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 June 29, 1997
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 June 29, 1997, 3,257,682 shares of the Registrant's
common stock, par value $1.00, were issued and outstanding.
Page 1 of 25
<PAGE>
RAYTECH CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets as
at June 29, 1997 and December 29, 1996 3
Condensed Consolidated Statements of
Operations for the thirteen weeks and the
twenty-six weeks ended June 29, 1997 and
June 30, 1996 4
Condensed Consolidated Statements of Cash
Flows for the twenty-six weeks ended
June 29, 1997 and June 30, 1996 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 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>
June 29, Dec. 29,
As at 1997 1996
<S> <C> <S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,680 $ 11,341
Trade accounts receivable, less allowance of $843
for 1997 and $726 for 1996 29,807 23,866
Inventories 28,429 28,709
Other current assets 9,820 8,120
Total current assets 74,736 72,036
Property, plant and equipment 134,808 127,811
Less accumulated depreciation 78,920 76,686
Net property, plant and equipment 55,888 51,125
Investment in securities 2,100 2,100
Investment in and advances to affiliates 10,294 9,972
Other assets 5,076 4,922
Total assets $148,094 $140,155
LIABILITIES
Current liabilities
Notes payable $ 15,565 $ 10,701
Current portion of long-term debt - Raymark 13,271 12,007
Current portion of long-term debt 146 152
Accounts payable 15,659 18,999
Accrued liabilities 20,912 22,759
Total current liabilities 65,553 64,618
Long-term debt due to Raymark 24,503 27,437
Long-term debt 706 237
Postretirement benefits other than pensions 9,998 9,429
Other long-term liabilities 4,923 4,419
Total liabilities 105,683 106,140
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, 5,389,741 and 5,371,821
issued and outstanding in fiscal 1997 and 1996, respectively 5,390 5,372
Additional paid in capital 70,231 70,208
Accumulated deficit (29,497) (38,922)
Cumulative translation adjustment 848 1,918
46,972 38,576
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 42,411 34,015
Total liabilities and shareholders' equity $148,094 $140,155
<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 26 Weeks Ended
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Sales $ 60,760 $ 60,142 $119,881 $112,179
Cost of sales (47,077) (45,352) (92,270) (83,590)
Gross profit 13,683 14,790 27,611 28,589
Selling and administrative expenses (5,828) (7,045) (12,969) (13,682)
Operating profit 7,855 7,745 14,642 14,907
Interest expense (327) (591) (645) (950)
Interest expense - Raymark (562) (413) (1,031) (826)
Other income (expense), net 439 581 921 789
Income before provision for income
taxes and minority interest 7,405 7,322 13,887 13,920
Provision for income tax (2,181) (2,442) (4,135) (5,059)
Minority interest (81) (288) (327) (578)
Net income $ 5,143 $ 4,592 $ 9,425 $ 8,283
Net income per share $ 1.46 $ 1.31 $ 2.68 $ 2.40
Average shares outstanding 3,525,023 3,493,306 3,523,075 3,449,201
<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>
June 29, June 30,
For the 26 Weeks Ended 1997 1996
<S> <C> <C>
Net cash provided by operating activities $ 9,141 $ 6,063
Cash flow from investing activities:
Capital expenditures (9,818) (3,720)
Proceeds on sale of property, plant and equipment 105 96
Note receivable due from AFM 37 -
Equity Investment in AFM - (9,400)
Payments to AFM for land and building (7,076) -
Payments to AFM for machinery and equipment - (3,500)
Net cash used in investing activities (16,752) (16,524)
Cash flow from financing activities:
Net borrowing (payments) on short-term borrowings 5,124 (1,101)
Principal payments on long-term debt (88) (80)
Proceeds from long-term borrowings 472 -
Payments on borrowings from Raymark (2,417) -
Other (48) (128)
Net cash used in financing activities 3,043 (1,309)
Effect of exchange rate changes on cash (93) (31)
Net change in cash and cash equivalents (4,661) (11,801)
Cash and cash equivalents at beginning of period 11,341 19,597
Cash and cash equivalents at end of period $ 6,680 $ 7,796
<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 1996 Form 10-K, Part 1, Item 1, pages 4-7, 13-19. As
part of the restructuring process of Raytech, Raymark common stock
was divested and sold in May, 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 subsequently, 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. Raytech management was informed that Raymark's cost of
defense and disposition of cases up to the automatic stay of
litigation under the involuntary bankruptcy proceedings was
approximately $333 million of Raymark's total insurance coverage
of approximately $395 million. Raytech management has also been
informed that as a result of the dismissal of the involuntary
petition, Raymark has encountered pending and newly filed
asbestos-related lawsuits but has received $27 million from a
state guarantee association to make up the insurance policies of
the insolvent carrier and $32 million in other policies to defend
against such litigation.
<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 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, 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
<PAGE>
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.
In January 1997, the U.S. Environmental Protection Agency ("EPA")
and the State of Connecticut filed suit against Raymark claiming
$212 million in damages for cleanup of the Stratford, Connecticut,
site. The EPA has also filed a bankruptcy claim against Raytech
as a successor to Raymark for cleanup of the Stratford site and
other Raymark sites. Determination of Raytech's liability for
such claims, if any, is 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 notified its insurers of the IDEM action and one insurer
responded by filing a complaint in January 1997 in the U.S.
District Court, Southern District of Indiana, captioned Reliance
Insurance Company vs. RPC seeking a declaratory judgment that any
liability of RPC is excluded from its policy with RPC. RPC
continues to assess the extent of the contamination and its
involvement and is currently negotiating with IDEM for an agreed
order of cleanup. The Company intends to offset its investigation
and cleanup costs against its notes payable to Raymark when such
costs become known pursuant to the indemnification clause in the
wet clutch and brake acquisition agreement since it appears that
any contamination would have occurred during Raymark's ownership
of the Indiana facility. Blood tests administered to residents in
the vicinity of the small waterways revealed no exposure.
As a result of an inspection, the Company has been
notified that the operations purchased from AFM in January 1996 in
Sterling Heights, Michigan, are in violation of a consent order
issued by the Michigan Department of Environmental Quality
("DEQ"). The consent order included a compliance program
providing for measures to be taken to bring certain operations
into compliance and recordkeeping on operations in compliance.
Negotiations with the DEQ have been in progress concerning the
compliance program and fines for past violations, resulting in a
tentative agreement providing for a consent judgment with a fine
of $181 and subject to completion of certain operational
<PAGE>
compliance programs. Finalization of the consent judgment is
pending. The Company has accrued its estimate of the probable
cost of resolution of this matter.
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
<PAGE>
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 have returned 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.
Other matters in the Bankruptcy Court include: (1) 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. (2) In September
1996, 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. (3) The process for
confirmation of a reorganization plan was begun in November 1996
with arguments being presented for a bar date and claim forms.
The process has been continued indefinitely pending the completion
of other matters before the Bankruptcy Court. (4) In November
1996, Raytech filed an adversary proceeding complaint against the
creditors' committee, et al., seeking a declaratory judgment of
the Bankruptcy Court that Raytech's liability to present and
future creditors of Raymark under the theory of successor
liability is limited pursuant to bankruptcy law. The creditors'
committee filed a motion for a summary judgment, which is being
considered by the Bankruptcy Court. (5) In January 1997, the
creditors' committee filed a motion for leave to file an adverse
proceeding complaint against Raymark, et al. seeking to have the
Raytech Bankruptcy Court assert control over Raymark and its
assets on the grounds that the reorganization of Raytech in 1986
and the corporate transfers to Raymark in 1988 were fraudulent.
The Bankruptcy Court allowed the complaint to be filed and served
but continued any further activity. (6) In March 1997, the
creditors' committee filed a motion for relief from the automatic
stay to permit the commencement of an adversary proceeding against
Raytech to litigate alternative theories of liability bearing upon
the extent to which Raytech may be liable to Raymark's creditors.
The motion was continued without a further hearing date set.
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.
<PAGE>
In September 1991, the U.S. District Court issued a ruling
dismissing one count of the class action citing as a reason the
preclusive effect of the 1988 Oregon case, previously discussed,
under the doctrine of collateral estoppel (conclusiveness of
judgment in a prior action), in which Raytech was ruled to be a
successor to Raymark's asbestos liability under Oregon law. The
remaining counts before the U.S. District Court involve the
transfer of Raymark's asbestos-related liabilities to Raytech on
the legal theories of alter-ego and fraudulent conveyance. Upon a
motion for reconsideration, the U.S. District Court affirmed its
prior ruling in February 1992. Also, in February 1992, the U.S.
District Court transferred the case in its entirety to the U.S.
District Court for the Eastern District of Pennsylvania. Such
transfer was made by the U.S. District Court without motion from
any party in the interest of the administration of justice as
stated by the U.S. District Court. In December 1992, Raytech
filed a motion to activate the case and to obtain rulings on the
remaining counts which was denied by the U.S. District Court. In
October 1993, the creditors' committee asked the Court to certify
the previous dismissal of the successor liability count. In
February 1994, the U.S. District Court granted the motion to
certify and the successor liability dismissal was accordingly
appealed. In May 1995, the Third Circuit Court of Appeals ruled
that Raytech is collaterally estopped (precluded) from
relitigating the issue of its successor liability as ruled in the
1988 Oregon case recited above, affirming the U.S. District
Court's ruling of dismissal. A petition for a writ of certiorari
was denied by the U.S. Supreme Court in October 1995. The ruling
leaves the Oregon case, as affirmed by the Ninth Circuit Court of
Appeals, as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities.
Costs incurred by the Company for asbestos-related
liabilities are indemnified by Raymark under the 1987 acquisition
agreements. By agreement, Raymark has reimbursed the Company in
part for such indemnified costs by payment of the amounts due in
Raytech common stock of equivalent value. Under such agreement,
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, 1995,
1996 and 1997 were applied as a reduction of the note obligations
pursuant to the agreements.
In January 1997, Raytech was named through a subsidiary
in a third party complaint captioned Martin Dembinski, et al. vs.
Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et al.
filed in the U.S. District Court for the Southern District of New
York for damages for asbestos-related disease. The case has been
<PAGE>
removed to the U.S. District Court, Eastern District of
Pennsylvania and remains pending. When required, the Company will
deny the allegations and will vigorously defend itself against the
claims made. Discovery procedures have not yet begun.
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 potentially
substantial uninsured asbestos-related and environmental
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
certain or all of the matters described above would have a
material adverse effect on the Company's results of operations,
financial position and cash flows. 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 June 29, 1997 and December 29, 1996, the results of operations
for the thirteen weeks and the twenty-six weeks ended June 29,
1997 and statements of cash flows for the twenty-six weeks ended
June 29, 1997. 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 29, 1996.
<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
Net, inventories consist of the following:
June 29, 1997 December 29, 1996
Raw material $10,272 $ 9,921
Work in process 7,813 8,033
Finished goods 10,344 10,755
$28,429 $28,709
NOTE D - RELATED PARTIES
During the first half of 1997, the Company purchased
yarn from Universal Friction Composites, a related party, in the
amount of $1,986 and at June 29, 1997, the related payable
amounted to $191.
In March 1997, 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 on March 31, 1997. At the record date, Craig R. Smith was
a related party to owners of 41,904 shares, or 40% of the
outstanding shares.
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 September 1996, Craig R. Smith entered into a
consulting agreement with Raymark for services regarding asbestos
litigation. Fees paid to date to Raytech pursuant to the terms of
the agreement are $26.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Net income for the thirteen-week period ended
June 29, 1997 amounted to $5,143 or $1.46 per share as compared
with $4,592 or $1.31 per share for the corresponding period in
1996. For the twenty-six week period, net income amounted to
$9,425 or $2.68 per share compared with net income of $8,283 or
$2.40 per share for the same period in 1996. The overall
improvement is the result of increased sales in the domestic
market segments and a reversal of environmental accruals no longer
required, partially offset by lower margins due to competitive
pricing pressures. European sales decreased primarily due to
foreign currency fluctuation.
Net Sales
Net sales for the thirteen-week period ended June 29,
1997 increased 1.0% to $60,760 as compared with $60,142 for the
same period one year ago. Net sales for the twenty-six week
period ended June 29, 1997 increased 6.9% to $119,881 as compared
with $112,179 for the same period one year ago. The overall
twenty-six week improvement is primarily due to additional sales
of approximately $4,319 related to the Sterling Heights operations
and additional volume within the domestic automotive, agriculture
and construction product market segments. Excluding Sterling
Heights, domestic sales increased by $5,151 compared to last year.
However, European sales decreased by $1,768 primarily due to
foreign currency fluctuation.
Gross Margin
Gross profit margin as a percentage of sales for the
thirteen-week period ended June 29, 1997 is 22.5%, as compared to
24.6% for the same period one year ago. For the twenty-six week
period ended June 29, 1997 gross profit margin as a percentage of
sales is 23.0% as compared to 25.5% for the same period one year
ago. The overall decrease is primarily due to an increase in
domestic manufacturing labor and material costs, equipment
maintenance, contractual price reductions to certain customers and
a lower gross margin on domestic agriculture and foreign
automotive sales.
Selling, General and Administrative Expense
Selling, general and administrative expenses decreased
to $12,969 as compared to $13,682 one year earlier. The decrease
is primarily due to the net reversal of $800 of accruals
established in 1996 related to environmental violations at the
Sterling Heights facility.
<PAGE>
Income Taxes
The effective tax rate for the twenty-six weeks ended
June 29, 1997 is 29.8%. Included in the effective tax rate for
1997 is the effect of reversing certain valuation allowances
related to net operating loss carryforwards of the German
operations.
Liquidity and Capital Resources
During the first half of fiscal 1997, the Company
generated positive cash flow from operating activities in the
amount of $9.1 million. The positive cash flow is the result of
the favorable earnings during the first half of fiscal 1997.
Capital expenditures year-to-date for fiscal 1997 amounted to
$10.7 million, which is consistent with the Company's projected
spending plan for 1997.
On January 31, 1997, Raybestos Products Company
completed the purchase of AFM Management Company for $1.0 million
from Advanced Friction Materials Company.
On January 6, 1997, Raybestos Products Company ("RPC")
completed the purchase of land and building from Advanced Friction
Materials Company for $6.6 million.
On April 30, 1997, Raytech Powertrain, Inc.
("Powertrain") purchased the land and building in Crawfordsville,
Indiana, previously leased by Raybestos Aftermarket Products
Company ("RAPCO"). Powertrain will continue to lease the land and
building to RAPCO with lease payments beginning in December 1997.
At June 29, 1997, the Company's wholly-owned German
subsidiaries had available unused lines of credit amounting to
DM1,874 ($1,073) 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 June 29, 1997 was $13,195.
Management believes that the Company will generate
sufficient cash flow from operations during the balance of 1997 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 above 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 filed against Raymark was dismissed following a trial and
the stay was lifted.
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. Raytech
management was informed that Raymark's cost of defense and
disposition of cases up to the automatic stay of litigation under
the involuntary bankruptcy proceedings was approximately $333
million of Raymark's total insurance coverage of approximately
$395 million. It has also been informed that as a result of the
dismissal of the involuntary petition, Raymark has encountered
pending and newly filed asbestos-related lawsuits but has received
$27 million from a state guarantee association to make up the
insurance policies of the insolvent carrier and $32 million in
other policies to defend against such litigation.
<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 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, 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
<PAGE>
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.
In January 1997, the U.S. Environmental Protection Agency ("EPA")
and the State of Connecticut filed suit against Raymark claiming
$212 million in damages for cleanup of the Stratford, Connecticut,
site. The EPA has also filed a bankruptcy claim against Raytech
as a successor to Raymark for cleanup of the Stratford site and
other Raymark sites. Determination of Raytech's liability for
such claims, if any, is 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 notified its insurers of the IDEM action and one insurer
responded by filing a complaint in January 1997 in the U.S.
District Court, Southern District of Indiana, captioned Reliance
Insurance Company vs. RPC seeking a declaratory judgment that any
liability of RPC is excluded from its policy with RPC. RPC
continues to assess the extent of the contamination and its
involvement and is currently negotiating with IDEM for an agreed
order of cleanup. The Company intends to offset its investigation
and cleanup costs against its notes payable to Raymark when such
costs become known pursuant to the indemnification clause in the
wet clutch and brake acquisition agreement since it appears that
any contamination would have occurred during Raymark's ownership
of the Indiana facility. Blood tests administered to residents in
the vicinity of the small waterways revealed no exposure.
As a result of an inspection, the Company has been notified
that the operations purchased from AFM in January 1996 in Sterling
Heights, Michigan, are in violation of a consent order issued by
the Michigan Department of Environmental Quality ("DEQ"). The
consent order included a compliance program providing for measures
to be taken to bring certain operations into compliance and
recordkeeping on operations in compliance. Negotiations with the
DEQ have been in progress concerning the compliance program and
fines for past violations resulting in a tentative agreement
providing for a consent judgment with a fine of $181 and subject
<PAGE>
to completion of certain operational compliance programs.
Finalization of the consent judgment is pending.
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
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
<PAGE>
creditors have returned 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.
Other matters in the Bankruptcy Court include: (1) 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. (2) 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. (3) The process for confirmation of a
reorganization plan was begun in November 1996 with arguments
being presented for a bar date and claim forms. The process has
been continued indefinitely pending the completion of other
matters before the Bankruptcy Court. (4) In November 1996,
Raytech filed an adversary proceeding complaint against the
creditors' committee, et al., seeking a declaratory judgment of
the Bankruptcy Court that Raytech's liability to present and
future creditors of Raymark under the theory of successor
liability is limited pursuant to bankruptcy law. The creditors
committee filed a motion for a summary judgment, which is being
considered by the Bankruptcy Court. (5) In January 1997, the
creditors' committee filed a motion for leave to file an adverse
proceeding complaint against Raymark, et al. seeking to have the
Raytech Bankruptcy Court assert control over Raymark and its
assets on the grounds that the reorganization of Raytech in 1986
and the corporate transfers to Raymark in 1988 were fraudulent.
The Bankruptcy Court allowed the complaint to be filed and served
but continued any further activity. (6) In March 1997, the
creditors' committee filed a motion for relief from the automatic
stay to permit the commencement of an adversary proceeding against
Raytech to litigate alternative theories of liability bearing upon
the extent to which Raytech may be liable to Raymark's creditors.
The motion was continued without a further hearing date set.
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
<PAGE>
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.
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, 1995, 1996 and 1997 were applied as a reduction of the
note obligations pursuant to the agreements.
In January 1997, Raytech was named through a subsidiary in a
third party complaint captioned Martin Dembinski, et al. vs.
Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et al.
filed in the U.S. District Court for the Southern District of New
York for damages for asbestos-related disease. The case has been
removed to the U.S. District Court, Eastern District of
Pennsylvania. When required the Company will deny the allegations
and will vigorously defend itself against the claims made.
Discovery procedures have not yet begun.
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 potentially
substantial uninsured asbestos-related and environmental
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
certain or all of the matters described above would have a
material adverse effect on the Company's results of operations,
financial position and cash flows. 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.
<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: August 8, 1997
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 26 Weeks Ended
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income as reported $ 5,143 $ 4,592 $ 9,425 $ 8,283
Primary
Common shares outstanding at
beginning of year 3,239,762 3,230,080 3,239,762 3,230,080
Weighted average of stock options
exercised 17,687 571 12,370 571
Weighted average of treasury
stock acquired - - - -
Common equivalent shares
for assumed exercise of
employee stock options 267,574 262,655 270,943 218,550
Weighted average number of shares
used in calculation of primary
income per share 3,525,023 3,493,306 3,523,075 3,449,201
Primary income per common share $1.46 $1.31 $2.68 $2.40
Fully Diluted
Common shares outstanding
at beginning of year 3,239,762 3,230,080 3,239,762 3,230,080
Weighted average of stock options
exercised 17,687 571 12,370 571
Weighted average of treasury
stock acquired - - - -
Common equivalent shares for
assumed exercise of employee
stock options 287,462 262,655 287,462 257,139
Weighted average number of shares
used in calculation of fully
diluted earnings per share 3,544,911 3,493,306 3,539,594 3,487,790
Fully diluted earnings per share $1.45 $1.31 $2.66 $2.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<RESTATED>
<CIK> 0000797917
<NAME> RAYTECH CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> JUN-29-1997
<PERIOD-TYPE> 6-MOS
<EXCHANGE-RATE> 1
<CASH> 6,680
<SECURITIES> 0
<RECEIVABLES> 30,442
<ALLOWANCES> 635
<INVENTORY> 28,429
<CURRENT-ASSETS> 74,736
<PP&E> 134,808
<DEPRECIATION> 78,920
<TOTAL-ASSETS> 148,094
<CURRENT-LIABILITIES> 65,553
<BONDS> 0
<COMMON> 5,390
0
0
<OTHER-SE> 37,021
<TOTAL-LIABILITY-AND-EQUITY> 148,094
<SALES> 119,881
<TOTAL-REVENUES> 119,881
<CGS> 92,270
<TOTAL-COSTS> 92,270
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,676
<INCOME-PRETAX> 13,887
<INCOME-TAX> 4,135
<INCOME-CONTINUING> 9,425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,425
<EPS-PRIMARY> 2.68
<EPS-DILUTED> 2.66
</TABLE>
