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 April 4, 1999, 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 April 4, 1999, 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 Unaudited Consolidated Balance Sheets
at April 4, 1999 and January 3, 1999 3
Condensed Unaudited Consolidated Statements of
Operations for the thirteen weeks
ended April 4, 1999 and March 29, 1998 4
Condensed Unaudited Consolidated Statements
of Cash Flows for the thirteen weeks ended
April 4, 1999 and March 29, 1998 5
Consolidated Unaudited Statements of
Shareholders' Equity for the thirteen weeks
ended April 4, 1999 and March 29, 1998 6
Notes to Condensed Unaudited Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 32
Signature 33
-2-<PAGE>
RAYTECH CORPORATION
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)(Unaudited)
<S> <C> <C>
April 4, Jan. 3,
As at 1999 1999
ASSETS
Current assets
Cash and cash equivalents $ 6,281 $ 7,482
Trade accounts receivable, net 30,522 29,058
Inventories 32,599 30,869
Other current assets 8,628 8,560
Total current assets 78,030 75,969
Property, plant and equipment 166,062 163,906
Less accumulated depreciation 92,871 92,014
Net property, plant and equipment 73,191 71,892
Intangible assets 22,180 22,385
Other assets 3,496 3,558
Total assets $176,897 $173,804
LIABILITIES
Current liabilities
Notes payable $13,777 $ 17,316
Current portion of long-term debt - Raymark 11,487 12,640
Current portion of long-term debt 1,148 1,187
Accounts payable 18,443 15,705
Accrued liabilities 21,724 21,595
Total current liabilities 66,579 68,443
Long-term debt due to Raymark 16,524 16,524
Long-term debt 5,451 5,708
Postretirement benefits other than pensions 11,233 11,017
Other long-term liabilities 8,255 7,815
Total liabilities 108,042 109,507
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
issued and outstanding 5,553 5,553
Additional paid in capital 70,501 70,501
Accumulated deficit (2,539) (7,027)
Accumulated other comprehensive income (99) (169)
73,416 68,858
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 68,855 64,297
Total liabilities and shareholders' equity $176,897 $173,804
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
<CAPTION>
April 4, March 29,
For the 13 Weeks Ended 1999 1998
<S> <C> <C>
Net sales $ 67,343 $ 62,895
Cost of sales (50,817) (48,200)
Gross profit 16,526 14,695
Selling, general and administrative expenses (8,461) (6,844)
Operating profit 8,065 7,851
Interest expense (367) (229)
Interest expense - Raymark (70) (45)
Other income (expense), net (29) (259)
Income before provision for income taxes
and minority interest 7,599 7,318
Provision for income tax (2,505) (2,708)
Income before minority interest 5,094 4,610
Minority interest (606) (453)
Net income $ 4,488 $ 4,157
Basic earnings per share $ 1.31 $ 1.24
Diluted earnings per share $ 1.29 $ 1.18
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
April 4, March 29,
For the 13 Weeks Ended 1999 1998
<S> <C> <C>
Net cash provided by operating activities $ 6,336 $ 2,376
Cash flow from investing activities:
Capital expenditures (5,554) (4,512)
Proceeds on sale of property, plant and equipment 74 36
Net cash used in investing activities (5,480) (4,476)
Cash flow from financing activities:
Cash overdraft 2,596 253
Proceeds from short-term borrowings - 337
Net payments on short-term borrowings (4,492) (1,001)
Principal payments on long-term debt (73) (68)
Proceeds from long-term borrowings - 1,013
Other - 330
Net cash used in financing activities (1,969) 864
Effect of exchange rate changes on cash (88) (36)
Net change in cash and cash equivalents (1,201) (1,272)
Cash and cash equivalents at beginning of period 7,482 9,913
Cash and cash equivalents at end of period $ 6,281 $ 8,641
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Treasury
Accumulated Stock
Other At Cost
Common Paid in Accumulated Comprehensive (2,132,059
Stock Capital Deficit (Loss) Income Shares) Total
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 28, 1997 $5,417 $70,275 $(23,384) $ 715 $(4,561) $48,462
Comprehensive income:
Net income 4,157 4,157
Changes during
the period 341 341
Total comprehensive
income 4,157 341 4,498
Stock options exercised
(124,369 shares) 125 206 331
Balance,
March 29, 1998 $5,542 $70,481 $(19,227) $ 1,056 $(4,561) 53,291
Balance,
January 3, 1999 $5,553 $70,501 $ (7,027) $ (169) $(4,561) $64,297
Comprehensive income:
Net income 4,488 4,488
Changes during
the period 70 70
Total comprehensive
income 4,488 70 4,558
Balance,
April 4, 1999 $5,553 $70,501 $ (2,539) $ (99) $(4,561) $68,855
<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 - 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 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 liabilities and
costs that may result from asbestos litigation. Management believed
that each purchase by Raytech from Raymark complied with Raytech's
<PAGE>
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 to be 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.
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.
However, subsequent to the involuntary bankruptcy proceedings
against Raymark, a restrictive insurance funding order was issued by
an Illinois Court, denying defense costs, and another Raymark
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. 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 the
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 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.
<PAGE>
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 intent 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
<PAGE>
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, treating 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. Departmental 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 $300
million 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 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
<PAGE>
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 February 1997, Raytech resumed making monthly payments
of $650,000 to Raymark pursuant to the 1987 Asset Purchase Agreement
as amended. In November 1997, the creditors' committee filed an
adversary proceeding complaint and motion for a temporary
restraining order to halt the payments. In January 1998, the
Bankruptcy Court stopped the payments pending a trial. Raymark
notified its retirees by letter that their benefits would cease
after February 1998 due to the effect of the cessation of payments
from Raytech under the injunction. Raymark retirees intervened in
the action; however, Raymark continued to fund their benefits. Upon
motion, the Raymark retirees have been permitted to form a committee
in the Raytech bankruptcy, but any rights to the Raytech estate
remain subject to the Court's judicial determination. In March
1999, the creditors' committee of retirees filed an adversary
proceeding against Raytech seeking a declaratory judgment holding
Raytech liable for employee welfare benefits due Raymark retirees,
including medical, life and supplemental pension benefits. In April
1999, a separate adversary proceeding was filed by Raytech against
the Pension Benefit Guaranty Corporation seeking a declaratory
judgment holding Raytech not liable for Raymark pension liabilities.
Both matters are pending in the Bankruptcy Court.
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.
<PAGE>
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 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.
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
<PAGE>
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 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.
As a result of an inspection, the Company was notified that
the operations purchased from AFM in January 1996 in Sterling
Heights, Michigan, were 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 substantial but negotiations with the DEQ resulted
in an agreement in September 1998 providing for a consent judgment
with an fine of $324.
In December 1998, a subsidiary of the Company filed a
complaint against a former administrative financial manager of AFM
alleging that he wrongfully converted Company monies in his control
to his own use and benefit in an amount greater than $3,000 prior to
the April 1998 completion of the acquisition of AFM as discussed in
the following paragraph. The suit is being litigated in the U.S.
District Court, Eastern District of Michigan, seeking damages in the
amount wrongfully converted, plus other damages, interest, costs and
attorney fees.
In April 1998, AFM redeemed 53% of its stock from the
former owner for a formulated amount of $6,044, $3,022 paid at
closing and the balance of $3,022 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 to
recover $1,500 of the amount paid for the AFM stock and to obtain a
declaratory judgment that the balance of $3,022 is not owed based
upon allegations that a fraud was perpetrated upon the Company
related to the case referenced above. The Company continues to
carry the note under its original terms pending the resolution of
the aforementioned claim.
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
<PAGE>
Pennsylvania. When required, the Company will seek an injunction
in the Bankruptcy Court to halt the litigation.
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 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. Trial
has been set for September 1999.
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 shares 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, 1997 and 1998 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
<PAGE>
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
unaudited consolidated financial statements contain all
adjustments necessary to fairly present the financial position of
Raytech as of April 4, 1999 and January 3, 1999 and the results
of operations and cash flows for the thirteen weeks ended April
4, 1999 and March 29, 1998. All adjustments are of a normal
recurring nature. 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. 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 January 3, 1999.
NOTE C - INVENTORIES
Net, inventories consist of the following:
April 4, 1999 January 3, 1999
Raw material $11,607 $11,480
Work in process 8,202 7,653
Finished goods 12,790 11,736
$32,599 $30,869
<PAGE>
NOTE D - EARNINGS PER SHARE
For the 13 Weeks Ended
April 4, March 29,
1999 1998
Basic EPS Computation
Numerator 4,488 4,157
Denominator:
Common shares outstanding at
beginning of year 3,421,395 3,285,308
Weighted average of stock options
exercised - 64,886
Weighted average shares 3,421,395 3,350,194
Basic earnings per share 1.31 1.24
Diluted EPS Computation
Numerator 4,488 4,157
Denominator:
Common shares outstanding
at beginning of year 3,421,395 3,285,308
Weighted average of stock options
exercised - 64,886
Dilutive potential common shares 49,727 181,887
Adjusted weighted average shares 3,471,122 3,532,081
Diluted earnings per share 1.29 1.18
<PAGE>
Note E - 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 operations produce 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 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 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
with related comments included in Management's Discussion and
Analysis.
<PAGE>
NOTE E, continued
<TABLE>
<CAPTION>
OPERATING SEGMENTS
Dry Total
Wet Friction Aftermarket Friction Segments
<S> <C> <C> <C> <C> <C>
1999
Net sales to external
customers $ 40,691 $ 17,330 $ 9,322 $ 67,343
Intersegment net sales (1) 3,723 5 27 3,755
Total net sales 44,414 17,335 9,349 71,098
Operating profit (2) 4,680 3,052 616 8,348
Corporate (3) - - - (749)
Consolidated earnings before
taxes and minority interest - - - $ 7,599
1998
Net sales to external
customers $ 40,031 $ 13,572 $ 9,292 $ 62,895
Intersegment net sales (1) 3,418 11 - 3,429
Total net sales 43,449 13,583 9,292 66,324
Operating profit (2) 4,774 2,414 760 7,948
Corporate (3) - - - (630)
Consolidated earnings before
taxes and minority interest - - - $ 7,318
<FN>
(1) The Company records intersegment sales at an amount negotiated between the
segments. All intersegment sales are eliminated in consolidation.
(2) The Company's management reviews the performance of its reportable segments
on an operating profit basis, which consists of income before tax and minority
interest.
(3) Represents compensation and related costs for employees of the
Company's corporate headquarters, professional fees, shareholder
fees and public relations expenses.
</TABLE>
<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 and Liquidity and Capital Resources
Raytech Corporation continued the momentum from year-end with
net income rising in the first quarter to $4.5 million or $1.31 per
basic share as compared to $4.2 million or $1.24 per basic share in
the first quarter of 1998. Earnings were driven by strong
performance in the aftermarket segment and improved performance in
the wet friction segment due primarily to increased sales in the
automotive original equipment market. The Company's dry friction
operations were down slightly over last year as a result of the
startup operations in China and the slowing of the economy in
Europe.
Net Sales
Worldwide net sales rose 7.0% in the first quarter of 1999 to
$67.3 million as compared to $62.9 million in the first quarter of
1998.
The wet friction segment reported increased sales of $.7 million
as compared to the same period in the prior year. The rise in
sales is primarily the result of increased unit production among
the automotive original equipment manufacturers, which is reflected
in the reported sales increase of $4.2 million in this market
sector over the prior year. Domestic car and light truck sales
are expected to increase from 14.8 million units to 15.6 million
units in 1999. According to industry analysts, the heavy duty
markets continue their decline as a result of the economic downturn
in Asia and Latin America. In addition the demand for heavy duty
equipment was affected by a decline in orders from the oil and
mining industries. Sales in this market decreased $1.6 million as
compared to last year. However domestic sales of heavy duty
equipment is expected to remain strong. Demand for agricultural
equipment remains weak as the farm sector continues to feel the
effects of depressed agricultural commodity prices. Sales in this
market decreased $1.9 million over last year.
Sales in the aftermarket segment showed significant improvement
over last year. Improved sales reflected deeper penetration into
the current customer base and sales of new products, such as
planetary gears, which were introduced into the product line in the
latter part of 1998. Additionally, the introduction of dry
friction products in the North American aftermarket took place
<PAGE>
during this quarter. The combination of the above provided
increased sales of $3.7 million over the same period in the prior
year.
The dry friction segment reported improved sales of less than
$.1 million, driven entirely by new sales from our operation in
China. The German operation remained at the same level as that of
the prior year due to the cooling of the German economy and the
European Union as a whole.
Operating Profits
The following discussion of operating results by industry
segment relates to information contained in Note E - Segment
Reporting in the Notes to Consolidated Financial Statements.
Operating profit is income before income taxes and minority
interest.
Operating profits increased 5.1% in the first quarter of 1999 to
$8.3 million as compared to $7.9 million in the first quarter of
1998.
In the wet friction segment the operating profit declined $.1
million as the result of price reductions to certain customers,
material costs, labor expenses and increases of $.7 million in
selling general and administrative expenses as a result of the
consolidation of Advanced Friction Materials Company into Raytech.
The aftermarket segment's operating profit increased $.6 million
due to increased unit sales, somewhat offset by higher shipping,
advertising and selling expenses amounting to $.3 million. In addi-
tion employee related expenses were up slightly as compared to 1998.
Operating profit in the dry friction segment was down $.1
million in the first quarter of 1999. The decline was primarily due
to selling, general and administrative expenses of $.3 million
associated with the operations in China and Germany.
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
<PAGE>
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 to date are
approximately $3.0 million and 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, 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. However, the failure to correct a material Year 2000
problem could result in the interruption of certain normal business
activities and operations. The Company's most reasonably likely
worst case scenario is that the Year 2000 noncompliance of a
critical third party, such as an energy supplier, could cause the
supplier to fail to delivery, with the result that production is
interrupted at one or more facilities. Such a disruption in
production could result in lost sales or profits. However, the
Company is reviewing the need to develop contingency plans, which
should be determined by mid 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.
<PAGE>
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
1999. In light of this outlook and the Company's continuing
commitment to aggressive asset management, production schedules
are being reviewed for 1999 to ensure the Company's production
meets demand.
The Company's outlook for 1999 worldwide sales and revenue
remains unchanged, calling for sales and revenues to slightly
surpass 1998 record levels. The growth in the automobile original
equipment market in conjunction with the introduction of new
products and new markets will offset the anticipated sales
reduction in the agricultural and heavy duty markets.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Statements under the "Outlook" and "Year 2000"
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 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
(including Year 2000 compliance); 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.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $6.3 million at
April 4, 1999 compared to $7.5 million at January 3, 1999. Capital
investment for the three-month period totaled $5.5 million,
compared to $4.5 million for the same period in 1998. The level
of capital investment is consistent with planned expenditures in
both years.
<PAGE>
The Company uses collateralized lines of credit for funding
purposes in the United States. Currently, the outstanding
balances from available lines of credit are $10.2 million, with
$6.1 million available in additional borrowings. The Company's
foreign subsidiaries have outstanding balances from available lines
of credit amounting to $3.6 million with available unused lines of
credit amounting to $1.4 million, which expire upon demand. The
Company believes that cash provided by operations will provide
sufficient liquidity to meet its funding requirements.
Recently Issued Accounting Pronouncement
Effective June 15, 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued for
fiscal years beginning after June 15, 1999. SFAS 133 establishes a
new model for accounting for derivatives and hedging activities.
The Company is still assessing the impact, if any, that this
pronouncement will have on its financial statements.
<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 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 approximately 3,300
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
agreement included as a condition of the purchase of the Wet Clutch
and Brake Division and German subsidiary from Raymark in 1987.
However, subsequent to the involuntary bankruptcy proceedings
against Raymark, a restrictive insurance funding order was issued by
an Illinois Court, denying defense costs, and another Raymark
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. 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 the
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
<PAGE>
Oregon ruled, under Oregon equity law, Raytech to be a successor to
Raymark's asbestos-related liability. In this case the liability
was negotiated to settlement for a negligible amount. The successor
decision was appealed, 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 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 for the asbestos-related liabilities of Raymark.
It was the intent 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 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. 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,
<PAGE>
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, treating 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 $300
million 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 is subject to
Bankruptcy Court deliberations and proceedings.
<PAGE>
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 February 1997, Raytech resumed making monthly payments
of $650,000 to Raymark pursuant to the 1987 Asset Purchase Agreement
as amended. In November 1997, the creditors' committee filed an
adversary proceeding complaint and motion for a temporary
restraining order to halt the payments. In January 1998, the
Bankruptcy Court stopped the payments pending a trial. Raymark
notified its retirees by letter that their benefits would cease
after February 1998 due to the effect of the cessation of payments
from Raytech under the injunction. Raymark retirees intervened in
the action; however, Raymark continued to fund their benefits. Upon
motion, the Raymark retirees have been permitted to form a committee
in the Raytech bankruptcy, but any rights to the Raytech estate
remain subject to the Court's judicial determination. In March
1999, the creditors' committee of retirees filed an adversary
proceeding against Raytech, seeking a declaratory judgment holding
Raytech liable for employee welfare benefits due Raymark retirees,
including medical, life and supplemental pension benefits. In April
1999, a separate adversary proceeding was filed by Raytech against
the Pension Benefit Guaranty Corporation, seeking a declaratory
judgment holding Raytech not liable for Raymark pension liabilities.
Both matters are pending in the Bankruptcy Court.
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
<PAGE>
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 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.
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
<PAGE>
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.
As a result of an inspection, the Company was notified that
the operations purchased from Advanced Friction Materials Company
("AFM") in January 1996 in Sterling Heights, Michigan, were 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 substantial
but negotiations with the DEQ resulted in an agreement finalized in
September 1998 providing for a consent judgment with a fine of $324.
In December 1998, a subsidiary of the Company filed a
complaint against a former administrative financial manager of AFM
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 $3,000 prior to
the April 1998 completion of the acquisition of AFM as discussed in
the following paragraph. The suit is being litigated in the U.S.
District Court, Eastern District of Michigan, seeking damages in the
amount wrongfully converted, plus other damages, interest, costs and
attorney fees.
In April 1998, AFM redeemed 53% of its stock from the
former owner for a formulated amount of $6,044, $3,022 paid at
closing and the balance of $3,022 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 Bankruptccy Court against the former owner
captioned Raytech Corporation, et al. vs. Oscar E. Stefanutti, et
al. to recover $1,500 of the amount paid for the AFM stock and to
obtain a declaratory judgment that the balance of $3,022 is not owed
based upon allegations that a fraud was perpetrated upon the Company
related to the Hartwick case referenced above.
<PAGE>
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.
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. Trial
has been set for September 1999.
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, 1997 and 1998
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
<PAGE>
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.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(27) Financial data schedule (Edgar Only)
(b) REPORTS ON 8-K
None
<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: May 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<RESTATED>
<CIK> 0000797917
<NAME> RAYTECH CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> APR-04-1999
<PERIOD-TYPE> 3-MOS
<EXCHANGE-RATE> 1
<CASH> 6,281
<SECURITIES> 0
<RECEIVABLES> 31,748
<ALLOWANCES> 1,226
<INVENTORY> 32,599
<CURRENT-ASSETS> 78,030
<PP&E> 166,062
<DEPRECIATION> 92,871
<TOTAL-ASSETS> 176,897
<CURRENT-LIABILITIES> 66,579
<BONDS> 0
<COMMON> 5,553
0
0
<OTHER-SE> 63,302
<TOTAL-LIABILITY-AND-EQUITY> 176,897
<SALES> 67,343
<TOTAL-REVENUES> 67,343
<CGS> 50,817
<TOTAL-COSTS> 50,817
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 437
<INCOME-PRETAX> 7,599
<INCOME-TAX> 2,505
<INCOME-CONTINUING> 4,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,488
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.29
</TABLE>
