<PAGE>
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 September 29, 1996
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 September 29, 1996, 3,232,080 shares of the Registrant's
common stock, par value $1.00, were issued and outstanding.
Page 1 of 25
RAYTECH CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets as
at September 29, 1996 and December 31, 1995 3
Condensed Consolidated Statements of
Operations for the thirty-nine weeks ended
September 29, 1996 and October 1, 1995 4
Condensed Consolidated Statements of Cash
Flows for the thirty-nine weeks ended
September 29, 1996 and October 1, 1995 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
-2-
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
<CAPTION>
Sept. 29, Dec. 31,
As at 1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 12,240 $ 19,597
Trade accounts receivable, less allowance of $701
for 1996 and $677 for 1995 26,290 17,553
Inventories 25,519 23,573
Other current assets 6,554 5,390
Total current assets 70,603 66,113
Property, plant and equipment 120,651 114,437
Less accumulated depreciation 77,207 72,235
Net property, plant and equipment 43,444 42,202
Investment in affiliates 10,067 -
Other assets 7,387 6,121
Total assets $131,501 $114,436
LIABILITIES
Current liabilities
Notes payable $ 8,815 $ 8,187
Current portion of long-term debt (including $28,920 and
$22,696 due to Raymark in 1996 and 1995, respectively) 29,067 22,839
Accounts payable 12,221 9,388
Accrued liabilities 20,716 20,376
Total current liabilities 70,819 60,790
Long-term debt due to Raymark 13,356 18,476
Long-term debt 279 242
Postretirement benefits other than pensions 8,864 8,253
Other long-term liabilities 7,600 7,995
Total liabilities 100,918 95,756
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, 5,364,139 and 5,362,139
issued and outstanding in fiscal 1996 and 1995, respectively 5,364 5,362
Additional paid in capital 70,194 70,192
Accumulated deficit (42,008) (54,913)
Cumulative translation adjustment 1,594 2,600
35,144 23,241
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 30,583 18,680
Total liabilities and shareholders' equity $131,501 $114,436
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except share data)
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 39 Weeks Ended
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales $ 53,660 $ 41,685 $ 165,839 $137,303
Cost of sales (40,861) 31,177 (124,451) 101,230
Gross profit 12,799 10,508 41,388 36,073
Selling and administrative expenses (7,273) (7,581) (20,955) (19,263)
Operating profit 5,526 2,927 20,433 16,810
Interest expense (3) (119) (953) (450)
Interest expense - Raymark (412) (508) (1,238) (1,526)
Other income (expense), net 85 884 874 5,218
Income before provision for income
taxes and minority interest 5,196 3,184 19,116 20,052
Provision for income tax (217) (1,514) (5,276) (7,598)
Minority interest (225) (84) (803) (646)
Net income $ 4,754 $ 1,586 $ 13,037 $ 11,808
Net income per share $ 1.38 $ .47 $ 3.78 $ 3.46
Average shares outstanding 3,454,092 3,389,401 3,450,410 3,414,572
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Sept. 29, Oct. 1,
For the 39 Weeks Ended 1996 1995
<S> <C> <C>
Net cash provided by operating activities $ 10,265 $ 12,020
Cash flow from investing activities:
Capital expenditures (5,403) (7,730)
Proceeds on sale of property, plant and equipment 119 2,186
Equity Investment in AFM (9,400) -
Acquisition of machinery and equipment from AFM (3,500) -
Net cash used in investing activities (18,184) (5,544)
Cash flow from financing activities:
Proceeds from short-term borrowings 3,218 -
Net borrowings (payments) under revolving
line of credit (2,385) 4,660
Principal payments on long-term debt (117) (635)
Proceeds from sale of stock - 25
Payments on borrowings from Raymark - (3,060)
Proceeds of borrowings from Raymark - 5,838
Other (128) (131)
Net cash used in financing activities 588 6,697
Effect of exchange rate changes on cash (26) 50
Net change in cash and cash equivalents (7,357) 13,223
Cash and cash equivalents at beginning of period 19,597 4,778
Cash and cash equivalents at end of period $ 12,240 $ 18,001
<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 1995 Form 10-K, Part 1, Item 1, pages 4-7. 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 estimated. 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 remained pending until August 1996 when the involuntary
petition was dismissed following a trial. Subsequent to the
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 in the asbestos-related lawsuits referenced
above, as provided in the indemnity section of the acquisition
agreement. 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. As a result of the
dismissal of the involuntary petition, Raymark has available
approximately $27 million in cash received from a state guarantee
association to make up the proceeds of the policies of the insolvent
carrier and approximately $32 million in remaining insurance
intended to be used to defend itself against pending and new
lawsuits filed against it.
<PAGE>
In an asbestos-related personal injury case decided in
October 1988 in a U.S. District Court in Oregon, Raytech was ruled
under Oregon equity law to be a successor to Raymark's asbestos-
related liability. The successor ruling was appealed by Raytech and
in October 1992 the Ninth Circuit Court of Appeals affirmed the
District Court's judgment on the grounds stated in the District
Court's opinion. The effect of this decision extends beyond the
Oregon District due to a Third Circuit Court of Appeals decision in
a related case cited below wherein Raytech was collaterally estopped
(precluded) from relitigating the issue of its successor liability
for Raymark's asbestos-related liabilities.
As the result of the inability of Raymark to fund Raytech's
costs of defense in 1989 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. In September,
Raytech filed a motion to dismiss its bankruptcy petition for the
reason that Raymark appears to again be capable of providing
indemnity to claims pending and that may be filed against Raytech.
The said motion to dismiss has been continued by the Court without a
further hearing date set.
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
<PAGE>
at the site, all relating to the closure of the Pennsylvania
landfill and to pay a nominal civil penalty. The estimated cost for
Raymark to comply with the order is $1.2 million. The DER has
reserved its right to reinstitute an action against the Company and
the other parties to the DER order in the event Raymark fails to
comply with its obligations under the Consent Order. Another
environmental claim was filed against the Company by the U.S.
Environmental Protection Agency for civil penalties charged Raymark
in the amount of $12 million arising out of alleged Resource
Conservation and Recovery Act violations at Raymark's Stratford,
Connecticut, manufacturing facility.
It is possible that additional claims for reimbursement of
environmental cleanup costs related to Raymark facilities may be
asserted against Raytech, as successor in liability to Raymark.
Determination of Raytech's liability for such future possible
claims, if any, would be subject to Bankruptcy Court deliberations
and proceedings. In April 1996, the Indiana Department of
Environmental Management ("IDEM") advised Raybestos Products Company
("RPC"), a wholly-owned subsidiary of the Company, that it may have
contributed to the release of lead and PCB's (polychlorinated
biphenyls) found in small waterways near its Indiana facility. In
June, IDEM named RPC as a potentially responsible party ("PRP").
RPC continues to assess the extent of the contamination and its
involvement and is currently negotiating with IDEM for an agreed
order of cleanup. If it is learned that the Company was involved in
the contamination, it will seek indemnification for the cleanup
costs from Raymark due to its prior ownership. Blood tests
administered to residents in the vicinity of the small waterways
revealed no exposure.
In April 1996, the creditors' committee filed a motion for
appointment of a trustee based upon alleged breaches of the
Company's fiduciary obligations to its creditors. The Company will
resist the motion when heard; however, the motion has been continued
without a hearing date set.
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court pending
the conclusion of the successor liability litigation. However, in
December 1992, the creditors' committee filed a motion to terminate
the exclusive period to file a plan of reorganization. At a hearing
in May 1993, the motion was denied by the Bankruptcy Court but was
appealed by the creditors' committee. In November 1993, the U.S.
District Court reversed the Bankruptcy Court and terminated the
exclusive period to file a plan of reorganization effective in
January 1994. Accordingly, any party in interest, including the
debtor, the creditors' committee, or a creditor could thereafter
file a plan of reorganization.
<PAGE>
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 included a final judgment in the
litigation to determine whether Raytech is a successor to the
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 provided 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. In July 1996, Raytech filed its
first amended Plan of Reorganization ("Debtor's Amended Plan") to
consider the Third Circuit Court of Appeals decision referenced
above and other developing factors. The Debtor's Amended Plan calls
for successor claimants to be paid from a created creditors trust
which is to assume the liabilities and be funded by 51% of the stock
of Raytech, tax advantaged contributions, proceeds from Raymark due
Raytech under indemnification agreements and proceeds from unjust
enrichment litigation. Treatment of environmental government
claimants is to be covered through a separate negotiated consent
order. The Debtor's Amended Plan relies upon a theory of limited
successor liability yet to be litigated. Raytech's management
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. The creditors' committee also filed an
amended Plan of Reorganization (Creditors' Amended Plan") in July
1996, which essentially did not alter the terms of the Creditors'
Plan previously filed. The Future Claimants Representative joined
in the Creditors' Amended Plan. Raytech believes the Creditors'
Amended Plan is unconfirmable and will vigorously contest attempts
to have it confirmed while it continues to try to get the Debtor's
Plan confirmed. In July 1996, the Equity Security Holders Committee
filed its separate Plan of Reorganization ("Equity Plan") which
calls for a successor trust to be established and funded by 65% of
the stock of Raytech. Treatment of successor and environment
claimants is similar to the Debtor's Amended Plan. The debtor
intends to resist the Equity Plan.
<PAGE>
Upon motion of the parties and support of the Bankruptcy
Court, the major interested parties agreed in August 1995 to
participate in non-binding mediation to attempt to effectuate a
consensual plan of reorganization. The mediation process commenced
in October 1995 and was concluded in March 1996 without agreement
for a consensual plan of reorganization. The competing plans of
Raytech, its creditors and the equity committee will now return to
Bankruptcy Court procedures. 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.
<PAGE>
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 177,570 shares in 1990, 163,303 shares in 1991 and
80,000 shares in 1993. The Company's acceptance of its own stock
was based upon an intent to control dilution of its outstanding
stock. In 1992, the indemnified costs were reimbursed by offsetting
certain payments due Raymark from the Company under the 1987
acquisition agreements. Costs incurred in 1994 and 1995 were
applied as a reduction of the note obligations pursuant to the
agreements. Costs incurred since are being accumulated as
indemnified costs for further reductions of the note obligations
referenced above.
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 rulings and the
competing plans of reorganization filed in the Bankruptcy Court
referenced above.
The ultimate liability 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 financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or adjustments relating to
establishment, settlement and classification of liabilities that may
be required in connection with reorganizing under the Bankruptcy
Code.
NOTE B - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments necessary
to fairly present the financial position of Raytech as of
September 29, 1996 and December 31, 1995, the results of operations
<PAGE>
for the thirty-nine weeks ended September 29, 1996 and statements
of cash flows for the thirty-nine weeks ended September 29, 1996.
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 December 31,
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:
Sept. 29, 1996 December 31, 1995
Raw material $ 8,381 $ 6,901
Work in process 7,653 6,143
Finished goods 9,485 10,529
$25,519 $23,573
NOTE D - RELATED PARTIES
During the first three quarters of 1996, the Company
purchased yarn from Universal Friction Composites, a related party,
in the amount of $2,377 and at September 29, 1996, the related
payable amounted to $273.
Effective May 2, 1996, 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 1996. As of September 29, 1996, 41,904 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.
In March 1996, 49% of the common stock of Raymark
Corporation was purchased by Craig R. Smith from his son Bradley C.
Smith for $7 in an agreement containing an option to purchase the
balance of the common stock at a later date.
<PAGE>
In September 1996, Craig R. Smith entered into a
consulting agreement with Raymark for services regarding asbestos
litigation. Proceeds are to be paid to Raytech pursuant to the
terms of the agreement.
NOTE E - ACQUISITION
On January 31, 1996, Raytech Composites, Inc.
("Composites"), a subsidiary of Raytech, and Raybestos Products
Company ("RPC"), a subsidiary of Composites, entered into a series
of related transactions with Advanced Friction Materials ("AFM")
and related entities and persons as follows: Composites acquired a
47% minority share of the common stock of AFM for $9.4 million cash
at closing; RPC acquired 100% of the common stock of AFM Management
Company, which leases employees to AFM, for $1.0 million, to be
paid for on January 31, 1997; RPC acquired the machinery and
equipment and certain other operating assets of AFM for $3.5
million cash at closing; RPC committed to acquire land and building
utilized in AFM's manufacturing operations (land and building
located at 44650 Merrill, Sterling Heights, Michigan) from a
principal owner of AFM for $6.6 million, to be consummated on
January 31, 1997; RPC loaned AFM $1.3 million cash at closing
bearing interest at the prime rate and maturing on January 31,
2003; RPC agreed to acquire AFM's inventory subsequent to closing
at an amount that has yet to be negotiated by the parties. In
addition, the parties entered into various other agreements,
including supply and technology exchange agreements. Subsequent to
the transaction, RPC is supplying AFM with products (automobile
transmission component parts) manufactured at the Sterling Heights
facility. Sales prices between RPC and AFM are established under
the terms of the supply agreement entered into at closing. AFM
will bear responsibility principally for sales and marketing of the
products to original equipment manufacturers.
Composites 47% common stock interest in AFM will be
accounted for under the equity method commencing February 1, 1996.
The excess of purchase price over the underlying net assets of AFM
Management Company and equity interest in the net assets of AFM is
being amortized on a straight line basis over a 30-year period.
The machinery and equipment and real property have been recorded
based upon preliminary assessments of fair value of the assets,
which are subject to adjustment based upon independent appraisals.
Had the transactions described above occurred on January 1, 1996 or
January 2, 1995, the estimated pro forma effect on the Company's
net income for the thirteen weeks ended March 31, 1996 and April 2,
1995, respectively, would not be material.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Net income for the thirteen-week period ended
September 29, 1996 amounted to $4,754 or $1.38 per share as
compared with $1,586 or $.47 per share for the corresponding period
in 1995. For the thirty-nine-week period, net income amounted to
$13,037 or $3.78 per share compared with net income of $11,808 or
$3.46 per share for the same period in 1995. Included in 1996 is
the contribution from the acquired Sterling Heights operations of
Advanced Friction Materials Company ("AFM"), which amounted to
approximately $.5 million after tax. Further, included in 1995 net
income is a one-time after-tax gain of approximately $2.7 million
which resulted from a favorable judgment in regard to a product
disparagement lawsuit.
Excluding the two items mentioned above, net income year-
to-date was up 37.6% over last year. However, the increase,
primarily due to domestic volume increases, was partially offset by
a slowdown in the European economy which resulted in a reduction in
sales; contractual price reductions to certain customers; an
increase in salary and wages and other employee benefits and
general inflationary cost increases.
During the first quarter of 1996, the Company acquired
certain assets from Advanced Friction Materials Company and also
acquired a 47% equity interest in AFM.
Net Sales
Net sales for the thirty-nine-week period ended
September 29, 1996 increased 20.8% to $165,839 as compared with
$137,303 for the same period one year ago. Net sales for the
thirteen-week period ended September 29, 1996 increased 28.7% to
$53,660 as compared with $41,685 for the same period one year ago.
The overall improvement for the thirty-nine-week period is
primarily due to additional sales of approximately $17,400 related
to the Sterling Heights operations and additional volume within the
domestic product market segments. Excluding Sterling Heights,
domestic sales increased by $14,100 compared to last year.
However, European sales decreased by $3,000 primarily due to a
continued decline in the European economy.
Gross Margin
Gross profit margin as a percentage of sales for the
thirteen-week period ended September 29, 1996 is 23.9%, as compared
to 25.2% for the same period one year ago. For the thirty-nine-
week period ended September 29, 1996 gross profit margin as a
percentage of sales is 25.0%, as compared to 26.3% for the same
<PAGE>
period one year ago. The overall decrease is primarily due to an
increase in domestic manufacturing labor and material costs,
contractual price reductions to certain customers and a lower gross
margin on AFM sales.
Selling, General and Administrative Expense
Selling, general and administrative expenses decreased
slightly for the third quarter to $7,273 as compared to $7,581 one
year earlier. However, for the thirty-nine-week period expenses
increased 8.8% to $20,955 as compared to $19,263 one year earlier.
Expenses are up due to the impact of increased sales volume on
related expenses, an increase in salary and wages and other
employee benefits and the impact of the acquired Sterling Heights
operation of AFM.
Interest Expense
Interest expense increased primarily as a result of obli-
gations accrued at present value for certain components of the AFM
acquisition and the use of the Company's revolving line of credit.
Income Taxes
The effective tax rate decreased from 47.6% for the
thirteen weeks ended October 1, 1995 to 4.2% primarily due to an
adjustment of prior years' accruals for tax items which were
favorably resolved.
Liquidity and Capital Resources
During the first three quarters of fiscal 1996, the
Company generated positive cash flow from operating activities in
the amount of $10.3 million. The positive cash flow is the result
of the favorable earnings during the first half of fiscal 1996.
Capital expenditures year-to-date for fiscal 1996 amounted to $5.4
million, which is consistent with the Company's projected spending
plan for 1996.
On January 31, 1996, Raytech Composites, Inc.
("Composites"), a subsidiary of Raytech acquired a 47% minority
share of the common stock of Advanced Friction Materials Company
("AFM") for $9.4 million.
On January 31, 1996, Raybestos Products Company ("RPC"),
a subsidiary of Composites, acquired the machinery and equipment
and certain other operating assets of AFM for $3.5 million.
At September 29, 1996, the Company's wholly-owned German
subsidiary (Raybestos Industrie-Produkte GmbH) had available unused
lines of credit amounting to DM3,132 ($2,054) which all expire on
demand.
<PAGE>
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 September 29, 1996 was $6,993.
Management believes that the Company will generate
sufficient cash flow from operations during the balance of 1996 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 1995 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. In August 1996, the involuntary petition in
bankruptcy against Raymark was dismissed following a trial.
Despite the restructuring plan implementation and subsequent
divestiture of Raymark, Raytech was named a co-defendant with
Raymark and other named defendants in approximately 3,300 asbestos-
related lawsuits as a successor in liability to Raymark. Until
February 1989, the defense of all such lawsuits was provided to
Raytech by Raymark in accordance with the indemnification agreement
included as a condition of the purchase of the Wet Clutch and Brake
Division and German subsidiary from Raymark in 1987. However,
subsequent to the involuntary bankruptcy proceedings against
Raymark, a restrictive 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 agreement. 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. As a result of the dismissal of the involuntary petition,
Raymark has available approximately $27 million in cash received
from a state guarantee association to make up the proceeds of the
policies of the insolvent carrier and approximately $32 million in
remaining insurance intended to be used to defend itself against
pending and new lawsuits filed against it.
<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 decision was appealed and in October 1992, the Ninth
Circuit Court of Appeals affirmed the District Court's judgment on
the grounds stated in the District Court's opinion. The effect of
this decision extends beyond the Oregon District due to a Third
Circuit Court of Appeals decision in a related case cited below
wherein Raytech was collaterally estopped (precluded) from
relitigating the issue of its successor liability for Raymark's
asbestos-related liabilities.
As the result of the inability of Raymark to fund Raytech's
cost of defense in 1989 recited above, and in order to obtain a
ruling binding across all jurisdictions on whether Raytech is
liable as a successor for asbestos-related and other claims
including claims yet to be filed relating to the operations of
Raymark or Raymark's predecessors, on March 10, 1989 Raytech filed
a petition seeking relief under Chapter 11 of Title 11, United
States Code in the United States Bankruptcy Court, District of
Connecticut. Under Chapter 11, substantially all litigation
against Raytech has been stayed while the debtor corporation and
its non-filing operating subsidiaries continue to operate their
businesses in the ordinary course under the same management and
without disruption to employees, customers or suppliers. In the
Bankruptcy Court a creditors' committee was appointed, comprised
primarily of asbestos claimants' attorneys. In August 1995,
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. In September, Raytech filed a motion to dismiss its
bankruptcy petition for the reason that Raymark appears to again be
capable of providing indemnity to claims pending and that may be
filed against Raytech. The said motion to dismiss has been
continued by the Court without a further hearing date set.
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
<PAGE>
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
event Raymark fails to comply with its obligations under the
Consent Order. Another environmental claim was filed against the
Company by the U.S. Environmental Protection Agency for civil
penalties charged Raymark in the amount of $12 million arising out
of alleged Resource Conservation and Recovery Act violations at
Raymark's Stratford, Connecticut, manufacturing facility.
It is possible that additional claims for reimbursement of
environmental cleanup costs related to Raymark facilities may be
asserted against Raytech, as successor in liability to Raymark.
Determination of Raytech's liability for such future possible
claims, if any, would be subject to Bankruptcy Court deliberations
and proceedings. In April 1996, the Indiana Department of
Environmental Management ("IDEM") advised Raybestos Products
Company ("RPC"), a wholly-owned subsidiary of the Company, that it
may have contributed to the release of lead and PCB's
(polychlorinated biphenyls) found in small waterways near its
Indiana facility. In June, IDEM named RPC as a potentially
responsible party ("PRP"). RPC continues to assess the extent of
the contamination and its involvement and is currently negotiating
with IDEM for an agreed order of cleanup. If it is learned that
the Company was involved in the contamination, it will seek
indemnification for the cleanup costs from Raymark due to its prior
ownership. Blood tests administered to residents in the vicinity
of the small waterways revealed no exposure.
In April 1996, the creditors' committee filed a motion for
appointment of a trustee based upon alleged breaches of the
Company's fiduciary obligations to its creditors. The Company will
resist the motion when heard; however, the motion has been
continued without a further hearing date set.
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court pending
the conclusion of the successor liability litigation. However, in
December 1992, the creditors' committee filed a motion to terminate
the exclusive period to file a plan of reorganization. At a
hearing in May 1993, the motion was denied by the Bankruptcy Court
but was appealed by the creditors' committee. In November 1993,
the U.S. District Court reversed the Bankruptcy Court and
terminated the exclusive period to file a plan of reorganization
effective in January 1994. Accordingly, any party in interest,
including the debtor, the creditors' committee or a creditor could
thereafter file a plan of reorganization.
<PAGE>
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 included a final judgment in the litigation to
determine whether Raytech is a successor to the 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 provided 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. In July 1996, Raytech filed its first amended Plan of
Reorganization ("Debtor's Amended Plan") to consider the Third
Circuit Court of Appeals decision referenced above and other
developing factors. The Debtor's Amended Plan calls for successor
claimants to be paid from a created creditors trust which is to
assume the liabilities and be funded by 51% of the stock of
Raytech, tax advantaged contributions, proceeds from Raymark due
Raytech under indemnification agreements and proceeds from unjust
enrichment litigation. Treatment of environmental government
claimants are to be covered through a separate negotiated consent
order. The Debtor's Amended Plan relies upon a theory of limited
successor liability yet to be litigated. 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. The Creditors' Committee also filed an Amended
Plan of Reorganization ("Creditors' Amended Plan") in July 1996,
which essentially did not alter the terms of the Creditors' Plan
previously filed. The Future Claimants Representative joined in
the Creditors' Amended Plan. Raytech believes the Creditors'
Amended Plan is unconfirmable and will vigorously contest attempts
to have it confirmed while it continues to try to get the Debtor's
Plan confirmed. In July 1996, the Equity Security Holders
Committee filed its separate Plan of Reorganization ("Equity Plan")
which calls for a successor trust to be established and funded by
65% of the stock of Raytech. Treatment of successor and
environment claimants is similar to the Debtor's Amended Plan. The
Debtor intends to resist the Equity Plan.
<PAGE>
Upon motion of the parties and support of the Bankruptcy
Court, the major interested parties agreed in August 1995 to
participate in non-binding mediation to attempt to effectuate a
consensual plan of reorganization. The mediation process commenced
in October 1995 and was concluded in March 1996 without agreement
for a consensual plan of reorganization. The competing plans of
Raytech, its creditors and the equity committee will now return to
Bankruptcy Court procedures. 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
transferred the case in its entirety to the U.S. District Court for
the Eastern District of Pennsylvania. Such transfer was made by
the U.S. District Court without motion from any party in the
interest of the administration of justice as stated by the U.S.
District Court. In December 1992, Raytech filed a motion to
activate the case and to obtain rulings on the remaining counts
which was denied by the U.S. District Court. In October 1993, the
creditors' committee asked the Court to certify the previous
dismissal of the successor liability count. In February 1994, the
U.S. District Court granted the motion to certify and the successor
liability dismissal was accordingly appealed. In May 1995, the
Third Circuit Court of Appeals ruled that Raytech is collaterally
estopped (precluded) from relitigating the issue of its successor
liability as ruled in the 1988 Oregon case recited above, affirming
the U.S. District Court's ruling of dismissal. A petition for a
writ of certiorari was denied by the U.S. Supreme Court in October
1995. The ruling leaves the Oregon case, as affirmed by the Ninth
Circuit Court of Appeals, as the prevailing decision holding
Raytech to be a successor to Raymark's asbestos-related
liabilities.
<PAGE>
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 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. Cost incurred since are being accumulated as
indemnified costs for further reductions of the note obligations
referenced above.
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
rulings and the competing plans of reorganization filed in the
Bankruptcy Court referenced above.
The ultimate liability 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: /s/ALBERT A. CANOSA
Albert A. Canosa
Vice President of
Administration, Treasurer
and Chief Financial Officer
Date: November 8, 1996
<PAGE>
Raytech Corporation and Subsidiaries
PART II
EXHIBIT (11)
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 39 Weeks Ended
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income $ 4,754 $ 1,586 $ 13,037 $11,808
Shares outstanding at beginning
of year 3,230,080 3,218,968 3,230,080 3,218,968
Add weighted average of stock
options exercised 1,048 11,115 1,048 5,623
Deduct weighted average shares to
treasury - (3) - (2)
Add common equivalent shares for
assumed exercise of employee
stock options 222,964 159,321 219,282 189,983
Weighted average number of shares
used in calculation of primary
income per share 3,454,092 3,389,401 3,450,410 3,414,572
Income per share $ 1.38 $ .47 $3.78 $3.46
Primary income per
common share $ 1.38 $ .47 $3.78 $3.46
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<RESTATED>
<CIK> 0000797917
<NAME> RAYTECH CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<CASH> 12,240
<SECURITIES> 0
<RECEIVABLES> 26,991
<ALLOWANCES> 701
<INVENTORY> 26,290
<CURRENT-ASSETS> 70,603
<PP&E> 120,651
<DEPRECIATION> 77,207
<TOTAL-ASSETS> 131,501
<CURRENT-LIABILITIES> 70,819
<BONDS> 0
<COMMON> 5,364
0
0
<OTHER-SE> 25,219
<TOTAL-LIABILITY-AND-EQUITY> 131,501
<SALES> 165,839
<TOTAL-REVENUES> 165,839
<CGS> 124,451
<TOTAL-COSTS> 124,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,191
<INCOME-PRETAX> 19,116
<INCOME-TAX> 5,276
<INCOME-CONTINUING> 13,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,037
<EPS-PRIMARY> 3.78
<EPS-DILUTED> 3.78
</TABLE>
