-----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, AjUmhr3I7ZAj32UFzDdiCszZsMaiAL4egowGcp88DNVRaO0jlSKuzLSFtsnU06ZX xFKbdQRjnYQ7AgisnpQqjw== 0000862255-01-000007.txt : 20010417 0000862255-01-000007.hdr.sgml : 20010417 ACCESSION NUMBER: 0000862255-01-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010416 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: SEC FILE NUMBER: 000-18434 FILM NUMBER: 1603649 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 0001.txt REINHOLD INDUSTRIES, INC 2000 10-K 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, 2000 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 OTC BULLETIN BOARD - ------------------------------------- ---------------------------- (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 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 [ ] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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 The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of March 15, 2001 was $17,584,000. The number of shares of common stock outstanding as of March 15, 2001 were 2,198,058. Documents incorporated in part by reference: Reinhold Industries, Inc. 2000 Annual Report to Stockholders - Parts I, II Reinhold Industries, Inc. Proxy Statement - Part III 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 five 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 2000, Aerospace's sales increased dramatically due to the award of a major contract (to be completed in early 2001) and business transferred from a competitor. 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 two major customers constituted approximately 55% of this business units' total sales in 2000. 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. Due to reduced military spending in recent years, business consolidation in the markets the Company serves continue to persist. On January 31, 2001, Alliant Techsystems, Inc. ("ATK") announced that it would be purchasing 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 seat back 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 frames so produced is 30% to 40% less than equivalent aluminum frames. CompositAir operates in both Camarillo, California and Santa Fe Springs, California. Almost 100% 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 2000, sales dropped by 38% compared to 1999. The decline was due to commercial difficulties at one of CompositAir's main customers as well as a temporary decline in the general aircraft marketplace. 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. During 2000, sales increased by 27% over 1999 due mainly to sales of compression molding tooling used for manufacture of products. 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. Reinhold, as the Guarantor for NP Aerospace, became obligated to pay to Courtaulds plc net consideration consisting of (a) Two Million Two Hundred Thousand pounds sterling ((pound)2,200,000) ($3,706,340 based on an exchange rate of $1.6847) cash on the Closing Date and (b) within 120 days following the end of each of the calendar years 1998 through 2001, a cash amount equal to 25% of the Pre-tax Profit on the light armored vehicle business only, the maximum aggregate amount of which shall not exceed Twenty Million pounds sterling ((pound)20,000,000). Additional payments of (pound)0 and (pound)140,000 ($227,000) were capitalized in 2000 and 1999, respectively, as part of the purchase price. NP Aerospace operates in Coventry, England. Additional information on the NP Aerospace acquisition is set forth in Note 2 to the Consolidated Financial Statements on page 32 and "Management Discussion and Analysis of Financial Condition and Results of Operations " on page 22 of Reinhold's 2000 Annual Report to Stockholders, which is incorporated herein by reference. 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 uncertain. Due to the high selling price of vehicles, large swings in revenue are possible. Overall sales in 2000 were 32% lower than in 1999 due mainly to the lack of new orders for vehicles. 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 for $15.2 million in cash. A majority of the purchase price was financed through a five year term loan with the Bank of America for $11.0 million with the balance being paid from cash on hand. 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 eight separate 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 the marketplace, the Company is forced to be highly competitive. Additional information on the Bingham acquisition is set forth in Note 2 to the Consolidated Financial Statements on page 33 and "Management Discussion and Analysis of Financial Condition and Results of Operations " on page 22 of Reinhold's 2000 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 40 through 42 and "Management Discussion and Analysis of Financial Condition and Results of Operations " on pages 21 through 22 of Reinhold's 2000 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 44 of Reinhold's 2000 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 can not 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 expires in January 2002. Samuel Bingham Enterprises, Inc. holds ten registered trademarks with expiration dates ranging from February 2002 through August 2009. Research and Development Research and development expenditures were approximately $327,000, $155,000 and $158,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Employees At December 31, 2000, Reinhold had 444 full-time employees and 10 part-time employees. Of these employees, 356 ( 346 full-time and 10 part-time) were employed in manufacturing and 98 (all full-time) in administration, product development and sales. Approximately 18% of the personnel are based at Reinhold's Santa Fe Springs, California facility, approximately 8% are based in Camarillo, California, approximately 24% are based at NP Aerospace located in Coventry, England and approximately 50% are based at the various manufacturing and administration facilities of Samuel Bingham. Approximately 70 of the employees in Coventry, England are represented by a labor union. Certain Samuel Bingham employees, approximately 55, 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. DESCRIPTION OF PROPERTY 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 Camarillo, CA Manufacturing 18,000 sq. ft. Leased (Expires 2002) 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 Dallas, TX Manufacturing 16,000 sq. ft. Own Houston, TX Manufacturing 9,000 sq. ft. Own College Park, GA Manufacturing 16,000 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) Montreal, Quebec, Canada Manufacturing 23,000 sq. ft. Own Bloomingdale, IL Administration 4,000 sq. ft. Leased (Expires 2004) Cincinnati, OH Manufacturing 15,000 sq. ft. Own
Construction of a new building and additional improvements at the Santa Fe Springs location are expected to be completed by the end of September 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 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. The Company is in the process of analyzing the legal foundations of the Department of Justice claim in light of the bankruptcy proceeding described below. The Company believes that two injunctions issued in 1996 in connection with Keene's bankruptcy proceeding under chapter 11 of Title 11 of the United States Code ("Bankruptcy Code") are relevant to the Justice Department's claim. As previously reported, Keene acquired Reinhold in 1984. On December 3, 1993, Keene filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court. Keene's chapter 11 filing came as a direct result of the demands on Keene of thousands of asbestos-related lawsuits that named Keene as a party. On July 31, 1996 (the "Effective Date"), Keene consummated its Fourth Amended Plan of Reorganization, as modified, under the Bankruptcy Code (the "Plan"). On the Effective Date, Reinhold was merged into and with Keene, with Keene becoming the surviving corporation. Keene, as the surviving corporation of the merger, was renamed Reinhold Industries, Inc. On the Effective Date, pursuant to the Plan the Company issued its Class B Common Stock to the Trustees of a Creditors' Trust, which was established under the Plan to administer Keene's asbestos liabilities. The Creditors' Trust has since sold most of its Class B Common Stock. The general bankruptcy injunction issued in the chapter 11 proceeding generally prohibits any entity from commencing or continuing any action, employment of process or act to collect, offset, affect or recover any claim, demand, interest or cause of action satisfied, released or discharged under the Plan. Such claims, demands, interests and causes of action include, whether known or unknown, all claims against Keene or the Company or their assets and all related causes of action, regardless of whether a proof of claim or interest was filed or allowed, and whether or not the holder of such claim or interest has voted on the Plan, or any causes of action based on any act or omission of any kind occurring prior to the Effective Date. In addition to this general bankruptcy injunction, the Company received the benefit of a supplemental "Permanent Channeling Injunction" as part of the Plan. The Permanent Channeling Injunction bars "Asbestos-Related Claims" and "Demands," as defined in the Plan, against the Company and channels those Claims and Demands to the Creditors' Trust. Pursuant to the Permanent Channeling Injunction, on or after the Effective Date of the Plan, any person or entity who holds or may hold an Asbestos-Related Claim or Demand against Keene will be forever stayed, restrained, and enjoined from taking certain actions for the purpose of, directly or indirectly, collecting, recovering, or receiving payment of, on, or with respect to such Asbestos-Related Claims or Demands against the Company. It is difficult to estimate the timing and ultimate costs to be incurred by the Company in connection with environmental liability claims in the future due to uncertainties about the status of laws and regulations, the adequacy of information available for individual sites and the extended time periods over which site remediation occurs. However, based on currently available information, if the environmental liability claims relating to the Valley Forge Site arose prior to the filing of Keene's bankruptcy case or if these claims were deemed to be Asbestos-Related Claims or Demands within the meaning of the Plan, then the Company does not believe that environmental liabilities associated with the Valley Forge Site should result in a material adverse impact on the Company's consolidated financial position or results of operation. However, if these claims are deemed to have arisen subsequent to the filing of Keene's bankruptcy case -- i.e the "release" or "threatened release," within the meaning of CERCLA, is deemed to have occurred after Keene filed its chapter 11 petition with the Bankruptcy Court or the claims are held to have arisen when the response costs were incurred -- and these claims are not deemed to be Asbestos-Related Claims or Demands as defined under the Plan, then the Company could incur liability for the claims. If a court were to determine that the Company was liable for recoverable costs associated with the Valley Forge Site under CERCLA, the resulting liability could have a material adverse impact on the Company's consolidated financial position and results of operations. 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 in the process of evaluating its potential environmental liability exposure at 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. Reinhold is a defendant in a number of other legal actions arising from the normal course of business. Management believes that these actions are not meritorious and will not have a material adverse effect on the financial position of Reinhold. Item 4. RESULTS OF VOTES OF SECURITY HOLDERS On September 8, 2000, a written consent of shareholders to action without a meeting was coordinated to consider and vote on the following proposal: 1. To amend the Corporation's existing Amended and Restated Certificate of Incorporation to (i) decrease the number of total authorized shares from 50,000,000 to 5,000,000; (ii) decrease the number of authorized shares of Common Stock from 45,000,000 to 4,750,000; and (iii) decrease the number of authorized shares of preferred stock from 5,000,000 to 250,000. The Board of Directors' authority to establish the rights and preferences of any series of preferred stock prior to the issuance of any such series and to issue preferred stock in one or more series, without further approval of stockholders of the Company, remains unchanged. The primary purpose of the proposed amendment is to reduce the number of authorized shares in order to reduce the minimum franchise tax payable to the State of Delaware. Affirmative votes of the holders of at least a majority of the outstanding shares of Class A Common Stock are required to approve the proposed amendments to Reinhold's Amended and Restated Certificate of Incorporation. Under the applicable provisions of the Delaware General Corporation Law, the Company's stockholders have no appraisal rights with respect to the proposed amendments. If the amendments are adopted, they will become effective upon the filing of the Certificate of Incorporation, as amended, with the Delaware Secretary of State. Results of the voting were as follows: Written consents representing 1,260,319 or 57.3% of the 2,198,058 outstanding shares were received approving the proposal. The approved Amended and Restated Certificate of Incorporation was filed with the Delaware Secretary of State and became effective on November 1, 2000. PART II Item 5. MARKET FOR 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 47 of Reinhold's 2000 Annual Report to Stockholders, which is incorporated herein by reference. Reinhold's common stock is traded on the NASD OTC Bulletin Board 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 15, 2001 -------------- -------------------- Class A Common Stock, par value $.01 per share 1,546 c. A 10% stock dividend was declared on July 5, 2000 payable to shareholders of record as of July 11, 2000. The dividend was payable on or about July 28, 2000. Fractional shares were paid in cash. Fractional share cash payments totaled $7,142.20. Item 6. SELECTED FINANCIAL DATA Reference is made to the "Selected Financial Data" on page 1 of Reinhold's 2000 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 Discussion and Analysis of Financial Condition and Results of Operations" on page 21 of Reinhold's 2000 Annual Report to Stockholders, which is incorporated herein by reference. Item7A. 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, 2000 is at variable interest rates based on LIBOR plus 1.75%. A hypothetical 10% change in interest rates would have had a $0.1 million and $0.02 million impact on interest expense for the years ended December 31, 2000 and 1999, 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, 2000 has fluctuated from 1.68 to 1.39, a range of 17%. A hypothetical 15% change in exchange rate would have had a $0.1 million and $0.2 million impact on net income for the year ended December 31, 2000 and 1999, respectively. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Independent Auditors' Report, the Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 25 through 46 of Reinhold's 2000 Annual Report to Stockholders, which is incorporated herein by reference. Financial data schedules are included in Part IV of this filing.
Schedule II - Valuation and Qualifying Accounts Allowance for Doubtful Accounts Receivable (in thousands) - ---------------------------------------------------------------------------------------------------------- Additions Charged to Balance at ----------------------- Balance at Beginning of Costs and End of Fiscal Year Ended Period Expenses Other Deductions Period - ----------------------------------------------------------------------------------------------------------- December 31, 1998 $344 - - $ 57 $287 - ----------------------------------------------------------------------------------------------------------- December 31, 1999 287 - - 227 60 - ----------------------------------------------------------------------------------------------------------- December 31, 2000 60 - 105 - 165 - -----------------------------------------------------------------------------------------------------------
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE None PART III Item 10. DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT ---------------------------------------------------------------------- The information required with respect to directors of Reinhold is included in the definitive Proxy Statement for the 2001 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 2001 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 2001 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 2001 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. PART IV Item 14. EXHIBITS AND REPORTS ON FORM 8-K a) 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. 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. 13 Annual Report to Stockholders 23.1 Consent of Independent Auditors and Report on Schedule 27 Financial Data Schedules b) REPORTS ON FORM 8-K A Form 8-K, Item 5 - Other Events, was filed with the Commission on November 1, 2000. The information reported was the notification by the U.S. Department of Justice that the Company may be a Potentially Responsible Party with respect to certain environmental liabilities and the demand to pay approximately $2.5 million in remediation costs. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Reinhold has duly caused this Annual Report to be signed on its behalf by the undersigned thereunto duly authorized. REINHOLD INDUSTRIES, INC. Registrant Date: April 16,2001 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 is signed below by the following persons on behalf of Reinhold and in the capacities and on the date indicated. /s/ Michael T. Furry April 16, 2001 ---------------------------------------- Michael T. Furry- President and Director (Principal Executive Officer) /s/ Ralph R. Whitney, Jr. April 16, 2001 ---------------------------------------- Ralph R. Whitney, Jr.- Chairman /s/ Andrew McNally, IV April 16, 2001 ---------------------------------------- Andrew McNally, IV- Director /s/ Glenn Scolnik April 16, 2001 ---------------------------------------- Glenn Scolnik- Director /s/ Thomas A. Brand April 16, 2001 ---------------------------------------- Thomas A. Brand- Director /s/ Richard A. Place April 16, 2001 ---------------------------------------- Richard A. Place- Director EX-13 2 0002.txt 2000 ANNUAL REPORT REINHOLD INDUSTRIES, INC. 2000 ANNUAL REPORT Picture - Products Picture - Products Picture - Building Picture - Board of Directors Board of Directors, left to right: Michael T. Furry, President and CEO; Ralph R. Whitney, Jr., Chairman; Andrew McNally IV; Thomas Brand; Richard A. Place; and Glenn Scolnik.
Reinhold Industries, Inc. and Subsidiaries Selected Financial Data 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Summary of operations (in thousands) Net sales $ 49,287 39,140 25,996 16,232 13,120 Gross profit $ 14,789 10,783 6,503 4,699 3,046 Operating income $ 5,364 5,704 2,196 1,595 17 Gain on sale of asset $ 962 - - - - Interest (expense) income, net $ (529) 100 (17) 103 1,159 Reorganization expenses $ - - - - 3,139 Net income (loss) $ 3,517 3,570 1,435 1,004 (2,353) - ----------------------------------------------------------------------------------------------------------- Year end position (in thousands) Cash and marketable securities $ 7,121 9,419 3,622 3,169 2,522 Working capital $ 14,589 13,256 8,961 6,314 3,602 Net property and equipment $ 11,280 5,726 5,476 4,526 5,158 Total assets $ 40,709 25,234 20,215 13,215 12,540 Long-term debt $ 8,721 1,125 1,550 - - Other long-term liabilities $ 449 204 2,559 873 3,314 Stockholders' equity $ 22,905 18,423 11,263 10,905 7,284 - ----------------------------------------------------------------------------------------------------------- Per share data (Note 2) Net income (loss): Basic (Note 1) $ 1.60 1.62 0.65 0.46 N.M.* Diluted (Note 1) $ 1.58 1.62 0.65 0.46 N.M.* Stockholders' equity $ 10.28 8.36 5.12 4.96 N.M.* Market price range: High $ 13.00 11.93 9.25 10.00 4.13 Low $ 6.50 6.14 5.50 2.88 3.25 - ----------------------------------------------------------------------------------------------------------- Other data (in thousands except stockholder & employee data) Orders on hand $ 16,442 13,841 16,194 5,989 4,935 Average shares outstanding - basic 2,198 2,198 2,198 2,198 Note 1 Average shares outstanding - diluted 2,229 2,205 2,198 2,198 Note 1 Average number of common stockholders 1,629 1,711 1,808 1,951 2,099 Average number of employees 439 289 220 124 105 - ----------------------------------------------------------------------------------------------------------- Note 1: Keene emerged from bankruptcy on July 31, 1996. Reinhold was merged into and with Keene, with the surviving company being renamed Reinhold Industries, Inc. The outstanding common stock of Keene on July 31,1996, 10,746,235 shares, was canceled and replaced by 978,956 shares of Class A Common Stock and 1,020,000 shares of Class B Common Stock. Therefore, the earnings per share and average shares outstanding information is not meaningful. Note 2: All share information has been adjusted for the Company's 10% stock dividend in 2000. *N.M. - Not Meaningful
See management analysis and Note 1 to the consolidated financial statements for discussion of Chapter 11 bankruptcy proceedings and the Effective Date of the Fourth Amended Plan of Reorganization. 1 MESSAGE FROM THE PRESIDENT BRIEF SUMMARY OF THE YEAR The financial results achieved by the company in the year 2000 were essentially as expected, with net income down 1% from our strong performance in 1999. A positive aspect was gross sales of $49.3 million, up $10.1 million, or 26%, over 1999. The increase is attributable to the $18.3 million in sales contributed by Bingham during the 10 months of Reinhold ownership. It was particularly important because it enabled us to sustain our five-year pattern of continuous sales growth. Individual performance of the Business Units was mixed. The Aerospace and Commercial Units had excellent years, but their strong results were partially eroded by poor results from CompositAir and NP Aerospace. Details of the performance of each of the Business Units will be reviewed following the story of the Bingham Acquisition. THE BINGHAM ACQUISITION The primary thrust of Reinhold's strategy for growth is focused acquisitions. On March 9, 2000, we took a significant step in implementing this strategy by acquiring the Samuel Bingham Company. An immediate effect of that acquisition was to invigorate the process of Picture - Michael T. Furry Michael T. Furry President and CEO 2 FOUNDED IN 1848 BY SAMUEL BINGHAM, THE COMPANY WAS ONE OF THE FIRST MANUFACTURERS OF RUBBER AND COMPOSITE ROLLERS aggressive revenue growth that began for Reinhold in 1996. Bingham manufactures rubber rollers for virtually all sheet and web-fed offset, flexographic, letterpress, and gravure printers, as well as metal decorators, manufacturers of film, packaging, converter products, and many other types of processors. Founded in 1848 by Samuel Bingham, the company was one of the first manufacturers of rubber and composite rollers and over the next 130 years built a reputation as an industry leader in innovation and product development. A century later, as competition intensified over the last thirty years of the 20th century, Bingham management relaxed their commitment to replacing and maintaining equipment and facilities. The consequence was a progressive loss of market share of the more richly-priced products and a negative effect on company morale. The decline of Bingham's fortunes brought them into focus as a potential acquisition for Reinhold. They met our criteria for a turn-around opportunity: irresolute management; poor financial performance; a discrete, definable marketplace; and a niche in a stable industry akin to our core business. Picture - Cores Cores are cleaned and polished prior to application of new rubber. 3 Against a stand of Bingham rollers Picture - Press in at Banta Publications in Liberty, action Missouri, Jeff See, left, VP of Sales at Bingham's Kansas City plant, and Gary Utt, Banta's Maintenance Manager, observe Bingham's rollers at work. A procession of rollers moves into the auto-clave for vulcanizing. Picture - Autoclave 4 AN IMPORTANT ASPECT OF OUR METHOD IS A REWARD SYSTEM BASED ON PRODUCTIVITY, AND WE PROMPTLY COMMUNICATE Picture - Autoclave FINANCIAL RESULTS TO ALL EMPLOYEES EACH MONTH. 5 THE REINHOLD PHILOSOPHY IS SIMPLY THE APPLICATION OF SOUND MANAGEMENT PRACTICES. Carl Smith, Bingham Rollers CEO,right, Picture - Carl Smith talks with Kevin Broady, and Kevin Broady Director of Manufacturing at Gardner Lithograph,a sheetfed lithographer in Buena Park, California. We saw in Bingham a significant opportunity to install Reinhold's management philosophy and techniques at the Plant Manager and Sales Manager levels. The Reinhold philosophy is simply the application of sound management practices: safety and mutual respect in the workplace; targeted production and financial goals with incentives and rewards for meeting them; continuous, on-the-job training and cross-training of employees; the development and nurture of team concepts that thrive in the culture of an enlightened work ethic; a sense of controlled urgency; and a commitment to producing products that establish industry leadership in quality and on-time delivery. An important aspect of our method is a reward system based on productivity, and we promptly communicate financial results to all employees each month. In short, Reinhold provides an environment that enables every employee to feel that they are an important contributor to the success of the company. The first step in the integration of Bingham into the Reinhold family was to find a leader. Six months after the acquisition, we found him. He is Carl Smith, and he assumed the responsibilities of Chief Executive Officer in September of 2000. Carl was graduated from San Diego State University with a degree in engineering and has more than 30 years of technical and manufacturing experience. His resume includes President and Chief Operating Officer for Fiberite Corporation and Senior Vice-President of the North American Business Unit of Park Electro Chemical Corporation. He hit the ground running. At the time of the acquisition, there were 12 manufacturing facilities. In December, we closed the two that were the least efficient - Cincinnati and Montreal - and transferred production of that business to our Blacklick, PA and Palmyra, NY facilities. 6 PRODUCTION IS RISING AND COSTS ARE COMING DOWN. By end of the year, production was rising and costs were coming down. Incentive plans based on the financial performance of the business were installed. Today, all incentive and commission plans are based on that criteria. Employee morale and customer confidence in Bingham are on the rise. Twenty-five years ago, Bingham was the benchmark for industry standards. Our immediate goals are improved safety and product quality, 100% on-time delivery, and lead times 50% faster than our competition. Their realization will assure that Bingham will again be regarded as the most knowledgeable and valued supplier in the industry. OVERALL COMPANY PERFORMANCE Profit for the year 2000 was augmented by the sale of our property in Rancho Cucamonga, California. The appreciation to book value that we received was approximately $1 million. The sale coincided with the start of construction and renovation of our Santa Fe Springs facility. Picture - Rubber mill Raw rubber is fed into the rubber mill with necessary emollients, fillers, and colorizers. 7 MUCH OF THIS UNIT'S IMPROVEMENT CAN BE ATTRIBUTED TO A CONTINUING Picture - In-Ground Lighting EMPHASIS ON CREATIVE TOOLING AND Products AGGRESSIVE PROCESS MANAGEMENT. These three of 18 new in-ground and water filtration products developed by the Commercial Unit during the year exemplify Reinhold's expanding design and tooling expertise. The Aerospace Business Unit contributed the most from operations to earnings before interest and taxes (EBIT) in the year 2000. Sales were up 44% and EBIT was up 111% over 1999. These results reflect an across-the-board increase in demand as well as the initial production order for Minuteman ablative components. The Commercial Business Unit added 18 new in-ground lighting and water filtration products during the year 2000. In the process, their sales increased 27% and EBIT increased 46% over 1999. Much of this Unit's improvement can be attributed to a continuing emphasis on creative tooling and aggressive process management. The CompositAir Business Unit experienced a severe decline in both sales and EBIT in the year 2000. This poor result was due to the continuing lack of order input from our principal customer, who suffered a decline in order input in 1999 from which they have not fully recovered. In light of that, we had forecast a significant reduction in sales for the year, but actual results were worse than expected. Compared to this Unit's record performance in 1999, revenue declined 38% A small, specialty roller gets a final quality verification check. Picture - specialty roller 8 THE SILVER LINING TO THIS CLOUDED YEAR WAS THAT WE WERE ABLE TO STRENGTHEN OUR RELATIONSHIP IN EUROPE. and EBIT 47%. Anticipating a reduction in revenue, we responded early with cost controls, head-count reduction, and efficiency improvement. The result was an EBIT of 17% of sales for the year. The silver lining to this clouded year was that we were able to strengthen our relationship in Europe. For the first time, CompositAir/NP Aerospace engineering teams collaborated with the customer to design and develop a new seatback from concept to completion. We expect 70% of the production to be done at NP Aerospace and 30% to be done at CompositAir for delivery in the USA. NP Aerospace UK also suffered a significant reduction in revenue and EBIT compared to a record 1999. Revenue was down 36% and EBIT was down 50%. The reduction in revenue was attributable to two principal events. First, the problems at our principal seating products customer affected this Unit as well as CompositAir. Second, no new vehicle sales occurred in the year 2000. In 1999, 22 vehicles were sold to Botswana and 12 to the UK-RAF. Such sales are not predictable, Picture - rollers Bingham offset lithography rollers ready for shipment. 9 WE HAVE DEVELOPED UNIQUE PRODUCT FEATURES THAT PUT US IN A FAVORABLE COMPETITIVE POSITION. however, for this is a volatile marketplace. Nevertheless, we have developed unique product features that put us in a favorable competitive position and are working on a number of potential vehicle sales. The timing and quantity continue to be speculative. From its acquisition in March of 2000 to year end, the Samuel Bingham Company contributed $18.3 million in revenue for the 10 months of Reinhold ownership. It also contributed more than $0.7 million to EBIT, a result that fell short of our pre-acquisition projections but was in accord with Bingham's recent history prior to acquisition - a record of irresolute management, tolerance of mediocrity, and nagging customer dissatisfaction with product quality. This acquisition has been a classic example of the difficulties inherent in turn-around situations where a sluggish culture has been allowed to ferment too long. Some of the actions that management has taken to correct these conditions at Bingham have already been addressed in preceding paragraphs of this report. Picture - Aft insulation segment This aft insulation segment is one of four major parts for the Minuteman first stage booster. Quadrant-molded into a single piece, the segment is unique for its large size. The Minuteman program calls for 644 booster motors over an eight-year period with more than 11,000 total parts to be supplied by Reinhold. Five different versions of the latest composite designs of Reinhold aircraft seatbacks, from left to right: typical back for smaller, regional Picture - Composite seatbacks carriers and short flights; three different backs for main cabin, tourist class seats; and a premium, long-flight, lay-flat back with electrically powered amenities for business or first class seats. 10 IN ACCORD WITH OUR POLICY OF AGGRESSIVE REVENUE GROWTH, REINHOLD WILL CONTINUE TO BE ALERT TO ACQUISITION OPPORTUNITIES THAT MEET OUR CRITERIA. NEW ACQUISITIONS In accord with our policy of aggressive revenue growth, Reinhold will continue to be alert to acquisition opportunities that meet our criteria. We look for companies that have a discrete, definable market in a stable industry with some kinship to Reinhold's core business, and whose share of that market can be increased through the implementation of Reinhold's financial and operational disciplines. Another key element of our acquisition concerns is the presence of potential leadership, work-force knowledge and motivation, and affinity for our philosophy and culture. We are currently exploring possibilities with more than one company. BOARD OF DIRECTORS During the year 2000, we began the process of securing national listing on NASDAQ. One of the criteria for national listing is an audit committee that includes a majority of independent outside directors. In meeting that criteria, we were fortunate to secure the services of three seasoned executives to join Reinhold's Board. Mr. Glenn Scolnik, attorney and president and CEO of Hammond, Kennedy, Whitney & Company, was appointed to the Board in August of 2000.The second to accept our invitation was Mr. Thomas Brand. Mr. Brand had been a Reinhold In our hybrid seatback manufacturing processes in Picture - NC machine Coventry, England and Santa Fe Springs,newly- refined NC (numerically controlled) machines perform secondary machining operations previously done by hand. 11 Picture - Wet grinding and polishing 12 THE LEASE PROVIDED, AMONG OTHER THINGS, THAT THREE SMALLER BUILDINGS BE RAZED AND A NEW, 50,000 SQ. FT. BUILDING BE CONSTRUCTED ON THE SITE. Board member in the mid 1990s but was required to step down at the effective date of the Keene Bankruptcy to accommodate the mandate of Keene's Plan of Reorganization. He was a member of the Fiberite Corporation Executive Staff for more than 30 years, and, for the last ten was Executive Vice President and General Manager. In early 2001, we were pleased that Mr. Richard A. Place accepted our offer to join the Reinhold Board. Mr. Place is a Navy veteran and a 30-year-plus executive with the Ford Motor Company. We look forward to active, independent advice and direction from these new directors. NEW BUILDING CONSTRUCTION Reinhold has occupied its present leasehold in Santa Fe Springs for almost 50 years. We now have three Business Units occupying the same space, and CompositAir operates a separate manufacturing plant of 18,000 sq. ft. in Camarillo, CA., 65 miles away. During those 50 years, the complexity and size of the business has changed greatly. Our Santa Fe Springs lease expired in May 2000. Pursuant to Board authorization in late 1999, we negotiated a new, long-term lease with the owner. The lease provided, among other things, that three smaller buildings be razed and a new, 50,000 sq. ft. building be constructed on the site. The manufacturing activities now being performed in Camarillo will be moved so that all CompositAir manufacturing will be consolidated in a new, state-of-the-art facility. This will enable us to produce approximately 200,000 seatbacks per year. CompositAir is already the cost leader in this highly competitive market, and the new facility will enable us to extend that advantage and continue to increase our market share. In the final stage of finishing, a roller undergoes wet grinding and polishing. 13 ALL REINHOLD HEADQUARTERS PERSONNEL WILL BE HOUSED IN THE NEW FACILITY. We expect production to begin in the new facility in the third quarter of 2001. By the fourth quarter, we expect that the Aerospace and Commercial Business Units will be relocated in existing buildings in our Santa Fe Springs facility. All Reinhold headquarters personnel will be housed in the new facility. RE-STATEMENT OF EARNINGS Reinhold was merged up and into Keene at the conclusion of the Keene Chapter 11 Bankruptcy effective July 31,1996. At that time, the company qualified for and adopted "fresh-start" reporting (i.e AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code"). This method is normal for companies emerging from Chapter 11 bankruptcy. Reinhold's financial statements from 1996 through 1999 were audited by KPMG in accordance with generally accepted auditing standards, and, during the year 2000, KPMG reviewed our unaudited interim financial statements. In Q1-2001, KPMG discovered that a condition for use of "fresh-start" reporting is that earnings be reported as if the statutory tax rate were in effect, with the benefit of the net operating loss carry forward (NOL) being recorded as additional paid-in capital. Although net income and earnings per share have been decreased in the re-statement of earnings, total stockholders' equity remains unchanged. Taxes paid each year from 1996 through 1999 are also unchanged, and, until our NOL is consumed, our effective tax rate for filing returns in the U.S. will continue to be approximately 3%. KEENE RELATED ASBESTOS ISSUE On June 16, 2000, the U.S. Department of Justice notified the Picture - Vulcraft truss 14 WE EXPECT TO SUSTAIN REINHOLD'S FIVE-YEAR PATTERN OF GROWTH IN BOTH SALES AND PROFIT IN 2001. Company that it may be a responsible party with respect to the Valley Forge National Historic Park and demanded payment of costs incurred by the government in connection with the investigation and remediation of asbestos at the Valley Forge site. On March 1, 2001, the Company commenced a lawsuit against the National Park Service and the U.S. Environmental Protection Agency in the United States District Court for the Southern District of New York, seeking a judicial determination that any claims for these costs asserted against it by the Park Service, EPA, or any third party, are barred as a matter of law under the court-approved 1996 Plan of Reorganization of Keene Corporation. The Company is the product of the merger of Keene and its wholly-owned subsidiary, Reinhold Industries, Inc. under that Plan. The Valley Forge site was the location of the manufacturing facility of Baldwin-Ehret-Hill, Inc., a company that Keene had acquired in 1968. Keene operated this facility from approximately 1968 to 1973, continuing to use asbestos in its manufacturing process consistent with facility practices dating back to the early 1900s. Keene sold the facility and the surrounding land to the U.S. Department of the Interior in or about 1977. At this time, we cannot predict the outcome of the litigation. However, we intend to prosecute the lawsuit vigorously. LOOKING AHEAD We expect to sustain Reinhold's five-year pattern of growth in both sales and profit in 2001. Total company backlog was $16.4 million as of January 1, 2001, up $2.6 million, or 19%, compared to January 1, 2000. A $4.8 million booking for the Minuteman ablative Construction of new building is underway. A Vulcraft truss is lifted into place. 15 OUR COMPETITORS IN THE AEROSPACE INDUSTRY HAVE NOT BEEN AS SUCCESSFUL. components in October of 2000 was a major contribution to the positive result. We expect the Aerospace Business Unit to continue to increase its market share by winning business from weaker competitors. The aerospace/solid rocket ablative market is directly dependent on Defense budgets and is, therefore, a fluctuating and shrinking market. Reinhold's policy of growth and diversification by acquisition outside of the aerospace industry has enabled us to retain key engineering and other human resources needed to meet the demands of that market at its peak without the burden of excessive costs when it is down. Our competitors in the aerospace industry have not been as successful. During the year 2000, several large contracts that had not been included in our forecast were obtained as a direct result of our technical skills and financial strength. We expect these positive factors to continue to work to our advantage in 2001. In the year 2000, the Commercial Business Unit enjoyed a substantial increase in revenue as a result of tooling orders for eighteen new products. Those products will be in production in 2001, and this Unit will show a modest increase in sales and profit for the year. Picture - New construction 16 WE HAVE CONTINUED TO INVEST IN AUTOMATION AND MANUFACTURING PROCESS REFINEMENT. CompositAir sales for the year 2000 were $7.5 million. Compared to 1999 sales of $12.1 million, that was a disappointing performance. The cause, which was outside of Reinhold's control, was a sharp reduction in aircraft seating product sales by our largest customer due to organizational and scheduling problems. No seat sales means no seatback structure sales. That situation is gradually improving. On another front, CompositAir participated as a product development advisor on a new product offering by the largest European manufacturer of aircraft seating products. The process included technical and design contributions by NP Aerospace engineering. That product is now in initial production in the UK for delivery to Europe. CompositAir will start manufacturing the same product for delivery in America later in 2001. CompositAir/NP Aerospace is now solidly positioned as the primary composite seatback supplier to the world's number one and number two manufacturers of aircraft seating products. We have continued to invest in automation and manufacturing process refinement. This is Picture - Roof structure Roof structures are assembled on site and installed in 8' x 60' sections. 17 THE LONG-RANGE OUTLOOK FOR NP AEROSPACE IS GOOD. essential to maintaining our present position as the cost leader in a market that considers aircraft seatbacks to be a commodity. We expect sales to increase slightly in 2001 as we experience a steady growth in market share based on cost reductions related to our new manufacturing facility and our "pull-through" approach to marketing. That means identifying the benefits of product features associated with composite seatbacks over those made of metal. The long-range outlook for NP Aerospace is good. This Unit enjoys a core business of commercial molding, medical composites, and "standard" military helmets that are UK Ministry of Defense related. In addition, this Unit produces composite commercial aircraft seatback structures. The core business products performed according to forecast in the year 2000. However, because of difficulties experienced by our largest customer - the same difficulties that afflicted CompositAir - seatback sales were down. We expect them to be better in 2001. From an expandable boom forklift, a pattern of skylights appears as Picture - Building interior tile on the plant floor. 18 THE PIVOTAL PRODUCT THAT WILL HAVE THE MOST IMPACT ON SALES AND PROFITS IS ARMORED VEHICLES. The pivotal product that will have the most significant impact on sales and profits for the year is armored vehicles. Sales are dependent on eruptive events in the world where military conflicts require the use of armored vehicles. Such events are difficult to predict, and it is equally difficult to forecast sales and profits for these products. Nevertheless, we think that vehicle sales will occur in the second half of 2001. We have completed a significant proposal for armored vehicles for the UK MOD. Of six competitors for this business, we believe that NP Aerospace is the only one proposing composite armor. We are cautiously optimistic. Earlier in this report, we covered the performance of Bingham for the first 10 months under Reinhold ownership. It was profitable but less that our forecast. Success in such a turnaround situation, as was so of our acquisition of CompositAir in 1994, cannot be realized overnight. But it will be realized. Our focus and our mandate are clear. In Carl Smith, we have the CEO we want. 19 WE ARE ALWAYS THANKFUL FOR THE CONTINUED SUPPORT OF OUR CUSTOMERS, SUPPLIERS, AND EMPLOYEE TEAMMATES. We know where the strengths and weaknesses lie. Our immediate goals are improved safety and product quality, 100% on-time delivery, and 50% faster lead times than our competition. Incentive and commission plans based on financial performance are in place. We have closed two unprofitable plants and moved the business to more productive ones. Customer satisfaction and employee morale are improving as these Reinhold concepts become manifest in the workplace: (1). Fewer people working harder and smarter, and (2). Results, not merely effort, are what is expected of everyone. The year 2001 will be profitable for Bingham and the company's position as an industry leader will continue to be restored. SUMMATION The outlook is good for sustained growth through 2001 and beyond. The balance of markets served enables Reinhold to overcome declines in one market through improvement in another. Every business unit will show modest increases in sales and profit. NP Aerospace can have an excellent year if one of several major international opportunities is realized. As in prior years, growth through acquisition will continue to be the cornerstone of building sales and profits. We are always thankful for the continued support of our customers, suppliers, and employee teammates. All of you are vital elements of Reinhold's future success. /s/ Michael T. Furry Michael T. Furry President and CEO 20 Reinhold Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reinhold Industries, Inc. and Subsidiaries (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. 2000 COMPARED WITH 1999 Backlog at December 31, 2000 was $16.4 million, up 19% from December 31, 1999, primarily due to increases in U.S. military related business. In 2000, order input increased 40% to $51.3 million and net sales increased 26% to $49.3 million from $39.1 million in 1999, due primarily to the acquisition of Samuel Bingham Company on March 9, 2000. Sales also increased $2.5 million for Aerospace products and $0.7 million for Commercial products. However, there was a $4.9 million decrease in sales at NP Aerospace, due primarily to the reduction of armored vehicle shipments, and a $6.5 million decrease in sales for CompositAir products, due mainly to the continuing commercial difficulties at our primary customer, B/E Aerospace. Gross profit margin increased to 30.0% from 27.5% due to higher sales in our Aerospace business unit. Gross margin contribution from Samuel Bingham was 27.3%. Gross profit margin in all other business units increased to 26.6% from 26.0% due to better mix and tighter cost controls. In 2000, selling, general and administrative expenses were $9.4 million (19.1% of sales) compared with $5.1 million (13.0% of sales) in 1999, due primarily to the Samuel Bingham Company acquisition ($4.3 million from date of acquisition). Selling, general and administrative expenses in 2000 were 23.2% of sales at Samuel Bingham Company compared to 16.3% of sales for the other business units. On December 29, 2000, the Company sold its 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 is secured by the land. Income before income taxes was unchanged at $5.8 million, although the percent to sales decreased to 11.8% in 2000 from 14.8% in 1999. Income before income taxes for NP Aerospace decreased to $1.2 million in 2000 (12.5% of sales) from $2.5 million in 1999 (17.0% of sales) due mainly to lower sales of armored vehicles and commercial aircraft seatbacks. Income before income taxes for CompositAir decreased to $1.2 million in 2000 (12.6% of sales) from $2.1 million in 1999 (13.1% of sales) due to lower sales of commercial aircraft seatbacks to our primary customer, B/E Aerospace. However, income before income taxes at the Aerospace business unit increased to $2.6 million (31.2% of sales) from $1.2 million (21.2% of sales) due to higher sales and the resulting absorption of overhead expenses. Income before income taxes for the Commercial business unit increased to $0.4 million (13.5% of sales) from $0.3 million (11.8% of sales) due to higher sales. Income before income taxes for Samuel Bingham Company was $0.01 million (0.1% of sales). In 2000, net interest expense was $0.5 million, due to the $11.0 million loan used to finance the Samuel Bingham Company acquisition, compared to net interest income of $0.1 million in 1999. A tax provision of $2.3 million was recorded in 2000 compared with a provision of $2.2 million in 1999. The effective tax rate in 2000 was 39.3% as compared to 38.5% in 1999. The change results principally from the rate difference on U.S. income. The effective tax rate in the United Kingdom is 30%. At December 31, 2000 and 1999, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $26.8 million and $31.8 million, respectively. At December 31, 2000, the Company also had net operating loss carryforwards for State income tax purposes of approximately $1.7 million. The Company may utilize the Federal net operating losses by carrying them forward to offset future Federal taxable income, if any, through 2011. The Company may utilize the State net operating losses by carrying them forward to offset future State taxable income, if any, through 2001. As more fully described in note 3 to the consolidated financial statements, benefits realized from loss carry forwards and deductible temporary differences arising prior to the reorganization (emergence from bankruptcy proceedings) are recorded directly to additional paid-in capital. Such benefits amounted to $1.81 million in 2000 and $1.47 million in 1999. Net income totaled $3.5 million, or $1.58 per diluted share in 2000 compared with $3.6 million, or $1.62 per diluted share in 1999. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000, working capital was $14.6 million, up $1.3 million from December 31, 1999. Cash and cash equivalents of $7.1 million held at December 31, 2000 were $2.3 million lower than cash and cash equivalents held at December 31, 1999, primarily due to $4.2 million of net cash used to finance the Samuel Bingham Company acquisition. Net cash provided by operating activities amounted to $4.2 million in 2000 and $7.4 million in 1999. The decrease over the prior period relates mainly to the note received on the sale of the undeveloped land and the reduction of accounts payable at the Samuel Bingham Company. Net cash used in investing activities in 2000 totaled $15.6 million, which consisted of the acquisition of the Samuel Bingham Company and associated costs ($15.2 million) and capital expenditures ($1.4 million) offset by the proceeds on the sale of the undeveloped land ($.9 million). Net cash used in investing activities in 1999 totaled $1.2 million, which consisted of capital expenditures and deferred consideration payable to Courtaulds plc. 21 Reinhold Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT'D) Net cash provided by financing activities in 2000 totaled $9.9 million, consisting of the proceeds from the Bank of America loan for the Samuel Bingham Company acquisition ($11.0 million) less subsequent repayment. Net cash used in financing activities in 1999 totaled $0.4 million relating to the repayment of the CIT/ Bank of America loan. The Company has commitments for capital expenditures of approximately $0.5 million at December 31, 2000 relating to the construction of a new 50,000 sq. ft. manufacturing/administration building at its Santa Fe Springs, California location. 1999 COMPARED WITH 1998 Backlog at December 31, 1999 was $13.8 million, down 15% from December 31, 1998, primarily due to a decrease in aircraft seatback orders. In 1999, order input increased 23% to $36.7 million and net sales increased 51% to $39.1 million from $26.0 million in 1998, primarily reflecting a full year of sales for NP Aerospace. Sales also increased $4.7 million for CompositAir products and $0.5 million for Commercial products. However, there was a $0.3 million decrease in sales for Aerospace products. Gross profit margin increased to 27.6% from 25.0% due to increased sales and the resulting absorption of fixed overhead expenses. Gross margin in the United States increased to 31.3% in 1999 from 27.2% in 1998. Gross margin in the United Kingdom increased to 23.4% in 1999 from 20.8% in 1998. In 1999, selling, general and administrative expenses were $5.1 million (13.0% of sales) compared with $4.3 million (16.6% of sales) in 1998. Although selling, general and administrative expenses were higher in 1999, these expenses decreased 3.6% as a percent of sales. Selling, general and administrative expense increases are primarily associated with the costs incurred for NP Aerospace for a full year. Income before income taxes increased to $5.8 million (14.8% of sales) from $2.2 million (8.4% of sales), reflecting higher sales and gross margins. Income before income taxes for the United States was $3.6 million (17.8% of sales) in 1999 compared with $1.8 million (10.3% of sales) in 1998. Income before income taxes for the United Kingdom was $2.2 million (11.6% of sales) in 1999 compared with $0.4 million (4.6% of sales) in 1998. In 1999, net interest income was $0.1 million. Interest income of $0.2 million was offset by interest expense of $0.1 million. In 1998, net interest expense was $0.01 million. The average yield was 4.08% in 1999 compared with 4.18% in 1998. A tax provision of $2.2 million was recorded in 1999 compared with a provision of $0.7 million in 1998, due primarily to increased profitability in the United Kingdom. The effective tax rate in 1999 was 38% as compared to 34% in 1998. The change results principally from the rate difference on foreign income. At December 31, 1999 and 1998, the Company had generated net operating loss carryovers for Federal income tax purposes of approximately $31,782,000 and $34,664,000, respectively. At December 31, 1999, the Company had also generated net operating loss carryovers for State income tax purposes of approximately $5,551,000. The Company may utilize the Federal net operating losses by carrying them forward to offset future Federal taxable income, if any, through 2011. The Company may utilize the State net operating losses by carrying them forward to offset future State taxable income, if any, through 2001. 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 $1,471,000 in 1999 and $703,000 in 1998. Net income totaled $3.6 million, or $1.62 per diluted share in 1999 compared with $1.4 million, or $0.65 per diluted share in 1998. As discussed in the notes to the consolidated financial statements, the Company acquired certain assets and assumed certain liabilities of the Ballistic and Performance Composites Division of Courtaulds Aerospace Ltd on April 24, 1998 (the Closing Date). On the Closing Date, Reinhold paid to Courtaulds plc Two Million Two Hundred Thousand pounds sterling ((pounds) 2,200,000) ($3,706,340 based on an exchange rate of $1.6847) and may make additional payments in the future as required by the Asset Sale Agreement. As of December 31, 2000, additional payments earned totalled (pounds) 140,000 ($227,000). The source of funds for a portion of the Purchase Consideration due on the Closing Date was a Five Year Loan and Security Agreement with The CIT Group Credit/Finance (CIT) in the amount of Four Million Dollars ($4,000,000) at an interest rate of prime plus 1.75% (9.50%). The term portion of the loan in the amount of Two Million Two Hundred Sixty-Eight Thousand Dollars ($2,268,000) was received from CIT. The remainder of the CIT credit facility was a revolver of One Million Seven Hundred Thirty-Two Thousand Dollars ($1,732,000), which was never used. The remaining portion of the purchase consideration not funded by the CIT loan was funded by Reinhold's cash on hand. Future payments required by the Agreement are expected to be financed from operating cash flows. On April 16, 1999, the Company repaid the outstanding loan with the CIT Group Credit/Finance through a refinancing with Bank of America National Trust and Savings Association ("B of A") and cancelled the revolver. The new credit facility with B of A is a term loan in the amount of $1,861,478 payable in 48 equal monthly principal installments of $38,780 plus interest at a rate which approximates LIBOR plus 1.75% and is secured by fixed assets. 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 22 Reinhold Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT'D) Bloomingdale, Illinois ("Bingham"). On March 9, 2000, the Company borrowed $11,000,000 from B of A to fund a portion of the purchase consideration due to Samuel Bingham Company. The principal portion of the loan is payable in twenty successive quarterly installments beginning June 30, 2000. Interest is payable quarterly at a rate which approximates LIBOR plus 1.75% and is secured by all financial assets of the Company. Both loan agreements with B of A are subject to various financial covenants to which the Company must comply. The covenants require the Company to maintain certain ratios of cash flow to total outstanding debt, mininum net worth and limits on capital expenditures. The Company is in compliance with the loan covenants at December 31, 2000. Management believes that the available cash and cash flows from operations will be sufficient to fund the Company's operating and capital expenditure requirements. 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 represent approximately 49.9% of the outstanding common stock of the Company. Pursuant to the Company's Certificate of Incorporation, upon consummation of the sale of the shares to the Purchasers, all of the 1,020,000 outstanding shares of Class B Common Stock (including those retained by the Creditors' Trust) were automatically converted into 1,020,000 shares of Class A Common Stock, and at the next meeting of the stockholders of the Company called for that purpose, the holders of the Class A Common Stock, voting as a class, will be entitled to elect all of the directors of the Company. Prior to the sale, the Creditors' Trust, as the holder of all of the Class B Common Stock, was entitled to elect two directors, and the holders of the Class A Common Stock were entitled to elect one director. In connection with the Stock Purchase Agreement, the amount of authorized Class A Common Stock changed from 1,480,000 shares to 2,500,000 shares. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 modifies the accounting for derivatives and hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective date of FASB Statement No. 133" which defers the effective date of SFAS No. 133 by one year. At this time, the Company does not expect the adoption of SFAS No. 133 to have a significant impact on its financial position or results of operations. 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 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. The Company is in the process of analyzing the legal foundations of the Department of Justice claim in light of the bankruptcy proceeding described below. The Company believes that two injunctions issued in 1996 in connection with Keene's bankruptcy proceeding under chapter 11 of Title 11 of the United States Code ("Bankruptcy Code") are relevant to the Justice Department's claim. 23 Reinhold Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT'D) As previously reported, Keene acquired Reinhold in 1984. On December 3, 1993, Keene filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court. Keene's chapter 11 filing came as a direct result of the demands on Keene of thousands of asbestos-related lawsuits that named Keene as a party. On July 31, 1996 (the "Effective Date"), Keene consummated its Fourth Amended Plan of Reorganization, as modified, under the Bankruptcy Code (the "Plan"). On the Effective Date, Reinhold was merged into and with Keene, with Keene becoming the surviving corporation. Keene, as the surviving corporation of the merger, was renamed Reinhold Industries, Inc. On the Effective Date, pursuant to the Plan the Company issued its Class B Common Stock to the Trustees of a Creditors' Trust, which was established under the Plan to administer Keene's asbestos liabilities. The Creditors' Trust has since sold most of its Class B Common Stock. The general bankruptcy injunction issued in the chapter 11 proceeding generally prohibits any entity from commencing or continuing any action, employment of process or act to collect, offset, affect or recover any claim, demand, interest or cause of action satisfied, released or discharged under the Plan. Such claims, demands, interests and causes of action include, whether known or unknown, all claims against Keene or the Company or their assets and all related causes of action, regardless of whether a proof of claim or interest was filed or allowed, and whether or not the holder of such claim or interest has voted on the Plan, or any causes of action based on any act or omission of any kind occurring prior to the Effective Date. In addition to this general bankruptcy injunction, the Company received the benefit of a supplemental "Permanent Channeling Injunction" as part of the Plan. The Permanent Channeling Injunction bars "Asbestos-Related Claims" and "Demands," as defined in the Plan, against the Company and channels those Claims and Demands to the Creditors' Trust. Pursuant to the Permanent Channeling Injunction, on or after the Effective Date of the Plan, any person or entity who holds or may hold an Asbestos-Related Claim or Demand against Keene will be forever stayed, restrained, and enjoined from taking certain actions for the purpose of, directly or indirectly, collecting, recovering, or receiving payment of, on, or with respect to such Asbestos-Related Claims or Demands against the Company. It is difficult to estimate the timing and ultimate costs to be incurred by the Company in connection with environmental liability claims in the future due to uncertainties about the status of laws and regulations, the adequacy of information available for individual sites and the extended time periods over which site remediation occurs. However, based on currently available information, if the environmental liability claims relating to the Valley Forge Site arose prior to the filing of Keene's bankruptcy case or if these claims were deemed to be Asbestos-Related Claims or Demands within the meaning of the Plan, then the Company does not believe that environmental liabilities associated with the Valley Forge Site should result in a material adverse impact on the Company's consolidated financial position or results of operation. However, if these claims are deemed to have arisen subsequent to the filing of Keene's bankruptcy case -- i.e the "release" or "threatened release," within the meaning of CERCLA, is deemed to have occurred after Keene filed its chapter 11 petition with the Bankruptcy Court or the claims are held to have arisen when the response costs were incurred -- and these claims are not deemed to be Asbestos-Related Claims or Demands as defined under the Plan, then the Company could incur liability for the claims. If a court were to determine that the Company was liable for recoverable costs associated with the Valley Forge Site under CERCLA, the resulting liability could have a material adverse impact on the Company's consolidated financial position and results of operations. 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 in the process of evaluating its potential environmental liability exposure at 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. 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. 24 Reinhold Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands, except for per share data)
Years ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- Net sales $ 49,287 39,140 25,996 Cost of sales 34,498 28,357 19,493 - ----------------------------------------------------------------------------------------------------------- Gross profit 14,789 10,783 6,503 Selling, general and administrative expenses 9,425 5,079 4,307 - ----------------------------------------------------------------------------------------------------------- Operating income 5,364 5,704 2,196 Gain on sale of asset 962 - - Interest income (expense), net (529) 100 (17) - ----------------------------------------------------------------------------------------------------------- Income before income taxes 5,797 5,804 2,179 Income taxes 2,280 2,234 744 - ----------------------------------------------------------------------------------------------------------- Net income $ 3,517 3,570 1,435 Earnings per share: Basic $ 1.60 1.62 0.65 Diluted $ 1.58 1.62 0.65 Weighted average common shares outstanding: Basic 2,198 2,198 2,198 Diluted 2,229 2,205 2,198 See accompanying notes to consolidated financial statements.
25 Reinhold Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data)
December 31, 2000 1999 - ----------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 7,121 9,419 Accounts receivable (less allowance for doubtful accounts of $165 and $60, respectively) 6,984 4,077 Inventories 6,065 4,085 Note receivable 1,000 - Prepaid expenses and other current assets 2,053 1,157 - ----------------------------------------------------------------------------------------------------------- Total current assets 23,223 18,738 Property and equipment, at cost 17,122 10,436 Less accumulated depreciation and amortization 5,842 4,710 - ----------------------------------------------------------------------------------------------------------- Net property and equipment 11,280 5,726 Cost in excess of fair value of net assets of acquired companies, net 5,948 633 Other assets 258 137 - ----------------------------------------------------------------------------------------------------------- $ 40,709 25,234 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,278 1,825 Accrued expenses 3,578 3,154 Current installments of long term debt 2,778 503 - ----------------------------------------------------------------------------------------------------------- Total current liabilities 8,634 5,482 Long-term debt, less current installments 8,721 1,125 Other long-term liabilities 449 204 Commitments and contigencies - - 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: 2,198,058 and 1,998,956, respectively. 22 20 Additional paid-in capital 15,931 12,328 Retained earnings 7,972 6,255 Accumulated other comprehensive loss (1,020) (180) - ----------------------------------------------------------------------------------------------------------- Net stockholders' equity 22,905 18,423 - ----------------------------------------------------------------------------------------------------------- $ 40,709 25,234 See accompanying notes to consolidated financial statements.
26 Reinhold Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Years ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,517 3,570 1,435 Adjustments to reconcile net income to net cash provided by operating activities (net of effects of acquisitions): Depreciation and amortization of property and equipment 1,227 912 782 Amortization of cost in excess of fair value of net assets of acquired companies 274 116 117 Additions to paid-in capital resulting from tax benefits 1,813 1,471 703 Changes in assets and liabilities: Accounts receivable, net 538 792 (359) Inventories 320 300 (178) Note receivable (1,000) - - Prepaid expenses and other current assets (544) (229) (143) Accounts payable (1,581) (1,151) 1,007 Accrued expenses (277) 1,741 (18) Other, net (100) (146) (234) - ----------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,187 7,376 3,112 CASH FLOWS USED IN INVESTING ACTIVITIES: Maturity of marketable securities - - 750 Acquisitions (15,200) (227) (3,707) Capital expenditures (1,355) (924) (956) Proceeds from sale of asset 945 - - - ----------------------------------------------------------------------------------------------------------- Net cash used in investing activities (15,610) (1,151) (3,913) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long term debt 11,000 - 2,268 Repayment of long term debt (1,129) (376) (264) Cash dividends paid (8) - - - ----------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 9,863 (376) 2,004 Effect of exchange rate changes on cash (738) (52) - - ----------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (2,298) 5,797 1,203 - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 9,419 3,622 2,419 - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 7,121 9,419 3,622 Supplementary disclosures of cash flow information - Cash paid during the year for: Income taxes $ 771 - 38 Interest $ 493 158 137 See accompanying notes to consolidated financial statements.
27 Reinhold Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Amounts in thousands, except share data) Common stock $0.01 par value ---------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ Preferred Class A Class B Shares Shares Amount Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 - 978,956 $10 1,020,000 $10 Net income - - - - 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, 1998 - 978,956 $10 1,020,000 $10 Net income - - - - Additions to paid-in capital resulting from tax benefits - - - - Decrease in additional pension liability in excess of unrecognized prior service cost - - - - Conversion of Class B shares to Class A shares 1,020,000 10 (1,020,000) (10) Foreign currency translation adjustment - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income - ------------------------------------------------------------------------------------------------------------------------------------ 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 - - - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
Reinhold Industries, Inc. and Subsidiaries
Comprehensive Income ---------------------------------------------------------- Accumulated other comprehensive Total comprehensive Additional paid-in capital Retained earnings loss income Net stockholders' equity - ------------------------------------------------------------------------------------------------------------------------------------ $10,154 $1,250 $(519) - $10,905 - 1,435 - 1,435 1,435 703 - - - 703 - - (1,730) (1,730) (1,730) - - (50) (50) (50) - ------------------------------------------------------------------------------------------------------------------------------------ (345) - ------------------------------------------------------------------------------------------------------------------------------------ $10,857 $2,685 $(2,299) $11,263 - 3,570 - 3,570 3,570 1,471 - - - 1,471 - - 2,249 2,249 2,249 - - - - - - - (130) (130) (130) - ------------------------------------------------------------------------------------------------------------------------------------ 5,689 - ------------------------------------------------------------------------------------------------------------------------------------ $12,328 $6,255 $(180) $18,423 - 3,517 - 3,517 3,517 1,813 - - - 1,813 1,790 (1,800) - - (8) - - (102) - (102) - - (738) (738) (738) - ------------------------------------------------------------------------------------------------------------------------------------ 2,677 - ------------------------------------------------------------------------------------------------------------------------------------ $15,931 $7,972 $(1,020) $22,905 - ------------------------------------------------------------------------------------------------------------------------------------
29 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2000 and 1999 1 ORGANIZATION DESCRIPTION OF BUSINESS Reinhold Industries, Inc. and Subsidiaries (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). Pursuant to the guidelines provided by the American Institute of Certified Public Accountants in Statement of Position 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7), the Company adopted fresh start reporting as of the close of business on July 31, 1996. In accordance with SOP 90-7, benefits from loss carryforwards and deductible temporary differences arising prior to the Company's reorganization (emergence from bankruptcy proceedings) are recorded as additional paid-in capital. 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. Pursuant to the Company's Certificate of Incorporation, upon consummation of the sale of the shares to the Purchasers, all of the 1,020,000 outstanding shares of Class B Common Stock (including those retained by the Creditors' Trust) were automatically converted into 1,020,000 shares of Class A Common Stock. In connection with the Stock Purchase Agreement, the amount of authorized Class A Common Stock changed from 1,480,000 shares to 2,500,000 shares. 30 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Reinhold and its wholly owned subsidiaries NP Aerospace Limited ("NP Aerospace") and Samuel Bingham Enterprises, Inc. ("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, 2000 December 31, 1999 - -------------------------------------------------------------------------------- Cash in banks $1,417 707 Money market funds 5,704 8,712 - -------------------------------------------------------------------------------- Total $7,121 9,419 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, 2000 December 31, 1999 - -------------------------------------------------------------------------------- Raw material $4,205 2,794 Work-in-process 744 700 Finished goods 1,116 591 - -------------------------------------------------------------------------------- Total $6,065 4,085 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 on units 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, 2000 and 1999 were $1,536,000 and $1,065,000, respectively. 31 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 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): Useful life December 31, 2000 December 31, 1999 - -------------------------------------------------------------------------------- Undeveloped land - $ - 900 Land - 1,283 - Buildings 10-40 years 2,809 848 Leasehold improvements 5-15 years 1,391 838 Machinery and equipment 5-25 years 11,206 7,178 Furniture and fixtures 3-10 years 381 672 Construction in process - 52 - - -------------------------------------------------------------------------------- 17,122 10,436 Less accumulated depreciation and amortization 5,842 4,710 - -------------------------------------------------------------------------------- $11,280 5,726 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 earnings. Maintenance and repairs are expensed as incurred. Renewals and betterments are capitalized. NOTE RECEIVABLE On December 29, 2000, the Company sold its 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 is secured by the land. COST IN EXCESS OF FAIR VALUE OF NET ASSETS OF ACQUIRED COMPANIES Cost in excess of fair value of net assets of acquired companies (goodwill) is amortized on a straight-line basis over 10 - 40 years. The gross amount and related accumulated amortization at December 31, 2000 and 1999 amounted to $6,725,000 and $777,000, and $1,118,000 and $485,000, respectively. ACQUIRED BUSINESS On April 24, 1998, NP Aerospace Limited 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. Reinhold, as the Guarantor for NP Aerospace, became obligated to pay to Courtaulds plc net consideration consisting of (a) Two Million Two Hundred Thousand pounds sterling ((pounds)2,200,000) ($3,706,340 based on an exchange rate of $1.6847) cash on the Closing Date and (b) within 120 days following the end of each of the calendar years 1998 through 2001, a cash amount equal to 25% of the Pre-tax Profit on the light armored vehicle business only, the maximum aggregate amount of which shall not exceed Twenty Million pounds sterling ((pounds)20,000,000). Additional payments will be capitalized as part of the purchase price, when and if earned. In the years ended December 31, 2000 and 1999, additional payments earned totalled (pounds)0 and (pounds)140,000 ($227,000). The acquisition was accounted for as a purchase. 32 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 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"). The purchase price paid was $14,742,000 plus out-of-pocket expenses of $406,000. The cost in excess of fair value of net assets is being amortized 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 Samuel Bingham Company 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): Samuel Bingham Company - -------------------------------------------------------------------------------- Working capital $ 3,362 Fixed assets 6,231 - -------------------------------------------------------------------------------- Net identifiable assets 9,593 Purchase price (including deferred consideration) 15,148 - -------------------------------------------------------------------------------- Cost in excess of fair value of net assets of acquired companies $ 5,555 The pro forma unaudited results of operations for the years ended December 31, 2000 and 1999, assuming consummation of the purchase as of January 1, 1999 are as follows (in thousands, except earnings per share data): Years ended December 31, 2000 1999 - -------------------------------------------------------------------------------- Net sales $53,613 63,047 Net income $ 3,749 4,329 Earnings per share - basic $ 1.71 1.97 Earnings per share - diluted $ 1.68 1.96 33 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 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. 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. The reconciliations of basic and diluted weighted average shares are as follows:
Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Net income $ 3,517 3,570 1,435 - ------------------------------------------------------------------------------------------------ Weighted average shares used in basic computation 2,198 2,198 2,198 Dilutive stock options 31 7 - - ------------------------------------------------------------------------------------------------ Weighted average shares used for diluted calculation 2,229 2,205 2,198
The Company has adjusted all share information for the stock divided described in Note 5. COMPREHENSIVE INCOME Total comprehensive income is reported in the Consolidated Statements of Stockholders' Equity and Comprehensive Income in the financial statements and includes net income, changes in the additional pension liability in excess of unrecognized prior service cost and changes in foreign currency translation. STOCK OPTION PLAN The Company accounts for its stock-based compensation in accordance with the provisions of SFAS No. 123 "Accounting For Stock-Based Compensation". Under the provisions of SFAS No. 123, the Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. 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. The Samuel Bingham Company Salaried Employees' 401 (k) Profit Sharing Plan covers all eligible employees who have completed one year of service. Employees may make contributions to the Plan up to the maximum limitations prescribed by the Internal Revenue Service. At the discretion of the Company, a matching contribution of up to 4% of the employees' compensation may be made per year. The matching contribution vests to the employee on a staggered basis over eight years and is fully vested at the end of the employees' eighth year of service. 34 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and income and expense and disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. 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. 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. 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. 3 INCOME TAXES The income tax provision consists of (in thousands): Years ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Federal $ 1,564 1,201 612 State 372 383 129 Foreign 344 650 3 - -------------------------------------------------------------------------------- Total $ 2,280 2,234 744 35 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 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, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- Taxes at statutory Federal rate $ 1,971 1,973 741 State taxes, net of Federal tax benefits 245 253 86 Rate difference on foreign income (46) (85) (137) Non-deductible expenses 57 55 54 Other 53 38 - - ----------------------------------------------------------------------------------------------------------- Total provision for income tax expense $ 2,280 2,234 744
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, 2000 December 31, 1999 - ----------------------------------------------------------------------------------------------------------- Deferred tax assets: Adjustments from quasi-reorganization $ 634 595 Net operating loss carryforwards 9,237 11,083 Inventory reserves 218 210 Other reserves 287 32 - ----------------------------------------------------------------------------------------------------------- Total gross deferred tax assets 10,376 11,920 Less valuation allowance (9,386) (11,199) - ----------------------------------------------------------------------------------------------------------- Net deferred tax assets 990 721 Deferred tax liabilities: Pension (604) (376) Depreciation (386) (345) - ----------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (990) (721) 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, 2000. At December 31, 2000 and 1999, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $26,788,000 and $31,782,000, respectively. At December 31, 2000, the Company also has net operating loss carryforwards for State income tax purposes of approximately $1,704,000. The Company may utilize the Federal net operating losses by carrying them forward to offset future Federal taxable income, if any, through 2011. The Company may utilize the State net operating losses by carrying them forward to offset future State taxable income, if any, through 2001. Benefits realized from loss carryforwards and deductible temporary differences arising prior to the reorganization are recorded directly to additional paid-in capital. Such benefits amounted to $1,813,000 in 2000, $1,471,000 in 1999 and $703,000 in 1998. 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. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 4 LONG TERM DEBT On April 22, 1998, the Company borrowed $2,268,000 from The CIT Group Credit/Finance (CIT) to fund a portion of the purchase consideration due to Courtaulds Aerospace. The Company had previously entered into a Five Year Loan and Security Agreement with CIT in the amount of Four Million Dollars ($4,000,000). The term portion of the loan ($2,268,000) was payable in equal monthly principal payments of $37,800 plus interest at prime plus 1.75% and was secured by fixed assets and land. The remainder of the CIT credit facility was a revolver of One Million Seven Hundred Thirty-Two Thousand Dollars ($1,732,000), which had never been used. On April 16, 1999, the Company repaid the outstanding loan with the CIT Group Credit/Finance through a refinancing with Bank of America National Trust and Savings Association ("B of A") and cancelled the revolver. The new credit facility with B of A is a term loan in the amount of $1,861,478 payable in 48 equal monthly principal installments of $38,780 plus interest at a rate which approximates LIBOR plus 1.75% (8.45% in total at December 31, 2000) and is secured by fixed assets. On March 9, 2000, the Company borrowed $11,000,000 from B of A to fund a portion of the purchase consideration due to Samuel Bingham Company. The principal portion of the loan is payable in twenty successive quarterly installments beginning June 30, 2000. Interest is payable quarterly at a rate which approximates LIBOR plus 1.75% (8.37% in total at December 31, 2000) and is secured by all financial assets of the Company. Both loan agreements with B of A are subject to various financial covenants to which the Company must comply. The covenants require the Company to maintain certain ratios of cash flow to total outstanding debt, mininum net worth and limits on capital expenditures. The Company is in compliance with the loan covenants at December 31, 2000. At December 31, 2000, maturities of long term debt were as follows (in thousands): 2001 $ 2,778 2002 2,715 2003 2,631 2004 2,688 2005 687 - -------------------------------------------------------------------------------- $ 11,499 5 STOCKHOLDERS' EQUITY On September 8, 2000, the stockholders' of the Company approved a reduction in the number of authorized shares of common stock from 45,000,000 shares to 4,750,000 shares and a reduction in the number of authorized shares of preferred stock from 5,000,000 shares to 250,000 shares. The changes were filed with the State of Delaware and became effective on November 1, 2000. 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. The earnings per share computations for all periods presented have been adjusted for the dividend. 6 STOCK OPTIONS 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. 37 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 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 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," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 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 recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, 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: 2000 1999 - -------------------------------------------------------------------------------- Risk free interest rate 6.2% 6.5% - -------------------------------------------------------------------------------- Dividend yield - - - -------------------------------------------------------------------------------- Volitility factor 81% 70% - -------------------------------------------------------------------------------- Weighted average life (years) 4.1 4.1 Using the Black-Scholes Option Pricing Model, the estimated weighted-average grant date fair value of options granted in 2000 was $6.22. The pro forma net income assuming the amortization of the estimated fair values over the option vesting period and diluted earnings per common share, had the fair value method of accounting for stock options been used, would have been as follows (in thousands, except per share data): 2000 1999 - -------------------------------------------------------------------------------- Pro forma net income $3,236 3,147 Pro forma earnings per share: Basic $ 1.47 $ 1.55 Diluted $ 1.45 $ 1.55 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, 2000 and 1999 is presented below:
Weighted average Number of shares Low High exercise price - ---------------------------------------------------------------------------------------------------------- Outstanding December 31, 1998 and 1997 - - - - - ---------------------------------------------------------------------------------------------------------- Granted in 1999 169,000 $7.50 $10.23 $7.59 Forfeited during 1999 6,000 $7.50 $ 7.50 $7.50 - ---------------------------------------------------------------------------------------------------------- Outstanding December 31, 1999 163,000 $7.50 $10.23 $7.59 10% stock dividend 16,100 - - - Granted in 2000 10,000 $9.75 $ 9.75 $9.75 Forfeited during 2000 3,100 $7.50 $ 7.50 $7.50 - ---------------------------------------------------------------------------------------------------------- Outstanding December 31, 2000 186,000 $8.25 $11.25 $8.35
At December 31, 2000, the weighted average remaining contractual life of options outstanding is 8.4 years. No options were exercisable at December 31, 2000, 1999 and 1998. 38 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 7 PENSION PLANS The Company currently has three pension plans covering substantially all employees. The benefits paid under the pension plans 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 plans 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, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Service cost $ 167 142 113 Interest cost on benefits earned in prior years 966 800 839 Expected return on assets (900) (921) (972) Amortization of net obligation at transition (3) 25 20 Amortization of net loss (297) 129 6 - ---------------------------------------------------------------------------------------------------------- Net pension cost (benefit) $ (67) 175 6
The following table sets forth a reconciliation of the pension plan's benefit obligation at December 31, 2000 and 1999 (in thousands):
2000 1999 - ---------------------------------------------------------------------------------------------------------- Projected benefit obligation at beginning of year $11,887 12,699 Projected benefit obligation at beginning of period - Samuel Bingham 1,966 - Service cost 167 142 Interest cost 966 800 Actuarial loss/(gain) 418 (649) Benefits paid (1,261) (1,105) - ---------------------------------------------------------------------------------------------------------- Projected benefit obligation at end of year $14,143 11,887
The following table sets forth a reconciliation of the pension plan's assets at December 31, 2000 and 1999 (in thousands):
2000 1999 - ---------------------------------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $11,814 10,755 Fair value of plan assets at beginning of period - Samuel Bingham 2,389 - Actual return on assets 351 1,685 Employer contributions 257 479 Benefits paid (1,261) (1,105) - ---------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $13,550 11,814
39 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) The following table sets forth a reconciliation of the pension plan's funded status at December 31, 2000 and 1999 (in thousands): 2000 1999 - -------------------------------------------------------------------------------- Projected benefit obligation at end of year $14,143 11,887 Fair value of plan assets at end of year 13,550 11,814 - -------------------------------------------------------------------------------- Funded status (593) (73) Unrecognized prior service cost 148 (4) Unrecognized net obligation at transition (36) 20 Unrecognized net loss 1,909 1,020 - -------------------------------------------------------------------------------- Prepaid pension cost at end of year $ 1,428 963 Intangible asset at December 31, $156 - Additional minimum liability at December 31, (258) - - -------------------------------------------------------------------------------- Additional pension liability in excess of prior service cost at December 31, $ (102) - Assumptions used in accounting for the pension plan were: December 31, 2000 December 31, 1999 - -------------------------------------------------------------------------------- Discount rate 7.00% 7.25% 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 five operating segments: Aerospace, CompositAir, Commercial, NP Aerospace and Samuel Bingham. Management has determined these to be Reinhold's operating segments based upon the nature of their products. Aerospace produces 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. Samuel Bingham manufactures rubber rollers for graphic arts and industrial applications. 40 Reinhold Industries, Inc. and Subsidiaries 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, 2000 1999 1998 - -------------------------------------------------------------------------------- Net sales Aerospace $ 8,417 5,863 6,165 CompositAir 9,462 15,955 11,214 Commercial 3,093 2,433 1,978 NP Aerospace 9,999 14,889 6,639 Samuel Bingham 18,316 - - - -------------------------------------------------------------------------------- Total sales $ 49,287 39,140 25,996 - -------------------------------------------------------------------------------- Income before income taxes Aerospace $ 2,625 1,241 1,587 CompositAir 1,196 2,088 94 Commercial 419 287 72 NP Aerospace 1,247 2,536 747 Samuel Bingham 13 - - Unallocated corporate (expenses) income 297 (348) (321) - -------------------------------------------------------------------------------- Total income before income taxes $ 5,797 5,804 2,179 - -------------------------------------------------------------------------------- Depreciation and amortization Aerospace $ 349 356 369 CompositAir 275 272 220 Commercial 150 155 150 NP Aerospace 160 163 64 Samuel Bingham 519 - - Unallocated corporate 48 82 96 - -------------------------------------------------------------------------------- Total depreciation and amortization $ 1,501 1,028 899 - -------------------------------------------------------------------------------- Capital expenditures Aerospace $ 688 117 63 CompositAir - 540 458 Commercial 16 52 132 NP Aerospace 222 215 303 Samuel Bingham 429 - - - -------------------------------------------------------------------------------- Total capital expenditures $ 1,355 924 956 - -------------------------------------------------------------------------------- Total assets Aerospace $ 4,963 4,735 CompositAir 2,613 3,469 Commercial 1,091 1,024 NP Aerospace 9,612 9,455 Samuel Bingham 18,077 - Unallocated corporate 4,353 6,551 - -------------------------------------------------------------------------------- Total assets $ 40,709 25,234 - -------------------------------------------------------------------------------- 41 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) The table below presents information related to geographic areas in which Reinhold operated (in thousands): December 31, 2000 December 31, 1999 December 31, 1998 - -------------------------------------------------------------------------------- Net sales United States $ 36,068 18,662 14,920 United Kingdom 9,098 14,188 8,579 Botswana 93 1,942 - Germany 865 1,916 1,797 Canada 1,073 - - All other 2,090 2,432 700 - -------------------------------------------------------------------------------- Net sales $ 49,287 39,140 25,996 9 COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain facilities and equipment under operating leases expiring through 2014. Total rental expense on all operating leases approximated $803,000, $514,000 and $509,000 for 2000, 1999 and 1998, respectively. Minimum future rental commitments under noncancelable operating leases at December 31, 2000 are as follows (in thousands): 2001 $ 911 2002 961 2003 921 2004 798 2005 798 Thereafter 8,493 - -------------------------------------------------------------------------------- $ 12,882 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 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. 42 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 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. The Company is in the process of analyzing the legal foundations of the Department of Justice claim in light of the bankruptcy proceeding described below. The Company believes that two injunctions issued in 1996 in connection with Keene's bankruptcy proceeding under chapter 11 of Title 11 of the United States Code ("Bankruptcy Code") are relevant to the Justice Department's claim. As previously reported, Keene acquired Reinhold in 1984. On December 3, 1993, Keene filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court. Keene's chapter 11 filing came as a direct result of the demands on Keene of thousands of asbestos-related lawsuits that named Keene as a party. On July 31, 1996 (the "Effective Date"), Keene consummated its Fourth Amended Plan of Reorganization, as modified, under the Bankruptcy Code (the "Plan"). On the Effective Date, Reinhold was merged into and with Keene, with Keene becoming the surviving corporation. Keene, as the surviving corporation of the merger, was renamed Reinhold Industries, Inc. On the Effective Date, pursuant to the Plan the Company issued its Class B Common Stock to the Trustees of a Creditors' Trust, which was established under the Plan to administer Keene's asbestos liabilities. The Creditors' Trust has since sold most of its Class B Common Stock. The general bankruptcy injunction issued in the chapter 11 proceeding generally prohibits any entity from commencing or continuing any action, employment of process or act to collect, offset, affect or recover any claim, demand, interest or cause of action satisfied, released or discharged under the Plan. Such claims, demands, interests and causes of action include, whether known or unknown, all claims against Keene or the Company or their assets and all related causes of action, regardless of whether a proof of claim or interest was filed or allowed, and whether or not the holder of such claim or interest has voted on the Plan, or any causes of action based on any act or omission of any kind occurring prior to the Effective Date. In addition to this general bankruptcy injunction, the Company received the benefit of a supplemental "Permanent Channeling Injunction" as part of the Plan. The Permanent Channeling Injunction bars "Asbestos-Related Claims" and "Demands," as defined in the Plan, against the Company and channels those Claims and Demands to the Creditors' Trust. Pursuant to the Permanent Channeling Injunction, on or after the Effective Date of the Plan, any person or entity who holds or may hold an Asbestos-Related Claim or Demand against Keene will be forever stayed, restrained, and enjoined from taking certain actions for the purpose of, directly or indirectly, collecting, recovering, or receiving payment of, on, or with respect to such Asbestos-Related Claims or Demands against the Company. It is difficult to estimate the timing and ultimate costs to be incurred by the Company in connection with environmental liability claims in the future due to uncertainties about the status of laws and regulations, the adequacy of information available for individual sites and the extended time periods over which site remediation occurs. However, based on currently available information, if the environmental liability claims relating to the Valley Forge Site arose prior to the filing of Keene's bankruptcy case or if these claims were deemed to be Asbestos-Related Claims or Demands within the meaning of the Plan, then the Company does not believe that environmental liabilities associated with the Valley Forge Site should result in a material adverse impact on the Company's consolidated financial position or results of operations. However, if these claims are deemed to have arisen subsequent to the filing of Keene's bankruptcy case -- i.e the "release" or "threatened release," within the meaning of CERCLA, is deemed to have occurred after Keene filed its chapter 11 petition with the Bankruptcy Court or the claims are held to have arisen when the response costs were incurred -- and these claims are not deemed to be Asbestos-Related Claims or Demands as defined under the Plan, then the Company could incur liability for the claims. If a court were to determine that the Company was liable for recoverable costs associated with the Valley Forge Site under CERCLA, the resulting liability could have a material adverse impact on the Company's consolidated financial position and results of operations. 43 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 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 in the process of evaluating its potential environmental liability exposure at 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 were as follows (in thousands): Years ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- B/E Aerospace $ 8,282 13,405 8,687 United Kingdom Ministry of Defense * 6,356 * Alliant Techsystems * 3,077 * Sales to these customers were less than 10% of total net sales for the period. B/E Aerospace accounted for approximately 11% of the Company's accounts receivable balance at December 31, 2000 and approximately 40% at December 31, 1999 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. 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 advise regarding strategic direction and merger and acquisition activities, including identifying potential acquisition candidates, for a fee of $20,000 per month. Accordingly, $240,000 and $140,000 was charged to expense in 2000 and 1999, repectively. 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. Additionally, the Company pays Mr. Scolnik a monthly legal retainer of $4,000. 44 Reinhold Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 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, - -------------------------------------------------------------------------------- 2000 Net sales $ 9,601 13,902 13,281 12,503 Gross profit $ 2,737 4,344 3,995 3,713 Net income $ 802 941 714 1,060 Net earnings per share: Basic $ 0.36 0.43 0.32 0.49 Diluted $ 0.36 0.42 0.32 0.48 1999 Net sales $ 8,688 9,574 11,659 9,219 Gross profit $ 2,176 2,630 3,242 2,735 Net income $ 767 952 1,219 632 Net earnings per share: Basic $ 0.35 0.43 0.55 0.29 Diluted $ 0.35 0.43 0.55 0.29 45 Reinhold Industries, Inc. and Subsidiaries INDEPENDENT AUDITORS' REPORT The Board of Directors Reinhold Industries, Inc. We have audited the accompanying consolidated balance sheets of Reinhold Industries, Inc. and Subsidiaries (the Company) as of December 31, 2000 and 1999 and the related consolidated statements of earnings, stockholders' equity and comprehensive income and cash flows for each of the years in the three year period 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Reinhold Industries, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three year period 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 46 Reinhold Industries, Inc. and Subsidiaries 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 2 Broadway 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 May 8, 2001 at 2:30 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 2 Broadway New York, New York 10004 212 509-4000 Independent Auditors KPMG LLP 355 South Grand Avenue Los Angeles, CA 90071 Attorneys Petillon & Hansen 1260 Union Bank Tower 21515 Hawthorne Boulevard Torrance, California 90503 Wapnick & Alvarado 11268 W. Washington Blvd. Suite 200 Culver City, CA 90230 Stock Listing Reinhold common stock is listed on the OTC Bulletin Board Symbol - RNHDA Stockholder Information 2000 1999 Market Price High Low High Low - -------------------------------------------------------------------------------- First Quarter ended March 31, 10.91 9.09 7.39 6.14 Second Quarter ended June 30, 10.00 9.09 8.41 6.14 Third Quarter ended September 30, 13.00 8.18 10.91 7.27 Fourth Quarter ended December 31, 10.00 6.50 11.93 8.41 The Class A Common Stock of the Company is listed on the OTC Bulletin Board 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, 2000 and 1999, adjusted for the effect of the 10% stock dividend on July 28, 2000. 47 Reinhold Industries, Inc. 12827 East Imperial Highway Santa Fe Springs, CA 90670 562 944-3281 EX-23 3 0003.txt KPMG CONSENT EXHIBIT 23.1 The Board of Directors Reinhold Industries, Inc. The audits referred to in our report dated March 16, 2001, included the related financial statement schedule as of December 31, 2000 and 1999, and for each of the years in the three year period ended December 31, 2000, included in the December 31, 2000 Annual Report on Form 10-K of Reinhold Industries, Inc. This financial statement schedule 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, 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 reports included herein. /s/ KPMG LLP Los Angeles, California April 12, 2001 -----END PRIVACY-ENHANCED MESSAGE-----