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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the Fiscal Year ended December 28, 2003 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
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 Office) (Zip Code)
(203) 925-8021
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
Common Stock - $1.00 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 filed requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
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 March 18, 2004, 41,737,306 shares of common stock were outstanding and the
aggregate market value of these shares (based upon the closing price of these
shares on the New York Stock Exchange) on such date held by non-affiliates was
approximately $21.8 million.
Documents incorporated by reference: None
INDEX TO RAYTECH CORPORATION
2003 FORM 10-K
Page
----
PART I.
Caution Regarding Forward Looking Statements ................... 4
Item 1. Business .............................................. 5
Item 2. Properties ............................................ 10
Item 3. Legal Proceedings ..................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ... 13
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ........................... 14
Item 6. Selected Financial Data ............................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 17
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk ........................................... 40
Item 8. Financial Statements and Supplementary Data ........... 41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................... 97
Item 9a. Controls and Procedures ............................... 97
PART III.
Item 10. Directors and Executive Officers of the Registrant .... 98
Item 11. Executive Compensation ................................ 102
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.. 109
Item 13. Certain Relationships and Related Transactions ........ 111
Item 14. Principal Accountant Fees and Services ................ 111
PART IV.
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................... 113
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Page
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(a)(1) Financial Statements ......................... 113
(a)(2) Financial Statement Schedules ................ 113
(a)(3) Exhibits ..................................... 113
(b) Reports on Form 8-K .......................... 113
(c) Index of Exhibits............................. 113
(d) Index to Consolidated Financial Statements
and Financial Statement Schedules
(reference)................................... 115
Signatures ..................................................... 117
Certifications ................................................. 120
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Caution Regarding Forward Looking Statements
Statements in this Form 10-K relating to management's views of trends,
the effects of changing prices, plans, objectives and other matters for future
operating periods are "forward looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. These forward looking statements are
subject to significant risks and uncertainties that could cause actual results
to differ materially from the results in the statements. Forward looking
statements relating to Raytech Corporation's businesses are based on assumptions
concerning certain factors that are not predictable and are subject to change.
These factors include general economic conditions, worldwide demand for
automotive and heavy duty vehicles, consumer confidence, actions of our
competitors, vendors and customers, factors affecting our costs such as raw
material prices, labor relations and environmental compliance and remediation,
interest and foreign currency exchange rates, technological issues, accounting
standards, and the risks set forth in the section entitled "Risk Factors." The
forward-looking statements herein are made as of the date of this report. We
have no obligation to update our forward looking statements.
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'
PART I
Item 1. Business
General
Raytech Corporation ("Raytech" or the "Company") develops, manufactures
and supplies specialty engineered friction and energy absorption components used
in oil immersed (wet) and dry transmission and brake systems for on- and
off-road vehicles. The Company also makes and markets specialty engineered
products for heat resistant, inertia control, and energy absorption
applications. The Company's products are typically found in passenger cars,
heavy duty construction and agricultural equipment, trucks, buses and in
logging, mining and military vehicles. Unless the context indicates otherwise,
all references herein to Raytech or the Company include the Company and its
subsidiaries. The Company's operations are categorized into three business
segments: Wet Friction, Dry Friction and Aftermarket.
The Wet Friction segment's products are used in an oil immersed (wet)
environment. Wet Friction products are primarily used in original equipment
vehicular automatic transmissions and braking systems for off-road heavy duty
equipment. The Company markets its products to automobile, heavy duty truck,
farm machinery, mining, truck, bus and military vehicle original equipment
manufacturers ("OEMs").
The Dry Friction segment's products are used in a dry rather than an
oil immersed environment. Dry Friction products are primarily used in original
equipment and aftermarket automobile and truck manual transmissions. The clutch
facings produced by this segment are marketed to system assemblers who sell to
OEMs and aftermarket rebuilders.
The Aftermarket segment produces products used for wet friction
applications, primarily plates and friction materials for automobile and light
truck transmissions. This segment also markets transmission filters and other
transmission related components to warehouse distributors and certain retail
operations in the automotive aftermarket.
In fiscal 2003, the Company recorded an operating loss of $57.5
million. The operating loss included an impairment charge of $48.8 million. The
remaining operating loss of $8.7 million can be attributed primarily to losses
incurred in the Wet Friction segment offset by earnings in the aftermarket and
Dry Friction segment. The losses sustained in the Wet Friction operations led
the Company to conduct an impairment analysis of its goodwill and other
intangibles in accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" and further to conduct
an impairment analysis of its long-lived assets in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company
with the assistance of a third party valuation firm developed a model that was
used by the Company to evaluate the future cash flows associated with the assets
and the impact on the current carrying values. The result of the analysis was
the impairment charge of $48.8 million of which $11.0 million was related to
long-lived tangible assets and $37.8 million was related to goodwill and other
intangible assets. See notes D and E in the Notes to Consolidated Financial
Statements contained in this report.
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Raytech was incorporated in June 1986 in Delaware and held as a
subsidiary of Raymark Corporation ("Raymark"). In October 1986, Raytech became
the publicly traded, New York Stock Exchange 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.
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 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. In
April 2001, Raytech emerged from protection of the Bankruptcy Court under
Chapter 11 of Title 11, United States Code. Certain asbestos personal injury
claims and certain environmental claims were discharged at the reorganization
date in exchange for cash and equity of 37,058,900 shares, representing 89.2% of
the Company's outstanding common stock at that time.
The effective date of the Company's emergence from bankruptcy was April
18, 2001; however, for accounting purposes, the reorganization and related
fresh-start adjustments have been recorded as of April 2, 2001. All financial
information prior to that date is presented as pertaining to the Predecessor
Company, while all financial information after that date is presented as
pertaining to the Successor Company.
The percentage of net sales for each segment of the consolidated net
sales over the past three years is as follows:
Successor Company Predecessor Company
------------------------------------------------ -------------------
For the Year Ended
---------------------------- For the Period For the Period
December 28, December 29, April 3, 2001 to January 1, 2001
2003 2002 December 30, 2001 to April 2, 2001
------------ ------------ ----------------- -------------------
Wet Friction operations 57% 61% 61% 62%
Dry Friction operations 21% 17% 15% 14%
Aftermarket operations 22% 22% 24% 24%
The sales, gross profit, operating profit (loss) and other financial
information pertaining to the operation of the business segments is contained in
Note H Segment Reporting in the Notes to the Consolidated Financial Statements
of the Company.
The Company's executive offices are located in Shelton, Connecticut.
Information about the Company, including its filings with the Securities and
Exchange Commission, is available on the Internet at www.raytech.com.
Risk Factors
The Company's businesses are subject to certain risks that could cause
material changes in its results of operations or financial condition in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors" for a more detailed description of these
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risks.
Sales Methods
The Wet Friction operations, predominantly in the United States, serve
the on-highway and off-highway vehicular markets through sale of products to
OEM's of automobiles, heavy duty trucks, buses, construction and mining
equipment and agricultural machinery, and through distributors supplying
components and replacement parts for these vehicles. The Wet Friction segment
sells certain products to the Aftermarket segment, which, in turn, distributes
these products to warehouse distributors in the aftermarket.
The Dry Friction operation sells clutch facings to manual transmission
system assemblers who, in turn, supply the OEM market and aftermarket in Europe
and the Far East.
The Aftermarket segment sells its products primarily to warehouse
distributors and in certain instances directly to retail outlets predominantly
in the United States.
Sales are made in all segments by Company sales representatives. Sales
are made under standard sales contracts for all or a portion of a customer's
products over a period of time or on an open order basis and may include price
commitments for multiple years.
Raytech's products are sold around the world, through export from its
U.S. plants, through its wholly-owned manufacturing subsidiaries in Germany, the
United Kingdom and China, and through distributors.
Raw Material Availability
The principal raw materials used in the manufacture of the Company's
energy absorption and transmission products include cold-rolled steel, metal
powders, synthetic resins, plastics and synthetic and natural fibers. All of
these materials are available from a number of competitive suppliers. The
availability of global steel supplies may impact both the availability of raw
materials and price of these materials. In 2004, worldwide increases in steel
demand have led to increased prices and concerns of a steel shortage. Potential
impacts on the Company from the current steel market conditions could include
reduced delivery levels of finished products to Raybestos customers and lower
profitability due to higher raw material costs.
Patents and Trademarks
Raytech owns a number of patents, both foreign and domestic. Such
patents expire between 2004 and 2018. In the opinion of management, the business
is not dependent upon the protection of any of its patents and would not be
materially affected by the expiration of any of such patents.
Raytech operates under a number of registered and common law
trademarks, including the trademark "RAYBESTOS." Certain trademarks have been
licensed to others on a limited basis. Some trademarks are registered
internationally.
Competition
The automotive parts industry is extremely competitive. Each of the
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Company's operating segments competes with several other manufacturers that
produce and sell similar products. Some of the Company's competitors are
considerably larger and have substantially greater financial resources than the
Company. The Wet Friction marketplace is comprised of four major competitors,
including the Company. The Company has one major competitor in the European Dry
Friction marketplace and competes with several Chinese and other Asian based
manufacturers in the Asian market. In the European Dry Friction market, several
of the Company's customers are also competitors. There are five major
competitors, including the Company, in the Aftermarket segment. Raytech believes
that it is competitive in all markets in which it is engaged due to its brand
recognition, product quality, service and price.
Significant Customers
During the years presented, sales to the following customers were
greater than 10 percent of the Company's consolidated sales:
Successor Company Predecessor Company
------------------------------------------------ -------------------
For the Year Ended
---------------------------- For the Period For the Period
December 28, December 29, April 3, 2001 to January 1, 2001
2003 2002 December 30, 2001 to April 2, 2001
------------ ------------ ----------------- -------------------
DaimlerChrysler 12.4% 14.4% 14.0% 13.8%
Caterpillar 9.5% 11.4% 14.3% 13.2%
Backlog
Sales backlog at the end of fiscal 2003, 2002 and 2001, by segment, was
as follows:
(in millions)
2003 2002 2001
---- ---- ----
Wet Friction $ 76.7 $ 78.5 $ 69.7
Dry Friction 12.3 8.7 2.7
Aftermarket 1.5 2.0 1.9
-------- -------- --------
Total $ 90.5 $ 89.2 $ 74.3
======== ======== ========
The Company expects that the current backlog will be filled during
2004.
Employees
At December 28, 2003, Raytech employed 1,565 employees, compared with
1,593 employees at the end of 2002. Raytech has agreements with labor unions
relating to wages, hours, fringe benefits and other conditions of employment
which cover most of its production employees. The term of the labor contract at
Raybestos Products Company ("RPC") in Crawfordsville, Indiana, is due to expire
in May 2006. The term of the labor contract at Raybestos Automotive Components
Company ("RACC") in Sterling Heights, Michigan, is due to expire in October
2004. The Company's German subsidiary is a member of an industry employers'
association that is party to various employee union contracts on behalf of its
members. The current contract covering German employees' wages continues through
February 2005.
Capital Expenditures
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Capital expenditures for the Successor Company were $9.0 million and
$9.6 million for fiscal years 2003 and 2002 and $7.5 million for the period
April 3, 2001 to December 30, 2001. Capital expenditures for the Predecessor
Company were $2.7 million for the period January 1, 2001 to April 2, 2001.
Capital expenditures for 2004 are budgeted at $10.0 million.
Research and Development
Research and development costs for the Successor Company were
approximately $7.2 million and $7.3 million in fiscal years 2003 and 2002,
respectively, and $5.3 million for the period April 3, 2001 to December 30,
2001. Research and development costs for the Predecessor Company were $1.7
million for the period January 1, 2001 to April 2, 2001. Separate research and
development facilities are maintained at appropriate manufacturing plants for
developing new products, improving existing production techniques and supplying
technical service to the business units and customers. Research and development
costs for 2004 are budgeted at $6.6 million.
Environmental Matters
The Company is subject to federal, state, local and foreign laws and
regulations governing the discharge of materials into the environment or
otherwise relating to the protection of the environment ("Environmental Laws").
The cost to the Company of complying with these Environmental Laws was
approximately $1.1 million during 2003, and it is projected at $1.1 million for
2004. Estimated capital expenditures for environmental control facilities for
2004 are budgeted to be $0.6 million.
The compliance costs noted above exclude remediation costs incurred by
the Company for the same periods. See Item 3 - Legal Proceedings for a full
description of remediation costs.
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Item 2. Properties
The Company, through its three operating segments, conducts
business at the following facilities:
The Wet Friction operation has facilities in Crawfordsville,
Indiana; Sterling Heights, Michigan; and Liverpool, England. The Crawfordsville,
Indiana, facility is owned and consists of approximately 461,000 square feet of
office, production, research and warehousing space. The Sterling Heights,
Michigan, facility is owned and consists of approximately 111,000 square feet of
office, production, research and warehousing space. The Liverpool, England,
facility is leased and consists of 52,000 square feet of office, production, and
warehousing space. The Wet Friction operation also leases sales office space in
Leverkusen, Germany, Peoria, Illinois, and Japan and leases an administrative
office in Indianapolis, Indiana.
The Dry Friction operation has facilities in Morbach, Germany,
and Suzhou, China. The Morbach, Germany, facility is owned and consists of
108,000 square feet of office, production, research and warehousing space. The
Suzhou, China, facility is owned and consists of 52,000 square feet of office,
production, and warehousing space on a long-term land lease. In addition, the
segment leases space from the Wet Friction segment at the Liverpool facility.
The Aftermarket operation has two facilities in Sullivan,
Indiana, that are owned and consist of 130,000 and 37,500 square feet of office
and warehousing space. These facilities are underutilized, leaving space for
future demand. A separate Crawfordsville, Indiana, aftermarket facility is owned
and consists of approximately 41,000 square feet. A portion of this facility has
been leased to the Company's Wet Friction segment; the remaining space houses
sales offices. The Aftermarket operation also leases sales office space in
Floral Park, New York.
The Company also leases 7,000 square feet of office space in
Shelton, Connecticut, for its headquarters staff.
The Company believes that its properties are substantially
suitable and adequate and have sufficient production capacity to meet the
reasonably anticipated demand for the Company's products.
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Item 3. Legal Proceedings
ENVIRONMENTAL REMEDIATION
Crawfordsville, Indiana - Shelly's Ditch Contamination Removal
In October 1987, RPC, a wholly-owned subsidiary of the
Company, purchased a major manufacturing facility (the "RPC Facility") in
Crawfordsville, Indiana. Some time thereafter, the Company learned that the
previous owner of the RPC Facility had disposed of polychlorinated biphenyls
("PCBs") in the ground at the RPC Facility in the mid-1960s and that such PCBs
were leaching from the RPC Facility into an adjacent ditch ("Shelly's Ditch").
In 1996, the Indiana Department of Environmental Management
(the "IDEM") advised RPC that the RPC Facility may have contributed to, and was
potentially responsible for, the release of lead and PCBs found in Shelly's
Ditch. In the late 1990s, RPC and the IDEM entered into an agreed order (the
"Agreed Order") for a risk-based remediation of PCBs and lead in Shelly's Ditch.
When the IDEM later sought to unilaterally withdraw from the Agreed Order, RPC
appealed and the court ordered the IDEM to reinstate the Agreed Order.
Meanwhile, at the IDEM's request, the United States Environmental Protection
Agency (the "EPA") became involved in Shelly's Ditch.
In December 2000, before the Agreed Order was reinstated, the
EPA issued a Unilateral Administrative Order to RPC under CERCLA (the "EPA
Removal Order") demanding removal of contaminated soils from those Shelly's
Ditch areas identified as Reaches 1 through 3 (the "Site"). The EPA Removal
Order required more work at greater expense than the IDEM Order. Thereafter, RPC
proceeded with the work required under the EPA Removal Order. During the second
quarter of fiscal 2003, a provision of $1.8 million was recorded for the
completion of work required by the EPA Removal Order. By December 28, 2003, RPC
had spent approximately $18.7 million on removal of lead and PCB contaminated
soils from the Site and had accrued $400,000 for potential EPA oversight cost
assessments relating to that work.
On January 9, 2004, the EPA confirmed that RPC had completed
the action required under the EPA Removal Order, including the removal and
proper disposal of Site soils and sediments contaminated with PCBs and lead. In
its confirmation, the EPA noted that RPC would continue to be subject to certain
obligations under that order, including record retention and the payment of
oversight costs. Whether RPC will be required to pay oversight costs relating to
the work under the EPA Removal Order will depend on the outcome of future
negotiations with the EPA and the IDEM regarding potential environmental
remediation downstream of the Site.
Crawfordsville, IN - Environmental Remediation Downstream of
Reaches 1 through 3 of Shelly's Ditch
On May 6, 2003, the EPA indicated that RPC is potentially
liable for PCB and lead contamination downstream of the Site. The EPA has not
issued an order to RPC regarding this downstream area. However, during the third
quarter of 2003, the Company began negotiations with the EPA concerning such
possible additional remediation. As a result, during the third quarter of 2003,
the
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Company recorded a $2.4 million provision relating to this potential liability
for future cleanup costs.
-12-
Crawfordsville, IN - Environmental Remediation and Expenses
relating to the RPC Facility
On May 15, 2001, the EPA issued a Pre-filing Notice and
Opportunity to Confer to RPC (the "Pre-filing Notice"). This notice stated that
the EPA might file a civil action lawsuit against RPC for violations of various
environmental statutes and would offer RPC the opportunity to participate in
pre-filing negotiations to resolve this matter. The EPA stated that it has
reason to believe that RPC committed violations of the Clean Air Act, Clean
Water Act, Resource Conservation and Recovery Act and Toxic Substances Control
Act and that RPC could be subject to substantial penalties. At that time, the
Company recorded a provision of $.3 million on advice of legal counsel. On
September 3, 2003, the EPA proposed that the parties settle the Pre-filing
Notice. The EPA stated that penalties for violations alleged in the Pre-filing
Notice could total approximately $180 million and suggested the following
resolution: RPC should pay approximately $2.4 million in fines and undertake
compliance activities, on-site investigative work that the EPA estimated would
cost about $1.0 million, and corrective action to resolve the Pre-filing Notice.
The parties have begun preliminary negotiations regarding the potential on-site
investigative work but have not obtained an overall EPA settlement proposal. The
Company recorded a provision of $3.1 million in the year-ended December 28, 2003
based on the EPA position.
Ferndale, MI - Potential Responsibility for Environmental Remediation
In a January 8, 2002 letter, the Michigan Department of
Environmental Quality asserted company responsibility for trichloroethylene
contamination at a Ferndale, Michigan industrial site that Advanced Friction
Materials Company ("AFM") leased from approximately 1974 to 1985. The Company
acquired 47% of the stock of AFM in 1996 and the balance of the shares in 1998.
The Company's liability at this site is indeterminable at this time.
ENVIRONMENTAL LITIGATION
Cost Recovery Actions against Insurers regarding Shelly's Ditch
In 1996, RPC notified its insurers and demanded defense and
indemnity regarding any environmental issues relating to alleged lead and PCB
contamination of Shelly's Ditch. In January 1997, one insurer filed a complaint
in the U.S. District Court, Southern District of Indiana, captioned Reliance
Insurance Company vs. Raybestos Products Company (the "Insurance Case"). The
complaint sought a declaratory judgment that the Reliance Insurance policies do
not provide coverage to RPC for defense and indemnity relating to investigation
and remediation of contamination in Shelly's Ditch. In January 2000, the
District Court rejected Reliance's claims and granted summary judgment to RPC.
In June 2001, Reliance Insurance Company was placed in liquidation in
Pennsylvania. The Company has filed claims in the Reliance liquidation for
recovery of its Shelly's Ditch expenses, but has not received a decision.
In February 2002, RPC filed a third-party complaint in the
Insurance Case against National Union and two other insurance carriers. The
third-party complaint seeks defense and indemnity from the insurers relating to
investigation and remediation of contamination in Shelly's Ditch.
-13-
In February 2004, National Union and its affiliates commenced
an adversary proceeding against the Company, RPC and others by filing a
complaint in U.S. Bankruptcy Court (the "Adversary Proceeding"). In the
Adversary Proceeding, National Union claims that RPC's third-party complaint
against National Union is barred by a January 2002 order of the U.S. Bankruptcy
Court in the Raymark Industries, Inc. and Raymark Corporation Chapter 11 cases
(the "Raymark Order"). National Union claims that the Raymark Order prohibited
RPC from pursuing its third-party complaint against National Union and declared
that the National Union insurance policies issued to the Company and RPC have
been exhausted. Also in February 2004, National Union filed a motion in the U.S.
District Court, Southern District of Indiana, asking that court to stay the
Insurance Case against National Union. The outcome of this Adversary Proceeding
and related motion for stay and their effects, if any, on the Insurance Case
against National Union cannot be predicted.
RPC Claims against IDEM
In July 2002, RPC filed an action against the IDEM for breach
of contract claiming damages based on the difference between the costs of
cleanup under the EPA Removal Order and the IDEM Agreed Order. The outcome of
this litigation cannot be predicted.
COMMERCIAL LITIGATION
On April 22, 2003, Automation by Design, Inc. filed a civil
action against RPC in U.S. District Court for the Southern District of Indiana.
The complaint alleges copyright infringement and breach of contract in
connection with RPC's purchase of certain equipment. In answer to plaintiff's
complaint, RPC denied liability and filed counterclaims for breach of contract
and declaratory judgment. The court has granted Automation by Design's motion to
amend its complaint to include Raytech Corporation and Production Design
Services, Inc. as defendants. RPC has agreed to defend and provide certain
indemnity protection to Production Design Services, Inc., which manufactured
certain equipment that is allegedly involved in this court action. The outcome
of this litigation cannot be predicted, and the Company's liability or
recoveries are indeterminable at this time.
EQUITY HOLDERS LITIGATION
In February 2002, lawyers claiming to represent the Committee
of Equity Holders of Raytech Corporation filed a motion in U.S. Bankruptcy Court
to compel Raytech to either issue up to approximately 700,000 additional shares
to the pre-reorganization holders of shares in Raytech or their successors, or
to proportionately reduce the shareholdings of the general unsecured creditor
shareholders under the Plan of Reorganization. The ultimate outcome of this
matter cannot be predicted; however, it is possible that its resolution could
cause the Company to issue additional shares to the original shareholder group,
or to retire shares held by the general unsecured creditor shareholder group.
This might directly impact the earnings per share calculations of the Company.
The Bankruptcy Court denied a Company motion to dismiss this action.
The Company is subject to certain other legal matters that
have arisen in the ordinary course of business, and management does not expect
them to have a significant adverse effect on the results of consolidated
operations,
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financial condition or cash flow.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders
during the fourth quarter of 2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the New York Stock Exchange
under the trading symbol RAY. As of March 18, 2004, there were 1,492 holders of
record of the Company's common stock.
Information regarding the quarterly high and low sales prices for 2003
and 2002 is set forth in Note U of the Consolidated Financial Statements, Part
II, Item 8 hereof.
The Company continues not to pay dividends. As a holding company,
Raytech Corporation's ability to pay dividends is dependent upon the receipt of
dividends or other payments from its subsidiaries. The payment of dividends by
certain of the Company's subsidiaries is subject to certain restrictions under
the Company's credit agreements. See Note F of the Consolidated Financial
Statements.
The following table sets forth information with respect to shares of
the Company's common stock that may be issued under the Company's existing
equity compensation plans as of December 28, 2003. The Company's equity
compensation plans are described in Note L to the Consolidated Financial
Statements.
Equity Compensation Plan Information
Number of Securities
Remaining Available
For Future Issuance
Number of Securities Weighted Average Under Equity
to be Issued Upon Exercise Price Compensation Plans
Exercise of of Outstanding [Excluding Securities
Outstanding Options, Options, Warrants Reflected in
Plan Category Warrants and Rights and Rights Column (a)]
------------- --------------------- ----------------- ---------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 3,035,659 $ 5.56 1,227,000
Equity compensation
plans not approved
by security holders - - -
--------- ------ ---------
Total 3,035,659 $ 5.56 1,227,000
========= ====== =========
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Item 6. Selected Financial Data
Consolidated Five-Year Financial Summary
Selected historical consolidated financial data is presented for the
five fiscal years ended December 28, 2003. The information is separated between
Predecessor Company, pre-emergence from bankruptcy, and Successor Company, post-
emergence from bankruptcy. As a result of reorganization and fresh-start
adjustments recorded in conjunction with the Company's emergence from
bankruptcy, the financial data of the Successor Company for the years ended
December 28, 2003, December 29, 2002, the period April 3, 2001 to December 30,
2001 are not comparable to the Predecessor Company for the period January 1,
2001 to April 2, 2001 and for the years ended December 30, 2000 and December 31,
1999.
The extraordinary gains on the settlement of liabilities recorded
during the period April 3, 2001 to December 30, 2001 (Successor Company) and the
period January 1, 2001 to April 2, 2001 (Predecessor Company) have been
reclassified to operating items in accordance with SFAS No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections."
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Item 6. Selected Financial Data (continued)
FIVE-YEAR REVIEW OF OPERATIONS
(in thousands, except per share data)
Successor Company Predecessor Company
---------------------------------------------- -----------------------------------------------
For the Year Ended For the Year Ended
--------------------------- For the Period For the Period ---------------------------
December 28, December 29, April 3, 2001 to January 1, 2001 to December 30, December 31,
2003 2002 December 30, 2001 April 2, 2001(6) 2000 1999
------------ ------------ ----------------- ------------------ ------------ ------------
Operating Results
Net sales $ 205,865 $ 209,866 $ 146,050 $ 55,205 $ 239,532 $ 251,966
Gross profit 26,126 36,771 21,460 11,394 59,489 60,238
Operating profit (loss)(1) (57,473) 4,440 (3,291) 3,652 27,215 27,518
Interest expense (2) 1,061 903 873 444 2,218 2,279
Gain on settlement of debt (3) - - 1,548 - -
Reorganization items (4) - - (784) 7,158,896 - -
Net (loss) income (1),(4), (5) (66,443) (2,825) (5,577) 6,995,257 (7,058,978) 16,364
------------ ------------ ------------ ------------ ------------ ------------
Share Data:
Basic (loss) earnings
per share (1),(4), (5) $ (1.59) $ (.07) $ (.13) $ 1,778.88 $ (2,015.40) $ 4.76
Weighted average shares 41,727 41,608 41,527 3,932 3,503 3,439
Diluted (loss) earnings
per share (1),(4), (5) $ (1.59) $ (.07) $ (.13) $ 1,772.62 $ (2,015.40) $ 4.65
Adjusted weighted average
shares 41,727 41,608 41,527 3,946 3,503 3,519
------------ ------------ ------------ ------------ ------------ ------------
Balance sheet (at year-end):
Total assets $ 206,024 $ 294,221 $ 320,788 $ 323,636 $ 320,316 $ 188,686
Working capital 25,414 23,317 28,157 26,753 21,402 11,201
Long-term obligations (7) 71,772 82,850 85,410 69,330 31,238 35,055
Liabilities subject to
compromise (5) - - - - 7,211,433 -
Total shareholders' equity
(deficit) 75,910 142,110 144,083 158,352 (6,979,138) 80,788
------------ ------------ ------------ ------------ ------------ ------------
Property, plant and equipment
Capital expenditures $ 8,968 $ 9,648 $ 7,488 $ 2,717 $ 13,539 $ 22,969
Depreciation 16,107 14,943 10,585 3,180 11,545 10,569
------------ ------------ ------------ ------------ ------------ ------------
(1) 2003 includes $48.8 million impairment charge. (See Notes D and E to
the Consolidated Financial Statements.)
(2) Predecessor Company includes cessation of interest accruals on Raymark
note in connection with a Bankruptcy Court Order.
(3) Represents gain on the settlement of debt. See Note F to the
Consolidated Financial Statements.
(4) Reorganization items - see Note X to the Consolidated Financial
Statements.
(5) The year ended December 30, 2000 includes recording of the estimated
amount of allowed claims in the amount of $7.2 billion relating to
asbestos personal injury, environmental and employee benefits issues.
See Note V to the Consolidated Financial Statements.
(6) Includes the reorganization and the adoption of fresh-start reporting
as a result of the Company's emergence from bankruptcy (See Notes V and
W to the Consolidated Financial Statements).
(7) Includes long-term liabilities and minority interest.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the related notes, included in
"Item 8 - Financial Statements and Supplemental Data." This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward- looking
statements as a result of certain factors, including, but not limited to, those
described in the section entitled "Caution Regarding Forward-Looking
Statements." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our present expectations and analysis
and are inherently susceptible to uncertainty and changes in circumstances. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such
forward-looking statements.
Executive Summary
The Company manufactures and distributes engineered products for heat
resistant, inertia control, energy absorption and transmission applications. The
Company's operations are categorized into three business segments: Wet Friction,
Dry Friction and Aftermarket. The Wet Friction segment manufactures and
distributes automatic transmission and wet wheel brake system components to OEMs
in North America, Europe and Asia. It is the largest segment and represents 57%
of total net sales and all of the recorded losses for 2003. The Dry Friction
segment manufactures and distributes manual transmission clutch facings in
Europe and Asia to system assemblers who sell manual transmission systems to
OEMs and the aftermarket. This segment represents 21% of total net sales. The
Aftermarket segment manufactures and sources automatic transmission parts, which
are sold predominantly to warehouse distributors who sell the product
domestically and to international customers. Approximately $8.6 million of sales
in 2003 represented parts manufactured by the Wet Friction segment, which were
sold through the Aftermarket segment. The Aftermarket segment represents 22% of
total net sales. Additional information on these business segments is presented
in Note H - Segment Reporting in the Notes to Consolidated Financial Statements.
An executive summary of significant events is presented below, as well
as a tabular presentation of the effects on the Company's financial results. The
issues and events are more fully explained in the Management's Discussion and
Analysis, subsequent to this Executive Summary.
Raytech Corporation recorded a $66.4 million loss for the year ended
December 28, 2003. The loss is due to certain events that occurred during the
2003 fiscal year.
It should be noted that in determining the value of goodwill and other
intangible assets at the time the Company emerged from bankruptcy, the projected
performance in terms of future cash flows by business segment was used to
determine the values. The valuation distribution was as follows:
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Wet Friction Aftermarket Total
------------ ----------- -----
Technology $ 13,862 $ 2,400 $ 16,262
Distribution base - 5,716 5,716
Trademarks 11,271 6,442 17,713
Goodwill 28,855 5,912 34,767
-------- -------- --------
$ 53,988 $ 20,470 $ 74,458
======== ======== ========
There were no goodwill or intangible values attributed to the Dry
Friction segment.
In addition to the goodwill and other intangibles, the Company
increased the book value of certain long-lived tangible assets to fair market
value in accordance with Statement of Position 90-7 ("SOP"). The increased
values (the "Step-Up") attributable to the long-lived assets were distributed as
follows:
Wet Friction segment $27,738
Aftermarket segment 3,085
-------
Total long-lived tangible assets
Step-Up $30,823
=======
There was no Step-Up in value attributed to the Dry Friction segment.
At emergence from bankruptcy, it was determined that, in order to
maintain segment performance comparability, the increased asset values
associated with the recording of the goodwill and other intangibles and the
Step-Up for the long-lived tangible assets would be maintained at a corporate
level. Segment reporting is discussed in Note H of the Notes to the Consolidated
Financial Statements.
Therefore, although the underlying financial analysis for the
impairment charges was determined using the financial projections for Wet
Friction and Aftermarket, the majority of the charges were recorded at the
corporate level. The $8.1 million charge recorded in the Wet Friction segment
represents assets held in that grouping.
1. The performance of the Wet Friction segment was materially
impacted by lower sales volume of $12.8 million and reduced
pricing on certain of its continuing sales. The operating loss
recorded by the segment for fiscal year 2003 of $20.0 million
compares to an operating profit of $3.3 million for the year
ended 2002, a change period over period of $23.3 million. The
operating loss in 2003 included an impairment charge of $8.1
million.
2. The Company, based on the deteriorating performance of the Wet
Friction segment, among other factors, developed projected
financial information, which provided a longer term view of
expected financial performance. The Company's previous
long-range plan was developed in 2000 during a much stronger
economic environment. The plan developed in 2000 served as the
basis for the application of the fresh-start accounting. The
results of the new financial plan showed substantially reduced
projected sales and profitability compared to the previous
plan. The Company used the services of an independent
consulting firm to develop valuation models based on the
financial projections. Using the new financial projections,
the Company:
A. Reviewed its recorded goodwill and other intangible
assets in
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accordance with SFAS 142, "Goodwill and Other
Intangible Assets." The results of the evaluation
determined that an impairment
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existed and a writeoff of goodwill and other
intangibles was appropriate. An impairment charge of
$37.8 million was recorded.
B. In conjunction with the analysis noted above, the
Company also evaluated its long-lived assets for
impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-
Lived Assets." This review determined that $11.0
million of certain long-lived assets was impaired and
were written off.
3. The Company, in conjunction with the original recording of the
deferred tax asset recorded a payable to the Raytech Personal
Injury Trust (the " PI Trust") in accordance with a tax
agreement established as an element of the Chapter 11
agreement. The Company, in reviewing the financial plan noted
above, determined that collectibility of certain deferred tax
assets recorded on the Company's books was in question. See
Note I to the Consolidated Financial Statements.
Based on the determination that a valuation allowance was
needed against the deferred tax assets, the Company reduced
the non-current payable to the PI Trust $30.5 million, which
created $30.5 million of other income. In addition, the
Company recorded an increase of $2.8 million to the current
payable to the PI Trust to reflect the impact of certain state
taxes. This resulted in a reduction of $2.8 million to other
income. The net effect of these entries was the recording of
$27.7 million in other income in conjunction with a reduction
of the payable to the PI Trust.
The Company then determined the impact of all the adjustments
relating to the reduction in the deferred tax assets and
recorded a tax provision of $25.0 million. A reconciliation of
the loss from operations multiplied by the statutory federal
tax rate to the reported tax provision is summarized in Note I
in the Consolidated Financial Statements.
4. In the quarter ended June 29, 2003, the Company recorded a
$1.8 million charge for costs incurred in compliance with the
EPA Removal Order. In the quarter ended September 28, 2003,
the Company recorded an additional $5.5 million for certain
additional remediation costs, fines and investigation costs.
These costs are more fully explained below and in Note G to
the Consolidated Financial Statements. The total impact of the
above was a $7.3 million charge to operations in 2003.
The impact of the above issues on reported financial results is set
forth in the table below.
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Adjustments
----------------------------------
Impairment
-------------------- Reported
Core SFAS SFAS Deferred Financial
Business 142 144 Taxes Environmental Results
---------- -------- -------- -------- ------------- ----------
Net sales $ 205,865 $ $ $ $ $ 205,865
Cost of sales (179,739) (179,739)
--------- ---------
Gross profit 26,126 26,126
SG&A (34,795) (34,795)
--------- ---------
Operating loss before
impairment charges (8,669) (8,669)
Impairment charges (37,770) (11,034) (48,804)
--------- -------- -------- -------- ------- ---------
Operating loss (8,669) (37,770) (11,034) (57,473)
Other income (expense), net (1,016) 27,743 26,727
Interest expense (1,061) (1,061)
--------- -------- -------- -------- ------- ---------
Loss before provision for
environmental claims,
income taxes and
minority interest (10,746) (37,770) (11,034) 27,743 (31,807)
Provision for environmental
claims (7,262) (7,262)
--------- -------- -------- -------- ------- ---------
Loss before income taxes
and minority interest (10,746) (37,770) (11,034) 27,743 (7,262) (39,069)
Provision for income taxes (1,762) (24,983) (26,745)
Minority interest (629) (629)
--------- -------- -------- -------- ------- ---------
Net (loss) income $ (13,137) $(37,770) $(11,034) $ 2,760 $(7,262) $ (66,443)
========= ======== ======== ======== ======= =========
The core business column above represents the results of the Company's
businesses from recurring operations, excluding the impairment charges, the
impact of recording a valuation allowance against the deferred tax assets and
the environmental charges associated with the Crawfordsville, Indiana, facility.
Risk Factors
The Company's businesses are subject to certain risks, including but
not limited to those described below, that could cause material changes in its
results of operations or financial condition in the future.
- The Company's businesses are greatly affected by general
economic conditions. The Company sells components to the
automotive and heavy duty equipment industries and in large
part is dependent upon consumer demand for automobiles,
consumer confidence and business investment in heavy
equipment. The Company's businesses sell components for
transmissions and brakes to automotive and heavy duty OEMs as
well as the automotive aftermarket. The economic slowdown and
recession of the last three years have resulted in reduced
heavy equipment and passenger vehicle production in the United
States and in foreign markets and reduced demand in the
aftermarket. It is possible that OEM vehicle and equipment
production will not increase significantly in 2004 and future
years. Continuation of the economic slowdown may adversely
affect the Company's revenues in all of its business segments.
- The Company's customers are large companies under pressure to
cut component costs. The Wet Friction segment's largest
customers are experiencing margin erosion due to reduced
volume, high labor costs and intense foreign competition. The
Company is a relatively small supplier of a limited number of
components. Due to their size, the Company's customers are
often able to demand component price reductions from their
suppliers, including all segments of the Company. These
customers may also demand technological changes and quality
improvements at the
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Company's expense. In addition, the trend in the automotive
aftermarket is toward longer transmission service and
replacement cycles due to improved quality. If foreign
automotive manufacturers continue to take U.S. market share
from the Company's domestic OEM customers and economic
conditions do not improve significantly, the Company's
revenues will continue to be adversely affected by these
factors.
- The Company is subject to substantial environmental
remediation obligations for past contamination that are not
yet fixed in scope or amount. The nature of environmental
contamination and its remediation are such that the amount and
nature of work necessary is often unknown until late in the
process. The level of responsibility of the parties involved
and the level of remediation to be required by governmental
authorities is also uncertain. The Company also incurs
substantial ongoing environmental compliance costs in
operating its production facilities. Substantial unanticipated
environmental costs could adversely affect profitability. (See
"Environmental Claims" below and Note G to the Consolidated
Financial Statements.)
- Raytech's Common Stock is currently included in the Russell
3000 equity index. The Russell 3000 is a market
capitalization-weighted index of the 3,000 largest U.S.
companies. Russell reconstitutes the index annually in order
to accurately rank the 3,000 largest companies in the U.S.
stock market by market capitalization to provide a truer
reflection of stock market activity and performance. There is
a risk that Raytech may no longer be part of that index after
the next recalculation of the index in June 2004. If Raytech
ceases to be a member of the Russell 3000, its common stock
price may be adversely affected because mutual funds and other
investors who must own or wish to own the Russell 3000 index
will sell or no longer purchase Raytech common stock. The PI
Trust holds 82.9% and the EPA holds 5.5% of the outstanding
common stock of the Company at December 28, 2003.
- In 2004, worldwide increases in steel demand have led to
increased prices and concerns of a steel shortage. Potential
impacts on the Company from the current steel market
conditions could include reduced delivery levels of finished
products to Raybestos customers and lower profitability due to
higher raw material costs.
Significant Accounting Policies
The Company's significant accounting policies are detailed in Note A in
the Notes to the Consolidated Financial Statements. The Consolidated Financial
Statements include the accounts of Raytech Corporation and its subsidiaries. The
investment by third parties in Allomatic Products Company ("APC") is accounted
for as minority interest in the Consolidated Financial Statements. There are no
unconsolidated entities. 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 assets and
liabilities and the reported revenue and expenses made in the financial
statements and accompanying notes. Actual results could differ from these
estimates. Significant estimates include inventory, receivable and environmental
reserves; depreciable lives of property, plant and equipment and intangible
assets, the accruals for pension and other
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postretirement and postemployment benefits; and the recoverable value of
deferred tax assets and the carrying value of goodwill and other intangible
assets.
The most significant areas involving management's judgment are
described below.
- - 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. The accrual
for environmental matters is discussed in this Management Discussion
and Analysis under the heading Provision for Environmental Remediation.
- - Pension benefits and welfare benefits represent financial obligations
that will be ultimately settled in the future with employees who meet
eligibility requirements. The court ordered that Raytech was liable for
the maintenance and funding of the underfunded pension plan obligations
of Raymark Corporation. Raytech, based on the court's order, assumed
the role of plan sponsor of the Raymark plans upon the emergence from
bankruptcy in the fall of 2001. Because of the uncertainties involved
in estimating the timing and amount of future payments, significant
estimates are required to calculate pension and welfare benefit
expenses and liabilities related to the Company's plans. The Company
utilizes the services of independent actuaries, whose models are used
to facilitate these calculations. Several key assumptions are used in
actuarial models to calculate pension expense and welfare benefit
expense and liability amounts recorded in the financial statements.
Management believes the three most significant variables in the pension
models are the expected long-term rate of return on plan assets, the
discount rate, and the expected rate of compensation increase.
Management believes the most significant assumption in the welfare
benefit model is the healthcare cost trend rate. The actuarial models
also use assumptions for various other factors, including employee
turnover, retirement age, and mortality. Company management believes
the assumptions used in the actuarial calculations are reasonable and
are within accepted practices in each of the respective geographic
locations in which we operate.
- - The Company provides certain warranties relating to the quality and
performance of its products. The primary product of the Company,
friction plates, is used in manual and automatic transmissions,
transfer cases and wet wheel brake systems for heavy duty equipment.
The Company maintains product liability insurance that covers personal
injuries and property damage alleged to have been caused by defective
products. The Company also has insurance to cover the costs of product
recalls arising from its German and Chinese operations. However, the
Company currently carries only limited insurance for product recall
costs in the United States, and none in the U.K., as management
believes such insurance to be cost prohibitive given the Company's
warranty experience. Warranty claims have historically been
insignificant due to the quality of the Company's products and the
impact of other potential parts interactions in these systems, which
may contribute to the root cause of any system failure. The costs in
2003 for product warranty support have been de minimis. Some sales
contracts with customers
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provide that the Company will indemnify the customer and its affiliates
against certain specified patent, copyright and trade secret
infringement claims of third parties that are based on the use or sale
of the Company components. There have been no significant claims to
date.
- - At December 28, 2003, the Company had goodwill and other intangibles of
$30.6 million, which were recorded as a result of the fresh-start
accounting process in 2001. Management reviews goodwill and indefinite
lived intangibles for impairment annually or when events or
circumstances indicate that its value may have declined. The unpatented
technology and distribution base are reviewed for impairment whenever
events or circumstances indicate that their carrying value may not be
recoverable. In order to evaluate impairment, assumptions about the
future condition and operations of the reporting unit to which the
goodwill relates are made. Using these assumptions, management
determines, with the assistance of other professionals, whether an
impairment charge is required to reduce goodwill and other intangible
assets to its estimated fair value. In the case of long-lived tangible
and definite-lived intangible assets, if the undiscounted future cash
flows related to the long-lived assets are less than the assets'
carrying value, a similar impairment charge would be recorded.
Management believes that the assumptions made to evaluate goodwill,
other intangibles and tangible long-lived assets impairment are
appropriate and reasonable.
- - The assessment of the amount of the Company's deferred tax assets,
which will be realizable, requires the use of significant judgments and
estimates. In making its assessment, the Company evaluates all relevant
evidence, including current industry dynamics within which the Company
operates, to determine if it would be able to realize all or a part of
its deferred tax assets in the future. Should the Company determine
that it would not be able to realize certain of its deferred tax
assets, a valuation allowance would be recorded in the period such a
determination is made.
Historical Information and Methods of Presentation
The Company, at December 28, 2003, completed its second full year of
operation as the Successor Company post-emergence from bankruptcy. In April
2001, Raytech emerged from the protection of Bankruptcy Court under Chapter 11
of Title 11 of the United States Bankruptcy Code. Raytech had been under the
Chapter 11 protection since March 1989. The bankruptcy history and emergence are
described in more detail in Note V to the 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 SOP No. 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code". The Effective Date of the Company's emergence from
bankruptcy was 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
was 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 the financial
performance of the Successor Company for the fiscal years ended December 28,
2003 and December 29, 2002 and for the thirty-nine-week periods ended December
29, 2002
-25-
and December 30, 2001.
Additionally, the financial analysis detailed below provides a
comparative analysis of the financial performance of the Successor Company for
the period December 31, 2001 through March 31, 2002 compared to the Predecessor
Company financial performance for the period January 1, 2001 through April 1,
2001. 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 W to the Consolidated Financial Statements.
The Company has elected not to present a comparative analysis of the
fifty- two-week period ended December 29, 2002 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 an
analysis not meaningful.
Successor Company Discussion and Analysis for the Year Ended December 28, 2003
Compared to the Year Ended December 29, 2002
Net Sales
Worldwide net sales were $205.9 million for the year ended December 28,
2003 compared to $209.9 million for the same period in the prior year, a decline
of $4.0 million. The decline in sales reflects a decrease in the Wet Friction
segment of $12.8 million and a decrease in the Aftermarket segment of $1.3
million offset by a $9.2 million increase in the Dry Friction segment. The
remaining change is due to lower intercompany sales from Wet Friction to
Aftermarket, which are eliminated in consolidation. The detailed discussion of
the individual segment performance is presented in "Business Segment and
Geographic Area Results."
Gross Profit
The gross profit for the 2003 fiscal year of $26.1 million compares to
the gross profit of $36.8 million for fiscal 2002, a decline in gross profit of
$10.7 million or 29.1%. The gross profit percentage for 2003 of 12.7% compares
to the gross profit percentage for 2002 of 17.5%. The decline in gross profit is
due entirely to the reduced gross profit in the Wet Friction segment of $13.4
million, which was partially offset by increased gross margin in the Dry
Friction segment of $3.4 million. The gross profit analysis by business segment
is presented in "Business Segment and Geographic Area Results."
Selling, General and Administrative
Selling, general and administrative expenses for the fiscal 2003 year
of $34.8 million compares to $32.3 million for the 2002 fiscal year, an increase
of $2.5 million or 7.7%. The increased costs were due to certain severance and
new hire costs in the Wet Friction segment of $.5 million. In addition, the Dry
Friction segment increased SG&A $1.7 million in support of the $9.2 million in
increased sales volume. The Aftermarket increased $.6 million due to primarily
providing for certain accounts receivable reserves in 2003. The above increases
were offset by $.3 million in reduced corporate costs.
Interest Expense
Interest expense for the fiscal year 2003 of $1.1 million compares to
-26-
interest expense of $.9 million for the 2002 year. The increased interest
expense of $.2 million reflects the increased borrowings year-over-year.
Other Income
The Company recorded other income of $26.8 million for fiscal 2003
compared to $.5 million for fiscal 2002, an increase in other income of $26.3
million. The other income component was significantly affected by the reduction
of certain net deferred tax assets and the corresponding payable to the PI
Trust, which generated other income in 2003. The payable to the PI Trust was
reduced $27.7 million due to the reduction of certain deferred tax assets, which
are more fully explained in Note I of the Consolidated Financial Statements and
within this Management's Discussion and Analysis.
In addition, the Company recorded $1.0 million of other expense during
fiscal 2003, which relates more closely to the $.5 million of other income
recorded in fiscal 2002. The change year-over-year related to the disposal of
certain property, plant and equipment in Dry Friction and Wet Friction.
Provision for Environmental Remediation
The Company recorded a provision in the second quarter of 2003 of $1.8
million for expected final remediation and administrative cost associated with
compliance with the EPA Removal, which is discussed in Note G - Litigation of
the Consolidated Financial Statements. The work required under the EPA Removal
Order has been completed at this time and a final report, which documents the
compliance actions, has been accepted by the EPA. During the thirteen-week
period ended June 29, 2003, the cost of contaminated soil removal increased over
the previously accrued amount by $1.6 million due to changes in the tonnage
required to be removed in order to comply with the EPA Removal Order compared to
the estimate. In addition, the EPA has estimated the administrative charge for
the agency's oversight of the execution of the EPA Removal Order will be
approximately $.4 million. Also, during the second quarter, the Company settled
a disputed billing amount, which arose in the first stage of the project from
the construction company hired to do the initial cleanup. The resolution of the
dispute resulted in a reduction of $.2 million of amounts previously recorded by
the Company. The construction company was replaced prior to the completion of
the first stage.
Although the Company has, to the best of its knowledge, complied fully
with the EPA Removal Order, there exists the potential for additional
remediation. Further, the Company may be required to remediate additional
contiguous parcels of property not subject to the EPA Removal Order, subject to
potential future actions taken by the EPA. The Company has recorded a provision
in the third quarter of 2003 of $2.4 million as its current estimate of the
potential cost to remediate the additional contiguous parcels of property not
subject to the EPA Removal Order as noted above. The estimate of cost noted
above is based on preliminary engineering data at a level of compliance similar
to the requirements contained in the EPA Removal Order. The Company is currently
negotiating a settlement with the EPA for future remediation on this site. The
outcome of the negotiation could also impact the estimated cost noted above.
On May 15, 2001, the EPA issued a Pre-filing Notice and Opportunity to
Confer to RPC. This notice stated that EPA is contemplating filing a civil
action against RPC for violations of various environmental statutes and is
offering RPC the opportunity to participate in pre-filing negotiations to
resolve this matter before initiation of litigation. The EPA stated that it has
reason to believe that RPC committed violations of the Clean Air Act, Clean
Water Act, Resource
-27-
Conservation and Recovery Act, and Toxic Substances Control Act and that RPC
could be subject to substantial penalty. The Company had previously recorded a
$.3 million provision for settlement of these violations. By letter dated
September 3, 2003, the EPA stated that penalties for violations alleged in the
Pre-filing Notice could total approximately $180 million and suggested that the
parties resolve the Pre-filing Notice claims as follows: RPC should pay
approximately $2.4 million and undertake compliance activities, onsite
investigative work that the EPA estimated would cost approximately $1 million,
and corrective action to resolve the Pre-filing Notice, with no estimate of such
cost of corrective action. The Company recorded a provision in the third quarter
of 2003 for $3.1 million based on the notice.
The IDEM conducted a site review in May 2003 at the Crawfordsville,
Indiana, facility of RPC. In July 2003, the IDEM sent RPC a report of such
inspection. This report stated that IDEM believes that RPC has violated certain
environmental law requirements. The IDEM report stated that the agency intends
to notify enforcement authorities but did not specify any fines for the alleged
violations. In November 2003, the Company received a Notice of Violation and
Proposed Agreed Order relating to the May 2003 inspection. Subsequent to
year-end the Company settled the order for $35 thousand.
In 2002, the Company recorded a charge of $5.4 million for compliance
with the EPA Removal Order discussed above, which increased the accrued
liability at year-end 2002 to $7.0 million.
The accrued liability at year-end 2003 is $6.2 million. See Note G -
Litigation for a full discussion of the above.
Business Segment and Geographic Area Results
The following discussion of operating results by industry segment and
geographic area related to information contained in Note H in the Consolidated
Financial Statements. Operating profit is income before income taxes and
minority interest.
Wet Friction Segment
2003 2002
---- ----
Net sales $ 125,095 $ 137,930
Gross profit 6,343 19,724
Operating profit (loss) (19,972) 3,276
The segment recorded a decline in sales for fiscal 2003 of $12.8
million compared to fiscal 2002. The decline in sales is due to lower sales to
the automotive OEM component of the segment of $4.5 million due to lower demand
for the Company's product and reduced pricing. The domestic automotive
manufacturers, who represent the OEM customers of the Company, continue to lose
market share to foreign competition, and the reduced demand for the domestic
product directly impacts Raytech. A significant portion of the lost North
American market share has been consumed by Asian automakers, a market Raytech
has not penetrated. In addition, sales to the heavy duty component of the
segment declined $5.0 million compared to fiscal 2002 results. The decline
represents certain part sales lost to competition as well as price reductions.
Also, sales through the European component of this segment declined $2.2 million
compared to sales recorded in the 2002 fiscal year. The sales decline reflects
the decision by management in late
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2002 to eliminate a non-core business product line produced at the United
Kingdom facility. The additional sales shortfall reflects reduced demand for
product.
The segment recorded a decline in gross profit of $13.4 million
compared to fiscal 2002 results. The gross profit margin for 2003 of 5.1%
compares to a gross profit margin of 14.3%, a decline of 9.2 percentage points.
The decline in gross profit reflects the impact of lower sales and reduced
pricing. The lack of gross profit in this segment was the driving force in the
losses sustained by the Company in 2003.
In addition to the impact of the reduced gross profit, the segment
recorded an impairment charge of $8.1 million in fiscal 2003. The charge
reflects the reduction in the book value of certain long-lived assets in
accordance with the guidelines set forth in SFAS 144. See Note D - Property,
Plant and Equipment of the Consolidated Financial Statements. The segment also
recorded certain charges relating to the net realizable value of inventory and
other charges relating to losses, which will be incurred when certain products
are produced and sold. The provision we recorded for 2003 was $1.5 million.
The Company produces goods for its customers based on a purchase order
system, and in certain instances using longer term contracts that stipulate a
fixed selling price with no commitment as to quantity. In instances where the
product's cost exceeds the selling price, a reserve is established for the
expected loss on goods in inventory and customer purchase orders received by the
balance sheet date. The Company has not recorded an estimate of the loss over
the term of these contracts since the quantity and mix of parts is not known and
the future production costs will be impacted by, among other things, changes in
economic conditions and management's actions, including expected cost savings
initiatives.
The operating loss for the 2003 fiscal year reflects the loss from
operations of $11.9 million and the impairment charge of $8.1 million for an
operating loss of $20.0 million. The segment had operating profit in fiscal 2002
of $3.3 million, a decline year-over-year of $23.3 million.
The Company is reviewing alternatives to improve the operating results
for this segment. Alternatives being discussed include:
- Creating a stronger focus on European Wet Friction
operations by transferring the management
responsibility for this component to the Dry Friction
management group, which is headquartered in Germany.
Subsequent to year-end, the Company transferred the
responsibility for the European Wet Friction group to
the Dry Friction management group. In 2004, the
results will be reported in that segment.
- Conducting a facilities utilization review to
determine if improved performance can be obtained
through consolidating certain facilities with a focus
on improved overhead absorption. Additionally, the
Company has identified in excess of $12.0 million of
cost savings projects it will implement in 2004.
- Reviewing the need for separate research and
development facilities and the potential to reduce
costs while maintaining Raytech technological
capabilities. Subsequent to year-end, the technical
facility staff was reduced, and the sales staff is
relocating to rented office space. The automotive OEM
research and development efforts will be supported at
the Crawfordsville facility. It is
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anticipated that the cost savings inherent in this
consolidation will approximate $.5 million.
These and other items will be explored by management in order to
improve on fiscal 2003 results.
Aftermarket Segment
2003 2002
---- ----
Net sales $ 44,931 $ 46,192
Gross profit 12,725 12,993
Operating profit 7,171 7,990
This segment experienced a reduction in net sales of $1.3 million or
2.7% in fiscal 2003 compared to the 2002 year. The sales reduction reflects the
lower demand for the Company's products due to long-lived parts in the OEM
product due primarily to improved quality. In addition, the segment produces
assembled kits for transmission rebuilding. Kit sales in 2003 were $1.5 million
lower than the 2002 year sales.
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The gross profit declined $.3 million or 2.1% in the 2003 year compared
to 2002. The gross profit percentage for 2003 of 28.3% compared to 28.1% in the
2002 year. The decrease in gross profit is due to the decrease in sales volume.
The segment was able to maintain its gross profit percentage, in spite of the
lower sales.
The operating profit declined $.8 million in fiscal 2003 compared to
2002. The decrease in operating profit is due to the decrease in gross profit
and a $.6 million increase in SG&A expense. The increase in SG&A expense is due
to an additional provision for accounts receivable reserves.
The segment includes APC, which is 57% owned by the Company, 40% owned
by Raymark, a related party, and 3% owned by certain employees of the Company.
Net sales for APC were $30.0 million in 2003 and $31.1 million in 2002.
Operating profit for APC was $2.5 million in 2003 and $3.9 million in 2002. APC
is consolidated in the financial results and a minority interest is recorded to
reflect the minority shareholders' interest in APC. A minority interest charge
is recorded for the minority's percent of income.
Dry Friction
2003 2002
---- ----
Net sales $ 44,453 $ 35,244
Gross profit 12,284 8,856
Operating profit 3,395 2,452
The segment reported an increase in net sales of $9.2 million or 26.1%
for fiscal 2003 compared to the 2002 year. The sales increase reflects an
increase in sales from the European Dry Friction component of this segment of
$8.2 million and an increase of $1.0 million through the Asian component of the
segment. The European increase reflects a volume increase of $2.2 million and an
increase due to the impact of foreign currency translation of $6.0 million. The
increase in the sales through the Asian operation are all volume related as the
operation, which is in China, is not impacted by translation since the currency
is fixed relative to the U.S. dollar. The sales growth reflects increased market
share as the Company's technology and competitive pricing continues to provide
growth in this segment.
The gross profit improved $3.4 million or 39% in fiscal 2003 compared
to the 2002 year. The gross profit percentage for fiscal 2003 of 27.6% compares
to 25.1%, an increase of 2.5 percentage points. The increase both in dollars and
gross margin percent reflects the strong gross profit being realized in the
Asian operation of 33.3% combined with the gross profit being realized in the
European operation of 23.9%. The Asian facility continues to grow as demand in
China and other countries served by the facility continues to provide sales
opportunities.
The operating profit increased $.9 million or 38.5% providing an
operating profit percentage of 7.6% compared to an operating profit percentage
of 7.0%, an increase of .6 percentage points. This segment represents
substantial growth and profitability opportunities for the Company as the
product technology and production methods continue to improve.
Corporate
The Company does not distribute the costs of operating the corporate
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headquarters and certain other costs, which it maintains in its corporate
group. In April 2001, the date the Company emerged from the Chapter 11
proceedings, it determined that the increased property, plant and equipment
value and the increase in recorded goodwill and other intangibles determined as
part of the requirement of SOP 90-7 would be maintained at the corporate level.
It was determined that this would provide historical comparability at the
operating segment level.
Therefore, certain charges related to the impairments, more fully
described in Notes D and E of the Consolidated Financial Statements were
recorded as expense in the corporate group as opposed to the operating segments.
In reviewing the impact of the corporate group on segment results, the
following should be noted:
- The operating loss of $29.7 million recorded as corporate
expenses includes the following (in millions):
Impairment charge $ (40.7)
Depreciation and amortization (4.7)
Environmental cost (7.5)
Corporate headquarters cost (6.1)
Reduction of payable to PI Trust 27.7
Other income 1.6
--------
$ (29.7)
========
Note the other income is due to the reduction in the payable
to the PI
Trust payable due to the adjustment to deferred
assets. See the other income discussion previous in this
Management's Discussion and Analysis.
Liquidity, Capital Resources and Future Liquidity
The Company recorded a net loss for the year ended December 28, 2003 of
$66.4 million. The impact on liquidity as measured by the net cash provided by
operating activities reflects a positive cash flow of $2.6 million. The impact
can be summarized as follows (in millions):
Net loss $ (66.4)
Non-cash charges
Depreciation and amortization 18.3
Impairment charges 48.8
Other working capital 1.9
--------
Total non-cash charges 69.0
--------
Net cash provided by
operating activities $ 2.6
========
The non-cash charges relating to the impairment are detailed in Note D
and
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Note E to the Consolidated Financial Statements.
Cash flows from operating activities for fiscal 2002 were $13.0
million. The decline in cash flows from operating activities year-over-year is
$10.3 million. The decline in cash flow reflects the losses recorded in the
business due to the poor performance of the Wet Friction segment.
The Company's cash and cash equivalents at December 28, 2003 totaled
$16.4 million compared to $20.0 million at December 29, 2002, a decrease of $3.6
million. Capital expenditures for fiscal 2003 totaled $9.0 million compared to
$9.6 million for the 2002 fiscal year. In both years, the capital expenditures
were comparable to planned spending amounts.
Changes in the components of working capital for fiscal 2003 provided
increased cash flow from reduced accounts receivable of $2.7 million, income tax
receivable of $3.7 million and inventories $4.2 million. Other current assets,
including restricted cash, required the use of cash of $2.2 million and accounts
payable of $.8 million. The reduction in the payable to the PI Trust of $27.7
million represents a non-cash reduction in the liability, which is explained in
Note I to the Consolidated Financial Statements and within this Management's
Discussion and Analysis.
The total borrowings at year-end 2003 of $22.4 million compares to
total borrowings of $19.4 million at year-end 2002, an increase of $3.0 million
period- over-period. The available lines of credit at December 28, 2003 of $10.6
million compares to $8.8 million at year-end 2002, an increase in availability
of $1.8 million. Full details of the Company's debt are contained in Note F -
Debt to the Consolidated Financial Statements. In addition, refer to Note N -
Commitments to the Consolidated Financial Statements for disclosure of future
obligations and commitments.
In connection with the recorded loss of $66.4 million, the Company
requested and obtained a waiver of the material adverse change clauses contained
in the domestic bank agreements.
In summary of the above, the cash and available lines of credit at
December 28, 2003 were $27.0 million compared to $28.8 million at year-end 2002,
a decrease in cash and available lines of credit of $1.8 million.
-33-
Items which will potentially require cash payments in 2004 other than
normal operating expenses include the following.
- The Company has recorded an accrued liability of $6.2 million
for certain environmental matters more fully discussed in this
section of the Form 10-K and in Note G to the Consolidated
Financial Statements. It is not certain at this time when
these funds will be expended. There exists the potential that
all or a portion of the funds will be spent in 2004.
-34-
- The Company assumed the liability for the Raymark pension
plans as part of the Chapter 11 reorganization. The plans,
which are discussed as part of Note M to the Consolidated
Financial Statements are under funded and the Company, through
an agreement with the Internal Revenue Service, is providing
both current contributions and catch-up contributions for
prior year funding deficiencies. The expected funding for the
plans in 2004 will be approximately $4.4 million. The funding
in fiscal 2003 was $6.9 million.
- Certain tax issues are discussed in Note I to the Consolidated
Financial Statements, which provides detail concerning the
status of the current Internal Revenue Service audit and the
use of certain future tax benefits.
Management believes that existing cash balances, the Company's lending
facilities and cash flow from operations during 2004 will be sufficient to meet
all of the Company's obligations arising in the normal course of business,
including anticipated capital investments. However, the ability of the Company
to utilize its lending facilities is dependent on the Company's ability to meet
its financial forecasts for 2004, which is not assured, and to meet the
financial covenants contained in its credit facilities. These forecasts include
certain revenue assumptions generally consistent with the prior year for the Wet
Friction (on a comparable basis) and Aftermarket segments and modest growth in
the Dry Friction segment, as well as certain cost-saving initiatives. If the
Company does not comply with the financial covenants, an event of default would
occur and could result in the acceleration of the Company's indebtedness under
its domestic credit facilities. If that were to occur, the ability of the
Company to continue would be dependent upon, among other things, its ability to
amend the credit facilities, enact certain actions to generate cash and/or to
seek additional alternative financing from other lenders.
Contractual Obligations
Securities and Exchange Commission regulations require that we present
our contractual obligations, and we have done so in the table that follows.
However, our future cash flow prospects cannot reasonably be assessed based on
such obligations. The most significant factor affecting our future cash flows is
our ability to earn and collect cash from customers. Future cash outflows,
whether they are contractual obligations or not, will vary based on our future
needs. While some such outflows are completely fixed (for example, commitments
to repay principal and interest on fixed-rate borrowings) most depend on future
events (for example, supply agreements to purchase commodity raw materials at
quantities to be determined in the future at then-market prices). Further,
normal operations involve significant expenditures that are not based on
"commitments," for example, expenditures for income taxes or for payroll.
Currently, certain sales agreements exist that will result in losses due to the
cost of production exceeding the agreed upon selling price. See the Wet Friction
segment discussion for the impact on financial results of these sales
agreements.
As defined by reporting regulations, our consolidated contractual
obligations as of December 28, 2003, follow:
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Less Than 1-3 3-5 More Than
Total 1 Year Years Years 5 Years
----- --------- ----- ----- ---------
(in thousands)
Long-term debt (a) $22,125 $ 7,934 $ 6,060 $7,429 $ 702
Capital lease obligations (b) 321 158 161 2 -
Operating leases (c) 4,455 886 1,204 525 1,840
Purchase obligations (d) - - - - -
Other liabilities (e)
Pension (f) 5,190 5,190 - - -
Postretirement (g) 613 613 - - -
Environmental (h) 6,174 - 6,174 - -
------- -------- ------- ------ ------
Total $38,878 $ 14,781 $13,599 $7,956 $2,542
======= ======== ======= ====== ======
(a) Bank debt, see Note F to the Consolidated Financial Statements.
(b) Capital lease obligations - see Note F to the Consolidated Financial
Statements.
(c) Future minimum lease payments under operating leases, principally for
office and warehouse space.
(d) The Company does not have any material purchase obligations. Contracts for
the purchase of materials are binding with regard to price but not
quantity.
(e) Because their future outflows are uncertain, the following non-current
liabilities are excluded from the table above: pension obligation,
postretirement benefits, deferred income taxes and the deferred payable to
the PI Trust.
(f) Represents the Company's estimated 2004 contribution to fund its pension
plans. The pension plans are described in Note M of the Consolidated
Financial Statements. The Company has not presented pension contribution
amounts for the periods beyond 2004 because they cannot be accurately
estimated at this time. The Company's long-term pension obligation at
December 28, 2003 is $13.5 million.
(g) Represents the current portion of the Company's postretirement obligation.
The postretirement plan is described in Note M to the Consolidated
Financial Statements. The Company has not presented the long-term portion
of its post retirement obligation, $15.1 million at December 28, 2003. The
timing of these payments cannot be accurately estimated.
(h) Represents the Company's current estimate of costs to satisfy potential
environmental fines, studies and remediation.
Off Balance Sheet Arrangements
The Company has no off balance sheet arrangements.
Financial Risks
The company maintains lines of credit with United States and foreign
banks, as well as other creditors detailed in Note F in the consolidated
financial statements. 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 43 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 2004 given current economic conditions. Further, the company can reduce the
short-term impact of interest rate fluctuation through deferral of capital.
-36-
Investment Should the Need Arise.
The Company maintains borrowings in both fixed rate and variable rate
debt instruments. The fixed rate debt at year-end 2003 of $6.4 million had rates
of interest that ranged from 2.5% to 6.2%. The variable rate debt at year-end
2003 of $15.7 million had rates of interest that ranged from 2.7% to 4.8%. The
variable debt reprices either at prime rate or the eurodollar rate. The Company
has not entered into any interest rate management programs such as interest rate
swaps or other derivative type transactions. The amount of exposure in the
short- term, which could be created by increases in rates is not considered
significant by management.
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
stockholders' equity and an average exchange rate in effect during the year 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.
Recently Issued Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission 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. SFAS No. 145 also amends SFAS 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 Company has adopted the provisions of SFAS No. 145 and has restated prior
periods to classify gains on the extinguishment of debt as extraordinary only
when in accordance with APB Opinion No. 30.
In December 2003, FASB revised and reissued FASB Interpretation No.
("FIN") 46, "Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51." The interpretation requires that the
assets, liabilities and results of the activity of variable interest entities be
consolidated into the financial statements by the primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
the owners and other parties involved. The provisions of FIN No. 46 must be
applied no later than as of the end of the first reporting period ending after
March 15, 2004. Management has determined that the adoption of FIN No. 46 will
have no significant impact on the Company's consolidated financial statements.
In April, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 Accounting for Derivative Instruments and Hedging Activities." This
Statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133. SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003, with
all provisions applied prospectively. The Company has determined that the
statement
-37-
is not currently applicable to the Company. The Company will evaluate contracts
entered or modified in the future and record them in accordance with the
provisions of SFAS No. 149.
In May, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities."
This Statement establishes standards regarding the manner in which an issuer
classifies and measures certain types of financial instruments having
characteristics of both liabilities and equity. SFAS No. 150 is generally
effective for financial instruments entered into or modified after May 31, 2003
and for contracts in existence at the start of the first interim period
beginning after June 15, 2003 for mandatorily redeemable financial instruments
issued by non-public companies; however, the effective date is for fiscal
periods beginning after December 15, 2004. The Company currently does not have
financial instruments with the characteristics described in the standard. The
Company will record financial instruments entered into or modified in future
periods in accordance with the provisions of SFAS No. 150.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
Statement revises disclosures about pension plans and other postretirement
benefit plans. This Statement is effective for financial statements with fiscal
years ended after December 15, 2003. The Company has adopted the additional
disclosure requirements of this Statement. The additional disclosures are
presented in Note M of the Consolidated Financial Statements.
Successor Company Discussion and Analysis for the Thirty-Nine-Week Period Ended
December 29, 2002 Compared to the Thirty-Nine-Week Period Ended
December 30, 2001
In developing a comparative analysis for the thirty-nine-week periods
ended December 29, 2002 and December 30, 2001, the following table sets forth
the quantitative information for the two periods.
(in thousands)
Successor Company
Thirty-Nine Week Period Ended
---------------------------------------
December 29, 2002 December 30, 2001
----------------- -----------------
Sales $ 157,157 $ 146,050
Cost of sales (130,911) (124,590)
--------- ---------
Gross profit 26,246 21,460
SG&A (24,737) (24,782)
Other operating income - 31
--------- ---------
Operating profit (loss) 1,509 (3,291)
Interest expense (626) (873)
Reorganization items - (784)
Gain on settlement of liabilities - 1,548
Other (2) 598
Provision for environmental and other claims (5,400) (5,860)
--------- ---------
Loss before income taxes and minority interest (4,519) (8,662)
Income tax benefit 1,007 3,970
--------- ---------
Loss before minority interest (3,512) (4,692)
Minority interest (643) (885)
--------- ---------
Net loss $ (4,155) $ (5,577)
========= =========
Net Sales
Worldwide net sales were $157.2 million for the thirty-nine-week period
ended December 29, 2002 compared to $146.1 million for the same period in the
prior year, an increase of $11.1 million or 7.6%. The detailed discussion for
the increased sales period-over-period is contained in the Business Segment
section.
Gross Profit
-38-
The gross profit for the thirty-nine-week period ended December 29,
2002 of $26.2 million compares to the gross profit of $21.5 million for the same
period in the prior year, an increase of $4.7 million or 22%. Gross profit as a
percent of sales for the 2002 period is 16.7% compared to 14.7% for the same
thirty-nine-week period in 2001, an increase of 2.0 percentage points. The gross
profit in the 2001 period was reduced by $5.9 million due to a step up in
inventory value to fair value at April 2, 2001, which was an effect of the
application of fresh-start accounting. The gross profit comparative
period-to-period, taking into consideration the inventory adjustment, shows a
margin decline of 2.0%. This decline is due substantially to certain startup
costs associated with a new product line in the Wet Friction segment.
Selling, General and Administrative
Selling, general and administrative expenses for the thirty-nine-week
period ended December 29, 2002 were $24.7 million compared to $24.8 million in
the same period in the prior year, a decrease of $.1 million or 0.4%. The SG&A
costs in the 2002 period include approximately $1.5 million for severance costs
for two officers of the Company and $21 thousand for employment related costs
associated with the new hires. SG&A expense as a percent of sales in the 2002
period of 15.7% compares to 17.0% in the thirty-nine-week period ended December
30, 2001.
Interest Expense
Interest expense for the thirty-nine-week period ended December 29,
2002 totaled $.6 million compared to $.9 million for the same period in the
prior year. Interest expense represents less than 1% of total expenses in both
periods.
Reorganization Item
In connection with the bankruptcy proceedings, Raytech incurred
approximately $784 thousand in professional fees during the thirty-nine-week
period ended December 30, 2001. These fees related to accounting, legal,
consulting and other miscellaneous services.
Provision for Environmental Remediation
The Company recorded, in the thirty-nine-week period ended December 29,
2002, a charge of $5.4 million for the completion of the remediation project
related to the Crawfordsville, Indiana, manufacturing facility. The accrued
liability for the completion of this project at fiscal 2002 year-end is $7.0
million. The historical and legal discussion of this project is contained in
Note E to the Notes to the Consolidated Financial Statements. This remediation
project, which is the subject of a unilateral administrative order of the U.S.
Environmental Protection Agency, requires the removal of polychlorinated
biphenyls (PCB's), which were found in a drainage ditch near the Indiana
facility. The remediation project consists of three separate segments of the
ditch. The first segment was completed in the summer of 2002. The second segment
was started in the fall of 2002 and completed in February 2003. The work on the
final segment is expected to begin in the spring of 2003 and be completed by the
fall of 2003. The completion of the third segment will fulfill the Company's
obligation under the U.S. EPA Order. In addition to the current year charge of
$5.4 million, the Company recorded a charge for remediation of $5.9 million in
2001 and $3.0 million in 2000. The Company is currently pursuing legal remedies
against various parties to recover the cost of the remediation. These legal
actions are discussed in the
-39-
litigation section of this document.
Income Tax (Provision) Benefit
For tax reporting purposes, the Company's emergence from bankruptcy did
not create a new tax reporting entity. Accordingly, the adjustments to adopt
fresh- start accounting are not applicable for the Company's tax reporting.
Therefore, with the exception of goodwill, these adjustments have created new
deferred tax items.
The effective tax rate for the thirty-nine-week period ended December
29, 2002 was a 22.3% benefit compared to a 45.8% benefit in the same period in
the prior year.
The effective tax rate for the year ended December 29, 2002 was 5.0%
compared to 2.3% for the year ended December 30, 2001. In calculating the
effective tax rate, the distinction between Successor Company and Predecessor
Company is not relevant as explained above; therefore, the taxable income for
book purposes in 2001 was $7.2 billion. The income tax provision for the current
year is $.08 million on a pretax loss of $1.7 million.
The Company's effective tax rate differs from the federal statutory
benefit of 35% due primarily to the effect of providing for certain state taxes
and the effect of an increase in the tax benefits payable to the PI Trust.
In connection with the Company's emergence from bankruptcy, the Company
recorded an income tax receivable and payable to the PI Trust in the amount of
$38 million resulting from net operating losses arising from the transfer of
stock and cash to the PI Trust carried back to 1991 through 2000. 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. During 2002, Raytech received tax refunds of $33.1
million, which were paid to 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 operating losses created by the reorganization, and
contributions made to the Raymark pension plan. To the extent that Raytech
Corporation generates losses in future periods, exclusive of losses attributable
to the payments discussed above, those losses will be retained by the Company.
The method of allocation in utilizing future operating losses between the PI
Trust and Raytech Corporation has not been determined at this time. The Company
has tax loss carryforwards of $74.8 million and tax credit carryforwards of $1.2
million at December 29, 2002. The net operating loss carryforwards are allocated
between Raytech Corporation and the PI Trust in the amounts of $2.8 million and
$72.0 million, respectively. Additional tax recoveries expected to be received
in future periods are shown as deferred tax assets and a deferred payable to the
PI Trust which amounted to $42.4 million at December 29, 2002 and $41.8 million
at December 30, 2001.
The Company is under 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.
At December 29, 2002, the Company had foreign loss carryforwards of
$4.1
-40-
million (Germany $.6 million and U.K. $3.5 million), which do not expire. A full
valuation allowance has been provided against the tax benefit of the U.K.
carryforwards due to uncertainty of future profitability of these operations.
In 2000, the Company recorded a deferred tax asset of $2.767 billion
relating to the tax effects of the liabilities subject to compromise. Total
deferred tax assets and liabilities at December 31, 2000 amounted to $2.772
billion. Based on its historical domestic taxable income, the Company expected
to realize approximately $140 million of the deferred tax asset through the
ten-year carryback of the previously paid domestic taxes and the expected tax
benefits during the twenty-year carryforward period. In addition, the Company
has recognized a deferred tax asset in connection with German loss
carryforwards. Accordingly, the Company in 2000 had recorded a valuation
allowance of $2.633 billion against the deferred tax asset to state it at its
expected net realizable value. The Plan became effective during 2001 and the
liabilities subject to compromise were settled for less than the recorded amount
of allowed claims. The net deferred tax asset was adjusted accordingly.
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 $1.3
million at December 29, 2002, if all of APC's earnings were to be distributed
through the distribution of dividends.
Gain on Settlement of Debt
A note payable to the former AFM principal dated April 1998 was settled
in October 2001. The settlement agreement required a payment of $3.1 million.
Prior to the settlement, the Company had a note payable of $3.0 million and
accrued interest of $1.6 million recorded. The Company has recorded a gain on
the settlement of this debt in the fourth quarter of 2001 in the amount of $1.5
million, which was comprised substantially of accrued interest.
Business Segment and Geographic Area Results
The following discussion of operating results by industry segment and
geographic area related to information contained in Note H in the Consolidated
Financial Statements. Operating profit is income before income taxes, minority
interest, provision for asbestos litigation, provision for environmental claims
and extraordinary items.
(in thousands)
Thirty-Nine-Week Period Ended
---------------------------------------
Sales Summary December 29, 2002 December 30, 2001
- ------------- ----------------- -----------------
Wet Friction $ 103,582 $ 95,512
Aftermarket 33,708 34,384
Dry Friction 27,091 22,074
Eliminations (7,224) (5,920)
--------- ---------
Net sales $ 157,157 $ 146,050
========= =========
Wet Friction Segment
-41-
The Wet Friction segment recorded sales of $103.6 million for the
thirty- nine-week period ended December 29, 2002 compared to $95.5 million for
the same period in the prior year, an increase of $8.1 million or 8.5%. The
increase was due to increased sales to the automotive OEM component of the Wet
Friction segment. The increased sales were substantially the result of acquiring
additional business with General Motors, which provided additional sales of $6.0
million, and a stronger automotive production environment in the
thirty-nine-week period in 2002, which contributed additional sales of $3.3
million, compared to the automotive market in the same period in 2001. Sales
growth in the automotive OEM component was offset by a decline in sales of $1.2
million in the heavy duty component of this segment due to the slow economy in
construction and mining and strong competition.
-42-
The operating profit for the thirty-nine-week period ended December 29,
2002 of $1.8 million compares to the operating profit of $3.4 million for the
same period in the prior year. The reduced operating profit is the result of
startup costs associated with the expanded automotive OEM business acquired in
2002.
Aftermarket Segment
The Aftermarket segment recorded sales of $33.7 million for the thirty-
nine-week period ended December 29, 2002 compared to $34.4 million for the same
period in the prior year, a decrease of $.7 million or 2.0%. Operating profit
for this thirty-nine-week period of $5.4 million compares to $6.0 million for
the same period in the prior year, a decrease of $.6 million, a reduction of
10.0%. The reduced operating profit is attributable to the lower sales
period-over- period and increased SG&A expenses.
Dry Friction Segment
The Dry Friction segment recorded sales of $27.1 million for the
thirty- nine-week period ended December 29, 2002 compared to $22.1 million for
the same period in the prior year, an increase of $5.0 million or 22.6%. The
sales increase was due to improved sales through the production facility in
China, which accounted for a substantial portion of the sales growth. Sales
through the production facility in Germany measured in the euro, which is the
functional currency, were EUR21.6 million compared to EUR20.5 million in the
same period in the prior year. The operating profits for the Dry Friction
segment for the thirty-nine-week period of $.9 million compares to operating
profit of $.6 million in the same period in the prior year, an increase of $.3
million. Operating profit measured in euros for the German operation was EUR.7
million compared to EUR.8 million in 2001. The increased profit is attributable
to the growth in China.
Results of Operations for the Successor Company for the Period December 31, 2001
through March 31, 2002 and Predecessor Company for the Period January 1, 2001
through 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
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 $34.3 million in the first
quarter of 2002 compared to $37.0 million in the same period in the prior year,
a decline of $2.7 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.
-43-
The Dry Friction segment recorded sales of $8.2 million for the first
quarter of 2002 compared to $8.1 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 25.0%. 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 profits by industry segment
relates to information contained in Note H - Segment Reporting to the
Consolidated Financial Statements. Operating profit is income before provision
for asbestos litigation, provision for environmental and other claims, income
taxes, 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 million or 20.0%. 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, or an increase
of 15.4%. This increase was accomplished on lower sales of $2.7 million and was
due
-44-
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 23.8%. The improved operating income performance
despite a decrease in sales 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 is 38.5% compared to an effective rate of 2.3% 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
36.2 percentage points caused primarily by certain adjustments in the prior
period related to the bankruptcy process.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
See Item 7.
-45-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Page No.
--------
Consolidated Balance Sheets at
December 28, 2003 and December 29, 2002
(Successor Company) 42
Consolidated Statements of Operations for the years ended
December 28, 2003, December 29, 2002, for the period April 3,
2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001
(Predecessor Company) 43
Consolidated Statements of Cash Flows for the years ended
December 28, 2003, December 29, 2002, for the period April 3,
2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001
(Predecessor Company) 44
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 28, 2003, December 29, 2002, for the
period April 3, 2001 to December 30, 2001 (Successor Company),
and for the period January 1,
2001 to April 2, 2001 (Predecessor Company) 45
Notes to Consolidated Financial Statements 46-95
Report of Independent Auditors 96
-46-
RAYTECH CORPORATION
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 28, December 29,
At Fiscal Year Ended 2003 2002
- ---------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 16,413 $ 19,983
Restricted cash 4,872 2,027
Trade accounts receivable, less allowance
of $1,250 for 2003 and $824 for 2002 24,739 26,640
Inventories, net 30,877 34,057
Income tax receivable 1,085 4,793
Other current assets 5,770 5,078
------------ ------------
Total current assets 83,756 92,578
------------ ------------
Property, plant and equipment 126,059 131,378
Less accumulated depreciation (36,824) (25,257)
------------ ------------
Net property, plant and equipment 89,235 106,121
------------ ------------
Goodwill, net 5,912 34,767
Other intangible assets, net 24,652 35,795
Deferred income taxes - 21,906
Other assets 2,469 3,054
------------ ------------
Total assets $ 206,024 $ 294,221
============ ============
LIABILITIES
Current liabilities
Notes payable and current portion of long-term debt $ 8,092 $ 15,091
Current portion of pension obligation 5,190 8,030
Accounts payable 14,609 15,089
Accrued liabilities 26,636 26,258
Payable to the PI Trust 3,815 4,793
------------ ------------
Total current liabilities 58,342 69,261
------------ ------------
Long-term debt 14,354 4,293
Pension obligation 13,453 12,815
Postretirement benefits other than pension 15,103 13,800
Deferred payable to the PI Trust 11,887 42,356
Deferred income taxes 6,881 -
Other long-term liabilities 706 827
------------ ------------
Total liabilities 120,726 143,352
------------ ------------
Minority interest 9,388 8,759
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, 41,737,306 and 41,701,554 issued and
outstanding for 2003 and 2002, respectively 41,737 41,701
Additional paid in capital 117,574 117,458
Accumulated deficit (74,845) (8,402)
Accumulated other comprehensive loss (8,556) (8,647)
------------ ------------
Total shareholders' equity 75,910 142,110
------------ ------------
Total liabilities and shareholders' equity $ 206,024 $ 294,221
============ ============
The accompanying notes are an integral part of these statements.
-47-
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Successor Company Predecessor Company
--------------------------------------------------------- -------------------
For the Year Ended
---------------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
Fiscal Year 2003 2002 Dec. 30, 2001 to April 2, 2001
- ------------------------------------------------------------------------------------------------------------------------
Net sales $ 205,865 $ 209,866 $ 146,050 $ 55,205
Cost of sales (179,739) (173,095) (124,590) (43,811)
----------- ----------- ----------- -----------
Gross profit 26,126 36,771 21,460 11,394
Selling, general and
administrative expenses (34,795) (32,331) (24,782) (7,742)
Impairment charge
Goodwill (28,855) - - -
Other intangible assets (8,915) - - -
Long-lived tangible assets (11,034) - - -
Other operating income, net - - 31 -
----------- ----------- ----------- -----------
Operating (loss) profit (57,473) 4,440 (3,291) 3,652
Currency transaction (loss)
gain (32) (352) 194 55
Interest expense - Raymark - - - (70)
Interest expense (1,061) (903) (873) (374)
Reorganization items - - (784) 7,158,896
Gain on settlement of debt - - 1,548 -
Other income, net 26,759 529 404 235
----------- ----------- ----------- -----------
Loss (income) before provision
for environmental claims,
income taxes and minority
interest (31,807) 3,714 (2,802) 7,162,394
Provision for environmental
claims (7,262) (5,400) (5,860) -
----------- ----------- ----------- -----------
(Loss) income before income
taxes and minority interest (39,069) (1,686) (8,662) 7,162,394
Income tax (provision) benefit (26,745) (84) 3,970 (166,823)
----------- ----------- ----------- -----------
(Loss) income before minority
interest (65,814) (1,770) (4,692) 6,995,571
Minority interest (629) (1,055) (885) (314)
----------- ----------- ----------- -----------
Net (loss) income $ (66,443) $ (2,825) $ (5,577) $ 6,995,257
=========== =========== =========== ===========
Basic (loss) earnings
per share $ (1.59) $ (.07) $ (.13) $ 1,778.88
=========== =========== =========== ===========
Diluted (loss) earnings
per share $ (1.59) $ (.07) $ (.13) $ 1,772.62
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-48-
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Successor Company Predecessor Company
--------------------------------------------------------- -------------------
For the Year Ended
---------------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
Fiscal Year 2003 2002 Dec. 30, 2001 to April 2, 2001
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (66,443) $ (2,825) $ (5,577) $ 6,995,257
Adjustments to reconcile net
(loss) income to net cash
provided by (used in) operations:
Deferred income tax provision (benefit) 27,701 (2,068) (6,214) 165,354
Inventory fair value adjustments - - 5,923 -
Depreciation and amortization 18,335 17,171 12,253 3,382
Impairment charge - goodwill 28,855 - - -
Impairment charge - other intangibles 8,915 - - -
Impairment charge - long-lived
tangible assets 11,034 - - -
Reduction of payable to PI Trust (27,743) - - -
Reorganization items, fresh-start
adjustments - - - (7,158,896)
Gain on settlement of debt - - (1,548) -
Income applicable to minority
interest 629 1,055 885 314
Loss on sale of fixed assets, net 1,443 91 133 6
Other non-cash items (355) 267 596 441
Changes in operating assets
and liabilities:
Restricted cash (2,845) 3,369 (4,363) 73
Trade accounts receivable 2,680 (3,218) 6,598 (5,097)
Inventories 4,160 (1,720) 1,119 383
Income tax receivable 3,708 33,084 - -
Other current assets 601 92 1,963 (1,412)
Other assets 397 (1,362) 189 (234)
Accounts payable (823) 1,524 (404) 1,088
Accrued liabilities (1,600) 5,428 3,154 (3,474)
Payable to the PI Trust (3,704) (32,487) - -
Other long-term liabilities (2,301) (5,444) 1,967 342
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 2,644 12,957 16,674 (2,473)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (8,968) (9,648) (7,488) (2,717)
Proceeds on sales of property, plant
and equipment 123 125 131 10
----------- ----------- ----------- -----------
Net cash used in investing
activities: (8,845) (9,523) (7,357) (2,707)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Net (payments) borrowings (on)
from short-term notes (6,749) 2,579 (2,710) 2,113
Proceeds from long-term borrowings 11,709 240 105 32
Principal payments on long-term debt (2,902) (1,547) (1,153) (482)
Payments on borrowings from Raymark - - - (703)
Cash overdrafts - - - (371)
Exercise of stock options 152 540 19 -
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 2,210 1,812 (3,739) 589
----------- ----------- ----------- -----------
Effect of exchange rate changes on cash 421 274 14 (78)
Net change in cash and cash equivalents (3,570) 5,520 5,592 (4,669)
Cash and cash equivalents at beginning
of period 19,983 14,463 8,871 13,540
----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period $ 16,413 $ 19,983 $ 14,463 $ 8,871
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-49-
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
(Accumulated Accumulated Treasury
Additional Deficit) Other Stock at Cost
Common Paid in Retained Comprehensive (2,132,059
Stock Capital Earnings (Loss) Income 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 (5,577) (5,577)
Changes during
the period (8,711) (8,711)
----------- ----------- ----------- ----------- ------------- -----------
Total comprehensive
loss (5,577) (8,711) (14,288)
Stock options exercised
(6,596 shares) 7 12 19
----------- ----------- ----------- ----------- ------------- -----------
Balance,
December 30, 2001 41,528 $116,843 (5,577) (8,711) - 144,083
Comprehensive loss:
Net loss (2,825) (2,825)
Changes during
the year 64 64
----------- ----------- ----------- ----------- ------------- -----------
Total comprehensive
loss (2,825) 64 (2,761)
Stock options exercised
(173,034 shares) 173 367 540
Tax benefits associated
with stock options 248 248
----------- ----------- ----------- ----------- ------------- -----------
Balance,
December 29, 2002 41,701 $117,458 (8,402) (8,647) - 142,110
Comprehensive loss:
Net loss (66,443) (66,443)
Changes during
the year 91 91
----------- ----------- ----------- ----------- ------------- -----------
Total comprehensive
loss (66,443) 91 (66,352)
Stock options exercised
(35,752 shares) 36 116 152
----------- ----------- ----------- ----------- ------------- -----------
Balance,
December 28, 2003 $ 41,737 $ 117,574 $ (74,845) $ (8,556) $ - $ 75,910
=========== =========== =========== =========== ============= ===========
The accompanying notes are an integral part of these statements.
-50-
RAYTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
Introduction
Raytech Corporation ("Raytech" or the "Company")manufactures and
distributes engineered products for heat resistant, inertia control, energy
absorption and transmission applications. The Company's operations are
categorized into three business segments: Wet Friction, Dry Friction and
Aftermarket. These segments are more fully described in Note H - Segment
Reporting. Demand for the Company's product is derived primarily from the
automotive original equipment markets for both manual and automatic
transmissions, the original equipment markets for agriculture, construction and
mining equipment and the aftermarket for primarily automatic transmission
products. All of these markets are highly competitive and can be highly
influenced by prevailing economic conditions.
The Company emerged from bankruptcy in April 2001, see "Bankruptcy and
Fresh-Start Accounting" in Note A - Summary of Significant Accounting Policies.
Upon emergence from bankruptcy in 2001, the Company was held liable for the
maintenance and funding of the underfunded pension obligations of Raymark
Corporation ("Raymark"). The Company, based on the court's order, has assumed
the role of plan sponsor for the Raymark plans. As a condition of the
reorganization plan all tax benefits received by the Company as a result of the
reorganization inure to the benefit of the Raytech Personal Injury Trust ("PI
Trust").
Note A - Summary of Significant Accounting Policies
The Company's accounting policies are detailed below. The consolidated
financial statements include the accounts of Raytech Corporation and its
subsidiaries. Intercompany balances and transactions are eliminated in
consolidation. The investment by third parties in Allomatic Products Company
("APC") is accounted for as minority interest in the consolidated financial
statements. There are no unconsolidated entities. 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 assets and liabilities and the reported revenue and expenses made in
the financial statements and accompanying notes. Actual results could differ
from these estimates. Significant estimates include inventory, receivable and
environmental reserves; depreciable lives of property, plant and equipment and
intangible assets; the accruals for pension and other postretirement and
postemployment benefits; the recoverable value of deferred tax assets and the
carrying value of goodwill and other intangible assets.
- Significant areas involving management's judgment are described below.
Pension benefits and welfare benefits represent financial obligations that will
be ultimately settled in the future with employees who meet eligibility
requirements. Because of the uncertainties involved in estimating the timing and
amount of future payments, significant estimates are required to calculate
-51-
pension and welfare benefit expenses and liabilities related to the Company's
plans. The Company utilizes the services of independent actuaries, whose models
are used to facilitate
Note A, continued
these calculations. Several key assumptions are used in actuarial
models to calculate pension expense and welfare benefit expense and
liability amounts recorded in the financial statements. Management
believes the three most significant variables in the pension models are
the expected long-term rate of return on plan assets, the discount
rate, and the expected rate of compensation increase. Management
believes the most significant assumption in the welfare benefit model
is the healthcare cost trend rate. The actuarial models also use
assumptions for various other factors, including employee turnover,
retirement age, and mortality. Company management believes the
assumptions used in the actuarial calculations are reasonable and are
within accepted practices in each of the respective geographic
locations in which we operate.
The Company provides certain warranties relating to the quality and
performance of its products. The primary product of the Company,
friction plates, is used in manual and automatic transmissions,
transfer cases and wet wheel brake systems for heavy duty equipment.
The Company maintains product liability insurance that covers personal
injuries and property damage alleged to have been caused by defective
products. The Company also has insurance to cover the costs of product
recalls arising from its German and Chinese operations. However, the
Company currently carries only limited insurance for product recall
costs in the United States, and none in the U.K., as management
believes such insurance to be cost prohibitive given the Company's
warranty experience. Warranty claims have historically not been
significant due to the quality of the Company's products and the impact
of other potential parts interactions in these systems, which may
contribute to the root cause of any system failure. The costs in 2003
for product warranty support have been de minimis. Some sales contracts
with customers provide that the Company will indemnify the customer and
its affiliates against certain specified patent, copyright and trade
secret infringement claims of third parties that are based on the use
or sale of the Company components. There have been no significant
claims to date.
The assessment of the amount of the Company's deferred tax assets,
which will be realizable, requires the use of significant judgments and
estimates. In making its assessment, the Company evaluates all relevant
evidence, including current industry dynamics within which the Company
operates, to determine if it would be able to realize all or a part of
its deferred tax assets in the future. Should the Company determine
that it would not be able to realize certain of its deferred tax
assets, a valuation allowance would be recorded in the period such a
determination is made.
Accruals for environmental matters are recorded when it is probable
that a liability has been incurred and the amount of the liability can
be
-52-
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. Environmental
remediation obligations are not recorded on a discounted basis.
Revenues from insurance carriers relating to environmental matters are
not recorded
Note A, continued
until it is probable that such recoveries will be realized.
At December 28, 2003, the Company had goodwill and other intangibles of
$30.6 million, which were recorded as a result of the fresh-start
accounting process in 2001. Management reviews goodwill and indefinite
lived intangibles for impairment annually or when events or
circumstances indicate that its value may have declined. In order to
evaluate the impairment assumptions the Company develops a set of
financial projections. Based on these financial projections, the
Company, with the assistance of a financial adviser, using various
valuation methods, the Company determines whether an impairment charge
is required to reduce goodwill and other intangible assets to its
estimated fair value. In the case of long-lived tangible assets, if the
undiscounted cash flows related to the long-lived assets are less than
the assets' carrying value, a similar impairment charge would be
recorded. Management believes that the assumptions made to evaluate the
impairment of goodwill and other intangibles are appropriate and
reasonable. However, changes in circumstances or conditions affecting
these assumptions could result in impairment charges in future periods
that may be material.
- - Fiscal Year
The Company's fiscal year is a 52-53-week period ending on the Sunday
closest to December 31st. All three years presented included 52 weeks.
- - Cash Equivalents
Cash equivalents are recorded at cost, which approximates fair value
and consist of certificates of deposit with maturities of three months
or less when purchased.
- - Inventories
Inventories are stated at the lower of cost or market with cost
determined primarily by using the first in, first out ("FIFO") method.
Costs included in inventories consist of materials, labor and
manufacturing overhead, which are related to the purchase and
production of inventories.
- - Property, Plant and Equipment
Upon emergence from bankruptcy, property, plant and equipment was
recorded on April 2, 2001 based on their fair values determined by
independent appraisals. Additions subsequent to April 2, 2001 have been
recorded at cost. Depreciation is based on the estimated service life
of the related asset and is provided using the straight line method.
Maintenance and repairs that do not increase the useful life of an
asset are expensed as incurred. Interest is capitalized on major
capital expenditures during the period of construction and to the date
such asset
-53-
is placed in service. Upon disposal of property, plant and equipment,
the appropriate accounts are reduced by the related costs and
accumulated depreciation. The resulting gains or losses are reflected
in the Consolidated Statements of Operations.
Property, plant and equipment are reviewed for impairment whenever
events or circumstances indicate that the carrying value may not be
recoverable. When such events or circumstances arise, an estimate of
the future cash
Note A, continued
flows produced by an asset, or the appropriate grouping of assets, is
compared to the asset's carrying value to determine if an impairment
exists pursuant to the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." If the asset is determined to be
impaired, the impairment loss is measured based on the excess of its
carrying value over its fair value. See Note D for a description of
impairment charges recognized during the fourth quarter of 2003.
- - Intangible Assets
Intangible assets consist primarily of goodwill, trademarks, unpatented
technology and distribution base. Effective with the period beginning
April 3, 2001, the Company has adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." In accordance with this standard, goodwill
and trademarks have been classified as indefinite-lived assets no
longer subject to amortization. Prior to the adoption of SFAS No. 142
in fiscal 2001, intangible assets with an indefinite life were
amortized on a straight-line basis over a period of not more than 40
years. Unpatented technology and distribution base are classified as
definite-lived assets and are being amortized on a straight line basis
with estimated lives ranging from 6 to 20 years. Indefinite-lived
Intangible assets are tested for impairment annually or more frequently
when events or circumstances indicate that the carrying amount may be
impaired. The unpatented technology and distribution base are reviewed
for improvement whenever events or circumstances indicate that their
carrying value may not be recoverable. Impairment testing is done at
the reporting unit level for goodwill. Reporting units are one level
below the business segment level but can be combined when reporting
units within the same segment have similar economic characteristics. An
goodwill impairment loss would be recognized when the carrying amount
of the reporting unit's net assets exceeds the estimated fair value of
the reporting unit. The estimated fair value of the reporting unit is
determined using a future undiscounted cash flow analysis. See Note E -
Goodwill and Other Intangible Assets for a description of impairment
charges recognized during the fourth quarter of 2003.
- - Income Taxes
The Company uses the liability method in accounting for income taxes.
Deferred tax assets and liabilities are recorded for temporary
differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements, using statutory tax rates
in effect for the year in which the differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the results of operations in the period
that includes the enactment date. A valuation allowance is recorded to
reduce the carrying amounts of
-54-
deferred tax assets unless it is more likely than not that such assets
will be realized.
The Company has not provided for deferred U.S. taxes on the
undistributed earnings of its foreign subsidiaries since a taxable
distribution of those earnings is not anticipated. In addition,
deferred U.S. income taxes have not been provided on the cumulative
translation adjustment component of accumulated other comprehensive
loss in shareholders' equity due to management's decision to
permanently reinvest those earnings. Further, the Company has not
provided for deferred U.S. taxes on the undistributed earnings of APC,
its majority-owned subsidiary, since management expects
Note A, continued
that these earnings will be distributed to the Company in a tax-free
transaction.
Pursuant to the Tax Benefits Assignment and Assumption Agreement, all
tax benefits received by the Company due to the reorganization are to
be passed onto the PI Trust as received.
- - Earnings Per Share
Basic earnings per common share is computed based on the weighted
average number of common shares outstanding during the year. Diluted
earnings per share is computed based on the weighted average number of
common and dilutive potential common shares during the year.
- - Translation of Foreign Currencies
The local currency is the functional currency for the Company's foreign
subsidiaries. The financial statements of foreign subsidiaries are
translated to U.S. dollars using the period-end exchange rate for
assets and liabilities, historical exchange rates for elements of
stockholders' equity and an average exchange rate for each period for
revenues and expenses. The effects of translating the Company's foreign
subsidiaries' financial statements are recorded as a component of
accumulated other comprehensive loss in shareholders' equity. Gains and
losses on intercompany foreign currency transactions that are of a
long-term investment nature are reported as translation adjustments as
a component of accumulated other comprehensive loss in shareholders'
equity.
- - Revenue Recognition
Revenue from the sale of the Company's products is recognized upon
shipment to the customer when title and risk of loss has transferred.
Substantially all of the Company's revenues are derived from fixed
price purchase orders. Costs and related expenses to manufacture the
products are recorded as costs of sales when the related revenue is
recognized. The Company establishes an allowance for doubtful accounts
based on historical experience and believes that collections of
revenues, net of the allowance for doubtful accounts, is reasonably
assured.
-55-
The Company produces goods for its customers based on a purchase order
system, and in certain instances using longer term contracts that
stipulate a fixed selling price with no commitment as to quantity. In
instances where the product's cost exceeds the selling price, a reserve
is established for the expected loss on goods in inventory and customer
purchase orders received by the balance sheet date. The Company has not
recorded an estimate of the loss over the term of these contracts since
the quantity and mix of parts is not known and that future production
costs will be impacted by, among other things, changes in economic
conditions and management's actions, including expected cost savings
initiatives.
Note A, continued
the minimum amount of the range is recorded. Environmental remediation
obligations are not recorded on a discounted basis. Revenues from
insurance carriers relating to environmental matters are not recorded
until it is probable that such recoveries will be realized.
- - Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value-based method of accounting in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost is
recognized for stock options granted at fair market value. Had
compensation costs of stock options been determined under a fair value
alternative method as stated in SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of
FASB Statement No. 123," the Company would have been required to record
the fair value for such options and employees' purchase rights, and
record such amount in the consolidated financial statements as
compensation expense. Pro forma stock-based employee compensation
costs, net (loss) income and (loss) earnings per share, as they would
have been recognized if the fair value method had been applied to all
awards, are presented in the table below.
Successor Company Predecessor Company
-------------------------------------------- -------------------
For the Year Ended
-------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
2003 2002 Dec. 30, 2001 to April 2, 2001
------------ ------------ --------------- ----------------
(dollars in thousands, except per share data)
Net (loss) income:
As reported $ (66,443) $ (2,825) $ (5,577) $6,995,257
Deduct: Total stock-based employee
Compensation expense determined
under fair value based method
for all awards, net of related
tax effects (2,424) - - -
--------- --------- -------- ----------
Pro forma $ (68,867) $ (2,825) $ (5,577) $6,995,257
========= ========= ======== ==========
Basic (loss) earnings per share:
As reported $ (1.59) $ (.07) $ (.13) $ 1,778.88
Pro forma $ (1.65) $ (.07) $ (.13) $ 1,778.88
Diluted (loss) earnings per share:
As reported $ (1.59) $ (.07) $ (.13) $ 1,772.62
Pro forma $ (1.65) $ (.07) $ (.13) $ 1,772.62
-56-
During the first quarter of fiscal 2003, the Company granted options
for 1,601,000 shares of common stock with an exercise price of $5.70
per share. The fair value of these options was estimated at $3.22 per
common share on the date of grant, using the Black-Scholes option
pricing model with the following assumptions: expected volatility of
56.7%, dividend yield of 0.00%, risk free interest rate of 3.60% and an
expected life of the options of six years. During the second quarter of
fiscal 2003, the Company granted options for 1,172,000 shares of common
stock with an exercise price of $5.70 per share. The fair value of
these options was estimated at $2.05 per common share on the date of
grant, using the Black-Scholes option pricing model with the following
assumptions: expected volatility of 62.30%, dividend yield of 0.00%,
risk free interest rate of 2.84% and an expected life of the options of
six years.
There was no pro forma impact on net (loss) income for the fiscal years
2002 or 2001. Options outstanding during these years were fully vested
in fiscal 1999.
Note A, continued
- - Property Taxes
The Company provides for property taxes based on the most current
information available, including actual taxes paid in the most current
year, coupled with information which would impact the expected tax rate
and property valuations. In instances where uncertainty exists as to
the estimated amount of taxes, the Company's best judgment is used
considering all information known at the time.
- - Reclassification
The extraordinary gains on the settlement of liabilities recorded
during the period April 3, 2001 to December 30, 2001 in the amount of
$1.5 million and the period January 1, 2001 to April 2, 2001 in the
amount of $7.1 billion have been reclassified to operating items in
accordance with the SFAS No. 145, "Recision of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." See Note F - Debt and Note X - Reorganization Items for a
further description of these items.
- - Bankruptcy and Fresh-Start Accounting
Raytech was incorporated in June 1986 in Delaware and held as a
subsidiary of 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. 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 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
-57-
of Connecticut.
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.
All financial information prior to that date is presented as pertaining
to the Predecessor Company while all financial information after that
date is presented as pertaining to the Successor Company. Accordingly,
the Statement of Operations includes the results of the reorganization
and fresh-start adjustments in the period January 1, 2001 to April 2,
2001 as Predecessor Company information. 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. For financial reporting purposes, the results of
the Predecessor Company and the Successor Company cannot be combined
for the 2001 fiscal year.
- - Recently Issued Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission 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
Note A, continued
debt to be aggregated and, when material, classified as an
extraordinary item net of the related income tax effect. SFAS No. 145
also amends SFAS 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 Company has
adopted the provisions of SFAS No. 145 and has restated prior periods
to classify gains on the extinguishment of debt as extraordinary only
when in accordance with APB Opinion No. 30.
In December 2003, FASB revised and reissued FASB Interpretation No.
("FIN") 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51." The
interpretation requires that the assets, liabilities and results of the
activity of variable interest entities be consolidated into the
financial statements by the primary beneficiaries if the entities do
not effectively disperse the risks and rewards of ownership among the
owners and other parties involved. The provisions of FIN No. 46 must be
applied no later than as of the end of the first reporting period
ending after March 15, 2004. Management has determined that the
adoption of FIN No. 46 will have no significant impact on the Company's
consolidated financial statements.
In April, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 Accounting for Derivative Instruments and Hedging Activities." This
Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FASB
Statement No. 133. SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003, with all provisions applied
prospectively. The Company has determined that the statement is not
currently applicable to the Company.
-58-
The Company will evaluate contracts entered or modified in the future
and record them in accordance with the provisions of SFAS No. 149.
In May, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equities." This Statement establishes standards regarding the manner in
which an issuer classifies and measures certain types of financial
instruments having characteristics of both liabilities and equity. SFAS
No. 150 is generally effective for financial instruments entered into
or modified after May 31, 2003 and for contracts in existence at the
start of the first interim period beginning after June 15, 2003 for
mandatorily redeemable financial instruments issued by non-public
companies; however, the effective date is for fiscal periods beginning
after December 15, 2004. The Company currently does not have financial
instruments with the characteristics described in the standard. The
Company will record financial instruments entered into or modified in
future periods in accordance with the provisions of SFAS No. 150.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement revises disclosures about pension plans and
other postretirement benefit plans. This Statement is effective for
financial statements with fiscal years ended after December 15, 2003.
The Company has adopted the
Note A, continued
additional disclosure requirements of this Statement. The additional
disclosures are presented in Note M of the Consolidated Financial
Statements.
Note B - Restricted Cash
Restricted cash relates to the following:
December 28, December 29,
2003 2002
------------ ------------
Payable to the PI Trust $ 3,182 $ 350
Letters of credit 1,630 1,617
Other 60 60
--------- -------
$ 4,872 $ 2,027
========= =======
The payable to the PI Trust consists of tax refunds and other funds
received by the Company that will be paid to the PI Trust at a future date.
The letters of credit collateralize certain obligations relating
primarily to workers' compensation.
-59-
Note C - Inventories
Net Inventories
Inventories, net of inventory reserves, are as follows:
December 28, December 29,
2003 2002
------------ ------------
Raw material $11,056 $ 11,049
Work in process 8,871 8,349
Finished goods 10,950 14,659
------- --------
$30,877 $ 34,057
======= ========
Inventory Reserves
Successor Company Predecessor Company
-------------------------------------------- -------------------
For the Year Ended
-------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
2003 2002 Dec. 30, 2001 to April 2, 2001
---- ---- --------------- ----------------
Beginning balance $ 3,174 $ 2,427 $ 2,901 $ 3,025
Provisions 1,666 858 407 30
Charge-offs (252) (111) (881) (154)
------- ------- -------- -------
Ending balance $ 4,588 $ 3,174 $ 2,427 $ 2,901
======= ======= ======== =======
In reviewing certain sales contracts, the Company determined the agreed
upon selling price was less than cost and established an inventory reserve of
$1.2 million with a corresponding charge to cost of goods sold.
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company adjusted the value of its inventories by $5.9 million on
that date to their estimated selling prices less costs to complete, cost of
disposal and a reasonable profit allowance for the completing and selling effort
as required by fresh-start reporting. This adjustment of $5.9 million was
recorded as cost of sales in the Statement of Operations during the second
quarter of 2001 as the inventory was sold.
-60-
Note D - Property, Plant and Equipment
Property, plant and equipment, at cost, is summarized as follows:
December 28, December 29,
2003 2002
------------ ------------
Land $ 3,798 $ 3,999
Buildings and improvements 28,676 30,920
Machinery and equipment 89,129 90,728
Capital leases 773 796
Construction in progress 3,683 4,935
-------- --------
126,059 131,378
Less accumulated depreciation (36,824) (25,257)
-------- --------
Net property, plant and equipment $ 89,235 $106,121
======== ========
The estimated useful lives for buildings and improvements range from 5
to 40 years; the estimated useful lives for machinery and equipment range from 3
to 20 years.
Capital leases consist primarily of automobiles, telephones and
computer equipment and are amortized over the economic life of the assets or the
term of the leases, whichever is shorter.
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company recorded the property, plant and equipment at their fair
values as determined by independent third-party appraisers.
In fiscal 2003, the Wet Friction segment had an operating loss. Due to
the operating loss, the Company determined that an impairment analysis was
appropriate and engaged the services of a third party valuation firm to evaluate
the carrying value of its long-lived assets in accordance with SFAS No. 144. The
Company developed a future cash flow analysis and based on the current year loss
and future cash flow analysis, it was determined that the carrying value of
certain asset groupings in the Wet Friction segment and certain assets contained
in the corporate asset grouping exceeded their fair value and that an impairment
had occurred. The Company has recorded a non- cash impairment of $8.1 million
relating to the Wet Friction assets and $2.9 million relating to the corporate
assets, for a total impairment of $11.0 million, reducing the carrying value of
its property, plant and equipment.
Maintenance and repairs charged to expense amounted to approximately
$9,468 for 2003, $9,355 for 2002, $6,651 for the period April 3, 2001 to
December 30, 2001 (Successor Company), and $2,028 for the period January 1, 2001
to April 2, 2001 (Predecessor Company). Depreciation expense relating to
property, plant and equipment was $16,107 for the year ended December 28, 2003,
$14,943 for the year ended 2002, $10,585 for the period April 3, 2001 to
December 30, 2001 (Successor Company), and $3,180 for the period January 1, 2001
to April 2, 2001 (Predecessor Company).
-61-
Note E - Goodwill and Other Intangible Assets
In July 2001, the FASB 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. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to forty years. As discussed in Note W,
the Company adopted fresh-start reporting as described in the AICPA Statement of
Position ("SOP") 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.
In fiscal 2003, the Wet Friction segment recorded an operating loss.
Due to the loss, the Company determined that an impairment analysis was
appropriate and engaged the services of a third party valuation firm to evaluate
the carrying value of its goodwill and intangible assets in accordance with SFAS
No. 142. The Company developed a future cash flow analysis and based on the
current year loss and future cash flow analysis, it was determined that its
carrying value of the Wet Friction segment, including step-up adjustments
recorded upon emergence from bankruptcy, exceeded the fair value and that an
impairment had occurred. Accordingly, the Company recorded an impairment charge
of $37.8 million as detailed in the table below. The goodwill and other
intangible assets are recorded in the corporate asset group. All impairment
charges related to the impairment of intangible assets are presented as a
component of corporate expense.
The changes in the carrying value of goodwill and other intangible
assets for the year ended December 28, 2003 are as follows:
Unpatented Distribution
Technology Base Trademarks Goodwill Total
---------- ------------ ---------- -------- --------
Balance at December 29, 2002 $ 12,866 $ 5,216 $ 17,713 $ 34,767 $ 70,562
Amortization (1,941) (287) - (2,228)
Impairment charge (1,902) (7,013) (28,855) (37,770)
-------- ------- -------- -------- --------
Balance at December 28, 2003 $ 9,023 $ 4,929 $ 10,700 $ 5,912 $ 30,564
======== ======= ======== ======== ========
The following table represents the carrying value of goodwill and other
intangible assets at December 28, 2003 and December 29, 2002.
-62-
Note E, continued
December 28, 2003 December 29, 2002
---------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Finite life intangible assets:
Unpatented technology $ 14,360 $ 5,337 $ 16,262 $ 3,396
Distribution base 5,716 787 5,716 500
-------- -------- -------- -------
Sub-total $ 20,076 $ 6,124 $ 21,978 $ 3,896
======== ======== ======== =======
Indefinite life intangible
assets:
Trademarks $ 10,700 $ 17,713
======== ========
Goodwill
Wet Friction $ - $ 28,855
Aftermarket 5,912 5,912
-------- --------
Subtotal $ 5,912 $ 34,767
======== ========
Intangible assets, net $ 30,564 $ 70,562
======== ========
The weighted-average amortization periods for the unpatented technology and the
distribution base are between 6 and 20 years. Amortization expense for 2003,
2002 and the period April 3, 2001 to December 30, 2001 amounted to $2.2 million,
$2.2 million and $1.7 million, respectively.
Estimated annual amortization expense is as follows:
For the year ending:
2004 $ 1,922
2005 1,922
2006 1,922
2007 1,622
2008 1,522
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
-------------------
Period from
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
=======
-63-
Note F - Debt
Debt, at fiscal year-end, consists of the following:
December 28, 2003 December 29, 2002
------------------------------- -------------------------------
Current Non-Current Total Current Non-Current Total
------- ----------- -------- -------- ----------- --------
Domestic bank debt
Line of credit $ 3,604 $ - $ 3,604 $ 8,556 $ - $ 8,556
Term loans
Wet Friction 1,055 4,133 5,188 2,750 - 2,750
Aftermarket 996 5,921 6,917 - - -
-------- ------- -------- -------- -------- --------
Total domestic bank debt 5,655 10,054 15,709 11,306 - 11,306
Foreign bank debt
Line of credit - - - 1,449 - 1,449
-------- ------- -------- -------- -------- --------
Term loans
Dry Friction Europe 979 4,137 5,116 680 4,095 4,775
Dry Friction Asia 1,300 - 1,300 1,480 - 1,480
-------- ------- -------- -------- -------- --------
Total foreign bank debt 2,279 4,137 6,416 3,609 4,095 7,704
-------- ------- -------- -------- -------- --------
Total bank debt 7,934 14,191 22,125 14,915 4,095 19,010
Leases 158 163 321 176 198 374
-------- ------- -------- -------- -------- --------
Total borrowings $ 8,092 $14,354 $ 22,446 $ 15,091 $ 4,293 $ 19,384
======== ======= ======== ======== ======== ========
The maturities of debt, as of December 28, 2003, are as follows:
2004 $ 8,092
2005 3,158
2006 3,063
2007 2,969
2008 4,462
Thereafter 702
-------
$22,446
=======
The domestic bank debt of the Company is at variable interest rates,
and the carrying amount approximates fair value. The Company maintains certain
of its foreign borrowings in fixed rate debt which approximates market value.
Domestic Bank Debt
The Company, through its Wet Friction segment subsidiaries, Raybestos
Products Company ("RPC"), and Raytech Automotive Components Company ("RACC"),
maintains a Loan and Security Agreement, which provides for RPC and RACC to
borrow up to $25.3 million in the aggregate. The agreement, as amended in
November 2003, consists of a $20 million revolving line of credit and a term
loan of $5.3 million. The revolving line of credit is limited through a formula
which provides availability based on qualified accounts receivable and
inventory. The term loan is payable in 34 monthly payments of $88 thousand,
commencing December 1, 2003 and maturing on September 28, 2006, with the final
payment being the remainder of the balance. The revolving line of credit matures
September 28, 2006. The revolving line of credit and the term loan are
collateralized by accounts receivable, inventory and machinery and equipment.
Amounts outstanding under the revolving line of credit bear interest at a rate
equal to, at the Company's option, the prime rate or the adjusted Eurodollar
Rate, plus a margin of 0.5% and 2.75%, respectively. Amounts outstanding under
the term loan bear interest at a rate equal to, at the Company's option, the
Prime Rate or the
-64-
adjusted Eurodollar Rate, plus a margin of 0.75% and 3.0%, respectively. The
agreement contains financial and other covenants, including a fixed charge
coverage ratio and a material adverse change clause. At December 28, 2003 and
Note F, continued
December 29, 2002, the net pledged assets of RPC and RACC amounted to $70.1
million and $90.3 million, respectively, consisting of cash, accounts
receivable, inventory, property, plant and equipment and all other tangible and
intangible assets. The agreement permits RPC and RACC to pay dividends to the
Company for costs and expenses incurred by the Company in the ordinary course of
business so long as no event of default has occurred and is continuing.
In October 2003, the Company, through its subsidiaries Raytech
Powertrain, Inc. ("RPI"), APC and Raytech Systems, Inc. ("RSI"), entered into a
loan agreement for $7.0 million with an interest rate at 1.65 basis points over
the adjusted Eurodollar rate with a five-year term. The loan is payable in 59
monthly payments of $83 thousand, commencing on December 1, 2003, with a balloon
payment of $2.1 million payable on November 3, 2008. The proceeds from this
facility will be used to pay environmental costs and pension costs. The loan is
collateralized by the assets of the borrowing entities. The agreement contains
financial and other covenants, including the maintenance of certain financial
ratios and a material adverse change clause. At December 28, 2003, the net
pledged assets of APC, RSI and RPI amounted to $54.0 million.
In connection with the recorded loss of $66.4 million, the Company
requested and obtained a waiver of the material adverse condition clauses
contained in the domestic bank agreements.
Foreign Bank Debt - Dry Friction Segment
The Company's wholly-owned German subsidiary, Raybestos
Industrie-Produkte GmbH ("RIP"), has available lines of credit with several
German banks amounting to EUR3.0 million ($3.8 million) as of December 28, 2003
and EUR5.0 ($5.2 million) at December 29, 2002. Interest is charged at rates
between 5.07% and 8.0%. The lines are repayable on demand.
The Company's wholly-owned German subsidiaries, Raytech Composites
Europe GmbH ("RCE") and RIP have various loan agreements where the maturities
range from September 2006 through December 2012. The loans are payable in equal
monthly installments over the term of the loan. The loans bear interest at rates
ranging from 2.5% through 6.2%. At December 28, 2003 and December 29, 2002,
respectively, the net pledged assets, consisting of machinery and equipment,
amounted to EUR12.7 million ($16.0 million) and EUR10.2 million ($10.7 million).
During the years presented, the Company's wholly-owned Chinese
subsidiary Raybestos Friction Products (Suzhou) Co. Ltd. ("RFP") has had various
loan agreements. The loans are short-term with maturities between six and twelve
months.
The weighted average rates on all domestic and foreign bank notes
payable at December 28, 2003 and December 29, 2002 were 3.71% and 4.04%,
respectively.
Note Payable to Former AFM Principal
-65-
The note payable to the former AFM principal dated April 1998 was
settled in October 2001. The settlement agreement required a payment of $3.1
million. Prior to the settlement, the Company had a note payable of $3.0 million
and accrued interest of $1.6 million recorded related to this debt. The Company
recognized a gain, related to the settlement of this note, in the amount of $1.5
million in the fourth quarter of 2001.
NOTE G - Litigation
ENVIRONMENTAL REMEDIATION
Crawfordsville, Indiana - Shelly's Ditch Contamination Removal
In October 1987, RPC, a wholly-owned subsidiary of the Company,
purchased a major manufacturing facility (the "RPC Facility") in Crawfordsville,
Indiana. Some time thereafter, the Company learned that the previous owner of
the RPC Facility had disposed of polychlorinated biphenyls ("PCBs") in the
ground at the RPC Facility in the mid-1960s and that such PCBs were leaching
from the RPC Facility into an adjacent ditch ("Shelly's Ditch").
In 1996, the Indiana Department of Environmental Management (the
"IDEM") advised RPC that the RPC Facility may have contributed to, and was
potentially responsible for, the release of lead and PCBs found in Shelly's
Ditch. In the late 1990s, RPC and the IDEM entered into an agreed order (the
"Agreed Order") for a risk-based remediation of PCBs and lead in Shelly's Ditch.
When the IDEM later sought to unilaterally withdraw from the Agreed Order, RPC
appealed and the court ordered the IDEM to reinstate the Agreed Order.
Meanwhile, at the IDEM's request, the United States Environmental Protection
Agency (the "EPA") became involved in Shelly's Ditch.
In December 2000, before the Agreed Order was reinstated, the EPA
issued a Unilateral Administrative Order to RPC under CERCLA (the "EPA Removal
Order") demanding removal of contaminated soils from those Shelly's Ditch areas
identified as Reaches 1 through 3 (the "Site"). The EPA Removal Order required
more work at greater expense than the IDEM Order. Thereafter, RPC proceeded with
the work required under the EPA Removal Order. During the second quarter of
fiscal 2003, a provision of $1.8 million was recorded for the completion of work
required by the EPA Removal Order. By December 28, 2003, RPC had spent
approximately $18.7 million on removal of lead and PCB contaminated soils from
the Site and had accrued $400,000 for potential EPA oversight cost assessments
relating to that work.
On January 9, 2004, the EPA confirmed that RPC had completed the action
required under the EPA Removal Order, including the removal and proper disposal
of Site soils and sediments contaminated with PCBs and lead. In its
confirmation, the EPA noted that RPC would continue to be subject to certain
obligations under that order, including record retention and the payment of
oversight costs. Whether RPC will be required to pay oversight costs relating to
the work under the EPA Removal Order will depend on the outcome of future
negotiations with the EPA and the IDEM regarding potential environmental
remediation downstream of the Site.
Crawfordsville, IN - Environmental Remediation Downstream of
-66-
Reaches 1 through 3 of Shelly's Ditch
On May 6, 2003, the EPA indicated that RPC is potentially liable for
PCB and lead contamination downstream of the Site. The EPA has not issued an
order to RPC regarding this downstream area. However, during the third quarter
of 2003, the Company began negotiations with the EPA concerning such possible
additional remediation. As a result, during the third quarter of 2003, the
Company recorded a $2.4 million provision relating to this potential liability
for future cleanup costs.
-67-
Note G, continued
Crawfordsville, IN - Environmental Remediation and Expenses
relating to the RPC Facility
On May 15, 2001, the EPA issued a Pre-filing Notice and Opportunity to
Confer to RPC (the "Pre-filing Notice"). This notice stated that the EPA might
file a civil action lawsuit against RPC for violations of various environmental
statutes and would offer RPC the opportunity to participate in pre-filing
negotiations to resolve this matter. The EPA stated that it has reason to
believe that RPC committed violations of the Clean Air Act, Clean Water Act,
Resource Conservation and Recovery Act and Toxic Substances Control Act and that
RPC could be subject to substantial penalties. At that time, the Company
recorded a provision of $.3 million on the advice of legal counsel. On September
3, 2003, the EPA proposed that the parties settle the Pre-filing Notice. The EPA
stated that penalties for violations alleged in the Pre-filing Notice could
total approximately $180 million and suggested the following resolution: RPC
should pay approximately $2.4 million in fines and undertake compliance
activities, on-site investigative work that the EPA estimated would cost about
$1.0 million, and corrective action to resolve the Pre-filing Notice. The
parties have begun preliminary negotiations regarding the potential on-site
investigative work but have not obtained an overall EPA settlement proposal. The
Company recorded a provision of $3.1 million in the year-ended December 28, 2003
based on the EPA position.
Ferndale, MI - Potential Responsibility for Environmental Remediation
In a January 8, 2002 letter, the Michigan Department of Environmental
Quality asserted company responsibility for trichloroethylene contamination at a
Ferndale, Michigan industrial site that Advanced Friction Materials Company
("AFM") leased from approximately 1974 to 1985. The Company acquired 47% of the
stock of AFM in 1996, and the balance of the shares in 1998. The Company's
liability at this site is indeterminable at this time.
ENVIRONMENTAL LITIGATION
Cost Recovery Actions against Insurers regarding Shelly's Ditch
In 1996, RPC notified its insurers and demanded defense and indemnity
regarding any environmental issues relating to alleged lead and PCB
contamination of Shelly's Ditch. In January 1997, one insurer filed a complaint
in the U.S. District Court, Southern District of Indiana, captioned Reliance
Insurance Company vs. Raybestos Products Company (the "Insurance Case"). The
complaint sought a declaratory judgment that the Reliance Insurance policies do
not provide coverage to RPC for defense and indemnity relating to investigation
and remediation of contamination in Shelly's Ditch. In January 2000, the
District Court rejected Reliance's claims and granted summary judgment to RPC.
In June 2001, Reliance Insurance Company was placed in liquidation in
Pennsylvania. The Company has filed claims in the Reliance liquidation for
recovery of its Shelly's Ditch expenses, but has not received a decision.
In February 2002, RPC filed a third-party complaint in the Insurance
Case against National Union and two other insurance carriers. The third-party
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complaint seeks defense and indemnity from the insurers relating to
investigation and remediation of contamination in Shelly's Ditch.
-69-
Note G, continued
In February 2004, National Union and its affiliates commenced an
adversary proceeding against the Company, RPC and others by filing a complaint
in U.S. Bankruptcy Court (the "Adversary Proceeding"). In the Adversary
Proceeding, National Union claims that RPC's third-party complaint against
National Union is barred by a January 2002 order of the U.S. Bankruptcy Court in
the Raymark Industries, Inc. and Raymark Corporation Chapter 11 cases (the
"Raymark Order"). National Union claims that the Raymark Order prohibited RPC
from pursuing its third-party complaint against National Union and declared that
the National Union insurance policies issued to the Company and RPC have been
exhausted. Also in February 2004, National Union filed a motion in the U.S.
District Court, Southern District of Indiana, asking that court to stay the
Insurance Case against National Union. The outcome of this Adversary Proceeding
and related motion for stay and their effects, if any, on the Insurance Case
against National Union cannot be predicted.
RPC Claims against IDEM
In July 2002, RPC filed an action against the IDEM for breach of
contract claiming damages based on the difference between the costs of cleanup
under the EPA Removal Order and the IDEM Agreed Order. The outcome of this
litigation cannot be predicted.
COMMERCIAL LITIGATION
On April 22, 2003, Automation by Design, Inc. filed a civil action
against RPC in U.S. District Court for the Southern District of Indiana. The
complaint alleges copyright infringement and breach of contract in connection
with RPC's purchase of certain equipment. In answer to plaintiff's complaint,
RPC denied liability and filed counterclaims for breach of contract and
declaratory judgment. The court has granted Automation by Design's motion to
amend its complaint to include Raytech Corporation and Production Design
Services, Inc. as defendants. RPC has agreed to defend and provide certain
indemnity protection to Production Design Services, Inc., which manufactured
certain equipment that is allegedly involved in this court action. The outcome
of this litigation cannot be predicted, and the Company's liability or
recoveries are indeterminable at this time.
EQUITY HOLDERS LITIGATION
In February 2002, lawyers claiming to represent the Committee of Equity
Holders of Raytech Corporation filed a motion in U.S. Bankruptcy Court to compel
Raytech to either issue up to approximately 700,000 additional shares to the
pre-reorganization holders of shares in Raytech or their successors, or to
proportionately reduce the shareholdings of the general unsecured creditor
shareholders under the Plan of Reorganization. The ultimate outcome of this
matter cannot be predicted; however, it is possible that its resolution could
cause the Company to issue additional shares to the original shareholder group,
or to retire shares held by the general unsecured creditor shareholder group.
This might directly impact the earnings per share calculations of the Company.
The Bankruptcy Court denied a Company motion to dismiss this action.
The Company is subject to certain other legal matters that have arisen
in the ordinary course of business, and management does not expect them to have
-70-
a significant adverse effect on the results of consolidated operations,
financial condition or cash flow.
Note H - Segment Reporting
The Company's operations are categorized into three operating segments
and a corporate group based on management structure, product type and
distribution channel as described below.
Wet Friction
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 for automatic transmissions and heavy duty original equipment
manufacturers, as well as farm machinery, mining, truck and bus manufacturers.
Dry Friction
The Dry Friction segment produces engineered friction products,
primarily used in original equipment automobile and truck manual transmissions.
The clutch facings produced by this segment are marketed to companies who
assemble the manual transmission systems used in automobiles and trucks.
Aftermarket
The Aftermarket segment produces specialty engineered products
primarily for automobile and lift truck automatic 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 segment includes APC, which is 57% owned by the Company, 40% owned
by Raymark, a related party, and 3% owned by certain employees of the Company.
Net sales for APC were $30.0 million in 2003 and $31.1 million in 2002.
Operating profit for APC was $2.5 million in 2003 and $3.9 million in 2002. APC
is consolidated in the financial results and a minority interest is recorded to
reflect the minority shareholders' interest in APC. A minority interest charge
is recorded for the minority's percent of income.
Corporate
The Corporate group consists principally of corporate expenses,
including costs to maintain the corporate headquarters and certain environmental
costs, and certain assets, liabilities and related income and expense stemming
from the reorganization plan implemented when the Company emerged from
bankruptcy in 2001. The Company has chosen not to distribute these costs to the
operating segments to preserve the historical comparability at the operating
segment level.
The operating loss of $29.7 million recognized in the Corporate group
for fiscal 2003 consists of the following:
Impairment charge $ (40.7)
Depreciation and amortization (4.7)
Environmental cost (7.5)
Corporate headquarters cost (6.1)
Reduction of payable to PI Trust 27.7
Other income 1.6
-------
$ (29.7)
=======
The impairment charge is described in Notes D - Property, Plant and Equipment
and E - Goodwill and Other Intangible Assets. The other income is due to the
-71-
reduction in the payable to the PI Trust due to the adjustment to deferred tax
assets, described in Note I - Income Taxes.
Information relating to operations by industry segment follows:
Note H, continued
Successor Company Predecessor Company
------------------------------------------- -------------------
For the Year Ended
-------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
2003 2002 Dec. 30, 2001 to April 2, 2001
------------ ------------ ------------- ----------------
NET SALES
Wet Friction $125,095 $137,930 $ 95,512 $ 37,047
Aftermarket 44,931 46,192 34,384 13,111
Dry Friction 44,453 35,244 22,074 8,147
Intersegment elimination (1) (8,614) (9,500) (5,920) (3,100)
-------- -------- -------- ----------
Net sales to external customers $205,865 $209,866 $146,050 $ 55,205
======== ======== ======== ==========
GROSS PROFIT
Wet Friction $ 6,343 $ 19,724 $ 15,201 $ 5,513
Aftermarket 12,725 12,993 9,814 3,555
Dry Friction 12,284 8,856 4,829 2,272
Intersegment elimination (5,226) (4,802) (8,384) 54
-------- -------- -------- ----------
Consolidated $ 26,126 $ 36,771 $ 21,460 $ 11,394
======== ======== ======== ==========
OPERATING (LOSS) PROFIT(2)
Wet Friction $(19,972) $ 3,276 $ 3,387 $ 1,327
Aftermarket 7,171 7,990 6,035 2,109
Dry Friction 3,395 2,452 603 754
Corporate (29,663) (15,404) (18,687) 7,158,204
-------- -------- -------- ----------
Consolidated $(39,069) $ (1,686) $ (8,662) $7,162,394
======== ======== ======== ==========
DEPRECIATION
Wet Friction $ 8,788 $ 8,945 $ 6,161 $ 2,112
Aftermarket 1,543 1,553 1,167 491
Dry Friction 3,246 2,664 1,607 563
Corporate 2,530 1,781 1,650 14
-------- -------- -------- ----------
Consolidated $ 16,107 $ 14,943 $ 10,585 $ 3,180
======== ======== ======== ==========
INTEREST EXPENSE, NET
Wet Friction $ 1,537 $ 1,282 $ 409 $ 242(3)
Aftermarket (35) (39) 20 44
Dry Friction 856 841 412 154
Corporate (1,297) (1,181) 32 4
-------- -------- -------- ----------
Consolidated $ 1,061 $ 903 $ 873 $ 444
======== ======== ======== ==========
EXPENDITURES FOR PROPERTY, PLANT,
AND EQUIPMENT
Wet Friction $ 4,525 $ 5,010 $ 4,707 $ 1,822
Aftermarket 772 1,068 1,061 127
Dry Friction 3,587 3,444 1,669 768
Corporate 84 126 51 -
-------- -------- -------- ----------
Consolidated $ 8,968 $ 9,648 $ 7,488 $ 2,717
======== ======== ======== ==========
SEGMENT ASSETS (AT YEAR-END) (4)
Wet Friction $ 74,537 $ 95,369 $ 97,821 $ 113,403
Aftermarket 35,144 31,031 27,376 32,427
Dry Friction 36,357 32,230 39,869 23,591
Corporate 59,986 135,591 155,722 154,215
-------- -------- -------- ----------
Consolidated $206,024 $294,221 $320,788 $ 323,636
======== ======== ======== ==========
-72-
Note H, continued
Successor Company Predecessor Company
------------------------------------------- -------------------
For the Year Ended
-------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
2003 2002 Dec. 30, 2001 to April 2, 2001
------------ ------------ --------------- ----------------
LONG-LIVED ASSETS BY
GEOGRAPHIC LOCATION
United States $ 96,326 $155,558 $163,537 $ 84,823
Germany 14,888 13,362 11,356 9,291
Other foreign countries 8,585 7,763 7,189 7,322
-------- -------- -------- --------
Consolidated $119,799 $176,683 $182,082 $101,436
======== ======== ======== ========
SALES BY GEOGRAPHIC LOCATION
United States $149,244 $161,020 $116,129 $ 43,379
Germany 45,311 38,218 25,094 10,485
Other foreign countries 11,310 10,628 4,827 1,341
-------- -------- -------- --------
Consolidated $205,865 $209,866 $146,050 $ 55,205
======== ======== ======== ========
SALES TO CUSTOMERS IN EXCESS
OF 10% OF TOTAL SALES
DaimlerChrysler $ 25,623 $ 30,324 $ 20,501 $ 7,640
Caterpillar 19,554 23,948 20,872 7,276
(1) The Company records intersegment sales at an amount negotiated between
the segments. All intersegment sales are eliminated in consolidation.
Substantially all intersegment sales represent sales from the Wet
Friction segment to the Aftermarket segment.
(2) The Company's management reviews the performance of its reportable
segments on an operating profit basis, consisting of (loss) income
before income taxes, and minority interest.
(3) Interest on debt due to affiliate and to Raymark.
(4) The significant changes in segment assets consisted of the following:
Wet Friction - reductions in accounts receivable of $1.3 million, a
reduction in inventory of $4.4 million and a reduction
in property, plant and equipment of $13.7 million of
which $8.1 million was due to impairment charges.
Corporate - a reduction in the deferred tax asset of $22.3 million,
a reduction in goodwill and other intangibles and
long-lived assets of $44.5 million and a reduction in
cash held at corporate of $6.5 million.
-73-
Note I - Income Taxes
For tax reporting purposes, the Company's emergence from bankruptcy, in
2001, did not create a new tax reporting entity. Accordingly, the adjustments to
adopt fresh-start accounting are not applicable for the Company's tax reporting.
Therefore, with the exception of goodwill, these adjustments created new
deferred tax items in 2001.
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 28, 2003, the
Company has tax loss carryforwards of $101.2 million and tax credit
carryforwards of $3.5 million. The net operating loss carryforwards are
allocated between Raytech Corporation and the PI Trust in the amounts of $21.2
million and $80.0 million, respectively. The tax credit carryforwards all 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 operating losses allocated to the PI Trust, and contributions
made to the Raymark pension plans. Losses generated by Raytech subsequent to the
emergence from bankruptcy, exclusive of losses attributable to the payments
discussed above, will be retained by the Company. The method of allocation in
utilizing current and future operating losses between the PI Trust and Raytech
Corporation has not been determined at this time. Additional tax recoveries
expected to be received in future periods are recorded as deferred tax assets,
net of valuation allowances, and a deferred payable to the PI Trust which
amounted to $11.9 million at December 28, 2003 and $42.4 million at December 29,
2002. The Company remitted $4.2 million to the PI Trust during 2003. In 2002
the Company paid the PI Trust $33.1 million.
(Loss) income before (provision) benefit for income taxes and minority
interest consists of:
Successor Company Predecessor Company
------------------------------------------- -------------------
For the Year Ended
------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
2003 2002 Dec. 30, 2001 to April 2, 2001
------------ ------------ --------------- ----------------
Domestic $(42,033) $(2,513) $ (6,411) $7,160,782
Foreign 2,964 827 (2,251) 1,612
-------- ------- --------- ----------
$(39,069) $(1,686) $ (8,662) $7,162,394
======== ======= ========= ==========
The Company's income tax (provision) benefit consists of the following:
Successor Company Predecessor Company
------------------------------------------- -------------------
For the Year Ended
------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
2003 2002 Dec. 30, 2001 to April 2, 2001
------------ ------------ --------------- ----------------
Current:
Federal $ (1,035) $(1,373) $ (1,559) $ (1,265)
State 2,502 (620) (581) (127)
Foreign (511) (159) (104) (77)
Deferred:
Federal (24,112) 1,973 5,668 (155,717)
State (3,575) 203 546 (9,637)
Foreign (14) (108) - -
--------- ------- -------- ----------
Total income taxes $ (26,745) $ (84) $ 3,970 $ (166,823)
========= ======= ======== ==========
The provision in 2003, 2002, and 2001 includes amounts for the
Company's profitable foreign entities in Germany and China, and Allomatic
Products Company, which is consolidated for financial reporting purposes, but
not for tax purposes. The provision for the period January 1, 2001 to April 2,
2001 also includes a deferred tax provision of $155.7 million, primarily
associated with the $7.1 billion gain on the settlement of liabilities subject
to compromise as a result of the Company's emergence from bankruptcy.
Reconciliation of (loss) income from operations multiplied by the
statutory
-74-
federal tax rate to reported income tax (provision) benefit is summarized as
follows:
-75-
Note I, continued
Successor Company Predecessor Company
------------------------------------------- -------------------
For the Year Ended
-------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
2003 2002 Dec. 30, 2001 to April 2, 2001
------------ ------------ --------------- ----------------
Pretax (loss) income
multiplied by the
statutory rate (35%) $ 13,674 $ 590 $ 3,032 $(2,506,838)
Increases (decreases) resulting from:
Effect of foreign income
taxes net of loss
carryforwards utilized 290 22 (892) 487
Reorganization adjustments - - (275) 8,202
Change in tax rate of
deferred assets 477 - - -
Net change in domestic
valuation allowance (43,424) - - 2,339,255
State income taxes, net
of federal benefit 2,502 (271) (23) (6,376)
Adjustment of prior years' accruals - - 1,425 -
Reduction in Trust payable 9,710 - - -
Goodwill write-down (10,099) - - -
Raymark pension provision - (412) - -
Permanent tax items (770) - - (72)
Other 895 (13) 703 (1,481)
-------- -------- -------- -----------
Income tax (provision) benefit $(26,745) $ (84) $ 3,970 $ (166,823)
======== ======== ======== ===========
Deferred tax assets (liabilities), at fiscal year-end, are comprised of
the following:
December 28, 2003 December 29, 2002
----------------- -----------------
Tax benefit to PI Trust $ 41,823 $ 42,356
Raytech minimum pension liability 503 360
Excess of book provisions
over tax deductions 5,735 5,403
Postretirement benefit 6,305 5,531
Excess of tax basis over
book basis of assets due
to restructuring 544 655
Foreign loss carryforwards 1,465 1,286
Non PI Trust net operating
loss carryforwards 7,425 963
-------- ---------
Gross deferred tax assets 63,800 56,554
Deferred tax asset
valuation allowance (44,889) (1,063)
-------- ---------
Deferred tax assets 18,911 55,491
Excess of book basis of
intangibles over tax basis (9,909) (13,735)
Excess of book basis of fixed
assets over tax basis (12,265) (17,318)
-------- ---------
Net deferred tax (liability) asset $ (3,263) $ 24,438
======== =========
-76-
Note I, continued
During 2003, as a result of certain industry dynamics and the Company's
deteriorating profitability in its domestic Wet Friction segment, including the
effect of changes associated with environmental remediation, the Company did not
recognize any tax benefits associated with the cumulative 2003 operating losses
incurred by the Company's U.S. operations due to doubts concerning future
recoverability.
Also, during 2003, the Company recorded an increase to the valuation
allowance of $43.8 million against certain domestic deferred tax assets due to
doubts about their future recoverability. The establishment of the valuation
allowance resulted in a charge against deferred income tax assets, of which
$43.4 million is included in the tax provision, and which also resulted in a
reduction in deferred income tax assets that inure to the benefit of the PI
Trust in accordance with the Tax Assignment and Assumption Agreement, as more
fully described above. Accordingly, the deferred payable to the Trust was
reduced by $30.5 million and other income was increased by an equal amount. In
addition, the short-term payable to the PI Trust was increased by $2.8 million
to reflect the increase in the state tax receivable that will inure to the
benefit of the PI Trust. This resulted in an equal amount of other expense. The
overall domestic net deferred tax liabilities relate to the tax effects of the
indefinite-lived intangible assets which cannot be used to support the
realization of existing deferred tax assets.
At year-end 2003, the Company's deferred tax asset valuation allowance
of $44.9 million consisted of a valuation allowance of $43.4 million for the
U.S. wholly-owned subsidiaries and $1.5 million for operations in the United
Kingdom ("U.K."). The Company had a valuation allowance for the U.K. operations
of $1.1 million and $.5 million for 2002 and 2001, respectively. There was no
reduction in the valuation allowance in any of the periods presented.
The Company has recorded a tax receivable in the amount of $1.0
million, due from state governments for returns filed in 2003. In accordance
with the Agreement, this amount inures to the benefit of the PI Trust. The
Company has received $7.1 million tax and interest, as a partial recovery of
state taxes. The State of Indiana has completed its audit of Raytech for the
years 1992 through 2001. As a result of the audit, Raytech was denied refunds
claimed for Indiana Gross Income tax paid in the years 1992 through 1997 of $1.0
million and certain interest on amounts refunded. Raytech filed a protest with
respect to these items with the Indiana Department of Revenue, and a hearing was
held on August 20, 2003. On September 18, 2003, Raytech received an order
denying the claim for refund. In response to the order, Raytech has filed a
petition with the Indiana Tax Court requesting a refund of Indiana gross income
tax and interest on amounts refunded. Pursuant to the Agreement, any tax refunds
received will be payable, net of Federal tax, to the PI Trust.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds previously received as a result of
the bankruptcy, 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
-77-
payable to, the PI Trust.
At December 28, 2003, the Company had foreign loss carryforwards of
$4.4 million all relating to the U.K. operations, which do not expire. A full
-78-
Note I, continued
valuation allowance continues to be provided against the tax benefit of the U.K.
carryforwards due to uncertainty of future profitability of these operations.
The Company owns 57% of the stock of 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 $1.5 million at December 28, 2003, if all of APC's
earnings were to be distributed through the distribution of dividends.
-79-
Note J - Liquidity
Cash flows from operating activities for fiscal 2003 were $2.6 million
compared to $13.0 million in 2002. The decline in cash flows from operating
activities of $10.4 million year over year is primarily due to the poor
performance of the Wet Friction segment.
The Company recorded a net loss for the year ended December 28, 2003 of
$66.4 million. Included in the Company's net loss for the year were significant
non-cash charges. Following is a reconciliation of the net loss to operating
cash flow (in millions)
Net loss $ (66.4)
Non-cash charges
Depreciation and amortization 18.3
Impairment charge 48.8
Other charges 1.9
-------
Total non-cash charges 69.0
-------
Net cash provided by
operating activities $ 2.6
=======
The non-cash charges relating to the impairment are detailed in Note D
- - Property, Plant and Equipment and Note E - Goodwill and Other Intangible
Assets.
Capital expenditures for fiscal 2003 totaled $9.0 million compared to
$9.6 million for the 2002 fiscal year. In both years, the capital expenditures
were comparable to planned spending amounts.
The Company's cash and cash equivalents at December 28, 2003 totaled
$16.4 million compared to $20.0 million at December 29, 2002, a decrease of $3.6
million.
The total borrowings at year-end 2003 of $22.4 million compares to
total borrowings of $19.4 million at year-end 2002, an increase of $3.0 million
period- over-period. The available lines of credit at December 28, 2003 of $10.6
million compares to $8.8 million at year-end 2002, an increase in availability
of $1.8 million. Full details of the Company's debt are contained in Note F -
Debt to the notes to the audited consolidated financial statements.
In summary of the above, the cash and available lines of credit at
December 28, 2003 were $27.0 million compared to $28.8 million at year-end 2002,
a decrease in cash and available lines of credit of $1.8 million.
The most significant factor affecting the Company's future cash flows
is its ability to earn and collect cash from customers. The automotive parts
industry is extremely competitive. Many of the Company's customers and
competitors are significantly larger than the Company. The Company's customers
are often able to demand price reductions from the suppliers including all
segments of Raytech. Some of the Company's sales are made under standard sales
contracts that include price commitments for multiple years. Specifically in the
Wet Friction segment, the Company is selling certain products to certain
customers at a loss under the terms of its current sales contracts. The Company
is currently working with its customers to re-negotiate the terms of these loss
contracts. In addition, the Company is reviewing alternatives to improve its
cost structure including:
X Transferring management of the European Wet Friction
operations to the European Dry Friction management group
headquartered in Germany.
-80-
-81-
Note J, continued
X Conducting a facilities utilization review to determine if
certain facilities can be consolidated.
X Consolidating research and development facilities.
The Company effectively manages its accounts receivable as evidenced by
the average days sales in trade receivables of 43 days.
Items which will potentially require the use of cash in 2004 other than
normal operating expenses include the following.
X The Company has recorded an accrued liability of $6.2 million
for certain environmental matters more fully discussed in Note
G - Litigation. It is not certain at this time when these
funds will be expended. There exists the potential that all or
a portion of the funds will be spent in 2004.
X The Company assumed the liability for the Raymark pension
plans as part of the Chapter 11 reorganization. The plans,
which are discussed as part of Note M - Employee Benefits are
under funded and the Company, through an agreement with the
Internal Revenue Service, is providing both current
contributions and catch-up contributions. The expected funding
for the plans in 2004 will be approximately $4.4 million. The
funding in fiscal 2003 was $6.9 million.
X Certain tax issues are discussed in Note I - Income Taxes,
which provides detail concerning the status of the current
Internal Revenue Service audit and the use of certain future
tax benefits.
Management believes that existing cash balances, the Company's lending
facilities and cash flow from operations during 2004 will be sufficient to meet
all of the Company's obligations arising in the normal course of business,
including anticipated capital investments. However, the ability of the Company
to utilize its lending facilities is dependent on the Company's ability to meet
its financial forecasts for 2004, which is not assured, and to meet the
financial covenants contained in its credit facilities. These forecasts include
certain revenue assumptions generally consistent with the prior year for the Wet
Friction (on a comparable basis) and Aftermarket segments and modest growth in
the Dry Friction segment, as well as certain cost-saving initiatives. If the
Company does not comply with the financial covenants, an event of default would
occur and could result in the acceleration of the Company's indebtedness under
its domestic credit facilities. If that were to occur, the ability of the
Company to continue would be dependent upon, among other things, its ability to
amend the credit facilities, enact certain actions to generate cash and/or to
seek additional alternative financing from other lenders.
-82-
Note K - Earnings Per Share
(in thousands, except share data)
Successor Company Predecessor Company
-------------------------------------------- -------------------
For the Year Ended
--------------------------- For the Period For the Period
December 28, December 29, Apr. 3, 2001 to January 1, 2001
2003 2002 Dec. 30, 2001 to April 2, 2001
---- ---- --------------- ----------------
Basic EPS Computation
Net (loss) income $ (66,443) $ (2,825) $ (5,577) $ 6,995,257
============ ============ =========== ===========
Weighted average shares 41,701,554 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 25,913 79,537 5,383 -
------------ ------------ ----------- -----------
Adjusted weighted average shares 41,727,467 41,608,057 41,527,307 3,932,385
============ ============ =========== ===========
Basic (loss) earnings per share $ (1.59) $ (.07) $ (.13) $ 1,778.88
============ ============ =========== ===========
Diluted EPS Computation
Net (loss) income $ (66,443) $ (2,825) $ (5,577) $ 6,995,257
============ ============ =========== ===========
Weighted average shares 41,701,554 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 25,913 79,537 5,383 -
Dilutive potential common shares - - - 13,897
------------ ------------ ----------- -----------
Adjusted weighted average shares
and equivalents 41,727,467 41,608,057 41,527,307 3,946,282
============ ============ =========== ===========
Diluted (loss) earnings per share $ (1.59) $ (.07) $ (.13) $ 1,772.62
============ ============ =========== ===========
-83-
Note K, continued
Options to purchase 579,288, 70,707, 493,473, and 487,550 shares of
common stock were excluded from the calculation of diluted earnings per share
for the Successor Company for the years ended December 28, 2003, December 29,
2002, the period April 3, 2001 to December 30, 2001 and for the Predecessor
Company for the period January 1, 2001 to April 2, 2001, respectively, due to
their antidilutive effect due either to their exercise price compared to the
average market price or the Company incurring a net loss for the period.
In connection with the Plan of Reorganization, 38 million shares were
issued.
In February 2002, lawyers claiming to represent the Committee of Equity
Holders filed a motion in U.S. Bankruptcy Court to compel Raytech to either
issue up to approximately 700,000 additional shares to the pre-reorganization
holders of shares in Raytech or their successors, or to proportionately reduce
the shareholdings of the general unsecured creditor shareholders under the Plan
of Reorganization. The ultimate outcome of this matter is unknown; however, it
is possible that its resolution could cause the Company to issue additional
shares to the original shareholder group, or to retire shares held by the
general unsecured creditor shareholder group. This might directly impact the
earnings per share calculations of the Company. The Company has filed a motion
for summary judgment asking the Court to dismiss the action and the court has
denied that motion.
-84-
Note L - Stock Option Plans
In 1991, the Company established a non-qualified stock option plan (the
"1990 Plan"), which was amended in 1997 to increase the number of shares of
common stock as to which options may be granted. In 2002, the Company
established an incentive stock option plan (the "2002 Plan"). Types of grants
allowed under the 2002 Plan include Non-Qualified Stock Options, Incentive Stock
Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units,
Performance Units, Performance Shares, Stock Awards, and Cash-Based Awards.
Under the 1990 Plan, as amended, the number of shares of common stock as to
which options may be granted from time to time may not exceed 1,000,000. Under
the 2002 Plan, the number of shares of common stock as to which options may be
granted from time to time may not exceed 4,000,000 shares. Under the terms of
all plans, the exercise price of any option may not be less than 100% of the
fair market value of the common stock on the date of grant.
Stock options granted under the 1990 and 2002 Plans generally vest over
a four-year period. In general, stock options granted under both of the Plans
expire ten years from the date of grant. The term during which options could be
granted under the 1990 Plan expired on December 31, 2000. At December 28, 2003,
there were 1,227,000 shares available for future grant under the 2002 Plan.
The following table summarizes stock option transactions for the fiscal
years ended December 28, 2003, December 29, 2002 and December 30, 2001:
Successor Company
-----------------------------------------
2003 2002 2001
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at
beginning of year 332,017 $ 4.25 573,757 $ 3.78 700,413 $ 3.79
Granted 2,773,000 5.70 - - - -
Exercised (35,752) 4.25 (173,034) 3.13 (6,596) 2.75
Lapsed (5,606) 4.25 (53,234) 2.89 - -
Canceled (28,000) - (15,472) 4.03 (120,060) 3.92
--------- -------- -------- ------
Outstanding at
end of year 3,035,659 $ 5.56 332,017 $ 4.25 573,757 $ 3.78
========= ======== ======== ====== ======== ======
Options exercisable
at end of year 290,659 $ 4.25 332,017 $ 4.25 573,757 $ 3.78
========= ======== ======== ====== ======== ======
The following table summarizes information concerning options
outstanding and exercisable at December 28, 2003:
Options Outstanding Options Exercisable
- -------------------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Years Price Exercisable Price
- -------------- ----------- ----------- -------- ----------- --------
$ 4.25 290,659 4.62 $ 4.25 290,659 $ 4.25
$ 5.70 l,601,000 9.00 $ 5.70 - $ 5.70
$ 5.70 1,144,000 9.54 $ 5.70 - $ 5.70
--------- ---- ------ ------- ------
$4.25-$5.70 3,035,659 8.78 $ 5.56 290,659 $ 4.25
========= ==== ====== ======= ======
-85-
Note M - Employee Benefits
Raytech Corporation sponsors both defined benefit plans and defined
contribution plans for certain groups of employees. Raytech also provides a
postretirement benefit plan, which covers the hourly workers at the
Crawfordsville, Indiana, facility and certain other employees who qualify for
benefits based on age and years of service.
In connection with the Company's Chapter 11 proceedings, the Pension
Benefit Guaranty Corporation filed certain motions claiming that Raytech
Corporation was responsible for the funding and sponsorship of two Raymark
Corporation pension plans. The Court ordered that Raytech was liable for the
maintenance and funding of the underfunded pension plan obligations of Raymark
Corporation. Raytech, based on the Court's order, assumed the role of Plan
sponsor of the Raymark Plans upon the emergence from bankruptcy in April 2001.
The U.S. Medicare Prescription Drug, Improvement and Modernization Act
of 2003 is not expected to have a significant effect on the Company's
postretirement benefit obligations.
The plans are summarized as follows:
- The Raytech Corporation Retirement Plan for Hourly Employees
provides defined benefits for the hourly employees located at the
Crawfordsville, Indiana, manufacturing facility.
- The German pension plan provides for defined benefits for certain
salaried employees of Raytech's German subsidiary.
- The Postretirement Benefit Plan provides for certain welfare
benefits for hourly employees of the Crawfordsville, Indiana,
facility. In addition, certain other employees of Raytech are
eligible for these benefits based on a combination of years of
service and age.
- The Raymark Industries, Inc. Retirement Plan for Hourly Paid
Employees provides for defined benefits for hourly employees of
the former Raymark Corporation. There are two separate plans
based on the former manufacturing locations of Raymark.
- The Company also sponsors certain defined contribution plans for
salaried and hourly employees. The contributions are based on a
percent of annual base compensation, the percentage ranging from
4% to 6%, dependent on performance to the annual Business Plan of
Raytech Corporation. Company contributions to the defined
contribution plans were $532 for 2003, $520 for 2002 and $409 for
the period April 3, 2001 through December 30, 2001 (Successor
Company). Contributions were $150 for the period January 1, 2001
through April 2, 2001 (Predecessor Company).
- The Company also sponsors a Supplemental Executive Retirement
Plan ("SERP"), a supplemental defined contribution plan pursuant
to which the Company makes contributions for the benefit of its
members of senior management in the amounts of 2% of salary and
bonus up to $200 and 8% of salary and bonus over $200.
Company contributions to the SERP were $36 for 2003 and
$21 for 2002.
-86-
Note M, continued
The following information summarizes activities in the pension and
postretirement benefit plans:
RAYTECH PENSION PLAN
December 28, December 29,
2003 2002
---- ----
Change in benefit obligations
Projected benefit obligations at
beginning of year $ 6,844 $ 5,779
Service cost 429 344
Interest cost 494 395
Amendments 765 -
Actuarial loss 804 461
Benefits paid (158) (135)
------- -------
Projected benefit obligations at end of year $ 9,178 $ 6,844
======= =======
Accumulated benefit obligation $ 8,544 $ 6,844
======= =======
Change in plan assets
Fair value of plan assets
at beginning of year $ 5,474 $ 5,317
Actual return on plan assets 270 292
Employer contribution 296 -
Benefits paid (158) (135)
------- -------
Fair value of plan assets
at end of year $ 5,882 $ 5,474
======= =======
Funded Status Reconciliation
Funded status $(3,296) $(1,370)
Unrecognized prior service cost 704 -
Unrecognized actuarial loss 1,769 923
------- -------
Net amount recognized $ (823) $ (447)
======= =======
Amounts recognized in the statements of
financial position consist of:
Accrued benefit liability $(2,662) $(1,370)
Intangible asset 704 -
Accumulated other comprehensive loss 1,135 923
------- -------
Net amount recognized $ (823) $ (447)
======= =======
Weighted average assumptions used to
determine benefit obligations
Discount rate 6.00% 6.50%
Rate of compensation increase n/a n/a
Weighted average assumptions used to
determine net periodic benefit cost
Discount rate 6.50% 7.00%
Expected return on plan assets 6.00% 6.50%
Rate of compensation increase n/a n/a
Plan Assets
Mutual funds 100% 100%
Due to the size of this plan, it was determined that the use of mutual
funds would provide a reasonable return with a low risk. The overall
yield in 2003 was 5%. In 2004, the Company intends to use one asset
manager for both the Raytech and Raymark pension plans.
The Company expects to contribute $.8 million to the Raytech pension
plan in 2004.
-87-
Note M, continued
RAYTECH PENSION PLAN, continued
Successor Company Predecessor Company
------------------------------------------- -------------------
For the Year Ended
-------------------------- For the Period For the Period
December 28, December 29, April 3, 2001 to January 1, 2001
Net Periodic Benefit Expense 2003 2002 December 30, 2001 to April 2, 2001
---------------------------- ------------ ------------ ----------------- ----------------
Service cost $ 429 $ 344 $ 243 $ 81
Interest cost obligations 494 395 265 88
Expected return on plan assets (330) (315) (208) (65)
Amortization of prior
service costs 60 - - 9
Recognized actuarial loss 19 - - -
------ ------ ----- ------
Total net periodic
benefit cost $ 672 $ 424 $ 300 $ 113
====== ====== ===== ======
In connection with the implementation of fresh-start reporting
on April 2, 2001, the Company increased the value of the liability related to
the Raytech pension plan by $.8 million to reflect the present value of future
obligations.
Raytech German Pension
The Company's German subsidiaries have an unfunded defined benefit plan
covering certain employees.
GERMAN PLAN
December 28, December 29,
2003 2002
---- ----
Change in benefit obligations
Projected benefit obligations at
beginning of year $ 3,177 $ 2,455
Service cost 72 75
Interest cost 194 154
Actuarial loss 6 47
Amendments 73 -
Benefits paid (110) (89)
Translation adjustment 655 535
------- -------
Projected benefit obligations at end of year $ 4,067 $ 3,177
======= =======
Accumulated benefit obligations $ 3,900 $ 3,037
======= =======
Change in plan assets
Fair value of plan assets
at beginning of year $ - $ -
Actual return on plan assets - -
Employer contribution 110 89
Plan participants' contributions - -
Benefits paid (110) (89)
------- -------
Fair value of plan assets
at end of year $ - $ -
======= =======
-88-
Note M, continued
GERMAN PLAN, continued
December 28, December, 29
2003 2002
---- ----
Funded Status Reconciliation
Funded status $(4,067) $(3,177)
Unrecognized prior service cost 81 -
Unrecognized actuarial loss 704 599
------- -------
Net amount recognized $(3,282) $(2,578)
======= =======
Amounts recognized in the statements of
financial position consist of:
Accrued benefit liability $(3,900) $(3,037)
Accumulated other comprehensive loss 618 459
------- -------
Net amount recognized $(3,282) $(2,578)
======= =======
The German Plan is denominated in Euro's. As a result, the net amount
recognized is impacted by the effect of the change in exchange rates year over
year.
Weighted average assumptions used to
determine benefit obligations
Discount rate 5.75% 6.00%
Rate of compensation increase 2.50% 2.50%
Weighted average assumptions used to
determine net periodic benefit cost
Discount rate 6.00% 7.00%
Expected return on plan assets 0.00% 0.00%
Rate of increase in future compensation 2.50% 2.50%
Successor Company Predecessor Company
------------------------------------------- -------------------
For the Year Ended
------------------------ For the Period For the Period
December 28, December 29, April 3, 2001 to January 1, 2001
Net Periodic Benefit Expense 2003 2002 December 30, 2001 to April 2, 2001
- ---------------------------- ------------ ------------ ----------------- ----------------
Service cost 72 $ 75 $ 43 $ 15
Interest cost 194 154 107 37
Amortization of net
actuarial loss 6 47 - -
--- ----- ----- -----
Total net periodic
benefit cost 272 $ 276 $ 150 $ 52
=== ===== ===== =====
The estimated pension contribution for 2004 is $.1 million.
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company increased the value of the liability related to the German
pension plan by $.4 million to reflect the present value of future obligations.
-89-
Note M, continued
POSTRETIREMENT BENEFIT PLAN
December 28, December 29,
2003 2002
---- ----
Change in benefit obligations
Benefit obligations at
beginning of year $ 16,587 $ 13,815
Service cost 684 587
Interest cost 1,117 1,004
Plan participants' contributions 26 25
Actuarial loss 1,931 1,514
Benefits paid (636) (358)
-------- --------
Benefit obligations at end of year $ 19,709 $ 16,587
======== ========
Change in plan assets
Fair value of plan assets
at beginning of year $ - $ -
Employer contribution 610 333
Plan participants' contribution 26 25
Benefits paid (636) (358)
-------- --------
Fair value of plan assets
at end of year $ - $ -
======== ========
Funded Status Reconciliation
Funded status $(19,709) $(16,587)
Unrecognized actuarial loss 4,007 2,185
-------- --------
Net amount recognized $(15,702) $(14,402)
======== ========
Amounts recognized in the
statements of financial
position consist of:
Accrued benefit liability $(15,702) $(14,402)
======== ========
Weighted average assumptions used to determine benefit obligations
Discount rate 6.0% 6.50%
Rate of compensation increase 5.00% 5.00%
Weighted average assumptions used to determine net periodic benefit cost
Discount rate 6.50% 7.00%
Expected return on plan assets n/a n/a
Rate of compensation increase 5.00% 5.00%
Assumed healthcare cost trend rates
Assumed healthcare cost trend rate for next year 8.50% 7.50%
Rate at which cost is assumed to decline 4.50% 5.00%
Year that the rate reaches the ultimate trend rate 2012 2008
The Company expects to contribute $.6 million to the postretirement benefit plan
in 2004.
-90-
Note M, continued
POSTRETIREMENT BENEFIT PLAN (continued)
Sensitivity Analysis, Postretirement Benefits:
For measurement purposes, a 8.5% annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 2004. This
rate was assumed to decrease gradually to 4.5% through 2012 and remain
at that level thereafter. The healthcare cost trend rate assumption has
a significant effect on the amounts reported. To illustrate the impact,
increasing or decreasing the assumed health care cost trend rates by 1
percentage point in each year would have the following effects:
1 Percentage Point 1 Percentage Point
Increase Decrease
2003 2002 2003 2002
---- ---- ---- ----
Effect on total of service
and interest cost
components of expense $ 176 $ 152 $ (154) $ (134)
Effect on accumulated post-
retirement benefit
obligations $ 1,609 $1,347 $(1,427) $(1,201)
Successor Company Predecessor Company
------------------------------------------- -------------------
For the Year Ended
-------------------------- For the Period For the Period
December 28, December 29, April 3, 2001 to January 1, 2001
Net Periodic Benefit Expense 2003 2002 December 30, 2001 to April 2, 2001
- ---------------------------- ------------ ------------ ----------------- ----------------
Service cost $ 684 $ 587 $ 399 $ 133
Interest cost 1,117 1,004 670 224
Amortization of prior
service cost - - - 1
Amortization of net
actuarial gain (loss) 109 - - (3)
------- ------ ------- -----
Total net periodic benefit
cost $ 1,910 $1,591 $ 1,069 $ 355
======= ====== ======= =====
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company decreased the value of the liability of the postretirement
benefit plan by $1.3 million to reflect the present value of future obligations.
-91-
Note M, continued
RAYMARK PENSION PLANS
December 28, December 29,
2003 2002
---- ----
Change in benefit obligations
Projected benefit obligations at
beginning of year $ 34,900 $ 36,199
Interest cost 2,194 2,268
Actuarial (gain) loss 3,529 (936)
Benefits paid (2,638) (2,631)
-------- --------
Projected benefit obligations at end of year $ 37,985 $ 34,900
======== ========
Accumulated benefit obligations $ 37,985 $ 34,900
======== ========
Change in plan assets
Fair value of plan assets at beginning of year $ 18,462 $ 16,215
Actual return (loss) on plan assets 3,208 (1,262)
Employer contribution 6,872 6,140
Benefits paid (2,638) (2,631)
-------- --------
Fair value of plan assets at end of year $ 25,904 $ 18,462
======== ========
Funded Status Reconciliation
Funded status $(12,081) $(16,438)
Unrecognized actuarial loss 11,204 9,555
-------- --------
Net amount recognized $ (877) $ (6,883)
======== ========
Amounts recognized in the statements of
financial position consist of:
Accrued benefit liability $(12,081) $(16,438)
Accumulated other comprehensive loss 11,204 9,555
-------- --------
Net amount recognized $ (877) $ (6,883)
======== ========
Weighted average assumptions used to
determine benefit obligations
Discount rate 5.50% 6.5%
Rate of compensation increase n/a n/a
Net Periodic Benefit Expense
Interest cost $ 2,194 $ 2,268
Expected return on plan assets (1,616) (1,324)
Recognized actuarial loss 288 95
-------- --------
Total net periodic benefit cost $ 866 $ 1,039
======== ========
Weighted average assumptions used to
determine net periodic benefit cost
Discount rate 6.50% 7.00%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase n/a n/a
Plan Assets
Equity securities 55% 46%
Debt securities 36 48
Other 9 6
-------- --------
100% 100%
======== ========
The plans' current asset distribution reflects the increase in equity securities
in 2003 compared to 2002 as the equity markets have improved. The overall yield
in 2003 was 14%. The Company intends to use one asset manager in 2004 for both
the Raymark and Raytech pension plans.
The Company expects to contribute $4.4 million to the Raymark pension plan in
2004.
-92-
Note N - Commitments
The Company leases office space in Indianapolis, Indiana; Peoria,
Illinois; Floral Park, New York; Leverkusen, Germany; Shelton, Connecticut, and
warehouse space in Sullivan, Indiana. Rental expense amounted to $1,172 for the
year ended December 28, 2003, $1,570 for the year ended December 29, 2002, $914
for the period April 3, 2001 to December 30, 2001 (Successor Company) and $313
for the period January 1, 2001 to April 2, 2001 (Predecessor Company). The
Company also leases various machinery and equipment.
The approximate future minimum rental payments as of December 28, 2003
were as follows:
2004 $ 886
2005 756
2006 448
2007 336
2008 189
After 2008 1,840
------
$4,455
======
-93-
Note O - Comprehensive Income
The components of and changes in accumulated other comprehensive (loss)
income are as follows:
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustments (Loss) Income
----------- ----------- -------------
PREDECESSOR COMPANY
Balance December 31, 2000 $ (926) $ (292) $(1,218)
Changes during the period 926 292 1,218
------ -------- -------
Balance April 2, 2001 $ - $ - $ -
====== ======== =======
SUCCESSOR COMPANY
Balance April 2, 2001 $ - $ - $ -
Changes during the period (272) (8,439) (8,711)
------ -------- -------
Balance December 30, 2001 (272) (8,439) (8,711)
Changes during the year 2,202 (2,138) 64
------ -------- -------
Balance December 29, 2002 1,930 (10,577) (8,647)
Changes during the year 2,111 (2,020) 91
------ -------- -------
Balance December 28, 2003 $4,041 $(12,597) $(8,556)
====== ======== =======
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company eliminated accumulated other comprehensive loss as required
by fresh-start reporting.
The Company has not provided for the future tax deduction associated
with foreign currency translation adjustments due to management's decision to
permanently reinvest the earnings of their foreign subsidiaries.
In 2003, the Company recorded a deferred tax asset of $143 thousand
associated with the additional minimum pension liability recorded for the
Raytech and German pension plans. Due to the limitation on the realizability of
the deferred tax assets, the Company recorded an increase to the valuation
allowance for this amount.
The $583 thousand additional minimum pension liability recorded during
2002 for the Raytech and German pension plans is net of taxes of $360 thousand.
No tax benefit was provided for the future tax deduction associated with the
additional minimum pension liability recorded for the Raytech and German pension
plans for the periods April 3, 2001 to December 30, 2001 (Successor Company) and
January 3, 1999 to April 2, 2001 (Predecessor Company) due to the limitations on
the realizability of deferred tax assets.
-94-
The tax benefits resulting from any tax deductions relating to the
Raymark Pension Plan have been assigned to the PI Trust in accordance with the
Plan, and
Note O, continued
therefore, Raytech will not receive the future tax deduction. Accordingly, the
future tax deduction relating to the minimum pension liability for the fiscal
years 2003 and 2002 and for the period April 3, 2001 to December 30, 2001
(Successor Company) was recorded as a deferred tax asset with a corresponding
payable to the PI Trust.
Note P - Research and Development
Cost of research and new product development amounted to $7,207 for
2003, $7,318 for 2002, $5,314 for the period April 3, 2001 to December 30, 2001
(Successor Company) and $1,726 for the period January 1, 2001 to April 2, 2001
(Predecessor Company). All of the aforementioned costs are included in selling,
general and administrative expenses in the Consolidated Statements of
Operations.
Note Q - Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents
and trade receivables. The Company places its cash with high credit quality
institutions. At times such amounts may be in excess of the FDIC insurance
limits. The primary businesses of the Company are the automotive and heavy duty
equipment markets and the related aftermarkets within the United States, Europe
and Asia. At December 28, 2003 and December 29, 2002, the Company's five largest
uncollateralized receivables represented approximately $8.3 million or 33.7% and
$10.9 million or 40.9%, respectively, of the Company's trade accounts receivable
balance. The Company performs ongoing credit evaluations of its customers'
financial condition but does not require collateral to support customer
receivables. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
-95-
Note R - Statements of Cash Flows
The following table sets forth certain supplemental disclosures of cash
flow information:
Successor Company Predecessor Company
---------------------------------------------- -------------------
For the Year Ended
-------------------------- For the Period For the Period
December 28, December 29, April 3, 2001 to January 1, 2001
2003 2002 December 30, 2001 to April 2, 2001
----------- ------------ ----------------- ----------------
Cash paid during the period for:
Income taxes $ 1,582 $ 1,874 $ 1,800 $ 61
Interest 1,792 746 839 306
Other non-cash activities:
PP&E in accounts payable
or under capital lease 1,399 933 549 (769)
Deferred payable to the
PI Trust (27,743) 597 5,123 36,636
Minimum pension liability 2,020 2,498 8,439 -
-96-
Note S - Related Parties
In 1990 and 1991, RPI, a subsidiary of the Company, and owner of all of
the common stock of APC, sold approximately 45% of common stock of APC to a
group of outside investors for the purpose of providing needed financing of
APC's business activities. In January 2002, approximately 40% of the common
stock of APC was acquired by Raymark from minority shareholders. Raymark is in
bankruptcy and controlled by a court appointed trustee. With the majority of the
creditors of Raymark being asbestos-related claimants, it is anticipated that
the assets of Raymark, including the 40% of APC's common stock, will be
transferred to the PI Trust that owns approximately 83% of Raytech, a related
party. Raytech directors Richard Lippe and Archie Dykes are Trustees of the PI
Trust and director Robert Carter is the Legal Representative of the PI Trust.
During 1998 and 1997, the Company purchased yarn from Universal
Friction Composites ("UFC"), a company that is in bankruptcy which was
consolidated with the Raymark bankruptcy in January 2002. With the majority of
the creditors of UFC being asbestos-related claimants, it is anticipated that
the assets of UFC will be transferred to Raytech's personal injury trust that
owns approximately 83% of Raytech, a related party. At December 28, 2003,
and December 29, 2002.
In 1998, the Company acquired manufacturing equipment from UFC for
$1,051, of which $907 is included in accounts payable at December 28, 2003,
and December 29, 2002.
Also see discussion regarding Raymark in Note A.
-97-
Note T - Supplementary Financial Statement Information at the end of the
Fiscal Year
December 28, December 29,
2003 2002
------------ ------------
OTHER CURRENT ASSETS
Deferred income taxes $ 3,618 $ 2,532
Non-trade receivables 1,336 541
Prepaid insurance 816 145
Other - 1,860
------- --------
$ 5,770 $ 5,078
======= ========
ACCRUED LIABILITIES
Property taxes $ 3,771 $ 3,625
Wages and other compensation and
related taxes 6,421 7,808
Income taxes payable 2,713 2,409
Employee benefits 2,826 1,313
Environmental cleanup 6,174 7,023
Other 4,731 4,080
------- --------
$26,636 $ 26,258
======= ========
Successor Company Predecessor Company
-------------------------------------------- -------------------
For the Year Ended
------------------------ For the Period For the Period
December 28, December 29, April 3, 2001 to January 1, 2001
2003 2002 December 30, 2001 to April 2, 2001
----------- ----------- ----------------- ----------------
ALLOWANCE FOR BAD DEBTS
Beginning balance $ 824 $ 729 $ 1,234 $ 1,234
Provisions 454 239 130 143
Charge-offs (28) (144) (635) (143)
------- ------- ------- -------
Ending balance $ 1,250 $ 824 $ 729 $ 1,234
======= ======= ======= =======
Successor Company Predecessor Company
---------------------------------------------- -------------------
For the Year Ended
-------------------------- For the Period For the Period
December 28, December 29, April 3, 2001 to January 1, 2001
2003 2002 December 30, 2001 to April 2, 2001
----------- ------------ ----------------- ---------------
OTHER INCOME, NET
Interest income $ 165 $ 342 $ 474 $ 106
Reduction of payable to
PI Trust 27,743 - - -
Loss on the disposal of
fixed assets (1,443) (91) (133) (6)
Other income, net 294 278 63 135
-------- -------- -------- --------
-98-
$ 26,759 $ 529 $ 404 $ 235
======== ======== ======== ========
-99-
Note U - Summarized Quarterly Financial Data (Unaudited)
2003 Fiscal Quarters Ended
------------------------------------------------
March 30 June 29 September 28 December 28
-------- ------- ------------ -----------
(in thousands except share and market data)
Net sales $ 55,735 $ 54,093 $ 47,878 $ 48,159
Gross profit 8,885 8,136 5,537 3,568
Income (loss) before
income taxes and
minority interest 384 (1,906) 15,124 (52,671)
Net loss (73) (1,539) (17,066) (47,765)
Basic loss per
share .00 (.04) (.41) (1.14)
Diluted loss per
share .00 (.04) (.41) (1.14)
Market range:
-high 7.22 8.20 4.85 3.94
-low 4.15 3.00 3.23 3.15
During the fiscal quarter ended December 28, 2003, the Company recorded
certain adjustments that specifically impacted the comparability of quarterly
results. The most significant of which was a charge of $48.8 million for the
impairment of goodwill and other intangible assets of $37.8 million and an
impairment charge to long-lived assets of $11.0 million. Further, the Company
recorded an inventory reserve of $1.2 million related to certain parts that are
sold below the cost of production. In addition, a reversal of $1.9 million for
an over- accrual of property taxes was recorded.
During the fiscal quarter ended September 28, 2003, the Company
recognized income of $23.7 million and a corresponding amount in the income tax
provision related to the reduction of the deferred payable to the PI Trust as a
result of the establishment of a valuation allowance of an equal amount against
the deferred tax asset that will inure to the benefit of the PI Trust in
accordance with the Tax Assignment and Assumption Agreement. See Note I - Income
Taxes for more details.
2002 Fiscal Quarters Ended
-----------------------------------------------
March 31 June 30 September 29 December 29
-------- ------- ------------ -----------
(in thousands except share and market data)
Net sales $ 52,709 $ 55,305 $ 51,740 $ 50,112
Gross profit 10,525 11,086 8,566 6,594
Income (loss) before
income taxes and
minority interest 2,833 2,331 (4,803) (2,047)
Net income (loss) 1,330 1,070 (3,189) (2,036)
Basic earnings (loss) per
share .03 .03 (.08) (.05)
Diluted earnings (loss) per
share .03 .03 (.08) (.05)
Market range:
-high 4.65 9.12 9.30 8.25
-low 2.35 3.85 4.85 4.98
-100-
Note U, continued
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not equal
the total computed for the year.
The Company determined subsequent to the filing of the Form 10-Q for
the quarter ended September 29, 2002 that depreciation expense had been
overstated in both the second quarter filing, at June 30, 2002, by $475 and in
the third quarter filing, at September 29, 2002, by $368. The quarterly
reporting herein reflects the corrected amounts for the quarters ended June 30,
2002 and September 29, 2002.
Note V - Formation of Raytech Corporation, Sale of Raymark,
Chapter 11 Proceeding and Emergence from Bankruptcy
Raytech was incorporated in June, 1986 in Delaware and held as a
subsidiary of 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
-101-
in Raytech in exchange for their claims. As such, the PI Trust established under
Note V, continued
the Bankruptcy Code would receive approximately 83% of the equity of Raytech and
the Governments and others would receive approximately 7% 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.
As a result of the final estimation of allowed claims, Raytech recorded
asbestos claims of $6.8 billion, Government claims of $431.8 million, pension
liability claims of $16.0 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. 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 were exempt from registration pursuant to the Bankruptcy Code;
however, shares issued to the PI Trust have restrictions on resale as a result
of the 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 December 28, 2003, the Company has $1 million
included in accrued liabilities related to this commitment.
See Note W - Fresh-Start Reporting.
-102-
Note W - Fresh-Start Reporting
The Effective Date of the Company's emergence from bankruptcy was April
18, 2001; however, for accounting purposes it is 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 SOP 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code." 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. Such excess is classified as goodwill in the
accompanying Consolidated Balance Sheet and is being accounted for in accordance
with SFAS No. 142, (see Note E - Goodwill and 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:
-103-
Note W, 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 $ 11,371 $ (2,500)(a) $ $ 8,871
Restricted cash 1,986 2,500 (a) 4,486
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 6,134 (2,381)(f) 3,753
----------- -------------- --------- -------------
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
=========== ============== ========= =============
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' (deficit) equity $ 322,883 $ (61,464) $ 62,217 $ 323,636
=========== ============== ========= =============
-104-
Note W, 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. 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 E -
Goodwill and Intangible Assets).
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 has used a statutory tax rate, which approximates 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 E - Goodwill and
Intangible Assets).
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 X), 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.
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).
-105-
NOTE X - Reorganization Items
Reorganization (expense) income included in the accompanying
Consolidated Statements of Operations consists of the following items:
Successor Company Predecessor Company
----------------- -------------------
For the Period For the Period
April 3, 2001 to January 1, 2001
December 30, 2001 to April 2, 2001
----------------- -------------------
Fresh-start adjustments $ - $ 99,996
Gain on the settlement of
liabilities subject
to compromise - 7,058,900
Professional fees (784) -
------ ----------
$ (784) $7,158,896
====== ==========
The fresh-start adjustments are discussed in Note W - Fresh-Start
Reporting. The professional fees listed above include accounting, legal,
consulting, appraisal and other miscellaneous services associated with the
implementation of the Plan. There were no reorganization items for any periods
prior to April 2, 2001 due to the indemnification agreement between Raytech and
Raymark, which allowed for all bankruptcy-related costs to be offset against the
outstanding Raytech debt to Raymark.
As a result of the consummation of the Plan, the Company recognized a
gain on the settlement of liabilities subject to compromise and related items,
net on April 2, 2001 as follows:
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)
-----------
Gain on settlement of liabilities
subject to compromise and related
items, net $ 7,058,900
===========
-106-
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Raytech Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 on page 41 present fairly, in all material respects, the
financial position of Raytech Corporation and its subsidiaries (the "Company")
at December 28, 2003 and December 29, 2002 (Successor Company), and the results
of their operations and their cash flows for the fiscal years ended December 28,
2003, December 29, 2002, the period April 3, 2001 to December 30, 2001
(Successor Company) and the period January 1, 2001 to April 2, 2001 (Predecessor
Company) in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note V to the consolidated financial statements, effective April
18, 2001, the Company was reorganized under a plan confirmed by the United
States Bankruptcy Court and adopted fresh-start accounting as further discussed
in Notes A and W to the consolidated financial statements. Accordingly, the
consolidated financial statements for the periods subsequent to the
reorganization (Successor Company financial statements) are not comparable to
the consolidated financial statements for the prior period (Predecessor Company
financial statements).
As discussed in Note A to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 145,
"Rescission of FAS Statements No. 4, 44 and 64, Amendment of FAS Statement No.
13 and Technical Corrections" ("SFAS 145") in 2003. Accordingly, the gain on
settlement of debt and the gain on settlement of liabilities subject to
compromise settlement of liabilities and reorganization items that previously
were classified as extraordinary items have been reclassified as operating items
within the consolidated statements of operations of the Company for the period
April 3, 2001 to December 30, 2001 (Successor Company) and the period January 1,
2001 to April 2, 2001 (Predecessor Company), for presentation purposes in
accordance with SFAS 145.
PricewaterhouseCoopers LLP
April 8, 2004
-107-
Hartford, Connecticut
April , 2004
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable
Item 9a. Controls and Procedures
(a) Based on evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures,
which evaluation was made under the supervision and with the
participation of management, including the Company's principal
executive officer and principal financial officer, the
Company's principal executive officer and principal financial
officer have each concluded that such disclosure controls and
procedures are effective in ensuring that information required
to be disclosed by the Company in reports that it files under
the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(b) There has been no change during the year ended December 28,
2003 in the Company's internal controls over financial
reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control
over financial reporting.
-108-
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth below are the names of all directors, together with their
ages as of March 1, 2004, principal occupations and business experience during
the last five years, present directorships, and the year each first became a
director.
Principal Occupation
Business Experience
During Last 5 Years First
and Present Became
Name Age Directorships Director
---- --- ----------------------------- --------
Albert A. Canosa 58 President and Chief 1998
Executive Officer,
Raytech Corporation;
Trustee, Quinnipiac
University; Director,
The Marlin Firearms
Company
Robert F. Carter 58 Attorney, Carter & 2001
Civitello
Archie R. Dykes 73 Chairman and Chief 2002
Executive Officer,
Fleming Companies, Inc.,
a food distribution company,
since 2003; Chairman and
Chief Executive Officer of
Capital City Holdings, Inc.,
an investment company, from
1988-2003; Director, Midas,
Inc. and PepsiAmericas, Inc.
Kevin S. Flannery 59 President, Whelan 2001
Financial Corporation,
a financial consulting
company; Chairman,
Telespectrum, Inc.;
Director, Geneva
Steel Corporation and
Redback Networks, Inc.
-109-
Principal Occupation
Business Experience
During Last 5 Years First
and Present Became
Name Age Directorships Director
---- --- ----------------------------- --------
David N. Forman 66 President, DBL Land 2002
Company, a real estate
developer, builder and
consultant
John H. Laeri, Jr. 68 Chairman, Meadowcroft 2001
Associates, Inc.,
investment bankers;
Director, President and
Chief Executive Officer,
The GolfCoach, Inc., a
golf products distributor;
Director and member of the
Audit Committee of UNR
Asbestos Disease Trust and
Claims Processing
Facility, Inc.
Stanley J. Levy 69 Attorney, Levy, Phillips 2001
Chairman of the & Konigsberg LLP
Board
Richard A. Lippe 65 Attorney, Meltzer, Lippe, 2002
Goldstein & Schlissel,
P.C.
Gene Locks 66 Attorney, Greitzer and Locks 2001
John J. Robbins 64 Accountant, retired 2003
partner of Kenneth
Leventhal and Company;
Director and member of
the Audit Committee of
Hovnanian Enterprises,
Inc., since 2001
-110-
Directors' Compensation
The directors' compensation includes the following annual retainers:
Chairman of the Board Retainer $ 75,000
Other Directors Retainer 25,000
Additional Audit Committee Chair Retainer 10,000
Additional Other Committee Chair Retainer 5,000
Additional Audit Committee Member
(Non-Chair) Retainer 4,000
Additional Other Committee Member
(Non-Chair) Retainer 2,000
In addition, each director receives $1,500 for each directors meeting attended
and $1,500 for each committee meeting attended. There is no minimum attendance
rule and any director that misses all meetings would receive the annual retainer
but no meeting fees.
Audit Committee
Raytech has a standing Audit Committee, consisting of directors John J.
Robbins (Chairman), Kevin S. Flannery, and David N. Forman, established by the
Board of Directors for the purpose of overseeing the accounting and financial
reporting processes and audits of the financial statements of Raytech. The Audit
Committee complies with the corporate governance rules of the New York Stock
Exchange ("NYSE") applicable to Audit Committees and all of its members are
"independent," as defined in the NYSE Listing Standards.
Audit Committee Financial Expert
The Board of Directors has determined that it has at least one "audit
committee financial expert," as defined in Regulation S-K of the Securities and
Exchange Commission ("SEC"), serving on its Audit Committee. The Board of
Directors has determined that the Chairman of the Audit Committee, John J.
Robbins, is an audit committee financial expert and that Mr. Robbins is
"independent," as defined in NYSE Listing Standards.
Executive Officers
Set forth below are the names of all executive officers, of which the
Company has only four, including the CEO, together with their ages as of March
1, 2004, principal occupations and business experience during the last five
years, and the year in which each first became an officer.
First Became
Name Age Positions Held Officer
---- --- ------------------------------ ------------
Albert A. Canosa 58 President and 1986
Chief Executive
Officer
John B. Devlin 52 Vice President, 1998
Treasurer and Chief
Financial Officer
-111-
Executive Officers (cont.)
Edgar P. DeVylder 59 Vice President, Administration 2002
General Counsel and Secretary
since 2002; Previously,
Partner, Pepe & Hazard,
2001-2002; Counsel, Cummings &
Lockwood, 2000-2001; Vice
President, General Counsel and
Secretary, BTR, Inc.,
1988-1999
Harold L. Pope 56 Vice President since 2002; 2002
previously General Manager,
AAC-Belcan, 2001-2002; Vice
President, Automated Analysis
Corporation, 1997-2001,
engineering staffing and
consulting firms
-112-
Item 11. Executive Compensation
Summary Compensation Table:
The following Summary Compensation Table identifies compensation
paid to the Chief Executive Officer and the three other executive officers for
2003 and the two prior years:
Long-Term
Compensation
---------------
Annual Compensation Awards Payouts
------------------- ------- ------ All Other
Name/ Salary Bonus Options LTIP Compensation
Position Year ($) ($) # $ ($)(1)
- -------- ---- ------- ----- ------- ---- ------------
Albert A. Canosa 2003 402,744 (2) - 800,000 - 50,444
President and Chief 2002 321,352 - - - 58,779
Executive Officer 2001 311,352 - - - 12,248
John B. Devlin 2003 214,424 - 267,000 - 27,310
Vice President, 2002 187,377 - - - 32,963
Treasurer and 2001 168,451 - - - 8,439
Chief Financial
Officer
Edgar P. DeVylder(3) 2003 196,633 - 267,000 - 12,324
Vice President, 2002 14,295 - - - 285
Administration, 2001 - - - - -
General Counsel
and Secretary
Harold L. Pope(4) 2003 176,983 - 267,000 - 80,214
Vice President 2002 30,121 - - - 431
2001 - - - - -
(1) The numbers stated include the Company's contributions to Messrs.
Canosa, Devlin, DeVylder and Pope under its employee 401(k)plan in the
amounts of $8,000, $7,518, $7,659 and $7,044, respectively, for 2003;
$8,000, $6,937, $0 and $0, respectively, for 2002, and in the amounts
of $6,800, $6,742, $0, and $0, respectively, for 2001. This column also
includes the following contributions by the Company to the Senior
Executive Retirement Plan, a supplemental defined contribution plan for
senior management, for the benefit of Messrs. Canosa, Devlin, DeVylder
and Pope in the amounts of $19,666, $4,980, $3,913 and $3,522,
respectively, for 2003; and $12,908, $3,748, $285 and $431,
respectively, for 2002. "All Other Compensation" includes executive
life and disability insurance for Messrs. Canosa, Devlin, DeVylder and
Pope of $19,828, $4,360, $752 and $651, respectively, for 2003, and
$19,204, $3,790, $0 and $0, respectively, for 2002. The column also
includes country club dues for Mr. Devlin of $1,713 for 2003 and for
Messrs. Canosa and Devlin $7,764 and $10,414 for 2002. The column also
includes personal use of company cars of $2,950, $8,741 and $2,153 for
Messrs. Canosa, Devlin and Pope, respectively, for 2003 and $10,903 and
$8,074 for Messrs. Devlin and Canosa, respectively for 2002. and in the
case of Mr. Pope, relocation compensation of $66,844.
(2) This number includes a retroactive salary adjustment of $45,000 for
2002 that was paid in March 2003.
(3) Mr. DeVylder was hired in December 2002.
(4) Mr. Pope was hired in November 2002.
Each of the executive officers has a termination pay agreement that
applies if (a) the company terminates his employment (except where he is
terminated for cause,
-113-
as defined), (b) he terminates his employment due to (i) a significant
diminution in his position, authority, duties or responsibilities, (ii) a
material reduction in base salary, opportunity to earn annual bonuses other than
as a result of adverse changes in the company's operating results, or other
compensation or benefits, or (iii) relocation of his place of business by more
than 35 miles from his previous place of business without his consent, or (c)
his employment is terminated by death or disability (a "Qualifying
Termination"). These agreements remain in effect for one year after a change in
control of the Company, which is defined as the Company ceasing to be a public
company, any person acquiring more than 25% of the outstanding common stock, or
the shareholders approving a merger in which the Company is not the surviving
entity or a sale of all or substantially all of the assets of the Company or of
the Company and its majority-owned subsidiaries. If the termination pay becomes
applicable, the Company will pay the executive 1 1/2 times (i) his annual base
salary then in effect plus (ii) the average annual bonus awarded to him for the
preceding three years, and continue his medical, life and other benefits for 2
1/2 years or until he obtains coverage from another employer. One-half of the
severance payment is subject to mitigation, i.e. will not be paid to the extent
the executive has been paid for other employment.
Option Grants in Last Fiscal Year
Potential Realizable
Number of Shares Percent of Value at Assumed
Underlying Total Options Exercise Annual Rates of Stock
Options Granted to Price Expiration Price Appreciation For
Name Granted Employees ($/Share) Date Option Term ($)
---- ---------------- ------------- --------- ---------- ----------------------
5% 10%
--- ---------
Albert A. Canosa 800,000 29.15 5.70 12/31/12 0 1,648,000
John B. Devlin 267,000 9.73 5.70 12/31/12 0 550,020
Edgar P. DeVylder 267,000 9.73 5.70 12/31/12 0 550,020
Harold L. Pope 267,000 9.73 5.70 12/31/12 0 550,020
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired at 12/28/03 at 12/28/03
on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (#) ($)
---- -------- -------- --------------- -------------
Albert A. Canosa - - 126,363/800,000 0/0
John B. Devlin - - 0/267,000 0/0
Edgar P. DeVylder - - 0/267,000 0/0
Harold L. Pope - - 0/267,000 0/0
Section 16(a) Beneficial Ownership Reporting Compliance
Based upon a review of the filings furnished to the Company and on
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representations from its directors and executive officers, the directors and
executive officers of the Company and holders of more than 10% of the Company's
Common Stock complied with all filing requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, during fiscal year 2003.
Code of Ethics
Raytech has adopted a code of ethics, the Code of Business Conduct,
that applies to all directors, officers and employees, including the principal
executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. The Code of Business
Conduct is posted on the Company's Website, www.raytech.com, and is available in
print to any shareholder by contacting Edgar P. DeVylder, Raytech Corporation,
Suite 295, Four Corporate Drive, Shelton, CT 06484.
Performance Table
The following table compares the Company's cumulative total shareholder
return on its common stock with certain indexes and peer groups for a five-year
period:
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG RAYTECH CORPORATION, RUSSELL 2000 INDEX*
AND DOW JONES AUTO PARTS INDUSTRY GROUP INDEX*
Dow Jones Auto
Russell 2000 Parts Industry
Raytech Index Group Index
------- ------------ --------------
1998 100 100 100
1999 117 120 101
2000 76 115 72
2001 87 116 92
2002 219 91 82
2003 114 132 114
* Based on closing index on the last trading day of the calendar year.
Assumes $100 invested on December 31, 1998 in Raytech common stock, Russell 2000
Index, and Dow Jones Auto Parts Industry Group Index.
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Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Raytech, consisting of four
directors, makes this report of its compensation policies applicable to the
executive officers and the basis for the Chief Executive Officer's compensation
for the last completed fiscal year.
The compensation philosophy of the Compensation Committee is based upon
the premise that all salaried personnel should be eligible to receive additional
compensation for outstanding contribution to Raytech and consists of the
following two elements: a fixed base salary and a management incentive in
variable amounts in accordance with the levels of eligibility and performance
criteria. The objectives under this philosophy are to maintain an equitable
internal classification of positions by grade, to maintain compensation
opportunity equal to or greater than the competition, to provide for aggregate
compensation related to performance achievement, to maintain an effective system
of salary planning and control and to provide executives with the opportunity to
earn additional compensation based on achievement of certain goals for Raytech
and its stockholders attributable to excellence in management and performance.
To accomplish the compensation objectives, all salaried positions,
including the Chief Executive Officer, are graded to reflect the level of
responsibility inherent in the position and its market value. The grading takes
into account the following factors: organizational relationships, knowledge
requirements, impact potential on corporate profitability, scope of monetary
responsibility, scope of managerial control and the areas of functional
responsibility requiring direction. The Compensation Committee considers all
such factors but places no relative weight on any of the factors. Though the
determination of executive compensation is performed in an organized manner,
using documented criteria as referenced below, the Compensation Committee
retains full discretionary authority in establishing executive compensation. On
February 9, 2004, the Board of Directors approved the Compensation Committee
Charter. Pursuant to the Compensation Committee Charter, that Committee shall
recommend to the Board, for its approval, the future compensation levels of the
CEO and executive officers of the Company.
The base salary for executive officers was set in 2002 in relation to
the base salary policy and practice of other bonus paying employers in the
metalworking/fabricating industry. The data source for determining the base
salary practice of bonus paying employers was Hewitt Associates Total
Compensation Measurement Survey, which resulted from an integration of
Management Compensation Services Project 777 Study and Hewitt's Compensation
Data Base used in the past. This data source was selected as a model for
executives' salaries based upon the similarities of industry, operations and
products to Raytech and the prestige of the sponsoring firm. Special pay
practice surveys may be conducted if the Compensation Committee deems it
appropriate in its discretion but no such survey has been conducted within the
last four years. The other bonus paying employers used in establishing the base
salary of executives are listed in the referenced Total Compensation Measurement
Survey. Of all industry groups of corporations set forth in the Total
Compensation Measurement Survey, the metalworking/fabricating group was
determined by the Compensation Committee to be the closest and most fitting in
type of operations, products and job responsibilities to Raytech. The Committee
also obtained 2001 compensation data from Watson Wyatt Worldwide, compensation
consultants.
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The base salaries of executive officers, including the Chief Executive
Officer, were generally low compared to those in the selected group listed.
Since this base salary tends to be lower than the salary policy of non-bonus
paying employers, comparable levels of total compensation are achieved or
exceeded only when the variable element of compensation is added to the base. To
strengthen the executives' commitment to improvement of the financial
performance of Raytech, the amount available for distribution as variable
compensation in any year is determined by either the return on equity or
earnings before tax at the Board's discretion. The formula necessitates that
Raytech achieve a stipulated earnings before tax or return on equity goal before
variable compensation is paid.
In accordance with the philosophy recited above, the Board stipulated
earnings before tax goals in each of the fiscal years 2001, 2002 and 2003 based
upon a Board approved Business Plan for each year. The stipulated earnings
before tax goal was not achieved for any of the 2001, 2002 and 2003 fiscal
years, resulting in no variable compensation or bonuses being paid to any
executive officers, including the Chief Executive Officer, for the years 2001,
2002 and 2003. The total compensation of the executive officers in the year in
which no variable compensation or bonuses were paid was low compared to the
metal working/fabricating group in Hewitt's Total Compensation Measurement
Survey grouping referenced above.
The bonus opportunities in the fiscal years 2001, 2002 and 2003 for
executive officers and the Chief Executive Officer were based on the following
factors:
(i) Each such position was graded in accordance with the level of
responsibility inherent in the position including market
value, organizational relationships, knowledge requirements,
impact on corporate profitability, scope of monetary
responsibility, scope of managerial control and areas of
functional responsibility, all as set forth in the established
compensation plan and was determined to be eligible for
participation in variable compensation.
(ii) In 2001 and 2002, the executive officers' positions all
received a grade providing for variable compensation
eligibility of 75% or 100% of each executive officer's base
salary.
(iii) In 2001 and 2002, the Chief Executive Officer's position
received a grade providing for variable compensation
eligibility of 100% of the Chief Executive Officer's base
salary.
(iv) In 2003, the maximum potential variable compensation for the
Chief Executive Officer and the other executive officers was
limited to 50% of each officer's base salary.
In addition to the annual variable compensation opportunities based
upon achieving earnings before tax goals, the Variable Compensation Plan
provides for long-term variable compensation opportunities for any three-year
strategic planning period determined by earnings per share goals established at
the Board's discretion. Being part of the Variable Compensation Plan, the
strategic plan variable compensation program has an identical philosophy to the
annual variable compensation program recited above. Additionally, the strategic
plan variable compensation program is designed to (i) provide stockholder
returns comparable to other high performance publicly traded companies; (ii)
strengthen key management commitment to improve the long-term financial
performance of Raytech; (iii)
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provide key management with a shareholder perspective; and (iv) focus key
employee resources on technology driven growth.
In accordance with the recited philosophy above, the Board stipulated
annual earnings per share goals for the strategic planning period for 2001
through 2003. The stipulated earnings per share goals were not achieved for the
years 2001, 2002 and 2003 resulting in no long-term (three-year) variable
compensation payouts to the executive officers, including the Chief Executive
Officer, for those years.
Effective January 1, 2003, the Chief Executive Officer and the other
named executive officers were granted options to purchase the common stock of
the Company at the then market price of $5.70 per share, in the amounts set
forth in the table above. The grants were made in order to provide an additional
incentive for such individuals through the potential for appreciation of the
stock and to more closely align the financial interests of the executives with
those of the stockholders. The Company had not granted any stock options to its
executives since 1998.
Raytech's contributions under the 401(k) defined contribution plan to
the executive officers, including the Chief Executive Officer, were made to all
participants in the plan in accordance with the operative provisions of said
plan. Such provisions, which apply to all participants, provide for a basic
company contribution, a matching company contribution and a supplemental company
contribution, subject to IRS contribution and income limits. Only the
supplemental company contribution is discretionary under the plan and if granted
is made to all participants. In 2002, the Compensation Committee approved and in
2003 the Company established the Supplemental Executive Retirement Plan
("SERP"), pursuant to which the Company makes supplemental contributions of 2%
of salary plus bonus up to $200,000, and 8% of salary and bonus over $200,000,
to accounts for the benefit of the CEO, the executive officers and another CEO
direct report. The SERP is an unfunded deferred compensation plan designed to
supplement the 401(k) plan, and Company contributions vest on the same schedule
as under the 401(k) plan.
Raytech currently has not established any policy with respect to
qualifying compensation paid to executive officers under Section 162(m) of the
Internal Revenue Code. In the event such a policy is established, it will be
included in this Compensation Committee Report on Executive Compensation.
Compensation Committee
Richard A. Lippe, Chairman
Robert F. Carter
John H. Laeri, Jr.
Gene Locks
Compensation Committee Interlocks and Insider Participation
Messrs. Carter, Laeri, Levy, Lippe and Locks served as members of the
Compensation Committee for various periods in fiscal year 2003. None of such
committee members (i) was, during fiscal year 2003, an officer or employee of
the Company or any of its subsidiaries, (ii) was formerly an officer of the
Company or any of its subsidiaries, or (iii) had any relationship requiring
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disclosure by the Company pursuant to any paragraph of Item 404 of SEC
Regulation S-K, except Mr. Lippe is a trustee and Mr. Carter is the Legal
Representative of the PI Trust, which has the relationship with the Company
described in Item 13, "Certain Relationships and Related Transactions."
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No executive officer served as an executive officer, director or member
of a compensation committee of any entity of which an executive officer is a
member of the Compensation Committee of the Company or the Company's Board of
Directors.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth information as of March 1, 2004
concerning:
- beneficial ownership of Raytech's common stock by persons
beneficially owning more than 5% of the outstanding common
stock, including the Raytech Personal Injury Trust;
- beneficial ownership of Raytech's common stock by each of the
directors and the executive officers named in the Summary
Compensation Table herein; and
- beneficial ownership of Raytech's common stock by all
directors and executive officers as a group.
The number of shares beneficially owned by each entity, person,
director or executive officer is determined under the rules of the SEC and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares as to which
the individual has the sole or shared voting power or investment power and also
any shares which the individual has the right to acquire as of April 30, 2004,
60 days after March 1, 2004, through the exercise of any stock option or other
right. Unless otherwise indicated, each person has sole investment and voting
power, or shares such powers with his or her spouse, with respect to the shares
set forth in the following table.
Shares of Common Stock
Beneficially Owned
--------------------------
Percent
Shareholders Total Of Class (1)
------------ ---------- ------------
Raytech Corporation Asbestos Personal
Injury Settlement Trust 34,584,432 82.86%
U.S. Environmental Protection Agency 2,300,868 5.51%
Non-Management Directors
Robert F. Carter 0
Archie R. Dykes 0
Kevin S. Flannery 0
David N. Forman 0
John H. Laeri, Jr. 0
Stanley J. Levy 0
Richard A. Lippe 0
Gene Locks 0
John J. Robbins 0
Executive Officers
Albert A. Canosa 361,781 (2) (3)
President, Chief Executive Officer
and Director
John B. Devlin 67,435 (4) (3)
Vice President, Treasurer
and Chief Financial Officer
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Edgar P. DeVylder 66,750 (5) (3)
Vice President, Administration,
General Counsel and Secretary
Harold L. Pope 66,750 (6) (3)
Vice President
All Directors and Executive Officers
as a Group (13) 562,031 (7) (3)
(1) Based on 41,737,306 shares of common stock outstanding, plus, in the
case of persons holding options, shares subject to options that are
exercisable within the next 60 days.
(2) Total includes 326,363 shares which Mr. Canosa holds options to
purchase within 60 days.
(3) Less than 1%.
(4) Includes 66,750 shares Mr. Devlin holds options to purchase that are
exercisable within the next 60 days.
(5) Includes 66,750 shares Mr. DeVylder holds options to purchase that are
exercisable within the next 60 days.
(6) Includes 66,750 shares Mr. Pope holds options to purchase that are
exercisable within the next 60 days.
(7) Total includes 526,613 shares which the Executive Officers as a group
hold options to purchase that are exercisable within the next 60 days.
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Item 13. Certain Relationships and Related Transactions
In connection with its Plan of Reorganization, in 2001, Raytech entered
into a Tax Benefits Assignment and Assumption Agreement ("Tax Benefits
Agreement") with the PI Trust, which was created in the reorganization to
represent the interests of asbestos-related claimants. The PI Trust owns
approximately 83% of Raytech. Pursuant to the Tax Benefits Agreement, all tax
benefits received by Raytech due to the reorganization are to be passed onto the
PI Trust as received. At December 28, 2003, the Company had tax loss
carryforwards of $ 101.2 million and tax credit carryforwards of $3.5 million.
The net operating loss carryforwards are allocated between Raytech and the PI
Trust in the amounts of $21.2 million and $80.0 million, respectively.
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 Tax Benefits 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 plans.
In 1990 and 1991, RPI, a subsidiary of the Company, and owner of all of
the common stock of APC, sold approximately 45% of common stock of APC to a
group of outside investors. In 2002 approximately 40% of the common stock of APC
was acquired by Raymark from some of these minority shareholders. Raymark is in
bankruptcy and controlled by a court appointed trustee.
During 1998 and 1997, the Company purchased yarn from Universal
Friction Composites ( UFC ), a company that is in bankruptcy which was
consolidated with the Raymark bankruptcy in January 2002. At December 29, 2003
and December 30, 2002, $246 was owed to UFC relating to these purchases. In
addition, in 1998, the Company acquired manufacturing equipment from UFC for
$1,051, of which $907 was owed to UFC at December 28, 2003 and December 29,
2002.
With the majority of the creditors of both Raymark and of UFC being
asbestos-related claimants, it is anticipated that a majority of the equity or
the assets of Raymark and UFC will be transferred to the PI Trust, a related
party.
Raytech directors Richard Lippe and Archie Dykes are trustees of the PI
Trust and director Robert Carter is the Legal Representative of the PI Trust.
Item 14. Principal Accountant Fees and Services
For the fiscal years ended December 28, 2003 and December 29, 2002,
fees for services provided by PricewaterhouseCoopers LLP ("PwC") were as
follows:
(in thousands)
2003 2002
------ ------
Audit Fees $ 691 $ 481
Audit-Related Fees 14 12
Tax Fees 214 337
Other fees 3 -
------ ------
Total $ 922 $ 830
====== ======
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Audit Fees
As noted above, fees billed by PwC for professional services rendered
for the audit of Raytech's annual financial statements for 2003 and for the
reviews of the financial statements included in Raytech's Forms 10-Q in 2003 (or
services that are normally provided by the accountant in connection with
statutory and regulatory filings) were $691 thousand. The Audit Committee
approved in advance PwC's provision of all audit and audit-related services.
Audit-Related Fees
The audit-related fees listed above are those fees for services
reasonably related to the performance of the audit or review of the registrant's
financial statements and not included in "Audit Fees."
Tax Fees
The tax fees listed in the table were for services rendered for tax
compliance (including federal and state returns) and tax examination assistance.
Other Fees
Fees billed by PwC for non-audit services rendered in 2003 (including
tax assistance) were $3 thousand.
Financial Information Systems Design and Implementation Fees
PwC did not render or bill any Financial Information Systems Design and
Implementation services to Raytech in 2003.
Audit Committee Pre-Approval
It is the policy of the Audit Committee to pre-approve all non-audit
services that PwC is permitted to provide, either by express prior approval of
the particular engagement or entry into such engagement pursuant to detailed
pre-approval policies and procedures established by the Committee. The Audit
Committee approved in advance PwC's provision of all non-audit services. The
Audit Committee considered whether and determined that the provision of these
services was compatible with maintaining PwC's independence.
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PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following financial statements are included in Part II, Item 8:
(1) Financial Statements
Consolidated Balance Sheets at December 28, 2003 and December
29, 2002
Consolidated Statements of Operations for the years ended
December 28, 2003 and December 29, 2002, for the period April
3, 2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001 (Predecessor Company)
Consolidated Statements of Cash Flows for the years ended
December 28, 2003 and December 29, 2002, for the period April
3, 2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001 (Predecessor Company)
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 28, 2003 and December 29, 2002, for
the period April 3, 2001 to December 30, 2001 (Successor
Company), and for the period January 1, 2001 to April 2, 2001
(Predecessor Company)
Notes to Consolidated Financial Statements
Report of Independent Accountants
(2) Financial Statement Schedules
Schedules not included with this additional financial
information have been omitted either because they are not
applicable or because the required information is shown in the
consolidated financial statements or footnotes.
(3) The Exhibits are listed in the index of Exhibits at Item (c)
hereafter.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended December
28, 2003.
(c) Index of Exhibits Page
----
2(a) Raytech Corporation's Second Amended Plan of
Reorganization (g)
3(a) Amended and Restated Certificate of Incorporation
of Raytech (filed herewith)
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3(b) Amended and Restated By-Laws of Raytech (filed herewith)
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4(a) Amendment No. 1 to Form S-4 Registration Statement,
Registration No. 33-7491 (b)
4(b) Loan and Security Agreement dated September 28, 2000, between
Raybestos Products Company and Raytech Automotive Components
Company and Congress Financial Corporation (New England), as
amended November 12, 2003 (filed herewith)
4(c) Loan Agreement, Security Agreement and Promissory Note dated
October 23, 2003, between Raytech Powertrain, Inc., Allomatic
Products Company and Raytech Systems, Inc. and Wachovia Bank,
National Association (filed herewith)
10(a) Raytech Corporation's 1990 Non-Qualified Stock Option Plan (d)
10(b) Amended and Restated Agreement and Plan of Merger dated as of
September 4, 1986 (a)
10(c) Stock Purchase Agreement dated March 30, 1987 between Raymark
Industries, Inc. and Raytech Composites (c), Amendment dated
July 18, 1991 (f) and Amendment dated December 21, 1992 (e)
10(d) Asset Purchase Agreement dated October 29, 1987 between
Raymark Industries, Inc. and Raytech Composites, Inc. (c),
Amendment dated July 18, 1991 (f) and Amendment dated December
21, 1992 (e)
10(e) Stock Purchase Agreement dated May 18, 1988 between Raytech
Corporation and Asbestos Litigation Management, Inc. (c)
10(f) Asset Purchase Agreement (Notarial Deed) dated June 19, 1992
between Ferodo Beral GmbH and Raytech Composites, Inc. and
Raybestos Reibbelag GmbH (e)
10(g) Loan Agreement dated September 16, 1993 between Raytech
Composites, Inc. and Raymark Industries, Inc. (f)
10(h) Loan Agreement dated January 10, 1994 between Raytech
Composites, Inc. and Raymark Industries, Inc. (f)
10(i) Raytech Corporation 2002 Incentive Compensation Plan (filed
herewith)
21 Subsidiaries of Raytech
23 Consent of Independent Accountants
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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Footnotes to Exhibits
(a) Incorporated by reference to the Exhibit to Registrant's
Amendment No. 1 to Form S-4, Registration Statement,
Registration No. 33-7491, filed with the Securities and
Exchange Commission on September 5, 1986.
(b) Filed with the Securities and Exchange Commission on September
5, 1986.
(c) Incorporated by reference to the Exhibit to Registrant's
Report on Form 10-K filed with the Securities and Exchange
Commission on March 29, 1989.
(d) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 (Registration No. 33-42420) filed with
the Securities and Exchange Commission on August 23, 1991.
(e) Incorporated by reference to the Exhibit to Registrant's
Report on Form 10-K filed with the Securities and Exchange
Commission on March 22, 1993.
(f) Incorporated by reference to the Exhibit to Registrant's
Report on Form 10-K filed with the Securities and Exchange
Commission on March 14, 1994.
(g) Incorporated by reference to the Exhibit to Registrant's
Report on Form 10-K filed with the Securities and Exchange
Commission on March 23, 2001.
Copies of exhibits, which are not included herewith, may be obtained by
submitting a written request, specifying the name of the exhibit and
including payment of $2.00 for each exhibit to cover handling and
postage, to: Edgar P. DeVylder, Secretary, Raytech Corporation, Suite
295, Four Corporate Drive, Shelton, Connecticut 06484.
(d) The Index to Consolidated Financial Statements and Financial Statement
Schedules is included beginning on page 116 hereafter.
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Index to Consolidated Financial Statements
Financial Statements:
Page
----
Consolidated Balance Sheets at December 28, 2003 and December
29, 2002 (Successor Company) 42
Consolidated Statements of Operations for the years ended
December 28, 2003, December 29, 2002, for the period April 3,
2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001 (Predecessor Company) 43
Consolidated Statements of Cash Flows for the years ended
December 28, 2003, December 29, 2002 for the period April 3,
2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001 (Predecessor Company) 44
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 28, 2003, December 29, 2002, for the
period April 3, 2001 to December 30, 2001 (Successor Company),
and for the period January 1, 2001 to April 2, 2001
(Predecessor Company) 45
Notes to Consolidated Financial Statements 46
Report of Independent Auditors 96
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 12, 2004
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ALBERT A. CANOSA
-------------------------
Albert A. Canosa
President and
Chief Executive Officer
Date: April 12, 2004
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities shown on April 12, 2004.
Signature and Title Signature and Title
------------------- -------------------
/s/ALBERT A. CANOSA /s/DAVID N. FORMAN
- ------------------------------ ------------------------------
Albert A. Canosa David N. Forman
President, Chief Executive Director
Officer and Director
/s/JOHN B. DEVLIN /s/STANLEY J. LEVY
- ------------------------------ -------------------------------
John B. Devlin Stanley J. Levy
Vice President, Treasurer and Director
Chief Financial Officer
/s/ROBERT F. CARTER /s/JOHN H. LAERI, JR.
- ------------------------------ ------------------------------
Robert F. Carter John H. Laeri, Jr.
Director Director
/s/ARCHIE R. DYKES /s/RICHARD A. LIPPE
- ------------------------------ -----------------------------
Archie R. Dykes Richard A. Lippe
Director Director
/s/KEVIN S. FLANNERY /s/GENE LOCKS
- ------------------------------ ------------------------------
Kevin S. Flannery Gene Locks
Director Director
/s/JOHN J. ROBBINS
------------------------------
John J. Robbins
Director
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