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 28, 1997 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 16, 1998, 3,285,308 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 1998 Annual Meeting of Shareholders are
incorporated by reference in Part III.
<PAGE>
INDEX TO RAYTECH CORPORATION
1997 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 ... 21
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ......................... 22
Item 6. Selected Financial Data ............................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 24
Item 8. Financial Statements and Supplementary Data ........... 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures .................. 88
<PAGE>
PART III.
Page
Item 10. Directors and Officers of Registrant ................ 88
Item 11. Executive Compensation .............................. 88
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................. 88
Item 13. Certain Relationships and Related Transactions ...... 88
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................... 88
(a)(1) List of Financial Statements ................ 88
(a)(2) List of Financial Statement Schedules ....... 89
(a)(3) Exhibits .................................... 89
(b) Reports on Form 8-K ......................... 89
(c) Index of Exhibits............................ 89
(d) Index to Consolidated Financial Statements
and Financial Statement Schedules
(reference) ................................. 92
Index to Consolidated Financial Statements and
Financial Statement Schedules................................ 93
Signatures .................................................... 94
<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 in the asbestos-related lawsuits referenced
above, as provided in the indemnity sections of the acquisition
agreements. (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
<PAGE>
Court of Appeals decision in a related case 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. (For a further
discussion regarding this liability and bankruptcy proceedings,
refer to Item 3. Legal Proceedings herein.)
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
1998 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.
On January 12, 1998, Craig R. Smith, President and
Chief Executive Officer of the Registrant, was terminated by the
Board of Directors, and Albert A. Canosa was elected President
and Chief Executive Officer. Mr. Canosa previously served as
Vice President of Administration, Chief Financial Officer and
Treasurer of the Registrant and will continue to hold the offices
of Chief Financial Officer and Treasurer pending replacement. At
a meeting on January 23, 1998, Albert A. Canosa was elected as a
Class II Director (term expiring 2000) in place of Craig R. Smith
who had resigned following his termination.
(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 28, 1997, December 29, 1996, and December 31,
1995 are set forth herein on page 73.
(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
working, construction, agriculture, utility, and electronic
industries, among others.
Raytech operates through six subsidiaries:
Raybestos Products Company, located in Crawfordsville, Indiana,
and Sterling Heights, Michigan; Raybestos Industrie-Produkte
<PAGE>
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 the subsidiaries for the last
three years was as follows:
Subsidiaries 1997 1996 1995
Raybestos Products Company 58% 55% 47%
Raybestos Industrie-
Produkte GmbH 15% 17% 23%
Raybestos Reibtechnik GmbH 3% 3% 4%
Raybestos U.K. Limited <1% <1% <1%
Allomatic Products Company 13% 13% 14%
Raybestos Aftermarket
Products Company 10% 11% 12%
Beginning January 1998, the Sterling Heights, Michigan, location
will be operated by Automotive Composites Company ("ACC"), a
newly formed subsidiary.
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 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 12% of total sales. Excluding
Sterling Heights, Raybestos Products Company sales, as a
percentage of total sales, are 46% in 1997.
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 1998 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 14%, 15%, and 14%
of consolidated sales in 1997, 1996, and 1995, respectively.
The Company's German subsidiaries had combined sales to two
customers, Fichtel & Sachs, amounting to 6%, 7%, and 9% of
consolidated sales in 1997, 1996, and 1995, respectively, and 4%,
5%, and 8% to LUK in 1997, 1996, and 1995, respectively. Sales
backlog at the end of 1997, 1996, and 1995 was approximately
<PAGE>
$107, million, $83 million, and $75 million, respectively. It is
anticipated that current backlog will be filled in 1998.
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 28, 1997, Raytech employed approximately
1,360 employees, compared with 1,259 employees at the end of
1996. In addition, in 1997 Raytech leased 390 hourly employees
from AFM. Effective in 1998, these employees will become
employees of ACC. 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. The term
of the labor contract at Automotive Composites Company in
Sterling Heights, Michigan, is due to expire in October 1998.
Capital Expenditures
Capital expenditures were $20.6 million, $8.4
million, and $10.3 million for 1997, 1996 and 1995, respectively.
Capital expenditures for 1998 are projected at $14.8 million.
Research and Development
Research and development costs were approximately
$5.9 million, $6.0 million, and $5.9 million for 1997, 1996 and
1995, 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 1998 are projected
at $6.2 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
$1.6 million for 1998. Because environmental regulations are
<PAGE>
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
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 28, 1997,
December 29, 1996, and December 31, 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. A separate
Crawfordsville facility is owned and consists of approximately
25,000 square feet of warehousing space for aftermarket
distribution. The Sterling Heights facility is owned and
consists of approximately 111,000 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 135,000 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 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
<PAGE>
purposes. All of the production facilities are continually being
upgraded to comply with applicable environmental standards and to
improve efficiency.
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. 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
<PAGE>
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. The successor
ruling was appealed by Raytech and in October 1992 the Ninth
Circuit Court of Appeals affirmed the District Court's judgment
on the grounds stated in the District Court's opinion. The
effect of this decision extends beyond the Oregon District due to
a Third Circuit Court of Appeals decision in a related case cited
below wherein Raytech was collaterally estopped (precluded) from
relitigating the issue of its successor liability for Raymark's
asbestos-related liabilities.
As the result of the inability of Raymark to fund
Raytech's cost of defense recited above, and in order to obtain a
ruling binding across all jurisdictions on whether Raytech is
liable as a successor for asbestos-related and other claims
including claims yet to be filed relating to the operations of
Raymark or Raymark's predecessors, on March 10, 1989 Raytech
filed a petition seeking relief under Chapter 11 of Title 11,
United States Code in the United States Bankruptcy Court,
District of Connecticut. Under Chapter 11, substantially all
litigation against Raytech has been stayed while the debtor
corporation and its non-filing operating subsidiaries continue to
operate their businesses in the ordinary course under the same
management and without disruption to employees, customers or
suppliers. In the Bankruptcy Court a creditors' committee was
appointed, comprised primarily of asbestos claimants' attorneys.
In August 1995, an official committee of equity security holders
was appointed relating to a determination of equity security
holders' interest in the estate.
In June 1989 Raytech filed a class action in the
Bankruptcy Court against all present and future asbestos
claimants seeking a declaratory judgment that it not be held
liable for the asbestos-related liabilities of Raymark. It was
the desire of Raytech to have this case heard in the U.S.
District Court, and since the authority of the Bankruptcy Court
is referred from the U.S. District Court, upon its motion and
argument the U.S. District Court withdrew its reference of the
case to the Bankruptcy Court and thereby agreed to hear and
decide the case. In September 1991, the U.S. District Court
issued a ruling dismissing one count of the class action citing
as a reason the preclusive effect of the 1988 Oregon case,
previously discussed, under the doctrine of collateral estoppel
(conclusiveness of judgment in a prior action), in which Raytech
was ruled to be a successor to Raymark's asbestos liability under
Oregon law. The remaining counts before the U.S. District Court
involve the transfer of Raymark's asbestos-related liabilities to
Raytech on the legal theories of alter-ego and fraudulent
<PAGE>
conveyance. Upon a motion for reconsideration, the U.S. District
Court affirmed its prior ruling in February 1992. Also, in
February 1992, the U.S. District Court transferred the case in
its entirety to the U.S. District Court for the Eastern District
of Pennsylvania. Such transfer was made by the U.S. District
Court without motion from any party in the interest of the
administration of justice as stated by the U.S. District Court.
In December 1992, Raytech filed a motion to activate the case and
to obtain rulings on the remaining counts which was denied by the
U.S. District Court. In October 1993, the creditors' committee
asked the Court to certify the previous dismissal of the
successor liability count. In February 1994, the U.S. District
Court granted the motion to certify and the successor liability
dismissal was accordingly appealed. In May 1995, the Third
Circuit Court of Appeals ruled that Raytech is collaterally
estopped (precluded) from relitigating the issue of its successor
liability as ruled in the 1988 Oregon case recited above,
affirming the U.S. District Court's ruling of dismissal. A
petition for a writ of certiorari was denied by the U.S. Supreme
Court in October 1995. The ruling leaves the Oregon case, as
affirmed by the Ninth Circuit Court of Appeals, as the prevailing
decision holding Raytech to be a successor to Raymark's asbestos-
related liabilities.
Since the bankruptcy filing, several entities have
asserted claims in Bankruptcy Court alleging environmental
liabilities of Raymark based upon similar theories of successor
liability against Raytech as alleged by asbestos claimants.
These claims are not covered by the class action referenced below
and will be resolved in the bankruptcy case. The environmental
claims include a claim of the Pennsylvania Department of
Environmental Resources ("DER") to perform certain activities in
connection with Raymark's Pennsylvania manufacturing facility,
which includes submission of an acceptable closure plan for a
landfill containing hazardous waste products located at the
facility and removal of accumulated baghouse dust from its
operations. In March 1991, the Company entered a Consent Order
which required Raymark to submit a revised closure plan which
provides for the management and removal of hazardous waste, for
investigating, treatment and monitoring of any contaminated
groundwater and for the protection of human health and
environment at the site, all relating to the closure of the
Pennsylvania landfill and to pay a nominal civil penalty. The
estimated cost for Raymark to comply with the order is $1.2
million. The DER has reserved its right to reinstitute an action
against the Company and the other parties to the DER order in the
event Raymark fails to comply with its obligations under the
Consent Order. Another environmental claim was filed against the
Company by the U.S. Environmental Protection Agency for civil
penalties charged Raymark in the amount of $12 million arising
out of alleged Resource Conservation and Recovery Act violations
at Raymark's Stratford, Connecticut, manufacturing facility.
<PAGE>
In January 1997, the U.S. Environmental Protection
Agency ("EPA") and the State of Connecticut filed suit against
Raymark claiming $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. It is
possible that additional claims for reimbursement of
environmental cleanup costs related to Raymark facilities may be
asserted against Raytech, as successor in liability to Raymark.
In April 1996, the Indiana Department of Environmental
Management ("IDEM") advised Raybestos Products Company ("RPC"), a
wholly-owned subsidiary of the Company, that it may have
contributed to the release of lead and PCB's (polychlorinated
biphenyls) found in small waterways near its Indiana facility.
In June, IDEM named RPC as a potentially responsible party
("PRP"). RPC notified its insurers of the IDEM action and one
insurer responded by filing a complaint in January 1997 in the
U.S. District Court, Southern District of Indiana, captioned
Reliance Insurance Company vs. RPC seeking a declaratory judgment
that any liability of RPC is excluded from its policy with RPC.
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. The Company incurred
$1,751 in legal and testing costs associated with this matter and
has requested reimbursement from Raymark under the
indemnification agreement.
As a result of an inspection, the Company has been
notified that the operations purchased from AFM in January 1996
in Sterling Heights, Michigan, are in violation of a consent
order issued by the Michigan Department of Environmental Quality
("DEQ"). The consent order included a compliance program
providing for measures to be taken to bring certain operations
into compliance and recordkeeping on operations in compliance.
Potential fines for the violations were as high as $4.6 million;
however, negotiations with the DEQ have been in progress
concerning the compliance program and fines for past violations,
resulting in a tentative agreement providing for a consent
judgment with a fine of $324 and subject to completion of certain
operational compliance programs. Finalization of the consent
judgment is pending. The Company has accrued the cost of
resolution of this matter.
<PAGE>
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court
pending the conclusion of the successor liability litigation.
However, in December 1992, the creditors' committee filed a
motion to terminate the exclusive period to file a plan of
reorganization. At a hearing in May 1993, the motion was denied
by the Bankruptcy Court but was appealed by the creditors'
committee. In November 1993, the U.S. District Court reversed
the Bankruptcy Court and terminated the exclusive period to file
a plan of reorganization effective in January 1994. Accordingly,
any party in interest, including the debtor, the creditors'
committee or a creditor could thereafter file a plan of
reorganization.
In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of
seeking confirmation allowing Raytech to emerge from the
bankruptcy filed March 10, 1989. Important conditions precedent
to confirmation of the Debtor's Plan include a final judgment in
the litigation to determine to what extent Raytech is a successor
to the liabilities of Raymark and a resolution of the
environmental claims or other claims filed or to be filed by
governmental agencies. The Debtor's Plan provides that in the
event Raytech is found to be a successor, it is to establish a
successor trust funded by an amount determined to be the
difference between what Raytech should have paid for the
businesses purchased from Raymark less the amount actually paid
and less amounts to be paid for environmental and other claims.
This remedy would satisfy its obligations as a successor in full
and render all claimants unimpaired, thereby eliminating the need
for balloting and all equity shareholders would retain their
interests in full. Raytech is reviewing the Debtor's Plan to
determine applicability and possible amendment in view of
developments in the bankruptcy proceedings referenced in this
Item 3. In September 1994, the Creditors' Committee filed its
own Plan of Reorganization in competition to the Debtor's Plan
("Creditors' Plan"). The Creditors' Plan calls for the
elimination of Raytech Corporation and its stockholders to be
replaced with a new Raytech. All of the stock of new Raytech
would then be distributed to unsecured claimants, environmental
claimants and both past and future asbestos disease claimants on
a formulated basis set forth in the Plan. Current stockholders
of Raytech would receive nothing under the Plan. Upon motion of
the parties and support of the Bankruptcy Court, the major
interested parties agreed in August 1995 to participate in non-
binding mediation to attempt to effectuate a consensual plan of
reorganization. The mediation process commenced in October 1995
and was concluded in March 1996 without agreement for a
consensual plan of reorganization. Raytech believes the
Creditors' Plan is unconfirmable and will vigorously contest
attempts to have it confirmed. The competing plans of Raytech
and its creditors have returned to Bankruptcy Court procedures.
The outcome of these matters is expected to take considerable
<PAGE>
time and is uncertain. If an adverse plan is confirmed, it would
have a material adverse impact on Raytech and its stockholders.
The process for confirmation of a reorganization plan
was begun in 1996 and continues with adversary positions being
presented to the Bankruptcy Court by the parties concerning the
claims bar date, the notice to claimants and estimation of
claims.
In November 1996, Raytech filed an adversary proceeding
complaint against the creditors' committee, et al., seeking a
declaratory judgment of the Bankruptcy Court that Raytech's
liability to present and future creditors as a successor to
Raymark is limited pursuant to bankruptcy law. The creditors'
committee filed a motion for a summary judgment, which was
granted by the Bankruptcy Court at a hearing in August 1997.
Raytech considers the grant of the summary judgment dismissing
the proceeding as unfounded in fact and law and will exhaust its
legal remedies through appeal of the order.
Several other matters have been filed in the Bankruptcy
Court in 1996 and 1997 but not acted upon as yet and remain
pending, including: (1) A creditors' committee motion for the
appointment of a trustee to manage the Company; (2) Raytech's
motion to dismiss its bankruptcy petition based upon Raymark
providing indemnity for liability claims that may be filed
against it; (3) a creditors' committee adversary proceeding
complaint seeking to assert control over Raymark and its assets
on the grounds of fraudulent transfers in the reorganization of
Raytech in 1986 and the divestiture of Raymark in 1988; (4) a
creditors' committee adversary proceeding complaint to litigate
alternative theories of liability of Raytech other than successor
liability; and (5) a creditors' committee adversary proceeding
complaint to sanction Raytech for violation of a stipulation to
give notice for non-ordinary course transactions by Raytech
subsidiaries.
In February 1997, Raytech resumed making monthly
payments of $650,000 to Raymark pursuant to the 1987 Asset
Purchase Agreement as amended, to ensure indemnification for
Raymark liabilities. In November 1997, the creditors' committee
filed an adversary proceeding complaint and motion for a
temporary restraining order to halt the payments based upon
several theories, including a waste of assets and breach of a
prior stipulation and fiduciary duty. In January 1998, the
Bankruptcy Court enjoined the payments pending a trial. Raymark
notified its retirees by letter that their benefits would cease
after February 1998 due to the effect of the cessation of
payments from Raytech under the injunction. Raymark and Raymark
retirees intervened in the action resulting in a Bankruptcy Court
order to Raytech to supplement Raymark's obligations to its
retirees pending a trial in April 1998.
<PAGE>
Following Raytech's cessation of the $650,000 note
payments in December 1997, Raymark commenced 33 separate lawsuits
against Raytech subsidiaries in various jurisdictions ("Raymark
Litigation") demanding payment or the return of assets for breach
of contract. Raytech filed an adversary proceeding complaint to
halt the Raymark litigation and was granted a temporary
restraining order in December 1997 by the Bankruptcy Court that
remains in effect. The creditors' committee intervened in the
action in support of the restraining order.
In January 1997, Raytech was named through a subsidiary
in a third party complaint captioned Martin Dembinski, et al. vs.
Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et
al. filed in the U.S. District Court for the Southern District of
New York for damages for asbestos-related disease. The case has
been removed to the U.S. District Court, Eastern District of
Pennsylvania. When required, the Company will seek an injunction
in the Bankruptcy Court to halt the litigation.
Costs incurred by the Company for asbestos related
liabilities are subject to indemnification by Raymark under the 1987
acquisition agreements. By agreement, in the past, Raymark has
reimbursed the Company in part for such indemnified costs by payment
of the amounts due in Raytech common stock of equivalent value.
Under such agreement, Raytech received 926,821 shares in 1989,
177,570 shares in 1990, 163,303 in 1991 and 80,000 shares in 1993.
The Company's acceptance of its own stock was based upon an intent
to control dilution of its outstanding stock. In 1992, the
indemnified costs were reimbursed by offsetting certain payments due
Raymark from the Company under the 1987 acquisition agreements.
Costs incurred in 1994, 1995, 1996 and 1997 were applied as a
reduction of the note obligations pursuant to the agreements.
The adverse ruling in the Third Circuit Court of Appeals of
which a petition for writ of certiorari was denied by the U.S.
Supreme Court, precluding Raytech from relitigating the issue of its
successor liability leaves the U.S. District Court's (Oregon) 1988
ruling as the prevailing decision holding Raytech to be a successor
to Raymark's asbestos-related liabilities. This ruling could have a
material adverse impact on Raytech as it does not have the resources
needed to fund Raymark's potentially substantial uninsured asbestos-
related and environmental liabilities. Determination of Raytech's
actual liabilities are subject to the Bankruptcy Court's
deliberations and rulings and the competing plans of reorganization
filed in the Bankruptcy Court referenced above.
The ultimate liability of the Company with respect to
asbestos-related, environmental, or other claims cannot presently be
determined. Accordingly, no provision for such liability has been
recorded in the financial statements. The accompanying financial
statements have been prepared assuming that the Company will
continue as a going concern. An unfavorable result on certain or
all of the matters described above would have a material adverse
effect on the Company's results of operations, financial position
and cash flows. These uncertainties raise substantial doubt about
<PAGE>
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 18, 1997. The matters submitted to stockholder vote and
the vote count on each matter were as follows:
1. Proposal to elect three Class II Directors for full
three-year terms and until their respective successors
are elected:
For Robert M. Gordon Withheld
2,830,132 196,920
For Dennis G. Heiner Withheld
2,848,236 178,816
For Craig R. Smith Withheld
2,846,591 180,461
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
1,736,306 340,311 21,188
3. Proposal to ratify the appointment of Coopers & Lybrand
as auditors for 1996:
For Against Abstain
2,995,498 19,999 11,555
Abstentions have the same effect as votes against
proposals presented to stockholders other than election of
directors. Non-votes are not included in vote totals and
therefore have no effect. 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, 2 and 3
above were adopted and effective on July 18, 1997.
Directors whose terms of office as Directors continued
after the Annual Shareholders' Meeting include:
Robert L. Bennett
Donald P. Miller
Robert B. Sims
<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 2, 1998, there were 2,062 holders of record of the
Registrant's common stock.
Information regarding the quarterly high and low sales
prices for 1997 and 1996 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>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Results
Net sales $234,475 $217,683 $177,498 $167,615 $139,290
Gross profit 51,575 54,269 48,699 44,548 37,463
Operating income 26,164 23,603 20,959 17,936 14,423
Interest expense (3,345) (3,132) (2,647) (2,601) (3,816)
Income before cumulative effect
of accounting changes 15,538(6) 15,991(3) 14,337(2) 8,643 8,556
Cumulative effect of changes in
accounting principles - - - (3,808)(1)
Net income $ 15,538 $ 15,991 $ 14,337 $ 8,643 $ 4,748
Basic earnings per common share:(5)
Earnings before cumulative
effect of accounting changes $ 4.76 $ 4.95 $ 4.44 $ 2.70 $ 2.66
Cumulative effect of changes in
accounting principles - - - - (1.18)
Net earnings 4.76 4.95 4.44 2.70 1.48
Weighted average shares 3,263,137 3,232,674 3,225,962 3,205,433 3,217,467
Diluted earnings per common share:(5)
Earnings before cumulative
effect of accounting changes $ 4.41 $ 4.65 $ 4.26 $ 2.52 $ 2.60
Cumulative effect of changes in
accounting principles - - - - (1.16)
Net earnings $ 4.41 $ 4.65 $ 4.26 $ 2.52 $ 1.44
Adjusted weighted average shares 3,524,391 3,441,645 3,369,003 3,426,034 3,290,912
Balance sheet
Total assets $153,385 $140,155 $114,436 $ 91,809 $ 79,488
Working capital 7,324 7,418 5,323 240 442
Long-term obligations 38,639 41,522 34,966 41,959 46,019
Commitments and contingencies(4)
Total shareholders'
equity (deficit) $ 48,462 $ 34,015 $ 18,680 $ 3,716 $ (5,860)
Property, plant and equipment
Capital expenditures $ 20,603 $ 8,390 $ 10,275 $ 11,354 $ 7,818
Depreciation $ 8,746 $ 8,039 $ 7,566 $ 6,892 $ 6,680
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.
(5) Reflects the adoption of Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share."
(6) Includes the reversal of $1,519 of valuation allowance against deferred tax assets
of German operations.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations and Liquidity and Capital Resources
1997 vs. 1996
Net income for the 1997 fiscal year amounted to $15,538 or
$4.76 basic earnings per share as compared to $15,991 or $4.95
basic earnings per share in fiscal 1996. In summary, the effect
of higher net sales and lower selling, general and administrative
expense in 1997 was offset by lower margins on sales and a higher
effective income tax rate.
Net Sales
Net sales increased 7.7% for fiscal 1997 and amounted to
$234,475 as compared with net sales of $217,683 in fiscal 1996.
The overall improvement is primarily due to additional domestic
OEM sales of approximately $4,871 related to the Sterling Heights
operations, acquired in the first quarter of 1996, and other
domestic sales increases of $14,527 due to additional volume
within the domestic automotive, agriculture and construction
product market segments.
European net sales decreased by $2,606 from $45,260 in 1996
to $42,654 in 1997. Net sales of the combined German operations,
which accounted for 18.2% of the consolidated sales of the
Company in 1997, decreased to $42,625 as compared with $44,776 in
fiscal 1996. An increase in unit sales of $4,085 was more than
offset by foreign currency fluctuation of $(6,236). German
operations reported operating income of $2,423 in fiscal 1997 as
compared with operating income of $1,496 in fiscal 1996.
Gross Profit
Gross profit as a percentage of sales for the period ended
December 28, 1997 is 22.0% as compared to 24.9% 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, lower gross
margin on product lines acquired in the Sterling Heights
acquisition, and manufacturing inefficiencies on the Company's
domestic agriculture product line.
Selling, General and Administrative
Selling, general and administrative expenses decreased 16.8%
to $25,683 as compared to $30,863 one year earlier. The decrease
is primarily due to the net reversal of $1,800 of accruals
established in 1996 related to environmental violations at the
Sterling Heights facility that have been resolved more favorably
than initially anticipated. In addition, 1997 provisions for
<PAGE>
discretionary compensation are lower than 1996 due to reduced
earnings at certain operations.
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 1997.
Other Income and Expense, Net
Other income and expense, net in 1997 primarily represents
interest income in the amount of $410 and income from equity
investment in affiliate in the amount of $647.
Other income and expense, net in 1996 primarily represents
interest income in the amount of $218, royalty income in the
amount of $350 and accretion of $385 of interest expense on
obligations due to AFM.
Income Taxes
The effective tax rate for the year ended December 28, 1997
was 29.0% versus 17.5% in 1996. Included in the effective tax
rate for 1997 is the effect of reversing certain valuation
allowances in the amount of $1,519 related to net operating loss
carryforwards of the German operations. Included in the
effective tax rate for 1996 were adjustments to prior years'
accruals in the amount of $3,100 for tax items which were
favorably resolved.
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.
<PAGE>
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 $1,496 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.
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.
<PAGE>
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 accretion of $385 of interest expense on
obligations due to AFM.
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
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
Effective January 1, 1997, the Company adopted Statement of
Position 96-1, Environmental Remediation Liabilities. The
adoption of the Statement had no impact on the Company's
consolidated financial condition, results of operations or cash
flows.
Effective February 1, 1997, the Company adopted SFAS 128,
"Earnings Per Share." SFAS 128 revises the computation,
presentation, and disclosure requirements related to earnings per
share ("EPS"). It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. This statement
requires restatement of all prior period EPS data presented.
Future Adoption of New Accounting Pronouncements
In 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued, effective for fiscal 1999. SFAS 130 establishes
standards for reporting and display of comprehensive income and
<PAGE>
its components (revenues, expenses, gains and losses) in a full
set of general purpose financial statements. The Company will
adopt SFAS 130 in fiscal 1998.
In 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued, effective for
fiscal 1999. SFAS 131 changes the way public companies report
information about operating segments. The Company will adopt
SFAS 131 in its annual financial statements for fiscal 1998 and
is still assessing the impact of this statement on its
disclosures.
Impact of Year 2000 Computer-Related Issues
Raytech's RPC subsidiary is currently implementing new
computer systems at an approximate cost of $2 million to be
completed in 1998. The new systems will be Year 2000 compliant.
Other subsidiaries are currently assessing the impact of the Year
2000 compliance, and the Company does not expect the cost to be
material to its financial position or results of operations or
cash flows.
Liquidity and Capital Resources
The Company generated cash flow from operating activities of
$25,547, $17,779, and $16,969 in 1997, 1996 and 1995,
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.
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 amounted to approximately $3.2
million.
Capital expenditures totaled $20,603 in fiscal 1997 as
compared with $8,390 and $10,275 in fiscal 1996 and 1995,
respectively. The Company has an ongoing program for upgrading
<PAGE>
its machinery and equipment in order to optimize manufacturing
quality, productivity and cost effectiveness.
In March 1995, RPC entered into a five-year loan agreement
with The CIT Group/Credit Finance, Inc., which provided 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 was predicated on satisfying an asset based formula
related to levels of certain accounts receivable, inventories and
machinery and equipment. The loans were collateralized by all
assets, excluding land and buildings at RPC. The purpose of the
loan was for working capital, capital expenditures, acquisitions
and possible settlement of successor liability issues. Under the
terms of the loan agreement, RPC was required to maintain certain
cash flow levels, and RPC's dividend payments to RCI were subject
to certain restrictions. The amount outstanding under line of
credit at December 29, 1996 was $8,718. The additional
borrowing availability at December 29, 1996 was $6,282, based
upon the asset borrowing formula.
In November 1997, RPC refinanced its revolving line of
credit in an effort to reduce its interest rate and to minimize
facility fees. The new loan agreement with NationsCredit,
Commercial Funding provides for RPC to borrow up to $17 million
in the aggregate, consisting of a revolving line of credit of $10
million and a term loan of $7 million for capital equipment
purchases. The loans bear an interest rate of .50% above the
prime rate. The loans are collateralized by accounts receivable,
inventory and machinery and equipment. The revolving loan allows
the Company to borrow based on a borrowing base formula as
defined in the Loan and Security Agreement (the "Agreement").
The Agreement includes certain covenant restrictions, including
restrictions on dividends payable to Raytech Composites, Inc.
("RCI"), a wholly-owned subsidiary of the Company. The purpose
of the loan is to refinance existing indebtedness and for general
working capital needs. The outstanding balance under this loan
agreement at December 28, 1997 is $11,310. The additional
borrowing availability at December 28, 1997 was $5,690, based
upon the asset borrowing formula.
The Company's wholly-owned German subsidiaries, Raybestos
Industrie-Produkte GmbH and Raytech Composites Europe GmbH, have
available lines of credit amounting to DM7,800 ($4,339) of which
DM2,901 ($1,615) remains unused at December 28, 1997. 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 June 1989 Raytech filed a class action in the Bankruptcy
Court against all present and future asbestos claimants seeking a
declaratory judgment that it not be held liable for the asbestos-
related liabilities of Raymark. It was the desire of Raytech to
have this case heard in the U.S. District Court, and since the
authority of the Bankruptcy Court is referred from the U.S.
District Court, upon its motion and argument the U.S. District
Court withdrew its reference of the case to the Bankruptcy Court
and thereby agreed to hear and decide the case. In September
1991, the U.S. District Court issued a ruling dismissing one
count of the class action citing as a reason the preclusive
effect of the 1988 Oregon case under the doctrine of collateral
<PAGE>
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.
The ultimate liability of the Company with respect to
asbestos-related, environmental, or other claims cannot presently
be determined. Accordingly, no provision for such liability has
been recorded in the financial statements. The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern. An unfavorable result on the
matters described above would have a material adverse effect on
the Company's results of operations, 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
<PAGE>
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 28, 1997, the amount owed
Raymark, including accrued interest, was approximately $33
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, the principal of the debt owed on
the Raymark Wet Clutch and Brake note was adjusted to reflect
payments, accrued interest and indemnity offsets. Monthly
installments of $650 were resumed to ensure indemnification for
Raymark liabilities. In December 1997, the monthly installments
were suspended and subsequently enjoined by the Bankruptcy Court
restraining order pending a trial. The order was amended in
February 1998 ordering payment of up to $150 for retiree benefits
in March 1998. The remaining principal balance at December 28,
1997 is $26,997.
In September 1993 and January 1994, RCI entered into loan
agreements with Raymark for $2,500 and $3,000, respectively. As
of December 28, 1997 and December 29, 1996, 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 debt obligations related to the German subsidiary are
denominated in DM's and amount to $1,961 at December 28, 1997.
As such, the Company is at risk to future currency fluctuations
with respect to this debt.
The Company experienced improving conditions in its foreign
and domestic market segments in fiscal 1997. Management believes
that the Company is operating in a healthy, stable environment
and will continue to do so through 1998. Subject to the outcome
of the legal matters discussed above, management believes that
the Company will generate sufficient cash flow during 1998 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 NationsCredit Commercial Funding.
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 28, 1997
and December 29, 1996
Consolidated Statements of Operations
for the 1997, 1996 and 1995 Fiscal Years
Consolidated Statements of Cash Flows
for the 1997, 1996 and 1995 Fiscal Years
Consolidated Statements of Shareholders'
Equity for the 1997, 1996, and 1995
Fiscal Years
Notes to Consolidated Financial Statements
Report of Independent Accountants
(Refer to Index to Consolidated Financial
Statements at Page 93)
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
<CAPTION>
Fiscal Year 1997 1996
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 9,913 $ 11,341
Trade accounts receivable, less allowance of $1,186
for 1997 and $726 for 1996 26,903 23,866
Inventories 28,202 28,709
Other current assets 8,590 8,120
Total current assets 73,608 72,036
Property, plant and equipment 143,131 127,811
Less accumulated depreciation 82,141 76,686
Net property, plant and equipment 60,990 51,125
Investment in and advances to affiliates 10,249 9,972
Other assets 8,538 7,022
Total assets $153,385 $140,155
LIABILITIES
Current liabilities
Notes payable $ 13,039 $ 10,701
Current portion of long-term debt - Raymark 9,970 12,007
Current portion of long-term debt 130 152
Accounts payable 20,703 18,999
Accrued liabilities 22,442 22,759
Total current liabilities 66,284 64,618
Long-term debt due to Raymark 21,988 27,437
Long-term debt 1,178 237
Postretirement benefits other than pensions 10,044 9,429
Other long-term liabilities 5,429 4,419
Total liabilities 104,923 106,140
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY
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; 5,417,367 and 5,371,821
issued in 1997 and 1996, respectively 5,417 5,372
Additional paid in capital 70,275 70,208
Accumulated deficit (23,384) (38,922)
Cumulative translation adjustment 715 1,918
53,023 38,576
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 48,462 34,015
Total liabilities and shareholders' equity $153,385 $140,155
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Fiscal year 1997 1996 1995
<S> <C> <C> <C>
Net sales $ 234,475 $ 217,683 $ 177,498
Cost of sales (182,900) (163,414) (128,799)
Gross profit 51,575 54,269 48,699
Selling, general and administrative
expenses (25,683) (30,863) (26,218)
Other operating income (expense), net 272 197 (1,522)
Operating income 26,164 23,603 20,959
Currency transaction gains (losses) (375) 63 (43)
Interest expense - Raymark (1,984) (2,056) (2,006)
Interest expense (1,361) (1,076) (641)
Other income (expense), net 1,325 121 5,917
Income before provision for income
taxes and minority interest 23,769 20,655 24,186
Provision for income taxes (6,900) (3,606) (9,009)
Income before minority interest 16,869 17,049 15,177
Minority interest (1,331) (1,058) (840)
Net income $ 15,538 $ 15,991 $ 14,337
Basic earnings per share $ 4.76 $ 4.95 $ 4.44
Diluted earnings per share $ 4.41 $ 4.65 $ 4.26
<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 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,538 $ 15,991 $14,337
Adjustments to reconcile net income
to net cash provided by operations:
Deferred income tax (1,066) (975) (853)
Depreciation and amortization 9,085 8,467 7,654
Income applicable to minority interest,
net of dividends 1,199 926 840
Income from equity investment in affiliate (647) - -
Other items not providing or
requiring cash (Note C) 633 30 1,924
Changes in operating assets and liabilities:
Trade receivables (4,208) (6,674) (3,758)
Inventory (160) (2,179) (292)
Other current assets (1,347) (2,723) 42
Other long-term assets (643) (124) (149)
Accounts payable 5,601 2,897 (2,723)
Accrued liabilities 733 2,396 (1,247)
Other long-term liabilities 829 (253) 1,194
Net cash provided by operating activities 25,547 17,779 16,969
Cash flow from investing activities:
Purchase of securities (200) (2,100) -
Capital expenditures (20,264) (8,467) (9,684)
Proceeds on sales of property, plant
and equipment 138 129 2,206
Equity investment in and advances to AFM 141 (10,569) -
Purchase of assets from AFM (7,076) (6,706) -
Net cash used in investing activities: (27,261) (27,713) (7,478)
Cash flow from financing activities:
Proceeds from short-term borrowings 2,625 4,943 3,775
Payment on short-term borrowings - (2,187) (905)
Proceeds from long-term borrowings 1,040 - -
Principal payments on long-term debt (164) (149) (689)
Proceeds from borrowings from Raymark 2,034 - 6,258
Payments on borrowings from Raymark (8,388) (917) (3,085)
Cash overdrafts 3,090 - -
Other 195 21 (73)
Net cash provided by financing
activities 432 1,711 5,281
Effect of exchange rate changes on cash (146) (33) 47
Net change in cash and cash equivalents (1,428) (8,256) 14,819
Cash and cash equivalents at beginning of year 11,341 19,597 4,778
Cash and cash equivalents at end of year $ 9,913 $ 11,341 $ 19,597
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Number Paid Cumulative
of Shares Common in Accumulated Translation Treasury Stock
Issued Stock Capital Deficit Adjustment Cost Shares
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 29, 1996 5,371,821 $ 5,372 $70,208 $ (38,922) $ 1,918 $(4,561) (2,132,059)
Stock options exercised 45,546 45 67
Cumulative translation
adjustment (1,203)
Purchase of treasury
stock
Net income for the
fiscal year ended
December 28, 1997 15,538
Balance,
December 28, 1997 5,417,367 $ 5,417 $70,275 $ (23,384) $ 715 $(4,561) (2,132,059)
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Continued, page 2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Number Paid Cumulative
of Shares Common in Accumulated Translation Treasury Stock
Issued Stock Capital Deficit Adjustment Cost Shares
<C> <C> <C> <C> <C> <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 exercised 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>
Continued, page 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Number Paid Cumulative
of Shares Common in Accumulated Translation Treasury Stock
Issued Stock Capital Deficit Adjustment Cost Shares
<C> <C> <C> <C> <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>
RAYTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per 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
relating to a determination of equity security holders' interest
in the estate.
In June 1989 Raytech filed a class action in the Bankruptcy
Court against all present and future asbestos claimants seeking a
declaratory judgment that it not be held liable for the asbestos-
related liabilities of Raymark. It was the desire of Raytech to
have this case heard in the U.S. District Court, and since the
authority of the Bankruptcy Court is referred from the U.S.
District Court, upon its motion and argument the U.S. District
Court withdrew its reference of the case to the Bankruptcy Court
and thereby agreed to hear and decide the case. In September
1991, the U.S. District Court issued a ruling dismissing one
count of the class action citing as a reason the preclusive
effect of the 1988 Oregon case, previously discussed, under the
doctrine of collateral estoppel (conclusiveness of judgment in a
prior action), in which Raytech was ruled to be a successor to
Raymark's asbestos liability under Oregon law. The remaining
counts before the U.S. District Court involve the 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
<PAGE>
Note A, continued
stated by the U.S. District Court. In December 1992, Raytech
filed a motion to activate the case and to obtain rulings on the
remaining counts which was denied by the U.S. District Court. In
October 1993, the creditors' committee asked the Court to certify
the previous dismissal of the successor liability count. In
February 1994, the U.S. District Court granted the motion to
certify and the successor liability dismissal was accordingly
appealed. In May 1995, the Third Circuit Court of Appeals ruled
that Raytech is collaterally estopped (precluded) from
relitigating the issue of its successor liability as ruled in the
1988 Oregon case recited above, affirming the U.S. District
Court's ruling of dismissal. A petition for a writ of certiorari
was denied by the U.S. Supreme Court in October 1995. The ruling
leaves the Oregon case, as affirmed by the Ninth Circuit Court of
Appeals, as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities.
Since the bankruptcy filing several entities have asserted
claims in Bankruptcy Court alleging environmental liabilities of
Raymark based upon similar theories of successor liability
against Raytech as alleged by asbestos claimants. These claims
are not covered by the class action referenced below and will be
resolved in the bankruptcy case. The environmental claims
include a claim of the Pennsylvania Department of Environmental
Resources ("DER") to perform certain activities in connection
with Raymark's Pennsylvania manufacturing facility, which
includes submission of an acceptable closure plan for a landfill
containing hazardous waste products located at the facility and
removal of accumulated baghouse dust from its operations. In
March 1991, the Company entered a Consent Order which required
Raymark to submit a revised closure plan which provides for the
management and removal of hazardous waste, for investigating
treatment and monitoring of any contaminated groundwater and for
the protection of human health and environment at the site, all
relating to the closure of the Pennsylvania landfill and to pay a
nominal civil penalty. The estimated cost for Raymark to comply
with the order is $1.2 million. The DER has reserved its right
to reinstitute an action against the Company and the other
parties to the DER order in the event Raymark fails to comply
with its obligations under the Consent Order. Another
environmental claim was filed against the Company by the U.S.
Environmental Protection Agency for civil penalties charged
Raymark in the amount of $12 million arising out of alleged Resource
Conservation and Recovery Act violations at Raymark's Stratford,
Connecticut, manufacturing facility.
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
<PAGE>
Note A, continued
Stratford site and other Raymark sites. Determination of Raytech's
liability for such claims, if any, is subject to Bankruptcy Court
deliberations and proceedings. It is possible that additional
claims for reimbursement of environmental cleanup costs related to
Raymark facilities may be asserted against Raytech, as successor in
liability to Raymark.
In April 1996, the Indiana Department of Environmental
Management ("IDEM") advised Raybestos Products Company ("RPC"), a
wholly-owned subsidiary of the Company, that it may have contributed
to the release of lead and PCB's (polychlorinated biphenyls) found
in small waterways near its Indiana facility. In June, IDEM named
RPC as a potentially responsible party ("PRP"). RPC notified its
insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern
District of Indiana, captioned Reliance Insurance Company vs. RPC
seeking a declaratory judgment that any liability of RPC is excluded
from its policy with RPC. 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. The Company incurred $1,751 in legal and testing costs
associated with this matter during fiscal years 1996 and 1997 and
has requested reimbursement from Raymark under the indemnification
agreement. The amount is included in other current assets at
December 28, 1997.
As a result of an inspection, the Company has been notified
that the operations purchased from AFM in January 1996 in Sterling
Heights, Michigan, are in violation of a consent order issued by the
Michigan Department of Environmental Quality ("DEQ"). The consent
order included a compliance program providing for measures to be
taken to bring certain operations into compliance and recordkeeping
on operations in compliance. Potential fines for the violations
were as high as $4.6 million; however, negotiations with the DEQ
have been in progress concerning the compliance program and fines
for past violations, resulting in a tentative agreement providing
for a consent judgment with a fine of $324 and subject to completion
of certain operational compliance programs. Finalization of the
consent judgment is pending. The Company has accrued the cost of
resolution of this matter.
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court
pending the conclusion of the successor liability litigation.
<PAGE>
Note A, continued
However, in December 1992, the creditors' committee filed a
motion to terminate the exclusive period to file a plan of
reorganization. At a hearing in May 1993, the motion was denied
by the Bankruptcy Court but was appealed by the creditors'
committee. In November 1993, the U.S. District Court reversed
the Bankruptcy Court and terminated the exclusive period to file
a plan of reorganization effective in January 1994. Accordingly,
any party in interest, including the debtor, the creditors'
committee, or a creditor could thereafter file a plan of
reorganization.
In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of
seeking confirmation allowing Raytech to emerge from the
bankruptcy filed March 10, 1989. Important conditions precedent
to confirmation of the Debtor's Plan include a final judgment in
the litigation to determine to what extent Raytech is a successor
to the liabilities of Raymark and a resolution of the
environmental claims or other claims filed or to be filed by
governmental agencies. The Debtor's Plan provides that in the
event Raytech is found to be a successor, it is to establish a
successor trust funded by an amount determined to be the
difference between what Raytech should have paid for the
businesses purchased from Raymark less the amount actually paid
and less amounts to be paid for environmental and other claims.
This remedy would satisfy its obligations as a successor in full
and render all claimants unimpaired, thereby eliminating the need
for balloting and all equity shareholders would retain their
interests in full. Raytech is reviewing the Debtor's Plan to
determine applicability and possible amendment in view of
developments in the bankruptcy proceedings. In September 1994,
the creditors' committee filed its own Plan of Reorganization in
competition to the Debtor's Plan ("Creditors' Plan"). The
Creditors' Plan calls for the elimination of Raytech Corporation
and its stockholders to be replaced with a new Raytech. All of
the stock of new Raytech would then be distributed to unsecured
claimants, environmental claimants and both past and future
asbestos disease claimants on a formulated basis set forth in the
Plan. Current stockholders of Raytech would receive nothing
under the Plan. Raytech believes the Creditors' Plan is
unconfirmable and will vigorously contest attempts to have it
confirmed. Upon motion of the parties and support of the
Bankruptcy Court, the major interested parties agreed in August
1995 to participate in non-binding mediation to attempt to
effectuate a consensual plan of reorganization. The mediation
process commenced in October 1995 and was concluded in March 1996
without agreement for a consensual plan of reorganization. The
competing plans of Raytech and its creditors have returned to
Bankruptcy Court procedures. The outcome of these matters is
expected to take considerable time and is uncertain. If an
<PAGE>
Note A, continued
adverse plan is confirmed, it would have a material adverse
impact on Raytech and its stockholders.
The process for confirmation of a reorganization plan was
begun in 1996 and continues with adversary positions being
presented to the Bankruptcy Court by the parties concerning the
claims bar date, the notice to claimants and estimation of
claims.
In November 1996, Raytech filed an adversary proceeding
complaint against the creditors' committee, seeking a declaratory
judgment of the Bankruptcy Court that Raytech's
liability to present and future creditors as a successor to
Raymark is limited pursuant to bankruptcy law. The creditors'
committee filed a motion for a summary judgment, which was
granted by the Bankruptcy Court at a hearing in August 1997.
Raytech considers the grant of the summary judgment dismissing
the proceeding as unfounded in fact and law and will exhaust its
legal remedies through appeal of the order.
Several other matters have been filed in the Bankruptcy
Court in 1996 and 1997 but not acted upon as yet and remain
pending, including: (1) A creditors' committee motion for the
appointment of a trustee to manage the Company; (2) Raytech's
motion to dismiss its bankruptcy petition based upon Raymark
providing indemnity for liability claims that may be filed
against it; (3) a creditors' committee adversary proceeding
complaint seeking to assert control over Raymark and its assets
on the grounds of fraudulent transfers in the reorganization of
Raytech in 1986 and the divestiture of Raymark in 1988; (4) a
creditors' committee adversary proceeding complaint to litigate
alternative theories of liability of Raytech other than successor
liability; and (5) a creditors' committee adversary proceeding
complaint to sanction Raytech for violation of a stipulation to
give notice for non-ordinary course transactions by Raytech
subsidiaries.
In February 1997, Raytech resumed making monthly payments of
$650,000 to Raymark pursuant to the 1987 Asset Purchase Agreement
as amended, to ensure indemnification for Raymark liabilities.
In November 1997, the creditors' committee filed an adversary
proceeding complaint and motion for a temporary restraining order
to halt the payments based upon several theories, including a
waste of assets and breach of a prior stipulation and fiduciary
duty. In January 1998, the Bankruptcy Court enjoined the
payments pending a trial. Raymark notified its retirees by
letter that their benefits would cease after February 1998 due to
the effect of the cessation of payments from Raytech under the
injunction. Raymark and Raymark retirees intervened in the
action resulting in a Bankruptcy Court order to Raytech to
<PAGE>
Note A, continued
supplement Raymark's obligations to its retirees pending a trial
in April 1998.
Following Raytech's cessation of the $650,000 note payments
in December 1997, Raymark commenced 33 separate lawsuits against
Raytech subsidiaries in various jurisdictions from New York to
California ("Raymark Litigation") demanding payment or the return
of assets for breach of contract. Raytech filed an adversary
proceeding complaint to halt the Raymark litigation and was
granted a temporary restraining order in December 1997 by the
Bankruptcy Court that remains in effect. The creditors'
committee intervened in the action in support of the restraining
order.
In January 1997, Raytech was named through a subsidiary in a
third party complaint captioned Martin Dembinski, et al. vs.
Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et
al. filed in the U.S. District Court for the Southern District of
New York for damages for asbestos-related disease. The case has
been removed to the U.S. District Court, Eastern District of
Pennsylvania. When required, the Company will seek an injunction
in the Bankruptcy Court to halt the litigation.
Costs incurred by the Company for asbestos related
liabilities are subject to indemnification by Raymark under the
1987 acquisition agreements. By agreement, in the past, Raymark
has reimbursed the Company in part for such indemnified costs by
payment of the amounts due in Raytech common stock of equivalent
value. Under such agreement, Raytech received 926,821 shares in
1989, 177,570 shares in 1990, 163,303 in 1991 and 80,000 shares
in 1993. The Company's acceptance of its own stock was based
upon an intent to control dilution of its outstanding stock. In
1992, the indemnified costs were reimbursed by offsetting certain
payments due Raymark from the Company under the 1987 acquisition
agreements. Costs incurred in 1994, 1995, 1996 and 1997 were
applied as a reduction of the note obligations pursuant to the
agreements.
The adverse ruling in the Third Circuit Court of Appeals, of
which a petition for writ of certiorari was denied by the U.S.
Supreme Court, precluding Raytech from relitigating the issue of
its successor liability leaves the U.S. District Court's (Oregon)
1988 ruling as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities. This ruling
could have a material adverse impact on Raytech as it does not
have the resources needed to fund Raymark's potentially
substantial uninsured asbestos-related and environmental
liabilities. Determination of Raytech's actual liabilities are
subject to the Bankruptcy Court's deliberations and rulings and
the competing plans of reorganization filed in the Bankruptcy
Court referenced above.
<PAGE>
Note A, continued
The ultimate liability of the Company with respect to
asbestos-related, environmental, or other claims cannot presently
be determined. Accordingly, no provision for such liability has
been recorded in the financial statements. The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern. An unfavorable result on
certain or all of the matters described above would have a
material adverse effect on the Company's results of operations,
financial position and cash flows. These uncertainties raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or adjustments relating to establishment,
settlement and classification of liabilities that may be required
in connection with reorganizing under the Bankruptcy Code.
<PAGE>
Note B - 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 subsidiaries: 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. In
1997, the Company formed Automotive Composites Company, a
subsidiary of the Company which will include the Sterling
Heights, Michigan, operations effective in 1998.
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 amounts for prior years 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 28, 1997, December 29,
1996, and December 31, 1995.
<PAGE>
Note B, continued
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.
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. 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.
6. 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.
7. Earnings Per Share
Basic earnings per common share is computed based on the
weighted average number of common shares outstanding during
the year. Diluted earnings per share is computed based on
the weighted average number of common and dilutive potential
common shares during the year.
8. 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
<PAGE>
Note B, continued
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.
9. Revenue Recognition
Sales are recorded by the Company when products are shipped
to customers.
10. Adoption of Recently Issued Accounting Pronouncements
Effective January 1, 1997, the Company adopted Statement of
Position 96-1, Environmental Remediation Liabilities. The
adoption of the Statement had no impact on the Company's
consolidated financial condition, results of operations or
cash flows.
Effective February 1, 1997, the Company adopted SFAS No.
128, "Earnings Per Share." SFAS 128 revises the computation,
presentation, and disclosure requirements related to
earnings per share. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital
structures. This statement requires restatement of all
prior period EPS data presented.
11. Recently Issued Accounting Pronouncements
In 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued, effective for fiscal 1999. SFAS 130 establishes
standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in
a full set of general purpose financial statements. The
Company will adopt SFAS 130 in fiscal 1998.
In 1997, SFAS No. 131, "Disclosures about segments of an
Enterprise and Related Information," was issued, effective
for fiscal 1999. SFAS 131 changes the way public companies
report information about operating segments. The Company
will adopt SFAS 131 in its annual financial statements for
fiscal 1998 and is still assessing the impact of this
statement on its disclosures.
<PAGE>
Note C - Statements of Cash Flows
Other items not providing or requiring cash consist of:
1997 1996 1995
Net loss on sale/writedown
of fixed assets $ 61 $ 268 $ 1,994
Other non-cash items 572 (238) (70)
$ 633 $ 30 $ 1,924
Income taxes paid were $5,731, $8,677, and $10,202 during
1997, 1996 and 1995, respectively.
Interest paid was $2,584, $2,731, and $2,449 during 1997,
1996 and 1995, respectively.
Excluded from the 1997, 1996 and 1995 Consolidated
Statements of Cash Flows is $451, $469, and $791, respectively,
of plant and equipment acquisitions in accounts payable or under
capital leases.
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.
<PAGE>
Note D - Inventories
Net Inventories
Inventories net of inventory reserves are as follows:
Fiscal Year 1997 1996
Raw materials $ 10,751 $ 9,921
Work-in-process 7,760 8,033
Finished goods 9,691 10,755
$ 28,202 $ 28,709
Inventory Reserves
Fiscal Year 1997 1996 1995
Beginning balance $ 3,671 $ 2,962 $ 2,660
Provisions for obsolete and
slow moving inventory 1,213 1,305 466
Charge-offs (1,059) (596) (164)
Ending balance $ 3,825 $ 3,671 $ 2,962
<PAGE>
Note E - Property, Plant and Equipment
Property, plant and equipment, at cost, is summarized as
follows:
Estimated
Useful
Lives
Fiscal Year 1997 1996 (Years)
Land $ 1,226 $ 1,218 -
Buildings and improvements 24,622 23,121 5-40
Machinery and equipment 105,664 99,790 3-20
Capital leases 904 877 See Below
Construction in progress 10,715 2,805 -
143,131 127,811
Less accumulated depreciation 82,141 76,686
Net property, plant and
equipment $ 60,990 $ 51,125
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 $11,655, $10,046, and $11,093 for 1997, 1996 and
1995, respectively.
Depreciation expense relating to property, plant and equipment
were $8,746, $8,039, and $7,566 for 1997, 1996 and 1995,
respectively.
<PAGE>
Note F - Debt
Debt consists of the following:
Fiscal Year 1997 1996
Notes due to Raymark (a) $ 31,958 $ 39,444
Notes payable to banks (b) 14,034 10,701
Capitalized leases and other
obligations 313 389
Total borrowings 46,305 50,534
Less short-term debt and current
portion of long-term debt 23,139 22,860
Long-term debt $ 23,166 $ 27,674
The aggregate maturities of debt are as follows:
1998 $ 23,139
1999 22,166
2000 309
2001 256
2002 215
Thereafter 220
Total Debt $ 46,305
(a) The notes due to Raymark 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 for Raymark liabilities.
<PAGE>
Note F, continued
In connection with a complaint filed by the creditors' committee
and a subsequent Bankruptcy Court injunction, the Company suspended
payments on the Wet Clutch and Brake note in December 1997. The
Bankruptcy Court's order was subsequently amended to require a note
payment of up to $150 for Raymark's retiree benefits in March 1998
and to set a trial date on this matter for April 1998. At December
28, 1997 and December 29, 1996, the principal balance of the Wet
Clutch and Brake note was $26,997 and $32,870, respectively, and
accrued interest, included in accrued liabilities, was $264 and $0,
respectively.
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 28, 1997 and December 29, 1996, the balances due on the
German note amounted to DM3,795 ($1,961) and DM3,795 ($2,411),
respectively. As of December 28, 1997 and December 29, 1996, the
accrued interest amounted to DM1,257 ($699) and DM899 ($584),
respectively, and is included in accrued liabilities.
In September 1993 and January 1994, "RCI" entered into
loan agreements with Raymark for $2,500 and $3,000, respectively.
As of December 28, 1997 and December 29, 1996, 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. As of December 28, 1997 and December 29, 1996, the accrued
interest amounted to $760 and $579, respectively, and is included
in accrued liabilities.
The Company has continued to classify 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 pending the outcome of the aforementioned trial in April
1998. Amounts due under the German subsidiary notes and the
current portion of 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).
(b) The Company's wholly-owned German subsidiaries
(Raybestos Industrie-Produkte GmbH and Raytech Composites Europe
GmbH) have available lines of credit with several German banks
amounting to DM7,800 ($4,339). Interest is charged at rates
between 4.1% and 7.5%. The lines are repayable on demand. The
amount outstanding under these available lines of credit at
December 28, 1997 and December 29, 1996 was DM4,899 ($2,724) and
<PAGE>
Note F, continued
DM3,054 ($1,983), respectively. At December 28, 1997 and December
29, 1996, the remaining available lines of credit amounted to
DM2,901 ($1,615) and DM2,856 ($1,855), respectively.
In March 1995, RPC entered into a five-year loan agreement
with The CIT Group/Credit Finance, Inc. ("CIT"), which provided 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 was predicated
on satisfying an asset based formula related to levels of certain
accounts receivable, inventories and machinery and equipment. The
loans were collateralized by all assets, excluding land and
buildings, at RPC. The purpose of the loan was for working
capital, capital expenditures, acquisitions and possible settlement
of successor liability issues. Under the terms of the loan
agreement, RPC was required to maintain certain cash flow levels,
and RPC's dividend payments to RCI were subject to certain
restrictions. The amount outstanding under the line of credit at
December 29, 1996 was $8,718. The additional borrowing
availability at December 29, 1996 was $6,282, 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.
In November 1997, RPC refinanced its revolving line of credit
in an effort to reduce its interest rate and to minimize facility
fees. The new loan agreement with NationsCredit, Commercial
Funding provides for RPC to borrow up to $17 million in the
aggregate, consisting of a revolving line of credit of $10 million
and a term loan of $7 million for capital equipment purchases. The
loans bear an interest rate of .50% above the prime rate. The
loans are collateralized by accounts receivable, inventory and
machinery and equipment. The revolving loan allows the Company to
borrow based on a borrowing base formula as defined in the Loan and
Security Agreement (the "Agreement"). The Agreement includes
certain covenant restrictions, including restrictions on dividends
payable to Raytech Composites, Inc. ("RCI"), a wholly-owned
subsidiary of the Company. At December 28, 1997, the net
restricted assets of RPC amounted to $25, consisting of cash,
inventory, machinery and equipment and all other tangible and
intangible assets, excluding land and buildings. The purpose of
the loan is to refinance existing indebtedness and for general
working capital needs. The outstanding balance under the
revolving line of credit is $4,506 and under the term loan
is $6,804 at December 28, 1997, respectively. The additional
borrowing availability on the revolving line of credit at
December 28, 1997 is $0, based upon the asset borrowing formula.
<PAGE>
Note F, continued
It is not practical for the Company to estimate the fair value
of the debt it has with Raymark due to the uncertainties associated
with the current bankruptcy proceedings. The remaining bank debt
of the Company is at variable interest rates, and the carrying
amount approximates fair value.
The weighted average rates on all bank notes payable at
December 28, 1997 and December 29, 1996 were 8.77% and 9.49%,
respectively.
<PAGE>
Note G - Research and Development
Cost of research and new product development amounted to
$5,903 in 1997, $5,958 in 1996, and $5,864 in 1995 and is included
in selling, general and administrative expenses in the Consolidated
Statements of Operations.
<PAGE>
Note H - Related Parties
During 1997 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. On
January 12, 1998, Craig R. Smith was terminated and resigned from
the Board of Directors.
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 and subsequently suspended in December
1998 (see Note F). During 1996, the Company incurred costs of
$917 and $1,705 subject to the indemnification clause which were
applied as a reduction of the note obligation in December 1996
and February 1997, respectively. As of December 1997, the
Company had incurred $1,773 of additional costs which were
applied as a reduction of the note pursuant to the
indemnification clause.
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 1997, APC declared a cash dividend of $2.81 per share
payable in equal quarterly installments to shareholders of record
in March 1997. 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
<PAGE>
Note H, continued
dividend were paid in 1997. 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
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 1997 and 1996, the Company purchased yarn from
Raymark amounting to $3,926 and $3,011, and at December 28, 1997
and December 29, 1996, the related payable amounted to $373 and
$103, respectively.
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 28, 1997, Echlin's voting interest in the
Company is 16.8%.
In September 1996, Craig R. Smith entered into a consulting
agreement with Raymark for services regarding asbestos
litigation. Proceeds were paid to Raytech in the form of an
offset against the note due Raymark in the amounts of $43 and $13
during 1997 and 1996, respectively.
Earnings attributable to minority shareholders of Allomatic
Products Company have been presented net of income tax as
minority interest in the Condensed Consolidated Statement of
Operations.
<PAGE>
Note I - Income Taxes
Income before provision for income taxes and minority
interest consists of:
1997 1996 1995
Domestic $22,460 $19,982 $23,811
Foreign 1,309 673 375
$23,769 $20,655 $24,186
The Company's provision for taxes consists of the following:
1997 1996 1995
Current:
Federal $ 6,437 $ 3,004 $ 7,876
State 1,392 1,421 1,852
Foreign 147 156 133
Deferred:
Federal (1,076) (975) (852)
Total income taxes $ 6,900 $ 3,606 $ 9,009
The analysis of the variance from the U.S. statutory income
tax rate for consolidated operations is as follows:
1997 1996 1995
U.S. statutory rate 35.0% 35.0% 35.0%
Increases (decreases)
resulting from:
Effect of foreign income
taxes net of loss carry-
forwards utilized (1.3) - -
Utilization of tax credits (1.4) (1.0) (.1)
Net decrease (increase) in
benefit from carryback of
future deductible amounts 2.8 (3.0) (3.6)
State income taxes, net of
federal benefit 3.8 4.2 5.0
Adjustment of prior years'
accruals 3.4 (15.0) (.1)
Raymark indemnification
payments (4.6) (7.8) (1.3)
Reversal of foreign loss
carryforward valuation
allowance (6.4) - -
Other (2.3) (.9) 2.3
Effective income tax rate 29.0% 17.5% 37.2%
<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:
1997 1996 1995
Excess of book provisions
over tax deductions $ 3,994 $ 4,977 $ 5,247
Postretirement benefit 4,040 3,592 3,238
Excess of tax basis over
book basis of assets due
to restructuring 2,807 3,346 2,277
Foreign loss carryforwards 1,832 3,660 3,865
Other 947 947 798
Gross deferred tax assets 13,620 16,522 15,425
Deferred tax asset
valuation allowance (4,260) (9,175) (8,547)
Deferred tax assets 9,360 7,347 6,878
Gross deferred tax
liabilities (excess of
tax over book depreciation) (3,783) (2,846) (3,352)
Net deferred tax asset $ 5,577 $ 4,501 $ 3,526
The net deferred tax asset represents future tax deductions
that can be realized upon carryback to prior years and German
loss carryforwards.
The deferred tax asset valuation allowance increased
(decreased) by $(4,915), $628 and $82 during 1997, 1996 and 1995,
respectively. The 1997 amount includes $1,519 of valuation
allowance reversal based upon management's conclusion that German
net operating loss carryforwards are more likely than not to be
realizable.
During 1997 and 1996, the Company utilized foreign loss
carryforwards, which reduced income tax expense by $417 and $366,
respectively. At December 28, 1997, the Company had foreign loss
carryforwards of $6,011, 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 twelve 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 multiplied by the number of years of credited
service. Effective in January 1997, the retirement allowance was
$204.00, and in March 1997, it was increased to $210.00. 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:
1997 1996 1995
Service cost $ 254 $ 247 $ 174
Interest cost on projected benefit
obligations 190 155 124
Actual return on plan assets (122) (99) (79)
Net amortization and deferral 33 30 11
Net periodic pension cost $ 355 $ 333 $ 230
<PAGE>
Note J, continued
The funded status of the Raytech Plan is as follows:
December 28, December 29,
1997 1996
Actuarial present value of
benefit obligations:
Vested $(2,940) $(2,390)
Non-vested (302) (205)
Total accumulated benefit obligations $(3,242) $(2,595)
Projected benefit obligations $(3,242) $(2,595)
Plan net assets at fair value 2,372 1,931
Excess of projected benefit
obligation over plan assets (870) (664)
Unrecognized past service cost 225 71
Unrecognized actuarial loss 590 514
Adjustment required to recognize
minimum liability (815) (585)
Net accrued pension liability $ (870) $ (664)
The assumptions used for the fiscal years ending 1997, 1996 and
1995 were:
Dec. 28, Dec. 29, Dec. 31,
1997 1996 1995
Discount rate 6.75% 7.0% 7.0%
Expected long-term rate of
return on assets 6.00% 6.0% 6.0%
The Company's German subsidiaries have unfunded defined benefit
plans covering certain employees. The net periodic pension cost for
these defined benefit plans is comprised of:
1997 1996 1995
Service cost $ 86 $ 96 $ 105
Interest cost on projected
benefit obligation 165 178 190
Amortization of transition amount 52 59 62
Amortization of actuarial gain (176) (204) (182)
Net periodic pension cost $ 127 $ 129 $ 175
Discount rate 7.0% 7.0% 7.0%
<PAGE>
Note J, continued
The status of the German plans is as follows:
Dec. 28, Dec. 29,
1997 1996
Actuarial present value
benefit obligations:
Vested $(2,022) $(2,214)
Non-vested (143) (149)
Total accumulated benefit obligations $(2,165) $(2,363)
Projected benefit obligations $(2,254) $(2,477)
Unrecognized past service cost 296 404
Unrecognized actuarial gain 34 (154)
Current maturities 100 117
Net accrued pension liability $ 1,824 $(2,110)
The Company also sponsors a defined contribution 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 Company contributions in 1997, 1996 and
1995 under the salary defined contribution plan was $800, $632, and
$598, respectively. In 1988, Raytech established a voluntary defined
contribution plan available to all bargaining unit and other hourly-
paid employees of the Company and its subsidiaries that are
authorized to participate. At Allomatic Products Company, a Company
incentive contribution of 2% is payable upon the attainment of
certain operating earnings goals. The total Company contributions in
1997, 1996, and 1995 under the hourly defined contribution plan was
$24, $18, and $18, 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
<PAGE>
Note J, continued
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
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:
1997 1996
Retirees and dependents $ 1,790 $ 1,227
Actives fully eligible 3,052 2,780
Actives not fully eligible 5,491 4,775
Unfunded accumulated postretirement
benefit obligation 10,333 8,782
Unrecognized net gain(loss) (21) 657
Accrued postretirement benefit cost 10,312 9,439
Less current portion 268 196
$10,044 $ 9,243
The components of net periodic postretirement benefit expense
for fiscal 1997, 1996 and 1995 are as follows:
1997 1996 1995
Service cost $ 446 $ 511 $ 383
Interest cost on accumulated
post-retirement benefit obligation 634 680 623
Unrecognized net gain(loss) (13) 77 (11)
Net periodic expense $1,067 $1,268 $ 995
The assumed discount rates used to measure the accumulated
postretirement benefit obligation at December 28, 1997, December 29,
1996 and December 31, 1995 were 6.75%, 7.0%, and 7.0%, respectively.
The assumed health care cost trend rate used to measure the expected
<PAGE>
Note J, continued
cost of benefits is 6.5% for both fiscal 1998 and 1997. 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.
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
1997 1,360 60
1996 1,259 45
1995 1,244 41
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 1997, May 1996 and October 1995,
the Company was reimbursed $120, $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 1997, 1996 and 1995 and for the fiscal years
then ended follows:
<CAPTION>
Net Operating Identifiable
Sales Income Assets
<S> <C> <C> <C>
1997
Domestic $191,822 $ 23,829 $130,948
Europe (1) 42,653 2,335 22,569
Consolidated $234,475 $ 26,164 $153,517
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
<FN>
(1) Primarily Germany
Domestic sales to a single customer, Caterpillar, Inc., were
14%, 15%, and 14% of consolidated sales for 1997, 1996 and 1995,
respectively.
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 1997
March 30 June 29 Sept. 28 December 28
Net sales $ 59,121 $ 60,760 $ 56,251 $ 58,343
Gross profit 13,928 13,683 11,782 12,182
Income before provision
for taxes and minority
interest 6,482 7,405(b) 5,572(b) 4,310
Net income $ 4,282 $ 5,143 $ 3,710 $ 2,403
Basic income per share $ 1.32 $ 1.58 $ 1.14 $ .73
Diluted income per share $ 1.22 $ 1.46 $ 1.05 $ .68
Market range:
-high 7-1/8 6-5/16 6-5/8 6-5/8
-low 4-1/8 5 5-1/4 5-3/16
Dividends - - - -
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)
Basic income per share $ 1.14 $ 1.42 $ 1.47 $ .91
Diluted 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 - - - -
(a) Includes adjustments to income tax expense for prior year accruals
no longer required.
(b) Includes adjustments related to environmental accruals established
in 1996 that are no longer required.
<PAGE>
Note M - Supplementary Financial Statement Detail
Fiscal Year 1997 1996
OTHER CURRENT ASSETS
Deferred income taxes $ 4,128 $ 4,000
Prepaid insurance 762 769
Prepaid expenses 1,751 1,260
Other 1,949 2,091
$ 8,590 $ 8,120
ACCOUNTS PAYABLE
Trade accounts payable $ 17,609 $ 11,882
Amounts due to AFM - 7,076
Cash overdraft 3,090 -
Other 4 41
$ 20,703 $ 18,999
Fiscal Year l997 l996
ACCRUED LIABILITIES
Property taxes $ 1,925 $ 1,933
Legal 1,366 728
Taxes 946 113
Wages and related taxes 6,997 8,547
Pensions and employee benefits 2,649 2,616
Product due Echlin (see Note H) 1,183 1,183
Other(1) 7,376 7,639
$ 22,442 $ 22,759
OTHER LONG-TERM LIABILITIES
Long-term pensions $ 1,823 $ 2,110
Other 3,606 2,309
$ 5,429 $ 4,419
(1) In fiscal 1997, the Company reversed $1.8 million of accruals
established in 1996 to reflect management's revised estimate
of probable liability for environmental violations at the
Sterling Heights facility.
<PAGE>
Note M, continued
<TABLE>
<CAPTION>
Fiscal Year 1997 1996 1995
OTHER OPERATING INCOME (EXPENSE), NET
<C> <C> <C> <C>
Production equipment write-down $ - $ - $(1,746)
Insurance recovery - 183 -
Reimbursement of savings plan
contributions (Note J) 120 79 224
Other, net 152 (65) -
$ 272 $ 197 $(1,522)
OTHER INCOME (EXPENSE), NET
Interest income $ 410 $ 218 $ 227
Lawsuit judgment - - 4,597
Note settlement - - 489
Income from equity
investment in affiliate 647 - -
Other, net 268 (97) 604
$1,325 $ 121 $ 5,917
ALLOWANCE FOR BAD DEBTS
Beginning balance $ 726 $ 822 $ 519
Provisions 524 28 303
Charge-offs (64) (124) -
Ending balance $1,186 $ 726 $ 822
AMORTIZATION EXPENSE OF
INTANGIBLE ASSETS
Advanced Friction Materials $ 370 $ 343 $ -
Allomatic Products Company 57 57 57
Other 21 30 32
Ending balance $ 448 $ 430 $ 89
<CAPTION>
<PAGE>
Note M, continued
</TABLE>
<TABLE>
CONDENSED FINANCIAL INFORMATION OF RAYTECH CORPORATION (PARENT)
<CAPTION>
Summary financial information of the parent holding company, Raytech Corporation,
which is operating under Chapter 11 of the U.S. Bankruptcy Code, is as follows:
Balance Sheet
1997 1996
<S> <C> <C>
Current Assets:
Cash $ 296 $ 134
Deferred taxes 3,971 3,761
Other current assets 2 794
Total current assets 4,269 4,689
Investment in subsidiaries 46,503 32,148
Deferred taxes 1,449 501
Other long-term assets 1,580 1,344
Total assets $ 53,801 $ 38,682
Current Liabilities:
Accounts payable and
accrued liabilities $ 3,456 $ 3,995
Other liabilities 1,883 672
Total liabilities 5,339 4,667
Shareholders' equity
Common stock 5,417 5,372
Additional paid in capital 70,275 70,208
Accumulated deficit (23,384) (38,922)
Cumulative translation adjustment 715 1,918
53,023 38,576
Less treasury stock at cost (4,561) (4,561)
Total shareholders' equity 48,462 34,015
Total liabilities and shareholders'
equity $ 53,801 $38,682
</TABLE>
<PAGE>
Note M, continued
Statements of Operations
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
General and administrative expenses $ 1,837 $ 2,489 $ 4,436
Income (loss) before equity in earnings
in subsidiaries (1,837) (2,489) (4,436)
Equity in earnings of subsidiaries 17,375 18,480 18,773
Net income $15,538 $15,991 $14,337
</TABLE>
Statement of Cash Flows
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net cash used in operating activities $(4,693) $(2,972) $(2,082)
Net cash provided by investing activities:
Dividends from subsidiary 4,743 3,015 2,070
Net cash provided by financing activities:
Proceeds from sale of stock 112 26 25
Net change in cash 162 69 13
Cash, beginning of period 134 65 52
Cash, end of period $ 296 $ 134 $ 65
<PAGE>
Note M, continued
NOTE TO CONDENSED FINANCIAL INFORMATION
OF RAYTECH CORPORATION (PARENT)
Note 1: Basis of Presentation
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 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.
<PAGE>
Note N - Commitments
Rental expense amounted to $1,050, $995, and $894, in 1997,
1996 and 1995, respectively. The approximate minimum rental
commitments under non-cancelable leases at December 28, 1997 were
as follows: 1998, $454; 1999, $385; 2000, $220; 2001, $219; 2002,
$219 and 2003 and thereafter, $787.
<PAGE>
Note O - Stock Option Plans
The Company's 1980 Non-Qualified Stock Option Plan (the
"Plan"), as amended, provided 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. In 1997, the shareholders approved an amendment of
the 1990 Plan authorizing 500,000 additional shares of common stock for
grant.
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 28, 1997 in shares
under option were as follows:
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
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 658,350 $ 3.56 697,234 $ 3.66 813,055 $ 4.04
Granted - - -
Exercised (45,546) 2.52 (9,682) 2.75 (11,115) 2.25
Lapsed (82,154) 7.88 (25,000) 6.75 (103,406) 6.81
Canceled (4,600) 1.75 (4,202) 2.94 (1,300) 1.75
Outstanding at
end of year 526,050 2.99 658,350 3.56 697,234 3.66
Options available
for future awards
at end of year 30,299 30,299 26,747
Options exercisable
at end of year 526,050 2.99 658,350 3.56 697,234 3.66
Options outstanding and exercisable at December 28, 1997 were as
follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
$1.75 78,450 1.84 $ 1.75 78,450 $ 1.75
$2.75 405,489 4.85 2.75 405,489 2.75
$7.63 42,111 .16 7.63 42,111 7.63
$1.75 526,050 4.03 $ 2.99 526,050 $ 2.99
</TABLE>
<PAGE>
Note P - Concentration of Credit Risk
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 28, 1997 and December 29, 1996, the Company had
uncollateralized receivables with two customers approximating
$7,375 and $6,804, respectively, which represents 27.4% and 28.5%
of the Company's trade accounts balance, 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.
<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 bears 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>
Note R - Earnings Per Share
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Basic EPS computation
Numerator $ 15,538 $ 15,991 $ 14,337
Denominator:
Common shares outstanding
at beginning of the year 3,239,762 3,230,080 3,218,968
Weighted average of treasury
stock acquired - - (2)
Stock options exercised 23,375 2,594 6,996
Weighted average shares 3,263,137 3,232,674 3,225,962
Basic EPS $4.76 $4.95 $4.44
Diluted EPS Computation
Numerator $ 15,538 $ 15,991 $ 14,337
Denominator:
Common shares outstanding
at beginning of the year 3,239,762 3,230,080 3,218,968
Weighted average of treasury
stock acquired - - (2)
Dilutive potential common
shares 261,254 208,971 143,041
Stock options exercised 23,375 2,594 6,996
Adjusted weighted
average shares 3,524,391 3,441,645 3,369,003
Diluted EPS $4.41 $4.65 $4.26
</TABLE>
<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 28, 1997 and December 29, 1996 and the consolidated
results of their operations and their cash flows for each of the
three fiscal years in the period ended December 28, 1997, 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,
<PAGE>
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
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 9, 1998
<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 28, 1997 and
December 29, 1996
Consolidated Statements of Operations for the 1997,
1996 and 1995 fiscal years
Consolidated Statements of Cash Flows for the 1997,
1996 and 1995 fiscal years
Consolidated Statements of Shareholders' Equity
for the 1997, 1996 and 1995 fiscal years
Notes to Consolidated Financial Statements
Report of Independent Accountants
<PAGE>
(2) Financial Statement Schedules
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 or footnotes.
(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 August 14, 1997, the Registrant received a
ruling of the United States Bankruptcy Court, District of
Connecticut, in the Adversary Proceeding No. 96-5181 filed in
the Registrant's bankruptcy proceedings, granting a motion for
summary judgment filed by the official committee of unsecured
creditors. The Adversary Proceeding was filed by the Registrant
in November 1996 seeking a declaratory judgment that its
liability for asbestos-related and other liabilities is limited
as a successor to Raymark Industries, Inc. To support the
summary judgment, the Court relied upon Schmoll v. AcandS, Inc.,
703 F. Supp. 868 (D.Or. 1988) which held the Registrant to be a
successor to the Raymark liabilities. The Court's ruling was
stated from the bench and is subject to a written order to be
issued at a later date. The Registrant considers the grant of
the summary judgment dismissing the proceeding as unfounded in
fact and law and intends to exhaust its legal remedies through
appeal of the order when received.
In Form 8-K dated January 12, 1998, the Board of Directors
terminated Craig R. Smith as President, Chief Executive Officer
and Director of the Registrant corporation, effective
January 12, 1998, and elected Albert A. Canosa as President,
Chief Executive Officer and Director in replacement. Mr. Canosa
previously served as Vice President of Administration, Chief
Financial Officer and Treasurer of the Registrant corporation
and will continue to hold the offices of Chief Financial Officer
and Treasurer.
(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)
<PAGE>
Page
3(a) Certificate of Incorporation of Raytech (d)
3(b) By-laws of Raytech (d)
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)
10(k) Loan and Security Agreement dated November 21,
1997 between Raybestos Products Company and
NationsCredit Commercial Corporation (n) 96
<PAGE>
Page
22 Subsidiaries of Raytech 131
24 Consent of Independent Accountants 132
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.
<PAGE>
(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.
(m) Included as an Exhibit to Registrant's Report on Form
10-Q filed with the Securities and Exchange Commission
on April 2, 1995.
(n) Included as an Exhibit to Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission on
March 18, 1998.
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 93
hereafter.
<PAGE>
Index To Consolidated Financial Statements
Page
Financial Statements:
Consolidated Balance Sheets for the
Fiscal Years Ended December 28, 1997
and December 29, 1996 35
Consolidated Statements of Operations
for the 1997, 1996 and 1995 Fiscal Years 36
Consolidated Statements of Cash Flows
for the 1997, 1996 and 1995 Fiscal Years 37
Consolidated Statements of Shareholders'
Equity for the 1997, 1996, and 1995
Fiscal Years 38
Notes to Consolidated Financial Statements 41
Report of Independent Accountants 86
<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/ALBERT A. CANOSA
Albert A. Canosa
President and
Chief Executive Officer
Date: March 18, 1998
<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 18, 1998.
Signature and Title Signature and Title
/s/ ALBERT A. CANOSA /s/DENNIS G. HEINER
Albert A. Canosa Dennis G. Heiner
President, Chief Executive Director
Officer and Director
/s/ALBERT A. CANOSA /s/DONALD P. MILLER
Albert A. Canosa Donald P. Miller
Treasurer and Chief Director
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
Exhibit 10
Loan and Security Agreement
This Loan and Security Agreement (as it may be amended, this
"Agreement") is entered into on November 21, 1997 between
NATIONSCREDIT COMMERCIAL CORPORATION, THROUGH ITS NATIONSCREDIT
COMMERCIAL FUNDING DIVISION ("Lender"), having an address at 1177
Avenue of the Americas, 36th Floor, New York, New York 10036 and
RAYBESTOS PRODUCTS COMPANY ("Borrower"), whose chief executive
office is located at One Corporate Drive, Shelton, Connecticut
06484 ("Borrower's Address"). The Schedules to this Agreement
are an integral part of this Agreement and are incorporated
herein by reference. Terms used, but not defined elsewhere, in
this Agreement are defined in Schedule B.
LOANS AND CREDIT ACCOMMODATIONS.
Amount. Subject to the terms and conditions contained in this
Agreement, Lender will:
Revolving Loans and Credit Accommodations. From time to time
during the Term at Borrower's request, make revolving loans to
Borrower ("Revolving Loans"), and make letters of credit, bankers
acceptances and other credit accommodations ("Credit
Accommodations") available to Borrower, in each case to the
extent that there is sufficient Availability at the time of such
request to cover, dollar for dollar, the requested Revolving Loan
or Credit Accommodation; provided, that after giving effect to
such Revolving Loan or Credit Accommodation, (x) the outstanding
balance of all monetary Obligations (including the principal
balance of any Term Loan and, solely for the purpose of
determining compliance with this provision, the Credit
Accommodation Balance) will not exceed the Maximum Facility
Amount set forth in Section 1(a) of Schedule A and (y) none of
the other Loan Limits set forth in Section 1 of Schedule A will
be exceeded. For this purpose, "Availability" means:
the aggregate amount of Eligible Accounts (less maximum existing
or asserted taxes, discounts, credits and allowances) multiplied
by the Accounts Advance Rate set forth in Section 1(b)(i) of
Schedule A but not to exceed the Accounts Sublimit(s) set forth
in Section 1(c) of Schedule A;
plus
the lower of cost or market value of Eligible Inventory
multiplied by the Inventory Advance Rate(s) set forth in Section
1(b)(ii) of Schedule A, but not to exceed the Inventory
Sublimit(s) set forth in Section 1(d) of Schedule A;
minus
all Reserves which Lender has established pursuant to Section 1.2
(including those to be established in connection with the
requested Revolving Loan or Credit Accommodation); and
minus
the outstanding balance of all of the monetary Obligations
(excluding the Credit Accommodation Balance and the principal
balance of the Term Loan).
Term Loan. On the date of this Agreement, make an advance to
Borrower computed with respect to the value of Borrower's
Eligible Equipment (the ("Equipment Advance") in the principal
amount, if any, set forth in Section 2(a)(i) of Schedule A. The
Equipment Advance is referred to as the "Term Loan."
Reserves. Lender may from time to time establish and revise such
reserves as Lender deems appropriate in its sole discretion
("Reserves") to reflect (i) events, conditions, contingencies or
risks which affect or may affect (A) the Collateral or its value,
or the security interests and other rights of Lender in the
Collateral or (B) the assets, business or prospects of Borrower
or any Obligor, (ii) Lender's good faith concern that any
Collateral report or financial information furnished by or on
behalf of Borrower or any Obligor to Lender is or may have been
incomplete, inaccurate or misleading in any material respect,
(iii) any fact or circumstance which Lender determines in good
faith constitutes, or could constitute, a Default or Event of
Default or (iv) any other events or circumstances which Lender
determines in good faith make the establishment or revision of a
Reserve prudent. Without limiting the foregoing, Lender shall (x)
in the case of each Credit Accommodation issued for the purchase
of Inventory (a) which meets the criteria for Eligible Inventory
set forth in clauses (i), (ii), (iii), (v) and (vi) of the
definition of Eligible Inventory, (b) which is or will be in
transit to one of the locations set forth in Section 9(d) of
Schedule A, (c) which is fully insured in a manner satisfactory
to Lender and (d) in the case of any Credit Accommodation issued
for any purpose, establish a Reserve equal to the full amount of
such Credit Accommodation plus all costs and other charges and
expenses relating to such Credit Accommodation. In addition, if
the outstanding principal balance of the Term Loan advance with
respect to Eligible Equipment exceeds the percentage set forth in
Section 2(a)(i) of Schedule A of the appraised value of such
Eligible Equipment, Lender may establish an additional Reserve in
the amount of such excess. Lender may, in its discretion,
establish and revise Reserves by deducting them in determining
Availability or by reclassifying Eligible Accounts or Eligible
Inventory as ineligible. In no event shall the establishment of
a Reserve in respect of a particular actual or contingent
liability obligate Lender to make advances hereunder to pay such
liability or otherwise obligate Lender with respect thereto.
Other Provisions Applicable to Credit Accommodations. Lender
may, in its sole discretion and on terms and conditions
acceptable to Lender, make Credit Accommodations available to
Borrower either by issuing them, or by causing other financial
institutions to issue them supported by Lender's guaranty or
indemnification; provided, that after giving effect to each
Credit Accommodation, the Credit Accommodation Balance will not
exceed the Credit Accommodation Limit set forth in Section 1(e)
of Schedule A. Any amounts paid by Lender in respect of a Credit
Accommodation will be treated for all purposes as a Revolving
Loan which shall be secured by the Collateral and bear interest,
and be payable, in the same manner as a Revolving Loan. Borrower
agrees to execute all documentation required by Lender or the
issuer of any Credit Accommodation in connection with any such
Credit Accommodation.
Repayment. Accrued interest on all monetary Obligations shall be
payable on the first day of each month. Principal of the Term
Loan shall be repaid as set forth in Section 2(b) of Schedule A.
If at any time any of the Loan Limits are exceeded, Borrower will
immediately pay to Lender such amounts (or provide cash
collateral to Lender with respect to the Credit Accommodation
Balance in the manner set forth in Section 7.3), as shall cause
Borrower to be in full compliance with all of the Loan Limits.
Notwithstanding the foregoing, Lender may, in its sole
discretion, make or permit Revolving Loans, the Term Loan, any
Credit Accommodations or any other monetary Obligations to be in
excess of any of the Loan Limits; provided, that Borrower shall,
upon Lender's demand, pay to Lender such amounts as shall cause
Borrower to be in full compliance with all of the Loan Limits.
All unpaid monetary Obligations shall be payable in full on the
Maturity Date (as defined in Section 7.1) or, if earlier, the
date of any early termination pursuant to Section 7.2.
Intentionally Omitted.
INTEREST AND FEES.
Interest. All Loans and other monetary Obligations shall bear
interest at the Interest Rate(s) set forth in Section 3 of
Schedule A, except where expressly set forth to the contrary in
this Agreement or another Loan Document; provided, that after the
occurrence of an Event of Default, all Loans and other monetary
Obligations shall, at Lender's option, bear interest at a rate
per annum equal to 2% in excess of the rate otherwise applicable
thereto (the "Default Rate") until paid in full (notwithstanding
the entry of any judgment against Borrower or the exercise of any
other right or remedy by Lender), and all such interest shall be
payable on demand. Changes in the Interest Rate shall be
effective as of the date of any change in the Prime Rate.
Notwithstanding anything to the contrary contained in this
Agreement, the aggregate of all amounts deemed to be interest
hereunder and charged or collected by Lender is not intended to
exceed the highest rate permissible under any applicable law, but
if it should, such interest shall automatically be reduced to the
extent necessary to comply with applicable law and Lender will
refund to Borrower any such excess interest received by Lender.
Fees. Borrower shall pay Lender the following fees which are in
addition to all interest and other sums payable by Borrower to
Lender under this Agreement, and are not refundable:
Closing Fee. A closing fee in the amount set forth in Section
6(a) of Schedule A, which shall be deemed to be fully earned as
of, and payable on, the date hereof.
Facility Fees. A facility fee for the Initial Term in the amount
set forth in Section 6(b)(i) of Schedule A (which shall be fully
earned and payable on each anniversary of the date of this
Agreement during the Initial Term, other than the Maturity Date),
and a facility fee for each Renewal Term in the amount set forth
in Section 6(b)(ii) of Schedule A (which shall be fully earned
and payable on the first day of such Renewal Term and on each
anniversary thereof during such Renewal Term, other than the
Maturity Date).
Intentionally Omitted.
Intentionally Omitted.
Intentionally Omitted.
Intentionally Omitted.
Intentionally Omitted.
Credit Accommodation Fees. The fees relating to Credit
Accommodations set forth in Section 6(i) of Schedule A, payable,
in arrears, on the first day of each month so long as any of the
Obligations are outstanding and on the Maturity Date, plus all
costs and fees charged by the issuer, payable as and when such
costs and fees are charged.
Computation of Interest and Fees. All interest and fees shall be
calculated daily on the closing balances in the Loan Account
based on the actual number of days elapsed in a year of 360 days.
For purposes of calculating interest and fees, if the outstanding
daily principal balance of the Revolving Loans is a credit
balance, such balance shall be deemed to be zero.
Loan Account; Monthly Accountings. Lender shall maintain a loan
account for Borrower reflecting all advances, charges, expenses
and payments made pursuant to this Agreement (the "Loan
Account"), and shall provide Borrower with a monthly accounting
reflecting the activity in the Loan Account. Each accounting
shall be deemed correct, accurate and binding on Borrower and an
account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Lender),
unless Borrower notifies Lender in writing to the contrary within
sixty days after such account is rendered, describing the nature
of any alleged errors or admissions. However, Lender's failure
to maintain the Loan Account or to provide any such accounting
shall not affect the legality or binding nature of any of the
Obligations. Interest, fees and other monetary Obligations due
and owing under this Agreement (including fees and other amounts
paid by Lender to issuers of Credit Accommodations) may, in
Lender's discretion, be charged to the Loan Account, and will
thereafter be deemed to be Revolving Loans and will bear interest
at the same rate as other Revolving Loans.
SECURITY INTEREST.
To secure the full payment and performance of all of the
Obligations, Borrower hereby grants to Lender a continuing
security interest in all of Borrower's personal property and
interests in personal property, whether tangible or intangible,
now owned or in existence or hereafter acquired or arising,
wherever located, including Borrower's interest in all of the
following, whether or not eligible for lending purposes: (i) all
Accounts, Chattel Paper, Instruments, Documents, Inventory,
Equipment and other Goods, Investment Property, General
Intangibles, Deposit Accounts and money, (ii) all proceeds and
products of all of the foregoing (including proceeds of any
insurance policies, proceeds of proceeds and claims against third
parties for loss or any destruction of any of the foregoing) and
(iii) all books and records relating to any of the foregoing.
ADMINISTRATION.
Lock Boxes and Blocked Accounts. Borrower will, at its expense,
establish (and revise from time to time as Lender may require)
collection procedures acceptable to Lender, in Lender's sole
discretion, for the collection of checks, wire transfers and
other proceeds of Accounts ("Account Proceeds"), which may
include (i) directing all Account Debtors to send all such
proceeds directly to a post office box designated by Lender
either in the name of Borrower (but as to which Lender has
exclusive access) or, at Lender's option, in the name of Lender
(a "Lock Box") or (ii) depositing all Account Proceeds received
by Borrower into one or more bank accounts maintained in Lender's
name (each, a "Blocked Account"), under an arrangement acceptable
to Lender with a depository bank acceptable to Lender, pursuant
to which all funds deposited into each Blocked Account are to be
transferred to Lender in such manner, and with such frequency, as
Lender shall specify or (iii) a combination of the foregoing.
Borrower agrees to execute, and to cause its depository banks to
execute, such Lock Box and Blocked Account agreements and other
documentation as Lender shall require from time to time in
connection with the foregoing.
Remittance of Proceeds. Except as provided in Section 4.1, all
proceeds arising from the sale or other disposition of any
Collateral shall be delivered, in kind, by Borrower to Lender in
the original form in which received by Borrower not later than
the following Business Day after receipt by Borrower. Until so
delivered to Lender, Borrower shall hold such proceeds separate
and apart from Borrower's other funds and property in an express
trust for Lender. Nothing in this Section 4.2 shall limit the
restrictions on disposition of Collateral set forth elsewhere in
this Agreement.
Application of Payments. Lender may, in its sole discretion,
apply, reverse and re-apply all cash and non-cash proceeds of
Collateral or other payments received with respect to the
Obligations, in such order and manner as Lender shall determine,
whether or not the Obligations are due, and whether before or
after the occurrence of a Default or an Event of Default. For
purposes of determining Availability, such amounts will be
credited to the Loan Account and the Collateral balances to which
they relate upon Lender's receipt of advice from Lender's Bank
(set forth in Section 11 of Schedule A) that such items have been
credited to Lender's account at Lender's Bank (or upon Lender's
deposit thereof at Lender's Bank in the case of payments received
by Lender in kind), in each case subject to final payment and
collection. However, for purposes of computing interest on the
Obligations, such items shall be deemed applied by Lender one
Business Day after Lender's receipt of advice of deposit thereof
at Lender's Bank.
Notification; Verification. Lender or its designee may, from
time to time, whether or not a Default or Event of Default has
occurred: (i) verify directly with the Account Debtors the
validity, amount and other matters relating to the Accounts and
Chattel Paper, by means of mail, telephone or otherwise, either
in the name of Borrower or Lender or such other name as Lender
may choose; (ii) notify Account Debtors that Lender has a
security interest in the Accounts and that payment thereof is to
be made directly to Lender; and (iii) demand, collect or enforce
payment of any Accounts and Chattel Paper (but without any duty
to do so).
Power of Attorney. Borrower hereby grants to Lender an
irrevocable power of attorney, coupled with an interest,
authorizing and permitting Lender (acting through any of its
officers, employees, attorneys or agents), at any time (whether
or not a Default or Event of Default has occurred and is
continuing, except as expressly provided below), at Lender's
option, but without obligation, with or without notice to
Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise: (i) execute on
behalf of Borrower any documents that Lender may, in its sole
discretion, deem advisable in order to perfect and maintain
Lender's security interests in the Collateral (including such
financing statements and continuation financing statements, and
amendments thereto, as Lender shall deem necessary or
appropriate) and to file as a financing statement any copy of
this Agreement or any financing statement signed by Borrower;
(ii) after an Event of Default execute on behalf of Borrower any
document exercising, transferring or assigning any option to
purchase, sell or otherwise dispose of or lease (as lessor or
lessee) any personal property which is part of the Collateral or
in which Lender has an interest; (iii) execute on behalf of
Borrower any invoices relating to any Accounts, any draft against
any Account Debtor, any proof of claim in bankruptcy, any notice
of Lien or claim, and any assignment or satisfaction of
mechanic's, materialman's or other Lien; (iv) execute on behalf
of Borrower any notice to any Account Debtor; (v) receive and
otherwise take control in any manner of any cash or non-cash
items of payment or proceeds of Collateral; (vi) endorse
Borrower's name on all checks and other forms of remittances
received by Lender; (vii) pay, contest or settle any Lien,
charge, encumbrance, security interest and adverse claim in or to
any of the Collateral, or any judgment based thereon, or
otherwise take any action to terminate or discharge the same;
(viii) after the occurrence of a Default or Event of Default,
grant extensions of time to pay, compromise claims relating to,
and settle Accounts, Chattel Paper and General Intangibles for
less than face value and execute all releases and other documents
in connection therewith; (ix) pay any sums required on account of
Borrower's taxes or to secure the release of any Liens therefor;
(x) pay any amounts necessary to obtain, or maintain in effect,
any of the insurance described in Section 5.12; (xi) after an
Event of Default, settle and adjust, and give releases of, any
insurance claim that relates to any of the Collateral and obtain
payment therefor; (xii) instruct any third party having custody
or control of any Collateral or books or records belonging to, or
relating to, Borrower to give Lender the same rights of access
and other rights with respect thereto as Lender has under this
Agreement; and (xiii) after the occurrence of a Default or Event
of Default, change the address for delivery of Borrower's mail
and receive and open all mail addressed to Borrower. Any and all
sums paid, and any and all costs, expenses, liabilities,
obligations and reasonable attorneys' fees incurred, by Lender
with respect to the foregoing shall be added to and become part
of the Obligations, shall be payable on demand, and shall bear
interest at a rate equal to the highest interest rate applicable
to any of the Obligations. Borrower agrees that Lender's rights
under the foregoing power of attorney or any of Lender's other
rights under this Agreement or the other Loan Documents shall not
be construed to indicate that Lender is in control of the
business, management or properties of Borrower.
Disputes. Borrower shall promptly notify Lender of all disputes
or claims relating to Accounts and Chattel Paper. Borrower will
not, without Lender's prior written consent, compromise or settle
any Account or Chattel Paper for less than the full amount
thereof, grant any extension of time of payment of any Account or
Chattel Paper, release (in whole or in part) any Account Debtor
or other person liable for the payment of any Account or Chattel
Paper or grant any credits, discounts, allowances, deductions,
return authorizations or the like with respect to any Account or
Chattel Paper; except that prior to the occurrence of an Event of
Default, Borrower may take any of such actions in the ordinary
course of its business, provided that Borrower reports the same
to Lender in connection with its collateral reporting described
in Section 5.13(a).
Invoices. At Lender's request, Borrower will cause all invoices
and statements which it sends to Account Debtors or other third
parties to be marked, in a manner satisfactory to Lender, to
reflect Lender's security interest therein.
Inventory.
Returns. Provided that no Event of Default has occurred and is
continuing, if any Account Debtor returns any Inventory to
Borrower in the ordinary course of its business, Borrower will
promptly determine the reason for such return and promptly issue
a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Lender). After the occurrence of an
Event of Default, Borrower will not accept any return without
Lender's prior written consent. Regardless of whether an Event
of Default has occurred, Borrower will (i) hold the returned
Inventory in trust for Lender; (ii) segregate all returned
Inventory from all of Borrower's other property; (iii)
conspicuously label the returned Inventory as Lender's property;
and (iv) immediately notify Lender of the return of such
Inventory, specifying the reason for such return, the location
and condition of the returned Inventory and, at Lender's request,
deliver such returned Inventory to Lender at an address specified
by Lender.
Other Covenants. Borrower will not, without Lender's prior
written consent, (i) store any Inventory with any warehouseman or
other third party other than as set forth in Section 9(d) of
Schedule A or (ii) sell any Inventory on a sale-or-return,
guaranteed sale, consignment, or other contingent basis. All of
the Inventory has been produced only in accordance with the Fair
Labor Standards Act of 1938 and all rules, regulations and orders
promulgated thereunder.
Access to Collateral, Books and Records. At reasonable times,
and on one Business Day's notice, prior to the occurrence of a
Default or an Event of Default, and at any time and with or
without notice after the occurrence of a Default or an Event of
Default, Lender or its agents shall have the right to inspect the
Collateral, and the right to examine and copy Borrower's books
and records. Lender shall take reasonable steps to keep
confidential all information obtained in any such inspection or
examination, but Lender shall have the right to disclose any such
information to its auditors, regulatory agencies, attorneys and
participants, and pursuant to any subpoena or other legal
process. Borrower agrees to give Lender access to any or all of
Borrower's premises to enable Lender to conduct such inspections
and examinations. Such inspections and examinations shall be at
Borrower's expense and the charge therefor shall be $650 per
person per day (or such higher amount as shall represent Lender's
then current standard charge), plus reasonable out-of-pocket
expenses. Lender may, at Borrower's expense, use Borrower's
personnel, computer and other equipment, programs, printed output
and computer readable media, supplies and premises for the
collection, sale or other disposition of Collateral to the extent
Lender, in its sole discretion, deems appropriate. Borrower
hereby irrevocably authorizes all accountants and third parties
to disclose and deliver to Lender, at Borrower's expense, all
financial information, books and records, work papers, management
reports and other information in their possession regarding
Borrower. Borrower will not enter into any agreement with any
accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's
Address without first obtaining Lender's written consent (which
consent may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Lender the same
rights with respect to access to books and records and related
rights as Lender has under this Agreement).
REPRESENTATIONS, WARRANTIES AND COVENANTS.
To induce Lender to enter into this Agreement, Borrower
represents, warrants and covenants as follows (it being
understood that (i) each such representation and warranty will be
deemed remade as of the date on which each Loan is made and each
Credit Accommodation is provided and shall not be affected by any
knowledge of, or any investigation by, Lender, and (ii) the
accuracy of each such representation, warranty and covenant will
be a condition to each Loan and Credit Accommodation):
Existence and Authority. Borrower is duly organized, validly
existing and in good standing under the laws of the jurisdiction
of its incorporation or formation. Borrower is qualified and
licensed to do business in all jurisdictions in which any failure
to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement
and all of the other Loan Documents have been duly and validly
authorized, do not violate Borrower's articles or certificate of
incorporation, by-laws or other organizational documents, or any
law or any agreement or instrument or any court order which is
binding upon Borrower or its property, do not constitute grounds
for acceleration of any indebtedness or obligation under any
agreement or instrument which is binding upon Borrower or its
property, and do not require the consent of any Person. This
Agreement and such other Loan Documents have been duly executed
and delivered by, and are enforceable against, Borrower, and all
other Obligors who have signed them, in accordance with their
respective terms. Sections 9(g) and 9(h) of Schedule A set forth
the ownership of Borrower and the names and ownership of
Borrower's Subsidiaries as of the date of this Agreement.
Name; Trade Names and Styles. The name of Borrower set forth in
the heading to this Agreement is its correct and complete legal
name as of the date hereof. Listed in Sections 9(a), 9(b) and
9(c) of Schedule A are all prior names of Borrower and all of
Borrower's present and prior trade names. Borrower shall give
Lender at least thirty days' prior written notice before changing
its name or doing business under any other name. Borrower has
complied with all laws relating to the conduct of business under
a fictitious business name. Borrower represents and warrants
that (i) each trade name does not refer to another corporation or
other legal entity; (ii) all Accounts invoiced under any such
trade names are owned exclusively by Borrower and are subject to
the security interest of Lender and the other terms of this
Agreement and (iii) all schedules of Accounts, including any
sales made or services rendered using any trade name shall show
Borrower's name as assignor.
Title to Collateral; Permitted Liens. Borrower has good and
marketable title to the Collateral. The Collateral now is and
will remain free and clear of any and all liens, charges,
security interests, encumbrances and adverse claims, except for
Permitted Liens. Lender now has, and will continue to have, a
first-priority perfected and enforceable security interest in all
of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Lender and the Collateral
against all claims of others. None of the Collateral which is
Equipment is or will be affixed to any real property in such a
manner, or with such intent, as to become a fixture. Except for
leases or subleases as to which Borrower has delivered to Lender
a landlord's waiver in form and substance satisfactory to Lender,
Borrower is not a lessee or sublessee under any real property
lease or sublease pursuant to which the lessor or sublessor may
obtain any rights in any of the Collateral, and no such lease or
sublease now prohibits, restrains, impairs or conditions, or will
prohibit, restrain, impair or condition, Borrower's right to
remove any Collateral from the premises. Whenever any Collateral
is located upon premises in which any third party has an interest
(whether as owner, mortgagee, beneficiary under a deed of trust,
lien or otherwise), Borrower shall, whenever requested by Lender,
cause each such third party to execute and deliver to Lender, in
form and substance acceptable to Lender, such waivers and
subordinations as Lender shall specify, so as to ensure that
Lender's rights in the Collateral are, and will continue to be,
superior to the rights of any such third party. Borrower will
keep in full force and effect, and will comply with all the terms
of, any lease of real property where any of the Collateral now or
in the future may be located.
Accounts and Chattel Paper. As of each date reported by
Borrower, all Accounts which Borrower has reported to Lender as
being Eligible Accounts comply in all respects with the criteria
for eligibility established by Lender and in effect at such time.
All Accounts and Chattel Paper are genuine and in all respects
what they purport to be, arise out of a completed, bona fide and
unconditional and non-contingent sale and delivery of goods or
rendition of services by Borrower in the ordinary course of its
business and in accordance with the terms and conditions of all
purchase orders, contracts or other documents relating thereto,
each Account Debtor thereunder had the capacity to contract at
the time any contract or other document giving rise to such
Accounts and Chattel Paper were executed, and the transactions
giving rise to such Accounts and Chattel Paper comply with all
applicable laws and governmental rules and regulations.
Intentionally Omitted.
Place of Business; Location of Collateral. Borrower's Address is
Borrower's chief executive office and the location of its books
and records. In addition, except as provided in the immediately
following sentence, Borrower has places of business and
Collateral located only at the locations set forth on Sections
9(d) and 9(e) of Schedule A. Borrower will give Lender at least
thirty days' prior written notice before opening any additional
place of business, changing its chief executive office or the
location of its books and records, or moving any of the
Collateral to a location other than Borrower's Address or one of
the locations set forth in Sections 9(d) and 9(e) of Schedule A,
and will execute and deliver all financing statements and other
agreements, instruments and documents which Lender shall require
as a result thereof.
Financial Condition, Statements and Reports. All financial
statements delivered to Lender by or on behalf of Borrower have
been prepared in conformity with GAAP and completely and fairly
reflect the financial condition of Borrower, at the times and for
the periods therein stated. Between the last date covered by any
such financial statement provided to Lender and the date hereof
(or, with respect to the remaking of this representation in
connection with the making of any Loan or the providing of any
Credit Accommodation, the date such Loan is made or such Credit
Accommodation is provided), there has been no material adverse
change in the financial condition or business of Borrower.
Borrower is solvent and able to pay its debts as they come due,
and has sufficient capital to carry on its business as now
conducted and as proposed to be conducted. All schedules,
reports and other information and documentation delivered by
Borrower to Lender with respect to the Collateral are, or will
be, when delivered, true, correct and complete as of the date
delivered or the date specified therein.
Tax Returns and Payments; Pension Contributions. Borrower has
timely filed all tax returns and reports required by applicable
law, has timely paid all applicable taxes, assessments, deposits
and contributions owing by Borrower and will timely pay all such
items in the future as they became due and payable. Borrower
may, however, defer payment of any contested taxes; provided,
that Borrower (i) in good faith contests Borrower's obligation to
pay such taxes by appropriate proceedings promptly and diligently
instituted and conducted; (ii) notifies Lender in writing of the
commencement of, and any material development in, the
proceedings; (iii) posts bonds or takes any other steps required
to keep the contested taxes from becoming a Lien upon any of the
Collateral and (iv) maintains adequate reserves therefor in
conformity with GAAP. Borrower is unaware of any claims or
adjustments proposed for any of Borrower's prior tax years which
could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay, all
amounts necessary to fund all present and future pension, profit
sharing and deferred compensation plans in accordance with their
terms, and Borrower has not withdrawn from participation in,
permitted partial or complete termination of, or permitted the
occurrence of any other event with respect to, any such plan
which could result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or any
other governmental agency.
Compliance with Laws. Borrower has complied in all material
respects with all provisions of all applicable laws and
regulations, including those relating to Borrower's ownership of
real or personal property, the conduct and licensing of
Borrower's business, the payment and withholding of taxes, ERISA
and other employee matters, safety and environmental matters.
Litigation. Section 9(f) of Schedule A discloses all claims,
proceedings, litigation or investigations pending or (to the best
of Borrower's knowledge) threatened against Borrower. There is
no claim, suit, litigation, proceeding or investigation pending
or (to the best of Borrower's knowledge) threatened by or against
or affecting Borrower in any court or before any governmental
agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material
adverse change in the financial condition or business of
Borrower, or in any material impairment in the ability of
Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly
inform Lender in writing of any claim, proceeding, litigation or
investigation in the future threatened or instituted by or
against Borrower.
Use of Proceeds. All proceeds of all Loans will be used solely
for lawful business purposes.
Insurance. Borrower will at all times carry property, liability
and other insurance, with insurers acceptable to Lender, in such
form and amounts, and with such deductibles and other provisions,
as Lender shall require, and Borrower will provide evidence of
such insurance to Lender, so that Lender is satisfied that such
insurance is, at all times, in full force and effect. Each
property insurance policy shall name Lender as loss payee and
shall contain a lender's loss payable endorsement in form
acceptable to Lender, each liability insurance policy shall name
Lender as an additional insured, and each business interruption
insurance policy shall be collaterally assigned to Lender, all in
form and substance satisfactory to Lender. All policies of
insurance shall provide that they may not be cancelled or changed
without at least thirty days' prior written notice to Lender,
shall contain breach of warranty coverage, and shall otherwise be
in form and substance satisfactory to Lender. Upon receipt of
the proceeds of any such insurance, Lender shall apply such
proceeds in reduction of the Obligations as Lender shall
determine in its sole discretion. Borrower will promptly deliver
to Lender copies of all reports made to insurance companies.
Financial and Collateral Reports. Borrower has kept and will
keep adequate records and books of account with respect to its
business activities and the Collateral in which proper entries
are made in accordance with GAAP reflecting all its financial
transactions, and will cause to be prepared and furnished to
Lender the following (all to be prepared in accordance with GAAP,
unless Borrower's certified public accountants concur in any
change therein and such change is disclosed to Lender):
Collateral Reports. On or before the fifteenth day of each
month, an aging of Borrower's Accounts, Chattel Paper and notes
receivable, and weekly Inventory reports, all in such form, and
together with such additional certificates, schedules and other
information with respect to the Collateral or the business of
Borrower or any Obligor, as Lender shall request; provided, that
Borrower's failure to execute and deliver the same shall not
affect or limit Lender's security interests and other rights in
any of the Accounts, nor shall Lender's failure to advance or
lend against a specific Account affect or limit Lender's security
interest and other rights therein. Together with each such
schedule, Borrower shall furnish Lender with copies (or, at
Lender's request, originals) of all contracts, orders, invoices,
and other similar documents, and all original shipping
instructions, delivery receipts, bills of lading, and other
evidence of delivery, for any goods the sale or disposition of
which gave rise to such Accounts, and Borrower warrants the
genuineness of all of the foregoing. In addition, Borrower shall
deliver to Lender the originals of all Instruments, Chattel
Paper, security agreements, guaranties and other documents and
property evidencing or securing any Accounts, immediately upon
receipt thereof and in the same form as received, with all
necessary endorsements. Lender may destroy or otherwise dispose
of all documents, schedules and other papers delivered to Lender
pursuant to this Agreement (other than originals of Instruments,
Chattel Paper, security agreements, guaranties and other
documents and property evidencing or securing any Accounts) six
months after Lender receives them, unless Borrower requests their
return in writing in advance and arranges for their return to
Borrower at Borrower's expense.
Annual Statements. Not later than ninety days after the close of
each fiscal year of Borrower, unqualified (except for a
qualification for a change in accounting principles with which
the accountant concurs) audited financial statements of Borrower
and its Subsidiaries as of the end of such year, on a
consolidated and consolidating basis, certified by a firm of
independent certified public accountants of recognized standing
selected by Borrower but acceptable to Lender, together with a
copy of any management letter issued in connection therewith and
a letter from such accountants acknowledging that Lender is
relying on such financial statements;
Interim Statements. Not later than fifteen days after the end of
each month hereafter, including the last month of Borrower's
fiscal year, unaudited interim financial statements of Borrower
and its Subsidiaries as of the end of such month and of the
portion of Borrower's fiscal year then elapsed, on a consolidated
and consolidating basis, certified by the principal financial
officer of Borrower as prepared in accordance with GAAP and
fairly presenting the consolidated financial position and results
of operations of Borrower and its Subsidiaries for such month and
period subject only to changes from audit and year-end
adjustments and except that such statements need not contain
notes;
Projections, Etc. Such business projections, Availability
projections, business plans, budgets and cash flow statements for
Borrower and its Subsidiaries as Lender shall request from time
to time;
Shareholder Reports, Etc. Promptly after the sending or filing
thereof, as the case may be, copies of any proxy statements,
financial statements or reports which Borrower or any Affiliate
of Borrower has made available to its shareholders and copies of
any regular, periodic and special reports or registration
statements which Borrower or any Affiliate of Borrower files with
the Securities and Exchange Commission or any governmental
authority which may be substituted therefor, or any national
securities exchange;
ERISA Reports. Upon request by Lender, copies of any annual
report to be filed pursuant to the requirements of ERISA in
connection with each plan subject thereto; and
Other Information. Such other data and information (financial
and otherwise) as Lender, from time to time, may reasonably
request, bearing upon or related to the Collateral or Borrower's
and each of its Subsidiary's financial condition or results of
operations.
Litigation Cooperation. Should any third-party suit or
proceeding be instituted by or against Lender with respect to any
Collateral or in any manner relating to Borrower, Borrower shall,
without expense to Lender, make available Borrower and its
officers, employees and agents, and Borrower's books and records,
without charge, to the extent that Lender may deem them
reasonably necessary in order to prosecute or defend any such
suit or proceeding.
Maintenance of Collateral, Etc. Borrower will maintain all of
its Equipment in good working condition, ordinary wear and tear
excepted, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Lender in
writing of any material loss or damage to the Collateral and of
any investigation, action, suit, proceeding or claim relating to
the Collateral or which may result in an adverse impact upon
Borrower's business, assets or financial condition.
Notification of Changes. Borrower will promptly notify Lender in
writing of any change in its officers or directors, the opening
of any new bank account or other deposit account, or any material
adverse change in the business or financial affairs of Borrower
or the existence of any circumstance which would make any
representation or warranty of Borrower untrue in any material
respect or constitute a material breach of any covenant of
Borrower.
Further Assurances. Borrower agrees, at its expense, to take all
actions, and execute or cause to be executed and delivered to
Lender all promissory notes, security agreements, agreements with
landlords, mortgagees and processors and other bailees,
subordination and intercreditor agreements and other agreements,
instruments and documents as Lender may request from time to
time, to perfect and maintain Lender's security interests in the
Collateral and to fully effectuate the transactions contemplated
by this Agreement.
Negative Covenants. Except as set forth in Section 13 of
Schedule A, Borrower will not, without Lender's prior written
consent, (i) merge or consolidate with another Person, form any
new Subsidiary or acquire any interest in any Person; (ii)
acquire any assets except in the ordinary course of business and
as otherwise permitted by this Agreement and the other Loan
Documents; (iii) enter into any transaction outside the ordinary
course of business; (iv) sell or transfer any Collateral or other
assets, except that Borrower may sell finished goods Inventory in
the ordinary course of its business, and Borrower may transfer
certain of its assets located in Sterling Heights, Michigan to
ACC so long as no Event of Default exists and ACC executes such
documents as Lender requests to insure Lender has a first
priority lien on the assets of ACC; (v) make any loans to, or
investments in, any Affiliate or other Person in the form of
money or other assets, except that provided no Event of Default
exists, Borrower may make loans to any Affiliate or subsidiary of
Borrower, provided, that the aggregate outstanding principal
amount of such loans outstanding at any one time shall not exceed
$1,000,000; (vi) incur any debt outside the ordinary course of
business; (vii) guaranty or otherwise become liable with respect
to the obligations of another party or entity, except that
Borrower shall be permitted to guaranty the obligations of its
subsidiary, Raybestos U.K., Ltd. arising under or relating to
such subsidiary's lease of real property; (viii) pay or declare
any dividends or other distributions on Borrower's stock, if
Borrower is a corporation (except for dividends payable solely in
capital stock of Borrower) or with respect to any equity
interests, if Borrower is not a corporation; (ix) redeem, retire,
purchase or otherwise acquire, directly or indirectly, any of
Borrower's capital stock or other equity interests; (x) make any
change in Borrower's capital structure, provided no Event of
Default then exists, Borrower may sell, assign or otherwise
transfer not more than 30% of its issued and outstanding capital
stock, provided, that after giving effect to any such sale,
assignment or transfer, the controlling ownership of Borrower
remains unchanged; (xi) dissolve or elect to dissolve; (xii) pay
any principal or interest on any indebtedness owing to an
Affiliate, (xiii) enter into any transaction with an Affiliate
other than on arms-length terms, except that Borrower may sell
Inventory, at Borrower's cost, to its Affiliates and subsidiaries
as set forth on Schedule C attached hereto; or (xiv) agree to do
any of the foregoing.
Notwithstanding anything to the contrary contained herein,
Borrower shall be permitted to declare, make or pay a
distribution to Raytech Composites, Inc. or Raymark Industries,
Inc.; provided, that in each instance, Borrower provides Lender
with five business days prior written notice to the date of any
contemplated distribution or payment ("Distribution Date") and
that, as of the Distribution Date, (i) no Event of Default then
exists, (ii) Borrower has no payables which are past due for more
than one hundred twenty days after invoice date, and (iii) the
Availability, as determined by Lender is not less than
$1,000,000, after giving effect to any such contemplated
distribution or payment.
Intentionally Omitted.
RELEASE AND INDEMNITY.
Release. Borrower hereby releases Lender and its Affiliates and
their respective directors, officers, employees, attorneys and
agents and any other Person affiliated with or representing
Lender (the "Released Parties") from any and all liability
arising from acts or omissions under or pursuant to this
Agreement, whether based on errors of judgment or mistake of law
or fact, except for those arising from willful misconduct.
However, in no circumstance will any of the Released Parties be
liable for lost profits or other special or consequential
damages. Such release is made on the date hereof and remade upon
each request for a Loan or Credit Accommodation by Borrower.
Without limiting the foregoing:
Lender shall not be liable for (i) any shortage or discrepancy
in, damage to, or loss or destruction of, any goods, the sale or
other disposition of which gave rise to an Account; (ii) any
error, act, omission, or delay of any kind occurring in the
settlement, failure to settle, collection or failure to collect
any Account; (iii) settling any Account in good faith for less
than the full amount thereof; or (iv) any of Borrower's
obligations under any contract or agreement giving rise to an
Account; and
In connection with Credit Accommodations or any underlying
transaction, Lender shall not be responsible for the conformity
of any goods to the documents presented, the validity or
genuineness of any documents, delay, default or fraud by
Borrower, shippers and/or any other Person. Borrower agrees that
any action taken by Lender, if taken in good faith, or any action
taken by an issuer of any Credit Accommodation, under or in
connection with any Credit Accommodation, shall be binding on
Borrower and shall not create any resulting liability to Lender.
In furtherance thereof, Lender shall have the full right and
authority to clear and resolve any questions of non-compliance of
documents, to give any instructions as to acceptance or rejection
of any documents or goods, to execute for Borrower's account any
and all applications for steamship or airway guaranties,
indemnities or delivery orders, to grant any extensions of the
maturity of, time of payment for, or time of presentation of, any
drafts, acceptances or documents, and to agree to any amendments,
renewals, extensions, modifications, changes or cancellations of
any of the terms or conditions of any of the Credit
Accommodations or applications and other documentation pertaining
thereto.
Indemnity. Borrower hereby agrees to indemnify the Released
Parties and hold them harmless from and against any and all
claims, debts, liabilities, demands, obligations, actions, causes
of action, penalties, costs and expenses (including attorneys'
fees), of every nature, character and description, which the
Released Parties may sustain or incur based upon or arising out
of any of the transactions contemplated by this Agreement or the
other Loan Documents or any of the Obligations, including any
transactions or occurrences relating to the issuance of any
Credit Accommodation, the Collateral relating thereto, any drafts
thereunder and any errors or omissions relating thereto
(including any loss or claim due to any action or inaction taken
by the issuer of any Credit Accommodation) (and for this purpose
any charges to Lender by any issuer of Credit Accommodations
shall be conclusive as to their appropriateness and may be
charged to the Loan Account), or any other matter, cause or thing
whatsoever occurred, done, omitted or suffered to be done by
Lender relating to Borrower or the Obligations (except any such
amounts sustained or incurred as the result of the willful
misconduct of the Released Parties). Notwithstanding any
provision in this Agreement to the contrary, the indemnity
agreement set forth in this Section shall survive any termination
of this Agreement.
TERM.
Maturity Date. Lender's obligation to make Loans and to provide
Credit Accommodations under this Agreement shall initially
continue in effect until the Initial Maturity Date set forth in
Section 7 of Schedule A (the "Initial Term"); provided, that such
date shall automatically be extended (the Initial Maturity Date,
as it may be so extended, being referred to as the "Maturity
Date") for successive additional terms of three years each (each
a "Renewal Term"), unless one party gives written notice to the
other, not less than sixty days prior to the Maturity Date, that
such party elects not to extend the Maturity Date. This
Agreement and the other Loan Documents and Lender's security
interests in and Liens upon the Collateral, and all
representations, warranties and covenants of Borrower contained
herein and therein, shall remain in full force and effect after
the Maturity Date until all of the monetary Obligations are
indefeasibly paid in full.
Early Termination. Lender's obligation to make Loans and to
provide Credit Accommodations under this Agreement may be
terminated prior to the Maturity Date as follows: (i) by
Borrower, effective thirty business days after written notice of
termination is given to Lender or (ii) by Lender at any time
after the occurrence of an Event of Default, without notice,
effective immediately; provided, that if any Affiliate of
Borrower is also a party to a financing arrangement with Lender,
no such early termination shall be effective unless such
Affiliate simultaneously terminates its financing arrangement
with Lender.
Payment of Obligations. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay in full all
Obligations, whether or not all or any part of such Obligations
are otherwise then due and payable. Without limiting the
generality of the foregoing, if, on the Maturity Date or on any
earlier effective date of termination, there are any outstanding
Credit Accommodations, then on such date Borrower shall provide
to Lender cash collateral in an amount equal to 110% of the
Credit Accommodation Balance to secure all of the Obligations
(including estimated attorneys' fees and other expenses) relating
to said Credit Accommodations or such greater percentage or
amount as Lender reasonably deems appropriate, pursuant to a cash
pledge agreement in form and substance satisfactory to Lender.
Effect of Termination. No termination shall affect or impair any
right or remedy of Lender or relieve Borrower of any of the
Obligations until all of the monetary Obligations have been
indefeasibly paid in full. Upon indefeasible payment and
performance in full of all of the monetary Obligations (and the
provision of cash collateral with respect to any Credit
Accommodation Balance as required by Section 7.3) and termination
of this Agreement, Lender shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other
documents as may be reasonably required to terminate Lender's
security interests in the Collateral.
EVENTS OF DEFAULT AND REMEDIES.
Events of Default. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and
Borrower shall give Lender immediate written notice thereof: (i)
if any warranty, representation, statement, report or certificate
made or delivered to Lender by Borrower or any of Borrower's
officers, employees or agents is untrue or misleading; (ii) if
Borrower fails to pay when due any principal or interest on any
Loan or any other monetary Obligation; (iii) if Borrower breaches
any covenant or obligation contained in this Agreement or any
other Loan Document or fails to perform any other non-monetary
Obligation; (iv) if any levy, assessment, attachment, seizure,
lien or encumbrance (other than a Permitted Lien) is made or
permitted to exist on all or any part of the Collateral; (v) if
one or more judgments aggregating in excess of $100,000, or any
injunction or attachment, is obtained against Borrower or any
Obligor which remains unstayed for more than ten days or is
enforced; (vi) the occurrence of any default under any financing
agreement, security agreement or other agreement, instrument or
document executed and delivered by (A) Borrower with, or in favor
of, any Person other than Lender or (B) Borrower or any Affiliate
of Borrower with, or in favor of, Lender or any Affiliate of
Lender; (vii) the dissolution, death, termination of existence in
good standing, insolvency or business failure or suspension or
cessation of business as usual of Borrower or any Obligor (or of
any general partner of Borrower or any Obligor if it is a
partnership) or the appointment of a receiver, trustee or
custodian for all or any part of the property of, or an
assignment for the benefit of creditors by Borrower or any
Obligor, or the commencement of any proceeding by Borrower or any
Obligor under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law
or statute of any jurisdiction, now or in the future in effect,
or if Borrower makes or sends a notice of a bulk transfer or
calls a meeting of its creditors; (viii) the commencement of any
proceeding against Borrower or any Obligor under any
reorganization, bankruptcy, insolvency, arrangement, readjustment
of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect; (ix) the actual or
attempted revocation or termination of, or limitation or denial
of liability upon, any guaranty of the Obligations, or any
security document securing the Obligations, by any Obligor; (x)
if Borrower makes any payment on account of any indebtedness or
obligation which has been subordinated to the Obligations other
than as permitted in the applicable subordination agreement, or
if any Person who has subordinated such indebtedness or
obligations attempts to limit or terminate its subordination
agreement; (xi) if there is any actual or threatened indictment
of Borrower or any Obligor under any criminal statute or
commencement or threatened commencement of criminal or civil
proceedings against Borrower or any Obligor, pursuant to which
the potential penalties or remedies sought or available include
forfeiture of any property of Borrower or such Obligor; (xii) if
there is a change in the record or beneficial ownership of an
aggregate of more than 20% of the outstanding shares of stock of
Borrower (or partnership or membership interests if it is a
partnership or limited liability company), in one or more
transactions, compared to the ownership of outstanding shares of
stock (or partnership or membership interests) of Borrower as of
the date hereof, without the prior written consent of Lender;
(xiii) if there is any change in the chief executive officer,
chief operating officer or chief financial officer of Borrower;
(xiv) if an Event of Default occurs under any Loan and Security
Agreement between Lender and an Affiliate of Borrower; or (xv) if
Lender determines in good faith that the Collateral is
insufficient to fully secure the Obligations or that the prospect
of payment of performance of the Obligations is impaired.
Remedies. Upon the occurrence of any Default, and at any time
thereafter, Lender, at its option, may cease making Loans or
otherwise extending credit to Borrower under this Agreement or
any other Loan Document. Upon the occurrence of any Event of
Default, and at any time thereafter, Lender, at its option, and
without notice or demand of any kind (all of which are hereby
expressly waived by Borrower), may do any one or more of the
following: (i) cease making Loans or otherwise extending credit
to Borrower under this Agreement or any other Loan Document; (ii)
accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any
deferred or installment payments allowed by any instrument
evidencing or relating to any of the Obligations; (iii) take
possession of any or all of the Collateral wherever it may be
found, and for that purpose Borrower hereby authorizes Lender,
without judicial process, to enter onto any of Borrower's
premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain (or
cause a custodian to remain) on the premises in exclusive control
thereof, without charge for so long as Lender deems it reasonably
necessary in order to complete the enforcement of its rights
under this Agreement or any other agreement; provided, that if
Lender seeks to take possession of any of the Collateral by court
process, Borrower hereby irrevocably waives (A) any bond and any
surety or security relating thereto required by law as an
incident to such possession, (B) any demand for possession prior
to the commencement of any suit or action to recover possession
thereof and (C) any requirement that Lender retain possession of,
and not dispose of, any such Collateral until after trial or
final judgment; (iv) require Borrower to assemble any or all of
the Collateral and make it available to Lender at one or more
places designated by Lender which are reasonably convenient to
Lender and Borrower, and to remove the Collateral to such
locations as Lender may deem advisable; (v) complete the
processing, manufacturing or repair of any Collateral prior to a
disposition thereof and, for such purpose and for the purpose of
removal, Lender shall have the right to use Borrower's premises,
vehicles and other Equipment and all other property without
charge; (vi) sell, lease or otherwise dispose of any of the
Collateral, in its condition at the time Lender obtains
possession of it or after further manufacturing, processing or
repair, at one or more public or private sales, in lots or in
bulk, for cash, exchange or other property, or on credit (a
"Sale"), and to adjourn any such Sale from time to time without
notice other than oral announcement at the time scheduled for
Sale (and, in connection therewith, (A) Lender shall have the
right to conduct such Sale on Borrower's premises without charge,
for such times as Lender deems reasonable, on Lender's premises,
or elsewhere, and the Collateral need not be located at the place
of Sale; (B) Lender may directly or through any of its Affiliates
purchase or lease any of the Collateral at any such public
disposition, and if permissible under applicable law, at any
private disposition and (C) any Sale of Collateral shall not
relieve Borrower of any liability Borrower may have if any
Collateral is defective as to title, physical condition or
otherwise at the time of sale); (vii) demand payment of and
collect any Accounts, Chattel Paper, Instruments and General
Intangibles included in the Collateral and, in connection
therewith, Borrower irrevocably authorizes Lender to endorse or
sign Borrower's name on all collections, receipts, Instruments
and other documents, to take possession of and open mail
addressed to Borrower and remove therefrom payments made with
respect to any item of Collateral or proceeds thereof and, in
Lender's sole discretion, to grant extensions of time to pay,
compromise claims and settle Accounts, General Intangibles and
the like for less than face value; and (viii) demand and receive
possession of any of Borrower's federal and state income tax
returns and the books and records utilized in the preparation
thereof or relating thereto. In addition to the foregoing
remedies, upon the occurrence of any Event of Default resulting
from a breach of any of the financial covenants set forth in
Section 5.19, Lender may, at its option, upon not less than ten
days' prior notice to Borrower, reduce any or all of the Advance
Rates set forth in Section 1(b) of Schedule A to the extent
Lender, in its sole discretion, deems appropriate. In addition
to the rights and remedies set forth above, Lender shall have all
the other rights and remedies accorded a secured party after
default under the UCC and under all other applicable laws, and
under any other Loan Document, and all of such rights and
remedies are cumulative and non-exclusive. Exercise or partial
exercise by Lender of one or more of its rights or remedies shall
not be deemed an election or bar Lender from subsequent exercise
or partial exercise of any other rights or remedies. The failure
or delay of Lender to exercise any rights or remedies shall not
operate as a waiver thereof, but all rights and remedies shall
continue in full force and effect until all of the Obligations
have been fully paid and performed. If notice of any sale or
other disposition of Collateral is required by law, notice at
least seven days prior to the sale designating the time and place
of sale in the case of a public sale or the time after which any
private sale or other disposition is to be made shall be deemed
to be reasonable notice, and Borrower waives any other notice.
If any Collateral is sold or leased by Lender on credit terms or
for future delivery, the Obligations shall not be reduced as a
result thereof until payment is collected by Lender.
Application of Proceeds. Subject to any application required by
law, all proceeds realized as the result of any Sale shall be
applied by Lender to the Obligations in such order as Lender
shall determine in its sole discretion. Any surplus shall be
paid to Borrower or other persons legally entitled thereto; but
Borrower shall remain liable to Lender for any deficiency. If
Lender, in its sole discretion, directly or indirectly enters
into a deferred payment or other credit transaction with any
purchaser at any Sale, Lender shall have the option, exercisable
at any time, in its sole discretion, of either reducing the
Obligations by the principal amount of the purchase price or
deferring the reduction of the Obligations until the actual
receipt by Lender of the cash therefor.
GENERAL PROVISIONS.
Notices. All notices to be given under this Agreement shall be
in writing and shall be given either personally, by reputable
private delivery service, by regular first-class mail or
certified mail return receipt requested, addressed to Lender or
Borrower at the address shown in the heading to this Agreement,
or by facsimile to the facsimile number shown in Section 9(i) of
Schedule A, or at any other address (or to any other facsimile
number) designated in writing by one party to the other party in
the manner prescribed in this Section 9.1. All notices shall be
deemed to have been given when received or when delivery is
refused by the recipient.
Severability. If any provision of this Agreement, or the
application thereof to any party or circumstance, is held to be
void or unenforceable by any court of competent jurisdiction,
such defect shall not affect the remainder of this Agreement,
which shall continue in full force and effect.
Integration. This Agreement and the other Loan Documents
represent the final, entire and complete agreement between
Borrower and Lender and supersede all prior and contemporaneous
negotiations, oral representations and agreements, all of which
are merged and integrated into this Agreement. THERE ARE NO ORAL
UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES
WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS.
Waivers. The failure of Lender at any time or times to require
Borrower to strictly comply with any of the provisions of this
Agreement or any other Loan Documents shall not waive or diminish
any right of Lender later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect
any other default, whether prior or subsequent, and whether or
not similar. None of the provisions of this Agreement or any
other Loan Document shall be deemed to have been waived by any
act or knowledge of Lender or its agents or employees, but only
by a specific written waiver signed by an authorized officer of
Lender and delivered to Borrower. Borrower waives demand,
protest, notice of protest and notice of default or dishonor,
notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper,
Instrument, Account, General Intangible, Document, Chattel Paper,
Investment Property or guaranty at any time held by Lender on
which Borrower is or may in any way be liable, and notice of any
action taken by Lender, unless expressly required by this
Agreement, and notice of acceptance hereof.
Amendment. The terms and provisions of this Agreement may not be
amended or modified except in a writing executed by Borrower and
a duly authorized officer of Lender.
Time of Essence. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement and
the other Loan Documents.
Attorneys Fees and Costs. Borrower shall reimburse Lender for
all reasonable attorneys' and paralegals' fees (including
in-house attorneys and paralegals employed by Lender) and all
filing, recording, search, title insurance, appraisal, audit, and
other costs incurred by Lender, pursuant to, in connection with,
or relating to this Agreement, including all reasonable
attorneys' fees and costs Lender incurs to prepare and negotiate
this Agreement and the other Loan Documents; to obtain legal
advice in connection with this Agreement and the other Loan
Documents or Borrower or any Obligor; to administer this
Agreement and the other Loan Documents (including the cost of
periodic financing statement, tax lien and other searches
conducted by Lender); to enforce, or seek to enforce, any of its
rights; prosecute actions against, or defend actions by, Account
Debtors; to commence, intervene in, or defend any action or
proceeding; to enforce and protect, or to seek to enforce and
protect, any of its rights and interests in any bankruptcy case
of Borrower, including, without limitation, by initiating and
prosecuting any motion for relief from the automatic stay and by
initiating, prosecuting or defending any other contested matter
or adversary proceeding in bankruptcy; to file or prosecute any
probate claim, bankruptcy claim, third-party claim, or other
claim; to examine, audit, copy, and inspect any of the Collateral
or any of Borrower's books and records; to protect, obtain
possession of, lease, dispose of, or otherwise enforce Lender's
security interests in, the Collateral; and to otherwise represent
Lender in any litigation relating to Borrower. If either Lender
or Borrower files any lawsuit against the other predicated on a
breach of this Agreement, the prevailing party in such action
shall be entitled to recover its reasonable costs and attorneys'
fees, including reasonable attorneys' fees and costs incurred in
the enforcement of, execution upon or defense of any order,
decree, award or judgment. All attorneys' fees and costs to
which Lender may be entitled pursuant to this Section shall
immediately become part of the Obligations, shall be due on
demand, and shall bear interest at a rate equal to the highest
interest rate applicable to any of the Obligations.
Benefit of Agreement; Assignability. The provisions of this
Agreement shall be binding upon and inure to the benefit of the
respective successors, assigns, heirs, beneficiaries and
representatives of Borrower and Lender; provided, that Borrower
may not assign or transfer any of its rights under this Agreement
without the prior written consent of Lender, and any prohibited
assignment shall be void. No consent by Lender to any assignment
shall release Borrower from its liability for any of the
Obligations.
Headings; Construction. Section and subsection headings are used
in this Agreement only for convenience. Borrower and Lender
acknowledge that the headings may not describe completely the
subject matter of the applicable Sections or subsections, and the
headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement.
This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision
of this Agreement shall be construed strictly against Lender or
Borrower under any rule of construction or otherwise.
GOVERNING LAW; CONSENT TO FORUM, ETC. THIS AGREEMENT HAS BEEN
NEGOTIATED, EXECUTED AND DELIVERED, AND SHALL BE DEEMED TO HAVE
BEEN MADE, IN NEW YORK, NEW YORK, AND SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF SUCH STATE. BORROWER
HEREBY CONSENTS AND AGREES THAT THE STATE AND FEDERAL COURTS IN
NEW YORK, NEW YORK OR THE STATE IN WHICH ANY OF THE COLLATERAL IS
LOCATED SHALL HAVE NON-EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER
PERTAINING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENTS OR ANY
MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE OTHER
LOAN DOCUMENTS. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS. BORROWER ALSO AGREES THAT ANY CLAIM OR DISPUTE
BROUGHT BY BORROWER AGAINST LENDER PURSUANT TO THIS AGREEMENT,
ANY OTHER LOAN DOCUMENT OR ANY MATTER ARISING OUT OF THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT EXCLUSIVELY
IN THE STATE AND FEDERAL COURTS OF NEW YORK. BORROWER HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE
OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE IN THE
MANNER AND SHALL BE DEEMED RECEIVED AS SET FORTH IN SECTION 9.1
FOR NOTICES, TO THE EXTENT PERMITTED BY LAW. NOTHING IN THIS
AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF
LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR
ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER
THIS AGREEMENT TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE FORUM
OR JURISDICTION.
WAIVER OF JURY TRIAL, ETC. BORROWER WAIVES (i) THE RIGHT TO
TRIAL BY JURY (WHICH LENDER ALSO WAIVES) IN ANY ACTION, SUIT,
PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED
TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL
OR ANY CONDUCT, ACTS OR OMISSIONS OF LENDER OR BORROWER OR ANY OF
THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS OR
AGENTS OR ANY OTHER PERSONS AFFILIATED WITH LENDER OR BORROWER,
WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE; (ii) THE RIGHT
TO INTERPOSE ANY CLAIMS, DEDUCTIONS, SETOFFS OR COUNTERCLAIMS OF
ANY KIND IN ANY ACTION OR PROCEEDING INSTITUTED BY LENDER WITH
RESPECT TO THE LOAN DOCUMENTS OR ANY MATTER RELATING THERETO,
EXCEPT FOR COMPULSORY COUNTERCLAIMS; (iii) NOTICE PRIOR TO
LENDER'S TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY
BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO
ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES AND (iv) THE
BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS.
BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL
INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT
LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE
DEALINGS WITH BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT
HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS
KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION,
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY
THE COURT.
IN WITNESS WHEREOF, Borrower and Lender have signed this
Agreement as of the date set forth in the heading.
Borrower:
RAYBESTOS PRODUCTS COMPANY
By
Its
Lender:
NationsCredit Commercial Corporation, through its NationsCredit
Commercial Funding Division
By
Its Authorized Signatory
Schedule A
Description of Certain Terms
This Schedule is an integral part of the Loan and Security
Agreement between RAYBESTOS PRODUCTS COMPANY and NATIONSCREDIT
COMMERCIAL CORPORATION, THROUGH ITS NATIONSCREDIT COMMERCIAL
FUNDING DIVISION (the "Agreement").
Loan Limits for Revolving Loans:
Maximum Facility Amount:
$17,000,000
Advance Rates:
Accounts Advance Rate:
85%; provided, that if the Dilution Percentage exceeds 2%, such
advance rate will be reduced by the number of full or partial
percentage points of such excess
Inventory Advance Rate(s):
Finished goods:
50%
Raw materials:
50%
Accounts Sublimits:
Sublimit on advances against Eligible Accounts described in
clause (vii)(C) of the definition of Eligible Accounts:
$500,000
Inventory Sublimit(s):
Overall sublimit on advances against Eligible Inventory:
$5,000,000 or, if less, the aggregate advances against Accounts
at any time of determination
Credit Accommodation Limit:
$0
Loan Limits for Term Loan:
Principal Amount:
Equipment Advance
The lesser of $7,000,000 and 115% of the appraised auction sale
value of Borrower's Eligible Equipment
Repayment Schedule:
Equipment Advance:
The Equipment Advance shall be repaid in equal consecutive
monthly installments amortized over 72 months payable on the
first day of each calendar month commencing January 1, 1998, with
the entire unpaid balance due and payable on the Maturity Date
Interest Rates:
Revolving Loans:
0.50% per annum in excess of the Prime Rate
Term Loan:
0.50% per annum in excess of the Prime Rate
Intentionally Omitted
Maximum Days:
Maximum days after original invoice date for Eligible Accounts:
90
Maximum days after original invoice due date for Eligible
Accounts:
Not applicable
Fees:
Closing Fee:
$65,000
Facility Fee:
Initial Term:
$85,000
Renewal Term(s):
$85,000
Intentionally Omitted
Intentionally Omitted
Intentionally Omitted
Intentionally Omitted
Intentionally Omitted
Intentionally Omitted
Fees for letters of credit and other Credit Accommodations (or
guaranties thereof by Lender):
Not applicable
Initial Maturity Date:
November 21, 2002
Intentionally Omitted
Borrower Information:
Prior Names of Borrower:
Raybestos Industrial Products Company
Prior Trade Names of Borrower:
None
Existing Trade Names of Borrower:
"Raybestos"
Inventory Locations:
Attached as Exhibit A9(d)
Other Locations:
Attached as Exhibit A9(e)
Litigation:
Attached as Exhibit A9(f)
Ownership of Borrower:
Raytech Composites, Inc. - 100%
Subsidiaries (and ownership thereof):
Raybestos U.K. Limited (England)
Facsimile Numbers:
Borrower:
(203) 925-8088
Lender:
(212) 597-1666
Description of Real Property:
Attached as Exhibit A10
Lender's Bank:
Marine Midland Bank N.A. (Buffalo, New York)
Other Covenants:
None
Exceptions to Negative Covenants:
None
IN WITNESS WHEREOF, Borrower and Lender have signed this Schedule
A as of the date set forth in the heading to the Agreement.
Borrower:
Raybestos Products Company
By
Its
Lender:
NationsCredit Commercial Corporation, through its NationsCredit
Commercial Funding Division
By
Its Authorized Signatory
Schedule B
Definitions
This Schedule is an integral part of the Loan and Security
Agreement between RAYBESTOS PRODUCTS COMPANY and NATIONSCREDIT
COMMERCIAL CORPORATION, THROUGH ITS NATIONSCREDIT COMMERCIAL
FUNDING DIVISION (the "Agreement").
As used in the Agreement, the following terms have the following
meanings:
"ACC" means Automotive Composite Company, a Delaware corporation
and an Affiliate of Borrower.
"Account" means any right to payment for Goods sold or leased or
for services rendered which is not evidenced by an Instrument or
Chattel Paper, whether or not it has been earned by performance.
"Account Debtor" means the obligor on an Account or Chattel
Paper.
"Account Proceeds" has the meaning set forth in Section 4.1.
"Affiliate" means, with respect to any Person, a relative,
partner, shareholder, member, manager, director, officer, or
employee of such Person, any parent or subsidiary of such Person,
or any Person controlling, controlled by or under common control
with such Person or any other Person affiliated, directly or
indirectly, by virtue of family membership, ownership, management
or otherwise.
"Agreement" and "this Agreement" mean the Loan and Security
Agreement of which this Schedule B is a part and the Schedules
thereto.
"Availability" has the meaning set forth in Section 1.1(a)
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. Sec. 101 et seq.).
"Blocked Account" has the meaning set forth in Section 4.1.
"Borrower" has the meaning set forth in the heading to the
Agreement.
"Borrower's Address" has the meaning set forth in the heading to
the Agreement.
"Business Day" means a day other than a Saturday or Sunday or any
other day on which Lender or banks in New York are authorized to
close.
"Chattel Paper" has the meaning set forth in the UCC.
"Collateral" means all property and interests in property in or
upon which a security interest or other Lien is granted pursuant
to this Agreement or the other Loan Documents.
"Credit Accommodation" has the meaning set forth in Section
1.1(a).
"Credit Accommodation Balance" means the sum of (i) the aggregate
undrawn face amount of all outstanding Credit Accommodations and
(ii) all interest, fees and costs due or, in Lender's estimation,
likely to become due in connection therewith.
"Default" means any event which with notice or passage of time,
or both, would constitute an Event of Default.
"Default Rate" has the meaning set forth in Section 2.1.
"Deposit Account" has the meaning set forth in the UCC.
"Dilution Percentage" means the gross amount of all returns,
allowances, discounts, credits, write-offs and similar items
relating to Borrower's Accounts computed as a percentage of
Borrower's gross sales, calculated on a ninety day rolling
average.
"Document" has the meaning set forth in the UCC.
"Early Termination Fee" has the meaning set forth in Section 7.2.
"Eligible Account" means, at any time of determination, an
Account which satisfies the general criteria set forth below and
which is otherwise acceptable to Lender (provided, that Lender
may, in its sole discretion, on fifteen days' prior written
notice to Borrower, change the general criteria for acceptability
of Eligible Accounts upon at least fifteen days' prior notice to
Borrower). An Account shall be deemed to meet the current
general criteria if (i) neither the Account Debtor nor any of its
Affiliates is an Affiliate, creditor or supplier of Borrower;
(ii) it does not remain unpaid more than the earlier to occur of
(A) the number of days after the original invoice date set forth
in Section 5(a) of Schedule A or (B) the number of days after the
original invoice due date set forth in Section 5(b) of Schedule
A; (iii) the Account Debtor or its Affiliates are not past due on
other Accounts owing to Borrower comprising more than 50% of all
of the Accounts owing to Borrower by such Account Debtor or its
Affiliates; (iv) all Accounts owing by the Account Debtor (other
than Caterpillar, Inc. or its Affiliates) or its Affiliates do
not represent more than 20% of all otherwise Eligible Accounts
and if the Account Debtor is Caterpillar, Inc. or its Affiliates,
all Accounts owing by Caterpillar, Inc. or its Affiliates do not
represent more than 35% of all otherwise Eligible Accounts
(provided, that Accounts which are deemed to be ineligible solely
by reason of this clause (iv) shall be considered Eligible
Accounts to the extent of the amount thereof which does not
exceed the respective percentages set forth above of all
otherwise Eligible Accounts); (v) no covenant, representation or
warranty contained in this Agreement with respect to such Account
(including any of the representations set forth in Section 5.4)
has been breached; (vi) the Account is not subject to any contra
relationship, counterclaim, dispute or set-off (provided, that
Accounts which are deemed to be ineligible solely by reason of
this clause (vi) shall be considered Eligible Accounts to the
extent of the amount thereof which is not affected by such contra
relationships, counterclaims, disputes or set-offs); (vii) the
Account Debtor's chief executive office or principal place of
business is located in the United States or Provinces of Canada
which have adopted the Personal Property Security Act or a
similar act, unless (A) the sale is fully backed by a letter of
credit, guaranty or acceptance acceptable to Lender in its sole
discretion, and if backed by a letter of credit, such letter of
credit has been issued or confirmed by a bank satisfactory to
Lender, is sufficient to cover such Account, and if required by
Lender, the original of such letter of credit has been delivered
to Lender or Lender's agent and the issuer thereof notified of
the assignment of the proceeds of such letter of credit to
Lender, (B) such Account is subject to credit insurance payable
to Lender issued by an insurer and on terms and in an amount
acceptable to Lender or (C) such Account Debtor's chief executive
office or principal place of business is located outside the
United States but such Account Debtor is an Affiliate of another
Account Debtor of Borrower whose chief executive office or
principal place of business is located in the United States;
(viii) it is absolutely owing to Borrower and does not arise from
a sale on a bill-and-hold, guarantied sale, sale-or-return,
sale-on-approval, consignment, retainage or any other repurchase
or return basis or consist of progress billings; (ix) Lender
shall have verified the Account in a manner satisfactory to
Lender; (x) the Account Debtor is not the United States of
America or any state or political subdivision (or any department,
agency or instrumentality thereof), unless Borrower has complied
with the Assignment of Claims Act of 1940 (31 U.S.C. Sec. 203 et
seq.) or other applicable similar state or local law in a manner
satisfactory to Lender; (xi) it is at all times subject to
Lender's duly perfected, first priority security interest and to
no other Lien that is not a Permitted Lien, and the goods giving
rise to such Account (A) were not, at the time of sale, subject
to any Lien except Permitted Liens and (B) have been delivered to
and accepted by the Account Debtor, or the services giving rise
to such Account have been performed by Borrower and accepted by
the Account Debtor; (xii) the Account is not evidenced by Chattel
Paper or an Instrument of any kind and has not been reduced to
judgment; (xiii) the Account Debtor's total indebtedness to
Borrower does not exceed the amount of any credit limit
established by Borrower or Lender and the Account Debtor is
otherwise deemed to be creditworthy by Lender (provided, that
Accounts which are deemed to be ineligible solely by reason of
this clause (xiii) shall be considered Eligible Accounts to the
extent the amount of such Accounts does not exceed the lower of
such credit limits); (xiv) there are no facts or circumstances
existing, or which could reasonably be anticipated to occur,
which might result in any adverse change in the Account Debtor's
financial condition or impair or delay the collectibility of all
or any portion of such Account; (xv) Lender has been furnished
with all documents and other information pertaining to such
Account which Lender has requested, or which Borrower is
obligated to deliver to Lender, pursuant to this Agreement; (xvi)
Borrower has not made an agreement with the Account Debtor to
extend the time of payment thereof beyond the time periods set
forth in clause (ii) above; and (xvii) Borrower has not posted a
surety or other bond in respect of the contract under which such
Account arose.
"Eligible Equipment" means, at any time of determination,
Equipment owned by Borrower which Lender, in its sole discretion,
deems to be eligible for borrowing purposes.
"Eligible Inventory" means, at any time of determination,
Inventory (other than packaging materials and supplies) which
satisfies the general criteria set forth below and which is
otherwise acceptable to Lender (provided, that Lender may, in its
sole discretion, change the general criteria for acceptability of
Eligible Inventory upon at least fifteen days' prior written
notice to Borrower). Inventory shall be deemed to meet the
current general criteria if (i) it consists of raw materials or
finished goods; (ii) it is in good, new and saleable condition;
(iii) it is not slow-moving, obsolete, unmerchantable, returned
or repossessed; (iv) it is not in the possession of a processor,
consignee or bailee, or located on premises leased or subleased
to Borrower, or on premises subject to a mortgage in favor of a
Person other than Lender, unless such processor, consignee,
bailee or mortgagee or the lessor or sublessor of such premises,
as the case may be, has executed and delivered all documentation
which Lender shall require to evidence the subordination or other
limitation or extinguishment of such Person's rights with respect
to such Inventory and Lender's right to gain access thereto; (v)
it meets all standards imposed by any governmental agency or
authority; (vi) it conforms in all respects to any covenants,
warranties and representations set forth in the Agreement; (vii)
it is at all times subject to Lender's duly perfected, first
priority security interest and no other Lien except a Permitted
Lien; and (viii) it is situated at an Inventory Location listed
in Section 9(d) of Schedule A or other location of which Lender
has been notified as required by Section 5.6.
"Equipment" means all Goods which are used or bought for use
primarily in business (including farming or a profession) or by a
Person who is a non-profit organization or governmental
subdivision or agency and which are not Inventory, farm products
or consumer goods, including all machinery, molds, machine tools,
motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dies and jigs, and all
attachments, accessories, accessions, replacements,
substitutions, additions or improvements to, or spare parts for,
any of the foregoing.
"Equipment Advance" has the meaning set forth in Section 1.1(b).
"ERISA" means the Employee Retirement Income Security Act of 1974
and all rules, regulations and orders promulgated thereunder.
"Event of Default" has the meaning set forth in Section 8.1.
"GAAP" means generally accepted accounting principles as in
effect from time to time, consistently applied.
"General Intangibles" has the meaning set forth in the UCC, and
includes all books and records pertaining to the Collateral and
other business and financial records in the possession of
Borrower or any other Person, inventions, designs, drawings,
blueprints, patents, patent applications, trademarks, trademark
applications (other than "intent to use" applications until a
verified statement of use is filed with respect to such
applications) and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and
other deposits, causes of action and other rights in all
litigation presently or hereafter pending for any cause or claim
(whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, rights to purchase or sell real
or personal property, rights as a licensor or licensee of any
kind, royalties, telephone numbers, internet addresses,
proprietary information, purchase orders, and all insurance
policies and claims (including life insurance, key man insurance,
credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, letters of credit,
banker's acceptances and guaranties, computer programs, discs,
tapes and tape files in the possession of Borrower or any other
Person, claims under guaranties, security interests or other
security held by or granted or assigned to Borrower, all rights
to indemnification and all other intangible property of every
kind and nature.
"Goods" means all things which are movable at the time the
security interest attaches or which are fixtures (other than
money, Documents, Instruments, Investment Property, Accounts,
Chattel Paper, General Intangibles, or minerals or the like
(including oil and gas) before extraction), including standing
timber which is to be cut and removed under a conveyance or
contract for sale, the unborn young of animals, and growing
crops.
"Initial Term" has the meaning set forth in Section 7.1.
"Instrument" has the meaning set forth in the UCC.
"Inventory" means all Goods held for sale or lease or furnished
or to be furnished under contracts of service, including all raw
materials, work in process, finished goods, goods in transit and
materials and supplies which are or might be used or consumed in
a business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such Goods, and
all products of the foregoing, and shall include interests in
goods represented by Accounts, returned, reclaimed or repossessed
goods and rights as an unpaid vendor.
"Investment Property" shall mean all of Borrower's securities,
whether certificated or uncertificated, securities entitlements,
securities accounts, commodity contracts and commodity accounts.
"Lender" has the meaning set forth in the heading to the
Agreement.
"Lien" means any interest in property securing an obligation owed
to, or a claim by, a Person other than the owner of the property,
whether such interest is based on common law, statute or
contract, including rights of sellers under conditional sales
contracts or title retention agreements and reservations,
exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and
encumbrances affecting property. For the purpose of this
Agreement, Borrower shall be deemed to be the owner of any
property which it has acquired or holds subject to a conditional
sale agreement or other arrangement pursuant to which title to
the property has been retained by or vested in some other Person
for security purposes.
"Loan Account" has the meaning set forth in Section 2.4.
"Loan Documents" means the Agreement and all notes, guaranties,
security agreements, certificates, landlord's agreements, Lock
Box and Blocked Account agreements and all other agreements,
documents and instruments now or hereafter executed or delivered
by Borrower or any Obligor in connection with, or to evidence the
transactions contemplated by, this Agreement.
"Loan Limits" means, collectively, the Availability limits and
all other limits on the amount of Loans and Credit Accommodations
set forth in this Agreement.
"Loans" means, collectively, the Revolving Loans and any Term
Loan.
"Lock Box" has the meaning set forth in Section 4.1.
"Maturity Date" has the meaning set forth in Section 7.1.
"Obligations" means all present and future Loans, advances,
debts, liabilities, obligations, guaranties, covenants, duties
and indebtedness at any time owing by Borrower to Lender, whether
evidenced by this Agreement or any other Loan Document, whether
arising from an extension of credit, opening of a Credit
Accommodation, guaranty, indemnification or otherwise (including
all fees, costs and other amounts which may be owing to issuers
of Credit Accommodations and all taxes, duties, freight,
insurance, costs and other expenses, costs or amounts payable in
connection with Credit Accommodations or the underlying goods),
whether direct or indirect (including those acquired by
assignment and any participation by Lender in Borrower's
indebtedness owing to others), whether absolute or contingent,
whether due or to become due, and whether arising before or after
the commencement of a proceeding under the Bankruptcy Code or any
similar statute, including all interest, charges, expenses, fees,
attorney's fees, expert witness fees, audit fees, letter of
credit fees, Closing Fees, Facility Fees, Servicing Fees, Unused
Line Fees, Minimum Borrowing Fees, Success Fees, amounts owing
under Warrants, Credit Accommodation Fees and any other sums
chargeable to Borrower under this Agreement or under any other
Loan Document.
"Obligor" means any guarantor, endorser, acceptor, surety or
other person liable on, or with respect to, the Obligations or
who is the owner of any property which is security for the
Obligations, other than Borrower.
"Permitted Liens" means: (i) purchase money security interests
in specific items of Equipment disclosed to Lender prior to the
date hereof or acquired by Borrower after the date hereof; (ii)
leases of specific items of Equipment disclosed to Lender prior
to the date hereof or acquired by Borrower after the date hereof;
(iii) Liens for taxes not yet due and payable; (iv) additional
Liens which are fully subordinate to the security interests of
Lender and are consented to in writing by Lender; (v) security
interests being terminated concurrently with the execution of
this Agreement; (vi) Liens of materialmen, mechanics,
warehousemen or carriers arising in the ordinary course of
business and securing obligations which are not delinquent; (vii)
Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type
described in clause (i) or (ii) above; provided, that any
extension, renewal or replacement Lien is limited to the property
encumbered by the existing Lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not
increase; (viii) Liens in favor of customs and revenue
authorities which secure payment of customs duties in connection
with the importation of goods; and (ix) security deposits posted
in connection with real property leases or subleases. Lender will
have the right to require, as a condition to its consent under
clause (iv) above, that the holder of the additional Lien sign an
intercreditor agreement in form and substance satisfactory to
Lender, in its sole discretion, acknowledging that the Lien is
subordinate to the security interests of Lender, and agreeing not
to take any action to enforce its subordinate Lien so long as any
Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate Lien
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership,
joint venture, limited liability company, trust, unincorporated
organization, association, corporation, government or any agency
or political division thereof, or any other entity.
"Prime Rate" means, at any given time, the prime rate as quoted
in The Wall Street Journal as the base rate on corporate loans
posted as of such time by at least 75% of the nation's 30 largest
banks (which rate is not necessarily the lowest rate offered by
such banks).
"Real Property" means the real property described in Section 10
of Schedule A.
"Released Parties" has the meaning set forth in Section 6.1.
"Renewal Term" has the meaning set forth in Section 7.1.
"Reserves" has the meaning set forth in Section 1.2.
"Revolving Loans" has the meaning set forth in Section 1.1(a).
"Sale" has the meaning set forth in Section 8.2.
"Subsidiary" means any corporation or other entity of which a
Person owns, directly or indirectly, through one or more
intermediaries, more than 50% of the capital stock or other
equity interest at the time of determination.
"Term" means the period commencing on the date of this Agreement
and ending on the Maturity Date.
"Term Loan" has the meaning set forth in Section 1.1(b).
"UCC" means, at any given time, the Uniform Commercial Code as
adopted and in effect at such time in the State of New York.
All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in
accordance with GAAP. All other terms contained in this
Agreement, unless otherwise indicated, shall have the meanings
provided by the UCC, to the extent such terms are defined
therein. The term "including," whenever used in this Agreement,
shall mean "including but not limited to." The singular form of
any term shall include the plural form, and vice versa, when the
context so requires. References to Sections, subsections and
Schedules are to Sections and subsections of, and Schedules to,
this Agreement. All references to agreements and statutes shall
include all amendments thereto and successor statutes in the case
of statutes.
IN WITNESS WHEREOF, Borrower and Lender have signed this Schedule
B as of the date set forth in the heading to the Agreement.
Borrower:
RAYBESTOS PRODUCTS COMPANY
By
Its
Lender:
NationsCredit Commercial Corporation, through its NationsCredit
Commercial Funding Division
By
Its Authorized Signatory
Schedule C
Affiliates and Subsidiaries of Borrower
Raytech Corporation
Raytech Composites, Inc.
Raytech Powertrain, Inc.
Raytech Fasteners, Inc.
Allomatic Products Company
Raybestos Aftermarket Products Company
Raybestos U.K. Ltd.
Raytech Composites Europe GmbH
Raybestos Reibtechnick GmbH
Raybestos Industrie-Produkte GmbH
IN WITNESS WHEREOF, Borrower and Lender have signed this Schedule
C as of the date set forth in the heading to the Agreement.
Borrower:
Raybestos Products Company
By
Its
Lender:
NationsCredit Commercial Corporation, through its NationsCredit
Commercial Funding Division
By
Its Authorized Signatory
NationsCredit Commercial Funding Loan and Security
Agreement
5
NationsCredit Commercial Funding
# 95770.v07 3/2/98 3:38 PM 21W@07!.DOC 1 3284.032
A-2
B-8
C-1
Exhibit 22
Subsidiaries of Raytech Corporation Incorporated
AFM Management Company Michigan
44650 Merrill Road
Sterling Heights, MI 48314
Allomatic Products Company Delaware
609 E. Chaney
Sullivan, IN 47882
Automotive Composites Company Delaware
44650 Merrill Road
Sterling Heights, MI 48314
Raybestos Aftermarket Products Company Delaware
964 East Market Street
Crawfordsville, IN 47933
Raybestos Friction Products (Suzhou) Co., Ltd. China
Xiang Yang Road
215011 Suzhou, China
Raybestos Industrie-Produkte GmbH Germany
Industriestrasse, 7
D-54497 Morbach, Germany
Raybestos Products Company Delaware
1204 Darlington Avenue
Crawfordsville, IN 47933
Raybestos Reibtechnik GmbH Germany
Quettingerstrasse, 220
D-51381 Leverkusen 3, Germany
Raybestos U.K. Ltd. England
16, Spindus Road
Speke
Liverpool L24 1YA, England
Raytech Composites Europe GmbH Germany
Bahnstrasse 48-50
5608 Radevormwald, Germany
Raytech Composites, Inc. Delaware
Suite 512, One Corporate Drive
Shelton, CT 06484
Raytech Europe, Inc. Delaware
Suite 512, One Corporate Drive
Shelton, CT 06484
Raytech Powertrain, Inc. 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 an explanatory paragraph
related to the Company's ability to continue as a going concern,
dated March 9, 1998, on our audits of the consolidated financial
statements of Raytech Corporation and subsidiaries as of December 28,
1997 and December 29, 1996 and for each of the three fiscal years in
the period ended December 28, 1997, which report is included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<CIK> 0000797917
<NAME> RAYTECH CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<PERIOD-TYPE> 12-MOS
<EXCHANGE-RATE> 1
<CASH> 9,913
<SECURITIES> 0
<RECEIVABLES> 28,089
<ALLOWANCES> 1,186
<INVENTORY> 28,202
<CURRENT-ASSETS> 73,608
<PP&E> 143,131
<DEPRECIATION> 82,141
<TOTAL-ASSETS> 153,385
<CURRENT-LIABILITIES> 66,284
<BONDS> 0
<COMMON> 5,417
0
0
<OTHER-SE> 43,045
<TOTAL-LIABILITY-AND-EQUITY> 153,385
<SALES> 234,475
<TOTAL-REVENUES> 234,475
<CGS> 182,900
<TOTAL-COSTS> 182,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,345
<INCOME-PRETAX> 23,769
<INCOME-TAX> 6,900
<INCOME-CONTINUING> 15,538
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,538
<EPS-PRIMARY> 4.76
<EPS-DILUTED> 4.41
</TABLE>
