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 2, 2000, 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 13, 2000, 3,480,904 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 $12.4 million.
Documents incorporated by reference: None
INDEX TO RAYTECH CORPORATION
1999 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 ... 21
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ........................... 22
Item 6. Selected Financial Data ............................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 24
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk ........................................... 40
<PAGE>
Item 8. Financial Statements and Supplementary Data ........... 41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures .................. 98
PART III.
Page
Item 10. Directors and Officers of Registrant ................ 99
Item 11. Executive Compensation .............................. 102
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................... 108
Item 13. Certain Relationships and Related Transactions ...... 109
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................. 109
(a)(1) List of Financial Statements ................ 109
(a)(2) List of Financial Statement Schedules ....... 109
(a)(3) Exhibits .................................... 109
(b) Reports on Form 8-K ......................... 109
(c) Index of Exhibits............................ 110
(d) Index to Consolidated Financial Statements
and Financial Statement Schedules
(reference) ................................. 112
Index to Consolidated Financial Statements and
Financial Statement Schedules................................ 113
Signatures .................................................... 114
<PAGE>
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
<PAGE>
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 the purchase
agreements, Raymark agreed to indemnify Raytech for its
liabilities, including asbestos-related, environmental, pension
and others. 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. The purchase price of
the stock 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.)
With the loss of defense from Raymark, the defense
of such lawsuits shifted directly to Raytech as it had no
<PAGE>
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
2000 debt maturities, working capital and capital spending needs.
However, the outcome of these matters is uncertain and should
Raytech be held fully liable, there would be a material adverse
impact on Raytech as it does not have the resources needed to
fund Raymark's substantial uninsured asbestos-related liabilities
and environmental liabilities and related costs of litigation as
defined further in Item 3. Legal Proceedings.
(b) Financial Information About Industry Segments
The sales and operating income of Raytech on a
consolidated basis, and its identifiable assets for the fiscal
years ended January 2, 2000, January 3, 1999, and December 28, 1997
are set forth herein starting on page 78.
<PAGE>
(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:
1999 1998 1997
Wet friction operations 62% 63% 62%
Dry friction operations 13% 13% 15%
Aftermarket operations 25% 24% 23%
Additional segment information is contained in the Management
Discussion and Analysis section and in Note K - Notes to
Consolidated Financial Statements.
<PAGE>
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 2000 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.
<PAGE>
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 as a percentage
of total Raytech sales to four customers are as follows:
1999 1998 1997
Caterpillar 11.9% 12.4% 14.3%
DaimlerChrysler 20.4% 14.9% 3.9%
Allison 10.2% 9.2% 6.7%
New Venture Gear 11.1% 5.6% -
Sales backlog for the wet friction segment at the end of 1999,
1998, and 1997 was approximately $92 million, $69 million, and
$91 million, respectively. It is anticipated that current
backlog will be filled in 2000.
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 entered the Asian market with
manufacturing that began in China in 1998. The markets are
competitive with several Chinese and other Asian-based
manufacturers competing for the business. Sales backlog at the end
of 1999, 1998, and 1997 was approximately $.7 million, $0 million,
and $11 million, respectively.
<PAGE>
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
1999, 1998, and 1997 was approximately $9 million, $7 million, and
$5 million, respectively. It is anticipated that current backlog
will be filled in 2000.
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 2, 2000, Raytech employed approximately
1,729 employees, compared with 1,753 employees at the end of 1998.
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 $23.2, $19.8, and $20.6
million for 1999, 1998 and 1997, respectively. Capital
expenditures for 2000 are projected at $16.9 million.
Research and Development
Research and development costs were approximately $5.4
million, $5.6 million, and $5.9 million for 1999, 1998 and 1997,
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 2000 are projected at $5.2 million.
Environmental Matters
Various federal, state and local laws and regulations
related to the discharge of potentially hazardous materials into
the environment, and the occupational exposure of employees to
airborne particles, gases and noise have affected and will continue
to affect the Registrant's operations, both directly and
<PAGE>
indirectly, in the future. The Company's operations have been
designed to comply with applicable environmental standards
established in such laws and regulations. Pollution and hazardous
waste controls are continually being upgraded at the existing
manufacturing facilities to help to ensure environmental
compliance. Expenditures for upgrading of pollution and hazardous
waste controls for environmental compliance, including capital
expenditures, are projected to be $1.2 million for 2000. Because
environmental regulations are constantly being revised and are
subject to differing interpretations by regulatory agencies,
Raytech is unable to predict the long-range cost of compliance with
environmental laws 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 2, 2000, January 3,
1999, and December 28, 1997 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 sales 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 two facilities in
Sullivan, Indiana, that are owned and consist of 130,000 and 37,500
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, Indiana, facility is owned and
consists of approximately 41,000 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.
As the result of the Court rulings recited above holding
Raytech a successor to Raymark's asbestos-related liabilities,
Raytech halted payments to Raymark under the 1987 Asset Purchase
Agreement in May 1995. However, in February 1997, with Raymark
temporarily out of bankruptcy, Raytech resumed making payments
pursuant to the Agreement. As the result of the creditors'
committee's action to halt the payments, the Bankruptcy Court
ordered the payments stopped in January 1998. In retaliation in
December 1997, Raymark commenced 33 separate lawsuits against
Raytech subsidiaries in various jurisdictions from New York to
California ("Raymark Litigation") demanding payment or the return of
assets for breach of contract. Raytech filed an adversary
proceeding complaint to halt the Raymark litigation and was granted
a temporary restraining order in December 1997 by the Bankruptcy
Court that remains in effect. The creditors' committee intervened
in the action in support of the restraining order.
In March and April 1998, Raymark and its parent, Raymark
Corporation, filed voluntary petitions in bankruptcy in a Utah Court
which stayed all litigation in the Raytech bankruptcy in which
Raymark was a party. In connection with its attempt to assert
control over Raymark and its assets, the creditors' committee,
joined by Raytech, the Guardian ad litem for Future Claimants, the
equity committee and the government agencies moved to have the venue
of the Raymark bankruptcies transferred from Utah to the Connecticut
Court. In July 1998, the Bankruptcy Court issued an order on the
motions and transferred venue to the Connecticut Court. In October
1998, a trustee was appointed by the United States Trustee over the
Raymark bankruptcies and is currently administering the Raymark
estate.
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
<PAGE>
Understanding provide for all general unsecured creditors including
but not limited to all asbestos and environmental claimants to
receive 90% of the equity in reorganized Raytech and any and all
refunds of taxes paid or net reductions in taxes owing resulting
from the transfer of equity to a trust established under the
Bankruptcy Code, 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 August 1999, a bar date was set for filing claims
against Raytech by the Bankruptcy Court. The Court appointed claims
agent reported in November 1999 that approximately 3200 claims were
filed as of the bar date. Such claims are being analyzed but appear
to be separated into asbestos personal injury, asbestos property
damage, environmental, including the EPA and State of Connecticut,
pension/retiree benefits and other employee related claims and other
contractual and general categories. The total amounts claimed, not
including unliquidated claims, exceed $300 billion. Claims not
believed valid by the debtor are being objected to and will be
determined by the Bankruptcy Court. All claims proven valid will be
dealt with through the plan of reorganization at confirmation.
In April 1999, separate adversary actions were filed in the
Bankruptcy Court by the retiree committee and the Pension Benefit
Guarantee Corporation, respectively, seeking judgments that retirees
and pensioners of Raymark have rights as claimants for their
benefits in the Raytech bankruptcy estate on the basis of successor
liability. Both matters have been heard and decided by the
Bankruptcy Court in 1999. In the retiree case, the Court ruled that
the Raymark Trustee had the right to terminate the welfare benefit
programs and accordingly that liability could not be transferred to
Raytech. A motion for reconsideration was denied by the Court. In
the pension case, the Court ruled that Raytech has the liability to
pay the Raymark pensions based on successor liability. Appeals of
the decisions have been filed. Any required funding is subject to
the plan of reorganization at confirmation.
In 1991, an environmental claim was filed by the
Pennsylvania Department of Environmental Resources ("DER") to
perform certain activities in connection with Raymark's Pennsylvania
manufacturing facility, including submission of an acceptable
<PAGE>
closure plan for a landfill containing hazardous waste products
located at the facility. In March 1991, the Company entered a
Consent Order which required Raymark to submit a revised closure
plan acceptable to the DER. The estimated cost for Raymark to
comply with the order was $1.2 million. The DER has notified the
Company that Raymark has failed to comply with its obligations under
the Consent Order. The matter will be dealt with through the plan
of reorganization at confirmation.
Pursuant to the Memorandum of Understanding, a consensual
plan of reorganization (the "Plan") has been drafted and is being
considered by all interested parties to the bankruptcy and upon
approval will be submitted to the Court as part of the confirmation
process. Allowed claims under the Plan will fall into five classes,
including priority, secured, general unsecured, affiliate and
shareholder. Most allowed claims will fall into the general
unsecured class and will be paid through the 90% equity
contribution, including all asbestos-related claims, environmental
claims, employee-related claims and contractual and general claims.
The confirmation process, which is underway and being
considered by the Bankruptcy Court, includes the approval of the
Plan, approval of a disclosure statement, an estimation of claims, a
vote by creditors and final confirmation by the Bankruptcy Court.
It is possible that the confirmation will occur in 2000; however,
the timing and terms of the final Plan cannot be predicted with
certainty.
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. In January 2000, the District Court
granted summary judgment to RPC, indicating that the insurer has a
duty to defend and indemnify losses stemming from the IDEM claim,
subject, however, to several remaining issues of coverage to be
decided, which remain pending. RPC continues to assess the extent of
the contamination and its involvement and is currently negotiating
with IDEM for an agreed order of cleanup. For any liability not
covered by insurance, the Company intends to offset its investi-
gation 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 resi-
dents in the vicinity of the small waterways revealed no exposure.
<PAGE>
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, a subsidiary of the Company filed a
complaint against a former administrative financial manager of AFM in
the U.S. District Court, Eastern District of Michigan, captioned
Raytech Composites, Inc. vs. Richard Hartwick, et ux. alleging that
he wrongfully converted Company monies in his control to his own use
and benefit in an amount greater than $3,300,000 prior to the April
1998 completion of the acquisition of AFM as discussed in the
following paragraph. In December 1999, the District Court ruled on
summary judgment in favor of Raytech on its claim against Hartwick in
the amount of $3,330,000. A constructive trust had been ordered by
the Court providing ownership to Raytech of four real estate
properties purchased by Hartwick with the converted funds. The four
properties have been sold resulting in a net recovery of $1,337,000.
Hartwick has been arrested by the State of Michigan under 13 counts
of embezzlement.
In April 1998, AFM redeemed 53% of its stock from the former
owner for a formulated amount of $6,044,000, $3,022,000 paid at
closing and the balance of $3,022,000 payable by note in three equal
annual installments resulting in the Company attaining 100% ownership
of AFM. In April 1999, an adversary proceeding was filed in the
Connecticut Bankruptcy Court against the former owner captioned
Raytech Corporation, et al. vs. Oscar E. Stefanutti, et al. to
recover $1,500,000 of the amount paid for the AFM stock and to obtain
a declaratory judgment that the balance of $3,022,000 is not owed
based upon the judgment that a fraud was perpetrated upon the Company
related to the Hartwick case referenced above. In September 1999,
the Bankruptcy Court granted jurisdiction of the case but exercised
discretionary abstention to enable the Court to focus on issues
impeding the plan confirmation. In June 1999, the former owner filed
an action against the Company in a County Court in Michigan captioned
Oscar E. Stefanutti, et al. vs. Raytech Automotive Components Company
to enforce payment of the note. An answer has been filed and
discovery has begun.
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
<PAGE>
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
is now being litigated in the U.S. District Court in Connecticut. A
motion for summary judgment has been filed by the plaintiffs and is
pending before the District Court. Judgment on the motion is
expected at any time.
Costs incurred by the Company for asbestos related
liabilities are subject to indemnification by Raymark under the 1987
acquisition agreements. By agreement, in the past, Raymark has
reimbursed the Company in part for such indemnified costs by payment
of the amounts due in Raytech common stock of equivalent value.
Under such agreement, Raytech received 926,821 shares in 1989,
177,570 shares in 1990, 163,303 in 1991 and 80,000 shares in 1993.
The Company's acceptance of its own stock was based upon an intent to
control dilution of its outstanding stock. In 1992, the indemnified
costs were reimbursed by offsetting certain payments due Raymark from
the Company under the 1987 acquisition agreements. Costs incurred in
1994, 1995, 1996, 1997, 1998, and 1999 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
written consensual plan of reorganization must still be 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
<PAGE>
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.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Shareholders' Meeting of Raytech was held
July 16, 1999. The matters submitted to stockholder vote and the vote
count on each matter were as follows:
1. Proposal to elect two Class I Directors for full
three-year terms and until their respective successors are
elected:
For Withheld
Donald P. Miller 3,059,013 61,139
Robert B. Sims 3,059,013 61,139
2. Proposal to ratify the appointment of
PricewaterhouseCoopers LLP as auditors for 1999:
For Against Abstain
3,081,701 34,940 3,511
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 July 16, 1999.
Directors whose terms of office as Directors continued after
the Annual Shareholders' Meeting include:
Robert L. Bennett
Albert A. Canosa
Robert M. Gordon
Frederick J. Mancheski
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, 2000, there were 1,673 holders of record of the Registrant's
common stock.
Information regarding the quarterly high and low sales
prices for 1999 and 1998 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)
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Operating Results
Net sales $251,966 $247,464 $234,475 $217,683 $177,498
Gross profit 60,238 58,650 51,575 54,269 48,699
Operating profit 27,518 26,007 26,164 23,603 20,959
Interest expense 2,279(5) 2,158(5) 3,345 3,132 2,647
Net income 16,364 16,357 15,538(4) 15,991(2) 14,337(1)
Share Data
Basic earnings per share $ 4.76 $ 4.81 $ 4.76 $ 4.95 $ 4.44
Weighted average shares 3,439,017 3,402,019 3,263,137 3,232,674 3,225,962
Diluted earnings per share $ 4.65 $ 4.61 $ 4.41 $ 4.65 $ 4.26
Adjusted weighted average shares 3,518,884 3,548,893 3,524,391 3,441,645 3,369,003
Balance sheet
Total assets $188,686 $172,034 $153,385 $140,155 $114,436
Working capital 11,201 5,464 7,324 7,418 5,323
Long-term obligations 35,055 39,002 38,639 41,522 34,966
Commitments and contingencies(3) - - - - -
Total shareholders'
equity 80,788 64,297 48,462 34,015 18,680
Property, plant and equipment
Capital expenditures $ 23,203 $ 19,754 $ 20,603 $ 8,390 $ 10,275
Depreciation 10,569 9,477 8,746 8,039 7,566
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
information on these business segments is presented in Note K -
Segment Reporting in the Notes to Consolidated Financial
Statements.
1999 Compared With 1998
Raytech continued its solid performance through the fourth
quarter of 1999 and as a result ended the year with record sales
of $252.0 million. Net income for the 1999 fiscal year amounted
to $16,364 or $4.76 basic earnings per share as compared to
$16,357 or $4.81 basic earnings per share in fiscal 1998.
Net Sales
Worldwide net sales rose 1.8% to $252.0 million, compared
with $247.5 million in 1998. The wet friction segment sales
increased $.9 million due to strong sales in the automotive
component of the wet friction segment, including sales of RACC
for the full year. However, increases were partially offset by
declines in the heavy duty and agricultural markets as the demand
for certain items continue to slow. Aftermarket sales increased
$5.3 million compared with the prior year as a result of
marketing efforts in existing product lines, the introduction of
new products, and improvement in market share. The dry friction
segment sales decreased $1.7 million year over year due to a
decline in sales ($2.0 million) and an adverse foreign currency
fluctuation ($1.6 million), offset by $1.9 million in revenues
from the China facility that became fully operational in 1999.
Gross Profit
Gross profit as a percentage of sales for the period ended
January 2, 2000 is 23.9% as compared to 23.7% for the same period
one year ago. The improvement is the result of cost saving
programs implemented at our manufacturing facilities, capital
investment aimed at reducing labor and creating greater
efficiencies and a favorable mix of products sold.
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses decreased .9%
to $32.7 million as compared to $33.0 one year earlier. The cost
decrease is attributable to reduced administrative staff and
greater savings in certain costs such as shipping due to using
the same common carriers at multiple locations and reduced
expedited freight costs.
Interest Expense
Interest expense, excluding the Raymark note, increased
primarily as a result of higher interest rates on borrowings
under the Company's revolving line of credit. Average monthly
bank borrowings increased during the year due to increased sales
volume and new borrowings for our China expansion.
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 1999 and
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 1999 includes interest
income in the amount of $352, which is comparable to interest
income for 1998.
Income Taxes
The effective tax rate for the year ended January 2, 2000
was 32.2% versus 28.0% in 1998. The effective tax rate in each
year is less than the federal statutory rate of 35% due primarily
to the effect of certain legal and other costs deducted for tax
purposes but net against the Raymark note payable in connection
with the indemnification agreement with Raymark, offset in part
by the effect of foreign and state income taxes. Due to the
uncertainties inherent in bankruptcy proceedings, a full
valuation allowance is provided for domestic deferred tax assets
where recoverability is contingent upon future taxable income.
The Company has approximately $6.2 million of foreign loss
carryforwards that can be used to offset future foreign cash
taxes. A valuation allowance is provided on the tax benefit of
approximately $3.5 of these foreign loss carryforwards due to
uncertainty of future profitability of certain operations.
<PAGE>
The Company has in process an Internal Revenue Service tax
audit for the 1996, 1997 and 1998 fiscal years. The IRS has
advised the Company that it is reviewing the deductibility of
certain bankruptcy related costs, which are included in the
indemnification agreement with Raymark, based on a 1999
Bankruptcy Court ruling of an unrelated taxpayer. The amount and
specific nature of costs that could be contested has not been
specified. The Company has deducted approximately $14.7 million
of such costs through January 2, 2000 and continues to believe
that these costs are deductible. At this time it is not possible
to assess the likelihood or amount of any IRS claim; however,
should the IRS assert a claim and prevail, an adjustment related
to prior year tax accruals would be required.
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.
1999 Net Sales by Business Segment
Wet Friction 62%
Aftermarket 25%
Dry Friction 13%
Wet Friction Segment (in millions)
Net Sales Operating Profit
1999 $156.7 $18.1
1998 155.8 18.4
1997 145.7 15.8
Wet Friction Segment
Revenues increased .6 percent to $156.7 million as compared
with $155.8 million in 1998. The growth was driven by the
continued strong sales in the automotive original equipment
market, with an increase of approximately $8.6 million over the
prior year. New products totaling $7.6 million were introduced
through the automotive original equipment section of the Wet
Friction segment. The heavy duty market continues to decline as
demand slows, with agricultural product sales being exceptionally
slow. The agricultural market declined approximately $6.2
million as compared to 1998. Lower farm commodity prices and
<PAGE>
weaker farm economic conditions have adversely affected retail
demand. These conditions are expected to continue to impact the
agricultural equipment market in 2000.
Operating profit declined slightly for the prior year from
$18.1 million in 1999 as compared to $18.4 million in 1998. The
modest decrease of $.3 million relates directly to the decrease
in overhead spending and material handling offset by an increase
in direct labor.
Aftermarket Segment (in millions)
Net Sales Operating Profit
1999 $64.1 $11.6
1998 58.8 9.0
1997 53.7 8.4
Aftermarket Segment
Revenues increased 9.0% to $64.1 million as compared with
$58.8 million in 1998. The increase is a result of marketing
efforts on existing product lines, the introduction of new
products and improvement in market share. The growth in sales of
transmission filters, friction plates and steel plates provided
$5.0 million of the total $5.3 in growth year-over-year. The
expansion of the dry friction clutch plates program provided the
remainder of the growth over 1998. The Aftermarket segment is
not expected to grow at the same rate in the year 2000. It is
anticipated that this segment will grow at a 3 percent rate.
Operating profit increased 28.9% to $11.6 million as
compared to $9.0 million in 1998. The increase is primarily due
to increased unit production and the introduction of new products
in 1999. The Aftermarket segment increased operating profit $2.6
million over 1998 on $5.3 million of increased sales. This
equates to operating profits increasing 49 cents for every new
sales dollar. This strong profitability ratio is due to improved
operating efficiencies in the manufacturing and distribution
components of this business.
Dry Friction Segment (in millions)
Net Sales Operating Profit
1999 $31.2 $1.2
1998 32.9 .8
1997 35.1 1.9
<PAGE>
Dry Friction Segment
Revenues decreased 5.2% to 31.2 million as compared with
$32.9 million in 1998. The decrease of $1.7 million is due to a
decline in sales ($2.0 million) and an adverse foreign currency
fluctuation ($1.6 million), offset by $1.9 million in revenues
from the China facility that became fully operational in 1999.
Increased competition and the slow growth in the European economy
are significant factors contributing to the 1999 performance.
Operating profit increased 50.0% to $1.2 million as compared
to $.8 million in 1998. The increase is due to the positive
results generated from the Company's China facility. This
operation completed its first full year of operations and is
anticipated to reach full capacity by year-end 2000.
Market Conditions and Outlook
The Company's wet friction segment expects to continue to
face an increasingly competitive automotive environment and a
continued 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 uncertain future of
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 remain low as a
result of prospects for increased global supplies of grains and
oilseeds, as well as fears about the Asian economic issues.
Accordingly, retail demand for agricultural equipment in 2000 is
now projected to remain at 1999 levels in North America, Europe
and 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 2000 to
ensure the Company's production meets demand.
The aftermarket segment is expected to remain constant
compared to results for 1999. 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, dry friction clutch
facings and planetary gears over the past years. Evaluating new
products for this market is a key element in the 2000 strategy.
<PAGE>
The dry friction segment 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 2000 anticipates modest reduction
in sales with improved operating income over 1999 results.
Increased market share in the automotive original 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 Update
The Company did not experience any disruptions to its normal
operations as a result of the transition into calendar year 2000.
Thorough testing of mission critical business processes has been
performed in order to validate the data integrity of internal and
external system interfaces. The total cost, associated with
achieving worldwide year 2000 compliance, excluding internal
costs, was approximately $3.5 million. The costs of the
Company's year 2000 compliance efforts were funded through
operating cash flows.
The Company will continue to monitor its business processes
and third parties for potential problems that could arise in the
first few months of calendar year 2000. Based on the Company's
preparations prior to January 1, 2000 and the absence of any
problems to date, no significant disruptions are anticipated.
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 through January 1, 2002 when the euro will
become the official currency of participating nations. 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.
<PAGE>
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 46
days. This allows for minimum borrowings in supporting 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 2000 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. Where possible, the Company
attempts to mitigate foreign currency translation effects by
borrowing in local currencies to fund operations. The Company
does not believe that the 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 manage any currency transaction risks due to the
immaterial amount of transactions of this type.
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 1999 were
the result of continued record performance and totaled $27.8
<PAGE>
million. Increases in trade receivables, inventory, other
assets, accounts payable, accrued liabilities and other long-term
liabilities of $3.6 million, $3.1 million, $.5 million, $2.0
million, $1.3 million and $.1 million, respectively, increased
cash flows from operations in 1999. The aggregate amount of the
1999 cash flow was used principally to invest in capital
projects, the net of which was $22.9 million. In addition to
cash flows from operations, the Company reduced debt to Raymark
by $5.3 million.
Over the past three years, operating activities have
provided an aggregate of $74.7 million in cash. During this
period, net cash used in financing activities was $6.9 million
and cash and cash equivalents decreased $.6 million. The
aggregate amount of these cash flows was used mainly to fund
capital investments and the acquisition of AFM as detailed below.
The ratio of year-end assets to net sales was 75% in 1999,
compared to 70 percent in 1998. 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 1999.
Trade accounts receivable result from sales in the normal
course of business. Trade receivables increased $2.4 million
during 1999 due to increased sales. The ratios of worldwide net
trade accounts receivable to year-end net sales were 12.6 percent
in 1999, 11.9 percent in 1998, and 11.5 percent in 1997. The
collection period for trade receivables averages 46 days in 1999
and 44 and 42 for 1998 and 1997, respectively.
Inventories increased by $2.4 million in 1999. Inventories
are valued on a first in, first out (FIFO) basis. The increase
over 1998 reflects additional inventories to support increased
sales and improved customer delivery performance. The ratios of
inventories to year-end net sales were 13.2 percent for 1999,
12.5 percent for 1998 and 12.0 percent for 1997.
Additional information detailing the debt of Raytech
Corporation can be found in Note F - Debt to the financial
statements.
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
<PAGE>
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
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
<PAGE>
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 90% of the equity in reorganized Raytech and
any and all refunds of taxes paid or net reductions in taxes owing
resulting from the transfer of equity to a trust established under
the Bankruptcy Code, 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.
Pursuant to the Memorandum of Understanding, a consensual plan
of reorganization (the "Plan") has been drafted and is being
considered by all interested parties to the bankruptcy and upon
approval will be submitted to the Court as part of the confirmation
process. Allowed claims under the Plan will fall into five
classes, including priority, secured, general unsecured, affiliate
and shareholder. Most allowed claims will fall into the general
unsecured class and will be paid through the 90% equity
contribution, including all asbestos-related claims, environmental
claims, employee-related claims and contractual and general claims.
The confirmation process, which is underway and being
considered by the Bankruptcy Court, includes the approval of the
Plan, approval of a disclosure statement, an estimation of claims,
a vote by creditors and final confirmation by the Bankruptcy Court.
It is possible that the confirmation will occur in 2000; however,
the timing and terms of the final Plan cannot be predicted with
certainty.
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 written consensual plan of reorganization must still
be 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, 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>
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 2, 2000, the amount owed
Raymark, including accrued interest, was approximately $23 million.
In December 1992 the Company reached an agreement with Raymark to
restructure its obligations resulting in the reduction of the
interest rate from 10.48% to 6%, replacing a required balloon
payment that was due in October of 1994 with an amortization
schedule requiring equal monthly installments of $650,000 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
Company continues to offset certain costs relating to Raymark
successor liability matters and the related bankruptcy proceedings
against the Raymark note pursuant to its indemnification agreement
(see Note H). The remaining principal balance at January 2, 2000
is $15,419,000.
In September 1993 and January 1994, Composites entered into
loan agreements with Raymark for $2,500,000 and $3,000,000
respectively. As of January 2, 2000 and January 3, 1999,
Composites has $3,000,000 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 deutsche marks and amount to $1,954,000 at January
2, 2000. 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 1999. Management believes that the
Company is operating in a healthy, stable environment and will
continue to do so through 2000. Subject to the outcome of the
legal matters discussed above, management believes that the Company
will generate sufficient cash flow during 2000 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.
<PAGE>
Recently Issued Accounting Pronouncement
In June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 137,
Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an
Amendment of FASB Statement No. 133. This statement defers, for
one year, the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, to those fiscal
years beginning after June 15, 2000. SFAS No. 133 requires all
derivatives to be recorded as either assets or liabilities and the
instruments to be measured at fair value. Gains or losses
resulting from changes in the values of those derivatives are to be
recognized immediately or deferred depending on the use of the
derivative and whether or not it qualified as a hedge. Raytech
will adopt SFAS No. 133 by January 1, 2001, as required.
Management is currently assessing the impact of this statement on
Raytech's results of operations and financial position.
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 million or $4.81 basic earnings per share as compared to
$15,538 million 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.
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
programs implemented at our manufacturing facilities and a
favorable mix of products sold.
<PAGE>
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, including
provision for estimated preacquisition embezzlement loss (see Notes
A & Q), 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.
1998 Compared with 1997
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 (in millions)
Net Sales Operating Income
1998 $155.8 $ 18.4
1997 $145.7 15.8
1996 $127.8 14.4
<PAGE>
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. 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.
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 1997 $1.8 million
of accrued liabilities relating to potential environmental problems
at the Sterling Heights, Michigan, facility were reversed into
income.
Aftermarket Segment (in millions)
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.
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.
<PAGE>
Dry Friction Segment (in millions)
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.
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
$1,519,000 related to net operating loss carryforwards of the
foreign operations.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Statements under the "Market Conditions and
Outlook" 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
<PAGE>
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; 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.
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk
See Item 7.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Consolidated Balance Sheets as of
January 2, 2000 and January 3, 1999
Consolidated Statements of Operations
for the 1999, 1998 and 1997 Fiscal Years
Consolidated Statements of Cash Flows
for the 1999, 1998 and 1997 Fiscal Years
Consolidated Statements of Shareholders'
Equity for the 1999, 1998, and 1997
Fiscal Years
Notes to Consolidated Financial Statements
Report of Independent Accountants
(Refer to Index to Consolidated Financial
Statements at Page 113)
<PAGE>
RAYTECH CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
<CAPTION>
As of 1999 1998
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 10,746 $ 7,482
Trade accounts receivable, less allowance of $1,350
for 1999 and $1,109 for 1998 31,804 29,350
Inventories, net 33,325 30,869
Other current assets 8,169 6,498
Total current assets 84,044 74,199
Property, plant and equipment 180,202 163,906
Less accumulated depreciation 98,130 92,014
Net property, plant and equipment 82,072 71,892
Intangible assets 20,074 22,385
Other assets 2,496 3,558
Total assets $ 188,686 $172,034
LIABILITIES
Current liabilities
Notes payable $ 19,175 $ 18,469
Current portion of long-term debt - Raymark 11,167 11,487
Current portion of long-term debt 1,362 1,187
Accounts payable 18,505 15,705
Accrued liabilities 22,634 21,887
Total current liabilities 72,843 68,735
Long-term debt due to Raymark 9,206 14,462
Long-term debt 6,581 5,708
Postretirement benefits other than pensions 12,132 11,017
Other long-term liabilities 7,136 7,815
Total liabilities 107,898 107,737
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY
Capital stock
Cumulative preferred stock, no par value
800,000 shares authorized, none issued - -
Common stock, par value $1.00
7,500,000 shares authorized; 5,612,963 and 5,553,454
issued in 1999 and 1998, respectively 5,613 5,553
Additional paid in capital 70,564 70,501
Retained earnings (accumulated deficit) 9,337 (7,027)
Accumulated other comprehensive loss (165) (169)
85,349 68,858
Less treasury shares at cost (4,561) (4,561)
Total shareholders' equity 80,788 64,297
Total liabilities and shareholders' equity $ 188,686 $172,034
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Fiscal year 1999 1998 1997
<S> <C> <C> <C>
Net sales $ 251,966 $ 247,464 $ 234,475
Cost of sales (191,728) (188,814) (182,900)
Gross profit 60,238 58,650 51,575
Selling, general and administrative
expenses (32,686) (33,030) (25,683)
Other operating (expense) income, net (34) 387 272
Operating profit 27,518 26,007 26,164
Currency transaction gains (losses) 105 (114) (375)
Interest expense - Raymark (274) (284) (1,984)
Interest expense (2,005) (1,874) (1,361)
Other income, net 1,201 1,065 1,325
Income before provision for income
taxes and minority interest 26,545 24,800 23,769
Provision for income taxes (8,554) (6,944) (6,900)
Income before minority interest 17,991 17,856 16,869
Minority interest (1,627) (1,499) (1,331)
Net income $ 16,364 $ 16,357 $ 15,538
Basic earnings per share $ 4.76 $ 4.81 $ 4.76
Diluted earnings per share $ 4.65 $ 4.61 $ 4.41
<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 1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,364 $ 16,357 $15,538
Adjustments to reconcile net income
to net cash provided by operations:
Deferred income tax 1,272 1,061 (1,066)
Depreciation and amortization 11,543 10,026 9,194
Income applicable to minority interest,
net of dividends 1,627 1,499 1,199
Income from equity investment in affiliate - - (647)
Other items not providing or
requiring cash (Note C) 600 485 524
Changes in operating assets and liabilities:
Trade receivables (3,545) (2,730) (4,208)
Inventories (3,080) (2,348) (160)
Other current assets (348) 1,028 (1,347)
Other long-term assets (113) (216) (643)
Accounts payable 1,991 (3,437) 5,601
Accrued liabilities 1,315 (1,142) 733
Other long-term liabilities 169 761 829
Net cash provided by operating activities 27,795 21,344 25,547
Cash flow from investing activities:
Purchase of securities - - (200)
Proceeds from sales of securities - 2,300 -
Capital expenditures (22,935) (18,038) (20,264)
Proceeds on sales of property, plant
and equipment 211 182 138
Equity investment in and advances to AFM - (2,665) 141
Purchase of assets from AFM - - (7,076)
Net cash used in investing activities: (22,724) (18,221) (27,261)
Cash flow from financing activities:
Proceeds from short-term borrowings 1,039 5,266 2,625
Proceeds from long-term borrowings 1,667 2,394 1,040
Principal payments on long-term debt (209) (4,267) (164)
Proceeds from borrowings from Raymark - - 2,034
Payments on borrowings from Raymark (5,256) (6,322) (8,388)
Cash overdrafts 993 (3,090) 3,090
Other 123 362 195
Net cash (used in) provided by
financing activities (1,643) (5,657) 432
Effect of exchange rate changes on cash (164) 103 (146)
Net change in cash and cash equivalents 3,264 (2,431) (1,428)
Cash and cash equivalents at beginning of year 7,482 9,913 11,341
Cash and cash equivalents at end of year $ 10,746 $ 7,482 $ 9,913
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except shares)
<CAPTION>
Treasury
Retained Accumulated Stock
Additional Earnings 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>
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
Comprehensive income:
Net income 16,364 16,364
Changes during
the year 4 4
Total comprehensive
income 16,364 4 16,368
Stock options exercised
(59,509 shares) 60 63 123
Balance,
January 2, 2000 $5,613 $70,564 $ 9,337 $ (165) $(4,561) $80,788
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
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.
In May 1988, following shareholder approval, Raytech sold
all of the Raymark stock to Asbestos Litigation Management, Inc.,
thereby divesting itself of Raymark. The purchase price of the
stock 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 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.
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
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.
As the result of the Court rulings recited above holding
Raytech a successor to Raymark's asbestos-related liabilities,
Raytech halted payments to Raymark under the 1987 Asset Purchase
Agreement in May 1995. However, in February 1997, with Raymark
temporarily out of bankruptcy, Raytech resumed making payments
pursuant to the Agreement. As the result of the creditors'
committee's action to halt the payments, the Bankruptcy Court
ordered the payments stopped in January 1998. In retaliation in
December 1997, Raymark commenced 33 separate lawsuits against
Raytech subsidiaries in various jurisdictions from New York to
California ("Raymark Litigation") demanding payment or the return
of assets for breach of contract. Raytech filed an adversary
proceeding complaint to halt the Raymark litigation and was
granted a temporary restraining order in December 1997 by the
Bankruptcy Court that remains in effect. The creditors'
committee intervened in the action in support of the restraining
order.
In March and April 1998, Raymark and its parent, Raymark
Corporation, filed voluntary petitions in bankruptcy in a Utah
Court which stayed all litigation in the Raytech bankruptcy in
which Raymark was a party. In connection with its attempt to
assert control over Raymark and its assets, the creditors'
committee, joined by Raytech, the Guardian ad litem for Future
Claimants, the equity committee and the government agencies moved
to have the venue of the Raymark bankruptcies transferred from
Utah to the Connecticut Court. In July 1998, the Bankruptcy
Court issued an order on the motions and transferred venue to the
Connecticut Court. In October 1998, a trustee was appointed by
the United States Trustee over the Raymark bankruptcies and is
currently administering the Raymark estate.
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 90% of the equity in reorganized Raytech and
any and all refunds of taxes paid or net reductions in taxes
owing resulting from the transfer of equity to a trust
established under the Bankruptcy Code, 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 August 1999, a bar date was set for filing claims against
Raytech by the Bankruptcy Court. The Court appointed claims
agent reported in November 1999 that approximately 3200 claims
were filed as of the bar date. Such claims are being analyzed
but appear to be separated into asbestos personal injury,
asbestos property damage, environmental, including the EPA and
State of Connecticut, pension/retiree benefits and other employee
related claims and other contractual and general categories. The
total amounts claimed, not including unliquidated claims, exceed
$300 billion. Claims not believed valid by the debtor are being
objected to and will be determined by the Bankruptcy Court. All
claims proven valid will be dealt with through the plan of
reorganization at confirmation.
In April 1999, separate adversary actions were filed in the
Bankruptcy Court by the retiree committee and the Pension Benefit
Guarantee Corporation, respectively, seeking judgments that
retirees and pensioners of Raymark have rights as claimants for
their benefits in the Raytech bankruptcy estate on the basis of
successor liability. Both matters have been heard and decided by
the Bankruptcy Court in 1999. In the retiree case, the Court
ruled that the Raymark Trustee had the right to terminate the
welfare benefit programs and accordingly that liability could not
be transferred to Raytech. A motion for reconsideration was
denied by the Court. In the pension case, the Court ruled that
Raytech has the liability to pay the Raymark pensions based on
successor liability. Appeals of the decisions have been filed.
Any required funding is subject to the plan of reorganization at
confirmation.
In 1991, an environmental claim was filed by the
Pennsylvania Department of Environmental Resources ("DER") to
perform certain activities in connection with Raymark's
Pennsylvania manufacturing facility, including submission of an
acceptable closure plan for a landfill containing hazardous waste
products located at the facility. In March 1991, the Company
entered a Consent Order which required Raymark to submit a
revised closure plan acceptable to the DER. The estimated cost
for Raymark to comply with the order was $1.2 million. The DER
has notified the Company that Raymark has failed to comply with
its obligations under the Consent Order. The matter will be
dealt with through the plan of reorganization at confirmation.
Pursuant to the Memorandum of Understanding, a consensual
plan of reorganization (the "Plan") has been drafted and is being
considered by all interested parties to the bankruptcy and upon
approval will be submitted to the Court as part of the
confirmation process. Allowed claims under the Plan will fall
into five classes, including priority, secured, general
unsecured, affiliate and shareholder. Most allowed claims will
fall into the general unsecured class and will be paid through
the 90% equity contribution, including all asbestos-related
claims, environmental claims, employee-related claims and
contractual and general claims.
The confirmation process, which is underway and being
considered by the Bankruptcy Court, includes the approval of the
Plan, approval of a disclosure statement, an estimation of
claims, a vote by creditors and final confirmation by the
Bankruptcy Court. It is possible that the confirmation will
occur in 2000; however, the timing and terms of the final Plan
cannot be predicted with certainty.
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.
In January 2000, the District Court granted summary judgment to
RPC, indicating that the insurer has a duty to defend and
indemnify losses stemming from the IDEM claim, subject, however,
to several remaining issues of coverage to be decided, which
remain pending. RPC continues to assess the extent of the
contamination and its involvement and is currently negotiating
with IDEM for an agreed order of cleanup. For any liability not
covered by insurance, 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.
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, a subsidiary of the Company filed a
complaint against a former administrative financial manager of
AFM in the U.S. District Court, Eastern District of Michigan,
captioned Raytech Composites, Inc. vs. Richard Hartwick, et ux.
alleging that he wrongfully converted Company monies in his
control to his own use and benefit in an amount greater than
$3,300 prior to the April 1998 completion of the acquisition of
AFM as discussed in the following paragraph. In December 1999,
the District Court ruled on summary judgment in favor of Raytech
on its claim against Hartwick in the amount of $3,330. A
constructive trust had been ordered by the Court providing
ownership to Raytech of four real estate properties purchased by
Hartwick with the converted funds. The four properties have been
sold resulting in a net recovery of $1,337. Hartwick has been
arrested by the State of Michigan under 13 counts of
embezzlement.
In April 1998, AFM redeemed 53% of its stock from the former
owner for a formulated amount of $6,044, $3,022 paid at closing
and the balance of $3,022 payable by note in three equal annual
installments resulting in the Company attaining 100% ownership of
AFM. In April 1999, an adversary proceeding was filed in the
Connecticut Bankruptcy Court against the former owner captioned
Raytech Corporation, et al. vs. Oscar E. Stefanutti, et al. to
recover $1,500 of the amount paid for the AFM stock and to obtain
a declaratory judgment that the balance of $3,022 is not owed
based upon the judgment that a fraud was perpetrated upon the
Company related to the Hartwick case referenced above. In
September 1999, the Bankruptcy Court granted jurisdiction of the
case but exercised discretionary abstention to enable the Court
to focus on issues impeding the plan confirmation. In June 1999,
the former owner filed an action against the Company in a County
Court in Michigan captioned Oscar E. Stefanutti, et al. vs.
Raytech Automotive Components Company to enforce payment of the
note. An answer has been filed and discovery has begun.
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 is now
being litigated in the U.S. District Court in Connecticut. A
motion for summary judgment has been filed by the plaintiffs and
is pending before the District Court. Judgment on the motion is
expected at any time.
Costs incurred by the Company for asbestos related
liabilities are subject to indemnification by Raymark under the
1987 acquisition agreements. By agreement, in the past, Raymark
has reimbursed the Company in part for such indemnified costs by
payment of the amounts due in Raytech common stock of equivalent
value. Under such agreement, Raytech received 926,821 shares in
1989, 177,570 shares in 1990, 163,303 in 1991 and 80,000 shares
in 1993. The Company's acceptance of its own stock was based
upon an intent to control dilution of its outstanding stock. In
1992, the indemnified costs were reimbursed by offsetting certain
payments due Raymark from the Company under the 1987 acquisition
agreements. Costs incurred in 1994, 1995, 1996, 1997, 1998, and
1999 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 written consensual plan
of reorganization must still be 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>
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 of contingent liabilities 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 2, 2000, January 3, 1999, and
December 28, 1997.
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. 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. 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 Issued Accounting Pronouncement
In June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement
No. 133 - an Amendment of FASB Statement No. 133. This
statement defers, for one year, the effective date of SFAS No.
133, Accounting for Derivative Instruments and Hedging
Activities, to those fiscal years beginning after June 15,
2000. SFAS No. 133 requires all derivatives to be recorded as
either assets or liabilities and the instruments to be
measured at fair value. Gains or losses resulting from
changes in the values of those derivatives are to be
recognized immediately or deferred depending on the use of the
derivative and whether or not it qualified as a hedge.
Raytech will adopt SFAS No. 133 by January 1, 2001, as
required. Management is currently assessing the impact of
this statement on Raytech's results of operations and
financial position.
<PAGE>
Note C - Statements of Cash Flows
Other items not providing or requiring cash consist of:
1999 1998 1997
Net loss on sale/writedown
of fixed assets $ 326 $ 84 $ 61
Other non-cash items 274 401 463
$ 600 $ 485 $ 524
Income taxes paid were $7,517, $5,992, and $ 5,731 during
1999, 1998 and 1997, respectively.
Interest paid was $1,868, $1,955, and $2,584 during 1999, 1998
and 1997, respectively.
Excluded from the 1999, 1998 and 1997 Consolidated Statements
of Cash Flows is $268, $1,716, and $451, 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:
As of 1999 1998
Raw materials $ 10,883 $ 11,480
Work-in-process 9,177 7,653
Finished goods 13,265 11,736
$ 33,325 $ 30,869
Inventory Reserves
As of 1999 1998 1997
Beginning balance $ 3,164 $ 3,825 $ 3,671
Provisions for obsolete and
slow moving inventory 894 366 1,213
Charge-offs (770) (1,027) (1,059)
Ending balance $ 3,288 $ 3,164 $ 3,825
<PAGE>
Note E - Property, Plant and Equipment
Property, plant and equipment, at cost, is summarized as
follows:
Estimated
Useful
Lives
As of 1999 1998 (Years)
Land $ 1,233 $ 1,239 -
Buildings and improvements 30,078 29,367 5-40
Machinery and equipment 136,235 123,866 3-20
Capital leases 951 895 See Below
Construction in progress 11,705 8,539 -
180,202 163,906
Less accumulated depreciation 98,130 92,014
Net property, plant and
equipment $ 82,072 $ 71,892
Capital leases consist primarily of automobiles and telephone
and computer equipment and are amortized over the economic life of
the assets or the term of the leases, whichever is shorter.
Maintenance and repairs charged to expense amounted to
approximately $10,902, $11,470, and $11,655 for 1999, 1998 and
1997, respectively.
Depreciation expense relating to property, plant and equipment
were $10,569, $9,477, and $8,746 for 1999, 1998 and 1997,
respectively.
<PAGE>
Note F - Debt
Debt consists of the following:
As of 1999 1998
Notes due to Raymark (a) $ 20,373 $ 25,949
Notes payable to banks (b) 23,784 22,065
Note payable to former principal
owner of AFM (c) 3,022 3,022
Capitalized leases and other
obligations 312 277
Total borrowings 47,491 51,313
Less short-term debt and current
portion of long-term debt 31,704 31,143
Long-term debt $ 15,787 $ 20,170
The aggregate maturities of debt are as follows:
2000 $ 31,704
2001 11,710
2002 545
2003 586
2004 and thereafter 2,946
Total Debt $ 47,491
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.
(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. In
connection with a complaint filed by the creditors' committee and a
subsequent Bankruptcy Court injunction, the Company halted payments
on the Wet Clutch and Brake note in December 1997. In connection
with the January 1998 Bankruptcy Court decision requiring 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 1999 and 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.
Costs incurred by the Company subject to the indemnification clause
of the 1987 agreements are being applied as a reduction of the note
obligations (refer to Note H). At January 2, 2000 and January 3,
1999, the principal balance of the Wet Clutch and Brake note was
$15,419 and $20,675, 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 2, 2000 and January 3, 1999, the balances due on the
German note amounted to DM3,795 ($1,954) and DM3,795 ($2,274),
respectively. The note bears interest at 7.5% per annum and is
included in the current portion of long-term debt. As of January 2,
2000 and January 3, 1999, the accrued interest amounted to DM1,332
($686) and DM1,161 ($696), 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 2, 2000 and January 3, 1999, 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 2, 2000 and January 3, 1999, the accrued
interest amounted to $1,123 and $943, respectively, and is included
in accrued liabilities.
The Company has continued to classify an amount equal to
one year of payments on the notes payable to Raymark for the
acquisition of the Wet Clutch and Brake Division 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 2000 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.
(b) The Company's wholly-owned German subsidiaries (Raybestos
Industrie-Produkte GmbH ["RIP"] and Raytech Composites Europe GmbH
["RCE"]) have available lines of credit with several German banks
amounting to DM8,010 ($4,124). Interest is charged at rates
between 6.5% and 10.8%. The lines are repayable on demand. The
amounts outstanding under these available lines of credit at
January 2, 2000 and January 3, 1999 were DM3,686 ($1,898) and
DM4,095 ($2,454), respectively. At January 2, 2000 and January 3,
1999, the remaining available lines of credit amounted to DM4,324
($2,226) and DM3,915 ($2,346), respectively.
During 1999 and 1998, RCE and RIP 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 between 2.5% and 5.8%. At
January 2, 2000 and January 3, 1999 the outstanding balances were
DM8,952 ($4,609) and DM6,000 ($3,596), respectively.
In November 1997, RPC entered into a revolving line of
credit with NationsCredit, Commercial Funding, which was acquired
by Bank of America during 1999, providing 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 2,
2000, the net restricted assets of RPC amounted to $32,719
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
$8,695 and under the term loan is $4,408 at January 2, 2000,
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 2, 2000 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, which changed its
name to Raytech Automotive Components Company ("RACC"), has a
revolving line of credit, payable to Bank of America which
provides for borrowings up to $10 million in the aggregate,
subject to the borrowing formula based upon RACC's accounts
receivable. The loan bears an interest rate of .50% above the
prime rate. The outstanding balance under the line of credit is
$3,570 at January 2, 2000. The additional borrowing availability
at January 2, 2000 is $3,429 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.
In February 1999, the Company's wholly-owned China
subsidiary [Raybestos Friction Products (Suzhou) Co. Ltd.] entered
into a loan agreement with the Industrial and Commercial Bank of
China. The loan bears interest at 5.58% per annum. As of
January 2, 2000, the balance due on the loan amounted to Rmb 5,000
($604).
The weighted average rates on all bank notes payable at
January 2, 2000 and January 3, 1999 were 8.67% and 8.66%,
respectively.
(c) Note payable to former principal owner of AFM bearing
interest at prime (see Note A and Note Q).
<PAGE>
Note G - Research and Development
Cost of research and new product development amounted to
$5,363 in 1999, $5,642 in 1998, and $5,903 in 1997 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).
The German Acquisition
The purchase price of approximately $8,200 of the German
subsidiary (Raybestos Industrie-Produkte GmbH) was initially
comprised of a DM7.0 million note (approximately $4,300 at the
acquisition date) and of DM6.5 million (approximately $3,900 at the
acquisition date) of Raytech stock issuable in installments. The
Raytech stock issuable to Raymark was due in eight installments
commencing March 1987. The first installment was DM1.25 million
($694 at the issuance date) and the remaining installments were
DM750 which are translated into dollars using the exchange rate in
effect when each payment becomes due. The number of shares
issuable was determined by the weighted average closing price of
Raytech stock for the five days prior to the payment date.
Accordingly, Raytech issued 72,038 and 63,565 shares of stock to
Raymark as of March 1987 and 1988, respectively. The 1989
installment of DM750 was paid in April 1989 in cash in lieu of
stock at Raymark's request in the amount of $396. Raytech issued
163,303 shares of stock to Raymark in March 1990 in payment of the
1990 installment. In August 1991, the Company and Raymark amended
the Stock Purchase Agreement to require the three remaining annual
stock payments in cash in lieu of the issuance of shares of Common
Stock in annual installments through April 1994. In December 1992,
the Stock Purchase Agreement was again amended providing for
payment of the 1992 payments to be completed in March 1993.
Payments due in 1993 and 1994 are suspended pending the purchased
assets being free of all Raymark-related liabilities as required
(see Note F).
The Raymark Divestiture - Raytech management has been informed
of the following with respect to ownership of Raymark:
In May 1988, the common stock of Raymark Corporation was
divested and sold to Asbestos Litigation Management, Inc.
("ALM"), a wholly-owned subsidiary of Litigation Control
Corporation ("LCC"). At the time of the said sale, LCC was
60% beneficially owned by Craig R. Smith, President and CEO of
Raytech (15% through his son, Bradley C. Smith).
In September 1988, LCC entered a tripartite agreement with
Celotex Corporation and Raymark for the purpose of sharing
asbestos litigation costs. Consideration paid by Raymark to
LCC was to assign $1,000 of its $33,530 note receivable due in
1994 from Raytech pursuant to the aforementioned Wet Clutch
and Brake Division acquisition.
In October 1988, LCC repurchased 75% of its outstanding stock
consisting of all of the shares beneficially owned by Craig R.
Smith and Bradley C. Smith and another unrelated shareholder
for $750. Consideration paid to Craig R. Smith
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
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
$2,622 subject to the indemnification clause which were applied
as a reduction of the note obligation in December 1996 and
February 1997, respectively. Additional costs of $1,773, $6,322
and $5,256 were applied as a reduction of the note pursuant to
the indemnification clause as of December 1997, 1998, and 1999,
respectively.
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.
The Company's Board of Directors reviewed Craig Smith's
beneficial ownership of the APC stock at length and recommended
continued disclosure of the related party transactions and
<PAGE>
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 Consolidated Statements 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 2, 2000 and January 3, 1999,
the related payable amounted to $246 and $246, respectively.
In 1998, the Company acquired manufacturing equipment from
UFC for $1,051, of which $907 is included in accounts payable at
January 2, 2000 and 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 2, 2000, Dana's
voting interest in the Company is 15.7%.
<PAGE>
Note I - Income Taxes
Income (loss) before provision for income taxes and minority
interest consists of:
1999 1998 1997
Domestic $26,260 $25,314 $22,460
Foreign 285 (514) 1,309
$26,545 $24,800 $23,769
The Company's provision for taxes consists of the following:
1999 1998 1997
Current:
Federal $ 5,163 $ 4,229 $ 6,437
State 1,158 1,074 1,392
Foreign 961 580 147
Deferred:
Federal 1,272 1,061 (1,076)
Total income taxes $ 8,554 $ 6,944 $ 6,900
The analysis of the variance from the U.S. statutory income
tax rate for consolidated operations is as follows:
1999 1998 1997
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 4.7 2.7 (1.3)
Utilization of tax credits (1.2) (1.6) (1.4)
Net decrease (increase) in
benefit from carryback of
future deductible amounts (1.8) (.9) 2.8
State income taxes, net of
federal benefit 2.9 2.8 3.8
Adjustment of prior years'
accruals 1.7 (4.0) 3.4
Raymark indemnification
payments (8.9) (7.0) (4.6)
Reversal of foreign loss
carryforward valuation
allowance - - (6.4)
Amortization of nondeductible
intangibles 1.1 .7 -
Other (1.3) .3 (2.3)
Effective income tax rate 32.2% 28.0% 29.0%
<PAGE>
Note I, continued
Deferred tax assets (liabilities) are comprised of the
following:
1999 1998 1997
Excess of book provisions
over tax deductions $ 2,928 $ 3,559 $ 3,994
Postretirement benefit 4,758 4,325 4,040
Excess of tax basis over
book basis of assets due
to restructuring 1,806 2,301 2,807
Foreign loss carryforwards 1,822 1,927 1,832
Other 947 947 947
Gross deferred tax assets 12,261 13,059 13,620
Deferred tax asset
valuation allowance (4,633) (4,851) (4,260)
Deferred tax assets 7,628 8,208 9,360
Gross deferred tax
liabilities (excess of
tax over book depreciation) (4,384) (3,692) (3,783)
Net deferred tax asset $ 3,244 $ 4,516 $ 5,577
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 $(218), $591 and $(4,915) during 1999, 1998 and
1997, 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.
At January 2, 2000, the Company had foreign loss carryforwards
of $6,240 (Germany $2,725, China $1,035 and U.K. $2,480), which do
not expire. A valuation allowance has been provided against the
tax benefit of the U.K. and China loss carryforwards due to
uncertainty of future profitability of these operations.
The Company has in process an Internal Revenue Service tax
audit for the 1996, 1997 and 1998 fiscal years. The IRS has
advised the Company that it is reviewing the deductibility of
certain bankruptcy related costs, which are included in the
indemnification agreement with Raymark, based on a 1999 Bankruptcy
Court ruling of an unrelated taxpayer. The amount and specific
nature of costs that could be contested has not been specified.
The Company has deducted approximately $14.7 million of such costs
through January 2, 2000 and continues to believe that these costs
are deductible. At this time it is not possible to assess the
<PAGE>
Note I, continued
likelihood or amount of any IRS claim; however, should
the IRS assert a claim and prevail, an adjustment related to prior
year tax accruals would be required.
<PAGE>
Note J - Employee Benefits
<TABLE>
<CAPTION>
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.
Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at
beginning of year $4,177 $3,242 $11,540 $10,333
Service cost 319 270 561 490
Interest cost 246 219 695 640
Plan participants' contributions - - 29 26
Amendments - - 95 -
Actuarial (gain) loss (1,202) 525 (2,683) 410
Benefits paid (85) (79) (287) (359)
Other - - 93 -
Benefit obligation at end of year $3,455 $4,177 $10,043 $11,540
Change in plan assets
Fair value of plan assets
at beginning of year $2,894 $2,372 $ - $ -
Actual return on plan assets 178 148 - -
Employer contribution 420 453 258 333
Plan participants' contribution - - 29 26
Benefits paid (85) (79) (287) (359)
Fair value of plan assets
at end of year $3,407 $2,894 $ - $ -
Funded Status Reconciliation and Key Assumptions
Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
Funded status $ (48) $(1,283) $(10,043) $(11,540)
Unrecognized actuarial (gain)
loss (131) 1,095 (2,446) 186
Unrecognized prior service 184 205 88 -
Prepaid (accrued) benefit cost $ 5 $ 17 $(12,401) $(11,354)
Amounts recognized in the
statement of financial
position consist of:
Accrued benefit liability $ (48) $(1,283) $(12,401) $(11,354)
Prepaid benefit cost - - - -
Intangible asset 53 205 - -
Unrecognized actuarial loss 0 1,095 - -
Net amount recognized $ 5 $ 17 $(12,401) $(11,354)
</TABLE>
<PAGE>
Note J, continued
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Weighted average assumptions
Discount rate 7.75% 6.00% 7.75% 6.00%
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
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Effect on total of service
and interest cost components
of expense $ 141 $ 100 $ (122) $(100)
Effect on accumulated postretire-
ment benefit obligation $ 895 $1,100 $ (806) $(900)
Net Periodic Benefit Expense
</TABLE>
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits
attributed to service during
the period $ 319 $ 270 $ 254 $ 561 $ 490 $ 446
Interest cost on benefit
obligation 246 219 190 695 640 634
Expected return on plan assets (178) (150) (124) - - -
Amortization of prior
service cost 20 20 20 7 - -
Amortization of net actuarial
(gain) loss 25 22 15 (51) (55) (13)
Total net periodic benefit
cost $ 432 $ 381 $ 355 $1,212 $1,075 $1,067
</TABLE>
<PAGE>
Note J, continued
The Company's German subsidiaries have unfunded defined benefit plans
covering certain employees.
Pension Benefits
1999 1998
Change in benefit obligation
Benefit obligation at
beginning of year $2,562 $2,254
Service cost 67 84
Interest cost 163 161
Actuarial (gain) loss 16 (8)
Benefits paid (121) (111)
Translation (368) 182
Benefit obligation at end of year $2,319 $2,562
Change in plan assets
Fair value of plan assets
at beginning of year $ - -
Actual return on plan assets - -
Employer contribution 121 111
Plan participants' contribution - -
Benefits paid (121) (111)
Fair value of plan assets
at end of year $ - $ -
Funded Status Reconciliation and Key Assumptions
Pension Benefits
1999 1998
Funded status $(2,319) $(2,562)
Actuarial net loss 346 217
Unrecognized transition obligation 183 267
Accrued benefit cost $(1,790) $(2,078)
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
<PAGE>
Note J, continued
<TABLE>
<CAPTION>
Net Periodic Benefit Expense
Pension Benefits
1999 1998 1997
<S> <C> <C> <C> <C>
Service cost - benefits
attributed to service during
the period $ 67 $ 84 $ 83
Interest cost on benefit
obligation 163 161 155
Amortization of transition
obligation 49 50 52
Amortization of net actuarial
(gain) (166) (172) (178)
Total net periodic benefit
cost $ 113 $ 123 $ 112
<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
1999, 1998 and 1997 under the salary defined contribution plan were $1,024, $818, and
$800, 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 1999, 1998, and
1997 under the hourly defined contribution plan were $39, $30, and $24, 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 segment produces 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 segment produces 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
thousands of dollars follows:
<PAGE>
NOTE K, continued
<TABLE>
<CAPTION>
OPERATING SEGMENTS
Dry Total
Wet Friction Aftermarket Friction Segments
1999
<S> <C> <C> <C> <C> <C>
Net sales to external
customers $ 156,725 $ 64,085 $ 31,156 $ 251,966
Intersegment net sales (1) 15,554 16 1,155 16,725
Total net sales $ 172,279 $ 64,101 $ 32,311 $ 268,691
Depreciation $ 7,037 $ 1,434 $ 2,050 $ 10,521
Interest expense 1,560 322 (3) 381 2,263
Operating profit (2) 18,092 11,559 1,186 30,837
Segment assets 138,062 30,802 22,385 191,249
Expenditures for property,
plant and equipment 16,006 3,098 4,047 23,151
1998
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 125,206 24,896 21,473 171,575
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
<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, consisting of income before tax and minority
interest.
(3) Interest on debt due to affiliate.
(4) Investment in equity investees of $10,249 in 1997 is included in segment assets
of Wet Friction.
</TABLE>
<PAGE>
NOTE K, continued
<TABLE>
<CAPTION>
SALES BY GEOGRAPHIC LOCATION
Dry
Wet Friction Aftermarket Friction Consolidated
1999
<S> <C> <C> <C> <C>
United States $ 146,466 $ 64,085 $ - $ 210,551
Germany 9,190 - 29,246 38,436
Other foreign countries 1,069 - 1,910 2,979
Total net sales $ 156,725 $ 64,085 $ 31,156 $ 251,966
1998
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
</TABLE>
Sales are attributed to geographic areas based on the location of the assets
producing the sales.
Domestic sales to four wet friction customers, which were each greater than
10% of total net sales, were as follows:
1999 1998 1997
Customer A $ 29,976 $ 30,716 $ 33,448
Customer B 51,476 36,974 9,083
Customer C 25,588 22,799 15,728
Customer D 27,997 13,971 -
<PAGE>
NOTE K, continued
<TABLE>
<CAPTION>
LONG-LIVED ASSETS BY GEOGRAPHIC LOCATION
Dry
Wet Friction Aftermarket Friction Consolidated
1999
<S> <C> <C> <C> <S> <C>
United States $ 45,754 $ 9,116 $ - $ 54,870
Germany 12,766 - 9,971 22,737
Other foreign countries 2,517 - 4,140 6,657
Total long-lived assets $ 61,037 $ 9,116 $ 14,111 $ 84,264
1998
United States $ 35,651 $ 7,881 - $ 43,532
Germany 12,812 - $ 9,901 22,713
Other foreign countries 2,020 - 3,855 5,875
Total long-lived assets $ 50,483 $ 7,881 $ 13,756 $ 72,120
1997
United States $ 33,067 $ 8,978 - $ 42,045
Germany 11,098 - $ 8,482 19,580
Other foreign countries 1,576 - 1,400 2,976
Total long-lived assets $ 45,741 $ 8,978 $ 9,882 $ 64,601
</TABLE>
<PAGE>
NOTE K, continued
<TABLE>
<CAPTION>
Income 1999 1998 1997
<S> <C> <C> <C>
Operating profit (4) $ 30,837 $ 28,138 $ 26,163
Corporate (1) (4,131) (3,236) (2,523)
Elimination (161) (102) 129
Consolidated earnings before
taxes and minority interest $ 26,545 $ 24,800 $ 23,769(3)
Net Sales 1999 1998 1997
Total sales $ 268,691 $ 263,006 $ 249,686
Eliminations (16,725) (15,542) (15,211)
Consolidated net sales $ 251,966 $ 247,464 $ 234,475
Assets 1999 1998 1997
Total assets $ 191,249 $ 171,575 $ 153,750
Corporate (2) 2,640 5,988 6,649
Eliminations (5,203) (5,529) (7,014)
Total consolidated assets $ 188,686 $ 172,034 $ 153,385
<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.
(4) The Company's management reviews the performance of its reportable segments
on an operating profit basis, consisting of income before tax and minority
interest.
</TABLE>
<TABLE>
<CAPTION>
Segment Corporate Consolidated
Other Significant Items Total Headquarters Tota1
1999
<S> <C> <C> <C> <C>
Depreciation $ 10,521 $ 48 $ 10,569
Interest expense 2,263 16 2,279
Expenditures for property,
plant and equipment 23,151 52 23,203
1998
Depreciation $ 9,437 $ 40 $ 9,477
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 expense 3,337 8 3,345
Expenditures for property,
plant and equipment 20,587 16 20,603
</TABLE>
<PAGE>
NOTE L - Summarized Quarterly Financial Data (Unaudited)
(in thousands except share and market data)
Fiscal Quarters Ended 1999
April 4 July 4 Oct. 3 January 2
Net sales $ 67,343 $ 65,833 $ 62,473 $ 56,317
Gross profit 16,526 16,351 14,477 12,884
Income before provision
for taxes and minority
interest 7,599 7,831 5,260 5,855
Net income 4,488 5,339 3,378 3,159
Basic earnings per share 1.31 1.56 .98 .91
Diluted earnings per share 1.29 1.53 .94 .89
Market range:
-high 3-1/4 4-1/4 7-9/16 4-1/8
-low 2-3/4 2-9/16 3-3/4 3-3/16
Dividends - - - -
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 earnings per share 1.24 1.75 .90 .92
Diluted earnings 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 - - - -
<PAGE>
Note M - Supplementary Financial Statement Detail
As of 1999 1998
OTHER CURRENT ASSETS
Deferred income taxes $ 2,938 $ 3,035
Prepaid insurance 371 789
Other 4,860 2,674
$ 8,169 $ 6,498
ACCOUNTS PAYABLE
Trade accounts payable $ 17,512 $ 15,705
Cash overdraft 993 -
$ 18,505 $ 15,705
ACCRUED LIABILITIES
Property taxes $ 2,452 $ 1,967
Legal 290 1,341
Taxes 0 806
Wages and related taxes 5,425 4,842
Pensions and employee benefits 2,411 2,529
Product due Echlin (see Note H) 1,183 1,183
Other 10,873 9,219
$ 22,634 $ 21,887
OTHER LONG-TERM LIABILITIES
Long-term pensions $ 1,669 $ 2,903
Other 5,467 4,912
$ 7,136 $ 7,815
<PAGE>
Note M, continued
Fiscal Year 1999 1998 1997
OTHER OPERATING INCOME (EXPENSE), NET
Reimbursement of savings plan
contributions $ - $ - $ 120
Other, net (34) 387 152
$ (34) $ 387 $ 272
OTHER INCOME, NET
Interest income $ 352 $ 412 $ 410
Income from equity
investment in affiliate - - 647
Other, net 849 653 268
$ 1,201 $ 1,065 $ 1,325
ALLOWANCE FOR BAD DEBTS
Beginning balance $ 1,109 $ 1,186 $ 726
Provisions 388 655 524
Charge-offs (147) (732) (64)
Ending balance $ 1,350 $ 1,109 $ 1,186
AMORTIZATION OF INTANGIBLE
ASSETS
Advanced Friction Materials $ 751 $ 477 $ 370
Allomatic Products Company 57 57 57
Other 166 15 21
$ 974 $ 549 $ 448
<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
1999 1998
Current Assets:
Cash $ 427 $ 480
Deferred taxes - 2,176
Other current assets 2 2
Total current assets 429 2,658
Investment in subsidiaries 83,336 62,746
Deferred taxes 192 1,479
Other long-term assets 2,019 1,851
Total assets $ 85,976 $ 68,734
Current Liabilities:
Accounts payable and
accrued liabilities $ 4,488 $ 3,733
Other liabilities 700 704
Total liabilities 5,188 4,437
Shareholders' equity
Common stock 5,613 5,553
Additional paid in capital 70,564 70,501
Retained earnings (accumulated
deficit) 9,337 (7,027)
Accumulated other
comprehensive loss (165) (169)
85,349 68,858
Less treasury stock at cost (4,561) (4,561)
Total shareholders' equity 80,788 64,297
Total liabilities and
shareholders' equity $ 85,976 $68,734
<PAGE>
Note M, continued
<TABLE>
<CAPTION>
Statements of Operations
1999 1998 1997
<S> <C> <C> <C>
General and administrative expenses $ (4,131) $ (3,236) $(2,523)
Provision for income taxes (5,387) (4,226) (4,859)
Loss before equity in earnings in
subsidiaries (9,518) (7,462) (7,382)
Equity in earnings of subsidiaries 25,882 23,819 22,920
Net income $ 16,364 $16,357 $15,538
Statements of Cash Flows
1999 1998 1997
Net cash used in operating activities $ (5,549) $(5,921) $(4,677)
Cash flow from investing activities:
Dividends from subsidiary 5,425 5,898 4,743
Other (52) (155) (16)
Net cash provided by investing activities: 5,373 5,743 4,727
Net cash provided by financing activities:
Proceeds from sale of stock 123 362 112
Net change in cash (53) 184 162
Cash and cash equivalents,
beginning of period 480 296 134
Cash and cash equivalents,
end of period $ 427 $ 480 $ 296
</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 $1,361, $1,334, and $1,050, in
1999, 1998 and 1997, respectively. The approximate minimum rental
commitments under non-cancelable leases at January 2, 2000 were as
follows: 2000, $607; 2001, $612; 2002, $452, 2003, $348; 2004, and
thereafter, $413.
<PAGE>
Note O - Stock Option Plans
The Company's 1980 Non-Qualified Stock Option Plan (the "1980
"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 1980 Plan were at 100% of
the fair market value on grant date or par value, whichever was higher.
Once granted, options became exercisable in whole or in part after one
year and expired on the tenth anniversary of the grant. The term during
which options could be granted under the 1980 Plan expired on
December 31, 1989 and all options granted under the 1980 Plan have
expired.
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." Had compensation cost been determined
consistent with FAS No. 123, pro forma net income for the years ended
January 2, 2000 and January 3, 1999 would have been $16,012 and $16,106,
respectively. Pro forma basic and diluted earnings per share for the
years ended January 2, 2000 and January 3, 1999 would have been $4.66
and $4.55, respectively, and $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 1999 and 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 2, 2000 in shares
under option were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
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 845,957 $3.56 526,050 $2.99 658,350 $3.56
Granted (1) - 500,000 4.25 -
Exercised (59,509) 2.06 (136,087) 2.66 (45,546) 2.52
Lapsed (3,735) 4.25 (650) 1.75 (82,154) 7.88
Canceled (24,700) 1.75 (43,356) 7.53 (4,600) 1.75
Outstanding at
end of year 758,013 $3.73 845,957 $3.56 526,050 $2.99
Options available
for future awards
at end of year 35,279 31,544 30,299
Options exercisable
at end of year 758,013 $3.73 347,202 $2.56 526,050 $2.99
</TABLE>
<TABLE>
<CAPTION>
Options outstanding and exercisable at January 2, 2000 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>
$2.75 262,993 2.83 $2.75 262,993 $2.75
$4.25 495,020 8.62 4.25 495,020 4.25
$2.75 - $4.25 758,013 6.61 $ 3.73 758,013 $ 3.73
<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 2,
2000 and January 3, 1999, the Company had uncollateralized
receivables with three customers approximating $19,068 or 60.8% and
$17,021 or 58.0%, respectively, 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
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 in April 1998 for a formulated amount of $6,044 under the
Agreement. RCI paid $3,022 at closing, 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.
As discussed in Note A, the Company has contested the purchase
price of the remaining 53% of AFM due to discovery of a pre-acquisition
fraud by an AFM employee, claiming return of $1,511 of the initial
purchase price payment and cancellation of the remaining $3,022
obligation. In June 1999, AFM's former owner initiated a lawsuit
against the Company for payment of the remaining amounts due. While the
Company has discontinued accrual of interest, it continues to carry the
obligation of $3,022 as a liability pending outcome of the lawsuit. In
the event of an outcome in favor of the Company, the reduction in
liability will be recorded with a corresponding reduction of goodwill.
Also, as discussed in Note A, the Company has successfully pursued legal
action against the AFM employee involved in the embezzlement, resulting
in liquidation of four real estate properties owned by the employee in
fiscal 1999 and 2000 to the benefit of the Company. Amounts recovered
were recorded net of related professional costs incurred in pursuit of
restitution as a reduction of AFM goodwill of $1,337. The Company has
also reserved for the estimated embezzlement loss in excess of net
amounts recovered from the real estate properties, pending the outcome
of the purchase price litigation.
<PAGE>
Note R - Earnings Per Share
1999 1998 1997
Basic EPS computation
Numerator $ 16,364 $ 16,357 $ 15,538
Denominator:
Common shares outstanding
at beginning of the year 3,421,395 3,285,308 3,239,762
Stock options exercised 17,622 116,711 23,375
Weighted average shares 3,439,017 3,402,019 3,263,137
Basic EPS $4.76 $4.81 $4.76
Diluted EPS Computation
Numerator $ 16,364 $ 16,357 $ 15,538
Denominator:
Common shares outstanding
at beginning of the year 3,421,395 3,285,308 3,239,762
Dilutive potential common
shares 79,867 146,874 261,254
Stock options exercised 17,622 116,711 23,375
Adjusted weighted
average shares 3,518,884 3,548,893 3,524,391
Diluted EPS $4.65 $4.61 $4.41
<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
Balance 12/28/97 $ 715 $ - $ 715
Changes during the year 211 $(1,095) (884)
Balance 1/3/99 $ 926 $(1,095) $ (169)
Changes during the year (1,091) 1,095 4
Balance 1/2/00 (165) - (165)
No tax benefit has been provided for the future tax deduction
associated with the minimum pension liability and translation
adjustments.
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 its
subsidiaries at January 2, 2000 and January 3, 1999, and the
results of their operations and their cash flows for each of the
three fiscal years in the period ended January 2, 2000, in
conformity with accounting principles generally accepted in the
United States. 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
auditing standards generally accepted in the United States, 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, which contemplates
realization of assets and settlement of liabilities in the
ordinary course of business. 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
February 24, 2000
<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 II Directors expires with the 2000 Annual Meeting
and two Directors will be elected as Class II Directors for full
three-year terms and until their successors are elected and qualified.
Set forth below are the names of three persons nominated by
the Board of Directors for election as Class II Directors and the
names of the other Class I 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 2000. 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 (serving until the Annual Meeting of Shareholders in 2002)
Donald P. Miller 68 Retired, formerly 1986
President and Chief
Executive Officer of
Posi-Seal International,
Inc. until 1986; Director,
Information Management
Associates; Director,
Saab Financial Auto
Receivables Corp.
Robert B. Sims 57 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 (currently serving and nominated to serve until the Annual
Meeting of Shareholders in 2003)
Robert M. Gordon 83 Retired, formerly 1986
President and Vice
Chairman of Raybestos-
Manhattan, Inc.
Frederick J. Mancheski(1) 73 Retired, formerly 1998
Chairman of the Board
and Chief Executive
Officer of Echlin Inc.;
Director, Marlin Co.
Albert A. Canosa(2) 54 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 2001)
Robert L. Bennett 63 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 $20,500 per year meeting fee plus $3,500
per year fee for one or more committee appointments in 1999. The
Directors are paid the annual Director's meeting fee or proportion
thereof only for scheduled meetings attended. The committee meeting
fee is paid regardless of attendance. There is no minimum attendance
rule and any Director that misses all meetings would receive no
portion of the annual Director's meeting fee.
Executive Officers
First Became
Name Age Positions Held Officer
Albert A. Canosa 54 President and 1986
Chief Executive
Officer
John B. Devlin 48 Vice President, 1998
Treasurer and Chief
Financial Officer
John J. Easton 56 Vice President, 1991
President of
Subsidiary, Raybestos
Products Company,
since 1987
LeGrande L. Young 64 Vice President, 1986
Administration,
Secretary and
General Counsel
<PAGE>
Item 11. Executive Compensation
<TABLE>
<CAPTION>
Summary Compensation Table:
The following Summary Compensation Table identifies current,
long-term and stock-related compensation paid to the Chief Executive
Officer and the three most highly compensated executive officers for
1999 and two prior years:
Long-Term
Compensation
Annual Compensation Awards Payouts All Other
Name/ Salary Bonus Options LTIP Compensation
Position (1) Year ($) ($) # $(2) ($)(3)
<S> <C> <C> <C> <C> <S> <C> <C>
Albert A. Canosa 1999 286,758 308,265 - 286,758 13,901
President and 1998 276,225 352,000 - - 9,600
Chief Executive 1997 155,626 166,069 - - 9,424
Officer
John B. Devlin (4) 1999 155,250 128,948 - 156,300 10,192
Vice President, 1998 116,477 144,000 - - 6,989
Treasurer and
Chief Financial
Officer
John J. Easton 1999 191,033 144,734 - 144,734 13,460
Vice President 1998 182,411 142,234 - - 13,304
1997 145,761 109,321 - - 11,945
LeGrande L. Young 1999 189,737 207,451 - 192,978 12,495
Vice President, 1998 179,724 237,056 - - 9,600
Administration, 1997 160,620 161,255 - - 9,600
Secretary and
General Counsel
Craig R. Smith (5) 1999 - - - - -
1998 33,394 - - - 379
1997 283,511 411,419 - - 9,600
<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, $9,410, $9,600 and $9,600, respectively, for 1999 and
in the amounts of $9,600, $6,989, $9,600 and $9,600, respectively, for 1998;
and to Messrs. Canosa, Easton, Young and Smith in the amounts of $9,424,
$9,030, $9,600 and $9,600, respectively, for 1997.
(4) Mr. Devlin was hired in March 1998 and accordingly had no compensation in 1997
from the Registrant.
(5) Mr. Smith was formerly President and Chief Executive Officer but was
terminated in January 1998.
</TABLE>
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option
Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options Options
on Value at 1/3/00 at 1/3/00
Exercise Realized Exercisable Exercisable
Name (#) ($) (#) ($)
<S> <C> <C> <C> <C> <C>
Albert A. Canosa (CEO) 7,000 16,625 159,781 $ 20,886
John B. Devlin - - 22,000 -
John J. Easton 7,000 16,188 66,566 $ 20,037
LeGrande L. Young 7,000 15,750 133,908 $ 22,951
</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
1994 $100 $ 98 $ 84
1995 66 134 121
1996 92 164 134
1997 126 212 167
1998 66 269 153
1999 77 320 113
* 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, 1994 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 and
performance.
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 grading 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 Hewitt Associates Total Compensation
Measurement, which resulted from an integration of Management
Compensation Services Project 777 Study and Hewitt's Compensation
Data Base used in the past. This data source was selected as a
model for executives' salaries based upon the similarities of
industry, operations and products to the Registrant and the
prestige of the sponsoring firm. Special pay practice 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 paying employers used in
establishing the base salary of executives are listed in the
reference Total Compensation Measurement. Of all industry groups
of corporations set forth in the Total Compensation Measurement,
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
Registrant. The base salaries of executive officers, including
the Chief Executive Officer, were generally low compared to the
survey 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 1997, 1998 and 1999 based upon a Board approved Business
Plan for each year. The stipulated earnings before tax goals
were achieved for the years 1997, 1998 and 1999 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 1999
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 1999 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.
(ii) The executive officers' positions all received a grade
providing for variable compensation eligibility of 75%
or 100% 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.
The corporate earnings before tax goals stipulated by
the Board for 1999 were met and exceeded in the amount
of 104% resulting in a variable compensation
opportunity to each executive officer of 104% of 75% or
100% of each such officer's base salary and resulting
in variable compensation opportunity to the Chief
Executive Officer of 104% 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 1999.
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 per share 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 per share goals for the strategic
planning period beginning 1996 through 1999. The stipulated
earnings per share goals were achieved for each of the years 1997,
1998 and 1999 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 per share
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
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 1999 as well as prior years, and the long-term variable
compensation related to strategic planning received in 1999.
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 28,048 (a) .8%
Albert A. Canosa 161,781 (b) 4.4%
Robert M. Gordon 29,548 (c) .8%
Frederick J. Mancheski - -
Donald P. Miller 28,048 (c) .8%
Robert B. Sims 28,048 (c) .8%
Executive Officers
Albert A. Canosa 161,781 (d) 4.4%
President and Chief
Executive Officer
John B. Devlin 22,000 (e) .6
Vice President, Treasurer
and Chief Financial Officer
John J. Easton 73,899 (f) 2.1%
Vice President
LeGrande L. Young 140,908 (g) 3.9%
Vice President, Administration,
Secretary and General Counsel
All Directors and Executive Officers
as a Group (9) 512,280 (h) 12.9%
(a) Total represents 21,048 shares which Mr. Bennett holds the
option to purchase within 60 days.
(b) Total includes 159,781 shares which Mr. Canosa holds the
option to purchase within 60 days.
(c) Total represents 28,048 shares which the named Director
holds the option to purchase within 60 days.
(d) Total includes 159,781 shares which Mr. Canosa holds the
option to purchase within 60 days.
(e) Total includes 22,000 shares which Mr. Devlin holds the
option to purchase within 60 days.
(f) Total includes 66,566 shares which Mr. Easton holds the
option to purchase within 60 days.
(g) Total includes 133,908 shares which Mr. Young holds the
option to purchase within 60 days.
(h) Total includes 487,447 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 2, 2000
and January 3, 1999
Consolidated Statements of Operations for the 1999,
1998 and 1997 fiscal years
Consolidated Statements of Cash Flows for the 1999,
1998 and 1997 fiscal years
Consolidated Statements of Shareholders' Equity
for the 1999, 1998 and 1997 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
None
(c) Index of Exhibits Page
3(a) Certificate of Incorporation of Raytech (d)
3(b) By-laws of Raytech (d)
4(a) Amendment No. 1 to Form S-4 Registration
Statement, Registration No. 33-7491 (b)
10(a) Raytech Corporation's 1980 Non-Qualified Stock
Option Plan, as amended (c)
10(a) Raytech Corporation's 1990 Non-Qualified Stock
Option Plan (h)
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
(i) and Amendment dated December 21, 1992 (j)
10(e) Asset Purchase Agreement dated October 29, 1987
between Raymark Industries, Inc. and Raytech
Composites, Inc. (e), Amendment dated July 18,
1991 (i) and Amendment dated December 21, 1992 (j)
10(f) Stock Purchase Agreement dated May 18, 1988
between Raytech Corporation and Asbestos
Litigation Management, Inc. (f)
10(g) Asset Purchase Agreement (Notarial Deed)
dated June 19, 1992 between Ferodo Beral
GmbH and Raytech Composites, Inc. and
Raybestos Reibbelag GmbH (j)
10(h) Loan Agreement dated September 16, 1993 between
Raytech Composites, Inc. and Raymark Industries,
Inc. (k)
10(i) Loan Agreement dated January 10, 1994 between
Raytech Composites, Inc. and Raymark Industries,
Inc. (k)
<PAGE>
Page
10(j) Loan and Security Agreement dated March 29,
1995 between Raybestos Products Company and
The CIT Group/Credit Finance, Inc. (l)
10(k) Loan and Security Agreement dated November 21,
1997 between Raybestos Products Company and
Nations credit Commercial Corporation (m)
10(l) Memorandum of Understanding dated July 23, 1998
Re. Consensual Plan of Reorganization (n)
22 Subsidiaries of Raytech 116
24 Consent of Independent Accountants 118
Footnotes to Exhibits
(a) Filed as an Exhibit to Registrant's Amendment
No. 1 to Form S-4, Registration Statement,
Registration No. 33-7491, filed with the Securities
and Exchange Commission on September 5, 1986.
(b) Filed with the Securities and Exchange Commission on
September 5, 1986.
(c) Included in Registrant's Registration Statement on Form
S-8 (Registration No. 2-95251) filed with the
Securities and Exchange Commission on January 11, 1985.
(d) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 23, 1987.
(e) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 28, 1988, as amended by Form 8 filed on
April 11, 1988 and Form 8 filed on April 19, 1988.
(f) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 29, 1989.
(g) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 20, 1991.
(h) Included in Registrant's Registration Statement on Form
S-8 (Registration No. 33-42420) filed with the
Securities and Exchange Commission on August 23, 1991
(i) 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.
(j) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 22, 1993.
(k) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 14, 1994.
(l) Included as an Exhibit to Registrant's Report on Form
10-Q filed with the Securities and Exchange Commission
on April 2, 1995.
(m) Included as an Exhibit to Registrant's Report on Form
10-K filed with the Securities and Exchange Commission
on March 18, 1998.
(n) 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 113
hereafter.
Index To Consolidated Financial Statements
Page
Financial Statements:
Consolidated Balance Sheets as of
January 2, 2000 and January 3, 1999 42
Consolidated Statements of Operations
for the 1999, 1998 and 1997 Fiscal Years 43
Consolidated Statements of Cash Flows
for the 1999, 1998 and 1997 Fiscal Years 44
Consolidated Statements of Shareholders'
Equity for the 1999, 1998, and 1997
Fiscal Years 45
Notes to Consolidated Financial Statements 46
Report of Independent Accountants 96
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 24, 2000
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 24,
2000.
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, Inc. Delaware
1204 Darlington Avenue
Crawfordsville, IN 47933
Raybestos U.K. Ltd. England
16, Spindus Road
Speke
Liverpool L24 1YA, England
RayMan Company, LLC Delaware
312 St. St. Clair Street
Sullivan, IN 47882
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
Raytech Systems, Inc. Delaware
312 S. St. Clair Street
Sullivan, IN 47882
RCI, Inc. Delaware
2780 Waterfront Parkway East Drive
Suite 100
Indianapolis, IN 46214
Exhibit 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Raytech Corporation and subsidiaries on Forms S-8
(File No. 33-42420 and 2-95251) of our report, which includes an
explanatory paragraph related to the Company's ability to continue
as a going concern, dated February 24, 2000, on our audit of the
consolidated financial statements of Raytech Corporation and
subsidiaries as of January 2, 2000, and January 3, 1999 and for
each of the three fiscal years in the period ended January 2, 2000,
which report is included in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
March 20, 2000
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<NAME> RAYTECH CORP
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