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 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 May 3, 2000, 3,480,904 shares of the Registrant's common
stock, par value $1.00, were issued and outstanding.
Page 1 of 34
RAYTECH CORPORATION
INDEX
Page
Number
PART I. UNAUDITED FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets
at April 2, 2000(Unaudited) and January 2, 2000 3
Condensed Unaudited Consolidated Statements of
Operations for the thirteen weeks ended
April 2, 2000 and April 4, 1999 4
Condensed Unaudited Consolidated Statements
of Cash Flows for the thirteen weeks
ended April 2, 2000 and April 4, 1999 5
Condensed Unaudited Consolidated Statements of
Shareholders' Equity for the thirteen weeks
ended April 2, 2000 and April 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 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 34
Signature 35
-2-
RAYTECH CORPORATION
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
April 2, Jan. 2,
2000 2000
At (Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 10,086 $ 10,746
Trade accounts receivable, net 36,865 31,804
Inventories 33,644 33,325
Other current assets 6,970 8,169
Total current assets 87,565 84,044
Property, plant and equipment 182,480 180,202
Less accumulated depreciation (100,270) (98,130)
Net property, plant and equipment 82,210 82,072
Intangible assets 19,867 20,074
Other assets 2,482 2,496
Total assets $192,124 $188,686
LIABILITIES
Current liabilities
Notes payable $ 17,986 $ 19,175
Current portion of long-term debt - Raymark 11,167 11,167
Current portion of long-term debt 1,338 1,362
Accounts payable 18,477 18,505
Accrued liabilities 23,710 22,634
Total current liabilities 72,678 72,843
Long-term debt due to Raymark 7,659 9,206
Long-term debt 6,651 6,581
Postretirement benefits other than pensions 12,323 12,132
Other long-term liabilities 7,522 7,136
Total liabilities 106,833 107,898
Commitments and Contingencies
SHAREHOLDERS' EQUITY
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, 5,612,963 issued
at April 2, 2000 and January 2, 2000 5,613 5,613
Additional paid in capital 70,562 70,564
Retained earnings 14,157 9,337
Accumulated other comprehensive loss (480) (165)
89,852 85,349
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 85,291 80,788
Total liabilities and shareholders' equity $192,124 $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>
April 2, April 4,
For the 13 Weeks Ended 2000 1999
<S> <C> <C>
Net sales $ 67,475 $ 67,343
Cost of sales (49,366) (50,817)
Gross profit 18,109 16,526
Selling, general and administrative expenses (8,734) (8,461)
Operating profit 9,375 8,065
Interest expense (509) (367)
Interest expense - Raymark (70) (70)
Other income (expense), net 310 (29)
Income before provision for income taxes
and minority interest 9,106 7,599
Provision for income taxes (3,825) (2,505)
Income before minority interest 5,281 5,094
Minority interest (461) (606)
Net income $ 4,820 $ 4,488
Basic earnings per share $ 1.38 $ 1.31
Diluted earnings per share $ 1.36 $ 1.29
<FN>
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>
April 2, April 4,
For the 13 Weeks Ended 2000 1999
<S> <C> <C>
Net cash provided by operating activities $ 4,400 $ 7,537
Cash flow from investing activities:
Capital expenditures (4,126) (5,554)
Proceeds on sales of property, plant and equipment 69 74
Net cash used in investing activities (4,057) (5,480)
Cash flow from financing activities:
Cash overdraft 1,475 2,596
Net payments on short-term borrowings (1,063) (4,492)
Principal payments on long-term debt (91) (73)
Proceeds from long-term borrowings 261 -
Payments on borrowings from Raymark (1,547) (1,201)
Other (2) -
Net cash used in financing activities (967) (3,170)
Effect of exchange rate changes on cash (36) (88)
Net change in cash and cash equivalents (660) (1,201)
Cash and cash equivalents at beginning of period 10,746 7,482
Cash and cash equivalents at end of period $10,086 $ 6,281
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(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) Income Shares) Total
<C> <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 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
Balance,
January 2, 2000 $5,613 $70,564 $ 9,337 $ (165) $(4,561) $80,788
Comprehensive income:
Net income 4,820 4,820
Changes during
the period (315) (315)
Total comprehensive
income 4,820 (315) 4,505
Purchase of subsidiary stock (2) (2)
Balance,
April 2, 2000 $5,613 $70,562 $14,157 $ (480) $(4,561) $85,291
<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 are being analyzed but appear
to be separated 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.
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
the pension case, the Court ruled that Raytech has the liability to
pay the Raymark pensions based on successor liability. Appeals of
the decisions have been filed. Any required funding is subject to
the plan of reorganization at confirmation.
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. The matter will be dealt with through the plan
of reorganization at confirmation.
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
<PAGE>
statement with respect to the Plan. Allowed claims under the Plan
will fall into five classes, including priority, secured, general
unsecured, affiliate and shareholder. Most allowed claims will 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 confirmation process, which is underway and currently
being considered by the Bankruptcy Court, includes the approval of
the Plan and supporting disclosure statement, an estimation of
claims, a vote by creditors and final confirmation by the Bankruptcy
Court. It is possible that the confirmation will occur in 2000;
however, the timing and 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, 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. 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 April, Hartwick pled no contest to the charges,
and his sentencing is pending.
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 motion of the plaintiffs,
the Bankruptcy Court issued a temporary restraining order stopping
<PAGE>
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 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
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. 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
<PAGE>
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 2, 2000 and the results of operations and cash flows for the
thirteen weeks ended April 2, 2000 and April 4, 1999. 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 2, 2000.
Certain amounts for the prior period's Statement of Cash
Flows have been reclassified to conform to the current period's
presentation.
NOTE C - INVENTORIES
Net, inventories consist of the following:
April 2, 2000 January 2, 2000
Raw material $ 10,576 $ 10,883
Work in process 8,381 9,177
Finished goods 14,687 13,265
$ 33,644 $ 33,325
<PAGE>
NOTE D - EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the 13 Weeks Ended
April 2, 2000 April 4, 1999
<S> <C> <C>
Basic EPS Computation
Numerator:
Net income $ 4,820 $ 4,488
Denominator:
Weighted average shares 3,480,904 3,421,395
Basic earnings per share $ 1.38 $ 1.31
Diluted EPS Computation
Numerator:
Net income $ 4,820 $ 4,488
Denominator:
Weighted average shares 3,480,904 3,421,395
Dilutive potential common shares 65,335 49,727
Adjusted weighted average shares 3,546,239 3,471,122
Diluted earnings per share $ 1.36 $ 1.29
Options to purchase 495,000 and 496,000 shares of common stock at
$4.25 were outstanding during the thirteen weeks ended April 2, 2000
and April 4, 1999, respectively, but were not included in the
computation of diluted earnings per share because the option's
exercise price was greater than average market price of the common
shares.
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
April 2, 2000 April 4, 1999
<S> <C> <C>
Wet Friction
Net sales to external
customers $ 44,049 $ 40,691
Intersegment net sales (1) 3,137 3,723
Total net sales $ 47,186 $ 44,414
Operating profit (2) $ 6,362 $ 4,680
Aftermarket
Net sales to external
customers $ 15,017 $ 17,330
Intersegment net sales (1) 8 5
Total net sales $ 15,025 $ 17,335
Operating profit (2) $ 2,599 $ 3,052
Dry Friction
Net sales to external
customers $ 8,409 $ 9,322
Intersegment net sales (1) 316 27
Total net sales $ 8,725 $ 9,349
Operating profit (2) $ 1,009 $ 616
Corporate
Operating profit (2,3) $ (864) $ (749)
Total Segments
Net sales to external
customers $ 67,475 $ 67,343
Intersegment net sales (1) 3,461 3,755
Total net sales $ 70,936 $ 71,098
Consolidated operating profit (2) $ 9,106 $ 7,599
<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>
Note F - Income Taxes
The effective tax rate for the thirteen-week period ended April 2,
2000 was 42 percent compared to 33 percent 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 9 percent 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 April 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 recorded net income for the thirteen-week
period ended April 2, 2000 of $4.8 million or $1.38 per basic share as
compared to $4.5 million or $1.31 per basic share for the same period
in the prior year. The earnings were driven by strong performance in
the Wet Friction segment, which recorded increased sales of $2.8
million or 6.2% and increased operating profit of $1.7 million or 36.2%
over the same period in 1999. The Dry Friction segment posted reduced
sales of $.6 million and improved operating profit of $.4 million while
the Aftermarket segment recorded lower sales of $2.3 million and lower
operating profit of $.5 million compared to the same period in 1999.
Increases in operating profit were offset by a higher tax rate in the
first quarter 2000 compared to the first quarter of 1999.
Net Sales
Worldwide net sales of $67.5 million for the thirteen-week
period ended April 2, 2000 was comparable to the recorded sales
amount of $67.3 million for the same period in the prior year.
The Wet Friction segment reported increased sales of $2.8
million over 1999 sales for the same period. Total sales of $47.2
million for the first quarter of 2000 reflected an increase in the
demand for agricultural products and certain heavy duty products of
$1.2 million over the first quarter results for 1999.
Additionally, the automotive and light truck component of the Wet
Friction segment recorded improved sales of $1.6 million over the
same period in 1999. Domestic car and light truck sales continue
at the record 1999 levels through the first quarter of 2000 and are
anticipated to remain at these levels throughout the remainder of
the year.
Sales in the Aftermarket segment of $15.0 million in the
thirteen-week period ended April 2, 2000 were $2.3 million less
than the recorded sales in the same period as the prior year. The
light winter weather contributed to the lower sales as compared to
1999 results.
The Dry Friction segment recorded sales of $8.7 million for
the first quarter of 2000, a $.6 million decrease from 1999 first
quarter results. The foreign exchange conversion rate decline in
<PAGE>
2000 compared to 1999 accounted for substantially the entire
difference.
Operating Profits
The following discussion of operating results by industry
segment relates to information contained in Note E - Segment
Reporting in the Notes to Condensed Consolidated Financial
Statements. Operating profit is income before income taxes and
minority interest.
Operating profits increased $1.5 million or 19.7 percent in
the first quarter of 1999 to $9.1 million as compared to $7.6
million in the first quarter of 1999.
The Wet Friction segment posted operating profits of $6.4
million as compared to $4.7 million in 1999, an increase of $1.7
million or 36.2 percent. The improved earnings reflect improved
operating efficiencies and reduced materials costs over the prior
year as well as improved sales volume.
The Aftermarket segment recorded operating profit for the
thirteen-week period ended April 2, 2000 of $2.6 million, a
reduction of $.5 million compared to 1999 results for the same
period. The reduced operating profit reflects the impact of
reduced sales, compared period-to-period, of $2.3 million.
The Dry Friction segment recorded operating profit for the
first quarter of 2000 of $1.0 million reflects an increase of $.4
million over 1999 results for the same period. The improved
operating profits were achieved on $.6 million less in sales and
reflects continued improvement in materials costs.
Income Taxes
The effective tax rate for the thirteen-week period ended
April 2, 2000 was 42 percent compared to 33 percent 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 9 percent 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
<PAGE>
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 April 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 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 consistent with 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, which recorded record sales in 1999,
is expected to remain at the 1999 revenue level. The demand for
aftermarket transmission products has been slowed by a generally
mild winter in many parts of the country.
The Dry Friction segment continues to operate in a sluggish
European environment with unemployment remaining at high levels and
economic growth improving only marginally. The development of new
market opportunities in Asia is supported through the new
production facility in China. The overall Asian economy continues
to be negatively affected by the weakened economies of Japan and
other Asian countries.
<PAGE>
The Company's outlook for 2000 worldwide sales and revenue
anticipates sales and revenues to be at the same level as compared
to 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.
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.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $10.1 million
at April 2, 2000 compared to $10.7 million at January 2, 2000.
Capital investment for the three-month period totaled $4.1
million. The level of capital investment is consistent with
planned expenditures in both periods.
The Company uses collateralized lines of credit for funding
purposes in the United States. Currently, the outstanding
balances from available lines of credit are $14.1 million, with
$7.5 million available in additional borrowings. The Company's
foreign subsidiaries have outstanding balances from available lines
of credit amounting to $3.9 million with available unused lines of
credit amounting to $.6 million, which expire upon demand. The
Company believes that cash provided by operations will provide
sufficient liquidity to meet its funding requirements.
<PAGE>
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.
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.
<PAGE>
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 are being
analyzed but appear to be separated 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.
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 the pension case, the Court ruled that
Raytech has the liability to pay the Raymark pensions based on
successor liability. Appeals of the decisions have been filed.
Any required funding is subject to the plan of reorganization at
confirmation.
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. The matter will be
dealt with through the plan of reorganization at confirmation.
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 will fall into five classes, including priority,
secured, general unsecured, affiliate and shareholder. Most
allowed claims will 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.
<PAGE>
The confirmation process, which is underway and
currently being considered by the Bankruptcy Court, includes the
approval of the Plan and supporting disclosure statement, an
estimation of claims, a vote by creditors and final confirmation
by the Bankruptcy Court. It is possible that the confirmation
will occur in 2000; however, the timing and 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, 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. 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
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
<PAGE>
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 April 2000, Hartwick pled no
contest to the charges and his sentencing is pending.
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
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
<PAGE>
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 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 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. 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
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 8, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<RESTATED>
<CIK> 0000797917
<NAME> RAYTECH CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-03-2000
<PERIOD-END> APR-02-2000
<PERIOD-TYPE> 3-MOS
<EXCHANGE-RATE> 1
<CASH> 10,086
<SECURITIES> 0
<RECEIVABLES> 38,245
<ALLOWANCES> 1,380
<INVENTORY> 33,644
<CURRENT-ASSETS> 87,565
<PP&E> 182,480
<DEPRECIATION> 100,270
<TOTAL-ASSETS> 192,124
<CURRENT-LIABILITIES> 72,678
<BONDS> 0
<COMMON> 5,613
0
0
<OTHER-SE> 79,678
<TOTAL-LIABILITY-AND-EQUITY> 192,124
<SALES> 67,475
<TOTAL-REVENUES> 67,475
<CGS> 49,366
<TOTAL-COSTS> 49,366
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 579
<INCOME-PRETAX> 9,106
<INCOME-TAX> 3,825
<INCOME-CONTINUING> 4,820
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,820
<EPS-BASIC> 1.38
<EPS-DILUTED> 1.36
</TABLE>
