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 July 1, 2001, 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 Sections 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 13, 2001, 41,536,444 shares of the Registrant's
common stock, par value $1.00, were issued and outstanding.
Page 1 of 49
RAYTECH CORPORATION
INDEX
Page Number
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance
Sheets at July 1, 2001 (Unaudited)
and December 31, 2000 3
Condensed Unaudited Consolidated Statements
of Operations for April 2, 2001, the period
from April 3, 2001 to July 1, 2001 and the
period from April 3, 2000 to July 2, 2000 5
Condensed Unaudited Consolidated Statements of
Operations for the period from January 1, 2001
to April 2, 2001, the period from April 3, 2001
to July 1, 2001 and the period from January 3,
2000 to July 2, 2000 6
Condensed Unaudited Consolidated Statements
of Cash Flows for the period from January 1, 2001
to April 2, 2001, the period from April 3, 2001
to July 1, 2001 and the period from January 3,
2000 to July 2, 2000 7
Condensed Unaudited Consolidated Statements of
Changes in Shareholders' Equity for the period
from January 1, 2001 to April 2, 2001, the
period from April 3, 2001 to July 1, 2001 and
the period from January 3, 2000 to July 2, 2000 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 41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 42
Item 2. Changes in Securities and Use of Proceeds 46
Item 4. Submission of Matters to a Vote of
Security Holders 47
Item 6. Exhibits and Reports on Form 8-K 48
Signature 49
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
Successor Predecessor
Company Company
July 1, 2001 Dec. 31,
At (Unaudited) 2000
ASSETS
Current assets
Cash and cash equivalents $ 15,294 $ 13,917
Trade accounts receivable, net 28,009 24,487
Inventories 30,731 33,322
Income taxes receivable 36,125 -
Other current assets 5,194 6,459
Total current assets 115,353 78,185
Property, plant and equipment 114,497 189,659
Less accumulated depreciation (3,395) (106,954)
Net property, plant and equipment 111,102 82,705
Intangible assets, net 69,995 19,499
Deferred income taxes 6,757 137,147
Other assets 2,641 2,780
Total assets $ 305,848 $ 320,316
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)(cont.)
Successor Predecessor
Company Company
July 1, 2001 Dec. 31,
At (Unaudited) 2000
LIABILITIES
Current liabilities
Notes payable $ 8,438 $ 10,308
Current portion of long-term debt - Raymark - 10,631
Current portion of long-term debt 3,155 -
Current portion of pension obligation 9,104 236
Accounts payable 14,596 13,070
Accrued liabilities 17,408 22,538
Payable to the PI Trust 36,125 -
Total current liabilities 88,826 56,783
Liabilities subject to compromise - 7,211,433
Long-term debt 8,153 9,053
Pension obligations 5,320 1,714
Postretirement benefits other than pensions 12,597 13,150
Deferred payable to the PI Trust 28,065 -
Other long-term liabilities 7,581 7,321
Total liabilities 150,542 7,299,454
Commitments and Contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock
Cumulative preferred stock, no par value
5,000,000 (Successor Company), 800,000 (Predecessor
Company) shares authorized, none issued and
outstanding - -
Common stock (Successor Company), par value $1.00,
50,000,000 shares authorized, 41,536,444 issued and
outstanding 41,536 -
Common stock (Predecessor Company), par value $1.00,
7,500,000 shares authorized, 5,651,372 issued and
outstanding - 5,651
Additional paid in capital 116,835 70,631
Accumulated deficit (2,395) (7,049,641)
Accumulated other comprehensive loss (670) (1,218)
155,306 (6,974,577)
Less treasury shares at cost - (4,561)
Total shareholders' equity (deficit) 155,306 (6,979,138)
Total liabilities and shareholders' equity (deficit) $ 305,848 $ 320,316
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Predecessor Company
Successor Company for For the Period
for the Period April 2, April 3, 2000
April 3, 2001 to 2001 to July 2,
July 1, 2001 (See Note B) 2000
Net Sales $ 50,561 $ - $ 61,122
Cost of sales (45,998) - (46,298)
Gross profit 4,563 - 14,824
Selling and administrative expenses (7,484) - (8,157)
Operating (loss) profit (2,921) - 6,667
Interest expense (310) - (471)
Interest expense - Raymark - - (70)
Reorganization items (385) 94,834 -
Other income, net 289 318
(Loss) income before provision for asbestos
litigation, provision for environ-
mental and other claims, income taxes
minority interest and extraordinary items (3,327) 94,834 6,444
Provision for environmental and other claims - - (447,750)
Provision for asbestos litigation - - (6,760,000)
(Loss) income before income taxes, minority
interest and extraordinary items (3,327) 94,834 (7,201,306)
Income tax benefit (provision) 1,238 (29,126) 137,761
(Loss) income before minority
interest and extraordinary items (2,089) 65,708 (7,063,545)
Minority interest (306) - (283)
(Loss) income before extraordinary items (2,395) 65,708 (7,063,828)
Extraordinary items, net of tax of $131,066 - 6,927,834 -
Net (loss) income $ (2,395) $ 6,993,542 $(7,063,828)
Basic loss per share $ (.06) (a) $ (2,023.70)
Diluted loss per share $ (.06) (a) $ (2,023.70)
(a) Earnings per share is not meaningful for the one-day results.
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Predecessor Company
For the Period
Successor Company January 1, 2001 For the Period
for the Period to April 2, Jan. 3, 2000
April 3, 2001 to 2001 to July 2,
July 1, 2001 (See Note B) 2000
Net Sales $ 50,561 $ 55,205 $ 128,597
Cost of sales (45,998) (43,811) (95,664)
Gross profit 4,563 11,394 32,933
Selling and administrative expenses (7,484) (7,742) (16,891)
Operating (loss) (2,921) 3,652 16,042
Interest expense (310) (374) (980)
Interest expense - Raymark - (70) (140)
Reorganization items (385) 94,834
Other income, net 289 290 628
(Loss) income before provision for asbestos
litigation, provision for environ-
mental and other claims, income taxes,
minority interest and extraordinary items (3,327) 98,332 15,550
Provision for environmental and other claims - - (447,750)
Provision for asbestos litigation - - (6,760,000)
(Loss) income before income taxes, minority
interest and extraordinary items items (3,327) 98,332 (7,192,200)
Income tax benefit (provision) 1,238 (30,595) 133,936
(Loss) income before minority
interest and extraordinary items (2,089) 67,737 (7,058,264)
Minority interest (306) (314) (744)
(Loss) income before extraordinary items (2,395) 67,423 (7,059,008)
Extraordinary items, net of tax of $131,066 - 6,927,834 -
Net (loss) income $ (2,395) $6,995,257 $(7,059,008)
Basic (loss) earnings per share $ (.06) $ 1,778.85 $ (2,025.12)
Diluted (loss) earnings per share $ (.06) $ 1,772.58 $ (2,025.12)
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Predecessor Company
Successor Company For the Period For the Period
for the Period January 1, 2001 Jan. 3, 2000
April 3, 2001 to to April 2, to July 2,
July 1, 2001 2001 2000
Cash flows from operating activities:
Net (loss) income $ (2,395) $ 6,995,257 $(7,059,008)
Adjustments to reconcile net (loss)
income to net cash provided
by operations:
Deferred income tax (3) 29,144 (140,470)
Depreciation and amortization 3,951 3,382 6,385
Reorganization items:
Fresh-start adjustments - (94,834) -
Extraordinary items - (6,927,834) -
Provision for asbestos litigation,
environmental and other claims - - 7,207,750
Income applicable to minority interest,
net of dividends 306 314 744
Changes in operating assets and
liabilities and other items 5,823 (5,418) 325
Net cash provided by
operating activities 7,682 11 15,726
Cash flow from investing activities:
Capital expenditures (3,370) (2,717) (6,831)
Proceeds on sales of property,
plant and equipment 35 10 84
Net cash used in investing activities (3,335) (2,707) (6,747)
Cash flow from financing activities:
Cash overdraft - (371) (993)
Net (payments) borrowings under line of
credit agreement (381) 1,544 -
Net proceeds (payments) on short-term
borrowings (27) 569 (4,822)
Principal payments on long-term borrowings (372) (482) (186)
Proceeds from long-term borrowings 36 32 403
Net payments on borrowings from Raymark - (703) (3,404)
Proceeds from exercise of stock options 19 - 105
Net cash (used in) provided by
financing activities (725) 589 (8,897)
Effect of exchange rate changes on cash (60) (78) (40)
Net change in cash and cash equivalents 3,562 (2,185) 42
Cash and cash equivalents at
beginning of period 11,732 13,917 10,746
Cash and cash equivalents at end of period $ 15,294 $11,732 $ 10,788
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
(unaudited)
PREDECESSOR COMPANY:
Retained Accumulated Treasury Shares
Additional Earnings Other At Cost
Common Paid in (Accumulated Comprehensive (2,132,059
Stock Capital Deficit) Loss Shares) Total
Balance,
January 2, 2000 $ 5,613 $ 70,564 $ 9,337 $ (165) $(4,561) $80,788
Comprehensive loss:
Net loss (7,059,008) (7,059,008)
Changes during
the period (540) (540)
Total comprehensive loss (7,059,008) (540) (7,059,548)
Stock options exercised
(38,409 shares) 38 67 105
Balance,
July 2, 2000 $ 5,651 $ 70,631 $(7,049,671) $ (705) $(4,561) $(6,978,655)
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 35,878 46,192 54,384 1,502 4,561 142,517
Balance,
April 2, 2001 $41,529 $116,823 $ - $ - $ - $ 158,352
SUCCESSOR COMPANY:
Balance,
April 2, 2001 $41,529 $116,823 $ - $ - $ - $ 158,352
Comprehensive income:
Net loss (2,395) (2,395)
Changes during
the period (670) (670)
Total comprehensive
income (2,395) (670) (3,065)
Stock options exercised
(6,596) 7 12 19
Balance,
July 1, 2001 $ 41,536 $116,835 $ (2,395) $ (670) $ - $ 155,306
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted,
except share and per share data)
(Unaudited)
NOTE A - Formation of Raytech Corporation, Sale of Raymark,
Chapter 11 Proceeding
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. Representing part of
the consideration of the transactions, Raymark agreed to indemnify
Raytech for Raymark's liabilities, including asbestos,
environmental, pension and others. 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 an asbestos-related personal injury case captioned
Raymond A. Schmoll v. ACandS, Inc., et al. 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 on the grounds stated in the District
Court's opinion. The effect of this decision extended beyond the
Oregon District due to a Third Circuit Court of Appeals decision in
a related case cited below wherein Raytech was collaterally estopped
(precluded) from relitigating the issue of its successor liability
for Raymark's asbestos-related liabilities.
As the result of the inability of Raymark to fund Raytech's
cost of defense under the indemnity and to halt 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 the U.S. Supreme Court,
the Schmoll 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 Court rulings recited above, 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 and any and all refunds of taxes resulting from the
transfer of equity to an asbestos personal injury trust (the "PI
Trust") established under the Bankruptcy Code, and existing equity
holders in Raytech to retain 10% of the equity in Raytech.
As a result of the final estimation of 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. On the Effective
Date, 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 is
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 and the Raymark retiree benefit claims though the outcome of
these claims is still subject to final Court decision. Settlement
of the Raymark claims resulted in cancellation in full of the
NOTE A, continued
Raymark debt and accrued interest of $12.0 million and a commitment
of Raytech to backstop the Raymark Trustee and related professional
fees in the event the Raymark Trustee has insufficient recovery of
funds for such purposes up to $1 million. 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.
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 July 1, 2001 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 financial information after that date is presented
as pertaining to the Successor Company. April 2, 2001 is the only
day subsequent to the Company's first quarter that relates to the
Predecessor Company, and the remaining days in the period from
April 3, 2001 to July 1, 2001 relate 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. For
financial reporting purposes, the results of the Predecessor Company
and the Successor Company cannot be combined. Accordingly, the
Statements of Operations include the results of the reorganization
and fresh-start adjustments for the one day, April 2, 2001, and for
the period January 1, 2001 to April 2, 2001 as Predecessor Company
information. The year-end condensed consolidated historic 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 31, 2000. Interim results are not necessarily
indicative of the results for the full year.
Certain amounts for prior periods have been reclassified to
conform with current year presentation.
NOTE C - Fresh-Start Reporting
The Effective Date of the Company's emergence from bankruptcy
was April 18, 2001; however, for accounting purposes it is considered
to be the close of business on April 2, 2001. As of April 2, 2001,
the Company adopted fresh-start reporting pursuant to the guidance
provided by 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"). In
accordance with fresh-start reporting, all assets and liabilities are
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 is approximately
$313 million, which was approximately $31 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" (see Note M).
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:
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 - 36,125 (c) 36,125
Other current assets 7,759 2,500 (a) (1,997)(f) 8,262
Total current assets 81,288 36,125 3,926 121,339
Net property, plant and
equipment 82,138 30,168 (d) 112,306
Goodwill 18,923 11,937 (e) 30,860
Other intangible assets 375 39,316 (g) 39,691
Deferred income taxes 137,202 (103,001)(f)(c) (27,441)(f) 6,760
Other assets 2,957 2,957
Total assets $ 322,883 $ (66,876) $ 57,906 $ 313,913
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 - 36,125 (c) 36,125
Total current liabilities 57,927 36,141 134 94,202
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) (6,316)(k) 5,320
Postretirement benefits
other than pensions 13,404 (1,308)(k) 12,096
Deferred payable to the PI Trust - 28,065 (c) 28,065
Other long-term liabilities 7,654 (312)(f) 7,342
Total liabilities 7,300,590 (7,137,227) (7,802) 155,561
Total shareholders'
(deficit) equity (6,977,707) 7,070,351 (l) 65,708 (m) 158,352
Total liabilities and
shareholders' (deficit) equity $ 322,883 $ (66,876) $ 57,906 $313,913
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 M).
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 M).
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.
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 - Reorganization Items
Reorganization income (expense) included in the accompanying
Consolidated Statements of Operations consist of the following items:
Successor Company Predecessor Company
for the Period
April 3, 2001 to for
July 1, 2001 April 2, 2001
Fresh-start adjustments $ - $ 94,834
Professional fees (385) -
$ (385) $ 94,834
The fresh-start adjustments are discussed in Note C. The
professional fees listed above include accounting, legal, consulting,
appraiser and other miscellaneous services associated with the
implementation of the Plan. There were no reorganization items for any
periods prior to April 2, 2001 due to the indemnification agreement
between Raytech and Raymark, which allowed for all bankruptcy-related
costs to be offset against the outstanding Raytech debt to Raymark.
NOTE E - 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:
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 (131,066)
Extraordinary gain on debt discharge $ 6,927,834
NOTE F - Inventories
Net inventories consist of the following:
Successor Company Predecessor Company
July 1, 2001 December 31, 2000
Raw material $ 9,180 $ 10,685
Work in process 7,192 8,165
Finished goods 14,359 14,472
$ 30,731 $ 33,322
NOTE F, continued
In connection with the implementation of fresh-start reporting on
April 2, 2001, the Company adjusted the value of its inventories by $5.9
million on the Effective Date to their estimated selling prices less
costs to complete, cost of disposal and a reasonable profit allowance
for the completing and selling effort as required by fresh-start
reporting. This adjustment of $5.9 million was recorded in the
Statement of Operations during the period April 3, 2001 to July 1, 2001
as the inventory was sold.
NOTE G - Property, Plant and Equipment
Property, plant and equipment - net consists of the following
Successor Predecessor
Company Company
July 1, 2001 Dec. 31, 2000
Land $ 3,852 $ 1,688
Buildings and improvements 28,450 31,170
Machinery and equipment 73,418 149,739
Capital leases 731 764
Construction in progress 8,046 6,298
114,497 189,659
Less: accumulated depreciation (3,395) (106,954)
Net property, plant and equipment $ 111,102 $ 82,705
In connection with the implementation of fresh-start reporting, the
Company adjusted the value of property, plant and equipment to reflect
the fair values of the assets by an independent appraisal.
Note H - Earnings Per Share
Predecessor Company
Successor Company for the Period
for the Period for April 3, 2000
April 3, 2001 to April 2, to July 2,
July 1, 2001 2001 2000
Basic EPS Computation
Numerator:
Net loss $ (2,395) $(7,063,828)
Denominator:
Weighted average shares 41,529,848 3,480,904
Stock options exercised 2,964 9,655
Adjusted weighted average shares 41,532,812 3,490,559
Basic loss per share $ (.06) (a) $ (2,023.70)
Diluted EPS Computation
Numerator:
Net loss $ (2,395) $(7,063,828)
Denominator:
Weighted average shares 41,529,848 3,480,904
Stock options exercised 2,964 9,655
Adjusted weighted average shares 41,532,812 3,490,559
Diluted loss per share $ (.06) (a) $(2,023.70)
(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. In addition, options to
purchase 493,775 shares of common stock at $4.25 were outstanding during the
period from April 3, 2000 to July 2, 2000. 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 and 44,420 options
for the period from April 3, 2001 to July 1, 2001 and April 3, 2000 to July 2,
2000, respectively, were not included in the computation of diluted earnings
per share because of their anti-dilutive effect.
In connection with the Plan of Reorganization, 38 million shares were issued.
NOTE H, continued
Predecessor Company
Successor Company For the Period For the Period
for the Period January 1, 2001 Jan. 3, 2000
April 3, 2001 to to April 2, to July 2,
July 1, 2001 2001 2000
Basic EPS Computation
Numerator:
(Loss) income before
extraordinary items $ (2,395) $ 67,423 $(7,059,008)
Extraordinary items - 6,927,834 -
Net (loss) income available
(attributable) to common
shareholders $ (2,395) $ 6,995,257 $(7,059,008)
Denominator:
Weighted average shares 41,529,848 3,519,313 3,480,904
Weighted average shares issued
as a result of reorganization - 413,158 -
Stock options exercised 2,964 - 4,827
Adjusted weighted average shares 41,532,812 3,932,471 3,485,731
Basic (loss) earnings per share:
(Loss) income before
extraordinary items $ (.06) $ 17.15 $ (2,025.12)
Extraordinary items - 1,761.70 -
Net (loss) income $ (.06) $ 1,778.85 $ (2,025.12)
NOTE H, continued
Predecessor Company
Successor Company For the Period For the Period
for the Period January 1, 2001 Jan. 3, 2000
April 3, 2001 to to April 2, to July 2,
July 1, 2001 2001 2000
Diluted EPS Computation
Numerator:
(Loss) income before
extraordinary items $ (2,395) $ 67,423 $(7,059,008)
Extraordinary items - 6,927,834 -
Net (loss) income available
(attributable) to common
stockholders $ (2,395) $ 6,995,257 $(7,059,008)
Denominator:
Weighted average shares 41,529,848 3,519,313 3,480,904
Weighted average shares issued
as a result of reorganization 413,158
Stock options exercised 2,964 - 4,827
Dilutive potential common shares - 13,897 -
Adjusted weighted average shares
and equivalents 41,532,812 3,946,368 3,485,731
Diluted (loss) earnings per share:
(Loss) income before
extraordinary items $ (.06) $ 17.08 $ (2,025.12)
Extraordinary items - 1,755.50 -
Net (loss) income $ (.06) $ 1,772.58 $ (2,025.12)
1018:
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. In addition, options
to purchase 493,775 and 495,000 shares of common stock at $4.25 were
outstanding during the period from January 1, 2001 to April 2, 2001 and
January 3, 2000 to July 2, 2000, 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 and 50,011
options for the period from April 3, 2001 to July 1, 2001 and January 3, 2000 to
July 2, 2000,
respectively, were not included in the computation of diluted earnings per
share because of their anti-dilutive effect.
In connection with the Plan of Reorganization, 38 million shares were issued.
1035:
NOTE I - 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.
Information relating to operations by industry segment follows:
NOTE I, continued
OPERATING SEGMENTS
Predecessor Company
Successor Company For the Period
for the Period for April 3, 2000
April 3, 2001 to April 2, to July 2,
July 1, 2001 2001 2000
Wet Friction
Net sales to external customers $ 30,911 - $ 38,880
Intersegment net sales (1) 1,701 - 3,435
Total net sales $ 32,612 - $ 42,315
Operating profit (2) $ 2,005 - $ 4,820
Aftermarket
Net sales to external customers $ 12,215 - $ 14,971
Intersegment net sales (1) - - 4
Total net sales $ 12,215 - $ 14,975
Operating profit (2) $ 1,983 - $ 2,646
Dry Friction
Net sales to external customers $ 7,435 - $ 7,271
Intersegment net sales (1) 21 - 232
Total net sales $ 7,456 - $ 7,503
Operating profit (loss) (2) $ 445 - $ (72)
Corporate
Operating (loss) profit before provision
for asbestos litigation,
environmental and other claims $ (7,760) $ 94,834 $ (950)
Provision for asbestos litigation,
environmental and other claims - - (7,207,750)
Operating (loss) profit (2,3) $ (7,760) $ 94,834 $(7,208,700)
Total Segments
Net sales to external customers $ 50,561 - $ 61,122
Intersegment net sales (1) 1,722 - 3,671
Total net sales $ 52,283 - $ 64,793
Consolidated operating (loss) profit $ (3,327) $ 94,834 $(7,201,306)
(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 (loss)
before tax, minority interest and extraordinary items.
(3) Represents compensation and related costs for employees of the Company's
corporate headquarters, professional fees, shareholder fees and public
relations expenses; and includes a charge in 2000 of $7.2 billion for
liabilities subject to compromise (see Note A) and in 2001 the effects
of the Plan of Reorganization (see Note C).
Note I, continued
OPERATING SEGMENTS
Predecessor Company
Successor Company For the Period For the Period
for the Period Jan. 1, 2001 Jan. 3, 2000
April 3, 2001 to April 2, to July 2,
July 1, 2001 2001 2000
Wet Friction
Net sales to external customers $ 30,911 $ 34,073 $ 82,929
Intersegment net sales (1) 1,701 2,974 6,572
Total net sales $ 32,612 $ 37,047 $ 89,501
Operating profit (2) $ 2,005 $ 1,327 $ 11,182
Aftermarket
Net sales to external customers $ 12,215 $ 13,101 $ 29,988
Intersegment net sales (1) - 10 12
Total net sales $ 12,215 $ 13,111 $ 30,000
Operating profit (2) $ 1,983 $ 2,109 $ 5,245
Dry Friction
Net sales to external customers $ 7,435 $ 8,031 $ 15,680
Intersegment net sales (1) 21 116 548
Total net sales $ 7,456 $ 8,147 $ 16,228
Operating profit (2) $ 445 $ 754 $ 937
Corporate
Operating (loss) profit before
provision for asbestos litigation,
environmental and other claims $ (7,760) $ 94,142 $ (1,814)
Provision for asbestos litigation,
environmental and other claims - - (7,207,750)
Operating (loss) profit (2,3) $ (7,760) $ 94,142 $(7,209,564)
Total Segments
Net sales to external customers $ 50,561 $ 55,205 $ 128,597
Intersegment net sales (1) 1,722 3,100 7,132
Total net sales $ 52,283 $ 58,305 $ 135,729
Consolidated operating (loss) profit $ (3,327) $ 98,332 $(7,192,200)
(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 (loss)
before tax, minority interest and extraordinary items.
(3) Represents compensation and related costs for employees of the Company's
corporate headquarters, professional fees, shareholder fees and public
relations expenses; and includes a charge in 2000 of $7.2 billion for
liabilities subject to compromise (see Note A) and in 2001 the effects of
the plan of reorganization (see Note C).
NOTE J - Income Taxes
For tax reporting purposes, the Company's emergence from
bankruptcy did not create a new tax reporting entity. Accordingly,
the adjustments to adopt fresh-start accounting are not applicable for
the Company's tax reporting. Therefore, with the exception of
goodwill, these adjustments have created new deferred tax items.
The Company's effective tax rate for the twenty-six-week period
ended July 1, 2001 is 135% and for the period April 3, 2001 through
July 1, 2001 is 37%. The effective tax rate for the twenty-six-week
period ended July 1, 2001 differs from the U.S. federal statutory tax
rate primarily due to the profitable operations of the Company's
German and majority-owned subsidiaries, which could not be offset
within certain tax jurisdictions by losses incurred by other operating
entities.
The Company's effective tax rate of 37% for the period April 3,
2001 through July 1, 2001 differs from the U.S. federal statutory tax
rate primarily due to the adjustment in the current period to reflect
the Company's annualized effective tax rate versus the 42% rate used
in the first quarter.
The Company had recorded a deferred tax asset of $2.8 billion in
2000 relating to the tax effects of the Liabilities Subject to
Compromise. Based on its historical domestic taxable income, the
Company expected to realize approximately $140 million of the deferred
tax asset, and accordingly, it recorded a valuation allowance of $2.6
billion against the deferred tax asset to state it at its expected net
realizable value. As a result of the settlement of the Liabilities
Subject to Compromise for substantially less than the recorded amount
of allowed claims as part of the Company's plan of reorganization, the
net deferred tax amount was adjusted accordingly. As of July 1, 2001,
the valuation allowance was approximately $.3 million relating to net
operating loss carryforwards in certain foreign tax jurisdictions.
The effective tax rate for the twenty-six-week and thirteen-week
periods ended July 2, 2000 was 42%, excluding the valuation allowance
recorded against the deferred tax benefit with respect to the
Liabilities Subject to Compromise recorded during those periods. This
rate differs from the U.S. federal statutory tax rate primarily due to
the effects of state and foreign taxes.
The Company has in process an Internal Revenue Service tax audit
for the fiscal years 1996 through 1999. The IRS has proposed
disallowance of $9.9 million of bankruptcy related costs from 1996
through 1998, which are included in the indemnification agreement with
Raymark. The Company has deducted approximately $14.0 million of such
costs during the period under audit and continues to believe these
costs are deductible. The ultimate resolution of the Company's
liability, if any, is dependent on the interpretation of a complex set
of facts and applicable legal precedents. While the Company and its
NOTE J, continued
advisors believe the Company's applicable legal precedents. While the
Company and its advisors believe the Company's position is supported
by the facts and the weight of the legal precedents, it is reasonably
possible, through a different factual analysis and application of
countervailing legal authority, that a final determination could be
adverse to the Company. As such, the Company intends to contest the
proposed disallowance and has not recorded any related provisions.
Should the IRS ultimately prevail in its claim, any adjustment related
to prior year taxes would be offset by a reduction in the amounts
payable to the PI Trust.
NOTE K - 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. 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 is preparing a plan for implementing and
carrying out the cleanup Order. Based on preliminary assessments, the
Company has estimated that the cost to comply with the Order will be
in the range of $3 million to $6 million and has recorded a liability
in the amount of $3 million. It is at least reasonably possible that
the preliminary assessment of estimated costs to comply with the Order
may be modified as the project progresses.
NOTE K, continued
In December 1998, a subsidiary of the Company filed a complaint
against a former administrative financial manager of Advanced Friction
Materials Company ("AFM") in the U.S. District Court, Eastern District
of Michigan, captioned Raytech Composites, Inc. vs. Richard Hartwick,
et ux. alleging that he wrongfully converted Company monies in his
control to his own use and benefit in an amount greater than $3.3
million prior to the April 1998 completion of the acquisition of AFM
as discussed in the following paragraph. In December 1999, the
District Court ruled on summary judgment in favor of Raytech on its
claim against Hartwick in the amount of $3.33 million. A
constructive trust had been ordered by the Court providing ownership
to Raytech of four real estate properties purchased by Hartwick with
the converted funds. The four properties have been sold resulting in
a net recovery of $1.4 million. In May 2000, Hartwick pled guilty to
embezzlement and was sentenced for 2 to 15 years in the Michigan State
Penitentiary. A restitution order was granted to the Company in the
amount of $1.33 million.
In April 1998, AFM redeemed 53% of its stock from the former
owner for a formulated amount of $6.044 million, $3.022 million paid
at closing and the balance of $3.022 million payable by note in three
equal annual installments resulting in the Company attaining 100%
ownership of AFM. In April 1999, an adversary proceeding was filed in
the Connecticut Bankruptcy Court against the former owner captioned
Raytech Corporation, et al. vs. Oscar E. Stefanutti, et al. to recover
$1.5 million of the amount paid for the AFM stock and to
obtain a declaratory judgment that the balance of $3.022 million is
not owed based upon the judgment that a fraud was perpetrated upon the
Company related to the Hartwick case referenced above. In September
1999, the Bankruptcy Court granted jurisdiction of the case but
exercised discretionary abstention to enable the Court to focus on
issues impeding the Plan confirmation. In June 1999, the former owner
filed an action against the Company in a County Court in Michigan
captioned Oscar E. Stefanutti, et al. vs. Raytech Automotive
Components Company to enforce payment of the note. Discovery has been
completed, and cross motions for summary judgment are being considered
by the Court. A trial date has been rescheduled for August 2001.
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) 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 has
enriched the Smith family by an estimated $12 million and has greatly
profited 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 Bankruptcy Court issued a temporary
restraining order stopping Mr. Smith and all defendants from
NOTE K, continued
dissipating, conveying, encumbering or otherwise disposing of any
assets, which order was amended several times and became a preliminary
injunction, which remains in effect. The reference to the Bankruptcy
Court has been withdrawn, and the matter is now being litigated in the
U.S. District Court in Connecticut. A motion for summary judgment was
filed by the plaintiffs and was ruled upon in part in March 2000 but
was subject to proof of standing to file the claim. On March 30,
2001, the Court granted plaintiff's motion for reconsideration and
ruled on summary judgment that as of May 1997 Raymark was insolvent
and that defendants (Smith, et al.) as fiduciaries owed a duty to
Raymark's creditors. The Court further ruled 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 ordered the parties to
attempt to settle the litigation which has failed. Accordingly, the
Court has set trial on the remaining issues in the case to November
2001 after which final judgment will be rendered. All litigation
costs in this case will be supported by Raytech pursuant to the
Settlement Agreement with Raymark of April 2001 referred to in Note A
above.
NOTE L - Liquidity
In connection with the bankruptcy proceedings, Raytech assumed
the liabilities of $.6 million relating to the Raymark retiree medical
claims arising from certain terminated plans and $11.2 million for
underfunded Raymark pension plans. The pension plans have a current
unfunded liability of $8.5 million, of which $6.5 million is due and
payable on September 16, 2001 and $2.0 million is due and payable
within the next year. There could also be interest and penalties
owing to the Internal Revenue Service.
The Plan also set forth a Tax Refund assignment agreement between
the Company and the PI Trust, which provides for the tax benefits
received by the Company due to the reorganization to be passed on to
the PI Trust as received, subject to a holdback provision.
Management believes that existing cash balances, availability
under its existing credit facilities and cash flow from operations
during 2001 will be sufficient to meet all of the Company's
obligations arising in the normal course of business, including
anticipated capital investments and all obligations arising from the
emergence from bankruptcy.
NOTE M - 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 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 indicates 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 has adopted SFAS No. 141 and No. 142 as of
April 3, 2001. All intangible assets and goodwill have been valued at
fair value as of the date of fresh-start reporting.
Successor Company Predecessor Company
July 1, 2001 December 31, 2000
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Finite life intangible assets:
Unpatented technology $ 16,262 $ 485 $ - $ -
Distribution base 5,716 71 - -
Sub-total 21,978 $ 556 - -
Indefinite life intangible
assets:
Trademarks 17,713 - -
Goodwill 30,860 21,620 2,121
Intangible assets, net $ 69,995 $ 19,499
The weighted-average amortization periods for the unpatented technology
and the distribution base are 8 and 20 years, respectively.
Amortization expense for the period from April 3, 2001 to July 1, 2001
amounted to $556. Estimated annual amortization expense is as follows:
NOTE M, continued
For the year ending:
2001 $ 1,670
2002 2,226
2003 2,226
2004 2,226
2005 2,226
As allowed 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 period from April 3, 2001 to July 1, 2001.
Reported net income presented exclusive of amortization expense
(including any related tax effects) recognized in prior periods
relating to goodwill of the Predecessor Company would have been:
Predecessor Company
Period from Period from Period from
January 1, 2001 April 3, 2000 January 3, 2000
to April 1, 2001 to July 2, 2000 to July 2, 2000
Reported net income (loss) $ 1,715 $(7,063,828) $(7,059,008)
Add back goodwill amortization 207 207 414
Adjusted net income (loss) $ 1,922 $(7,063,621) $(7,058,594)
Basic earnings (loss) per share:
Reported net income (loss) $ .49 $ (2,023.70) $ (2,025.12)
Goodwill amortization .06 .06 .12
Adjusted net income (loss) $ .55 $ (2,023.64) $ (2,025.00)
Diluted earnings (loss) per share:
Reported net income $ .48 $ (2,023.70) $ (2,025.12)
Goodwill amortization .06 .06 .12
Adjusted net income (loss) $ .54 $ (2,023.64) $ (2,025.00)
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, Liquidity and Capital Resources
In April 2001 Raytech Corporation emerged from the protection of
Bankruptcy Court under Chapter 11 of Title 11 of the United States
Code. Raytech Corporation had been under the Chapter 11 protection
since May 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
Certificated 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 period subsequent to April 2, 2001 has been designated "Successor
Company." In accordance with fresh-start reporting, all assets and
liabilities are recorded at their respective fair market values. The
fair value of substantially all of the Company's long-lived assets
were determined using information provided by third-party appraisers.
Further, the Company, in accordance with SOP 90-7, has adopted
those changes in accounting principles, which will be required within
the next twelve months. Specifically, the Company has adopted
Statements of Financial Accounting Standards Nos. 141 - "Business
Combinations" and 142 - "Goodwill and Other Intangible Assets" as of
April 2, 2001. See Note M to the Unaudited Condensed Consolidated
Financial Statements.
The Company has determined that the most meaningful presentation
of financial information would be to provide comparative analysis of
the financial performance for the Successor Company for the period
April 3, 2001 through July 1, 2001 compared to the predecessor
financial information for the period April 3, 2000 to July 2, 2000.
This is designated below as Successor Company discussion and analysis.
Additionally, the Predecessor Company financial analysis detailed
below analyzes the financial performance of Raytech Corporation for
the thirteen-week periods ended April 1, 2001 and April 2, 2000.
The adjustments relating to the recording of reorganization
expenses and other fresh-start adjustments for the one-day period
ended April 2, 2001 are detailed in Note C to the unaudited condensed
consolidated financial statements.
The Company has elected not to present a comparative analysis for
the twenty-six-week periods ended July 1, 2001 and July 2, 2000 since
such information in the current period would require consolidating
statements of the Predecessor Company and the Successor Company. It
was determined that the significance of the adjustments relating to
the emergence from bankruptcy would render such an analysis not
meaningful.
Raytech Corporation recorded a net loss for the period from
April 3, 2001 to July 1, 2001 of $2.4 million or $.06 per basic share
as compared to a net loss of $7.064 billion or $(2,023.70) per basic
share for the thirteen-week period ended July 2, 2000. In the
thirteen-week period ended July 2, 2000 the Company recorded certain
charges and related liabilities based on estimated asbestos-related
personal injury liabilities of $6.760 billion, estimated Government's
claim for certain environmental liabilities of $431.8 million and
estimated liabilities for Raymark pension plans of $16 million. These
were recorded as Liabilities Subject to Compromise at that time.
Effective April 2, 2001, the Company recorded certain adjustments,
detailed in Note C to the Unaudited Condensed Consolidated Financial
Statements, relating to the emergence from bankruptcy. The
Liabilities Subject to Compromise have been settled with the third
party creditors in exchange for 90% of the common stock of Raytech
Corporation valued at $142.5 million, a cash payment of $2.5 million,
the assumption of certain pension plan obligations of Raymark
Corporation and certain future tax benefits, resulting in an
extraordinary gain on debt discharge for the one day, April 2, 2001,
of $6.928 billion. Note A to the Unaudited Condensed Consolidated
Financial Statements more fully describes this transaction.
Net Sales
Worldwide net sales for the period from April 3, 2001 to
July 1, 2001 of $50.6 million were less than the recorded sales of
$61.1 million for the thirteen-week-period ended July 2, 2000, a
reduction of 17%. The lower sales reflect the economic effects of
the poor economy in the United States and the reduced demand from
the automobile original equipment manufacturers. Certain
competitive issues have also caused a reduction in sales as
outlined below.
The Wet Friction segment reported sales of $ 32.6 million for
the period from April 3, 2001 to July 1, 2001 compared to $42.3
million for the thirteen-week period ended July 2, 2000, a reduction
of 23%. The reduced sales are due primarily to the lower demand for
our product from the automobile original equipment manufacturers,
reflecting the reduced sales to the end consumer and the further
desire of the automobile original equipment manufacturers to reduce
their inventory. This accounts for substantially all of Raytech's
sales reduction in this segment.
The Aftermarket segment reported sales of $ 12.2 million for the
period from April 3, 2001 to July 1, 2001, compared to $15 million
for the thirteen-week period ended July 2, 2000, a reduction of 19%.
The reduced sales reflect lower demand for our products due to the
poor economy in the United States as consumers postpone certain
automobile repairs. The competition in this market has increased due
to the overall market slowdown as well as certain changes in the
customer base and its buying patterns. We are attempting to broaden
our product line in response to the changing market.
Dry Friction sales for the period from April 3, 2001 to
July 1, 2001 were $ 7.5 million compared to the same amount for the
thirteen-week period ended July 2, 2000. The sales reflected an
improvement in the Chinese operation where sales increased $.4
million or 36%, which was offset by a slight decline in the German
operations. The Dry Friction segment has not been affected by the
poor domestic economy.
Gross Profit
The gross profit for the period from April 3, 2001 to July 1,
2001 of $4.6 million represents 9.0% of sales for the period compared
to the gross profit of $14.8 million for the thirteen-week period
ended July 2, 2000, which represents 24.2% of sales for the period.
The decline in gross profit dollars as well as the percentage for the
period is due to the decreased sales volume of $ 10.5 million, as
well as the impact of adopting fresh-start accounting, as it impacts
depreciation (an increase of $.4 million), and inventory costs of
sales (an increase of $5.5 million). See Note C to the Unaudited
Condensed Consolidated Financial Statements for a more detailed
explanation.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the
period from April 3, 2001 to July 1, 2001 of $7.5 million are 8.5%
less than the SG&A expenses recorded during the thirteen-week period
ended July 2, 2000 of $ 8.2 million. The reduction is due to
substantially reduced administrative costs of $1.4 million, offset by
the impact of adopting fresh-start accounting, as it impacts certain
pension costs (an increase of $.3 million) and amortization of
intangibles (an increase of $.4 million). See Note C to the
Unaudited Condensed Consolidated Financial Statements for a more
detailed explanation.
Interest Expense
Interest expense for the period from April 3, 2001 to July 1,
2001 of $310 thousand is less than the interest expense for the
thirteen-week period ended July 2, 2000 of $541 thousand, which
included $70 thousand of interest due to Raymark. The reduction in
interest expense is due to the settlement of the Raymark debt (see
Note A to the Unaudited Condensed Consolidated Financial
Statements), the reduction in bank debt of $2.5 million and the
reduction in interest rates of 2.5 percentage points.
Operating Profits
The following discussion of operating results by industry
segment relates to information contained in Note I - Segment
Reporting in the Notes to Condensed Consolidated Financial
Statements. Operating profit is income before income taxes,
minority interest, and extraordinary items.
The Company recorded an operating loss of $3.3 million for the
period April 3, 2001 to July 1, 2001, which compares to $7.2
billion loss for the thirteen-week period ended July 2, 2000.
The Wet Friction segment recorded operating profit of $2.0
million for the period from April 3, 2001 to July 1, 2001 as
compared to $4.8 million for the thirteen-week period ended
July 2, 2000. The decline in sales during the period of $9.7
million to $32.6 million compared to $42.3 million in 2000 was the
primary reason for the reduced profit.
The Aftermarket segment recorded an operating profit for the
period from April 3, 2001 to July 1, 2001 of $2.0 million as
compared to $2.6 million for the thirteen-week period ended
July 2, 2000, a decrease of $.6 million or 23%. The reduced
operating profits reflect the reduced sales of $ 2.8 million
compared to the second quarter of 2000.
The Dry Friction segment recorded operating profit of $.4
million for the period from April 3, 2001 to July 1, 2001 as
compared to an operating loss of $.1 million for the thirteen-week
period ended July 2, 2000. The operating profit change is due to
improved profitability at the plant in China, which has increased
operating profit through sales growth.
Raytech Corporation has taken certain steps to address the
decreased operating profit, including reductions in both the hourly
and salaried work force, wage reduction and new hire containment
programs and a stronger focus on reducing material costs.
Income Taxes
For tax reporting purposes, the Company's emergence from
bankruptcy did not create a new tax reporting entity. Accordingly,
the adjustments to adopt fresh-start accounting are not applicable
for the Company's tax reporting. Therefore, with the exception of
goodwill, these adjustments have created new deferred tax items.
The Company's effective tax rate for the twenty-six-week
period ended July 1, 2001 is 135% and for the period April 3, 2001
through July 1, 2001 is 37%. The effective tax rate for the
twenty-six-week period ended July 1, 2001 differs from the U.S.
federal statutory tax rate primarily due to the profitable
operations of the Company's German and majority-owned subsidiaries,
which could not be offset within certain tax jurisdictions by
losses incurred by other operating entities.
The Company's effective tax rate of 37% for the period
April 3, 2001 through July 1, 2001 differs from the U.S. federal
statutory tax rate primarily due to the adjustment in the current
period to reflect the Company's annualized effective tax rate
versus the 42% rate used in the first quarter.
The Company had recorded a deferred tax asset of $2.8 billion
in 2000 relating to the tax effects of the Liabilities Subject to
Compromise. Based on its historical domestic taxable income, the
Company expected to realize approximately $140 million of the
deferred tax asset, and accordingly, it recorded a valuation
allowance of $2.6 billion against the deferred tax asset to state
it at its expected net realizable value. As a result of the
settlement of the Liabilities Subject to Compromise for
substantially less than the recorded amount of allowed claims as
part of the Company's plan of reorganization, the net deferred tax
asset was adjusted accordingly. As of July 1, 2001, the valuation
allowance was approximately $.3 million relating to net operating
loss carryforwards in certain foreign tax jurisdictions.
The effective tax rate for the twenty-six-week and thirteen-
week periods ended July 2, 2000 was 42%, excluding the valuation
allowance recorded against the deferred tax benefit with respect to
the Liabilities Subject to Compromise recorded during those
periods. This rate differs from the U.S. federal statutory tax
rate primarily due to the effects of state and foreign taxes.
The Company has in process an Internal Revenue Service tax
audit for the fiscal years 1996 through 1999. The IRS has proposed
disallowance of $9.9 million of bankruptcy related costs from 1996
through 1998, which are included in the indemnification agreement
with Raymark. The Company has deducted approximately $14.0 million
of such costs during the period under audit and continues to
believe these costs are deductible. The ultimate resolution of the
Company's liability, if any, is dependent on the interpretation of
a complex set of facts and applicable legal precedents. While the
Company and its advisors believe the Company's position is
supported by the facts and the weight of the legal precedents, it
is reasonably possible, through a different factual analysis and
application of countervailing legal authority, that a final
determination could be adverse to the Company. As such, the
Company intends to contest the proposed disallowance and has not
recorded any related provisions. Should the IRS ultimately prevail
in its claim, any adjustment related to prior year taxes would be
offset by a reduction in the amounts payable to the PI Trust.
Results of Operations for the Predecessor Company for the Thirteen-
Week-Period ended April 1, 2001
Raytech Corporation recorded net income for the thirteen-week
period ended April 1, 2001 of $1.7 million or $.49 per basic share
as compared to $4.8 million or $1.38 per basic share for the same
period in the prior year. The reduced earnings were due primarily
to the slow U.S. economy and the significantly lower automobile
production for Raytech's original equipment manufacturing
customers. As detailed below, the Wet Friction segment was hardest
hit, recording lower sales of $10.2 million compared to 2000, a
decline of 21.6%.
The Aftermarket segment was also negatively affected by the
poor economy, which is reflected in the reduced sales of $1.9
million compared to the same period in 2000, a reduction of 12.7%.
Net Sales
Worldwide net sales of $55.2 million for the thirteen-week
period ended April 1, 2001 were less than net sales for the same
period in the prior year of $67.5 million by $12.3 million or
18.2%.
The Wet Friction segment reported sales of $37 million in the
first quarter of 2001 compared to $47.2 million for the same period
in the prior year, a decline of $10.2 million or 21.6%.
Approximately 50% of the reduced sales in this segment were due to
lower demand from the automotive original equipment customers as the
demand for new cars and light trucks was lower in the first quarter
of 2001 compared with the prior year first quarter. Additionally,
the production of new cars and light trucks was further affected by
the apparent desire of the Big 3 U.S. automobile manufacturers to
reduce inventory levels. In the North American market, light
vehicle production fell approximately 20% period-over-period. In
addition to the decline in automobile original equipment sales, this
segment was also affected by the loss of a portion of the business
of a heavy duty customer. This loss of business to foreign
competition accounted for approximately $5.1 million or 50% of the
sales decline period-over-period.
The Aftermarket segment reported sales of $13.1 million for the
thirteen-week period ended April 1, 2001 compared to $15.0 million
for the same period in 2000, a decrease of $1.9 million or 12.7%.
The sales decline was due to a variety of issues, most significantly
the softness in the U.S. economy and the automobile sector in
particular. Further, the competitive issues in this market segment
have continued from the prior year.
The Dry Friction segment recorded sales of $8.1 million for the
first quarter of 2001 compared to $8.7 million for the same period
in the prior year, a decline of $.6 million or 6.9%. The German
operation, which represents over 92% of the sales of this segment,
reported sales of DM16 million in the first quarter of 2001 compared
to DM16.3 million in the same period in the prior year. The reduced
sales for this segment is substantially due to the decline in the
deutsche mark period-over-period.
Gross Profit
Gross profit as a percentage of sales for the thirteen-week
period ended April 1, 2001 was 20.6% as compared to 26.8% for the
same period in the prior year, a decrease of 6.2 percentage points.
The reduced gross profit is a direct result of the reduced sales
volume experienced by Raytech in the first quarter of 2001 compared
to 2000. The decrease in sales period-over-period was $12.3
million. The resulting decrease in gross profit is caused primarily
by under absorbed overhead.
Selling, General and Administrative
Selling, general and administrative expenses decreased 11.5% to
$7.7 million, as compared to $8.7 million in the first quarter of
the prior year. The decrease is attributable to lower salary
expenses and employee reductions.
Interest Expense
Interest expense, excluding Raymark interest, for the period of
$.4 million is $.1 million less than the same period in the prior
year amount of $.5 million, a reduction of 20%. The reduction in
interest expense is due to the 1% reduction in the interest rate on
domestic bank debt period-over-period.
Operating Profits
The following discussion of operating results by industry
segment relates to information contained in Note I - Segment
Reporting in the Notes to Condensed Consolidated Financial
Statements. Operating profit is income before income taxes and
minority interest.
Operating profit decreased $5.6 million or 61.5% in the first
quarter of 2001 to $3.5 million as compared to $9.1 million in the
first quarter of 2000. The decline in operating profit, as more
fully explained below, was due to the reduced sales of $12.3 million
as compared to the same period in the prior year.
The Wet Friction segment posted operating profit of $1.3
million in the first quarter of 2001 as compared to $6.4 million in
2000, a decline of $5.1 million or 80%. The decline in sales of
this segment of 21.6%, or $10.2 million, and the resulting
underabsorption of overhead, was the primary cause of the reduced
operating profit in this segment; a more detailed discussion of
sales is contained in the "Net Sales" section of this report.
Raytech Corporation has taken certain steps to address the decreased
operating profit in this segment, including reductions in both the
hourly and salaried work force, wage and new hire containment
programs and a stronger focus on reducing material costs.
The cost containment programs outlined above are in place in
all segments of Raytech.
The Aftermarket segment recorded an operating profit in the
first quarter of $2.1 million, which was less than the prior year
amount of $2.6 million by $.5 million or 19.2%. The reduced
operating profit reflects the impact of the lower sales, compared
period to period of $1.9 million.
The Dry Friction segment recorded operating profit of $.8
million compared to $1.0 million in the same period in the prior
year, a reduction of $.2 million or 20%. The operating profit
decline is due substantially to negative currency translations.
Income Taxes
The effective tax rate for the thirteen-week period ended
April 1, 2001 was 42%, which is the same tax rate used in the same
period in the prior year. The rate differs from the statutory
federal rate principally because of state and foreign taxes.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $15.3
million at July 1, 2001 compared to $13.9 million at December 31,
2000. Capital investment for the period from January 1, 2001 to
July 1, 2001 totaled $6.1 million. The level of capital investment
is consistent with planned expenditures.
As discussed in Note A, the Company was required to pay the
unsecured creditors $2.5 million as part of the terms of the Plan.
In addition, settlement of the Raymark claims resulted in
forgiveness of the Raymark debt and accrued interest.
As of July 1, 2001, the outstanding debt consists of the
following:
Current Non-Current Total
Domestic bank debt $ 5,421 $ 3,250 $ 8,671
Foreign bank debt 3,017 4,694 7,711
Leases 133 209 342
Total bank debt and leases 8,571 8,153 16,724
Note to former AFM principal 3,022 - 3,022
Total outstanding debt $ 11,593 $ 8,153 $ 19,746
The Company believes that cash provided by operations and that
available from its credit facilities will provide sufficient
liquidity to meet its funding requirements.
Future Liquidity
See Part II - Item 1 Legal Proceedings.
Concurrent to the effective date of the Plan, Raytech
Corporation settled the Liabilities Subject To Compromise either
through the issuance of common stock, payment in cash or the
assumption of certain liabilities. The two liabilities recorded on
Raytech's books are $.6 million for retiree medical claims arising
from certain plans, which have been terminated, and a liability for
$11.2 million for certain Raymark pension plans. The pension plans
have a current unfunded liability of $8.5 million of which $6.5
million is due and payable on September 16, 2001, and $2.0 million
is due and payable within the next year. There could also be
interest and penalties owing to the Internal Revenue Service.
The Plan also set forth a Tax Refund Assignment Agreement
between the Company and the Personal Injury Trust, which provides
for the tax benefits received by the Company due to the
reorganization to be passed onto the Personal Injury Trust as
received, subject to a holdback provision.
Management believes that existing cash balances, availability
under its existing credit facilities and cash flow from operations
during 2001 will be sufficient to meet all of the Company's
obligations arising in the normal course of business, including
anticipated capital investments and all obligations arising from the
emergence from bankruptcy.
Outlook
The statements contained in this Outlook section are based on
management's current expectations. With the exception of the
historical information contained herein, the statements presented in
this Outlook section are forward-looking statements that involve
numerous risks and uncertainties. Actual results may differ
materially.
The reduced sales for the period from April 3, 2001 to
July 1, 2001 in the automotive equipment market are expected to
continue through the remainder of the 2001 year. Additionally, the
Company expects to continue to face an increasingly competitive
automotive environment and a steady state for the demand in certain
agricultural machine products. Our major customers in the
automotive industry face an increased competitive automotive
environment which is likely to continue to limit Raytech's pricing
flexibility in the near term. Although there are indications the
Asian economies have begun to stabilize, the Asian economic
difficulties could continue to have an unfavorable effect on overall
economic conditions in the U.S. and Canada, where our major
customers' sales are concentrated.
With regard to the Company's agricultural equipment operations,
worldwide farm commodity prices remain at low levels. In spite of
these conditions, it is expected that retail demand for agricultural
equipment in 2001 will be at 2000 levels. However, the Company
expects demand for certain heavy duty products will be reduced
through the remainder of 2001 based on a review of its current order
bank. In light of this outlook and the Company's continuing
commitment to aggressive asset management, production schedules are
being reviewed for 2001 to ensure the Company's production meets
demand.
The Aftermarket segment has been negatively affected by the
slowing U.S. economy, which is reflected in the reporting period.
The competitive pressures in this industry segment are extreme as
companies attempt to gain market share. This market is expected to
remain below 2000 levels for the remainder of the year.
The Dry Friction segment continues to operate in a sluggish
European environment with unemployment remaining at high levels and
economic growth deteriorating from 2000 levels. Sales are expected
to be near 2000 levels in terms of local currency, with lower sales
reported due to unfavorable translation adjustments into U.S.
dollars. The development of new market opportunities in Asia is
supported through the new production facility in China. The overall
Asian economy continues to be negatively affected by the weakened
economies of Japan and other Asian countries.
The Company's outlook for 2001 anticipates reduced sales with
lower operating profit compared to 2000 results even excluding
fresh-start and reorganization adjustments. Maintaining market
share in the automotive original equipment market and the continued
introduction of new products for aftermarket distribution are
expected to be the drivers for performance. Further, it is
anticipated that the dry friction operation in China will improve
the performance of that segment.
Financial Risks
The Company is naturally exposed to various interest rate risk
and foreign currency risk in its normal course of business.
The rates of interest on the various debt agreements at
July 1, 2001 range from 2.5% to 10.8%. The Company has not entered
into any interest rate management programs such as interest rate
swaps or other derivative type transactions. The amount of exposure
which could be created by increases in rates is not considered
significant by management.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Statements under the "Outlook" heading 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 determine 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
(including the effect of conversion to and from the euro);
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
Representing part of the consideration of the transactions,
Raymark agreed to indemnify Raytech for Raymark's liabilities,
including asbestos, environmental, pension and others. 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 an asbestos-related personal injury case captioned
Raymond A. Schmoll v. ACandS, Inc., et al. 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 on the grounds stated in the District
Court's opinion. The effect of this decision extended beyond the
Oregon District due to a Third Circuit Court of Appeals decision
in a related case cited below wherein Raytech was collaterally
estopped (precluded) from relitigating the issue of its successor
liability for Raymark's asbestos-related liabilities.
As the result of the inability of Raymark to fund Raytech's
cost of defense under the indemnity and to halt 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 the U.S. Supreme
Court, the Schmoll 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 Court rulings recited above, 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 and any and all refunds of taxes
resulting from the transfer of equity to an asbestos personal
injury trust (the "PI Trust") established under the Bankruptcy
Code, and existing equity holders in Raytech to retain 10% of the
equity in Raytech.
As a result of the final estimation of 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 in 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. On the
Effective Date, 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 is 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
and the Raymark retiree benefit claims though the outcome of
these claims is still subject to final Court decision.
Settlement of the Raymark claims resulted in cancellation in full
of the Raymark debt and accrued interest of $12 million and a
commitment of Raytech to backstop the Raymark Trustee and related
professional fees in the event the Raymark Trustee has
insufficient recovery of funds for such purposes up to $1
million. 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.
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. 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 is preparing a plan for implementing and carrying out the cleanup
Order. Based on preliminary assessments, the Company has estimated
that the cost to comply with the Order will be in the range of $3
million to $6 million and has recorded a liability in the amount of
$3 million. It is at least reasonably possible that the preliminary
assessment of estimated costs to comply with the Order may be
modified as the project progresses.
In December 1998, a subsidiary of the Company filed a complaint
against a former administrative financial manager of Advanced
Friction Materials Company ("AFM") in the U.S. District Court,
Eastern District of Michigan, captioned Raytech Composites, Inc. vs.
Richard Hartwick, et ux. alleging that he wrongfully converted
Company monies in his control to his own use and benefit in an amount
greater than $3.3 million prior to the April 1998 completion of the
acquisition of AFM as discussed in the following paragraph. In
December 1999, the District Court ruled on summary judgment in favor
of Raytech on its claim against Hartwick in the amount of $3.33
million. A constructive trust had been ordered by the Court
providing ownership to Raytech of four real estate properties
purchased by Hartwick with the converted funds. The four properties
have been sold resulting in a net recovery of $1.4 million. In May
2000, Hartwick pled guilty to embezzlement and was sentenced for 2 to
15 years in the Michigan State Penitentiary. A restitution order was
granted to the Company in the amount of $1.33 million.
In April 1998, AFM redeemed 53% of its stock from the former
owner for a formulated amount of $6.044 million, $3.022 million paid
at closing and the balance of $3.022 million payable by note in three
equal annual installments resulting in the Company attaining 100%
ownership of AFM. In April 1999, an adversary proceeding was filed
in the Connecticut Bankruptcy Court against the former owner
captioned Raytech Corporation, et al. vs. Oscar E. Stefanutti, et al.
to recover $1.5 million of the amount paid for the AFM stock and to
obtain a declaratory judgment that the balance of $3.022 million is
not owed based upon the judgment that a fraud was perpetrated upon
the Company related to the Hartwick case referenced above. In
September 1999, the Bankruptcy Court granted jurisdiction of the case
but exercised discretionary abstention to enable the Court to focus
on issues impeding the Plan confirmation. In June 1999, the former
owner filed an action against the Company in a County Court in
Michigan captioned Oscar E. Stefanutti, et al. vs. Raytech Automotive
Components Company to enforce payment of the note. Discovery has
been completed, and cross motions for summary judgment are being
considered by the Court. A trial date has been rescheduled for
August 2001.
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) 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 has enriched the Smith family by an estimated $12
million and has greatly profited 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 Bankruptcy
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, which remains in effect. The
reference to the Bankruptcy Court has been withdrawn, and the matter
is now being litigated in the U.S. District Court in Connecticut. A
motion for summary judgment was filed by the plaintiffs and was ruled
upon in part in March 2000 but was subject to proof of standing to
file the claim. On March 30, 2001, the Court granted plaintiff's
motion for reconsideration and ruled on summary judgment that as of
May 1997 Raymark was insolvent and that defendants (Smith, et al.) as
fiduciaries owed a duty to Raymark's creditors. The Court further
ruled 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 ordered the parties to attempt to settle the
litigation which has failed. Accordingly, the Court has set trial on
the remaining issues in the case to November 2001 after which final
judgment will be rendered. All litigation costs in this case will be
supported by Raytech pursuant to the Settlement Agreement with
Raymark of April 2001 referred to in Note A above.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As more fully described in Item 1, Legal Proceedings, the
Company issued 38 million shares of common stock to the allowed
claimants as a part of the consideration in the settlement of the
Liabilities Subject to Compromise in accordance with the
effectiveness of the Company's Plan of Reorganization on April 18,
2001. The common shares issued are exempt from registration
pursuant to the Bankruptcy Code; however, the shares issued to the
Personal Injury Trust have restrictions on resale as a result of the
Trust's high percentage of ownership of Raytech.
As a result of the issuance of the common stock, the allowed
claimants have a 90% ownership interest of the equity of Raytech and
the existing equity holders' ownership interest in Raytech has been
diluted to 10% of the equity.
Item 4. RESULTS OF VOTES OF SECURITY HOLDERS.
The Annual Shareholders' Meeting of Raytech was held
July 20, 2001. The matter submitted to stockholder vote and
the vote count on the matter was as follows:
1. Proposal to ratify the appointment of
PricewaterhouseCoopers LLP as auditors for 2001:
For Against Abstain
37,867,331 4,034 74,454
For purposes of determining whether a proposal has received a
majority vote, abstentions will be included in the vote totals with
the result that an abstention has the same effect as a negative
vote. Under applicable Delaware law, "non-votes" will not be
included in the vote totals of proposals voted and, therefore, will
have no effect on the vote of that proposal. A "non-vote" occurs
when a broker holding shares for a beneficial owner votes on one
proposal but does not vote on another proposal because the broker
does not have discretionary voting power and has not received
instructions from the beneficial owner.
Pursuant to the vote of shareholders, proposal 1 was adopted
and effective on July 20, 2001.
No directors were up for election at this Annual Meeting as a
result of their appointments under the Corporation's Second Amended
Plan of Reorganization confirmed by the U.S. Bankruptcy Court on
August 31, 2000 and made effective April 18, 2001.
Directors whose terms of office as Directors continued after
the Annual Shareholders' Meeting include:
Albert A. Canosa
Robert F. Carter
James L. Fishel
Kevin S. Flannery
John H. Laeri
Stanley J. Levy
H. Craig Lewis
Gene Locks
Frederick J. Mancheski
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON 8-K
None
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 15, 2001