SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the Fiscal Year ended December 29, 2002 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
Commission File Number 1-9298
RAYTECH CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-1182033
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(State or Other Jurisdiction of (I.R.S. Employer Incorporation or
Organization)
Identification No.)
Suite 295, Four Corporate Drive
Shelton, Connecticut 06484
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(Address of Principal Executive Office) (Zip Code)
(203) 925-8023
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock - $1.00 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filed requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of March 20, 2003, 41,701,554 shares of common stock were outstanding and the
aggregate market value of these shares (based upon the closing price of these
shares on the New York Stock Exchange) on such date held by non-affiliates was
approximately $49.9 million.
Documents incorporated by reference: None
INDEX TO RAYTECH CORPORATION
2002 FORM 10-K
PART I.
Page
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Item 1. Business
(a) Overview ............................................ 4
(b) Financial Information About Industry Segments ....... 4
(c) Narrative Description of Business ................... 4
Introduction .................................... 4
Sales Methods ................................... 5
Raw Material Availability ....................... 5
Patents and Trademarks .......................... 6
Competition, Significant Customers and Backlog .. 6
Employees ....................................... 7
Capital Expenditures ............................ 7
Research and Development ........................ 7
Environmental Matters ........................... 7
(d) Financial Information About Foreign Operations ...... 8
Item 2. Properties ...................................................... 9
Item 3. Legal Proceedings ............................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.............. 11
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ..................................... 12
Item 6. Selected Financial Data ......................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 15
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk ..................................................... 36
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Page
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Item 8. Financial Statements and Supplementary Data ..................... 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................. 92
PART III.
Item 10. Directors and Executive Officers of the Registrant ............. 93
Item 11. Executive Compensation ......................................... 96
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters........... 101
Item 13. Certain Relationships and Related Transactions ................. 102
Item 14. Controls and Procedures ........................................ 102
PART IV.
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................................ 102
(a)(1) Financial Statements ................................... 102
(a)(2) Financial Statement Schedules .......................... 103
(a)(3) Exhibits ............................................... 103
(b) Reports on Form 8-K .................................... 103
(c) Index of Exhibits....................................... 103
(d) Index to Consolidated Financial Statements
and Financial Statement Schedules (reference). 105
Signatures ............................................................... 106
Certifications ........................................................... 109
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Item 1. Business
(a) Overview
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. Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-defendant with Raymark
and other named defendants in numerous asbestos-related lawsuits as a successor
in liability to Raymark. In order to stay the asbestos-related litigation, on
March 10, 1989, Raytech filed a petition seeking relief under Chapter 11 of
Title 11, United States Code in the United States Bankruptcy Court, District of
Connecticut. In April 2001, the Company emerged from protection of the
Bankruptcy Court under Chapter 11 of Title 11, United States Code. The
bankruptcy was predicated on certain asbestos personal injury claims and certain
environmental claims which were discharged at the reorganization date.
(b) Financial Information About Industry Segments
The sales, gross profit, operating profit (loss) and other financial
information pertaining to the operation of the business segments is contained in
Note F Segment Reporting in the notes to the consolidated financial statements
of Raytech Corporation. The reporting reflects the pre-emergence from bankruptcy
(Predecessor Company) and post emergence from bankruptcy (Successor Company)
financial information.
(c) Narrative Description of Business
Introduction
Raytech Corporation and its subsidiaries manufacture and distribute
engineered products for heat resistant, inertia control, energy absorption and
transmission applications. The Company's operations are categorized into three
business segments: Wet Friction, Dry Friction and Aftermarket.
The Wet Friction operations produce specialty engineered products for
heat resistant, inertia control, energy absorption and transmission
applications used in an oil immersed environment. The Company markets
its products to automobile and heavy duty original equipment
manufacturers ("OEM"), as well as to farm machinery, mining, truck and
bus manufacturers.
The Dry Friction operations produce engineered friction products, which
are not used in an oil immersed environment, primarily used in original
equipment automobile and truck manual transmissions. The clutch facings
produced by this segment are marketed to companies who assemble the
manual transmission systems used in automobiles and trucks.
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The Aftermarket segment produces specialty engineered products used for
wet friction applications, primarily for automobile and light truck
transmissions. In addition to these products, this segment markets
transmission filters and other transmission related components. The
focus of this segment is marketing to warehouse distributors and
certain retail operations in the automotive aftermarket.
The percentage of net sales for each segment of the consolidated net
sales over the past three years is as follows:
Successor Company Predecessor Company
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For the Period For the Period For the
For the Year April 3, 2001 to January 1, 2001 Year Ended
Ended 2002 December 30, 2001 to April 2, 2001 2000
Wet Friction operations 61% 61% 62% 64%
Dry Friction operations 17% 15% 14% 12%
Aftermarket operations 22% 24% 24% 24%
Additional segment information is contained in the Management's Discussion and
Analysis section and in Note F in the notes to the consolidated financial
statements.
Sales Methods
The Wet Friction operations, predominantly a domestic operation, serve
the on-highway and off-highway vehicular markets through sale of its products to
OEM's of heavy duty trucks, buses, automobiles, construction and mining
equipment and agricultural machinery, and through distributors supplying
components and replacement parts for these vehicles. Sales to certain vehicular
markets in the Wet Friction operation are made through a wholly-owned
distributor in the Aftermarket segment.
The Aftermarket, predominantly a domestic operation, sells its products
primarily to equipment distributors and in certain instances directly to retail
outlets.
The Dry Friction operation sells dry friction facings to clutch
assemblers who in turn supply the OEM and aftermarket in Europe and the Far
East.
Sales are made in all segments by Company sales representatives. Sales
are made under standard sales contracts for all or a portion of a customer's
products over a period of time or on an open order basis.
Raytech's products are sold around the world, through export from its
U.S. plants, through its wholly-owned subsidiaries in Germany, the United
Kingdom and China, and through distributors.
Raw Material Availability
The principal raw materials used in the manufacture of energy
absorption and transmission products include cold-rolled steel, metal powders,
synthetic resins, plastics and synthetic and natural fibers. All of these
materials are readily available from a number of competitive suppliers.
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Patents and Trademarks
Raytech owns a number of patents, both foreign and domestic. Such
patents expire between 2003 and 2018. In the opinion of management, the business
is not dependent upon the protection of any of its patents or licenses and would
not be materially affected by the expiration of any of such patents and
licenses.
Raytech operates under a number of registered and common law
trademarks, including the trademark "RAYBESTOS." Certain trademarks have been
licensed on a limited basis. Some trademarks are registered internationally.
Competition, Significant Customers and Backlog
Raytech faces vigorous competition with respect to price, service and
product performance in all of its markets from both foreign and domestic
competitors.
Domestic sales as a percentage of total Raytech sales to two customers
are as follows:
Successor Company Predecessor Company
---------------------------------- -----------------------------
For the Period For the Period For the
For the Year April 3, 2001 to January 1, 2001 Year Ended
Ended 2002 December 30, 2001 to April 2, 2001 2000
---------- ----------------- ---------------- ----
Caterpillar 10.9% 14.3% 13.2% 13.0%
DaimlerChrysler 13.9% 14.0% 13.8% 15.4%
In the wet friction original equipment automotive automatic
transmission parts sector, there are approximately four competitors, including
one foreign company, utilizing price, service and product performance to attempt
to gain market share. Though not the largest company competing in this market,
Raytech is highly competitive due to cost efficient plants, dedicated and
skilled employees and products that are high in quality and reliability. The
original equipment heavy-duty, off-highway vehicle sector is highly competitive
with approximately three companies vying for the business, including two foreign
companies, and approximately three competitors for the oil-immersed friction
plate sector. Raytech competes in these markets using its integrated, cost
efficient operations and its high quality products and service. Sales backlog
for the Wet Friction segment at the end of 2002, 2001, and 2000 was
approximately $79 million, $70 million, and $72 million, respectively. It is
anticipated that current backlog will be filled in 2003.
In the Dry Friction segment, the European markets in which the Company
participates are competitive with approximately two competitors in the passenger
car clutch sector. Raytech entered the Asian market with manufacturing that
began in China in 1998. The Asian markets are competitive with several Chinese
and other Asian-based manufacturers competing for the business. Sales backlog at
the end of 2002, 2001, and 2000 was approximately $3.5 million, $2.7 million,
and $.7 million, respectively. It is anticipated that current backlog will be
filled in 2003.
In the Aftermarket segment, the domestic automotive, automatic
transmission sector has approximately five competitors. Here, Raytech believes
that some of its competitors have a broader product line and greater financial
resources, but the Company is able to compete due to customer
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acceptance of both its high quality and low cost product lines. The transmission
filter business is competitive with approximately five competitors. Sales
backlog at the end of 2002, 2001, and 2000 was approximately $2 million, $2
million, and $6 million, respectively. It is anticipated that current backlog
will be filled in 2003.
Competition in all markets served by Raytech is based on product
quality, service and price. On such basis, Raytech believes that it is
competitive in all markets in which it is engaged.
Employees
At December 29, 2002, Raytech employed 1,593 employees, compared with
1,531 employees at the end of 2001. Raytech has agreements with labor unions
relating to wages, hours, fringe benefits and other conditions of employment
which cover most of its production employees. The term of the labor contract at
Raybestos Products Company in Crawfordsville, Indiana, is due to expire in May
2006. The term of the labor contract at Automotive Composites Company in
Sterling Heights, Michigan, is due to expire in October 2004.
Capital Expenditures
Capital expenditures were $9.6 million for 2002 (Successor Company),
$7.5 million for the period April 3, 2001 to December 30, 2001 (Successor
Company), $2.7 million for the period January 1, 2001 to April 2, 2001
(Predecessor Company), and $13.5 million for 2000 (Predecessor Company). Capital
expenditures for 2003 are projected at $12.2 million.
Research and Development
Research and development costs for the Successor Company for 2002 were
approximately $7.3 million, $5.3 million for the period April 3, 2001 to
December 30, 2001 and for the Predecessor Company $1.7 million for the period
January 1, 2001 to April 2, 2001 and $6.8 million in 2000. Separate research and
development facilities are maintained at appropriate manufacturing plants for
the purpose of developing new products, improving existing production
techniques, supplying technical service to the business units and customers, and
discovering new applications for existing products. Research and development
costs for 2003 are projected at $ 8.0 million.
Environmental Matters
Various federal, state and local laws and regulations related to the
discharge of potentially hazardous materials into the environment, and the
occupational exposure of employees to airborne particles, gases and noise have
applied to and will continue to apply to the Registrant's operations, both
directly and indirectly, in the future. Environmental requirements are taken
into consideration in the Company's operations. Pollution and hazardous waste
controls are continually being upgraded at the existing manufacturing facilities
to help to ensure environmental compliance. Expenditures for upgrading of
pollution and hazardous waste controls for environmental compliance, including
capital expenditures, are projected to be $.8 million for 2003. In addition, the
Company has been engaged in an environmental investigation and remediation
project pursuant to a Federal Order issued by the U.S. Environmental Protection
Agency (EPA) near its manufacturing facility in Crawfordsville, Indiana. The
Company has an accrued liability of $7.0 million at December 29, 2002 for
estimated environmental investigation and remediation costs for this project
that might be incurred during 2003 and which management expects should be
sufficient to meet all Company cleanup obligations regarding the project. See
Note E to the Consolidated Financial Statements for more details. Because
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environmental regulations are constantly being revised and are subject to
differing interpretations by regulatory agencies, Raytech is unable to predict
the long-range cost of compliance with environmental laws and regulations.
(d) Financial Information about Foreign Operations
Financial information about the foreign operations of Raytech for the
Successor Company for the year ended December 29, 2002, the period April 3, 2001
to December 30, 2001 and for the Predecessor Company for the period January 1,
2001 to April 2, 2001 and the year ended December 31, 2000 is set forth in Note
F to the Consolidated Financial Statements, included herein.
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Item 2. Properties
Raytech, through its three operating segments, has plants as follows:
The Wet Friction operations have a Crawfordsville, Indiana, facility
that is owned and consists of approximately 461,000 square feet of office,
production, research and warehousing space that is suitable and adequate to
provide the productive capacity to meet reasonably anticipated demand of
products. The Sterling Heights, Michigan, facility is owned and consists of
approximately 111,000 square feet of office, production, research and
warehousing space that is suitable and adequate to provide the productive
capacity to meet reasonably anticipated demand of products. The Liverpool,
England, facility is leased and consists of 52,000 square feet of office,
production, research and warehousing space. Wet friction also leases sales
office space in Leverkusen, Germany and Peoria, Illinois, and leases an
administrative office in Indianapolis, Indiana.
The Dry Friction operations have a Morbach, Germany, plant that is
owned and consists of 108,000 square feet of office, production, research and
warehousing space that is suitable and adequate to provide the production
capacity to meet reasonably anticipated demand of products. The Suzhou, China,
facility is owned and consists of 52,000 square feet of office, production,
research and warehousing space that is suitable and adequate to provide the
production capacity to meet reasonably anticipated demand of products.
The Aftermarket operations have two facilities in Sullivan, Indiana,
that are owned and consist of 130,000 and 37,500 square feet of office and
warehousing space that is suitable and adequate to provide the capacity to meet
anticipated demand of products. The capacity is underutilized, leaving space for
future demand. A separate Crawfordsville, Indiana, facility is owned and
consists of approximately 41,000 square feet, which is currently being evaluated
for alternative uses. Aftermarket also leases sales office space in Floral Park,
New York.
Raytech also leases office space in Shelton, Connecticut, for its
headquarters staff.
Raytech believes that its properties are substantially suitable and
adequate for its purposes.
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Item 3. Legal Proceedings
The Company is subject to certain legal matters that have arisen in the
ordinary course of business, and management does not expect them to have a
material adverse effect. In addition, the Company is involved in the following
litigation.
In April 1996, the Indiana Department of Environmental Management
("IDEM") advised Raybestos Products Company ("RPC"), a wholly-owned subsidiary
of the Company, that it may have contributed to the release of lead and PCB's
(polychlorinated biphenyls) found in a drainage ditch near its Indiana facility.
In June 1996, IDEM named RPC as a potentially responsible party ("PRP"). RPC
notified its insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern District of
Indiana, captioned Reliance Insurance Company vs. RPC seeking a declaratory
judgment that any liability of RPC is excluded from its policy with RPC. In
January 2000, the District Court granted summary judgment to RPC, indicating
that the insurer has a duty to defend and indemnify losses stemming from the
IDEM claim. However, in June 2001, Reliance Insurance Company was placed in
rehabilitation in Pennsylvania. The effect upon RPC's claim is not known at this
time. Three additional insurers have been added to the Reliance case as ordered
by the District Court. IDEM has turned the matter over to the U.S. Environmental
Protection Agency ("EPA"). In December 2000, the EPA issued a Unilateral
Administrative Order under CERCLA ("Order") demanding removal of contaminated
soils from the referenced drainage ditch. RPC has prepared a plan for
implementation and is in compliance with the cleanup Order. The Company has
estimated that the cost to comply with the Order will be approximately $14.3
million of which $7.3 million has been spent through December 29, 2002. The
remaining balance of $7.0 million is included in accrued liabilities. It is at
least reasonably possible that the assessment of estimated costs to comply with
the Order may be modified as the project progresses and that there may be
additional assessments from the EPA.
Prior to IDEM's relinquishment of control of the cleanup to the EPA,
IDEM and RPC had reached an Agreed Order providing for a risk-based remediation
of the contamination different from the EPA's Order. IDEM withdrew from the
Agreed Order, which was ruled to be a breach of contract by an Indiana State
Superior Court. In July 2002, RPC filed an action against IDEM for damages based
on the difference between the costs of cleanup under the EPA Order and the IDEM
Agreed Order. The outcome of this litigation is not known.
In February 2002, lawyers claiming to represent the Committee of Equity
Holders filed a motion in U.S. Bankruptcy Court to compel Raytech to either
issue up to approximately 700,000 additional shares to the pre-reorganization
holders of shares in Raytech or their successors or to proportionately reduce
the shareholdings of the general unsecured creditor shareholders under the Plan
of Reorganization. The ultimate outcome of this matter is unknown; however, it
is possible that its resolution could cause the Company to issue additional
shares to the original shareholder group, or to retire shares held by the
general unsecured creditor shareholder group. This might directly impact the
earnings per share calculations of the Company. The Company has filed a motion
for summary judgment asking the Court to dismiss the action.
On January 8, 2002, the Michigan Department of Environmental Quality
("MDEQ") sent a letter to the Company alleging Company responsibility for
trichloroethylene ("TCE") contamination at a Ferndale, Michigan, industrial site
leased and occupied by Advanced Friction Materials Company ("AFM") from
approximately 1974 to 1985. AFM was acquired by the Company in 1998. The
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Company is cooperating with the MDEQ in evaluating the subsurface of the site to
obtain data concerning the alleged contamination. The Company's liability at
this site is indeterminable at this time.
Item 4. Submission of Matters to a Vote of Security Holders.
Article SEVENTH of the Amended Certificate of Incorporation of Raytech
Corporation currently provides that the Board of Directors shall consist of not
more than nine and not less than three Directors. In February 2003, the Board
proposed that this provision of Article SEVENTH be revised to state that the
entire Board of Directors shall consist of not more than eleven and not less
than three directors, as such number may be fixed by the Board of Directors from
time to time. The Raytech Corporation Asbestos Personal Injury Settlement Trust,
which beneficially owns approximately 83% of the outstanding shares of Common
Stock of Raytech Corporation, has given its consent to this Amendment. In March
2003, Raytech Corporation mailed its Schedule 14C Information Statement to its
shareholders. This Amendment to the Amended Certificate of Incorporation of
Raytech Corporation will be filed with the State of Delaware and will become
effective on or about April 15, 2003.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Registrant's (Raytech) common stock is traded on the New York Stock
Exchange under the trading symbol RAY. As of March 20, 2003, there were 1,535
holders of record of the Registrant's common stock.
Information regarding the quarterly high and low sales prices for 2002
and 2001 and information with respect to dividends is set forth in Note P of the
Consolidated Financial Statements, Part II, Item 8 hereof.
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Item 6. Selected Financial Data
Consolidated Five-Year Financial Summary
Selected historical consolidated financial data is presented for the
five fiscal years ended December 29, 2002. The information is separated between
Predecessor Company, pre-emergence from bankruptcy, and Successor Company,
post-emergence from bankruptcy. As a result of reorganization and fresh-start
adjustments recorded in conjunction with the Company's emergence from
bankruptcy, the financial data of the Successor Company is not comparable to
that of the Predecessor Company.
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Item 6. Selected Financial Data (continued)
FIVE-YEAR REVIEW OF OPERATIONS
(in thousands, except per share data)
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Successor Company Predecessor Company
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As of and for the Period As of and for the Period
April 3, 2001 to January 1, 2001 to
2002 December 30, 2001 April 2, 2001(4) 2000 1999 1998
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Operating Results
Net sales $ 209,866 $ 146,050 $ 55,205 $ 239,532 $ 251,966 $ 247,464
Gross profit 36,771 21,460 11,394 59,489 60,238 58,650
Operating profit (loss) 4,440 (3,291) 3,652 27,215 27,518 26,007
Interest expense 903 873 444(2) 2,218(2) 2,279(2) 2,158(2)
(Loss) income before
extraordinary items (2,825) (6,531) 72,334 (7,058,978) 16,364 16,357
Extraordinary items - 954(5) 6,922,923 - - -
Net (loss) income (2,825) (5,577) 6,995,257 (7,058,978)(3) 16,364 16,357
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Share Data
Basic (loss) earnings per share $ (.07) $ (.13) $ 1,778.88 $ (2,015.40)(3) $ 4.76 $ 4.81
Weighted average shares 41,608,057 41,527,307 3,932,385 3,502,522 3,439,017 3,402,019
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Diluted (loss) earnings
per share $ (.07) $ (.13) $ 1,772.62 $ (2,015.40)(3) $ 4.65 $ 4.61
Adjusted weighted average
shares 41,608,057 41,527,307 3,946,282 3,502,522 3,518,884 3,548,893
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Balance sheet
Total assets $ 294,221 $ 320,788 $ 323,636 $ 320,316 $ 188,686 $ 172,034
Working capital 23,317 28,157 26,753 21,402 11,201 5,464
Long-term obligations (6) 82,850 85,410 69,330 31,238 35,055 39,002
Liabilities subject to
compromise (3) - - - 7,211,433 - -
Commitments and
contingencies (1)
Total shareholders' equity
(deficit) 142,110 144,083 158,352 (6,979,138) 80,788 64,297
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Property, plant and equipment
Capital expenditures $ 9,648 $ 7,488 $ 2,717 $ 13,539 $ 22,969 $ 18,038
Depreciation 14,943 10,585 3,180 11,545 10,569 9,477
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Dividends declared per share $ - $ - $ - $ - $ - $ -
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(1) See Notes E and M to the consolidated financial statements.
(2) Includes cessation of interest accruals on Raymark note in connection with
a Bankruptcy Court Order.
(3) Includes recording of the estimated amount of allowed claims in the amount
of $7.2 billion relating to asbestos personal injury, environmental and
employee benefits issues. See Note Q to the consolidated financial
statements.
(4) Includes the reorganization and the adoption of fresh-start reporting as a
result of the Company's emergence from bankruptcy (See Notes R and S).
(5) Represents an extraordinary gain net of taxes of $594 as a result of a
settlement of a note payable to a former AFM principal.
(6) Includes long-term liabilities and minority interest.
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995: Statements under the "Market Conditions and Outlook" and "Future
Liquidity" headings below and other statements herein that relate to future
operating periods are subject to important risks and uncertainties that could
cause actual results to differ materially. Forward-looking statements relating
to the Company's businesses involve certain factors that are subject to change,
including the many interrelated factors that affect consumer confidence,
including worldwide demand for automotive and heavy duty products, general
economic conditions, the environment, actions of competitors in the various
industries in which the Company competes; production difficulties, including
capacity and supply constraints; dealer practices; labor relations; interest and
currency exchange rates; technological difficulties; accounting standards, and
other risks and uncertainties. Further information, including factors that
potentially could materially affect the Company's financial results, is included
in the Company's filings with the Securities and Exchange Commission.
Results of Operations and Liquidity and Capital Resources
Raytech Corporation and its subsidiaries manufacture and distribute
engineered products for heat resistant, inertia control, energy absorption and
transmission applications. The Company's operations are categorized into three
business segments: wet friction, dry friction and aftermarket. Additional
information on these business segments is presented in Note F Segment Reporting
in the Notes to Consolidated Financial Statements.
Raytech Corporation, at December 29, 2002, completed its first full
year of operation as the Successor Company post-emergence from bankruptcy. In
April 2001, Raytech Corporation emerged from the protection of Bankruptcy Court
under Chapter 11 of Title 11 of the United States Bankruptcy Code. Raytech
Corporation had been under the Chapter 11 protection since March 1989. The
bankruptcy history and emergence are described in more detail in Note Q to the
Consolidated Financial Statements.
As of April 2, 2001, the Company adopted fresh-start reporting pursuant
to the guidance provided by the American Institute of Certified Public
Accountant's 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 was considered to be the close of
business on April 2, 2001 for financial reporting purposes. The periods
presented prior to April 2, 2001 have been designated "Predecessor Company" and
the periods subsequent to April 2, 2001 have been designated "Successor
Company." In accordance with fresh-start reporting, all assets and liabilities
were recorded at their respective fair values. The fair value of substantially
all of the Company's long-lived assets was determined using information provided
by third-party appraisers.
The Company has determined that the most meaningful presentation of
financial information would be to provide comparative analysis of the financial
performance of the Successor Company for the thirty-nine-week periods ended
December 29, 2002 and December 30, 2001. This is designated below as Successor
Company discussion and analysis.
Additionally, the financial analysis detailed below provides a
comparative analysis of the financial performance of the Successor Company
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for the period December 31, 2001 through March 31, 2002 compared to the
Predecessor Company financial performance for the period January 1, 2001 through
April 1, 2001.
The Company has also presented comparative analysis of the financial
performance for the Successor Company for the periods April 3, 2001 through
December 30, 2001 compared to the Predecessor Company for the period April 3,
2000 through December 31, 2000.
Additionally, the Predecessor Company financial analysis detailed below
provides a comparative analysis of 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 R to the Consolidated Financial Statements.
The Company has elected not to present a comparative analysis for the
fifty-two-week period ended December 29, 2002 since such information in the
prior period would require consolidating statements of the Predecessor Company
and the Successor Company. It was determined that the significance of the
adjustments relating to the emergence from bankruptcy would render such an
analysis not meaningful.
Accounting Policies
The Company's accounting policies are detailed in Note A - Summary of
Significant Accounting Policies in the Notes to the audited Financial
Statements. The consolidated financial statements include the accounts of
Raytech Corporation and its majority-owned subsidiaries. Intercompany balances
and transactions have been eliminated in consolidation. The investment by third
parties in Allomatic Products Company is accounted for as minority interest in
the consolidated financial statements. There are no unconsolidated entities and
Raytech does not use Special Purpose Entities (SPE's). The preparation of the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported and disclosures of
contingent assets and liabilities and the reported revenue and expenses made in
the financial statements and accompanying notes. Actual results could differ
from these estimates. Significant estimates include inventory, receivable and
environmental reserves; depreciable lives of property, plant and equipment and
intangible assets, pension and other postretirement and postemployment benefits;
and the recoverable value of deferred tax assets.
The most significant areas involving management's judgment are
described below.
Accruals for environmental matters are recorded when it is probable
that a liability has been incurred and the amount of the liability can be
reasonably estimated or if an amount is likely to fall within a range and no
amount within the range can be determined to be the better estimate, the minimum
amount of the range is recorded. Remediation obligations are not recorded on a
discounted basis. Reimbursements from insurance carriers relating to
environmental matters are not recorded until it is probable that such recoveries
will be realized. The accrual for environmental matters is
-16-
discussed in this Management Discussion and Analysis under the heading Provision
for Environmental remediation.
Pension benefits and welfare benefits represent financial obligations
that will be ultimately settled in the future with employees who meet
eligibility requirements. Because of the uncertainties involved in estimating
the timing and amount of future payments, significant estimates are required to
calculate pension and welfare benefit expenses and liabilities related to the
Company's plans. The Company utilizes the services of independent actuaries,
whose models are used to facilitate these calculations. Several key assumptions
are used in actuarial models to calculate pension expense and welfare benefit
expense and liability amounts recorded in the financial statements. Management
believes the three most significant variables in the pension models are the
expected long-term rate of return on plan assets, the discount rate, and the
expected rate of compensation increase. Management believes the most significant
assumption in the welfare benefit model is the healthcare cost trend rate. The
actuarial models also use assumptions for various other factors, including
employee turnover, retirement age, and mortality. Company management believes
the assumptions used in the actuarial calculations are reasonable and are within
accepted practices in each of the respective geographic locations in which we
operate.
At December 29, 2002, the Company had goodwill and other intangibles of
$70.6 million, which were recorded as a result of the fresh-start accounting
process in 2001. Management reviews goodwill and indefinite lived intangibles
for impairment annually or when events or circumstances indicate that its value
may have declined. In order to evaluate impairment of goodwill, assumptions
about the future condition and operations of the business unit to which the
goodwill and other indefinite lived intangible asset relates are made. Using
these assumptions, management determines, with the assistance of other
professionals, whether an impairment charge is required to reduce goodwill to
its estimated fair value. The impairment evaluation process for other
intangibles uses projected future cash flows (undiscounted). This test is
performed when circumstances and events indicate that the carrying amount of an
individual asset or grouping of assets may not be recoverable. Should
undiscounted cash flows be less than the carrying amount of the assets, an
impairment charge reducing the carrying amount to fair value is required.
Management believes that the assumptions made to evaluate goodwill and other
intangibles impairment are appropriate and reasonable. However, changes in
circumstances or conditions affecting these assumptions could result in
impairment charges in future periods that may be material.
Successor Company Discussion and Analysis for the Thirty-Nine-Week Period Ended
December 29, 2002 Compared to the Thirty-Nine-Week Period Ended December 30,
2001
In developing a comparative analysis for the thirty-nine-week periods
ended December 29, 2002 and December 30, 2001, the following table sets forth
the quantitative information for the two periods.
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(in thousands)
Successor Company
Thirty-Nine Week Period Ended
-------------------------------------
December 29, 2002 December 30, 2001
----------------- -----------------
Sales $ 157,157 $ 146,050
Cost of sales (130,911) (124,590)
--------- ---------
Gross profit 26,246 21,460
SG&A (24,737) (24,782)
Other operating income - 31
--------- ---------
Operating profit (loss) 1,509 (3,291)
Interest expense (626) (873)
Reorganization items - (784)
Other (2) 598
Provision for environmental and other claims (5,400) (5,860)
--------- ---------
Loss before income taxes, minority
interest and extraordinary items (4,519) (10,210)
Income tax benefit 1,007 4,564
--------- ---------
Loss before minority interest and
extraordinary items (3,512) (5,646)
Minority interest (643) (885)
--------- ---------
Loss before extraordinary item (4,155) (6,531)
Extraordinary item, net of tax - 954
--------- ---------
Net loss $ (4,155) $ (5,577)
========= =========
Net Sales
Worldwide net sales were $157.2 million for the thirty-nine-week period
ended December 29, 2002 compared to $146.1 million for the same period in the
prior year, an increase of $11.1 million or 7.6%. The detailed discussion for
the increased sales period-over-period is contained in the Business Segment
section.
Gross Profit
The gross profit for the thirty-nine-week period ended December 29,
2002 of $26.2 million compares to the gross profit of $21.5 million for the same
period in the prior year, an increase of $4.7 million or 22%. Gross profit as a
percent of sales for the 2002 period is 16.7% compared to 14.7% for the same
thirty-nine-week period in 2001, an increase in margin points of 2.0%. The gross
profit in the 2001 period was reduced by $5.9 million due to a step up in
inventory value to fair value at April 2, 2001, which was an effect of the
application of fresh-start accounting. The gross profit comparative
period-to-period, taking into consideration the inventory adjustment, shows a
margin decline of 2.0%. This decline is due substantially to certain startup
costs associated with a new product line in the Wet Friction segment.
Selling, General and Administrative
Selling, general and administrative expenses for the thirty-nine-week
period ended December 29, 2002 were $24.7 million compared to $24.8 million in
the same period in the prior year, a decrease of $.1 million or 0.4%. The SG&A
costs in the 2002 period include approximately $1.5 million for severance costs
for two officers of the Company and $21 thousand for employment related costs
associated with the new hires. SG&A expense as a percent of sales in the 2002
period of 15.7% compares to 17.0% in the thirty-nine-week period ended December
30, 2001.
Interest Expense
Interest expense for the thirty-nine-week period ended December 29,
2002 totaled $.6 million compared to $.9 million for the same period in the
prior year. Interest expense represents less than 1% of total expenses in both
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periods.
Reorganization Item
In connection with the bankruptcy proceedings, Raytech incurred
approximately $784 thousand in professional fees during the thirty-nine-week
period ended December 30, 2001. These fees related to accounting, legal,
consulting and other miscellaneous services.
Provision for Environmental Remediation
The Company recorded, in the thirty-nine-week period ended December 29,
2002, a charge of $5.4 million for the completion of the remediation project
related to the Crawfordsville, Indiana, manufacturing facility. The accrued
liability for the completion of this project at year-end is $7.0 million. The
historical and legal discussion of this project is contained in Note E to the
Notes to the Consolidated Financial Statements. This remediation project, which
is the subject of a unilateral administrative order of the U.S. Environmental
Protection Agency, requires the removal of polychlorinated biphenyls (PCB's),
which were found in a drainage ditch near the Indiana facility. The remediation
project consists of three separate segments of the ditch. The first segment was
completed in the summer of 2002. The second segment was started in the fall of
2002 and completed in February 2003. The work on the final segment is expected
to begin in the spring of 2003 and be completed by the fall of 2003. The
completion of the third segment will fulfill the Company's obligation under the
U.S. EPA order. In addition to the current year charge of $5.4 million, the
Company recorded a charge for remediation of $5.9 million in 2001 and $3.0
million in 2000. The Company is currently pursuing legal remedies against
various parties to recover the cost of the remediation. These legal actions are
discussed in the litigation section of this document.
Income Tax (Provision) Benefit
For tax reporting purposes, the Company's emergence from bankruptcy did
not create a new tax reporting entity. Accordingly, the adjustments to adopt
fresh-start accounting are not applicable for the Company's tax reporting.
Therefore, with the exception of goodwill, these adjustments have created new
deferred tax items.
The effective tax rate for the thirty-nine-week period ended December
29, 2002 was a 22.3% benefit compared to a 44.7% benefit in the same period in
the prior year.
The effective tax rate for the year ended December 29, 2002 was 5.0%
compared to 28.2% for the year ended December 30, 2001. In calculating the
effective tax rate, the distinction between Successor Company and Predecessor
Company is not relevant as explained above; therefore, the taxable income for
book purposes in 2001 was $93.3 million. The income tax provision for the
current year is $.08 million, hence the effective rate for the year is as noted,
5.0%.
The Company's effective tax rate differs from the federal statutory
benefit of 35% due primarily to the effect of providing for certain State, taxes
and the effect of an increase in the tax benefits payable to the PI Trust.
In connection with the Company's emergence from bankruptcy, the Company
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recorded an income tax receivable and payable to the PI Trust in the amount of
$38 million resulting from net operating losses arising from the transfer of
stock and cash to the PI Trust carried back to 1991 through 2000. Pursuant to
the Tax Benefits Assignment and Assumption Agreement (the "Agreement"), all tax
benefits received by the Company due to the reorganization are to be passed onto
the PI Trust as received. During 2002, Raytech received tax refunds of $33.1
million, which were paid to the PI Trust. Additionally, future payments to the
PI Trust and others will create additional tax deductions, which will inure to
the benefit of the PI Trust in accordance with the Agreement. These include
deductions for payments to the PI Trust of tax benefits associated with the
utilization of the operating losses created by the reorganization, and
contributions made to the Raymark pension plan. To the extent that Raytech
Corporation generates losses in future periods, exclusive of losses attributable
to the payments discussed above, those losses will be retained by the Company.
The method of allocation in utilizing future operating losses between the PI
Trust and Raytech Corporation has not been determined at this time. The Company
has tax loss carryforwards of $74.8 million and tax credit carryforwards of $1.2
million at December 29, 2002. The net operating loss carryforwards are allocated
between Raytech Corporation and the PI Trust in the amounts of $2.8 million and
$72.0 million, respectively. Additional tax recoveries expected to be received
in future periods are shown as deferred tax assets and a deferred payable to the
PI Trust which amounted to $42.4 million at December 29, 2002 and $41.8 million
at December 30, 2001.
The Company is under audit for 1996 through 2001. Any tax assessment,
up to the amount of the refunds received, arising from this audit, or any other
years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
At December 29, 2002, the Company had foreign loss carryforwards of
$4.1 million (Germany $.6 million and U.K. $3.5 million), which do not expire. A
full valuation allowance has been provided against the tax benefit of the U.K.
carryforwards due to uncertainty of future profitability of these operations.
In 2000, the Company recorded a deferred tax asset of $2.767 billion
relating to the tax effects of the liabilities subject to compromise. Total
deferred tax assets and liabilities at December 31, 2000 amounted to $2.772
billion. Based on its historical domestic taxable income, the Company expected
to realize approximately $140 million of the deferred tax asset through the
ten-year carryback of the previously paid domestic taxes and the expected tax
benefits during the twenty-year carryforward period. In addition, the Company
has recognized a deferred tax asset in connection with German loss
carryforwards. Accordingly, the Company in 2000 had recorded a valuation
allowance of $2.633 billion against the deferred tax asset to state it at its
expected net realizable value. The Plan became effective during 2001 and the
liabilities subject to compromise were settled for less than the recorded amount
of allowed claims. The net deferred tax asset was adjusted accordingly.
The Company owns 57% of the stock of Allomatic Products Company
("APC"). The Company has not recorded a deferred tax liability for the
undistributed earnings of APC since management expects that those earnings will
be distributed to the Company in a tax-free transaction. However, the deferred
tax liability on the undistributed earnings of APC would be approximately $1.3
million at
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December 29, 2002, if all of APC's earnings were to be distributed through the
distribution of dividends.
Extraordinary Item
A note payable to the former AFM principal dated April 1998 was settled
in October 2001. The settlement agreement required a payment of $3.1 million.
Prior to the settlement, the Company had a note payable of $3.0 million and
accrued interest of $1.6 million recorded. The Company has recorded an
extraordinary gain in the fourth quarter of 2001 in the amount of $954 thousand
net of taxes of $594 thousand, which was comprised substantially of accrued
interest.
Business Segment and Geographic Area Results
The following discussion of operating results by industry segment and
geographic area related to information contained in Note F in the Consolidated
Financial Statements. Operating profit is income before income taxes, minority
interest, provision for asbestos litigation, provision for environmental claims
and extraordinary items.
(in thousands)
Thirty-Nine-Week Period Ended
----------------------------------------
Sales Summary December 29, 2002 December 30, 2001
------------- ----------------- -----------------
Wet Friction $ 103,582 $ 95,512
Aftermarket 33,708 34,384
Dry Friction 27,091 22,074
Eliminations (7,224) (5,920)
--------- ---------
Net sales $ 157,157 $ 146,050
========= =========
Wet Friction Segment
The Wet Friction segment recorded sales of $103.6 million for the
thirty-nine-week period ended December 29, 2002 compared to $95.5 million for
the same period in the prior year, an increase of $8.1 million or 8.5%. The
increase was due to increased sales to the automotive OEM component of the Wet
Friction segment. The increased sales were substantially the result of acquiring
additional business with General Motors, which provided additional sales of $6.0
million, and a stronger automotive production environment in the
thirty-nine-week period in 2002, which contributed additional sales of $3.3
million, compared to the automotive market in the same period in 2001. Sales
growth in the automotive OEM component was offset by a decline in sales of $1.2
million in the heavy duty component of this segment due to the slow economy in
construction and mining and strong competition.
The operating profit for the thirty-nine-week period ended December 29,
2002 of $1.8 million compares to the operating profit of $3.4 million for the
same period in the prior year. The reduced operating profit is the result of
startup costs associated with the expanded automotive OEM business acquired in
2002.
Aftermarket Segment
The Aftermarket segment recorded sales of $33.7 million for the
thirty-nine-week period ended December 29, 2002 compared to $34.4 million for
the same period in the prior year, a decrease of $.7 million or 2.0%. Operating
profit for this thirty-nine-week period of $5.4 million compares to $6.0 million
for the
-21-
same period in the prior year, a decrease of $.6 million, a reduction of 10.0%.
The reduced operating profit is attributable to the lower sales
period-over-period and increased SG&A expenses.
Dry Friction Segment
The Dry Friction segment recorded sales of $27.1 million for the
thirty-nine-week period ended December 29, 2002 compared to $22.1 million for
the same period in the prior year, an increase of $5.0 million or 22.6%. The
sales increase was due to improved sales through the production facility in
China, which accounted for a substantial portion of the sales growth. Sales
through the production facility in Germany measured in the euro, which is the
functional currency, were EUR21.6 million compared to EUR20.5 million in the
same period in the prior year. The operating profits for the Dry Friction
segment for the thirty-nine-week period of $.9 million compares to operating
profit of $.6 million in the same period in the prior year, an increase of $.3
million. Operating profit measured in euros for the German operation was EUR.7
million compared to EUR.8 million in 2001. The increased profit is attributable
to the growth in China.
Results of Operations for the Successor Company for the Period December 31, 2001
through March 31, 2002 and Predecessor Company for the Period January 1, 2001
through April 1, 2001
Net Sales
Worldwide net sales of $52.7 million for the thirteen-week period ended
March 31, 2002 compared to $55.2 million for the same period in the prior year
for a decline of $2.5 million or 4.5%. The details of the sales performance are
presented below distinguishing the sales performance in each business segment.
The Wet Friction segment reported sales of $34.3 million in the first
quarter of 2002 compared to $37.0 million in the same period in the prior year,
a decline of $2.7 million, representing a significant portion of the sales
decline for the Company in the period. The primary market impacted is the heavy
duty component of this segment in both Europe and domestically. The automobile
OEM component of this segment reflected sales at the same level as 2001.
The Aftermarket segment recorded net sales of $12.5 million for the
thirteen-week period ended March 31, 2002 compared to $13.1 million for the same
period in the prior year, a decline of $.6 million or 4.6%. The sales decline
was due to a variety of issues including the mild winter weather, better
inventory management at our customers and the improved quality of components at
the OEM level.
The Dry Friction segment recorded sales of $8.2 million for the first
quarter of 2002 compared to $8.1 million in the same period in the prior year.
The sales reflect increased sales through the operation in China of $1.3 million
offset by reduced sales through the operation in Germany of approximately the
same amount. The reduction in German sales includes a negative currency
translation impact of approximately $.4 million.
Gross Profit
The Company recorded gross profit of $10.5 million for the
thirteen-week period ended March 31, 2002 on sales of $52.7 million yielding a
gross margin percentage of 20.0%. This compares to a gross profit of $11.4
million for the same period in the prior year on sales of $55.2 million, a gross
profit margin of 20.6%. The gross profit in 2002 was reduced by $1.1 million due
to increased
-22-
depreciation and amortization as a result of the application of fresh-start
accounting post first quarter of 2001. The impact of the increased amortization
and depreciation was a reduction in the gross profit margin of 2.1%. On a
comparable basis, the gross margin has increased period-over-period 1.5
percentage points due to cost reduction programs instituted throughout 2001 and
the first quarter of 2002.
Selling, General and Administrative
The selling, general and administrative expenses for the thirteen-week
period ended March 31, 2002 were $7.6 million compared to $7.7 million for the
same period in the prior year, a reduction of $.1 million or 1.3%. The lower
costs reflect the impact of certain cost reduction programs implemented in 2001
balanced with Raytech's commitment to investing in technology for future growth.
Interest Expense
Interest expense for the first quarter of $.3 million compares to
interest expense, excluding Raymark interest, of $.4 million in the same period
in the prior year, a reduction of 25.0%. The reduction is due to lower rates in
2002 on domestic debt. The interest rate on foreign debt is approximately the
same.
Operating Profits
The following discussion of operating profits by industry segment
relates to information contained in Note F - Segment Reporting to the
Consolidated Financial Statements. Operating profit is income before provision
for asbestos litigation, provision for environmental and other claims, income
taxes, minority interest and extraordinary items.
Operating profit of $2.8 million was recorded for the first quarter of
2002 compared to $3.5 million for the same period in the prior year, a decrease
of $.7 million or 20.0%. The operating profit was negatively affected by the
reduced sales period-over-period of $2.5 million. Additionally, operating
profits were reduced by the impact of fresh-start accounting due to the increase
in depreciation and amortization of $1.1 million in comparing first quarter 2002
to the first quarter of 2001.
The Wet Friction segment posted operating profits of $1.5 million, an
increase of $.2 million over the same period in the prior year, or an increase
of 15.4%. This increase was accomplished on lower sales of $2.7 million and was
due to implementing cost reduction programs in 2001 and 2002.
The Aftermarket segment recorded operating profit for the quarter of
$2.6 million compared to $2.1 million in the same period in the prior year, an
increase of $.5 million or 23.8%. The improved operating income performance
despite a decrease in sales is due to cost reduction programs initiated in 2001
and 2002 coupled with improved material pricing. Additionally, management works
closely with the work force in this segment to maximize the peaks and valleys of
manufacturing and shipping product in the aftermarket industry.
The Dry Friction segment recorded operating profit of $.8 million for
the thirteen-week period ended March 31, 2002 compared to $.8 million in the
same period in the prior year. The operating income reflects improved operating
profits from the operation in China offset by reduced operating profit in
Europe. The decline in Europe is due primarily to lower volume sales.
Income Taxes
-23-
The effective tax rate for the thirteen-week period ended March 31,
2002 is 38.5% compared to an effective rate of 42% for the same period in the
prior year. The rate for the current period reflects a statutory federal rate
adjusted for state and foreign taxes. The rate differs from the 2001 rate by 3.5
percentage points caused primarily by certain adjustments in the prior period
related to the bankruptcy process.
Liquidity and Capital Resources
Cash and cash equivalents at December 29, 2002 were $20.0 million
compared to $14.5 million at December 30, 2001, an increase of $5.5 million
year-over-year. Cash flow from operating activities for the 2002 year were $13.0
million compared to $14.2 million in 2001, a decrease of $1.2 million
year-over-year. Capital expenditures for the 2002 year of $9.6 million were
approximately the same compared to the 2001 capital expenditures of $10.2
million. Both years' capital expenditures were in line with management's
expectations. The net cash from financing activities for 2002 of $1.8 million
compares to net cash used in financing activities in 2001 of $3.1 million, a
change year-over-year of $4.9 million. The net cash provided by financing
activities in 2002 represents net borrowings of $1.3 million in addition to the
proceeds from the exercise of stock options of $.5 million.
Accounts receivable at December 29, 2002 of $26.6 million compares to
$23.0 million at December 30, 2001, an increase of $3.6 million. Days sales in
accounts receivable at year-end 2002 of 46 days compares to 42 days sales in
accounts receivable at year-end 2001, an increase of 4 days.
Inventory at year-end 2002 of $34.1 million compares to $31.6 million
at year-end 2001, an increase of $2.5 million. Days sales in inventory at
year-end 2002 of 72 days represents an increase of 4 days over the 2001 level of
68 days.
The Company maintains borrowing facilities both domestically and with
foreign lenders, the details of which are contained in Note D to the Notes to
the Consolidated Financial Statements. The following represents the outstanding
debt and available lines of credit at year-end 2002 and 2001:
(in thousands)
2002 2001
------------------------------------- -------------------------------------
Current Non-Current Total Current Non-Cu Total
------- ----------- ----- ------- ------ -----
Domestic bank debt $11,306 $ - $11,306 $ 6,209 $ 2,750 $ 8,959
Foreign bank debt 3,609 4,095 7,704 3,934 3,895 7,829
------- ------- ------- ------- ------- -------
Total bank debt 14,915 4,095 19,010 10,143 6,645 16,788
Leases 176 198 374 119 175 294
------- ------- ------- ------- ------- -------
Total borrowings $15,091 $ 4,293 $19,384 $10,262 $ 6,820 $17,082
======= ======= ======= ======= ======= =======
Available lines of credit:
2002 2001
---- ----
Domestic $ 5,006 $ 6,129
Foreign 3,829 1,265
------- -------
Total $ 8,835 $ 7,394
======= =======
-24-
The current domestic loan agreement with Congress Financial Corporation
has a covenant requiring the borrowing companies to maintain a twelve-month
rolling earnings before interest, taxes, depreciation and amortization (EBITDA)
of $15 million (see Note D). The domestic borrowing facility matures in
September 2003. The Company is reviewing borrowing alternatives and intends to
enter into a new lending arrangement by September 2003.
The Company assumed the liability for the Raymark pension plans as part
of the reorganization. Funding for the plans in 2003 is expected to be
approximately $7.6 million.
The Company is complying with a Federal Order issued by the U.S.
Environmental Protection Agency (EPA) at its manufacturing facility in
Crawfordsville, Indiana. The Company reevaluated the projected cost to complete
this project in 2002 and determined that, based on work completed to date, the
estimate previously received from its environmental engineering firm was not
sufficient to complete the project. The Company has employed a new environmental
engineering firm and a new construction company to complete this project. The
scope of the cleanup plan has not changed, and the additional charge recorded
during the year, of $5.4 million, is expected to be sufficient to complete this
project.
The Company has an accrued liability at December 29, 2002 of $7.0
million for the completion of the remediation. The Company began the year with
an accrued liability of $6.8 million, reduced by payments of $5.2 million and
increased by an additional accrual of $5.4 million, providing for the ending
accrual of $7.0 million. This remediation project is more fully described under
the heading Provision for Environmental Remediation. Additionally, see Note E to
the Notes to the Consolidated Financial Statements.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement"), all tax benefits received by the Company due to the reorganization
are to be passed onto the PI Trust as received. At December 29, 2002, the
Company had tax loss carryforwards of $ 74.8 million and tax credit
carryforwards of $1.2 million. The net operating loss carryforwards are
allocated between Raytech Corporation and the PI Trust in the amounts of $2.8
million and $72.0 million, respectively. Additionally, future payments to the PI
Trust and others will create additional tax deductions, which will inure to the
benefit of the PI Trust in accordance with the Agreement. These include
deductions for payments to the PI Trust of tax benefits associated with the
utilization of the net operating losses created by the reorganization, and
contributions made to the Raymark pension plan. To the extent Raytech
Corporation generates net operating losses in future periods, exclusive of net
operating losses attributable to the payments discussed above, those net
operating losses will be retained by the Company. The method of allocation in
utilizing future net operating losses between the PI Trust and Raytech
Corporation has not been determined at this time. Additional tax recoveries
expected to be received in future periods are shown as deferred tax assets and a
deferred payable to the PI Trust which amounted to $42.4 million at December 29,
2002.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit,
or any other years in the carryback period, are, pursuant to the Agreement, the
-25-
responsibility of the PI Trust and will therefore reduce the deferred tax assets
associated with, and liability payable to, the PI Trust.
Management believes that existing cash balances, the Company's ability
to replace the current lending facility and cash flow from operations during
2003 will be sufficient to meet all of the Company's obligations arising in the
normal course of business, including anticipated capital investments.
Financial Risks
The Company maintains lines of credit with United States and foreign
banks, as well as other creditors detailed in Note D in the Consolidated
Financial Statements. The Company is naturally exposed to various interest rate
risk and foreign currency risk in its normal course of business.
The Company effectively manages its accounts receivable as evidenced by
the average days sales in trade receivables of 46 days. This allows for minimum
borrowings in supporting inventory and trade receivables. Management does not
anticipate a significant change in fiscal policy in any of its borrowing markets
in 2003 given current economic conditions. Further, the Company can reduce the
short-term impact of interest rate fluctuation through deferral of capital
investment should the need arise.
The Company maintains borrowings in both fixed rate and variable rate
debt instruments. The fixed rate debt at year-end 2002 of $6.3 million had rates
of interest that ranged from 2.5% to 6.2%. The variable rate debt at year-end
2002 of $13.1 million had rates of interest that ranged from 4.2% to 9.6%. The
variable debt reprices either at prime rate or the Eurodollar rate. The Company
has not entered into any interest rate management programs such as interest rate
swaps or other derivative type transactions. The amount of exposure which could
be created by increases in rates is not considered significant by management.
The local currencies of the Company's foreign subsidiaries have been
designated as their functional currencies. Accordingly, financial statements of
foreign operations are translated using the exchange rate at the balance sheet
date for assets and liabilities, historical exchange rates for elements of
stockholders' equity and an average exchange rate in effect during the year for
revenues and expenses. Where possible, the Company attempts to mitigate foreign
currency translation effects by borrowing in local currencies to fund
operations. The Company does not believe that the fluctuation in foreign
currency will have a material adverse effect on the Company's overall financial
condition. Additionally, the Company does not enter into agreements to manage
any currency transaction risks.
Outlook
The Company presently estimates financial performance in 2003 to be
similar to the 2002 year financial performance, absent the charges for
environmental remediation. There are typical business risks which exist in the
domestic and foreign markets, which could negatively impact management's
estimate.
Recently Issued Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 145 (SFAS 145) "Recision of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections." The
Statement rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, when material, classified as an
extraordinary item net of the related income tax effect. FAS 145 also amends FAS
13 to require that certain lease modifications having economic effect similar to
sale-leaseback transactions be accounted for in the same manner as
-26-
sale-leaseback transactions. The Company adopted the provisions of SFAS No. 145
as of April 1, 2002 except for the provisions which rescind SFAS 4, which will
be adopted in fiscal 2003. SFAS 145 did not have an effect on the financial
position or results of operations for 2002.
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 146 (SFAS No. 146), "Accounting for Costs Associated
with Exit or Disposal Activities." The objectives of SFAS No. 146 are to address
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 nullified Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS No. 146 and Issue No.
94-3 relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity to be recognized when the liability
is incurred. Under Issue No. 94-3, a liability for an exit cost as defined in
Issue No. 94-3 was recognized at the date of an entity's commitment to an exit
plan. The provisions of SFAS No. 146 will be effective for the Company for exit
or disposal activities that are initiated after December 31, 2002.
In December 2002, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 148 (SFAS No. 148) "Accounting for Stock Based
Compensation - Transition and Disclosure." This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure
about those effects in interim financial information. The Company adopted the
disclosure provisions of this Statement as of December 29, 2002. Should the
Company choose to implement the fair value based method for its stock-based
compensation in the future, it will be required to adopt the remaining
provisions of SFAS No. 148.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to a
guarantor's accounting for, and disclosure of, the issuance of certain types of
guarantees. For certain guarantees issued after December 31, 2002, FIN 45
requires a guarantor to recognize, upon issuance of a guarantee, a liability for
the fair value of the obligations it assumes under the guarantee. Guarantees
issued prior to January 1, 2003 are not subject to liability recognition but are
subject to expanded disclosure requirements. We do not believe that the adoption
of this Interpretation will have a material impact on our consolidated financial
position or statement of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51." Under FIN 46, which requires companies to consolidate
variable interest entities for which the company is deemed to be the primary
beneficiary, and to disclose information about variable interest entities in
which the company has a significant variable interest. FIN 46 became effective
immediately for variable interest entities formed after January 31, 2003 and
will become effective in the third quarter of 2003 for any variable interest
entities formed prior to February 1, 2003. Raytech Corporation will adopt FIN 46
as it becomes effective but does not have any such entities.
Results of Operations for the Successor Company for the Period April 3, 2001
-27-
through December 30, 2001 compared with the Predecessor Company for the Period
April 3, 2000 through December 31, 2000
Raytech Corporation revenues for the thirty-nine-week period ended
December 30, 2001 were $146.1 million compared to $172.1 million in the same
period in the prior year. Raytech Corporation recorded a net loss of $5.6
million for the 39-week period ended December 30, 2001 compared to a net loss of
$7.1 billion for the same period in the prior year. The Company recorded $.13
and $2,012.64 loss per basic share for the thirty-nine-week period ended
December 30, 2001 and December 31, 2000, respectively.
In developing a comparative analysis of the thirty-nine-week periods
ended December 30, 2001 and December 31, 2000, the following table sets forth
the quantitative information for the two periods. The periods are unusual due to
the recording of certain adjustments relating to the emergence from bankruptcy
in 2001 and the recording of the significant amounts pertaining to the
liabilities subject to compromise in 2000. It is important for the reader to be
aware of these events in reading the comparative information.
(in thousands)
Thirty-Nine-Week Period Ended
----------------------------------------
December 30, 2001 December 31, 2000
----------------- -----------------
(Successor Company) (Predecessor Company)
Sales $ 146,050 $ 172,057
Cost of sales (124,590) (130,677)
------- -------
Gross profit 21,460 41,380
Selling, general and
administrative expenses (24,782) (23,706)
Other 31 166
------ ------
Operating (loss) profit (3,291) 17,840
Interest expense (873) (1,639)
Reorganization items (784) -
Other 598 1,034
Provision for environmental (5,860) (450,250)
Provision for asbestos litigation - (6,760,000)
--------- ------------
Loss before minority interest,
income taxes and extraordinary
item (10,210) (7,193,015)
Income tax benefit 4,564 130,247
--------- ------------
Loss before minority interest and
extraordinary item (5,646) (7,062,768)
Minority interest (885) (1,030)
--------- ------------
Loss before extraordinary item (6,531) (7,063,798)
Extraordinary item 954 -
--------- ------------
Net loss $ (5,577) $ (7,063,798)
========= ============
Net Sales
Worldwide net sales were $146.1 million for the thirty-nine-week period
ended December 30, 2001 compared to $172.1 million in the same period in the
prior year, a reduction of $26 million or 15.1%. The Wet Friction segment sales
for the period of $95.5 million were lower than the prior period amount of
$117.9 million by $22.4 million or 19.0%. The sales shortfall in this segment is
caused by a reduction in sales in the heavy duty original equipment component of
this segment as well as the automotive original equipment market. The poor
economy in the United States was the primary reason for this decline. The
Aftermarket segment recorded sales of $34.4 million for the thirty-nine-week
period ended December 30, 2001 compared to $43.4 million for the same
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period in the prior year, a reduction of $9.0 million or 20.7%. The reduction is
due to the loss of business at major customers. The Dry Friction segment
recorded sales for the period of $22.1 million compared to $20.6 million for the
same period in the prior year, an increase of $1.5 million or 7.3%. The increase
was due substantially to improved production and sales through the facility in
China.
The changes in the individual segments are more fully detailed in the
Business Segment section.
Gross Profit
The gross profit for the thirty-nine-week period ended December 30,
2001 of $21.5 million is $19.9 million less than the recorded amount of $41.4
million for the same period in the prior year, a decline of 48%. The gross
profit expressed as a percentage was 14.7% for the thirty-nine-week period ended
December 30, 2001 compared to 24.1% for the same period in the prior year, a
decline of 9.4 percentage points. The gross profit was reduced
period-over-period by increased amortization of intangibles of $1.5 million and
increased depreciation of $1.6 million due to the adjustments to the balance
sheet accounts in applying fresh-start accounting. In addition, the gross profit
for the period was reduced by $5.9 million due to the step-up in inventory value
to fair value also as a consequence of applying fresh-start accounting. The sum
of the aforementioned adjustments reduced gross profit by $9 million, or 21.7%,
in comparison to the results for the same period in the prior year. The
remaining reduction of $10.9 million (26.3%) is a result of the reduced sales
period-over-period of $26 million. The 42% impact on gross margin is consistent
with the historic contribution margins maintained by the Company. During the
2001 period, the Company instituted various cost reduction programs focused on
reducing material and labor costs and the variable components of overhead costs.
Overall the number of employees were reduced from 1,642 to 1,531, a reduction of
111 employees or 6.8%.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for the period
April 3, 2001 through December 30, 2001 were $24.8 million compared to $23.7
million for the same period in the prior year, an increase of $1.1 million or
5%. The increase period-over-period is due in part to the increase in the
amortization of intangible assets of $.2 million, which is a result of the
application of fresh-start accounting. In addition, legal and professional fees
for the period amounted to $2.5 million related to environmental issues, certain
costs associated with litigation in support of the Raymark actions for recovery
of certain assets, other legal matters and other professional fees. Certain of
these fees were historically used to offset the Raymark debt (under the Raymark
indemnification agreement) in the prior period. In connection with the
bankruptcy proceedings, Raytech assumed the liability for the Raymark pension
plans. The pension cost for the thirty-nine-week period ended December 30, 2001
amounted to $784 thousand. This plan was not a liability for Raytech in the same
period in the prior year. These increased expenses
-29-
were offset by cost reduction programs, primarily in human resources, within the
traditional costs associated with SG&A.
Interest Expense
Interest expense for the thirty-nine-week period ended December 30,
2001 totaled $.9 million compared to $1.6 million in the same period in the
prior year, a decrease of $.7 million or 44%. The elimination of the Raymark
debt, as a component of the Plan of Reorganization accounted for $.2 million of
the decline. The remaining $.5 million was due to the reduction in the domestic
borrowing rate from an average of 5.0% for the period April 3, 2001 through
December 30, 2001 compared to an average borrowing rate of 9.5% for the same
period in the prior year.
Reorganization Items
In connection with the bankruptcy proceedings, Raytech incurred
approximately $784 thousand in professional fees during the thirty-nine-week
period ended December 30, 2001. These fees related to accounting, legal,
consulting and other miscellaneous services.
Provision for Environmental and Asbestos Litigation
The Company recorded an expense for environmental liability during the
thirty-nine-week period ended December 30, 2001 of $5.9 million. The Company is
complying with a Federal Order issued by the U.S. Environmental Protection
Agency (EPA) at its manufacturing facility in Crawfordsville, Indiana. The
Company has an accrued liability of $7.4 million at December 30, 2001, which
should provide for full remediation and fines in compliance with the Order. See
Note E in the Consolidated Financial Statements for more details.
In addition, in the thirty-nine-week period ended December 31, 2000,
the Company recorded as a component of the liabilities subject to compromise an
expense of $450.3 million, which consisted of $431.8 million in claims from the
Federal and certain State Governments for certain environmental issues, $16
million as an estimate for the Raymark pension obligation and $2.5 million for
certain claims related to other Raymark employee plans. In addition, an expense
of $6.8 billion was recorded during the period to reflect the estimated claims
associated with the asbestos litigation. All of the above matters were settled
in conjunction with the Plan of Reorganization.
Income Tax Benefit
For tax reporting purposes, the Company's emergence from bankruptcy did
not create a new tax reporting entity. Accordingly, the adjustments to adopt
fresh-start accounting are not applicable for the Company's tax reporting.
Therefore, with the exception of goodwill, these adjustments have created new
deferred tax items.
The effective tax rate for the thirty-nine-week period ended December
30, 2001 was a 45% benefit compared to a 1.8% benefit in the same period in the
prior year.
The effective tax rate for the year ended December 30, 2001 was 28%
compared to 42% for the year ended December 31, 2000, excluding the deferred tax
benefit in 2000 referred to below. In calculating the effective tax rate, the
distinction between Successor Company and Predecessor Company is not relevant as
explained above; therefore, the taxable income for book purposes in 2001 is
$93.3 million. The income tax provision for this period is $26.3
-30-
million, hence the effective rate for the year is as noted, 28%.
The Company's tax rate differs from the federal statutory rate of 35%
due primarily to the effect of recording goodwill as part of the fresh-start
adjustments, which reduced the tax rate for the period approximately 9%.
Additionally, the effect of providing for certain State, foreign and other tax
adjustments increased the effective rate 2%.
In connection with the Company's emergence from bankruptcy, the Company
recorded an income tax receivable and payable to the PI Trust in the amount of
$38 million resulting from net operating losses arising from the transfer of
stock and cash to the PI Trust carried back to 1991 through 2000. Pursuant to
the Tax Benefits Assignment and Assumption Agreement (the "Agreement"), all tax
benefits received by the Company due to the reorganization are to be passed onto
the PI Trust as received. The Company has tax loss carryforwards of $30.2
million and tax credit carryforwards of $4.9 million at December 30, 2001, all
of which will inure to the benefit of the PI Trust. Additionally, future
payments to the PI Trust and others will create additional tax deductions, which
will inure to the benefit of the PI Trust in accordance with the Agreement.
These include deductions for payments to the PI Trust of tax benefits associated
with the utilization of the operating losses created by the reorganization, and
contributions made to the Raymark pension plan. To the extent Raytech
Corporation generates losses in future periods, exclusive of losses attributable
to the payments discussed above, those losses will be retained by the Company.
The method of allocation in utilizing future operating losses between the PI
Trust and Raytech Corporation has not been determined at this time. Additional
tax recoveries to be received in future periods are shown as deferred tax assets
and a deferred payable to the PI Trust which amounted to $41.8 million at
December 30, 2001.
The Company has filed for and received in 2002 Federal tax refunds of
$32.1 million. Pursuant to the Agreement, Raytech has paid over to the Trust
$22.5 million of the refund and retained $9.6 million as required by the
holdback provision of the Agreement. The Company expects to file returns
relating to the $6 million due from state governments in 2002.
The Company is under audit for 1996 through 1998, and it is anticipated
the audit will be expanded through year-end 2001. Any tax assessment, up to the
amount of the refunds received, arising from this audit, or the future audit of
the current year, or any other years in the carryback period, are, pursuant to
the Agreement, the responsibility of the PI Trust and will therefore reduce the
deferred tax asset associated with, and liability payable to, the PI Trust.
At December 30, 2001, the Company had foreign loss carryforwards of
$3.1 million (Germany $1.2 million, China $0.2 million and U.K. $1.7 million),
which do not expire. A valuation allowance has been provided against the tax
benefit of the U.K. carryforwards due to uncertainty of future profitability of
these operations.
In 2000, the Company recorded a deferred tax asset of $2.767 billion
relating to the tax effects of the liabilities subject to compromise. Total
deferred tax assets and liabilities at December 31, 2000 amounted to $2.772
billion. Based on its historical domestic taxable income, the Company expected
to realize approximately $140 million of the deferred tax asset through the
ten-year carryback of the previously paid domestic taxes and the expected tax
benefits during the twenty-year carryforward period. In addition, the Company
has recognized a deferred tax asset in connection with German loss
carryforwards. Accordingly, the Company in 2000 had recorded a valuation
-31-
allowance of $2.633 billion against the deferred tax asset to state it at its
expected net realizable value. The Plan became effective during 2001 and the
liabilities subject to compromise were settled for less than the recorded amount
of allowed claims. The net deferred tax asset was adjusted accordingly.
The Company owns 56.95% of the stock of Allomatic Products Company
("APC"). The Company has not recorded a deferred tax liability for the
undistributed earnings of APC since management expects that those earnings will
be distributed to the Company in a tax-free transaction. However, the deferred
tax liability on the undistributed earnings of APC would be approximately $1.0
million at December 30, 2001, if all of APC's earnings were to be distributed
through the distribution of dividends.
Extraordinary Item
A note payable to the former AFM principal dated April 1998 was settled
in October 2001. The settlement agreement required a payment of $3.1 million.
Prior to the settlement, the Company had a note payable of $3.0 million and
accrued interest of $1.6 million recorded. The Company has recorded an
extraordinary gain in the fourth quarter of 2001 in the amount of $954 thousand
net of taxes of $594 thousand, which was comprised substantially of accrued
interest.
Business Segment and Geographic Area Results
The following discussion of operating results by industry segment and
geographic area relates to information contained in Note F in the Consolidated
Financial Statements. Operating profit is income before provision for asbestos
litigation, provision for environmental and other claims, income taxes, minority
interest, and extraordinary items.
Successor Company Net Sales by Business Segment (in thousands)
-----------------------------------------------
Wet Friction $ 95,512
Aftermarket 34,384
Dry Friction 22,074
Wet Friction Segment
(in thousands)
Net Sales Operating Profit
SUCCESSOR COMPANY
April 3, 2001 through
December 30, 2001 $ 95,512 $ 3,387
--------- -------
PREDECESSOR COMPANY
April 3, 2000 through
December 31, 2000 $ 117,927 $11,740
--------- -------
Wet Friction Segment
Revenues decreased 19.0% percent to $95.5 million during the period
April 3, 2001 through December 30, 2001 as compared with $117.9 million in the
same period in the prior year. The decline was caused primarily by the low
automobile production in North America as the slow economy impacted the buying
patterns of consumers. As inventory levels of automobiles increased during the
period April through September 2001, production schedules at our facilities were
adjusted to reflect the changes in demand. In the period October through
December 2001, automobile sales increased due to favorable financing packages
available to consumers. These increased sales served to reduce automobile
-32-
inventory levels rather than provide for increased production at our facilities.
In addition to the impact of the poor economy in the United States, the Company
provided price concessions totaling $.9 million. Further, the loss of business
in the automobile OEM component of the segment reflected $2.8 million of lost
business due to technology changes in certain transmissions manufactured by our
customer base. This reduction was offset somewhat by providing components for
the new technology. Additionally, the loss of certain business to foreign
production amounted to $2.4 million in reduced sales. The remaining sales
decline of $12.9 million was attributed to the poor economy.
The operating profit for the thirty-nine-week period ended December 30,
2001 of $3.4 million compared unfavorably to the $11.7 million recorded in the
same period in the prior year, a reduction of $8.3 million. The sales reduction
of $22.4 million for the period was the cause of the reduced operating profit.
The relationship between sales and operating profit reflects a 65% decrease in
operating profit as a percentage of reduced sales. The Company was able to
maintain this ratio through cost reduction programs, which were implemented in a
timely manner.
Aftermarket Segment
(in thousands)
Net Sales Operating Profit
--------- ----------------
SUCCESSOR COMPANY
April 3, 2001 through
December 30, 2001 $ 34,384 $ 6,035
--------- -------
PREDECESSOR COMPANY
April 3, 2000 through
December 31, 2000 $ 43,448 $ 8,207
--------- -------
The Aftermarket segment recorded sales of $34.4 million for the
thirty-nine-week period ended December 30, 2001 compared to $43.4 million for
the same period in the prior year, a decrease of $9.0 million or 20.7%. The
decrease in sales is due to the loss of business at major customers. In addition
to the poor economy, this segment lost sales due to the acquisition of a major
customer by a group which was more aligned to purchasing friction products from
a major competitor of Raytech. This accounted for $6.3 million in reduced sales.
Further, another major customer brought in-house the manufacturing of certain
steel plate parts, which was reflected in reduced sales of $2.3 million. The
remaining sales reduction of $.4 million was attributed to the poor U.S.
economy.
Operating profits for the Aftermarket segment for the thirty-nine-week
period ended December 30, 2001 were $6.0 million compared to $8.2 million for
the same period in the prior year, a reduction of $2.2 million or 26.8%. The
Aftermarket segment reacted in a timely manner to the sales decline and reduced
costs through an internal reorganization which streamlined certain distribution
functions and also reduced costs in the manufacturing process.
-33-
Dry Friction Segment
(in thousands)
Net Sales Operating Profit (Loss)
--------- -----------------------
SUCCESSOR COMPANY
April 3, 2001 through
December 30, 2001 $ 22,074 $ 603
--------- -----
PREDECESSOR COMPANY
April 3, 2000 through
December 31, 2000 $ 20,581 $ (.3)
--------- -----
Revenues of $22.1 million were recorded in the thirty-nine-week period
ended December 30, 2001 compared to $20.6 for the same period in the prior year,
an increase of $1.5 million or 7.3%. The increase was due to increased sales
through the operations in China, which were opened in 1998. Revenues for the
China operations for the period were $4.8 million compared to $3.0 million for
the same period in 2000, an increase of $1.8 million or 60%. The revenue
generated through the German operation was substantially the same as in the same
period in the prior year.
The operating profits for this segment for the period of $.6 million
compared to a loss in the same period in the prior year of $.3 million, an
increase period-over-period of $.9 million. This improved operating profit is
attributable entirely to the increased sales through the China facility.
Results of Operations for the Predecessor Company for the Thirteen-Week-Periods
ended April 1, 2001 and April 2, 2000
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 $9.9 million compared to 2000, a decline of 22.5%.
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 $37.0 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.
-34-
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 DM16.0 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 F to the Consolidated Financial
Statements. Operating profit is income before provision for asbestos litigation,
provision for environmental and other claims, income taxes, minority interest
and extraordinary items.
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 79.7%. The decline in sales of this segment of 21.4%, or $10.1
million, and the resulting under absorption 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
-35-
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.
Item7a. Quantitative and Qualitative Disclosures about Market Risk
See Item 7.
-36-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Consolidated Balance Sheets at December 29, 2002 (Successor
Company) and December 30, 2001 (Successor Company)
Consolidated Statements of Operations for the year ended
December 29, 2002 (Successor Company), for the period April 3,
2001 to December 30, 2001 (Successor Company), for the period
January 1, 2001 to April 2, 2001 (Predecessor Company) and for
the year ended December 31, 2000 (Predecessor Company)
Consolidated Statements of Cash Flows for the year ended
December 29, 2002 (Successor Company), for the period April 3,
2001 to December 30, 2001 (Successor Company), for the period
January 1, 2001 to April 2, 2001 (Predecessor Company) and for
the year ended December 31, 2000 (Predecessor Company)
Consolidated Statements of Changes in Shareholders' Equity for
the year ended December 29, 2002 (Successor Company), for the
period April 3, 2001 to December 30, 2001 (Successor Company),
for the period January 1, 2001 to April 2, 2001 (Predecessor
Company) and for the year ended December 31, 2000 (Predecessor
Company)
Notes to Consolidated Financial Statements
Report of Independent Accountants
-37-
RAYTECH CORPORATION
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
----------------------------------------------------------------------------------------------
December 29, December 30,
At Fiscal Year Ended 2002 2001
----------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 19,983 $ 14,463
Restricted cash 2,027 5,396
Trade accounts receivable, less allowance
of $824 for 2002 and $729 for 2001 26,640 22,961
Inventories, net 34,057 31,562
Income tax receivable 4,793 37,877
Other current assets 5,078 7,048
--------------------------------------------------------------------------------------------
Total current assets 92,578 119,307
--------------------------------------------------------------------------------------------
Property, plant and equipment 131,378 119,678
Less accumulated depreciation (25,257) (10,386)
--------------------------------------------------------------------------------------------
Net property, plant and equipment 106,121 109,292
--------------------------------------------------------------------------------------------
Intangible assets, net 70,562 72,790
Deferred income taxes 21,906 16,600
Other assets 3,054 2,799
--------------------------------------------------------------------------------------------
Total assets $ 294,221 $ 320,788
============================================================================================
LIABILITIES
Current liabilities
Notes payable and current portion of long-term debt $ 15,091 $ 10,262
Current portion of pension obligation 8,030 7,049
Accounts payable 15,089 13,268
Accrued liabilities 26,258 22,694
Payable to the PI Trust 4,793 37,877
--------------------------------------------------------------------------------------------
Total current liabilities 69,261 91,150
--------------------------------------------------------------------------------------------
Long-term debt 4,293 6,820
Pension obligation 12,815 15,409
Postretirement benefits other than pension 13,800 12,876
Deferred payable to the PI Trust 42,356 41,759
Other long-term liabilities 827 987
--------------------------------------------------------------------------------------------
Total liabilities 143,352 169,001
--------------------------------------------------------------------------------------------
Minority interest 8,759 7,704
Commitments and contingencies
SHAREHOLDERS' EQUITY
Capital stock
Cumulative preferred stock, no par value
5,000,000 shares authorized, none issued and
outstanding - -
Common stock, par value $1.00, 50,000,000 shares
authorized, 41,701,554 and 41,528,520 issued and
outstanding for 2002 and 2001, respectively 41,701 41,528
Additional paid in capital 117,458 116,843
Accumulated deficit (8,402) (5,577)
Accumulated other comprehensive loss (8,647) (8,711)
--------------------------------------------------------------------------------------------
Total shareholders' equity 142,110 144,083
--------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 294,221 $320,788
============================================================================================
The accompanying notes are an integral part of these statements.
-38-
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Successor Company Predecessor Company
----------------- -------------------
Ended For the Period For the Period For the
For the Year Apr. 3, 2001 to January 1, 2001 to Year Ended
Fiscal Year 2002 Dec. 30, 2001 April 2, 2001 2000
------------------------------------------------------------------------------------------------------------------
Net sales $ 209,866 $ 146,050 $ 55,205 $ 239,532
Cost of sales (173,095) (124,590) (43,811) (180,043)
----------------------------------------------------------------------------------------------------------------
Gross profit 36,771 21,460 11,394 59,489
Selling, general and
administrative expenses (32,331) (24,782) (7,742) (32,440)
Other operating income, net - 31 - 166
----------------------------------------------------------------------------------------------------------------
Operating profit (loss) 4,440 (3,291) 3,652 27,215
Currency transaction (loss)
gain (352) 194 55 316
Interest expense - Raymark - - (70) (262)
Interest expense (903) (873) (374) (1,956)
Reorganization items - (784) 99,996 -
Other income, net 529 404 235 1,028
----------------------------------------------------------------------------------------------------------------
Income (loss) before provision
for asbestos litigation,
provision for environmental
claims, income taxes,
minority interest and
extraordinary items 3,714 (4,350) 103,494 26,341
Provision for environmental
and other claims (5,400) (5,860) - (450,250)
Provision for asbestos
litigation - - - (6,760,000)
-----------------------------------------------------------------------------------------------------------------
(Loss) income before income
taxes, minority interest
and extraordinary items (1,686) (10,210) 103,494 (7,183,909)
Income tax (provision) benefit (84) 4,564 (30,846) 126,422
-----------------------------------------------------------------------------------------------------------------
(Loss) income before minority
interest and extraordinary
items (1,770) (5,646) 72,648 (7,057,487)
Minority interest (1,055) (885) (314) (1,491)
-----------------------------------------------------------------------------------------------------------------
(Loss) income before extra-
ordinary items (2,825) (6,531) 72,334 (7,058,978)
Extraordinary items, net of
taxes of $594 and $135,977 - 954 6,922,923 -
-----------------------------------------------------------------------------------------------------------------
Net (loss) income $ (2,825) $ (5,577) $ 6,995,257 $ (7,058,978)
=================================================================================================================
Basic (loss) earnings
per share $ (.07) $ (.13) $ 1,778.88 $ (2,015.40)
=================================================================================================================
Diluted (loss) earnings
per share $ (.07) $ (.13) $ 1,772.62 $ (2,015.40)
=================================================================================================================
The accompanying notes are an integral part of these statements.
-39-
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
Successor Company Predecessor Company
----------------- -------------------
For the For the Period For the Period For the
Year Ended April 3, 2001 to January 1, 2001 to Year Ended
Fiscal Year 2002 December 30, 2001 April 2, 2001 2000
--------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (2,825) $ (5,577) $ 6,995,257 $(7,058,978)
Adjustments to reconcile net
(loss) income to net cash
provided by operations:
Deferred income tax (2,068) (5,661) 29,395 (136,273)
Inventory fair value adjustments - 5,923 - -
Depreciation and amortization 17,171 12,253 3,382 12,367
Reorganization items, fresh-start
adjustments - - (99,996) -
Extraordinary items - (954) (6,922,923) -
Income applicable to minority
interest 1,055 885 314 1,491
Adjustment for asbestos-
related claims - - - 7,210,250
Net loss on sale of fixed assets 91 133 6 515
Other non-cash items (1,586) (551) 423 (705)
Changes in operating assets
and liabilities:
Trade accounts receivable (3,218) 6,598 (5,097) 6,972
Income tax receivable 33,084 - - -
Inventories (1,720) 1,119 383 (298)
Other current assets 3,461 (2,400) (1,339) 877
Other long-term assets (1,362) 189 (234) (893)
Accounts payable 1,524 (404) 1,088 (4,006)
Payable to the PI Trust (32,487) - - -
Accrued liabilities 5,428 3,154 (3,474) 1,451
Other long-term liabilities (3,591) 1,967 342 1,159
-------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 12,957 16,674 (2,473) 33,929
-------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (9,648) (7,488) (2,717) (13,539)
Proceeds on sales of property, plant
and equipment 125 131 10 167
-------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities: (9,523) (7,357) (2,707) (13,372)
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (payments) borrowings (on)
from short-term notes 2,579 (2,710) 2,113 (12,668)
Proceeds from long-term borrowings 240 105 32 5,717
Principal payments on long-term debt (1,547) (1,153) (482) (636)
Payments on borrowings from Raymark - - (703) (9,616)
Cash overdrafts - - (371) (622)
Exercise of stock options 540 19 - 105
-------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 1,812 (3,739) 589 (17,720)
-------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 274 14 (78) (43)
Net change in cash and cash equivalents 5,520 5,592 (4,669) 2,794
Cash and cash equivalents at beginning
of period 14,463 8,871 13,540 10,746
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end
of period $ 19,983 $ 14,463 $ 8,871 $ 13,540
=============================================================================================================
The accompanying notes are an integral part of these statements.
-40-
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
PREDECESSOR COMPANY:
(Accumulated Accumulated Treasury
Additional Deficit) Other Stock at Cost
Common Paid in Retained Comprehensive (2,132,059
Stock Capital Earnings (Loss) Income Shares) Total
--------------------------------------------------------------------------------------------------------------
Balance,
January 2, 2000 $ 5,613 $ 70,564 $ 9,337 $ (165) $(4,561) $ 80,788
Comprehensive loss:
Net loss (7,058,978) (7,058,978)
Changes during
the year (1,053) (1,053)
-------------------------------------------------------------------------------------------------------------
Total comprehensive
loss (7,058,978) (1,053) (7,060,031)
Stock options exercised
(38,409 shares) 38 67 105
-------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2000 5,651 70,631 (7,049,641) (1,218) (4,561) (6,979,138)
Comprehensive income:
Net income 6,995,257 6,995,257
Changes during
the period (284) (284)
-------------------------------------------------------------------------------------------------------------
Total comprehensive
income 6,995,257 (284) 6,994,973
Reorganization 35,870 46,200 54,384 1,502 4,561 142,517
-------------------------------------------------------------------------------------------------------------
Balance,
April 2, 2001 $41,521 $116,831 $ - $ - $ - $ 158,352
=============================================================================================================
SUCCESSOR COMPANY:
Balance
April 2, 2001 $41,521 $116,831 $ - $ - $ - $ 158,352
Comprehensive loss:
Net loss (5,577) (5,577)
Changes during
the period (8,711) (8,711)
-------------------------------------------------------------------------------------------------------------
Total comprehensive
loss (5,577) (8,711) (14,288)
Stock options exercised
(6,596 shares) 7 12 19
-------------------------------------------------------------------------------------------------------------
Balance,
December 30, 2001 41,528 116,843 (5,577) (8,711) - 144,083
-------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (2,825) (2,825)
Changes during
the year 64 64
-------------------------------------------------------------------------------------------------------------
Total comprehensive
loss (2,825) 64 (2,761)
Stock options exercised
(173,034 shares) 173 367 540
Tax benefits associated
with stock options 248 248
-------------------------------------------------------------------------------------------------------------
Balance,
December 29, 2002 $41,701 $117,458 $ (8,402) $(8,647) $ - $ 142,110
=============================================================================================================
The accompanying notes are an integral part of these statements.
-41-
RAYTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted,
except per share data)
Note A - Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Raytech
Corporation and its majority-owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation. The investment by third
parties in Allomatic Products Company is accounted for as minority interest in
the consolidated financial statements. Certain amounts for prior years have been
reclassified to conform to the current year's presentation. The more significant
accounting policies follow:
1. Nature of Operations
Raytech Corporation and its subsidiaries manufacture and distribute
engineered products for heat resistant, inertia control, energy
absorption and transmission applications. The Company's operations are
categorized into three business segments: Wet Friction, Dry Friction
and Aftermarket. These segments are more fully described in Note F -
Segment Information. Demand for the Company's product is derived
primarily from the automotive original equipment markets for both
manual and automatic transmissions, the original equipment markets for
agriculture, construction and mining equipment and the aftermarket for
primarily automatic transmission products. All of these markets are
highly competitive and can be highly influenced by prevailing economic
conditions.
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. Despite the restructuring plan implementation and subsequent
divestiture of Raymark, Raytech was named a co-defendant with Raymark
and other named defendants in numerous asbestos-related lawsuits as a
successor in liability to Raymark. In order to stay the
asbestos-related litigation, on March 10, 1989, Raytech filed a
petition seeking relief under Chapter 11 of Title 11, United States
Code in the United States Bankruptcy Court, District of Connecticut.
2. Emergence from Bankruptcy
The Effective Date of the Company's emergence from bankruptcy was April
18, 2001; however, for accounting purposes, the Company has accounted
for the reorganization and fresh-start adjustments on April 2, 2001.
All financial information prior to that date is presented as pertaining
to the Predecessor Company while all financial information after that
date is presented as pertaining to the Successor Company. Accordingly,
the Statement of Operations includes the results of the reorganization
and fresh-start adjustments in the period January 1, 2001 to April 2,
2001 as
-42-
Note A, continued
Predecessor Company information. Consequently, after giving effect to
the reorganization and fresh-start adjustments, the financial
statements of the Successor Company are not comparable to those of the
Predecessor Company. For financial reporting purposes, the results of
the Predecessor Company and the Successor Company cannot be combined
for the 2001 fiscal year.
3. Fiscal Year
The Company reports on a 52-53 week fiscal year; the last three fiscal
years ended December 29, 2002, December 30, 2001, and December 31,
2000.
4. Cash Equivalents
Cash equivalents are recorded at cost, which approximates fair value
and consist of certificates of deposit with maturities of three months
or less when purchased.
5. Inventories
Inventories are stated at the lower of cost or market with cost
determined primarily by using the FIFO (first in, first out) method.
Costs included in inventories consist of materials, labor and
manufacturing overhead, which are related to the purchase and
production of inventories.
6. Property, Plant and Equipment
Property, plant and equipment was adjusted on April 2, 2001 to reflect
their fair values based on independent appraisals. Additions subsequent
to April 2, 2001 have been recorded at cost. Depreciation is based on
the estimated service life of the related asset and is provided using
the straight line method. Maintenance and repairs that do not increase
the useful life of an asset are expensed as incurred. Interest is
capitalized on major capital expenditures during the period of
construction and to the date such asset is placed in service. Upon
disposal of property, plant and equipment, the appropriate accounts are
reduced by the related costs and accumulated depreciation. The
resulting gains or losses are reflected in the Consolidated Statements
of Operations. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
many not be recoverable. If the sum of the expected future net cash
flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment is recognized, and the
asset is written down to its fair value.
7. Intangible Assets
Intangible assets subsequent to April 2, 2001 consist of goodwill,
trademarks, unpatented technology, and distribution base. The
unpatented technology and distribution base are being amortized on a
straight line basis between 6 and 20 years. The Company periodically
evaluates the carrying value of these intangible assets when events and
circumstances warrant such a review. The carrying value is considered
impaired and written down to its appropriate value when the anticipated
undiscounted cash flow from such asset is separately identified and is
less than its carrying value. The goodwill and trademarks are
considered to be
-43-
Note A, continued
indefinite-lived assets, and are not being amortized. The goodwill is
reviewed for impairment at the reporting unit level annually.
Trademarks are reviewed for impairment annually. The carrying value of
trademarks and goodwill is considered impaired when the carrying value
exceeds its implied fair value.
Prior to April 2, 2001, intangible assets consisted of goodwill and the
intangible pension asset. Goodwill was amortized on a straight-line
basis over 40 years or less. The intangible pension asset was
remeasured and adjusted annually through an actuarial calculation.
8. Income Taxes
The Company accounts for income taxes using the liability method which
recognizes the amount of taxes payable or refundable for the current
year and recognizes deferred tax liabilities and assets for the future
tax consequences of events that have been recognized in the financial
statements or tax returns.
The Company has not provided for deferred U.S. taxes on the
undistributed earnings of its foreign subsidiaries since a taxable
distribution of those earnings is not anticipated. In addition,
deferred U.S. income taxes have not been provided on the cumulative
translation adjustment component of accumulated other comprehensive
loss in shareholders' equity due to management's decision to
permanently reinvest those earnings.
9. Earnings Per Share
Basic earnings per common share is computed based on the weighted
average number of common shares outstanding during the year. Diluted
earnings per share is computed based on the weighted average number of
common and dilutive potential common shares during the year.
10. Translation of Foreign Currencies
The local currencies of the Company's subsidiaries in Germany, the
United Kingdom and China have been designated as their functional
currencies. Accordingly, financial statements of foreign operations are
translated using the exchange rate at the balance sheet date for assets
and liabilities, historical rates for elements of stockholders' equity
and an average exchange rate in effect during the year for revenue and
expense items. The effects of translating the Company's foreign
subsidiaries' financial statements are recorded as a component of other
accumulated comprehensive loss in shareholders' equity. Gains and
losses on intercompany foreign currency transactions that are of a
long-term investment nature are reported as translation adjustments as
a component of other accumulated comprehensive loss in shareholders'
equity.
11. Revenue Recognition
In accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," which became effective in 2000,
revenue from the sale of the Company's products is recognized upon
shipment
-44-
Note A, continued
to the customer and when title has transferred. Substantially all of
the Company's revenues are derived from fixed price purchase orders.
Costs and related expenses to manufacture the products are recorded as
costs of sales when the related revenue is recognized. The Company
establishes bad debt reserves based on historical experience and
believes that collections of revenues, net of the bed debt reserves, is
reasonably assured.
12. Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported and disclosures of contingent assets and
liabilities and the reported revenues and expenses made in the
financial statements and accompanying notes. Actual results could
differ from these estimates. Significant estimates include inventory,
receivables and environmental reserves; depreciable lives of property,
plant and equipment and intangible assets; pension and other post
retirement and postemployment benefits; and the recoverable value of
deferred tax assets.
13. Environmental Matters
Accruals for environmental matters are recorded when it is probable
that a liability has been incurred and the amount of the liability can
be reasonably estimated or if an amount is likely to fall within a
range and no amount within the range can be determined to be the better
estimate, the minimum amount of the range is recorded. Environmental
remediation obligations are not recorded on a discounted basis.
Revenues from insurance carriers relating to environmental matters are
not recorded until it is probable that such recoveries will be
realized.
14. Stock-Based Compensation
SFAS No. 123 encourages a fair value based method of accounting for
employee stock options and similar equity instruments, which generally
would result in the recording of additional compensation expense in the
Company's financial statements. The Statement also allows the Company
to continue to account for stock-based employee compensation using the
intrinsic value for equity instruments using APB Opinion No. 25. The
Company has adopted the disclosure-only provisions of SFAS No. 123, as
amended by SFAS No. 148. Accordingly, no compensation cost has been
recognized for the stock option plans in the accompanying financial
statements.
There was no pro forma impact on net income (loss) for the Successor
Company or Predecessor Company during any of the periods presented. The
options outstanding were fully vested in 1999. The fair value of the
options granted during 1998 was estimated at $2.01 per common share on
the date of grant, using the Black-Scholes option pricing model with
the following assumptions: the expected volatility was 54%, the
dividend yield was $0, the risk free interest rate used was 5.42% and
the expected life of four years was used for the options.
-45-
Note A, continued
15. Website Access to Information
Raytech maintains a website at www.raytech.com, which provides, free of
charge, access to its annual report on Form 10-K, quarterly reports on
Form 10-Q and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with, or
furnished to the Securities and Exchange Commission.
16. Recently Issued Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 145 (SFAS 145) "Recision of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." The Statement rescinds Statement 4, which required all
gains and losses from extinguishment of debt to be aggregated and, when
material, classified as an extraordinary item net of the related income
tax effect. SFAS No. 145 also amends SFAS 13 to require that certain
lease modifications having economic effect similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. The Company adopted the provisions of SFAS No. 145 as of
April 1, 2002 except for the provisions which rescind SFAS 4, which
will be adopted in fiscal 2003. SFAS 145 did not have an effect on the
financial position or results of operations for 2002.
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 146 (SFAS No. 146), "Accounting for Costs
Associated with Exit or Disposal Activities." The objectives of SFAS
No. 146 are to address financial accounting and reporting for costs
associated with exit or disposal activities. SFAS No. 146 nullified
Emerging Issues Tas Force (EITF) Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between SFAS No. 146 and Issue No. 94-3 relates to
its requirements for recognition of a liability for a cost associated
with an exit or disposal activity to be recognized when the liability
is incurred. Under Issue No. 94-3, a liability for an exit cost as
defined in Issue No. 94-3 was recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS No. 146 will be
effective for the Company for exit or disposal activities that are
initiated after December 31, 2002.
In December 2002, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 148 (SFAS No. 148) "Accounting for
Stock Based Compensation - Transition and Disclosure." This Statement
amends FASB Statement No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure
provisions of that Statement to require prominent disclosure about the
effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally,
this Statement amends APB Opinion No. 28, Interim Financial Reporting,
to require disclosure about those effects in interim financial
information. The Company adopted the disclosure provisions of this
Statement as of December 29, 2002. Should the Company choose to
implement the fair value based method for its stock-based compensation
in the future, it will be required to adopt the remaining provisions of
SFAS No. 148.
Note A, continued
-46-
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
clarifies the requirements of SFAS No. 5, "Accounting for
Contingencies," relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. For certain
guarantees issued after December 31, 2002, FIN 45 requires a guarantor
to recognize, upon issuance of a guarantee, a liability for the fair
value of the obligations it assumes under the guarantee. Guarantees
issued prior to January 1, 2003 are not subject to liability
recognition but are subject to expanded disclosure requirements. We do
not believe that the adoption of this Interpretation will have a
material impact on our consolidated financial position or statement of
operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51." Under FIN 46, which requires
companies to consolidate variable interest entities for which the
company is deemed to be the primary beneficiary, and to disclose
information about variable interest entities in which the company has a
significant variable interest. FIN 46 became effective immediately for
variable interest entities formed after January 31, 2003 and will
become effective in the third quarter of 2003 for any variable interest
entities formed prior to February 1, 2003. Raytech Corporation will
adopt FIN 46 as it becomes effective but does not have any such
entities.
-47-
Note B - Inventories
Net Inventories
Inventories, net of inventory reserves, are as follows:
Successor Company
-----------------
2002 2001
---- ----
Raw material $11,049 $ 10,829
Work in process 8,349 7,207
Finished goods 14,659 13,526
------- --------
$34,057 $ 31,562
======= ========
Inventory Reserves
Successor Company Predecessor Company
-------------------------- -------------------------
for the Period for the Period
Apr. 3, 2001 to January 1, 2001
2002 Dec. 30, 2001 to April 2, 2001 2000
---- --------------- ---------------- ----
Beginning balance $ 2,427 $ 2,901 $ 3,025 $ 2,579
Provisions for obsolete
and slow moving
inventory 858 407 30 869
Charge-offs (111) (881) (154) (423)
-------------------------------------------------------------------------------------
Ending balance $ 3,174 $ 2,427 $ 2,901 $ 3,025
=====================================================================================
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 as cost of sales in the Statement of Operations during the second
quarter of 2001 as the inventory was sold.
-48-
Note C - Property, Plant and Equipment
Property, plant and equipment, at cost, is summarized as follows:
----------------------------------------------------------------------
At 2002 2001
----------------------------------------------------------------------
Land $ 3,999 $ 3,889
Buildings and improvements 30,920 29,343
Machinery and equipment 90,728 83,676
Capital leases 796 445
Construction in progress 4,935 2,325
-------- --------
131,378 119,678
Less accumulated depreciation (25,257) (10,386)
-------- --------
Net property, plant and equipment $106,121 $109,292
======== ========
The estimated useful life for buildings and improvements range from 5
to 40 years; the estimated useful lives for machinery and equipment range from 3
to 20 years.
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company adjusted the value of property, plant and equipment to
reflect the fair values of the assets as determined by independent third-party
appraisers. This included the elimination of accumulated depreciation on that
date.
Capital leases consist primarily of automobiles, telephones and
computer equipment and are amortized over the economic life of the assets or the
term of the leases, whichever is shorter. Maintenance and repairs charged to
expense amounted to approximately $9,355 for 2002 (Successor Company), $6,651
for the period April 3, 2001 to December 30, 2001 (Successor Company), $2,028
for the period January 1, 2001 to April 2, 2001 (Predecessor Company), and
$10,601 for 2000 (Predecessor Company). Depreciation expense relating to
property, plant and equipment was $14,943 for the year ended 2002 (Successor
Company). Depreciation expense was $10,585 for the period April 3, 2001 to
December 30, 2001 (Successor Company), $3,180 for the period January 1, 2001 to
April 2, 2001 (Predecessor Company) and $11,545 for 2000 (Predecessor Company).
-49-
Note D - Debt
Debt consists of the following:
2002 2001
Current Non-Current Total Current Non-Current Total
Domestic bank debt $ 11,306 $ - $ 11,306 $ 6,209 $ 2,750 $ 8,959
Foreign bank debt 3,609 4,095 7,704 3,934 3,895 7,829
-------- -------- -------- -------- -------- --------
Total bank debt 14,915 4,095 19,010 10,143 6,645 16,788
Leases 176 198 374 119 175 294
-------- -------- -------- -------- -------- --------
Total borrowings $ 15,091 $ 4,293 $ 19,384 $ 10,262 $ 6,820 $ 17,082
======== ======== ======== ======== ======== ========
The aggregate maturities of debt are as follows:
2003 $ 15,091
2004 982
2005 786
2006 751
2007 697
Thereafter 1,077
--------
$ 19,384
========
The domestic bank debt of the Company is at variable interest rates,
and the carrying amount approximates fair value. The Company maintains certain
of its foreign borrowings in fixed rate debt which approximates market value.
Domestic Bank Debt
The Company, through its subsidiaries Raybestos Products Company and Raytech
Automotive Components Company, maintains a Loan and Security Agreement
("Agreement"), with Congress Financial Corporation ("Congress"). The Agreement
provides for Raybestos Products Company ("RPC") and Raytech Automotive
Components Company ("RACC") to borrow up to $30 million in the aggregate. The
Agreement consists of a $25 million revolving line of credit and a term loan of
$5 million. The revolving line of credit is limited through a formula which
provides availability based on qualified accounts receivable and inventory. The
term note is payable in 36 monthly payments of $83, commencing November 1, 2000
and maturing on September 30, 2003, with the final payment being the remainder
of the balance. The revolving line of credit also matures September 30, 2003.
The revolving line of credit and the term note are collateralized by accounts
receivable, inventory and machinery and equipment. The notes bear interest at
either 2.25% above the adjusted Eurodollar rate or prime rate at the discretion
of the Company. The interest rates at December 29, 2002 and December 30, 2001
were 4.25% and 5.0%, respectively. The agreement includes certain covenants, the
most restrictive of which requires the borrowers to maintain quarterly minimum
twelve-month rolling earnings before interest, taxes, depreciation and
amortization (EBITDA) of $15 million. At December 29, 2002 and December 30,
2001, the net pledged assets of RPC and RACC amounted to $90.3 million and $90.9
million, respectively, consisting of cash, accounts receivable, inventory,
property, plant and equipment and all other tangible and intangible assets. At
December 29, 2002 and December 30, 2001, the outstanding balance from the
revolving line of credit amounted to $8.6 million and $5.2 million,
respectively, with $5.0 million and $6.1 million, respectively, available in
additional Note D, continued
-50-
borrowings (availability is determined based on qualified accounts receivable
and inventory). The balance under the term loan at December 29, 2002 and
December 30, 2001 was $2.7 million and $3.7 million, respectively, of which $2.7
million and $1.0 million is classified as current at December 29, 2002 and
December 30, 2001, respectively.
The Company is reviewing borrowing alternatives and intends to enter
into a new lending arrangement by September 2003.
Foreign Bank Debt
The Company's wholly-owned German subsidiary, Raybestos
Industrie-Produkte GmbH ("RIP"), has available lines of credit with several
German banks amounting to EUR5.0 million ($5.2 million) as of December 29, 2002
and EUR4.1 ($3.6 million) at December 30, 2001. Interest is charged at rates
between 5.07% and 8.0%. The lines are repayable on demand. The amounts
outstanding under these available lines of credit at December 29, 2002 and
December 30, 2001 (which includes Raytech Composites Europe ["RCE"] in 2001)
were EUR1.4 million ($1.4 million) and EUR2.7 million ($2.4 million),
respectively, and are classified as current debt. At December 29, 2002 and
December 30, 2001, the remaining available lines of credit amounted to EUR3.6
million ($3.8 million) and EUR1.3 million ($1.2 million), respectively.
At December 29, 2002 and December 30, 2001, RIP and RCE had various
loan agreements with Commerzbank for EUR4.5 million ($4.8 million). The
maturities range from September 2006 through December 2012. The loans bear
interest at rates ranging from 2.5% through 6.2%. At December 29, 2002 and
December 30, 2001, respectively, the net pledged assets amounted to EUR10.2
million ($10.7 million) and EUR10.8 million ($9.6 million), consisting of
machinery and equipment. At December 29, 2002 and December 30, 2001 the
outstanding balances were EUR4.5 ($4.8 million) and EUR4.9 million ($4.3
million), respectively. The current portion of this debt is EUR.6 million ($.7
million) and EUR.5 million ($.4 million) at December 29, 2002 and December 30,
2001, respectively.
In September 2002, the Company's wholly-owned Chinese subsidiary
[Raybestos Friction Products (Suzhou) Co. Ltd. ("RFP")] entered into a loan
agreement with the ABC Bank of China. The loan bears interest at 2.58% per annum
and matures in September 2003. As of December 29, 2002 the loan amounted to Rmb
9 million ($1.1 million) and is classified as current debt. In July 2002, RFP
entered into a loan agreement with the ABC Bank of China for Rmb 5.0 million
($.6 million). The loan bears interest at 2.76% per annum and matures in July
2003. As of December 29, 2002, the balance due on the loan amounted to Rmb 3.3
($.4 million) and is classified as current debt.
In December 2001, RFP entered into a loan agreement with the Industrial
and Commercial Bank of China. The loan bears interest at 5.85% per annum and
matured in December 2002. As of December 30, 2001, the balance due on the loan
amounted to Rmb 4.0 million ($.5 million) and is classified as current debt. In
December 2000, RFP entered into a loan agreement with the Industrial and
Commercial Bank of China for Rmb 5.0 million ($.6 million). The loan bears
interest at 5.94% per annum and matured in December 2002. This was classified as
current in 2001.
-51-
Note D, continued
The weighted average rates on all domestic and foreign bank notes
payable at December 29, 2002 and December 30, 2001 were 4.04% and 5.81%,
respectively.
Note Payable to Former AFM Principal
The note payable to the former AFM principal dated April 1998 was
settled in October 2001. The settlement agreement required a payment of $3.1
million. Prior to the settlement, the Company had a note payable of $3.0 million
and accrued interest of $1.6 million recorded related to this debt. Accordingly,
the Company has recognized an extraordinary gain in the fourth quarter of 2002
in the amount of $1.0 million net of taxes of $.6 million.
Raymark Debt
The Raymark debt is the result of the purchase of the Wet Clutch and
Brake Division and a German subsidiary from Raymark in 1987. Prior to April 2,
2001, costs incurred by the Company, which were subject to an indemnification
clause contained in the debt agreement, were being applied as a reduction of the
note obligation. These costs amounted to $0 for the period January 1, 2001 to
April 2, 2001 (Predecessor Company) and $9.6 million for 2000 (Predecessor
Company).
Upon emergence from the Plan of Reorganization, the Raymark debt was
canceled per agreement between Raymark and Raytech. The amount canceled amounted
to $10,709 plus accrued interest.
-52-
NOTE E - Litigation
The Company is subject to certain legal matters that have arisen
in the ordinary course of business, and management does not expect them to have
a material adverse effect. In addition, the Company is involved in the following
litigation.
In April 1996, the Indiana Department of Environmental Management
("IDEM") advised Raybestos Products Company ("RPC"), a wholly-owned subsidiary
of the Company, that it may have contributed to the release of lead and PCB's
(polychlorinated biphenyls) found in a drainage ditch near its Indiana facility.
In June 1996, IDEM named RPC as a potentially responsible party ("PRP"). RPC
notified its insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern District of
Indiana, captioned Reliance Insurance Company vs. RPC seeking a declaratory
judgment that any liability of RPC is excluded from its policy with RPC. In
January 2000, the District Court granted summary judgment to RPC, indicating
that the insurer has a duty to defend and indemnify losses stemming from the
IDEM claim. However, in June 2001, Reliance Insurance Company was placed in
rehabilitation in Pennsylvania. The effect upon RPC's claim is not known at this
time. Three additional insurers have been added to the Reliance case as ordered
by the District Court. IDEM has turned the matter over to the U.S. Environmental
Protection Agency ("EPA"). In December 2000, the EPA issued a Unilateral
Administrative Order under CERCLA ("Order") demanding removal of contaminated
soils from the referenced drainage ditch. RPC has prepared a plan for
implementation and is in compliance with the cleanup Order. The Company has
estimated that the cost to comply with the Order will be approximately $14.3
million of which $7.3 million has been spent through December 29, 2002. The
remaining balance of $7.0 million is included in accrued liabilities. It is at
least reasonably possible that the assessment of estimated costs to comply with
the Order may be modified as the project progresses and that there may be
additional assessments from the EPA.
Prior to IDEM's relinquishment of control of the cleanup to the EPA,
IDEM and RPC had reached an Agreed Order providing for a risk-based remediation
of the contamination different from the EPA's Order. IDEM withdrew from the
Agreed Order, which was ruled to be a breach of contract by an Indiana State
Superior Court. In July 2002, RPC filed an action against IDEM for damages based
on the difference between the costs of cleanup under the EPA Order and the IDEM
Agreed Order. The outcome of this litigation is not known.
In February 2002, lawyers claiming to represent the Committee of Equity
Holders filed a motion in U.S. Bankruptcy Court to compel Raytech to either
issue up to approximately 700,000 additional shares to the pre-reorganization
holders of shares in Raytech or their successors or to proportionately reduce
the shareholdings of the general unsecured creditor shareholders under the Plan
of Reorganization. The ultimate outcome of this matter is unknown; however, it
is possible that its resolution could cause the Company to issue additional
shares to the original shareholder group, or to retire shares held by the
general unsecured creditor shareholder group. This might directly impact the
earnings per share calculations of the Company. The Company has filed a motion
for summary judgment asking the Court to dismiss the action.
-53-
Note E, continued
On January 8, 2002, the Michigan Department of Environmental Quality
("MDEQ") sent the Company a letter alleging responsibility for trichloroethylene
("TCE") contamination at a Ferndale, Michigan, industrial site formerly occupied
by Advanced Friction Materials Company ("AFM") from 1974 to 1985. AFM was
acquired by the Company in 1998. The Company is cooperating with the MDEQ in
evaluating the subsurface of the site to obtain data concerning the alleged
contamination. The Company's liability at this site is indeterminable at this
time.
-54-
Note F - Segment Reporting
The Company's operations are categorized into three business segments
based on management structure, product type and distribution channel as
described below.
The Wet Friction segment produces specialty engineered products for
heat resistant, inertia control, energy absorption and transmission
applications. The Company markets its products to automobile original
equipment manufacturers and 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.
In 2001, the Company recorded the impact of fresh-start reporting as a
part of its corporate expenses. As a result, the segments do not reflect any
adjustments for fresh-start accounting (see Note R). The Company in 2002
continues to report those adjustments related to fresh-start accounting as
corporate expenses.
Information relating to operations by industry segment follows:
-55-
Note F, Continued
Successor Company Predecessor Company
---------------------------- -----------------------------
April 3, 2001 January 1, 2001
2002 December 30, 2001 to April 2, 2001 2000
---------------------------- -----------------------------
NET SALES
Wet Friction $137,930 $ 95,512 $ 37,047 $ 165,113
Aftermarket 46,192 34,384 13,111 58,473
Dry Friction 35,244 22,074 8,147 29,306
Intersegment elimination (1) (9,500) (5,920) (3,100) (13,360)
-------- -------- -------- -----------
Net sales to external customers $209,866 $146,050 $ 55,205 $ 239,532
======== ======== ======== ===========
GROSS PROFIT
Wet Friction $ 19,724 $ 15,201 $ 5,513 $ 35,676
Aftermarket 12,993 9,814 3,555 17,253
Dry Friction 8,856 4,829 2,272 6,613
Corporate (4,802) (8,384) 54 (53)
-------- -------- -------- -----------
Consolidated $ 36,771 $ 21,460 $ 11,394 $ 59,489
======== ======== ======== ===========
OPERATING PROFIT (LOSS)(2)
Wet Friction $ 3,276 $ 3,387 $ 1,327 $ 18,102
Aftermarket 7,990 6,035 2,109 10,806
Dry Friction 2,452 603 754 716
Corporate (4) (15,404) (20,235) 99,304 (7,213,533)
-------- -------- -------- -----------
Consolidated $ (1,686) $(10,210) $103,494 $(7,183,909)
======== ======== ======== ===========
DEPRECIATION
Wet Friction $ 8,945 $ 6,161 $ 2,112 $ 7,869
Aftermarket 1,553 1,167 491 1,579
Dry Friction 2,664 1,607 563 2,051
Corporate 1,781 1,650 14 46
-------- -------- -------- -----------
Consolidated $ 14,943 $ 10,585 $ 3,180 $ 11,545
======== ======== ======== ===========
INTEREST EXPENSE, NET
Wet Friction $ 1,282 $ 409 $ 242(3) $ 1,353(3)
Aftermarket (39) 20 44 239(3)
Dry Friction 841 412 154 452
Corporate (1,181) 32 4 174
-------- -------- -------- -----------
Consolidated $ 903 $ 873 $ 444 $ 2,218
======== ======== ======== ===========
EXPENDITURES FOR PROPERTY, PLANT,
AND EQUIPMENT
Wet Friction $ 5,010 $ 4,707 $ 1,822 $ 8,491
Aftermarket 1,068 1,061 127 2,299
Dry Friction 3,444 1,669 768 2,680
Corporate 126 51 - 69
-------- -------- -------- -----------
Consolidated $ 9,648 $ 7,488 $ 2,717 $ 13,539
======== ======== ======== ===========
SEGMENT ASSETS
Wet Friction $ 95,369 $ 97,821 $113,403 $ 110,404
Aftermarket 31,031 27,376 32,427 33,473
Dry Friction 32,230 39,869 23,591 22,927
Corporate 135,591 155,722 154,215 153,512
-------- -------- -------- -----------
Consolidated $294,221 $320,788 $323,636 $ 320,316
======== ======== ======== ===========
-56-
Note F, continued
Successor Company Predecessor Company
-------------------------- --------------------------
April 3, 2001 to January 1, 2001
2002 December 30, 2001 to April 2, 2001 2000
--------------------------- --------------------------
LONG-LIVED ASSETS BY
GEOGRAPHIC LOCATION
United States $ 84,996 $ 90,747 $ 65,525 $ 65,438
Germany 13,362 11,356 9,291 10,012
Other foreign countries 7,763 7,189 7,322 7,255
-------- -------- -------- --------
Consolidated $106,121 $109,292 $ 82,138 $ 82,705
======== ======== ======== ========
SALES BY GEOGRAPHIC LOCATION
United States $161,020 $116,129 $ 43,379 $199,634
Germany 38,218 25,094 10,485 36,454
Other foreign countries 10,628 4,827 1,341 3,444
-------- -------- -------- --------
Consolidated $209,866 $146,050 $ 55,205 $239,532
======== ======== ======== ========
SALES TO CUSTOMERS IN EXCESS
OF 10% OF TOTAL SALES
Customer A $ 30,324 $ 20,872 $ 7,276 $ 31,159
Customer B 23,948 20,501 7,640 36,820
Customer C 18,701 10,068 3,076 18,430
(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, consisting of income before
provision for asbestos litigation, provision for environmental and
other claims, income taxes, minority interest, and extraordinary items.
(3) Interest on debt due to affiliate and to Raymark.
(4) Includes the cost of operating the corporate office, the impact of
recording the liabilities subject to compromise in 2000, and the impact
of the reorganization costs and fresh-start accounting in 2001.
-57-
Note G - 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 in 2001.
(Loss) income before (provision) benefit for income taxes, minority
interest and extraordinary items consists of:
Successor Company Predecessor Company
------------------------------- --------------------------------
For the Year for the Period for the Period For the Year
Ended April 3, 2001 to January 1, 2001 Ended
2002 December 30, 2001 to April 2, 2001 2000
------------ ----------------- ---------------- -------------
Domestic $(2,513) $ (7,959) $ 101,882 $ (7,186,663)
Foreign 827 (2,251) 1,612 2,754
------- --------- ------------ -------------
$(1,686) $ (10,210) $ 103,494 $ (7,183,909)
======= ========= ============ =============
The Company's income tax (provision) benefit consists of the following:
Successor Company Predecessor Company
------------------------------- ------------------------------
For the Year for the Period for the Period For the Year
Ended April 3, 2001 to January 1, 2001 Ended
2002 December 30, 2001 to April 2, 2001 2000
------------ ----------------- ---------------- ------------
Federal $ (1,373) $ (1,045) $ (1,265) $ (7,698)
State (620) (501) (127) (1,823)
Foreign (159) (104) (77) (330)
Deferred:
Federal 1,973 5,668 (26,797) 118,236
State 203 546 (2,580) 18,494
Foreign (108) - - (457)
-------- -------- -------- ----------
Total income taxes $ (84) $ 4,564 $(30,846) $ 126,422
======== ======== ======== ==========
Reconciliation of (loss) income from operations multiplied by the
statutory federal tax rate to reported income tax (provision) benefit is
summarized as follows:
Successor Company Predecessor Company
-------------------------------- ------------------------------
For the Year for the Period for the Period For the Year
Ended April 3, 2001 to January 1, 2001 Ended
2002 December 30, 2001 to April 2, 2001 2000
------------ ----------------- ---------------- ------------
Pretax (loss) income
multiplied by the
statutory rate (35%) $ 590 $ 3,574 $ (36,223) $ 2,514,368
Increases (decreases)
resulting from:
Effect of foreign income
taxes net of loss
carryforwards utilized 22 (892) 487 177
Reorganization adjustments - (275) 8,202 -
Utilization of tax credits - - - 205
Net change in federal
valuation allowance - - - (2,397,794)
State income taxes, net
of federal benefit (271) 29 (1,759) 10,836
Adjustment of prior years'
accruals - 1,425 - (628)
Raymark indemnification
payments - - - 896
Raymark pension provision (412) - - -
Amortization of nondeductible
intangibles - - (72) (294)
Other (13) 703 (1,481) (1,344)
-------- --------- ----------- ------------
Income tax (provision) benefit $ (84) $ 4,564 $ (30,846) $ 126,422
======== ========= =========== ============
-58-
Note G, continue
Deferred tax assets (liabilities) are comprised of the following:
Successor Company
--------------------------
2002 2001
---- ----
Tax benefit to PI Trust $ 42,356 $ 41,759
Raytech minimum pension liability 360 -
Excess of book provisions
over tax deductions 5,403 5,171
Postretirement benefit 5,531 5,030
Excess of tax basis over
book basis of assets due
to restructuring 655 863
Foreign loss carryforwards 1,286 916
Non PI Trust net operating
loss carryforwards 963 -
Other - -
------ ------
Gross deferred tax assets 56,554 53,739
Deferred tax asset
valuation allowance (1,063) (543)
------ ------
Deferred tax assets 55,491 53,196
Excess of book basis of
intangibles over tax basis (13,735) (14,589)
Excess of book basis of fixed
assets over tax basis (17,318) (17,327)
-------- ---------
Net deferred tax asset $ 24,438 $ 21,280
======== =========
In connection with the Company's emergence from bankruptcy, the Company
recorded an income tax receivable and payable to the PI Trust in the amount of
$38 million resulting from net operating losses arising from the transfer of
stock and cash to the PI Trust carried back to 1991 through 2000. Pursuant to
the Tax Benefits Assignment and Assumption Agreement (the "Agreement"), all tax
benefits received by the Company due to the reorganization are to be passed onto
the PI Trust as received. During 2002, Raytech received tax refunds of $33.1
million, which were paid to the PI Trust. Additionally, future payments to the
PI Trust and others will create additional tax deductions, which will inure to
the benefit of the PI Trust in accordance with the Agreement. These include
deductions for payments to the PI Trust of tax benefits associated with the
utilization of the operating losses created by the reorganization, and
contributions made to the Raymark pension plan. To the extent that Raytech
Corporation generates losses in future periods, exclusive of losses attributable
to the payments discussed above, those losses will be retained by the Company.
The method of allocation in utilizing future operating losses between the PI
Trust and Raytech Corporation has not been determined at this time. The Company
has tax loss carryforwards of $74.8 million and tax credit carryforwards of $1.2
million at December 29, 2002. The net operating loss carryforwards are allocated
between Raytech Corporation and the PI Trust in the amounts of $2.8 million and
$72.0 million, respectively. Additional tax recoveries expected to be received
in future periods are shown as deferred tax assets and a deferred payable to the
PI Trust which amounted to $42.4 million at December 29, 2002 and $41.8 million
at December 30, 2001.
-59-
Note G, continued
The Company is under audit for 1996 through 2001. Any tax assessment,
up to the amount of the refunds received, arising from this audit, or any other
years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
At December 29, 2002, the Company had foreign loss carryforwards of
$4.1 million (Germany $.6 million and U.K. $3.5 million), which do not expire. A
full valuation allowance has been provided against the tax benefit of the U.K.
carryforwards due to uncertainty of future profitability of these operations.
In 2000, the Company recorded a deferred tax asset of $2.767 billion
relating to the tax effects of the liabilities subject to compromise. Total
deferred tax assets and liabilities at December 31, 2000 amounted to $2.772
billion. Based on its historical domestic taxable income, the Company expected
to realize approximately $140 million of the deferred tax asset through the
ten-year carryback of the previously paid domestic taxes and the expected tax
benefits during the twenty-year carryforward period. In addition, the Company
has recognized a deferred tax asset in connection with German loss
carryforwards. Accordingly, the Company in 2000 had recorded a valuation
allowance of $2.633 billion against the deferred tax asset to state it at its
expected net realizable value. The Plan became effective during 2001 and the
liabilities subject to compromise were settled for less than the recorded amount
of allowed claims. The net deferred tax asset was adjusted accordingly.
The Company owns 57% of the stock of Allomatic Products Company
("APC"). The Company has not recorded a deferred tax liability for the
undistributed earnings of APC since management expects that those earnings will
be distributed to the Company in a tax-free transaction. However, the deferred
tax liability on the undistributed earnings of APC would be approximately $1.3
million at December 29, 2002, if all of APC's earnings were to be distributed
through the distribution of dividends.
-60-
Note H - Liquidity
Cash and cash equivalents at December 29, 2002 were $20.0 million
compared to $14.5 million at December 30, 2001, an increase of $5.5 million
year-over-year. Cash flow from operating activities for the 2002 year was $13.0
million compared to $14.2 million in 2001, a decrease of $1.2 million
year-over-year. Capital expenditures for the 2002 year of $9.6 million were
approximately the same compared to the 2001 capital expenditures of $10.2
million. Both years' capital expenditures were in line with management's
expectations. The net cash from financing activities for 2002 of $1.8 million
compares to net cash used in financing activities in 2001 of $3.1 million, a
change year-over-year of $4.9 million. The net cash provided by financing
activities in 2002 represents net borrowings of $1.3 million in addition to the
proceeds from the exercise of stock options of $.5 million.
Accounts receivable at December 29, 2002 of $26.6 million compares to
$23.0 million at December 30, 2001, an increase of $3.6 million. Days sales in
accounts receivable at year-end 2002 of 46 days compares to 42 days sales in
accounts receivable at year-end 2001, an increase of 4 days.
Inventory at year-end 2002 of $34.1 million compares to $31.6 million
at year-end 2001, an increase of $2.5 million. Days sales in inventory at
year-end 2002 of 72 days represents an increase of 4 days over the 2001 level of
68 days.
The Company maintains borrowing facilities both domestically and with
foreign lenders, the details of which are contained in Note D to the Notes to
the Consolidated Financial Statements. The following represents the outstanding
debt and available lines of credit at year-end 2002 and 2001:
(in thousands)
2002 2001
------------------------------- ------------------------------
Current Non-Current Total Current Non-Current Total
-------- ----------- ----- -------- ----------- ------
Domestic bank debt $ 11,306 $ - $ 11,306 $ 6,209 $ 2,750 $ 8,959
Foreign bank debt 3,609 4,095 7,704 3,934 3,895 7,829
-------- -------- -------- -------- -------- --------
Total bank debt 14,915 4,095 19,010 10,143 6,645 16,788
Leases 176 198 374 119 175 294
-------- -------- -------- -------- -------- --------
Total borrowings $ 15,091 $ 4,293 $ 19,384 $ 10,262 $ 6,820 $ 17,082
======== ======== ======== ======== ======== ========
Available lines of credit:
2002 2001
---- ----
Domestic $ 5,006 $ 6,129
Foreign 3,829 1,265
------- -------
Total $ 8,835 $ 7,394
======= =======
The current domestic loan agreement with Congress Financial Corporation
has a covenant requiring the borrowing companies to maintain a twelve-month
rolling earnings before interest, taxes, depreciation and amortization (EBITDA)
of $15 million (see Note D).
The domestic borrowing facility matures in September 2003. The Company
is reviewing borrowing alternatives and intends to enter into a new lending
arrangement by September 2003.
-61-
Note H, continued
The Company assumed the liability for the Raymark pension plans as part
of the reorganization. Funding for the plans in 2003 is expected to be
approximately $7.6 million.
The Company is complying with a Federal Order issued by the U.S.
Environmental Protection Agency (EPA) at its manufacturing facility in
Crawfordsville, Indiana. The Company reevaluated the projected cost to complete
this project in 2002 and determined that, based on work completed to date, the
estimate previously received from its environmental engineering firm was not
sufficient to complete the project. The Company has employed a new environmental
engineering firm and a new construction company to complete this project. The
scope of the cleanup plan has not changed, and the additional charge recorded
during the year, of $5.4 million, is expected to be sufficient to complete this
project.
The Company has an accrued liability at December 29, 2002 of $7.0
million for the completion of the remediation. The Company began the year with
an accrued liability of $6.8 million, reduced by payments of $5.2 million and
increased by an additional accrual of $5.4 million, providing for the ending
accrual of $7.0 million. This remediation project is more fully described under
the heading Provision for Environmental Remediation. Additionally, see Note E to
the Notes to the Consolidated Financial Statements.
Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement"), all tax benefits received by the Company due to the reorganization
are to be passed onto the PI Trust as received. At December 29, 2002, the
Company had tax loss carryforwards of $ 74.8 million and tax credit
carryforwards of $1.2 million. The net operating loss carryforwards are
allocated between Raytech Corporation and the PI Trust in the amounts of $2.8
million and $72.0 million, respectively. Additionally, future payments to the PI
Trust and others will create additional tax deductions, which will inure to the
benefit of the PI Trust in accordance with the Agreement. These include
deductions for payments to the PI Trust of tax benefits associated with the
utilization of the net operating losses created by the reorganization, and
contributions made to the Raymark pension plan. To the extent Raytech
Corporation generates net operating losses in future periods, exclusive of net
operating losses attributable to the payments discussed above, those net
operating losses will be retained by the Company. The method of allocation in
utilizing future net operating losses between the PI Trust and Raytech
Corporation has not been determined at this time. Additional tax recoveries
expected to be received in future periods are shown as deferred tax assets and a
deferred payable to the PI Trust which amounted to $42.4 million at December 29,
2002 and $41.8 million at December 30, 2001.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit,
or any other years in the carryback period, are, pursuant to the Agreement, the
-62-
Note H, continued
responsibility of the PI Trust and will therefore reduce the deferred tax assets
associated with, and liability payable to, the PI Trust.
Management believes that existing cash balances, the Company's ability
to replace the current lending facility and cash flow from operations during
2003 will be sufficient to meet all of the Company's obligations arising in the
normal course of business, including anticipated capital investments.
-63-
Note I - Earnings Per Share
Successor Company Predecessor Company
--------------------------------------------------------------------------
for the Period For the Period
April 3, 2001 to January 1, 2001 to
2002 Dec. 30, 2001 April 2, 2001 2000
--------------------------------------------------------------------------
Basic EPS Computation
Numerator:
(Loss) income before
extraordinary items $ (2,825) $ (6,531) $ 72,334 $(7,058,978)
Extraordinary items - 954 6,922,923 -
----------- ----------- ----------- -----------
Net (loss) income $ (2,825) $ (5,577) $ 6,995,257 $(7,058,978)
=========== =========== =========== ===========
Denominator:
Weighted average shares 41,528,520 41,521,924 3,519,313 3,480,904
Weighted average shares issued
as a result of reorganization - - 413,072 -
Weighted average stock options
exercised 79,537 5,383 - 21,618
----------- ----------- ----------- -----------
Adjusted weighted average shares 41,608,057 41,527,307 3,932,385 3,502,522
=========== =========== =========== ===========
Basic (loss) earnings per share:
(Loss) income before
extraordinary items $ (.07) $ (.15) $ 18.39 $ (2,015.40)
Extraordinary items - .02 1,760.49 -
----------- ----------- ----------- -----------
Net (loss) income $ (.07) $ (.13) $ 1,778.88 $ (2,015.40)
=========== =========== =========== ===========
Diluted EPS Computation
Numerator:
(Loss) income before
extraordinary items $ (2,825) $ (6,531) $ 72,334 $(7,058,978)
Extraordinary items - 954 6,922,923 -
----------- ----------- ----------- -----------
Net (loss) income $ (2,825) $ (5,577) $ 6,995,257 $(7,058,978)
=========== =========== =========== ===========
Denominator:
Weighted average shares 41,528,520 41,521,924 3,519,313 3,480,904
Weighted average shares issued
as a result of reorganization - - 413,072 -
Weighted average stock options
exercised 79,537 5,383 - 21,618
Dilutive potential common shares - - 13,897 -
----------- ----------- ----------- -----------
Adjusted weighted average shares
and equivalents 41,608,057 41,527,307 3,946,282 3,502,522
=========== =========== =========== ===========
Diluted (loss) earnings per share:
(Loss) income before
extraordinary items $ (.07) $ (.15) $ 18.33 $ (2,015.40)
Extraordinary items - .02 1,754.29 -
----------- ----------- ----------- -----------
Net (loss) income $ (.07) $ (.13) $ 1,772.62 $ (2,015.40)
=========== =========== =========== ===========
Note I, continued
-64-
The dilutive potential common shares from outstanding stock options of
70,707, 9,658 and 26,853 for 2002 (Successor Company), the period April 3, 2001
to December 30, 2001 (Successor Company) and 2000 (Predecessor Company),
respectively, were not included in the computation of diluted earnings per share
because of their anti-dilutive effect due to the Company incurring a net loss
for the period.
Options to purchase 483,815, 487,550 and 495,020 shares of common stock
at $4.25 were outstanding during the period April 3, 2001 to December 30, 2001
(Successor Company), the period January 1, 2001 to April 2, 2001 (Predecessor
Company) and for 2000 (Predecessor Company), 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 connection with the Plan of Reorganization, 38 million shares were
issued.
On February 12, 2002, the Official Committee of Equity Security Holders
filed a motion in the United States Bankruptcy Court objecting to the allocation
of common shares under the Plan of Reorganization between the unsecured
creditors and the existing equity holders. The ultimate outcome of this matter
is unknown; however, it is possible that its resolution could cause the Company
to issue additional shares, or to retire shares, in the future. This might
directly impact the earnings per share calculations of the Company.
-65-
Note J - Stock Option Plans
In 1991, the shareholders approved the adoption of a non-qualified
stock option plan ("1990 Plan"). In general, options granted under the 1990 Plan
were at 100% of the fair market value on grant date or par value, whichever was
higher. Once granted, options became exercisable in whole or in part after one
year and expired on the tenth anniversary of the grant. The Plan provided for
the grant of options for up to 500,000 shares of common stock authorized for
such purpose by the shareholders. Effective November 1, 1992, the Company
granted 479,071 non-qualified options at an option price of $2.75. At the date
of grant the market price per share was $2.375. In 1997, the shareholders
approved an amendment of the 1990 Plan authorizing 500,000 additional shares of
common stock for grant. Effective August 13, 1998, the Company granted 500,000
non-qualified options at the option price of $4.25 which was the market price
per share at the date of the grant. The term during which options could be
granted under the 1990 Plan expired on December 31, 2000.
In 2002, the shareholders approved the adoption of the Incentive
Compensation Plan ("2002 Plan"). Types of grants covered under the 2002 Plan at
the discretion of the Board of Directors include Non-Qualified Stock Options,
Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted
Stock Units, Performance Units, Performance Shares, Stock Awards, and Cash-Based
Awards. No grants have been made under the 2002 Plan. The total number of shares
reserved for issuance under the 2002 Plan is 4,000,000. Such shares have been
previously authorized but unissued and will be registered and listed on the New
York Stock Exchange.
Changes during the three years ended December 29, 2002 in shares under
option were as follows:
Successor Company Predecessor Company
-------------------------------------------- ---------------------
2002 2001 2000
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ------- ------- -------- ------- -------
Outstanding at
beginning of year 573,757 $ 3.78 700,413 $3.79 758,013 $3.73
Exercised (173,034) 3.13 (6,596) 2.75 (38,409) 2.75
Lapsed (53,234) 2.89 - - - -
Canceled (15,472) 4.03 (120,060) 3.92 (19,191) 3.33
------- -------- ------- -----
Outstanding at
end of year 332,017 $ 4.25 573,757 $3.78 700,413 $3.79
======= ====== ======== ===== ======= =====
Options exercisable
at end of year 332,017 $ 4.25 573,757 $3.78 700,413 $3.79
======= ====== ======== ===== ======= =====
There were no options available for future awards at December 29, 2002,
December 30, 2001, and December 31, 2000 under the 1990 Plan.
Options outstanding and exercisable at December 29, 2002 were as
follows:
Options Outstanding Options Exercisable
-------------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
$ 4.25 332,017 5.62 $ 4.25 332,017 $ 4.25
-66-
Note K - Employee Benefits
Raytech Corporation sponsors both defined benefit plans and defined
contribution plans for certain groups of employees and additionally, assumed the
role of plan sponsor for two Raymark defined benefit plans as a result of the
emergence from bankruptcy. Raytech also provides a post retirement benefit plan,
which covers the hourly workers at the Crawfordsville, Indiana, facility and
certain other employees who qualify for benefits based on age and years of
service.
The plans are summarized as follows:
- The Raytech Corporation Retirement Plan for Hourly Employees
provides defined benefits for the hourly employees located at the
Crawfordsville, Indiana, manufacturing facility.
- The German pension plan provides for defined benefits for certain
salaried employees of Raytech's German subsidiary.
- The Raymark Industries, Inc. Retirement Plan for Hourly Paid
Employees provides for defined benefits for hourly employees of
the former Raymark Corporation. There are two separate plans based
on the former manufacturing locations of Raymark.
- The Postretirement Benefit Plan provides for certain welfare
benefits for hourly employees of the Crawfordsville, Indiana,
facility. In addition, certain other employees of Raytech are
eligible for these benefits based on a combination of years of
service and age.
- The Company also sponsors certain defined contribution plans for
salaried and hourly employees. The contributions are based on a
percent of annual base compensation, the percentage ranging from
4% to 6%, dependent on performance to Plan. Company contributions
to the defined contribution plans were $520 for 2002 (Successor
Company) and $409 for the period April 3, 2001 through December
30, 2001. Contributions were $150 for the period January 1, 2001
through April 2, 2001 and $874 in 2000 (Predecessor Company).
-67-
Note K, continued
Financial Disclosures of Employee Benefits
RAYTECH PENSION PLAN Successor Company
-------------------- -------------------
2002 2001
------- ------
Change in benefit obligations
Projected benefit obligations at
beginning of year $ 5,779 $4,618
Service cost 344 324
Interest cost 395 353
Actuarial loss 461 592
Benefits paid (135) (108)
------- ------
Projected benefit obligations at end of year $ 6,844 $5,779
======= ======
Change in plan assets
Fair value of plan assets
at beginning of year $ 5,317 $4,382
Actual return on plan assets 292 279
Employer contribution - 764
Benefits paid (135) (108)
------- ------
Fair value of plan assets
at end of year $ 5,474 $5,317
======= ======
Funded Status Reconciliation
Funded status $(1,370) $ (462)
Unrecognized actuarial loss 923 439
------- ------
Net amount recognized $ (447) $ (23)
======= ======
Amounts recognized in the statements
of financial position consist of:
Accrued benefit liability $(1,370) $ (462)
Accumulated other
comprehensive loss 923 439
------- ------
Net amount recognized $ (447) $ (23)
======= ======
Weighted average assumptions
Discount rate 6.50% 7.00%
Expected return on plan assets 6.00% 6.00%
Rate of compensation increase n/a n/a
-68-
Note K, continued
RAYTECH PENSION PLAN, continued
Successor Company Predecessor Company
------------------------ -----------------------
for the Period for the Period
April 3, 2001 to January 1, 2001
Net Periodic Benefit Expense 2002 December 30, 2001 to April 2, 2001 2000
---------------------------- ---- ----------------- -----------------------
Service cost $ 344 $ 243 $ 81 $ 302
Interest cost obligations 395 265 88 302
Expected return on plan assets (315) (208) (65) (217)
Amortization of prior
service costs - - 9 37
------ ----- ------ -----
Total net periodic benefit
cost $ 424 $ 300 $ 113 $ 424
====== ===== ====== =====
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company increased the value of the liability related to the Raytech
pension plan by $.8 million to reflect the present value of future obligations.
Raytech German Pension
The Company's German subsidiaries have unfunded defined benefit plan
covering certain employees.
Successor Company
-----------------
GERMAN PLAN 2002 2001
----------- ---- ----
Change in benefit obligations
Projected benefit obligations at
beginning of year $ 2,455 $ 2,611
Service cost 75 58
Interest cost 154 144
Actuarial loss (gain) 47 (127)
Benefits paid (89) (96)
Translation adjustment 535 (135)
------- -------
Projected benefit obligations at end of year $ 3,177 $ 2,455
======= =======
Accumulated benefit obligations $ 3,037 $ 2,012
======= =======
Change in plan assets
Fair value of plan assets
at beginning of year $ - $ -
Actual return on plan assets - -
Employer contribution 89 96
Plan participants' contributions - -
Benefits paid (89) (96)
------- -------
Fair value of plan assets
at end of year $ - $ -
======= =======
Note K, continued
-69-
GERMAN PLAN, continued
Successor Company
-----------------
2002 2001
---- ----
Funded Status Reconciliation
Funded status $(3,177) $(2,012)
Unrecognized actuarial loss 599 -
------- -------
Net amount recognized $(2,578) $(2,012)
======= =======
Amounts recognized in the statements
of financial position consist of:
Accrued benefit liability $(3,037) $(2,455)
Accumulated other comprehensive loss 459 443
------- -------
Net amount recognized $(2,578) $(2,012)
======= =======
Weighted average assumptions
Discount rate 6.00% 7.00%
Expected return on plan assets n/a n/a
Rate of compensation increase n/a n/a
Successor Company Predecessor Company
------------------------- -----------------------
for the Period for the Period
April 3, 2001 to January 1, 2001
Net Periodic Benefit Expense 2002 December 30, 2001 to April 2, 2001 2000
---------------------------- ---- ----------------- ---------------- ----
Service cost $ 75 $ 43 $ 15 $ 60
Interest cost 154 107 37 150
Amortization of transition
obligations - - - 45
Amortization of net actuarial
loss (gain) 47 - - (124)
----- ------- ------- -----
Total net periodic benefit
cost $ 276 $ 150 $ 52 $ 131
===== ======= ======= =====
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company increased the value of the liability related to the German
pension plan by $.4 million to reflect the present value of future obligations.
-70-
Note K, continued
POSTRETIREMENT BENEFIT PLAN Successor Company
--------------------------- -----------------
2002 2001
---- ----
Change in benefit obligations
Benefit obligations at
beginning of year $ 13,815 $ 11,757
Service cost 587 532
Interest cost 1,004 894
Plan participants' contributions 25 23
Actuarial loss 1,514 991
Benefits paid (358) (382)
-------- --------
Benefit obligations at end of year $ 16,587 $ 13,815
======== ========
Change in plan assets
Fair value of plan assets
at beginning of year $ - $ -
Employer contribution 333 359
Plan participants' contribution 25 23
Benefits paid (358) (382)
-------- --------
Fair value of plan assets
at end of year $ - $ -
======== ========
Funded Status Reconciliation
Funded status $(16,587) $(13,815)
Unrecognized actuarial loss 2,185 671
-------- --------
Net amount recognized $(14,402) $(13,144)
======== ========
Amounts recognized in the
statements of financial
position consist of:
Accrued benefit liability $(14,402) $(13,144)
======== ========
Weighted average assumptions
Discount rate 6.50% 7.00%
Expected return on plan assets n/a n/a
Rate of compensation increase 5.00% 5.00%
Healthcare trend rate 8.00% 8.50%
-71-
Note K, continued
POSTRETIREMENT BENEFIT PLAN (continued)
Sensitivity Analysis, Postretirement Benefits:
For measurement purposes, a 8% annual rate of increase in the per capita
cost of covered healthcare benefits was assumed for 2002. This rate was
assumed to decrease gradually to 5% through 2008 and remain at that level
thereafter. The healthcare cost trend rate assumption has a significant
effect on the amounts reported. To illustrate the impact, increasing or
decreasing the assumed health care cost trend rates by 1 percentage point
in each year would have the following effects:
1 Percentage Point 1 Percentage Point
Increase Decrease
2002 2001 2002 2001
---- ---- ---- ----
Effect on total of service
and interest cost
components of expense $ 152 $ 133 $ (134) $(118)
Effect on accumulated post-
retirement benefit
obligations 1,347 1,095 (1,201) (994)
Successor Company Predecessor Company
----------------------------- --------------------------
for the Period for the Period
April 3, 2001 to January 1, 2001
Net Periodic Benefit Expense 2002 December 30, 2001 to April 2, 2001 2000
---------------------------- ---- ----------------- ---------------- ------
Service cost $ 587 $ 399 $ 133 $ 499
Interest cost obligations 1,004 670 224 801
Amortization of prior
service cost - - 1 8
Amortization of net actuarial
gain - - (3) (59)
Early retirement window - - - 50
------ -------- ------- ------
Total net periodic benefit
cost $1,591 $ 1,069 $ 355 $1,299
====== ======== ======= ======
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company decreased the value of the liability of the postretirement
benefit plan by $1.3 million to reflect the present value of future obligations.
-72-
Note K, continued
RAYMARK PENSION PLANS
In connection with the bankruptcy proceedings, Raytech assumed the
liability of $11.2 million for underfunded Raymark pension plans.
Successor Company
-----------------
2002 2001
---- ----
Change in benefit obligations
Projected benefit obligations at
beginning of period $ 36,199 $ 30,632
Interest cost 2,268 1,859
Actuarial (gain) loss (936) 4,180
Benefits paid (2,631) (472)
-------- --------
Projected benefit obligations at end of period $ 34,900 $ 36,199
======== ========
Change in plan assets
Fair value of plan assets at beginning of period $ 16,215 $ 19,432
Actual return on plan assets (1,262) (2,745)
Employer contribution 6,140 -
Benefits paid (2,631) (472)
-------- --------
Fair value of plan assets at end of period $ 18,462 $ 16,215
======== ========
Funded Status Reconciliation
Funded status $(16,438) $(19,984)
Unrecognized actuarial loss 9,555 8,000
-------- --------
Net amount recognized $ (6,883) $(11,984)
======== ========
Amounts recognized in the statements of
financial position consist of:
Accrued benefit liability $(16,438) $(19,984)
Accumulated other comprehensive loss 9,555 8,000
-------- --------
Net amount recognized $ (6,883) $(11,984)
======== ========
Weighted average assumptions
Discount rate 6.50% 7.00%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase n/a n/a
Net Periodic Benefit Expense
Interest cost $ 2,268 $ 1,859
Expected return on plan assets (1,324) (1,075)
Recognized actuarial loss 95 -
-------- --------
Total net periodic benefit cost $ 1,039 $ 784
======== ========
-73-
Note L - Statements of Cash Flows
The following table sets forth certain supplemental disclosures of cash
flow information:
Successor Company Predecessor Company
-------------------------- -----------------------
for the Period for the Period
Apr. 3, 2001 to January 1, 2001
2002 Dec. 30, 2001 to April 2, 2001 2000
---- --------------- ---------------- ----
Cash paid during the
period for:
Income taxes $ 1,874 $ 1,800 $ 61 $ 8,619
Interest 746 839 306 1,700
Non-cash investing and
financing activities:
PP&E in accounts payable
or under capital lease 933 549 (769) 140
Deferred payable to the
PI Trust 597 5,123 36,636 -
Minimum pension liability 2,498 8,439 - 292
-74-
Note M - Commitments
Rental expense amounted to $1,570 for the period December 30, 2001 to
December 29, 2002, $914 for the period April 3, 2001 to December 30, 2001
(Successor Company) and $313 for the period January 1, 2001 to April 2, 2001
(Predecessor Company) and $1,379 for 2000 (Predecessor Company). The approximate
minimum rental commitments under non-cancelable leases at December 29, 2002,
were as follows: 2003, $989; 2004, $735; 2005 $466; 2006, $403; and 2007, $384.
-75-
Note N - Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents
and trade receivables. The Company places its cash with high credit quality
institutions. At times such amounts may be in excess of the FDIC insurance
limits. The primary businesses of the Company are the automotive and heavy duty
equipment markets and the related aftermarkets within the United States, Europe
and Asia. At December 29, 2002 and December 30, 2001, the Company's five largest
uncollateralized receivables represented approximately $10.9 million or 40.9%
and $9.7 million or 42.1%, respectively, of the Company's trade accounts
receivable balance. The Company performs ongoing credit evaluations of its
customers' financial condition but does not require collateral to support
customer receivables. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information.
-76-
Note O - Supplementary Financial Statement Detail
At 2002 2001
----------------------------------------------------------------------------
OTHER CURRENT ASSETS
Deferred income taxes $ 2,532 $ 4,680
Non-trade receivables 541 1,207
Prepaid insurance 145 252
Other 1,860 909
----------------------------------------------------------------------------
$ 5,078 $ 7,048
============================================================================
ACCRUED LIABILITIES
Property taxes $ 3,625 $ 2,971
Wages and other compensation and
related taxes 7,808 3,646
Income taxes payable 2,409 2,692
Employee benefits 1,313 2,210
Environmental cleanup 7,023 6,782
Other 4,080 4,393
----------------------------------------------------------------------------
$ 26,258 $ 22,694
============================================================================
Successor Company Predecessor Company
--------------------------- ------------------------
For the Period For the Period
April 3, 2001 to January 1, 2001
Fiscal Year 2002 December 30, 2001 to April 2, 2001 2000
-----------------------------------------------------------------------------------
ALLOWANCE FOR BAD DEBTS
Beginning balance $ 729 $1,234 $ 1,234 $ 1,350
Provisions 239 130 143 26
Charge-offs (144) (635) (143) (142)
-----------------------------------------------------------------------------------
Ending balance $ 824 $ 729 $ 1,234 $ 1,234
===================================================================================
Successor Company Predecessor Company
-------------------------- --------------------------
for the Period for the Period
April 3, 2001 to January 1, 2001
Fiscal Year 2002 December 30, 2001 to April 2, 2001 2000
------------------------------------------------------------------------------------
OTHER INCOME, NET
Interest income $ 342 $ 474 $ 106 $ 592
Other income
(expense), net 187 (70) 129 436
------------------------------------------------------------------------------------
$ 529 $ 404 $ 235 $ 1,028
====================================================================================
-77-
Note P - Summarized Quarterly Financial Data (Unaudited)
(in thousands except share and market data)
Fiscal Quarters Ended 2002
----------------------------------------------------------------------------------
Qtr. 1 Qtr. 2 Qtr. 3
As Reported As Revised As Revised Qtr. 4
----------------------------------------------------------------------------------
Net sales $ 52,709 $ 55,305 $ 51,740 $ 50,112
Gross profit 10,525 11,086 8,566 6,594
Income (loss) before
income taxes and
minority interest 2,833 2,331 (4,803) (2,047)
Net income (loss) 1,330 1,070 (3,189) (2,036)
Basic earnings (loss) per
share .03 .03 (.08) (.05)
Diluted earnings (loss) per
share .03 .03 (.08) (.05)
Market range:
-high 4.65 9.12 9.30 8.25
-low 2.35 3.85 4.85 4.98
Dividends
The Company determined subsequent to the filing of the Form 10-Q for
the quarter ended September 29, 2002 that depreciation expense had been
overstated in both the second quarter filing, at June 30, 2002, by $475 and in
the third quarter filing, at September 29, 2002, by $368. The quarterly
reporting above reflects the corrected amounts for these two quarters. The
impact on earnings per share would have been an increase of $.01 in the second
quarter and no impact in the third quarter. The quarters, as reported in the
Company's Form 10-Q filings for 2002, were as follows:
Fiscal Quarters Ended 2002
-------------------------------------------------------------------
Qtr. 1 Qtr. 2 Qtr. 3
-------------------------------------------------------------------
Net sales $ 52,709 $ 55,305 $ 51,740
Gross profit 10,525 10,611 8,198
Income (loss) before
income taxes and
minority interest 2,833 1,856 (5,171)
Net income (loss) 1,330 778 (3,428)
Basic earnings (loss) per share .03 .02 (.08)
Diluted earnings (loss) per
share .03 .02 (.08)
Market range:
-high 4.65 9.12 9.30
-low 2.35 3.85 4.85
Dividends
-78-
Note P, continued
Fiscal Quarters Ended 2001 (2)
----------------------------------------------------------------------------------
Predecessor Company Successor Company
------------------------- ---------------------
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4
----------------------------------------------------------------------------------
4/2/01 4/3/01 to
7/1/01
----------------------------------------------------------------------------------
Net sales $ 55,205 $ - $ 50,561 $ 48,752 $ 46,737
Gross profit 11,394 - 4,563 9,364 7,533
Income (loss) before
provision for taxes,
minority interest
and extraordinary
items 3,498 99,996 (3,327) (1,157) (5,726)
Net income (loss) 1,715 6,993,542 (2,395) 881 (4,063)
Basic earnings (loss)
per share (1) .49 - (2) (.06) .02 (.10)
Diluted earnings
(loss) per share (1) .48 - (2) (.06) .02 (.10)
Market range:
-high 3.50 - 3.70 2.95 2.55
-low 2.19 - 2.22 2.02 1.75
Dividends - - - - -
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share does not equal
the total computed for the year.
(1) Includes the effect of the Plan of Reorganization and fresh-start
reporting (See Notes R and S).
(2) Earnings per share is not meaningful for the one-day results.
-79-
NOTE Q - Formation of Raytech Corporation, Sale of Raymark,
Chapter 11 Proceeding and Emergence from Bankruptcy
Raytech Corporation ("Raytech" or the "Company") was incorporated in
June, 1986 in Delaware and held as a subsidiary of Raymark Corporation
("Raymark"). In October 1986, Raytech became the publicly traded (NYSE) holding
company of Raymark stock through a triangular merger restructuring plan approved
by Raymark's shareholders whereby each share of common stock of Raymark was
automatically converted into a share of Raytech common stock. In May 1988,
Raytech divested all of the Raymark stock.
In accordance with the restructuring plan, Raytech, through its
subsidiaries, purchased certain non-asbestos businesses of Raymark in 1987,
including the Wet Clutch and Brake Division and Raybestos Industrie-Produkte
GmbH, a German subsidiary. Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-defendant with Raymark
and other named defendants in numerous asbestos-related lawsuits as a successor
in liability to Raymark.
In one of the asbestos-related personal injury cases decided in October
1988 in a U.S. District Court in Oregon, Raytech was ruled under Oregon equity
law to be a successor to Raymark's asbestos-related liability. The successor
ruling was appealed by Raytech and in October 1992 the Ninth Circuit Court of
Appeals affirmed the District Court's judgment. The effect of this decision
extended beyond the Oregon District due to a Third Circuit Court of Appeals
decision in a related case wherein Raytech was collaterally estopped (precluded)
from relitigating the issue of its successor liability for Raymark's
asbestos-related liabilities.
In order to stay the asbestos-related litigation, on March 10, 1989,
Raytech filed a petition seeking relief under Chapter 11 of Title 11, United
States Code in the United States Bankruptcy Court, District of Connecticut.
After several Court rulings, including an appeal to the U.S. Supreme
Court, the Oregon case, as affirmed by the Ninth Circuit Court of Appeals,
remained as the prevailing decision holding Raytech to be a successor to
Raymark's asbestos-related liabilities.
As a result of the referenced Court rulings, in October, 1998 Raytech
reached a tentative settlement with its creditors for a consensual plan of
reorganization (the "Plan"), providing for all general unsecured creditors
including all asbestos and environmental claimants to receive 90% of the equity
in Raytech in exchange for their claims. As such, an asbestos personal injury
trust (the "PI Trust") established under the Bankruptcy Code would receive
approximately 83% of the equity of Raytech and the Governments and others would
receive approximately 6% of the equity of Raytech. In addition, any and all
refunds of taxes resulting from the implementation of the Plan would be paid to
the PI Trust. The existing equity holders in Raytech were to retain 10% of the
equity in Raytech.
As a result of the final estimation of allowed claims, Raytech recorded
asbestos claims of $6.76 billion, Government claims of $431.8 million, pension
liability claims of $16 million and retiree benefit claims of $2.5 million
during 2000. The total estimated amount of allowed claims was $7.2 billion.
-80-
Note Q, continued
On August 31, 2000, the Bankruptcy Court confirmed Raytech's Plan,
which confirmation was affirmed by the U.S. District Court on September 13,
2000. The Plan became effective on April 18, 2001 ("Effective Date"), resulting
in Raytech emerging from bankruptcy. On the Effective Date, a channeling
injunction ordered by the Bankruptcy Court pursuant to Section 524(g) of the
Bankruptcy Code has and will permanently and forever stay, enjoin and restrain
any asbestos-related claims against Raytech and subsidiaries, thereby channeling
such claims to the PI Trust for resolution. On the Effective Date, the rights
afforded and the treatment of all claims and equity interests in the Plan were
in exchange for and in complete satisfaction, discharge and release of, all
claims and equity interests against Raytech. The Company's Certificate of
Incorporation was amended and restated in accordance with the Plan providing for
authority to issue up to 55 million shares of stock, of which 50 million is
common and 5 million is preferred. In settlement of the estimated amount of
allowed claims of $7.2 billion, approximately 38 million shares of common stock
were issued and $2.5 million in cash was payable to the allowed claimants and a
commitment was made to pay to the PI Trust any and all refunds of taxes paid or
net reductions in taxes resulting from the implementation of the Plan. The
shares issued were exempt from registration pursuant to the Bankruptcy Code;
however, shares issued to the PI Trust have restrictions on resale as a result
of the high percentage of ownership in Raytech.
In addition, Raytech had assumed the liability for the Raymark pension
plan claim. In September 2002 with the final Court decision denying Raytech's
appeal, the Company assumed the administration of the plans. It has been
represented to Raytech by the Raymark Trustee that the retiree benefit claim
will be retained by Raymark. Settlement of the Raymark claims resulted in
cancellation in full of the Raymark debt and accrued interest of $12.0 million
and a commitment of Raytech to backstop the Raymark Trustee for professional
fees in the event the Raymark Trustee has insufficient recovery of funds for
such purposes up to $1 million. At December 29, 2002, the Company has $1 million
included in accrued liabilities related to this commitment.
See Note R - Fresh-Start Reporting.
-81-
Note R - 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 were recorded
at their respective fair market values. The fair value of substantially all of
the Company's property, plant and equipment and identifiable intangible assets
were determined by independent third-party appraisers.
The reorganization value of the Successor Company was determined based
on the equity value (which represents enterprise value less debt) of the
Successor Company plus the Successor Company's outstanding liabilities. The
reorganization value was approximately $324 million, which was approximately $35
million in excess of the aggregate fair value of the Company's tangible and
identifiable intangible assets. Such excess is classified as goodwill in the
accompanying Consolidated Balance Sheet and is being accounted for in accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets" (see Note V).
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:
-82-
Note R, continued
Adjustments to Record
Effectiveness of the Plan of Reorganization
(in thousands)
Predecessor Reorganized
Balance Sheet Reorganization Fresh-Start Balance Sheet
April 2, 2001 Adjustments Adjustments April 2, 2001
------------- ------------- ----------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 11,371 $ (2,500)(a) $ $ 8,871
Restricted cash 1,986 2,500 (a) 4,486
Trade accounts receivable 29,207 29,207
Inventories 32,590 5,923 (b) 38,513
Income taxes receivable - 37,877 (c) 37,877
Other current assets 6,134 (2,381)(f) 3,753
------------------------------------------------------------------------------------------
Total current assets 81,288 37,877 3,542 122,707
------------------------------------------------------------------------------------------
Net property, plant and
equipment 82,138 30,823 (d) 112,961
Goodwill 18,923 15,844 (e) 34,767
Other intangible assets 375 39,316 (g) 39,691
Deferred income taxes 137,202 (99,341)(f)(c) (27,308)(f) 10,553
Other assets 2,957 2,957
------------------------------------------------------------------------------------------
Total assets $ 322,883 $ (61,464) $62,217 $ 323,636
==========================================================================================
LIABILITIES
Current liabilities
Notes payable and current
portion of long-term debt $ 12,144 $ $ $ 12,144
Raymark debt 10,709 (10,709)(h) -
Current portion of pension
obligations 353 8,500 (j) 134 (k) 8,987
Accounts payable 14,220 2,500 (a) 16,720
Accrued liabilities 20,501 (275)(i) 20,226
Payable to PI Trust - 37,877 (c) 37,877
------------------------------------------------------------------------------------------
Total current liabilities 57,927 37,893 134 95,954
------------------------------------------------------------------------------------------
Liabilities subject to
compromise 7,211,433 (7,211,433)(j) -
Long-term debt 8,536 8,536
Pension obligations 1,636 10,000 (j) (6,916)(k) 4,720
Postretirement benefits
other than pensions 13,404 (1,308)(k) 12,096
Deferred payable to the PI Trust - 36,636 (c) 36,636
Other long-term liabilities 7,654 (312)(f) 7,342
------------------------------------------------------------------------------------------
Total liabilities 7,300,590 (7,126,904) (8,402) 165,284
------------------------------------------------------------------------------------------
Total shareholders'
(deficit) equity (6,977,707) 7,065,440 (l) 70,619 (m) 158,352
------------------------------------------------------------------------------------------
Total liabilities and
shareholders' (deficit) equity $ 322,883 $ (61,464) $62,217 $ 323,636
==========================================================================================
-83-
Note R, continued
The explanation of the "Reorganization Adjustments" and "Fresh Start
Adjustments" columns of the condensed consolidated balance sheet in the
preceding table are as follows:
a) The Plan required the Company to pay $2.5 million to the unsecured
creditors, which has been reflected as restricted cash. During April
2001, $2.1 million of the liability was paid and $.4 million has been
retained by the Company as restricted cash.
b) Finished goods and work-in-progress inventories have been valued based
on their estimated net selling prices less costs to complete, costs of
disposal and a reasonable profit allowance for estimated completing and
selling effort.
c) Income taxes receivable and the payable to the PI Trust reflect the
payable to the PI Trust of current tax recoveries in accordance with
the Plan. Additional tax recoveries to be received in future periods
are shown as deferred tax assets and a deferred payable to the PI
Trust.
d) Property, plant and equipment has been adjusted to reflect the fair
values of the assets based on independent appraisals.
e) The unamortized balance of goodwill of the Predecessor Company has been
eliminated. Reorganization value in excess of amounts allocable to
identifiable assets has been classified as goodwill. The goodwill is
being accounted for in accordance with SFAS No. 142 (see Note V).
f) Deferred tax assets and liabilities have been adjusted for the
settlement of the liabilities subject to compromise and the recording
of deferred taxes relating to the differences in book and tax bases of
assets and liabilities after applying fresh start reporting. The
Company has used 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 V).
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 Q), the write-off of accrued interest on the
Raymark debt ($2.2 million), and an accrual for bankruptcy-related fees
($.9 million) that were recorded against the Raymark debt in accordance
with the previous indemnification between Raymark and the Company prior
to the effective date.
j) Liabilities Subject to Compromise have been adjusted to reflect the
settlement of the claims for cash, assumption of certain pension
obligations, the issuance of common shares in the reorganized company
and tax recoveries in accordance with the Plan.
k) The pension and post retirement benefits other than pensions have been
adjusted to include the present values of future obligations.
l) Shareholders' equity was adjusted to reflect adjustments for the
issuance of 90% of the outstanding common shares to the unsecured
creditors at an overall equity value of $158.3 million in accordance
with the Plan.
m) Shareholders' equity was adjusted to reflect the elimination of the
accumulated deficit, accumulated other comprehensive loss and treasury
shares (which have been retired).
NOTE S - Reorganization Items
-84-
Reorganization (expense) income included in the accompanying
Consolidated Statements of Operations consists of the following items:
Successor Company
----------------- Predecessor Company
for the Period -------------------
April 3, 2001 to for
December 30, 2001 April 2, 2001
----------------- -------------
Fresh-start
adjustments $ - $ 99,996
Professional fees (784) -
------- --------
$ (784) $ 99,996
======= ========
The fresh-start adjustments are discussed in Note R. The professional
fees listed above include accounting, legal, consulting, appraisal and other
miscellaneous services associated with the implementation of the Plan. There
were no reorganization items for any periods prior to April 2, 2001 due to the
indemnification agreement between Raytech and Raymark, which allowed for all
bankruptcy-related costs to be offset against the outstanding Raytech debt to
Raymark.
NOTE T - Extraordinary Items
As a result of the consummation of the Plan, the Company recognized an
extraordinary gain on 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 (135,977)
-----------
Extraordinary gain on debt discharge $ 6,922,923
===========
In October 2001, the Company settled a note payable with a former principal of
Advanced Friction Materials in the amount of $3.1 million. As a result of the
settlement, the Company recognized an extraordinary gain in the amount of $954,
net of taxes of $594 (see Note D).
-85-
Note U - Comprehensive Income
The components of and changes in accumulated other comprehensive (loss) income
are as follows:
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustments (Loss) Income
----------- ----------- -------------
Predecessor Company
Balance January 2, 2000 $ (165) $ - $ (165)
Changes during the year (761) (292) (1,053)
------- -------- -------
Balance December 31, 2000 (926) (292) (1,218)
Changes during the period 926 292 1,218
------- -------- -------
Balance April 2, 2001 $ - $ - $ -
======= ======== =======
=========================================================================
Successor Company
Balance April 2, 2001 $ - $ - $ -
Changes during the period (272) (8,439) (8,711)
------- -------- -------
Balance December 30, 2001 (272) (8,439) (8,711)
Changes during the period 2,202 (2,138) 64
------- -------- -------
Balance December 29, 2002 $ 1,930 $(10,577) $(8,647)
======= ======== =======
In connection with the implementation of fresh-start reporting on April
2, 2001, the Company eliminated accumulated other comprehensive loss as required
by fresh-start reporting.
The Company has not provided for the future tax deduction associated
with foreign currency translation adjustments due to management's decision to
permanently reinvest the earnings of their foreign subsidiaries.
The $583 thousand additional minimum pension liability recorded during
2002 for the Raytech and German pension plans is net of taxes of $360 thousand.
No tax benefit has been provided for the future tax deduction associated with
the additional minimum pension liability recorded for the Raytech and German
pension plans for the periods April 3, 2001 to December 30, 2001 (Successor
Company) and January 3, 1999 to April 2, 2001 (Predecessor Company) due to the
limitations on the realizability of deferred tax assets.
The tax benefits resulting from any tax deductions relating to the
Raymark Pension Plan have been assigned to the PI Trust in accordance with the
Plan, and therefore, Raytech will not receive the future tax deduction.
Accordingly, the future tax deduction relating to the minimum pension liability
for 2002 (Successor Company) and for the period April 3, 2001 to December 30,
2001 (Successor Company) was recorded as a deferred tax asset with a
corresponding payable to the PI Trust.
-86-
Note V - Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, establishes
specific criteria for the recognition of intangible assets separately from
goodwill, and requires that unallocated negative goodwill be written off
immediately as an extraordinary gain instead of being deferred and amortized.
SFAS No. 142 addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. Under SFAS No. 142, goodwill and
indefinite-lived intangibles need to be reviewed for impairment at least
annually. In addition, the amortization period of intangible assets with finite
lives will no longer be limited to forty years. As discussed in Note R, the
Company adopted fresh-start reporting as described in the American Institute of
Certified Public Accountants' Statement of Position No. 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code." SOP 90-7
requires that any change in accounting principles that will be required within
the twelve months following the adoption of fresh-start reporting should be
adopted at that time. Accordingly, the Company has adopted SFAS No. 141 and No.
142 as of April 2, 2001. All intangible assets and goodwill have been valued at
fair value as of the date of fresh-start reporting.
Successor Company
-----------------
2002 2001
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Finite life intangible assets:
Unpatented technology $ 16,262 $ 3,396 $ 16,262 $ 1,455
Distribution base 5,716 500 5,716 213
-------- ------- -------- -------
Sub-total 21,978 $ 3,896 21,978 $ 1,668
-------- ------- -------- -------
Indefinite life intangible
assets:
Trademarks 17,713 17,713
-------- --------
Goodwill 34,767 34,767
-------- --------
Intangible assets, net $ 70,562 $ 72,790
======== ========
The weighted-average amortization periods for the unpatented technology and the
distribution base are between 6 and 20 years. Amortization expense for 2002
(Successor Company) and the period April 3, 2001 to December 30, 2001 (Successor
Company) amounted to $2.2 million and $1.7 million, respectively.
-87-
Note V, continued
Estimated annual amortization expense is as follows:
For the year ending:
2003 $ 2,226
2004 2,226
2005 2,226
2006 2,226
2007 2,226
As required by SFAS No. 142, trademarks and goodwill for the Successor
Company will not be amortized but will be reviewed for impairment annually. The
Company's three operating segments have been defined as reporting units for
purposes of testing goodwill for impairment. The amount of goodwill has been
assigned to each of the Company's segments as follows: $28.9 million for the Wet
Friction segment and $5.9 million for the Aftermarket segment. No goodwill has
been allocated to the Dry Friction segment. The Company performed its annual
impairment review of the trademarks and goodwill in accordance with SFAS 142, as
of March 31, 2002. That effort, which was performed with assistance from a third
party valuation firm, indicated that no impairment adjustment was necessary.
Accordingly, there were no changes in the carrying amount of trademarks or
goodwill during the period from December 31, 2001 to December 29, 2002.
Reported net income presented exclusive of amortization expense
(including any related tax effects) recognized in prior periods relating to
goodwill of the Predecessor Company would have been:
Predecessor Company
--------------------------------
Period from
January 1, 2001
to April 1, 2001 2000
---------------- ----
Reported net income (loss) $ 1,715 $(7,058,978)
Add back goodwill amortization 207 822
------- -----------
Adjusted net income (loss) $ 1,922 $(7,058,156)
======= ===========
Basic earnings (loss) per share:
Reported net income (loss) $ .49 $ (2,015.40)
Goodwill amortization .06 .24
------- -----------
Adjusted net income (loss) $ .55 $ (2,015.16)
======= ===========
Diluted earnings (loss) per share:
Reported net income (loss) $ .48 $ (2,015.40)
-------
Goodwill amortization .06 .24
------- -----------
Adjusted net income (loss) $ .54 $ (2,015.16)
======= ===========
-88-
Note W - Research and Development
Cost of research and new product development amounted to $7,318 for
2002, $5,314 for the period April 3, 2001 to December 30, 2001 (Successor
Company) and $1,726 for the period January 1, 2001 to April 2, 2001 (Predecessor
Company) and $6,822 in 2000 (Predecessor Company). All of the aforementioned
costs are included in selling, general and administrative expenses in the
Consolidated Statements of Operations.
Note X - Restricted Cash
Restricted cash relates to the following:
----------------------------------------------------------------------
At 2002 2001
----------------------------------------------------------------------
Pension escrow $ - $ 3,000
Letters of credit 1,617 1,986
Other 410 410
----------------------------------------------------------------------
$ 2,027 $ 5,396
======================================================================
The letters of credit collateralize certain obligations relating primarily to
workers' compensation.
-89-
Note Y - Related Parties
In 1990 and 1991, Raytech Powertrain, Inc., a subsidiary of the
Company, and owner of all of the common stock of Allomatic Products Company
("APC"), sold approximately 45% of common stock of APC to a group of outside
investors for the purpose of providing needed financing of APC's business
activities. In January 2002, approximately 40% of the common stock of APC was
acquired by Raymark from minority shareholders. Raymark is in bankruptcy and
controlled by a court appointed trustee. With the majority of the creditors of
Raymark being asbestos-related claimants, it is anticipated that the assets of
Raymark, including the 40% of APC's common stock, will be transferred to the
Raytech personal injury trust that owns approximately 83% of Raytech, a related
party.
During 1998 and 1997, the Company purchased yarn from Universal
Friction Composites ("UFC"), a company that is in bankruptcy which was
consolidated with the Raymark bankruptcy in January 2002. With the majority of
the creditors of UFC being asbestos-related claimants, it is anticipated that
the assets of UFC will be transferred to Raytech's personal injury trust that
owns approximately 83% of Raytech, a related party. At December 29, 2002 and
December 30, 2001, $246 is included in accounts payable relating to these
purchases.
In 1998, the Company acquired manufacturing equipment from UFC for
$1,051, of which $907 is included in accounts payable at December 29, 2002 and
December 30, 2001.
Also see discussion regarding Raymark in Note A.
-90-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Raytech Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 105 present fairly, in all material
respects, the financial position of Raytech Corporation (the "Company," a
holding company) and its subsidiaries at December 29, 2002 (Successor Company)
and December 30, 2001 (Successor Company), and the results of their operations
and their cash flows for the fiscal year ended December 29, 2002 (Successor
Company), the period April 3, 2001 to December 30, 2001 (Successor Company), the
period January 1, 2001 to April 2, 2001 (Predecessor Company), and the fiscal
year ended December 31, 2000 (Predecessor Company), in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note Q to the consolidated financial statements, effective April
18, 2001, the Company was reorganized under a plan confirmed by the United
States Bankruptcy Court and adopted fresh-start reporting as further described
in Notes A and R to the consolidated financial statements. Accordingly, the
consolidated financial statements for the periods subsequent to the
reorganization (Successor Company financial statements) are not comparable to
the consolidated financial statements presented for the prior periods
(Predecessor Company financial statements).
PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
March 14, 2003
-91-
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable
-92-
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Article SEVENTH of the Amended Certificate of Incorporation of Raytech
Corporation currently provides that the Board of Directors shall consist of not
more than nine and not less than three Directors. In February 2003, the Board
proposed that this provision of Article SEVENTH be revised to state that the
entire Board of Directors shall consist of not more than eleven and not less
than three directors, as such number may be fixed by the Board of Directors from
time to time. The Raytech Corporation Asbestos Personal Injury Settlement Trust,
which beneficially owns approximately 83% of the outstanding shares of Common
Stock of Raytech Corporation, has given its consent to this Amendment. In March
2003, Raytech Corporation mailed its Schedule 14C Information Statement to its
shareholders. This Amendment to the Amended Certificate of Incorporation of
Raytech Corporation will be filed with the State of Delaware and will become
effective on or about April 15, 2003.
Set forth below are the names of all Directors, together with their
ages, principal occupations and business experience during the last five years,
present directorships, and the year each first became a Director.
Principal Occupation
Business Experience
During Last 5 Years First
and Present Became
Name Age Directorships Director
---- --- -------------------- --------
(Serving until 2003
Stockholders' Meeting)
Albert A. Canosa 57 President and Chief 1998
Executive Officer,
Raytech Corporation;
Previously, Vice
President of Adminis-
tration, Treasurer
and Chief Financial
Officer, Raytech
Corporation; Director,
Quinnipiac University
Robert F. Carter 57 Attorney, Carter & 2001
Civitello
Archie R. Dykes 72 Senior Chairman of 2002
PepsiAmericas, Inc.;
Chairman and Chief
Executive Officer of
Capital City Holdings,
Inc.; Non-Executive
Chairman and Director,
Fleming Companies, Inc.;
Director, Midas, Inc.
-93-
Principal Occupation
Business Experience
During Last 5 Years First
and Present Became
Name Age Directorships Director
---- --- -------------------- --------
(Serving until 2003
Stockholders' Meeting)
David N. Forman 65 President, DBL Company; 2002
Director, The Collaborative
Group, Ltd.
John H. Laeri, Jr. 67 Chairman, Meadowcroft 2001
Associates, Inc.;
President and Chief
Executive Officer, The
GolfCoach, Inc.; Director,
Celotex Corp., Claims
Processing Facility, Inc.,
The GolfCoach, Inc.
Stanley J. Levy 68 Attorney, Levy, Phillips 2001
& Konigsberg LLP
Richard A. Lippe 64 Attorney, Meltzer, Lippe, 2002
Goldstein & Schlissel,
P.C.; Director, Long
Island Software & Technology
Network, Long Island
Life Sciences Initiative
Gene Locks 66 Attorney, Greitzer and 2001
Locks; Director, UNR
Industries, Inc.
(Serving until 2004
Stockholders' Meeting)
Kevin S. Flannery 58 President, Whelan 2001
Financial Corporation;
Chairman, Telespectrum,
Inc.; Director, Palatin
Technologies, Inc.,
Sarcom Inc., Centis
Corporation, Sheffield
Steel Corporation,
Geneva Steel Corporation
-94-
Directors' Compensation
The Directors' compensation includes an annual retainer of $25,000
(except the Chairman of the Board has an annual retainer of $75,000) and
non-chair committee members have an additional annual retainer of $2,000 for
each committee appointment (except that non-chair Audit Committee members have
an additional annual retainer of $4,000). The annual retainer for the chair of
each committee shall be $5,000 (except that the annual retainer for the chair of
the Audit Committee shall be $10,000). In addition, each Director receives
$1,500 for each Director's meeting attended and $1,500 for each committee
meeting attended. There is no minimum attendance rule and any Director that
misses all meetings would receive the annual retainer but no meeting fees.
Executive Officers
First Became
Name Age Positions Held Officer
---- --- -------------- ------------
Albert A. Canosa 57 President and 1986
Chief Executive
Officer
John B. Devlin 51 Vice President, 1998
Treasurer and Chief
Financial Officer
Harold L. Pope 56 Vice President 2002
Edgar P. DeVylder 58 Vice President, 2002
Administration,
General Counsel
and Secretary
-95-
Item 11. Executive Compensation
Summary Compensation Table:
The following Summary Compensation Table identifies current, long-term
and stock-related compensation paid to the Chief Executive Officer and the three
most highly compensated executive officers for 2002 and two prior years:
Long-Term
Compensation
------------
Annual Compensation Awards Payouts
---------------------- ------ ------- All Other
Name/ Salary Bonus Options LTIP Compensation
Position(1) Year ($) ($) # $ ($)(2)
-------- ---- ------- ------- ------- ---- ------
Albert A. Canosa 2002 321,352 - - - 13,449
President and Chief 2001 311,352 - - - 12,248
Executive Officer 2000 298,800 311,352 - - 15,429
John B. Devlin 2002 187,377 - - - 8,937
Vice President, 2001 168,451 - - - 8,439
Treasurer and 2000 161,771 162,865 - - 10,684
Chief Financial
Officer
Edgar P. DeVylder(4) 2002
Vice President, 2001
Administration, 2002
General Counsel
and Secretary
John J. Easton(5) 2002 189,938 - - - 327,108
2001 201,083 - - - 10,822
2000 199,056 201,083 - - 14,222
Harold L. Pope(3) 2002
Vice President 2001
2000
LeGrande L. Young(6) 2002 202,818 - - - 479,388
2001 201,083 - - - 9,816
2000 197,706 201,083 - - 13,216
(1) Registrant has only four executive officers, including the CEO.
(2) The numbers stated for each year include Registrant contributions to
Messrs. Canosa, Devlin, Easton and Young under its defined contribution
plan [401(k)] in the amounts of $8,000, $6,937, $7,597 and $7,621,
respectively, for 2002; $6,800, $6,742, $6,800 and $6,800, respectively,
for 2001, and in the amounts of $10,200, $9,870, $10,200, and $10,200,
respectively, for 2000. The numbers stated for Messrs. Easton and Young in
2002 include severance pay.
(3) Mr. Pope was hired in November 2002 and accordingly had insufficient
compensation to report and had no compensation in the two prior years from
the Registrant.
(4) Mr. DeVylder was hired in December 2002 and accordingly had insufficient
compensation to report and had no compensation in the two prior years from
the Registrant.
(5) Mr. Easton was formerly a Vice President who retired in November 2002.
(6) Mr. Young was formerly Vice President, Administration, Secretary and
General Counsel who retired in December 2002.
-96-
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options Options
on Value at 12/29/02 at 12/29/02
Exercise Realized Exercisable Exercisable
Name (#) ($) (#) ($)
---- -------- -------- ----------- -----------
Albert A. Canosa (CEO) 33,418 202,847 126,363 259,044
John B. Devlin 22,000 46,340 - -
John J. Easton(1) 32,059 73,736 34,507 70,739
LeGrande L. Young(2) 36,722 140,470 97,186 199,231
(1) Retired in November 2002.
(2) Retired in December 2002.
Performance Graph (Table)
The following Performance Graph (Table) compares the Registrant's
cumulative total shareholder return on its common stock with certain indexes and
peer groups for a five-year period:
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG RAYTECH CORPORATION, RUSSELL 2000 INDEX*
AND DOW JONES AUTO PARTS INDUSTRY GROUP INDEX*
Dow Jones Auto
Russell 2000 Parts Industry
Raytech Index Group Index
------- ----- -----------
1997 100 100 100
1998 52 100 101
1999 61 120 98
2000 40 115 73
2001 45 117 93
2002 115 91 82
* Based on closing index on the last trading day of the calendar year.
Assumes $100 invested on December 31, 1997 in Raytech common stock, Russell 2000
Index, and Dow Jones Auto Parts Industry Group Index
-97-
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors of the Registrant,
consisting of four Directors, makes this report of its compensation policies
applicable to the executive officers and the basis for the Chief Executive
Officer's compensation for the last completed fiscal year.
The compensation philosophy of the Compensation Committee is based upon
the premise that all salaried personnel should be eligible to receive additional
compensation for outstanding contribution to the Corporation and consists of the
following two elements: a fixed base salary and a management incentive in
variable amounts in accordance with the levels of eligibility and performance
criteria. The objectives under this philosophy are to maintain an equitable
internal classification of positions by grade, to maintain compensation
opportunity equal to or greater than the competition, to provide for aggregate
compensation related to performance achievement, to maintain an effective system
of salary planning and control and to provide executives with the opportunity to
earn additional compensation based on achievement of certain goals for the
Corporation and its shareholders attributable to excellence in management and
performance.
To accomplish the compensation objectives, all salaried positions,
including the Chief Executive Officer, are graded to reflect level of
responsibility inherent in the position and market value. The grading takes into
account the following factors: organizational relationships, knowledge
requirements, impact potential on corporate profitability, scope of monetary
responsibility and managerial control and the areas of functional responsibility
requiring direction. The Compensation Committee considers all such factors but
places no relative weight on any of the factors. Though the determination of
executive compensation is performed in an organized manner, using documented
criteria as referenced below, the Compensation Committee generally retains full
discretionary authority in establishing executive compensation.
The base salary for executive officers is set in relation to the base
salary policy and practice of other bonus paying employers in the
metalworking/fabricating industry. The data source for determining the base
salary practice of bonus paying employers is Hewitt Associates Total
Compensation Measurement, which resulted from an integration of Management
Compensation Services Project 777 Study and Hewitt's Compensation Data Base used
in the past. This data source was selected as a model for executives' salaries
based upon the similarities of industry, operations and products to the
Registrant and the prestige of the sponsoring firm. Special pay practice surveys
may be conducted if the Compensation Committee deems it appropriate in its
discretion but have not done so within the last three years. The other bonus
paying employers used in establishing the base salary of executives are listed
in the reference Total Compensation Measurement. Of all industry groups of
corporations set forth in the Total Compensation Measurement, the
metalworking/fabricating group was determined by the Compensation Committee to
be the closest and most fitting in type of operations, products and job
responsibilities to the Registrant. The base salaries of executive officers,
including the Chief Executive Officer, were generally low compared to the survey
listed. Since this base salary tends to be lower than the salary policy of
non-bonus paying employers, comparable levels of total compensation are achieved
or exceeded only when the variable element of compensation is added to the base.
To strengthen the executives commitment to improvement of the financial
performance of the Corporation, the amount available for distribution as
variable compensation in any year is determined by either the return on equity
or earnings before tax at the Board's discretion. The formula necessitates that
the Corporation achieve a stipulated earnings before
-98-
tax or return on equity goal before variable compensation is paid. Payment of
shareholder dividends in the year variable compensation is earned is a pre-
requisite to payment; provided, however, that such compensation may be paid in
any event if the Board finds that unusual circumstances justify such payments.
In accordance with the philosophy recited above, the Board stipulated
earnings before tax goals in each of the fiscal years 2000, 2001 and 2002 based
upon a Board approved Business Plan for each year. The stipulated earnings
before tax goal was achieved for the year 2000 but not for 2001 and 2002
resulting in variable compensation or bonus to the executive officers but not
for 2001 and 2002, including the Chief Executive Officer, as well as other key
employees, in amounts established in the variable compensation plan. Earnings
before tax are recited in the Registrant's 2002 Annual Report on Form 10-K
herein. The total compensation of the executive officers in the years in which
variable compensation or bonus was paid based on performance was high compared
to the Hewitt's Total Compensation Measurement Survey grouping referenced above.
The bonus opportunities in the fiscal years 2000, 2001 and 2002 for
executive officers and the Chief Executive Officer were therefore based on the
following factors:
(i) Each such position was graded in accordance with the level of
responsibility inherent in the position including market
value, organizational relationships, knowledge requirements,
impact on corporate profitability, scope of monetary
responsibility, scope of managerial control and areas of
functional responsibility, all as set forth in the established
compensation plan and was determined to be eligible for
participation in variable compensation.
(ii) The executive officers' positions all received a grade
providing for variable compensation eligibility of 75% or 100%
of each executive officer's base salary.
(iii) The Chief Executive Officer's position received a grade
providing for variable compensation eligibility of 100% of the
Chief Executive Officer's base salary.
(iv) The corporate earnings before tax goals stipulated by the
Board for 2000, 2001 and 2002 if met in the amount of 100%
would result in a variable compensation opportunity to each
executive officer of 100%, of 75% or 100% of each such
officer's base salary and resulting in variable compensation
opportunity to the Chief Executive Officer of 100% of such
officer's base salary. Actual variable compensation awarded
would then be determined by the evaluation of performance of
each officer to specific written objectives submitted at the
beginning of each year.
In addition to the variable compensation opportunities based upon
achieving earnings before tax goals annually, the Variable Compensation Plan
provides for long-term variable compensation opportunities for any three-year
strategic planning period determined by earnings per share goals established at
the Board's discretion. Being part of the Variable Compensation Plan, the
strategic plan variable compensation program has an identical philosophy to the
annual variable compensation program recited above. Additionally, the strategic
plan variable compensation program is designed to (i) provide shareholder
returns comparable to other high performance publicly traded companies; (ii)
strengthen key management commitment to improve the long-term financial
performance of the Corporation; (iii) provide key management with a
-99-
shareholder perspective; and (iv) focus key employee resources on
technology driven growth.
In accordance with the recited philosophy above, the Board stipulated
annual earnings per share goals for the strategic planning period beginning 2000
through 2002. The stipulated earnings per share goals were achieved for each of
the year 2000 but not 2002 or 2001 resulting in no long-term (three-year)
variable compensation payouts to the executive officers, including the Chief
Executive Officer.
Reiterating, the base salary of the Chief Executive Officer is based
upon comparable positions in the metalworking/fabrication industry grouping of
Hewitt's Total Compensation Measurement Survey and is low in comparison. The
variable or bonus portion of the Chief Executive Officer compensation is subject
to achievement of the earnings goals referenced above and is high in comparison
to total compensation of other chief executive officers similarly positioned in
the survey. As stated, the achievement of the stipulated earnings before tax
goal was directly related to the variable compensation or bonus received by the
Chief Executive Officer in 2000.
The Registrant's contributions under the defined contribution plan
[401(k)] to the executive officers, including the Chief Executive Officer, were
made to all participants in the plan in accordance with the operative provisions
of said plan. Such provisions, which apply to all participants, provide for a
basic Company contribution, a matching Company contribution and a supplemental
Company contribution. Only the supplemental Company contribution is
discretionary under the plan and if granted is made to all participants.
The Registrant currently has not established any policy with respect to
qualifying compensation paid to executive officers under Section 162(m) of the
Internal Revenue Code. In the event such a policy is established, it will be
included in this Compensation Committee Report on Executive Compensation.
The preceding Performance Graph (Table) compares the Registrant's
cumulative total shareholder return on its common stock with the Russell 2000
Index and the Dow Jones Auto Parts Industry Group Index. The Russell 2000 Index
was selected as a broad equity market index comparison in place of Standard &
Poor's 500 for the reasons that the Registrant is not included in the Standard &
Poor's 500, but is included in the Russell 2000 Index, and such Index includes
companies that are of comparable market capitalization. The Dow Jones Auto Parts
Industry Group Index was selected in lieu of a Registrant-constructed peer group
index for the reasons that difficulties were encountered in presenting the
requisite peer comparison due to a very limited peer group and such peers
essentially being privately held companies or subsidiaries or divisions of
larger publicly held companies which necessary data to draw a comparison is not
publicly available. Further, the Dow Jones Auto Parts Industry Group Index
includes companies that trade in the same industry and have similar market
capitalizations.
Compensation Committee
Robert F. Carter
Stanley J. Levy
Richard A. Lippe
Gene Locks
-100-
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Directors
Shares of Common Stock
Beneficially Owned
-----------------------
Percent
Total Of Class
----- --------
Albert A. Canosa 161,781(a) .39%
Executive Officers
Albert A. Canosa 161,781(a) .39%
President and Chief
Executive Officer
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
Harold L. Pope
Vice President
Edgar P. DeVylder
Vice President, Administration,
General Counsel and Secretary
All Directors and Executive Officers
as a Group (12) 161,781(b) .39%
(a) Total includes 126,363 shares which Mr. Canosa holds the option to purchase
within 60 days.
(b) Total includes 126,363 shares which the Executive Officers as a group hold
the option to purchase within 60 days.
-101-
Item 13. Certain Relationships and Related Transactions
None
Item 14. Controls and Procedures
(a) Based on evaluation of the effectiveness of the design and operation of
the Company disclosure controls and procedures, which evaluation was
made under the supervision and with the participation of management,
including the Company's principal executive officer and principal
financial officer within the 90-day period prior to the filing of this
Annual Report on Form 10-K, the principal executive officer and
principal financial officer have each concluded that such disclosure
controls and procedures are effective in ensuring that information
required to be disclosed by the Company in reports that it files under
the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules
and forms.
(b) No significant changes were made to the Company's internal controls or
in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
PART IV
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
(a) The following financial statements are included in Part II, Item 8:
(1) Financial Statements
Consolidated Balance Sheets at December 29, 2002 (Successor Company)
and December 30, 2001 (Successor Company)
Consolidated Statements of Operations for the year ended December 29,
2002, for the period April 3, 2001 to December 30, 2001 (Successor
Company), for the period January 1, 2001 to April 2, 2001 (Predecessor
Company), and for the year ended December 31, 2000 (Predecessor
Company)
Consolidated Statements of Cash Flows for the year ended December 29,
2002, for the period April 3, 2001 to December 30, 2001 (Successor
Company), for the period January 1, 2001 to April 2, 2001 (Predecessor
Company), and for the year ended December 31, 2000 (Predecessor
Company)
Consolidated Statements of Changes in Shareholders' Equity for the year
ended December 29, 2002, for the period April 3, 2001 to December 30,
2001 (Successor Company), for the period January 1, 2001 to April 2,
2001 (Predecessor Company), and for the year ended December 31, 2000
(Predecessor Company).
Notes to Consolidated Financial Statements
Report of Independent Accountants
-102-
(2) Financial Statement Schedules
Schedules not included with this additional financial information have
been omitted either because they are not applicable or because the
required information is shown in the consolidated financial statements
or footnotes.
(3) The Exhibits are listed in the index of Exhibits at Item (c) hereafter.
(b) Reports on Form 8-K
None
(c) Index of Exhibits
Page
----
2(a) Raytech Corporation's Second Amended Plan of Reorganization (j)
3(a) Certificate of Amendment and Restatement of the Certificate of
Incorporation of Raytech (j)
3(b) Amended and Restated By-Laws of Raytech (j)
4(a) Amendment No. 1 to Form S-4 Registration Statement, Registration No.
33-7491 (b)
10(a) Raytech Corporation's 1990 Non-Qualified Stock Option Plan (e)
10(b) Amended and Restated Agreement and Plan of Merger dated as of
September 4, 1986 (a)
10(c) Stock Purchase Agreement dated March 30, 1987 between Raymark
Industries, Inc. and Raytech Composites (c), Amendment dated July
18, 1991 (f) and Amendment dated December 21, 1992 (g)
10(d) Asset Purchase Agreement dated October 29, 1987 between Raymark
Industries, Inc. and Raytech Composites, Inc. (c), Amendment dated
July 18, 1991 (f) and Amendment dated December 21, 1992 (g)
10(e) Stock Purchase Agreement dated May 18, 1988 between Raytech
Corporation and Asbestos Litigation Management, Inc. (d)
10(f) Asset Purchase Agreement (Notarial Deed) dated June 19, 1992 between
Ferodo Beral GmbH and Raytech Composites, Inc. and Raybestos
Reibbelag GmbH (g)
10(g) Loan Agreement dated September 16, 1993 between Raytech Composites,
Inc. and Raymark Industries, Inc. (h)
10(h) Loan Agreement dated January 10, 1994 between Raytech Composites,
Inc. and Raymark Industries, Inc. (h)
10(i) Memorandum of Understanding dated July 23, 1998 Re. Consensual Plan
of Reorganization (i)
-103-
21 Subsidiaries of Raytech
22 Matters Submitted to Vote of Security Holders (k)
23 Consent of Independent Accountants
Footnotes to Exhibits
(a) Filed as an Exhibit to Registrant's Amendment No. 1 to Form
S-4, Registration Statement, Registration No. 33-7491, filed
with the Securities and Exchange Commission on September 5,
1986.
(b) Filed with the Securities and Exchange Commission on September
5, 1986.
(c) Included as an Exhibit to Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission on March 28,
1988, as amended by Form 8 filed on April 11, 1988 and Form 8
filed on April 19, 1988.
(d) Included as an Exhibit to Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission on March 29,
1989.
(e) Included in Registrant's Registration Statement on Form S-8
(Registration No. 33-42420) filed with the Securities and
Exchange Commission on August 23, 1991.
(f) Included as an Exhibit to Registrant's Report on Form 10-Q
filed with the Securities and Exchange Commission on September
29, 1991, as amended by Form 8 filed on February 27, 1992.
(g) Included as an Exhibit to Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission on March 22,
1993.
(h) Included as an Exhibit to Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission on March 14,
1994.
(i) Included as an Exhibit to Registrant's Report on Form 10-Q
filed with the Securities and Exchange Commission on November
6, 1998.
(j) Included as an Exhibit to Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission on March 23,
2001.
(k) Filed with the Securities and Exchange Commission on March 25,
2003 on Schedule 14C.
Copies of exhibits which are not included herewith and which have not
previously been filed with the Securities and Exchange Commission may
be obtained by submitting a written request, specifying the name of the
exhibit and including payment of $2.00 for each exhibit to cover
handling and postage, to: Edgar P. DeVylder, Secretary, Raytech
Corporation, Suite 295, Four Corporate Drive, Shelton, Connecticut
06484.
(d) The Index to Consolidated Financial Statements and Financial Statement
Schedules is included beginning on page 105 hereafter.
-104-
Index to Consolidated Financial Statements
Financial Statements: Page
----
Consolidated Balance Sheets at
December 29, 2002 (Successor Company)
and December 30, 2001 (Successor Company) 38
Consolidated Statements of Operations for the year ended
December 29, 2002 (Successor Company), for the period April 3,
2001 to December 30, 2001 (Successor Company), for the period
January 1, 2001 to April 2, 2001 (Predecessor
Company) and for the year ended December 31,
2000 (Predecessor Company) 39
Consolidated Statements of Cash Flows for the year ended
December 29, 2002 (Successor Company), for the period April 3,
2001 to December 30, 2001 (Successor Company), for the period
January 1, 2001 to April 2, 2001 (Predecessor Company) and for
the year ended December 31,
2000 (Predecessor Company) 40
Consolidated Statements of Changes in Shareholders' Equity for
the year ended December 29, 2002 (Successor Company), for the
period April 3, 2001 to December 30, 2001 (Successor Company),
for the period January 1, 2001 to April 2, 2001 (Predecessor
Company) and for the year ended December 31, 2000
(Predecessor Company) 41
Notes to Consolidated Financial Statements 42
Report of Independent Accountants 91
-105-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RAYTECH CORPORATION
By: /s/JOHN B. DEVLIN
------------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
Date: March 31, 2003
-106-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RAYTECH CORPORATION
By: /s/ALBERT A. CANOSA
------------------------
Albert A. Canosa
President and
Chief Executive Officer
Date: March 31, 2003
-107-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities shown on March 31, 2003.
Signature and Title Signature and Title
/s/ALBERT A. CANOSA /s/DAVID N. FORMAN
------------------------------ ------------------------------
Albert A. Canosa David N. Forman
President, Chief Executive Director
Officer and Director
/s/JOHN B. DEVLIN /s/STANLEY J. LEVY
------------------------------ -------------------------------
John B. Devlin Stanley J. Levy
Vice President, Treasurer and Director
Chief Financial Officer
/s/ROBERT F. CARTER /s/JOHN H. LAERI, JR.
------------------------------ ------------------------------
Robert F. Carter John H. Laeri, Jr.
Director Director
/s/ARCHIE R. DYKES /s/RICHARD A. LIPPE
------------------------------ -----------------------------
Archie R. Dykes Richard A. Lippe
Director Director
/s/KEVIN S. FLANNERY /s/GENE LOCKS
------------------------------ ------------------------------
Kevin S. Flannery Gene Locks
Director Director
-108-
CERTIFICATION
I, John B. Devlin, Chief Financial Officer of Raytech Corporation (the
"Registrant"), certify that:
1. I have reviewed this annual report on Form 10-K of Raytech Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of and for, the periods presented in
this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
/s/JOHN B. DEVLIN
-----------------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
-109-
CERTIFICATION
I, Albert A. Canosa, President and Chief Executive Officer of Raytech
Corporation (the "Registrant"), certify that:
1. I have reviewed this annual report on Form 10-K of Raytech Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of and for, the periods presented in
this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
/s/ALBERT A. CANOSA
-------------------------------------
Albert A. Canosa
President and Chief Executive Officer
-110-
CERTIFICATION
I, John B. Devlin, Chief Financial Officer of Raytech Corporation (the
"Company"), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby
certify as follows:
1. The annual report on Form 10-K of the Company for the period
ended December 29, 2002 fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in such Form 10-K fairly presents,
in accordance with United States generally accepted accounting
principles, in all material respects, the financial condition
and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 31st day of
March, 2003.
/s/JOHN B. DEVLIN
-----------------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
CERTIFICATION
I, Albert A. Canosa, President and Chief Executive Officer of Raytech
Corporation (the "Company"), pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, do hereby certify as follows:
1. The annual report on Form 10-K of the Company for the period
ended December 29, 2002 fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in such Form 10-K fairly presents,
in accordance with United States generally accepted accounting
principles, in all material respects, the financial condition
and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this Certification this 31st day of
March, 2003.
/s/ALBERT A. CANOSA
-----------------------------
Albert A. Canosa
President and
Chief Executive Officer