-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wqkor3N4wnlIGcUOGcUOsE11zQKptNrjLTpDjpXBd8w6G9TYN0aQAL/dt/JeWJo4 h9CiFXHdMWSsWaI2ysYt3A== 0000797917-99-000017.txt : 19991115 0000797917-99-000017.hdr.sgml : 19991115 ACCESSION NUMBER: 0000797917-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYTECH CORP CENTRAL INDEX KEY: 0000797917 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490] IRS NUMBER: 061182033 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09298 FILM NUMBER: 99747849 BUSINESS ADDRESS: STREET 1: FOUR CORPORATE DR STE 512 CITY: SHELTON STATE: CT ZIP: 06484 BUSINESS PHONE: 2039258023 10-Q 1 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 October 3, 1999, or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-9298 RAYTECH CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 06-1182033 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Suite 295, Four Corporate Drive Shelton, Connecticut 06484 (Address of Principal Executive Offices) (Zip Code) 203-925-8023 (Registrant's Telephone Number) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of November 11, 1999, 3,480,904 shares of the Registrant's common stock, par value $1.00, were issued and outstanding. Page 1 of 36 RAYTECH CORPORATION INDEX Page Number PART I. UNAUDITED FINANCIAL INFORMATION: Item 1. Condensed Unaudited Consolidated Balance Sheets at October 3,1999 and January 3, 1999 3 Condensed Unaudited Consolidated Statements of Operations for the thirteen weeks and thirty-nine weeks ended October 3, 1999 and September 27, 1998 4 Condensed Unaudited Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 3, 1999 and September 27, 1998 5 Consolidated Unaudited Statements of Shareholders' Equity for the thirty-nine weeks ended October 3, 1999 and September 27, 1998 6 Notes to Condensed Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 6. Exhibits and Reports on Form 8-K 35 Signature 36 -2- RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)(Unaudited) October 3, Jan. 3, At 1999 1999 ASSETS Current assets Cash and cash equivalents $ 9,766 $ 7,482 Trade accounts receivable, net 32,973 29,058 Inventories 32,869 30,869 Other current assets 7,580 8,560 Total current assets 83,188 75,969 Property, plant and equipment 175,818 163,906 Less accumulated depreciation 97,520 92,014 Net property, plant and equipment 78,298 71,892 Intangible assets 21,847 22,385 Other assets 3,601 3,558 Total assets $ 186,934 $173,804 LIABILITIES Current liabilities Notes payable $ 19,712 $ 17,316 Current portion of long-term debt - Raymark 11,487 12,640 Current portion of long-term debt 1,135 1,187 Accounts payable 16,928 15,705 Accrued liabilities 19,876 21,595 Total current liabilities 69,138 68,443 Long-term debt due to Raymark 13,830 16,524 Long-term debt 6,656 5,708 Postretirement benefits other than pensions 11,787 11,017 Other long-term liabilities 9,135 7,815 Total liabilities 110,546 109,507 SHAREHOLDERS' EQUITY Capital stock Cumulative preference stock, no par value 800,000 shares authorized, none issued & outstanding Common stock, par value $1.00 - - 7,500,000 shares authorized, 5,582,813 and 5,553,454 issued as of October 3, 1999 and January 3, 1999, respectively 5,583 5,553 Additional paid in capital 70,542 70,501 Retained earnings (deficit) 6,178 (7,027) Accumulated other comprehensive income (1,354) (169) 80,949 68,858 Less treasury shares at cost (4,561) (4,561) Total shareholders' equity 76,388 64,297 Total liabilities and shareholders' equity $ 186,934 $173,804 The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data) (unaudited)
For the 13 Weeks Ended For the 39 Weeks Ended Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1999 1998 1999 1998 Net Sales $ 62,473 $ 61,486 $195,649 $188,026 Cost of sales (47,996) (48,515) (148,295) (143,887) Gross profit 14,477 12,971 47,354 44,139 Selling and administrative expenses (8,894) (7,485) (25,726) (23,101) Operating profit 5,583 5,486 21,628 21,038 Interest expense (482) (299) (1,300) (1,359) Interest expense - Raymark (70) (46) (210) (136) Other income, net 229 11 572 587 Income before provision for income taxes and minority interest 5,260 5,152 20,690 20,130 Provision for income tax (1,526) (1,744) (6,000) (5,653) Income before minority interest 3,734 3,408 14,690 14,477 Minority interest (356) (327) (1,485) (1,253) Net income $ 3,378 $ 3,081 $ 13,205 $ 13,224 Basic earnings per share $ .98 $ .90 $ 3.85 $ 3.90 Diluted earnings per share $ .94 $ .87 $ 3.76 $ 3.71 The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Oct. 3, Sept. 27, For the 39 Weeks Ended 1999 1998 Net cash provided by operating activities $ 15,612 $ 7,970 Cash flow from investing activities: Capital expenditures (15,754) (11,936) Purchase of common stock in AFM - (3,337) Proceeds on sale of property, plant and equipment 382 136 Net cash used in investing activities (15,372) (15,137) Cash flow from financing activities: Cash overdraft 2,284 (739) Net borrowing under revolving line of credit 632 3,456 Net proceeds from short-term borrowings 829 1,175 Principal payments on long-term debt (190) (129) Proceeds from long-term borrowings 1,231 2,356 Payments on borrowings from Raymark (2,694) (349) Other 71 356 Net cash used in financing activities 2,163 6,126 Effect of exchange rate changes on cash (119) 7 Net change in cash and cash equivalents 2,284 (1,034) Cash and cash equivalents at beginning of period 7,482 9,913 Cash and cash equivalents at end of period $ 9,766 $ 8,879 The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands) (unaudited)
Treasury Accumulated Stock Other At Cost Common Paid in Accumulated Comprehensive (2,132,059 Stock Capital Deficit (Loss) Income Shares) Total Balance, December 28, 1997 $5,417 $70,275 $(23,384) $ 715 $(4,561) $48,462 Comprehensive income: Net income 13,224 13,224 Changes during the period (507) (507) Total comprehensive income 13,224 (507) 12,717 Stock options exercised (136,087 shares) 136 226 362 Balance, September 27, 1998 $5,553 $70,501 $(10,160) $ 208 $(4,561) $61,541 Balance, January 3, 1999 $5,553 $70,501 $ (7,027) $ (169) $(4,561) $64,297 Comprehensive income: Net income 13,205 13,205 Changes during the period (1,185) (1,185) Total comprehensive income 13,205 (1,185) 12,020 Stock options exercised ( 29,359 shares) 30 41 71 Balance, October 3, 1999 $5,583 $70,542 $ 6,178 $(1,354) $(4,561) $76,388 The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) (Unaudited) NOTE: For purposes of the notes and Item 2, Raytech Corporation and its subsidiaries are referenced on a consolidated basis as "Raytech" or the "Company" where appropriate. NOTE A - Formation of Raytech Corporation, Sale of Raymark, Chapter 11 Proceeding and Other Litigation Raytech Corporation ("Raytech" or the "Company") was incorporated in June 1986 in Delaware and held as a subsidiary of Raymark Corporation ("Raymark"). In October 1986, Raytech became the publicly traded (NYSE) holding company of Raymark stock through a triangular merger restructuring plan approved by Raymark's shareholders whereby each share of common stock of Raymark was automatically converted into both a share of Raytech common stock and a right to purchase a warrant for Raytech common stock. The warrants expired on October 1, 1994. The purpose of the formation of Raytech and the restructuring plan was to provide a means to gain access to new sources of capital and borrowed funds to be used to finance the acquisition and operation of new businesses in a corporate structure that should not subject it or such acquired businesses to any asbestos-related or other liabilities of Raymark under the doctrine of successor liability, piercing the corporate veil and fraudulent conveyance. Prior to the formation of Raytech, Raymark had been named as a defendant in more than 88,000 lawsuits claiming substantial damages for injury or death from exposure to airborne asbestos fibers. Subsequent to the divestiture sale of Raymark in 1988, lawsuits continued to be filed against Raymark at the rate of approximately 1,000 per month until an involuntary petition in bankruptcy was filed against Raymark in February 1989, which stayed all its litigation. In August 1996, the involuntary petition filed against Raymark was dismissed following a trial and the stay was lifted. However, in March 1998, Raymark filed a voluntary bankruptcy petition again staying the litigation. In accordance with the restructuring plan, Raytech purchased the Wet Clutch and Brake Division and German subsidiary in 1987 from its then wholly-owned subsidiary, Raymark. Each such acquisition was financed through borrowed funds from new lenders and Raytech stock and notes. Pursuant to these acquisitions, Raymark agreed to indemnify Raytech for any future liabilities and costs that may result from asbestos litigation. Management believed that each purchase by Raytech from Raymark complied with Raytech's restructuring plan principles of (i) paying fair market value, (ii) acquiring businesses that did not give rise to any asbestos-related or other claims against Raymark, (iii) permitting Raymark to retain the proceeds for its ongoing business and creditors, (iv) entering the transactions in good faith and not to hinder, delay or defraud creditors, and (v) conducting its affairs independent of Raymark. In May 1988, following shareholder approval, Raytech sold all of the Raymark stock to Asbestos Litigation Management, Inc., thereby divesting itself of Raymark. Consideration received for the Raymark stock consisted of $50 cash paid at the closing and a 7-l/2% $950 promissory note to be paid in six equal annual installments. Despite the restructuring plan implementation and subsequent divestiture of Raymark, Raytech was named a co-defendant with Raymark and other named defendants in approximately 3,300 asbestos-related lawsuits as a successor in liability to Raymark. Until February 1989, the defense of all such lawsuits was provided to Raytech by Raymark in accordance with the indemnification agreement included as a condition of the purchase of the Wet Clutch and Brake Division and German subsidiary from Raymark in 1987. However, subsequent to the involuntary bankruptcy proceedings against Raymark, a restrictive insurance funding order was issued by an Illinois Court, denying defense costs, and another Raymark insurance carrier had been declared insolvent. These circumstances caused Raymark to be unable to fund the costs of defense to Raytech in the asbestos-related lawsuits referenced above. Raytech management was informed that Raymark's cost of defense and disposition of cases up to the automatic stay of litigation in 1989 under the involuntary bankruptcy proceedings was approximately $333 million of Raymark's total insurance coverage of approximately $395 million. It has also been informed that as a result of the dismissal of the involuntary petition, Raymark encountered newly filed asbestos-related lawsuits but had received $27 million from a state guarantee association to make up the insurance policies of the insolvent carrier and had $32 million in other policies to defend against such litigation. In March 1998, Raymark filed a voluntary bankruptcy petition as a result of several large asbestos-related judgments. In an asbestos-related personal injury case decided in October 1988 in a U.S. District Court in Oregon, Raytech was ruled under Oregon equity law to be a successor to Raymark's asbestos- related liability. The successor ruling was appealed by Raytech and in October 1992 the Ninth Circuit Court of Appeals affirmed the District Court's judgment on the grounds stated in the District Court's opinion. The effect of this decision extends beyond the Oregon District due to a Third Circuit Court of Appeals decision in a related case cited below wherein Raytech was collaterally estopped (precluded) from relitigating the issue of its successor liability for Raymark's asbestos-related liabilities. 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. Since the bankruptcy filing several entities have asserted claims in Bankruptcy Court alleging environmental liabilities of Raymark based upon similar theories of successor liability against Raytech as alleged by asbestos claimants. These claims are not covered by the class action referenced above and will be resolved in the bankruptcy case. The environmental claims include a claim of the Pennsylvania Department of Environmental Resources ("DER") to perform certain activities in connection with Raymark's Pennsylvania manufacturing facility, which includes submission of an acceptable closure plan for a landfill containing hazardous waste products located at the facility and removal of accumulated baghouse dust from its operations. In March 1991, the Company entered a Consent Order which required Raymark to submit a revised closure plan which provides for the management and removal of hazardous waste, for investigating, treating and monitoring of any contaminated groundwater and for the protection of human health and environment at the site, all relating to the closure of the Pennsylvania landfill and to pay a nominal civil penalty. The estimated cost for Raymark to comply with the order is $1.2 million. The DER has reserved its right to reinstitute an action against the Company and the other parties to the DER order in the event Raymark fails to comply with its obligations under the Consent Order. Another environmental claim was filed against the Company by the U.S. Environmental Protection Agency for civil penalties charged Raymark in the amount of $12 million arising out of alleged Resource Conservation and Recovery Act violations at Raymark's Stratford, Connecticut, manufacturing facility. In January 1997, the U.S. Departmental Protection Agency ("EPA") and the State of Connecticut filed suit against Raymark claiming damages for cleanup of the Stratford, Connecticut, site in an amended amount of $300 million. The EPA and the State of Connecticut have also filed bankruptcy claims against Raytech as a successor to Raymark for cleanup of the Stratford site and other Raymark sites totaling $330 million. Determination of Raytech's liability for such claims is subject to Bankruptcy Court deliberations and proceedings. Under bankruptcy rules, the debtor-in-possession has an exclusive period in which to file a reorganization plan. Such exclusive period had been extended by the Bankruptcy Court pending the conclusion of the successor liability litigation. However, in December 1992, the creditors' committee filed a motion to terminate the exclusive period to file a plan of reorganization. At a hearing in May 1993, the motion was denied by the Bankruptcy Court but was appealed by the creditors' committee. In November 1993, the U.S. District Court reversed the Bankruptcy Court and terminated the exclusive period to file a plan of reorganization effective in January 1994. Accordingly, any party in interest, including the debtor, the creditors' committee or a creditor could thereafter file a plan of reorganization. In May 1994, Raytech filed a Plan of Reorganization ("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of seeking confirmation allowing Raytech to emerge from the bankruptcy filed March 10, 1989. In September 1994, the creditors' committee filed its own Plan of Reorganization in competition to the Debtor's Plan ("Creditors' Plan"). Upon motion of the parties and support of the Bankruptcy Court, the major interested parties agreed in August 1995 to participate in non-binding mediation to attempt to effectuate a consensual plan of reorganization. The mediation process commenced in October 1995 and was concluded in March 1996 without agreement for a consensual plan of reorganization. The competing plans of Raytech and its creditors then returned to Bankruptcy Court procedures. As the result of the Memorandum of Understanding between the Debtor and its Creditors referenced hereafter, a consensual plan of reorganization has been drafted and is circulating among the parties for review and approval. In February 1997, Raytech resumed making monthly payments of $650,000 to Raymark pursuant to the 1987 Asset Purchase Agreement as amended. In November 1997, the creditors' committee filed an adversary proceeding complaint and motion for a temporary restraining order to halt the payments. In January 1998, the Bankruptcy Court stopped the payments pending a trial. Raymark notified its retirees by letter that their benefits would cease after February 1998 due to the effect of the cessation of payments from Raytech under the injunction. Raymark retirees intervened in the action; however, Raymark continued to fund their benefits. Upon motion, the Raymark retirees have been permitted to form a committee in the Raytech bankruptcy, but any rights to the Raytech estate remain subject to the Court's judicial determination. In March 1999, the creditors' committee of retirees filed an adversary proceeding against Raytech seeking a declaratory judgment holding Raytech liable for employee welfare benefits due Raymark retirees, including medical, life and supplemental pension benefits. In April 1999, a separate adversary proceeding was filed by Raytech against the Pension Benefit Guaranty Corporation seeking a declaratory judgment holding Raytech not liable for Raymark pension liabilities. Both matters are pending in the Bankruptcy Court and discovery procedures in the litigation are underway. Following Raytech's cessation of monthly $650,000 note payments to Raymark in December 1997, Raymark commenced 33 separate lawsuits against Raytech subsidiaries in various jurisdictions from New York to California ("Raymark Litigation") demanding payment or the return of assets for breach of contract. Raytech filed an adversary proceeding complaint to halt the Raymark litigation and was granted a temporary restraining order in December 1997 by the Bankruptcy Court that remains in effect. The creditors' committee intervened in the action in support of the restraining order. In March and April 1998, Raymark and its parent, Raymark Corporation, filed voluntary petitions in bankruptcy in a Utah Court which stayed all litigation in the Raytech bankruptcy in which Raymark was a party. In connection with its attempt to assert control over Raymark and its assets the creditors' committee, joined by Raytech, the Guardian Ad Litem for future claimants, the equity committee and the government agencies moved to have the venue of the Raymark bankruptcies transferred from Utah to the Connecticut Court. In July 1998, the Bankruptcy Court issued an order on the motions and transferred venue to the Connecticut Court. Raymark filed an appeal of the order but has since withdrawn the appeal. In October 1998, a trustee was appointed by the United States Trustee over the Raymark bankruptcies. The Trustee is currently administering the Raymark estate. In April 1999, adversary actions were filed in the Bankruptcy Court 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. The matters are pending and hearings are expected in the Bankruptcy Court by December 1999. In October, 1998 Raytech reached a tentative settlement with its creditors and entered into a Memorandum of Understanding with respect to achieving a consensual plan of reorganization (the "Plan"). The parties to the settlement include Raytech, the Official Creditors Committee, the Guardian ad litem for Future Claimants, the Connecticut Department of Environmental Protection and the U. S. Department of Justice, Environmental and Natural Resources Division. Substantive economic terms of the Memorandum of Understanding provide for all general unsecured creditors including but not limited to all asbestos and environmental claimants to receive, through a trust established under The Bankruptcy Code, 90% of the equity in a company to be reorganized ("Reorganized Raytech") and any and all refunds of taxes paid or net reductions in taxes owing resulting from the transfer of equity to the trust, and existing equity holders in Raytech to receive 10% of the equity in Reorganized Raytech. Substantive non-economic terms of the Memorandum of Understanding provide for the parties to jointly work to achieve a consensual Plan, to determine an appropriate approach to related pension and employee benefit plans and to cease activities that have generated adverse proceedings in the Bankruptcy Court. The parties have also agreed to jointly request a finding in the confirmation order to the effect that while Raytech's liabilities appear to exceed the reasonable value of its assets, the allocation of 10% of the equity to existing equity holders is fair and equitable by virtue of the benefit to the estate of resolving complicated issues without further costly and burdensome litigation and the risks attendant therewith and the economic benefits of emerging from bankruptcy without further delay. The Plan has been drafted and is under review and upon approval will be submitted to the Court. A bar date for claims was established in August 1999 and claims filed are being analyzed for validity. 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. A motion for summary judgment has been filed and is pending before the District Court. RPC continues to assess the extent of the contamination and its involvement and is currently negotiating with IDEM for an agreed order of cleanup. The Company intends to offset its investigation and cleanup costs against its notes payable to Raymark when such costs become known pursuant to the indemnification clause in the wet clutch and brake acquisition agreement since it appears that any contamination would have occurred during Raymark's ownership of the Indiana facility. During the nine months ended October 3, 1999, the Company offset $2.6 million in costs against the notes payable to Raymark. Blood tests administered to residents in the vicinity of the small waterways revealed no exposure. As a result of an inspection, the Company was notified that the operations purchased from AFM in January 1996 in Sterling Heights, Michigan, were in violation of a consent order issued by the Michigan Department of Environmental Quality ("DEQ"). The consent order included a compliance program providing for measures to be taken to bring certain operations into compliance and record keeping on operations in compliance. Potential fines for the violations were substantial but negotiations with the DEQ resulted in an agreement in September 1998 providing for a consent judgment with an fine of $324. In December 1998, a subsidiary of the Company filed a complaint against a former administrative financial manager of AFM alleging that he wrongfully converted Company monies in his control to his own use and benefit in an amount greater than $3,000 prior to the April 1998 completion of the acquisition of AFM as discussed in the following paragraph. The suit is being litigated in the U.S. District Court, Eastern District of Michigan, seeking damages in the amount wrongfully converted, plus other damages, interest, costs and attorney fees. Discovery is continuing, and a motion for a summary judgment has been filed and is pending before the District Court. A constructive trust has been ordered by the Court providing ownership of four real estate properties, previously held by a former administrative financial manager, to the Company. The ultimate realizable value of the properties is uncertain. The Company will record proceeds received from the sale of the properties as a reduction of good will resulting from the AFM acquisition. In October, one property has been sold and efforts to sell the others are 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 to recover $1,500 of the amount paid for the AFM stock and to obtain a declaratory judgment that the balance of $3,022 is not owed based upon allegations that a fraud was perpetrated upon the Company related to the case referenced above. 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. The Company continues to carry the note under its original terms pending the resolution of the aforementioned claim. In June 1999, the former owner filed an action against the Company in a County Court in Michigan to enforce payment of the note. The matter was stayed pending the Bankruptcy court's decision. The case will now be tried in the Michigan County Court. An answer has been filed and discovery will begin soon. In January 1997, Raytech was named through a subsidiary in a third party complaint captioned Martin Dembinski, et al. vs. Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et al. filed in the U.S. District Court for the Southern District of New York for damages for asbestos-related disease. The case has been removed to the U.S. District Court, Eastern District of Pennsylvania. When required, the Company will seek an injunction in the Bankruptcy Court to halt the litigation. In December 1998, the trustee of Raymark, Raytech and the Raytech creditors' committee joined in filing an adversary proceeding (complaint) against Craig R. Smith, et al. (including relatives, business associates and controlled corporations) alleging 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. Discovery procedures are continuing and a motion for a summary judgment has been filed by the plaintiffs and is pending before the District Court. Judgment on the motion is expected in November 1999. Costs incurred by the Company for asbestos related liabilities are subject to indemnification by Raymark under the 1987 acquisition agreements. By agreement, in the past, Raymark has reimbursed the Company in part for such indemnified costs by payment of the amounts due in Raytech common stock of equivalent value. Under such agreement, Raytech received 926,821 shares in 1989, 177,570 shares in 1990, 163,303 shares in 1991 and 80,000 shares in 1993. The Company's acceptance of its own stock was based upon an intent to control dilution of its outstanding stock. In 1992, the indemnified costs were reimbursed by offsetting certain payments due Raymark from the Company under the 1987 acquisition agreements. Costs incurred in 1994, 1995, 1996, 1997 and 1998 were applied as a reduction of the note obligations pursuant to the agreements. The adverse ruling in the Third Circuit Court of Appeals, of which a petition for writ of certiorari was denied by the U.S. Supreme Court, precluding Raytech from relitigating the issue of its successor liability leaves the U.S. District Court's (Oregon) 1988 ruling as the prevailing decision holding Raytech to be a successor to Raymark's asbestos-related liabilities. This ruling could have had a material adverse impact on Raytech as it did not have the resources needed to fund Raymark's potentially substantial uninsured asbestos-related and environmental liabilities. However, the tentative settlement between Raytech and its creditors as recited in the Memorandum of Understanding referenced above has defined the impact of the successor liabilities imposed by the referenced court decisions. While an outline of principles in the Memorandum of Understanding has been agreed to by Raytech and its creditors, a consensual plan of reorganization must still be written and agreed to by the parties of interest in the bankruptcy and is subject to review and confirmation by the Bankruptcy Court, which at this time cannot be predicted with certainty. Should the Memorandum of Understanding not result in a confirmed plan of reorganization, the ultimate liability of the Company with respect to asbestos-related, environmental, or other claims would remain undetermined. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The uncertainties regarding the reorganization proceedings raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability, revaluation and classification of recorded asset amounts or adjustments relating to establishment, settlement and classification of liabilities that may be required in connection with reorganizing under the Bankruptcy Code. NOTE B - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the accompanying condensed unaudited consolidated financial statements contain all adjustments necessary to fairly present the financial position of Raytech as of October 3, 1999 and January 3, 1999 and the results of operations and cash flows for the thirteen and thirty-nine weeks ended October 3, 1999 and September 27, 1998. All adjustments are of a normal recurring nature. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The financial statements contained herein should be read in conjunction with the financial statements and related notes filed on Form 10-K for the year ended January 3, 1999. NOTE C - INVENTORIES Net, inventories consist of the following: Oct. 3, 1999 January 3, 1999 Raw material $ 9,516 $11,480 Work in process 9,777 7,653 Finished goods 13,576 11,736 $32,869 $30,869 NOTE D - EARNINGS PER SHARE
For the 13 Weeks Ended For the 39 Weeks Ended Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1999 1998 1999 1998 Basic EPS Computation Numerator $ 3,378 $ 3,081 $13,205 $13,224 Denominator: Common shares outstanding at beginning of year 3,421,395 3,285,308 3,421,395 3,285,308 Weighted average of stock options exercised 15,417 135,990 5,139 109,756 Weighted average shares 3,436,812 3,421,298 3,426,534 3,395,064 Basic earnings per share $ .98 $ .90 $ 3.85 $ 3.90 Diluted EPS Computation Numerator $ 3,378 $ 3,081 $13,205 $ 13,224 Denominator: Common shares outstanding at beginning of year 3,421,395 3,285,308 3,421,395 3,285,308 Weighted average of stock options exercised 15,417 135,990 5,139 109,756 Dilutive potential common shares 139,530 138,746 83,731 165,283 Adjusted weighted average shares 3,576,342 3,560,044 3,510,265 3,560,347 Diluted earnings per share $ .94 $ .87 $ 3.76 $ 3.71
Note E - Segment Reporting The Company's operations are categorized into three business segments based on management structure, product type and distribution channel as described below. The wet friction operations produce specialty engineered products for heat resistant, inertia control, energy absorption and transmission applications. The Company markets its products to automobile original equipment manufacturers, heavy duty original equipment manufacturers, as well as farm machinery, mining, truck and bus manufacturers. The dry friction operations produce engineered friction products, primarily used in original equipment automobile and truck transmissions. The clutch facings produced by this segment are marketed to companies who assemble the manual transmission systems used in automobiles and trucks. The aftermarket segment produces specialty engineered products primarily for automobile and lift truck transmissions. In addition to these products, this segment markets transmission filters and other transmission related components. The focus of this segment is marketing to warehouse distributors and certain retail operations in the automotive aftermarket. Information relating to operations by industry segment follows with related comments included in Management's Discussion and Analysis. NOTE E, continued
OPERATING SEGMENTS For the 13 Weeks Ended For the 39 Weeks Ended Oct. 3, Sept. 27, Oct. 3, Sept. 27, 1999 1998 1999 1998 Wet Friction Net sales to external customers $ 38,458 $ 38,271 $121,360 $117,987 Intersegment net sales (1) 4,638 3,864 10,807 10,095 Total net sales $ 43,096 $ 42,135 $132,167 $128,082 Operating profit (2) $ 4,033 $ 3,402 $ 13,904 $ 13,513 Aftermarket Net sales to external customers $ 16,149 $ 14,907 $ 49,704 $ 43,928 Intersegment net sales (1) 11 4 16 16 Total net sales $ 16,160 $ 14,911 $ 49,720 $ 43,944 Operating profit (2) $ 2,751 $ 2,424 $ 8,598 $ 7,638 Dry Friction Net sales to external customers $ 7,866 $ 8,308 $ 24,585 $ 26,111 Intersegment net sales (1) 211 (89) 605 - Total net sales $ 8,077 $ 8,219 $ 25,190 $ 26,111 Operating profit (2) $ 132 $ 284 $ 1,134 $ 1,260 Corporate (3) $ (1,656) $ (958) $ (2,946) $ (2,281) Total Segments Net sales to external customers $ 62,473 $ 61,486 $195,649 $188,026 Intersegment net sales (1) 4,860 3,779 11,428 10,111 Total net sales $ 67,333 $ 65,265 $207,077 $198,137 Consolidated earnings before taxes and minority interest $ 5,260 $ 5,152 $ 20,690 $ 20,130 (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.
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 income was $3.4 million, or $.98 per basic share for the third quarter ended October 3, 1999, compared with $3.1 million, or $.90 per basic share, for the corresponding period in 1998, an increase of 10 percent. Net income for the nine months ended October 3, 1999 was $13.2 million, or $3.85 per basic share as compared with $13.2 million, or $3.90 per basic share for the corresponding period in 1998. The decrease in basic earnings per share is the result of an increased tax provision of $.3 million, an increase in minority interest in earnings of a subsidiary of $.2 million and a greater number of shares outstanding during the period. Earnings were driven by strong performance in the aftermarket segment reflected in the operating profit increase of 12.6% over the prior year and improved performance in the wet friction segment due primarily to increased sales in the automotive original equipment market reflected in the operating profit increase of 2.9 percent over the prior year. The Company's dry friction operations were down slightly over last year as a result of the startup operations in China and the continued slowing of the economy in Europe. Operating profits in this segment were down 10 percent compared to the prior year. Net Sales Worldwide net sales rose 1.6% for the quarter, to $62.5 million, and 4.0% for the nine months ended October 3, 1999, to $195.6 million, compared with $61.5 million and $188.0 million, respectively, last year. The wet friction segment reported increased sales of $3.4 million or 2.9 percent as compared to the same period in the prior year. The rise in sales is primarily the result of increased unit production among the automotive original equipment manufacturers and the sales of new products to this customer base, which is reflected in the reported sales increase of $9.6 million in the automotive original equipment market sector over the prior year. Domestic car and light truck sales are expected to reach 17 million units in 1999 according to industry analysts, which would be the record year for sales in this industry. The heavy duty markets continue their decline as a result of the economic downturn in Asia and Latin America. In addition the demand for heavy duty equipment was affected by a decline in orders from the oil and mining industries. Sales in this market decreased $1.0 million as compared to last year. However domestic sales of heavy duty equipment is expected to remain strong. Demand for agricultural equipment remains weak as the farm sector continues to feel the effects of depressed agricultural commodity prices and reduced domestic farm income. Sales in this market decreased $5.2 million or 45 percent over last year. Sales in the aftermarket segment increased by $5.8 million over the same period in the prior year, equating to a 13 percent growth rate. Improved sales reflected deeper penetration into the current customer base and sales of new products and the penetration of new markets. The sales of dry friction products in the North American aftermarket, a new market for 1999, continued during this quarter. The dry friction segment reported a decrease in sales of $1.5 million or 5.8 percent. The reduction in sales is primarily due to the cutback in orders from original equipment customers in Europe, which reflects the slow economic conditions present in Western Europe, somewhat offset by new sales from operations in China. Operating Profits The following discussion of operating results by industry segment relates to information contained in Note E - Segment Reporting in the Notes to Consolidated Financial Statements. Operating profit as discussed in segment reporting is income before income taxes and minority interest. Worldwide operating profits in the third quarter of $5.6 million reflected an increase of 1.8 percent over the same period in the prior year. Operating profit in the third quarter of 1998 was $5.5 million. Operating profits for the nine months ended October 3, 1999 of $21.6 reflected an increase of $.6 million or 2.9 percent over the prior year's amount of $21 million for the same nine-month period. The wet friction segment reported operating profits of $4.0 million for the quarter ended October 3, 1999 as compared to $3.4 million for the same period in 1998, an increase of 17.6 percent. The recorded operating profit for the 39-week period ended October 3, 1999 of $13.9 million reflects an increase of $.4 million over the same period in the prior year, an increase of 3.0 percent. This increase was driven by increased sales of $3.4 million during this period and the improved gross profit in the third quarter. The aftermarket segment reported operating profits of $2.8 million for the quarter ended October 3, 1999, an increase of $.3 million over the same period in the prior year. The 12.5 percent increase in operating profits reflects improved sales of $1.2 million. The reported operating profit for the 39-week period ended October 3, 1999 of $8.6 million reflects an increase of $1 million over the same period in the prior year. The increased operating profit of 13.2 percent over the prior year was due to the increased sales of $5.8 million during this 39-week period as compared to the same period in the prior year. The dry friction operating profit of $.1 million during the quarter ended October 3, 1999 reflects a decline of $.15 million from the same period in the prior year. The 39-week period ended October 3, 1999 recorded operating profit of $1.13 million as compared to t $1.26 million in the same period in 1999, a decrease of $.13 million. This decrease in operating profits reflects decreased sales during the period of $1.5 million. Income Taxes The effective tax rate for the thirteen-week period ended October 3, 1999 was 29% compared to 34% for the same period in the prior year. The effective tax rate for the thirty-nine week period ended October 3, 1999 was 29.0% versus 28.1% in 1998. Included in the effective tax rate for 1999 and 1998 is the effect of certain legal and environmental costs deducted for tax purposes but offset against the Raymark note payable in connection with the indemnification agreement with Raymark. The Company's net deferred tax asset of $4.5 million principally represents future tax deductions that can be realized upon carryback to prior years and the tax effect of approximately $6.5 million of foreign loss carryforwards that can be used to offset future foreign cash taxes. 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 based on a recent Bankruptcy Court ruling regarding certain administrative expenses. The amount and specific nature of costs that could be contested has not been specified. No provision has been made in the financial statements for any possible assessment from the IRS on this matter. Year 2000 The Company's Year 2000 Program addresses major assessment areas that include information systems, mainframe computers, personal computers, the distributed network, the shop floor, facilities systems, the Company's products, product research and development facilities, and the readiness of the Company's suppliers and distribution network. The program includes the following phases: identification and assessment, business criticality analysis, project work prioritization, compliance plan development, remediation and testing, production implementation, and contingency plan development for mission critical systems. The Company is Year 2000 compliant with its mission critical activities and systems. The Company has initiated infrastructure and information systems modifications to ensure that both hardware and software systems are compliant. The Company also is requesting assurances from its significant suppliers and dealers that they are addressing this issue to ensure there will be no major disruptions. The total cost of the modifications and upgrades to date are approximately $3.5 million. Although no assurances can be given as to the Company's compliance, particularly as it relates to third parties, the Company does not expect that either future costs of modifications or the consequences of any unsuccessful modifications will have a material adverse effect on the Company's financial position or results of operations. However, the failure to correct a material Year 2000 problem could result in the interruption of certain normal business activities and operations. The Company's most reasonably likely worst case scenario is that the Year 2000 noncompliance of a critical third party, such as an energy supplier, could cause the supplier to fail to deliver, with the result that production is interrupted at one or more facilities. Such a disruption in production could result in lost sales or profits. Outlook The statements continued in this Outlook section are based on management's current expectations. With the exception of the historical information contained herein, the statements presented in this Outlook section are forward-looking statements that involve numerous risks and uncertainties. Actual results may differ materially. The forward-looking statements contained in this Form 10-Q are within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company expects to continue to face an increasingly competitive automotive environment and a slowdown for the demand in certain agricultural machine products. Our major customers in the automotive industry face an increased competitive automotive environment which is likely to continue to limit Raytech's pricing flexibility in the near term. 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, due to extremely depressed agricultural commodity prices, the farm sector remains under pressure. United States Department of Agriculture estimates of net farm cash income deteriorated during the quarter and farm real estate values have declined in many parts of the country. In addition, credit availability for equipment purchases in emerging markets is expected to remain limited. As a consequence of these factors, retail demand for farm equipment is now projected to decline by 25-30 percent in North America this year, with declines of 5-15 percent expected in other major markets. In light of this outlook and the Company's continuing commitment to aggressive asset management, production schedules are being reviewed for 1999 to ensure the Company's production meets demand. The Company's outlook for 1999 worldwide sales and revenue anticipates sales and revenues to approximate 1998 levels. The growth in the automobile original equipment market in conjunction with the introduction of new products and new markets will offset the anticipated sales reduction in the agricultural and European dry friction markets. Safe Harbor Statement Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under the "Outlook" and "Year 2000" headings above and other statements herein that relate to future operating periods are subject to important risks and uncertainties that could cause actual results to differ materially. Forward- looking statements relating to the Company's businesses involve certain factors that are subject to change, including the many interrelated factors that consumer confidence, including worldwide demand for automotive and heavy duty products, general economic conditions, the environment, actions of competitors in the various industries in which the Company competes; production difficulties, including capacity and supply constraints; dealer practices; labor relations; interest and currency exchange rates (including the effect of conversion to the euro); technological difficulties (including Year 2000 compliance); accounting standards, and other risks and uncertainties. Further information, including factors that potentially could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Liquidity and Capital Resources The Company's wet friction and dry friction operations are capital intensive and the required capital is funded through current operations and external borrowing sources. The aftermarket operation has historically required less capital investment and has provided needed capital through current operations. In the first nine months of 1999 a positive cash flow from operating activities of $15.6 million resulted from the continued strong operating performance and compares to $8.0 million in the same period in 1998. During this nine-month period of 1999, trade accounts receivable increased $3.9 million, inventories increased $2.0 and trade accounts payable increased $1.2 million. The overall cash position increased $2.3 million, totaling $9.8 million at October 3, 1999 compared to $7.5 million at January 3, 1999. Capital investment for the nine-month period of $15.8 million is consistent with the planned annual expenditures of $21.5 for 1999. Capital investment during this same period in 1998 was $11.9 million. The Company uses collateralized lines of credit for funding purposes in the United States. Currently, the outstanding balances from available lines of credit are $16.6 million, with $2.0 million available in additional borrowings. The Company's foreign subsidiaries have outstanding balances from available lines of credit amounting to $3.1 million with available unused lines of credit amounting to $1.9 million, which expire upon demand. The Company believes that cash provided by operations will provide sufficient liquidity to meet its funding requirements. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The formation of Raytech and the implementation of the restructuring plan more fully described in Item 1 above was for the purpose of providing a means to acquire and operate businesses in a corporate structure that would not be subject to any asbestos-related or other liabilities of Raymark. Prior to the formation of Raytech, Raymark had been named as a defendant in more than 88,000 lawsuits, claiming substantial damages for injury or death from exposure to airborne asbestos fibers. Subsequent to the divestiture of Raymark in 1988, lawsuits continued to be filed against Raymark at the rate of approximately 1,000 per month until an involuntary petition in bankruptcy was filed against Raymark in February 1989 which stayed all its litigation. In August 1996, the involuntary petition filed against Raymark was dismissed following a trial and the stay was lifted. However, in March 1998, Raymark filed a voluntary bankruptcy petition again staying the litigation. Despite the restructuring plan implementation and subsequent divestiture of Raymark, Raytech was named a co-defendant with Raymark and other named defendants in approximately 3,300 asbestos-related lawsuits as a successor in liability to Raymark. Until February 1989, the defense of all such lawsuits was provided to Raytech by Raymark in accordance with the indemnification agreement included as a condition of the purchase of the Wet Clutch and Brake Division and German subsidiary from Raymark in 1987. However, subsequent to the involuntary bankruptcy proceedings against Raymark, a restrictive insurance funding order was issued by an Illinois Court, denying defense costs, and another Raymark insurance carrier had been declared insolvent. These circumstances caused Raymark to be unable to fund the costs of defense to Raytech in the asbestos-related lawsuits referenced above. Raytech management was informed that Raymark's cost of defense and disposition of cases up to the automatic stay of litigation in 1989 under the involuntary bankruptcy proceedings was approximately $333 million of Raymark's total insurance coverage of approximately $395 million. It has also been informed that as a result of the dismissal of the involuntary petition, Raymark encountered newly filed asbestos-related lawsuits but had received $27 million from a state guarantee association to make up the insurance policies of the insolvent carrier and had $32 million in other policies to defend against such litigation. In March 1998, Raymark filed a voluntary bankruptcy petition as a result of several large asbestos-related judgments against it. In October 1988, in a case captioned Raymond A. Schmoll v. ACandS, Inc., et al., the U.S. District Court for the District of Oregon ruled, under Oregon equity law, Raytech to be a successor to Raymark's asbestos-related liability. In this case the liability was negotiated to settlement for a negligible amount. The successor decision was appealed, and in October 1992, the Ninth Circuit Court of Appeals affirmed the District Court's judgment on the grounds stated in the District Court's opinion. The effect of this decision extends beyond the Oregon District due to a Third Circuit Court of Appeals decision in a related case cited below wherein Raytech was collaterally estopped (precluded) from relitigating the issue of its successor liability for Raymark's asbestos-related liabilities. As the result of the inability of Raymark to fund Raytech's cost of defense recited above, and in order to obtain a ruling binding across all jurisdictions on whether Raytech is liable as a successor for asbestos-related and other claims including claims yet to be filed relating to the operations of Raymark or Raymark's predecessors, on March 10, 1989 Raytech filed a petition seeking relief under Chapter 11 of Title 11, United States Code in the United States Bankruptcy Court, District of Connecticut. Under Chapter 11, substantially all litigation against Raytech has been stayed while the debtor corporation and its non-filing operating subsidiaries continue to operate their businesses in the ordinary course under the same management and without disruption to employees, customers or suppliers. In the Bankruptcy Court a creditors' committee was appointed, comprised primarily of asbestos claimants' attorneys. In August 1995, an official committee of equity security holders was appointed relating to a determination of equity security holders' interest in the bankruptcy estate. In June 1989 Raytech filed a class action in the Bankruptcy Court captioned Raytech v. Earl White, et al. against all present and future asbestos claimants seeking a declaratory judgment that it not be held liable for the asbestos-related liabilities of Raymark. It was the intent of Raytech to have this case heard in the U.S. District Court, and since the authority of the Bankruptcy Court is referred from the U.S. District Court, upon its motion and argument the U.S. District Court withdrew its reference of the case to the Bankruptcy Court and thereby agreed to hear and decide the case. In September 1991, the U.S. District Court issued a ruling dismissing one count of the class action citing as a reason the preclusive effect of the 1988 Schmoll case recited above under the doctrine of collateral estoppel (conclusiveness of judgment in a prior action), in which Raytech was ruled to be a successor to Raymark's asbestos liability under Oregon law. The remaining counts before the U.S. District Court involve the transfer of Raymark's asbestos-related liabilities to Raytech on the legal theories of alter-ego and fraudulent conveyance. Upon a motion for reconsideration, the U.S. District Court affirmed its prior ruling in February 1992. Also, in February 1992, the U.S. District Court transferred the case in its entirety to the U.S. District Court for the Eastern District of Pennsylvania. Such transfer was made by the U.S. District Court without motion from any party in the interest of the administration of justice as stated by the U.S. District Court. In December 1992, Raytech filed a motion to activate the case and to obtain rulings on the remaining counts which was denied by the U.S. District Court. In October 1993, the creditors' committee asked the Court to certify the previous dismissal of the successor liability count. In February 1994, the U.S. District Court granted the motion to certify and the successor liability dismissal was accordingly appealed. In May 1995, the Third Circuit Court of Appeals ruled that Raytech is collaterally estopped (precluded) from relitigating the issue of its successor liability as ruled in the 1988 Oregon case recited above, affirming the U.S. District Court's ruling of dismissal. A petition for a writ of certiorari was denied by the U.S. Supreme Court in October 1995. The ruling leaves the Oregon case, as affirmed by the Ninth Circuit Court of Appeals, as the prevailing decision holding Raytech to be a successor to Raymark's asbestos-related liabilities. Since the bankruptcy filing, several entities have asserted claims in Bankruptcy Court alleging environmental liabilities of Raymark based upon similar theories of successor liability against Raytech as alleged by asbestos claimants. These claims are not covered by the class action referenced above and will be resolved in the bankruptcy case. The environmental claims include a claim of the Pennsylvania Department of Environmental Resources ("DER") to perform certain activities in connection with Raymark's Pennsylvania manufacturing facility, which includes submission of an acceptable closure plan for a landfill containing hazardous waste products located at the facility and removal of accumulated baghouse dust from its operations. In March 1991, the Company entered a Consent Order which required Raymark to submit a revised closure plan which provides for the management and removal of hazardous waste, for investigating, treating and monitoring of any contaminated groundwater and for the protection of human health and environment at the site, all relating to the closure of the Pennsylvania landfill and to pay a nominal civil penalty. The estimated cost for Raymark to comply with the order is $1.2 million. The DER has reserved its right to reinstitute an action against the Company and the other parties to the DER order in the event Raymark fails to comply with its obligations under the Consent Order. Another environmental claim was filed against the Company by the U.S. Environmental Protection Agency for civil penalties charged Raymark in the amount of $12 million arising out of alleged Resource Conservation and Recovery Act violations at Raymark's Stratford, Connecticut, manufacturing facility. In January 1997, the U.S. Environmental Protection Agency ("EPA") and the State of Connecticut filed suit against Raymark claiming damages for cleanup of the Stratford, Connecticut, site in an amended amount of $300 million. The EPA and the State of Connecticut have also filed bankruptcy claims against Raytech as a successor to Raymark for cleanup of the Stratford site and other Raymark sites totaling $330 million. Determination of Raytech's liability for such claims is subject to Bankruptcy Court deliberations and proceedings. Under bankruptcy rules, the debtor-in-possession has an exclusive period in which to file a reorganization plan. Such exclusive period had been extended by the Bankruptcy Court pending the conclusion of the successor liability litigation. However, in December 1992, the creditors' committee filed a motion to terminate the exclusive period to file a plan of reorganization. At a hearing in May 1993, the motion was denied by the Bankruptcy Court but was appealed by the creditors' committee. In November 1993, the U.S. District Court reversed the Bankruptcy Court and terminated the exclusive period to file a plan of reorganization effective in January 1994. Accordingly, any party in interest, including the debtor, the creditors' committee or a creditor could thereafter file a plan of reorganization. In May 1994, Raytech filed a Plan of Reorganization ("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of seeking confirmation allowing Raytech to emerge from the bankruptcy filed March 10, 1989. In September 1994, the creditors' committee filed its own Plan of Reorganization in competition to the Debtor's Plan ("Creditors' Plan"). Upon motion of the parties and support of the Bankruptcy Court, the major interested parties agreed in August 1995 to participate in non-binding mediation to attempt to effectuate a consensual plan of reorganization. The mediation process commenced in October 1995 and was concluded in March 1996 without agreement for a consensual plan of reorganization. The competing plans of Raytech and its creditors then returned to Bankruptcy Court procedures. As the result of the Memorandum of Understanding between the Debtor and its Creditors referenced hereafter, a consensual plan of reorganization has been drafted and is circulating among the parties for review and approval. In February 1997, Raytech resumed making monthly payments of $650,000 to Raymark pursuant to the 1987 Asset Purchase Agreement as amended. In November 1997, the creditors' committee filed an adversary proceeding complaint and motion for a temporary restraining order to halt the payments. In January 1998, the Bankruptcy Court stopped the payments pending a trial. Raymark notified its retirees by letter that their benefits would cease after February 1998 due to the effect of the cessation of payments from Raytech under the injunction. Raymark retirees intervened in the action; however, Raymark continued to fund their benefits. Upon motion, the Raymark retirees have been permitted to form a committee in the Raytech bankruptcy, but any rights to the Raytech estate remain subject to the Court's judicial determination. In March 1999, the creditors' committee of retirees filed an adversary proceeding against Raytech, seeking a declaratory judgment holding Raytech liable for employee welfare benefits due Raymark retirees, including medical, life and supplemental pension benefits. In April 1999, a separate adversary proceeding was filed by Raytech against the Pension Benefit Guaranty Corporation, seeking a declaratory judgment holding Raytech not liable for Raymark pension liabilities. Both matters are pending in the Bankruptcy Court and discovery procedures in the litigation are underway. Following Raytech's cessation of monthly $650,000 note payments to Raymark in December 1997, Raymark commenced 33 separate lawsuits against Raytech subsidiaries in various jurisdictions from New York to California ("Raymark Litigation") demanding payment or the return of assets for breach of contract. Raytech filed an adversary proceeding complaint to halt the Raymark litigation and was granted a temporary restraining order in December 1997 by the Bankruptcy Court that remains in effect. The creditors' committee intervened in the action in support of the restraining order. In March and April 1998, Raymark and its parent, Raymark Corporation, filed voluntary petitions in bankruptcy in a Utah Court which stayed all litigation in the Raytech bankruptcy in which Raymark was a party. In connection with its attempt to assert control over Raymark and its assets, the creditors' committee, joined by Raytech, the Guardian Ad Litem for future claimants, the equity committee and the government agencies moved to have the venue of the Raymark bankruptcies transferred from Utah to the Connecticut Court. In July 1998, the Bankruptcy Court issued an order on the motions and transferred venue to the Connecticut Court. Raymark filed an appeal of the order but has since withdrawn the appeal. In October 1998, a trustee was appointed by the United States Trustee over the Raymark bankruptcies. The Trustee is currently administering the Raymark estate. In April 1999 adversary actions were filed in the Bankruptcy Court 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. The matters are pending and hearings are expected in the Bankruptcy Court by December 1999. In October, 1998 Raytech reached a tentative settlement with its creditors and entered into a Memorandum of Understanding with respect to achieving a consensual plan of reorganization (the "Plan"). The parties to the settlement include Raytech, the Official Creditors Committee, the Guardian ad litem for Future Claimants, the Connecticut Department of Environmental Protection and the U. S. Department of Justice, Environmental and Natural Resources Division. Substantive economic terms of the Memorandum of Understanding provide for all general unsecured creditors including but not limited to all asbestos and environmental claimants to receive, through a trust established under The Bankruptcy Code, 90% of the equity in a company to be reorganized ("Reorganized Raytech") and any and all refunds of taxes paid or net reductions in taxes owing resulting from the transfer of equity to the trust, and existing equity holders in Raytech to receive 10% of the equity in Reorganized Raytech. Substantive non-economic terms of the Memorandum of Understanding provide for the parties to jointly work to achieve a consensual Plan, to determine an appropriate approach to related pension and employee benefit plans and to cease activities that have generated adverse proceedings in the Bankruptcy Court. The parties have also agreed to jointly request a finding in the confirmation order to the effect that while Raytech's liabilities appear to exceed the reasonable value of its assets, the allocation of 10% of the equity to existing equity holders is fair and equitable by virtue of the benefit to the estate of resolving complicated issues without further costly and burdensome litigation and the risks attendant therewith and the economic benefits of emerging from bankruptcy without further delay. The Plan has been drafted and is under review and upon approval will be submitted to the Court. A bar date for claims was established in August 1999 and claims filed are being analyzed for validity. 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. A motion for summary judgment has been filed and is pending before the District Court. RPC continues to assess the extent of the contamination and its involvement and is currently negotiating with IDEM for an agreed order of cleanup. The Company intends to offset its investigation and cleanup costs against its notes payable to Raymark when such costs become known pursuant to the indemnification clause in the wet clutch and brake acquisition agreement since it appears that any source of contamination would have occurred during Raymark's ownership of the Indiana facility. During the nine months ended October 3, 1999, the Company offset $2.6 million in costs against the notes payable to Raymark. Blood tests administered to residents in the vicinity of the small waterways revealed no exposure. As a result of an inspection, the Company was notified that the operations purchased from Advanced Friction Materials Company ("AFM") in January 1996 in Sterling Heights, Michigan, were in violation of a consent order issued by the Michigan Department of Environmental Quality ("DEQ"). The consent order included a compliance program providing for measures to be taken to bring certain operations into compliance and record keeping on operations in compliance. Potential fines for the violations were substantial but negotiations with the DEQ resulted in an agreement finalized in September 1998 providing for a consent judgment with a fine of $324. In December 1998, a subsidiary of the Company filed a complaint against a former administrative financial manager of AFM captioned Raytech Composites, Inc. vs. Richard Hartwick, et ux. alleging that he wrongfully converted Company monies in his control to his own use and benefit in an amount greater than $3,000 prior to the April 1998 completion of the acquisition of AFM as discussed in the following paragraph. The suit is being litigated in the U.S. District Court, Eastern District of Michigan, seeking damages in the amount wrongfully converted, plus other damages, interest, costs and attorney fees. Discovery is continuing, and a motion for a summary judgment has been filed and is pending before the District Court. A constructive trust has been ordered by the Court providing ownership of four real estate properties, previously held by a former administrative financial manager, to the Company. The ultimate realizable value of the properties is uncertain. The Company will record proceeds received from the sale of the properties as a reduction of good will resulting from the AFM acquisition. In October, one property has been sold and efforts to sell the others are 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 allegations 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. The matter was stayed pending the Bankruptcy Court's decision. The case will now be tried in the Michigan County Court. An answer has been filed and discovery will begin soon. In January 1997, Raytech was named through a subsidiary in a third party complaint captioned Martin Dembinski, et al. vs. Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et al. filed in the U.S. District Court for the Southern District of New York for damages for asbestos-related disease. The case has been removed to the U.S. District Court, Eastern District of Pennsylvania. When required, the Company will seek an injunction in the Bankruptcy Court to halt the litigation. In December 1998, the trustee of Raymark, Raytech and the Raytech creditors' committee joined in filing an adversary proceeding (complaint) against Craig R. Smith, et al. (including relatives, business associates and controlled corporations) alleging a systematic stripping of assets belonging to Raymark in an elaborate and ongoing scheme perpetrated by the defendants. The alleged fraudulent scheme extended back to the 1980's and continued up to this action and has enriched the Smith family by an estimated $12 million and has greatly profited their associates, while depriving Raymark and its creditors of nearly all of its assets amounting to more than $27 million. Upon motion of the plaintiffs, the Bankruptcy Court issued a temporary restraining order stopping Mr. Smith and all defendants from dissipating, conveying, encumbering or otherwise disposing of any assets, which order has been amended several times and remains in effect pending a preliminary injunction hearing. The reference to the Bankruptcy Court has been withdrawn, and the matter is now being litigated in the U.S. District Court in Connecticut. Discovery procedures are continuing and a motion for a summary judgment has been filed by the plaintiffs and is pending before the District Court. Judgment on the motion is expected in November 1999. Costs incurred by the Company for asbestos related liabilities are subject to indemnification by Raymark under the 1987 acquisition agreements. By agreement, in the past, Raymark has reimbursed the Company in part for such indemnified costs by payment of the amounts due in Raytech common stock of equivalent value. Under such agreement, Raytech received 926,821 shares in 1989, 177,570 shares in 1990, 163,303 in 1991 and 80,000 shares in 1993. The Company's acceptance of its own stock was based upon an intent to control dilution of its outstanding stock. In 1992, the indemnified costs were reimbursed by offsetting certain payments due Raymark from the Company under the 1987 acquisition agreements. Costs incurred in 1994, 1995, 1996, 1997 and 1998 were applied as a reduction of the note obligations pursuant to the agreements. The adverse ruling in the Third Circuit Court of Appeals, of which a petition for writ of certiorari was denied by the U.S. Supreme Court, precluding Raytech from relitigating the issue of its successor liability leaves the U.S. District Court's (Oregon) 1988 ruling as the prevailing decision holding Raytech to be a successor to Raymark's asbestos-related liabilities. This ruling could have had a material adverse impact on Raytech as it did not have the resources needed to fund Raymark's potentially substantial uninsured asbestos-related and environmental liabilities. However, the tentative settlement between Raytech and its creditors as recited in the Memorandum of Understanding referenced above has defined the impact of the successor liabilities imposed by the referenced court decisions. While an outline of principles in the Memorandum of Understanding has been agreed to by Raytech and its creditors, a consensual plan of reorganization must still be written and agreed to by the parties of interest in the bankruptcy and is subject to review and confirmation by the Bankruptcy Court, which at this time cannot be predicted with certainty. Should the Memorandum of Understanding not result in a confirmed plan of reorganization, the ultimate liability of the Company with respect to asbestos- related, environmental, or other claims would remain undetermined. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The uncertainties regarding the reorganization proceedings raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability, revaluation and classification of recorded asset amounts or adjustments relating to establishment, settlement and classification of liabilities that may be required in connection with reorganizing under the Bankruptcy Code. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS (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: November 11, 1999 EX-27 2
5 0000797917 RAYTECH CORP 1,000 U.S. DOLLARS JAN-02-2000 JAN-04-1999 OCT-03-1999 9-MOS 1 9,766 0 34,589 1,616 32,869 83,188 175,818 97,520 186,934 69,138 0 5,583 0 0 70,805 186,934 195,649 195,649 148,295 148,295 0 0 1,510 20,690 6,000 13,205 0 0 0 13,205 3.85 3.76
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