Item 1. Business
(a) General Development of Business.
Raytech Corporation ("Raytech" or the "Company") was incorporated in June 1986 in Delaware as a subsidiary of Raymark Corporation ("Raymark"). In October 1986, the Raymark shareholders approved a triangular merger restructuring plan resulting in Raytech becoming the publicly traded (NYSE) holding company of Raymark with each share of the Raymark common stock being automatically converted to a share of Raytech common stock, plus a right to purchase a warrant for Raytech stock. The issued warrants expired in October 1994. The purpose of the formation of Raytech and the restructuring plan was to provide a means to gain access to new sources of capital and borrowed funds to be used to finance the acquisition and operation of new businesses in a corporate structure that should not subject it or such acquired businesses to any asbestos-related or other liabilities of Raymark under the doctrines of successor liability, piercing the corporate veil and fraudulent conveyance.
In accordance with the stated restructuring purposes, Raytech, through its subsidiaries, purchased certain non-asbestos businesses of Raymark in 1987, including the Wet Clutch and Brake Division for $76.9 million and Raybestos Industrie-Produkte GmbH, a German subsidiary for $8.2 million. In anticipation of such sales, Raymark retained independent investment bankers and financial analysts for the purpose of determining fair purchase prices and divestiture. Representing part of the consideration of the transactions, Raymark agreed to indemnify Raytech for Raymark's liabilities, including asbestos, environmental, pension and others.
In May 1988, Raytech divested all of the Raymark stock to Asbestos Litigation Management, Inc. The purchase price of the stock was affected by Raymark's substantial asbestos-related liabilities.
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. Until February 1989, the defense of all such lawsuits was provided to Raytech by Raymark in accordance with the indemnification included as a condition of the purchase of the Wet Clutch and Brake Division and the German subsidiary from Raymark in 1987. In February 1989, an involuntary petition for bankruptcy was filed against Raymark, causing Raymark to be unable to continue funding the costs of defense to Raytech in the asbestos-related lawsuits referenced above.
With the loss of defense from Raymark, the defense of such lawsuits shifted directly to Raytech as it had no insurance providing coverage for asbestos-related liabilities. As a result of the above factors and to halt the asbestos-related litigation, in March 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. Under Chapter 11, substantially all litigation against Raytech was stayed while the debtor corporation and its non-filed operating subsidiaries continue to operate their businesses in the ordinary course under the same management and without disruption to employees, customers or suppliers. The bankruptcy proceedings imposed little or no limitation to the manufacturing and selling of products and other day-to-day operations of the businesses.
In one of the asbestos-related personal injury lawsuits decided in October 1988 in a U.S. District Court in Oregon, Raytech was ruled under Oregon equity law to be a successor to Raymark's asbestos-related liability. The successor ruling was appealed by Raytech and in October 1992, the Ninth Circuit Court of Appeals affirmed the District Court's judgment on the grounds stated in the District Court's opinion. The effect of this decision extended beyond the Oregon District due to a 1995 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 and a petition for a writ of certiorari was denied by the U.S. Supreme Court in October 1995. (For a further discussion regarding this liability and bankruptcy proceedings, refer to Item 3. Legal Proceedings herein.)
In October 1998, Raytech reached a tentative settlement with its creditors to achieve a consensual plan of reorganization. The settlement provided for all general unsecured creditors, including asbestos and environmental claimants, to receive 90% of the equity of the Company and existing equity holders to retain the remaining 10% of the equity. In fulfillment of the settlement, on August 31, 2000, the consensual plan of reorganization ("Plan") was confirmed by the Bankruptcy Court. The Plan is not yet effective pending fulfillment of certain conditions.
Barring an unforeseen downturn in business and assuming that the confirmed reorganization plan to control its legal responsibility for Raymark's asbestos-related and other liabilities will be made effective in the bankruptcy proceedings, Raytech believes it will generate sufficient cash flow to satisfy 2001 debt maturities, working capital and capital spending needs. However, the outcome of these matters is uncertain and should Raytech be held fully liable, there would be a material adverse impact on Raytech as it does not have the resources needed to fund the substantial uninsured asbestos-related, employee
benefit-related and environmental liabilities and related costs of litigation as defined further in Item 3. Legal Proceedings.
(b) Financial Information About Industry Segments
The sales and operating income of Raytech on a consolidated basis, and its identifiable assets for the fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999 are set forth herein starting on page 73.
(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, 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 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 over the past three years is as follows:
2000 1999 1998
Wet friction operations 64% 62% 63% Dry friction operations 12% 13% 13% Aftermarket operations 24% 25% 24%
Additional segment information is contained in the Management Discussion and Analysis section and in Note K - Notes to Consolidated Financial Statements.
Sales Methods
The wet friction operations, predominantly a domestic operation, serves the on-highway and off-highway vehicular markets by sale of its products to OEM of heavy 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.
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 predominantly in Europe.
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 the 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.
Patents and Trademarks
Raytech owns a number of patents both foreign and domestic. Such patents expire between 2001 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.
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 is the leading competitor in these markets and sets the standards for the industry, resulting from its integrated, cost efficient operations and its high quality products and service. Domestic sales as a percentage of total Raytech sales to three customers are as follows:
2000 1999 1998
Caterpillar 13.0% 11.9% 12.4%
DaimlerChrysler 15.4% 14.8% 14.9%
Allison 7.7% 10.2% 9.2%
Sales backlog for the wet friction segment at the end of 2000, 1999, and 1998 was approximately $72 million, $92 million, and $69 million, respectively. It is anticipated that current backlog will be filled in 2001.
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 is not the leader but has enhanced its competitive position in these markets, having significantly increased its market share through acquisition and restructuring. Raytech entered the Asian market with manufacturing that began in China in 1998. The markets are competitive with several Chinese and other Asian-based manufacturers competing for the business. Sales backlog at the end
of 2000, 1999, and 1998 was approximately $.7 million, $.7 million, and $0 million, respectively.
In the aftermarket segment, the domestic automotive, automatic transmission sector has approximately five competitors. Here, Raytech believes that some of its competitors have greater financial resources, but its competitive position is increasing due to the customer 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 2000, 1999, and 1998 was approximately $6 million, $9 million, and $7 million, respectively. It is anticipated that current backlog will be filled in 2001.
Competition in all markets served by Raytech is based on product quality, service and price. On such basis Raytech believes that it is highly competitive in all markets in which it is engaged.
Employees
At December 31, 2000, Raytech employed approximately 1,642 employees, compared with 1,729 employees at the end of 1999. 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 2003. The term of the labor contract at Automotive Composites Company in Sterling Heights, Michigan, is due to expire in October 2001.
Capital Expenditures
Capital expenditures were $13.4 million, $23.2 million, and $19.8 million for 2000, 1999 and 1998, respectively. Capital expenditures for 2001 are projected at $17.8 million.
Research and Development
Research and development costs were approximately $6.8 million, $7.1 million, and $5.6 million for 2000, 1999 and 1998, respectively. 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 2001 are projected at $9.3 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 affected and will continue to affect the Registrant's operations, both directly and indirectly, in the future. The Company's operations have been designed to comply with applicable environmental standards established in such laws and regulations. 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 $1.1 million for 2001. Because 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. Nevertheless, management believes that compliance should not materially affect earnings, financial position or its competitive position.
(d) Financial Information about Foreign Operations
Financial information about the foreign operations of Raytech for the fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999 is set forth in Note K to Consolidated Financial Statements, included herein.
Item 2.
Item 2. Properties
Raytech, through its three operating segments, has plants as follows:
The wet friction operations has a Crawfordsville, Indiana, facility that is owned and consists of approximately 455,000 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 27,000 square feet of office, production, research and warehousing space. Wet friction also leases sales office space in Leverkusen, Germany and Peoria, Illinois, and has an administrative office in Indianapolis, Indiana.
The dry friction operations has 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 25,000 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 has 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 of warehousing space for aftermarket distribution. 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. All of the production facilities are continually being upgraded to comply with applicable environmental standards and to improve efficiency.
Item 3.
Item 3. Legal Proceedings
The formation of Raytech and the implementation of the restructuring plan more fully described in Item 1 above was for the purpose of providing a means to acquire and operate businesses in a corporate structure that should not be subject to any asbestos- related or other liabilities of Raymark.
Prior to the formation of Raytech, Raymark had been named as a defendant in more than 88,000 lawsuits, claiming substantial damages for injury or death from exposure to airborne asbestos fibers. Subsequent to the divestiture of Raymark in 1988, lawsuits continued to be filed against Raymark at the rate of approximately 1,000 per month until an involuntary petition in bankruptcy was filed against Raymark in February 1989 which stayed all its litigation. In August 1996, the involuntary petition filed against Raymark was dismissed following a trial and the stay was lifted. However, in March 1998, Raymark filed a voluntary bankruptcy petition again staying the litigation.
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. Until February 1989, the defense of all such lawsuits was provided to Raytech by Raymark in accordance with the indemnification included as a condition of the purchase of the Wet Clutch and Brake Division and German subsidiary from Raymark in 1987. In 1989, the involuntary bankruptcy proceedings against Raymark caused Raymark to be unable to fund the costs of defense to Raytech in the asbestos-related lawsuits referenced above. Raytech management was informed that Raymark's cost of defense and disposition of cases up to the automatic stay of litigation in 1989 under the involuntary bankruptcy proceedings was approximately $333 million of Raymark's total insurance coverage of approximately $395 million. It has also been informed that as a result of the dismissal of the involuntary petition, Raymark encountered newly filed asbestos-related lawsuits but had received $27 million from a state guarantee association to make up the insurance policies of an insolvent carrier and had $32 million in other policies to defend against such litigation. In March 1998, Raymark filed a voluntary bankruptcy petition as a result of several large asbestos-related judgments against it.
In October 1988, in a case captioned Raymond A. Schmoll v. ACandS, Inc., et al., the U.S. District Court for the District of Oregon ruled, under Oregon equity law, Raytech to be a successor to Raymark's asbestos-related liability. The successor decision was appealed by Raytech, and in October 1992, the Ninth Circuit Court of Appeals affirmed the District Court's judgment on the grounds stated in the District Court's opinion. The effect of this decision extends beyond the Oregon District due to a Third Circuit Court of Appeals decision in a related case cited below wherein Raytech was collaterally estopped (precluded) from relitigating the issue of its successor liability for Raymark's asbestos-related liabilities.
As the result of the inability of Raymark to fund Raytech's cost of defense recited above and to halt the asbestos-related litigation, on March 10, 1989, Raytech filed a petition seeking relief under Chapter 11 of Title 11, United States Code in the United States Bankruptcy Court, District of Connecticut. Under Chapter 11, substantially all litigation against Raytech was stayed while the debtor corporation and its non-filing operating subsidiaries continue to operate their businesses in the ordinary course under the same management and without disruption to employees, customers or suppliers. In the Bankruptcy Court a creditors' committee was appointed, comprised primarily of asbestos claimants' attorneys. In August 1995, an official committee of equity security holders was appointed relating to a determination of equity security holders' interest in the bankruptcy estate.
In June 1989 Raytech filed a class action in the Bankruptcy Court captioned Raytech v. Earl White, et al. against all present and future asbestos claimants seeking a declaratory judgment that it not be held liable as a successor for the asbestos-related liabilities of Raymark. The U.S. District Court withdrew its reference of the case to the Bankruptcy Court, and agreed to hear and decide the case. In September 1991, the U.S. District Court issued a ruling dismissing the class action citing as a reason the preclusive effect of the 1988 Schmoll case recited above under the doctrine of collateral estoppel (conclusiveness of judgment in a prior action), in which Raytech was ruled to be a successor to Raymark's asbestos liability under Oregon law. Upon a motion for reconsideration, the U.S. District Court affirmed its prior ruling in February 1992. Also, in February 1992, the U.S. District Court transferred the case in its entirety to the U.S. District Court for the Eastern District of Pennsylvania. Such transfer was made by the U.S. District Court without motion from any party in the interest of the administration of justice as stated by the U.S. District Court. In February 1994, the U.S. District Court's dismissal of the case was appealed. In May 1995, the Third Circuit Court of Appeals ruled that Raytech is collaterally estopped (precluded) from relitigating the issue of its successor liability as ruled in the 1988 Oregon case recited above, affirming the U.S. District Court's ruling of dismissal. A petition for a writ of certiorari was denied by the U.S. Supreme Court in October 1995. The ruling leaves the Oregon case, as affirmed by the Ninth Circuit Court of Appeals, as the prevailing decision holding Raytech to be a successor to Raymark's asbestos-related liabilities.
As the result of the Court rulings recited above holding Raytech a successor to Raymark's asbestos-related liabilities, Raytech halted payments to Raymark under the 1987 Asset Purchase Agreement in May 1995. However, in February 1997, with Raymark temporarily out of bankruptcy, Raytech resumed making payments pursuant to the Agreement. As the result of the creditors' committee's action to halt the payments, the Bankruptcy Court ordered the payments stopped in January 1998.
Costs incurred by the Company for asbestos-related liabilities are subject to indemnification by Raymark under the 1987 acquisition agreements. By agreement, in the past, Raymark has reimbursed the Company in part for such indemnified costs by payment of the amounts due in Raytech common stock of equivalent value. Under such agreement, Raytech received 926,821 shares in 1989, 177,570 shares in 1990, 163,303 in 1991 and 80,000 shares in 1993. The Company's acceptance of its own stock was based upon an intent to control dilution of its outstanding stock. In 1992, the indemnified costs were reimbursed by offsetting certain payments due Raymark from the Company under the 1987 acquisition agreements. Costs incurred since 1994 were applied as a reduction of the note obligations pursuant to the agreements.
In March and April 1998, Raymark and its parent, Raymark Corporation, filed voluntary petitions in bankruptcy in a Utah Court which stayed all litigation in the Raytech bankruptcy in which Raymark was a party. In connection with asserting control over Raymark and its assets, the creditors' committee, Raytech, the Guardian ad litem for Future Claimants, the equity committee and the government agencies caused the Raymark bankruptcies to be transferred from Utah to the Connecticut Court. In October 1998, a trustee was appointed by the United States Trustee over the Raymark bankruptcies and is currently administering the Raymark estate.
In October, 1998 Raytech reached a tentative settlement with its creditors and entered into a Memorandum of Understanding with respect to achieving a consensual plan of reorganization (the "Plan"). The parties to the settlement included Raytech, the Official Creditors Committee, the Guardian ad litem for Future Claimants, the Connecticut Department of Environmental Protection and the U. S. Department of Justice, Environmental and Natural Resources Division. Substantive economic terms of the Memorandum of Understanding provided for all general unsecured creditors including but not limited to all asbestos and environmental claimants to receive 90% of the equity in reorganized Raytech and any and all refunds of taxes paid or net reductions in taxes owing resulting from the transfer of equity to a trust established under the Bankruptcy Code, and existing equity holders in Raytech to receive 10% of the equity in reorganized Raytech. The Memorandum of Understanding also requires that an amount of cash, which will be determined at the effective date, be transferred to the trust. The amount of cash has been estimated at $2.5 million. Substantive non- economic terms of the Memorandum of Understanding provided for the parties to jointly work to achieve a consensual Plan, to determine an appropriate approach to related pension and employee benefit plans and to cease activities that have generated adverse proceedings in the Bankruptcy Court. The parties also agreed to jointly request a finding in the confirmation order to the effect that while Raytech's liabilities appear to exceed the reasonable value of its assets, the allocation of 10% of the equity to existing equity holders is fair and equitable by virtue of the benefit to the estate of resolving complicated issues without further costly and burdensome litigation and the risks attendant therewith and the economic benefits of emerging from bankruptcy without further delay.
In August 1999, the Bankruptcy Court set a bar date for filing claims against Raytech, resulting in approximately 3,200 claims. Such claims were categorized into asbestos personal injury, asbestos property damage, environmental, including the EPA and State of Connecticut, pension/retiree benefits and other employee related claims and other contractual and general categories. Through Court proceedings many of the filed claims were expunged, leaving only valid claims to be dealt with in the Plan. In order to comply with the mandatory estimation of all claims against the debtor in the confirmation process, Raytech, the creditors' committee and the Government entered into discussions to attempt to make estimations of the asbestos and Government claims not subject to the bar date. The discussions resulted in an agreement on the estimate of such asbestos and Government claims, and accordingly, a motion was filed in the Bankruptcy Court for an allowance of asbestos claims of $6.760 billion and Government claims of $431.8 million for purposes of voting and distribution under the terms of the Plan. In March 2000, the Bankruptcy Court entered an interim order allowing such amounts as general unsecured claims subject to an objection period through June 2000 and the completion of the initial vote of the Plan of confirmation on July 7, 2000. As a result of the resolution of the objections raised with only a slight modification to the Plan and the overwhelming favorable response to the initial vote, management was substantially certain that the Plan would be confirmed and that the estimate of the $7.2 billion of allowed claims would be finally approved by the Bankruptcy Court. Accordingly, Raytech recorded a charge and related liability in the financial statements in the amount of $7.2 billion for the estimated amount of allowed claims in the second quarter of 2000. Such estimations are recorded as liabilities subject to compromise since it is expected that the distributions under the Plan with respect to such claims will be lesser amounts consisting of a 90% equity distribution in reorganized Raytech at the effective date pursuant to the Plan referenced above in this Note A. Upon the effective date of the Plan, Raytech will utilize the "fresh start" reporting principles contained in the AICPA's Statement of Position 90-7, which will result in adjustments relating to the amounts and classification of recorded assets and liabilities determined as of the effective date. Under the Plan, the ultimate consideration to be received by all unsecured creditors will be covered under the referenced 90% equity distribution and will be substantially less than amounts shown in the accompanying financial statements.
In 1999, the Bankruptcy Court ("Court") issued rulings on adversary actions brought by Raymark retirees and pensioners seeking rights as claimants for benefits from Raytech on the basis of successor liability. As to the pensioners, the Court ruled that Raytech has the liability as a successor to Raymark. The decision has been appealed and remains pending. As noted in the previous paragraph, during the second quarter of 2000, management was substantially certain that the Plan would be confirmed and that the pension liability would be Raytech's responsibility, although under legal appeal. The resulting recorded charge and related liability estimated at $16 million was recorded in the second quarter of 2000 and is subject to compromise based on the pending appeal. As to the retirees, the Court ruled that the Raymark Trustee's termination of the retirees benefit plans was justified and thus the post-termination liability thereafter could not be transferred to Raytech. In response to the bar date set for filing claims in 1999, approximately 700 retirees filed timely claims. The validity and the amount of claims were not estimated until the fourth quarter of 2000. The charge for the estimated amount of allowed claims of $2.5 million was recorded in the fourth quarter of 2000, and the liability is subject to compromise. For both the PBGC and retiree claims, the Court has not yet determined if they will be classified as priority or unsecured claims. At December 31, 2000, they are both considered to be unsecured claims and included in liabilities subject to compromise pending final Court decision.
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 contained several conditions to the occurrence of the effective date of the Plan ("Effective Date"). The majority of the conditions have been met, and the remaining conditions to the Effective Date are the resolution of the Raymark claims and the requested tax-related rulings from the IRS or an opinion of counsel. It is unknown when the above-referenced conditions to the Effective Date will be satisfied, but it is management's intention that they will be met as soon as possible. Until the Effective Date occurs, the terms of the Plan, although confirmed, are not yet in effect. On the Effective Date, a channeling injunction ordered by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code 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 shall be in exchange for and in complete satisfaction, discharge and release of all claims and equity interests against Raytech.
In 1991, an environmental claim was filed by the Pennsylvania Department of Environmental Resources ("DER") to perform certain activities in connection with Raymark's Pennsylvania manufacturing facility, including submission of an acceptable closure plan for a landfill containing hazardous waste products located at the facility. In March 1991, the Company entered a Consent Order which required Raymark to submit a revised closure plan acceptable to the DER. The estimated cost for Raymark to comply with the order was $1.2 million. The DER notified the Company in 2000 that Raymark had failed to comply with its obligations under the Consent Order. In December 2000, Raymark sold its Pennsylvania manufacturing facility, and the buyer has entered a consent agreement with the DER to comply with the order, thereby satisfying the claim against Raytech.
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. IDEM has turned the matter over to the U.S. Environmental Protection Agency ("EPA"), and in April 2000, the EPA issued a subpoena for information to determine compliance with federal environmental regulations and in July 2000 proposed a consent order of environmental response that was rejected by RPC. In December 2000, the EPA issued a Unilateral Administrative Order under CERCLA ("Order") demanding removal of contaminated soils from the referenced drainage ditch. RPC has given notice that it intends to comply with the Order and has designated a contractor and project coordinator as required. RPC is preparing a plan for implementing and carrying out the cleanup Order. Based on preliminary assessments, the Company has estimated that the cost to comply with the Order will be in the range of $3 million to $6 million and has recorded a liability in the amount of $3 million at December 31, 2000. It is at least reasonably possible that the preliminary assessment of estimated costs to comply with the Order may be modified as the project progresses. A receivable from Reliance Insurance Company will be recorded when the Company has determined that it is probable that such recovery will be realized.
In January 1997, Raytech was named through a subsidiary in a third party complaint captioned Martin Dembinski, et al. vs. Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et al. filed in the U.S. District Court for the Southern District of New York for damages for asbestos-related disease. The case has been removed to the U.S. District Court, Eastern District of Pennsylvania. When
required, the Company will seek an injunction in the Bankruptcy Court to halt the litigation under the channeling injunction referenced above.
In December 1998, a subsidiary of the Company filed a complaint against a former administrative financial manager of Advanced Friction Materials Company ("AFM") in the U.S. District Court, Eastern District of Michigan, captioned Raytech Composites, Inc. vs. Richard Hartwick, et ux. alleging that he wrongfully converted Company monies in his control to his own use and benefit in an amount greater than $3.3 million prior to the April 1998 completion of the acquisition of AFM as discussed in the following paragraph. In December 1999, the District Court ruled on summary judgment in favor of Raytech on its claim against Hartwick in the amount of $3.330 million. A constructive trust had been ordered by the Court providing ownership to Raytech of four real estate properties purchased by Hartwick with the converted funds. The four properties have been sold resulting in a net recovery of $1.337 million. Hartwick has been arrested by the State of Michigan under 13 counts of embezzlement. In May 2000, Hartwick pled guilty to the charges and has been sentenced for 2 to 15 years in the Michigan State Penitentiary. A restitution order was granted to the Company in the amount of $1.33 million.
In April 1998, AFM redeemed 53% of its stock from the former owner for a formulated amount of $6.044 million, $3.022 million paid at closing and the balance of $3.022 million payable by note in three equal annual installments resulting in the Company attaining 100% ownership of AFM. In April 1999, an adversary proceeding was filed in the Connecticut Bankruptcy Court against the former owner captioned Raytech Corporation, et al. vs. Oscar E. Stefanutti, et al. to recover $1.5 million of the amount paid for the AFM stock and to obtain a declaratory judgment that the balance of $3.022 million is not owed based upon the judgment that a fraud was perpetrated upon the Company related to the Hartwick case referenced above. In September 1999, the Bankruptcy Court granted jurisdiction of the case but exercised discretionary abstention to enable the Court to focus on issues impeding the plan confirmation. In June 1999, the former owner filed an action against the Company in a County Court in Michigan captioned Oscar E. Stefanutti, et al. vs. Raytech Automotive Components Company to enforce payment of the note. Discovery has been completed, and cross motions for summary judgment are being considered by the Court. A trial date has been set for April 2001.
In December 1998, the trustee of Raymark, Raytech and the Raytech creditors' committee joined in filing an adversary proceeding (complaint) against Craig R. Smith, et al. (including relatives, business associates and controlled corporations) alleging a systematic stripping of assets belonging to Raymark in an elaborate and ongoing scheme perpetrated by the defendants. The alleged fraudulent scheme extended back to the 1980's and continued up to this action and has enriched the Smith family by an estimated $12 million and has greatly profited their associates, while depriving Raymark and its creditors of nearly all of its assets amounting to more than $27 million. Upon motion of the plaintiffs, the Bankruptcy Court issued a temporary restraining order stopping Mr. Smith and all defendants from dissipating, conveying, encumbering or otherwise disposing of any assets, which order has been amended several times and remains in effect pending a preliminary injunction hearing. The reference to the Bankruptcy Court has been withdrawn, and the matter is now being litigated in the U.S. District Court in Connecticut. A motion for summary judgment was filed by the plaintiffs and was ruled upon in March 2000. The ruling granted plaintiffs summary judgment on several of the counts but denied summary judgment with respect to the claims against Mr. Smith for the stripping of assets from Raymark and its creditors for the reason that there was insufficient evidence of insolvency of Raymark, giving plaintiffs standing to file the claim. The Court invited plaintiffs to file for reconsideration of the denial with sufficient evidence of insolvency of Raymark at the time Mr. Smith expropriated the assets. Such motion for reconsideration was filed in April 2000 and remains pending.
The adverse ruling in the Third Circuit Court of Appeals, of which a petition for writ of certiorari was denied by the U.S. Supreme Court, precluding Raytech from relitigating the issue of its successor liability leaves the U.S. District Court's (Oregon) 1988 ruling as the prevailing decision holding Raytech to be a successor to Raymark's asbestos-related liabilities. This ruling has had a material adverse impact on Raytech as it did not have the resources needed to fund Raymark's potentially substantial uninsured asbestos- related and environmental liabilities. However, the Plan of Reorganization has defined the impact of the successor liabilities imposed by the referenced court decisions. While the Plan of Reorganization has been confirmed by the Bankruptcy Court and the U.S. District Court, it is not yet effective subject to certain conditions precedent, which timing cannot be predicted with certainty. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The uncertainties regarding the reorganization proceedings raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability, revaluation and classification of recorded asset amounts or adjustments relating to settlement and classification of liabilities that may be required in connection with reorganizing under the Bankruptcy Code.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5.
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 1, 2001, there were 1,596 holders of record of the Registrant's common stock.
Information regarding the quarterly high and low sales prices for 2000 and 1999 and information with respect to dividends is set forth in Note L of the Consolidated Financial Statements, Part II, Item 8 hereof.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 K - Segment Reporting in the Notes to Consolidated Financial Statements.
2000 Compared With 1999
The most significant event that occurred in the year 2000 for Raytech Corporation was the confirmation by the Bankruptcy Court of Raytech's Second Amended Plan of Reorganization ("Plan"), which confirmation was affirmed by the U.S. District Court on September 13, 2000. The Plan and the confirmation process are discussed more fully in Note A to the Consolidated Financial Statements herein. During fiscal 2000, the Company recorded certain charges and related liabilities as "liabilities subject to compromise" in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.
The charges and related liabilities discussed above included an estimate of the asbestos-related personal injury liability of $6.76 billion and an estimate of the government's claim for certain environmental liabilities of $431.8 million. As part of the bankruptcy proceedings with respect to successor liability, Raytech has recorded a charge of $16 million to reflect its liability for funding the Raymark pension plan as well as a charge for $2.5 million for certain other Raymark retiree liabilities.
When the Plan becomes effective, substantially all the liabilities subject to compromise will be discharged in exchange for 90% of stock of reorganized Raytech, while the current equity holders will retain a 10% ownership position. The Bankruptcy Court has not yet determined if the pension and retiree claims will be discharged as part of the exchange for 90% of stock of reorganized Raytech or whether they will be addressed as a priority claim, which would require Raytech to fund the liabilities out of current operations. There are several conditions and other matters that must be resolved in order to have the Plan become effective. Accordingly, it is difficult to predict with certainty when it will become effective.
Raytech Corporation's revenues for the year ended December 31, 2000 were $239.5 million compared to $252.0 million in 1999. Net loss for the year ended December 31, 2000 was ($7.1) billion or $(2,015.40) basic loss per share, as compared to net income of $16.4 million or $4.76 basic earnings per share in 1999.
Net Sales
Worldwide net sales were $239.5 million, compared with $252.0 million in 1999, a reduction of $12.5 million or 5%. The wet friction segment sales decreased $4.0 million primarily due to weak sales in the light duty component of the wet friction segment. The decline in sales volume was partially due to the much anticipated slowing in the U.S. economy and the loss of certain sales to a major customer due to foreign competition. The impact on the automotive original equipment manufacturers has resulted in slow movement of inventory. However, decreases were partially offset by improvements in the heavy duty and agricultural markets as the demand for certain items increased. Aftermarket sales decreased $5.7 million compared with the prior year as a result of aggressive inventory management at certain of our customers. In general, the aftermarket was slower in 2000 as compared to 1999. The dry friction segment sales decreased $2.8 million year over year due to an adverse foreign currency fluctuation ($3.9 million), offset by an increase in sales of $1.1 million.
Gross Profit
Gross profit as a percentage of sales for the period ended December 31, 2000 is 24.8% as compared to 23.9% for the same period one year ago. The improved gross profit of .9 percentage points was due primarily to the improved performance at the Sterling Heights, Michigan, manufacturing facility. During the 2000 fiscal year, management changes and related cost savings programs at this facility provided for the improved performance. Manufacturing costs were further controlled through reductions in the number of employees during the year, as well as benefits derived through improved efficiencies from capital investment.
Selling, General and Administrative
Selling, general and administrative expenses decreased .9% to $32.4 million as compared to $32.7 one year earlier. The cost decrease is attributable to reduced administrative staff and reductions in selling costs.
Interest Expense
Interest expense, excluding the Raymark note, is down slightly as compared to the prior year. During 2000, Raybestos Products Company and Raytech Automotive Components Company terminated their Loan and Security Agreements with Bank of America and entered into a new Loan and Security Agreement ("Agreement") with Congress Financial Corporation. The new Agreement provides for Raybestos Products Company, Raytech Automotive Components Company and Automotive Composites Company 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 debt refinancing lowered the interest rate 50 basis points on all domestic borrowing. Additionally, lower capital expenditures year- over-year provided funds to lower the overall debt position of the Company.
In connection with the January 1998 Bankruptcy Court decision to require Raytech to halt payments on its promissory note payable to Raymark, management has concluded that interest should not be accrued during the cease payment period. Accordingly, no interest has been accrued in fiscal 2000, 1999 and 1998. The ultimate resolution of interest to be paid on the note is subject to the uncertainties inherent in reorganization proceedings under the Bankruptcy Code.
Other Income, Net
Other income, net consists of miscellaneous items of which the most significant is interest income in the amount of $592 thousand.
Income Taxes
In 2000, the Company recorded an additional deferred tax asset of $2.767 billion relating to the tax effects of the liabilities subject to compromise. Based on its historical taxable income, the Company expects to realize approximately $140 million of the total deferred tax asset through the ten-year carryback of the previously paid taxes and the expected tax benefits during the twenty-year carryforward period. Accordingly, the Company has recorded a valuation allowance of $2.633 billion against the gross deferred tax asset to state it at its expected net realizable value. When the Plan becomes effective, and the liabilities subject to compromise are settled for less than the recorded amount of allowed claims, the net deferred tax asset will be adjusted accordingly.
The Company's effective tax rate, excluding the deferred tax benefit referred to above, for the year ended December 31, 2000 was 42% compared to 32% for the same period in the prior year. The Company's effective tax rate of 42% differs from the federal statutory rate primarily due to state and foreign taxes. In the prior periods, the tax rate was reduced by the effect of certain legal and other costs deducted for tax purposes but offset for financial reporting purposes against the principal balance of the Raymark note payable in connection with an indemnification agreement with Raymark (see Note A to the Consolidated Financial Statements). The offset against the principal balance of the Raymark note has been substantially utilized and this tax benefit is no longer available. This issue accounts for substantially all of the increase in the effective tax rate.
The Company has in process an Internal Revenue Service tax audit for the 1996 through 1999 fiscal years. The IRS has proposed disallowance of $9.9 million of bankruptcy-related costs relating to 1996 through 1998, which are included in the indemnification agreement with Raymark. The Company has deducted approximately $17.0 million of such costs through December 31, 2000 and continues to believe these costs are deductible. The ultimate resolution of the Company's liability, if any, is dependent on the interpretation of a complex set of facts and applicable legal precedents. While the Company and its advisors believe the Company's position is supported by the facts and the weight of the legal precedents, it is reasonably possible, through a different factual analysis and application of countervailing legal authority, that a final determination could be adverse to the Company. As such, the Company intends to contest the proposed disallowance and has not recorded any related provisions. Should the IRS ultimately prevail in its claim, an adjustment related to prior year tax accruals would be required.
Business Segment and Geographic Area Results
The following discussion of operating results by industry segment and geographic area relates to information contained in Note K - Segment Reporting in the Notes to Consolidated Financial Statements. Operating profit is income before income taxes and minority interest.
2000 Net Sales by Business Segment
Wet Friction 64% Aftermarket 24% Dry Friction 12%
Wet Friction Segment (in millions)
Net Sales Operating Profit
2000 $152.7 $18.1 1999 156.7 18.1 1998 155.8 18.4
Wet Friction Segment
Revenues decreased 2.6 percent to $152.7 million as compared with $156.7 million in 1999. The decline was the result of slowing demand in the light duty original equipment market, which includes automotive original equipment and light duty or highway original equipment. New products totaling $5.3 million were introduced through the automotive original equipment section of the Wet Friction segment. The increases were offset by slower demand in the fourth quarter of 2000 as the automobile manufacturers reduced orders for our products. Additionally, the loss to foreign competitors of certain parts to one of our customers further reduced sales. The heavy duty market showed improvement over 1999 as demand for certain agricultural products increased. The agricultural market increased approximately $2.2 million as compared to 1999.
Operating profit was equal to the prior year at $18.1 million. The ability to retain the operating profits at the same level as 1999 with $4 million less in sales is due primarily to improved profitability at the Michigan manufacturing facility and other cost containment programs throughout the Company.
Aftermarket Segment (in millions)
Net Sales Operating Profit
2000 $58.4 $10.8 1999 64.1 11.6 1998 58.8 9.0
Aftermarket Segment
The Aftermarket segment recorded revenues of $58.4 million for fiscal 2000 as compared to $64.1 million in 1999, a decrease of $5.7 million or 9%. The decrease was due partly to an internal reorganization at a major customer combined with a more focused inventory management program. The combination of these changes reduced sales $1.7 million. Additionally, the aftermarket in general was slower in 2000 as compared to 1999, which is reflected in reduced sales across all product lines.
Operating profits of $10.8 million were less than the $11.6 million recorded in 1999, a decrease of $.8 million or 7%. The decrease in operating profits was due entirely to the lower sales volume year-over-year. Operating profit as a percent of sales increased to 18.5% in 2000 from 18.1% in 1999. The increase reflects the effect of cost reduction programs and improved manufacturing efficiencies implemented in 2000.
Dry Friction Segment (in millions)
Net Sales Operating Profit
2000 $28.4 $ .7 1999 31.2 1.2 1998 32.9 .8
Dry Friction Segment
Revenues of $28.4 million were recorded in the Dry Friction segment for 2000 as compared to $31.2 million in 1999, a decline of $2.8 million or 9%. Revenues produced at our facility in China improved significantly over 1999 with $.9 million of increased revenues, an increase of 46%. In local currency, revenues of the German operation were up slightly ($.2 million) when compared to 1999. The most significant impact in this segment was the year- over-year decline in the deutsche mark, which provided a negative translation adjustment of $3.9 million.
Operating profit of $.7 million was lower than 1999 by $.5 million or 42%. The decrease in operating profit was due to the currency translation adjustment offset by increases in sales from the China facility.
Market Conditions and Outlook
The Company's wet friction segment expects to continue to face an increasingly competitive automotive environment and a continued slowdown for the demand in certain agricultural machine products. Our major customers in the automotive industry face an increased competitive automotive environment which is likely to continue to limit Raytech's pricing flexibility in the near term. In addition, the weakness of the Japanese yen and other Asian currencies against the U.S. dollar and the uncertain future of the Asian economies could result in substantial increases in imports from Asia to the U.S. and Canada. The Asian economic difficulties could have an unfavorable effect on overall economic conditions in the U.S. and Canada, where our major customers' sales are concentrated.
With regard to the Company's agricultural equipment operations, worldwide farm commodity prices remain low as a result of prospects for increased global supplies of grains and oilseeds, as well as fears about the Asian economic issues. Accordingly, retail demand for agricultural equipment in 2001 is now projected to remain at 2000 levels in North America, Europe, Latin America and Australia. In light of this outlook and the Company's continuing commitment to aggressive asset management, production schedules are being reviewed for 2001 to ensure the Company's production meets demand.
The aftermarket segment is expected to remain constant compared to results for 2000. The competition in this market continues to increase as mergers continue to occur between suppliers. The sales in this segment have been driven by new product introductions in filters, dry friction clutch facings and planetary gears over the past years. Introducing new products for this market is a key element in the 2001 strategy.
The dry friction segment continues to operate in a sluggish European environment with unemployment remaining at high levels and economic growth improving only marginally. The development of new market opportunities in Asia is supported through the new production facility in China. This facility improved sales substantially over 1999, growing from $1.9 million in sales to $2.8 million in 2000, an increase of $.9 million. The overall Asian economy continues to be negatively affected by the weakened economies of Japan and other Asian countries. Therefore, growth in 2001 will be at a slower pace compared to 2000.
The Company's outlook for 2001 anticipates modest reduction in sales with lower operating income compared to 2000 results. Maintaining market share in the automotive original equipment market and the continued introduction of new products for aftermarket distribution are expected to be the drivers for performance. Further, it is anticipated that the dry friction operation in China will improve the performance of this segment.
Euro Conversion
The Company is well advanced in the process of identification, implementation and testing of its systems to adopt the euro currency in its operations affected by this change. The Company's affected suppliers, distribution network and financial institutions have been contacted and the Company does not believe the currency change will significantly impact these relationships. As a result, the Company expects to have its systems ready to process the euro conversion during the transition period through January 1, 2002 when the euro will become the official currency of participating nations. The cost of information systems modifications, effects on product pricing and purchase contracts, and the impact on foreign currency financial instruments are not expected to be material.
Financial Risks
The Company maintains lines of credit with United States and foreign banks, as well as other creditors detailed in Note F - Debt in the Notes to 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 37 days, a reduction of 9 days from the prior year. 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 2001 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 2000 of $16.9 million had rates of interest that ranged from 2.5% to 7.5%. The variable rate debt at year-end 2000 of $13.1 million had rates of interest that ranged from 8% to 9.5%. The variable debt reprices either at prime rate, the Eurodollar rate or the European Community discount 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 the 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 due to the immaterial amount of transactions of this type.
Liquidity and Capital Resources
The Company's wet friction and dry friction operations are capital intensive and the required capital is funded through current operations and external borrowing sources. The aftermarket operation has historically required less capital investment and has provided needed capital through current operations.
The positive cash flows provided by operations in 2000 were the result of continued strong performance in operating activities and totaled $34.3 million. Cash provided by changes in trade accounts receivable of $7.0 million, other current assets of $1.3 million and accrued and other liabilities of $2.6 million were offset by cash used by changes in inventory of $.3 million, other long-term assets of $.9 million and accounts payable of $4.0 million. The aggregate amount of the 2000 cash flow was used principally to invest in capital projects of $13.5 million, to reduce bank debt $7.6 million net (after borrowings) and to reduce the Raymark debt $9.6 million.
Over the past three years, operating activities have provided an aggregate of $83.5 million in cash. During this period, net cash used in financing activities was $25.0 million and cash and cash equivalents increased $4.0 million. The aggregate amount of these cash flows was used mainly to fund capital investments and the acquisition of AFM.
Trade accounts receivable result from sales in the normal course of business. Trade receivables decreased $7.0 million during 2000 due to reduced sales and stronger receivables management. The ratios of worldwide net trade accounts receivable to year-end net sales were 10.2% in 2000, 12.6% in 1999, and 11.9% in 1998. The collection period for trade receivables averaged 37 days in 2000 and 46 and 44 days for 1999 and 1998, respectively.
Inventories were equal to 1999 levels. Inventories are valued on a first in, first out (FIFO) basis. The inventory levels at the end of 2000 reflect the impact of reduced sales offset by the need to maintain adequate inventory levels for customer service delivery. The ratios of inventories to year-end net sales were 13.9% for 2000, 13.2% for 1999, and 12.5% for 1998.
Additional information detailing the debt of Raytech Corporation can be found in Note F - Debt in Notes to the Consolidated Financial Statements.
Future Liquidity
See Item 3 Legal Proceedings. The future liquidity issues facing the Company are partially outlined in Note F in Notes to the Consolidated Financial Statements. Costs incurred by the Company relating to Raymark successor liability matters and the related bankruptcy proceedings are subject to indemnification by Raymark under the 1987 acquisition agreements and are being applied as a reduction of the note obligations. These costs amounted to $9.6 million, $5.3 million and $6.3 million, respectively, for fiscal 2000, 1999, and 1998. At December 31, 2000, the principal balance of the Wet Clutch and Brake note was $5.8 million. There is also other Raymark debt that is not subject to indemnification that amounted to $4.8 million at December 31, 2000.
Additionally, the future liquidity will be affected by the Second Amended Plan of Reorganization ("Plan") and certain liabilities recorded during 2000, which are classified as "Liabilities Subject to Compromise." Included in these liabilities are certain amounts relating to environmental and asbestos personal
injury claims that are expected to be extinguished upon the transfer of Raytech stock to the Personal Injury Trust, as fully discussed in Note A to the Consolidated Financial Statements. Also included in the liabilities subject to compromise are $16 million for the Raymark pension and $2.5 for certain other Raymark retiree benefits. It is uncertain at this time how these two liabilities will be extinguished.
The Plan also sets forth a Tax Refund Assignment Agreement between the Company and the Personal Injury Trust, which provides for the tax benefits received by the Company due to the reorganization to be passed onto the Personal Injury Trust as received.
The Plan also requires that an amount of cash, which will be determined at the effective date, will be transferred to the Personal Injury Trust. It is estimated that the amount will be approximately $2.5 million.
The Company reduced its debt position $17.5 million, as compared to 1999 (see Note F to the Consolidated Financial Statements). Additionally, the Company increased its cash position $3.2 million during fiscal 2000. The Company had outstanding bank debt at year-end of $16.0 million with available lines of credit of $6 million. The cash position of Raytech at year-end 2000 is $13.9 million. In addition to cash and available lines of credit, the Company has budgeted $17.8 million in capital expenditures for the 2001 year. Certain of these expenditures could be postponed if financial demands warranted such action. Subject to the outcome of the legal matters discussed above, management believes that the Company will generate sufficient cash flow during 2001 to meet all of the Company's obligations arising in the normal course of business and anticipated capital investments. If the Plan becomes effective in 2001, and the details of the Plan remain consistent to their current status, management believes that the Company will generate sufficient cash flow during 2001 to meet all of the Company's obligations arising in the normal course of business and to meet all the obligations of the proposed Plan.
Recently Issued Accounting Pronouncements
Effective January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS NO. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management has completed its analysis relating to the adoption of these statements and will include the effects of this adoption in the 2001 financial statements. Management has concluded that the impact of SFAS No. 133 will not be material.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," as amended by SAB No. 101A, which delayed the implementation date of SAB No. 101 for companies with fiscal years beginning between December 16, 1999 and March 15, 2000. Since the issuance of SAB No. 101 and SAB No. 101A, the SEC issued SAB No. 101B, which delayed implementation until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB No. 101 summarized the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Management has reviewed its policies with respect to revenue recognition and has determined that the policies are in compliance with SAB 101 and accounting principles generally accepted in the United States of America.
In March 2000, the FASB issued guidance on stock compensation issues in the form of FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25." The Interpretation clarifies the application of APB Opinion No. 25 for certain issues. The Interpretation is effective beginning July 1, 2000. Management has completed its analysis of FASB Interpretation No. 44 and has determined that it is not applicable at this time.
1999 Compared With 1998
Raytech continued its solid performance through the fourth quarter of 1999 and as a result ended the year with record sales of $252.0 million. Net income for the 1999 fiscal year amounted to $16,364 or $4.76 basic earnings per share as compared to $16,357 or $4.81 basic earnings per share in fiscal 1998.
Net Sales
Worldwide net sales rose 1.8% to $252.0 million, compared with $247.5 million in 1998. The wet friction segment sales increased $.9 million due to strong sales in the automotive component of the wet friction segment, including sales of Raytech Automotive Components Company for the full year. However, increases were partially offset by declines in the heavy duty and agricultural markets as the demand for certain items continued to slow. Aftermarket sales increased $5.3 million compared with the prior year as a result of marketing efforts in existing product lines, the introduction of new products, and improvement in market share. The dry friction segment sales decreased $1.7 million year over year due to a decline in sales ($2.0 million) and an adverse foreign currency fluctuation ($1.6 million), offset by $1.9 million
in revenues from the China facility that became fully operational in 1999.
Gross Profit
Gross profit as a percentage of sales for the period ended January 2, 2000 is 23.9% as compared to 23.7% for the same period one year ago. The improvement is the result of cost saving programs implemented at our manufacturing facilities, capital investment aimed at reducing labor and creating greater efficiencies and a favorable mix of products sold.
Selling, General and Administrative
Selling, general and administrative expenses decreased .9% to $32.7 million as compared to $33.0 one year earlier. The cost decrease is attributable to reduced administrative staff and selling costs.
Interest Expense
Interest expense, excluding the Raymark note, increased primarily as a result of higher interest rates on borrowings under the Company's revolving line of credit. Average monthly bank borrowings increased during the year due to increased sales volume and new borrowings for our China expansion.
In connection with the January 1998 Bankruptcy Court decision to require Raytech to halt payments on its promissory note payable to Raymark, management has concluded that interest should not be accrued during the cease payment period. Accordingly, no interest has been accrued in fiscal 1999 and 1998. The ultimate resolution of interest to be paid on the note is subject to the uncertainties inherent in reorganization proceedings under the Bankruptcy Code.
Other Income, Net
Other income, net in 1999 includes interest income in the amount of $352 thousand, which is comparable to interest income for 1998.
Income Taxes
The effective tax rate for the year ended January 2, 2000 was 32.2% versus 28.0% in 1998. The effective tax rate in each year is less than the federal statutory rate of 35% due primarily to the effect of certain legal and other costs deducted for tax purposes but net against the Raymark note payable for financial reporting purposes in connection with the indemnification agreement with Raymark, offset in part by the effect of foreign and state income taxes. Due to the uncertainties inherent in bankruptcy proceedings, a full valuation allowance is provided for domestic deferred tax assets where recoverability is contingent upon future taxable income. The Company has approximately $6.2 million of foreign loss carryforwards that can be used to offset future foreign cash taxes. A valuation allowance is provided on the tax benefit of approximately $3.5 million of these foreign loss carryforwards due to uncertainty of future profitability of certain operations.
Business Segment and Geographic Area Results
The following discussion of operating results by industry segment and geographic area relates to information contained in Note K - Segment Reporting in the Notes to Consolidated Financial Statements. Operating profit is income before income taxes and minority interest.
1999 Net Sales by Business Segment
Wet Friction 62% Aftermarket 25% Dry Friction 13%
Wet Friction Segment (in millions)
Net Sales Operating Profit
1999 $156.7 $18.1 1998 155.8 18.4
Wet Friction Segment
Revenues increased .6 percent to $156.7 million as compared with $155.8 million in 1998. The growth was driven by the continued strong sales in the automotive original equipment market, with an increase of approximately $8.6 million over the prior year. New products totaling $7.6 million were introduced through the automotive original equipment channel of the Wet Friction segment. The heavy duty market continues to decline as demand slows, with agricultural product sales being exceptionally slow. The agricultural market declined approximately $6.2 million as compared to 1998. Lower farm commodity prices and weaker farm economic conditions have adversely affected retail demand.
Operating profit declined slightly from the prior year from $18.1 million in 1999 as compared to $18.4 million in 1998. The modest decrease of $.3 million relates directly to the decrease in overhead spending and material handling offset by an increase in direct labor.
Aftermarket Segment (in millions)
Net Sales Operating Profit
1999 $64.1 $11.6 1998 58.8 9.0
Aftermarket Segment
Revenues increased 9.0% to $64.1 million as compared with $58.8 million in 1998. The increase is a result of marketing efforts on existing product lines, the introduction of new products and improvement in market share. The growth in sales of transmission filters, friction plates and steel plates provided $5.0 million of the total $5.3 million in growth year-over-year. The expansion of the dry friction clutch plates program provided the remainder of the growth over 1998.
Operating profit increased 28.9% to $11.6 million as compared to $9.0 million in 1998. The increase is primarily due to increased unit production and the introduction of new products in 1999. The Aftermarket segment increased operating profit $2.6 million over 1998 on $5.3 million of increased sales. This equates to operating profits increasing 49 cents for every new sales dollar. This strong profitability ratio is due to improved operating efficiencies in the manufacturing and distribution components of this business.
Dry Friction Segment (in millions)
Net Sales Operating Profit
1999 $31.2 $1.2 1998 32.9 .8
Dry Friction Segment
Revenues decreased 5.2% to $31.2 million as compared with $32.9 million in 1998. The decrease of $1.7 million is due to a decline in sales ($2.0 million) and an adverse foreign currency fluctuation ($1.6 million), offset by $1.9 million in revenues from the China facility that became fully operational in 1999. Increased competition and the slow growth in the European economy are significant factors contributing to the 1999 performance.
Operating profit increased 50.0% to $1.2 million as compared to $.8 million in 1998. The increase is due to the positive results generated from the Company's China facility.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under the "Market Conditions and Outlook" and "Euro Conversion" headings above and other statements herein that relate to future operating periods are subject to important risks and uncertainties that could cause actual results to differ materially. Forward-looking statements relating to the Company's businesses involve certain factors that are subject to change, including the many interrelated factors that affect consumer confidence, including worldwide demand for automotive and heavy duty products, general economic conditions, the environment, actions of competitors in the various industries in which the Company competes; production difficulties, including capacity and supply constraints; dealer practices; labor relations; interest and currency exchange rates (including the effect of conversion to the euro); technological difficulties; accounting standards, and other risks and uncertainties. Further information, including factors that potentially could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
See Item 7.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Consolidated Balance Sheets at December 31, 2000 and January 2, 2000
Consolidated Statements of Operations for the 2000, 1999 and 1998 Fiscal Years
Consolidated Statements of Cash Flows for the 2000, 1999 and 1998 Fiscal Years
Consolidated Statements of Changes in Shareholders' Equity for the 2000, 1999, and 1998 Fiscal Years
Notes to Consolidated Financial Statements
Report of Independent Accountants
RAYTECH CORPORATION
RAYTECH CORPORATION
RAYTECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, unless otherwise noted, except per share data)
Note A - Formation of Raytech Corporation, Sale of Raymark, Chapter 11 Proceeding and Other Litigation
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 both a share of Raytech common stock and a right to purchase a warrant for Raytech common stock. The warrants expired on October 1, 1994. The purpose of the formation of Raytech and the restructuring plan was to provide a means to gain access to new sources of capital and borrowed funds to be used to finance the acquisition and operation of new businesses in a corporate structure that should not subject it or such acquired businesses to any asbestos- related or other liabilities of Raymark under the doctrine of successor liability, piercing the corporate veil and fraudulent conveyance.
Prior to the formation of Raytech, Raymark had been named as a defendant in more than 88,000 lawsuits claiming substantial damages for injury or death from exposure to airborne asbestos fibers. Subsequent to the divestiture sale of Raymark in 1988, lawsuits continued to be filed against Raymark at the rate of approximately 1,000 per month until an involuntary petition in bankruptcy was filed against Raymark in February 1989, which stayed all its litigation. In August 1996, the involuntary petition filed against Raymark was dismissed following a trial and the stay was lifted. However, in March 1998, Raymark filed a voluntary bankruptcy petition again staying the litigation.
In accordance with the stated restructuring plan, Raytech, through its subsidiaries, purchased certain non-asbestos businesses of Raymark in 1987, including the Wet Clutch and Brake Division for $76.9 million and Raybestos Industrie-Produkte GmbH, a German subsidiary for $8.2 million. In anticipation of such sales, Raymark retained independent investment bankers and financial analysts for the purpose of determining fair purchase prices and divestiture. Representing part of the consideration of the transactions, Raymark agreed to indemnify Raytech for Raymark's liabilities, including asbestos, environmental, pension and others.
In May 1988, Raytech divested all of the Raymark stock to Asbestos Litigation Management, Inc. The purchase price of the stock was affected by Raymark's substantial asbestos-related liabilities.
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. Until February 1989, the defense of all such lawsuits was provided to Raytech by Raymark in accordance with the indemnification included as a condition of the purchase of the Wet Clutch and Brake Division and German subsidiary from Raymark in 1987. In 1989, the involuntary bankruptcy proceedings against Raymark caused Raymark to be unable to fund the costs of defense to Raytech in the asbestos-related lawsuits referenced above. Raytech management was informed that Raymark's cost of defense and disposition of cases up to the automatic stay of litigation in 1989 under the involuntary bankruptcy proceedings was approximately $333 million of Raymark's total insurance coverage of approximately $395 million. It has also been informed that as a result of the dismissal of the involuntary petition, Raymark encountered newly filed asbestos-related lawsuits but had received $27 million from a state guarantee association to make up the insurance policies of an insolvent carrier and had $32 million in other policies to defend against such litigation. In March 1998, Raymark filed a voluntary bankruptcy petition as a result of several large asbestos-related judgments.
In an asbestos-related personal injury case captioned Raymond A. Schmoll v. ACandS, Inc., et al. decided in October 1988 in a U.S. District Court in Oregon, Raytech was ruled under Oregon equity law to be a successor to Raymark's asbestos-related liability. The successor ruling was appealed by Raytech and in October 1992 the Ninth Circuit Court of Appeals affirmed the District Court's judgment on the grounds stated in the District Court's opinion. The effect of this decision extends beyond the Oregon District due to a Third Circuit Court of Appeals decision in a related case cited below wherein Raytech was collaterally estopped (precluded) from relitigating the issue of its successor liability for Raymark's asbestos-related liabilities.
As the result of the inability of Raymark to fund Raytech's cost of defense recited above and to halt the asbestos-related litigation, on March 10, 1989, Raytech filed a petition seeking relief under Chapter 11 of Title 11, United States Code in the United States Bankruptcy Court, District of Connecticut. Under Chapter 11, substantially all litigation against Raytech was stayed while the debtor corporation and its non-filing operating subsidiaries continue to operate their businesses in the ordinary course under the same management and without disruption to employees, customers or suppliers. In the Bankruptcy Court a creditors' committee was appointed, comprised primarily of asbestos claimants' attorneys. In August 1995, an official committee of equity security holders was appointed relating to a determination of equity security holders' interest in the bankruptcy estate.
In June 1989 Raytech filed a class action in the Bankruptcy Court captioned Raytech v. Earl White, et al. against all present and future asbestos claimants seeking a declaratory judgment that it not be held liable as a successor for the asbestos-related liabilities of Raymark. The U.S. District Court withdrew its reference of the case to the Bankruptcy Court, and agreed to hear and decide the case. In September 1991, the U.S. District Court issued a ruling dismissing the class action citing as a reason the preclusive effect of the 1988 Schmoll case recited above under the doctrine of collateral estoppel (conclusiveness of judgment in a prior action), in which Raytech was ruled to be a successor to Raymark's asbestos liability under Oregon law. Upon a motion for reconsideration, the U.S. District Court affirmed its prior ruling in February 1992. Also, in February 1992, the U.S. District Court transferred the case in its entirety to the U.S. District Court for the Eastern District of Pennsylvania. Such transfer was made by the U.S. District Court without motion from any party in the interest of the administration of justice as stated by the U.S. District Court. In February 1994, the U.S. District Court's dismissal of the case was appealed. In May 1995, the Third Circuit Court of Appeals ruled that Raytech is collaterally estopped (precluded) from relitigating the issue of its successor liability as ruled in the 1988 Oregon case recited above, affirming the U.S. District Court's ruling of dismissal. A petition for a writ of certiorari was denied by the U.S. Supreme Court in October 1995. The ruling leaves the Oregon case, as affirmed by the Ninth Circuit Court of Appeals, as the prevailing decision holding Raytech to be a successor to Raymark's asbestos-related liabilities.
As the result of the Court rulings recited above holding Raytech a successor to Raymark's asbestos-related liabilities, Raytech halted payments to Raymark under the 1987 Asset Purchase Agreement in May 1995. However, in February 1997, with Raymark temporarily out of bankruptcy, Raytech resumed making payments pursuant to the Agreement. As the result of the creditors' committee's action to halt the payments, the Bankruptcy Court ordered the payments stopped in January 1998.
Costs incurred by the Company for asbestos-related liabilities are subject to indemnification by Raymark under the 1987 acquisition agreements. By agreement, in the past, Raymark has reimbursed the Company in part for such indemnified costs by payment of the amounts due in Raytech common stock of equivalent value. Under such agreement, Raytech received 926,821 shares in 1989, 177,570 shares in 1990, 163,303 in 1991 and 80,000 shares in 1993. The Company's acceptance of its own stock was based upon an intent to control dilution of its outstanding stock. In 1992, the indemnified costs were reimbursed by offsetting certain payments due Raymark from the Company under the 1987 acquisition agreements. Costs incurred since 1994 were applied as a reduction of the note obligations pursuant to the agreements.
In March and April 1998, Raymark and its parent, Raymark Corporation, filed voluntary petitions in bankruptcy in a Utah Court which stayed all litigation in the Raytech bankruptcy in which Raymark was a party. In connection with asserting control over Raymark and its assets, the creditors' committee, Raytech, the Guardian ad litem for Future Claimants, the equity committee and the government agencies caused the Raymark bankruptcies to be transferred from Utah to the Connecticut Court. In October 1998, a trustee was appointed by the United States Trustee over the Raymark bankruptcies and is currently administering the Raymark estate.
In October, 1998 Raytech reached a tentative settlement with its creditors and entered into a Memorandum of Understanding with respect to achieving a consensual plan of reorganization (the "Plan"). The parties to the settlement included Raytech, the Official Creditors Committee, the Guardian ad litem for Future Claimants, the Connecticut Department of Environmental Protection and the U. S. Department of Justice, Environmental and Natural Resources Division. Substantive economic terms of the Memorandum of Understanding provided for all general unsecured creditors including but not limited to all asbestos and environmental claimants to receive 90% of the equity in reorganized Raytech and any and all refunds of taxes paid or net reductions in taxes owing resulting from the transfer of equity to a trust established under the Bankruptcy Code, and existing equity holders in Raytech to receive 10% of the equity in reorganized Raytech. The Memorandum of Understanding also requires that an amount of cash, which will be determined at the effective date, be transferred to the trust. The amount of cash has been estimated at $2.5 million. Substantive non-economic terms of the Memorandum of Understanding provided for the parties to jointly work to achieve a consensual Plan, to determine an appropriate approach to related pension and employee benefit plans and to cease activities that have generated adverse proceedings in the Bankruptcy Court. The parties also agreed to jointly request a finding in the confirmation order to the effect that while Raytech's liabilities appear to exceed the reasonable value of its assets, the allocation of 10% of the equity to existing equity holders is fair and equitable by virtue of the benefit to the estate of resolving complicated issues without further costly and burdensome litigation and the risks attendant therewith and the economic benefits of emerging from bankruptcy without further delay.
In August 1999, the Bankruptcy Court set a bar date for filing claims against Raytech, resulting in approximately 3,200 claims. Such claims were categorized into asbestos personal injury, asbestos property damage, environmental, including the EPA and State of Connecticut, pension/retiree benefits and other employee related claims and other contractual and general categories. Through Court proceedings many of the filed claims were expunged, leaving only valid claims to be dealt with in the Plan. In order to comply with the mandatory estimation of all claims against the debtor in the confirmation process, Raytech, the creditors' committee and the Government entered into discussions to attempt to make estimations of the asbestos and Government claims not subject to the bar date. The discussions resulted in an agreement on the estimate of such asbestos and Government claims, and accordingly, a motion was filed in the Bankruptcy Court for an allowance of asbestos claims of $6.760 billion and Government claims of $431.8 million for purposes of voting and distribution under the terms of the Plan. In March 2000, the Bankruptcy Court entered an interim order allowing such amounts as general unsecured claims subject to an objection period through June 2000 and the completion of the initial vote of the Plan of confirmation on July 7, 2000. As a result of the resolution of the objections raised with only a slight modification to the Plan and the overwhelming favorable response to the initial vote, management was substantially certain that the Plan would be confirmed and that the estimate of the $7.2 billion of allowed claims would be finally approved by the Bankruptcy Court. Accordingly, Raytech recorded a charge and related liability in the financial statements in the amount of $7.2 billion for the estimated amount of allowed claims in the second quarter of 2000. Such estimations are recorded as liabilities subject to compromise since it is expected that the distributions under the Plan with respect to such claims will be lesser amounts consisting of a 90% equity distribution in reorganized Raytech at the effective date pursuant to the Plan referenced above in this Note A. Upon the effective date of the Plan, Raytech will utilize the "fresh start" reporting principles contained in the AICPA's Statement of Position 90-7, which will result in adjustments relating to the amounts and classification of recorded assets and liabilities determined as of the effective date. Under the Plan, the ultimate consideration to be received by all unsecured creditors will be covered under the referenced 90% equity distribution and will be substantially less than amounts shown in the accompanying financial statements.
In 1999, the Bankruptcy Court ("Court") issued rulings on adversary actions brought by Raymark retirees and pensioners seeking rights as claimants for benefits from Raytech on the basis of successor liability. As to the pensioners, the Court ruled that Raytech has the liability as a successor to Raymark. The decision has been appealed and remains pending. As noted in the previous paragraph, during the second quarter of 2000, management was substantially certain that the Plan would be confirmed and that the pension liability would be Raytech's responsibility, although under legal appeal. The resulting recorded charge and related liability estimated at $16 million was recorded in the second quarter of 2000 and is subject to compromise based on the pending appeal. As to the retirees, the Court ruled that the Raymark Trustee's termination of the retirees benefit plans was justified and thus the post- termination liability thereafter could not be transferred to Raytech. In response to the bar date set for filing claims in 1999, approximately 700 retirees filed timely claims. The validity and the amount of claims were not estimated until the fourth quarter of 2000. The charge for the estimated amount of allowed claims of $2.5 million was recorded in the fourth quarter of 2000, and the liability is subject to compromise. For both the PBGC and retiree claims, the Court has not yet determined if they will be classified as priority or unsecured claims. At December 31, 2000, they are both considered to be unsecured claims and included in liabilities subject to compromise pending final Court decision.
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 contained several conditions to the occurrence of the effective date of the Plan ("Effective Date"). The majority of the conditions have been met, and the remaining conditions to the Effective Date are the resolution of the Raymark claims and the requested tax-related rulings from the IRS or an opinion of counsel. It is unknown when the above- referenced conditions to the Effective Date will be satisfied, but it is management's intention that they will be met as soon as possible. Until the Effective Date occurs, the terms of the Plan, although confirmed, are not yet in effect. On the Effective Date, a channeling injunction ordered by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code 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 shall be in exchange for and in complete satisfaction, discharge and release of all claims and equity interests against Raytech.
In 1991, an environmental claim was filed by the Pennsylvania Department of Environmental Resources ("DER") to perform certain activities in connection with Raymark's Pennsylvania manufacturing facility, including submission of an acceptable closure plan for a landfill containing hazardous waste products located at the facility. In March 1991, the Company entered a Consent Order which required Raymark to submit a revised closure plan acceptable to the DER. The estimated cost for Raymark to comply with the order was $1.2 million. The DER notified the Company in 2000 that Raymark had failed to comply with its obligations under the Consent Order. In December 2000, Raymark sold its Pennsylvania manufacturing facility, and the buyer has entered a consent agreement with the DER to comply with the order, thereby satisfying the claim against Raytech.
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. IDEM has turned the matter over to the U.S. Environmental Protection Agency ("EPA"), and in April 2000, the EPA issued a subpoena for information to determine compliance with federal environmental regulations and in July 2000 proposed a consent order of environmental response that was rejected by RPC. In December 2000, the EPA issued a Unilateral Administrative Order under CERCLA ("Order") demanding removal of contaminated soils from the referenced drainage ditch. RPC has given notice that it intends to comply with the Order and has designated a contractor and project coordinator as required. RPC is preparing a plan for implementing and carrying out the cleanup Order. Based on preliminary assessments, the Company has estimated that the cost to comply with the Order will be in the range of $3 million to $6 million and has recorded a liability in the amount of $3 million at December 31, 2000. It is at least reasonably possible that the preliminary assessment of estimated costs to comply with the Order may be modified as the project progresses. A receivable from Reliance Insurance Company will be recorded when the Company has determined that it is probable that such recovery will be realized.
In January 1997, Raytech was named through a subsidiary in a third party complaint captioned Martin Dembinski, et al. vs. Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et al. filed in the U.S. District Court for the Southern District of New York for damages for asbestos-related disease. The case has been removed to the U.S. District Court, Eastern District of Pennsylvania. When required, the Company will seek an injunction in the Bankruptcy Court to halt the litigation under the channeling injunction referenced above.
In December 1998, a subsidiary of the Company filed a complaint against a former administrative financial manager of Advanced Friction Materials Company ("AFM") in the U.S. District Court, Eastern District of Michigan, captioned Raytech Composites, Inc. vs. Richard Hartwick, et ux. alleging that he wrongfully converted Company monies in his control to his own use and benefit in an amount greater than $3.3 million prior to the April 1998 completion of the acquisition of AFM as discussed in the following paragraph. In December 1999, the District Court ruled on summary judgment in favor of Raytech on its claim against Hartwick in the amount of $3.330 million. A constructive trust had been ordered by the Court providing ownership to Raytech of four real estate properties purchased by Hartwick with the converted funds. The four properties have been sold resulting in a net recovery of $1.337 million. Hartwick has been arrested by the State of Michigan under 13 counts of embezzlement. In May 2000, Hartwick pled guilty to the charges and has been sentenced for 2 to 15 years in the Michigan State Penitentiary. A restitution order was granted to the Company in the amount of $1.33 million.
In April 1998, AFM redeemed 53% of its stock from the former owner for a formulated amount of $6.044 million, $3.022 million paid at closing and the balance of $3.022 million payable by note in three equal annual installments resulting in the Company attaining 100% ownership of AFM. In April 1999, an adversary proceeding was filed in the Connecticut Bankruptcy Court against the former owner captioned Raytech Corporation, et al. vs. Oscar E. Stefanutti, et al. to recover $1.5 million of the amount paid for the AFM stock and to obtain a declaratory judgment that the balance of $3.022 million is not owed based upon the judgment that a fraud was perpetrated upon the Company related to the Hartwick case referenced above. In September 1999, the Bankruptcy Court granted jurisdiction of the case but exercised discretionary abstention to enable the Court to focus on issues impeding the plan confirmation. In June 1999, the former owner filed an action against the Company in a County Court in Michigan captioned Oscar E. Stefanutti, et al. vs. Raytech Automotive Components Company to enforce payment of the note. Discovery has been completed, and cross motions for summary judgment are being considered by the Court. A trial date has been set for April 2001.
In December 1998, the trustee of Raymark, Raytech and the Raytech creditors' committee joined in filing an adversary proceeding (complaint) against Craig R. Smith, et al. (including relatives, business associates and controlled corporations) alleging a systematic stripping of assets belonging to Raymark in an elaborate and ongoing scheme perpetrated by the defendants. The alleged fraudulent scheme extended back to the 1980's and continued up to this action and has enriched the Smith family by an estimated $12 million and has greatly profited their associates, while depriving Raymark and its creditors of nearly all of its assets amounting to more than $27 million. Upon motion of the plaintiffs, the Bankruptcy Court issued a temporary restraining order stopping Mr. Smith and all defendants from dissipating, conveying, encumbering or otherwise disposing of any assets, which order has been amended several times and remains in effect pending a preliminary injunction hearing. The reference to the Bankruptcy Court has been withdrawn, and the matter is now being litigated in the U.S. District Court in Connecticut. A motion for summary judgment was filed by the plaintiffs and was ruled upon in March 2000. The ruling granted plaintiffs summary judgment on several of the counts but denied summary judgment with respect to the claims against Mr. Smith for the stripping of assets from Raymark and its creditors for the reason that there was insufficient evidence of insolvency of Raymark, giving plaintiffs standing to file the claim. The Court invited plaintiffs to file for reconsideration of the denial with sufficient evidence of insolvency of Raymark at the time Mr. Smith expropriated the assets. Such motion for reconsideration was filed in April 2000 and remains pending.
The adverse ruling in the Third Circuit Court of Appeals, of which a petition for writ of certiorari was denied by the U.S. Supreme Court, precluding Raytech from relitigating the issue of its successor liability leaves the U.S. District Court's (Oregon) 1988 ruling as the prevailing decision holding Raytech to be a successor to Raymark's asbestos-related liabilities. This ruling has had a material adverse impact on Raytech as it did not have the resources needed to fund Raymark's potentially substantial uninsured asbestos- related and environmental liabilities. However, the Plan of Reorganization has defined the impact of the successor liabilities imposed by the referenced court decisions. While the Plan of Reorganization has been confirmed by the Bankruptcy Court and the U.S. District Court, it is not yet effective subject to certain conditions precedent, which timing cannot be predicted with
Note A, continued
certainty. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The uncertainties regarding the reorganization proceedings raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability, revaluation and classification of recorded asset amounts or adjustments relating to settlement and classification of liabilities that may be required in connection with reorganizing under the Bankruptcy Code.
Note B - Summary of Significant Accounting Policies
1. Background and Basis of Presentation
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.
Demand for the Company's product is derived primarily from the automotive original equipment, agriculture, construction and aftermarket segments which are highly competitive. These markets can be highly influenced by prevailing economic conditions such as interest rates and employment issues.
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 minority interest in Allomatic Products Company is accounted for as minority interest in the consolidated financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported and disclosures of contingent liabilities made in the financial statements and accompanying notes. Actual results could differ from these estimates. Significant estimates include inventory and receivable reserves, depreciable lives of property, plant and equipment and intangible assets, pension and other postretirement and postemployment benefits, bankruptcy-related claims (see Note A) and the recoverable value of deferred tax assets.
Certain amounts for prior years have been reclassified to conform to the current year's presentation.
2. Fiscal Year
The Company reports on a 52-53 week fiscal year; the last three fiscal years ended December 31, 2000, January 2, 2000, and January 3, 1999.
3. Cash Equivalents
Cash equivalents are recorded at cost, which approximates market and consist of certificates of deposit with original maturities of three months or less.
Note B, continued
4. Inventories
Inventories are stated at the lower of cost or market with cost determined primarily by using the FIFO (first in, first out) method.
5. Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation. 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 and 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 cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized.
6. Amortization of Intangibles
Intangible assets consist of goodwill and the intangible pension asset. Goodwill is amortized on a straight line basis over forty years or less. The intangible pension asset is remeasured and adjusted annually through an actuarial calculation. The Company periodically evaluates the carrying value of 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.
7. 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.
Note B, continued
8. 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.
9. Translation of Foreign Currencies
The local currencies of the Company's subsidiaries in Germany, the United Kingdom and China have been designated as the 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 separate component of accumulated comprehensive income in shareholders' equity.
10. Revenue Recognition
Sales are recorded by the Company upon delivery of products when both title and risks and rewards of ownership have passed to the customer.
11. 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. 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.
12. Recently Issued Accounting Pronouncements
Effective January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS NO. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that an entity recognize
Note B, continued
all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management has completed its analysis relating to the adoption of these statements and will include the effects of this adoption in the 2001 financial statements. Management has concluded that the impact of SFAS No. 133 will not be material.
In March 2000, the FASB issued guidance on stock compensation issues in the form of FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25." The Interpretation clarifies the application of APB Opinion No. 25 for certain issues. The Interpretation is effective beginning July 1, 2000. Management has completed its analysis of FASB Interpretation No. 44 and has determined that it is not applicable at this time.
Note C - Statements of Cash Flows
Other items not (providing) or requiring cash consist of:
2000 1999 1998
Net loss on sale/writedown of fixed assets $ 515 $ 326 $ 84 Other non-cash items (705) 274 401
$ (190) $ 600 $ 485
Income taxes paid were $8,619, $7,517, and $ 5,992 during 2000, 1999 and 1998, respectively.
Interest paid was $1,700, $1,868, and $1,955 during 2000, 1999 and 1998, respectively.
Excluded from the 2000, 1999 and 1998 Consolidated Statements of Cash Flows is $140, $268, and $1,716, respectively, of plant and equipment acquisitions in accounts payable or under capital leases.
Note D - Inventories
Net Inventories
Inventories, net of inventory reserves, are as follows:
At 2000 1999
Raw materials $ 10,685 $ 10,883 Work-in-process 8,165 9,177 Finished goods 14,472 13,265
$ 33,322 $ 33,325
Inventory Reserves
At 2000 1999 1998
Beginning balance $ 3,288 $ 3,164 $ 3,825 Provisions for obsolete and slow moving inventory 869 894 366 Charge-offs (646) (770) (1,027)
Ending balance $ 3,511 $ 3,288 $ 3,164
Note E - Property, Plant and Equipment
Property, plant and equipment, at cost, is summarized as follows:
Estimated Useful Lives At 2000 1999 (Years)
Land $ 1,688 $ 1,542 -
Buildings and improvements 31,170 30,078 5-40
Machinery and equipment 149,739 136,235 3-20
Capital leases 764 951 See Below
Construction in progress 6,298 11,705 -
189,659 180,511
Less accumulated depreciation (106,954) (98,136)
Net property, plant and equipment $ 82,705 $ 82,375
Capital leases consist primarily of automobiles and telephone 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 $10,601, $10,902, and $11,470 for 2000, 1999 and 1998, respectively.
Depreciation expense relating to property, plant and equipment was $11,545, $10,569, and $9,477 for 2000, 1999 and 1998, respectively.
Note F - Debt
The aggregate maturities of debt are as follows:
2001 $ 20,939 2002 2,261 2003 1,605 2004 1,665 2005 1,408 Thereafter 2,114
$ 29,992
It is not practical for the Company to estimate the fair value of the debt it has with Raymark due to the uncertainties associated with the current bankruptcy proceedings. Additionally, the note payable to the former principal owner of AFM is being disputed (see Note A). Due to the uncertainty associated with the outcome of the court case, it is not practical to estimate the fair value of the debt. The remaining bank debt of the Company is at variable interest rates, and the carrying amount approximates fair value.
Domestic Bank Debt
On September 28, 2000, Raybestos Products Company and Raytech Automotive Components Company terminated the Loan and Security Agreements with Bank of America Commercial Funding and entered into a new Loan and Security Agreement ("Agreement"), with Congress Financial Corporation. The new Agreement provides for Raybestos Products Company ("RPC"), Raytech Automotive Components Company ("RACC") and Automotive Composites Company ("ACC") 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, commencing
Note F, continued
November 1, 2000, with the final payment being the remainder of the balance. 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 rate at December 31, 2000 was 9.5%. The agreement includes certain covenant restrictions. At December 31, 2000, the net pledged assets of RPC, RACC and ACC amounted to $96,543, consisting of cash, accounts receivable, inventory, property, plant and equipment and all other tangible and intangible assets. At December 31, 2000, the outstanding balance from the revolving line of credit amounted to $2,689 with $4,800 available in additional borrowings (availability is determined based on qualified accounts receivable and inventory). The balance under the term loan at December 31, 2000 was $4,750, of which $1,000 is classified as current and $3,750 is classified as long-term.
The outstanding balances at January 2, 2000 with Bank of America Commercial Funding were $12,265 for the revolving loan and $4,408 for the term loan. The additional borrowing available under the revolving loan at January 2, 2000 was zero.
Foreign Bank Debt
The Company's wholly-owned German subsidiaries (Raybestos Industrie-Produkte GmbH ["RIP"] and Raytech Composites Europe GmbH ["RCE"]) have available lines of credit with several German banks amounting to DM8,010 ($3,859). Interest is charged at rates between 8.3% and 10.8%. The lines are repayable on demand. The amounts outstanding under these available lines of credit at December 31, 2000 and January 2, 2000 were DM5,441 ($2,621) and DM3,686 ($1,898), respectively, and are classified as current debt. At December 31, 2000 and January 2, 2000, the remaining available lines of credit amounted to DM2,569 ($1,238) and DM4,324 ($2,226), respectively.
During 2000 and 1999, RCE and RIP entered into various loan agreements with Commerzbank for amounts ranging from DM790 to DM2,847. The maturities range from September 2006 through December 2012. The loans bear interest at rates between 2.5% and 8.5%. At December 31, 2000 and January 2, 2000, respectively, the net pledged assets amounted to DM20,738 ($9,991) and DM19,314 ($9,945), consisting of machinery and equipment. At December 31, 2000 and January 2, 2000 the outstanding balances were DM10,009 ($4,823) and DM8,952 ($4,609), respectively. The current portion of this debt is DM749 ($361) and DM455 ($234) at December 31, 2000 and January 2, 2000, respectively.
Note F, continued
In February 1999, the Company's wholly-owned China subsidiary [Raybestos Friction Products (Suzhou) Co. Ltd. "RFP" ] entered into a loan agreement with the Industrial and Commercial Bank of China. The loan bears interest at 5.85% per annum. As of December 31, 2000 and January 2, 2000, the balance due on the loan amounted to Rmb 4,000 ($483) and Rmb 5,000 ($604), respectively, 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 5,000 ($604). The loan bears interest at 5.94% per annum and matures in December 2002. As of December 31, 2000 the balance due on the loan amounted to Rmb 5,000 ($604) and is classified as long-term debt.
The weighted average rates on all domestic and foreign bank notes payable at December 31, 2000 and January 2, 2000 were 8.08% and 8.67%, respectively.
Note Payable to Former AFM Principal
The note payable to the former AFM principal dated April 1998 is payable in three equal annual installments and bears interest at prime. As noted in Note A, the Company is litigating the outstanding payments on this note. The entire balance has been classified as current, anticipating settlement of this issue in 2001.
Raymark Debt
The notes due to Raymark are the result of the purchase of the Wet Clutch and Brake Division and the German subsidiary from Raymark in 1987. In addition, Raytech Composites, Inc. ("RCI") entered into loan agreements with Raymark.
In December 1992, the Company and Raymark amended the Asset Purchase Agreement of the Wet Clutch and Brake Division. Under the terms of the amendment, the original note in the principal amount of $23,074 plus accrued interest of $17,543 was canceled and replaced by an uncollateralized promissory note in the amount of $40,617, bearing interest at the rate of 6% per annum and payable in equal monthly installments of $650 commencing April 1993. The principal portion of the monthly installments was to be paid into an escrow account pending clearance of all Raymark encumbrances and liabilities as provided by the agreement (refer to Note A). In May 1995, the escrow agreement was amended, and the Company reclaimed the balance in the escrow and suspended payment of the monthly installments as a result of the Third Circuit Court of Appeals decision that jeopardized the assets purchased from Raymark in 1987 being free of all Raymark related encumbrances and liabilities. In February 1997, monthly installments of $650 were resumed to ensure indemnification for Raymark liabilities. In connection with a complaint filed by the creditors' committee and a subsequent Bankruptcy Court injunction, the Company halted payments on the Wet Clutch and Brake note in December 1997, and management has concluded that interest should not be accrued during the cease payment period. Accordingly, no interest has been accrued in fiscal 2000, 1999 and 1998. The ultimate resolution of interest to be paid on the note is subject to the uncertainties inherent in reorganization proceedings under the bankruptcy code. Costs incurred by the Company subject to the indemnification clause of the 1987 agreements are being applied as a reduction of the note obligations. These costs amounted to $9,616, $5,256 and $6,322, respectively, for fiscal 2000, 1999, and 1998. At December 31, 2000 and January 2, 2000, the principal balance of the Wet Clutch and Brake note was $5,803 and $15,419, respectively.
As agreed by the Company and Raymark, remaining obligations under the German subsidiary note, payable in German deutsche marks (DM) are suspended pending the assets purchased being free of all Raymark related encumbrances and liabilities. At December 31, 2000 and January 2, 2000, the balances due on the German note amounted to DM3,795 ($1,828) and DM3,795 ($1,954), respectively. The note bears interest at 7.5% per annum. As of December 31, 2000 and January 2, 2000, the accrued interest amounted to DM1,611 ($776) and DM1,332 ($686), respectively, and is included in accrued liabilities.
In September 1993 and January 1994, RCI entered into loan agreements with Raymark for $2,500 and $3,000, respectively. As of December 31, 2000 and January 2, 2000, RCI has $3,000 outstanding under the loan agreements. The loans bear interest at 6% per annum. As of December 31, 2000 and January 2, 2000, the accrued interest amounted to $1,303 and $1,123, respectively, and is included in accrued liabilities.
The Company has classified all of the Raymark debt as current at December 31, 2000 due to the pending status of the bankruptcy proceedings (see Note A).
Note G - Research and Development
Cost of research and new product development amounted to $6,822 in 2000, $7,085 in 1999, and $5,642 in 1998 and is included in selling, general and administrative expenses in the Consolidated Statements of Operations.
Note H - Related Parties
During 1988, the Company repurchased 200,000 shares of its common stock from Echlin Inc. (since acquired by Dana Corporation) in exchange for approximately $1,200 of credit on future product sales from the Company to Dana, which is pre-petition debt under the Company's bankruptcy filing. At December 31, 2000, Dana's voting interest in the Company is 15.5%. This debt is included in "Liabilities Subject to Compromise" at December 31, 2000.
In 1990 and 1991, Raytech Powertrain, Inc., a subsidiary of the Company, and owner of all of the capital stock of Allomatic Products Company ("APC"), sold approximately 45% of the capital stock of APC to a group of investors, including Craig Smith, for the purpose of partially financing APC's move from New York to Indiana and for the further growth of its business. Subsequently, all APC stock held by Craig Smith was transferred to relatives and related companies, including Universal Friction Composites, Inc. (see below), and accordingly, in the opinion of General Counsel of the Company, remains 40% beneficially owned by him. The Company's Board of Directors reviewed Craig Smith's beneficial ownership of the APC stock at length and recommended continued disclosure of the related party transactions and appointed the General Counsel of the Company to monitor and report all such related party transactions in the future.
Earnings attributable to minority shareholders of Allomatic Products Company have been presented net of income tax as minority interest in the Consolidated Statements of Operations.
During 1998 and 1997, the Company purchased yarn from Universal Friction Composites ("UFC"), a company that management has been informed is owned by Bradley C. Smith, son of Craig Smith. At December 31, 2000 and January 2, 2000, $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 31, 2000 and January 2, 2000.
Also see discussion regarding Raymark in Note A.
Note I - Income Taxes
(Loss) income before (benefit) provision for income taxes and minority interest consists of:
2000 1999 1998 Domestic $(7,186,663) $26,260 $25,314 Foreign 2,754 285 (514) $(7,183,909) $26,545 $24,800
The Company's income tax (benefit) provision consists of the following:
2000 1999 1998 Current: Federal $ 7,698 $ 5,163 $ 4,229 State 1,823 1,158 1,074 Foreign 330 961 580 Deferred: Federal (118,236) 775 636 State (18,494) 121 100 Foreign 457 376 325 Total income taxes $(126,422) $ 8,554 $ 6,944
Reconciliation of (loss) income from operations multiplied by the statutory federal tax rate to reported income tax (benefit) expense is summarized as follows:
2000 1999 1998 Pretax (loss) income multiplied by the statutory rate (35%) $(2,514,368) $ 9,291 $ 8,680
Increases (decreases) resulting from: Effect of foreign income taxes net of loss carry- forwards utilized (177) 1,248 670 Utilization of tax credits (205) (308) (397) Net change in federal valuation allowance 2,397,794 (539) (292) State income taxes, net of federal benefit (10,836) 831 763 Adjustment of prior years' accruals 628 447 (992) Raymark indemnification payments (896) (2,362) (1,736) Amortization of nondeductible intangibles 294 284 174 Other 1,344 (338) 74 Income tax (benefit) expense $(126,422) $ 8,554 $ 6,944
Note I, continued
Deferred tax assets (liabilities) are comprised of the following:
2000 1999 1998
Liabilities subject to compromise $ 2,766,573 $ - $ - Excess of book provisions over tax deductions 2,557 2,928 3,559 Postretirement benefit 5,149 4,758 4,325 Excess of tax basis over book basis of assets due to restructuring 1,312 1,806 2,301 Foreign loss carryforwards 925 1,822 1,927 Other 947 947 947 Gross deferred tax assets 2,777,463 12,261 13,059 Deferred tax asset valuation allowance (2,632,637) (4,633) (4,851) Deferred tax assets 144,826 7,628 8,208 Gross deferred tax liabilities (excess of tax over book depreciation) ( 5,309) (4,384) (3,692)
Net deferred tax asset $ 139,517 $ 3,244 $ 4,516
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 expects 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 has recorded a valuation allowance of $2.633 billion against the deferred tax asset to state it at its expected net realizable value. When the Plan becomes effective and the liabilities subject to compromise are settled for less than the recorded amount of allowed claims, the net deferred tax asset will be adjusted accordingly.
In 1999 and 1998, the net deferred asset represents future tax deductions that can be realized upon carryback to prior years and German loss carryforwards.
At December 31, 2000, the Company had foreign loss carryforwards of $3,486 (Germany $2,254, China $1,010 and U.K. $222), which do not expire. A valuation allowance has been
Note I, continued
provided against the tax benefit of the U.K. and China loss carryforwards due to uncertainty of future profitability of these operations.
The Company has in process an Internal Revenue Service tax audit for the fiscal years 1996 through 1999. The IRS has proposed disallowance of $9.9 million of bankruptcy related costs from 1996 through 1998, which are included in the indemnification agreement with Raymark. The Company has deducted approximately $17.0 million of such costs through December 31, 2000 and continues to believe these costs are deductible. The ultimate resolution of the Company's liability, if any, is dependent on the interpretation of a complex set of facts and applicable legal precedents. While the Company and its advisors believe the Company's position is supported by the facts and the weight of the legal precedents, it is reasonably possible, through a different factual analysis and application of countervailing legal authority, that a final determination could be adverse to the Company. As such, the Company intends to contest the proposed disallowance and has not recorded any related provisions. Should the IRS ultimately prevail in its claim, an adjustment related to prior year tax accruals would be required.
Note J - Employee Benefits
Note J, continued
Note J, continued
The Company's German subsidiaries have unfunded defined benefit plans covering certain employees.
Pension Benefits 2000 1999
Change in benefit obligations Benefit obligations at beginning of year $2,319 $2,562 Service cost 60 67 Interest cost 150 163 Actuarial (gain) loss (97) 16 Benefits paid (115) (121) Translation adjustment (149) (368)
Benefit obligations at end of year $2,168 $2,319
Change in plan assets Fair value of plan assets at beginning of year $ - $ - Actual return on plan assets - - Employer contribution 115 121 Plan participants' contributions - - Benefits paid (115) (121)
Fair value of plan assets at end of year $ - $ -
Funded Status Reconciliation and Key Assumptions
Pension Benefits 2000 1999
Funded status $(2,168) $(2,319) Unrecognized actuarial loss 382 346 Unrecognized transition obligation 129 183
Accrued benefit cost $(1,657) $(1,790)
Note J, continued
Note K - Segment Reporting
The Company's operations are categorized into three business segments based on management structure, product type and distribution channel as described below.
The Wet Friction segment produces specialty engineered products for heat resistant, inertia control, energy absorption and transmission applications. The Company markets its products to automobile original equipment manufacturers, heavy duty original equipment manufacturers, as well as farm machinery, mining, truck and bus manufacturers.
The Dry Friction segment produces engineered friction products, primarily used in original equipment automobile and truck transmissions. The clutch facings produced by this segment are marketed to companies who assemble the manual transmission systems used in automobiles and trucks.
The Aftermarket segment produces specialty engineered products primarily for automobile and lift truck transmissions. In addition to these products, this segment markets transmission filters and other transmission related components. The focus of this segment is marketing to warehouse distributors and certain retail operations in the automotive aftermarket.
Information relating to operations by industry segment follows:
NOTE K, continued
NOTE K, continued
2000 1999 1998
Customer A $ 31,159 $ 29,976 $ 30,716 Customer B 36,820 37,305 36,974 Customer C 18,430 25,588 22,799 Customer D 13,917 17,035 13,971 NOTE K, continued
NOTE K, continued
NOTE L - Summarized Quarterly Financial Data (Unaudited) (in thousands except share and market data)
Fiscal Quarters Ended 2000 April 2 July 2 October 1 December 31
Net sales $ 67,475 $ 61,122 $ 56,755 $ 54,180 Gross profit 18,109 14,824 14,012 12,544 Income (loss) before provision for taxes and minority interest 9,106 (7,201,306)(1) 5,918 2,373 Net (loss) income 4,820 (7,063,828)(1) 2,972 (2,942) Basic earnings (loss) per share(2) 1.38 (2,023.70)(1) .84 (.84) Diluted earnings (loss) per share(2) 1.36 (2,023.70)(1) .84 (.84)
Market range: -high 4.00 3.94 3.31 2.94 -low 3.33 3.00 2.63 1.88 Dividends - - - -
(1) 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 A to the Consolidated Financial Statements. (2) Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share for 2000 does not equal the total computed for the year due to the impact of the average weighted shares for the year versus the average weighted shares in the second quarter and the magnitude of the recorded loss in the second quarter.
Fiscal Quarters Ended 1999 April 4 July 4 Oct. 3 January 2
Net sales $ 67,343 $ 65,833 $ 62,473 $ 56,317 Gross profit 16,526 16,351 14,477 12,884 Income before provision for taxes and minority interest 7,599 7,831 5,260 5,855 Net income 4,488 5,339 3,378 3,159 Basic earnings per share 1.31 1.56 .98 .91 Diluted earnings per share 1.29 1.53 .94 .89
Market range: -high 3.25 4.25 7.56 4.13 -low 2.75 2.56 3.75 3.19 Dividends - - - -
Note M - Supplementary Financial Statement Detail
At 2000 1999
OTHER CURRENT ASSETS
Deferred income taxes $ 2,686 $ 2,938 Non-trade receivables 1,408 1,095 Prepaid insurance 361 371 Other 2,004 3,765 $ 6,459 $ 8,169
ACCOUNTS PAYABLE
Trade accounts payable $ 12,699 $ 17,512 Cash overdraft 371 993 $ 13,070 $ 18,505
ACCRUED LIABILITIES
Property taxes $ 2,632 $ 2,452 Accrued interest 2,058 1,811 Wages and other compensation and related taxes 5,106 7,948 Income taxes payable 1,199 - Pensions and employee benefits 2,806 2,411 Dana claim (formerly Echlin [see Note H]) - 1,183 Environmental cleanup 3,000 - Other 5,973 6,829 $ 22,774 $ 22,634
LIABILITIES SUBJECT TO COMPROMISE
Personal injury asbestos litigation claims $6,760,000 $ - Governmental environmental claims 431,750 - Raymark pension claims 16,000 - Raymark retiree claims 2,500 - Dana claim (formerly Echlin [see Note H]) 1,183 - $7,211,433 $ -
OTHER LONG-TERM LIABILITIES
Long-term pensions $ 1,714 $ 1,669 Minority interest 6,505 5,014 Other 816 453 $ 9,035 $ 7,136
Note M, continued
Fiscal Year 2000 1999 1998
OTHER INCOME, NET
Interest income $ 592 $ 352 $ 412 Other, net 436 849 653 $ 1,028 $ 1,201 $ 1,065
ALLOWANCE FOR BAD DEBTS
Beginning balance $ 1,350 $ 1,109 $ 1,186 Provisions 26 388 655 Charge-offs (142) (147) (732) Ending balance $ 1,234 $ 1,350 $ 1,109
AMORTIZATION OF INTANGIBLE ASSETS
Raytech Automotive Components Company $ 751 $ 751 $ 477 Allomatic Products Company 57 57 57 Other 14 166 15 $ 822 $ 974 $ 549
Note M, continued
CONDENSED FINANCIAL INFORMATION OF RAYTECH CORPORATION (PARENT)
Summary financial information of the parent holding company, Raytech Corporation, which is operating under Chapter 11 of the U.S. Bankruptcy Code, is as follows:
Balance Sheets At fiscal year ended 2000 1999
Current Assets: Cash $ 143 $ 427 Other current assets 2 2 Total current assets 145 429
Investment in subsidiaries 96,618 83,336
Deferred taxes 137,035 192 Other long-term assets 2,125 2,019 Total assets $ 235,923 $ 85,976
Current Liabilities: Accounts payable and accrued liabilities $ 2,796 $ 4,488
Liabilities subject to compromise 7,211,433 - Other liabilities 832 700
Total liabilities 7,215,061 5,188
Shareholders' equity Common stock 5,651 5,613 Additional paid in capital 70,631 70,564 (Accumulated deficit) retained earnings (7,049,641) 9,337 Accumulated other comprehensive loss (1,218) (165)
(6,974,577) 85,349
Less treasury stock at cost (4,561) (4,561)
Total shareholders' (deficit) equity (6,979,138) 80,788
Total liabilities and shareholders' equity $ 235,923 $85,976
Note M, continued
Note M, continued
NOTE TO CONDENSED FINANCIAL INFORMATION OF RAYTECH CORPORATION (PARENT)
Note 1: Basis of Presentation
The accompanying financial statements of Raytech Corporation, a holding company, include the following accounts:
- Cash in debtor-in-possession accounts.
- All of the Company's income tax accounts except as related to Allomatic Products Company and foreign subsidiaries.
- Costs and expenses and related accounts payable and accrued liabilities which in the opinion of management relate to the operation of the holding company. Such costs consist principally of compensation and related costs of certain employees designated as employees of the Registrant, operating costs of the Shelton, Connecticut, headquarters facility, certain professional fees, shareholder fees, public relations expenses and bankruptcy-related (asbestos personal injury, environmental, and employee benefits) claims. These costs are financed with subsidiary dividends.
- Capital accounts of the holding company.
The investment in and operating results of the holding company's wholly- and majority-owned subsidiaries are reflected on the equity method.
Note N - Commitments
Rental expense amounted to $1,379, $1,361, and $1,334, in 2000, 1999 and 1998, respectively. The approximate minimum rental commitments under non-cancelable leases at December 31, 2000 were as follows: 2001, $633; 2002, $630, 2003, $371; 2004, $248; 2005 $172 and thereafter, $96.
Note O - 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.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock plans as allowed under FASB Statement No. 123, "Accounting for Stock-Based Compensation." Had compensation cost been determined consistent with FASB No. 123, pro forma net income for the years ended January 2, 2000 and January 3, 1999 would have been $16,012 and $16,106, respectively. There was no pro forma impact on net loss for the year ended December 31, 2000 as the options outstanding were fully vested in 1999. Pro forma basic and diluted earnings per share for the years ended January 2, 2000 and January 3, 1999 would have been $4.66 and $4.55, respectively, and $4.73 and $4.54, respectively.
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.
Note O, continued
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values