<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 29, 1996 1-9298
RAYTECH CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-1182033
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Suite 512, One Corporate Drive
Shelton, Connecticut 06484
(Address of Principal Executive Office) (Zip Code)
(203) 925-8023
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
Common Stock - $1.00 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in part
III of this Form 10-K or any amendment to this Form 10-K. / /
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 filed requirements for the past 90 days.
Yes X No
As of March 17, 1997, 3,255,632 shares of common stock were outstanding
and the aggregate market value of these shares (based upon the closing
price of these shares on the New York Stock Exchange) on such date
held by non-affiliates was approximately $17.5 million.
Documents Incorporated by Reference
Portions of Registrant's definitive proxy statement pursuant to
Regulation 14A for the 1997 Annual Meeting of Shareholders are
incorporated by reference in Part III.
<PAGE>
INDEX TO RAYTECH CORPORATION
1996 FORM 10-K
PART I.
Page
Item 1. Business
(a) General Development of Business .................. 4
(b) Financial Information About Industry Segments .... 7
(c) Narrative Description of Business ................ 7
Introduction ..................................... 7
Sales Methods .................................... 9
Raw Material Availability ........................ 9
Patents and Trademarks ........................... 10
Competition, Significant Customers and Backlog ... 10
Employees ........................................ 11
Capital Expenditures ............................. 11
Research and Development ......................... 11
Environmental Matters ............................ 11
(d) Financial Information About Foreign Operations ... 12
Item 2. Properties ............................................ 12
Item 3. Legal Proceedings ..................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ... 20
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ......................... 21
Item 6. Selected Financial Data ............................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 23
Item 8. Financial Statements and Supplementary Data ........... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures .................. 82
<PAGE>
PART III.
Page
Item 10. Directors and Officers of Registrant ................ 82
Item 11. Executive Compensation .............................. 82
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................. 82
Item 13. Certain Relationships and Related Transactions ...... 82
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................... 82
(a)(1) List of Financial Statements ................ 82
(a)(2) List of Financial Statement Schedules ....... 83
(a)(3) Exhibits .................................... 83
(b) Reports on Form 8-K ......................... 83
(c) Index of Exhibits............................ 83
(d) Index to Consolidated Financial Statements
and Financial Statement Schedules
(reference) ................................. 86
Index to Consolidated Financial Statements and
Financial Statement Schedules................................ 87
Signatures .................................................... 92
<PAGE>
Item 1. Business
(a) General Development of Business.
Raytech Corporation was organized in June 1986 as a
Delaware corporation. On October 15, 1986, Raytech became the
public holding company for its subsidiaries, Raymark Corporation
and Raymark Industries, Inc. (jointly referred to as "Raymark").
At the Annual Stockholders' Meeting held in October 1986, the
stockholders voted in favor of the establishment of a new holding
company, Raytech, to serve as the continuing vehicle for public
ownership of Raymark and of other businesses which may be
acquired by Raytech. Pursuant to a plan of merger, the common
stock of Raymark was, on October 15, 1986, the effective date of
the merger, converted on a share for share basis into common
stock of Raytech. Consequently, the stockholders of Raymark
became the stockholders of Raytech. Additionally, each
stockholder was granted a right to purchase a warrant for each
share held. Most of the warrants were sold and the proceeds were
used to cover Raytech's initial capitalization, organizational
and operating expenses. The warrants expired on October 1, 1994.
In 1986, Raytech sought the advice of counsel as to
whether or not newly acquired assets and businesses would be
subject to the asbestos-related claims against Raymark on
theories of successor liability, piercing the corporate veil or
fraudulent conveyance. Counsel advised Raytech that such
determinations were heavily fact-dependent and were dependent
upon how the transactions were ultimately structured and
implemented. Such counsel further advised that, if Raytech made
acquisitions of assets or businesses without the use of Raymark's
assets or credit or made purchases of assets or businesses of
Raymark that, although the case law in the area was still
developing and applicable legal standards may vary considerably
from state to state, it should be possible under existing case
law to acquire such assets or businesses without thereby
subjecting Raytech or such acquired assets or businesses to
liability for the asbestos-related claims of Raymark under the
doctrines of successor liability, piercing the corporate veil or
fraudulent conveyance, so long as Raytech complied with the
principles of (i) paying fair market value, (ii) acquiring
businesses that did not give rise to any asbestos-related or
other claims against Raymark, (iii) permitting Raymark to retain
the proceeds for its ongoing business and creditors, (iv)
entering the transactions in good faith and not to hinder, delay
or defraud creditors, and (v) conducting its affairs independent
of Raymark.
Following the merger, Raytech sought to finance the
acquisition of attractive businesses in industries that utilized
management's operating expertise. In accordance with the stated
purpose and goals of the restructuring, Raytech through its
subsidiaries, and during 1987 purchased the non-asbestos
businesses of Raymark as follows:
<PAGE>
1. In October 1987, Raytech Composites, Inc., a wholly-
owned subsidiary of Raytech, acquired certain assets
and assumed certain liabilities of the Wet Clutch
and Brake Division of Raymark for $76.9 million.
The purchase price initially was comprised of $14.9
million cash, $16 million of Raytech stock issuable
in future installments and $46 million of notes.
This acquisition was financed partially through the
sale of Warrants and funds borrowed from a new
lender. A 1991 amendment provided for cash in lieu
of future installments of stock.
2. In November 1987, Raytech acquired the stock of
Raybestos Industrie-Produkte GmbH, a German
subsidiary, from Raymark for $8.2 million. The
purchase price initially was comprised of a DM7
million note, equating to approximately $4.3
million, and DM6.5 million, equating to approxi-
mately $3.9 million, of Raytech stock issuable in
future installments. A 1991 amendment provided for
cash in lieu of future installments of stock.
In the anticipation of such purchases by Raytech,
Raymark retained Duff & Phelps, Inc., nationally-known
independent investment and financial analysts, to determine the
fair market value of certain Raymark assets and businesses
exclusive of all asbestos-related actual and contingent
liabilities or litigation being transferable to the buyer or
buyers. Duff & Phelps, Inc. completed its assigned
responsibilities and provided Raymark with its opinion regarding
the current fair market value of the assets and businesses of
Raymark reflecting the assumption that no actual or contingent
liabilities arising from asbestos-related liabilities or
litigation could be transferred to prospective purchasers. In
addition, Raymark retained Dean Witter Reynolds, Inc. as its
investment banker for purposes of exercising its efforts to
obtain bids for the purchase of certain of its assets and
businesses and to otherwise advise and assist in the sale and
divestiture thereof. These processes were the basis for
determining the purchase prices.
As part of the continuing restructuring of Raytech
and in order to attempt to alleviate itself of the substantial
asbestos-related liabilities and litigation surrounding Raymark,
management, believing it to be in the best interest of Raytech,
recommended to the Board of Directors the sale of Raymark stock.
The sale was approved by the Raytech Board of Directors subject
to shareholder approval. In May 1988 following shareholder
approval, Raytech sold all of the Raymark stock to Asbestos
Litigation Management, Inc. ("ALM"), thereby divesting itself of
Raymark. Consideration received for the Raymark stock consisted
of $50 cash paid at the closing and a 7-l/2% $950 promissory note
to be paid in six equal annual installments beginning one year
after the closing with interest payable annually. ALM was a
<PAGE>
wholly-owned subsidiary of Litigation Control Corporation
("LCC"). At the time of the said sale and purchase, LCC was 60%
beneficially owned by Craig R. Smith, President and Chief
Executive Officer of Raytech (15% through his son, Bradley C.
Smith). The basis for determining the purchase price of the
stock was negotiations between the parties but was affected by
Raymark's substantial asbestos-related liabilities.
Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-
defendant with Raymark and other named defendants in
approximately 3,300 asbestos-related lawsuits as a successor in
liability to Raymark. Until February 1989, the defense of all
such lawsuits was provided to Raytech by Raymark in accordance
with an indemnification agreement included as a condition of the
purchase of the Wet Clutch and Brake Division and the German
subsidiary from Raymark in 1987. In February 1989, an
involuntary petition for bankruptcy was filed against Raymark,
and subsequently, a restrictive funding order was issued by an
Illinois Circuit Court which required one of Raymark's insurance
carriers to pay claims but not defense costs and another
insurance carrier had been declared insolvent. These
circumstances caused Raymark to be unable to fund the costs of
defense to Raytech under its indemnification agreement. (For a
discussion regarding Raymark's insurance, refer to Item 3. Legal
Proceedings, third paragraph herein.) With the loss of
indemnification from Raymark, the defense of such lawsuits
shifted directly to Raytech as it had no insurance providing
coverage for asbestos-related liabilities. As a result of the
above factors and in order to obtain a ruling binding across all
jurisdictions on whether Raytech is liable as a successor for
asbestos-related and other claims including claims yet to be
filed relating to the operations of Raymark or Raymark's
predecessors, in March 1989 Raytech filed a petition seeking
relief under Chapter 11 of Title 11, United States Code in the
United States Bankruptcy Court, District of Connecticut. Under
Chapter 11, substantially all litigation against Raytech has been
stayed while the debtor corporation and its non-filed operating
subsidiaries continue to operate their businesses in the ordinary
course under the same management and without disruption to
employees, customers or suppliers. The bankruptcy proceedings
have imposed little or no limitation to the manufacturing and
selling of products and other day-to-day operations of the
businesses.
In an asbestos-related personal injury case decided
in October 1988 in a U.S. District Court in Oregon, Raytech was
ruled under Oregon equity law to be a successor to Raymark's
asbestos-related liability. The successor ruling was appealed by
Raytech and in October 1992, the Ninth Circuit Court of Appeals
affirmed the District Court's judgment on the grounds stated in
the District Court's opinion. The effect of this decision
extends beyond the Oregon District due to a 1995 Third Circuit
Court of Appeals decision in a related case wherein Raytech was
<PAGE>
collaterally estopped (precluded) from relitigating the issue of
its successor liability for Raymark's asbestos-related
liabilities and a petition for a writ of certiorari was denied by
the U.S. Supreme Court in October 1995. (For a further
discussion regarding this liability and bankruptcy proceedings,
refer to Item 3. Legal Proceedings herein.)
In January 1996, Raytech Composites, Inc.
("Composites"), a subsidiary of Raytech, and Raybestos Products
Company ("RPC"), a subsidiary of Composites, entered into a
series of related transactions with Advanced Friction Materials
Company ("AFM") and related entities and persons wherein
Composites acquired a 47% minority share of the common stock of
AFM, and RPC acquired certain assets from AFM, including
machinery, equipment, inventories and other operating assets, and
committed to acquire the land and building utilized in AFM's
manufacturing operations and the common stock of AFM Management
Company which leased employees to AFM. In addition, the parties
entered into various other related agreements, including supply
and technology agreements. Under the agreements AFM will bear the
responsibility for sales and marketing of products to automotive
manufacturers.
Barring an unforeseen downturn in business and
assuming that the reorganization plan filed by Raytech to limit
its legal responsibility for Raymark's asbestos-related and other
liabilities will be confirmed in the bankruptcy proceedings,
Raytech believes it will generate sufficient cash flow to satisfy
1997 debt maturities, working capital and capital spending needs.
However, the outcome of these matters is uncertain and should
Raytech be held fully liable, there would be a material adverse
impact on Raytech as it does not have the resources needed to
fund Raymark's substantial uninsured asbestos-related liabilities
and environmental liabilities and related costs of litigation as
defined further in Item 3. Legal Proceedings.
(b) Financial Information About Industry Segments
The sales and operating income of Raytech on a
consolidated basis, and its identifiable assets for the fiscal
years ended December 29, 1996, December 31, 1995, and January 1,
1995 are set forth herein on page 71.
(c) Narrative Description of Business
Introduction
Raytech, through its principal subsidiaries, is a
multinational manufacturer and marketer of specialty engineered
products for heat resistant, inertia control, energy absorption
and transmission applications. Its products are used in the
vehicular, aerospace, nucleonics, petrochemical, energy, metal
<PAGE>
working, construction, agriculture, utility, and electronic
industries, among others.
Raytech operates through six business units:
Raybestos Products Company, located in Crawfordsville, Indiana,
and Sterling Heights, Michigan; Raybestos Industrie-Produkte
GmbH, located in Morbach, Germany; Raybestos Reibtechnik GmbH,
located in Leverkusen, Germany; Raybestos U.K. Ltd., located in
Liverpool, England; Allomatic Products Company, located in
Sullivan, Indiana; and Raybestos Aftermarket Products Company
located in Crawfordsville, Indiana. The percentage of sales of
products represented by each of these business units for the last
three years was as follows:
Business Unit 1996 1995 1994
Raybestos Products Company 55% 47% 48%
Raybestos Industrie-
Produkte GmbH 17% 23% 22%
Raybestos Reibtechnik GmbH 3% 4% 4%
Raybestos U.K. Limited <1% <1% -
Allomatic Products Company 13% 14% 13%
Raybestos Aftermarket
Products Company 11% 12% 14%
Raybestos Products Company manufactures and markets
a variety of products utilizing friction materials, consisting of
paper, elastomeric, graphitic and sintered metal, among others,
which operate in an oil-immersed environment. The products,
including those manufactured at Sterling Heights, are used to
absorb energy in automatic transmissions, clutches and brakes in
automotive and heavy duty off-highway vehicular applications.
Included in the Raybestos Products Company sales is
the contribution made by the acquired Sterling Heights, Michigan,
operations of Advanced Friction Materials Company ("AFM"). The
Sterling Heights sales represent 11% of total sales. Excluding
Sterling Heights, Raybestos Products Company sales, as a
percentage of total sales, are 44% in 1996.
Raybestos Industrie-Produkte GmbH manufactures and
markets dry friction material products consisting of clutch
facings and friction washers used in passenger cars, trucks,
tractors, off-highway vehicles, specialized vehicles and
machines.
Raybestos U.K. Ltd. manufactures and markets
friction material products which operate in an oil immersed
environment. The products are used in automatic transmissions,
<PAGE>
clutches and brakes in automotive and heavy duty off-highway
vehicular applications.
Allomatic Products Company manufactures and markets
automatic transmission products, including friction plates and
filters, for the automotive aftermarket industry.
Raybestos Aftermarket Products Company, which
operates a distribution facility in Crawfordsville, Indiana,
markets automatic transmission products and other friction
materials in the aftermarket.
Raybestos Reibtechnik GmbH markets and distributes
friction material products for oil immersed applications
throughout Europe.
Sales Methods
Raytech serves the on-highway and off-highway
vehicular markets by sale of its products to Original Equipment
Manufacturers (OEM) of heavy trucks, buses, automobiles,
construction and mining equipment and agricultural machinery, and
through distributors supplying components and replacement parts
for these vehicles.
The construction and mining equipment and
agricultural machinery industries comprise the off-highway
vehicle market. Each has two segments: OEM and aftermarket.
The aftermarket is supplied primarily through the OEM's, who sell
products directly to equipment distributors.
Sales are made both to OEM's and distributors by
company sales representatives. Sales in both the original
equipment and replacement markets are made under standard sales
contracts for all or a portion of a customer's products over a
period of time, or on an open order basis. Sales to certain
vehicular markets are made through AFM as a distributor.
Raytech's products are sold around the world,
through export from the U.S. plants, through its wholly-owned
subsidiaries in Germany and the United Kingdom, and through
distributors.
Raw Material Availability
The principal raw materials used in the manufacture
of energy absorption and transmission products include cold-
rolled steel, metal powders, synthetic resins, plastics and
synthetic and natural fibers. All of these materials are readily
available from a number of competitive suppliers.
<PAGE>
Patents and Trademarks
Raytech owns a number of patents both foreign and
domestic. Such patents expire between 1997 and 2018. In the
opinion of management, the business is not dependent upon the
protection of any of its patents or licenses and would not be
materially affected by the expiration of any of such patents and
licenses.
Raytech operates under a number of registered and
common law trademarks, including the trademark "RAYBESTOS."
Certain trademarks have been licensed on a limited basis. Some
trademarks are registered internationally.
Competition, Significant Customers and Backlog
Raytech faces vigorous competition with respect to
price, service and product performance in all of its markets from
both foreign and domestic competitors. In the original equipment
automotive automatic transmission parts sector there are
approximately four competitors, including one foreign company
utilizing price, service and product performance to attempt to
gain market share. Though not the largest company competing in
this market, Raytech is highly competitive due to cost efficient
plants, dedicated and skilled employees and products that are
high in quality and reliability. The original equipment heavy-duty,
off-highway vehicle sector is highly competitive with
approximately three companies vying for the business, including
two foreign companies. Price, service and product performance
are competitive factors. Raytech is the leading competitor in
these markets and sets the standards for the industry, resulting
from its integrated, cost efficient operations and its high
quality products and service. The European markets in which the
Company participates are competitive with approximately two
competitors in the passenger car clutch sector and approximately
three competitors for the oil-immersed friction plate sector.
Raytech is not the leader but has enhanced its competitive
position in the European markets, having significantly increased
its market share through acquisition and restructuring. In the
domestic automotive automatic transmission aftermarket sector
there are approximately five competitors. Here, Raytech believes
that some of its competitors have greater financial resources,
but its competitive position is increasing due to the customer
acceptance of both its high quality and low cost product lines.
The transmission filter business is competitive with
approximately five competitors. Raytech is not a major
competitor, having recently entered this market. Domestic sales
to a single customer, Caterpillar, Inc., were 15%, 14%, and 16%
of consolidated sales in 1996, 1995, and 1994, respectively.
The Company's German subsidiaries had combined sales to two
customers, Fichtel & Sachs, amounting to 7%, 9%, and 9% of
consolidated sales in 1996, 1995, and 1994, respectively, and 5%,
8%, and 9% to LUK in 1996, 1995, and 1994, respectively. Sales
backlog at the end of 1996, 1995, and 1994 was approximately $83,
<PAGE>
million, $75 million, and $72 million, respectively. It is
anticipated that current backlog will be filled in 1997.
Competition in all markets served by Raytech is based on product
quality, service and price. On such basis Raytech believes that
it is highly competitive in all markets in which it is engaged.
Employees
At December 29, 1996, Raytech employed approximately
1,259 employees, compared with 1,244 employees at the end of
1995. Raytech has agreements with labor unions relating to
wages, hours, fringe benefits and other conditions of employment
which cover most of its production employees. The term of the
labor contract at Raybestos Products Company in Crawfordsville,
Indiana, is due to expire in May 2000 and in Sterling Heights,
Michigan, in October 1998.
Capital Expenditures
Capital expenditures were $8.4 million, $10.3
million, and $11.4 million for 1996, 1995 and 1994, respectively.
Capital expenditures for 1997 are projected at $20.5 million.
Research and Development
Research and development costs were approximately
$6.0 million, $5.9 million, and $5.3 million for 1996, 1995 and
1994, respectively. Separate research and development facilities
are maintained at appropriate manufacturing plants for the
purpose of developing new products, improving existing production
techniques, supplying technical service to the business units and
customers, and discovering new applications for existing
products. Research and development costs for 1997 are projected
at $6.1 million.
Environmental Matters
Various federal, state and local laws and
regulations related to the discharge of potentially hazardous
materials into the environment, and the occupational exposure of
employees to airborne particles, gases and noise have affected
and will continue to affect the Registrant's operations, both
directly and indirectly, in the future. The Company's operations
have been designed to comply with applicable environmental
standards established in such laws and regulations. Pollution
and hazardous waste controls are continually being upgraded at
the existing manufacturing facilities to help to ensure
environmental compliance. Expenditures for upgrading of
pollution and hazardous waste controls for environmental
compliance, including capital expenditures, are projected to be
$1.2 million for 1997. Because environmental regulations are
constantly being revised and are subject to differing
interpretations by regulatory agencies, Raytech is unable to
predict the long-range cost of compliance with environmental laws
<PAGE>
and regulations. Nevertheless, management believes that
compliance should not materially affect earnings, financial
position or its competitive position.
(d) Financial Information about Foreign Operations
Financial information about the foreign operations
of Raytech for the fiscal years ended December 29, 1996,
December 31, 1995, and January 1, 1995 is set forth in Note K to
Consolidated Financial Statements, included herein.
Item 2. Properties
Raytech, through its subsidiaries, has plants located in
Crawfordsville and Sullivan, Indiana; Sterling Heights, Michigan;
Liverpool, England, and in Morbach, Germany. All of these plants
are used for the manufacturing and warehousing of products
produced by Raytech. The Crawfordsville facility is owned and
consists of approximately 455,000 square feet of office,
production, research and warehousing space that is suitable and
adequate to provide the productive capacity to meet reasonably
anticipated demand of products. The productive capacity is
underutilized, leaving space for future demand. The Sterling
Heights facility is owned and consists of approximately 90,000
square feet of office, production, research and warehousing space
that it suitable and adequate to provide the productive capacity
to meet reasonably anticipated demand of products. The Sullivan
facility was purchased in March 1994 and consists of 96,000
square feet of office, production and warehousing space that is
suitable and adequate to provide the productive capacity to meet
anticipated demand of products. The productive capacity is
underutilized, leaving space for future demand. The Liverpool,
England, facility is leased and consists of 27,000 square feet of
office, production, research and warehousing space. The Morbach,
Germany, plant is owned and consists of 108,000 square feet of
office, production, research and warehousing space that is
suitable and adequate to provide the production capacity to meet
reasonably anticipated demand of products. The property owned in
Morbach, Germany, is pledged as collateral under various lending
agreements. Raytech also leases warehouse space in
Crawfordsville, Indiana, for aftermarket distribution, office
space in Leverkusen, Germany, for Raybestos Reibtechnik GmbH and
office space in Shelton, Connecticut, for its headquarters staff.
Raytech and its subsidiaries believe that their
properties are substantially suitable and adequate for their
purposes. All of the production facilities are continually being
upgraded to comply with applicable environmental standards and to
improve efficiency.
<PAGE>
Item 3. Legal Proceedings
The formation of Raytech and the implementation of the
restructuring plan more fully described in Item 1 above was for
the purpose of providing a means to acquire and operate
businesses in a corporate structure that would not be subject to
any asbestos-related or other liabilities of Raymark.
Prior to the formation of Raytech, Raymark was first
sued in an asbestos-related claim in 1971 and has since been
named as a defendant in more than 88,000 lawsuits in which
substantial damages have been sought for injury or death from
exposure to airborne asbestos fibers. More than 35,000 of such
lawsuits were disposed of by settlements, dismissals, summary
judgments and trial verdicts at a cost in excess of $333 million
principally covered by Raymark's insurance. Subsequent to the
sale of Raymark in 1988, lawsuits continued to be filed against
Raymark at the rate of approximately 1,000 per month until an
involuntary petition in bankruptcy was filed against Raymark in
February 1989 which stayed all its litigation. In August 1996,
the involuntary petition filed against Raymark was dismissed
following a trial and the stay was lifted.
Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-
defendant with Raymark and other named defendants in
approximately 3,300 asbestos-related lawsuits as a successor in
liability to Raymark. Until February 1989, the defense of all
such lawsuits was provided to Raytech by Raymark in accordance
with the indemnification agreement included as a condition of the
purchase of the Wet Clutch and Brake Division and German
subsidiary from Raymark in 1987. However, subsequent to the
involuntary bankruptcy proceedings against Raymark, a restrictive
funding order was issued by an Illinois Circuit Court which
required one of Raymark's insurance carriers to pay claims but
not defense costs and another insurance carrier has been declared
insolvent. These circumstances caused Raymark to be unable to
fund the costs of defense to Raytech under its indemnification
agreement. Raytech management was informed that Raymark's cost
of defense and disposition of cases up to the automatic stay of
litigation under the involuntary bankruptcy proceedings was
approximately $333 million of Raymark's total insurance coverage
of approximately $395 million. It has also been informed that as
a result of the dismissal of the involuntary petition, Raymark
has encountered pending and newly filed asbestos-related lawsuits
but has received $27 million from a state guarantee association
to make up the insurance policies of the insolvent carrier and
$32 million in other policies to defend against such litigation.
In October 1988, in a case captioned Raymond A. Schmoll
v. ACands, Inc., et al., the U.S. District Court for the District
of Oregon ruled, under Oregon equity law, Raytech to be a
successor to Raymark's asbestos-related liability. In this case
<PAGE>
the liability was negotiated to settlement for a negligible
amount. The successor decision was appealed and in October 1992,
the Ninth Circuit Court of Appeals affirmed the District Court's
judgment on the grounds stated in the District Court's opinion.
The effect of this decision extends beyond the Oregon District
due to a Third Circuit Court of Appeals decision in a related
case cited below wherein Raytech was collaterally estopped
(precluded) from relitigating the issue of its successor
liability for Raymark's asbestos-related liabilities.
As the result of the inability of Raymark to fund
Raytech's cost of defense recited above, and in order to obtain a
ruling binding across all jurisdictions on whether Raytech is
liable as a successor for asbestos-related and other claims
including claims yet to be filed relating to the operations of
Raymark or Raymark's predecessors, on March 10, 1989 Raytech
filed a petition seeking relief under Chapter 11 of Title 11,
United States Code in the United States Bankruptcy Court,
District of Connecticut. Under Chapter 11, substantially all
litigation against Raytech has been stayed while the debtor
corporation and its non-filing operating subsidiaries continue to
operate their businesses in the ordinary course under the same
management and without disruption to employees, customers or
suppliers. In the Bankruptcy Court a creditors' committee was
appointed, comprised primarily of asbestos claimants' attorneys.
In August 1995, an official committee of equity security holders
was appointed for a limited time relating to a determination of
equity security holders' interest in the estate.
Since the bankruptcy filing, several entities have
asserted claims in Bankruptcy Court alleging environmental
liabilities of Raymark based upon similar theories of successor
liability against Raytech as alleged by asbestos claimants.
These claims are not covered by the class action referenced below
and will be resolved in the bankruptcy case. The environmental
claims include a claim of the Pennsylvania Department of
Environmental Resources ("DER") to perform certain activities in
connection with Raymark's Pennsylvania manufacturing facility,
which includes submission of an acceptable closure plan for a
landfill containing hazardous waste products located at the
facility and removal of accumulated baghouse dust from its
operations. In March 1991, the Company entered a Consent Order
which required Raymark to submit a revised closure plan which
provides for the management and removal of hazardous waste, for
investigating, treatment and monitoring of any contaminated
groundwater and for the protection of human health and
environment at the site, all relating to the closure of the
Pennsylvania landfill and to pay a nominal civil penalty. The
estimated cost for Raymark to comply with the order is $1.2
million. The DER has reserved its right to reinstitute an action
against the Company and the other parties to the DER order in the
event Raymark fails to comply with its obligations under the
Consent Order. Another environmental claim was filed against the
Company by the U.S. Environmental Protection Agency for civil
<PAGE>
penalties charged Raymark in the amount of $12 million arising
out of alleged Resource Conservation and Recovery Act violations
at Raymark's Stratford, Connecticut, manufacturing facility.
It is possible that additional claims for reimbursement
of environmental cleanup costs related to Raymark facilities may
be asserted against Raytech, as successor in liability to
Raymark. In January 1997, the U.S. Environmental Protection
Agency ("EPA") and the State of Connecticut filed suit against
Raymark claiming $212 million in damages for cleanup of the
Stratford, Connecticut, site. The EPA has also filed a
bankruptcy claim against Raytech as a successor to Raymark for
cleanup of the Stratford site and other Raymark sites.
Determination of Raytech's liability for such claims, if any, is
subject to Bankruptcy Court deliberations and proceedings.
In April 1996, the Indiana Department of Environmental
Management ("IDEM") advised Raybestos Products Company ("RPC"), a
wholly-owned subsidiary of the Company, that it may have
contributed to the release of lead and PCB's (polychlorinated
biphenyls) found in small waterways near its Indiana facility.
In June, IDEM named RPC as a potentially responsible party
("PRP"). RPC notified its insurers of the IDEM action and one
insurer responded by filing a complaint in January 1997 in the
U.S. District Court, Southern District of Indiana, captioned
Reliance Insurance Company vs. RPC seeking a declaratory judgment
that any liability of RPC is excluded from its policy with RPC.
RPC continues to assess the extent of the contamination and its
involvement and is currently negotiating with IDEM for an agreed
order of cleanup. The Company intends to offset its
investigation and cleanup costs against its notes payable to
Raymark when such costs become known pursuant to the
indemnification clause in the wet clutch and brake acquisition
agreement since it appears that any contamination would have
occurred during Raymark's ownership of the Indiana facility.
Blood tests administered to residents in the vicinity of the
small waterways revealed no exposure.
As a result of an inspection, the Company has been
notified that the operations purchased from AFM in January 1996
in Sterling Heights, Michigan, are in violation of a consent
order issued by the Michigan Department of Environmental Quality
("DEQ"). The consent order included a compliance program
providing for measures to be taken to bring certain operations
into compliance and recordkeeping on operations in compliance.
Potential fines for the violations could be as high as $4.6
million; however, the Company is in negotiations with the DEQ and
believes it will resolve the matter for substantially less. The
Company is working diligently to get its operations in
compliance.
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court
<PAGE>
pending the conclusion of the successor liability litigation.
However, in December 1992, the creditors' committee filed a
motion to terminate the exclusive period to file a plan of
reorganization. At a hearing in May 1993, the motion was denied
by the Bankruptcy Court but was appealed by the creditors'
committee. In November 1993, the U.S. District Court reversed
the Bankruptcy Court and terminated the exclusive period to file
a plan of reorganization effective in January 1994. Accordingly,
any party in interest, including the debtor, the creditors'
committee or a creditor could thereafter file a plan of
reorganization.
In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of
seeking confirmation allowing Raytech to emerge from the
bankruptcy filed March 10, 1989. Important conditions precedent
to confirmation of the Debtor's Plan include a final judgment in
the litigation to determine whether Raytech is a successor to the
liabilities of Raymark and a resolution of the environmental
claims or other claims filed or to be filed by governmental
agencies. The Debtor's Plan provides that in the event Raytech
is found to be a successor, it is to establish a successor trust
funded by an amount determined to be the difference between what
Raytech should have paid for the businesses purchased from
Raymark less the amount actually paid and less amounts to be paid
for environmental and other claims. This remedy would satisfy
its obligations as a successor in full and render all claimants
unimpaired, thereby eliminating the need for balloting and all
equity shareholders would retain their interests in full.
Raytech believes the Debtor's Plan to be confirmable. In
September 1994, the Creditors' Committee filed its own Plan of
Reorganization in competition to the Debtor's Plan ("Creditors'
Plan"). The Creditors' Plan calls for the elimination of Raytech
Corporation and its stockholders to be replaced with a new
Raytech. All of the stock of new Raytech would then be
distributed to unsecured claimants, environmental claimants and
both past and future asbestos disease claimants on a formulated
basis set forth in the Plan. Current stockholders of Raytech
would receive nothing under the Plan. Raytech believes the
Creditors' Plan is unconfirmable and will vigorously contest
attempts to have it confirmed while it continues to try to get
the Debtor's Plan confirmed. Upon motion of the parties and
support of the Bankruptcy Court, the major interested parties
agreed in August 1995 to participate in non-binding mediation to
attempt to effectuate a consensual plan of reorganization. The
mediation process commenced in October 1995 and was concluded in
March 1996 without agreement for a consensual plan of
reorganization. The competing plans of Raytech and its creditors
will now return to Bankruptcy Court procedures. The outcome of
these matters is expected to take considerable time and is
uncertain. If an adverse plan is confirmed, it would have a
material adverse impact on Raytech and its stockholders.
<PAGE>
Other matters in the Bankruptcy Court include: (1) In
April 1996, the creditors' committee filed a motion for
appointment of a trustee based upon alleged breaches of the
Company's fiduciary obligations to its creditors. The Company
will resist the motion when heard; however, the motion has been
continued without a further hearing date set. (2) In September,
Raytech filed a motion to dismiss its bankruptcy petition for the
reason that Raymark appears to again be capable of providing
indemnity to claims pending and that may be filed against
Raytech. The said motion to dismiss has been continued by the
Court without a further hearing date set. (3) The process for
confirmation of a reorganization plan was begun in November 1996
with arguments being presented for a bar date and claim forms.
The process has been continued indefinitely pending the
completion of other matters before the Bankruptcy Court. (4) In
November 1996, Raytech filed an adversary proceeding complaint
against the creditors' committee, et al., seeking a declaratory
judgment of the Bankruptcy Court that Raytech's liability to
present and future creditors of Raymark under the theory of
successor liability is limited pursuant to bankruptcy law.
Scheduling of the proceedings is presently being considered by
the Court. (5) In January 1997, the creditors' committee filed a
motion for leave to file an adverse proceeding complaint against
Raymark, et al. seeking to have the Raytech Bankruptcy Court
assert control over Raymark and its assets on the grounds that
the reorganization of Raytech in 1986 and the corporate transfers
to Raymark in 1988 were fraudulent. The motion was continued
without a further hearing date set. (6) In March 1997, the
creditors' committee filed a motion for relief from the automatic
stay to permit the commencement of an adversary proceeding
against Raytech to litigate alternative theories of liability
bearing upon the extent to which Raytech may be liable to
Raymark's creditors. The motion is awaiting a date for hearing.
In June 1989 Raytech filed a class action in the
Bankruptcy Court captioned Raytech v. Earl White, et al. against
all present and future asbestos claimants seeking a declaratory
judgment that it not be held liable for the asbestos-related
liabilities of Raymark. It was the desire of Raytech to have
this case heard in the U.S. District Court, and since the
authority of the Bankruptcy Court is referred from the U.S.
District Court, upon its motion and argument the U.S. District
Court withdrew its reference of the case to the Bankruptcy Court
and thereby agreed to hear and decide the case. In September
1991, the U.S. District Court issued a ruling dismissing one
count of the class action citing as a reason the preclusive
effect of the 1988 Schmoll case recited above under the doctrine
of collateral estoppel (conclusiveness of judgment in a prior
action), in which Raytech was ruled to be a successor to
Raymark's asbestos liability under Oregon law. The remaining
counts before the U.S. District Court involve the transfer of
Raymark's asbestos-related liabilities to Raytech on the legal
theories of alter-ego and fraudulent conveyance. Upon a motion
for reconsideration, the U.S. District Court affirmed its prior
<PAGE>
ruling in February 1992. Also, in February 1992, the U.S.
District Court transferred the case in its entirety to the U.S.
District Court for the Eastern District of Pennsylvania. Such
transfer was made by the U.S. District Court without motion from
any party in the interest of the administration of justice as
stated by the U.S. District Court. In December 1992, Raytech
filed a motion to activate the case and to obtain rulings on the
remaining counts, which was denied by the U.S. District Court.
In October 1993, the creditors' committee asked the Court to
certify the previous dismissal of the successor liability count.
In February 1994, the U.S. District Court granted the motion to
certify, and the successor liability dismissal was accordingly
appealed. In May 1995, the Third Circuit Court of Appeals ruled
that Raytech is collaterally estopped (precluded) from
relitigating the issue of its successor liability as ruled in the
1988 Oregon case recited above, affirming the U.S. District
Court's ruling of dismissal. A petition for a writ of certiorari
was denied by the U.S. Supreme Court in October 1995. The ruling
leaves the Oregon case, as affirmed by the Ninth Circuit Court of
Appeals, as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities.
Costs incurred by the Company for asbestos related
liabilities are indemnified by Raymark under the 1987 acquisition
agreements. By agreement, Raymark has reimbursed the Company in
part for such indemnified costs by payment of the amounts due in
Raytech common stock of equivalent value. Under such agreement,
Raytech received 926,821 shares in 1989, 177,570 shares in 1990,
163,303 in 1991 and 80,000 shares in 1993. The Company's
acceptance of its own stock was based upon an intent to control
dilution of its outstanding stock. In 1992, the indemnified
costs were reimbursed by offsetting certain payments due Raymark
from the Company under the 1987 acquisition agreements. Costs
incurred in 1994, 1995 and 1996 were applied as a reduction of
the note obligations pursuant to the agreements.
In February 1994, a jury in a case in the U.S. District
Court for the Southern District of Indiana captioned Raybestos
Products Company vs. Gilbert W. Younger, et al. returned a
verdict in favor of Raybestos Products Company ("RPC"), a wholly-
owned subsidiary of the Company, for $2.9 million plus costs and
against Gilbert W. Younger and Transgo, a corporation. RPC had
sued the defendants in 1990 for defamation of products and
injurious falsehoods concerning RPC's manufactured products. In
April 1994, the Court granted RPC its costs, attorneys' fees and
interest in addition to the damages awarded by the jury. The
defendants filed for bankruptcy under Chapter 11 in 1992 and the
defendant's plan of reorganization was confirmed in September
1994 by a California Bankruptcy Court. Under the plan of
reorganization and ordered by the Court, the total amount of the
awarded damages had been placed in a secured escrow account
pending appeals. In April 1995, the Seventh Circuit Court of
Appeals affirmed the verdict except for the award of prejudgment
<PAGE>
interest. In June 1995, RPC received the awarded damages,
including post-judgment interest, in the amount of $4.6 million,
bringing the case to a final conclusion.
In January 1997, Raytech was named through a subsidiary
in a third party complaint captioned Martin Dembinski, et al. vs.
Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et
al. filed in the U.S. District Court for the Southern District of
New York for damages for asbestos-related disease. The case has
been removed to the U.S. District Court, Eastern District of
Pennsylvania. When required the Company will deny the
allegations and will vigorously defend itself against the claims
made. Discovery procedures have not yet begun.
The adverse ruling in the Third Circuit Court of Appeals
of which a petition for writ of certiorari was denied by the U.S.
Supreme Court, precluding Raytech from relitigating the issue of
its successor liability leaves the U.S. District Court's (Oregon)
1988 ruling as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities. This ruling
could have a material adverse impact on Raytech as it does not
have the resources needed to fund Raymark's potentially
substantial uninsured asbestos-related and environmental
liabilities. Determination of Raytech's actual liabilities are
subject to the Bankruptcy Court's deliberations and rulings and
the competing plans of reorganization filed in the Bankruptcy
Court referenced above.
The ultimate liability of the Company with respect to
asbestos-related, environmental, or other claims cannot presently
be determined. Accordingly, no provision for such liability has
been recorded in the financial statements. The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern. An unfavorable result on
certain or all of the matters described above would have a
material adverse effect on the Company's results of operations,
financial position and cash flows. These uncertainties raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or adjustments relating to establishment,
settlement and classification of liabilities that may be required
in connection with reorganizing under the Bankruptcy Code.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Shareholders' Meeting of Raytech was held July 19,
1996. The matters submitted to stockholder vote and the vote count
on each matter were as follows:
1. Proposal to elect two Class I Directors for full
three-year terms and until their respective successors
are elected:
For Donald P. Miller Withheld
2,876,502 34,054
For Robert B. Sims Withheld
2,876,710 33,846
2. Proposal to amend the 1990 Non-Qualified Stock Option
Plan to authorize 500,000 additional shares of common
stock for grant.
For Against Abstain
1,198,249 1,712,307 25,743
3. Proposal to ratify the appointment of Coopers & Lybrand
as auditors for 1996:
For Against Abstain
2,878,361 27,412 4,783
Abstentions and "non-votes" have the same effect as votes
against proposals presented to stockholders other than election of
directors. A "non-vote" occurs when a nominee holding shares for
a beneficial owner votes on one proposal but does not vote on
another proposal because the nominee does not have discretionary
voting power and has not received instructions from the beneficial
owner.
Pursuant to the vote of shareholders, proposals 1 and 3 above
were adopted and effective on July 19, 1996.
Directors whose terms of office as Directors continued after
the Annual Shareholders' Meeting include:
Robert L. Bennett
Robert M. Gordon
Dennis G. Heiner
Craig R. Smith
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Registrant's (Raytech) common stock is traded on the New
York Stock Exchange under the trading symbol RAY. As of March 3,
1997, there were 2,161 holders of record of the Registrant's
common stock.
Information regarding the quarterly high and low sales
prices for 1996 and 1995 and information with respect to
dividends is set forth in Note L of the Consolidated Financial
Statements, Part II, Item 8 hereof.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
FIVE-YEAR REVIEW OF OPERATIONS
(in thousands, except share data)
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating Results
Net sales $217,683 $177,498 $167,615 $139,290 $125,540
Gross profit 54,269 48,699 44,548 37,463 31,612
Operating profit 23,603 20,959 17,936 14,423 10,516
Interest expense (3,132) (2,647) (2,601) (3,816) (5,442)
Income before cumulative effect
of accounting changes 15,991(3) 14,337(2) 8,643 8,556 3,413
Cumulative effect of changes in
accounting principles - - - (3,808)(1) -
Net income $ 15,991 $ 14,337 $ 8,643 $ 4,748 $ 3,413
Per share of common stock
Income before cumulative effect
of changes in accounting
principles $ 4.65 $ 4.26 $ 2.52 $ 2.60 $ 1.04
Cumulative effect of changes
in accounting principles - - - (1.16) -
Net income per share $ 4.65 $ 4.26 $ 2.52 $ 1.44 $ 1.04
Balance sheet
Total assets $140,155 $114,436 $ 91,809 $ 79,488 $ 73,287
Working capital 7,418 5,323 240 442 5,262
Long-term obligations 41,522 34,966 41,959 46,019 54,218
Commitments and contingencies(4)
Total shareholders'
equity (deficit) $ 34,015 $ 18,680 $ 3,716 $ (5,860) $ (9,902)
Property, plant and equipment
Capital expenditures $ 8,390 $ 10,275 $ 11,354 $ 7,818 $ 5,579
Depreciation $ 8,039 $ 7,566 $ 6,892 $ 6,680 $ 6,385
Weighted average shares
outstanding 3,441,645 3,369,003 3,426,034 3,290,912 3,282,691
Dividends declared per share $ - $ - $ - $ - $ -
<FN>
(1) Reflects the adoption of Statement of Financial Accounting Standards (SFAS) No.
106, "Accounting for Postretirement Benefits Other Than Pensions," and Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
(2) Includes $4,597 of pretax income ($2,758 after-tax and $.80 per share) related
to a favorable litigation judgment.
(3) Includes reversal of $3,100 of prior year tax accruals no longer required.
(4) See Notes A and N to the consolidated financial statements.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations and Liquidity and Capital Resources
1996 vs. 1995
Net income for the 1996 fiscal year amounted to $15,991 or
$4.65 per share as compared to $14,337 or $4.26 per share in
fiscal 1995. The favorable operating results are principally the
result of improved performance within the domestic product market
segments; the reversal of $3,100 of prior year tax accruals that
were no longer required and the improvement in operating income
at the Company's German operation due to cost savings as a result
of a plant consolidation in prior years. However, the favorable
performance was somewhat offset by the negative effects of a
slowdown in the European economy, which resulted in a reduction
in foreign sales; contractual price reductions to certain
customers; an increase in salary and wages and other employee
benefits and other general cost increases. Included in the
results of operations for fiscal 1995 is a one-time pretax gain
of $4,597 (approximately $2,758 after tax) which resulted from a
favorable judgment in regard to a product defamation lawsuit.
During the first quarter of 1996, the Company acquired
certain assets from Advanced Friction Materials Company ("AFM")
and also acquired a 47% equity interest in AFM.
Net Sales
Net sales increased 22.6% for fiscal 1996 and amounted to
$217,683 as compared with net sales of $177,498 in fiscal 1995.
The overall improvement is primarily due to additional sales of
approximately $24,272 related to the Sterling Heights operations
and additional volume within the domestic product market
segments. Excluding Sterling Heights, domestic sales increased
by $19,523 compared to last year. However, European sales
decreased by $3,610 primarily due to a continued decline in the
European economy.
Results of Foreign Operations
Net sales of the combined German operations, which accounted
for 20.6% of the consolidated sales of the Company in 1996,
decreased to $44,776 as compared with $48,239 in fiscal 1995.
The decrease is due to a reduction in unit sales of $(1,346) and
foreign currency fluctuation of $(2,117). On a combined basis,
the German operations reported operating income of $1,592 in
fiscal 1996 as compared with operating income of $1,062 in fiscal
1995. The favorable performance is due to cost savings resulting
from a plant consolidation.
<PAGE>
Gross Profit
Gross profit as a percentage of sales for the period ended
December 29, 1996 is 24.9% as compared to 27.4% for the same
period one year ago. The overall decrease is primarily due to an
increase in domestic manufacturing labor and material costs,
contractual price reductions to certain customers and a lower
gross margin on product lines acquired in the Sterling Heights
acquisition.
Selling, General and Administrative
Selling, general and administrative expenses increased 17.7%
to $30,863 as compared to $26,218 one year earlier. Expenses are
up due to the impact of the acquired Sterling Heights operation
of AFM, increased sales volume and an increase in salary and
wages and other employee benefits.
Other Operating Income and Expense, Net
Other operating income and expense, net in 1996 primarily
represents income related to an insurance recovery on personal
property damage.
Other operating expense, net in 1995 includes the write-down
of certain production equipment.
Other Income and Expense, Net
Other income and expense, net in 1996 primarily represents
interest income in the amount of $218, royalty income in the
amount of $350 and other expense for obligations accrued at
present value for certain components of the AFM acquisition at
$385.
Other income and expense, net in 1995 includes a one-time
pretax gain of $4,597 which resulted from a favorable judgment in
regard to a product defamation lawsuit.
Interest Expense
Interest expense increased primarily as a result of higher
average borrowings under the Company's revolving line of credit
resulting from higher working capital requirements in 1996.
Income Taxes
The effective tax rate of 17.5% was less than the U.S.
statutory rate due primarily to adjustments to prior year tax
accruals as a result of a favorable tax settlement and the tax
benefit of costs incurred under indemnification arrangements with
Raymark, offset in part by the effect of state income taxes and a
decrease in the benefit realizable from future deductible
amounts. The valuation allowance against deferred tax assets
<PAGE>
increased by $628 during 1996. The net deferred tax asset
represents future tax deductions that can be realized upon
carryback to prior years.
Recently Issued Accounting Pronouncements
The Company accounts for and discloses earnings per share in
accordance with APB Opinion No. 15, "Earnings Per Share." In
February 1997, SFAS No. 128, "Earnings Per Share," was issued,
effective for fiscal 1997. SFAS 128 revises the computation,
presentation, and disclosure requirements related to earnings per
share. The Company has not assessed the impact of the adoption
of this standard.
Impact of Year 2000 Computer-Related Issues
The Company has begun to implement a strategy to be fully
compliant with year 2000 computer-related issues. While the
Company has not quantified the financial impact of this
implementation, it is not expected to be material to the
Company's financial position or results of operations.
1995 vs. 1994
Net income for the 1995 fiscal year amounted to $14,337 or
$4.26 per share as compared to $8,556 or $2.52 per share in
fiscal 1994. Included in the results of operations for fiscal
1995 is a one-time pretax gain of $4,597 (approximately $2,758
after tax) which resulted from a favorable judgment in regard to
a product defamation lawsuit.
Included in the results for fiscal 1994 is a pretax charge
of $400 representing additional costs associated with a
commitment by the Company to make additional contributions to
reinstate certain designated investment values lost in employee
savings plans investment contracts (refer to Note J). Also
included in the results for 1994 are pretax charges of $1,768
relating to the consolidation of the Company's operations in
Germany, offset in part by a $1,086 pretax gain on the sale of
the Radevormwald, Germany, plant and other machinery and
equipment.
Net Sales
Net sales increased 6% for fiscal 1995 and amounted to
$177,498 as compared with net sales of $167,615 in fiscal 1994.
The overall improvement is the result of strong performance in the
agriculture, construction and automotive original equipment market
segments. The aftermarket segment encountered severe pressure
within its market segment but still managed modest growth for 1995.
The Company's German operations experienced a significant increase
in sales as compared to last year primarily due to foreign currency
fluctuation.
<PAGE>
Results of Foreign Operations
Net sales of the combined German operations, which accounted
for 27% of the consolidated sales of the Company in 1995, increased
to $48,239 as compared with $43,499 in fiscal 1994. The increase
is due to foreign currency fluctuation. On a combined basis, the
German operations reported operating income of $1,062 in fiscal
1995 as compared with an operating loss of $2,606 in fiscal 1994.
The 1994 operating loss includes an additional net charge of $698
related to the consolidation of the Radevormwald and Morbach
facilities which had begun in 1993. This net charge relates to
additional costs to relocate and reinstall production equipment,
partially offset by a $1,086 gain on the sale of the Radevormwald
facility and certain machinery and equipment. Of these amounts,
the Company has remaining accruals as of December 31, 1995 of $448
relating to future severance payments and anticipated repayments of
certain grants.
Gross Profit
Gross profit improved 9% as compared with 1994. This
improvement is the result of the favorable absorption of overhead
as domestic unit production increases to meet the additional unit
volume sales demands coupled with a favorable mix of higher margin
units being sold. These improvements were partially offset by
mechanical problems within the manufacturing process which reduced
gross profit by $700. The Company's German consolidation program
completed one year ago has achieved production efficiencies which
have returned the operations to profitability.
Selling, General and Administrative
Selling, general and administrative expenses increased 5% for
fiscal 1995 as compared with fiscal 1994. The increase is
primarily due to higher levels of research and development,
increased distribution expenses due to higher sales volume, legal
and other professional fees and general inflationary increases.
Other Operating Expenses, Net
Other operating expenses, net in 1995 includes the write-down
of certain production equipment.
Other operating expenses, net in 1994 includes a provision of
$1,768 relating to the German plant consolidation, income of $1,086
related to the sale of the Radevormwald plant and certain equipment
and a charge of $400 related to a commitment by the Company to make
additional contributions to reinstate certain designated investment
values lost in employee savings plans investment contracts that
were placed with Executive Life Insurance Company.
<PAGE>
Other Income and Expense, Net
Other income and expense, net in 1995 incudes a one-time
pretax gain of $4,597 which resulted from a favorable judgment in
regard to a product defamation lawsuit.
Interest Expense
Interest expense remained consistent with the same period a
year ago and relates principally to the interest on the debt to
Raymark.
Income Taxes
The effective tax rate of 37.2% exceeded the U.S. statutory
rate by 2.2% primarily due to state income taxes, net of federal
benefit, offset, in part, by net increase in benefit from carryback
of future deductible amounts (refer to Note I). The valuation
allowance against deferred tax assets increased by $82 during 1995
The net deferred tax asset of $3,526 represents future tax
deductions that can be realized upon carryback to prior years.
Liquidity and Capital Resources
The Company generated cash flow from operating activities of
$17,779, $16,969 and $15,890 in 1996, 1995 and 1994,
respectively. Included in the Company's cash flow from operating
activities in fiscal 1995 is a one-time after-tax net gain of
approximately $2,758 which resulted from a favorable judgment in
regard to a product defamation lawsuit. The Company's cash flow
from operating activities in 1994 was the result of improved
earnings.
On January 31, 1996, Raytech Composites, Inc.
("Composites"), a subsidiary of Raytech, and Raybestos Products
Company ("RPC"), a subsidiary of Composites, entered into a
series of related transactions with Advanced Friction Materials
("AFM") and related entities and persons as follows: Composites
acquired a 47% minority share of the common stock of AFM for $9.4
million cash at closing; RPC acquired 100% of the common stock of
AFM Management Company, which leases employees to AFM, for $1.0
million, which was paid for on January 31, 1997; RPC acquired the
machinery and equipment and certain other operating assets of AFM
for $3.5 million cash at closing; RPC committed to acquire land
and building utilized in AFM's manufacturing operations (land and
building located at 44650 Merrill, Sterling Heights, Michigan)
from a principal owner of AFM for $6.6 million, which was
consummated on January 31, 1997; RPC loaned AFM $1.3 million cash
at closing bearing interest at the prime rate and maturing on
January 31, 2003; RPC agreed to acquire AFM's inventory
subsequent to closing, which has amounted to approximately $3.2
million. In addition, the parties entered into various other
agreements, including supply and technology exchange agreements.
<PAGE>
Subsequent to the transaction, RPC is supplying AFM with products
(automobile transmission component parts) manufactured at the
Sterling Heights facility. Sales prices between RPC and AFM are
established under the terms of the supply agreement entered into
at closing. AFM will bear responsibility principally for sales
and marketing of the products to original equipment manufacturers
and development of new products.
Composites 47% ownership interest in AFM is accounted for
under the equity method commencing February 1, 1996. The excess
of purchase price over the Company's equity in the underlying net
assets of AFM is being amortized on a straight line basis over a
30-year period.
Capital expenditures totaled $8,390 in fiscal 1996 as
compared with $10,275 and $11,354 in fiscal 1995 and 1994,
respectively. The Company has an ongoing program for upgrading
its machinery and equipment in order to optimize manufacturing
quality, productivity and cost effectiveness.
In March 1995, RPC, a wholly-owned subsidiary of the
Company, entered into a five-year loan agreement with The CIT
Group/Credit Finance, Inc., which provides for RPC to borrow up
to $15 million, consisting of a revolving line of credit of $10
million and a term loan of $5 million at an interest rate of
1.75% above the prime rate. The amount of borrowing is
predicated on satisfying an asset based formula related to levels
of certain accounts receivable, inventories and machinery and
equipment. The loans are collateralized by all assets, excluding
land and buildings at RPC. The purpose of the loan is for
working capital, capital expenditures, acquisitions and possible
settlement of successor liability issues. Under the terms of the
loan agreement, RPC is required to maintain certain cash flow
levels, and RPC's dividend payments to RCI are subject to certain
restrictions. The amounts outstanding under line of credit at
December 29, 1996 and December 31, 1995 are $8,718 and $3,775,
respectively. The additional borrowing availability at
December 29, 1996 and December 31, 1995 was $6,282 and $11,225,
respectively, based upon the asset borrowing formula.
The Company's wholly-owned German subsidiary, Raybestos
Industrie-Produkte GmbH, has available lines of credit amounting
to DM5,910 ($3,838) of which DM2,856 ($1,855) remains unused at
December 29, 1996. The Company used the available lines of
credit to fund working capital and capital expenditure needs.
Future Liquidity
Since the formation of Raytech and the restructuring that
occurred in 1986, Raytech has been named a co-defendant in
approximately 3,300 asbestos-related lawsuits as a successor in
liability to Raymark. Until February 1989, the defense of all
<PAGE>
such lawsuits was provided to Raytech by Raymark in accordance
with the indemnification agreement included as a condition of the
purchase of the Wet Clutch and Brake Division and the German
subsidiary from Raymark in 1987. In February 1989, an
involuntary petition in bankruptcy was filed against Raymark, and
subsequently, a restrictive funding order was issued by an
Illinois Circuit Court which required one of Raymark's insurance
carriers to pay claims but not defense costs and another
insurance carrier had been declared insolvent. These
circumstances caused Raymark to be unable to fund the costs of
defense to Raytech in the asbestos-related lawsuits referenced
above as provided in the indemnity section of the acquisition
agreement.
In an asbestos-related personal injury case decided in
October 1988 in a U.S. District Court in Oregon, Raytech was
ruled under Oregon equity law to be a successor to Raymark's
asbestos-related liability. The successor ruling was appealed by
Raytech and in October 1992, the Ninth Circuit Court of Appeals
affirmed the District Court's judgment on the grounds stated in
the District Court's opinion. The effect of this decision
extends beyond the Oregon District due to a Third Circuit Court
of Appeals decision in a related case cited below wherein Raytech
was collaterally estopped (precluded) from relitigating the issue
of its successor liability for Raymark's asbestos-related
liabilities, and a petition for a writ of certiorari was denied
by the U.S. Supreme Court in October 1995.
As the result of the inability of Raymark to fund Raytech's
costs of defense recited above and in order to obtain a ruling
binding across all jurisdictions as to whether Raytech is liable
as a successor for asbestos-related and other claims, including
claims yet to be filed relating to the operations of Raymark and
its predecessors, on March 10, 1989, Raytech filed a petition
seeking relief under Chapter 11 of Title 11, United States Code
in the United States Bankruptcy Court, District of Connecticut.
Under Chapter 11, substantially all litigation against Raytech
has been stayed while the debtor corporation and its non-filed
operating subsidiaries continue to operate their businesses in
the ordinary course under the same management and without
disruption to employees, customers and suppliers. In the
Bankruptcy Court a creditors' committee was appointed, comprised
primarily of asbestos claimants' attorneys. In August 1995, an
official committee of equity security holders was appointed for a
limited time relating to a determination of equity security
holders' interest in the estate.
In June 1989 Raytech filed a class action in the Bankruptcy
Court against all present and future asbestos claimants seeking a
declaratory judgment that it not be held liable for the asbestos-
related liabilities of Raymark. It was the desire of Raytech to
have this case heard in the U.S. District Court, and since the
authority of the Bankruptcy Court is referred from the U.S.
District Court, upon its motion and argument the U.S. District
<PAGE>
Court withdrew its reference of the case to the Bankruptcy Court
and thereby agreed to hear and decide the case. In September
1991, the U.S. District Court issued a ruling dismissing one
count of the class action citing as a reason the preclusive
effect of the 1988 Oregon case under the doctrine of collateral
estoppel (conclusiveness of judgment in a prior action), in which
Raytech was ruled to be a successor to Raymark's asbestos
liability under Oregon law. The remaining counts before the U.S.
District Court involve the transfer of Raymark's asbestos-related
liabilities to Raytech on the legal theories of alter-ego and
fraudulent conveyance. Upon a motion for reconsideration, the
U.S. District Court affirmed its prior ruling in February 1992.
Also, in February 1992, the U.S. District Court transferred the
case in its entirety to the U.S. District Court for the Eastern
District of Pennsylvania. Such transfer was made by the U.S.
District Court without motion from any party in the interest of
the administration of justice as stated by the U.S. District
Court. In December 1992, Raytech filed a motion to activate the
case and to obtain rulings on the remaining counts which was
denied by the U.S. District Court. In October 1993, the
creditors' committee asked the Court to certify the previous
dismissal of the successor liability count. In February 1994,
the U.S. District Court granted the motion to certify and the
successor liability dismissal was accordingly appealed. In May
1995, the Third Circuit Court of Appeals ruled that Raytech is
collaterally estopped (precluded) from relitigating the issue of
its successor liability as ruled in the 1988 Oregon case recited
above, affirming the U.S. District Court's ruling of dismissal.
A petition for a writ of certiorari was denied by the U.S.
Supreme Court in October 1995. The ruling leaves the Oregon
case, as affirmed by the Ninth Circuit Court of Appeals, as the
prevailing decision holding Raytech to be a successor to
Raymark's asbestos-related liabilities.
The adverse ruling in the Third Circuit Court of Appeals, of
which a petition for writ of certiorari was denied by the U.S.
Supreme Court, precluding Raytech from relitigating the issue of
its successor liability leaves the U.S. District Court's (Oregon)
1988 ruling as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities. This ruling
could have a material adverse impact on Raytech as it does not
have the resources needed to fund Raymark's potentially
substantial uninsured asbestos-related and environmental
liabilities. Determination of Raytech's actual liabilities are
subject to the Bankruptcy Court's deliberations and rulings and
the competing plans of reorganization filed in the Bankruptcy
Court referenced above.
The ultimate liability of the Company with respect to
asbestos-related, environmental, or other claims cannot presently
be determined. Accordingly, no provision for such liability has
been recorded in the financial statements. The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern. An unfavorable result on the
<PAGE>
matters described above would have a material adverse effect on
the Company's results of operations and financial position.
These uncertainties raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or adjustments relating
to establishment, settlement and classification of liabilities
that may be required in connection with reorganizing under the
Bankruptcy Code.
The Company has a long-term obligation to Raymark resulting
from the purchase of the wet clutch and brake business and the
German subsidiary in 1987. At December 29, 1996, the amount owed
Raymark was approximately $39 million. In December 1992 the
Company reached an agreement with Raymark to restructure its
obligations resulting in the reduction of the interest rate from
10.48% to 6%, replacing a required balloon payment that was due
in October of 1994 with an amortization schedule requiring equal
monthly installments of $650 through July of 1999 to be paid into
an escrow account and suspension of payments due under the German
stock acquisition until the assets purchased are free of all
Raymark related encumbrances and liabilities. Subsequently, in
May 1995, the monthly installments were suspended, and the escrow
account containing previously paid installments was retracted
pending the assets purchased being free of Raymark related
encumbrances and liabilities. In February 1997, monthly
installlments of $650 were resumed to ensure indemnification of
Raymark liabilities in the event the Raytech bankruptcy is
dismissed pursuant to the pending motion to dismiss and claims
for Raymark liabilities are levied against Raytech. The
principal of the debt owed Raymark was adjusted to reflect
payments, accrued interest and indemnity offsets resulting in a
revised promissory note in the amount of $33,694. The debt
obligations related to the German subsidiary are denominated in
DM's and amount to $2,995 at December 29, 1996. As such, the
Company is at risk to future currency fluctuations with respect
to this debt.
While the Company experienced improving conditions in its
domestic market segments during fiscal 1996, management is
cautiously optimistic about sustained improvement through fiscal
1997 and is projecting only modest growth in its 1997 forecast.
Subject to the outcome of the legal matters discussed above,
management believes that the Company will generate sufficient
cash flow during 1996 to meet all of the Company's obligations
arising in the normal course of business. In addition, in the
event the Company falls short of its cash flow forecast, the
Company has an available line of credit with The CIT Group/Credit
Finance, Inc.
<PAGE>
Impact of Inflation
The Company's business is subject to the impact of
inflation. During the past year, this impact has been minimal.
Management's strategy is to try to reclaim any cost increases
through more efficient manufacturing and when competitively
feasible, higher selling prices.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Consolidated Balance Sheets for the
fiscal years ended December 29, 1996
and December 31, 1995
Consolidated Statements of Operations
for the 1996, 1995 and 1994 Fiscal Years
Consolidated Statements of Cash Flows
for the 1996, 1995 and 1994 Fiscal Years
Consolidated Statements of Shareholders'
Equity for the 1996, 1995, and 1994
Fiscal Years
Notes to Consolidated Financial Statements
Report of Independent Accountants
(Refer to Index to Consolidated Financial
Statements at Page 87)
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
<CAPTION>
Fiscal Year 1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 11,341 $ 19,597
Trade accounts receivable, less allowance of $726
for 1996 and $822 for 1995 23,866 17,553
Inventories 28,709 23,573
Other current assets 8,120 5,390
Total current assets 72,036 66,113
Investment in securities 2,100 -
Property, plant and equipment 127,811 114,437
Less accumulated depreciation 76,686 72,235
Net property, plant and equipment 51,125 42,202
Investment in and advances to affiliates 9,972 -
Other assets 4,922 6,121
Total assets $140,155 $114,436
LIABILITIES
Current liabilities
Notes payable $ 10,701 $ 8,187
Current portion of long-term debt - Raymark 12,007 22,696
Current portion of long-term debt 152 143
Accounts payable 18,999 9,388
Accrued liabilities 22,759 20,376
Total current liabilities 64,618 60,790
Long-term debt due to Raymark 27,437 18,476
Long-term debt 237 242
Postretirement benefits other than pensions 9,429 8,253
Other long-term liabilities 4,419 7,995
Total liabilities 106,140 95,756
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock
Cumulative preferred stock, no par value
800,000 shares authorized, none issued - -
Common stock, par value $1.00
7,500,000 shares authorized; 5,371,821 and 5,362,139
issued in 1996 and 1995, respectively 5,372 5,362
Additional paid in capital 70,208 70,192
Accumulated deficit (38,922) (54,913)
Cumulative translation adjustment 1,918 2,600
38,576 23,241
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 34,015 18,680
Total liabilities and shareholders' equity $140,155 $114,436
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<CAPTION>
Fiscal year 1996 1995 1994
<S> <C> <C> <C>
Net sales $217,683 $177,498 $167,615
Cost of sales (163,414) (128,799) (123,067)
Gross profit 54,269 48,699 44,548
Selling, general and administrative
expenses (30,863) (26,218) (25,045)
Other operating income (expense), net 197 (1,522) (1,567)
Operating profit 23,603 20,959 17,936
Currency transaction gains (losses) 63 (43) (163)
Interest expense - Raymark (2,056) (2,006) (2,347)
Interest expense (1,076) (641) (254)
Other income (expense), net 121 5,917 (714)
Income before provision for income
taxes and minority interest 20,655 24,186 14,458
Provision for income taxes (3,606) (9,009) (5,815)
Income before minority interest 17,049 15,177 8,643
Minority interest (1,058) (840) -
Net income $ 15,991 $ 14,337 $ 8,643
Earnings per share $ 4.65 $ 4.26 $ 2.52
Weighted average shares outstanding 3,441,645 3,369,003 3,426,034
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
<CAPTION>
Fiscal Year 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,991 $ 14,337 $ 8,643
Adjustments to reconcile net income
to net cash provided by operations:
Deferred income tax (975) (853) (1,086)
Depreciation and amortization 8,467 7,654 7,007
Income applicable to minority interest,
net of dividends 926 840 -
Other items not providing or
requiring cash (Note C) 30 1,924 (467)
Changes in operating assets and liabilities:
Trade receivables (6,674) (3,758) 52
Inventory (2,179) (292) (2,504)
Other current assets (2,723) 42 (63)
Other long-term assets (124) (149) (252)
Accounts payable 2,897 (2,723) 1,938
Accrued liabilities 2,396 (1,247) 3,355
Other long-term liabilities (253) 1,194 (733)
Net cash provided by operating activities 17,779 16,969 15,890
Cash flow from investing activities:
Purchase of securities (2,100) - -
Capital expenditures (8,467) (9,684) (10,668)
Proceeds on sales of property, plant
and equipment 129 2,206 101
Equity investment in and advances to AFM (10,569) - -
Purchase of assets from AFM (6,706) - -
Net cash used in investing activities: (27,713) (7,478) (10,567)
Cash flow from financing activities:
Proceeds from short-term borrowings 4,943 3,775 4,719
Payment on short-term borrowings (2,187) (905) -
Principal payments on long-term debt (149) (689) (2,876)
Proceeds from borrowings from Raymark - 6,258 500
Payments on borrowings from Raymark (917) (3,085) (5,966)
Other 21 (73) (47)
Net cash provided (used) in financing
activities 1,711 5,281 (3,670)
Effect of exchange rate changes on cash (33) 47 135
Net change in cash and cash equivalents (8,256) 14,819 1,788
Cash and cash equivalents at beginning of year 19,597 4,778 2,990
Cash and cash equivalents at end of year $ 11,341 $ 19,597 $ 4,778
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (in thousands, except share data)
<CAPTION>
Number Paid Cumulative
of Shares Common in Accumulated Translation Treasury Stock
Issued Stock Warrants Capital Deficit Adjustment Cost Shares
<C> <C> <C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 5,362,139 $ 5,362 $ - $70,192 $(54,913) $ 2,600 $(4,561) (2,132,059)
Stock options excercised 9,682 10 16
Cumulative translation
adjustment (682)
Net income for the
fiscal year ended
December 29, 1996 15,991
Balance,
December 29, 1996 5,371,821 $ 5,372 $ - $70,208 $(38,922) $ 1,918 $(4,561) (2,132,059)
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Continued, page 2
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (in thousands, except share data)
<CAPTION>
Number Paid Cumulative
of Shares Common in Accumulated Translation Treasury Stock
Issued Stock Warrants Capital Deficit Adjustment Cost Shares
<C> <C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 5,351,024 $ 5,351 $ - $70,148 $(69,250) $ 2,028 $(4,561) (2,132,056)
Stock options exercised 11,115 11 44
Cumulative translation
adjustment 572
Purchase of treasury
stock - (3)
Net income for the fiscal
year ended December 31,
1995 14,337
Balance,
December 31, 1995 5,362,139 $ 5,362 $ - $70,192 $(54,913) $ 2,600 $(4,561) (2,132,059)
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Continued, page 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (in thousands, except share data)
<CAPTION>
Number Paid Cumulative
of Shares Common in Accumulated Translation Treasury Stock
Issued Stock Warrants Capital Deficit Adjustment Cost Shares
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 2, 1994 5,331,155 $ 5,331 $ 3,998 $66,118 $ (77,761) $ 1,015 $(4,561) (2,132,022)
Stock options exercised 19,869 20 32
Warrants expired (3,998) 3,998
Cumulative translation
adjustment 1,013
Purchase of treasury
stock - (34)
Other (132)
Net income for the
fiscal year ended
January 1, 1995 8,643
Balance,
January 1, 1995 5,351,024 $ 5,351 $ - $70,148 $(69,250) $ 2,028 $(4,561) (2,132,056)
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except share data)
Note A - Formation of Raytech Corporation, Sale of Raymark,
Chapter 11 Proceeding and Other Litigation
Raytech Corporation ("Raytech" or the "Company") was
incorporated on June 13, 1986 in Delaware and held as a
subsidiary of Raymark Corporation ("Raymark"). In October 1986,
Raytech became the publicly traded (NYSE) holding company of
Raymark stock through a triangular merger restructuring plan
approved by Raymark's shareholders at its October 1986 Annual
Meeting whereby each share of common stock of Raymark was
automatically converted into both a share of Raytech common stock
and a right to purchase a warrant for Raytech common stock. Each
warrant entitled the holder to purchase one share of Raytech
common stock at a price of $9.00 at any time, subject to certain
limitations, prior to October 1, 1991, extended to 1994. The
warrants expired on October 1, 1994. Raymark, thereby, became a
wholly-owned subsidiary of Raytech. The purpose of the formation
of Raytech and the restructuring plan was to provide a means to
gain access to new sources of capital and borrowed funds to be
used to finance the acquisition and operation of new businesses
in a corporate structure that should not subject it or such
acquired businesses to any asbestos-related or other liabilities
of Raymark.
Prior to the formation of Raytech, Raymark was first sued in
an asbestos-related claim in 1971 and has since been named as a
defendant in more than 88,000 lawsuits in which substantial
damages have been sought for injury or death from exposure to
airborne asbestos fibers. More than 35,000 of such lawsuits have
been disposed of by settlements, dismissals, summary judgments
and trial verdicts at a cost in excess of $333,000 principally
covered by Raymark's insurance. Subsequent to the sale of
Raymark as described below lawsuits continued to be filed against
Raymark at the rate of approximately 1,000 per month until an
involuntary petition in bankruptcy was filed against Raymark in
February 1989, which stayed all its litigation. In August 1996,
the involuntary petition filed against Raymark was dismissed
following a trial and the stay was lifted.
In accordance with the restructuring plan, Raytech purchased
the Wet Clutch and Brake Division and German subsidiary in 1987
from its then wholly-owned subsidiary, Raymark. Each such
acquisition was financed through borrowed funds from new lenders
and Raytech stock and notes. Pursuant to these acquisitions,
Raymark agreed to indemnify Raytech for any future legal
liabilities and costs that may result from asbestos litigation.
Management believes that each purchase by Raytech from Raymark
complies with Raytech's restructuring plan principles of (i)
paying fair market value, (ii) acquiring businesses that did not
<PAGE>
Note A, continued
give rise to any asbestos-related or other claims against
Raymark, (iii) permitting Raymark to retain the proceeds for its
ongoing business and creditors, (iv) entering the transactions in
good faith and not to hinder, delay or defraud creditors, and (v)
conducting its affairs independent of Raymark.
In May 1988, following shareholder approval, Raytech sold
all of the Raymark stock to Asbestos Litigation Management, Inc.,
thereby divesting itself of Raymark. Consideration received for
the Raymark stock consisted of $50 cash paid at the closing and a
7-l/2% $950 promissory note to be paid in six equal annual
installments beginning one year after the closing with interest
payable annually. This transaction resulted in a pretax loss of
approximately $59,000 which was reflected in the 1988
consolidated financial statements.
Despite the restructuring plan implementation and subsequent
divestiture of Raymark, Raytech was named a co-defendant with
Raymark and other named defendants in approximately 3,300
asbestos-related lawsuits as a successor in liability to Raymark.
The dollar value of these lawsuits cannot be estimated. Until
February 1989, the defense of all such lawsuits was provided to
Raytech by Raymark in accordance with the indemnification
agreement included as a condition of the purchase of the Wet
Clutch and Brake Division and German subsidiary from Raymark in
1987. In February 1989, an involuntary petition in bankruptcy
was filed against Raymark, and subsequently, a restrictive
funding order was issued by an Illinois Circuit Court, which
required one of Raymark's insurance carriers to pay claims but
not defense costs, and another insurance carrier had been
declared insolvent. These circumstances caused Raymark to be
unable to fund the costs of defense to Raytech in the asbestos-
related lawsuits referenced above, as provided in the indemnity
section of the acquisition agreement. Raytech management was
informed that Raymark's cost of defense and disposition of cases
up to the automatic stay of litigation under the involuntary
bankruptcy proceedings was approximately $333 million of
Raymark's total insurance coverage of approximately $395 million.
Raytech management has also been informed that as a result of the
dismissal of the involuntary petition, Raymark has encountered
pending and newly filed asbestos-related lawsuits but has
received $27 million from a state guarantee association to make
up the insurance policies of the insolvent carrier and $32
million in other policies to defend against such litigation.
In an asbestos-related personal injury case decided in
October 1988 in a U.S. District Court in Oregon, Raytech was
ruled under Oregon equity law to be a successor to Raymark's
asbestos-related liability. The successor ruling was appealed by
Raytech and in October 1992 the Ninth Circuit Court of Appeals
<PAGE>
Note A, continued
affirmed the District Court's judgment on the grounds stated in
the District Court's opinion. The effect of this decision
extends beyond the Oregon District due to a Third Circuit Court
of Appeals decision in a related case cited below wherein Raytech
was collaterally estopped (precluded) from relitigating the issue
of its successor liability for Raymark's asbestos-related
liabilities.
As the result of the inability of Raymark to fund Raytech's
costs of defense recited above, and in order to obtain a ruling
binding across all jurisdictions as to whether Raytech is liable
as a successor for asbestos-related and other claims, including
claims yet to be filed relating to the operations of Raymark or
its predecessors, on March 10, 1989, Raytech filed a petition
seeking relief under Chapter 11 of Title 11, United States Code
in the United States Bankruptcy Court, District of Connecticut.
Under Chapter 11, substantially all litigation against Raytech
has been stayed while the debtor corporation and its non-filed
operating subsidiaries continue to operate their businesses in
the ordinary course under the same management and without
disruption to employees, customers or suppliers. In the
Bankruptcy Court a creditors' committee was appointed, comprised
primarily of asbestos claimants' attorneys. In August 1995, an
official committee of equity security holders was appointed for a
limited time relating to a determination of equity security
holders' interest in the estate.
Since the bankruptcy filing several entities have asserted
claims in Bankruptcy Court alleging environmental liabilities of
Raymark based upon similar theories of successor liability
against Raytech as alleged by asbestos claimants. These claims
are not covered by the class action referenced below and will be
resolved in the bankruptcy case. The environmental claims
include a claim of the Pennsylvania Department of Environmental
Resources ("DER") to perform certain activities in connection
with Raymark's Pennsylvania manufacturing facility, which
includes submission of an acceptable closure plan for a landfill
containing hazardous waste products located at the facility and
removal of accumulated baghouse dust from its operations. In
March 1991, the Company entered a Consent Order which required
Raymark to submit a revised closure plan which provides for the
management and removal of hazardous waste, for investigating
treatment and monitoring of any contaminated groundwater and for
the protection of human health and environment at the site, all
relating to the closure of the Pennsylvania landfill and to pay a
nominal civil penalty. The estimated cost for Raymark to comply
with the order is $1.2 million. The DER has reserved its right
to reinstitute an action against the Company and the other
parties to the DER order in the event Raymark fails to comply
with its obligations under the Consent Order. Another
environmental claim was filed against the Company by the U.S.
<PAGE>
Note A, continued
Environmental Protection Agency for civil penalties charged
Raymark in the amount of $12 million arising out of alleged Resource
Conservation and Recovery Act violations at Raymark's Stratford,
Connecticut, manufacturing facility.
It is possible that additional claims for reimbursement of
environmental cleanup costs related to Raymark facilities may be
asserted against Raytech, as successor in liability to Raymark. In
January 1997, the U.S. Departmental Protection Agency ("EPA") and
the State of Connecticut filed suit against Raymark claiming $212
million in damages for cleanup of the Stratford, Connecticut, site.
The EPA has also filed a bankruptcy claim against Raytech as a
successor to Raymark for cleanup of the Stratford site and other
Raymark sites. Determination of Raytech's liability for such
claims, if any, is subject to Bankruptcy Court deliberations and
proceedings.
In April 1996, the Indiana Department of Environmental
Management ("IDEM") advised Raybestos Products Company ("RPC"), a
wholly-owned subsidiary of the Company, that it may have contributed
to the release of lead and PCB's (polychlorinated biphenyls) found
in small waterways near its Indiana facility. In June, IDEM named
RPC as a potentially responsible party ("PRP"). RPC notified its
insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern
District of Indiana, captioned Reliance Insurance Company vs. RPC
seeking a declaratory judgment that any liability of RPC is excluded
from its policy with RPC. RPC continues to assess the extent of the
contamination and its involvement and is currently negotiating with
IDEM for an agreed order of cleanup. The Company intends to offset
its investigation and cleanup costs against its notes payable to
Raymark when such costs become known pursuant to the indemnification
clause in the wet clutch and brake acquisition agreement since it
appears that any contamination would have occurred during Raymark's
ownership of the Indiana facility. Blood tests administered to
residents in the vicinity of the small waterways revealed no
exposure.
As a result of an inspection, the Company has been notified
that the operations purchased from AFM in January 1996 in Sterling
Heights, Michigan, are in violation of a consent order issued by the
Michigan Department of Environmental Quality ("DEQ"). The consent
order included a compliance program providing for measures to be
taken to bring certain operations into compliance and recordkeeping
on operations in compliance. Potential fines for the violations
could be as high as $4.6 million; however, the Company is in
negotiations with the DEQ and believes it will resolve the matter
for substantially less. The Company is working diligently to get
its operations in compliance. The Company has accrued its estimate
of the probable cost of resolution of this matter.<PAGE>
Note A, continued
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court
pending the conclusion of the successor liability litigation.
However, in December 1992, the creditors' committee filed a
motion to terminate the exclusive period to file a plan of
reorganization. At a hearing in May 1993, the motion was denied
by the Bankruptcy Court but was appealed by the creditors'
committee. In November 1993, the U.S. District Court reversed
the Bankruptcy Court and terminated the exclusive period to file
a plan of reorganization effective in January 1994. Accordingly,
any party in interest, including the debtor, the creditors'
committee, or a creditor could thereafter file a plan of
reorganization.
In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of
seeking confirmation allowing Raytech to emerge from the
bankruptcy filed March 10, 1989. Important conditions precedent
to confirmation of the Debtor's Plan include a final judgment in
the litigation to determine whether Raytech is a successor to the
liabilities of Raymark and a resolution of the environmental
claims or other claims filed or to be filed by governmental
agencies. The Debtor's Plan provides that in the event Raytech
is found to be a successor, it is to establish a successor trust
funded by an amount determined to be the difference between what
Raytech should have paid for the businesses purchased from
Raymark less the amount actually paid and less amounts to be paid
for environmental and other claims. This remedy would satisfy
its obligations as a successor in full and render all claimants
unimpaired, thereby eliminating the need for balloting and all
equity shareholders would retain their interests in full.
Raytech's management believes the Debtor's Plan to be
confirmable. In September 1994, the Creditors' Committee filed
its own Plan of Reorganization in competition to the Debtor's
Plan ("Creditors' Plan"). The Creditors' Plan calls for the
elimination of Raytech Corporation and its stockholders to be
replaced with a new Raytech. All of the stock of new Raytech
would then be distributed to unsecured claimants, environmental
claimants and both past and future asbestos disease claimants on
a formulated basis set forth in the Plan. Current stockholders
of Raytech would receive nothing under the Plan. Raytech
believes the Creditors' Plan is unconfirmable and will vigorously
contest attempts to have it confirmed while it continues to try
to get the Debtor's Plan confirmed. Upon motion of the parties
and support of the Bankruptcy Court, the major interested parties
agreed in August 1995 to participate in non-binding mediation to
attempt to effectuate a consensual plan of reorganization. The
mediation process commenced in October 1995 and was concluded in
March 1996 without agreement for a consensual plan of
<PAGE>
Note A, continued
reorganization. The competing plans of Raytech and its creditors
will now return to Bankruptcy Court procedures. The outcome of
these matters is expected to take considerable time and is
uncertain. If an adverse plan is confirmed, it would have a
material adverse impact on Raytech and its stockholders.
Other matters in the Bankruptcy Court include: (1) In April
1996, the creditors' committee filed a motion for appointment of
a trustee based upon alleged breaches of the Company's fiduciary
obligations to its creditors. The Company will resist the motion
when heard; however, the motion has been continued without a
further hearing date set. (2) In September 1996, Raytech filed a
motion to dismiss its bankruptcy petition for the reason that
Raymark appears to again be capable of providing indemnity to
claims pending and that may be filed against Raytech. The said
motion to dismiss has been continued by the Court without a
further hearing date set. (3) The process for confirmation of a
reorganization plan was begun in November 1996 with arguments
being presented for a bar date and claim forms. The process has
been continued indefinitely pending the completion of other
matters before the Bankruptcy Court. (4) In November 1996,
Raytech filed an adversary proceeding complaint against the
creditors' committee, et al., seeking a declaratory judgment of
the Bankruptcy Court that Raytech's liability to present and
future creditors of Raymark under the theory of successor
liability is limited pursuant to bankruptcy law. Scheduling of
the proceedings is presently being considered by the Court. (5)
In January 1997, the creditors' committee filed a motion for
leave to file an adverse proceeding complaint against Raymark, et
al. seeking to have the Raytech Bankruptcy Court assert control
over Raymark and its assets on the grounds that the
reorganization of Raytech in 1986 and the corporate transfers to
Raymark in 1988 were fraudulent. The motion was continued
without a further hearing date set. (6) In March 1997, the
creditors' committee filed a motion for relief from the automatic
stay to permit the commencement of an adversary proceeding
against Raytech to litigate alternative theories of liability
bearing upon the extent to which Raytech may be liable to
Raymark's creditors. The motion is awaiting a date for hearing.
In June 1989 Raytech filed a class action in the Bankruptcy
Court against all present and future asbestos claimants seeking a
declaratory judgment that it not be held liable for the asbestos-
related liabilities of Raymark. It was the desire of Raytech to
have this case heard in the U.S. District Court, and since the
authority of the Bankruptcy Court is referred from the U.S.
District Court, upon its motion and argument the U.S. District
Court withdrew its reference of the case to the Bankruptcy Court
and thereby agreed to hear and decide the case. In September
1991, the U.S. District Court issued a ruling dismissing one
count of the class action citing as a reason the preclusive
<PAGE>
Note A, continued
effect of the 1988 Oregon case, previously discussed, under the
doctrine of collateral estoppel (conclusiveness of judgment in a
prior action), in which Raytech was ruled to be a successor to
Raymark's asbestos liability under Oregon law. The remaining
counts before the U.S. District Court involve the transfer of
Raymark's asbestos-related liabilities to Raytech on the legal
theories of alter-ego and fraudulent conveyance. Upon a motion
for reconsideration, the U.S. District Court affirmed its prior
ruling in February 1992. Also, in February 1992, the U.S.
District Court transferred the case in its entirety to the U.S.
District Court for the Eastern District of Pennsylvania. Such
transfer was made by the U.S. District Court without motion from
any party in the interest of the administration of justice as
stated by the U.S. District Court. In December 1992, Raytech
filed a motion to activate the case and to obtain rulings on the
remaining counts which was denied by the U.S. District Court. In
October 1993, the creditors' committee asked the Court to certify
the previous dismissal of the successor liability count. In
February 1994, the U.S. District Court granted the motion to
certify and the successor liability dismissal was accordingly
appealed. In May 1995, the Third Circuit Court of Appeals ruled
that Raytech is collaterally estopped (precluded) from
relitigating the issue of its successor liability as ruled in the
1988 Oregon case recited above, affirming the U.S. District
Court's ruling of dismissal. A petition for a writ of certiorari
was denied by the U.S. Supreme Court in October 1995. The ruling
leaves the Oregon case, as affirmed by the Ninth Circuit Court of
Appeals, as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities.
Costs incurred by the Company for asbestos-related
liabilities are indemnified by Raymark under the 1987 acquisition
agreements. By agreement, Raymark has reimbursed the Company in
part for such indemnified costs by payment of the amounts due in
Raytech common stock of equivalent value. Under such agreement,
Raytech received 177,570 shares in 1990, 163,303 shares in 1991
and 80,000 shares in 1993. The Company's acceptance of its own
stock was based upon an intent to control dilution of its
outstanding stock. In 1992, the indemnified costs were
reimbursed by offsetting certain payments due Raymark from the
Company under the 1987 acquisition agreements. Costs incurred in
1994, 1995 and 1996 were applied as a reduction of the note
obligations pursuant to the agreements.
In February 1994, a jury in the U.S. District Court for the
Southern District of Indiana returned a verdict in favor of
Raybestos Products Company ("RPC"), a wholly-owned subsidiary of
the Company, for $2.9 million plus costs and against Gilbert W.
Younger and Transgo, a corporation. RPC had sued the defendants
in 1990 for defamation of products and injurious falsehoods
concerning RPC's manufactured products. In April 1994, the Court
<PAGE>
Note A, continued
granted RPC its costs, attorneys' fees and interest in addition
to the damages awarded by the jury. The defendants filed for
bankruptcy under Chapter 11 in 1992 and the defendant's plan of
reorganization was confirmed in September 1994 by a California
Bankruptcy Court. Under the plan of reorganization and ordered
by the Court, the total amount of the awarded damages had been
placed in a secured escrow account pending appeals. In April
1995, the Seventh Circuit Court of Appeals affirmed the verdict
except for the award of prejudgment interest. In June 1995, RPC
received the awarded damages, including post-judgment interest,
in the amount of $4.6 million, bringing the case to a final
conclusion.
In January 1997, Raytech was named through a subsidiary in a
third party complaint captioned Martin Dembinski, et al. vs.
Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et
al. filed in the U.S. District Court for the Southern District of
New York for damages for asbestos-related disease. The case has
been removed to the U.S. District Court, Eastern District of
Pennsylvania and remains pending. When required, the Company
will deny the allegations and will vigorously defend itself
against the claims made. Discovery procedures have not yet
begun.
The adverse ruling in the Third Circuit Court of Appeals, of
which a petition for writ of certiorari was denied by the U.S.
Supreme Court, precluding Raytech from relitigating the issue of
its successor liability leaves the U.S. District Court's (Oregon)
1988 ruling as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities. This ruling
could have a material adverse impact on Raytech as it does not
have the resources needed to fund Raymark's potentially
substantial uninsured asbestos-related and environmental
liabilities. Determination of Raytech's actual liabilities are
subject to the Bankruptcy Court's deliberations and rulings and
the competing plans of reorganization filed in the Bankruptcy
Court referenced above.
The ultimate liability of the Company with respect to
asbestos-related, environmental, or other claims cannot presently
be determined. Accordingly, no provision for such liability has
been recorded in the financial statements. The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern. An unfavorable result on
certain or all of the matters described above would have a
material adverse effect on the Company's results of operations,
financial position and cash flows. These uncertainties raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or adjustments relating to establishment,
Note A, continued
settlement and classification of liabilities that may be required
in connection with reorganizing under the Bankruptcy Code.
<PAGE>
Note B - Summary of Significant Accounting Policies
1. Background and Basis of Presentation
Raytech, through its principal subsidiaries, is a
multinational manufacturer and marketer of specialty
engineered products for heat resistant, inertia control,
energy absorption and transmission applications. Its
products are used in the vehicular, aerospace, nucleonics,
petrochemical, energy, metal working, construction,
agriculture, utility and electronic industries, among
others.
Raytech operates through six business units: Raybestos
Products Company ("RPC"), located in Crawfordsville, Indiana
and Sterling Heights, Michigan; Raybestos Industrie-Produkte
GmbH, located in Morbach, Germany; Raybestos U.K. Ltd.,
located in Liverpool, England; Allomatic Products Company,
located in Sullivan, Indiana; and Raybestos Aftermarket
Products Company located in Crawfordsville, Indiana.
Demand for the Company's product is derived primarily from
the automotive original equipment, agriculture, construction
and aftermarket segments which are highly competitive.
These markets can be highly influenced by prevailing
economic conditions such as interest rates and employment
issues.
The consolidated financial statements include the accounts
of Raytech Corporation and its majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated
in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported and disclosures made in the financial statements
and accompanying notes. Actual results could differ from
these estimates.
Certain 1995 amounts have been reclassified to conform to
the current year's presentation.
2. Fiscal Year
The Company reports on a 52-53 week fiscal year; the last
three fiscal years ended December 29, 1996, December 31,
1995, and January 1, 1995.
3. Cash and Cash Equivalents
Cash equivalents are recorded at cost, which approximates
market, and consist primarily of U.S. Treasury notes with
maturities of three months or less. In 1995, cash
<PAGE>
Note B, continued
equivalents also included other short-term securities with
maturities of three months or less.
4. Inventories
Inventories are stated at the lower of cost or market with
cost determined primarily by using the FIFO (first in, first
out) method.
5. Investments in Securities
Investments at December 29, 1996 represented the Company's
purchase of 4.75% U.S. Treasury notes due September 30, 1998
which the Company intends to hold until maturity. The
market value of this investment approximates amortized cost.
6. Property, Plant and Equipment
Property, plant and equipment is stated at cost less
accumulated depreciation. Depreciation is based on the
estimated service life of the related asset and is provided
using the straight line method for assets acquired after
1980 and accelerated methods for previously acquired assets.
Maintenance and repairs that do not increase the useful life
of an asset are expensed as incurred. Interest is
capitalized on major capital expenditures during the period
of construction and to the date such asset is placed in
service. Upon disposal of property, plant and equipment,
the appropriate accounts are reduced by the related costs
and accumulated depreciation. The resulting gains and
losses are reflected in the Consolidated Statements of
Operations.
7. Income Taxes
The Company accounts for income taxes using the liability
method which recognizes the amount of taxes payable or
refundable for the current year and recognizes deferred tax
liabilities and assets for the future tax consequences of
events that have been recognized in the financial statements
or tax returns.
8. Net Income Per Share
Primary net income per common share is computed based on the
weighted average number of common and common equivalent
shares outstanding during the year. Fully diluted net
income per common share is not presented since it does not
differ materially from primary net income per common share
or is anti-dilutive.
<PAGE>
Note B, continued
9. Translation of Foreign Currencies
The local currencies of the Company's subsidiaries in
Germany and the United Kingdom have been designated as the
functional currencies. Accordingly, financial statements of
foreign operations are translated using the exchange rate at
the balance sheet date for assets and liabilities, and an
average exchange rate in effect during the year for revenue
and expense items. The effects of translating the Company's
foreign subsidiaries' financial statements are recorded as a
separate component of shareholders' equity (deficit).
10. Revenue Recognition
Sales are recorded by the Company when products are shipped
to customers.
11. Adoption of Recently Issued Accounting Pronouncements
The Company applies APB Opinion No. 25, "Accounting For Stock
issued to Employees" and related interpretations in
accounting for its stock plans as allowed under SFAS 123
"Accounting for Stock-Based Compensation" which was adopted
effective January 1, 1996. Accordingly, the adoption of
SFAS 123 did not have a material impact on the Company's
financial statements.
Effective January 1, 1996, the Company adopted SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The adoption of this
standard did not have a material impact on the Company's
financial statements.
12. Recently Issued Accounting Pronouncements
The Company accounts for and discloses earnings per share in
accordance with APB Opinion No. 15, "Earnings Per Share." In
February 1997, SFAS No. 128, "Earnings Per Share," was
issued effective for fiscal 1997. SFAS 128 revises the
computation, presentation and disclosure requirements
related to earnings per share. The Company has not assessed
the impact of the adoption of this standard.
<PAGE>
Note C - Statements of Cash Flows
Other items not providing or requiring cash consist of:
1996 1995 1994
Net loss (gain) on sale/writedown
of fixed assets $ 268 $ 1,994 $(1,960)
Nonmonetary yarn purchases
(Note H) - - 1,570
Other non-cash items (238) (70) (77)
$ 30 $ 1,924 $ (467)
Income taxes paid were $8,677, $10,202, and $7,719 during
1996, 1995 and 1994, respectively.
Interest paid was $2,731, $2,449, and $2,607 during 1996,
1995 and 1994, respectively.
Excluded from the 1996, 1995 and 1994 Consolidated
Statements of Cash Flows is $469, $791, and $686, respectively,
of plant and equipment acquisitions in accounts payable or under
capital leases. The 1994 Consolidated Statement of Cash Flows
excludes the sale of the Radevormwald, Germany, facility for a
$1,530 receivable from the buyer, which was paid in January 1995.
In connection with the purchase of certain assets of the
Advanced Friction Materials Company, the Company committed to
purchase certain real property in Sterling Heights, Michigan, and
the common stock of the AFM Management Company on January 31,
1997 for $7,600 less amounts paid during 1996. The transaction
has been recorded as an installment purchase, and accordingly,
the real property and the related payable have been reflected in
the Company's 1996 financial statements.
<PAGE>
Note D - Inventories
Net Inventories
Inventories net of inventory reserves are as follows:
Fiscal Year 1996 1995
Raw materials $ 9,921 $ 6,901
Work-in-process 8,033 6,143
Finished goods 10,755 10,529
$28,709 $ 23,573
Inventory Reserves
Fiscal Year 1996 1995 1994
Beginning balance $ 2,962 $ 2,660 $ 1,482
Provisions for obsolete and
slow moving inventory 1,305 466 2,435
Charge-offs (596) (164) (1,257)
Ending balance $ 3,671 $ 2,962 $ 2,660
<PAGE>
Note E - Property, Plant and Equipment
Property, plant and equipment, at cost, is summarized as
follows:
Estimated
Useful
Lives
Fiscal Year 1996 1995 (Years)
Land $ 1,218 $ 546 -
Buildings and improvements 23,121 17,553 5-40
Machinery and equipment 99,790 91,638 3-20
Capital leases 877 1,283 See Below
Construction in progress 2,805 3,417 -
127,811 114,437
Less accumulated depreciation 76,686 72,235
Net property, plant and
equipment $ 51,125 $ 42,202
Capital leases consist primarily of automobiles and telephone
and computer equipment and are amortized over the economic life of
the assets or the term of the leases, whichever is shorter.
Maintenance and repairs charged to expense amounted to
approximately $10,046, $11,093, and $9,300 for 1996, 1995 and 1994,
respectively.
Depreciation expense relating to property, plant and equipment
were $8,039, $7,566, and $6,892 for 1996, 1995 and 1994,
respectively.
<PAGE>
Note F - Debt
Debt consists of the following:
Fiscal Year 1996 1995
Notes due to Raymark (a) $ 39,444 $ 41,172
Notes payable to banks (b) 10,701 8,187
Capitalized leases and other
obligations 389 385
Total borrowings 50,534 49,744
Less short-term debt and current
portion of long-term debt 22,860 31,026
Long-term debt $ 27,674 $ 18,718
The aggregate maturities of debt are as follows:
1997 $ 22,860
1998 6,393
1999 21,260
2000 21
Total Debt $ 50,534
(a) The notes due to Raymark amounting to $39,444 and $41,172
at December 29, 1996 and December 31, 1995, respectively, are the
result of the purchase of the Wet Clutch and Brake Division and the
German subsidiary from Raymark in 1987.
In December 1992, the Company and Raymark amended the
Asset Purchase Agreement of the Wet Clutch and Brake Division.
Under the terms of the amendment, the original note in the
principal amount of $23,074 plus accrued interest of $17,543 was
canceled and replaced by an uncollateralized promissory note in the
amount of $40,617, bearing interest at the rate of 6% per annum and
payable in equal monthly installments of $650 commencing April
1993. The principal portion of the monthly installments was to be
paid into an escrow account pending clearance of all Raymark
encumbrances and liabilities as provided by the agreement (refer to
Note A). In May 1995, the escrow agreement was amended, and the
Company reclaimed the balance in the escrow and suspended payment
of the monthly installments as a result of the Third Circuit Court
of Appeals decision that jeopardizes the assets purchased from
Raymark in 1987 being free of all Raymark related encumbrances and
liabilities. In February 1997, monthly installments of $650 were
resumed to ensure indemnification of Raymark liabilities in the
event the Raytech bankruptcy is dismissed pursuant to the pending
motion to dismiss and claims for Raymark liabilities are levied
against Raytech. The principal of the debt owed Raymark was
adjusted to reflect payments, accrued interest and indemnity
offsets resulting in a revised promissory note in the amount of
$33,694.
<PAGE>
Note F, continued
As agreed by the Company and Raymark, remaining
obligations under the German subsidiary note, payable in German
deutsche marks (DM) are suspended pending the assets purchased
being free of all Raymark related encumbrances and liabilities.
At December 29, 1996 and December 31, 1995, the balances due on the
German note amounted to DM 4,612 ($2,995) and DM4,440 ($3,091),
respectively, including interest of DM899 ($584) and DM625 ($435),
respectively.
In September 1993 and January 1994, Raytech Composites,
Inc. ("RCI"), a wholly-owned subsidiary of the Company, entered
into loan agreements with Raymark for $2,500 and $3,000,
respectively. As of December 29, 1996 and December 31, 1995, RCI
has $3,000 outstanding under the loan agreements. The loans bear
interest at 6% per annum and are included in the current portion of
long-term debt.
The Company has classified the notes payable to Raymark
for the acquisition of the Wet Clutch and Brake Division in
accordance with the terms of the February 1997 adjusted note
agreement. Amounts due under the German subsidiary notes and the
RCI loan agreements with Raymark are classified as short-term
liabilities and are included as 1997 maturities of debt, although
actual repayment is subject to assets purchased from Raymark being
free of related encumbrances and liabilities as well as the
aforementioned bankruptcy proceedings. Costs incurred by the
Company subject to the indemnification clause of the 1987
agreements will be applied as a reduction of the note obligations
(refer to Note H). The repayment terms of this debt could be
further affected by the Bankruptcy Court proceedings referred to in
Note A.
(b) The Company's wholly-owned German subsidiary (Raybestos
Industrie-Produkte GmbH) has available lines of credit with several
German banks amounting to DM5,910 ($3,838). Interest is charged at
rates approximating 3-5% above the German Federal Bank rate. At
December 29, 1996 and December 31, 1995, the weighted average rate
on the outstanding borrowings was 7.25% and 6.86%, respectively.
The expiration of the lines is on demand. The amount outstanding
under these available lines of credit at December 29, 1996 and
December 31, 1995 was DM3,054 ($1,983) and DM6,338 ($4,412),
respectively. At December 29, 1996 and December 31, 1995, the
remaining available lines of credit amounted to DM2,856 ($1,855)
and DM1,572 ($1,094), respectively.
In March 1995, RPC, a wholly-owned subsidiary of the
Company, entered into a five-year loan agreement with The CIT
Group/Credit Finance, Inc., which provides for RPC to borrow up to
$15,000, consisting of a revolving line of credit of $10,000 and a
term loan of $5,000 at an interest rate of 1.75% above the prime
rate. The amount of borrowing is predicated on satisfying
<PAGE>
Note F, continued
an asset based formula related to levels of certain accounts
receivable, inventories and machinery and equipment. The loans are
collateralized by all assets, excluding land and buildings, at RPC.
The purpose of the loan is for working capital, capital
expenditures, acquisitions and possible settlement of successor
liability issues. Under the terms of the loan agreement, RPC is
required to maintain certain cash flow levels, and RPC's dividend
payments to RCI are subject to certain restrictions. The amounts
outstanding under the line of credit at December 29, 1996 and
December 31, 1995 were $8,718 and $3,775, respectively. The
additional borrowing availability at December 29, 1996 and December
31, 1995 was $6,282 and $11,225, respectively, based upon the asset
borrowing formula. The Company has classified amounts outstanding
under the line of credit as current since its intention is to repay
such amounts as cash becomes available.
The weighted average rates on notes payable at December 29,
1996 and December 31, 1995 were 9.49% and 8.43%, respectively.
<PAGE>
Note G - Research and Development
Cost of research and new product development amounted to
$5,958 in 1996, $5,864 in 1995, and $5,298 in 1994 and is included
in selling, general and administrative expenses in the Consolidated
Statements of Operations.
<PAGE>
Note H - Related Parties
During 1996 and other relevant periods of time, Raymark was
owned by a corporation owned by Bradley C. Smith, son of Craig R.
Smith, Director and Chief Executive Officer of the Company.
As discussed in Note A, in 1987, Raytech acquired certain
assets and assumed certain liabilities of the Wet Clutch and Brake
Division and acquired the stock of a German subsidiary from its
then wholly-owned subsidiary, Raymark. The purchases from Raymark
and subsequent transactions with Raymark took place as follows:
Wet Clutch and Brake Acquisition
The purchase price of $76,900 for the Wet Clutch and Brake
Division was initially comprised of $14,900 cash, $16,000 of
Raytech stock issuable in installments and $46,000 of notes (refer
to Note F). The Raytech stock issuable to Raymark was due in six
annual installments beginning October 30, 1987. The first
installment was $10,000 and the remaining installments were $1,200
each. The number of shares to be issued was determined by taking
the average closing price of Raytech stock for the five days prior
to the payment date. Accordingly, Raytech issued 1,365,188 and
311,688 shares of stock to Raymark as of November 1987 and 1988,
respectively. Pursuant to the 1987 Asset Purchase Agreement of the
Wet Clutch and Brake Division, Raymark could require Raytech to
repurchase or redeem any of the shares of its stock held by Raymark
at the then current market price. In June 1988, the Company
reached an agreement with Raymark for cash prepayments on a portion
of promissory notes due Raymark for the purchase of the Wet Clutch
and Brake Division in return for the elimination of the redemption
rights on 1,365,188 shares of Raytech stock then held by Raymark.
This cash prepayment of $4,500 was paid to Raymark over an
eighteen-month period, $2,100 during 1988, and the remaining $2,400
in 1989. In November 1988, pursuant to the said Asset Purchase
Agreement, Raytech issued 311,688 shares of Raytech stock to
Raymark. Raymark exercised its option to require the Company to
repurchase these shares. Accordingly, Raytech paid $1,200 to
Raymark in return for 311,688 shares of Company stock. The 1989
and 1990 installments of $1,200 were paid in cash in lieu of stock
at the request of Raymark. In August 1991, the Company and Raymark
amended the Asset Purchase Agreement to require all future annual
stock payments in cash in lieu of the issuance of shares of Common
Stock in annual installments through November 1992. In December
1992, the Asset Purchase Agreement was again amended providing for
payment of the 1991 and 1992 payments to be completed in March
1993. Such amendment also provided for a restructure of the
remaining note (see Note F).
<PAGE>
Note H, continued
The German Acquisition
The purchase price of approximately $8,200 of the German
subsidiary (Raybestos Industrie-Produkte GmbH) was initially
comprised of a DM7.0 million note (approximately $4,300 at the
acquisition date) and of DM6.5 million (approximately $3,900 at the
acquisition date) of Raytech stock issuable in installments. The
Raytech stock issuable to Raymark was due in eight installments
commencing March 1987. The first installment was DM1.25 million
($694 at the issuance date) and the remaining installments were
DM750 which are translated into dollars using the exchange rate in
effect when each payment becomes due. The number of shares
issuable was determined by the weighted average closing price of
Raytech stock for the five days prior to the payment date.
Accordingly, Raytech issued 72,038 and 63,565 shares of stock to
Raymark as of March 1987 and 1988, respectively. The 1989
installment of DM750 was paid in April 1989 in cash in lieu of
stock at Raymark's request in the amount of $396. Raytech issued
163,303 shares of stock to Raymark in March 1990 in payment of the
1990 installment. In August 1991, the Company and Raymark amended
the Stock Purchase Agreement to require the three remaining annual
stock payments in cash in lieu of the issuance of shares of Common
Stock in annual installments through April 1994. In December 1992,
the Stock Purchase Agreement was again amended providing for
payment of the 1992 payments to be completed in March 1993.
Payments due in 1993 and 1994 are suspended pending the purchased
assets being free of all Raymark-related liabilities as required
(see Note F).
The Raymark Divestiture - Raytech management has been informed
of the following with respect to ownership of Raymark:
In May 1988, the common stock of Raymark Corporation was
divested and sold to Asbestos Litigation Management, Inc.
("ALM"), a wholly-owned subsidiary of Litigation Control
Corporation ("LCC"). At the time of the said sale, LCC was
60% beneficially owned by Craig R. Smith, President and CEO
of Raytech (15% through his son, Bradley C. Smith).
In September 1988, LCC entered a tripartite agreement with
Celotex Corporation and Raymark for the purpose of sharing
asbestos litigation costs. Consideration paid by Raymark to
LCC was to assign $1,000 of its $33,530 note receivable due in
1994 from Raytech pursuant to the aforementioned Wet Clutch
and Brake Division acquisition.
In October 1988, LCC repurchased 75% of its outstanding stock
consisting of all of the shares beneficially owned by Craig R.
Smith and Bradley C. Smith and another unrelated shareholder
for $750. Consideration paid to Craig R. Smith
<PAGE>
Note H, continued
and Bradley C. Smith was $450 and $150, respectively. Messrs.
Smith and Smith were thereby completely divested of any stock
ownership in LCC.
In January 1989, LCC sold all of the outstanding stock of its
subsidiary, ALM, to Bradley C. Smith, the son of Craig R.
Smith, and another unrelated party for $17. Subsequently,
Bradley C. Smith purchased the balance of the stock of ALM
and is now the sole owner. In March 1996, 49% of the common
stock of Raymark Corporation was purchased by Craig R. Smith
from his son Bradley C. Smith for $7 in an agreement
containing an option to purchase the balance of the common
stock at a later date.
Other Matters
During 1989, Raytech incurred costs, including bankruptcy
related attorneys' fees and lender refinance charges, in the
amount of $1,558 subject to the indemnification clause of the
1987 agreement covering the purchase of assets of the Wet Clutch
and Brake Division. Pursuant to Raymark's request, Raytech
accepted 926,821 shares of Raytech stock in payment therefor.
During 1990, Raytech incurred similar costs in the amount of
$1,033 and was indemnified by a return of $364 or 177,570 shares
of Raytech stock held by Raymark, an offset against the April
1990 note payment due under the German acquisition of $521, and
then a subsequent return in February 1991 of an additional $148
or 74,826 shares of Raytech stock. Additionally, in January
1991, the Company incurred $750 of additional refinance charges,
which were also subject to the indemnification clause. Raytech
accepted Raymark's request to a reimbursement in the form of all
remaining shares of Raytech stock held by Raymark, which amounted
to $175 or 88,477 shares and then a reduction of $575 of future
stock obligations pursuant to the Wet Clutch and Brake and German
subsidiary acquisitions. Accordingly, in April 1991, $446 of
such credit was used to defray the April 1991 stock obligation
pursuant to the German subsidiary acquisition leaving a balance
of $132 to be applied toward the stock obligation due in November
1991 pursuant to the Wet Clutch and Brake acquisition. In July
1991, the Company and Raymark agreed that any future
reimbursement of indemnified costs by Raymark will be taken in
the form of a reduction of future stock obligations under the
Stock Purchase Agreement for the German subsidiary and any excess
to be taken as a reduction of the note due Raymark. In December
1992, the Company and Raymark amended the Asset Purchase
Agreement of the Wet Clutch and Brake Division. Under the terms
of the amendment, the note in the principal amount of $23,074
plus accrued interest in the amount of $17,543 was canceled and
replaced by an uncollateralized promissory note in the amount of
$40,617, bearing interest at the rate of 6% per annum and payable
in equal monthly installments of $650 commencing April 1993. The
<PAGE>
Note H, continued
principal portion of the monthly installments was to be paid into
an escrow pending clearance of all Raymark encumbrances and
liabilities as provided by the Agreements. Payments due in 1991
and 1992 under the acquisition agreements as amended and deferred
by agreement, amounting to $1,875, including accrued interest,
were paid in monthly installments of $650 until paid in full in
March 1993 bearing interest at 6%. As agreed by the Company and
Raymark, 1993 and 1994 obligations under the German subsidiary
note were suspended pending the assets purchased from Raymark in
1987 being free of all Raymark related encumbrances and
liabilities. Also, costs incurred by the Company subject to the
indemnification clause of the 1987 agreements were to be applied
as a reduction of the note obligations. As agreed in April 1993,
the Company received 80,000 shares of its stock from Raymark
valued at $262 as a credit for reimbursement of costs incurred by
the Company under the indemnification clause. As of December
1994, the Company had incurred $253 of additional costs subject
to the indemnification clause which were applied as a reduction
of the note obligations pursuant to the agreement. As of May
1995, the Company had incurred $460 of additional costs subject
to the indemnification clause which was applied as a reduction of
the note obligations pursuant to the agreement. Also, in May
1995, the Company reclaimed the balance in the escrow and
suspended payment of the monthly installments as a result of the
Third Circuit Court of Appeals decision that jeopardizes the
assets purchased from Raymark in 1987 being free of all Raymark
related encumbrances and liabilities. Monthly installments were
resumed in February 1997 (see Note F). During 1996, the Company
had incurred $2,622 of additional costs subject to the
indemnification clause which were applied in February 1997 as a
reduction of the note obligations pursuant to the agreement.
In 1990 and 1991, Raytech Powertrain, Inc., a subsidiary of
the Company, and owner of all of the capital stock of Allomatic
Products Company ("APC"), sold approximately 45% of the capital
stock of APC to a group of investors, including Craig Smith, for
the purpose of partially financing APC's move from New York to
Indiana and for the further growth of its business.
Subsequently, all APC stock held by Craig Smith was transferred
to relatives and related companies, including Universal Friction
Composites, Inc., and accordingly, in the opinion of General
Counsel of the Company, remains 40% beneficially owned by him.
In March 1996, APC declared a cash dividend of $2.81 per share
payable in equal quarterly installments to shareholders of record
in March 1996. At the record date, Craig Smith beneficially
owned 41,904 shares of the outstanding shares of APC stock. The
first, second and third quarter installments of the declared
dividend were paid in 1996. The Company's Board of Directors
reviewed Craig Smith's beneficial ownership of the APC stock and
resulting payment of dividends at length and has recommended
continued disclosure of the related party transactions and
<PAGE>
Note H, continued
appointed the General Counsel of the Company to monitor and
report all such related party transactions in the future.
In September 1993 and January 1994, Raytech Composites,
Inc., a wholly-owned subsidiary of the Company, borrowed $2,500
and $500 under the loan agreements with Raymark. The loans bear
interest at 6% per annum.
During 1996 and 1995, the Company purchased yarn from
Raymark amounting to $3,011 and $2,993, and at December 29, 1996
and December 31, 1995, the related payable amounted to $103 and
$239, respectively.
During 1993 and 1994, Raymark contracted with a subsidiary
of the Company to purchase certain equipment for $1,570 which
became excess as a result of the German consolidation. Payments
in full were made in kind with manufactured yarn through August
1994.
During 1988, the Company repurchased 200,000 shares of its
common stock from Echlin Inc. in exchange for approximately
$1,200 of credit on future product sales from the Company to
Echlin, which is pre-petition debt under the Company's bankruptcy
filing. As of December 29, 1996, Echlin's voting interest in the
Company is 16.9%.
In September 1996, Craig R. Smith entered into a consulting
agreement with Raymark for services regarding asbestos
litigation. Proceeds are to be paid to Raytech pursuant to the
terms of the agreement. During 1996, $13 was paid to Raytech in
the form of an offset against the note due Raymark.
<PAGE>
Note I - Income Taxes
Income before provision for income taxes and minority
interest consists of:
1996 1995 1994
Domestic $19,982 $23,811 $18,875
Foreign 673 375 (4,417)
$20,655 $24,186 $14,458
The Company's provision for taxes consists of the following:
1996 1995 1994
Current:
Federal $ 3,004 $ 7,876 $ 5,277
State 1,421 1,852 1,590
Foreign 156 133 34
Deferred:
Federal (975) (852) (1,086)
Total income taxes $ 3,606 $ 9,009 $ 5,815
The analysis of the variance from the U.S. statutory income
tax rate for consolidated operations is as follows:
1996 1995 1994
U.S. statutory rate 35.0% 35.0% 34.7%
Increases (decreases)
resulting from:
Foreign losses not deductible - - 10.6
Utilization of tax credits (1.0) (.1) (5.0)
Net decrease (increase) in
benefit from carryback of
future deductible amounts 3.0 (3.6) (2.4)
State income taxes, net of
federal benefit 4.2 5.0 7.2
Adjustment of prior years'
accruals (15.0) (.1) (4.8)
Raymark indemnification
payments (7.8) (1.3) -
Other (.9) 2.3 (.1)
Effective income tax rate 17.5% 37.2% 40.2%
<PAGE>
Note I, continued
During 1996, the Company finalized its federal income tax
audits for the fiscal years 1992-1994 resulting in a favorable
adjustment of $3,100 to prior year income tax accruals.
Deferred tax assets (liabilities) are comprised of the
following:
1996 1995 1994
Excess of book provisions
over tax deductions $ 4,977 $ 5,247 $ 4,108
Postretirement benefit 3,592 3,238 2,892
Excess of tax basis over
book basis of assets due
to restructuring 3,346 2,277 2,580
Foreign loss carryforwards 3,660 3,865 3,710
Other 947 798 982
Gross deferred tax assets 16,522 15,425 14,272
Deferred tax asset
valuation allowance (9,175) (8,547) (8,465)
Deferred tax assets 7,347 6,878 5,807
Gross deferred tax
liabilities (excess of
tax over book depreciation) (2,846) (3,352) (3,134)
Net deferred tax asset $ 4,501 $ 3,526 $ 2,673
The net deferred tax asset represents future tax deductions
that can be realized upon carryback to prior years.
The deferred tax asset valuation allowance increased by
$628, $82 and $2,430 during 1996, 1995 and 1994, respectively.
During 1996 and 1995, the Company utilized foreign loss
carryforwards, which reduced income tax expense by $336 and $177,
respectively. At December 29, 1996, the Company had foreign loss
carryforwards of $7,320, which do not expire.
<PAGE>
Note J - Employee Benefits
Raytech has several pension plans covering substantially all
employees. Pension expense for the defined benefit plan includes
current service costs and the amortization of prior service costs
over an average of thirteen years.
The Company also provides self-insured health care and life
insurance benefits for its active and retired employees.
In January 1988, the Company formed Raytech Corporation's
Retirement Plan for Hourly Employees (the "Raytech Plan"). The
Raytech Plan covers substantially all hourly employees of RPC in
Indiana retroactive to November 1, 1987 and calls for benefits to be
paid to eligible employees at retirement based upon an annual normal
retirement allowance of $192.00 multiplied by the number of years of
credited service. Effective in January 1994, the retirement
allowance was raised to $198.00, and in May 1996, it was increased to
$204.00. Prior to November 1, 1987 all obligations due to Raybestos
Products Company employees and the related assets were covered under
Raymark Industries, Inc. Retirement Plan for Hourly Employees (the
"Predecessor Plan"). In May of 1988, pursuant to the divestiture of
Raymark, all assets and obligations of the Predecessor Plan
transferred to Asbestos Litigation Management (see Notes A and H).
Employees covered under the Raytech Plan are eligible to
participate upon the attainment of age 21 and the completion of one
year of service. The benefits are based on negotiated benefits and
years of credited service. Employees who were eligible under the
Predecessor Plan became immediately eligible at November 1, 1987 for
the Raytech Plan. Upon retirement, these employees will receive
benefits from both plans.
The Company's funding policy is to contribute annually at least
the minimum amount required by the Employee Retirement Income
Security Act. The plan invests primarily in short-term investment
contracts. The Company uses the "projected unit credit method" for
determining the amounts and incidence of employer contributions to
provide for pension benefits.
The net periodic pension cost for defined benefit plans was
comprised of:
1996 1995 1994
Service cost $ 247 $ 174 $ 214
Interest cost on projected benefit
obligations 155 124 107
Actual return on plan assets (99) (79) (59)
Net amortization and deferral 30 11 8
Net periodic pension cost $ 333 $ 230 $ 270
<PAGE>
Note J, continued
The funded status of the Raytech Plan is as follows:
December 29, December 31,
1996 1995
Actuarial present value of
benefit obligations:
Vested $(2,390) $(2,052)
Non-vested (205) (148)
Total accumulated benefit obligations $(2,595) $(2,200)
Projected benefit obligations $(2,595) $(2,200)
Plan net assets at fair value 1,931 1,460
Excess of projected benefit
obligation over plan assets (664) (740)
Unrecognized past service cost 71 79
Unrecognized actuarial loss 514 502
Adjustment required to recognize
minimum liability (585) (581)
Net accrued pension liability $ (664) $ (740)
The assumptions used for the fiscal years ending 1996, 1995 and
1994 were:
Dec. 29, Dec. 31, Jan. 1,
1996 1995 1995
Discount rate 7.0% 7.0% 8.5%
Expected long-term rate of
return on assets 6.0% 6.0% 6.0%
The Company's German subsidiaries have defined benefit plans
covering certain employees. The net periodic pension cost for these
defined benefit plans is comprised of:
1996 1995 1994
Service cost $ 96 $ 105 $ 91
Interest cost on projected
benefit obligation 178 190 161
Amortization of transition amount 59 62 55
Amortization of actuarial gain (204) (182) (157)
Net periodic pension cost $ 129 $ 175 $ 150
Discount rate 7.0% 7.0% 7.0%
<PAGE>
Note J, continued
The status of the German plans is as follows:
Dec. 29, Dec. 31,
1996 1995
Actuarial present value
benefit obligations:
Vested $(2,214) $(2,387)
Non-vested (149) (164)
Total accumulated benefit obligations $(2,363) $(2,551)
Projected benefit obligations $(2,477) $(2,722)
Unrecognized past service cost 404 495
Unrecognized actuarial gain (154) (159)
Current maturities 117 132
Net accrued pension liability $(2,110) $(2,254)
In June 1986, Raymark terminated its defined benefit plan for
salaried employees and replaced it by modifying the defined
contribution plan. Subsequent to the sale of Raymark, this defined
contribution plan was replaced by a similar plan which covers
essentially all salaried employees of Raytech. Contributions
generally aggregate up to 6% of each salaried employee's base salary
in stock or cash. The total expense in 1996, 1995 and 1994 under
these defined contribution plans was $632, $598 and $603,
respectively.
The Company also provides certain postretirement life insurance
and medical benefits covering certain hourly and salaried domestic
employees. These benefits and similar benefits for active employees
are provided through an insurance company and a third-party
administrator whose premiums are based on benefits paid during the
years.
Under the Company's non-contributory postretirement life
insurance plan, at retirement, participants meeting eligibility
requirements, which are based on age and years of service, are
entitled to receive a death benefit of $3 for hourly employees; or
for salaried employees an amount equal to 50% of final annual base
salary for pre-October 1, 1988 hires or an amount equal to the
greater of $5 or 10% of final annual base salary for post-October 1,
1988 hires. These benefits are provided by the purchase of
individual life insurance policies upon the participants' retirement.
The Company also has a contributory, self-insured post-
retirement health plan. The plan provides certain medical coverage
to retirees and their dependents during the retirees' lifetime, and
benefits are subject to deductibles, an 80% coinsurance provision and
a $10 lifetime maximum for post age 65 hourly employees and a $50
<PAGE>
Note J, continued
lifetime maximum for post age 65 salaried employees. Eligibility is
based on age and years of service. Hourly participant contributions
are governed by the Company's collective bargaining agreement for
pre-age 65 coverage and are based on scheduled amounts for post age-
65 coverage. Contributions for pre-age 65 salaried participants are
based on 15% of pooled cost for retirees and 25% of pooled cost for
spouses with no contribution required for post-age 65 participants.
The Company funds the costs associated with providing the post-
retirement life insurance and health benefits on a "pay-as-you-go"
basis.
The components of the accumulated postretirement benefit
obligation are as follows:
1996 1995
Retirees and dependents $ 1,227 $ 979
Actives fully eligible 2,780 3,076
Actives not fully eligible 4,775 5,950
Unfunded accumulated postretirement
benefit obligation 8,782 10,005
Unrecognized net gain(loss) 657 (1,566)
Accrued postretirement benefit cost 9,439 8,439
Less current portion 196 186
$ 9,243 $ 8,253
The components of net periodic postretirement benefit expense
for fiscal 1996, 1995 and 1994 are as follows:
1996 1995 1994
Service cost $ 511 $ 383 $ 431
Interest cost on accumulated
post-retirement benefit obligation 680 623 548
Unrecognized net gain(loss) 77 (11) 73
Net periodic expense $1,268 $ 995 $1,052
The assumed discount rates used to measure the accumulated
postretirement benefit obligation at December 29, 1996, December 31,
1995 and January 1, 1995 were 7.0%, 7% and 8.5%, respectively. The
assumed health care cost trend rate used to measure the expected cost
of benefits is 6.5% for both fiscal 1997 and 1996. The health care
cost trend rate has a significant effect on the amounts reported.
For example, a one percentage point increase in the health care cost
trend rate would increase the accumulated postretirement benefit
obligation by $1,100 and increase net periodic expense by $100.
<PAGE>
Note J, continued
The following table summarizes the number of active and retired
employees at the end of the last three fiscal years who are covered
under these plans:
Year Active Retirees
1996 1,259 45
1995 1,244 41
1994 1,310 36
Effective the beginning of fiscal 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No.
112, "Employers' Accounting for Postemployment Benefits," which
requires companies to recognize the cost of providing postemployment
benefits over the employees' service period. The effect of
implementing the provisions of SFAS 112 was immaterial.
During 1988, certain assets of the employee savings plans were
invested in a long-term investment contract with Executive Life
Insurance Company. In April 1991, Executive Life Insurance Company
was placed in conservation by the California Insurance Commission and
pursuant to the terms of a Rehabilitation Plan approved by a
California Superior Court effective September 1993, all contracts
were restructured adjusting the values downward. In 1994, the
Company committed to make additional contributions to the employee
savings plans to reinstate certain designated employee investment
values lost as a result of the Executive Life Insurance Company
failure and subsequent conservation and rehabilitation plan.
Following receipt of governmental approvals, the Company made the
contributions to the employee savings plans in April 1995 in the
amount of $1,068 covering full reinstatement of investment losses in
Executive Life contracts. In May 1996 and October 1995, the Company
was reimbursed $79 and $224, respectively, from Executive Life
holdbacks.
<PAGE>
Note K - Geographic Information
<TABLE>
Raytech, through its principal subsidiaries, is a multinational
manufacturer and marketer of specialty engineered products for heat
resistant, inertia control, energy absorption and transmission
applications. Its products are used in the vehicular, aerospace,
nucleonics, petrochemical, energy, metal working, construction,
agriculture, utility and electronic industries, among others.
A summary of information about Raytech's operations by geographic
segments at year-end 1996, 1995 and 1994 and for the fiscal years
then ended follows:
<CAPTION>
Net Operating Identifiable
Sales Income Assets
<S> <C> <C> <C>
1996
Domestic $172,424 $ 22,153 $119,821
Europe (1) 45,259 1,450 20,334
Consolidated $217,683 $ 23,603 $140,155
1995
Domestic $128,629 $ 19,835 $ 90,258
Europe (1) 48,869 1,124 24,178
Consolidated $177,498 $ 20,959 $114,436
1994
Domestic $124,116 $ 21,011 $ 70,550
Europe (1) 43,499 (2,606) 21,259
Consolidated $167,615 $ 18,405 $ 91,809
(1) Primarily Germany
<FN>
Domestic sales to a single customer, Caterpillar, Inc., were
15%, 14%, and 16% of consolidated sales for 1996, 1995 and 1994,
respectively. The Company's German subsidiaries had sales to two
customers, Fichtel & Sachs and LUK, of 7% and 5% each of consolidated
sales for 1996, of 9% and 8% each of consolidated sales for 1995, and
9% each of consolidated sales for 1994.
Domestic operating income includes corporate general and
administrative expenses.
</TABLE>
<PAGE>
NOTE L - Summarized Quarterly Financial Data (Unaudited)
(in thousands except share and market data)
Fiscal Quarters Ended 1996
March 31 June 30 Sept. 29 December 29
Net sales $ 52,037 $ 60,142 $ 53,660 $ 51,844
Gross profit 13,799 14,790 12,799 12,881
Income before provision
for taxes and minority
interest 6,598 7,322 5,196 1,539
Net income $ 3,691 $ 4,592 $ 4,754(a)$ 2,954(a)
Net income per share $ 1.09 $ 1.31 $ 1.38 $ .86
Market range:
-high 3-7/8 6-3/4 5 4-1/2
-low 2-7/8 3-1/2 3-3/4 3-1/2
Dividends - - - -
Fiscal Quarters Ended 1995
April 2 July 2 October 1 December 31
Net sales $ 49,913 $ 45,705 $ 41,685 $ 40,195
Gross profit 14,389 11,176 10,508 12,626
Income before provision
for taxes and minority
interest 7,117 9,751 3,184 4,134
Net income $ 4,577 $ 5,645(b) $ 1,586 $ 2,529
Net income per share $ 1.33 $ 1.67 $ .47 $ .75
Market range:
-high 4-5/8 4-3/8 4-1/4 3-3/4
-low 4 2-1/4 2-3/4 2-3/4
Dividends - - - -
(a) Includes adjustments to income tax expense for prior year accruals
no longer required.
(b) Includes a one-time after-tax gain of $2,758, which resulted from a
favorable judgment in regard to a product defamation lawsuit.
<PAGE>
Note M - Supplementary Financial Statement Detail
Fiscal Year 1996 1995
ACCOUNTS PAYABLE
Trade accounts payable $ 11,882 $ 9,377
Amounts due to AFM 7,076 -
Other 41 11
$ 18,999 $ 9,388
Fiscal Year l996 l995
ACCRUED LIABILITIES
Property taxes $ 1,933 $ 2,023
Legal 728 324
Taxes 113 2,050
Wages and related taxes 8,547 7,483
Pensions and employee benefits 2,616 2,747
Product due Echlin (see Note H) 1,183 1,183
Other 7,639 4,566
$ 22,759 $ 20,376
OTHER LONG-TERM LIABILITIES
Long-term pensions $ 2,110 $ 2,253
Other 2,309 5,742
$ 4,419 $ 7,995
<PAGE>
Note M, continued
Fiscal Year 1996 1995 1994
OTHER OPERATING INCOME (EXPENSE), NET
Production equipment write-down $ - $(1,746) -
German plant consolidation - - $(1,167)
Insurance recovery 183 - -
Reinstatement of designated
employee savings plans values 79 224 (400)
Other (65) - -
$ 197 $(1,522) $(1,567)
OTHER INCOME (EXPENSE), NET
Interest income $ 218 $ 227 $ 82
Lawsuit judgment - 4,597 -
Note settlement - 489 -
Other (97) 604 (796)
121 $ 5,917 $ (714)
ALLOWANCE FOR BAD DEBTS
Beginning balance $ 822 $ 519 $ 402
Provisions 28 303 312
Charge-offs (124) - (195)
Ending balance 726 $ 822 $ 519
<PAGE>
Note N - Commitments
Rental expense amounted to $995, $894, and $741, in 1996, 1995
and 1994, respectively. The approximate minimum rental commitments
under non-cancelable leases at December 29, 1996 were as follows:
1997, $469; 1998, $412; 1999, $222; 2000, $118; 2001, $116; and 2002
and thereafter, $532.
<PAGE>
Note O - Stock Option Plans
The Company's 1980 Non-Qualified Stock Option Plan (the
"Plan"), as amended, provides for the grant of options for up to
600,000 shares of common stock and any accompanying stock appreciation
rights. The Company granted both non-qualified and incentive stock
options. In general, options granted under the Plan are at 100% of
the fair market value on grant date or par value, whichever is higher.
Once granted, options become exercisable in whole or in part after one
year and expire on the tenth anniversary of the grant. Prior to the
merger (refer to Note A), options were generally exercisable at the
cumulative rate of 20% per year beginning one year from the date of
grant. At the 1986 Annual Meeting, par value was reduced to $1.00 per
share, and options granted below par value in 1985 were approved. On
the effective date of the merger, all outstanding options under the
Plan were canceled and new non-qualified options were issued by the
Company at an option price of $6.81 which was equal to the fair market
value at the date of grant. The term during which any future options
may be granted under the Plan expired on December 31, 1989.
In 1991, the shareholders approved the adoption of a new non-
qualified stock option plan ("1990 Plan") to replace the expired Plan.
The terms and provisions of the 1990 Plan are similar to the expired
Plan, providing for the grant of options for up to 500,000 shares of
common stock authorized for such purpose by the shareholders.
Effective November 1, 1992, the Company granted 479,071 non-qualified
options at an option price of $2.75. At the date of grant the market
price per share was $2.375.
The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its
stock plans as allowed under FAS Statement No. 123, "Accounting for
Stock-Based Compensation." Accordingly, the adoption of this
statement in fiscal 1996 did not affect the Company's results of
operations, financial position or liquidity. Had compensation cost
been determined consistent with FAS No. 123, pro forma net income and
earnings per share would not have changed from the reported amounts
since no options have been granted since December 15, 1994.
<PAGE>
Note O, continued
Changes during the three years ended December 29, 1996 in shares
under option were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 697,234 $ 3.66 813,055 $ 4.04 869,342 $ 4.02
Granted - - -
Exercised (9,682) 2.75 (11,115) 2.25 (19,869) 2.45
Lapsed (25,000) 6.75 (103,406) 6.81 (36,418) 4.49
Canceled (4,202) 2.94 (1,300) 1.75 - -
Outstanding at
end of year 658,350 3.56 697,234 3.66 813,055 4.04
Options available
for future awards
at end of year 30,299 26,747 26,747
Options exercisable
at end of year 658,350 3.56 697,234 3.66 813,055 4.04
</TABLE>
Options outstanding and exercisable at December 29, 1996 were as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
<C> <C> <C> <C> <C> <C> <C>
$ 1.75 - $ 2.63 93,500 2.84 $ 1.75 93,500 $ 1.75
$ 2.75 - $ 4.13 440,585 5.84 2.75 440,585 2.75
$ 7.63 - $11.44 124,265 .47 7.79 124,265 7.79
$ 1.75 - $11.44 658,350 4.40 $ 3.56 658,350 $ 3.56
</TABLE>
<PAGE>
Note P - Concentration of Trade Receivables and
Financial Instruments
Financial instruments, which potentially subject the Company
to concentration of credit risk, consist principally of cash and
cash equivalents, trade receivables and investments in marketable
securities. The Company places its cash with high credit quality
institutions. At times such amounts may be in excess of the FDIC
insurance limits. The primary businesses of the Company's U.S.
subsidiaries are the automotive and heavy duty equipment markets
and the related aftermarkets within the United States. As of
December 29, 1996 and December 31, 1995, the Company had
uncollateralized receivables with two customers approximating
$6,804 and $3,721, respectively, which represents 28.5% and 21% of
the Company's trade accounts balance, respectively. During fiscal
1996 and 1995, sales to these customers amounted to approximately
$36,291 and $37,609, respectively, which represents 16.7% and 21%
of the Company's revenues, respectively. The Company performs
ongoing credit evaluations of its customers' financial condition
but does not require collateral to support customer receivables.
The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers,
historical trends and other information. The Company has
investments in U.S. Treasury notes in the amount of $2,100 which
mature in 1998.
<PAGE>
Note Q - Acquisition
On January 31, 1996, Raytech Composites, Inc. ("Composites"),
a subsidiary of Raytech, and Raybestos Products
Company ("RPC"), a subsidiary of Composites, entered into a series
of related transactions with Advanced Friction Materials ("AFM")
and related entities and persons as follows: Composites acquired a
47% minority share of the common stock of AFM for $9.4 million cash
at closing; RPC acquired 100% of the common stock of AFM Management
Company, which leases employees to AFM, for $1.0 million, which was
paid for on January 31, 1997; RPC acquired the machinery and
equipment and certain other operating assets of AFM for $3.5
million cash at closing; RPC committed to acquire land and building
utilized in AFM's manufacturing operations (land and building
located at 44650 Merrill, Sterling Heights, Michigan) from a
principal owner of AFM for $6.6 million, which was consummated on
January 31, 1997; RPC loaned AFM $1.3 million cash at closing
bearing interest at the prime rate and maturing on January 31,
2003; RPC agreed to acquire AFM's inventory subsequent to closing,
which has amounted to approximately $3.2 million. In addition, the
parties entered into various other agreements, including supply and
technology exchange agreements. Subsequent to the transaction, RPC
is supplying AFM with products (automobile transmission component
parts) manufactured at the Sterling Heights facility. Sales prices
between RPC and AFM are established under the terms of the supply
agreement entered into at closing. AFM will bear responsibility
principally for sales and marketing of the products to original
equipment manufacturers and development of new products.
Composites 47% ownership interest in AFM is accounted for
under the equity method commencing February 1, 1996. The excess of
purchase price over the Company's equity in the underlying net
assets of AFM is being amortized on a straight line basis over a
30-year period.
The machinery and equipment and real property have been
recorded based upon the fair value of the assets. Had the
transactions described above occurred on January 1, 1996 or
January 2, 1995, the estimated pro forma effect on the Company's
net income would not have been material.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Raytech Corporation:
We have audited the consolidated financial statements of Raytech
Corporation (the "Company," a holding company) and subsidiaries
listed in Item 14(a) of this Form 10-K. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Raytech Corporation and subsidiaries as of
December 29, 1996 and December 31, 1995 and the consolidated
results of their operations and their cash flows for each of the
three fiscal years in the period ended December 29, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements,
Raymark Corporation ("Raymark") is a defendant in numerous
lawsuits seeking substantial damages relating to airborne
asbestos fibers. The Company has been named a co-defendant in
approximately 3,300 of these asbestos-related lawsuits as a
successor in liability to Raymark. In addition, the Company is
co-defendant with Raymark in lawsuits involving environmental
matters as a successor in liability to Raymark. On March 10,
1989, Raytech filed a petition seeking relief under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code"). Under
the provisions of the Bankruptcy Code, the Company is operating
as a debtor-in-possession. The Company's operating subsidiaries,
none of which have filed for protection under Chapter 11,
continue to operate their businesses in the ordinary course of
business. Raytech filed to protect itself from the lawsuits
<PAGE>
mentioned above and to obtain a binding ruling for all
jurisdictions on whether Raytech is liable as a successor for
asbestos-related claims, including any claims yet to be filed,
relating to the operations of Raymark or its predecessors.
During 1995, Raytech received adverse rulings precluding it from
relitigating the 1988 ruling holding Raytech to be a successor to
Raymark's asbestos-related claims. Determination of Raytech's
actual liabilities as successor to Raymark's asbestos-related and
environmental claims is subject to the uncertainties inherent in
the process of reorganizing under the Bankruptcy Code. Such
liabilities could have a material adverse effect on the Company.
These uncertainties raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or adjustments relating
to establishment, settlement and classification of liabilities
that may be required in connection with reorganizing under the
Bankruptcy Code.
COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
March 13, 1997
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
None
PART III
Item 10. Directors and Executive Officers of Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
Responses to Items 10 through 13 are included in the
Registrant's definitive proxy statement filed pursuant to
Regulation 14A for the 1997 Annual Meeting of Shareholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
(a) The following financial statements are included in Part II,
Item 8:
(1) Financial Statements
Consolidated Balance Sheets - December 29, 1996 and
December 31, 1995
Consolidated Statements of Operations for the 1996,
1995 and 1994 fiscal years
Consolidated Statements of Cash Flows for the 1996,
1995 and 1994 fiscal years
Consolidated Statements of Shareholders' Equity
(Deficit) for the 1996, 1995 and 1994 fiscal years
Notes to Consolidated Financial Statements
Report of Independent Accountants
<PAGE>
(2) Financial Statement Schedules
The following additional financial information is filed as
part of this Form 10-K and should be read in conjunction
with the consolidated financial statements. Schedules not
included with this additional financial information have
been omitted either because they are not applicable or
because the required information is shown in the
consolidated financial statements.
- Schedule I - Condensed Financial Statements
of the Registrant (Parent)(Unaudited)
(3) The Exhibits are listed in the index of Exhibits at Item
(c) hereafter.
(b) Reports on Form 8-K
In Form 8-K dated January 31, 1996, Raytech Composites, Inc., a
subsidiary of the Registrant, acquired a minority share of 47%
of the stock of Advanced Friction Materials Company located in
Sterling Heights, Michigan, from Oscar E. Stefanutti and related
family trusts. Consideration for the stock transaction was
$9,400,000 taken from cash reserves based upon a principle of
current value related to synergies of the business, coupled with
projected earnings. Raybestos Products Company, the operating
subsidiary of Raytech Composites, Inc., simultaneously entered
into a technology exchange agreement with Advanced Friction
Materials Company and agreed to purchase certain operating
assets and real property both on the closing and on the first
anniversary date at a combined purchase price of $10,600,000
cash to be adjusted in part by an evaluation of certain current
assets. Advanced Friction Materials Company, the majority
ownership of which remains in Oscar E. Stefanutti and related
family trusts, is engaged and will continue in the development,
engineering and sales of automobile transmission component
parts, including friction plates, bands and friction materials
for torque converters, to original equipment manufacturers. On
April 12, 1996, Amendment No. 1 was filed on Form 8-K/A,
providing the financial statements for the acquired business and
the pro forma financial information required to be filed.
(c) Index of Exhibits Page
2(a) Plan or Reorganization dated May 31, 1994
filed by the Registrant (k)
2(b) Plan of Reorganization dated September 12,
1994 filed by the unsecured creditors'
committee (l)
3(a) Certificate of Incorporation of Raytech (d)
3(b) By-laws of Raytech (d)
<PAGE>
Page
4(a) Amendment No. 1 to Form S-4 Registration
Statement, Registration No. 33-7491 (b)
10(a) Raytech Corporation's 1980 Non-Qualified Stock
Option Plan, as amended (c)
10(b) Raytech Corporation's Variable Compensation
Program as amended and restated December 14, 1990
(g)
10(c) Amended and Restated Agreement and Plan of
Merger dated as of September 4, 1986 (a)
10(d) Stock Purchase Agreement dated March 30, 1987
between Raymark Industries, Inc. and Raytech
Composites (e), Amendment dated July 18, 1991
(h) and Amendment dated December 21, 1992 (i)
10(e) Asset Purchase Agreement dated October 29, 1987
between Raymark Industries, Inc. and Raytech
Composites, Inc. (e), Amendment dated July 18,
1991 (h) and Amendment dated December 21, 1992 (i)
10(f) Stock Purchase Agreement dated May 18, 1988
between Raytech Corporation and Asbestos
Litigation Management, Inc. (f)
10(g) Asset Purchase Agreement (Notarial Deed) dated
June 19, 1992 between Ferodo Beral GmbH and
Raytech Composites, Inc. and Raybestos
Reibbelag GmbH (i)
10(h) Loan Agreement dated September 16, 1993 between
Raytech Composites, Inc. and Raymark Industries,
Inc. (j)
10(i) Loan Agreement dated January 10, 1994 between
Raytech Composites, Inc. and Raymark Industries,
Inc. (j)
10(j) Loan and Security Agreement dated March 29, 1995
between Raybestos Products Company and The CIT
Group/Credit Finance, Inc. (m)
11 Statement re. Computation of Per Share Earnings 94
22 Subsidiaries of Raytech 95
24 Consent of Independent Accountants 96
<PAGE>
Footnotes to Exhibits
(a) Filed as an Exhibit to Registrant's Amendment No. 1 to
Form S-4, Registration Statement, Registration No. 33-7491,
filed with the Securities and Exchange Commission on
September 5, 1986.
(b) Filed with the Securities and Exchange Commission on
September 5, 1986.
(c) Included in Registrant's Registration Statement on Form
S-8 (Registration No. 2-95251) filed with the Securities
and Exchange Commission on January 11, 1985.
(d) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 23, 1987.
(e) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission on
March 28, 1988, as amended by Form 8 filed on April 11,
1988 and Form 8 filed on April 19, 1988.
(f) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission on
March 29, 1989.
(g) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission on
March 20, 1991.
(h) Included as an Exhibit to Registrant's Report on Form
10-Q filed with the Securities and Exchange Commission on
September 29, 1991, as amended by Form 8 filed on
February 27, 1992.
(i) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission on
March 22, 1993.
(j) Included as an Exhibit to Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission on
March 14, 1994.
(k) Included as an Exhibit to Registrant's Report on Form 10-Q
filed with the Securities and Exchange Commission on
August 9, 1994.
(l) Included as an Exhibit to Registrant's Report on Form
10-Q filed with the Securities and Exchange Commission
on November 7, 1994.
<PAGE>
(m) Included as an Exhibit to Registrant's Report on Form
10-Q filed with the Securities and Exchange Commission
on April 2, 1995.
Copies of exhibits which are not included herewith and which
have not previously been filed with the Securities and Exchange
Commission may be obtained by submitting a written request,
specifying the name of the exhibit and including payment of
$2.00 for each exhibit to cover handling and postage, to:
LeGrande L. Young, Secretary, Raytech Corporation, Suite 512,
One Corporate Drive, Shelton, Connecticut 06484.
(d) The Index to Consolidated Financial Statements and Financial
Statement Schedules is included beginning on page 87
hereafter.
<PAGE>
Index To Consolidated Financial Statements
and Financial Statement Schedules
Page
Financial Statements:
Consolidated Balance Sheets for the
Fiscal Years Ended December 29, 1996
and December 31, 1995 34
Consolidated Statements of Operations
for the 1996, 1995 and 1994 Fiscal Years 35
Consolidated Statements of Cash Flows
for the 1996, 1995 and 1994 Fiscal Years 36
Consolidated Statements of Shareholders'
Equity (Deficit) for the 1996, 1995, and 1994
Fiscal Years 37
Notes to Consolidated Financial Statements 40
Report of Independent Accountants 80
Financial Statement Schedules:
Schedule I - Condensed Financial Statements
of the Registrant (Parent)(Unaudited) 88
<PAGE>
<TABLE>
RAYTECH CORPORATION
SCHEDULE I - Condensed Financial Statements
of the Registrant (Parent)
BALANCE SHEETS (UNAUDITED)
(in thousands)
<CAPTION>
ASSETS
1996 1995
<S> <C> <C>
Assets:
Cash $ 134 $ 65
Other current assets 794 2
Deferred taxes 3,761 3,977
Due from Raytech Composites, Inc.
(eliminated in consolidation) 1,478 1,310
Total current assets 6,167 5,354
Property, plant and equipment, net 134 111
Investment in majority-owned subsidiaries 30,670 22,262
Deferred taxes 501 2,901
Other long-term assets 1,210 1,080
Total assets $ 38,682 $ 31,708
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable $ 41 $ 33
Accrued liabilities 3,954 8,871
Total current liabilities 3,995 8,904
Other liabilities 672 4,124
Total liabilities 4,667 13,028
Investment in subsidiaries - -
Shareholders' equity (deficit)
Common stock $ 5,372 $ 5,362
Additional paid in capital 70,208 70,192
Accumulated deficit (38,922) (54,913)
Cumulative translation adjustment 1,918 2,600
38,576 23,241
Less treasury stock at cost (4,561) (4,561)
Total shareholders' equity (deficit) 34,015 18,680
Total liabilities and shareholders'
equity (deficit) $ 38,682 $31,708
<FN>
The accompanying notes and the notes to the consolidated financial statements
are an integral part of the condensed financial statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
<TABLE>
SCHEDULE I - Condensed Financial Statements
of the Registrant (Parent)
STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share data)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
General and administrative expenses $ 2,489 $ 4,436 $ 4,774
Income (loss) before equity in earnings
in subsidiaries (2,489) (4,436) (4,774)
Equity in earnings of subsidiaries 18,480 18,773 13,417
Net income 15,991 $ 14,337 $ 8,643
Earnings per share $ 4.65 $ 4.26 $ 2.52
Average shares outstanding 3,441,645 3,369,003 3,426,034
<FN>
The accompanying notes and the notes to the consolidated financial statements are
an integral part of these condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
RAYTECH CORPORATION
SCHEDULE I - Condensed Financial Statements
of the Registrant (Parent)
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
1996 1995 1994
<S> <C> <S> <C> <C> <C> <C> <C> <C>
Net cash used in operating activities $(2,972) $(2,082) $(3,892)
Cash flow from investing activities:
Dividends from subsidiary 3,015 2,070 3,973
Net cash provided by
investing activities 3,015 2,070 3,973
Cash flow from financing activities:
Proceeds from sale of stock 26 25 52
Increase (decrease) in bank overdraft - - (81)
Net cash provided by (used in)
financing activities 26 25 (29)
Net change in cash 69 13 52
Cash, beginning of period 65 52 -
Cash, end of period $ 134 $ 65 $ 52
<FN>
The accompanying notes and the notes to the consolidated financial statements are an
integral part of these condensed financial statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
SCHEDULE I - Condensed Financial Statements
of the Registrant (Parent)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(in thousands)
Note 1: Basis of Presentation
The accompanying notes should be read in conjunction with the
consolidated financial statements of Raytech Corporation (the
"Registrant") and the notes thereto. The accompanying financial
statements of Raytech Corporation, a holding company, include the
following accounts:
. Cash in debtor-in-possession accounts.
. Income tax accounts except as related to Allomatic Products
Company and foreign subsidiaries. Under the Company's
corporate tax allocation policy, income taxes are provided
on a stand-alone basis.
. Costs and expenses and related accounts payable and accrued
liabilities which in the opinion of management relate to the
operation of the holding company. Such costs consist
principally of compensation and related costs of certain
employees now designated as employees of the Registrant,
operating costs of the Shelton, Connecticut, headquarters
facility, certain professional fees, shareholder fees and
public relations expenses. These costs are financed with
subsidiary dividends.
. Capital accounts of the holding company.
The investment in and operating results of the holding company's
wholly- and majority-owned subsidiaries are reflected on the equity
method. Due from Raytech Composites, Inc. results primarily from the
allocation of income taxes and certain legal fees.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RAYTECH CORPORATION
By: /s/CRAIG R. SMITH
Craig R. Smith
President and
Chief Executive Officer
Date: March 25, 1997
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities shown on
March 25, 1997.
Signature and Title Signature and Title
/s/ CRAIG R. SMITH /s/DENNIS G. HEINER
Craig R. Smith Dennis G. Heiner
President, Chief Executive Director
Officer and Director
/s/ALBERT A. CANOSA /s/DONALD P. MILLER
Albert A. Canosa Donald P. Miller
Vice President of Administration, Director
Treasurer and Chief
Financial Officer
/s/ROBERT L. BENNETT /s/ROBERT B. SIMS
Robert L. Bennett Robert B. Sims
Director Director
/s/ROBERT M. GORDON
Robert M. Gordon
Director
<TABLE>
FORM 10-K
RAYTECH CORPORATION AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
<CAPTION>
For the Fiscal Year Ended
December 29, December 31, January 1,
1996 1995 1995
<S> <C> <C> <C>
Net income $ 15,991 $ 14,337 $ 8,643
Primary
Common shares outstanding
at beginning of year 3,230,080 3,218,968 3,199,133
Weighted average of treasury
stock acquired - (2) (20)
Common equivalent shares for
assumed exercise of employee
stock options 208,971 143,041 220,601
Weighted average of options
exercised 2,594 6,996 6,320
Weighted average shares
outstanding 3,441,645 3,369,003 3,426,034
Primary earnings per share $4.65 $4.26 $2.52
Fully Diluted
Common shares outstanding
at beginning of year 3,230,080 3,218,968 3,199,133
Weighted average of treasury
stock acquired - (2) (20)
Common equivalent shares for
assumed exercise of employee
stock options 208,971 143,041 220,601
Weighted average of options
exercised 2,594 6,996 6,320
Weighted average shares
outstanding 3,441,645 3,369,003 3,426,034
Fully diluted earnings per share $4.65 $4.26 $2.52
</TABLE>
Exhibit 22
Subsidiaries of Raytech Corporation Incorporated
Raytech Composites, Inc. Delaware
Suite 512, One Corporate Drive
Shelton, CT 06484
Raytech Powertrain, Inc. Delaware
Suite 512, One Corporate Drive
Shelton, CT 06484
Raytech Fasteners, Inc. Delaware
Suite 512, One Corporate Drive
Shelton, CT 06484
Raybestos Products Company Delaware
1204 Darlington Avenue
Crawfordsville, IN 47933
AFM Management Company Michigan
44650 Merrill Road
Sterling Heights, MI 48314
Raybestos U.K. Ltd. England
16, Spindus Road
Speke
Liverpool L24 1YA, England
Raytech Composites Europe GmbH Germany
Bahnstrasse 48-50
5608 Radevormwald, Germany
Raybestos Industrie-Produkte GmbH Germany
Industriestrasse, 7
D-54497 Morbach, Germany
Raybestos Reibtechnik GmbH Germany
Quettingerstrasse, 220
D-51381 Leverkusen 3, Germany
Allomatic Products Company Delaware
609 E. Chaney
Sullivan, IN 47882
Raybestos Aftermarket Products Company Delaware
964 East Market Street
Crawfordsville, IN 47933
Miami Rivet Company Delaware
Suite 512, One Corporate Drive
Shelton, CT 06484
Exhibit 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statement of Raytech Corporation and subsidiaries
on Form S-8 (File No. 33-42420) of our report, which includes
explanatory paragraphs related to the Company's ability to continue
as a going concern, dated March 13, 1997, on our audits of the
consolidated financial statements of Raytech Corporation and
subsidiaries as of December 29, 1996 and December 31, 1995 and for
each of the three fiscal years in the period ended December 29,
1996, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
March 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<CIK> 0000797917
<NAME> RAYTECH CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<PERIOD-TYPE> 12-MOS
<EXCHANGE-RATE> 1
<CASH> 11,341
<SECURITIES> 0
<RECEIVABLES> 24,592
<ALLOWANCES> 726
<INVENTORY> 28,709
<CURRENT-ASSETS> 72,036
<PP&E> 127,811
<DEPRECIATION> 76,686
<TOTAL-ASSETS> 140,155
<CURRENT-LIABILITIES> 64,618
<BONDS> 0
<COMMON> 5,372
0
0
<OTHER-SE> 28,643
<TOTAL-LIABILITY-AND-EQUITY> 140,155
<SALES> 217,683
<TOTAL-REVENUES> 217,683
<CGS> 163,414
<TOTAL-COSTS> 163,414
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,132
<INCOME-PRETAX> 20,655
<INCOME-TAX> 3,606
<INCOME-CONTINUING> 15,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,991
<EPS-PRIMARY> 4.65
<EPS-DILUTED> 4.65
</TABLE>
