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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the Fiscal Year ended January 3, 1999, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Commission File Number 1-9298
RAYTECH CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-1182033
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Suite 295, Four 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 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
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. [ ]
As of March 19, 1999, 3,421,395 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 $9.8 million.
Documents incorporated by reference: None
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INDEX TO RAYTECH CORPORATION
1998 FORM 10-K
PART I.
Page
Item 1. Business
(a) General Development of Business .................. 4
(b) Financial Information About Industry Segments .... 6
(c) Narrative Description of Business ................ 7
Introduction ..................................... 7
Sales Methods .................................... 8
Raw Material Availability ........................ 8
Patents and Trademarks ........................... 8
Competition, Significant Customers and Backlog ... 9
Employees ........................................ 10
Capital Expenditures ............................. 10
Research and Development ......................... 10
Environmental Matters ............................ 10
(d) Financial Information About Foreign Operations ... 11
Item 2. Properties ............................................ 12
Item 3. Legal Proceedings ..................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ... 20
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ........................... 21
Item 6. Selected Financial Data ............................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 23
Item 8. Financial Statements and Supplementary Data ........... 40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures .................. 96<PAGE>
PART III.
Page
Item 10. Directors and Executive Officers of Registrant....... 97
Item 11. Executive Compensation .............................. 100
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................... 106
Item 13. Certain Relationships and Related Transactions ...... 107
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................. 107
(a)(1) List of Financial Statements ................ 107
(a)(2) List of Financial Statement Schedules ....... 107
(a)(3) Exhibits .................................... 107
(b) Reports on Form 8-K ......................... 107
(c) Index of Exhibits............................ 109
(d) Index to Consolidated Financial Statements
and Financial Statement Schedules
(reference) ................................. 111
Index to Consolidated Financial Statements .................... 112
Signatures .................................................... 113
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Item 1. Business
(a) General Development of Business.
Raytech Corporation ("Raytech" or the "Company") was
incorporated in June 1986 in Delaware as a subsidiary of Raymark
Corporation ("Raymark"). In October 1986, the Raymark
shareholders approved a triangular merger restructuring plan
resulting in Raytech becoming the publicly traded (NYSE) holding
company of Raymark with each share of the Raymark common stock
being automatically converted to a share of Raytech common stock,
plus a right to purchase a warrant for Raytech stock. The issued
warrants expired in October 1994. 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 under the doctrines of successor liability, piercing
the corporate veil and fraudulent conveyance.
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:
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
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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. 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 divestiture
thereof. These processes were the basis for determining the
purchase prices and divestiture.
Raytech's purchase of the Wet Clutch and Brake Division
and German subsidiary in 1987 from Raymark was financed through
borrowed funds from new lenders. Pursuant to these acquisitions,
Raymark agreed to indemnify Raytech for any future liabilities
and costs that may result from asbestos litigation. Management
believed that each purchase by Raytech from Raymark complied with
Raytech's restructuring plan principles of (i) paying fair market
value, (ii) acquiring businesses that did not give rise to any
asbestos-related or other claims against Raymark, (iii)
permitting Raymark to retain the proceeds for its ongoing
business and creditors, (iv) entering the transactions in good
faith and not to hinder, delay or defraud creditors, and (v)
conducting its affairs independent of Raymark.
In May 1988, following shareholder approval, Raytech
sold all of the Raymark stock to Asbestos Litigation Management,
Inc., thereby divesting itself of Raymark. Consideration
received from the Raymark stock consisted of $50 cash paid at the
closing and a 7-1/2% $950 promissory note paid in six equal
annual installments. 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 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 for bankruptcy was filed against Raymark,
and subsequently, a restrictive insurance funding order was
issued by an Illinois Court denying defense costs coverage and
another Raymark 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. (For a discussion regarding Raymark's insurance, refer to
Item 3. Legal Proceedings, third paragraph herein.)
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With the loss of defense from Raymark, the defense
of such lawsuits shifted directly to Raytech as it had no
insurance providing coverage for asbestos-related liabilities.
As a result of the above factors and in order to obtain a ruling
binding across all jurisdictions on whether Raytech is liable as
a successor for asbestos-related and other claims including
claims yet to be filed relating to the operations of Raymark or
Raymark's predecessors, in March 1989 Raytech filed a petition
seeking relief under Chapter 11 of Title 11, United States Code
in the United States Bankruptcy Court, District of Connecticut.
Under Chapter 11, substantially all litigation against Raytech
has been stayed while the debtor corporation and its non-filed
operating subsidiaries continue to operate their businesses in
the ordinary course under the same management and without
disruption to employees, customers or suppliers. The bankruptcy
proceedings have imposed little or no limitation to the
manufacturing and selling of products and other day-to-day
operations of the businesses.
In an asbestos-related personal injury case decided
in October 1988 in a U.S. District Court in Oregon, Raytech was
ruled under Oregon equity law to be a successor to Raymark's
asbestos-related liability. The successor ruling was appealed by
Raytech and in October 1992, the Ninth Circuit Court of Appeals
affirmed the District Court's judgment on the grounds stated in
the District Court's opinion. The effect of this decision
extends beyond the Oregon District due to a 1995 Third Circuit
Court of Appeals decision in a related case wherein Raytech was
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 a reorganization plan to control 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
1999 debt maturities, working capital and capital spending needs.
However, the outcome of these matters is uncertain and should
Raytech be held fully liable, there would be a material adverse
impact on Raytech as it does not have the resources needed to
fund Raymark's substantial uninsured asbestos-related liabilities
and environmental liabilities and related costs of litigation as
defined further in Item 3. Legal Proceedings.
(b) Financial Information About Industry Segments
The sales and operating income of Raytech on a
consolidated basis, and its identifiable assets for the fiscal
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years ended January 3, 1999, December 28, 1997, and December 29,
1996 are set forth herein on page 74.
(c) Narrative Description of Business
Introduction
Raytech Corporation and its subsidiaries manufacture
and distribute engineered products for heat resistant, inertia
control, energy absorption and transmission applications. The
Company's operations are categorized into three business
segments: wet friction, dry friction and aftermarket.
The wet friction operations produce specialty engineered
products for heat resistant, inertia control, energy
absorption and transmission applications used in an oil
immersed environment. The Company markets its products
to automobile and heavy duty original equipment
manufacturers ("OEM"), as well as to farm machinery,
mining, truck and bus manufacturers.
The dry friction operations produce engineered friction
products, primarily used in original equipment
automobile and truck transmissions. The clutch facings
produced by this segment are marketed to companies who
assemble the manual transmission systems used in
automobiles and trucks.
The aftermarket segment produces specialty engineered
products primarily for automobile and light truck
transmissions. In addition to these products, this
segment markets transmission filters and other
transmission related components. The focus of this
segment is marketing to warehouse distributors and
certain retail operations in the automotive aftermarket.
The percentage of net sales for each segment over the
past three years is as follows:
1998 1997 1996
Wet friction operations 63% 62% 59%
Dry friction operations 13% 15% 17%
Aftermarket operations 24% 23% 24%
Additional segment information is contained in the Management
Discussion and Analysis section and in Note K - Notes to
Consolidated Financial Statements.
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Sales Methods
The wet friction operations, predominantly a
domestic operation, serves the on-highway and off-highway
vehicular markets by sale of its products to OEM of heavy trucks,
buses, automobiles, construction and mining equipment and
agricultural machinery, and through distributors supplying
components and replacement parts for these vehicles. Sales to
certain vehicular markets in the wet friction operation are made
through a wholly-owned distributor.
The aftermarket, predominantly a domestic operation,
sells its products primarily to equipment distributors and in
certain instances directly to retail outlets.
The dry friction operation sells dry friction
facings to clutch assemblers who in turn supply the OEM and
aftermarket predominantly in Europe.
Sales are made in all segments by company sales
representatives. Sales 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.
Raytech's products are sold around the world,
through export from the U.S. plants, through its wholly-owned
subsidiaries in Germany, the United Kingdom and China, 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.
Patents and Trademarks
Raytech owns a number of patents both foreign and
domestic. Such patents expire between 1999 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.
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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 wet friction 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, and approximately three competitors for the oil-
immersed friction plate sector. 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. Domestic sales to two
customers, Caterpillar, Inc. and DaimlerChrysler, were 12%, 14%
and 15% in 1998, 1997 and 1996, respectively, and 15%, 4% and 4%
in 1998, 1997 and 1996, respectively. Sales backlog for the wet
friction segment at the end of 1998, 1997, and 1996 was
approximately $69 million, $91 million, and $68 million,
respectively. It is anticipated that current backlog will be
filled in 1999.
In the dry friction segment the European markets in which
the Company participates are competitive with approximately two
competitors in the passenger car clutch sector. Raytech is not the
leader but has enhanced its competitive position in these markets,
having significantly increased its market share through acquisition
and restructuring. Raytech has just entered the Asian market with
manufacturing to begin in China in 1999. The markets are
competitive with several Chinese and other Asian-based
manufacturers competing for the business. Sales backlog at the end
of 1998, 1997, and 1996 was approximately $0 million, $11 million,
and $11 million, respectively.
In the aftermarket segment, the domestic automotive,
automatic transmission sector has 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. Sales backlog at the end of
1998, 1997, and 1996 was approximately $7 million, $5 million, and
$4 million, respectively. It is anticipated that current backlog
will be filled in 1999.
<PAGE>
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 January 3, 1999, Raytech employed approximately
1,753 employees, compared with 1,729 employees at the end of 1997.
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 2001.
Capital Expenditures
Capital expenditures were $19.8, $20.6 million, and
$8.4 million for 1998, 1997 and 1996, respectively. Capital
expenditures for 1999 are projected at $21.5 million.
Research and Development
Research and development costs were approximately
$5.6 million, $5.9 million, and $6.0 million for 1998, 1997 and
1996, 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 1999 are projected at $6.3
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 $2.7 million for 1999. Because
environmental regulations are constantly being revised and are
subject to differing interpretations by regulatory agencies,
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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 January 3, 1999,
December 28, 1997, and December 29, 1996 is set forth in Note K to
Consolidated Financial Statements, included herein.
<PAGE>
Item 2. Properties
Raytech, through its three operating segments, has plants
as follows:
The wet friction operations has a Crawfordsville, Indiana,
facility that 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 Sterling Heights
facility is owned and consists of approximately 111,000 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 Liverpool, England,
facility is leased and consists of 27,000 square feet of office,
production, research and warehousing space. Wet friction also
leases office space in Leverkusen, Germany.
The dry friction operations has a Morbach, Germany, plant
that 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.
The Suzhou, China, facility is owned and consists of 25,000 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 aftermarket operations has a Sullivan, Indiana,
facility that is owned and consists of 135,000 square feet of
office and warehousing space that is suitable and adequate to
provide the capacity to meet anticipated demand of products. The
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.
Raytech also leases office space in Shelton, Connecticut,
for its headquarters staff.
Raytech believes that its properties are substantially
suitable and adequate for its purposes. All of the production
facilities are continually being upgraded to comply with applicable
environmental standards and to improve efficiency.
<PAGE>
Item 3. Legal Proceedings
The formation of Raytech and the implementation of the
restructuring plan more fully described in Item 1 above was for the
purpose of providing a means to acquire and operate businesses in a
corporate structure that would not be subject to any asbestos-
related or other liabilities of Raymark.
Prior to the formation of Raytech, Raymark had been named
as a defendant in more than 88,000 lawsuits, claiming substantial
damages for injury or death from exposure to airborne asbestos
fibers. Subsequent to the divestiture of Raymark in 1988, lawsuits
continued to be filed against Raymark at the rate of approximately
1,000 per month until an involuntary petition in bankruptcy was
filed against Raymark in February 1989 which stayed all its
litigation. In August 1996, the involuntary petition filed against
Raymark was dismissed following a trial and the stay was lifted.
However, in March 1998, Raymark filed a voluntary bankruptcy
petition again staying the litigation.
Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-defendant
with Raymark and other named defendants in approximately 3,300
asbestos-related lawsuits as a successor in liability to Raymark.
Until February 1989, the defense of all such lawsuits was provided
to Raytech by Raymark in accordance with the indemnification
agreement included as a condition of the purchase of the Wet Clutch
and Brake Division and German subsidiary from Raymark in 1987.
However, subsequent to the involuntary bankruptcy proceedings
against Raymark, a restrictive insurance funding order was issued by
an Illinois Court, denying defense costs, and another Raymark
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. Raytech
management was informed that Raymark's cost of defense and
disposition of cases up to the automatic stay of litigation in 1989
under the involuntary bankruptcy proceedings was approximately $333
million of Raymark's total insurance coverage of approximately $395
million. It has also been informed that as a result of the
dismissal of the involuntary petition, Raymark encountered newly
filed asbestos-related lawsuits but had received $27 million from a
state guarantee association to make up the insurance policies of the
insolvent carrier and had $32 million in other policies to defend
against such litigation. In March 1998, Raymark filed a voluntary
bankruptcy petition as a result of several large asbestos-related
judgments against it.
In October 1988, in a case captioned Raymond A. Schmoll v.
ACandS, Inc., et al., the U.S. District Court for the District of
Oregon ruled, under Oregon equity law, Raytech to be a successor to
Raymark's asbestos-related liability. In this case the liability
was negotiated to settlement for a negligible amount. The successor
<PAGE>
decision was appealed, and in October 1992, the Ninth Circuit Court
of Appeals affirmed the District Court's judgment on the grounds
stated in the District Court's opinion. The effect of this decision
extends beyond the Oregon District due to a Third Circuit Court of
Appeals decision in a related case cited below wherein Raytech was
collaterally estopped (precluded) from relitigating the issue of its
successor liability for Raymark's asbestos-related liabilities.
As the result of the inability of Raymark to fund Raytech's
cost of defense recited above, and in order to obtain a ruling
binding across all jurisdictions on whether Raytech is liable as a
successor for asbestos-related and other claims including claims yet
to be filed relating to the operations of Raymark or Raymark's
predecessors, on March 10, 1989 Raytech filed a petition seeking
relief under Chapter 11 of Title 11, United States Code in the
United States Bankruptcy Court, District of Connecticut. Under
Chapter 11, substantially all litigation against Raytech has been
stayed while the debtor corporation and its non-filing operating
subsidiaries continue to operate their businesses in the ordinary
course under the same management and without disruption to
employees, customers or suppliers. In the Bankruptcy Court a
creditors' committee was appointed, comprised primarily of asbestos
claimants' attorneys. In August 1995, an official committee of
equity security holders was appointed relating to a determination of
equity security holders' interest in the bankruptcy estate.
In June 1989 Raytech filed a class action in the Bankruptcy
Court captioned Raytech v. Earl White, et al. against all present
and future asbestos claimants seeking a declaratory judgment that it
not be held liable for the asbestos-related liabilities of Raymark.
It was the intent of Raytech to have this case heard in the U.S.
District Court, and since the authority of the Bankruptcy Court is
referred from the U.S. District Court, upon its motion and argument
the U.S. District Court withdrew its reference of the case to the
Bankruptcy Court and thereby agreed to hear and decide the case. In
September 1991, the U.S. District Court issued a ruling dismissing
one count of the class action citing as a reason the preclusive
effect of the 1988 Schmoll case recited above under the doctrine of
collateral estoppel (conclusiveness of judgment in a prior action),
in which Raytech was ruled to be a successor to Raymark's asbestos
liability under Oregon law. The remaining counts before the U.S.
District Court involve the transfer of Raymark's asbestos-related
liabilities to Raytech on the legal theories of alter-ego and
fraudulent conveyance. Upon a motion for reconsideration, the U.S.
District Court affirmed its prior 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.
<PAGE>
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 above 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, treating 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. Environmental Protection Agency
("EPA") and the State of Connecticut filed suit against Raymark
claiming damages for cleanup of the Stratford, Connecticut, site in
an amended amount of $300 million. The EPA has also filed a $300
million 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 is subject to
Bankruptcy Court deliberations and proceedings.
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
<PAGE>
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. In September 1994, the creditors' committee
filed its own Plan of Reorganization in competition to the Debtor's
Plan ("Creditors' 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. The
competing plans of Raytech and its creditors then returned to
Bankruptcy Court procedures.
In February 1997, Raytech resumed making monthly payments
of $650,000 to Raymark pursuant to the 1987 Asset Purchase Agreement
as amended. In November 1997, the creditors' committee filed an
adversary proceeding complaint and motion for a temporary
restraining order to halt the payments. In January 1998, the
Bankruptcy Court stopped 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 retirees intervened in
the action; however, Raymark continued to fund their benefits. Upon
motion, the Raymark retirees have been permitted to form a committee
in the Raytech bankruptcy, but any rights to the Raytech estate
remain subject to the Court's judicial determination.
Following Raytech's cessation of monthly $650,000 note
payments to Raymark in December 1997, Raymark commenced 33 separate
lawsuits against Raytech subsidiaries in various jurisdictions from
New York to California ("Raymark Litigation") demanding payment or
the return of assets for breach of contract. Raytech filed an
adversary proceeding complaint to halt the Raymark litigation and
was granted a temporary restraining order in December 1997 by the
Bankruptcy Court that remains in effect. The creditors' committee
intervened in the action in support of the restraining order.
In March and April 1998, Raymark and its parent, Raymark
Corporation, filed voluntary petitions in bankruptcy in a Utah Court
<PAGE>
which stayed all litigation in the Raytech bankruptcy in which
Raymark was a party. In connection with its attempt to assert
control over Raymark and its assets, the creditors' committee,
joined by Raytech, the Guardian Ad Litem for future claimants, the
equity committee and the government agencies moved to have the venue
of the Raymark bankruptcies transferred from Utah to the Connecticut
Court. In July 1998, the Bankruptcy Court issued an order on the
motions and transferred venue to the Connecticut Court. Raymark
filed an appeal of the order but has since withdrawn the appeal. In
October 1998, a trustee was appointed by the United States Trustee
over the Raymark bankruptcies.
In October, 1998 Raytech reached a tentative settlement
with its creditors and entered into a Memorandum of Understanding
with respect to achieving a consensual plan of reorganization (the
"Plan"). The parties to the settlement include Raytech, the
Official Creditors Committee, the Guardian ad litem for Future
Claimants, the Connecticut Department of Environmental Protection
and the U. S. Department of Justice, Environmental and Natural
Resources Division. Substantive economic terms of the Memorandum of
Understanding provide for all general unsecured creditors including
but not limited to all asbestos and environmental claimants to
receive, through a trust established under The Bankruptcy Code, 90%
of the equity in a company to be reorganized ("Reorganized Raytech")
and any and all refunds of taxes paid or net reductions in taxes
owing resulting from the transfer of equity to the trust, and
existing equity holders in Raytech to receive 10% of the equity in
Reorganized Raytech. Substantive non-economic terms of the
Memorandum of Understanding provide for the parties to jointly work
to achieve a consensual Plan, to determine an appropriate approach
to related pension and employee benefit plans and to cease
activities that have generated adverse proceedings in the Bankruptcy
Court. The parties have also agreed to jointly request a finding in
the confirmation order to the effect that while Raytech's
liabilities appear to exceed the reasonable value of its assets, the
allocation of 10% of the equity to existing equity holders is fair
and equitable by virtue of the benefit to the estate of resolving
complicated issues without further costly and burdensome litigation
and the risks attendant therewith and the economic benefits of
emerging from bankruptcy without further delay.
In April 1996, the Indiana Department of Environmental
Management ("IDEM") advised Raybestos Products Company ("RPC"), a
wholly-owned subsidiary of the Company, that it may have contributed
to the release of lead and PCB's (polychlorinated biphenyls) found
in small waterways near its Indiana facility. In June, IDEM named
RPC as a potentially responsible party ("PRP"). RPC notified its
insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern
District of Indiana, captioned Reliance Insurance Company vs. RPC
seeking a declaratory judgment that any liability of RPC is excluded
from its policy with RPC. The discovery process in this action is
<PAGE>
nearing completion. RPC continues to assess the extent of the
contamination and its involvement and is currently negotiating with
IDEM for an agreed order of cleanup. The Company intends to offset
its investigation and cleanup costs against its notes payable to
Raymark when such costs become known pursuant to the indemnification
clause in the wet clutch and brake acquisition agreement since it
appears that any source of contamination would have occurred during
Raymark's ownership of the Indiana facility. Blood tests
administered to residents in the vicinity of the small waterways
revealed no exposure.
As a result of an inspection, the Company was notified that
the operations purchased from Advanced Friction Materials Company
("AFM") in January 1996 in Sterling Heights, Michigan, were 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 record keeping on operations
in compliance. Potential fines for the violations were substantial
but negotiations with the DEQ resulted in an agreement finalized in
September 1998 providing for a consent judgment with a fine of $324.
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.
In December 1998, the trustee of Raymark, Raytech and the
Raytech creditors' committee joined in filing an adversary
proceeding (complaint) against Craig R. Smith, et al. (including
relatives, business associates and controlled corporations) alleging
a systematic stripping of assets belonging to Raymark in an
elaborate and ongoing scheme perpetrated by the defendants. The
alleged fraudulent scheme extended back to the 1980's and continued
up to this action and has enriched the Smith family by an estimated
$12 million and has greatly profited their associates, while
depriving Raymark and its creditors of nearly all of its assets
amounting to more than $27 million. Upon motion of the plaintiffs,
the Bankruptcy Court issued a temporary restraining order stopping
Mr. Smith and all defendants from dissipating, conveying,
encumbering or otherwise disposing of any assets, which order has
been amended several times and remains in effect pending a
preliminary injunction hearing. The reference to the Bankruptcy
Court has been withdrawn, and the matter will now be litigated in
the U.S. District Court in Connecticut. Trial has been set for
September 1999.
Costs incurred by the Company for asbestos related
liabilities are subject to indemnification by Raymark under the 1987
<PAGE>
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, 1997 and 1998 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
had a material adverse impact on Raytech as it did not have the
resources needed to fund Raymark's potentially substantial uninsured
asbestos-related and environmental liabilities. However, the
tentative settlement between Raytech and its creditors as recited in
the Memorandum of Understanding referenced above has defined the
impact of the successor liabilities imposed by the referenced court
decisions. While an outline of principles in the Memorandum of
Understanding has been agreed to by Raytech and its creditors, a
consensual plan of reorganization must still be written and agreed
to and is subject to review and confirmation by the Bankruptcy
Court, which at this time cannot be predicted with certainty.
Should the Memorandum of Understanding not result in a confirmed
plan of reorganization, the ultimate liability of the Company with
respect to asbestos-related, environmental, or other claims would
remain undetermined. The accompanying financial statements have
been prepared assuming that the Company will continue as a going
concern, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the normal course of
business. The uncertainties regarding the reorganization
proceedings 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, revaluation
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
November 20, 1998. The matters submitted to stockholder vote
and the vote count on each matter were as follows:
1. Proposal to elect one Class III Director for a full
three-year term and until his respective successor is
elected:
For Robert L. Bennett Withheld
3,044,650 123,854
2. Proposal to ratify the appointment of
PricewaterhouseCoopers LLP as auditors for 1998:
For Against Abstain
2,503,687 659,159 5,658
Abstentions and "non-votes" have the same effect as
votes against proposals presented to stockholders other than
election of directors. A "non-vote" occurs when a nominee
holding shares for a beneficial owner votes on one proposal but
does not vote on another proposal because the nominee does not
have discretionary voting power and has not received
instructions from the beneficial owner.
Pursuant to the vote of shareholders, proposals 1 and
2 above were adopted and effective on November 20, 1998.
Directors whose terms of office as Directors continued
after the Annual Shareholders' Meeting include:
Albert A. Canosa
Robert M. Gordon
Frederick J. Mancheski
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 1, 1999, there were 1,762 holders of record of the
Registrant's common stock.
Information regarding the quarterly high and low sales
prices for 1998 and 1997 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>
<CAPTION>
FIVE-YEAR REVIEW OF OPERATIONS
(in thousands, except share data)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Operating Results
Net sales $247,464 $234,475 $217,683 $177,498 $167,615
Gross profit 58,650 51,575 54,269 48,699 44,548
Operating profit 26,007 26,164 23,603 20,959 17,936
Interest expense 2,158(5) 3,345 3,132 2,647 2,601
Net income 16,357 15,538(4) 15,991(2) 14,337(1) 8,643
Share Data
Basic earnings per share $ 4.81 $ 4.76 $ 4.95 $ 4.44 $ 2.70
Weighted average shares 3,402,019 3,263,137 3,232,674 3,225,962 3,205,433
Diluted earnings per share $ 4.61 $ 4.41 $ 4.65 $ 4.26 $ 2.52
Adjusted weighted average shares 3,548,893 3,524,391 3,441,645 3,369,003 3,426,034
Balance sheet
Total assets $173,804 $153,385 $140,155 $114,436 $ 91,809
Working capital 7,526 7,324 7,418 5,323 240
Long-term obligations 41,064 38,639 41,522 34,966 41,959
Commitments and contingencies(3) - - - - -
Total shareholders'
equity (deficit) $ 64,297 $ 48,462 $ 34,015 $ 18,680 $ 3,716
Property, plant and equipment
Capital expenditures $ 19,754 $ 20,603 $ 8,390 $ 10,275 $ 11,354
Depreciation $ 9,477 $ 8,746 $ 8,039 $ 7,566 $ 6,892
Dividends declared per share $ - $ - $ - $ - $ -
<FN>
(1) Includes $4,597 of pretax income ($2,758 after-tax and $.80 per share) related
to a favorable litigation judgment.
(2) Includes reversal of $3,100 of prior year tax accruals no longer required.
(3) See Notes A and N to the consolidated financial statements.
(4) Includes the reversal of $1,519 of valuation allowance against deferred tax
assets of German operations.
(5) Includes cessation of interest accruals on Raymark note in connection with a
Bankruptcy Court Order.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations and Liquidity and Capital Resources
Raytech Corporation and its subsidiaries manufacture and
distribute engineered products for heat resistant, inertia
control, energy absorption and transmission applications. The
Company's operations are categorized into three business segments:
wet friction, dry friction and aftermarket. Additional infor-
mation on these business segments is presented in Note K - Segment
Reporting in the Notes to Consolidated Financial Statements.
1998 Compared With 1997
Raytech continued its solid performance through the fourth
quarter of 1998 and as a result ended the year with record sales
and earnings. Net income for the 1998 fiscal year amounted to
$16,357 or $4.81 basic earnings per share as compared to $15,538
or $4.76 basic earnings per share in fiscal 1997.
Net Sales
Worldwide net sales rose 5.54% to $247.5 million, compared
with $234.5 million in 1997. The wet friction segment sales
increased $10.0 million due to strong sales in the automotive
component of the wet friction segment. However, increases were
partially offset by declines in the heavy duty and agricultural
markets as the demand for certain items slows. The inclusion of
AFM in the wet friction segment results of operations since April
1998 positively increased revenues by $3.6 million for the year.
Aftermarket sales continue to produce increased sales reflecting a
$5.2 million increase as compared with the same period in the
prior year. The dry friction segment sales decreased $2.2 million
year over year due to a slight decline in sales and an adverse
foreign currency fluctuation.
Net sales of the Company's combined German operations, which
accounted for 16.9% of the consolidated sales of the Company in
1998 decreased to $42.0 million as compared to $42.6 million in
1997. The combined sales are derived from the German operations of
the wet friction segment, which were $9.3 million and $7.5 million
in 1998 and 1997, respectively, and from the German operations of
the dry friction segment, which were $32.7 million and $35.1
million in 1998 and 1997, respectively.
Gross Profit
Gross profit as a percentage of sales for the period ended
January 3, 1999 is 23.7% as compared to 22.0% for the same period
one year ago. The improvement is the result of cost saving
<PAGE>
programs implemented at our manufacturing facilities and a
favorable mix of products sold.
Selling, General and Administrative
Selling, general and administrative expenses increased 28.4%
to $33.0 million as compared to $25.7 one year earlier. The
increase is primarily due to increased shipping costs as a result
of increased sales, higher advertising and special promotional
expenses, the consolidation of AFM into Raytech, administrative
expenses associated with the startup of China operations, planned
salary increases and general inflation.
Additionally, in 1997, $1.8 million of accrued liabilities
relating to potential environmental matters at the Sterling
Heights, Michigan, facility were reversed into income.
Interest Expense
Interest expense excluding Raymark increased primarily as a
result of higher average borrowings under the Company's revolving
line of credit resulting from higher working capital requirements
in 1998 and the acquisition of AFM.
In connection with the January 1998 Bankruptcy Court decision
to require Raytech to halt payments on its promissory note payable
to Raymark, management has concluded that interest should not be
accrued during the cease payment period. Accordingly, no interest
has been accrued in fiscal 1998. The ultimate resolution of
interest to be paid on the note is subject to the uncertainties
inherent in reorganization proceedings under the Bankruptcy Code.
Other Income and Expense, Net
Other income and expense, net in 1998 primarily represents
interest income in the amount of $412, which is comparable to
interest income for 1997. Other income and expense, net in 1997
includes income from equity investment in affiliate in the amount
of $647.
Income Taxes
The effective tax rate for the year ended January 3, 1999 was
28.0% versus 29.0% in 1997. Included in the effective tax rate
for 1998 and 1997 is the effect of certain legal and environmental
costs deducted for tax purposes but offset against the Raymark
note payable in connection with the indemnification agreement with
Raymark. 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 foreign
operations. The Company's net deferred tax asset of $4.5 million
represents future tax deductions that can be realized upon
<PAGE>
carryback to prior years. The Company has approximately $6.5
million of foreign loss carryforwards that can be used to offset
future foreign cash taxes.
Business Segment and Geographic Area Results
The following discussion of operating results by industry
segment and geographic area relates to information contained in
Note K - Segment Reporting in the Notes to Consolidated Financial
Statements. Operating profit is income before income taxes and
minority interest.
1998 Net Sales by Business Segment
Wet Friction 63%
Aftermarket 24%
Dry Friction 13%
Wet Friction Segment
Net Sales Operating Income
1998 $155.8 $ 18.4
1997 $145.7 15.8
1996 $127.8 14.4
Wet Friction Operations
Revenues increased 6.9% to $155.8 million as compared with
$145.7 million in 1997. The growth was driven by the continued
strong sales in the automotive original equipment market, with an
increase of approximately $16.2 million over the prior year. The
inclusion of AFM in the wet friction segment results of operations
since April 1998 positively increased revenues by $3.6 million for
the year. The heavy duty market continues to decline as demand
slows in Asia and Latin America. Sales in this market decreased
$2.5 million as compared to 1997. Industry leaders predict that
next year will be slightly below 1998 record levels. The
agricultural market declined approximately $3.6 million as
compared to 1997. Lower farm commodity prices and weaker farm
economic conditions have adversely affected retail demand. These
conditions are expected to continue to reflect the agricultural
equipment market in 1999.
Operating profit increased 16.5% to $18.4 million as compared
to $15.8 million in 1997. The increase is primarily due to higher
sales and a favorable mix of products sold, as well as the
discontinuance of interest accruals on the Raymark note. However,
these results were negatively impacted by increases in labor and
material costs, price reductions to certain customers and
increases in selling, general and administrative expenses due
principally to the consolidation of AFM since April 1998. In
<PAGE>
1997 $1.8 million of accrued liabilities relating to potential
environmental problems at the Sterling Heights, Michigan, facility
were reversed into income.
Aftermarket Segment
Net Sales Operating Income
1998 $ 58.8 $ 9.0
1997 53.7 8.4
1996 52.5 6.9
Aftermarket Operations
Revenues increased 9.5% to $58.8 million as compared with
$53.7 million in 1997. The increase is a result of marketing
efforts on existing product lines, the introduction of new
products and improvement in market share. The Aftermarket segment
remains stable with modest growth expected in 1999.
Operating profit increased 7.1% to $9.0 million as compared
to $8.4 million in 1997. The increase is primarily due to
increased unit production and the introduction of new products in
1998. Interest expense is up slightly as compared to 1997 due to
the restructuring of intersegment debt.
Dry Friction Segment
Net Sales Operating Income
1998 $32.9 $ .8
1997 35.1 1.9
1996 37.4 1.0
Dry Friction Operations
Revenues decreased 6.3% to 32.9 million as compared with
$35.1 million in 1997. The decrease is the result of foreign
currency fluctuation of $(.7) million and a reduction in sales of
$(1.5) million. Increased competition and the slow growth in the
European economy are significant factors contributing to the 1998
performance.
Operating profit decreased 57.9% to $.8 million as compared
to $1.9 million in 1997. The decrease is due to startup costs
associated with the opening of a facility in China and reduced
sales.
Market Conditions and Outlook
The statements contained in this Outlook section are based on
management's current expectations. With the exception of the
<PAGE>
historical information contained herein, the statements presented
in this Outlook section are forward-looking statements that
involve numerous risks and uncertainties. Actual results may
differ materially. The forward-looking statements contained in
this Form 10-K are within the meaning of Section 27A of the
Securities Exchange Act of 1933 and Section 21E of the Securities
Exchange Act of 1934.
The Company's wet friction operation expects to continue to
face an increasingly competitive automotive environment and a
slowdown for the demand in certain agricultural machine products.
Our major customers in the automotive industry face an increased
competitive automotive environment which is likely to continue to
limit Raytech's pricing flexibility in the near term. In
addition, the weakness of the Japanese yen and other Asian
currencies against the U.S. dollar and the continued deterioration
in the Asian economies could result in substantial increases in
imports from Asia to the U.S. and Canada. The Asian economic
difficulties could have an unfavorable effect on overall economic
conditions in the U.S. and Canada, where our major customers'
sales are concentrated.
With regard to the Company's agricultural equipment
operations, worldwide farm commodity prices continue on a downward
course as a result of prospects for increased global supplies of
grains and oilseeds, as well as fears about the Asian economic
crisis. Accordingly, retail demand for agricultural equipment in
1999 is now projected to decline by 20 percent in North America,
by 10 percent in Europe and by 15 percent in Latin America and
Australia. In light of this outlook and the Company's continuing
commitment to aggressive asset management, production schedules
are being reviewed for 1999 to ensure the Company's production
meets demand.
The aftermarket operation is expected to remain constant
compared to results for 1998. The competition in this market
continues to increase as mergers continue to occur between
suppliers. The sales growth in this segment has been the result
of new product introduction in filters and planetary gears over
the past years. Evaluating new products for this market is a key
element in the 1999 strategy.
The dry friction operation continues to operate in a sluggish
European environment with unemployment remaining at high levels
and economic growth improving only marginally. The development of
new market opportunities in Asia is supported through the new
production facility in China. The overall Asian economy continues
to be negatively affected by the weakened economies of Japan and
other Asian countries.
The Company's outlook for 1999 anticipates modest growth over
1998 results. Increased market share in the automotive original
<PAGE>
equipment market and the continued introduction of new products
for aftermarket distribution are expected to be the drivers for
performance. Further, it is anticipated that the dry friction
operation in China will improve the performance of this segment.
Year 2000
The Company's Year 2000 Program addresses major assessment
areas that include information systems, mainframe computers,
personal computers, the distributed network, the shop floor,
facilities systems, the Company's products, product research and
development facilities, and the readiness of the Company's
suppliers and distribution network. The program includes the
following phases: identification and assessment, business
criticality analysis, project work prioritization, compliance plan
development, remediation and testing, production implementation,
and contingency plan development for mission critical systems.
The Company's objective is to become Year 2000 compliant with
its mission critical activities and systems by mid 1999, allowing
substantial time for further testing, verification and the final
conversion of less important systems. The Company continues to be
on schedule in its plans to accomplish this objective and has
initiated infrastructure and information systems modifications to
ensure that both hardware and software systems are compliant. The
Company also is requesting assurances from its significant
suppliers and dealers that they are addressing this issue to
ensure there will be no major disruptions.
The total cost of the modifications and upgrades to date are
approximately $2.5 million and should not exceed $3.5 million.
Although no assurances can be given as to the Company's
compliance, particularly as it relates to third-parties, the
Company does not expect that either future costs of modifications
or the consequences of any unsuccessful modifications will have a
material adverse effect on the Company's financial position or
results of operations. However, the failure to correct a material
Year 2000 problem could result in the interruption of certain
normal business activities and operations. The Company's most
reasonably likely worst case scenario is that the Year 2000
noncompliance of a critical third party, such as an energy
supplier, could cause the supplier to fail to delivery, with the
result that production is interrupted at one or more facilities.
Such a disruption in production could result in lost sales or
profits. However, the Company is reviewing the need to develop
contingency plans, which should be determined by early 1999,
should any Year 2000 failures occur in any of the assessment areas
noted above.
<PAGE>
Euro Conversion
The Company is well advanced in the process of
identification, implementation and testing of its systems to
adopt the euro currency in its operations affected by this
change. The Company's affected suppliers, distribution network
and financial institutions have been contacted and the Company
does not believe the currency change will significantly impact
these relationships. As a result, the Company expects to have
its systems ready to process the euro conversion during the
transition period from January 1, 1999 through January 1, 2002.
The cost of information systems modifications, effects on product
pricing and purchase contracts, and the impact on foreign
currency financial instruments are not expected to be material.
Financial Risks
The Company maintains lines of credit with United States and
foreign banks, as well as other creditors detailed in Note F -
Debt in the Notes to Consolidated Financial Statements.
The Company is naturally exposed to various interest rate
risk and foreign currency risk in its normal course of business.
The Company is fortunate to operate in an environment which
allows for effective management of its accounts receivable as
evidenced by the average days sales in trade receivables of 43
days. This allows for minimum borrowings in supporting unusual
inventory and trade receivable growth due to increased sales.
Management does not anticipate a significant change in fiscal
policy in any of its borrowing markets in 1999 given current
economic conditions. Further, the Company can reduce the short-
term impact of interest rate fluctuation through deferral of
capital investment should the need arise.
The rates of interest on the various debt agreements range
from 3% to 11%. The Company has not entered into any interest
rate management programs such as interest rate swaps or other
derivative type transactions. The amount of exposure which could
be created by increases in rates is not considered significant by
management.
The local currencies of the Company's foreign subsidiaries
have been designated as the functional currencies. Accordingly,
financial statements of foreign operations are translated using
the exchange rate at the balance sheet date for assets and
liabilities and an average exchange rate in effect during the
year for revenues and expenses. The Company does not believe
that the fluctuation in foreign currency will have a material
adverse effect on the Company's overall financial condition.
Additionally, the Company does not enter into agreements to
<PAGE>
manage any currency transaction risks due to the immaterial
amount of transactions of this type.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995: Statements under the "Market
Conditions and Outlook," "Year 2000" and "Euro Conversion"
headings above and other statements herein that relate to future
operating periods are subject to important risks and
uncertainties that could cause actual results to differ
materially. Forward-looking statements relating to the Company's
businesses involve certain factors that are subject to change,
including the many interrelated factors that consumer confidence,
including worldwide demand for automotive and heavy duty
products, general economic conditions, the environment, actions
of competitors in the various industries in which the Company
competes; production difficulties, including capacity and supply
constraints; dealer practices; labor relations; interest and
currency exchange rates (including the effect of conversion to
the euro); technological difficulties (including Year 2000
compliance); accounting standards, and other risks and
uncertainties. Further information, including factors that
potentially could materially affect the Company's financial
results, is included in the Company's filings with the Securities
and Exchange Commission.
Liquidity and Capital Resources
The Company's wet friction and dry friction operations are
capital intensive and the required capital is funded through
current operations and external borrowing sources. The
aftermarket operation has historically required less capital
investment and has provided needed capital through current
operations.
The positive cash flows provided by operations in 1998 were
the result of continued record performance and totaled $19.3
million. Increases in trade receivables, inventory and other
assets of $2.4 million, $2.3 million and $1.3 million,
respectively, and decreases in accounts payable and accrued
liabilities of $3.4 million and $1.4 million, respectively,
reduced cash flows from operations in 1998. The aggregate amount
of the 1998 cash flow was used principally to invest in capital
projects, the total of which was $18.0 million and to complete
the purchase of AFM in the amount of $2.7 million. In addition
to cash flows from operations, the Company reduced debt to banks
and Raymark by $3.6 million.
Over the past three years, operating activities have
provided an aggregate of $62.6 million in cash. During this
period, net borrowings decreased by $1.5 million and cash and
<PAGE>
cash equivalents have decreased $12.1 million. The aggregate
amount of these cash flows was used mainly to fund capital
investment of $46.8 million and the acquisition of AFM as
detailed below.
The ratio of year-end assets to net sales was 70% in 1998,
compared to 65.4 percent in 1997. The higher ratio reflects
higher trade receivables and inventory in support of increased
sales. Additionally, property, plant and equipment increased due
to the capital investment made in 1998. Intangible assets also
increased due to the AFM acquisition.
Trade accounts receivable result from sales in the normal
course of business. Trade receivables increased $2.2 million
during 1998 due to increased sales. The ratios of worldwide net
trade accounts receivable to year-end net sales were 11.7 percent
in 1998, 11.5 percent in 1997 and 11 percent in 1996. The
collection period for trade receivables averages 43 days in 1998
and 42 and 40 for 1997 and 1996, respectively.
Inventories increased by $2.7 in 1998. Inventories are
valued on a first in, first out (FIFO) basis. The increase over
1997 reflects additional inventories to support increased sales.
The ratios of inventories to year-end net sales were 12.5 percent
for 1998, 12 percent for 1997 and 13.2 percent for 1996.
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 leased 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. In addition, the
Stock Purchase Agreement ("Agreement") provided for the 53% stock
owner to put his stock to Composites anytime after two years. The
owner put 53% of AFM stock to Composites which assigned its
obligation to purchase the stock to AFM. Based on the formulated
amount of $6,044 in accordance with the Agreement AFM redeemed 53%
of its stock from the former owner by paying $3,022 in April 1998,
and the balance of $3,022 is payable in three equal annual
installments. The note bears interest at a rate equal to the prime
<PAGE>
rate as stated in THE WALL STREET JOURNAL. Effective April 1998,
Raytech has consolidated the results of AFM, which were previously
recorded under the equity method. The pro forma effect on
operations had Raytech made the acquisition at the beginning of the
period is not significant.
With the redemption of 53% of AFM Stock, AFM became a wholly-
owned subsidiary of Composites. AFM has a revolving line of
credit, payable to NationsCredit Commercial Funding which provides
for borrowings up to $10 million in the aggregate, subject to the
borrowing formula based upon AFM's accounts receivable. The loan
bears an interest rate of .50% above the prime rate. The
outstanding balance under the line of credit is $4,795 at
January 3, 1999. The additional borrowing availability at
January 3, 1999 is $2,205 based upon the asset-based 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 Composites. At January 3, 1999, the net restricted assets of
RPC amounted to $26,153, consisting of cash, inventory, machinery
and equipment and all other tangible and intangible assets,
excluding land and building. 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 $5,662 and under the term loan is $5,558 at January 3, 1999,
respectively. The term loan is repayable in equal monthly
installments of $95 over six years commencing on January 1, 1998
with the unpaid balance due January 1, 2004. The additional
borrowing availability on the revolving line of credit at
January 3, 1999 is $0, 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 DM8,010 ($4,800) of which
DM3,915 ($2,346) remains unused at January 3, 1999. The Company
used the available lines of credit to fund working capital and
capital expenditure needs.
<PAGE>
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 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 insurance funding order was issued by an Illinois
Court denying defense costs, and another Raymark 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.
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 intent of Raytech to
have this case heard in the U.S. District Court, and since the
authority of the Bankruptcy Court is referred from the U.S.
District Court, upon its motion and argument the U.S. District
<PAGE>
Court withdrew its reference of the case to the Bankruptcy Court
and thereby agreed to hear and decide the case. In September 1991,
the U.S. District Court issued a ruling dismissing one count of the
class action citing as a reason the preclusive effect of the 1988
Oregon case under the doctrine of collateral estoppel
(conclusiveness of judgment in a prior action), in which Raytech
was ruled to be a successor to Raymark's asbestos liability under
Oregon law. The remaining counts before the U.S. District Court
involve the transfer of Raymark's asbestos-related liabilities to
Raytech on the legal theories of alter-ego and fraudulent
conveyance. Upon a motion for reconsideration, the U.S. District
Court affirmed its prior ruling in February 1992. Also, in
February 1992, the U.S. District Court transferred the case in its
entirety to the U.S. District Court for the Eastern District of
Pennsylvania. Such transfer was made by the U.S. District Court
without motion from any party in the interest of the administration
of justice as stated by the U.S. District Court. In December 1992,
Raytech filed a motion to activate the case and to obtain rulings
on the remaining counts which was denied by the U.S. District
Court. In October 1993, the creditors' committee asked the Court
to certify the previous dismissal of the successor liability count.
In February 1994, the U.S. District Court granted the motion to
certify and the successor liability dismissal was accordingly
appealed. In May 1995, the Third Circuit Court of Appeals ruled
that Raytech is collaterally estopped (precluded) from relitigating
the issue of its successor liability as ruled in the 1988 Oregon
case recited above, affirming the U.S. District Court's ruling of
dismissal. A petition for a writ of certiorari was denied by the
U.S. Supreme Court in October 1995. The ruling leaves the Oregon
case, as affirmed by the Ninth Circuit Court of Appeals, as the
prevailing decision holding Raytech to be a successor to Raymark's
asbestos-related liabilities.
In October 1998, Raytech reached a tentative settlement with
its creditors and entered into a Memorandum of Understanding with
respect to achieving a consensual plan of reorganization (the
"Plan"). The parties to the settlement include Raytech, the
Official Creditors Committee, the Guardian ad litem for Future
Claimants, the Connecticut Department of Environmental Protection
and the U.S. Department of Justice, Environmental and Natural
Resources Division. Substantive economic terms of the Memorandum
of Understanding provide for all general unsecured creditors,
including but not limited to all asbestos and environmental
claimants to receive, through a trust established under the
Bankruptcy Code, 90% of the equity in a company to be reorganized
("Reorganized Raytech") and any and all refunds of taxes paid or
net reductions in taxes owing resulting from the transfer of equity
to the trust, and existing equity holders in Raytech to receive 10%
of the equity in Reorganized Raytech. Substantive non-economic
terms of the Memorandum of Understanding provide for the parties to
jointly work to achieve a consensual Plan, to determine an
appropriate approach to related pension and employee benefit plans
<PAGE>
and to cease activities that have generated adverse proceedings in
the Bankruptcy Court. The parties have also agreed to jointly
request a finding in the confirmation order to the effect that
while Raytech's liabilities appear to exceed the reasonable value
of its assets, the allocation of 10% of the equity to existing
equity holders is fair and equitable by virtue of the benefit to
the estate of resolving complicated issues without further costly
and burdensome litigation and the risks attendant therewith and the
economic benefits of emerging from bankruptcy without further
delay.
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 had a material adverse impact on Raytech as it did not
have the resources needed to fund Raymark's potentially substantial
uninsured asbestos-related and environmental liabilities. However,
the tentative settlement between Raytech and its creditors as
recited in the Memorandum of Understanding referenced above has
defined the impact of the successor liabilities imposed by the
referenced court decisions. While an outline of principles in the
Memorandum of Understanding has been agreed to by Raytech and its
creditors, a consensual plan of reorganization must still be
written and agreed to and is subject to review and confirmation by
the Bankruptcy Court, which at this time cannot be predicted with
certainty. Should the Memorandum of Understanding not result in a
confirmed plan of reorganization, the ultimate liability of the
Company with respect to asbestos-related, environmental, or other
claims would remain undetermined. The accompanying financial
statements have been prepared assuming that the Company will
continue as a going concern, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in
the normal course of business. The uncertainties regarding the
reorganization proceedings 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, revaluation 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 January 3, 1999, the amount owed
Raymark, including accrued interest, was approximately $31 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
<PAGE>
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 stopped by
the Bankruptcy Court restraining order pending a trial. The
remaining principal balance at January 3, 1999 is $22,737.
In September 1993 and January 1994, Composites entered into
loan agreements with Raymark for $2,500 and $3,000, respectively.
As of January 3, 1999 and December 28, 1997, Composites 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 $2,274 at January 3, 1999. As
such, the Company is at risk to future currency fluctuations with
respect to this debt.
The Company experienced improving conditions in its domestic
market segments in fiscal 1998. Management believe that the
Company is operating in a healthy, stable environment and will
continue to do so through 1999. Subject to the outcome of the
legal matters discussed above, management believes that the Company
will generate sufficient cash flow during 1999 to meet all of the
Company's obligations arising in the normal course of business and
anticipated capital investments. In addition, in the event the
Company falls short of its cash flow forecast, the Company has
available lines of credit.
Recently Issued Accounting Pronouncement
Effective June 15, 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued for
fiscal years beginning after June 15, 1999. SFAS 133 establishes a
new model for accounting for derivatives and hedging activities.
The Company is still assessing the impact, if any, that this
pronouncement will have on its financial statements.
1997 Compared With 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
<PAGE>
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
$234.5 million as compared with net sales of $217.7 million in
fiscal 1996. The overall improvement was primarily due to
additional domestic OEM sales of approximately $4.9 million related
to the Sterling Heights operations, acquired in the first quarter
of 1996, and other domestic sales increases of $12.9 million due to
additional volume within the wet friction operations. Aftermarket
sales continued to produce increased sales reflecting a $1.2
million increase as compared with the same period in the prior
year.
Net sales of the Company's combined German operations, which
accounted for 18.2% of the consolidated sales of the Company in
1997 decreased to $42.6 million as compared to $44.8 million in
1996. The combined sales were derived from the German operations
of the wet friction segment, which were $7.5 million and $7.4
million in 1997 and 1996, respectively, and from the German
operations of the dry friction segment, which were $35.1 million
and $37.4 million in 1997 and 1996, respectively.
Gross Profit
Gross profit as a percentage of sales for the period ended
December 28, 1997 was 22.0% as compared to 24.9% for the same
period one year ago. The overall decrease was 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 $25.7 million as compared to $30.9 million one year earlier.
The decrease was primarily due to the net reversal of $1.8 million
of accruals established in 1996 related to environmental violations
at the Sterling Heights facility that were resolved more favorably
than initially anticipated. In addition, 1997 provisions for
discretionary compensation were lower than 1996 due to reduced
earnings at certain operations.
<PAGE>
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 represented
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 represented
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 was 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.
1997 vs. 1996
Wet Friction Operations
Revenues increased 14.0% to $145.7 million as compared with
$127.8 million in 1996. The increase was primarily due to
additional domestic OEM sales of approximately $11.1 million
partially related to the Sterling Heights operations acquired in
the first quarter of 1996, increased sales of $4.1 million in the
agricultural market and additional sales in the construction market
of $2.7 million.
Earnings before taxes and minority interest increased 9.7% to
$15.8 million as compared to $14.4 million in 1996. The positive
results were due to increased sales volume, offset by material and
labor cost increases, lower gross margin on product lines acquired
in the Sterling Heights acquisition and manufacturing
inefficiencies on certain product lines. The Company reversed
environmental accruals established in 1996 related to violations at
the Sterling Heights facility that were resolved more favorably
than initially anticipated.
<PAGE>
Aftermarket Operations
Revenues increased 2.3% to $53.7 million in 1997, as compared
to $52.5 million in 1996.
Earnings before taxes and minority interest increased 21.7% to
$8.4 million as compared with $6.9 million in 1996. The increase
was primarily due to increased market share on certain product
lines and improved margins on others. Interest expense was down
slightly as compared to 1996 due to the reduction in average
outstanding balance on intersegment debt.
Dry Friction Operations
Revenues decreased 6.4% to $35.0 million in 1997 as compared
to $37.4 million in 1996. The decrease was primarily the result of
an unfavorable exchange rate of $5.2 million, which was offset by
the sales increase of $2.8 million.
Earnings before taxes and minority interest increased 90.0% to
$1.9 million as compared to $1.0 million in 1996. The results were
due to improvement in gross margin on higher volume sales.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Consolidated Balance Sheets for the
fiscal years ended January 3, 1999
and December 28, 1997
Consolidated Statements of Operations
for the 1998, 1997 and 1996 Fiscal Years
Consolidated Statements of Cash Flows
for the 1998, 1997 and 1996 Fiscal Years
Consolidated Statements of Shareholders'
Equity for the 1998, 1997, and 1996
Fiscal Years
Notes to Consolidated Financial Statements
Report of Independent Accountants
(Refer to Index to Consolidated Financial
Statements at Page 112)
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
<CAPTION>
Fiscal Year 1998 1997
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,482 $ 9,913
Trade accounts receivable, less allowance of $1,415
for 1998 and $1,186 for 1997 29,058 26,903
Inventories 30,869 28,202
Other current assets 8,560 8,590
Total current assets 75,969 73,608
Property, plant and equipment 163,906 143,131
Less accumulated depreciation 92,014 82,141
Net property, plant and equipment 71,892 60,990
Investment in and advances to affiliates - 10,249
Intangible assets 22,385 1,898
Other assets 3,558 6,640
Total assets $ 173,804 $153,385
LIABILITIES
Current liabilities
Notes payable $ 17,316 $ 13,039
Current portion of long-term debt - Raymark 12,640 9,970
Current portion of long-term debt 1,187 130
Accounts payable 15,705 20,703
Accrued liabilities 21,595 22,442
Total current liabilities 68,443 66,284
Long-term debt due to Raymark 16,524 21,988
Long-term debt 5,708 1,178
Postretirement benefits other than pensions 11,017 10,044
Other long-term liabilities 7,815 5,429
Total liabilities 109,507 104,923
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock
Cumulative preferred stock, no par value
800,000 shares authorized, none issued - -
Common stock, par value $1.00
7,500,000 shares authorized; 5,553,454 and 5,417,367
issued in 1998 and 1997, respectively 5,553 5,417
Additional paid in capital 70,501 70,275
Accumulated deficit (7,027) (23,384)
Accumulated other comprehensive (loss) income (169) 715
68,858 53,023
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 64,297 48,462
Total liabilities and shareholders' equity $ 173,804 $153,385
<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 1998 1997 1996
<S> <C> <C> <C>
Net sales $ 247,464 $ 234,475 $ 217,683
Cost of sales (188,814) (182,900) (163,414)
Gross profit 58,650 51,575 54,269
Selling, general and administrative
expenses (33,030) (25,683) (30,863)
Other operating income (expense), net 387 272 197
Operating profit 26,007 26,164 23,603
Currency transaction gains (losses) (114) (375) 63
Interest expense - Raymark (284) (1,984) (2,056)
Interest expense (1,874) (1,361) (1,076)
Other income (expense), net 1,065 1,325 121
Income before provision for income
taxes and minority interest 24,800 23,769 20,655
Provision for income taxes (6,944) (6,900) (3,606)
Income before minority interest 17,856 16,869 17,049
Minority interest (1,499) (1,331) (1,058)
Net income $ 16,357 $ 15,538 $ 15,991
Basic earnings per share $ 4.81 $ 4.76 $ 4.95
Diluted earnings per share $ 4.61 $ 4.41 $ 4.65
<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 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,357 $ 15,538 $15,991
Adjustments to reconcile net income
to net cash provided by operations:
Deferred income tax l,061 (1,066) (975)
Depreciation and amortization 10,026 9,085 8,467
Income applicable to minority interest,
net of dividends 1,499 1,199 926
Income from equity investment in affiliate - (647) -
Other items not providing or
requiring cash (Note C) 485 633 30
Changes in operating assets and liabilities:
Trade receivables (2,438) (4,208) (6,674)
Inventory (2,348) (160) (2,179)
Other current assets (1,034) (1,347) (2,723)
Other long-term assets (216) (643) (124)
Accounts payable (3,437) 5,601 2,897
Accrued liabilities (1,434) 733 2,396
Other long-term liabilities 761 829 (253)
Net cash provided by operating activities 19,282 25,547 17,779
Cash flow from investing activities:
Purchase of securities - (200) (2,100)
Proceeds from sales of securities 2,300 - -
Capital expenditures (18,038) (20,264) (8,467)
Proceeds on sales of property, plant
and equipment 182 138 129
Equity investment in and advances to AFM (2,665) 141 (10,569)
Purchase of assets from AFM - (7,076) (6,706)
Net cash used in investing activities: (18,221) (27,261) (27,713)
Cash flow from financing activities:
Proceeds from short-term borrowings 5,266 2,625 4,943
Payment on short-term borrowings - - (2,187)
Proceeds from long-term borrowings 2,394 1,040 -
Principal payments on long-term debt (4,267) (164) (149)
Proceeds from borrowings from Raymark - 2,034 -
Payments on borrowings from Raymark (4,260) (8,388) (917)
Cash overdrafts (3,090) 3,090 -
Other 362 195 21
Net cash (used) provided by
financing activities (3,595) 432 1,711
Effect of exchange rate changes on cash 103 (146) (33)
Net change in cash and cash equivalents (2,431) (1,428) (8,256)
Cash and cash equivalents at beginning of year 9,913 11,341 19,597
Cash and cash equivalents at end of year $ 7,482 $ 9,913 $ 11,341
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<CAPTION>
Treasury
Accumulated Stock
Other At Cost
Common Paid in Accumulated Comprehensive (2,132,059
Stock Capital Deficit (Loss) Income Shares) Total
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 $5,362 $70,192 $(54,913) $ 2,600 $(4,561) $18,680
Comprehensive income:
Net income 15,991 15,991
Changes during
the year (682) (682)
Total comprehensive
income 15,991 (682) 15,309
Stock options exercised
(9,682 shares) 10 16 26
Balance,
December 29, 1996 $5,372 $70,208 $(38,922) $ 1,918 $(4,561) $34,015
Comprehensive income:
Net income 15,538 15,538
Changes during
the year (1,203) (1,203)
Total comprehensive
income 15,538 (1,203) 14,335
Stock options exercised
(45,546 shares) 45 67 112
Balance,
December 28, 1997 $5,417 $70,275 $(23,384) $ 715 $(4,561) $48,462
Comprehensive income:
Net income 16,357 16,357
Changes during
the year (884) (884)
Total comprehensive
income 16,357 (884) $15,473
Stock options exercised
(136,087 shares) 136 226 362
Balance,
January 3, 1999 $5,553 $70,501 $(7,027) $ (169) $(4,561) $64,297
<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 in June, 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 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. The warrants expired on October 1, 1994. 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 under the doctrine of
successor liability, piercing the corporate veil and fraudulent
conveyance.
Prior to the formation of Raytech, Raymark had been named as
a defendant in more than 88,000 lawsuits claiming substantial
damages for injury or death from exposure to airborne asbestos
fibers. Subsequent to the divestiture sale of Raymark in 1988,
lawsuits continued to be filed against Raymark at the rate of
approximately 1,000 per month until an involuntary petition in
bankruptcy was filed against Raymark in February 1989, which
stayed all its litigation. In August 1996, the involuntary
petition filed against Raymark was dismissed following a trial
and the stay was lifted. However, in March 1998, Raymark filed a
voluntary bankruptcy petition again staying the litigation.
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 liabilities
and costs that may result from asbestos litigation. Management
believed that each purchase by Raytech from Raymark complied with
Raytech's restructuring plan principles of (i) paying fair market
value, (ii) acquiring businesses that did not
give rise to any asbestos-related or other claims against
Raymark, (iii) permitting Raymark to retain the proceeds for its
ongoing business and creditors, (iv) entering the transactions in
good faith and not to hinder, delay or defraud creditors, and (v)
conducting its affairs independent of Raymark.
<PAGE>
Note A, continued
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.
Despite the restructuring plan implementation and subsequent
divestiture of Raymark, Raytech was named a co-defendant with
Raymark and other named defendants in approximately 3,300
asbestos-related lawsuits as a successor in liability to Raymark.
Until February 1989, the defense of all such lawsuits was
provided to Raytech by Raymark in accordance with the
indemnification agreement included as a condition of the purchase
of the Wet Clutch and Brake Division and German subsidiary from
Raymark in 1987. However, subsequent to the involuntary
bankruptcy proceedings against Raymark, a restrictive insurance
funding order was issued by an Illinois Court, denying defense
costs, and another Raymark 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. Raytech management was informed that
Raymark's cost of defense and disposition of cases up to the
automatic stay of litigation in 1989 under the involuntary
bankruptcy proceedings was approximately $333 million of
Raymark's total insurance coverage of approximately $395 million.
It has also been informed that as a result of the dismissal of
the involuntary petition, Raymark encountered newly filed
asbestos-related lawsuits but had received $27 million from a
state guarantee association to make up the insurance policies of
the insolvent carrier and had $32 million in other policies to
defend against such litigation. In March 1998, Raymark filed a
voluntary bankruptcy petition as a result of several large
asbestos-related judgments.
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.
<PAGE>
Note A, continued
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 intent 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
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
<PAGE>
Note A, continued
<PAGE>
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 above 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,
treating 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 damages for cleanup of the Stratford, Connecticut, site in
an amended amount of $300 million. The EPA has also filed a $300
million 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 is subject to
Bankruptcy Court deliberations and proceedings.
<PAGE>
Note A, continued
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court pending
the conclusion of the successor liability litigation. However, in
December 1992, the creditors' committee filed a motion to terminate
the exclusive period to file a plan of reorganization. At a hearing
in May 1993, the motion was denied by the Bankruptcy Court but was
appealed by the creditors' committee. In November 1993, the U.S.
District Court reversed the Bankruptcy Court and terminated the
exclusive period to file a plan of reorganization effective in
January 1994. Accordingly, any party in interest, including the
debtor, the creditors' committee or a creditor could thereafter file
a plan of reorganization.
In May 1994, Raytech filed a Plan of Reorganization ("Debtor's
Plan") in the U.S. Bankruptcy Court for the purpose of seeking
confirmation allowing Raytech to emerge from the bankruptcy filed
March 10, 1989. In September 1994, the creditors' committee filed
its own Plan of Reorganization in competition to the Debtor's Plan
("Creditors' 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. The competing plans of
Raytech and its creditors then returned to Bankruptcy Court
procedures.
In February 1997, Raytech resumed making monthly payments of
$650,000 to Raymark pursuant to the 1987 Asset Purchase Agreement as
amended. In November 1997, the creditors' committee filed an
adversary proceeding complaint and motion for a temporary
restraining order to halt the payments. In January 1998, the
Bankruptcy Court stopped 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 retirees intervened in
the action; however, Raymark continued to fund their benefits. Upon
motion, the Raymark retirees have been permitted to form a committee
in the Raytech bankruptcy, but any rights to the Raytech estate
remain subject to the Court's judicial determination.
Following Raytech's cessation of monthly $650,000 note payments
to Raymark 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
<PAGE>
Note A, continued
Court that remains in effect. The creditors' committee intervened
in the action in support of the restraining order.
In March and April 1998, Raymark and its parent, Raymark
Corporation, filed voluntary petitions in bankruptcy in a Utah Court
which stayed all litigation in the Raytech bankruptcy in which
Raymark was a party. In connection with its attempt to assert
control over Raymark and its assets the creditors' committee, joined
by Raytech, the Guardian Ad Litem for future claimants, the equity
committee and the government agencies moved to have the venue of the
Raymark bankruptcies transferred from Utah to the Connecticut Court.
In July 1998, the Bankruptcy Court issued an order on the motions
and transferred venue to the Connecticut Court. Raymark filed an
appeal of the order but has since withdrawn the appeal. In October
1998, a trustee was appointed by the United States Trustee over the
Raymark bankruptcies.
In October, 1998 Raytech reached a tentative settlement with
its creditors and entered into a Memorandum of Understanding with
respect to achieving a consensual plan of reorganization (the
"Plan"). The parties to the settlement include Raytech, the
Official Creditors Committee, the Guardian ad litem for Future
Claimants, the Connecticut Department of Environmental Protection
and the U. S. Department of Justice, Environmental and Natural
Resources Division. Substantive economic terms of the Memorandum of
Understanding provide for all general unsecured creditors including
but not limited to all asbestos and environmental claimants to
receive, through a trust established under The Bankruptcy Code, 90%
of the equity in a company to be reorganized ("Reorganized Raytech")
and any and all refunds of taxes paid or net reductions in taxes
owing resulting from the transfer of equity to the trust, and
existing equity holders in Raytech to receive 10% of the equity in
Reorganized Raytech. Substantive non-economic terms of the
Memorandum of Understanding provide for the parties to jointly work
to achieve a consensual Plan, to determine an appropriate approach
to related pension and employee benefit plans and to cease
activities that have generated adverse proceedings in the Bankruptcy
Court. The parties have also agreed to jointly request a finding in
the confirmation order to the effect that while Raytech's
liabilities appear to exceed the reasonable value of its assets, the
allocation of 10% of the equity to existing equity holders is fair
and equitable by virtue of the benefit to the estate of resolving
complicated issues without further costly and burdensome litigation
and the risks attendant therewith and the economic benefits of
emerging from bankruptcy without further delay.
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
<PAGE>
Note A, continued
to the release of lead and PCB's (polychlorinated biphenyls) found
in small waterways near its Indiana facility. In June, IDEM named
RPC as a potentially responsible party ("PRP"). RPC notified its
insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern
District of Indiana, captioned Reliance Insurance Company vs. RPC
seeking a declaratory judgment that any liability of RPC is excluded
from its policy with RPC. The discovery process in this action is
nearing completion. RPC continues to assess the extent of the
contamination and its involvement and is currently negotiating with
IDEM for an agreed order of cleanup. The Company intends to offset
its investigation and cleanup costs against its notes payable to
Raymark when such costs become known pursuant to the indemnification
clause in the wet clutch and brake acquisition agreement since it
appears that any contamination would have occurred during Raymark's
ownership of the Indiana facility. Blood tests administered to
residents in the vicinity of the small waterways revealed no
exposure.
As a result of an inspection, the Company was notified that the
operations purchased from AFM in January 1996 in Sterling Heights,
Michigan, were 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 record keeping
on operations in compliance. Potential fines for the violations
were substantial but negotiations with the DEQ resulted in a
tentative agreement providing for a consent judgment with a fine of
$324.
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.
In December 1998, the trustee of Raymark, Raytech and the
Raytech creditors' committee joined in filing an adversary
proceeding (complaint) against Craig R. Smith, et al. (including
relatives, business associates and controlled corporations)
alleging systematic stripping of assets belonging to Raymark in
an elaborate and ongoing scheme perpetrated by the defendants.
The alleged fraudulent scheme extended back to the 1980's and
continued up to this action and has enriched the Smith family by
an estimated $12 million and has greatly profited their
associates, while depriving Raymark and its creditors of nearly
all of its assets amounting to more than $27 million. Upon
<PAGE>
Note A, continued
motion of the plaintiffs, the Bankruptcy Court issued a temporary
restraining order stopping Mr. Smith and all defendants from
dissipating, conveying, encumbering or otherwise disposing of any
assets, which order has been amended several times and remains in
effect pending a preliminary injunction hearing. The reference
to the Bankruptcy Court has been withdrawn, and the matter will
now be litigated in the U.S. District Court in Connecticut.
Trial has been set for September 1999.
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 shares in 1991 and 80,000
shares in 1993. The Company's acceptance of its own stock was
based upon an intent to control dilution of its outstanding
stock. In 1992, the indemnified costs were reimbursed by
offsetting certain payments due Raymark from the Company under
the 1987 acquisition agreements. Costs incurred in 1994, 1995,
1996, 1997 and 1998 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 had a material adverse impact on Raytech as it did not
have the resources needed to fund Raymark's potentially
substantial uninsured asbestos-related and environmental
liabilities. However, the tentative settlement between Raytech
and its creditors as recited in the Memorandum of Understanding
referenced above has defined the impact of the successor
liabilities imposed by the referenced court decisions. While an
outline of principles in the Memorandum of Understanding has been
agreed to by Raytech and its creditors, a consensual plan of
reorganization must still be written and agreed to and is subject
to review and confirmation by the Bankruptcy Court, which at this
time cannot be predicted with certainty. Should the Memorandum
of Understanding not result in a confirmed plan of
reorganization, the ultimate liability of the Company with
respect to asbestos-related, environmental, or other claims would
remain undetermined. The accompanying financial statements have
been prepared assuming that the Company will continue as a going
concern, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the normal course of
business. The uncertainties regarding the reorganization
proceedings raise substantial doubt about the Company's ability
<PAGE>
Note A, continued
to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability,
revaluation 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 Corporation and its subsidiaries manufacture and
distribute engineered products for heat resistant, inertia
control, energy absorption and transmission applications.
The Company's operations are categorized into three business
segments: wet friction, dry friction and aftermarket.
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. Significant estimates include inventory and
receivable reserves, depreciable lives of property, plant and
equipment and intangible assets, pension and other
postretirement and postemployment benefits and the recoverable
value of deferred tax assets.
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 January 3, 1999, December 28, 1997,
and December 29, 1996.
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.
<PAGE>
Note B, continued
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. Amortization of Intangibles
Intangible assets, excluding the intangible pension asset,
are amortized on a straight line basis over forty years or
less (see Note M). The intangible pension asset is remeasured
and adjusted annually through an actuarial calculation. The
Company periodically evaluates the carrying value of
intangible assets when events and circumstances warrant such a
review. The carrying value is considered impaired when the
anticipated undiscounted cash flow from such asset is
separately identified and is less than its carrying value.
7. Income Taxes
The Company accounts for income taxes using the liability
method which recognizes the amount of taxes payable or
refundable for the current year and recognizes deferred tax
liabilities and assets for the future tax consequences of
events that have been recognized in the financial statements
or tax returns.
8. 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.
<PAGE>
Note B, continued
9. Translation of Foreign Currencies
The local currencies of the Company's subsidiaries in Germany,
the United Kingdom and China have been designated as the
functional currencies. Accordingly, financial statements of
foreign operations are translated using the exchange rate at
the balance sheet date for assets and liabilities, and an
average exchange rate in effect during the year for revenue
and expense items. The effects of translating the Company's
foreign subsidiaries' financial statements are recorded as a
separate component of accumulated comprehensive income in
shareholders' equity.
10. Revenue Recognition
Sales are recorded by the Company when products are shipped to
customers.
11. Recently Adopted Accounting Pronouncements
Effective December 29, 1997, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." 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.
Effective December 29, 1997, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information." SFAS 131 changes the way public companies report
information about operating segments.
Effective December 15, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement
Benefits." SFAS 132 standardizes the way employers disclose
information about pensions and other postretirement benefit
plans.
12. Recently Issued Accounting Pronouncement
Effective June 15, 1998, SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" was issued for fiscal years
beginning after June 15, 1999. SFAS 133 establishes a new
model for accounting for derivatives and hedging activities.
The Company is still assessing the impact, if
any, that this pronouncement will have on its financial
statements.
<PAGE>
Note C - Statements of Cash Flows
Other items not providing or requiring cash consist of:
1998 1997 1996
Net loss on sale/writedown
of fixed assets $ 84 $ 61 $ 268
Other non-cash items 401 572 (238)
$ 485 $ 633 $ 30
Income taxes paid were $5,992, $5,731, and $ 8,677 during
1998, 1997 and 1996, respectively.
Interest paid was $1,955, $2,584, and $2,731 during 1998, 1997
and 1996, respectively.
Excluded from the 1998, 1997 and 1996 Consolidated Statements
of Cash Flows is $1,716, $451, and $469, respectively, of plant and
equipment acquisitions in accounts payable or under capital leases.
<PAGE>
Note D - Inventories
Net Inventories
Inventories net of inventory reserves are as follows:
Fiscal Year 1998 1997
Raw materials $ 11,480 $ 10,751
Work-in-process 7,653 7,760
Finished goods 11,736 9,691
$ 30,869 $ 28,202
Inventory Reserves
Fiscal Year 1998 1997 1996
Beginning balance $ 3,825 $ 3,671 $ 2,962
Provisions for obsolete and
slow moving inventory 366 1,213 1,305
Charge-offs (1,027) (1,059) (596)
Ending balance $ 3,164 $ 3,825 $ 3,671
<PAGE>
Note E - Property, Plant and Equipment
Property, plant and equipment, at cost, is summarized as
follows:
Estimated
Useful
Lives
Fiscal Year 1998 1997 (Years)
Land $ 1,239 $ 1,226 -
Buildings and improvements 29,367 24,622 5-40
Machinery and equipment 123,866 105,664 3-20
Capital leases 895 904 See Below
Construction in progress 8,539 10,715 -
163,906 143,131
Less accumulated depreciation 92,014 82,141
Net property, plant and
equipment $ 71,892 $ 60,990
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 $11,470, $11,655, and $10,046 for 1998, 1997 and
1996, respectively.
Depreciation expense relating to property, plant and equipment
were $9,477, $8,746, and $8,039 for 1998, 1997 and 1996,
respectively.
<PAGE>
Note F - Debt
Debt consists of the following:
Fiscal Year 1998 1997
Notes due to Raymark (a) $ 28,011 $ 31,958
Notes payable to banks (b) 22,065 14,034
Note payable to former principal
owner of AFM (c) 3,022 -
Capitalized leases and other
obligations 277 313
Total borrowings 53,375 46,305
Less short-term debt and current
portion of long-term debt 31,143 23,139
Long-term debt $ 22,232 $ 23,166
The aggregate maturities of debt are as follows:
1999 $ 31,143
2000 18,917
2001 324
2002 273
2003 414
Thereafter 2,304
Total Debt $ 53,375
(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 jeopardized 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. In
January 1998, the Bankruptcy Court stopped the payments pending a
trial. In connection with the January 1998 Bankruptcy Court
decision to require Raytech to halt payments on its promissory note
payable to Raymark, management has concluded that interest should
not be accrued during the cease payment period. Accordingly, no
interest has been accrued in fiscal 1998. The ultimate resolution
of interest to be paid on the note is subject to the uncertainties
inherent in reorganization proceedings under the bankrupcy code.
At January 3, 1999 and December 28, 1997, the principal balance of
the Wet Clutch and Brake note was $22,737 and $26,997,
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 January 3, 1999 and December 28, 1997, the balances due on the
German note amounted to DM3,795 ($2,274) and DM3,795 ($1,961),
respectively. As of January 3, 1999 and December 28, 1997, the
accrued interest amounted to DM1,161 ($696) and DM1,257 ($699),
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 January 3, 1999 and December 28, 1997, 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 January 3, 1999 and December 28, 1997, the accrued
interest amounted to $943 and $760, 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. 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 1999 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
<PAGE>
Note F, continued
available lines of credit with several German banks
amounting to DM8,010 ($4,800). Interest is charged at rates
between 6.3% and 10.8%. The lines are repayable on demand. The
amounts outstanding under these available lines of credit at
January 3, 1999 and December 28, 1997 were DM4,095 ($2,454) and
DM3,109 ($1,729), respectively. At January 3, 1999 and
December 28, 1997, the remaining available lines of credit amounted
to DM3,915 ($2,346) and DM2,901 ($1,615), respectively.
During 1998 and 1997, Raytech Composites Europe GmbH
entered into various loan agreements with Commerzbank for amounts
ranging from DM790 to DM2847. The maturities range from September
2006 through December 2012. The loans bear interest at rates
betweeen 2.5% and 5.8%. At January 3, 1999 and
December 28, 1997 the outstanding balances were DM6,000 ($3,596)
and DM1,790 ($995), 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.
In November 1997, RPC refinanced its revolving line of
credit. 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
January 3, 1999, the net restricted assets of RPC amounted to
$26,153 consisting of cash, inventory, machinery and equipment and
all other tangible and intangible assets, excluding land and
buildings. The outstanding balance under the revolving line of
credit is $5,662 and under the term loan is $5,558 at January 3,
1999, respectively. The term loan is repayable in equal monthly
installments of $95 over six years commencing on January 1, 1998
with the unpaid balance due January 1, 2004. The additional
borrowing availability on the revolving line of credit at
January 3, 1999 is $0, based upon the asset borrowing formula.
With the redemption of 53% of AFM Stock (see Note Q), AFM
became a wholly-owned subsidiary of RCI. AFM has a revolving
line of credit, payable to NationsCredit Commercial Funding which
<PAGE>
Note F, continued
provides for borrowings up to $10 million in the aggregate,
subject to the borrowing formula based upon AFM's accounts
receivable. The loan bears an interest rate of .50% above the
prime rate. The outstanding balance under the line of credit is
$4,795 at January 3, 1999. The additional borrowing availability
at January 3, 1999 is $2,205 based upon the asset-based 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.
(c) AFM redeemed 53% of its stock by paying $3,022 in April
1998, and the balance of $3,022 is payable in three equal annual
installments. The note bears interest at a rate equal to the prime
rate as stated in THE WALL STREET JOURNAL (see Note Q).
At January 3, 1999, the accrued interest on the AFM note
amounted to $171 and is included in accrued liabilities.
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
January 3, 1999 and December 28, 1997 were 8.66% and 8.77%,
respectively.
<PAGE>
Note G - Research and Development
Cost of research and new product development amounted to
$5,642 in 1998, $5,903 in 1997, and $5,958 in 1996 and is included
in selling, general and administrative expenses in the Consolidated
Statements of Operations.
<PAGE>
Note H - Related Parties
During 1998 and other relevant periods of time, management has
been informed that Raymark was owned by Craig R. Smith, formerly a
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
<PAGE>
Note H, continued
for $750. Consideration paid to Craig R. Smith 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, and the balance was purchased
by Craig R. Smith in 1998.
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
<PAGE>
Note H, continued
in equal monthly installments of $650 commencing April 1993. The
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. As of December 1998, the Company had
incurred $4,260 of additional costs, which were also applied as a
reduction of the note.
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
<PAGE>
Note H, continued
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
dividend were paid in 1997 and the fourth quarter installment was
paid in 1998. 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.
Earnings attributable to minority shareholders of Allomatic
Products Company have been presented net of income tax as
minority interest in the Condensed Consolidated Statement of
Operations.
In September 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 1998 and 1997, the Company purchased yarn from
Universal Friction Composites ("UFC"), a company that management
has been informed is owned by Bradley C. Smith, amounting to
$2,509 and $3,926, and at January 3, 1999 and December 28, 1997,
the related payable amounted to $246 and $373, respectively.
In 1998, the Company acquired manufacturing equipment from
UFC for $1,051, of which $907 is included in accounts payable at
January 3, 1999.
During 1988, the Company repurchased 200,000 shares of its
common stock from Echlin Inc. (since acquired by Dana Corporation)
in exchange for approximately $1,200 of credit on future product
sales from the Company to Dana, which is pre-petition debt under
the Company's bankruptcy filing. As of January 3, 1999, Dana's
voting interest in the Company is 15.9%.
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 amount of $43 during 1997.
<PAGE>
Note I - Income Taxes
Income before provision for income taxes and minority
interest consists of:
1998 1997 1996
Domestic $25,314 $22,460 $19,982
Foreign (514) 1,309 673
$24,800 $23,769 $20,655
The Company's provision for taxes consists of the following:
1998 1997 1996
Current:
Federal $ 4,229 $ 6,437 $ 3,004
State 1,074 1,392 1,421
Foreign 580 147 156
Deferred:
Federal 1,061 (1,076) (975)
Total income taxes $ 6,944 $ 6,900 $ 3,606
The analysis of the variance from the U.S. statutory income
tax rate for consolidated operations is as follows:
1998 1997 1996
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 2.7 (1.3) -
Utilization of tax credits (1.6) (1.4) (1.0)
Net decrease (increase) in
benefit from carryback of
future deductible amounts (.9) 2.8 (3.0)
State income taxes, net of
federal benefit 2.8 3.8 4.2
Adjustment of prior years'
accruals (4.0) 3.4 (15.0)
Raymark indemnification
payments (7.0) (4.6) (7.8)
Reversal of foreign loss
carryforward valuation
allowance - (6.4) -
Other 1.0 (2.3) (.9)
Effective income tax rate 28.0% 29.0% 17.5%
<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:
1998 1997 1996
Excess of book provisions
over tax deductions $ 3,559 $ 3,994 $ 4,977
Postretirement benefit 4,325 4,040 3,592
Excess of tax basis over
book basis of assets due
to restructuring 2,301 2,807 3,346
Foreign loss carryforwards 1,927 1,832 3,660
Other 947 947 947
Gross deferred tax assets 13,059 13,620 16,522
Deferred tax asset
valuation allowance (4,851) (4,260) (9,175)
Deferred tax assets 8,208 9,360 7,347
Gross deferred tax
liabilities (excess of
tax over book depreciation) (3,692) (3,783) (2,846)
Net deferred tax asset $ 4,516 $ 5,577 $ 4,501
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 $591, $(4,915) and $628 during 1998, 1997 and
1996, 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 1998 and 1997, the Company utilized foreign loss
carryforwards, which reduced income tax expense by $326 and $417,
respectively. At January 3, 1999, the Company had foreign loss
carryforwards of $6,525, which do not expire.
<PAGE>
Note J - Employee Benefits
Raytech has several pension plans covering substantially all employees
and also provides certain postretirement, self-insured health care and life
insurance benefits for its domestic active and retired employees.
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
Change in benefit obligation
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of year $3,242 $2,595 $10,333 $ 8,782
Service cost 270 254 490 446
Interest cost 219 190 640 634
Plan participants' contributions - - 26 39
Amendments - 175 - -
Actuarial loss 525 88 410 738
Benefits paid (79) (60 (359) (306)
Benefit obligation at end of year $4,177 $3,242 $11,540 $10,333
Change in plan assets
Fair value of plan assets
at beginning of year $2,372 $1,931 $ - $ -
Actual return on plan assets 148 122 - -
Employer contribution 453 379 333 267
Plan participants' contribution - - 26 39
Benefits paid (79) (60) (359) (306)
Fair value of plan assets
at end of year $2,894 $2,372 $ - $ -
Funded Status Reconciliation and Key Assumptions
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
Funded status $(1,283) $ (870) $(11,540) $(10,333)
Unrecognized actuarial loss 1,095 590 186 21
Unrecognized prior service 205 226 - -
Prepaid (accrued) benefit
cost $ 17 $ (54) $(11,354) $(10,312)
Amounts recognized in the
statement of financial
position consist of:
Accrued benefit liability $(1,283) $ (870) $(11,354) $(10,312)
Prepaid benefit cost n/a n/a n/a n/a
Intangible asset 205 226 n/a n/a
Unrecognized actuarial loss* 1,095 590 n/a n/a
Net amount recognized $ (17) $ (54) $(11,354) $(10,312)
<FN>
*Beginning with the adoption of FAS 130, this amount is reflected in
Accumulated Other Comprehensive Income in Shareholders' Equity.
</TABLE>
<PAGE>
Note J, continued
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
Weighted average assumptions
<S> <C> <C> <C> <C>
Discount rate 6.00% 6.75% 6.00% 6.75%
Expected return on plan assets 6.00% 6.00% n/a n/a
Rate of compensation increase n/a n/a 5.00% 5.00%
Healthcare trend rate n/a n/a 6.50% 6.50%
Sensitivity Analysis, Postretirement Benefits:
For measurement purposes, a 6.50% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed. The healthcare cost trend rate
assumption has a significant effect on the amounts reported. To illustrate the
impact, increasing or decreasing the assumed health care cost trend rates by 1
percentage point in each year would have the following effects:
</TABLE>
<TABLE>
<CAPTION>
1 Percentage Point 1 Percentage Point
Increase Decrease
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Effect on total of service
and interest cost components
of expense $ 100 $ 100 $(100) $(100)
Effect on accumulated postretire-
ment benefit obligation $1,100 $1,100 $(900) $(900)
</TABLE>
<TABLE>
<CAPTION>
Net Periodic Benefit Expense (Income)
Postretirement
Pension Benefits Benefits
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits
attributed to service
during the period $ 270 $ 254 $ 247 $ 490 $ 446 $ 511
Interest cost on benefit
obligation 219 190 155 640 634 680
Expected return on plan
assets (150) (124) (99) - - -
Amortization of prior
service cost 20 20 8 - - -
Amortization of net actuarial
(gain) loss 22 15 22 (55) (13) 77
Total net periodic benefit
cost $ 381 $ 355 $ 333 $1,075 $1,067 $1,268
</TABLE>
<PAGE>
Note J, continued
The Company's German subsidiaries have unfunded defined benefit plans
covering certain employees.
Pension Benefits
1998 1997
Change in benefit obligation
Benefit obligation at
beginning of year $2,254 $2,121
Service cost 84 83
Interest cost 161 155
Actuarial (gain) loss (8) 9
Benefits paid (111) (110)
Translation 182 (4)
Benefit obligation at end of year $2,562 $2,254
Change in plan assets
Fair value of plan assets
at beginning of year $ 0 $ 0
Actual return on plan assets 0 0
Employer contribution 111 110
Plan participants' contribution 0 0
Benefits paid (111) (110)
Fair value of plan assets
at end of year $ 0 $ 0
Funded Status Reconciliation and Key Assumptions
Pension Benefits
1998 1997
Funded status $(2,562) $(2,254)
Actuarial net loss 217 34
Unrecognized prior service cost - -
Unrecognized transition obligation 267 297
Prepaid (accrued) benefit cost $(2,078) $(1,923)
Weighted average assumptions
Discount rate 7.00% 7.00%
Expected return on plan assets n/a n/a
Rate of compensation increase n/a n/a
Healthcare trend rate n/a n/a
<PAGE>
Note J, continued
<TABLE>
<CAPTION>
Net Periodic Benefit Expense (Income)
Pension Benefits
1998 1997 1996
<C> <S> <C> <C> <C>
Service cost - benefits
attributed to service during
the period $ 84 $ 83 $ 96
Interest cost on benefit
obligation 161 155 178
Amortization of transition
obligation 50 52 59
Amortization of net actuarial
(gain) loss (172) (178) (204)
Total net periodic benefit
cost $ 123 $ 112 $ 129
<FN>
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 1998, 1997 and 1996 under the salary defined
contribution plan were $818, $800, and $632, 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 1998, 1997, and
1996 under the hourly defined contribution plan were $30, $24, and $18,
respectively.
</TABLE>
<PAGE>
Note K - Segment Reporting
The Company's operations are categorized into three business
segments based on management structure, product type and distribution
channel as described below.
The wet friction operations produce specialty engineered products
for heat resistant, inertia control, energy absorption and
transmission applications. The Company markets its products to
automobile original equipment manufacturers, heavy duty original
equipment manufacturers, as well as farm machinery, mining, truck
and bus manufacturers.
The dry friction operations produce engineered friction products,
primarily used in original equipment automobile and truck
transmissions. The clutch facings produced by this segment are
marketed to companies who assemble the manual transmission systems
used in automobiles and trucks.
The aftermarket segment produces specialty engineered products
primarily for automobile and lift truck transmissions. In addition
to these products, this segment markets transmission filters and
other transmission related components. The focus of this segment is
marketing to warehouse distributors and certain retail operations in
the automotive aftermarket.
Information relating to operations by industry segment in millions of
dollars follows with related comments included in Management's
Discussion and Analysis.
<PAGE>
NOTE K, continued
<TABLE>
<CAPTION>
OPERATING SEGMENTS
Dry Total
Wet Friction Aftermarket Friction Segments
1998
<S> <C> <C> <C> <C>
Net sales to external
customers $ 155,769 $ 58,844 $ 32,851 $ 247,464
Intersegment net sales (1) 15,358 19 165 15,542
Total net sales 171,127 58,863 33,016 263,006
Depreciation 6,458 1,243 1,736 9,437
Interest expense 1,467 430 (3) 336 2,233
Operating profit (2) 18,368 9,020 750 28,138
Segment assets 127,268 24,604 21,473 173,345
Expenditures for property,
plant and equipment 12,851 1,813 4,935 19,599
1997
Net sales to external
customers $ 145,715 $ 53,663 $ 35,097 $ 234,475
Intersegment net sales (1) 15,131 80 - 15,211
Total net sales 160,846 53,743 35,097 249,686
Depreciation 6,037 1,053 1,616 8,706
Interest expense 2,621 384 (3) 332 3,337
Operating profit (2) 15,770 8,447 1,946 26,163
Segment assets (4) 111,593 25,174 16,983 153,750
Expenditures for property,
plant and equipment 13,702 2,692 4,193 20,587
1996
Net sales to external
customers $ 127,785 $ 52,498 $ 37,400 $ 217,683
Intersegment net sales (1) 17,393 14 - 17,407
Total net sales 145,178 52,512 37,400 235,090
Depreciation 5,214 940 1,847 8,001
Interest expense 2,199 396 (3) 422 3,017
Operating profit (2) 14,428 6,948 1,002 22,378
Segment assets 102,108 20,671 15,793 138,572
Expenditures for property,
plant and equipment 5,070 1,627 1,601 8,298
<FN>
(1) The Company records intersegment sales at an amount negotiated between the
segments. All intersegment sales are eliminated in consolidation.
(2) The Company's management reviews the performance of its reportable segments
on an operating profit basis, which consists of income before tax and minority
interest.
(3) Interest on debt due to affiliate.
(4) Investment in equity investees of $10,249 and $9,972 in 1997 and 1996,
respectively, are included in segment assets of Wet Friction.
</TABLE>
<PAGE>
NOTE K, continued
SALES BY GEOGRAPHIC LOCATION
<TABLE>
<CAPTION>
Dry
Wet Friction Aftermarket Friction Consolidated
1998
<S> <C> <C> <C> <S> <C>
United States $ 146,323 $ 58,844 $ - $ 205,167
Germany 9,294 - 32,721 42,015
Other foreign countries 152 - 130 282
Total net sales $ 155,769 $ 58,844 $ 32,851 $ 247,464
1997
United States $ 138,159 $ 53,663 $ - $ 191,822
Germany 7,528 - 35,097 42,625
Other foreign countries 28 - - 28
Total net sales $ 145,715 $ 53,663 $ 35,097 $ 234,475
1996
United States $ 119,926 $ 52,498 $ - $ 172,424
Germany 7,376 - 37,400 44,776
Other foreign countries 483 - - 483
Total net sales $ 127,785 $ 52,498 $ 37,400 $ 217,683
<FN>
Sales are attributed to geographic areas based on the location of the assets
producing the sales.
Domestic sales to two wet friction customers, which were greater than 10% of
total net sales, were as follows:
1998 1997 1996
Customer A $ 30,716 $ 33,448 $ 31,592
Customer B 36,974 9,083 9,248
</TABLE>
<PAGE>
NOTE K, continued
<TABLE>
<CAPTION>
LONG-LIVED ASSETS BY GEOGRAPHIC LOCATION
Dry
Wet Friction Aftermarket Friction Consolidated
1998
<S> <C> <C> <S> <C>
United States $ 56,287 $ 9,630 - $ 65,917
Germany 12,812 - $ 9,901 22,713
Other foreign countries 2,020 - 3,855 5,875
Total long-lived assets $ 71,119 $ 9,630 $ 13,756 $ 94,505
1997
United States $ 43,409 $ 10,783 - $ 54,192
Germany 11,098 - $ 8,482 19,580
Other foreign countries 1,576 - 1,400 2,976
Total long-lived assets $ 56,083 $ 10,783 $ 9,882 $ 76,748
1996
United States $ 39,964 $ 6,684 $ - $ 46,648
Germany 9,826 - 8,300 18,126
Other foreign countries 1,500 - - 1,500
Total long-lived assets $ 51,290 $ 6,684 $ 8,300 $ 66,274
</TABLE>
<PAGE>
NOTE K, continued
<TABLE>
<CAPTION>
Income 1998 1997 1996
<S> <C> <C> <C>
Operating profit $ 28,138 $ 26,163 $ 22,378
Corporate (1) (3,236) (2,523) (1,777)
Elimination (102) 129 54
Consolidated earnings before
taxes and minority interest $ 24,800 $ 23,769 (3) $ 20,655
Net Sales 1998 1997 1996
Total sales $ 263,006 $ 249,686 $ 235,090
Eliminations (15,542) (15,211) (17,407)
Consolidated net sales $ 247,464 $ 234,475 $ 217,683
Assets 1998 1997 1996
Total assets $ 173,345 $ 153,750 $ 138,572
Corporate (2) 5,988 6,649 6,234
Eliminations (5,529) (7,014) (4,651)
Total consolidated assets $ 173,804 $ 153,385 $ 140,155
<FN>
(1) Represents compensation and related costs for employees of the
Company's corporate headquarters, professional fees, shareholder
fees and public relations expenses.
(2) Includes cash, deferred tax assets and long-term assets.
(3) Income from equity investment in affiliate in the amount of $647 is
included in 1997.
</TABLE>
<TABLE>
<CAPTION>
Segment Corporate Consolidated
Other Significant Items Total Headquarters Tota1
1998
<S> <C> <C> <C> <C> <C>
Depreciation $ 9,437 $ 40 $ 9,477
Interest income - - -
Interest expense 2,233 7 2,240
Expenditures for property,
plant and equipment 19,599 155 19,754
1997
Depreciation $ 8,706 $ 40 $ 8,746
Interest income
Interest expense 3,337 8 3,345
Expenditures for property,
plant and equipment 20,587 16 20,603
1996
Depreciation 8,001 38 8,039
Interest income
Interest expense 3,017 115 3,132
Expenditures for property,
plant and equipment 8,298 92 8,390
</TABLE>
<PAGE>
NOTE L - Summarized Quarterly Financial Data (Unaudited)
(in thousands except share and market data)
Fiscal Quarters Ended 1998
March 29 June 28 Sept. 27 January 3
Net sales $ 62,895 $ 63,645 $ 61,486 $ 59,438
Gross profit 14,695 16,473 12,971 14,511
Income before provision
for taxes and minority
interest 7,318 7,660 5,152 4,670
Net income $ 4,157 $ 5,986 $ 3,081 $ 3,133
Basic income per share $ 1.24 $ 1.75 $ .90 $ .92
Diluted income per share $ 1.18 $ 1.67 $ .87 $ .89
Market range:
-high 5-3/4 5-7/8 5-3/8 4
-low 3-15/16 4-11/16 3 2-13/16
Dividends - - - -
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(a) 5,572(a) 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 - - - -
(a) Includes adjustments related to environmental accruals established
in 1996 that are no longer required.
<PAGE>
Note M - Supplementary Financial Statement Detail
Fiscal Year 1998 1997
OTHER CURRENT ASSETS
Deferred income taxes $ 3,035 $ 4,128
Prepaid insurance 789 762
Prepaid expenses 2,062 1,751
Other 2,674 1,949
$ 8,560 $ 8,590
ACCOUNTS PAYABLE
Trade accounts payable $ 15,702 $ 17,609
Cash overdraft - 3,090
Other 3 4
$ 15,705 $ 20,703
Fiscal Year l998 l997
ACCRUED LIABILITIES
Property taxes $ 1,967 $ 1,925
Legal 1,341 1,366
Taxes 806 946
Wages and related taxes 4,842 6,997
Pensions and employee benefits 2,529 2,649
Product due Dana (see Note H) 1,183 1,183
Other 8,927 7,376
$ 21,595 $ 22,442
OTHER LONG-TERM LIABILITIES
Long-term pensions $ 2,903 $ 1,823
Other 4,912 3,606
$ 7,815 $ 5,429
<PAGE>
Note M, continued
Fiscal Year 1998 1997 1996
OTHER OPERATING INCOME (EXPENSE), NET
Insurance recovery $ - $ - $ 183
Reimbursement of savings plan
contributions - 120 79
Other, net 387 152 (65)
$ 387 $ 272 $ 197
OTHER INCOME (EXPENSE), NET
Interest income $ 412 $ 410 $ 218
Income from equity
investment in affiliate - 647 -
Other, net 653 268 (97)
$ 1,065 $ 1,325 $ 121
ALLOWANCE FOR BAD DEBTS
Beginning balance $ 1,186 $ 726 $ 822
Provisions 628 524 28
Charge-offs (732) (64) (124)
Ending balance $ 1,082 $ 1,186 $ 726
AMORTIZATION EXPENSE OF
INTANGIBLE ASSETS
Advanced Friction Materials $ 477 $ 370 $ 343
Allomatic Products Company 57 57 57
Other 15 21 30
Ending balance $ 549 $ 448 $ 430
<PAGE>
Note M, continued
CONDENSED FINANCIAL INFORMATION OF RAYTECH CORPORATION (PARENT)
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
1998 1997
Current Assets:
Cash 480 $ 296
Deferred taxes 2,176 3,322
Other current assets 2 2
Total current assets 2,658 3,620
Investment in subsidiaries 63,841 47,152
Deferred taxes 1,479 1,449
Other long-term assets 1,851 1,580
Total assets $ 69,829 $ 53,801
Current Liabilities:
Accounts payable and
accrued liabilities $ 3,733 $ 3,456
Other liabilities 704 1,883
Total liabilities 4,437 5,339
Shareholders' equity
Common stock 5,553 5,417
Additional paid in capital 70,501 70,275
Accumulated deficit (7,027) (23,384)
Accumulated other
comprehensive income 926 715
69,829 53,801
Less treasury stock at cost (4,561) (4,561)
Total shareholders' equity 65,392 48,462
Total liabilities and
shareholders' equity $ 69,829 $53,801
<PAGE>
Note M, continued
<TABLE>
<CAPTION>
Statements of Operations
1998 1997 1996
<S> <C> <C> <C>
General and administrative expenses $(3,236) $ (2,523) $(1,777)
Provision for income taxes (4,226) (4,859) (1,630)
Income (loss) before equity in earnings
in subsidiaries (7,462) (7,382) (3,407)
Equity in earnings of subsidiaries 23,819 22,920 19,398
Net income $16,357 $15,538 $15,991
Statement of Cash Flows
1998 1997 1996
Net cash used in operating activities $(6,076) $(4,693) $(2,972)
Net cash provided by investing activities:
Dividends from subsidiary 5,898 4,743 3,015
Net cash provided by financing activities:
Proceeds from sale of stock 362 112 26
Net change in cash 184 162 69
Cash, beginning of period 296 134 65
Cash, end of period $ 480 $ 296 $ 134
</TABLE>
<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.
- All of the Company's income tax accounts except as
related to Allomatic Products Company and foreign
subsidiaries.
- 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 $1,334, $1,050, and $995, in 1998,
1997 and 1996, respectively. The approximate minimum rental
commitments under non-cancelable leases at January 3, 1999 were as
follows: 1999, $492; 2000, $398; 2001, $285; 2002, $278 and 2003,
$276 and 2004 and thereafter, $206.
<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 shares of
common stock and any accompanying stock appreciation rights. The
Company granted both non-qualified and incentive stock options under the
Plan. 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. The term during which
options could 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. Effective August 13, 1998, the Company granted 500,000 non-
qualified options at the option price of $4.25 which was the market
price per share at the date of the 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 1997 and 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 for the
year ended January 3, 1999 would have been $16,106. Pro forma basic and
diluted earnings per share for the year ended January 3, 1999 would have
been $4.73 and $4.54, respectively.
The fair value of the option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used in 1998. The expected volatility was
54%, the dividend yield was $0, the risk free interest rate used was
5.42% and the expected life of four years was used for the options.
<PAGE>
Note O, continued
Changes during the three years ended January 3, 1999 in shares
under option were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
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 526,050 $2.99 658,350 $ 3.56 697,234 $ 3.66
Granted (1) 500,000 4.25 - -
Exercised (136,087) 2.66 (45,546) 2.52 (9,682) 2.75
Lapsed (650) 1.75 (82,154) 7.88 (25,000) 6.75
Canceled (43,356) 7.53 (4,600) 1.75 (4,202) 2.94
Outstanding at
end of year 845,957 3.56 526,050 2.99 658,350 3.56
Options available
for future awards
at end of year 31,544 30,299 30,299
Options exercisable
at end of year 347,202 2.56 526,050 2.99 658,350 3.56
</TABLE>
<TABLE>
<CAPTION>
Options outstanding and exercisable at January 3, 1999 were as
follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
<C> <S><C> <C> <C> <C> <C> <C>
$1.75 65,950 .82 $ 1.75 65,950 $ 1.75
$2.75 281,252 3.83 2.75 281,252 2.75
$4.25 498,755 9.62 4.25 - -
$1.75 - $4.25 845,957 7.01 $ 3.56 347,202 $ 2.56
<FN>
(1) Options become exercisable one year from the date of grant.
</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 January 3,
1999, the Company had uncollateralized receivables with three
customers approximating $17,021 or 58.6% of the Company's trade
account balance. At December 28, 1997, the Company had
uncollateralized receivables with two customers approximating $7,375
or 27.5% of the Company's trade account balance. 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
leased 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 was 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.
In January 1996, RCI acquired 47% of the stock of AFM. The Stock
Purchase Agreement ("Agreement") provided for the 53% stock owner to
put his stock to RCI anytime after two years. The owner put 53% of
AFM stock to RCI which assigned its obligation to purchase the stock
to AFM. Based on the formulated amount of $6,044 under the Agreement
AFM redeemed 53% of its stock from the former owner by paying $3,022
in April 1998, and the balance of $3,022 is payable in three equal
annual installments with interest at prime. Effective April 1998,
Raytech has consolidated the results of AFM, which were previously
recorded under the equity method. The pro forma effect on operations,
had Raytech made the acquisition at the beginning of the period, is
not significant.
<PAGE>
Note R - Earnings Per Share
1998 1997 1996
Basic EPS computation
Numerator $ 16,357 $ 15,538 $ 15,991
Denominator:
Common shares outstanding
at beginning of the year 3,285,308 3,239,762 3,230,080
Stock options exercised 116,711 23,375 2,594
Weighted average shares 3,402,019 3,263,137 3,232,674
Basic EPS $4.81 $4.76 $4.95
Diluted EPS Computation
Numerator $ 16,357 $ 15,538 $ 15,991
Denominator:
Common shares outstanding
at beginning of the year 3,285,308 3,239,762 3,230,080
Dilutive potential common
shares 146,874 261,254 208,971
Stock options exercised 116,711 23,375 2,594
Adjusted weighted
average shares 3,548,893 3,524,391 3,441,645
Diluted EPS $4.61 $4.41 $4.65
<PAGE>
Note S - Comprehensive Income
In 1998, Raytech adopted SFAS No. 130, "Reporting Comprehensive
Income" and has elected to report Comprehensive Income in the
Consolidated Statements of Shareholders' Equity.
The components of and changes in accumulated other comprehensive
(loss) income are as follows:
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustment (Loss) Income
Beginning balance 12/31/95 $ 2,600 - $ 2,600
Changes during the year (682) - (682)
Balance 12/29/96 1,918 - 1,918
Changes during the year (1,203) - (1,203)
Balance 12/28/97 715 - 715
Changes during the year 211 $(1,095) (884)
Balance 1/3/99 $ 926 $(1,095) $ (169)
No tax benefit has been provided for the future tax deduction
associated with the minimum pension liability and translation
adjustments.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Raytech Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index appearing under Item 14(a)(1) present
fairly, in all material respects, the financial position of
Raytech Corporation (the "Company," a holding company) and
subsidiaries at January 3, 1999 and December 28, 1997, and the
results of their operations and their cash flows for each of the
three fiscal years in the period ended January 3, 1999, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing the accounting
principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note A to the consolidated financial statements,
Raymark Corporation ("Raymark") is a defendant in numerous
lawsuits seeking substantial damages relating to airborne
asbestos fibers. The Company has been named a co-defendant in
approximately 3,300 of these asbestos-related lawsuits as a
successor in liability to Raymark. In addition, the Company is
co-defendant with Raymark in lawsuits involving environmental
matters as a successor in liability to Raymark. On March 10,
1989, Raytech filed a petition seeking relief under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code"). Under
the provisions of the Bankruptcy Code, the Company is operating
as a debtor-in-possession. The Company's operating subsidiaries,
none of which have filed for protection under Chapter 11,
continue to operate their businesses in the ordinary course of
business. Raytech filed to protect itself from the lawsuits
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.
<PAGE>
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. During 1998, Raytech entered
into a tentative settlement with its creditors; however, a formal
consensual plan of reorganization must still be agreed to and is
subject to review and confirmation by the Bankruptcy Court.
Consequently, determination of Raytech's actual liabilities as
successor to Raymark's asbestos-related and environmental claims
continues to be 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,
revaluation 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.
PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
March 5, 1999
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
Not applicable
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
Directors
The Certificate of Incorporation of Raytech Corporation
provides that the Board of Directors shall consist of not more than
nine and not less than three Directors, that the Directors shall be
divided into three classes, designated Class I, Class II and Class
III, as nearly equal in number as may be possible, and that each class
of Directors shall be elected for a term of three years. The term of
office of the Class I Directors expires with the 1999 Annual Meeting
and two Directors will be elected as Class I Directors for full three-
year terms and until their successors are elected and qualified.
Set forth below are the names of two persons nominated by
the Board of Directors for election as Class I Directors and the names
of the other Class II and the Class III Directors, together with their
ages, principal occupations and business experience during the last
five years, present directorships, the year each first became a
Director and the number of shares of Raytech Common Stock owned by
each beneficially, directly or indirectly, as of March 1999. Except
as otherwise indicated, the persons listed have sole voting and
investment power with respect to shares beneficially owned by them.
The nominees are presently Directors and the nominees and Directors
were elected Directors at an Annual Meeting of Shareholders.
Principal Occupation
Business Experience
During Last 5 Years First
and Present Became
Name Age Directorships Director
Class I (currently serving and nominated to serve until the Annual
Meeting of Shareholders in 2002)
Donald P. Miller 67 Retired, formerly 1986
President and Chief
Executive Officer of
Posi-Seal International,
Inc. until 1986; Director,
Information Management
Association; Director,
Saab Financial Auto
Receivables Corp.
Robert B. Sims 56 President and Chief 1986
Executive Officer of
Counselcor LLC since
1995; Prior thereto Senior
Vice President, Secretary
and General Counsel of
Summagraphics Corporation
<PAGE>
Principal Occupation
Business Experience
During Last 5 Years First
and Present Became
Name Age Directorships Director
Class II (serving until the Annual Meeting of Shareholders in 2000)
Robert M. Gordon 82 Retired, formerly 1986
President and Vice
Chairman of Raybestos-
Manhattan, Inc.
Frederick J. Mancheski(1) 72 Retired, formerly 1998
Chairman of the Board
and Chief Executive
Officer of Echlin Inc.;
Director, Marlin Co.
Albert A. Canosa(2) 53 President and Chief 1998
Executive Officer of
Raytech Corporation;
Previously, Vice
President of Adminis-
tration, Treasurer
and Chief Financial
Officer of Raytech
Corporation
Class III (serving until the Annual Meeting of Shareholders in 2002)
Robert L. Bennett 62 Principal, Bennett, 1989
Fisher, Giuliano &
Gottsman, The Electronic
Publishing Group since
1993
(1) Appointed by the Board of Directors to fill the vacancy caused by
the resignation of Dennis G. Heiner in July 1998 and to serve his
term remaining.
(2) Appointed by the Board of Directors to fill the vacancy caused by
the resignation of Craig R. Smith in January 1998 and to serve
his term remaining.
<PAGE>
Directors' Compensation
Directors received a $17,000 per year meeting fee plus $3,000
per year fee for one or more committee appointments in 1998. The
Directors are paid the annual Director's meeting fee or proportion
thereof only for scheduled meetings attended. The committee meeting
fee is paid regardless of attendance. There is no minimum attendance
rule and any Director that misses all meetings would receive no
portion of the annual Director's meeting fee.
Executive Officers
First Became
Name Age Positions Held Officer
Albert A. Canosa 53 President and 1986
Chief Executive
Officer
John B. Devlin 47 Vice President, 1998
Treasurer and Chief
Financial Officer
John J. Easton 55 Vice President, 1991
President of
Subsidiary, Raybestos
Products Company,
since 1987
LeGrande L. Young 63 Vice President, 1986
Administration,
Secretary and
General Counsel
<PAGE>
Item 11. Executive Compensation
<TABLE>
<CAPTION>
Summary Compensation Table:
The following Summary Compensation Table identifies current,
long-term and stock-related compensation paid to the Chief Executive
Officer and the three most highly compensated executive officers for
1998 and two prior years:
Long-Term
Compensation
Annual Compensation Awards Payouts All Other
Name/ Salary Bonus Options LTIP Compensation
Position (1) Year ($) ($) # $(2) ($)(3)
<S> <C> <C> <C> <C> <S> <C>
Albert A. Canosa 1998 276,225 352,000 - - 9,600
President and 1997 155,626 166,069 - - 9,424
Chief Executive 1996 149,582 171,087 - 152,078 8,983
Officer
John B. Devlin (4) 1998 116,477 144,000 - - 6,989
Vice President,
Treasurer and
Chief Financial
Officer
John J. Easton 1998 182,411 142,234 - - 13,304
Vice President 1997 145,761 109,321 - - 11,945
1996 140,156 157,674 - 140,155 8,606
LeGrande L. Young 1998 179,724 237,056 - - 9,600
Vice President, 1997 160,620 161,255 - - 9,600
Administration, 1996 154,333 179,808 - 159,030 9,000
Secretary and
General Counsel
Craig R. Smith(5) 1998 33,394 - - - 379
1997 283,511 411,419 - - 9,600
1996 272,369 423,854 - 282,569 9,000
<FN>
(1) Registrant has only four executive officers, including the CEO.
(2) Payouts pursuant to the Strategic Plan Variable Compensation Program providing
awards for a three-year strategic planning period based upon earnings per
share achievements.
(3) The numbers stated for each year recite Registrant contributions to Messrs.
Canosa, Devlin, Easton and Young under its defined contribution plan [401(k)]
in the amounts of $9,600, $6,989, $9,600 and $9,600, respectively, for 1998; to
Messrs. Canosa, Easton, Young and Smith in the amounts of $9,424, $9,030,
$9,600 and $9,600, respectively, for 1997; and $8,983, $8,606, $9,000 and
$9,000, respectively, for 1996.
(4) Mr. Devlin was hired in March 1998 and accordingly had no compensation in the
two prior years from the Registrant.
(5) Mr. Smith was formerly President and Chief Executive Officer but was
terminated in January 1998.
</TABLE>
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option
Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options Options
on Value at 1/3/99 at 1/3/99
Exercise Realized Exercisable Exercisable
Name (#) ($) (#) ($)
<S> <C> <C> <S> <C> <C>
Albert A. Canosa (CEO) - - 40,418 $ 12,052
John J. Easton - - 39,059 $ 11,882
LeGrande L. Young - - 43,722 $ 12,465
Craig R. Smith (1) 96,784 227,264 - -
<FN>
(1) Terminated in January 1998.
</TABLE>
Performance Table
The following Performance Graph compares the Registrant's
cumulative total shareholder return on its common stock with
certain indexes and peer groups for a five-year period:
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG RAYTECH CORPORATION*, DOW JONES EQUITY
INDEX** AND DOW JONES AUTOMOTIVE PARTS
AND EQUIPMENT INDEX**
Dow Jones
Auto Parts and
Raytech Dow Jones Equity Equipment Index
1993 100 100 100
1994 140 98 84
1995 92 131 101
1996 128 161 112
1997 176 208 139
1998 92 264 128
* Total return assumes reinvestment of dividends.
** Based on closing index on the last trading day of the
calendar year.
Assumes $100 invested on January 3, 1993 in Raytech common
stock, Dow Jones Equity Index, and Dow Jones Automotive
Parts and Equipment Index.
<PAGE>
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors of
the Registrant, consisting of three Directors, makes this report of
its compensation policies applicable to the executive officers and
the basis for the Chief Executive Officer's compensation for the
last completed fiscal year.
The compensation philosophy of the Compensation Committee
is based upon the premise that all salaried personnel should be
eligible to receive additional compensation for outstanding
contribution to the Corporation and consists of the following two
elements: a fixed base salary and a management incentive in
variable amounts in accordance with the levels of eligibility and
performance criteria. The objectives under this philosophy are to
maintain an equitable internal classification of positions by grade,
to maintain compensation opportunity equal to or greater than the
competition, to provide for aggregate compensation related to
performance achievement, to maintain an effective system of salary
planning and control and to provide executives with the opportunity
to earn additional compensation based on achievement of certain
goals for the Corporation and its shareholders attributable to
excellence in management.
To accomplish the compensation objectives, all salaried
positions, including the Chief Executive Officer, are graded to
reflect level of responsibility inherent in the position and market
value. The judgment takes into account the following factors:
organizational relationships, knowledge requirements, impact
potential on corporate profitability, scope of monetary
responsibility and managerial control and the areas of functional
responsibility requiring direction. The Compensation Committee
considers all such factors but places no relative weight on any of
the factors. Though the determination of executive compensation is
performed in an organized manner, using documented criteria as
referenced below, the Compensation Committee retains full
discretionary authority in establishing executive compensation.
The base salary for executive officers is set in relation
to the base salary policy and practice of other bonus paying
employers in the metalworking/fabricating industry. The data source
for determining the base salary practice of bonus paying employers
is Project 777 - Management Compensation Services, a division of
Hewitt Associates. Other executive compensation report services
relied upon as cross-checks to the Project 777 are AMA - Top
Management Compensation Report and Total Compensation Data Base
Middle Market CompBook. These data sources were selected as models
for executives' salaries based upon the similarities of industry,
operations and products to the Company and the prestige of the
sponsoring firms. Special surveys may be conducted if the
Compensation Committee deems it appropriate in its discretion but
have not done so within the last three years. The other bonus
<PAGE>
paying employers used in establishing the base salary of executives
are listed in the Metal Working/Fabricating Industry Division of
Project 777, consisting of 37 companies only one of which was
included in the line-of-business index in the Performance Graph set
forth above. Of all industry groups of corporations set forth in
Project 777, the metalworking/fabricating group was determined by
the Compensation Committee to be the closest and most fitting in
type of operations, products and job responsibilities to the
Company. The base salaries of executive officers, including the
Chief Executive Officer, were low compared to the surveys listed.
Since this base salary tends to be lower than the salary policy of
non-bonus paying employers, comparable levels of total compensation
are achieved or exceeded only when the variable element of
compensation is added to the base. To strengthen the executives
commitment to improvement of the financial performance of the
Corporation, the amount available for distribution as variable
compensation in any year is determined by either the return on
equity or earnings before tax at the Board's discretion. The
formula necessitates that the Corporation achieve a stipulated
earnings before tax or return on equity goal before variable
compensation is paid. Payment of shareholder dividends in the year
variable compensation is earned is a prerequisite to payment;
provided, however, that such compensation may be paid in any event
if the Board finds that unusual circumstances justify such payments.
In accordance with the philosophy recited above, the Board
stipulated earnings before tax goals in each of the fiscal years
1996, 1997 and 1998 based upon a Board approved Business Plan for
each year. The stipulated earnings before tax goals were achieved
for the years 1996, 1997 and 1998 resulting in variable compensation
or bonus to the executive officers, including the Chief Executive
Officer, as well as other key employees, in amounts established in
the variable compensation plan. Earnings before tax are recited in
the Registrant's 1998 Annual Report on Form 10-K herein. The total
compensation of the executive officers in the years in which
variable compensation or bonus was paid based on performance was
high compared to the Project 777 survey grouping referenced above.
The bonus opportunities in the 1998 fiscal year for
executive officers and the Chief Executive Officer were therefore
based on the following factors:
(i) Each such position was graded in accordance with the level
of responsibility inherent in the position including
market value, organizational relationships, knowledge
requirements, impact on corporate profitability, scope of
monetary responsibility, scope of managerial control and
areas of functional responsibility, all as set forth in
the established compensation plan and was determined to be
eligible for participation in variable compensation.
<PAGE>
(ii) The executive officers' positions all received a grade
providing for variable compensation eligibility of 75% of
each executive officer's base salary.
(iii) The Chief Executive Officer's position received a grade
providing for variable compensation eligibility of 100% of
the Chief Executive Officer's base salary.
(iv) The corporate earnings before tax goals stipulated by the
Board for 1998 were met and exceeded in the amount of 128%
resulting in a variable compensation opportunity to each
executive officer of 128% of 75% of each such officer's
base salary and resulting in variable compensation
opportunity to the Chief Executive Officer of 128% of 100%
of such officer's base salary. Actual variable
compensation awarded was then determined by the evaluation
of performance of each officer to specific written
objectives submitted at the beginning of 1998.
In addition to the variable compensation opportunities
based upon achieving earnings before tax goals annually, the
Variable Compensation Plan provides for long-term variable
compensation opportunities for any three-year strategic planning
period determined by earnings before tax goals established at the
Board's discretion. Being part of the Variable Compensation Plan,
the strategic plan variable compensation program has an identical
philosophy to the annual variable compensation program recited
above. Additionally, the strategic plan variable compensation
program is designed to (i) provide shareholder returns comparable
to other high performance publicly traded companies; (ii)
strengthen key management commitment to improve the long-term
financial performance of the Corporation; (iii) provide key
management with a shareholder perspective; and (iv) focus key
employee resources on technology driven growth.
In accordance with the recited philosophy above, the
Board stipulated annual earnings before tax goals for the
strategic planning period beginning 1994 through 1996. The
stipulated earnings before tax goals were achieved for each of the
years 1994, 1995 and 1996 resulting in long-term (three-year)
variable compensation payouts to the executive officers, including
the Chief Executive Officer, as well as other members of the
strategic planning teams, in amounts established in the variable
compensation plan. Each executive officer and the Chief Executive
Officer were eligible for 100% of base salary. Earnings before
tax are recited in the Registrant's Annual Reports on Form 10-K
for the years referenced above. The maximum award is limited to
100% of eligibility.
Reiterating, the base salary of the Chief Executive
Officer is based upon comparable positions in the
metalworking/fabrication industry grouping of Project 777 and is
<PAGE>
low in comparison. The variable or bonus portion of the Chief
Executive Officer compensation is subject to achievement of the
earnings goals referenced above and is high in comparison to total
compensation of other chief executive officers similarly
positioned in Project 777. As stated, the achievement of the
stipulated earnings before tax goal was directly related to the
variable compensation or bonus received by the Chief Executive
Officer in 1998 as well as prior years, and the long-term variable
compensation related to strategic planning received in 1996.
The Registrant's contributions under the defined
contribution plan [401(k)] to the executive officers, including
the Chief Executive Officer, were made to all participants in the
plan in accordance with the operative provisions of said plan.
Such provisions, which apply to all participants, provide for a
basic Company contribution, a matching Company contribution and a
supplemental Company contribution. Only the supplemental Company
contribution is discretionary under the plan and if granted is
made to all participants.
The Registrant currently has not established any policy
with respect to qualifying compensation paid to executive
officers under Section 162(m) of the Internal Revenue Code. In
the event such a policy is established, it will be included in
this Compensation Committee Report on Executive Compensation.
The preceding Performance Graph compares the
Registrant's cumulative total shareholder return on its common
stock with the Dow Jones Equity Market Index and the Dow Jones
Automotive Equipment and Parts Industry. The Dow Jones Equity
Market Index was selected as a broad equity market index
comparison in place of Standard & Poor's 500 for the reasons that
the Registrant is not included in the Standard & Poor's 500 and
such Index includes companies that trade on the same exchange and
some companies that are of comparable market capitalization. The
Dow Jones Automotive Equipment and Parts Industry Index was
selected in lieu of a Registrant-constructed peer group index for
the reasons that difficulties were encountered in presenting the
requisite peer comparison due to a very limited peer group and
such peers essentially being privately held companies or
subsidiaries or divisions of larger publicly held companies which
necessary data to draw a comparison is not publicly available.
Further, the Dow Jones Automotive Equipment and Parts Industry
Index includes companies that trade in the same industry and have
similar market capitalizations.
Compensation Committee
Albert A. Canosa
Donald P. Miller
Robert B. Sims
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Directors
Shares of Common Stock
Beneficially Owned
Percent
Total Of Class
Robert L. Bennett 12,818 (a) .4%
Albert A. Canosa 40,418 (b) 1.2%
Robert M. Gordon 7,318 (c) .2%
Frederick J. Mancheski - -
Donald P. Miller 5,818 (c) .2%
Robert B. Sims 5,818 (c) .2%
Executive Officers
Albert A. Canosa 40,418 (d) 1.2%
President and Chief
Executive Officer
John B. Devlin - -
Vice President, Treasurer
and Chief Financial Officer
John J. Easton 39,392 (e) 1.1%
Vice President
LeGrande L. Young 43,722 (f) 1.3%
Vice President, Administration,
Secretary and General Counsel
All Directors and Executive Officers
as a Group (9) 155,304 (g) 4.3%
(a) Total represents 12,818 shares which Mr. Bennett holds the
option to purchase within 60 days.
(b) Total includes 40,418 shares which Mr. Canosa holds the
option to purchase within 60 days.
(c) Total represents 5,818 shares which the named Director holds
the option to purchase within 60 days.
(d) Total includes 40,418 shares which Mr. Canosa holds the
option to purchase within 60 days.
(e) Total includes 39,059 shares which Mr. Easton holds the
option to purchase within 60 days.
(f) Total includes 43,722 shares which Mr. Young holds the
option to purchase within 60 days.
(g) Total includes 153,471 shares which the Directors and
Executive Officers as a group hold the option to purchase
within 60 days.
<PAGE>
Item 13. Certain Relationships and Related Transactions
Since January 1998 there have been no certain
relationships and related transactions. (For related
transactions prior to January 1998 refer to Note H of
Item 8.)
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 - January 3, 1999 and
December 28, 1997
Consolidated Statements of Operations for the 1998, 1997
and 1996 fiscal years
Consolidated Statements of Cash Flows for the 1998,
1997 and 1996 fiscal years
Consolidated Statements of Shareholders' Equity
for the 1998, 1997 and 1996 fiscal years
Notes to Consolidated Financial Statements
Report of Independent Accountants
(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 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.
In Form 8-K dated October 8, 1998, the Registrant reached a
tentative settlement of the Raytech Corporation bankruptcy
with representatives for its creditors and equityholders
with respect to a consensual plan of reorganization ("Plan")
to be filed in its Chapter 11 bankruptcy case which was
commenced in the United States Bankruptcy Court for the
District of Connecticut (the "Bankruptcy Court") in March
1989. The Settlement is by and among Raytech, the Official
Creditors' Committee, the Guardian Ad Litem for Future
Claimants, the State of Connecticut, Department of
Environmental Protection, the United States Department of
Justice, Environmental and Natural Resources Division, and
the Official Equity Committee. Under the Settlement, the
Plan, which is subject to the vote of creditors and
equityholders, and confirmation by the Bankruptcy Court,
will provide general unsecured creditors, including the
present and future asbestos claimants and government
claimants, through the vehicle of a trust established
pursuant to Section 524(g) of the Bankruptcy Code, with (i)
ninety percent (90%) of the stock of reorganized Raytech,
(ii) all excess cash not necessary to fund the ongoing
operations of reorganized Raytech, and (iii) net recoveries
from certain claims against third parties. Under the Plan,
the existing Raytech stockholders shall receive ten percent
(10%) of the stock of reorganized Raytech. It is estimated
that the entire plan confirmation process could take up to a
year.
The dilution of shareholder value under the Settlement
reflects the fact that pursuant to court decisions discussed
below, Raytech's adjudged liabilities, as successor to
Raymark Industries, Inc. ("Raymark"), appear to substan-
tially exceed the reasonable value of its assets. The
corporate restructuring of Raytech approved by the
shareholders in 1986 was ruled invalid by a U.S. District
Court in Oregon and Raytech was thereby held to have
successor liability for Raymark's asbestos tort liabilities.
See Schmoll v. ACandS, Inc., 703 F. Supp. 868 (D. Ore.
1988), aff'd 977 F.2d 499 (9th Cir. 1992). Raytech then
filed a voluntary petition in bankruptcy to stay the
multiple asbestos tort suits filed against it on theories of
successor liability. Thereafter, Raytech sought
determination in its bankruptcy case, that it was not bound
by the decision in Schmoll. The U.S. District Court ruled
that Raytech was bound under the principles of collateral
estoppel by the decision in Schmoll.
<PAGE>
Raytech Corporation v. White, No. B-89-623 (D. Conn.,
August 28, 1991) and that decision was affirmed by the Court
of Appeals, 54 F3d 187 (3d Cir. 1995), cert. denied, 516
U.S. 914, 116 S. Ct. 302 (1995).
Raytech then filed an adversary proceeding in the Bankruptcy
Court seeking a declaration that its liability as successor
to Raymark was limited. (See Adversary Proceeding No. 96-
5181.) The Court granted the creditors' motion for summary
judgment against Raytech ruling that under Schmoll and
White, Raytech's liability as Raymark's successor was
unlimited in scope (Bkrptcy. Conn Feb 11, 1998).
(c) Index of Exhibits Page
2(a) Plan or Reorganization dated May 31, 1994
filed by the Registrant (k)
2(b) Plan of Reorganization dated September 12,
1994 filed by the unsecured creditors'
committee (l)
3(a) Certificate of Incorporation of Raytech (d)
3(b) By-laws of Raytech (d)
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)
Page
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
Nations credit Commercial Corporation (n)
10(l) Memorandum of Understanding dated July 23, 1998
Re. Consensual Plan of Reorganization (o)
22 Subsidiaries of Raytech 115
24 Consent of Independent Accountants 116
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.
<PAGE>
(f) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 29, 1989.
(g) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 20, 1991.
(h) Included as an Exhibit to Registrant's Report on Form
10-Q filed with the Securities and Exchange Commission
on September 29, 1991, as amended by Form 8 filed on
February 27, 1992.
(i) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 22, 1993.
(j) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 14, 1994.
(k) Included as an Exhibit to Registrant's Report on Form
10-Q filed with the Securities and Exchange Commission
on August 9, 1994.
(l) Included as an Exhibit to Registrant's Report on Form
10-Q filed with the Securities and Exchange Commission
on November 7, 1994.
(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.
(o) Included as an Exhibit to Registrant's Report on Form
10-Q filed with the Securities and Exchange Commission
on November 6, 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 295, Four Corporate Drive, Shelton,
Connecticut 06484.
(d) The Index to Consolidated Financial Statements and Financial
Statement Schedules is included beginning on page 112
hereafter.
<PAGE>
Index To Consolidated Financial Statements
Page
Financial Statements:
Consolidated Balance Sheets for the
Fiscal Years Ended January 3, 1999
and December 28, 1997 41
Consolidated Statements of Operations
for the 1998, 1997 and 1996 Fiscal Years 42
Consolidated Statements of Cash Flows
for the 1998, 1997 and 1996 Fiscal Years 43
Consolidated Statements of Shareholders'
Equity for the 1998, 1997, and 1996
Fiscal Years 44
Notes to Consolidated Financial Statements 45
Report of Independent Accountants 94
<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 26, 1999
<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 26,
1999.
Signature and Title Signature and Title
/s/ ALBERT A. CANOSA /s/FREDERICK J. MANCHESKI
Albert A. Canosa Frederick J. Mancheski
President, Chief Executive Director
Officer and Director
/s/JOHN B. DEVLIN /s/DONALD P. MILLER
John B. Devlin Donald P. Miller
Vice President, Treasurer and Director
Chief Financial Officer
/s/ROBERT L. BENNETT /s/ROBERT B. SIMS
Robert L. Bennett Robert B. Sims
Director Director
/s/ROBERT M. GORDON
Robert M. Gordon
Director
Exhibit 22
Subsidiaries of Raytech Corporation Incorporated
Advanced Friction Materials Company Michigan
44600 Merrill Road
Sterling Heights, MI 48314
Allomatic Products Company Delaware
609 E. Chaney Street
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, Suzhou New District
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
Industriestrasse, 7
D-54497 Morbach, Germany
Raytech Composites, Inc. Delaware
Suite 295, Four Corporate Drive
Shelton, CT 06484
Raytech Europe, Inc. Delaware
Suite 295, Four Corporate Drive
Shelton, CT 06484
Raytech Powertrain, Inc. Delaware
Suite 295, Four 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 5, 1999, on our audits of the consolidated financial
statements of Raytech Corporation and subsidiaries as of January 3,
1999 and December 28, 1997 and for each of the three fiscal years in
the period ended January 3, 1999, which report is included in this
Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
March 25, 1999
<TABLE> <S> <C>
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<NAME> RAYTECH CORP
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<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JAN-03-1999
<PERIOD-TYPE> 12-MOS
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0
0
<OTHER-SE> 58,744
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<SALES> 247,464
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