UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 30, 2002, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-9298
RAYTECH CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 06-1182033
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Suite 295, Four Corporate Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices) (Zip Code)
203-925-8023
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes /X/ No / /
As of August 6, 2002, 41,642,832 shares of the Registrant's common stock, par
value $1.00, were issued and outstanding. (See Part II, Item 1. Legal
Proceedings, Paragraph 3.)
Page 1 of 46
RAYTECH CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002 (Unaudited)
(Successor Company) and December 30, 2001 (Successor Company) 3
Condensed Unaudited Consolidated Statements of Operations for the
period April 1, 2002 to June 30, 2002 (Successor Company), for the
period April 3, 2001 to July 1, 2001 (Successor Company) and for April
2, 2001 (Predecessor Company) 5
Condensed Unaudited Consolidated Statements of Operations for the
period December 31, 2001 to June 30, 2002 (Successor Company), for the
period April 3, 2001 to July 1, 2001 (Successor Company) and for the
period January 1, 2001 to April 2, 2001 (Predecessor Company) 6
Condensed Unaudited Consolidated Statements of Cash Flows for the
period December 31, 2001 to June 30, 2002 (Successor Company), for the
period April 3, 2001 to July 1, 2001 (Successor Company) and for the
period January 1, 2001 to April 2, 2001 (Predecessor Company) 7
Condensed Unaudited Consolidated Statements of Changes in
Shareholders' Equity for the period December 31, 2001 to June 30, 2002
(Successor Company), for the period April 3, 2001 to July 1, 2001
(Successor Company) and for the period January 1, 2001 to April 2,
2001 (Predecessor Company) 8
Notes to Condensed Unaudited Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 6. Exhibits and Reports on Form 8-K 43
Signature 44
Certification of Chief Financial Officer 45
Certification of Chief Executive Officer 46
-2-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
Successor Company
-----------------
June 30, 2002 December 30, 2001
At (unaudited)
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 16,238 $ 14,463
Restricted cash 6,212 5,396
Trade accounts receivable, less allowance
of $775 for June 30, 2002 and $729 for
December 30, 2001 29,484 22,961
Inventories, net 30,482 31,562
Income taxes receivable 4,793 37,877
Other current assets 7,495 7,048
--------- ---------
Total current assets 94,704 119,307
--------- ---------
Property, plant and equipment 126,170 119,678
Less accumulated depreciation (17,922) (10,386)
--------- ---------
Net property, plant and equipment 108,248 109,292
--------- ---------
Intangible assets, net 71,678 72,790
Deferred income taxes 16,623 16,600
Other assets 2,810 2,799
--------- ---------
Total assets $ 294,063 $ 320,788
========= =========
The accompanying notes are an integral part of these statements.
-3-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)(cont.)
Successor Company
-----------------
June 30, 2002 December 30, 2001
At (unaudited)
--------- ---------
LIABILITIES
Current liabilities
Notes payable and current
portion of long-term debt $ 9,641 $ 10,262
Current portion of pension obligation 7,049 7,049
Accounts payable 15,822 13,268
Accrued liabilities 21,312 22,694
Payable to the PI Trust 4,938 38,022
--------- ---------
Total current liabilities 58,762 91,295
--------- ---------
Long-term debt 6,814 6,820
Pension obligation 16,469 15,409
Postretirement benefits other than pensions 13,407 12,876
Deferred payable to the PI Trust 41,614 41,614
Other long-term liabilities 971 987
--------- ---------
Total liabilities 138,037 169,001
--------- ---------
Minority interest 8,480 7,704
--------- ---------
COMMITMENTS & 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,
41,606,724 issued and outstanding 41,606 41,528
Additional paid in capital 117,008 116,843
Accumulated deficit (3,469) (5,577)
Accumulated other comprehensive loss (7,599) (8,711)
--------- ---------
Total shareholders' equity 147,546 144,083
--------- ---------
Total liabilities and
shareholders' equity $ 294,063 $ 320,788
========= =========
The accompanying notes are an integral part of these statements.
-4-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Predecessor
Successor Company Company
----------------- -----------
for the Period For
for the Period April 3, 2001 April 2,
April 1, 2002 to to July 1, 2001 2001
June 30, 2002 (See Note B) (See Note B)
---------------- --------------- -------------
Net Sales $ 55,305 $ 50,561 $ --
Cost of sales (44,694) (45,998) --
----------- ----------- -----------
Gross profit 10,611 4,563 --
Selling and administrative expenses (8,180) (7,484) --
----------- ----------- -----------
Operating profit (loss) 2,431 (2,921) --
Interest expense (179) (310) --
Reorganization items -- (385) 99,996
Other (expense) income, net (396) 289 --
----------- ----------- -----------
Income (loss) before income taxes,
minority interest and extraordinary
items 1,856 (3,327) 99,996
Income tax (provision) benefit (714) 1,238 (29,377)
----------- ----------- -----------
Income (loss) before minority interest and
extraordinary items 1,142 (2,089) 70,619
Minority interest (364) (306) --
----------- ----------- -----------
Income (loss) before extraordinary items 778 (2,395) 70,619
----------- ----------- -----------
Extraordinary items, net of tax of $135,977 -- -- 6,922,923
----------- ----------- -----------
Net income (loss) $ 778 $ (2,395) $ 6,993,542
=========== =========== ===========
Basic earnings (loss) per share $ .02 $ (.06) $ (a)
=========== =========== ===========
Diluted earnings (loss) per share $ .02 $ (.06) $ (a)
=========== =========== ===========
(a) Earnings per share is not meaningful for one-day results.
The accompanying notes are an integral part of these statements.
-5-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Predecessor
Successor Company Company
----------------- -------
for the Period for the Period
for the Period April 3, 2001 January 1,
December 31, 2001 to July 1, 2001 2001 to
to June 30, 2002 (See Note B) April 2, 2001
----------- ----------- -----------
Net Sales $ 108,014 $ 50,561 $ 55,205
Cost of sales (86,878) (45,998) (43,811)
----------- ----------- -----------
Gross profit 21,136 4,563 11,394
Selling and administrative expenses (15,774) (7,484) (7,742)
----------- ----------- -----------
Operating profit (loss) 5,362 (2,921) 3,652
Interest expense (456) (310) (374)
Interest expense - Raymark -- -- (70)
Reorganization items -- (385) 99,996
Other (expense) income, net (217) 289 290
----------- ----------- -----------
Income (loss) before income taxes,
minority interest and extraordinary
items 4,689 (3,327) 103,494
Income tax (provision) benefit (1,805) 1,238 (30,846)
----------- ----------- -----------
Income (loss) before minority interest and
extraordinary items 2,884 (2,089) 72,648
Minority interest (776) (306) (314)
----------- ----------- -----------
Income (loss) before extraordinary items 2,108 (2,395) 72,334
----------- ----------- -----------
Extraordinary items, net of tax of $135,977 -- -- 6,922,923
----------- ----------- -----------
Net income (loss) $ 2,108 $ (2,395) $ 6,995,257
=========== =========== ===========
Basic earnings (loss) per share $ .05 $ (.06) $ 1,778.88
=========== =========== ===========
Diluted earnings (loss) per share $ .05 $ (.06) $ 1,772.62
=========== =========== ===========
The accompanying notes are an integral part of these statements.
-6-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Predecessor
Successor Company Company
----------------- -----------
for the Period For the
for the Period April 3, 2001 Period Jan. 1,
December 31, 2001 to July 1, 2001 2001 to
to June 30, 2002 (See Note B) April 2, 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income(loss) $ 2,108 $ (2,395) $ 6,995,257
Depreciation and amortization 8,964 3,951 3,382
Other operating activities (3,002) 8,626 (7,001,128)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 8,070 10,182 (2,489)
----------- ----------- -----------
Cash flow from investing activities:
Capital expenditures (5,576) (3,370) (2,717)
Proceeds on sales of property,
plant and equipment 196 35 10
----------- ----------- -----------
Net cash used in investing activities (5,380) (3,335) (2,707)
----------- ----------- -----------
Cash flow from financing activities:
Cash overdraft -- -- (371)
Net borrowings (payments)
on short-term notes (859) (408) 2,113
Principal payments on long-term debt (552) (372) (482)
Proceeds from long-term debt 106 36 32
Net proceeds on borrowings from Raymark -- -- (703)
Proceeds from exercise of stock options 243 19 --
----------- ----------- -----------
Net cash (used in) provided by
financing activities (1,062) (725) 589
----------- ----------- -----------
Effect of exchange rate changes on cash 147 (60) (78)
Net change in cash and cash equivalents 1,775 6,062 (4,685)
Cash and cash equivalents at
beginning of period 14,463 9,232 13,917
----------- ----------- -----------
Cash and cash equivalents at end of period $ 16,238 $ 15,294 $ 9,232
=========== =========== ===========
The accompanying notes are an integral part of these statements.
-7-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
(unaudited)
Treasury
Accumulated Shares
Additional Other At Cost
Common Paid in Accumulated Comprehensive (2,132,059
Stock Capital Deficit Loss Shares) Total
----- ------- ------- ---- ------- -----
PREDECESSOR COMPANY
Balance,
December 31, 2000 $ 5,651 $ 70,631 $(7,049,641) $ (1,218) $(4,561) $(6,979,138)
Comprehensive income:
Net income 6,995,257 6,995,257
Changes during
the period (284) (284)
------- -------- ----------- -------- ------- -----------
Total comprehensive
income 6,995,257 (284) 6,994,973
Reorganization 35,870 46,200 54,384 1,502 4,561 142,517
Balance,
April 2, 2001 $41,521 $116,831 $ -- $ -- $ -- $ 158,352
======= ======== =========== ======== ======= ===========
SUCCESSOR COMPANY
Balance,
April 2, 2001 $41,521 $116,831 $ -- $ -- $ -- $ 158,352
Comprehensive income:
Net loss (2,395) (2,395)
Changes during
the period (670) (670)
------- -------- ----------- -------- ------- -----------
Total comprehensive
loss (2,395) (670) (3,065)
Stock options exercised
(6,596 shares) 7 12 19
------- -------- ----------- -------- ------- -----------
Balance,
July 1, 2001 $ 41,528 $116,843 $ (2,395) $ (670) $ -- $ 155,306
======= ======== =========== ======== ======= ===========
Balance,
December 30, 2001 $41,528 $116,843 $ (5,577) $ (8,711) $ -- $ 144,083
Comprehensive income:
Net income 2,108 2,108
Changes during
the period 1,112 1,112
------- -------- ----------- -------- ------- -----------
Total comprehensive
income 2,108 1,112 3,220
Stock options exercised
(78,204 shares) 78 165 243
Balance,
June 30, 2002 $41,606 $117,008 $ (3,469) $(7,599) $ -- $ 147,546
======= ======== =========== ======== ======= ===========
The accompanying notes are an integral part of these statements.
-8-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted,
except per share data)
(Unaudited)
Note A - Formation of Raytech Corporation, Sale of Raymark,
Chapter 11 Proceeding and Emergence from Bankruptcy
Raytech Corporation ("Raytech" or the "Company") was incorporated in
June, 1986 in Delaware and held as a subsidiary of Raymark Corporation
("Raymark"). In October 1986, Raytech became the publicly traded (NYSE) holding
company of Raymark stock through a triangular merger restructuring plan approved
by Raymark's shareholders whereby each share of common stock of Raymark was
automatically converted into a share of Raytech common stock. In May 1988,
Raytech divested all of the Raymark stock.
In accordance with the restructuring plan, Raytech, through its
subsidiaries, purchased certain non-asbestos businesses of Raymark in 1987,
including the Wet Clutch and Brake Division and Raybestos Industrie-Produkte
GmbH, a German subsidiary. Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-defendant with Raymark
and other named defendants in numerous asbestos-related lawsuits as a successor
in liability to Raymark.
In one of the asbestos-related personal injury cases decided in
October 1988 in a U.S. District Court in Oregon, Raytech was ruled under Oregon
equity law to be a successor to Raymark's asbestos-related liability. The
successor ruling was appealed by Raytech and in October 1992 the Ninth Circuit
Court of Appeals affirmed the District Court's judgment. The effect of this
decision extended beyond the Oregon District due to a Third Circuit Court of
Appeals decision in a related case wherein Raytech was collaterally estopped
(precluded) from relitigating the issue of its successor liability for Raymark's
asbestos-related liabilities.
In order to stay the asbestos-related litigation, on March 10, 1989,
Raytech filed a petition seeking relief under Chapter 11 of Title 11, United
States Code in the United States Bankruptcy Court, District of Connecticut.
After several Court rulings, including an appeal to the U.S. Supreme
Court, the Oregon case, as affirmed by the Ninth Circuit Court of Appeals,
remained as the prevailing decision holding Raytech to be a successor to
Raymark's asbestos-related liabilities.
As a result of the referenced Court rulings, in October, 1998 Raytech
reached a tentative settlement with its creditors for a consensual plan of
reorganization (the "Plan"), providing for all general unsecured creditors
including all asbestos and environmental claimants to receive 90% of the equity
in Raytech in exchange for their claims. As such, an asbestos personal injury
trust (the "PI Trust") established under the Bankruptcy Code would receive
approximately 84% of the equity of Raytech and the Governments and others would
receive approximately 6% of the equity of Raytech. In addition, any and all
refunds of taxes resulting from the implementation of the Plan would be paid to
the PI Trust. The existing equity holders in Raytech were to retain 10% of the
equity in Raytech.
-9-
Note A, continued
As a result of the final estimation of allowed claims, Raytech
recorded asbestos claims of $6.76 billion, Government claims of $431.8 million,
pension liability claims of $16 million and retiree benefit claims of $2.5
million during 2000. The total estimated amount of allowed claims was $7.2
billion.
On August 31, 2000, the Bankruptcy Court confirmed Raytech's Plan,
which confirmation was affirmed by the U.S. District Court on September 13,
2000. All conditions under the confirmation of the Plan were subsequently met,
and the Plan became effective on April 18, 2001 ("Effective Date"), resulting in
Raytech emerging from bankruptcy. On the Effective Date, a channeling injunction
ordered by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy
Code has and will permanently and forever stay, enjoin and restrain any
asbestos-related claims against Raytech and subsidiaries, thereby channeling
such claims to the PI Trust for resolution. On the Effective Date, the rights
afforded and the treatment of all claims and equity interests in the Plan were
in exchange for and in complete satisfaction, discharge and release of, all
claims and equity interests against Raytech. The Company's Certificate of
Incorporation was amended and restated in accordance with the Plan providing for
authority to issue up to 55 million shares of stock, of which 50 million is
common and 5 million is preferred. In settlement of the estimated amount of
allowed claims of $7.2 billion, approximately 38 million shares of common stock
were issued and $2.5 million in cash was payable to the allowed claimants and a
commitment was made to pay to the PI Trust any and all refunds of taxes paid or
net reductions in taxes resulting from the implementation of the Plan. The
shares issued are exempt from registration pursuant to the Bankruptcy Code;
however, shares issued to the PI Trust have restrictions on resale as a result
of the high percentage of ownership in Raytech. In addition, Raytech has
recorded the liability for the Raymark pension plan claim though the outcome of
this claim is still subject to final Court decision. 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 June 30, 2002, the Company has $1 million included in accrued
liabilities related to this commitment. Also, on the Effective Date, the Board
of Directors was increased to nine with one appointed by the equity committee
and the remaining directors appointed by the unsecured creditors' committee.
See Note C - Fresh-Start Reporting.
-10-
Note B - Condensed Consolidated Financial Statements
These condensed unaudited consolidated financial statements
(Successor and Predecessor Company) have been prepared pursuant to the
requirements of Article 10 of Regulation S-X, and in the opinion of management,
contain all adjustments necessary to fairly present the consolidated financial
position of Raytech as of June 30, 2002 and the consolidated results of
operations and cash flows for all interim periods presented. All adjustments are
of a normal recurring nature except for those relating to reorganization and
fresh-start adjustments (see Note C). The effective date of the Company's
emergence from bankruptcy was April 18, 2001; however, for accounting purposes,
the Company has accounted for the reorganization and fresh-start adjustments on
April 2, 2001, which is the first day after the Company's first quarter for
fiscal 2001. All financial information prior to that date is presented as
pertaining to the Predecessor Company while all information after that date is
presented as pertaining to the Successor Company. Consequently, after giving
effect to the reorganization and fresh-start adjustments, the financial
statements of the Successor Company are not comparable to those of the
Predecessor Company. The year-end condensed consolidated balance sheet data was
derived from audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. The financial statements contained herein should be read in conjunction
with the Company's financial statements and related notes filed on Form 10-K for
the year ended December 30, 2001. Interim results are not necessarily indicative
of the results for the full year.
-11-
Note C - Fresh-Start Reporting
The effective date of the Company's emergence from bankruptcy was April
18, 2001; however, for accounting purposes it was considered to be the close of
business on April 2, 2001. As of April 2, 2001, the Company adopted fresh-start
reporting pursuant to the guidance provided by the American Institute of
Certified Public Accountants' Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). In
accordance with fresh-start reporting, all assets and liabilities were recorded
at their respective fair market values. The fair value of substantially all of
the Company's property, plant and equipment and identifiable intangible assets
were determined by independent third-party appraisers.
The reorganization value of the Successor Company was determined based
on the equity value (which represents enterprise value less debt) of the
Successor Company plus the Successor Company's outstanding liabilities. The
reorganization value was approximately $324 million, which was approximately $35
million in excess of the aggregate fair value of the Company's tangible and
identifiable intangible assets less liabilities. Such excess is classified as
goodwill in the accompanying Condensed Consolidated Balance Sheet and is being
accounted for in accordance with SFAS NO. 142, "Goodwill and Other Intangible
Assets."
To facilitate the calculation of the equity value of the Successor
Company, the Company developed a set of financial projections. Based on these
financial projections, the equity value was determined by the Company, with the
assistance of a financial advisor, using various valuation methods, including
(i) a comparison of the Company and its projected performance to the market
values of comparable companies, (ii) a review and analysis of several recent
transactions of companies in similar industries to the Company, and (iii) a
calculation of the present value of the future cash flows under the projections.
The estimated equity value is highly dependent upon achieving the future
financial results set forth in the projections as well as the realization of
certain other assumptions, which are not guaranteed. The total equity value as
of the effective date was determined to be approximately $158 million.
The reorganization and the adoption of fresh-start reporting resulted
in the following adjustments to the Company's Condensed Consolidated Balance
Sheet as of April 2, 2001:
-12-
Note C, continued
Adjustments to Record
Effectiveness of the Plan of Reorganization
(in thousands)
Predecessor Reorganized
Balance Sheet Reorganization Fresh-Start Balance Sheet
April 2, 2001 Adjustments Adjustments April 2, 2001
------------- ----------- ----------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 11,732 $ (2,500)(a) $ $ 9,232
Trade accounts receivable 29,207 29,207
Inventories 32,590 5,923 (b) 38,513
Income taxes receivable - 37,877 (c) 37,877
Other current assets 7,759 2,500 (a) (2,381)(f) 7,878
--------- ---------- --------- ---------
Total current assets 81,288 37,877 3,542 122,707
--------- ---------- --------- ---------
Net property, plant and
equipment 82,138 30,823 (d) 112,961
Goodwill 18,923 15,844 (e) 34,767
Other intangible assets 375 39,316 (g) 39,691
Deferred income taxes 137,202 (99,341)(f)(c) (27,308)(f) 10,553
Other assets 2,957 2,957
--------- ---------- --------- ---------
Total assets $ 322,883 $ (61,464) $ 62,217 $ 323,636
========= ========== ========= =========
-13-
Note C, continued
Adjustments to Record
Effectiveness of the Plan of Reorganization
(in thousands)
Predecessor Reorganized
Balance Sheet Reorganization Fresh-Start Balance Sheet
April 2, 2001 Adjustments Adjustments April 2, 2001
------------- ----------- ----------- -------------
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
=========== =========== ======== ========
-14-
Note C, continued
The explanation of the "Reorganization Adjustments" and "Fresh Start
Adjustments" columns of the condensed consolidated balance sheet in the
preceding table are as follows:
a) The Plan required the Company to pay $2.5 million to the unsecured
creditors, which has been reflected as restricted cash, included in
other current assets. During April 2001, $2.1 million of the liability
was paid and $.4 million has been retained by the Company as restricted
cash.
b) Finished goods and work-in-progress inventories have been valued based
on their estimated net selling prices less costs to complete, costs of
disposal and a reasonable profit allowance for estimated completing and
selling effort.
c) Income taxes receivable and the payable to the PI Trust reflect the
payable to the PI Trust of current tax recoveries in accordance with the
Plan. Additional tax recoveries to be received in future periods are
shown as deferred tax assets and a deferred payable to the PI Trust.
d) Property, plant and equipment has been adjusted to reflect the fair
values of the assets based on independent appraisals.
e) The unamortized balance of goodwill of the Predecessor Company has been
eliminated. Reorganization value in excess of amounts allocable to
identifiable assets has been classified as goodwill. The goodwill is
being accounted for in accordance with SFAS No. 142 (see Note I).
f) Deferred tax assets and liabilities have been adjusted for the
settlement of the liabilities subject to compromise and the recording of
deferred taxes relating to the differences in book and tax bases of
assets and liabilities after applying fresh start reporting. The Company
is using a statutory tax rate of approximately 38%, 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 I).
h) Raymark debt has been canceled to reflect the resolution of the claims
on the Effective Date.
i) Accrued liabilities have been adjusted to reflect the $1 million
backstop commitment agreed to as a result of the settlement of the
Raymark debt (see Note A), the write-off of accrued interest on the
Raymark debt ($2.2 million), and an accrual for bankruptcy-related fees
($.9 million) that were recorded against the Raymark debt in accordance
with the previous indemnification between Raymark and the Company prior
to the effective date.
j) Liabilities Subject to Compromise have been adjusted to reflect the
settlement of the claims for cash, assumption of certain pension
obligations, the issuance of common shares in the reorganized company
and tax recoveries in accordance with the Plan.
k) The pension and post retirement benefits other than pensions have been
adjusted to include the present values of future obligations.
-15-
NOTE C, continued
l) Shareholders' equity was adjusted to reflect adjustments for the issuance
of 90% of the outstanding common shares to the unsecured creditors at an
overall equity value of $158.3 million in accordance with the Plan.
m) Shareholders' equity was adjusted to reflect the elimination of the
accumulated deficit, accumulated other comprehensive loss and treasury
shares (which have been retired).
NOTE D - Extraordinary Items
As a result of the consummation of the Plan, the Company recognized an
extraordinary gain of the debt discharge on April 2, 2001 as follows:
Predecessor
Company
-----------
April 2, 2001
-------------
Settlement of liabilities subject
to compromise $ 7,211,433
Assumption of pension-related obligations (18,500)
Settlement of Raymark debt 11,984
Cash payment to the PI Trust (2,500)
Back-stop settlement with Raymark (1,000)
Issuance of common stock (142,517)
-----------
Sub-total 7,058,900
Tax expense (135,977)
-----------
Extraordinary gain on debt discharge $ 6,922,923
===========
Note E - Inventories
Inventories, net consist of the following:
Successor Company
-----------------
June 30, 2002 December 30, 2001
(Unaudited)
-------------- -----------------
Raw material $ 9,303 $ 10,829
Work in process 8,167 7,207
Finished goods 13,012 13,526
-------- --------
$ 30,482 $ 31,562
======== ========
-16-
Note F - Earnings Per Share
Successor Company Predecessor
--------------------------------- Company
For the Period For the Period --------------
April 1, 2002 April 3, 2001 to For
to June 30, 2002 July 1, 2001 April 2, 2001
---------------- ---------------- ----------------
Basic EPS Computation
Numerator:
Net income (loss) $ 778 $ (2,395)
=========== =============
Denominator:
Weighted average shares 41,528,520 41,521,924
Weighted average stock
options exercised 33,696 2,964
----------- -------------
Adjusted weighted average
shares 41,562,216 41,524,888
=========== =============
Basic income (loss) per share $ .02 $ (.06) (a)
=========== =============
Diluted EPS Computation
Numerator:
Net income (loss) $ 778 $ (2,395)
=========== =============
Denominator:
Weighted average shares 41,528,520 41,521,924
Weighted average stock
options exercised 33,696 2,964
Dilutive potential common
shares 124,901 -
----------- -------------
Adjusted weighted
average shares 41,687,117 41,524,888
=========== =============
Diluted income (loss)
per share $ .02 $ (.06) (a)
=========== =============
(a) Earnings per share is not meaningful for the one-day results.
Options to purchase 483,815 shares of common stock at $4.25 were
outstanding during the period from April 3, 2001 to July 1, 2001. These shares
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than average market price of the common
shares.
In addition, the dilutive potential common shares of 12,207 options for
the period from April 3, 2001 to July 1, 2001 were not included in the
computation of diluted earnings per share because of their anti-dilutive effect.
See Notes A and B regarding the effect of the Company's plan of
reorganization.
-17-
Note F, continued
Predecessor
Successor Company Company
--------------------------------- -----------
For the Period For the Period For the Period
December 31, 2001 April 3, 2001 to January 1, 2001
to June 30, 2002 July 1, 2001 to April 2, 2001
---------------- ------------ ----------------
Basic EPS Computation
Numerator:
Income (loss) before
extraordinary items $ 2,108 $ (2,395) $ 72,334
Extraordinary items - - 6,922,923
----------- ----------- -----------
Net income (loss) available
(attributable) to common
shareholders $ 2,108 $ (2,395) $ 6,995,257
=========== =========== ===========
Denominator:
Weighted average shares 41,528,520 41,521,924 3,519,313
Weighted average shares issued
as a result of reorganization - - 413,072
Weighted average stock options
exercised 16,848 2,964 -
----------- ----------- -----------
Adjusted weighted average shares 41,545,368 41,524,888 3,932,385
=========== =========== ============
Basic earnings (loss) per share:
Income (loss) before
extraordinary items $ .05 $ (.06) $ 18.39
Extraordinary items - - 1,760.49
----------- ----------- -----------
Net income (loss) $ .05 $ (.06) $ 1,778.88
=========== =========== ============
-18-
Note F, continued
Predecessor
Successor Company Company
--------------------------------- -----------
For the Period For the Period For the Period
December 31, 2001 April 3, 2001 to January 1, 2001
to June 30, 2002 July 1, 2001 to April 2, 2001
---------------- ------------ ----------------
Diluted EPS Computation
Numerator:
Income (loss) before
extraordinary items $ 2,108 $ (2,395) $ 72,334
Extraordinary items - - 6,922,923
----------- ----------- -----------
Net income (loss) available
(attributable) to common
stockholders $ 2,108 $ (2,395) $ 6,995,257
=========== =========== ===========
Denominator:
Weighted average shares 41,528,520 41,521,924 3,519,313
Weighted average shares issued
as a result of reorganization - - 413,072
Weighted average stock
options exercised 16,848 2,964 -
Dilutive potential common shares 54,155 - 13,897
----------- ----------- -----------
Adjusted weighted average shares
and equivalents 41,599,523 41,524,888 3,946,282
=========== =========== ===========
Diluted earnings (loss) per share:
Income (loss) before
extraordinary items $ .05 $ (.06) $ 18.33
Extraordinary items - - 1,754.29
----------- ---------- -----------
Net income (loss) $ .05 $ (.06) $ 1,772.62
=========== ========== ===========
Options to purchase 483,815 and 493,775 shares of common stock at $4.25
were outstanding during the periods from April 3, 2001 to July 1, 2001 and
January 1, 2001 to April 2, 2001, respectively. These shares were not included
in the computation of diluted earnings per share because the option's exercise
price was greater than average market price of the common shares.
In addition, the dilutive potential common shares of 12,207 options for
the period from April 3, 2001 to July 1, 2001 were not included in the
computation of diluted earnings per share because of their anti-dilutive effect.
See Notes A and B regarding the effect of the Company's plan of
reorganization.
On February 12, 2002, the Official Committee of Equity Security Holders
filed a motion in the United States Bankruptcy Court objecting to the allocation
of common shares under the Plan of Reorganization between the unsecured
creditors and the existing equity holders. The ultimate outcome of this matter
is unknown; however, it is possible that its resolution could cause the Company
to issue additional shares, or to retire shares, in the future. This would
directly impact the earnings per share calculations of the Company.
-19-
Note G - Segment Reporting
The Company's operations are categorized into three business segments
based on management structure, product type and distribution channel as
described below.
The Wet Friction segment produces specialty engineered products for heat
resistant, inertia control, energy absorption and transmission
applications. The Company markets its products to automobile original
equipment manufacturers, heavy duty original equipment manufacturers, as
well as farm machinery, mining, truck and bus manufacturers.
The Dry Friction segment produces engineered friction products, primarily
used in original equipment automobile and truck transmissions. The clutch
facings produced by this segment are marketed to companies who assemble
the manual transmission systems used in automobiles and trucks.
The Aftermarket segment produces specialty engineered products primarily
for automobile and lift truck transmissions. In addition to these
products, this segment markets transmission filters and other
transmission related components. The focus of this segment is marketing
to warehouse distributors and certain retail operations in the automotive
aftermarket.
The Company has recorded the impact of fresh-start reporting as a part of its
corporate headquarters. As a result, the segments do not reflect any adjustments
for fresh-start accounting (see Note C).
Information relating to operations by industry segment follows:
-20-
NOTE G, continued
OPERATING SEGMENTS
Successor Company
--------------------------------- Predecessor
For the Period For the Period Company
April 1, 2002 April 3, 2001 to -----------------
to June 30, 2002 July 1, 2001 For April 2, 2001
---------------- ------------ -----------------
WET FRICTION
Net sales to external
customers $ 34,804 $ 30,911 $ --
Intersegment net sales (1) 2,499 1,701 --
-------- -------- --------
Total net sales $ 37,303 $ 32,612 $ --
======== ======== ========
Operating profit (2) $ 2,144 $ 2,005 $ --
======== ======== ========
AFTERMARKET
Net sales to external
customers $ 12,101 $ 12,215 $ --
Intersegment net sales (1) 5 -- --
-------- -------- --------
Total net sales $ 12,106 $ 12,215 $ --
======== ======== ========
Operating profit (2) $ 2,268 $ 1,983 $ --
======== ======== ========
DRY FRICTION
--------
Net sales to external
customers $ 8,400 $ 7,435 $ --
Intersegment net sales (1) 37 21 --
-------- -------- --------
Total net sales $ 8,437 $ 7,456 $ --
======== ======== ========
Operating profit (2) $ 193 $ 445 $ --
======== ======== ========
CORPORATE
Operating (loss) profit (2,3) $ (2,749) $ (7,760) $ 99,996
======== ======== ========
TOTAL SEGMENTS
Net sales to external
customers $ 55,305 $ 50,561 $ --
Intersegment net sales (1) 2,541 1,722 --
-------- -------- --------
Total net sales $ 57,846 $ 52,283 $ --
======== ======== ========
Operating profit (loss) (2) $ 1,856 $ (3,327) $ 99,996
======== ======== ========
(1) The Company records intersegment sales at an amount negotiated between
the segments. All intersegment sales are eliminated in consolidation.
(2) The Company's management reviews the performance of its reportable
segments on an operating profit basis, which consists of income before
taxes and minority interest.
(3) Represents the impact of fresh-start reporting (see Note C),
compensation and related costs for employees of the Company's corporate
headquarters, professional and shareholder fees and public relations
expenses.
-21-
NOTE G, continued
OPERATING SEGMENTS
Predecessor
Successor Company Company
--------------------------------- -----------
For the Period For the Period For the Period
December 31, 2001 April 3, 2001 to January 1, 2001
to June 30, 2002 July 1, 2001 to April 2, 2001
---------------- ------------ ----------------
WET FRICTION
Net sales to external
customers $ 66,919 $ 30,911 $ 34,073
Intersegment net sales (1) 4,732 1,701 2,974
--------- --------- ---------
Total net sales $ 71,651 $ 32,612 $ 37,047
========= ========= =========
Operating profit (2) $ 3,657 $ 2,005 $ 1,327
========= ========= =========
AFTERMARKET
Net sales to external
customers $ 24,572 $ 12,215 $ 13,101
Intersegment net sales (1) 18 -- 10
--------- --------- ---------
Total net sales $ 24,590 $ 12,215 $ 13,111
========= ========= =========
Operating profit (2) $ 4,826 $ 1,983 $ 2,109
========= ========= =========
DRY FRICTION
Net sales to external
customers $ 16,523 $ 7,435 $ 8,031
Intersegment net sales (1) 67 21 116
--------- --------- ---------
Total net sales $ 16,590 $ 7,456 $ 8,147
========= ========= =========
Operating profit (2) $ 948 $ 445 $ 754
========= ========= =========
CORPORATE
Operating (loss) profit (2,3) $ (4,742) $ (7,760) $ 99,304
========= ========= =========
TOTAL SEGMENTS
Net sales to external
customers $ 108,014 $ 50,561 $ 55,205
Intersegment net sales (1) 4,817 1,722 3,100
--------- --------- ---------
Total net sales $ 112,831 $ 52,283 $ 58,305
========= ========= =========
Operating profit (loss) (2) $ 4,689 $ (3,327) $ 103,494
========= ========= =========
(1) The Company records intersegment sales at an amount negotiated between
the segments. All intersegment sales are eliminated in consolidation.
(2) The Company's management reviews the performance of its reportable
segments on an operating profit basis, which consists of income before
taxes and minority interest.
(3) Represents the impact of fresh-start reporting (see Note C),
compensation and related costs for employees of the Company's corporate
headquarters, professional and shareholder fees and public relations
expenses.
-22-
Note H - Income Taxes
The effective tax rate for the twenty-six-week period ended June 30,
2002 is 38.5% compared to an effective rate of 135% for the same period in the
prior year, excluding the one-day effect in the amount of $29.4 million relating
to the Plan of Reorganization on April 2, 2001. The rate for the current period
reflects a statutory federal rate adjusted for state and foreign taxes. The rate
differs from the 2001 rate by 96.5 percentage points caused primarily by certain
adjustments in the prior period related to the bankruptcy process. The effective
tax rate for the thirteen-week period ended June 30, 2002 is 38.5% compared to
an effective rate of 37% in the same period in the prior year, excluding the
one-day effect in the amount of $29.4 million relating to the Plan of
Reorganization on April 2, 2001. Substantially the same rate is used in both
periods.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement") as modified, all tax benefits received by the Company due to the
reorganization are to be passed onto the PI Trust as received. At December 30,
2001, the Company had tax loss carryforwards of $30.2 million and tax credit
carryforwards of $4.9 million, all of which will inure to the benefit of the PI
Trust. Additionally, future payments to the PI Trust and others will create
additional tax deductions, which will inure to the benefit of the PI Trust in
accordance with the Agreement. These include deductions for payments to the PI
Trust of tax benefits associated with the utilization of the operating losses
created by the reorganization, and contributions made to the Raymark pension
plan. If 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, if any, between the PI Trust and Raytech Corporation has not been
determined at this time. Additional tax recoveries to be received in future
periods are shown as deferred tax assets and a deferred payable to the PI Trust
which amounted to $41.6 million at June 30, 2002.
The Company has filed for and received in 2002 Federal tax refunds of
$33.4 million. During the second quarter of 2002, the Agreement was modified to
eliminate the holdback provision. As such, and pursuant to the Agreement as
modified, Raytech has paid over to the Trust the entire amount of the refunds.
Additionally, at June 30, 2002, the Company has recorded a tax receivable in the
amount of $4.8 million relating to amounts due from state governments for
returns filed in 2002. These refunds when received will be paid to the Trust.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit or
any other years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
The Company owns 57% of the stock of Allomatic Products Company
("APC"). The Company has not recorded a deferred tax liability for the
undistributed earnings of APC since management expects that those earnings will
be distributed to the Company in a tax-free transaction. However, the deferred
tax liability on the undistributed earnings of APC would be approximately $1.0
million at June 30, 2002, if all of APC's earnings were to be distributed
through dividends.
-23-
Note I - Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, establishes
specific criteria for the recognition of intangible assets separately from
goodwill, and requires that unallocated negative goodwill be written off
immediately as an extraordinary gain instead of being deferred and amortized.
SFAS No. 142 addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. Under SFAS No. 142, goodwill and indefinite-
lived intangibles need to be reviewed for impairment at least annually at the
reporting unit level. In addition, the amortization period of intangible assets
with finite lives will no longer be limited to forty years. As discussed in Note
C, the Company adopted fresh-start reporting as described in the American
Institute of Certified Public Accountants' Statement of Position No. 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code."
SOP 90-7 requires that any change in accounting principles that will be required
within the twelve months following the adoption of fresh- start reporting should
be adopted at that time. Accordingly, the Company adopted SFAS No. 141 and No.
142 as of April 2, 2001. All intangible assets and goodwill have been valued at
fair value as of the date of fresh-start reporting.
Successor Company
-----------------
June 30, 2002 December 30, 2001
------------- -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Finite life intangible
assets:
Unpatented technology $ 16,262 $2,425 $ 16,262 $ 1,455
Distribution base 5,716 355 5,716 213
------ ----- ------ ------
Sub-total 21,978 $2,780 21,978 $ 1,668
------ ===== ------ =====
Indefinite life intangible
assets:
Trademarks 17,713 17,713
------ ------
Goodwill 34,767 34,767
------ ------
Intangible assets, net $ 71,678 $ 72,790
====== ======
The weighted-average amortization periods for the unpatented technology and the
distribution base are 6 and 20 years, respectively. Amortization expense for
both the periods from April 1, 2002 to June 30, 2002 and from April 2, 2001 to
July 1, 2001 amounted to $556. For the period December 31, 2001 to June 30, 2002
amortization expense amounted to $1,112.
-24-
Note I, continued
Estimated annual amortization expense is as follows:
For the year ending:
2002 $ 2,224
2003 2,224
2004 2,224
2005 2,224
2006 2,224
As required by SFAS No. 142, trademarks and goodwill for the Successor Company
will not be amortized but will be reviewed for impairment annually. The
Company's three operating segments have been defined as reporting units for
purposes of testing goodwill for impairment. The amount of goodwill has been
assigned to each of the Company's segments as follows: $28.9 million for the Wet
Friction segment and $5.9 million for the Aftermarket segment. No goodwill has
been allocated to the Dry Friction segment. During the period from April 1, 2002
to June 30, 2002, the Company performed its annual impairment review of the
reporting units in accordance with FAS 142, as of March 31, 2002. That effort,
which was performed with assistance from a third party valuation firm, indicated
that no impairment adjustment was necessary. Accordingly, there were no changes
in the carrying amount of trademarks or goodwill during the period from December
31, 2001 to June 30, 2002.
Reported net income presented exclusive of amortization expense
(including any related tax effects) recognized in prior periods relating to
goodwill of the Predecessor Company would have been:
Predecessor Company
-------------------
For the Period
January 1, 2001 to
April 1, 2001
------------------
Reported net income $ 1,715
Add back goodwill amortization 207
-----
Adjusted net income $ 1,922
=====
Basic earnings per share:
Reported net income $ .49
Goodwill amortization .06
-----
Adjusted net income $ .55
=====
Diluted earnings per share:
Reported net income $ .48
-----
Goodwill amortization .06
-----
Adjusted net income $ .54
=====
-25-
Note J - Litigation
The Company is subject to certain legal matters that have arisen in the
ordinary course of business, which management expects would not have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company. In addition, the Company is involved in the following
litigation.
In April 1996, the Indiana Department of Environmental Management
("IDEM") advised Raybestos Products Company ("RPC"), a wholly-owned subsidiary
of the Company, that it may have contributed to the release of lead and PCB's
(polychlorinated biphenyls) found in a drainage ditch near its Indiana facility.
In June 1996, IDEM named RPC as a potentially responsible party ("PRP"). RPC
notified its insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern District of
Indiana, captioned Reliance Insurance Company vs. RPC seeking a declaratory
judgment that any liability of RPC is excluded from its policy with RPC. In
January 2000, the District Court granted summary judgment to RPC, indicating
that the insurer has a duty to defend and indemnify losses stemming from the
IDEM claim. However, in June 2001, Reliance Insurance Company was placed in
rehabilitation in Pennsylvania. The effect upon RPC's claim is not known at this
time. Three additional insurers have been added to the Reliance case as ordered
by the District Court. IDEM has turned the matter over to the U.S. Environmental
Protection Agency ("EPA"). In December 2000, the EPA issued a Unilateral
Administrative Order under CERCLA ("Order") demanding removal of contaminated
soils from the referenced drainage ditch. RPC has prepared a plan for
implementation and is in compliance with the cleanup Order. The Company has
estimated that the cost to comply with the Order and related fines will be
approximately $9.1 million of which $5.0 million has been spent through June 30,
2002. The remaining balance of $4.1 million is included in accrued liabilities.
It is at least reasonably possible that the assessment of estimated costs to
comply with the Order may be modified as the project progresses and that there
may be additional assessments from the EPA. Prior to IDEM's relinquishment of
control of the cleanup to the EPA, IDEM and RPC had reached an Agreed Order
providing for a risk-based remediation of the contamination different from the
EPA's Order. IDEM withdrew from the Agreed Order, which was ruled to be a breach
of contract by an Indiana State Superior Court. In July 2002, RPC filed an
action against IDEM for damages determined to be the difference between the
costs of cleanup under the EPA Order and the IDEM Agreed Order. The outcome of
this litigation is not known.
In February 2002, the Committee of Equity Holders filed a motion in the
U.S. Bankruptcy Court asking for the distribution of the Company's shares to the
general creditors under the Plan of Reorganization to be recalculated, claiming
that the equity holders received less than the required percentage of shares.
The ultimate outcome of this matter is unknown; however, it is possible that its
resolution could cause the Company to issue additional shares, or to retire
shares, in the future. This would directly impact the earnings per share
calculations of the Company. At a preliminary hearing in April 2002, the Court
took the matter under advisement pending submission of position papers by the
parties. The Company has filed a motion for summary judgment asking the Court to
dismiss the action.
The Company is in receipt of a letter from the Michigan Department of
Environmental Quality ("MDEQ") alleging responsibility for trichloroethylene
("TCE") contamination at a Ferndale, Michigan, industrial site formerly occupied
by Advanced Friction Materials Company ("AFM") from 1974 to 1985. AFM was
acquired by the Company in 1998. The Company is cooperating with the
-26-
Note J, continued
MDEQ in evaluating the subsurface of the site to obtain data concerning the
alleged contamination. Estimated costs of such evaluation should not exceed $15
thousand. The Company's liability at this site is indeterminable at this time.
-27-
Note K - Liquidity
Concurrent with the effective date of the Plan, Raytech settled the
Liabilities Subject To Compromise either through the issuance of common stock,
payment in cash or the assumption of a liability of $11.2 million for certain
Raymark pension plans, among other resolutions. The pension plans have a current
unfunded liability for pre-2001 funding of $6.5 million. The Company is working
with the Internal Revenue Service ("IRS") and the Pension Benefit Guaranty
Corporation ("PBGC") to obtain a funding waiver under Revenue Procedure 94-41.
The request for waiver was filed with the IRS on February 28, 2002. The waiver,
if granted, would provide for an extended period of time for funding this
pre-2001 amount of $6.5 million while keeping the annual funding going forward
on a current basis. The funding required for the 2001 pension funding period
would be approximately $3.3 million, the anticipated funding for the pre-2001
period amount would be approximately $1.6 million annually for five years. The
total payment due through September 15, 2002 would amount to $6.5 million. In
December 2001, the Company and the PBGC entered into an escrow agreement, which
is intended to reflect the Company's intent to fund subject to receiving the
waiver. The escrow account was funded with $3.0 million in December 2001 and an
additional $1.2 million in January 2002 for a total of $4.2 million, which is
included in restricted cash at June 30, 2002. The remaining funding requirement
in 2002 for the 2001 plan year and the pre-2001 period is $2.3 million. In the
event that the waiver from the IRS is not granted, the funding requirements for
2001 would be $12.3 million. This would require additional borrowings by the
Company. The Company anticipates that additional borrowings would be available
using assets of the Company not currently pledged as collateral for its existing
debt. The Company expects to be successful in receiving this waiver.
The Plan also sets forth a Tax Benefits Assignment and Assumption
Agreement (the "Agreement") between the Company and the PI Trust, which provides
that the tax benefits received by the Company due to the reorganization be
passed onto the PI Trust as received. In 2002, the Company filed its 2001
Federal tax return for the Raytech consolidated group and received a tax refund
of $33.4 million, which was subsequently paid to the PI Trust. The income tax
receivable at June 30, 2002 in the amount of $4.8 million relating to amounts
due from state governments for returns filed in 2002 will be paid to the PI
Trust when received. During the second quarter of 2002, the Agreement was
modified. The holdback provision was eliminated, but the Agreement retained the
provision whereby the PI Trust would indemnify Raytech Corporation for potential
IRS audit adjustments.
The Company is complying with a Federal Order issued by the U.S.
Environmental Protection Agency (EPA) at its manufacturing facility in
Crawfordsville, Indiana. The Company has an accrued liability of $4.1 million at
June 30, 2002, which is expected to provide for full remediation and fines in
compliance with the Order. It is anticipated that substantially all of these
costs will be paid in the 2002 fiscal year. The Company paid $2.7 million during
the period from April 1, 2002 to June 30, 2002 and $3.3 million during the
period from December 31, 2001 to June 30, 2002.
Management believes that existing cash balances, availability under its
existing credit facilities and cash flow from operations during 2002 will be
sufficient to meet all of the Company's obligations arising in the normal course
of business, including anticipated capital investments. In the event that the
waiver is not obtained for the Raymark pension funding, additional borrowings
will be required.
-28-
Note L - Restricted Cash
Restricted cash relates to the following:
Successor Company
-----------------
June 30, 2002 December 30, 2001
------------- -----------------
Pension escrow $ 4,200 $ 3,000
Letters of credit 1,602 1,986
Other 410 410
----- -----
$ 6,212 $ 5,396
====== =====
The letters of credit collateralize certain obligations relating primarily
to workers' compensation. The pension escrow account is discussed in Note K -
Liquidity.
-29-
Note M - Recently Issued Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 146 (SFAS No. 146), "Accounting for Costs Associated
with Exit or Disposal Activities." The objectives of SFAS No. 146 are to
address financial accounting and reporting for costs associated with exit or
disposal activities. SFAS No. 146 nullifies Emerging Issues Task Force
(EITF) Issue No.94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The principal difference between SFAS No. 146 and Issue
No. 94-3 relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. Under Issue No. 94-3, a liability for an exit cost as defined in
Issue No. 94-3 was recognized at the date of an entity's commitment to an exit
plan. The provisions of SFAS No. 146 will be effective for the Company for
exit or disposal activities that are initiated beginning in fiscal 2003.
-30-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
In preparing the discussion and analysis required by the Federal Securities
Laws, it is presumed that users of the interim financial information have read
or have access to the discussion and analysis for the preceding fiscal year.
Results of Operations and Liquidity and Capital Resources
In April 2001, Raytech Corporation emerged from the protection of the
Bankruptcy Court under Chapter 11 of Title 11 of the United States Bankruptcy
Code. Raytech Corporation had been under the Chapter 11 protection since March
1989. The bankruptcy history and emergence are described in more detail in Note
A to the Unaudited Condensed Consolidated Financial Statements.
As of April 2, 2001, the Company adopted fresh-start reporting pursuant
to the guidance provided by the American Institute of Certified Public
Accountant's Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The Effective Date of
the Company's emergence from bankruptcy is considered to be the close of
business on April 2, 2001 for financial reporting purposes. The periods
presented prior to April 2, 2001 have been designated "Predecessor Company" and
the periods subsequent to April 2, 2001 have been designated "Successor
Company." In accordance with fresh-start reporting, all assets and liabilities
were recorded at their respective fair values. The fair value of substantially
all of the Company's long-lived assets were determined using information
provided by third-party appraisers.
The Company has determined that the most meaningful presentation of
financial information would be to provide comparative analysis of financial
performance for the Successor Company for the period April 1, 2002 through June
30, 2002 compared to the period April 3, 2001 through July 1, 2001.
Additionally, the period December 31, 2001 through March 31, 2002, Successor
Company, has been compared to the period January 1, 2001 through April 1, 2001,
Predecessor Company.
The adjustments relating to the recording of reorganization expenses and
other fresh-start adjustments for the one-day period ended April 2, 2001 are
detailed in Note C to the Unaudited Condensed Consolidated Financial Statements.
The Company has not elected to present a comparative analysis for the
twenty-six-week periods ended June 30, 2002 and July 1, 2001, since such
information in the prior period would require consolidating statements of the
Predecessor Company and the Successor Company. It was determined that the
significance of the adjustments relating to the emergence from bankruptcy would
render such analysis not meaningful.
Accounting Policies
The unaudited condensed consolidated financial statements include the
accounts of Raytech Corporation and its majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
The investment by third parties in Allomatic Products Company is accounted for
as minority interest in the Unaudited Condensed Consolidated Financial
Statements. There are no unconsolidated entities and Raytech does not use
Special Purpose Entities (SPE's). The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported and disclosures of contingent
-31-
liabilities 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, pension and other postretirement and
postemployment benefits, and the recoverable value of deferred tax assets.
Accruals for environmental matters are recorded when it is probable that
a liability has been incurred and the amount of the liability can be reasonably
estimated or if an amount is likely to fall within a range and no amount within
the range can be determined to be the better estimate, the minimum amount of the
range is recorded. Remediation obligations are not recorded on a discounted
basis. Reimbursements from insurance carriers relating to environmental matters
are not recorded until it is probable that such recoveries will be realized.
Results of Operations for the Successor Company for the Period April 1, 2002 to
June 30, 2002 and the period April 3, 2001 to July 1, 2001
Raytech Corporation recorded net income of $.8 million for the thirteen-
week period ended June 30, 2002 or $.02 per basic share compared to a loss of
$2.4 million or $.06 loss per basic share for the same period April 3, 2001
through July 1, 2001. The improved earnings of $3.2 million were due
substantially to the improved gross profit in 2002. In 2001 as part of the
application of fresh-start accounting inventories were stated at sales value
less distribution cost, which increased the carrying value of inventories by
$5.9 million at April 2, 2001. The stepped up inventory sold in the period April
3, 2001 through July 1, 2001, thereby increasing the cost of sales for that
period. The cost of sales in the period April 1, 2002 through June 30, 2002
reflect a more traditional inventory valuation process and more accurately
reflects the gross margin for the period.
Net Sales
Worldwide net sales for the thirteen-week period ended June 30, 2002
were $55.3 million compared to $50.6 million for the period April 3, 2001
through July 1, 2001, an increase of $4.7 million or 9.3%. Details of the sales
performance are presented below in relation to the three business segments.
The Wet Friction segment reported sales of $34.8 million for the
thirteen-week-period ended June 30, 2002 compared to $30.9 million for the
period April 3, 2001 through July 1, 2001, an increase of $3.9 million or 12.6%.
The increase period-over-period is due to improved sales in the automotive OEM
component of this segment. The Company was awarded a significant contract, which
began in the latter part of the first quarter of 2002. The heavy duty component
of the Wet Friction segment is substantially performing at the same level as the
period April 3, 2001 through July 1, 2001.
The Aftermarket segment recorded sales of $12.1 million for the
thirteen-week-period ended June 30, 2002 compared to $12.2 million for the
period April 3, 2001 through July 1, 2001, substantially performing at the same
level as the comparable period in the prior year. The flat sales reflect the
slow growth, which was anticipated for this segment for 2002, due to flat
performance in the aftermarket overall.
-32-
The Dry Friction segment recorded sales of $8.4 million for the
thirteen-week period ended June 30, 2002 compared to $7.4 million for the period
April 3, 2001 through July 1, 2001, an increase of $1.0 million or 13.5%. The
improved sales reflect the increased sales from the operations in China as that
element of the Dry Friction segment continues to expand its sales in China, Asia
and Central Europe. The increased sales in China were offset by lower than prior
year sales in the Western European operations.
Gross Profit
The Company recorded gross profit of $10.6 million for the thirteen-week
period ended June 30, 2002 on sales of $55.3 million, yielding a gross margin
percentage of 19.2%. This compares to a gross profit of $4.6 million for the
period April 3, 2001 through July 1, 2002. The sales for this period were $50.6
million, yielding a gross margin percentage of 9.0%. The reduced gross margin in
2001 was due substantially to the write-up of inventory amounts to sales value
less distribution costs on April 2, 2001 in accordance with the fresh-start
accounting rules. The impact of the $5.9 million inventory write- up was to
reduce gross margin in the period April 3, 2001 through July 1, 2001 as this
inventory was sold and the costs flowed through the statement of operations. In
addition, improved sales performance in the 2002 period of $4.7 million provided
for improved overhead absorption on the improved throughput.
Selling, General and Administrative
The selling, general and administrative expenses for the thirteen-week
period ended June 30, 2002 were $8.2 million compared to $7.5 million for the
same period in the prior year, an increase of $.7 million or 9.3%. The increase
is due to legal costs associated with certain environmental and other issues;
additionally, certain variable compensation expenses were recorded in the 2002
period, which were not recorded in 2001.
Interest Expense
Interest expense for the thirteen-week period ended June 30, 2002 was
$.2 million compared to interest expense of $.3 million in the period April 3,
2001 through July 1, 2001, a reduction of $.1 million or 33%. The reduced
interest is due to lower interest rates of 4.75% and reduced debt of $.6 million
at June 30, 2002 compared to July 1, 2001.
Operating Profits
The following discussion of operating results by industry segment
relates to information contained in Note G - Segment Reporting to the Unaudited
Condensed Consolidated Financial Statements. Operating profit is income before
income taxes and minority interest.
Operating profit of $1.9 million was recorded for the thirteen-week
period ended June 30, 2002, which compares to an operating loss of $3.3 million
for the period April 3, 2001 through July 1, 2001, an increase of $5.2 million.
The operating profit showed improvement due to improved sales for the period in
2002. In addition, the inventory adjustment detailed in the gross profit
analysis above reduced operating profit in the 2001 period. The reduced
operating profit is reflected in the corporate component of the segment
information, which is detailed in Note G to the Condensed Consolidated Unaudited
Financial Statements, Segment Reporting.
The Wet Friction segment reported operating profit of $2.1 million for
the thirteen-week period ended June 30, 2002 compared with $2.0 million for the
period April 3, 2001 through July 1, 2001, an increase of $0.1 million. The
increase is due to the improved sales for the segment of $3.9 million compared
to the same period in 2001. The operating profit was reduced by poor
-33-
performance in the European component of the Wet Friction segment. Management is
implementing changes in that operation, which are expected to improve the
financial performance.
The Aftermarket segment recorded operating profit for the thirteen-week
period ended June 30, 2002 of $2.3 million compared to $2.0 million for the
period April 3, 2001 through July 1, 2001, an increase of $.3 million. The sales
for the two periods are substantially the same.
The Dry Friction segment recorded operating profit of $.2 million for
the thirteen-week period ended June 30, 2002 compared to $.4 million for the
period April 3, 2001 through July 1, 2001, a decrease of $.2 million. The sales
increase for the above periods of $1.0 million, due to improved sales in our
China operation, was offset by exchange losses of $.1 million during the period
as the euro gained strength against other currencies.
Other Income (Expense)
Other income (expense) for the thirteen weeks ended June 30, 2002 was
$(.4) million as compared to $.3 million in the thirteen weeks ended July 1,
2001. The decrease was primarily due to certain exchange losses of $.2 million
due to the improved strength of the euro against other currencies and certain
environmental-related expenses.
Income Taxes
The effective tax rate for the thirteen-week period ended June 30, 2002
is 38.5% compared to an effective rate of 37% in the same period in the prior
year, excluding the one-day effect in the amount of $29.4 million relating to
the Plan of Reorganization on April 2, 2001. Substantially the same rate is used
in both periods.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement") as modified, all tax benefits received by the Company due to the
reorganization are to be passed onto the PI Trust as received. At December 30,
2001, the Company had tax loss carryforwards of $30.2 million and tax credit
carryforwards of $4.9 million, all of which will inure to the benefit of the PI
Trust. Additionally, future payments to the PI Trust and others will create
additional tax deductions, which will inure to the benefit of the PI Trust in
accordance with the Agreement. These include deductions for payments to the PI
Trust of tax benefits associated with the utilization of the operating losses
created by the reorganization, and contributions made to the Raymark pension
plan. If 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, if any, between the PI Trust and Raytech Corporation has not been
determined at this time. Additional tax recoveries to be received in future
periods are shown as deferred tax assets and a deferred payable to the PI Trust
which amounted to $41.6 million at June 30, 2002.
The Company has filed for and received in 2002 Federal tax refunds of
$33.4 million. During the second quarter, the Agreement was modified to
eliminate the holdback provision. As such, and pursuant to the Agreement as
modified, Raytech has paid over to the Trust the entire amount of the refunds.
Additionally, at June 30, 2002, the Company has recorded a tax receivable in the
amount of $4.8 million relating to amounts due from state governments for
returns filed in 2002. These refunds will be paid to the Trust when received.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit or
any other years in the carryback period, are, pursuant to the Agreement,
-34-
the responsibility of the PI Trust and will therefore reduce the deferred tax
asset associated with, and liability payable to, the PI Trust.
The Company owns 57% of the stock of Allomatic Products Company ("APC").
The Company has not recorded a deferred tax liability for the undistributed
earnings of APC since management expects that those earnings will be distributed
to the Company in a tax-free transaction. However, the deferred tax liability on
the undistributed earnings of APC would be approximately $1.0 million at June
30, 2002, if all of APC's earnings were to be distributed through dividends.
Results of Operations for the Successor Company for the Period December 31, 2001
to March 31, 2002 and Predecessor Company for the Period January 1, 2001 to
April 1, 2001
Net Sales
Worldwide net sales of $52.7 million for the thirteen-week period ended
March 31, 2002 compared to $55.2 million for the same period in the prior year
for a decline of $2.5 million or 4.5%. The details of the sales performance are
presented below distinguishing the sales performance in each business segment.
The Wet Friction segment reported sales of $32.1 million in the first
quarter of 2002 compared to $34.1 million in the same period in the prior year,
a decline of $2.0 million, representing a significant portion of the sales
decline for the Company in the period. The primary market impacted is the heavy
duty component of this segment in both Europe and domestically. The automobile
OEM component of this segment reflected sales at the same level as 2001.
The Aftermarket segment recorded net sales of $12.5 million for the
thirteen-week period ended March 31, 2002 compared to $13.1 million for the same
period in the prior year, a decline of $.6 million or 4.6%. The sales decline
was due to a variety of issues including the mild winter weather, better
inventory management at our customers and the improved quality of components at
the OEM level.
The Dry Friction segment recorded sales of $8.1 million for the first
quarter of 2002 compared to $8.0 million in the same period in the prior year.
The sales reflect increased sales through the operation in China of $1.3 million
offset by reduced sales through the operation in Germany of approximately the
same amount. The reduction in German sales includes a negative currency
translation impact of approximately $.4 million.
Gross Profit
The Company recorded gross profit of $10.5 million for the thirteen-week
period ended March 31, 2002 on sales of $52.7 million yielding a gross margin
percentage of 20.0%. This compares to a gross profit of $11.4 million for the
same period in the prior year on sales of $55.2 million, a gross profit margin
of 20.6%. The gross profit in 2002 was reduced by $1.1 million due to increased
depreciation and amortization as a result of the application of fresh-start
accounting post first quarter of 2001. The impact of the increased amortization
and depreciation was a reduction in the gross profit margin of 2.1%. On a
comparable basis, the gross margin has increased period- over-period 1.5
percentage points due to cost reduction programs instituted throughout 2001 and
the first quarter of 2002.
-35-
Selling, General and Administrative
The selling, general and administrative expenses for the thirteen-week
period ended March 31, 2002 were $7.6 million compared to $7.7 million for the
same period in the prior year, a reduction of $.1 million or 1.3%. The lower
costs reflect the impact of certain cost reduction programs implemented in 2001
balanced with Raytech's commitment to investing in technology for future growth.
Interest Expense
Interest expense for the first quarter of $.3 million compares to
interest expense, excluding Raymark interest, of $.4 million in the same period
in the prior year, a reduction of 25%. The reduction is due to lower rates in
2002 on domestic debt. The interest rate on foreign debt is approximately the
same.
Operating Profits
The following discussion of operating results by industry segment
relates to information contained in Note G - Segment Reporting to the Unaudited
Condensed Consolidated Financial Statements. Operating profit is income before
income taxes and minority interest.
Operating profit of $2.8 million was recorded for the first quarter of
2002 compared to $3.5 million for the same period in the prior year, a decrease
of $.7 million or 20%. The operating profit was negatively affected by the
reduced sales period-over-period of $2.5 million. Additionally, operating
profits were reduced by the impact of fresh-start accounting due to the increase
in depreciation and amortization of $1.1 million in comparing first quarter 2002
to the first quarter of 2001.
The Wet Friction segment posted operating profits of $1.5 million, an
increase of $.2 million over the same period in the prior year, an increase of
15%. This increase was accomplished on lower sales of $2.0 million and was due
to implementing cost reduction programs in 2001 and 2002.
The Aftermarket segment recorded operating profit for the quarter of
$2.6 million compared to $2.1 million in the same period in the prior year, an
increase of $.5 million or 24%. The improved operating income performance is due
to cost reduction programs initiated in 2001 and 2002 coupled with improved
material pricing. Additionally, management works closely with the work force in
this segment to maximize the peaks and valleys of manufacturing and shipping
product in the aftermarket industry.
The Dry Friction segment recorded operating profit of $.8 million for
the thirteen-week period ended March 31, 2002 compared to $.8 million in the
same period in the prior year. The operating income reflects improved operating
profits from the operation in China offset by reduced operating profit in
Europe. The decline in Europe is due primarily to lower volume sales.
Income Taxes
The effective tax rate for the thirteen-week period ended March 31, 2002
is 38.5% compared to an effective rate of 42% for the same period in the prior
year. The rate for the current period reflects a statutory federal rate adjusted
for state and foreign taxes. The rate differs from the 2001 rate by 3.5
percentage points caused primarily by certain adjustments in the prior period
related to the bankruptcy process.
-36-
Outlook
The Company's Wet Friction segment expects sales to improve in 2002 as
compared to the results recorded in 2001 by an estimated 2%. The increase
reflects the continued slow growth in the automotive original equipment market
for Raytech related products as the United States economy recovers during 2002.
Our customers in the automotive OEM are expected to continue to face competitive
pressure from foreign competition from both Europe and Asia, which will provide
increased pressure on the supplier base for continued cost reduction. The
Company was successful in expanding its supplier position with General Motors
Corporation and the new production, which began in the latter part of the first
quarter of 2002, will partially offset the negative effects of both pricing and
the slow economy as these issues impact the Wet Friction segment. The heavy duty
component of the Wet Friction segment is expected to remain constant in 2002 due
to competitive pressure on pricing. The markets served by this component of the
Wet Friction segment, mainly construction, mining and agriculture, are not
expected to grow significantly in 2002; therefore, increased production is not
expected.
The Aftermarket segment is expected to remain at the same level as 2001.
The slow economy in the United States is expected to continue to negatively
offset growth for this segment. Additionally, the continued improved quality of
the original equipment manufacturers has pushed out the need for replacement
parts. This trend is expected to continue in 2002, reducing the opportunity for
increased sales. This segment continues to explore opportunities to expand its
product offerings in the transmission aftermarket and will continue to explore
opportunities in 2002.
The Dry Friction segment is expected to increase revenues in 2002 over
2001 results. The development of new market opportunities in Asia is expected to
continue through the expansion of our production facility in China, which was
completed in June 2002. In 2001, this facility improved revenues substantially
over 2000 results and is expected to continue the positive performance in 2002.
The European revenues are expected to increase in 2002 due to modest growth in
the overall European economy.
Raytech formed an expansion committee in 2001 consisting of key
employees within the Company and skilled consultants from outside the Company.
The expansion committee is reviewing existing business in the vehicular market,
new product development in the vehicular markets and new product development in
non- vehicular markets. The expansion committee meets regularly and has a number
of projects under development in each of the expansion directions. The projects
are in various development stages and will be disclosed in greater detail when
appropriate.
The Company's outlook for 2002 anticipates total revenues to exceed 2001
levels by 1.5% with improved operating profits reflective of the increased
sales. There are many events which could negatively impact the Company's current
view, including the impact of the economy worsening in the United States and
around the world.
Financial Risks
The Company maintains lines of credit with United States and foreign
banks, as well as other creditors. The Company is naturally exposed to various
interest rate risk and foreign currency risk in its normal course of business.
The Company effectively manages its accounts receivable as evidenced by
the average days sales in trade receivables of 44 days. This allows for minimum
borrowings in supporting inventory and trade receivables. Management does not
anticipate a significant change in fiscal policy in any of its borrowing markets
in 2002 given current economic conditions. Further, the Company can reduce the
-37-
short-term impact of interest rate fluctuation through deferral of capital
investment should the need arise.
The local currencies of the Company's foreign subsidiaries have been
designated as their functional currencies. Accordingly, financial statements of
foreign operations are translated using the exchange rate at the balance sheet
date for assets and liabilities, historical exchange rates for elements of
stockholder's equity and an average exchange rate in effect during the period
for revenues and expenses. Where possible, the Company attempts to mitigate
foreign currency translation effects by borrowing in local currencies to fund
operations. The Company does not believe that the fluctuation in foreign
currency will have a material adverse effect on the Company's overall financial
condition. Additionally, the Company does not enter into agreements to manage
any currency transaction risks due to the immaterial amount of transactions of
this type.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $16.2 million at June
30, 2002 compared to $14.5 million at December 30, 2001. Capital investment for
the six-month period totaled $5.6 million. The level of capital investment is
consistent with planned expenditures.
The debt at June 30, 2002 consists of the following:
Current Non-Current Total
------- ----------- -----
Domestic bank debt $ 6,135 $ 2,250 $ 8,385
Foreign bank debt 3,379 4,372 7,751
Leases 127 192 319
----- ----- -----
Total outstanding debt $ 9,641 $ 6,814 $16,455
===== ===== ======
Available lines of credit:
Domestic $ 9,162
Foreign 2,785
------
Total available $ 11,947
======
The domestic debt is collateralized by accounts receivable, inventory
and machinery and equipment. The accounts receivable and inventory components
are determined using a formula based on the respective account balances. In the
event accounts receivable and inventory were to decline, availability would also
decline. Additionally, the agreement includes certain covenants, the most
restrictive of which requires the borrowers to maintain minimum annual earnings
before interest, taxes, depreciation and amortization of $15 million. The
foreign debt consists of both term notes and lines of credit. The lines of
credit are payable on demand.
The Company does not maintain any off balance sheet debt, guarantees or
other arrangements.
Future Liquidity
Concurrent with the effective date of the Plan, Raytech settled the
Liabilities Subject To Compromise either through the issuance of common stock,
payment in cash or the assumption of a liability for $11.2 million for certain
Raymark pension plans among other resolutions. The pension plans have a current
unfunded liability for pre-2001 funding for $6.5 million. The Company is working
with the Internal Revenue Service (IRS) and the PBGC to obtain a funding waiver
under Revenue Procedure 94-41. The request for waiver was filed with the IRS on
February 28, 2002. The waiver, if granted, would provide for an extended period
of time for funding this pre-2001 amount of $6.5 million
-38-
while keeping the annual funding going forward on a current basis. The funding
required for the 2001 pension funding period would be approximately $3.3
million, the anticipated funding for the pre-2001 period amount would be
approximately $1.6 million annually for five years. The total payment due
through September 15, 2002 would amount to $6.5 million. In December 2001, the
Company and the PBGC entered into an escrow agreement, which is intended to
reflect the Company's intent to fund subject to receiving the waiver. The escrow
account was funded with $3.0 million in December 2001 and an additional $1.2
million in January 2002 for a total of $4.2 million, which is included in
restricted cash at June 30, 2002. The remaining funding requirement in 2002 for
the 2001 plan year and the pre-2001 period is $2.3 million. In the event that
the waiver from the IRS is not granted, the funding requirements for 2001 would
be $12.3 million. This would require additional borrowings by the Company. The
Company anticipates that additional borrowings would be available using assets
of the Company not currently pledged as collateral for its existing debt. The
Company expects to be successful in receiving this waiver.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement"), all tax benefits received by the Company due to the reorganization
are to be passed onto the PI Trust as received. At December 30, 2001, the
Company had tax loss carryforwards of $30.2 million and tax credit carryforwards
of $4.9 million, all of which will inure to the benefit of the PI Trust.
Additionally, future payments to the PI Trust and others will create additional
tax deductions, which will inure to the benefit of the PI Trust in accordance
with the Agreement. These include deductions for payments to the PI Trust of tax
benefits associated with the utilization of the operating losses created by the
reorganization, and contributions made to the Raymark pension plan. If 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, if any, between
the PI Trust and Raytech Corporation has not been determined at this time.
Additional tax recoveries to be received in future periods are shown as deferred
tax assets and a deferred payable to the PI Trust which amounted to $41.6
million at June 30, 2002.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit or
any other years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
The Company is complying with a Federal Order issued by the U.S.
Environmental Protection Agency (EPA) at its manufacturing facility in
Crawfordsville, Indiana. The Company has an accrued liability of $4.1 million at
June 30, 2002, which is expected to provide for full remediation and fines in
compliance with the Order. It is anticipated that substantially all of these
costs will be paid in the 2002 fiscal year. The Company paid $3.3 million during
the twenty-six-week period ended June 30, 2002.
Management believes that existing cash balances, availability under its
existing credit facilities and cash flow from operations during 2002 will be
sufficient to meet all of the Company's obligations arising in the normal course
of business, including anticipated capital investments. In the event that the
waiver is not obtained for the Raymark pension funding, additional borrowings
will be required. The Company expects to be able to obtain the additional
borrowings, if necessary.
Recently Issued Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 146 (SFAS No. 146), "Accounting for Costs Associated
with Exit or Disposal Activities." The objectives of SFAS No. 146 are to address
-39-
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue
No.94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS No. 146 and Issue No. 94-
3 relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue No. 94-3, a liability for an exit cost as defined in Issue
No. 94-3 was recognized at the date of an entity's commitment to an exit plan.
The provisions of SFAS No. 146 will be effective for the Company for exit or
disposal activities that are initiated beginning in fiscal 2003.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995: Statements under the "Market Conditions and Outlook" and "Future
Liquidity" headings above and other statements herein that relate to future
operating periods are subject to important risks and uncertainties that could
cause actual results to differ materially. Forward-looking statements relating
to the Company's businesses involve certain factors that are subject to change,
including the many interrelated factors that affect consumer confidence,
including worldwide demand for automotive and heavy duty products, general
economic conditions, the environment, actions of competitors in the various
industries in which the Company competes; production difficulties, including
capacity and supply constraints; dealer practices; labor relations; interest and
currency exchange rates; technological difficulties; accounting standards, and
other risks and uncertainties. Further information, including factors that
potentially could materially affect the Company's financial results, is included
in the Company's filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2.
-40-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to certain legal matters that have arisen in the
ordinary course of business, which management expects would not have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company. In addition, the Company is involved in the following
litigation.
In April 1996, the Indiana Department of Environmental Management
("IDEM") advised Raybestos Products Company ("RPC"), a wholly-owned subsidiary
of the Company, that it may have contributed to the release of lead and PCB's
(polychlorinated biphenyls) found in a drainage ditch near its Indiana facility.
In June 1996, IDEM named RPC as a potentially responsible party ("PRP"). RPC
notified its insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern District of
Indiana, captioned Reliance Insurance Company vs. RPC seeking a declaratory
judgment that any liability of RPC is excluded from its policy with RPC. In
January 2000, the District Court granted summary judgment to RPC, indicating
that the insurer has a duty to defend and indemnify losses stemming from the
IDEM claim. However, in June 2001, Reliance Insurance Company was placed in
rehabilitation in Pennsylvania. The effect upon RPC's claim is not known at this
time. Three additional insurers have been added to the Reliance case as ordered
by the District Court. IDEM has turned the matter over to the U.S. Environmental
Protection Agency ("EPA"). In December 2000, the EPA issued a Unilateral
Administrative Order under CERCLA ("Order") demanding removal of contaminated
soils from the referenced drainage ditch. RPC has prepared a plan for
implementation and is in compliance with the cleanup Order. The Company has
estimated that the cost to comply with the Order and related fines will be
approximately $9.1 million of which $5.0 million has been spent through June 30,
2002. The remaining balance of $4.1 million is included in accrued liabilities.
It is at least reasonably possible that the assessment of estimated costs to
comply with the Order may be modified as the project progresses and that there
may be additional assessments from the EPA. Prior to IDEM's relinquishment of
control of the cleanup to the EPA, IDEM and RPC had reached an Agreed Order
providing for a risk-based remediation of the contamination different from the
EPA's Order. IDEM withdrew from the Agreed Order, which was ruled to be a breach
of contract by an Indiana State Superior Court. In July 2002, RPC filed an
action against IDEM for damages determined to be the difference between the
costs of cleanup under the EPA Order and the IDEM Agreed Order. The outcome of
this litigation is not known.
In February 2002, the Committee of Equity Holders filed a motion in the
U.S. Bankruptcy Court asking for the distribution of the Company's shares to the
general creditors under the Plan of Reorganization to be recalculated, claiming
that the equity holders received less than the required percentage of shares.
The ultimate outcome of this matter is unknown; however, it is possible that its
resolution could cause the Company to issue additional shares, or to retire
shares, in the future. This would directly impact the earnings per share
calculations of the Company. At a preliminary hearing in April 2002, the Court
took the matter under advisement pending submission of position papers by the
parties. The Company has filed a motion for summary judgment asking the Court to
dismiss the action.
-41-
The Company is in receipt of a letter from the Michigan Department of
Environmental Quality ("MDEQ") alleging responsibility for trichloroethylene
("TCE") contamination at a Ferndale, Michigan, industrial site formerly occupied
by Advanced Friction Materials Company ("AFM") from 1974 to 1985. AFM was
acquired by the Company in 1998. The Company is cooperating with the MDEQ in
evaluating the subsurface of the site to obtain data concerning the alleged
contamination. Estimated costs of such evaluation should not exceed $15,000. The
Company's liability at this site is indeterminable at this time.
-42-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on 8-K
None
-43-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAYTECH CORPORATION
By: /s/ JOHN B. DEVLIN
------------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
Date: August 12, 2002
-44-
CERTIFICATION
I, John B. Devlin, Chief Financial Officer of Raytech Corporation (the
"Company"), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby
certify as follows:
1. The quarterly report on Form 10-Q of the Company for the
period ended June 30, 2002 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in such Form 10-Q fairly presents,
in accordance with United States generally accepted accounting
principles, in all material respects, the financial condition
and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 12th day of
August, 2002.
/s/ JOHN B. DEVLIN
-----------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
-45-
CERTIFICATION
I, Albert A. Canosa, Chief Executive Officer of Raytech Corporation
(the "Company"), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do
hereby certify as follows:
1. The quarterly report on Form 10-Q of the Company for the
period ended June 30, 2002 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in such Form 10-Q fairly presents,
in accordance with United States generally accepted accounting
principles, in all material respects, the financial condition
and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 12th day of
August, 2002.
/s/ ALBERT A. CANOSA
-----------------------
Albert A. Canosa
President and
Chief Executive Officer
-46-