UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





**FORM
10-K**





xAnnual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Fiscal Year ended January 2, 2005 or





oTransition 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.
      EmployerIncorporation
      or Organization)
    Identification
      No.)**Suite
      295, Four Corporate Drive****Shelton,
      Connecticut**
    **06484**(Address
      of Principal Executive Office)
    (Zip
      Code)





**(203)
925-8021**


(Registrant's
Telephone Number, Including Area Code)




Securities
registered pursuant to Section 12(b) of the Act:




Title of each class
    Name
      of each exchange
      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 filing requirements for the past
90 days.





Yes x No o





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. [X] Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).





Yes o No x





The
aggregate market value of the registrant’s voting stock held by non-affiliates
of the registrant as of June 25, 2004 was $10.7 million.





Indicate
by check mark whether the Registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.





Yes xNo o





The
number of shares of the registrant’s common stock outstanding as of March 31,
2005 was 41,737,306.





**Documents
incorporated by reference:**


None.











**INDEX
      TO RAYTECH CORPORATION****2004
      FORM 10-K**PagePART
      I.Caution
      Regarding Forward Looking Statements
    3Item
      1. Business
    4Item
      2. Properties
    9Item
      3. Legal Proceedings
    10Item
      4. Submission of Matters to a Vote of Security Holders
    12PART
      II.Item
      5. Market for Registrant's Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities
    13Item
      6. Selected Financial Data
    14Item
      7. Management's Discussion and Analysis of Financial Condition andResults of Operations
    15Item
      7a. Quantitative and Qualitative Disclosures About Market
    Risk
    29Item
      8. Financial Statements and Supplementary Data
    30Item
      9. Changes in and Disagreements with Accountants on Accountingand
      Financial Disclosure
    75Item
      9a. Controls and Procedures
    75Item
      9b. Other Information
    75PART
      III.Item
      10. Directors and Executive Officers of the Registrant
    76Item
      11. Executive Compensation
    79Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
    85Item
      13. Certain Relationships and Related Transactions
    87Item
      14. Principal Accounting Fees and Services
    88PART
      IV.Item
      15. Exhibits, Financial Statement Schedules
    89Signatures
    92




2





**Caution
Regarding Forward Looking Statements**





Statements
in this Form 10-K relating to management’s views of trends, plans, objectives
and other matters for future operating periods are “forward looking statements”
as defined in the Private Securities Litigation Reform Act of 1995. These
forward looking statements are subject to significant risks and uncertainties
that could cause actual results to differ materially from the results in the
statements. Forward looking statements relating to our businesses are based on
assumptions concerning certain factors that are not predictable and are subject
to change. These factors include general economic conditions; worldwide demand
for automotive and heavy duty vehicles; consumer confidence; actions of our
competitors, vendors and customers; factors affecting our costs such as raw
material prices, labor relations, environmental compliance and remediation, and
interest and foreign currency exchange rates; technological issues; accounting
standards; among other factors. The forward-looking statements herein are made
as of the date of this report. We have no obligation to update our forward
looking statements.




3





**Part
I.**


****


**Item
1. Business**


**


*General*





Raytech
Corporation (“Raytech” or the “Company”) develops, manufactures and supplies
specialty engineered friction and energy absorption components used in oil
immersed (wet) and dry transmission and brake systems for on- and off-road
vehicles. The Company also makes and markets specialty engineered products for
heat resistant, inertia control, and energy absorption applications. Our
products are typically found in passenger cars, heavy-duty construction and
agricultural equipment, trucks, buses and logging, mining and military vehicles.
Unless the context indicates otherwise, all references herein to us, we, Raytech
or the Company include the Company and its subsidiaries.




Raytech
was incorporated in June 1986 in Delaware as a subsidiary of Raymark Corporation
(which, with its subsidiary Raymark Industries, Inc., is collectively referred
to in this report as “Raymark”). In October 1986, Raytech became the publicly
traded holding company of Raymark stock through a restructuring plan whereby
each share of common stock of Raymark was automatically converted into one share
of Raytech common stock. In 1988, Raytech divested the Raymark subsidiary. In
accordance with the restructuring plan, Raytech, through its subsidiaries,
purchased certain non-asbestos businesses of Raymark. Despite the divestiture of
Raymark, Raytech was named a co-defendant with Raymark and other named
defendants in numerous asbestos-related lawsuits as a successor in liability to
Raymark. In order to stay the litigation, 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. In April 2001, Raytech
emerged from protection of the Bankruptcy Court under a plan of reorganization.
Under the plan of reorganization certain asbestos personal injury claims and
certain environmental claims were discharged in exchange for cash and equity of
37,058,900 shares, representing 89.2% of the Company’s outstanding common stock
at that time. A channeling injunction was ordered by the Bankruptcy Court that
will permanently and forever stay, enjoin and restrain any asbestos-related
claims against the Company and its subsidiaries. Under the Bankruptcy Code, the
Raytech Asbestos Personal Injury Settlement Trust (“PI Trust”) was established
and all future asbestos related claims are to be channeled to the PI Trust for
resolution. Additionally, any and all future refunds of taxes, realized by the
Company and resulting from the implementation of the plan of reorganization,
will inure to the benefit of the PI Trust.




The
Company's operations are categorized into three operating segments and a
corporate group based on management structure, product type and distribution
channel, as described below. During the first quarter of 2004, we restructured
our operating segments to facilitate a stronger focus on the European wet
friction operations. Oversight of the European wet friction operations,
Raybestos Reibtechnik GmbH ("RRT") and Raybestos U.K. Ltd. ("RUK"), and sales of
wet friction products outside of North America was transferred to the European
management team. The newly defined operating segments are Domestic Wet Friction,
International (including the European wet friction operations and European and
Asian dry friction operations), and Aftermarket. All prior period segment
information presented has been restated to reflect the newly defined segments.




The
Domestic Wet Friction segment manufactures and distributes automatic
transmission and wet wheel brake system components. The segment markets its
products to automotive, heavy-duty truck, farm and construction machinery and
mining original equipment manufacturers ("OEMs") in North America.





The
International segment manufactures and distributes manual transmission
components, manufactures certain wet friction products in the United Kingdom,
and distributes automatic transmission and wet wheel brake system components
outside of North America. The segment markets its products to automotive,
heavy-duty truck, farm and construction machinery and mining OEMs. The
International segment markets its dry friction products worldwide and its wet
friction products throughout Europe and Asia.




4




The
Aftermarket segment produces specialty engineered products primarily for
automobile and lift truck automatic transmissions. In addition to these
products, this segment markets transmission filters and other transmission
related components. The focus of this segment is marketing to warehouse
distributors and certain retail operations in the automotive aftermarket.




The
Corporate group consists principally of corporate activities and includes costs
to maintain the corporate headquarters, certain environmental costs, and certain
assets, liabilities and related income and expense stemming from the
reorganization plan implemented when the Company emerged from bankruptcy in
2001. We have chosen not to distribute these costs to the operating segments to
preserve the historical comparability at the operating segment level.




During
the second quarter of 2004 the Company's President and Chief Executive Officer
retired. The Board of Directors has named an interim President and Chief
Executive Officer, Larry Singleton, from a financial advisory and consulting
firm, effective June 1, 2004. The Board of Directors is currently negotiating
the terms of a permanent appointment, as President and Chief Executive Officer,
with Mr. Singleton.




We
continue to review alternatives to improve our operating results. During 2004,
the Company conducted a facilities utilization review and made the decision to
close its manufacturing operations in Sterling Heights, Michigan and Liverpool,
England. The closure of these facilities is expected to be completed during
2005. During 2004, the Company closed its technical center in Sterling Heights,
Michigan and relocated the functions previously performed there to other
locations. The Company also began the process of relocating its corporate
functions from Shelton, Connecticut to its existing manufacturing and
development facilities located in Crawfordsville, Indiana. The closure of the
Shelton corporate offices is expected to be completed during 2005.







The
percentage of net sales for each segment of the consolidated net sales over the
past three years is as follows:





**For the**
      **Year Ended**
      **Jan.
      2, 2005**
    
    **For the**
      **Year Ended**
      **Dec.
      28, 2003**
    
    **For the**
      **Year Ended**
      **Dec.
      29, 2002**Domestic
      Wet Friction
      operations
    
    
    56.7
    %
    
    57.8
    %
    
    62.6
    %International
      operations
    
    
    29.7
    %
    
    27.5
    %
    
    23.3
    %Aftermarket
      operations
    
    
    21.6
    %
    
    21.8
    %
    
    22.0
    %Intersegment
      elimination
    
    
    (8.0
    %)
    
    (7.1
    %)
    
    (7.9
    %)





The net
sales, gross profit, operating profit (loss) and other financial information
pertaining to the operation of the business segments is contained in Note 10 -
Segment Reporting to the Consolidated Financial Statements of the Company.




Our
executive offices are located in Shelton, Connecticut. Information about the
Company, including its filings with the Securities and Exchange Commission, is
available, free of charge, on the Internet at www.raytech.com .





5





*Sales
Methods*





The
Domestic Wet Friction operations serve the on-highway and off-highway vehicular
markets through the sale of products to OEMs of automobiles, heavy-duty trucks,
buses, construction and mining equipment and agricultural machinery, through
sales to distributors that supply components and replacement parts for these
vehicles, and through sales by the International segment. The Domestic Wet
Friction segment sells certain products to the Aftermarket segment, which in
turn distributes these products to warehouse distributors in the
aftermarket.




Our
International operation sells dry friction clutch facings to manual transmission
system assemblers who, in turn, supply the OEM market and aftermarket in Europe
and the Far East. This segment sells wet friction products to OEMs of
automobiles, heavy-duty trucks, buses, construction and mining equipment and
agricultural machinery, and through distributors supplying components and
replacement parts for these vehicles.




The
Aftermarket segment sells its products primarily to warehouse distributors and
in certain instances directly to retail outlets.




Sales in
all segments are made by Company sales representatives. Sales are made under
sales contracts for all or a portion of a customer's products over a period of
time or on an open order basis and may include price commitments for multiple
years. In some cases, these contracts stipulate price reductions in future years
that may negatively impact our profitability.




Our
products are sold around the world, through export from our plants in the United
States, through our wholly-owned manufacturing subsidiaries in Germany, the
United Kingdom and China, and through distributors.





*Raw
Material Availability*





The
principal raw materials used in the manufacture of our products include
cold-rolled steel, metal powders, synthetic resins, plastics and synthetic and
natural fibers. All of these materials are available from a number of
competitive suppliers. In 2004, worldwide increases in steel demand led to
increased prices, which negatively impacted the Company's 2004 profitability.
Management expects the increase in steel prices will continue to negatively
impact the Company's profitability during 2005. In addition to steel, we use
other raw materials, specifically in our paper production process, where a
shortage of supply could negatively impact our profitability and our ability to
deliver to customers. Other potential future impacts on the Company from the
current market conditions could include reduced delivery levels of finished
products to customers due to reduced availability of materials.





*Patents
and Trademarks*





Raytech
owns a number of patents, both foreign and domestic. Such patents expire between
2006 and 2023. In the opinion of management, our business is not dependent upon
the protection of any of its patents and would not be materially affected by the
expiration of any of such patents. We operate under a number of registered and
common law trademarks, including the trademark "RAYBESTOS." Certain trademarks
have been licensed to others on a limited basis. Some trademarks are registered
internationally.




6


**


*Competition*





The
automotive parts industry is extremely competitive. Each of the Company’s
operating segments competes with several other manufacturers that produce and
sell similar products. Some of our competitors are considerably larger and have
substantially greater financial resources than the Company. The wet friction
marketplace is comprised of four major competitors, including the Company. The
Company has one major competitor in the European dry friction marketplace and
competes with several Chinese and other Asian based manufacturers in the Asian
market. In the European Dry Friction market, several of the Company’s customers
are also competitors. There are five major competitors, including the Company,
in the Aftermarket segment. Raytech believes that it is competitive in all
markets in which it is engaged due to its brand recognition, product quality,
service and price.




The
Company’s businesses are greatly affected by general economic conditions. We are
in large part dependent upon consumer demand for automobiles, consumer
confidence and business investment in heavy equipment. We are a relatively small
supplier of a limited number of components. Our customers are large companies
under pressure to cut component costs. The Domestic Wet Friction segment’s OEM
customers are experiencing margin erosion due to reduced volume, high labor
costs and intense foreign competition. Due to their size, our customers are
often able to demand component price reductions from their suppliers including
the Company. These customers may also demand technological changes and quality
improvements at the Company’s expense. The Company’s competitors have
substantially greater resources to respond to these competitive conditions.





*Significant
Customers*





During
the years presented, sales to the following customers were greater than 10
percent of the Company’s consolidated sales during at least one of the years
presented:





******For
      the**Year Ended**Jan. 2,
      2005**
    
    ******For
      the**Year Ended**Dec. 28,
      2003**
    
    ******For
      the**Year Ended**Dec. 29,
      2002**Caterpillar
    
    
    11.9
    %
    
    9.5
    %
    
    11.4
    %DaimlerChrysler
    
    
    10.1
    %
    
    12.4
    %
    
    14.4
    %





The
Company's largest customers, including those listed above, have unionized work
forces and could be subject to plant shutdowns in the event of a labor dispute,
which could adversely affect the Company's shipments to those customers and the
Company's revenues.





From time to time, the Company loses business from
existing customers, including its largest customers, due to pricing,
technologicial or other competitive pressures. The Company also from time to
time gains new business and renewals of existing business from existing or new
customers through its continuing cost reduction, sales and development efforts.
The cumulative effect of these changes, or the loss of one of its largest
customers, could have a material adverse effect on the consolidated financial
results of the Company.





*Backlog*





Sales
backlog at the end of fiscal 2004 and 2003, by segment, was as
follows:





*(in
      millions)*
    
    **2004**
    
    **2003**Domestic
      Wet Friction
    
    $
    81.1
    
    $
    76.7International
    
    
    25.0
    
    
    15.6Aftermarket
    
    
    2.8
    
    
    1.5Total
    
    $
    108.9
    
    $
    93.8





The
Company expects that the current backlog will be filled during
2005.




7




*Employees*





At
January 2, 2005, Raytech employed 1,704 employees, compared with 1,565 employees
at the end of 2003. 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 labor contract at Raybestos Products Company
(“RPC”) in Crawfordsville, Indiana, is due to expire in May 2006. The labor
contract at Raybestos Automotive Components Company (“RACC”) in Sterling
Heights, Michigan, was renegotiated in 2004 and is due to expire in September
2007. In addition to the customary provisions of such an agreement, the new
union contract at RACC provides for severance benefits in the event of a plant
closure. The Company’s German subsidiary is a member of an industry employers’
association that is party to various employee union contracts on behalf of its
members. The current contract covering German employees’ wages continues through
February 2006.





*Capital
Expenditures*





Capital
expenditures were $6.7 million, $9.0 million and $9.6 million for fiscal years
2004, 2003 and 2002. Capital expenditures for 2005 are budgeted at $10.7
million. The 2005 capital expenditure budget includes $1.2 million related to
the expansion of our operations in China.


**


*Research
and Development*





Research
and development costs were approximately $6.6 million, $7.2 million and $7.3
million in fiscal years 2004, 2003 and 2002, respectively. Separate research and
development facilities are maintained at the Crawfordsville, Indiana and
Morbach, Germany plants for developing new products, improving existing
production techniques and supplying technical service to the business units and
customers. During 2004, the Company consolidated the research and development
activities that had been performed at the Sterling Heights, Michigan facility
into the Crawfordsville, Indiana facility. Research
and development costs for 2005 are budgeted at $5.3 million.





*Environmental
Matters*





The
Company is subject to federal, state, local and foreign laws and regulations
governing the discharge of materials into the environment or otherwise relating
to the protection of the environment (“Environmental Laws”). The cost to the
Company of complying with these Environmental Laws was approximately $1.2
million during 2004, and it is projected at $1.2 million for 2005. Estimated
capital expenditures for environmental control facilities for 2005 are budgeted
to be $.6 million. Substantial unanticipated environmental costs could adversely
affect profitability.




The
compliance costs noted above exclude remediation and related costs incurred by
the Company for the same periods. The Company is subject to substantial
environmental remediation obligations for past contamination that are not yet
fixed in scope or amount. The nature of environmental contamination and its
remediation are such that the amount and nature of work necessary is often
unknown until late in the process. The level of responsibility of the parties
involved and the level of remediation to be required by governmental authorities
is also uncertain. See Item 3 - Legal Proceedings for a full description of
remediation costs.




8




**Item
2. Properties**





The
Company conducts business at the following facilities:




The
Domestic Wet Friction segment has facilities in Crawfordsville, Indiana and
Sterling Heights, Michigan. The Crawfordsville, Indiana, facility is owned and
consists of approximately 461,000 square feet of office, production, research
and warehousing space. The Sterling Heights, Michigan, facility is owned and
consists of approximately 111,000 square feet of office, production, research
and warehousing space. The Domestic Wet Friction operation also leases sales
office space in Peoria, Illinois and Troy, Michigan and warehouse space in
Crawfordsville, Indiana. As a result of a facilities review, the Company has
decided to close the Sterling Heights, Michigan manufacturing facility in 2005
and intends to offer the real estate for sale.




The
International segment has facilities in Liverpool, England, Morbach, Germany and
Suzhou, China and leases a sales office in Shanghai, China. The Liverpool,
England, facility is leased and consists of 52,000 square feet of office,
production, and warehousing space. The Morbach, Germany, facility is owned and
consists of 108,000 square feet of office, production, research and warehousing
space. The Suzhou, China, facility is owned and consists of 52,000 square feet
of office, production, and warehousing space on a long-term land lease. As a
result of a facilities review, the Company has decided to close the Liverpool
facility in 2005.




The
Aftermarket segment has two facilities in Sullivan, Indiana, that are owned and
consist of 130,000 and 37,500 square feet of office and warehousing space. These
facilities are underutilized, leaving space for future demand. A separate
Crawfordsville, Indiana, aftermarket facility is owned and consists of
approximately 41,000 square feet. A portion of this facility has been leased to
the Company’s Domestic Wet Friction segment; the remaining space houses sales
offices. The Aftermarket segment also leases sales office space in Floral Park,
New York.




The
Company also leases 7,000 square feet of office space in Shelton, Connecticut,
for its headquarters staff. In December 2004, the Company decided to relocate
its corporate functions to its Crawfordsville, Indiana facility and to close the
Shelton office in 2005.




The
Company believes that its properties are suitable and adequate and have
sufficient production capacity to meet the reasonably anticipated demand for the
Company’s products.




The
Company’s operating lease commitments are discussed in Note 15 - Commitments to
the Consolidated Financial Statements.




9





**Item
3. Legal Proceedings**




*Environmental
Remediation*





Crawfordsville,
Indiana - Shelly Ditch Contamination Removal




In
October 1987, RPC, a wholly-owned subsidiary of the Company, purchased a major
manufacturing facility (the “RPC Facility”) in Crawfordsville, Indiana. Sometime
thereafter, the Company learned that the previous owner of the RPC Facility had
released polychlorinated biphenyls (“PCBs”) to the ground at the RPC Facility in
the mid-1960s and that such PCBs were leaching from the RPC Facility into an
adjacent ditch (“Shelly Ditch”).




In 1996,
the Indiana Department of Environmental Management (the “IDEM”) advised RPC that
the RPC Facility may have contributed to, and was potentially responsible for,
the release of lead and PCBs found in Shelly Ditch. In the late 1990s, RPC and
the IDEM entered into an agreed order (the “Agreed Order”) for a risk-based
remediation of PCBs and lead in Shelly Ditch. When the IDEM later sought to
unilaterally withdraw from the Agreed Order, RPC appealed and the Marion County
Superior Court ordered the IDEM to reinstate the Agreed Order. Meanwhile, at the
IDEM’s request, the United States Environmental Protection Agency (the “EPA”)
became involved in Shelly Ditch. ****




In
December 2000, before the Agreed Order was reinstated, the EPA issued a
Unilateral Administrative Order to RPC under CERCLA (the “EPA Removal Order”)
demanding removal of contaminated soils from those Shelly Ditch areas identified
as Reaches 1 through 3 (the “Site”). The EPA Removal Order required more work at
greater expense than the IDEM Agreed Order. Thereafter, RPC proceeded with the
work required under the EPA Removal Order.




On
January 9, 2004, the EPA confirmed that RPC had completed the action required
under the EPA Removal Order, including the removal and proper disposal of Site
soils and sediments contaminated with PCBs and lead. In its confirmation, the
EPA noted that RPC would continue to be subject to certain obligations under
that order, including record retention and the payment of oversight costs.
Whether RPC will be required to pay oversight costs relating to the work under
the EPA Removal Order will depend on the outcome of future negotiations with the
EPA regarding potential environmental remediation downstream of the Site.




At
January 2, 2005, RPC had spent approximately $18.7 million on removal of lead
and PCB contaminated soils from the Site and had accrued $.4 million for
potential EPA oversight costs relating to that work.




Crawfordsville,
IN - Environmental Remediation Downstream of the Site




On May 6,
2003, the EPA indicated that RPC is potentially liable for PCB and lead
contamination downstream of the Site. The EPA has not issued an order to RPC
regarding this downstream area. However, during the third quarter of 2003, the
Company began negotiations with the EPA concerning such possible additional
remediation. As a result, during the third quarter of 2003, the Company recorded
a $2.4 million accrual relating to this potential liability for future cleanup
costs. The Company has an accrual of $2.2 million at January 2, 2005 related to
this matter. ****




Crawfordsville,
IN - Environmental Remediation and Expenses  relating
to the RPC Facility




On May
15, 2001, the EPA issued a Pre-filing Notice and Opportunity to Confer
to **** RPC (the
“Pre-filing Notice”). This notice stated that the EPA might file a civil action
lawsuit against RPC for violations of various environmental statutes and would
offer RPC the opportunity to participate in pre-filing negotiations to resolve
this matter. The EPA stated that it had reason to believe that RPC committed
violations of the Clean Air Act, Clean Water Act, Resource Conservation and
Recovery Act, and Toxic Substances
Control Act and that RPC could be subject to substantial penalties. On September
3, 2003, the EPA proposed that the parties settle the Pre-filing Notice. The EPA
stated that penalties for violations alleged in the Pre-filing Notice could
total approximately $180.0 million and suggested the following resolution: RPC
should pay approximately $2.4 million in fines and undertake compliance
activities, on-site investigative work that the EPA estimated would cost about
$1.0 million, and corrective action to resolve the Pre-filing Notice. During
2004, RPC performed on-site investigative work. RPC is currently engaged in
negotiations with the EPA regarding potential on-site corrective action and the
amount of any penalty. The Company has an accrual of $3.4 million as of January
2, 2005, based on the EPA position.




10




Ferndale,
MI - Potential Responsibility for Environmental Remediation




**** In a
January 8, 2002 letter, the Michigan Department of Environmental Quality
asserted Company responsibility for trichloroethylene contamination at a
Ferndale, Michigan industrial site that Advanced Friction Materials Company
(“AFM”) leased from approximately 1974 to 1985. The Company acquired 47% of the
stock of AFM in 1996 and the balance of the shares in 1998. The Company’s
liability at this site is indeterminable at this time and no liability has been
recorded as of January 2, 2005.





*Environmental
Litigation*





Cost
Recovery Actions against Insurers regarding Shelly Ditch




In 1996,
RPC notified its insurers and demanded defense and indemnity regarding any
environmental issues relating to alleged lead and PCB contamination of Shelly
Ditch. In January 1997, one insurer filed a complaint in the U.S. District
Court, Southern District of Indiana, captioned Reliance  Insurance
Company vs. Raybestos Products Company (the
“Insurance Case”). The complaint sought a declaratory judgment that the Reliance
Insurance policies do not provide coverage to RPC for defense and indemnity
relating to investigation and remediation of contamination in Shelly Ditch. In
January 2000, the District Court rejected Reliance‘s claims and granted summary
judgment to RPC. In June 2001, Reliance Insurance Company was placed in
liquidation in Pennsylvania. The Company has filed claims in the Reliance
liquidation for recovery of its Shelly Ditch expenses but has not received a
decision.




In
February 2002, RPC filed a third-party complaint in the Insurance Case against
three insurance carriers. The third-party complaint seeks defense and indemnity
from the insurers relating to investigation and remediation of contamination in
Shelly Ditch. Later that year, two of the insurance carriers, USF&G and
Westchester, filed motions to compel arbitration of the insurance coverage
issues under these policies. The U.S. District Court denied these motions to
compel and the two insurance companies appealed to the U.S. Court of Appeals for
the Seventh Circuit ("Appeals Court"). On August 27, 2004, the Court of Appeals
reversed the District Court's order refusing to compel such arbitration and
remanded the case to the District Court for entry of an order compelling
arbitration. On October 15, 2004, the District Court entered its order
compelling arbitration and RPC promptly submitted the USF&G and Westchester
insurance issues to arbitration. The arbitration is currently scheduled to take
place during January 2006.




In
February 2004, the third insurance carrier, National Union and its affiliates,
commenced an adversary proceeding against the Company, RPC and others by filing
a complaint in U.S. Bankruptcy Court (the “Adversary Proceeding”). In the
Adversary Proceeding, National Union claims that RPC’s complaint against
National Union is barred by a 2002 order of the U.S. Bankruptcy Court in the
Raymark Chapter 11 cases that prohibits RPC from pursuing its third-party
complaint against National Union and declares that the National Union insurance
policies issued to the Company and RPC have been exhausted. Also in February
2004, National Union filed a motion in the U.S. District Court, Southern
District of Indiana, asking that court to stay the Insurance Case against
National Union. On September 10, 2004, the U.S. District Court granted National
Union's motion for stay. The outcome of this Adversary Proceeding and related
stay and their effects, if any, on the Insurance Case against National Union
cannot be predicted.




11





RPC
Claims against IDEM





In July
2002, RPC filed an action against the IDEM for breach of contract claiming
damages based on the difference between the costs of cleanup under the EPA
Removal Order and the IDEM Agreed Order. The outcome of this litigation cannot
be predicted.





*Commercial
Litigation*





On April
22, 2003, Automation by Design, Inc. (“ABD”) filed a civil action against RPC in
U.S. District Court for the Southern District of Indiana. The complaint alleged
copyright infringement and breach of contract in connection with RPC’s purchase
of certain equipment. RPC denied liability and filed counterclaims for breach of
contract and declaratory judgment. The court granted ABD’s motion to amend its
complaint to include as defendants Raytech Corporation and Production Design
Services, Inc., which manufactured certain equipment allegedly involved in this
court action and which RPC agreed to defend and indemnify against certain
liabilities. On December 8, 2004, the District Court granted RPC’s motion for
summary judgment, ruling that ABD’s claims fail as a matter of law. In January
2005, RPC filed a petition for reimbursement of its legal fees and costs
incurred in defending the action. ABD has filed an appeal of the summary
judgment ruling. The Company does not believe that the outcome of this
litigation will have a material adverse effect on its consolidated results of
operations, financial condition or cash flow.





*Equity
Holders Litigation*





In
February 2002, lawyers representing the Committee of Equity Holders of Raytech
Corporation filed a motion in U.S. Bankruptcy Court to compel the Company to
either issue up to approximately 700,000 additional shares to the
pre-reorganization holders of shares in the Company or their successors, or to
proportionately reduce the shareholdings of the general unsecured creditor
shareholders under the Plan of Reorganization. On October 27, 2004 the
Bankruptcy Court approved a settlement of the Equity Holders litigation,
pursuant to which each “Record Date Registered Holder”, as defined in Section 4
of the approved settlement agreement, was entitled to receive a payment of $0.16
per share. These payments, plus other payments required under the settlement,
were $.6 million, which was accrued by the Company during the third quarter of
2004 and paid by the Company during the fourth quarter of 2004. The payment of
these costs was funded by the Company’s majority shareholder. The Company has
recorded a liability to its majority shareholder for this amount on its books at
January 2, 2005.




The
Company is subject to certain other legal matters that have arisen **** in the
ordinary course of business, and management does not expect them to have a
significant adverse effect on the Company’s results of consolidated operations,
financial condition or cash flow.




**Item
4. Submission of Matters to a Vote of Security Holders**




There
were no matters submitted to a vote of security holders during the fourth
quarter of 2004.




12


**Part
II.**





**Item
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities**




The
Company's common stock is traded on the New York Stock Exchange under the
trading symbol RAY. As of March 11, 2005, there were 1,469 holders of record of
the Company's common stock.




Information
regarding the quarterly high and low sales prices for 2004 and 2003 is set forth
in Note 21 to the Consolidated Financial Statements, Part II, Item 8 hereof.




The
Company continues not to pay dividends. As a holding company, Raytech
Corporation’s ability to pay dividends is dependent upon the receipt of
dividends or other payments from its subsidiaries. The payment of dividends by
certain of the Company’s subsidiaries is subject to certain restrictions under
the Company’s credit agreements. See Note 8 - Debt to the Consolidated Financial
Statements.




Information
regarding securities authorized for issuance under equity compensation plans is
included in Part III, Item 12 hereof.




13




**Item
6. Selected Financial Data**





Selected
historical consolidated financial data is presented below for the most recent
five fiscal years. The information is separated between Predecessor Company,
pre-emergence from bankruptcy, and Successor Company, post-emergence from
bankruptcy. As a result of reorganization and fresh-start adjustments recorded
in conjunction with the Company’s emergence from bankruptcy, the financial data
of the Successor Company for the years ended January 2, 2005, December 28, 2003,
December 29, 2002 and the period April 3, 2001 to December 30, 2001 are not
comparable to the Predecessor Company for the period January 1, 2001 to April 2,
2001 and for the year ended December 30, 2000.




The
effective date of the Company’s reorganization was April 18, 2001, however for
accounting purposes, the reorganization and the related fresh-start adjustments
were recorded as of April 2, 2001.





***FIVE-YEAR
      REVIEW OF OPERATIONS***(in
      thousands, except per share data)**Successor**
    
    **Predecessor****Company**
    
    **Company**YearEndedJan.
      2,2005
    
    YearEndedDec.
      282003
    
    YearEndedDec.
      292002
    
    PeriodApr
      3,2001 toDec. 30,2001
    
    Period

      Jan 1,
      2001 to
      Apr. 2,
      2001(6)
    
    YearEndedDec.
      30,2000Operating
      results:Net
      sales
    
    $
    227,313
    
    $
    205,865
    
    $
    209,866
    
    $
    146,050
    
    $
    55,205
    
    $
    239,532Gross
      profit
    
    
    40,935
    
    
    26,126
    
    
    36,771
    
    
    21,460
    
    
    11,394
    
    
    59,489Operating
      (loss) profit (1)
    
    
    (3,051
    )
    
    (57,473
    )
    
    4,440
    
    
    (3,291
    )
    
    3,652
    
    
    27,215Interest
      expense (2)
    
    
    1,231
    
    
    1,061
    
    
    903
    
    
    873
    
    
    444
    
    
    2,218Gain
      on settlement of debt (3)
    
    
    —
    
    
    —
    
    
    —
    
    
    1,548
    
    
    —
    
    
    —Reorganization
      items (4)
    
    
    —
    
    
    —
    
    
    —
    
    
    (784
    )
    
    7,158,896
    
    
    —Net
      (loss) income (1) (4) (5)
    
    
    (2,750
    )
    
    (66,443
    )
    
    (2,825
    )
    
    (5,577
    )
    
    6,995,257
    
    
    (7,058,978
    )Share
      data:Basic
      (loss) earningsper
      share (1) (4) (5)
    
    $
    (.07
    )
    $
    (1.59
    )
    $
    (.07
    )
    $
    (.13
    )
    $
    1,778.88
    
    $
    (2,015.40
    )Weighted
      averagebasic
      shares
    
    
    41,737
    
    
    41,728
    
    
    41,608
    
    
    41,527
    
    
    3,932
    
    
    3,503Diluted
      (loss) earningsper
      share (1) (4) (5)
    
    $
    (.07
    )
    $
    (1.59
    )
    $
    (.07
    )
    $
    (.13
    )
    $
    1,772.62
    
    $
    (2,015.40
    )Weighted
      averagediluted
      shares
    
    
    41,737
    
    
    41,728
    
    
    41,608
    
    
    41,527
    
    
    3,946
    
    
    3,503Balance
      Sheet (at period end):Total
      assets
    
    $
    205,686
    
    $
    206,024
    
    $
    294,221
    
    $
    320,788
    
    $
    323,636
    
    $
    320,316Working
      capital
    
    
    33,653
    
    
    25,414
    
    
    23,317
    
    
    28,157
    
    
    26,753
    
    
    21,402Long-term
      obligations (7)
    
    
    71,707
    
    
    71,772
    
    
    82,850
    
    
    85,410
    
    
    69,330
    
    
    31,238Liabilities
      subject tocompromise
      (5)
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    7,211,433Total
      shareholders'equity
      (deficit)
    
    
    73,180
    
    
    75,910
    
    
    142,110
    
    
    144,083
    
    
    158,352
    
    
    (6,979,138
    )Property,
      plant and equipment:Capital
      expenditures
    
    $
    6,668
    
    $
    8,968
    
    $
    9,648
    
    $
    7,488
    
    $
    2,717
    
    $
    13,539Depreciation
    
    
    14,267
    
    
    16,107
    
    
    14,943
    
    
    10,585
    
    
    3,180
    
    
    11,545
  
 (1)
    2004
      includes $1.6 million impairment charge. 2003 includes $48.8 million
      impairment charge. See Note 6 - Property, Plant and Equipment and Note 7 -
      Goodwill and Other Intangible Assets to the Consolidated Financial
      Statements.
 (2)
    Predecessor
      Company includes cessation of interest accruals on the Raymark note in
      connection with a Bankruptcy Court Order.
 (3)
    Represents
      gain on the settlement of a note payable to a former AFM principal. Prior
      to the settlement, the Company had a note payable of$3.0
      million and accrued interest of $1.6 million recorded related to this
      debt. The settlement agreement required a payment of $3.1 million.
 (4)
    Reorganization
      items include fresh-start accounting adjustments, gain on the settlement
      of liabilities subject to compromise and professional fees.
 (5)
    The
      year ended December 30, 2000 includes recording of the estimated amount of
      allowed claims in the amount of $7.2 billion relating to asbestos personal
      injury, environmental and employee benefits issues.
 (6)
    Includes
      the reorganization and the adoption of fresh-start reporting as a result
      of the Company's emergence from bankruptcy.
 (7)
    Includes
      long-term liabilities and minority
interest.


14




**Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations**




The
following discussion should be read in conjunction with the Consolidated
Financial Statements, including the related notes, included in “Item 8 -
Financial Statements and Supplemental Data.” This discussion contains
forward-looking statements that are subject to significant risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those described in the section entitled "Caution Regarding
Forward Looking Statements.” Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect our present expectations and
analysis and are inherently susceptible to uncertainty and changes in
circumstances. We assume no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking statements.





*Executive
Summary*





On
January 2, 2005 we completed our third full year of operation post emergence
from bankruptcy. We continue to face significant challenges as we look toward
our future. Reduced volumes in the U.S. auto industry and new transmission
technology have had a dramatic impact on our business. In order to succeed in
the current environment we need to adapt and seek alternatives to improve our
operating results.




The
Company’s businesses are greatly affected by general economic conditions. Our
businesses sell components for transmissions and brakes to automotive and
heavy-duty OEMs as well as the automotive aftermarket, and in large part are
dependent upon consumer demand for automobiles, consumer confidence and business
investment in heavy equipment. Economic conditions may adversely affect revenues
in all of our business segments.




The
Company’s customers are large companies under pressure to cut component costs.
In particular, the Domestic Wet Friction segment’s largest customers are
experiencing margin erosion due to reduced volume, high labor and benefit costs
and intense foreign competition. We are a relatively small supplier of a limited
number of components. Due to their size, our customers are often able to demand
component price reductions from their suppliers, including all segments of the
Company. These customers may also demand technological changes and quality
improvements at our expense. In addition, the trend in the automotive
aftermarket is toward longer transmission service and replacement cycles due to
improved quality. Our revenues and margins may be adversely affected by these
factors.




During
the first quarter of 2004, the Company restructured its operating segments to
facilitate a stronger focus on the European wet friction operations. Management
of the European wet friction operations, RRT and RUK and sales of wet friction
products outside of North America, was transferred to the European management
team. The newly defined operating segments are Domestic Wet Friction,
International (including the European wet friction operations and European and
Asian dry friction operations), and Aftermarket. All prior period segment
information presented has been restated to reflect the newly defined segments.




Although
we are reporting an operating loss for 2004, there are many positive items to
discuss regarding our performance. All three of our operating segments reported
increased sales, improved gross margin and improved operating profit in
2004.




The
Domestic Wet Friction segment, most directly impacted by the decline in the U.S.
auto market, managed to increase sales modestly due to increased volume in the
heavy-duty sector partially offset by the continued decline in volume in the
automotive sector. The segment was able to improve gross margin performance as a
result of the volume increase, cost reductions and the non-recurrence of certain
one-time charges incurred during 2003.




The
International segment benefited from increasing demand in China and to a lesser
degree in Europe. During 2004, we began a third expansion of our operations in
China. When completed, the new facility in China will increase our capacity,
positioning us to take advantage of the growing market in China and increase our
exports from China.




The
Aftermarket segment grew sales through expanding its foreign customer base and
increased volume in newer product lines including gaskets and solenoids.
Subsequent to the end of fiscal 2004, but prior to filing this
report, we increased the Company’s indirect ownership of Allomatic Products
Company (“APC”), a company within our Aftermarket segment, from approximately
57% of its outstanding common stock to approximately 96% of its outstanding
common stock. See Note 22 - Subsequent Event to the Consolidated Financial
Statements.




15





In 2004,
worldwide increases in steel demand led to increased prices, which negatively
impacted our profitability. However, the Company was able to mitigate the impact
of the increase in steel cost through increased sales prices and increased
proceeds from the sale of scrap steel. We expect the increase in the price of
steel, net of any benefit derived from increased sales prices and proceeds from
scrap sales, will continue to negatively impact our profitability during 2005.
In addition to steel, we use other raw materials, specifically in our paper
production process, where a shortage of supply could negatively impact our
profitability and our ability to deliver to customers.




During
the second quarter of 2004, the Company's President and Chief Executive Officer
retired. The board of directors has named an interim President and Chief
Executive Officer, Larry Singleton, from a financial advisory and consulting
firm, effective June 1, 2004. The Company is obligated to pay that firm a
monthly fee. In addition to the monthly fee, the Company has agreed to pay a
one-time success fee of $.2 million, which was accrued as of January 2, 2005.




During
the third quarter of 2004, we reorganized our domestic management team. The
purpose of this reorganization was to centralize and streamline the management
of the domestic sales, research and manufacturing activities.




On
October 26, 2004, the Board of Directors of the Company approved decisions of
the Boards of Directors of RACC, and RUK, its indirect wholly-owned
subsidiaries, that those companies should completely close their manufacturing
facilities. The decisions were the result of a facilities utilization review
indicating that improved overhead absorption and performance might be obtained
through consolidation of the Company's facilities. The manufacturing operations
of RACC are located in Sterling Heights, Michigan. Our best estimate of the
timing of the RACC closing, which will depend on production requirements and
commitments to customers, is that it will be completed by the end of 2005. The
manufacturing operations of RUK are located in Liverpool, England. Manufacturing
at the RUK facility ended during March of 2005, however, the removal of
equipment and other exit activities will continue over the next few months.




During
the fourth quarter of 2004, we reached terms with certain major customers on
revised sales contract provisions that will enable the Company to close its
manufacturing plant in Sterling Heights, Michigan. The new sales contract
provisions, in addition to more favorable pricing, allow the Company to transfer
the production of certain products to other facilities and to discontinue the
production of other products upon closure of the Sterling Heights, Michigan
facility. In some cases the new pricing was retroactive to July or August of
2004. The impact of the retroactive price increase was approximately $.8 million
which will be recognized, prospectively over the estimated remaining period of
production for those customers.




We
believe that the changes that have occurred in our industry are fundamental and
will be long-term. In order to succeed and return to profitability, we must
adapt to the new climate and reduce our costs while continuing to manage our
resources. We have taken steps during 2004 to lower our costs and increase our
revenues. Certain of the steps taken during 2004 will have a negative impact on
our operating cash flows in 2005. As we move forward, and embark on strategic
initiatives to enhance our operating profitability, we need to be cognizant of
managing our working capital and other financial resources to ensure our future
liquidity. We will continue to reassess our operating and business strategy to
determine the best use of our resources and will attempt to identify strategic
initiatives that we might pursue to improve our performance.





16





**Results
of Operations**




**** The
following table sets forth selected data from the statement of operations for
the Company for the fiscal years ended January 2, 2005, December 28, 2003 and
December 29, 2002:




*(amounts
      in thousands)*
    
    ****Fiscal**2004**
    
    ****%
      of**sales**
    
    
    ****Fiscal**2003**
    
    ****%
      of**sales**
    
    
    ****Fiscal**2002**
    
    ****%
      of**sales**Net
      sales
    
    $
    227,313
    
    
    100.0
    %
    
    $
    205,865
    
    
    100.0
    %
    
    $
    209,866
    
    
    100.0
    %Gross
      profit
    
    
    40,935
    
    
    18.0
    
    
    
    26,126
    
    
    12.7
    
    
    
    36,771
    
    
    17.5Selling,
      general andadministrative
      expense
    
    
    39,014
    
    
    17.2
    
    
    
    34,795
    
    
    16.9
    
    
    
    32,331
    
    
    15.4Impairment
      charge
    
    
    1,560
    
    
    .7
    
    
    
    48,804
    
    
    23.7
    
    
    
    —
    
    
    —Restructuring
      expenses
    
    
    3,412
    
    
    1.5
    
    
    
    —
    
    
    —
    
    
    
    —
    
    
    —Operating
      (loss) profit
    
    
    (3,051
    )
    
    -1.3
    
    
    
    (57,473
    )
    
    -27.9
    
    
    
    4,440
    
    
    2.1Other
      income (expense)
    
    
    2,828
    
    
    1.2
    
    
    
    25,666
    
    
    12.5
    
    
    
    (726
    )
    
    -.3Environmental
      claims
    
    
    —
    
    
    —
    
    
    
    (7,262
    )
    
    -3.5
    
    
    
    (5,400
    )
    
    -2.6Income
      (loss) before income taxesand
      minority interest
    
    
    (223
    )
    
    -.1
    
    
    
    (39,069
    )
    
    -19.0
    
    
    
    (1,686
    )
    
    -.8Income
      taxes
    
    
    1,895
    
    
    .8
    
    
    
    26,745
    
    
    13.0
    
    
    
    84
    
    
    0Minority
      interest
    
    
    632
    
    
    .3
    
    
    
    629
    
    
    .3
    
    
    
    1,055
    
    
    .5Net
      loss
    
    $
    (2,750
    )
    
    -1.2
    %
    
    $
    (66,443
    )
    
    -32.3
    %
    
    $
    (2,825
    )
    
    -1.3
    %
 ****
 **Fiscal
2004 Compared to Fiscal 2003**





Sales
increased in all three of our operating segments in 2004 compared to 2003
levels. As a result, worldwide sales increased $21.4 million or 10.4% in 2004
compared to the prior year. The increase in sales was due primarily to increased
demand in the heavy-duty component of the Domestic Wet Friction segment,
increased demand in China and Europe, expansion into foreign markets and
increased product offerings in the Aftermarket segment and favorable currency
translation adjustments in Europe. We continue to experience pressure to reduce
prices from certain major customers, most notably in the Domestic OEM market and
to a lesser degree in China and Europe.




Gross
profit increased $14.8 million or 56.7% in 2004 compared to the prior year. As a
percent of sales, gross profit improved to 18.0% from 12.7% in 2003. Gross
margin performance improved in all three operating segments. The Domestic Wet
Friction segment realized the most significant improvement in gross margin as a
result of the implementation of cost reduction programs and the non-recurrence
of certain one-time expenses incurred during the fourth quarter of 2003. The
International segment benefited from favorable currency translation adjustments,
a modest increase in demand and increased sales of higher margin products. The
Aftermarket segment benefited from increased sales of its high margin friction
plate line, principally to new foreign customers.




SG&A
increased $4.2 million or 12.1% in 2004 compared to 2003. As a percent of sales,
SG&A expense increased slightly to 17.2% from 16.9% in the prior year. The
overall increase in SG&A expense was due principally to severance costs,
increased consulting costs, increased incentive compensation expense and
currency translation, partially offset by operating cost reductions. The
severance expense charged to SG&A during 2004 related to the retirement of
our President and Chief Executive and a reorganization of the domestic
management team.




The
restructuring expense and impairment charge recorded in 2004 relate to the
announced closure of our manufacturing facilities in Sterling Heights, Michigan
and Liverpool, England and the relocation of our corporate functions. See Note 3
- Restructuring Costs to the Consolidated Financial Statements for further
details regarding the 2004 restructuring costs. The impairment charge recorded
in 2003 related to the write down of certain tangible and intangible assets
triggered by the decline in profitability in the Domestic Wet Friction segment
during 2003.




As a
result of the foregoing, operating losses were reduced $54.4 million year over
year.




Other
income, in both 2004 and 2003, is principally the result of the reduction of
certain net deferred tax assets and the corresponding payable to the PI Trust.
This is explained more fully in Note 11 - Income Taxes to the Consolidated
Financial Statements. Additionally, the cost associated with settlement of the
equity holders litigation, during
2004, is reported in this line. This is explained more fully in Note 9 -
Litigation to the Consolidated Financial Statements.




17





The
Company is subject to substantial environmental remediation obligations for past
contamination that are not yet fixed in scope or amount. The nature of
environmental contamination and its remediation is such that the amount and
nature of work necessary is often unknown until late in the process. The level
of responsibility of the parties involved and the level of remediation to be
required by governmental authorities is also uncertain. The Company also incurs
substantial ongoing environmental compliance costs in operating its production
facilities. Substantial unanticipated environmental costs could adversely affect
profitability. Environmental claims are discussed in Item 3. Legal Proceedings
-- Environmental Remediation and Environmental Investigation.




The
minority interest expense relates to APC, which is 57% owned by the Company, 40%
owned by Raymark, a related party, and 3% owned by certain employees of the
Company. APC is consolidated in the financial results and a minority interest is
recorded to reflect the minority shareholders’ interest in APC. On March 21,
2005, the Company, through its majority owned subsidiary, APC, purchased the APC
common stock owned by Raymark in exchange for a ten-year unsecured subordinated
promissory note in the original principal amount of $7.2 million. See Note 22 -
Subsequent Event to the Consolidated Financial Statements.





**Fiscal
2003 Compared to Fiscal 2002**





Worldwide
sales decreased $4.0 million or 1.9% in 2003 compared to 2002. Although the
overall decline in sales was only 1.9%, by segment the fluctuations
year-over-year were more significant. The Domestic Wet Friction segment’s sales
declined 9.5% reflecting lower demand from our domestic OEM customers. Sales in
the International segment increased 15.8%, principally due to favorable currency
translation adjustments and a modest increase in demand for dry friction
products. Sales decreased modestly in the Aftermarket segment reflecting lower
demand.




Gross
profit decreased $10.6 million or 28.9% in 2003 compared to 2002. As a percent
of sales, gross profit decreased to 12.7% from 17.5% in 2002. The decline in
gross profit as a percentage of sales was due principally to the decline in the
wet friction business, partially offset by increased gross margin in the dry
friction business.





SG&A
expense increased $2.5 million or 7.6% in 2003 compared to 2002. As a percent of
sales, SG&A increased to 16.9% compared to 15.4% in 2002. The increase was
driven by certain severance and new hire costs in the Domestic Wet Friction
segment and an additional provision for certain trade accounts receivable in the
Aftermarket segment. Additionally, the International segment incurred increased
SG&A in support of higher sales volume.




Other
income in 2003 is principally the result of the reduction of certain net
deferred tax assets and the corresponding payable to the PI Trust. This is
explained more fully in Note 11 - Income Taxes to the Consolidated Financial
Statements.




Environmental
claims are discussed in Item 3. Legal Proceedings -- Environmental Remediation
and Environmental Investigation.





18





**Domestic
Wet Friction**





The
following table sets forth selected data from the statement of operations for
the Domestic Wet Friction segment for the fiscal years ended January 2, 2005,
December 28, 2003 and December 29, 2002:





**Fiscal**
    
    **%
      of**
    
    **Fiscal**
    
    **%
      of**
    
    **Fiscal**
    
    **%
      of***(amounts
      in thousands)*
    
    **2004**
    
    **sales**
    
    **2003**
    
    **sales**
    
    **2002**
    
    **sales**Net
      sales
    
    $
    128,892
    
    
    100.00
    %
    $
    119,002
    
    
    100.00
    %
    $
    131,445
    
    
    100.00
    %Gross
      profit
    
    
    12,926
    
    
    10.0
    
    
    4,563
    
    
    3.8
    
    
    18,784
    
    
    14.3Selling,
      general and administrative expense
    
    
    11,578
    
    
    9.0
    
    
    12,756
    
    
    10.7
    
    
    12,023
    
    
    9.1Impairment
      charge
    
    
    —
    
    
    —
    
    
    8,093
    
    
    6.8
    
    
    —
    
    
    —Restructuring
      expenses
    
    
    1,723
    
    
    1.3
    
    
    —
    
    
    —
    
    
    —
    
    
    —Operating
      (loss) profit
    
    
    (375
    )
    
    -0.3
    
    
    (16,286
    )
    
    -13.7
    
    
    6,761
    
    
    5.1


**Fiscal
2004 Compared to Fiscal 2003**





Sales for
the Domestic Wet Friction segment increased $9.9 million or 8.3% in 2004
compared to 2003. The increase in sales year over year is principally due to
increase in heavy-duty volume, offset partially by a decrease in automotive
volume. Although this segment continues to experience pricing pressure from
customers, in the fourth quarter of 2004 we reached terms with certain major
customers that included more favorable pricing. The net impact of the price
changes in 2004 was not significant to the overall change in sales.




Gross
profit increased $8.4 million or 183.3% in 2004 compared to the prior year.
Gross profit as a percent of sales increased to 10.0% in 2004 from 3.8% in 2003.
Overall, the improvement in gross profit is due to cost reductions and increased
leverage on fixed costs due to higher sales volume. As a result of the
impairment charge recorded during the fourth quarter of 2003, depreciation
expense was reduced by $1.0 million in 2004. During 2003 we established a
reserve for the expected loss on products in inventory and customer purchase
orders received by the balance sheet date, in the amount of $1.5 million.
Finally, the increase in the price of steel resulted in an increase of our raw
material costs that was partially offset through increased sales prices and
increased proceeds from the sale of scrap steel.




The
Domestic Wet Friction segment sells product to its customers, in certain
instances, using longer-term contracts that include price commitments for
multiple years. In some cases these contracts stipulate price reductions in
future years that may negatively impact on our gross profit.




SG&A
expense decreased $1.2 million or 9.2% in 2004 compared to 2003. The decrease in
SG&A expense is principally due to the consolidation of the research and
development activities that had been performed at the Sterling Heights, Michigan
facility into the Crawfordsville, Indiana facility during March of this year and
an increased emphasis on managing expenses, partially offset by increased
freight costs.




The
impairment charge recorded in 2003 related to the write-down of the segment’s
long-lived assets triggered by the marked decline in profitability.




The
restructuring expense recorded in 2004 relates to the planned closure of our
manufacturing facility in Sterling Heights, Michigan. See Note 3 - Restructuring
Cost to the Consolidated Financial Statements for further details regarding the
2004 restructuring costs.




As a
result of the foregoing, operating losses were reduced $15.9 million in 2004
compared to the prior year.




The
Company continues to review alternatives to improve the operating results for
this segment. Actions taken or being contemplated are as follows:





•
    During
      the first quarter of 2004, the Company reorganized its operating segments
      to facilitate a stronger focus on the European wet friction operations.
      Oversight of the European wet friction operations, RRT and RUK, was
      transferred to the European management
team.


•
    During
      March of 2004, the technical center located in Sterling Heights, Michigan
      was closed. The research and development
      activities, that had been conducted at this facility, were consolidated
      into the Crawfordsville, Indiana facility. The automotive sales and
      applications engineering groups previously located in this building have
      been relocated to a nearby office building in the Detroit
      area.




19




•
    The
      Company has implemented cost savings programs during 2004 and is
      continuing to evaluate all aspects of its operations for additional cost
      savings alternatives.


•
    During
      the third quarter of 2004, the Company announced a domestic management
      reorganization. The purpose of the management reorganization is to
      centralize and streamline the management of the domestic sales, research
      and manufacturing activities.


•
    The
      Company has conducted a facilities utilization review and has determined
      that improved performance can be obtained through the closure of its
      facility located in Sterling Heights, Michigan. The Company's plan for the
      closure of this facility is discussed more fully in Note 3 - Restructuring
      Costs to the Consolidated Financial
Statements.


•
    During
      the fourth quarter of 2004 we reached terms with certain major customers
      on more favorable pricing. We continue to work with certain other
      customers to negotiate more favorable
pricing.


•
    The
      Company has reached terms with certain customers to transfer production of
      certain profitable product lines to other facilities upon the closure of
      the Sterling Heights, Michigan manufacturing
facility.





**Fiscal
2003 Compared to Fiscal 2002**





Sales for
the Domestic Wet Friction segment decreased $12.4 million or 9.5% in 2003
compared to 2002. The decline in sales is due to lower sales to the automotive
OEM component of the segment of $4.5 million, due to lower demand for our
product and reduced pricing. The domestic automotive manufacturers, who comprise
our OEM customers, continued to lose market share to foreign competition, which
directly impacts Raytech. A significant portion of the lost North American
market share had been consumed by Asian automakers, a market we have not
penetrated. In addition, sales to the heavy-duty component of the segment
declined $5.0 million compared to the prior year. The decline represents certain
part sales lost to competition as well as price reductions.




Gross
profit declined $14.2 million or 75.7%, in 2003 compared to the prior year. The
decline in gross profit reflects the impact of lower sales and reduced pricing.
Gross profit was negatively impacted during 2003 by the establishment of a
reserve for the expected loss on products in inventory and customer purchase
orders received by the balance sheet date in the amount of $1.5 million. The
lack of gross profit in this segment was the driving force in the losses
sustained by the Company in 2003.





SG&A
expense increased $.7 million or 6.1% in 2003 compared to 2002. The increased
costs were principally due to certain severance and new hire costs.




The
impairment charge recorded in 2003 related to the write-down of the segment’s
long-lived assets triggered by the marked decline in profitability.




As a
result of the above, operating profit decreased $23.0 million or 340.9% in 2003
compared to 2002.




20





**International**





The
following table sets forth selected data from the statement of operations for
the International segment for the fiscal years ended January 2, 2005, December
28, 2003 and December 29, 2002:





**Fiscal**
    
    **%
      of**
    
    **Fiscal**
    
    **%
      of**
    
    **Fiscal**
    
    **%
      of***(amounts
      in thousands)*
    
    **2004**
    
    **sales**
    
    **2003**
    
    **sales**
    
    **2002**
    
    **sales**Net
      sales
    
    $
    67,433
    
    
    100.0
    %
    $
    56,698
    
    
    100.0
    %
    $
    48,981
    
    
    100.0
    %Gross
      profit
    
    
    18,487
    
    
    27.4
    
    
    14,064
    
    
    24.8
    
    
    9,796
    
    
    20.0Selling,
      general and administrative expense
    
    
    11,025
    
    
    16.3
    
    
    9,808
    
    
    17.3
    
    
    8,366
    
    
    17.1Impairment
      charge
    
    
    1,560
    
    
    2.3
    
    
    -
    
    
    -
    
    
    -
    
    
    -Restructuring
      expenses
    
    
    644
    
    
    .9
    
    
    -
    
    
    -
    
    
    -
    
    
    -Operating
      profit
    
    
    5,258
    
    
    7.8
    
    
    4,256
    
    
    7.5
    
    
    1,430
    
    
    2.9


****
 **Fiscal
2004 Compared to Fiscal 2003**


Sales for
the International segment increased $10.7 million or 18.9% in 2004 compared to
2003. Sales were impacted by favorable currency translation of $5.0 million. The
currency translation impact reflects the increase period-over-period in the
exchange rate of the Euro and the British pound to the U.S. dollar. After
adjusting for currency translation, the increase in sales for the year is due to
increasing demand most notably in China and to a lesser degree in Europe. In
China, demand is higher in both the passenger and commercial components of the
market. In Europe, demand has increased for heavy-duty products in the segment's
wet friction business, with more modest demand increases for the segment's
commercial products in its dry friction business.





Gross
profit increased $4.4 million or 31.4% year-over-year. As a percentage of sales,
gross profit increased to 27.4% compared to 24.8% in the prior year. The
segment's gross profit was favorably impacted by currency translation in the
amount of $1.1 million. After adjusting for currency translation, the increase
in gross margin for the year is primarily due to a more profitable sales mix and
cost reductions in the segment's wet friction business. We have experienced
competitive pricing pressures in the dry friction market in both China and
Europe.




SG&A
expense increased $1.2 million or 12.4% in 2004 compared to 2003. SG&A
expense was unfavorably impacted by currency translation of $.9 million. The
slight decrease in SG&A as a percent of sales, after adjusting for currency
translation, is principally due to savings realized from the consolidation of
our wet friction sales office into our dry friction facility in Morbach,
Germany, in late 2003.





The
restructuring expenses and impairment charge recorded in 2004 relate to the
closure of our manufacturing facilities in Liverpool, England. See Note 3 -
Restructuring Cost to the Consolidated Financial Statements for further details
regarding the 2004 restructuring costs.





As a
result of the above, operating profit improved $1.0 million or 23.5% in 2004
compared to 2003. The impact of currency translation on operating profit was
negligible year over year.





**Fiscal
2003 Compared to Fiscal 2002**





Sales for
the International segment increased $7.7 million or 15.8% in 2003 compared to
2002. Sales were favorably impacted by currency translation of $7.3 million. The
currency translation reflect the increase period-over-period in the exchange
rate of the Euro and the British pound to the U.S. dollar. After adjusting for
currency translation, the increase in sales for year is due to increased volume
in the Europe dry friction business and in China, partially offset by reduced
volume in the European wet friction business. The decline in the European wet
friction business was principally the result of a management decision in late
2002 to eliminate a non-core business product line produced at the United
Kingdom facility.




Gross
profit increased $4.3 million or 43.6% year-over-year. As a percentage of sales,
gross profit increased to 24.8% compared to 20.0% in the prior year. The
segment's gross profit was favorably impacted by currency translation
in the amount of $1.3 million. After adjusting for currency translation, the
increase in gross margin for the year is primarily due to increased sales
volume.




21





SG&A
expense increased $1.4 million or 17.2% in 2003 compared to 2002. The increase
in SG&A expense was principally due to the unfavorable impact of currency
translation of $1.2 million.




As a
result of the above, operating profit improved $2.8 million or 197.6% in 2003
compared to 2002.





**Aftermarket**





The
following table sets forth selected data from the statement of operations for
the Aftermarket segment for the fiscal years ended January 2, 2005, December 28,
2003 and December 29, 2002:





**Fiscal**
    
    **%
      of**
    
    **Fiscal**
    
    **%
      of**
    
    **Fiscal**
    
    **%
      of***(amounts
      in thousands)*
    
    **2004**
    
    **sales**
    
    **2003**
    
    **sales**
    
    **2002**
    
    **sales**Net
      sales
    
    $
    49,186
    
    
    100.0
    %
    $
    44,931
    
    
    100.0
    %
    $
    46,192
    
    
    100.0
    %Gross
      profit
    
    
    14,565
    
    
    29.6
    
    
    12,725
    
    
    28.3
    
    
    12,993
    
    
    28.1Selling, general and administrative
      expense
    
    
    6,471
    
    
    13.2
    
    
    5,447
    
    
    12.1
    
    
    4,587
    
    
    9.9Operating
      profit
    
    
    8,094
    
    
    16.5
    
    
    7,278
    
    
    16.2
    
    
    8,406
    
    
    18.2





**Fiscal
2004 Compared to Fiscal 2003**





Sales for
the Aftermarket segment increased $4.3 million or 9.5% in 2004 compared to 2003.
The increase was the result of increased sales of friction plates, principally
to foreign customers, and an increase in newer product lines such as gaskets and
solenoids.




Gross
profit increased $1.8 million or 14.5% year over year. As a percentage of sales,
gross profit increased to 29.6% compared to 28.3% in the prior year. The
increase in gross profit is driven by increased sales volume, most notably
higher margin friction plates. The segment was negatively impacted by an
increase in coil steel, a key raw material. A portion of the impact of the
increased raw material cost was recovered through increased sales prices. We
expect that the increased price of steel will continue to negatively impact
profitability in 2005.




SG&A
expense increased $1.0 million or 18.8% in 2004 compared to 2003. The increase
in SG&A was driven by increased medical, incentive compensation and
distribution costs.




As a
result of the foregoing, operating profit increased $.8 million or 11.2% for the
2004 fiscal year compared to the 2003 fiscal year.




22





**Fiscal
2003 Compared to Fiscal 2002**





Sales for
the Aftermarket segment decreased $1.3 million or 2.7% in 2003 compared to 2002.
The decrease was driven by reduced demand for aftermarket parts as a result of
longer lasting OEM parts. The decrease was most notable in sales for assembled
kits for transmission rebuilding which decreased $1.5 million from 2002 levels.




The
decrease in gross profit of $.3 million or 2.1% in 2003 compared to the prior
year is due to the lower sales volume. Gross profit as a percent of sales
increased slightly in 2003 compared to 2002.




SG&A
expense increased $.9 million or 18.7% in 2003 compared to 2002. The increase in
SG&A is principally due to an additional provision for accounts receivable.




As a
result of the above, operating profit decreased $1.1 million or 13.4% in 2003
compared to 2002.





**Liquidity,
Capital Resources and Future Liquidity**





The
Company's cash and cash equivalents at January 2, 2005 totaled $13.6 million
compared to $16.4 million at December 28, 2003, a decrease of $2.8 million.
Capital expenditures for the year were $6.7 million, a reduction of $2.3
million compared with the capital spending for the prior year. Net cash provided
by operating activities was $.1 million compared to cash provided by operating
activities of $5.5 million in the prior year period. Cash outflows for operating
assets and liabilities were $15.0 million during 2004. Significant cash flows
relating to operating assets and liabilities were a $2.6 million increase in
trade accounts receivable, a $8.3 million increase in inventories, a $5.5
million cash payment for pension funding, partially offset by an increase in
accruals, most notably severance and incentive compensation.




Cash and
cash available under existing lines of credit at January 2, 2005 were $19.7
million compared to $27.0 million at year-end 2003, a decrease in cash and
available lines of credit of $7.3 million.




The total
borrowings at January 2, 2005 of $26.7 million compares to total borrowings of
$22.4 million at year-end 2003, an increase of $4.3 million period-over-period.
The available lines of credit at January 2, 2005 of $6.1 million compares to
$10.6 million at year-end 2003, a decrease in availability of $4.5 million. Full
details of the Company’s debt are contained in Note 8 - Debt to the Consolidated
Financial Statements.




As a
result of the recognition of the costs associated with the closure of the
Sterling Heights, Michigan manufacturing facility, the Company requested and
obtained a waiver of a fixed charge coverage ratio contained in one of its
domestic bank agreements.




On March
21, 2005 the Company, through, its majority owned subsidiary, APC, purchased
shares of APC owned by Raymark in exchange for a ten-year unsecured promissory
note of $7.2 million which increased the Company’s indirect ownership of APC
from approximately 57% of its outstanding common stock to approximately 96% of
its outstanding common stock. In connection with this transaction the Company
requested and obtained a waiver of the negative covenant restricting the
repurchase or acquisition of the borrowers' capital stock contained in one of
its domestic bank agreements during the fourth quarter of 2004.




Subsequent
to the end of 2004, but prior to the filing of this report, the Company amended
its domestic debt agreements. The primary purpose of the amendments was the
modification of the debt covenant calculations to provide the Company greater
flexibility to manage its cash resources and certain one-time costs that will be
incurred during 2005 related to the plant closures announced during 2004.
Additionally, the amendment to the Domestic Wet Friction loan and security
agreement provides for a remedy of future non-compliance with the quarterly debt
covenants, by an irrevocable cash contribution by the parent. In April 2005, the
parent made an irrevocable cash contribution of $1.0 million to RPC, a borrower,
to remedy the debt covenant non-compliance occurring at the end of the first
quarter of 2005. The parent may be required to make additional cash
contributions in the future in the event of any further non-compliance of the
borrowers. The amendments are discussed in Note 8 - Debt to the Consolidated
Financial Statements.




Refer to
the Notes 8 - Debt and 15 - Commitments to the Consolidated Financial Statements
for information regarding the Company's obligations and commitments by year.
These obligations and commitments consist of long-term debt, capital leases and
rental agreements.




23




The
Company's potential obligations regarding environmental remediation are
explained fully in Note 9 - Litigation to the Consolidated Financial Statements.




The
Company assumed the liability for the Raymark pension plans as part of the
reorganization. Funding for the plans in 2004 was $4.6 million. Funding for
these plans in 2005 is expected to be approximately $1.3 million.




Certain
tax issues are discussed in Note 11 - Income Taxes to the Consolidated Financial
Statements, which provides detail concerning the status of the current Internal
Revenue Service audit and the use of certain future tax benefits.




The
Company incurred costs associated with the retirement of its President and Chief
Executive Officer during the second quarter and the reorganization of its
domestic management team during the third quarter of 2004. The total cost
associated with these items is approximately $1.4 million of which $.8 million
was paid during 2004, with the balance to be paid during 2005.




The
Company has conducted a facilities utilization review and has determined that
improved performance can be obtained through the closure of certain facilities.
The Company estimates that the total cash outflows related to these closures to
be approximately $5.5 million, of which we expect to expend $4.6 million during
2005 and the remaining balance will be spent during 2006 and 2007. The expenses
related to these closures as more fully explained in Note 3 - Restructuring
Costs to the Consolidated Financial Statements.





During
2004, we reached terms with certain major customers on revised sales contract
provisions that will enable us to close our manufacturing plant in Sterling
Heights, Michigan. The new sales contract provisions require the Company, in
certain instances, to build up inventory levels to facilitate the transition to
a new vendor or to another manufacturing location within the Company. As a
result, we expect our inventory levels to increase through September
2005 by as much as $3.5 million. During the fourth quarter of 2005, we expect
this trend will reverse and inventory levels will begin to decrease. We
currently expect that the amount of inventory related to the build up will be
less than $2.0 million at year end 2005.





During
2004, we began a third expansion of our operations in China. When completed, the
new facility in China will increase our capacity, positioning us to take
advantage of the growing market in China and increase our exports from China.
The expected cost of the expansion project in China is $1.9 million, with $.9
million expended during 2004 and the remainder of these expenditures to be
incurred before the end of 2005.





Management
believes that existing cash balances, the Company’s lending facilities and cash
flow from operations will be sufficient to meet all of the Company’s obligations
arising in the normal course of business, the anticipated non-operating
requirements discussed above and anticipated capital investments over the next
year. However, the ability of the Company to utilize its lending facilities is
dependent on the Company’s ability to meet its financial forecasts, which is not
assured, and to meet the financial covenants contained in its credit facilities.
These forecasts include modest revenue growth in all three operating segments as
well as certain cost-saving initiatives, partially offset by certain cost
increases and inflation assumptions. If the Company does not comply with the
financial covenants, an event of default would occur and could result in the
acceleration of the Company’s indebtedness under its domestic credit facilities.
If that were to occur, the ability of the Company to continue would be dependent
upon, among other things, its ability to amend its credit facilities, undertake
certain actions to generate cash and/or to seek additional alternative financing
from other lenders.




24


*Contractual
Obligations*





Securities
and Exchange Commission regulations require that we present our contractual
obligations, and we have done so in the table that follows. However, our future
cash flow prospects cannot reasonably be assessed based on such obligations. The
most significant factor affecting our future cash flows is our ability to earn
and collect cash from customers. Future cash outflows, whether they are
contractual obligations or not, will vary based on our future needs. While some
such outflows are completely fixed (for example, commitments to repay principal
and interest on fixed-rate borrowings) most depend on future events (for
example, supply agreements to purchase commodity raw materials at quantities to
be determined in the future at then-market prices). Further, normal operations
involve significant expenditures that are not based on “commitments,” for
example, expenditures for income taxes or for payroll.




As
defined by reporting regulations, our consolidated contractual obligations as of
January 2, 2005, follow:


**Less
      Than**
    
    **1-3**
    
    **4-5**
    
    **More
      Than****Total**
    
    **1
      Year**
    
    **Years**
    
    **Years**
    
    **5
      Years******
    
    **(in
      thousands)**Long-term
      debt (a)
    
    $
    26,490
    
    $
    15,169
    
    $
    6,146
    
    $
    3,831
    
    $
    1,344Capital
      lease obligations (b)
    
    
    206
    
    
    111
    
    
    95
    
    
    —
    
    
    —Operating
      leases (c)
    
    
    4,909
    
    
    1,051
    
    
    1,193
    
    
    415
    
    
    2,250Purchase
      obligations (d)
    
    
    1,104
    
    
    1,104
    
    
    —
    
    
    —
    
    
    —Other
      liabilities (e)Pension
      (f)
    
    
    2,248
    
    
    2,248
    
    
    —
    
    
    —
    
    
    —Postretirement
      (g)
    
    
    918
    
    
    918
    
    
    —
    
    
    —
    
    
    —Environmental
      (h)
    
    
    5,975
    
    
    500
    
    
    5,475
    
    
    —
    
    
    —Severance
      (i)
    
    
    4,009
    
    
    3,084
    
    
    925
    
    
    —
    
    
    —Total
    
    $
    45,859
    
    $
    24,185
    
    $
    13,834
    
    $
    4,246
    
    $
    3,594


(a)
    Bank
      debt, see Note 8 - Debt to the Consolidated Financial Statements. The
      Company has not included interest expense in the amounts presented because
      it is not practical to do so. The majority of the outstanding debt at
      January 2, 2005, relates to the Company’s revolving debt facility and
      other variable rate instruments. The expense in future years will be
      dependent upon the amounts borrowed against under the revolving debt
      facility and the rates incurred on the variable rate instruments which
      cannot be accurately estimated at this
time.
 (b)
    Capital
      lease obligations - see Note 8 - Debt to the Consolidated Financial
      Statements.
 (c)
    Future
      minimum lease payments under operating leases, principally for office and
      warehouse space.
 (d)
    Generally,
      the Company does not have any material purchase obligations. Contracts for
      the purchase of materials are binding with regard to price but not
      quantity. At January 2, 2005, the Company had firm contracts related to
      the expansion of its operations in China of $.9 million and firm material
      purchase orders of $.2 million.
 (e)
    Because
      their future outflows are uncertain, the following non-current liabilities
      are excluded from the table above: pension obligation, postretirement
      benefits, deferred income taxes and the deferred payable to the PI
      Trust.
 (f)
    Represents
      the Company’s estimated 2005 contribution to fund its pension plans. The
      pension plans are described in Note 14 - Employee Benefits to the
      Consolidated Financial Statements. The Company has not presented pension
      contribution amounts for the periods beyond 2005 because the timing of
      these payments cannot be accurately estimated at this time. The Company’s
      long-term pension obligation at January 2, 2005 is $14.2
      million.
 (g)
    Represents
      the current portion of the Company’s postretirement obligation. The
      postretirement plan is described in Note 14 - Employee Benefits to the
      Consolidated Financial Statements. The Company has not presented the
      long-term portion of its post retirement obligation of $16.8 million at
      January 2, 2005. The timing of these payments cannot be accurately
      estimated.
 (h)
    Represents
      the Company’s current estimate of costs to satisfy potential environmental
      fines, studies and remediation.
 (i)
    Represents
      severance related to the Company’s 2004 restructure programs. See Note 3 -
      Restructuring Costs to the Consolidated Financial
    Statements.


*Off
Balance Sheet Arrangements*





The
Company has no off balance sheet arrangements.




25


**
 *Recently
Issued Accounting Pronouncements*


** In July
2002, the Public Company Accounting Reform and Investor Protection Act of 2002
(the Sarbanes-Oxley Act) was enacted. Section 404 stipulates that public
companies must take responsibility for maintaining an effective system of
internal control. The act requires public companies to report on the
effectiveness of their control over financial reporting and obtain an attest
report from their independent registered public accountant about management’s
report. The act requires most public companies (accelerated filers) to report on
the company’s internal control over financial reporting for fiscal years ended
on or after November 15, 2004. Other public companies (non-accelerated filers)
must begin to comply with the new requirements related to internal control over
financial reporting for their first fiscal year ending on or after July 15, 2006
under the latest extension granted by the Securities and Exchange Commission.
Raytech is a non-accelerated filer and therefore does not have to comply with
section 404 of the act until 2006.




In May
2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvements
and Modernization Act of 2003." This statement requires the Company to disclose
the effects of the Act and to assess the impact of the subsidy on the
accumulated postretirement benefit obligation and net periodic postretirement
benefit cost in the first interim or annual period beginning after June 15,
2004. The Company has not reflected any amount associated with the subsidy in
our accumulated postretirement obligation as we do not believe the benefits
provided by our plan qualify for the subsidy. **




In
November 2004 the Financial Accounting Standards Board (“FASB”) issued Statement
of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs - an
amendment of ARB No. 43, Chapter 4”. This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight handling costs and wasted
material (spoilage). This statement requires that these types of costs be
recognized as current period charges. SFAS No. 151 is effective prospectively
for inventory costs incurred during fiscal years beginning after June 15, 2005,
with earlier application permitted for such costs incurred during fiscal years
beginning after November 24, 2004. Management
does not expect the adoption of SFAS No. 151 to have a significant impact on the
Company’s consolidated financial statements.




In
December 2004 the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
an amendment of APB Opinion No. 29”. SFAS No. 153 amends Accounting Principles
Board (“APB”) Opinion 29 concerning the accounting for exchanges of similar
productive assets. Such transactions should be accounted for at fair value, the
basic principle for nonmonetary transactions, unless the exchange lacks
commercial substance. The effective date of SFAS No. 153 is for nonmonetary
asset exchanges taking place in fiscal years beginning after December 16, 2004.
The Company will adopt SFAS No. 153 in 2005 and does not expect it to have a
significant impact on the Company’s consolidated financial statements.




In
December, 2004 the FASB issued SFAS No. 123 (revised 2004), “Share Based
Payment”. This statement replaces SFAS 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion 25, "Accounting for Stock Issued to
Employees." SFAS No. 123 (revised 2004) requires that the cost of share-based
payment transactions (including those with employees and non-employees) be
recognized as compensation costs in the financial statements. SFAS No. 123
(revised 2004) applies to all share-based payment transactions in which an
entity acquires goods or services by issuing (or offering to issue) its shares,
share options, or other equity instruments (except for those held by an ESOP) or
by incurring liabilities in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or that require (or may require)
settlement by the issuance of an entity's shares or other equity instruments.
This statement applies to all new awards granted during the fiscal year
beginning after June 15, 2005 and to previous awards that are modified or
cancelled after such date. We have not yet fully evaluated the effect of SFAS
No. 123 (revised 2004) on our financial statements and have not determined the
method of adoption we will use to implement SFAS No. 123 (revised
2004).





26





In
December 2004, the FASB issued FSP FAS 109-1, “Application of FASB Statement No.
109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”).” The
AJCA introduces a special 9% tax deduction on qualified production activities.
FSP FAS 109-1 clarifies that this tax deduction should be accounted for as a
special tax deduction in accordance with Statement 109. Based upon the Company’s
preliminary evaluation of the effects of this guidance, we do not believe that
it will have any impact on the Company’s Consolidated Financial Statements.




In
December 2004, the FASB issued FSP FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creations Act of  2004.”
The AJCA introduces a limited time 85% dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer (repatriation
provision), provided certain criteria are met. FSP FAS 109-2 provides accounting
and disclosure guidance for the repatriation provision. Based upon the Company’s
preliminary evaluation of the effects of the repatriation provision, we do not
believe that it will have any impact on the Company’s Consolidated Financial
Statements.




During
March 2005, the Securities Exchange Commission issued Staff Accounting Bulletin
(“SAB”) No. 107, guidance on SFAS No. 123 (revised 2004). SAB No. 107 was issued
to assist preparers by simplifying some to the implementation challenges of SFAS
No 123 (revised 2004) while enhancing the information that investors receive.
The Company will consider the guidance provided by SAB No. 107 as it implements
SFAS No. 123 (revised 2004) during 2005.





***Critical
Accounting Estimates***





The
Company’s significant accounting policies are detailed in Note 1 to the
Consolidated Financial Statements.
The Consolidated Financial Statements include the accounts of Raytech
Corporation and its subsidiaries. The investment by third parties in APC is
accounted for as minority interest in the Consolidated Financial Statements.
There are no unconsolidated entities. The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported and disclosures of contingent
assets and liabilities and the reported revenue and expenses made in the
financial statements and accompanying notes. Actual results could differ from
these estimates. Significant estimates include inventory, receivable and
environmental reserves; depreciable lives of property, plant and equipment and
intangible assets; the accruals for pension and other postretirement and
postemployment benefits; and the recoverable value of deferred tax assets and
the carrying value of goodwill and other intangible assets.




The most
significant areas involving management’s judgment are described below.





•
    Pension
      benefits and welfare benefits represent financial obligations that will be
      ultimately settled in the future with employees who meet eligibility
      requirements. Because of the uncertainties involved in estimating the
      timing and amount of future payments, significant estimates are required
      to calculate pension and welfare benefit expenses and liabilities related
      to the Company’s plans. The Company utilizes the services of independent
      actuaries, whose models are used to facilitate these calculations. Several
      key assumptions are used in actuarial models to calculate pension expense
      and welfare benefit expense and liability amounts recorded in the
      financial statements. Management
      believes the three most significant variables in the pension models are
      the expected long-term rate of return on plan assets, the discount rate,
      and the expected rate of compensation increase. Management believes the
      most significant assumptions in the welfare benefit model are the
      healthcare cost trend rate and the discount rate. The actuarial models
      also use assumptions for various other factors, including employee
      turnover, retirement age, and mortality. Company management believes the
      assumptions used in the actuarial calculations are reasonable and are
      within accepted practices in each of the respective geographic locations
      in which we operate. The Company sponsors both defined benefit plans and
      defined contribution plans for certain groups of employees. The Company
      also provides a postretirement benefit plan for certain groups of
      employees. In addition, the court ordered that the Company was liable for
      the maintenance and funding of the underfunded pension plan obligations of
      the Raymark Industries, Inc. Retirement Plan for Hourly Paid Employees and
      the Retirement Plan for Hourly Paid Employees of Raymark Industries, Inc.
      Marshville Plant (the “Raymark Plans”). The
      Company, based on the court’s order, assumed the role of plan sponsor of
      the Raymark Plans upon the emergence from bankruptcy in the fall of
      2001.




•
    At
      January 2, 2005, the Company had goodwill and other intangibles of $28.6
      million, which were recorded as a result of the fresh-start accounting
      process in 2001. Management reviews goodwill and indefinite-lived
      intangibles for
      impairment annually or when events or circumstances indicate that their
      value may have declined. Definite- lived intangible assets, including
      unpatented technology and distribution base, are reviewed for impairment
      whenever events or circumstances indicate that their carrying value may
      not be recoverable. In order to evaluate impairment, assumptions about the
      future condition and operations of the reporting unit to which the
      goodwill relates are made. Using assumptions, management determines, with
      the assistance of other professionals, whether an impairment charge is
      required to reduce goodwill and other intangible assets to their estimated
      fair value. In the case of long-lived tangible and definite-lived
      intangible assets, if the undiscounted future cash flows related to the
      long lived assets are less than the assets’ carrying value, a similar
      impairment charge would be recorded. Management believes that the
      assumptions made to evaluate goodwill, other intangibles and tangible
      long-lived assets impairment are appropriate and reasonable. However,
      changes in circumstances or conditions affecting these assumptions could
      result in impairment charges in future periods that may be
      material.




27




•
    The
      assessment of the amount of the Company’s deferred income tax assets that
      will be realizable requires the use of significant judgments and
      estimates. In making its assessment, the Company evaluates all relevant
      evidence, including current industry dynamics within which the Company
      operates, to determine if it would be able to realize all or a part of its
      deferred income tax assets in the future. Should the Company determine
      that it would not be able to realize certain of its deferred income tax
      assets, a valuation allowance is provided in the period such a
      determination is made.




•
    Accruals
      for environmental matters are recorded when it is probable that a
      liability has been incurred and the amount of the liability can be
      reasonably estimated or if an amount is likely to fall within a range and
      no amount within the range can be determined to be the better estimate,
      the minimum amount of the range is recorded. Remediation
      obligations are not recorded on a discounted basis. Reimbursements from
      insurance carriers relating to environmental matters are not recorded
      until it is probable that such recoveries will be realized. The accrual
      for environmental matters is discussed in Item 3. Legal
      Proceedings.




•
    The
      Company provides certain warranties relating to the quality and
      performance of its products. The primary product of the Company, friction
      plates, is used in manual and automatic transmissions, transfer cases and
      wet wheel brake systems for heavy-duty equipment. The Company maintains
      product liability insurance that covers personal injuries and property
      damage alleged to have been caused by defective products. The Company also
      has insurance to cover the costs of product recalls arising from its
      German and Chinese operations. However, the Company currently carries only
      limited insurance for product recall costs in the United States, and none
      in the United Kingdom, as management believes such insurance to be cost
      prohibitive given the Company’s warranty experience. Warranty claims have
      historically been insignificant due to the quality of the Company’s
      products and the possibility that other parts in the systems or their
      interactions may contribute to any system failure. The costs in 2004
      related to product warranty were de minimis. Some sales contracts with
      customers provide that the Company will indemnify the customer and its
      affiliates against certain specified patent, copyright and trade secret
      infringement claims of third parties that are based on the use or sale of
      the Company’s components. There have been no significant claims to
      date.




•
    Inventories
      are stated at lower of cost or market with cost determined by using the
      first in, first out (“FIFO”) method. Costs included in inventory consist
      of materials, labor and manufacturing overhead, which are related to the
      purchase and production of inventories. The allocation of labor and
      overhead costs to the items in inventory requires management to make
      certain assumptions and estimates regarding both the production process
      and the costs incurred. The Company provides estimated inventory
      allowances for excess, slow moving and obsolete inventory as well as for
      inventory whose carrying value is in excess of its net realizable value.
      The determination of inventory allowances requires that management make
      certain assumptions and estimates regarding both the future demand and
      selling price of the products. Management believes that the assumptions
      and estimates used in the inventory valuation process are reasonable based
      on our understanding of our business and the industry in which we
      operate.




28





**Item
7a. Quantitative and Qualitative Disclosures about Market Risk**




We
maintain lines of credit with United States and foreign banks, as well as other
creditors detailed in Note 8 -Debt to the Consolidated Financial Statements. We
are naturally exposed to various interest rate risk and foreign currency risk in
the normal course of business.




Management
does not anticipate a significant change in any of its borrowing markets in 2005
given current economic conditions. We strive to manage working capital levels to
support business needs while minimizing borrowings. Further, we can reduce the
short-term impact of interest rate fluctuations through deferral of certain
capital investment should the need arise.




The
Company maintains borrowings in both fixed rate and variable rate debt
instruments. The fixed rate debt at January 2, 2005 of $5.8 million had rates of
interest that ranged from 2.5% to 6.2%. The variable rate debt at January 2,
2005 of $20.7 million had rates of interest that ranged from 4.1% to 5.8%. The
variable debt reprices either at prime rate or the Eurodollar rate. We have not
entered into any interest rate management programs such as interest rate swaps
or other derivative type transactions. The amount of exposure in the short-term
that could be created by increases in rates is not considered significant by
management. A 100 basis point increase in annual interest rates, applied to the
Company’s variable rate borrowings at January 2, 2005, would result in an
increase in interest expense and a corresponding reduction in cash flow of
approximately $60 thousand.




The local
currencies of our foreign subsidiaries have been designated as their functional
currencies. Accordingly, financial statements of foreign operations are
translated using the exchange rate at the balance sheet date for assets and
liabilities, historical exchange rates for elements of stockholders’ equity, and
an average exchange rate in effect during the year for revenues and expenses.
Where possible, we attempt to mitigate foreign currency translation effects by
borrowing in local currencies to fund operations. We do not believe that the
fluctuations in foreign currency will have a material adverse effect on our
overall consolidated financial statements. Additionally, we do not enter into
agreements to manage any currency transaction risks.




29




**Item
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**Financial
      Statements:
    Page
      No.Consolidated Statements of Operations for the years ended January
      2, 2005,December
      28, 2003 and December 29, 2002
    31Consolidated
      Balance Sheets at January 2, 2005 and December 28, 2003
    32Consolidated Statements of Cash Flows for the years
      endedJanuary
      2, 2005, December 28, 2003, and December 29, 2002
    33Consolidated
      Statements of Changes in Shareholders’ Equityfor the years ended
      January 2, 2005, December 28, 2003 and December
      29, 2002
    34Notes
      to Consolidated Financial Statements
    35Report
      of Independent Registered Public Accounting Firm
    74





30





**RAYTECH
CORPORATION**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**   (in
thousands, except share data)





**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Net sales
    
    $
    227,313
    
    $
    205,865
    
    $
    209,866Cost of sales
    
    
    186,378
    
    
    179,739
    
    
    173,095Gross profit
    
    
    40,935
    
    
    26,126
    
    
    36,771Selling, general and administrative expenses
    
    
    39,014
    
    
    34,795
    
    
    32,331Restructuring expenses
    
    
    3,412
    
    
    —
    
    
    —Impairment chargeGoodwill
    
    
    —
    
    
    28,855
    
    
    —Other intangible assets
    
    
    —
    
    
    8,915
    
    
    —Long-lived assets
    
    
    1,560
    
    
    11,034
    
    
    —Operating (loss) profit
    
    
    (3,051
    )
    
    (57,473
    )
    
    4,440Interest expense
    
    
    (1,231
    )
    
    (1,061
    )
    
    (903
    )Currency transaction loss
    
    
    (502
    )
    
    (32
    )
    
    (352
    )Reduction of payable to PI Trust
    
    
    6,071
    
    
    27,743
    
    
    —Other (expense) income, net
    
    
    (1,510
    )
    
    (984
    )
    
    529(Loss) income before environmental claims, income taxes
      and minority interest
    
    
    (223
    )
    
    (31,807
    )
    
    3,714Environmental claims
    
    
    —
    
    
    7,262
    
    
    5,400(Loss) Income before income taxes and minority
      interest
    
    
    (223
    )
    
    (39,069
    )
    
    (1,686
    )Income taxes
    
    
    1,895
    
    
    26,745
    
    
    84Loss before minority interest
    
    
    (2,118
    )
    
    (65,814
    )
    
    (1,770
    )Minority interest
    
    
    632
    
    
    629
    
    
    1,055Net loss
    
    $
    (2,750
    )
    $
    (66,443
    )
    $
    (2,825
    )Basic and diluted loss per share
    
    $
    (.07
    )
    $
    (1.59
    )
    $
    (.07
    )





*The
accompanying notes are an integral part of these statements.*





31





**RAYTECH
      CORPORATION****CONSOLIDATED
      BALANCE SHEETS**(in
      thousands, except share data)**January
      2,**
    
    **December
      28,****2005**
    
    **2003****ASSETS**Current
      assetsCash
      and cash equivalents
    
    $
    13,620
    
    $
    16,413Restricted
      cash
    
    
    5,548
    
    
    4,872Trade
      accounts receivable, less allowanceof
      $1,462 in 2004 and $1,250 in 2003
    
    
    27,506
    
    
    24,739Inventories,
      net
    
    
    39,582
    
    
    30,877Income
      taxes receivable
    
    
    1,333
    
    
    1,085Deferred
      income taxes
    
    
    3,854
    
    
    3,618Other
      current assets
    
    
    3,009
    
    
    2,152Total
      current assets
    
    
    94,452
    
    
    83,756Property,
      plant and equipment
    
    
    126,118
    
    
    126,059Accumulated
      depreciation
    
    
    (46,113
    )
    
    (36,824
    )Net
      property, plant and equipment
    
    
    80,005
    
    
    89,235Goodwill
    
    
    5,912
    
    
    5,912Other
      intangible assets, net
    
    
    22,731
    
    
    24,652Other
      assets
    
    
    2,586
    
    
    2,469Total
      assets
    
    $
    205,686
    
    $
    206,024**LIABILITIES
      AND SHAREHOLDERS' EQUITY**Current
      liabilitiesNotes
      payable and current portion of long-term debt
    
    $
    15,280
    
    $
    8,092Current
      portion of pension obligation
    
    
    2,248
    
    
    5,190Accounts
      payable
    
    
    15,068
    
    
    14,609Accrued
      liabilities
    
    
    23,810
    
    
    26,636Payable
      to the PI Trust
    
    
    4,393
    
    
    3,815Total
      current liabilities
    
    
    60,799
    
    
    58,342Long-term
      debt
    
    
    11,416
    
    
    14,354Pension
      obligation
    
    
    14,175
    
    
    13,453Postretirement
      benefits other than pension
    
    
    16,834
    
    
    15,103Deferred
      payable to the PI Trust
    
    
    4,627
    
    
    11,887Deferred
      income taxes
    
    
    7,591
    
    
    6,881Other
      long-term liabilities
    
    
    7,044
    
    
    706Total
      liabilities
    
    
    122,486
    
    
    120,726Commitments
      and contingenciesMinority
      interest
    
    
    10,020
    
    
    9,388Shareholders'
      equityCapital
      stockCumulative
      preferred stock, no par value;5,000,000
      shares authorized; none issued andoutstanding
    
    
    —
    
    
    —Common
      stock, par value $1.00; 50,000,000 sharesauthorized;
      41,737,306 shares issued andoutstanding
    
    
    41,737
    
    
    41,737Additional
      paid-in capital
    
    
    117,574
    
    
    117,574Accumulated
      deficit
    
    
    (77,595
    )
    
    (74,845
    )Accumulated
      other comprehensive loss
    
    
    (8,536
    )
    
    (8,556
    )Total
      shareholders' equity
    
    
    73,180
    
    
    75,910Total
      liabilities and shareholders' equity
    
    $
    205,686
    
    $
    206,024





*The
accompanying notes are an integral part of these
statements.*


32





**RAYTECH
      CORPORATION****CONSOLIDATED
      STATEMENTS OF CASH FLOWS**(in
      thousands)
  **For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Cash
      flows from operating activities:Net
      loss
    
    $
    (2,750
    )
    $
    (66,443
    )
    $
    (2,825
    )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
    
    
    16,188
    
    
    18,335
    
    
    17,171Deferred
      income tax provision (benefit)
    
    
    608
    
    
    27,701
    
    
    (2,068
    )Impairment
      charge
    
    
    1,560
    
    
    48,804
    
    
    —Reduction
      of payable to PI Trust
    
    
    (6,071
    )
    
    (27,743
    )
    
    —Restructuring
      charges
    
    
    3,412
    
    
    —
    
    
    —Minority
      interest
    
    
    632
    
    
    629
    
    
    1,055Loss
      on disposal of equipment
    
    
    1,011
    
    
    1,443
    
    
    91Other
      non-cash items
    
    
    572
    
    
    (355
    )
    
    267Changes
      in operating assets and liabilities:Trade
      accounts receivable
    
    
    (2,565
    )
    
    2,680
    
    
    (3,218
    )Inventories
    
    
    (8,253
    )
    
    4,160
    
    
    (1,720
    )Income
      tax receivable
    
    
    (248
    )
    
    3,708
    
    
    33,084Other
      current assets
    
    
    (828
    )
    
    601
    
    
    92Other
      assets
    
    
    (115
    )
    
    397
    
    
    (1,362
    )Accounts
      payable
    
    
    300
    
    
    (823
    )
    
    1,524Accrued
      liabilities
    
    
    (3,567
    )
    
    (1,600
    )
    
    5,428Payable
      to the PI Trust
    
    
    578
    
    
    (3,704
    )
    
    (32,487
    )Other
      long term liabilities
    
    
    (347
    )
    
    (2,301
    )
    
    (5,444
    )Net
      cash provided by operating activities
    
    
    117
    
    
    5,489
    
    
    9,588Cash
      flows from investing activities:Capital
      expenditures
    
    
    (6,668
    )
    
    (8,968
    )
    
    (9,648
    )Proceeds
      on sales of property, plant and equipment
    
    
    133
    
    
    123
    
    
    125Restricted
      cash
    
    
    (676
    )
    
    (2,845
    )
    
    3,369Net
      cash used by investing activities
    
    
    (7,211
    )
    
    (11,690
    )
    
    (6,154
    )Cash
      flows from financing activities:Net
      borrowings (payments) on short-term notes
    
    
    7,043
    
    
    (6,749
    )
    
    2,579Principal
      payments on long-term debt
    
    
    (3,111
    )
    
    (2,902
    )
    
    (1,547
    )Proceeds
      from long-term borrowings
    
    
    —
    
    
    11,709
    
    
    240Proceeds
      from the exercise of stock options
    
    
    —
    
    
    152
    
    
    540Net
      cash provided by financing activities
    
    
    3,932
    
    
    2,210
    
    
    1,812Effect
      of exchange rate changes on cash
    
    
    369
    
    
    421
    
    
    274Net
      change in cash and cash equivalents
    
    
    (2,793
    )
    
    (3,570
    )
    
    5,520Cash
      and cash equivalents atbeginning of year
    
    
    16,413
    
    
    19,983
    
    
    14,463Cash
      and cash equivalents at end of year
    
    $
    13,620
    
    $
    16,413
    
    $
    19,983
  *The
      accompanying notes are an integral part of these
      statements.*




33





**RAYTECH
CORPORATION**


**CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY**


(in
thousands)




**Accumulated****Additional**
    
    
    
    
    
    **Other****Common**
    
    
    **Paid
      in**
    
    
    **Accumulated**
    
    
    **Comprehensive****Stock**
    
    
    **Capital**
    
    
    **Deficit**
    
    
    **(Loss)
      Income**
    
    
    **Total**Balance
      December 30, 2001
    
    $
    41,528
    
    $
    116,843
    
    $
    (5,577
    )
    $
    (8,711
    )
    $
    144,083Comprehensive
      (loss) income:Net
      loss
    
    
    —
    
    
    —
    
    
    (2,825
    )
    
    —
    
    
    (2,825
    )Other
      comprehensiveincome
    
    
    —
    
    
    —
    
    
    —
    
    
    64
    
    
    64Total
      comprehensive(loss) income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,761
    )Stock
      options exercised
    
    
    173
    
    
    367
    
    
    —
    
    
    —
    
    
    540Tax
      benefits associatedwith stock options
    
    
    —
    
    
    248
    
    
    —
    
    
    —
    
    
    248Balance
      December 29, 2002
    
    
    41,701
    
    
    117,458
    
    
    (8,402
    )
    
    (8,647
    )
    
    142,110Comprehensive
      (loss) income:Net
      loss
    
    
    —
    
    
    —
    
    
    (66,443
    )
    
    —
    
    
    (66,443
    )Other
      comprehensiveincome
    
    
    —
    
    
    —
    
    
    —
    
    
    91
    
    
    91Total
      comprehensive(loss)
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66,352
    )Stock
      options exercised
    
    
    36
    
    
    116
    
    
    —
    
    
    —
    
    
    152Balance
      December 28, 2003
    
    
    41,737
    
    
    117,574
    
    
    (74,845
    )
    
    (8,556
    )
    
    75,910Comprehensive
      loss:Net
      loss
    
    
    —
    
    
    —
    
    
    (2,750
    )
    
    —
    
    
    (2,750
    )Other
      comprehensiveloss
    
    
    —
    
    
    —
    
    
    —
    
    
    20
    
    
    20Total
      comprehensiveloss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,730
    )Balance
      January 2, 2005
    
    $
    41,737
    
    $
    117,574
    
    $
    (77,595
    )
    $
    (8,536
    )
    $
    73,180





*The
accompanying notes are an integral part of these statements.*




34
 
 ****
 **RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Introduction**





Raytech
Corporation (“Raytech” or the ”Company) manufactures and distributes engineered
products for heat resistant, inertia control, energy absorption and transmission
applications. The Company’s operations are categorized into three business
segments: Domestic Wet Friction, International and Aftermarket. These segments
are more fully described in Note 10 - Segment Reporting. Demand for the
Company’s products is derived primarily from the automotive original equipment
markets for both manual and automatic transmissions, the original equipment
markets for agriculture, construction and mining equipment and the aftermarket
for primarily automatic transmission products. All of these markets are highly
competitive and can be highly influenced by prevailing economic conditions.
Unless the context indicates otherwise, all references herein to us, we, Raytech
or the Company include the Company and its subsidiaries





Raytech
was incorporated in June 1986 in Delaware as a subsidiary of Raymark Corporation
(which, with its subsidiary Raymark Insustries, Inc., is collectively
referred to in this report as "Raymark"). In October 1986, Raytech became the
publicly traded holding company of Raymark stock through a restructuring plan
whereby each share of common stock of Raymark was automatically converted
into one share of Raytech common stock. In 1988, Raytech divested the Raymark
subsidiary. In accordance with the restructuring plan, Raytech, through its
subsidiaries, purchased certain non-asbestos businesses of Raymark. Despite
the divestiture of Raymark, Raytech was named a co-defendant with Raymark and
other named defendants in numerous asbestos-related lawsuits as a successor in
liability to Raymark. In order to stay the litigation, 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. In
April 2001, Raytech emerged from protection of the Bankruptcy Court under a plan
of reorganization. Under the plan of reorganization certain asbestos
personal injury claims and certain environmental claims were discharged in
exchange for cash and equity of 37,058,900 shares, representing 89.2% of
the Company's outstanding common stock at that time. A channeling
injunction was ordered by the Bankruptcy Court that will permanently and
forever stay, enjoin and restrain any asbestos-related claims against the
Company and its subsidiaries. Under the Bankruptcy Code, the Raytech Asbestos
Personal Injury Settlement Trust ("PI Trust") was established and all future
asbestos related claims are to be channeled to the PI Trust for resolution.
Additionally, any and all future refunds of taxes, realized by the Company and
resulting from the implementation of the plan of reorganization, will inure to
the benefit of the PI Trust.





**Note
1 - Summary of Significant Accounting Policies**





The
Company’s accounting policies are detailed below. The consolidated financial
statements include the accounts of Raytech Corporation and its subsidiaries.
Intercompany balances and transactions are eliminated in consolidation. The
investment by third parties in Allomatic Products Company (“APC”) is accounted
for as minority interest in the consolidated financial statements. There are no
unconsolidated entities. The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported and disclosures of contingent assets and
liabilities and the reported revenue and expenses made in the financial
statements and accompanying notes. Actual results could differ from these
estimates. Significant estimates include asset valuation allowances for
inventory and accounts receivable, accruals for environmental matters; useful
lives of plant and equipment and intangible assets; accruals for pension and
other postretirement and postemployment benefits; the valuation allowance for
deferred income tax assets and the fair value of goodwill and other intangible
assets.




•    
Significant areas involving management’s judgment are described below.





Pension
benefits and welfare benefits represent financial obligations that will be
ultimately settled in the future with employees who meet eligibility
requirements. Because of the uncertainties involved in estimating the timing and
amount of future payments, significant estimates are required to calculate
pension and welfare benefit expenses and liabilities related to the Company’s
plans. The Company utilizes the services of independent actuaries, whose models
are used to facilitate these calculations. Several key assumptions are used in
actuarial models to calculate pension expense and welfare benefit expense and
liability amounts recorded in the financial statements. Management believes the
three most significant variables in the pension models are the expected
long-term rate of return on plan assets, the discount rate, and the expected
rate of compensation increase. Management believes the most significant
assumptions in the welfare benefit model are the healthcare cost trend rate and
the discount rate. The actuarial models also use assumptions for various other
factors, including employee turnover, retirement age, and mortality. Company
management believes the assumptions used in the actuarial calculations are
reasonable and are within accepted practices in each of the respective
geographic locations in which we operate. The Company sponsors both defined
benefit plans and defined contribution plans for certain groups of employees.
The Company also provides a postretirement benefit plan for certain groups of
employees. In addition, the court ordered that the Company was liable for the
maintenance and funding of the underfunded pension plan obligations of the
Raymark Industries, Inc. Retirement Plan for Hourly Paid Employees and the
Retirement Plan for Hourly Paid Employees of Raymark Industries, Inc. Marshville
Plant (the “Raymark Plans”). The Company, based on the court’s order, assumed
the role of plan sponsor of the Raymark Plans upon the emergence from bankruptcy
in 2001.




35


****


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
1 - Summary of Significant Accounting Policies (Continued)**




At
January 2, 2005, the Company had goodwill and other intangibles of $28.6
million, which were recorded as a result of the fresh-start accounting process
in 2001. Management reviews goodwill and indefinite lived intangibles for
impairment annually or when events or circumstances indicate that its value may
have declined. In order to evaluate impairment assumptions, the Company develops
a set of financial projections. Based on these financial projections, the
Company, with the assistance of a financial advisor, using various valuation
methods determines whether an impairment charge is required to reduce goodwill
and other intangible assets to their estimated fair value. In the case of
long-lived tangible assets, if the undiscounted cash flows related to the
long-lived assets are less than the assets’ carrying value, a similar impairment
charge would be recorded. Management
believes that the assumptions made to evaluate the impairment of goodwill and
other intangibles are appropriate and reasonable. However, changes in
circumstances or conditions affecting these assumptions could result in
impairment charges in future periods that may be material.




The
assessment of the amount of the Company’s deferred income tax assets that will
be realizable requires the use of significant judgments and estimates. In making
its assessment, the Company evaluates all relevant evidence, including current
industry dynamics within which the Company operates, to determine if it would be
able to realize all or a part of its deferred income tax assets in the future.
Should the Company determine that it would not be able to realize certain of its
deferred income tax assets, a valuation allowance is provided in the period such
a determination is made.




Accruals
for environmental matters are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated or if
an amount is likely to fall within a range and no amount within the range can be
determined to be the better estimate, the minimum amount of the range is
recorded. Environmental remediation obligations are not recorded on a discounted
basis. Recoveries from insurance carriers relating to environmental matters are
not recorded until it is probable that such recoveries will be realized.




The
Company provides certain warranties relating to the quality and performance of
its products. The primary product of the Company, friction plates, is used in
manual and automatic transmissions, transfer cases and wet wheel brake systems
for heavy duty equipment. The Company maintains product liability insurance that
covers personal injuries and property damage alleged to have been caused by
defective products. The Company also has insurance to cover the costs of product
recalls arising from its German and Chinese operations. However,
the Company currently carries only limited insurance for product recall costs in
the United States, and none in the United Kingdom, as management believes such
insurance to be cost prohibitive given the Company’s warranty experience.
Warranty claims have historically been insignificant due to the quality of the
Company’s products and the possibility that other parts in the systems or their
interactions may contribute to any system failure. The costs in 2004 related to
product warranty have been de minimis. Some sales contracts with customers
provide that the Company will indemnify the customer and its affiliates against
certain specified patent, copyright and trade secret infringement claims of
third parties that are based on the use or sale of the Company components. There
have been no significant claims to date.





36


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
1 - Summary of Significant Accounting Policies (Continued)**





•Fiscal
Year





The
Company’s fiscal year is a 52-53-week period ending on the Sunday closest to
December 31st. Fiscal 2004 included 53 weeks, fiscal 2003 and fiscal 2002
included 52 weeks.





•Fresh
Start Accounting





The
Company adopted fresh-start reporting as described in the AICPA Statement of
Position (“SOP”) No. 90-7, “Financial Reporting by Entities in Reoganization
Under Bankruptcy Code.” SOP 90-7 requires that any change in accounting
principles that will be required within the twelve months following the adoption
of fresh-start reporting should be adopted at that time. Accordingly, the
Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 141,
“Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”
on April 2, 2001.





•Cash
Equivalents





Cash
equivalents, consisting of certificates of deposit with maturities of three
months or less when purchased, are stated at cost plus interest earned, which
approximates fair value.





•Inventories





Inventories
are stated at lower of cost or market with cost determined by using the first
in, first out (“FIFO”) method. Costs included in inventory consist of materials,
labor and manufacturing overhead, which are related to the purchase and
production of inventories. The allocation of labor and overhead costs to the
items in inventory requires management to make certain assumptions and estimates
regarding both the production process and the costs incurred. The Company
provides estimated inventory allowances for excess, slow moving and obsolete
inventory as well as for inventory whose carrying value is in excess of its net
realizable value. The determination of inventory allowances requires that
management make certain assumptions and estimates regarding both the future
demand and selling price of the products. Management believes that the
assumptions and estimates used in the inventory valuation process are reasonable
based on our understanding of our business and the industry in which we operate. **





•Property, Plant and
Equipment





On April
2, 2001, upon emergence from bankruptcy, property, plant and equipment was
recorded based on their fair values determined by independent appraisals.
Additions subsequent to April 2, 2001 have been recorded at cost. 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 or available for service. Upon disposal of
property, plant and equipment, the appropriate accounts are reduced by the
related costs and accumulated depreciation. The resulting gains or losses are
reflected in the Consolidated Statements of Operations.





Property,
plant and equipment are reviewed for impairment whenever events or circumstances
indicate that the carrying value may not be recoverable. When such events or
circumstances arise, an estimate of the future cash flows produced by an asset,
or the appropriate grouping of assets, is compared to the asset’s carrying value
to determine if an impairment exists pursuant to the requirements of SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If the
asset is determined to be impaired, the impairment loss is measured based on the
excess of its carrying value over its fair value.





37


****


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
1 - Summary of Significant Accounting Policies (Continued)**





•Intangible
Assets





Intangible
assets consist primarily of goodwill, trademarks, unpatented technology and
distribution base. Effective with the period beginning April 3, 2001, the
Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” In
accordance with this standard, goodwill and trademarks have been classified as
indefinite-lived assets no longer subject to amortization. Prior to the adoption
of SFAS No. 142 intangible assets with an indefinite life were amortized on a
straight line basis over a period of not more than 40 years. Unpatented
technology and distribution base are classified as definite-lived assets and are
being amortized on a straight line basis with estimated lives ranging from 6 to
20 years. Indefinite-lived intangible assets are tested for impairment annually
or more frequently when events or circumstances indicate that the carrying
amount may be impaired. The unpatented technology and distribution base are
reviewed for impairment whenever events or circumstances indicate that their
carrying value may not be recoverable. Impairment testing is done at the
reporting unit level for goodwill. Reporting units are one level below the
operating segment level but can be combined when reporting units within the same
operating segment have similar economic characteristics. A goodwill impairment
loss would be recognized when the carrying amount of the reporting unit’s net
assets exceeds the estimated fair value of the reporting unit. The estimated
fair value of the reporting unit is determined using a future discounted cash
flow analysis.





•Income
Taxes





The
Company uses the liability method in accounting for income taxes. Deferred
income tax assets and liabilities are recorded for temporary differences between
the tax basis of assets and liabilities and their reported amounts in the
financial statements, using statutory tax rates in effect for the year in which
the differences are expected to reverse. The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. A valuation allowance
is recorded to reduce the net carrying amounts of deferred income tax assets to
an amount more likely than not that such assets will be realized.





The
Company has not provided for deferred U.S. income taxes on the undistributed
earnings of its foreign subsidiaries since a taxable distribution of those
earnings is not anticipated. In addition, deferred U.S. income taxes have not
been provided on the cumulative translation adjustment component of accumulated
other comprehensive loss in shareholders’ equity due to management’s decision to
permanently reinvest those earnings. Further, the Company has not provided for
deferred U.S. income taxes on the undistributed earnings of APC, its
majority-owned subsidiary, since management expects that these earnings will be
distributed to the Company in a tax-free transaction. Pursuant to the Tax
Benefits Assignment and Assumption Agreement, all tax benefits received by the
Company due to the reorganization are to be passed onto the PI Trust as
received.





•Loss Per
Share





Basic and
diluted losses per common share amounts are computed based on the weighted
average number of common shares outstanding during the year. All potentially
dilutive securities are anti-dilutive for the periods presented due to the
losses incurred by the Company during those periods.




38





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
1 - Summary of Significant Accounting Policies (Continued)**





•Translation of Foreign
Currencies





The local
currency is the functional currency for the Company’s foreign subsidiaries. The
financial statements of foreign subsidiaries are translated to U.S. dollars
using the period-end exchange rate for assets and liabilities, historical
exchange rates for elements of stockholders’ equity and an average exchange rate
for each period for revenues and expenses. The effects of translating the
Company's foreign subsidiaries' financial statements are recorded as a component
of accumulated other comprehensive loss in shareholders' equity. Gains and
losses on intercompany foreign currency transactions that are of a long-term
investment nature are reported as translation adjustments as a component of
accumulated other comprehensive loss in shareholders’ equity. All other foreign
currency transaction gains and losses are included in operations.





•Revenue
Recognition





Revenue
from the sale of the Company’s products is recognized upon shipment to the
customer when ownership and risk of loss has been transferred. Substantially all
of the Company’s revenues are derived from fixed price purchase orders. Costs
and related expenses to manufacture the products are recorded as costs of sales
when the related revenue is recognized. The Company establishes an allowance for
doubtful accounts based on historical experience and believes that collections
of revenues, net of the allowance for doubtful accounts, is reasonably assured.





The
Company produces goods for its customers based on a purchase order system, and
in certain instances using longer term contracts that stipulate a fixed selling
price with no commitment as to quantity. In instances where the product’s cost
exceeds the selling price, an accrual is provided for the expected loss on goods
in inventory and customer purchase orders received by the balance sheet date.
The Company has not recorded an estimate of the loss over the term of these
contracts since the quantity and mix of parts is not known and future production
costs will be impacted by, among other things, changes in economic conditions
and management’s actions, including expected cost savings initiatives.





When the
Company receives an incentive to enter into an agreement with a customer, the
revenue attributed to the incentive is recognized over the term of the agreement
or the life of the specific relationship with the customer.




39


****


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)







**Note
1 - Summary of Significant Accounting Policies (Continued)**





•Stock-Based
Compensation





The
Company accounts for stock-based compensation using the intrinsic value-based
method of accounting in accordance with Accounting Principles Board Opinion No.
25. As such, no compensation cost is recognized for stock options granted with
an exercise price equal to the fair market value of the underlying stock as of
the grant date. Had compensation costs of stock options been determined under a
fair value alternative method as stated in Statement of Financial Accounting
Standards No. 148, “Accounting for Stock-Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123,” the Company would have been
required to recognize compensation cost based on the fair value of the options
granted. Required pro forma information applying a fair value method to all
awards, is presented in the table below.





**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Net
      loss:As
      reported
    
    $
    (2,750
    )
    $
    (66,443
    )
    $
    (2,825
    )Total
      stock-based employee compensationexpense
      determined under fair valuebased
      method for all awards, net ofrelated
      tax effects
    
    
    (1,353
    )
    
    (2,232
    )
    
    —Pro
      forma
    
    $
    (4,103
    )
    $
    (68,675
    )
    $
    (2,825
    )Basic
      and diluted loss per share:As
      reported
    
    $
    (.07
    )
    $
    (1.59
    )
    $
    (.07
    )Pro
      forma
    
    $
    (.10
    )
    $
    (1.65
    )
    $
    (.07
    )





During
the first quarter of fiscal 2003, the Company granted options for 1,601,000
shares of common stock with an exercise price of $5.70 per share. The fair value
of these options was estimated at $3.22 per common share on the date of grant,
using the Black-Scholes option pricing model and the following assumptions:
expected volatility of 56.70%, dividend yield of 0.00%, risk free interest rate
of 3.60% and an expected life of the options of six years. During the second
quarter of fiscal 2003, the Company granted options for 1,172,000 shares of
common stock with an exercise price of $5.70 per share. The fair value of these
options was estimated at $2.05 per common share on the date of grant, using the
Black-Scholes option pricing model and the following assumptions: expected
volatility of 62.30%, dividend yield of 0.00%, risk free interest rate of 2.84%
and an expected life of the options of six years. All options, granted to date,
vest over a four year period.





There
were no options granted during 2004. There was no pro forma impact on net loss
for the fiscal year 2002 because options outstanding during that year were fully
vested in fiscal 1999.





•Restructuring
Charges





The
Company has implemented a restructuring program during 2004. The expenses
related to the restructuring programs have been recognized in accordance with
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”
and SFAS No. 112, “Employers’ Accounting for Postemployment Benefits”. SFAS No.
146 requires that a liability for costs associated with an exit or disposal
activity be recognized when incurred. The Company accounts for one-time benefit
arrangements under the provisions of SFAS No. 146, which require that the
expense be recognized when the plan has been communicated to employees if
employees are not required to render service until they are terminated in order
to receive termination benefits or ratably over the future service period if
employees are required to render service until they are terminated in order to
receive termination benefits. The Company accounts for ongoing benefit
arrangements under SFAS No. 112, “Employers Accounting for Postemployment
Benefits”, which requires that a liability be recognized when the costs are
probable and reasonably estimable. The Company also considered the contractual
termination benefits guidance in SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits".





40


****


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
1 - Summary of Significant Accounting Policies (Continued)**





•Property
Taxes





The
Company recognizes property tax expense based on the most current information
available, including actual taxes paid in the most current year, coupled with
information which would impact the expected tax rate and property valuations. In
instances where uncertainty exists as to the estimated amount of taxes, the
Company’s best judgment is used considering all information known at the time.





•Reclassification





Certain
2003 and 2002 amounts have been reclassified to conform to the 2004
presentation.





•Recently Issued
Accounting Pronouncements





In July
2002, the Public Company Accounting Reform and Investor Protection Act of 2002
(the Sarbanes-Oxley Act) was enacted. Section 404 stipulates that public
companies must take responsibility for maintaining an effective system of
internal control. The act requires public companies to report on the
effectiveness of their control over financial reporting and obtain an attest
report from their independent registered public accountant about management’s
report. The act requires most public companies (accelerated filers) to report on
the company’s internal control over financial reporting for fiscal years ended
on or after November 15, 2004. Other public companies (non-accelerated filers)
must begin to comply with the new requirements related to internal control over
financial reporting for their first fiscal year ending on or after July 15, 2006
under the latest extension granted by the Securities and Exchange Commission.
Raytech is a non-accelerated filer and therefore does not have to comply with
section 404 of the act until 2006.




In May
2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvements
and Modernization Act of 2003." This statement requires the Company to disclose
the effects of the Act and to assess the impact of the subsidy on the
accumulated postretirement benefit obligation and net periodic postretirement
benefit cost in the first interim or annual period beginning after June 15,
2004. The Company has not reflected any amount associated with the subsidy in
our accumulated postretirement obligation as we do not believe the benefits
provided by our plan qualify for the subsidy. **





In
November 2004 the Financial Accounting Standards Board (“FASB”) issued SFAS No.
151, “Inventory Costs - an amendment of ARB No. 43, Chapter 4”. This statement
clarifies the accounting for abnormal amounts of idle facility expense, freight
handling costs and wasted material (spoilage). This statement requires that
these types of costs be recognized as current period charges. SFAS No. 151 is
effective prospectively for inventory costs incurred during fiscal years
beginning after June 15, 2005, with earlier application permitted for such costs
incurred during fiscal years beginning after November 24, 2004. Management does
not expect the adoption of SFAS No. 151 to have a significant impact on the
Company’s financial statements.





In
December 2004 the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
an amendment of APB Opinion No. 29”. SFAS No. 153 amends Accounting Principles
Board (“APB”) Opinion 29 concerning the accounting for exchanges of similar
productive assets. Such transactions should be accounted for at fair value, the
basic principle for nonmonetary transactions, unless the exchange lacks
commercial substance. The effective date of SFAS No. 153 is for nonmonetary
asset exchanges taking place in fiscal years beginning after December 16, 2004.
The Company will adopt SFAS No. 153 in 2005 and does not expect it to have a
significant impact on the Company’s consolidated financial statements.




41


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
1 - Summary of Significant Accounting Policies (Continued)**





•Recently Issued
Accounting Pronouncements (Continued)





In
December 2004 the FASB issued SFAS No. 123 (revised 2004), “Share Based
Payment”. This statement replaces SFAS 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion 25, "Accounting for Stock Issued to
Employees." SFAS No. 123 (revised 2004) requires that the cost of share-based
payment transactions (including those with employees and non-employees) be
recognized, as compensation costs, in the financial statements. SFAS No. 123
(revised 2004) applies to all share-based payment transactions in which an
entity acquires goods or services by issuing (or offering to issue) its shares,
share options, or other equity instruments (except for those held by an ESOP) or
by incurring liabilities in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or that require (or may require)
settlement by the issuance of an entity's shares or other equity instruments.
This statement applies to all new awards granted during the fiscal year
beginning after June 15, 2005 and to previous awards that are modified or
cancelled after such date. We have not yet fully evaluated the effect of SFAS
No. 123 (revised 2004) on our financial statements and have not determined the
method of adoption we will use to implement SFAS No. 123 (revised
2004).





In
December 2004, the FASB issued FSP FAS 109-1, “Application of FASB Statement No.
109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”).” The
AJCA introduces a special 9% tax deduction on qualified production activities.
FSP FAS 109-1 clarifies that this tax deduction should be accounted for as a
special tax deduction in accordance with Statement 109. Based upon the Company’s
preliminary evaluation of the effects of this guidance, we do not believe that
it will have any impact on the Company’s consolidated financial statements.





In
December 2004, the FASB issued FSP FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creations Act of 2004.” The AJCA introduces a limited time 85% dividends
received deduction on the repatriation of certain foreign earnings to a U.S.
taxpayer (repatriation provision), provided certain criteria are met. FSP FAS
109-2 provides accounting and disclosure guidance for the repatriation
provision. Based upon the Company’s preliminary evaluation of the effects of the
repatriation provision, we do not believe that it will have any impact on the
Company’s consolidated financial statements.





During
March 2005, the Securities Exchange Commission issued Staff Accounting Bulletin
(“SAB”) No. 107, guidance on SFAS No. 123 (revised 2004). SAB No. 107 was issued
to assist preparers by simplifying some to the implementation challenges of SFAS
No 123 (revised 2004) while enhancing the information that investors receive.
The Company will consider the guidance provided by SAB No. 107 as it implements
SFAS No. 123 (revised 2004).





**Note
2 - Liquidity**





**** 2004
represented our third full year of operation since emergence from bankruptcy.
Operating performance improved in 2004 compared to the prior year; however, we
still incurred a net loss for the year and generated significantly less
operating cash flow.





Cash and
cash available under existing lines of credit at January 2, 2005 were $19.7
million compared to $27.0 million at year-end 2003, a decrease in cash and
available lines of credit of $7.3 million.




As a
result of the recognition of the costs associated with the closure of the
Sterling Heights, Michigan manufacturing facility, the Company requested and
obtained a waiver of a fixed charge coverage ratio contained in one of its
domestic bank agreements.




42





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
2 - Liquidity (Continued)**





On March
21, 2005 the Company, through its majority owned subsidiary, APC, purchased
common stock of APC owned by Raymark, in exchange for a ten-year unsecured
promissory note of $7.2 million, which increased the Company’s indirect
ownership of APC from approximately 57% of its outstanding common stock to
approximately 96% of its outstanding common stock. In connection with this
transaction the Company requested and obtained a waiver of the negative covenant
restricting the repurchase or acquisition of the borrowers' capital stock
contained in one of its domestic bank agreements during the fourth quarter of
2004.


Subsequent
to the end of 2004, but prior to the filing of this report, the Company amended
its domestic debt agreements. The primary purpose of the amendments was the
modification of the debt covenant calculations to provide the Company greater
flexibility to manage its cash resources and certain one-time costs that will be
incurred during 2005 related to the plant closures announced during 2004.
Additionally, the amendment to the Domestic Wet Friction loan and security
agreement provides for a remedy of future non-compliance with the quarterly debt
covenants, by an irrevocable cash contribution by the parent. In April 2005, the
parent made an irrevocable cash contribution of $1.0 million to RPC, a borrower,
to remedy the debt covenant non-compliance occurring at the end of the first
quarter of 2005. The parent may be required to make additional cash
contributions in the future in the event of any further non-compliance of the
borrowers. The amendments are discussed in Note 8 -
Debt.





The most
significant factor affecting the Company’s future cash flows is its ability to
generate income and collect cash from customers. The automotive parts industry
is extremely competitive. Many of the Company’s customers and competitors are
significantly larger than the Company. The Company’s customers are often able to
demand price reductions from their suppliers including all segments of Raytech.
Some of the Company’s sales are made under standard sales contracts that include
price commitments for multiple years which in some cases require price
reductions in future years. Specifically in the Domestic Wet Friction segment,
the Company is selling certain products to certain customers at a loss under the
terms of its current sales contracts. The Company has been working with certain
of its customers to re-negotiate the terms of loss contracts. During the fourth
quarter of 2004, we reached agreement with certain major customers on more
favorable sales contract provisions. We continue to work with other customers to
re-negotiate the terms of loss contracts. In addition, we are reviewing
strategic alternatives to improve our cost structure.




Items
that will potentially require the use of cash during the next year other than
normal operating expenses include the following.





•
    The
      Company has recorded a liability of $6.0 million for certain environmental
      matters more fully discussed in Note 9 - Litigation. It is not certain at
      this time when these funds will be expended. Management expects that
      approximately $.5 million will be spent during 2005 and the balance in
      2006.




•
    The
      Company assumed the liability for the pension plans of Raymark as part of
      the Chapter 11 reorganization. The plans, which are discussed as part of
      Note 14 - Employee Benefits, are under funded and the Company, through an
      agreement with the Internal Revenue Service, is providing both current
      contributions and catch-up contributions. The expected funding for the
      plans in 2005 will be approximately $1.3
million.




•
    The
      Company incurred costs associated with the retirement of its President and
      Chief Executive Officer during the second quarter and the restructuring of
      its domestic management team during the third quarter of 2004. The
      total cost associated with these items is approximately $1.4 million of
      which $.8 million was paid during 2004, with the balance to be paid during
      2005.




•
    The
      Company has conducted a facilities utilization review and has determined
      that improved performance can be obtained through the closure of certain
      facilities and moving certain production to other facilities operated by
      the Company. The Company estimates that the total cash outflows related to
      these closures to be approximately $5.5 million, of which we expect to
      expend $4.6 million during 2005 and the remaining balance will be spent
      during 2006 and 2007. The expenses related to these closures as more fully
      explained in Note 3 - Restructuring Costs.




•
    Certain
      tax issues are discussed in Note 11 - Income Taxes, which provides detail
      concerning the status of the current Internal Revenue Service audit and
      the use of certain future tax benefits.




•
    During
      2004, we reached terms with certain major customers on revised sales
      contract provisions that will enable us to close our manufacturing plant
      in Sterling Heights, Michigan. The new sales contract provisions require
      the Company, in certain instances, to build up inventory levels to
      facilitate the transition to a new vendor or to another manufacturing
      location within the Company. As a result, we expect our inventory levels
      to increase through September 2005 by as much as $3.5 million. During the
      fourth quarter of 2005, we expect this trend will reverse and inventory
      levels will begin to decrease. We currently expect that the amount of
      inventory related to the build up will be less than $2.0 million at year
      end 2005.




43





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
2 - Liquidity (Continued)**





Management
believes that existing cash balances, the Company’s lending facilities and cash
flow from operations will be sufficient to meet all of the Company’s obligations
arising in the normal course of business, the anticipated non-operating
requirements discussed above and anticipated capital investments over the next
year. However, the ability of the Company to utilize its lending facilities is
dependent on the Company’s ability to meet its financial forecast, which is not
assured, and to meet the financial covenants contained in its credit facilities.
These forecasts include modest revenue growth in all three operating segments as
well as certain cost-saving initiatives, partially offset by some cost increases
and inflation assumptions. If the Company does not comply with the financial
covenants, an event of default would occur and could result in the acceleration
of the Company’s indebtedness under its domestic credit facilities. If that were
to occur, the ability of the Company to continue would be dependent upon, among
other things, its ability to amend its credit facilities, undertake certain
actions to generate cash and/or to seek additional alternative financing from
other lenders.





**Note
3 - Restructuring Costs**





During
2004, the Company conducted a facilities utilization review and made the
decision to close its manufacturing operations in Sterling Heights, Michigan and
Liverpool, England. The closure of these facilities is expected to be completed
during 2005. Additionally, during 2004, the Company began the process of
relocating its corporate functions from Shelton, Connecticut to its existing
manufacturing and development facilities located in Crawfordsville, Indiana. The
closure of the Shelton corporate offices is expected to be completed during
2005.




The table
below sets forth the Company’s estimate of the total cost of the restructuring
programs, the portion recognized in 2004 and the portion expected to be
recognized in a future period:





**Expected**
    
    **Recognized**
    
    **To
      Be****Total**
    
    **During**
    
    **Recognized****Cost**
    
    **2004**
    
    **in
      the Future**Severance
      and termination benefits
    
    $
    4,009
    
    $
    3,087
    
    $
    922Lease
      termination costs
    
    
    558
    
    
    —
    
    
    558Asset
      impairment
    
    
    1,560
    
    
    1,560
    
    
    —Other
    
    
    1,632
    
    
    448
    
    
    1,184$
    7,759
    
    $
    5,095
    
    $
    2,664





The table
below sets forth the significant components of the restructuring charges
recognized during 2004, by segment:





**Domestic****Wet****Friction**
    
    **International**
    
    **Corporate**
    
    **Total**Severance
      and termination benefits
    
    $
    1,673
    
    $
    369
    
    $
    1,045
    
    $
    3,087Asset
      impairment
    
    
    —
    
    
    1,560
    
    
    —
    
    
    1,560Other
    
    
    173
    
    
    275
    
    
    —
    
    
    448$
    1,846
    
    $
    2,204
    
    $
    1,045
    
    $
    5,095





The table
below sets forth the activity with respect to the restructuring accrual at
January 2, 2005:





**Recognized**
    
    
    
    
    
    **Currency**
    
    **Balance****During**
    
    **Non-cash**
    
    **Cash**
    
    **Translation**
    
    **January****2004**
    
    **Charge**
    
    **Payments**
    
    **Adjustment**
    
    **2,
      2005**Severance
      and termination benefits
    
    $
    3,087
    
    $
    —
    
    $
    —
    
    $
    17
    
    $
    3,104Asset
      impairment
    
    
    1,560
    
    
    (1,560
    )
    
    —
    
    
    —
    
    
    —Other
    
    
    448
    
    
    (173
    )
    
    —
    
    
    —
    
    
    275$
    5,095
    
    $
    (1,733
    )
    $
    —
    
    $
    17
    
    $
    3,379




44




**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
3 - Restructuring Costs (Continued)**





The
employee severance and termination benefits relate to the elimination of
approximately 300 employees, most of which are engaged in manufacturing
activities at the Sterling Heights, Michigan and Liverpool, England facilities.
The portion of the severance and termination benefits cost expected to be
incurred, but not recognized during 2004, relates principally to one-time
retention or vesting benefits that will be earned and recognized over the future
service period of the employees. The Company anticipates that the remaining
expense will be recognized during 2005 and that these amounts will be paid
during 2005 and 2006.




The lease
termination costs relate to the Liverpool, England facilities. The estimated
cost is based on the Company’s ongoing discussions with the landlord and does
not include the full minimum lease commitment based on the original term of the
lease. The Company expects that these costs will be recognized and paid during
2005, when the facilities are vacated. These estimates do not include any costs
associated with terminating the Shelton, Connecticut
lease, which are not anticipated to be material.





The asset
impairment charge relates to equipment located at the Liverpool, England
facilities, determined to be impaired as a result of the decision to close those
facilities. The equipment at the Sterling Heights, Michigan facility was deemed
to be impaired and written down to liquidation value in 2003, due to the lack of
profitability at that facility.





The other
restructuring costs relate to accelerated depreciation associated with the
shortening of the useful lives of certain equipment as a result of the decision
to close the facilities and other costs associated with exiting the
facilities.





These
costs have been reported on the Consolidated Statement of Operations as
“Restructuring expenses” except for the impairment charge which is reported on
the line “Impairment charge” and $123 representing accelerated depreciation
costs that have been reported as “Cost of sales”. The accrual for these
restructuring costs is included in accrued liabilities and other long-term
liabilities on the Consolidated Balance Sheet at January 2, 2005.





All of
the restructuring costs except the asset impairment and accelerated depreciation
will result in cash outflows.





**Note
      4 - Restricted Cash**Restricted
      cash relates to the following:
  **January
      2,**
    
    **December
      28,****2005**
    
    **2003**Payable
      to the PI Trust
    
    $
    3,199
    
    $
    2,832Letters
      of credit
    
    
    1,939
    
    
    1,630Other
    
    
    410
    
    
    410$
    5,548
    
    $
    4,872





The
payable to the PI Trust consists of tax refunds and other funds received by the
Company that will be paid to the PI Trust at a future date.





The
letters of credit collateralize certain obligations relating primarily to
workers' compensation and certain supplier accounts.




45





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
      5 - Inventories**Inventories,
      net of inventory allowances, are as follows:
  **January
      2,**
    
    **December
      28,****2005**
    
    **2003**Raw
      materials
    
    $
    12,464
    
    $
    11,056Work
      in process
    
    
    11,020
    
    
    8,871Finished
      goods
    
    
    16,098
    
    
    10,950$
    39,582
    
    $
    30,877





The
activity in inventory allowances, deducted in the balance sheet from gross
inventories, is as follows:


**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Beginning
      balance
    
    $
    4,588
    
    $
    3,174
    
    $
    2,427Provisions
    
    
    510
    
    
    1,666
    
    
    858Charge
      offs
    
    
    (417
    )
    
    (252
    )
    
    (111
    )Currency
      translation adjustment
    
    
    48
    
    
    —
    
    
    —Ending
      balance
    
    $
    4,729
    
    $
    4,588
    
    $
    3,174





The
Domestic Wet Friction segment produces goods for its customers based on a
purchase order system, and in certain instances using longer-term contracts that
stipulate a fixed selling price with no commitment as to quantity. In instances
where the product's cost exceeds the selling price, an allowance is established
for the expected loss on products in inventory. The Company has not recorded an
estimate of the loss over the term of these contracts since the quantity and mix
of parts is not known and the future production costs will be impacted by, among
other things, changes in economic conditions and management's actions, including
expected cost reductions. The amount reserved for the expected loss on products
in inventory was $.8 million and $1.2 million at January 2, 2005 and December
28, 2003, respectively.





**Note
6 - Property, Plant and Equipment**





Property,
plant and equipment, at cost, are summarized as follows:





**January
      2,**
    
    **December
      28,****2005**
    
    **2003**Land
    
    $
    3,635
    
    $
    3,798Buildings
      and improvements
    
    
    29,567
    
    
    28,676Machinery
      and equipment
    
    
    88,127
    
    
    89,902Construction
      in progress
    
    
    4,789
    
    
    3,683126,118
    
    
    126,059Less:
      Accumulated depreciation
    
    
    (46,113
    )
    
    (36,824
    )Net
      property, plant and equipment
    
    $
    80,005
    
    $
    89,235


The
estimated useful lives for buildings and improvements range from 5 to 40 years;
the estimated useful lives for machinery and equipment range from 3 to 20 years.





46





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
6 - Property, Plant and Equipment (Continued)**





Capital
leases consist primarily of automobiles, telephones and computer equipment and
are amortized over the economic life of the assets or the term of the leases,
whichever is shorter. Assets under capital lease, which are included in the
table above, are as follows:





**January
      2,**
    
    **December 28,****2005**
    
    **2003**Assets
      under capital lease
    
    $
    623
    
    $
    773Less:
      Accumulated depreciation
    
    
    (332
    )
    
    (346
    )Net
      assets under capital lease
    
    $
    291
    
    $
    427





During
2004, the Company conducted a facilities utilization review and made the
decision to close its manufacturing operations in Sterling Heights, Michigan and
Liverpool, England. As a result of this decision, the Company determined that it
was appropriate to evaluate the carrying value of its long-lived assets at these
facilities for impairment in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”. As a result of this evaluation, it
was determined that certain long-lived assets located at the Liverpool, England
facilities were impaired. The Company recorded a non-cash impairment of $1.6
million, reducing the carrying value of its equipment at this facility. There
was no further impairment of the long-lived assets located at the Sterling
Heights, Michigan facility, which had been deemed impaired and written down to
liquidation value during 2003, as discussed below.





In fiscal
2003, the Domestic Wet Friction segment had an operating loss. Due to the
operating loss, the Company determined that an impairment analysis was
appropriate and engaged the services of a third party valuation firm to evaluate
the carrying value of its long-lived assets in accordance with SFAS No. 144. The
Company developed a future cash flow analysis and based on the current year loss
and future cash flow analysis, it was determined that the carrying value of
certain asset groupings in the Domestic Wet Friction segment and certain assets
contained in the corporate asset grouping exceeded their fair value and that an
impairment had occurred. The Company recorded a non-cash impairment of $8.1
million relating to the Domestic Wet Friction assets and $2.9 million relating
to the corporate assets, for a total impairment of $11.0 million, reducing the
carrying value of its property, plant and equipment.





Maintenance
and repairs charged to expense amounted to approximately $9,558, $9,468, and
$9,355 in 2004, 2003 and 2002, respectively. Depreciation expense relating to
property, plant and equipment was $14,267, $16,107 and $14,943 in 2004, 2003 and
2002, respectively.





**Note
7 - Goodwill and Other Intangible Assets**





During
the second quarter of 2004, the Company performed its annual impairment review
of its goodwill and indefinite-lived intangible assets. The review indicated
that no impairment existed at April 1, 2004.





During
the fourth quarter of 2004, the Company decided to close its manufacturing
facility located in Sterling Heights, Michigan. This closure is expected to be
completed by the end of fiscal 2005. As a result of this closure future sales
will be reduced. Based on these circumstances, the Company determined that it
was appropriate to perform an impairment analysis, specifically for trademarks,
in accordance with SFAS No. 142. The updated impairment analysis indicated that
no impairment had occurred. Accordingly, no adjustment was made to the value of
our goodwill and intangible assets during 2004.




47





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data) ****


****


**Note
7 - Goodwill and Other Intangible Assets (Continued)**





In fiscal
2003, the Wet Friction segment recorded an operating loss. Due to the loss, the
Company determined that an impairment analysis was appropriate and engaged the
services of a third party valuation firm to evaluate the carrying value of its
goodwill and intangible assets in accordance with SFAS No. 142. The Company
developed a future cash flow analysis and based on the current year loss and
future cash flow analysis, it was determined that its carrying value of the Wet
Friction segment, including step-up adjustments recorded upon emergence from
bankruptcy, exceeded the fair value and that an impairment had occurred.
Accordingly, the Company recorded an impairment charge of $37.8 million. The
goodwill and other intangible assets are recorded in the corporate asset group.
All impairment charges related to the impairment of intangible assets were
presented as a component of corporate expense.




The
following table represents the carrying value of goodwill and other intangible
assets at January 2, 2005 and December 28, 2003.


**January
      2, 2005**
    
    **December
      28, 2003****Gross**
    
    
    
    **Gross****Carrying**
    
    **Accumulated**
    
    **Carrying**
    
    **Accumulated****Amount**
    
    **Amortization**
    
    **Amount**
    
    **Amortization**Finite
      life intangible assetsUnpatented
      technology
    
    $
    14,360
    
    $
    6,972
    
    $
    14,360
    
    $
    5,337Distribution
      base
    
    
    5,716
    
    
    1,073
    
    
    5,716
    
    
    787Total
    
    $
    20,076
    
    $
    8,045
    
    $
    20,076
    
    $
    6,124Indefinite
      life intangible assetsTrademarks
    
    $
    10,700
    
    
    
    
    $
    10,700GoodwillAftermarket
    
    $
    5,912
    
    
    
    
    $
    5,912Intangible
      assets, net
    
    $
    28,643
    
    
    
    
    $
    30,564


The
weighted-average amortization periods for the unpatented technology and the
distribution base are between 6 and 20 years. Amortization expense for 2004,
2003 and 2002 amounted to $1.9 million, $2.2 million and $2.2 million,
respectively.


Estimated
      annual amortization expense is as follows:For
      the year ending:2005
    
    $
    1,9222006
    
    
    1,9222007
    
    
    1,6222008
    
    
    1,5222009
    
    
    1,522


48




**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data) ****





**Note
      8 - Debt**Debt,
      at fiscal year-end, consists of the following:
  **January
      2, 2005**
    
    **December
      28, 2003****Current**
    
    **Non-Current**
    
    **Total**
    
    **Current**
    
    **Non-Current**
    
    **Total**Domestic
      bank debtLine
      of credit
    
    $
    10,762
    
    $
    —
    
    $
    10,762
    
    $
    3,604
    
    $
    —
    
    $
    3,604Term
      loansDomestic
      Wet Friction
    
    
    1,055
    
    
    3,078
    
    
    4,133
    
    
    1,055
    
    
    4,133
    
    
    5,188Aftermarket
    
    
    996
    
    
    4,837
    
    
    5,833
    
    
    996
    
    
    5,921
    
    
    6,917Total
      domestic bank debt
    
    
    12,813
    
    
    7,915
    
    
    20,728
    
    
    5,655
    
    
    10,054
    
    
    15,709Foreign
      bank debtLine
      of credit
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Term
      loansEurope
    
    
    1,056
    
    
    3,406
    
    
    4,462
    
    
    979
    
    
    4,137
    
    
    5,116Asia
    
    
    1,300
    
    
    —
    
    
    1,300
    
    
    1,300
    
    
    —
    
    
    1,300Total
      foreign bank debt
    
    
    2,356
    
    
    3,406
    
    
    5,762
    
    
    2,279
    
    
    4,137
    
    
    6,416Total
      bank debt
    
    
    15,169
    
    
    11,321
    
    
    26,490
    
    
    7,934
    
    
    14,191
    
    
    22,125Leases
    
    
    111
    
    
    95
    
    
    206
    
    
    158
    
    
    163
    
    
    321Total
      borrowings
    
    $
    15,280
    
    $
    11,416
    
    $
    26,696
    
    $
    8,092
    
    $
    14,354
    
    $
    22,446
  The
      maturities of debt, as of January 2, 2005, are as follows:
  2005
    
    $
    15,2802006
    
    
    3,1872007
    
    
    3,0542008
    
    
    2,5692009
    
    
    1,262Thereafter
    
    
    1,344$
    26,696


The
carrying value of the Company's debt approximates fair
value.





The
Company, through its Domestic Wet Friction segment subsidiaries, Raybestos
Products Company (“RPC”) and Raybestos Automotive Components Company (“RACC”),
maintains a Loan and Security Agreement, which provides for RPC and RACC to
borrow up to $25.3 million in the aggregate. The agreement, as amended in
November 2003, consists of a $20 million revolving line of credit and a term
loan of $5.3 million. The revolving line of credit is limited through a formula
which provides availability based on qualified accounts receivable and
inventory. At January 2, 2005, the amount available under the revolving line of
credit was $2.0 million. The revolving line of credit matures September 28,
2006. The term loan is payable in 34 monthly payments of $88, commencing
December 1, 2003 and maturing on September 28, 2006, with the final payment
being the remainder of the balance. The revolving line of credit and the term
loan are collateralized by accounts receivable, inventory and property, plant
and equipment. Amounts outstanding under the revolving line of credit bear
interest at a rate equal to, at the Company’s option, the prime rate or the
adjusted Eurodollar rate, plus a margin of 0.5% and 2.75%, respectively. Amounts
outstanding under the term loan bear interest at a rate equal to, at the
Company’s option, the prime rate or the adjusted Eurodollar rate, plus a margin
of 0.75% and 3.0%, respectively. The agreement contains financial and other
covenants, including a fixed charge coverage ratio and a material adverse change
clause. At January 2, 2005 and December 28, 2003, the aggregate pledged assets
of RPC and RACC amounted to $62.1 million and $59.6 million, respectively,
consisting of cash, accounts receivable, inventory, machinery and equipment and
all other tangible and intangible assets, except real property. The agreement
permits RPC and RACC to pay dividends to the Company for costs and expenses
incurred by the Company in the ordinary course of business so long as no event
of default has occurred and is continuing. During the second quarter of 2004,
the Company entered into a fifth amendment to this agreement. The fifth
amendment alters the determination of availability under the revolving line of
credit to exclude certain receivables due to a potential right of setoff and
grants the lender a mortgage on the real property owned by RPC, located in
Sterling Heights, Michigan. The carrying value of the real property in Sterling
Heights, Michigan was $5.0 million at January 2, 2005. Further, in accordance
with the fifth amendment, the lender may make loans, subject to certain limits,
under the revolving line of credit up to the lesser of the amount of the
excluded receivables or $1.9 million. During the fourth quarter of 2004, the
Company entered into a sixth amendment to this agreement. Under the sixth
amendment, the lender waives certain defaults that may arise as a result of an
agreement between the Company and a certain customer. Subsequent to the end of
2004, but prior to filing this report, the Company entered into a seventh
amendment to this agreement. The seventh amendment modifies the fixed charge
coverage ratio to exclude a one-time forgiveness of certain intercompany
receivables recorded by RPC during the first quarter of 2005, related to the
closure of the RUK facility, clarifies the periods to be included in the
calculation of the fixed charge coverage ratio in the future and provides a
remedy for future non-compliance by an irrevocable cash contribution by the
parent. Additionally, the seventh amendment waives the Company’s non-compliance
with the fixed charge coverage ratio for the fourth quarter of 2004. The
non-compliance was a result of the recognition of the costs associated with the
closure of the Sterling Heights, Michigan manufacturing facility.




49





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data) ****





**Note
8 - Debt (Continued)**




The
Company, through its subsidiaries Raytech Powertrain, Inc. (“RPI”), APC, Raytech
Systems, Inc. (“RSI”) and Raybestos Powertrain, LLC (“RPL”), is party to a loan
agreement for $7.0 million with an interest rate at 1.65 basis points over the
adjusted Eurodollar rate with a five-year term. The loan is payable in 59
monthly payments of $83, commencing on December 1, 2003, with a balloon payment
of $2.1 million payable on November 3, 2008. The proceeds from this facility
were used to pay environmental costs and pension costs. The loan is
collateralized by the assets of the borrowing entities. The agreement contains
financial and other covenants, including the maintenance of certain financial
ratios and a material adverse change clause. At January 2, 2005 and December 28,
2003, the aggregate pledged assets of APC, RSI, RPI and RPL were $44.1 million
and $54.0 million respectively. Subsequent to the end of 2004, but prior to
filing this report, the Company entered into the first amendment to this
agreement. The first amendment modifies the calculation of the debt service
coverage ratio to exclude fifty percent of distributions to the borrower’s
parent company.




On March
21, 2005 the Company, through its majority owned subsidiary, APC, purchased
common stock of APC owned by Raymark, in exchange for a ten-year unsecured
promissory note of $7.2 million, which increased the Company’s indirect
ownership of APC from approximately 57% of its outstanding common stock to
approximately 96% of its outstanding common stock. In connection with this
transaction the Company requested and obtained a waiver of the negative covenant
restricting the repurchase or acquisition of the borrowers' capital stock
contained in one of its domestic bank agreements during the fourth quarter of
2004.




The
Company's wholly-owned German subsidiary, Raybestos Industrie-Produkte GmbH
(“RIP”), has available lines of credit with several German banks. Interest is
charged at rates between 3.80% and 10.75%. The lines are repayable on demand. At
January 2, 2005 and December 28, 2003, there were no borrowings outstanding
under these lines of credit. The amount available under these lines of credit
was $4.1 million at January 2, 2005.




The
Company’s wholly-owned German subsidiaries, Raytech Composites Europe GmbH
(“RCE”) and RIP, have various loan agreements where the maturities range from
September 2006 through December 2012. The loans are payable in equal periodic
installments (usually quarterly or semi-annually) over the term of the loan. The
loans bear interest at rates ranging from 2.5% through 6.2%. At January 2, 2005
and December 28, 2003, respectively, the aggregate pledged assets, consisting of
machinery and equipment, amounted to EUR 12.1 million ($16.5 million) and
EUR12.7 million ($16.0 million).




During
the periods presented, the Company’s wholly-owned Chinese subsidiary Raybestos
Friction Products (Suzhou) Co. Ltd. (“RFP”) has had various loan agreements. The
loans are short-term with maturities between six and twelve months.




The
weighted average rates on all domestic and foreign bank notes payable at January
2, 2005 and December 28, 2003 were 4.85% and 3.71%, respectively.





50


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data) ****





**NOTE
9 - Litigation**




*Environmental
Remediation*





Crawfordsville,
Indiana - Shelly Ditch Contamination Removal




In
October 1987, RPC, a wholly-owned subsidiary of the Company, purchased a major
manufacturing facility (the “RPC Facility”) in Crawfordsville, Indiana. Sometime
thereafter, the Company learned that the previous owner of the RPC Facility had
released polychlorinated biphenyls (“PCBs”) to the ground at the RPC Facility in
the mid-1960s and that such PCBs were leaching from the RPC Facility into an
adjacent ditch (“Shelly Ditch”).




In 1996,
the Indiana Department of Environmental Management (the “IDEM”) advised RPC that
the RPC Facility may have contributed to, and was potentially responsible for,
the release of lead and PCBs found in Shelly Ditch. In the late 1990s, RPC and
the IDEM entered into an agreed order (the “Agreed Order”) for a risk-based
remediation of PCBs and lead in Shelly Ditch. When the IDEM later sought to
unilaterally withdraw from the Agreed Order, RPC appealed and the Marion County
Superior Court ordered the IDEM to reinstate the Agreed Order. Meanwhile, at the
IDEM’s request, the United States Environmental Protection Agency (the “EPA”)
became involved in Shelly Ditch. ****





In
December 2000, before the Agreed Order was reinstated, the EPA issued a
Unilateral Administrative Order to RPC under CERCLA (the “EPA Removal Order”)
demanding removal of contaminated soils from those Shelly Ditch areas identified
as Reaches 1 through 3 (the “Site”). The EPA Removal Order required more work at
greater expense than the IDEM Agreed Order. Thereafter, RPC proceeded with the
work required under the EPA Removal Order.




On
January 9, 2004, the EPA confirmed that RPC had completed the action required
under the EPA Removal Order, including the removal and proper disposal of Site
soils and sediments contaminated with PCBs and lead. In its confirmation, the
EPA noted that RPC would continue to be subject to certain obligations under
that order, including record retention and the payment of oversight costs.
Whether RPC will be required to pay oversight costs relating to the work under
the EPA Removal Order will depend on the outcome of future negotiations with the
EPA and the IDEM regarding potential environmental remediation downstream of the
Site.




By
January 2, 2005, RPC had spent approximately $18.7 million on removal of lead
and PCB contaminated soils from the Site and had accrued $.4 million for
potential EPA oversight costs relating to that work.




Crawfordsville,
IN - Environmental Remediation Downstream of the Site




On May 6,
2003, the EPA indicated that RPC is potentially liable for PCB and lead
contamination downstream of the Site. The EPA has not issued an order to RPC
regarding this downstream area. However, during the third quarter of 2003, the
Company began negotiations with the EPA concerning such possible additional
remediation. As a result, during the third quarter of 2003, the Company recorded
a $2.4 million accrual relating to this potential liability for future cleanup
costs. The Company has an accrual of $2.2 million at January 2, 2005 related to
this matter. ****




51


****


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data) ****





**NOTE
9 - Litigation (Continued)**





Crawfordsville,
IN - Environmental Remediation and Expenses  relating
to the RPC Facility




On May
15, 2001, the EPA issued a Pre-filing Notice and Opportunity to Confer
to **** RPC (the
“Pre-filing Notice”). This notice stated that the EPA might file a civil action
lawsuit against RPC for violations of various environmental statutes and would
offer RPC the opportunity to participate in pre-filing negotiations to resolve
this matter. The EPA stated that it had reason to believe that RPC committed
violations of the Clean Air Act, Clean Water Act, Resource Conservation and
Recovery Act, and Toxic Substances Control Act and that RPC could be subject to
substantial penalties. On September 3, 2003, the EPA proposed that the parties
settle the Pre-filing Notice. The EPA stated that penalties for violations
alleged in the Pre-filing Notice could total approximately $180.0 million and
suggested the following resolution: RPC should pay approximately $2.4 million in
fines and undertake compliance activities, on-site investigative work that the
EPA estimated would cost about $1.0 million, and corrective action to resolve
the Pre-filing Notice. During 2004, RPC performed on-site investigative work.
RPC is currently engaged in negotiations with the EPA regarding potential
on-site corrective action and the amount of any penalty. The Company has an
accrual of $3.4 million as of January 2, 2005, based on the EPA
position.




Ferndale,
MI - Potential Responsibility for Environmental Remediation




**** In a
January 8, 2002 letter, the Michigan Department of Environmental Quality
asserted Company responsibility for trichloroethylene contamination at a
Ferndale, Michigan industrial site that Advanced Friction Materials Company
(“AFM”) leased from approximately 1974 to 1985. The Company acquired 47% of the
stock of AFM in 1996 and the balance of the shares in 1998. The Company’s
liability at this site is indeterminable at this time and no liability has been
accrued as of January 2, 2005.





*Environmental
Litigation*





Cost
Recovery Actions against Insurers regarding Shelly Ditch





In 1996,
RPC notified its insurers and demanded defense and indemnity regarding any
environmental issues relating to alleged lead and PCB contamination of Shelly
Ditch. In January 1997, one insurer filed a complaint in the U.S. District
Court, Southern District of Indiana, captioned Reliance
Insurance Company vs. Raybestos Products  Company (the
“Insurance Case”). The complaint sought a declaratory judgment that the Reliance
Insurance policies do not provide coverage to RPC for defense and indemnity
relating to investigation and remediation of contamination in Shelly Ditch. In
January 2000, the District Court rejected Reliance‘s claims and granted summary
judgment to RPC. In June 2001, Reliance Insurance Company was placed in
liquidation in Pennsylvania. The Company has filed claims in the Reliance
liquidation for recovery of its Shelly Ditch expenses but has not received a
decision.




In
February 2002, RPC filed a third-party complaint in the Insurance Case against
three insurance carriers. The third-party complaint seeks defense and indemnity
from the insurers relating to investigation and remediation of contamination in
Shelly Ditch. Later that year, two of the insurance carriers, USF&G and
Westchester, filed motions to compel arbitration of the insurance coverage
issues under these policies. The U.S. District Court denied these motions to
compel and the two insurance companies appealed to the U.S. Court of Appeals for
the Seventh Circuit ("Appeals Court"). On August 27, 2004, the Court of Appeals
reversed the District Court's order refusing to compel such arbitration and
remanded the case to the District Court for entry of an order compelling
arbitration. On October 15, 2004, the District Court entered its order
compelling arbitration and RPC promptly submitted the USF&G and Westchester
insurance issues to arbitration. The arbitration is currently scheduled to take
place during January 2006.




52




**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)


**NOTE
9 - Litigation (Continued)**





In
February 2004, the third insurance carrier, National Union and its affiliates,
commenced an adversary proceeding against the Company, RPC and others by filing
a complaint in U.S. Bankruptcy Court (the “Adversary Proceeding”). In the
Adversary Proceeding, National Union claims that RPC’s complaint against
National Union is barred by a 2002 order of the U.S. Bankruptcy Court in the
Raymark Chapter 11 cases that prohibits RPC from pursuing its third-party
complaint against National Union and declares that the National Union insurance
policies issued to the Company and RPC have been exhausted. Also in February
2004, National Union filed a motion in the U.S. District Court, Southern
District of Indiana, asking that court to stay the Insurance Case against
National Union. On September 10, 2004, the U.S. District Court granted National
Union's motion for stay. The outcome of this Adversary Proceeding and related
stay and their effects, if any, on the Insurance Case against National Union
cannot be predicted.





RPC
Claims against IDEM





In July
2002, RPC filed an action against the IDEM for breach of contract claiming
damages based on the difference between the costs of cleanup under the EPA
Removal Order and the IDEM Agreed Order. The outcome of this litigation cannot
be predicted.





*Commercial
Litigation*





On April
22, 2003, Automation by Design, Inc. (“ABD”) filed a civil action against RPC in
U.S. District Court for the Southern District of Indiana. The complaint alleged
copyright infringement and breach of contract in connection with RPC’s purchase
of certain equipment. RPC denied liability and filed counterclaims for breach of
contract and declaratory judgment. The court granted ABD’s motion to amend its
complaint to include as defendants Raytech Corporation and Production Design
Services, Inc., which manufactured certain equipment allegedly involved in this
court action and which RPC agreed to defend and indemnify against certain
liabilities. On December 8, 2004, the District Court granted RPC’s motion for
summary judgment, ruling that ABD’s claims fail as a matter of law. In January
2005, RPC filed a petition for reimbursement of its legal fees and costs
incurred in defending the action. ABD has filed an appeal of the summary
judgment ruling. The Company does not believe that the outcome of this
litigation will have a material adverse effect on its consolidated results of
operations, financial condition or cash flows.





*Equity
Holders Litigation*





In
February 2002, lawyers representing the Committee of Equity Holders of Raytech
Corporation filed a motion in U.S. Bankruptcy Court to compel the Company to
either issue up to approximately 700,000 additional shares to the
pre-reorganization holders of shares in the Company or their successors, or to
proportionately reduce the shareholdings of the general unsecured creditor
shareholders under the Plan of Reorganization. On October 27, 2004 the
Bankruptcy Court approved a settlement of the Equity Holders litigation,
pursuant to which each “Record Date Registered Holder”, as defined in Section 4
of the approved settlement agreement, was entitled to receive a payment of $0.16
per share. These payments plus other payments required under the settlement were
$.6 million, which was accrued by the Company during the third quarter of 2004
and paid by the Company during the fourth quarter of 2004. The payment of these
costs was funded by the Company’s majority shareholder. The Company has recorded
a liability to its majority shareholder for this amount on its books at January
2, 2005.




The
Company is subject to certain other legal matters that have arisen **** in the
ordinary course of business, and management does not expect them to have a
significant adverse effect on the results of the Company’s consolidated
operations, financial condition or cash flow.




53




**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data) ****





**Note
10 - Segment Reporting**





The
Company has three operating segments and a corporate group based on management
structure, product type and distribution channel, as described below. During the
first quarter of 2004, the Company restructured its operating segments to
facilitate a stronger focus on the European wet friction operations. Oversight
of the European wet friction operations, Raybestos Reibtechnik GmbH ("RRT") and
Raybestos U.K. Ltd. ("RUK") and sales of wet friction products outside of North
America, was transferred to the European management team. The newly defined
operating segments are Domestic Wet Friction, International (including the
European wet friction operations and European and Asian dry friction
operations), and Aftermarket. All prior period segment information has been
restated to reflect the newly defined segments.





Domestic
Wet Friction





The
Domestic Wet Friction segment manufactures and distributes automatic
transmission and wet wheel brake system components. The Company markets its
products to automobile, heavy duty truck, farm machinery, mining, and bus
original equipment manufacturers ("OEMs") in North America.





International





The
International segment manufactures and distributes automatic transmission,
manual transmission and wet wheel brake system components. The Company markets
its products to automobile, heavy duty truck, farm machinery, mining, and bus
OEMs. The International segment markets its dry friction products worldwide and
its wet friction products throughout Europe and Asia.





Aftermarket





The
Aftermarket segment produces specialty engineered products primarily for
automobile and lift truck automatic transmissions. In addition to these
products, this segment markets transmission filters and other transmission
related components. The focus of this segment is marketing to warehouse
distributors and certain retail operations in the automotive aftermarket.





Corporate





The
Corporate group consists principally of corporate activities, including costs to
maintain the corporate headquarters, certain environmental costs, and certain
assets, liabilities and related income and expense stemming from the
reorganization plan implemented when the Company emerged from bankruptcy in
2001. The Company has chosen not to distribute these costs to the operating
segments to preserve the historical comparability at the operating segment
level.





The
increased operating loss of $40.6 million recognized in the Corporate group for
fiscal 2003 compared to fiscal 2002, was the result of a $40.7 million
impairment charge, which is described more fully in Notes 6 - Property, Plant
and Equipment and 7 - Goodwill and Other Intangible Assets.




Information
relating to operations by industry segment follows:




54


****


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share
data)****





**Note
      10 - Segment Reporting (Continued)****For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Net
      salesDomestic
      Wet Friction
    
    $
    128,892
    
    $
    119,002
    
    $
    131,445International
    
    
    67,433
    
    
    56,698
    
    
    48,981Aftermarket
    
    
    49,186
    
    
    44,931
    
    
    46,192Intersegment
      elimination
    
    
    (18,198
    )
    
    (14,766
    )
    
    (16,752
    )Net
      sales to external customers
    
    $
    227,313
    
    $
    205,865
    
    $
    209,866Gross
      profitDomestic
      Wet Friction
    
    $
    12,926
    
    $
    4,563
    
    $
    18,784International
    
    
    18,487
    
    
    14,064
    
    
    9,796Aftermarket
    
    
    14,565
    
    
    12,725
    
    
    12,993Intersegment
      elimination
    
    
    (5,043
    )
    
    (5,226
    )
    
    (4,802
    )Consolidated
    
    $
    40,935
    
    $
    26,126
    
    $
    36,771Operating
      (loss) profitDomestic
      Wet Friction
    
    $
    (375
    )
    $
    (16,286
    )
    $
    6,761International
    
    
    5,258
    
    
    4,256
    
    
    1,430Aftermarket
    
    
    8,094
    
    
    7,278
    
    
    8,406Corporate
    
    
    (16,028
    )
    
    (52,721
    )
    
    (12,157
    )Consolidated
    
    $
    (3,051
    )
    $
    (57,473
    )
    $
    4,440DepreciationDomestic
      Wet Friction
    
    $
    5,999
    
    $
    8,047
    
    $
    8,171International
    
    
    3,870
    
    
    3,987
    
    
    3,438Aftermarket
    
    
    1,422
    
    
    1,536
    
    
    1,553Corporate
    
    
    2,976
    
    
    2,537
    
    
    1,781Consolidated
    
    $
    14,267
    
    $
    16,107
    
    $
    14,943Interest
      expense, netDomestic
      Wet Friction
    
    $
    1,926
    
    $
    1,532
    
    $
    1,265International
    
    
    391
    
    
    861
    
    
    858Aftermarket
    
    
    111
    
    
    (35
    )
    
    (39
    )Corporate
    
    
    (1,197
    )
    
    (1,297
    )
    
    (1,181
    )Consolidated
    
    $
    1,231
    
    $
    1,061
    
    $
    903Expenditures
      for property, plant and equipmentDomestic
      Wet Friction
    
    $
    1,672
    
    $
    4,016
    
    $
    4,715International
    
    
    3,911
    
    
    4,096
    
    
    3,739Aftermarket
    
    
    1,051
    
    
    682
    
    
    892Corporate
    
    
    34
    
    
    174
    
    
    302Consolidated
    
    $
    6,668
    
    $
    8,968
    
    $
    9,648Segment
      assets (at year-end)Domestic
      Wet Friction
    
    $
    71,911
    
    $
    69,679
    
    $
    88,003International
    
    
    50,438
    
    
    43,599
    
    
    39,596Aftermarket
    
    
    30,884
    
    
    35,092
    
    
    30,784Corporate
    
    
    52,453
    
    
    57,654
    
    
    135,838Consolidated
    
    $
    205,686
    
    $
    206,024
    
    $
    294,221Long
      lived assets by geographic locationUnited
      States
    
    $
    86,129
    
    $
    96,326
    
    $
    155,558Germany
    
    
    14,014
    
    
    14,888
    
    
    13,362Other
      foreign countries
    
    
    8,505
    
    
    8,585
    
    
    7,763Consolidated
    
    $
    108,648
    
    $
    119,799
    
    $
    176,683




55




**RAYTECH
      CORPORATION****NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**(in
      thousands, unless otherwise noted, except per share
  data)
  **Note
      10 - Segment Reporting (Continued)**
  **For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Sales
      by geographic locationUnited
      States
    
    $
    160,299
    
    $
    149,244
    
    $
    161,020Germany
    
    
    52,931
    
    
    45,311
    
    
    38,218Other
      foreign countries
    
    
    14,083
    
    
    11,310
    
    
    10,628Consolidated
    
    $
    227,313
    
    $
    205,865
    
    $
    209,866Sales
      to customers in excess of 10% of total salesCaterpillar
    
    $
    26,968
    
    $
    19,554
    
    $
    23,948DaimlerChrysler
    
    
    22,910
    
    
    25,623
    
    
    30,324





(1) The
Company records intersegment sales at an amount negotiated between the segments.
All intersegment sales are eliminated in consolidation. Substantially all
intersegment sales represent sales from the Domestic Wet Friction segment to the
Aftermarket segment.





**Note
11 - Income Taxes**





For tax
reporting purposes, the Company’s emergence from bankruptcy, in 2001, did not
create a new tax reporting entity. Accordingly, the adjustments to adopt
fresh-start accounting are not applicable for the Company’s tax reporting.
Therefore, with the exception of goodwill, these adjustments created new
deferred tax items in 2001.





Pursuant
to the Tax Benefits Assignment and Assumption Agreement (the “Agreement”), all
tax benefits received by the Company due to the reorganization are to be passed
onto the PI Trust as received. At January 2, 2005, the Company has domestic tax
loss carryforwards of $107.0 million, which begin to expire in 2021, and tax
credit carryforwards of $2.5 million. The net operating loss carryforwards are
allocated between the Company and the PI Trust in the amounts of $25.0 million
and $82.0 million, respectively. The tax credit carryforwards all inure to the
benefit of the PI Trust. Additionally, future payments to the PI Trust and
others will create additional tax deductions, which will inure to the benefit of
the PI Trust in accordance with the Agreement. These include deductions for
payments to the PI Trust of tax benefits associated with the utilization of the
operating losses allocated to the PI Trust, and contributions made to the
Raymark pension plans. Losses generated by the Company subsequent to its
emergence from bankruptcy, exclusive of losses attributable to the payments
discussed above, will be retained by the Company. The method of allocation in
utilizing current and future operating losses between the PI Trust and the
Company has not been formally determined at this time. However, the Company has
allocated the net operating losses between the PI Trust and the Company based on
year of origin. Additional tax recoveries, expected to be received in future
periods, are recorded as deferred tax assets, net of related valuation
allowances, and a deferred payable to the PI Trust which amounted to $4.6
million at January 2, 2005 and $11.9 million at December 28, 2003, respectively.
The Company has scheduled out the reversal patterns of its deferred tax assets
and liabilities in determining its net deferred tax position. Future changes in
the composition and reversal patterns of the Company’s deferred tax assets and
liabilities may impact the deferred tax asset that inures to the benefit of the
PI Trust and the related deferred payable. The impact on the deferred payable to
the PI Trust could cause a corresponding impact on pre-tax income.




56







**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
11 - Income Taxes (Continued)**





(Loss)
income before provision for income taxes and minority interest consists
of:





**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Domestic
    
    $
    (4,754
    )
    $
    (42,033
    )
    $
    (2,513
    )Foreign
    
    
    4,531
    
    
    2,964
    
    
    827$
    (223
    )
    $
    (39,069
    )
    $
    (1,686
    )
  The
      Company's income tax provision (benefit) consists of the
      following:
  **For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Current:Federal
    
    $
    (426
    )
    $
    1,035
    
    $
    1,373State
    
    
    84
    
    
    (2,502
    )
    
    620Foreign
    
    
    1,629
    
    
    511
    
    
    159Deferred:Federal
    
    
    602
    
    
    24,112
    
    
    (1,973
    )State
    
    
    20
    
    
    3,575
    
    
    (203
    )Foreign
    
    
    (14
    )
    
    14
    
    
    108Total
      income tax provision
    
    $
    1,895
    
    $
    26,745
    
    $
    84





The
provision in 2004, 2003, and 2002 includes amounts for the Company’s profitable
foreign entities in Germany and China, and Allomatic Products Company, which is
consolidated for financial reporting purposes, but not for tax
purposes.




Reconciliation
of loss from operations multiplied by the statutory federal tax rate to reported
income tax provision is summarized as follows:





**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Pretax
      loss multiplied by thestatutory
      rate (35%)
    
    $
    (78
    )
    $
    (13,674
    )
    $
    (590
    )Increases
      (decreases) resulting from:Effect
      of foreign income taxes
    
    
    29
    
    
    (290
    )
    
    (22
    )Change
      in tax rate of deferred assets
    
    
    —
    
    
    (477
    )
    
    —Net
      change in domestic valuation allowance
    
    
    4,945
    
    
    39,849
    
    
    —State
      income taxes, net of federal benefit
    
    
    104
    
    
    1,073
    
    
    271Reduction
      in payable to PI Trust
    
    
    (2,125
    )
    
    (9,710
    )
    
    —Goodwill
      write down
    
    
    —
    
    
    10,099
    
    
    —Raymark
      pension provision
    
    
    —
    
    
    —
    
    
    412Permanent
      tax items
    
    
    250
    
    
    770
    
    
    —Refundable
      federal income taxes
    
    
    (1,190
    )
    
    —
    
    
    —Other
    
    
    (40
    )
    
    (895
    )
    
    13Total
      income tax provision
    
    $
    1,895
    
    $
    26,745
    
    $
    84




57





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
11 - Income Taxes (Continued)**





Deferred
tax assets (liabilities), at fiscal year-end, are comprised of the
following:





**January 2,**
    
    **December
      28,****2005**
    
    **2003**Tax
      benefit to PI Trust
    
    $
    48,814
    
    $
    41,823Raytech
      minimum pension liability
    
    
    1,300
    
    
    503Excess
      of book over tax deductions
    
    
    7,998
    
    
    5,735Postretirement
      benefit
    
    
    7,121
    
    
    6,305Excess
      of tax basis over book basis of assetsdue to
      restructuring
    
    
    402
    
    
    544Foreign
      tax carryforwards
    
    
    1,895
    
    
    1,465Non
      PI Trust operating loss carryforwards
    
    
    7,938
    
    
    7,425Gross
      deferred tax assets
    
    
    75,468
    
    
    63,800Deferred
      tax valuation allowance
    
    
    (59,139
    )
    
    (44,889
    )Deferred
      tax assets
    
    
    16,329
    
    
    18,911Excess
      of book basis of intangibles over tax basis
    
    
    (9,136
    )
    
    (9,909
    )Excess
      of book basis of fixed assets over tax basis
    
    
    (10,930
    )
    
    (12,265
    )Net
      deferred tax liability
    
    $
    (3,737
    )
    $
    (3,263
    )





During
2004, the Company recorded an increase to the valuation allowance of $13.8
million against certain domestic deferred tax assets due to doubts about their
future recoverability. The establishment of the valuation allowance resulted in
a charge against deferred income tax assets which resulted in a partial
reduction in deferred income tax assets that inure to the benefit of the PI
Trust in accordance with the Agreement, as more fully described above.
Accordingly, the related deferred payable to the Trust was reduced by $7.3
million and other income was increased by an equal amount. In addition, the
short-term payable to the PI Trust was increased by $1.2 million to reflect the
increase in prior years refundable federal income taxes that will inure to the
benefit of the PI Trust. This resulted in an equal amount of other expense. The
overall domestic net deferred tax liabilities relate to the tax effects of the
indefinite-lived intangible assets and certain land which cannot be used to
support the realization of existing deferred tax assets. Also, during 2004, the
deferred tax asset relating to the German minimum pension liability was
increased by $134, with a corresponding increase to equity.





During
2003, as a result of certain industry dynamics and the Company’s deteriorating
profitability in its Domestic Wet Friction segment, including the effect of
changes associated with environmental remediation, the Company did not recognize
any tax benefits associated with the cumulative 2003 operating losses incurred
by the Company’s U.S. operations due to doubts concerning future recoverability.




Also,
during 2003, the Company recorded an increase to the valuation allowance of
$43.8 million against certain deferred tax assets due to doubts about their
future recoverability. The establishment of the valuation allowance resulted in
a charge against deferred income tax assets, of which $43.4 million is included
in the tax provision, and which also resulted in a reduction in deferred income
tax assets that inure to the benefit of the PI Trust in accordance with the Tax
Assignment and Assumption Agreement, as more fully described above. Accordingly,
the deferred payable to the PI Trust was reduced by $30.5 million and other
income was increased by an equal amount. In addition, the short-term payable to
the PI Trust was increased by $2.8 million to reflect an increase in the state
tax receivable that will inure to the benefit of the PI Trust. This resulted in
an equal amount of other expense. The overall domestic net deferred tax
liabilities relate to the tax effects of the indefinite-lived intangible assets
which cannot be used to support the realization of existing deferred tax assets.





At
year-end 2004, the Company’s deferred tax asset valuation allowance of $59.1
million consisted of a valuation allowance of $57.2 million for the U.S.
wholly-owned subsidiaries and $1.9 million for operations in the United Kingdom
(“U.K.”). The Company had a valuation allowance of $43.4 million for the U.S.
wholly-owned subsidiaries in 2003. Additionally, the Company had a valuation
allowance for the U.K. operations of $1.5 million and $1.1 million for 2003 and
2002, respectively. There was no reduction in the valuation allowance in any of
the periods presented.




58




**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
11 - Income Taxes (Continued)**





The
Company has recorded a tax receivable in the amount of $1,333 as of January 2,
2005, of which $1,290 is due from the federal government and $43 is due from
state governments. The Company received $45 in January 2004 and $897 in May 2004
as partial recovery of the state taxes related to returns filed in 2003 and
2004. The state refunds inure to the benefit of the PI Trust. In addition, the
State of Indiana has completed its audit of Raytech for the years 1992 through
2001. As a result of the audit, Raytech was denied refunds claimed for Indiana
gross income tax paid in the years 1992 through 1997 of $1,044 and certain
interest on amounts refunded. Raytech filed a protest with respect to these
items with the Indiana Department of Revenue, and a hearing was held on August
20, 2003. On September 18, 2003, Raytech received an order denying the claim for
refund. In response to the order, Raytech has filed a petition with the Indiana
Tax Court requesting a refund of Indiana gross income tax and interest on
amounts refunded. Pursuant to the Agreement, any tax refunds received will be
payable, net of Federal tax, to the PI Trust.




The
Company is under an IRS audit for 1996 through 2001. Any tax assessments, up to
the amount of the refunds received, arising from this audit or any other year in
the carryback period are, pursuant to the Agreement, the responsibility of the
PI Trust and will therefore impact the deferred tax asset attributable to the PI
Trust. Any change in the deferred tax asset attributable to the PI Trust will
also impact the valuation allowance and the related deferred payable to the PI
Trust. Pursuant to a settlement meeting held in April 2004, the Company and the
IRS have reached a tentative settlement of the IRS audit. The settlement, which
was signed on January 4, 2005, if approved by the IRS District Director and the
Joint Committee on Internal Revenue Taxation, would result in no payment of
federal tax, given the Company’s net operating losses. However, interest on the
tax assessment would be payable. Should the tax settlement be approved in its
current form, the Company would record a tax benefit of approximately $1.5
million.




At
January 2, 2005, the Company had foreign loss carryforwards of $5.7 million all
relating to the U.K. operations, which do not expire. A full valuation allowance
continues to be provided against the tax benefit of the U.K. carryforwards due
to uncertainty of future profitability of these operations.




The
Company owns 57% of the stock of APC. The Company has not recorded a deferred
tax liability for the undistributed earnings of APC since management expects
that those earnings will be distributed to the Company in a tax-free
transaction. However, the deferred tax liability on the undistributed earnings
of APC would be approximately $1.4 million at January 2, 2005, if all of APC’s
earnings were to be distributed through the distribution of dividends. See Note
22 - Subsequent Event for a discussion of the acquisition of the shares of APC
owned by Raymark on March 21, 2005.





**Note
      12 - Loss Per Share**
  **For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Net
      loss
    
    $
    (2,750
    )
    $
    (66,443
    )
    $
    (2,825
    )Weighted
      average shares
    
    
    41,737
    
    
    41,702
    
    
    41,528Weighted
      average stock options exercised
    
    
    —
    
    
    26
    
    
    80Adjusted
      weighted average shares
    
    
    41,737
    
    
    41,728
    
    
    41,608Basic
      and diluted loss per share
    
    $
    (.07
    )
    $
    (1.59
    )
    $
    (.07
    )





Options
to purchase 1,942,164, 579,288, and 70,707 shares of common stock were
anti-dilutive for the years ended January 2, 2005, December 28, 2003 and
December 29, 2002, respectively due to the Company incurring losses in each
period.




59





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
13 - Stock Option Plans**





In 1991,
the Company established a non-qualified stock option plan (the “1990 Plan”),
which was amended in 1997 to increase the number of shares of common stock as to
which options may be granted. In 2002, the Company established an incentive
stock option plan (the “2002 Plan”). Types of grants allowed under the 2002 Plan
include Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation
Rights, Restricted Stock, Restricted Stock Units, Performance Units, Performance
Shares, Stock Awards, and Cash-Based Awards.





Under the
1990 Plan, as amended, the number of shares of common stock as to which options
may be granted from time to time may not exceed 1,000,000. Under the 2002 Plan,
the number of shares of common stock as to which options may be granted from
time to time may not exceed 4,000,000 shares. Under the terms of all plans, the
exercise price of any option may not be less than 100% of the fair value of the
common stock on the date of grant.




Stock
options granted under the 1990 and 2002 Plans generally vest over a four-year
period. In general, stock options granted under both of the Plans expire ten
years from the date of grant. The term during which options could be granted
under the 1990 Plan expired on December 31, 2000. At January 2, 2005, there were
2,335,225 shares available for future grant under the 2002 Plan.





The
following table summarizes stock option transactions for the fiscal years ended
January 2, 2005, December 28, 2003 and December 29, 2002:


2004
    
    2003
    
    2002Weighted
    
    
    
    Weighted
    
    
    
    WeightedAverage
    
    
    
    Average
    
    
    
    AverageExercise
    
    
    
    Exercise
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    Price
    
    Options
    
    PriceOutstanding
      at beginning of year
    
    
    3,035,659
    
    $
    5.56
    
    
    332,017
    
    $
    4.25
    
    
    573,757
    
    $
    3.78Granted
    
    
    —
    
    
    —
    
    
    2,773,000
    
    
    5.70
    
    
    —
    
    
    —Exercised
    
    
    —
    
    
    —
    
    
    (35,752
    )
    
    4.25
    
    
    (173,034
    )
    
    3.13Expired
    
    
    —
    
    
    —
    
    
    —
    
    
    4.25
    
    
    (53,234
    )
    
    2.89Forfeited
    
    
    (1,093,495
    )
    
    5.68
    
    
    (33,606
    )
    
    5.46
    
    
    (15,472
    )
    
    4.03Options
      outstanding at end of year
    
    
    1,942,164
    
    
    5.49
    
    
    3,035,659
    
    
    5.56
    
    
    332,017
    
    
    4.25Options
      exercisable at end of year
    
    
    940,764
    
    $
    5.27
    
    
    290,659
    
    $
    4.25
    
    
    332,017
    
    $
    4.25


The
following table summarizes information concerning options outstanding and
exercisable at January 2, 2005:





WeightedAverage
    
    Weighted
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    AverageRange
      of
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise
      Price
    
    Outstanding
    
    Life
      Years
    
    Price
    
    Exercisable
    
    Price$4.25
    
    
    
    
    
    277,414
    
    
    3.62
    
    $
    4.25
    
    
    277,414
    
    $
    4.25$5.70
    
    
    
    
    
    800,750
    
    
    8.00
    
    
    5.70
    
    
    533,750
    
    
    5.70$5.70
    
    
    
    
    
    864,000
    
    
    8.54
    
    
    5.70
    
    
    129,600
    
    
    5.70$4.25
      - $5.70
    
    
    
    
    
    1,942,164
    
    
    7.61
    
    
    5.49
    
    
    940,764
    
    
    5.27





60





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
14 - Employee Benefits**





Raytech
Corporation sponsors both defined benefit plans and defined contribution plans
for certain groups of employees. Raytech also provides a postretirement benefit
plan, which covers the hourly workers at the Crawfordsville, Indiana facility
and certain other employees who qualify for benefits based on age and years of
service.





In
connection with the Company's Chapter 11 proceedings, the Pension Benefit
Guaranty Corporation ("PBGC") filed certain motions claiming that the Company
was responsible for the funding and sponsorship of two Raymark pension plans.
The court ordered that the Company was liable for the maintenance and funding of
the underfunded pension plan obligations of Raymark. The Company, based on the
court's order, assumed the role of plan sponsor of the Raymark Plans upon
emergence from bankruptcy. The Company obtained a deferral of its funding
obligations for 2000. Since obtaining the deferral, the Company has made funding
payments to the Raymark Plans as required. As of January 2, 2005, the
outstanding balance of the deferred amounts was approximately $1.5 million.
During the second quarter of 2004, the Company executed a mortgage of its real
property located in Crawfordsville, Indiana to the PBGC, guaranteeing its
remaining deferred funding obligations of the Raymark Plans. At January 2, 2005,
the carrying value of the real property mortgaged was $4.9 million.





The
Raytech and Raymark plans are summarized as follows:





•
    The
      Raytech Corporation Retirement Plan for Hourly Employees provides defined
      benefits for the hourly employees located at the Crawfordsville, Indiana
      manufacturing facility.


•
    The
      German pension plan provides for defined benefits for certain salaried
      employees of Raytech’s German subsidiary.


•
    The
      Postretirement Benefit Plan provides for certain welfare benefits for
      hourly employees of the Crawfordsville, Indiana facility. In addition,
      certain other employees of Raytech are eligible for these benefits based
      on a combination of years of service and
age.


•
    The
      Raymark Industries, Inc. Retirement Plan for Hourly Paid Employees and the
      Retirement Plan for Hourly Paid Employees of Raymark Industries, Inc.
      Marshville Plant (the “Raymark Plans”) provide for defined benefits for
      former hourly employees of Raymark. The Raymark plans are
      frozen.


•
    The
      Company also sponsors certain defined contribution plans for salaried and
      hourly employees. The contributions are based on a percent of annual base
      compensation, the percentage ranging from 2% to 6%, dependent on the
      employee’s deferrals to the plan and the Company’s performance to the
      annual Business Plan. Company contributions to the defined contribution
      plans were $545, $532, $520 for 2004, 2003 and 2002,
      respectively.


•
    The
      Company also sponsors a Supplemental Executive Retirement Plan (“SERP”), a
      supplemental defined contribution plan pursuant to which the Company
      records expense for the benefit of certain members of senior management in
      the amounts of 2% of annual salary and bonus up to $200 and 8% of annual
      salary and bonus over $200. The Company recognized expense in the amount
      of $28, $36 and $21 related to the SERP, for 2004, 2003 and 2002,
      respectively.





On
December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization
Act of 2003. The act introduces a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. The current measurements of accumulated
postretirement benefit obligations and net periodic benefit costs do not reflect
any amount associated with the subsidy because the Company believes that the
benefits provided by the plan are not actuarially equivalent to the Medicare
Part D Standard Plan.




61


**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
14 - Employee Benefits (Continued)**





The
following information summarizes activities in the pension and postretirement
benefit plans:





**Raytech
      Pension Plan****January**
    
    **December****2,
      2005**
    
    **28,
      2003****Change
      in benefit obligations**Projected
      benefit obligations at beginning of year
    
    $
    9,178
    
    $
    6,844Service
      cost
    
    
    464
    
    
    429Interest
      cost
    
    
    548
    
    
    494Amendments
    
    
    —
    
    
    765Actuarial
      loss
    
    
    500
    
    
    804Benefits
      paid
    
    
    (188
    )
    
    (158
    )Projected
      benefit obligations at end of year
    
    $
    10,502
    
    $
    9,178Accumulated
      benefit obligation
    
    $
    10,502
    
    $
    8,544**Change
      in plan assets**Fair
      value of plan assets at beginning of year
    
    $
    5,882
    
    $
    5,474Actual
      return on plan assets
    
    
    262
    
    
    270Employer
      contribution
    
    
    816
    
    
    296Benefits
      paid
    
    
    (188
    )
    
    (158
    )Fair
      value of plan assets at end of year
    
    $
    6,772
    
    $
    5,882Funded
      status
    
    $
    (3,730
    )
    $
    (3,296
    )Unrecognized
      prior service cost
    
    
    644
    
    
    704Unrecognized
      actuarial loss
    
    
    2,305
    
    
    1,769Net
      amount recognized
    
    $
    (781
    )
    $
    (823
    )**Amounts
      recognized in the statements of financial position consist
      of:**Accrued
      benefit liability
    
    $
    (3,730
    )
    $
    (2,662
    )Intangible
      asset
    
    
    644
    
    
    704Accumulated
      other comprehensive loss
    
    
    2,305
    
    
    1,135Net
      amount recognized
    
    $
    (781
    )
    $
    (823
    )





**Weighted
      average assumptions used to determine year end benefit
      obligations**
 Discount
      rate
    
    
    5.75
    %
    
    6.00
    %Rate
      of compensation increase
    
    
    n/a
    
    
    n/a**Plan
      Assets**Guaranteed
      Investment Contract
    
    
    100
    %
    
    100
    %





**Weighted
average assumptions used to determine annual net periodic benefit
cost**





**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Discount
      rate
    
    
    6.00
    %
    
    6.50
    %
    
    7.00
    %Expected
      return on plan assets
    
    
    6.00
    %
    
    6.00
    %
    
    6.50
    %Rate
      of compensation increase
    
    
    n/a
    
    
    n/a
    
    
    n/a




62




**RAYTECH
      CORPORATION****NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**(in
      thousands, unless otherwise noted, except per share
  data)
  **Note
      14 - Employee Benefits (Continued)****Raytech
      Pension Plan (Continued)****Net
      Periodic Benefit Cost**
 ****
 **For
      the years ended**
    ********
    ****
    **January
      2,**
    ****
    **December
      28,**
    ****
    **December
      29,**
    ********
    ****
    **2005**
    ****
    **2003**
    ****
    **2002**Service
      cost
    
    $
    464
    
    $
    429
    
    $
    344Interest
      cost
    
    
    548
    
    
    494
    
    
    395Expected
      return on plan assets
    
    
    (372
    )
    
    (330
    )
    
    (315
    )Amortization
      of prior period service costs
    
    
    60
    
    
    60
    
    
    —Recognized
      actuarial loss
    
    
    74
    
    
    19
    
    
    —Total
      net periodic benefit cost
    
    $
    774
    
    $
    672
    
    $
    424
 
 Due to
the size of this plan, it was determined that the use of a guaranteed investment
contract would provide a reasonable return with a low risk. The overall yield in
2004 was 4.2%. In 2005, the Company intends to use one asset manager for both
the Raytech and Raymark pension plans.




The
Company expects to contribute $.7 million to the Raytech pension plan in 2005.





Benefits
expected to be paid are as follows:





2005
    
    $
    2582006
    
    
    2782007
    
    
    3192008
    
    
    3452009
    
    
    3812010-2014
    
    
    2,663





**Raytech
German Pension Plan**




The
Company's German subsidiaries have an unfunded defined benefit plan covering
certain employees.





**German
      Plan****January**
    
    **December****2,
      2005**
    
    **28,
      2003****Change
      in benefit obligations**Projected
      benefit obligations at beginning of year
    
    $
    4,067
    
    $
    3,177Service
      cost
    
    
    85
    
    
    72Interest
      cost
    
    
    229
    
    
    194Amendments
    
    
    —
    
    
    73Actuarial
      loss
    
    
    509
    
    
    6Benefits
      paid
    
    
    (125
    )
    
    (110
    )Translation
      adjustment
    
    
    379
    
    
    655Projected
      benefit obligations at end of year
    
    $
    5,144
    
    $
    4,067Accumulated
      benefit obligation
    
    $
    4,944
    
    $
    3,900




63





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
      14 - Employee Benefits (Continued)****Raytech
      German Pension Plan (Continued)**
  **January**
    
    **December****2,
      2005**
    
    **28,
      2003****Change
      in plan assets**Fair
      value of plan assets at beginning of year
    
    $
    —
    
    $
    —Actual
      return on plan assets
    
    
    —
    
    
    —Employer
      contribution
    
    
    125
    
    
    110Benefits
      paid
    
    
    (125
    )
    
    (110
    )Fair
      value of plan assets at end of year
    
    $
    —
    
    $
    —Funded
      status
    
    $
    (5,144
    )
    $
    (4,067
    )Unrecognized
      prior service cost
    
    
    —
    
    
    81Unrecognized
      actuarial loss
    
    
    1,286
    
    
    704Net
      amount recognized
    
    $
    (3,858
    )
    $
    (3,282
    )**Amounts
      recognized in the statements of financial position consist
      of:**Accrued
      benefit liability
    
    $
    (4,944
    )
    $
    (3,900
    )Accumulated
      other comprehensive loss
    
    
    1,086
    
    
    618Net
      amount recognized
    
    $
    (3,858
    )
    $
    (3,282
    )





**Weighted
      average assumptions used to determine year end benefit
      obligations**Discount
      rate
    
    
    5.00
    %
    
    5.75
    %Rate
      of compensation increase
    
    
    2.50
    %
    
    2.50
    %





**Weighted
average assumptions used to determine annual net periodic benefit
cost**





**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Discount
      rate
    
    
    5.75
    %
    
    6.00
    %
    
    7.00
    %Expected
      return on plan assets
    
    
    n/a
    
    
    n/a
    
    
    n/aRate
      of compensation increase
    
    
    2.50
    %
    
    2.50
    %
    
    2.50
    %





**Plan
Assets**





There are
no plan assets, as in Germany there are no minimum funding
requirements.





**Net
      Periodic Benefit Cost**
  **For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Service
      cost
    
    $
    85
    
    $
    72
    
    $
    75Interest
      cost
    
    
    229
    
    
    194
    
    
    154Amortization
      of prior service cost
    
    
    80
    
    
    —
    
    
    —Amortization
      of net actuarial loss
    
    
    25
    
    
    6
    
    
    47Total
      net periodic benefit cost
    
    $
    419
    
    $
    272
    
    $
    276





The
estimated pension contribution for 2005 is $.2 million.





The
functional currency for the German operations is the Euro. The amounts presented
above have been translated to U.S. dollars using period end rates for beginning
and ending asset and liability balances and period average rates for activity
during the periods.




64





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
      14 - Employee Benefits (Continued)****Raytech
      German Pension Plan (Continued)**Benefits
      expected to be paid are as follows:
  2005
    
    $
    1782006
    
    
    1882007
    
    
    1972008
    
    
    2072009
    
    
    2202010-2014
    
    
    1,788





**Postretirement
      Benefit Plan****January**
    
    **December****2,
      2005**
    
    **28,
      2003****Change
      in benefit obligations**Projected
      benefit obligations at beginning of year
    
    $
    19,709
    
    $
    16,587Service
      cost
    
    
    917
    
    
    684Interest
      cost
    
    
    1,323
    
    
    1,117Plan
      participants’ contributions
    
    
    29
    
    
    26Actuarial
      loss
    
    
    3,183
    
    
    1,931Benefits
      paid
    
    
    (579
    )
    
    (636
    )Projected
      benefit obligations at end of year
    
    $
    24,582
    
    $
    19,709**Change
      in plan assets**Fair
      value of plan assets at beginning of year
    
    $
    —
    
    $
    —Employer
      contribution
    
    
    550
    
    
    610Plan
      participants’ contribution
    
    
    29
    
    
    26Benefits
      paid
    
    
    (579
    )
    
    (636
    )Fair
      value of plan assets at end of year
    
    $
    —
    
    $
    —Funded
      status
    
    $
    (24,582
    )
    $
    (19,709
    )Unrecognized
      actuarial loss
    
    
    6,828
    
    
    4,007Net
      amount recognized
    
    $
    (17,754
    )
    $
    (15,702
    )**Amounts
      recognized in the statements of financial position consist
      of:**Accrued
      benefit liability
    
    $
    (17,754
    )
    $
    (15,702
    )





**Weighted
      average assumptions used to determine year end benefit
      obligations**Discount
      rate
    
    
    5.75
    %
    
    6.00
    %Rate
      of compensation increase
    
    
    5.00
    %
    
    5.00
    %**Assumed
      healthcare cost trend rates**Assumed
      healthcare cost trend rate for next year
    
    
    9.75
    %
    
    8.50
    %Rate
      at which cost is assumed to decline
    
    
    4.50
    %
    
    4.50
    %Year
      that plan reaches ultimate trend rate
    
    
    2012
    
    
    2012




65





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
14 - Employee Benefits (Continued)**




**Postretirement
Benefit Plan (Continued)**





**Weighted
average assumptions used to determine annual net periodic benefit
cost**




**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Discount
      rate
    
    
    6.00
    %
    
    6.50
    %
    
    7.00
    %Expected
      return on plan assets
    
    
    n/a
    
    
    n/a
    
    
    n/aRate
      of compensation increase
    
    
    5.00
    %
    
    5.00
    %
    
    5.00
    %
 ****
 **Net
Periodic Benefit Cost**
 
 **For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Service
      cost
    
    $
    917
    
    $
    684
    
    $
    587Interest
      cost
    
    
    1,323
    
    
    1,117
    
    
    1,004Amortization
      of net actuarial loss
    
    
    362
    
    
    109
    
    
    —Total
      net periodic benefit cost
    
    $
    2,602
    
    $
    1,910
    
    $
    1,591





The
Company expects to contribute $.9 million to the postretirement benefit plan in
2005.





Benefits
expected to be paid are as follows:





2005
    
    $
    9182006
    
    
    1,1192007
    
    
    1,2412008
    
    
    1,3972009
    
    
    1,5242010-2014
    
    
    2,094





For
measurement purposes, a 9.75% annual rate of increase per capita cost of covered
healthcare benefits was assumed for 2005. This rate was assumed to decrease
gradually to 4.50% through 2012 and remain at that level thereafter. 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:




**1
      Percentage Point**
    
    **1
      Percentage Point****Increase**
    
    **Decrease****2004**
    
    **2003**
    
    **2004**
    
    **2003**Effect
      on total service and interestcost
      components of expense
    
    $
    235
    
    $
    176
    
    $
    (203
    )
    $
    (154
    )Effect
      on accumulated post-retirement
      benefit obligations
    
    $
    2,131
    
    $
    1,609
    
    $
    (1,869
    )
    $
    (1,427
    )




66





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
      14 - Employee Benefits (Continued)****Raymark
      Pension Plans**
  **January**
    
    **December****2,
      2005**
    
    **28,
      2003****Change
      in benefit obligations**Projected
      benefit obligations at beginning of year
    
    $
    37,985
    
    $
    34,900Interest
      cost
    
    
    1,976
    
    
    2,194Actuarial
      loss
    
    
    145
    
    
    3,529Benefits
      paid
    
    
    (2,988
    )
    
    (2,638
    )Projected
      benefit obligations at end of year
    
    $
    37,118
    
    $
    37,985Accumulated
      benefit obligation
    
    $
    37,118
    
    $
    37,985**Change
      in plan assets**Fair
      value of plan assets at beginning of year
    
    $
    25,904
    
    $
    18,462Actual
      return on plan assets
    
    
    2,037
    
    
    3,208Employer
      contribution
    
    
    4,593
    
    
    6,872Benefits
      paid
    
    
    (2,988
    )
    
    (2,638
    )Fair
      value of plan assets at end of year
    
    $
    29,546
    
    $
    25,904Funded
      status
    
    $
    (7,572
    )
    $
    (12,081
    )Unrecognized
      actuarial loss
    
    
    11,152
    
    
    11,204Net
      amount recognized
    
    $
    3,580
    
    $
    (877
    )





**Amounts
recognized in the statements of financial position consist
of:**


Accrued
      benefit liability
    
    $
    (7,572
    )
    $
    (12,081
    )Accumulated
      other comprehensive loss
    
    
    11,152
    
    
    11,204Net
      amount recognized
    
    $
    3,580
    
    $
    (877
    )





**Weighted
      average assumptions used to determine year end benefit
      obligations**Discount
      rate
    
    
    5.25
    %
    
    5.50
    %Rate
      of compensation increase
    
    
    n/a
    
    
    n/a**Plan
      Assets**Equity
      securities
    
    
    54
    %
    
    55
    %Debt
      securities
    
    
    35
    %
    
    36
    %Other
    
    
    11
    %
    
    9
    %Total
    
    
    100
    %
    
    100
    %




67





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
14 - Employee Benefits (Continued)**




**Raymark
Pension Plans (Continued)**




**Weighted
average assumptions used to determine annual net periodic benefit
cost**





**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Discount
      rate
    
    
    6.00
    %
    
    6.50
    %
    
    7.00
    %Expected
      return on plan assets
    
    
    8.00
    %
    
    8.00
    %
    
    8.00
    %Rate
      of compensation increase
    
    
    n/a
    
    
    n/a
    
    
    n/a
  **Net
Periodic Benefit Cost**
 **For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Interest
      cost
    
    $
    1,976
    
    $
    2,194
    
    $
    2,268Expected
      return on plan assets
    
    
    (2,161
    )
    
    (1,616
    )
    
    (1,324
    )Recognized
      actuarial loss
    
    
    321
    
    
    288
    
    
    95Total
      net periodic benefit cost
    
    $
    136
    
    $
    866
    
    $
    1,039





The
allocation of investments by asset class is structured to balance asset growth
and manage risk. The overall yield in 2004 was 7.5%. In 2005, the Company
intends to use one asset manager for both the Raytech and Raymark pension plans.




The
expected long-term rate of return on plan assets represents the average rate
that the Company expects to earn over the long-term on the assets of the plan,
including those from dividends, interest income and capital appreciation. The
rate has been determined based on expectations regarding future rates of return
for the plan’s investment portfolio, with consideration given to the historical
rates of return for similar portfolios.




The
Company expects to contribute $1.3 million to the Raymark pension plan in 2005.




Benefits
expected to be paid are as follows:


2005
    
    $
    2,7132006
    
    
    2,7132007
    
    
    2,7332008
    
    
    2,7612009
    
    
    2,7442010-2014
    
    
    13,873




68





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
15 - Commitments**





The
Company leases space in Peoria, Illinois; Floral Park, New York; Troy, Michigan;
Leverkusen, Germany; Liverpool, England; Shanghai, China; Shelton, Connecticut;
and Sullivan, Indiana under operating leases. The Company also leases various
machinery and equipment under operating and capital leases. Rental expense
amounted to $1,585, $1,172 and $1,570 for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002, respectively.





The
approximate future minimum rental payments as of January 2, 2005 were as
follows:





2005
    
    $
    1,0512006
    
    
    7932007
    
    
    4002008
    
    
    2482009
    
    
    167After
      2009
    
    
    2,250$
    4,909





Items
under capital leases, which are included in the amounts presented above, are
$111, $80 and $15 due in 2005, 2006 and 2007, respectively.




As a
result of a facilities utilization review conducted during 2004, we have decided
to close our operations in Liverpool, England and to relocate our corporate
offices from Shelton, Connecticut to our Crawfordsville, Indiana facility. We
intend to vacate these leased facilities during 2005. The future minimum lease
payments presented above have not been reduced by any anticipated sublease
rentals or landlord concessions relating to vacating the Liverpool, England and
Shelton, Connecticut facilities.





**Note
16 - Comprehensive (Loss) Income**





The
components of and changes in accumulated other comprehensive (loss) income are
as follows:





**Foreign**
    
    **Minimum**
    
    **Accumulated****Currency**
    
    **Pension**
    
    **Other****Translation**
    
    **Liability**
    
    **Comprehensive****Adjustments**
    
    **Adjustments**
    
    **(Loss)
      Income**Balance
      December 30, 2001
    
    $
    (272
    )
    $
    (8,439
    )
    $
    (8,711
    )Changes
      during the year
    
    
    2,202
    
    
    (2,138
    )
    
    64Balance
      December 29, 2002
    
    
    1,930
    
    
    (10,577
    )
    
    (8,647
    )Changes
      during the year
    
    
    2,111
    
    
    (2,020
    )
    
    91Balance
      December 28, 2003
    
    
    4,041
    
    
    (12,597
    )
    
    (8,556
    )Changes
      during the year
    
    
    1,549
    
    
    (1,529
    )
    
    20Balance
      January 2, 2005
    
    $
    5,590
    
    $
    (14,126
    )
    $
    (8,536
    )





The
Company recorded a deferred tax asset of $797, $143 and $360 associated with the
additional minimum pension liability recorded for the Raytech and German pension
plans in 2004, 2003 and 2002, respectively. Due to the limitation on the
realizability of the deferred tax assets, the Company recorded an increase to
the valuation allowance for the portion of the deferred tax asset related to the
Raytech plan.




The accumulated other comprehensive (loss) income
related to the additional minimum pension liability is net of taxes of $374,
$360 and $360 in 2004, 2003 and 2002, respectively.





The tax
benefits resulting from any tax deductions relating to the Raymark Plans have
been assigned to the PI Trust in accordance with the Plan, and therefore,
Raytech will not receive the future tax deduction. Accordingly, the future tax
deduction relating to the minimum pension liability for the fiscal years 2004,
2003 and 2002 was recorded as a deferred tax asset with a corresponding payable
to the PI Trust.




The
Company has not provided for the future tax deduction associated with foreign
currency translation adjustments due to management’s decision to permanently
reinvest the earnings of their foreign subsidiaries.





69





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
17 - Research and Development**





The
Company has research and development facilities in Crawfordsville, Indiana and
Morbach,Germany for development of new products, improvement of existing
production techniques and to provide technical service to the business units and
customers. Cost of research and new product development amounted to $6,545,
$7,207 and $7,318 for the fiscal years 2004, 2003 and 2002, respectively. All of
the aforementioned costs are included in selling, general and administrative
expenses in the Consolidated Statements of Operations.





**Note
18 - Concentration of Credit Risk**





Financial
instruments, which potentially subject the Company to concentration of credit
risk, consist principally of cash and cash equivalents and trade receivables.
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 are the automotive and heavy duty equipment markets and the related
aftermarkets within the United States, Europe and Asia. At January 2, 2005 and
December 28, 2003, the Company’s five largest uncollateralized receivables
represented approximately $10.3 million or 37.3% and $8.3 million or 33.7% of
the Company’s trade accounts receivable balance, respectively. Accounts
receivable due from the Company’s two largest customers Caterpillar and
DaimlerChrysler were $2.2 million and $3.3 million or 8.2% and 11.9% of the
Company’s trade receivable balance, respectively. The Company performs ongoing
credit evaluations of its customers' financial condition but does not require
collateral to support customer receivables. The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.





**Note
19 - Supplementary Financial Statement Information**




The
following table sets forth certain supplemental disclosures of balance sheet
information:





**January**
    
    **December****2,
      2005**
    
    **28,
      2003**Other
      current assetsNon-trade
      receivables
    
    $
    1,004
    
    $
    638Intangible
      pension asset
    
    
    644
    
    
    704Prepaid
      insurance
    
    
    335
    
    
    249Other
      prepaid expense
    
    
    1,026
    
    
    561$
    3,009
    
    $
    2,152Accrued
      liabilitiesProperty
      taxes
    
    $
    1,984
    
    $
    3,771Wages
      and other compensation and related taxes
    
    
    6,656
    
    
    6,421Severance
      related to 2004 restructure programs
    
    
    2,179
    
    
    —Income
      taxes payable
    
    
    3,079
    
    
    2,713Employee
      benefits
    
    
    2,811
    
    
    2,826Environmental
      cleanup
    
    
    500
    
    
    6,174Professional
      fess
    
    
    1,400
    
    
    810Equity
      holders settlement
    
    
    591
    
    
    —Deferred
      revenue
    
    
    662
    
    
    —Other
    
    
    3,948
    
    
    3,921$
    23,810
    
    $
    26,636




70




**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
19 - Supplementary Financial Statement Information (Continued)**




The
activity in the allowance for bad debts, deducted in the balance sheet from
trade accounts receivable, was as follows:





**For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Beginning
      balance
    
    $
    1,250
    
    $
    824
    
    $
    729Provisions
    
    
    538
    
    
    454
    
    
    239Charge-offs
    
    
    (326
    )
    
    (28
    )
    
    (144
    )Ending
      balance
    
    $
    1,462
    
    $
    1,250
    
    $
    824
  The
      following table sets forth certain detail of the components of other
      income (expense) as presented on theConsolidated Statements of
      Operations:
  **For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Interest
      income
    
    $
    163
    
    $
    165
    
    $
    342Loss
      on disposal of equipment
    
    
    (504
    )
    
    (1,443
    )
    
    (91
    )Equity
      holders settlement
    
    
    (591
    )
    
    —
    
    
    —Environmental
      costs
    
    
    (967
    )
    
    (276
    )
    
    (412
    )Other
      income, net
    
    
    389
    
    
    570
    
    
    690$
    (1,510
    )
    $
    (984
    )
    $
    529
  The
      following table sets forth certain supplemental disclosures of cash flow
      information:
  **For
      the years ended****January
      2,**
    
    **December
      28,**
    
    **December
      29,****2005**
    
    **2003**
    
    **2002**Cash
      paid during the year for:Income
      taxes
    
    $
    1,401
    
    $
    1,582
    
    $
    1,874Interest
    
    
    2,406
    
    
    1,792
    
    
    746Other
      non-cash activities:PP&E
      in accounts payable or under capital lease
    
    
    2,322
    
    
    1,399
    
    
    933Minimum
      pension liability
    
    
    1,526
    
    
    2,020
    
    
    2,498


71





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)





**Note
20 - Related Parties**





Raymark
currently owns, through its court appointed bankruptcy trustee, approximately
40% of the common stock of APC, a subsidiary of the Company. On March 21, 2005,
the Company, through its majority owned subsidiary, APC, purchased shares of
APC, owned by Raymark, in exchange for a ten-year unsecured promissory note of
$7.2 million. See Note 22.




Approximately
83% of Raytech’s common stock is owned by the PI Trust. Since the majority of
Raymark’s creditors are asbestos-related claimants, it is anticipated that the
assets of Raymark will ultimately be transferred to the PI Trust established for
those same claimants. Raytech directors, Richard Lippe and Archie Dykes, are
Trustees of the PI Trust and Raytech director Robert Carter is the
court-appointed Legal Representative of future claimants under the PI Trust.




During
1998 and 1997, the Company purchased yarn from Universal Friction Composites
(“UFC”), a company that is in bankruptcy, which was consolidated with the
Raymark bankruptcy in January 2002. With the majority of the creditors of UFC
being asbestos-related claimants, it is anticipated that the assets of UFC will
be transferred to the PI Trust. At January 2, 2005 and December 28, 2003, $246
is included in accounts payable relating to these purchases. In 1998, the
Company acquired manufacturing equipment from UFC for $1,051, of which $907 is
included in accounts payable at January 2, 2005 and December 28, 2003,
respectively.




Upon
emergence from bankruptcy, the Company committed to backstop the Raymark court
appointed trustee for professional fees in the event that the Raymark court
appointed trustee has insufficient recovery funds for such purposes up to $1.0
million. At January 2, 2005 the Company has $1.0 million included in accrued
liabilities related to this commitment.




On
October 27, 2004, the Bankruptcy Court approved a settlement of the Equity
Holders litigation (see Note 9 for further explanation of the Equity Holders
Litigation). The payments required under the settlement were $.6 million, which
were paid by the Company during the fourth quarter of 2004. The payment of these
costs was funded by the PI Trust. The Company has recorded an accrued liability
for this amount at January 2, 2005.





Also see
discussion regarding Raymark in Note 1.





**Note
21 - Summarized Quarterly Financial Data - Unaudited**




**2004
      Fiscal Quarters Ended****March
      28**
    
    **June
      27**
    
    **September
      26**
    
    **January
      2**Net
      sales
    
    $
    56,598
    
    $
    58,405
    
    $
    53,984
    
    $
    58,326Gross
      profit
    
    
    11,059
    
    
    12,529
    
    
    8,914
    
    
    8,433Income
      (loss) before incometaxes
      and minority interest
    
    
    2,435
    
    
    1,382
    
    
    (2,469
    )
    
    (1,571
    )Net
      income (loss)
    
    
    1,351
    
    
    57
    
    
    (3,269
    )
    
    (889
    )Basic
      and dilutedincome
      (loss) per share
    
    
    .03
    
    
    .00
    
    
    (.08
    )
    
    (.02
    )Market
      range:High
    
    
    3.88
    
    
    3.35
    
    
    2.01
    
    
    2.08Low
    
    
    3.32
    
    
    1.45
    
    
    1.20
    
    
    1.62




During
the third quarter of 2004, the Company recorded costs related to its domestic
reorganization of $.7 million and cost related to the settlement of a lawsuit of
$.6 million.





During
the fourth quarter of 2004, the Company recorded restructuring costs of $5.1
million as more fully described in Note 3. Additionally, during the fourth
quarter of 2004, the Company recognized other income of $6.1 million related to
the reduction of the deferred payable to the PI Trust as a result of the
establishment of a valuation allowance against the deferred income tax asset
that will inure to the benefit of the PI Trust, partially offset by an increase
to the short-term payable to the PI Trust due to the increase in prior years
refundable federal income taxes that will also inure to the benefit of the PI
Trust.




72





**RAYTECH
CORPORATION**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**


(in
thousands, unless otherwise noted, except per share data)




**Note
21 - Summarized Quarterly Financial Data - Unaudited (Continued)**





**2003
      Fiscal Quarters Ended****March
      30**
    
    **June
      29**
    
    **September
      28**
    
    **December
      28**Net
      sales
    
    $
    55,735
    
    $
    54,093
    
    $
    47,878
    
    $
    48,159Gross
      profit
    
    
    8,885
    
    
    8,136
    
    
    5,537
    
    
    3,568Income
      (loss) before incometaxes
      and minority interest
    
    
    384
    
    
    (1,906
    )
    
    15,124
    
    
    (52,671
    )Net
      loss
    
    
    (73
    )
    
    (1,539
    )
    
    (17,066
    )
    
    (47,765
    )Basic
      and dilutedincome
      (loss) per share
    
    
    .00
    
    
    (.04
    )
    
    (.41
    )
    
    (1.14
    )Market
      range:High
    
    
    7.22
    
    
    8.20
    
    
    4.85
    
    
    3.94Low
    
    
    4.15
    
    
    3.00
    
    
    3.23
    
    
    3.15





During
the fiscal quarter ended December 28, 2003, the Company recorded certain
adjustments that specifically impacted the comparability of the quarterly
results. The most significant of which was a charge of $48.8 million for the
impairment of goodwill and other intangible assets of $37.8 million and an
impairment charge to long-lived assets of $11.0 million. Further, the Company
recorded an inventory reserve of $1.2 million related to certain parts that are
sold below the cost of production. In addition, a reversal of $1.9 million for
an over-accrual of property taxes was recorded.




During
the fiscal quarter ended September 28, 2003, the Company recognized income of
$23.7 million and a corresponding amount in the income tax provision related to
the reduction of the deferred payable to the PI Trust as a result of the
establishment of a valuation allowance of an equal amount against the deferred
income tax asset that will inure to the benefit of the PI Trust in accordance
with the Tax Assignment and Assumption Agreement.





**Note
22 - Subsequent Event**





On March
21, 2005, the Company, through its majority owned subsidiary, APC, purchased
shares of APC owned by Raymark. The transaction increased the Company’s indirect
ownership of APC from approximately 57% of its outstanding common stock to
approximately 96% of its outstanding common stock.




APC
purchased 41,904 shares of APC common stock that were owned by Raymark, and
in payment therefor, APC issued a ten year unsecured subordinated promissory
note in the initial principal amount of $7.2 million (the “Note”).





The Note
is subordinated to APC’s existing and future senior indebtedness and will bear
interest at an annual rate of 8% payable quarterly; one-half of which is payable
in cash and one-half of which is payable, at APC’s option, in either cash or by
increasing the outstanding principal amount of the Note. Principal payments on
the Note are due on each annual anniversary of the issue date of the Note,
beginning in 2011, at an annual rate of 3% of the then outstanding principal
balance, with a final payment in full in 2015. APC may redeem the Note, in whole
or in part, at any time without premium or penalty. In addition to certain
financial reporting requirements, the Note contains net worth and current ratio
covenants as well as merger and asset sale limitations, which if not met could
cause an event of default permitting the holder of the Note to accelerate the
repayment of the entire principal amount and all accrued interest then
outstanding under the Note.




73





**Report
of Registered Public Accounting Firm**




To the
Board of Directors and Shareholders


of
Raytech Corporation:





In our
opinion, the consolidated financial statements listed in the index appearing
under Item 8 on page 30 present fairly, in all material respects, the financial
position of Raytech Corporation and its subsidiaries (the “Company”) at January
2, 2005 **** and
December 28, 2003, and the results of their **** operations
and their **** cash
flows for each of the three fiscal years in the period ended January 2, 2005 in
conformity with accounting principles generally accepted in the United States of
America. 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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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 our opinion.





**PricewaterhouseCoopers
LLP**


Hartford,
Connecticut


April 18,
2005





74





**Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure**




Not
applicable




**Item
9a. Controls and Procedures**





(a)
    Based
      on an evaluation, as of the end of the period covered by this report, of
      the effectiveness of the design and operation of the Company’s disclosure
      controls and procedures, which evaluation was made under the supervision
      and with the participation of management, including the Company’s
      principal executive officer and principal financial officer, the Company’s
      principal executive officer and principal financial officer have each
      concluded that such disclosure controls and procedures are effective in
      ensuring that information required to be disclosed by the Company in
      reports that it files under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in Securities
      and Exchange Commission rules and forms.


(b)
    There
      has been no change during the quarter ended January 2, 2005 in the
      Company’s internal controls over financial reporting that has materially
      affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.





**Item
9b. Other Information**




None.





75





**PART
III**


**Item
10. Directors and Executive Officers of the Registrant**





**Directors**





Set forth
below are the names of all directors, together with their ages as of March 15,
2005, principal occupations and business experience during the last five years,
present directorships, and the year each first became a director. John H. Laeri,
Jr., who served as a director from 2001 through 2004, died in February 2005.





**Principal
      Occupation**
    ********
    ****
    **Business
      Experience**
    ********
    ****
    **During
      Last 5 Years**
    **First******
    ****
    **and
      Present**
    **Became****Name**
    **Age**
    **Directorships**
    **Director**Robert
      F. Carter
    59
    Attorney,
      Carter & Civitello
    2001Archie
      R. Dykes
    74
    Director,
      Midas International,
    2002Inc.
      and PepsiAmericas, Inc.Chairman
      and Chief ExecutiveOfficer,
      Fleming Companies, Inc.,a
      food distribution company,from
      2003 to 2004; Chairman andChief
      Executive Officer ofCapital
      City Holdings, Inc.,an
      investment company, from1988
      to 2003 and Chairman in 2004David
      N. Forman
    67
    President,
      DBL Land
    2002Company,
      a real estatedeveloperStanley
      J. Levy
    70
    Attorney,
      Levy, Phillips
    2001&
      Konigsberg LLPChairman
      of the BoardRichard
      A. Lippe
    66
    Attorney,
      Meltzer, Lippe,
    2002Goldstein
      & Breitstone, P.C.Gene
      Locks
    67
    Attorney,
      Locks Law Firm
    2001John
      J. Robbins
    65
    Accountant,
      retired
    2003partner
      of KennethLeventhal
      & Co.;Director
      and member ofthe
      Audit Committee ofHovnanian
      Enterprises, Inc.,since
      2001




76


**Directors’
Compensation**


The
      directors’ compensation includes the following annual
      retainers:
  Chairman
      of the Board Retainer
    
    $
    150,000Other
      Directors Retainer
    
    
    30,000Additional
      Audit Committee Chair Retainer
    
    
    15,000Additional
      Other Committee Chair Retainer
    
    
    7,500Additional
      Audit Committee Member (Non-Chair) Retainer
    
    
    6,000Additional
      Other Committee Member (Non-Chair) Retainer
    
    
    3,500





In
addition, each director receives $1,500 for each Board of Directors meeting
attended and $1,500 for each committee meeting attended. There is no minimum
attendance rule and any director that misses all meetings would receive the
annual retainer but no meeting fees.





**Audit
Committee**





Raytech
has a standing Audit Committee, consisting of directors John J. Robbins
(Chairman), David N. Forman and Gene Locks, established by the Board of
Directors for the purpose of overseeing the accounting and financial reporting
processes and audits of the financial statements of Raytech. The Audit Committee
complies with the corporate governance rules of the New York Stock Exchange
(“NYSE”) applicable to Audit Committees and all of its members are
“independent,” as defined in the NYSE Listing Standards.





**Audit
Committee Financial Expert**





The Board
of Directors has determined that it has at least one “audit committee financial
expert,” as defined in Regulation S-K of the Securities and Exchange Commission
(“SEC”), serving on its Audit Committee. The Board of Directors has determined
that the Chairman of the Audit Committee, John J. Robbins, is an audit committee
financial expert and that Mr. Robbins is “independent,” as defined in NYSE
Listing Standards.




77





**Executive
Officers**





Set forth
below are the names of all current “executive officers”, of which the Company
has only four, including the CEO, together with their ages as of March 31, 2005,
their principal occupations and business experience during the last five years,
and the year in which each first became an officer. Mr. Butz and Mr. Klee are
officers of subsidiaries of the Company and are included in the table and
elsewhere in this report because they may be deemed to be “executive officers”
of the Company under applicable rules of the SEC.





****
    **First
      Became****Officer
      of Company****Name**
    **Age**
    **Positions
      Held**
    **or
      Subsidiary**Larry
      W. Singleton
    54
    President
      and
    2004Chief
      ExecutiveOfficer
      (1)John
      B. Devlin
    53
    Vice
      President,
    1998Treasurer
      and ChiefFinancial
      OfficerJohn
      A. Butz
    53
    Chief
      Operating Officer,
    1990North
      AmericanOperations
      since 2004;prior
      thereto, Presidentof
      subsidiaries in theAftermarket
      SegmentAlfred
      Klee
    58
    Managing
      Director,
    1991International
      Operationssince
      2004; prior thereto,Managing
      Director ofsubsidiaries
      in the DryFriction
      Segment





(1) Mr.
Singleton is not an employee of the Company. Mr. Singleton has been a principal
in AlixPartners LLC since 2004. AlixPartners recommended Mr. Singleton to the
Board of Directors as an interim President and Chief Executive Officer.
AlixPartners provides operational and financial consulting services to Raytech.
Before becoming a principal in AlixPartners in February, 2004, Mr. Singleton was
a Director of Safety-Kleen Corp. from August 2002 to December 2003, Executive
Vice President and Chief Financial Officer of Safety-Kleen Corp. from November
2001 to December 2003, and Senior Vice President and Chief Financial Officer of
that company from August 2000 to November 2001. Before joining Safety-Kleen
Corp. Mr. Singleton was Executive Vice President of Gulf States Steel, Inc. from
February 1999 to July 2000. From January 2000 through January 2001, Mr.
Singleton served as an investment committee member to Revitalizacni Agentura,
a.s., a subsidiary of the Czech Republic’s national bank, formed to assist the
Czech government in restructuring numerous industrial companies in anticipation
of entering the European Union. Mr. Singleton has been a Director of The Thaxton
Group, Inc., a sub-prime lender, since January, 2004. ****





78





**Item
11. Executive Compensation**




**Summary
Compensation Table** **:**





The
following Summary Compensation Table identifies compensation paid for 2004 and
the two prior years to the Chief Executive Officer, the former Chief Executive
Officer, and the four other “executive officers” of the Company as of January 2,
2005.





Long-TermAnnual
      Compensation
    
    Compensation
    
    All
      OtherName/
    
    
    
    Salary
    
    Bonus
    
    Other
    
    Awards
    
    Payouts
    
    CompensationPosition
    
    Year
    
    ($)
    
    ($)
    
    ($)(1)
    
    Options
      #
    
    LTIP
      ($)
    
    ($)(2)Larry
      W. Singleton(3)
    
    
    2004
    
    
    (3
    )
    
    (3
    )
    
    (3
    )
    
    (3
    )
    
    (3
    )
    
    (3
    )President
      and Chief
    
    
    2003
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Executive
      Officer
    
    
    2002
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Albert
      A. Canosa(4)
    
    
    2004
    
    
    196,332
    
    
    —
    
    
    14,282
    
    
    —
    
    
    —
    
    
    477,728Former
      Chief
    
    
    2003
    
    
    402,784
    (5)
    
    —
    
    
    30,616
    
    
    800,000
    
    
    —
    
    
    19,828Executive
      Officer
    
    
    2002
    
    
    321,352
    
    
    —
    
    
    39,575
    
    
    —
    
    
    —
    
    
    19,204John
      B. Devlin
    
    
    2004
    
    
    224,308
    
    
    25,000
    
    
    19,117
    
    
    —
    
    
    —
    
    
    4,385Vice
      President,
    
    
    2003
    
    
    214,424
    
    
    —
    
    
    22,951
    
    
    267,000
    
    
    —
    
    
    4,359Treasurer
      and
    
    
    2002
    
    
    187,377
    
    
    —
    
    
    29,172
    
    
    —
    
    
    —
    
    
    3,790Chief
      FinancialOfficerJohn
      A. Butz
    
    
    2004
    
    
    200,154
    
    
    84,000
    
    
    20,303
    
    
    —
    
    
    —
    
    
    55,406Chief
      Operating
    
    
    2003
    
    
    179,990
    
    
    2,000
    
    
    12,215
    
    
    118,000
    
    
    —
    
    
    349Officer,
      North
    
    
    2002
    
    
    173,400
    
    
    2,000
    
    
    11,879
    
    
    —
    
    
    —
    
    
    331AmericanOperationsAlfred
      Klee(6)
    
    
    2004
    
    
    267,895
    
    
    115,039
    
    
    14,516
    
    
    —
    
    
    —
    
    
    2,825Managing
      Director,
    
    
    2003
    
    
    208,526
    
    
    91,815
    
    
    11,283
    
    
    140,000
    
    
    —
    
    
    2,564International
    
    
    2002
    
    
    163,383
    
    
    109,470
    
    
    8,587
    
    
    —
    
    
    —
    
    
    2,138OperationsEdgar
      P. DeVylder(7)
    
    
    2004
    
    
    208,638
    
    
    —
    
    
    12,808
    
    
    —
    
    
    —
    
    
    9,621Vice
      President,
    
    
    2003
    
    
    196,633
    
    
    —
    
    
    11,572
    
    
    267,000
    
    
    —
    
    
    752Administration,
    
    
    2002
    
    
    14,295
    
    
    —
    
    
    285
    
    
    —
    
    
    —
    
    
    —General
      Counseland
      Secretary





(1)
    The
      numbers stated under “Other Annual Compensation”
  include:


a.
    the
      Company’s contributions to Messrs. Canosa, Devlin, Butz, and DeVylder
      under its employee 401(k) plan in the amounts of $6,629, $8,200, $7,745
      and $8,200, respectively, for 2004; $8,000, $7,518, $7,058, and $7,659,
      respectively, for 2003; and $8,000, $6,937, $6,800, and $0, respectively,
      for 2002.


b.
    the
      Company’s contributions to the Senior Executive Retirement Plan, a
      supplemental defined contribution plan for senior management (“SERP”), for
      the benefit of Messrs. Canosa, Devlin, Butz and DeVylder in the amounts of
      $3,315, $7,764, $10,440, and $4,608, respectively, for 2004; $19,666,
      $4,980, $3,529, and $3,913, respectively, for 2003; and $12,908, $3,748,
      $3,400, and $285, respectively, for
2002.


c.
    country
      club dues for Mr. Butz of $468 for 2004, for Mr. Devlin and Mr. Butz of
      $1,713 and $457, respectively, for 2003 and for Messrs. Canosa, Devlin and
      Butz of $7,764, $10,414 and $415, respectively, for
  2002.


d.
    the
      value of personal use of company cars of $4,338, $3,154, $1,650, and
      $14,516 for Messrs. Canosa, Devlin, Butz, and Klee, respectively, during
      2004; $2,950, $8,741, $1,170 and $11,283 for Messrs. Canosa, Devlin, Butz,
      and Klee, respectively, for 2003; and $10,903, $8,074, $1,264, and $8,587
      for Messrs. Canosa, Devlin, Butz, and Klee, respectively, for
      2002.





79




(2)
    The
      numbers stated under “All Other Compensation”
include:


a.
    executive
      life and disability insurance for Messrs. Canosa, Devlin, Butz and
      DeVylder of $19,090, $4,385, $404, and 815, respectively, for 2004;
      $19,828, $4,360, $349, and $752, respectively, for 2003; and $19,204,
      $3,790, $331, and $0, respectively, for
2002.


b.
    executive
      life insurance for Mr. Klee of $2,684 for 2004, $2,435 for 2003 and $2,031
      for 2002; and accident insurance for Mr. Klee of $141 for 2004, $128 for
      2003 and $107 for 2002.


c.
    reimbursement
      of relocation-related expenses of Mr. Butz of
$55,002.


d.
    for
      Mr. Canosa, a severance payment of $423,323, and a payout of his SERP
      account of $35,315.





(3)
    Mr.
      Singleton is a principal in AlixPartners LLC and is not an employee of the
      Company. In 2004, the Company entered into an agreement with AlixPartners
      to pay it $440 per hour, not to exceed $85,000 per month, for Mr.
      Singleton’s services. The Company paid a total of $537,700 to AlixPartners
      for Mr. Singleton’s services in 2004 and $28,836 in travel and other
      expenses, and did not pay any direct compensation to Mr. Singleton. In
      January 2005, the Company paid an additional success fee of $200,000 to
      AlixPartners based on Mr. Singleton’s activities during
    2004.





(4)
    Mr.
      Canosa’s employment terminated in May,
2004.





(5)
    This
      number includes a retroactive salary adjustment of $45,000 for 2002 that
      was paid in March 2003.





(6)
    All
      amounts paid to Mr. Klee were paid in Euros and are converted to U.S.
      dollars in the above table at the applicable average annual rate during
      the year.





(7)
    Mr.
      DeVylder was hired in December 2002 and terminated his employment in
      January 2005. A severance payment of $155,700 and a payment of his SERP
      account of $8,806 were made in 2005, and are not included in the
      table.





Mr.
Devlin and Mr. Butz each have, and Mr. DeVylder had, a termination pay agreement
that applies if (a) the Company terminates his employment (except where he is
terminated for Cause, as defined), (b) he terminates his employment due to (i) a
significant diminution in his position, authority, duties or responsibilities,
(ii) a material reduction in base salary, opportunity to earn annual bonuses
other than as a result of adverse changes in the Company’s operating results, or
other compensation or benefits, or (iii) relocation of his place of business by
more than 35 miles from his previous place of business without his consent, or
(c) his employment is terminated by death or disability (a “Qualifying
Termination”). These agreements remain in effect for one year after a change in
control of the Company, which is defined as the Company ceasing to be a public
company, any person acquiring more than 25% of the outstanding common stock, or
the shareholders approving a merger in which the Company is not the surviving
entity or a sale of all or substantially all of the assets of the Company or of
the Company and its majority-owned subsidiaries. If the termination pay becomes
applicable, the Company will pay the executive 1.5 times the sum of (i) his
annual base salary then in effect plus (ii) the average annual bonus awarded to
him for the preceding three years, and continue his medical, life and other
benefits for 2.5 years or until he obtains coverage from another employer.
One-half of the severance payment is subject to mitigation, i.e. will not be
paid to the extent the executive has been paid for other employment.




In 2000,
the Company entered into an employment agreement with Mr. Klee for a term
currently expiring in December 2006. Unless the Company gives written notice of
termination at least 18 months prior to the expiration date, the contract will
be automatically extended for an additional year until the year Mr. Klee reaches
the age of 65. This agreement remains in effect upon a change of control of the
Company. If Mr. Klee’s employment is terminated by the Company prior to the
contract expiration date, he is entitled to payment of his base salary until
expiration of the contract term, Mr. Klee is also subject to a non-competition
clause after termination of his employment prior to age 65, for which the
Company must pay him 50% of his base salary unless the Company gives Mr. Klee
one year’s written notice of a disclaimer of the non-competition restraint or
unless he breaches the non-competition provision. In the event of Mr. Klee’s
death, his heirs are entitled to a payment of his salary for an additional six
months.





80




**Option
Grants in Last Fiscal Year**





The
Company granted no options or stock appreciation rights in the last fiscal
year.





**Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values**





UnexercisedUnexercised
    
    In-the-MoneyShares
    
    
    
    Options
    
    OptionsAcquired
    
    
    
    at
      1/2/05
    
    at
      1/2/05On
    
    Value
    
    Exercisable/
    
    Exercisable/Exercise
    
    Realized
    
    Unexercisable
    
    UnexercisableName
    
    (#)
    
    ($)
    
    (#)
    
    ($)Larry
      W. Singleton
    
    -0-
    
    -0-
    
    -0-
    
    -0-/-0-Albert
      A. Canosa
    
    -0-
    
    -0-
    
    304,131/0
    
    -0-/-0-John
      B. Devlin
    
    -0-
    
    -0-
    
    133,500/133,500
    
    -0-/-0-John
      A. Butz
    
    -0-
    
    -0-
    
    43,869/88,500
    
    -0-/-0-Alfred
      Klee
    
    -0-
    
    -0-
    
    47,000/105,000
    
    -0-/-0-Edgar
      P. DeVylder
    
    -0-
    
    -0-
    
    133,500/133,500
    
    -0-/-0-





**Section
16(a) Beneficial Ownership Reporting Compliance** ****




Based
upon a review of the filings furnished to the Company and on representations
from its directors and executive officers, the directors and executive officers
of the Company and holders of more than 10% of the Company’s Common Stock
complied with all filing requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, during fiscal year 2004.





**Code
of Ethics**





Raytech
has adopted a Code of Business Conduct and Ethics that applies to all directors,
officers and employees, including the principal executive officer, principal
financial officer, principal accounting officer or controller and persons
performing similar functions. The Code of Business Conduct and Ethics is posted
on the Company’s Website, www.raytech.com, and is available in print to any
shareholder by contacting the General Counsel, Raytech Corporation, Suite 295,
Four Corporate Drive, Shelton, CT 06484.




81





**Performance
Table**




The
following table compares the Company'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, RUSSELL 2000
INDEX* AND DOW JONES AUTO PARTS INDUSTRY GROUP INDEX*




Dow
      Jones AutoRussell
      2000
    
    Parts
      IndustryRaytech
    
    Index
    
    Group
      Index1999
    
    $
    100
    
    $
    100
    
    $
    1002000
    
    
    65
    
    
    96
    
    
    712001
    
    
    74
    
    
    97
    
    
    912002
    
    
    186
    
    
    76
    
    
    812003
    
    
    97
    
    
    110
    
    
    1132004
    
    
    54
    
    
    129
    
    
    117


*Based on
closing index on the last trading day of the calendar year.




Assumes
$100 invested on December 31, 1999 in Raytech common stock, Russell 2000 Index,
and Dow Jones Auto Parts Industry Group Index.





82





**Compensation
Committee Report on Executive Compensation**





The
Compensation Committee of the Board of Raytech, currently consisting of two
directors, makes this report of its compensation policies applicable to the
“executive officers” named in the Compensation Table and the basis for the
former 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 Raytech 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 Raytech
and its stockholders attributable to excellence in management and performance.




Pursuant
to its charter, the Compensation Committee recommends to the Board, for its
approval, the future compensation levels of the CEO and executive officers of
the Company. To accomplish the compensation objectives, all salaried positions,
including the former Chief Executive Officer, were graded to reflect the level
of responsibility inherent in the position and its market value. The grading
took into account the following factors: organizational relationships, knowledge
requirements, impact potential on corporate profitability, scope of monetary
responsibility, scope of 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, and retains
full discretionary authority in establishing executive
compensation.




Mr.
Singleton, the acting CEO, is a principal in AlixPartners LLC and is not an
employee of the Company. In 2004, the Company entered into an agreement with
AlixPartners to pay it $440 per hour, not to exceed $85,000 per month, for Mr.
Singleton’s services. The Company did not pay any direct compensation to Mr.
Singleton. In January 2005, the Company paid an additional success fee of
$200,000 to AlixPartners based on Mr. Singleton’s activities during 2004. The
Board of Directors is currently negotiating with Mr. Singleton the terms of a
permanent appointment as President and Chief Executive Officer.




In 2002,
the base salary for executive officers was 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 was Hewitt Associates Total
Compensation Measurement Survey, 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 Raytech and the prestige of the sponsoring firm. Of all industry
groups of corporations set forth in the Total Compensation Measurement Survey,
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 Raytech. The Committee also obtained 2001 compensation data
from Watson Wyatt Worldwide, compensation consultants. In 2002, the base
salaries of executive officers, including the former Chief Executive Officer,
were found to be generally low compared to those in the reference group in the
survey. Special pay practice surveys may be conducted if the Compensation
Committee deems it appropriate in its discretion but no such survey has been
conducted with respect to executive officer salaries within the last three
years. In 2003 and 2004, the Committee determined that executive officers would
not be eligible for automatic merit salary increases.




To
strengthen the executives’ commitment to improvement of the financial
performance of Raytech, the amount available for distribution as bonuses in any
year was determined by earnings before tax and other financial measures at the
Board’s discretion. Generally, during the years 2002, 2003 and 2004, the Board
required that Raytech achieve a stipulated earnings before tax goal before
targeted bonuses were paid.




None of
the annual bonus plan’s stipulated earnings before tax goals for the 2002, 2003
and 2004 fiscal years were achieved. However, in each of those years,
discretionary bonuses were approved by the Committee and paid to certain of the
executive officers based on the profitability of their business unit or their
individual performance and contribution to key corporate objectives during the
year, as shown in the Compensation Table. Specifically, in February 2005, the
Compensation Committee and the Board of Directors approved, subject to certain
conditions, the payment of bonuses to 66 senior managers of the Company,
including the executive officers listed in the Compensation
Table, in respect of their individual 2004 performance. The conditions to
payment have not been fully satisfied and these bonuses have not yet been paid.
In February 2005, the Committee and the Board also approved, subject to certain
conditions, a bonus plan for 76 senior managers of the Company, including the
executive officers listed in the Compensation Table, based on achievement of
individual, corporate and segment goals for 2005 to be specified in
advance.




83





In late
2002, the Board replaced a prior three-year strategic plan bonus plan with a
long-term employee stock option plan, pursuant to which the Board approved the
option grants to the named officers described below. The stock option program is
designed to (i) provide stockholder returns comparable to other high-performance
publicly traded companies; (ii) strengthen key management commitment to improve
the long-term financial performance of Raytech; (iii) provide key management
with a shareholder perspective; and (iv) focus key employee resources on
technology-driven growth.




Effective
January 1, 2003, the former Chief Executive Officer and the other named
executive officers were granted options to purchase the common stock of the
Company at the then market price of $5.70 per share, in the amounts set forth in
the table above. The grants were made in order to provide an additional
incentive for such individuals through the potential for appreciation of the
stock and to more closely align the financial interests of the executives with
those of the stockholders. No options have been granted since 2003.




Raytech’s
basic and matching contributions under the 401(k) defined contribution plan to
the executive officers, including the former 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, subject to IRS contribution and income limits. Only the
supplemental Company contribution is discretionary under the plan and if granted
is made to all participants. The supplemental Company contribution was not made
to any salaried participants for 2002, 2003 or 2004. In 2002, the Compensation
Committee approved and in 2003 the Company established the Supplemental
Executive Retirement Plan (“SERP”), pursuant to which the Company makes
supplemental contributions of 2% of salary plus bonus up to $200,000, and 8% of
salary and bonus over $200,000, to accounts for the benefit of the former CEO,
and certain executive officers as indicated in the footnotes to the Compensation
Table. The SERP is an unfunded deferred compensation plan designed to supplement
the 401(k) plan, and Company contributions vest on the same schedule as under
the 401(k) plan.




Raytech
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.





Compensation
      Committee
      
      Richard
      A. Lippe, Chairman
      Robert
      F. Carter


84





Compensation
Committee Interlocks and Insider Participation




Messrs.
Carter, Laeri, Locks and Lippe served as members of the Compensation Committee
in fiscal year 2004. None of such committee members (i) was, during fiscal year
2004, an officer or employee of the Company or any of its subsidiaries, (ii) was
formerly an officer of the Company or any of its subsidiaries, or (iii) had any
relationship requiring disclosure by the Company pursuant to any paragraph of
Item 404 of SEC Regulation S-K, except Mr. Lippe is a trustee and Mr. Carter is
the Legal Representative of the future claimants under the PI Trust, which has
the relationship with the Company described in Item 13, “Certain Relationships
and Related Transactions.”




No
executive officer served as an executive officer, director or member of a
compensation committee of any entity of which an executive officer is a member
of the Compensation Committee of the Company or the Company’s Board of
Directors.





**Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters**





Equity
      Compensation Plan InformationPlan
      Category
    
    Number
      of Securitiesto be Issued UponExercise
      ofOutstanding Options,Warrants and
      Rights
    
    Weighted
      AverageExercise Priceof
      OutstandingOptions, Warrantsand
      Rights
    
    Number
      of SecuritiesRemaining AvailableFor Future
      IssuanceUnder EquityCompensation
      Plans[Excluding SecuritiesReflected
      inColumn (a)](a)
    
    (b)
    
    (c)Equity
      compensationplans
      approved bysecurity
      holders
    
    
    1,942,164
    
    $
    5.49
    
    
    2,335,225Equity
      compensationplans
      not approvedby
      security holders
    
    
    —
    
    
    —
    
    
    —Total
    
    
    1,942,164
    
    $
    5.49
    
    
    2,335,225
  Security
Ownership





The
following table sets forth information as of March 31, 2005
concerning:





•
    beneficial
      ownership of Raytech’s common stock by persons beneficially owning more
      than 5% of the outstanding common stock, including the Raytech Personal
      Injury Trust;


•
    beneficial
      ownership of Raytech’s common stock by each of the directors and the
      “executive officers” named in the Summary Compensation Table (including
      certain former executive officers); and


•
    beneficial
      ownership of Raytech’s common stock by all directors and current
      “executive officers” as a group.





The
number of shares beneficially owned by each entity, person, director or
executive officer is determined under the rules of the SEC and the information
is not necessarily indicative of beneficial ownership for any other purpose.
Under such rules, beneficial ownership includes any shares as to which the
individual has the sole or shared voting power or investment power and also any
shares which the individual has the right to acquire as of May 31, 2005, 60 days
after March 31, 2005, through the exercise of any stock option or other right.
Unless otherwise indicated, each person has sole investment and voting power, or
shares such powers with his or her spouse, with respect to the shares set forth
in the following table.




85





Shares
      ofCommon
      Stock
    
    
    PercentBeneficially
      Owned
    
    
    Of
      Class (1)**Shareholders**Raytech
      Corporation Asbestos Personal Injury Settlement Trust
      (“PI Trust”)
    
    
    34,584,432
    (2
    )
    
    82.86
    %U.S.
      Environmental Protection Agency (“EPA”)
    
    
    2,300,868
    (2
    )
    
    5.51
    %**Non-Management
      Directors**Robert
      F. Carter
    
    
    -0-
    
    
    
    (3
    )Archie
      R. Dykes
    
    
    -0-
    (4
    )
    
    (3
    )David
      N. Forman
    
    
    -0-
    
    
    
    (3
    )Stanley
      J. Levy
    
    
    -0-
    
    
    
    (3
    )Richard
      A. Lippe
    
    
    -0-
    (4
    )
    
    (3
    )Gene
      Locks
    
    
    -0-
    
    
    
    (3
    )John
      J. Robbins
    
    
    -0-
    
    
    
    (3
    )**Named
      Executive Officers**Larry
      W. Singleton
    
    
    -0-
    
    
    
    (3
    )President
      and Chief Executive OfficerAlbert
      A. Canosa
    
    
    361,781
    (5
    )
    
    (3
    )Former
      Chief Executive OfficerJohn
      B. Devlin
    
    
    134,185
    (6
    )
    
    (3
    )Vice
      President, Treasurer
      and Chief Financial OfficerJohn
      A. Butz
    
    
    43,869
    (7
    )
    
    (3
    )Chief
      Operating Officer,
      North American OperationsAlfred
      Klee
    
    
    47,000
    (8
    )
    
    (3
    )Managing
      Director, International OperationsEdgar
      P. DeVylder
    
    
    133,500
    (9
    )
    
    (3
    )Former
      Vice President, Administration, General Counsel and
    SecretaryAll
      Directors and “Executive Officers” as a Group
    
    
    720,335
    (10
    )
    
    1.69





(1)
    Based
      on 41,737,306 shares of common stock outstanding, plus, in the case of
      persons holding options, shares subject to options that are exercisable
      within the next 60 days.


(2)
    The
      PI Trust’s ownership does not include the 2,300,868 shares owned by the
      Environmental Protection Agency, which the PI Trust has the right to
      acquire under certain circumstances pursuant to an agreement entered into
      at the time of the Company’s
reorganization.


(3)
    Less
      than 1%.


(4)
    Mr.
      Dykes and Mr. Lippe are trustees of the PI Trust and, in such capacity,
      share (with a third trustee) the power to vote and to dispose of the PI
      Trust’s shares.


(5)
    Total
      includes 326,363 shares which Mr. Canosa holds options to purchase that
      are exercisable within the next 60 days and which expire on June 1,
      2005.


(6)
    Includes
      133,500 shares which Mr. Devlin holds options to purchase that are
      exercisable within the next 60
days.


(7)
    Includes
      43,869 shares which Mr. Butz holds options to purchase that are
      exercisable within the next 60
days.


(8)
    Includes
      47,000 shares which Mr. Klee holds options to purchase that are
      exercisable within the next 60
days.


(9)
    Includes
      133,500 shares which Mr. DeVylder holds options to purchase that are
      exercisable within the next 60 days and which expire on April 2,
      2005.


(10)
    Total
      includes 684,232 shares which the “executive officers” as a group hold
      options to purchase that are exercisable within the next 60
      days.




86




**Item
13. Certain Relationships and Related Transactions**
  Raymark
owned, through its court appointed bankruptcy trustee, approximately 40% of the
common stock of APC, a subsidiary of the Company. On January 18, 2005, the
Company and APC entered into a Stock Purchase Agreement pursuant to which APC
will purchase the APC common stock owned by Raymark in exchange for a ten-year
unsecured subordinated promissory note in the original principal amount of $7.2
million. On March 21, 2005, APC completed the purchase of the shares and
delivered the note.
  Approximately
83% of Raytech’s common stock is owned by the PI Trust, which was created in the
reorganization to represent the interests of asbestos-related claimants. Since
the majority of Raymark’s creditors are asbestos-related claimants, it is
anticipated that the assets of Raymark will ultimately be transferred to the PI
Trust established for those same claimants. Raytech directors, Richard Lippe and
Archie Dykes, are Trustees of the PI Trust and Raytech director Robert Carter is
the court-appointed Legal Representative of future claimants under the PI Trust.
  In
connection with its Plan of Reorganization, in 2001, Raytech entered into the
Tax Benefits Agreement with the PI Trust. Pursuant to the Tax Benefits
Agreement, all tax benefits received by Raytech due to the reorganization are to
be passed onto the PI Trust as received. At January 2, 2005, the Company had tax
loss carryforwards of $107.0 million and tax credit carryforwards of $2.5
million. The net operating loss carryforwards are allocated between Raytech and
the PI Trust in the amounts of $25.0 million and $82.0 million, respectively.
Additionally, future payments to the PI Trust and others will create additional
tax deductions, which will inure to the benefit of the PI Trust in accordance
with the Tax Benefits Agreement. These include deductions for payments to the PI
Trust of tax benefits associated with the utilization of the net operating
losses created by the reorganization, and contributions made to the Raymark
pension plans.
  During
1998 and 1997, the Company purchased yarn from Universal Friction Composites
(”UFC” ), a company that is in bankruptcy which was consolidated with the
Raymark bankruptcy in January 2002. At January 2, 2005 and December 29, 2003,
$246 thousand was owed to UFC relating to these purchases. In addition, in 1998,
the Company acquired manufacturing equipment from UFC for $1,051 thousand, of
which $907 thousand was owed to UFC at January 2, 2005 and December 28, 2003.
With the majority of the creditors of UFC being asbestos-related claimants, it
is anticipated that a majority of the equity or the assets of UFC will be
transferred to the PI Trust.
  Upon
emergence from bankruptcy, the Company committed to backstop the Raymark court
appointed trustee for professional fees in the event that the Raymark court
appointed trustee has insufficient recovery funds for such purposes up to $1.0
million. At January 2, 2005 the Company has $1.0 million included in accrued
liabilities related to this commitment.
  On
October 27, 2004 the Bankruptcy Court approved a settlement of the Equity
Holders litigation (see Note 9 - Litigation to the Consolidated Financial
Statements for further explanation of the Equity Holders Litigation). The
payments required under the settlement were $.6 million, which were paid by the
Company during the fourth quarter of 2004. The payment of these costs was funded
by the PI Trust. The Company has recorded an accrued liability for this amount
at January 2, 2005.
 
  87
 
 **Item
14.  Principal Accounting Fees and Services**
 
 For the
fiscal years ended January 2, 2005, and December 28, 2003, fees for
services provided
by
PricewaterhouseCoopers
LLP (“PwC”) were as follows:
 (in
      thousands)2004
    
    
    2003Audit
      Fees
    
    $
    729
    
    $
    691Audit-Related
      Fees
    
    
    44
    
    
    14Tax
      Fees
    
    
    168
    
    
    214Other
      fees
    
    
    —
    
    
    3Total
    
    $
    941
    
    $
    922
 
 Audit
Fees
 
 As noted
above, fees billed by PwC for professional services rendered for the audit of
Raytech’s annual financial statements for 2004 and for the reviews of the
financial statements included in Raytech’s Forms 10-Q in 2004 (or services that
are normally provided by the accountant in connection with statutory and
regulatory filings) were $729 thousand. The Audit Committee approved in advance
PwC’s provision of all audit and audit-related services.
 
 Audit-Related
Fees
 
 The
audit-related fees listed above are those fees for services reasonably related
to the performance of the audit or review of the Company’s financial statements
and not included in “Audit Fees.”
 
 Tax
Fees
 
 The tax
fees listed in the table were for services rendered for tax compliance
(including federal and state returns) and tax examination assistance.
 
 Other
Fees
 
 PwC did
not render or bill for any non-audit services during 2004 (including tax
assistance).
 
 Financial
Information Systems Design and Implementation Fees
 
 PwC did
not render or bill any financial information systems design and implementation
services to Raytech in 2004.
 
 Audit
Committee Pre-Approval
 
 It is the
policy of the Audit Committee to pre-approve all audit and non-audit services
that PwC is permitted to provide, either by express prior approval of the
particular engagement or entry into such engagement pursuant to detailed
pre-approval policies and procedures established by the Committee. The Audit
Committee approved in advance PwC’s provision of all non-audit services. The
Audit Committee considered whether and determined that the provision of these
services was compatible with maintaining PwC’s independence. **
  88
  **PART
IV**
 **Item
15. Exhibits, Financial Statement Schedules**
 
 (a.) The
following financial statements are included in Part II, Item 8:
 
 (1)   Financial
Statements
 
 Consolidated
Balance Sheets at January 2, 2005 and December 28, 2003
  Consolidated
Statements of Operations for the years ended January 2, 2005, December 28, 2003
and December 29, 2002
  Consolidated
Statements of Cash Flows for the years ended January 2, 2005, December 28, 2003
and December 29, 2002
  Consolidated
Statements of Changes in Shareholders’ Equity for the years ended January 2,
2005, December 28, 2003 and December 29, 2002
  Notes to
the 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) Exhibits
Required by Item
601 of Regulation S-K.
  Exhibit
      Number
    Exhibit
      Description2(a)
    Raytech
      Corporation’s Second Amended Plan of Reorganization. Incorporated by
      reference to the Exhibit to Registrant’s Report on Form 10-K filed with
      the Securities and Exchange Commission on March 23,
  2001.3(a)
    Amended
      and Restated Certificate of Incorporation of Raytech. Incorporated by
      reference to Annual Report on Form 10-K for the year ended December 28,
      2003, filed April 12, 2004.3(b)
    Amended
      and Restated By-Laws of Raytech. Incorporated by reference to Annual
      Report on Form 10-K for the year ended December 28, 2003, filed April 12,
      2004.4(a)
    Amendment
      No. 1 to Form S-4 Registration Statement, Registration No. 33-7491. Filed
      with the Securities and Exchange Commission on September 5, 1986.4(b)(1)
    Loan
      and Security Agreement dated September 28, 2000, between Raybestos
      Products Company and Raytech Automotive Components Company and Congress
      Financial Corporation (New England), as amended November 12, 2003.
      Incorporated by reference to Annual Report on Form 10-K for the year ended
      December 28, 2003, filed April 12, 2004.4(b)(2)
    Amendment
      to Loan and Security Agreement dated September 28, 2000, between Raybestos
      Products Company and Raytech Automotive Components Company and Congress
      Financial Corporation (New England), dated May 10, 2004, and form of
      Mortgage filed May 13, 2004. Incorporated by reference to Quarterly Report
      on Form 10-Q filed May 12, 2004.
  89
  4(b)(3)
    Amendment
      to Loan and Security Agreement dated September 28, 2000, between Raybestos
      Products Company and Raytech Automotive Components Company and Congress
      Financial Corporation (New England), dated October 12, 2004. Filed
      herewith.4(b)(4)
    Amendment
      to Loan and Security Agreement dated September 28, 2000, between Raybestos
      Products Company and Raytech Automotive Components Company and Wachovia
      Capital Finance Corporation (New England), dated April 13, 2005. Filed
      herewith.4(c)(1)
    Loan
      Agreement, Security Agreement and Promissory Note dated October 23, 2003,
      between Raytech Powertrain, Inc., Allomatic Products Company and Raytech
      Systems, Inc. and Wachovia Bank, National Association. Incorporated by
      reference to Annual Report on Form 10-K for the year ended December 28,
      2003, filed April 12, 2004.4(c)(2)
    Joinder
      and Assumption Agreement between Raybestos Powertrain LLC, Raytech
      Powertrain, Inc., Allomatic Products Company and Raytech Systems, Inc. and
      Wachovia Bank, National Association dated May 11, 2004. Incorporated by
      reference to Quarterly Report on Form 10-Q filed May 12, 2004.4(c)(3)
    Amendment
      to the Loan Agreement dated October 23, 2003, between Raytech Powertrain,
      Inc., Allomatic Products Company and Raytech Systems, Inc. and Wachovia
      Bank, National Association dated April 13, 2005. Filed herewith.10(a)
    Raytech
      Corporation 1990 Non-Qualified Stock Option Plan. Incorporated by
      reference to the Registrant’s Registration Statement on Form S-8
      (Registration No. 33-42420) filed with the Securities and Exchange
      Commission on August 23, 1991.10(b)
    Amended
      and Restated Agreement and Plan of Merger dated as of September 4, 1986.
      Incorporated by reference to the 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,
    1986.10(c)
    Stock
      Purchase Agreement dated March 30, 1987 between Raymark Industries, Inc.
      and Raytech Composites (c), Amendment dated July 18, 1991 (f) and
      Amendment dated December 21, 1992. Incorporated by reference to the
      Exhibit to Registrant's Report on Form 10-K filed with the Securities and
      Exchange Commission on March 22, 1993.10(d)
    Asset
      Purchase Agreement dated October 29, 1987 between Raymark Industries, Inc.
      and Raytech Composites, Inc. (c), Amendment dated July 18, 1991 (f) and
      Amendment dated December 21, 1992 Incorporated by reference to the Exhibit
      to Registrant's Report on Form 10-K filed with the Securities and Exchange
      Commission on March 22, 1993.10(e)
    Stock
      Purchase Agreement dated May 18, 1988 between Raytech Corporation and
      Asbestos Litigation Management, Inc. Incorporated by reference to the
      Exhibit to Registrant's Report on Form 10-K filed with the Securities and
      Exchange Commission on March 29, 1989.10(f)
    Stock
      Purchase Agreement dated as of January 18, 2005, by and among Allomatic
      Products Company, Raytech Corporation and Raymark Industries, Inc., by its
      Chapter 11 Trustee. Incorporated by reference to the exhibit to
      Registrant’s report on Form 8-K filed with the Securities and Exchange
      Commission on January 21, 2005.10(g)
    Loan
      Agreement dated September 16, 1993 between Raytech Composites, Inc. and
      Raymark Industries, Inc. Incorporated by reference to the Exhibit to
      Registrant's Report on Form 10-K filed with the Securities and Exchange
      Commission on March 14, 1994.
  90
  10(h)
    Loan
      Agreement dated January 10, 1994 between Raytech Composites, Inc. and
      Raymark Industries, Inc. Incorporated by reference to the Exhibit to
      Registrant's Report on Form 10-K filed with the Securities and Exchange
      Commission on March 14, 1994.10(i)
    Raytech
      Corporation 2002 Incentive Compensation Plan. Incorporated by reference to
      Annual Report on Form 10-K for the year ended December 28, 2003, filed
      April 12, 2004.10(k)
    Agreement
      between Raytech Corporation and AlixPartners LLC dated May 21, 2004. Filed
      herewith.10(l)
    Collective
      Bargaining Agreement signed on October 12, 2004, between Raybestos
      Automotive Components Company, an indirect wholly owned subsidiary of the
      Registrant, and Local 771, International Union United Automobile,
      Aerospace and Agricultural Implement Workers of America (UAW).
      Incorporated by reference to the Exhibit to Registrant's Report on Form
      8-K filed with the Securities and Exchange Commission on October 14,
      2004.10(m)
    Settlement
      Agreement and Release approved October 27, 2004, by and among the Official
      Committee of Equity Security Holders in the Chapter 11 case of Raytech
      Corporation, Raytech Corporation, the Raytech Corporation Asbestos
      Personal Injury Trust, the Official Committee of Unsecured Creditors in
      the Chapter 11 case of Raytech Corporation, and Robert Carter, in his
      capacity as the Future Claimants’ Representative in the Chapter 11 case of
      Raytech Corporation, Incorporated by reference to the Exhibit to
      Registrant's Report on Form 8-K filed with the Securities and Exchange
      Commission on November 1, 2004.21
    Subsidiaries
      of Raytech. Filed herewith.23
    Consent
      of Independent Registered Public Accounting Firm. Filed
      herewith.31.1
    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley
      Act of 2002. Filed herewith.31.2
    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley
      Act of 2002. Filed herewith.32.1
    Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002. Filed
herewith.
 Copies of
exhibits, which are not included herewith, 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: Corporate Secretary,
Raytech Corporation, Suite 295, Four Corporate Drive, Shelton, Connecticut
06484.
  
 (b) The Exhibits
listed in item (a)(3), that indicate they are included with this filing, are
included following the signature pages.
  (c) The required
information is shown in the consolidated financial statements or footnotes.
  91
  
 
 **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**Date: April 18,
2005
    By:
    /s/ JOHN B. DEVLINJohn
      B. DevlinVice
      President, Treasurer
      and
      Chief Financial Officer
  92
  
 
 **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****Date: April 18, 2005
    By:
    /s/ Larry W. SingletonLarry W. SingletonPresident
      and
      Chief
      Executive Officer
  93
  
 
 **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 April 18, 2005.
  **Signatures**
    
    
    **Title**/s/ JOHN B.
      DEVLIN
    
    
    /s/ DAVID N.
      FORMANJohn
      B. Devlin
    
    
    David
      N. FormanVice
      President, Treasurer and
      Chief
      Financial Officer
    
    
    Director
  /s/ ROBERT F.
      CARTER
    
    
    /s/ STANLEY J.
      LEVYRobert
      F. Carter
    
    
    Stanley
      J. LevyDirector
    
    
    Director
  /s/ ARCHIE R.
      DYKES
    
    
    /s/ RICHARD A.
      LIPPEArchie
      R. Dykes
    
    
    Richard
      A. LippeDirector
    
    
    Director
  /s/ JOHN J.
      ROBBINS
    
    
    /s/ GENE
      LOCKSJohn
      J. Robbins
    
    
    Gene
      LocksDirector
    
    
    Director
  94