UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 2001, 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 Sections 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
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes X No
As of November 14, 2001, 41,528,520 shares of the Registrant's
common stock, par value $1.00, were issued and outstanding.
Page 1 of 50
RAYTECH CORPORATION
INDEX
Page Number
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance
Sheets at September 30, 2001 (Unaudited)
and December 31, 2000 3
Condensed Unaudited Consolidated Statements
of Operations for the period July 2, 2001 to
September 30, 2001 and the period from
July 3, 2000 to October 1, 2000 5
Condensed Unaudited Consolidated Statements of
Operations for the period from January 1, 2001
to April 2, 2001, the period from April 3, 2001
to September 30, 2001 and the period from
January 3, 2000 to October 1, 2000 6
Condensed Unaudited Consolidated Statements
of Cash Flows for the period from January 1, 2001
to April 2, 2001, the period from April 3, 2001
to September 30, 2001 and the period from
January 3, 2000 to October 1, 2000 7
Condensed Unaudited Consolidated Statements of
Changes in Shareholders' Equity for the period
from January 1, 2001 to April 2, 2001, the period
from April 3, 2001 to September 30, 2001 and the
period from January 3, 2000 to October 1, 2000 8
Notes to Condensed Unaudited Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 6. Exhibits and Reports on Form 8-K 49
Signature 50
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Successor Predecessor
Company Company
Sept. 30, 2001 Dec. 31,
At (Unaudited) 2000
ASSETS
Current assets
Cash and cash equivalents $ 18,643 $ 13,917
Trade accounts receivable, net 26,377 24,487
Inventories 30,542 33,322
Income taxes receivable 37,877 -
Other current assets 4,834 6,459
Total current assets 118,273 78,185
Property, plant and equipment 116,506 189,659
Less accumulated depreciation (6,700) (106,954)
Net property, plant and equipment 109,806 82,705
Intangible assets, net 73,346 19,499
Deferred income taxes 13,244 137,147
Other assets 2,769 2,780
Total assets $ 317,438 $ 320,316
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)(cont.)
Successor Predecessor
Company Company
Sept. 30, 2001 Dec. 31,
At (Unaudited) 2000
LIABILITIES
Current liabilities
Notes payable and current portion of long-term debt $ 11,737 $ 10,308
Current portion of long-term debt - Raymark - 10,631
Current portion of pension obligation 9,104 236
Accounts payable 15,508 13,070
Accrued liabilities 17,257 22,538
Payable to the PI Trust 37,877 -
Total current liabilities 91,483 56,783
Liabilities subject to compromise - 7,211,433
Long-term debt 8,100 9,053
Pension obligations 4,926 1,714
Postretirement benefits other than pensions 13,137 13,150
Deferred payable to the PI Trust 36,636 -
Other long-term liabilities 7,982 7,321
Total liabilities 162,264 7,299,454
Commitments and Contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock
Cumulative preferred stock, no par value
5,000,000 (Successor Company), 800,000 (Predecessor
Company) shares authorized, none issued and
outstanding - -
Common stock (Successor Company), par value $1.00,
50,000,000 shares authorized, 41,528,520 issued and
outstanding 41,528 -
Common stock (Predecessor Company), par value $1.00,
7,500,000 shares authorized, 5,651,372 issued and
outstanding - 5,651
Additional paid in capital 116,843 70,631
Accumulated deficit (1,514) (7,049,641)
Accumulated other comprehensive loss (1,683) (1,218)
155,174 (6,974,577)
Less treasury shares at cost - (4,561)
Total shareholders' equity (deficit) 155,174 (6,979,138)
Total liabilities and shareholders' equity (deficit) $ 317,438 $ 320,316
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Successor Company Predecessor Company
for the Period For the Period
July 2, 2001 to July 3, 2000 to
Sept. 30, 2001 October 1, 2000
Net Sales $ 48,752 $ 56,755
Cost of sales (39,388) (42,743)
Gross profit 9,364 14,012
Selling and administrative expenses (9,977) (7,827)
Operating (loss) profit (613) 6,185
Interest expense (302) (609)
Interest expense - Raymark - (70)
Reorganization items (399) -
Other income, net 157 412
(Loss) income before income taxes and
minority interest (1,157) 5,918
Income tax benefit (provision) 2,371 (2,483)
Income before minority interest 1,214 3,435
Minority interest (333) (463)
Net income $ 881 $ 2,972
Basic earnings per share $ .02 $ .84
Diluted earnings per share $ .02 $ .84
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Predecessor Company
For the Period
Successor Company January 1, 2001 For the Period
for the Period to April 2, Jan. 3, 2000
April 3, 2001 to 2001 to Oct. 1,
Sept. 30, 2001 (See Note B) 2000
Net Sales $ 99,313 $ 55,205 $ 185,352
Cost of sales (85,871) (43,811) (138,407)
Gross profit 13,442 11,394 46,945
Selling and administrative expenses (16,976) (7,742) (24,718)
Operating (loss) profit (3,534) 3,652 22,227
Interest expense (612) (374) (1,589)
Interest expense - Raymark - (70) (210)
Reorganization items (784) 99,996 -
Other income, net 446 290 1,040
(Loss) income before provision for asbestos
litigation, provision for environ-
mental and other claims, income taxes,
minority interest and extraordinary items (4,484) 103,494 21,468
Provision for environmental and other claims - - (447,750)
Provision for asbestos litigation - - (6,760,000)
(Loss) income before income taxes, minority
interest and extraordinary items (4,484) 103,494 (7,186,282)
Income tax benefit (provision) 3,609 (30,846) 131,453
(Loss) income before minority
interest and extraordinary items (875) 72,648 (7,054,829)
Minority interest (639) (314) (1,207)
(Loss) income before extraordinary items (1,514) 72,334 (7,056,036)
Extraordinary items, net of tax of $135,977 - 6,922,923 -
Net (loss) income $ (1,514) $6,995,257 $(7,056,036)
Basic (loss) earnings per share $ (.04) $ 1,778.88 $ (2,017.78)
Diluted (loss) earnings per share $ (.04) $ 1,772.62 $ (2,017.78)
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Predecessor Company
Successor Company For the Period For the Period
for the Period January 1, 2001 Jan. 3, 2000
April 3, 2001 to to April 2, to Oct. 1,
Sept. 30, 2001 2001 2000
Cash flows from operating activities:
Net (loss) income $ (1,514) $ 6,995,257 $(7,056,036)
Adjustments to reconcile net (loss)
income to net cash provided
by (used in) operations:
Deferred income tax (2,691) 29,395 (140,470)
Depreciation and amortization 8,117 3,382 9,527
Reorganization items:
Fresh-start adjustments - (99,996) -
Extraordinary items - (6,922,923) -
Provision for asbestos litigation,
environmental and other claims - - 7,207,750
Income applicable to minority interest,
net of dividends 639 314 1,207
Changes in operating assets and
liabilities and other items 10,901 (7,918) (765)
Net cash provided by (used in)
operating activities 15,452 (2,489) 21,213
Cash flow from investing activities:
Capital expenditures (5,039) (2,717) (9,367)
Proceeds on sales of property,
plant and equipment 71 10 127
Net cash used in investing activities (4,968) (2,707) (9,240)
Cash flow from financing activities:
Cash overdraft - (371) (993)
Net (payments) borrowings under line of
credit agreement (209) 1,544 -
Net (payments) proceeds on short-term
borrowings (192) 569 (7,229)
Principal payments on long-term borrowings (782) (482) (257)
Proceeds from long-term borrowings 36 32 653
Net payments on borrowings from Raymark - (703) (3,975)
Proceeds from exercise of stock options 19 - 105
Net cash (used in) provided by
financing activities (1,128) 589 (11,696)
Effect of exchange rate changes on cash 55 (78) (81)
Net change in cash and cash equivalents 9,411 (4,685) 196
Cash and cash equivalents at
beginning of period 9,232 13,917 10,746
Cash and cash equivalents at end of period $ 18,643 $ 9,232 $ 10,942
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
(unaudited)
PREDECESSOR COMPANY:
Retained Accumulated Treasury Shares
Additional Earnings Other At Cost
Common Paid in (Accumulated Comprehensive (2,132,059
Stock Capital Deficit) Loss Shares) Total
Balance,
January 2, 2000 $ 5,613 $ 70,564 $ 9,337 $ (165) $(4,561) $80,788
Comprehensive loss:
Net loss (7,056,036) (7,056,036)
Changes during
the period (767) (767)
Total comprehensive loss (7,056,036) (767) (7,056,803)
Stock options exercised
(38,409 shares) 38 67 105
Balance,
October 1, 2000 $ 5,651 $ 70,631 $(7,046,699) $ (932) $(4,561) $(6,975,910)
Balance,
December 31, 2000 $ 5,651 $ 70,631 $(7,049,641) $ (1,218) $(4,561) $(6,979,138)
Comprehensive income:
Net income 6,995,257 6,995,257
Changes during
the period (284) (284)
Total comprehensive
income 6,995,257 (284) 6,994,973
Reorganization 35,870 46,200 54,384 1,502 4,561 142,517
Balance,
April 2, 2001 $41,521 $116,831 $ - $ - $ - $ 158,352
SUCCESSOR COMPANY:
Balance,
April 2, 2001 $41,521 $116,831 $ - $ - $ - $ 158,352
Comprehensive loss:
Net loss (1,514) (1,514)
Changes during
the period (1,683) (1,683)
Total comprehensive
loss (1,514) (1,683) (3,197)
Stock options exercised
(6,596) 7 12 19
Balance,
Sept. 30, 2001 $ 41,528 $116,843 $ (1,514) $(1,683) $ - $ 155,174
The accompanying notes are an integral part of these statements.
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted,
except share and per share data)
(Unaudited)
NOTE A - Formation of Raytech Corporation, Sale of Raymark,
Chapter 11 Proceeding
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 a share of Raytech common stock. In May
1988, Raytech divested all of the Raymark stock.
In accordance with the restructuring plan, Raytech, through its
subsidiaries, purchased certain non-asbestos businesses of Raymark
in 1987, including the Wet Clutch and Brake Division and Raybestos
Industrie-Produkte GmbH, a German subsidiary. Despite the
restructuring plan implementation and subsequent divestiture of
Raymark, Raytech was named a co-defendant with Raymark and other
named defendants in numerous asbestos-related lawsuits as a
successor in liability to Raymark.
In one of the asbestos-related personal injury cases captioned
Raymond A. Schmoll v. ACandS, Inc., et al. 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 extended beyond the
Oregon District due to a Third Circuit Court of Appeals decision in
a related case wherein Raytech was collaterally estopped (precluded)
from relitigating the issue of its successor liability for Raymark's
asbestos-related liabilities.
In order to stay the asbestos-related litigation, 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.
After several Court rulings, including an appeal to the U.S.
Supreme Court, the Schmoll case, as affirmed by the Ninth Circuit
Court of Appeals, remained as the prevailing decision holding
Raytech to be a successor to Raymark's asbestos-related liabilities.
As a result of the referenced Court rulings, in October, 1998
Raytech reached a tentative settlement with its creditors for a
consensual plan of reorganization (the "Plan"), providing for all
general unsecured creditors including all asbestos and environmental
claimants to receive 90% of the equity in Raytech in exchange for
their claims. In addition, any and all refunds of taxes resulting
from the implementation of the Plan would be paid to an asbestos
personal injury trust (the "PI Trust") established under the
Bankruptcy Code. The existing equity holders in Raytech would
retain 10% of the equity in Raytech.
As a result of the final estimation of claims, Raytech recorded
asbestos claims of $6.76 billion, Government claims of $431.8
million, pension liability claims of $16 million and retiree benefit
claims of $2.5 million during 2000. The total estimated amount of
allowed claims was $7.2 billion.
On August 31, 2000, the Bankruptcy Court confirmed Raytech's
Plan, which confirmation was affirmed by the U.S. District Court on
September 13, 2000. All conditions under the confirmation of the
Plan were subsequently met, and the Plan became effective on
April 18, 2001 ("Effective Date"), resulting in Raytech emerging
from bankruptcy. On the Effective Date, a channeling injunction
ordered by the Bankruptcy Court pursuant to Section 524(g) of the
Bankruptcy Code has and will permanently and forever stay, enjoin
and restrain any asbestos-related claims against Raytech and
subsidiaries, thereby channeling such claims to the PI Trust for
resolution. On the Effective Date, the rights afforded and the
treatment of all claims and equity interests in the Plan were in
exchange for and in complete satisfaction, discharge and release of,
all claims and equity interests against Raytech. On the Effective
Date, the Company's Certificate of Incorporation was amended and
restated in accordance with the Plan providing for authority to
issue up to 55 million shares of stock, of which 50 million is
common and 5 million is preferred. In settlement of the estimated
amount of allowed claims of $7.2 billion, approximately 38 million
shares of common stock were issued and $2.5 million in cash is
payable to the allowed claimants and a commitment was made to pay to
the PI Trust any and all refunds of taxes paid or net reductions in
taxes resulting from the implementation of the Plan. The shares
issued are exempt from registration pursuant to the Bankruptcy Code;
however, shares issued to the PI Trust have restrictions on resale
NOTE A, continued
as a result of the high percentage of ownership in Raytech. In
addition, Raytech has recorded the liability for the Raymark pension
plan claim though the outcome of this claim is still subject to
final Court decision. It has been represented to Raytech that the
retiree benefit claim will be retained by Raymark. Settlement of
the Raymark claims resulted in cancellation in full of the Raymark
debt and accrued interest of $12.0 million and a commitment of
Raytech to backstop the Raymark Trustee for professional fees in the
event the Raymark Trustee has insufficient recovery of funds for
such purposes up to $1 million. To date, $.85 million has been paid
to the Raymark Trustee under said backstop provision. Also, on the
Effective Date, the Board of Directors was increased to nine with
one appointed by the equity committee and the remaining directors
appointed by the unsecured creditors' committee.
NOTE B - Condensed Consolidated Financial Statements
These condensed unaudited consolidated financial statements
(successor and predecessor company) have been prepared pursuant to
the requirements of Article 10 of Regulation S-X, and in the opinion
of management, contain all adjustments necessary to fairly present
the consolidated financial position of Raytech as of September 30,
2001 and the consolidated results of operations and cash flows for
all interim periods presented. All adjustments are of a normal
recurring nature except for those relating to reorganization and
fresh-start adjustments (see Note C). The Effective Date of the
Company's emergence from bankruptcy was April 18, 2001; however, for
accounting purposes, the Company has accounted for the reorganization
and fresh-start adjustments on April 2, 2001, which is the first day
after the Company's first quarter for fiscal 2001. All financial
information prior to that date is presented as pertaining to the
Predecessor Company while all financial information after that date
is presented as pertaining to the Successor Company. April 2, 2001
is the only day subsequent to the Company's first quarter that
relates to the Predecessor Company, and the remaining days in the
period from April 3, 2001 to September 30, 2001 relate to the
Successor Company. Consequently, after giving effect to the
reorganization and fresh-start adjustments, the financial statements
of the Successor Company are not comparable to those of the
Predecessor Company. For financial reporting purposes, the results
of the Predecessor Company and the Successor Company cannot be
combined. Accordingly, the Statement of Operations includes the
results of the reorganization and fresh-start adjustments in the
period January 1, 2001 to April 2, 2001 as Predecessor Company
information. The year-end condensed consolidated historic balance
NOTE B, continued
sheet data was derived from audited financial statements but does not
include all disclosures required by accounting principles generally
accepted in the United States of America. The financial statements
contained herein should be read in conjunction with the Company's
financial statements and related notes filed on Form 10-K for the
year ended December 31, 2000. Interim results are not necessarily
indicative of the results for the full year.
Certain amounts for prior periods have been reclassified to
conform with current year presentation.
NOTE C - Fresh-Start Reporting
The Effective Date of the Company's emergence from bankruptcy
was April 18, 2001; however, for accounting purposes it is considered
to be the close of business on April 2, 2001. As of April 2, 2001,
the Company adopted fresh-start reporting pursuant to the guidance
provided by the American Institute of Certified Public Accountant's
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). In
accordance with fresh-start reporting, all assets and liabilities are
recorded at their respective fair market values. The fair value of
substantially all of the Company's property, plant and equipment and
identifiable intangible assets were determined by independent third-party
appraisers.
The reorganization value of the Successor Company was determined
based on the equity value (which represents enterprise value less
debt) of the Successor Company plus the Successor Company's
outstanding liabilities. The reorganization value is approximately
$324 million, which was approximately $35 million in excess of the
aggregate fair value of the Company's tangible and identifiable
intangible assets. Such excess is classified as goodwill in the
accompanying Condensed Consolidated Balance Sheet and is being
accounted for in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets" (see Note M).
To facilitate the calculation of the equity value of the
Successor Company, the Company developed a set of financial
projections. Based on these financial projections, the equity value
was determined by the Company, with the assistance of a financial
advisor, using various valuation methods, including (i) a comparison
of the Company and its projected performance to the market values of
comparable companies, (ii) a review and analysis of several recent
transactions of companies in similar industries to the Company, and
NOTE C, continued
(iii) a calculation of the present value of the future cash flows
under the projections. The estimated equity value is highly
dependent upon achieving the future financial results set forth in
the projections as well as the realization of certain other
assumptions which are not guaranteed. The total equity value as of
the Effective Date was determined to be approximately $158 million.
The reorganization and the adoption of fresh-start reporting
resulted in the following adjustments to the Company's Condensed
Consolidated Balance Sheet as of April 2, 2001:
Adjustments to Record
Effectiveness of the Plan of Reorganization
(in thousands)
Predecessor Reorganized
Balance Sheet Reorganization Fresh-Start Balance Sheet
April 2, 2001 Adjustments Adjustments April 2, 2001
ASSETS
Current assets
Cash and cash equivalents $ 11,732 $ (2,500)(a) $ $ 9,232
Trade accounts receivable 29,207 29,207
Inventories 32,590 5,923 (b) 38,513
Income taxes receivable - 37,877 (c) 37,877
Other current assets 7,759 2,500 (a) (2,381)(f) 7,878
Total current assets 81,288 37,877 3,542 122,707
Net property, plant and
equipment 82,138 30,823 (d) 112,961
Goodwill 18,923 15,844 (e) 34,767
Other intangible assets 375 39,316 (g) 39,691
Deferred income taxes 137,202 (99,341)(f)(c) (27,308)(f) 10,553
Other assets 2,957 2,957
Total assets $ 322,883 $ (61,464) $ 62,217 $ 323,636
NOTE C, continued
Adjustments to Record
Effectiveness of the Plan of Reorganization
(in thousands)
Predecessor Reorganized
Balance Sheet Reorganization Fresh-Start Balance Sheet
April 2, 2001 Adjustments Adjustments April 2, 2001
LIABILITIES
Current liabilities
Notes payable and current
portion of long-term debt $ 12,144 $ $ $ 12,144
Raymark debt 10,709 (10,709)(h) -
Current portion of pension
obligations 353 8,500 (j) 134 (k) 8,987
Accounts payable 14,220 2,500 (a) 16,720
Accrued liabilities 20,501 (275)(i) 20,226
Payable to PI Trust - 37,877 (c) 37,877
Total current liabilities 57,927 37,893 134 95,954
Liabilities subject to
compromise 7,211,433 (7,211,433)(j) -
Long-term debt 8,536 8,536
Pension obligations 1,636 10,000 (j) (6,916)(k) 4,720
Postretirement benefits
other than pensions 13,404 (1,308)(k) 12,096
Deferred payable to the PI Trust - 36,636 (c) 36,636
Other long-term liabilities 7,654 (312)(f) 7,342
Total liabilities 7,300,590 (7,126,904) (8,402) 165,284
Total shareholders'
(deficit) equity (6,977,707) 7,065,440 (l) 70,619 (m) 158,352
Total liabilities and
shareholders' (deficit) equity $ 322,883 $ (61,464) $ 62,217 $323,636
NOTE C, continued
The explanation of the "Reorganization Adjustments" and "Fresh Start
Adjustments" columns of the condensed consolidated balance sheet in
the preceding table are as follows:
a) The Plan required the Company to pay $2.5 million to the unsecured
creditors, which has been reflected as restricted cash, included
in other current assets. During April 2001, $2.1 million of the
liability was paid and $.4 million has been retained by the Company
as restricted cash.
b) Finished goods and work-in-progress inventories have been valued
based on their estimated net selling prices less costs to complete,
costs of disposal and a reasonable profit allowance for estimated
completing and selling effort.
c) Income taxes receivable and the payable to the PI Trust reflect
the payable to the PI Trust of current tax recoveries in accordance
with the Plan. Additional tax recoveries to be received in future
periods are shown as deferred tax assets and a deferred payable
to the PI Trust.
d) Property, plant and equipment has been adjusted to reflect the fair
values of the assets based on independent appraisals.
e) The unamortized balance of goodwill of the Predecessor Company
has been eliminated. Reorganization value in excess of amounts
allocable to identifiable assets has been classified as goodwill.
The goodwill is being accounted for in accordance with SFAS No. 142
(see Note M).
f) Deferred tax assets and liabilities have been adjusted for the
settlement of the liabilities subject to compromise and the
recording of deferred taxes relating to the differences in book and
tax bases of assets and liabilities after applying fresh start reporting.
The Company is using a statutory tax rate of approximately 38%, which
approximates the Company's historic tax rate.
g) Other intangible assets have been adjusted to reflect their fair
values as determined by an independent valuation (see Note M).
h) Raymark debt has been canceled to reflect the resolution of the
claims on the Effective Date.
i) Accrued liabilities have been adjusted to reflect the $1 million
backstop commitment agreed to as a result of the settlement of
the Raymark debt (see Note A), the write-off of accrued interest
on the Raymark debt ($2.2 million), and an accrual for
bankruptcy-related fees ($.9 million) that were recorded against
the Raymark debt in accordance with the previous indemnification
between Raymark and the Company prior to the effective date.
j) Liabilities Subject to Compromise have been adjusted to reflect
the settlement of the claims for cash, assumption of certain pension
obligations, the issuance of common shares in the reorganized company
and tax recoveries in accordance with the Plan.
k) The pension and post retirement benefits other than pensions have been
adjusted to include the present values of future obligations.
l) Shareholders' equity was adjusted to reflect adjustments for the
issuance of 90% of the outstanding common shares to the unsecured
creditors at an overall equity value of $158.3 million in accordance
with the Plan.
m) Shareholders' equity was adjusted to reflect the elimination of
the accumulated deficit, accumulated other comprehensive loss and
treasury shares (which have been retired).
NOTE D - Reorganization Items
Reorganization income (expense) included in the accompanying Consolidated
Statements of Operations consist of the following items:
Successor Company Successor Company
for the Period for the Period Predecessor Company
July 2, 2001 to April 3, 2001 to for
September 30, 2001 Sept. 30, 2001 April 2, 2001
Fresh-start $ - $ - $ 99,996
adjustments
Professional fees (399) (784) -
$ (399) $ (784) $ 99,996
The fresh-start adjustments are discussed in Note C. The professional fees
listed above include accounting, legal, consulting, appraiser and other
miscellaneous services associated with the implementation of the Plan.
There were no reorganization items for any periods prior to April 2, 2001 due
to the indemnification agreement between Raytech and Raymark, which allowed
for all bankruptcy-related costs to be offset against the outstanding Raytech
debt to Raymark.
NOTE E - Extraordinary Items
As a result of the consummation of the Plan, the Company recognized an
extraordinary gain of the debt discharge on April 2, 2001 as follows:
Settlement of liabilities subject
to compromise $ 7,211,433
Assumption of pension-related obligations (18,500)
Settlement of Raymark debt 11,984
Cash payment to the PI Trust (2,500)
Back-stop settlement with Raymark (1,000)
Issuance of common stock (142,517)
Sub-total 7,058,900
Tax expense (135,977)
Extraordinary gain on debt discharge $ 6,922,923
NOTE F - Inventories
Net inventories consist of the following:
Successor Company Predecessor Company
Sept. 30, 2001 December 31, 2000
Raw material $ 7,812 $ 10,685
Work in process 7,520 8,165
Finished goods 15,210 14,472
$ 30,542 $ 33,322
In connection with the implementation of fresh-start reporting on
April 2, 2001, the Company adjusted the value of its inventories by
$5.9 million on the Effective Date to their estimated selling prices
less costs to complete, cost of disposal and a reasonable profit
allowance for the completing and selling effort as required by
fresh-start reporting. This adjustment of $5.9 million was recorded
in the Statement of Operations during the second quarter of 2001
as the inventory was sold.
NOTE G - Property, Plant and Equipment
Property, plant and equipment - net consists of the following
Successor Predecessor
Company Company
Sept. 30, 2001 Dec. 31, 2000
Land $ 3,854 $ 1,688
Buildings and improvements 28,455 31,170
Machinery and equipment 74,452 149,739
Capital leases 706 764
Construction in progress 9,039 6,298
116,506 189,659
Less: accumulated depreciation (6,700) (106,954)
Net property, plant and equipment $ 109,806 $ 82,705
In connection with the implementation of fresh-start reporting, the Company
adjusted the value of property, plant and equipment to reflect the fair values
of the assets by an independent appraisal.
NOTE H - Earnings Per Share
Successor Company Predecessor Company
for the Period for the Period
July 2, 2001 to July 3, 2000 to
Sept. 30, 2001 October 1, 2000
Basic EPS Computation
Numerator:
Net income $ 881 $ 2,972
Denominator:
Weighted average shares 41,521,924 3,480,904
Stock options exercised 6,596 38,409
Adjusted weighted average shares 41,528,520 3,519,313
Basic earnings per share $ .02 $ .84
Diluted EPS Computation
Numerator:
Net income $ 881 $ 2,972
Denominator:
Weighted average shares 41,521,924 3,480,904
Stock options exercised 6,596 38,409
Dilutive potential common shares - 13,756
Adjusted weighted average shares 41,528,520 3,533,069
Diluted earnings per share $ .02 $ .84
Options to purchase 394,943 and 493,775 shares of common stock at $4.25 were
outstanding during the period from July 2, 2001 to September 30, 2001 and
July 3, 2000 to October 1, 2000, respectively. In addition, options to
purchase 180,059 shares of common stock at $2.75 were outstanding during
the period from July 2, 2001 to September 30, 2001. These shares were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than average market price of the common shares.
In connection with the Plan of Reorganization, 38 million shares were issued.
NOTE H, continued
Predecessor Company
Successor Company For the Period For the Period
for the Period January 1, 2001 Jan. 3, 2000
April 3, 2001 to to April 2, to Oct. 1,
Sept. 30, 2001 2001 2000
Basic EPS Computation
Numerator:
(Loss) income before
extraordinary items $ (1,514) $ 72,334 $(7,056,036)
Extraordinary items - 6,922,923 -
Net (loss) income (attributable)
available to common
shareholders $ (1,514) $ 6,995,257 $(7,056,036)
Denominator:
Weighted average shares 41,521,924 3,519,313 3,480,904
Weighted average shares issued
as a result of reorganization - 413,072 -
Stock options exercised 4,800 - 16,021
Adjusted weighted average shares 41,526,724 3,932,385 3,496,925
Basic (loss) earnings per share:
(Loss) income before
extraordinary items $ (.04) $ 18.39 $ (2,017.78)
Extraordinary items - 1,760.49 -
Net (loss) income $ (.04) $ 1,778.88 $ (2,017.78)
NOTE H, continued
Predecessor Company
Successor Company For the Period For the Period
for the Period January 1, 2001 Jan. 3, 2000
April 3, 2001 to to April 2, to October 1,
Sept. 30, 2001 2001 2000
.
Diluted EPS Computation
Numerator:
(Loss) income before
extraordinary items $ (1,514) $ 72,334 $(7,056,036)
Extraordinary items - 6,922,923 -
Net (loss) income (attributable)
available to common
stockholders $ (1,514) $ 6,995,257 $(7,056,036)
Denominator:
Weighted average shares 41,521,924 3,519,313 3,480,904
Weighted average shares issued
as a result of reorganization 413,072
Stock options exercised 4,800 - 16,021
Dilutive potential common shares - 13,897 -
Adjusted weighted average shares
and equivalents 41,526,724 3,946,282 3,496,925
Diluted (loss) earnings per share:
(Loss) income before
extraordinary items $ (.04) $ 18.33 $ (2,017.78)
Extraordinary items - 1,754.29 -
Net (loss) income $ (.04) $ 1,772.62 $ (2,017.78)
Options to purchase 483,815, 487,550 and 495,020 shares of common stock at
$4.25 were outstanding during the period from April 3, 2001 to September 30,
2001, January 1, 2001 to April 2, 2001 and January 3, 2000 to October 1, 2000,
respectively. In addition, options to purchase 209,927 shares of common stock
at $2.75 were outstanding during the period from April 3, 2001 to September 30,
2001, respectively. These shares 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.
In addition, the dilutive potential common shares of 37,864 options for the
period from January 3, 2000 to October 1, 2000 were not included in the
computation of diluted earnings per share because of their anti-dilutive
effect.
In connection with the Plan of Reorganization, 38 million shares were issued.
NOTE I - 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 segment produces 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 segment produces 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.
The Company's management reviews the performance of its business segments (Wet
Friction, Dry Friction and Aftermarket) using a historical basis of accounting,
which does not reflect any adjustments relating to the adoption of fresh-start
accounting in connection with the Company's emergence from bankruptcy. All
adjustments relating to fresh-start accounting are included in the Corporate
segment.
Information relating to operations by industry segment follows:
NOTE I, continued
OPERATING SEGMENTS
Successor Company Predecessor Company
for the Period For the Period
July 2, 2001 to July 3, 2000 to
Sept. 30, 2001 October 1, 2000
Wet Friction
Net sales to external customers $ 29,903 $ 36,561
Intersegment net sales (1) 2,105 2,890
Total net sales $ 32,008 $ 39,451
Operating (loss) profit (2) $ (709) $ 4,042
Aftermarket
Net sales to external customers $ 11,225 $ 13,829
Intersegment net sales (1) 2 8
Total net sales $ 11,227 $ 13,837
Operating profit (2) $ 1,864 $ 2,720
Dry Friction
Net sales to external customers $ 7,624 $ 6,365
Intersegment net sales (1) 15 171
Total net sales $ 7,639 $ 6,536
Operating profit (loss) (2) $ 398 $ 79
Corporate
Operating loss (2,3) $ (2,710) $ (923)
Total Segments
Net sales to external customers $ 48,752 $ 56,755
Intersegment net sales (1) 2,122 3,069
Total net sales $ 50,874 $ 59,824
Consolidated operating (loss) profit $ (1,157) $ 5,918
(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 (loss)
before tax, minority interest and extraordinary items.
(3) Represents compensation and related costs for employees of the Company's
corporate headquarters, professional fees, shareholder fees and public
relations expenses, and in 2001 includes the effects of fresh-start
accounting (see Note C).
NOTE I, continued
OPERATING SEGMENTS Predecessor Company
Successor Company For the Period For the Period
for the Period Jan. 1, 2001 Jan. 3, 2000
April 3, 2001 to to April 2, to Oct. 1,
Sept. 30, 2001 2001 2000
Wet Friction
Net sales to external customers $ 60,814 $ 34,073 $ 119,490
Intersegment net sales (1) 3,806 2,974 9,462
Total net sales $ 64,620 $ 37,047 $ 128,952
Operating profit (2) $ 1,296 $ 1,327 $ 15,224
Aftermarket
Net sales to external customers $ 23,440 $ 13,101 $ 43,817
Intersegment net sales (1) 2 10 20
Total net sales $ 23,442 $ 13,111 $ 43,837
Operating profit (2) $ 3,847 $ 2,109 $ 7,965
Dry Friction
Net sales to external customers $ 15,059 $ 8,031 $ 22,045
Intersegment net sales (1) 36 116 719
Total net sales $ 15,095 $ 8,147 $ 22,764
Operating profit (2) $ 843 $ 754 $ 1,016
Corporate
Operating (loss) profit before
provision for asbestos litigation,
environmental and other claims $(10,470) $ 99,304 $ (2,737)
Provision for asbestos litigation,
environmental and other claims - - (7,207,750)
Operating (loss) profit (2,3) $(10,470) $ 99,304 $(7,210,487)
Total Segments
Net sales to external customers $ 99,313 $ 55,205 $ 185,352
Intersegment net sales (1) 3,844 3,100 10,201
Total net sales $103,157 $ 58,305 $ 195,553
Consolidated operating (loss) profit $ (4,484) $103,494 $(7,186,282)
The weighted-average amortization periods for the unpatented technology and
the distribution base are 8 and 20 years, respectively. Amortization expense
for the period from July 2, 2001 to September 30, 2001 amounted to $556 and
for the period April 3, 2001 to September 30, 2001 amounted to $1,112.
NOTE M, continued
Estimated annual amortization expense is as follows:
For the year ending:
2001 $ 1,670
2002 2,226
2003 2,226
2004 2,226
2005 2,226
As allowed by SFAS No. 142, trademarks and goodwill for the Successor Company
will not be amortized but will be reviewed for impairment annually. The
Company's three operating segments have been defined as reporting units for
purposes of testing goodwill for impairment. The amount of goodwill has been
assigned to each of the Company's segments. There were no changes in the
carrying amount of trademarks or goodwill during the period from April 3, 2001
to September 30, 2001.
Reported net income presented exclusive of amortization expense (including
any related tax effects) recognized in prior periods relating to goodwill of the
Predecessor Company would have been:
Predecessor Company
Period from Period from Period from
January 1, 2001 July 3, 2000 January 3, 2000
to April 1, 2001 to Oct. 1, 2000 to Oct. 1, 2000
Reported net income (loss) $ 1,715 $ 2,972 $(7,056,036)
Add back goodwill amortization 207 207 621
Adjusted net income (loss) $ 1,922 $ 3,179 $(7,055,415)
Basic earnings (loss) per share:
Reported net income (loss) $ .49 $ .84 $ (2,017.78)
Goodwill amortization .06 .06 .18
Adjusted net income (loss) $ .55 $ .90 $ (2,017.60)
Diluted earnings (loss) per share:
Reported net income $ .48 $ .84 $ (2,017.78)
Goodwill amortization .06 .06 .18
Adjusted net income (loss) $ .54 $ .90 $ (2,017.60)
NOTE N - Recently Issued Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued
Financial Accounting Statement No. 144 (SFAS 144), "Accounting for the
Impairment or Disposal of Long-Lived Assets." The objectives of SFAS
144 are to address significant issues relating to the implementation of
Financial Accounting Statement No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," and to develop a single accounting model, based on the
framework established in SFAS 121, for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired. The
provisions of SFAS 144 will be effective for the Company as of the
beginning of fiscal 2002. Management is currently assessing the impact
of this statement on its financial statements.
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, Liquidity and Capital Resources
In April 2001 Raytech Corporation emerged from the protection of
Bankruptcy Court under Chapter 11 of Title 11 of the United States
Code. Raytech Corporation had been under the Chapter 11 protection
since May 1989. The bankruptcy history and emergence are described in
more detail in Note A to the Unaudited Condensed Consolidated
Financial Statements.
As of April 2, 2001, the Company adopted fresh-start reporting
pursuant to the guidance provided by the American Institute of
Certified Public Accountant's Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). The Effective Date of the Company's emergence from
bankruptcy is considered to be the close of business on April 2, 2001
for financial reporting purposes. The periods presented prior to
April 2, 2001 have been designated "Predecessor Company" and the
periods subsequent to April 2, 2001 has been designated "Successor
Company." In accordance with fresh-start reporting, all assets and
liabilities were recorded at their respective fair market values. The
fair value of substantially all of the Company's long-lived assets
were determined using information provided by third-party appraisers.
Further, the Company, in accordance with SOP 90-7, has adopted
those changes in accounting principles which will be required within
the next twelve months. Specifically, the Company has adopted
Statements of Financial Accounting Standards Nos. 141 - "Business
Combinations" and 142 - "Goodwill and Other Intangible Assets" as of
April 2, 2001. See Note M to the Unaudited Condensed Consolidated
Financial Statements.
The Company has determined that the most meaningful presentation
of financial information would be to provide comparative analysis of
the financial performance for the Successor Company for the periods
July 2, 2001 through September 30, 2001 and April 3, 2001 through
September 30, 2001 compared to the predecessor financial information
for the periods July 3, 2000 to October 1, 2000 and April 3, 2000
through October 1, 2000, respectively. This is designated below as
Successor Company discussion and analysis.
Additionally, the Predecessor Company financial analysis detailed
below provides a comparative analysis of the financial performance of
Raytech Corporation for the thirteen-week periods ended April 1, 2001
and April 2, 2000.
The adjustments relating to the recording of reorganization
expenses and other fresh-start adjustments for the one-day period
ended April 2, 2001 are detailed in Note C to the Unaudited Condensed
Consolidated Financial Statements.
The Company has elected not to present a comparative analysis for
the thirty-nine-week periods ended September 30, 2001 and October 1,
2000 since such information in the current period would require
consolidating statements of the Predecessor Company and the Successor
Company. It was determined that the significance of the adjustments
relating to the emergence from bankruptcy would render such an
analysis not meaningful.
Successor Company Discussion and Analysis
Results of Operations for the Successor Company for the Thirteen-Week
Period ended September 30, 2001 and Results of Operations for the
Successor Company for the Period April 3, 2001 to September 30, 2001
Raytech Corporation recorded a net income of $.9 million for the
thirteen-week period ended September 20, 2001 or $.02 per basic share
as compared to net income of $3.0 million or $.84 per basic share for
the thirteen-week period ended October 1, 2000. The change
period-over-period of $2.1 million was due primarily to reduced sales volume,
certain increased depreciation and amortization charges, which
resulted from the reorganization and increased professional fees. The
specific explanation of these items are detailed in the discussion
below.
Net Sales
Worldwide net sales for the thirteen-week period ended
September 30, 2001 of $48.8 million were $8.0 million less than the
recorded amount of $56.8 million for the thirteen-week period ended
October 1, 2000, a reduction of 14%. Net sales for the period from
April 3, 2001 to September 30, 2001 were $99.3 million as compared to
$117.9 million in the period from April 3, 2000 to October 1, 2000, a
reduction of $18.6 million or 16%. The reduced sales reflect the
economic effects of the poor economy in the United States and the
reduced demand from both the automobile original equipment
manufacturers and slower sales to the automobile aftermarket. The
specific impact by business segment is detailed below.
The Wet Friction segment reported sales of $32.0 million for the
period from July 2, 2001 to September 30, 2001 compared to $39.5
million for the same period in the prior year, a reduction of $7.5
million or 19%. Sales for the period from April 3, 2001 to
September 30, 2001 were $64.6 million as compared to $81.8 million in
the period from April 3, 2000 to October 1, 2000, a reduction of $17.2
million or 21%. The reduced sales reflect the lower demand for our
products from the automobile original equipment manufacturers
reflecting the reduced sales to the end consumer and the desire of the
automobile original equipment manufacturers to reduce their inventory.
The reduced demand due to the economy accounts for substantially all
of the sales decline for this segment.
The Aftermarket segment reported sales of $11.2 million for the
period July 2, 2001 through September 30, 2001 as compared to $13.8
million for the same period in the prior year, a reduction of $2.6
million or 19%. Sales for the period from April 3, 2001 to
September 30, 2001 were $23.4 million as compared to $28.8 million in
the period from April 3, 2000 to October 1, 2000, a reduction of $5.4
million or 19%. The reduced sales reflect the poor economy in the
United States as consumers postpone certain automobile repairs and
maintenance items. Additionally, the improved quality by the
automobile original equipment manufacturers has pushed out the repair
and maintenance cycle. The competition in the aftermarket has also
increased due to the slowdown in sales to the original equipment
manufacturers as the various parts manufacturers attempt to sell more
into the aftermarket.
The Dry Friction segment reported sales of $7.6 million in sales
for the period July 2, 2001 through September 30, 2001 as compared to
$6.5 million for the same period in the prior year, an increase of
$1.1 million or 17%. Sales for the period from April 3, 2001 to
September 30, 2001 were $15.1 million as compared to $14.0 million, an
increase of $1.1 million or 8%. The increase in sales is due
substantially to the improved performance at our facility in China,
which produces a lower cost clutch facing, which is sold in China and
other markets where cost is the deciding factor. This increase in
sales in China during the thirteen-week period ended September 30,
2001 is $825 thousand over the same period in the prior year. This
accounts for approximately 75% of the sales increase in the Dry
Friction segment period-over-period.
Gross Profit
The gross profit for the period July 2, 2001 through
September 30, 2001 of $9.4 million represents 19% of sales for the
period as compared to $14.0 million or 25% of sales for the same
period in the prior year. The gross profit for the period from
April 3, 2001 to September 30, 2001 of $13.4 million represents 13% of
sales as compared to $28.8 million or 24% of sales for the comparable
period in the prior year. The reduced gross margin in all periods
reflects the impact of the reduced sales in the period-over-period of
$8.0 million. The impact of the reduced sales is due to higher labor
and overhead costs as a percentage of sales. The erratic actions by
the automobile original equipment manufacturers in their attempts to
manage inventory impacts the Company's ability to adjust labor and
overhead in the most efficient manner. Cost reduction programs have
been implemented at all of the facilities and additional programs are
currently being reviewed. In addition, the gross margin was impacted
in the period April 3, 2001 to July 2, 2001 by the adoption of
fresh-start accounting through an increase in inventory costs of $5.9
million.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for the
period July 2, 2001 through September 30, 2001 were $10.0 million as
compared to $7.8 million for the same period in the prior year, an
increase of $2.2 million or 28%. SG&A for the period from April 3,
2001 to September 30, 2001 was $17.0 million as compared to $16.0
million in the period April 3, 2000 to October 1, 2000, an increase of
$1.0 million or 6%. The increase in SG&A period-over-period is due to
efficiencies which reduced costs amounting to $.3 million offset by
increases in three major areas amounting to $2.5 million as follows:
The impact of fresh start accounting, primarily in increased
amortization of intangible assets of $.1 million for this quarter and
the pension expenses due to the assumption of the Raymark pension plan
of $.2 million, which accounts for $.3 million of the increase. The
increase in professional fee expenses, primarily legal, which in the
prior year were used to offset the Raymark debt (under the Raymark
indemnification agreement), represents $.9 million. The other large
item is an increase in the accrued expenses for an environmental
issue, see Part II, Other Information, Item 1, Legal Proceedings, at
the Crawfordsville, Indiana, facility. This accrual was increased
$1.3 million based on updated projections for the remediation work.
The increases in the third quarter of 2001 discussed above account for
the majority of the increases comparing the period April 3, 2001 to
September 30, 2001 with the similar period in 2000.
Interest Expense
Interest expense for the period July 2, 2001 through
September 30, 2001 was $.3 million as compared to $.7 million for the
same period in the prior year, a decrease of $.4 million or 57%.
Interest expense for the period April 3, 2001 to September 30, 2001
was $.6 million as compared to $1.2 million for the period April 3,
2000 to October 1, 2000, a decrease of $.6 million or 50%. The
decrease in interest expense reflects the decline in interest rates
period-over-period of three percentage points as the United States
Federal Reserve has attempted to ease interest rates domestically as
an economic stimulus. Interest rates on foreign debt have remained
steady.
Operating (Loss) Profits
The following discussion of operating results by industry segment
relates to information contained in Note I - Segment Reporting in the
Notes to Condensed Consolidated Financial Statements. Operating
profit is income before income taxes, minority interest and
extraordinary items.
The Company recorded an operating loss of $1.2 million for the
period July 2, 2001 through September 30, 2001 as compared to income
of $5.9 million for the thirteen-week period ended October 1, 2000.
The Company reported an operating loss of $4.5 million for the period
from April 3, 2001 to September 30, 2001 as compared to profit of
$12.4 million for the period April 3, 2000 to October 1, 2000.
The Wet Friction segment recorded an operating loss of $.7
million for the period July 2, 2001 through September 30, 2001
compared to an operating profit of $4.0 million for the
thirteen-week-period in the prior year or a reduction of $4.7 million.
Operating profit for the period from April 3, 2001 to September 30, 2001
was $1.3 million compared to $8.9 million for the period April 3, 2000 to
October 1, 2000. The reduction in gross profit reflects the reduced
sales volume in this segment of $7.5 million and $17.2 million for the
thirteen-week-period ended September 30, 2001 and period from April 3,
2001 to September 30, 2001, respectively, compared to similar periods
in the prior year. In addition to the impact from the sales decline,
the segment recorded additional expenses as follows: pricing
concessions of $1.0 million, severance payments amounting to $.6
million, utility rate increases amounting to $.5 million and the
impact of fresh-start reporting on inventory costs of $3.9 million
during the period from April 3, 2001 to September 30, 2001.
The Aftermarket segment recorded an operating profit of $1.9
million for the thirteen-week-period ended September 30, 2001 as
compared to $2.7 million in the same period as prior year, a decrease
of $.8 million. Operating profit for the period from April 3, 2001 to
September 30, 2001 was $3.8 million as compared to $5.4 million in the
period April 3, 2000 to October 1, 2000, a reduction of $1.6 million.
The reduction is primarily due to the reduction in sales volume.
The Dry Friction segment recorded operating profit of $.4 million
for the thirteen-week-period ended September 30, 2001 as compared to
$.1 million in the same period in the prior year. Operating profit
for the period from April 3, 2001 to September 30, 2001 of $.8 million
compared to break-even for the period April 3, 2000 to October 1,
2000. The improvement in operating profit is the result of increased
sales and reductions in selling, general and administrative expenses.
Income Taxes
For tax reporting purposes, the Company's emergence from
bankruptcy did not create a new tax reporting entity.
Accordingly, the adjustments to adopt fresh-start accounting are
not applicable for the Company's tax reporting. Therefore, with
the exception of goodwill, these adjustments have created new
deferred tax items.
The Company's effective tax rate for the thirty-nine-week
period ended September 30, 2001 is 217% and for the period July 2,
2001 through September 30, 2001 is 205%, excluding the one-day tax
effect in the amount of $29.377 million relating to the Plan of
Reorganization on April 2, 2001. The effective rate for the
thirty-nine-week period reflects the Company's anticipated
annualized rate and differs from the federal statutory tax rate
for several reasons. The Company has profitable operations in
certain tax jurisdictions which could not be offset by losses
incurred by other operating entities in other tax jurisdictions.
Further, certain losses of foreign operations did not provide a
tax benefit due to limitations on the realizability of those tax
attributes. In addition, there were adjustments made in the
current period to properly record tax accruals relating to prior
periods. And finally, there is the tax effect of expenses that
are not deductible for tax purposes. The effective tax rate for
the thirteen-week period ended September 30, 2001 of 205% differs
from the annualized rate of 217% due to the adjustment in the
current period to reflect the Company's annualized effective tax
rate versus the rate used in the previous quarter.
The Company had recorded a deferred tax asset of $2.8 billion
in 2000 relating to the tax effects of the Liabilities Subject to
Compromise. Based on its historical domestic taxable income, the
Company expected to realize approximately $140 million of the
deferred tax asset, and accordingly, it recorded a valuation
allowance of $2.6 billion against the deferred tax asset to state
it at its expected net realizable value. As a result of the
settlement of the Liabilities Subject to Compromise for
substantially less than the recorded amount of allowed claims as
part of the Company's plan of reorganization, the net deferred tax
asset was adjusted accordingly. As of July 1, 2001, the valuation
allowance was approximately $.3 million relating to net operating
loss carryforwards in certain foreign tax jurisdictions.
The effective tax rate for the thirty-nine-week and thirteen-week
periods ended October 1, 2000 was 42%, excluding the valuation allowance
recorded against the deferred tax benefit with respect to the Liabilities
Subject to Compromise recorded during those periods. This rate differs
from the U.S. federal statutory tax rate primarily due to the effects of
state and foreign taxes.
The Company has in process an Internal Revenue Service tax
audit for the fiscal years 1996 through 1999. The IRS has
proposed disallowance of $9.9 million of bankruptcy related costs
from 1996 through 1998, which are included in the indemnification
agreement with Raymark. The Company has deducted approximately
$14.0 million of such costs during the period under audit and
continues to believe these costs are deductible. The ultimate
resolution of the Company's liability, if any, is dependent on the
interpretation of a complex set of facts and applicable legal
precedents. While the Company and its advisors believe the
Company's position is supported by the facts and the weight of the
legal precedents, it is reasonably possible, through a different
factual analysis and application of countervailing legal
authority, that a final determination could be adverse to the
Company. As such, the Company intends to contest the proposed
disallowance and has not recorded any related provisions. Should
the IRS ultimately prevail in its claim, any adjustment related to
prior year taxes would be offset by a reduction in the amounts
payable to the PI Trust.
Results of Operations for the Predecessor Company for the
Thirteen-Week-Period ended April 1, 2001
Raytech Corporation recorded net income for the thirteen-week
period ended April 1, 2001 of $1.7 million or $.49 per basic share
as compared to $4.8 million or $1.38 per basic share for the same
period in the prior year. The reduced earnings were due primarily
to the slow U.S. economy and the significantly lower automobile
production for Raytech's original equipment manufacturing
customers. As detailed below, the Wet Friction segment was
hardest hit, recording lower sales of $10.2 million compared to
2000, a decline of 21.6%.
The Aftermarket segment was also negatively affected by the
poor economy, which is reflected in the reduced sales of $1.9
million compared to the same period in 2000, a reduction of 12.7%.
Net Sales
Worldwide net sales of $55.2 million for the thirteen-week
period ended April 1, 2001 were less than net sales for the same
period in the prior year of $67.5 million by $12.3 million or
18.2%.
The Wet Friction segment reported sales of $37 million in the
first quarter of 2001 compared to $47.2 million for the same period
in the prior year, a decline of $10.2 million or 21.6%.
Approximately 50% of the reduced sales in this segment were due to
lower demand from the automotive original equipment customers as the
demand for new cars and light trucks was lower in the first quarter
of 2001 compared with the prior year first quarter. Additionally,
the production of new cars and light trucks was further affected by
the apparent desire of the Big 3 U.S. automobile manufacturers to
reduce inventory levels. In the North American market, light
vehicle production fell approximately 20% period-over-period. In
addition to the decline in automobile original equipment sales, this
segment was also affected by the loss of a portion of the business
of a heavy duty customer. This loss of business to foreign
competition accounted for approximately $5.1 million or 50% of the
sales decline period-over-period.
The Aftermarket segment reported sales of $13.1 million for the
thirteen-week period ended April 1, 2001 compared to $15.0 million
for the same period in 2000, a decrease of $1.9 million or 12.7%.
The sales decline was due to a variety of issues, most significantly
the softness in the U.S. economy and the automobile sector in
particular. Further, the competitive issues in this market segment
have continued from the prior year.
The Dry Friction segment recorded sales of $8.1 million for the
first quarter of 2001 compared to $8.7 million for the same period
in the prior year, a decline of $.6 million or 6.9%. The German
operation, which represents over 92% of the sales of this segment,
reported sales of DM16 million in the first quarter of 2001 compared
to DM16.3 million in the same period in the prior year. The reduced
sales for this segment is substantially due to the decline in the
deutsche mark period-over-period.
Gross Profit
Gross profit as a percentage of sales for the thirteen-week
period ended April 1, 2001 was 20.6% as compared to 26.8% for the
same period in the prior year, a decrease of 6.2 percentage points.
The reduced gross profit is a direct result of the reduced sales
volume experienced by Raytech in the first quarter of 2001 compared
to 2000. The decrease in sales period-over-period was $12.3
million. The resulting decrease in gross profit is caused primarily
by under absorbed overhead.
Selling, General and Administrative
Selling, general and administrative expenses decreased 11.5% to
$7.7 million, as compared to $8.7 million in the first quarter of
the prior year. The decrease is attributable to lower salary
expenses and employee reductions.
Interest Expense
Interest expense, excluding Raymark interest, for the period of
$.4 million is $.1 million less than the same period in the prior
year amount of $.5 million, a reduction of 20%. The reduction in
interest expense is due to the 1% reduction in the interest rate on
domestic bank debt period-over-period.
Operating Profits
The following discussion of operating results by industry
segment relates to information contained in Note I - Segment
Reporting in the Notes to Condensed Consolidated Financial
Statements. Operating profit is income before income taxes and
minority interest.
Operating profit decreased $5.6 million or 61.5% in the first
quarter of 2001 to $3.5 million as compared to $9.1 million in the
first quarter of 2000. The decline in operating profit, as more
fully explained below, was due to the reduced sales of $12.3 million
as compared to the same period in the prior year.
The Wet Friction segment posted operating profit of $1.3
million in the first quarter of 2001 as compared to $6.4 million in
2000, a decline of $5.1 million or 80%. The decline in sales of
this segment of 21.6%, or $10.2 million, and the resulting
underabsorption of overhead, was the primary cause of the reduced
operating profit in this segment; a more detailed discussion of
sales is contained in the "Net Sales" section of this report.
Raytech Corporation has taken certain steps to address the decreased
operating profit in this segment, including reductions in both the
hourly and salaried work force, wage and new hire containment
programs and a stronger focus on reducing material costs.
The cost containment programs outlined above are in place in
all segments of Raytech.
The Aftermarket segment recorded an operating profit in the
first quarter of $2.1 million, which was less than the prior year
amount of $2.6 million by $.5 million or 19.2%. The reduced
operating profit reflects the impact of the lower sales, compared
period to period of $1.9 million.
The Dry Friction segment recorded operating profit of $.8
million compared to $1.0 million in the same period in the prior
year, a reduction of $.2 million or 20%. The operating profit
decline is due substantially to negative currency translations.
Income Taxes
The effective tax rate for the thirteen-week period ended
April 1, 2001 was 42%, which is the same tax rate used in the same
period in the prior year. The rate differs from the statutory
federal rate principally because of state and foreign taxes.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $18.6
million at September 30, 2001 compared to $13.9 million at
December 31, 2000. Capital investment for the period from January 1,
2001 to September 30, 2001 totaled $7.8 million. The level of
capital investment is less than originally planned due to scaling
back the capital expenditure plan to reflect the reduced cash flow
due to lower sales.
As of September 30, 2001, the outstanding debt consists of the
following:
Current Non-Current Total
Domestic bank debt $ 5,593 $ 3,000 $ 8,593
Foreign bank debt 3,009 4,885 7,894
Leases 113 215 328
Total bank debt and leases 8,715 8,100 16,815
Note to former AFM principal 3,022 - 3,022
Total outstanding debt $ 11,737 $ 8,100 $ 19,837
The Company believes that cash provided by operations and that
available from its credit facilities will provide sufficient
liquidity to meet its funding requirements. The Company has
additional unsecured collateral in the event additional borrowings
are required.
Future Liquidity
See Part II - Item 1 Legal Proceedings.
Concurrent to the effective date of the Plan, Raytech settled
the Liabilities Subject To Compromise either through the issuance of
common stock, payment in cash or the assumption of a liability for
$11.2 million for certain Raymark pension plans among other
resolutions. The pension plans have a current unfunded liability
for pre-2001 funding for $6.5 million. The Company is working with
the Internal Revenue Service (IRS) and the Pension Benefit Guaranty
Corporation (PBGC) to obtain a funding waiver under Revenue
Procedure 94-41. The waiver, if granted, would provide for an
extended period of time for funding this pre-2001 amount of $6.5
million while keeping the annual funding going forward on a current
basis. The funding required for the 2001 pension funding period
would be approximately $3.3 million, the anticipated funding for the
pre-2001 period amount would be approximately $1.6 million annually
for five years. The total payment due through September 15, 2002
would amount to $4.9 million. In the event that the waiver from the
IRS is not granted, the funding requirements for 2001 would
approximate $12.3 million. The Company expects to be successful in
receiving this waiver.
The Plan also set forth a Tax Refund Assignment Agreement
between the Company and the Personal Injury Trust, which provides
for the tax benefits received by the Company due to the
reorganization to be passed onto the Personal Injury Trust as
received, subject to a holdback provision.
Management believes that existing cash balances, availability
under its existing credit facilities and cash flow from operations
during 2001 will be sufficient to meet all of the Company's
obligations arising in the normal course of business, including
anticipated capital investments and all obligations arising from the
emergence from bankruptcy. In the event that the waiver is not
obtained for the Raymark pension funding, additional borrowings may
be required.
Outlook
The statements contained 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.
In developing the outlook for the remainder of the 2001 year,
the impact on the United States and world economies from the
terrorists' attack, which occurred on September 11, 2001, is
unknown. The U.S. automakers have responded to the potential drop
in demand with financing packages which have, through the end of
October 2001, increased sales. The impact from the terrorists'
attack and the retaliation by the United States will undoubtedly
have an impact on the future economy; however, at this point it is
not possible to quantify that impact.
The reduced sales in 2001 in the automotive equipment market
are expected to continue through the remainder of the 2001 year.
Additionally, 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. The Asian economic
difficulties could continue to 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. In spite of
these conditions, it is expected that retail demand for agricultural
equipment in 2001 will be at 2000 levels. However, the Company
expects demand for certain heavy duty products will be reduced
through the remainder of 2001 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 the remainder of 2001 to ensure the Company's
production meets demand.
The Aftermarket segment has been negatively affected by the
slowing U.S. economy, which is reflected in the reporting period.
The competitive pressures in this industry segment are extreme as
companies attempt to gain market share. This market is expected to
remain below 2000 levels for the remainder of the year.
The Dry Friction segment continues to operate in a sluggish
European environment with unemployment remaining at high levels and
economic growth deteriorating from 2000 levels. Sales are expected
to be near 2000 levels in terms of local currency, with lower sales
reported due to unfavorable translation adjustments into U.S.
dollars. 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. Raytech has expanded
Dry Friction sales through its Chinese operations and expects to
continue to enjoy growth in this market.
The Company's outlook for 2001 anticipates reduced sales with
lower operating profit compared to 2000 results even excluding
fresh-start and reorganization adjustments. Maintaining market
share in the automotive original equipment market and the continued
introduction of new products for aftermarket distribution are
expected to be the drivers for performance. Further, it is
anticipated that the dry friction operation in China will improve
the performance of that segment.
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 at
September 30, 2001 range from 2.5% to 10.8%. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 a share of Raytech
common stock. In May 1988, Raytech divested all of the Raymark
stock.
In accordance with the restructuring plan, Raytech, through
its subsidiaries, purchased certain non-asbestos businesses of
Raymark in 1987, including the Wet Clutch and Brake Division and
Raybestos Industrie-Produkte GmbH, a German subsidiary. Despite
the restructuring plan implementation and subsequent divestiture
of Raymark, Raytech was named a co-defendant with Raymark and
other named defendants in numerous asbestos-related lawsuits as a
successor in liability to Raymark.
In one of the asbestos-related personal injury cases
captioned Raymond A. Schmoll v. ACandS, Inc., et al. 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
extended beyond the Oregon District due to a Third Circuit Court
of Appeals decision in a related case wherein Raytech was
collaterally estopped (precluded) from relitigating the issue of
its successor liability for Raymark's asbestos-related
liabilities.
In order to stay the asbestos-related litigation, 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.
After several Court rulings, including an appeal to the U.S.
Supreme Court, the Schmoll case, as affirmed by the Ninth
Circuit Court of Appeals, remained as the prevailing decision
holding Raytech to be a successor to Raymark's asbestos-related
liabilities.
As a result of the referenced Court rulings, in October,
1998 Raytech reached a tentative settlement with its creditors
for a consensual plan of reorganization (the "Plan"), providing
for all general unsecured creditors including all asbestos and
environmental claimants to receive 90% of the equity in Raytech
in exchange for their claims. In addition, any and all refunds
of taxes resulting from the implementation of the Plan would be
paid to an asbestos personal injury trust (the "PI Trust")
established under the Bankruptcy Code. The existing equity
holders in Raytech would retain 10% of the equity in Raytech.
As a result of the final estimation of claims, Raytech
recorded asbestos claims of $6.76 billion, Government claims of
$431.8 million, pension liability claims of $16 million and
retiree benefit claims of $2.5 million in 2000. The total
estimated amount of allowed claims was $7.2 billion.
On August 31, 2000, the Bankruptcy Court confirmed Raytech's
Plan, which confirmation was affirmed by the U.S. District Court
on September 13, 2000. All conditions under the confirmation of
the Plan were subsequently met, and the Plan became effective on
April 18, 2001 ("Effective Date"), resulting in Raytech emerging
from bankruptcy. On the Effective Date, a channeling injunction
ordered by the Bankruptcy Court pursuant to Section 524(g) of the
Bankruptcy Code has and will permanently and forever stay, enjoin
and restrain any asbestos-related claims against Raytech and
subsidiaries, thereby channeling such claims to the PI Trust for
resolution. On the Effective Date, the rights afforded and the
treatment of all claims and equity interests in the Plan were in
exchange for and in complete satisfaction, discharge and release
of, all claims and equity interests against Raytech. On the
Effective Date, the Company's Certificate of Incorporation was
amended and restated in accordance with the Plan providing for
authority to issue up to 55 million shares of stock, of which 50
million is common and 5 million is preferred. In settlement of
the estimated amount of allowed claims of $7.2 billion,
approximately 38 million shares of common stock were issued and
$2.5 million in cash is payable to the allowed claimants and a
commitment was made to pay to the PI Trust any and all refunds of
taxes paid or net reductions in taxes resulting from the
implementation of the Plan. The shares issued are exempt from
registration pursuant to the Bankruptcy Code; however, shares
issued to the PI Trust have restrictions on resale as a result of
the high percentage of ownership in Raytech. In addition,
Raytech has recorded the liability for the Raymark pension plan
claim though the outcome of this claim is still subject to final
Court decision. It has been represented to Raytech that the
retiree benefit claim will be assumed by Raymark. Settlement of
the Raymark claims resulted in cancellation in full of the Ray-
mark debt and accrued interest of $12 million and a commitment of
Raytech to backstop the Raymark Trustee professional fees in the
event the Raymark Trustee has insufficient recovery of funds for
such purposes up to $1 million. To date $.85 million has been
paid to the Raymark Trustee under said backstop provision. Also,
on the Effective Date, the Board of Directors was increased to
nine with one appointed by the equity committee and the remaining
directors appointed by the unsecured creditors' committee.
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
a drainage ditch near its Indiana facility. In June 1996, IDEM named
RPC as a potentially responsible party ("PRP"). RPC notified its
insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern
District of Indiana, captioned Reliance Insurance Company vs. RPC
seeking a declaratory judgment that any liability of RPC is excluded
from its policy with RPC. In January 2000, the District Court
granted summary judgment to RPC, indicating that the insurer has a
duty to defend and indemnify losses stemming from the IDEM claim.
However, in June 2001, Reliance Insurance Company was placed in
rehabilitation in Pennsylvania. The effect upon RPC's claim is not
known at this time. IDEM has turned the matter over to the U.S.
Environmental Protection Agency ("EPA"). In December 2000, the EPA
issued a Unilateral Administrative Order under CERCLA ("Order")
demanding removal of contaminated soils from the referenced drainage
ditch. RPC has given notice that it intends to comply with the Order
and has designated a contractor and project coordinator as required.
RPC is preparing a plan for implementing and carrying out the cleanup
Order. Based on preliminary assessments, the Company has estimated
that the cost to comply with the Order will be in the range of $4
million to $6 million and has recorded a liability in the amount of
$4 million, which includes an additional $1.3 million provision
recorded in the third quarter of 2001. It is at least reasonably
possible that the preliminary assessment of estimated costs to comply
with the Order may be modified as the project progresses.
In April 1998, Advanced Friction Materials ("AFM") redeemed 53%
of its stock from the former owner for a formulated amount of $6.044
million, $3.022 million paid at closing and the balance of $3.022
million payable by note in three equal annual installments resulting
in the Company attaining 100% ownership of AFM. In April 1999, AFM
withheld payment of the note as a result of the discovery of an
embezzlement by the former financial manager of AFM affecting the
formulated payment. 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. A trial date was scheduled for August
2001. Just prior to the start of the trial, the Court ordered a
mediation resulting in a settlement of the case in October 2001
providing for payment by the Company of $3.1 million and full
releases of the parties. The Company expects to record approximately
$1.5 million in income in the fourth quarter of 2001 in connection
with the settlement. The settlement was based on recoveries in the
embezzlement case and litigation costs savings.
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 was amended several times and
became a preliminary injunction, which remains in effect. 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 part in March 2000 but was subject to proof of standing to
file the claim. On March 30, 2001, the Court granted plaintiff's
motion for reconsideration and ruled on summary judgment that as of
May 1997 Raymark was insolvent and that defendants (Smith, et al.) as
fiduciaries owed a duty to Raymark's creditors. The Court further
ruled that the transfer of $8.5 million of funds, specifically
earmarked for tort claims, to Smith related entities was a breach of
that fiduciary duty, was a fraudulent transfer and was an unjust
enrichment to the Smith family. Pending final judgment on the
ruling, the Court ordered the parties to attempt to settle the
litigation in April 2001, which failed causing the Court to set the
trial for November 2001. Just prior to the start of the trial, the
Court again urged the parties to settle, resulting in negotiations
and a tentative settlement. The Court vacated the trial pending
completion of the settlement. All litigation costs in this case will
be supported by Raytech pursuant to the Settlement Agreement with
Raymark of April 2001 referred to in Note A above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(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 14, 2001