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 July 2, 2000, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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 August 11, 2000, 3,519,313 shares of the Registrant's
common stock, par value $1.00, were issued and outstanding.
Page 1 of 38
RAYTECH CORPORATION
INDEX
Page
Number
PART I. UNAUDITED FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets
at July 2, 2000 (Unaudited) and January 2, 2000 3
Condensed Unaudited Consolidated Statements of
Operations for the thirteen and twenty-six
weeks ended July 2, 2000 and July 4, 1999 4
Condensed Unaudited Consolidated Statements
of Cash Flows for the twenty-six weeks
ended July 2, 2000 and July 4, 1999 5
Condensed Unaudited Consolidated Statements of
Shareholders' Equity for the twenty-six weeks
ended July 2, 2000 and July 4, 1999 6
Notes to Condensed Unaudited Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 37
Signature 38
-2-
RAYTECH CORPORATION
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
July 2, Jan. 2,
2000 2000
At (Unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 10,788 $ 10,746
Trade accounts receivable, net 33,273 31,804
Inventories 32,581 33,325
Other current assets 7,018 8,169
Total current assets 83,660 84,044
Property, plant and equipment 183,617 180,202
Less accumulated depreciation (101,993) (98,130)
Net property, plant and equipment 81,624 82,072
Intangible assets 19,588 20,074
Deferred income taxes 140,774 304
Other assets 2,318 2,192
Total assets $ 327,964 $188,686
LIABILITIES
Current liabilities
Notes payable $ 14,251 $ 19,175
Current portion of long-term debt - Raymark 11,167 11,167
Current portion of long-term debt 1,251 1,362
Accounts payable 17,723 18,505
Accrued liabilities 20,347 22,634
Total current liabilities 64,739 72,843
Liabilities subject to compromise 7,208,933 -
Long-term debt due to Raymark 5,802 9,206
Long-term debt 6,773 6,581
Postretirement benefits other than pensions 12,579 12,132
Other long-term liabilities 7,793 7,136
Total liabilities 7,306,619 107,898
Commitments and Contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock
Cumulative preferred stock, no par value
800,000 shares authorized, none issued & outstanding - -
Common stock, par value $1.00
7,500,000 shares authorized, 5,651,372 and 5,612,963
issued and outstanding at July 2, 2000 and
January 2, 2000, respectively 5,651 5,613
Additional paid in capital 70,631 70,564
Retained earnings (accumulated deficit) (7,049,671) 9,337
Accumulated other comprehensive loss (705) (165)
(6,974,094) 85,349
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity (deficit) (6,978,655) 80,788
Total liabilities and shareholders' equity (deficit) $ 327,964 $188,686
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
<S> <C> <S> <C> <C> <C> <C> <C>
Net Sales $ 61,122 $ 65,833 $ 128,597 $ 133,176
Cost of sales (46,298) (49,482) (95,664) (100,299)
Gross profit 14,824 16,351 32,933 32,877
Selling and administrative expenses (8,157) (8,371) (16,891) (16,832)
Operating profit 6,667 7,980 16,042 16,045
Interest expense (471) (451) (980) (818)
Interest expense - Raymark (70) (70) (140) (140)
Other income, net 318 372 628 343
Income before provision for asbestos
litigation, provision for environmental
and other claims, income taxes
and minority interest 6,444 7,831 15,550 15,430
Provision for environmental and
other claims (447,750) - (447,750) -
Provision for asbestos litigation (6,760,000) - (6,760,000) -
(Loss) income before income taxes
and minority interest (7,201,306) 7,831 (7,192,200) 15,430
Income tax benefit (provision) 137,761 (1,969) 133,936 (4,474)
(Loss) income before minority
interest (7,063,545) 5,862 (7,058,264) 10,956
Minority interest (283) (523) (744) (1,129)
Net (loss) income $(7,063,828) $ 5,339 $(7,059,008) $ 9,827
Basic (loss) earnings per share $ (2,023.70) $ 1.56 $ (2,025.12) $ 2.87
Diluted (loss) earnings per share $ (2,023.70) $ 1.53 $ (2,025.12) $ 2.82
<FN>2
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
July 2, July 4,
For the 26 Weeks Ended 2000 1999
<S> <C> <S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(7,059,008) $ 9,827
Adjustments to reconcile net (loss) income
to net cash provided by operations:
Deferred income tax (140,470) -
Depreciation and amortization 6,385 5,657
Provision for asbestos litigation,
environmental and other claims 7,207,750 -
Income applicable to minority interest,
net of dividends 744 1,129
Changes in operating assets and liabilities
and other items 325 (5,944)
Net cash provided by operating activities 15,726 10,669
Cash flow from investing activities:
Capital expenditures (6,831) (10,562)
Proceeds on sales of property, plant and equipment 84 359
Net cash used in investing activities (6,747) (10,203)
Cash flow from financing activities:
Cash overdraft (993) 2,467
Net (payments) borrowings on short-term notes (4,822) 292
Principal payments on long-term debt (186) (113)
Proceeds from long-term borrowings 403 1,072
Payments on borrowings from Raymark (3,404) (2,330)
Proceeds from exercise of stock options 105 -
Net cash (used in) provided by financing
activities (8,897) 1,388
Effect of exchange rate changes on cash (40) (151)
Net change in cash and cash equivalents 42 1,703
Cash and cash equivalents at beginning of period 10,746 7,482
Cash and cash equivalents at end of period $ 10,788 $ 9,185
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands, except shares)
(unaudited)
<TABLE>
<CAPTION>
Treasury
Retained Accumulated Shares
Additional Earnings Other At Cost
Common Paid in (Accumulated Comprehensive (2,132,059
Stock Capital Deficit) Loss Shares) Total
<C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 3, 1999 $5,553 $70,501 $ (7,027) $ (169) $(4,561) $64,297
Comprehensive income:
Net income 9,827 9,827
Changes during
the period (923) (923)
Total comprehensive
income 9,827 (923) 8,904
Balance,
July 4, 1999 $5,553 $70,501 $ 2,800 $(1,092) $(4,561) $73,201
Balance,
January 2, 2000 $5,613 $70,564 $ 9,337 $ (165) $(4,561) $80,788
Comprehensive loss:
Net loss (7,059,008) (7,059,008)
Changes during
the period (540) (540)
Total comprehensive loss (7,059,008) (540) (7,059,548)
Stock options exercised
(38,409 shares) 38 67 105
Balance,
July 2, 2000 $5,651 $70,631 $(7,049,671) $ (705) $(4,561) $(6,978,655)
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
(Unaudited)
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
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
<PAGE>
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. The purchase price of the
stock was affected by Raymark's substantial asbestos-related
liabilities.
Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-defendant
with Raymark and other named defendants in 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.
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
<PAGE>
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 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.
<PAGE>
As the result of the Court rulings recited above holding
Raytech a successor to Raymark's asbestos-related liabilities,
Raytech halted payments to Raymark under the 1987 Asset Purchase
Agreement in May 1995. However, in February 1997, with Raymark
temporarily out of bankruptcy, Raytech resumed making payments
pursuant to the Agreement. As the result of the creditors'
committee's action to halt the payments, the Bankruptcy Court
ordered the payments stopped in January 1998. In retaliation 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. In October
1998, a trustee was appointed by the United States Trustee over the
Raymark bankruptcies and is currently administering the Raymark
estate.
In October, 1998 Raytech reached a tentative settlement
with its creditors and entered into a Memorandum of Understanding
with respect to achieving a consensual plan of reorganization (the
"Plan"). The parties to the settlement 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 90% of the equity in reorganized Raytech and any and all
refunds of taxes paid or net reductions in taxes owing resulting
from the transfer of equity to a trust established under the
Bankruptcy Code, and existing equity holders in Raytech to receive
10% of the equity in reorganized Raytech. 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
<PAGE>
Raytech's liabilities appear to exceed the reasonable value of its
assets, the allocation of 10% of the equity to existing equity
holders is fair and equitable by virtue of the benefit to the estate
of resolving complicated issues without further costly and
burdensome litigation and the risks attendant therewith and the
economic benefits of emerging from bankruptcy without further delay.
In August 1999, a bar date was set for filing claims
against Raytech by the Bankruptcy Court. The Court appointed claims
agent reported in November 1999 that approximately 3200 claims were
filed as of the bar date. Such claims were categorized into
asbestos personal injury, asbestos property damage, environmental,
including the EPA and State of Connecticut, pension/retiree benefits
and other employee related claims and other contractual and general
categories. The total amounts claimed, not including unliquidated
claims, exceeded $300 billion. Claims believed invalid by the
debtor were objected to and the Bankruptcy Court expunged many
claims following hearings in February 2000. All claims proven valid
will be dealt with through the plan of reorganization at
confirmation.
By Bankruptcy Court order, the bar date referenced above
did not apply to asbestos-related personal injury ("Asbestos")
claimants although many filed claims pursuant to the terms of the
bar date. In order to comply with the mandatory estimation of all
claims against the debtor in the confirmation process, Raytech, the
creditors' committee and the Government entered into discussions to
attempt to make estimations of the Asbestos and Government claims
not subject to the bar date. The discussions resulted in an
agreement on the estimate of such Asbestos and Government claims,
and accordingly, a motion was filed in the Bankruptcy Court for an
allowance of Asbestos claims of $6.760 billion and Government claims
of $431.8 million for purposes of voting and distribution under the
terms of the Plan. In March 2000, the Bankruptcy Court entered an
interim order allowing such amounts as general unsecured claims
subject to an objection period through June 2000 and the completion
of the initial vote of the plan of confirmation on July 7, 2000. As
a result of the resolution of the objections raised with only a
slight modification to the plan and the overwhelming favorable
response to the initial vote, management is substantially certain
that the plan will be confirmed and that the estimate of the $7.2
billion of allowed claims will be finally approved by the Bankruptcy
Court. Accordingly, Raytech has recorded a charge and related
liability in the accompanying financial statements in the amount of
the estimated amount of allowed claims. Such estimations are
recorded as liabilities subject to compromise since it is expected
that the distributions under the Plan with respect to such claims
will be lesser amounts consisting of a 90% equity distribution in
reorganized Raytech at confirmation pursuant to the Plan referenced
above in this Note A. Upon the effective daten of the Plan, Raytech will
utilize the "fresh start" reporting principles contained in the
AICPA's Statement of Position 90-7, which will result in adjustments
<PAGE>
relating to the amounts and classification of recorded assets and
liabilities determined as of the effective date. Under the Plan,
the ultimate consideration to be received by all unsecured creditors
will be covered under the referenced 90% equity distribution and
will be substantially less than amounts shown in the accompanying
financial statements. However, until the Plan is confirmed by the
Court, the Company cannot be certain of confirmation and the
ultimate amount creditors will be entitled to receive.
In April 1999, separate adversary actions were filed in the
Bankruptcy Court by the retiree committee and the Pension Benefit
Guarantee Corporation, respectively, seeking judgments that retirees
and pensioners of Raymark have rights as claimants for their
benefits in the Raytech bankruptcy estate on the basis of successor
liability. Both matters have been heard and decided by the
Bankruptcy Court in 1999. In the retiree case, the Court ruled that
the Raymark Trustee had the right to terminate the welfare benefit
programs and accordingly that liability could not be transferred to
Raytech. A motion for reconsideration was denied by the Court. In
July 2000, the appellate court affirmed the Bankruptcy Court's
decision not to transfer the retiree liability to Raytech. In the
pension case, the Court ruled that Raytech has the liability to pay
the Raymark pensions based on successor liability. Appeals of the
decisions were filed. However, as a result of the adverse pension
case decision, Raytech has recorded a charge and related liability
in an estimated amount of $16 million in the accompanying financial
statements. Such charged liability is subject to compromise based
on the pending appeal of the decision and confirmation of the plan
of reorganization.
In 1991, an environmental claim was filed by the
Pennsylvania Department of Environmental Resources ("DER") to
perform certain activities in connection with Raymark's Pennsylvania
manufacturing facility, including submission of an acceptable
closure plan for a landfill containing hazardous waste products
located at the facility. In March 1991, the Company entered a
Consent Order which required Raymark to submit a revised closure
plan acceptable to the DER. The estimated cost for Raymark to
comply with the order was $1.2 million. The DER has notified the
Company that Raymark has failed to comply with its obligations under
the Consent Order. In July 2000, Raymark has contracted to sell its
Pennsylvania manufacturing facility and the buyer has agreed to
comply with the order on behalf of Raymark.
Pursuant to the Memorandum of Understanding, a consensual
plan of reorganization (the "Plan") has been prepared and filed in
the Bankruptcy Court in April 2000 along with the disclosure
statement with respect to the Plan. Allowed claims under the Plan
fall into five classes, including priority, secured, general
unsecured, affiliate and shareholder. Most allowed claims fall into
the general unsecured class and will be paid through the 90% equity
<PAGE>
contribution, including all asbestos-related claims, environmental
claims, employee-related claims and contractual and general claims.
The procedure for confirmation of the Plan is well
underway, and the Bankruptcy Court has recently entered an interim order
allowing the estimation of claims and approved the adequacy of the disclosure
statement to the Plan, resulting in the solicitation of votes in May
2000 from creditors and equity holders to accept or reject the Plan.
Several objections to the Plan were filed and set for hearings in
July 2000. Prior to the conduct of hearings on the objections,
Raytech and the creditors' committee negotiated with the objectors
resulting in slight modifications to the Plan and withdrawal of the
objections. Resolicitation of a certain class of creditors was
ordered by the Court to vote on the slightly modified Plan and is
currently being conducted. A confirmation hearing has been
scheduled by the Court for late August 2000. It is possible that
the effective date of the confirmation will occur in 2000; however,
the timing and exact terms of the final Plan cannot be predicted
with certainty until confirmation.
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 1996, IDEM
named RPC as a potentially responsible party ("PRP"). RPC notified
its insurers of the IDEM action and one insurer responded by filing
a complaint in January 1997 in the U.S. District Court, Southern
District of Indiana, captioned Reliance Insurance Company vs. RPC
seeking a declaratory judgment that any liability of RPC is excluded
from its policy with RPC. In January 2000, the District Court
granted summary judgment to RPC, indicating that the insurer has a
duty to defend and indemnify losses stemming from the IDEM claim,
subject, however, to several remaining issues of coverage to be
decided, which remain pending. RPC continues to assess the extent
of the contamination and its involvement and is currently
negotiating with IDEM for an agreed order of cleanup. In April
2000, the United States Environmental Protection Agency issued a
subpoena for information to determine compliance with federal
environmental regulations and in July proposed a consent order of
environmental response that is currently being considered by RPC.
For any liability not covered by insurance, 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.
In January 1997, Raytech was named through a subsidiary in
a third party complaint captioned Martin Dembinski, et al. vs.
<PAGE>
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, a subsidiary of the Company filed a
complaint against a former administrative financial manager of
Advanced Friction Materials Company ("AFM") in the U.S. District
Court, Eastern District of Michigan, captioned Raytech Composites,
Inc. vs. Richard Hartwick, et ux. alleging that he wrongfully
converted Company monies in his control to his own use and benefit
in an amount greater than $3,300 prior to the April 1998 completion
of the acquisition of AFM as discussed in the following paragraph.
In December 1999, the District Court ruled on summary judgment in
favor of Raytech on its claim against Hartwick in the amount of
$3,330. A constructive trust had been ordered by the Court
providing ownership to Raytech of four real estate properties
purchased by Hartwick with the converted funds. The four properties
have been sold resulting in a net recovery of $1,337. Hartwick has
been arrested by the State of Michigan under 13 counts of
embezzlement. In May 2000, Hartwick pled guilty to the charges, and
has been sentenced for 2 to 15 years in the Michigan State
Penitentiary.
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
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 the judgment that a fraud was perpetrated upon the
Company related to the Hartwick case referenced above. In September
1999, the Bankruptcy Court granted jurisdiction of the case but
exercised discretionary abstention to enable the Court to focus on
issues impeding the plan confirmation. In June 1999, the former
owner filed an action against the Company in a County Court in
Michigan captioned Oscar E. Stefanutti, et al. vs. Raytech
Automotive Components Company to enforce payment of the note. An
answer has been filed and discovery is underway.
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
<PAGE>
up to this action and has enriched the Smith family by an estimated
$12 million and has greatly profited their associates, while
depriving Raymark and its creditors of nearly all of its assets
amounting to more than $27 million. Upon motion of the plaintiffs,
the Bankruptcy Court issued a temporary restraining order stopping
Mr. Smith and all defendants from dissipating, conveying,
encumbering or otherwise disposing of any assets, which order has
been amended several times and remains in effect pending a
preliminary injunction hearing. The reference to the Bankruptcy
Court has been withdrawn, and the matter is now being litigated in
the U.S. District Court in Connecticut. A motion for summary
judgment was filed by the plaintiffs and was ruled upon in March
2000. The ruling granted plaintiffs summary judgment on several of
the counts but denied summary judgment with respect to the claims
against Mr. Smith for the stripping of assets from Raymark and its
creditors for the reason that there was insufficient evidence of
insolvency of Raymark giving plaintiffs standing to file the claim.
The Court invited plaintiffs to file for reconsideration of the
denial with sufficient evidence of insolvency of Raymark at the time
Mr. Smith expropriated the assets. Such motion for reconsideration
was filed in April 2000 and is pending.
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, 1998, 1999 and 2000 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 has had a
material adverse impact on Raytech as it did not have the resources
needed to fund Raymark's potentially substantial uninsured asbestos-
related and environmental liabilities. However, the 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
<PAGE>
written consensual plan of reorganization must still be agreed to
and is subject to review and confirmation by the Bankruptcy Court,
which at this time cannot be predicted with certainty. The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets and liquidation of
liabilities in the normal course of business. The uncertainties
regarding the reorganization proceedings raise substantial doubt
about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability, revaluation and classification of recorded asset
amounts 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
July 2, 2000, the results of operations for the thirteen and twenty-
six weeks ended July 2, 2000 and July 4, 1999 and cash flows for the
twenty-six weeks ended July 2, 2000 and July 4, 1999. In addition to
the normal and recurring adjustments, certain adjustments reflecting
charges to income and related liability accounts have been recorded.
The adjustments are more fully explained in Note A to the
Consolidated Financial Statements above and the Management's
Discussion and Analysis of Financial Conditions and Results of
Operations contained in that section of this Form 10-Q. 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 2,
2000.
NOTE C - INVENTORIES
Net, inventories consist of the following:
July 2, 2000 January 2, 2000
Raw material $ 10,328 $ 10,883
Work in process 7,831 9,177
Finished goods 14,422 13,265
$ 32,581 $ 33,325
<PAGE>
NOTE D - EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
Basic EPS Computation
<S> <C> <S> <C> <C> <C> <C>
Numerator:
Net (loss) income $(7,063,828) $ 5,339 $(7,059,008) $ 9,827
Denominator:
Common shares outstanding at
beginning of year 3,480,904 3,421,395 3,480,904 3,421,395
Stock options exercised 9,655 - 4,827 -
Weighted average shares 3,490,559 3,421,395 3,485,731 3,421,395
Basic (loss) earnings per share $ (2,023.70) $ 1.56 $ (2,025.12) $ 2.87
Diluted EPS Computation
Numerator:
Net (loss) income $(7,063,828) $ 5,339 $(7,059,008) $ 9,827
Denominator:
Common shares outstanding at
beginning of year 3,480,904 3,421,395 3,480,904 3,421,395
Stock options exercised 9,655 - 4,827 -
Dilutive potential common shares - 61,947 - 56,251
Adjusted weighted average shares 3,490,559 3,483,342 3,485,731 3,477,646
Diluted (loss) earnings
per share $ (2,023.70) $ 1.53 $ (2,025.12) $ 2.82
Options to purchase 493,775 and 495,020 shares of common stock at $4.25 were
outstanding during the thirteen and twenty-six-week period ended July 2, 2000.
Options to purchase 497,510 and 498,755 shares at $4.25 were outstanding during
the thirteen and twenty-six-week period ended July 4, 1999. The shares were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than average market price of the common shares.
In addition, the dilutive potential common shares of 44,420 and 50,011 for the
thirteen- and twenty-six-week period ended July 2, 2000 were not included in the
computation of diluted earnings per share because of their antidilutive effect.
See Note A regarding the potential dilutive effect of the Company's plan of
reorganization.
</TABLE>
<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 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.
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.
Information relating to operations by industry segment follows with
related comments included in Management's Discussion and Analysis.
<PAGE>
NOTE E, continued
OPERATING SEGMENTS
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
Wet Friction
Net sales to external customers $ 38,880 $ 42,211 $ 82,929 $ 82,902
Intersegment net sales (1) 3,435 2,446 6,572 6,169
Total net sales $ 42,315 $ 44,657 $ 89,501 $ 89,071
Operating profit (2) $ 4,820 $ 5,191 $ 11,182 $ 9,871
Aftermarket
Net sales to external customers $ 14,971 $ 16,225 $ 29,988 $ 33,555
Intersegment net sales (1) 4 - 12 5
Total net sales $ 14,975 $ 16,225 $ 30,000 $ 33,560
Operating profit (2) $ 2,646 $ 2,795 $ 5,245 $ 5,847
Dry Friction
Net sales to external customers $ 7,271 $ 7,397 $ 15,680 $ 16,719
Intersegment net sales (1) 232 367 548 394
Total net sales $ 7,503 $ 7,764 $ 16,228 $ 17,113
Operating (loss) profit (2) $ (72) $ 386 $ 937 $ 1,002
Corporate
Operating loss before provision
for asbestos litigation,
environmental and other claims $ (950) $ (541) $ (1,814) $ (1,290)
Provision for asbestos litigation,
environmental and other claims (7,207,750) - (7,207,750) -
Operating loss (2,3) $(7,208,700) $ (541) $(7,209,564) $ (1,290)
Total Segments
Net sales to external customers $ 61,122 $ 65,833 $128,597 $133,176
Intersegment net sales (1) 3,671 2,813 7,132 6,568
Total net sales $ 64,793 $ 68,646 $135,729 $139,744
Consolidated operating (loss)
profit $(7,201,306) $ 7,831 $(7,192,200) $ 15,430
<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;
and includes a charge of $7.2 billion for liabilities subject to compromise (see
Note A).
</TABLE>
<PAGE>
Note F - Income Taxes
In the second quarter of 2000, the Company recorded a
deferred tax asset of $2.883 billion relating to the tax effects of
the liabilities subject to compromise. Based on its historical
taxable income, the Company expects to realize approximately $140
million of the deferred tax asset through the ten-year carryback of
the previously paid taxes and the expected tax benefits during the
twenty-year carryforward period. Accordingly, the Company has
recorded a valuation allowance of $2.743 billion against the deferred
tax asset to state it at its expected net realizable value. If the
plan is confirmed and effectuated in 2000, and the liabilities subject
to compromise are settled for less than the recorded amount of allowed
claims, the net deferred tax asset will be adjusted accordingly at
that time.
The Company's effective tax rate, excluding the deferred tax
benefit referred to above, for the twenty-six-week period ended
July 2, 2000 was 42% compared to 29% for the same period in the prior
year. The Company's effective tax rate, excluding the deferred tax
benefit referred to above, for the thirteen-week period ended July 2,
2000 was 42% compared to 25% for the same period in the prior year.
In the prior period, the tax rate was reduced by the effect
of certain legal and other costs deducted for tax purposes but offset
against the principal balance of the Raymark note payable in
connection with an indemnification agreement with Raymark. The offset
against the principal balance of the Raymark note has been
substantially utilized and this tax benefit is no longer available.
This issue accounts for substantially all of the increase in the
effective tax rate.
The Company has in process an Internal Revenue Service tax
audit for the 1996, 1997, and 1998 fiscal years. The IRS has advised
the Company that it is reviewing the deductibility of certain
bankruptcy related costs, which are included in the indemnification
agreement with Raymark, based on a 1999 Bankruptcy Court ruling of an
unrelated taxpayer. The amount and specific nature of costs that
could be contested has not been specified. The Company has deducted
approximately $16.0 million of such costs through July 2, 2000 and
continues to believe that these costs are deductible. At this time it
is not possible to assess the likelihood or amount of any IRS claim;
however, should the IRS assert a claim and prevail, an adjustment
related to prior year tax accruals would be required.
<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 worldwide net loss for the thirteen-week
period ended July 2, 2000 was $7.064 billion or $(2,023.70) per basic
share as compared to income of $5.3 million or $1.56 per basic share for the
same period in 1999. Raytech Corporation recorded a net loss for the
twenty-six-week period ended July 2, 2000 of $7.059 billion or
$(2,025.12) per basic share as compared to income of $9.8 million or $2.87
per basic share for the same period in the prior year. The Company
recorded certain charges and related liabilities, as discussed in more
detail in Note A to the Consolidated Financial Statements herein,
based on the estimated asbestos-related personal injury liability of
$6.760 billion and the estimate of the Government's claim for certain
environmental liabilities of $431.8 million. As part of the
bankruptcy proceeding with respect to successor liability, Raytech has
recorded a charge of $16 million to reflect its potential liability
for funding the Raymark pension plan. The charges discussed were
recorded as "Liabilities Subject to Compromise" in accordance with the
American Institute of Certified Public Accounts Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code."
The Plan, discussed in Note A to the Consolidated Financial
Statements herein, provides for the satisfaction and discharge of the
Company's pre-petition liabilities (Liabilities Subject to Compromise)
and upon the effective date of the Plan, will provide the reorganized
company with a capital structure appropriate for an industrial
products company. A confirmation hearing with respect to the Plan
currently is scheduled for late August 2000, and management believes
the Plan will be confirmed at that time. When the Plan is confirmed
and becomes effective, substantially all the liabilities subject to
compromise will be discharged in exchange for 90% of stock of
reorganized Raytech, while the current equity holders will retain a
10% ownership position. There are several conditions and other
matters that must be resolved in order to have the Plan confirmed and
become effective. Accordingly, it is difficult to predict with
certainty when it will be confirmed and become effective.
Exclusive of the charges related to the estimated claims of $7.2
billion, more fully described in Note A to the Consolidated Financial
Statements, pretax income for the thirteen-week and twenty-six-week
period ended July 2, 2000 was $6.4 million and $15.6 million
respectively. The performance year-to-date reflects the improved
<PAGE>
operating efficiencies and reduced materials and labor cost as an
offset to the sales decline period-over-period.
Net Sales
Worldwide net sales of $61.1 million and $128.6 million for the
thirteen-week and the twenty-six-week period ended July 2, 2000 were
less than the recorded sales amounts of $65.8 million and $133.2
million for the same periods in the prior year. The reduced sales
were driven by slower demand in the Aftermarket and Dry Friction
segment which were offset by increased demand in the Wet Friction
segment on a year-to-date basis. Sales were below prior year in all
segments for the second quarter.
The Wet Friction segment recorded sales of $42.3 million for the
thirteen-week period ended July 2, 2000, a decline of $2.4 million
from the prior year amount of $44.7. The reduced sales in the second
quarter reflect a lower sales volume in the heavy duty component of
this segment, which was anticipated based on an analysis of sales back
orders. The Wet Friction segment reported sales of $89.5 million for
the twenty-six-week period ended July 2, 2000 compared to $89.1
million in the same period for 1999. The flat sales reflect the
growth in sales of agricultural products and slower sales in the on-
road heavy product line. The automobile original equipment demand
remains at 1999 record levels for the twenty-six-week period.
Aftermarket sales for the quarter ended July 2, 2000 were $15.0
million compared to $16.2 million in the prior year. The $1.2 million
decline in sales reflects slower sales of dry friction in the North
American market as well as the effects of the mild winter weather.
Sales in the Aftermarket segment of $30 million in the twenty-six-week
period ended July 2, 2000 were $3.6 million less than the recorded
sales of $33.6 million in the same period in the prior year. The
light winter weather contributed to the lower sales as compared to
1999 results as well as more aggressive inventory management at
certain of our customers.
Dry Friction segment sales were $7.5 million for its thirteen-week
period ended July 2, 2000, $.3 million less than the prior year
amount of $7.8 million. The reduced sales reflect both a slower
European economy and the currency translation adjustments. The Dry
Friction segment recorded sales of $16.2 million for the six-month
period ended July 2, 2000, a $.9 million decrease from 1999 results.
The foreign exchange conversion rate decline in 2000, compared to
1999, accounted for a substantial portion of the difference, as well
as a slower sales economy for these products in Europe.
Operating Profits
The following discussion of operating results by industry
segment relates to information contained in Note E - Segment
<PAGE>
Reporting in the Notes to Condensed Consolidated Financial Statements.
Operating profit is income before income taxes and minority interest.
The Company recorded operating losses of $7.2 billion for the
thirteen-week period ended July 2, 2000 as compared to $7.8 million of
operating profit for the same period in the prior year. Operating
losses for the six-month period ended July 2, 2000 of $7.2 billion
compare to operating profits during the same period in 1999 of $15.4
million.
The Wet Friction segment recorded operating profit of $4.8
million for the thirteen-week period ended July 2, 2000, which was $.4
million less than the $5.2 million recorded in the same period in
1999. The reduced operating profit was down by the lower sales
recorded as compared to the same period in 1999 of $2.4 million. The
Wet Friction segment posted operating profits of $11.2 million as
compared to $9.9 million in 1999, an increase of $1.3 million or 13
percent for the six-month period ended July 2, 2000. The improved
earnings reflect improved operating efficiencies and reduced materials
costs over the prior year.
The Aftermarket segment recorded $2.7 million of operating profit
for the quarter ended July 2, 2000, which approximated the 1999
operating profit of $2.8 million for the same period in 1999. The
Aftermarket segment recorded operating profit for the twenty-six-week
period ended July 2, 2000 of $5.2 million, a reduction of $.6 million
compared to 1999 results for the same period. The reduced operating
profit reflects the impact of reduced sales, compared period-to-
period, of $3.6 million.
The Dry Friction segment recorded a $.1 million operating loss for the
second quarter compared to a $.4 million of operating profit in 1999 for the
same period. This operating loss was driven by currency translation and
under absorption of certain manufacturing costs during the quarter.
The Dry Friction segment recorded operating profit for the twenty-six
week period ended July 2, 2000 of $.9 million reflecting a decrease of
$.1 million over 1999 results for the same period. The reduced
operating profits were due to reduced sales period-over-period of $.9
million.
Income Taxes
In the second quarter of 2000, the Company recorded a deferred
tax asset of $2.883 billion relating to the tax effects of the
liabilities subject to compromise. Based on its historical taxable
income, the Company expects to realize approximately $140 million of
the deferred tax asset through the ten-year carryback of the
previously paid taxes and the expected tax benefits during the twenty-
year carryforward period. Accordingly, the Company has recorded a
valuation allowance of $2.743 billion against the deferred tax asset
to state it at its expected net realizable value. If the plan is
confirmed and effectuated in 2000, and the liabilities subject to
<PAGE>
compromise are settled for less than the recorded amount of allowed
claims, the net deferred tax asset will be adjusted accordingly at
that time.
The Company's effective tax rate, excluding the deferred tax
benefit referred to above, for the twenty-six-week period ended
July 2, 2000 was 42% compared to 29% for the same period in the prior
year. The Company's effective tax rate, excluding the deferred tax
benefit referred to above, for the thirteen-week period ended July 2,
2000 was 42% compared to 25% for the same period in the prior year.
In the prior periods, the tax rate was reduced by the effect of
certain legal and other costs deducted for tax purposes but offset
against the principal balance of the Raymark note payable in
connection with an indemnification agreement with Raymark. The offset
against the principal balance of the Raymark note has been
substantially utilized and this tax benefit is no longer available.
These issues account for substantially all of the increase in the
effective tax rates.
The Company has in process an Internal Revenue Service tax audit
for the 1996, 1997, and 1998 fiscal years. The IRS has advised the
Company that it is reviewing the deductibility of certain bankruptcy
related costs, which are included in the indemnification agreement
with Raymark, based on a 1999 Bankruptcy Court ruling of an unrelated
taxpayer. The amount and specific nature of costs that could be
contested has not been specified. The Company has deducted
approximately $16.0 million of such costs through July 2, 2000 and
continues to believe that these costs are deductible. At this time it
is not possible to assess the likelihood or amount of any IRS claim;
however, should the IRS assert a claim and prevail, an adjustment
related to prior year tax accruals would be required.
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 Company expects to continue to face an increasingly
competitive automotive environment and a steady state 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. Although there are indications the
Asian economies have begun to stabilize, the Asian economic
difficulties could have an unfavorable effect on overall economic
<PAGE>
conditions in the U. S. and Canada, where our major customers' sales
are concentrated.
With regard to the Company's agricultural equipment operations,
worldwide farm commodity prices remain at low levels. Under these
conditions, it is expected that retail demand for agricultural
equipment will be higher than 1999 levels. The Company expects demand
for certain heavy duty products will be reduced through the remainder
of 2000 based on a review of its current order bank. In light of this
outlook and the Company's continuing commitment to aggressive asset
management, production schedules are being reviewed for 2000 to ensure
the Company's production meets demand.
The Aftermarket segment sales, which were at record highs in
1999, are expected to decline compared to 1999 levels. The demand for
aftermarket transmission products has been slowed by generally mild
weather in many parts of the country and more aggressive inventory
management by certain customers.
The Dry Friction segment continues to operate in a sluggish
European environment with unemployment remaining at high levels and
economic growth improving only marginally. Sales are expected to be
near 1999 levels in terms of functional currency, with lower sales
reported due to translation adjustment. The development of new market
opportunities in Asia is supported through the new production facility
in China. The overall Asian economy continues to be negatively
affected by the weakened economies of Japan and other Asian countries.
The Company's outlook for 2000 worldwide sales and revenue
anticipates sales and revenues to be lower than 1999.
Financial Risks
The Company is naturally exposed to various interest rate risk
and foreign currency risk in its normal course of business.
The rates of interest on the various debt agreements range from
3% to 11%. The Company has not entered into any interest rate
management programs such as interest rate swaps or other derivative
type transactions. The amount of exposure which could be created by
increases in rates is not considered significant by management.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $10.8 million at
July 2, 2000 compared to $10.7 million at January 2, 2000. Capital
investment for the six-month period totaled $6.8 million. The level
of capital investment is consistent with planned expenditures in both
periods.
<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 $10.0 million, with $8.8 million
available in additional borrowings. The Company's foreign
subsidiaries have outstanding balances from available lines of credit
amounting to $4.3 million with available unused lines of credit
amounting to $.9 million, which expire upon demand. The Company
believes that cash provided by operations will provide sufficient
liquidity to meet its funding requirements.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Statements under the "Outlook" heading 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 determine 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 and from the euro);
technological difficulties; accounting standards, and other risks and
uncertainties. Further information, including factors that potentially
could materially affect the Company's financial results, is included in
the Company's filings with the Securities and Exchange Commission.
Recently Issued Accounting Pronouncement
In June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 137,
Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an
Amendment of FASB Statement No. 133. This statement defers, for one
year, the effective date of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, to those fiscal years beginning
after June 15, 2000. SFAS No. 133 requires all derivatives to be
recorded as either assets or liabilities and the instruments to be
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives are to be recognized immediately or
deferred depending on the use of the derivative and whether or not it
qualified as a hedge. Raytech will adopt SFAS No. 133 by January 1,
2001, as required. Management is currently assessing the impact of
this statement on Raytech's results of operations and financial
position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2.
<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 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 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. The purchase price of
the stock was affected by Raymark's substantial asbestos-related
liabilities.
Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-
defendant with Raymark and other named defendants in
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
<PAGE>
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.
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 writ of certiorari was denied by the U.S. Supreme
Court in October 1995. The ruling leaves the Oregon case, as
affirmed by the Ninth Circuit Court of Appeals, as the prevailing
decision holding Raytech to be a successor to Raymark's asbestos-
related liabilities.
As the result of the Court rulings recited above holding
Raytech a successor to Raymark's asbestos-related liabilities,
Raytech halted payments to Raymark under the 1987 Asset Purchase
Agreement in May 1995. However, in February 1997, with Raymark
temporarily out of bankruptcy, Raytech resumed making payments
pursuant to the Agreement. As the result of the creditors'
committee's action to halt the payments, the Bankruptcy Court
ordered the payments stopped in January 1998. In retaliation 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
<PAGE>
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. In October 1998, a trustee was appointed by
the United States Trustee over the Raymark bankruptcies and is
currently administering the Raymark estate.
In October, 1998 Raytech reached a tentative settlement
with its creditors and entered into a Memorandum of Understanding
with respect to achieving a consensual plan of reorganization
(the "Plan"). The parties to the settlement 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 90% of the equity in reorganized Raytech and
any and all refunds of taxes paid or net reductions in taxes
owing resulting from the transfer of equity to a trust
established under the Bankruptcy Code, and existing equity
holders in Raytech to receive 10% of the equity in reorganized
Raytech. 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 August 1999, a bar date was set for filing claims
against Raytech by the Bankruptcy Court. The Court appointed
<PAGE>
claims agent reported in November 1999 that approximately 3200
claims were filed as of the bar date. Such claims were
categorized into asbestos personal injury, asbestos property
damage, environmental, including the EPA and State of
Connecticut, pension/retiree benefits and other employee-related
claims and other contractual and general categories. The total
amounts claimed, not including unliquidated claims, exceeded $300
billion. Claims believed invalid by the debtor were being
objected to and the Bankruptcy Court expunged many claims
following hearings in February 2000. All claims proven valid
will be dealt with through the plan of reorganization at
confirmation.
By Bankruptcy Court order, the bar date referenced above
did not apply to asbestos-related personal injury ("Asbestos")
claimants although many filed claims pursuant to the terms of the
bar date. In order to comply with the mandatory estimation of
all claims against the debtor in the confirmation process,
Raytech, the creditors' committee and the Government entered into
discussions to attempt to make estimations of the Asbestos and
Government claims not subject to the bar date. The discussions
resulted in an agreement on the estimate of such Asbestos and
Government claims, and accordingly, a motion was filed in the
Bankruptcy Court for an allowance of Asbestos claims of $6.760
billion and Government claims of $431.8 million for purposes of
voting and distribution under the terms of the Plan. In March
2000, the Bankruptcy Court entered an interim order allowing such
amounts as general unsecured claims subject to an objection
period through June 2000 and the completion of the initial vote
of the plan of confirmation on July 7, 2000. As a result of the
resolution of the objections raised with only a slight
modification to the plan and the overwhelming favorable response
to the initial vote, management is substantially certain that the
plan will be confirmed and that the estimate of the $7.2 billion
of allowed claims will be finally approved by the Bankruptcy
Court. Accordingly, Raytech has recorded a charge and related
liability in the accompanying financial statements in the amount
of the estimated amount of allowed claims. Such estimations are
recorded as liabilities subject to compromise since it is
expected that the distributions under the Plan with respect to
such claims will be lesser amounts consisting of a 90% equity
distribution in reorganized Raytech at confirmation pursuant to
the Plan referenced above in this Note A. Upon the effective date of
the Plan, Raytech will utilize the "fresh start" reporting
principles contained in the AICPA's Statement of Position 90-7,
which will result in adjustments relating to the amounts and
classification of recorded assets and liabilities determined as
of the effective date. Under the Plan, the ultimate
consideration to be received by all unsecured creditors will be
covered under the referenced 90% equity distribution and will be
substantially less than amounts shown in the accompanying
financial statements. However, until the Plan is confirmed by
<PAGE>
the Court, the Company cannot be certain of confirmation and the
ultimate amount creditors will be entitled to receive.
In April 1999, separate adversary actions were filed in
the Bankruptcy Court by the retiree committee and the Pension
Benefit Guarantee Corporation, respectively, seeking judgments
that retirees and pensioners of Raymark have rights as claimants
for their benefits in the Raytech bankruptcy estate on the basis
of successor liability. Both matters have been heard and decided
by the Bankruptcy Court in 1999. In the retiree case, the Court
ruled that the Raymark Trustee had the right to terminate the
welfare benefit programs and accordingly that liability could not
be transferred to Raytech. A motion for reconsideration was
denied by the Court. In July 2000, the appellate court affirmed
the Bankruptcy Court's decision not to transfer the retiree
liability to Raytech. In the pension case, the Court ruled that
Raytech has the liability to pay the Raymark pensions based on
successor liability. Appeals of the decisions were filed.
However, as a result of the adverse pension case decision,
Raytech has recorded a charge and related liability in an
estimated amount of $16 million in the accompanying financial
statements. Such charged liability is subject to compromise
based on the pending appeal of the decision and confirmation of
the plan of reorganization.
In 1991, an environmental claim was filed by the
Pennsylvania Department of Environmental Resources ("DER") to
perform certain activities in connection with Raymark's
Pennsylvania manufacturing facility, including submission of an
acceptable closure plan for a landfill containing hazardous waste
products located at the facility. In March 1991, the Company
entered a Consent Order which required Raymark to submit a
revised closure plan acceptable to the DER. The estimated cost
for Raymark to comply with the order was $1.2 million. The DER
has notified the Company that Raymark has failed to comply with
its obligations under the Consent Order. In July 2000 Raymark
has contracted to sell its Pennsylvania manufacturing facility
and the buyer has agreed to comply with the order on behalf of
Raymark.
Pursuant to the Memorandum of Understanding, a
consensual plan of reorganization (the "Plan") has been prepared
and filed in the Bankruptcy Court in April 2000 along with the
disclosure statement with respect to the Plan. Allowed claims
under the Plan fall into five classes, including priority,
secured, general unsecured, affiliate and shareholder. Most
allowed claims fall into the general unsecured class and will be
paid through the 90% equity contribution, including all asbestos-
related claims, environmental claims, employee-related claims and
contractual and general claims.
The procedure for confirmation of the Plan is underway
and the Bankruptcy Court has recently entered an interim order allowing the
estimation of claims and approved the adequacy of the disclosure statement to
the Plan resulting in the solicitation of votes from creditors
and equity holders to accept or reject the Plan. Several
objections to the Plan were filed and set for hearing in July
2000. Prior to the conduct of hearings on the objection, Raytech
and the creditors' committee negotiated with the objectors
resulting in slight modifications to the Plan and withdrawal of
the objections. Resolicitation of a certain class of creditors
was ordered by the Court to vote on the slightly modified Plan
and is currently being conducted. A confirmation hearing has
been scheduled by the Court for late August 2000. It is possible
that the effective date of the confirmation will occur in 2000;
however, the timing and exact terms of the final Plan cannot be
predicted with certainty.
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 1996, IDEM named RPC as a potentially responsible party
("PRP"). RPC notified its insurers of the IDEM action and one
insurer responded by filing a complaint in January 1997 in the
U.S. District Court, Southern District of Indiana, captioned
Reliance Insurance Company vs. RPC seeking a declaratory judgment
that any liability of RPC is excluded from its policy with RPC.
In January 2000, the District Court granted summary judgment to
RPC, indicating that the insurer has a duty to defend and
indemnify losses stemming from the IDEM claim, subject, however,
to several remaining issues of coverage to be decided, which
remain pending. RPC continues to assess the extent of the
contamination and its involvement and is currently negotiating
with IDEM for an agreed order of cleanup. In April 2000, the
United States Environmental Protection Agency issued a subpoena
for information to determine compliance with federal
environmental regulations and in July proposed a consent order of
environmental response that is currently being considered by RPC.
For any liability not covered by insurance, 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.
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, a subsidiary of the Company filed a
complaint against a former administrative financial manager of
Advanced Friction Materials Company ("AFM") in the U.S. District
Court, Eastern District of Michigan, captioned Raytech
Composites, Inc. vs. Richard Hartwick, et ux. alleging that he
wrongfully converted Company monies in his control to his own use
and benefit in an amount greater than $3,300 prior to the April
1998 completion of the acquisition of AFM as discussed in the
following paragraph. In December 1999, the District Court ruled
on summary judgment in favor of Raytech on its claim against
Hartwick in the amount of $3,330. A constructive trust had been
ordered by the Court providing ownership to Raytech of four real
estate properties purchased by Hartwick with the converted funds.
The four properties have been sold resulting in a net recovery of
$1,337. Hartwick has been arrested by the State of Michigan
under 13 counts of embezzlement. In May 2000, Hartwick pled
guilty to the charges and has been sentenced for 2 to 15 years in
the Michigan State Penitentiary.
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 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 the judgment that a fraud was
perpetrated upon the Company related to the Hartwick case
referenced above. In September 1999, the Bankruptcy Court
granted jurisdiction of the case but exercised discretionary
abstention to enable the Court to focus on issues impeding the
plan confirmation. In June 1999, the former owner filed an
action against the Company in a County Court in Michigan
captioned Oscar E. Stefanutti, et al. vs. Raytech Automotive
Components Company to enforce payment of the note. An answer has
been filed and discovery is underway.
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
<PAGE>
motion of the plaintiffs, the Bankruptcy Court issued a temporary
restraining order stopping Mr. Smith and all defendants from
dissipating, conveying, encumbering or otherwise disposing of any
assets, which order has been amended several times and remains in
effect pending a preliminary injunction hearing. The reference
to the Bankruptcy Court has been withdrawn, and the matter is now
being litigated in the U.S. District Court in Connecticut. A
motion for summary judgment was filed by the plaintiffs and was
ruled upon in March 2000. The ruling granted plaintiffs summary
judgment on several of the counts but denied summary judgment
with respect to the claims against Mr. Smith for the stripping of
assets from Raymark and its creditors for the reason that there
was insufficient evidence of insolvency of Raymark, giving
plaintiffs standing to file the claim. The Court invited
plaintiffs to file for reconsideration of the denial with
sufficient evidence of insolvency of Raymark at the time Mr.
Smith expropriated the assets. Such motion for reconsideration
was filed in April 2000 and is pending.
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, 1998, 1999
and 2000 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 has had a material adverse impact on Raytech as it
did not have the resources needed to fund Raymark's potentially
substantial uninsured asbestos-related and environmental
liabilities. However, the 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 written consensual plan
of reorganization must still be agreed to and is subject to
review and confirmation by the Bankruptcy Court, which at this
time cannot be predicted with certainty. The accompanying
financial statements have been prepared assuming that the Company
<PAGE>
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 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
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
Vice President, Treasurer
and Chief Financial Officer
Date: August 14, 2000
