UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)of the
Securities Exchange Act of 1934
For the Quarter Ended September 27, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 1-9298
RAYTECH CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-1182033
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Suite 295, Four Corporate Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices) (Zip Code)
203-925-8023
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
As of September 27, 1998, 3,421,395 shares of the Registrant's
common stock, par value $1.00, were issued and outstanding.
Page 1 of 33
<PAGE>
RAYTECH CORPORATION
INDEX
Page
Number
PART I. UNAUDITED FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets as
at September 27, 1998 and December 28, 1997 3
Condensed Consolidated Statements of
Operations for the thirteen weeks
and thirty-nine weeks ended
September 27, 1998 and September 28, 1997 4
Condensed Consolidated Statements of Cash
Flows for the thirteen weeks and thirty-nine
weeks ended September 27, 1998 and 5
September 28, 1997
Consolidated Statements of Shareholders'
Equity - 1998 6
Consolidated Statements of Shareholders'
Equity - 1997 7
Notes to Condensed Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 31
Signature 33
-2-<PAGE>
RAYTECH CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)(Unaudited)
<CAPTION>
Sept. 27, Dec. 28,
As at 1998 1997
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 8,879 $ 9,913
Trade accounts receivable, less allowance of $900
for 1998 and $1,186 for 1997 34,481 26,903
Inventories 30,008 28,202
Other current assets 9,436 8,590
Total current assets 82,804 73,608
Property, plant and equipment 156,722 143,131
Less accumulated depreciation 90,039 82,141
Net property, plant and equipment 66,683 60,990
Investment in and advances to affiliates - 10,249
Other assets 24,945 8,538
Total assets $174,432 $153,385
LIABILITIES
Current liabilities
Notes payable $ 22,358 $ 13,039
Current portion of long-term debt - Raymark 11,037 9,970
Current portion of long-term debt 1,121 130
Accounts payable 16,498 20,703
Accrued liabilities 17,657 22,442
Total current liabilities 68,671 66,284
Long-term debt due to Raymark 20,784 21,988
Long-term debt 5,831 1,178
Postretirement benefits other than pensions 10,848 10,044
Other long-term liabilities 6,757 5,429
Total liabilities 112,891 104,923
SHAREHOLDERS' EQUITY
Capital stock
Cumulative preference stock, no par value
800,000 shares authorized, none issued & outstanding
Common stock, par value $1.00 - -
7,500,000 shares authorized, 5,553,454 and 5,417,367
issued and outstanding in fiscal 1998 and 1997, respectively 5,553 5,417
Additional paid in capital 70,501 70,275
Accumulated deficit (10,160) (23,384)
Accumulated other comprehensive income 208 715
66,102 53,023
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 61,541 48,462
Total liabilities and shareholders' equity $174,432 $153,385
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except share data)
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 39 Weeks Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $ 61,486 $ 56,251 $ 188,026 $176,132
Cost of sales (48,515) (44,469) (143,887) (136,739)
Gross profit 12,971 11,782 44,139 39,393
Selling and administrative expenses (7,485) (5,395) (23,101) (18,364)
Operating profit 5,486 6,387 21,038 21,029
Interest expense (299) (338) (1,359) (983)
Interest expense - Raymark (46) (563) (136) (1,594)
Other income (expense), net 11 86 587 1,007
Income before provision for income
taxes and minority interest 5,152 5,572 20,130 19,459
Provision for income tax (1,744) (1,677) (5,653) (5,812)
Minority interest (327) (185) (1,253) (512)
Net income $ 3,081 $ 3,710 $ 13,224 $ 13,135
Basic earnings per share $ .90 $ 1.14 $ 3.90 $ 4.03
Diluted earnings per share $ .87 $ 1.05 $ 3.71 $ 3.73
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Sept. 27, Sept. 28,
For the 39 Weeks Ended 1998 1997
<S> <C> <C> <C>
Net cash provided by operating activities $ 7,970 $ 15,735
Cash flow from investing activities:
Capital expenditures (11,936) (14,754)
Proceeds on sale of property, plant and equipment 136 125
Note receivable due from AFM - 101
Purchase of common stock in AFM (3,337) -
Payments to AFM for land and building - (7,076)
Net cash used in investing activities (15,137) (21,604)
Cash flow from financing activities:
Cash overdraft (739) -
Net (payments) proceeds from short-term borrowings 1,175 (373)
Net borrowing (payments) under revolving
line of credit 3,456 4,078
Proceeds on long-term debt 2,356 462
Principal payments on long-term debt (129) (126)
Principal payments on borrowings from Raymark (349) (3,905)
Other 356 97
Net cash used in financing activities 6,126 233
Effect of exchange rate changes on cash 7 (89)
Net change in cash and cash equivalents (1,034) (5,725)
Cash and cash equivalents at beginning of period 9,913 11,341
Cash and cash equivalents at end of period $ 8,879 $ 5,616
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Number Paid Other
of Shares Common in Accumulated Comprehensive Treasury Stock
Issued Stock Capital Deficit Income Cost Shares
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 28, 1997 5,417,367 $ 5,417 $70,275 $ (23,384) $ 715 $(4,561) (2,132,059)
Stock options exercised 136,087 136 226
Cumulative translation
adjustment (507)
Purchase of treasury
stock
Net income for the
period ended
September 27, 1998 13,224
Balance,
September 27, 1998 5,553,454 $ 5,553 $70,501 $ (10,160) $ 208 $(4,561) (2,132,059)
<FN>
The accompanying notes are an integral part of these statements.<PAGE>
</TABLE>
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Number Paid Other
of Shares Common in Accumulated Comprehensive Treasury Stock
Issued Stock Capital Deficit Income Cost Shares
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 29, 1996 5,371,821 $ 5,372 $70,208 $ (38,922) $ 1,918 $(4,561) (2,132,059)
Stock options exercised 38,162 38 59
Cumulative translation
adjustment (1,466)
Purchase of treasury
stock
Net income for the
period ended
September 28, 1997 13,135
Balance,
September 28, 1997 5,409,983 $ 5,410 $70,267 $ (25,787) $ 452 $(4,561) (2,132,059)
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
(Unaudited)
NOTE: For purposes of the notes and Item 2, Raytech Corporation
and its subsidiaries are referenced on a consolidated basis
as "Raytech" or the "Company" where appropriate.
NOTE A - RESTRUCTURING OF RAYTECH, CHAPTER 11 PROCEEDINGS
AND OTHER LITIGATION
Raytech Corporation ("Raytech" or the "Company") was
incorporated on June 13, 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 at its October 1986 Annual Meeting 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. Each warrant entitled the
holder to purchase one share of Raytech common stock at a price of
$9.00 at any time, subject to certain limitations, prior to
October 1, 1991, extended to 1994. The warrants expired on
October 1, 1994. Raymark, thereby, became a wholly-owned
subsidiary of Raytech. 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.
Prior to the formation of Raytech, Raymark was first sued
in an asbestos-related claim in 1971 and has since been named as a
defendant in more than 88,000 lawsuits in which substantial
damages have been sought for injury or death from exposure to
airborne asbestos fibers. More than 35,000 of such lawsuits have
been disposed of by settlements, dismissals, summary judgments and
trial verdicts at a cost in excess of $333,000 principally covered
by Raymark's insurance. Subsequent to the sale of Raymark, as
described below, 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.
<PAGE>
In accordance with the restructuring plan, Raytech
purchased the Wet Clutch and Brake Division and German subsidiary
in 1987 from its then wholly-owned subsidiary, Raymark. Each such
acquisition was financed through borrowed funds from new lenders
and Raytech stock and notes. Pursuant to these acquisitions,
Raymark agreed to indemnify Raytech for any future legal
liabilities and costs that may result from asbestos litigation.
Management believed that each purchase by Raytech from Raymark
complied with Raytech's restructuring plan principles of (I)
paying fair market value, (ii) acquiring businesses that did not
give rise to any asbestos-related or other claims against Raymark,
(iii) permitting Raymark to retain the proceeds for its ongoing
business and creditors, (iv) entering the transactions in good
faith and not to hinder, delay or defraud creditors, and (v)
conducting its affairs independent of Raymark.
In May 1988, following shareholder approval, Raytech sold
all of the Raymark stock to Asbestos Litigation Management, Inc.,
thereby divesting itself of Raymark. Consideration received for
the Raymark stock consisted of $50 cash paid at the closing and a
7-l/2% $950 promissory note paid in six equal annual installments.
Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-
defendant with Raymark and other named defendants in approximately
3,300 asbestos-related lawsuits as a successor in liability to
Raymark. The dollar value of these lawsuits cannot be estimated.
Until February 1989, the defense of all such lawsuits was provided
to Raytech by Raymark in accordance with the indemnification
agreement included as a condition of the purchase of the Wet
Clutch and Brake Division and German subsidiary from Raymark in
1987. In February 1989, an involuntary petition in bankruptcy was
filed against Raymark, and subsequently, a restrictive funding
order was issued by an Illinois Circuit Court, which required one
of Raymark's insurance carriers to pay claims but not defense
costs, and another insurance carrier had been declared insolvent.
These circumstances caused Raymark to be unable to fund the costs
of defense to Raytech in the asbestos-related lawsuits referenced
above, as provided in the indemnity section of the acquisition
agreement. Raytech management was informed that Raymark's cost of
defense and disposition of cases up to the automatic stay of
litigation under the involuntary bankruptcy proceedings was
approximately $333 million of Raymark's total insurance coverage
of approximately $395 million. Raytech management was also
informed that as a result of the dismissal of the involuntary
petition, Raymark again encountered asbestos-related lawsuits but
had received $27 million from a state guarantee association to
make up the insurance policies of the insolvent carrier and had
$32 million in other policies to defend against such litigation.
However, in March 1998 Raymark filed a voluntary bankruptcy
petition naming several large asbestos-related judgment creditors.
In an asbestos-related personal injury case 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 costs of defense recited above, and in order to obtain a
ruling binding across all jurisdictions as to whether Raytech is
liable as a successor for asbestos-related and other claims,
including claims yet to be filed relating to the operations of
Raymark or its predecessors, 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 has been 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. 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 estate.
In June 1989 Raytech filed a class action in the
Bankruptcy Court against all present and future asbestos claimants
seeking a declaratory judgment that it not be held liable for the
asbestos-related liabilities of Raymark. It was the desire of
Raytech to have this case heard in the U.S. District Court, and
since the authority of the Bankruptcy Court is referred from the
U.S. District Court, upon its motion and argument the U.S.
District Court withdrew its reference of the case to the
Bankruptcy Court and thereby agreed to hear and decide the case.
In September 1991, the U.S. District Court issued a ruling
dismissing one count of the class action citing as a reason the
preclusive effect of the 1988 Oregon case, previously discussed,
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. The
remaining counts before the U.S. District Court involve the
transfer of Raymark's asbestos-related liabilities to Raytech on
the legal theories of alter-ego and fraudulent conveyance. 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 December 1992, Raytech
filed a motion to activate the case and to obtain rulings on the
remaining counts which was denied by the U.S. District Court. In
October 1993, the creditors' committee asked the Court to certify
the previous dismissal of the successor liability count. In
February 1994, the U.S. District Court granted the motion to
certify and the successor liability dismissal was accordingly
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.
Since the bankruptcy filing several entities have
asserted claims in Bankruptcy Court alleging environmental
liabilities of Raymark based upon similar theories of successor
liability against Raytech as alleged by asbestos claimants. These
claims are not covered by the class action referenced above and
will be resolved in the bankruptcy case. The environmental claims
include a claim of the Pennsylvania Department of Environmental
Resources ("DER") to perform certain activities in connection with
Raymark's Pennsylvania manufacturing facility, which includes
submission of an acceptable closure plan for a landfill containing
hazardous waste products located at the facility and removal of
accumulated baghouse dust from its operations. In March 1991, the
Company entered a Consent Order which required Raymark to submit a
revised closure plan which provides for the management and removal
of hazardous waste, for investigating treatment and monitoring of
any contaminated groundwater and for the protection of human
health and environment at the site, all relating to the closure of
the Pennsylvania landfill and to pay a nominal civil penalty. The
estimated cost for Raymark to comply with the order is $1.2
million. The DER has reserved its right to reinstitute an action
against the Company and the other parties to the DER order in the
event Raymark fails to comply with its obligations under the
Consent Order. Another environmental claim was filed against the
Company by the U.S. Environmental Protection Agency for civil
penalties charged Raymark in the amount of $12 million arising out
of alleged Resource Conservation and Recovery Act violations at
Raymark's Stratford, Connecticut, manufacturing facility.
In January 1997, the U.S. Environmental Protection Agency
("EPA") and the State of Connecticut filed suit against Raymark
claiming an amended amount of $300 million in damages for cleanup
of the Stratford, Connecticut, site. The EPA has also filed a
bankruptcy claim against Raytech as a successor to Raymark for
cleanup of the Stratford site and other Raymark sites.
Determination of Raytech's liability for such claims, if any, is
subject to Bankruptcy Court deliberations and proceedings.
Under bankruptcy rules, the debtor-in-possession has
an exclusive period in which to file a reorganization plan.
Such exclusive period had been extended by the Bankruptcy Court
pending the conclusion of the successor liability litigation.
However, in December 1992, the creditors' committee filed a
motion to terminate the exclusive period to file a plan of
reorganization. At a hearing in May 1993, the motion was
denied by the Bankruptcy Court but was appealed by the
creditors' committee. In November 1993, the U.S. District
Court reversed the Bankruptcy Court and terminated the
exclusive period to file a plan of reorganization effective in
January 1994. Accordingly, any party in interest, including
the debtor, the creditors' committee, or a creditor could
thereafter file a plan of reorganization.
In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose
of seeking confirmation allowing Raytech to emerge from the
bankruptcy filed March 10, 1989. In September 1994, the
creditors' committee filed its own Plan of Reorganization in
competition to the Debtor's Plan ("Creditors' Plan"). Upon
motion of the parties and support of the Bankruptcy Court, the
major interested parties agreed in August 1995 to participate
in non-binding mediation to attempt to effectuate a consensual
plan of reorganization. The mediation process commenced in
October 1995 and was concluded in March 1996 without agreement
for a consensual plan of reorganization. The competing plans
of Raytech and its creditors then returned to Bankruptcy Court
procedures.
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
include 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 provide for
all general unsecured creditors including but not limited to
all asbestos and environmental claimants to receive, through a
trust established under The Bankruptcy Code, 90% of the equity
in a company to be reorganized ("Reorganized Raytech") and any
and all refunds of taxes paid or net reductions in taxes owing
resulting from the transfer of equity to the trust,and existing
equity holders in Raytech to receive 10% of the equity in
Reorganized Raytech. Substantive non-economic terms of the
Memorandum of Understanding provide 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 have 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.
Following Raytech's cessation of monthly $650,000 note
payments to Raymark in December 1997, Raymark commenced 33
separate lawsuits against Raytech subsidiaries in various
jurisdictions from New York to California ("Raymark
Litigation") demanding payment or the return of assets for
breach of contract. Raytech filed an adversary proceeding
complaint to halt the Raymark litigation and was granted a
temporary restraining order in December 1997 by the Bankruptcy
Court that remains in effect. The creditors' committee
intervened in the action in support of the restraining order.
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
its attempt to assert control over Raymark and its assets the
creditors' committee, joined by Raytech, the Guardian Ad Litem
for future claimants, the equity committee and the government
agencies moved to have the venue of the Raymark bankruptcies
transferred from Utah to the Connecticut Court. In July 1998,
the Bankruptcy Court issued an order on the motions and
transferred venue to the Connecticut Court. Raymark filed an
appeal of the order but has since withdrawn the appeal. In
October 1998 a trustee was appointed by the United States
Trustee over the Raymark bankruptcies.
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 small waterways near its Indiana facility.
In June, 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. The discovery process in this action is nearing
completion. RPC continues to assess the extent of the
contamination and its involvement and is currently negotiating
with IDEM for an agreed order of cleanup. The Company intends
to offset its investigation and cleanup costs against its notes
payable to Raymark when such costs become known pursuant to the
indemnification clause in the wet clutch and brake acquisition
agreement since it appears that any source of contamination
would have occurred during Raymark's ownership of the Indiana
facility. Blood tests administered to residents in the
vicinity of the small waterways revealed no exposure. The
Company incurred $1,751 in legal and testing costs associated
with this matter during fiscal years 1996 and 1997 and has
filed for reimbursement from Raymark under the indemnification
agreement. The amount is included in other current assets at
December 28, 1997. An additional $137 in legal costs has been
incurred in 1998.
As a result of an inspection, the Company was notified
that the operations purchased from AFM in January 1996 in
Sterling Heights, Michigan, are in violation of a consent order
issued by the Michigan Department of Environmental Quality
("DEQ"). The consent order included a compliance program
providing for measures to be taken to bring certain operations
into compliance and record keeping on operations in compliance.
Potential fines for the violations were as high as $4.6
million; however, negotiations with the DEQ have been in
progress concerning the compliance program and fines for past
violations, resulting in an agreement finalized in September
1998 providing for a consent judgment with a fine of $324.
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.
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
in 1994, 1995, 1996 and 1997 were applied as a reduction of the
note obligations pursuant to the agreements.
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 could have 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 tentative
settlement between Raytech and its creditors as recited in the
Memorandum of Understanding referenced above has defined the
impact of the successor liabilities imposed by the referenced
court decisions. While an outline of principles in the
Memorandum of Understanding has been agreed to by Raytech and
its creditors, a consensual plan of reorganization must still
be written and agreed to and is subject to review and
confirmation by the Bankruptcy Court, which at this time cannot
be predicted with certainty. Should the Memorandum of
Understanding not result in a confirmed plan of reorganization,
the ultimate liability of the Company with respect to asbestos-
related, environmental, or other claims would remain
undetermined. 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 establishment,
settlement and classification of liabilities that may be
required in connection with reorganizing under the Bankruptcy
Code.
NOTE B - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying
condensed consolidated financial statements contain all
adjustments necessary to fairly present the financial position
of Raytech as of September 27, 1998 and December 28, 1997, the
results of operations for the thirty-nine weeks ended
September 27, 1998 and statements of cash flows for the thirty-
nine weeks ended September 27, 1998. All adjustments are of a
normal recurring nature except for the reversal of $1,800 in
environmental accruals for the quarter ended September 28,
1997. The financial statements contained herein should be read
in conjunction with the financial statements and related notes
filed on Form 10-K for the year-ended December 28, 1997.
The year-end condensed balance sheet data was derived
from audited financial statements but does not include all
disclosures required by generally accepted accounting
principles.
NOTE C - INVENTORIES
Net, inventories consist of the following:
Sept. 27, 1998 December 28, 1997
Raw material $10,981 $10,751
Work in process 7,746 7,760
Finished goods 11,281 9,691
$30,008 $28,202
<PAGE>
NOTE D - EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 39 Weeks Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic EPS Computation
Numerator 3,081 3,710 13,224 13,135
Denominator:
Common shares outstanding at
beginning of year 3,285,308 3,239,762 3,285,308 3,239,762
Weighted average of stock options
exercised 135,990 25,582 109,756 16,746
Weighted average shares 3,421,298 3,265,344 3,395,064 3,256,508
Basic earnings per share .90 1.14 3.90 4.03
Diluted EPS Computation
Numerator 3,081 3,710 13,224 13,135
Denominator:
Common shares outstanding
at beginning of year 3,285,308 3,239,762 3,285,308 3,239,762
Weighted average of stock options
exercised 135,990 25,582 109,756 16,746
Dilutive potential common shares 138,746 273,637 165,283 264,979
Adjusted weighted average shares 3,560,044 3,538,981 3,560,347 3,521,487
Diluted earnings per share .87 1.05 3.71 3.73<PAGE>
</TABLE>
NOTE E - COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" and has elected to report
comprehensive income in the condensed consolidated statement of
shareholders' equity. Comprehensive income is the change in
equity from transactions and other events from nonowner
sources. Comprehensive income includes net income and other
comprehensive income. The components and related activity of
accumulated other comprehensive income, resulting from foreign
currency adjustments, are as follows:
Accumulated
Other
Comprehensive Income
Balance December 29, 1996 $ 1,918
Changes year-to-date (1,466)
Balance September 28, 1997 $ 452
Balance December 28, 1997 $ 715
Changes year-to-date (507)
Balance September 27, 1998 $ 208
NOTE F - ACQUISITION OF COMMON STOCK OF AFM
In January 1996 RCI acquired 47% of the stock of
Advanced Friction Materials Company ("AFM"). The Stock
Purchase Agreement ("Agreement") provided for the 53% stock
owner to put his stock to RCI anytime after two years. The
owner put 53% of AFM stock to RCI which assigned its obligation
to purchase the stock to AFM. Based on the formulated amount
of $6,044 in accordance with the Agreement AFM redeemed 53% of
its stock by paying $3,022 in April 1998, and the balance of
$3,022 is payable in three equal annual installments. The note
bears interest at a rate equal to the prime rate as stated in
THE WALL STREET JOURNAL. Effective April 1998, Raytech has
consolidated the results of AFM, which were previously recorded
under the equity method. The pro forma effect on operations
had Raytech made the acquisition at the beginning of the period
is not significant.
With the redemption of 53% of AFM Stock, AFM became a
wholly-owned subsidiary of RCI. AFM has a revolving line of
credit, payable to NationsCredit Commercial Funding which
provides for borrowings up to $10 million in the aggregate,
subject to a borrowing formula based upon AFM's accounts
receivable. The loan bears an interest rate of .50% above the
prime rate. The outstanding balance under the line of credit
is $4,834 at September 27, 1998. The additional borrowing
availability at September 27, 1998 is $2,166 based upon the
asset-based borrowing formula.
NOTE G - DEBT
During the third quarter of fiscal 1998, Raytech
management reconsidered the impact of the January 1998
Bankruptcy Court decision to require Raytech to halt payments
on its promissory note payable to Raymark. Based upon the
Court's decision, Raytech has concluded that interest should
not be accrued during the cease payment period. Accordingly,
no interest has been accrued in the fiscal 1998 third quarter,
and the first and second fiscal 1998 quarters have been
restated to reverse interest accrued during those periods of
$629 and $222, respectively. The effect of the restatement on
net income and earnings per share for the 1998 first and second
quarters was $463 and $169 and $.14 and $.05 per share,
respectively.
The ultimate resolution of interest to be paid on the
note is subject to the uncertainties inherent in reorganization
proceedings under the Bankruptcy Code.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In preparing the discussion and analysis required by
the Federal Securities Laws, it is presumed that users of the
interim financial information have read or have access to the
discussion and analysis for the preceding fiscal year.
RESULTS OF OPERATIONS
Raytech Corporation continued strong performance in
the third quarter with net income of $3.081 million or $.90 per
basic share, compared with $3.710 million or $1.14 per basic
share, for the same quarter last year. Nine-month net income
was $13.2 million, or $3.90 per basic share, compared with
$13.1 million, or $4.03 per basic share for the same nine-
month period in the prior year. Revenue growth, driven by
strong demand for Company products led to the strong
performance. Third quarter profits reflected positive
contributions from the original equipment market, the
aftermarket and the European dry clutch market.
Worldwide net sales and revenues rose 9.3% for the
quarter, to $61.5 million, and 6.8% for nine months, to $188.0
million, compared with $56.3 million and $176.1 million,
respectively, last year. Domestic automotive original
equipment sales account for substantially all of the increased
sales reflecting an increase of $10.0 million for the nine-
month period over the prior year. Domestic aftermarket sales
continue to produce increased sales reflecting a $1.0 million
increase for the nine-month period as compared with the same
period in the prior year. Due to an adverse foreign exchange
translation impact, overseas sales were slightly lower in
dollar terms for both the quarter and year-to-date. The
inclusion of AFM in consolidated results of operations since
April 1988 positively increased revenue by $2.4 million year-to-date.
The ratio of cost of goods sold to net sales was 79
percent in the third quarter of 1998 and 1997. During the
first nine months of 1998, the ratio of cost of goods sold to
net sales was 76.5 percent compared to 77.6 percent in the
first nine months of last year. The increased year-to-date
ratio was primarily due to the effect of increased unit
production offset in part by higher materials and labor costs
and price reductions to certain customers.
Selling, general and administrative expenses
increased 25.8 percent for the nine-month period to $23.1
million, compared to $18.4 million in 1997. The consolidation
of AFM accounts for $2.4 million of the increase or 51 percent
and higher costs associated with increased sales volume.
Additionally, in 1997 $1.8 million of accrued liabilities
relating to potential environmental problems at the Sterling
Heights, Michigan, facility were reversed. This accrual
reversal accounts for 38 percent of the change year-to-year.
The interest expense for the period increased due to increased
borrowings to support increased sales and additional borrowings
associated with the AFM acquisition.
During the third quarter of fiscal 1998, Raytech
management reconsidered the impact of the January 1998
Bankruptcy Court decision to require Raytech to halt payments
on its promissory note payable to Raymark. Based upon the
Court's decision, Raytech has concluded that interest should
not be accrued during the cease payment period. Accordingly,
no interest has been accrued in the fiscal 1998 third quarter,
and the first and second fiscal 1998 quarters have been
restated to reverse interest accrued during those periods of
$629 and $222, respectively. The effect of the restatement on
net income and earnings per basic share for the 1998 first and
second quarters was $463 and $169 and $.14 and $.05 per basic
share, respectively.
The ultimate resolution of interest to be paid on the
note is subject to the uncertainties inherent in reorganization
proceedings under the Bankruptcy Code.
Year 2000
The Company's Year 2000 Program addresses major
assessment areas that include information systems, mainframe
computers, personal computers, the distributed network, the
shop floor, facilities systems, the Company's products, product
research and development facilities, and the readiness of the
Company's suppliers and distribution network. The program
includes the following phases: identification and assessment,
business criticality analysis, project work prioritization,
compliance plan development, remediation and testing,
production implementation, and contingency plan development for
mission critical systems.
The Company's objective is to become Year 2000
compliant with its mission critical activities and systems by
mid 1999, allowing substantial time for further testing,
verification and the final conversion of less important
systems. The Company continues to be on schedule in its plans
to accomplish this objective and has initiated infrastructure
and information systems modifications to ensure that both
hardware and software systems are compliant. The Company also
is requesting assurances from its significant suppliers and
dealers that they are addressing this issue to ensure there
will be no major disruptions.
The total cost of the modifications and upgrades
should not exceed $3.5 million. Although no assurances can be
given as to the Company's compliance, particularly as it
relates to third-parties based upon the progress to date, the
Company does not expect that either future costs of
modifications or the consequences of any unsuccessful
modifications will have a material adverse effect on the
Company's financial position or results of operations.
Accordingly, the Company believes that the most reasonably
likely worst case Year 2000 scenario would not have a material
adverse effect on the Company's financial position or results
of operations. However, the Company is reviewing the need to
develop contingency plans, which should be determined by early
1999, should any Year 2000 failures occur in any of the
assessment areas noted above.
OUTLOOK
The statements continued in this Outlook section are
based on management's current expectations. With the exception
of the historical information contained herein, the statements
presented in this Outlook section are forward-looking
statements that involve numerous risks and uncertainties.
Actual results may differ materially. The forward-looking
statements contained in this Form 10-Q are within the meaning
of Section 27A of the Securities Exchange Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
The Company expects to continue to face an
increasingly competitive automotive environment and a 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 continued
deterioration in 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 continued on a
downward course during the quarter as a result of prospects for
increased global supplies of grains and oilseeds, as well as
fears about the Asian economic crisis. United States crop
conditions remained generally good throughout the Midwest, with
federal financial assistance expected to offset some of the
drought-related losses being experienced in the South. Under
these conditions, it is expected that retail demand for
agricultural equipment will decline for the rest of 1998 and
1999. In light of this outlook and the Company's continuing
commitment to aggressive asset management, production schedules
are being reviewed for the fourth quarter of 1998 and 1999 to
ensure the Company's production meets demand.
The Company's outlook for 1998 worldwide sales and
revenue remains unchanged, calling for sales and revenues to
slightly surpass 1997 record levels.
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash and cash equivalents totaled $8.9
million at September 27,1998 compared to $9.9 million at
December 28, 1997. The decrease in cash is primarily caused by
increased inventory and accounts receivable in support of the
increased sales for the period. Capital investment for the
nine-month period totaled $11.9 million, compared to $14.9
million for the same period in 1997. The level of capital
investment is consistent with planned expenditures in both
years.
The Company uses secured lines of credit for funding
purposes in the United States. Currently, the outstanding
balances from available lines of credit are $13.3 million, with
$2.2 million available in additional borrowings. The Company's
wholly-owned German subsidiaries had available unused lines of
credit amounting to DM2.8 million or $1.7 million, which expire
upon demand. The Company believes that cash provided by
operations will provide sufficient liquidity to meet its
funding requirements.<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 would not be subject
to any asbestos-related or other liabilities of Raymark.
Prior to the formation of Raytech, Raymark was first
sued in an asbestos-related claim in 1971 and has since been
named as a defendant in more than 88,000 lawsuits in which
substantial damages have been sought for injury or death from
exposure to airborne asbestos fibers. More than 35,000 of such
lawsuits were disposed of by settlements, dismissals, summary
judgments and trial verdicts at a cost in excess of $333
million principally covered by Raymark's insurance. Subsequent
to the 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.
Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-
defendant with Raymark and other named defendants in
approximately 3,300 asbestos-related lawsuits as a successor in
liability to Raymark. The dollar value of these lawsuits
cannot be estimated. Until February 1989, the defense of all
such lawsuits was provided to Raytech by Raymark in accordance
with the indemnification agreement included as a condition of
the purchase of the Wet Clutch and Brake Division and German
subsidiary from Raymark in 1987. In February 1989, an
involuntary petition in bankruptcy was filed against Raymark,
and subsequently, a restrictive funding order was issued by an
Illinois Circuit Court, which required one of Raymark's
insurance carriers to pay claims but not defense costs, and
another insurance carrier had been declared insolvent. These
circumstances caused Raymark to be unable to fund the costs of
defense to Raytech in the asbestos-related lawsuits referenced
above, as provided in the indemnity section of the acquisition
agreement. Raytech management was informed that Raymark's cost
of defense and disposition of cases up to the automatic stay of
litigation under the involuntary bankruptcy proceedings was
approximately $333 million of Raymark's total insurance
coverage of approximately $395 million. Raytech management was
also informed that as a result of the dismissal of the
involuntary petition, Raymark again encountered asbestos-
related lawsuits but had received $27 million from a state
guarantee association to make up the insurance policies of the
insolvent carrier and had $32 million in other policies to
defend against such litigation. However, in March 1998 Raymark
filed a voluntary bankruptcy petition naming several large
asbestos-related judgment creditors.
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 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 in order to obtain
a ruling binding across all jurisdictions on whether Raytech is
liable as a successor for asbestos-related and other claims
including claims yet to be filed relating to the operations of
Raymark or Raymark's predecessors, 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 has been 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 estate.
In June 1989 Raytech filed a class action in the
Bankruptcy Court against all present and future asbestos
claimants seeking a declaratory judgment that it not be held
liable for the asbestos-related liabilities of Raymark. It was
the desire of Raytech to have this case heard in the U.S.
District Court, and since the authority of the Bankruptcy Court
is referred from the U.S. District Court, upon its motion and
argument the U.S. District Court withdrew its reference of the
case to the Bankruptcy Court and thereby agreed to hear and
decide the case. In September 1991, the U.S. District Court
issued a ruling dismissing one count of the class action citing
as a reason the preclusive effect of the 1988 Oregon case,
previously discussed, 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. The remaining counts before the
U.S. District Court involve the transfer of Raymark's asbestos-
related liabilities to Raytech on the legal theories of alter-
ego and fraudulent conveyance. 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 December 1992,
Raytech filed a motion to activate the case and to obtain
rulings on the remaining counts which was denied by the U.S.
District Court. In October 1993, the creditors' committee
asked the Court to certify the previous dismissal of the
successor liability count. In February 1994, the U.S. District
Court granted the motion to certify and the successor liability
dismissal was accordingly 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.
Since the bankruptcy filing, several entities have
asserted claims in Bankruptcy Court alleging environmental
liabilities of Raymark based upon similar theories of successor
liability against Raytech as alleged by asbestos claimants.
These claims are not covered by the class action referenced
above and will be resolved in the bankruptcy case. The
environmental claims include a claim of the Pennsylvania
Department of Environmental Resources ("DER") to perform
certain activities in connection with Raymark's Pennsylvania
manufacturing facility, which includes submission of an
acceptable closure plan for a landfill containing hazardous
waste products located at the facility and removal of
accumulated baghouse dust from its operations. In March 1991,
the Company entered a Consent Order which required Raymark to
submit a revised closure plan which provides for the management
and removal of hazardous waste, for investigating, treatment
and monitoring of any contaminated groundwater and for the
protection of human health and environment at the site, all
relating to the closure of the Pennsylvania landfill and to pay
a nominal civil penalty. The estimated cost for Raymark to
comply with the order is $1.2 million. The DER has reserved
its right to reinstitute an action against the Company and the
other parties to the DER order in the event Raymark fails to
comply with its obligations under the Consent Order. Another
environmental claim was filed against the Company by the U.S.
Environmental Protection Agency for civil penalties charged
Raymark in the amount of $12 million arising out of alleged
Resource Conservation and Recovery Act violations at Raymark's
Stratford, Connecticut, manufacturing facility.
In January 1997, the U.S. Environmental Protection
Agency ("EPA") and the State of Connecticut filed suit against
Raymark claiming damages for cleanup of the Stratford,
Connecticut, site in an amended amount of $300 million. The
EPA has also filed a bankruptcy claim against Raytech as a
successor to Raymark for cleanup of the Stratford site and
other Raymark sites. Determination of Raytech's liability for
such claims, if any, is subject to Bankruptcy Court
deliberations and proceedings.
Under bankruptcy rules, the debtor-in-possession has
an exclusive period in which to file a reorganization plan.
Such exclusive period had been extended by the Bankruptcy Court
pending the conclusion of the successor liability litigation.
However, in December 1992, the creditors' committee filed a
motion to terminate the exclusive period to file a plan of
reorganization. At a hearing in May 1993, the motion was
denied by the Bankruptcy Court but was appealed by the
creditors' committee. In November 1993, the U.S. District
Court reversed the Bankruptcy Court and terminated the
exclusive period to file a plan of reorganization effective in
January 1994. Accordingly, any party in interest, including
the debtor, the creditors' committee or a creditor could
thereafter file a plan of reorganization.
In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose
of seeking confirmation allowing Raytech to emerge from the
bankruptcy filed March 10, 1989. In September 1994, the
Creditors' Committee filed its own Plan of Reorganization in
competition to the Debtor's Plan ("Creditors' Plan"). Upon
motion of the parties and support of the Bankruptcy Court, the
major interested parties agreed in August 1995 to participate
in non-binding mediation to attempt to effectuate a consensual
plan of reorganization. The mediation process commenced in
October 1995 and was concluded in March 1996 without agreement
for a consensual plan of reorganization. The competing plans
of Raytech and its creditors then returned to Bankruptcy Court
procedures.
<PAGE>
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 parties to the settlement include 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 provide for all general
unsecured creditors including but not limited to all asbestos
and environmental claimants to receive, through a trust
established under The Bankruptcy Code, 90% of the equity in a
company to be reorganized ("Reorganized Raytech") and any and
all refunds of taxes paid or net reductions in taxes owing
resulting from the transfer of equity to the trust,and existing
equity holders in Raytech to receive 10% of the equity in
Reorganized Raytech. Substantive non-economic terms of the
Memorandum of Understanding provide 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 have 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 burdomsome litigation and the risks
attendant therewith and the economic benefits of emerging from
bankruptcy without further delay.
Following Raytech's cessation of monthly $650,000
note payments to Raymark in December 1997, Raymark commenced 33
separate lawsuits against Raytech subsidiaries in various
jurisdictions ("Raymark Litigation") demanding payment or the
return of assets for breach of contract. Raytech filed an
adversary proceeding complaint to halt the Raymark litigation
and was granted a temporary restraining order in December 1997
by the Bankruptcy Court that remains in effect. The creditors'
committee intervened in the action in support of the
restraining order.
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
its attempt to assert control over Raymark and its assets, the
creditors' committee joined by Raytech, the guardian ad litem
for future claimants, the equity committee and the government
agencies moved to have the venue of the Raymark bankruptcies
transferred from Utah to the Connecticut Court. In July 1998,
the Bankruptcy Court issued an order on the motions and
transferred venue to the Connecticut Court. Raymark filed an
appeal of the order but has since withdrawn the appeal. In
October 1998 a trustee was appointed by the United States
Trustee over the Raymark bankruptcies.
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 small waterways near its
Indiana facility. In June, 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. The discovery process in this action is
nearing completion. RPC continues to assess the extent of the
contamination and its involvement and is currently negotiating
with IDEM for an agreed order of cleanup. The Company intends
to offset its investigation and cleanup costs against its notes
payable to Raymark when such costs become known pursuant to the
indemnification clause in the wet clutch and brake acquisition
agreement since it appears that any source of contamination
would have occurred during Raymark's ownership of the Indiana
facility. Blood tests administered to residents in the
vicinity of the small waterways revealed no exposure. The
Company incurred $1,751 in legal and testing costs associated
with this matter in 1996 and 1997 and has filed for
reimbursement from Raymark under the indemnification agreement.
An additional $137 in legal costs has been incurred in 1998.
As a result of an inspection, the Company has been
notified that the operations purchased from AFM in January 1996
in Sterling Heights, Michigan, are in violation of a consent
order issued by the Michigan Department of Environmental
Quality ("DEQ"). The consent order included a compliance
program providing for measures to be taken to bring certain
operations into compliance and record keeping on operations in
compliance. Potential fines for the violations were as high as
$4.6 million; however, negotiations with the DEQ have been in
progress concerning the compliance program and fines for past
violations, resulting in an agreement finalized in September
1998 providing for a consent judgment with a fine of $324.
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.
<PAGE>
District Court, Eastern District of Pennsylvania. When
required, the Company will seek an injunction in the Bankruptcy
Court to halt the litigation.
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 in 1994, 1995, 1996 and 1997 were
applied as a reduction of the note obligations pursuant to the
agreements.
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 could have 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 tentative settlement between Raytech
and its creditors as recited in the Memorandum of Understanding
referenced above has defined the impact of the successor
liabilities imposed by the referenced court decisions. While an
outline of principles in the Memorandum of Understanding has been
agreed to by Raytech and its creditors, a consensual plan of
reorganization must still be written and agreed to and is subject
to review and confirmation by the Bankruptcy Court, which at this
time cannot be predicted with certainty. Should the Memorandum of
Understanding not result in a confirmed plan of reorganization,
the ultimate liability of the Company with respect to asbestos-
related, environmental, or other claims would remain
undetermined. 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 establishment, settlement and
classification of liabilities that may be required in connection
with reorganizing under the Bankruptcy Code.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(10) Memorandum of Understanding
Re. Consensual Plan of Reorganization
(27) Financial data schedule (Edgar Only)
(b) REPORTS ON 8-K
Filed: October 8, 1998
Tentative Settlement of Raytech Corporation
Bankruptcy
Raytech Corporation, the Registrant/Debtor
("Raytech")has reached a tentative settlement (the
"Settlement") with representatives for its
creditors and equityholders with respect to a
consensual plan of reorganization ("Plan") to be
filed in its Chapter 11 bankruptcy case which was
commenced in the United States Bankruptcy Court
for the District of Connecticut (the "Bankruptcy
Court") in March 1989. The Settlement is by and
among Raytech, the Official Creditors' Committee,
the Guardian Ad Litem for Future Claimants, the
State of Connecticut, Department of Environmental
Protection, the United States Department of
Justice, Environmental and Natural Resources
Division, and the Official Equity Committee.
Under the Settlement, the Plan, which is subject
to the vote of creditors and equityholders, and
confirmation by the Bankruptcy Court, will provide
general unsecured creditors, including the present
and future asbestos claimants and government
claimants, through the vehicle of a trust
established pursuant to Section 524(g) of the
Bankruptcy Code, with (i) ninety percent (90%) of
the stock of reorganized Raytech, (ii) all excess
cash not necessary to fund the ongoing operations
of reorganized Raytech, and (iii) net recoveries
from certain claims against third parties. Under
the Plan, the existing Raytech stockholders shall
receive ten percent (10%) of the stock of
reorganized Raytech. It is estimated that the
entire plan confirmation process could take up to
a year.
The dilution of shareholder value under the
Settlement reflects the fact that pursuant to
court decisions discussed below, Raytech's
adjudged liabilities, as successor to Raymark
Industries, Inc. ("Raymark"), appear to
substantially exceed the reasonable value of its
assets. The corporate restructuring of Raytech
approved by the shareholders in 1986 was ruled
invalid by a U.S. District Court in Oregon and
Raytech was thereby held to have successor
liability for Raymark's asbestos tort liabilities.
See Schmoll v. Acands, Inc., 703 F. Supp. 868 (D.
Ore. 1988), aff'd 977 F.2d 499 (9th Cir. 1992).
Raytech then filed a voluntary petition in
bankruptcy to stay the multiple asbestos tort
suits filed against it on theories of successor
liability. Thereafter, Raytech sought
determination in its bankruptcy case, that it was
not bound by the decision in Schmoll. The U.S.
District Court ruled that Raytech was bound under
the principles of collateral estoppel by the
decision in Schmoll.
Raytech Corporation v. White, No. B-89-623 (D.
Conn., August 28, 1991) and that decision was
affirmed by the Court of Appeals, 54 F3d 187 (3d
Cir. 1995), cert. denied, 516 U.S. 914, 116 S. Ct.
302 (1995).
Raytech then filed an adversary proceeding in the
Bankruptcy Court seeking a declaration that its
liability as successor to Raymark was limited.
(See Adversary Proceeding No. 96-5181.) The Court
granted the creditors' motion for summary judgment
against Raytech ruling that under Schmoll and
White, Raytech's liability as Raymark's successor
was unlimited in scope (Bkrptcy. Conn Feb 11,
1998).
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
RAYTECH CORPORATION
By: /s/JOHN B. DEVLIN
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
Date: November 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<RESTATED>
<CIK> 0000797917
<NAME> RAYTECH CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<CASH> 8,879
<SECURITIES> 0
<RECEIVABLES> 35,381
<ALLOWANCES> 900
<INVENTORY> 30,008
<CURRENT-ASSETS> 82,804
<PP&E> 156,722
<DEPRECIATION> 90,039
<TOTAL-ASSETS> 174,432
<CURRENT-LIABILITIES> 68,671
<BONDS> 0
<COMMON> 5,553
0
0
<OTHER-SE> 55,988
<TOTAL-LIABILITY-AND-EQUITY> 174,432
<SALES> 188,026
<TOTAL-REVENUES> 188,026
<CGS> 143,887
<TOTAL-COSTS> 143,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,495
<INCOME-PRETAX> 20,130
<INCOME-TAX> 5,653
<INCOME-CONTINUING> 13,224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,224
<EPS-PRIMARY> 3.90
<EPS-DILUTED> 3.71
</TABLE>
Exhibit 10
MEMORANDUM OF UNDERSTANDING ("MEMORANDUM
OF UNDERSTANDING") ENTERED INTO AS OF THIS
23RD DAY OF JULY, 1998 WITH RESPECT TO
CONSENSUAL PLAN OF REORGANIZATION (THE "PLAN")
BY AND AMONG RAYTECH CORPORATION ("RAYTECH" OR THE "DEBTOR"),
THE OFFICIAL EQUITY COMMITTEE (THE "EQUITY COMMITTEE"),
THE OFFICIAL CREDITORS' COMMITTEE (THE "CREDITORS'
COMMITTEE"), THE GUARDIAN AD LITEM FOR FUTURE CLAIMANTS
(THE "FUTURES REPRESENTATIVE"), THE STATE OF CONNECTICUT,
DEPARTMENT OF ENVIRONMENTAL PROTECTION ("CONNECTICUT")
AND THE UNITED STATES DEPARTMENT OF JUSTICE, ENVIRONMENTAL
AND NATURAL RESOURCES DIVISION (THE "US")
I. GENERAL POINT
The parties hereto will utilize their best efforts to obtain
Bankruptcy Court approval of this Memorandum of
Understanding, but such approval shall not be a condition of
the parties' agreement hereto.
II. ECONOMIC TERMS
(a) All allowed administrative expense and priority claims
of Raytech shall be paid out of the Raytech estate upon
confirmation of the Plan or upon such other terms as may be
agreed to by and among any such particular claimant and the
parties hereto or as may be otherwise provided pursuant to
the Bankruptcy Code.
(b) General unsecured creditors, through the vehicle of a
trust (the "Trust") established pursuant to Section 524(g)
of the Bankruptcy Code, shall receive in the aggregate, (i)
90% of the equity in reorganized Raytech, and (ii) such
excess cash as is agreed upon by the Creditors' Committee
and the Debtor after consulting with the parties hereto and
with their financial advisors, as available and not
necessary to fund (a) administrative and priority claims and
(b) the ongoing business activities of reorganized Raytech.
All general unsecured claims including but not limited to
the present and future asbestos related claims and
governmental claims, shall be satisfied out of the
distribution(s) from the Trust. Any and all refunds of
taxes paid or net reductions in taxes owing which result
from deductions generated from transfers of the Raytech
equity to the Trust shall be deemed excess cash whenever
received and included in amounts received or to be received
by the Trust. In the event reorganized Raytech shall be
sold while it still has unused tax deductions, carrybacks or
carryforwards which would result in excess cash if and when
enjoyed, the component of the sales price representing the
present value of any such tax benefits shall be calculated
and allocated to the Trust (whether in cash or stock) before
the balance of the sales price is distributed to all equity
holders.
(c) Existing Raytech equity shall receive 10% of the equity
of reorganized Raytech.
(d) With respect to any shares that would be issued to
Craig Smith, Bradley Smith, any person related to them, any
entity related to them, or any assignee of any such person
or entity, the parties will seek a prejudgment remedy and/or
such other order from the Bankruptcy Court pursuant to which
any such shares shall not be distributed until satisfaction
of any and all claims reorganized Raytech or the Trust may
have against Craig Smith, Bradley Smith, their families and
related entities.
(e) The net recoveries from claims or any unsatisfied
claims to recover assets from Raymark Industries, Inc.
("Raymark") including any assets recovered from Craig Smith
and his family and other related entities or transferees
(collectively, the "Raymark Assets") shall be treated as
follows: To the extent that Raymark Assets (i) in the hands
of Raymark, were specifically for the benefit of personal
injury, property damage or government environmental claims,
such as insurance proceeds for their benefit, or (ii)
consist of real property which was environmentally
remediated by the federal, state, or any local governmental
entity such that the federal, state, or any local
governmental entity is entitled to a lien with respect to
such property under applicable law, such assets shall be
assigned to or prosecuted by or for the benefit of the
Trust. All other Raymark Assets shall be for the benefit of
the Raytech estate or reorganized Raytech, as the case may
be.
III. NON-ECONOMIC TERMS
(a) Raytech represents that it has given no release or
guaranty to Craig Smith or Bradley Smith of claims by
Raytech.
(b) A claims bar date will be set for general unsecured
creditors other than holders of asbestos-related personal
injury and death claims. The parties hereto will all and
jointly advise the Bankruptcy Court that no claims bar date
other than for voting purposes is necessary for holders of
asbestos-related personal injury and death claims.
(c) The Creditors' Committee and the Debtor, after
consultation with the parties hereto, shall agree upon the
most appropriate and economic approach to claims with
respect to the existing Raytech and Raymark retirement and
health plans, as well as any unfunded benefits remaining
from any terminated pension plans, from the perspective of
the Raytech estate as a whole.
(d) Upon execution of the Memorandum of Understanding and
approval by the Bankruptcy Court thereof, the following will
occur:
Raytech will no longer seek to make severance
payments to Craig Smith and the parties hereto
will oppose any request for payment thereof.
Raytech and its subsidiaries will no longer seek
to make the note payments to Raymark and the
parties hereto will oppose any request for payment
thereof.
Raytech and the Equity Committee will join and/or
support the attempt by the Creditors' Committee
and the Futures Representative to bring the
Raymark stock and/or assets within the estate of
Raytech.
The parties hereto will use their best efforts to
have the Bankruptcy Court hold the existing
estimation proceedings with respect to the
asbestos related claims in abeyance pending
confirmation of the Plan, at which time these
proceedings will be dismissed.
The parties hereto will seek to obtain a
standstill with respect to the remedies action
appeal, pending confirmation of the Plan, at which
time the appeal will be dismissed.
(e) The Plan will provide that the Equity Committee shall
name one member to the board of directors of reorganized
Raytech who shall serve for a term of 3 years; provided,
however, that such term shall terminate in the event that
the Trust sells its entire interest in reorganized Raytech
and the purchaser or purchasers has offered to purchase the
remaining shares outstanding at the same price and on the
same terms and conditions as offered to the Trust. The Plan
will further provide that the Creditors' Committee, in
consultation with the Debtor, the Futures Representative,
Connecticut and the US, shall have the right to designate
the remaining members of the Board of Directors of
reorganized Raytech.
(f) The parties will jointly request that, as part of the
confirmation order, there be a finding 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
the existing equity holders is fair and equitable by virtue
of the benefit to the estate in resolving complicated issues
without further costly and burdensome litigation and the
risks attendant thereto as well as the economic benefit to
Raytech of emerging from bankruptcy without further delay,
provided that such a finding shall not be a condition of the
parties' agreement hereto.
(g) The Plan will provide for indemnification by
reorganized Raytech of the members of the Equity Committee.
<PAGE>
(h) This Memorandum of Understanding may be executed in
counterparts.
Raytech Corporation Guardian Ad Litem For the
Future Claimants
By:___________________________ By:__________________________
Its President and Chief
Executive Officer
Official Creditors' Committee State of Connecticut
of Raytech Corporation Department of Environmental
Protection
Richard Blumenthal
Attorney General
By:___________________________ By:__________________________
Its Chairman John M. Looney
Assistant Attorney General
Official Equity Committee of United States of America
Raytech Corporation Lois J. Schiffer
Assistant Attorney General
Environmental and Natural
Resources Division
United States Department
of Justice
By:___________________________
Its Chairman By:__________________________
Henry S. Friedman
Senior Attorney
Timothy K. Webster
Trial Attorney
Environmental Enforcement
Section
U.S. Department of Justice
Stephen C. Robinson
United States Attorney
District of Connecticut
By:__________________________
Deirdre A. Martini
