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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934
For the Quarter Ended September 29, 2002 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to __________
Commission File Number 1-9298
RAYTECH CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 06-1182033
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Suite 295, Four Corporate Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices) (Zip Code)
203-925-8023
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of November 7, 2002, 41,683,554 shares of the Registrant's common stock, par
value $1.00, were issued and outstanding. (See Part II, Item 1. Legal
Proceedings, Paragraph 3.)
Page 1 of 55
RAYTECH CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 29, 2002 (Unaudited) (Successor Company)
and December 30, 2001 (Successor Company) 4
Condensed Unaudited Consolidated Statements of
Operations for the period July 1, 2002 to
September 29, 2002 (Successor Company) and for
the period July 2, 2001 to September 30, 2001
(Successor Company) 6
Condensed Unaudited Consolidated Statements of
Operations for the period December 31, 2001 to
September 29, 2002 (Successor Company), for the period
April 3, 2001 to September 30, 2001 (Successor Company)
and for the period January 1, 2001 to April 2, 2001
(Predecessor Company) 7
Condensed Unaudited Consolidated Statements
of Cash Flows for the period December 31, 2001 to
September 29, 2002 (Successor Company), for the period
April 3, 2001 to September 30, 2001 (Successor Company)
and for the period January 1, 2001 to April 2, 2001
(Predecessor Company) 8
Condensed Unaudited Consolidated Statements of
Changes in Shareholders' Equity for the period
December 31, 2001 to September 29, 2002 (Successor
Company), for the period April 3, 2001 to September 30,
2001 (Successor Company) and for the period January 1,
2001 to April 2, 2001 (Predecessor Company) 9
Notes to Condensed Unaudited Consolidated
Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 34
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 44
Item 4. Controls and Procedures 45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 4. Submission of Matters to a Vote of Security Holders 48
-2-
Item 6. Exhibits and Reports on Form 8-K 49
Signature 50
Certification of Chief Executive Officer (ss.302) 51
Certification of Chief Executive Officer (ss.302) 52
Exhibits 53
Exhibit 99(A) Certification Chief Financial Officer (ss.906) 54
Exhibit 99(B) Certification of Chief Executive Officer (ss.906) 55
-3-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
Successor Company
-----------------
September 29, 2002
At (unaudited) December 30, 2001
------------------ -----------------
ASSETS
Current assets
Cash and cash equivalents $ 18,113 $ 14,463
Restricted cash 2,015 5,396
Trade accounts receivable, less allowance
of $865 at September 29, 2002 and $729
at December 30, 2001 30,652 22,961
Inventories, net 33,372 31,562
Income taxes receivable 4,793 37,877
Other current assets 7,754 7,048
------------ ------------
Total current assets 96,699 119,307
------------ ------------
Property, plant and equipment 127,278 119,678
Less accumulated depreciation (22,228) (10,386)
------------ ------------
Net property, plant and equipment 105,050 109,292
------------ ------------
Intangible assets, net 71,122 72,790
Deferred income taxes 16,623 16,600
Other assets 2,585 2,799
------------ ------------
Total assets $ 292,079 $ 320,788
============ ============
The accompanying notes are an integral part of these statements.
-4-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)(cont.)
Successor Company
-----------------
September 29, 2002
At (unaudited) December 30, 2001
------------------ -----------------
LIABILITIES
Current liabilities
Notes payable and current
portion of long-term debt $ 11,238 $ 10,262
------------ ------------
Current portion of pension obligation 5,349 7,049
Accounts payable 16,039 13,268
Accrued liabilities 24,944 22,694
Payable to the PI Trust 4,938 38,022
------------ ------------
Total current liabilities 62,508 91,295
------------ ------------
Long-term debt 6,534 6,820
Pension obligation 13,698 15,409
Postretirement benefits other than pensions 13,590 12,876
Deferred payable to the PI Trust 41,614 41,614
Other long-term liabilities 983 987
------------ ------------
Total liabilities 138,927 169,001
------------ ------------
Minority interest 8,653 7,704
------------ ------------
Commitments and contingencies
------------ ------------
SHAREHOLDERS' EQUITY
Capital stock
Cumulative preferred stock,
no par value, 5,000,000
shares authorized, none
issued and outstanding -- --
Common stock, par value $1.00,
50,000,000 shares authorized,
41,683,554 issued and outstanding at
September 29, 2002 and 41,528,520
issued and outstanding at
September 30, 2001 41,683 41,528
Additional paid in capital 117,152 116,843
Accumulated deficit (6,897) (5,577)
Accumulated other comprehensive loss (7,439) (8,711)
------------ ------------
Total shareholders' equity 144,499 144,083
------------ ------------
Total liabilities and
shareholders' equity $ 292,079 $ 320,788
============ ============
The accompanying notes are an integral part of these statements.
-5-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Successor Company
-----------------
for the Period
July 1, 2002 for the Period
to July 2, 2001 to
September 29, 2002 September 30, 2001
------------------ ------------------
Net Sales $ 51,740 $ 48,752
Cost of sales (43,542) (39,388)
------------ ------------
Gross profit 8,198 9,364
Selling and administrative expenses (7,960) (8,667)
------------ ------------
Operating profit (loss) 238 697
Interest expense (309) (302)
Reorganization items -- (399)
Other income, net 300 157
------------ ------------
Income (loss) before provision for
environmental claims, income taxes
and minority interest 229 153
Provision for environmental claims (5,400) (1,310)
------------ ------------
Loss before income taxes
and minority interest (5,171) (1,157)
Income tax benefit 1,916 2,371
------------ ------------
(Loss) income before minority interest (3,255) 1,214
Minority interest (173) (333)
------------ ------------
Net (loss) income $ (3,428) $ 881
============ ============
Basic (loss) earnings per share $ (.08) $ .02
============ ============
Diluted (loss) earnings per share $ (.08) $ .02
============ ============
The accompanying notes are an integral part of these statements.
-6-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Predecessor
Company
Successor Company -----------
----------------- for the Period
for the period for the Period January 1,
December 31, 2001 April 3, 2001 to 2001 to
to September 30, 2001 April 2, 2001
September 29, 2002 (See Note B) (See Note B)
------------------ ------------ ------------
Net Sales $ 159,754 $ 99,313 $ 55,205
Cost of sales (130,420) (85,871) (43,811)
------------ ------------ ------------
Gross profit 29,334 13,442 11,394
Selling and administrative expenses (23,734) (15,666) (7,742)
------------ ------------ ------------
Operating profit (loss) 5,600 (2,224) 3,652
Interest expense (765) (612) (374)
Interest expense - Raymark -- -- (70)
Reorganization items -- (784) 99,996
Other income, net 83 446 290
------------ ------------ ------------
Income (loss) before provision for
environmental claims, income taxes,
minority interest and extraordinary
items 4,918 (3,174) 103,494
Provision for environmental claims (5,400) (1,310) --
------------ ------------ ------------
(Loss) income before income taxes,
minority interest and extraordinary
items (482) (4,484) 103,494
Benefit (provision) for income taxes 111 3,609 (30,846)
------------ ------------ ------------
(Loss) income before minority interest
and extraordinary items (371) (875) 72,648
Minority interest (949) (639) (314)
------------ ------------ ------------
(Loss) income before extraordinary items (1,320) (1,514) 72,334
------------ ------------ ------------
Extraordinary items, net of tax of
$135,977 -- -- 6,922,923
------------ ------------ ------------
Net (loss) income $ (1,320) $ (1,514) $ 6,995,257
============ ============ ============
Basic (loss) earnings per share $ (.03) $ (.04) $ 1,778.88
============ ============ ============
Diluted (loss) earnings per share $ (.03) $ (.04) $ 1,772.62
============ ============ ============
The accompanying notes are an integral part of these statements.
-7-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Predecessor
Company
Successor Company -----------
----------------- for the
for the Period for the Period Period Jan. 1,
December 31, 2001 April 3, 2001 2001 to
to to Sept. 30, 2001 April 2, 2001
September 29, 2002 (See Note B) (See Note B)
------------------ ------------ ------------
Cash flows from operating activities:
Net (loss) income $ (1,320) $ (1,514) $ 6,995,257
Depreciation and amortization 13,867 8,117 3,382
Other operating activities (2,717) 8,849 (7,001,128)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 9,830 15,452 (2,489)
------------ ------------ ------------
Cash flow from investing activities:
Capital expenditures (6,919) (5,039) (2,717)
Proceeds on sales of property,
plant and equipment 58 71 10
------------ ------------ ------------
Net cash used in investing activities (6,861) (4,968) (2,707)
------------ ------------ ------------
Cash flow from financing activities:
Cash overdraft -- -- (371)
Net borrowings (payments)
on short-term notes 768 (401) 2,113
Principal payments on long-term debt (830) (782) (482)
Proceeds from long-term debt 121 36 32
Net proceeds on borrowings from Raymark -- -- (703)
Proceeds from exercise of stock options 464 19 --
------------ ------------ ------------
Net cash provided by (used in)
financing activities 523 (1,128) 589
------------ ------------ ------------
Effect of exchange rate changes on cash 158 55 (78)
Net change in cash and cash equivalents 3,650 9,411 (4,685)
Cash and cash equivalents at
beginning of period 14,463 9,232 13,917
------------ ------------ ------------
Cash and cash equivalents at end of period $ 18,113 $ 18,643 $ 9,232
============ ============ ============
The accompanying notes are an integral part of these statements.
-8-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
(unaudited)
Treasury
Accumulated Shares
Additional Other At Cost
Common Paid in Accumulated Comprehensive (2,132,059
Stock Capital Deficit Loss Shares) Total
----- ------- ------- ---- ------- -----
PREDECESSOR COMPANY
Balance,
December 31, 2000 $ 5,651 $ 70,631 $(7,049,641) $ (1,218) $ (4,561) $(6,979,138)
Comprehensive income:
Net income 6,995,257 6,995,257
Changes during
the period (284) (284)
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive
income 6,995,257 (284) 6,994,973
Reorganization 35,870 46,200 54,384 1,502 4,561 142,517
Balance,
April 2, 2001 $ 41,521 $ 116,831 $ -- $ -- $ -- $ 158,352
=========== =========== =========== =========== =========== ===========
SUCCESSOR COMPANY
Balance,
April 2, 2001 $ 41,521 $ 116,831 $ -- $ -- $ -- $ 158,352
Comprehensive loss:
Net loss (1,514) (1,514)
Changes during
the period (1,683) (1,683)
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive
loss (1,514) (1,683) (3,197)
Stock options exercised
(6,596 shares) 7 12 19
----------- ----------- ----------- ----------- ----------- -----------
Balance,
September 30, 2001 $ 41,528 $ 116,843 $ (1,514) $ (1,683) $ -- $ 155,174
=========== =========== =========== =========== =========== ===========
Balance,
December 30, 2001 $ 41,528 $ 116,843 $ (5,577) $ (8,711) $ -- $ 144,083
Comprehensive loss:
Net loss (1,320) (1,320)
Changes during
the period 1,272 1,272
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive
loss (1,320) 1,272 (48)
Stock options exercised
(155,034 shares) 155 309 464
Balance,
September 29, 2002 $ 41,683 $ 117,152 $ (6,897) $ (7,439) $ -- $ 144,499
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-9-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted,
except per share data)
(Unaudited)
Note A - Formation of Raytech Corporation, Sale of Raymark,
Chapter 11 Proceeding and Emergence from Bankruptcy
Raytech Corporation ("Raytech" or the "Company") was incorporated in June,
1986 in Delaware and held as a subsidiary of Raymark Corporation ("Raymark"). In
October 1986, Raytech became the publicly traded (NYSE) holding company of
Raymark stock through a triangular merger restructuring plan approved by
Raymark's shareholders whereby each share of common stock of Raymark was
automatically converted into a share of Raytech common stock. In May 1988,
Raytech divested all of the Raymark stock.
In accordance with the restructuring plan, Raytech, through its
subsidiaries, purchased certain non-asbestos businesses of Raymark in 1987,
including the Wet Clutch and Brake Division and Raybestos Industrie-Produkte
GmbH, a German subsidiary. Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-defendant with Raymark
and other named defendants in numerous asbestos-related lawsuits as a successor
in liability to Raymark.
In one of the asbestos-related personal injury cases decided in October
1988 in a U.S. District Court in Oregon, Raytech was ruled under Oregon equity
law to be a successor to Raymark's asbestos-related liability. The successor
ruling was appealed by Raytech and in October 1992 the Ninth Circuit Court of
Appeals affirmed the District Court's judgment. The effect of this decision
extended beyond the Oregon District due to a Third Circuit Court of Appeals
decision in a related case wherein Raytech was collaterally estopped (precluded)
from relitigating the issue of its successor liability for Raymark's
asbestos-related liabilities.
In order to stay the asbestos-related litigation, on March 10, 1989,
Raytech filed a petition seeking relief under Chapter 11 of Title 11, United
States Code in the United States Bankruptcy Court, District of Connecticut.
After several Court rulings, including an appeal to the U.S. Supreme
Court, the Oregon case, as affirmed by the Ninth Circuit Court of Appeals,
remained as the prevailing decision holding Raytech to be a successor to
Raymark's asbestos-related liabilities.
As a result of the referenced Court rulings, in October, 1998 Raytech
reached a tentative settlement with its creditors for a consensual plan of
reorganization (the "Plan"), providing for all general unsecured creditors
including all asbestos and environmental claimants to receive 90% of the equity
in Raytech in exchange for their claims. As such, an asbestos personal injury
trust (the "PI Trust") established under the Bankruptcy Code would receive
approximately 84% of the equity of Raytech and the Governments and others would
receive approximately 6% of the equity of Raytech. In addition, any and all
refunds of taxes resulting from the implementation of the Plan would be paid to
the PI Trust. The existing equity holders in Raytech were to retain 10% of the
equity in Raytech.
-10-
Note A, continued
As a result of the final estimation of allowed claims, Raytech recorded
asbestos claims of $6.76 billion, Government claims of $431.8 million, pension
liability claims of $16 million and retiree benefit claims of $2.5 million
during 2000. The total estimated amount of allowed claims was $7.2 billion.
On August 31, 2000, the Bankruptcy Court confirmed Raytech's Plan, which
confirmation was affirmed by the U.S. District Court on September 13, 2000. All
conditions under the confirmation of the Plan were subsequently met, and the
Plan became effective on April 18, 2001 ("Effective Date"), resulting in Raytech
emerging from bankruptcy. On the Effective Date, a channeling injunction ordered
by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code has
and will permanently and forever stay, enjoin and restrain any asbestos-related
claims against Raytech and subsidiaries, thereby channeling such claims to the
PI Trust for resolution. On the Effective Date, the rights afforded and the
treatment of all claims and equity interests in the Plan were in exchange for
and in complete satisfaction, discharge and release of, all claims and equity
interests against Raytech. The Company's Certificate of Incorporation was
amended and restated in accordance with the Plan providing for authority to
issue up to 55 million shares of stock, of which 50 million is common and 5
million is preferred. In settlement of the estimated amount of allowed claims of
$7.2 billion, approximately 38 million shares of common stock were issued and
$2.5 million in cash was payable to the allowed claimants and a commitment was
made to pay to the PI Trust any and all refunds of taxes paid or net reductions
in taxes resulting from the implementation of the Plan. The shares issued are
exempt from registration pursuant to the Bankruptcy Code; however, shares issued
to the PI Trust have restrictions on resale as a result of their high percentage
of ownership in Raytech. In addition, Raytech had assumed the liability for the
Raymark pension plan claim. In September 2002 with the final Court decision
denying Raytech's appeal, the Company assumed the administration of the plans.
It has been represented to Raytech by the Raymark Trustee that the retiree
benefit claim will be retained by Raymark. Settlement of the Raymark claims
resulted in cancellation in full of the Raymark debt and accrued interest of
$12.0 million and a commitment of Raytech to backstop the Raymark Trustee for
professional fees in the event the Raymark Trustee has insufficient recovery of
funds for such purposes up to $1 million. At September 29, 2002, the Company has
$1 million included in accrued liabilities related to this commitment.
See Note C - Fresh-Start Reporting.
-11-
Note B - Condensed Consolidated Financial Statements
These condensed unaudited consolidated financial statements (Successor and
Predecessor Company) have been prepared pursuant to the requirements of Article
10 of Regulation S-X, and in the opinion of management, contain all adjustments
necessary to fairly present the consolidated financial position of Raytech as of
September 29, 2002 and the consolidated results of operations and cash flows for
all interim periods presented. All adjustments are of a normal recurring nature
except for those relating to reorganization and fresh- start adjustments (see
Note C). The effective date of the Company's emergence from bankruptcy was April
18, 2001; however, for accounting purposes, the Company has accounted for the
reorganization and fresh-start adjustments on April 2, 2001, which is the first
day after the Company's first quarter for fiscal 2001. All financial information
prior to that date is presented as pertaining to the Predecessor Company while
all information after that date is presented as pertaining to the Successor
Company. Consequently, after giving effect to the reorganization and fresh-start
adjustments, the financial statements of the Successor Company are not
comparable to those of the Predecessor Company. The year-end condensed
consolidated balance sheet data was derived from audited financial statements
but does not include all disclosures required by accounting principles generally
accepted in the United States of America. The financial statements contained
herein should be read in conjunction with the Company's financial statements and
related notes filed on Form 10-K for the year ended December 30, 2001. Interim
results are not necessarily indicative of the results for the full year.
Certain amounts for prior periods have been reclassified to conform to the
current period presentation.
-12-
Note C - Fresh-Start Reporting
The effective date of the Company's emergence from bankruptcy was April
18, 2001; however, for accounting purposes it was considered to be the close of
business on April 2, 2001. As of April 2, 2001, the Company adopted fresh-start
reporting pursuant to the guidance provided by the American Institute of
Certified Public Accountants' Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). In
accordance with fresh-start reporting, all assets and liabilities were recorded
at their respective fair market values. The fair value of substantially all of
the Company's property, plant and equipment and identifiable intangible assets
were determined by independent third-party appraisers.
The reorganization value of the Successor Company was determined based on
the equity value (which represents enterprise value less debt) of the Successor
Company plus the Successor Company's outstanding liabilities. The reorganization
value was approximately $324 million, which was approximately $35 million in
excess of the aggregate fair value of the Company's tangible and identifiable
intangible assets less liabilities. Such excess is classified as goodwill in the
accompanying Condensed Consolidated Balance Sheet and is being accounted for in
accordance with SFAS NO. 142, "Goodwill and Other Intangible Assets."
To facilitate the calculation of the equity value of the Successor
Company, the Company developed a set of financial projections. Based on these
financial projections, the equity value was determined by the Company, with the
assistance of a financial advisor, using various valuation methods, including
(i) a comparison of the Company and its projected performance to the market
values of comparable companies, (ii) a review and analysis of several recent
transactions of companies in similar industries to the Company, and (iii) a
calculation of the present value of the future cash flows under the projections.
The estimated equity value is highly dependent upon achieving the future
financial results set forth in the projections as well as the realization of
certain other assumptions, which are not guaranteed. The total equity value as
of the effective date was determined to be approximately $158 million.
The reorganization and the adoption of fresh-start reporting resulted in
the following adjustments to the Company's Condensed Consolidated Balance Sheet
as of April 2, 2001:
-13-
Note C, continued
Adjustments to Record
Effectiveness of the Plan of Reorganization
(in thousands)
Predecessor Reorganized
Balance Sheet Reorganization Fresh-Start Balance Sheet
April 2, 2001 Adjustments Adjustments April 2, 2001
------------- ----------- ----------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 11,732 $ (2,500)(a) $ $ 9,232
Trade accounts receivable 29,207 29,207
Inventories 32,590 5,923 (b) 38,513
Income taxes receivable - 37,877 (c) 37,877
Other current assets 7,759 2,500 (a) (2,381)(f) 7,878
--------- ---------- --------- ---------
Total current assets 81,288 37,877 3,542 122,707
--------- ---------- --------- ---------
Net property, plant and
equipment 82,138 30,823 (d) 112,961
Goodwill 18,923 15,844 (e) 34,767
Other intangible assets 375 39,316 (g) 39,691
Deferred income taxes 137,202 (99,341)(f)(c) (27,308)(f) 10,553
Other assets 2,957 2,957
--------- ---------- --------- ---------
Total assets $ 322,883 $ (61,464) $ 62,217 $ 323,636
========= ========== ========= =========
-14-
Note C, continued
Adjustments to Record
Effectiveness of the Plan of Reorganization
(in thousands)
Predecessor Reorganized
Balance Sheet Reorganization Fresh-Start Balance Sheet
April 2, 2001 Adjustments Adjustments April 2, 2001
------------- ----------- ----------- -------------
LIABILITIES
Current liabilities
Notes payable and current
portion of long-term debt $ 12,144 $ $ $ 12,144
Raymark debt 10,709 (10,709)(h) --
Current portion of pension
obligations 353 8,500 (j) 134 (k) 8,987
Accounts payable 14,220 2,500 (a) 16,720
Accrued liabilities 20,501 (275)(i) 20,226
Payable to PI Trust -- 37,877 (c) 37,877
----------- ----------- -------- --------
Total current liabilities 57,927 37,893 134 95,954
----------- ----------- -------- --------
Liabilities subject to
compromise 7,211,433 (7,211,433)(j) --
Long-term debt 8,536 8,536
Pension obligations 1,636 10,000 (j) (6,916)(k) 4,720
Postretirement benefits
other than pensions 13,404 (1,308)(k) 12,096
Deferred payable to the PI Trust -- 36,636 (c) 36,636
Other long-term liabilities 7,654 (312)(f) 7,342
----------- ----------- -------- --------
Total liabilities 7,300,590 (7,126,904) (8,402) 165,284
----------- ----------- -------- --------
Total shareholders'
(deficit) equity (6,977,707) 7,065,440 (l) 70,619 (m) 158,352
----------- ----------- -------- --------
Total liabilities and
shareholders' equity (deficit) $ 322,883 $ (61,464) $ 62,217 $323,636
=========== =========== ======== ========
-15-
Note C, continued
The explanation of the "Reorganization Adjustments" and "Fresh Start
Adjustments" columns of the condensed consolidated balance sheet in the
preceding table are as follows:
a) The Plan required the Company to pay $2.5 million to the unsecured
creditors, which has been reflected as restricted cash, included in other
current assets. During April 2001, $2.1 million of the liability was paid
and $.4 million has been retained by the Company as restricted cash.
b) Finished goods and work-in-progress inventories have been valued based on
their estimated net selling prices less costs to complete, costs of
disposal and a reasonable profit allowance for estimated completing and
selling effort.
c) Income taxes receivable and the payable to the PI Trust reflect the
payable to the PI Trust of current tax recoveries in accordance with the
Plan. Additional tax recoveries to be received in future periods are shown
as deferred tax assets and a deferred payable to the PI Trust.
d) Property, plant and equipment has been adjusted to reflect the fair values
of the assets based on independent appraisals.
e) The unamortized balance of goodwill of the Predecessor Company has been
eliminated. Reorganization value in excess of amounts allocable to
identifiable assets has been classified as goodwill. The goodwill is being
accounted for in accordance with SFAS No. 142 (see Note I).
f) Deferred tax assets and liabilities have been adjusted for the settlement
of the liabilities subject to compromise and the recording of deferred
taxes relating to the differences in book and tax bases of assets and
liabilities after applying fresh start reporting. The Company used a
statutory tax rate of approximately 38%, which approximated the Company's
historic tax rate.
g) Other intangible assets have been adjusted to reflect their fair values as
determined by an independent valuation (see Note I).
h) Raymark debt has been canceled to reflect the resolution of the claims on
the Effective Date.
i) Accrued liabilities have been adjusted to reflect the $1 million backstop
commitment agreed to as a result of the settlement of the Raymark debt
(see Note A), the write- off of accrued interest on the Raymark debt ($2.2
million), and an accrual for bankruptcy-related fees ($.9 million) that
were recorded against the Raymark debt in accordance with the previous
indemnification between Raymark and the Company prior to the effective
date.
j) Liabilities Subject to Compromise have been adjusted to reflect the
settlement of the claims for cash, assumption of certain pension
obligations, the issuance of common shares in the reorganized company and
tax recoveries in accordance with the Plan.
k) The pension and post retirement benefits other than pensions have been
adjusted to include the present values of future obligations.
-16-
NOTE C, continued
l) Shareholders' equity was adjusted to reflect adjustments for the issuance
of 90% of the outstanding common shares to the unsecured creditors at an
overall equity value of $158.3 million in accordance with the Plan.
m) Shareholders' equity was adjusted to reflect the elimination of the
accumulated deficit, accumulated other comprehensive loss and treasury
shares (which have been retired).
NOTE D - Extraordinary Items
As a result of the consummation of the Plan, the Company recognized an
extraordinary gain of the debt discharge on April 2, 2001 as follows:
Predecessor
Company
-------------
April 2, 2001
-------------
Settlement of liabilities subject
to compromise $ 7,211,433
Assumption of pension-related obligations (18,500)
Settlement of Raymark debt 11,984
Cash payment to the PI Trust (2,500)
Back-stop settlement with Raymark (1,000)
Issuance of common stock (142,517)
-----------
Sub-total 7,058,900
Tax expense (135,977)
-----------
Extraordinary gain on debt discharge $ 6,922,923
===========
Note E - Inventories
Inventories, net consist of the following:
Successor Company
-----------------
September 29, 2002 December 30, 2001
(Unaudited)
------------------ -----------------
Raw material $ 10,338 $ 10,829
Work in process 8,793 7,207
Finished goods 14,241 13,526
---------- ----------
$ 33,372 $ 31,562
========== ==========
-17-
Note F - Earnings Per Share
Successor Company
-----------------------------------------
For the Period For the Period
July 1, 2002 to July 2, 2001 to
September 29, 2002 September 30, 2001
------------------ ------------------
Basic EPS Computation
Numerator:
Net (loss) income $ (3,428) $ 881
=========== ===========
Denominator:
Weighted average shares 41,528,520 41,521,924
Weighted average stock
options exercised 121,703 6,596
----------- -----------
Adjusted weighted average
shares 41,650,223 41,528,520
=========== ===========
Basic (loss) income per share $ (.08) $ .02
=========== ===========
Diluted EPS Computation
Numerator:
Net (loss) income $ (3,428) $ 881
=========== ===========
Denominator:
Weighted average shares 41,528,520 41,521,924
Weighted average stock
options exercised 121,703 6,596
----------- -----------
Adjusted weighted
average shares 41,650,223 41,528,520
=========== ===========
Diluted (loss) income
per share $ (.08) $ .02
=========== ===========
The potential common shares of 142,052 for the period July 1, 2002 to
September 29, 2002 were not included in the computation of diluted earnings per
share because of their anti-dilutive effect due to the Company incurring a net
loss for the period.
Options to purchase 394,943 shares of common stock at $4.25 were
outstanding during the period from July 2, 2001 to September 30, 2001. In
addition, options to purchase 180,059 shares of common stock at $2.75 were
outstanding during the period from July 2, 2001 to September 30, 2001. These
shares were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common shares.
-18-
Note F, continued
Predecessor
Successor Company Company
---------------------------------------- ------------------
For the Period For the Period For the Period
December 31, 2001 April 3, 2001 to January 1, 2001
to Sept. 29, 2002 Sept. 30, 2001 to April 2, 2001
------------------ ------------------ ------------------
Basic EPS Computation
Numerator:
(Loss) income before
extraordinary items $ (1,320) $ (1,514) $ 72,334
Extraordinary items -- -- 6,922,923
----------- ----------- ----------
Net (loss) income
(attributable) available
to common shareholders $ (1,320) $ (1,514) $6,995,257
=========== =========== ==========
Denominator:
Weighted average shares 41,528,520 41,521,924 3,519,313
Weighted average shares issued
as a result of reorganization -- -- 413,072
Weighted average stock options
exercised 51,800 4,800 --
----------- ----------- ----------
Adjusted weighted average shares 41,580,320 41,526,724 3,932,385
=========== =========== ==========
Basic (loss) earnings per share:
(Loss) income before
extraordinary items $ (.03) $ (.04) $ 18.39
Extraordinary items -- -- 1,760.49
----------- ----------- ----------
Net (loss) income $ (.03) $ (.04) $ 1,778.88
=========== =========== ==========
-19-
Note F, continued
Predecessor
Successor Company Company
---------------------------------------- ------------------
For the Period For the Period For the Period
December 31, 2001 April 3, 2001 to January 1, 2001
to Sept. 29, 2002 Sept. 30, 2001 to April 2, 2001
------------------ ------------------ ------------------
Diluted EPS Computation
Numerator:
(Loss) income before
extraordinary items $ (1,320) $ (1,514) $ 72,334
Extraordinary items -- -- 6,922,923
----------- ----------- ----------
Net (loss) income (attributable)
available to common stockholders $ (1,320) $ (1,514) $6,995,257
=========== =========== ==========
Denominator:
Weighted average shares 41,528,520 41,521,924 3,519,313
Weighted average shares issued
as a result of reorganization -- -- 413,072
Weighted average stock
options exercised 51,800 4,800 --
Dilutive potential common shares -- -- 13,897
----------- ----------- ----------
Adjusted weighted average shares
and equivalents 41,580,320 41,526,724 3,946,282
=========== =========== ==========
Diluted (loss) earnings per share:
(Loss) income before
extraordinary items $ (.03) $ (.04) $ 18.33
Extraordinary items -- -- 1,754.29
----------- ----------- ----------
Net (loss) income $ (.03) $ (.04) $ 1,772.62
=========== =========== ==========
The potential common shares of 76,600 for the period of December 31, 2001
to September 29, 2002 were not included in the computation of diluted earnings
per share because of their anti-dilutive effect due to the Company incurring a
net loss for the period.
Options to purchase 483,815 and 487,550 shares of common stock at $4.25
were outstanding during the period from April 3, 2001 to September 30, 2001, and
January 1, 2001 to April 2, 2001, respectively. In addition, options to purchase
209,927 shares of common stock at $2.75 were outstanding during the period from
April 3, 2001 to September 30, 2001. These shares were not included in the
computation of diluted earnings per share because the option's exercise price
was greater than the average market price of the common shares.
See Notes A and B regarding the effect of the Company's plan of
reorganization.
On February 12, 2002, the Official Committee of Equity Security Holders
filed a motion in the United States Bankruptcy Court objecting to the allocation
of common shares under the Plan of Reorganization between the unsecured
creditors and the existing equity holders. The ultimate outcome of this matter
is unknown; however, it is possible that its resolution could cause the Company
to issue additional shares, or to retire shares, in the future. This would
directly impact the earnings per share calculations of the Company.
-20-
Note G - Segment Reporting
The Company's operations are categorized into three business segments
based on management structure, product type and distribution channel as
described below.
The Wet Friction segment produces specialty engineered products for heat
resistant, inertia control, energy absorption and transmission
applications. The Company markets its products to automobile original
equipment manufacturers, heavy duty original equipment manufacturers, as
well as farm machinery, mining, truck and bus manufacturers.
The Dry Friction segment produces engineered friction products, primarily
used in original equipment automobile and truck transmissions. The clutch
facings produced by this segment are marketed to companies who assemble
the manual transmission systems used in automobiles and trucks.
The Aftermarket segment produces specialty engineered products primarily
for automobile and lift truck transmissions. In addition to these
products, this segment markets transmission filters and other transmission
related components. The focus of this segment is marketing to warehouse
distributors and certain retail operations in the automotive aftermarket.
The Company has recorded the impact of fresh-start reporting as a part of its
corporate headquarters. As a result, the segments do not reflect any adjustments
for fresh-start accounting (see Note C).
Information relating to operations by industry segment follows:
-21-
NOTE G, continued
OPERATING SEGMENTS
Successor Company
----------------------------------------
For the Period For the Period
July 1, 2002 to July 2, 2001 to
September 29, 2002 September 30, 2001
------------------ ------------------
WET FRICTION
Net sales to external
customers $ 31,271 $ 29,903
Intersegment net sales (1) 2,343 2,105
------------ ------------
Total net sales $ 33,614 $ 32,008
============ ============
Operating profit (loss) (2) $ 713 $ (709)
============ ============
AFTERMARKET
Net sales to external
customers $ 11,040 $ 11,225
Intersegment net sales (1) 9 2
------------ ------------
Total net sales $ 11,049 $ 11,227
============ ============
Operating profit (2) $ 1,370 $ 1,864
============ ============
DRY FRICTION
Net sales to external
customers $ 9,429 $ 7,624
Intersegment net sales (1) 22 15
------------ ------------
Total net sales $ 9,451 $ 7,639
============ ============
Operating profit (2) $ 925 $ 398
============ ============
CORPORATE
Operating loss before provision for
environmental claims (2,3) $ (2,779) $ (1,400)
Provision for environmental claims (5,400) (1,310)
------------ ------------
Operating loss (2,3) $ (8,179) $ (2,710)
============ ============
Total Segments
Net sales to external
customers $ 51,740 $ 48,752
Intersegment net sales (1) 2,374 2,122
------------ ------------
Total net sales $ 54,114 $ 50,874
============ ============
Operating loss (2) $ (5,171) $ (1,157)
============ ============
(1) The Company records intersegment sales at an amount negotiated between the
segments. All intersegment sales are eliminated in consolidation.
(2) The Company's management reviews the performance of its reportable
segments on an operating profit basis, which consists of income before
taxes and minority interest.
(3) Represents the impact of fresh-start reporting (see Note C), compensation
and related costs for employees of the Company's corporate headquarters,
professional and shareholder fees and public relations expenses.
-22-
Note G, continued
OPERATING SEGMENTS
Predecessor
Successor Company Company
-------------------------------------- -------------
For the Period For the Period For the Period
December 31, 2001 April 3, 2001 to January 1, 2001 to
to Sept, 29, 2002 Sept. 30, 2001 April 2, 2001
----------------- -------------- -------------
WET FRICTION
Net sales to external
customers $ 98,190 $ 60,814 $ 34,073
Intersegment net sales (1) 7,075 3,806 2,974
------------ ------------ ------------
Total net sales $ 105,265 $ 64,620 $ 37,047
============ ============ ============
Operating profit (2) $ 4,370 $ 1,296 $ 1,327
============ ============ ============
AFTERMARKET
Net sales to external
customers $ 35,612 $ 23,440 $ 13,101
Intersegment net sales (1) 27 2 10
------------ ------------ ------------
Total net sales $ 35,639 $ 23,442 $ 13,111
============ ============ ============
Operating profit (2) $ 6,196 $ 3,847 $ 2,109
============ ============ ============
DRY FRICTION
Net sales to external
customers $ 25,952 $ 15,059 $ 8,031
Intersegment net sales (1) 89 36 116
------------ ------------ ------------
Total net sales $ 26,041 $ 15,095 $ 8,147
============ ============ ============
Operating profit (2) $ 1,873 $ 843 $ 754
============ ============ ============
CORPORATE
Operating (loss) profit before
provision for environmental
claims $ (7,521) $ (9,160) $ 99,304
Provision for environmental
claims 5,400) (1,310) --
------------ ------------ ------------
Operating (loss)profit (2,3) $ (12,921) $ (10,470) $ 99,304
============ ============ ============
TOTAL SEGMENTS
Net sales to external
customers $ 159,754 $ 99,313 $ 55,205
Intersegment net sales (1) 7,191 3,844 3,100
------------ ------------ ------------
Total net sales $ 166,945 $ 103,157 $ 58,305
============ ============ ============
Operating (loss) profit (2) $ (482) $ (4,484) $ 103,494
============ ============ ============
(1) The Company records intersegment sales at an amount negotiated between the
segments. All intersegment sales are eliminated in consolidation.
(2) The Company's management reviews the performance of its reportable
segments on an operating profit basis, which consists of income before
taxes and minority interest.
(3) Represents the impact of fresh-start reporting (see Note C), compensation
and related costs for employees of the Company's corporate headquarters,
professional and shareholder fees and public relations expenses.
-23-
Note H - Income Taxes
The effective tax rate for the thirty-nine-week period ended September 29,
2002 is a benefit of 23% compared to an effective rate of 217% for the same
period in the prior year, excluding the one-day effect in the amount of $29.4
million relating to the Plan of Reorganization on April 2, 2001. The rate for
the current period reflects a statutory federal rate adjusted for state and
foreign taxes. The rate differs from the 2001 rate by 240 percentage points. In
the current period, the tax rate was impacted by a change in the mix of domestic
and foreign income and loss and the effect of state taxes. The effective tax
rate for the thirteen-week period ended September 29, 2002 is a benefit of 37%
compared to a benefit of 205% in the same period in the prior year. The
effective rate for the thirty-nine-week period ended September 30, 2001 reflects
the Company's anticipated annualized rate and differs from the federal statutory
tax rate for several reasons. The Company had profitable operations in certain
tax jurisdictions which could not be offset by losses incurred by other
operating entities in other tax jurisdictions. Further, certain losses of
foreign operations did not provide a tax benefit due to limitations on the
realizability of those tax attributes. In addition, there were adjustments made
in the current period to properly record tax accruals relating to prior periods.
And finally, there was the tax effect of expenses that are not deductible for
tax purposes.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement") as modified, all tax benefits received by the Company due to the
reorganization are to be passed onto the PI Trust as received. At December 30,
2001, the Company had tax loss carryforwards of $30.2 million and tax credit
carryforwards of $4.9 million, all of which will inure to the benefit of the PI
Trust. Additionally, future payments to the PI Trust and others will create
additional tax deductions, which will inure to the benefit of the PI Trust in
accordance with the Agreement. These include deductions for payments to the PI
Trust of tax benefits associated with the utilization of the net operating
losses created by the reorganization, and contributions made to the Raymark
pension plan. If Raytech Corporation generates net operating losses in future
periods, exclusive of net operating losses attributable to the payments
discussed above, those net operating losses will be retained by the Company. The
method of allocation in utilizing future net operating losses, if any, between
the PI Trust and Raytech Corporation has not been determined at this time.
Additional tax recoveries to be received in future periods are shown as deferred
tax assets (net of deferred tax liabilities) and a deferred payable to the PI
Trust which amounted to $41.6 million at September 29, 2002.
The Company has filed for and received in 2002 Federal tax refunds of
$33.4 million. During the second quarter of 2002, the Agreement was modified to
eliminate the holdback provision. As such, and pursuant to the Agreement as
modified, Raytech has paid over to the Trust the entire amount of the refunds.
Additionally, at September 29, 2002, the Company has a tax receivable in the
amount of $4.8 million relating to amounts due from state governments for
returns filed in 2002. These refunds when received will be paid to the Trust.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit or
any other years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
The Company owns 57% of the stock of Allomatic Products Company ("APC").
The Company has not recorded a deferred tax liability for the undistributed
earnings of APC since management expects that those earnings will be distributed
to the Company in a tax-free transaction. However, the deferred
-24-
Note H, continued
tax liability on the undistributed earnings of APC would be approximately $1.0
million at September 29, 2002, if all of APC's earnings were to be distributed
through dividends.
-25-
Note I - Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, establishes
specific criteria for the recognition of intangible assets separately from
goodwill, and requires that unallocated negative goodwill be written off
immediately as an extraordinary gain instead of being deferred and amortized.
SFAS No. 142 addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. Under SFAS No. 142, goodwill and indefinite-
lived intangibles need to be reviewed for impairment at least annually at the
reporting unit level. In addition, the amortization period of intangible assets
with finite lives will no longer be limited to forty years. As discussed in Note
C, the Company adopted fresh-start reporting as described in the American
Institute of Certified Public Accountants' Statement of Position No. 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code."
SOP 90-7 requires that any change in accounting principles that will be required
within the twelve months following the adoption of fresh- start reporting should
be adopted at that time. Accordingly, the Company adopted SFAS No. 141 and No.
142 as of April 2, 2001. All intangible assets and goodwill have been valued at
fair value as of the date of fresh-start reporting.
Successor Company
-----------------
September 29, 2002 December 30, 2001
------------------ -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Finite life intangible
assets:
Unpatented technology $ 16,262 $ 2,910 $ 16,262 $ 1,455
Distribution base 5,716 426 5,716 213
------------ ------------ ------------ ------------
Sub-total 21,978 $ 3,336 21,978 $ 1,668
------------ ============ ------------ ============
Indefinite life intangible
assets:
Trademarks 17,713 17,713
------------ ------------
Goodwill 34,767 34,767
------------ ------------
Intangible assets, net $ 71,122 $ 72,790
============ ============
The weighted-average amortization periods for the unpatented technology and the
distribution base are 6 and 20 years, respectively. Amortization expense for
both the periods from July 1, 2002 to September 29, 2002 and from July 2, 2001
to September 30, 2001 amounted to $556. For the period December 31, 2001 to
September 29, 2002 amortization expense amounted to $1,668.
-26-
Note I, continued
Estimated annual amortization expense is as follows:
For the year ending:
2002 $ 2,224
2003 2,224
2004 2,224
2005 2,224
2006 2,224
As required by SFAS No. 142, trademarks and goodwill for the Successor Company
will not be amortized but will be reviewed for impairment annually. The
Company's three operating segments have been defined as reporting units for
purposes of testing goodwill for impairment. The amount of goodwill has been
assigned to each of the Company's segments as follows: $28.9 million for the Wet
Friction segment and $5.9 million for the Aftermarket segment. No goodwill has
been allocated to the Dry Friction segment. The Company performed its annual
impairment review of the trademarks and goodwill in accordance with SFAS 142, as
of March 31, 2002. That effort, which was performed with assistance from a third
party valuation firm, indicated that no impairment adjustment was necessary.
Accordingly, there were no changes in the carrying amount of trademarks or
goodwill during the period from December 31, 2001 to September 29, 2002.
Reported net income presented exclusive of amortization expense (including
any related tax effects) recognized in prior periods relating to goodwill of the
Predecessor Company would have been:
Predecessor Company
-------------------
For the Period
January 1, 2001 to
April 1, 2001
-------------------
Reported net income $ 1,715
Add back goodwill amortization 207
---------
Adjusted net income $ 1,922
=========
Basic earnings per share:
Reported net income $ .49
Goodwill amortization .06
---------
Adjusted net income $ .55
=========
Diluted earnings per share:
Reported net income $ .48
---------
Goodwill amortization .06
---------
Adjusted net income $ .54
=========
-27-
Note J - Litigation
The Company is subject to certain legal matters that have arisen in the
ordinary course of business, which management expects would not have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company. In addition, the Company is involved in the following
litigation.
In April 1996, the Indiana Department of Environmental Management ("IDEM")
advised Raybestos Products Company ("RPC"), a wholly-owned subsidiary of the
Company, that it may have contributed to the release of lead and PCB's
(polychlorinated biphenyls) found in a drainage ditch near its Indiana facility.
In June 1996, IDEM named RPC as a potentially responsible party ("PRP"). RPC
notified its insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern District of
Indiana, captioned Reliance Insurance Company vs. RPC seeking a declaratory
judgment that any liability of RPC is excluded from its policy with RPC. In
January 2000, the District Court granted summary judgment to RPC, indicating
that the insurer has a duty to defend and indemnify losses stemming from the
IDEM claim. In early 2001, Reliance paid $500,000 to RPC as partial
reimbursement for previously incurred defense costs. However, in June 2001,
Reliance Insurance Company was placed in rehabilitation in Pennsylvania. The
effect upon RPC's claim is not known at this time. Three additional insurers
have been added to the Reliance case as ordered by the District Court. RPC has
demanded $15.55 million from the three carriers, none of which have responded as
yet. Rather, the parties all have filed various motions which have not yet been
heard by the Court. IDEM has turned the matter over to the U.S. Environmental
Protection Agency ("EPA"). In December 2000, the EPA issued a Unilateral
Administrative Order under CERCLA ("Order") demanding removal of contaminated
soils from the referenced drainage ditch. RPC has prepared a plan for
implementation, has begun remediation at the site and is in compliance with the
cleanup Order. The Company has revised the costs to complete the project and at
September 29, 2002 recorded a charge of $5.4 million, which reflects the
anticipated increase in costs. The Company has estimated that the cost to comply
with the Order and related fines will be approximately $14.5 million of which
$6.2 million has been spent through September 29, 2002. The remaining balance of
$8.3 million is included in accrued liabilities. It is at least reasonably
possible that the assessment of estimated costs to comply with the Order may be
modified as the project progresses and that there may be additional assessments
from the EPA. Prior to IDEM's relinquishment of control of the cleanup to the
EPA, IDEM and RPC had reached an Agreed Order providing for a risk-based
remediation of the contamination different from the EPA's Order. IDEM withdrew
from the Agreed Order, which was ruled to be a breach of contract by an Indiana
State Superior Court. In July 2002, RPC filed an action against IDEM for damages
determined to be the difference between the costs of cleanup under the EPA Order
and the IDEM Agreed Order. Various motions have been filed by each party on
which the Court has yet to rule. The outcome of this litigation is not known.
In February 2002, the Committee of Equity Holders filed a motion in the
U.S. Bankruptcy Court asking for the distribution of the Company's shares to the
general creditors under the Plan of Reorganization to be recalculated, claiming
that the equity holders received less than the required percentage of shares.
The ultimate outcome of this matter is unknown; however, it is possible that its
resolution could cause the Company to issue additional shares, or to retire
shares, in the future. This would directly impact the earnings per share
calculations of the Company. At a preliminary hearing in April 2002, the Court
took the matter under advisement pending submission of
-28-
Note J, continued
position papers by the parties. The Company has filed a motion for summary
judgment asking the Court to dismiss the action, and the Committee has filed an
objection. It is not known when the Court will rule on the motion.
The Company is in receipt of a letter from the Michigan Department of
Environmental Quality ("MDEQ") alleging responsibility for trichloroethylene
("TCE") contamination at a Ferndale, Michigan, industrial site formerly occupied
by Advanced Friction Materials Company ("AFM") from 1974 to 1985. AFM was
acquired by the Company in 1998. The Company is cooperating with the MDEQ in
evaluating the subsurface of the site to obtain data concerning the alleged
contamination. A work plan has been approved by the MDEQ and the testing
procedure has begun. Estimated costs of such evaluation should not exceed $15
thousand. The Company's liability at this site is indeterminable at this time.
-29-
Note K - Liquidity
Concurrent with the effective date of the Plan, Raytech settled the
Liabilities Subject To Compromise either through the issuance of common stock,
payment in cash or the assumption of a liability of $11.2 million for certain
Raymark pension plans, among other resolutions. The Company has reached an
agreement with the Internal Revenue Service ("IRS") and the Pension Benefit
Guaranty Corporation ("PBGC") and has received a funding waiver under Revenue
Procedure 94-41. The waiver provides for an extended period of time for funding
this pre-2001 amount of $6.5 million while keeping the annual funding going
forward on a current basis. In September 2002, a contribution to the Plan was
made of $4.9 million satisfying the funding obligation through the 2001 Plan
year. The pension plans have a current unfunded liability for pre- 2001 funding
of $4.8 million.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement"), all tax benefits received by the Company due to the reorganization
are to be passed onto the PI Trust as received. At December 30, 2001, the
Company had tax loss carryforwards of $30.2 million and tax credit carryforwards
of $4.9 million, all of which will inure to the benefit of the PI Trust.
Additionally, future payments to the PI Trust and others will create additional
tax deductions, which will inure to the benefit of the PI Trust in accordance
with the Agreement. These include deductions for payments to the PI Trust of tax
benefits associated with the utilization of the net operating losses created by
the reorganization, and contributions made to the Raymark pension plan. If
Raytech Corporation generates net operating losses in future periods, exclusive
of net operating losses attributable to the payments discussed above, those net
operating losses will be retained by the Company. The method of allocation in
utilizing future net operating losses, if any, between the PI Trust and Raytech
Corporation has not been determined at this time. Additional tax recoveries to
be received in future periods are shown as deferred tax assets and a deferred
payable to the PI Trust which amounted to $41.6 million at September 29, 2002.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit or
any other years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
The Company is complying with a Federal Order issued by the U.S.
Environmental Protection Agency (EPA) at its manufacturing facility in
Crawfordsville, Indiana. The Company reevaluated the projected cost to complete
this project during the third quarter of 2002 and determined that, based on work
completed to date, the estimate previously received from its environmental
engineering firm was not sufficient to complete the project. The Company has
employed a new environmental engineering firm and a new construction company to
complete this project. The scope of the cleanup plan has not changed, and the
additional charge recorded during the third quarter is expected to be sufficient
to complete this project. The Company, at September 29, 2002, recorded a charge
of $5.4 million, which reflects the anticipated increase in costs to complete
the project. The Company has an accrued liability of $8.3 million at September
29, 2002, which is expected to provide for full remediation and fines in
compliance with the Order. It is anticipated that substantially all of these
costs will be paid in the next twelve months. The Company paid $4.5 million
during the thirty- nine-week period ended September 29, 2002.
Management believes that existing cash balances, availability under its
existing credit facilities and cash flow from operations during 2002 will be
sufficient to meet all of the Company's obligations arising in the normal course
of business, including anticipated capital investments.
-30-
Note L - Restricted Cash
Restricted cash relates to the following:
Successor Company
-----------------
September 29, 2002 December 30, 2001
------------------ -----------------
Pension escrow $ -- $ 3,000
Letters of credit 1,604 1,986
Other 411 410
---------- ----------
$ 2,015 $ 5,396
========== ==========
The letters of credit collateralize certain obligations relating primarily
to workers' compensation. The pension escrow account is discussed in Note K -
Liquidity.
-31-
Note M - Recently Issued Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 146 (SFAS No. 146), "Accounting for Costs Associated
with Exit or Disposal Activities." The objectives of SFAS No. 146 are to address
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue
No.94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS No. 146 and Issue No. 94-
3 relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue No. 94-3, a liability for an exit cost as defined in Issue
No. 94-3 was recognized at the date of an entity's commitment to an exit plan.
The provisions of SFAS No. 146 will be effective for the Company for exit or
disposal activities that are initiated beginning in fiscal 2003.
In May 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 145 (SFAS 145) "Recision of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections." The
Statement rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, when material, classified as an
extraordinary item net of the related income tax effect. FAS 145 also amends FAS
13 to require that certain lease modifications having economic effect similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The provisions of SFAS 145 are effective for
transactions occurring after May 15, 2002. It is not expected that SFAS 145 will
have a material effect on our financial position or results of operations.
-32-
Note N - Subsequent Event
Subsequent to the end of the third quarter, September 29, 2002, two
participants in the executive severance program decided to take retirement. The
estimated amount of expense associated with the program is $1.5 million and will
be recorded in the fourth quarter of 2002.
-33-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In preparing the discussion and analysis required by the Federal
Securities Laws, it is presumed that users of the interim financial information
have read or have access to the discussion and analysis for the preceding fiscal
year.
Results of Operations and Liquidity and Capital Resources
In April 2001, Raytech Corporation emerged from the protection of the
Bankruptcy Court under Chapter 11 of Title 11 of the United States Bankruptcy
Code. Raytech Corporation had been under the Chapter 11 protection since March
1989. The bankruptcy history and emergence are described in more detail in Note
A to the Unaudited Condensed Consolidated Financial Statements.
As of April 2, 2001, the Company adopted fresh-start reporting pursuant to
the guidance provided by the American Institute of Certified Public Accountant's
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"). The Effective Date of the Company's
emergence from bankruptcy is considered to be the close of business on April 2,
2001 for financial reporting purposes. The periods presented prior to April 2,
2001 have been designated "Predecessor Company" and the periods subsequent to
April 2, 2001 have been designated "Successor Company." In accordance with
fresh-start reporting, all assets and liabilities were recorded at their
respective fair values. The fair value of substantially all of the Company's
long-lived assets were determined using information provided by third-party
appraisers.
The Company has determined that the most meaningful presentation of
financial information would be to provide comparative analysis of financial
performance for the Successor Company for the periods July 1, 2002 through
September 29, 2002 and April 1, 2002 through September 29, 2002 compared to the
periods July 2, 2001 through September 30, 2001 and April 3, 2001 through
September 30, 2001, respectively. Additionally, the period December 31, 2001
through March 31, 2002, Successor Company, has been compared to the period
January 1, 2001 through April 1, 2001, Predecessor Company.
The adjustments relating to the recording of reorganization expenses and
other fresh-start adjustments for the one-day period ended April 2, 2001 are
detailed in Note C to the Unaudited Condensed Consolidated Financial Statements.
The Company has elected not to present a comparative analysis for the
thirty-nine-week periods ended September 29, 2002 and September 30, 2001, since
such information in the prior period would require consolidating statements of
the Predecessor Company and the Successor Company. It was determined that the
significance of the adjustments relating to the emergence from bankruptcy would
render such analysis not meaningful.
Accounting Policies
The unaudited condensed consolidated financial statements include the
accounts of Raytech Corporation and its majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
The investment by third parties in Allomatic Products Company is accounted for
as minority interest in the Unaudited Condensed Consolidated Financial
Statements. There are no unconsolidated entities and Raytech does not use
Special Purpose Entities (SPE's). The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported and disclosures of contingent liabilities made
in the financial statements and accompanying notes. Actual results could differ
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from these estimates. Significant estimates include inventory, receivable and
environmental reserves, depreciable lives of property, plant and equipment and
intangible assets, pension and other postretirement and postemployment benefits,
and the recoverable value of deferred tax assets.
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated or if an amount is likely to fall within a range and no amount within
the range can be determined to be the better estimate, the minimum amount of the
range is recorded. Remediation obligations are not recorded on a discounted
basis. Reimbursements from insurance carriers relating to environmental matters
are not recorded until it is probable that such recoveries will be realized.
Results of Operations for the Successor Company for the Thirteen-Week Periods
ended September 29, 2002 and September 30, 2001 and Results of Operations for
the Successor Company for the Periods April 1, 2002 to September 29, 2002 and
April 3, 2001 to September 30, 2001
Raytech Corporation recorded a net loss of $3.4 million for the thirteen-
week period ended September 29, 2002 or $.08 loss per basic share as compared to
net income of $.9 million or $.02 per basic share for the thirteen-week period
ended September 30, 2001. The change period over period was due to a charge to
income for estimated costs associated with an environmental cleanup in Indiana.
The details are more fully explained in Litigation Note J and in Liquidity Note
K. The accrual for this liability was increased $5.4 million at September 29,
2002.
Net Sales
Net sales for the thirteen-week period ended September 29, 2002 were $51.7
million compared to net sales of $48.8 million for the same period in the prior
year, an increase of $2.9 million or 5.9%. Net sales for the period April 1,
2002 through September 29, 2002 of $107.0 million compared to $99.3 million for
the same period in the prior year, an increase of $7.7 million or 7.8%. The
increased sales are explained below as the change relates to the individual
segments.
The Wet friction segment reported sales of $31.3 million for the thirteen-
week period ended September 29, 2002 compared to $29.9 million for the same
period in the prior year, an increase of $1.4 million or 4.7%. Sales for the
period April 1, 2002 to September 29, 2002 were $66.1 million compared to $60.8
million in the same period in the prior year, an increase of $5.3 million or
8.7%. The improved sales for the quarter and the twenty-six-week period reflect
the growth in the automotive OEM component of the market, principally through
new business in 2002. The automotive component of this segment has benefited
from the aggressive sales incentives and low cost financing packages the
automotive OEM's have used to stimulate sales. The heavy duty component of this
segment reflects lower sales due to lower demand in certain markets and
increased competition.
The Aftermarket segment reported sales of $11.0 million for the thirteen-
week period ended September 29, 2002 compared to $11.2 million for the same
period in the prior year, reflecting a reduction of $.2 million in sales period-
over-period or 1.8%. Sales for the twenty-six week period ended September 29,
2002 were $23.1 million compared to $23.4 million for the same period in the
prior year, a reduction of $.3 million or 1.3%. The sales performance reflects
the flat demand period-over-period for the aftermarket products. The aftermarket
for Raytech's products has been impacted by improved quality of OEM parts and
mild winter weather.
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The Dry Friction segment reported sales of $9.4 million for the thirteen-
week period ended September 29, 2002 compared to $7.6 million for the same
period in the prior year, an increase of $1.8 million or 23.7%. Sales for the
period April 1, 2002 through September 29, 2002 were $17.8 million compared to
sales of $15.1 million for the same period in the prior year, an increase of
$2.7 million or 17.9%. The improved sales reflect the strong sales performance
of the operation in China. In June of 2002, the expansion of this facility was
completed in order to provide for the needed capacity to serve the Asian and
Eastern European markets.
Gross Profit
Raytech recorded gross profit of $8.2 million for the thirteen-week period
ended September 29, 2002, which represents 15.9% of sales for the period as
compared to a gross profit of $9.4 million for the same period in the prior
year, which represents 19.3% of sales for that period. The reduced gross margin
of $1.2 million reflects certain startup costs associated with new sales to the
automotive OEM market as well as product mix in the Aftermarket segment. Gross
profit for the period April 1, 2002 to September 29, 2002 was $18.8 million,
which reflects a percentage of sales for the period of 17.6% compared to a gross
margin of $13.4 million for the same period in the prior year, which represents
13.5% of sales for that period. The comparability of gross margins in the
twenty-six-week period is difficult due to certain accounting treatments in 2001
which were required as part of fresh-start accounting. Specifically, a $5.9
million adjustment was made to increase inventory to fair market value. This
increased inventory value reduced the gross margin in subsequent periods as the
inventory was sold in the 2001 period.
Selling, General and Administrative
The selling, general and administrative (SG&A) expenses for the period
July 1, 2002 to September 29, 2002 were $8.0 million or 15.5% of sales for the
period compared to $8.7 million for the period July 2, 2001 to September 30,
2001, which represented 17.8% of sales for that period. SG&A for the period
April 1, 2002 to September 29, 2002 were $16.1 million, which represents 15.0%
of sales for the period compared to $15.7 million for the period April 3, 2001
to September 30, 2001, which represents 15.8% of sales for that period. The
significant change for the thirteen-week period ended September 29, 2002 was due
to lower legal costs and other cost reduction programs throughout the Company.
Interest Expense
Interest expense for the period July 1, 2002 to September 29, 2002 of $.3
million is the same as the amount recorded in the same period in the prior year.
The interest expense for the period April 1, 2002 to September 29, 2002 of $.5
million compares to $.6 million in the prior year. The interest expense reflects
both similar borrowings and interest rates period-over-period.
Operating Profits
The following discussion of operating results by industry segment relates
to information contained in Note G - Segment Reporting to the Unaudited
Condensed Consolidated Financial Statements. Operating profit on a segment basis
is income before income taxes, minority interest and extraordinary items.
An operating loss of $5.2 million was recorded for the thirteen-week
period ended September 29, 2002 compared to an operating loss of $1.2 million
for the period July 2, 2001 to September 30, 2001. Raytech recorded an operating
loss of $3.3 million for the period April 1, 2002 to September 29, 2002 compared
to an operating loss of $4.5 million for the period April 3, 2001 to September
30, 2001. The operating loss for the thirteen-week period ended September 29,
2002 reflects an addition to the recorded liability and an expense for the
period for
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an environmental remediation project at the Crawfordsville, Indiana, facility.
The Company reevaluated the projected cost to complete this project during the
third quarter of 2002 and determined that, based on work completed to date, the
estimate previously received from its environmental engineering firm was not
sufficient to complete the project. The Company has employed a new environmental
engineering firm and a new construction company to complete this project. The
scope of the cleanup plan has not changed, and the additional charge recorded
during the third quarter is expected to be sufficient to complete this project.
An additional $5.4 million was charged to expense and added to the accrual, to
reflect a change in the estimated cost to complete the remediation project. See
Note J - Litigation. The improved operating loss of $1.2 million for the twenty-
six week period ended September 29, 2002 reflects the impact of the inventory
adjustment detailed in the gross profit analysis above. In addition, operating
performance has improved period-over-period. This improvement was negatively
affected by the charge of $5.4 million for environmental remediation noted
above.
The Wet Friction segment recorded an operating profit for the
thirteen-week period ended September 29, 2002 of $.7 million compared to an
operating loss of $.7 million for the period July 2, 2001 through September 30,
2001, an improvement of $1.4 million. The operating profit for the
twenty-six-week period April 1, 2002 through September 29, 2002 is $2.8 million
compared to an operating profit of $1.3 million, an improvement of $1.5 million
period-over-period. The operating profit in the 2002 periods has been improved
due to increased sales period-over-period. These improvements have been offset
by startup costs associated with a new supply contract and poor performance in
the European component of the Wet Friction segment. The European performance in
the period July 1, 2002 to September 29, 2002 showed improvement
period-over-period due to reduced costs and improved efficiencies at that
location.
The Aftermarket segment recorded operating profit of $1.4 million for the
period July 1, 2002 to September 29, 2002 compared to operating profit of $1.9
million for the period July 2, 2001 to September 30, 2002, a decline of $.5
million. The operating profit for the twenty-six-week period April 1, 2002 to
September 29, 2002 is $3.6 million compared to an operating profit of $3.8
million for the period April 3, 2001 to September 30, 2001, a decrease of $.2
million. The reduction in operating profit for the thirteen-week period ended
September 29, 2002 compared to the same period in the prior year is due to the
product mix in sales and lower sales of $.2 million period-over-period;
additionally, customer incentives have been increased in 2002. The reduced
profit for the twenty-six-week period reflects lower sales and product mix, and
the increased sales incentive costs for the period.
The Dry Friction segment recorded operating profit of $.9 million for the
thirteen-week period ended September 29, 2002 compared to $.4 for the thirteen-
week period July 1, 2001 through September 30, 2001, an increase of $.5 million.
The operating profit for the twenty-six week period April 1, 2002 to September
29, 2002 of $1.1 million compared to an operating profit for the period April 3,
2001 to September 21, 2001 of $.8 million, an increase of $.3 million
period-over-period. The operating profit increase in both periods of 2002 over
2001 is due to increased sales through our operation in China and improved
operating efficiencies in the European operation.
Income Taxes
The effective tax rate for the thirty-nine-week period ended September 29,
2002 is a benefit of 23% compared to an effective rate of 217% for the same
period in the prior year, excluding the one-day effect in the amount of $29.4
million relating to the Plan of Reorganization on April 2, 2001. The rate for
the current period reflects a statutory federal rate adjusted for state and
foreign taxes. The rate differs from the 2001 rate by 240 percentage points. In
the current period, the tax rate was impacted by a change in the mix of domestic
and foreign income and loss and the effect of state taxes. The effective tax
-37-
rate for the thirteen-week period ended September 29, 2002 is a benefit of 37%
compared to a benefit of 205% in the same period in the prior year. The
effective rate for the thirty-nine-week period ended September 30, 2001 reflects
the Company's anticipated annualized rate and differs from the federal statutory
tax rate for several reasons. The Company had profitable operations in certain
tax jurisdictions which could not be offset by losses incurred by other
operating entities in other tax jurisdictions. Further, certain losses of
foreign operations did not provide a tax benefit due to limitations on the
realizability of those tax attributes. In addition, there were adjustments made
in the current period to properly record tax accruals relating to prior periods.
And finally, there was the tax effect of expenses that are not deductible for
tax purposes.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement") as modified, all tax benefits received by the Company due to the
reorganization are to be passed onto the PI Trust as received. At December 30,
2001, the Company had tax loss carryforwards of $30.2 million and tax credit
carryforwards of $4.9 million, all of which will inure to the benefit of the PI
Trust. Additionally, future payments to the PI Trust and others will create
additional tax deductions, which will inure to the benefit of the PI Trust in
accordance with the Agreement. These include deductions for payments to the PI
Trust of tax benefits associated with the utilization of the net operating
losses created by the reorganization, and contributions made to the Raymark
pension plan. If Raytech Corporation generates net operating losses in future
periods, exclusive of net operating losses attributable to the payments
discussed above, those net operating losses will be retained by the Company. The
method of allocation in utilizing future net operating losses, if any, between
the PI Trust and Raytech Corporation has not been determined at this time.
Additional tax recoveries to be received in future periods are shown as deferred
tax assets (net of deferred tax liabilities) and a deferred payable to the PI
Trust which amounted to $41.6 million at September 29, 2002.
The Company has filed for and received in 2002 Federal tax refunds of
$33.4 million. During the second quarter of 2002, the Agreement was modified to
eliminate the holdback provision. As such, and pursuant to the Agreement as
modified, Raytech has paid over to the Trust the entire amount of the refunds.
Additionally, at September 29, 2002, the Company has a tax receivable in the
amount of $4.8 million relating to amounts due from state governments for
returns filed in 2002. These refunds when received will be paid to the Trust.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit or
any other years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
The Company owns 57% of the stock of Allomatic Products Company ("APC").
The Company has not recorded a deferred tax liability for the undistributed
earnings of APC since management expects that those earnings will be distributed
to the Company in a tax-free transaction. However, the deferred tax liability on
the undistributed earnings of APC would be approximately $1.0 million at
September 29, 2002, if all of APC's earnings were to be distributed through
dividends.
Results of Operations for the Successor Company for the Period December 31,
2001 to March 31, 2002 and Predecessor Company for the Period January 1, 2001
to April 1, 2001
Net Sales
Worldwide net sales of $52.7 million for the thirteen-week period ended
March 31, 2002 compared to $55.2 million for the same period in the prior year
-38-
for a decline of $2.5 million or 4.5%. The details of the sales performance are
presented below distinguishing the sales performance in each business segment.
The Wet Friction segment reported sales of $32.1 million in the first
quarter of 2002 compared to $34.1 million in the same period in the prior year,
a decline of $2.0 million, representing a significant portion of the sales
decline for the Company in the period. The primary market impacted is the heavy
duty component of this segment in both Europe and domestically. The automobile
OEM component of this segment reflected sales at the same level as 2001.
The Aftermarket segment recorded net sales of $12.5 million for the
thirteen-week period ended March 31, 2002 compared to $13.1 million for the same
period in the prior year, a decline of $.6 million or 4.6%. The sales decline
was due to a variety of issues including the mild winter weather, better
inventory management at our customers and the improved quality of components at
the OEM level.
The Dry Friction segment recorded sales of $8.1 million for the first
quarter of 2002 compared to $8.0 million in the same period in the prior year.
The sales reflect increased sales through the operation in China of $1.3 million
offset by reduced sales through the operation in Germany of approximately the
same amount. The reduction in German sales includes a negative currency
translation impact of approximately $.4 million.
Gross Profit
The Company recorded gross profit of $10.5 million for the thirteen-week
period ended March 31, 2002 on sales of $52.7 million yielding a gross margin
percentage of 20.0%. This compares to a gross profit of $11.4 million for the
same period in the prior year on sales of $55.2 million, a gross profit margin
of 20.6%. The gross profit in 2002 was reduced by $1.1 million due to increased
depreciation and amortization as a result of the application of fresh-start
accounting post first quarter of 2001. The impact of the increased amortization
and depreciation was a reduction in the gross profit margin of 2.1%. On a
comparable basis, the gross margin has increased period-over-period 1.5
percentage points due to cost reduction programs instituted throughout 2001 and
the first quarter of 2002.
Selling, General and Administrative
The selling, general and administrative expenses for the thirteen-week
period ended March 31, 2002 were $7.6 million compared to $7.7 million for the
same period in the prior year, a reduction of $.1 million or 1.3%. The lower
costs reflect the impact of certain cost reduction programs implemented in 2001
balanced with Raytech's commitment to investing in technology for future growth.
Interest Expense
Interest expense for the first quarter of $.3 million compares to interest
expense, excluding Raymark interest, of $.4 million in the same period in the
prior year, a reduction of 25%. The reduction is due to lower rates in 2002 on
domestic debt. The interest rate on foreign debt is approximately the same.
Operating Profits
The following discussion of operating results by industry segment relates
to information contained in Note G - Segment Reporting to the Unaudited
Condensed Consolidated Financial Statements. Operating profit is income before
income taxes and minority interest.
Operating profit of $2.8 million was recorded for the first quarter of
2002 compared to $3.5 million for the same period in the prior year, a decrease
of $.7
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million or 20%. The operating profit was negatively affected by the reduced
sales period-over-period of $2.5 million. Additionally, operating profits were
reduced by the impact of fresh-start accounting due to the increase in
depreciation and amortization of $1.1 million in comparing first quarter 2002 to
the first quarter of 2001.
The Wet Friction segment posted operating profits of $1.5 million, an
increase of $.2 million over the same period in the prior year, an increase of
15%. This increase was accomplished on lower sales of $2.0 million and was due
to implementing cost reduction programs in 2001 and 2002.
The Aftermarket segment recorded operating profit for the quarter of $2.6
million compared to $2.1 million in the same period in the prior year, an
increase of $.5 million or 24%. The improved operating income performance is due
to cost reduction programs initiated in 2001 and 2002 coupled with improved
material pricing. Additionally, management works closely with the work force in
this segment to maximize the peaks and valleys of manufacturing and shipping
product in the aftermarket industry.
The Dry Friction segment recorded operating profit of $.8 million for the
thirteen-week period ended March 31, 2002 compared to $.8 million in the same
period in the prior year. The operating income reflects improved operating
profits from the operation in China offset by reduced operating profit in
Europe. The decline in Europe is due primarily to lower volume sales.
Income Taxes
The effective tax rate for the thirteen-week period ended March 31, 2002
was 38.5% compared to an effective rate of 42% for the same period in the prior
year. The rate for the current period reflects a statutory federal rate adjusted
for state and foreign taxes. The rate differs from the 2001 rate by 3.5
percentage points caused primarily by certain adjustments in the prior period
related to the bankruptcy process.
Outlook
The Company's Wet Friction segment expects sales to improve for 2002 as
compared to the results recorded in 2001 by an estimated 3%. The increase
reflects the continued slow growth in the automotive original equipment market
for Raytech related products as the automotive industry continues to outperform
the general economy. Our customers in the automotive OEM are expected to
continue to face competitive pressure from foreign competition from both Europe
and Asia, which will provide increased pressure on the supplier base for
continued cost reduction. The heavy duty component of the Wet Friction segment
is expected to remain constant for the remainder of 2002. The markets served by
this component of the Wet Friction segment, mainly construction, mining and
agriculture, are expected to remain flat for the remainder of 2002.
The Aftermarket segment is expected to decline compared to 2001 by 6%. The
slow economy in the United States is expected to continue to negatively impact
this segment. Additionally, the continued improved quality of the original
equipment manufacturers has pushed out the need for replacement parts. This
trend is expected to continue in 2002, reducing the opportunity for increased
sales. This segment continues to explore opportunities to expand its product
offerings in the transmission aftermarket and will continue to explore
opportunities in the upcoming year.
The Dry Friction segment is expected to increase revenues in 2002 over
2001 results by 17%. The development of new market opportunities in Asia is
expected to continue through the expansion of our production facility in China,
which was completed in June 2002. In 2001, this facility improved revenues
substantially over 2000 results and is expected to continue the positive
performance for the
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reminder of 2002. The European revenues are expected to increase in 2002 due to
modest growth in the overall European economy.
Raytech formed an expansion committee in 2001 consisting of key employees
within the Company and skilled consultants from outside the Company. The
expansion committee is reviewing existing business in the vehicular market, new
product development in the vehicular markets and new product development in non-
vehicular markets.
The Company's outlook for 2002 anticipates total revenues to exceed 2001
levels by 3% with improved operating profits reflective of the increased sales.
There are many events which could negatively impact the Company's current view,
including the impact of the economy worsening in the United States and around
the world.
Financial Risks
The Company maintains lines of credit with United States and foreign
banks, as well as other creditors. The Company is naturally exposed to various
interest rate risk and foreign currency risk in its normal course of business.
The Company effectively manages its accounts receivable as evidenced by
the average days sales in trade receivables of 46 days. This allows for minimum
borrowings in supporting inventory and trade receivables. Management does not
anticipate a significant change in fiscal policy in any of its borrowing markets
in 2002 given current economic conditions. Further, the Company can reduce the
short-term impact of interest rate fluctuation through deferral of capital
investment should the need arise.
The local currencies of the Company's foreign subsidiaries have been
designated as their functional currencies. Accordingly, financial statements of
foreign operations are translated using the exchange rate at the balance sheet
date for assets and liabilities, historical exchange rates for elements of
stockholder's equity and an average exchange rate in effect during the period
for revenues and expenses. Where possible, the Company attempts to mitigate
foreign currency translation effects by borrowing in local currencies to fund
operations. The Company does not believe that the fluctuation in foreign
currency will have a material adverse effect on the Company's overall financial
condition. Additionally, the Company does not enter into agreements to manage
any currency transaction risks due to the immaterial amount of transactions of
this type.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $18.1 million at September
29, 2002 compared to $14.5 million at December 30, 2001. Capital investment for
the thirty-nine week period totaled $6.9 million. The level of capital
investment is consistent with planned expenditures.
The debt at September 29, 2002 consists of the following:
Current Non-Current Total
------- ----------- -----
Domestic bank debt $ 7,890 $ 2,000 $ 9,890
Foreign bank debt 3,214 4,369 7,583
Leases 134 165 299
-------- ------- -------
Total outstanding debt $ 11,238 $ 6,534 $17,772
======== ======= =======
Available lines of credit:
Domestic $ 8,800
Foreign 3,634
--------
Total available $ 12,434
========
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The domestic debt is collateralized by accounts receivable, inventory and
machinery and equipment. The accounts receivable and inventory components are
determined using a formula based on the respective account balances. In the
event accounts receivable and inventory were to decline, availability would also
decline. Additionally, the agreement includes certain covenants, the most
restrictive of which requires the borrowers to maintain minimum annual earnings
before interest, taxes, depreciation and amortization of $15 million. The
foreign debt consists of both term notes and lines of credit. The lines of
credit are payable on demand.
The Company does not maintain any off balance sheet debt, guarantees or
other arrangements.
Future Liquidity
Concurrent with the effective date of the Plan, Raytech settled the
Liabilities Subject To Compromise either through the issuance of common stock,
payment in cash or the assumption of a liability of $11.2 million for certain
Raymark pension plans, among other resolutions. The Company has reached an
agreement with the Internal Revenue Service ("IRS") and the Pension Benefit
Guaranty Corporation ("PBGC") and has received a funding waiver under Revenue
Procedure 94-41. The waiver provides for an extended period of time for funding
this pre-2001 amount of $6.5 million while keeping the annual funding going
forward on a current basis. In September 2002, a contribution to the Plan was
made of $4.9 million satisfying the funding obligation through the 2001 Plan
year. The pension plans have a current unfunded liability for pre-2001 funding
of $4.8 million.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement"), all tax benefits received by the Company due to the reorganization
are to be passed onto the PI Trust as received. At December 30, 2001, the
Company had tax loss carryforwards of $30.2 million and tax credit carryforwards
of $4.9 million, all of which will inure to the benefit of the PI Trust.
Additionally, future payments to the PI Trust and others will create additional
tax deductions, which will inure to the benefit of the PI Trust in accordance
with the Agreement. These include deductions for payments to the PI Trust of tax
benefits associated with the utilization of the net operating losses created by
the reorganization, and contributions made to the Raymark pension plan. If
Raytech Corporation generates net operating losses in future periods, exclusive
of net operating losses attributable to the payments discussed above, those net
operating losses will be retained by the Company. The method of allocation in
utilizing future net operating losses, if any, between the PI Trust and Raytech
Corporation has not been determined at this time. Additional tax recoveries to
be received in future periods are shown as deferred tax assets and a deferred
payable to the PI Trust which amounted to $41.6 million at September 29, 2002.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit or
any other years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
The Company is complying with a Federal Order issued by the U.S.
Environmental Protection Agency (EPA) at its manufacturing facility in
Crawfordsville, Indiana. The Company reevaluated the projected cost to complete
this project during the third quarter of 2002 and determined that, based on work
completed to date, the estimate previously received from its environmental
engineering firm was not sufficient to complete the project. The Company has
employed a new environmental engineering firm and a new construction company to
complete this project. The scope of the cleanup plan has not changed, and the
additional charge recorded during the third quarter is expected to be sufficient
to complete this project. The Company, at September 29, 2002, recorded a charge
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of $5.4 million, which reflects the anticipated increase in costs to complete
the project. The Company has an accrued liability of $8.3 million at September
29, 2002, which is expected to provide for full remediation and fines in
compliance with the Order. It is anticipated that substantially all of these
costs will be paid in the next twelve months. The Company paid $4.5 million
during the thirty- nine-week period ended September 29, 2002.
Management believes that existing cash balances, availability under its
existing credit facilities and cash flow from operations during 2002 will be
sufficient to meet all of the Company's obligations arising in the normal course
of business, including anticipated capital investments.
Recently Issued Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 146 (SFAS No. 146), "Accounting for Costs Associated
with Exit or Disposal Activities." The objectives of SFAS No. 146 are to address
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 nullifies Emerging Issues Task Force Issue No.94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between SFAS No. 146 and Issue No. 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. Under Issue
No. 94-3, a liability for an exit cost as defined in Issue No. 94-3 was
recognized at the date of an entity's commitment to an exit plan. The provisions
of SFAS No. 146 will be effective for the Company for exit or disposal
activities that are initiated beginning in fiscal 2003.
In May 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 145 (SFAS 145) "Recision of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections." The
Statement rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, when material, classified as an
extraordinary item net of the related income tax effect. FAS 145 also amends FAS
13 to require that certain lease modifications having economic effect similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The provisions of SFAS 145 are effective for
transactions occurring after May 15, 2002. It is not expected that SFAS 145 will
have a material effect on our financial position or results of operations.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995: Statements under the "Market Conditions and Outlook" and "Future
Liquidity" headings above and other statements herein that relate to future
operating periods are subject to important risks and uncertainties that could
cause actual results to differ materially. Forward-looking statements relating
to the Company's businesses involve certain factors that are subject to change,
including the many interrelated factors that affect consumer confidence,
including worldwide demand for automotive and heavy duty products, general
economic conditions, the environment, actions of competitors in the various
industries in which the Company competes; production difficulties, including
capacity and supply constraints; dealer practices; labor relations; interest and
currency exchange rates; technological difficulties; accounting standards, and
other risks and uncertainties. Further information, including factors that
potentially could materially affect the Company's financial results, is included
in the Company's filings with the Securities and Exchange Commission.
-43-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2.
-44-
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, including the Company's President and Chief Executive
Officer and Vice President, Treasurer, and Chief Financial Officer, have
conducted an evaluation within the past 90 days of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act rule 13a-14. Based
on that evaluation, the President and Chief Executive Officer and Vice
President, Treasurer and Chief Financial Officer have concluded that the
disclosure controls and procedures were effective, in all material respects, in
ensuring that all material information required to be filed in this quarterly
report has been made known to them on a timely basis and that it has been
properly recorded, processed, summarized and reported, as required.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date that management, including the President and Chief Executive Officer
and Vice President, Treasurer and Chief Financial Officer, carried out its last
evaluation. During the evaluation, no significant deficiencies or material
weaknesses were identified.
-45-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to certain legal matters that have arisen in the
ordinary course of business, which management expects would not have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company. In addition, the Company is involved in the following
litigation.
In April 1996, the Indiana Department of Environmental Management ("IDEM")
advised Raybestos Products Company ("RPC"), a wholly-owned subsidiary of the
Company, that it may have contributed to the release of lead and PCB's
(polychlorinated biphenyls) found in a drainage ditch near its Indiana facility.
In June 1996, IDEM named RPC as a potentially responsible party ("PRP"). RPC
notified its insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern District of
Indiana, captioned Reliance Insurance Company vs. RPC seeking a declaratory
judgment that any liability of RPC is excluded from its policy with RPC. In
January 2000, the District Court granted summary judgment to RPC, indicating
that the insurer has a duty to defend and indemnify losses stemming from the
IDEM claim. In early 2001, Reliance paid $500,000 to RPC as partial
reimbursement for previously incurred defense costs. However, in June 2001,
Reliance Insurance Company was placed in rehabilitation in Pennsylvania. The
effect upon RPC's claim is not known at this time. Three additional insurers
have been added to the Reliance case as ordered by the District Court. RPC has
demanded $15.55 million from the three carriers, none of which have responded as
yet. Rather, the parties all have filed various motions which have not yet been
heard by the Court. IDEM has turned the matter over to the U.S. Environmental
Protection Agency ("EPA"). In December 2000, the EPA issued a Unilateral
Administrative Order under CERCLA ("Order") demanding removal of contaminated
soils from the referenced drainage ditch. RPC has prepared a plan for
implementation, has begun remediation at the site and is in compliance with the
cleanup Order. The Company has now quantified the costs to complete the project
and at September 29, 2002 recorded a charge of $5.4 million, which reflects the
anticipated increase in costs. The Company has estimated that the cost to comply
with the Order and related fines will be approximately $14.5 million of which
$6.2 million has been spent through September 29, 2002. The remaining balance of
$8.3 million is included in accrued liabilities. It is at least reasonably
possible that the assessment of estimated costs to comply with the Order may be
modified as the project progresses and that there may be additional assessments
from the EPA. Prior to IDEM's relinquishment of control of the cleanup to the
EPA, IDEM and RPC had reached an Agreed Order providing for a risk-based
remediation of the contamination different from the EPA's Order. IDEM withdrew
from the Agreed Order, which was ruled to be a breach of contract by an Indiana
State Superior Court. In July 2002, RPC filed an action against IDEM for damages
determined to be the difference between the costs of cleanup under the EPA Order
and the IDEM Agreed Order. Various motions have been filed by each party on
which the Court has yet to rule. The outcome of this litigation is not known.
In February 2002, the Committee of Equity Holders filed a motion in the
U.S. Bankruptcy Court asking for the distribution of the Company's shares to the
general creditors under the Plan of Reorganization to be recalculated, claiming
that the equity holders received less than the required percentage of shares.
The ultimate outcome of this matter is unknown; however, it is possible that its
resolution could cause the Company to issue additional shares, or to retire
shares, in the future. This would directly impact the earnings per share
calculations of the Company. At a preliminary hearing in April 2002, the Court
-46-
took the matter under advisement pending submission of position papers by the
parties. The Company has filed a motion for summary judgment asking the Court to
dismiss the action, and the Committee has filed an objection. It is not known
when the Court will rule on the motion.
The Company is in receipt of a letter from the Michigan Department of
Environmental Quality ("MDEQ") alleging responsibility for trichloroethylene
("TCE") contamination at a Ferndale, Michigan, industrial site formerly occupied
by Advanced Friction Materials Company ("AFM") from 1974 to 1985. AFM was
acquired by the Company in 1998. The Company is cooperating with the MDEQ in
evaluating the subsurface of the site to obtain data concerning the alleged
contamination. A work plan has been approved by the MDEQ and the testing
procedure has begun. Estimated costs of such evaluation should not exceed $15
thousand. The Company's liability at this site is indeterminable at this time.
-47-
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Shareholders' Meeting of Raytech was held September 26, 2002.
The matters submitted to stockholder vote and the vote count on the matters was
as follows:
1. Proposal to elect eight Directors for one-year terms and until their
respective successors are elected.
For Withheld
Albert A. Canosa 38,100,560 24,460
---------- ----------
Robert F. Carter 38,106,507 18,513
---------- ----------
Archie R. Dykes 38,106,507 18,513
---------- ----------
David N. Forman 38,106,501 18,519
---------- ----------
John H. Laeri 38,106,507 18,513
---------- ----------
Stanley J. Levy 38,106,501 18,519
---------- ----------
Richard A. Lippe 38,106,501 18,519
---------- ----------
Gene Locks 38,106,507 18,513
---------- ----------
2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as
auditors for 2002:
For 37,874,327 Against 211,956 Abstain 5,319
---------- ------- -----
3. Proposal to approve the adoption of the 2002 Incentive Compensation
Plan.
For 37,253,403 Against 277,232 Abstain 31,407
---------- ------- ------
For purposes of determining whether a proposal has received a majority
vote, abstentions will be included in the vote totals with the result that an
abstention has the same effect as a negative vote. Under applicable Delaware
law, "non-votes" will not be included in the vote totals of proposals voted and,
therefore, will have no effect on the vote of that proposal. A "non-vote" occurs
when a broker holding shares for a beneficial owner votes on one proposal but
does not vote on another proposal because the broker does not have discretionary
voting power and has not received instructions from the beneficial owner.
Pursuant to the vote of shareholders, proposal 1, 2 and 3 were adopted and
effective on September 26, 2002.
The Director whose term of office as Director continued (for an additional
two years) after the Annual Shareholders' Meeting includes:
Kevin S. Flannery
-48-
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
None
(b) Reports on 8-K
None
-49-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAYTECH CORPORATION
By: /s/JOHN B. DEVLIN
------------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
Date: November 13, 2002
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CERTIFICATION OF CHIEF FINANCIAL OFFICER (SS.302)
I, John B. Devlin, Chief Financial Officer of Raytech Corporation (the
"Issuer"), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, do hereby
certify for purposes of the third quarter Form 10-Q Report ("Report") as
follows:
(1) I have reviewed the Report.
(2) Based on my knowledge, the 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.
(3) Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material
respects the financial condition, and results of operations of the Issuer
as of, and for, the periods presented in the Report.
(4) The Issuer's other certifying officers and I:
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls and procedures to ensure that
material information relating to the Issuer, and its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the periodic Report is being
prepared;
(C) have evaluated the effectiveness of the Issuer's internal controls
as of a date within 90 days prior to the Report; and
(D) have presented in the Report our conclusions about the effectiveness
of the internal controls based on our evaluation as of that date.
(5) The Issuer's other certifying officers and I have disclosed to the
Issuer's auditors and the audit committee of the Issuer's Board of
Directors (or persons performing the equivalent function):
(A) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Issuer's ability to
record, process, summarize and report financial data and have
identified for the Issuer's auditors any material weaknesses in
internal controls; and
(B) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Issuer's internal
controls; and
6. The Issuer's other certifying officers and I have indicated in the Report
whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of our evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
IN WITNESS WHEREOF, I have executed this Certification this 13th day of
November, 2002.
/s/JOHN B. DEVLIN
---------------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
-51-
CERTIFICATION OF CHIEF EXECUTIVE OFFICER (SS.302)
I, Albert A. Canosa, President and Chief Executive Officer of Raytech
Corporation (the "Issuer"), pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, do hereby certify for purposes of the third quarter Form 10-Q Report
("Report") as follows:
(1) I have reviewed the Report.
(2) Based on my knowledge, the 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.
(3) Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material
respects the financial condition, and results of operations of the Issuer
as of, and for, the periods presented in the Report.
(4) The Issuer's other certifying officers and I:
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls and procedures to ensure that
material information relating to the Issuer, and its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the periodic Report is being
prepared;
(C) have evaluated the effectiveness of the Issuer's internal controls
as of a date within 90 days prior to the Report; and
(D) have presented in the Report our conclusions about the effectiveness
of the internal controls based on our evaluation as of that date.
(5) The Issuer's other certifying officers and I have disclosed to the
Issuer's auditors and the audit committee of the Issuer's Board of
Directors (or persons performing the equivalent function):
(A) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Issuer's ability to
record, process, summarize and report financial data and have
identified for the Issuer's auditors any material weaknesses in
internal controls; and
(B) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Issuer's internal
controls; and
6. The Issuer's other certifying officers and I have indicated in the Report
whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of our evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
IN WITNESS WHEREOF, I have executed this Certification this 13th day of
November, 2002.
/s/ALBERT A. CANOSA
-----------------------
Albert A. Canosa
President and
Chief Executive Officer
-52-
EXHIBITS
Exhibit 99(A) Certification of Chief Financial Officer (ss.906)
Exhibit 99(B) Certification of Chief Executive Officer (ss.906)
-53-