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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) [X]
    
    Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
 For the Quarter Ended June 27, 2004,
or [  ]
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to Commission File Number 1-9298 RAYTECH CORPORATION 
  Delaware
    
    06-1182033(State or other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)
 Suite 295, Four Corporate DriveShelton, Connecticut
    
    06484(Address of Principal Executive Offices)
    
    (Zip Code)
 203-925-8021
(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 [  ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes
[  ]   No [X] Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes
[X]   No [  ] As of July 30, 2004, 41,737,306 shares of common stock were outstanding
and the aggregate market value of these shares (based upon the closing price of
Raytech common stock on the New York Stock Exchange) on such date held by
non-affiliates was approximately $10.5 million.




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RAYTECH CORPORATION INDEX  
 PageNumberPART I. FINANCIAL INFORMATION:Item 1.Financial StatementsCondensed Consolidated Balance Sheets at June 27, 2004 and December 28, 2003
    
    
    3Condensed Consolidated Statements of Operations for the 13 and 26 weeks ended June 27, 2004 and June 29, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the 26 weeks ended June 27, 2004 and June 29, 2003
    
    
    5Condensed Consolidated Statements of Changes in Shareholders Equity for the 26 weeks ended June 27, 2004 and June 29, 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    32Item 2.Changes in Securities and Use of Proceeds
    
    
    32Item 4.Submission of Matters to a Vote of Security Holders
    
    
    32Item 6.Exhibits and Reports on Form 8-K
    
    
    33Signature
    
    
    34EX-10.A: MORTGAGE DATED APRIL 28, 2004EX-10.B: AGREEMENT BETWEEN AP SERVICES, LLC AND RAYTECH CORPORATIONEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
  -2-




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RAYTECH CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEETS
   June 27,
    
    December 28,2004
    
    2003ASSETSCurrent assetsCash and cash equivalents
    
    $
    15,972
    
    
    $
    16,413Restricted cash
    
    
    5,225
    
    
    
    4,872Trade accounts receivable, less allowance
of $1,028 and $1,250
    
    
    31,888
    
    
    
    24,739Inventories, net
    
    
    33,228
    
    
    
    30,877Income taxes receivable
    
    
    143
    
    
    
    1,085Other current assets
    
    
    6,377
    
    
    
    5,770Total current assets
    
    
    92,833
    
    
    
    83,756Property, plant and equipment
    
    
    126,992
    
    
    
    126,059Less accumulated depreciation
    
    
    (43,819
    )
    
    
    (36,824
    )Net property, plant and equipment
    
    
    83,173
    
    
    
    89,235Goodwill, net
    
    
    5,912
    
    
    
    5,912Other intangible assets, net
    
    
    23,690
    
    
    
    24,652Other assets
    
    
    2,600
    
    
    
    2,469Total assets
    
    $
    208,208
    
    
    $
    206,024LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesNotes payable and current portion of long-term debt
    
    $
    11,765
    
    
    $
    8,092Current portion of pension obligation
    
    
    5,190
    
    
    
    5,190Accounts payable
    
    
    13,582
    
    
    
    14,609Accrued liabilities
    
    
    28,390
    
    
    
    26,636Payable to the PI Trust
    
    
    3,220
    
    
    
    3,815Total current liabilities
    
    
    62,147
    
    
    
    58,342Long-term debt
    
    
    12,691
    
    
    
    14,354Pension obligation
    
    
    11,322
    
    
    
    13,453Postretirement benefits other than pension
    
    
    15,758
    
    
    
    15,103Deferred payable to the PI Trust
    
    
    11,887
    
    
    
    11,887Deferred income taxes
    
    
    6,827
    
    
    
    6,881Other long-term liabilities
    
    
    606
    
    
    
    706Total liabilities
    
    
    121,238
    
    
    
    120,726Minority interest
    
    
    9,931
    
    
    
    9,388Commitments and contingenciesShareholders EquityCapital stockCumulative preferred stock, no par value,
5,000,000 shares authorized, none issued and
outstanding
    
    
    
    
    
    
    Common stock, par value $1.00, 50,000,000 shares
authorized, 41,737,306 issued and
outstanding
    
    
    41,737
    
    
    
    41,737Additional paid in capital
    
    
    117,574
    
    
    
    117,574Accumulated deficit
    
    
    (73,437
    )
    
    
    (74,845
    )Accumulated other comprehensive loss
    
    
    (8,835
    )
    
    
    (8,556
    )Total shareholders equity
    
    
    77,039
    
    
    
    75,910Total liabilities and shareholders equity
    
    $
    208,208
    
    
    $
    206,024
 The accompanying notes are an integral part of these statements. -3-




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RAYTECH CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   For the 13 weeks ended
    
    For the 26 weeks endedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    58,405
    
    
    $
    54,093
    
    
    $
    115,003
    
    
    $
    109,828Cost of sales
    
    
    45,876
    
    
    
    45,935
    
    
    
    91,415
    
    
    
    92,785Gross profit
    
    
    12,529
    
    
    
    8,158
    
    
    
    23,588
    
    
    
    17,043Selling, general and
administrative expenses
    
    
    10,424
    
    
    
    8,427
    
    
    
    19,026
    
    
    
    16,706Operating profit (loss)
    
    
    2,105
    
    
    
    (269
    )
    
    
    4,562
    
    
    
    337Interest expense
    
    
    348
    
    
    
    278
    
    
    
    663
    
    
    
    515Other expense (income), net
    
    
    375
    
    
    
    (403
    )
    
    
    82
    
    
    
    (418
    )Income (loss) before provision for
environmental claims, income
taxes and minority interest
    
    
    1,382
    
    
    
    (144
    )
    
    
    3,817
    
    
    
    240Provision for environmental claims
    
    
    
    
    
    
    1,762
    
    
    
    
    
    
    
    1,762Income (loss) before provision
for income taxes and
minority interest
    
    
    1,382
    
    
    
    (1,906
    )
    
    
    3,817
    
    
    
    (1,522
    )Provision (benefit) for income taxes
    
    
    1,038
    
    
    
    (586
    )
    
    
    1,866
    
    
    
    (402
    )Income (loss) before minority interest
    
    
    344
    
    
    
    (1,320
    )
    
    
    1,951
    
    
    
    (1,120
    )Minority interest
    
    
    287
    
    
    
    219
    
    
    
    543
    
    
    
    492Net income (loss)
    
    $
    57
    
    
    $
    (1,539
    )
    
    $
    1,408
    
    
    $
    (1,612
    )Basic earnings (loss) per share
    
    $
    .00
    
    
    $
    (.04
    )
    
    $
    .03
    
    
    $
    (.04
    )Diluted earnings (loss) per share
    
    $
    .00
    
    
    $
    (.04
    )
    
    $
    .03
    
    
    $
    (.04
    )
 The accompanying notes are an integral part of these statements. -4-




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RAYTECH CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   For the 26 weeks endedJune 27,
    
    June 29,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    1,408
    
    
    $
    (1,612
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation and amortization
    
    
    8,344
    
    
    
    9,192Other non-cash items
    
    
    (569
    )
    
    
    419Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (7,080
    )
    
    
    (4,149
    )Inventories
    
    
    (1,510
    )
    
    
    1,328Accounts payable
    
    
    (1,011
    )
    
    
    33Other operating assets and liabilities, net
    
    
    (17
    )
    
    
    (1,249
    )Net cash (used in) provided by operating activities
    
    
    (435
    )
    
    
    3,962Cash flow from investing activities:Capital expenditures
    
    
    (1,754
    )
    
    
    (5,547
    )Restricted cash
    
    
    (353
    )
    
    
    (2,001
    )Net cash used in investing activities
    
    
    (2,107
    )
    
    
    (7,548
    )Cash flow from financing activities:Net borrowings (payments) on short-term notes
    
    
    3,676
    
    
    
    (1,729
    )Principal payments on long-term debt
    
    
    (1,506
    )
    
    
    (1,188
    )Proceeds from long-term borrowings
    
    
    
    
    
    
    1,146Proceeds from the exercise of stock options
    
    
    
    
    
    
    152Net cash provided by (used in) financing activities
    
    
    2,170
    
    
    
    (1,619
    )Effect of exchange rate changes on cash
    
    
    (69
    )
    
    
    217Net change in cash and cash equivalents
    
    
    (441
    )
    
    
    (4,988
    )Cash and cash equivalents at
beginning of period
    
    
    16,413
    
    
    
    19,983Cash and cash equivalents at end of period
    
    $
    15,972
    
    
    $
    14,995
 The accompanying notes are an integral part of these statements. -5-




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RAYTECH CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
   AccumulatedAdditional
    
    
    
    
    
    OtherCommon
    
    Paid in
    
    Accumulated
    
    ComprehensiveStock
    
    Capital
    
    Deficit
    
    Income (Loss)
    
    TotalBalance,
December 29, 2002
    
    $
    41,701
    
    
    $
    117,458
    
    
    $
    (8,402
    )
    
    $
    (8,647
    )
    
    $
    142,110Comprehensive (loss) income:Net loss
    
    
    
    
    
    
    
    
    
    
    (1,612
    )
    
    
    
    
    
    
    (1,612
    )Currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    838
    
    
    
    838Total comprehensive
(loss) income
    
    
    
    
    
    
    
    
    
    
    (1,612
    )
    
    
    838
    
    
    
    (774
    )Stock options exercised
    
    
    36
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    152Balance,
June 29, 2003
    
    $
    41,737
    
    
    $
    117,574
    
    
    $
    (10,014
    )
    
    $
    (7,809
    )
    
    $
    141,488Balance,
December 28, 2003
    
    $
    41,737
    
    
    $
    117,574
    
    
    $
    (74,845
    )
    
    $
    (8,556
    )
    
    $
    75,910Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    1,408
    
    
    
    
    
    
    
    1,408Currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (279
    )
    
    
    (279
    )Total comprehensive
income (loss)
    
    
    
    
    
    
    
    
    
    
    1,408
    
    
    
    (279
    )
    
    
    1,129Balance,
June 27, 2004
    
    $
    41,737
    
    
    $
    117,574
    
    
    $
    (73,437
    )
    
    $
    (8,835
    )
    
    $
    77,039
 The accompanying notes are an integral part of these statements. -6-




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RAYTECH CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Note A  Summary of Significant Accounting Policies Presentation of Condensed Unaudited Consolidated Financial Statements These condensed unaudited consolidated financial statements have been
prepared pursuant to the requirements of Article 10 of Regulation S-X, and
in the opinion of management, contain all adjustments necessary to fairly
present the consolidated financial position of Raytech Corporation (the
Company) as of June 27, 2004 and the consolidated results of operations
and cash flows for all interim periods presented. All adjustments are of a
normal recurring nature. The year-end condensed consolidated balance sheet
data was derived from audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the
United States of America. The financial statements contained herein should
be read in conjunction with the Companys financial statements and related
notes filed on Form 10-K for the year ended December 28, 2003. Interim
results are not necessarily indicative of the results for the full year. Reclassification Certain fiscal 2003 amounts on the accompanying condensed consolidated
statements of operations for the periods ended June 29, 2003 have been
reclassified to present the interim period in a manner consistent with the
annual financial statements filed on Form 10-K for the year ended December
28, 2003. The reclassification has no impact on income (loss) before
provision for income taxes and minority interest. Stock-Based Compensation The Company accounts for stock-based compensation using the intrinsic
value-based method of accounting in accordance with Accounting Principles Board
Opinion No. 25, under which no compensation cost is recognized for stock
options granted at fair market value. Had compensation costs of stock options
been determined under a fair value alternative method as stated in Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an Amendment of FASB Statement No.
123, the Company would have been required to record the fair value for such
options and record such amount in the consolidated financial statements as
compensation expense. Pro forma stock-based employee compensation costs, net
income (loss) and earnings (loss) per share, as they would have been recognized
if the fair value method had been applied to all awards, are presented in the
table below. 13 weeks ended
    
    26 weeks endedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net income (loss):As reported
    
    $
    57
    
    
    $
    (1,539
    )
    
    $
    1,408
    
    
    $
    (1,612
    )Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (670
    )
    
    
    (671
    )
    
    
    (1,341
    )
    
    
    (1,084
    )Pro forma
    
    $
    (613
    )
    
    $
    (2,210
    )
    
    $
    67
    
    
    $
    (2,696
    )Basic earnings (loss) per share:As reported
    
    $
    .00
    
    
    $
    (.04
    )
    
    $
    .03
    
    
    $
    (.04
    )Pro forma
    
    $
    (.01
    )
    
    $
    (.05
    )
    
    $
    .00
    
    
    $
    (.06
    )Diluted earnings (loss) per share:As reported
    
    $
    .00
    
    
    $
    (.04
    )
    
    $
    .03
    
    
    $
    (.04
    )Pro forma
    
    $
    (.01
    )
    
    $
    (.05
    )
    
    $
    .00
    
    
    $
    (.06
    )
 -7-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note A, continued During the first quarter of fiscal 2003, the Company granted options for
1,601,000 shares of common stock with an exercise price of $5.70 per share.
The fair value of these options was estimated at $3.22 per common share on the
date of grant, using the Black-Scholes option pricing model with the following
assumptions:
expected volatility of 56.7%, dividend yield of 0.00%, risk free interest rate
of 3.60% and an expected life of the options of six years. During the second
quarter of fiscal 2003, the Company granted options for 1,172,000 shares of
common stock with an exercise price of $5.70 per share. The fair value of
these options was estimated at $2.05 per common share on the date of grant,
using the Black-Scholes option pricing model with the following assumptions:
expected volatility of 62.30%, dividend yield of 0.00%, risk free interest rate
of 2.84% and an expected life of the options of six years. There were no options granted during the 26 weeks ended June 27, 2004. For a summary of all other significant accounting policies, refer to
Note A to the consolidated financial statements included with the 2003 Form
10-K. Note B  Liquidity The most significant factor affecting the Companys future cash flows is
its ability to earn and collect cash from customers. The automotive parts
industry is extremely competitive. Many of the Companys customers and
competitors are significantly larger than the Company. The Companys customers
are often able to demand price reductions from the suppliers including all
segments of Raytech. Some of the Companys sales are made under standard sales
contracts that include price commitments for multiple years. Specifically in
the Domestic Wet Friction segment, the Company is selling certain products to
certain customers at a loss under the terms of its current sales contracts.
The Company is currently working with its customers to re-negotiate the terms
of these loss contracts. In addition, the Company is reviewing strategic
alternatives to improve its cost structure. Cash used by operating activities for the 26 weeks ended June 27, 2004 was
$.4 million compared to cash provided by operating activities of $4.0 million
during the same period last year. The principal operating use of cash during
the first half of 2004 was an increase in working capital primarily driven by
an increase in trade accounts receivable. The increase in trade accounts
receivable at June 27, 2004 compared to December 28, 2003 is attributable to
higher sales during the second quarter of 2004 compared to the fourth quarter
of 2003. Compared to the same period last year, trade accounts receivable
levels are relatively unchanged. The Companys average days sales in trade
receivables was 51 and 52 days at June 27, 2004 and June 29, 2003,
respectively. Capital expenditures during the first 26 weeks of 2004 were $1.8 million
compared to $5.5 million during the first 26 weeks of 2003. Capital
expenditures for the full year 2004 are expected to be approximately
$7.5 million. The Companys cash and cash equivalents at June 27, 2004 totaled $16.0
million compared to $16.4 million at December 28, 2003, a decrease of $.4
million. -8-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note B, continued The total borrowings at June 27, 2004 of $24.5 million compares to total
borrowings of $22.4 million
at year-end 2003, an increase of $2.1 million period-over-period. The
available lines of credit at June 27, 2004 of $9.7 million compares to $10.6
million at year-end 2003, a decrease in availability of $.9 million. Full
details of the Companys debt are contained in Note F to the Condensed
Consolidated Financial Statements. In summary of the above, the cash and available lines of credit at June
27, 2004 were $25.7 million compared to $27.0 million at year-end 2003, a
decrease in cash and available lines of credit of $1.3 million. Refer to Notes F  Debt and N  Commitments to the consolidated financial
statements, included within the Companys 2003 Form 10-K, for information
regarding the Companys obligations and commitments by year. These obligations
and commitments consist of long-term debt, capital leases and rental
agreements. The Companys potential obligations regarding environmental remediation
are explained fully in Note G  Litigation of the Condensed Consolidated
Financial Statements. Items that will potentially require the use of cash during the remainder
of fiscal 2004 other than normal operating expenses include the following.  
    
    The Company has recorded an accrued liability of $6.2 million for
certain environmental matters more fully discussed in Note G -
Litigation. It is not certain at this time when these funds will be
expended. There exists the potential that all or a portion of the funds
will be spent in 2004.
    
    The Company assumed the liability for the Raymark pension plans as
part of the Chapter 11 reorganization. The plans, which are discussed
as part of Note M  Employee Benefits to the consolidated financial
statements included within the Companys 2003 Form 10-K, are under
funded and the Company, through an agreement with the Internal Revenue
Service, is providing both current contributions and catch-up
contributions. The expected funding for the plans in 2004 will be
approximately $4.4 million, $2.4 million of which was funded during the
first 26 weeks of 2004.
    
    The Company incurred costs associated with the retirement of its
President and Chief Executive Officer during the second quarter and the
restructuring of its domestic management team during the third quarter
of 2004 (See Note L). The total cost associated with these items is
approximately $1.3 million of which $.8 million will be paid during the
remainder of 2004, with the balance paid during 2005.
    
    The Company is conducting a facilities utilization review to
determine if improved performance can be obtained through
consolidation or closure of
certain facilities. If, as
a result of this review, a decision is made to consolidate or close certain facilities the Company may incur expenses related to these
actions.
    
    Certain tax issues are discussed in Note I  Income Taxes, which
provides detail concerning the status of the current Internal Revenue
Service audit and the use of certain future tax benefits. -9-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note B, continued Management believes that existing cash balances, the Companys lending
facilities and cash flow from operations during 2004 will be sufficient to meet
all of the Companys obligations arising in the normal course of business,
including anticipated capital investments. However, the ability of the Company
to utilize its lending facilities is dependent on the Companys ability to meet
its financial forecasts for 2004, which is not assured, and to meet the
financial covenants contained in its credit facilities. These forecasts
include certain revenue assumptions generally consistent with the prior year
for the Domestic Wet Friction (on a comparable basis) and Aftermarket segments
and modest growth in the International segment, as well as certain cost-saving
initiatives. If the Company does not comply with the financial covenants, an
event of default would occur and could result in the acceleration of the
Companys indebtedness under its domestic credit facilities. If that were to
occur, the ability of the Company to continue would be dependent upon, among
other things, its ability to amend the credit facilities, enact certain actions
to generate cash and/or to seek additional alternative financing from other
lenders. Note C  Restricted Cash Restricted cash relates to the following: June 27,
    
    December 28,2004
    
    2003Payable to the PI Trust
    
    $
    3,531
    
    
    $
    3,182Letters of credit
    
    
    1,635
    
    
    
    1,630Other
    
    
    59
    
    
    
    60$
    5,225
    
    
    $
    4,872
 The payable to the Personal Injury Trust (PI Trust) consists of tax
refunds and other funds received by the Company that will be paid to the PI
Trust at a future date. The letters of credit collateralize certain obligations relating primarily
to workers compensation. Note D  Inventories Inventories, net, consist of the following: June 27, 2004
    
    December 28, 2003Raw material
    
    $
    11,530
    
    
    $
    11,056Work in process
    
    
    10,927
    
    
    
    8,871Finished goods
    
    
    10,771
    
    
    
    10,950$
    33,228
    
    
    $
    30,877
 Inventory reserves were $3,634 and $4,588 at June 27, 2004 and December
28, 2003, respectively. -10-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note E  Goodwill and Other Intangible Assets June 27, 2004
    
    December 28, 2003Gross
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationFinite life intangible
assets:Unpatented technology
    
    $
    14,360
    
    
    $
    6,155
    
    
    $
    14,360
    
    
    $
    5,337Distribution base
    
    
    5,716
    
    
    
    931
    
    
    
    5,716
    
    
    
    787Total
    
    $
    20,076
    
    
    $
    7,086
    
    
    $
    20,076
    
    
    $
    6,124Indefinite life intangible
assets:Trademarks
    
    $
    10,700
    
    
    
    
    
    
    $
    10,700Goodwill
    
    $
    5,912
    
    
    
    
    
    
    $
    5,912Intangible assets, net
    
    $
    29,602
    
    
    
    
    
    
    $
    30,564
 The weighted-average amortization periods for the unpatented technology
and the distribution base are between 6 and 20 years. Amortization expense for
the 13 weeks ended June 27, 2004 and June 29, 2003 amounted to $482 and $557,
respectively. Amortization expense for the 26 weeks ended June 27, 2004 and
June 29, 2003 amounted to $962 and $1,113, respectively. Estimated annual amortization expense is as follows: For the year ending:2004
    
    $
    1,9222005
    
    
    1,9222006
    
    
    1,9222007
    
    
    1,6222008
    
    
    1,522
 Trademarks and goodwill are not being amortized but are reviewed for
impairment annually or more frequently when events or circumstances indicate
that the carrying amount may be impaired. The Companys three operating
segments have been defined as reporting units for purposes of testing goodwill
for impairment. Goodwill has been assigned to each of the Companys segments.
During the 13 weeks ended June 27, 2004, the Company performed its annual
impairment review of its goodwill and trademarks. The review indicated that no
impairment existed at April 1, 2004. Accordingly, there were no changes in the
carrying amount of trademarks or goodwill during the 26 weeks ended June 27,
2004. -11-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note F  Debt Debt at June 27, 2004 and December 28, 2003 consists of the following: June 27, 2004
    
    December 28, 2003Current
    
    Non-Current
    
    Total
    
    Current
    
    Non-Current
    
    TotalDomestic bank debtLine of credit
    
    $
    7,308
    
    
    $
    
    
    
    $
    7,308
    
    
    $
    3,604
    
    
    $
    
    
    
    $
    3,604Term loansDomestic Wet Friction
    
    
    1,055
    
    
    
    3,605
    
    
    
    4,660
    
    
    
    1,055
    
    
    
    4,133
    
    
    
    5,188Aftermarket
    
    
    996
    
    
    
    5,421
    
    
    
    6,417
    
    
    
    996
    
    
    
    5,921
    
    
    
    6,917Total domestic bank debt
    
    
    9,359
    
    
    
    9,026
    
    
    
    18,385
    
    
    
    5,655
    
    
    
    10,054
    
    
    
    15,709Foreign bank debtLine of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Term loansEurope
    
    
    949
    
    
    
    3,538
    
    
    
    4,487
    
    
    
    979
    
    
    
    4,137
    
    
    
    5,116Asia
    
    
    1,300
    
    
    
    
    
    
    
    1,300
    
    
    
    1,300
    
    
    
    
    
    
    
    1,300Total foreign bank debt
    
    
    2,249
    
    
    
    3,538
    
    
    
    5,787
    
    
    
    2,279
    
    
    
    4,137
    
    
    
    6,416Total bank debt
    
    
    11,608
    
    
    
    12,564
    
    
    
    24,172
    
    
    
    7,934
    
    
    
    14,191
    
    
    
    22,125Leases
    
    
    157
    
    
    
    127
    
    
    
    284
    
    
    
    158
    
    
    
    163
    
    
    
    321Total borrowings
    
    $
    11,765
    
    
    $
    12,691
    
    
    $
    24,456
    
    
    $
    8,092
    
    
    $
    14,354
    
    
    $
    22,446
 The carrying value of the Companys debt approximates fair value. The Company, through its Domestic Wet Friction segment subsidiaries,
Raybestos Products Company (RPC), and Raybestos Automotive Components Company
(RACC), maintains a Loan and Security Agreement, which provides for RPC and
RACC to borrow up to $25.3 million in the aggregate. The agreement, as amended
in November 2003, consists of a $20 million revolving line of credit and a term
loan of $5.3 million. The revolving line of credit is limited through a
formula which provides availability based on qualified accounts receivable and
inventory. The revolving line of credit matures September 28, 2006. The term
loan is payable in 34 monthly payments of $88, commencing December 1, 2003 and
maturing on September 28, 2006, with the final payment being the remainder of
the balance. The revolving line of credit and the term loan are collateralized
by accounts receivable, inventory and property, plant and equipment. Amounts
outstanding under the revolving line of credit bear interest at a rate equal
to, at the Companys option, the prime rate or the adjusted Eurodollar rate,
plus a margin of 0.5% and 2.75%, respectively. Amounts outstanding under the
term loan bear interest at a rate equal to, at the Companys option, the prime
rate or the adjusted Eurodollar rate, plus a margin of 0.75% and 3.0%,
respectively. The agreement contains financial and other covenants, including
a fixed charge coverage ratio and a material adverse change clause. At June
27, 2004 and December 28, 2003, the aggregate pledged assets of RPC and RACC
amounted to $62.8 million and $59.6 million, respectively, consisting of cash,
accounts receivable, inventory, machinery and equipment and all other tangible
and intangible assets, except real property. The agreement permits RPC and
RACC to pay dividends to the Company for costs and expenses incurred by the
Company in the ordinary course of business so long as no event of default has
occurred and is continuing. During the second quarter of 2004, the Company
entered into a fifth amendment to this agreement. The fifth amendment alters
the determination of availability under the revolving line of credit to exclude
certain receivables due to a -12-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note F, continued potential right of setoff and grants the lender a mortgage on the real property
owned by the Company in Sterling Heights, Michigan. The carrying value of the
real property in Sterling Heights, Michigan was $5.1 million at June 27, 2004.
Further, in accordance with the fifth amendment, the lender may make loans,
subject to certain limits, under the revolving line of credit up to the lesser
of the amount of the excluded receivables or $1.9 million. The Company, through its subsidiaries Raytech Powertrain, Inc. (RPI),
Allomatic Products Company (APC) Raytech Systems, Inc. (RSI) and Raybestos
Powertrain, LLC, is party to a loan agreement for $7.0 million with an interest
rate at 1.65 basis points over the adjusted Eurodollar rate with a five-year
term. The loan is payable in 59 monthly payments of $83, commencing on
December 1, 2003, with a balloon payment of $2.1 million payable on November 3,
2008. The proceeds from this facility will be used to pay environmental costs
and pension costs. The loan is collateralized by the assets of the borrowing
entities. The agreement contains financial and other covenants, including the
maintenance of certain financial ratios and a material adverse change clause.
At June 27, 2004 and December 28, 2003, the aggregate pledged assets of APC,
RSI, RPI and Raybestos Powertrain, LLC were $53.1 million and $54.0 million
respectively. The Companys wholly-owned German subsidiary, Raybestos Industrie-Produkte
GmbH (RIP), has available lines of credit with several German banks. Interest
is charged at rates between 5.75% and 7.125%. The lines are repayable on
demand. At June 27, 2004 and December 28, 2003, there were no borrowings
outstanding under these lines of credit. The Companys wholly-owned German subsidiaries, Raytech Composites Europe
GmbH (RCE) and RIP have various loan agreements where the maturities range
from September 2006 through December 2012. The loans are payable in equal
periodic installments (usually quarterly or semi-annually) over the term of the
loan. The loans bear interest at rates ranging from 2.5% through 6.2%. At
June 27, 2004 and December 28, 2003, respectively, the aggregate pledged
assets, consisting of machinery and equipment, amounted to EUR13.2 million
($16.1 million) and EUR12.7 million ($16.0 million). During the periods presented, the Companys wholly-owned Chinese
subsidiary Raybestos Friction Products (Suzhou) Co. Ltd. (RFP) has had
various loan agreements. The loans are short-term with maturities between six
and twelve months. The weighted average rates on all domestic and foreign bank notes payable
at June 27, 2004 and December 28, 2003 were 3.93% and 3.71%, respectively. -13-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note G  Litigation Environmental Remediation Crawfordsville, Indiana  Shellys Ditch Contamination Removal In October 1987, RPC, a wholly-owned subsidiary of the Company, purchased
a major manufacturing facility (the RPC Facility) in Crawfordsville, Indiana.
Sometime thereafter, the Company learned that the previous owner of the RPC
Facility had disposed of polychlorinated biphenyls (PCBs) in the ground at
the RPC Facility in the mid-1960s and that such PCBs were leaching from the RPC
Facility into an adjacent ditch (Shellys Ditch). In 1996, the Indiana Department of Environmental Management (the IDEM)
advised RPC that the RPC Facility may have contributed to, and was potentially
responsible for, the release of lead and PCBs found in Shellys Ditch. In the
late 1990s, RPC and the IDEM entered into an agreed order (the Agreed Order)
for a risk-based remediation of PCBs and lead in Shellys Ditch. When the IDEM
later sought to unilaterally withdraw from the Agreed Order, RPC appealed and
the Marion County Superior Court ordered the IDEM to reinstate the Agreed
Order. Meanwhile, at the IDEMs request, the United States Environmental
Protection Agency (the EPA) became involved in Shellys Ditch. In December 2000, before the Agreed Order was reinstated, the EPA issued a
Unilateral Administrative Order to RPC under CERCLA (the EPA Removal Order)
demanding removal of contaminated soils from those Shellys Ditch areas
identified as Reaches 1 through 3 (the Site). The EPA Removal Order required
more work at greater expense than the IDEM Agreed Order. Thereafter, RPC
proceeded with the work required under the EPA Removal Order. By June 27, 2004,
RPC had spent approximately $18.7 million on removal of lead and PCB
contaminated soils from the Site and had accrued $400 for potential EPA
oversight costs relating to that work. On January 9, 2004, the EPA confirmed that RPC had completed the action
required under the EPA Removal Order, including the removal and proper disposal
of Site soils and sediments contaminated with PCBs and lead. In its
confirmation, the EPA noted that RPC would continue to be subject to certain
obligations under that order, including record retention and the payment of
oversight costs. Whether RPC will be required to pay oversight costs relating
to the work under the EPA Removal Order will depend on the outcome of future
negotiations with the EPA and the IDEM regarding potential environmental
remediation downstream of the Site. Crawfordsville, IN  Environmental Remediation Downstream of Reaches 1 through 3 of Shellys Ditch On May 6, 2003, the EPA indicated that RPC is potentially liable for PCB
and lead contamination downstream of the Site. The EPA has not issued an order
to RPC regarding this downstream area. However, during the third quarter of
2003, the Company began negotiations with the EPA concerning such possible
additional remediation. As a result, during the third quarter of 2003, the
Company recorded a $2.4 million provision relating to this potential liability
for future cleanup costs. -14-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note G, continued Crawfordsville, IN  Environmental Remediation and Expenses relating to the RPC Facility On May 15, 2001, the EPA issued a Pre-filing Notice and Opportunity to
Confer to RPC (the Pre-filing Notice). This notice stated that the EPA might
file a civil action lawsuit against RPC for violations of various environmental
statutes and would offer RPC the opportunity to participate in pre-filing
negotiations to resolve this matter. The EPA stated that it has reason to
believe that RPC committed violations of the Clean Air Act, Clean Water Act,
Resource Conservation and Recovery Act, and Toxic Substances Control Act and
that RPC could be subject to substantial penalties. At that time, the Company
recorded a provision of $.3 million on the advice of legal counsel. On
September 3, 2003, the EPA proposed that the parties settle the Pre-filing
Notice. The EPA stated that penalties for violations alleged in the Pre-filing
Notice could total approximately $180 million and suggested the following
resolution: RPC should pay approximately $2.4 million in fines and undertake
compliance activities, on-site investigative work that the EPA estimated would
cost about $1.0 million, and corrective action to resolve the Pre-filing
Notice. The parties have begun preliminary negotiations regarding the
potential on-site investigative work but have not obtained an overall EPA
settlement proposal. The Company recorded a provision of $3.1 million in the
year ended December 28, 2003 based on the EPA position. Ferndale, MI  Potential Responsibility for Environmental Remediation In a January 8, 2002 letter, the Michigan Department of Environmental
Quality asserted Company responsibility for trichloroethylene contamination at
a Ferndale, Michigan industrial site that Advanced Friction Materials Company
(AFM) leased from approximately 1974 to 1985. The Company acquired 47% of
the stock of AFM in 1996 and the balance of the shares in 1998. The Companys
liability at this site is indeterminable at this time. Environmental Litigation Cost Recovery Actions against Insurers regarding Shellys Ditch In 1996, RPC notified its insurers and demanded defense and indemnity
regarding any environmental issues relating to alleged lead and PCB
contamination of Shellys Ditch. In January 1997, one insurer filed a
complaint in the U.S. District Court, Southern District of Indiana, captioned
Reliance Insurance Company vs. Raybestos Products Company (the Insurance
Case). The complaint sought a declaratory judgment that the Reliance
Insurance policies do not provide coverage to RPC for defense and indemnity
relating to investigation and remediation of contamination in Shellys Ditch.
In January 2000, the District Court rejected Reliances claims and granted
summary judgment to RPC. In June 2001, Reliance Insurance Company was placed
in liquidation in Pennsylvania. The Company has filed claims in the Reliance
liquidation for recovery of its Shellys Ditch expenses but has not received a
decision. In February 2002, RPC filed a third-party complaint in the Insurance Case
against National Union and two other insurance carriers. The third-party
complaint seeks defense and indemnity from the insurers relating to
investigation and remediation of contamination in Shellys Ditch. -15-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note G, continued In February 2004, National Union and its affiliates commenced an adversary
proceeding against the Company, RPC and others by filing a complaint in U.S.
Bankruptcy Court (the Adversary Proceeding). In the Adversary Proceeding,
National Union claims that RPCs third-party complaint against National Union
is barred by a January 2002 order of the U.S. Bankruptcy Court in the Raymark
Industries, Inc. and Raymark Corporation Chapter 11 cases (the Raymark
Order). National Union claims that the Raymark Order prohibited RPC from
pursuing its third-party complaint against National Union and declared that the
National Union insurance policies issued to the Company and RPC have been
exhausted. Also in February 2004, National Union filed a motion in the U.S.
District Court, Southern District of Indiana, asking that court to stay the
Insurance Case against National Union. The outcome of this Adversary
Proceeding and related motion for stay and their effects, if any, on the
Insurance Case against National Union cannot be predicted. RPC Claims against IDEM In July 2002, RPC filed an action against the IDEM for breach of contract
claiming damages based on the difference between the costs of cleanup under the
EPA Removal Order and the IDEM Agreed Order. The outcome of this litigation
cannot be predicted. Commercial Litigation On April 22, 2003, Automation by Design, Inc. filed a civil action against
RPC in U.S. District Court for the Southern District of Indiana. The complaint
alleges copyright infringement and breach of contract in connection with RPCs
purchase of certain equipment. In answer to plaintiffs complaint, RPC denied
liability and filed counterclaims for breach of contract and declaratory
judgment. The court has granted Automation by Designs motion to amend its
complaint to include Raytech Corporation and Production Design Services, Inc.
as defendants. RPC has agreed to defend and provide certain indemnity
protection to Production Design Services, Inc., which manufactured certain
equipment that is allegedly involved in this court action. The outcome of this
litigation cannot be predicted, and the Companys liability or recoveries are
indeterminable at this time. Equity Holders Litigation In February 2002, lawyers claiming to represent the Committee of Equity
Holders of Raytech Corporation filed a motion in U.S. Bankruptcy Court to
compel the Company to either issue up to approximately 700,000 additional
shares to the pre-reorganization holders of shares in the Company or their
successors, or to proportionately reduce the shareholdings of the general
unsecured creditor shareholders under the Plan of Reorganization. The ultimate
outcome of this matter cannot be predicted; however, it is possible that its
resolution could cause the Company to issue additional shares to the original
shareholder group, or to retire shares held by the general unsecured creditor
shareholder group. This might directly impact the earnings per share
calculations of the Company. The Bankruptcy Court denied a Company motion to
dismiss this action. Recent attempts to settle this case have been
unsuccessful and trial is scheduled for October 2004. The Company is subject to certain other legal matters that have arisen in the
ordinary course of business, and management does not expect them to have a
significant adverse effect on the results of consolidated operations, financial
condition or cash flow. -16-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note H  Segment Reporting The Companys operations are categorized into three operating segments and
a corporate group based on management structure, product type and distribution
channel, as described below. The Company, during the first quarter of 2004,
restructured its operating segments to facilitate a stronger focus on the
European wet friction operations. Oversight of the European wet friction
operations, Raybestos Reibtechnik GmbH (RRT) and Raybestos U.K. Ltd. (RUK),
was transferred to the European management team. The newly defined operating
segments are Domestic Wet Friction, International (including the European wet
friction operations and European and Asian dry friction operations), and
Aftermarket. All prior period segment information presented has been restated
to reflect the newly defined segments. Domestic Wet Friction The Domestic Wet Friction segment manufactures and distributes automatic
transmission and wet wheel brake system components. The Company markets its
products to automobile, heavy duty truck, farm machinery, mining, and bus
original equipment manufacturers (OEMs) in North America. International The International segment manufactures and distributes automatic
transmission, manual transmission and wet wheel brake system components. The
Company markets its products to automobile, heavy duty truck, farm machinery,
mining, and bus OEMs. The International segment markets its dry friction
products worldwide and its wet friction products throughout Europe and Asia. Aftermarket The Aftermarket segment produces specialty engineered products primarily
for automobile and lift truck automatic transmissions. In addition to these
products, this segment markets transmission filters and other transmission
related components. The focus of this segment is marketing to warehouse
distributors and certain retail operations in the automotive aftermarket. Corporate The Corporate group consists principally of corporate activities,
including costs to maintain the corporate headquarters, certain environmental
costs, and certain assets, liabilities and related income and expense stemming
from the reorganization plan implemented when the Company emerged from
bankruptcy in 2001. The Company has chosen not to distribute these costs to
the operating segments to preserve the historical comparability at the
operating segment level. -17-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note H, continued Information relating to operations by industry segment follows: For the 13 weeks ended
    
    For the 26 weeks endedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net SalesDomestic Wet Friction
    
    $
    32,361
    
    
    $
    31,900
    
    
    $
    63,763
    
    
    $
    64,953International
    
    
    16,864
    
    
    
    14,896
    
    
    
    33,517
    
    
    
    29,959Aftermarket
    
    
    13,616
    
    
    
    11,290
    
    
    
    26,002
    
    
    
    22,779Intersegment elimination (1)
    
    
    (4,436
    )
    
    
    (3,993
    )
    
    
    (8,279
    )
    
    
    (7,863
    )Net sales to external customers
    
    $
    58,405
    
    
    $
    54,093
    
    
    $
    115,003
    
    
    $
    109,828Gross ProfitDomestic Wet Friction
    
    $
    4,521
    
    
    $
    2,579
    
    
    $
    8,417
    
    
    $
    5,280International
    
    
    4,647
    
    
    
    3,641
    
    
    
    9,436
    
    
    
    7,546Aftermarket
    
    
    4,304
    
    
    
    3,258
    
    
    
    7,989
    
    
    
    6,637Corporate
and intersegment elimination
    
    
    (943
    )
    
    
    (1,320
    )
    
    
    (2,254
    )
    
    
    (2,420
    )Consolidated
    
    $
    12,529
    
    
    $
    8,158
    
    
    $
    23,588
    
    
    $
    17,043Operating Profit (Loss)(2)Domestic Wet Friction
    
    $
    897
    
    
    $
    (1,024
    )
    
    $
    1,567
    
    
    $
    (2,232
    )International
    
    
    1,773
    
    
    
    1,504
    
    
    
    3,959
    
    
    
    2,883Aftermarket
    
    
    2,580
    
    
    
    2,135
    
    
    
    4,814
    
    
    
    4,545Corporate
    
    
    (3,868
    )
    
    
    (4,521
    )
    
    
    (6,523
    )
    
    
    (6,718
    )Consolidated
    
    $
    1,382
    
    
    $
    (1,906
    )
    
    $
    3,817
    
    
    $
    (1,522
    )
  (1)
    
    The Company records intersegment sales at an amount negotiated between
the segments. All intersegment sales are eliminated in consolidation.
Substantially all intersegment sales are sales of wet friction products to
the Aftermarket segment.(2)
    
    The Companys management reviews the performance of its reportable
segments on an operating profit basis, consisting of income before income
taxes and minority interest. -18-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note I  Income Taxes The tax provision for the thirteen-week period ended June 27, 2004 is $1.0
million compared to a benefit of $.6 million for the same period in the prior
year. The provision for the current period includes federal taxes resulting
from profit generated by APC, foreign taxes associated with operations in
Germany and China and state taxes generated by domestic operations. The
Company did not recognize any tax benefits associated with losses generated by
U.S. domestic operations due to doubts concerning their future recoverability.
The Companys effective tax rate for the thirteen-week period ended June 27,
2004 was 75.1% compared to a benefit of 30.7% for the same period in the prior
year. The effective tax rate for the twenty-six-week period ended June 27,
2004 is 48.9% compared to a benefit of 26.4% for the same period in the prior
year. The effective rate for the thirteen-week and twenty-six-week periods
ended
June 29, 2003 reflect a statutory federal rate adjusted for state and foreign
taxes and contribution made to the Raymark pension plans. In addition, the
Company did not recognize any tax benefits associated with operating losses
incurred by the Companys U.K. operations due to doubts about their future
recoverability. Pursuant to the Tax Benefits Assignment and Assumption Agreement
(the Agreement), all tax benefits received by the Company due to the
reorganization are to be passed onto the PI Trust as received. At June
27, 2004, the Company has tax loss carryforwards of $101.2 million
and tax credit carryforwards of $3.5 million. The net operating loss
carryforwards are allocated between the Company and the PI Trust in the
amounts of $21.2 million and $80.0 million, respectively. The tax
credit carryforwards all inure to the benefit of the PI Trust.
Additionally, future payments to the PI Trust and others will create
additional tax deductions, which will inure to the benefit of the PI
Trust in accordance with the Agreement. These include deductions for
payments to the PI Trust of tax benefits associated with the utilization
of the operating losses allocated to the PI Trust, and contributions
made to the Raymark pension plans. Losses generated by the Company
subsequent to the emergence from bankruptcy, exclusive of losses
attributed to the payments discussed above, will be retained by the
Company. The method of allocation in utilizing current and future
operating losses between the PI Trust and the Company has not been
determined at this time. Additional tax recoveries, expected to be
received in future periods, are recorded as deferred tax assets, net of
valuation allowances, and a deferred payable to the PI Trust, which
amounted to $11.9 million at June 27, 2004 and December 28, 2003.

The Company utilizes certain assumptions concerning future events in
determining its deferred tax position. These assumptions could change
in the future based on actual facts and circumstances that may arise
during the future periods. Any changes in these assumptions could
impact the deferred tax asset that inures to the benefit of the PI
Trust and the related deferred payable. The impact on the deferred

payble to the PI Trust could cause a corresponding

impact on pre-tax income. At June 27, 2004, the Company has recorded a tax receivable in the
amount of $143, of which $100 is due from the Federal government and $43
is due from state governments. The Company received $45 in January 2004
and $897 in May 2004 as partial recovery of the state taxes related to
returns filed in 2003 and 2004, respectively. The state refunds inure
to the benefit of the PI Trust. The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds received, arising from this
audit or any other years in the carryback period, are, pursuant to the
Agreement, the responsibility of the PI Trust and will therefore impact
the deferred tax asset attributable to the PI Trust. Any change in the
deferred tax asset attributable to the PI Trust will also impact the
valuation allowance and the related deferred payable to the PI Trust.
Pursuant to a settlement meeting held in April 2004, the Company and the
IRS have reached a tentative settlement of the IRS audit. The
settlement, if approved by the IRS District Director and the Joint
Committee on Internal Revenue Taxation, would result in no payment of -19-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note I  continued Federal tax given the Companys net operating losses. However, interest
on the tax assessment would be payable. The PI Trust would be
responsible for the interest on any tax assessment. The Company expects
the approval process to be completed prior to the end of the current
fiscal year. The Company owns 57% of the stock of APC. The Company has not
recorded a deferred tax liability for the undistributed earnings of APC
since management expects that those earnings will be distributed to the
Company in a tax-free transaction. However, the deferred tax liability
on the undistributed earnings of APC would be approximately $1.5 million
at June 27, 2004, if all of APCs earnings were to be distributed
through dividends. Note J  Earnings Per Share 13 weeks ended
    
    26 weeks endedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Basic EPS ComputationNet income (loss)
    
    $
    57
    
    
    $
    (1,539
    )
    
    $
    1,408
    
    
    $
    (1,612
    )Weighted average shares
    
    
    41,737,306
    
    
    
    41,701,554
    
    
    
    41,737,306
    
    
    
    41,701,554Weighted average stock options exercised
    
    
    
    
    
    
    32,148
    
    
    
    
    
    
    
    16,074Adjusted weighted average shares
    
    
    41,737,306
    
    
    
    41,733,702
    
    
    
    41,737,306
    
    
    
    41,717,628Basic earnings (loss) per share
    
    $
    .00
    
    
    $
    (.04
    )
    
    $
    .03
    
    
    $
    (.04
    )Diluted EPS ComputationNet income (loss)
    
    $
    57
    
    
    $
    (1,539
    )
    
    $
    1,408
    
    
    $
    (1,612
    )Weighted average shares
    
    
    41,737,306
    
    
    
    41,701,554
    
    
    
    41,737,306
    
    
    
    41,701,554Weighted average stock options exercised
    
    
    
    
    
    
    32,148
    
    
    
    
    
    
    
    16,074Adjusted weighted average shares and
equivalents
    
    
    41,737,306
    
    
    
    41,733,702
    
    
    
    41,737,306
    
    
    
    41,717,628Diluted earnings (loss) per share
    
    $
    .00
    
    
    $
    (.04
    )
    
    $
    .03
    
    
    $
    (.04
    )
 -20-




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##### Table of Contents



RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note J  continued Options to purchase 3,034,414 shares of common stock were not included
in the computation of diluted earnings per share for the 13 and 26 weeks
ended June 27, 2004 and options to purchase 3,063,659 shares of common
stock were not included in the computation of diluted earnings per share
for the 13 and 26 weeks ended June 29, 2003, due to their anti-dilutive
effect due either to their exercise price compared to the market price or
the Company incurring a loss for the period. In February 2002, lawyers claiming to represent the Committee of Equity
Holders of Raytech Corporation filed a motion in U.S. Bankruptcy Court to
compel the Company to either issue up to approximately 700,000 additional
shares to the pre-reorganization holders of shares in the Company or their
successors, or to proportionately reduce the shareholdings of the general
unsecured creditor shareholders under the Plan of Reorganization. The ultimate
outcome of this matter cannot be predicted; however, it is possible that its
resolution could cause the Company to issue additional shares to the original
shareholder group, or to retire shares held by the general unsecured creditor
shareholder group. This might directly impact the earnings per share
calculations of the Company. The Bankruptcy Court denied a Company motion to
dismiss this action. Recent attempts to settle this case have been
unsuccessful and trial is scheduled for October 2004. Note K  Pension and Post Retirement Benefit Plans Components of Net Periodic Benefit Cost For the 13 weeks endedPension Benefits
    
    Post Retirement BenefitsJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Service Cost
    
    $
    146
    
    
    $
    111
    
    
    $
    197
    
    
    $
    158Interest Cost
    
    
    696
    
    
    
    728
    
    
    
    290
    
    
    
    269Expected return on plan assets
    
    
    (635
    )
    
    
    (414
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    Amortization of net (gain) loss
    
    
    107
    
    
    
    25
    
    
    
    40
    
    
    
    Net periodic benefit cost
    
    $
    348
    
    
    $
    450
    
    
    $
    527
    
    
    $
    427
 For the 26 weeks endedPension Benefits
    
    Post Retirement BenefitsJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Service Cost
    
    $
    292
    
    
    $
    219
    
    
    $
    394
    
    
    $
    315Interest Cost
    
    
    1,394
    
    
    
    1,447
    
    
    
    580
    
    
    
    539Expected return on plan assets
    
    
    (1,271
    )
    
    
    (828
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    Amortization of net (gain) loss
    
    
    215
    
    
    
    50
    
    
    
    81
    
    
    
    Net periodic benefit cost
    
    $
    699
    
    
    $
    888
    
    
    $
    1,055
    
    
    $
    854
 -21-




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RAYTECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise noted, except per share data)
(unaudited) Note K  continued The Company previously disclosed in its financial statements for the year
ended December 28, 2003, that it expected to contribute $5.3 million to its
pension plans and $.6 million to fund its post retirement plan in 2004. As of
June 27, 2004, $2.4 million of contributions have been made. The Company
presently anticipates contributing an additional $3.5 million to fund its
pension and post retirement plans in 2004. The 2004 planned contributions of
$5.9 million reflect a $.5 million reduction provided by the Pension Funding
Equity Act of 2004. In connection with the Companys Chapter 11 proceedings, the Pension
Benefit Guaranty Corporation (PBGC) filed certain motions claiming that the
Company was responsible for the funding and sponsorship of two Raymark
Corporation pension plans. The court ordered that the Company was liable for
the maintenance and funding of the underfunded pension plan obligations of
Raymark Corporation. The Company, based on the courts order, assumed the role
of plan sponsor of the Raymark Plans upon emergence from bankruptcy.
The Company obtained a deferral of its funding obligations for 2000.
Since obtaining the deferral, the Company has made funding payments
to the Raymark Plans as required. As of June 27, 2004, the
outstanding balance of the deferred amounts was approximately $2.3
million. During
the second quarter of 2004, the Company executed a mortgage of its real
property located in Crawfordsville, Indiana to the PBGC, guaranteeing its
 remaining deferred funding obligations of the Raymark Plans. At June 27, 2004 the carrying value
of the real property mortgaged was $4.7 million. Note L  Subsequent Event During the third quarter of 2004, but prior to the filing of this report,
the Company announced a domestic management restructuring. The purpose of the
management restructuring is to centralize and streamline the management of the
domestic sales, research and manufacturing activities. In addition to
expanding or redefining the roles of several existing employees, 5 positions
were eliminated. The one-time cost associated with this restructuring program
is $.6 million. The Company will record this cost in the third quarter of
2004. -22-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations In preparing the discussion and analysis required by the federal
securities laws, it is assumed that users of the interim financial information
have read or have access to the discussion and analysis for the preceding
fiscal year. Caution Regarding Forward Looking Statements Statements in this Managements Discussion and Analysis relating to
managements views of trends, the effects of changing prices, plans, objectives
and other matters for future operating periods are forward-looking statements
as defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to significant risks and uncertainties
that could cause actual results to differ materially from the results in the
statements. Forward-looking statements relating to Raytech Corporation (the
Company) businesses are based on assumptions concerning certain factors that
are not predictable and are subject to change. These factors include general
economic conditions, worldwide demand for automotive and heavy duty vehicles,
consumer confidence, actions of our competitors, vendors and customers, factors
affecting our costs such as raw material prices, labor relations and
environmental compliance and remediation, interest and foreign currency
exchange rates, technological issues, accounting standards, and the risks set
forth in the section entitled Risk Factors. The forward-looking statements
herein are made as of the date of this report. We have no obligation to update
our forward-looking statements. Risk Factors The Companys businesses are subject to certain risks, including but not
limited to those described below, that could cause material changes in its
results of operations or financial condition in the future.  
    
    The Companys businesses are greatly affected by general economic
conditions. The Company sells components to the automotive and heavy
duty equipment industries and in large part is dependent upon consumer
demand for automobiles, consumer confidence and business investment in
heavy equipment. The Companys businesses sell components for
transmissions and brakes to automotive and heavy duty original
equipment manufacturers (OEMs) as well as the automotive
aftermarket. The economic slowdown and recession in 2001 through 2003
resulted in reduced heavy equipment and passenger vehicle production
in the United States and in foreign markets and reduced demand in the
aftermarket. It is possible that OEM vehicle and equipment production
will not increase significantly in 2004 and future years. Economic
conditions may adversely affect the Companys revenues in all of its
business segments.
    
    The Companys customers are large companies under pressure to cut
component costs. The Domestic Wet Friction segments largest
customers are experiencing margin erosion due to reduced volume, high
labor costs and intense foreign competition. The Company is a
relatively small supplier of a limited number of components. Due to
their size, the Companys customers are often able to demand component
price reductions from their suppliers, including all segments of the
Company. These customers may also demand technological changes and
quality improvements at the Companys expense. In addition, the trend
in the automotive aftermarket is toward longer transmission service
and replacement cycles due to improved quality. The Companys
revenues and margins may be adversely affected by these factors.
    
    The Companys largest customers have unionized workforces and may be
subject to plant shutdowns in the event of a labor dispute, which
could adversely affect the Companys shipments to those customers and
the Companys revenues. -23-




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##### Table of Contents




    
    The Company is subject to substantial environmental remediation
obligations for past contamination that are not yet fixed in scope or
amount. The nature of environmental contamination and its remediation
are such that the amount and nature of work necessary is often unknown
until late in the process. The level of responsibility of the parties
involved and the level of remediation to be required by governmental
authorities is also uncertain. The Company also incurs substantial
ongoing environmental compliance costs in operating its production
facilities. Substantial unanticipated environmental costs could
adversely affect profitability.
    
    Worldwide increases in steel demand have led to increased prices and
concerns of a steel shortage. Potential impacts on the Company from
the current steel market conditions could include reduced delivery
levels of finished products to customers and lower profitability due
to higher raw material costs. Management expects the increases in the
price of steel will negatively impact the Companys profitability
during the second half of 2004. Significant Accounting Policies Preparation of the Companys financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Management believes the most complex and
sensitive judgments, because of their significance to the consolidated
financial statements, result primarily from the need to make estimates about
the effects of matters that are inherently uncertain. Managements Discussion
and Analysis and Note A to the Consolidated Financial Statements in the
Companys Form 10-K for fiscal 2003 describe the significant accounting
estimates and policies used by management in the preparation of the
consolidated financial statements. Actual results in these areas could differ
from managements estimates. There have been no changes in the Companys
critical accounting estimate processes and policies during the 26 weeks ended
June 27, 2004. Results of Operations and Liquidity and Capital Resources During the second quarter of 2004 the Companys President and Chief
Executive Officer retired. The Board of Directors has named an interim
President and Chief Executive Officer,
from a financial advisory and consulting firm,
effective June 1, 2004. The Company is obligated to pay that firm
a monthly fee plus a success fee, to be determined at a later date,
based on the results of the assignment. A committee has been formed
to undertake a search for a permanent president and chief executive
officer. The Company reported increased sales of $4.3 million in the second quarter
of 2004 compared to the second quarter of 2003. Year to date sales increased
$5.2 million over the same period in 2003. The increase in sales was due
principally to the increased demand and product offering in the Aftermarket
segment and favorable currency translation adjustments in the Companys
European operations. The Company continues to experience pressure to reduce
prices from certain of its major customers, most notably in the Domestic Wet
Friction segment and to a lesser degree in China. Gross profit increased to 21.5% of sales in the second quarter of 2004
compared to 15.1% during the same period last year. Year to date gross profit
as a percentage of sales increased to 20.5% compared to 15.5% for the same
period in 2003. The Company realized improved gross profit across all three of
its operating segments, principally due to improved productivity and cost
reduction programs, partially offset by the impact of price reductions. During
the first half of 2004 the Company experienced increases in the price of steel,
a key raw material. Management expects the increases in the price of steel will
negatively impact the Companys profitability during the second half of 2004.
Additional severance expense will be recognized during the third quarter
related to the restructuring of the domestic management team, see Note L of the
Condensed Consolidated Financial Statements. SG&A expenses increased $2.0 million or 23.7% during the second quarter of
2004 compared to the second quarter of 2003. Year to date SG&A expense
increased $2.3 million or 13.9% compared to the same period in 2003. The
increase is principally due to severance costs, increased consulting costs,
increased incentive compensation expense and currency translation, partially
offset by operating cost reductions. -24-




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##### Table of Contents



Interest expense is incurred on the Companys debt facilities. See Note F
of the Condensed Consolidated Financial Statements. The Companys income taxes are discussed in detail in Note I of the
Condensed Consolidated Financial Statements. As a condition of the
reorganization plan, all tax benefits received by the Company as a result of
the reorganization inure to the benefit of the PI Trust. Minority interest relates to the Companys majority-owned subsidiary,
Allomatic Products Company (APC). APC, a member of the Companys Aftermarket
segment, is 57% owned by the Company, 40% owned by a related party and 3% owned
by certain employees of the Company. APC is consolidated in the financial
statements and a minority interest is recorded to reflect the minority
shareholders interest in APC. The Company recorded net income of $.1 million, or nil per basic share,
for the 13 week period ended June 27, 2004 compared to a net loss of $1.5
million, or a loss of $.04 per basic share for the same period in the prior
year. The Company recorded net income of $1.4 million, or $.03 per basic
share, for the 26 week period ended June 27, 2004 compared to a net loss of
$1.6 million or a loss of $.04 per basic share for the same period in 2003. The
increase in earnings is due principally to improved operating performance
across all segments. Additionally, in the second quarter of 2003 the Company
recorded a charge for non-recurring environmental costs in the amount of $1.8
million During the first quarter of 2004, the Company restructured its operating
segments to facilitate a stronger focus on the European wet friction
operations. Management of the European wet friction operations, Raybestos
Reibtechnik GmbH (RRT) and Raybestos U.K. Ltd. (RUK) was transferred to the
European management team. The newly defined operating segments are Domestic
Wet Friction, International (including the European wet friction operations and
European and Asian dry friction operations), and Aftermarket. Details of
performance by operating segment are presented below. All prior period segment
information presented has been restated to reflect the newly defined segments. Domestic Wet Friction The following tables set forth selected income statement data for the
Domestic Wet Friction segment for the 13 and 26 weeks ended June 27, 2004 and
June 29, 2003. For the 13 weeks ended(amounts in millions)June 27, 2004
    
    June 29, 2003Net sales
    
    $
    32.4
    
    
    
    100.0
    %
    
    $
    31.9
    
    
    
    100.0
    %Gross profit
    
    
    4.5
    
    
    
    14.0
    
    
    
    2.6
    
    
    
    8.1Selling, general and
administrative expense
    
    
    2.9
    
    
    
    9.1
    
    
    
    3.4
    
    
    
    10.6Income (loss) before taxes
    
    
    .9
    
    
    
    2.8
    
    
    
    (1.0
    )
    
    
    (3.2
    )
 For the 26 weeks ended(amounts in millions)June 27, 2004
    
    June 29, 2003Net sales
    
    $
    63.8
    
    
    
    100.0
    %
    
    $
    65.0
    
    
    
    100.0
    %Gross profit
    
    
    8.4
    
    
    
    13.2
    
    
    
    5.3
    
    
    
    8.1Selling, general and
administrative expense
    
    
    5.7
    
    
    
    8.9
    
    
    
    6.8
    
    
    
    10.4Income (loss) before taxes
    
    
    1.6
    
    
    
    2.5
    
    
    
    (2.2
    )
    
    
    (3.4
    )
 The Domestic Wet Friction segments sales increased $.5 million or 1.4% in
the second quarter of 2004 -25-




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##### Table of Contents



from the
same period in 2003. The increase in sales
was driven principally by an increase in heavy-duty and intercompany sales
volume of $1.8 million and $.8 million, respectively, in the second quarter
compared to the same periods in 2003. The increase in heavy duty and
intercompany volume was partially offset by a decrease in automotive sales
volume of $1.5 million and price reductions, in both the heavy-duty and
automotive components, of $.6 million. Sales for the 26 week period ended June
27, 2004 decreased $1.2 million or 1.8% from the same
period in 2003. The decrease year to date compared to the same period last
year is due to price reductions in the heavy-duty and automotive components of
the segment of $1.6 million, decreased automotive volume of $2.7 million,
partially offset by an increase in heavy-duty volume of $3.1 million. Gross profit
for the 13 and 26 weeks ended June 27, 2004 was $4.5 million
and $8.4 million, respectively compared with $2.6 million and $5.3 million for
the 13 and 26 weeks ended June 29, 2003. Gross profit as a percentage of sales
increased to 14.0% in the second quarter of 2004 compared to 8.1% in the same
quarter last year; and increased to 13.2% compared with 8.1% for the 6 months
ended June 27, 2004 and June 29, 2003, respectively. Overall, the increase in
gross profit is the combined result of cost reductions, improved productivity
and improved overhead absorption, partially offset by the impact of sales price
reductions. Additionally, as a result of the impairment charge recorded during
the fourth quarter of 2003, depreciation expense was reduced by $.2 million and
$.5 million for the 13 and 26 weeks ended June 27, 2004, respectively. The
increase in the price of steel resulted in an increase of raw material costs of
$.8 million and $1.0 million during the 13 and 26 weeks ended June 27, 2004,
respectively. Correspondingly, the segment also realized an increase in the
proceeds from the sale of scrap of $.5 million and $1.0 million in the 13 and
26 weeks ended June 27, 2004, respectively, compared to the same periods in
2003. Although the Company has been able to mitigate the impact of the
increased cost of steel with greater proceeds from the sale of scrap during the
first half of 2004, management expects that the increased price of steel will
negatively impact its profitability during the remainder of the year. The Domestic
Wet Friction segment produces goods for its customers based
on a purchase order system, and in certain instances using longer-term
contracts that stipulate a fixed selling price with no commitment as to
quantity. In instances where the products cost exceeds the selling price, a
reserve is established for the expected loss on products in inventory and
customer purchase orders received by the balance sheet date. The Company has
not recorded an estimate of the loss over the term of these contracts since the
quantity and mix of parts is not known and the future production costs will be
impacted by, among other things, changes in economic conditions and
managements actions, including expected cost reductions. Cost reductions
realized during the first half of 2004 allowed the Company to reduce its
reserve for expected loss on goods in inventory and customer purchase orders in
the amount of $.7 million at June 27, 2004 compared to December 28, 2003.
During the 13 weeks ended June 27, 2004, the reserve for expected loss on goods
in inventory and customer purchase orders was reduced by $.3 million. SG&A expense
decreased $.5 million or 14.7% for the second quarter of 2004
compared to the same quarter in 2003 and $1.1 million or 16.2% for the first
half of 2004 compared to the same period last year. The decrease in SG&A is
principally the result of an increased emphasis on managing expenses. As a
result of the impairment charge recorded during the fourth quarter of 2003,
depreciation expense was reduced by $.1 million and $.2 million for the 13 and
26 weeks ended June 27, 2004, respectively, compared to the same periods in the
prior year. Additionally, a reduction in force taken in research and
development in late 2003 resulted in reduced research and development expense
of $.4 million and $.5 million for the 13 and 26 weeks ended June 27, 2004,
respectively, compared to the same periods last year. As a
result of the above, income before taxes improved to $.9 million for
the 13 weeks ended June 27, 2004 compared to a loss before taxes of $1.0
million in the same period in 2003. For the 26 week period income before taxes
improved to $1.6 million compared to a loss before taxes of $2.2 million for
the same period last year. The Company
continues to review alternatives to improve the operating
results for this segment. Actions taken or being contemplated are as follows:  
    
    During the first quarter of 2004, the Company reorganized its
operating segments to facilitate a stronger -26-




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##### Table of Contents



focus on the European wet
friction operations. Oversight of the European wet friction operations,
RRT and RUK, was transferred to the European management team.
    
    During March of 2004, the Sterling Heights technical center was
closed. The automotive sales and applications engineering groups
previously located in this building have been relocated to a nearby
office building in the Detroit area.
    
    The Company has implemented cost savings programs during the first
half of 2004 and is continuing to evaluate all aspects of its operations
for additional cost savings alternatives.
    
    Subsequent to the end of the second quarter but prior to filing this
report, the Company announced a domestic management restructuring. The
purpose of the management restructuring is to centralize and streamline
the management of the domestic sales, research and manufacturing
activities.
    
    The Company is conducting a facilities utilization review to
determine if improved performance can be obtained through consolidating
certain facilities with a focus on improved overhead absorption. The term labor contract at Raybestos Automotive Components Company in
Sterling Heights, Michigan, is due to expire in October, 2004. The Company
expects to begin negotiations relating to this contract during August, 2004. International The following tables set forth selected income statement data for the
International segment for the 13 and 26 weeks ended June 27, 2004 and June 29,
2003. For the 13 weeks ended(amounts in millions)June 27, 2004
    
    June 29,2003Net sales
    
    $
    16.9
    
    
    
    100.0
    %
    
    $
    14.9
    
    
    
    100.0
    %Gross profit
    
    
    4.6
    
    
    
    27.6
    
    
    
    3.6
    
    
    
    24.4Selling, general and
administrative expense
    
    
    2.7
    
    
    
    15.9
    
    
    
    2.2
    
    
    
    14.8Income before taxes
    
    
    1.8
    
    
    
    10.5
    
    
    
    1.5
    
    
    
    10.1
 For the 26 weeks ended(amounts in millions)June 27, 2004
    
    June 29,2003Net sales
    
    $
    33.5
    
    
    
    100.0
    %
    
    $
    30.0
    
    
    
    100.0
    %Gross profit
    
    
    9.4
    
    
    
    28.2
    
    
    
    7.5
    
    
    
    25.2Selling, general and
administrative expense
    
    
    5.4
    
    
    
    16.0
    
    
    
    4.6
    
    
    
    15.4Income before taxes
    
    
    4.0
    
    
    
    11.8
    
    
    
    2.9
    
    
    
    9.6
 The International segments sales increased $2.0 million or 13.2% in the
second quarter of 2004 from the same period in 2003. Sales for the 26 week
period ended June 27, 2004 increased $3.6 million or 11.9% from the same period
in 2003. The increase is principally due to favorable currency translation
gains of $.9 million and $2.7 million in the 13 and 26 weeks ended June 27,
2004, respectively. The currency translation gains reflect the increase
period-over-period in the exchange rate of the Euro and the British pound to
the U.S. dollar. After adjusting for currency translation gains, the increase
in sales for the quarter and year to date period is due to increasing demand
most notably in China and to a lesser degree in Europe. Gross profit
for the 13 and 26 weeks ended June 27, 2004 was $4.6 million
and $9.4 million, respectively compared with $3.6 million and $7.5 million for
the 13 and 26 weeks ended June 29, 2003, respectively. The
segments gross profit was favorably impacted by currency translation gains in
the amount of $.2 million and $.6 million in the 13 and 26 weeks ended June 27,
2004, respectively. Gross profit as a
percentage of sales increased to 27.6% in the second quarter of 2004 compared
to 24.4% in the same quarter last year; and increased to 28.2% compared with
25.2% for the 6 months ended June 27, 2004 and June 29, 2003, respectively. -27-




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After adjusting for currency translation, the increase in
gross margin for the quarter and year to date period is primarily due to
favorable product mix in the German dry friction business and cost reductions
in the segments wet friction business. Gross profit decreased slightly in
China year over year due to increasing competitive pricing pressures within
that market and unfavorable product mix. SG&A expense increased $.5 million or 22.7% for the second quarter of 2004
compared to the same period in 2003 and $.8 million or 17.4% for the first half
of 2004 compared to the same period last year. SG&A expense as a percentage of
sales increased slightly for the 13 and 26 weeks ended June 27, 2004 compared
to the same periods in the prior year. The segments SG&A expense was
unfavorably impacted by currency
translation gains in the amount of $.2 million and $.5 million in the 13 and 26
weeks ended June 27, 2004, respectively. After adjusting for currency
translation, the remaining increase in SG&A as a percent of sales is driven by
an increase in expense in its wet friction operation in the United Kingdom. As a result of the above, income before taxes improved to $1.8 million for
the 13 weeks ended June 27, 2004 compared to $1.5 million in the same period in
2003. For the 26 week period income before taxes improved to $4.0 million
compared to $2.9 million for the same period last year. The impact of currency
translation on income before taxes was negligible for both the 13 and 26 week
period ended June 27, 2004. The Company is currently conducting a facilities utilization review to
determine if profitability can be improved through consolidating certain
facilities. If the facilities utilization review results in a decision to
consolidate or close certain facilities a loss may be incurred relating to
these actions. Aftermarket The following tables set forth selected income statement data for the
Aftermarket segment for the 13 and 26 weeks ended June 27, 2004 and June 29,
2003. For the 13 weeks ended(amounts in millions)June 27, 2004
    
    June 29, 2003Net sales
    
    $
    13.6
    
    
    
    100.0
    %
    
    $
    11.3
    
    
    
    100.0
    %Gross profit
    
    
    4.3
    
    
    
    31.6
    
    
    
    3.3
    
    
    
    28.9Selling, general &
administrative expense
    
    
    1.6
    
    
    
    12.0
    
    
    
    1.2
    
    
    
    10.7Income before taxes &
minority interest
    
    
    2.6
    
    
    
    18.9
    
    
    
    2.1
    
    
    
    18.9
 For the 26 weeks ended(amounts in millions)June 27, 2004
    
    June 29, 2003Net sales
    
    $
    26.0
    
    
    
    100.0
    %
    
    $
    22.8
    
    
    
    100.0
    %Gross profit
    
    
    8.0
    
    
    
    30.7
    
    
    
    6.6
    
    
    
    29.1Selling, general &
administrative expense
    
    
    3.2
    
    
    
    12.2
    
    
    
    2.3
    
    
    
    9.9Income before taxes &
minority interest
    
    
    4.8
    
    
    
    18.5
    
    
    
    4.5
    
    
    
    20.0
 The Aftermarket segments sales increased $2.3 million or 20.6% in the
second quarter of 2004 from the same period in 2003. Sales for the 26 week
period ended June 27, 2004 increased $3.2 million or 14.1% from the same period
in 2003. The increase in sales is due to increased volume to existing domestic
customers, expansion of product offering within existing product lines and
increased foreign market share. Gross profit for the 13 and 26 weeks ended June 27, 2004 was $4.3 million
and $8.0 million, respectively compared with $3.3 million and $6.6 million for
the 13 and 26 weeks ended June 29, 2003. The increase in gross -28-




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profit is due
primarily to the increased sales in the 2004 periods compared to the same
periods in 2003. Gross profit as a percentage of sales increased to 31.6% in
the second quarter of 2004 compared to 28.9% in the same quarter last year; and
increased to 30.7% compared with 29.1% for the 6 months ended June 27, 2004 and
June 29, 2003, respectively. The increase in gross profit as a percent of
sales is due to increased sales of higher margin products. The Aftermarket
segment experienced raw material price increases during the first 26 weeks of
2004 due to the increased price of steel which were able to be offset through
sales price increases. However, management anticipates that the increased
price of steel may negatively impact profitability during the remainder of
2004. SG&A expense increased $.4 million or 33.3% for the second quarter of 2004
compared to the same quarter in 2003 and $.9 million or 39.1% for the first
half of 2004 compared to the same period last year. The
increase in SG&A is principally the result of increased incentive compensation
and medical costs. As a result of the above, income before taxes and minority interest
improved to $2.6 million for the 13 weeks ended June 27, 2004 compared to $2.1
million in the same period in 2003. For the 26 week period income before taxes
and minority interest improved to $4.8 million compared to $4.5 million for the
same period last year. Liquidity, Capital Resources and Future Liquidity The Companys cash and cash equivalents at June 27, 2004 totaled $16.0
million compared to $16.4 million at December 28, 2003, a decrease of $.4
million. Capital expenditures for the six-month period totaled $1.8 million,
which is lower than planned expenditures, and a reduction of $3.8 million
compared with the capital spending for the same period in the prior year.
Capital spending is expected to increase during the remainder of 2004 compared
to the first half of the year, but is not expected to return to prior year
levels. Net cash used in operating activities was $.4 million for the six-month
period ended June 27, 2004, compared to cash provided by operating activities
of $4.0 million in the prior year period. Cash outflows for operating assets
and liabilities were $9.6 million during the current year period, which was
primarily comprised of the following: a $7.1 million increase in trade accounts
receivable, a $1.5 million increase in inventories, a $2.4 million cash payment
for pension funding, partially offset by a $1.4 increase in other liabilities,
net. These were the most significant aspects of the change in other operating
activities recorded on the statement of cash flows. The total borrowings at June 27, 2004 of $24.5 million compares to total
borrowings of $22.4 million at year-end 2003, an increase of $2.1 million
period-over-period. The available lines of credit at June 27, 2004 of $9.7
million compares to $10.6 million at year-end 2003, a decrease in availability
of $.9 million. Full details of the Companys debt are contained in Note F to
the Condensed Consolidated Financial Statements. In summary of the above, the cash and available lines of credit at June
27, 2004 were $25.7 million compared to $27.0 million at year-end 2003, a
decrease in cash and available lines of credit of $1.3 million. Refer to the Managements Discussion and Analysis section and to Notes F -
Debt and N  Commitments to the consolidated financial statements, included
within the Companys 2003 Form 10-K, for information regarding the Companys
obligations and commitments by year. These obligations and commitments consist
of long-term debt, capital leases and rental agreements. The Companys potential obligations regarding environmental remediation
are explained fully in Note G  Litigation of the Condensed Consolidated
Financial Statements. The Company assumed the liability for the Raymark pension plans as part of
the reorganization. Funding for the plans in 2004 is expected to be
approximately $4.4 million of which $2.4 million was funded in the first six
months of 2004. Certain tax issues are discussed in Note I  Income Taxes, which provide
details concerning the status of the current Internal Revenue Service audit and
the use of certain future tax benefits. -29-




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The Company
incurred costs associated with the retirement of its President
and Chief Executive Officer during the second quarter and the restructuring of
its domestic management team during the third quarter of 2004 (See Note L 
Subsequent Event of the Condensed Consolidated Financial Statements). The
total cost associated with these items is approximately $1.3 million of which
$.8 million will be paid during the remainder of 2004, with the balance paid
during 2005. The Company
is conducting a facilities utilization review to determine if
improved performance can be obtained through consolidation or closure
of certain facilities. If, as a result of this review,
a decision is made to consolidate or close certain facilities the Company may
incur expenses related to these actions. Management
believes that existing cash balances, the Companys lending
facilities and cash flow from operations will be sufficient to meet all of the
Companys obligations arising in the normal course of business,
including anticipated capital investments. However, the ability of the
Company to utilize its lending facilities is dependent on the Companys ability
to meet its financial forecasts, which is not assured, and to meet the
financial covenants contained in its credit facilities. These forecasts
include certain revenue assumptions generally consistent with the prior year
for the Domestic Wet Friction (on a comparable basis) and Aftermarket segments
and modest growth in the International segment, as well as certain cost-saving
initiatives. If the Company does not comply with the financial covenants, an
event of default would occur and could result in the acceleration of the
Companys indebtedness under its domestic credit facilities. If that were to
occur, the ability of the Company to continue would be dependent upon, among
other things, its ability to amend the credit facilities, take certain actions
to generate cash and/or to seek additional alternative financing from other
lenders. Financial Risks The Company
maintains lines of credit with United States and foreign
banks, as well as other creditors detailed in Note F to the Condensed
Consolidated Financial Statements. The Company is naturally exposed to various
interest rate risk and foreign currency risk in its normal course of business. Management does not
anticipate a significant change in fiscal policy in any of its borrowing
markets in 2004 given current economic conditions. The Company
strives to manage working capital levels to support business needs
while minimizing borrowings. Further, the Company can
reduce the short-term impact of interest rate fluctuations through deferral of
certain capital investment should the need arise. The Company maintains borrowings in both fixed rate and variable rate debt
instruments. The fixed rate debt at June 27, 2004 of $5.8 million had rates of
interest that ranged from 2.5% to 6.2%. The variable rate debt at June 27,
2004 of $18.4 million had rates of interest that ranged from 3.0% to 4.8%. The
variable debt reprices either at prime rate or the Eurodollar rate. The
Company has not entered into any interest rate management programs such as
interest rate swaps or other derivative type transactions. The amount of
exposure in the short-term that could be created by increases in rates is not
considered significant by management. The local currencies of the Companys foreign subsidiaries have been
designated as their functional currencies. Accordingly, financial
statements of foreign operations are translated using the exchange rate at
the balance sheet date for assets and liabilities, historical exchange
rates for elements of stockholders equity, and an average exchange rate in
effect during the year for revenues and expenses. Where possible, the
Company attempts to mitigate foreign currency translation effects by
borrowing in local currencies to fund operations. The Company does not
believe that the fluctuations in foreign currency will have a material
adverse effect on the Companys overall consolidated financial condition.
Additionally, the Company does not enter into agreements to manage any
currency transaction risks. -30-




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Item 3. Quantitative and Qualitative Disclosures About Market Risk See Item 2. 
 Item 4. Controls and Procedures  (a)
    
    The Company conducted an evaluation of the effectiveness of the
design and operation of the Companys disclosure controls and
procedures under the supervision and with the participation of
management, including the Companys principal executive officer and
principal financial officer, as of June 27, 2004. Based on this
evaluation, the principal executive officer and principal financial
officer have each concluded that such disclosure controls and
procedures were effective in all material respects in ensuring that
information required to be disclosed by the Company in reports that
it files under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and
Exchange Commission rules and forms.(b)
    
    No significant changes were made to the Companys internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses. -31-




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings See discussion of litigation in Note G of the Condensed Consolidated
Financial Statements. 
 Item 2. Changes in Securities and Use of Proceeds See discussion of the Companys debt agreements in Note F of the Condensed
Consolidated Financial Statements. 
 Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of Raytech was held on June 24, 2004.
The following matters were submitted to a stockholder vote at the Annual
Meeting. The votes cast for, against or withheld, abstentions and non-votes on
the matters were as set forth below. 1. Proposal to elect eight directors for one-year terms and until their
respective successors are elected. The following directors were nominated and
elected: For
    
    WithheldRobert F. Carter
    
    
    37,339,542
    
    
    
    883,406Archie R. Dykes
    
    
    38,104,905
    
    
    
    118,043David N. Forman
    
    
    38,105,642
    
    
    
    117,306John H. Laeri
    
    
    37,857,659
    
    
    
    365,289Stanley J. Levy
    
    
    38,104,937
    
    
    
    118,011Richard A. Lippe
    
    
    37,857,846
    
    
    
    365,102Gene Locks
    
    
    37,857,843
    
    
    
    365,105John J. Robbins
    
    
    38,105,643
    
    
    
    117,305
 2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as
auditors for 2004. The proposal was adopted. For:  38,128,452  Against:  89,390  Abstain:  5,106 For purposes of determining whether a proposal has received a majority
vote, abstentions were included in the vote totals with the result that an
abstention had the same effect as a negative vote. Under applicable Delaware
law, non-votes were not included in the vote totals of proposals voted and,
therefore, had no effect on the vote on that proposal. A non-vote would
occur when a broker holding shares for a beneficial owner voted on one proposal
but did not vote on another proposal because the broker did not have
discretionary voting power and had not received instructions from the
beneficial owner. -32-




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10(a)
    
    Mortgage dated April 28, 2004, by Raybestos Products Company
to The Pension Benefit Guaranty Corporation.10(b)
    
    Agreement between AP Services, LLC
and Raytech Corporation for the engagement of AP Services, LLC to
provide certain temporary employees to Raytech Corporation.31.1
    
    Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 200232.1
    
    Certifications of the Chief Executive Officer and the Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 (b) Reports on 8-K 1.
    
    Current Report on Form 8-K dated March 29, 2004,
announcing preliminary financial results for the year ended December
28, 2003 and late filing of Annual Report on Form 10-K.2.
    
    Current Report on Form 8-K dated May 27,
2004, announcing retirement of Albert A. Canosa, President
and Chief Executive Officer, and appointment of Larry W.
Singleton as interim President and Chief Executive
Officer.
 -33-




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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 CORPORATIONBy:
    /s/JOHN B. DEVLINJohn B. DevlinVice President, Treasurer
and Chief Financial Officer Date: August 11, 2004 -34-