-----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, DzkL2/dNy48yKdUaP2DavwR0IXbeI2s+FfBBTOyFYyh+MWzEV7dTnSl4MIqJom7e GQU76q37byFp2cz+VMoSQg== 0000891618-96-000420.txt : 19960621 0000891618-96-000420.hdr.sgml : 19960621 ACCESSION NUMBER: 0000891618-96-000420 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYCHEM CORP CENTRAL INDEX KEY: 0000082206 STANDARD INDUSTRIAL CLASSIFICATION: 3640 IRS NUMBER: 941369731 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08341 FILM NUMBER: 96563046 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-Q 1 FORM 10-Q FOR PERIOD ENDED 3/31/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 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 Identification No.) incorporation or organization) 300 Constitution Drive, Menlo Park, CA 94025-1164 (Address of principal executive offices) (Zip code) (415) 361-3333 (Registrant's telephone number, including area code) 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 ------ ------ As of April 26, 1996, the registrant had outstanding 44,635,691 shares of Common Stock, $1.00 par value. 2 RAYCHEM CORPORATION INDEX TO FORM 10-Q
Page Number ----------- PART I. FINANCIAL INFORMATION Item 1: Financial Information Consolidated Condensed Statements of Operations - Three and Nine Months Ended March 31, 1996 and 1995 1 Consolidated Condensed Balance Sheets - March 31, 1996, and June 30, 1995 2 Consolidated Condensed Statements of Cash Flows - Nine Months Ended March 31, 1996 and 1995 3 Notes to Consolidated Condensed Financial Statements 4-9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 PART II. OTHER INFORMATION Item 1: Legal Proceedings 18 Item 5: Other Information 18 Item 6: Exhibits and Reports on Form 8-K 18 SIGNATURES 19
3 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Nine Months Ended March 31, March 31, --------------------- -------------------------- 1996 1995 1996 1995 --------- -------- ----------- ----------- Revenues $ 417,819 $368,784 $ 1,239,385 $ 1,119,423 Cost of goods sold 207,577 184,066 599,152 551,573 Research and development expense 29,782 29,700 90,337 85,677 Selling, general, and administrative expense 121,868 119,719 378,450 356,179 Provision for restructuring and divestitures 43,571 -- 43,571 23,900 Loss on reorganization / formation of Ericsson Raynet joint venture and other Raynet items 2,103 931 2,103 32,231 Equity in net (income) losses of affiliated companies (843) 10,953 28,017 48,269 Interest expense, net 1,867 2,799 7,883 10,366 Other expense (income), net 948 2,054 (1,825) 7,170 --------- -------- ----------- ----------- Income before income taxes, extraordinary item, and change in accounting principle 10,946 18,562 91,697 4,058 (Credit) provision for income taxes (30,762) 7,666 (7,543) 21,491 --------- -------- ----------- ----------- Income (loss) before extraordinary item and change in accounting principle 41,708 10,896 99,240 (17,433) Extraordinary item - loss related to early retirement of debt, net of $0 income taxes -- -- -- (6,318) Cumulative effect of change in accounting principle, net of $0 income taxes -- -- -- (1,477) --------- -------- ----------- ----------- Net income (loss) $ 41,708 $ 10,896 $ 99,240 $ (25,228) ========= ======== =========== =========== Average number of common shares and equivalents outstanding 46,680 44,434 45,814 43,478 ========= ======== =========== =========== Earnings (loss) per common share: Income (loss) before extraordinary item and change in accounting principle $ 0.89 $ 0.25 $ 2.17 $ (0.40) Extraordinary item -- -- -- (0.15) Change in accounting principle -- -- -- (0.03) --------- -------- ----------- ----------- Net income (loss) $ 0.89 $ 0.25 $ 2.17 $ (0.58) ========= ======== =========== =========== Dividends per common share $ 0.10 $ 0.08 $ 0.26 $ 0.24 ========= ======== =========== ===========
See accompanying notes to consolidated condensed financial statements. 1 4 RAYCHEM CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED) MARCH 31, 1996 June 30, 1995 -------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 175,893 $ 118,067 Accounts receivable, net 312,839 304,819 Inventories: Raw materials 82,036 76,862 Work in process 50,552 53,632 Finished goods 101,972 103,206 ----------- ----------- Total inventories 234,560 233,700 Prepaid taxes 51,969 60,661 Other current assets 87,156 62,361 ----------- ----------- Total current assets 862,417 779,608 Property, plant, and equipment 1,126,046 1,117,939 Less accumulated depreciation and amortization 619,170 590,520 ----------- ----------- Net property, plant, and equipment 506,876 527,419 Other assets 144,259 147,718 ----------- ----------- TOTAL ASSETS $ 1,513,552 $ 1,454,745 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 31,929 $ 28,632 Accounts payable 66,658 67,102 Other accrued liabilities 207,947 183,479 Income taxes 15,870 22,943 Current maturities of long-term debt 30,545 1,042 ----------- ----------- Total current liabilities 352,949 303,198 Long-term debt 226,121 263,552 Deferred income taxes 24,612 35,002 Other long-term liabilities 91,174 98,215 Minority interests 6,111 5,120 Commitments and contingencies (See notes) Stockholders' equity: Preferred Stock, $1.00 par value Authorized: 15,000,000 shares; Issued: none -- -- Common Stock, $1.00 par value Authorized: 72,150,000 shares Issued: 44,792,227 and 43,897,275 shares, respectively 44,792 43,897 Additional contributed capital 405,039 380,127 Retained earnings 339,939 272,657 Currency translation 33,833 61,946 Treasury Stock, at cost (277,313 and 226,640 shares, respectively) (18,477) (8,330) Other 7,459 (639) ----------- ----------- Total stockholders' equity 812,585 749,658 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,513,552 $ 1,454,745 =========== ===========
See accompanying notes to consolidated condensed financial statements. 2 5 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- - ------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED MARCH 31 (IN THOUSANDS) 1996 1995 - - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income (loss) $ 99,240 $ (25,228) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for restructuring and divestitures, net of payments 37,737 14,924 Loss on reorganization / formation of Ericsson Raynet joint venture 2,103 14,950 Equity in net losses of affiliated companies 28,017 19,024 Extraordinary loss related to early retirement of debt -- (1,043) Change in accounting principle -- 1,477 Net loss on disposal of other property, plant, and equipment 2,265 -- Gain on sale of investments (1,151) -- Depreciation and amortization 58,556 50,413 Deferred income tax benefit (37,390) (152) Changes in certain assets and liabilities, net of effects from restructuring and divestitures, joint venture reorganization / formation, extraordinary item, and change in accounting principle: Accounts receivable (19,646) 3,835 Inventories (11,144) (6,627) Accounts payable and accrued liabilities 4,187 (15,042) Income taxes (6,366) (800) Other assets and liabilities 7,291 24,842 --------- --------- Net cash provided by operating activities 163,699 80,573 --------- --------- Cash flows from investing activities: Investment in property, plant, and equipment (57,061) (69,627) Disposition of property, plant, and equipment 1,358 6,755 Advances to affiliated companies (33,001) (12,451) Proceeds from sale of specified Raynet assets -- 40,000 Proceeds from sale of investments 3,693 -- Cost of acquisition, net of cash acquired -- (3,930) Purchase of investment (2,044) (1,000) --------- --------- Net cash used in investing activities (87,055) (40,253) --------- --------- Cash flows from financing activities: Net proceeds from short-term debt 4,466 3,149 Proceeds from long-term debt 30 225,498 Payments of long-term debt (1,509) (212,427) Common Stock issued under employee benefit plans 59,587 30,736 Common Stock repurchased (64,719) (15,192) Proceeds from repayments of stockholder notes receivable 338 294 Cash dividends (11,550) (10,452) --------- --------- Net cash (used in) provided by financing activities (13,357) 21,606 --------- --------- Effect of exchange rate changes on cash and cash equivalents (5,461) 4,792 --------- --------- Increase in cash and cash equivalents 57,826 66,718 Cash and cash equivalents at beginning of period 118,067 78,090 --------- --------- Cash and cash equivalents at end of period $ 175,893 $ 144,808 ========= ========= SUPPLEMENTAL DISCLOSURES Cash paid for: Interest (net of amounts capitalized) $ 13,957 $ 20,812 Income taxes (net of refunds) 26,921 18,443
See accompanying notes to consolidated condensed financial statements. 3 6 RAYCHEM CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) STATEMENT OF ACCOUNTING PRESENTATION In the opinion of management, the accompanying unaudited consolidated condensed financial statements include all adjustments, including normal recurring accruals, necessary to present fairly the results of operations for the three and nine months ended March 31, 1996 and 1995, the financial position as of March 31, 1996 and the cash flows for the nine months ended March 31, 1996 and 1995. The June 30, 1995 balance sheet included is derived from the consolidated financial statements included in the company's Annual Report on Form 10-K for the year ended June 30, 1995. Certain prior-period amounts have been reclassified to conform with the 1996 financial statement presentation. BUSINESS SEGMENTS Revenues and operating income (loss) by business segment are as follows:
In thousands ---------------------------------------------------------- Three Months Ended Nine Months Ended March 31, March 31, ------------------------ ---------------------------- 1996 1995 1996 1995 --------- --------- ----------- ----------- Revenues Electronics $ 174,296 $ 156,463 $ 490,986 $ 441,453 Industrial 128,718 115,766 409,135 368,186 Telecommunications 114,805 96,555 339,264 309,784 Raynet -- -- -- -- --------- --------- ----------- ----------- Total revenues $ 417,819 $ 368,784 $ 1,239,385 $ 1,119,423 ========= ========= =========== =========== Operating income (loss) before provision for restructuring and loss on reorganization / formation of JV and other Raynet items Electronics $ 35,280 $ 25,504 $ 95,328 $ 72,572 Industrial 28,112 17,500 87,872 69,041 Telecommunications 20,626 13,766 68,834 47,475 Raynet -- -- -- -- Corporate (25,426) (21,471) (80,588) (63,094) --------- --------- ----------- ----------- Total operating income $ 58,592 $ 35,299 $ 171,446 $ 125,994 ========= ========= =========== =========== Operating income (loss) including provision for restructuring and loss on reorganization / formation of JV and other Raynet items Electronics $ 21,717 $ 25,504 $ 81,765 $ 72,572 Industrial 7,287 17,500 67,047 69,041 Telecommunications 13,974 13,766 62,182 23,575 Raynet (2,103) (931) (2,103) (32,231) Corporate (27,957) (21,471) (83,119) (63,094) --------- --------- ----------- ----------- Total operating income $ 12,918 $ 34,368 $ 125,772 $ 69,863 ========= ========= =========== ===========
4 7 RAYNET Raynet Corporation and subsidiaries (Raynet) was consolidated in prior years when it was wholly owned by the company. On November 16, 1994, the company formed a joint venture, Ericsson Raynet, with LM Ericsson (Ericsson), a Swedish telecommunications company. Consequently, Raychem changed its Raynet accounting in 1995 from consolidation to the equity method. Raychem revenues and expenses for the first quarter of 1995 have been restated to account for Raynet in accordance with the equity method of accounting. The equity in Ericsson Raynet net loss for the nine-month period ended March 31, 1995, includes the results of Raynet Corporation and subsidiaries through November 16, 1994. See "Investments" note for summarized Ericsson Raynet financial information. During the third quarter of fiscal 1996, Raychem and Ericsson amended their Joint Venture Agreement. Effective January 1, 1996, Raychem will no longer share in ongoing operating losses of the joint venture (other than potential warranty claims if they are in excess of reserves which have been previously established). Through December 31, 2000, Raychem may receive a modest income allocation from the venture. BellSouth Enterprises Inc. (BSE) is entitled to receive a portion of any income or distributions that Raychem may receive. As previously disclosed, BSE had financed a portion of software development work at Raynet and, upon formation of the joint venture, royalty payments were reconfigured and based on distributions received by Raychem from Ericsson Raynet. The reorganization of Ericsson Raynet resulted in a $2 million charge in the third quarter. INCOME TAXES The estimated annual effective income tax rate for the core business (which does not include any Raynet related losses) was 14% for the three and nine months ended March 31, 1996, down from a 25% rate in the comparable periods of the prior year and the previous quarter's 21% estimate for fiscal 1996. The reduction in the estimated annual tax rate recognizes the utilization of prior year and current year U.S. tax deductions resulting from the favorable impact on U.S. taxable income of the Ericsson Raynet reorganization, strengthening business in the U.S., and the tax effect of a lease financing transaction which closed in April 1996. As a consequence, a catch-up tax benefit adjustment of $8 million was recorded in the quarter. In addition, the company reassessed the valuation of its deferred tax asset and concluded that a portion is likely to be realized based on these changed circumstances. As a result, the company recorded an additional third quarter tax benefit of $25 million. RECENT ACCOUNTING STANDARD In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by APB Opinion No. 30. The statement must be adopted by the first quarter of 1997. The company does not expect the adoption of the statement to have a material impact on the company's results of operations or financial condition. 5 8 FINANCIAL INSTRUMENTS Gains and losses from forward exchange contracts used to hedge receivables and payables and to cover certain anticipated transactions totaled $0.8 million gain and $0.4 million loss for the three months ended March 31, 1996 and 1995, respectively. Gains from forward exchange contracts totaled $4.8 million and $4.7 million for the nine months ended March 31, 1996 and 1995, respectively. The company incurred total foreign exchange transaction gains and losses of $0.5 million gain and $0.9 million loss for the three months ended March 31, 1996 and 1995, respectively. Total foreign exchange transaction losses totaled $1.0 million and $4.4 million for the nine months ended March 31, 1996 and 1995, respectively. All realized and unrealized gains and losses are included in "Other expense (income), net." The total amount of foreign exchange exposure hedged was $138 million at March 31, 1996. The company hedges exposures that arise from trade and intercompany receivables and payables, and loans in non-functional currencies. The company has unhedged non-functional currency translation and transaction exposures in countries whose currencies do not have a liquid, cost-effective forward market available for hedging. Such exposures at March 31, 1996, included $8.1 million in net intercompany payables in non-functional currencies and $4.8 million of net monetary assets in foreign countries with the U.S. dollar as functional currency. RESTRUCTURING AND DIVESTITURES The core business incurred a pretax restructuring charge of $44 million in the third quarter of 1996 as the company moved to simplify and lower the costs of its operations. All of the charges, with the exception of net $4 million in asset writedowns, are cash in nature and are expected to be substantially incurred over the next twelve months and funded through operating cash flows. Approximately 700 positions will be eliminated by the end of calendar 1996, some portion of which may be replaced elsewhere. As of March 31, 1996, forty-four employees have separated from the company as a result of the restructuring. The core business incurred a pretax charge of $24 million in the first quarter of 1995 for the restructuring of its telecommunications business segment. All charges, excluding asset writedowns, were cash in nature, substantially incurred in 1995, and funded through operating cash flows. The following table sets forth components of the company's "Provision for restructuring and divestitures" for the three and nine months ended March 31, 1996 (Unaudited):
Employee Asset Severance Writedowns Leases Other Total --------- ---------- ------ ----- ----- (in thousands) Employee severance $37,907 $ -- $-- $ -- $ 37,907 Assets to be sold -- 5,887 -- -- 5,887 Discontinued product inventory -- 250 -- -- 250 Vacated buildings -- -- 821 -- 821 Other -- -- -- 615 615 Adjustment to prior year reserves -- (2,470) -- 561 (1,909) ------- ------- ---- ------ -------- Provision for restructuring and divestitures: $37,907 $ 3,667 $821 $1,176 $ 43,571 ======= ======= ==== ====== ========
6 9 The following table sets forth the company's restructuring reserves as of March 31, 1996:
Restructuring Reserves ---------------------- Employee Asset Severance Writedowns Leases Other Total --------- ---------- ------ ----- ----- (in thousands) Reserve Balances, June 30, 1995: $ 2,162 $ -- $-- $ 1,015 $ 3,177 Provision for restructuring and divestitures (Unaudited) 37,907 3,667 821 1,176 43,571 Cash payments (Unaudited) (5,113) -- (13) (708) (5,834) Non-cash items (Unaudited) (36) (1,732) -- -- (1,768) -------- ------- ----- ------- -------- RESERVE BALANCES, MARCH 31, 1996 (UNAUDITED): $ 34,920 $ 1,935 $ 808 $ 1,483 $ 39,146 ======== ======= ===== ======= ========
MARKETABLE SECURITIES During the third quarter, one of the company's investments, previously privately-held and accounted for on the cost basis, filed a registration statement and its shares began trading in the over-the-counter market. As the fair value of this equity security is now readily determinable, it has been classified as available-for-sale and is carried at fair value at March 31, 1996. The unrealized gain of $8 million is included in the "Other" component of stockholder's equity. INVESTMENTS The financial position and results of operations of Ericsson Raynet, the only significant equity investment of the company, are summarized below:
(Unaudited) (Unaudited) Three Months Ended Nine Months Ended March 31, March 31, --------------------- ---------------------- 1996 1995(a) 1996 1995(a) -------- -------- -------- --------- Revenues $ (b) $ 11,560 $ (b) $ 41,075 ======== ======== ======== ======== Gross profit (loss) $ (b) $ (4,939) $ (b) $(13,898) Research and development expense (b) 11,324 (b) 31,970 Selling, general, and administrative expense (b) 9,767 (b) 29,393 Interest and other (income) expense (b) (1,496) (b) (587) -------- -------- -------- -------- Pretax loss $ (b) $(24,534) $ (b) $(74,674) ======== ======== ======== ======== Raychem's equity in loss $ (b) $(11,466) $(29,818)(c) $(49,674) ======== ======== ======== ========
7 10
(UNAUDITED) MARCH 31, June 30, 1996 1995 ----------- -------- Current assets $(b) $62,864 Non-current assets (b) 34,203 Current liabilities $(b) $65,906 Non-current liabilities (b) 495
(a) Results for the three and nine months ended March 31, 1995, include the results of Raynet Corporation and subsidiaries through November 16, 1994, and the results of Ericsson Raynet from November 17, 1994, through March 31, 1995, on the equity basis of accounting as reflected in Raychem's financial statements. (b) Following the reorganization, effective January 1, 1996, Raychem's interest in the joint venture is accounted for on the cost basis. (c) Raychem's equity in loss for the nine months ended March 31, 1996, represents its share of losses through December 31, 1995, which the company accounted for on the equity basis of accounting. No equity in loss was recorded for the three months ended March 31, 1996, as per (b) above. REPURCHASE OF COMMON STOCK In December 1994, the Board of Directors authorized the repurchase, at management's discretion, of up to 1.5 million shares of the company's stock during any one fiscal year. Shares repurchased under this authorization will be re-issued under the company's employee stock plans. During the nine months ended March 31, 1996, the company repurchased 1,100,000 shares and subsequently reissued 1,049,327 shares, leaving 277,313 shares in treasury stock at March 31, 1996. CONTINGENCIES The company has been named, among others, as a potentially responsible party ("PRP") in administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. At all of the sites, the company is alleged to be a de minimis generator of hazardous wastes, and the company believes that it has limited or no liability for cleanup costs at these sites. The company has also been notified by a state environmental agency that it may be required to investigate the need for remedial work at one of its manufacturing sites. The company is currently conducting such investigations on a voluntary basis. The company and its subsidiaries have also been named as a defendant, along with sixteen other corporate and governmental codefendants, in a private cost recovery for environmental cleanup expenses at the West Contra Costa County Landfill in Richmond, California. On August 4, 1995, the company's and other defendants' motion for judgment on the pleadings was granted by the District Court striking the plaintiff's claim that the company and the other defendants were jointly and severally liable for response costs at the site. As a result, the company's potential liability, if any, for response costs at the site would be based on the company's disposal of wastes at the site. The company believes its wastes constitute less than 2% of the total amount of wastes disposed of at the site. From time to time, the company and its subsidiaries become involved in lawsuits arising from various commercial matters, including product liability. The principal product liability 8 11 litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The only such action in which material damages are alleged seeks in excess of $150 million, but the claim has not progressed sufficiently for the company to estimate a range of possible loss, if any. The company intends to defend itself vigorously in these matters. The company's experience to date is that losses, if any, from such claims have not had a material effect on the company's financial position or results of operations. The company maintains insurance to cover product liability claims in excess of deductibles. 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. Legal proceedings tend to be unpredictable and costly. Based on currently available information, however, management believes that the resolution of pending claims, regulatory inquiries, and legal proceedings will not have a material adverse effect on the company's operating results or financial position. SUBSEQUENT EVENTS On April 16, 1996, the company's Board of Directors declared a quarterly cash dividend of $0.10 per share of Common Stock, payable on June 11, 1996, to stockholders of record as of May 15, 1996. In April 1996, the company entered into lease financing covering the majority of its manufacturing equipment in the United States. The company has the option of buying out the lease in 10 years for a fixed amount. Cash proceeds from the financing were approximately $113 million and are being used in roughly equal portions to reduce long-term debt and for other corporate purposes. On May 2, 1996, the company prepaid $57 million of the outstanding term loan principal. In April 1996, the Board of Directors authorized the company's management, at its discretion, to repurchase up to 2.0 million shares of the company's stock during any one fiscal year, effective July 1, 1996. In unusual circumstances, management may elect to repurchase an additional 0.5 million shares in a fiscal year. This change increases the board's previous 1.5 million share repurchase authorization. 9 12 RAYCHEM CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW The company reported net income of $42 million, or $0.89 per share, in the third quarter of 1996, compared to a net income of $11 million, or $0.25 per share, in the third quarter of 1995. Revenues for the quarter increased to $418 million from $369 million in the comparable prior-year period. This represents a 12% increase over the year-ago quarter on a constant currency basis (which assumes that foreign currency exchange rates had remained constant from the prior period). For the nine months ended March 31, 1996, net income was $99 million, or $2.17 per share, compared to a net loss of $25 million, or $0.58 per share, for the same period in the prior year. Revenues for the nine months ended March 31, 1996, were $1.239 billion, an 8% increase over the prior-year period on a constant currency basis. Raychem's "ongoing" pretax income for the third quarter of 1996 increased to $57 million from $31 million in the year-ago quarter. Raychem's results are summarized as follows:
- - -------------------------------------------------------------------------------------- PRETAX INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CHANGE Three Months Ended Nine Months Ended IN ACCOUNTING PRINCIPLE March 31, March 31, (in millions) 1996 1995 1996 1995 - - -------------------------------------------------------------------------------------- Core business: "Ongoing" pretax income $ 57 $ 31 $ 173 $ 110 Nonrecurring charges, net -- -- (5) -- Provision for restructuring and divestitures (44) -- (44) (24) -------------------------------- Core business pretax income 13 31 124 86 Loss on reorganization / formation of Ericsson Raynet joint venture and other Raynet items (2) (1) (2) (32) Equity in Ericsson Raynet net loss -- (11) (30) (50) -------------------------------- Consolidated $ 11 $ 19 $ 92 $ 4 ================================
During the third quarter of 1996, the company recorded a $44 million provision for restructuring and divestitures which impacted each of the business segments. In addition, Raychem incurred a $2 million charge to adjust its investment in Ericsson Raynet after concluding definitive agreements with Ericsson to reconfigure the partnership. See "Raynet" in the notes to consolidated condensed financial statements for further details on the reconfiguration. In addition, pretax income for the nine months ended March 31, 1996, included net $5 million of nonrecurring charges, reflecting a $6.6 million gain (included in "Other expense 10 13 (income), net") from an insurance settlement arising from a previous shareholder lawsuit, offset by $12 million of charges incurred from severances and other related actions. Pretax income for the nine months ended March 31, 1995, included a $24 million provision for restructuring of the telecommunications business segment. Net income for the nine months ended March 31, 1995, included an extraordinary loss of $6.3 million, or $0.15 per share, for the early retirement of debt following payment by the company of its 9.55% privately placed senior notes. In addition, the company adopted in the first quarter, effective July 1, 1994, Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of this accounting change (a charge of $1.5 million, or $0.03 per share) was reflected in the 1995 year-to-date results. The following discussion of the results of operations is based on the company's business segments--electronics, industrial, and telecommunications (which, along with the corporate groups, are referred to collectively as the "core business"). BUSINESS SEGMENT OPERATIONS Electronics Revenues in the electronics business segment were $174 million in the third quarter of 1996 compared to $156 million in the prior-year quarter, a 10% constant currency increase. The Electronics Division's higher sales to commercial market segments and to defense customers more than offset declining automotive industry sales as European automakers' build rates decreased. Elo TouchSystems experienced strong growth in its touchscreen sales to manufacturers of point-of-sales equipment, and sales increased for point-of-information and gaming applications. Despite an 11% unit volume growth, PolySwitch Division revenues declined over the prior-year quarter as a result of soft sales to personal computer and cellular telephone customers, price reductions, and an unfavorable product mix shift. The division continues to see its distribution customers reduce their order rate in response to shorter PolySwitch delivery lead-times. The segment incurred restructuring charges of $14 million in the third quarter of 1996 related to actions within the Electronics and PolySwitch divisions. The Electronics Division will move its devices manufacturing from France to North America and will further rationalize its manufacturing, distribution, and sales order operations in Europe and North America. The PolySwitch Division has implemented a variety of cost savings steps to minimize the profit pressures from lower revenue. Electronics business segment operating income, excluding the $14 million of restructuring charges, was $35 million, up from $26 million in the year-ago quarter. Improved results in the Electronics Division and Elo TouchSystems business offset weaker PolySwitch Division performance. Segment revenues for the nine months ended March 31, 1996, increased to $491 million from $441 million in the comparable prior-year period. Operating income for the nine months ended March 31, 1996, excluding the current quarter's provision for restructuring, was $95 million. This compares to $73 million in the nine-month period of the prior year, reflecting improved results primarily by the Electronics Division. Industrial Revenues in the industrial business segment for the three months ended March 31, 1996, were $129 million, up from $116 million, a 9% constant currency increase over the prior-year period. The segment's Electrical Products Division had broad revenue growth, with especially strong sales in the Middle East. The new Chemelex business unit, which now includes the former Ultratec Division, had a solid sales increase compared to a weak third quarter last year. Heat tracing and leak detection sales were up more than 20% from year- 11 14 ago levels, while corrosion protection product sales declined reflecting weak water and gas distribution business in Europe. The industrial business segment incurred $21 million of restructuring charges in the third quarter of 1996. The Electrical Products Division's restructuring actions were concentrated in Europe and focused on improving productivity in sales support, logistics, and manufacturing. The Chemelex Division restructured its manufacturing, sales and support operations worldwide. In addition, corrosion protection product manufacturing will be consolidated in North America. Excluding the above restructuring charges, operating income in the industrial business segment for the third quarter of 1996 was $28 million, up from $18 million in the year-ago period. Industrial business segment revenues for the nine months ended March 31, 1996, were $409 million compared to $368 million in the comparable prior-year period. Operating income, excluding the current quarter's provision for restructuring, was $88 million for the nine-month period, versus $69 million in the comparable prior-year period. The increase in operating income before the provision for restructuring reflects primarily strong revenues in the Electrical Products Division. Telecommunications Revenues in the telecommunications business segment increased to $115 million from $97 million in the third quarter of the prior year, a 17% increase in constant currency terms. Sales of Miniplex products in North America were up strongly from year-ago levels. The Telecom Division continued to experience a mix shift away from its traditional copper closure business to lower margin fiber, coaxial, and electronic products. The segment incurred $7 million of restructuring charges in the third quarter of 1996 to shift a portion of its Belgian manufacturing activities to lower cost locations and streamline its sales and kitting operations throughout Europe. Excluding the current quarter's restructuring charges, operating income was $21 million, up from $14 million in the year-ago quarter, reflecting higher volume as well as the benefits of prior-year restructuring actions. Revenues for the nine months ended March 31, 1996, increased to $339 million from $310 million in the comparable prior-year period. Excluding the $24 million restructuring charge incurred in the prior-year first quarter and the current quarter's $7 million provision for restructuring, operating income for the nine months ended March 31, 1996, increased from $48 million to $68 million. This increase resulted from both higher volume and benefits of prior-year restructuring actions, partially offset by a shift to lower margin products. Orders and Backlog During the third quarter of 1996, incoming orders were greater than shipments for the company overall. Incoming orders were approximately equal to shipments in the electronics segment, and orders were greater than shipments in the industrial and telecommunications segments. Backlog at March 31, 1996, was $301 million. EQUITY IN ERICSSON RAYNET NET LOSS Following the reconfiguration of the partnership agreement, effective January 1, 1996, Raychem no longer shares in the operating losses of the Ericsson Raynet joint venture and therefore has not recorded an equity in net loss for the third quarter of 1996. Raychem's $30 million equity in loss for the nine months ended March 31, 1996, represents its share of losses, in accordance with the previously-agreed loss allocation, through December 31, 1995, which the company accounted for on the equity basis of accounting. PROVISION FOR RESTRUCTURING AND DIVESTITURES The core business incurred a pretax restructuring charge of $44 million in the third quarter of 1996 as the company moved to simplify and lower the costs of its operations. The restructuring charge included $38 million for employee severance costs. Approximately 12 15 700 positions will be eliminated by the end of calendar 1996, some portion of which may be replaced elsewhere. The bulk of these actions will occur in Europe where the company's manufacturing and support operations in Belgium, France, and the United Kingdom have been reconfigured. In addition, a variety of other restructuring actions at both divisional and corporate levels took place throughout Raychem's worldwide organization. The core business incurred a pretax charge of $24 million in the first quarter of 1995 for the restructuring of its telecommunications business segment. The restructuring was substantially completed by June 30, 1995. The company expected to receive approximately $24 million of annual savings, of which the company realized approximately $18 million of savings through the nine months ended March 31, 1996. Substantially all of the savings are cash related. See "Restructuring and Divestitures" in the notes to consolidated condensed financial statements for further details on the restructuring charge and the remaining restructuring reserve. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE Selling, general, and administrative expense (SG&A) as a percent of revenues for the three months ended March 31, 1996, decreased to 29% from 32% in the year-ago period reflecting the company's ongoing efforts to lower SG&A costs. For the nine months ended March 31, 1996, SG&A expense as a percent of revenues was 31%, down slightly from 32% in the comparable period of the prior year. INCOME TAXES The estimated annual effective income tax rate for the core business (which does not include any Raynet related losses) was 14% for the three and nine months ended March 31, 1996, down from a 25% rate in the comparable periods of the prior year and the previous quarter's 21% estimate for fiscal 1996. The reduction in the estimated annual tax rate recognizes the utilization of prior year and current year U.S. tax deductions resulting from the favorable impact on U.S. taxable income of the Ericsson Raynet reorganization, strengthening business in the U.S., and the tax effect of a lease financing transaction which closed in April 1996. As a consequence, a catch-up tax benefit adjustment of $8 million was recorded in the quarter. In addition, the company reassessed the valuation of its deferred tax asset and concluded that a portion is likely to be realized based on these changed circumstances. As a result, the company recorded an additional third quarter tax benefit of $25 million. RECENT ACCOUNTING STANDARD In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." For a description, see "Recent Accounting Standards" in the notes to consolidated condensed financial statements. The statement must be adopted by the first quarter of fiscal 1997. The company does not expect the adoption of the statement to have a material impact on the company's results of operations or financial condition. 13 16 LIQUIDITY AND CAPITAL RESOURCES Debt exceeded cash by $113 million at March 31, 1996, compared to $175 million at June 30, 1995. Debt net of cash decreased $62 million in the first nine months of 1996, compared to a decrease of $51 million in the first nine months of 1995. The continued decrease in debt net of cash resulted primarily from improved profitability. Inventory, as measured by the number of days of inventory on hand, improved slightly to 108 days for the third quarter of 1996 compared to 109 days at June 30, 1995. Receivables, as measured by the number of billing days outstanding, increased to 63 days at March 31, 1996, from 61 days at June 30, 1995. In April 1996, the company entered into lease financing covering the majority of its manufacturing equipment in the United States. The company has the option of buying out the lease for a fixed amount in 10 years. Cash proceeds from the financing were approximately $113 million and are being used in roughly equal portions to reduce long-term debt and for other corporate purposes. Given the company's accumulated tax assets, this is an attractive long-term financing that consumes prior year net operating losses and extends the life of U.S. accumulated tax benefits. In addition, it will lower the company's long-term borrowing costs. On September 28, 1995, the company amended its syndicated loan agreements which consisted of a five-year partially amortizing term loan of $225 million, and a renewable 364-day revolving credit facility of $200 million. The revolving credit facility was increased to $250 million and extended to a term of 4 years. Variable pricing terms for both the term loan and revolving credit facility were improved, and certain restrictive covenants were relaxed. The $225 million syndicated term loan agreement requires varying quarterly payments beginning in December 1996 and continuing until final maturity in September 1999. The first quarterly payment of $15 million will become due December 31, 1996. A portion of the above lease financing proceeds was used to prepay $57 million of the outstanding term loan principal on May 2, 1996. In January 1995, the company entered into a revolving credit agreement with the Ericsson Raynet joint venture. The company agreed to make available to the joint venture a maximum of $50 million, due in full on December 20, 1995, or earlier if the revolving credit arrangement were terminated at the company's discretion. Upon expiration, the credit agreement was renewed and extended one year. The credit agreement stipulates that borrowings under the arrangement will be interest-free, and imposes no covenants on the joint venture. During the quarter ended March 31, 1996, the company made advances to Ericsson Raynet of $7 million under this credit agreement, increasing the amount due to the company to $27 million. As a result of the reconfiguration of the Ericsson Raynet partnership, Raychem converted the amount due under the revolving credit agreement to capital. Raychem subsequently terminated the revolving credit agreement. 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. With the creation of the joint venture, this royalty payment was reconfigured. Raychem made two payments to BSE of $10 million each in November 1994 and 1995, and is required to make one additional payment of $10 million in November 1996. BSE will be entitled to receive a portion of any income allocation that Raychem is entitled to receive as a result of the reconfigured Ericsson Raynet partnership agreement. 14 17 The company has continued to repurchase shares of the company's stock as previously authorized by the Board of Directors. During the nine months ended March 31, 1996, the company repurchased 1.1 million shares at a cost of $65 million. In addition, for the nine months ended March 31, 1996, the company received $60 million from the issuance of Common Stock under various employee benefit plans. Capital expenditures of $57 million in the first nine months of 1996 decreased $13 million compared to the prior-year period, when the company had significant capital expenditures for manufacturing facilities in Japan, the People's Republic of China, and Mexico. At March 31, 1996, the company had $176 million in cash and cash equivalents, $290 million in committed credit facilities (of which $1 million were utilized) and approximately $181 million in various uncommitted credit facilities (of which $44 million were utilized). The combination of cash and cash equivalents, available lines of credit, and future cash flows from operations are expected to be sufficient to satisfy substantially all the company's needs for working capital, normal capital expenditures, scheduled debt repayments, and anticipated dividends. FORWARD-LOOKING STATEMENTS AND RISK FACTORS The following forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made including those discussed under risk factors below. All of the 1996 third quarter's restructuring charges, excluding net asset writedowns of $4 million, are cash in nature and are expected to be substantially incurred over the next twelve months and funded through operating cash flow. The company expects that the restructuring charges will be recovered within 18 to 24 months through lower operating costs. When fully implemented, the annual run-rate savings is expected to be in the $35-$40 million range; substantially all of the savings are cash related. The third quarter restructuring actions reflect complex changes that will affect the company's worldwide operations. Timelines could be longer than anticipated and implementation difficulties or market factors could alter the estimated benefits. Certain costs related to the various 1996 third quarter restructuring actions, estimated at $5 million, were not recognizable in the third quarter and are expected to be recognized as an operating expense over the next few quarters. The company continues to work to improve operational efficiency in all areas of the company, and to reduce SG&A costs. Reviews continue and further actions may yet be identified that could result in additional charges in the future. Generally, streamlining costs in the foreseeable future are expected to be more modest than those of the third quarter, and will flow through the income statement as a normal cost of business. While not currently anticipated, the company's operating results and financial condition could be adversely affected by its ability to effectively manage the transition to the new organizational and operating structures. There can be no assurance that the company will be successful in achieving its goals or that it will be able to do so without unintended adverse consequences. 15 18 Under the terms of a preliminary agreement reached on May 10, 1996, the company has agreed to sell, subject to several contingencies, its nickel-titanium shape memory OEM components business. This transaction is expected to result in an immaterial gain. The company continues to evaluate the sale or licensing of its shape memory metal medical products intellectual property portfolio and the sale or closure of Chemelex's plastic pipe coupling business. As a result of the Ericsson Raynet reorganization, effective January 1, 1996, Raychem no longer shares in the ongoing operating losses of the joint venture. While there is the potential for some future charges related to warranty claims, the company believes that Ericsson Raynet's existing warranty reserves are adequate. The company has a deferred tax asset valuation allowance which is primarily attributable to U.S. federal and state deferred tax assets. Realization of the deferred tax assets is dependent on generating sufficient future U.S. income to utilize deductions and credits prior to their expiration. Management believes sufficient uncertainty exists regarding the realization of these deferred tax assets that a valuation allowance is required. The amount of the valuation allowance will be reassessed in future periods and may be reduced further as U.S. income improves. The company periodically identifies financial targets. These targets constitute goals, not projections or assured results. The ability to successfully implement restructuring as well as business risks, including, but not necessarily limited to, those identified below, affect the ability to meet these targets. RISK FACTORS The company has manufacturing facilities in many countries and is subject 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. Although compliance with such environmental regulations has not had a material effect on capital expenditures or operating results in the past, there is no assurance that any such regulations or changes in regulations will not have a material adverse effect on future capital expenditures or operating results. In the past, supplies of certain raw materials the company uses have become limited and it is possible that this will occur in the future. When it does occur, it can result in increased prices, rationing, and shortages. In response, the company tries to identify alternative materials and technologies for such raw materials or other sources of supply. Although the effect in the past has not been material, such situations could adversely affect financial results. From time to time, the company and/or its subsidiaries become involved in lawsuits arising from various commercial matters, including, but not limited to, competitive issues, contract issues, intellectual property matters and product liability. Currently, the principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. Litigation tends to be unpredictable and costly. There is no assurance that litigation will not have an adverse effect on the company's financial position or results of operations. Over half of the company's revenues result from sales outside the United States and the company also has several production facilities located outside the United States. The company's financial results can be adversely affected by changes in foreign currency rates, changes in worldwide economic conditions, changes in trade policies or tariffs, changes in interest rates, and political unrest overseas. These effects may be mitigated by the global nature of both the company's sales and production activities. 16 19 The company has a substantial investment in intellectual properties consisting of patents, trademarks, copyrights, and trade secrets and relies significantly on the protection provided by these intellectual property rights. Accordingly, the company aggressively protects these rights and may become involved in issues of infringement or theft by third parties from time to time. The company may also become involved as a defendant in intellectual property lawsuits. Litigation can be unpredictable and costly. While it is doubtful that an unfavorable resolution of any such dispute would have a material adverse effect on the company's financial condition, it is possible that an unfavorable outcome could be material. The company maintains property, cargo, auto, product, general liability, and directors and officers liability insurance to protect itself against potential loss exposures. To the extent that losses occur, there could be an adverse effect on the company's financial results depending on the nature of the loss, and the level of insurance coverage maintained by the company. From time to time, the company may reevaluate and change the types and levels of insurance coverage that it purchases. A portion of the company's research and development activities, its corporate headquarters, and other critical business operations are located near major earthquake faults. In the event of a major earthquake, the ultimate impact on the company, significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected. The company is predominantly not insured for losses and interruptions caused by earthquakes. The company has historically achieved revenue growth by developing or acquiring new and innovative materials science technologies and products. Commitment to continued research and development and acquisition of new or compatible technologies continues to be an important part of the company's strategy. To the extent that product or technology development or integration of acquired technologies takes longer than expected or is not successful, there could be an adverse effect on the company's financial results. The company's operating results are subject to fluctuations in demand and seasonal activity of certain product lines. A substantial amount of the company's revenues are realized through orders and shipments booked within a quarter and the backlog at the end of any quarter may not be predictive of the financial results for the next quarter. A shortfall in revenue could result from a number of factors such as overall economic conditions, competition, lower than expected demand, or supply constraints. In addition, changes in geographic or product mix may impact gross profits. Because of the foregoing factors, in addition to other factors, which affect the company's operating results and financial position, past financial performance or management's expectations should not be considered to be a reliable indicator of future performance. Investors should not use historical trends to anticipate results or trends in future periods. Further, the company's stock price is subject to volatility. Any of the factors discussed above could have an adverse impact on the company's stock price. In addition, failure of revenues or earnings in any quarter to meet the investment community's expectations, as well as broader market trends, could have an adverse impact on the company's stock price. The company does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances. 17 20 RAYCHEM CORPORATION PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS In Bow Valley, et al. v. Saint John Shipbuilding and Raychem, a lawsuit originally filed on September 9, 1988, in the Supreme Court of Newfoundland, Canada, Trial Division, the Supreme Court of Canada has granted a hearing of the case. Information about this lawsuit was disclosed in the company's annual report on Form 10-K for the year ended June 30, 1996. ITEM 5: OTHER INFORMATION In January 1996 the company announced several senior management changes. Robert J. Vizas, Vice President, General Counsel and Secretary, has decided to leave Raychem and resume his career as a legal consultant. Stephen A. Balogh, Vice President of Human Resources, also will leave the company to pursue outside opportunities. Searches are underway to fill both positions. Separately, Eric Van Zele was named Vice President, Europe and will return to Belgium where he will also assume primary business responsibility for the European sales and marketing activities for the Telecom Division. Additionally, James L. Claypool, Vice President, will return to California in June to lead the Menlo Park Telecom Resource Center. In April 1996, the Board of Directors established a minimum company stock ownership guideline for executive officers of the company. These guidelines require vice presidents to own Raychem Common Stock having a fair market value at least one times their annual salary, senior vice presidents at least two times their annual salary, and the chief executive officer at least four times his annual salary. Each executive officer will have three years to reach this ownership level. On April 29, 1996, the company announced the appointment of Timothy S. Jenks, worldwide general manager of the Electrical Products Division, to the position of vice president. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits EXHIBIT NO. DESCRIPTION ----------- ----------- 2(d) Reorganization Agreement dated as of March 27, 1996 2(e) Amendment and Restated Joint Venture Agreement dated as of March 29, 1996 27 Financial Data Schedule (b) Reports on Form 8-K None.
18 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYCHEM CORPORATION (Registrant) Date: May 13, 1996 /s/ RAYMOND J. SIMS ------------------ -------------------------------------- Raymond J. Sims Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ DEIDRA D. BARSOTTI -------------------------------------- Deidra D. Barsotti Vice President and Controller (Principal Accounting Officer) 19 22 EXHIBIT INDEX Exhibit 2(d) Reorganization Agreement dated as of March 27, 1996 Exhibit 2(e) Amendment and Restated Joint Venture Agreement dated as of March 29, 1996 Exhibit 27 Financial Data Schedule EX-2.(D) 2 REORGANIZATION AGREEMENT 1 Exhibit 2(d) - - ------------------------------------------------------------------------------- REORGANIZATION AGREEMENT Among ERICSSON RAYNET ERICSSON INC. ERICSSON HOLDING INC. ERICSSON HOLDING III INC. RAYCHEM CORPORATION and RAYNET INTERNATIONAL, INC. Dated as of March 27, 1996 - - ------------------------------------------------------------------------------- 2 TABLE OF CONTENTS -----------------
Page ---- ARTICLE 1 DEFINITIONS Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Amended and Restated Joint Venture Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Assumed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Distributed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 EHU Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Formation Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 License Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Raynet Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Retained Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Third Party Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Warranty Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE 2 ACTIONS TO BE TAKEN AT THE CLOSING 2.1. The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2. Actions at Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.3. Instruments of Conveyance and Transfer, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.4. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.5. Condition to Transfer of Certain Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.6. Transfer of Assets and Liabilities to EUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF RAYCHEM AND RAYNET 3.1. Corporate Organization; Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.2. No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.3. Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.4. Brokers and Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.5. Restrictions on Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.6. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.7. Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
i 3 TABLE OF CONTENTS ----------------- (continued)
Page ---- ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF EUS, EHU AND EHU2 4.1. Corporate Organization; Authority . . . . . . . . . . . . . . . . . . . . . . 11 4.2. No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.3. Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.4. Brokers and Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.5. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.6. Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 5 COVENANTS 5.1. Reasonable Best Efforts in Good Faith to Consummate . . . . . . . . . . . . . 13 5.2. Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.3. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 6 CONDITIONS TO CLOSING 6.1. Conditions to the Obligations of EUR, EUS, EHU and EHU2 . . . . . . . . . . 14 6.2. Conditions to the Obligations of EUR, Raychem and Raynet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 7 INDEMNIFICATION, CONTRIBUTION AND SURVIVAL 7.1. Survival of Representations, Warranties, Covenants and Agreements . . . . . . 18 7.2. Indemnification by Raychem and Raynet . . . . . . . . . . . . . . . . . . . . 18 7.3. Indemnification by EUS, EHU and EHU2 . . . . . . . . . . . . . . . . . . . . . 18 7.4. Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 8 MISCELLANEOUS 8.1. Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.2. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.3. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.4. Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.5. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 8.6. Section and Other Headings . . . . . . . . . . . . . . . . . . . . . . . . . . 24 8.7. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 8.8. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ii 4 TABLE OF CONTENTS ----------------- (continued)
Page 8.9. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 24 8.10. Benefits Only to Parties . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 24 8.11. Consultation and Arbitration . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 25 SCHEDULES --------- 1.1 Non-consolidated Balance Sheet of EUR at December 31, 1995 2.2e The Tax Basis, Agreed Value, and Excess of Tax Basis over Agreed Value of Assets Contributed to the Partnership on November 16, 1994 ("Initially Contributed Assets"), by Raynet and EHU 3.2 Raychem and Raynet Conflicts, etc. 3.3 Raychem and Raynet Consents 4.2 EUS Conflicts, etc. 4.3 EUS Consents EXHIBITS -------- 1 Amended and Restated Joint Venture Agreement 2 License Agreement
iii 5 REORGANIZATION AGREEMENT This Reorganization Agreement, dated as of March 27, 1996 among Ericsson Raynet, a general partnership organized under the laws of the State of Delaware ("EUR"), Ericsson Inc., a corporation organized under the laws of the State of Delaware ("EUS"), Ericsson Holding Inc., a corporation organized under the laws of the State of Delaware ("EHU"), Ericsson Holding III Inc., a corporation organized under the laws of the State of Delaware ("EHU2"), Raychem Corporation, a corporation organized under the laws of the State of Delaware ("Raychem"), and Raynet International, Inc., a corporation organized under the laws of the State of California ("Raynet"). W I T N E S S E T H: WHEREAS, EHU and Raynet have entered into a Joint Venture Agreement, dated as of November 16, 1994 (the "Original Joint Venture Agreement"), whereby EUR was established; and WHEREAS, EHU and Raynet desire to amend the Original Joint Venture Agreement; NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements herein contained, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS For purposes of this Agreement, the following terms shall have the meanings set forth below: "Affiliate" means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by or under common Control with such other Person. 6 "Agreement" means this Reorganization Agreement, as it may be amended from time to time, and the Exhibits and Schedules hereto. "Amended and Restated Joint Venture Agreement" means the Amended and Restated Joint Venture Agreement, to be dated as of the Closing Date, among EHU, EHU2 and Raynet in substantially the form attached hereto as Exhibit 1. "Assumed Liabilities" means all of EUR's liabilities and obligations as of the close of business on the Closing Date other than the Retained Liabilities, it being understood that such liabilities and obligations do not include any liabilities or obligations of Raychem or Raynet that existed on or prior to November 16, 1994, except only those that were "Included Liabilities" as defined in the Formation Agreement. "Balance Sheet" means EUR's non-consolidated adjusted balance sheet as of December 31, 1995 prepared in accordance with U.S. generally accepted accounting principles consistently applied and attached hereto as Schedule 1.1. "Control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), when used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities, by contract or otherwise. "Distributed Assets" means all assets of or belonging to EUR at the Closing Date other than the Excluded Assets. "EHU Loan" means the Intercompany loan payable to EHU appearing on the Balance Sheet in the amount of $22,110,243.92. -2- 7 "Excluded Assets" means all trade receivables and intercompany receivables belonging to EUR at the Closing Date, and the Licensed Patent Technology and the Licensed Technology (each as defined in the License Agreement, including the capitalized software appearing on the Balance Sheet). "Formation Agreement" means the Formation Agreement, dated as of October 10, 1994, as amended on November 16, 1994, among Telefonaktiebolaget L M Ericsson ("Ericsson"), EUS, EHU, Raychem and Raynet. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "License Agreement" means the License Agreement, to be dated as of the Closing Date, between EUS and EUR in substantially the form attached hereto as Exhibit 2. "Parties" means EUR, EUS, EHU, EHU2, Raychem and Raynet and their respective successors and permitted assigns. "Person" means an individual, corporation, partnership, limited liability company, trust or unincorporated organization or any government or agency or political subdivision thereof. "Raynet Loan" means the Intercompany loan payable to Raynet appearing on the Balance Sheet in the amount of $24,245,617.58. "Retained Liabilities" means the Warranty Liability and the EHU Loan. "Third Party Claim" means any claim made by any third party which is to be the basis for a claim for indemnification hereunder. "Warranty Liability" means any and all liability in excess of $7,628,000 that EUR or EHU or any of EHU's Affiliates may incur directly or indirectly after December 31, -3- 8 1995 in order to repair, replace or refund a Product (as defined in the Amended and Restated Joint Venture Agreement) on account of its nonperformance or nonfunctionality for which revenues were recorded (in whole or in part) on or before December 31, 1995 under the Specified Contracts (as defined in the Amended and Restated Joint Venture Agreement), it being understood that in calculating the amount of such expenses, services rendered or products supplied by EUR, EHU or any of EHU's Affiliates shall be based upon their respective costs. For this purpose inventory costs shall be reflected at book value adjusted for reserves for lower of cost or market, and expenses shall be charged on a basis consistent with the basis on which EUR has heretofore recorded warranty accruals. If any portion of the deferred revenues at December 31, 1995 relating to Products delivered under the Specified Contracts on or before that date are not eventually collected from the customers on account of the nonperformance or nonfunctionality of the Products, then 71.074% of the deferred revenues not collected shall be treated as Warranty Liability. ARTICLE 2 ACTIONS TO BE TAKEN AT THE CLOSING 2.1. The Closing. The closing of the transactions provided for in this Article 2 (herein called the "Closing") shall take place at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York 10004 U.S.A., at 10:00 a.m., local time, on March 29, 1996, or at such other time and place as the Parties shall mutually agree. The date of the Closing is referred to in this Agreement as the "Closing Date". 2.2. Actions at Closing. At the Closing, subject to the terms and conditions of this Agreement, the applicable Parties hereby agree to take the following actions in the -4- 9 following order, all of which shall be deemed to occur on the Closing Date in the following order: (a) Raynet shall contribute to the capital of EUR (such contributions being hereinafter referred to as the "Raynet Contributions") (i) cash in the amount of $3,125,000.00 and (ii) all other liabilities or obligations of EUR to Raynet existing at the Closing Date, whether or not recorded on the books of EUR, other than payables generated in the ordinary course of business from ongoing services and products furnished by Raynet to EUR, including without limitation parts, employee severance payments, accounting services, janitorial services, rent and building security (whether such payables are identified at the date of this Agreement or at a later time). Raynet shall pay the cash portion of the Raynet Contributions to EUR by wire transfer in same day funds for credit to the account of EUR at Morgan Guaranty Trust Co. of New York, ABA # 021000238, Account # 60007039. (b) EUR shall distribute to EHU the Distributed Assets. (c) EUR shall cancel the Raynet capital subscription promissory note in the amount of $8,105,215. (d) EHU shall assume and agree to pay, perform and discharge when due the Assumed Liabilities. (e) Pursuant to Treasury Regulations section 1.704-1(b)(2)(iv)(f), EUR's assets shall be revalued in connection with the distribution contemplated in paragraph (b) of this Section. For purposes of revaluing Capital Accounts, the Parties have agreed that the fair market value of EUR's assets on the Closing Date shall equal their Fair Market Value (as such term is defined in -5- 10 the Amended and Restated Joint Venture Agreement) on such date and, specifically, that the asset entitled "Capitalized R&D related to Intellectual Property Rights as defined in the Formation Agreement dated 10/10/94" listed in Schedule 2.2e hereto has a fair market value equal to the "Agreed Value" thereof as of November 16, 1994 as determined under the Original Joint Venture Agreement, adjusted for "Depreciation" (as such term is defined in the Original Joint Venture Agreement) from November 16, 1994 to the Closing Date. Such revaluation shall be recorded on the books of EUR at the Closing and shall constitute an amendment to, and part of, the Original Joint Venture Agreement. It is anticipated that, after such revaluation and taking into account results of operations up to and including December 31, 1995, EHU's and Raynet's capital accounts on the books of EUR will be approximately $15 million and $5 million, respectively. The Parties acknowledge that the Capital Accounts will be further adjusted pursuant to the Amended and Restated Joint Venture Agreement to reflect results of operations from January 1, 1996. (f) EHU2 shall make a contribution to the capital of EUR in an amount equal to 1% of the capital account of EHU after giving effect to the revaluation contemplated by Section 2.2(e). EHU2 shall pay such amount to EUR by wire transfer in same day funds for credit to the account of EUR at Morgan Guaranty Trust Co. of New York, ABA # 021000238, Account # 60007039. (g) EHU2 shall be admitted to EUR as a general partner and EHU, EHU2 and Raynet shall execute and deliver the Amended and Restated Joint Venture Agreement. (h) EUR and EUS shall execute and deliver the License Agreement. -6- 11 (i) Raynet shall file an amendment to its certificate of incorporation with the Secretary of State of the State of California whereby it will change its name to a name that does not include the word "Raynet" so that EHU shall be permitted to adopt the name "Raynet" if it desires to do so. 2.3. Instruments of Conveyance and Transfer, Etc. At the Closing, the applicable Parties shall deliver the following documents: (a) EUR shall deliver to EHU such deeds, bills of sale, endorsements, certificates and instruments of assignment, conveyance and transfer reasonably satisfactory in form and substance to the Parties as shall be necessary to vest in EHU all of EUR's right, title and interest in the Distributed Assets. (b) EHU shall deliver to EUR such instruments of assumption as shall be reasonably satisfactory in form and substance to the Parties as shall be necessary for EHU to assume the Assumed Liabilities. 2.4. Further Assurances. If at any time at or after the Closing any Party shall consider or be advised that any further deeds, other instruments of conveyance and transfer, assignments, assumptions or assurances in law or any other things are necessary, desirable or proper to vest, perfect or confirm in EHU, of record or otherwise, the title to any assets, properties or rights acquired or to be acquired by reason of, or as a result of, the transfers to be effected at the Closing, or to perfect or confirm the assumption by EHU of the liabilities or obligations to be assumed by it at the Closing, each of the Parties agrees to execute and deliver all such deeds, instruments, assignments, assumptions and assurances in law and to do all things necessary, desirable or proper to vest, perfect or confirm title to the applicable -7- 12 assets, properties or rights or to confirm the assumption of the applicable liabilities and otherwise to carry out the purposes of this Agreement. 2.5. Condition to Transfer of Certain Contracts. The parties hereto acknowledge and agree that certain agreements and contracts to which EUR is a party are not assignable by their terms to EHU without the consent of the other contracting party. The parties hereto shall use their reasonable best efforts to obtain such consents prior to the Closing, but if any such consent is not obtained with respect to any such agreement or contract and if such agreement or contract is not assigned to EHU in accordance with the provisions hereof, EUR agrees to continue to deal with the other contracting party to such contract as the prime contracting party, but EHU shall be entitled to all of the financial and other benefits of such contract, shall be responsible for all of the liabilities thereunder and shall perform the obligations of EUR thereunder as subcontractor. 2.6. Transfer of Assets and Liabilities to EUS. Immediately after the Closing, unless EHU elects in its discretion not to do so, EHU shall transfer all of the Distributed Assets to EUS, and EUS shall assume all of the Assumed Liabilities. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF RAYCHEM AND RAYNET Raychem and Raynet jointly and severally represent and warrant to EUS, EHU and EUR as follows: 3.1. Corporate Organization; Authority. Raychem and Raynet are corporations duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation. Each of Raychem and Raynet -8- 13 has full power and authority to execute and deliver this Agreement and to consummate and perform the transactions to be consummated or performed by it hereunder. Raynet has full power and authority to execute and deliver the Amended and Restated Joint Venture Agreement and to consummate and perform the transactions to be consummated or performed by it thereunder. The execution, delivery and performance by each of Raychem and Raynet of this Agreement and the Amended and Restated Joint Venture Agreement by Raynet have been duly authorized by all necessary corporate action on the part of Raychem and Raynet. This Agreement constitutes a valid and legally binding obligation of Raychem and Raynet, and the Amended and Restated Joint Venture Agreement when executed and delivered will constitute a valid and legally binding obligation of Raynet, in each case enforceable against such corporation in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 3.2. No Conflicts. Except as set forth on Schedule 3.2, the execution and delivery of this Agreement by Raychem and Raynet and the execution and delivery of the Amended and Restated Joint Venture Agreement by Raynet and the consummation by Raychem and Raynet of the transactions contemplated hereby and thereby will not (i) violate any law, rule, regulation, order, judgment or decree applicable to Raychem or Raynet; (ii) violate any provision of the certificate of incorporation or by-laws of Raychem or Raynet; or (iii) result in any breach of or default under, or entitle any party to terminate, cancel or accelerate, any mortgage, indenture, lease, agreement or other contract or commitment to which Raychem or Raynet is a party or by which Raychem or Raynet or any of Raychem's or Raynet's property is bound. -9- 14 3.3. Consents. Except as set forth on Schedule 3.3, no consent, license, approval or authorization of, or registration or declaration with, any governmental authority, agency, bureau or commission, or any third party, is required to be obtained or made by Raychem or Raynet in connection with the execution, delivery, performance, validity and enforceability of this Agreement or the Amended and Restated Joint Venture Agreement. 3.4. Brokers and Intermediaries. Neither Raychem nor Raynet has employed any broker, finder, advisor or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to a broker's, finder's or similar fee or commission in connection therewith or upon the consummation thereof. 3.5. Restrictions on Conduct of Business. Neither Raychem nor Raynet nor any of its subsidiaries is a party to any noncompetition agreement or other restriction or prohibition which, following the Closing, would restrict or prohibit EUR or EHU from conducting the business of Raynet and its subsidiaries as conducted before the formation of EUR. 3.6. Tax Matters. Raychem and Raynet make no representation or warranty as to the tax consequences of the transactions contemplated hereby. 3.7. Filings. Raychem has filed a Notification and Report Form under the HSR Act with the Federal Trade Commission and the Antitrust Division of the Department of Justice with respect to this Agreement and the transactions contemplated hereby. -10- 15 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF EUS, EHU AND EHU2 EUS, EHU and EHU2 jointly and severally represent and warrant to Raychem, Raynet and EUR as follows: 4.1. Corporate Organization; Authority. EUS, EHU and EHU2 are corporations duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation. Each of EUS, EHU and EHU2 has full power and authority to execute and deliver this Agreement and to consummate and perform the transactions to be consummated or performed by it hereunder. Each of EUS and EHU has full power and authority to execute and deliver the License Agreement and each of EHU and EHU2 has full power and authority to execute and deliver the Amended and Restated Joint Venture Agreement and each of EUS, EHU and EHU2 has full power and authority to consummate and perform the transactions to be consummated or performed by it thereunder. The execution, delivery and performance of (i) this Agreement by each of EUS, EHU and EHU2, (ii) the License Agreement by EUS and EHU, and (iii) the Amended and Restated Joint Venture Agreement by EHU and EHU2, have been duly authorized by all necessary corporate action on the part of EUS, EHU and EHU2, as the case may be. This Agreement constitutes a valid and legally binding obligation of EUS, EHU and EHU2, and the License Agreement and the Amended and Restated Joint Venture Agreement when executed and delivered will each constitute a valid and legally binding obligation of EUS, EHU and EHU2, in each case enforceable against such corporation in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. -11- 16 4.2. No Conflicts. Except as set forth on Schedule 4.2, the execution and delivery of this Agreement by EUS, EHU and EHU2 and the execution and delivery of the License Agreement and the Amended and Restated Joint Venture Agreement by EUS, EHU and EHU2, as the case may be, and the consummation by EUS, EHU and EHU2, as the case may be, of the transactions contemplated hereby and thereby will not (i) violate any law, rule, regulation, order, judgment or decree applicable to EUS, EHU or EHU2; (ii) violate any provision of the certificate of incorporation or by-laws of EUS, EHU or EHU2; or (iii) result in any breach of or default under, or entitle any party to terminate, cancel or accelerate, any mortgage, indenture, lease, agreement or other contract or commitment to which EUS, EHU or EHU2 is a party or by which EUS, EHU or EHU2 or any of EUS's, EHU's or EHU2's property is bound. 4.3. Consents. Except as set forth on Schedule 4.3, no consent, license, approval or authorization of, or registration or declaration with, any governmental authority, agency, bureau or commission, or any third party, is required to be obtained or made by EUS, EHU or EHU2 in connection with the execution, delivery, performance, validity and enforceability of this Agreement, the License Agreement or the Amended and Restated Joint Venture Agreement. 4.4. Brokers and Intermediaries. None of EUS, EHU or EHU2 has employed any broker, finder, advisor or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to a broker's, finder's or similar fee or commission in connection therewith or upon the consummation thereof. 4.5. Tax Matters. EUS, EHU and EHU2 make no representation or warranty as to the tax consequences of the transactions contemplated hereby. -12- 17 4.6. Filings. EUS (on behalf of Ericsson) has filed a Notification and Report Form under the HSR Act with the Federal Trade Commission and the Antitrust Division of the Department of Justice with respect to this Agreement and the transactions contemplated hereby. ARTICLE 5 COVENANTS 5.1. Reasonable Best Efforts in Good Faith to Consummate. Subject to the terms and conditions herein provided, EUS, EHU, EHU2, Raychem and Raynet each hereby covenants to the others that it shall use its reasonable best efforts in good faith to take or cause to be taken as promptly as practicable all action necessary or desirable on its part to permit the consummation of the transactions contemplated by this Agreement on or before March 31, 1996 and to cooperate fully with the others to that end. 5.2. Filings. EUS (on behalf of Ericsson) and Raychem shall use their respective best efforts to respond as promptly as practicable to all inquiries received from the Federal Trade Commission or the Antitrust Division for additional information or documentation. The Parties shall use their respective reasonable best efforts to promptly take all such action as may be necessary under United States Federal, state and other laws applicable to or necessary for the consummation of the transactions contemplated hereby, and will file and, if appropriate, use their reasonable best efforts to have declared effective or approved all documents and notifications with all governmental or regulatory authorities that it deems necessary or appropriate for the consummation of the transactions contemplated hereby. The Parties shall use their reasonable best efforts to promptly take all such actions as may be necessary or appropriate under -13- 18 the laws and directives of the European Union for the consummation of the transactions contemplated hereby. 5.3. Expenses. Whether or not the transactions contemplated by this Agreement are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby (including fees and disbursements of accountants and attorneys) shall be paid by the party that incurs such expenses. ARTICLE 6 CONDITIONS TO CLOSING 6.1. Conditions to the Obligations of EUR, EUS, EHU and EHU2. The obligations of EUR, EUS, EHU and EHU2 under this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, unless waived as provided in Section 8.1: (a) Representations, Warranties and Agreements. All representations and warranties made herein by Raychem or Raynet shall be true and correct in all material respects on the date hereof and (except as contemplated hereby) at and as of the Closing Date with the same effect as though made at and as of such date, and each of Raychem and Raynet shall have performed in all material respects all covenants and agreements required by this Agreement to be performed by it at or prior to the Closing Date. EUS shall have received from Raychem and Raynet certificates, dated the Closing Date and signed by authorized officers of Raychem and Raynet, to the foregoing effect. (b) Authorizations, Approvals and Consents. The mandatory waiting period under the HSR Act (including any extension thereof) shall have expired and the -14- 19 authorizations, approvals, consents and other items referred to in Schedules 3.3 and 4.3 as being Closing conditions shall have been obtained. (c) Litigation. No court or governmental agency of competent jurisdiction shall have entered and maintained in effect an injunction or other similar order against consummation of the transactions contemplated by this Agreement, and no action or proceeding shall have been instituted and remain pending before a court or other governmental body by any governmental agency or public authority to restrain or prohibit or otherwise challenge the transactions contemplated by this Agreement, nor shall any governmental agency or public authority have notified any party to this Agreement that consummation of the transactions contemplated by this Agreement would constitute a violation of the laws, rules or regulations of the United States or any state or foreign jurisdiction and that it intends to commence proceedings to restrain or otherwise challenge the consummation of the transactions contemplated by this Agreement, unless such agency or authority shall have withdrawn such notice prior to the Closing Date. (d) Execution and Filing of Other Documents. The License Agreement and the Amended and Restated Joint Venture Agreement shall have been executed and delivered by all parties thereto (other than EUS, EHU and EHU2, as applicable) and shall be in full force and effect. Raynet shall have filed an amendment to its certificate of incorporation whereby it will change its name so that its new name does not include "Raynet" therein and shall have delivered the necessary documentation to EHU to irrevocably grant permission to EHU to use the name Raynet. -15- 20 (e) Validity of Transactions. All legal and other proceedings or matters in connection with the transactions contemplated hereby and all opinions, certificates and other instruments incident to such transactions shall be reasonably satisfactory in form and substance to EUS as it shall reasonably require to carry out the provisions of this Agreement. 6.2. Conditions to the Obligations of EUR, Raychem and Raynet. The obligations of EUR, Raychem and Raynet under this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, unless waived as provided in Section 8.1: (a) Representations, Warranties and Agreements. All representations and warranties made herein by EUS, EHU and EHU2 shall be true and correct in all material respects on the date hereof and (except as contemplated hereby) at and as of the Closing Date with the same effect as though made at and as of such date, and each of EUS, EHU and EHU2 shall have performed in all material respects all covenants and agreements required by this Agreement to be performed by it at or prior to the Closing Date. Raychem shall have received from EUS, EHU and EHU2 certificates, dated the Closing Date and signed by authorized officers of EUS, EHU and EHU2, to the foregoing effect. (b) Authorization, Approvals and Consents. The mandatory waiting period under the HSR Act (including any extensions thereof) shall have expired and the authorizations, approvals, consents and other items referred to in Schedules 3.3 and 4.3 as being Closing conditions shall have been obtained. (c) Litigation. No court or governmental agency of competent jurisdiction shall have entered and maintained -16- 21 in effect an injunction or other similar order against consummation of the transactions contemplated by this Agreement, and no action or proceeding shall have been instituted and remain pending before a court or other governmental body by any governmental agency or public authority to restrain or prohibit or otherwise challenge the transactions contemplated by this Agreement, nor shall any governmental agency or public authority have notified any party to this Agreement that consummation of the transactions contemplated by this Agreement would constitute a violation of the laws, rules or regulations of the United States or any state or foreign jurisdiction and that it intends to commence proceedings to restrain or otherwise challenge the consummation of the transactions contemplated by this Agreement, unless such agency or authority shall have withdrawn such notice prior to the Closing Date. (d) Execution and Filing of Other Documents. The License Agreement and the Amended and Restated Joint Venture Agreement shall have been executed and delivered by all parties thereto (other than Raychem and Raynet, as applicable) and shall be in full force and effect. (e) Validity of Transactions. All legal and other proceedings or matters in connection with the transactions contemplated hereby and all opinions, certificates and other instruments incident to such transactions shall be reasonably satisfactory in form and substance to Raychem as it shall reasonably require to carry out the provisions of this Agreement. -17- 22 ARTICLE 7 INDEMNIFICATION, CONTRIBUTION AND SURVIVAL 7.1. Survival of Representations, Warranties, Covenants and Agreements. The respective representations, warranties, covenants and agreements of EUS, EHU, EHU2, Raychem and Raynet set forth in this Agreement or in any certificate delivered by either of them pursuant to this Agreement shall survive the Closing and the consummation of the transactions contemplated hereby. 7.2. Indemnification by Raychem and Raynet. Raychem and Raynet hereby jointly and severally agree to indemnify and hold harmless EUS, EHU, EHU2 and EUR (and each of their respective directors, officers and Affiliates and their respective successors and permitted assigns) on an after-tax basis from and against any and all losses, obligations, deficiencies, liabilities, claims, damages, costs and expenses (including without limitation the amount of any settlement entered into pursuant hereto and all reasonable legal and other expenses incurred in connection with the investigation, prosecution or defense of any matter indemnified pursuant hereto) (collectively, "Damages") which any such indemnified party may sustain, suffer or incur directly or indirectly and which result from the breach by Raychem or Raynet of any representation, warranty, covenant or agreement made by it in this Agreement or in any material agreement or instrument executed and delivered by it pursuant hereto. For purposes of this Section 7.2, a "breach" of the Amended and Restated Joint Venture Agreement shall mean an Event of Default as defined in Section 9.1 thereof. 7.3. Indemnification by EUS, EHU and EHU2. EUS, EHU and EHU2 hereby jointly and severally agree to indemnify and hold harmless Raychem, Raynet and EUR (and each of their respective directors, officers and Affiliates and their -18- 23 respective successors and permitted assigns) on an after-tax basis from and against any and all Damages which any such indemnified party may sustain, suffer or incur directly or indirectly and which result from (a) the breach by EUS, EHU or EHU2 of any representation, warranty, covenant or agreement made by it in this Agreement or in any material agreement or instrument executed and delivered by it pursuant hereto, (b) the Assumed Liabilities or (c) except as otherwise provided in the Amended and Restated Joint Venture Agreement, liabilities of EUR arising after the Closing Date. For purposes of this Section 7.3, a "breach" of the Amended and Restated Joint Venture Agreement shall mean an Event of Default as defined in Section 9.1 thereof. 7.4. Claims. Any claim for indemnity under Section 7.2 or Section 7.3 hereof shall be made by written notice from the indemnified party to the indemnifying party specifying in reasonable detail the basis of the claim. When an indemnified party seeking indemnification under Section 7.2 or Section 7.3 receives notice of any Third Party Claims which is to be the basis for a claim for indemnification hereunder, the indemnified party shall give written notice within a reasonable period thereof to the indemnifying party reasonably indicating (to the extent known) the nature of such claims and the basis thereof. Any failure by the indemnified party to provide such notice shall not affect the indemnifying party's obligations hereunder, except to the extent of any material liability caused by such delay. Upon notice from the indemnified party, the indemnifying party may, but shall not be required to, assume the defense of any such Third Party Claim, including its compromise or settlement, and the indemnifying party shall pay all reasonable costs and expenses thereof and shall be fully responsible for the outcome thereof; provided, however, that the indemnifying party may not settle or compromise any Third Party Claim without the -19- 24 indemnified party's prior written consent (which consent shall not be unreasonably withheld). The indemnifying party shall give written notice to the indemnified party as to its intention to assume the defense of any such Third Party Claim within ten (10) business days after the date of receipt of the indemnified party's notice in respect of such Third Party Claim. If an indemnifying party does not, within ten (10) business days after the indemnified party's notice is given, give written notice to the indemnified party of its assumption of the defense of the Third Party Claim, the indemnifying party shall be deemed to have waived its rights to control the defense thereof. If the indemnified party assumes the defense of any Third Party Claim because of the failure of the indemnifying party to do so in accordance with this Section 7.4, the indemnifying party shall pay all reasonable costs and expenses of such defense and shall be fully responsible for the outcome thereof. The indemnifying party shall have no liability with respect to any compromise or settlement thereof effected without its prior written consent (which consent shall not be unreasonably withheld). ARTICLE 8 MISCELLANEOUS 8.1. Amendments and Waivers. This Agreement may be amended or modified in whole or in part at any time prior to the Closing by an instrument in writing executed by each of the Parties in the same manner as this Agreement. In addition, any Party may, at its option, by an instrument in writing executed in the same manner as this Agreement, waive or extend the time for the fulfillment of any or all of the conditions herein contained to which its obligations hereunder are subject. No failure by any Party to take any action with respect to a breach of this Agreement or a default by another -20- 25 Party shall constitute a waiver of the former Party's right to enforce any provision of this Agreement or to take action with respect to such breach or default or any subsequent breach or default. Waiver by any Party of any breach or failure to comply with any provision of this Agreement by another Party shall not be construed as, or constitute, a continuing waiver of such provisions, or a waiver of any other breach of or failure to comply with any other provisions of this Agreement. 8.2. Notices. All notices, requests, consents, demands, instructions, approvals and other communications hereunder shall be in writing and shall be validly given, made or served, if delivered personally or sent by certified mail, recognized courier service or telefax (confirmed by certified mail or recognized courier service in the case of telefaxes), and shall be deemed effective when actually received, as follows: (a) If to EUS, EHU or EHU2, to: Ericsson Inc. 740 E. Campbell Road Richardson, Texas 75081 Attention: General Counsel Fax: 214 907-7553 with a copy to: Sullivan & Cromwell 125 Broad Street New York, New York 10004 Attention: Richard R. Howe, Esq. Fax: 212 558-3111 (b) If to Raychem or Raynet, to: Raychem Corporation 300 Constitution Drive, Mail Stop 120/8502 Menlo Park, California 94025-1164 Attention: General Counsel Fax: 415 361-5623 -21- 26 With a copy to: Heller Ehrman White & McAuliffe 525 University Avenue Palo Alto, California 94301-1900 Attention: Sarah A. O'Dowd, Esq. Fax: 415 324-0638 (c) If to EUR, to: Ericsson Raynet 155 Constitution Drive Menlo Park, California 94025-1106 Attention: Chief Executive Officer Fax: 415 324-6668 With copies to EHU and Raynet as above provided or to such other address or addresses as any party may from time to time designate in writing delivered in a like manner to the other parties hereto. 8.3. Assignment. Except as otherwise expressly provided herein, none of the Parties shall assign this Agreement or any rights, benefits or obligations hereunder without the prior written consent of the other Parties. Any attempt to so assign or delegate any of the foregoing without such consent shall be void. 8.4. Guarantees. (a) Raychem hereby irrevocably and unconditionally guarantees the due and punctual payment of all amounts required to be paid by Raynet pursuant to this Agreement or the Amended and Restated Joint Venture Agreement and the performance in accordance with their terms of all liabilities and obligations of Raynet hereunder and thereunder; provided, however, that the obligations of Raychem pursuant to this guarantee shall be subject to the same limitations as apply to the obligations of Raynet set forth herein. This guarantee shall be a continuing guarantee of payment and performance, and not a guarantee of collection only. This guarantee is absolute and continuing, and the -22- 27 obligations and liabilities of Raychem hereunder shall be primary and not secondary. This guarantee shall extend to, and Raychem waives any notice with respect to, any modification, amendment or waiver by Raychem or Raynet of any provision of this Agreement which is made in accordance with the provisions of Section 8.1 hereof. The obligations of Raychem under this guarantee may be enforced directly against Raychem, and Raychem waives presentation to, demand for payment from or protest to Raynet of any of the obligations hereby guaranteed, and also waives notice of protest for non-payment or other satisfaction. (b) EUS hereby irrevocably and unconditionally guarantees the due and punctual payment of all amounts required to be paid by EHU or EHU2 pursuant to this Agreement or the Amended and Restated Joint Venture Agreement and the performance in accordance with their terms of all liabilities and obligations of EHU and EHU2 hereunder and thereunder; provided, however, that the obligations of EUS pursuant to this guarantee shall be subject to the same limitations as apply to the obligations of EHU set forth herein. This guarantee shall be a continuing guarantee of payment and performance, and not a guarantee of collection only. This guarantee is absolute and continuing, and the obligations and liabilities of EUS hereunder shall be primary and not secondary. This guarantee shall extend to, and EUS waives any notice with respect to, any modification, amendment or waiver by EUS, EHU or EHU2 of any provision of this Agreement which is made in accordance with the provisions of Section 8.1 hereof. The obligations of EUS under this guarantee may be enforced directly against EUS, and EUS waives presentation to, demand for payment from or protest to EHU or EHU2 of any of the obligations hereby guaranteed, and also waives notice of protest for non-payment or other satisfaction. -23- 28 8.5. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF DELAWARE; PROVIDED, HOWEVER, THAT IF SUCH STATE'S CHOICE OF LAW PROVISIONS INDICATE THAT ANOTHER JURISDICTION'S LAWS ARE APPLICABLE, SUCH CHOICE OF LAW PROVISIONS WILL NOT BE APPLICABLE. 8.6. Section and Other Headings. Headings of the articles, sections and subsections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part hereof. 8.7. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and each fully executed counterpart shall be deemed an original. 8.8. Entire Agreement. This Agreement constitutes the entire and only agreement between the Parties relating to the subject matter hereof. Any and all prior arrangements, representations, promises, understandings and conditions in connection with said matter and any representations, promises or conditions not expressly incorporated herein or expressly made a part hereof shall not be binding upon any Party. Nothing contained herein shall affect the continuation in accordance with its terms of the Formation Agreement. 8.9. Severability. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable, such illegality, invalidity or unenforceability shall not affect any other provisions of this Agreement. 8.10. Benefits Only to Parties. Nothing expressed by or mentioned in this Agreement is intended or shall be construed to give any Person other than the Parties and their -24- 29 respective successors or assigns any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the Parties and their respective successors and assigns and for the benefit of no other Person. 8.11. Consultation and Arbitration. For purposes of this Section 8.11, EUS, EHU and EHU2 shall be deemed to be a single Party, and Raychem and Raynet shall be deemed to be a single Party. (a) The Parties agree that they shall attempt to resolve in good faith disputes arising in connection with this Agreement or any Exhibit hereto. Each Party agrees to designate for this purpose a representative who is authorized to make decisions on such Party's behalf. A dispute shall be referred by a Party for consultation between the Parties by delivering written notice to the other Party briefly stating the nature of the dispute and requesting consultation. (b) In the event that, upon the expiration of sixty (60) calendar days after receipt of the notice referred to in Section 8.11(a), the Parties are unable to resolve the matter in dispute, and if the matter relates to any alleged breach of any representation, warranty, covenant or agreement in this Agreement or any Exhibit hereto, then the dispute shall be resolved in the manner provided in Section 8.11(c). (c) Any dispute with respect to an alleged breach of any representation, warranty, covenant or agreement in this Agreement or any Exhibit, including any dispute relating to the construction or interpretation of the rights and obligations of any Party, which is not resolved through consultation as provided in Section 8.11(a) and (b), shall be -25- 30 resolved by an arbitration proceeding conducted in accordance with the following: (i) The arbitration proceeding shall be governed by the rules of the American Arbitration Association ("AAA"); (ii) The arbitrators shall be qualified by education and training to pass upon the particular matter to be decided; (iii) There shall be three (3) arbitrators, one of whom shall be selected by the Party seeking to initiate arbitration, one by the other Party and the third by the two arbitrators so selected; (iv) The arbitration proceeding shall take place in a location in the United States selected by majority vote of the arbitrators; (v) The Parties shall agree in advance as to the manner in which the arbitration panel shall promptly hear witnesses and arguments, review documents and otherwise conduct the arbitration proceedings. Both Parties shall receive notice of the subject of the arbitration, and the arbitration shall not be binding on the Parties with respect to any matters not specified in such notice. Should the Parties fail to reach an agreement as to the conduct of such proceedings, the arbitration panel shall formulate its own procedural rules and promptly commence the arbitration proceedings; (vi) The arbitration proceedings shall be conducted as expeditiously as possible with due consideration for the complexity of the dispute in question. The arbitration panel shall issue its decision in writing within forty-five (45) calendar days from the hearing of final arguments by the Parties; -26- 31 (vii) The arbitration award shall be given in writing and shall be final and binding on the Parties with respect to the subject matter identified in the notice called for by Section 8.11(c)(v), and not subject to any appeal and shall deal with the question of costs of arbitration; (viii) Judgment upon the award may be entered in any court having jurisdiction or, application may be made to such court for a judicial recognition of the award or an order of enforcement thereof, as the case may be; (ix) The Parties shall not submit a dispute subject to this Section 8.11(c) to any federal, state, local or foreign court or arbitration association except as may be necessary to enforce the arbitration procedures of this Section 8.11(c) or to enforce the award of the arbitration panel, and if court proceedings to stay litigation or compel arbitration under the Federal Arbitration Act (Title 9, U.S.C.) or similar state or foreign legislation are necessary, the Party who unsuccessfully opposes such proceedings shall pay all associated costs, expenses and attorneys' fees which are reasonably incurred by the other Party; and (x) The Parties shall keep confidential the arbitration proceedings and the terms of any arbitration award, except as may be otherwise required by law. -27- 32 IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be duly executed on its behalf by one of its officers thereunto duly authorized, all as of the date and year first above written. ERICSSON RAYNET By: /s/ Goran Eriksson --------------------------------- Name: Goran Eriksson Title: President and Chief Executive Officer ERICSSON INC. By: /s/ Joseph L. Hagan --------------------------------- Name: Joseph L. Hagan Title: Vice President and Chief Financial Officer ERICSSON HOLDING INC. By: /s/ Mans Ekelof --------------------------------- Name: Mans Ekelof Title: Secretary ERICSSON HOLDING III INC. By: /s/ Mans Ekelof --------------------------------- Name: Mans Ekelof Title: Secretary RAYCHEM CORPORATION By: /s/ Raymond J. Sims --------------------------------- Name: Raymond J. Sims Title: Senior Vice President and Chief Financial Officer RAYNET INTERNATIONAL, INC. By: /s/ Raymond J. Sims --------------------------------- Name: Raymond J. Sims Title: Senior Vice President and Chief Financial Officer -28- EX-2.(E) 3 AMENDED AND RESTATED JOINT VENTURE AGREEMENT 1 Exhibit 2(e) - - -------------------------------------------------------------------------------- AMENDED AND RESTATED JOINT VENTURE AGREEMENT Among ERICSSON HOLDING INC. ERICSSON HOLDING III INC. and RAYNET INTERNATIONAL, INC. Dated as of March 29, 1996 - - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS 1.1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Allocation Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Bankruptcy Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Board of Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Book Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Capital Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Capital Account Gross Income . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Capital Account Gross Losses . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Capital Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Encumbrance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Initially Contributed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 5 License Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Managing General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Net Book Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Original Joint Venture Agreement . . . . . . . . . . . . . . . . . . . . . . . . 6 Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Partnership Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Partnership Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Partnership Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Restated Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Shared Product Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Specified Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Tax Matters Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Third-Party Final Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Treasury Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 U.S. GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE II REORGANIZATION 2.1. Reorganization of Partnership . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.2. Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
-i- 3 TABLE OF CONTENTS (continued)
Page 2.3. Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.4. Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.5. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.6. Ownership of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE III CONTRIBUTIONS 3.1. Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.2. Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE IV ALLOCATIONS 4.1. Capital Account Gross Income and Capital Account Gross Losses . . . . . . . . . . 13 4.2. Allocation of Items of Capital Account Gross Income and Items of Capital Account Gross Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.3. Adjustment to Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE V DISTRIBUTIONS 5.1. Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.2. Distributions on Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE VI ACCOUNTING AND RECORDS 6.1. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.2. Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.3. Tax Returns and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.4. Withholdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 6.5. Records of Shared Product Expenses . . . . . . . . . . . . . . . . . . . . . . . . 26 6.6. Audit Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE VII MANAGEMENT OF THE PARTNERSHIP 7.1. Board of Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.2. Meetings, Quorum and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.3. Restrictions on Authority of Board of Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
-ii- 4 TABLE OF CONTENTS (continued)
Page ---- ARTICLE VIII TRANSFER OF PARTNERSHIP INTERESTS 8.1. Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.2. Call Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.3. Intracompany Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE IX DEFAULTS 9.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.2. Remedies Upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE X TERMINATION 10.1. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.2. Winding-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE XI MISCELLANEOUS 11.1. Relationship of Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 11.2. Waiver of Partition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 11.3. Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 11.4. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 11.5. Severability; Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . 36 11.6. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 11.7. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11.8. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11.9. Arbitration and Consultation on Disputes . . . . . . . . . . . . . . . . . . . . 38 EXHIBITS 1 The Tax Basis, Agreed Value, and Excess of Tax Basis over Agreed Value of Assets Contributed to the Partnership on November 16, 1994 ("Initially Contributed Assets"), by Raynet and EHU 2 Contracts deemed included in the Specified Contracts APPENDIXES A Tax Items Controlled by Raynet B Tax Items Controlled by EHU and EHU2
-iii- 5 AMENDED AND RESTATED JOINT VENTURE AGREEMENT THIS AMENDED AND RESTATED JOINT VENTURE AGREEMENT made and entered into as of March 29, 1996, by and among Ericsson Holding Inc., a Delaware corporation ("EHU"), Ericsson Holding III Inc., a Delaware corporation ("EHU2"), and Raynet International, Inc., a California corporation ("Raynet"). W I T N E S S E T H : WHEREAS, EHU, EHU2 and Raynet, among other parties, have entered into a Reorganization Agreement, dated as of March 27, 1996 (the "Reorganization Agreement"), in which they have agreed to amend and restate the Joint Venture Agreement between EHU and Raynet dated as of November 16, 1994 to read as provided herein and to admit EHU2 as a general partner of the partnership formed by such Joint Venture Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Certain Definitions. For all purposes of this Agreement, the following terms have the following meanings: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such other Person. "Agreement" means this Amended and Restated Joint Venture Agreement, as it may be further amended from time to time. 6 "Allocation Percentage" means, with respect to EHU, 99% and, with respect to EHU2, 1%. "Auditors" means Price Waterhouse or such other firm of independent certified public accountants as EHU shall hereafter select as the auditors for the Partnership. "Bankruptcy" means, with respect to any Partner, the happening of any of the following: (i) The appointment by a court of competent jurisdiction of a trustee, trustees, receiver, receivers, custodian or custodians under the Bankruptcy Code to administer all or a substantial portion of its assets (including its Partnership Interest); (ii) The filing by such Partner of a voluntary petition for relief under the Bankruptcy Code or the filing of a pleading in any court of record admitting in writing its inability to pay its debts as they become due; (iii) The making by such Partner of a general assignment for the benefit of creditors; (iv) The failure by such Partner to pay, or the admission in writing of its inability or unwillingness to pay, its debts generally as they became due; (v) The filing by such Partner of an answer admitting the material allegations of, or its consenting to, or defaulting in answering, an involuntary petition for relief filed against it in any proceeding under the Bankruptcy Code; or (vi) The entry by any court of competent jurisdiction of an order, judgment or decree granting relief against such Partner in a proceeding under the -2- 7 Bankruptcy Code which remains unstayed and in effect for a period of 60 consecutive days. "Bankruptcy Code" means the United States Bankruptcy Code, 11 U.S.C. Section 101 et seq., as amended from time to time. "Board of Managers" means the Board of Managers of the Partnership established pursuant to Section 7.1. "Book Value" means, with respect to any Partnership Asset, for the purpose of calculating the Capital Accounts of the Partners, the adjusted tax basis of such Partnership Asset for federal income tax purposes, except that with respect to Partnership Assets as of the date of this Agreement, Book Value means the value determined at the Closing under Section 2.2(e) of the Reorganization Agreement and recorded on the books of the Partnership in accordance with Section 2.2(e) of the Reorganization Agreement; provided, however, that for the Partnership Asset entitled "Capitalized R&D related to Intellectual Property Rights as defined in the Formation Agreement dated 10/10/94" on Exhibit 1 hereto, "Book Value" shall mean the "Agreed Value" of such asset at the time of its contribution as shown on Exhibit 1 hereto, adjusted for Depreciation from November 16, 1994 to the date of this Agreement. "Capital Account" means, with respect to any Partner, the Capital Account maintained for such Partner in accordance with Section 3.2 hereof. "Capital Account Gross Income" has the meaning specified in Section 4.1(a) hereof. "Capital Account Gross Losses" has the meaning specified in Section 4.1(a) hereof. -3- 8 "Capital Contribution" means the amount of any cash and the Fair Market Value of any assets contributed to the capital of the Partnership by a Partner with respect to such Partner's Partnership Interest; provided, however, that with respect to any Initially Contributed Asset, Capital Contribution means the "Agreed Value" of such asset at the time of its contribution, as shown on Exhibit 1 hereto. "Code" means the Internal Revenue Code of 1986, as amended. "Control" (including, with correlative meanings, the terms "control", "controlling", "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities, by contract or otherwise. "Depreciation" means, for the purposes of calculating the Capital Accounts of the Partners, all deductions attributable to depreciation, amortization or cost recovery with respect to Partnership Assets having a useful life exceeding one year calculated by reference to Book Value; provided, however, that with respect to any Partnership Asset whose tax basis differed from its Book Value at the time of contribution, Depreciation shall be an amount that bears the same ratio to such Book Value at the time of contribution as the depreciation, amortization or other cost recovery deduction for such period with respect to such asset for federal income tax purposes bears to its adjusted tax basis at the date the Partnership Asset was contributed. "Encumbrance" means any mortgage, deed of trust, lien, pledge, easement, hypothecation, assignment, security -4- 9 interest or any other encumbrance or restriction of any type whatsoever. "Fair Market Value" means, with respect to the Partnership, any Partnership Interest or any assets of the Partnership, the fair market value thereof as determined in good faith by the Partners; provided, however, that the "Fair Market Value" of Initially Contributed Assets at the date contributed means the "Agreed Value" of such assets at such date as shown on Exhibit 1 hereto. The Partners have agreed that the Fair Market Value of Partnership Assets on the date hereof shall be the net amount for each such asset shown on the U.S. GAAP books of EUR at the March closing of such books immediately before the distribution of assets contemplated by Section 2.2(b) of the Reorganization Agreement; provided, however, that the Partners have agreed that (i) the Fair Market Value on the date hereof of the asset entitled "Capitalized R&D related to Intellectual Property Rights as defined in the Formation Agreement dated 10/10/94" as shown on Exhibit 1 hereto is equal to the "Agreed Value" thereof as of November 16, 1994 as determined under the Original Joint Venture Agreement, adjusted for "Depreciation" as such term is defined in the Original Joint Venture Agreement from November 16, 1994 to the date hereof; and (ii) the Fair Market Value on the date hereof of the "Net Fixed Assets" as shown on the U.S. GAAP books of EUR shall total $6 million, of which $4 million shall be the Fair Market Value of the tangible personal property comprising that asset. "Fiscal Year" means the fiscal year of the Partnership for federal income tax purposes. "Initially Contributed Assets" means the assets contributed to the Partnership at the time of formation of -5- 10 the Partnership on November 16, 1994 shown on Exhibit 1 hereto. "License Agreement" means the License Agreement, dated as of the date hereof, between the Partnership and EUS. "Managing General Partner" means EHU or such successor as EHU appoints. "Member" means a member of the Board of Managers. "Net Book Value" of any asset means Book Value less all Depreciation taken into account with respect to such asset through the date of determination (or, in the case of an asset held by the Partnership on the date hereof, from the date hereof through the date of determination). "Original Joint Venture Agreement" means the Joint Venture Agreement between EHU and Raynet dated as of November 16, 1994. "Partner" means EHU, EHU2 and Raynet and any successor to either and any additional Person who becomes a partner in the Partnership in accordance with the provisions of this Agreement. "Partnership" means the general partnership created by the Original Joint Venture Agreement, as reorganized by this Agreement. "Partnership Assets" means all right, title and interest of the Partnership in and to the tangible and intangible assets of the Partnership and any property (real or personal) or estate acquired in exchange for any such assets. "Partnership Interest" means the entire ownership interest of a Partner in the Partnership at the relevant time, including the right of such Partner to any and all -6- 11 benefits to which a Partner may be entitled as provided in this Agreement, together with the obligations of such Partner to comply with all terms and provisions of this Agreement. "Partnership Law" means the Uniform Partnership Law of the State of Delaware, Chapter 15 of Title 6 of the Delaware Code 1935, as in effect on the date hereof, excluding any amendment thereto subsequent to the date hereof that would be applicable to the Partnership only in the absence of a provision in this Agreement to the contrary, unless such amendment is satisfactory to the Partners as evidenced in writing to such effect. "Person" means an individual, corporation, partnership, trust or unincorporated organization or a government or any agency or political subdivision thereof. "Products" means any of the eight (8) products heretofore manufactured or sold by the Partnership and presently known as LOC2, LOC2i, RVS, RIDES, iRIDES, BCI, LCI and BroadView. Each Product shall remain a Product unless and until such time as it shall have undergone a significant functional change. If EHU believes that a Product has been or is being modified so that a significant functional change has occurred or will occur, with the result that such Product should no longer be considered a "Product" under this Agreement, EHU shall give Raynet at least three months' notice thereof. If Raynet disagrees with EHU, then the issue of whether the Product as so modified has undergone or will have undergone a significant functional change shall be referred to consultation and arbitration in accordance with Section 11.9. Unless otherwise agreed, each arbitrator selected shall be a qualified engineer in the field of telecommunications. -7- 12 "Restated Balance" means, with respect to Capital Accounts, the Capital Account balances of the Partners as recorded on the books of the Partnership at the completion of the Closing under the Reorganization Agreement. "Shared Product Expenses" means expenses incurred by the Partnership, EHU or any Affiliate of EHU after December 31, 1995 in order to repair, replace or refund a Product on account of its nonperformance or nonfunctionality for which Product revenues were recorded (in whole or in part) on or before December 31, 1995 under the Specified Contracts. In calculating the amount of such expenses, services rendered or products supplied by the Partnership, EHU or any of EHU's Affiliates shall be based upon their respective costs. For this purpose inventory costs shall be reflected at the book value adjusted for reserves for lower of cost or market, and such expenses shall be charged on a basis consistent with the basis on which the Partnership has heretofore recorded the expenses of repairing, replacing, refunding or rebating Products. If any portion of the deferred revenues at December 31, 1995 relating to Products delivered under the Specified Contracts on or before that date are not eventually collected from the customers on account of the nonperformance or nonfunctionality of the Products, then 71.074% of the deferred revenues not collected shall be also treated as Shared Product Expenses. "Specified Contracts" means any and all contracts between the Partnership and either Nynex or Deutsche Bundespost Telekom in existence at any time during the period commencing November 16, 1994 and ending December 31, 1995, including without limitation the contracts listed in Exhibit 2 hereto. "Tax Matters Partner" has the meaning specified in Section 6.3 hereof. -8- 13 "Third-Party Final Sales" for any Fiscal Year or other period after January 1, 1996 means all revenues recognized in accordance with U.S. GAAP during such Fiscal Year or other period by the Partnership, EHU, any of EHU's Affiliates or any third party to whom EHU or its Affiliates shall sublicense the right to use the Licensed Patent Technology and the Licensed Technology specified in the License Agreement from the sale, lease, installation or distribution of Products, including Products which are given away as an incentive to generate other revenues, to third parties which are not Affiliates of the seller. For this purpose, (i) revenues derived from the sale, lease, installation or distribution of software Products, whether characterized as software Product revenues, service revenues or otherwise, shall be considered revenues from the sale, lease, installation or distribution of Products, (ii) Products which are given away as an incentive to generate other revenues shall be regarded as having been sold, leased, installed or distributed, and (iii) prices of bundled Products sold, leased, installed or distributed as a part of a system, given away as an incentive to generate other revenues or otherwise included in a larger transaction in which the revenues for the Product are not separately identifiable shall be valued as if the Product were sold, leased, installed or distributed separately at the most recent price received in a normal recurring representative sale of the Product. Notwithstanding the foregoing, if no such sale has occurred (a) revenue for non-software Products shall be determined by multiplying the total sales price in the larger transaction by a fraction, the numerator of which is the manufacturing cost of the Product and the denominator of which is the manufacturing cost of the system, such manufacturing costs to be determined consistently for the Product and all other products included in the larger -9- 14 transaction in accordance with U.S. GAAP consistently applied, and (b) revenues for software Products that are sold in the same transaction as non-Products shall be deemed to be 6% of the revenues associated with the devices included in the larger transaction that are supported by the software Products, which devices either are Products or are similar to Products except insofar as they have undergone a significant functional change. "Transfer" means the sale, assignment, transfer or other disposition or conveyance of a legal or beneficial interest, directly or indirectly, but shall not include a pledge with respect to all or a portion of a Partnership Interest unless and until action is taken to foreclose on such pledge. "Treasury Regulations" means the regulations issued under the Code that are in effect on the date of this Agreement. "U.S. GAAP" means U.S. generally accepted accounting principles consistently applied. ARTICLE II REORGANIZATION 2.1. Reorganization of Partnership. The parties hereto, having established a general partnership pursuant to the Original Joint Venture Agreement, hereby reorganize such Partnership under the Partnership Law for the purposes set forth in this Article II. 2.2. Name. The name of the Partnership is "Ericsson Raynet." 2.3. Offices. The principal office of the Partnership shall be at 155 Constitution Drive, Menlo Park, -10- 15 California 94025-1106, or at such other place as the Board of Managers may from time to time designate. The Partnership may maintain additional offices at such other places as the Board of Managers shall from time to time designate. 2.4. Purposes. The purposes of the Partnership shall be to own the Licensed Patent Technology and the Licensed Technology specified in the License Agreement, to license the same in accordance with the License Agreement, to engage in other activities permitted by the License Agreement and to conduct such other business and activities as the Managing General Partner shall determine from time to time in accordance with the provisions of this Agreement. 2.5. Term. The Partnership shall continue until June 30, 2005 unless earlier terminated pursuant to Section 10.1 hereof; provided, however, that if at least 30 days prior to the expiration of such term the Managing General Partner decides to extend such term, the Managing General Partner will inform the other Partners of its decision and the other Partners will amend this Agreement to extend the term as directed by the Managing General Partner. 2.6. Ownership of Property. Legal title to all assets, rights and property, whether real, personal or mixed, conveyed to or held or acquired by the Partnership shall reside in the Partnership and shall be conveyed only in the name of the Partnership, and no Partner, individually, shall have any ownership of such assets, rights and property. -11- 16 ARTICLE III CONTRIBUTIONS 3.1. Contributions. Except as otherwise provided in this Agreement or in the Reorganization Agreement, no Partner shall be required to make any Capital Contribution from and after the date of this Agreement; provided, however, that EHU shall be required to make a Capital Contribution for each Fiscal Year equal to 51%, and Raynet shall be required to make a Capital Contribution equal to 49%, of the amount of any and all Shared Product Expenses incurred and paid during such Fiscal Year, but only to the extent that (x) the cumulative amount of Shared Product Expenses for all Fiscal Years less (y) the amount of Capital Contributions required to be made by both EHU and Raynet in respect of Shared Product Expenses incurred in all previous Fiscal Years exceeds (z) $7,628,000. If EHU shall determine that the cumulative amount of Shared Product Expenses is such that Capital Contributions by EHU and Raynet are likely to be required pursuant to this Section 3.1, EHU shall seek the consent of Raynet (which shall not be unreasonably withheld) before such Shared Product Expenses are incurred and before services or products are provided. Each of Raynet's and EHU's liability to make such Capital Contributions in the foregoing amounts shall survive any withdrawal (whether or not in contravention of the terms of this Agreement) of Raynet, EHU or EHU2, as the case may be, from the Partnership or any termination of the Partnership and in the event of any such termination shall be paid to the other general Partners or their successors and assigns. 3.2. Capital Accounts. A separate capital account (a "Capital Account") shall be established and maintained for each Partner during the term of the Partnership in accordance with federal income tax accounting -12- 17 principles. The Capital Account of each Partner as of the date of this Agreement shall be restated on the date of this Agreement to its Restated Balance. Each Partner's Capital Account thereafter shall be (i) increased by (A) the amount of Capital Account Gross Income allocated to such Partner and (B) the amount of cash and the Fair Market Value of tangible or intangible assets contributed to the Partnership by such Partner as a Capital Contribution and (ii) decreased by (A) the amount of any Capital Account Gross Losses allocated to such Partner and (B) the amount of distributions to such Partner. Each Partner's Capital Account shall be determined in accordance with the capital accounting rules set forth in Treasury Regulations Section 1.704-1(b)(2)(iv) and shall, as provided in Section 4.2 hereof, be adjusted upon the occurrence of certain events as provided in Treasury Regulations Section 1.704- 1(b)(2)(iv)(f). Any transferee of all (or a portion) of a Partnership Interest shall succeed to the Capital Account (or portion of the Capital Account) attributable to the transferred Partnership Interest. ARTICLE IV ALLOCATIONS 4.1. Capital Account Gross Income and Capital Account Gross Losses. (a) "Capital Account Gross Income" and "Capital Account Gross Losses" shall be the gross income or gross deductions and losses (including capital gains, income and gain exempt from tax, and items of loss, deduction or expense not deductible from Partnership income or capitalized into the basis of Partnership property), respectively, of the Partnership determined for each Fiscal Year in accordance with the accounting method followed for federal income tax purposes, except that (i) in computing -13- 18 Capital Account Gross Income and Capital Account Gross Losses all depreciation, amortization and cost recovery deductions shall be deemed equal to Depreciation, (ii) gain or loss on the sale or other disposition of a Partnership Asset shall be determined by reference to Net Book Value and (iii) with respect to the Fiscal Year beginning July 1, 1995, Partnership income and losses for the period prior to January 1, 1996 shall be allocated according to the Original Joint Venture Agreement during which period the closing of the books method will be employed. (b) If a Partner's Partnership Interest is increased or decreased during any Fiscal Year by transfer to a third party or otherwise, Capital Account Gross Income and Capital Account Gross Losses attributable to such Partnership Interest for such Fiscal Year shall be apportioned between the transferor and transferee or computed as to such Partners, as the case may be, ratably on a daily basis, unless the Partners agree on another method permitted under the Code and applicable Treasury Regulations and except with respect to the portion of the Fiscal Year beginning July 1, 1995 and ending December 31, 1995, during which the closing of the books method will be employed. 4.2. Allocation of Items of Capital Account Gross Income and Items of Capital Account Gross Losses. (a) Capital Account Gross Income shall, from and after January 1, 1996, be allocated to the Partners as follows: (i) First, items of Capital Account Gross Income for each Fiscal Year shall be allocated 100% to Raynet until Capital Account Gross Income allocated to Raynet pursuant to this Section 4.2(a)(i) is equal to 5% of Third-Party Final Sales of the Products for the Fiscal Year; provided, however, that in no event shall any -14- 19 allocations be made to Raynet pursuant to this Section 4.2(a)(i) either (1) after the cumulative amount of Capital Account Gross Income allocated to Raynet pursuant to this Section 4.2(a)(i) equals $25,000,000.00 or (2) with respect to any sales of Products after December 31, 2000; (ii) next, 100% to EHU and EHU2 in proportion to their respective Allocation Percentages until the cumulative amount of Capital Account Gross Income allocated to EHU and EHU2 pursuant to this Section 4.2(a)(ii) equals the sum of (x) $3,703,703,703.70 plus (y) the cumulative amount of Capital Account Gross Losses of the Partnership from and after January 1, 1996 (which shall be added as if they were a positive number); and (iii) thereafter, 0.675% to Raynet and 99.325% to EHU and EHU2 in proportion to EHU's and EHU2's respective Allocation Percentages. (b) Capital Account Gross Losses (other than Depreciation with respect to the Partnership Asset entitled "Capitalized R&D related to Intellectual Property Rights as defined in the Formation Agreement dated 10/10/94" on Exhibit 1 hereto) shall, from and after January 1, 1996, be allocated to the Partners as follows: (i) first, 49% to Raynet and 51% to EHU and EHU2 in proportion to their respective Allocation Percentages until the amount of Capital Account Gross Losses allocated pursuant to this Section 4.2(b)(i) for the Fiscal Year equals the amount of Capital Contributions, if any, required to be made to the Partnership by EHU and Raynet pursuant to Section 3.1 in respect of such Fiscal Year; -15- 20 (ii) 100% to EHU and EHU2 in proportion to their respective Allocation Percentages. (c) The Depreciation with respect to the Partnership Asset entitled "Capitalized R&D related to Intellectual Property Rights as defined in the Formation Agreement dated 10/10/94" on Exhibit 1 hereto shall, from and after January 1, 1996, be allocated to the Partners as follows: (i) 49% to Raynet and 51% to EHU and EHU2 in proportion to their respective Allocation Percentages, which amount shall not include the amount of depreciation, amortization and other cost recovery deductions allocated to Raynet pursuant to Section 4.2(d); provided, however, that 100% of the amount of Capital Account Gross Losses that otherwise would be allocated to Raynet pursuant to this Section 4.2(c)(i) shall be allocated to EHU and EHU2 in proportion to their respective Allocation Percentages until the cumulative amount so allocated to EHU and EHU2 pursuant to this proviso for all Fiscal Years equals $5,100,000.00. (d) Notwithstanding Sections 4.2(a), (b) and (c) hereof, for tax purposes but not for purposes of crediting or charging Capital Accounts, depreciation, amortization or other cost recovery deductions, or gain or loss realized by the Partnership, with respect to any property that was contributed to the Partnership or that was held by the Partnership at a time when the Book Value of the Partnership Assets was adjusted for allocations pursuant to Section 4.3 hereof (in a manner consistent with Treasury Regulations Section 1.704-1(b)(2)(iv)(g)), shall be allocated between the Partners in a manner which takes into account the differences between the adjusted basis for federal income -16- 21 tax purposes to the Partnership of its interest in such property and the Fair Market Value of such interest at the time of its contribution or revaluation. In making such allocations the Partnership shall use the traditional method as described in Treasury Regulations Section 1.704-3(b), as permitted by the Code and Treasury Regulations. In particular, (i) depreciation, amortization and other cost recovery deductions reflecting the excess of the tax basis of the Initially Contributed Assets contributed by Raynet over their "Agreed Value" at the time of the formation of the Partnership on November 16, 1994, as shown on Exhibit 1 hereto, shall be allocated to Raynet; (ii) Raynet's share of gain or loss upon a taxable disposition of any or all of the Initially Contributed Assets contributed by Raynet shall reflect such excess tax basis, adjusted to account for allocations of deductions pursuant to clause (i) of this sentence; and (iii) corresponding treatment shall apply in respect of property acquired by the Partnership to the extent that the tax basis of such property reflects, in whole or in part, such excess tax basis of any Initially Contributed Asset contributed by Raynet. 4.3. Adjustment to Capital Accounts. Immediately before any distribution pursuant to Section 10.2(c)(iii) hereof, the Partnership shall revalue the Capital Accounts by allocating gain or loss for Capital Account purposes as if the Partnership sold all of its assets for Fair Market Value. Such gain or loss shall be included in Capital Account Gross Income or Capital Account Gross Losses and shall be allocated in accordance with Section 4.2 of this Agreement. -17- 22 ARTICLE V DISTRIBUTIONS 5.1. Distributions. From and after January 1, 1996, the Partnership shall make distributions in respect of each Fiscal Year annually within thirty (30) days after completion of the yearly financial report referred to in Section 6.2(a) as follows: (a) to Raynet in an amount equal to 5% of Third-Party Final Sales of the Products for the Fiscal Year; provided, however , that in no event shall any distributions be made to Raynet with respect to any sales of Products after December 31, 2000 and in no event shall the cumulative amount distributed to Raynet pursuant to this Section 5.1(a) exceed $25,000,000.00; (b) next, to EHU and EHU2 at such times and in such amounts as shall be determined by the Board of Managers until the cumulative amount distributed to EHU and EHU2 pursuant to this Section 5.1(b) equals the sum of (x) $3,703,703,703.70 plus (y) the cumulative amount of Capital Account Gross Losses of the Partnership from and after January 1, 1996 (which shall be added as if they were a positive number); and (c) thereafter, 0.675% to Raynet and 99.325% to EHU and EHU2 in proportion to EHU's and EHU2's respective Allocation Percentages. If the Partnership shall not have sufficient funds to make any distribution required by Section 5.1(a), or any distribution in accordance with Sections 5.2 or 8.2 the amount of which is determined by reference to Section 5.1(a), EHU shall make a Capital Contribution or otherwise make funds available to the Partnership to enable it to make such distribution. -18- 23 5.2. Distributions on Liquidation. Any distribution pursuant to Section 10.2(c)(iii) hereof shall be made first to Raynet in an amount equal to the sum of the amount of any distributions required by Section 5.1(a) which have not theretofore been made plus the greater of (a) $1 or (b) the excess, if any, of (i) the cumulative amount allocated to Raynet pursuant to Section 4.2(a)(iii) over (ii) the cumulative amount distributed to Raynet pursuant to Section 5.1(c), and thereafter to EHU and EHU2 in accordance with their respective Allocation Percentages. ARTICLE VI ACCOUNTING AND RECORDS 6.1. Books and Records. The Partnership shall keep or cause to be kept at the Partnership's principal office separate books of account for the Partnership (including a record as to each Partner's Capital Account) which shall show a true, accurate and complete record of each transaction of the Partnership, including but not limited to, all costs and expenses incurred, all charges made, all credits made and received and all income derived in connection with the operation of the business of the Partnership, each in accordance with U.S. GAAP. The Partnership shall also keep or cause to be kept at the Partnership's principal office separate books of account for the Partnership which shall show the same items in accordance with federal income tax accounting principles. 6.2. Financial Reports. (a) The Partnership shall prepare and deliver to each Partner as promptly as practicable, and in any event not later than sixty (60) days after the end of each quarter and ninety (90) days after the end of each Fiscal Year, a financial report of the -19- 24 Partnership, prepared in accordance with U.S. GAAP, for such period, including a balance sheet, a statement of income (loss) and a statement of Partners' capital (deficiency). The report furnished after the close of the Fiscal Year shall include a statement of cash flows and allocations to the Partners of the Partnership's taxable income, gains, losses, deductions, credits and the balance in each Partner's Capital Account. (b) Within sixty (60) days after the end of each quarter and ninety (90) days after the end of each Fiscal Year, EHU shall provide to the other Partners unaudited schedules of Third-Party Final Sales and cumulative Shared Product Expenses to the end of such quarter or Fiscal Year. (c) The Partnership shall also prepare and deliver to EHU after the close of each fiscal quarter and the end of each Fiscal Year a financial report of the Partnership prepared in accordance with the "FIRE" financial reporting system of Ericsso- n, which, in the case of the report furnished after the end of the Fiscal Year, shall thereafter be audited by the Auditors. Such reports shall be delivered to EHU in accordance with the normal reporting schedule established by Ericsson. 6.3. Tax Returns and Information. (a) EHU is hereby designated "Tax Matters Partner", as defined in the Code, for the Partnership and shall be so designated in each federal information return filed on behalf of the Partnership. The Tax Matters Partner shall not be liable to the Partnership or any other Partner for any act or omission taken or suffered by it in such capacity in good faith in the belief that such act or omission is in or is not opposed to the best interests of the Partnership as expressed by this Agreement; provided, however, that such act or omission -20- 25 does not constitute fraud, a willful violation of law or a willful violation of this Agreement. (b) The Tax Matters Partner shall, at its own expense, cause to be prepared all income and other required federal, state, local and foreign tax returns for the Partnership (and any corporation or partnership as to which the Partnership files returns or directs the filing of returns), and shall use its best efforts to cause the same to be sent (together with related work papers) to each Partner for review at least 75 days prior to filing, shall in all events cause the same to be sent (together with related work papers) to each Partner for review at least 45 days prior to filing and shall cause the same to be timely filed with extension by the appropriate authorities but not beyond the 15th day of the ninth month after the end of the Partnership's taxable year (unless due without extension after such day), unless otherwise agreed by all Partners. Such returns shall be prepared so as to be consistent with the allocation to Raynet of depreciation, amortization and other cost recovery deductions reflecting the excess, as shown on Exhibit 1 hereto, of the tax basis of Partnership Assets contributed to the Partnership by Raynet over the "Agreed Value" of such assets at the date of the formation of the Partnership on November 16, 1994; and provided, further, that as to any tax return for the Partnership filed after the date of this Agreement, Raynet shall have full authority to direct the preparation of such return with respect to any items relating to the issues identified in Appendix A or relating to any other issue that substantially affects Raynet without materially adversely affecting EHU or EHU2 (collectively, "Raynet Issues"); provided, however, that if the Tax Matters Partner requests that Raynet, at its own expense, provide an opinion of Heller, Ehrman, White & McAuliffe or other counsel reasonably acceptable to the Tax -21- 26 Matters Partner to the effect that there is "substantial authority", as that term is defined under the Treasury Regulations in effect at the time of such request, for the reporting of such item on such return, and Raynet does not provide such opinion, then such return may be prepared as to such item in such manner as the Tax Matters Partner deems appropriate. (c) With respect to any issue identified in Appendix A, the Partners agree that Raynet shall have full authority over any position the Partnership takes in any tax audits of the Partnership and in any tax litigation in which the Partnership is involved, and EHU and EHU2 shall have such authority with respect to issues identified in Appendix B. Raynet shall have the power to appoint counsel ("Raynet Counsel"), at its own expense, to represent the Partnership with respect to any issue identified in Appendix A in any audit or litigation involving the Partnership. EHU and EHU2 shall have the power to appoint counsel ("EHU Counsel"), at their own expense, to represent the Partnership with respect to any issue identified in Appendix B in any audit or litigation involving the Partnership. Any such appointment of counsel, however, shall be subject to the approval of the other Partners, which approval shall not be unreasonably withheld; provided, however, that approval of the appointment of Heller, Ehrman, White & McAuliffe as Raynet Counsel, or Sullivan & Cromwell as EHU Counsel, shall not be withheld absent a direct conflict with the party whose approval is needed. Raynet Counsel shall act only in the interest, and only at the direction, of Raynet and shall have full authority to file any administrative adjustment requests, to file any petition relating to an administrative adjustment request and to negotiate, settle and litigate any issue identified in Appendix A without the consent of any other party, and, to the extent limited to issues identified -22- 27 in Appendix A, any such settlement shall bind the Partnership, EHU and EHU2. EHU Counsel shall act only in the interest, and only at the direction, of EHU or EHU2 and shall have full authority to file any administrative adjustment requests, to file any petition relating to an administrative adjustment request and to negotiate, settle and litigate any issue identified in Appendix B without the consent of any other party, and, to the extent limited to issues identified in Appendix B, any such settlement shall bind the Partnership and Raynet. EHU and EHU2 shall use their best efforts (i) to allow Raynet to control any audit or litigation relationship of the Partnership with the Internal Revenue Service with respect to any issue identified in Appendix A, beginning with the initial contact with the auditor and continuing through final resolution of any ensuing litigation, including without limitation the execution of such powers of attorney as Raynet reasonably deems necessary to permit Raynet Counsel to represent the Partnership as described in this Section 6.3(c) and (ii) to cooperate with Raynet Counsel in its defense or settlement of any issue identified in Appendix A. Raynet shall use its best efforts to keep EHU and EHU2 apprised of all material developments with respect to any audit or litigation involving issues identified in Appendix A for which Raynet has appointed Raynet Counsel, shall arrange for EHU and EHU2 to be invited to all meetings and conferences with the Internal Revenue Service or any other taxing authority, shall provide drafts of all documents prior to submission and shall consult with EHU and EHU2 or its representatives regarding any such audit or litigation; provided, however, that the foregoing clause shall not be interpreted to limit Raynet's authority in any audit of, or litigation involving, the Partnership with respect to any issue identified in Appendix A. Raynet shall use its best efforts to cooperate -23- 28 with EHU Counsel in its defense or settlement of any issue identified in Appendix B. EHU shall use its best efforts to keep Raynet apprised of all material developments with respect to any audit or litigation involving any issue identified in Appendix B for which EHU has appointed EHU Counsel, shall arrange for Raynet to be invited to all meetings and conferences with the Internal Revenue Service or any other taxing authority, shall provide drafts of all documents prior to submission and shall consult with Raynet or its representatives regarding any such audit or litigation; provided, however, that the foregoing clause shall not be interpreted to limit EHU's authority in any audit of, or litigation involving, the Partnership with respect to any issue identified in Appendix B. Except as otherwise provided in this Agreement, the Partners do not hereby waive any rights granted under the Code or applicable Treasury Regulations with respect to any audit of the Partnership; provided, however, that Raynet agrees with respect to the issues identified in Appendix B, and EHU and EHU2 agree with respect to issues identified in Appendix A, to report on their respective tax returns and for all other purposes (including without limitation, Hart-Scott-Rodino and European Union filings, 10Qs, 10Ks, annual reports and press releases) consistently with the return position of the Partnership, and further agree, in connection with any audit or litigation, not to take any position inconsistent with the return position of the Partnership with respect to such issues identified in Appendices A and B and not to agree to a settlement inconsistent with a settlement approved by the Partner with authority with respect to such issues. (d) Within 20 days of receipt (unless earlier notification is required elsewhere in this Agreement), the Tax Matters Partner (or any other Partner receiving such notification) shall give to the other Partners written -24- 29 notice of the receipt from any taxing authority of any notification of an audit or investigation of the Partnership and shall keep the other Partner fully informed as to the status of any audit of the Partnership's tax affairs and all proceedings in connection therewith. Except as otherwise provided in Section 6.3(c): (i) each Partner shall have the right (1) to participate in any audit or administrative proceeding relating to the determination of any item of taxation relating to the Partnership and (2) to participate in any discussions with the Internal Revenue Service relating to any item of Partnership taxation; (ii) the Tax Matters Partner shall not enter into any settlement or compromise of any issue related to any item of Partnership taxation or agreement extending the statute of limitations on behalf of Raynet without the consent of Raynet; and (iii) in the event that a Partner notifies the Tax Matters Partner of its intention to represent itself or to obtain its own tax counsel or accountants to represent it in connection with any examination of Partnership items affecting that Partner, any related proceeding or any proposed adjustment relating thereto, the Tax Matters Partner shall supply that Partner and its tax counsel and accountants, at that Partner's sole cost and expense, with copies of all written communications received by the Tax Matters Partner with respect thereto, together with such other information and documents as they may reasonably request in connection therewith, and the Tax Matters Partner shall cooperate with that Partner and its tax counsel and accountants, at that Partner's sole cost and expense, in connection with any separate representation. (e) For purposes of this Section 6.3, obligations of EHU and Raynet, respectively, shall be obligations of each of them and their respective Affiliates. -25- 30 6.4. Withholdings. Each Partner hereby agrees that, notwithstanding anything herein to the contrary, the Partnership shall be entitled, upon advice of counsel and after consultation with the affected Partner, to withhold from such Partner and pay over to the Internal Revenue Service or any foreign, state or local governmental taxing authority any sums required and necessary to be withheld to prevent any liability or contingent liability on the part of the Partnership or any Partner, and the amounts withheld and paid over shall be deemed to have been distributed to such Partner from whom any such amounts have been withheld. 6.5. Records of Shared Product Expenses. EHU shall maintain supporting documentation relating to each Shared Product Expense which shall include evidence that (i) the expense relates to a Product for which revenues were recorded (in whole or in part) on or before December 31, 1995 under the Specified Contracts, (ii) the expense was incurred as the result of a valid reason related to the nonperformance or nonfunctionality of the Product (not as the result of negligence of the customer or a third party, negligence of the Partnership after December 31, 1995, an Act of God, commercial concerns unrelated to performance of the Product, commercial decisions not to provide functionality that otherwise could be provided or any other invalid reason) and (iii) supporting documentation for all costs incurred in performing the repair, including payroll records evidencing the hours spent on warranty activities and the installation upon which personnel were engaged, parts and installation on which they were installed and other costs by installation. 6.6. Audit Rights. Raynet shall have the right upon request and at its sole expense to direct that an independent public accounting firm audit the books and -26- 31 records of the Partnership or EHU or any of EHU's Affiliates at reasonable times during normal business hours and to confer with the Partnership's or EHU's or EHU's Affiliates' auditors in order to determine the accuracy of allocations under Section 4.1 and distributions under Section 5.1, including as necessary Third-Party Final Sales and/or Shared Product Expenses incurred during any Fiscal Year. ARTICLE VII MANAGEMENT OF THE PARTNERSHIP 7.1. Board of Managers. (a) The business and affairs of the Partnership shall be managed under the direction of the Board of Managers. (b) The Board of Managers shall at all times consist of not less than one Member, the number to be established by the Managing General Partner, who shall have the sole power to elect the Member or Members of the Board of Managers from time to time in their discretion. Each Member shall serve until his or her resignation, removal or death. 7.2. Meetings, Quorum and Voting. (a) The Board of Managers shall hold such meetings at such times and at such places as it shall determine. The Board of Managers may take action by unanimous written consent. Meetings may be held by telephone if all Members participating in the meeting are able to hear and be heard by each other. Notice of any meeting may be waived by a Member at any time, whether before or after the meeting, and shall be deemed waived by any Member who attends or participates by telephone in the meeting. (b) A majority of the Members shall constitute a quorum for the transaction of business at any meeting of the -27- 32 Board of Managers. The approval of a majority of the Members present at a meeting of the Board of Managers at which a quorum is present or unanimous written consent of the Members shall be the act of the Board of Managers. (c) The Board of Managers may establish such committees as it deems appropriate. 7.3. Restrictions on Authority of Board of Managers. Notwithstanding Section 7.1, the Board of Managers will not take any of the following actions without the prior consent of Raynet, which will not be unreasonably withheld: (a) any merger or consolidation involving the Partnership; (b) the admission of additional Partners to the Partnership; (c) the voluntary termination or dissolution of the Partnership; (d) the filing of a voluntary petition under the Bankruptcy Code; (e) any amendment of the License Agreement; (f) any sale or other disposition by the Partnership of the Licensed Patent Technology and the Licensed Technology referred to in the License Agreement; and (g) the conduct of any business activities (other than owning the Licensed Patent Technology and the Licensed Technology and licensing the same in accordance with the License Agreement and activities incidental thereto). -28- 33 ARTICLE VIII TRANSFER OF PARTNERSHIP INTERESTS 8.1. Restrictions on Transfer. Except as otherwise set forth in this Article VIII, no Partner may Transfer or subject to any Encumbrance all or any part of its Partnership Interest. Any attempt so to Transfer or subject to any Encumbrance any Partnership Interest shall be void. 8.2. Call Option. Raynet hereby grants to EHU and EHU2 the irrevocable option to purchase and acquire from Raynet (or any transferee of Raynet) at any time after December 31, 2000 all of Raynet's Partnership Interest at an aggregate purchase price equal to the sum of the amount of any distributions required by Section 5.1(a) which have not theretofore been made plus the greater of (a) $1 or (b) the excess, if any, of (i) the cumulative amount allocated to Raynet pursuant to Section 4.2(a)(iii) over (ii) the cumulative amount distributed to Raynet pursuant to Section 5.1(c). 8.3. Intracompany Transfers. Each of EHU, EHU2 and Raynet may Transfer all (but not less than all) of its Partnership Interest provided that (i) the transferee is a direct or indirect subsidiary of EUS, in the case of EHU and EHU2, or Raychem, in the case of Raynet, and at least 80 percent of the total outstanding voting securities of such subsidiary is held directly or indirectly by EHU or Raychem, as the case may be, (ii) the transferee agrees in writing to be bound by the terms of this Agreement to the same extent as the transferor, and (iii) the transfer would not result in a termination of the Partnership under Section 708 of the Code. In the event that such a transfer is proposed, the transferor shall notify the other Partners of the identity of such transferee and provide such other information -29- 34 concerning the proposed transfer as the other Partners may reasonably request. In the event a transfer is prohibited because it would cause a termination of the Partnership under Section 708 of the Code, the Partner that proposed such transfer may make it in two stages at least 12 months, but not more than 13 months, apart so long as such transfer does not cause a termination. No transfer of a Partnership Interest by any Partner in accordance with this Section 8.3 shall release the transferring Partner from any of its obligations or liabilities under this Agreement, and it shall remain jointly and severally liable for all obligations and liabilities of the transferee hereunder. Any permitted transferee pursuant to this Section 8.3 shall have the same rights and obligations as the applicable transferor. ARTICLE IX DEFAULTS 9.1. Events of Default. An "Event of Default" shall be considered to have occurred with respect to a Partner (the "Defaulting Partner") if: (a) Raynet, on the one hand, or EHU or EHU2, on the other hand, fails to perform or violates any material term or condition of this Agreement and such failure or violation continues for 20 days after such Partner has been given written notice thereof by EHU, in the case of Raynet, or by Raynet, in the case of EHU or EHU2; (b) Such Partner withdraws from the Partnership or otherwise causes the dissolution of the Partnership in con- travention of the terms of this Agreement; or -30- 35 (c) The Partnership is terminated as a result of the Bankruptcy of such Partner. 9.2. Remedies Upon Default. (a) Upon the occurrence and during the continuance of an Event of Default, Raynet, in the case of an Event of Default by EHU or EHU2, and EHU, in the case of Default by Raynet, may elect to terminate the Partnership as provided in Section 10.1 hereof, in which event the affairs of the Partnership shall be wound up as provided in Section 10.2 hereof. (b) The Defaulting Partner shall be liable to the Partnership and to the non-defaulting Partner(s) (the "Non-De- faulting Partner(s)") for any and all losses, claims, damages, costs and expenses (including, without limitation, reasonable legal fees and tax costs) suffered or incurred by the Partnership or the Non-Defaulting Partner(s) as a result of such Event of Default. ARTICLE X TERMINATION 10.1. Termination. The Partnership shall be dissolved and its affairs wound up pursuant to Section 10.2 hereof upon the first to occur of any of the following events (each, an "Event of Termination"): (a) the expiration of the term of the Partnership set forth in Section 2.5 hereof; (b) prior to January 1, 2001, the execution by the Partners of a unanimous written consent to the dissolution of the Partnership; (c) after December 31, 2000, the execution by EHU and EHU2 of a written consent to the dissolution of the Partnership; -31- 36 (d) the Bankruptcy of a Partner, unless in case the Bankruptcy is of Raynet, EHU and EHU2 have consented, or in case the Bankruptcy is of EHU or EHU2, Raynet shall have consented, to a continuation of the Partnership with the successor or successors of the bankrupt Partner, including, without limitation, the representative of the bankrupt Partner's estate or a court-appointed trustee, receiver or custodian and any mediate or immediate transferee therefrom of such bankrupt Partner admitted as a new Partner; or (e) the election of Raynet or EHU as a Non-Defaulting Partner pursuant to Section 9.2(a) hereof to terminate the Partnership upon the occurrence and during the continuance of an Event of Default. 10.2. Winding-up. Upon the occurrence of an Event of Termination, the Partnership affairs shall be wound up as promptly as practicable as follows: (a) The Board of Managers shall cause to be prepared a statement of the assets and liabilities of the Partnership as of the date of dissolution. (b) The assets of the Partnership shall be liquidated as promptly as possible, and receivables collected, all in an orderly and businesslike manner so as not to involve undue sacrifice. If any assets are sold to a Partner or an Affiliate of a Partner, such assets shall be sold at an arm's-length price and on arm's-length terms. (c) The proceeds of liquidation under Section 10.2(b) hereof and all other assets of the Partnership shall be applied and distributed as follows in the following order of priority: -32- 37 (i) to the payment of the debts and liabilities of the Partnership, including all amounts owed to EHU or EHU2 or any Affiliate of EHU or EHU2 but not including any amounts owed to Raynet or Raychem or any Affiliate thereof, and the expenses of liquidation; (ii) to establish any reserves that the Board of Managers (or if EHU or EHU2 is a Defaulting Partner, then Raynet), in accordance with sound business judgment, deems reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership, which reserves may be paid over to an escrow agent selected by the Board of Managers (or if EHU or EHU2 is a Defaulting Partner, then Raynet) to be held by such agent for the purpose of (x) distributing such reserves in payment of the aforementioned contingencies and (y) upon the expiration of such period as the Board of Managers (or if EHU or EHU2 is a Defaulting Partner, then Raynet) may deem advisable, distributing the balance thereof in the manner provided in this Section 10.2(c); and (iii) thereafter, to the Partners in accordance with Section 5.2 hereof. Any distribution pursuant to Section 5.2 hereof shall be made no later than (A) the end of the Partnership taxable year in which the liquidation of the Partnership occurs or (B) if later, within 90 days after the date of such liquidation. Distributions pursuant to Section 5.2 hereof may be made to a trust established for the benefit of the Partners for the purposes of liquidating -33- 38 Partnership assets, collecting amounts owed to the Partnership and paying any contingent or unforeseen liabilities or obligations of the Partnership or of any Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the Partners from time to time, in the reasonable discretion of the Board of Managers (or if EHU or EHU2 is a Defaulting Partner, then Raynet), in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the Partners pursuant to this Agreement. (d) The Partners shall otherwise comply with all requirements of applicable law pertaining to the winding-up of the Partnership. (e) Notwithstanding the foregoing provisions of this Section 10.2, in the event that the Partnership shall be dissolved under circumstances where EHU or EHU2 is a Defaulting Partner, EHU shall have the option to direct that the assets of the Partnership be distributed in kind 49% to Raynet and 51% to EHU and EHU2 in accordance with their respective Allocation Percentages, and in the event of any such distribution in kind Raynet shall not be entitled to claim any loss of tax benefits or any tax costs as any element of losses, claims, damages, costs and expenses to which Raynet might otherwise be entitled under Section 9.2(b) hereof to the extent that any such loss of tax benefits or tax costs can be reduced, avoided or mitigated as a result of the receipt of such assets in kind; provided, however, that in the event of any such distribution to Raynet, Raynet shall not sell, pledge, license, assign, -34- 39 transfer, encumber or otherwise dispose of any of the assets so distributed to Raynet, except that Raynet shall transfer all such assets to EHU promptly after December 31, 2000, without the payment of any consideration by EHU. ARTICLE XI MISCELLANEOUS 11.1. Relationship of Parties. Except as otherwise expressly provided in this Agreement, (a) no Partner, acting alone, shall have any authority to act for, or undertake to assume any obligations or responsibility on behalf of, any other Partner or the Partnership, and (b) no Partner shall be responsible or liable for any indebtedness or obligation of any other Partner incurred either before or after the execution of this Agreement. 11.2. Waiver of Partition. Except as may be otherwise provided by law in connection with the winding up, liquidation and dissolution of the Partnership, each Partner hereby irrevocably waives any and all rights that it may have to maintain an action for partition of any of the Partnership assets. No Partner or Affiliate of a Partner shall file an involuntary petition against the Partnership under any law relating to reorganization or relief of debtors. 11.3. Amendments and Waivers. This Agreement may be amended or modified only by an instrument in writing executed by each of the Partners. No Partner shall be released from its obligations hereunder without the written consent of each other Partner. The observance of any terms of this Agreement may be waived (either generally or in particular instances) by the Partner entitled to enforce -35- 40 such term, but any such waiver shall be effective only if in writing signed by the Partner against which such waiver is to be asserted. No failure by any Partner to take any action with respect to a breach of this Agreement or a default by another Partner shall constitute a waiver of the former Partner's right to enforce any provision of this Agreement or to take action with respect to such breach or default or any subsequent breach or default. Waiver by any Partner of any breach or failure to comply with any provision of this Agreement by another Partner shall not be construed as, or constitute, a continuing waiver of such provisions, or a waiver of any other breach of or failure to comply with any other provisions of this Agreement. 11.4. Entire Agreement. This Agreement, together with the Reorganization Agreement and the License Agreement, constitutes the entire and only agreements between the parties hereto and their Affiliates relating to the subject matter hereof. Any and all prior arrangements, representations, promises, understandings and conditions in connection with said matter and any representations, promises or conditions not expressly incorporated herein or expressly made a part hereof shall not be binding upon any Partner. 11.5. Severability; Interpretation. The provisions of this Agreement shall be construed and interpreted in accordance with the purposes hereof to the maximum extent permitted by law. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein shall, for any reason, be held to be invalid, illegal or unenforceable, such illegality, invalidity or unenforceability shall not affect any other provisions of this Agreement. Nothing contained herein shall be construed in such a way as to -36- 41 require any Partner to take any action which, in the reasonable opinion of counsel reasonably acceptable to the other Partners, is contrary to law, or to prohibit any Partner from taking any action which, in the reasonable opinion of counsel reasonably acceptable to the other Partners, is required by law. Any opinion of counsel relied upon by a Partner for purposes of this Section 11.5 shall be in writing and, upon request of any other Partner, shall be furnished to such Partner. 11.6. Notices. All notices, requests, consents, demands, instructions, approvals and other communications hereunder shall be in writing and shall be validly given, made or served, if delivered personally or sent by certified mail, recognized courier service or telefax (confirmed by certified mail or recognized courier service in the case of telefaxes), and shall be deemed effective when actually received, as follows: (a) If to EHU or EHU2 to: Ericsson Inc. 740 East Campbell Road Richardson, Texas 75081 Attention: General Counsel Fax: 214 907-7553 With copies to: Sullivan & Cromwell 125 Broad Street New York, New York 10004 Attention: Richard R. Howe, Esq. Fax: 212 558-3111 (b) If to Raynet to: c/o Raychem Corporation 300 Constitution Drive, Mail Stop 120/8502 Menlo Park, California 94025-1164 Attention: General Counsel Fax: 415 361-5623 -37- 42 With a copy to: Heller Ehrman White & McAuliffe 525 University Avenue Palo Alto, California 94301-1900 Attention: Sarah A. O'Dowd, Esq. Fax: 415 324-0638 (e) If to Partnership to: Ericsson Raynet 155 Constitution Drive Menlo Park, California 94025-1106 Attention: Chief Executive Officer Fax: 415 324-6668 or to such other address or addresses as any party may from time to time designate in writing delivered in a like manner to the other parties hereto. 11.7. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and each fully executed counterpart shall be deemed an original. 11.8. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF DELAWARE; PROVIDED, HOWEVER, THAT IF SUCH STATE'S CHOICE OF LAW PROVISIONS INDICATE THAT ANOTHER JURISDICTION'S LAWS ARE APPLICABLE, SUCH CHOICE OF LAW PROVISIONS WILL NOT BE APPLICABLE. 11.9. Arbitration and Consultation on Disputes. For purposes of this Section 11.9, EHU and EHU2 shall be deemed to be a single Partner. (a) The Partners agree that they shall attempt to resolve in good faith disputes arising in connection with this Agreement. Each Partner agrees to designate for this purpose a representative who is not a member of the Board of Managers and who is authorized to make decisions on such Partner's behalf. A dispute shall be referred by a Partner -38- 43 for consultation between the Partners by delivering written notice to the other Partner briefly stating the nature of the dispute and requesting consultation. (b) In the event that, upon the expiration of sixty (60) calendar days after receipt of the notice referred to in paragraph (a), the Partners are unable to resolve the matter in dispute, and if the matter relates to any alleged breach of this Agreement or to the determination of Third-Party Final Sales or the definition of "Product," including any dispute relating to the construction or interpretation of the rights and obligations of any Partner, then the dispute shall be resolved in the manner provided in paragraph (c). (c) Any dispute with respect to an alleged breach of this Agreement, including any dispute relating to the construction or interpretation of the rights and obligations of any Partner, which is not resolved through consultation as provided in paragraphs (a) and (b), shall be resolved by an arbitration proceeding conducted in accordance with the following: (i) The arbitration proceeding shall be governed by the rules of the American Arbitration Association ("AAA"); (ii) The arbitrators shall be qualified by education and training to pass upon the particular matter to be decided; (iii) There shall be three (3) arbitrators, one of whom shall be selected by the Partner seeking to initiate arbitration, one by the other Partner and the third by the two arbitrators so selected; -39- 44 (iv) The arbitration proceeding shall take place in a location in the United States selected by majority vote of the arbitrators; (v) The Partners shall agree in advance as to the manner in which the arbitration panel shall promptly hear witnesses and arguments, review documents and otherwise conduct the arbitration proceedings. Both Partners shall receive notice of the subject of the arbitration, and the arbitration shall not be binding on the Partners with respect to any matters not specified in such notice. Should the Partners fail to reach an agreement as to the conduct of such proceedings, the arbitration panel shall formulate its own procedural rules and promptly commence the arbitration proceedings; (vi) The arbitration proceedings shall be conducted as expeditiously as possible with due consideration for the complexity of the dispute in question. The arbitration panel shall issue its decision in writing within forty-five (45) calendar days from the hearing of final arguments by the Partners; (vii) The arbitration award shall be given in writing and shall be final and binding on the Partners with respect to the subject matter identified in the notice called for by subparagraph (v), and not subject to any appeal and shall deal with the question of costs of arbitration; (viii) Judgment upon the award may be entered in any court having jurisdiction or, application may be made to such court for a judicial recognition of the award or an order of enforcement thereof, as the case may be; -40- 45 (ix) The Partners shall not submit a dispute subject to this paragraph (c) to any federal, state, local or foreign court or arbitration association except as may be necessary to enforce the arbitration procedures of this paragraph (c) or to enforce the award of the arbitration panel. If court proceedings to stay litigation or compel arbitration under the Federal Arbitration Act (Title 9, U.S.C.) or similar state or foreign legislation are necessary, the Partner who unsuccessfully opposes such proceedings shall pay all associated costs, expenses and attorneys' fees which are reasonably incurred by the other Partner; and (x) The Partners shall keep confidential the arbitration proceedings and the terms of any arbitration award, except as may be otherwise required by law. -41- 46 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers as of the day and year first above written. RAYNET INTERNATIONAL, INC. By: /s/ Raymond J. Sims ------------------------------ Name: Raymond J. Sims Title: Senior Vice President and Chief Financial Officer ERICSSON HOLDING INC. By: /s/ Mans Ekelof ------------------------------ Name: Mans Ekelof Title: Secretary ERICSSON HOLDING III INC. By: /s/ Mans Ekelof ------------------------------ Name: Mans Ekelof Title: Secretary -42- EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS JUN-30-1996 JUL-01-1995 MAR-31-1996 1 175,893 0 324,128 11,289 234,560 862,417 1,126,046 619,170 1,513,552 352,949 226,121 0 0 44,792 767,793 1,513,552 1,237,929 1,239,385 597,703 599,152 90,337 2,731 7,883 91,697 (7,543) 99,240 0 0 0 99,240 $2.17 0
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