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 28, 1998
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 28, 1998, 3,420,995 shares of the Registrant's
common stock, par value $1.00, were issued and outstanding.
Page 1 of 35
<PAGE>
RAYTECH CORPORATION
INDEX
Page
Number
PART I. UNAUDITED FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Balance Sheets as
at June 28, 1998 and December 28, 1997 3
Condensed Consolidated Statements of
Operations for the thirteen weeks
and twenty-six weeks ended June 28, 1998
and June 29, 1997 4
Condensed Consolidated Statements of Cash
Flows for the thirteen weeks and twenty-six
weeks ended June 28, 1998 and June 29, 1997 5
Consolidated Statements of Shareholders'
Equity - 1997 6
Consolidated Statements of Shareholders'
Equity - 1998 7
Notes to Condensed Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 34
Signature 35
-2-<PAGE>
RAYTECH CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)(Unaudited)
<CAPTION>
June 28, Dec. 28,
As at 1998 1997
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,200 $ 9,913
Trade accounts receivable, less allowance of $761
for 1998 and $1,186 for 1997 31,920 26,903
Inventories 30,107 28,202
Other current assets 9,284 8,590
Total current assets 77,511 73,608
Property, plant and equipment 150,888 143,131
Less accumulated depreciation 86,634 82,141
Net property, plant and equipment 64,254 60,990
Investment in and advances to affiliates 16,444 10,249
Other assets 8,616 8,538
Total assets $166,825 $153,385
LIABILITIES
Current liabilities
Notes payable 21,501 13,039
Current portion of long-term debt - Raymark 13,374 9,970
Current portion of long-term debt 140 130
Accounts payable 14,553 20,703
Accrued liabilities 18,984 22,442
Total current liabilities 68,552 66,284
Long-term debt due to Raymark 18,706 21,988
Long-term debt 4,453 1,178
Postretirement benefits other than pensions 10,580 10,044
Other long-term liabilities 6,325 5,429
Total liabilities 108,616 104,923
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, 5,553,054 and 5,417,367
issued and outstanding in fiscal 1998 and 1997, respectively 5,553 5,417
Additional paid in capital 70,501 70,275
Accumulated deficit (13,873) (23,384)
Accumulated other comprehensive income 589 715
62,770 53,023
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 58,209 48,462
Total liabilities and shareholders' equity $166,825 $153,385
<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 28, June 29, June 28, June 29,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $ 63,645 $ 60,760 $126,540 $119,881
Cost of sales (47,172) (47,077) (95,372) (92,270)
Gross profit 16,473 13,683 31,168 27,611
Selling and administrative expenses (8,772) (5,828) (15,616) (12,969)
Operating profit 7,701 7,855 15,552 14,642
Interest expense (831) (327) (1,060) (645)
Interest expense - Raymark (267) (562) (941) (1,031)
Other income (expense), net 835 439 576 921
Income before provision for income
taxes and minority interest 7,438 7,405 14,127 13,887
Provision for income tax (1,148) (2,181) (3,690) (4,135)
Minority interest (473) (81) (926) (327)
Net income $ 5,817 $ 5,143 $ 9,511 $ 9,425
Basic earnings per share $ 1.70 $ 1.58 $ 2.81 $ 2.90
Diluted earnings per share $ 1.62 $ 1.46 $ 2.67 $ 2.68
<FN>
The accompanying notes are an integral part of these statements.
<FN>
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
June 28, June 29,
For the 26 Weeks Ended 1998 1997
<S> <C> <C>
Net cash provided by operating activities $ 5,655 $ 9,141
Cash flow from investing activities:
Capital expenditures (7,773) (9,818)
Proceeds on sale of property, plant and equipment 72 105
Purchase of common stock in AFM (3,000) -
Acquisition of machinery and equipment from AFM - (7,039)
Net cash used in investing activities (10,701) (16,752)
Cash flow from financing activities:
Cash overdraft (3,090) -
Proceeds from short-term borrowings 2,998 5,124
Proceeds on long-term debt 1,185 472
Principal payments on long-term debt (101) (88)
Payments on borrowings from Raymark - (2,417)
Other 356 (48)
Net cash used in financing activities 1,348 3,043
Effect of exchange rate changes on cash (15) (93)
Net change in cash and cash equivalents (3,713) (4,661)
Cash and cash equivalents at beginning of period 9,913 11,341
Cash and cash equivalents at end of period $ 6,200 $ 6,680
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Number Paid Other
of Shares Common in Accumulated Comprehensive Treasury Stock
Issued Stock Capital Deficit Income Cost Shares
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 29, 1996 5,371,821 $ 5,372 $70,208 $ (38,922) $ 1,918 $(4,561) (2,132,059)
Stock options exercised 17,920 18 23
Cumulative translation
adjustment (1,070)
Purchase of treasury
stock
Net income for the
period ended
June 29, 1997 9,425
Balance,
June 29, 1997 5,389,741 $ 5,390 $70,231 $ (29,497) $ 848 $(4,561) (2,132,059)
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Number Paid Other
of Shares Common in Accumulated Comprehensive Treasury Stock
Issued Stock Capital Deficit Income Cost Shares
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 28, 1997 5,417,367 $ 5,417 $70,275 $ (23,384) $ 715 $(4,561) (2,132,059)
Stock options exercised 135,687 136 226
Cumulative translation
adjustment (126)
Purchase of treasury
stock
Net income for the
period ended
June 28,1998 9,511
Balance,
June 28, 1998 5,553,054 $ 5,553 $70,501 $ (13,873) $ 589 $(4,561) (2,132,059)
<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)
(Unaudited)
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
Raytech Corporation ("Raytech" or the "Company") was
incorporated on June 13, 1986 in Delaware and held as a subsidiary
of Raymark Corporation ("Raymark"). In October 1986, Raytech
became the publicly traded (NYSE) holding company of Raymark stock
through a triangular merger restructuring plan approved by
Raymark's shareholders at its October 1986 Annual Meeting whereby
each share of common stock of Raymark was automatically converted
into both a share of Raytech common stock and a right to purchase
a warrant for Raytech common stock. Each warrant entitled the
holder to purchase one share of Raytech common stock at a price of
$9.00 at any time, subject to certain limitations, prior to
October 1, 1991, extended to 1994. The warrants expired on
October 1, 1994. Raymark, thereby, became a wholly-owned
subsidiary of Raytech. The purpose of the formation of Raytech
and the restructuring plan was to provide a means to gain access
to new sources of capital and borrowed funds to be used to finance
the acquisition and operation of new businesses in a corporate
structure that should not subject it or such acquired businesses
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 have
been disposed of by settlements, dismissals, summary judgments and
trial verdicts at a cost in excess of $333,000 principally covered
by Raymark's insurance. Subsequent to the sale of Raymark, as
described below, 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. However, in March 1998 Raymark filed a
voluntary bankruptcy petition again staying the litigation.
<PAGE>
In accordance with the restructuring plan, Raytech
purchased the Wet Clutch and Brake Division and German subsidiary
in 1987 from its then wholly-owned subsidiary, Raymark. Each such
acquisition was financed through borrowed funds from new lenders
and Raytech stock and notes. Pursuant to these acquisitions,
Raymark agreed to indemnify Raytech for any future legal
liabilities and costs that may result from asbestos litigation.
Management believes that each purchase by Raytech from Raymark
complies with Raytech's restructuring plan principles of (i)
paying fair market value, (ii) acquiring businesses that did not
give rise to any asbestos-related or other claims against Raymark,
(iii) permitting Raymark to retain the proceeds for its ongoing
business and creditors, (iv) entering the transactions in good
faith and not to hinder, delay or defraud creditors, and (v)
conducting its affairs independent of Raymark.
In May 1988, following shareholder approval, Raytech sold
all of the Raymark stock to Asbestos Litigation Management, Inc.,
thereby divesting itself of Raymark. Consideration received for
the Raymark stock consisted of $50 cash paid at the closing and a
7-l/2% $950 promissory note to be paid in six equal annual
installments beginning one year after the closing with interest
payable annually. This transaction resulted in a pretax loss of
approximately $59,000 which was reflected in the 1988 consolidated
financial statements.
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 was also
informed that as a result of the dismissal of the involuntary
petition, Raymark again encountered asbestos-related lawsuits but
had received $27 million from a state guarantee association to
make up the insurance policies of the insolvent carrier and had
<PAGE>
$32 million in other policies to defend against such litigation.
However, in March 1998 Raymark filed a voluntary bankruptcy
petition naming several large asbestos-related judgment creditors.
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
relating to a determination of equity security holders' interest
in the estate.
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
<PAGE>
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.
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 Raymark in the amount of $12 million arising out
of alleged Resource Conservation and Recovery Act violations at
Raymark's Stratford, Connecticut, manufacturing facility.
<PAGE>
In January 1997, the U.S. Environmental Protection Agency
("EPA") and the State of Connecticut filed suit against Raymark
claiming an amended amount of $300 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. 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 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. The
discovery process in this action is nearing completion. 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 source of 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. The Company incurred $1,751 in legal and testing costs
associated with this matter during fiscal years 1996 and 1997 and
has filed for reimbursement from Raymark under the indemnification
agreement. The amount is included in other current assets at
December 28, 1997. An additional $66 in legal costs has been
incurred in 1998.
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.
Potential fines for the violations were as high as $4.6 million;
however, 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 $324. Finalization of the consent
<PAGE>
judgment now is pending before a Michigan State Court. The
Company has accrued the 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 to what extent 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 is reviewing the Debtor's
Plan to determine applicability and possible amendment in view
of developments in the bankruptcy proceedings. 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. 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.
<PAGE>
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 have returned to Bankruptcy Court procedures.
Efforts to reach a consensual plan of reorganization are
continuing. 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.
The process for confirmation of a reorganization plan
was begun in 1996 and continues with adversary positions being
presented to the Bankruptcy Court by the parties concerning the
claims bar date, the notice to claimants and estimation of
claims.
In November 1996, Raytech filed an adversary
proceeding complaint against the creditors' committee, seeking
a declaratory judgment of the Bankruptcy Court that Raytech's
liability to present and future creditors as a successor to
Raymark is limited pursuant to bankruptcy law. The creditors'
committee filed a motion for a summary judgment, which was
granted by the Bankruptcy Court at a hearing in August 1997.
Raytech has filed an appeal of the order.
Several other matters have been filed in the
Bankruptcy Court in 1996 and 1997 but not acted upon as yet and
remain pending, including: (1) A creditors' committee motion
for the appointment of a trustee to manage the Company; (2)
Raytech's motion to dismiss its bankruptcy petition based upon
Raymark providing indemnity for liability claims that may be
filed against it; (3) a creditors' committee adversary
proceeding complaint seeking to assert control over Raymark and
its assets on the grounds of fraudulent transfers in the
reorganization of Raytech in 1986 and the divestiture of
Raymark in 1988; (4) a creditors' committee adversary
proceeding complaint to litigate alternative theories of
liability of Raytech other than successor liability; and (5) a
creditors' committee adversary proceeding complaint to sanction
Raytech for violation of a stipulation to give notice for non-
ordinary course transactions by Raytech subsidiaries. In March
1998, the creditors' committee filed a motion to activate the
complaint seeking to assert control over Raymark and its
assets, which is pending before the Court.
In February 1997, Raytech resumed making monthly
payments of $650,000 to Raymark pursuant to the 1987 Asset
Purchase Agreement as amended, to ensure indemnification for
Raymark liabilities. In November 1997, the creditors'
committee filed an adversary proceeding complaint and motion
for a temporary restraining order to halt the payments based
upon several theories, including a waste of assets and breach
<PAGE>
of a prior stipulation and fiduciary duty. In January 1998,
the Bankruptcy Court enjoined the payments pending a trial.
Raymark's retirees were notified by letter that their benefits
would cease after February 1998 due to the effect of the
cessation of payments from Raytech under the injunction.
Raymark and Raymark retirees intervened in the action resulting
in a Bankruptcy Court order to Raytech to supplement Raymark's
obligations to its retirees pending a trial in April 1998. In
March 1998, prior to the trial, Raytech advised the Court that
under the circumstances it would not make the payments
resulting in the trial being put over and the order concerning
Raymark's obligations to its retirees put in abeyance.
Following Raytech's cessation of the $650,000 note
payments in December 1997, Raymark commenced 33 separate
lawsuits against Raytech subsidiaries in various jurisdictions
from New York to California ("Raymark Litigation") demanding
payment or the return of assets for breach of contract.
Raytech filed an adversary proceeding complaint to halt the
Raymark litigation and was granted a temporary restraining
order in December 1997 by the Bankruptcy Court that remains in
effect. The creditors' committee intervened in the action in
support of the restraining order.
In March and April 1998 Raymark and its parent,
Raymark Corporation, filed voluntary petitions in bankruptcy in
a Utah Court which stayed all litigation in the Raytech
bankruptcy in which Raymark was a party. In connection with
its attempt to assert control over Raymark and its assets the
creditors' committee, joined by Raytech, the Guardian Ad Litem
for future claimants, the equity committee and the government
agencies moved to have the venue of the Raymark bankruptcies
transferred from Utah to the Connecticut Court. In July 1998,
the Bankruptcy Court issued an order on the motions and
transferred venue to the Connecticut Court. Raymark has filed
an appeal of the order.
In relation to the termination of Craig R. Smith as
Chief Executive Officer and his claims for severance in the
amount of $279, the Bankruptcy Court temporarily restrained any
payment pursuant to an action filed by the creditors'
committee. Raytech advised the Court that under the
circumstances it would not make the severance payments
resulting in the withdrawal of the adversary action.
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
<PAGE>
required, the Company will seek an injunction in the Bankruptcy
Court to halt the litigation.
Costs incurred by the Company for asbestos related
liabilities are subject to indemnification by Raymark under the
1987 acquisition agreements. By agreement, in the past,
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.
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>
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 28, 1998 and December 28, 1997, the
results of operations for the twenty-six weeks ended June 28,
1998 and statements of cash flows for the twenty-six weeks
ended June 28, 1998. All adjustments are of a normal recurring
nature except for the reversal of $800 in environmental
accruals for the quarter ended June 29, 1997. 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 28, 1997.
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 28, 1998 December 28, 1997
Raw material $10,829 $10,751
Work in process 7,808 7,760
Finished goods 11,470 9,691
$30,107 $28,202
<PAGE>
NOTE D - EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic EPS Computation
Numerator 5,817 5,143 9,511 9,425
Denominator:
Common shares outstanding at
beginning of year 3,285,308 3,239,762 3,285,308 3,239,762
Weighted average of stock options
exercised 128,392 17,687 96,639 12,370
Weighted average shares 3,413,700 3,257,449 3,381,947 3,252,132
Basic earnings per share 1.70 1.58 2.81 2.90
Diluted EPS Computation
Numerator 5,817 5,143 9,511 9,425
Denominator:
Common shares outstanding
at beginning of year 3,285,308 3,239,762 3,285,308 3,239,762
Weighted average of stock options
exercised 128,392 17,687 96,639 12,370
Dilutive potential common shares 176,137 267,574 176,337 270,943
Adjusted weighted average shares 3,589,837 3,525,023 3,558,284 3,523,075
Diluted earnings per share 1.62 1.46 2.67 2.68
</TABLE>
<PAGE>
NOTE E - Comprehensive Income
During the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" and has elected to report
comprehensive income in the condensed consolidated statement of
shareholders' equity. Comprehensive income is the change in
equity from transactions and other events from nonowner
sources. Comprehensive income includes net income and other
comprehensive income. The components and related activity of
accumulated other comprehensive income, resulting from foreign
currency adjustments, are as follows:
Accumulated
Other
Comprehensive Income
Balance December 29, 1996 $ 1,918
Changes year-to-date (1,070)
Balance June 29, 1997 $ 848
Balance December 28, 1997 $ 715
Changes year-to-date (126)
Balance June 28, 1998 $ 589
Note F - Acquisition of Common Stock of AFM
In January 1996 RCI acquired 47% of the stock of
Advanced Friction Materials Company ("AFM"). The Stock
Purchase Agreement ("Agreement") provided for the 53% stock
owner to put his stock to RCI anytime after two years. The
owner put 53% of AFM stock to RCI which assigned its obligation
to purchase the stock to AFM. Based on the formulated amount
of $6,044 in accordance with the Agreement AFM redeemed 53% of
its stock by paying $3,022 in April 1998, and the balance of
$3,022 is payable in three equal annual installments. The note
bears interest at a rate equal to the prime rate as stated in
THE WALL STREET JOURNAL. Effective April 1998, Raytech has
consolidated the results of AFM, which were previously recorded
under the equity method. The pro forma effect on operations
had Raytech made the acquisition at the beginning of the period
is not significant.
With the redemption of 53% of AFM Stock, AFM became a
wholly-owned subsidiary of RCI. AFM has a revolving line of
credit, payable to NationsCredit Commercial Funding which
provides for borrowings up to $10 million in the aggregate.
The loan bears an interest rate of .50% above the prime rate.
The outstanding balance under the line of credit is $4,796 at
<PAGE>
June 28, 1998. The additional borrowing availability at
June 28, 1998 is $2,204 based upon the asset borrowing formula.
<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 28, 1998 amounted to $5,817 or $1.70 per basic share as
compared with $5,143 or $1.58 per basic share for the
corresponding period in 1997. For the twenty-six week period,
net income amounted to $9,511 or $2.81 per basic share compared
with net income of $9,425 or $2.90 per basic share for the same
period in 1997. The positive results are due to increased
sales volume, improved gross margin and a lower effective tax
rate partially offset by increased selling and interest
expense.
The decrease in basic earnings per share "EPS" is
primarily due to the greater weighted average of stock options
exercised during the period as compared to fiscal 1997. The
effect of which diluted the weighted average shares used in the
calculation of EPS (see Note D).
Net Sales
Net sales for the thirteen-week period ended June 28,
1998 increased 4.75% to $63,645 as compared with $60,760 for
the same period one year ago. Net sales for the twenty-six
week period ended June 28, 1998 increase 5.55% to $126,540 as
compared with $119,881 for the same period one year ago. The
overall improvement is primarily due to additional sales volume
within the domestic OEM market segment. In addition, certain
product lines within the aftermarket segment showed modest
growth as the Company continues to increase market share.
European sales increased by $2,082. However, due to adverse
foreign currency fluctuation that was reduced to $200 for the
period.
Revenue increased by approximately $1.9 million as a
result of the consolidation of AFM.
Gross Margin
Gross profit margin as a percentage of sales for the
thirteen-week period ended June 28, 1998 is 25.88%, as compared
to 22.52% for the same period one year ago. For the twenty-six
week period ended June 28, 1998 gross profit margin as a
percentage of sales is 24.63% as compared to 23.03% for the
same period one year ago. The overall increase is primarily
due to increased unit production coupled with a favorable mix
of higher margin units being sold. However, the improvements
were partially offset by an increase in domestic manufacturing
<PAGE>
labor and material costs, contractual price reductions to
certain customers and a lower gross margin on domestic
construction and foreign heavy duty sales.
Selling, General and Administrative Expense
Selling, general and administrative expenses
increased to $15,616 as compared to $12,969 for the six months
ended June 28, 1998. The increase is largely due to selling
expenses of $1,660 associated with the AFM consolidation. In
addition, shipping costs were up due to increased sales volume.
In the second quarter 1997, there was a net reversal of $800 in
accruals that had been established in 1996 relating to
environmental violations at the Company's Sterling Heights
facility.
Interest Expense
Interest expense increased primarily due to higher
average borrowings and the additional debt associated with the
consolidation of AFM (Note F).
Income Taxes
The effective tax rate for the twenty-six weeks ended
June 28, 1998 is 26.1%. This rate reflects a reduction for
certain costs incurred by Raytech for asbestos-related
liabilities subject to indemnification by Raymark under the
1987 acquisition agreements. Included in the 1998 consolidated
tax provision is a provision for foreign taxes in the amount of
$185. Included in the 1997 consolidated tax provision is a
reserve adjustment for $1,000 relating to Germany net operating
loss carryforwards.
Impact of Year 2000 Computer-Related Issues
Raytech's RPC subsidiary is currently implementing
new computer systems at an approximate cost of $2 million to be
completed in 1999. The new systems will be Year 2000
compliant. Other subsidiaries are currently assessing the
impact of the Year 2000 compliance, and the Company does not
expect the cost to be material to its financial position or
results of operations or cash flows.
Recently Issued Accounting Pronouncements
In 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued, effective for
fiscal 1999. SFAS 131 changes the way public companies report
information about operating segments. The Company will adopt SFAS
131 in its annual financial statements for fiscal 1998 and is
still assessing the impact of this statement on its disclosures.
<PAGE>
In February 1998, SFAS No. 132, "Employers' Disclosure
Disclosures about Pensions and Other Postretirement Benefits," was
issued, effective for fiscal 1998. The Company will adopt SFAS
132 in its annual financial statements for fiscal 1998 and is
still assessing the impact of this statement on its disclosures.
Liquidity and Capital Resources
During the first half of fiscal 1998, the Company
generated positive cash flow from operating activities in the
amount of $5.7 million. The positive cash flow is the result
of the favorable earnings during the first half of fiscal 1998.
Capital expenditures year-to-date for fiscal 1998 amounted to
$8.3 million, which is consistent with the Company's projected
spending plan for 1998.
In November 1997, RPC refinanced its revolving line
of credit in an effort to reduce its interest rate and to
minimize facility fees. The new loan agreement with
NationsCredit, Commercial Funding provides for RPC to borrow up
to $17 million in the aggregate, consisting of a revolving line
of credit of $10 million and a term loan of $7 million for
capital equipment purchases. The loans bear an interest rate
of .50% above the prime rate. The loans are collateralized by
accounts receivable, inventory and machinery and equipment.
The revolving loan allows the Company to borrow based on a
borrowing base formula as defined in the Loan and Security
Agreement (the "Agreement"). The Agreement includes certain
covenant restrictions, including restrictions on dividends
payable to Raytech Composites, Inc. ("RCI"), a wholly-owned
subsidiary of the Company. At June 28, 1998, the net
restricted assets of RPC amounted to $30,000 consisting of
cash, inventory, machinery and equipment and all other tangible
and intangible assets, excluding land and buildings. The
purpose of the loan is to refinance existing indebtedness and
for general working capital needs. The outstanding balance
under the revolving line of credit is $6,173 and under the term
loan is $6,229 at June 28, 1998, respectively. The additional
borrowing availability on the revolving line of credit at
June 28, 1998 is $0, based upon the asset borrowing formula.
In January 1996 RCI acquired 47% of the stock of
Advanced Friction Materials Company ("AFM"). The Stock
Purchase Agreement ("Agreement") provided for the 53% stock
owner to put his stock to RCI anytime after two years. The
owner put 53% of AFM stock to RCI which assigned its obligation
to purchase the stock to AFM. Based on the formulated amount
of $6,044 in accordance with the Agreement AFM redeemed 53% of
its stock by paying $3,022 in April 1998, and the balance of
$3,022 is payable in three equal annual installments. The note
bears interest at a rate equal to the prime rate as stated in
THE WALL STREET JOURNAL.
<PAGE>
With the redemption of 53% of AFM Stock, AFM became a
wholly-owned subsidiary of RCI. AFM has a revolving line of
credit, payable to NationsCredit Commercial Funding which
provides for borrowings up to $10 million in the aggregate.
The loan bears an interest rate of .50% above the prime rate.
The outstanding balance under the line of credit is $4,796 at
June 28, 1998. The additional borrowing availability at
June 28, 1998 is $2,204 based upon the asset borrowing formula.
At June 28, 1998, the Company's wholly-owned German
subsidiaries had available unused lines of credit amounting to
DM2,036 ($1,126) which all expire on demand.
Management believes that the Company will generate
sufficient cash flow from operations during the balance of 1998
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. However,
in March 1998 Raymark filed a voluntary bankruptcy petition
again staying the litigation.
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
<PAGE>
coverage of approximately $395 million. Raytech management was
also informed that as a result of the dismissal of the
involuntary petition, Raymark again encountered asbestos-related
lawsuits but had received $27 million from a state
guarantee association to make up the insurance policies of the
insolvent carrier and had $32 million in other policies to
defend against such litigation. However, in March 1998 Raymark
filed a voluntary bankruptcy petition naming several large
asbestos-related judgment creditors.
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. The
successor ruling was appealed by Raytech and in October 1992
the Ninth Circuit Court of Appeals affirmed the District
Court's judgment on the grounds stated in the District Court's
opinion. The effect of this decision extends beyond the Oregon
District due to a Third Circuit Court of Appeals decision in a
related case cited below wherein Raytech was collaterally
estopped (precluded) from relitigating the issue of its
successor liability for Raymark's asbestos-related liabilities.
As the result of the inability of Raymark to fund
Raytech's cost of defense recited above, and in order to obtain
a ruling binding across all jurisdictions on whether Raytech is
liable as a successor for asbestos-related and other claims
including claims yet to be filed relating to the operations of
Raymark or Raymark's predecessors, on March 10, 1989 Raytech
filed a petition seeking relief under Chapter 11 of Title 11,
United States Code in the United States Bankruptcy Court,
District of Connecticut. Under Chapter 11, substantially all
litigation against Raytech has been stayed while the debtor
corporation and its non-filing operating subsidiaries continue
to operate their businesses in the ordinary course 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 relating to a determination of
equity security holders' interest in the estate.
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
<PAGE>
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.
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
<PAGE>
a nominal civil penalty. The estimated cost for Raymark to
comply with the order is $1.2 million. The DER has reserved
its right to reinstitute an action against the Company and the
other parties to the DER order in the event Raymark fails to
comply with its obligations under the Consent Order. Another
environmental claim was filed against the Company by the U.S.
Environmental Protection Agency for civil penalties charged
Raymark in the amount of $12 million arising out of alleged
Resource Conservation and Recovery Act violations at Raymark's
Stratford, Connecticut, manufacturing facility.
In January 1997, the U.S. Environmental Protection Agency
("EPA") and the State of Connecticut filed suit against Raymark
claiming damages for cleanup of the Stratford, Connecticut,
site in an amended amount of $300 million. 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. 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 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. The discovery process in this action is nearing
completion. 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 source of 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. The
Company incurred $1,751 in legal and testing costs associated
with this matter in 1996 and 1997 and has filed for
reimbursement from Raymark under the indemnification agreement.
An additional $66 in legal costs has been incurred in 1998.
<PAGE>
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. Potential fines for the violations were as high as
$4.6 million; however, 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 $324. Finalization of the
consent judgment now is pending before a Michigan State Court.
The Company has accrued the 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 to what extent 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 is reviewing the Debtor's
Plan to determine applicability and possible amendment in view
of developments in the bankruptcy proceedings referenced in
this Item 3. In September 1994, the Creditors' Committee filed
its own Plan of Reorganization in competition to the Debtor's
<PAGE>
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.
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.
Raytech believes the Creditors' Plan is unconfirmable and will
vigorously contest attempts to have it confirmed. The
competing plans of Raytech and its creditors have returned to
Bankruptcy Court procedures. Efforts to reach a consensual
plan of reorganization are continuing. 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.
The process for confirmation of a reorganization plan was
begun in 1996 and continues with adversary positions being
presented to the Bankruptcy Court by the parties concerning the
claims bar date, the notice to claimants and estimation of
claims.
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 as a successor to
Raymark is limited pursuant to bankruptcy law. The creditors'
committee filed a motion for a summary judgment, which was
granted by the Bankruptcy Court at a hearing in August 1997.
Raytech has filed an appeal of the order.
Several other matters have been filed in the Bankruptcy
Court in 1996 and 1997 but not acted upon as yet and remain
pending, including: (1) A creditors' committee motion for the
appointment of a trustee to manage the Company; (2) Raytech's
motion to dismiss its bankruptcy petition based upon Raymark
providing indemnity for liability claims that may be filed
against it; (3) a creditors' committee adversary proceeding
complaint seeking to assert control over Raymark and its assets
on the grounds of fraudulent transfers in the reorganization of
Raytech in 1986 and the divestiture of Raymark in 1988; (4) a
creditors' committee adversary proceeding complaint to litigate
alternative theories of liability of Raytech other than
successor liability; and (5) a creditors' committee adversary
proceeding complaint to sanction Raytech for violation of a
stipulation to give notice for non-ordinary course transactions
<PAGE>
by Raytech subsidiaries. In March 1998, the creditors'
committee filed a motion to activate the complaint seeking to
assert control over Raymark and its assets which is pending
before the Court.
In February 1997, Raytech resumed making monthly payments
of $650,000 to Raymark pursuant to the 1987 Asset Purchase
Agreement as amended, to ensure indemnification for Raymark
liabilities. In November 1997, the creditors' committee filed
an adversary proceeding complaint and motion for a temporary
restraining order to halt the payments based upon several
theories, including a waste of assets and breach of a prior
stipulation and fiduciary duty. In January 1998, the
Bankruptcy Court enjoined the payments pending a trial.
Raymark's retirees were notified by letter that their benefits
would cease after February 1998 due to the effect of the
cessation of payments from Raytech under the injunction.
Raymark and Raymark retirees intervened in the action resulting
in a Bankruptcy Court order to Raytech to supplement Raymark's
obligations to its retirees pending a trial in April 1998. In
March 1998, prior to the trial, Raytech advised the Court that
under the circumstances it would not make the payments
resulting in the trial being put over and the order concerning
Raymark's obligations to its retirees put in abeyance.
Following Raytech's cessation of the $650,000 note
payments in December 1997, Raymark commenced 33 separate
lawsuits against Raytech subsidiaries in various jurisdictions
("Raymark Litigation") demanding payment or the return of
assets for breach of contract. Raytech filed an adversary
proceeding complaint to halt the Raymark litigation and was
granted a temporary restraining order in December 1997 by the
Bankruptcy Court that remains in effect. The creditors'
committee intervened in the action in support of the
restraining order.
In March and April 1998 Raymark and its parent, Raymark
Corporation, filed voluntary petitions in bankruptcy in a Utah
Court which stayed all litigation in the Raytech bankruptcy in
which Raymark was a party. In connection with its attempt to
assert control over Raymark and its assets, the creditors'
committee joined by Raytech, the guardian ad litem for future
claimants, the equity committee and the government agencies
moved to have the venue of the Raymark bankruptcies transferred
from Utah to the Connecticut Court. In July 1998, the
Bankruptcy Court issued an order on the motions and transferred
venue to the Connecticut Court. Raymark has filed an appeal of
the order.
In relation to the termination of Craig R. Smith as Chief
Executive Officer and his claims for severance in the amount of
$279, the Bankruptcy Court temporarily restrained any payment
<PAGE>
pursuant to an action filed by the creditors' committee.
Raytech advised the Court that under the circumstances it would
not make the severance payments resulting in the withdrawal of
the adversary action.
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 seek an
injunction in the Bankruptcy Court to halt the litigation.
Costs incurred by the Company for asbestos related
liabilities are subject to indemnification by Raymark under the
1987 acquisition agreements. By agreement, in the past, 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.
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
<PAGE>
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/JOHN B. DEVLIN
John B. Devlin
Vice President, Treasurer
and Chief Financial Officer
Date: August 7, 1998
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