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 March 31, 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 March 31, 1996, 3,230,080 shares of the Registrant's common
stock, par value $1.00, were issued and outstanding.
Page 1 of 24
<PAGE>
RAYTECH CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets as
at March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of
Operations for the thirteen weeks ended
March 31, 1996 and April 2, 1995 4
Condensed Consolidated Statements of Cash
Flows for the thirteen weeks ended
March 31, 1996 and April 2, 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 16
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit 11 - Earnings Per Share Computation 24
-2-<PAGE>
RAYTECH CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
<CAPTION>
March 31, Dec. 31,
As at 1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,634 $ 19,597
Trade accounts receivable, less allowance of $811
for 1996 and $677 for 1995 23,433 17,553
Inventories 23,358 23,573
Other current assets 5,896 5,390
Total current assets 57,321 66,113
Property, plant and equipment 124,018 114,437
Less accumulated depreciation 73,774 72,235
Net property, plant and equipment 50,244 42,202
Investment in affiliates 10,251 -
Other assets 7,250 6,121
Total assets $125,066 $114,436
LIABILITIES
Current liabilities
Notes payable $ 4,833 $ 8,187
Current portion of long-term debt (including $24,771 and
$22,696 due to Raymark in 1996 and 1995, respectively) 24,910 22,839
Accounts payable 10,101 9,388
Accrued liabilities 29,480 20,376
Total current liabilities 69,324 60,790
Long-term debt due to Raymark 16,795 18,476
Long-term debt 235 242
Postretirement benefits other than pensions 8,694 8,253
Other long-term liabilities 8,003 7,995
Total liabilities 103,051 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, 5,362,142 and 5,351,024
issued and outstanding in fiscal 1995 and 1994, respectively 5,362 5,362
Additional paid in capital 70,191 70,192
Accumulated deficit (51,222) (54,913)
Cumulative translation adjustment 2,245 2,600
26,576 23,241
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 22,015 18,680
Total liabilities and shareholders' equity $125,066 $114,436
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, April 2,
For the 13 Weeks Ended 1996 1995
<S> <C> <C>
Net sales $ 52,037 $ 49,913
Cost of sales 38,238 35,524
Gross profit 13,799 14,389
Selling, general and administrative expenses (6,637) (6,959)
Operating profit 7,162 7,430
Interest expense (359) (98)
Interest expense - Raymark (413) (509)
Other income, net 208 294
Income before provision for income taxes
and minority interest 6,598 7,117
Provision for income tax (2,617) (2,540)
Minority interest (290) -
Net income $ 3,691 $ 4,577
Net income per share $ 1.09 $ 1.33
Weighted average shares outstanding 3,372,574 3,443,600
<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>
March 31, April 2,
For the 13 Weeks Ended 1996 1995
<S> <C> <C>
Net cash provided by operating activities $ 2,583 $ 1,414
Cash flow from investing activities:
Capital expenditures (1,366) (2,408)
Proceeds on sale of property, plant and equipment 22 1,921
Equity Investment in AFM (9,400) -
Acquisition of machinery and equipment from AFM (3,500) -
Net cash used in investing activities (14,244) (487)
Cash flow from financing activities:
Proceeds from short-term borrowings - 10,000
Payments on short-term borrowings (3,241) (10,788)
Principal payments on long-term debt (42) (576)
Payments on borrowings from Raymark - (1,459)
Other (1) -
Net cash used in financing activities (3,284) (2,823)
Effect of exchange rate changes on cash (18) 67
Net change in cash and cash equivalents (14,963) (1,829)
Cash and cash equivalents at beginning of period 19,598 4,778
Cash and cash equivalents at end of period $ 4,635 $ 2,949
<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 remains pending. 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. 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.
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<PAGE>
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 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 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
<PAGE>
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. RPC
is currently making an assessment of the advisory and is yet without
knowledge concerning the extent of the contamination or its
involvement.
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 at a hearing set by the Bankruptcy Court for
May 21, 1996.
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court pending
the conclusion of the successor liability litigation. However, in
December 1992, the creditors' committee filed a motion to terminate
the exclusive period to file a plan of reorganization. At a hearing
in May 1993, the motion was denied by the Bankruptcy Court but was
appealed by the creditors' committee. In November 1993, the U.S.
District Court reversed the Bankruptcy Court and terminated the
exclusive period to file a plan of reorganization effective in
January 1994. Accordingly, any party in interest, including the
debtor, the creditors' committee, or a creditor could thereafter
file a plan of reorganization.
In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of
seeking confirmation allowing Raytech to emerge from the bankruptcy
filed March 10, 1989. Important conditions precedent to
confirmation of the Debtor's Plan include 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 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'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. 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 reorganization. The mediation process commenced
in October 1995 and was concluded in March 1996 without agreement
for a consensual plan of reorganization. The competing plans of
Raytech and its creditors 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<PAGE>
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,
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.
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 in
the Bankruptcy Court in the amount of $22.8 million covering its
theory of 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<PAGE>
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 Seventh Circuit Court
of Appeals 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 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
March 31, 1996 and December 31, 1995, the results of operations for
the thirteen weeks ended March 31, 1996 and statements of cash
flows for the thirteen weeks ended March 31, 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.
<PAGE>
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:
March 31, 1996 December 31, 1995
Raw material $ 6,629 $ 6,901
Work in process 5,868 6,143
Finished goods 10,861 10,529
$23,358 $23,573
NOTE D - RELATED PARTIES
During the first three months of 1996, the Company
purchased yarn from Universal Friction Composites, a related party,
in the amount of $747 and at March 31, 1996, the related payable
amounted to $180.
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 March 31, 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.
On March 20, 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.
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
<PAGE>
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. Composites 47% common
stock interest in AFM will be accounted for under the equity method
commencing February 1, 1996.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Net income for the thirteen-week period ended March 31,
1996 amounted to $3,691 or $1.09 per share as compared with $4,577
or $1.33 per share for the corresponding period in 1995. The
reduction in net income is primarily due to a slowdown in the
European economy which resulted in a reduction in sales; a decline
in the domestic aftermarket business segment; contractual price
reduction to certain customers; an increase in salary and wages and
other employee benefits and general inflationary increases. During
the thirteen-week period ended March 31, 1996, the Company acquired
certain assets from Advanced Friction Materials Company ("AFM") and
also acquired a 47% equity interest in AFM.
Net Sales
Net sales for the first quarter of fiscal 1996 increased
by 4.3% to $52,037 compared with $49,913 in the corresponding
period in 1995. The overall improvement is primarily due to
additional sales of approximately $2,000 related to the AFM
acquisition. Excluding AFM, domestic sales remained unchanged
compared to last year. However, European sales decreased due to a
continued decline in the German economy.
Gross Margin
Gross profit margin for the thirteen-week period ended
March 31, 1996 decreased 4.1% to $13,799 as compared with $14,389
for the same period a year ago. The decrease in gross margin is
due to a reduction in sales in Germany, 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
4.9% to $6,637 for the thirteen-week period ended March 31, 1996 as
compared with 1995. The decrease is mainly due to a reduction in
professional fees.
Interest Expense
Interest expense increased primarily as a result of
obligations accrued at present value for certain components of the
AFM acquisition and the use of the Company's revolving line of
credit.
<PAGE>
Liquidity and Capital Resources
During the first quarter of fiscal 1996, the Company
generated positive cash flow from operating activities in the
amount of $2.6 million. The positive cash flow is the result of
the favorable earnings during the first quarter of fiscal 1996.
Capital expenditures year-to-date for fiscal 1996 amounted to $1.4
million, which is consistent with the Company's projected spending
plan for 1996.
At March 31, 1996, the Company's wholly-owned German
subsidiary (Raybestos Industrie-Produkte GmbH) had available unused
lines of credit amounting to DM1,623 ($1,099) which all expire on
demand.
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 March 31, 1996 was $1,930.
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 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. 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. 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.
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
<PAGE>
was negotiated to settlement for a negligible amount. The
successor decision was appealed and in October 1992, the Ninth
Circuit Court of Appeals affirmed the District Court's judgment on
the grounds stated in the District Court's opinion. The effect of
this decision extends beyond the Oregon District due to a Third
Circuit Court of Appeals decision in a related case cited below
wherein Raytech was collaterally estopped (precluded) from
relitigating the issue of its successor liability for Raymark's
asbestos-related liabilities.
As the result of the inability of Raymark to fund Raytech's
cost of defense recited above, and in order to obtain a ruling
binding across all jurisdictions on whether Raytech is liable as a
successor for asbestos-related and other claims including claims
yet to be filed relating to the operations of Raymark or Raymark's
predecessors, on March 10, 1989 Raytech filed a petition seeking
relief under Chapter 11 of Title 11, United States Code in the
United States Bankruptcy Court, District of Connecticut. Under
Chapter 11, substantially all litigation against Raytech has been
stayed while the debtor corporation and its non-filing operating
subsidiaries continue to operate their businesses in the ordinary
course under the same management and without disruption to
employees, customers or suppliers. In the Bankruptcy Court a
creditors' committee was appointed, comprised primarily of asbestos
claimants' attorneys. In August 1995, 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
event Raymark fails to comply with its obligations under the
Consent Order. Another environmental claim was filed against the<PAGE>
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. RPC is currently making an assessment of the
advisory and is yet without knowledge concerning the extent of the
contamination or its involvement.
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 at a hearing set by the Bankruptcy Court for
May 21, 1996.
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court pending
the conclusion of the successor liability litigation. However, in
December 1992, the creditors' committee filed a motion to terminate
the exclusive period to file a plan of reorganization. At a
hearing in May 1993, the motion was denied by the Bankruptcy Court
but was appealed by the creditors' committee. In November 1993,
the U.S. District Court reversed the Bankruptcy Court and
terminated the exclusive period to file a plan of reorganization
effective in January 1994. Accordingly, any party in interest,
including the debtor, the creditors' committee or a creditor could
thereafter file a plan of reorganization.
In May 1994, Raytech filed a Plan of Reorganization ("Debtor's
Plan") in the U.S. Bankruptcy Court for the purpose of seeking
confirmation allowing Raytech to emerge from the bankruptcy filed
March 10, 1989. Important conditions precedent to confirmation of
the Debtor's Plan include 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 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<PAGE>
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 interested parties agreed in August
1995 to participate in non-binding mediation to attempt to
effectuate a consensual plan of reorganization. The mediation
process commenced in October 1995 and was concluded in March 1996
without agreement for a consensual plan of reorganization. The
competing plans of Raytech and its creditors 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<PAGE>
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, 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.
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 in the Bankruptcy
Court in the amount of $22.8 million covering its theory of 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 a case in the U.S. District Court
for the Southern District of Indiana captioned Raybestos Products
Company vs. Gilbert W. Younger, et al. 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.<PAGE>
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 Seventh Circuit
Court of Appeals 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
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
In Form 8-K dated January 31, 1996, Raytech
Composites, Inc., a subsidiary of the Registrant,
acquired a minority share of 47% of the stock of
Advanced Friction Materials Company located in
Sterling Heights Michigan, from Oscar E. Stefanutti
and related family trusts. Consideration for the
stock transaction was $9,400,000 taken from cash
reserves based upon a principle of current value
related to synergies of the business, coupled with
projected earnings. Raybestos Products Company, the
operating subsidiary of Raytech Composites, Inc.,
simultaneously entered into a technology exchange
agreement with Advanced Friction Materials Company and
agreed to purchase certain operating assets and real
property both on the closing and on the first
anniversary date at a combined purchase price of
$10,600,000 cash to be adjusted in part by an
evaluation of certain current assets. Advanced
Friction Materials Company, the majority ownership of
which remains in Oscar E. Stefanutti and related
family trusts, is engaged and will continue in the
development, engineering and sales of automobile
transmission component parts, including friction
plates, bands and friction materials for torque
converters, to original equipment manufacturers. On
April 12, 1996, Amendment No. 1 was filed on Form 8-
K/A, providing the financial statements for the
acquired business and the pro forma financial
information required to be filed.
<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: May 14, 1996
FORM 10-Q
RAYTECH CORPORATION AND SUBSIDIARIES
PART II
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Thirteen Weeks Ended
March 31, April 2,
1996 1995
<S> <C> <C>
Net income as reported $ 3,691 $ 4,577
Shares outstanding at beginning of year 3,230,080 3,218,968
Add weighted average of stock options
exercised - 180
Deduct weighted average shares to treasury - -
Add common equivalent shares
for assumed exercise of
employee stock options 142,494 224,452
Weighted average number of shares
used in calculation of primary
income per share 3,372,574 3,443,600
Income per share $1.09 $1.33
Primary income per common share $1.09 $1.33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<RESTATED>
<CIK> 0000797917
<NAME> RAYTECH CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<PERIOD-TYPE> 3-MOS
<EXCHANGE-RATE> 1
<CASH> 4,634
<SECURITIES> 0
<RECEIVABLES> 24,244
<ALLOWANCES> 811
<INVENTORY> 23,358
<CURRENT-ASSETS> 57,321
<PP&E> 124,018
<DEPRECIATION> 73,774
<TOTAL-ASSETS> 125,066
<CURRENT-LIABILITIES> 69,324
<BONDS> 0
<COMMON> 5,362
0
0
<OTHER-SE> 16,653
<TOTAL-LIABILITY-AND-EQUITY> 125,066
<SALES> 52,037
<TOTAL-REVENUES> 52,037
<CGS> 38,238
<TOTAL-COSTS> 38,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 772
<INCOME-PRETAX> 6,598
<INCOME-TAX> 2,617
<INCOME-CONTINUING> 3,691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,691
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
