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 October 1, 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 October 1, 1995, 3,230,080 shares of the Registrant's common
stock, par value $1.00, were issued and outstanding.
Page 1 of 25 <PAGE>
RAYTECH CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets as
at October 1, 1995 and January 1, 1995 3
Condensed Consolidated Statements of
Operations for the thirty-nine weeks ended
October 1, 1995 and October 2, 1994 4
Condensed Consolidated Statements of Cash
Flows for the thirty-nine weeks ended
October 1, 1995 and October 2, 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 17
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
Exhibit 11 - Earnings Per Share Computation 25
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
<CAPTION>
Oct. 1, Jan. 1,
As at 1995 1995
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 18,001 $ 4,778
Trade accounts receivable, less allowance of $677
for 1995 and $519 for 1994 18,731 13,718
Inventories 22,713 22,859
Other current assets 3,609 5,019
Total current assets 63,054 46,374
Property, plant and equipment 116,126 111,147
Less accumulated depreciation 72,813 70,292
Net property, plant and equipment 43,313 40,855
Other assets 4,619 4,580
Total assets $110,986 $ 91,809
LIABILITIES
Current liabilities
Notes payable $ 10,002 $ 4,928
Current portion of long-term debt (including $7,260 and
$6,855 due to Raymark in 1995 and 1994, respectively) 7,542 8,001
Accounts payable 8,180 12,055
Accrued liabilities 21,597 20,993
Total current liabilities 47,321 45,977
Long-term debt due to Raymark 33,462 30,627
Long-term debt 228 245
Postretirement benefits other than pensions 8,439 7,593
Other long-term liabilities 5,304 3,651
Total liabilities 94,754 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 (57,442) (69,250)
Cumulative translation adjustment 2,681 2,028
20,793 8,277
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 16,232 3,716
Total liabilities and shareholders' equity $110,986 $ 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 39 Weeks Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $41,685 $42,062 $137,303 $129,466
Cost of sales 31,177 32,551 101,230 96,735
Gross profit 10,508 9,511 36,073 32,731
Selling and administrative expenses (7,581) (5,969) (19,263) (18,420)
Operating profit 2,927 3,542 16,810 14,311
Interest expense (119) (157) (450) (364)
Interest expense - Raymark (508) (599) (1,526) (1,771)
Other income (expense), net 884 210 5,218 (83)
Income before provision
for income taxes 3,184 2,996 20,052 12,093
Provision for income tax (1,514) (1,090) (7,598) (4,608)
Minority interest (84) - (646) -
Net income $ 1,586 $ 1,906 $ 11,808 $ 7,485
Net income per share $ .47 $ .56 $ 3.46 $ 2.20
Average shares outstanding 3,389,401 3,431,276 3,414,572 3,410,031
<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>
October 1, October 2,
For the 39 Weeks Ended 1995 1994
<S> <C> <C>
Net cash provided from operating
activities $12,020 $12,371
Cash flow from investing activities:
Capital expenditures (7,730) (8,830)
Proceeds on sale of property, plant and equipment 2,186 -
Net cash used in investing activities (5,544) (8,830)
Cash flow from financing activities:
Proceeds from short-term borrowings 29,301 3,850
Payments on short-term borrowings (24,641) (2,754)
Proceeds from long-term borrowings - 51
Principal payments on long-term debt (635) (154)
Proceeds of borrowings from Raymark 5,838 500
Payments of obligations to Raymark (3,060) (4,249)
Proceeds from sale of stock 25 -
Dividends paid (131) 68
Net cash used in financing activities 6,697 (2,688)
Effect of exchange rate changes on cash 50 -
Net change in cash and cash equivalents 13,223 853
Cash and cash equivalents at beginning of period 4,778 2,990
Cash and cash equivalents at end of period $ 18,001 $ 3,843
<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 August 1995,
pursuant to an order of the Bankruptcy Court, an official committee
of equity security holders was appointed 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
liabilities of Raymark based upon similar theories of successor
liability against Raytech as alleged by asbestos claimants. These
claims are not covered by the class action referenced 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 landfill and to pay a nominal civil penalty. The
estimated cost for Raymark to comply with the order is $1.2<PAGE>
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
continues to try to get the Debtor's Plan confirmed. Upon motion
of the parties and support of the Bankruptcy Court, the major <PAGE>
interested parties agreed in August 1995 to participate in non-
binding mediation to attempt to effectuate a consensual plan of
reorganization. A mediator has been selected and the mediation
process commenced in October 1995. 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. A petition for a writ of
certiorari was denied by the U.S. Supreme Court in October 1995.
The ruling leaves the Oregon case, as affirmed by the Ninth Circuit
Court of Appeals, as the prevailing decision holding Raytech to be
a successor to Raymark's asbestos-related liabilities.
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,<PAGE>
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
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 $253 and $460, respectively, and 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. This litigation was settled by the parties as approved by
the Court in October 1995, wherein Raytech was dismissed without
liability.
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,
of which a petition for writ of certiorari was denied by the U.S.
Supreme Court, precluding Raytech from relitigating the issue of
its successor liability leaves the U.S. District Court's (Oregon)
1988 ruling as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities. This ruling
could have 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<PAGE>
rulings and the competing plans of reorganization filed in the
Bankruptcy Court referenced above.
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
result 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
October 1, 1995 and January 1, 1995, the results of operations for
the thirteen and thirty-nine weeks ended October 1, 1995 and
statements of cash flows for the thirteen and thirty-nine weeks
ended October 1, 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:
October 1, 1995 January 1, 1995
Raw material $ 6,506 $ 6,367
Work in process 6,014 6,524
Finished goods 10,193 9,968
$22,713 $22,859
<PAGE>
NOTE D - RELATED PARTIES
During the first nine months of 1995, the Company
purchased yarn from Universal Friction Composites, a related party,
in the amount of $2,001 and at October 1, 1995, the related payable
amounted to $387.
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 October 1, 1995,
41,658 shares, or 40% 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.
Accordingly, the 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 October 1,
1995 was $5,847.<PAGE>
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
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 October 1,
1995 amounted to $1,586 or $.47 per share as compared with $1,906
or $.56 per share for the corresponding period in 1994. For the
thirty-nine week period net income amounted to $11,808 or $3.46 per
share compared with net income of $7,485 or $2.20 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
thirty-nine weeks ended October 1, 1995 is a one-time pretax 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 thirteen-week period ended October 1,
1995 decreased 1.0% to $41,685 compared with $42,062 in the
corresponding period in 1994. Net sales for the first thirty-nine
weeks of 1995 increased 6.1% to $137,303 as compared with $129,466
for the same period a year ago. 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
October 1, 1995 increased 10.5% to $10,508 as compared with $9,511
for the same period a year ago. Gross profit margin for the
thirty-nine weeks ended October 1, 1995 increased 10.2% to $36,073
as compared with $32,731 for the same period a year ago. This
improvement is primarily due to sales increases across all of the
Company's market segments except the aftermarket segment. The
aftermarket segment has seen severe competitive pressure within its
product lines which has resulted in a decrease in sales as compared
to last year. Further, the Company's German consolidation program,
implemented and completed in 1994, is showing positive results.
The Company's dry friction business has returned to profitability.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased
27.0% to $7,581 for the thirteen-week period ended October 1, 1995
as compared with 1994. For the thirty-nine week period ended
October 1, 1995, expenses increased 4.6% to $19,263. The increase
is primarily due to higher levels of research and development,<PAGE>
distribution expenses due to higher sales volume, legal and other
professional fees, employee benefits expense and general
inflationary increases.
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 thirty-nine weeks of fiscal 1995, the
Company generated positive cash flow from operating activities in
the amount of $12.0 million. The positive cash flow is the result
of the favorable earnings during the first half of fiscal 1995.
Capital expenditures year-to-date for fiscal 1995 amounted to $7.7
million, which is consistent with the Company's projected spending
plan for 1995.
At October 1, 1995, the Company's wholly-owned German
subsidiary (Raybestos Industrie-Produkte GmbH) had available unused
lines of credit amounting to DM1,978 ($1,386) which expire as
follows: DM571 ($400) August 31, 1995; DM648 ($454) on demand;
DM749 ($525) which expires January 30, 1996 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 October 1, 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 in April 1996.
In January 1995, the Company's wholly-owned German
subsidiary (Raybestos Industrie-Produkte GmbH) received DM2,475
($1,530) due from the sale of the Radevormwald plant and certain
equipment.
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 October 1, 1995 was $5,847.
<PAGE>
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 August 1995, pursuant to an order of the
Bankruptcy Court an official committee of equity security holders
was appointed 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
liabilities of Raymark based upon similar theories of successor
liability against Raytech as alleged by asbestos claimants. These
claims are not covered by the class action referenced 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 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<PAGE>
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. Upon motion of the
parties and support of the Bankruptcy Court, the major interested
parties agreed in August 1995 to participate in non-binding
mediation to attempt to effectuate a consensual plan of<PAGE>
reorganization. A mediator has been selected and the mediation
process commenced in October 1995. 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 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. A
petition for a writ of certiorari was denied by the U.S. Supreme
Court in October 1995. The ruling leaves the Schmoll case, as
affirmed by the Ninth Circuit Court of Appeals, as the prevailing
decision holding Raytech to be a successor to Raymark's asbestos-
related liabilities.
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,<PAGE>
163,303 in 1991 and 80,000 shares in 1993. The Company's
acceptance of its own stock was based upon an intent to control
dilution of its outstanding stock. In 1992 the indemnified costs
were reimbursed by offsetting certain payments due Raymark from the
Company under the 1987 acquisition agreements. 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. This litigation was
settled by the parties as approved by the Court in October 1995,
wherein Raytech was dismissed without liability.
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, of
which a petition for writ of certiorari was denied by the U.S.
Supreme Court, precluding Raytech from relitigating the issue of
its successor liability leaves the U.S. District Court's (Oregon)
1988 ruling as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities. This ruling
could have 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<PAGE>
rulings and the competing plans of reorganization filed in the
Bankruptcy Court referenced above.
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 result 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
None
<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:
Albert A. Canosa
Vice President of
Administration, Treasurer
and Chief Financial Officer
Date:
<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 39 Weeks Ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income $ 1,586 $ 1,906 $ 11,808 $ 7,485
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 11,115 5,397 5,623 3,035
Deduct weighted average shares to
treasury (3) (33) (2) (15)
Add common equivalent shares for
assumed exercise of employee
stock options 159,321 226,779 189,983 207,878
Weighted average number of shares
used in calculation of primary
income per share 3,389,401 3,431,276 3,414,572 3,410,031
Income per share $ .47 $ .56 $3.46 $2.20
Primary income per
common share $ .47 $ .56 $3.46 $2.20
</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> OCT-01-1995
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<CASH> 18,001
<SECURITIES> 0
<RECEIVABLES> 19,408
<ALLOWANCES> 677
<INVENTORY> 22,713
<CURRENT-ASSETS> 63,054
<PP&E> 116,126
<DEPRECIATION> 72,813
<TOTAL-ASSETS> 110,986
<CURRENT-LIABILITIES> 47,321
<BONDS> 0
<COMMON> 5,362
0
0
<OTHER-SE> 10,870
<TOTAL-LIABILITY-AND-EQUITY> 110,986
<SALES> 137,303
<TOTAL-REVENUES> 137,303
<CGS> 101,230
<TOTAL-COSTS> 101,230
<OTHER-EXPENSES> 19,263
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,976
<INCOME-PRETAX> 20,052
<INCOME-TAX> 7,598
<INCOME-CONTINUING> 11,808
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,808
<EPS-PRIMARY> 3.46
<EPS-DILUTED> 3.46
</TABLE>
