FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended July 2, 1995
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 512, One 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 July 2, 1995, 3,230,080 shares of the Registrant's common
stock, par value $1.00, were issued and outstanding.
Page 1 of 24 <PAGE>
RAYTECH CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets as
at July 2, 1995 and January 1, 1995 3
Condensed Consolidated Statements of
Operations for the twenty-six weeks ended
July 2, 1995 and July 3, 1994 4
Condensed Consolidated Statements of Cash
Flows for the twenty-six weeks ended
July 2, 1995 and July 3, 1994 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit 11 - Earnings Per Share Computation 24
-2-
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
<CAPTION>
July 2, Jan. 1,
As at 1995 1995
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 10,705 $ 4,778
Trade accounts receivable, less allowance of $612
for 1995 and $519 for 1994 19,565 13,718
Inventories 22,539 22,859
Other current assets 3,607 5,019
Total current assets 56,416 46,374
Property, plant and equipment 115,164 111,147
Less accumulated depreciation 71,980 70,292
Net property, plant and equipment 43,184 40,855
Other assets 4,617 4,580
Total assets $104,217 $ 91,809
LIABILITIES
Current liabilities
Notes payable $ 4,668 $ 4,928
Current portion of long-term debt (including $7,133 and
$6,855 due to Raymark in 1995 and 1994, respectively) 7,406 8,001
Accounts payable 8,803 12,055
Accrued liabilities 22,486 20,993
Total current liabilities 43,363 45,977
Long-term debt due to Raymark 33,056 30,627
Long-term debt 252 245
Postretirement benefits other than pensions 8,143 7,593
Other long-term liabilities 4,794 3,651
Total liabilities 89,608 88,093
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, 5,362,142 and 5,351,024
issued and outstanding in fiscal 1995 and 1994, respectively 5,362 5,351
Additional paid in capital 70,192 70,148
Accumulated deficit (59,028) (69,250)
Cumulative translation adjustment 2,644 2,028
19,170 8,277
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 14,609 3,716
Total liabilities and shareholders' equity $104,217 $ 91,809
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except share data)
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $45,705 $43,849 $95,618 $87,404
Cost of sales 34,529 32,410 70,053 64,184
Gross profit 11,176 11,439 25,565 23,220
Selling and administrative
expenses (4,723) (6,025) (11,682) (12,451)
Operating profit 6,453 5,414 13,883 10,769
Interest expense (233) (115) (331) (207)
Interest expense - Raymark (509) (585) (1,018) (1,172)
Other income (expense), net 4,040 (374) 4,334 (293)
Income before provision for income
taxes and minority interest 9,751 4,340 16,868 9,097
Provision for income tax (3,544) (1,751) (6,084) (3,518)
Minority interest (562) - (562) -
Net income $ 5,645 $ 2,589 $10,222 $ 5,579
Net income per share $ 1.67 $ .75 $ 3.00 $ 1.64
Average shares outstanding 3,383,918 3,446,398 3,411,827 3,399,970
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
July 2, July 3,
For the 26 Weeks Ended 1995 1994
<S> <C> <C>
Net cash provided from operating
activities $ 8,137 $ 7,530
Cash flow from investing activities:
Capital expenditures (4,936) (5,136)
Proceeds on sale of property, plant and equipment 1,962 -
Net cash used in investing activities (2,974) (5,136)
Cash flow from financing activities:
Proceeds from short-term borrowings 37,062 3,206
Payments on short-term borrowings (37,885) (2,754)
Proceeds from long-term borrowings - -
Principal payments on long-term debt (613) (102)
Proceeds of borrowings from Raymark 5,652 500
Payments of obligations to Raymark (3,432) (2,337)
Proceeds from sale of stock 25 -
Dividends paid (131) -
Net cash used in financing activities 678 (1,487)
Effect of exchange rate changes on cash 86 -
Net change in cash and cash equivalents 5,927 907
Cash and cash equivalents at beginning of period 4,778 2,990
Cash and cash equivalents at end of period $10,705 $ 3,897
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
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 - RESTRUCTURING OF RAYTECH, CHAPTER 11 PROCEEDINGS
AND OTHER LITIGATION
The restructuring of the Company in October 1986 was for
the stated purpose of separating Raytech from Raymark Industries,
Inc.'s ("Raymark") substantial asbestos-related liabilities and
litigation. For a further discussion of this matter, please refer
to Raytech's 1994 Form 10-K, Part 1, Item 1, Pages 4-8. As part of
the restructuring process of Raytech, Raymark common stock was
divested and sold as of May 20, 1988 to Asbestos Litigation
Management, Inc.
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.
The dollar value of these lawsuits cannot be calculated as most
complaints either over inflate claims, state only jurisdictional
minimums or do not specify damages at all. 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. In February 1989, an
involuntary petition in bankruptcy was filed against Raymark and
remains pending. Subsequent to the involuntary bankruptcy
proceedings against Raymark, a restrictive funding order was issued
by an Illinois Circuit Court, which required one of Raymark's
insurance carriers to pay claims but not defense costs, and another
insurance carrier had been declared insolvent. These circumstances
caused Raymark to be unable to fund the costs of defense to Raytech
under its indemnification agreements. Raymark's cost of defense
and disposition of cases up to the automatic stay of litigation
under the involuntary bankruptcy proceedings has been approximately
$333 million of Raymark's total insurance coverage of approximately
$395 million. Of the $62 million remaining, $32 million is covered
by the insolvent carrier and the remaining is either blocked due to
lower levels not being exhausted or does not provide for defense of
the claims.
<PAGE>
In a 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 liability in the case was settled for an immaterial
amount. 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 July 1995, pursuant
to a motion by several of the larger equity security holders of
Raytech, the Bankruptcy Court issued an order directing the U.S.
Trustee to appoint an official committee of equity security holders
for a limited time relating to a determination of equity security
holders interest in the estate.
Since the bankruptcy filing, several entities have
asserted claims in Bankruptcy Court, alleging environmental and
pension liabilities of Raymark based upon the same theories of
successor liability against Raytech as alleged by asbestos
claimants. These claims are not covered by the class action
referenced below and will be resolved in the bankruptcy case. The
environmental claims include a claim by 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 treatment 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
<PAGE>
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 Connecticut
manufacturing facility.
Under bankruptcy rules, the debtor-in-possession had 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 may
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. Important conditions precedent to
confirmation of the Debtor's Plan include litigation in the
Bankruptcy Court to determine the remedy for Raytech as a successor
to the asbestos-related liabilities of Raymark and a resolution of
the environmental claims or other claims filed or to be filed by
governmental agencies. The Debtor's Plan provides that in the
event Raytech is found to be a successor, it is to establish a
successor trust funded by an amount determined to be the difference
between what Raytech should have paid for the businesses purchased
from Raymark less the amount actually paid and less amounts to be
paid for environmental and other claims. This remedy would satisfy
its obligations as a successor in full and render all claimants
unimpaired, thereby eliminating the need for balloting and all
equity shareholders would retain their interests in full. Raytech
believes the Debtor's Plan to be confirmable. In September 1994,
the Creditors' Committee filed its own Plan of Reorganization in
competition to the Debtor's Plan ("Creditors' Plan"). The
Creditors' Plan calls for the elimination of Raytech Corporation
and its stockholders to be replaced with a new Raytech. All of the
stock of new Raytech would then be distributed to unsecured
claimants, environmental claimants and both past and future
asbestos disease claimants on a formulated basis set forth in the
Plan. Current stockholders of Raytech would receive nothing under
the Plan. Raytech believes the Creditors' Plan is unconfirmable
and will vigorously contest attempts to have it confirmed while it
<PAGE>
continues to try to get the Debtor's Plan confirmed. The outcome
of these matters is expected to take considerable time and is
uncertain. If an adverse plan is confirmed, it would have a
material adverse impact on Raytech and its stockholders.
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 desire 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. The ruling leaves the Oregon
case ruling, 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. Raytech is considering an
appeal to the U.S. Supreme Court.
Costs incurred by the Company for asbestos-related
liabilities are indemnified by Raymark under the 1987 acquisition
agreements. By agreement, 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 has 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
<PAGE>
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 and 1995 were applied as a reduction of the note obligations
pursuant to the agreements.
In October 1992, the Secretary of the Department of Labor
filed suit against Raymark and certain named fiduciaries in the
U. S. District Court for Connecticut naming the Company as a
successor to Raymark, alleging the breach of fiduciary duties
required under ERISA in connection with the purchase of a group
annuity contract from Executive Life Insurance Company to fund the
benefits of participants and beneficiaries of three pension plans.
Executive Life was placed in conservatorship by the California
Insurance Commission in April 1991. The Department of Labor filed
a claim against Raytech in the Bankruptcy Court in the amount of
$22.8 million for successor liability to the damages alleged in the
suit. All parties to this litigation have reached a tentative
settlement which dismisses Raytech without liability. The
settlement is subject to formalization.
In February 1994, a jury in the U. S. District Court for
the Southern District of Indiana returned a verdict in favor of
Raybestos Products Company ("RPC"), a wholly-owned subsidiary of
the Company, for $2.9 million plus costs and against Gilbert W.
Younger and Transgo, a corporation. RPC had sued the defendants in
1990 for defamation of products and injurious falsehoods concerning
RPC's manufactured products. In April 1994, the Court granted RPC
its costs, attorneys' fees and interest in addition to the damages
awarded by the jury. The defendants filed for bankruptcy under
Chapter 11 in 1992 and the defendant's plan of reorganization was
confirmed in September 1994 by a California Bankruptcy Court.
Under the plan of reorganization and ordered by the Court, the
total amount of the awarded damages had been placed in a secured
escrow account pending appeals. In April 1995, the 7th Circuit
Court of Appeal affirmed the verdict except for the award of
prejudgment interest. In June 1995, RPC received the awarded
damages, including post-judgment interest, in the amount of $4.6
million, bringing the case to a final conclusion.
The adverse ruling in the Third Circuit Court of Appeals
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 a
material adverse impact on Raytech as it does not have the
resources needed to fund Raymark's substantial uninsured asbestos-
related liabilities. Determination of Raytech's actual liabilities
are subject to the Bankruptcy Court's deliberations and rulings and
the competing plans of reorganization filed in the Bankruptcy Court
referenced above.
<PAGE>
The ultimate liability, if any, of the Company with
respect to asbestos-related, environmental, or other claims cannot
presently be determined. Accordingly, no provision for such
liability has been recorded in the financial statements.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. An unfavorable
ruling on the matters described above would have a material adverse
effect on the Company's results of operations and financial
position. These uncertainties raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
NOTE B - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments necessary
to fairly present the financial position of Raytech as of
July 2, 1995 and January 1, 1995, the results of operations for the
thirteen and twenty-six weeks ended July 2, 1995 and statements of
cash flows for the thirteen and twenty-six weeks ended July 2,
1995. Except for the matters disclosed herein, all adjustments are
of a normal recurring nature. 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 1,
1995.
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.
NOTE C - INVENTORIES
Inventories consist of the following:
July 2, 1995 January 1, 1995
Raw material $ 6,447 $ 6,367
Work in process 6,055 6,524
Finished goods 10,037 9,968
$22,539 $22,859
NOTE D - RELATED PARTIES
During the first six months of 1995, the Company purchased
yarn from Universal Friction Composites, a related party, in the
amount of $1,165 and at July 2, 1995, the related payable amounted
to $273.
<PAGE>
Effective March 31, 1995, Allomatic Products Company
("APC"), a majority-owned subsidiary, declared a cash dividend of
$2.81 per share payable in equal quarterly installments to
shareholders of record in March 1995. As of April 2, 1995, 34,208
shares, or 33% of the outstanding shares, were held by Universal
Friction Composites, Inc., a corporation directed by Bradley C.
Smith, as President, a son of Craig R. Smith, and 7% of the
outstanding shares were held by Bradley C. Smith, individually.
Accordingly, the total beneficial interest of Craig R. Smith is
40%.
Earnings attributable to minority shareholders of
Allomatic Products Company have been presented net of income tax as
minority interest in the Condensed Consolidated Statement of
Operations.
NOTE E - WARRANTS
The 4,000,000 warrants authorized by the Company in 1986
have expired effective October 1, 1994 by the terms of the
warrants. Of the 3,998,148 warrants issued, none were exercised
prior to the expiration date. The authorized shares of stock count
has been reduced from 11,500,000 to 7,500,000 reflecting the
termination of the registration of shares to cover the exercise of
warrants.
NOTE F - LOAN AGREEMENT
In March 1995, RPC, a wholly-owned subsidiary of the
Company, entered into a five-year loan agreement with The CIT
Group/Credit Finance, Inc., which provides for RPC to borrow up to
$15 million, consisting of a revolving line of credit of $10
million and a term loan of $5 million at an interest rate of 1.75%
above the prime rate. The amount of borrowing is predicated on
satisfying a borrowing base formula related to levels of certain
accounts receivable and inventories. The loans are collateralized
by accounts receivable, inventory and machinery and equipment at
RPC. The purpose of the loan is for working capital, capital
expenditures, acquisitions and possible settlement of successor
liability issues. Under the terms of the loan agreement, RPC is
required to maintain certain cash flow levels and is prohibited
from declaring or paying dividends, except under certain
conditions. The amount outstanding under this loan at July 2, 1995
was $0.
NOTE G - SAVINGS PLANS COMMITMENT
In 1994, the Company committed to make additional
contributions to the Hourly and Salaried Savings Plans to reinstate
certain designated employee investment values lost as a result of
<PAGE>
the Executive Life Insurance Company failure and subsequent
conservation and rehabilitation plan. Following receipt of
governmental approvals, the Company made the contributions to the
Savings Plans in April 1995 in the amount of $1,068 covering full
reinstatement of investment losses in Executive Life contracts.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Net income for the thirteen-week period ended July 2,
1995 amounted to $5,645 or $1.67 per share as compared with $2,589
or $.75 per share for the corresponding period in 1994. For the
twenty-six week period net income amounted to $10,222 or $3.00 per
share compared with net income of $5,579 or $1.64 per share for the
same period in 1994. This is basically a result of additional
sales volume in the market segments that the Company sells its
products and a return to profitability of the Company's German dry
friction business. Included in the results of operations for the
twenty-six weeks ended July 2, 1995 is a one-time pre-tax gain of
$4.6 million (approximately $2.7 million after tax) which resulted
from a favorable judgment in regard to a product disparagement
lawsuit.
Net Sales
Net sales for the first twenty-six weeks of 1995
increased 9.4% to $95,618 as compared with $87,404 for the same
period a year ago. Net sales for the thirteen-week period ended
July 2, 1995 increased 4.2% to $45,705 compared with $43,849 in the
corresponding period in 1994. This overall improvement is a
continuation of strong 1994 performance in the construction,
agriculture and automotive market segments. In addition, the
Company has reported modest improvement within the European market
segment.
Gross Margin
Gross profit margin for the thirteen-week period ended
July 2, 1995 was down slightly compared to the same period a year
ago. The downturn was primarily due to mechanical problems within
the manufacturing process. However, all problems have been
resolved and for the twenty-six weeks ended July 2, 1995 gross
profit margin is up 10% compared to the same period a year ago.
This improvement is a result of the company's German consolidation
program implemented and completed in 1994, the company's German dry
friction business has returned to profitability.
Selling, General and Administrative Expense
Selling, general and administrative expenses decreased to
$4,723 and $11,682 in the thirteen and twenty-six week periods,
respectively, for 1995. The decrease of 21.6% and 6.2%,
respectively, is primarily due to the reduction in non-bankruptcy
related legal proceedings and one-time charges relating to employee
savings plans that were incurred in 1994.
<PAGE>
Interest Expense
Interest expense remained consistent with the same period
a year ago and relates principally to the interest on the debt to
Raymark.
Liquidity and Capital Resources
During the first twenty-six weeks of fiscal 1995, the
Company generated positive cash flow from operating activities in
the amount of $8.1 million. The positive cash flow is the result
of the favorable earnings during the first half of fiscal 1995.
Capital expenditures in the first quarter of fiscal 1995 amounted
to $4.9 million, which is consistent with the Company's projected
spending plan for 1995.
At July 2, 1995, the Company's wholly-owned German
subsidiary (Raybestos Industrie-Produkte GmbH) had available unused
lines of credit amounting to DM1,459 ($1,056) which expire as
follows: DM424 ($307) August 31, 1995; DM297 ($215) on demand;
DM728 ($527) which expires September 30, 1995 and DM10 ($7) on
demand.
In September 1993 and January 1994, Raytech Composites,
Inc., a wholly-owned subsidiary of the Company, entered loan
agreements with Raymark for $2.5 million and $3 million,
respectively, and as of July 2, 1995 has borrowed $2.5 million and
$.5 million under the loan agreements, respectively. The loans
bear interest at 6% per annum with principal and accrued interest
due at an extended date in April 1996.
In March 1995, Raybestos Products Company ("RPC"), a
wholly-owned subsidiary of the Company, entered into a loan
agreement with The CIT Group/Credit Finance, Inc., which provides
for RPC to borrow up to $15 million, consisting of a revolving line
of credit of $10 million and a term loan of $5 million at an
interest rate of 1.75% above the prime rate. The loans are
collateralized by accounts receivable, inventory and machinery and
equipment at RPC. The purpose of the loan is for working capital,
capital expenditures, acquisitions and possible settlement of
successor liability issues. The amount outstanding under this loan
at July 2, 1995 was $0.
Management believes that the Company will generate
sufficient cash flow from operations during the balance of 1995 to
meet all of the Company's obligations arising in the ordinary
course of operations.<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The formation of Raytech and the implementation of the
restructuring plan more fully described in Item 1 of Form 10-K
filed for the fiscal year 1994 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 was first sued
in an asbestos-related claim in 1971 and has since been named as a
defendant in more than 88,000 lawsuits in which substantial damages
have been sought for injury or death from exposure to airborne
asbestos fibers. More than 35,000 of such lawsuits were disposed
of by settlements, dismissals, summary judgments and trial verdicts
at a cost in excess of $333 million principally covered by
Raymark's insurance. Subsequent to the 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 and remains pending.
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.
The dollar value of these lawsuits cannot be calculated as most
complaints either over inflate claims, state only jurisdictional
minimums or do not specify damages at all. 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
funding order was issued by an Illinois Circuit Court which
required one of Raymark's insurance carriers to pay claims but not
defense costs and another insurance carrier has been declared
insolvent. These circumstances caused Raymark to be unable to fund
the costs of defense to Raytech under its indemnification
agreements. Raymark's cost of defense and disposition of cases up
to the automatic stay of litigation under the involuntary
bankruptcy proceedings has been approximately $333 million of
Raymark's total insurance coverage of approximately $395 million.
Of the $62 million remaining, $32 million is covered by the
insolvent carrier and the remaining is either blocked due to lower
levels not being exhausted or does not provide for defense of the
claims.
<PAGE>
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 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 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. In the Bankruptcy Court a
creditors' committee was appointed, comprised primarily of asbestos
claimants' attorneys. In July 1995, pursuant to a motion by
several of the larger equity security holders of Raytech, the
Bankruptcy Court issued an order directing the U.S. Trustee to
appoint an official committee of equity security holders for a
limited time relating to a determination of equity security holders
interest in the estate.
Since the bankruptcy filing, several entities have
asserted claims in Bankruptcy Court alleging environmental and
pension liabilities of Raymark based upon the same theories of
successor liability against Raytech as alleged by asbestos
claimants. These claims are not covered by the class action
referenced below 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, treatment 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
<PAGE>
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 Connecticut
manufacturing facility.
Under bankruptcy rules, the debtor-in-possession had 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 may
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. Important conditions precedent to confirmation of
the Debtor's Plan include litigation in the Bankruptcy Court to
determine the remedy for Raytech as a successor to the asbestos-
related liabilities of Raymark and a resolution of the
environmental claims or other claims filed or to be filed by
governmental agencies. The Debtor's Plan provides that in the
event Raytech is found to be a successor, it is to establish a
successor trust funded by an amount determined to be the difference
between what Raytech should have paid for the businesses purchased
from Raymark less the amount actually paid and less amounts to be
paid for environmental and other claims. This remedy would satisfy
its obligations as a successor in full and render all claimants
unimpaired, thereby eliminating the need for balloting and all
equity shareholders would retain their interests in full. Raytech
believes the Debtor's Plan to be confirmable. In September 1994,
the Creditors' Committee filed its own Plan of Reorganization in
competition to the Debtor's Plan (Creditor's Plan). The Creditors'
Plan calls for the elimination of Raytech Corporation and its
stockholders to be replaced with a new Raytech. All of the stock
of new Raytech would then be distributed to unsecured claimants,
environmental claimants and both past and future asbestos disease
claimants on a formulated basis set forth in the Plan. Current
stockholders of Raytech would receive nothing under the Plan.
Raytech believes the Creditors' Plan is unconfirmable and will
vigorously contest attempts to have it confirmed while it continues
to try to get the Debtor's Plan confirmed. The outcome of these
<PAGE>
matters is expected to take considerable time and is uncertain. If
an adverse plan is confirmed, it would have a material adverse
impact on Raytech and its stockholders.
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 desire 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
for Connecticut 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 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 Schmoll case recited
above, affirming the U.S. District Court's ruling of dismissal.
The ruling leaves the Schmoll case ruling, 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. Raytech is considering an appeal to the U.S. Supreme
Court.
Costs incurred by the Company for asbestos related
liabilities are indemnified by Raymark under the 1987 acquisition
agreements. By agreement, 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
<PAGE>
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. Cost incurred in
1994 were applied as a reduction of the note obligations pursuant
to the agreements.
In October 1992, the Secretary of the Department of Labor
filed suit against Raymark and certain named fiduciaries in the
U. S. District Court for Connecticut captioned Robert B. Reich,
Secretary of the U. S. Department of Labor vs. Raymark Industries,
Inc, et al. naming the Company as a successor to Raymark, alleging
the breach of fiduciary duties required under ERISA in connection
with the purchase of a group annuity contract from Executive Life
Insurance Company to fund the benefits of participants and
beneficiaries of three pension plans. Executive Life was placed in
conservatorship by the California insurance Commission in April
1991. The Department of Labor filed a claim against Raytech in the
Bankruptcy Court in the amount of $22.8 million for successor
liability to the damages alleged in the suit. All parties to this
litigation have reached a tentative settlement which dismisses
Raytech without liability. The settlement is subject to
formalization.
In February 1994, a jury in the U. S. District Court for the
Southern District of Indiana returned a verdict in favor of
Raybestos Products Company ("RPC"), a wholly-owned subsidiary of
the Company, for $2,980 plus costs and against Gilbert W. Younger
and Transgo, a corporation. RPC had sued the defendants in 1990
for defamation of products and injurious falsehoods concerning
RPC's manufactured products. In April 1994, the Court granted RPC
its costs, attorneys' fees and interest in addition to the damages
awarded by the jury. The defendants filed for bankruptcy under
Chapter 11 in 1992, and the defendant's plan of reorganization was
confirmed in September 1994 by a California Bankruptcy Court.
Under the plan of reorganization and ordered by the Court, the
total amount of the awarded damages had been placed in a secured
escrow account pending appeals. In April 1995, the 7th Circuit
Court of Appeal affirmed the verdict except for the award of
prejudgment interest. In June 1995, RPC received the awarded
damages, including post-judgment interest, in the amount of $4.6
million, bringing the case to a final conclusion.
The adverse ruling in the Third Circuit Court of Appeals
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 a
material adverse impact on Raytech as it does not have the
resources needed to fund Raymark's substantial uninsured asbestos-
related liabilities. Determination of Raytech's actual liabilities
are subject to the Bankruptcy Court's deliberations and rulings and
the competing plans of reorganization filed in the Bankruptcy Court
referenced above.<PAGE>
The ultimate liability, if any, of the Company with respect to
asbestos-related, environmental, or other claims cannot presently
be determined. Accordingly, no provision for such liability has
been recorded in the financial statements. The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern. An unfavorable ruling on the
matters described above would have a material adverse effect on the
Company's results of operations and financial position. These
uncertainties raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from
the outcome of these uncertainties.
<PAGE>
ITEM 6(a). EXHIBITS
(11) Statement re. Computation of Per Share Earnings
ITEM 6(b). REPORTS ON 8-K
In Form 8-K dated May 15, 1995, it was reported that
the Registrant received a ruling of the United States
Court of Appeals for the Third Circuit in the case
entitled Raytech Corporation v. Earl White, et al. (No.
94-1347) which affirmed a lower court ruling that had
dismissed part of an action brought by the Registrant
seeking a declaratory judgment that it not be held liable
for the asbestos-related liabilities of Raymark
Industries, Inc. from which the Registrant had purchased
some of its operating assets. The lower court, the U.S.
District Court of the District of Connecticut, had issued
a ruling in 1991 dismissing the successor liability count
of the class action citing as a reason the preclusive
effect of a 1988 judgment of the U.S. District Court of
the District of Oregon (Schmoll v. ACands, Inc., et al.)
under the doctrine of collateral estoppel in which case
the Registrant was ruled to be a successor to Raymark
Industries, Inc. asbestos-related liabilities. The
report further indicated that the Registrant remains
subject to the Bankruptcy Court, District of Connecticut,
where it filed a petition seeking relief under Chapter 11
in 1989 in order to determine its successor liability to
claims made against Raymark Industries, Inc. The outcome
of the bankruptcy remains uncertain.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly authorized.
RAYTECH CORPORATION
By: /s/ALBERT A. CANOSA
Albert A. Canosa
Vice President of
Administration, Treasurer
and Chief Financial Officer
Date: August 9, 1995
<TABLE>
Raytech Corporation and Subsidiaries
PART II
EXHIBIT (11)
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income $ 5,645 $ 2,589 $10,222 $ 5,579
Shares outstanding at beginning
of year 3,218,968 3,199,133 3,218,968 3,199,133
Add weighted average of stock
options exercised 5,631 2,450 2,877 1,854
Deduct weighted average shares to
treasury (2) (9) (1) (5)
Add common equivalent shares for
assumed exercise of employee
stock options 159,321 244,824 189,983 198,988
Weighted average number of shares
used in calculation of primary
income per share 3,383,918 3,446,398 3,411,827 3,399,970
Income per share $ 1.67 $ .75 $ 3.00 $ 1.64
Primary income per
common share $ 1.67 $ .75 $ 3.00 $1.64
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<RESTATED>
<CIK> 0000797917
<NAME> RAYTECH CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> JAN-01-1995
<PERIOD-START> JAN-02-1995
<PERIOD-END> JUL-02-1995
<PERIOD-TYPE> 6-MOS
<EXCHANGE-RATE> 1
<CASH> 10,705
<SECURITIES> 0
<RECEIVABLES> 20,177
<ALLOWANCES> 612
<INVENTORY> 22,539
<CURRENT-ASSETS> 56,416
<PP&E> 115,164
<DEPRECIATION> 71,980
<TOTAL-ASSETS> 104,217
<CURRENT-LIABILITIES> 43,363
<BONDS> 0
<COMMON> 5,362
0
0
<OTHER-SE> 9,247
<TOTAL-LIABILITY-AND-EQUITY> 104,217
<SALES> 95,618
<TOTAL-REVENUES> 95,618
<CGS> 70,053
<TOTAL-COSTS> 70,053
<OTHER-EXPENSES> 11,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,349
<INCOME-PRETAX> 16,868
<INCOME-TAX> 6,084
<INCOME-CONTINUING> 10,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,222
<EPS-PRIMARY> 3.00
<EPS-DILUTED> 3.00
</TABLE>
