingham was acquired on March 9, 2000. Sales for Thermal Insulation totaled $2.0 million from the acquisition date of April 20, 2001. Gross profit margin decreased to 26.8% from 30.0% due to lower sales and the resulting underabsorption of overhead expenses at both NP Aerospace and CompositAir. Gross profit margin from Aerospace decreased to 40.2% from 45.7% due mainly to product mix. Gross profit margin from Bingham decreased to 24.5% from 27.3% due 17 Reinhold Industries, Inc. MANAGEMENT' DISCUSSION AND ANALYSIS (cont'd) mainly to higher costs of workers compensation and medical insurance. Gross profit margin from Thermal Insulation was 35.5%. In 2001, selling, general and administrative expenses were $10.7 million (21.9% of sales) compared with $9.4 million (19.1% of sales) in 2000, due primarily to an additional two months of costs at Bingham, which was acquired on March 9, 2000. Selling, general and administrative expenses in 2001 were 27.6% of sales at Bingham compared to 18.4% of sales for the other business units. In 2001, the Company recorded a charge of approximately $5.4 million to write-down long-lived assets associated with the Bingham operating segment. Included in the $5.4 million charge was approximately $1.3 million write-down of fixed assets related to the seven manufacturing and administrative locations of Bingham that were closed or were in the process of being closed. The fixed assets were written down to their estimated fair value which was determined based on the proceeds received and estimated to be received from the sales of the respective facilities. The Company then determined that the estimated future undiscounted operating cash flows of the remaining Bingham operations were less than the carrying amount of Bingham's remaining long-lived assets. Based on its evaluation, the Company determined Bingham's long-lived assets, with a carrying value of $10.7 million, were impaired and wrote them down by approximately $4.0 million to their estimated fair value. This write-down was charged to goodwill. Fair value was based on estimated discounted future operating cash flows of the Bingham operations. On December 29, 2000, the Company sold their undeveloped land to Paragon Santa Anita LLC for a net gain of $0.962 million. The selling price for the property was $2.05 million with $1.05 million paid in cash at closing. Additional consideration consisted of a 9% note receivable due in one year in the amount of $1.0 million. The note was secured by the land. The note was paid in full in December 2001. In 2001, net interest expense was unchanged at $0.5 million. A loss before income taxes of $3.5 million (-7.1% of sales) was realized in 2001 compared to a profit of $5.8 million (11.8% of sales) in 2000. A loss before income taxes of $6.6 million (-34.6% of sales) was realized at Bingham due mainly to the $5.4 million write-down of long-lived assets and lower annualized sales. Income before income taxes for NP Aerospace decreased to $0.4 million in 2001 (3.9% of sales) from $1.1 million in 2000 (9.6% of sales) due mainly to lower sales across all product segments. Income before income taxes for CompositAir decreased to $0.2 million in 2001 (3.0% of sales) from $1.3 million in 2000 (17.2% of sales) due to lower sales of commercial aircraft seatbacks and the resulting underabsorption of overhead expenses. Income before income taxes at the Aerospace business unit increased to $2.7 million (28.3% of sales) from $2.6 million (31.2% of sales) due to higher sales and the resulting absorption of overhead expenses offset by a less favorable product mix. Income before income taxes for the Commercial business unit decreased to $0.3 million (10.1% of sales) from $0.4 million (13.5% of sales) due to higher manufacturing costs. Income before income taxes for Thermal Insulation was $0.4 million (21.1% of sales). A tax provision of $0.3 million was recorded in 2001 compared with a provision of $2.3 million in 2000. The effective tax rate in 2001 was 7.5% as compared to 39.3% in 2000. The change primarily results from the rate difference on U.S. income and the increase in the valuation allowance. The effective tax rate in the United Kingdom was 58%. This rate differs from the statutory rate as a result of the Company recording a liability in connection with a property revaluation in the United Kingdom. At December 31, 2001 and 2000, the Company had generated net operating loss carryovers for Federal income tax purposes of approximately $25.6 million and $26.8 million , respectively. At December 31, 2001, the Company's net operating loss carryovers for State income tax purposes have expired. The Company may utilize the Federal net operating losses by carrying them forward to offset future Federal taxable income, if any, through 2011. As more fully described in note 3 to notes to consolidated financial statements, benefits realized from loss carry forwards and deductible temporary differences arising prior to the reorganization have been recorded directly to additional paid-in capital. Such benefits amounted to zero in 2001 and $1.8 million in 2000. Net loss totaled $3.7 million, or ($1.40) per diluted share in 2001 compared with net income of $3.5 million, or $1.31 per diluted share in 2000. Acquired Businesses On March 9, 2000, Reinhold Industries, Inc. (the "Company"), through its wholly-owned subsidiary, Samuel Bingham Enterprises, Inc., an Indiana corporation, purchased substantially all of the assets, including real, personal and intellectual properties, and assumed certain liabilities of Samuel Bingham Company, an industrial and graphic arts roller manufacturing and supplying business, headquartered in Bloomingdale, Illinois ("Bingham"). On March 9, 2000, the Company borrowed $11,000,000 from Bank of America to fund a portion of the purchase consideration due to Bingham. The principal portion of the loan was payable in twenty successive quarterly installments beginning June 30, 2000. Interest was payable quarterly at a rate which approximates LIBOR plus 1.75% and is secured by all financial assets of the Company. On April 20, 2001, Reinhold, purchased certain assets and assumed certain liabilities of Edler Industries, Inc. ("Edler"). Edler is a manufacturer of structural and ablative composite components mainly for subcontractors of the U.S. defense industry. The operation has been renamed the "Thermal Insulation" division of Reinhold. The purchase 18 Reinhold Industries, Inc. price was $2.6 million consisting of $1.6 million cash paid at closing and a $1.0 million, 8% interest bearing note paid in September 2001. Change in Control On May 21, 1999, pursuant to a Stock Purchase Agreement dated May 18, 1999, between Keene Creditors' Trust, the holder of all of the outstanding shares of the Class B Common Stock of the Company and Reinhold Enterprises, Inc., a newly formed Indiana corporation ("REI"), the Creditors' Trust sold 997,475 shares of Class B Common Stock owned by it to certain purchasers designated by REI (the "Purchasers"). These shares represented approximately 49.9% of the outstanding common stock of the Company. The sale of shares to the Purchasers constitutes an "ownership shift" within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended. Section 382 limits the utilization of net operating loss carryforwards upon certain accumulations of stock of corporate issuers. Additional purchases of shares by the Purchasers prior to May 22, 2002, or purchases of shares by other shareholders that result in those shareholders owning more than 5% of the outstanding Common Stock of the Company prior to May 22, 2002, may result in significant limitations on the Company's ability to utilize its net operating loss carryforwards to offset its future income for federal income tax purposes. Between May 21, 1999 and May 22, 2002, no additional purchases of shares were made by the Purchasers or by other shareholders that resulted in those shareholders owning more than 5% of the outstanding Common Stock of the Company. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial accounting and reporting for business combination and requires all business combinations to be accounted for using the purchase method. SFAS No. 141 is effective for any business combinations initiated after June 30, 2001. SFAS No. 142, effective for the Company January 1, 2002, addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Goodwill and other intangible assets with indefinite lives will no longer be amortized but instead subject to impairment tests at least annually. The Company has determined that the impact of adopting SFAS No. 142 had a favorable impact of $202,000 (net of related tax effects) to its results of operations in 2002. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144, effective for the Company January 1, 2002, supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). SFAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. The impact of adopting SFAS No. 144 was immaterial to the Company's financial position and results of operations. In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than the date an entity commits to an exit plan. Additionally, it establishes that fair value is the objective for the initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of SFAS No. 146 will have a material effect on its consolidated financial position or results of operations. In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amends SFAS No. 123, "Accounting for Stock Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for financial statements for years ending after December 15, 2002. The disclosure provisions of SFAS No. 148 have been adopted by the Company. The Company has elected to continue to apply the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", to account for employee stock options. Legal Proceedings The Company has been informed that it may be a potentially responsible party ("PRP") under the Comprehensive Environmental Response, 19 Reinhold Industries, Inc. MANAGEMENT' DISCUSSION AND ANALYSIS (cont'd) Compensation, and Liability Act of 1980, as amended ("CERCLA"), with respect to certain environmental liabilities arising at the Valley Forge National Historical Park Site ("Valley Forge Site") located in Montgomery County, Pennsylvania and at a site formerly known as the Casmalia Resources Hazardous Waste Management Facility, located in Santa Barbara County, California ("Casmalia Site"). CERCLA imposes liability for the costs of responding to a release or threatened release of "hazardous substances" into the environment. CERCLA liability is imposed without regard to fault. PRPs under CERCLA include current owners and operators of the site, owners and operators at the time of disposal, as well as persons who arranged for disposal or treatment of hazardous substances sent to the site, or persons who accepted hazardous substances for transport to the site. Because PRPs' CERCLA liability to the government is joint and several, a PRP may be required to pay more than its proportional share of such costs. Liability among PRPs, however, is subject to equitable allocation through contribution actions. On June 16, 2000 the U.S. Department of Justice notified the Company that it may be a PRP with respect to the Valley Forge Site and demanded payment for past costs incurred by the United States in connection with the site, which the Department of Justice estimated at $1,753,726 incurred by the National Park Service ("NPS") as of May 31, 2000 and $616,878 incurred by the United States Environmental Protection Agency ("EPA") as of November 30, 1999. Payment of these past costs would not release the Company from liability for future response costs. Management believes that in or about 1977, the Company's predecessor, Keene Corporation ("Keene"), sold to the U.S. Department of Interior certain real property and improvements now located within the Valley Forge Site. Prior to the sale, Keene operated a manufacturing facility on the real property and may have used friable asbestos, the substance which gives rise to the claim at the Valley Forge Site. On December 30, 2002, the United States District Court for the Southern District of New York approved and entered a Consent Decree agreed upon by the United States and the Company settling the claims asserted by the National Park Service against the Company. The United States and the Company stipulated that the EPA will not seek reimbursement of its response costs with respect to the Valley Forge Site and that the Company's claim for a declaratory judgement with respect to those costs may be dismissed with prejudice. Under the terms of the Consent Decree, the Company was obligated to pay $500,000 to the Department of the Interior. In return, the Company has received from the United States a covenant not to sue, subject to certain limited exceptions, for claims under CERCLA Sections 106, 107 and 113 and RCRA Section 7003 relating to the Site. The payment to the Department of the Interior was made on January 23, 2003. In September 2002, in accordance with SFAS No. 5, Accounting for Contingencies, the Company had recorded a reserve of $500,000 for the estimated cost to conclude this matter. These costs were included in the December 31, 2002 balance sheet as a component of "Accrued Expenses." Pursuant to the Consent Decree and CERCLA Section 113(f)(2), the Company's settlement with the United States bars any other party from asserting claims for contribution for any response costs incurred with respect to the Valley Forge Site by the United States, any State or other governmental entity, or any other party. With respect to the Casmalia Site, on August 11, 2000, the EPA notified the Company that it is a PRP by virtue of waste materials deposited at the site. The EPA has designated the Company as a "de minimis" waste generator at this site, based on the amount of waste at the Casmalia Site attributed to the Company. The Company is not currently a party to any litigation concerning the Casmalia Site, and based on currently available data, the Company believes that the Casmalia Site is not likely to have a material adverse impact on the Company's consolidated financial position or results of operations. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's financial position, results of operations, or liquidity. Forward Looking Statements This Annual Report contains statements which, to the extent that they are not recitations of historical fact, constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). The words "estimate," "anticipate," "project," "intend," "expect," and similar expressions are intended to identify forward looking statements. All forward looking statements involve risks and uncertainties, including, without limitation, statements and assumptions with respect to future revenues, program performance and cash flow. Readers are cautioned not to place undue reliance on these forward looking statements which speak only as of the date of this Annual Report. The Company does not undertake any obligation to publicly release any revisions to these forward looking statements to reflect events, circumstances or changes in expectations after the date of this Annual Report, or to reflect the occurrence of unanticipated events. The forward looking statements in this document are intended to be subject to safe harbor protection provided by Sections 27A of the Securities Act and 21E of the Exchange Act. 20 Reinhold Industries, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, (Amounts in thousands, except for per share data) 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- Net sales $ 59,042 48,947 49,287 Cost of sales 40,821 35,807 34,498 - -------------------------------------------------------------------------------------------------------------- Gross profit 18,221 13,140 14,789 Selling, general and administrative expenses 11,243 10,710 9,425 Write-down of long-lived assets - 5,351 - - -------------------------------------------------------------------------------------------------------------- Operating income (loss) 6,978 (2,921) 5,364 Gain on sale of asset - - 962 Interest expense, net (320) (532) (529) - -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 6,658 (3,453) 5,797 Income taxes 2,506 270 2,280 - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ 4,152 (3,723) 3,517 Earnings (loss) per share: Basic $1.56 (1.40) 1.32 Diluted $1.55 (1.40) 1.31 - -------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding: Basic 2,660 2,658 2,658 Diluted 2,681 2,658 2,695 See accompanying notes to consolidated financial statements.
21 Reinhold Industries, Inc. CONSOLIDATED BALANCE SHEETS
December 31, December 31, (Amounts in thousands, except per share data) 2002 2001 - -------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 3,037 4,105 Accounts receivable (less allowance for doubtful accounts of $73 and $166, respectively) 9,977 5,596 Inventories 5,938 6,275 Prepaid expenses and other current assets 2,479 2,499 - -------------------------------------------------------------------------------------------------------------- Total current assets 21,431 18,475 Property and equipment, at cost 19,742 17,570 Less accumulated depreciation and amortization 8,435 7,006 - -------------------------------------------------------------------------------------------------------------- Net property and equipment 11,307 10,564 Goodwill 3,786 3,786 Other assets 210 204 - -------------------------------------------------------------------------------------------------------------- $36,734 33,029 Liabilities and stockholders' equity Current liabilities: Borrowings under line of credit $ 3,000 - Accounts payable 4,127 2,389 Accrued expenses 3,660 1,687 Current installments of long term debt 149 3,418 - -------------------------------------------------------------------------------------------------------------- Total current liabilities 10,936 7,494 Long-term debt, less current installments 124 6,280 Long-term pension liability 5,596 3,899 Other long-term liabilities 276 279 Commitments and contingencies - - Stockholders' equity: Preferred stock - Authorized: 250,000 shares Issued and outstanding: None - - Common stock, $0.01 par value: Authorized: 4,750,000 shares Issued and outstanding: 2,659,812 and 2,416,722, respectively 27 24 Additional paid-in capital 21,213 17,514 Retained earnings 4,873 2,655 Accumulated other comprehensive loss (6,311) (5,116) - -------------------------------------------------------------------------------------------------------------- Net stockholders' equity 19,802 15,077 - -------------------------------------------------------------------------------------------------------------- $36,734 33,029 See accompanying notes to consolidated financial statements.
22 Reinhold Industries, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, (Amounts in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $4,152 (3,723) 3,517 Adjustments to reconcile net income (loss) to net cash provided by operating activities (net of effects of acquisitions): Depreciation and amortization 1,617 1,658 1,501 Additions to paid-in capital resulting from tax benefits 1,756 - 1,813 Write-down of long-lived assets - 5,351 - Changes in assets and liabilities: Accounts receivable, net (4,381) 1,639 538 Inventories 337 18 320 Note receivable - 1,000 (1,000) Prepaid expenses and other current assets 20 (446) (544) Accounts payable 1,738 (116) (1,581) Accrued expenses 1,973 (1,891) (277) Other, net 46 33 (100) - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 7,258 3,523 4,187 Cash flows from investing activities: Acquisitions - (2,645) (15,200) Capital expenditures (2,465) (2,377) (1,355) Proceeds from sale of assets 105 1,256 945 - -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (2,360) (3,766) (15,610) Cash flows from financing activities: Proceeds from long term debt - - 11,000 Repayment of long term debt (9,425) (2,327) (1,129) Borrowings against line of credit 7,221 - - Repayments on line of credit (4,221) - - Dividends paid (6) (9) (8) - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (6,431) (2,336) 9,863 Effect of exchange rate changes on cash 465 (437) (738) - -------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (1,068) (3,016) (2,298) - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 4,105 7,121 9,419 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $3,037 4,105 7,121 - -------------------------------------------------------------------------------------------------------------- Supplementary disclosures of cash flow information - Cash paid during the year for: Income taxes $ 352 394 771 Interest $ 272 867 493 See accompanying notes to consolidated financial statements.
23 Reinhold Industries, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - ------------------------------------------------------------------------
Common stock $0.01 par value Preferred Class A (Amounts in thousands, except share data) Shares Shares Amount - -------------------------------------------------------------------------------------------------- Balance, December 31, 1999 - 1,998,956 $20 - -------------------------------------------------------------------------------------------------- Net income Additions to paid-in capital resulting from tax benefits - - 10% stock dividend 199,102 2 Increase in additional pension liability in excess of unrecognized prior service cost - - Foreign currency translation adjustment - - - -------------------------------------------------------------------------------------------------- Comprehensive income - -------------------------------------------------------------------------------------------------- Balance, December 31, 2000 - 2,198,058 $22 - -------------------------------------------------------------------------------------------------- Net loss - - 10% stock dividend 218,664 2 Increase in additional pension liability in excess of unrecognized prior service cost - - Foreign currency translation adjustment - - - -------------------------------------------------------------------------------------------------- Comprehensive loss - -------------------------------------------------------------------------------------------------- Balance, December 31, 2001 - 2,416,722 $24 - -------------------------------------------------------------------------------------------------- Net income - - 10% stock dividend 240,933 3 Shares issued in conjunction with Directors Deferred Stock Plan 2,157 - Additions to paid-in capital resulting from tax benefits - - Increase in additional pension liability in excess of unrecognized prior service cost - - Foreign currency translation adjustment - - - -------------------------------------------------------------------------------------------------- Comprehensive income - -------------------------------------------------------------------------------------------------- Balance, December 31, 2002 - 2,659,812 $27 See accompanying notes to consolidated financial statements.
24 Reinhold Industries, Inc.
Comprehensive Income (Loss) ---------------------------------------- Accumulated other comprehensive Total comprehensive Additional paid-in capital Retained earnings loss income (loss) Net stockholders' equity - ------------------------------------------------------------------------------------------------------------------------------------ $12,328 $6,255 $ (180) $18,423 - ------------------------------------------------------------------------------------------------------------------------------------ - 3,517 - 3,517 3,517 1,813 - - - 1,813 1,790 (1,800) - - (8) - - (102) (102) (102) - - (738) (738) (738) - ------------------------------------------------------------------------------------------------------------------------------------ 2,677 - ------------------------------------------------------------------------------------------------------------------------------------ $15,931 $7,972 $(1,020) $22,905 - ------------------------------------------------------------------------------------------------------------------------------------ - (3,723) - (3,723) (3,723) 1,583 (1,594) - - (9) - - (3,659) (3,659) (3,659) - - (437) (437) (437) - ------------------------------------------------------------------------------------------------------------------------------------ (7,819) - ------------------------------------------------------------------------------------------------------------------------------------ $17,514 $2,655 $(5,116) $15,077 - ------------------------------------------------------------------------------------------------------------------------------------ - 4,152 - 4,152 4,152 1,925 (1,934) - - (6) 18 - - - 18 1,756 - - - 1,756 - - (1,660) (1,660) (1,660) - - 465 465 465 - ------------------------------------------------------------------------------------------------------------------------------------ 2,957 - ------------------------------------------------------------------------------------------------------------------------------------ $21,213 $4,873 $(6,311) $19,802
25 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002 1 Organization Description of Business Reinhold Industries, Inc. (Reinhold or the Company) is a manufacturer of advanced custom composite components, sheet molding compounds and rubber rollers for a variety of applications in the United States and Europe. Reinhold derives revenues from the defense, aerospace, printing and other commercial industries. Chapter 11 Reorganization Reinhold was acquired by Keene Corporation (Keene) in 1984 and operated as a division of Keene until 1990, when Reinhold was incorporated in the state of Delaware as a wholly owned subsidiary of Keene. On December 3, 1993, Keene filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code) in the United States Bankruptcy Court (Bankruptcy Court). Keene's Chapter 11 filing came as a direct result of the demands on Keene of thousands of asbestos-related lawsuits which named Keene as a party. On July 31, 1996 (the Effective Date), Keene consummated its Plan of Reorganization under the Bankruptcy Code (the Plan) and emerged from bankruptcy. On the Effective Date, Reinhold was merged into and with Keene, with Keene becoming the surviving corporation. Pursuant to the merger, all of the issued and outstanding capital stock of Reinhold was canceled. Keene, as the surviving corporation of the merger, was renamed Reinhold. On the Effective Date, Reinhold issued 1,998,956 shares of Common Stock, of which 1,020,000 of Class B Common Stock was issued to the Trustees of a Creditors' Trust (the Creditors' Trust) set up to administer Keene's asbestos claims. The remaining 978,956 shares of Class A Common Stock were issued to Keene's former stockholders as of record date, June 30, 1996. All of Keene's previous outstanding Common Stock was canceled. The payments and distributions made to the Creditors' Trust pursuant to the terms and conditions of the Plan were made in complete satisfaction, release and discharge of all claims and demands against, liabilities of, liens on, obligations of and interest in Reinhold (Reorganized Company). On May 21, 1999, pursuant to a Stock Purchase Agreement, dated May 18, 1999, between the Creditors' Trust, the holder of all of the outstanding shares of the Class B Common Stock of the Company and Reinhold Enterprises, Inc., a newly formed Indiana corporation ("REI"), the Creditors' Trust sold 997,475 shares of Class B Common Stock owned by it to certain purchasers designated by REI (the "Purchasers"). These shares represent approximately 49.9% of the outstanding common stock of the Company. 2 Summary of Significant Accounting Policies and Practices Critical Accounting Policies The Company's consolidated financial statements and related public financial information are based on the application of generally accepted accounting principles ("GAAP"). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in the external disclosures of the Company including information regarding contingencies, risk and financial condition. The Company believes its use of estimates and underlying accounting assumptions adhere to generally accepted accounting principles and are consistently and conservatively applied. Valuations based on estimates are reviewed for reasonableness and conservatism on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenues, receivables, inventories, acquisitions, valuation of long-lived and intangible assets, pension and post-retirement benefits, the realizability of deferred tax assets, and foreign exchange translation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. 26 Reinhold Industries, Inc. Revenue Recognition and Allowances for Doubtful Accounts The Company recognizes revenue when title and risk of ownership have passed to the buyer. Allowances for doubtful accounts are estimated based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have a material effect on reserve balances required. Inventories We value our inventories at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The Company writes down its inventory for estimated obsolescence equal to the cost of the inventory. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations. Fair Value of Assets Acquired and Liabilities Assumed in Purchase Combinations The purchase combinations carried out by us require management to estimate the fair value of the assets acquired and liabilities assumed in the combinations. These estimates of fair value are based on our business plan for the entities acquired including planned redundancies, restructuring, use of assets acquired and assumptions as to the ultimate resolution of obligations assumed for which no future benefit will be received. Should actual use of assets or resolution of obligations differ from our estimates, revisions to the estimated fair values would be required. If a change in estimate occurs after one year of the acquisition, the change would be recorded in our statement of operations. Pensions and Post Retirement Benefits The valuation of the Company's pension and other post-retirement plans requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. These assumptions include discount rates, investment returns, projected salary increases and benefits, and mortality rates. The actuarial assumptions used in the Company's pension reporting are reviewed annually and compared with external benchmarks to assure that they accurately account for our future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on the Company's pension expenses and related funding requirements. Valuation of Long-lived and Intangible Assets In accordance with SFAS No. 142 and SFAS No. 144, we assess the fair value and recoverability of our long-lived assets, including goodwill, whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. In doing so, we make assumptions and estimates regarding future cash flows and other factors to make our determination. The fair value of our long-lived assets and goodwill is dependent upon the forecasted performance of our business and the overall economic environment. When we determine that the carrying value of our long-lived assets and goodwill may not be recoverable, we measure any impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, we may have to record additional impairment charges not previously recognized. During 2001, we performed an assessment of the goodwill related to our acquisition of Bingham, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." As a result, we recorded a charge of $4.0 million during the third quarter of 2001 to reduce goodwill associated with the purchase of Bingham. The charge was based on the amount by which the carrying amount of these assets exceeded their fair value. Income Taxes We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. 27 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) Cumulative Foreign Exchange Translation Accounting In preparing our consolidated financial statements, we are required to translate the financial statements of NP Aerospace from the currency in which they keep their accounting records, the British Pound Sterling, into United States dollars. This process results in exchange gains and losses which are either included within the statement of operations or as a separate part of our net equity under the caption "foreign currency translation adjustment." Under the relevant accounting guidance, the treatment of these translation gains or losses is dependent upon management's determination of the functional currency of NP Aerospace. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures would be considered the functional currency but any dependency upon the parent and the nature of the subsidiary's operations must also be considered. If any subsidiary's functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is included in cumulative translation adjustments. However, if the functional currency is deemed to be the United States dollar then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. Based on our assessment of the factors discussed above, we consider NP Aerospace's local currency to be the functional currency. Accordingly, we recorded foreign currency translation gains of approximately $465,000 and foreign currency losses of approximately $437,000 that were included as part of "accumulated other comprehensive loss" within our balance sheet at December 31, 2002 and 2001, respectively. Environmental Liabilities With respect to outstanding actions that are in preliminary procedural stages, as well as any actions that may be filed in the future, insufficient information exists upon which judgments can be made as to the validity or ultimate disposition of such actions, thereby making it difficult to reasonably estimate what, if any, potential liability or costs may be incurred. Accordingly, no estimate of future liability has been included for such claims. See Note 9 of the accompanying consolidated financial statements for additional discussion of legal proceedings. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Reinhold and its wholly owned subsidiaries NP Aerospace and Bingham. All material intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents The Company considers cash in banks, commercial paper, demand notes, and similar short-term investments purchased with maturities of less than three months as cash and cash equivalents for the purpose of the statements of cash flows. Cash and cash equivalents consist of the following (in thousands): December 31, December 31, 2002 2001 - ------------------------------------------------------------------------------ Cash in banks $2,155 2,138 Money market funds 882 1,967 - ------------------------------------------------------------------------------ Total $3,037 4,105 28 Reinhold Industries, Inc. Inventories Inventories are stated at the lower of cost or market on a first-in, first-out (FIFO) basis. Inventoried costs relating to long-term contracts and programs are stated at the actual production costs, including factory overhead, initial tooling, and other related non-recurring costs incurred to date, reduced by amounts related to revenue recognized on units delivered. The components of inventory are as follows (in thousands): December 31, December 31, 2002 2001 - ------------------------------------------------------------------------------ Raw material $4,625 $4,557 Work-in-process 874 919 Finished goods 439 799 - ------------------------------------------------------------------------------ Total $ 5,938 $6,275 Accounting for Government Contracts Substantially all of the Company's government contracts are firm fixed price. Sales and cost of sales on such contracts are recorded as units are delivered. Estimates of cost to complete are reviewed and revised periodically throughout the contract term, and adjustments to profit resulting from such revisions are recorded in the accounting period in which the revisions are made. Losses on contracts are recorded in full as they are identified. Amounts billed to contractors of the U.S. Government included in accounts receivable at December 31, 2002 and 2001 were $2,218,000 and $1,010,000, respectively. Property and Equipment The Company depreciates property and equipment principally on a straight-line basis based over estimated useful lives. Leasehold improvements are amortized straight-line over the shorter of the lease term or estimated useful life of the asset.
Property and equipment, at cost, consists of the following (in thousands): December 31, December 31, Useful Life 2002 2001 - --------------------------------------------------------------------------------------------------------------- Land - $635 1,283 Buildings 10-40 years 2,068 1,429 Leasehold improvements 5-15 years 3,891 2,459 Machinery and equipment 5-25 years 11,744 10,814 Furniture and fixtures 3-10 years 1,333 1,226 Construction in process - 71 359 - --------------------------------------------------------------------------------------------------------------- 19,742 17,570 Less accumulated depreciation and amortization 8,435 7,006 - --------------------------------------------------------------------------------------------------------------- $11,307 10,564
When property is sold or otherwise disposed of, the asset cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of operations. Maintenance and repairs are expensed as incurred. Improvements which significantly increase the useful life of the asset are capitalized. 29 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) Note Receivable On December 29, 2000, the Company sold their undeveloped land to Paragon Santa Anita LLC for a net gain of $962,000. The selling price for the property was $2,050,000 with $1,050,000 paid in cash at closing. Additional consideration consisted of a 9% note receivable due in one year in the amount of $1,000,000. The note was secured by the land. The note was paid in full in December 2001. Goodwill Prior to January 1, 2002, goodwill was amortized on a straight-line basis over 10 - 40 years. The gross amount of goodwill and related accumulated amortization at both December 31, 2002 and 2001 amounted to $8,921,000 and $5,135,000, respectively. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142, effective for the Company January 1, 2002, addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Goodwill and other intangible assets with indefinite lives are no longer amortized but instead subject to impairment tests at least annually. In September 2001, the Company determined that the estimated future undiscounted operating cash flows of the remaining Bingham operations were less than the carrying amount of Bingham's remaining long-lived assets. Based on its evaluation, the Company determined Bingham's long-lived assets, with a carrying value of $10.7 million, were impaired and wrote them down by $4.0 million to their estimated fair value. This write-down was charged to goodwill. Fair value was based on estimated discounted future operating cash flows of the Bingham operations. In accordance with SFAS No. 142, the Company performed the first part of the two-step goodwill impairment test. For each of the Company's reporting units for which goodwill was recorded, the Company determined that the fair value exceeded the carrying amount at December 31, 2002. As a result, the second step of the impairment test was not required. Acquired Businesses On March 9, 2000, Reinhold, through its wholly-owned subsidiary, Samuel Bingham Enterprises, Inc., an Indiana corporation, purchased substantially all of the assets, including real, personal and intellectual properties, and assumed certain liabilities of Samuel Bingham Company, an industrial and graphic arts roller manufacturing and supplying business, headquartered in Bloomingdale, Illinois ("Bingham"). The purchase price paid was $14,742,000 plus out-of-pocket expenses of $406,000. Prior to January 1, 2002, the cost in excess of fair value of net assets was amortized on a straight-line basis over forty years. A source of funds for the purchase price was a five-year term loan with the Bank of America for $11,000,000 with the balance being paid from cash on hand. The acquisition of Bingham has been accounted for by the purchase method and, accordingly, the results of operations have been included in the consolidated financial statements from the date of acquisition. The purchase price has been allocated to net identifiable assets acquired as follows (in thousands): Bingham - ------------------------------------------------------------------------------- Working capital $3,362 Fixed assets 6,231 - ------------------------------------------------------------------------------- Net identifiable assets 9,593 Purchase price (including deferred consideration) 15,148 - ------------------------------------------------------------------------------- Goodwill $5,555 30 Reinhold Industries, Inc. The pro forma unaudited results of operations for the year ended December 31, 2000, assuming consummation of the purchase as of January 1, 2000 are as follows (in thousands, except earnings per share data): Net sales $ 53,613 Net income $ 3,749 Earnings per share - basic $1.41 Earnings per share - diluted $1.39 On April 20, 2001, Reinhold, purchased certain assets and assumed certain liabilities of Edler Industries, Inc. ("Edler"). Edler is a manufacturer of structural and ablative composite components mainly for subcontractors of the U.S. defense industry. The operation has been renamed the "Thermal Insulation" division of Reinhold. The purchase price was $2.6 million consisting of $1.6 million cash paid at closing and a $1.0 million, 8% interest bearing note paid in September 2001. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations have been included in the consolidated financial statements from the date of acquisition. Prior to January 1, 2002, the cost in excess of fair value of net assets was amortized on a straight-line basis over twenty years. Income Taxes The Company accounts for income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. As more fully described in note 3 of notes to consolidated financial statements, income tax benefits realized from temporary differences and operating loss carry forwards prior to the chapter 11 reorganization described above are recorded directly to additional paid-in capital. Earnings per common share The Company presents basic and diluted earnings per share ("EPS"). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Basic and diluted EPS reflect changes in the number of shares resulting from the Company's 10% stock dividend (see note 5). The reconciliations of basic and diluted weighted average shares are as follows:
Years ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Net income (loss) $4,152 (3,723) 3,517 - --------------------------------------------------------------------------------------------------------------- Weighted average shares used in basic computation 2,660 2,658 2,658 Dilutive stock options 20 - 37 Shares to be issued - Directors Deferred Stock Plan 1 - -
Weighted average shares used for diluted calculation 2,681 2,658 2,695 Anti-dilutive stock options excluded from the diluted calculation were approximately 198,000, 204,600, and 149,000 at December 31, 2002, 2001 and 2000, respectively. Accumulated Other Comprehensive Income (Loss) Other comprehensive loss refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are included in comprehensive income (loss) but excluded from net income (loss) as those amounts are recorded directly as an adjustment to stockholders' equity, net of tax. The Company's other comprehensive loss is composed of changes in the additional pension liability in 31 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) excess of unrecognized prior service cost and foreign currency translation adjustments. The accumulated balance of additional pension liability in excess of unrecognized prior service cost and foreign currency translation losses at December 31, 2002 and 2001 is $5,421,000 and $3,761,000, and $890,000 and $1,355,000, respectively. Stock Option Plan The Company accounts for its stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25), and has adopted the disclosure-only alternative of SFAS No. 123 "Accounting For Stock-Based Compensation" (SFAS 123), as amended. The following table illustrates the effect on net income and earnings per share had compensation expense for the employee stock-based plans been recorded based on the fair value method under SFAS 123:
Years ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Net income (loss) as reported $4,152 ($3,723) $3,517 Deduct, Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (134) (280) (281) - --------------------------------------------------------------------------------------------------------------- Net income (loss), as adjusted $4,018 ($4,003) $3,236 Earnings (loss) per share: Basic - as reported $1.56 ($1.40) $1.32 Basic - as adjusted $1.51 ($1.51) $1.22 Diluted - as reported $1.55 ($1.40) $1.31 Diluted - as adjusted $1.50 ($1.51) $1.20
Pension and Other Postretirement Plans The Company has three defined benefit pension plans and a 401(k) retirement and profit sharing plan covering substantially all of its employees. The benefits for the Samuel Bingham Company Employees' Retirement Plan and the Samuel Bingham Company Hourly Employees' Pension Plan are based on years of service multiplied by a fixed monthly benefit. The Reinhold Industries, Inc. Retirement Plan benefits are based on years of service and the employee's compensation during the last years of service before retirement. The cost of these programs is being funded currently. On January 1, 2002, the Company established the Reinhold Industries, Inc. 401(k) Plan covering both Reinhold and Bingham employees who have completed six months of service and attained 21 years of age. Employees may make contributions to the Plan up to the maximum limitations prescribed by the Internal Revenue Service. The Company may, at its sole discretion, contribute and allocate to each eligible participant, a percentage of the participant's elective deferral. Matching contributions, if any, shall be determined as of the end of the Plan year. The matching contribution vests to the employee on a straight-line basis over five years and is fully vested at the end of the employees' fifth year of service. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company accounts for long lived assets and certain intangibles including goodwill at amortized cost. Goodwill is tested for impairment in accordance with SFAS No. 142 and all other long-lived assets are tested for impairment in accordance with SFAS No. 144. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of such assets, if facts and circumstances suggest that they may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. 32 Reinhold Industries, Inc. In 2001, the Company recorded a charge of approximately $5.4 million to write-down long-lived assets associated with the Bingham operating segment. Included in the $5.4 million charge was approximately $1.3 million write-down of fixed assets related to the seven manufacturing and administrative locations of Bingham that were closed or were in the process of being closed. The fixed assets were written down to their estimated fair value which was determined based on the proceeds received and estimated to be received from the sales of the respective facilities. The sales of these facilities were completed prior to December 31, 2002. In 2001, the Company determined that the estimated future undiscounted operating cash flows of the remaining Bingham operations were less than the carrying amount of Bingham's remaining long-lived assets. Based on its evaluation, the Company determined Bingham's long-lived assets, with a carrying value of $10.7 million, were impaired and wrote them down by approximately $4.0 million to their estimated fair value. This write-down was charged to goodwill. Fair value was based on estimated discounted future operating cash flows of Bingham. Fair Value of Financial Instruments The carrying amounts of the following financial instruments approximate fair value because of the short maturity of those instruments: cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, other assets, accounts payable, accrued expenses and current installments of long term debt. The long term debt bears interest at a variable market rate, and thus has a carrying amount that approximates fair value. Foreign Currency The reporting currency of the Company is the United States dollar. The functional currency of NP Aerospace is the UK pound sterling. For consolidation purposes, the assets and liabilities of the Company's subsidiary are translated at the exchange rate in effect at the balance sheet date. The consolidated statements of earnings are translated at the average exchange rate in effect for the years. Reclassifications Certain amounts in the prior years consolidated financial statements have been reclassified to conform with the current year presentation. Shipping and Handling Costs Shipping and handling costs are included in cost of sales. Research and Development Research and development expenditures were approximately $314,000, $348,000 and $327,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Labor Subject to Collective Bargaining Agreements Approximately 56 of the employees at NP Aerospace in Coventry, England are represented by a labor union. Certain Bingham employees, approximately 32, located in San Leandro, California, Searcy, Arkansas and Blacklick, Pennsylvania are also represented by a labor union. Reinhold believes its workforce to be relatively stable and considers its employee relations to be excellent. Raw Materials and Purchased Components The principal raw materials for composite fabrication include pre-impregnated fiber cloth (made of carbon, graphite, aramid or fiberglass fibers which have been heat-treated), molding compounds, resins (phenolic and epoxy), hardware, adhesives and solvents. No significant supply problems have been encountered in recent years. Reinhold uses PAN (polyacrylonitrile) and rayon in the manufacture of composites. However, the supply of rayon used to make carbon fiber cloth typically used in ablative composites is highly dependent upon the qualification of the rayon supplier by the United States Department of Defense. A major supplier has ceased production of the rayon used in Reinhold's ablative products. This could have an effect on the rayon supply in the coming years. Also, a European company has become the world's sole supplier of graphite and carbon, which is used in Reinhold's ablative applications. At this time, Reinhold cannot determine if there will be any significant impact on price or supply. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial accounting and reporting for business combinations and requires all business combinations to be accounted for using the purchase method. SFAS No. 33 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) 141 is effective for any business combinations initiated after June 30, 2001. SFAS No. 142, effective for the Company January 1, 2002, addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Goodwill and other intangible assets with indefinite lives will no longer be amortized but instead subject to impairment tests at least annually. The impairment test is comprised of two parts. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, the second step of the goodwill impairment test must be performed. The second step compares the implied fair value of the reporting unit's goodwill with the respective carrying amount in order to determine the amount of impairment loss, if any. In accordance with SFAS No. 142, the Company performed the first part of the two-step goodwill impairment test. For each of the Company's reporting units for which goodwill was recorded, the Company determined that the fair value exceeded the carrying amount at December 31, 2002. As a result, the second step of the impairment test was not required. Under SFAS No. 142, the Company discontinued amortization of its goodwill beginning January 1, 2002, which resulted in reduced expense of approximately $202,000 (net of related tax effects) in fiscal 2002. A reconciliation of net income (loss) and earnings per share for periods prior to the adoption of SFAS No. 142 is as follows (in thousands, except per share data):
Years ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Net income (loss), as reported $4,152 (3,723) 3,517 Impact of adoption of SFAS 142 (net of related tax effects) - 311 164 - --------------------------------------------------------------------------------------------------------------- Net income (loss), as adjusted $4,152 (3,412) 3,681 - --------------------------------------------------------------------------------------------------------------- Earnings (loss) per share, as adjusted: Basic $1.56 (1.28) 1.38 Diluted $1.55 (1.28) 1.37
The gross amount of goodwill and related accumulated amortization at both December 31, 2002 and 2001 amounted to $8,921,000 and $5,135,000, respectively. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144, effective for the Company January 1, 2002, supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. The impact of adopting SFAS No. 144 was immaterial to the Company's financial position and results of operations. In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a 34 Reinhold Industries, Inc. cost associated with an exit or disposal activity be recognized when the liability is incurred rather than the date an entity commits to an exit plan. Additionally, it establishes that fair value is the objective for the initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of SFAS No. 146 will have a material effect on its consolidated financial position or results of operations. In December 2002, , the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for financial statements for years ending after December 15, 2002. The disclosure provisions of SFAS No. 148 have been adopted by the Company. The Company has elected to continue to apply the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," to account for employee stock options. 3 Income Taxes The income tax provision consists of (in thousands):
Years ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Federal $1,529 43 1,564 State 493 15 372 Foreign 484 212 344 - --------------------------------------------------------------------------------------------------------------- Total $2,506 270 2,280
The income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to pretax income as a result of the following (in thousands):
Years ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Taxes at statutory Federal rate $2,264 ( 1,086) 1,971 State taxes, net of Federal tax benefits 325 10 245 Rate difference on foreign income (65) 88 (46) Non-deductible expenses 43 82 57 Change in valuation allowance - 1,183 - Other (61) (7) 53 - --------------------------------------------------------------------------------------------------------------- Total provision for income tax expense $2,506 270 2,280
35 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
December 31, December 31, 2002 2001 - --------------------------------------------------------------------------------------------------------------- Deferred tax assets: Adjustments from quasi-reorganization $ 634 634 Asset impairment 1,104 1,649 Net operating loss carryforwards 7,194 8,713 Inventory reserves 205 378 Other reserves 528 337 - --------------------------------------------------------------------------------------------------------------- Total gross deferred tax assets 9,665 11,711 Less valuation allowance (8,995) (10,857) - --------------------------------------------------------------------------------------------------------------- Net deferred tax assets (670) (854) Deferred tax liabilities: Pension (670) ( 854) Depreciation - - - --------------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (670) (854) Net deferred tax assets $ - -
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the level of historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will not realize the benefits of these deductible differences at December 31, 2002. At December 31, 2002 and 2001, the Company had generated net operating loss carryforwards for Federal income tax purposes of approximately $21,158,000 and $25,628,000, respectively. At December 31, 2001, the Company's net operating loss carryforwards for State income tax purposes have expired. The Company may utilize the Federal net operating losses by carrying them forward to offset future Federal taxable income, if any, through 2011. Benefits realized from loss carryforwards and deductible temporary differences arising prior to the reorganization have been recorded directly to additional paid-in capital. Such benefits amounted to $1,756,000 in 2002 and zero in 2001. Pursuant to the Plan, Keene (predecessor company) transferred certain assets on July 31, 1996 to the Creditors' Trust. Certain assets at the date of transfer were not capable of being valued until the resolution of pending litigation. The Company anticipates a future tax benefit; however, since the value of certain assets is not currently quantifiable and the extent of any potential benefit resultant upon the transfer of the assets is not estimable, the Company has not disclosed nor recorded a deferred tax benefit in the accompanying consolidated financial statements. 36 Reinhold Industries, Inc. 4 Long Term Debt On March 9, 2000, the Company borrowed $11,000,000 from Bank of America to fund a portion of the purchase consideration due to Samuel Bingham Company. The principal portion of the loan was payable in twenty successive quarterly installments beginning June 30, 2000. Interest was payable quarterly at a rate which approximated LIBOR plus 1.75% and was secured by all financial assets of the Company. On March 20, 2002, the Company entered into a one year $10,000,000 revolving credit facility with LaSalle Bank National Association ("LaSalle"). Interest is at a rate which approximates LIBOR plus 2.50% (3.90% at December 31, 2002) and is secured by all financial assets of the Company. The credit agreement with LaSalle is subject to various financial covenants to which the Company must comply. The covenants require the Company to maintain certain ratios of profitability, cash flow, total outstanding debt, minimum net worth and limits on capital expenditures. As of December 31, 2002, the Company was in compliance with all applicable covenants. On March 21, 2002, the Company received $7,200,000 from LaSalle against this credit facility. The proceeds from the credit facility and additional cash on hand were used to extinguish all outstanding debt with B of A. The outstanding balance with LaSalle was $3,000,000 at December 31, 2002. At December 31, 2002, maturities of long term debt were as follows (in thousands): Obligations under capital leases - ----------------------------------------------------------------- 2003 $ 168 2004 101 2005 31 2006 - - ----------------------------------------------------------------- 300 - ----------------------------------------------------------------- Less amount representing interest 27 - ----------------------------------------------------------------- Present value of minimum lease payments $ 273 5 Stockholders' Equity On May 10, 2000, the Board of Directors approved the distribution of a 10% stock dividend payable to stockholders of record on July 11, 2000, where an additional 199,102 shares were issued on July 28, 2000. On May 8, 2001, the Board of Directors approved the distribution of a 10% stock dividend payable to stockholders of record on July 13, 2001, where an additional 218,664 shares were issued on July 31, 2001. On May 1, 2002, the Board of Directors approved the distribution of a 10% stock dividend payable to stockholders of record on May 31, 2002, where an additional 240,933 shares were issued on June 21, 2002. All common stock information and earnings per share computations for all periods presented have been adjusted for the dividends. 37 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) 6 Stock Options Stock Incentive Plan Stock Incentive Plan On July 31, 1996, the Company established the Reinhold Stock Incentive Plan for key employees. The Reinhold Stock Incentive Plan permits the grant of stock options, stock appreciation rights and restricted stock. The total number of shares of stock subject to issuance under the Reinhold Stock Incentive Plan may not exceed 100,000. The maximum number of shares of stock with respect to which options or stock appreciation rights may be granted to any eligible employee during the term of the Reinhold Stock Incentive Plan may not exceed 10,000. The shares to be delivered under the Reinhold Stock Incentive Plan may consist of authorized but unissued stock or treasury stock, not reserved for any other purpose. The Plan provides that the options are exercisable based on vesting schedules, provided that in no event shall such options vest more rapidly than 33 1/3 % annually. The options expire no later than ten years from the date of grant. On June 3, 1999, the Board of Directors approved and adopted the Reinhold Industries, Inc. Stock Option Agreement by and between the Company and Michael T. Furry, granting Mr. Furry the option, effective June 3, 1999, to acquire up to 90,000 shares of Class A common stock of the Company at fair market value at that date ($8.25 per share). Terms of the Agreement are equivalent to those in the Reinhold Stock Incentive Plan. The number of stock options outstanding and the exercise price were adjusted for the impact of the 10% stock dividends. On September 30, 2002, the Company approved the Amended and Restated Reinhold Stock Incentive Plan. This amendment increases the total number of shares of stock subject to issuance under the Reinhold Stock Incentive Plan from 100,000 to 265,800 (including the impact of the stock dividends declared in 2000, 2001 and 2002). The maximum number of shares of stock with respect to which options or stock appreciation rights may be granted to any eligible employee during the term of the Reinhold Stock Incentive Plan were increased from 10,000 to 60,000. All other terms remain unchanged. The amendment is subject to shareholder approval. If the Corporation's shareholders do not approve the Plan by July 31, 2003, the Plan shall terminate, all options granted shall terminate and cease to remain outstanding, and no further stock option grants shall be made under the Plan. As of December 31, 2002, options granted under the Amended and Restated Reinhold Stock Incentive Plan totalled 100,000. Due to the shareholder approval requirement, the dilutive effect, if any, of these options was not included in earnings per share computations for any periods presented. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and the related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options approximates the fair value of the underlying stock on the date of grant, no compensation expense is generally recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, as amended, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:
2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- Risk free interest rate n/a n/a 6.2% - -------------------------------------------------------------------------------------------------------------- Dividend yield - - - - -------------------------------------------------------------------------------------------------------------- Volitility factor n/a n/a 81% - -------------------------------------------------------------------------------------------------------------- Weighted average life (years) n/a n/a 4.1
38 Reinhold Industries, Inc. Using the Black-Scholes Option Pricing Model, the estimated weighted-average grant date fair value of options granted in 2000 was $6.22. No options were granted to employees during 2002 or 2001. See note 1 for the Company's accounting policy for its Employee Stock-Based Plans, as well as the effect on net income and earnings per share had the Employee Stock-Based Plans been recorded based on the fair value method under SFAS 123. The Black-Scholes Option Pricing Model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different than those of traded options, and because changes in the assumptions can materially affect the fair value estimate, in management's opinion, the existing models may not necessarily provide a reliable single measure of the fair value of its employee stock options. A summary of the status of the option plans as of and for the changes during the year ended December 31, 2002 and 2001 is presented below:
Weighted average Number of shares Low High exercise price - --------------------------------------------------------------------------------------------------------------- Outstanding December 31, 2000 186,000 $7.50 $10.23 $7.72 - --------------------------------------------------------------------------------------------------------------- Options issued in connection with 10% stock dividend 18,600 $6.82 $9.30 $7.01 Granted in 2001 - - - - Forfeited during 2001 - - - - - --------------------------------------------------------------------------------------------------------------- Outstanding December 31, 2001 204,600 $6.82 $9.30 $7.01 - --------------------------------------------------------------------------------------------------------------- Options issued in connection with 10% stock dividend 20,460 6.20 8.45 6.38 Granted in 2002 - - - - Forfeited during 2002 6,655 8.45 8.45 8.45 - --------------------------------------------------------------------------------------------------------------- Outstanding December 31, 2002 218,405 $6.20 $8.06 $6.31
At December 31, 2002, the weighted average remaining contractual life of options outstanding is 6.4 years. Options representing 206,305 shares are currently exercisable. The weighted average exercise price of the options exercisable at December 31, 2002 is $6.31. Directors' Deferred Stock Plan On September 30, 2002, the Company established the Reinhold Industries, Inc. Directors Deferred Stock Plan. The Plan allows the non-employee Directors of the Company to elect to receive stock in lieu of cash payment for their services on the Board of Directors. If the Director elects to receive Company stock, he has the option of receiving the shares immediately or deferring receipt of those shares to a future date. The value of the services performed are charged to the statement of operations in the year incurred. As of December 31, 2002, 25,000 shares have been reserved for issuance under this Plan. 39 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) 7 Pension Plans The Company currently has four pension plans covering substantially all employees. The benefits paid under the pension plan generally are based on an employee's years of service and compensation during the last years of employment (as defined). Annual contributions made to the pension plan are determined in compliance with the minimum funding requirements of ERISA, using a different actuarial cost method and different actuarial assumptions than are used for determining pension expense for financial reporting purposes. Plan assets consist principally of publicly traded equity and debt securities. Net pension cost included the following (in thousands):
Years ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Service cost $235 212 167 Interest cost on benefits earned in prior years 945 953 966 Expected return on assets (1,025) (1,159) (900) Amortization of net obligation at transition (18) (18) (3) Amortization of net loss 278 83 (297) - --------------------------------------------------------------------------------------------------------------- Net pension cost $ 415 71 (67)
The following table sets forth a reconciliation of the pension plan's benefit obligation at December 31, 2002 and 2001 (in thousands):
2002 2001 - --------------------------------------------------------------------------------------------------------------- Projected benefit obligation at beginning of year $14,536 14,143 Service cost 235 212 Interest cost 945 953 Actuarial loss 116 443 Benefits paid (1,208) (1,215) - --------------------------------------------------------------------------------------------------------------- Projected benefit obligation at end of year $14,624 14,536
The following table sets forth a reconciliation of the pension plan's assets at December 31, 2002 and 2001 (in thousands):
2002 2001 - --------------------------------------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $12,232 13,550 Actual return on assets (918) (778) Employer contributions 67 675 Benefits paid (1,208) (1,215) - --------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $10,173 12,232
40 Reinhold Industries, Inc. The following table sets forth a reconciliation of the pension plan's funded status at December 31, 2002 and 2001 (in thousands).
2002 2001 - --------------------------------------------------------------------------------------------------------------- Projected benefit obligation at end of year $14,624 14,536 Fair value of plan assets at end of year 10,173 12,232 - --------------------------------------------------------------------------------------------------------------- Funded status (4,451) (2,304) Unrecognized prior service cost 173 133 Unrecognized net obligation at transition 2 (17) Unrecognized net loss 5,961 4,220 - --------------------------------------------------------------------------------------------------------------- Prepaid pension cost at end of year $1,685 2,032 Intangible asset at December 31, $175 138 Additional minimum liability at December 31, (5,596) (3,899) - --------------------------------------------------------------------------------------------------------------- Additional pension liability in excess of prior service cost at December 31, $(5,421) (3,761)
Assumptions used in accounting for the pension plan were:
December 31, December 31, 2002 2001 - --------------------------------------------------------------------------------------------------------------- Discount rate 6.75% 6.75% Rate of increase in compensation levels 5.0 5.0 Expected long-term rate of return on assets 9.0 9.0
The unrecognized prior service cost and the unrecognized net loss are being amortized on a straight-line basis over the average future service of employees expected to receive benefits under the plans. The unrecognized net obligation at transition is being amortized on a straight-line basis over 15 years. 8 Operating Segments The Company reports segment data pursuant to SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." Reinhold is a manufacturer of advanced custom composite components, sheet molding compounds and rubber rollers for a variety of applications in the United States and Europe. The Company generates revenues from six operating segments: Aerospace, CompositAir, Commercial, Thermal Insulation, NP Aerospace and Bingham. Management has determined these to be Reinhold's operating segments based upon the nature of their products. Aerospace and Thermal Insulation produce a variety of products for the U.S. military and space programs. CompositAir produces components for the commercial aircraft seating industry. The Commercial segment produces lighting housings and pool filter tanks. NP Aerospace produces products for law enforcement, lighting, military, automotive and commercial aircraft. Bingham manufactures rubber rollers for graphic arts and industrial applications. 41 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) The information in the following tables is derived directly from the segment's internal financial reporting for corporate management purposes (in thousands).
Years ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Net sales Aerospace $17,807 9,511 8,417 CompositAir 6,538 5,877 7,547 Commercial 2,877 3,072 3,093 Thermal Insulation 1,443 2,004 - NP Aerospace 13,285 9,322 11,914 Bingham 17,092 19,161 18,316 - --------------------------------------------------------------------------------------------------------------- Total sales $59,042 48,947 49,287 Income (loss) before income taxes Aerospace $ 6,964 2,696 2,625 CompositAir 450 174 1,297 Commercial 221 311 419 Thermal Insulation (172) 422 - NP Aerospace 1,614 366 1,146 Bingham (748) (6,622) 13 Unallocated corporate (expenses) income (1,671) (800) 297 - --------------------------------------------------------------------------------------------------------------- Total income (loss) before income taxes $ 6,658 (3,453) 5,797 Depreciation and amortization Aerospace $ 270 328 349 CompositAir 194 273 275 Commercial 127 138 150 Thermal Insulation 85 121 - NP Aerospace 282 172 160 Bingham 525 542 519 Unallocated corporate 134 84 48 - --------------------------------------------------------------------------------------------------------------- Total depreciation and amortization $ 1,617 1,658 1,501 Capital expenditures Aerospace $ 1,010 891 688 CompositAir 95 158 - Commercial 437 29 16 Thermal Insulation 44 296 - NP Aerospace 382 239 222 Samuel Bingham 363 764 429 Unallocated corporate 134 - - - --------------------------------------------------------------------------------------------------------------- Total capital expenditures $ 2,465 2,377 1,355 Total assets Aerospace $ 7,367 5,026 CompositAir 2,749 2,453 Commercial 1,220 914 Thermal Insulation 3,069 3,431 NP Aerospace 8,504 6,023 Bingham 10,311 10,947 Unallocated corporate 3,514 4,235 - --------------------------------------------------------------------------------------------------------------- Total assets $36,734 33,029
42 Reinhold Industries, Inc.
Years ended December 31, 2002 2001 - ---------------------------------------------------------------------------------------- Goodwill Aerospace $ 238 238 CompositAir 161 161 Thermal Insulation 2,122 2,122 Bingham 1,265 1,265 - ---------------------------------------------------------------------------------------- Total goodwill $3,786 3,786 Write-down of long-lived assets Bingham $ - 5,351 - ---------------------------------------------------------------------------------------- Total write-down of long-lived assets $ - 5,351
The table below presents information related to geographic areas in which Reinhold operated (in thousands):
December 31, December 31, December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Net sales North America $40,479 38,319 37,141 United Kingdom 13,807 8,294 9,098 Greece 2,518 - - Germany 1,706 1,096 865 All other 532 1,238 2,183 - --------------------------------------------------------------------------------------------------------------- Net sales $59,042 48,947 49,287 Total assets North America $28,230 27,006 United Kingdom 8,504 6,023 - --------------------------------------------------------------------------------------------------------------- Total assets $36,734 33,029 Long-lived assets North America $13,626 12,948 United Kingdom 1,677 1,606 - --------------------------------------------------------------------------------------------------------------- Long-lived assets $15,303 14,554
43 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) 9 Commitments and Contingencies Leases The Company leases certain facilities and equipment under operating leases expiring through 2014. Certain facility leases are subject to annual escalations of approximately 1% to 3%. Total rental expense on all operating leases approximated $1,471,000, $1,192,000 and $803,000 for 2002, 2001 and 2000, respectively. Minimum future rental commitments under noncancelable operating leases at December 31, 2002 are as follows (in thousands): 2003 $ 1,299 2004 985 2005 841 2006 776 2007 726 Thereafter 6,909 - ------------------------------------------------------------------ $ 11,536 Legal Proceedings The Company has been informed that it may be a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), with respect to certain environmental liabilities arising at the Valley Forge National Historical Park Site ("Valley Forge Site") located in Montgomery County, Pennsylvania and at a site formerly known as the Casmalia Resources Hazardous Waste Management Facility, located in Santa Barbara County, California ("Casmalia Site"). CERCLA imposes liability for the costs of responding to a release or threatened release of "hazardous substances" into the environment. CERCLA liability is imposed without regard to fault. PRPs under CERCLA include current owners and operators of the site, owners and operators at the time of disposal, as well as persons who arranged for disposal or treatment of hazardous substances sent to the site, or persons who accepted hazardous substances for transport to the site. Because PRPs' CERCLA liability to the government is joint and several, a PRP may be required to pay more than its proportional share of such costs. Liability among PRPs, however, is subject to equitable allocation through contribution actions. On June 16, 2000 the U.S. Department of Justice notified the Company that it may be a PRP with respect to the Valley Forge Site and demanded payment for past costs incurred by the United States in connection with the site, which the Department of Justice estimated at $1,753,726 incurred by the National Park Service ("NPS") as of May 31, 2000 and $616,878 incurred by the United States Environmental Protection Agency ("EPA") as of November 30, 1999. Payment of these past costs would not release the Company from liability for future response costs. Management believes that in or about 1977, the Company's predecessor, Keene Corporation ("Keene"), sold to the U.S. Department of Interior certain real property and improvements now located within the Valley Forge Site. Prior to the sale, Keene operated a manufacturing facility on the real property and may have used friable asbestos, the substance which gives rise to the claim at the Valley Forge Site. On December 30, 2002, the United States District Court for the Southern District of New York approved and entered a Consent Decree agreed upon by the United Sates and the Company settling the claims asserted by the National Park Service against the Company. The United States and the Company stipulated that the EPA will not seek reimbursement of its response costs with respect to the Valley Forge Site and that the Company's claim for a declaratory judgement with respect to those costs may be dismissed with prejudice. 44 Reinhold Industries, Inc. Under the terms of the Consent Decree, the Company was obligated to pay $500,000 to the Department of the Interior. In return, the Company has received from the United States a covenant not to sue, subject to certain limited exceptions, for claims under CERCLA Sections 106, 107 and 113 and RCRA Section 7003 relating to the Site. The payment to the Department of the Interior was made on January 23, 2003. In September 2002, in accordance with SFAS No. 5, Accounting for Contingencies, the Company had recorded a reserve of $500,000 for the estimated cost to conclude this matter. These costs were included in the December 31, 2002 balance sheet as a component of "Accrued Expenses." Pursuant to the Consent Decree and CERCLA Section 113(f)(2), the Company's settlement with the United States bars any other party from asserting claims for contribution for any response costs incurred with respect to the Valley Forge Site by the United States, any State or other governmental entity, or any other party. With respect to the Casmalia Site, on August 11, 2000, the EPA notified the Company that it is a PRP by virtue of waste materials deposited at the site. The EPA has designated the Company as a "de minimis" waste generator at this site, based on the amount of waste at the Casmalia Site attributed to the Company. The Company is not currently a party to any litigation concerning the Casmalia Site, and based on currently available data, the Company believes that the Casmalia Site is not likely to have a material adverse impact on the Company's consolidated financial position or results of operations. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's financial position, results of operations, or liquidity. 10 Business and Credit Concentrations The Company's principal customers are prime contractors to the U.S. Government, other foreign governments and aircraft seat manufacturers. Sales to each customer that exceed 10% of total net sales for the periods presented and the operating segment that realized the sale were as follows (in thousands).
Years ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- Alliant Techsystems (Aerospace) $14,853 5,078 * B/E Aerospace (CompositAir and NP Aerospace) * 6,050 8,282 * Sales to these customers were less than 10% of total net sales for the period.
Alliant Techsystems accounted for approximately 17% of the Company's accounts receivable balance at December 31, 2002 and B/E Aerospace accounted for approximately 12% of the Company's accounts receivable balance at December 31, 2001 before any adjustments for the allowance for doubtful accounts. No other customer exceeded 10% of the Company's gross accounts receivable balance. The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. 45 Reinhold Industries, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd) 11 Related Party Transactions On June 3, 1999, Reinhold entered into a two year agreement with Hammond, Kennedy, Whitney and Company ("HKW"), a private equity firm, to provide Reinhold and its subsidiaries with advice regarding strategic direction and merger and acquisition activities, including identifying potential acquisition candidates, for a fee of $20,000 per month. The agreement is automatically renewed thereafter for successive one year periods, unless termination notification is provided by either party within 120 days of the renewal date. Mssrs. Ralph R. Whitney, Jr., Andrew McNally, IV and Glenn Scolnik, all members of the Board of Directors of Reinhold, are principals of HKW. 12 Quarterly Summary of Information (Unaudited) Summarized unaudited financial data is as follows (in thousands, except per share data).
Three Months Ended March 31, June 30, September 30, December 31, - -------------------------------------------------------------------------------------------------------------- 2002 Net sales $ 13,930 13,331 13,562 18,219 Gross profit $ 4,102 4,102 4,310 5,707 Net income (loss) $ 824 700 660 1,968 Net earnings (loss) per share: Basic $ 0.31 0.26 0.25 0.74 Diluted $ 0.31 0.26 0.25 0.73 - -------------------------------------------------------------------------------------------------------------- 2001 Net sales $ 12,162 13,336 12,096 11,353 Gross profit $ 3,487 3,597 3,283 2,773 Net income $ 518 642 (4,729) (154) Net earnings per share: Basic $ 0.19 0.24 (1.78) (0.05) Diluted $ 0.19 0.24 (1.78) (0.05)
46 Reinhold Industries, Inc. INDEPENDENT AUDITORS' REPORT - ---------------------------- The Board of Directors Reinhold Industries, Inc. We have audited the accompanying consolidated balance sheets of Reinhold Industries, Inc. (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reinhold Industries, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets. /s/ Ernst & Young LLP Orange County, California February 18, 2003 47 INDEPENDENT AUDITORS' REPORT - ---------------------------- The Board of Directors Reinhold Industries, Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity and comprehensive income and cash flows of Reinhold Industries, Inc. and subsidiaries (the Company) for the year ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Reinhold Industries, Inc. and subsidiaries for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /S/ KPMG LLP Los Angeles, California March 16, 2001 48 Board Of Directors Ralph R. Whitney, Jr. Chairman of The Board Chairman Hammond, Kennedy, Whitney & Company Michael T. Furry President and CEO Reinhold Industries, Inc. Andrew McNally, IV Managing Director Hammond, Kennedy, Whitney & Company Glenn Scolnik President Hammond, Kennedy, Whitney & Company Thomas A. Brand Retired Fiberite Corporation Richard A. Place Retired Ford Motor Company Corporate Officers Michael T. Furry President and CEO Brett R. Meinsen Vice President - Finance and Administration, Treasurer and Secretary Corporate Offices 12827 East Imperial Highway Santa Fe Springs, CA 90670 562 944-3281 562 944-7238 (fax) Investor Relations Contact Judy Sanson Reinhold Industries, Inc. Registrar Continental Stock Transfer & Trust Company 17 Battery Park New York, New York 10004 Annual Meeting The Annual Stockholders' Meeting will be held at the offices of Reinhold Industries, Inc. 12827 East Imperial Hwy. Santa Fe Springs, CA on April 30, 2003 at 2:00 p.m. Form 10-K Stockholders may obtain a copy of Reinhold's 10-K without charge by writing to Investor Relations Department Transfer Agent Continental Stock Transfer & Trust Company 17 Battery Park New York, New York 10004 212 509-4000 Independent Auditors Ernst & Young LLP 18111 Von Karman Avenue Suite 1000 Irvine, CA 92612 Attorneys Petillon & Hansen 1260 Union Bank Tower 21515 Hawthorne Boulevard Torrance, California 90503 Horgan, Rosen, Beckham & Coren, LLP 23975 Park Sorrento Suite 200 Calabasas, CA 91302 Stock Listing Reinhold common stock is listed on the Nasdaq National Market Symbol - RNHDA Stockholder Information
2002 2001 Market Price High Low High Low - --------------------------------------------------------------------------------------------------- First Quarter ended March 31, 2002 6.46 4.73 7.85 5.78 Second Quarter ended June 30, 2002 8.13 5.63 7.85 6.61 Third Quarter ended September 30, 2002 8.00 6.05 7.27 4.70 Fourth Quarter ended December 31, 2002 8.99 6.30 5.93 4.76
The Class A Common Stock of the Company is listed on the Nasdaq National Market under the ticker symbol RNHDA. The table above sets forth the high and low sale prices of the Company's Class A Common Stock for each of the quarterly periods for the years ended December 31, 2002 and 2001, adjusted for the effect of the 10% stock dividend on May 31, 2002. Reinhold Industries, Inc. 12827 East Imperial Highway Santa Fe Springs, CA 90670 562-944-3281 EX-16 5 exhibit16.txt LETTER FROM KPMG ON CHANGE OF ACCOUNTANTS Exhibit 16 KPMG 21700 Oxnard Street, Suite 1200 Woodland Hills, CA 91367 May 9, 2001 Securities and Exchange Commission Washington, D.C. 20549 Ladies and Gentlemen: We were previously principal accountants for Reinhold Industries, Inc. and, under the date of March 16, 2001, we reported on the consolidated financial statements of Reinhold Industries, Inc. and subsidiaries as of and for the years ended December 31, 2000 and 1999. On May 1, 2001, our appointment as principal accountants was terminated. We have read Reinhold Industries, Inc.'s statements included under Item 4 of its Form 8-K dated May 7, 2001, and we agree with such statements, except that we are not in a position to agree or disagree with Reinhold Industries, Inc.'s statement that the change was approved by written consent of the Board of Directors or that Ernst & Young LLP was engaged as the Company's new certifying accountant. Very truly yours, /s/ KPMG LLP EX-23 6 exhibit231.txt CONSENT FROM E&Y Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Reinhold Industries, Inc. of our report dated February 18, 2003, included in the 2002 Annual Report to Shareholders of Reinhold Industries, Inc. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-101589) pertaining to the Amended and Restated Reinhold Industries, Inc. Stock Incentive Plan and the Registration Statement (Form S-8 No. 333-39925) pertaining to the Reinhold Industries, Inc. Stock Incentive Plan of our report dated February 18, 2003, with respect to the consolidated financial statements of Reinhold Industries, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2002. Our audits also included the information as of and for the years ended December 31, 2002 and 2001 included in the financial statement schedules of Reinhold Industries, Inc. listed in Item 15(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Orange County, California March 26, 2003 EX-23 7 exhibit232.txt CONSENT FROM KPMG Exhibit 23.2 Consent of Independent Auditors The Board of Directors Reinhold Industries, Inc. The audit referred to in our report dated March 16, 2001, included the related financial statement schedule II-A as of December 31, 2000 and for the year ended December 31, 2000, included in the December 31, 2000 Annual Report on Form 10-K of Reinhold Industries, Inc. This financial statement schedule II-A is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule. In our opinion, such financial statement schedule II-A, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our report included herein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-101589) pertaining to the Amended and Restated Reinhold Industries, Inc Stock Incentive Plan and the Registration Statement (Form S-8 No. 333-39925) pertaining to the Reinhold Industries, Inc. Stock Incentive Plan of our report dated March 16, 2001, with respect to the consolidated financial statements and schedule of Reinhold Industries, Inc. incorporated by reference and included in this Annual Report (Form 10-K) for the year ended December 31, 2000, respectively. /s/ KPMG LLP Los Angeles, California March 24, 2003 EX-99 8 exhibit99.txt CERTIFICATION - SARBANES-OXLEY Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Reinhold Industries, Inc. (the "Company") on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Michael T. Furry, President and Chief Executive Officer of the Company, and Brett R. Meinsen, Vice President - Finance and Administration of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ MICHAEL T. FURRY Michael T. Furry President and Chief Executive Officer March 28, 2003 /s/ BRETT R. MEINSEN Brett R. Meinsen Vice President - Finance and Administration March 28, 2003 -----END PRIVACY-ENHANCED MESSAGE-----