UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 29, 2003, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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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
--------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
203-925-8023
(Registrant's Telephone Number)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the Registrant 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 August 4, 2003, 41,737,306 shares of common stock were outstanding and the
aggregate market value of these shares (based upon the closing price of Raytech
common stock on the New York Stock Exchange) on such date held by non-affiliates
was approximately $23.2 million.
Page 1 of 31
RAYTECH CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets at June 29, 2003 (Unaudited)
and December 29, 2002 3
Condensed Unaudited Consolidated Statements of
Operations for the thirteen weeks ended
June 29, 2003 and June 30, 2002 4
Condensed Unaudited Consolidated Statements of
Operations for the twenty-six weeks ended
June 29, 2003 and June 30, 2002 5
Condensed Unaudited Consolidated Statements
of Cash Flows for the twenty-six weeks
ended June 29, 2003 and June 30, 2002 6
Condensed Unaudited Consolidated Statements of
Changes in Shareholders' Equity for the twenty-six
weeks ended June 29, 2003 and June 30, 2002 7
Notes to Condensed Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
Certifications 30
-2-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
--------------------------------------------------------------------------------
June 29, 2003 December 29,
At (unaudited) 2002
---------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 14,995 $ 19,983
Restricted cash 4,028 2,027
Trade accounts receivable, less allowance
of $890 and $824 31,245 26,640
Inventories, net 33,159 34,057
Income taxes receivable 1,826 4,793
Other current assets 5,420 5,078
-------------------------------------------------------------------------------------------
Total current assets 90,673 92,578
-------------------------------------------------------------------------------------------
Property, plant and equipment 138,353 131,378
Less accumulated depreciation (33,463) (25,257)
-------------------------------------------------------------------------------------------
Net property, plant and equipment 104,890 106,121
-------------------------------------------------------------------------------------------
Intangible assets, net 69,449 70,562
Deferred income taxes 21,921 21,906
Other assets 2,956 3,054
-------------------------------------------------------------------------------------------
Total assets $289,889 $294,221
===========================================================================================
LIABILITIES
Current liabilities
Notes payable and current portion of long-term debt $ 13,582 $ 15,091
Current portion of pension obligation 8,030 8,030
Accounts payable 15,309 15,089
Accrued liabilities 24,700 26,258
Payable to the PI Trust 3,823 4,793
-------------------------------------------------------------------------------------------
Total current liabilities 65,444 69,261
-------------------------------------------------------------------------------------------
Long-term debt 4,645 4,293
Pension obligation 11,529 12,815
Postretirement benefits other than pension 14,309 13,800
Deferred payable to the PI Trust 42,356 42,356
Other long-term liabilities 867 827
-------------------------------------------------------------------------------------------
Total liabilities 139,150 143,352
-------------------------------------------------------------------------------------------
Minority interest 9,251 8,759
Commitments and contingencies
SHAREHOLDERS' EQUITY
Capital stock
Cumulative preferred stock, no par value,
5,000,000 shares authorized, none issued and
outstanding -- --
Common stock, par value $1.00, 50,000,000 shares
authorized, 41,737,306 and 41,701,554 issued and
outstanding 41,737 41,701
Additional paid in capital 117,574 117,458
Accumulated deficit (10,014) (8,402)
Accumulated other comprehensive loss (7,809) (8,647)
-------------------------------------------------------------------------------------------
Total shareholders' equity 141,488 142,110
-------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 289,889 $ 294,221
===========================================================================================
The accompanying notes are an integral part of these statements.
-3-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except share data)
(unaudited)
For the 13 Weeks Ended June 29, 2003 June 30, 2002
(as revised)
---------------------------------------------------------------------------
Net sales $ 54,093 $ 55,305
Cost of sales (45,957) (44,219)
-------------------------------------------------------------------------
Gross profit 8,136 11,086
Selling, general and
administrative expenses (8,565) (8,180)
-------------------------------------------------------------------------
Operating (loss) profit (429) 2,906
Interest expense (278) (179)
Other income (expense), net 563 (396)
-------------------------------------------------------------------------
(Loss) income before provision for environmental
claims, income taxes and minority interest (144) 2,331
Provision for environmental claims (1,762) --
-------------------------------------------------------------------------
(Loss) income before provision for income
taxes and minority interest (1,906) 2,331
Benefit (provision) for income taxes 586 (897)
-------------------------------------------------------------------------
(Loss) income before minority interest (1,320) 1,434
Minority interest (219) (364)
-------------------------------------------------------------------------
Net (loss) income $(1,539) $ 1,070
=========================================================================
Basic (loss) earnings per share $ (.04) $ .03
=========================================================================
Diluted (loss) earnings per share $ (.04) $ .03
=========================================================================
The accompanying notes are an integral part of these statements.
-4-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except share data)
(unaudited)
For the 26 Weeks Ended June 29, 2003 June 30, 2002
(as revised)
----------------------------------------------------------------------------
Net sales $ 109,828 $108,014
Cost of sales (92,807) (86,403)
-------------------------------------------------------------------------
Gross profit 17,021 21,611
Selling, general and
administrative expenses (16,844) (15,774)
-------------------------------------------------------------------------
Operating profit 177 5,837
Interest expense (515) (456)
Other income (expense), net 578 (217)
-------------------------------------------------------------------------
Income before provision for environmental
claims, income taxes and minority interest 240 5,164
Provision for environmental claims (1,762) --
-------------------------------------------------------------------------
(Loss) income before provision for income
taxes and minority interest (1,522) 5,164
Benefit (provision) for income taxes 402 (1,988)
-------------------------------------------------------------------------
(Loss) income before minority interest (1,120) 3,176
Minority interest (492) (776)
-------------------------------------------------------------------------
Net (loss) income $ (1,612) $ 2,400
=========================================================================
Basic (loss) earnings per share $ (.04) $ .06
=========================================================================
Diluted (loss) earnings per share $ (.04) $ .06
=========================================================================
The accompanying notes are an integral part of these statements.
-5-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(in thousands)
(unaudited)
For the 26 Weeks Ended June 29, 2003 June 30, 2002
(as revised)
----------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (1,612) $ 2,400
Depreciation and amortization 9,192 8,489
Other operating activities (5,619) (2,819)
-------------------------------------------------------------------------
Net cash provided by
operating activities 1,961 8,070
-------------------------------------------------------------------------
Cash flow from investing activities:
Capital expenditures (5,547) (5,576)
Proceeds on sales of property,
plant and equipment -- 196
-------------------------------------------------------------------------
Net cash used in investing activities (5,547) (5,380)
Cash flow from financing activities:
Net payments on short-term notes (1,729) (859)
Principal payments on long-term debt (1,188) (552)
Proceeds from long-term borrowings 1,146 106
Proceeds from exercise of stock options 152 243
-------------------------------------------------------------------------
Net cash used in financing activities (1,619) (1,062)
Effect of exchange rate changes on cash 217 147
Net change in cash and cash equivalents (4,988) 1,775
Cash and cash equivalents at
beginning of period 19,983 14,463
-------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 14,995 $16,238
=========================================================================
The accompanying notes are an integral part of these statements.
-6-
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------
(in thousands)
(unaudited)
Accumulated
Additional Other
Common Paid in Accumulated Comprehensive
Stock Capital Deficit Loss Total
(as revised) (as revised)
---------------------------------------------------------------------------------------------
Balance,
December 30, 2001 $41,528 $116,843 $ (5,577) $(8,711) $ 144,083
Comprehensive income:
Net income -- -- 2,400 -- 2,400
Changes during
the period -- -- -- 1,112 1,112
-------------------------------------------------------------------------------------------
Total comprehensive
income -- -- 2,400 1,112 3,512
Stock options exercised 78 165 243
Balance,
June 30, 2002 $41,606 $117,008 $ (3,177) $(7,599) $ 147,838
===========================================================================================
Balance,
December 29, 2002 $41,701 $117,458 $ (8,402) $(8,647) $ 142,110
Comprehensive income:
Net loss -- -- (1,612) -- (1,612)
Changes during
the period -- -- -- 838 838
-------------------------------------------------------------------------------------------
Total comprehensive
income -- -- (1,612) 838 (774)
--------------------------------------------------------------------------------------------
Stock options exercised 36 116 152
Balance,
June 29, 2003 $41,737 $117,574 $(10,014) $(7,809) $ 141,488
===========================================================================================
The accompanying notes are an integral part of these statements.
-7-
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(dollars in thousands, unless otherwise noted,
except per share data)
(Unaudited)
Note A - Summary of Significant Accounting Policies
For a summary of all other significant accounting policies, refer to Note
A to the consolidated financial statements included with the 2002 Form 10-K.
1. Presentation of Condensed Unaudited Consolidated Financial Statements
These condensed unaudited consolidated financial statements have been
prepared pursuant to the requirements of Article 10 of Regulation S-X, and
in the opinion of management, contain all adjustments necessary to fairly
present the consolidated financial position of Raytech as of June 29, 2003
and the consolidated results of operations and cash flows for all interim
periods presented. All adjustments are of a normal recurring nature. The
year-end condensed consolidated balance sheet data was derived from
audited financial statements but does not include all disclosures required
by accounting principles generally accepted in the United States of
America. The financial statements contained herein should be read in
conjunction with the Company's financial statements and related notes
filed on Form 10-K for the year ended December 29, 2002. Interim results
are not necessarily indicative of the results for the full year.
2. Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," 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, "Accounting for Stock-Based Compensation -
Transition and Disclosure." Accordingly, no compensation cost has been
recognized for the stock option plans in the accompanying financial
statements.
SFAS No. 123, as amended by SFAS No. 148, requires the Company to disclose
pro forma net income and pro forma earnings per share amounts as if
compensation expense was recognized for options granted after 1994. Pro
forma net income and the related basic and diluted earnings per share
amounts would be as follows:
-8-
Note A, continued
For the 13 Weeks Ended
June 29, 2003 June 30, 2002
(as revised)
------------- -------------
(Unaudited)
Net (loss) income:
As reported $ (1,539) $ 1,070
Less: Total stock-based employee
compensation expense determined
under fair value based method (671) --
--------- ---------
Pro forma net (loss) income $ (2,210) $ 1,070
========= =========
Basic (loss) earnings per share:
As reported $ (.04) $ .03
Pro forma $ (.05) $ .03
Diluted (loss) earnings per share:
As reported $ (.04) $ .03
Pro forma $ (.05) $ .03
During the thirteen weeks ended June 29, 2003, the Company granted options
for 1,172,000 shares of common stock with an exercise price of $5.70 per
share. The fair value of these options was estimated at $2.05 per common
share on the date of grant, using the Black-Scholes option pricing model
with the following assumptions: expected volatility of 62.30%, dividend
yield of 0.00%, risk free interest rate of 2.84% and an expected life of
the options of six years. Options to purchase 290,659 shares of common
stock at $4.25 per share and options to purchase 2,773,000 shares of
common stock at $5.70 per share were not included in the computation of
diluted earnings per share for the thirteen weeks ended June 29, 2003
because of their anti-dilutive effect due to the Company incurring a net
loss for the period.
There was no pro forma impact on net income for the thirteen weeks ended
June 30, 2002, as all options outstanding during the period were fully
vested in 1999.
For the 26 Weeks Ended
June 29, 2003 June 30, 2002
(as revised)
------------- -------------
(Unaudited)
Net (loss) income:
As reported $ (1,612) $ 2,400
Less: Total stock-based employee
compensation expense determined
under fair value based method (1,084) --
--------- ---------
Pro forma net (loss) income $ (2,696) $ 2,400
========= =========
Basic (loss) earnings per share:
As reported $ (.04) $ .06
Pro forma $ (.06) $ .06
Diluted (loss) earnings per share:
As reported $ (.04) $ .06
Pro forma $ (.06) $ .06
During the twenty-six weeks ended June 29, 2003, the Company granted
options for 2,773,000 shares of common stock with an exercise price of
-9-
Note A, continued
$5.70 per share. Options to purchase 290,659 shares of common stock at
$4.25 per share and options to purchase 2,773,000 shares of common stock
at $5.70 per share were not included in the computation of diluted
earnings per share for the twenty-six weeks ended June 29, 2003 because of
their anti-dilutive effect due to the Company incurring a net loss for the
period.
There was no pro forma impact on net income for the twenty-six weeks ended
June 30, 2002, as all options outstanding during the period were fully
vested in 1999.
3. Guarantees
On November 26, 2002, FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including 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.
The Company provides certain warranties relating to the quality and
performance of its products. The primary product of the Company, friction
plates, is used in manual and automatic transmissions, transfer cases and
wet wheel brake systems for heavy duty equipment. Warranty claims have
historically been de minimis due to the quality of the Company's products
and the impact of other potential parts interactions in these systems,
which may contribute to the root cause of any system failure. The Company
does maintain product warranty insurance in the event a warranty issue
does arise. The costs in 2003 for product warranty support have been de
minimis.
4. Recently Issued Accounting Pronouncements
In April, 2003, the FASB issued Financial Accounting Standard No. 149
(SFAS No. 149) "Amendment of Statement 133 Accounting for Derivative
Instruments and Hedging Activities." This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under FASB Statement No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, with all
provisions applied prospectively. Amendments relating to implementation
issues that were previously cleared by the FASB and were effective for
fiscal quarters beginning before June 15, 2003 should continue to be
applied in accordance with their respective effective dates. Raytech is
evaluating the impact, if any, that this statement may have on future
reporting. Management's initial review has determined that the statement
is not currently applicable to Raytech.
In May, 2003, the FASB issued Financial Accounting Standard No. 150 (SFAS
No. 150), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equities. This Statement
establishes standards regarding the manner in which an issuer classifies
and measures certain types of financial instruments having characteristics
of both liabilities and equity. SFAS No. 150 is
-10-
Note A, continued
effective for financial instruments entered into or modified after May 31,
2003 and for contracts in existence at the start of the first interim
period beginning after June 15, 2003. Raytech currently does not have
financial instruments with the characteristics described in the standard.
Note B - Inventories
Inventories, net, consist of the following:
June 29, 2003 December 29, 2002
(Unaudited)
------------- -----------------
Raw material $11,944 $11,049
Work in process 7,727 8,349
Finished goods 13,488 14,659
------- -------
$33,159 $34,057
======= =======
Note C - Earnings Per Share
For the For the
13 Weeks Ended 13 Weeks Ended
June 29, 2003 June 30, 2002
(as revised)
------------- --------------
(Unaudited)
Basic EPS Computation
Numerator:
Net (loss) income $ (1,539) $ 1,070
Denominator:
Weighted average shares 41,701,554 41,528,520
Weighted average stock
options exercised 32,148 33,696
------------ -----------
Adjusted weighted average shares 41,733,702 41,562,216
============ ===========
Basic (loss) earnings per share $ (.04) $ .03
============ ===========
Diluted EPS Computation
Numerator:
Net (loss) income $ (1,539) $ 1,070
Denominator:
Weighted average shares 41,701,554 41,528,520
Weighted average stock
options exercised 32,148 33,696
Dilutive potential common shares -- 124,901
------------ -----------
Adjusted weighted average shares 41,733,702 41,687,117
============ ===========
Diluted (loss) earnings per share $ (.04) $ .03
============ ===========
-11-
Note C, continued
Options to purchase 290,659 shares of common stock at $4.25 per share and
options to purchase 2,773,000 shares of common stock at $5.70 per share were not
included in the computation of diluted earnings per share for the thirteen weeks
ended June 29, 2003 because of their anti-dilutive effect due to the Company
incurring a net loss for the period.
For the For the
26 Weeks Ended 26 Weeks Ended
June 29, 2003 June 30, 2002
(as revised)
------------- --------------
(Unaudited)
Basic EPS Computation
Numerator:
Net (loss) income $ (1,612) $ 2,400
Denominator:
Weighted average shares 41,701,554 41,528,520
Weighted average stock
options exercised 16,074 16,848
------------ -----------
Adjusted weighted average shares 41,717,628 41,545,368
============ ===========
Basic (loss) earnings per share $ (.04) $ .06
============ ===========
Diluted EPS Computation
Numerator:
Net (loss) income $ (1,612) $ 2,400
Denominator:
Weighted average shares 41,701,554 41,528,520
Weighted average stock
options exercised 16,074 16,848
Dilutive potential common shares -- 54,155
------------ -----------
Adjusted weighted average shares 41,717,628 41,599,523
============ ===========
Diluted (loss) earnings per share $ (.04) $ .06
============ ===========
Options to purchase 290,659 shares of common stock at $4.25 per share and
options to purchase 2,773,000 shares of common stock at $5.70 per share were not
included in the computation of diluted earnings per share for the twenty-six
weeks ended June 29, 2003 because of their anti-dilutive effect due to the
Company incurring a net loss for the period.
In February 2002, lawyers claiming to represent the Committee of Equity
Holders filed a motion in U.S. Bankruptcy Court to compel Raytech to either
issue up to approximately 700,000 additional shares to the pre-reorganization
holders of shares in Raytech or their successors, or to proportionately reduce
the shareholdings of the general unsecured creditor shareholders under the Plan
of Reorganization. The ultimate outcome of this matter is unknown; however, it
is possible that its resolution could cause the Company to issue additional
shares to the original shareholder group, or to retire shares held by the
general unsecured creditor shareholder group. This might directly impact the
earnings per share calculations of the Company. The Company has filed a motion
for summary judgment asking the Court to dismiss the action, and the Court has
denied that motion.
Note D - Segment Reporting
-12-
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 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 segment produces engineered friction products, which are
not used in an oil immersed environment, and are 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.
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.
Information relating to operations by industry segment follows:
OPERATING SEGMENTS
For the For the
13 Weeks Ended 13 Weeks Ended
June 29, 2003 June 30, 2002
(as revised)
------------- --------------
(Unaudited)
NET SALES
Wet Friction $ 33,740 $ 37,303
Aftermarket 11,290 12,106
Dry Friction 11,401 8,437
Intersegment elimination (1) (2,338) (2,541)
-------- --------
Net sales to external customers $ 54,093 $ 55,305
======== ========
OPERATING (LOSS) PROFIT (2)
Wet Friction $ (1,233) $ 2,144
Aftermarket 2,013 2,268
Dry Friction 1,504 193
Corporate (2,428) (2,274)
-------- --------
Consolidated $ (144) $ 2,331
======== ========
-13-
Note D, continued
For the For the
26 Weeks Ended 26 Weeks Ended
June 29, 2003 June 30, 2002
(as revised)
------------- --------------
(Unaudited)
NET SALES
Wet Friction $ 68,412 $ 71,651
Aftermarket 22,779 24,590
Dry Friction 23,110 16,590
Intersegment elimination (1) (4,473) (4,817)
--------- ---------
Net sales to external customers $ 109,828 $ 108,014
========= =========
OPERATING (LOSS) PROFIT (2)
Wet Friction $ (2,427) $ 3,657
Aftermarket 4,243 4,826
Dry Friction 2,869 948
Corporate (4,445) (4,267)
--------- ---------
Consolidated $ 240 $ 5,164
========= =========
(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 (loss) income before
provision for environmental claims, income taxes and minority interest.
Note E - Income Taxes
The effective rate for the thirteen-week period ended June 29, 2003 is a
benefit of 30.7% compared to an expense of 38.5% for the same period in the
prior year. The difference is attributable to changes in the mix of earnings and
losses in the domestic and foreign entities and the effect of permanent
differences. The effective tax rate for the twenty-six week period ended June
29, 2003 is a benefit of 26.4% compared to an expense of 38.5% for the same
period in the prior year. The effective rate for the twenty-six-week period
ended June 29, 2003 reflects the Company's anticipated annualized rate and
differs from the Federal statutory rate for several reasons. The rate for the
current period reflects a statutory federal rate adjusted for state and foreign
taxes and contributions made to the Raymark pension plans. Payments to the
Raymark pension plans create a permanent difference due to this tax benefit
inuring to the Raytech Personal Injury Trust in accordance with the Tax Benefits
Assignment and Assumption Agreement. In addition, the Company did not recognize
any tax benefits associated with the operating losses incurred by the Company's
U.K. operations due to doubts about their future recoverability.
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 June 29, 2003, the Company
has 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. The tax credit
Note E, continued
-14-
carryforwards all belong 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 allocated to the PI Trust, and contributions
made to the Raymark pension plans. If Raytech Corporation generates additional
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 current and future operating losses, if any, 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 June 29, 2003.
At June 29, 2003, the Company has recorded a tax receivable in the amount
of $1.8 million, net of Federal income tax, due from state governments for
returns filed in 2002. The Company has received $3.0 million, net of Federal tax
and interest, in the thirteen-week period ended June 29, 2003 as a partial
recovery of these state taxes. In accordance with the Agreement, this amount
inures to the benefit of the PI Trust. The State of Indiana has completed its
audit of Raytech for the years 1992 through 2001. As a result of the audit,
Raytech was denied refunds claimed for Indiana Gross Income tax paid in the
years 1992 through 1997 of $1.0 million and certain interest on amounts
refunded. Raytech has filed a protest with respect to these items with the
Indiana Department of Revenue, and a hearing is expected later this year.
Pursuant to the Agreement, any tax refunds received will be payable, net of tax,
to the PI Trust.
The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this audit or
any other years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.
The Company owns 57% of the stock of Allomatic Products Company ("APC").
The Company has not recorded a deferred tax liability for the undistributed
earnings of APC since management expects that those earnings will be distributed
to the Company in a tax-free transaction. However, the deferred tax liability on
the undistributed earnings of APC would be approximately $1.3 million at June
29, 2003, if all of APC's earnings were to be distributed through dividends.
-15-
Note F - Goodwill and Other Intangible Assets
June 29, 2003 December 29, 2002
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
(Unaudited)
Finite life intangible
assets:
Unpatented technology $ 16,262 $4,366 $ 16,262 $ 3,396
Distribution base 5,716 643 5,716 500
-------- ------ -------- --------
Sub-total 21,978 $5,009 21,978 $ 3,896
-------- ------ -------- --------
Indefinite life intangible
assets:
Trademarks 17,713 17,713
-------- --------
Goodwill 34,767 34,767
-------- --------
Intangible assets, net $ 69,449 $ 70,562
======== ========
The weighted-average amortization periods for the unpatented technology and the
distribution base are 8.6 and 20.0 years, respectively. Amortization expense for
the thirteen weeks ended June 29, 2003 amounted to $557. Amortization expense
for the twenty-six weeks ended June 29, 2003 amounted to $1,113.
Estimated annual amortization expense is as follows:
For the year ending:
2003 $ 2,226
2004 2,226
2005 2,226
2006 2,226
2007 1,926
Trademarks and goodwill 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. During the
thirteen weeks ended June 29, 2003, the Company performed its annual impairment
review of the reporting units in accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," as of March 31, 2003. The 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 twenty-six weeks ended June 29,
2003.
Note G - Litigation
The Company is subject to certain legal matters that have arisen in the
ordinary course of business, and management does not expect these matters will
have a material adverse effect on the Company. In addition, the Company is
involved in the following litigation.
-16-
Note G, continued
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 (the "Site") 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 Company has filed a claim for
such defense and indemnity cost reimbursement in the rehabilitation proceedings
but has not yet received any decision on its claim. Three additional insurers
have been added to the Reliance case as ordered by the District Court.
The U.S. Environmental Protection Agency ("EPA") became involved in the
Site in December 2000 and issued a Unilateral Administrative Order under CERCLA
("Order") demanding removal of contaminated soils from the Site. RPC has
substantially completed the investigation and remediation required under the
Order. The Company has estimated that the cost to comply with the Order will be
approximately $16.2 million of which $10.5 million has been spent through June
29, 2003. The remaining balance of $5.7 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. On May 6, 2003, EPA
indicated that RPC is potentially liable for PCB contamination downstream of the
Site area that is the subject of the Order. EPA has not issued an order to RPC
regarding this downstream area. However, the Company has engaged in negotiations
with the EPA concerning such possible additional remediation. Regardless of the
outcome of these negotiations, the Company might be required to do additional
remediation at the Site.
Before EPA became involved in the Site, IDEM and RPC had entered into an
Agreed Order providing for a risk-based remediation of the contamination
different from the EPA's Order. After IDEM withdrew from the Agreed Order, an
Indiana State Superior Court ruled that IDEM's purported withdrawal from the
Agreed Order was illegal and ordered IDEM to reinstate the Agreed Order and IDEM
complied. In July 2002, RPC filed an action against IDEM for breach of contract
claiming 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
-17-
Note G, continued
filed a motion for summary judgment asking the Court to dismiss the action and
the court has denied that motion.
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 that Advanced
Friction Materials Company ("AFM") leased from 1974 to 1985. The Company
acquired AFM 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.
Note H - Restricted Cash
Restricted cash relates to the following:
June 29, 2003 December 29, 2002
------------- -----------------
(Unaudited)
Payable to the Trust $1,998 $ --
Letters of credit 1,620 1,617
Other 410 410
------ ------
$4,028 $2,027
====== ======
The letters of credit collateralize certain obligations relating
primarily to workers' compensation.
Note I - Revision of Interim Financial Statements
The accompanying condensed unaudited consolidated statements of
operations for the thirteen and twenty-six weeks ended June 30, 2002, and the
condensed unaudited consolidated statements of cash flows and of changes in
shareholders' equity, as well as the accompanying notes, have been revised from
those previously reported to reflect lower depreciation expense and the related
tax effects.
The Company determined subsequent to the filing of the Form 10-Q for the
quarter ended September 29, 2002, that depreciation expense had been overstated
in both the second quarter filing, at June 30, 2002, by $475 and in the third
quarter filing, at September 29, 2002, by $368. The quarterly reporting herein
reflects the corrected amounts for the thirteen and twenty-six weeks ended June
30, 2002.
-18-
Note I, continued
The effect of this revision is as follows:
For the 13 Weeks Ended For the 26 Weeks Ended
June 30, 2002 June 30, 2002
---------------------- ----------------------
As Previously As As Previously As
Reported Revised Reported Revised
------------- ------- ------------- -------
(Unaudited)
Net sales $ 55,305 $ 55,305 $108,014 $108,014
Gross profit 10,611 11,086 21,136 21,611
Income before income taxes
and minority interest 1,856 2,331 4,689 5,164
Net income 778 1,070 2,108 2,400
Basic earnings per share .02 .03 .05 .06
Diluted earnings per share .02 .03 .05 .06
Accumulated deficit (3,469) (3,177) (3,469) (3,177)
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In preparing the discussion and analysis required by the Federal
Securities Laws, it is presumed that users of the interim financial information
have read or have access to the discussion and analysis for the preceding fiscal
year.
As further discussed in Note I to the condensed unaudited consolidated
financial statements, amounts relating to the thirteen and twenty-six weeks
ended June 30, 2002 have been revised from those previously reported to reflect
lower depreciation expenses and the related tax effects.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995: Statements under the "Liquidity, Capital Resources and Future
Liquidity" heading 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.
Significant Accounting Policies
Preparation of the Company's financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Management believes the most complex and
sensitive judgments, because of their significance to the consolidated financial
statements, result primarily from the need to make estimates about the effects
of matters that are inherently uncertain. Management's Discussion and Analysis
and Note 1 to the Consolidated Financial Statements in the Company's Form 10-K
for fiscal 2002 describe the significant accounting estimates and policies used
by management in the preparation of the consolidated financial statements.
Actual results in these areas could differ from management's estimates. There
have been no changes in the Company's critical accounting estimates during the
twenty-six-week period ended June 29, 2003.
Results of Operations and Liquidity and Capital Resources
Raytech Corporation recorded a net loss of $1.5 million for the
thirteen-week-period ended June 29, 2003 or $.04 loss per basic and diluted
share compared to net income of $1.1 million or $.03 per basic and diluted share
in the same period in the prior year. The reduction in earnings was due to lower
gross profit and an environmental charge of $1.8 million for the period. The
Company recorded a net loss for the twenty-six-week period ended June 29, 2003
of $1.6 million or $.04 loss per basic and diluted share compared to net income
of $2.4 million or $.06 per basic and diluted share, a decrease of $4.0 million
period-over-period. The decrease is due to lower gross profit and an
environmental charge taken in the
-20-
second quarter of 2003. The details for the quarter and the twenty-six-week
period are presented below.
Net Sales
Raytech recorded net sales of $54.1 million for the thirteen-week period
ended June 29, 2003 compared to $55.3 million for the same period in the prior
year, a decrease of $1.2 million. The Company recorded net sales of $109.8
million for the twenty-six-week period ended June 29, 2003 compared to $108.0
million for the same period in the prior year, an increase of $1.8 million. An
analysis of the change in sales for the thirteen-week and twenty-six-week
periods compared to prior period amounts are presented below.
The Wet Friction segment recorded sales of $33.7 million for the
thirteen-week period ended June 29, 2003 compared to $37.3 million for the same
period in the prior year, a decrease of $3.6 million period-over-period. The
decrease is divided equally between lower sales to the automotive OEM component
of the segment and lower sales to the heavy duty component of the segment. The
reduced sales to the automotive OEM's is due to lower demand in the overall
automotive market due to the poor U.S. economy, which is reflected in the 3.6%
year-to-date decline in North American car and truck production in 2003. The
lower sales to the heavy duty component of the segment reflect lower sales to
the agricultural market due to lower demand and lower sales to the construction
market due to lower demand and increased competition. The net sales for the
twenty-six-week period ended June 29, 2003 of $68.4 million compares to $71.7
million for the same period in the prior year, a decrease in sales of $3.3
million. Most of the decrease is attributable to lower sales for the period in
the heavy duty component of this segment. The automotive OEM component of the
segment recorded higher sales for the six-month period of $.2 million compared
to the same period in the prior year.
The Aftermarket segment recorded net sales of $11.3 million for the
thirteen-week period ended June 29, 2003 compared to $12.1 million for the same
period in the prior year, a decrease of $.8 million. The reduced sales for the
quarter continues to reflect the slower aftermarket for Raytech's products from
the customer base, predominately warehouse distribution, due to the slower
economy and improved OEM quality of original equipment parts. Specifically,
sales in the transmission filter component of this segment are slower due to
reduced replacement schedules suggested by the OEM manufacturers. The net sales
for the twenty-six-week period ended June 29, 2003 of $22.8 million compare to
$24.6 million for the same period in the prior year, a decrease of $1.8 million
period-over-period. The sales for the six-month period reflect the same issues
outlined above for the quarter ended June 29, 2003.
The Dry Friction segment recorded net sales of $11.4 million for the
thirteen-week period ended June 29, 2003 compared to $8.4 million for the same
period in the prior year, an increase of $3.0 million period-over-period. The
sales increase reflects the continued expansion through the operation in China,
which increased sales $1.0 million over 2002 results for the same period as
demand for product from the facility continues to increase. The net sales
through the German operation improved $2.2 million in the thirteen-week period
ended June 29, 2003 over net sales in the same period in the prior year. The
increase in sales through the German operation reflects a volume increase of $.6
million and a translation gain of $1.6 million due to the effects of the
exchange change in the Euro to the U.S. dollar. The Dry Friction segment
recorded net sales of $23.1 million for the twenty-six-week period ended June
29, 2003 compared to $16.6 million for the same period in the prior year, an
increase of $6.5 million. The increased sales for the six-month period reflects
improved sales of $1.7 million through the operation in China and $5.1 million
in increased sales through the German operation. The improved sales in China
reflect a volume increase due to increased demand for our
-21-
product. The increase in sales through the German operation reflects a volume
increase of $1.8 million and a translation gain of $3.3 million due to the
change in exchange rates period-over-period of the Euro to the U.S. dollar.
Gross Profit
Raytech recorded gross profit for the thirteen-week period ended June
29, 2003 of $8.1 million, a gross profit percentage of 15.0% compared to $11.1
million in the same period in the prior year, a gross profit percentage of
20.0%, a decline of 5 percentage points period-over-period. The decline in
margin reflects lower margins in the Wet Friction segment of the business, which
reported a gross margin of 9.1% for the thirteen-week period ended June 29, 2003
compared to 17.1% for the same period in the prior year, a decline of 8
percentage points. The decline is due to higher costs associated with the
continued implementation of a new production line in the automotive OEM
component of this segment. Certain capital investments have been made to improve
the efficiency of the production, and improved profitability is expected over
the next quarters. In addition, certain labor, materials and overhead cost
reduction programs are in place aimed at improving profitability in light of the
lower sales in this segment. The Aftermarket and Dry Friction segments recorded
gross profit percentages of 28.9% and 27.6%, respectively, which are
substantially the same as the prior year. Raytech recorded a gross profit of
$17.0 million for the twenty-six-week period ended June 29, 2003 compared to
$21.6 million for the same period in the prior year, a decrease of $4.6 million
period-over-period. The gross profit percentage for the twenty-six-week period
of 15.5% compared to a gross profit percentage of 20.0% for the same period in
2002, a decrease of 4.5 percentage points. The decrease for the six-month period
reflects the issues detailed above for the thirteen-week period, which is
reflected in the Wet Friction segment gross profit of 9.1% for the period
compared to 16.5% for the same twenty-six-week period in 2002, a decrease of 7.4
percentage points. The Aftermarket segment recorded a gross profit percentage of
29.1% for the twenty-six-week period ended June 29, 2003, which was
substantially the same as the same period in the prior year while the Dry
Friction segment recorded a gross profit percentage of 28.5%, an increase over
the same period in the prior year of 3.2 percentage points primarily to
increased sales period-over-period.
Selling, General and Administrative
The selling, general and administrative expenses for the
thirteen-week-period ended June 29, 2003 were $8.6 million compared to $8.2
million for the same period in the prior year, an increase of $.4 million
period-over-period. The increased SG&A for the period reflects higher selling
and administrative costs in the Dry Friction segment of $.4 million in support
of the increased sales for that segment. The SG&A costs for the twenty-six-week
period ended June 29, 2003 were $16.8 million compared to $15.8 million in the
same period in the prior year, an increase of $1.0 million. In addition to the
explanation noted above for the second quarter, the increased SG&A reflects
certain severance and new hire costs as well as increased research and
development costs in 2003 over the 2002 costs for the same period.
Interest
Interest expense for the thirteen-week period ended June 29, 2003 of $.3
million compares to $.2 million for the same period in the prior year, an
increase of $.1 million. The interest expense for the twenty-six-week period
ended June 29, 2003 of $.5 million compares to $.5 million for the same period
in the prior year, an increase of less than $.1 million. The increased interest
expense for the
-22-
thirteen-week- and twenty-six-week period reflects higher average outstanding
debt of $.4 million and $2.0 million, respectively.
Operating Profits
The following discussion of operating results by industry segment
relates to information contained in Note D - Segment Reporting to the Unaudited
Condensed Consolidated Financial Statements. Operating profit is income before
provision for environmental claims, income taxes and minority interest.
Raytech Corporation recorded an operating loss of $.1 million for the
thirteen-week period ended June 29, 2003 compared to operating income of $2.3
million for the same period in the prior year, a reduction of $2.4 million. The
reduced operating profit is due substantially to the lower gross profit of $3.0
million and higher SG&A costs of $.4 million. The operating profit for the
twenty-six-week period ended June 30, 2003 of $.2 million compares to an
operating profit of $5.2 million for the same period in the prior year, a
decrease of $5.0 million. The decrease in operating profits reflects a decline
in gross profit of $4.6 million and an increase in SG&A for the twenty-six-week
period of $1.0 million. The details of the changes in SG&A are outlined above in
the SG&A section of this MD&A analysis. The changes in operating profits are
detailed below by business segment.
The Wet Friction segment recorded an operating loss of $1.2 million for
the thirteen-week period ended June 29, 2003 compared to an operating profit of
$2.1 million for the same period in the prior year, a decrease of $3.3 million
period-over-period. The operating loss for the twenty-six-week period ended June
29, 2003 of $2.4 million compares to operating profit for the same period in the
prior year of $3.7 million, a decline in operating profit of $6.1 million
compared to the twenty-six-week results for 2002. The primary reason for the
reduced operating profit in this segment is the reduced gross profits for both
the thirteen-week- and twenty-six-week periods in 2003 of $3.3 million and $5.6
million, respectively. A full discussion of the causes for the decline in gross
profit is detailed under the gross profit heading presented earlier in this MD&A
section. The SG&A costs for the segment increased $.2 million for the
thirteen-week period ended June 29, 2003 compared to the same period in the
prior year. The increase is due primarily to increased selling expense for
samples. The SG&A costs increased $.6 million for the 26-week period due
primarily to increased research and development costs and certain employee costs
for severance and new hires.
The operating profit for the Aftermarket segment for the thirteen-week
period ended June 29, 2003 of $2.0 million compared to operating profit of $2.3
million for the same period in the prior year, a decrease of $.3 million. The
decrease is due to the lower sales for the period of $.8 million, which was the
primary reason gross profit was reduced $.4 million. The reduced gross profit
was offset by lower SG&A costs for the period of $.1 million. The operating
profit for the twenty-six-week period ended June 29, 2003 of $4.2 million
compares to operating profit for the same period in the prior year of $4.8
million, a decrease of $.6 million period-over-period. The decreased operating
profit reflects the impact of lower sales for the period of $1.8 million on the
gross profit for the period. The gross profit declined $.4 million in the
six-month period in 2003 compared to the same period in the prior year. SG&A and
other costs reflected a reduction of $.1 million compared to the 2002 results.
The Dry Friction segment recorded operating profit of $1.5 million for
the thirteen-week period ended June 29, 2003 compared to $.2 million for the
same period in 2002, an increase in operating profit of $1.3 million. The
increased operating profit was driven by the improved sales of $3.0 million over
the second quarter results of 2002. The improved sales increased the gross
profit by $.8
-23-
million for the period. The segment recorded operating profit of $2.9 million
for the twenty-six-week period ended June 29, 2003 compared to $.9 million for
the same period in the prior year. The increased operating profit of $2.0
million reflects an increased gross profit of $2.4 million due to increased
sales in the segment of $6.5 million for the twenty-six-week period. Increased
selling costs of $.4 million offset certain improvements in gross profit.
Provision for Environmental Claims
The Company recorded a charge in the second quarter of 2003 of $1.8
million for expected final remediation and administrative costs associated with
compliance with the EPA Unilateral Administrative Order, which is discussed in
Note G of this report. The work required under the Order has been completed at
this time and a final report, which documents the compliance actions, is being
prepared for submission to the EPA. During the thirteen-week period ended June
29, 2003, the cost of contaminated soil removal increased over the previously
accrued amount $1.6 million due to changes in the tonnage required to be removed
in order to comply with the Order compared to the estimate. In addition, the EPA
has estimated the administrative charge for the agency's oversight of the
execution of the Order will be approximately $.4 million. The final
determination of this cost will occur subsequent to the EPA receiving the final
report from the environmental engineering firm. Also, during the quarter, the
Company settled a disputed billing amount, which arose in the first stage of the
project from the construction company hired to do the initial cleanup. The
resolution of the dispute resulted in a reduction of $.2 million of amounts
previously recorded by the Company. The construction company was replaced prior
to the completion of the first stage.
Although the Company has, to the best of its knowledge, complied fully
with the Order issued by the EPA, there exists the potential for additional
remediation. Further, the Company may be required to remediate additional
contiguous parcels of property not subject to the Order, subject to potential
future actions taken by the EPA. See Note G for a discussion of this potential
additional commitment.
Income Taxes
See Note E - Income Taxes to the condensed unaudited consolidated
financial statements included in Item I of this Part I.
Liquidity, Capital Resources and Future Liquidity
The Company's cash and cash equivalents at June 29, 2003 totaled $15.0
million compared to $20.0 million at December 29, 2002, a decrease of $5.0
million. Capital expenditures for the twenty-six-week period totaled $5.5
million which is consistent with planned expenditures and approximates capital
spending for the same period in the prior year. Net cash provided by operating
activities was $2.0 million for the twenty-six-week period ended June 29, 2003,
compared to cash provided by operating activities of $8.1 million in the prior
year period. Cash outflows for other operating activities were $5.6 million
during the current year period, which was primarily comprised of the following:
a $4.6 million increase in accounts receivable, and a $2.0 million increase in
restricted cash, partially offset by a $.9 million decrease in inventory.
The debt and available lines of credit at June 29, 2003 and December 29,
2002 consist of the following:
-24-
(in thousands)
June 29, 2003 (Unaudited) December 29, 2002
----------------------------- -----------------------------
Current Non-Current Total Current Non-Current Total
------- ----------- -------- ------- ----------- --------
Domestic bank debt $ 9,275 $ 23 $ 9,298 $ 11,306 $ -- $ 11,306
Foreign bank debt 4,151 4,466 8,617 3,609 4,095 7,704
-------- -------- -------- -------- -------- --------
Total bank debt 13,426 4,489 17,915 14,915 4,095 19,010
Leases 156 156 312 176 198 374
-------- -------- -------- -------- -------- --------
Total borrowings $ 13,582 $ 4,645 $ 18,227 $ 15,091 $ 4,293 $ 19,384
======== ======== ======== ======== ======== ========
Available lines of credit:
2003 2002
------- -------
Domestic $ 5,885 $ 5,006
Foreign 2,632 3,829
------- -------
Total $ 8,517 $ 8,835
======= =======
Refer to the Management's Discussion and Analysis section and to Note M
to the consolidated financial statements, both included within the Company's
2002 Form 10-K, for information regarding the Company's obligations and
commitments by year. These obligations and commitments consist of long-term
debt, capital leases and rental agreements. During the thirteen-week period
ended June 29, 2003, the Dry Friction segment renegotiated its borrowing
agreement in China, lowering the interest rate 3.9 percentage points on the
borrowings of $1.5 million. In addition, the German subsidiary reduced its
borrowing rate on $1.0 million in borrowings by 2.1 percentage points during the
period.
The current domestic loan agreement has a covenant requiring the
borrowing companies to maintain a rolling twelve-month earnings before interest,
taxes, depreciation and amortization (EBITDA). The Company was in compliance
with this covenant at June 29, 2003.
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 is complying with a Federal Order issued by the U.S.
Environmental Protection Agency ("EPA") at its manufacturing facility in
Crawfordsville, Indiana. See Note G - Litigation. The Company spent $3.3 million
during the twenty-six weeks ended June 29, 2003 and has a remaining accrual of
$5.7 million for completion of the project, which is included in other accrued
liabilities. The Company recorded an additional accrual amount of $1.8 million
for the thirteen-week period ended June 29, 2003 and management estimates the
remaining accrual is expected to be sufficient for compliance with the order.
Refer to "Provision for Environmental Claims" on page 23 for further discussion.
The Company assumed the liability for the Raymark pension plans as part
of the Chapter 11 reorganization. Funding for the plans in 2003 is expected to
be approximately $7.6 million of which $2.4 million was funded during the
twenty-six-week period of 2003.
Certain tax issues are discussed in Note E - Income Taxes, which provide
details concerning the status of the current Internal Revenue Service audit and
the use of certain future tax benefits.
-25-
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. 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 52 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 LOCAL CURRENCIES OF THE COMPANY'S FOREIGN SUBSIDIARIES HAVE BEEN
DESIGNATED AS THEIR FUNCTIONAL CURRENCIES. ACCORDINGLY, FINANCIAL STATEMENTS OF
FOREIGN OPERATIONS ARE TRANSLATED USING THE EXCHANGE RATE AT THE BALANCE SHEET
DATE FOR ASSETS AND LIABILITIES, HISTORICAL EXCHANGE RATES FOR ELEMENTS OF
STOCKHOLDER'S EQUITY AND AN AVERAGE EXCHANGE RATE IN EFFECT DURING THE PERIOD
FOR REVENUES AND EXPENSES. WHERE POSSIBLE, THE COMPANY ATTEMPTS TO MITIGATE
FOREIGN CURRENCY TRANSLATION EFFECTS BY BORROWING IN LOCAL CURRENCIES TO FUND
OPERATIONS. THE COMPANY DOES NOT BELIEVE THAT THE FLUCTUATION IN FOREIGN
CURRENCY WILL HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S OVERALL FINANCIAL
CONDITION. ADDITIONALLY, THE COMPANY DOES NOT ENTER INTO AGREEMENTS TO MANAGE
ANY CURRENCY TRANSACTION RISKS DUE TO THE IMMATERIAL AMOUNT OF TRANSACTIONS OF
THIS TYPE. THE IMPACT OF THE TRANSLATION BETWEEN THE EURO AND THE U.S. DOLLAR
ARE DETAILED IN THE NET SALES SECTION OF ITEM 2 OF THE MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SEE NOTE A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IN THE NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS FOR A DISCUSSION OF NEW ACCOUNTING
PRONOUNCEMENTS DURING THE PERIOD.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2.
ITEM 4. CONTROLS AND PROCEDURES
(a) Based on evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures, which evaluation was
made under the supervision and with the participation of management,
including the Company's principal executive officer and principal
financial officer, the Company's principal executive officer and
principal financial officer have each concluded that such disclosure
controls and procedures are effective in ensuring that information
required to be disclosed by the Company in reports that it files under
the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules
and forms.
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(b) There has been no change during the thirteen weeks ended June 29, 2003
in the Company's internal controls over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note G - Litigation.
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Item 4. Submission of Matters to a Vote of Security Holders
The Annual Shareholders' Meeting of Raytech was held June 19, 2003.
The matters submitted to stockholder vote and the vote count on the matters
were as follows:
1. Proposal to elect nine Directors for one-year terms and
until their respective successors are elected
For Withheld
--- --------
Albert A. Canosa 37,547,028 92,028
---------- -------
Robert F. Carter 37,480,751 158,305
---------- -------
Archie R. Dykes 37,539,328 99,728
---------- -------
David N. Forman 37,539,787 99,269
---------- -------
John H. Laeri 37,505,927 133,129
---------- -------
Stanley J. Levy 37,480,011 159,045
---------- -------
Richard A. Lippe 37,480,138 158,918
---------- -------
Gene Locks 37,480,138 158,918
---------- -------
John J. Robbins 37,480,597 158,459
---------- -------
2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP
as auditors for 2003
For 37,570,224 Against 67,359 Abstain 1,473
3. Proposal to amend Raytech's Certificate of Incorporation
For 37,602,344 Against 32,832 Abstain 3,880
For purposes of determining whether a proposal has received a
majority vote, abstentions were included in the vote totals with the result
that an abstention had the same effect as a negative vote. Under applicable
Delaware law, "non-votes" were not included in the vote totals of proposals
voted and, therefore, had no effect on the vote on that proposal. A
"non-vote" would occur when a broker holding shares for a beneficial owner
voted on one proposal but did not vote on another proposal because the
broker did not have discretionary voting power and had not received
instructions from the beneficial owner.
Pursuant to the vote of shareholders, proposals 1, 2 and 3 were
adopted and effective on June 19, 2003.
The Director whose term of office as Director will continue from a
term of three years beginning with an effective date of April 18, 2001 is:
Kevin S. Flannery
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31-1 Section 302 Certification of the Chief Financial Officer
31-2 Section 302 Certification of the Chief Executive Officer
(b) Reports on 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAYTECH CORPORATION
By: /s/ JOHN B. DEVLIN
---------------------------------
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
Date: August 13, 2003
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