-----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, MJN+ViepTPaNc8IYQMwZFaqjsbQOSI5K75I1PGK5TMf3OOluBGD7HDPNjHui5RAa NvYv4obMl1cqt6H9w1ofCA== 0000862255-06-000013.txt : 20060419 0000862255-06-000013.hdr.sgml : 20060419 20060403104845 ACCESSION NUMBER: 0000862255-06-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060331 DATE AS OF CHANGE: 20060419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REINHOLD INDUSTRIES INC/DE/ CENTRAL INDEX KEY: 0000862255 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 132596288 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18434 FILM NUMBER: 06731645 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 form10k.txt 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, 2005 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 Securities registered pursuant to Section 12(b) of the Act: (Title of each class) (Name of each exchange on which registered) NONE NONE - ------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, PAR VALUE $0.01 - ------------------------------------------------------------------------------- Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X --- ----- Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO X ---- ---- Indicate by check mark whether the registrant (1) filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO X Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. X Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X --- --- Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO X --- --- The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2005 was $76,409,000. The number of shares of common stock outstanding as of March 17, 2006 was 3,290,003. Documents incorporated in part by reference: Parts I, II and IV incorporate certain information by reference from the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 2005. Part III incorporates certain information by reference from the registrant's definitive proxy statement for the annual meeting of Stockholders to be held on May 4, 2006, which proxy statement will be filed no later than 120 days after the close of the registrant's fiscal year ended December 31, 2005. From time to time, we make certain comments and disclosures in reports and statements filed with the Securities and Exchange Commission (SEC), including this report or statements made by our officers or directors which may be forward-looking in nature. Examples include statements related to Company growth, the adequacy of funds to service debt and our opinions about trends and factors which may impact future operating results. These forward-looking statements could also involve, among other things, statements regarding our intent, belief or expectation with respect to (i) the Company's results of operations and financial condition, (ii) the consummation of acquisition, disposition or financing transactions and the effect thereof on the Company's business, and (iii) the Company's plans and objectives for future operations and expansion or consolidation. Any forward-looking statements are subject to the risks and uncertainties that could cause actual results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements. Such risks and uncertainties may include: o Cyclicality of the markets for our products; o Loss of key customers; o Increased competition; o Technological obsolescence of our products; o Availability and prices of raw materials; o Significant product liability claims; or o Natural disasters. Any forward-looking statements are also subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally. These assumptions would be based on facts and conditions as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond the Company's control. As a result, you are cautioned not to rely on these forward-looking statements. You should be aware that forward-looking statements generally use words such as the Company "believes," "anticipates," "expects," "estimates" and similar statements. These statements are subject to certain risks and uncertainties which could cause actual results of operations to differ materially from expectations. You should consider any forward-looking statements in context with the various disclosures made by us about our businesses, including without limitation the risk factors more specifically described below in Item 1A. RISK FACTORS. Available Information We are subject to the informational requirements of the Securities Exchange Act of 1934 that require the Company to electronically file reports, proxy and information statements, and other information with the SEC. The public may read and copy our filings at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public can obtain information on the operation of the Public Reference Room by calling 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. We will provide electronic or paper copies of such filings free of charge upon request. We have adopted a Code of Ethics that applies to the Chief Executive Officer, Vice President - Finance and Administration and Controller. Nasdaq Rule 4350 (n) mandates that the Company adopt a Code of Ethics and require that it be applicable to all directors, officers and employees. A copy of the Business Ethics and Code of Conduct can be found on the Company's website at www.reinhold-ind.com. REINHOLD INDUSTRIES, INC. FORM 10-K INDEX PART 1 PAGE - ------- Item 1 - Business 5 Item 1A - Risk Factors 11 Item 1B - Unresolved Staff Comments 14 Item 2 - Properties 14 Item 3 - Legal Proceedings 14 Item 4 - Submission of Matters to a Vote of Security Holders 15 PART II - ------- Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters 16 Item 6 - Selected Financial Data 16 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A - Quantitative and Qualitative Disclosures about Market Risk 17 Item 8 - Financial Statements and Supplementary Data 17 Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 18 Item 9A - Controls and Procedures 18 Item 9B - Other Information 18 PART III - -------- Item 10 - Directors and Executive Officers of the Registrant 19 Item 11 - Executive Compensation 19 Item 12 - Security Ownership of Certain Beneficial Owners and Management 19 Item 13 - Certain Relationships and Related Transactions 19 Item 14 - Principal Accountant Fees and Services 19 PART IV - ------- Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 20 SIGNATURES 25 EXHIBITS 27 CERTIFICATIONS 28 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 United States. 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"). Keene owned BEH, a manufacturer of acoustical ceilings, ventilation systems, and thermal insulation products, for approximately five 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 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, as modified (the "Plan") for solicitation. On June 12, 1996, the Bankruptcy Court and the U.S. District Court held a confirmation hearing on Keene's Plan . The Plan was confirmed by the U.S. District Court by order entered on June 14, 1996. On July 31, 1996, Keene's Plan became effective (the "Effective Date"). On the Effective Date, Keene's wholly-owned subsidiary, 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. 1,020,000 of the shares of common stock, identified as Class B Common Stock, were issued to the Trustees of a 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 stockholders of record as of June 30, 1996. All of Keene's previously outstanding common stock was canceled. Today, Reinhold is a manufacturer of advanced custom composite components and sheet molding compounds for a variety of applications in the United States and Europe. Reinhold derives revenues from the defense, aerospace and other commercial industries. Reinhold is currently organized in three operating segments as follows: Aerospace - The Aerospace business unit manufactures structural and ablative composite components mainly for subcontractors of the United States 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"). R&T is 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. On April 20, 2001, Reinhold purchased certain assets and assumed certain liabilities of Edler Industries, Inc. ("Edler"). Edler was a manufacturer of structural and ablative composite components mainly for subcontractors of the United States defense industry. The operation was renamed the "Thermal Insulation" division of Reinhold. Effective January 1, 2003, the Thermal Insulation operating segment was consolidated with the Aerospace operating segment. During 2005, Aerospace's sales decreased by 5% due primarily to decreased shipments of composite structures related to the space shuttle program. Because a substantial portion of Reinhold's business has been as a supplier to government contractors, Reinhold has developed a limited number of customers with which it does significant amounts of business. Sales to Alliant Techsystems, Inc. constituted approximately 89% of this business unit's total sales in 2005. Reinhold's future prospects will depend on the continued business of such customers and on Reinhold's continued status as a qualified supplier to such customers. Additionally, as a supplier to government contractors, nearly all of Aerospace's backlog is subject to termination. Cancellation of the Minuteman III Propulsion Replacement Program would have a significant impact on the profitability of this business unit. Sales related to this program are expected to continue through 2007 and drop significantly in 2008. Sales of components related to the Minuteman III Propulsion Replacement Program for 2005, 2004 and 2003 totaled approximately $14.5 million, $12.7 million and $14.5 million, respectively. Seating Products - In May 1994, Reinhold acquired CompositAir from SP Systems, Inc. In 2005, CompositAir was renamed the Seating Products business unit. Seating Products is a niche manufacturer of composite commercial aircraft seatbacks and other aircraft seating products. Seating Products has been in continuous production of composite seatback frames since 1980. Composites of epoxy, phenolic, or other resin systems, reinforced with aramid or other glass fibers, are laminated into the complex shapes required by today's feature-packed commercial aircraft seats. The weight of the frames is 30% to 40% less than equivalent aluminum frames. Seating Products operates in both Oxnard, California and Santa Fe Springs, California. Over 75% of Seating Products' 2005 sales were from one customer. Reinhold's future prospects will depend on the continued business of that customer and on Reinhold's continued status as a qualified supplier to that customer. In 2005, sales increased by 32% compared to 2004 due primarily to the addition of a new customer and improving economic conditions in the airline marketplace. Commercial - The Commercial business unit manufactures compression molded sheet molding compound (SMC) products for lighting, water filtration and other various commercial and aerospace applications. SMC formulations include thermosetting polymer matrix resins, glass fibers and other additives which provide strength, stiffness, and protection from corrosion, chemical environments and ultraviolet degradation. Sales in 2005 increased 8% from 2004 due primarily to higher selling prices for all products. NP Aerospace - On April 24, 1998, NP Aerospace Limited ("NP Aerospace"), a wholly-owned subsidiary of Reinhold, purchased from Courtaulds Aerospace Limited ("CAL"), 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. CAL is a U.K. Corporation, which is a wholly-owned subsidiary of Courtaulds plc, a U.K. Corporation. NP Aerospace operates in Coventry, England. NP Aerospace manufactures a wide variety of composite products including compression molded canopies for street lights, commercial aircraft seatback frames, aramid composite combat helmets, protective personal body armor, carbon composite radiography support couches and light-armored composite vehicle structures. On November 21, 2005, the Company sold 100% of the capital stock of NP Aerospace, to The Carlyle Group ("TCG") for $53.2 million, subject to a post-closing working capital adjustment. TCG required that NP Aerospace be cash free, free of all debt and delivered with a normal level of working capital. The purchase price was adjusted by $2.3 million during the first quarter 2006 to $50.9 million based on the final computation of closing date working capital. The purchase price adjustment was accrued as of December 31, 2005. Additional information on NP Aerospace is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 13 - 22 of Reinhold's 2005 Annual Report to Stockholders, which is incorporated herein by reference. Bingham - On March 9, 2000, Samuel Bingham Enterprises, Inc. ("Bingham"), a newly formed wholly-owned subsidiary of Reinhold, purchased certain assets and assumed certain liabilities of Samuel Bingham Company. Samuel Bingham Company 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. Bingham has been in continuous existence since that date. In addition to serving the graphic arts marketplace, Bingham 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. During the three months ended September 30, 2004, management committed to a plan of action to sell Bingham. The decision to sell was based on continuing losses from operations and a negative long-term outlook in the marketplaces this subsidiary serves. On September 30, 2004, management determined that the plan of sale criteria in FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," had been met. Accordingly, the carrying value of its fixed assets was adjusted to its fair value less costs to sell and goodwill was determined to be impaired in accordance with the criteria of FASB No 142. Fair value was determined based on the highest offer received from several potential strategic suitors. The resulting $5.7 million impairment charge was included in "Loss from operations of discontinued component" in the statement of operations. On December 17, 2004, Bingham sold certain assets and transferred certain liabilities to Finzer Roller, L.L.C. for $3.1 million in cash, subject to post-closing adjustments. The assets sold included accounts receivable, inventories, prepaid expenses, equipment, real property, tangible personal property, intellectual and other intangible property. Liabilities transferred include accounts payable, accrued expenses and defined benefit pension plan obligations. The purchase price was adjusted by $0.3 million during the first quarter 2005 to $2.8 million based on the final computation of closing date working capital. The purchase price adjustment was accrued as of December 31, 2004. The sales of Samuel Bingham Enterprises, Inc. and NP Aerospace Ltd. meet the criteria defined in FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" as discontinued operations and are presented herein as such. Additional information on operating segments is set forth in Note 8 to the Consolidated Financial Statements on pages 46 through 47 and "Management's Discussion and Analysis of Financial Condition and Results of Operations " on pages 13 through 22 of Reinhold's 2005 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 48 of Reinhold's 2005 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. Competition Reinhold competes with many companies in the sale of ablative and structural composite products. The markets served by Reinhold are specialized and competitive. Several of its competitors have greater financial, technical and operating resources than Reinhold. Although Reinhold has competed successfully in the critical areas of price, product performance and engineering support services, there is no assurance that Reinhold will be able to continue to manufacture and sell its products profitably in competitive markets. Because a substantial portion of Reinhold's business has been as a supplier to government contractors, Reinhold has developed a limited number of customers with which it does significant amounts of business. Reinhold's future prospects will depend on the continued business of such customers and on Reinhold's continued status as a qualified supplier to such customers. Reinhold's success also depends on developing additional commercial composite products to replace heavier and shape restrictive metals-based products. Raw Materials and Purchased Components The principal raw materials for composite fabrication include pre-impregnated fiber cloth (made of carbon, graphite, aramid or fiberglass fibers which have been heat-treated), molding compounds, resins (phenolic and epoxy), hardware, adhesives and solvents. Occasionally, certain raw materials and parts are supplied by customers for incorporation into the finished product. Reinhold's principal suppliers of raw materials are Cytec Fiberite, Inc. and Newport Adhesives and Composites, Inc. No significant supply problems have been encountered in recent years. Reinhold uses PAN (polyacrylonitrile) and rayon in the manufacture of composites. However, the supply of rayon used to make carbon fiber cloth typically used in ablative composites is highly dependent upon the qualification of the rayon supplier by the United States Department of Defense. North American Rayon has ceased production of the rayon used in Reinhold's ablative products. This could have an effect on the rayon supply in the coming years. Also, a European company has become the world's sole supplier of graphite and carbon, which is used in Reinhold's ablative applications. At this time, Reinhold cannot determine if there will be any significant impact on price or supply. Environmental Matters Reinhold's manufacturing facilities are subject to regulation by federal, state and local environmental agencies. Management believes all facilities meet or exceed all applicable environmental requirements in all material respects and believes that continued compliance will not materially affect capital expenditures, earnings or competitive position. Refer to Item 3 for additional environmental legal proceedings. Patents and Trademarks Reinhold currently holds no registered patents or trademarks. Research and Development Research and development expenditures were approximately $278,000, $230,000 and $196,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Employees At December 31, 2005, Reinhold had 117 full-time employees and 32 part-time employees. Of these employees, 126 (94 full-time and 32 part-time) were employed in manufacturing and 23 (23 full-time and 0 part time) in administration, product development and sales. Approximately 97% of the personnel are based at Reinhold's Santa Fe Springs, California facility and approximately 3% are based at Reinhold's Oxnard, California facility. There are no employees represented by a labor union. Reinhold believes its workforce to be relatively stable and considers its employee relations to be excellent. Item 1A. RISK FACTORS Our business, financial condition, results of operations and cash flows may be affected by known and unknown risks, uncertainties and other factors. Any of these risks, uncertainties and other factors could cause the Company's future financial results to differ materially from recent financial results or from currently anticipated future financial results. In addition to those noted elsewhere in this report, the Company is subject to the following risks and uncertainties: Our markets are cyclical, leading to periodic declines in sales. The markets in which we sell our products are cyclical and have experienced periodic declines. Our sales are, therefore, unpredictable and tend to fluctuate based on a number of factors, including economic conditions and developments affecting the aerospace industry and the customers served. Although the market for our products sold for new commercial aircraft production currently appears to be experiencing a slight improvement, any downturn in commercial aircraft production could have a negative impact on our business, financial condition and operating results. We are dependent on a limited number of customers, which makes us vulnerable to the continued relationship with and financial health of those customers. Because a substantial portion of our business has been as a supplier to government contractors, we depend on a limited number of customers with which we do significant amounts of business. Our future prospects will depend on the continued business of such customers and on our continued status as a qualified supplier to such customers. We cannot guarantee that our current significant customers will continue to buy products from us at current levels. The loss of a key customer could have a material adverse effect on us. We compete with many companies that have greater financial, technical and operating resources than we do, and with whom we may not be able to compete successfully. We compete with many companies in the sale of ablative and structural composite products. The markets we serve are specialized and competitive. Several of our competitors have greater financial, technical and operating resources than we do. We cannot assure you that we will be able to continue to manufacture and sell our products profitably in competitive markets. Our products and processes are subject to risks from changes in technology. Our products and processes are subject to risks of obsolescence as a result of changes in technology. To address this risk, we invest in product design and development, and in capital expenditures. We cannot guarantee that our product design and development efforts will be successful, or that the amounts of money required to be invested for product design and development and capital expenditures will not increase materially in the future. Goodwill could be impaired in the future. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," we assess the fair value and recoverability of our long-lived assets, including goodwill. We make assessments whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from the asset's use and eventual disposition. In doing so, we make assumptions and estimates regarding future cash flows and other factors to make our determination. The fair value of our long-lived assets and goodwill is dependent upon the forecasted performance of our business and the overall economic environment. When we determine that the carrying value of our long-lived assets and goodwill may not be recoverable, we measure any impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, we may have to record additional impairment charges not previously recognized. In assessing the recoverability of our goodwill at December 31, 2005, we were required to make certain critical estimates and assumptions. These estimates and assumptions included that during the next several years we would make improvements in manufacturing efficiency, achieve reductions in operating costs, and obtain increases in sales and backlog. If any of these or other estimates and assumptions are not realized in the future, the Company may be required to record an impairment charge for the goodwill. The goodwill of the Company was $2,521,000 at December 31, 2005. Significant consolidation in the aerospace industry could adversely affect our business and financial results. The aerospace industry is experiencing significant consolidation, including among our customers, competitors and suppliers. Consolidation among our customers may result in delays in the award of new contracts and losses of existing business. Consolidation among our competitors may result in larger competitors with greater resources and market share, which could adversely affect our ability to compete successfully. Consolidation among our suppliers may result in fewer sources of supply and increased cost to us. Our manufacturing operations may be adversely affected by the availability and increases in prices of raw materials and components. The failure of our suppliers to deliver on a timely basis raw materials and components to us, and increases in the prices of raw materials, may adversely affect our results of operations and cash flows. 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 our 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 used in our ablative applications. We cannot assure you that these developments will not have a significant impact on price or supply. Product liability claims in excess of insurance could adversely affect our financial results and financial condition. We face potential liability for personal injury or death as a result of the failure of products designed or manufactured by us. Although we maintain product liability insurance, any material product liability not covered by insurance could have a material adverse effect on our financial condition, results of operations and cash flows. Damage or destruction of our facilities caused by earthquake or other causes could adversely affect our financial results and financial condition. Although we maintain standard property casualty insurance covering our properties, we do not carry any earthquake insurance because of the cost of such insurance. Our main property is located in California, an area subject to frequent and sometimes severe earthquake activity. Even if covered by insurance, any significant damage or destruction of our facilities could result in the inability to meet customer delivery schedules and may result in the loss of customers and significant additional costs to us. As a result, any significant damage or destruction of our properties could have a material adverse effect on our business, financial condition or results of operations. Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES The following chart lists the principal locations and size of Reinhold's facilities and indicates whether the property is owned or leased and, if leased, the lease expiration. LEASED OR OWNED LOCATION USE SIZE LEASE EXPIRATION - -------------------- ------------------ -------------- -------------------- Santa Fe Springs, CA Administration and 130,000 sq. ft. Leased (Expires 2016) Manufacturing Oxnard, CA R&D 3,600 sq. ft. Leased (Expires 2008) Portland, OR Sub-Leased to Third Party 14,000 sq. ft. Leased (Expires 2006) Construction of a new building and additional improvements at the Santa Fe Springs location were substantially completed in 2001. Reinhold believes its facilities are utilized consistent with economic conditions and the requirements of its operations. Item 3. LEGAL PROCEEDINGS On August 11, 2000, the Environmental Protection Agency ("EPA") notified the Company 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 a site formerly known as the Casmalia Resources Hazardous Waste Management Facility, located in Santa Barbara County, California ("Casmalia Site"). The EPA has designated the Company as a "de minimis" waste generator at this site, based on the amount of waste at the Casmalia Site attributed to the Company. The Company is not currently a party to any litigation concerning the Casmalia Site, and based on currently available data, the Company believes that the Casmalia Site is not likely to have a material adverse impact on the Company's consolidated condensed financial position or results of operations. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's financial position, results of operations, or liquidity. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------- On November 17, 2005, on notice duly given, a special meeting of the stockholders of the Company (the "Special Meeting") was held, at which a quorum was present. At the Special Meeting, the stockholders of the Company approved the Share Sale Agreement dated as of September 26, 2005, and authorized the sale of all of the outstanding capital shares of the Company 's NP Aerospace subsidiary to TCG Guardian 2 Limited, an affiliate of The Carlyle Group The vote of the stockholders was 2,483,346 shares in favor, 39,722 shares against, and 3,369 shares abstaining. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Data regarding the market price of Reinhold's common stock is included in the "Selected Financial Data" on page 1 and under Stockholder Information on page 55 of Reinhold's 2005 Annual Report to Stockholders, which is incorporated herein by reference. Reinhold's common stock is traded on the NASDAQ Capital Market under the symbol RNHDA. The stock price quotations incorporated herein reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. (b) The approximate number of common equity security holders is as follows: Approximate Number of Holders of Record Title of Class as of March 3, 2006 -------------- ------------------- Class A Common Stock, par value $.01 per share 1,224 (c) A 10% stock dividend was declared on May 1, 2002 payable to stockholders of record as of May 31, 2002. The dividend was paid on June 21, 2002. Fractional shares were paid in cash. Fractional share cash payments totaled $5,913.60. A 10% stock dividend was declared on April 30, 2003 payable to stockholders of record as of May 16, 2003. The dividend was paid on May 30, 2003. Fractional shares were paid in cash. Fractional share cash payments totaled $9,327.96. Data regarding the dividends paid on Reinhold's common stock for 2005 and 2004 is included in the "Selected Financial Data" on page 1 and under Stockholder Information on page 55 of Reinhold's 2005 Annual Report to Stockholders, which is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA Reference is made to the "Selected Financial Data" on page 1 of Reinhold's 2005 Annual Report to Stockholders, which is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 13 of Reinhold's 2005 Annual Report to Stockholders, which is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During 2005, the Company sold its NP Aerospace subsidiary and used a portion of the proceeds to pay off all of its outstanding debt. The Company's previously identified market risks, interest rates on outstanding debt and fluctuations in the value of the BPS to the United States Dollar, no longer exist at December 31, 2005. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information for Item 8 is included in Reinhold's consolidated financial statements as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005 and Reinhold's unaudited quarterly financial data for the two year period ended December 31, 2005, in the Consolidated Financial Statements (including the Consolidated Balance Sheet, Consolidated Statement of Operations, Consolidated Statement of Cash Flows, Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income and Notes to Consolidated Financial Statements) and unaudited Quarterly Financial Data sections of Reinhold's 2005 Annual Report to Stockholders, which are incorporated herein by reference. The report of the independent registered public accounting firm on Reinhold's consolidated financial statements is on page 51 of Reinhold's 2005 Annual Report to Stockholders and is also incorporated herein by reference. Schedule II-A - Valuation and Qualifying Accounts Allowance for Doubtful Accounts Receivable (in thousands)
Balance at Additions Charged to Balance at Beginning of Costs and End of Period Expenses Other Deductions Period Fiscal Year Ended - ---------------------------------------------------------------------------------------------------------- December 31, 2003 15 - - - 15 - ---------------------------------------------------------------------------------------------------------- December 31, 2004 15 - - - 15 - ------------------------------------------------------------------------------------------------------------ December 31, 2005 15 - - - 15 - ------------------------------------------------------------------------------------------------------------
Schedule II-B - Valuation and Qualifying Accounts Inventory Reserves (in thousands)
Balance at Additions Charged to Balance at Beginning of Costs and End of Fiscal Year Ended Period Expenses Other Deductions Period - ---------------------------------------------------------------------------------------------------------- December 31, 2003 125 - 113 - 238 - ---------------------------------------------------------------------------------------------------------- December 31, 2004 238 - - 4 234 - ---------------------------------------------------------------------------------------------------------- December 31, 2005 234 179 - - 413 - ----------------------------------------------------------------------------------------------------------
Schedule II-C - Valuation and Qualifying Accounts Deferred Tax Valuation Allowance (in thousands)
Balance at Additions Charged to Balance at Beginning of Costs and End of Fiscal Year Ended Period Expenses Other Deductions Period - --------------------------------------------------------------------------------------------------------- December 31, 2003 8,995 2,284 6,711 - --------------------------------------------------------------------------------------------------------- December 31, 2004 6,711 2,482 4,229 - ---------------------------------------------------------------------------------------------------------- December 31, 2005 4,229 4,229 - - ----------------------------------------------------------------------------------------------------------
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Item 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of December 31, 2005, an evaluation was performed by the Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. (b) Changes in Internal Controls There have been no significant changes in internal controls or in factors that could significantly affect internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. Item 9B. OTHER INFORMATION None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required with respect to directors and officers of Reinhold is included in the definitive Proxy Statement for the 2006 Annual Meeting of Stockholders, 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 2006 Annual Meeting of Stockholders, 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 2006 Annual Meeting of Stockholders, 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 2006 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year and is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by Item 14 is included in the definitive proxy statement for the 2006 Annual Meeting of Stockholders, 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 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------- ----------- (a) Documents filed as part of this report: 1. Financial Statements: The following financial statements are contained in the Company's 2005 Annual Report to Stockholders: Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 Consolidated Balance Sheets at December 31, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003 Notes to Consolidated Financial Statements See Part II, Item 8 of this report for information regarding the incorporation by reference herein of such financial statements. 2. Financial Statement Schedules: Certain schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. Schedule II -A - Valuation and Qualifying Accounts Schedule II - B - Valuation and Qualifying Accounts Schedule II - C - Valuation and Qualifying Accounts 3) EXHIBITS 2.1Keene 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, toKeene Corporation's Form 8-K filed with the Commission on June 28, 1996. 3.4 Second amended and restated Certificate of Incorporation and amended By-laws of Reinhold Industries, Inc., on Form DEFS14A filed with the Commission on September 24, 1999. 3.5 Third amended and restated Certificate of Incorporation of Reinhold Industries, Inc., on Form DEF14C filed with the Commission on October 10, 2000. 3.6 Amended and Restated By-Laws of Reinhold Industries, Inc. on form 8-K filed with the Commission on August 31, 2004. 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 referenceto 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 incorporated by reference to Exhibit 10.1 to the Company's Report 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 incorporated by reference to Exhibit 10.2 to the Company's Report 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 incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-QSB filed with the Commission on August 16, 1999. 10.8 Asset Purchase Agreement by and between Samuel Bingham Company, a Delaware corporation, and Samuel Bingham Enterprises, Inc. dated February 3, 2000 on Form 8-K/A filed with the Commission on May 23, 2000. 10.9 Credit Agreement between Reinhold Industries, Inc., Samuel Bingham Enterprises, Inc., NP Aerospace Limited (the "Borrowers") and LaSalle Bank National Association dated March 21, 2002 incorporated by reference to Exhibit 10.9 to the Company's Report on Form 10-Q filed with the Commission on May 9, 2002. 10.10 Amended and Restated Reinhold Industries, Inc. Stock Incentive Plan, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, filed with the Commission on December 1, 2002. ** 10.11 Directors Deferred Stock Plan dated September 30, 2002 incorporated by reference to Exhibit 10.11 to the Company's Report on Form 10-K filed with the Commission on March 28, 2003. ** 10.12 Asset Purchase Agreement by and among Reinhold Industries, Inc., Samuel Bingham Enterprises, Inc., and Finzer Roller, L.L.C. incorporated by reference to Exhibit 2 to the Company's Report on Form 8-K filed with the Commission on December 17, 2004. 10.13 Amended and Restated Credit Agreement dated as of December 8, 2004 among Reinhold Industries, Inc., NP Aerospace Limited, as borrowers, and LaSalle Bank National Association filed on Form 10-K filed with the Commission on March 30, 2005. 10.14 Share Sale Agreement dated as of September 26, 2005 by and among Reinhold Industries, Inc. and TCG Guardian 2 Limited incorporated by reference to Annex A to the Company's Report on Form DEFM14A filed with the Commission on October 21, 2005. 10.15 First Amendment to Amended and Restated Credit Agreement dated as of November 18, 2005 among Reinhold Industries, Inc., as borrower, and LaSalle Bank National Association filed herewith. 13 Certain portions of 2005 Annual Report to Stockholders (with the exception of the information incorporated by reference into Items 1, 5, 6, 7, 7A and 8 of this report, Reinhold's 2005 Annual Report to Stockholders is not deemed to be filed as a part of this report) 21 Subsidiaries of the registrant NONE 23 Consent of Independent Registered Public Accounting Firm 31.1 Certification of CEO Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 31.2 Certification of CFO Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 32.1 Certification of CEO Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 32.2 Certification of CFO Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 ** Management compensation plans and agreements (b) REPORTS ON FORM 8-K Form 8-K was filed on November 21, 2005 announcing that the Company had completed the sale of its NP Aerospace Ltd. subsidiary to TCG Guardian 2 an affiliate of The Carlyle Group, for approximately 30 million pounds sterling in cash. Also on November 21, 2005, the Company entered into a First Amendment to its Amended and Restated Credit Agreement, dated December 8, 2004, with LaSalle Bank National Association and other participating lenders, pursuant to which the lenders made available to the Company a term loan in the maximum principal amount of $5.5 million and a revolving loan in the maximum principal amount of $4.5 million. Also on November 21, 2005, the Company announced that its Board of Directors declared a special dividend of $6.00 per share to all stockholders of record on December 16, 2005 payable on January 3, 2006. The special dividend will be funded by (1) the remaining net proceeds from the sale of NP Aerospace, and (2) the new credit facility with LaSalle Bank. The Company also announced that it will discontinue its previous policy of paying regular quarterly dividends. Form 8-K was filed on November 14, 2005 announcing the Company's third quarter 2005 financial results. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. REINHOLD INDUSTRIES, INC. Registrant Date: March 31, 2006 By:/s/ Brett R. Meinsen -------------------- -------------------- Brett R. Meinsen Vice President - Finance & Administration (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ Michael T. Furry March 31, 2006 -------------------------------------- Michael T. Furry- President and Director (Principal Executive Officer) /s/ Ralph R. Whitney, Jr. March 31, 2006 --------------------------------------- Ralph R. Whitney, Jr.- Chairman /s/ Andrew McNally, IV March 31, 2006 ------------------------------------- Andrew McNally, IV- Director /s/ Glenn Scolnik March 31, 2006 ------------------------------------------- Glenn Scolnik- Director /s/ Thomas A. Brand March 31, 2006 ----------------------------------------- Thomas A. Brand- Director /s/ Richard A. Place March 31, 2006 ------------------------------------------- Richard A. Place- Director /s/ C. Miles Schmidt, Jr. March 31, 2006 ---------------------------------------- C. Miles Schmidt, Jr.- Director /s/ Richard C. Morrison March 31, 2006 --------------------------------------- Richard C. Morrison - Director /s/ Matthew C. Hook March 31, 2006 --------------------------------------- Matthew C. Hook - Director EX-10 2 lasallecreditagreement.txt Exhibit 10.15 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is made as of November __, 2005, by and among REINHOLD INDUSTRIES, INC. (the "Borrower"), the LENDERS (as defined below) and LASALLE BANK, NATIONAL ASSOCIATION, as Agent (the "Administrative Agent"). RECITALS A. The Borrower, NP Aerospace Limited ("NP Aerospace"), the financial institutions signatory thereto (the "Lenders") and the Administrative Agent entered into an Amended and Restated Credit Agreement dated as of December 8, 2004 (as amended, modified, restated or extended from time to time, the "Credit Agreement"), pursuant to the terms of which the Lenders made (i) a revolving credit facility available to the Borrower and NP Aerospace in the aggregate principal amount of $12,000,000 and (ii) a term loan facility available to the Borrower and NP Aerospace in the aggregate principal amount of $24,500,000. B. In connection with the Borrower's sale of all of its equity interests in NP Aerospace pursuant to the NP Aerospace Sale Agreement (as defined herein), the Borrower has requested, and the Administrative Agent and the Lenders have agreed, to enter into this Amendment to amend certain provisions of the Credit Agreement. C. Capitalized terms used but not defined herein are defined in the Credit Agreement. AGREEMENT NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Borrower, the Lenders and the Administrative Agent agree as follows: 1. Definitions. Capitalized terms used but not defined herein are defined in the Credit Agreement. 2. Amendments. (a) The following definitions in Section 1.01 of the Credit Agreement are hereby amended and restated in their entirety, or added to Section 1.01 of the Credit Agreement, as the case may be, as follows: Agent Fee Letter means the second amended and restated Fee Letter dated as of November __, 2005 between Reinhold and the Administrative Agent. Applicable Margin means, for any day, the rate per annum set forth below for the applicable Loans and the L/C Fee and non-use fee:
LIBOR Base Rate Margin for Margin for LIBOR Margin Base Rate Margin Non-Use L/C Fee Revolving Loans Revolving Loans for Term Loans for Term Loans Rate Fee Rate - --------------------- ------------------ ------------------- ------------------ ------------------- --------------- 2.50% 0% 2.50% 0% 0.50% 2.50% - --------------------- ------------------ ------------------- ------------------ ------------------- ---------------
Borrowing Base means an amount equal to the total of (a) 80% of the unpaid amount (net of such reserves and allowances as the Administrative Agent deems necessary in its reasonable discretion) of all Eligible Accounts plus (b) the lesser of (i) 50% of the value of all Eligible Inventory valued at the lower of cost or market (net of such reserves and allowances as the Administrative Agent deems necessary in its reasonable discretion) and (ii) $2,500,000. Collateral Documents means, collectively, the Guaranty and Collateral Agreement, each Mortgage, each Collateral Access Agreement, each Perfection Certificate, each control agreement and any other agreement or instrument pursuant to which any Loan Party, any Subsidiary or any other Person grants or purports to grant collateral to the Administrative Agent for the benefit of the Lenders or otherwise relates to such collateral. Delayed Draw Date has the meaning set forth in Section 12.3. Dividend Program means the special cash distribution program whereby Reinhold may make a certain one-time cash distribution to its common shareholders in the Fiscal Quarter ending March 31, 2006 in an amount of up to $6.00 per share of common stock, with such distributions to be funded by available cash of Reinhold and proceeds of the Term Loan. NP Aerospace Sale Agreement has the meaning set forth in the First Amendment to the Amended and Restated Credit Agreement dated as of November __, 2005 among the Borrower, the Administrative Agent and the Lenders signatory thereto. Revolving Commitment means $4,500,000, as reduced from time to time pursuant to Section 6.1. Term Loan Commitment means $5,500,000. (b) The following definitions in Section 1.01 of the Credit Agreement are hereby deleted in there entirety: Borrower Representative, Domestic Borrower, Domestic Subsidiary, Eligible Foreign Account, Eligible Foreign Inventory, Excess Cash Flow, Foreign Collateral Documents, Foreign Pension Plan, Foreign Subsidiary, NP Aerospace and Security Trustee. (c) The definition of "Eligible Inventory" in Section 1.01 of the Credit Agreement is hereby amended by deleting the proviso contained in subsection (c) thereof. (d) The definition of "GAAP" in Section 1.01 of the Credit Agreement is hereby amended by deleting the proviso contained therein. (e) The definition of "Interest Period" in Section 1.01 of the Credit Agreement is hereby amended by deleting the text "one, two or three months" contained therein and replacing it with the text "two weeks (with respect to Revolving Loans only) or one, two or three months". (f) Section 2.1.2 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it as follows: 2.1.2 Term Loan Commitment. Each Lender with a Term Loan Commitment agrees to make a loan to the Borrower (each such loan, a "Term Loan") on the Delayed Draw Date in such Lender's Pro Rata Share of the Term Loan Commitment. The Commitments of the Lenders to make Term Loans shall expire on the earlier of (i) March 31, 2006 and (ii) the Delayed Draw Date and any amount of Term Loan Commitment which is not utilized by the Borrower on any such date shall be automatically terminated. (g) The Credit Agreement is hereby amended by deleting Section 2.2.4 in its entirety. (h) Section 2.3.1 of the Credit Agreement is hereby amended by deleting the phrase: "(on behalf of the applicable Borrower)" in each place where it appears. (i) The Credit Agreement is hereby amended by deleting Section 2.6 in its entirety. (j) Section 5.1 of the Credit Agreement is hereby amended by numbering the first paragraph of such section as subparagraph (a) and adding the following new subparagraph (b) thereto: (b) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a non-use fee, for the period from November __, 2005 to the Delayed Draw Date, at the Non-Use Fee Rate in effect from time to time of such Lender's Pro Rata Share (as adjusted from time to time) of the unused amount of the Term Loan Commitment. For purposes of calculating usage under this Section, the Term Loan Commitment shall be deemed used to the extent of advances of the Term Loan. Such non-use fee shall be payable in arrears on the last day of each calendar quarter and on the Delayed Draw Date for any period then ending for which such non-use fee shall not have previously been paid. (k) Section 6.2.2(a)(i) of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it as follows: (i) Concurrently with the receipt by any Loan Party of any Net Cash Proceeds from any Asset Disposition, in an amount equal to 100% of such Net Cash Proceeds, but only if such Net Cash Proceeds exceed $300,000 in any Fiscal Year (and then only to the extent of such excess). (l) The Credit Agreement is hereby amended by deleting Section 6.2.2(a)(iv) in its entirety. (m) Section 6.4.2 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it as follows: 6.4.2 Term Loans. The Term Loan shall be paid as follows: (i) on the last day of each calendar month in which the Term Loan is outstanding, a monthly principal installment equal to $122,500 (with the first such payment commencing on the last day of the calendar month succeeding the Delayed Draw Date) and (ii) a final principal installment equal to the remaining outstanding principal balance of the Term Loan on the Term Loan Maturity Date. Each Lender shall be paid its Pro Rata Share of each such installment. Unless sooner paid in full, the outstanding principal balance of the Term Loan shall be paid in full on the Term Loan Maturity Date. (n) The first paragraph of Sections 9, 10 and 11 of the Credit Agreement and the first sentence and second from the last sentence of Section 15.5 of the Credit Agreement are hereby amended by deleting the text "jointly and severally" contained therein. (o) The Credit Agreement is hereby amended by deleting Section 9.9(c) in its entirety. (p) Sections 10.1.5(c), 10.7 and 13.1.7 of the Credit Agreement are hereby amended by deleting each reference to "Foreign Pension Plan" contained therein. (q) Section 10.10 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it as follows: 10.10 Further Assurances. Take, and cause each other Loan Party to take, such actions as are necessary or as the Administrative Agent or the Required Lenders may reasonably request from time to time to ensure that the Obligations of each Loan Party under the Loan Documents are secured by substantially all of the assets of the Borrower and each Subsidiary (as well as all Capital Securities of each domestic Subsidiary and 65% of all Capital Securities of each direct foreign Subsidiary (or, if less, the percentage owned by the relevant Loan Party)) and guaranteed by each domestic Subsidiary (including, upon the acquisition or creation thereof, any Subsidiary acquired or created after the Restatement Date), in each case as the Administrative Agent may determine, including (a) the execution and delivery of guaranties, security agreements, pledge agreements, mortgages deeds of trust, financing statements and other documents, and the filing or recording of any of the foregoing and (b) the delivery of certificated securities and other collateral with respect to which perfection is obtained by possession. Cause all collections from Accounts to be directed to a bank account maintained with the Administrative Agent or to such other bank account as the Administrative Agent may otherwise consent. (r) Section 10.11 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it as follows: 10.11 Deposit Accounts. Unless the Administrative Agent otherwise consents in writing, in order to facilitate the Administrative Agent's and the Lenders' maintenance and monitoring of their security interests in the collateral, maintain all of its principal deposit and operating accounts with the Administrative Agent. (s) Section 11.1(c) of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it as follows: (c) Debt of Borrower to any of its Wholly-Owned Subsidiaries or Debt of any Wholly-Owned Subsidiaries of Borrower to Borrower; provided that in each case such Debt shall be evidenced by a demand note in form and substance reasonably satisfactory to the Administrative Agent and pledged and delivered to the Administrative Agent pursuant to the Collateral Documents as additional collateral security for the Obligations, and the obligations under such demand note shall be subordinated to the Obligations of Borrower hereunder in a manner reasonably satisfactory to the Administrative Agent; (t) Section 11.4 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it as follows: 11.4 Restricted Payments. Not, and not permit any other Loan Party to, (a) make any distribution to any holders of its Capital Securities, (b) purchase or redeem any of its Capital Securities, (c) except as provided in Section 11.7 hereof, pay any management fees or similar fees to any of its equityholders or any Affiliate thereof, (d) make any redemption, prepayment, defeasance, repurchase or any other payment in respect of any Subordinated Debt or (e) set aside funds for any of the foregoing. Notwithstanding the foregoing, so long as such Loan Party is otherwise in compliance with the provisions of this Agreement and the financial covenants contained herein, and immediately after giving effect to the transactions described below is in pro forma compliance with such financial covenants, (i) any Subsidiary of Borrower may pay dividends or make other distributions to Borrower or to a Wholly-Owned Subsidiary; and (ii) so long as no Event of Default or Unmatured Event of Default exists or would result therefrom, Reinhold may (A) pursuant to the Dividend Program, make dividends or other distributions to its shareholders in an aggregate amount not to exceed $20,000,000 in the Fiscal Quarter ending March 31, 2006, (B) make dividends or other distributions to its shareholders in an amount not to exceed the lesser of (I) $1,700,000 and (II) $0.50 per share of its common stock on December 16, 2005, (C) make dividends of its own stock, including cash payments for fractional shares and (D) redeem its Capital Securities and (iii) Reinhold may make dividends to directors of Reinhold so long as such amounts have been properly accrued pursuant to Reinhold's Directors Deferred Stock Plan, in an aggregate amount not to exceed $2,000,000 during the term of this Agreement. (u) Section 11.7 of the Credit Agreement is hereby amended by deleting the reference "Section 11.4(e)(ii)(d)" therein and replacing it with the reference "Sections 11.4(ii) and (iii)". (v) Section 11.14.1 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it as follows: 11.14.1 Fixed Charge Coverage Ratio. Not permit the Fixed Charge Coverage Ratio for any Computation Period to be less than 1.25 to 1.00. (w) Section 11.14.2 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it as follows: 11.14.2 Total Debt to EBITDA Ratio. Not permit the Total Debt to EBITDA Ratio as of the last day of any Computation Period to exceed 2.50 to 1.00 for any such Computation Period. (x) A new Section 12.3 of the Credit Agreement is hereby added as follows: 12.3 Delayed Draw Credit Extension. The obligation of the Lenders to make the Term Loan is, in addition to the conditions precedent specified in Section 12.2, subject to the conditions precedent that the Administrative Agent shall have received all of the following, each duly executed and dated the Delayed Draw Date (or such earlier date as shall be satisfactory to the Administrative Agent), as applicable, in form and substance satisfactory to the Administrative Agent (and the date on which all such conditions precedent have been satisfied or waived in writing by the Administrative Agent and the Lenders is called the "Delayed Draw Date"): 12.3.1 Notice of Borrowing; Letter of Direction. An irrevocable notice of borrowing with respect to the Term Loan on the Delayed Draw Date and an irrevocable letter of direction with respect to the proceeds of the Term Loan on the Delayed Draw Date. 12.3.2 Notes. A Note for each Lender requesting one. ----- 12.3.3 Authorization Documents. The Borrower's (i) charter (or similar formation document), certified by the appropriate governmental authority; (ii) good standing certificates in its state of incorporation (or formation) and in each other state requested by the Administrative Agent; (iii) bylaws (or similar governing document); (iv) resolutions of its board of directors (or similar governing body) approving and authorizing (A) the drawing of the Term Loan and the transactions contemplated in connection therewith and (B) the Dividend Program and (C) such other matters with respect to the Term Loan and Dividend Program as may be requested by the Administrative Agent; and (v) signature and incumbency certificates of its officers executing any of the applicable Loan Documents (it being understood that the Administrative Agent and each Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein), all certified by its secretary or an assistant secretary (or similar officer) as being in full force and effect without modification. 12.3.3 Opinions of Counsel. Such opinions of counsel as may be reasonably requested by the Administrative Agent. 12.3.4 Solvency Opinion. True, correct and complete copy of any solvency opinion obtained by Reinhold in connection with the Dividend Program. 12.3.5 Solvency Certificate. A Solvency Certificate executed by a Senior Officer of Reinhold in form and substance satisfactory to the Administrative Agent (which, among other things, shall state that the Borrower and its Subsidiaries shall be solvent after giving effect to the dividends contemplated by the Dividend Program). 12.3.6 Closing Certificate. A certificate executed by a Senior Officer of the Borrower certifying (a) the matters set forth in Section 12.2.1 of the Credit Agreement as of the Delayed Draw Date, (b) as to its compliance with Section 11.4 of the Credit Agreement and (c) that all necessary governmental, regulatory, creditor, shareholder and other material consents, approvals and exemptions required to be obtained by the Borrower in connection with the Dividend Program have been duly obtained and are in full force and effect. 12.3.7 Consents, etc. Certified copies of all documents evidencing any consents and governmental approvals (if any) required for the execution, delivery and performance by the Borrower of the Dividend Program. 12.3.8 Other. Such other documents as the Administrative Agent or any Lender may reasonably request. (y) Sections 14.14, 14.15 and 14.16 of the Credit Agreement are hereby amended by deleting such sections in their entirety. (z) The Credit Agreement is hereby amended by deleting Section 16 in its entirety. (aa) The Credit Agreement and each of the other Loan Documents are hereby amended by (i) deleting each reference to "each Borrower", "a Borrower", "any Borrower", "such Borrower", "Borrowers", "the Borrowers", "Domestic Borrower" and "Borrower Representative" contained therein and replacing each such reference with a reference to "the Borrower", in each case with such corresponding grammatical changes as shall be necessary or appropriate in connection therewith and (ii) deleting each reference to "no Borrower" contained in Section 9.9 and replacing it with a reference to "neither the Borrower". (bb) The Credit Agreement and each of the other Loan Documents is hereby amended by deleting each reference to "the Borrowers and their Subsidiaries" contained therein and replacing it with a reference to "the Borrower and its Subsidiaries" and by deleting each reference to "the Borrowers'" and replacing it with a reference to "the Borrower's". (cc) The Credit Agreement is hereby amended by deleting each reference to "Eligible Domestic Account" contained therein and replacing it with a reference to "Eligible Account". (dd) The Credit Agreement is hereby amended by deleting each reference to "Eligible Domestic Inventory" contained therein and replacing it with a reference to "Eligible Inventory". (ee) The Credit Agreement and each of the other Loan Documents is hereby amended by deleting each reference to "Security Trustee". (ff) The existing Annex A to the Credit Agreement setting forth the Lenders and Pro Rata Shares is hereby amended by deleting such Annex in its entirety and replacing it with the revised Annex A provided at Annex I hereto. (gg) The existing Annex B to the Credit Agreement setting forth the Addresses for Notices is hereby amended by deleting such Annex in its entirety and replacing it with the revised Annex B provided at Annex I hereto. (hh) The existing Exhibit A to the Credit Agreement setting forth the form of Note is hereby amended by deleting such exhibit in its entirety and replacing it with the revised Exhibit A provided at Annex II hereto. (ii) The existing Exhibit B to the Credit Agreement setting forth the form of Compliance Certificate is hereby amended by deleting such exhibit in its entirety and replacing it with the revised Exhibit B provided at Annex II hereto. (jj) The existing Exhibit C to the Credit Agreement setting forth the form of Borrowing Base Certificate is hereby amended by deleting such exhibit in its entirety and replacing it with the revised Exhibit C provided at Annex II hereto. (kk) The existing Exhibit D to the Credit Agreement setting forth the form of Assignment Agreement is hereby amended by deleting such exhibit in its entirety and replacing it with the revised Exhibit D provided at Annex II hereto. (ll) The existing Exhibit E to the Credit Agreement setting forth the form of Notice of Borrowing is hereby amended by deleting such exhibit in its entirety and replacing it with the revised Exhibit E provided at Annex II hereto. (mm) The existing Exhibit F to the Credit Agreement setting forth the form of Notice of Conversion/Continuation is hereby amended by deleting such exhibit in its entirety and replacing it with the revised Exhibit F provided at Annex II hereto. (nn) Schedules 9.6 through 11.11 of the Credit Agreement are hereby amended and restated in their entirety as set forth on Annex III hereto. 2. Waiver and Agreement. The Administrative Agent and Lenders hereby agree as follows: (i) effective September 15, 2005, Administrative Agent and Lenders waive the required prepayment from Excess Cash Flow payable on such date pursuant to Section 6.2.2(a)(iv) of the Credit Agreement and (ii) Administrative Agent and Lenders agree that the monthly principal payment in the amount of $367,000 due and payable on October 31, 2005 pursuant to Section 6.4.2 of the Credit Agreement shall be deferred and shall now be due and payable on the earlier of (a) the consummation of the transactions contemplated by the NP Aerospace Sale Agreement and (b) November 30, 2005. 3. Interpretation. Reference in this Amendment, the Credit Agreement or any other Loan Document to the Credit Agreement shall be a reference to the Credit Agreement as amended hereby and as further amended, modified, restated or extended from time to time. The Borrower acknowledges and agrees that all Liabilities (as defined in the Security Agreement) are, and shall at all times be, entitled to the benefits of the Collateral Documents. 4. Representations and Warranties. To induce the Administrative Agent and the Lenders to execute this Amendment, the Borrower represents and warrants to the Administrative Agent and the Lenders as follows: (a) The Borrower is in good standing under the laws of the State of Delaware and in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify would not have a Material Adverse Effect. (b) The Borrower is duly authorized to execute and deliver this Amendment and is duly authorized to perform its obligations hereunder. (c) The execution, delivery and performance by the Borrower of this Amendment do not and will not (i) require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (ii) conflict with (A) any provision of law, (B) the certificate of incorporation or bylaws of the Borrower or (C) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon the Borrower or any of its properties or (iii) require, or result in, the creation or imposition of any Lien on any asset of the Borrower, other than in the favor of Lenders. (d) This Amendment is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting enforceability of creditors' rights generally and to general principals of equity. (e) The representations and warranties in the Loan Documents (including but not limited to Section 9 of the Credit Agreement) are true and correct in all material respects with the same effect as though made on and as of the date of this Amendment (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties were true and correct as of such earlier date). (f) No Event of Default or Unmatured Event of Default has occurred and is continuing. 5. Affirmation. Except as expressly amended hereby, the Credit Agreement and the other Loan Documents are and shall continue in full force and effect and the Borrower hereby fully ratifies and affirms each Loan Document to which it is a party. Reference in any of this Amendment, the Credit Agreement or any other Loan Document to the Credit Agreement shall be a reference to the Credit Agreement as amended hereby and as further amended, modified, restated, supplemented or extended from time to time. This Amendment shall constitute a Loan Document for purposes of the Credit Agreement and the other Loan Documents. 6. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute one instrument. Delivery of an executed counterpart of this Amendment by facsimile shall be effective as delivery of an original counterpart. 7. Headings. The headings and captions of this Amendment are for the purposes of reference only and shall not affect the construction of, or be taken into consideration in interpreting, this Amendment. 8. Conditions to Amendment. This Amendment shall become effective upon the satisfaction in full of all of the following conditions precedent, each of which shall be satisfactory to the Administrative Agent and the Lenders: (a) Delivery of Loan Documents. The Borrower shall have delivered the following documents in form and substance satisfactory to the Administrative Agent (and, as applicable, duly executed and dated as of the date hereof): (i) Amendment. This Amendment. (ii) Note. A promissory note substantially in the form of Exhibit A to the Credit Agreement payable to LaSalle Bank National Association, as Lender. (iii) Amendment to Guaranty and Collateral Agreement. An amendment to the Guaranty and Collateral Agreement, together with all supplemental schedules and other documents required to be delivered in connection therewith. (iv) Authorization Documents. The Borrower's (A) certificate of incorporation, certified by the appropriate governmental authority, (B) good standing certificates in its state of incorporation and in each other state requested by Agent, (C) bylaws, (D) resolutions of its board of directors approving and authorizing the Borrower's execution, delivery and performance of the Amendment and the transactions contemplated thereby and (E) signature and incumbency certificates of its officers executing the Amendment and the other documents being delivered in connection therewith, all certified by its secretary or an assistant secretary as being in full force and effect without modification. (v) Opinion of Counsel. An opinion of counsel to the Borrower as to such matters as may be reasonably requested by the Administrative Agent. (vi) Insurance. Evidence satisfactory to the Administrative Agent of the existence of insurance required to be maintained pursuant to Section 10.3(b) of the Credit Agreement. (vii) Borrowing Base Certificate. A Borrowing Base Certificate of the Borrower in the form attached as Exhibit C to the Credit Agreement. (viii) Fee Letter. An Amended and Restated Fee Letter dated as of the date hereof between the Borrower and the Administrative Agent (the "Fee Letter"). (ix) NP Aerospace Sale Agreement. An executed copy of the NP Aerospace Sale Agreement (as defined below), together with any amendments or supplements thereto, certified by the secretary or assistant secretary of the Borrower as being true accurate and complete. (x) UCC. UCC financing statement naming the Borrower as debtor and the Administrative Agent as secured party filed in the Borrower's jurisdiction of incorporation and covering all Collateral. (b) Related Transactions. The Borrower shall have completed the Related Transactions. As used herein, "Related Transactions" shall mean (i) the consummation of the transactions contemplated by that certain Sale and Purchase Agreement dated as of September 26, 2005 between Reinhold Industries, Inc., as seller and TCG Guardian 2 Limited, as buyer (the "NP Aerospace Sale Agreement") and (ii) the receipt by the Administrative Agent or its designee of not less than $25,757,000 (plus accrued interest thereon) in immediately available funds as a prepayment of the Loans (such prepayment to be allocated among the Loans as determined by the Administrative Agent). (c) Payment of Fees. Evidence of payment by the Borrower of all accrued and unpaid fees, costs and expenses to the extent then due and payable, together with all Attorney Costs of the Administrative Agent to the extent invoiced prior to the date hereof, plus such additional amounts of Attorney Costs as shall constitute the Administrative Agent's reasonable estimate of Attorney Costs incurred or to be incurred by the Administrative Agent through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Borrower and the Administrative Agent). (d) Revolving Outstandings. Immediately prior to giving effect to this Amendment, the Revolving Outstandings under the Credit Agreement shall not exceed $3,000,000. (e) Amendment Fee. Receipt by the Administrative Agent of the amendment fee payable pursuant to the Fee Letter. (f) Assignment Agreement. Receipt and acceptance by the Administrative Agent of an Assignment Agreement dated on or prior to the date hereof between National City Bank of Indiana and LaSalle Bank National Association pursuant to which National City Bank of Indiana shall have sold and transferred to LaSalle Bank National Association all of its Loans and Commitments under the Credit Agreement. (g) Other. Such other documents as the Administrative Agent or any Lender may reasonably request. The date upon which such events have occurred is the "Effective Date." 9. Further Assurances. The Borrower agrees to execute and deliver in form and substance satisfactory to the Administrative Agent and the Lenders such further documents, instruments, amendments, financing statements and to take such further action, as may be necessary from time to time to perfect and maintain the liens and security interests created by the Loan Documents, as amended hereby. 10. APPLICABLE LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO ILLINOIS CHOICE OF LAW DOCTRINE. [signature page follows] IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the date first written above. BORROWER: REINHOLD INDUSTRIES, INC. By: ----------------------------------------- Michael T. Furry, President BANK: LASALLE BANK, NATIONAL ASSOCIATION, as Administrative Agent and Lender By: ----------------------------------------- Its: ---------------------------------------- Annex I - 2 ANNEX I ANNEX A LENDERS AND PRO RATA SHARES
Revolving Term Loan Lender Commitment Amount Pro Rata Share Commitment Pro Rata Share - ------------------------- ---------------------- ---------------------- ----------------------- ---------------------- LaSalle Bank National $4,500,000 100% $5,500,000 100% Association - ------------------------- ---------------------- ---------------------- ----------------------- ---------------------- TOTALS $4,500,000 100% $5,500,000 100% - ------------------------- ---------------------- ---------------------- ----------------------- ----------------------
ANNEX B ADDRESSES FOR NOTICES REINHOLD INDUSTRIES, INC. - ------------------------ 12827 E. Imperial Hwy. Santa Fe Springs, CA 90670 Attention: Michael Furry Telephone: (562) 944-3281 Facsimile: (562) 903-3019 LASALLE BANK NATIONAL ASSOCIATION, as Administrative Agent, Issuing Lender - ---------------------------------- and Lender Notices of Borrowing , Conversion, Continuation 135 South LaSalle Street Chicago, Illinois 60603 Attention: Janet Bukowiecki Telephone: (312) 904-8456 Facsimile: (312) 904-8808 Request for Letters of Credit and other Letter of Credit Matters Global Trade Advisory - Operations ABN AMRO Plaza 540 West Madison, 26th Floor Chicago, Illinois 60661 Attention: Standby LC Operations Dept. Facsimile: (312) 780-0828 Email: standbylc.chi@abnamro.com All Other Notices 135 South LaSalle Street Chicago, Illinois 60603 Attention: H. Russell Bauer Telephone: (312) 904-2092 Facsimile: (312) 904-8808 Annex II - 13 ANNEX II EXHIBIT A FORM OF NOTE -------,------- $__________________ Chicago, Illinois The undersigned, for value received, promises to pay to the order of ______________ (the "Lender") at the principal office of LaSalle Bank National Association (the "Administrative Agent") in Chicago, Illinois the aggregate unpaid amount of all Revolving Loans made to the undersigned by the Lender pursuant to the Credit Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of the Lender), such principal amount to be payable on the dates set forth in the Credit Agreement. The undersigned further promises to pay interest on the unpaid principal amount of each Revolving Loan from the date of such Revolving Loan until such Revolving Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America. This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Amended and Restated Credit Agreement, dated as of December 8, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"; terms not otherwise defined herein are used herein as defined in the Credit Agreement), among the undersigned, certain financial institutions (including the Lender) and the Administrative Agent, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated. This Note is made under and governed by the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. This Note issued on the date hereof (the "New Note") amends and restates the Note previously issued by the Borrower and NP Aerospace Limited under the Amended and Restated Credit Agreement payable to LaSalle Bank National Association (the "Original Note") and does not constitute a novation, payment and reborrowing, or termination of the Obligations under the Original Note. The Obligations under the Original Note are in all respects continuing (as amended and restated hereby) and the Liens and security interests and all other rights granted under the Loan Documents with respect to the Original Note are in all respects continuing and in full force and effect and the Collateral Documents secure the payment of the Obligations under the New Note. [signature appears on the following page] REINHOLD INDUSTRIES, INC. By:__________________________________________________ Title:_______________________________________________ EXHIBIT B FORM OF COMPLIANCE CERTIFICATE To:_______________LaSalle Bank National Association, as Administrative Agent Please refer to the Amended and Restated Credit Agreement dated as of December 8, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among Reinhold Industries, Inc., as borrower (the "Borrower"), various financial institutions and LaSalle Bank National Association, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement. I. Reports. Enclosed herewith is a copy of the [annual audited/quarterly/monthly] report of the Borrower as at _____________, ____ (the "Computation Date"), which report fairly presents in all material respects the financial condition and results of operations [(subject to the absence of footnotes and to normal year-end adjustments)] of the Borrower as of the Computation Date and has been prepared in accordance with GAAP consistently applied. II. Financial Tests. The Borrower hereby certifies and warrants to you that the following is a true and correct computation as at the Computation Date of the following ratios and/or financial restrictions contained in the Credit Agreement: A. Section 11.14.2 - Minimum Fixed Charge Coverage Ratio 1. EBITDA $________ 2. Income taxes paid $________ 3. Capital Expenditures $________ 4. Sum of (2) and (3) $________ 5. Remainder of (1) minus (4) $________ 6. Cash Interest Expense $________ 7. Required payments of Funded Debt $________ 8. Sum of (6) and (7) $________ 9. Ratio of (5) to (8) ___ to 1.0 10. Minimum Required 1.25 to 1.0 B. Section 11.14.5 - Maximum Total Debt to EBITDA Ratio 1. Total Debt $________ 2. EBITDA $________ (from Item A(3) above) 3. Ratio of (1) to (2) ____ to 1 4. Maximum allowed 2.50 to 1.0 The Borrower further certifies to you that no Event of Default or Unmatured Event of Default has occurred and is continuing. The Borrower has caused this Certificate to be executed and delivered by its duly authorized officer on - ---------, ----. REINHOLD INDUSTRIES, INC. By: -------------------------------------------------- Title: ----------------------------------------------- EXHIBIT C FORM OF BORROWING BASE CERTIFICATE To: LaSalle Bank National Association, as Administrative Agent Please refer to the Amended and Restated Credit Agreement dated as of December 8, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among Reinhold Industries, Inc. (the "Borrower"), various financial institutions and LaSalle Bank National Association, as Administrative Agent. This certificate (this "Certificate"), together with supporting calculations attached hereto, is delivered to you pursuant to the terms of the Credit Agreement. Capitalized terms used but not otherwise defined herein shall have the same meanings herein as in the Credit Agreement. The Borrower hereby certifies and warrants to the Administrative Agent and the Lenders that at the close of business on ______________, ____ (the "Calculation Date"), the Borrowing Base was $_____________, computed as set forth on the schedule attached hereto. The Borrower has caused this Certificate to be executed and delivered by its officer thereunto duly authorized on ___________, ______. REINHOLD INDUSTRIES, INC. By: -------------------------------------------------- Title: ----------------------------------------------- SCHEDULE TO BORROWING BASE CERTIFICATE Dated as of [_________________] A. ELIGIBLE ACCOUNTS RECEIVABLE 1. Accounts Receivable $______________ 2. Less Ineligibles - Administrative Agent's Lien Not Perfected $______________ - Subject to other Lien $______________ - Subject to Offset, etc. $______________ - Bankrupt or Insolvent Account Debtor $______________ - Account Debtor not in U.S. (or Ireland, as applicable) $______________ - Sale on Approval, Sale or Return, Bill and Hold or Consignment $______________ - Account Debtor is the U.S. (unless comply with Assignment of Claims Act) $______________ - Amount in excess of credit limit $______________ - Over 90 days past invoice date $______________ - Affiliate Receivables $______________ - 25% or more of Receivables from related Account Debtor are ineligible $______________ - Exceeds 35%/Other concentration limit $______________ - Other $______________ - Total $______________ 3. Eligible Accounts Receivable [Item 1 minus Item 2] $______________ ----- 4. Item 3 times 80% $______________ B. ELIGIBLE INVENTORY 1. Inventory $______________ 2. Less Ineligibles - Administrative Agent's Lien Not Perfected $______________ - Subject to other Lien $______________ - Not Salable $______________ - Located off-site and no Collateral Access Agreement $______________ - Produced in violation of FLSA $______________ - Restriction on ability of Administrative Agent to sell $______________ - Not located in U.S. $______________ - "In transit" or held on consignment $______________ - Work-in-progress or Tooling Inventory $______________ - Packaging materials $______________ - Subject to progress payments $______________ - Other $______________ - Total $______________ 3. Eligible Inventory [Item 1 minus Item 2] less obsolescence reserve of $_________ $______________ ---- 4. Item 3 times 50% $______________ 5. Maximum Inventory Amount $2,500,000 6. Available Inventory Amount (lesser of 4 and 5) $______________ C. BORROWING BASE CALCULATION 1. Borrowing Base [Item A.4 plus Item B.6] $______________ ---- 2. Lesser of Item 1 and the Revolving Commitment Amount $______________ 3. Revolving Outstandings $______________ 4. Net Availability [Excess of Item 2 over Item 3] $______________ 5. Required Prepayment [Excess of Item 3 over Item 2] $______________ EXHIBIT D FORM OF ASSIGNMENT AGREEMENT THIS ASSIGNMENT AND ACCEPTANCE (as from time to time amended, modified, restated, supplemented and in effect, this "Assignment and Acceptance") is entered into as of [__________] by and between [__________] ("Assignor") and [__________] ("Assignee"). Reference is made to the Amended and Restated Agreement dated as of December 8, 2004 (as amended, restated, modified or supplemented from time to time, the "Agreement"), among Reinhold Industries, Inc. (the "Borrower"), the financial institutions party to the Credit Agreement ("Lenders") and LaSalle Bank National Association, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Agreement. Assignor and Assignee agree as follows: 1. Assignor hereby sells and assigns to Assignee, and Assignee hereby purchases and assumes from Assignor the interests set forth on Schedule 1 hereto, in and to Assignor's rights and obligations under the Agreement as of the Effective Date (as defined below). Such purchase and sale is made without recourse, representation or warranty except as expressly set forth herein. 2. Assignor (i) represents that as of the date hereof, that it is the legal and beneficial owner of the interests assigned hereunder free and clear of any adverse claim or security interest, (ii) makes no other representation or warranty and assumes no responsibility with respect to any statement, warranties or representations made in or in connection with the Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Agreement, any Loan Documents or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or any other Person or the performance or observance by any Loan Party of its obligations under the Agreement or the Loan Documents or any other instrument or document furnished pursuant thereto. 3. Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (ii) confirms that it has received a copy of the Agreement, together with copies of the most recent financial statements delivered pursuant to Section 10.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (iii) agrees that it will, independently and without reliance upon Administrative Agent, Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement; (iv) appoints and authorizes Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers under the Agreement as are delegated to Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (vi) agrees that it will perform in accordance with their terms all obligations which by the terms of the Agreement are required to be performed by it as a Lender; (vii) represents that on the date of this Assignment and Acceptance it is not presently aware of any facts that would cause it to make a claim under the Agreement[; and (viii) if organized under the laws of a jurisdiction outside the United States, attaches the forms prescribed by the Internal Revenue Service of the United States, which have been duly executed, certifying as to Assignee's exemption from United States withholding taxes with respect to all payments to be made to Assignee under the Agreement or such other documents as are necessary to indicate that all such payments are subject to such tax at a rate reduced by an applicable tax treaty.] 4. The effective date for this Assignment and Acceptance shall be as set forth on the Schedule 1 hereto (the "Effective Date"). Following the execution of this Agreement and Acceptance, it will be delivered to Administrative Agent for acceptance and recording by Administrative Agent pursuant to the Agreement. 5. Upon such acceptance and recording, from and after the Effective Date, (i) Assignee shall be a party to the Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Agreement. 6. Upon such acceptance and recording, from and after the Effective Date, Administrative Agent shall make all payments in respect of the interest assigned hereby (including payments of principal, interest, fees and other amounts) to Assignee. Assignor and Assignee shall make all appropriate adjustments in payments for periods prior to the Effective Date by Administrative Agent or with respect to the making of this assignment directly between themselves. 7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first written above. ASSIGNOR: By: ____________________ Title: ___________________ ASSIGNEE: By: ____________________ Title: ___________________ Accepted: LASALLE BANK NATIONAL ASSOCIATION as Administrative Agent By:_______________________ Title:_____________________ **[Add the following if required by Credit Agreement]** REINHOLD INDUSTRIES, INC. By:_______________________ Title:______________________] Schedule 1 Assignor: [__________] Assignee: [__________] Effective Date: [__________] Credit Agreement: Amended and Restated Credit Agreement dated as of December 8, 2004 among Reinhold Industries, Inc., certain Lenders and LaSalle Bank National Association, as administrative agent, as amended. Interests Assigned: Facility/ Commitment Revolving Credit Term Loan Commitment Commitment - ----------------------------------------------------------------------- Commitment of Assignor $ $ - ------------------------------------------------------------------------ Amounts Assigned $ $ - ------------------------------------------------------------------------ Commitment of Assignee $ $ (after assignment) - ------------------------------------------------------------------------ Assignee Information Address for Notices: Address for Payments: ___________________________ Bank: _____________ ___________________________ ABA #: _____________ Attention: _______________ Account #: ____________ Telephone: _______________ Reference: ___________ Telecopy: _______________ EXHIBIT E FORM OF NOTICE OF BORROWING To: LaSalle Bank National Association, as Administrative Agent Please refer to the Amended and Restated Credit Agreement dated as of December 8, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among Reinhold Industries, Inc. (the "Borrower"), various financial institutions and LaSalle Bank National Association, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement. The undersigned hereby gives irrevocable notice, pursuant to Section 2.2.2 of the Credit Agreement, of a request hereby for a borrowing as follows: (i) The requested borrowing date for the proposed borrowing (which is a Business Day) is - --------------, ----. (ii) The aggregate amount of the proposed borrowing is $______________. (iii) The type of Revolving Loans comprising the proposed borrowing are [Base Rate] [LIBOR] Loans. (iv) The duration of the Interest Period for each LIBOR Loan made as part of the proposed borrowing, if applicable, is ___________ months (which shall be two weeks (with respect to Revolving Loans only), 1, 2 or 3 months). The undersigned hereby certifies that on the date hereof and on the date of borrowing set forth above, and immediately after giving effect to the borrowing requested hereby: (i) there exists and there shall exist no Unmatured Event of Default or Event of Default under the Credit Agreement; and (ii) each of the representations and warranties contained in the Credit Agreement and the other Loan Documents is true and correct as of the date hereof, except to the extent that such representation or warranty expressly relates to another date and except for changes therein expressly permitted or expressly contemplated by the Credit Agreement. The Borrower has caused this Notice of Borrowing to be executed and delivered by its officer thereunto duly authorized on ___________, ______. REINHOLD INDUSTRIES, INC. By: -------------------------------------------------- Title: ----------------------------------------------- EXHIBIT F FORM OF NOTICE OF CONVERSION/CONTINUATION To: LaSalle Bank National Association, as Administrative Agent Please refer to the Amended and Restated Credit Agreement dated as of December 8, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among Reinhold Industries, Inc. (the "Borrower"), various financial institutions and LaSalle Bank National Association, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement. The undersigned hereby gives irrevocable notice, pursuant to Section 2.2.3 of the Credit Agreement, of its request to: (a) on [ date ] convert $[________]of the aggregate outstanding principal amount of the [_______] Loan, bearing interest at the [________] Rate, into a(n) [________] Loan [and, in the case of a LIBOR Loan, having an Interest Period of [_____] month(s)]; [(b) on [ date ] continue $[________]of the aggregate outstanding principal amount of the [_______] Loan, bearing interest at the LIBOR Rate, as a LIBOR Loan having an Interest Period of [_____] month(s)]. The undersigned hereby represents and warrants that all of the conditions contained in Section 12.2 of the Credit Agreement have been satisfied on and as of the date hereof, and will continue to be satisfied on and as of the date of the conversion/continuation requested hereby, before and after giving effect thereto. The Borrower has caused this Notice of Conversion/Continuation to be executed and delivered by its officer thereunto duly authorized on ___________, ______. REINHOLD INDUSTRIES, INC. By: ------------------------------------------------ Title: ----------------------------------------------- Annex III - 1 Annex III Schedules EX-13 3 annualreport.txt Reinhold Industries, Inc. 2005 Annual Report The Board of Directors (Pictures of Board Members) Michael T. Furry President and CEO Ralph R. Whitney, Jr. Chairman of the Board Andrew McNally, IV Glenn Scolnik Thomas A. Brand Richard A. Place Richard C. Morrison C. Miles Schmidt, Jr. Matthew C. Hook Reinhold Industries, Inc. Selected Financial Data
2005 2004 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------- Summary of operations (in thousands) (Note 1) Net sales $ 32,559 32,231 30,978 28,665 20,464 Gross profit $ 12,249 12,957 11,722 10,288 6,220 Operating income $ 4,281 5,621 5,529 4,985 1,906 Interest income, net $ - 7 8 21 128 Income from continuing operations $ 3,077 2,361 3,414 2,921 2,207 Income (loss) from discontinued operations $ 30,256 (1,251) 2,310 1,231 (5,930) Net income (loss) $ 33,333 1,110 5,724 4,152 (3,723) - ------------------------------------------------------------------------------------------------------------- Year-end position (in thousands) Cash and cash equivalents $ 8,965 4,015 6,172 3,037 4,105 Working capital $ 7,723 12,482 17,855 10,495 10,981 Net property and equipment $ 5,661 8,171 12,664 11,307 10,564 Total assets $ 29,450 39,446 43,790 36,610 33,029 Long-term debt $ - 24,229 30 124 6,280 Long-term liabilities $ 10,119 6,591 7,297 5,872 4,178 Stockholders' equity (deficit) $ 7,482 (3,190) 29,066 19,802 15,077 - ------------------------------------------------------------------------------------------------------------- Per share data (Note 2) Net income (loss): Basic - continuing operations $ 0.94 0.77 1.16 1.00 0.76 Diluted - continuing operations $ 0.94 0.75 1.09 0.99 0.76 Basic - discontinued operations $ 9.27 (0.41) 0.79 0.42 (2.03) Diluted - discontinued operations $ 9.26 (0.41) 0.74 0.42 (2.03) Basic $ 10.21 0.36 1.95 1.42 (1.27) Diluted $ 10.20 0.35 1.83 1.41 (1.27) Stockholders' equity (deficit) $ 2.29 (1.05) 9.91 6.77 5.16 Market price range (Note 3): High $ 30.46 28.71 20.23 8.17 7.14 Low $ 15.70 15.46 7.52 4.30 4.27 Cash dividends declared $ 8.00 12.75 - - - - ------------------------------------------------------------------------------------------------------------- Other data (in thousands except stockholder & employee data) (Note 2) Orders on hand $ 11,549 20,452 15,077 24,424 19,494 Average shares outstanding - basic 3,265 3,048 2,932 2,926 2,923 Average shares outstanding - diluted 3,269 3,151 3,122 2,948 2,923 Average number of common stockholders 1,265 1,314 1,414 1,465 1,516 Average number of employees 130 130 136 134 129 Note 1: The summary of operations has been adjusted to reflect the sale of the Company's Samuel Bingham Enterprises, Inc. subsidiary in December 2004 and NP Aerospace Ltd. in November 2005. Note 2: All share information presented has been adjusted for the Company's 10% stock dividends in 2003, 2002 and 2001. Note 3: Market prices in 2005 and 2004 have been adjusted for the Company's extraordinary dividends of $6.00 per share declared in November 2005 and $11.75 per share declared in December 2004.
1 A Message from the President In our Message last year we reported that 2004 was the most eventful year in the history of our company. Now, in describing our performance in 2005, I can report to you that the salutary effect of those events has been a significant boon to long-term shareholder values and has presaged an event of even greater moment for the stockholders of Reinhold. On November 21, 2005, on the virtual eve of the strongest sales and earnings performance in our history, we sold our NP Aerospace subsidiary to The Carlyle Group. The price was (pound) 28.7 million British Pounds Sterling ($51 million U.S. Dollars). The divestiture of any valuable asset, whether it be real property, or stocks, or bonds, or insurance, or precious metals, can be an ambivalent experience. There may be families to consider. If it is a company, there will be employees. There may be stockholders. There may be directors. There will be emotions. During any transaction, everyone and everything will age and change. From the day of its acquisition in May of 1998, the management team of NP Aerospace happily accommodated itself to the philosophy and management structure of Reinhold. In that relationship, affinity has been a constant. Perhaps it is the roots. They run deep. It was 1928 when F.E. and L.W. Reinhold founded Reinhold Engineered Plastics to make products of new, synthetic materials. Two years earlier, in 1926, thousands of miles away, the progenitor of NP Aerospace had already begun to make products from synthetic materials closely akin to those employed by Reinhold. 2 (FACING PAGE ILLUSTRATION) A Message from the President (Continued) Whether by happenstance or destiny we do not know, but 70 plus years later, these two companies were drawn together by a common product, significantly strong, light weight, versatile, and inevitable: composite aircraft seatback structures. By more than that, however, they seemed drawn by some peculiar affinity. Indeed, they seemed to be meant for each other. So Reinhold proposed, and Courtaulds said yes, and Reinhold Industries, Inc. purchased NP Aerospace from Courtaulds Aerospace, Ltd. in Coventry, West Midlands, England in 1998. It was the quality and variety of NP Aerospace's defense-oriented product lines that attracted The Carlyle Group. They divide their diverse holdings into 10 categories, and Aerospace/Defense is number one on that list. Their avowed goal is to expand NP Aerospace into a player in the worldwide marketplace. NP Aerospace has been a valuable asset to Reinhold. Our management teams matured in their collaboration, from the design and production of a new hybrid seatback to the creation of NP Aerospace Jordan in 2004. That collaboration exemplifies the maturity to which NP Aerospace management has acceded. In deciding to sell, your board was influenced by the affirmative response to this Reinhold criterion, which has long been a touchstone for our decision making: is this transaction in the best interests of our shareholders? Your board believes that it was, that the time was right, that its value was optimal, and that by any standard of measure, this was a good deal. 4 (FACING PAGE ILLUSTRATION) A Message from the President (Continued) A good deal is one that benefits all parties: the Buyer, The Carlyle Group; the Seller, Reinhold Industries; and the Employees of NP Aerospace. Of the $51 million realized from the sale, $25.8 million went to retire the loan that funded the special dividend of $11.75 per share in the fourth quarter of 2004; $19.5 million funded the special dividend of $6.00 per share on January 3, 2006; and $1.6 million funded the regular dividend of $0.50 per share paid in the fourth quarter of 2005. Any taxes owing will be paid by borrowing from our existing credit line. Anyone who acquired Reinhold stock before September of 2004 and retained it will have received the special dividend of $11.75 per share, another special dividend of $6.00 per share, and six quarterly dividends of $0.50 per share, a total of $20.75, and they will still own their stock. Now, we part, not sorrowfully, and with no little pride, but gratified to know that both companies, Reinhold Industries, Inc. and NP Aerospace, have benefited greatly from our union. Because of it, we are much stronger than we were when joined seven years ago. Today, our company is comprised of the nucleus created by the brothers Reinhold and three acquisitions: Reynolds and Taylor in 1992, CompositAir in 1994, and Edler Industries in 2001. All of these elements are a seamless part of one company now, fabricating from fibre-reinforced, thermosetting resin matrices three distinct lines of products serving three industrial markets: Aerospace/Defense, Aircraft Seating Products, and Commercial Sheet Molding Compounds and Molding. That is a powerful bond, symbolically and literally. 6 (FACING PAGE ILLUSTRATION) A Message from the President (Continued) Net sales for Reinhold Industries for 2005 amounted to $32.6 million, just slightly ahead of 2004, and pre-tax earnings were $4.3 million, or 13% of sales. After-tax earnings from continuing operations were $3.1 million. In our 2005 Statement of Operations, $30.3 million is identified as Income from discontinued operations. That, combined with $3.1 million after-tax earnings from continuing operations, accounts for $33.3 million in Net income for the year. Income from our Santa Fe Springs Aerospace product line fell short of our record sales and earnings in 2004, but it was still an excellent year with pre-tax earnings of $6.3 million on sales of $22.8 million, or 28%. Minuteman update. ATK Thiokol has informed us that they intend to enter a warm-line program that will provide for the re-furbishment of small quantities of motors per year after the current contract expires in 2008. The new contract is scheduled to run from 2009 through 2015, and Reinhold will produce the same parts that we now produce. The Commercial Sheet Molding Compounds and Molding products line earned $0.3 million before taxes on sales of $3.5 million, or 9%. This product line has never failed to make a profit, and gross sales have risen at a consistent rate for the past eight years. Sales and earnings for the Aircraft Seating Products line went into decline in 2001, hitting bottom in 2004 with sales of $4.7 million and a loss of 8 (FACING PAGE ILLUSTRATION) A Message from the President (Continued) $0.8 million. Recovery was underway in 2005 but was too late to have much effect. Sales crept up to $6.2 million, and the loss declined to $0.7 million. However, we have won two major contracts that are now in production. One is for our largest customer, who needed a quick turnaround that we were able to meet, and the other is from a new customer whose business we had been soliciting for 18 years without success. In the past, this customer depended exclusively on aluminum seatbacks of their own manufacture. Now, in response to an industry-wide mandate by aircraft manufacturers for a 15% reduction in the weight of interiors for new aircraft models, they are switching to composite seatbacks. We expect the move from aluminum to composites to affect more than seatbacks in the future. We are working with our principal customers on designs that utilize composites for seat pans, arms, legs, spreaders, frames, and beams as well. As recently as 2001, aluminum accounted for 70% and composites 30% of the worldwide seatback market. Those ratios will not change immediately, but when they do, they will change to our advantage. For another beneficent year, we are grateful to our customers, our employees, and our suppliers. /s/ Michael T. Furry Michael T. Furry President, CEO, and Director 10 (FACING PAGE ILLUSTRATION) Reinhold Industries, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Reinhold Industries, Inc. (Reinhold or the Company) is a manufacturer of advanced custom composite components and sheet molding compounds for a variety of applications in the United States and Europe. The Company generates revenues from three operating segments: Aerospace, Seating Products and Commercial. 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. Seating Products produces components for the commercial aircraft seating industry. The Commercial segment produces lighting housings and pool filter tanks. Products are marketed by company sales personnel and sales representatives in the United States. Our business, financial condition, results of operations and cash flows may be affected by known and unknown risks, uncertainties and other factors. Any of these risks, uncertainties and other factors could cause the Company's future financial results to differ materially from recent financial results or from currently anticipated future financial results. In addition to those noted elsewhere in this report, the Company is subject to the following risks and uncertainties: Our markets are cyclical, leading to periodic declines in sales. The markets in which we sell our products are cyclical and have experienced periodic declines. Our sales are, therefore, unpredictable and tend to fluctuate based on a number of factors, including economic conditions and developments affecting the aerospace industry and the customers served. Although the market for our products sold for new commercial aircraft production currently appears to be experiencing a slight improvement, any downturn in commercial aircraft production could have a negative impact on our business, financial condition and operating results. We are dependent on a limited number of customers, which makes us vulnerable to the continued relationship with and financial health of those customers. Because a substantial portion of our business has been as a supplier to government contractors, we depend on a limited number of customers with which we do significant amounts of business. Our future prospects will depend on the continued business of such customers and on our continued status as a qualified supplier to such customers. We cannot guarantee that our current significant customers will continue to buy products from us at current levels. The loss of a key customer could have a material adverse effect on us. We compete with many companies that have greater financial, technical and operating resources than we do, and with whom we may not be able to compete successfully. We compete with many companies in the sale of ablative and structural composite products. The markets we serve are specialized and competitive. Several of our competitors have greater financial, technical and operating resources than we do. We cannot assure you that we will be able to continue to manufacture and sell our products profitably in competitive markets. Our products and processes are subject to risks from changes in technology. Our products and processes are subject to risks of obsolescence as a result of changes in technology. To address this risk, we invest in product design and development, and in capital expenditures. We cannot guarantee that our product design and development efforts will be successful, or that the amounts of money required to be invested for product design and development and capital expenditures will not increase materially in the future. Goodwill could be impaired in the future. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," we assess the fair value and recoverability of our long-lived assets, including goodwill. We make assessments whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from the asset's use and eventual disposition. In doing so, we make assumptions and estimates regarding future cash flows and other factors to make our determination. The fair value of our long-lived assets and goodwill is dependent upon the forecasted performance of our business and the overall economic environment. When we determine that the carrying value of our 13 Reinhold Industries, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) long-lived assets and goodwill may not be recoverable, we measure any impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, we may have to record additional impairment charges not previously recognized. In assessing the recoverability of our goodwill at December 31, 2005, we were required to make certain critical estimates and assumptions. These estimates and assumptions included that during the next several years we would make improvements in manufacturing efficiency, achieve reductions in operating costs, and obtain increases in sales and backlog. If any of these or other estimates and assumptions are not realized in the future, the Company may be required to record an impairment charge for the goodwill. The goodwill of the Company was $2,521,000 at December 31, 2005. Significant consolidation in the aerospace industry could adversely affect our business and financial results. The aerospace industry is experiencing significant consolidation, including among our customers, competitors and suppliers. Consolidation among our customers may result in delays in the award of new contracts and losses of existing business. Consolidation among our competitors may result in larger competitors with greater resources and market share, which could adversely affect our ability to compete successfully. Consolidation among our suppliers may result in fewer sources of supply and increased cost to us. Our manufacturing operations may be adversely affected by the availability and increases in prices of raw materials and components. The failure of our suppliers to deliver on a timely basis raw materials and components to us, and increases in the prices of raw materials, may adversely affect our results of operations and cash flows. 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 our 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 used in our ablative applications. We cannot assure you that these developments will not have a significant impact on price or supply. Product liability claims in excess of insurance could adversely affect our financial results and financial condition. We face potential liability for personal injury or death as a result of the failure of products designed or manufactured by us. Although we maintain product liability insurance, any material product liability not covered by insurance could have a material adverse effect on our financial condition, results of operations and cash flows. Damage or destruction of our facilities caused by earthquake or other causes could adversely affect our financial results and financial condition. Although we maintain standard property casualty insurance covering our properties, we do not carry any earthquake insurance because of the cost of such insurance. Our main property is located in California, an area subject to frequent and sometimes severe earthquake activity. Even if covered by insurance, any significant damage or destruction of our facilities could result in the inability to meet customer delivery schedules and may result in the loss of customers and significant additional costs to us. As a result, any significant damage or destruction of our properties could have a material adverse effect on our business, financial condition or results of operations. Critical Accounting Policies The Company's consolidated financial statements and related public financial information are based on the application of U.S. generally accepted accounting principles ("GAAP"). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in the external disclosures of the Company including information regarding contingencies, risk and financial condition. The Company believes its use of estimates and underlying accounting assumptions adhere to generally accepted accounting principles and are consistently and conservatively applied. Valuations based on estimates are reviewed for reasonableness and conservatism on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenues, receivables, 14 Reinhold Industries, Inc. inventories, acquisitions, valuation of long-lived and intangible assets, pension and post-retirement benefits, the realizability of deferred tax assets, and foreign exchange translation. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. Revenue Recognition and Allowance for Doubtful Accounts The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. Allowance for doubtful accounts is estimated based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have a material effect on reserve balances required. Inventories The Company values its inventories at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The Company writes down its inventory for estimated obsolescence equal to the cost of the inventory. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations. Fair Value of Assets Acquired and Liabilities Assumed in Purchase Combinations The purchase combinations carried out by the Company require management to estimate the fair value of the assets acquired and liabilities assumed in the combinations. These estimates of fair value are based on our business plan for the entities acquired including planned redundancies, restructuring, use of assets acquired and assumptions as to the ultimate resolution of obligations assumed for which no future benefit will be received. Should actual use of assets or resolution of obligations differ from our estimates, revisions to the estimated fair values would be required. If a change in estimate occurs after one year of the acquisition, the change would be recorded in our statement of operations. Pensions and Post-Retirement Benefits The valuation of the Company's pension and other post-retirement plans requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. These assumptions include discount rates, investment returns, projected salary increases and benefits, and mortality rates. The actuarial assumptions used in the Company's pension reporting are reviewed annually and compared with external benchmarks to assure that they accurately account for our future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on the Company's pension expenses and related funding requirements. Valuation of Long-lived and Intangible Assets In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," the Company assesses the fair value and recoverability of its long-lived assets, including goodwill, whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. In doing so, the Company makes assumptions and estimates regarding future cash flows and other factors to make our determination. The fair value of the Company's long-lived assets and goodwill is dependent upon the forecasted performance of its business and the overall economic environment. When the Company determines that the carrying value of our long-lived assets and goodwill may not be recoverable, it measures any impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, the Company may have to record additional impairment charges not previously recognized. 15 Reinhold Industries, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Discontinued Operations During the three months ended September 30, 2004, management committed to a plan of action to sell its wholly-owned subsidiary, Samuel Bingham Enterprises, Inc. The decision to sell was based on continuing losses from operations and a negative long-term outlook in the marketplaces this subsidiary serves. On September 30, 2004, management determined that the plan of sale criteria in FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," had been met. Accordingly, the carrying value of its fixed assets was adjusted to fair value less costs to sell and goodwill was determined to be impaired in accordance with the criteria of FASB No 142. Fair value was determined based on the highest offer received from several potential strategic suitors. The resulting $5.7 million impairment charge was included in "Loss on discontinued operations" in the statement of operations. On December 17, 2004, Samuel Bingham Enterprises, Inc. sold certain assets and transferred certain liabilities to Finzer Roller, L.L.C. for $3.1 million in cash, subject to post-closing adjustments. The assets sold included accounts receivable, inventories, prepaid expenses, equipment, real property, tangible personal property, intellectual and other intangible property. Liabilities transferred include accounts payable, accrued expenses and defined benefit pension plan obligations. The purchase price was reduced by $0.3 million during the first quarter 2005 to $2.8 million based on the final computation of closing date working capital. The purchase price adjustment has been reflected in the December 31, 2004 financial statements. In 2005, an additional $258,000 of costs associated with the disposal of Samuel Bingham Enterprises, Inc. were incurred. These costs were primarily related to adjustments of workers compensation reserves. On November 21, 2005, the Company sold 100% of the capital stock of its wholly-owned subsidiary, NP Aerospace Ltd., to The Carlyle Group ("TCG") for $53.2 million, subject to a post-closing working capital adjustment. TCG required that NP Aerospace be cash free, free of all debt and delivered with a normal level of working capital. The purchase price was reduced by $2.3 million during the first quarter 2006 to $50.9 million based on the final computation of closing date working capital. The purchase price adjustment has been reflected in the December 31, 2005 financial statements. The sales of Samuel Bingham Enterprises, Inc. and NP Aerospace Ltd. meet the criteria defined in FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" as discontinued operations and are presented herein as such. Operating results of the discontinued operations for the years ended December 31, 2005, 2004 and 2003 are summarized as follows (in thousands): 2005 2004 2003 - -------------------------------------------------------------------------------- Net sales $ 42,458 40,583 36,023 - -------------------------------------------------------------------------------- Income from operations 6,952 3,858 3,560 Impairment loss - (5,692) - Interest expense (1,300) - - Additional gain (loss) on sale 43,117 (465) - Tax benefit (expense) (18,513) 1,048 (1,250) - -------------------------------------------------------------------------------- Income (loss) on discontinued operations $30,256 (1,251) 2,310 Income Taxes The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. Cumulative Foreign Exchange Translation Accounting In preparing our consolidated financial statements, the Company is required to translate the financial statements of NP Aerospace from the currency in which it keeps its accounting records, the British Pound Sterling, into United States dollars. This process results in exchange gains and losses which are either included within the statement of operations or as a separate part of net equity under the caption "foreign currency translation adjustment." Under the relevant accounting guidance, the treatment of these translation gains or losses is dependent upon management's determination of the functional currency of NP Aerospace. 16 Reinhold Industries, Inc. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures would be considered the functional currency but any dependency upon the parent and the nature of the subsidiary's operations must also be considered. If any subsidiary's functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is included in cumulative translation adjustments. However, if the functional currency is deemed to be the United States dollar then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. Based on our assessment of the factors discussed above, the Company considers NP Aerospace's local currency to be the functional currency. Accordingly, the Company recorded foreign currency translation gains of approximately $1,021,000 and $346,000 that were included as part of "accumulated other comprehensive loss" within its balance sheet at December 31, 2004 and December 31, 2003, respectively. On November 21, 2005, the Company sold 100% of the capital stock of NP Aerospace Ltd., to The Carlyle Group ("TCG"). In conjunction with the sale, foreign currency transactions that were previously included as part of "accumulated other comprehensive loss" in the balance sheet were recognized in the income statement as a component of discontinued operations. Accounting for Investment in Majority Owned Subsidiary In August 2004, NP Aerospace Ltd. ("NPA"), the Company's wholly-owned U.K. subsidiary, and King Abdullah II Design and Development Bureau ("KADDB"), a Jordanian company, entered into a joint venture agreement to establish a composites manufacturing facility in the country of Jordan. NP Aerospace Jordan WLL ("NPAJ"), a Jordanian limited liability company, was created as a result of the agreement. NPAJ is owned 51% by NPA and 49% by KADDB. In accordance with SFAS 94, " Consolidation of All Majority-Owned Subsidiaries," the Company is required to consolidate all majority-owned subsidiaries unless control is temporary or does not rest with the majority owner. This Statement requires consolidation of a majority-owned subsidiary even if it has "nonhomogeneous" operations, a large minority interest, or a foreign location. As of December 31, 2004, the financial statements of NPAJ were consolidated into the financial statements of NP Aerospace. On November 21, 2005, NPAJ was sold to TCG as a component of the NPA sale. Property and Equipment The Company depreciates property and equipment principally on a straight-line basis over estimated useful lives. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.When property is sold or otherwise disposed of, the asset cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of operations. Maintenance and repairs are expensed as incurred. Improvements which significantly increase the useful life of the asset are capitalized. Environmental Liabilities With respect to outstanding actions that are in preliminary procedural stages, as well as any actions that may be filed in the future, insufficient information exists upon which judgments can be made as to the validity or ultimate disposition of such actions, thereby making it difficult to reasonably estimate what, if any, potential liability or costs may be incurred. Accordingly, no estimate of future liability has been included for such claims. See note 9 of the accompanying consolidated financial statements for additional discussion of legal proceedings. Stock Based Compensation The Company accounts for its stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25), and has adopted the disclosure-only alternative of SFAS No. 123 "Accounting For Stock-Based Compensation" (SFAS 123), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Translation and Disclosure." 2005 Compared with 2004 Backlog at December 31, 2005 was $11.5 million, down 44% from December 31, 2004, due primarily to a delay in the receipt of new orders for the Minuteman III Propulsion Replacement Program. In 2005, order input decreased by $14.0 million to $23.7 million due primarily to the delay of new orders for the Minuteman III Propulsion Replacement Program and the completion of a multi year order for composite structures related to the Space Shuttle program. Total net sales increased by 1% to $32.6 million from $32.2 million in 2004. Sales decreased by $1.4 million (6%) for the Aerospace business 17 Reinhold Industries, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) unit compared to 2004 due primarily to the completion of a multi year order for composite structures related to the Space Shuttle program. Sales for the Seating Products business unit increased by $1.5 million (32%) due to the addition of a new customer and improving economic conditions in the airline marketplace. Sales for the Commercial business unit increased by $0.3 million (8%) due primarily to higher selling prices for all products. Gross profit margin decreased to 37.6% from 40.2% due primarily to unfavorable product mix. Gross profit margin from Aerospace decreased to 45.5% from 47.6% due primarily to the completion of higher margin business related to the Space Shuttle program in 2004. Gross profit margin from Seating Products increased to 14.4% from 10.3% due to higher sales and the resulting absorption of manufacturing overhead expenses. Gross profit margin from Commercial decreased to 27.9% from 28.8% due to unfavorable product mix . In 2005, selling, general and administrative expenses were $8.0 million (24.3% of sales) compared with $7.3 million (22.8% of sales) in 2004. The increase is due to higher costs related to product development, employee recruiting, travel, marketing brochures and additional sales headcount. In 2005, net interest income decreased to zero from $7 thousand due to outstanding indebtedness to LaSalle bank. Income before income taxes was $4.3 million or 13.1% of sales in 2005 and $5.6 million or 17.4% of sales in 2004. Income before income taxes at the Aerospace business unit decreased to $6.3 million (27.6% of sales) in 2005 from $7.8 million (32.2% of sales) in 2004 due to lower sales and unfavorable product mix. A loss before income taxes for Seating Products of $0.7 million (-11.1% of sales) was realized in 2005 compared to a loss before income taxes of $0.8 million ( -17.5% of sales) in 2004 due to higher sales. Income before income taxes for the Commercial business unit was flat at $0.3 million, 9.4% of sales in 2005 and 10.5% of sales in 2004. A tax provision of $1.2 million was recorded in 2005 compared with a provision of $3.3 million in 2004 due to a lower effective tax rate. The effective tax rate in 2005 was 28.1% as compared to 58.0% in 2004 due to the utilization of foreign tax credits. At December 31, 2005, the Company utilized its entire net operating loss carryforward for Federal income tax purposes of approximately $35.4 million primarily to offset the gain associated with the sale of NP Aerospace. During 2004, the Company deducted a $10.6 million payment on its federal and state income tax returns associated with the settlement of bankruptcy related litigation between Bairnco and the Keene Creditors Trust. However, the federal and state tax benefit of this deduction approximating $4.2 million has not been included in the statement of operations and is accounted for on the balance sheet under the heading "Other long-term liabilities." Future domestic taxable income totaling approximately $6.1 million must be generated in order to realize net deferred tax assets at December 31, 2005. Net income from continuing operations totaled $3.1 million, or $0.94 per diluted share in 2005 compared with $2.4 million, or $0.75 per diluted share in 2004. Liquidity and Capital Resources As of December 31, 2005, working capital was $7.7 million, down $4.8 million from December 31, 2004. Cash and cash equivalents of $9.0 million held at December 31, 2005 were $5.0 million higher than cash and cash equivalents held at December 31, 2004 due primarily to the proceeds received from the sale of NP Aerospace less dividends paid by the Company. Net cash provided by operating activities amounted to $9.2 million in 2005 and $7.5 million in 2004. Excluding the cash flows from discontinued operations, net cash provided by operating activities amounted to $17.2 million in 2005 and $4.1 million in 2004. The increase over the prior period relates primarily to the realization of deferred tax benefits and accrued income taxes on the sale of NP Aerospace ($11.3 million) and the realization of tax benefits on accumulated other comprehensive loss items ($1.8 million). Cash flows used in discontinued operations in 2005 of $8.1 million consist primarily of the gain on sale of NP Aerospace ($43.1 million) offset by the accrued sales price adjustment ($2.3 million) and operating cash flows through November 21, 2005. Cash flows provided by discontinued operations in 18 Reinhold Industries, Inc. 2004 of $3.4 million were operating cash flows from Bingham and NP Aerospace ($2.9 million) and the loss on disposal of Bingham ($0.5 million). Net cash provided by investing activities totaled $50.5 million in 2005 consisting of capital expenditures of $0.4 million offset by the cash provided by discontinued operations of $50.9 million. Cash flows provided by discontinued operations in 2005 consisted of the net proceeds received from the sale of NP Aerospace of $51.0 million, the write-off of loan fees of $0.6 million offset by capital expenditures of $0.6 million. Net cash provided by investing activities in 2004 totaled $1.4 million consisting of capital expenditures of $0.6 million offset by the cash flows provided by discontinued operations of $2.1 million. Cash flows provided by discontinued operations in 2004 consisted of the net proceeds received on the sale of Bingham of $3.1 million offset by loan fees associated with the LaSalle credit facility totalling $0.6 million and capital expenditures of $0.4 million. Net cash used in financing activities in 2005 totaled $54.7 million, consisting of the proceeds from the exercise of employee stock options ($0.3 million), dividends paid to shareholders ($26.3 million) and cash flows used in discontinued operations of $28.7 million. The cash flows used in discontinued operations in 2005 of $28.7 million consisted of proceeds on long-term debt from LaSalle Bank ($0.6 million) and the subsequent payoff of the entire outstanding debt with LaSalle ($29.3 million). Net cash used in financing activities in 2004 totaled $11.1 million, consisting of the proceeds from exercise of employee stock options ($1.9 million), the payment of dividends to shareholders ($41.5 million) offset by cash flows provided by discontinued operations of $28.5 million. Cash flows provided by discontinued operations in 2004 of $28.5 million consisted of proceeds on long term debt from LaSalle Bank ($31.5 million) offset by the repayment of long term debt and capital leases ($3.0 million). The Company does not have any current significant commitments for capital expenditures at December 31, 2005. The Company believes that its current working capital of $7.7 million, the available line of credit, and anticipated working capital to be generated by future operations will be sufficient to support the Company's working capital requirements through at least December 31, 2006. The Company does not have any material future commitments for capital expenditures, debt service or working capital requirements that would impair its liquidity on a long-term basis. Contingent commercial commitments at December 31, 2005 are as follows (in thousands): Description Total amount Amount Outstanding Expiration date - ------------------------------------------------------------------------------- Credit facility $10,000 $600 12/08/2009 - ------------------------------------------------------------------------------- Contractual obligations The following is a summary of contractual obligations at December 31, 2005 (in thousands):
Payments due by period ----------------------------------------------------------------- Less than 1 - 3 3 - 5 More than 5 Contractual obligation Total 1 year Years Years Years - ----------------------------------------------------------------------------------------------------------------------------- Operating lease obligations $ 8,493 791 2,272 2,284 3,146 - ----------------------------------------------------------------------------------------------------------------------------- Purchase obligations 2,030 2,030 - - - - ----------------------------------------------------------------------------------------------------------------------------- Pension plan obligation* 2,537 1,353 1,184 - - - ----------------------------------------------------------------------------------------------------------------------------- Total $13,060 4,174 3,456 2,284 3,146 * = Cash contributions to the plan after 2008 are indeterminable.
2004 Compared with 2003 Backlog at December 31, 2004 was $20.5 million, up 36% from December 31, 2003, due primarily to the timing of new orders related to the Minuteman III Propulsion Replacement Program.. In 2004, order input increased 77% to $37.8 million. Total net sales increased by 4% to $32.2 million from $31.0 million in 2003. Sales increased by $2.0 million (9%) for the Aerospace business unit compared to 2003 due primarily to increased shipments of composite structures related to the Space Shuttle program. Sales for the Seating Products business unit decreased by $0.5 million (11%) due to economic problems in the commercial airline industry. Sales for the Commercial business unit decreased by $0.2 million (6%) due primarily to decreased shipments of pool heater covers. Gross profit margin increased to 40.2% from 37.8% due primarily to favorable product mix in the Aerospace business segment. Gross profit margin from Aerospace increased to 47.3% 19 Reinhold Industries, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) from 44.8% due primarily to favorable product mix related to the Space Shuttle program. Gross profit margin from Seating Products decreased to 10.3% from 20.5% due to lower sales and the resulting underabsorption of fixed overhead costs. Gross profit margin from Commercial increased to 28.8% from 19.3% due to lower manufacturing overhead costs and higher labor efficiencies. In 2004, selling, general and administrative expenses were $7.3 million (22.8% of sales) compared with $6.2 million (20.0% of sales) in 2003. The increase is due to higher pension related expenses,management incentive compensation costs, additional sales headcount, professional fees related to the potential sale of the Company and higher costs of public company compliance. In 2004, net interest income was approximately unchanged from 2003 at $7 thousand. Income before income taxes was $5.6 million or 17.4% of sales in 2004 and $5.5 million or 17.9% of sales in 2003. Income before income taxes at the Aerospace business unit increased to $7.8 million (32.2% of sales) in 2004 from $6.9 million (30.1% of sales) in 2003 due to higher sales and favorable product mix. A loss before income taxes for Seating Products of $0.8 million (-17.5% of sales) was realized in 2004 compared to a loss before income taxes of $0.3 million in 2003 (-5.5% of sales) due to lower sales, higher manufacturing overhead costs and higher selling and general and administrative expenses. Income before income taxes for the Commercial business unit increased to $0.3 million (10.5% of sales) from $0.1 million (2.0% of sales) due to higher average selling prices and lower overhead expenses A tax provision of $3.3 million was recorded in 2004 compared with a provision of $2.1 million in 2003 due to higher income before income taxes and a higher effective tax rate. The effective tax rate in 2004 was 58.0% as compared to 38.3% in 2003 due to additional federal income taxes recorded on repatriated U.K. earnings and the inability to utilize foreign tax credits. At December 31, 2004 and 2003, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $23.9 million and $20.6 million, respectively. The Company may utilize the federal net operating losses by carrying them forward to offset future federal taxable income, if any. Benefits realized from loss carryforwards and deductible temporary differences arising prior to the reorganization have been recorded directly to additional paid-in capital. Such benefits amounted to $3.5 million in 2004 and $4.1 million in 2003. Future domestic taxable income totalling approximately $15.2 million must be generated in order to realize net deferred tax assets at December 31, 2004. Net income from continuing operations totaled $2.4 million, or $0.75 per diluted share in 2004 compared with $3.4 million, or $1.09 per diluted share in 2003. Liquidity and Capital Resources As of December 31, 2004, working capital was $12.5 million, down $5.4 million from December 31, 2003. Cash and cash equivalents of $4.0 million held at December 31, 2004 were $2.2 million lower than cash and cash equivalents held at December 31, 2003 due primarily due to the increased dividends paid by the Company. Net cash provided by operating activities amounted to $7.5 million in 2004 and $5.9 million in 2003. Excluding the cash flows from discontinued operations, net cash provided by operating activities amounted to $4.1 million in 2004 and $4.5 million in 2003. The decrease over the prior period relates primarily to lower net income offset by improved working capital management. Cash flows provided by discontinued operations in 2004 of $3.4 million were operating cash flows from Bingham and NP Aerospace ($2.9 million) and the loss on disposal of Bingham ($0.5 million). Cash flows provided by discontinued operations in 2003 of $1.3 million were operating cash flows from Bingham and NP Aerospace. Net cash provided by investing activities in 2004 totaled $1.4 million consisting of capital expenditures of $0.6 million offset by the cash flows provided by discontinued operations of $2.1 million. Cash flows provided by discontinued operations in 2004 consisted of the net proceeds received on the sale of Bingham of $3.1 million offset by loan fees associated with the LaSalle credit facility totalling $0.6 million and capital expenditures of $0.4 million. Net cash used in investing activities in 2003 totaled $2.6 20 Reinhold Industries, Inc. million consisting of capital expenditures of $1.9 million and cash flows used in discontinued operations of $0.7 million. Cash flows used in discontinued operations in 2003 consisted of the net proceeds received on sales of assets of $0.5 million offset by capital expenditures of $1.2 million. Net cash used in financing activities in 2004 totaled $11.1 million, consisting of the proceeds from exercise of employee stock options ($1.9 million), the payment of dividends to shareholders ($41.5 million) offset by cash flows provided by discontinued operations of $28.5 million. Cash flows provided by discontinued operations in 2004 of $28.5 million consisted of proceeds on long term debt from LaSalle Bank ($31.5 million) offset by the repayment of long term debt and capital leases ($3.0 million). Net cash used in financing activities in 2003 totaled $0.1 million consisting primarily of cash flows used in discontinued operations. Cash flows used in discontinued operations in 2003 of $0.1 million consisted primarily of the repayment of debt. The Company does not have any current significant commitments for capital expenditures at December 31, 2004. The Company believes that its current working capital of $12.5 million, the available line of credit, and anticipated working capital to be generated by future operations will be sufficient to support the Company's working capital requirements through at least December 31, 2005. Change in Control On May 21, 1999, pursuant to a Stock Purchase Agreement dated May 18, 1999, between Keene Creditors' Trust, the holder of all of the outstanding shares of the Class B Common Stock of the Company and Reinhold Enterprises, Inc., a newly formed Indiana corporation ("REI"), the Creditors' Trust sold 997,475 shares of Class B Common Stock owned by it to certain purchasers designated by REI (the "Purchasers"). These shares represented approximately 49.9% of the outstanding common stock of the Company. The sale of shares to the Purchasers constitutes an "ownership shift" within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended. Section 382 limits the utilization of net operating loss carryforwards upon certain accumulations of stock of corporate issuers. Additional purchases of shares by the Purchasers prior to May 22, 2002, or purchases of shares by other shareholders that result in those shareholders owning more than 5% of the outstanding Common Stock of the Company prior to May 22, 2002, may have resulted in significant limitations on the Company's ability to utilize its net operating loss carryforwards to offset its future income for federal income tax purposes. Between May 21, 1999 and May 22, 2002, no additional purchases of shares were made by the Purchasers or by other shareholders that resulted in those shareholders owning more than 5% of the outstanding Common Stock of the Company. Recent Accounting Pronouncements In December 2003, the FASB revised Statement No. 132 (FAS 132R), "Employers' Disclosure about Pensions and Other Postretirement Benefits." FAS 132R expands employers' disclosure requirements for pension and postretirement benefits to enhance information about plan assets, obligations, benefit payments, contributions and net benefit cost. FAS 132R does not change the accounting requirements for pensions and other postretirement benefits. This statement is effective for fiscal years ending after December 15, 2003, and the Company has included these disclosures in note 7 to its consolidated financial statements. In November 2004, the FASB revised Statement No. 151 (FAS 151) "Inventory Costs, an amendment of ARB No. 43, Chapter 4." FAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The impact to the Company has determined to be immaterial. In December 2004, the FASB revised Statement No. 123 (FAS 123R), "Share-Based Payment." FAS 123R requires all share-based 21 Reinhold Industries, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for public entities (excluding small business issuers) in the first interim or annual reporting period beginning after June 15, 2005. The impact to the Company has determined to be immaterial. Legal Proceedings On August 11, 2000, the Environmental Protection Agency ("EPA") notified the Company 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 a site formerly known as the Casmalia Resources Hazardous Waste Management Facility, located in Santa Barbara County, California ("Casmalia Site"). The EPA has designated the Company as a "de minimis" waste generator at this site, based on the amount of waste at the Casmalia Site attributed to the Company. The Company is not currently a party to any litigation concerning the Casmalia Site, and based on currently available data, the Company believes that the Casmalia Site is not likely to have a material adverse impact on the Company's consolidated condensed financial position or results of operations. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's financial position, results of operations, or liquidity. Forward Looking Statements This Annual Report contains statements which, to the extent that they are not recitations of historical fact, constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). The words "estimate," "anticipate," "project," "intend," "expect," and similar expressions are intended to identify forward looking statements. All forward looking statements involve risks and uncertainties, including, without limitation, statements and assumptions with respect to future revenues, program performance and cash flow. Readers are cautioned not to place undue reliance on these forward looking statements which speak only as of the date of this Annual Report. The Company does not undertake any obligation to publicly release any revisions to these forward looking statements to reflect events, circumstances or changes in expectations after the date of this Annual Report, or to reflect the occurrence of unanticipated events. The forward looking statements in this document are intended to be subject to safe harbor protection provided by Sections 27A of the Securities Act and 21E of the Exchange Act. 22 Reinhold Industries, Inc. Consolidated Statements of Operations (Amounts in thousands, except for per share data) YEARS ENDED DECEMBER 31, 2005 2004 2003 - -------------------------------------------------------------------------------- Net sales $32,559 32,231 30,978 Cost of sales 20,310 19,274 19,256 - -------------------------------------------------------------------------------- Gross profit 12,249 12,957 11,722 Selling, general and administrative expenses 7,968 7,336 6,193 - -------------------------------------------------------------------------------- Operating income 4,281 5,621 5,529 Interest income, net - 7 8 - -------------------------------------------------------------------------------- Income before income taxes 4,281 5,628 5,537 Income taxes 1,204 3,267 2,123 - -------------------------------------------------------------------------------- Income from continuing operations 3,077 2,361 3,414 Discontinued operations: Income from operation of discontinued segment 6,952 3,858 3,560 Impairment loss - (5,692) - Interest expense (1,300) - - Gain (loss) on disposition 43,117 (465) - Income tax benefit (expense) (18,513) 1,048 (1,250) - -------------------------------------------------------------------------------- Income (loss) on discontinued operations 30,256 (1,251) 2,310 - -------------------------------------------------------------------------------- Net income $33,333 1,110 5,724 Earnings (loss) per share: Basic - continuing operations $ 0.94 0.77 1.16 Diluted - continuing operations $ 0.94 0.75 1.09 Basic - discontinued operations $ 9.27 (0.41) 0.79 Diluted - discontinued operations $ 9.26 (0.41) 0.74 Basic $ 10.21 0.36 1.95 Diluted $ 10.20 0.35 1.83 - -------------------------------------------------------------------------------- Weighted average common shares outstanding: Basic 3,265 3,048 2,932 Diluted 3,269 3,151 3,122 Dividends per common share $ 8.00 12.75 - See accompanying notes to consolidated financial statements. 23
Reinhold Industries, Inc. Consolidated Balance Sheets (Amounts in thousands, except share data) December 31, 2005 December 31, 2004 - ------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 8,965 4,015 Accounts receivable (net of allowance for doubtful accounts of $15 and $15, respectively) 4,322 8,758 Inventories 3,167 8,214 Prepaid pension 2,312 1,278 Deferred taxes 411 1,312 Other prepaid expenses and current assets 395 721 - ------------------------------------------------------------------------------------------------------------- Total current assets 19,572 24,298 Property and equipment, at cost 14,803 18,079 Less accumulated depreciation and amortization 9,142 9,908 - ------------------------------------------------------------------------------------------------------------- Net property and equipment 5,661 8,171 Goodwill 2,521 2,521 Deferred taxes 1,671 3,851 Other assets 25 605 - ------------------------------------------------------------------------------------------------------------- $29,450 39,446 Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 1,890 4,030 Accrued expenses 2,417 3,091 Accrued income taxes 5,264 - Accrued sales price adjustment 2,278 261 Current installments of long term debt - 4,434 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 11,849 11,816 Long-term debt, less current installments - 24,229 Long-term pension liability 5,797 5,879 Minority interest - 409 Other long-term liabilities 4,322 303 Commitments and contingencies Stockholders' equity (deficit): Preferred stock - Authorized: 250,000 shares Issued and outstanding: None - - Common stock, $0.01 par value: Authorized: 4,750,000 shares Issued and outstanding: 3,288,867 and 3,251,222, respectively 33 32 Additional paid-in capital 4,209 1,371 Retained earnings 6,998 - Accumulated other comprehensive loss (3,758) (4,593) - ------------------------------------------------------------------------------------------------------------- Net stockholders' equity (deficit) 7,482 (3,190) - ------------------------------------------------------------------------------------------------------------- $29,450 39,446 See accompanying notes to consolidated financial statements.
24
Reinhold Industries, Inc. Consolidated Statements of Cash Flows (Amounts in thousands) YEARS ENDED DECEMBER 31, 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income from continuing operations $ 3,077 2,361 3,414 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,001 1,054 952 Additions to paid-in capital resulting from tax benefits 2,394 3,616 4,138 Reduction in accumulated other comprehensive loss resulting from tax benefits 1,774 - - Non-cash compensation 160 226 54 Changes in assets and liabilities: Accounts receivable, net 427 (1,651) 527 Inventories (363) 215 (457) Prepaid expenses and other current assets (871) 556 (465) Accounts payable 923 223 (1,046) Accrued income taxes 5,264 - - Accrued expenses 362 174 (316) Deferred tax assets 3,081 (2,923) (2,240) Other, net (12) 239 (15) Cash flows (used in) provided by discontinued operations (8,054) 3,387 1,309 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 9,163 7,477 5,855 Cash flows from investing activities: Capital expenditures (404) (642) (1,923) Cash flows provided by (used in) discontinued operations 50,905 2,083 (680) - ---------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 50,501 1,441 (2,603) Cash flows from financing activities: Proceeds from exercise of stock options 284 1,918 33 Dividends paid (26,335) (41,524) (9) Cash flows (used in) provided by discontinued operations (28,663) 28,531 (141) - ---------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (54,714) (11,075) (117) Net increase (decrease)in cash and cash equivalents 4,950 (2,157) 3,135 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 4,015 6,172 3,037 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $8,965 4,015 6,172 Supplementary disclosures of cash flow information - Cash paid during the year for: Income taxes - continuing operations $323 300 299 Income taxes - discontinued operations 2,061 1,935 837 Interest - continuing operations - - - Interest - discontinued operations 1,300 77 41 - ---------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
25
Reinhold Industries, Inc. Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Amounts in thousands, except share data) Common stock $0.01 par value Preferred Class A Shares Shares Amount - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 - 2,659,812 $27 Net income - - 10% stock dividend 265,418 2 Shares issued or reserved in conjunction with Director's Deferred Stock Plan 4,248 - Stock options exercised 5,723 - 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, 2003 - 2,935,201 $29 Net income - - Cash dividends paid and accrued - - Shares issued or reserved in conjunction with Director's Deferred Stock Plan 4,635 - Stock options exercised 311,386 3 Additions to paid-in capital resulting from tax benefits - - Decrease in additional pension liability in excess of unrecognized prior service cost - - Foreign currency translation adjustment - - - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2004 - 3,251,222 $32 Net income - - Cash dividends paid and accrued - - Shares issued or reserved in conjunction with Director's Deferred Stock Plan 2,808 - Stock options exercised 34,837 1 Additions to paid-in capital resulting from tax benefits - - Decrease in additional pension liability in excess of unrecognized prior service cost - - Foreign currency translation adjustment/other - - - ------------------------------------------------------------------------------------------------------------------------- Comprehensive income - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2005 - 3,288,867 $33 See accompanying notes to consolidated financial statements.
26
Reinhold Industries, Inc. Additional Paid-in Retained Accumulated Other Total Comprehensive Net Stockholders' Capital Earnings Comprehensive Loss Income (Loss) Equity (Deficit) - ------------------------------------------------------------------------------------------------------------------------- $21,213 $ 4,873 $(6,311) - $19,802 - 5,724 - 5,724 5,724 2,865 (2,876) - - (9) 54 - - - 54 33 - - - 33 4,138 - - - 4,138 - - (1,403) (1,403) (1,403) - - 727 727 727 - ------------------------------------------------------------------------------------------------------------------------- 5,048 - ------------------------------------------------------------------------------------------------------------------------- $28,303 $ 7,721 $(6,987) - $29,066 - 1,110 - 1,110 1,110 (32,692) (8,831) - - (41,523) 226 - - - 226 1,918 - - - 1,921 3,616 - - - 3,616 - - 1,210 1,210 1,210 - - 1,184 1,184 1,184 - ------------------------------------------------------------------------------------------------------------------------- 3,504 - ------------------------------------------------------------------------------------------------------------------------- $1,371 $ - $(4,593) - ($3,190) - 33,333 - 33,333 33,333 - (26,335) - - (26,335) 132 - - - 132 284 - - - 285 2,394 - - - 2,394 - - 1,856 1,856 1,856 28 - (1,021) (1,021) (993) - ------------------------------------------------------------------------------------------------------------------------- 34,168 - ------------------------------------------------------------------------------------------------------------------------- $ 4,209 $ 6,998 $(3,758) $7,482
27 Reinhold Industries, Inc. Notes to Consolidated Financial Statements December 31, 2005 1 Organization Description of Business Reinhold Industries, Inc. (Reinhold or the Company) is a manufacturer of advanced custom composite components and sheet molding compounds for a variety of applications in the United States and Europe. Reinhold derives revenues from the defense, aerospace, and other commercial industries. Chapter 11 Reorganization Reinhold was acquired by Keene Corporation (Keene) in 1984 and operated as a division of Keene until 1990, when Reinhold was incorporated in the state of Delaware as a wholly-owned subsidiary of Keene. On December 3, 1993, Keene filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code) in the United States Bankruptcy Court (Bankruptcy Court). Keene's Chapter 11 filing came as a direct result of the demands on Keene of thousands of asbestos-related lawsuits which named Keene as a party. On July 31, 1996 (the Effective Date), Keene consummated its Plan of Reorganization under the Bankruptcy Code (the Plan) and emerged from bankruptcy. On the Effective Date, Reinhold was merged into and with Keene, with Keene becoming the surviving corporation. Pursuant to the merger, all of the issued and outstanding capital stock of Reinhold was canceled. Keene, as the surviving corporation of the merger, was renamed Reinhold. On the Effective Date, Reinhold issued 1,998,956 shares of Common Stock, of which 1,020,000 of Class B Common Stock was issued to the Trustees of a Creditors' Trust (the Creditors' Trust) set up to administer Keene's asbestos claims. The remaining 978,956 shares of Class A Common Stock were issued to Keene's former stockholders as of record date, June 30, 1996. All of Keene's previous outstanding Common Stock was canceled. The payments and distributions made to the Creditors' Trust pursuant to the terms and conditions of the Plan were made in complete satisfaction, release and discharge of all claims and demands against, liabilities of, liens on, obligations of and interest in Reinhold (Reorganized Company). On May 21, 1999, pursuant to a Stock Purchase Agreement, dated May 18, 1999, between the Creditors' Trust, the holder of all of the outstanding shares of the Class B Common Stock of the Company and Reinhold Enterprises, Inc., a newly formed Indiana corporation ("REI"), the Creditors' Trust sold 997,475 shares of Class B Common Stock owned by it to certain purchasers designated by REI (the "Purchasers"). These shares represent approximately 49.9% of the outstanding common stock of the Company. 2 Summary of Significant Accounting Policies and Practices Critical Accounting Policies The Company's consolidated financial statements and related public financial information are based on the application of U.S. generally accepted accounting principles ("GAAP"). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in the external disclosures of the Company including information regarding contingencies, risk and financial condition. The Company believes its use of estimates and underlying accounting assumptions adhere to generally accepted accounting principles and are consistently and conservatively applied. Valuations based on estimates are reviewed for reasonableness and conservatism on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenues, receivables, inventories, acquisitions, valuation of long-lived and intangible assets, pension and post-retirement benefits, the realizability of deferred tax assets, and foreign exchange translation. The Company bases its estimates on historical experience and on 28 Reinhold Industries, Inc. various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. Revenue Recognition and Allowance for Doubtful Accounts The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. Allowance for doubtful accounts is estimated based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have a material effect on reserve balances required. Inventories The Company values its inventories at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The Company writes down its inventory for estimated obsolescence equal to the cost of the inventory. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations. Fair Value of Assets Acquired and Liabilities Assumed in Purchase Combinations The purchase combinations carried out by the Company require management to estimate the fair value of the assets acquired and liabilities assumed in the combinations. These estimates of fair value are based on our business plan for the entities acquired including planned redundancies, restructuring, use of assets acquired and assumptions as to the ultimate resolution of obligations assumed for which no future benefit will be received. Should actual use of assets or resolution of obligations differ from our estimates, revisions to the estimated fair values would be required. If a change in estimate occurs after one year of the acquisition, the change would be recorded in our statement of operations. Pensions and Post-Retirement Benefits The valuation of the Company's pension and other post-retirement plans requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. These assumptions include discount rates, investment returns, projected salary increases and benefits, and mortality rates. The actuarial assumptions used in the Company's pension reporting are reviewed annually and compared with external benchmarks to assure that they accurately account for our future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on the Company's pension expenses and related funding requirements. Valuation of Long-lived and Intangible Assets In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" , the Company assesses the fair value and recoverability of its long-lived assets, including goodwill, whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. In doing so, the Company makes assumptions and estimates regarding future cash flows and other factors to make its determination. The fair value of its 29 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) long-lived assets and goodwill is dependent upon the forecasted performance of the business and the overall economic environment. When the Company determines that the carrying value of its long-lived assets and goodwill may not be recoverable, it measures any impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, the Company may have to record additional impairment charges not previously recognized. Discontinued Operations During the three months ended September 30, 2004, management committed to a plan of action to sell its wholly-owned subsidiary, Samuel Bingham Enterprises, Inc. The decision to sell was based on continuing losses from operations and a negative long-term outlook in the marketplaces this subsidiary serves. On September 30, 2004, management determined that the plan of sale criteria in FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," had been met. Accordingly, the carrying value of its fixed assets was adjusted to its fair value less costs to sell and goodwill was determined to be impaired in accordance with the criteria of FASB No 142. Fair value was determined based on the highest offer received from several potential strategic suitors. The resulting $5.7 million impairment charge was included in "Loss on discontinued operations" in the statement of operations. On December 17, 2004, Samuel Bingham Enterprises, Inc. sold certain assets and transferred certain liabilities to Finzer Roller, L.L.C. for $3.1 million in cash, subject to post-closing adjustments. The assets sold included accounts receivable, inventories, prepaid expenses, equipment, real property, tangible personal property, intellectual and other intangible property. Liabilities transferred include accounts payable, accrued expenses and defined benefit pension plan obligations. The purchase price was reduced by $0.3 million during the first quarter 2005 to $2.8 million based on the final computation of closing date working capital. The purchase price adjustment has been reflected in the December 31, 2004 financial statements. On November 21, 2005, the Company sold 100% of the capital stock of its wholly-owned subsidiary, NP Aerospace Ltd., to The Carlyle Group ("TCG") for $53.2 million, subject to a post-closing working capital adjustment. TCG required that NP Aerospace be cash free, free of all debt and delivered with a normal level of working capital. The purchase price was reduced by $2.3 million during the first quarter 2006 to $50.9 million based on the final computation of closing date working capital. The purchase price adjustment has been reflected in the December 31, 2005 financial statements. The sales of Samuel Bingham Enterprises, Inc. and NP Aerospace Ltd. meet the criteria defined in FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" as discontinued operations and are presented herein as such. Assets held for sale included in the consolidated balance sheet as of December 31, 2005 and 2004 are as follows: December 31, 2005 December 31, 2004 ----------------- ----------------- Accounts receivable $ - 4,009 Inventory - 5,410 Prepaid expenses - 163 Property, plant and equipment - 1,913 Accounts payable - (3,063) Accrued expenses - (1,297) Other liabilities - (165) Minority interest - (409) ------------------- ------------------ Net assets held for sale $ - $6,561 30 Reinhold Industries, Inc. Operating results of the discontinued operations for the years ended December 31, 2005, 2004 and 2003 are summarized as follows (in thousands): 2005 2004 2003 - -------------------------------------------------------------------------------- Net sales $ 42,458 40,583 36,023 - -------------------------------------------------------------------------------- Income from operations 6,952 3,858 3,560 Impairment loss - (5,692) - Interest expense (1,300) - - Additional gain (loss) on sale 43,117 (465) - Tax benefit (expense) (18,513) 1,048 (1,250) - -------------------------------------------------------------------------------- Income (loss) on discontinued operations $30,256 (1,251) 2,310 Income Taxes The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. Cumulative Foreign Exchange Translation Accounting In preparing our consolidated financial statements, the Company is required to translate the financial statements of NP Aerospace from the currency in which it keeps its accounting records, the British Pound Sterling, into United States dollars. This process results in exchange gains and losses which are either included within the statement of operations or as a separate part of the Company's net equity under the caption "foreign currency translation adjustment." Under the relevant accounting guidance, the treatment of these translation gains or losses is dependent upon management's determination of the functional currency of NP Aerospace. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures would be considered the functional currency but any dependency upon the parent and the nature of the subsidiary's operations must also be considered. If any subsidiary's functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is included in cumulative translation adjustments. However, if the functional currency is deemed to be the United States dollar then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. Based on our assessment of the factors discussed above, the Company considers NP Aerospace's local currency to be the functional currency. Accordingly, the Company recorded foreign currency translation gains of approximately $1,021,000 and $346,000 that were included as part of "accumulated other comprehensive loss" within its balance sheet at December 31, 2004 and December 31, 2003, respectively. On November 21, 2005, the Company sold 100% of the capital stock of NP Aerospace Ltd., to The Carlyle Group ("TCG"). In conjunction with the sale, foreign currency transactions that were previously included as part of "accumulated other comprehensive loss" in the balance sheet were recognized in the income statement as a component of discontinued operations. Accounting for Investment in Majority Owned Subsidiary In August 2004, NP Aerospace Ltd. ("NPA"), the Company's wholly-owned U.K. subsidiary, and King Abdullah II Design and Development Bureau ("KADDB"), a Jordanian company, entered into a joint venture agreement to establish a composites manufacturing facility in the country of Jordan. NP Aerospace Jordan WLL ("NPAJ"), a Jordanian limited liability company, was created as a result of the agreement. NPAJ is owned 51% by NPA and 49% by KADDB. In accordance with SFAS 94, " Consolidation of All Majority-Owned Subsidiaries," the Company is required to consolidate all majority-owned 31 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) subsidiaries unless control is temporary or does not rest with the majority owner. This Statement requires consolidation of a majority-owned subsidiary even if it has "nonhomogeneous" operations, a large minority interest, or a foreign location. As of December 31, 2004, the financial statements of NPAJ were consolidated into the financial statements of NP Aerospace. On November 21, 2005, NPAJ was sold to TCG as a component of the NPA sale. Property and Equipment The Company depreciates property and equipment principally on a straight-line basis over estimated useful lives. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.When property is sold or otherwise disposed of, the asset cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of operations. Maintenance and repairs are expensed as incurred. Improvements which significantly increase the useful life of the asset are capitalized. Environmental Liabilities With respect to outstanding actions that are in preliminary procedural stages, as well as any actions that may be filed in the future, insufficient information exists upon which judgments can be made as to the validity or ultimate disposition of such actions, thereby making it difficult to reasonably estimate what, if any, potential liability or costs may be incurred. Accordingly, no estimate of future liability has been included for such claims. See note 9 of the accompanying consolidated financial statements for additional discussion of legal proceedings. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Reinhold and its wholly-owned subsidiary, NP Aerospace. The financial statements of NP Aerospace include the accounts of NP Aerospace Jordan. The 49% interest in NP Aerospace Jordan that is not owned by NP Aerospace is reflected in the financial statements under the heading "Minority interest." All material intercompany accounts and transactions have been eliminated in consolidation. NP Aerospace was sold to The Carlyle Group on November 21, 2005. 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, 2005 December 31, 2004 - ------------------------------------------------------------------------------- Cash in banks $3,965 1,657 Money market funds 5,000 2,358 - ------------------------------------------------------------------------------- Total $8,965 4,015 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, 2005 December 31, 2004 - -------------------------------------------------------------------------------- Raw material $2,087 1,583 Work-in-process 804 781 Finished goods 276 440 Assets held for sale - 5,410 - -------------------------------------------------------------------------------- Total $ 3,167 8,214 32 Reinhold Industries, Inc. Accounting for Government Contracts Amounts billed to contractors of the U.S. Government included in accounts receivable at December 31, 2005 and 2004 were $2,192,000 and $3,384,000, respectively. Property and Equipment The Company depreciates property and equipment principally on a straight-line basis over estimated useful lives. Leasehold improvements are amortized on a straight-line basis 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, 2005 December 31, 2004 - ------------------------------------------------------------------------------------------------------------- Leasehold improvements 5-15 years $ 4,271 4,179 Machinery and equipment 5-25 years 9,757 9,509 Furniture and fixtures 3-10 years 716 974 Construction in process - 59 16 Assets held for sale - 3,401 - ------------------------------------------------------------------------------------------------------------- Property and equipment, at cost 14,803 18,079 Accumulated depreciation and amortization 9,142 8,420 Accumulated depreciation and amortization on assets held for sale - 1,488 - ------------------------------------------------------------------------------------------------------------- Net property and equipment $ 5,661 8,171
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. Improvements which significantly increase the useful life of the asset are capitalized. Goodwill Prior to January 1, 2002, costs in excess of fair value of net assets of acquired companies (goodwill) was amortized on a straight-line basis over 10 - - 40 years. The gross amount of goodwill and related accumulated amortization amounted to $3,313,000 and $792,000 at both December 31, 2005 and 2004, respectively. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142, effective for the Company January 1, 2002, addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Goodwill and other intangible assets with indefinite lives are no longer amortized but instead subject to impairment tests at least annually. In accordance with SFAS No. 142, the Company performed the first part of the two-step goodwill impairment test. For each of the Company's reporting units for which goodwill was recorded, the Company determined that the fair value exceeded the carrying amount at December 31, 2005. As a result, the second step of the impairment test was not required. 33 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) Income Taxes The Company accounts for income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. As more fully described in note 3 of notes to consolidated financial statements, income tax benefits realized from temporary differences and operating loss carryforwards prior to the chapter 11 reorganization described above are recorded directly to additional paid-in capital. Earnings per common share The Company presents basic and diluted earnings per share ("EPS"). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Basic and diluted EPS reflect changes in the number of shares resulting from the Company's 10% stock dividends (see note 5). The reconciliations of basic and diluted weighted average shares are as follows (in thousands):
YEARS ENDED DECEMBER 31, 2005 2004 2003 - ------------------------------------------------------------------------------------------------------------- Net income $ 33,333 1,110 5,724 - ------------------------------------------------------------------------------------------------------------- Weighted average shares used in basic computation 3,265 3,048 2,932 Dilutive stock options 4 103 190 - ------------------------------------------------------------------------------------------------------------- Weighted average shares used for diluted calculation 3,269 3,151 3,122
Accumulated Other Comprehensive Loss Other comprehensive loss refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are included in other comprehensive loss but excluded from net income (loss) as those amounts are recorded directly as an adjustment to stockholders' equity, net of tax. The Company's other comprehensive loss is composed of changes in the additional pension liability in excess of unrecognized prior service cost and foreign currency translation adjustments. The accumulated balance of additional pension liability in excess of unrecognized prior service cost at December 31, 2005 and 2004 is $3,758,000 and $5,614,000, respectively. The accumulated balance of foreign currency translation gains at December 31, 2005 and 2004 is $0 and $1,021,000, respectively. Stock Option Plan The Company accounts for its stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25), and has adopted the disclosure-only alternative of SFAS No. 123 "Accounting For Stock-Based Compensation" (SFAS 123), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Translation and Disclosure." 34 Reinhold Industries, Inc. The following table illustrates the effect on net income and earnings per share had compensation expense for the employee based plans been recorded based on the fair value method under SFAS 123 (in thousands, except per share data):
YEARS ENDED DECEMBER 31, 2005 2004 2003 - ------------------------------------------------------------------------------------------------------------- Net income as reported $33,333 1,110 5,724 Deduct, Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (106) (106) (115) - ------------------------------------------------------------------------------------------------------------- Net income, as adjusted $33,227 1,004 5,609 Earnings per share: Basic - as reported $10.21 0.36 1.95 Basic - as adjusted $10.18 0.33 1.91 Diluted - as reported $10.20 0.35 1.83 Diluted - as adjusted $10.16 0.32 1.80
Pension and Other Postretirement Plans In the United States, the Company has one defined benefit pension plan and a 401(k) retirement and profit sharing plan covering substantially all of its employees. The Reinhold Industries, Inc. Retirement Plan benefits are based on years of service and the employee's compensation during the last years of service before retirement. The cost of these programs is being funded currently. On December 31, 2004, the Reinhold Industries, Inc. Retirement Plan was frozen. No additional years of service or future salary increases will accrue to active employees in determining plan benefits. There will be no change in benefit levels to terminated vested and retired employees. On January 1, 2002, the Company established the Reinhold Industries, Inc. 401(k) Plan covering all Reinhold employees in the United States who have completed six months of service and attained 21 years of age. Employees may make contributions to the Plan up to the maximum limitations prescribed by the Internal Revenue Service. The Company may, at its sole discretion, contribute and allocate to each eligible participant, a percentage of the participant's elective deferral. Matching contributions, if any, shall be determined as of the end of the Plan year. On January 1, 2005, the Company decided that it would match 50% of the participant's elective deferral in 2005 up to a maximum of 3%.The matching contribution vests to the employee immediately. Costs of the matching contribution in 2005 were approximately $132,000. Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of The Company accounts for long-lived assets and certain intangibles including goodwill at amortized cost. Goodwill is tested for impairment in accordance with SFAS 142 and all other long-lived assets are tested for impairment in accordance with SFAS 144. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of such assets, if facts and circumstances suggest that they may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. 35 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) 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. The functional currency of NP Aerospace Jordan in the Jordanian Dinar. 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. On November 21, 2005, the Company sold 100% of the capital stock of NP Aerospace Ltd., to The Carlyle Group ("TCG"). In conjunction with the sale, foreign currency transactions that were previously included as part of "accumulated other comprehensive loss" in the balance sheet were recognized in the income statement as a component of discontinued operations. Reclassifications Certain amounts in the prior year's consolidated financial statements have been reclassified to conform with the current year presentation. Shipping and Handling Costs Shipping and handling costs are included in cost of sales. Research and Development Research and development expenditures were approximately $278,000, $230,000 and $196,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Labor Subject to Collective Bargaining Agreements As of December 31, 2005, the Company did not employ any labor subject to collective bargaining agreements. Reinhold believes its workforce to be relatively stable and considers its employee relations to be excellent. Raw Materials and Purchased Components The principal raw materials for composite fabrication include pre-impregnated fiber cloth (made of carbon, graphite, aramid or fiberglass fibers which have been heat-treated), molding compounds, resins (phenolic and epoxy), hardware, adhesives and solvents. No significant supply problems have been encountered in recent years. Reinhold uses PAN (polyacrylonitrile) and rayon in the manufacture of composites. However, the supply of rayon used to make carbon fiber cloth typically used in ablative composites is highly dependent upon the qualification of the rayon supplier by the United States Department of Defense. A major supplier has ceased production of the rayon used in Reinhold's ablative products. This could have an effect on the rayon supply in the coming years. Also, a European company has become the world's sole supplier of graphite and carbon, which is used in Reinhold's ablative applications. At this time, Reinhold cannot determine if there will be any significant impact on price or supply. Recent Accounting Pronouncements In December 2003, the FASB revised SFAS No. 132 (SFAS 132R), "Employers' Disclosure about Pensions and Other Postretirement Benefits." SFAS 132R expands employers' disclosure requirements for pension and postretirement benefits to enhance information about plan assets, obligations, benefit payments, contributions and net benefit cost. SFAS 132R does not change the accounting requirements for pensions and other postretirement benefits. This statement is effective for fiscal years ending after December 15, 2003, and the Company has included these disclosures in note 7 to its consolidated financial statements. 36 Reinhold Industries, Inc. In November 2004, the FASB revised SFAS No. 151 (SFAS 151) "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The impact to the Company was determined to be immaterial. In December 2004, the FASB revised SFAS No. 123 (SFAS 123R), "Share-Based Payment." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for public entities (excluding small business issuers) in the first interim or annual reporting period beginning after June 15, 2005. The impact to the Company was determined to be immaterial. 3 Income Taxes The income tax expense consists of the following (in thousands):
YEARS ENDED DECEMBER 31, 2005 2004 2003 - ---------------------------------------------------------------------------------------------------------------- Current: Federal $11,631 3,556 3,796 State 2,635 189 628 Foreign 2,369 1,397 1,189 - ---------------------------------------------------------------------------------------------------------------- Total current $16,635 5,142 5,613 Deferred: Federal $ 3,141 (2,617) (2,240) State (59) (306) - - ---------------------------------------------------------------------------------------------------------------- Total deferred $ 3,082 (2,923) (2,240) - ---------------------------------------------------------------------------------------------------------------- Total income tax expense $19,717 2,219 3,373
The income tax expense (benefit) applicable to continuing operations and discontinued operations is as follows (in thousands): YEARS ENDED DECEMBER 31, 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes from continuing operations: Current $ 1,735 3,596 4,363 Deferred (531) (329) (2,240) - ---------------------------------------------------------------------------------------------------------------- Total provision for income taxes from continuing operations 1,204 3,267 2,123 - ---------------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes from discontinued operations: Current 14,900 1,546 1,250 Deferred 3,613 (2,594) - - ---------------------------------------------------------------------------------------------------------------- Total provision (benefit) for income taxes from discontinued operations 18,513 (1,048) 1,250 - ---------------------------------------------------------------------------------------------------------------- Total income tax expense $19,717 2,219 3,373
37 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) A reconciliation of the U.S. statutory federal income tax expense to income tax expense on income from continuing operations is as follows (in thousands):
YEARS ENDED DECEMBER 31, 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------- Taxes at statutory Federal rate $1,499 1,914 1,883 State taxes, net of Federal tax benefit 184 323 233 State deferred tax benefit related to state rate change, net of Federal tax benefit (117) - - Federal deferred tax benefit related to rate change (304) - - Rate difference on foreign income 14 22 33 Foreign dividends 5,920 1,023 - Foreign tax credits (5,959) - - Non-deductible expenses 104 40 19 Change in valuation allowance (127) (118) - Other (10) 63 (45) - ---------------------------------------------------------------------------------------------------------------- Total provision for income taxes from continuing operations $1,204 3,267 2,123
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):
December 31, 2005 December 31, 2004 - ------------------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ - 8,123 Tax credits - 898 State taxes 893 1 Underfunded pension obligation 2,309 2,263 Other reserves 606 329 - ------------------------------------------------------------------------------------------------------------- Total gross deferred tax assets 3,808 11,614 Less valuation allowance - (4,229) - ------------------------------------------------------------------------------------------------------------- Net deferred tax assets 3,808 7,385 Deferred tax liabilities: Pension (921) (492) US income tax on foreign earnings - (746) Goodwill (252) (171) Fixed assets (553) (599) Other - (214) - ------------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (1,726) (2,222) - ------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 2,082 5,163
38 Reinhold Industries, Inc. 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 that it is more likely than not the Company will realize all of these deductible temporary differences recorded at December 31, 2005. Furthermore, the Company was able to utilize all its net operating loss carryforwards and tax credits primarily related to the gain on the sale of NP Aerospace Ltd. As a result, the Company released its entire valuation allowance of $4.2 million in 2005. The release of the valuation allowance was accounted for as follows: $2.3 million was accounted for as an increase in additional paid-in capital related to both the benefit of pre-reorganization net operating loss and credit carryforwards ($1.6 million) and exercise of employee stock option deductions ($0.7 million), $1.8 million reduced accumulated other comprehensive loss and $0.1 million was accounted for as a reduction of income tax expense. In 2005, the Company also recorded $0.1 million of tax benefit related to the exercise of employee stock options. At December 31, 2005, the Company utilized its entire net operating loss carryforward for Federal income tax purposes of approximately $35.4 million primarily to offset the gain associated with the sale of NP Aerospace. Benefits realized from these net operating loss and credit carryforwards and deductible temporary differences arising prior to the reorganization have been recorded to additional paid-in capital. Such benefits amounted to $1.6 million in 2005 and $3.5 million in 2004. In filing its 2004 federal and state income tax returns, the Company deducted a $10.6 million payment associated with the settlement of bankruptcy related litigation between Bairnco and the Keene Creditors Trust. However, the federal and state tax benefit of this deduction approximating $4.2 million has not been included in the statement of operations and is accounted for on the balance sheet under the heading "Other long-term liabilities." Furthermore, since the deduction related to the period prior to the reorganization, when ultimately realized, the benefit will be recorded to additional paid-in capital. United States and foreign earnings (losses) from continuing operations before income taxes are as follows (in thousands): YEARS ENDED DECEMBER 31, 2005 2004 2003 - ------------------------------------------------------------------------------- United States $4,563 6,175 6,366 Foreign (282) (547) (829) - ------------------------------------------------------------------------------- Total $4,281 5,628 5,537 Foreign losses for all years represent intercompany fees charged to NP Aerospace that have been allocated back to continuing operations. 4 Long Term Debt On March 20, 2002, the Company entered into a revolving credit facility with LaSalle Bank National Association ("LaSalle"). On December 7, 2004, the Company amended the existing credit facility with LaSalle. The credit facility consisted of a five-year term loan in the amount of $24,500,000 and a revolving credit facility of up to $12,000,000. Prior to December 31, 2004, the Company received $31,500,000 from LaSalle against this credit facility. The proceeds from the credit facility and additional cash on hand were used to pay the special cash dividend of $11.75 per share on December 28, 2004 totaling approximately $38,200,000. On November 21, 2005, in conjunction with the proceeds received from the sale of NP Aerospace, the entire outstanding balance with LaSalle approximating $25,757,000 was repaid. 39 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) On November 18, 2005, the Company further amended the credit facility. The current credit facility consists of a 45 month term commitment in the amount of $5,500,000 and a revolving credit facility of up to $4,500,000 and is secured by all of the Company's financial assets. The term loan is payable in equal monthly principal installments of $122,500 plus accrued interest. Interest is at a rate which approximates LIBOR plus 2.5%. Borrowings against the revolving credit facility are not due until 2009, but are voluntarily repayable at any time. Accrued interest on the revolving credit facility is payable monthly and is at a rate which approximates LIBOR plus 2.5%. A monthly fee of 0.5% of the unused revolving credit facility is also payable. Borrowings under the revolving credit facility are limited to the lower of $4,500,000 or a baseline amount ("borrowing base") which is computed monthly and includes qualifying accounts receivable and inventories. If outstanding borrowings under the revolving credit facility exceed the borrowing base, then a mandatory repayment of the difference would be required. The borrowing base at December 31, 2005 was approximately $4.5 million. Letters of credit are included in the revolving credit facility and are subject to a fee of 2.5% of the face amount. Outstanding letters of credit at December 31, 2005 were $600,000. The amount available under the revolving credit facility at December 31, 2005 was approximately $3.9 million. The outstanding balance with LaSalle was zero at December 31, 2005. The credit facility is subject to various financial covenants to which the Company must comply. The covenants require the Company to maintain certain ratios of profitability, total outstanding debt, and limits on cash dividends. The Company was in compliance with all covenants as of December 31, 2005. 5 Stockholders' Equity On May 1, 2002, the Board of Directors approved the distribution of a 10% stock dividend payable to stockholders of record on May 31, 2002, where an additional 240,933 shares were issued on June 21, 2002. On April 30, 2003, the Board of Directors approved the distribution of a 10% stock dividend to shareholders of record as of May 16, 2003. As a result, an additional 265,418 shares were issued on May 29, 2003. All common stock information and earnings per share computations for all periods presented have been adjusted for the stock dividend. The number of stock options outstanding and the exercise price were also adjusted for the impact of the 10% stock dividend. The following is a schedule of cash dividends declared and paid in 2005 and 2004 (in thousands, except per share data):
2005 - ------------------------------------------------------------------------------------------------ Declaration Date Record Date Payment Date Amount per Share Total Dividend - ------------------------------------------------------------------------------------------------ February 25 March 10 March 24 $0.50 $ 1,630 May 5 May 24 June 10 $0.50 1,631 August 11 August 26 September 16 $0.50 1,631 November 14 December 2 December 16 $0.50 1,650 November 21 December 16 January 3, 2006 $6.00 19,793 - ---------------------------------------------------------------------------------------------- TOTALS $8.00 $26,335
40 Reinhold Industries, Inc.
2004 - ------------------------------------------------------------------------------------------------ Declaration Date Record Date Payment Date Amount per Share Total Dividend - ------------------------------------------------------------------------------------------------ August 12 September 1 September 15 $0.50 $ 1,596 October 28 November 12 November 24 $0.50 1,625 December 8 December 17 December 28 $11.75 38,302 - ------------------------------------------------------------------------------------------------ TOTALS $12.75 $41,523
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. The Plan provides that the options are exercisable based on vesting schedules, provided that in no event shall such options vest more rapidly than 33 1/3 % annually. The options expire no later than ten years from the date of grant. During 2005, the Board of Directors approved the acceleration of 3,667 outstanding options. Compensation expense recorded on the accelerated options totalled approximately $28,000. On June 3, 1999, the Board of Directors approved and adopted the Reinhold Industries, Inc. Stock Option Agreement by and between the Company and Michael T. Furry, granting Mr. Furry the option, effective June 3, 1999, to acquire up to 90,000 shares of Class A common stock of the Company at fair market value at that date ($8.25 per share). Terms of the Agreement are equivalent to those in the Reinhold Stock Incentive Plan. The number of stock options outstanding and the exercise price were adjusted for the impact of the 10% stock dividends. On September 30, 2002, the Company adopted the Amended and Restated Reinhold Stock Incentive Plan. This amendment increases the total number of shares of stock subject to issuance under the Reinhold Stock Incentive Plan from 100,000 to 286,523 (including the impact of the stock dividends declared in 2000, 2001, 2002 and 2003). The maximum number of shares of stock with respect to which options or stock appreciation rights may be granted to any eligible employee during the term of the Reinhold Stock Incentive Plan were increased from 10,000 to 60,000. Vesting occurs ratably over the vesting period. All other terms remain unchanged. As of December 31, 2004 and December 31, 2005, options granted under the Amended and Restated Reinhold Stock Incentive Plan totalled 121,000. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and the related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 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, as amended, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes Option Pricing 41 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) Model with the following weighted-average assumptions: 2005 2004 2003 - ------------------------------------------------------------------------------- Risk free interest rate 6.0% 6.0% 6.0% - ------------------------------------------------------------------------------- Dividend yield - - - - ------------------------------------------------------------------------------- Volitility factor 70% 70% 70% - ------------------------------------------------------------------------------- Weighted average life (years) 4.1 4.1 4.1 Using the Black-Scholes Option Pricing Model, the estimated weighted-average grant date fair value of options granted in 2003 was $4.90. No options were granted to employees during 2005 or 2004. See note 2 for the Company's accounting policy for its Employee Stock-Based Plans, as well as the effect on net income and earnings per share had the Employee Stock-Based Plans been recorded based on the fair value method under SFAS 123. The Black-Scholes Option Pricing Model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different than those of traded options, and because changes in the assumptions can materially affect the fair value estimate, in management's opinion, the existing models may not necessarily provide a reliable single measure of the fair value of its employee stock options. A summary of the status of the option plans as of and for the changes during the years ended December 31, 2005 and 2004 is presented below:
Weighted average Number of shares Low High exercise price - ------------------------------------------------------------------------------------------------------------------------- Outstanding December 31, 2003 355,389 $5.63 $11.36 $6.28 - ------------------------------------------------------------------------------------------------------------------------- Granted in 2004 - - - - Forfeited during 2004 - - - - Exercised during 2004 311,385 5.63 11.36 6.17 - ------------------------------------------------------------------------------------------------------------------------- Outstanding December 31, 2004 44,004 $7.32 $11.36 $7.99 - ------------------------------------------------------------------------------------------------------------------------- Granted in 2005 - - - - Forfeited during 2005 9,167 7.32 7.32 7.32 Exercised during 2005 34,837 7.32 11.36 8.17 - ------------------------------------------------------------------------------------------------------------------------- Outstanding December 31, 2005 - $ - $ - $ -
42 Reinhold Industries, Inc. Directors' Deferred Stock Plan On September 30, 2002, the Company established the Reinhold Industries, Inc. Director's Deferred Stock Plan. The Plan allows the non-employee Directors of the Company to elect to receive stock in lieu of cash payment for their services on the Board of Directors. If the Director elects to receive Company stock, he has the option of receiving the shares immediately or deferring receipt of those shares to a future date. The value of the services performed are charged to the statement of operations in the year incurred. As of December 31, 2005, 10,448 shares have been reserved for future issuance under this Plan. On October 28, 2004, the Plan was amended to compensate the Director's on a quarterly basis in advance rather than in arrears. The Plan also allows those Director's who defer receipt of their shares to accrue dividends declared. Dividends accrued at December 31, 2005 on unissued shares under the amended plan total approximately $182,000. 7 Pension Plans Annual contributions made to the Reinhold Industries, Inc Retirement Plan are determined in compliance with the minimum funding requirements of ERISA, using a different actuarial cost method and different actuarial assumptions than are used for determining pension expense for financial reporting purposes. Plan assets consist principally of publicly traded equity and debt securities. On December 31, 2004, the Reinhold Industries, Inc. Retirement Plan was frozen. No additional years of service or future salary increases will accrue to active employees in determining plan benefits. There will be no change in benefit levels to terminated vested and retired employees. On December 17, 2004, in conjunction with the sale of Samuel Bingham Enterprises, Inc., the assets and obligations of two defined benefit pension plans were transferred to the buyer. Net pension cost included the following (in thousands):
YEARS ENDED DECEMBER 31, 2005 2004 2003 - ------------------------------------------------------------------------------------------------------------- Service cost $ - 307 232 Interest cost on benefits earned in prior years 833 1,058 969 Expected return on assets (881) (942) (869) Amortization of net obligation at transition - - 1 Amortization of net loss 427 570 464 Curtailment loss - 17 - - ------------------------------------------------------------------------------------------------------------- Net pension cost $ 379 1,010 797
The following table sets forth a reconciliation of the pension plans' benefit obligation at December 31, 2005 and 2004 (in thousands):
2005 2004 - ------------------------------------------------------------------------------------------------------------- Projected benefit obligation at beginning of year $14,816 17,254 Service cost - 307 Interest cost 833 1,058 Actuarial loss 757 1,353 Benefits paid (1,036) (1,235) Curtailments - (1,200) Divestiture - (2,721) - ------------------------------------------------------------------------------------------------------------- Projected benefit obligation at end of year $15,370 14,816
43 18 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) The following table discloses the target allocation and actual percentage of the fair value of total plan assets represented by each asset category at December 31, 2005 and 2004: Target Allocation 2005 2004 - -------------------------------------------------------------------------------- Equity securities 60 - 70% 63% 61% Debt securities 30 - 40% 34% 37% Real estate 0% 0% 0% Other 0% 3% 2% - -------------------------------------------------------------------------------- Totals 100% 100% The projected benefit obligation at December 31, 2005 increased by $554,000 from December 31, 2004 due primarily to the reduction of the weighted-average discount rate from 5.75% to 5.44%. The following table sets forth a reconciliation of the pension plans' assets at December 31, 2005 and 2004 (in thousands): 2005 2004 - -------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $10,215 11,586 Actual return on assets 1,293 1,222 Employer contributions 1,413 453 Benefits paid (1,036) (1,235) Divestiture - (1,811) - -------------------------------------------------------------------------------- Fair value of plan assets at end of year $11,885 10,215 The following table sets forth a reconciliation of the pension plans' funded status at December 31, 2005 and 2004 (in thousands): 2005 2004 - -------------------------------------------------------------------------------- Projected benefit obligation at end of year $15,370 14,816 Fair value of plan assets at end of year 11,885 10,215 - -------------------------------------------------------------------------------- Funded status (3,485) (4,601) Unrecognized net loss 5,797 5,879 - -------------------------------------------------------------------------------- Prepaid pension cost at end of year $ 2,312 1,278 Additional minimum liability at December 31, $(5,797) (5,879) - -------------------------------------------------------------------------------- Additional pension liability in excess of prior service cost at December 31, $ (5,797) (5,879) 44 Reinhold Industries, Inc. Amounts recognized as prepaid benefit costs at December 31, 2005 and 2004 amounted to $2,312 and $1,278, respectively. Amounts recognized as accrued benefit obligation at December 31, 2005 and 2004 amounted to $0 and $0, respectively. Assumptions used in accounting for the pension plan were: December 31, 2005 December 31, 2004 ----------------- ----------------- Weighted-average discount rate 5.44% 5.75% Weighted-average rate of increase in compensation levels N/A 4.00% Weighted-average expected long-term rate of return on assets 8.50% 8.50% The weighted average expected long term rate of return on assets was established as of January 1 of each year presented and was changed on January 1, 2004 to 8.5%. The long-term rate of return was developed using a financial model which computes the historical rate of return on the various asset classes (equities, debt, others) contained in the portfolio and projects the inflation adjusted real rate of return for the future. Assumptions concerning discount rates and rates of increase in compensation levels are determined based on the current economic environment at the end of each respective annual reporting period. The company evaluates the funded status of each of its retirement plans using these current assumptions and determines the appropriate funding level considering applicable regulatory requirements, reporting considerations and other factors. Recent decreases in long-term interest rates have the effect of increasing plan liabilities and if expected returns on plan assets are not achieved, future funding obligations could increase substantially. Assuming no changes in current assumptions, the company expects to contribute approximately $1,353,000 for the calendar year 2006. The following table discloses the amount of benefits expected to be paid in future years (in thousands): 2006 $ 1,135 2007 1,133 2008 1,113 2009 1,088 2010 1,072 2011-2015 5,149 - ---------------------------------------------------------------------- Totals $10,690 The pension plan's accumulated benefit obligation was $15,370,000 at December 31, 2005 and $14,816,000 at December 31, 2004. 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. The measurement dates used to determine pension benefits were December 31, 2005 and 2004. The company maintains a trust which holds the assets of the plan. The investment of assets in defined benefit plans is based on the expected long-term capital market outlook. Asset return assumptions utilizing historical returns and investment manager forecasts are set forth for each major asset category including domestic equities and government and corporate market debt. Investment allocations are determined by the Board of Directors. Long-term allocation guidelines are set and expressed in terms of a target range allocation for each asset class to provide portfolio management flexibility. The asset allocation is diversified to maintain risk at a reasonable 45 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) level without sacrificing return. Factors including the future growth in the number of plan participants and forecasted benefit obligations, inflation and the rate of salary increases are also considered in developing asset allocations and target return assumptions. 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 and sheet molding compounds for a variety of applications in the United States and Europe. The Company generates revenues from three operating segments: Aerospace, Seating Products and Commercial. 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. Seating Products produces components for the commercial aircraft seating industry. The Commercial segment produces lighting housings and pool filter tanks. On November 21, 2005, the Company sold its NP Aerospace subsidiary. On December 17, 2004, the Company sold its Samuel Bingham Enterprises, Inc. subsidiary. Prior to 2005, both NP Aerospace and Bingham had been reported as separate business segments. All prior periods have been adjusted to conform with the current presentation. In addition, the name of the former CompositAir business unit has been changed to Seating Products. The information in the following table is derived directly from the segments internal financial reporting for corporate management purposes (in thousands).
YEARS ENDED DECEMBER 31, 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------- Net sales Aerospace $22,797 24,234 22,255 Seating Products 6,230 4,716 5,250 Commercial 3,532 3,281 3,473 - --------------------------------------------------------------------------------------------------------------- Total sales $32,559 32,231 30,978 - --------------------------------------------------------------------------------------------------------------- Income before income taxes from continuing operations Aerospace $ 6,298 7,798 6,863 Seating Products (696) (824) (288) Commercial 332 343 71 Unallocated corporate expenses (1,653) (1,689) (1,109) - ---------------------------------------------------------------------------------------------------------------- Total income before income taxes from continuing operations $ 4,281 5,628 5,537 - ---------------------------------------------------------------------------------------------------------------- Depreciation and amortization Aerospace $ 335 340 367 Seating Products 224 229 216 Commercial 106 148 129 Unallocated corporate 336 337 240 - --------------------------------------------------------------------------------------------------------------- Total depreciation and amortization $ 1,001 1,054 952 - --------------------------------------------------------------------------------------------------------------- Capital expenditures Aerospace $ 300 394 1,113 Seating Products 42 52 214 Commercial - 31 358 Unallocated corporate 62 165 238 - --------------------------------------------------------------------------------------------------------------- Total capital expenditures $ 404 642 1,923 - ---------------------------------------------------------------------------------------------------------------
46 Reinhold Industries, Inc.
YEARS ENDED DECEMBER 31, 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------- Total assets Aerospace $11,156 12,266 Seating Products 3,253 2,564 Commercial 1,479 1,503 Assets held for sale - 13,858 Unallocated corporate 13,562 9,255 - -------------------------------------------------------------------------------------------------------------- Total assets $29,450 39,446 Goodwill Aerospace $ 2,360 2,360 Seating Products 161 161 - ------------------------------------------------------------------------------------------------------------- Total goodwill $ 2,521 2,521
The table below presents information related to geographic areas in which Reinhold's customers were located (in thousands):
YEARS ENDED DECEMBER 31, 2005 2004 2003 - --------------------------------------------------------------------------------------------------------------- Net sales North America $29,663 29,500 27,263 United Kingdom 2,896 2,731 3,715 - --------------------------------------------------------------------------------------------------------------- Net sales $32,559 32,231 30,978
The table below presents information related to geographic areas in which Reinhold operated (in thousands): December 31, 2005 December 31, 2004 - -------------------------------------------------------------------------------- Total assets North America $29,450 25,588 Assets held for sale - United Kingdom - 13,858 - -------------------------------------------------------------------------------- Total assets $29,450 39,446 Long-lived assets North America $ 9,878 13,235 Assets held for sale - United Kingdom - 1,913 - -------------------------------------------------------------------------------- Long-lived assets $ 9,878 15,148 9 Commitments and Contingencies Leases The Company leases certain facilities and equipment under operating leases expiring through 2014. Certain facility leases are subject to annual escalations of approximately 1% to 3%. Total rental expense on all operating leases approximated $971,000, $838,000 and $704,000 for 2005, 2004 and 2003, respectively. 47 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued) Minimum future rental commitments under noncancelable operating leases and aggregate future minimum rentals under noncancelable subleases at December 31, 2005 are as follows (in thousands): Operating lease commitments Sublease income - -------------------------------------------------------------------------------- 2006 $ 791 31 2007 766 - 2008 762 - 2009 744 - 2010 753 - Thereafter 4,677 - - -------------------------------------------------------------------------------- $ 8,493 31 Legal Proceedings On August 11, 2000, the Environmental Protection Agency ("EPA") notified the Company 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 a site formerly known as the Casmalia Resources Hazardous Waste Management Facility, located in Santa Barbara County, California ("Casmalia Site"). The EPA has designated the Company as a "de minimis" waste generator at this site, based on the amount of waste at the Casmalia Site attributed to the Company. The Company is not currently a party to any litigation concerning the Casmalia Site, and based on currently available data, the Company believes that the Casmalia Site is not likely to have a material adverse impact on the Company's consolidated condensed 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. Insurance Due to a significant increase in workers' compensation insurance premiums, on November 1, 2003, the Company changed its insurance for workers' compensation costs from fully insured to a partially self-insured basis. The Company is now responsible for payment of all workers' compensation costs to a maximum of $250,000 per individual claim and $1,250,000 in the aggregate. Claims paid by the insurance company as well as the estimated future costs to be incurred are recorded as expenses on a monthly basis. In addition, the Company was required to provide our insurance company with a irrevocable Letter of Credit in the amount of $600,000. As of December 31, 2005, $600,000 of the Letter of Credit was unused. The policy period extended through October 2004. At that time, claims experience was reviewed and a determination was made to not continue on a partially self-insured basis. As of December 31, 2005 and 2004, based on information provided to us by the insurance company, approximately $180,000 and $118,000, respectively, was accrued for future losses associated with the expired policy period. Purchase commitments Obligations under non-cancellable purchase orders at December 31, 2005 totalled approximately $2.0 million. 10 Business and Credit Concentrations The Company's principal customers are prime contractors to the U.S. Government and aircraft seat manufacturers. 48 Reinhold Industries, Inc. Sales to each customer that exceed 10% of total net sales for the periods presented were as follows (in thousands): YEARS ENDED DECEMBER 31, 2005 2004 2003 - -------------------------------------------------------------------------------- Alliant Techsystems (Aerospace) $20,201 18,256 19,324 B/E Aerospace (Seating Products) 4,891 3,862 4,434 Alliant Techsystems accounted for approximately 37% of the Company's accounts receivable balance at December 31, 2005 and 14% at December 31, 2004 before any adjustments for the allowance for doubtful accounts. Sales of components related to the Minuteman III Propulsion Replacement Program for 2005, 2004 and 2003 totaled approximately $14.5 million, $12.7 million and $14.5 million, respectively. Sales related to this program are expected to continue through 2007 and drop significantly in 2008. B/E Aerospace accounted for approximately 28% of the Company's accounts receivable balance at December 31, 2005 and 10% at December 31, 2004 before any adjustments for the allowance for doubtful accounts. Although sales to Weber Aircraft did not exceed 10% of total net sales for the year ended December 31, 2005, they accounted for approximately 12% of the Company's accounts receivable balance at December 31, 2005. 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 advice regarding strategic direction and merger and acquisition activities, including identifying potential acquisition candidates, for a fee of $20,000 per month. The agreement is automatically renewed thereafter for successive one year periods, unless termination notification is provided by either party within 120 days of the renewal date. Mssrs. Ralph R. Whitney, Jr., Andrew McNally, IV and Glenn Scolnik, all members of the Board of Directors of Reinhold, are partners of HKW. 12 Quarterly Summary of Information (Unaudited) Summarized unaudited financial data is as follows (in thousands, except per share data):
THREE MONTHS ENDED March 31, June 30, September 30, December 31, - ------------------------------------------------------------------------------------------------------------- 2005 - ------------------------------------------------------------------------------------------------------------- Net sales $7,181 7,496 8,297 9,585 Gross profit $2,811 2,904 3,203 3,331 Income from continuing operations before income taxes $ 832 892 960 1,597 Net income (loss) from continuing operations $ (54) (52) (451) 3,634 Net income (loss) $1,695 1,738 723 29,177 Net earnings (loss) per share: Basic - continuing operations $(0.02) (0.02) (0.14) 1.11 Diluted - continuing operations $(0.02) (0.02) (0.14) 1.11 Basic $ 0.52 0.53 0.22 8.93 Diluted $ 0.52 0.53 0.22 8.93 - -------------------------------------------------------------------------------------------------------------
49 Reinhold Industries, Inc. Notes to Consolidated Financial Statements (continued)
THREE MONTHS ENDED March 31, June 30, September 30, December 31, - ------------------------------------------------------------------------------------------------------------- 2004 - ------------------------------------------------------------------------------------------------------------- Net sales $7,216 7,319 7,744 9,952 Gross profit $2,609 2,834 3,037 4,477 Income from continuing operations before income taxes $1,133 781 1,351 2,363 Net income from continuing operations $ 658 478 828 397 Net income (loss) $1,179 1,686 (2,171) 416 Net earnings (loss) per share: Basic - continuing operations $ 0.22 0.16 0.27 0.13 Diluted - continuing operations $ 0.21 0.15 0.26 0.13 Basic $ 0.40 0.57 (0.71) 0.14 Diluted $ 0.37 0.53 (0.71) 0.13 - -------------------------------------------------------------------------------------------------------------
13 Subsequent events On February 28, 2006, the Company announced that it had engaged TM Capital Corp. to explore strategic alternatives for the enhancement of shareholder value, including a possible sale of the Company. The Company cannot give assurance that it will consummate a sale or other strategic alternative. In conjunction with the sale of NP Aerospace on November 21, 2005 (the "completion date"), the Company agreed that in the event of a sale of all or substantially all of the assets of the Company within 18 months of the completion date, the acquirer would be responsible for all obligations of the Company defined in the Share Sale Agreement (the "agreement") dated September 26, 2005. If the acquirer did not agree to these conditions, the Company would be required to establish an escrow account to cover any claims made under the agreement. The escrow account amounts decrease over time from the completion date as follows: 5,000,000 Pounds Sterling ($8.75 million) from completion date through May 31, 2006; 3,000,000 Pounds Sterling ($5.25 million) from June 1, 2006 through November 30, 2006; and 2,000,000 Pounds Sterling ($3.50 million) from December 1, 2006 through May 31, 2007. On March 13, 2006, the Company utilized a portion its credit line with LaSalle Bank by borrowing $3.0 million against the term facility. The proceeds from the borrowing and cash on hand were used to pay the balance of 2005 estimated federal and state taxes totalling approximately $5.8 million. 50 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Reinhold Industries, Inc. We have audited the accompanying consolidated balance sheets of Reinhold Industries, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders' equity (deficit) and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reinhold Industries, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Irvine, California March 16, 2006 51 Reinhold Industries, Inc. 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 and CEO Hammond, Kennedy, Whitney & Company Thomas A. Brand Retired Fiberite Corporation Richard A. Place Retired Ford Motor Company Richard C. Morrison Retired Babson Capital Management, Inc. C. Miles Schmidt, Jr. Retired Halcore Group, Inc. Matthew C. Hook Managing Director Centerfield Capital Partners L.P. Corporate Officers Michael T. Furry President and CEO David R. Ewing Chief Operating Officer 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 Wanda Morrison Reinhold Industries, Inc. Registrar Continental Stock Transfer & Trust Company 17 Battery Place 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 4, 2006 at 8:30 a.m. Form 10-K Stockholders may obtain a copy of Reinhold's 10-K without charge by writing to Investor Relations Department Transfer Agent Continental Stock Transfer & Trust Company 17 Battery Place New York, New York 10004 (212) 509-4000 Independent Registered Public Accounting Firm Ernst & Young LLP 18111 Von Karman Avenue Suite 1000 Irvine, CA 92612 Attorneys Sommer Barnard Attorneys, PC One Indiana Square, Suite 3500 Indianapolis, Indiana 46204 Horgan, Rosen, Beckham & Coren, LLP 23975 Park Sorrento Suite 200 Calabasas, CA 91302 Stock Listing Reinhold common stock is listed on the Nasdaq Capital Market Symbol - RNHDA
Stockholder Information 2005 2004 Dividends per Share - ----------------------------------------------------------------------------------------------- Market Price High Low High Low 2005 2004 - ----------------------------------------------------------------------------------------------- First Quarter ended March 31, 30.46 23.69 23.26 18.70 $0.50 $0.00 Second Quarter ended June 30, 29.50 26.94 20.50 18.60 0.50 0.00 Third Quarter ended September 30, 28.25 19.36 23.20 15.46 0.50 0.50 Fourth Quarter ended December 31, 24.38 15.70 28.71 22.36 6.50 12.25
The Class A Common Stock of the Company is listed on the Nasdaq Capital Market under the ticker symbol RNHDA. The table above sets forth the high and low sale prices of the Company's Class A Common Stock for each of the quarterly periods for the years ended December 31, 2005 and 2004, adjusted for the effect of the $6.00 per share special dividend declared in November 2005 and paid in January 2006 and the special dividend of $11.75 per share declared and paid in December 2004. As of March 3, 2006, the approximate number of holders of Class A common stock (holders of record) were 1,224. Reinhold Industries, Inc. 12827 East Imperial Highway Santa Fe Springs, CA 90670 (562) 944-3281 EX-23 4 eyconsent.txt Exhibit 23 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in this Annual Report (Form 10-K) of Reinhold Industries, Inc. of our report dated March 16, 2006, included in the 2005 Annual Report to Shareholders of Reinhold Industries, Inc. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-101589) pertaining to the Amended and Restated Reinhold Industries, Inc. Stock Incentive Plan and the Registration Statement (Form S-8 No. 333-39925) pertaining to the Reinhold Industries, Inc. Stock Incentive Plan of our report dated March 16, 2006, with respect to the consolidated financial statements of Reinhold Industries, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2005. Our audits also included the financial statement schedules of Reinhold Industries, Inc. listed in Item 15(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Irvine, California March 30, 2006 EX-31 5 ceo302.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael T. Furry, President and Chief Executive Officer of Reinhold Industries, Inc., certify that: 1. I have reviewed this report on Form 10-K of Reinhold Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ MICHAEL T. FURRY Michael T. Furry President and Chief Executive Officer March 31, 2006 EX-31 6 cfo302.txt Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Brett Meinsen, Vice President - Finance and Administration, Secretary and Treasurer of Reinhold Industries, Inc., certify that: 1. I have reviewed this report on Form 10-K of Reinhold Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ BRETT MEINSEN Brett Meinsen Vice President - Finance and Administration, Secretary, Treasurer March 31, 2006 EX-32 7 ceo906.txt Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Michael T. Furry, President and Chief Executive Officer of Reinhold Industries, Inc. (the "Company"), hereby certifies that to the best of his knowledge: 1. The Annual Report on Form 10-K for the fiscal year ended December 31, 2005 of the Company (the "Report") fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated The foregoing certification is being furnished pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document. /s/ MICHAEL T. FURRY Michael T. Furry President and Chief Executive Officer March 31, 2006 A signed copy of this written statement required by section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 8 cfo906.txt Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Brett Meinsen, Vice President - Finance and Administration, Secretary and Treasurer of Reinhold Industries, Inc. (the "Company"), hereby certifies that to the best of his knowledge: 1. The Annual Report on Form 10-K for the fiscal year ended December 31, 2005 of the Company (the "Report") fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated The foregoing certification is being furnished pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document. /s/ BRETT MEINSEN Brett Meinsen Vice President - Finance and Administration, Secretary, Treasurer March 31, 2006 A signed copy of this written statement required by section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----