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 March 31, 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 May 9, 2002, 4,560,579 shares of the Registrant's common stock, par value
$1.00, were issued and outstanding.
Page 1 of 33
RAYTECH CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets at March 31, 2002 (Unaudited)(Successor Company)
and December 30, 2001 (Successor Company) 3
Condensed Unaudited Consolidated Statements of
Operations for the thirteen weeks ended
March 31, 2002 (Successor Company) and April 1,
2001 (Predecessor Company) 5
Condensed Unaudited Consolidated Statements of Cash Flows
for the thirteen weeks ended March 31, 2002 (Successor
Company) and April 1, 2001 (Predecessor Company) 6
Condensed Unaudited Consolidated Statements of
Changes in Shareholders' Equity for the thirteen
weeks ended March 31, 2002 (Successor Company) and
April 1, 2001 (Predecessor Company) 7
Notes to Condensed Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 32
Signature 33
-2-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
------------------------------------------------------------------------------------
Successor Company
March 31, 2002 December 30, 2001
At (unaudited)
------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 15,538 $ 14,463
Restricted cash 15,951 5,396
Trade accounts receivable, less allowance
of $727 for 2002 and $729 for 2001 26,851 22,961
Inventories, net 29,944 31,562
Income taxes receivable 6,133 37,877
Other current assets 7,408 7,048
------------------------------------------------------------------------------------
Total current assets 101,825 119,307
------------------------------------------------------------------------------------
Property, plant and equipment 121,705 119,678
Less accumulated depreciation (13,751) (10,386)
------------------------------------------------------------------------------------
Net property, plant and equipment 107,954 109,292
------------------------------------------------------------------------------------
Intangible assets, net 72,234 72,790
Deferred income taxes 16,600 16,600
Other assets 2,552 2,799
------------------------------------------------------------------------------------
Total assets $301,165 $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
March 31, 2002 December 30, 2001
At (unaudited)
------------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Notes payable and current
portion of long-term debt $ 10,723 $ 10,262
Current portion of pension obligation 7,049 7,049
Accounts payable 13,003 13,268
Accrued liabilities 23,059 22,694
Payable to the PI Trust 15,913 38,022
---------------------------------------------------------------------------------
Total current liabilities 69,747 91,295
---------------------------------------------------------------------------------
Long-term debt 6,526 6,820
Pension obligation 15,909 15,409
Postretirement benefits other than pensions 13,139 12,876
Deferred payable to the PI Trust 41,614 41,614
Other long-term liabilities 8,883 8,691
---------------------------------------------------------------------------------
Total liabilities 155,818 176,705
---------------------------------------------------------------------------------
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, 41,528,520 issued and
outstanding 41,528 41,528
Additional paid in capital 116,843 116,843
Accumulated deficit (4,247) (5,577)
Accumulated other comprehensive loss (8,777) (8,711)
---------------------------------------------------------------------------------
Total shareholders' equity 145,347 144,083
---------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 301,165 $ 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)
---------------------------------------------------------------------------
Successor Predecessor
Company Company
For the 13 Weeks Ended March 31, 2002 April 1, 2001
---------------------------------------------------------------------------
Net sales $ 52,709 $ 55,205
Cost of sales (42,184) (43,811)
---------------------------------------------------------------------------
Gross profit 10,525 11,394
Selling, general and
administrative expenses (7,594) (7,742)
---------------------------------------------------------------------------
Operating profit 2,931 3,652
Interest expense (277) (374)
Interest expense - Raymark -- (70)
Other income, net 179 290
---------------------------------------------------------------------------
Income before provision for income taxes
and minority interest 2,833 3,498
Provision for income taxes (1,091) (1,469)
---------------------------------------------------------------------------
Income before minority interest 1,742 2,029
Minority interest (412) (314)
---------------------------------------------------------------------------
Net income $ 1,330 $ 1,715
===========================================================================
Basic earnings per share $ .03 $ .49
===========================================================================
Diluted earnings per share $ .03 $ .48
===========================================================================
The accompanying notes are an integral part of these statements.
-5-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(in thousands)
(unaudited)
----------------------------------------------------------------------------
Successor Predecessor
Company Company
For the 13 Weeks Ended March 31, 2002 April 1, 2001
----------------------------------------------------------------------------
Net cash provided by (used in)
operating activities $ 3,481 $ (863)
----------------------------------------------------------------------------
Cash flow from investing activities:
Capital expenditures (2,755) (2,717)
Proceeds on sales of property,
plant and equipment 62 10
----------------------------------------------------------------------------
Net cash used in investing activities (2,693) (2,707)
Cash flow from financing activities:
Cash overdraft - (371)
Net borrowings on short term notes 529 2,113
Principal payments on long-term debt (262) (482)
Proceeds from long-term borrowings 54 32
Net proceeds on borrowings
from Raymark -- 171
----------------------------------------------------------------------------
Net cash provided by
financing activities 321 1,463
Effect of exchange rate changes on cash (34) (78)
Net change in cash and cash equivalents 1,075 (2,185)
Cash and cash equivalents at
beginning of period 14,463 13,917
----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,538 $11,732
============================================================================
The accompanying notes are an integral part of these statements.
-6-
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 1,715 1,715
Changes during
the period (284) (284)
--------------------------------------------------------------------------------------------------------------
Total comprehensive
income 1,715 (284) 1,431
--------------------------------------------------------------------------------------------------------------
Balance,
April 1, 2001 $ 5,651 $ 70,631 $(7,047,926) $(1,502) $(4,561) $(6,977,707)
==============================================================================================================
--------------------------------------------------------------------------------------------------------------
SUCCESSOR COMPANY
Balance,
December 30, 2001 $41,528 $116,843 $ (5,577) $(8,711) $ - $ 144,083
Comprehensive income:
Net income 1,330 1,330
Changes during
the period (66) (66)
--------------------------------------------------------------------------------------------------------------
Total comprehensive
income 1,330 (66) 1,264
--------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2002 $41,528 $116,843 $ (4,247) $(8,777) $ - $ 145,347
==============================================================================================================
The accompanying notes are an integral part of these statements.
-7-
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.
-8-
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. To date, $.8 million has been paid to the Raymark Trustee under this
backstop provision. 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.
-9-
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 March 31, 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.
-10-
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.
Note D - Inventories
Inventories, net consist of the following:
Successor Company
March 31, 2002 December 30, 2001
(Unaudited)
-------------- -----------------
Raw material $ 9,305 $ 10,829
Work in process 7,880 7,207
Finished goods 12,759 13,526
-------- --------
$ 29,944 $ 31,562
======== ========
-11-
NOTE E - Earnings Per Share
For the 13 Weeks Ended
Successor Company Predecessor Company
March 31, 2002 April 1, 2001
----------------- -------------------
Basic EPS Computation
Numerator:
Net income $ 1,330 $ 1,715
Denominator:
Weighted average shares 41,528,520 3,519,313
Basic earnings per share $ .03 $ .49
=========== ==========
Diluted EPS Computation
Numerator:
Net income $ 1,330 $ 1,715
Denominator:
Weighted average shares 41,528,520 3,519,313
Dilutive potential
common shares 37,304 18,133
----------- ----------
Adjusted weighted average
shares and equivalents 41,565,824 3,537,446
Diluted earnings per share $ .03 $ .48
=========== ==========
Options to purchase 380,453 and 487,550 shares of common stock at $4.25
were outstanding during the thirteen weeks ended March 31, 2002(Successor
Company) and April 1, 2001 (Predecessor Company), respectively, but 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 during
each period.
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.
-12-
Note F - 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:
-13-
NOTE F, continued
OPERATING SEGMENTS
For the 13 Weeks Ended
Successor Company Predecessor Company
March 31, 2001 April 1, 2001
----------------- -------------------
Wet FRICTION
Net sales to external
customers $ 32,115 $ 34,073
Intersegment net sales (1) 2,233 2,974
-------- --------
Total net sales $ 34,348 $ 37,047
======== ========
Operating profit (2) $ 1,513 $ 1,327
======== ========
AFTERMARKET
Net sales to external
customers $ 12,471 $ 13,101
Intersegment net sales (1) 13 10
-------- --------
Total net sales $ 12,484 $ 13,111
======== ========
Operating profit (2) $ 2,558 $ 2,109
======== ========
DRY FRICTION
Net sales to external
customers $ 8,123 $ 8,031
Intersegment net sales (1) 30 116
-------- --------
Total net sales $ 8,153 $ 8,147
======== ========
Operating profit (2) $ 755 $ 754
======== ========
CORPORATE
Operating loss (2,3) $ (1,993) $ (692)
======== ========
TOTAL SEGMENTS
Net sales to external
customers $ 52,709 $ 55,205
Intersegment net sales (1) 2,276 3,100
-------- --------
Total net sales $ 54,985 $ 58,305
======== ========
Consolidated operating profit (2) $ 2,833 $ 3,498
======== ========
(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.
-14-
Note G - 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% caused primarily by certain adjustments in the prior period related to the
bankruptcy process.
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, subject to a holdback provision.
At December 30, 2001, the Company has 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 March 31, 2002.
The Company has filed for and received in 2002 Federal tax refunds of
$32 million. Pursuant to the Agreement, Raytech has paid over to the Trust $22.5
million of the refund and retained $9.7 million as required by the holdback
provision of the Agreement, which is included in restricted cash and as a
current payable to the PI Trust at March 31, 2002. Additionally, at March 31,
2002, the Company has recorded a tax receivable in the amount of $6.1 million
relating to $4.8 million due from state governments for returns filed in 2002
and $1.3 million in additional Federal tax refunds for the carryback period
related to certain tax law changes enacted in 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 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 March 31, 2002, if all of APC's earnings were to be distributed
through dividends.
-15-
Note H - 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
-----------------
March 31, 2002 December 30, 2001
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Finite life intangible
assets:
Unpatented technology $16,262 $ 1,940 $16,262 $1,455
Distribution base 5,716 284 5,716 213
------- ------- ------- ------
Sub-total 21,978 $ 2,224 21,978 1,668
------- ------- ------- ------
Indefinite life intangible
assets:
Trademarks 17,713 17,713
------- -------
Goodwill 34,767 34,767
------- -------
Intangible assets, net $72,234 $72,790
======= =======
The weighted-average amortization periods for the unpatented technology and the
distribution base are 6 and 20 years, respectively. Amortization expense for the
thirteen weeks ended March 31, 2002 amounted to $556.
-16-
Note H, 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. There were no changes in the
carrying amount of trademarks or goodwill during the thirteen weeks ended March
31, 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 13
Weeks Ended
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
=========
-17-
Note I - 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 given notice that it intends
to comply with the Order and has designated a contractor and project coordinator
as required. RPC prepared a plan for implementation and has begun carrying out
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 $2.3 million
has been spent through March 31, 2002. The remaining balance of $6.8 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.
In December 1998, the trustee of Raymark, Raytech and the Raytech
creditors' committee joined in filing an adversary proceeding (complaint)
against Craig R. Smith, et al. (including relatives, business associates and
controlled corporations) in the U.S. District Court in Hartford, Connecticut,
captioned Laureen Ryan, Trustee, et al. vs. Craig R. Smith, et al. alleging a
systematic stripping of assets belonging to Raymark in an elaborate and ongoing
scheme perpetrated by the defendants. The alleged fraudulent scheme extended
back to the 1980's and continued up to this action and enriching the Smith
family by an estimated $12 million and their associates, while depriving Raymark
and its creditors of nearly all of its assets amounting to more than $27
million. Upon motion of the plaintiffs, the Court issued a temporary restraining
order stopping Mr. Smith and all defendants from dissipating, conveying,
encumbering or otherwise disposing of any assets, which order was amended
several times and became a preliminary injunction. A motion for summary judgment
was filed by the plaintiffs and was ruled upon in March 2001. The Court ruled
that defendants (Smith, et al.) as fiduciaries owed a duty to Raymark's
creditors, that the transfer of $8.5 million of funds, specifically earmarked
for tort claims, to Smith related entities was a breach of that fiduciary duty,
was a fraudulent transfer and was an unjust enrichment to the Smith family.
Pending final judgment on the ruling, the Court set a trial on the remaining
issues for November 2001. Just prior to the start of the trial, the Court
strongly urged the parties to settle resulting in negotiations and a
-18-
Note I, continued
tentative settlement causing the trial to be vacated. The settlement was
completed in January 2002 and included payments of $.5 million and Allomatic
Products Company stock held by Smith and related parties to Raymark. Allomatic
Products Company is a majority-owned subsidiary of Raytech, of which Raytech
owns 57%. Smith and related parties owned approximately 40% prior to the
settlement with Raymark.
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 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. A study is underway to determine the
environmental conditions at the site, the Company's potential liability and
other potentially responsible parties. The Company's liability is indeterminable
at this time.
-19-
Note J - 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 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 March 31, 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 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, subject to a holdback provision (see Note G - Income Taxes).
In January 2002, the Company filed its 2001 Federal tax return for the Raytech
consolidated group and received a tax refund of $32.1 million of which $22.5
million was forwarded to the PI Trust and $9.7 million is being held as a
holdback amount and has been recorded as part of the Company's restricted cash.
The remaining current receivable of $6.1 million represents taxes due from state
governments and additional amounts due from the Federal Government due to
certain changes in the tax laws enacted in 2002. These returns were filed in
2002. At March 31, 2002, the Company has a payable to the PI Trust in the amount
of $15.9 million.
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 $6.8 million at
March 31, 2002, which should 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 $.6 million during
the thirteen-week period ended March 31, 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.
-20-
Note K - Restricted Cash
Restricted cash relates to the following:
For the 13 Weeks Ended
Successor Company
March 31, 2002 December 30, 2001
-------------- -----------------
Pension escrow $ 4,200 $3,000
Letters of credit 1,677 1,986
PI Trust 9,664 --
Other 410 410
------- ------
$15,951 $5,396
======= ======
The letters of credit collateralize certain obligations relating
primarily to workers' compensation. The PI Trust relates to the holdback amount
more fully discussed in Note G - Income Taxes. The pension escrow account is
discussed in Note J - Liquidity.
-21-
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
Raytech Corporation recorded net income of $1.3 million for the
thirteen-week period ended March 31, 2002 or $.03 per basic share compared to
$1.7 million or $.49 per basic share in the same period in the prior year. The
reduced earnings of $.4 million is due to the increased depreciation and
amortization recorded during the period due to the implementation of fresh-
start accounting in April 2001 upon Raytech's emergence from bankruptcy offset
by increased margins. The cost reduction programs implemented in 2001 improved
earnings on lower sales when comparing the period-over-period results.
In April 2001, Raytech Corporation emerged from the protection of
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.
Accounting Policies
The unaudited condensed consolidated financial statements include the
accounts of Raytech Corporation and its majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
The investment by third parties in Allomatic Products Company is accounted for
as minority interest in the Unaudited Condensed Consolidated Financial
Statements. There are no unconsolidated entities and Raytech does not use
Special Purpose Entities (SPE's). The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported and disclosures of contingent liabilities made
in the financial statements and accompanying notes. Actual results could differ
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.
-22-
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.
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.
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
-23-
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 F - 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% caused primarily by certain adjustments in the prior period related to the
bankruptcy process.
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, subject to a holdback provision.
At December 30, 2001, the Company has tax loss carryforwards of $30.2 million
and tax credit carryforwards of $4.9 million,
-24-
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 March 31,
2002.
The Company has filed for and received in 2002 Federal tax refunds of
$32 million. Pursuant to the Agreement, Raytech has paid over to the Trust $22.5
million of the refund and retained $9.7 million as required by the holdback
provision of the Agreement, which is included in restricted cash and as a
current payable to the PI Trust at March 31, 2002. Additionally, at March 31,
2002, the Company has recorded a tax receivable in the amount of $6.1 million
relating to $4.8 million due from state governments for returns filed in 2002
and $1.3 million in additional Federal tax refunds for the carryback period
related to certain tax law changes enacted in 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 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 March 31, 2002, if all of APC's earnings were to be distributed
through dividends.
Outlook
In developing the outlook for the 2002 year, the impact on the United
States and world economies from the terrorists' attack, which occurred on
September 11, 2001, is unknown. The U.S. automakers have responded to the
potential drop in demand with financing packages which have, through the end of
2001, increased sales. The impact from the terrorists' attack and the
retaliation by the United States will undoubtedly have an impact on the future
economy; however, at this point it is not possible to quantify that impact.
The Company's Wet Friction segment expects sales to decline in 2002 as
compared to the results recorded in 2001 by an estimated 5%. The reduction
reflects the continued slowdown in the automotive original equipment market as
the United States economy recovers at a slow pace 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 will begin in the second 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 decline in 2002 due to competitive pressure
-25-
on pricing and the loss of certain business due to foreign production. 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 planned expansion of our production facility in China. 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.
The Company's outlook for 2002 anticipates total revenues to be at 2001
levels as well as comparative operating profits. 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 in the world, the impact of the war
on terrorism on the economy and the level of uncertainty perceived by the
consumers in the markets the Company serves.
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 43 days. This allows for minimum
borrowings in supporting inventory and trade receivables. Management does not
anticipate a significant change in fiscal policy in any of its borrowing markets
in 2002 given current economic conditions. Further, the Company can reduce the
short-term impact of interest rate fluctuation through deferral of capital
investment should the need arise.
The local currencies of the Company's foreign subsidiaries have been
designated as their functional currencies. Accordingly, financial statements of
foreign operations are translated using the exchange rate at the balance sheet
date for assets and liabilities, historical exchange rates for elements of
stockholder's equity and an average exchange rate in effect during the period
for revenues and expenses. Where possible, the Company attempts to mitigate
foreign currency translation effects by borrowing in local currencies to fund
operations. The Company does not believe that the fluctuation in foreign
currency will have a material adverse effect on the Company's overall financial
condition. Additionally, the Company does not enter into agreements to manage
any currency transaction risks due to the immaterial amount of transactions of
this type.
-26-
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $15.5 million at March
31, 2002 compared to $14.5 million at December 30, 2001. Capital investment for
the three-month period totaled $2.8 million. The level of capital investment is
consistent with planned expenditures in both periods.
The debt at March 31, 2002 consists of the following:
Current Non-Current Total
-------- ----------- -------
Domestic bank debt $ 7,087 $2,500 $ 9,587
Foreign bank debt 3,489 3,808 7,297
Leases 147 218 365
------- ------ -------
Total outstanding debt $10,723 $6,526 $17,249
======= ====== =======
Available lines of credit:
Domestic $ 4,985
Foreign 1,512
-------
Total available $ 6,497
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 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 March 31, 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
-27-
Company not currently pledged as collateral for its existing debt. The Company
expects to be successful in receiving this waiver.
The Plan also set forth a Tax Benefits Assignment and Assumption
Agreement between the Company and the Raytech Corporation Asbestos Personal
Injury Settlement Trust (the "Trust"), which provides that the tax benefits
received by the Company due to the reorganization be passed onto the Trust as
received, subject to a holdback provision. See Note G to the Unaudited Condensed
Consolidated Financial Statements for more details. At December 30, 2001, the
Company had recorded as a current asset, Income Tax Receivable $37.9 million
with a corresponding liability, payable to the PI Trust. In January 2002, the
Company filed its 2001 Federal tax return for the Raytech consolidated group and
received a tax refund of $32.1 million of which $22.5 was forwarded to the Trust
and $9.7 is being held as a holdback amount. The remaining current receivable of
$6.1 million represents taxes due from state governments of $4.8 million, which
were filed in April 2002, and an additional $1.3 million in Federal tax refunds
for the carryback period related to certain rule changes enacted in 2002 by the
IRS.
The Company is under audit for 1996 through 2001. Any tax assessment,
up to the amount of the refunds received, arising from this audit, or the future
audit of the current year, 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 $6.8 million at
March 31, 2002, which should 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 $.6 million during
the thirteen- week period ended March 31, 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.
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.
-28-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2.
-29-
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 given notice that it intends
to comply with the Order and has designated a contractor and project coordinator
as required. RPC prepared a plan for implementation and has begun carrying out
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 $2.3 million
has been spent through March 31, 2002. The remaining balance of $6.8 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.
In December 1998, the trustee of Raymark, Raytech and the Raytech
creditors' committee joined in filing an adversary proceeding (complaint)
against Craig R. Smith, et al. (including relatives, business associates and
controlled corporations) in the U.S. District Court in Hartford, Connecticut,
captioned Laureen Ryan, Trustee, et al. vs. Craig R. Smith, et al. alleging a
systematic stripping of assets belonging to Raymark in an elaborate and ongoing
scheme perpetrated by the defendants. The alleged fraudulent scheme extended
back to the 1980's and continued up to this action and enriching the Smith
family by an estimated $12 million and their associates, while depriving Raymark
and its creditors of nearly all of its assets amounting to more than $27
million. Upon motion of the plaintiffs, the Court issued a temporary restraining
order stopping Mr. Smith and all defendants from dissipating, conveying,
encumbering or otherwise disposing of any assets, which order was amended
several times and became a preliminary injunction. A motion for summary judgment
was filed by the plaintiffs and was ruled upon in March 2001. The Court ruled
that defendants (Smith, et al.) as fiduciaries owed a duty to Raymark's
creditors, that the transfer of $8.5 million of funds, specifically earmarked
for tort claims, to Smith related entities was a breach of that
-30-
fiduciary duty, was a fraudulent transfer and was an unjust enrichment to the
Smith family. Pending final judgment on the ruling, the Court set a trial on the
remaining issues for November 2001. Just prior to the start of the trial, the
Court strongly urged the parties to settle resulting in negotiations and a
tentative settlement causing the trial to be vacated. The settlement was
completed in January 2002 and included payments of $.5 million cash and
Allomatic Products Company stock held by Smith and related parties to Raymark.
Allomatic Products Company is a majority-owned subsidiary of Raytech, of which
Raytech owns 57%. Smith and related parties owned approximately 40% prior to the
settlement with Raymark.
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 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. A study is underway to determine the
environmental conditions at the site, the Company's potential liability and
other potentially responsible parties. The Company's liability is undeterminable
at this time.
-31-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on 8-K
None
-32-
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: May 13, 2002
-33-