-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JfVyjX9jXuaCcVuSU/GdXpWQMLFE9/+rqh+P9tMEFF6bvjZunD8n606sLOgCYlZd UtRTdqaR9+vm3g1caaBbhA== 0000891618-98-004244.txt : 19980921 0000891618-98-004244.hdr.sgml : 19980921 ACCESSION NUMBER: 0000891618-98-004244 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980918 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: SEC FILE NUMBER: 001-08341 FILM NUMBER: 98711630 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 FOR THE FISCAL YEAR ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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: (650) 361-3333 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EXCHANGE 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. [X] 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 25, 1998, (based on the closing sale price as reported on the New York Stock Exchange on such date) was $2,504,460,837. Number of shares of Common Stock outstanding as of August 25, 1998: 80,164,888 DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV: Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1998 Part III: Portions of the Proxy Statement dated September 18, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 company utilizes its expertise in materials science, electronics, and process engineering to develop, manufacture and market a variety of high-performance products for electronics original equipment manufacturers (OEMs), and telecommunications, energy and industrial applications. The terms "company" or "Raychem" mean Raychem Corporation and its consolidated subsidiaries. For information regarding the company's restructuring actions, see the Note entitled "Restructuring and Divestitures" in the notes to consolidated financial statements, and the section entitled "Financial Review" of the company's 1998 Annual Report to Stockholders (the "1998 Annual Report"), which are incorporated by reference in this Annual Report on Form 10-K. This annual report on Form 10-K contains a number of forward-looking statements. Actual results may differ materially from the results anticipated in the statements made due to a variety of factors. For information regarding these risk factors, see "Forward-Looking Statements and Risk Factors" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. (B) FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS During the fourth quarter of 1998, the company realigned its businesses by combining the former telecommunications and energy networks segment and the commercial and industrial infrastructure segment into the new telecommunications, energy and industrial business segment. This allows the company to offer a broader product line, more efficient distribution, and services to respond to customers' changing buying patterns. The company's financial results are now reported as two business segments, described below, and the corporate group. The electronics OEM components segment serves original equipment manufacturers in transportation, defense, and a wide range of commercial electronics industries. Products offered by this segment include circuit protection devices, wire and cable, heat-shrinkable insulation and molded parts, and computer touchmonitors. The telecommunications, energy and industrial segment serves telecommunication operators; power, gas, and water utilities; and industrial plants and pipelines. Products offered by this segment include telephone copper cable accessories, fiber-optic cable systems and accessories, access network electronics, electric power cable accessories, heat-tracing systems, and corrosion protection products. The company's business segments, along with the corporate group, are referred to as the "core business." For financial and other information concerning the company's business segments, see the Note entitled "Business Segments" and the section entitled "Financial Review" of the 1998 Annual Report, which are incorporated by reference in this Annual Report on Form 10-K. (C) NARRATIVE DESCRIPTION OF BUSINESS For information regarding operating results, principal products produced, and industries served by the company's business segments, see the Note entitled "Business Segments" and the section entitled "Financial Review" of the 1998 Annual Report, which are incorporated by reference in this Annual Report on Form 10-K. Methods of Distribution The products of the company's business segments are marketed primarily through Raychem's worldwide sales force as well as through outside distribution channels both within and outside the United States. 1 3 Sources and Availability of Raw Materials Although the company has not experienced any significant delays in obtaining the materials needed to satisfy its requirements, in the past supplies of certain raw materials the company uses have become limited. In addition, certain components purchased by the company are presently available from only one or a few sources of supply. In response, the company tries to identify alternative materials and technologies for the raw materials and components and to develop alternative sources of supply. 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, 1998, the company had in force 875 U.S. patents and 3,353 foreign patents, and had pending 250 U.S. patent applications and 2,598 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 business 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. Working Capital Information relative to working capital is included in the section entitled "Financial Review" of the 1998 Annual Report, which is incorporated by reference in this Annual Report on Form 10-K. Customers The company's business segments sell to many customers. Management does not believe that the loss of any one customer would have a material adverse effect on the business of the company. During 1998, no single customer 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, 1998, will be shipped in fiscal 1999. 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, 1998 and 1997, for each of the company's business segments.
JUNE 30, -------------- 1998 1997 ----- ----- (IN MILLIONS) Electronics OEM components.................................. $155 $167 Telecommunications, energy and industrial................... 122 124 ---- ---- Total............................................. $277 $291 ==== ====
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 competitive strengths 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 company's products compete with other products and technologies. The company's competitors include some of the largest companies in the world. Many of these companies have financial, technical, and other resources substantially greater than the company's. Even when the company has strong intellectual property protection for its products, other products, at times based on lower-cost technologies, compete with the company's products. For this and other reasons, in some of the company's markets, prices trend downward over time, requiring improvements in manufacturing and design to remain competitive. Research and Development For financial information on research and development expense, see the sections entitled "Consolidated Statement of Operations" and "Financial Review" of the 1998 Annual Report, which are incorporated by reference in this Annual Report on Form 10-K. 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 1998 Annual Report, which are incorporated by reference in this Annual Report on Form 10-K. 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, 1998, the company employed 9,036 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, 1998, these operations employed approximately 4,797 people, representing 53% of the company's total work force. 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 1998 Annual Report, which are incorporated by reference in this Annual Report on Form 10-K. 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 significant size are located in Belgium, Germany, Ireland, Japan, Mexico, the People's Republic of China, and the United Kingdom. The company owns approximately 213 acres of land in the United States and 219 acres abroad for a total of 432 acres. The company owns or leases approximately 5,513,000 square feet of manufacturing, distribution, research and development, and sales and administrative facilities worldwide. Of this total, electronics OEM components uses approximately 33%; telecommunications, energy and industrial, 46%; and corporate, 21%. None of the property owned by the company is held subject to any major encumbrances. 3 5 The company's facilities are suitable for their respective uses and, in general, are adequate to support the current and anticipated volume of business. Also, 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 1998 Annual Report, which is incorporated by reference in this Annual Report on Form 10-K. For information regarding leased properties, see the Note entitled "Commitments" of the 1998 Annual Report, which is incorporated by reference in this Annual Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS The company and its subsidiaries are parties to lawsuits or may in the future become parties to lawsuits involving various types of commercial claims, including, but not limited to, product liability, unfair competition, antitrust, breach of contract, environmental, and intellectual property matters. Legal proceedings tend to be unpredictable and costly and may be affected by events outside the control of the company. The company maintains various levels of insurance to apply to product liability and certain other claims in excess of deductibles. There is no assurance that litigation will not have an adverse effect on the company's financial position or results of operations. The company's major litigation matters as of June 30, 1998, are described below. On December 19, 1994, the company filed a complaint entitled Raychem Corporation and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. in the Superior Court of the State of California, County of San Mateo, which alleged, among other claims, misappropriation of trade secrets. On May 2, 1995, a complaint entitled Bourns, Inc. v. Raychem Corporation was filed in the United States District Court, Central District of California, alleging antitrust law violations. Many of the claims asserted in the company's state action were consolidated with Bourns' federal action against the company. On March 9, 1998, this case was transferred from the Eastern Division of the Central District to the Western Division of the Central District and reassigned to a new judge. The trial for Bourns' action against the company commenced on June 16, 1998. During the sixth week of the trial, due to the length of the proceeding, the judge bifurcated the company's trade secret action against Bourns for trial at a later date. On August 10, 1998, the trial of Bourns' action against the company ended with a jury verdict that awarded Bourns $64 million in damages. Legal fees and expenses, including attorneys fees, are also recoverable by Bourns under applicable U.S. antitrust law. The company intends to file motions with the trial court to set aside the jury verdict and to ask for a new trial on the grounds that the verdict is contrary to the evidence presented at trial and is incorrect as a matter of law. If necessary, the company intends to appeal any adverse final judgement. Under applicable U.S. antitrust law, any final damage award against the company will be trebled. The company also intends to continue with its theft of trade secrets case against Bourns. The new trial date for the trade secret action has not been set by the court. Because the company intends to appeal any adverse final judgement in the trial court, the company has not accrued any liability with respect to this litigation. Currently, the company's principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company's experience to date is that losses, if any, from such claims have not had a material effect on the company's financial position or results of operations. However, the company sells its products into applications (such as electronic interconnection products for aerospace and automotive markets) where product liability issues could be material. Effective March 31, 1996, the company increased its insurance deductible for heat-tracing products. The company's insurance deductible for claims arising from events prior to March 31, 1996, remains unchanged. The company is a defendant in a product liability case in the United States District Court in Seattle, All Alaskan Seafoods, Inc., et al. v. Raychem Corporation, Minnesota Mining and Manufacturing Corporation and Marine Electric, Inc., et al. The action arises out of a cargo vessel fire allegedly caused by a heat-tracing product. The plaintiffs in this case are seeking in excess of $150 million in damages. On November 21, 1997, the District Court granted the company's motion to limit damages claimed by the plaintiffs to the value of the 4 6 cargo lost or destroyed and certain other incidental claims of crew members (now alleged to be approximately $4 million) on account of the incident giving rise to the plaintiffs' claims. The parties have stipulated to a dismissal (without prejudice) of the remaining claims, so that plaintiffs may appeal the District Court's decision to the Ninth Circuit Court of Appeals. Plaintiffs filed their Notice of Appeal on May 26, 1998. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. Four separate state actions based on essentially the same facts, alleging wrongful distributor termination and antitrust claims, have been consolidated in the Superior Court of San Mateo County, California, Unit Process Company, et al. v. Raychem Corporation, et al. The dismissal in the United States District Court, Northern District of California, of an action alleging essentially the same facts was affirmed by the Ninth Circuit Court of Appeals in 1996. On February 25, 1998, the Superior Court granted the Company's motion to dismiss this lawsuit, with leave to the plaintiffs to amend certain of their claims. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. Additionally, the company has been named, among others, as a potentially responsible party in judicial and administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. The company believes that it does not have a material liability for cleanup costs at these sites. 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, 1998, 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 ---- --- -------- -------------- Deidra D. Barsotti...................... 42 Vice President and Controller 1991 L. Frans Berthels....................... 53 Senior Vice President 1995 Peter L. Brooks......................... 52 Vice President 1995 Timothy J. Burch........................ 47 Vice President 1996 Karen O. Cottle......................... 49 Vice President, General Counsel 1996 and Secretary Ralph H. Harnett........................ 50 Senior Vice President 1993 Richard A. Kashnow...................... 56 Chairman of the Board, President 1995 and Chief Executive Officer John D. McGraw.......................... 51 Senior Vice President 1995 Arati Prabhakar......................... 39 Senior Vice President and 1997 Chief Technology Officer Raymond J. Sims......................... 47 Senior Vice President and 1988 Chief Financial Officer Hus Tigli............................... 44 Senior Vice President 1995 Eric Van Zele........................... 50 Vice President 1994
There are no family relationships between any executive officers. All of the executive officers except Dr. Kashnow, Dr. Prabhakar and Mr. Burch have been employed by or associated with the company in their present or other managerial and executive capacities for more than five years. 5 7 Dr. Kashnow joined Raychem in 1995 as Chairman of the Board, President, and Chief Executive Officer. Before joining Raychem, Dr. Kashnow was President of Schuller International Group, a subsidiary of Manville Corporation from 1991 to 1995. Dr. Kashnow holds a Ph.D. in Physics from Tufts University. Dr. Prabhakar joined Raychem in 1997 as Senior Vice President and Chief Technology Officer, and left the company in September 1998. Before joining Raychem, Dr. Prabhakar served as Director of the U.S. National Institute of Standards and Technology from 1993 to 1997. Dr. Prabhakar holds a Ph.D. in Applied Physics from the California Institute of Technology. Mr. Burch joined Raychem in 1996 as Vice President of Human Resources. Before joining Raychem, Mr. Burch served in various human resource management positions for General Electric Company from 1973 through 1996. Mr. Burch holds a B.A. in sociology from Lafayette College. Ralph Harnett, Senior Vice President for the former telecommunications and energy networks segment left the company in August 1998. 6 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The section entitled "Quarterly Financial Data (Unaudited)" of the 1998 Annual Report is incorporated by reference in this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA For selected financial data, see the section entitled "Ten-Year Summary" of the 1998 Annual Report, which is incorporated by reference in this Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section entitled "Financial Review" of the 1998 Annual Report is incorporated by reference in this Annual Report on Form 10-K, except for "Forward-looking Statements and Risk Factors," which are set forth below. Statements made in the section entitled "Financial Review" of the 1998 Annual Report that are not statements of historical fact are forward-looking statements. Actual results may differ materially from the results anticipated in the statements due to a variety of factors including those described below. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Statements made or incorporated by reference in this annual report on Form 10-K, the 1998 Annual Report, or other communications (including press release and analyst calls) that are not statements of historical fact, are forward-looking statements. These statements include, but are not necessarily limited to, those relating to: - anticipated product and alliance plans, acquisitions, - litigation matters, - restructuring actions, - productivity improvements, - Year 2000 readiness, - expected tax position, - currency and economic effects, - dividends, - profitability, and - other financial, strategic, and growth-related commitments, targets, trends, or goals. A number of risks and uncertainties, including those discussed below, could affect forward-looking statements and could cause actual results to differ materially from the statements made. FLUCTUATIONS IN FOREIGN EXCHANGE RATES MAY AFFECT THE COMPANY'S RESULTS. Approximately two-thirds of the company's revenues result from sales outside the United States, a significant portion of which are denominated in foreign currencies. In addition, the company has several production facilities located outside the United States. The company's financial results therefore can be affected by changes in foreign currency rates. To mitigate these effects, the company hedges its transaction exposure (i.e., the effect on earnings and cash flows of changes in foreign exchange rates on receivables and payables denominated in foreign currencies). The company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on the company's consolidated net income. Accordingly, the company's reported revenues and net income have been and in the future may be affected by changes in foreign exchange rates. 7 9 IMPORTANCE OF INTERNATIONAL MARKETS. International markets provide the company with significant growth opportunities. However, the following events, among others, could adversely affect the company's financial results: - periodic economic downturns in different regions of the world, - changes in trade policies or tariffs, - political instability, and - fluctuations in exchange rates. During the six months ended June 30, 1998, the deterioration of economic conditions in certain Asian countries has caused revenues in Asia to fall below the company's expectations. Future results in Asia will depend on an improvement in these economic conditions. Continuing economic recession in Asia may lead to the cancellation of orders, pressure to reduce prices in the region, and difficulty in collecting receivables owed to the company or other factors that may adversely affect the company. RESTRUCTURING ACTIONS MAY NOT ACHIEVE INTENDED RESULTS. The company continues to implement a number of complex restructuring actions. Delay or difficulty in implementing these actions or market factors could reduce the anticipated benefit of these actions. The company's revenues, operating results, and financial condition could be adversely affected by the company's ability to manage effectively the transition to the new organizational structures, to continually improve manufacturing processes, and to outsource certain activities. There can be no assurance that the company will succeed in achieving its goals or that it will do so without unintended adverse consequences. PROBLEMS ASSOCIATED WITH YEAR 2000. The company has a comprehensive Year 2000 project designed to identify and assess the risks associated with its information systems, products, operations and infrastructure, suppliers, and customers that are not Year 2000 compliant, and to develop, implement, and test remediation and contingency plans to mitigate these risks. The project comprises four phases: (1) identification of risks, (2) assessment of risks, (3) development of remediation and contingency plans, and (4) implementation and testing. The company's Year 2000 project is currently in the assessment phase and, with respect to certain information systems and products, in the remediation phase. The company believes that its greatest potential risks are associated with its information systems and systems embedded in its operations and infrastructure. The company is at the beginning stage of assessments for its operations and infrastructure, and cannot predict whether significant problems will be identified. The company has not yet determined the extent of contingency planning that may be required. Based on the status of the assessments made and remediation plans developed to date, the company is not in a position to state the total cost of remediation of all Year 2000 issues. Costs identified to date have not been material. The company does not currently expect the total costs to be material, and it expects to be able to fund the total costs through operating cash flows. However, the company has not yet completed its assessments, developed remediation for all problems, developed any contingency plans, or completely implemented or tested any of its remediation plans. As the Year 2000 project continues, the company may discover additional Year 2000 problems, may not be able to develop, implement, or test remediation or contingency plans, or may find that the costs of these activities exceed current expectations and become material. In many cases, the company is relying on assurances from suppliers that new and upgraded information systems and other products will be Year 2000 compliant. The company plans to test such third-party products, but cannot be sure that its tests will be adequate or that, if problems are identified, they will be addressed in a timely and satisfactory way. Because the company uses a variety of information systems and has additional systems embedded in its operations and infrastructure, the company cannot be sure that all of its systems will work together in a Year 2000-compliant fashion. Furthermore, the company cannot be sure that it will not suffer business interruptions, either because of its own Year 2000 problems or those of its customers or suppliers whose Year 2000 problems may make it difficult or impossible for them to fulfill their commitments to the company. If the company fails to satisfactorily resolve Year 2000 issues related to its products in a timely manner, it could be exposed to liability to third parties. 8 10 The company is continuing to evaluate Year 2000-related risks and corrective actions. However, the risks associated with the Year 2000 problem are pervasive and complex, can be difficult to identify and to address, and can result in material adverse consequences to the company. Even if the company, in a timely manner, completes all of its assessments, identifies and tests remediation plans believed to be adequate, and develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences to the company. IMPLEMENTATION OF NEW INFORMATION SYSTEMS COULD CAUSE BUSINESS DISRUPTIONS. In 1996, the company began an enterprisewide process reengineering and information-system implementation to redesign the company's supply chain and other key business processes. This system will replace the company's core data and information systems with a fully integrated, enterprisewide information system. It will cover all of the company's major manufacturing sites and sales locations. The company does not expect to fully implement the system in all geographical areas and divisions by the year 2000. However, the company does expect to complete the implementation of this system for a major portion of the company's business by the end of calendar year 1999. The change in systems and processes is substantial. During implementation of this new system, the change could cause delays in: - order processing, - shipments of products, - invoicing, and - the accumulation and analysis of financial data. There can be no assurance that these delays, if they occur, will not have an adverse effect on the company's operating results or financial position. LITIGATION IS UNPREDICTABLE AND COSTLY. From time to time the company or its subsidiaries, or both, become involved in lawsuits arising from various types of commercial claims, including: - product liability, - unfair competition, - antitrust, - breach of contract, - environmental, and - intellectual property matters. Currently, the company's principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company also sells other products in markets where product liability issues could be material (for example, electronic interconnect products -- such as wire, cable, heat-shrinkable tubing, marking systems, connectors, and other devices -- for aerospace and automotive markets). Additionally, the company has been named, among others, as a potentially responsible party in judicial and administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. The company has a substantial investment in intellectual properties (consisting of patents, trademarks, copyrights, and trade secrets). The company relies significantly on the protection these intellectual property rights provide. Accordingly, the company protects these rights and from time to time becomes involved in issues of infringement or theft by third parties. The third parties may assert related counterclaims against the company, including unfair competition, antitrust or infringement claims. The company has been involved, as both a defendant and a plaintiff, in intellectual property lawsuits and could become involved in others in the future. Litigation tends to be unpredictable and costly. Events outside the company's control may affect the results of litigation. There is no assurance that litigation will not have a material adverse effect on the company's future financial position or results of operations. 9 11 INSURANCE COVERAGE MAY BE INADEQUATE. The company maintains various kinds of insurance to protect itself against certain potential loss exposures, including property, cargo, auto, product, general liability, and directors and officers liability insurance. To the extent that losses occur, depending on the nature of the loss, and the type and level of insurance coverage maintained by the company, there could be an adverse effect on the company's financial results. From time to time, the company may reevaluate and change the types and levels of insurance coverage that it purchases. There can be no assurance that insurance coverage: - will be available for all losses, - will continue to be available to the company under all circumstances at commercially reasonable rates, or, - if available, will be adequate in amount. THE COMPANY'S ANNUAL EFFECTIVE TAX RATE IS DIFFICULT TO ESTIMATE. The company determines its provision for income taxes based on the company's level of profitability in each jurisdiction in which it is subject to tax. It is difficult for the company to predict the geographic distribution and level of profitability in each jurisdiction. The company's geographic distribution and level of profitability may therefore vary from forecasts. This type of variance could cause the company's estimated annual effective tax rate in interim quarters to vary from the actual annual effective tax rate for the year. NEW PRODUCTS AND ACQUISITIONS MAY NOT PRODUCE ANTICIPATED BENEFITS. The company has historically achieved part of its revenue growth by developing or acquiring new and innovative materials science technologies and products. The company remains committed to internal research and development efforts, and will continue to pursue the acquisition of new or compatible technologies and businesses as an important part of the company's growth strategy. The company also has entered into, and in the future may enter into, arrangements with other companies to expand product offerings and to enhance its own manufacturing capabilities. These arrangements may include minority equity investments in the other companies. The company cannot predict success in its research and development efforts, acquisitions of new technologies, products, or businesses, or arrangements with third parties. Accordingly, there can be no assurance that: - the company will successfully realize its objectives, - the realization of these goals will not take longer or cost more than anticipated, or - there will not be unintended adverse financial or other consequences from these actions. ENVIRONMENTAL REGULATIONS MAY ADVERSELY IMPACT THE COMPANY'S OPERATIONS. The company has manufacturing facilities in many countries and many of those countries subject the company to environmental regulations. These regulations, and any changes in them, can affect the company's manufacturing processes as well as the cost, availability, and use of raw materials. The company's compliance with applicable environmental regulations has not had a material effect on the company's capital expenditures or operating results in the past. However, there is no assurance that environmental regulations, or changes in such regulations, will not have a material adverse effect on the company's future capital expenditures or operating results. DISRUPTIONS IN THE SUPPLY OF CERTAIN RAW MATERIALS AND COMPONENTS CAN HAVE ADVERSE EFFECTS ON THE COMPANY. In the past, a variety of factors have limited the supply of certain raw materials and components the company uses. This may occur again in the future. In addition, certain components purchased by the company are presently available from only one or a few sources of supply. In such cases, disruptions of established supply channels could result in increased prices, rationing, or shortages. In response, the company tries to identify alternative materials and technologies for the raw materials and components and to develop alternative sources of supply. Disruptions in the supply of raw materials and components can adversely affect financial results. A SIGNIFICANT PORTION OF THE COMPANY'S FACILITIES ARE LOCATED NEAR ACTIVE EARTHQUAKE FAULTS. A significant portion of the company's business operations, research and development activities, and its corporate headquarters, are located near major earthquake faults. The ultimate impact of a major earthquake on the 10 12 company, significant suppliers, and the general infrastructure is unknown, but could materially affect operating results. The company predominantly is not insured for losses and interruptions caused by earthquakes. THE COMPANY OPERATES IN COMPETITIVE MARKETS. The company's products compete with other products and technologies. The company's competitors include some of the largest companies in the world. Many of these companies have financial, technical, and other resources substantially greater than the company's. Even when the company has strong intellectual property protection for its products, other products, at times based on lower-cost technologies, compete with the company's products. For this and other reasons, in some of the company's markets, prices trend downward over time, requiring improvements in manufacturing and design to remain competitive. Competitive pressures may adversely affect the company's financial results. OTHER MARKET FORCES CAN ADVERSELY AFFECT THE DEMAND FOR THE COMPANY'S PRODUCTS. Changing market circumstances, such as fluctuations in demand and the seasonality of certain product lines, may affect the company's operating results. The company also sells certain of its products to customers in industries and countries that are experiencing periods of rapid change. For example: - The telecommunications industry is going through a period of rapid technological change, and customers in this industry may delay purchases of the company's products until they resolve technology issues more clearly. - Foreign countries are privatizing many electric power utilities, which may affect the purchasing policies of these utility companies. These types of market forces may adversely affect the company's operations and financial performance. GEOGRAPHIC AND PRODUCT MIX CHANGES MAY AFFECT THE COMPANY'S GROSS PROFITS AND RESULTS OF OPERATIONS. The company's results of operations vary by product line and by geographic region. Changes in the company's geographic or product mix of sales may therefore affect the company's gross profits. THE COMPANY'S ORDER BACKLOG IS NOT PREDICTIVE OF FUTURE RESULTS. The company realizes a substantial amount of its revenues through orders and shipments booked within a quarter. The backlog at the end of any quarter may not predict the company's financial results for the following quarter. GENERAL. Because of the foregoing factors, in addition to other factors that affect the company's operating results and financial position, investors should: - not consider past financial performance or management's expectations a reliable indicator of future performance, and - not use historical trends to anticipate results or trends in future periods. In that regard, results of operations and financial condition could be adversely affected by a number of factors in addition to those discussed above, including overall economic conditions and lower than expected demand. Further, the company's stock price is subject to volatility. Any of the factors discussed above could have an adverse effect on the company's stock price. In addition, the company's stock price could be adversely affected if the company's revenues or earnings in any quarter fail to meet the investment community's expectations, or if there are broader, negative market trends. The company does not undertake an obligation to update its forward-looking statements or risk factors to reflect future events or circumstances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The section entitled "Market Risk Discussion" contained within "Financial Review" of the 1998 Annual Report is incorporated by reference in this Annual Report on Form 10-K. 11 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, together with the Notes thereto and the report thereon of PricewaterhouseCoopers LLP, dated July 15, 1998, except as to the second paragraph of the "Contingencies" footnote, which is as of August 10, 1998, and the "Quarterly Financial Data (Unaudited)" of the 1998 Annual Report are incorporated by reference in this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 12 14 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 page 2 of the Proxy Statement dated September 18, 1998 (the "1998 Proxy Statement"), which page is incorporated by reference in this Annual Report on Form 10-K. 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 5 to 10 of the 1998 Proxy Statement, which pages are incorporated by reference in this Annual Report on Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is set forth on pages 2 to 4 of the 1998 Proxy Statement, which pages are incorporated by reference in this Annual Report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding transactions with the company's directors and executive officers is set forth on page 12 of the 1998 Proxy Statement, which page is incorporated by reference in this Annual Report on Form 10-K. 13 15 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 1998 ANNUAL REPORT* -------------- Financial Review............................................ 7 - 15 Report of Independent Accountants........................... 17 Consolidated Balance Sheet at June 30, 1998 and 1997........ 18 Consolidated Statement of Operations for the three years ended June 30, 1998....................................... 19 Consolidated Statement of Cash Flows for the three years ended June 30, 1998....................................... 20 Consolidated Statement of Stockholders' Equity for the three years ended June 30, 1998................................. 21 Notes to Consolidated Financial Statements.................. 22 - 36 Quarterly Financial Data (Unaudited)........................ 37 Ten-Year Summary............................................ 38 - 39
- --------------- * Incorporated by reference in this Annual Report on Form 10-K and included in this filing as Exhibit 13. (2) Financial Statement Schedules
PAGE IN 1998 FORM 10-K -------------- Report of Independent Accountants on Financial Statement Schedule.................................................. 19 Schedule II -- Valuation and Qualifying Accounts............ 20
The Valuation and Qualifying Accounts schedule should be read in conjunction with the financial statements in the 1998 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. (3) Index to Exhibits
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2(a) Reorganization Agreement dated as of March 27, 1996(11) 2(b) Amendment and Restated Joint Venture Agreement dated as of March 29, 1996(11) 3(a) Certificate of Amendment of Amended and Restated Certificate of Incorporation(16) 3(b) Amended and Restated Bylaws(17) 3(c) Certificate of Merger(1) 4(a) Rights Agreement(4) 4(b) Credit Agreement dated as of September 12, 1996(13) 10(a) Executive Long Term Incentive Plan(2) 10(b) Bonus Deferral Plan(2) 10(c) Amended and Restated 1987 Directors Stock Option Plan(6) 10(d) Supplemental Executive Retirement Plan(3) 10(e) Amended and Restated 1990 Incentive Plan(6) 10(f) Consulting Agreement dated as of April 1, 1990, between the company and Paul M. Cook(5)
14 16
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10(g) 1995 Executive Deferred Compensation Plan(7) 10(h) Executive Termination Compensation Policy dated as of June 1, 1995(8) 10(i) Consulting/Employment Agreement dated as of June 7, 1995, between the company and Robert J. Saldich(8) 10(j) Employment letter between the company and Dr. Richard Kashnow dated August 11, 1995(9) 10(k) Supplemental agreement between the company and Dr. Richard Kashnow dated February 5, 1996(10) 10(l) Agreement and release between the company and Mr. Harry O. Postlewait dated November 16, 1995(10) 10(m) Participation Agreement between the company and U.S. Bancorp Leasing & Financial dated April 11, 1996(12) 10(n) Participation Agreement between the company and Metlife Capital Limited Partnership dated April 11, 1996(12) 10(o) Headlease Agreement A between the company and Fleet National Bank dated April 11, 1996(12) 10(p) Headlease Agreement B between the company and Fleet National Bank dated April 11, 1996(12) 10(q) Lease Agreement A between the company and Fleet National Bank dated April 11, 1996(12) 10(r) Lease Agreement B between the company and Fleet National Bank dated April 11, 1996(12) 10(s) Agreement and release between the company and Mr. Michael T. Everett dated July 22, 1996(12) 10(t) Consulting Agreement dated as of August 16, 1996, between the company and Isaac Stein and Waverley Associates, Inc.(13) 10(u) Consulting Agreement dated as of December 12, 1996, between the company and James F. Gibbons(14) 10(v) 1996 Directors Stock Option Plan(15) 10(w) Supplemental agreement between the company and Dr. Richard Kashnow dated June 30, 1997(15) 10(x) Agreement and release between the company and Ralph H. Harnett dated June 4, 1998 12 Computation of Ratio of Earnings to Fixed Charges 13 Portions of the 1998 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.
- --------------- (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. 15 17 (2) 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. (3) 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. (4) 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. (5) 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. (6) 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. (7) 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. (8) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, (File No. 2-15299) and incorporated by reference. (9) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, (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 December 31, 1995, (File No. 2-15299) and incorporated by reference. (11) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, (File No. 2-15299) and incorporated by reference. (12) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, (File No. 2-15299) and incorporated by reference. (13) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, (File No. 2-15299) and incorporated by reference. (14) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, (File No. 2-15299) and incorporated by reference. (15) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 (File No. 2-15299) and incorporated by reference. (16) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, (File No. 2-15299) and incorporated by reference (17) Filed as an exhibit to the company's Current Report on Form 8-K dated April 28, 1998, (File No. 2-15299) and incorporated by reference. (b) Reports on Form 8-K The company filed a Current Report on Form 8-K dated April 17, 1998, the date on which the Board of Directors amended and restated the Company's Bylaws (Bylaws). The amendments to the Bylaws, among other things, add advance notice requirements and procedures for the submission by stockholders of nominations for the board of directors and other proposals to be presented at annual stockholder meetings. 16 18 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/ RICHARD H. KASHNOW -------------------------------------- Richard A. Kashnow President and Chief Executive Officer Date: September 18, 1998 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Richard A. Kashnow 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/ RICHARD A. KASHNOW President, Chairman of the September 18, 1998 - ----------------------------------------------------- Board and Richard A. Kashnow Chief Executive Officer (Principal Executive Officer) /s/ RAYMOND J. SIMS Senior Vice President and September 18, 1998 - ----------------------------------------------------- Chief Financial Officer Raymond J. Sims (Principal Financial Officer) /s/ DEIDRA D. BARSOTTI Vice President and September 18, 1998 - ----------------------------------------------------- Controller (Principal Deidra D. Barsotti Accounting Officer) /s/ RICHARD DULUDE Director September 18, 1998 - ----------------------------------------------------- Richard Dulude Director - ----------------------------------------------------- James F. Gibbons /s/ JOHN P. MCTAGUE Director September 18, 1998 - ----------------------------------------------------- John P. McTague
17 19
SIGNATURE TITLE DATE --------- ----- ---- /s/ DEAN O. MORTON Director September 18, 1998 - ----------------------------------------------------- Dean O. Morton /s/ ISAAC STEIN Director September 18, 1998 - ----------------------------------------------------- Isaac Stein /s/ CHANG-LIN TIEN Director September 18, 1998 - ----------------------------------------------------- Chang-Lin Tien /s/ CYRIL J. YANSOUNI Director September 18, 1998 - ----------------------------------------------------- Cyril J. Yansouni
18 20 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 15, 1998, except as to the second paragraph of the "Contingencies" footnote, which is as of August 10, 1998, appearing on page 17 of the 1998 Annual Report to Stockholders of Raychem Corporation (which report and consolidated financial statements are incorporated herein by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule 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. PricewaterhouseCoopers LLP San Jose, California July 15, 1998, except as to the second paragraph of the "Contingencies" footnote, which is as of August 10, 1998 19 21 SCHEDULE II RAYCHEM CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS* YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO FOREIGN BALANCE BEGINNING COSTS AND ACCOUNTS CURRENCY AT END DESCRIPTION OF YEAR EXPENSES, NET WRITTEN OFF TRANSLATION OF YEAR ----------- ---------- ------------- ----------- ----------- ------- 1998: Accounts receivable................. $ 8,797 $3,591 $2,168 $(489) $ 9,731 ======= ====== ====== ===== ======= 1997: Accounts receivable................. $10,033 $1,449 $2,244 $(441) $ 8,797 ======= ====== ====== ===== ======= 1996: Accounts receivable................. $10,348 $3,145 $3,204 $(256) $10,033 ======= ====== ====== ===== =======
- --------------- * Allowances are deducted from assets to which they apply. 20 22 199810K 23 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 2(a) Reorganization Agreement dated as of March 27, 1996(11) 2(b) Amendment and Restated Joint Venture Agreement dated as of March 29, 1996(11) 3(a) Certificate of Amendment of Amended and Restated Certificate of Incorporation(16) 3(b) Amended and Restated Bylaws(17) 3(c) Certificate of Merger(1) 4(a) Rights Agreement(4) 4(b) Credit Agreement dated as of September 12, 1996(13) 10(a) Executive Long Term Incentive Plan(2) 10(b) Bonus Deferral Plan(2) 10(c) Amended and Restated 1987 Directors Stock Option Plan(6) 10(d) Supplemental Executive Retirement Plan(3) 10(e) Amended and Restated 1990 Incentive Plan(6) 10(f) Consulting Agreement dated as of April 1, 1990, between the company and Paul M. Cook(5) 10(g) 1995 Executive Deferred Compensation Plan(7) 10(h) Executive Termination Compensation Policy dated as of June 1, 1995(8) 10(i) Consulting/Employment Agreement dated as of June 7, 1995, between the company and Robert J. Saldich(8) 10(j) Employment letter between the company and Dr. Richard Kashnow dated August 11, 1995(9) 10(k) Supplemental agreement between the company and Dr. Richard Kashnow dated February 5, 1996(10) 10(l) Agreement and release between the company and Mr. Harry O. Postlewait dated November 16, 1995(10) 10(m) Participation Agreement between the company and U.S. Bancorp Leasing & Financial dated April 11, 1996(12) 10(n) Participation Agreement between the company and Metlife Capital Limited Partnership dated April 11, 1996(12) 10(o) Headlease Agreement A between the company and Fleet National Bank dated April 11, 1996(12) 10(p) Headlease Agreement B between the company and Fleet National Bank dated April 11, 1996(12) 10(q) Lease Agreement A between the company and Fleet National Bank dated April 11, 1996(12) 10(r) Lease Agreement B between the company and Fleet National Bank dated April 11, 1996(12) 10(s) Agreement and release between the company and Mr. Michael T. Everett dated July 22, 1996(12) 10(t) Consulting Agreement dated as of August 16, 1996, between the company and Isaac Stein and Waverley Associates, Inc. (13) 10(u) Consulting Agreement dated as of December 12, 1996, between the company and James F. Gibbons (14)
24
EXHIBIT NO. DESCRIPTION ----------- ----------- 10(v) 1996 Directors Stock Option Plan(15) 10(w) Supplemental agreement between the company and Dr. Richard Kashnow dated June 30, 1997(15) 10(x) Agreement and release between the company and Ralph H. Harnett dated June 4, 1998 12 Computation of Ratio of Earnings to Fixed Charges 13 Portions of the 1998 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.
- --------------- (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 Proxy Statement dated September 12, 1988, mailed to stockholders in connection with the 1988 Annual Meeting of Stockholders and incorporated by reference. (3) 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. (4) 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. (5) 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. (6) 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. (7) 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. (8) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, (File No. 2-15299) and incorporated by reference. (9) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, (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 December 31, 1995, (File No. 2-15299) and incorporated by reference. (11) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, (File No. 2-15299) and incorporated by reference. (12) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, (File No. 2-15299) and incorporated by reference. (13) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, (File No. 2-15299) and incorporated by reference. (14) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, (File No. 2-15299) and incorporated by reference. (15) Filed as an exhibit to the company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 (File No. 2-15299) and incorporated by reference. 25 (16) Filed as an exhibit to the company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, (File No. 2-15299) and incorporated by reference (17) Filed as an exhibit to the company's Current Report on Form 8-K dated April 28, 1998, (File No. 2-15299) and incorporated by reference. EX-10 2 AGREEMENT AND RELEASE DATED JUNE 4, 1998 1 Exhibit 10(x) June 4, 1998 Ralph H. Harnett Re: Agreement and Release Dear Ralph: This Agreement and Release (the "Agreement") is to confirm our agreement with respect to the termination of your employment with Raychem Corporation ("Raychem"). Please indicate your agreement by signing, dating, and returning this Agreement to me no later than June 30, 1998. We have agreed that your employment with Raychem will end as of the end of the business day on August 1, 1998 or, if you elect to terminate your employment voluntarily before such date, such earlier date (the "Termination Date"). Thereafter, you will no longer be an employee of Raychem. In your final paycheck on the Termination Date, you will be paid all earned and unpaid salary together with any accrued and unused vacation pay, less deductions authorized or required by law. In addition, to induce Raychem to enter into this Agreement, you agree to enter into the Professional Services Agreement attached as Exhibit 1. You agree that the consideration named in this Agreement is sufficient to compensate you for the release given herein, for any consulting services you may provide to Raychem pursuant to the Professional Services Agreement, and for agreeing to all other terms set forth in this Agreement. You also agree that the severance amounts set forth herein are in lieu of any severance payments to which you would otherwise be entitled under Raychem's Human Resources policies. Commencing on August 1, 1998, you will also receive a severance amount equal to (i) one (1) year of severance payments based on your current salary of Three Hundred And Forty Thousand Dollars ($340,000.00) regardless of whether you obtain other employment during this period (the "Full Salary Period"), and (ii) if you are not working at a new job or for yourself (self-employed) during the one (1) year period commencing on August 1, 1999, upon your written request as set forth below, up to an additional one (1) year of such severance payments based on your current salary ($340,000.00) or, if you are working at a new job or for yourself (self-employed) during the year commencing on August 1, 1999, and your annual cash compensation 2 and/or salary (including bonuses) from this employment is less than Three Hundred And Forty Thousand Dollars ($340,000.00), the difference between those two (2) figures (the "Differential Salary Period"). Your written request to receive all or part of the second year of such severance payments must be received by Raychem at least seven (7) days prior to the date you would be eligible for such payments. Your written request must include confirmation that you are not working or, if you are, what your salary or compensation and expected bonus are. You also agree to subsequently notify Raychem in writing within five (5) days after any changes in such information (including changes in employment, salary, compensation and bonus) and to certify to Raychem on a quarterly basis, and otherwise, as requested by Raychem, the amount of compensation, salary and bonus from another employer and/or self-employment you are receiving during the Differential Salary Period. Payments pursuant to the Full Salary and the Differential Salary Period are not eligible for deferral under the Raychem Executive Deferred Compensation Plan. This severance benefit, minus deductions authorized or required by law, will be paid in bi-weekly installments. All required notification must be sent to Raychem's Corporate Legal Department, Attention General Counsel. Information on health coverage and COBRA conversion rights will be mailed to your home address. Your present Raychem medical benefits (for you and your eligible covered dependents) will remain in effect, at standard staff rates, until the earliest to occur of (i) one (1) year after the Termination Date, or (ii) you secure other employment and you therefore become eligible for medical insurance, or, you are eligible for medical insurance through any other means, or (iii) your death, or (iv) you reach age sixty-five (65). Your present Raychem dental benefits (for you and your eligible covered dependents) will remain in effect, at standard staff rates, until the earliest to occur of (i) one (1) year after the Termination Date, or (ii) you secure other employment and you therefore become eligible for dental insurance, or, you are eligible for dental insurance through any other means, or (iii) your death, or (iv) you reach age sixty-five (65). You agree to notify Raychem in writing within five (5) days after securing other employment or obtaining other medical or dental benefits. For purposes of COBRA, the "qualifying event" shall be deemed to be the Termination Date. COBRA coverage, to the extent required by law, will run concurrently with the Full Salary Period, and with the Differential Salary Period if applicable, up to the end of the eighteen (18) month COBRA period. Your spouse and/or dependent children will be entitled to COBRA benefits to the extent provided by statute should your death occur during the period of your COBRA coverage. The standard Raychem-paid life insurance benefits will remain in effect on your behalf for one (1) year from the Termination Date. 3 If you are terminating your employment with Raychem before age fifty-five (55) and are vested in the Raychem Pension Plan, you will be offered the option of receiving your accrued benefit as an annuity or a lump sum in the first month of the second calendar quarter following your termination. If your pension benefit amount as a lump sum is less than Five Thousand Dollars ($5,000) then it will be distributed to you without the option to decline. At any time after reaching retirement age (age 65 or older, or age 55 with ten (10) or more years of service), you are eligible to receive your pension benefit as a normal or early retirement benefit; at your option, the payment can be in the form of an annuity or a lump sum. Raychem will furnish to you through one (1) year from the Termination Date, according to then current Raychem practices and policies: o Financial planning services. o The career transition services of either de Recat & Associates, or Peller Marion & Associates, professional outplacement firms, to support and enhance your job search efforts. Your outstanding stock options to purchase Raychem stock and restricted stock, under the 1990 Incentive Plan (the "1990 Plan") and the 1988 Executive Long-Term Incentive Plan (the "Incentive Plan"), to the extent they are unvested, will continue to vest through August 1, 1999. Any incentive stock options shall convert to non-qualified stock options three (3) months following the Termination Date. In exchange for the benefits provided to you under this Agreement, you agree that the termination date for the 1990 Plan and the Incentive Plan relating to all outstanding stock options and restricted stock shall be August 1, 1999, and any unvested options or restricted stock under the 1990 Plan or Incentive Plan will lapse as of August 1, 1999. The post-termination exercise period of your options under the 1990 Plan or the Incentive Plan will begin on August 1, 1999, and your vested options under the 1990 Plan or Incentive Plan will expire three (3) months following August 1, 1999. Any outstanding unvested options under stock option or incentive plans other than the 1990 Plan or the Incentive Plan will expire on your Termination Date (as defined in paragraph 2 of this Agreement). All outstanding vested options under such other plans will expire per the terms of such other plans. However, the provisions of this Agreement shall not extend the exercisability of options to purchase Raychem stock beyond the expiration date(s) stated in the relevant option agreement(s). 4 You will continue to be considered a designated insider for purposes of trading in Raychem stock for the entire Full Salary Period, and, if applicable, during the Differential Salary Period. Any Raychem employee benefits not otherwise provided for in this Agreement will no longer be available to you as of the Termination Date. You agree that you will return all Raychem property to Richard Kashnow or designee by the Termination Date. Raychem property includes but is not limited to all samples, cases, brochures, papers, notes, and other documents, and all copies thereof, relating to Raychem, its business, and its customers that have been obtained by you during your employment, together with other Raychem or Raychem-customer or supplier property in your possession. You acknowledge your obligations under the Proprietary Information And Inventions Agreement, which still remains in effect. You also acknowledge that a breach of that agreement and the disclosure of Raychem proprietary information would cause irreparable harm to Raychem and entitle Raychem to obtain injunctive relief without further proof of damage. We have enclosed a copy of that agreement as Exhibit 2 for your reference. As further consideration for the severance benefits set forth in this Agreement, you agree that you will not, during the term of the Full Salary Period and Differential Salary Period, if applicable, directly or indirectly, anywhere in the United States, including any county of the state of California, or in any foreign country in which, during such period, business is conducted by Raychem or substantial customers of Raychem are located, enter into or engage in any activity, as a sole proprietor, shareholder, employee, director, partner, consultant, or otherwise, or in any way be concerned with the design, development, use, manufacture and/or sale of any technology, product, product line or component which is directly competitive with any technology based on Raychem proprietary information, or any technology, product, product line or component, which is in development, manufactured and/or sold by Raychem alone or jointly with third parties as of the Termination Date. You also agree that during the term of the Full Salary Period and Differential Salary Period, if applicable, you will not directly or indirectly solicit or induce any other employee or consultant with Raychem to terminate their employment or relationship with Raychem. Raychem and you acknowledge that the provisions of this paragraph may or may not be enforceable under the laws of certain states and/or certain 5 countries. Raychem and you intend that this paragraph be enforced, to the extent enforceable, in all jurisdictions worldwide in which Raychem currently does business, and that lack of enforceability in any one jurisdiction shall not impair enforcement in any other jurisdiction. Breach of this provision shall entitle Raychem to terminate severance payments under this Agreement in addition to any other legal remedies to which it may be entitled. Also, in consideration for a portion of the severance payment being paid to you under the terms of this Agreement, in the amount of one (1) week of salary, less deductions authorized or required by law, you, on behalf of your heirs, spouses and assigns, hereby completely release and forever discharge Raychem from any claim of age discrimination, known or unknown, foreseen or unforeseen, arising under the Age Discrimination in Employment Act of 1967 or the California Fair Employment and Housing Act, up to the Termination Date. Raychem Corporation is prepared to offer you the consideration set forth herein, which is above and beyond the wages and benefits to which you would otherwise be entitled, in exchange for your agreement to release all claims, known or unknown, against Raychem Corporation, its parent, subsidiaries and affiliates, and its past, present, and future officers, directors, shareholders, agents, employees, attorneys, insurers, successors, and assigns (collectively referred to in this Agreement as "Raychem") as of the date you signed this Agreement. You are not eligible to receive the consideration outlined herein unless you elect to sign this Agreement. In consideration for the severance benefits set forth in this Agreement, you, on behalf of yourself, your heirs, spouse, and assigns, hereby completely release and forever discharge Raychem from any and all claims, of any and every kind, nature, and character, known or unknown, foreseen or unforeseen, based on any act or omission occurring prior to the Termination Date, including but not limited to any claims arising out of your offer of employment, your employment, any employment agreement, or termination of your employment with Raychem or acts leading up to such termination, and all claims under federal and state discrimination laws, including but not limited to claims arising under the Age Discrimination in Employment Act of 1967, and the California Fair Employment and Housing Act. The only exceptions are any claims that you may have for unemployment compensation, any rights that you may have under any Raychem Pension Plan, any Workers' Compensation benefits to which you may be found entitled, any claims for amounts deferred pursuant to the Raychem Executive Deferred Compensation Plan, any claims relating to the Raychem TaxSaver Plus Plan, and any claims for 6 indemnification, including any related insurance coverage, to which you may be entitled in connection with your service as an officer of Raychem (collectively referred to in this Agreement as "Exempt Claims"). This Release shall not apply to your right to be indemnified to the fullest extent allowed by Raychem's Articles and Bylaws, any indemnification agreement between you and Raychem, or under applicable law with respect to any claims, actions or proceedings based on or arising out of acts performed within the course and scope of your employment with Raychem. This Agreement fully and finally extinguishes and discharges all claims (except for Exempt Claims), whether known or not and you hereby agree to release not only claims known but those unknown to you which arose out of your employment with Raychem or and/or its termination. You therefore agree to waive the provisions of California Civil Code Section 1532 which states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." You fully understand that, if, in fact, any matter covered by this Agreement is found hereafter to be other than or different from the fact now believed by you to be true, you expressly accept and assume that this Agreement will be and remain effective, notwithstanding such difference in the facts. You agree neither to file nor to encourage or knowingly permit another to file on your behalf any claim, charge, action or complaint concerning any matter referred to in this Agreement. If you have previously filed any such claims (other than Workers' Compensation claims), you agree to take all reasonable steps to cause them to be withdrawn without delay. This Agreement constitutes the entire agreement between yourself and Raychem with respect to any matters referred to in this Agreement and supersedes any and all of the other oral or written agreements between yourself and Raychem, with the exception of the Professional Services Agreement attached hereto as Exhibit 1, and the Proprietary Information And Inventions Agreement attached hereto as Exhibit 2, which remain in full force and effect. No other consideration, agreements, representations, oral statements, understandings, policies or course of conduct that are not expressly set forth in this Agreement should be implied or are binding. You are not relying upon any other agreement, representation, statement, 7 omission, understanding, policy or course of conduct that is not expressly set forth in this Agreement. You understand and agree that this Agreement will not be deemed or construed at any time or for any purposes as an admission of any liability or wrongdoing by either yourself or Raychem. You also agree that if any provision of this Agreement is deemed invalid, the remaining provisions will still be given full force and effect. The terms and conditions of this Agreement will be governed by the laws of California applicable to contracts made and performed within California. In the event of any conflict between this Agreement and the Professional Services Agreement attached hereto as Exhibit 1, this Agreement shall govern and control. Prior to execution of this Agreement, you should apprise yourself of sufficient relevant information to intelligently exercise your own judgment. You are advised to consult an attorney. You may take at least twenty-one (21) days from your receipt of this Agreement to consider whether or not you wish to accept benefits described herein in exchange for this Agreement. Please also note that even if you do sign this Agreement, you may change your mind and revoke this Agreement and forego the additional benefits, provided that you notify me in writing, within seven (7) days after the date of your signing. This Agreement will not be effective until after such seven (7) day revocation period has expired. In order to obtain the consideration described in this Agreement, this Agreement must be signed by you and returned to me by June 30, 1998. Finally, you agree that you will not disclose to anyone (except for your spouse, accountant, financial planner and/or lawyer) or allow anyone else to disclose the existence of, reason for, or contents of this Agreement without Raychem's prior written consent, unless required to do so by law. Sincerely, /s/ RICHARD A. KASHNOW -------------------------------- Richard A. Kashnow Chairman of the Board, President and Chief Executive Officer 8 ================================================================================ EMPLOYEE'S ACCEPTANCE OF AGREEMENT, RELEASE AND BENEFITS I HAVE CAREFULLY READ, FULLY UNDERSTAND, AND VOLUNTARILY AGREE TO ALL THE TERMS OF THIS AGREEMENT AND RELEASE IN EXCHANGE FOR THE ADDITIONAL BENEFITS TO WHICH I WOULD NOT OTHERWISE BE ENTITLED. THIS RELEASE IS EXECUTED VOLUNTARILY AND WITH FULL KNOWLEDGE OF ITS SIGNIFICANCE. /s/ 6/29/98 /s/ Ralph H. Harnett - ------------------------- --------------------------- Date 9 Exhibit 1 PROFESSIONAL SERVICES AGREEMENT - Ralph H. Harnett THIS PROFESSIONAL SERVICES AGREEMENT (hereinafter "Professional Services Agreement") is effective as of August 2, 1998 (hereinafter "Effective Date"), by and between RAYCHEM CORPORATION, a corporation organized and existing under and by virtue of the laws of the State of Delaware, having a place of business at 300 Constitution Drive, Menlo Park, California 94025-1164 (hereinafter "RAYCHEM"), and Ralph H. Harnett (hereinafter "CONSULTANT"). NOW, THEREFORE, for and in consideration of the mutual covenants and obligations assumed by the parties hereto, it is agreed as follows: 1. CONSULTANT, pursuant to the provisions of this Professional Services Agreement, is retained to perform services as reasonably requested from time to time by RAYCHEM, at such place or places and at such times as shall be mutually agreeable. The services shall be carried out at the direction of the Chief Executive Officer or designee. 2. Full and complete compensation for CONSULTANT's services and also for the discharge of CONSULTANT's obligations hereunder shall be CONSULTANT's consideration named in the Agreement and Release between the parties dated June 4, 1998 (hereinafter "Agreement and Release"), to which this Professional Services Agreement is attached as Exhibit 1. A. RAYCHEM shall reimburse CONSULTANT for the expense of round trip tourist class transportation, hotels and meals, reasonably incurred by CONSULTANT in connection with any trip made by CONSULTANT at the request of RAYCHEM, that have been preapproved by the Chief Executive Officer or designee. RAYCHEM shall reimburse CONSULTANT for any other reasonable expenses actually incurred which are incidental to the services performed hereunder. Expenses exceeding One Hundred Dollars ($100.00) must be approved in advance by the Chief Executive Officer or designee. B. Invoices for expenses shall be submitted to the Chief Executive Officer 10 or designee within thirty (30) days. Payment of CONSULTANT's invoice shall be made by RAYCHEM within thirty (30) days of receipt thereof. 3. CONSULTANT's relationship to RAYCHEM shall be that of an independent contractor and nothing in this Professional Services Agreement shall be construed to create an employer-employee relationship. Since CONSULTANT will not be an employee of RAYCHEM, it is understood that CONSULTANT will not be entitled to any benefits under RAYCHEM's retirement, group insurance or medical plans or any other employee benefits except as expressly provided in the Agreement and Release. In the performance of all services hereunder, CONSULTANT shall comply with all applicable laws and regulations. 4. CONSULTANT recognizes the vital importance to RAYCHEM of the confidential nature of all proprietary information of Raychem Corporation, its parent, subsidiaries and/or affiliates (hereinafter "RAYCHEM GROUP"). In order to prevent what CONSULTANT agrees would otherwise result in the inevitable disclosure of Proprietary Information which would thereby cause irreparable harm to the RAYCHEM GROUP, CONSULTANT agrees that CONSULTANT will not, without the prior written consent of RAYCHEM, during the term of this Professional Services Agreement including any renewal thereof, directly or indirectly, anywhere in the State of California, or in any other State of the United States or in any other country in which during such period business is conducted by the RAYCHEM GROUP or substantial customers of the RAYCHEM GROUP, enter into or engage in any activity as a sole proprietor, shareholder, employee, director, partner, consultant or otherwise which is in any way concerned with the design, development, use, manufacture and/or sale of any technology, product, product line or component in development, manufactured or sold by the RAYCHEM GROUP. Further, CONSULTANT shall not directly or indirectly solicit or induce any employee of the RAYCHEM GROUP to leave their employment with the RAYCHEM GROUP. CONSULTANT further agrees that CONSULTANT shall not, either during the term of this Professional Services Agreement and any extension thereof, serve as an expert witness for, or advisor to any third party in connection with any litigation involving RAYCHEM without the express prior written consent of RAYCHEM. This provision is in addition to any requirement of the Proprietary Information And Inventions Agreement between RAYCHEM and CONSULTANT and of any applicable policies and laws regarding trade secrets. 11 5. RAYCHEM and CONSULTANT acknowledge that the provisions of Paragraph 4 may or may not be enforceable under the laws of certain states and/or certain countries. RAYCHEM and CONSULTANT intend that Paragraph 4 be enforced, to the extent enforceable, in all jurisdictions worldwide in which the RAYCHEM GROUP currently does business, and that lack of enforceability in any one jurisdiction shall not impair enforcement in any other jurisdiction. 6. CONSULTANT understands that RAYCHEM does not desire to acquire from CONSULTANT any secret or confidential know-how or information of CONSULTANT or which CONSULTANT has acquired or shall hereafter acquire from any third party. Accordingly, CONSULTANT represents and warrants that CONSULTANT is free to divulge to RAYCHEM, without any obligation to, or violation of any right of CONSULTANT or others, any and all information, practices or techniques which CONSULTANT will describe, demonstrate, divulge, or any other manner make known to RAYCHEM during CONSULTANT's performance of services hereunder. CONSULTANT hereby undertakes to exonerate, indemnify and hold harmless RAYCHEM from and against any and all liability, loss, cost, expense, damage, claim or demand for actual or alleged violation of the rights of CONSULTANT or of the rights divulged to RAYCHEM in any trade secret, know-how or information CONSULTANT has divulged to RAYCHEM in any trade secret, know-how or other confidential information by reason of RAYCHEM's receipt or use of the services or information described above, or otherwise in connection therewith. 7. As used in this Professional Services Agreement, the term "Invention" shall mean any and all discoveries, improvements, trade secrets, processes, techniques, copyrightable material, computer programs, formula, design and know-how, of any kind or nature, whether or not patentable, and whether or not related to RAYCHEM's business, and which are invented, conceived, discovered, developed or reduced to practice by CONSULTANT and which in any way result from or arise out of CONSULTANT's services hereunder and/or CONSULTANT's exposure to RAYCHEM's proprietary information pursuant to Paragraph 7 of this Professional Services Agreement. CONSULTANT agrees that CONSULTANT will promptly and fully disclose to RAYCHEM all Inventions. CONSULTANT also agrees to and hereby does assign to RAYCHEM all right, title and interest in and to all Inventions and CONSULTANT represents and warrants that CONSULTANT has no 12 contractual or other obligations to any third party which preclude or in any way encumber CONSULTANT's right to assign to RAYCHEM the full and exclusive right, title and interest in and to any and all Inventions. It is further understood and agreed that all Inventions will be and remain the property of RAYCHEM whether or not disclosed, assigned or patented. CONSULTANT shall, if RAYCHEM shall so request, assist RAYCHEM in every proper way to obtain for the sole benefit of RAYCHEM, patents on Inventions in any and all countries. The decision to file (or not to file) and/or continue to prosecute a patent application or applications on any Inventions shall be in RAYCHEM's sole discretion. 8. The parties hereto acknowledge that during the course of CONSULTANT's service to RAYCHEM pursuant to this Professional Services Agreement it may be necessary or desirable for RAYCHEM to disclose to CONSULTANT significant RAYCHEM proprietary information. Any information imparted to RAYCHEM in confidence by a third party shall be deemed for purposes of this Professional Services Agreement to constitute RAYCHEM proprietary information. CONSULTANT fully understands that the maintenance of RAYCHEM's proprietary information in strict confidence and the confinement of its use to RAYCHEM is of vital importance to RAYCHEM. CONSULTANT therefore agrees that all information and knowledge divulged to CONSULTANT by RAYCHEM or which CONSULTANT acquires in connection with or as a result of CONSULTANT's services hereunder shall be regarded and treated by CONSULTANT as confidential. Without limiting the generality of the foregoing, CONSULTANT recognizes that, unless and until published, all features of the materials, apparatus, process and application methods heretofore or hereafter used or developed by RAYCHEM shall be regarded and treated by CONSULTANT as a trade secret of RAYCHEM. CONSULTANT shall not use, nor shall CONSULTANT disclose, any such information or knowledge to any person either during or after the term of this Professional Services Agreement, except only to those employees of RAYCHEM as may be necessary in the regular course of CONSULTANT's duties hereunder, or except as otherwise authorized in writing by RAYCHEM, unless such information or knowledge are, or become, publicly known through no act or omission of CONSULTANT. 9. CONSULTANT recognizes that all records and copies of records, drawings, models, apparatus, samples and the like which in any way relate to RAYCHEM's technology, operations, investigations and business, and which 13 are made or received by CONSULTANT during the term of, or otherwise pursuant to, this Professional Services Agreement are and shall remain the exclusive property of RAYCHEM. CONSULTANT shall keep such records and/or copies thereof at all times in CONSULTANT's custody and subject to CONSULTANT's control, and shall surrender the same to RAYCHEM immediately upon the request of RAYCHEM. 10. CONSULTANT hereby undertakes to exonerate RAYCHEM, its officers, directors, shareholders, agents, employees, attorneys, insurers, successors and/or assigns from and against any and all liability, loss, cost, damage, claims, demands for expenses of every kind on account of any injuries (including death) to CONSULTANT or loss of or damage to CONSULTANT's property arising out of or resulting in any manner from or occurring in connection with CONSULTANT's performances of services hereunder, except only if caused solely by the negligence of RAYCHEM or its servants or employees. 11. CONSULTANT shall not assign this Professional Services Agreement or any part thereof without RAYCHEM's prior written consent, and any such purported assignment shall be void. This Professional Services Agreement shall inure to the benefit of RAYCHEM's parent, subsidiaries, successors and/or assigns. 12. This Professional Services Agreement shall be effective as of the date first written above and shall terminate on August 1, 1999. This Professional Services Agreement will be subject to a one (1) year renewal at RAYCHEM's option, which renewal shall be automatic if, and extend for the period that, CONSULTANT continues to receive compensation from RAYCHEM pursuant to the Agreement and Release dated June 4, 1998. Any act or omission by CONSULTANT constituting a material breach of this Professional Services Agreement shall subject this Professional Services Agreement to termination immediately by RAYCHEM for good cause and shall automatically suspend all RAYCHEM obligations to perform hereunder so long as CONSULTANT is in breach hereof. This Professional Services Agreement shall terminate automatically in the event of CONSULTANT's death or inability for any reason to perform the services contemplated herein. On termination of this Professional Services Agreement, for any reason, RAYCHEM's obligation to pay any compensation, except for services or expenses already properly accrued or incurred, shall forthwith cease and terminate. Termination of this Professional Services Agreement for any reason shall not affect 14 CONSULTANT's obligations under Paragraphs 4 through 10, inclusive, hereof. 13. CONSULTANT represents and warrants that CONSULTANT has or will promptly obtain an agreement containing provisions equivalent in all material respects to the provisions contained in Paragraphs 4 through 10, inclusive, hereof with all agents, employees or associates of CONSULTANT who will be in any way involved either with RAYCHEM proprietary information or otherwise in connection with the services being performed hereunder. The obligations undertaken by CONSULTANT pursuant to Paragraphs 4 through 10, inclusive, hereof shall extend to the RAYCHEM GROUP and to its predecessors and successors in interest. 14. Any notices or communications hereunder shall be effective only if in writing, addressed as follows: If to RAYCHEM: RAYCHEM CORPORATION Attn: Richard A. Kashnow 300 Constitution Drive Mail Stop 120/7815 Menlo Park, California 94025-1164 with a copy to: RAYCHEM CORPORATION Attn: Legal Department Mail Stop 120/8502 300 Constitution Drive Menlo Park, California 94025-1164 If to CONSULTANT: Ralph H. Harnett 15. This Professional Services Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Professional Services Agreement shall be determined in accordance with the laws of the State of California applicable to contracts made within the State of California. 16. This Professional Services Agreement, together with the Agreement and Release dated June 4, 1998 and the Proprietary Information And Inventions Agreement dated June 27, 1973, constitutes the entire agreement between the parties and supersedes any and all of the other oral or written agreements between 15 CONSULTANT and RAYCHEM. In the event of any conflict between this Professional Services Agreement and the Agreement and Release, the Agreement and Release will govern. Any changes in or modifications to this Professional Services Agreement shall be effective only if in writing and signed by the parties hereto. CONSULTANT represents that in entering into this Professional Services Agreement, CONSULTANT has not relied on any previous oral or implied representations, inducements or understandings of any kind or nature whatsoever. IN WITNESS WHEREOF, the parties hereto have executed this Professional Services Agreement to be effective as of the Effective Date. RAYCHEM CORPORATION by: /s/ RICHARD A. KASHNOW ------------------------------------- Richard A. Kashnow Title: Chief Executive Officer Date: /s/ 6/29/98 ----------------------------------- CONSULTANT by: /s/ RALPH H. HARNETT ------------------------------------- (Ralph H. Harnett) Date: /s/ 6/29/98 ----------------------------------- EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLAR AMOUNTS IN THOUSANDS) (Unaudited) In the computation of the ratio of earnings to fixed charges, "earnings" consist of income before income taxes, adjusted to add back fixed charges (excluding capitalized leases). "Fixed charges" consist of interest on all indebtedness, including both amounts expensed and amounts capitalized. The table below sets forth the computation of the Ratio of Earnings to Fixed Charges for each of the five years in the period ended June 30, 1998.
Year Ended June 30, -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Income before income taxes, extraordinary item, and change in accounting principle $ 232,595 $ 227,740 $ 146,130 $ (270) $ 33,745 add: Interest expense 17,562 12,455 19,216 20,434 22,318 Portion of rents representative of interest factor (a) 8,900 9,804 11,550 11,550 12,870 Equity in net losses of Ericsson Raynet joint venture - - 29,818 85,946 - less: Capitalized interest (883) (393) (660) (724) (1,172) ============================================================== Income as adjusted $ 258,174 $ 249,606 $ 206,054 $ 116,936 $ 67,761 ============================================================== Fixed Charges: Interest expense $ 17,562 $ 12,455 $ 19,216 $ 20,434 $ 22,318 Portion of rents representative of interest factor (a) 8,900 9,804 11,550 11,550 12,870 Debt prepayment penalty (b) - - - 7,814 - ============================================================== Fixed Charges $ 26,462 $ 22,259 $ 30,766 $ 39,798 $ 35,188 ============================================================== Ratio of earnings to fixed charges 9.76 11.21 6.70 2.94 1.93 ==============================================================
(a) Calculated as approximately one-third of rental expense, representing a reasonable approximation of such rentals attributable to interest. (b) Represents effective interest charged on the early retirement of debt. Recorded as an extraordinary loss on the income statement. EX-13 4 PORTIONS OF THE 1998 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 Financial Contents - -------------------------------------------------------------------------------- Financial Review 7 - -------------------------------------------------------------------------------- Report of Management 17 - -------------------------------------------------------------------------------- Report of Independent Accountants 17 - -------------------------------------------------------------------------------- Consolidated Financial Statements 18 - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements 22 - -------------------------------------------------------------------------------- Ten-Year Summary 38 - -------------------------------------------------------------------------------- Directors and Officers 40 - -------------------------------------------------------------------------------- This annual report contains a number of statements--relating to goals, targets, strategies, growth rates, profitability, alliances and acquisitions, cost reductions, restructuring actions, productivity improvements, Year 2000 readiness, product development, currency effects, tax position, inventories, and other matters--that constitute forward-looking statements. Stated goals or targets and other forward-looking statements are not projections and do not assure results. Actual results may differ materially from the results anticipated in the statements made, due to a variety of factors, including changing market conditions, competition, currency, success in redesigning processes and implementing cost reduction programs, or difficulties with alliances or in acquiring or marketing new products or technologies. Detailed discussions of these risk factors and additional risk factors are described in the company's filings with the Securities and Exchange Commission and in the Financial Review section of this annual report. The company does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances. 2 FINANCIAL REVIEW RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Overview ........ The company reported revenues of $1.798 billion in 1998, up 2% in reported currencies, and up 6% on a constant currency basis. Strong results during the first half of the fiscal year were partially offset in the second half due to the effects of the weak Asian economies and slow heat-tracing sales, due in part to an unusually warm winter in certain regions of Europe and the United States. Net income in 1998 was $179 million, or $2.07 per share, assuming dilution. Key components of the company's results are summarized in the table below:
============================================================================================================================== YEARS ENDED JUNE 30 (in millions, except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Revenues $ 1,798 $ 1,765 $ 1,672 - ------------------------------------------------------------------------------------------------------------------------------ Core business "ongoing" pretax income (a) $ 272 $ 263 $ 230 Unusual items: Provision for restructuring and divestitures (28) (53) (44) Loss on minority investment (12) -- -- Gain on sale of assets -- 23 3 Severance, plant consolidation, and other charges -- (6) (18) Insurance settlement -- -- 7 - ------------------------------------------------------------------------------------------------------------------------------ Core business pretax income 232 227 178 Provision (benefit) for income taxes 53 (26) (2) - ------------------------------------------------------------------------------------------------------------------------------ Core business net income 179 253 180 Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items -- -- (2) Equity in net loss of Ericsson Raynet -- -- (30) - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 179 $ 253 $ 148 ============================================================================================================================== Earnings per share--assuming dilution $ 2.07 $ 2.77 $ 1.61 ==============================================================================================================================
(a) "Core business" refers to the company, excluding Ericsson Raynet; "ongoing" refers to the core business, excluding unusual items. Raychem's core business "ongoing" pretax income was $272 million in 1998, up 3% from 1997, which was up 14% from 1996. As a percentage of core business revenues, "ongoing" pretax income was 15% in 1998 and 1997, and 14% in 1996. [CHART OMITTED] The increase in "ongoing" pretax income in 1998 compared to 1997 was a result of higher sales volumes, which was partially offset by price reductions, lower margins due to product mix effects, and adverse currency movements. Additionally, as growth in "ongoing" pretax income was below the company's expectations there was no bonus expense in 1998 as compared to $29 million in the prior year. During 1998 the U.S. dollar appreciated significantly against the Japanese yen, and also appreciated against most European currencies. "Ongoing" pretax income would have been $28 million higher if currency exchange rates had remained constant. The increase in "ongoing" pretax income in 1997 compared to 1996 was driven by higher sales volumes and greater operating efficiency, partially offset by adverse currency effects. During the second half of fiscal 1997, the U.S. dollar and the British pound appreciated significantly against most European currencies compared to their 1996 levels. These currency movements reduced "ongoing" pretax income by approximately $12 million in the second half of fiscal 1997. The company incurred pretax restructuring charges of $28 million in 1998, $53 million in 1997, and $44 million in 1996. These charges are further described in the section "Provision for Restructuring and Divestitures." The 1998 results also included a nonrecurring charge of $12 million, reflecting the write-off of goodwill, cash advances, and other assets related to Raychem's minority investment in Superconducting Core Technologies, Inc., which ceased commercial operations in March 1998. The 1997 results included a $23 million gain from the sale of intellectual property and a $6 million charge for severance, plant consolidation, and other charges. The 1996 results included a gain of $3 million from the sale of the company's shape memory metals components business; a charge of $18 million for severance, plant consolidation, and other charges; and proceeds from an insurance settlement of $7 million in connection with a previously settled shareholder lawsuit. 7 3 Income Taxes The company recorded a tax provision of $53 million in 1998, compared to tax benefits of $26 million in 1997, and $2 million in 1996. The increase in the 1998 tax provision resulted from lower U.S. tax benefits recognized for financial statement purposes. In 1997 and 1996, the company reported discrete tax benefits of $55 million and $25 million, respectively, resulting from a reassessment of the valuation allowance related to U.S. federal and state deferred tax assets. In 1998, the company did not report a discrete tax benefit. However, in the fourth quarter of 1998, approximately $45 million of the reduction in the U.S. valuation allowance was reported as an increase to additional contributed capital since the tax benefits were related to stock plan deductions. Commencing in 1999, the company anticipates a normalized tax rate in the mid-thirty percent range. In 1999 through 2001, the company expects the U.S. tax provision to exceed cash tax payments by an amount in the range of $30 to $50 million each year. This difference results from the tax benefits reported in the financial statements in 1996, 1997, and 1998 that will be realized in cash through reduced tax payments in 1999 and thereafter. Ericsson Raynet Profitability for 1996 was adversely impacted by losses related to Ericsson Raynet, a joint venture formed in 1995 with LM Ericsson. Effective January 1, 1996, the joint venture agreement was amended to provide that Raychem would no longer share in the ongoing operating losses of the joint venture. Therefore, Raychem now accounts for the venture on the cost basis. In 1996, Raychem's equity in net losses of Ericsson Raynet through December 31, 1995, was $30 million and the company incurred $2 million of charges in connection with the reorganization of the joint venture. The following discussion of the results of operations is based on the company's core business, including the impact of the previously mentioned unusual items. Core Business Operations ........................ Revenues and Revenue Growth Core business revenues were $1.798 billion in 1998, up 2% from $1.765 billion in 1997, which were up 6% from $1.672 billion in 1996. Revenue growth would have been 6% in 1998, 9% in 1997, and 8% in 1996, excluding the effect of changes in foreign currency exchange rates in those years. On a year-over-year basis, the company expects continuing downward pressure on revenues during the first half of 1999 if exchange rates remain at June 30, 1998 levels. Reported revenues and revenue growth were also impacted by price reductions in most product lines due to competitive pressures and volume discounts, as shown in the next table.
YEARS ENDED JUNE 30 (percentage change over prior year) 1998 1997 ======================================================================== Components of reported revenue growth: Growth in unit volumes, net of product mix changes 11% 13% Effect of price reductions (a) (5%) (4%) - ------------------------------------------------------------------------ Constant currency revenue growth 6% 9% Effect of exchange rate changes (4%) (3%) - ------------------------------------------------------------------------ Reported revenue growth 2% 6% ========================================================================
(a) A management estimate based on year-over-year changes in revenues at constant volume and mix. On a constant currency basis, revenues in 1998 grew 10% in North America, 4% in Europe, 4% in Asia, and 8% in the rest of the world, as revenue growth in Latin America was offset by revenue declines in other markets. Within Europe, revenues grew 8% in Eastern Europe and 3% in Western Europe. As a result of the weak economic conditions in Asia, the company experienced revenue declines in the region during the second half of fiscal 1998, particularly in Korea. If these economic conditions persist, the company expects further downward pressure on revenues in Asia. Revenues in 1997 compared to 1996 in constant currencies were up 22% in Asia, 8% in North America, and 5% in Europe, and increased slightly in the rest of the world, as decreases in Latin America were offset by increases in other markets. Within Europe, revenues in Eastern Europe grew 47%, but were relatively flat in Western Europe. Gross Profit and Operating Expenses
============================================================== YEARS ENDED JUNE 30 (percentage of revenues) 1998 1997 1996 - -------------------------------------------------------------- Gross profit 48% 50% 51% - -------------------------------------------------------------- Selling, general, and administrative expense 26% 28% 30% - -------------------------------------------------------------- Research and development expense 6% 7% 7% ==============================================================
Gross profit as a percentage of revenues declined to 48% in 1998, compared to 50% in 1997. The decline was due to price declines, unfavorable currency movements, and a continued shift in mix toward product lines that have lower margins than the corporate average. In 1997 gross profit as a percentage of revenues was 50%, compared to 51% in 1996. The decline in gross profit margin was primarily due to adverse currency movements and a mix shift to product lines that had lower margins than the corporate average. The company expects the gross profit margin for 1999 to remain at approximately the same level as compared to 1998, with operating efficiencies and benefits from previous restructuring activities offsetting pricing pressures and the continued shift toward lower-margin products. 8 4 Selling, general, and administrative (SG&A) expense as a percentage of revenues declined to 26% in 1998. The reduction in SG&A expense in 1998 was the result of currency movements, the absence of bonus expense in 1998 compared to 1997, and benefits from prior restructuring actions. SG&A expense as a percentage of revenues declined to 28% in 1997 from 30% in 1996. The reduction in SG&A costs in 1997 was largely the result of benefits from prior restructuring actions. In 1997 and 1996, SG&A expense included charges for severance and other costs of $6 million and $12 million, respectively. Business Segments During the fourth quarter of 1998, the company realigned its businesses by combining the former telecommunications and energy networks segment and the commercial and industrial infrastructure segment into the new telecommunications, energy and industrial business segment. This allows the company to offer a broader product line, more efficient distribution, and services to respond to customers' changing buying patterns. The company's financial results are now reported as two business segments, described below, and the corporate group. Electronics OEM Components This business segment serves original equipment manufacturers (OEMs) in transportation, defense, and a wide range of commercial electronics industries.
==================================================================== YEARS ENDED JUNE 30 (dollars in millions) 1998 1997 1996 - -------------------------------------------------------------------- Revenues $815 $758 $671 - -------------------------------------------------------------------- Constant currency growth 12% 16%(a) 10% ====================================================================
(a) Includes TouchPanel Systems (TPS), a Japanese joint venture of Elo TouchSystems, previously accounted for under the equity method. Excluding TPS, segment growth was 12% in 1997. In 1998, revenues in the electronics OEM components business segment were $815 million, up 12% on a constant currency basis, reflecting increased sales across all product divisions. Revenues from the sale of circuit protection devices were up 17% on a constant currency basis from 1997. The strong growth during the first three quarters of 1998 was partially offset by a sharp decline in the fourth quarter, reflecting the slowdown in worldwide demand for electronic components and continuing pricing pressures. The average sales price of circuit protection devices declined 9% in comparison to 1997, with a greater impact in the second half of fiscal 1998. As a result of a slowdown in the worldwide demand for electronic components, the company expects slower revenue growth in sales of its circuit protection devices during the first half of 1999. Revenues from interconnection products were up 9% on a constant currency basis, reflecting growth in commercial, automotive and aerospace markets, partially offset by a decline in defense markets. On a constant currency basis, revenues from the sale of touchscreen products were up 18% from the previous year, with strong growth in the U.S. and Europe offsetting sales declines in Japan. The segment's gross profit as a percentage of revenues declined three percentage points in 1998 when compared to the prior year, primarily because of price reductions in most of the segment's product lines, as well as adverse currency movements. In 1997, revenues for the electronics OEM components business segment were $758 million, up 16% in constant currency terms over 1996. Revenues in the segment increased significantly over the prior year, with solid performance across all markets. Sales of circuit protection devices were up 27% compared to 1996, reflecting an increase of 42% in unit volumes, partially offset by an 8% price reduction and a shift in product mix toward lower-priced devices. Sales of interconnection products were up 14% in commercial markets and up slightly in defense markets. Revenues from the sale of touchscreen products increased 19% in 1997. The segment's gross profit as a percentage of revenues remained essentially unchanged, as price declines were offset by improved manufacturing efficiencies. Telecommunications, Energy and Industrial This business segment serves telecommunication operators; power, gas, and water utilities; and industrial plants and pipelines.
================================================================================== YEARS ENDED JUNE 30 (dollars in millions) 1998 1997 1996 - ---------------------------------------------------------------------------------- Revenues $983 $1,007 $1,001 - ---------------------------------------------------------------------------------- Constant currency revenue growth 2% 3% 7% ==================================================================================
In 1998, revenues for the telecommunications, energy and industrial business segment were $983 million, up 2% on a constant currency basis. Sales of access network electronics increased over 40% compared to the prior year. The strong growth in sales of access network electronics and fiber accessories offset continued declines in sales of copper cable accessories, which declined 6%. Growth rates for sales in access network electronics are expected to remain strong in North America during 1999, which will be partially offset by the company's decision to discontinue sales of access network electronics internationally. Sales of electric heat-tracing systems declined 11%, reflecting a sharp decline in the second half of fiscal 1998 due in part to the unusually warm winter in certain regions of Europe and the United States. Gross profit as a percentage of revenues declined one percentage point compared to 1997. This decline primarily reflected price declines in most of the segment's markets, adverse currency movements, and the continued shift in product mix away from copper cable accessories to lower-margin products, particularly access network electronics. In 1997, revenues for the telecommunications, energy and industrial business segment were $1.007 billion, up 3% on a constant currency basis. Strong sales growth of access network electronics and fiber-optic products more than offset a 6% decline in sales of copper cable accessories. Sales of electrical products declined due to lower surge arrester sales, principally in 9 5 Canada. Revenues from the sale of heat-tracing products experienced strong growth, while sales of corrosion prevention products remained essentially flat. The segment's gross profit as a percentage of revenues declined two percentage points compared to 1996, primarily reflecting a shift in product mix from copper cable accessories to access network electronics products, which generally have lower margins. 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 designed to streamline the company's operations, reduce operating costs, and position the company for profitable growth. During the fourth quarter of 1998, the company incurred a pretax restructuring charge of $28 million (the 1998 restructuring). The charge impacted the operating income of the business segments as follows: electronics OEM components-$7 million; telecommunications, energy and industrial-$15 million; and resulted in a charge to the corporate group of $6 million. The restructuring actions included write-downs of inventory, reflecting the company's decision to discontinue sales of access network electronics products internationally; write-downs of machinery and equipment related to the shutdown of certain product lines and operations; severance costs related to the consolidation of the telecommunications and energy networks segment and the commercial and industrial infrastructure segment; and severance costs associated with moving certain manufacturing facilities to lower-cost locations. Approximately $12 million of the 1998 restructuring charge is cash in nature and is expected to be funded through operating cash flow. The remaining $16 million primarily represents write-downs of inventory and machinery and equipment. As a result of the 1998 restructuring, approximately 130 positions will be eliminated. The 1998 restructuring is expected to be substantially completed by the end of 1999. During the third quarter of 1997, the company incurred a pretax restructuring charge of $53 million to implement several streamlining programs and eliminated approximately 500 positions (the 1997 restructuring). As of June 30, 1998, 382 employees have separated from the company and 71 employees have assumed other positions within the company as a result of the 1997 restructuring. The charge impacted the operating income of the business segments as follows: electronics OEM components-$12 million; telecommunications, energy and industrial-$32 million; and resulted in a charge to the corporate group of $9 million. A significant portion of the restructuring expenses included severance costs and asset write-downs for consolidating the Telecom and Electrical Products divisions to achieve greater sales synergies and to improve manufacturing and product development efficiencies in their cable accessories businesses. Additional one-time costs were incurred to consolidate the Electronics and PolySwitch divisions, streamline the worldwide operations of the commercial and industrial infrastructure business segment, and restructure the research and development organization in the United Kingdom. The 1997 restructuring was substantially completed by June 30, 1998. Approximately $36 million of the 1997 restructuring charge was cash in nature and was funded through operating cash flow. During the third quarter of 1996, the core business incurred a pretax restructuring charge of $44 million to simplify operations and reduce costs (the 1996 restructuring). The charge impacted operating income of the company's business segments as follows: electronics OEM components-$14 million; telecommunications, energy and industrial-$28 million; and resulted in a charge to the corporate group of $2 million. The restructuring charge included $38 million for employee severance costs. As of June 30, 1998, 676 positions have been eliminated. The bulk of these actions affected Raychem locations in Europe where the company's manufacturing and support operations in Belgium, France, and the United Kingdom were reconfigured. In addition, a variety of other restructuring actions at both divisional and corporate levels took place throughout Raychem's worldwide organization. The 1996 restructuring was substantially completed by June 30, 1997. The charge, excluding $4 million in net asset write-downs, was cash in nature and was funded through operating cash flow. The company expects each of the 1998 and 1997 restructuring charges to be recovered over an 18- to 24-month period. Each restructuring action is expected to result in an annual run-rate savings in the range of $30 to $35 million. The 1996 restructuring actions resulted in approximately $39 million of annualized savings. For further details on these restructuring actions, see "Restructuring and Divestitures" under "Notes to Consolidated Financial Statements." Acquisition In June 1998, Raychem signed a letter of intent to acquire the telecommunications business of Plasticos Mondragon S.A. in Valencia, Spain (Mondragon). The Mondragon telecommunications business, which has annual sales of about $17 million, manufactures and supplies components for connecting, insulating, and protecting copper and fiber-optic telephone networks. The acquisition is expected to be completed in the first half of fiscal 1999. 10 6 New Accounting Standards In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income as defined includes all changes in equity (net assets) during a period from nonowner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments, unrealized gain/loss on available-for-sale securities, and mark-to-market adjustments for hedging activities. The disclosures prescribed by FAS 130 will be made beginning with the first quarter of fiscal 1999. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The company is in the process of reassessing its current business segment reporting to determine if changes in reporting will be required in adopting this new standard. The disclosures prescribed by FAS 131 will be adopted in the company's 1999 annual report. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives will be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The company plans to adopt FAS 133 in the first quarter of fiscal 2000 and has not yet determined the effect, if any, of adopting the new standard. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- The company's financial position continues to be strong. At June 30, 1998, the company had $93 million in cash and cash equivalents and $424 million in unused credit facilities, of which $307 million are committed facilities. The company has a current shelf registration with the Securities and Exchange Commission, which enables the company to issue up to $400 million in debt securities; this registration statement became effective in July 1997. The combination of cash and cash equivalents, available lines of credit, public debt issuance capabilities, and future cash flows from operations is expected to be sufficient to satisfy substantially all of the company's needs for cash for anticipated capital expenditures, working capital, dividends, share repurchases, and potential acquisitions. The following table presents certain measures of liquidity and capital resources:
============================================================================ YEARS ENDED JUNE 30 (dollars in millions) 1998 1997 1996 - ---------------------------------------------------------------------------- Debt net of cash $247 $137 $ 79 - ---------------------------------------------------------------------------- Debt net of cash as a percentage of stockholders' equity 29% 16% 9% - ---------------------------------------------------------------------------- Days' sales outstanding 62 59 60 - ---------------------------------------------------------------------------- Days' sales in inventory 104 99 104 ============================================================================
The increase in debt net of cash in 1998 was primarily the result of an increase in short-term borrowings to repurchase shares of the company's Common Stock. During 1998, the company repurchased 5.7 million shares for $239 million. The $58 million increase in debt net of cash in 1997 was also primarily due to increased share repurchases. From July 1 through August 26, 1998, the company repurchased 3.2 million shares for $100 million. Days' sales in inventory (DSI) increased to 104 days, caused in part by a decrease in sales in the fourth quarter and higher inventory levels. In June 1998, the company organized all key supply chain activities and logistics resources into a single organization. Although the company expects only modest improvement in inventory levels in the short term, the company is focusing on improvements to supply chain management together with the implementation of a fully integrated enterprisewide information system to help reduce DSI in the longer term. In 1997, DSI decreased to 99 days, reflecting ongoing efforts by the company to reduce the number of locations holding inventory and the levels of inventory being held. 11 7 The table below summarizes the company's cash flows from operating, investing, and financing activities:
================================================================================= Years ended June 30 (dollars in millions) 1998 1997 1996 - --------------------------------------------------------------------------------- Net cash provided by (used in): Operating activities $ 208 $ 229 $ 224 Investing activities (114) (60) (101) Financing activities (83) (296) (11) Effect of exchange rate changes on cash and cash equivalents (5) (11) (6) - --------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents $ 6 $(138) $ 106 =================================================================================
Operating Activities .................... The decrease in net cash provided by operating activities in 1998 was primarily the result of increased levels of inventory, and decreased levels of accounts payable and other accrued liabilities, partially offset by lower tax payments. Net cash payments for restructuring and divestitures were $21 million in 1998, $24 million in 1997, and $17 million in 1996. At June 30, 1998, $22 million of accrued severance liability remained, which is expected to be substantially paid in cash in 1999. Also, in 1999 through 2001, the company expects the U.S. tax provision to exceed cash tax payments by an amount in the range of $30 to $50 million each year. This difference results from tax benefits that were reported in the financial statements in 1996, 1997, and 1998 that will be realized in cash through reduced tax payments in 1999 and thereafter. Investing Activities .................... Net cash used in investing activities in 1998 was $114 million, compared to $60 million in 1997 and $101 million in 1996. Capital expenditures were $105 million in 1998, $90 million in 1997, and $79 million in 1996. Capital expenditures in 1999 are expected to be approximately $100 million. In 1998, the company made an investment of $10 million in cash related to an alliance with Tadiran Telecommunications Ltd. In 1997, the company received $25 million from the sale of intellectual property and $8 million from liquidations of other investments, and invested $10 million in Superconducting Core Technologies, Inc. In 1996, the company made a cash investment of $23 million in Ericsson Raynet. Also, in 1996, the company received $7 million in cash proceeds from the sale of its shape memory metal components business. In the first half of fiscal 1999, the company expects to acquire the telecommunications business of Mondragon, for a cash purchase price of approximately $40 million. Financing Activities .................... Net cash used in financing activities decreased to $83 million in 1998 from $296 million in 1997. During 1998, the company repurchased 5.7 million shares of the company's Common Stock for $239 million. The company repurchased 6.8 million shares in 1997 for $247 million, and 3.0 million shares in 1996 for $95 million. In July 1997, the board of directors authorized management to spend up to $300 million during any fiscal year, commencing with 1998, to repurchase the company's stock. Spending on share repurchases in 1998 was funded in part by increased borrowings under the company's committed credit facilities. Net proceeds from short-term debt were $131 million in 1998 compared to $10 million in 1997. In addition, cash used in financing activities during 1997 included $118 million used to prepay the balance of a syndicated term loan agreement. In September 1996, the company entered into a syndicated five-year revolving credit agreement for $400 million, replacing an existing $250 million revolving credit facility. Borrowings under the revolving credit agreement bear interest at variable spreads over LIBOR. The revolving credit agreement includes covenants that, among other things, specify a maximum leverage limit and a minimum fixed-charge coverage ratio. In April 1996, the company entered into a lease financing secured by the majority of its manufacturing equipment in the United States. The company has the option of terminating the transaction for a fixed amount in 10 years. The arrangement is accounted for as 10-year partially amortizing secured debt, with interest that varies periodically with LIBOR. Cash proceeds from the financing were approximately $113 million and were used in roughly equal proportions for reduction of long-term debt and for other corporate purposes. The arrangement lowered the company's long-term borrowing costs. Net interest expense was $12 million in 1998 compared to $5 million in 1997 and $10 million in 1996. The increase in 1998 was principally due to the increased level of short-term borrowings. The decrease in 1997 was primarily the result of lower average debt levels during the year and the prepayment of higher-cost long-term debt. The company's quarterly cash dividend has been paid consistently since the second quarter of 1978. In the third quarter of 1996, the quarterly dividend was increased 25% to $0.05 per share. Effective in the third quarter of 1997, the company increased the quarterly dividend 40% to $0.07 per share. Effective in the third quarter of 1998, the company increased the quarterly dividend an additional 14% to $0.08 per share. During 1998, the company paid $25 million in dividends to its stockholders, compared to $21 million in 1997 and $16 million in 1996. The company expects to continue to pay cash dividends in the foreseeable future. 12 8 MARKET RISK DISCUSSION - -------------------------------------------------------------------------------- The company's cash flow and earnings are subject to fluctuations due to exchange rate variation. The company attempts to limit its exposure to changing foreign currency exchange (FX) 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 (USD). This diverse base of local currency costs serves to partially counterbalance the earnings effect of potential changes in value of the company's local currency-denominated revenues. Also, the company denominates its third-party export sales in U.S. dollars, whenever possible. Short-term exposures to changing FX rates are managed by financial market transactions, principally through the purchase of forward FX contracts (with maturities of six months or less) to offset the earnings and cash-flow impact of the nonfunctional currency-denominated receivables and payables. Forward FX contracts are denominated in the same currency as the receivable or payable being covered, and the term of the forward FX contract matches the term of the underlying receivable or payable. The company covers all known and measurable exposed receivables and payables denominated in currencies that have a liquid, cost-effective forward foreign exchange market. The receivables and payables being covered arise from trade and intercompany transactions, intercompany loans, and other firm commitments affecting the company. The company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in FX rates on the company's operations. Accordingly, the company's reported revenues and net income have been, and in the future may be, affected by changes in FX rates. The company does not have significant exposure to changing interest rates because of the low net levels of both marketable securities and debt on the company's balance sheet. The company does not undertake any specific actions to cover its exposure to interest rate risk and the company is not a party to any interest rate risk management transactions. The company does not purchase or hold any derivative financial instruments for trading purposes. Exchange Rate Sensitivity ......................... The tables below provide information about the company's derivative financial instruments and related balance sheet items by currency and present such information in USD equivalents. The tables summarize information on instruments and related underlying transactions that are sensitive to FX rates, including foreign currency forward exchange contracts and nonfunctional currency-denominated receivables and payables. The net amount that is exposed to changes in foreign currency rates is then subjected to a 10% change in the value of the foreign currency versus the U.S. dollar. The company believes it has no material sensitivity to changes in foreign currency rates on its net exposed derivative financial instrument position. The tables below present the impact on the company's earnings of a 10% appreciation and a 10% depreciation of the U.S. dollar against the indicated currencies:
==================================================================================================================== JUNE 30, 1998 USD NET UNDERLYING NET FX FX (dollars in millions) VALUE OF FOREIGN EXPOSED GAIN (LOSS) GAIN (LOSS) NET CURRENCY LONG (SHORT) FROM 10% FROM 10% FX TRANSACTION CURRENCY APPRECIATION DEPRECIATION CURRENCY CONTRACTS EXPOSURES POSITION OF USD OF USD - -------------------------------------------------------------------------------------------------------------------- Belgian franc $ 16.5 $ 20.5 $ (4.1) $ 0.4 $(0.5) German mark 10.6 7.5 (3.1) 0.3 (0.3) Spanish peseta 36.2 35.7 0.5 -- 0.1 French franc 16.9 15.7 (1.1) 0.1 (0.1) British pound 3.1 5.2 2.1 (0.2) 0.2 Italian lira 10.1 9.7 (0.3) -- -- Japanese yen 40.3 26.9 (13.4) 1.2 (1.5) Others 24.5 26.2 (1.4) 0.1 (0.2) - -------------------------------------------------------------------------------------------------------------------- Total $158.2 $147.4 $(20.8) $ 1.9 $(2.3) ====================================================================================================================
=================================================================================================================== JUNE 30, 1997 USD Net Underlying Net FX FX (dollars in millions) value Of foreign exposed gain (loss) gain (loss) net currency long (short) from 10% from 10% FX transaction currency appreciation depreciation Currency contracts exposures position of USD of USD - ------------------------------------------------------------------------------------------------------------------- Belgian franc $ 1.6 $ 8.1 $ (6.6) $0.6 $(0.7) German mark 9.0 9.4 0.4 -- -- French franc 13.3 11.1 (2.2) 0.2 (0.3) British pound 1.7 1.2 (0.4) -- -- Italian lira 9.4 10.2 0.8 -- -- Japanese yen 35.4 34.6 (0.9) -- -- Others 41.6 39.0 (2.8) 0.3 (0.3) - ------------------------------------------------------------------------------------------------------------------- Total $112.0 $113.6 $(11.7) $1.1 $(1.3) ===================================================================================================================
13 9 Interest Rate Sensitivity ......................... A 60-basis-point move in interest rates (10% of the company's weighted-average worldwide interest rate in 1998) affecting the company's floating-rate financial instruments as of June 30, 1998, including both debt obligations and investments, would have an immaterial effect on the company's pretax earnings over the next fiscal year. A 60-basis-point move in interest rates would also have an immaterial effect on the fair value of the company's fixed rate financial instruments as of June 30, 1998. In 1997, an assumed 55-basis-point move in interest rates (10% of the company's weighted-average worldwide interest rate in 1997) was also determined to have an immaterial effect. YEAR 2000 - -------------------------------------------------------------------------------- The company has a comprehensive Year 2000 project designed to identify and assess the risks associated with its information systems, products, operations and infrastructure, suppliers, and customers that are not Year 2000 compliant, and to develop, implement, and test remediation and contingency plans to mitigate these risks. The project comprises four phases: (1) identification of risks, (2) assessment of risks, (3) development of remediation and contingency plans, and (4) implementation and testing. INFORMATION SYSTEMS. As part of an enterprisewide process reengineering commenced in 1996, the company is replacing a substantial portion of its existing information systems with a fully integrated, enterprisewide information system that it expects will be Year 2000 compliant, and that will support the majority of the company's operations, including major plants in the United States and Europe. This project was undertaken without regard to possible Year 2000 issues and has not been accelerated as a result of Year 2000 issues. Therefore, the company does not expect to record Year 2000-related expenses in connection with the implementation of this system. However, this system will not be fully implemented in certain of the company's locations by the year 2000. A review of the company's information systems for locations where this system will not have been implemented prior to January 1, 2000, has been completed and the company is currently determining the work necessary for the existing systems in these locations to become Year 2000 compliant. The company uses a standardized enterprise information system in its Asian, Latin American, and certain other locations, and for sales-order and supply-chain activity in certain plants in North America. The company is currently in the process of implementing an upgrade for this system, which is expected to be Year 2000 compliant, and expects this upgrade to be completed by mid calendar year 1999. Testing of all information systems will be conducted over the next year. The company's Electronic Data Interchange applications (through which the company communicates business transactions with certain of its customers and suppliers) will be converted to be Year 2000 compliant by the end of calendar year 1998. The company is also actively reviewing its hardware and systems infrastructure, such as networks, to attempt to achieve Year 2000 compliance in order to support the activities described above. PRODUCTS. The company has assessed the capabilities of most of its products sold to customers and is in the process of developing remediation plans for Year 2000 compliance. Based on the assessments made to date, only a small number of the company's products are affected by Year 2000 issues. The company expects to make the products that it will continue to sell Year 2000 compliant within the next six months and to make upgrades available for certain other products. OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items used in the operations and facilities of the company are currently being assessed for Year 2000 compliance. This assessment is in the beginning stage and is expected to be completed during the first quarter of fiscal 1999. SUPPLIERS. The company is also in the process of evaluating its supplier base to determine whether Year 2000 issues affecting suppliers will adversely impact the company's operations. To mitigate this risk, the company has contacted its suppliers to assess their Year 2000 readiness and will continue to monitor the progress of its key suppliers. The company has a limited number of key suppliers and expects to have the assessment of these key suppliers completed during the next six months. CUSTOMERS. The company established a Global Year 2000 Desk at its headquarters in California to handle all customer requests for compliance, survey, and other general information related to its Year 2000 Programs. GENERAL AND RISK FACTORS. The company's Year 2000 project is currently in the assessment phase and, with respect to certain information systems and products, in the remediation phase. The company believes that its greatest potential risks are associated with its information systems and systems embedded in its operations and infrastructure. The company is at the beginning stage of assessments for its operations and infrastructure, and cannot predict whether significant problems will be identified. The company has not yet determined the extent of contingency planning that may be required. Based on the status of the assessments made and remediation plans developed to date, the company is not in a position to state the total cost of remediation of all Year 2000 issues. Costs identified to date have not been material. The company does not currently expect the total costs to be material, and it expects to be able to fund the total costs through operating cash flows. However, the company has not yet completed its assessments, developed remediation for all problems, developed any contingency plans, or completely implemented or tested any of its remediation plans. As the Year 2000 project continues, the company may discover additional Year 2000 problems, may not be able to develop, implement, or test remediation or contingency plans, or may find that the costs of these activities exceed current expectations and become material. In many cases, the company is relying on assurances from suppliers that new and upgraded information systems and other products will be Year 2000 compliant. The company plans to test such third-party products, but cannot be sure that its tests will be adequate or that, if problems are identified, they will be addressed by the supplier in a timely and satisfactory way. Because the company uses a variety of information systems and has additional systems embedded in its operations and infrastructure, the company cannot be sure that all of its systems will work together in a Year 2000-compliant fashion. Furthermore, the company cannot be sure that it will not suffer business interruptions, either because of its own Year 2000 problems or those of its customers or suppliers whose Year 2000 problems may make it difficult or impossible for them to fulfill their commitments to the company. If the company fails to satisfactorily resolve Year 2000 issues related to its products in a timely manner, it could be exposed to liability to third parties. 14 10 The company is continuing to evaluate Year 2000-related risks and corrective actions. However, the risks associated with the Year 2000 problem are pervasive and complex; they can be difficult to identify and to address, and can result in material adverse consequences to the company. Even if the company, in a timely manner, completes all of its assessments, identifies and tests remediation plans believed to be adequate, and develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences to the company. 15 11 [PAGE 16 INTENTIONALLY OMITTED. SEE FORWARD-LOOKING STATEMENTS AND RISK FACTORS SECTION AT THE END OF ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN THIS FORM 10-K.] 16 12 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 controls 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 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. PricewaterhouseCoopers LLP, independent accountants, are retained to audit Raychem's financial statements. Their accompanying report is based on an audit 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/ RICHARD A. KASHNOW /s/ RAYMOND J. SIMS - ----------------------- ------------------------- Richard A. Kashnow Raymond J. Sims President and Senior Vice President and Chief Executive Officer Chief Financial Officer - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- [PRICEWATERHOUSECOOPERS LOGO] 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, cash flows, and stockholders' equity present fairly, in all material respects, the financial position of Raychem Corporation and its subsidiaries at June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, 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. /S/ PRICEWATERHOUSECOOPERS LLP San Jose, California July 15, 1998, except as to the second paragraph of the "Contingencies" footnote, which is as of August 10, 1998 17 13 CONSOLIDATED BALANCE SHEET
================================================================================================================================ JUNE 30 (in thousands except share data) 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 92,667 $ 86,583 Accounts receivable, net of allowances for doubtful accounts of $9,731 and $8,797, respectively 325,039 339,142 Inventories: Raw materials 90,874 82,008 Work in process 64,143 54,677 Finished goods 123,931 111,154 --------------------------- Total inventories 278,948 247,839 Prepaid taxes 38,350 42,998 Other current assets 110,593 89,541 - -------------------------------------------------------------------------------------------------------------------------------- Total current assets 845,597 806,103 - -------------------------------------------------------------------------------------------------------------------------------- Property, plant, and equipment: Land 29,861 35,706 Buildings 351,810 348,836 Machinery and equipment 718,753 689,528 Leasehold improvements 47,499 44,607 --------------------------- Total property, plant, and equipment 1,147,923 1,118,677 Less accumulated depreciation and amortization 668,737 645,229 - -------------------------------------------------------------------------------------------------------------------------------- Net property, plant, and equipment 479,186 473,448 - -------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets 186,595 136,325 - -------------------------------------------------------------------------------------------------------------------------------- Other assets 107,977 93,384 - -------------------------------------------------------------------------------------------------------------------------------- Total assets $1,619,355 $1,509,260 ================================================================================================================================ Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------------------------------------------------------- Current liabilities: Notes payable to banks $ 181,284 $ 54,063 Accounts payable 82,901 88,625 Compensation and benefits 56,878 87,735 Other accrued liabilities 88,914 102,861 Income taxes 62,871 40,598 Current maturities of long-term debt 6,574 5,752 - -------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 479,422 379,634 - -------------------------------------------------------------------------------------------------------------------------------- Long-term debt 151,488 164,004 - -------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities 27,762 25,827 - -------------------------------------------------------------------------------------------------------------------------------- Other long-term liabilities 92,257 86,017 - -------------------------------------------------------------------------------------------------------------------------------- Minority interests 8,784 8,759 - -------------------------------------------------------------------------------------------------------------------------------- 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: 150,000,000 and 144,300,000 shares, respectively Issued: 90,028,103 and 90,089,030 shares, respectively 90,028 90,089 Additional contributed capital 425,477 368,164 Retained earnings 665,753 540,623 Currency translation (30,808) (9,336) Treasury Stock, at cost (7,144,399 and 4,164,846 shares, respectively) (290,320) (143,106) Other (488) (1,415) - -------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 859,642 845,019 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,619,355 $1,509,260 ================================================================================================================================
See accompanying notes to consolidated financial statements. 18 14 CONSOLIDATED STATEMENT OF OPERATIONS
=================================================================================================================================== YEARS ENDED JUNE 30 (in thousands except share data) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $1,798,456 $1,764,706 $1,671,561 Cost of goods sold 930,274 880,928 815,352 Research and development expense 108,234 119,336 122,137 Selling, general, and administrative expense 470,207 492,879 508,206 Provision for restructuring and divestitures 27,591 52,812 43,571 Loss on minority investment 11,973 -- -- Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items -- -- 2,103 Equity in net losses of affiliated companies -- -- 27,280 Interest expense, net 12,488 4,651 9,631 Other expense (income), net 5,094 (13,640) (2,849) - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 232,595 227,740 146,130 Provision (benefit) for income taxes 53,496 (25,604) (1,782) - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 179,099 $ 253,344 $ 147,912 =================================================================================================================================== Earnings per share--basic $ 2.12 $ 2.85 $ 1.67 Average number of shares outstanding--basic 84,586,598 88,955,076 88,722,248 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings per share--assuming dilution $ 2.07 $ 2.77 $ 1.61 Average number of shares outstanding--assuming dilution 86,475,681 91,513,208 91,996,236 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 19 15 CONSOLIDATED STATEMENT OF CASH FLOWS
======================================================================================================================= YEARS ENDED JUNE 30 (in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 179,099 $ 253,344 $ 147,912 Adjustments to reconcile net income to net cash provided by operating activities: Provision for restructurings and divestitures, net of payments 6,969 28,510 26,992 Loss on minority investment 11,973 -- -- Loss on reorganization/formation of Ericsson Raynet joint venture -- -- 2,103 Equity in net losses of affiliated companies -- -- 27,280 Net loss (gain) on sale of intellectual property and other assets 340 (21,027) 108 Depreciation and amortization 81,535 78,557 79,427 Deferred income tax benefit (4,850) (84,522) (45,353) Tax benefit related to employee stock options 59,921 -- -- Changes in certain assets and liabilities, net of effects from restructuring and divestitures, and joint venture reorganization/formation: Accounts receivable (2,689) (38,947) (18,375) Inventories (45,737) (24,013) (9,380) Accounts payable and accrued liabilities (39,367) (6,211) 7,761 Income taxes (36,771) 13,248 12,537 Other assets and liabilities (2,821) 30,330 (6,564) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 207,602 229,269 224,448 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Investment in property, plant, and equipment (104,672) (90,485) (78,589) Disposition of property, plant, and equipment 5,795 6,934 3,973 Proceeds from sale of investments and other -- 33,538 7,443 Investments in and advances to affiliated companies (15,300) (10,152) (34,076) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (114,177) (60,165) (101,249) - ----------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds from short-term debt 131,161 9,741 7,618 Proceeds from long-term debt 15,396 39,090 119,277 Payments of long-term debt (22,609) (138,479) (108,802) Common Stock repurchased (239,379) (246,964) (95,184) Common Stock issued under employee benefit plans 57,533 61,999 81,378 Proceeds from repayments of stockholder notes receivable 770 383 428 Cash dividends (25,479) (21,379) (16,038) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (82,607) (295,609) (11,323) - ----------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (4,734) (11,027) (5,828) - ----------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 6,084 (137,532) 106,048 Cash and cash equivalents at beginning of year 86,583 224,115 118,067 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 92,667 $ 86,583 $ 224,115 ======================================================================================================================= Supplemental Disclosures Cash paid for: Interest (net of amounts capitalized) $ 16,026 $ 16,116 $ 20,312 Income taxes (net of refunds) 34,729 47,413 29,436 =======================================================================================================================
See accompanying notes to consolidated financial statements. 20 16 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
================================================================================================================================== ADDITIONAL COMMON CONTRIBUTED RETAINED CURRENCY TREASURY (in thousands except share data) STOCK CAPITAL EARNINGS TRANSLATION STOCK OTHER TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1995 $87,795 $336,229 $272,657 $ 61,946 $ (8,330) $ (639) $ 749,658 ================================================================================================================================== Net income -- -- 147,912 -- -- -- 147,912 Common Stock issued, net of retirements (1,987,212 shares) 1,987 27,746 -- -- -- -- 29,733 Cash dividends ($0.18 per share of Common Stock) -- -- (16,038) -- -- -- (16,038) Currency translation -- -- -- (36,809) -- -- (36,809) Treasury Stock purchased (3,000,000 shares), net of issuances (3,221,774 shares) -- -- (42,655) -- (300) -- (42,955) Unrealized gain on available-for-sale marketable securities -- -- -- -- -- 9,861 9,861 Other -- -- -- -- -- (156) (156) - ---------------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1996 89,782 363,975 361,876 25,137 (8,630) 9,066 841,206 ================================================================================================================================== Net income -- -- 253,344 -- -- -- 253,344 Common Stock issued, net of retirements (307,268 shares) 307 4,189 -- -- -- -- 4,496 Cash dividends ($0.24 per share of Common Stock) -- -- (21,379) -- -- -- (21,379) Currency translation -- -- -- (34,473) -- -- (34,473) Treasury Stock purchased (6,800,000 shares), net of issuances (2,866,660 shares) -- -- (53,218) -- (134,476) -- (187,694) Unrealized loss on available-for-sale marketable securities -- -- -- -- -- (9,097) (9,097) Other -- -- -- -- -- (1,384) (1,384) - ---------------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1997 90,089 368,164 540,623 (9,336) (143,106) (1,415) 845,019 ================================================================================================================================== Net income -- -- 179,099 -- -- -- 179,099 Retirement of Common Stock (60,927 shares) (61) (2,608) -- -- -- -- (2,669) Cash dividends ($0.30 per share of Common Stock) -- -- (25,479) -- -- -- (25,479) Currency translation -- -- -- (21,472) -- -- (21,472) Treasury Stock purchased (5,700,000 shares), net of issuances (2,720,442 shares) -- -- (28,490) -- (147,214) -- (175,704) Unrealized gain on available-for-sale marketable securities -- -- -- -- -- 3,266 3,266 Tax benefit related to employee stock options -- 59,921 -- -- -- -- 59,921 Other -- -- -- -- -- (2,339) (2,339) - ---------------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1998 $90,028 $425,477 $665,753 $(30,808) $(290,320) $ (488) $ 859,642 ==================================================================================================================================
See accompanying notes to consolidated financial statements. 21 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF OPERATIONS - -------------------------------------------------------------------------------- Raychem Corporation, founded in 1957, is a broadly based materials science company serving both domestic and international markets. The company utilizes its expertise in materials science, electronics, and process engineering to develop, manufacture and market a variety of high-performance products for electronics original equipment manufacturers (OEMs), and telecommunications, energy and industrial applications. The terms "company" or "Raychem" mean Raychem Corporation and its consolidated subsidiaries. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- Basis of Consolidation ...................... The consolidated financial statements include the accounts of all wholly owned and majority owned subsidiaries and entities of which the company has control. Investments in entities of which the company owns between 20% and 50% and entities on which the company has the ability to exercise significant influence but not control are accounted for under the equity method. Other investments are accounted for using the cost method. 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, 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 (income), 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. 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 10-45 years Machinery and equipment 3-10 years Leasehold improvements Term of lease or life of asset - --------------------------------------------------------------------------------
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 reviews the carrying value of intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Revenue Recognition ................... Revenue from product sales is recognized when the earnings process is complete. This generally occurs at the time product is shipped. Other revenues are principally from licensing and royalty arrangements and are recognized according to the terms of the specific agreements. Environmental Costs ................... Environmental liabilities are recorded when environmental assessments and/or remedial efforts are probable and the cost can be reasonably estimated. Income Taxes ............ Deferred income taxes result primarily from temporary differences between financial reporting and tax reporting. Determination of deferred tax assets and liabilities is based on the difference between the financial statement bases and tax bases of assets and liabilities, using enacted tax rates. Earnings Per Share .................. The company has adopted and retroactively applied the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128) for all periods presented. FAS 128 requires the company to report both basic earnings per share, which is computed by dividing net income by the weighted-average number of common shares outstanding, and diluted earnings per share, which is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive potential common shares outstanding. 22 18 Treasury Stock .............. In December 1994, the board of directors authorized the repurchase, at management's discretion, of up to 3 million shares of the company's stock during any one fiscal year. In April 1996, the board of directors increased this authorization to repurchase up to 4 million shares of the company's stock during any one fiscal year, effective July 1, 1996. In April 1997, the board of directors further increased this authorization to repurchase up to 6 million shares of the company's stock during any rolling 12-month period commencing on or after April 16, 1997. In July 1997, the board of directors modified its share repurchase authorization. Commencing with fiscal 1998, management is permitted, at its discretion, to repurchase up to $300 million of the company's stock during any fiscal year. Shares repurchased under the board of directors' authorization are used to offset the dilution caused by the company's employee stock purchase and stock option plans. The company's repurchases of shares of Common Stock are recorded as "Treasury Stock" 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." Accounting for Stock-Based Compensation ....................................... The company accounts for employee stock-based compensation using the intrinsic value method of accounting prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The company provides pro forma disclosures of net income and earnings per share as required under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). FAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments based on the fair-value method of accounting. See "Stock" in the notes to consolidated financial statements for pro forma disclosures in accordance with FAS 123. New Accounting Standards ........................ In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. "Comprehensive income" as defined includes all changes in equity (net assets) during a period from nonowner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments, unrealized gain/loss on available-for-sale securities, and mark-to-market adjustments on hedging activities. The disclosures prescribed by FAS 130 must be made beginning with the first quarter of fiscal 1999. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The company is in the process of reassessing current business segment reporting to determine if changes in reporting will be required in adopting this new standard. The disclosures prescribed by FAS 131 will first be adopted in the company's 1999 annual report. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives should be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The company plans to adopt FAS 133 in the first quarter of fiscal 2000 and has not yet determined the effect, if any, of adopting the new standard. Use of Estimates ................ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to financial statements. Changes in such estimates may affect amounts reported in future periods. Financial Presentation ...................... Certain prior-year amounts have been reclassified to conform with the 1998 financial statement presentation. 23 19 FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- 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 that place all foreign currency forward transactions under the direction of corporate treasury and restrict all derivative transactions to those intended for hedging purposes. The company operates in more than 85 countries worldwide, with approximately two-thirds 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 partially 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 U.S. dollars, 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 of six months or less, to offset the earnings and cashflow impact of the nonfunctional currency denominated receivables and payables. Forward foreign exchange contracts are denominated in the same currency as the receivable or payable being covered, and the term of the forward foreign exchange contract matches the term of the underlying receivable or payable. Forward foreign exchange contracts are revalued monthly at balance sheet foreign exchange translation rates, and the resultant realized and unrealized gains and losses are included in "Other expense (income), net." The company is subject to credit risk exposure from nonperformance by the counterparties to these transactions, typically large international financial institutions. Net gains and losses from forward foreign exchange contracts used to cover receivables and payables totaled a $12 million gain, a $3 million loss, and a $5 million gain for the years ended June 30, 1998, 1997, and 1996, respectively. The company incurred total net foreign exchange losses of none, $2 million and $1 million for 1998, 1997, and 1996, respectively. The net amount of foreign exchange exposure covered was $158 million and $112 million at June 30, 1998 and 1997, respectively. The company covers exposures that arise from trade and intercompany receivables and payables, intercompany loans, and other firm commitments in nonfunctional currencies. These exposures (percent of net contract value) are primarily in Japanese yen (25%), Spanish pesetas (23%), French francs (11%), Belgian francs (10%), German marks (7%), and Italian lire (6%). The company does not cover nonfunctional currency translation and transaction exposures in countries whose currencies do not have a liquid, cost-effective forward market available for hedging. Such exposures at June 30, 1998, included $12 million of net intercompany payables in nonfunctional currencies and $8 million of net monetary assets in foreign countries with the U.S. dollar as functional currency. The company has periodically entered into forward foreign exchange contracts to hedge a portion of its equity in foreign subsidiaries. The gains and losses on these contracts were included in "Currency translation" as a component of "Stockholders' equity." There were no such hedges of foreign equity outstanding at June 30, 1998 and 1997. 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, 1998 and 1997, 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. 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 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.
================================================================================================================================== JUNE 30 1998 1997 ------------------------- ------------------------- ASSET (LIABILITY) CARRYING FAIR Carrying Fair (IN THOUSANDS) AMOUNT VALUE amount value - ---------------------------------------------------------------------------------------------------------------------------------- Long-term debt, including current maturities, and accrued interest of $3,651 and $2,998 in 1998 and 1997, respectively $(161,713) $(165,270) $(172,754) $(173,477) - ---------------------------------------------------------------------------------------------------------------------------------- Forward foreign exchange contracts included in: Other current assets 840 840 694 694 Other accrued liabilities (1,127) (1,127) (463) (463) ==================================================================================================================================
24 20 MARKETABLE SECURITIES - -------------------------------------------------------------------------------- Marketable securities are classified as available for sale and carried at fair value as determined by quoted market prices. The aggregate fair value of the marketable securities held at June 30, 1998 and 1997, was $12 million and $6 million, respectively. Gross unrealized holding gains were $7 million and $1 million as of June 30, 1998 and 1997, respectively, and are included as a separate component of "Stockholders' equity." PENSIONS AND OTHER POSTRETIREMENT BENEFITS - -------------------------------------------------------------------------------- The company has adopted and retroactively applied the requirements of Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (FAS 132) to all periods presented. FAS 132 revises employers' disclosures of pensions and other postretirement benefit plans; however, it does not change measurement or recognition of the costs of those plans. 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. In July 1997, the company amended its U.S. defined benefit pension plan by converting it from a career-average-pay plan to a final-pay plan. The amendment generated an unrecognized prior service cost of $7 million. In July 1997, the company amended its 401(k) pension plan. The company's contribution to this plan is based upon the amount of the employees' contribution to the plan. The cost of this plan in fiscal 1998 was approximately $3 million.
============================================================================================================================= PENSION BENEFITS --------------------------------------------- AS OF AND FOR THE YEARS ENDED JUNE 30 U.S. PLANS NON-U.S. PLANS OTHER BENEFITS --------------------- --------------------- --------------------- (in thousands) 1998 1997 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $136,534 $133,617 $188,969 $167,761 $ 2,904 $ 3,106 Service cost 6,281 6,632 9,900 8,244 145 151 Interest cost 10,040 9,902 13,324 13,451 218 233 Amendments -- 7,242 -- -- -- -- Actuarial loss (gain) 12,558 (2,449) 15,267 5,563 (663) (379) Benefits paid (17,624) (18,410) (4,523) (4,526) (41) (207) Foreign currency translation -- -- (5,999) (1,524) -- -- - ----------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $147,789 $136,534 $216,938 $188,969 $ 2,563 $ 2,904 ============================================================================================================================= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $131,737 $122,169 $172,430 $142,693 $ -- $ -- Actual return on plan assets 15,843 24,909 38,013 21,145 -- Employer contributions 11,124 3,069 8,153 7,308 41 207 Benefits paid (17,624) (18,410) (4,523) (4,526) (41) (207) Foreign currency translation -- -- (3,323) 5,810 -- -- - ----------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $141,080 $131,737 $210,750 $172,430 $ -- $ -- ============================================================================================================================= FUNDED STATUS OF THE PLAN Benefit obligation in excess of plan assets $ (6,709) $ (4,797) $ (6,188) $(16,539) $(2,563) $(2,904) Unrecognized actuarial loss (gain) 2,746 (5,813) (42,533) (35,266) (1,386) (770) Unrecognized net liability (asset) 554 583 (5,137) (6,758) -- -- Unrecognized prior service cost 18,710 21,743 2,378 2,622 -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ 15,301 $ 11,716 $(51,480) $(55,941) $(3,949) $(3,674) ============================================================================================================================= AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF: Prepaid (accrued) benefit cost $ 15,301 $ 11,716 $(51,480) $(55,941) $(3,949) $(3,674) Accrued benefit liability (2,292) (2,520) -- -- -- -- Intangible asset 2,292 2,520 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ 15,301 $ 11,716 $(51,480) $(55,941) $(3,949) $(3,674) =============================================================================================================================
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $62 million, $53 million, and none, respectively, as of June 30, 1998, and $57 million, $49 million, and none, respectively, as of June 30, 1997. 25 21 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:
========================================================================================================================= PENSION BENEFITS ------------------------------------------------- U.S. PLANS NON-U.S. PLANS OTHER BENEFITS ---------------------- ---------------------- ----------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30 Discount rate 7.00% 7.75% 7.75% 7.35% 8.15% 8.10% 7.00% 7.75% 7.75% Expected long-term return on plan assets 9.00% 9.00% 8.50% 8.65% 9.00% 9.05% -- -- -- Increase in compensation levels 4.25% 4.75% 4.75% 5.00% 5.50% 5.60% -- -- -- =========================================================================================================================
The following table sets forth the components of net periodic benefit cost:
================================================================================================================================== PENSION BENEFITS ------------------------------------------------------------------- YEARS ENDED JUNE 30 U.S. PLANS NON-U.S. PLANS OTHER BENEFITS ------------------------------- -------------------------------- ---------------------- (in thousands) 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 6,281 $ 6,632 $ 6,319 $ 9,900 $ 8,244 $ 9,151 $145 $151 $157 Interest cost 10,040 9,902 9,206 13,324 13,451 14,113 218 233 230 Expected return on plan assets (11,715) (10,950) (8,588) (14,626) (13,334) (11,099) -- -- -- Amortization of prior service cost 3,031 2,336 2,026 237 240 233 -- -- -- Amortization of transition obligation (asset) 31 (97) (1,449) (1,090) (1,072) (1,035) -- -- -- Recognized settlement (gain) loss (65) (773) 1,840 -- -- -- (47) (8) -- Recognized actuarial (gain) loss (64) (15) 602 (1,021) (943) -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 7,539 $ 7,035 $ 9,956 $ 6,724 $ 6,586 $ 11,363 $316 $376 $387 ==================================================================================================================================
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. For measurement purposes, a 7% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.5% for 2001. The table below presents the impact of a one-percentage-point increase and a one-percentage-point decrease in the assumed health care cost trend on the total of service and interest cost components and on the postretirement benefit obligation.
================================================================================ AS OF AND FOR THE YEAR ENDED JUNE 30, 1998 ONE-PERCENTAGE- ONE-PERCENTAGE- (in thousands) POINT INCREASE POINT DECREASE - -------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 44 $ (39) - -------------------------------------------------------------------------------- Effect on postretirement benefit obligation $238 $(209) ================================================================================
26 22 DEBT STRUCTURE - -------------------------------------------------------------------------------- Long-Term Debt ..............
================================================================================ JUNE 30 (in thousands) 1998 1997 - -------------------------------------------------------------------------------- 2.20% to 9.66% notes payable to banks, and other debt requiring payments in varying amounts, through 2017 $ 45,980 $ 53,764 Secured debt requiring varying semiannual payments from January 1997 through December 2006 (interest rate fluctuates semiannually and was 5.64% at June 30, 1998) 112,082 115,992 - -------------------------------------------------------------------------------- Total long-term debt 158,062 169,756 Less current maturities 6,574 5,752 - -------------------------------------------------------------------------------- Long-term portion $151,488 $164,004 ================================================================================
In April 1996, the company entered into a lease financing covering the majority of its manufacturing equipment in the United States. The arrangement is accounted for as 10-year partially amortizing secured debt with interest that varies periodically with LIBOR. The proceeds of approximately $113 million were used in roughly equal portions for prepayment of a portion of outstanding debt and for other corporate purposes. Long-term debt maturing during the five years subsequent to June 30, 1998, is as follows: 1999--$7 million; 2000--$19 million; 2001--$10 million; 2002--$25 million; 2003--$13 million; and thereafter--$84 million. Assets pledged as security for long-term debt totaled $36 million at June 30, 1998. In July 1997, a shelf registration was filed with the Securities and Exchange Commission, which provides the company with the ability to issue up to $400 million in debt securities. Short-Term Debt ............... In September 1996, the company entered into a new syndicated five-year revolving credit agreement providing for borrowings of up to $400 million, which replaced an existing $250 million revolving credit facility. Borrowings under the revolving credit agreement bear interest at variable spreads over LIBOR. The revolving credit agreement includes covenants that, among other things, specify a maximum leverage limit and a minimum fixed-charge coverage ratio. At June 30, 1998 and 1997, there were $135 million and no borrowings outstanding, respectively, under this credit facility. In addition to short-term borrowings, lines of credit are used for letters of credit, bank guarantees, and other purposes. The company had no significant compensating balance requirements at June 30, 1998. Information regarding credit facilities is as follows:
=============================================================================== June 30 (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------- Total lines of credit $624,252 $631,373 Available unused credit lines $423,610 $567,382 - ------------------------------------------------------------------------------- Worldwide weighted average interest rate, short-term debt 5.9% 5.5% ===============================================================================
27 23 STOCK - -------------------------------------------------------------------------------- Stock Split ........... In November 1997, the stockholders approved an increase in the authorized Common Stock to 150 million shares and a two-for-one stock split of the company's outstanding Common Stock. All share and per share data have been restated to reflect the stock split. 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 699,000 in 1998, 922,000 in 1997, and 1,534,000 in 1996. At June 30, 1998, a total of 3,882 of the 8,229 eligible employees were participants in the plans. In November 1995 and 1996, the stockholders approved plan amendments to increase issuable shares by 2,000,000, each year. The total number of shares reserved for future issuance under the plans was 2,311,000 at June 30, 1998. 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, restricted stock, and performance shares. As of June 30, 1998, only stock options and restricted stock 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. Substantially all of these options have a 10-year term and vest over a four-year period. In November 1995 and 1996, the stockholders approved amendments to the 1990 Incentive Plan to increase the aggregate number of shares issuable under the plan by 2,500,000 and 5,600,000, respectively. Also, in November 1996, the stockholders approved an amendment to the 1990 Incentive Plan to increase the limit on shares that may be granted to any one individual in any one year to 1,000,000 and to include performance shares within that limit. During 1998, 81,700 shares of restricted stock were awarded under the 1990 Incentive Plan. Of these shares, 1,500 shares were forfeited and the balance of 80,200 shares remains outstanding at June 30, 1998. The difference between par value and fair market value on the date the restricted stock was awarded will be amortized over the three-year restriction period as compensation expense. Approximately $1 million of compensation expense was recognized during 1998 related to restricted stock. During 1997, 34,400 shares of restricted stock were issued under the 1990 Incentive Plan, resulting in compensation expense totaling $0.3 million. During 1996, 75,000 shares of restricted stock were issued under the 1990 Incentive Plan, resulting in compensation expense totaling $1.7 million. At June 30, l998, 1,019 optionees held options for the purchase of Common Stock with expiration dates occurring between July 28, 1998 and June 30, 2008, with an average exercise price of $31 a share. The following table summarizes the company's option activity during the years ending June 30, 1998, 1997, and 1996:
============================================================================================================================ 1998 1997 1996 ------------------------------------------------------------------------------- WEIGHTED Weighted Weighted OPTION SHARES, JUNE 30 AVERAGE average average (in thousands except exercise price) SHARES EXERCISE PRICE Shares exercise price Shares exercise price - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 8,950 $ 24.30 9,630 $ 19.69 11,176 $ 16.87 Granted 2,499 $ 46.11 2,030 $ 38.78 2,886 $ 25.27 Exercised (1,940) $ 18.54 (2,288) $ 17.57 (3,818) $ 15.74 Canceled (511) $ 32.86 (422) $ 24.90 (614) $ 19.49 - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 8,998 $ 31.11 8,950 $ 24.30 9,630 $ 19.69 - ---------------------------------------------------------------------------------------------------------------------------- Exercisable at end of year 4,126 $ 21.77 4,170 $ 18.28 4,590 $ 16.94 ============================================================================================================================
The weighted-average fair value of options granted in 1998 was $20.14, approximately 44% of the average exercise price of $46.11. The weighted-average fair value of options granted in 1997 and 1996 was $16.04 and $10.67, respectively, approximately 41% and 42% of the respective average exercise prices. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rate of 6.19%, 6.30% and 6.01%; dividend yield of 0.64%, 0.54% and 0.67%; volatility of 35.38%, 29.90% and 32.07%; and expected life of six years for all years. 28 24 The following table summarizes information on outstanding and exercisable stock options as of June 30, 1998:
================================================================================================================ OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- --------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES (IN THOUSANDS) (IN YEARS) PRICE (IN THOUSANDS) PRICE - ---------------------------------------------------------------------------------------------------------------- $ 2.52-$ 9.92 54 6.2 $ 6.07 54 $ 6.07 $10.33-$19.60 2,625 4.4 $17.19 2,432 $17.13 $19.75-$28.31 1,814 6.9 $23.22 987 $23.14 $30.63-$38.31 622 8.2 $35.87 243 $35.99 $39.56-$47.94 3,883 8.9 $43.78 410 $39.57 - ---------------------------------------------------------------------------------------------------------------- $ 2.52-$47.94 8,998 7.1 $31.11 4,126 $21.77 ================================================================================================================
The company has elected to continue to follow APB Opinion No. 25 for accounting for its employee stock options and stock purchase plans. Fair values of the options and employee stock purchase plan shares were calculated using the methodology prescribed by FAS 123. The pro forma effects of using these fair values are presented below:
=============================================================================== YEARS ENDED JUNE 30 (in thousands except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------- AS REPORTED Net income $179,099 $253,344 $147,912 Earnings per share--basic $ 2.12 $ 2.85 $ 1.67 Earnings per share--assuming dilution $ 2.07 $ 2.77 $ 1.61 - ------------------------------------------------------------------------------- PRO FORMA Net income $151,371 $237,616 $139,641 Earnings per share--basic $ 1.79 $ 2.67 $ 1.57 Earnings per share--assuming dilution $ 1.75 $ 2.60 $ 1.52 ===============================================================================
EARNINGS PER SHARE - -------------------------------------------------------------------------------- In the second quarter of 1998, the company adopted and retroactively applied the requirements of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," to all periods presented. The following table sets forth the computation of earnings per share--basic and earnings per share--assuming dilution:
=========================================================================================== YEARS ENDED JUNE 30 (in thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------- Net income available to stockholders $179,099 $253,344 $147,912 =========================================================================================== Shares calculation: Average shares outstanding--basic 84,587 88,955 88,722 Effect of dilutive securities: Potential Common Stock relating to stock options and employee stock purchase plan 1,889 2,558 3,274 - ------------------------------------------------------------------------------------------- Average shares outstanding--assuming dilution 86,476 91,513 91,996 - ------------------------------------------------------------------------------------------- Earnings per share--basic $ 2.12 $ 2.85 $ 1.67 Earnings per share--assuming dilution $ 2.07 $ 2.77 $ 1.61 ===========================================================================================
Options to purchase 3,152,000 shares of Common Stock at prices ranging from $38.31 to $47.94 per share were outstanding during 1998, but were not included in the computation of earnings per share--assuming dilution because the options' exercise prices were greater than the average market price of the common shares. The options expire between November 2006 and June 2008. 29 25 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 designed to streamline the company's operations, reduce operating costs, and position the company for profitable growth. During the fourth quarter of 1998, the company incurred a pretax restructuring charge of $28 million (the 1998 restructuring). The restructuring actions included write-downs of inventory and machinery and equipment of discontinued products and operations, severance costs related to the consolidation of the telecommunications and energy networks segment and the commercial and industrial infrastructure segment, and severance costs associated with moving certain manufacturing facilities to lower-cost locations. Approximately $12 million of the 1998 restructuring charge is cash in nature and is expected to be funded through operating cash flow. The remaining $16 million primarily represents write-downs of inventory and machinery and equipment. As a result of the 1998 restructuring, approximately 130 positions will be eliminated. The 1998 restructuring is expected to be substantially completed by the end of fiscal 1999. The company incurred a pretax restructuring charge of $53 million in the third quarter of 1997 to implement several streamlining programs and eliminated approximately 500 positions (the 1997 restructuring). A significant portion of the restructuring expenses included severance and asset write-downs for consolidating the Telecom and Electrical Products divisions to achieve greater sales synergies, and to improve manufacturing and product development efficiencies in their cable accessories businesses. Additional one-time costs were incurred to consolidate the Electronics and PolySwitch divisions, to streamline the worldwide operations of the commercial and industrial infrastructure business segment, and to restructure the research and development organization in the United Kingdom. The 1997 restructuring was substantially completed by June 30, 1998. Approximately $36 million of the 1997 restructuring charge was cash in nature and was funded through operating cash flow. The remaining $17 million represented asset write-downs of inventory, facilities, and machinery and equipment related to discontinued products and consolidation of manufacturing and distribution activities. As of June 30, 1998, 382 employees have separated from the company and 71 employees have assumed other positions within the company as a result of the 1997 restructuring. The core business incurred a pretax restructuring charge of $44 million in the third quarter of 1996 as the company moved to simplify operations and reduce costs (the 1996 restructuring). These actions primarily affected the company's operations in Europe, where its manufacturing and support operations in Belgium, France, and the United Kingdom were reconfigured. In addition, a variety of other restructuring actions at both divisional and corporate levels were implemented throughout Raychem's worldwide organization. The charge, excluding $4 million in net asset write-downs, was cash in nature, substantially paid in 1997, and funded through operating cash flow. Approximately 700 positions were to be eliminated. As of June 30, 1998, 676 employees have separated from the company as a result of the 1996 restructuring. The following table sets forth components of the company's "Provision for restructuring and divestitures" for the years ended June 30, 1998, 1997, and 1996:
================================================================================================================================ PROVISION FOR RESTRUCTURING AND DIVESTITURES YEARS ENDED JUNE 30 EMPLOYEE ASSET (in thousands) COSTS WRITE-DOWNS LEASES OTHER TOTAL - -------------------------------------------------------------------------------------------------------------------------------- 1998 Employee severance and related costs $12,161 $ -- $ -- $ -- $12,161 Discontinued products -- 6,168 -- -- 6,168 Machinery and equipment write-downs -- 5,457 -- -- 5,457 Contractual obligations -- -- -- 1,850 1,850 Other -- -- 89 1,866 1,955 - -------------------------------------------------------------------------------------------------------------------------------- Total 1998 $12,161 $11,625 $ 89 $3,716 $27,591 ================================================================================================================================ 1997 Employee severance and related costs $35,533 $ -- $ -- $ -- $35,533 Discontinued products -- 4,806 -- -- 4,806 Machinery and equipment write-downs -- 5,075 -- -- 5,075 Vacated buildings -- 6,798 600 -- 7,398 - -------------------------------------------------------------------------------------------------------------------------------- Total 1997 $35,533 $16,679 $600 $ -- $52,812 ================================================================================================================================ 1996 Employee severance $37,907 $ -- $ -- $ -- $37,907 Assets to be sold -- 5,887 -- -- 5,887 Discontinued products -- 250 -- -- 250 Vacated buildings -- -- 821 -- 821 Other -- -- -- 615 615 Adjustment to prior year reserves -- (2,470) -- 561 (1,909) - -------------------------------------------------------------------------------------------------------------------------------- Total 1996 $37,907 $ 3,667 $821 $1,176 $43,571 ================================================================================================================================
30 26 The following table sets forth the company's restructuring reserves as of June 30, 1996, 1997, and 1998:
- ----------------------------------------------------------------------------------------------------------------------------- RESTRUCTURING RESERVES EMPLOYEE ASSET (in thousands) COSTS WRITE-DOWNS LEASES OTHER TOTAL - ----------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1995 $ 2,162 $ -- $ -- $ 1,015 $ 3,177 - ----------------------------------------------------------------------------------------------------------------------------- Provision for restructuring and divestitures 37,907 3,667 821 1,176 43,571 Cash payments (15,442) -- (30) (1,425) (16,897) Noncash items (894) (2,621) 36 (66) (3,545) - ----------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1996 23,733 1,046 827 700 26,306 - ----------------------------------------------------------------------------------------------------------------------------- Provision for restructuring and divestitures 35,533 16,679 600 -- 52,812 Cash payments (23,432) -- (372) (498) (24,302) Noncash items (3,815) (15,889) (384) 103 (19,985) - ----------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1997 32,019 1,836 671 305 34,831 - ----------------------------------------------------------------------------------------------------------------------------- Provision for restructuring and divestitures 12,161 11,625 89 3,716 27,591 Cash payments (19,303) -- (646) (673) (20,622) Noncash items (2,559) (399) (25) -- (2,983) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE JUNE 30, 1998 $ 22,318 $ 13,062 $ 89 $ 3,348 $ 38,817 =============================================================================================================================
LOSS ON MINORITY INVESTMENT - -------------------------------------------------------------------------------- In the third quarter of 1998, the company recorded a nonrecurring, noncash charge of $12 million ($9 million after tax) reflecting the write-off of goodwill, cash advances, and other assets related to its minority investment in Superconducting Core Technologies, Inc. (SCT). SCT ceased commercial operations in early March 1998 due to insufficient funding to support future cash-flow needs. ERICSSON RAYNET - -------------------------------------------------------------------------------- Formation of Ericsson Raynet Joint Venture .......................................... In November 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," took over the operations of the company's Raynet subsidiary. 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. With the creation of the joint venture, this royalty payment was reconfigured. Raychem paid BSE $10 million in 1996. Raychem agreed to make other royalty payments to BSE contingent upon the revenues and earnings performance of the joint venture. Amendment to Ericsson Raynet Joint Venture .......................................... During the third quarter of fiscal 1996, Raychem and Ericsson amended their joint venture agreement. Raychem's equity in net loss of $30 million for the year ended June 30, 1996, represents its share of Ericsson Raynet losses through December 31, 1995. Effective January 1, 1996, Raychem no longer shares in ongoing operating losses of the joint venture (other than potential warranty claims if they are in excess of reserves that have been previously established). Through December 31, 2000, Raychem may receive a modest income allocation from the venture. BSE is entitled to receive a portion of any income or distributions that Raychem receives. The reorganization of Ericsson Raynet resulted in a $2 million pretax charge in 1996 that was included in the line item "Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items." Revolving Credit Agreement .......................... In January 1995, the company entered into a revolving credit agreement with Ericsson Raynet. In 1996, the company made advances to Ericsson Raynet of $23 million under this credit agreement, bringing the amount due to the company to $27 million. As a result of the reconfiguration of the Ericsson Raynet joint venture, Raychem converted the amount due under the revolving credit agreement to capital. Raychem subsequently terminated the revolving credit agreement. 31 27 INTEREST - -------------------------------------------------------------------------------- Interest expense, net, consisted of the following components:
=========================================================================== YEARS ENDED JUNE 30 (in thousands) 1998 1997 1996 - --------------------------------------------------------------------------- Interest expense incurred $ 17,562 $ 12,455 $ 19,216 Interest expense capitalized (883) (393) (660) Interest income (4,191) (7,411) (8,925) - --------------------------------------------------------------------------- Interest expense, net $ 12,488 $ 4,651 $ 9,631 ===========================================================================
OTHER EXPENSE (INCOME), NET - -------------------------------------------------------------------------------- Other expense (income), net, consists primarily of bank charges, minority interest, net foreign exchange gains and losses, gains and losses on the disposition of fixed assets and investments, and certain other nonoperating items. Other expense (income), net, was net expense of $5 million in 1998, net income of $14 million in 1997, and net income of $3 million in 1996. The $14 million other income, net, in 1997 included a $23 million pretax gain, arising from the sale of a portfolio of patents and intellectual property to Medtronic, Inc. The $3 million other income, net, in 1996 included $7 million in proceeds from an insurance settlement and a gain of $3 million from the sale of the company's shape memory metals components business. INCOME TAXES - -------------------------------------------------------------------------------- Income before income taxes consisted of the following components:
================================================================================ YEARS ENDED JUNE 30 (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- U.S. operations $100,641 $ 99,710 $ 57,203 Non-U.S. operations 131,954 128,030 88,927 - -------------------------------------------------------------------------------- Income before income taxes $232,595 $227,740 $146,130 ================================================================================
The provision (benefit) for income taxes included:
==================================================================================================== YEARS ENDED JUNE 30 (in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Current tax: U.S. federal $ 10,892 $ 3,976 $ 5,383 U.S. state and local 4,756 4,994 2,990 Non-U.S. 42,698 49,948 35,198 - ---------------------------------------------------------------------------------------------------- Total current tax 58,346 58,918 43,571 - ---------------------------------------------------------------------------------------------------- Deferred (benefit) tax: U.S. federal, including Puerto Rico (10,659) (67,835) (39,789) U.S. state and local (960) (9,205) (5,243) Non-U.S. 6,769 (7,482) (321) - ---------------------------------------------------------------------------------------------------- Total deferred benefit (4,850) (84,522) (45,353) - ---------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes $ 53,496 $ (25,604) $ (1,782) ====================================================================================================
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 $361 million at June 30, 1998. 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 1998, $3 million for 1997, and $4 million for 1996. 32 28 The company's provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income before income taxes as follows:
============================================================================================================================ YEARS ENDED JUNE 30 (in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Provision for income taxes determined by applying U.S. statutory rate to income before income taxes $ 81,408 $ 79,709 $ 51,146 Benefit for income taxes related to deferred deductions, net operating losses, foreign tax credits, minimum tax credits, and changes in valuation allowance, net (27,401) (106,754) (51,140) Tax rate differences (7,050) (2,394) (6,809) State and local taxes, net of federal income tax benefits 5,931 3,251 1,635 Adjustment of prior years' taxes 338 1,570 1,056 Other items, net 270 (986) 2,330 - ---------------------------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes $ 53,496 $ (25,604) $ (1,782) ============================================================================================================================
Future expirations of U.S. credit carryforwards, if not utilized, are as follows: 2000-$1.4 million; 2001-$0.5 million; 2002-$0.3 million; 2003-$2.0 million; 2004-$6.8 million; 2005-$4.3 million; 2006-$4.3 million; 2007-$0.7 million; and $4.9 million with no expiration. U.S. federal tax return examinations have been completed for years through 1993. The company believes adequate provisions for income tax have been recorded for all years. Deferred tax assets (liabilities) comprised the following:
=================================================================================================== JUNE 30 (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------- Assets: Difference between book and tax bases of assets $ 73,279 $ 64,938 Compensation and benefits accrual 13,200 7,927 Retirement benefits 3,880 4,600 Asset reserves 15,917 11,693 Restructuring and divestitures accruals 13,393 21,344 Capitalization of research and experimental costs, net of amortization 71,290 121,925 Difference between book and tax bases of investments 12,415 14,011 Net operating loss carryforwards 1,748 1,535 General business credits 20,276 26,005 Minimum tax credit 4,902 4,902 Other 27,637 15,555 - --------------------------------------------------------------------------------------------------- Gross deferred tax assets 257,937 294,435 Less valuation allowance (2,837) (104,132) - --------------------------------------------------------------------------------------------------- Deferred tax assets, net 255,100 190,303 - --------------------------------------------------------------------------------------------------- Liabilities: Difference between book and tax bases of assets (35,072) (32,473) Compensation and benefits accrual (1,165) (2,310) Retirement benefits (6,677) (14,873) Other (13,664) (12,227) - --------------------------------------------------------------------------------------------------- Gross deferred tax liabilities (56,578) (61,883) - --------------------------------------------------------------------------------------------------- Net deferred tax assets $198,522 $ 128,420 ===================================================================================================
Balance sheet classification of the net deferred tax assets is as follows:
=============================================================================== JUNE 30 (in thousands) 1998 1997 - ------------------------------------------------------------------------------- Current assets $ 39,967 $ 20,187 Noncurrent assets 186,595 136,325 Current liabilities (278) (2,265) Noncurrent liabilities (27,762) (25,827) - ------------------------------------------------------------------------------- Net deferred tax assets $198,522 $128,420 ===============================================================================
The decrease in the valuation allowance of $101 million in 1998 and $109 million in 1997 was due primarily to a reassessment of the company's ability to realize its net U.S. federal and state deferred tax assets in the future. Approximately $45 million of the valuation allowance at June 30, 1997, was related to the tax benefits of stock options. This was recorded as an increase to additional contributed capital in 1998, as the remaining portion of the valuation allowance related to U.S. federal and state deferred tax assets was reversed. The remaining valuation allowance shown above reflects the company's ongoing assessment regarding the realizability of certain non-U.S. deferred tax assets. 33 29 WORLDWIDE OPERATIONS - --------------------------------------------------------------------------------
================================================================================================================================== UNITED REST OF CONSOLIDATED (in thousands) STATES EUROPE ASIA THE WORLD CONSOLIDATION TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- Revenues from unaffiliated customers(a) 1998 $ 732,067 $659,007 $270,191 $137,191 $ -- $1,798,456 1997 661,208 694,722 269,228 139,548 -- 1,764,706 1996 612,435 684,661 220,586 153,879 -- 1,671,561 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues between geographic areas(b) 1998 339,502 128,526 30,385 90 (498,503) -- 1997 282,545 148,156 18,207 1,392 (450,300) -- 1996 243,120 130,581 11,677 1,485 (386,863) -- - ---------------------------------------------------------------------------------------------------------------------------------- Total revenues 1998 1,071,569 787,533 300,576 137,281 (498,503) 1,798,456 1997 943,753 842,878 287,435 140,940 (450,300) 1,764,706 1996 855,555 815,242 232,263 155,364 (386,863) 1,671,561 - ---------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) before provision 1998 156,019 120,220 16,929 (3,427) -- 289,741 for restructuring and divestitures, loss on minority investment, and loss on 1997 103,478 144,327 21,768 1,989 -- 271,562 reorganization/formation of Ericsson Raynet joint venture and other Raynet items 1996 91,964 115,825 9,627 8,450 -- 225,866 - ---------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) including provision 1998 123,486 115,483 15,853 (4,645) -- 250,177 for restructuring and divestitures, loss on minority investment, and loss on 1997 78,433 117,731 20,725 1,861 -- 218,750 reorganization/formation of Ericsson Raynet joint venture and other Raynet items 1996 79,836 83,961 9,138 7,257 -- 180,192 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1998 100,641 101,779 20,302 9,873 -- 232,595 1997 99,710 91,025 27,111 9,894 -- 227,740 1996 57,203 55,186 21,534 12,207 -- 146,130 - ---------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 1998 481,730 367,396 138,678 62,692 -- 1,050,496 1997 439,772 392,707 154,699 52,919 -- 1,040,097 1996 380,349 427,527 128,067 57,907 -- 993,850 - ---------------------------------------------------------------------------------------------------------------------------------- Corporate assets 1998 402,217 109,690 31,247 25,705 -- 568,859 1997 319,844 89,899 38,723 20,697 -- 469,163 1996 373,846 124,590 33,447 24,883 -- 556,766 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 1998 883,947 477,086 169,925 88,397 -- 1,619,355 1997 759,616 482,606 193,422 73,616 -- 1,509,260 1996 754,195 552,117 161,514 82,790 -- 1,550,616 ==================================================================================================================================
(a) Revenues from unaffiliated customers in each geographic area reflect only shipments originating locally and exclude direct exports from other geographic areas. (b) Revenues between geographic areas are recorded on the basis of arms-length prices established by the company. 34 30 BUSINESS SEGMENTS - -------------------------------------------------------------------------------- The company's financial results are now reported as two business segments and the corporate group. The electronics OEM components segment serves original equipment manufacturers in transportation, defense, and a wide range of commercial electronics industries. Products offered by this segment include circuit protection devices, wire and cable, heat-shrinkable insulation and molded parts, and computer touchmonitors. The telecommunications, energy and industrial segment serves telecommunication operators; power, gas, and water utilities; and industrial plants and pipelines. This newly formed business segment combines the former telecommunications and energy networks segment and the former commercial and industrial infrastructure segment. Products offered by this segment include telephone copper cable accessories, fiber-optic cable systems and accessories, access network electronics, electric power cable accessories, heat-tracing systems, and corrosion protection products.
- -------------------------------------------------------------------------------------------------------------------------------- ELECTRONICS TELECOMMUNICATIONS, OEM ENERGY AND CORPORATE CONSOLIDATED (in thousands) COMPONENTS INDUSTRIAL GROUP TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Revenues(a) 1998 $815,438 $ 983,018 $ -- $1,798,456 1997 757,356 1,007,350 -- 1,764,706 1996 670,595 1,000,966 -- 1,671,561 - -------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) before provision for 1998 150,407 213,419 (74,085) 289,741 restructuring and divestitures, loss on minority investment, and loss on reorganization/formation 1997 153,060 203,957 (85,455) 271,562 of Ericsson Raynet joint venture and other Raynet items 1996 119,963 197,214 (91,311) 225,866 - -------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) including provision for 1998 143,357 186,475 (79,655) 250,177 restructuring and divestitures, loss on minority investment, and loss on reorganization/formation 1997 140,590 172,495 (94,335) 218,750 of Ericsson Raynet joint venture and other Raynet items 1996 106,400 169,737 (95,945) 180,192 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1998 -- -- -- 232,595 1997 -- -- -- 227,740 1996 -- -- -- 146,130 - -------------------------------------------------------------------------------------------------------------------------------- Total assets 1998 505,264 545,232 568,859 1,619,355 1997 493,256 546,841 469,163 1,509,260 1996 438,926 554,924 556,766 1,550,616 - -------------------------------------------------------------------------------------------------------------------------------- Capital expenditures 1998 51,353 34,879 18,440 104,672 1997 33,003 37,701 19,781 90,485 1996 30,503 30,448 17,638 78,589 - -------------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 1998 35,768 33,426 12,341 81,535 1997 30,474 30,925 17,158 78,557 1996 32,326 32,879 14,222 79,427 ================================================================================================================================
(a) Revenues between segments are immaterial. COMMITMENTS - -------------------------------------------------------------------------------- Total rental expense was $27 million in 1998, $29 million in 1997, and $35 million in 1996. The company had commitments at June 30, 1998, to expend approximately $17 million for the construction or acquisition of additional property, plant, and equipment. Annual future minimum lease payments at June 30, 1998, under noncancelable operating leases, are as follows: 1999--$22 million; 2000--$17 million; 2001--$12 million; 2002--$7 million; 2003--$4 million; and thereafter--$24 million. In June 1998, the company signed a letter of intent to acquire the telecommunications business of a company in Spain for approximately $40 million in cash. The acquisition is expected to be completed in the first half of fiscal 1999 and will be accounted for using the purchase method. 35 31 CONTINGENCIES - -------------------------------------------------------------------------------- The company and its subsidiaries are parties to lawsuits or may in the future become parties to lawsuits involving various types of commercial claims, including, but not limited to, product liability, unfair competition, antitrust, breach of contract, and intellectual property matters. Legal proceedings tend to be unpredictable and costly and may be affected by events outside the control of the company. The company maintains various levels of insurance to apply to product liability and certain other claims in excess of deductibles. There is no assurance that litigation will not have an adverse effect on the company's financial position or results of operations. The company's major litigation matters as of June 30, 1998, are described below. On December 19, 1994, the company filed a complaint entitled Raychem Corporation and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. in the Superior Court of the State of California, County of San Mateo, which alleged, among other claims, misappropriation of trade secrets. On May 2, 1995, a complaint entitled Bourns, Inc. v. Raychem Corporation was filed in the United States District Court, Central District of California, alleging antitrust law violations. Many of the claims asserted in the company's state action were consolidated with Bourns' federal action against the company. On March 9, 1998, this case was transferred from the Eastern Division of the Central District to the Western Division of the Central District and reassigned to a new judge. The trial for Bourns' action against the company commenced on June 16, 1998. During the sixth week of the trial, due to the length of the proceeding, the judge bifurcated the company's trade secret action against Bourns for trial at a later date. On August 10, 1998, the trial of Bourns' action against the company ended with a jury verdict that awarded Bourns $64 million in damages. Legal fees and expenses, including attorneys fees, are also recoverable by Bourns under applicable U.S. antitrust law. The company intends to file motions with the court to set aside the jury's verdict, to reduce the damages, and to ask for a new trial on the grounds that the verdict is contrary to the evidence presented at trial and is incorrect as a matter of law and that the jury's damage award bears no relationship to the market segment to which the verdict was directed. If necessary, the company intends to appeal this decision. Under applicable U.S. antitrust law, any remaining damage award against the company will be trebled. The company also intends to continue with its theft of trade secrets case against Bourns. The new trial date for the trade secret action has not been set by the court. Because the company intends to appeal the verdict in this case, if necessary, the company has not accrued any liability with respect to this litigation. Currently, the company's principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company's experience to date is that losses, if any, from such claims have not had a material effect on the company's financial position or results of operations. However, the company sells its products into applications (such as electronic interconnection products for aerospace and automotive markets) where product liability issues could be material. Effective March 31, 1996, the company increased its insurance deductible for heat-tracing products. The company's insurance deductible for claims arising from events prior to March 31, 1996, remains unchanged. The company is a defendant in a product liability case in the United States District Court in Seattle, All Alaskan Seafoods, Inc., et al. v. Raychem Corporation, Minnesota Mining and Manufacturing Corporation and Marine Electric, Inc., et al. The action arises out of a cargo vessel fire allegedly caused by a heat-tracing product. The plaintiffs in this case are seeking in excess of $150 million in damages. On November 21, 1997, the District Court granted the company's motion to limit damages claimed by the plaintiffs to the value of the cargo lost or destroyed and certain other incidental claims of crew members (now alleged to be approximately $4 million) on account of the incident giving rise to the plaintiffs' claims. The parties have stipulated to a dismissal (without prejudice) of the remaining claims, so that plaintiffs may appeal the District Court's decision to the Ninth Circuit Court of Appeals. Plaintiffs filed their Notice of Appeal on May 26, 1998. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. Four separate state actions based on essentially the same facts, alleging wrongful distributor termination and antitrust claims, have been consolidated in the Superior Court of San Mateo County, California, in a litigation entitled Unit Process Company, et al. v. Raychem Corporation, et al. The dismissal in the United States District Court, Northern District of California, of an action alleging essentially the same facts was affirmed by the Ninth Circuit Court of Appeals in 1996. On February 25, 1998, the Superior Court granted the company's motion to dismiss this lawsuit, with leave to the plaintiffs to amend certain of their claims. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. Additionally, the company has been named, among others, as a potentially responsible party in judicial and administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. The company believes that it does not have material liability for cleanup costs at these sites. 36 32 QUARTERLY FINANCIAL DATA (UNAUDITED) - --------------------------------------------------------------------------------
============================================================================================================================ QUARTER ENDED (in thousands except per share data) SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 - ---------------------------------------------------------------------------------------------------------------------------- Fiscal 1998 Revenues $455,031 $467,117 $445,162 $431,146 Gross profit 228,083 229,983 212,604 197,512 Provision for restructuring and divestitures -- -- -- 27,591 Income before income taxes 82,027 74,615 52,754 23,199 Net income 61,521 55,961 39,565 22,052 - ---------------------------------------------------------------------------------------------------------------------------- Per share data:(a) Earnings per share--basic $ 0.72 $ 0.66 $ 0.47 $ 0.26 Earnings per share--assuming dilution 0.70 0.64 0.46 0.26 Cash dividends per share 0.07 0.07 0.08 0.08 Price range of Common Stock(b) 36 36 9/32-49 23/32 40 1/4-48 1/2 35 1/4-44 1/4 29 9/16-41 1/2 ============================================================================================================================ Fiscal 1997 Revenues $430,311 $441,047 $427,878 $465,470 Gross profit 221,235 225,366 208,882 228,295 Provision for restructuring and divestitures -- -- 52,812 -- Income before income taxes 88,683(c) 62,106 8,288 68,663 Net income 72,720(c) 52,435 68,453(d) 59,736 - ---------------------------------------------------------------------------------------------------------------------------- Per share data:(a) Earnings per share--basic $ 0.81(c) $ 0.59 $ 0.76(d) $ 0.68 Earnings per share--assuming dilution 0.79(c) 0.57 0.74(d) 0.67 Cash dividends per share 0.05 0.05 0.07 0.07 Price range of Common Stock(b) 29 1/2-38 1/4 35 3/16-43 3/16 39 1/2-44 3/4 30 1/4-41 7/8 ============================================================================================================================
(a) Adjusted for a two-for-one stock split effective November 17, 1997, and for the adoption of FAS 128. (b) The price range of Common Stock is as reported on the New York Stock Exchange composite tape. (c) Includes a $23 million pretax gain in the quarter ended September 30, 1996, related to the sale of intellectual property. (d) Includes a discrete tax benefit of $55 million in the quarter ended March 31, 1997, related to the reassessment of the company's deferred tax asset valuation allowance. Raychem Corporation Common Stock is listed on the New York Stock Exchange. The number of stockholders of record as of August 25, 1998, was 6,641. 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 25, 1998, was $31 3/8 per share. 37 33 TEN-YEAR SUMMARY - --------------------------------------------------------------------------------
=================================================================================================================================== YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- RAYCHEM CORPORATION Consolidated(a) - ----------------------------------------------------------------------------------------------------------------------------------- INCOME DATA - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $ 1,798,456 $ 1,764,706 $ 1,671,561 $ 1,530,573 $ 1,461,532 - ----------------------------------------------------------------------------------------------------------------------------------- Provision for restructuring and divestitures $ 27,591 $ 52,812 $ 43,571 $ 23,900 $ -- - ----------------------------------------------------------------------------------------------------------------------------------- Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items $ -- $ -- $ 2,103 $ 32,032 $ -- - ----------------------------------------------------------------------------------------------------------------------------------- Equity in net loss of Ericsson Raynet $ -- $ -- $ 29,818 $ 85,946 $ -- - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary item, and changes in accounting principles $ 232,595 $ 227,740 $ 146,130 $ (270) $ 33,745 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 179,099 $ 253,344 $ 147,912 $ (29,243) $ 1,679 =================================================================================================================================== SHARE DATA - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--basic $ 2.12 $ 2.85 $ 1.67 $ (0.34) $ 0.02 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--assuming dilution $ 2.07 $ 2.77 $ 1.61 $ (0.34) $ 0.02 - ----------------------------------------------------------------------------------------------------------------------------------- Cash dividends per share $ 0.30 $ 0.24 $ 0.18 $ 0.16 $ 0.16 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding--basic 84,586,598 88,955,076 88,722,248 87,076,056 84,995,214 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding--assuming dilution 86,475,681 91,513,208 91,996,236 87,076,056 86,632,066 =================================================================================================================================== BALANCE SHEET DATA - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,619,355 $ 1,509,260 $ 1,550,616 $ 1,454,745 $ 1,399,015 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term debt $ 151,488 $ 164,004 $ 148,352 $ 263,552 $ 244,681 - ----------------------------------------------------------------------------------------------------------------------------------- Total debt $ 339,346 $ 223,819 $ 302,981 $ 293,226 $ 275,548 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 859,642 $ 845,019 $ 841,206 $ 749,658 $ 732,924 - ----------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in debt net of cash $ 109,443 $ 58,370 $ (96,293) $ (22,299) $ 55,842 =================================================================================================================================== OTHER SIGNIFICANT MEASURES - ----------------------------------------------------------------------------------------------------------------------------------- Gross profit as a percent of revenues 48.3% 50.1% 51.2% 50.4% 46.6% - ----------------------------------------------------------------------------------------------------------------------------------- Research and development expense as a percent of revenues 6.0% 6.8% 7.3% 7.8% 9.3% - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general, and administrative expense as a percent of revenues 26.1% 27.9% 30.4% 32.4% 33.6% - ----------------------------------------------------------------------------------------------------------------------------------- Net debt as a percent of stockholders' equity 28.7% 16.2% 9.4% 23.4% 26.9% - ----------------------------------------------------------------------------------------------------------------------------------- Number of employees 9,036 8,650 8,697 9,496 10,769 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues per average number of employees $ 203 $ 203 $ 184 $ 151 $ 136 =================================================================================================================================== RAYNET CORPORATION - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $ -- $ -- $ -- $ -- $ 57,784 - ----------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ -- $ -- $ -- $ -- $ (102,993) =================================================================================================================================== (a) Raynet Corporation and subsidiaries' results are presented on the equity basis of accounting in 1995 and through December 31, 1996 versus consolidated in prior years. Following the reorganization of Ericsson Raynet, effective January 1, 1996, Raychem's interest in the joint venture is accounted for on the cost basis. (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) Cash exceeded debt at June 30.
38 34
=================================================================================================================================== YEARS ENDED JUNE 30 (dollars in thousands except per share amounts) 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------------------------------------- RAYCHEM CORPORATION Consolidated(a) - ----------------------------------------------------------------------------------------------------------------------------------- INCOME DATA - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $ 1,385,730 $ 1,301,601(b) $ 1,250,772(b) $ 1,114,713(b) $ 1,083,028 - ----------------------------------------------------------------------------------------------------------------------------------- Provision for restructuring and divestitures $ -- $ 43,300 $ 3,697 $ 90,000 $ -- - ----------------------------------------------------------------------------------------------------------------------------------- Loss on reorganization/formation of Ericsson Raynet joint venture and other Raynet items $ -- $ -- $ -- $ -- $ -- - ----------------------------------------------------------------------------------------------------------------------------------- Equity in net loss of Ericsson Raynet $ -- $ -- $ -- $ -- $ -- - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, extraordinary item, and changes in accounting principles $ 39,584 $ 12,585(c) $ (3,109) $ (86,261) $ 63,767 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 9,625 $ (24,808) $ (23,429) $ (111,398) $ 36,347 =================================================================================================================================== SHARE DATA - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--basic $ 0.12 $ (0.32) $ (0.32) $ (1.56) $ 0.52 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share--assuming dilution $ 0.11 $ (0.32) $ (0.32) $ (1.56) $ 0.52 - ----------------------------------------------------------------------------------------------------------------------------------- Cash dividends per share $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.15 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding--basic 82,220,582 78,060,098 74,268,322 71,417,046 69,717,613 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding--assuming dilution 84,806,178 78,060,098 74,268,322 71,417,046 69,857,870 =================================================================================================================================== BALANCE SHEET DATA - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,332,270 $ 1,392,606 $ 1,234,860 $ 1,270,834 $ 1,172,783 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term debt $ 233,853 $ 229,768 $ 233,347 $ 31,087 $ 29,029 - ----------------------------------------------------------------------------------------------------------------------------------- Total debt $ 275,562 $ 257,763 $ 265,340 $ 212,954 $ 130,294 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 689,504 $ 715,188 $ 651,973 $ 690,467 $ 734,286 - ----------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in debt net of cash $ 32,715 $ (57,610) $ 90,589 $ 98,633 $ (19,132) =================================================================================================================================== OTHER SIGNIFICANT MEASURES - ----------------------------------------------------------------------------------------------------------------------------------- Gross profit as a percent of revenues 48.7% 48.4% 48.6% 49.6% 52.8% - ----------------------------------------------------------------------------------------------------------------------------------- Research and development expense as a percent of revenues 9.3% 10.8% 11.2% 11.0% 11.1% - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general, and administrative expense as a percent of revenues 34.6% 33.6% 35.8% 37.5% 36.7% - ----------------------------------------------------------------------------------------------------------------------------------- Net debt as a percent of stockholders' equity 20.5% 15.2% 25.5% 11.0% (d) - ----------------------------------------------------------------------------------------------------------------------------------- Number of employees 10,772 11,187 11,406 11,065 11,451 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues per average number of employees $ 126 $ 115 $ 111 $ 99 $ 97 =================================================================================================================================== RAYNET CORPORATION - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $ 9,671 $ 16,594 $ 11,500 $ 7,625 $ 2,960 - ----------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (92,551) $ (89,334) $ (73,959) $ (64,484) $ (54,307) ===================================================================================================================================
39 35 DIRECTORS - -------------------------------------------------------------------------------- RICHARD DULUDE Retired Vice Chairman, Corning Incorporated JAMES F. GIBBONS Special Counsel to the President, Stanford University RICHARD A. KASHNOW Chairman of the Board, President and Chief Executive Officer, Raychem Corporation JOHN P. MCTAGUE Vice President of Technical Affairs, Ford Motor Company DEAN O. MORTON Retired Executive Vice President, Director and Chief Operating Officer, Hewlett-Packard Company ISAAC STEIN President, Waverley Associates, Inc. CHANG-LIN TIEN NEC Distinguished Professor of Engineering, University of California, Berkeley CYRIL J. YANSOUNI Chairman and Chief Executive Officer, Read-Rite Corporation OFFICERS - -------------------------------------------------------------------------------- DEIDRA D. BARSOTTI Vice President and Controller L. FRANS BERTHELS Senior Vice President PETER L. BROOKS Vice President TIMOTHY J. BURCH Vice President PETER S. CARSON Vice President JAMES L. CLAYPOOL Vice President KAREN O. COTTLE Vice President, General Counsel and Secretary GORDON HUNTER Vice President RICHARD A. KASHNOW President and Chief Executive Officer LARS LARSEN Vice President and Treasurer JOHN D. MCGRAW Senior Vice President RAYMOND J. SIMS Senior Vice President and Chief Financial Officer MARK S. THOMPSON Vice President HUS TIGLI Senior Vice President ERIC VAN ZELE Vice President 40 36 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 1998 Annual Report (Exhibit 13 to this filing). This graph appears in the section entitled "Financial Review" of the 1998 Annual Report. "ONGOING" PRETAX INCOME (excludes Ericsson Raynet and unusual items) A bar chart (dollars in millions) depicting: $230 in 1996; $263 in 1997 and $272 in 1998. EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY NAME ORGANIZED UNDER THE LAWS OF - ----------------------------------------------------------------------------------------------------- Compagnie Francaise des Isolants France Elo TouchSystems, Inc. Tennessee K.K. Raychem Japan Raychem (Australia) Pty., Ltd. Australia (New South Wales) Raychem (Delaware) Ltd. Delaware Raychem (H.K.) Limited Hong Kong Raychem (Nederland) B.V. The Netherlands Raychem A/S Norway Raychem A/S Denmark Raychem AG Switzerland Raychem Aktiebolag Sweden Raychem Canada Limited Canada Raychem Gesellschaft m.b.H. Austria Raychem GmbH Germany Raychem Industries N.V. Belgium Raychem International Corporation California Raychem International Manufacturing Corporation California Raychem International Cayman Islands, B.W. I. Raychem Korea Limited Korea Raychem Limited United Kingdom Raychem N.V. Belgium Raychem OY Finland Raychem Produtos Irradiados Limitada Brazil Raychem RPG Limited India Raychem S.A. Spain Raychem S.A. France Raychem S.A. Industrial y Comercial Argentina RAYCHEM S.p.A. Italy Raychem Saudi Arabia Limited Saudi Arabia Raychem Shanghai Cable Accessories Ltd. People's Republic of China Raychem Singapore Pte. Limited Singapore 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 GmbH Germany Sigmaform U.K. Limited United Kingdom
EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 333-31395) and to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-00353, No. 333-00355, No. 333-00925, No. 33-15116, No. 333-18125, No. 333-21959, 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. 3358869, No. 33-58871 and No. 33-59600) of Raychem Corporation of our report dated July 15, 1998, except as to the second paragraph of the "Contingencies" footnote, which is as of August 10, 1998, appearing on page 17 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 19 of this Form 10-K. PricewaterhouseCoopers LLP San Jose, California September 15, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 92,667 12,096 334,770 9,731 278,948 845,597 1,147,923 668,737 1,619,355 479,422 151,488 0 0 90,028 769,614 1,619,355 1,791,771 1,798,456 927,345 930,274 108,234 3,591 12,488 232,595 53,496 179,099 0 0 0 179,099 2.12 2.07
EX-99.1 8 SUBSIDIARIES PARTICIPATING IN 1984 STOCK PLAN 1 Exhibit 99(a) 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 K.K. Raychem Raychem A.G. Raychem A/S (Denmark) Raychem (Australia) Proprietary, Ltd. Raychem Gesellschaft m.b.H. Raychem GmbH Raychem (H.K.) Limited Raychem International Corporation Raychem Korea Limited 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, Inc. Sigmaform U.K. Limited Sigmaform GmbH SHG Strahlenchemie Holding GmbH Elo TouchSystems, Inc. Elo TouchSystems GmbH & Co. KG Walter Rose GmbH EX-99.2 9 SUBSIDIARIES PARTICIPATING IN 1985 STOCK PLAN 1 Exhibit 99(b) Participating subsidiaries in the Amended and Restated 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 Canada Limited Raychem del Peru, S.A. Raychem Industrial Y Comercial Limitada Raychem International Raychem International Manufacturing Corporation Raychem Produtos Irradiados Limitada Raychem S.A. Industrial y Comercial Raychem Technologias, S.A. de C.V. Raychem Thai Limited Raychem Uruguay S.A. Raychem de Venezuela, C.A. Raychem Technologies Ltd. . -----END PRIVACY-ENHANCED MESSAGE-----