0000891618-95-000555.txt : 19950920 0000891618-95-000555.hdr.sgml : 19950920 ACCESSION NUMBER: 0000891618-95-000555 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950919 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYCHEM CORP CENTRAL INDEX KEY: 0000082206 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 941369731 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08341 FILM NUMBER: 95574689 BUSINESS ADDRESS: STREET 1: 300 CONSTITUTION DR STREET 2: MS 120/8502 CITY: MENLO PARK STATE: CA ZIP: 94025-1164 BUSINESS PHONE: 4153613333 MAIL ADDRESS: STREET 1: 300 CONSTITUTION DRIVE STREET 2: MS 120/8502 CITY: MENLO PARK STATE: CA ZIP: 94025-1164 FORMER COMPANY: FORMER CONFORMED NAME: RAYTHERM CORP DATE OF NAME CHANGE: 19720526 10-K 1 FORM 10-K 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number 2-15299 RAYCHEM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-1369731 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 300 CONSTITUTION DRIVE, MENLO PARK, CA 94025-1164 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (415) 361-4180 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, $1 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 required 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 / / 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. / / The aggregate market value of voting stock held by nonaffiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and directors are "affiliates" of the registrant) as of August 21, 1995, (based on the closing sale price as reported on the New York Stock Exchange on such date) was $1,950,514,125. Number of shares of Common Stock outstanding as of August 21, 1995: 44,066,955. DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV: Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1995 Part III: Portions of the Proxy Statement dated September 18, 1995. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Raychem Corporation, founded in 1957, is a broadly based materials science company serving both domestic and international markets. The terms "company" or "Raychem" mean Raychem Corporation and its consolidated subsidiaries. The company develops, manufactures, and sells a variety of high-performance products used by customers in the aerospace, automotive, cable television, commercial electronics, communications, computer, construction, defense, industrial infrastructure, mass transit, medical, and telephone industries. On November 16, 1994, the company formed a joint venture, Ericsson Raynet, with LM Ericsson, a Swedish telecommunications company. Ericsson Raynet has taken over and is continuing the operations of the company's Raynet subsidiary ("Raynet"). Raynet delivered fiber-optic distribution systems for voice, video, and data to telecommunications network operators. Raynet was consolidated in prior years when it was a wholly owned Raychem subsidiary. Following formation of the joint venture, Raychem changed its Raynet accounting in 1995 from consolidation to the equity method. Raychem's equity in net losses of affiliated companies for 1995 includes the results of Raynet Corporation and subsidiaries through November 16, 1994, and Raynet's allocation of the results of Ericsson Raynet from November 17, 1994, through June 30, 1995. For information regarding the transaction and loss allocations, see the Note entitled "Raynet" in the company's 1995 Annual Report to Stockholders (the "1995 Annual Report"), which is incorporated herein by reference and is included in this filing as Exhibit 13. For information regarding the company's restructuring actions, see the Note entitled "Restructuring and Divestitures" and the section entitled "Financial Review" of the 1995 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The company's business is organized into three industry segments designated as electronics, industrial, and telecommunications (collectively referred to as the "core business"). Raynet Corporation and subsidiaries results are presented on the equity basis of accounting in 1995 versus consolidated in 1994 and 1993. Thus, Raynet is not considered an industry segment in 1995. For financial and other information concerning the company's industry segments, see the Note entitled "Business Segments" and the section entitled "Financial Review" of the 1995 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. (C) NARRATIVE DESCRIPTION OF BUSINESS For information regarding operating results, principal products produced, and industries served by the company's industry segments, see the Note entitled "Business Segments" and the section entitled "Financial Review" of the 1995 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. METHODS OF DISTRIBUTION The products of the company's industry segments are marketed primarily through Raychem's worldwide sales force as well as through outside distribution channels both within and outside the United States. SOURCES AND AVAILABILITY OF RAW MATERIALS Materials required by the company's industry segments in their continuing manufacturing operations, or substitutes for such materials, are generally available from multiple sources worldwide. In recent months, supplies of certain raw materials the company uses has been tightening. In some instances, this has resulted in 1 3 increased prices, rationing, spot shortages, and the potential for future shortages. In response, the company has identified alternative materials for some products, and these materials are currently undergoing qualification testing. To date, the company has had no disruption of manufacturing, and the impact of raw material price increases has been immaterial. PATENTS AND PROPRIETARY INFORMATION The company applies for patents in the United States and other countries, as appropriate, to protect its significant patentable developments. As of June 30, 1995, the company had in force 943 U.S. patents and 3,581 foreign patents, and had pending 327 U.S. patent applications and 3,100 foreign patent applications. Patents held by the company in the aggregate are of material importance in the operation of the company's business. Certain patents are the subject of litigation. Management, however, does not believe that any single patent, or group of related patents, is essential to the company's business as a whole or to that of any of its industry segments. Additionally, the company owns and uses in its business a substantial body of proprietary information and numerous trademarks. In the normal course of business, the company from time to time makes and receives inquiries with regard to possible patent infringement. The company believes that it is unlikely that the outcome of these inquiries will have a material adverse effect on the company's financial position. The company intends to be active in the protection of its intellectual property, including its patents. WORKING CAPITAL Information relative to working capital is included in the section entitled "Financial Review" of the 1995 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. CUSTOMERS The company's industry segments sell to many customers. Management does not believe that the loss of any one customer would have a materially adverse effect on the business of the company. During 1995, there was no single customer that accounted for 10% or more of the company's revenues. BACKLOG The company's business is characterized by short lead times and the absence of a significant backlog. The company expects that substantially all of the backlog at June 30, 1995, will be shipped in fiscal 1996. Unfilled orders may be canceled by customers prior to shipment of goods; however, such cancellations historically have not been material. Set forth below is the backlog at June 30, 1995 and 1994, for each of the company's industry segments.
JUNE 30, ------------- 1995 1994 ---- ---- (IN MILLIONS) Electronics................................. $130 $129 Industrial.................................. 62 48 Telecommunications.......................... 83 83 Raynet...................................... --* 15 ---- ---- Total....................................... $275 $275 ==== ====
--------------- * Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1995 versus consolidated in 1994. GOVERNMENT CONTRACTS No material portion of the company's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. 2 4 COMPETITION The company's key competitive elements in its core business include: developing products that provide innovative solutions to customers' technical problems; providing high product quality and performance; continually introducing new products as well as improvements to existing products; and providing ongoing customer support. The products of the company's core industry segments are sold in highly competitive markets. The company's total sales are often a small fraction of total sales within the markets in which it operates. Raychem's products compete with those of a large number of companies and divisions within companies that are both larger and smaller than Raychem. Ericsson Raynet joint venture is engaged in the development, manufacture, and sale of fiber-optic loop optical carrier systems and integrated operations support system software. Ericsson Raynet's products compete with those of specialized telecommunications companies and affiliates of diversified international corporations that are both larger and smaller than Ericsson Raynet. The competitive features of Ericsson Raynet's markets include emphasis on product quality, price, and performance in the provision of telecommunications services for the local loop network. RESEARCH AND DEVELOPMENT For financial information on research and development expense, see the sections entitled "Consolidated Statement of Operations" and "Financial Review" of the 1995 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. ENVIRONMENTAL REGULATIONS For information regarding the effect of environmental regulations on the company, see the section entitled "Financial Review," the Note entitled "Summary of Significant Accounting Policies," and the Note entitled "Contingencies" of the 1995 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. Additional information regarding environmental administrative and judicial proceedings is set forth in Part I, Item 3 of this Form 10-K under the caption "Legal Proceedings." EMPLOYEES As of June 30, 1995, the company employed 9,496 people. (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The company's international operations are conducted primarily through wholly owned subsidiaries that are responsible for sales, distribution and, in some cases, research, development, and manufacturing activities. At June 30, 1995, these operations employed approximately 5,144 people, representing 54% of the company's total work force. The company's principal international operations are located in Western Europe. Although the company's Western European operations are subject to a number of risks, such as changes in foreign currency exchange rates, management believes that they do not involve significantly greater risks than the company's domestic operations. The company also operates in the Middle East, Asia, and Latin America. Although doing business in these parts of the world involves some degree of risk due to greater economic and political uncertainties, management believes that the company's spending and exposure levels are appropriate in the regions in which it conducts business. For additional information regarding the company's international and domestic operations and export sales, see the Note entitled "Worldwide Operations" and the section entitled "Financial Review" of the 1995 Annual Report, which are incorporated herein by reference and are included in this filing as Exhibit 13. 3 5 ITEM 2. PROPERTIES The company's principal domestic facilities are located in Menlo Park and Redwood City, California, and in Fuquay-Varina, North Carolina. Additional facilities of significance are located in Belgium, France, Germany, Ireland, Japan, the People's Republic of China, and the United Kingdom. The company owns and leases a total of 6,472,000 square feet of manufacturing, distribution, research and development, and sales and administrative facilities worldwide. The approximate square footage of all property owned and leased by each of the company's industry segments and corporate as of June 30, 1995, is shown in the following table:
JUNE 30, 1995 ------------------------------------------------------------------------- TELECOM- CONSOLIDATED ELECTRONICS INDUSTRIAL MUNICATIONS CORPORATE TOTAL ----------- ---------- ----------- --------- ------------ (SQUARE FEET IN THOUSANDS) Owned property: United States.................... 467 198 396 737 1,798 International.................... 779 605 833 63 2,280 ----- ----- ----- ----- ----- Total owned property.......... 1,246 803 1,229 800 4,078 ----- ----- ----- ----- ----- Leased Property: United States.................... 359 190 170 390 1,109 International.................... 596 366 321 2 1,285 ----- ----- ----- ----- ----- Total leased property......... 955 556 491 392 2,394 ----- ----- ----- ----- ----- Total owned and leased property.................... 2,201 1,359 1,720 1,192 6,472 ===== ===== ===== ===== =====
The company owns approximately 223 acres of land in the United States and 370 acres abroad for a total of 593 acres. Of this total, electronics uses approximately 198 acres; industrial, 156 acres; telecommunications, 134 acres; and corporate, 105 acres. The company's facilities are suitable for their respective uses and, in general, are adequate to support the current and anticipated volume of business. The company conducts continuing reviews of its facilities under improvement programs aimed at modernization and cost reduction. For information on capital expenditures, see the section entitled "Financial Review" of the 1995 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. For information regarding leased properties, see the Note entitled "Commitments" of the 1995 Annual Report, which is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 3. LEGAL PROCEEDINGS I. The company and its subsidiaries have been named as defendants in lawsuits arising from various commercial matters, including product liability. The principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze protection products. Principal product liability matters include: A. On March 7, 1995, a complaint entitled All Alaskan Seafoods, Inc., AAS-DMP Management Partnership, L.P. by Kodiak Marine Protein, Inc., General Partner, Holding Company Dalmoreproduct, Sandra Kegley, and Shin Nihon Global Co., Ltd. v. Raychem Corporation and Rubatex Corporation was filed in the United States District Court, Western District of Washington at Seattle, asserting liability against the company for alleged fire damage to a ship and its cargo and the death of one crew member. The complaint seeks compensatory and exemplary damages based on claims of strict product liability and negligence. Damage to the ship and its cargo has been alleged to exceed $25 million and the plaintiffs are claiming lost business damages of an unspecified amount. The company intends to defend itself vigorously in this matter. 4 6 B. On May 10, 1995, a decision was rendered on an appeal of a judgment in the company's favor in a lawsuit originally filed on September 9, 1988, in the Supreme Court of Newfoundland, Canada, Trial Division, Bow Valley, et al. v. Saint John Shipbuilding and Raychem. The Court of Appeal found the company 20% responsible for property damage of approximately $5 million (Canadian). The plaintiffs have since sought leave to appeal the decision to the Supreme Court of Canada. The Supreme Court of Canada has not yet decided whether to hear the case. The plaintiffs had alleged claims for damages arising out of a fire on an offshore drilling platform and made allegations attributing the cause and spread of the fire to heat-tracing and cladding products manufactured by the company. On November 30, 1993, a Petition by joint venturers of the plaintiffs in the Bow Valley lawsuit making similar claims was filed in the Supreme Court of Newfoundland, Canada, Trial Division and was served on the company on March 25, 1994. This action is stayed. A New Brunswick lawsuit filed by Saint John Shipbuilding against Raychem Canada, Ltd. arising out of the same incident has also been stayed by prior agreement of the parties. C. On January 5, 1995, the company and its insurers agreed to settle for $8.5 million the property damage claims in the lawsuit entitled Culinary Foods, Inc., et al. v. Raychem Corporation, filed in the United States District Court, Northern District of Illinois, on December 14, 1992. Of this amount, the company was required to pay a $1 million insurance deductible. Subsequently, the personal injury claims in the Culinary Foods action were settled for $1.05 million, which was funded entirely by insurance. This lawsuit asserted liability against the company for alleged property damage and personal injury (a death) arising out of use of a heat-tracing product. II. The company is also involved in certain other litigation which the company believes does not meet the disclosure threshold of Item 103 of Regulation S-K. Some of these include: A. On May 4, 1994, the United States District Court for the Northern District of California entered an Order Granting Summary Adjudication on Certain Issues and Continuing Motion As to Other Issues in the matter of Raychem Corporation v. Federal Insurance Company, a lawsuit filed by the company on December 16, 1991, seeking recovery from Federal, its insurer, of $8.25 million paid by the company in settlement of a class action securities suit. The Order found in Raychem's favor that the indemnification of officers and directors for settlement payments and defense costs was "permitted by law," that any "allocation" for coverage purposes between the corporation and the officers and directors is improper, and that the officers and directors were acting in their official capacities insofar as the acts alleged to have occurred; further that although Federal has raised no genuine issue of material fact to the contrary, Federal was allowed to conduct discovery over a six-month period on whether Raychem's indemnification of the officers and directors was in good faith and whether settlement payments and defense costs were for matters insurable under the law. The Company is actively pursuing its breach of contract claim and its claim that Federal acted in bad faith in connection with its handling of this claim. Cross motions for summary judgment are scheduled for hearing in September, 1995. B. On August 4, 1995, a motion filed by the company and other defendants for judgment on the pleadings was granted by the United States District Court, Northern District of California, in a lawsuit originally filed on August 27, 1993, West County Landfill, Inc. v. Raychem International Corporation; FMC Corporation; Kaiser Aluminum & Chemical Corporation; Flint Ink Corporation; Stauffer Chemical Company; Rhone-Poulenc Basic Chemicals Co.; Rhone-Poulenc Inc.; Pacific Gas & Electric Company; Union Oil Company of California; Chevron U.S.A. Inc.; Chevron Chemical Company; Shell Oil Company; Desoto, Inc.; Occidental Chemical Corporation; General Motors Corporation; Romic Chemical Corporation; United Airlines, Inc.; United States Department of Defense; United States Department of Navy, striking the plaintiff's claim that the company and other defendants were jointly and severally liable for response costs at a site operated by the plaintiff. The allegations in the original complaint contend that the defendants generated hazardous materials which were disposed of at the site. Raychem International Corporation is alleged to have done so during the period 1975 through 1979 and perhaps at other times. The complaint seeks recovery of response costs which plaintiff has allegedly incurred in an amount exceeding $15 million. As a result of the District Court's grant of the company's motion, the company's potential liability, if any, for response costs at the site would be based on the company's disposal of wastes at the site. The company believes that its wastes constitute less than 3% of the total amount of wastes disposed of at the site. 5 7 C. On July 10, 1991, the company received written notice from the California Department of Health Services ("DHS") that it intends to issue an administrative order relating to the clean-up of soil contamination at the company's administrative and manufacturing site in Menlo Park, California. The company is currently negotiating with DHS regarding the proposed administrative order. To date, no administrative order has been issued by DHS. D. On October 1, 1994, The United States Environmental Protection Agency revised its designation of the company to de minimus potentially responsible party in administrative proceedings instituted by the United States Environmental Protection Agency on March 23, 1989, naming the company, among others, as an interested party. The company has also been named, among others, as a potentially responsible party in a matter initiated by the California Environmental Protection Agency on September 1, 1992. In each of these matters it is alleged that the company may be liable for costs of correcting environmental conditions at certain hazardous waste sites. E. On February 10, 1995, Creole Engineering Co., Unit Process Company, and the three other plaintiffs appealed the grant on January 13, 1995, by the United States District Court, Northern District of California, of the company's motion to dismiss related lawsuits filed on August 19, 1993, Creole Engineering Co. v. Raychem Corporation, Tri-Systems, and Tracer Construction Company, and on June 29, 1993, Unit Process Company; Brock Easley, Inc.; Bylin Heating Systems, Inc.; and Fluid Flow Control Contractors v. Raychem Corporation; Debenham Electrical Supply Company, Inc.; and K.V.A. Electrical Supply Corp. This appeal was made to the United States Court of Appeals for the Ninth Circuit. In addition, on February 10, 1995, the plaintiffs filed lawsuits against the company alleging violations of similar provisions of the laws of four states (California, Colorado, Louisiana, and Washington), based on essentially the same facts alleged in the federal action. The California, Louisiana, and Washington actions have been consolidated in the Superior Court of San Mateo County, California, and the Colorado action is in the District Court of Jefferson County, Colorado. The complaints in each of the two lawsuits seek damages in excess of $15 million (prior to trebling) arising out of distributor terminations and other alleged antitrust violations by the company. F. On May 2, 1995, a Complaint entitled Bourns, Inc. v. Raychem Corporation was filed in the United States District Court, Central District of California, in response to the company's action, filed December 19, 1994, in the Superior Court of the State of California, County of San Mateo, Raychem Corporation and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. The Bourns' action alleges violation of federal antitrust laws. The company's state court action alleges, among other claims, misappropriation of trade secrets and breach of contract and seeks in excess of $5 million in damages. Mr. Hogge has filed a cross-complaint alleging interference with the pursuit of a lawful occupation and unfair competition. Neither the federal complaint nor Mr. Hogge's counterclaim specify a claim for monetary damages. On August 28, 1995, Bourns AG filed an arbitration proceeding against the company with the International Chamber of Commerce in Paris seeking damages for breach of a private brand agreement in an amount in excess of $1.5 million. G. On June 30, 1995, PSI Telecommunications, Inc. served on the company its amended answer and counterclaim to the company's second amended complaint for patent infringement, in a lawsuit initially filed by the company on November 30, 1993, in the United States District Court, Northern District of California, against PSI Telecommunications, Inc. PSI Telecommunications, Inc. has filed a counterclaim against the company for declaratory judgment that the patent is invalid and not infringed, antitrust and unfair competition counterclaims, and inequitable conduct and patent misuse defenses. No monetary damages have been alleged. The company believes the counterclaims are without merit. H. On July 6, 1994, the company and Communications Technology Corporation settled all claims and counterclaims in the company's lawsuit for patent infringement filed in the United States District Court, Northern District of California, on November 2, 1992. III. Legal proceedings tend to be unpredictable and costly. Based on currently available information, however, management believes that the resolution of pending claims, regulatory inquiries, and legal proceedings will not have a material adverse effect on the company's operating results or financial position. The company is maintaining insurance to cover product liability and certain other claims. 6 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None in the fourth quarter. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of all executive officers of the company as of June 30, 1995, their positions with the company, and the date each was first elected as, or otherwise deemed to be, an executive officer of the registrant. This table is included as an unnumbered item in Part I of this Form 10-K.
DATE APPOINTED NAME AGE POSITION AN OFFICER ------------------------------------ --- ------------------------------------ -------------- Robert J. Saldich................... 62 President, Chief Executive Officer 1971 and Director Harry O. Postlewait................. 61 Executive Vice President 1971 Charles J. Abbe..................... 54 Senior Vice President, Corporate 1993 Development Michael T. Everett.................. 46 Senior Vice President, Asia 1987 Ralph H. Harnett.................... 47 Senior Vice President, Telecom 1993 Raymond J. Sims..................... 44 Senior Vice President and Chief 1988 Financial Officer James B. Spradling.................. 61 Senior Vice President, Europe 1973 Joseph G. Wirth..................... 59 Senior Vice President and Chief 1991 Technical Officer Stephen A. Balogh................... 48 Vice President 1990 Deidra D. Barsotti.................. 39 Vice President and Controller 1991 Peter L. Brooks..................... 49 Vice President 1995 John D. McGraw...................... 48 Vice President 1995 Andrew F. Roake..................... 43 Vice President 1995 Hus Tigli........................... 41 Vice President 1995 Eric Van Zele....................... 47 Vice President 1994 Robert J. Vizas..................... 48 Vice President, General Counsel and 1990 Secretary Rik P. Dobbelaere................... 41 Division Manager 1995 Timothy S. Jenks.................... 40 Division Manager 1995 Robert R. Roeser.................... 52 President and Chief Executive 1995 Officer, Elo TouchSystems, Inc.
There are no family relationships between any executive officers. All of the executive officers except Mr. Wirth have been employed by or associated with the company in their present or other managerial and executive capacities for more than five years. Mr. Wirth was a Vice President at General Electric Company before becoming Senior Vice President and Chief Technical Officer of Raychem in 1991. 7 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The section entitled "Quarterly Financial Data (Unaudited)" of the 1995 Annual Report is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA The section entitled "Ten-Year Summary" of the 1995 Annual Report is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section entitled "Financial Review" of the 1995 Annual Report is incorporated herein by reference and is included in this filing as Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, together with the Notes thereto and the report thereon of Price Waterhouse LLP, dated July 18, 1995, and the section entitled "Quarterly Financial Data (Unaudited)" of the 1995 Annual Report are incorporated herein by reference and are included in this filing as Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 8 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the company's directors is presented in the subsection entitled "Nominees" appearing on pages 2 to 3 of the Proxy Statement dated September 18, 1995 (the "1995 Proxy Statement"), which page is incorporated herein by reference. Information regarding the company's executive officers is set forth in Part I of this Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information regarding the company's compensation of its executive officers is set forth on pages 6 to 11 of the 1995 Proxy Statement which pages are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is set forth on page 4 of the 1995 Proxy Statement, which pages are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding transactions with the company's directors and executive officers is set forth on page 13 of the 1995 Proxy Statement, which pages are incorporated herein by reference. 9 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements
PAGE IN 1995 ANNUAL REPORT* -------------- Financial Review....................................................... 20-26 Report of Independent Accountants...................................... 27 Consolidated Balance Sheet at June 30, 1995 and 1994................... 28 Consolidated Statement of Operations for the three years ended June 30, 1995................................................................. 29 Consolidated Statement of Cash Flows for the three years ended June 30, 1995................................................................. 30 Consolidated Statement of Stockholders' Equity for the three years ended June 30, 1995.................................................. 31 Notes to Consolidated Financial Statements............................. 32-46 Quarterly Financial Data (Unaudited)................................... 47 Ten-Year Summary....................................................... 48-49
(2) Financial Statement Schedules Separate Financial Statements of Subsidiaries Not Consolidated and Fifty Percent or Less Owned Persons: Raynet International, Inc., Special Report dated November 16, 1994 Ericsson Raynet, Annual Report dated June 30, 1995
Schedules: Report of Independent Accountants on Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts
The financial statement schedule should be read in conjunction with the financial statements in the 1995 Annual Report to Stockholders. All other Financial Statement Schedules are omitted because they are not required or are not applicable, or the required information is included in the Consolidated Financial Statements or the Notes. --------------- * Incorporated herein by reference and included in this filing as Exhibit 13. 10 12 (3) Index to Exhibits
EXHIBIT NO. DESCRIPTION ------ ----------------------------------------------------------------------------------- 2(a) Ericsson Raynet Formation Agreement dated as of October 10, 1994(11) 2(b) Amendment to Ericsson Raynet Formation Agreement dated as of November 16, 1994(11) 2(c) Ericsson Raynet Joint Venture Agreement dated as of November 16, 1994(11) 3(a) Amended and Restated Certificate of Incorporation(6) 3(b) Bylaws(1) 3(c) Certificate of Merger(1) 4(a) Rights Agreement(5) 4(b) Credit Agreement dated as of September 29, 1994(10) 4(c) Term Loan Agreement dated as of September 29, 1994(10) 10(a) Amended and Restated 1981 Incentive Stock Option Plan(2) 10(b) Amended and Restated 1981 Supplemental Stock Option Plan(2) 10(c) Executive Long Term Incentive Plan(3) 10(d) Bonus Deferral Plan(3) 10(e) Amended and Restated 1987 Directors Stock Option Plan(8) 10(f) Supplemental Executive Retirement Plan(4) 10(g) Raynet Corporation Common Stock Plan(4) 10(h) Amended and Restated 1990 Incentive Plan(8) 10(i) Consulting Agreement dated as of April 1, 1990, between the company and Paul M. Cook(6) 10(j) Description of Bonus Plan(7) 10(k) Consulting Agreement dated as of April 18, 1994, between Raynet Corporation and Robert M. Halperin(9) 10(l) Raynet Corporation 1993 Common Stock Plan(9) 10(m) 1995 Executive Deferred Compensation Plan(12) 10(n) Consulting Agreement effective July 1, 1994, between the company and Isaac Stein and Waverley Associates, Inc. 10(o) Revolving Credit Line Agreement dated as of January 2, 1995, between the company and Ericsson Raynet 10(p) Executive Termination Compensation Policy dated as of June 1, 1995 10(q) Consulting/Employment Agreement dated as of June 7, 1995, between the company and Robert J. Saldich 13 Portions of the 1995 Annual Report to Stockholders 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule 99(a) List of subsidiaries whose employees are participating in the Amended and Restated 1984 Employee Stock Purchase Plan for United States employees and employees of certain domestic and foreign subsidiaries. 99(b) List of subsidiaries whose employees are participating in the 1985 Supplemental Employee Stock Purchase Plan for employees of certain subsidiaries.
11 13 --------------- (1) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987, (File No. 2-15299) and incorporated by reference. (2) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1987, (File No. 2-15299) and incorporated by reference. (3) Filed as an exhibit to the company's Proxy Statement dated September 12, 1988, mailed to stockholders in connection with the 1988 Annual Meeting of Stockholders and incorporated by reference. (4) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1988, (File No. 2-15299) and incorporated by reference. (5) Filed as an exhibit to the Registration Statement on Form 8-A filed by the company on February 3, 1989, (File No. 2-15299) and incorporated by reference. (6) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, (File No. 2-15299) and incorporated by reference. (7) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, (File No. 2-15299) and incorporated by reference. (8) Filed as an exhibit to the company's Registration Statement on Form S-8 filed by the company on October 25, 1993, (Registration No. 33-50737) and incorporated by reference. (9) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, (File No. 2-15299) and incorporated by reference. (10) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, (File No. 2-15299) and incorporated by reference. (11) Filed as an exhibit to the company's Form 8-K dated November 16, 1994, (File No. 2-15299) and incorporated by reference. (12) Filed as an exhibit to the company's Registration Statement on Form S-8 filed by the company on April 5, 1995, (Registration No. 33-58437) and incorporated by reference. (b) Reports on Form 8-K None. 12 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYCHEM CORPORATION Registrant By: /s/ ROBERT J. SALDICH ----------------------------------- Robert J. Saldich President and Chief Executive Officer Date: September 19, 1995 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert J. Saldich and Raymond J. Sims, or either of them, as his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. 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 and on the dates indicated.
SIGNATURE TITLE DATE ------------------------------------------ ------------------------------ ------------------- /s/ ROBERT J. SALDICH President, Chief Executive September 19, 1995 ------------------------------------------ Officer and Director Robert J. Saldich (Principal Executive Officer) /s/ RAYMOND J. SIMS Senior Vice President and September 19, 1995 ------------------------------------------ Chief Financial Officer Raymond J. Sims (Principal Financial Officer) /s/ DEIDRA D. BARSOTTI Vice President and Controller September 19, 1995 ------------------------------------------ (Principal Accounting Officer) Deidra D. Barsotti /s/ PAUL M. COOK Chairman of the Board September 19, 1995 ------------------------------------------ Paul M. Cook
13 15
SIGNATURE TITLE DATE ------------------------------------------ ------------------------------ ------------------- /s/ RICHARD DULUDE Director September 19, 1995 ------------------------------------------ Richard Dulude /s/ JAMES F. GIBBONS Director September 19, 1995 ------------------------------------------ James F. Gibbons /s/ JOHN P. MCTAGUE Director September 19, 1995 ------------------------------------------ John P. McTague /s/ DEAN O. MORTON Director September 19, 1995 ------------------------------------------ Dean O. Morton ------------------------------------------ Director Isaac Stein /s/ CYRIL J. YANSOUNI Director September 19, 1995 ------------------------------------------ Cyril J. Yansouni
14 16 RAYNET INTERNATIONAL, INC. Special Report November 16, 1994 17 RAYNET INTERNATIONAL, INC. CONTENTS --------------------------------------------------------------------------- Consolidated Financial Statements 2 --------------------------------------------------------------------------- Notes to Consolidated Financial Statements 5 --------------------------------------------------------------------------- Report of Independent Accountants 20 --------------------------------------------------------------------------- 18 RAYNET INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEET ------------------------------------------------------------------------------------- NOVEMBER 16, 1994 (IN THOUSANDS) ------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 11,236 Accounts receivable, net of allowance for doubtful accounts of $196 22,473 Inventories, net 25,285 Prepaid expenses and other current assets 1,705 ------------------------------------------------------------------------------------- Total current assets 60,699 Property, plant and equipment, net 25,119 Capitalized software development costs, net 11,406 Other assets 1,111 ------------------------------------------------------------------------------------- TOTAL ASSETS $ 98,335 ===================================================================================== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable to parent company $ 14,535 Loan payable to parent company 34,279 Accounts payable 17,331 Accrued payroll and related liabilities 4,914 Other accrued liabilities 4,515 Deferred income 1,861 Excluded liabilities 8,699 ------------------------------------------------------------------------------------- Total current liabilities 86,134 Long-term warranty liability 320 ------------------------------------------------------------------------------------- Total liabilities 86,454 ------------------------------------------------------------------------------------- Commitments and contingencies (see note) Shareholder's equity: Common and preferred stock 528,799 Accumulated deficit (517,243) Foreign currency translation 325 ------------------------------------------------------------------------------------- Total shareholder's equity 11,881 ------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 98,335 =====================================================================================
See accompanying notes to consolidated financial statements. Page 2 19 RAYNET INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT -------------------------------------------------------------------------------- FOR THE PERIOD FROM JULY 1 THROUGH NOVEMBER 16, 1994 (IN THOUSANDS) -------------------------------------------------------------------------------- Revenues, net of returns and allowances $ 26,348 Cost of goods sold 33,941 Research and development expense 17,688 Sales, marketing, and administrative expense 16,442 Interest expense, net 328 Other expense, net 126 -------------------------------------------------------------------------------- Loss before income taxes (42,177) Provision for income taxes 2 -------------------------------------------------------------------------------- NET LOSS ($42,179) Accumulated deficit, beginning of period (475,064) -------------------------------------------------------------------------------- ACCUMULATED DEFICIT, END OF PERIOD ($517,243) ================================================================================
See accompanying notes to consolidated financial statements. Page 3 20 RAYNET INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------------------------------------------------------------------------ FOR THE PERIOD FROM JULY 1 THROUGH NOVEMBER 16, 1994 (IN THOUSANDS) ------------------------------------------------------------------------------------------------------ Cash flows used in operating activities: Net loss ($42,179) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 4,040 Amortization 1,839 Changes in certain assets and liabilities: Decrease in accounts receivable 14,247 Decrease in inventories 2,388 Decrease in prepaid expenses and other assets 1,098 Increase in accounts payable to parent company and excluded liabilities 6,370 Decrease in accounts payable and accruals (9,122) Decrease in deferred income (471) ------------------------------------------------------------------------------------------------------ Net cash used in operating activities (21,790) ------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Increase in capitalized software development costs (1,857) Investment in property, plant and equipment, net of retirements (2,127) ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (3,984) ------------------------------------------------------------------------------------------------------ Cash flows from financing activities - net borrowings from parent company 34,279 ------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents 25 ------------------------------------------------------------------------------------------------------ Increase in cash and cash equivalents 8,530 Cash and cash equivalents at beginning of period 2,706 ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $11,236 ====================================================================================================== SUPPLEMENTAL DISCLOSURE Cash paid during the period for income taxes $ 74
See accompanying notes to consolidated financial statements. Page 4 21 RAYNET INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE COMPANY Raynet Corporation was incorporated in 1987 by Raychem Corporation (the parent company or Raychem) to develop, manufacture, and sell high-performance, cost-effective, resource-sharing fiber optic telephone and video distribution systems for local loop applications throughout the world. Since its inception, Raynet has engaged primarily in product engineering and development. Commercial deployment began in the first half of calendar 1993. Raynet International, Inc. (RNI) was formed in 1988 to pursue market opportunities for fiber-optic telephone distribution systems outside the United States and Canada. On June 24, 1993, Raychem purchased all of the convertible preferred stock in RNI which had been previously held by BellSouth Enterprises Inc. (BSE). Raychem has waived its right to associated dividends since July 1, 1994. Prior to the merger of Raynet Corporation and RNI on November 15, 1994, Raychem contributed its RNI preferred stock holdings to Raynet Corporation. The surviving company, Raynet International, Inc., is hereinafter referred to as "the company." The company's fiscal year end is June 30. Raychem is the company's sole shareholder. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. REVENUE RECOGNITION AND RELATED COSTS The company has conducted technology field trials, domestic first office applications (FOA), and international pilots. These activities are covered by fixed price contracts and involve the deployment of pre-production or low volume Raynet systems. Revenue typically is recognized on such contracts upon the customer's acceptance of the delivered system. Associated production costs, charged to cost of goods sold, Page 5 22 RAYNET INTERNATIONAL, INC. are deferred until such time that revenue is recognized. There were no deferred trial/pilot costs in net inventory as of November 16, 1994. Under the company's DBP Telekom OPAL 93 commercial volume contract, product sales revenue and associated cost of goods sold are recognized as product is accepted by the customer. The company subcontracts related trenching and engineering activities, referred to as "turnkey" services, as well as product installation services. Billings for turnkey services provided by subcontractors are recognized on a percentage of completion basis and recorded as an offset to the related project cost of goods sold. Other non-manufacturing operating costs incurred to support this contract are deferred to the extent recoverable and recognized in cost of goods sold in proportion to product or turnkey revenue recognized. The OPAL 93 contract was completed in the first quarter of fiscal 1995. For the period ended November 16, 1994, $12.7 million, or 48% of revenues, relates to this contract. Revenue under other commercial contracts is recognized when the earnings process is complete. This generally occurs at the time product is shipped. For the period ended November 16, 1994, $11.3 million, or 43% of revenues, relates to product shipped under the company's July 1993 supply contract with NYNEX. The company's sales contracts often allow for billings based on agreed upon milestones. Deferred income arises from amounts billed in advance of revenue recognized while unbilled receivables arise from revenue recognized in advance of amounts billed. Unbilled receivables totaled $1.5 million at November 16, 1994, of which $0.75 million, classified as other assets, is due beyond one year. CASH AND CASH EQUIVALENTS All highly liquid investments with a maturity of 90 days or less at the date of purchase are considered to be cash equivalents. At November 16, 1994, the company had $5.4 million invested with financial institutions in short-term interest bearing deposits that mature within 30 days. INVENTORIES Inventories are stated at the lower of cost or market value. Cost of inventories is determined on the first-in, first-out method. Page 6 23 RAYNET INTERNATIONAL, INC. The components of inventories, net were as follows: -------------------------------------------------------------------------------- NOVEMBER 16, 1994 (in thousands) -------------------------------------------------------------------------------- Raw materials $14,513 Work-in-process 6,071 Finished goods 4,701 -------------------------------------------------------------------------------- $25,285 ================================================================================
WARRANTY The company warrants the performance of its various products, pursuant to written limited warranties, typically for periods of between one and three years after customer acceptance. A warranty liability is provided at the time of shipment based upon expected return rates, average costs to repair, and anticipated retrofit activity. Warranty and retrofit liabilities at November 16, 1994 totaled $1.5 million, of which $1.2 million was included in "Other accrued liabilities." PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at original cost. Depreciation and amortization are provided over the economic lives of the individual assets and, for leasehold improvements, over the terms of their respective leases, if shorter, using accelerated methods for assets acquired prior to fiscal 1991 and the straight-line method for acquisitions thereafter. The components of property, plant and equipment were as follows: -------------------------------------------------------------------------------- NOVEMBER 16, 1994 -------------------------------------------------------------------------------- Machinery and equipment $ 54,884 Furniture and fixtures 5,483 Leasehold improvements 8,095 -------------------------------------------------------------------------------- 68,462 Less: accumulated depreciation and amortization (43,343) -------------------------------------------------------------------------------- $ 25,119 ================================================================================
Depreciation expense was $4.0 million for the period. Page 7 24 RAYNET INTERNATIONAL, INC. INTANGIBLE ASSETS Trademarks and software licenses are amortized on a straight-line basis over their legal or estimated useful lives, whichever is shorter. SOFTWARE DEVELOPMENT COSTS In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," the company capitalizes software development costs as resulting products become "technologically feasible." At November 16, 1994, the company had $11.4 million in capitalized software development costs, which is net of accumulated amortization of $6.8 million. Amortization of capitalized software development costs begins when the products are available for general release to customers on a volume basis and is computed on a product-by-product basis as the greater of: (a) the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues for the product; or (b) the straight-line method over a period not to exceed three years. The company began amortizing capitalized software development costs in fiscal 1993. Total amortization of $1.8 million has been included in cost of goods sold for the period. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the company's foreign operations are translated into United States dollars at exchange rates prevailing at period end, and the resulting translation adjustments are included as a component of shareholder's equity. Net realized and unrealized foreign currency exchange gain or loss was insignificant for the period. RELATED PARTY TRANSACTIONS REVOLVING CREDIT AGREEMENT WITH RAYCHEM The company may borrow up to $150 million under a revolving credit agreement with Raychem International Manufacturing Corporation (RIMC), an affiliated company and wholly owned subsidiary of the parent company. Advances are made Page 8 25 RAYNET INTERNATIONAL, INC. through bank transfers between the companies' accounts each day in the amount needed to cover the company's daily operating cash needs. These advances bear interest monthly at the then current prime rate calculated on the average daily balance for the month. This agreement is terminable on ninety (90) days notice. This agreement was terminated on November 16, 1994 in connection with the formation of Ericsson Raynet (see "Subsequent Event - Ericsson Raynet Partnership" footnote). PARTICIPATION IN RAYCHEM'S EMPLOYEE STOCK PURCHASE PLAN The company's employees are eligible to participate in the parent company's Employee Stock Purchase Plan. This plan provides that eligible employees may contribute up to 15% of their base earnings towards the quarterly purchase of the parent company common stock. The employees' purchase price is derived from a formula based on the fair market value of the parent company's common stock. No compensation expense is recorded in connection with this plan. Amounts withheld from employees related to employees' participation in this plan are transferred quarterly to the parent company. After the formation of Ericsson Raynet (see "Subsequent Event - Ericsson Raynet Partnership" footnote), the partnership's employees will be ineligible to participate in this plan. PARTICIPATION IN RAYCHEM'S PENSION PLANS The company's employees also participate in the parent company's pension plans. Raychem has noncontributory defined benefit pension plans which cover substantially all U.S. employees and a number of its employees in foreign countries. The benefits for these plans are based primarily on years of service and employee compensation. The parent company funds these pension plans when legally or contractually required. Plan assets generally consist of publicly traded securities, bonds and cash investments. The company is charged for pension expense as an element of a composite fringe benefit charge from its parent company. Information on the actuarial present value of benefit obligations, fair value of plan assets and pension costs are not provided as such information is not maintained separately for employees of the company. As a result of the formation of Ericsson Raynet (see "Subsequent Event - Ericsson Raynet Partnership" footnote), effective December 31, 1994 the partnership's employees will no longer participate in Raychem's pension plans. Page 9 26 RAYNET INTERNATIONAL, INC. OTHER POSTRETIREMENT BENEFITS The parent company provides postretirement health care benefits to U.S. employees who qualify for the parent company's defined benefit pension plan and retire on or after age 55, until reaching age 65. Such benefits are limited to allowing retirees to continue their participation in the parent company's group medical plan. Eligible retirees pay monthly premiums, thus reducing the parent company's cost. Raychem adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106), effective July 1, 1992. This statement requires accrual accounting for all postretirement benefits other than pensions. The cost associated with this recently implemented standard has also been charged to the company as an element of a composite fringe benefit charge from the parent company. Information on the actual expense resulting from the adoption of FAS 106 is not maintained separately for employees of the company. OTHER TRANSACTIONS WITH RAYCHEM In the normal course of business, the company contracts to purchase materials and receive certain services from the parent company such as employer payroll based charges, security and maintenance of the company's facilities, contracted construction work, and relocation of the company's employees. In general, charges for payroll and relocation are passed through at actual cost, while other charges are in accordance with negotiated agreements. The company also reimburses the parent company for certain amounts Raychem pays on its behalf, such as direct deposit payroll, foreign currency intercompany payables, business insurance, and workers compensation premiums. Total charges for these products, services, and reimbursements were approximately $23.5 million for the period. The company had outstanding accounts payable to the parent company of $14.5 million as of November 16, 1994. FINANCIAL INSTRUMENTS DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Page 10 27 RAYNET INTERNATIONAL, INC. Cash and Cash Equivalents The carrying amount approximates fair value. Forward Foreign Exchange Contracts The fair values of forward foreign exchange contracts, which approximate their carrying amount, are estimated based on quoted market prices of comparable contracts. FORWARD FOREIGN EXCHANGE CONTRACTS The parent company enters into forward foreign exchange contracts on behalf of the company to hedge certain of the company's foreign currency denominated receivables and payables. The related gains and losses on these contracts are included in "other expense, net" as they arise. To the extent that a forward contract is intended to hedge a firm foreign currency commitment, the gains and losses that arise from these transactions are deferred and included in the company's current assets or liabilities. The related gains and losses are recognized in later periods and included in the measurement of the related foreign currency transaction. For the period ended November 16, 1994, $0.8 million of deferred hedge gain was included in cost of goods sold. There were no deferred hedge gains or losses in current assets or liabilities at November 16, 1994. Parties to the hedging transactions typically are large international financial institutions. During the period ended November 16, 1994, the parent company managed all of the company's forward foreign exchange contracts which related primarily to major western European currencies. At November 16, 1994, the company did not have any forward foreign exchange contracts outstanding. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the company to significant concentrations of credit risk consist of trade accounts receivable. As of November 16, 1994, the company's trade accounts receivable were due primarily from NYNEX (22%), the DBP Telekom (66%) and Ericsson, S.A. (5%). Page 11 28 RAYNET INTERNATIONAL, INC. INTEREST Interest expense, net for the period consists principally of interest charged by Raychem on the Revolving Credit Agreement. INCOME TAXES Effective July 1, 1992, the company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" (FAS 109). For U.S. federal tax purposes, the company and its subsidiaries are members of an affiliated group of which Raychem is the common parent corporation. The affiliated group files its U.S. federal tax return on a consolidated basis utilizing a June 30 fiscal year end. For purposes of financial statement presentation, income tax expense and related asset and liability accounts have been computed on a stand-alone basis. Deferred tax liabilities (assets) under FAS 109 consisted of the following at June 30, 1994:
(IN THOUSANDS) -------------------------------------------------------------------------------- Gross deferred tax liabilities $ 749 -------------------------------------------------------------------------------- ASSETS: Difference in book and tax bases of assets (3,426) Compensation accruals (249) Asset reserves (2,796) Capitalization of research & experimental costs, net of amortization (91,547) Loss and tax credit carryforwards (37,855) Other (2,545) -------------------------------------------------------------------------------- GROSS DEFERRED TAX ASSETS (138,418) -------------------------------------------------------------------------------- DEFERRED TAX ASSET VALUATION ALLOWANCE 137,669 -------------------------------------------------------------------------------- TOTAL NET DEFERRED TAX ASSETS $ 0 ================================================================================
Page 12 29 RAYNET INTERNATIONAL, INC. For the interim period from July 1 through November 16, 1994, any change in net deferred tax assets arising from the results of operations would be offset by a corresponding adjustment in the valuation allowance. The loss before income taxes for the period from July 1 through November 16, 1994 is primarily attributable to U.S. operations. The company's net operating losses and tax credit carryforwards expire in 2002 through 2009. COMMON AND PREFERRED STOCK Prior to the merger of Raynet Corporation and RNI, Raynet Corporation issued 34,762,271 shares of common stock and 86,905,678 shares of Series A common Stock to RIMC with respect to its prior equity contribution of $121.7 million. In connection with the merger of Raynet Corporation into RNI, the company was recapitalized. At November 16, 1994, issued and outstanding shares, as well as shares authorized, were as follows:
------------------------------------------------------------------------------ Issued and Outstanding Authorized ------------------------------------------------------------------------------ Common Stock 36,362,272 215,000,000 Series A common stock 90,905,678 100,000,000 Series A preferred stock 8,771,870 8,771,870 Series B preferred stock 1,200,000 1,200,000 Series C preferred stock 4,200,000 4,200,000 Series D preferred stock 26,611,800 55,000,000
STOCK OPTIONS All 4,396,050 options outstanding at November 15, 1994 (average exercise price of $2.04) under the company's 1987 and 1993 Common Stock Option Plans were terminated. FOREIGN OPERATIONS The company maintains wholly owned subsidiaries in Germany, France, Spain, Belgium, and the United Kingdom. These foreign subsidiaries perform sales and marketing functions and provide field installation and engineering support for international deployments of the company's products. Revenues, net of returns and allowances, from unaffiliated customers for the period include $10.8 million in the Page 13 30 RAYNET INTERNATIONAL, INC. United States, $12.7 million in Germany and $2.8 million in other European countries. These revenues reflect only local shipments and exclude direct exports from other geographic areas. Total assets, excluding intercompany receivables and investments, comprised $71.6 million in the United States, $22.9 million in Germany and $4.0 million in other European countries at November 16, 1994. COMMITMENTS AND CONTINGENCIES LEASES The company leases certain machinery and equipment, and its manufacturing and office facilities under operating leases. These leases require the company to pay taxes, insurance, and maintenance expenses, and provide for renewal and/or purchase options at the fair market value of the property. Certain office and manufacturing facilities are leased from the parent company. As of November 16, 1994, the aggregate minimum rental commitments under non-cancelable leases were as follows:
-------------------------------------------------------------------------------- COMMITMENT TO THE PARENT COMMITMENT YEAR ENDING JUNE 30 COMPANY TO OTHERS TOTAL -------------------------------------------------------------------------------- (IN THOUSANDS) 1995 $ 606 $ 925 $1,531 1996 932 730 1,662 1997 - 307 307 1998 - 72 72 1999 - 14 14 Thereafter - - - -------------------------------------------------------------------------------- TOTAL $1,538 $2,048 $3,586 ================================================================================
Rental expense under operating leases was approximately $1.5 million for the period. As of November 16, 1994, the company had outstanding bank guarantees of $0.7 million related to its OPAL 93 contract performance, duty declaration, and certain foreign leases. Page 14 31 RAYNET INTERNATIONAL, INC. ROYALTY AGREEMENTS Since 1988, the company has entered into various agreements with BSE which provide for royalty payments based on a percentage of the company's net sales of certain products. In October 1994, Raychem Corporation, Raynet Corporation, RNI, and BSE, entered into an agreement whereby, among other things, BSE agreed to reduce by half the ongoing royalties, previously generally due at 6% of revenues, with respect to the period July 1 through September 30, 1994, and to forego royalties with respect to the period October 1, 1994 through the closing of the joint venture with Ericsson (see "Subsequent Event - Ericsson Raynet Partnership" footnote), contingent on said closing occurring prior to December 1, 1994. All such royalties, amounting to $0.6 million and classified as Excluded Liabilities on the accompanying consolidated balance sheet, were due and payable on the closing date of the joint venture. Additionally, the company is required to pay BSE $10 million in calendar 1994, and to make two additional payments of $10 million each over the next two calendar years. The company has agreed to make other royalty payments to BSE contingent upon the revenues and earnings performance of Ericsson Raynet. SUBSEQUENT EVENT - ERICSSON RAYNET PARTNERSHIP On November 16, 1994, the company and L M Ericsson, a Swedish telecommunications company, formed a joint venture, called "Ericsson Raynet", which assumed and is continuing the company's operations. Ericsson Raynet is headquartered in Menlo Park, California, and has been organized as a general partnership under Delaware law. Ericsson representatives will constitute a majority of the Board of Managers of the joint venture. In forming the joint venture, the company sold certain specified assets to Ericsson in exchange for $40 million. Ericsson contributed the purchased assets to the joint venture, and the company contributed substantially all of its remaining assets and liabilities to the joint venture. Funding of the joint venture will initially be provided by the partners, generally 51% by Ericsson and 49% by the company. During the first five to eight years of operation, subject to various conditions, substantially all of the profits of the joint venture up to $156 million will be allocated to the company; thereafter profits of the joint venture will be shared 51/49 by Ericsson and the company, respectively. Ericsson's share of the joint venture's losses will be capped at $25 million for the fiscal year ending June 30, 1995. During the fiscal year ending June 30, 1996, up to $19.6 million of losses will be allocated to Page 15 32 RAYNET INTERNATIONAL, INC. Ericsson and the company in a 51/49 ratio; additional losses, if any, up to $10 million will be allocated 100% to the company; and, thereafter, additional losses, if any, will again be allocated to Ericsson and the company in a 51/49 ratio. Ericsson has a right to purchase the company's interest in the joint venture at a fixed price for a limited period beginning November 16, 1996; and Ericsson and the company have call and put rights, respectively, on the company's interest in the joint venture exercisable at fair market value at any time after July 1, 1999. If any of these options are exercised, the company has agreed to pay BSE a portion of the purchase price received. Certain liabilities to be retained by the company have been classified as "Excluded Liabilities" in the accompanying consolidated balance sheet and consist at November 16, 1994 of: -------------------------------------------------------------------------------------- (in thousands) -------------------------------------------------------------------------------------- Accrued balances as of June 30, 1994 Retention bonus $1,187 Restructuring for consulting and severance 1,022 Employee deferred option bonus 42 Tax liabilities, net 35 BSE royalty 2,046 -------------------------------------------------------------------------------------- SUBTOTAL $4,332 -------------------------------------------------------------------------------------- Additional accruals for the period: Employee severance 387 BSE royalty 621 Retention bonus 2,972 -------------------------------------------------------------------------------------- SUBTOTAL PERIOD EXPENSE $3,980 -------------------------------------------------------------------------------------- Reimbursement to Raychem of their funding of period severance expense 387 -------------------------------------------------------------------------------------- TOTAL EXCLUDED LIABILITIES $8,699 ======================================================================================
Also to be retained by the company are the net assets of its foreign subsidiaries in France, Spain, Belgium and the United Kingdom, referred to as "excluded subsidiaries". Net assets of these excluded foreign subsidiaries totaled $0.5 million as of November 16, 1994. Page 16 33 RAYNET INTERNATIONAL, INC. Ericsson and Raychem agreed that for purposes of determining financial matters or economic results to the parties, the joint venture would be effective as of July 1, 1994. Since the joint venture was not legally formed at that time, it was contemplated that the same economics would be accomplished by adjusting contributions to and distributions from the joint venture to account for the period July 1 through November 16, 1994 (the actual date of formation of the partnership). In order to accomplish this, it was agreed that Raychem would bear the loss from operations (excluding expenses related to excluded liabilities) for the period July 1 through November 16, 1994 (referred to in the Joint Venture Agreement as the "Stub Period Loss"). As a result, the assets contributed by RNI to the joint venture includes a receivable from Raychem of $38.2 million. Ericsson and Raychem also agreed that the results of operations of the foreign subsidiaries not transferred to the joint venture (RNI subsidiaries in the UK, Belgium, France and Spain) would be included in the measurement of the Stub Period Loss. As a result, the net income of $0.269 million of these subsidiaries is included in the Stub Period Loss and the assets contributed to the joint venture by RNI includes a receivable from RNI of $0.269 million. If the accompanying consolidated statement of operations excluded expenses related to the above excluded liabilities of $8.7 million, the resulting Stub Period Loss is calculated as follows: -------------------------------------------------------------------------------- FOR THE PERIOD FROM JULY 1 THROUGH NOVEMBER 16, 1994 (IN THOUSANDS) -------------------------------------------------------------------------------- Target revenues $26,348 Cost of goods sold 32,829 Research and development expense 16,220 Sales, marketing, and administrative expense 15,042 Interest expense, net 328 Other expense, net 129 -------------------------------------------------------------------------------- Loss before income taxes (38,200) Provision for income taxes 2 -------------------------------------------------------------------------------- NET LOSS ($38,202) ================================================================================
The assets and liabilities to be contributed by RNI and Ericsson to the joint venture consist of the following: Page 17 34 RAYNET INTERNATIONAL, INC.
--------------------------------------------------------------------------------------------------------------------------------- NOVEMBER 16, 1994 (IN THOUSANDS) Raynet Raynet Eliminating Consolidated International GmbH Entries Balances --------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 4,263 $ 4,726 -- $ 8,989 Accounts receivable, net of allowance for doubtful accounts of $196 6,380 14,720 -- 21,100 Inventories 23,169 3,001 (885) 25,285 Prepaid expenses and other current assets 1,170 324 -- 1,494 Intercompany Receivable 11,990 404 (12,394) -- Receivable from excluded subs. 2,404 4 -- 2,408 Receivable from Raychem/RNI 38,471 -- -- 38,471 Property, plant & equipment, net 24,001 988 -- 24,989 Capitalized software development costs, net 11,406 -- -- 11,406 Investment, intercompany 29 -- (29) -- Other assets 1,111 -- -- 1,111 ------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 124,394 24,167 (13,308) 135,253 ------------------------------------------------------------------------------------------------------------------------------- Accounts payable to Raychem 14,362 -- -- 14,362 Intercompany payable 405 11,987 (12,392) -- Payable to excluded subs. 240 -- -- 240 Loan payable to parent company 34,279 -- -- 34,279 Accounts payable 7,981 9,181 -- 17,162 Accrued payroll and related liabilities 3,874 588 -- 4,462 Other accrued liabilities 5,239 974 -- 6,213 Long-term warranty liability 320 -- -- 320 ------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 66,700 22,730 (12,392) 77,038 ------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $ 57,694 $ 1,437 (916) $ 58,215 ===============================================================================================================================
Page 18 35 RAYNET INTERNATIONAL, INC. On January 2, 1995, the joint venture entered into three revolving credit agreements with its partners. Raynet and Ericsson each committed to make available to the joint venture a maximum of $50 million, due in full on December 20, 1995 or earlier if the revolving credit agreement is terminated at the discretion of the lender. Both credit agreements stipulate that borrowings by the joint venture will be interest-free. The third revolving credit agreement, between the joint venture and Ericsson, provides for maximum borrowings of $25 million. Principal and accrued but unpaid interest is due in full on December 20, 1995 or earlier if this agreement is terminated at Ericsson's discretion. Interest is payable quarterly in arrears at a rate which approximates third-party lending rates. None of these agreements impose covenants or restrictions on the joint venture's operations. Page 19 36 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Raynet International, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and accumulated deficit and of cash flows present fairly, in all material respects, the financial position of Raynet International, Inc. and its subsidiaries at November 16, 1994 and the results of their operations and their cash flows for the period from July 1 through November 16, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California January 6, 1995 Page 20 37 ERICSSON RAYNET Annual Report June 30, 1995 38 ERICSSON RAYNET CONTENTS --------------------------------------------------------------------------- Consolidated Financial Statements 2 --------------------------------------------------------------------------- Notes to Consolidated Financial Statements 6 --------------------------------------------------------------------------- Report of Independent Accountants 18 --------------------------------------------------------------------------- 39 ERICSSON RAYNET CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------- NOVEMBER 16, JUNE 30, 1994 (IN THOUSANDS) 1995 (INCEPTION) ---------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 3,121 $ 8,989 Accounts receivable 15,749 21,100 Due from Raychem and its affiliates 9,622 40,879 Due from Ericsson and its affiliates 451 -- Inventories 33,048 25,285 Prepaid expenses and other current assets 873 1,494 ---------------------------------------------------------------------------------- Total current assets 62,864 97,747 Property, plant and equipment, net 21,811 24,989 Capitalized software development costs, net 12,050 11,406 Other assets 342 1,111 ---------------------------------------------------------------------------------- TOTAL ASSETS $ 97,067 $135,253 ================================================================================== LIABILITIES AND PARTNERS' EQUITY Current liabilities: Accounts payable to Raychem or its affiliates $ 1,903 $ 14,602 Accounts payable to Ericsson or its affiliates 1,372 -- Loans payable to Ericsson or its affiliates 13,271 -- Loans payable to Raychem or its affiliates 3,460 34,279 Accounts and notes payable 6,806 17,162 Accrued payroll and related liabilities 5,289 4,462 Accrued restructuring costs 12,401 -- Other accrued liabilities 5,534 4,352 Deferred income 15,870 1,861 ---------------------------------------------------------------------------------- Total current liabilities 65,906 76,718 Long-term warranty liability 495 320 ---------------------------------------------------------------------------------- Total liabilities 66,401 77,038 ---------------------------------------------------------------------------------- Commitments and contingencies (see note) Partners' equity: Ericsson 19,511 29,513 Raychem 18,745 28,356 Capital contribution receivable (8,105) -- Foreign currency translation 515 346 ---------------------------------------------------------------------------------- Total partners' equity 30,666 58,215 ---------------------------------------------------------------------------------- TOTAL LIABILITIES AND PARTNERS' EQUITY $ 97,067 $135,253 ==================================================================================
See accompanying notes to consolidated financial statements. Page 2 40 ERICSSON RAYNET CONSOLIDATED STATEMENT OF OPERATIONS -------------------------------------------------------------------------------- FOR THE PERIOD FROM NOVEMBER 16, 1994 (INCEPTION) THROUGH JUNE 30, 1995 (IN THOUSANDS) -------------------------------------------------------------------------------- Revenues, net of returns and allowances $ 19,228 Cost of goods sold 36,796 Research and development expense 25,681 Sales, marketing, and administrative expense 23,085 Restructuring of operations 12,446 Interest income, net 96 Other income, net 789 -------------------------------------------------------------------------------- Loss before income taxes (77,895) Provision for income taxes 461 -------------------------------------------------------------------------------- NET LOSS ($78,356) ================================================================================
See accompanying notes to consolidated financial statements. Page 3 41 ERICSSON RAYNET CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
----------------------------------------------------------------------------------------------------- CAPITAL FOREIGN CONTRI- CURR- BUTION ENCY RECEIV- TRANS- (IN THOUSANDS) ERICSSON RAYCHEM ABLE LATION TOTAL ----------------------------------------------------------------------------------------------------- Balance at November 16, 1994 (inception) $ 29,513 $ 28,356 -- $346 $ 58,215 Allocation of losses to partners (31,347) (47,009) -- -- (78,356) Additional contributions 21,345 37,398 -- -- 58,743 Capital contributions receivable from Raychem -- -- ($8,105) -- (8,105) Currency translation -- -- -- 169 169 ----------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1995 $ 19,511 $ 18,745 ($8,105) $515 $ 30,666 =====================================================================================================
See accompanying notes to consolidated financial statements. Page 4 42 ERICSSON RAYNET CONSOLIDATED STATEMENT OF CASH FLOW ---------------------------------------------------------------------------------------------- FOR THE PERIOD FROM NOVEMBER 16, 1994 (INCEPTION) THROUGH JUNE 30, 1995 (IN THOUSANDS) ---------------------------------------------------------------------------------------------- Cash flows used in operating activities: Net loss ($78,356) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 6,296 Amortization 3,179 Restructuring of operations 12,446 Changes in certain assets and liabilities: Decrease in accounts receivable 5,351 Decrease in due from Raychem and its affiliates 2,146 Increase in due from Ericsson and its affiliates (451) Increase in inventories (7,763) Decrease in prepaid expenses and other assets 1,380 Decrease in accounts payable to Partners (11,327) Decrease in accounts payable and accruals (8,172) Decrease in accrued restructuring (45) Increase in deferred income 14,009 ---------------------------------------------------------------------------------------------- Net cash used in operating activities (61,307) ---------------------------------------------------------------------------------------------- Cash flows from investing activities: Increase in capitalized software development costs (3,813) Investment in property, plant and equipment, net of retirements (2,968) ---------------------------------------------------------------------------------------------- Net cash used in investing activities (6,781) ---------------------------------------------------------------------------------------------- Cash flows from financing activities : Net decrease in loans payable to Raychem (30,819) Net borrowings from Ericsson 13,271 Capital contributions from Ericsson 21,345 Capital contributions from Raychem 37,398 Increase in capital contribution receivable (8,105) Decrease in funding due from Raychem 29,111 ---------------------------------------------------------------------------------------------- Net cash provided by financing activities 62,201 ---------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 19 ---------------------------------------------------------------------------------------------- (5,868) Decrease in cash and cash equivalents Cash and cash equivalents at beginning of period 8,989 ---------------------------------------------------------------------------------------------- $ 3,121 Cash and cash equivalents at end of period ============================================================================================== SUPPLEMENTAL DISCLOSURE Cash paid during the period for income taxes $ 283
See accompanying notes to consolidated financial statements. Page 5 43 ERICSSON RAYNET NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE PARTNERSHIP On November 16, 1994, Raychem Corporation ("Raychem"), through its wholly owned subsidiary Raynet International, Inc. ("RNI") and L M Ericsson ("Ericsson"), through its majority owned subsidiary Ericsson GE Holding Inc. (now called Ericsson Holding Inc.), formed Ericsson Raynet ("the partnership") as a general partnership under Delaware law. The partnership assumed the operations of RNI, formed in 1988, which was the surviving company after its merger on November 15, 1994 with Raynet Corporation, incorporated in 1987. The partnership develops, manufactures, and sells high-performance, resource-sharing fiber optic telephone and video distribution systems for local loop applications throughout the world. Ericsson representatives constitute a majority of the partnership's Board of Managers. The partnership, which is headquartered in Menlo Park, California, has a fiscal year end of June 30. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the partnership and its wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated. The assets contributed to and the liabilities assumed by the partnership at November 16, 1994 were recorded at the historical cost basis of RNI. The statement of operations represents operating activity from the inception of the partnership through June 30, 1995. REVENUE RECOGNITION AND RELATED COSTS Revenue under commercial contracts is recognized when the earnings process is complete. This generally occurs at the time product is shipped. For the period from November 16, 1994 through June 30, 1995, $10.2 million, or 53% of revenues, relates to product shipped or services provided under the partnership's contracts with NYNEX; and $4.7 million or 25% of revenues, relates to product shipped to the Deutsche Bundespost (DBP) Telekom under follow-on spares orders to the OPAL 93 commercial volume contract. Page 6 44 ERICSSON RAYNET Under the partnership's DBP Telekom OPAL 94 commercial volume contract, product sales revenue and associated cost of goods sold are recognized as product is accepted by the customer. Non-manufacturing operating costs incurred to support the installation of product delivered under this contract are deferred to the extent recoverable and recognized in cost of goods sold in proportion to product revenue recognized. As of June 30, 1995, $1.3 million of deferred installation costs were classified in net inventory. The contract allows the DBP to withhold payment of a percentage of amounts billed until certain contract performance criteria are met. As of June 30, 1995, the DBP was withholding payment of $1.5 million (classified in accounts receivable) which the partnership anticipates to collect in fiscal 1996. Revenues related to this contract are anticipated to commence in the first quarter of fiscal 1996. The partnership's sales contracts often allow for billings based on agreed upon milestones. Deferred income arises from amounts billed in advance of revenue recognized while unbilled receivables arise from revenue recognized in advance of amounts billed. At June 30, 1995, unbilled receivables totaled $0.75 million. At November 16, 1994, unbilled receivables totaled $1.5 million, of which $0.75 million was classified as long-term in "other assets." CASH AND CASH EQUIVALENTS All highly liquid investments with a maturity of 90 days or less at the date of purchase are considered to be cash equivalents. At June 30, 1995 and November 16, 1994, the partnership had $2.9 million and $4.6 million, respectively, invested with financial institutions in short-term interest bearing deposits that mature within 90 days. INVENTORIES Inventories are stated at the lower of cost or market value. Cost of inventories is determined on the first-in, first-out method. The components of inventories, net were as follows:
----------------------------------------------------------------------------------- JUNE 30, NOVEMBER 16, (IN THOUSANDS) 1995 1994 ----------------------------------------------------------------------------------- Raw materials $ 9,027 $14,513 Work-in-process 8,352 6,071 Finished goods 15,669 4,701 ----------------------------------------------------------------------------------- $33,048 $25,285 ===================================================================================
Page 7 45 ERICSSON RAYNET WARRANTY The partnership warrants the performance of its various products, pursuant to written limited warranties, typically for periods of between one and three years after customer acceptance. A warranty liability is provided at the time of shipment based upon expected return rates, average costs to repair, and anticipated retrofit activity. Warranty and retrofit liabilities at June 30, 1995 and November 16, 1994 totaled $1.8 million and $1.5 million, respectively, including $1.3 million and $1.2 million, respectively, recorded as "other accrued liabilities." PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at original cost. Depreciation and amortization are provided over the economic lives of the individual assets and, for leasehold improvements, over the terms of their respective leases, if shorter, using accelerated methods for assets acquired prior to fiscal 1991 and the straight-line method for acquisitions thereafter. The components of property, plant and equipment were as follows:
---------------------------------------------------------------------------------- JUNE 30, NOVEMBER 16, (IN THOUSANDS) 1995 1994 ---------------------------------------------------------------------------------- Machinery and equipment $ 55,967 $ 54,617 Furniture and fixtures 6,118 5,423 Leasehold improvements 8,159 8,095 ---------------------------------------------------------------------------------- 70,244 68,135 Less: accumulated depreciation and amortization (48,433) (43,146) ---------------------------------------------------------------------------------- $ 21,811 $ 24,989 ==================================================================================
Depreciation expense was $6.3 million for the period from November 16, 1994 through June 30, 1995. INTANGIBLE ASSETS Trademarks and software licenses are amortized on a straight-line basis over their legal or estimated useful lives, whichever is shorter. Page 8 46 ERICSSON RAYNET SOFTWARE DEVELOPMENT COSTS In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," the partnership capitalizes software development costs as resulting products become "technologically feasible." At June 30, 1995 and November 16, 1994, the partnership had $12.1 million and $11.4 million, respectively, in net capitalized software development costs. Accumulated amortization was $10.0 million and $6.8 million at June 30, 1995 and November 16, 1994, respectively. Amortization of capitalized software development costs begins when the products are available for general release to customers on a volume basis and is computed on a product-by-product basis as the greater of: (a) the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues for the product; or (b) the straight-line method over a period not to exceed three years. Total amortization of $3.2 million has been included in cost of goods sold for the period. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the partnership's foreign operation are translated into United States dollars at exchange rates prevailing at period end and the income statement is translated at average exchange rates during the period. The resulting translation adjustments are accumulated under partners' equity. Net operational gains and losses on foreign exchange, mainly related to amounts receivable or payable, are included in "other income, net." The net realized and unrealized foreign currency exchange gain was $1.0 million for the period November 16, 1994 through June 30, 1995. ADVERTISING COSTS The partnership expenses advertising costs as incurred. No advertising costs were incurred for the period November 16, 1994 through June 30, 1995. RESTRUCTURING OF OPERATIONS In June 1995, the partnership announced a plan to restructure its operations in order to sharpen focus on selected high potential products, markets, and customers and to reduce costs. Planned changes include the relocation of manufacturing operations to existing Ericsson units in Sweden and consolidation of certain general and administrative functions within Ericsson in the U.S. and Sweden. The partnership Page 9 47 ERICSSON RAYNET intends to reduce its workforce by approximately 40%, with nearly all of the reductions to take place in Menlo Park, California. These restructuring activities are anticipated to be completed by December 1995. The restructuring charge of $12.4 million includes provisions for employees severance costs, including health insurance benefits and outplacement services, lease termination costs, and the write-off of fixed assets and leasehold improvements. RELATED PARTY TRANSACTIONS REVOLVING CREDIT AGREEMENTS On January 2, 1995, the partnership entered into revolving credit agreements (RCA) with RNI or Ericsson Inc. ("EUS"), a subsidiary of Ericsson. Both RNI and EUS committed to make available to the partnership a maximum of $50 million, due in full on December 20, 1995 or earlier if the RCA is terminated at the discretion of the lender. Both credit agreements stipulate that borrowings by the partnership will be interest-free. An additional RCA, between the partnership and EUS, provides for maximum borrowings of $25 million. Principal and accrued but unpaid interest is due in full on December 20, 1995 or earlier if this agreement is terminated at EUS's discretion. Interest is payable quarterly in arrears at a rate which approximates third-party lending rates. None of these agreements impose covenants or restrictions on the partnership's operations. To meet temporary cash requirements, the partnership's wholly owned subsidiary in Germany entered into a short-term loan agreement with one of Ericsson's affiliates in Germany. This loan, plus interest, was repaid in full in July 1995. Amounts outstanding under these agreements at June 30, 1995 were:
(in thousands) -------------------------------------------------------------------------------- Non-interest bearing RCA with EUS $ 3,602 Interest bearing RCA with EUS 9,091 Short-term loan with Ericsson affiliate in Germany 578 -------------------------------------------------------------------------------- Total loans payable to Ericsson or its affiliates $13,271 ================================================================================ Non-interest bearing RCA with RNI $ 3,460 ================================================================================
On November 16, 1994, the partnership assumed the debt Raynet Corporation had accumulated under its revolving credit agreement with Raychem International Page 10 48 ERICSSON RAYNET Manufacturing Corporation (RIMC), a wholly owned subsidiary of Raychem. The agreement was terminated in connection with the partnership's formation, at which time $16.8 million of the $34.3 million then payable to RIMC was forgiven by Raychem as part of its capital contributions and the remaining $17.5 million was paid from capital contributions by Ericsson. PARTICIPATION IN PENSION PLANS Until December 31, 1994, the partnership's employees were eligible to participate in Raychem's pension plans, which were noncontributory defined benefit pension plans that covered substantially all U.S. employees and a number of its employees in foreign countries. The benefits for these plans were based primarily on years of service and employee compensation. Raychem funded these pension plans as legally and contractually required. Plan assets generally consisted of publicly traded securities, bonds and cash investments. Raychem charged the partnership for pension expense as an element of a composite fringe benefit charge. Effective January 1, 1995, the partnership's employees in the U.S. began participation in The Retirement Plan for Employees of Ericsson Inc. (the "Ericsson Plan"), which is also a noncontributory defined benefit pension plan. The benefits for this plan are based primarily upon years of service and employees' qualifying compensation during the final years of employment. Partnership contributions are made to the extent allowed for Federal income tax purposes. Assets and liabilities in respect of accrued benefits earned by participation in the Raychem Pension Plan through December 31, 1994, were transferred to the Ericsson Plan. The partnership accrues for pension expense as an element of a composite fringe benefit charge based on management's best estimates of actual pension costs. Information on actual pension costs, the actuarial present value of benefits and the fair market value of plan assets is not available at this time as the Ericsson Plan operates on a calendar year plan year and an actuarial valuation including the partnership's participants has not yet been completed. PARTICIPATION IN CAPITAL ACCUMULATION AND SAVINGS PLAN Effective January 1, 1995, the partnership's eligible employees in the U.S. began participation in the Capital Appreciation and Savings Plan of Ericsson Inc. Eligible participants may contribute on a pre-tax basis from 1% to 13% of their eligible earnings into the Capital Accumulation 401K portion of the Plan and may contribute Page 11 49 ERICSSON RAYNET from 1% to 3% to the Savings portion on an after-tax basis. The partnership contributes 1% of a participant's eligible pay to the Capital Accumulation portion of the Plan, whether or not the participant contributes. The partnership also matches dollar for dollar participant contributions of up to 3% of eligible pay. The participant may elect to apply the match to either their before-tax 401K contribution or their after-tax contribution, or to a combination of both. Contributions are 100% vested immediately with the exception of the partnership match on Employee Savings contributions, which become 100% vested at the time the participant completes two years of service. Contributions are remitted to a trust for investment each month. Participants may direct the investment of their accounts among six separate funds which are invested in varying combinations of common stock, mutual funds, government bond funds, and other publicly traded investments. OTHER POSTRETIREMENT BENEFITS Until December 31, 1994, Raychem provided postretirement health care benefits to partnership employees in the U.S. who qualified for its defined benefit pension plan and retired on or after age 55, until reaching age 65. Such benefits were limited to allowing retirees to continue their participation in Raychem's group medical plan. Eligible retirees paid monthly premiums, thus reducing Raychem's cost. Effective January 1, 1995, the partnership's eligible active or retired employees in the U.S. began participation in certain retiree health and life insurance benefit plans of EUS. Retiring participants become eligible for retiree health and life insurance benefits upon retirement with 10 or more years retirement plan vesting service coupled with immediate commencement of pension benefits. Contributions required from retirees depend upon the date of retirement as well as age and years of service at retirement. The partnership funds the benefit costs on a pay-as-you-go basis. Information on retirement plan costs is not available at this time as the EUS Plan operates on a calendar year plan year and an actuarial valuation including the partnership's participants has not yet been completed. OTHER TRANSACTIONS WITH PARTNERS In the normal course of business, the partnership contracts to purchase materials and receive certain services from the partners such as security and maintenance of the partnership's facilities, administration of various employee benefit plans, contracted construction work, relocation of the partnership's employees, and international sales and marketing functions. In general, charges for relocation are passed through at Page 12 50 ERICSSON RAYNET actual cost, while other charges are in accordance with negotiated agreements. The partnership also reimburses the partners for certain amounts they pay on its behalf, such as direct deposit payroll, employer payroll based charges, business insurance, health insurance, and workers compensation premiums. Total charges for these products, services, and reimbursements were approximately $29.3 million to Ericsson and $9.8 million to Raychem for the period November 16, 1994 through June 30, 1995. The partnership had outstanding accounts payable to Ericsson and its affiliates of $1.4 million as of June 30, 1995. The partnership had outstanding accounts payable to Raychem and its affiliates of $1.9 million and $14.6 million as of June 30, 1995 and November 16, 1994, respectively. The partnership sells its product or services to Ericsson or Ericsson affiliates in accordance with negotiated agreements. Sales to Ericsson or its affiliates for the period November 16, 1994 through June 30, 1995 were $0.9 million. Amounts due from Raychem and its affiliates relate primarily to funding or contribution requirements as agreed to by the partners. As of June 30, 1995 and November 16, 1994, $9.1 million and $38.2 million, respectively, related to funding or contribution requirements, were due from RNI or Raychem. Remaining amounts outstanding at both balance sheet dates relate to product sales made prior to the partnership's formation by Raynet Corporation to RNI subsidiaries which were not subsequently contributed to the partnership. FINANCIAL INSTRUMENTS DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS For cash and cash equivalents, the carrying amount approximates fair value. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the partnership to significant concentrations of credit risk consist of trade accounts receivable. As of June 30, 1995, the partnership's trade accounts receivable were due primarily from NYNEX (21%), and the DBP Telekom (67%). FOREIGN OPERATIONS The partnership maintains a wholly owned subsidiary in Germany, Raynet GmbH, which performs sales and marketing functions and provides field installation and Page 13 51 ERICSSON RAYNET engineering support for deployments of the partnership's products. Revenues, net of returns and allowances, from unaffiliated customers for the period November 16, 1994 through June 30, 1995 include $14.5 million in the United States and $4.7 million in Germany. These revenues reflect only local shipments and exclude direct exports from other geographic areas. Revenues between the U.S. and Raynet GmbH, which are recorded on the basis of arms-length prices established by the partnership, were $16.3 million for the period November 16, 1994 through June 30, 1995. Income before income taxes and net loss incurred by Raynet GmbH for the period are insignificant. Total assets, excluding intercompany receivables and investments, comprised $66.5 million in the United States and $30.6 million in Germany at June 30, 1995. INTEREST Interest income, net for the period November 16, 1994 through June 30, 1995 consists principally of net interest earned from Ericsson under the partnership's $25 million revolving credit agreement and interest earned on various short-term investments held by Raynet GmbH. INCOME TAXES For U.S. Federal income tax purposes, the partnership's results of operations pass through to its partners. Accordingly, the partnership is not subject to U.S. taxes. The provision for income taxes of $0.5 million for the period from November 16, 1994 through June 30, 1995 relates to the operations of Raynet GmbH. A reconciliation of the partners' tax bases of asset and liabilities to the reported amounts of such assets and liabilities is not presented herein as it is not considered meaningful. COMMITMENTS AND CONTINGENCIES LEASES The partnership leases certain machinery and equipment, and its manufacturing and office facilities under operating leases. These leases require the partnership to pay taxes, insurance, and maintenance expenses, and provide for renewal and/or purchase options at the fair market value of the property. Certain office and manufacturing facilities are leased from Raychem. Page 14 52 ERICSSON RAYNET As of June 30, 1995, the aggregate minimum rental commitments under non-cancellable leases were as follows:
-------------------------------------------------------------------------------- COMMITMENT COMMITMENT YEAR ENDING JUNE 30 TO RAYCHEM TO OTHERS TOTAL -------------------------------------------------------------------------------- (in thousands) 1996 $892 $1,813 $2,705 1997 -- 501 501 1998 -- 178 178 1999 -- 16 16 2000 -- -- -- Thereafter -- -- -- -------------------------------------------------------------------------------- TOTAL $892 $2,508 $3,400 ================================================================================
Rental expense under operating leases was approximately $2.2 million for the period from November 16, 1994 through June 30, 1995. As of June 30, 1995 and November 16, 1994, the partnership had outstanding bank guarantees of $1.0 million and $0.7 million, respectively, related to its OPAL 93 or OPAL 94 contract performance, duty declaration, and certain foreign leases. PARTNERS' EQUITY In forming the partnership, RNI sold certain specified assets to Ericsson in exchange for $40 million. Ericsson contributed the purchased assets and RNI contributed substantially all of its remaining assets and liabilities to the partnership. Funding is provided by the partners, generally 51% by Ericsson and 49% by RNI. During the first five to eight years of operation, subject to various conditions, substantially all of the partnership's profits up to $156 million will be allocated to RNI; thereafter profits will be shared 51/49 by Ericsson and RNI, respectively. Ericsson's share of the partnership's losses were capped at $25 million for the period ended June 30, 1995. During the fiscal year ending June 30, 1996, up to $19.6 million of losses will be allocated to Ericsson and RNI in a 51/49 ratio; additional losses, if any, up to $10 million will be allocated 100% to RNI; and, thereafter, additional losses, if any, will again be allocated to Ericsson and RNI in a 51/49 ratio. Page 15 53 ERICSSON RAYNET Ericsson has a right to purchase RNI's interest in the partnership at a fixed price for a limited period beginning November 16, 1996 ("First Call Option"); and Ericsson and Raychem have call and put rights, respectively, on RNI's interest in the partnership exercisable at fair market value at any time after July 1, 1999. If any of these options are exercised, Raychem has agreed to pay BellSouth Enterprises Inc. a portion of the purchase price received. CAPITAL CONTRIBUTION RECEIVABLE In accordance with an agreement between the partners, a portion of RNI's capital contributions have been made in the form of non-interest bearing promissory notes. RNI is required to fund such amounts upon the earlier of Ericsson's exercise of its First Call Option, the distribution of profits related to RNI's Incremental Loss for 1995 as defined in the Joint Venture Agreement or the Target Date defined in the agreement as 2000 at the earliest; 2003 if certain future events occur. ALLOCATION OF LOSS TO PARTNERS The accompanying financial statements are prepared on a historical cost basis reflecting the original costs as recorded on the books and records of RNI without any step up adjustments arising from the partnership's formation. Consequently, the financial statements do not include intangibles arising upon the partnership's formation or the amortization thereof. Raychem has recorded its investment in the partnership at the net book value of the RNI assets on a historical cost basis. Ericsson has recorded its investment based on its purchase price of $40 million which exceeds its beginning capital, on a historical cost basis, of $29.5 million. The purchase price in excess of the beginning capital account at historical costs results in an intangible of $10.5 million arising upon the partnership's formation. This intangible will be amortized by Ericsson Holding Inc. over ten years beginning November 16, 1994 resulting in amortization expense of $0.7 million for the period November 16, 1994 through June 30, 1995. Ericsson and Raychem have agreed that Ericsson's share of the loss for the period November 16, 1994 through June 30, 1995, including amortization of the intangible asset arising on the partnership's formation, is limited to $25 million, excluding restructuring costs. Page 16 54 ERICSSON RAYNET The following presents the loss to be included in the financial statements of each partner:
------------------------------------------------------------------------------------------ FOR THE PERIOD FROM NOVEMBER 16, 1994 (INCEPTION) THROUGH JUNE 30, 1995 ERICSSON RAYCHEM TOTAL ------------------------------------------------------------------------------------------ (IN THOUSANDS) Net loss on a historical cost basis, excluding restructuring costs allocated 51% / 49% $ 33,614 $32,296 $65,910 Amortization of intangibles arising upon formation, net 655 -- 655 ------------------------------------------------------------------------------------------ Allocation prior to maximum loss limitation 34,269 32,296 66,565 Maximum loss limitation adjustment (9,269) 9,269 -- ------------------------------------------------------------------------------------------ Loss before restructuring expenses 25,000 41,565 66,565 Restructuring expenses shared in ratio of 51/49 6,347 6,099 12,446 ------------------------------------------------------------------------------------------ Total allocated loss from the partnership $ 31,347 $47,664 $79,011 ==========================================================================================
Page 17 55 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of Ericsson Raynet In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows, and changes in partners' equity, present fairly, in all material respects, the financial position of Ericsson Raynet and its subsidiary at June 30, 1995 and November 16, 1994 and the results of their operations and their cash flows for the period from November 16, 1994 (inception) through June 30, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California July 18, 1995 Page 18 56 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Raychem Corporation: Our audits of the consolidated financial statements referred to in our report dated July 18, 1995 appearing on page 27 of Exhibit 13 to this Form 10-K (which is incorporated herein by reference) also included an audit of the Financial Statement Schedule II listed in Item 14(a)(2) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP San Jose, California July 18, 1995 57 SCHEDULE II RAYCHEM CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS* YEARS ENDED JUNE 30, 1995, 1994, AND 1993 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO FOREIGN BALANCE BEGINNING COSTS AND ACCOUNTS CURRENCY AT END DESCRIPTION OF YEAR EXPENSES WRITTEN OFF TRANSLATION OF YEAR ------------------------------------ ---------- ---------- ----------- ----------- ------- 1995: Accounts receivable................. $ 11,599 $2,857 $ 4,509** $ 401 $10,348 ======= ====== ====== ======= ======= 1994: Accounts receivable................. $ 8,557 $6,288 $ 2,395 $ (851) $11,599 ======= ====== ====== ======= ======= 1993: Accounts receivable................. $ 8,828 $3,626 $ 2,748 $(1,149) $ 8,557 ======= ====== ====== ======= =======
--------------- * Allowances are deducted from assets to which they apply. ** Includes $1,044 effect of deconsolidation of certain Raychem subsidiaries. EX-10.N 2 EX-10(N) 1 EXHIBIT 10(n) August 12, 1994 Mr. Isaac Stein 525 University Avenue Suite #415 Palo Alto, CA 94301 Dear Isaac: Thank you for agreeing to serve as Chairman of the new Executive Committee of the Board of Directors of Raychem. Your compensation as Chairman will be $25,000 per year. You will also continue as Chairman of the Raynet Oversight Committee and will receive an annual fee of $25,000 for chairing this effort. In addition to your normal board responsibilities, we have also agreed that you will spend approximately 50% of your professional time as a consultant to the Board and to the CEO. Initially, these efforts will focus on completion of the Raynet-Ericsson joint venture, management succession and the operations of the Board itself. It is presently contemplated that your services will be required in this capacity for one to two years. You will receive a retainer of $30,000 per month for these consulting services. In addition, we will reimburse your customary out-of-pocket expenses and will pay Waverley Associates, Inc. as a contribution to your rental and secretarial expenses an additional $5,000 per month. This arrangement will commence as of July 1, 1994 and will continue until terminated by either party on 9 months notice. This letter will amend and supersede our letter agreement of January 25, 1994. You and Waverley will continue to receive a customary indemnity from Raychem for these services covering liabilities and expenses, including costs of defense. At today's Board meeting, you were also granted a stock option covering 25,000 shares of Raychem common stock. It is our expectation that there will be an additional grant at the beginning of fiscal 1996 commensurate with your level of involvement. 2 Mr. Isaac Stein August 12, 1994 Page 2 Please sign and return the enclosed copy of this letter to confirm this arrangement. Very truly yours, /s/ PAUL M. COOK Paul M. Cook PMC/lda cc: Robert J. Saldich Robert J. Vizas Read and Agreed to: /s/ ISAAC STEIN Isaac Stein EX-10.O 3 EX-10(O) 1 EXHIBIT 10(o) REVOLVING CREDIT LINE AGREEMENT Ericsson Raynet, a Delaware partnership ("Borrower") and Raynet International, Inc,. a Delaware corporation ("Lender") hereby agree as follows: 1. Lender hereby agrees to make available to Borrower from the date hereof through and including December 20, 1995 (the "Maturity Date"), but subject to Lender's right to terminate this Revolving Credit Line Agreement (this "Agreement"), as hereinafter provided, a revolving line of credit in the maximum amount of $50,000,000.00. Borrower may borrow all or any portion of such sum at any time or times prior to the Maturity Date, provided that all principal amounts borrowed hereunder, and all interest accrued thereon, shall in all events be due and payable to Lender in New York City, or at such other location specified by Lender, at the earlier of (such earlier time being hereinafter referred to as the "Due Date") (i) demand by Lender, or (ii) the Maturity Date. Lender reserves in all events the right to terminate this Agreement, and any further obligation to lend money to Borrower, as of the earlier of (i) the Due Date or (ii) any other date which is specified in a written notice delivered to Borrower and which is at least three business days after the date of such notice. 2. Amounts borrowed under this Agreement may be repaid at any time prior to the Due Date without premium or penalty of any kind, and repaid amounts may be reborrowed at any time prior to such Due Date, provided that Borrower shall give Lender three (3) business days notice prior to any such prepayment unless Lender waives such notice. Any acceptance of prepayment by Lender shall constitute a waiver of the notice required hereby. 3. No interest shall be payable under this Agreement. 4. All indebtedness of the Borrower arising from borrowings hereunder shall be evidenced by a demand note substantially in the form of the grid promissory note attached hereto as Exhibit A. Borrower shall pay all fees and costs incurred by Lender in connection with collecting any principal or interest due to Lender hereunder, including, without limitation, court costs and attorneys fees. All borrowings hereunder shall rank at least pari passu with all other unsecured debt of the Borrower to any bank, financial institution or other person. Borrower hereby expressly waives any requirement of presentment, demand, protest or other notice of any kind in connection with Lender's collection of any amount due hereunder or under the aforesaid promissory note. 5. The Agreement constitutes the entire understanding and agreement of the parties as to the subject matter hereof. This Agreement may not be altered or amended except by further written agreement between the parties. 6. This Agreement may be executed in any number of counterparts each of which shall be deemed an original of the Agreement, but all of which together shall constitute one and the same instrument. In making proof hereof it shall not be necessary to produce or account for more than one such counterpart. Dated as of January 2, 1995. RAYNET INTERNATIONAL, INC. ("LENDER") By: /s/ RAYMOND J. SIMS Raymond J. Sims Title: Director ERICSSON RAYNET ("BORROWER") By: /s/ R G KELSCH Robert Kelsch Title: President 2 EXHIBIT A PROMISSORY NOTE $50,000,000.00 U.S. Date: January 2, 1995 FOR VALUE RECEIVED, the undersigned Ericsson Raynet, a Delaware partnership ("Borrower") hereby unconditionally promises to pay to the order of Raynet International, Inc., a Delaware corporation ("Lender") in New York City, or other location as designated from time to time by Lender, upon demand and in any event by no later than December 20, 1995, in lawful money of the United States of America and in immediately available funds, the aggregate unpaid principal amount of all loans made by Lender to the undersigned hereunder as such loans are set forth on the schedule hereto. No interest shall be payable under this Agreement. The holder of this note is authorized to set forth the date and amount of each loan pursuant hereto and each payment of principal with respect thereto on the schedule annexed hereto and made a part hereof, or on a continuation thereof which shall be attached hereto and made a part hereof, which endorsement shall constitute prima facie evidence of the accuracy of the information endorsed. If any payment on this note becomes due and payable on a Saturday, Sunday or other day on which commercial banks in New York are authorized or required by law to close, the maturity thereof shall be extended to the next succeeding business day. Prepayment of all or any part of the principal of this note may be made at any time without premium or penalty, subject to the terms of the Credit Agreement referred to hereinbelow. This note is the note described in the Revolving Credit line Agreement dated January 2, 1995 ("Credit Agreement") between Ericsson Raynet (as Borrower) and Raynet International, Inc. (as Lender), which Credity Agreement and all its terms and provisions are incorporated herein by reference as though fully set forth herein. Such agreement provides that the Borrower may borrow up to $50,000,000.00 U.S. at any time or times, and may reborrow principal which has been repaid, provided that all principal must be repaid to the Lender by December 20, 1995, or, if earlier, on demand. IN WITNESS WHEREOF, the undersigned has caused this note to be duly executed as of the day and year first above written. ERICSSON RAYNET By: EXHIBIT - DO NOT SIGN Robert Kelsch Title: President EX-10.P 4 EX-10(P) 1 EXHIBIT 10(p) RAYCHEM CORPORATION EXECUTIVE TERMINATION COMPENSATION POLICY PHILOSOPHY: From time to time, Raychem may need to terminate the employment of certain officers of the corporation without cause. Raychem recognizes that such officers may have difficulty locating new employment. In recognition of the level of responsibility held by such officers, Raychem will provide certain benefits to ease their transition. Officers who receive termination compensation will become consultants to Raychem for a period of time and certain restrictions will be placed on their activities. ELIGIBILITY: All employees appointed by Raychem's Board of Directors as officers of Raychem Corporation, at the level of Vice President or above ("Officers"), are eligible to receive the executive termination benefit. This replaces any severance or layoff benefits for which Officers otherwise may have been eligible under any other policy or geographic practice, but it does not supersede any written employment agreement with Raychem. GUIDELINES: 1. Executive Termination Benefit. If a Covered Termination of Employment (defined below) occurs and Officer remains eligible to receive the Executive Termination Benefit, such benefit shall be paid by Raychem to Officer, and Officer shall sign a full release of all claims against Raychem. The "Executive Termination Benefit" shall mean: (a) Continuation of Officer's base salary for one year ("Full Salary Period") after a Covered Termination of Employment, regardless of whether Officer obtains other employment during the Full Salary Period (Variable Pay Plan eligibility ceases at employment termination), offset by amounts Officer is eligible to receive upon retirement (early, regular, deferred or other), whether or not Officer actually retires; (b) For a period of up to one calendar year after the end of the Full Salary Period ("Differential Salary Period"), payment of base salary differential for any time when Officer does not hold employment with a base salary equal to or greater than Officer's base salary upon termination, offset further by amounts Officer is eligible to receive upon retirement (early, regular, deferred or other), whether or not Officer actually retires; -1- 2 (c) Continuation of Officer's medical, dental and life insurance benefits at staff rates until Officer obtains other employment or medical and dental coverage, during the Full Salary Period and the Differential Salary Period; (d) Continuation of vesting of Officer's options to purchase Raychem stock through the Full Salary Period, to the extent that such options are unvested; (e) Right to financial planning services, if still provided by Raychem to Officers, for the Full Salary Period; (f) Continuation of Officer's right to retain his or her company car and computer through the Full Salary Period; and (g) Outplacement selected by Raychem, to support and enhance Officer's job search efforts. The Executive Termination Benefit is supplemental to the provisions which apply to all employees upon termination of employment, such as payment of accrued vacation pay, refunds of deposits under the stock purchase plan, and the opportunity to continue certain insurance plans at personal expense. Other benefits for which Officer may be eligible at the time of termination of employment, such as purchase of company car and computer according to Raychem policy, shall not be affected by this Agreement. Nothing in this policy is intended to extend the exercisability of options to purchase Raychem stock beyond the expiration date(s) stated in the relevant option agreement(s). In the event of Officer's death while receiving the Executive Termination Benefit, all benefits shall cease, except that if death occurs during the Full Salary Period, payment of Officer's base salary shall continue through the end of the Full Salary Period. 2. Covered Termination of Employment (a) Definition. A "Covered Termination of Employment" means termination of Officer's employment by Raychem or a successor for the convenience of Raychem (which includes a determination that Officer's good-faith performance has not met Raychem's needs or standards, but excludes a Termination for Cause, as defined below). -2- 3 (b) Excluded Events. The Executive Termination Benefit is not payable if Officer's employment terminates because of a Voluntary Termination, a Termination for Cause, Officer's disability by reason of physical or mental incapacity to perform the duties of Officer's job assignment, or Officer's death. "Voluntary Termination" means a termination of employment initiated by Officer. "Termination for Cause" means a termination of employment by Raychem, at Raychem's sole discretion, because of (i) Officer's willful or continued failure to substantially perform his or her duties for reasons other than physical or mental incapacity, (ii) Officer's willful engaging in misconduct which is materially injurious to Raychem, monetarily or otherwise, (iii) Officer's acts of personal dishonesty or moral turpitude, (iv) Officer's acts of insubordination, or (v) Officer's willful breach of a material obligation or duty to Raychem. 4. Noncompetition and Nonsolicitation As a condition of receiving the Executive Termination Benefit, Officer shall provide consulting services during the Full Salary Period. In order to protect Raychem's proprietary information, while serving as a consultant Officer will be precluded from entering into any employment or consulting arrangement with any direct competitor of any business operated by Raychem and/or its subsidiaries, as such business is conducted on the date of termination of Officer's employment. In addition, while serving as a consultant Officer shall not, directly or indirectly, aid or endeavor to solicit or induce any other employee and/or consultant to leave their employment with Raychem in order to accept employment of any kind with any other person, firm, partnership or corporation. 5. Not a Contract of Employment This policy does not create a contract of employment. No rights to hire or continuation of employment, or to advancement or reassignment, are hereby created. PROCESS: 1. Consulting -3- 4 Officer shall enter into a consulting agreement, pursuant to which Officer will provide consultation to Raychem while Officer is receiving salary continuation and differential payments from Raychem. As a consultant, Officer will be required to make him or herself available on an as needed basis at mutually agreeable times for consultation with regard to Raychem's business at no additional charge to Raychem. 2. Payment of Executive Termination Benefit If the Executive Termination Benefit becomes payable, Raychem or its successor may elect among several ways to pay Officer. Raychem may make salary payments biweekly or on another periodic schedule, or in a lump sum, in any case less deductions authorized or required by law. Also, Raychem may continue in force Officer's insurance benefits, secure individual pre-paid insurance policies on Officer's behalf or pay the cost of post-termination medical benefits in a lump sum. 3. Documentation If Officer is eligible for base salary differential payments after the expiration of the Full Salary Period, Officer may submit a written request for such payments. Raychem shall have no obligation to make base salary differential payments to Officer in the absence of a written request. Officer shall submit all supporting documentation when and as requested by Raychem. CLAIMS: 1. If any claim for payment of a benefit under this policy shall be denied, the [COMPENSATION COMMITTEE OF RAYCHEM'S BOARD OF DIRECTORS ("COMMITTEE")] shall: (a) Notify the claimant within a reasonable time of such denial setting forth the specific reasons therefor; and (b) Afford such claimant a reasonable opportunity for a full and fair review of the decision denying claimant's claim. 2. Claimant may request review of a denial of his or her claim within thirty (30) days of such denial. Upon such request, the Committee shall take appropriate steps to review its decision in light of any further information or comments submitted by the claimant. The Committee is empowered to hold a hearing at which the claimant shall be entitled to present the basis of his or her claim for review and at which claimant may be represented by counsel. -4- 5 3. The Committee shall render a decision within sixty (60) days after the Claimant's request for review (which period may be extended by the Committee to 120 days if circumstances so require) and shall advise the claimant in writing of its decision on such review, specifying its reasons and identifying appropriate provisions of this policy. AMENDMENT AND TERMINATION: The Company expects to continue this policy but reserves the right, at any time with or without prior notice, to amend it in whole or in part or to terminate and discontinue it if, in the Company's sole discretion, such amendment or termination is deemed advisable. -5- EX-10.Q 5 EX-10(Q) 1 EXHIBIT 10(q) CONSULTING/EMPLOYMENT AGREEMENT This Agreement is entered into as of June 7, 1995, between Raychem Corporation, a Delaware corporation having its principal place of business at 300 Constitution Drive, Menlo Park, California 94025, and Robert J. Saldich ("Saldich"), an individual having a home address of 27 Crescent Drive, Palo Alto, California 94301. Saldich is currently the CEO of Raychem Corporation. Raychem desires to insure the availability of services by Saldich through June 7, 1998. This Agreement sets forth the compensation and benefits to be received by Saldich through June 7, 1998 and the services Saldich agrees to provide as set forth in the letter of June 7, 1995 from Paul M. Cook to Saldich. The parties therefore agree as follows: 1. SERVICES Saldich agrees to remain as CEO or consultant to Raychem until his 65th birthday. Saldich will remain as CEO until such time as the Board of Directors of Raychem selects a new CEO, and Saldich will participate in the CEO selection process and provide an orderly transition process. 2. COMPENSATION AND STOCK OPTIONS (a) For as long as Saldich remains the CEO, he will receive his current compensation plus annual raises and bonuses in the normal course of business based on his performance and the performance of the Company; (b) In the event Saldich steps down as CEO prior to age 65 and assumes other duties, either as an employee or consultant, his compensation throughout his sixty-fifth birthday (June 7, 1998) will be his annual salary at the time he leaves the CEO position. Saldich will continue to accrue Raychem service time for pension purposes for the duration of this Agreement, or until June 7, 1998. By mutual agreement, this amount may be paid by crediting Saldich with Raychem service through age 65, if he elects to take retirement prior to that time, and paying him an amount annually equal to the difference between his annual salary and his annual retirement income from Raychem. If Saldich elects to take retirement, he agrees to hold himself available for up to 20% of his time to perform such consulting duties as the Board may from time to time require; (c) In addition to the compensation enumerated in Paragraph b above, Saldich will receive a bonus payment at the end of the fiscal year following his departure as CEO that will reflect the Board's assessment of (a) his performance of his duties in effecting this 2 transition, and (b) the effect of his efforts on the Company's performance; (d) Saldich will receive all available Raychem employee or executive benefits through his 65th birthday, June 7, 1998, as long as he continues to perform such duties or be available to perform such duties as the Board shall require. This means that all of his stock options will continue to vest until age 65 and remain available for him to exercise by their terms following his 65th birthday. 3. BENEFITS (a) During the term of this Agreement, Raychem shall provide Saldich with a car, life insurance, health insurance, and other standard employee benefits under Raychem's standard benefit provisions. Such benefits shall be premised on a base compensation of $650,000 per year, or the actual compensation at the time of retirement if greater than $650,000. (b) For purposes of calculating Saldich's pension, the three year average salary to be used shall be assumed to be $650,000 per year or the actual average of his final three years' salary, whichever is greater. (c) Raychem will provide Saldich with an office and secretary through June 7, 1998. 4. CONFIDENTIALITY Saldich shall hold in confidence all of Raychem's Proprietary Information and all proprietary information entrusted by third parties to Raychem. Saldich shall not disclose, use, copy, publish, summarize, or remove from Raychem's premises any such Proprietary Information except as necessary to carry out his responsibilities under this Agreement. 5. NON-COMPETITION Saldich agrees that he will not, during the period of this Agreement, consult or work for any entity concerned with the design, development, use, manufacture, or sale of any product or product line that is competitive with any product or product line manufactured or sold by Raychem. 6. GENERAL 2 3 (a) Entire Agreement. This Agreement is the entire agreement between the parties and supersedes any and all prior agreements between the parties with respect to the services described by this Agreement. This Agreement also replaces any executive or employee severance benefits to which Saldich may be entitled otherwise. (b) Assignment. Neither party shall assign any right or obligation described in this Agreement without the other party's prior written consent. Dated: June 29, 1995 RAYCHEM CORPORATION /s/ PAUL M. COOK Paul M. Cook Chairman of the Board Dated: June 29, 1995 /s/ ROBERT J. SALDICH ROBERT J. SALDICH 3 EX-13 6 ANNUAL REPORT 1 EXHIBIT 13 FINANCIAL REVIEW ================================================================================ RESULTS OF OPERATIONS OVERVIEW -------------------------------------------------------------------------------- The company reported a net loss of $29 million, or $0.67 per share, for 1995, compared to net income of $2 million, or $0.04 per share, in 1994 and $10 million, or $0.23 per share, in 1993. Revenues increased to $1.53 billion in 1995 from $1.46 billion in 1994, and $1.39 billion in 1993. Revenues in 1994 and 1993 included $58 million and $10 million, respectively, in revenues from Raynet Corporation and subsidiaries (Raynet). Raynet was consolidated in prior years when it was a wholly owned Raychem subsidiary. On November 16, 1994, the company formed a joint venture, Ericsson Raynet, with LM Ericsson, a Swedish telecommunications company. Consequently, Raychem changed its Raynet accounting in 1995 from consolidation to the equity method. Raychem's equity in net losses of affiliated companies for 1995 includes the results of Raynet Corporation and subsidiaries through November 16, 1994, and Raynet's allocation of the results of Ericsson Raynet from November 17, 1994, through June 30, 1995 (see "Raynet" in the notes to consolidated financial statements for details on the transaction and loss allocations; see "Investments" in the notes to consolidated financial statements for summarized financial information). Raynet's pretax loss for 1995 of $118 million included a $28 million loss on formation of the Ericsson Raynet joint venture, equity in net loss of $86 million, and $4 million of other Raynet items. Several unusual transactions have affected core business results in the last three years. Pretax income for 1995 included a pretax charge of $24 million for restructuring and divestitures, a gain of $5 million from the sale of the company's minority interest in Menlo Care, Inc., and charges of $9 million for severance and other costs. Results for 1994 included charges of $6 million for plant consolidation and severance costs. Results for 1993 included charges of $17 million for plant consolidation and severance costs, $9 million in one-time license fee income, and a gain of $4 million from the sale of the remaining portion of the company's equity interest in Mitek Surgical Products, Inc. (Mitek). Excluding these transactions and the effect of Raynet, Raychem's "ongoing" pretax income was $146 million in 1995, compared to $143 million in 1994 and $136 million in 1993. Raychem's results for the past three years are summarized as follows:
-------------------------------------------------------------------------------- PRETAX INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CHANGES IN ACCOUNTING PRINCIPLES YEARS ENDED JUNE 30 (in millions) 1995 1994 1993 -------------------------------------------------------------------------------- Core business "Ongoing" pretax income $ 146 $ 143 $ 136 One-time license fees - - 9 Provision for restructuring and divestitures (24) - - Gain on sales of assets 5 - 4 Severance, plant consolidation, and other charges (9) (6) (17) -------------------------------------------------------------------------------- Core business pretax income 118 137 132 Loss on formation of Ericsson Raynet joint venture and other Raynet items (32) - - Equity in net loss of Ericsson Raynet (86) - - Raynet pretax loss - (103) (92) -------------------------------------------------------------------------------- Consolidated $ (0) $ 34 $ 40 --------------------------------------------------------------------------------
The provision for income taxes was $21 million in 1995, compared to $32 million in both 1994 and 1993. The provision for income taxes in 1995 was lower than in 1994 due to the recognition of tax benefits related to restructuring, severance, and other costs, and lower profits in certain non-U.S. subsidiaries. The results for 1995 include an extraordinary loss of $6 million, or $0.15 per share, for the early retirement of debt following payment by the company of its 9.55% privately placed senior notes. In addition, the company adopted, effective July 1, 1994, Financial Accounting Standards Board (FASB) Statement No. 112, "Employers' Accounting for Postemployment Benefits" (FAS 112). The cumulative effect of this accounting change was a charge of $1 million, or $0.03 per share. The following discussion of the results of operations is based on the company's business segments--electronics, industrial, and telecommunications (which, along with the corporate groups, are referred to collectively as the "core business")--and on Raynet. 20 2 CORE BUSINESS OPERATIONS -------------------------------------------------------------------------------- REVENUES AND GROSS PROFIT Core business revenues for 1995 increased 9% to $1.53 billion from $1.40 billion in 1994, which was an increase of 2% over 1993. Revenues would have increased 4% from 1994 to 1995, and 7% from 1993 to 1994, if foreign currency exchange rates had remained constant in those years. Gross profit as a percent of revenues for the company's core business was 50% in 1995, unchanged from 1994 and 1993. ELECTRONICS Revenues in the electronics business segment increased 17% to $611 million in 1995 from $522 million in 1994, although growth on a constant currency basis was 13%. In 1995, decreases in worldwide defense sales were more than offset by increases of more than 30% in sales of PolySwitch devices and touchscreen products, and continued growth in sales to the automotive market by the Electronics division (which consolidates the combined operations of the former Thermofit, Wire and Cable, and Devices/ICD business units). Elo TouchSystems experienced strong growth as a result of large contracts with major equipment manufacturers deploying new point-of-sale and public interactive systems. Prices generally declined in many of the segment's markets, with PolySwitch decreasing its prices substantially from those of the prior year while increasing its sales in all geographic regions. Gross profit as a percent of revenues for the electronics segment remained essentially unchanged, despite the decrease in prices, reflecting primarily higher volumes and manufacturing efficiencies. Revenues in 1994 were $522 million, up 4% from $503 million in 1993, while constant currency growth was 6%. Revenues in 1994 included $3 million in license fees and royalty income, down from $11 million ($9 million of which were one-time license fees) in 1993. In 1994, decreases in worldwide defense sales were more than offset by growth in sales of PolySwitch devices and touchscreen products. Several of the segment's divisions increased business with the automotive market, which resulted in higher sales of PolySwitch devices, wire and cable, and molded parts. Prices generally decreased in 1994 in many of the segment's markets, principally due to increasing competitive price pressure. Gross profit as a percent of revenues for the electronics segment increased two percentage points in 1994, primarily the result of improved manufacturing capabilities and higher volumes for PolySwitch devices. Restructuring and plant consolidation activities in previous years also helped to improve profitability within the Thermofit and Wire and Cable divisions. INDUSTRIAL Revenues in the industrial business segment for 1995 grew 11% to $499 million from $452 million in 1994, while constant currency growth for the segment was 5%. The segment's Electrical Products Division increased sales in North America, Europe, and Latin America. Revenues were also up for Chemelex, notably in North America. Revenues were down sharply in Ultratec, the segment's pipeline accessory division, which had benefited a year ago from major pipeline projects. Prices remained generally unchanged in most of the segment's markets. Gross profit as a percent of revenues was also unchanged as improved revenues and profitability in the Electrical Products and Chemelex divisions offset the effects of revenue declines in Ultratec. Segment revenues of $452 million in 1994 were up 2% from $443 million in 1993, while constant currency growth for the segment was 8%. Electrical Products increased sales in Asia and North America. Revenues were also up in Ultratec as it benefited from significant projects, notably in Mexico and India. In addition, the unusually harsh winter conditions contributed to North American sales growth for the Chemelex division. Europe's continuing recession and adverse currency movements moderated the reported revenue growth experienced across the segment's divisions. Prices generally declined in 1994 in many of the segment's markets. Nevertheless, gross profit as a percent of revenues in the industrial segment improved slightly in 1994 from 1993 due to higher manufacturing yields and improved efficiency, notably in Electrical Products and Chemelex, but was partially offset by lower margin business within Ultratec. TELECOMMUNICATIONS Revenues in the telecommunications business segment were $420 million in 1995, down 2% from $430 million in 1994, although revenues declined 5% on a constant currency basis. Revenues were up 21 3 in North America, but down in Europe and Asia, and approximately unchanged in Latin America. The discontinuance of unprofitable product lines and a general market shift away from the copper telephony network accounted for the revenue decline. While the segment is introducing new products into other market segments of the outside plant network, sales of these new products, which carry lower margins, are not yet sufficient to offset the decline in sales of copper closures. Prices generally declined across the world in the copper segment as competitive pressures increased. Gross profit as a percent of revenues remained unchanged because previous restructuring actions reduced the impact of lower sales levels and prices. The declining copper closure business and increasing competition has led the segment not only to reduce overall resources, but also shift its resources to focus on the growing parts, principally fiber and electronics products, of its marketplace. Revenues were unchanged in 1994 from $430 million in 1993, although growth was 6% on a constant currency basis. Sales growth in Asia, Latin America, and Spain was offset by adverse currency fluctuations and lower revenues in several European countries. Prices decreased slightly in 1994 due to increased competition in the segment's market. Adverse currency fluctuations and a $4 million cost to restructure the segment's European manufacturing operations impacted gross profit as a percent of revenues for the telecommunications business segment--down over two percentage points in 1994. PROVISION FOR RESTRUCTURING AND DIVESTITURES Over the past several years, the company has strengthened its core businesses and improved its results of operations through a series of initiatives. These actions were in response to product shifts within markets, declining worldwide defense sales, and expanding commercial opportunities. The company therefore consolidated manufacturing capabilities and streamlined operations. The core business incurred a pretax charge of $24 million in the first quarter of 1995 for the restructuring of its telecommunications business segment. The segment's restructuring charge included $13 million for severance costs related to a net workforce reduction of 340 employees, resulting from the closure of telecommunications' manufacturing operations in Germany and the restructuring of its North American activities. The remaining charge of $11 million related to plant consolidations and the shutdown of unprofitable product lines. The charge, excluding $8 million of asset writedowns, was cash in nature and was primarily incurred in 1995 and funded through operating cash flow. The restructuring was substantially completed by June 30, 1995, and will result in approximately $24 million of annualized savings, of which $10 million of savings were realized in fiscal 1995. Substantially all of the savings are cash related. In 1992, the company incurred pretax charges of $42 million for restructuring and divestitures. A significant portion of this restructuring charge--$24 million--was due to the electronics segment's accelerated efforts to realign its business toward a more commercial focus. The segment's restructuring charge included $13 million for severance costs, primarily related to the commercial reorientation of the sales force and reconfiguration of electronics into three functionally integrated divisions. The remaining electronics charge of $11 million related to plant consolidations and the shutdown of unprofitable product lines. In addition, Electrical Products provided $3 million for the relocation of part of its Menlo Park, California, operations to Delaware and for other plant consolidations. In total, these actions provided for a workforce reduction of approximately 460 employees. Other actions amounted to $14 million and included the sale and discontinuation of various portions of certain businesses. All of these programs were substantially completed at June 30, 1995. See "Restructuring and Divestitures" in the notes to consolidated financial statements for further details on the restructuring reserves and the nature of the 1995 provision for restructuring and divestitures. RESEARCH AND DEVELOPMENT EXPENSE Raychem continues to invest in product development. Research and development (R&D) expense for the core business totaled $119 million in 1995, up from $95 million in 1994 and $89 million in 1993. R&D expense represented 8% of revenues in 1995, compared to 7% in 1994 and 6% in 1993. The increase in 1995 over 1994 primarily reflects increased development spending, but also includes $2 million of severance and other costs to consolidate certain R&D activities. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE Selling, general, and administrative (SG&A) expense as a percent of revenues was 32% in 1995, unchanged from 1994 and 1993. 22 4 OTHER EXPENSE, NET Other expense, net, consists primarily of amortization of intangible assets, net foreign exchange gains and losses, bank charges, gains and losses on the disposition of fixed assets and investments, and certain other non-operating items. Other expense, net of income items, was $4 million in 1995, $8 million in 1994, and $10 million in 1993. The decrease from 1994 to 1995 was due principally to the $5 million gain from the sale of the company's minority interest in Menlo Care, Inc. The decrease from 1993 to 1994 was due principally to lower net foreign exchange losses. INCOME TAXES The core business' provision for income taxes was $21 million, $32 million, and $31 million in 1995, 1994, and 1993, respectively. The provision for income taxes in each of these years resulted primarily from profitable non-U.S. operations. Substantially all of the Raynet-related losses are incurred in the U.S. No U.S. tax benefit has been recorded because management believes sufficient uncertainty exists regarding the realizability of the benefit. The provision for income taxes in 1995 was lower than in 1994 due to the recognition of tax benefits related to restructuring, severance, and other costs, and lower profits in certain non-U.S. subsidiaries. The provision for income taxes in 1994 was higher than in 1993 due to higher non-U.S. income. EXTRAORDINARY ITEM On November 1, 1994, the company prepaid the holders of its 9.55% privately placed senior notes. Accordingly, the company recorded an extraordinary loss of $6 million for the early retirement of debt. For details, see "Extraordinary Item--Loss Related to Early Retirement of Debt" in the notes to consolidated financial statements. CHANGES IN ACCOUNTING PRINCIPLES Effective July 1, 1994, the company adopted FAS 112. This statement changed the method of accounting for certain postemployment benefits from a cash basis to an accrual basis. Adopting the standard resulted in a one-time charge against net income of $1 million in 1995 to reflect the cumulative amount that would have been accrued had the statement been in effect in prior years. Effective July 1, 1992, the company adopted two new standards of the FASB. Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires accrual accounting for the expected future cost of company-provided health care for retirees. Statement No. 109, "Accounting for Income Taxes," changed the method of accounting for income taxes to an asset and liability method from a deferred method. The net cumulative effect of adopting these two standards was to increase 1993 net income by $2 million. For details, see the notes to consolidated financial statements. NEW ACCOUNTING STANDARDS In October 1994, the FASB issued Statement No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," which the company adopted in the second quarter of 1995. For required disclosures, see "Financial Instruments" in the notes to consolidated financial statements. In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." For a description, see the notes to consolidated financial statements. This statement must be adopted by the first quarter of fiscal 1997. The company has not yet fully determined the impact of adoption, if any, on the company's results of operations or financial condition. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS It is the company's goal to be recognized worldwide as an exemplary corporate citizen with outstanding environmental, occupational health, and safety performance for our products and for the facilities where we develop, manufacture, and distribute these products. This includes compliance with governmental regulations relating to the environment. Such regulations continue to evolve throughout the world, and changes in regulation can affect the company's manufacturing processes as well as the cost, availability, and use of raw materials. The company does not expect compliance with environmental regulations to have a material effect on capital expenditures or operating results in 1996; however, changes in regulation 23 5 or in the availability or cost of raw materials, or other unknown factors or events, may have a material adverse effect on capital expenditures or operating results. In recent months, supplies of certain raw materials the company uses have been tightening. In some instances, this has resulted in increased prices, rationing, spot shortages, and the potential for future shortages. In response, the company has identified alternative materials for some products, and they are currently undergoing qualification testing. To date, the company has had no disruption of manufacturing, and the impact of raw material price increases has been immaterial. The company has embarked on an "Operational Excellence" program to improve operational efficiency in all areas of the company and to reduce SG&A costs. The program focuses on vigorous process improvements across organizational boundaries. While actions associated with the program are expected to reduce ongoing costs, they may also result in related charges to implement the changes. A portion of the company's research and development activities, its corporate headquarters, and other critical business operations are located near major earthquake faults. In the event of a major earthquake, the ultimate impact on the company, significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected. The company is predominantly not insured for losses and interruptions caused by earthquakes. The company's international business activities and its results could be significantly affected by changes in the policies of foreign governments and in prevailing social and economic conditions overseas, including civil unrest, unstable governments, changing inflation and foreign exchange rates, restrictive exchange controls, and trade restrictions or prohibitions. Any of the foregoing factors could have an adverse effect on future results. RAYNET OPERATIONS - 1995 -------------------------------------------------------------------------------- Raynet was consolidated in prior years when it was a wholly owned Raychem subsidiary. On November 16, 1994, the company formed a joint venture, Ericsson Raynet, with LM Ericsson, a Swedish telecommunications company. Consequently, Raychem changed its Raynet accounting in 1995 from consolidation to the equity method. Raychem's equity in net losses of affiliated companies for 1995 includes the results of Raynet Corporation and subsidiaries through November 16, 1994, and Raynet's allocation of the results of Ericsson Raynet from November 17, 1994, through June 30, 1995 (see "Raynet" in the notes to consolidated financial statements for details on the transaction and loss allocations). Raynet's pretax loss for 1995 of $118 million includes a $28 million loss on the formation of the Ericsson Raynet joint venture, $4 million of other Raynet items, and equity in net loss of $86 million. The equity in net loss includes Raynet Corporation and subsidiaries' loss of $38 million through November 16, 1994, and Raynet's $48 million loss allocation from Ericsson Raynet. Ericsson Raynet's net loss for the period from November 17, 1994, through June 30, 1995, was $78 million and included $12 million of restructuring costs related to an operational consolidation. The Ericsson Raynet restructuring costs were shared by Ericsson and Raynet on a 51/49 basis, and the remaining loss was allocated to Ericsson and Raynet on a 51/49 basis subject to Ericsson's $25 million loss allocation limit for 1995. See "Investments" in the notes to consolidated financial statements for additional summarized financial information. See "Raynet" in the notes to consolidated financial statements for details of the partner's loss allocations in fiscal 1996. RAYNET OPERATIONS - 1994 VS. 1993 -------------------------------------------------------------------------------- Revenues at Raynet were $58 million in 1994, up from $10 million in 1993. Revenues in 1994 principally resulted from the previously announced OPAL '93 contract with the German telephone company, Deutsche Bundespost Telekom (DBPT), and volume shipments to NYNEX. Revenues in 1993 were derived primarily from field trial installations, first office applications, and RIDES software licensing arrangements. R&D expense at Raynet was $41 million and $40 million in 1994 and 1993, respectively. Raynet's SG&A expense increased to $39 million in 1994 from $35 million in 1993 because of higher international sales and marketing spending, and employee severance costs. Raynet capitalized $4 million and $8 million of software development costs in 1994 and 1993, respectively, for its domestic and international operating systems and system support software. Amortization of certain of these costs began in 1993 and 1994 as the related products were made available for sale. 24 6 ================================================================================ LIQUIDITY AND CAPITAL RESOURCES CONSOLIDATED -------------------------------------------------------------------------------- Debt net of cash decreased by $22 million to $175 million at June 30, 1995, from $197 million at June 30, 1994. Debt net of cash increased by $56 million in 1994. The decrease in debt net of cash in 1995 resulted primarily from reduced funding requirements for Raynet losses, cash proceeds from the Ericsson Raynet joint venture transaction, and proceeds from the sale of a minority interest in Menlo Care, Inc., partially offset by the company's repurchase of its Common Stock. The increase in debt net of cash in 1994 resulted from increases in accounts receivable and inventories, higher capital spending, and a $20 million funding of the company's U.S. pension plan, partially offset by increases in accounts payable and accrued liabilities, lower tax payments, and the effect of a large tax refund in the United Kingdom. In February 1991, the company entered into a $210 million privately placed debt agreement. In December 1992, the company entered into an interest rate swap agreement with a financial institution, which effectively converted $100 million of notional principal amount from a fixed to a floating interest rate. The effect of this interest rate swap was to reduce net interest expense in both 1993 and 1994 by $1 million. In December 1993, the company terminated the swap agreement. The termination resulted in a gain of $3 million, which was deferred, to be amortized over the remaining life of the hedged debt. On November 1, 1994, the company prepaid the holders of its 9.55% privately placed senior notes, resulting in an extraordinary loss, which included recognition of the remaining deferred gain on the termination of the interest rate swap. In September 1994, the company entered into syndicated loan agreements providing for a five-year partially amortizing term loan of $225 million, and a renewable 364-day revolving credit facility of $200 million. Interest on the term loan and revolving credit facility are at variable spreads over LIBOR. The term loan requires quarterly principal payments of $15 million beginning December 31, 1996, increasing to $17.5 million at December 31, 1997, and to $20 million from December 31, 1998, with a final payment of $35 million due September 29, 1999. Proceeds from the term loan were drawn on November 1, 1994, and used to retire the 9.55% privately placed senior notes and for general corporate purposes, while the revolving credit facility replaced existing committed credit facilities. The new syndicated loan agreements include covenants that, among other things, specify a minimum net worth requirement, a maximum leverage limit, a minimum fixed charge coverage ratio, and limits on further advances to fund Raynet operations. In November 1994, the company completed the transactions related to the formation of the Ericsson Raynet joint venture. In forming the joint venture, Raychem sold certain specified assets of its Raynet subsidiary to Ericsson in exchange for $40 million in cash. In January 1995, the company entered into a revolving credit agreement with the joint venture. The company agreed to make available to the joint venture a maximum of $50 million, due in full on December 20, 1995, or earlier if the revolving credit arrangement is terminated at the company's discretion. The credit agreement stipulates that borrowings under the arrangement will be interest-free, and imposes no covenants or restrictions on the joint venture's operations. Ericsson has also entered into a similar agreement with the joint venture. Through June 30, 1995, the company made net advances to Ericsson Raynet of $62 million, of which $4 million was under the above credit agreement and the remaining $58 million has been capitalized as an investment in the joint venture. In December 1994, the Board of Directors authorized the repurchase, at management's discretion, of up to 1.5 million shares of the company's stock during any one fiscal year. Shares repurchased under this authorization will be used to offset the dilution caused by the company's employee stock plans. The company repurchased 700,000 shares at a cost of $26 million in 1995, and subsequently reissued 473,360 shares through June 30, 1995. In the fourth quarter of fiscal 1995, the company sold its minority interest in Menlo Care, Inc. for cash and common stock of Johnson & Johnson. A portion of the stock received was sold during the quarter. The cash proceeds from these two related transactions amounted to $4 million. In June 1993, Raychem repurchased all of the preferred stock in Raynet International Inc. (RNI), a subsidiary of Raynet, previously held by BellSouth Enterprises Inc. As a result of this $30 million purchase, Raynet and RNI were essentially wholly owned by the company and its consolidated 25 7 subsidiaries. Accordingly, at June 30, 1994 and 1993, there was no minority interest related to the RNI preferred stock. In 1993, Raychem received $4 million from the sale of the remaining portion of the company's investment in Mitek and $7 million from the sale of various fixed assets. Net interest expense was $13 million in both 1995 and 1994, compared to $15 million in 1993. While debt was higher in 1995 versus 1994, net interest expense was unchanged due to lower interest cost resulting from the refinancing of the company's debt. Net interest expense was lower in 1994 due to the repurchase of the RNI preferred stock. Proceeds from the issuance of Common Stock to employees participating in the company's employee stock purchase plan and stock option plans amounted to $40 million in 1995, up from $34 million in 1994. The company's quarterly cash dividend has been paid consistently since the second quarter of 1978. During 1995 the company paid $14 million in dividends to its stockholders, and expects to continue to pay dividends in the foreseeable future. At June 30, 1995, the company had $118 million in cash and cash equivalents, $240 million in committed credit facilities (of which $2 million was utilized), and $180 million in various uncommitted credit facilities (of which $54 million was utilized). The combination of cash and cash equivalents, available lines of credit, and future cash flows from operations are expected to be sufficient to satisfy substantially all of the company's needs for working capital, normal capital expenditures, and anticipated dividends. The future operating cash requirements of Ericsson Raynet that Raychem is obligated to fund are expected to be below the funding levels of 1995. CORE BUSINESS -------------------------------------------------------------------------------- See the previous section "Liquidity and Capital Resources--Consolidated" for a discussion of 1995. Cash provided by operations in the core business improved to $151 million in 1994 from $126 million in 1993. The increase in 1994 resulted from decreased spending for restructuring and divestitures, lower tax payments, and a large tax refund in the United Kingdom, partially offset by increases in accounts receivable and a $20 million funding of the U.S. pension plan. Inventory as measured by the number of days of inventory on hand improved to 109 days for 1995 from 114 days for 1994. Receivables as measured by the number of billing days outstanding were 61 days at June 30, 1995, down from 65 days at June 30, 1994. The decrease in receivables days outstanding resulted from changes in the receivables mix and an improvement in collections in some larger countries. Capital expenditures as a percent of revenues were 6% in 1995, down slightly from 7% in 1994, but equal to that of 1993. Investments in core business property, plant, and equipment totaled $94 million, $93 million, and $79 million in 1995, 1994, and 1993, respectively. The increase in 1994 was due to spending on a number of projects, including new manufacturing facilities in Japan and the People's Republic of China, and on new PolySwitch capacity in Menlo Park, California. Capital expenditures in 1996 are expected to be about 7% of revenues. RAYNET -------------------------------------------------------------------------------- See "Liquidity and Capital Resources--Consolidated" above for a discussion of 1995. Net cash used in operating and investing activities at Raynet increased to $136 million in 1994, up from $80 million in 1993. The higher cash needs in 1994 resulted from a larger operating loss and increases in receivables and inventories as volume shipments commenced. The lower cash needs in 1993 resulted from the collection of a $12 million receivable from DBPT for development contracts and lower capital expenditures. Capital expenditures totaled $11 million in both 1994 and 1993. In the fourth quarter of 1993, Raynet received a $168 million capital injection from Raychem. Proceeds were used to pay down existing intercompany debt and to partially fund expenditures in 1994. The intercompany debt at June 30, 1994, of $122 million was reflected as equity since Raychem intended to, and did, capitalize this debt in early fiscal 1995. 26 8 REPORT OF MANAGEMENT ================================================================================ Responsibility for the preparation, integrity, and objectivity of the financial information presented in this annual report rests with Raychem management. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, applying certain estimates and judgments as required. Raychem maintains a system of internal accounting control designed to be cost-effective while providing reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and are properly recorded in the financial records. Internal control effectiveness is supported through written communication of policies and procedures, careful selection and training of personnel, quarterly financial reviews with divisions and major subsidiaries, and audits by a professional staff of internal auditors. The company's control environment is further enhanced through a formal Statement of Corporate Values which sets standards of professionalism and integrity for employees worldwide. Price Waterhouse LLP, independent accountants, are retained to examine Raychem's financial statements. Their accompanying report is based on an examination conducted in accordance with generally accepted auditing standards, including a review of financial controls and tests of accounting procedures and records as deemed necessary. The Audit Committee of the Board of Directors is composed solely of nonemployee directors, and is responsible for recommending to the Board the independent accounting firm to be retained for the coming year, subject to stockholder approval. The Audit Committee meets periodically and privately with the independent accountants, with our internal auditors, and with Raychem management, to review accounting, auditing, financial control, and financial reporting matters. /s/ Robert J. Saldich /s/ Raymond J. Sims Robert J. Saldich Raymond J. Sims President and Chief Senior Vice President and Executive Officer Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS ================================================================================ TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF RAYCHEM CORPORATION In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Raychem Corporation and its subsidiaries at June 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in the notes to consolidated financial statements, the company changed its method of accounting for postemployment benefits in 1995 and its methods of accounting for income taxes and nonpension postretirement benefits in 1993. /s/ Price Waterhouse LLP San Jose, California July 18, 1995 27 9 CONSOLIDATED BALANCE SHEET ===========================================================================================
June 30 (in thousands except share data) 1995 1994 ------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 118,067 $ 78,090 Accounts receivable, net of allowances for doubtful accounts of $10,348 in 1995 and $11,599 in 1994 304,819 312,624 Inventories: Raw materials 76,862 99,129 Work in process 53,632 55,406 Finished goods 103,206 93,254 ----------- ----------- Total inventories 233,700 247,789 Prepaid taxes 60,661 40,014 Other current assets 62,361 57,425 ------------------------------------------------------------------------------------------- Total current assets 779,608 735,942 ------------------------------------------------------------------------------------------- Property, plant, and equipment: Land 50,063 46,840 Buildings 374,577 359,911 Machinery and equipment 645,265 646,752 Leasehold improvements 48,034 57,192 ---------- ---------- Total property, plant, and equipment 1,117,939 1,110,695 Less accumulated depreciation and amortization 590,520 576,216 ------------------------------------------------------------------------------------------- Net property, plant, and equipment 527,419 534,479 ------------------------------------------------------------------------------------------- Other assets 147,718 128,594 ------------------------------------------------------------------------------------------- Total assets $ 1,454,745 $ 1,399,015 =========================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 28,632 $ 26,986 Accounts payable 67,102 83,136 Compensation and benefits 85,690 91,422 Other accrued liabilities 97,789 93,151 Income taxes 22,943 25,515 Current maturities of long-term debt 1,042 3,881 ------------------------------------------------------------------------------------------- Total current liabilities 303,198 324,091 ------------------------------------------------------------------------------------------- Long-term debt 263,552 244,681 ------------------------------------------------------------------------------------------- Deferred income taxes 35,002 27,433 ------------------------------------------------------------------------------------------- Other long-term liabilities 98,215 65,625 ------------------------------------------------------------------------------------------- Minority interests 5,120 4,261 ------------------------------------------------------------------------------------------- Commitments and contingencies (See notes) ------------------------------------------------------------------------------------------- Stockholders' equity: Preferred Stock, $1.00 par value Authorized: 15,000,000; Issued: none - - Common Stock, $1.00 par value Authorized: 72,150,000 Issued: 1995-43,897,275; 1994-43,005,786 43,897 43,006 Additional contributed capital 380,127 354,660 Retained earnings 272,657 319,905 Currency translation 61,946 16,077 Treasury Stock, at cost (226,640 shares) (8,330) - Notes receivable from sale of stock (639) (724) ------------------------------------------------------------------------------------------- Total stockholders' equity 749,658 732,924 ------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,454,745 $ 1,399,015 ===========================================================================================
See accompanying notes to consolidated financial statements. 28 10 CONSOLIDATED STATEMENT OF OPERATIONS ==============================================================================================
YEARS ENDED JUNE 30 (in thousands except share data) 1995 1994 1993 ---------------------------------------------------------------------------------------------- Revenues $1,530,573 $1,461,532 $1,385,730 Cost of goods sold 758,566 779,820 710,820 Research and development expense 118,762 136,619 128,992 Selling, general, and administrative expense 495,537 491,563 479,889 Provision for restructuring and divestitures 23,900 -- -- Loss on formation of Ericsson Raynet joint venture and other Raynet items 32,032 -- -- Equity in net losses of affiliated companies 84,758 109 1,121 Interest expense, net 13,046 12,762 14,867 Other expense, net 4,242 6,914 10,457 ---------------------------------------------------------------------------------------------- (Loss) income before income taxes, extraordinary item, and changes in accounting principles (270) 33,745 39,584 Provision for income taxes 21,178 32,066 31,659 ---------------------------------------------------------------------------------------------- (Loss) income before extraordinary item and changes in accounting principles (21,448) 1,679 7,925 Extraordinary item--loss related to early retirement of debt, net of $0 income taxes (6,318) -- -- Cumulative effect of changes in accounting principles, net of $0 income taxes (1,477) -- 1,700 ---------------------------------------------------------------------------------------------- Net (loss) income $ (29,243) $ 1,679 $ 9,625 ============================================================================================== (Loss) earnings per common share: (Loss) income before extraordinary item and changes in accounting principles $ (0.49) $ 0.04 $ 0.19 Extraordinary item (0.15) -- -- Changes in accounting principles (0.03) -- 0.04 ---------------------------------------------------------------------------------------------- Net (loss) income $ (0.67) $ 0.04 $ 0.23 ============================================================================================== Average number of common shares outstanding 43,538,028 43,290,797 42,232,289 ==============================================================================================
See accompanying notes to consolidated financial statements. 29 11 CONSOLIDATED STATEMENT OF CASH FLOWS ========================================================================================================
YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993 -------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net (loss) income $ (29,243) $ 1,679 $ 9,625 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Provision for restructuring and divestitures, net of payments 7,620 (6,163) (18,802) Loss on formation of Ericsson Raynet joint venture 14,517 -- -- Equity in net losses of affiliated companies 84,758 109 1,121 Extraordinary loss related to early retirement of debt (1,043) -- -- Changes in accounting principles 1,477 -- (1,700) Depreciation and amortization 74,798 86,265 80,643 Deferred income tax provision (benefit) 3,465 (4,723) (1,377) Gain on sale of investment (5,414) (870) (3,609) Net loss on disposal of other property, plant, and equipment 3,856 127 84 Changes in certain assets and liabilities, net of effects from restructuring and divestitures, joint venture formation, extraordinary item, and changes in accounting principles: Accounts receivable (12,911) (61,340) 9,536 Inventories (1,107) (14,734) (19,590) Accounts payable and accrued liabilities (1,166) 25,317 33,195 Income taxes (14,822) 17,329 (57,182) Other assets and liabilities 4,479 (17,212) 24,531 -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 129,264 25,784 56,475 -------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Investment in property, plant, and equipment (94,041) (104,056) (89,545) Disposition of property, plant, and equipment 6,342 4,494 6,963 Proceeds from sale of specified Raynet assets 40,000 -- -- Advances to affiliated companies (63,427) -- -- Cost of acquisition, net of cash acquired (3,930) -- -- Repurchase of Raynet minority interest -- -- (30,000) Proceeds from sale of investment 4,387 873 3,774 Purchase of investment (1,000) -- -- -------------------------------------------------------------------------------------------------------- Net cash used in investing activities (111,669) (98,689) (108,808) -------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds from (payment of) short-term debt 5,031 (11,503) 18,936 Proceeds from long-term debt 225,498 17,405 9,219 Payments of long-term debt (213,100) (8,242) (6,529) Common Stock repurchased (26,139) -- -- Common Stock issued under employee benefit plans 39,877 34,071 35,570 Proceeds from repayments of stockholder notes receivable 320 117 2,880 Cash dividends (13,950) (13,624) (13,156) -------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 17,537 18,224 46,920 -------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 4,845 (1,175) (9,503) -------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 39,977 (55,856) (14,916) Cash and cash equivalents at beginning of year 78,090 133,946 148,862 -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 118,067 $ 78,090 $ 133,946 ======================================================================================================== Supplemental Disclosures Cash paid for: Interest (net of amounts capitalized) $ 25,710 $ 19,197 $ 26,583 Income taxes (net of refunds) 25,623 6,991 60,479 ========================================================================================================
See accompanying notes to consolidated financial statements. 30 12 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
============================================================================================================================= NOTES ADDITIONAL CURRENCY RECEIVABLE COMMON CONTRIBUTED RETAINED TRANS- TREASURY FROM SALE (in thousands except share data) STOCK CAPITAL EARNINGS LATION STOCK OF STOCK TOTAL ----------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1992 $40,242 $287,322 $335,381 $ 55,503 $ -- $(3,260) $ 715,188 ----------------------------------------------------------------------------------------------------------------------------- Net income -- -- 9,625 -- -- -- 9,625 Common Stock issued (1,632,990 shares) 1,633 34,190 -- -- -- (253) 35,570 Cash dividends ($0.32 per share of Common Stock) -- -- (13,156) -- -- -- (13,156) Currency translation -- -- -- (60,603) -- -- (60,603) Repayments of notes receivable -- -- -- -- -- 2,880 2,880 ----------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1993 41,875 321,512 331,850 (5,100) -- (633) 689,504 ----------------------------------------------------------------------------------------------------------------------------- Net income -- -- 1,679 -- -- -- 1,679 Common Stock issued (1,131,013 shares) 1,131 33,148 -- -- -- (208) 34,071 Cash dividends ($0.32 per share of Common Stock) -- -- (13,624) -- -- -- (13,624) Currency translation -- -- -- 21,177 -- -- 21,177 Repayments of notes receivable -- -- -- -- -- 117 117 ----------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1994 43,006 354,660 319,905 16,077 -- (724) 732,924 ----------------------------------------------------------------------------------------------------------------------------- Net loss -- -- (29,243) -- -- -- (29,243) Common Stock issued (891,490 shares) 891 25,467 -- -- -- (235) 26,123 Cash dividends ($0.32 per share of Common Stock) -- -- (13,950) -- -- -- (13,950) Currency translation -- -- -- 45,869 -- -- 45,869 Treasury Stock purchased (700,000 shares) net of issuances (473,360 shares) -- -- (4,055) -- (8,330) -- (12,385) Repayments of notes receivable -- -- -- -- -- 320 320 ----------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1995 $43,897 $380,127 $272,657 $ 61,946 $(8,330) $ (639) $ 749,658 =============================================================================================================================
See accompanying notes to consolidated financial statements. 31 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of all wholly owned and majority owned subsidiaries. Investments in entities owned 20% or more but less than majority owned and not otherwise controlled by the company are accounted for under the equity method. Due to the formation of the Ericsson Raynet joint venture in November 1994, the operations of Raynet Corporation and subsidiaries (Raynet) for 1995 are included in the consolidated financial statements using the equity method of accounting; Raynet's operations were consolidated in prior years (see "Raynet" note). All significant intercompany accounts and transactions are eliminated. FOREIGN CURRENCY TRANSLATION Assets and liabilities of operations outside the United States, except for operations in highly inflationary economies (principally in Latin America), are translated into U.S. dollars using the exchange rate in effect at each period end. Revenues and expenses are translated at the average exchange rate prevailing during the period. The effects of foreign currency translation adjustments arising from differences in exchange rates from period to period are deferred and included as a component of "stockholders' equity." The effects of foreign currency transactions and of remeasuring the financial position and results of operations into the functional currency are included in "other expense, net." CASH EQUIVALENTS All highly liquid investments with a maturity of three months or less at the date of purchase are classified as cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined principally using the first-in, first-out method and includes materials, direct and indirect labor, and manufacturing overhead. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are carried at cost. Effective July 1, 1990, the company adopted the straight-line method of depreciation for property, plant, and equipment placed in service on or after that date. Fixed assets placed in service prior to 1991 continue to be depreciated using principally accelerated methods. Property, plant, and equipment are depreciated over the estimated useful lives of the individual assets and, for leasehold improvements, over the terms of their respective leases, if shorter. The estimated useful lives of major classes of depreciable assets are as follows: -------------------------------------------------------------------------------- Buildings and Improvements 5 - 45 years Machinery and Equipment 3 - 10 years Leasehold Improvements Term of lease or life of asset --------------------------------------------------------------------------------
SOFTWARE CAPITALIZATION The company capitalizes software development costs as resulting products become technologically feasible. Capitalized software development costs are amortized over a period not to exceed three years, commencing when the products are available for general release to customers on a volume basis. At June 30, 1994, the company had $11 million in net capitalized software development costs. For the years ended June 30, 1994, and 1993, amortization of software development costs was $4 million and $1 million, respectively. Capitalized software development costs at June 30, 1995, and related amortization for the year ended June 30, 1995, were zero as the company's Raynet subsidiary, which held this software, was accounted for on the equity basis of accounting beginning in 1995. INTANGIBLE ASSETS Goodwill represents the excess of purchase price over the fair value of identifiable net assets of businesses acquired and is amortized on a straight-line basis over periods not exceeding 20 years. Patents and trademarks are amortized on a straight-line basis over their legal or estimated useful lives, whichever is shorter. The company assesses the carrying value of intangible assets on a regular basis. An impairment of intangible assets is recognized when it is deemed probable that the carrying amount of an asset cannot be fully recovered, based on estimated future operating profits of the related business. 32 14 REVENUE RECOGNITION Revenue from product sales is recognized when the earnings process is complete. This generally occurs at the time product is shipped. Revenue on certain Raynet contracts was recognized upon installation and acceptance by the customer. Other revenues are principally from licensing and royalty arrangements. License and royalty revenues are recognized according to the terms of the specific agreements. ENVIRONMENTAL COSTS Environmental expenditures are expensed or capitalized as appropriate. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. INCOME TAXES The company adopted the provisions of Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes" (FAS 109), effective as of July 1, 1992. FAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The cumulative effect of adopting the standard as of July 1, 1992, was a $4 million, or $0.10 per share, increase in 1993 net income. EARNINGS (LOSS) PER COMMON SHARE Primary earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding after giving effect to stock options considered to be dilutive common stock equivalents. Common shares outstanding includes issued shares less shares held in treasury. In the case that fully diluted earnings per common share is materially different from primary earnings per common share, fully diluted earnings per common share is calculated by dividing net income by the sum of the weighted average number of common shares outstanding, dilutive stock options, and shares issuable under the company's Employee Stock Purchase Plan at the end of the period. Common stock equivalents would be excluded from both the primary and fully diluted calculations if a net loss was incurred for the period as they would be anti-dilutive. TREASURY STOCK The company's repurchases of shares of Common Stock are recorded as treasury shares and result in a reduction of "stockholders' equity." When treasury shares are reissued, the company uses a first-in, first-out method and the excess of repurchase cost over reissuance price is treated as a reduction of "retained earnings." NEW ACCOUNTING STANDARD In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by APB Opinion No. 30. The statement must be adopted by the first quarter of fiscal 1997. The company has not yet fully determined the impact of adoption, if any, on the company's results of operations or financial condition. FINANCIAL PRESENTATION Certain prior-year amounts have been reclassified to conform with the 1995 financial statement presentation. ================================================================================ RAYNET On November 16, 1994, the company and LM Ericsson (Ericsson), a Swedish telecommunications company, formed a joint venture for the development, manufacture, and marketing of fiber-optic communications systems for telephone access networks worldwide. The joint venture, called "Ericsson Raynet," has taken over and is continuing the operations of the company's Raynet subsidiary, and is headquartered in Menlo Park, California. Ericsson Raynet has been organized as a partnership under Delaware law; the company's Raynet subsidiary holds the company's interest in the joint venture. Ericsson representatives constitute a majority of the Board of Managers of the joint venture. In forming the joint venture, Raychem sold certain specified assets of its Raynet subsidiary to Ericsson in exchange for $40 million in cash. Ericsson contributed the purchased assets to the joint venture, and Raynet contributed substantially all of its remaining assets and liabilities to the joint venture. Funding of the joint venture will initially be provided by the partners, generally 51% by Ericsson and 49% by Raynet, subject to Ericsson's loss allocation limit described below. 33 15 During the first five to eight years of operation, subject to various conditions, substantially all of the profits of the joint venture up to $156 million (plus incremental losses borne by Raynet on account of the loss cap) will be allocated to Raynet; thereafter, profits of the joint venture will be shared 51/49 by Ericsson and Raynet, respectively. Ericsson's share of the joint venture's losses was capped at $25 million for the fiscal year ending June 30, 1995. In addition, restructuring costs in 1995 were shared 51/49 by Ericsson and Raynet, respectively, without consideration of Ericsson's previously mentioned loss allocation cap. During the fiscal year ending June 30, 1996, up to $19.6 million of losses will be allocated to Ericsson and Raynet in a 51/49 ratio; additional losses, if any, of up to $10 million will be allocated 100% to Raynet; and additional losses, if any, will again be allocated to Ericsson and Raynet in a 51/49 ratio. BellSouth Enterprises Inc. (BSE) had financed a portion of the software development work at Raynet and held a royalty interest in the software related revenues of Raynet. The royalty was based on a variable rate subject to meeting certain annual royalty payment levels. Royalty expense under the agreement was $3 million and $1 million in 1994 and 1993, respectively. With the creation of the joint venture, this royalty payment was reconfigured. Raychem paid BSE $10 million in November 1994, and is required to make two additional payments of $10 million each in November 1995 and 1996. Raychem has agreed to make other royalty payments to BSE contingent upon the revenues and earnings performance of the joint venture. At such time as the joint venture achieves profitability, these royalty payments could approximate 36% of Raychem's distributions from the joint venture. Ericsson has the right to purchase Raynet's interest in the joint venture at a fixed price for a limited period beginning November 16, 1996; and Ericsson and Raynet have call and put rights, respectively, on Raynet's interest in the joint venture exercisable at fair market value at any time after July 1, 1999. If any of these options are exercised, Raychem has agreed to pay BSE a portion of the purchase price received. The company's loss resulting from these transactions, a pre-tax charge of $28 million, is included in the line item "loss on formation of Ericsson Raynet joint venture and other Raynet items." For purposes of recording its loss, the company has discounted its obligations to BSE to their present value as of November 16, 1994, using a 7.97% discount rate. See "Investments" note for summarized financial information of Ericsson Raynet and related party balances. REVOLVING CREDIT AGREEMENT On January 2, 1995, the company entered into a revolving credit agreement with Ericsson Raynet. The company committed to make available to the joint venture a maximum of $50 million, due in full on December 20, 1995, or earlier if the revolving credit arrangement is terminated at the company's discretion. The credit agreement stipulates that borrowings under the agreement will be interest-free, and imposes no covenants or restrictions on the joint venture's operations. Ericsson has also entered into a similar agreement with the joint venture. At June 30, 1995, Ericsson Raynet had borrowed $4 million from the company under the revolving credit agreement, which amount is included in "other current assets." REPURCHASE OF MINORITY INTEREST On June 24, 1993, the company repurchased all of the convertible preferred stock in Raynet International Inc. (RNI), a subsidiary of Raynet Corporation, previously held by BSE. As a result of this $30 million purchase, Raynet and RNI were essentially wholly owned by Raychem and its consolidated subsidiaries. The RNI preferred stock was previously recorded as a minority interest. Accordingly, at June 30, 1994 and 1993, there was no minority interest related to the RNI preferred stock. The excess of Raychem's cost over the fair value of the preferred stock was recorded as "goodwill" and was being amortized over a five-year period. Goodwill amortization expense was $1 million in 1994 (none in 1993). In 1995, the underlying assets of the business were sold and the remaining $4 million of unamortized goodwill was included in the "loss on formation of Ericsson Raynet joint venture and other Raynet items." ================================================================================ FINANCIAL INSTRUMENTS In October 1994, the FASB issued Statement No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," which the company adopted in the second quarter of 1995. Currently, the company is not a party to any interest rate risk management transactions. The company does not hold any derivative financial instruments for trading purposes. The company has written policies which place all foreign currency forward and option transactions under the direction of corporate treasury and restrict all derivative transactions to those intended for hedging purposes. 34 16 The company operates in more than 40 countries worldwide, with in excess of sixty percent of its revenues occurring outside the United States. The company attempts to limit its exposure to changing foreign currency exchange rates through both operational and financial market actions. The company manufactures its products in a number of locations around the world, and hence has a cost base that is well diversified over a number of European and Asian currencies as well as the U.S. dollar. This diverse base of local currency costs serves to counterbalance the income effect of potential changes in the value of the company's local currency denominated revenues. Also, the company denominates its third-party export sales in the currency of the selling Raychem entity, whenever possible. FORWARD FOREIGN EXCHANGE CONTRACTS Short-term exposures to changing foreign currency exchange rates are managed by financial market transactions, principally through the purchase of forward foreign exchange contracts (with maturities usually less than three months) to hedge the non-functional currency denominated receivables and payables and anticipated transactions of the company's operating units. The related realized and unrealized gains and losses are included in "other expense, net." The company is subject to credit risk exposure from nonperformance by the counterparties to these transactions, typically large international financial institutions. Gains and losses from forward foreign exchange contracts used to hedge receivables, payables and anticipated transactions totaled a $4 million gain for the year ended June 30, 1995. The company incurred total foreign exchange transaction losses of $4 million, $5 million, and $10 million for 1995, 1994, and 1993, respectively. The total amount of exposure hedged at June 30, 1995, was $205 million, reflecting hedging for trade and intercompany receivables and payables (including anticipated transactions), and loans in non-functional currencies. The company has unhedged non-functional currency translation and transaction exposures in countries whose currencies do not have a liquid, cost-effective forward market available for hedging. Exposures at June 30, 1995, included $7 million in net intercompany payables in non-functional currencies and $7 million of net monetary assets in foreign countries with the U.S. dollar as functional currency. The company periodically enters into forward foreign exchange contracts to hedge a portion of its equity in foreign subsidiaries. The gains and losses on these contracts are included in "stockholders' equity." There were no such hedges of foreign equity outstanding at June 30, 1995. INTEREST RATE SWAP AGREEMENT On December 8, 1992, the company entered into a three-year interest rate swap agreement for a notional principal amount of $100 million, involving the exchange of fixed and floating interest payment obligations. On December 8, 1993, the company terminated the swap agreement. In addition to the financial risk that varied during the life of this swap agreement in relation to market interest rates, the company was subject to credit risk exposure from nonperformance by the counterparty to the swap agreement. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the company to significant concentrations of credit risk consist primarily of cash and trade accounts receivable. The company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. These financial institutions are located throughout the world, and the company's policy is designed to limit exposure to any one institution. The company's periodic evaluations of the relative credit standing of these financial institutions are considered in the company's investment strategy. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities comprising the company's customer base and their dispersion across many different industries and countries. Credit risk to certain countries is further limited through the use of irrevocable letters of credit and bank guarantees. As of June 30, 1995 and 1994, the company had no significant concentrations of credit risk. FAIR VALUE OF FINANCIAL INSTRUMENTS For certain of the company's financial instruments, including cash and cash equivalents, accounts receivable, notes payable to banks, accounts payable, and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Consequently, such instruments are not included in the following table, which provides information regarding the estimated fair values of other financial instruments. 35 17
-------------------------------------------------------------------------------------------- 1995 1994 --------------------- --------------------- JUNE 30 CARRYING FAIR CARRYING FAIR ASSET (LIABILITY)(in thousands) AMOUNT VALUE AMOUNT VALUE -------------------------------------------------------------------------------------------- Long-term debt, including current maturities, and accrued interest of $2,812 and $6,685 in 1995 and 1994, respectively $(267,406) $(267,406) $(255,247) $(261,405) Forward foreign exchange contracts included in: Other current assets $ 805 $ 805 $ 1,231 $ 1,231 Other accrued liabilities $ (307) $ (307) $ (15) $ (15) --------------------------------------------------------------------------------------------
The fair value of long-term debt is estimated using discounted cash flow analysis, based on the incremental borrowing rates currently available to the company for bank loans with similar terms and maturities. The estimated fair value of forward foreign exchange contracts is primarily based on quoted market prices of comparable contracts. ================================================================================ INVESTMENTS Of the total investments accounted for by the equity method, Ericsson Raynet, a 49%-owned joint venture for the development, manufacture, and marketing of fiber-optic communication systems for telephone access networks worldwide, represented $18 million at June 30, 1995 (see related "Raynet" note). The remaining investments accounted for by the equity method aggregate to $2 million at June 30, 1995, and include various manufacturing companies owned between 20%-50%. Investments are included as a component of "other assets." No dividends were received from equity affiliates in 1995. The investment balance and the company's equity in net losses of affiliated companies were immaterial in prior years. Summarized financial information of Ericsson Raynet and the other equity affiliates follows:
------------------------------------------------------------------------------- TOTAL ERICSSON OTHER EQUITY 1995 (in thousands) RAYNET AFFILIATES AFFILIATES ------------------------------------------------------------------------------- Current assets $ 62,864 (a) $ 19,354 $ 82,218 Non-current assets 34,203 (a) 6,892 41,095 Current liabilities 65,906 (a) 23,666 89,572 Non-current liabilities 495 (a) 1,077 1,572 ------------------------------------------------------------------------------- Revenues $ 45,502 (b) $ 40,990 $ 86,492 ------------------------------------------------------------------------------- Gross profit (loss) $ (24,074)(b) $ 15,645 $ (8,429) ------------------------------------------------------------------------------- Net (loss) income $(116,638)(b) $ 4,698 $(111,940) ------------------------------------------------------------------------------- Raychem's equity in (loss) income $ (85,946)(c) $ 1,188 $ (84,758) -------------------------------------------------------------------------------
(a) Balances as of June 30, 1995 are those of Ericsson Raynet. (b) Includes the results of Raynet Corporation and subsidiaries through November 16, 1994, and the results of Ericsson Raynet from November 17, 1994, through June 30, 1995. (c) The joint venture agreement specifies varying profit and loss allocations to its partners as more fully described in the accompanying "Raynet" note. Raychem's equity in loss includes the results of Raynet Corporation and subsidiaries through November 16, 1994, and Raychem's allocation of the results of Ericsson Raynet from November 17, 1994, through June 30, 1995. Included in Raychem's "other accrued liabilities" is a $9 million obligation to fund the cash losses of Ericsson Raynet, which amount was paid subsequent to June 30, 1995. Included in Raychem's "other long-term liabilities" is an $8 million non-interest bearing promissory note, due no earlier than November 1996, payable to Ericsson Raynet for capital contributions relating to non-cash losses. At June 30, 1995, the company's investment balance in Ericsson Raynet was greater than its equity share in the net assets of Ericsson Raynet by $3 million principally due to the joint venture's classification of a capital contribution receivable from Raynet as a contra-equity item. 36 18 ================================================================================ OTHER POSTRETIREMENT BENEFITS The company provides postretirement health care benefits to U.S. employees who qualify for the company's defined benefit pension plan and retire on or after age 55, until the employees reach age 65. Such benefits are limited to allowing retirees to continue their participation in the company's group medical plan. Eligible retirees pay monthly premiums, thus reducing the cost to the company. The company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106), effective July 1, 1992. This statement requires accrual accounting for all postretirement benefits other than pensions. The company elected to immediately recognize the transition obligation as the cumulative effect of a change in accounting principle, resulting in a decrease to 1993 net income of $2 million, or $0.06 per share. Prior to the adoption of FAS 106, the cost of providing medical and dental benefits to early retirees was expensed as incurred. The cost of these benefits (determined in accordance with FAS 106) was $0.4 million, comprised of a service cost of $0.2 million and interest cost of $0.2 million, in each of the years 1995, 1994, and 1993. The following table sets forth components of the accumulated postretirement benefit obligation:
-------------------------------------------------------------------------------- JUNE 30 (in thousands) 1995 1994 -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation attributable to: Retirees $ 792 $ 500 Fully eligible employees 689 600 Other active employees 1,740 1,600 -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation 3,221 2,700 Unrecognized net gain 74 233 -------------------------------------------------------------------------------- Accrued postretirement benefit obligation $3,295 $2,933 --------------------------------------------------------------------------------
The assumed discount rates used to measure the accumulated postretirement benefit obligation were 7.75% at June 30, 1995 and 8.25% at June 30, 1994. The assumed health care cost trend rate for 1995 is 9%, declining to an ultimate rate in 2001 of 6%. A one percentage point increase in the assumed health care cost trend rate for each future year increases annual net periodic postretirement benefit cost and the accumulated postretirement benefit obligation as of June 30, 1995, by $0.1 million and $0.4 million, respectively. ================================================================================ RETIREMENT BENEFITS The company has noncontributory defined benefit pension plans that cover substantially all U.S. employees and a number of its employees in foreign countries. The benefits for these plans are based primarily on years of service and employee compensation. The company funds these pension plans when legally or contractually required, or earlier. Plan assets for the U.S. and non-U.S. defined benefit pension plans generally consist of publicly traded securities, bonds, and cash investments. Amortization of prior service cost is calculated on a straight-line basis over the expected future years of service of the plans' active participants. Effective January 1, 1995, the company adopted amendments to the International Pension Plan to expand benefit coverage to include more employees. This change resulted in an increase of $0.2 million in pension expense for 1995 and an increase of approximately $2.5 million in the projected benefit obligation. In 1995, the U.S. plan recognized a curtailment loss of $1.2 million related to the transfer of Raynet employees to the Ericsson pension plan. On January 1, 1993, the U.S. plan was amended to update the years used to calculate past service benefits. The amendment generated an unrecognized prior service cost of $5 million. The assumptions used to measure the projected benefit obligation and to compute the expected long-term return on assets for the company's defined benefit pension plans are as follows:
-------------------------------------------------------------------------------- 1995 1994 1993 -------------------------------------------------------------------------------- U.S. plans: Discount rate 7.75% 8.25% 8.25% Average increase in compensation levels 4.75% 5.25% 5.5% Expected long-term return on assets 8.5% 9% 9% Non-U.S. plans: Discount rates 5.5% - 9.3% 6% - 8.5% 6% - 9.5% Average increase in compensation levels 3% - 6.9% 4% - 6.9% 6% - 7% Expected long-term return on assets 7.5% - 10% 7.5% - 9.5% 8% - 10% --------------------------------------------------------------------------------
37 19 Net periodic pension cost includes the following components:
------------------------------------------------------------------------------------------------------------- U.S. PLANS NON-U.S. PLANS ----------------------------- ----------------------------- YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993 1995 1994 1993 ------------------------------------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 6,105 $ 6,161 $ 5,479 $ 9,584 $ 7,477 $ 7,154 Interest cost on projected benefit obligation 9,009 8,091 7,061 13,161 10,148 8,809 Actual (return) loss on plan assets (16,342) 165 (10,927) (3,969) (14,055) (15,488) Net amortization and deferral 9,820 (6,697) 4,828 (6,241) 5,607 7,744 ------------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 8,592 $ 7,720 $ 6,441 $12,535 $ 9,177 $ 8,219 -------------------------------------------------------------------------------------------------------------
The following table sets forth the funded status of the plans: ------------------------------------------------------------------------------------------------------------------------
ASSETS EXCEED ACCUMULATED BENEFITS ACCUMULATED BENEFITS EXCEED ASSETS --------------------------------------------- ---------------------------------------- U.S. PLANS NON-U.S. PLANS U.S. PLANS NON-U.S. PLANS --------------------- --------------------- ------------------ ------------------- JUNE 30 (in thousands) 1995 1994 1995 1994 1995 1994 1995 1994 ------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $(103,501) $ (93,365) $ (64,030) $ (55,629) $(3,978) $ (1,776) $(43,820) $(33,232) ------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation $(108,949) $ (98,025) $ (65,111) $ (56,687) $(4,027) $( 1,808) $(45,855) $(35,200) ------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation $(118,013) $(107,694) $(121,614) $(107,740) $(7,702) $ (3,141) $(54,377) $(42,021) Plan assets at fair value 110,652 98,915 120,735 105,038 - - 744 - ------------------------------------------------------------------------------------------------------------------------- Plan assets less than projected benefit obligation (7,361) (8,779) (879) (2,702) (7,702) (3,141) (53,633) (42,021) Unrecognized net loss (gain) 17,170 21,961 (1,167) 2,096 818 (620) (4,798) (3,698) Unrecognized net transition (asset) liability (1,668) (3,204) (8,169) (8,942) 645 675 (477) - Unrecognized prior service cost 8,150 10,747 3,055 3,174 5,247 3,161 - - Adjustment required to recognize additional minimum liability - - - - (3,033) (2,211) - - ------------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) pension cost $ 16,291 $ 20,725 $ (7,160) $ (6,374) $(4,025) $ (2,136) $(58,908) $(45,719) -------------------------------------------------------------------------------------------------------------------------
================================================================================ DEBT STRUCTURE Long-term debt consists of the following:
-------------------------------------------------------------------------------- JUNE 30 (in thousands) 1995 1994 -------------------------------------------------------------------------------- 3.3% to 8.875% notes payable to banks and others requiring payments in varying amounts through 2025 $ 39,094 $ 37,062 9.55% privately placed senior notes, payable in 1996, retired on November 1, 1994 - 210,000 Syndicated term loan requiring varying quarterly payments beginning December 1996 through September 1999. The interest rate fluctuates quarterly and was 6.792% at June 30, 1995. 225,000 - Industrial Revenue Bond due in equal quarterly installments through 1996. The interest rate, which fluctuates according to the lender's prime rate, was 5.13% at June 30, 1995. 500 1,500 -------------------------------------------------------------------------------- Total long-term debt 264,594 248,562 Less current maturities 1,042 3,881 -------------------------------------------------------------------------------- Long-term portion $263,552 $244,681 --------------------------------------------------------------------------------
38 20 The company entered into a $210 million private placement debt agreement in February 1991. In December 1992, the company entered into a three-year interest rate swap agreement which effectively converted $100 million of notional principal amount from a fixed rate to a floating rate. Under the agreement, which was to mature on December 8, 1995, the company made payments to a counterparty at variable rates based on LIBOR, reset every six months, and in return received payments based on a fixed rate of 5.715%. The LIBOR rate for the period from December 8, 1992, to June 7, 1993, was 3.875% and the LIBOR rate for the period from June 8, 1993, to December 8, 1993, was 3.4375%. The effect of the interest rate swap agreement was to reduce interest expense in both 1994 and 1993 by $1 million. On December 8, 1993, the company terminated this agreement which resulted in a deferred gain of $3 million to be amortized over the remaining life of the hedged debt. In 1994, $1 million of the gain was recognized as a reduction of interest expense. On November 1, 1994, the company prepaid the holders of its 9.55% privately placed senior notes resulting in an extraordinary loss, which included recognition of the remaining deferred gain on the termination of the interest rate swap (see note "Extraordinary Item--Loss Related to the Early Retirement of Debt"). On September 29, 1994, the company entered into syndicated loan agreements providing for a five-year partially amortizing loan of $225 million, and a renewable 364-day revolving credit facility of $200 million. Interest on the term loan and revolving credit facility are at variable spreads over LIBOR. Proceeds from the term loan were drawn on November 1, 1994, and used to retire the 9.55% privately placed senior notes and for general corporate purposes, while the revolving credit facility replaced existing committed credit facilities. The new syndicated loan agreements include covenants that, among other things, specify a minimum net worth requirement, a maximum leverage limit, a minimum fixed charge coverage ratio, and limits on further advances to fund Raynet operations. Long-term debt maturing during the five years subsequent to June 30, 1995, is as follows: 1996--$1 million; 1997--$47 million; 1998--$69 million; 1999--$98 million; 2000--$36 million; and thereafter-- $14 million. Assets pledged as security for long-term debt totaled $46 million at June 30, 1995. Information regarding short-term debt is as follows:
-------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (dollars in thousands) 1995 1994 1993 -------------------------------------------------------------------------------- Total lines of credit at June 30 $419,864 $483,073 $448,651 Available unused credit lines at June 30 $364,307 $437,856 $394,636 -------------------------------------------------------------------------------- Weighted average interest rate at June 30: Highly inflationary economies 16.8% 15.1% 9.8% Other countries 7.0% 9.4% 7.3% Worldwide average 7.1% 9.5% 7.5% --------------------------------------------------------------------------------
In addition to short-term borrowings, lines of credit are used for letters of credit, debt guarantees, and other purposes. The company had no significant compensating balance requirements or capital lease obligations at June 30, 1995. ================================================================================ STOCK REPURCHASE OF COMMON STOCK In December 1994, the Board of Directors authorized the repurchase, at management's discretion, of up to 1.5 million shares of the company's stock during any one fiscal year. Shares repurchased under this authorization are used to offset the dilution caused by the company's employee stock purchase and stock option plans. In 1995, the company repurchased 700,000 shares, of which 473,360 shares were reissued and 226,640 shares were held as treasury stock at June 30, 1995. The 473,360 shares reissued were repurchased at an aggregate price of $18 million and reissued at an aggregate price of $14 million. The $4 million difference between the repurchase and reissuance prices was treated as a reduction of retained earnings. EMPLOYEE STOCK PURCHASE PLANS The company's employee stock purchase plans provide that eligible employees may contribute up to 15% of their base earnings toward the quarterly purchase of the company's Common Stock. The employees' purchase price is derived from a formula based on the fair market value of the Common Stock. No compensation expense is recorded in connection with the plans. Shares issued under the plans were 905,000 in 1995, 901,000 in 1994, and 1,188,000 in 1993. At June 30, 1995, a total of 4,466 of the 8,337 eligible employees were participants in the plans. 39 21 On October 28, 1992, the stockholders approved an amendment to the employee stock purchase plans to reduce the maximum enrollment period from 27 months to 12 months and to increase the aggregate number of shares issuable under the plans by 1,400,000. On October 27, 1993, the stockholders approved an amendment to the employee stock purchase plans to increase the aggregate number of shares issuable under the plans by 700,000. On November 9, 1994, the stockholders approved another amendment to the employee stock purchase plans to increase the aggregate number of shares issuable under the plans by 700,000. The total number of shares reserved for future issuance under the plans was 733,000 at June 30, 1995. STOCK OPTION AND INCENTIVE PLANS The company has various stock option and management incentive plans for selected employees, officers, directors, and consultants. The plans provide for awards in the form of stock options, stock appreciation rights, stock purchase rights, convertible debentures, and performance shares. As of June 30, 1995, only stock options had been awarded under the plans. Options to purchase Common Stock have been granted at no less than fair market value on the date of grant. On October 27, 1993, the stockholders approved an amendment to the 1990 Incentive Plan to increase by 1,700,000 shares the aggregate number of shares issuable under the plan. On November 9, 1994, the stockholders approved two amendments to the 1990 Incentive Plan to: 1) limit the number of shares with respect to which options may be granted to no more than 200,000 shares to any one participant in any one-year period; and 2) to extend up to five years the period during which awards granted on or after August 12, 1994, may be exercised following retirement from the company. At June 30, 1995, 853 optionees held options for the purchase of Common Stock with expiration dates occurring between July 1, 1995 and June 30, 2005, with an average exercise price of $34 per share. The following table summarizes Raychem option activity during 1995, 1994, and 1993:
---------------------------------------------------------------------------------------- OPTION SHARES, JUNE 30 (in thousands except per share data) 1995 1994 1993 ---------------------------------------------------------------------------------------- Outstanding at beginning of year 5,211 4,896 4,299 Granted 1,051 894 1,188 Exercised (466) (232) (453) Expired or canceled (208) (347) (138) ---------------------------------------------------------------------------------------- Outstanding at end of year 5,588 5,211 4,896 ---------------------------------------------------------------------------------------- Exercisable 3,256 2,676 2,284 ---------------------------------------------------------------------------------------- Available for future grant 759 1,792 710 ---------------------------------------------------------------------------------------- Option price per share Exercised $17-$40 $21-$41 $17-$41 Outstanding $17-$45 $17-$45 $17-$45 ----------------------------------------------------------------------------------------
================================================================================ RESTRUCTURING AND DIVESTITURES Over the past several years, the company has strengthened its core businesses and improved its results of operations through a series of initiatives. These actions were in response to product shifts within markets, declining worldwide defense sales, and expanding commercial opportunities. The company therefore consolidated manufacturing capabilities and streamlined operations. The core business incurred a pretax charge of $24 million in the first quarter of 1995 for the restructuring of its telecommunications business segment. All charges, excluding asset writedowns, were cash in nature, substantially incurred in 1995, and funded through operating cash flows. The following table sets forth components of the company's "Provision for restructuring and divestitures" for the year ended June 30, 1995 (none in 1994 and 1993): 40 22
------------------------------------------------------------------------------------------------------ YEAR ENDED JUNE 30 EMPLOYEE ASSET (in thousands) SEVERANCE WRITEDOWNS LEASES OTHER TOTAL ------------------------------------------------------------------------------------------------------ 1995 Telecommunications: Employee severance $13,200 $ - $ - $ - $13,200 Assets to be sold - 5,680 - 1,000 6,680 Discontinued product inventory - 2,600 - - 2,600 Vacated buildings - - 620 - 620 Other - - - 800 800 ------------------------------------------------------------------------------------------------------ Provision for restructuring and divestitures $13,200 $8,280 $620 $1,800 $23,900 ------------------------------------------------------------------------------------------------------
The company has implemented a number of programs in prior years to restructure the core business. Reserves which were established prior to fiscal 1992 have largely been used, and the remaining balances, if any, are immaterial. The following table sets forth the company's restructuring reserves as of June 30, 1993, 1994, and 1995:
-------------------------------------------------------------------------------------------------------------- RESTRUCTURING RESERVES EMPLOYEE ASSET (in thousands) SEVERANCE WRITEDOWNS LEASES OTHER TOTAL -------------------------------------------------------------------------------------------------------------- Balance July 1, 1992 $ 11,585 $ 3,681 $ 1,363 $ 7,698 $ 24,327 -------------------------------------------------------------------------------------------------------------- Cash payments (8,584) - (688) (3,320) (12,592) Non-cash items - (2,199) - (1,200) (3,399) -------------------------------------------------------------------------------------------------------------- Balance June 30, 1993 3,001 1,482 675 3,178 8,336 -------------------------------------------------------------------------------------------------------------- Cash payments (1,663) - (645) (2,726) (5,034) Non-cash items - (630) - - (630) -------------------------------------------------------------------------------------------------------------- Balance June 30, 1994 1,338 852 30 452 2,672 -------------------------------------------------------------------------------------------------------------- Provision for restructuring and divestitures 13,200 8,280 620 1,800 23,900 Adjustment to reserves 1,300 (1,300) - - - Cash payments (13,676) - (650) (1,237) (15,563) Non-cash items - (7,832) - - (7,832) -------------------------------------------------------------------------------------------------------------- Balance June 30, 1995 $ 2,162 $ - $ - $ 1,015 $ 3,177 --------------------------------------------------------------------------------------------------------------
================================================================================ INTEREST Interest expense, net, consisted of the following components:
------------------------------------------------------------------------------- Years ended June 30 (in thousands) 1995 1994 1993 ------------------------------------------------------------------------------- Interest expense incurred $ 20,434 $ 22,318 $ 26,991 Interest expense capitalized (724) (1,172) (362) Interest income (6,664) (8,384) (11,762) ------------------------------------------------------------------------------- Interest expense, net $ 13,046 $ 12,762 $ 14,867 -------------------------------------------------------------------------------
================================================================================ SALE OF ASSETS In the fourth quarter of 1995, Johnson & Johnson acquired, in a tax-free reorganization, all of the outstanding common stock of Menlo Care, Inc., a company in which Raychem held a minority interest. This transaction resulted in a pretax gain of $5 million. In 1993, the company sold its remaining equity interest in Mitek Surgical Products, Inc. for $4 million, resulting in a pretax gain of $4 million. These gains were included in "other expense, net." 41 23 As proceeds from the Menlo Care transaction, the company received cash, and shares of Johnson & Johnson common stock valued on the closing date at approximately $6 million. In connection with the transaction, the company agreed that it had no present plan or intention to sell more than 60% of the stock received. At June 30, 1995, the company held Johnson & Johnson stock valued at approximately $3 million, the fair value based on the quoted market price. ================================================================================ INCOME TAXES As discussed in the "Summary of Significant Accounting Policies," the company adopted FAS 109 effective July 1, 1992. (Loss) income before income taxes, extraordinary item, and changes in accounting principles consisted of the following components:
---------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993 ---------------------------------------------------------------------------------------------- U.S. operations, including Puerto Rico $(89,868) $(102,200) $ (74,736) Non-U.S. operations 89,598 135,945 114,320 ---------------------------------------------------------------------------------------------- (Loss) income before income taxes, extraordinary item, and changes in accounting principles $ (270) $ 33,745 $ 39,584 ----------------------------------------------------------------------------------------------
The provision for income taxes included:
-------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993 -------------------------------------------------------------------------------- Current tax (benefit): U.S. federal, including Puerto Rico $ 547 $ 1,194 $ (2,398) U.S. state and local 510 775 743 Non-U.S 16,656 34,820 34,691 -------------------------------------------------------------------------------- Total current tax 17,713 36,789 33,036 -------------------------------------------------------------------------------- Deferred tax (benefit): U.S. federal, including Puerto Rico (12) (2,419) 1,419 Non-U.S 3,477 (2,304) (2,796) -------------------------------------------------------------------------------- Total deferred tax (benefit) 3,465 (4,723) (1,377) -------------------------------------------------------------------------------- Provision for income taxes $ 21,178 $ 32,066 $ 31,659 --------------------------------------------------------------------------------
The company has provided for U.S. federal income taxes and foreign withholding taxes on the portion of the undistributed earnings of non-U.S. subsidiaries expected to be remitted. Undistributed earnings intended to be reinvested indefinitely in foreign subsidiaries were approximately $388 million at June 30, 1995. If these earnings were distributed, foreign withholding taxes would be imposed; however, foreign tax credits would become available to substantially reduce any resulting U.S. income tax liability. Income from operations in certain countries is subject to reduced tax rates as a result of satisfying certain commitments regarding employment and capital investment. The exemption grants for these operations will expire at various dates through 2010. The income tax benefits related to the tax status of these operations are estimated to be $3 million for 1995, and $5 million for 1994 and 1993. The company's provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to (loss) income before income taxes, extraordinary item, and changes in accounting principles as follows:
-------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30 (in thousands) 1995 1994 1993 -------------------------------------------------------------------------------------------------- (Benefit) tax determined by applying U.S. statutory rate to (loss) income before income taxes, extraordinary item, and changes in accounting principles $ (95) $ 11,811 $ 13,459 Tax benefit of deferred deductions, net operating losses, and net foreign and minimum tax credits to be carried forward to future years 31,873 31,025 30,932 Tax rate differences and foreign tax credits, net of withholding taxes (8,202) (9,572) (12,443) State and local taxes, net of federal income tax benefits 338 497 51 Adjustment of prior years' taxes 230 210 (2,395) Other items, net (2,966) (1,905) 2,055 -------------------------------------------------------------------------------------------------- Provision for income taxes $ 21,178 $ 32,066 $ 31,659 --------------------------------------------------------------------------------------------------
42 24 Future expirations of U.S. tax loss and tax credit carryforwards, if not utilized, are as follows: $0.6 million in 1998; $6.2 million in 1999; $1.3 million in 2000; $6.4 million in 2004; $4.3 million in 2005; $4.2 million in 2006; $4.8 million in 2007; $2.0 million in 2008; $12.3 million in 2009; $18.7 million in 2010; and $7.8 million with no expiration. U.S. federal tax return examinations have been completed for years through 1992. The company believes adequate provisions for income tax have been recorded for all years. Deferred tax liabilities (assets) under FAS 109 were comprised of the following:
----------------------------------------------------------------------------------------------------- JUNE 30 (in thousands) 1995 1994 1993 ----------------------------------------------------------------------------------------------------- Liabilities: Difference between book and tax bases of assets $ -- $ -- $ 1,487 Retirement benefits 874 1,668 2,658 Other 14,613 13,127 11,434 ----------------------------------------------------------------------------------------------------- Gross deferred tax liabilities 15,487 14,795 15,579 ----------------------------------------------------------------------------------------------------- Assets: Compensation and benefits accrual (3,949) (3,412) (2,748) Asset reserves (11,396) (16,662) (7,473) Restructuring and divestitures accruals (8,065) (5,109) (10,484) Capitalization of research and experimental costs, net of amortization (166,744) (167,576) (176,829) Difference between book and tax bases of investments (712) (2,215) (1,918) Net operating loss carryforwards (38,065) (12,124) -- General business credits (27,049) (14,670) (9,056) Minimum tax credit (4,097) (3,277) (3,167) Foreign tax credit (31,488) (5,900) -- Difference between book and tax bases of assets (1,833) (275) -- Other (10,236) (9,055) (13,874) ----------------------------------------------------------------------------------------------------- Gross deferred tax assets (303,634) (240,275) (225,549) ----------------------------------------------------------------------------------------------------- Deferred tax asset valuation allowance 292,822 229,787 210,404 ----------------------------------------------------------------------------------------------------- Net deferred tax liability $ 4,675 $ 4,307 $ 434 -----------------------------------------------------------------------------------------------------
The net change in the total valuation allowance for the year ended June 30, 1995, was an increase of $63 million. The deferred tax asset valuation allowance is primarily attributed to U.S. federal and state deferred tax assets. Management believes sufficient uncertainty exists regarding the realizability of these items that a valuation allowance is required. ================================================================================ EXTRAORDINARY ITEM--LOSS RELATED TO EARLY RETIREMENT OF DEBT On November 1, 1994, the company prepaid the holders of its 9.55% privately placed senior notes. Accordingly, the company recorded an extraordinary loss of $6 million related to the early retirement of debt. The extraordinary loss was comprised of a $7 million prepayment penalty and deferred debt issuance costs, net of a $1 million deferred gain resulting from the termination of a related interest rate swap agreement. There was no tax benefit recognized for the extraordinary item because it increased U.S. losses. 43 25 =================================================================================================================================== WORLDWIDE OPERATIONS(a) -----------------------------------------------------------------------------------------------------------------------------------
UNITED REST OF CONSOLIDATED (in thousands) STATES EUROPE ASIA WORLD CONSOLIDATION TOTAL ----------------------------------------------------------------------------------------------------------------------------------- Revenues from unaffiliated customers(b) 1995 $539,518 $653,221 $198,845 $138,989 $ -- $1,530,573 1994 562,199 587,196 179,060 133,077 -- 1,461,532 1993 487,958 644,547 127,090 126,135 -- 1,385,730 ----------------------------------------------------------------------------------------------------------------------------------- Revenues between geographic areas(c) 1995 220,267 117,188 13,729 138 (351,322) -- 1994 199,331 141,493 8,427 142 (349,393) -- 1993 169,586 183,176 4,700 55 (357,517) -- ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 1995 759,785 770,409 212,574 139,127 (351,322) 1,530,573 1994 761,530 728,689 187,487 133,219 (349,393) 1,461,532 1993 657,544 827,723 131,790 126,190 (357,517) 1,385,730 ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) before provision for 1995 43,664 103,926 4,809 5,309 -- 157,708 restructuring and divestitures, and loss on 1994 (80,764) 120,825 2,026 11,443 -- 53,530 formation of JV and other Raynet items 1993 (64,039) 115,476 2,514 12,078 -- 66,029 ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) including provision 1995 6,532 85,126 4,809 5,309 -- 101,776 for restructuring and divestitures, and loss on 1994 (80,764) 120,825 2,026 11,443 -- 53,530 formation of JV and other Raynet items 1993 (64,039) 115,476 2,514 12,078 -- 66,029 ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, 1995 (89,868) 60,983 18,583 10,032 -- (270) extraordinary item, and changes in 1994 (102,200) 108,345 15,686 11,914 -- 33,745 accounting principles 1993 (74,736) 93,967 6,282 14,071 -- 39,584 ----------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 1995 335,609 487,079 150,511 60,492 -- 1,033,691 1994 433,155 452,888 139,947 56,328 -- 1,082,318 1993 426,920 416,147 85,698 46,910 -- 975,675 ----------------------------------------------------------------------------------------------------------------------------------- Corporate assets 1995 186,911 177,809 40,445 15,889 -- 421,054 1994 201,762 67,581 32,542 14,812 -- 316,697 1993 203,758 105,346 26,011 21,480 -- 356,595 ----------------------------------------------------------------------------------------------------------------------------------- Total assets 1995 522,520 664,888 190,956 76,381 -- 1,454,745 1994 634,917 520,469 172,489 71,140 -- 1,399,015 1993 630,678 521,493 111,709 68,390 -- 1,332,270 -----------------------------------------------------------------------------------------------------------------------------------
(a) Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1995 versus consolidated in 1994 and 1993. (b) Revenues from unaffiliated customers in each geographic area reflect only shipments originating locally and exclude direct exports from other geographic areas. (c) Revenues between geographic areas are recorded on the basis of arms-length prices established by the company. Beginning in 1993, revenues originating from the company's Tijuana, Mexico facility are reported as originating in the United States due to a change in the cross-border product transfer agreement between the United States and Mexico. 44 26 ================================================================================ BUSINESS SEGMENTS The electronics business segment serves the aerospace, automotive, defense, mass transit, computer, communications, medical, and other industries. The industrial business segment serves industrial and commercial infrastructure customers, including electric, gas, and water utilities; industrial plants and pipelines; and commercial construction. The telecommunications business segment serves the telephone and cable television industries. The company's Raynet subsidiary delivered fiber-optic distribution systems for voice, video, and data to telecommunications network operators. Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1995 versus consolidated in 1994 and 1993.
--------------------------------------------------------------------------------------------------------------------------------- TELECOMMU- CONSOLIDATED (in thousands) ELECTRONICS INDUSTRIAL NICATIONS RAYNET CORPORATE TOTAL --------------------------------------------------------------------------------------------------------------------------------- Revenues(a) 1995 $611,036 $499,344 $420,193 $ -- $ -- $1,530,573 1994 521,890 451,814 430,044 57,784 -- 1,461,532 1993 503,168 443,390 429,501 9,671 -- 1,385,730 --------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) before provision for 1995 98,768 86,519 62,809 -- (90,388) 157,708 restructuring and divestitures, and loss on 1994 88,070 77,800 76,485 (100,416) (88,409) 53,530 formation of JV and other Raynet items 1993 64,334 80,869 87,191 (88,946) (77,419) 66,029 --------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) including provision 1995 98,768 86,519 38,909 -- (122,420) 101,776 for restructuring and divestitures, and loss 1994 88,070 77,800 76,485 (100,416) (88,409) 53,530 on formation of JV and other Raynet items 1993 64,334 80,869 87,191 (88,946) (77,419) 66,029 --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, 1995 -- -- -- -- -- (270) extraordinary item, and changes 1994 -- -- -- -- -- 33,745 in accounting principles 1993 -- -- -- -- -- 39,584 --------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 1995 448,858 323,109 261,724 -- 421,054 1,454,745 1994 381,863 300,320 290,591 109,544 316,697 1,399,015 1993 341,578 279,367 275,100 79,630 356,595 1,332,270 --------------------------------------------------------------------------------------------------------------------------------- Capital expenditures 1995 37,179 22,515 20,802 -- 13,545 94,041 1994 33,211 20,415 26,967 10,758 12,705 104,056 1993 17,508 14,758 24,411 11,036 21,832 89,545 --------------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 1995 27,020 16,456 19,873 -- 11,449 74,798 1994 24,672 16,715 17,795 14,806 12,277 86,265 1993 23,531 14,030 20,687 10,259 12,136 80,643 ---------------------------------------------------------------------------------------------------------------------------------
(a) Revenues between segments are immaterial. 45 27 ================================================================================ COMMITMENTS Total rental expense was $35 million in 1995, and $39 million in both 1994 and 1993. The company had commitments at June 30, 1995, to expend approximately $15 million for the construction or acquisition of additional property, plant, and equipment. Annual future minimum lease payments at June 30, 1995, under noncancelable operating leases, are as follows: 1996--$27 million; 1997--$20 million; 1998--$16 million; 1999--$11 million; 2000--$11 million; and thereafter--$64 million. ================================================================================ CONTINGENCIES The company has been named, among others, as a potentially responsible party ("PRP") in administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. At all of the sites, the company is alleged to be a de minimis generator of hazardous wastes, and the company believes that it has limited or no liability for cleanup costs at these sites. The company has also been notified by a state environmental agency that it may be required to investigate the need for remedial work at one of its manufacturing sites. The company is currently conducting such investigations on a voluntary basis. The company and its subsidiaries have also been named as a defendant, along with sixteen other corporate and governmental codefendants, in a private cost recovery for environmental cleanup expenses at the West Contra Costa County Landfill in Richmond, California. On August 4, 1995, the company's and other defendants' motion for judgment on the pleadings was granted by the District Court, striking the plaintiff's claim that the company and the other defendants were jointly and severally liable for response costs at the site. As a result, the company's potential liability, if any, for response costs at the site would be based on the company's disposal of wastes at the site. The company believes its wastes constitute less than 2% of the total amount of wastes disposed of at the site. Additionally, the company and its subsidiaries have been named as defendants in lawsuits arising from various commercial matters, including product liability. The principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The only such action in which material damages are alleged seeks in excess of $25 million, but the claim has not progressed sufficiently for the company to estimate a range of possible loss, if any. The company intends to defend itself vigorously in these matters. The company's experience to date is that losses, if any, from such claims have not had, nor are they expected to have, a material effect on the company's financial position or results of operations. The company maintains insurance to cover product liability claims. In the second quarter of 1992, the company and its insurer reached settlement with the plaintiffs in a class action securities suit. The settlement totaled $19.5 million, which was funded $8.25 million by the company and $11.25 million by its insurer. The company expects to recover a portion of its funding, either through litigation or when a definitive agreement is reached with its insurer, and has filed suit against its insurer to resolve this issue. Recovery, if any, will be recorded when received. Legal proceedings tend to be unpredictable and costly. Based on currently available information, however, management believes that the resolution of pending claims, regulatory inquiries, and legal proceedings will not have a material adverse effect on the company's operating results or financial position. 46 28
QUARTERLY FINANCIAL DATA (UNAUDITED) ================================================================================================================================= ================================================================================================================================= QUARTER ENDED (in thousands except share data) SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 --------------------------------------------------------------------------------------------------------------------------------- FISCAL 1995:(a) Revenues $368,145(b) $382,494 $368,784 $411,150 Gross profit 185,286(b) 197,846 184,718 204,157 Provision for restructuring and divestitures 23,900 -- -- -- Loss on formation of Ericsson Raynet joint venture and other Raynet items 31,723(b) (423) 931 (199) (Loss) income before income taxes, extraordinary item, and change in accounting principle (45,638) 31,134 18,562 (4,328) (Loss) income before extraordinary item and change in accounting principle (48,328) 19,999 10,896 (4,015) Extraordinary item--(loss) adjustment related to early retirement of debt, net of $0 income taxes (7,074) 756 -- -- Cumulative effect of change in accounting principle, net of $0 income taxes (1,477) -- -- -- Net (loss) income (56,879) 20,755 10,896 (4,015) --------------------------------------------------------------------------------------------------------------------------------- Per share data: (Loss) earnings per common share: (Loss) income before extraordinary item and change in accounting principle $ (1.12) $ 0.45 $ 0.25 $ (0.09) Extraordinary item (0.16) 0.02 -- -- Change in accounting principle (0.04) -- -- -- -------- -------- -------- -------- Net (loss) income $ (1.32) $ 0.47 $ 0.25 $ (0.09) -------- -------- -------- -------- Cash dividends per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08 Price range of Common Stock(c) 35 1/8 - 41 7/8 32 3/8 - 42 3/8 34 1/4 - 41 3/8 32 1/2 - 41 1/4 ================================================================================================================================= FISCAL 1994: Revenues $355,432 $353,835 $361,278 $390,987 Gross profit 171,702 165,851 165,769 178,390 Income before income taxes 18,317 4,731 7,395 3,302 Net income (loss) 6,411 1,656 1,066 (7,454) --------------------------------------------------------------------------------------------------------------------------------- Per share data: Net income (loss) per common share $ 0.15 $ 0.04 $ 0.02 $ (0.17) Cash dividends per common share 0.08 0.08 0.08 0.08 Price range of Common Stock(c) 34 1/8 - 44 3/8 35 1/4 - 43 35 3/8 - 40 3/4 33 1/4 - 38 3/4 =================================================================================================================================
(a) Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in fiscal 1995 versus consolidated in fiscal 1994. (b) Reflects restatement of Raynet Corporation and subsidiaries' results to the equity basis of accounting. (c) The price range of Common Stock is as reported on the New York Stock Exchange composite tape. Raychem Corporation Common Stock is listed on the New York Stock Exchange. The number of stockholders as of August 21, 1995, was 6,387. Dividends have been paid quarterly since the second quarter of fiscal 1978. The closing price of the company's Common Stock on the New York Stock Exchange composite tape on August 21, 1995, was $44 5/8 per share. 47 29
TEN-YEAR SUMMARY =============================================================================================================================== =============================================================================================================================== YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1995 1994 1993 =============================================================================================================================== RAYCHEM CORPORATION Consolidated(a) =============================================================================================================================== INCOME DATA Revenues $1,530,573 $1,461,532 $1,385,730 ------------------------------------------------ Provision for restructuring and divestitures $ 23,900 $ - $ - ------------------------------------------------ Loss on formation of Ericsson Raynet joint venture and other Raynet items $ 32,032 $ - $ - ------------------------------------------------ Equity in net loss of Ericsson Raynet $ 85,946 $ - $ - ------------------------------------------------ (Loss) income before income taxes, extraordinary item, and changes in accounting principles $ (270) $ 33,745 $ 39,584 ------------------------------------------------ Net (loss) income $ (29,243) $ 1,679 $ 9,625 =============================================================================================================================== SHARE DATA (Loss) earnings per common share $ (0.67) $ 0.04 $ 0.23 ------------------------------------------------ Cash dividends per common share $ 0.32 $ 0.32 $ 0.32 ------------------------------------------------ Cash dividends per Series B share $ - $ - $ - ------------------------------------------------ Weighted average number of shares outstanding 43,538,028 43,290,797 42,232,289 =============================================================================================================================== BALANCE SHEET DATA Total assets $1,454,745 $1,399,015 $1,332,270 ------------------------------------------------ Long-term debt $ 263,552 $ 244,681 $ 233,853 ------------------------------------------------ Total debt $ 293,226 $ 275,548 $ 275,562 ------------------------------------------------ Stockholders' equity $ 749,658 $ 732,924 $ 689,504 ------------------------------------------------ (Decrease) increase in debt net of cash $ (22,299) $ 55,842 $ 32,715 =============================================================================================================================== OTHER SIGNIFICANT MEASURES Gross profit as a percent of product sales 50.5 % 46.7 % 48.2 % ------------------------------------------------ Research and development expense as a percent of revenues 7.8 % 9.3 % 9.3 % ------------------------------------------------ Selling, general, and administrative expense as a percent of revenues 32.4 % 33.6 % 34.6 % ------------------------------------------------ Net debt as a percent of stockholders' equity 23.4 % 26.9 % 20.5 % ------------------------------------------------ Number of employees 9,496 10,769 10,772 ------------------------------------------------ Revenues per average number of employees $ 151 $ 136 $ 126 =============================================================================================================================== RAYNET CORPORATION(f) =============================================================================================================================== Revenues $ - $ 57,784 $ 9,671 ------------------------------------------------ Net (loss) income $ - $ (102,993) $ (92,551) ===============================================================================================================================
(a) Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1995 versus consolidated in prior years. (b) Restated to reflect reclassification of royalty and licensing income from "other expense, net" to "revenues." (c) Reflects reclassification of litigation settlement to "other expense, net." (d) Restated to reflect the three-for-one stock split effective on November 2, 1987. (e) Cash exceeded debt at June 30. (f) Raynet Corporation was incorporated in 1988. 48 30 TEN-YEAR SUMMARY
============================================================================================================ ============================================================================================================ YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1992 1991 ============================================================================================================ RAYCHEM CORPORATION Consolidated(a) ============================================================================================================ INCOME DATA Revenues $1,301,601 (b) $1,250,772 (b) ----------------------------- Provision for restructuring and divestitures $ 43,300 $ 3,697 ----------------------------- Loss on formation of Ericsson Raynet joint venture and other Raynet items $ - $ - ----------------------------- Equity in net loss of Ericsson Raynet $ - $ - ----------------------------- (Loss) income before income taxes, extraordinary item, and changes in accounting principles $ 12,585 (c) $ (3,109) ----------------------------- Net (loss) income $ (24,808) $ (23,429) ============================================================================================================ SHARE DATA (Loss) earnings per common share $ (0.64) $ (0.63) ----------------------------- Cash dividends per common share $ 0.32 $ 0.3 ----------------------------- Cash dividends per Series B share $ - $ - ----------------------------- Weighted average number of shares outstanding 39,030,049 37,134,161 ============================================================================================================ BALANCE SHEET DATA Total assets $1,392,606 $1,234,860 ----------------------------- Long-term debt $ 229,768 $ 233,347 ----------------------------- Total debt $ 257,763 $ 265,340 ----------------------------- Stockholders' equity $ 715,188 $ 651,973 ----------------------------- (Decrease) increase in debt net of cash $ (57,610) $ 90,589 ============================================================================================================ OTHER SIGNIFICANT MEASURES Gross profit as a percent of product sales 48.2 % 48.5 % ----------------------------- Research and development expense as a percent of revenues 10.8 % 11.2 % ----------------------------- Selling, general, and administrative expense as a percent of revenues 33.6 % 35.8 % ----------------------------- Net debt as a percent of stockholders' equity 15.2 % 25.5 % ----------------------------- Number of employees 11,187 11,406 ----------------------------- Revenues per average number of employees $ 115 $ 111 ============================================================================================================ RAYNET CORPORATION(f) ============================================================================================================ Revenues $ 16,594 $ 11,500 ----------------------------- Net (loss) income $ (89,334) $ (73,959) ============================================================================================================ ============================================================================================================ YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1990 1989 ============================================================================================================ RAYCHEM CORPORATION Consolidated(a) ============================================================================================================ INCOME DATA Revenues $1,114,713 (b) $1,083,028 ----------------------------- Provision for restructuring and divestitures $ 90,000 $ - ----------------------------- Loss on formation of Ericsson Raynet joint venture and other Raynet items $ - $ - ----------------------------- Equity in net loss of Ericsson Raynet $ - $ - ----------------------------- (Loss) income before income taxes, extraordinary item, and changes in accounting principles $ (86,261) $ 63,767 ----------------------------- Net (loss) income $ (111,398) $ 36,347 ============================================================================================================ SHARE DATA (Loss) earnings per common share $ (3.12) $ 1.04 ----------------------------- Cash dividends per common share $ 0.32 $ 0.30 ----------------------------- Cash dividends per Series B share $ - $ 0.01 ----------------------------- Weighted average number of shares outstanding 35,708,523 34,928,935 ============================================================================================================ BALANCE SHEET DATA Total assets $1,270,834 $1,172,783 ----------------------------- Long-term debt $ 31,087 $ 29,029 ----------------------------- Total debt $ 212,954 $ 130,294 ----------------------------- Stockholders' equity $ 690,467 $ 734,286 ----------------------------- (Decrease) increase in debt net of cash $ 98,633 $ (19,132) ----------------------------- ============================================================================================================ OTHER SIGNIFICANT MEASURES Gross profit as a percent of product sales 49.6 % 52.8 % ----------------------------- Research and development expense as a percent of revenues 11.0 % 11.1 % ----------------------------- Selling, general, and administrative expense as a percent of revenues 37.5 % 36.7 % ----------------------------- Net debt as a percent of stockholders' equity 11.0 % (e) ----------------------------- Number of employees 11,065 11,451 ----------------------------- Revenues per average number of employees $ 99 $ 97 ============================================================================================================ RAYNET CORPORATION(f) Revenues $ 7,625 $ 2,960 ----------------------------- Net (loss) income $ (64,484) $ (54,307) ============================================================================================================ ============================================================================================================================== YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1988 1987 1986 ============================================================================================================================== RAYCHEM CORPORATION Consolidated(a) ============================================================================================================================== INCOME DATA Revenues $1,094,733 $ 944,434 $ 797,632 ----------------------------------------------- Provision for restructuring and divestitures $ - $ - $ - ----------------------------------------------- Loss on formation of Ericsson Raynet joint venture and other Raynet items $ - $ - $ - ----------------------------------------------- Equity in net loss of Ericsson Raynet $ - $ - $ - ----------------------------------------------- (Loss) income before income taxes, extraordinary item, and changes in accounting principles $ 169,304 $ 100,821 $ 65,490 ----------------------------------------------- Net (loss) income $ 125,285 $ 73,599 $ 48,790 ============================================================================================================================== SHARE DATA (Loss) earnings per common share $ 3.69 $ 2.25 (d) $ 1.55 (d) ----------------------------------------------- Cash dividends per common share $ 0.22 $ 0.15 (d) $ 0.15 (d) ----------------------------------------------- Cash dividends per Series B share $ 0.03 $ 0.02 (d) $ 0.02 (d) ----------------------------------------------- Weighted average number of shares outstanding 33,979,365 32,738,442 (d) 31,508,283 (d) ============================================================================================================================== BALANCE SHEET DATA Total assets $1,148,975 $ 926,920 $ 785,592 ----------------------------------------------- Long-term debt $ 35,458 $ 22,377 $ 54,088 ----------------------------------------------- Total debt $ 129,246 $ 132,409 $ 149,603 ----------------------------------------------- Stockholders' equity $ 722,155 $ 570,946 $ 452,464 ----------------------------------------------- (Decrease) increase in debt net of cash $ (80,857) $ (57,859) $ 4,921 ============================================================================================================================== OTHER SIGNIFICANT MEASURES Gross profit as a percent of product sales 54.3 % 52.2 % 53.3 % ----------------------------------------------- Research and development expense as a percent of revenues 7.7 % 7.3 % 8.3 % ----------------------------------------------- Selling, general, and administrative expense as a percent of revenues 32.8 % 33.2 % 34.5 % ----------------------------------------------- Net debt as a percent of stockholders' equity (e) 13.5 % 29.9 % ----------------------------------------------- Number of employees 10,909 9,899 9,928 ----------------------------------------------- Revenues per average number of employees $ 105 $ 95 $ 82 ============================================================================================================================== RAYNET CORPORATION(f) Revenues $ 25,160 $ - $ - ----------------------------------------------- Net (loss) income $ 2,562 $ - $ - ==============================================================================================================================
49 31 EXHIBIT 13 APPENDIX OMITTED GRAPHIC MATERIAL The following graphic material, included in the original paper format, has been excluded from the electronic filing of the 1995 Annual Report (Exhibit 13 to this filing). Item (a) appears in the Note entitled "Worldwide Operations" of the 1995 Annual Report, and items (b) through (g) appear in the section entitled "Financial Review" of the 1995 Annual Report. (a) 1995 REVENUES BY CUSTOMER LOCATION A proportional pie chart (in millions) depicting: U.S./Canada $510; Europe $613; Asia $255; and Rest of World $153. (b) "ONGOING" PRETAX INCOME (excludes Raynet) A bar chart (in millions) depicting: $136 in 1993; $143 in 1994; and $146 in 1995. (c) GROSS PROFIT AS A PERCENT OF REVENUES (excludes Raynet) A bar chart (in percent) depicting: 50 in 1993; 50 in 1994; and 50 in 1995. (d) RESEARCH AND DEVELOPMENT EXPENSE AS A PERCENT OF REVENUES (excludes Raynet) A bar chart (in percent) depicting: 6 in 1993; 7 in 1994; and 8 in 1995. (e) SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE AS A PERCENT OF REVENUES (excludes Raynet) A bar chart (in percent) depicting: 32 in 1993; 32 in 1994; and 32 in 1995. (f) INVENTORY DAYS REACH (excludes Raynet) A line graph depicting in number of days: 117 in 1992; 114 in 1993; and 109 in 1995. (g) DAYS SALES OUTSTANDING (excludes Raynet) A line graph depicting in number of days: 54 in 1993; 65 in 1994; and 61 in 1995. EX-21 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY NAME ORGANIZED UNDER THE LAWS OF -------------------------------------------------------------------------------------------------------------- Compagnie Francaise des Isolants (CFI) . . . . . . . . . . . . . . . . . . . . . France Elo TouchSystems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tennessee K.K. Raychem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan Raychem AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland Raychem Aktiebolag . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden Raychem A/S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denmark Raychem A/S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Norway Raychem (Australia) Proprietary, Ltd . . . . . . . . . . . . . . . . . . . . . . Australia (New South Wales) Raychem Canada Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada Raychem (Delaware) Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Raychem DISC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California Raychem Gesellschaft m.b.H. . . . . . . . . . . . . . . . . . . . . . . . . . . Austria Raychem GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Raychem Industries N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium Raychem International Corporation . . . . . . . . . . . . . . . . . . . . . . . California Raychem International. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cayman Islands, B.W. I. Raychem International Manufacturing Corporation . . . . . . . . . . . . . . . . California Raychem Korea Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Korea Raychem Limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom Raychem (Nederland) Besloten Vennootschap. . . . . . . . . . . . . . . . . . . . The Netherlands Raychem N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium Raychem OY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland Raychem Produtos Irradiados Limitada . . . . . . . . . . . . . . . . . . . . . . Brazil Raychem Puerto Rico Corporation. . . . . . . . . . . . . . . . . . . . . . . . . Delaware Raychem RPG Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . India Raychem S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France Raychem, S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain Raychem S.A. Industrial y Comercial . . . . . . . . . . . . . . . . . . . . . . Argentina Raychem Saudi Arabia Limited . . . . . . . . . . . . . . . . . . . . . . . . . . Saudi Arabia Raychem Shanghai Cable Accessories Ltd . . . . . . . . . . . . . . . . . . . . . People's Republic of China Raychem Singapore Pte. Limited . . . . . . . . . . . . . . . . . . . . . . . . . Singapore Raychem S.p.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy Raychem Taiwan Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan Raychem Technologies Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cyprus Raychem Tecnologias, S.A. de C.V. . . . . . . . . . . . . . . . . . . . . . . . Mexico Raychem Ventures, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California RTP Development Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware SHG Strahlenchemie Holding GmbH . . . . . . . . . . . . . . . . . . . . . . . . Germany Sigmaform France S.A.R.L. . . . . . . . . . . . . . . . . . . . . . . . . . . . France Sigmaform GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany Sigmaform U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom Walter Rose GmbH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany
EX-23 8 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-15116, No. 33-15117, No. 33-23856, No. 33-29215, No. 33-29216, No. 33-37579, No. 33-37580, No. 33-45986, No. 33-50737, No. 33-58437, No. 33-58869, No. 33-58871, and No. 33-59600) of Raychem Corporation of our report dated July 18, 1995, appearing on page 27 of Exhibit 13 which is included in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule II, listed in Item 14(a)(2) of this Form 10-K. We also consent to the incorporation by reference of our reports on the separate financial statements of Raynet International, Inc. as of and for the period ended November 16, 1994 and on the financial statements of Ericsson Raynet as of and for the period ended June 30, 1995, which appear in Item 14(a)(2) of this Form 10-K. PRICE WATERHOUSE LLP San Jose, California September 18, 1995 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED JUNE 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000082206 RAYCHEM CORPORATION 1000 YEAR JUN-30-1995 JUL-01-1994 JUN-30-1995 118,067 0 315,167 10,348 233,700 779,608 1,117,939 590,520 1,454,745 303,198 263,552 43,897 0 0 705,761 1,454,745 1,527,260 1,530,573 756,552 758,566 118,762 2,857 13,046 (270) 21,178 (21,448) 0 (6,318) (1,477) (29,243) (0.67) 0
EX-99.A 10 EX-99(A) 1 EXHIBIT 99(a) RAYCHEM CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1995 Participating Subsidiaries in the Amended and Restated 1984 Employee Stock Purchase Plan for United States employees and employees of certain domestic and foreign subsidiaries. The following subsidiaries of Raychem Corporation have been designated by the Administrator to participate in the Plan: Compagnie Francaise des Isolants S.A. (CFI) Elo Touch Systems, Inc. K.K. Raychem Raychem AG Raychem A/S (Denmark) Raychem (Australia) Proprietary, Ltd. Raychem Gesellschaft m.b.H. Raychem GmbH Raychem (H.K.) Limited Raychem International Corporation Raychem Korea Ltd Raychem Limited Raychem (Nederland) B.V. Raychem New Zealand Limited Raychem N.V. Raychem OY Raychem S.A. Raychem, S.A. Raychem Saudi Arabia Limited Raychem Singapore Pte. Limited Raychem S.p.A. Raychem Taiwan Limited Remtek International Corporation Sigmaform France S.A.R.L. Sigmaform GmbH Sigmaform (U.K.) Limited Walter Rose GmbH EX-99.B 11 EX-99(B) 1 EXHIBIT 99(b) RAYCHEM CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1995 Participating Subsidiaries in the 1985 Supplemental Employee Stock Purchase Plan for employees of certain subsidiaries. The following subsidiaries of Raychem Corporation have been designated by the Administrator to participate in the Plan: Raychem Ltd. Raychem Aktiebolag Raychem A/S (Norway) Raychem Canada Limited Raychem Industrial y Comercial Limitada Raychem International (Ireland) Raychem Produtos Irradiados Limitada Raychem S.A. Industrial y Comercial Raychem Tecnologias, S.A. de C.V. Raychem Technologies Limited Raychem de Venezuela, C.A.